As filed with the Securities and Exchange Commission on June 13, 1997
Schedule 14A Information
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
LIVE ENTERTAINMENT INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No Fee Required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $.01 par value, of the Registrant
Series B Preferred Stock, $1.00 par value, of the Registrant
Series C Preferred Stock, $1.00 par value, of the Registrant
(2) Aggregate number of securities to which transaction applies:
2,452,467 shares of Common Stock
3,819,802 shares of Series B Preferred Stock
15,000 shares of Series C Preferred Stock
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
(set forth the amount on which the filing fee is calculated
and state how it was determined):
$6.00 per share of Common Stock
$10.00 per share of Series B Preferred Stock
$944.8624 per share of Series C Preferred Stock
(4) Proposed maximum aggregate value of transaction:
$67,085,758
(5) Total fee paid:
$13,417.15, equaling 1/50th of one percent of the proposed
maximum aggregate value of transaction.
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
LIVE ENTERTAINMENT INC.
15400 Sherman Way, Suite 500
Van Nuys, California 91406
(818) 908-0303
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held July 9, 1997
A Special Meeting of Stockholders (the "Special Meeting") of LIVE
Entertainment Inc., a Delaware corporation (the "Company"), will be held at
10:00 a.m., local time, on July 9, 1997, at the Wyndham Bel Age Hotel, 1020
North San Vicente Boulevard, West Hollywood, California, for the following
purposes:
1. To consider and vote upon a proposal (the "Merger Proposal") to
approve and adopt the Agreement and Plan of Merger dated April 17,
1997 (the "Merger Agreement"), among Film Holdings Co., a Delaware
corporation ("Parent"), Film Acquisition Co., a Delaware corporation
and wholly owned subsidiary of Parent ("Merger Sub") and the Company,
and the transactions contemplated thereby, including the Merger (as
hereinafter defined); and
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on June 6, 1997
as the record date for the determination of stockholders entitled to vote
at the Special Meeting and any adjournment or postponement thereof.
The Merger Agreement provides for the merger (the "Merger") of Merger
Sub with and into the Company, with the Company surviving as a wholly owned
subsidiary of Parent. Subject to the terms and conditions of the Merger
Agreement, upon consummation of the Merger:
(i) each share of Common Stock of the Company will be converted into
the right to receive $6.00 per share in cash;
(ii) each share of Series B Cumulative Convertible Preferred Stock of
the Company will be converted into the right to receive $10.00
per share in cash, plus accrued and unpaid dividends; and
(iii) each share of Series C Convertible Preferred Stock of the
Company will be converted into the right to receive
$944.8624 per share in cash, all as more fully described in
the accompanying Proxy Statement.
The Board of Directors of the Company (the "Board") has determined
that the Merger is in the best interests of the Company and its
stockholders and has unanimously approved the Merger Agreement and the
transactions contemplated thereby, including the Merger. The Board
unanimously recommends that the Company's stockholders vote "FOR" the Merger
Proposal.
The accompanying Proxy Statement includes a description of the terms
of the proposed Merger. A copy of the Merger Agreement is attached to the
Proxy Statement as Annex A.
In accordance with the General Corporation Law of the State of
Delaware (the "DGCL"), a complete list of the holders of Common Stock and
Series C Preferred Stock entitled to vote at the Special Meeting will be
open to examination, during ordinary business hours, at the office of the
Corporate Secretary, 15400 Sherman Way, Suite 500, Van Nuys, California,
for 10 days preceding the Special Meeting, by any holder of Common Stock or
Series C Preferred Stock for any purpose germane to the Special Meeting.
As is more fully explained in the Proxy Statement, holders of Common
Stock have the right to dissent from the Merger and to receive payment of
the fair value of their shares upon full compliance with Section 262 of the
DGCL. A copy of Section 262 is attached to the Proxy Statement as Annex B.
By order of the Board of Directors,
Ronald B. Cushey
Secretary
<PAGE>
LIVE ENTERTAINMENT INC.
15400 Sherman Way, Suite 500
Van Nuys, California 91406
(818) 908-0303
PROXY STATEMENT
This Proxy Statement (the "Proxy Statement") is being furnished to the
holders of common stock, $.01 per share ("Common Stock"), of LIVE
Entertainment Inc., a Delaware corporation (the "Company" or "LIVE"), in
connection with the solicitation of proxies by the Board of Directors of
the Company (the "Board") for use at a Special Meeting of Stockholders of
the Company (the "Special Meeting") to be held at 10:00 a.m., local time,
on July 9, 1997, at the Wyndham Bel Age Hotel, 1020 North San Vicente
Boulevard, West Hollywood, California, and at any and all adjournments or
postponements thereof. This Proxy Statement and the accompanying form of
proxy are first being mailed to stockholders of the Company on or about
June 16, 1997.
This Proxy Statement relates to the Agreement and Plan of Merger,
dated April 17, 1997 (the "Merger Agreement"), among Film Holdings Co., a
Delaware corporation ("Parent"), Film Acquisition Co., a Delaware
corporation and wholly owned subsidiary of Parent ("Merger Sub") and the
Company, and the transactions contemplated thereby, including the Merger
(as hereinafter defined). A copy of the Merger Agreement is attached
hereto as Annex A.
The Merger Agreement provides for the merger (the "Merger") of Merger
Sub with and into the Company, with the Company surviving as a wholly owned
subsidiary of Parent. Subject to the terms and conditions of the Merger
Agreement, upon consummation of the Merger:
(i) each share of Common Stock, par value $.01 per share, of the
Company (the "Common Stock") other than shares owned by Parent,
the Company or their subsidiaries or by stockholders exercising
dissenters' rights, will be converted into the right to receive
$6.00 per share in cash (the "Common Stock Merger Price") for an
aggregate of approximately $14,715,000;
(ii) each share of Series B Cumulative Convertible Preferred Stock,
par value $1.00 per share, of the Company (the "Series B
Preferred Stock") other than shares owned by Parent, the Company
or their subsidiaries, will be converted into the right to
receive $10.00 per share in cash, plus accrued and unpaid
dividends (the "Series B Merger Price") for an aggregate of
approximately $38,198,000 and
(iii) each share of Series C Convertible Preferred Stock, par
value $1.00 per share, of the Company (the "Series C
Preferred Stock") will be converted into the right to
receive $944.8624 per share in cash for an aggregate of
approximately $14,173,000 (the "Series C Merger Price" and
together with the Common Stock Merger Price and the Series
B Merger Price, the "Merger Price") for a total
consideration of approximately $67,086,000, all as more
fully described in the accompanying Proxy Statement. See
"THE MERGER AGREEMENT -- Conversion of Securities."
Financing for the Merger includes a $15,000,000 equity contribution
from the group acquiring the Company, a $15,000,000 subordinated debt
facility from affiliates of CPI Securities L.P. and a $120,000,000 combined
senior credit facility from The Chase Manhattan Bank, as well as cash on
hand at the Company at the Closing of the Merger.
The Board has determined that the Merger is in the best interests of
the Company and its stockholders and has unanimously approved the Merger
Agreement and the transactions contemplated thereby, including the Merger.
The Board unanimously recommends that the holders of the Series C Preferred
Stock and the Common Stock vote "FOR" the proposal (the "Merger Proposal")
to approve and adopt the Merger Agreement and the transactions contemplated
thereby, including the Merger.
The Merger is for cash only. After the Closing, current Company
stockholders will have no further ownership interest in the Company.
At the close of business on the Record Date (as hereinafter defined),
Pioneer Electronic Corporation ("Pioneer") was the beneficial and record
owner of 637,844 shares of Common Stock and 15,000 shares of Series C
Preferred Stock, representing approximately 50.3% of the outstanding voting
power of the Common Stock and Series C Preferred Stock, taken together
(Pioneer's percentage of the outstanding voting power of the Common Stock
and Series C Preferred Stock will increase to approximately 50.7% as of
June 30, 1997). Pursuant to the Stockholder Agreement (as hereinafter
defined), Pioneer has agreed to vote its shares of Common Stock and Series
C Preferred Stock in favor of the Merger Proposal. The aforementioned
stockholder has sufficient voting power to approve the Merger Proposal,
regardless of the vote of any other stockholder of the Company. See "THE
SPECIAL MEETING -- Required Vote," "THE MERGER AGREEMENT," "THE
STOCKHOLDER AGREEMENT" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT."
The Common Stock is traded on The Nasdaq National Market System under
the symbol "LIVE." On April 17, 1997, the day before public announcement
of the Merger was made, the last reported sale price of Common Stock, as
reported by The Nasdaq National Market System, was $5.625 per share. On
June 13, 1997, the last trading day prior to the date of this Proxy
Statement, the last reported sale price of Common Stock, as reported by
The Nasdaq National Market System, was $5.625 per share.
Stockholders of the Company are urged to read this Proxy Statement and
the Annexes hereto in their entirety.
The date of this Proxy Statement is June 16, 1997
<PAGE>
No persons have been authorized to give any information or to
make any representations other than those contained in this Proxy
Statement in connection with the solicitation of proxies hereby
and, if given or made, such information or representations must not
be relied on as having been authorized by the Company or any other
person. The delivery of this Proxy Statement shall not imply that
there has been no change in the information set forth herein or in
the affairs of the Company since the date hereof.
---------------------------
As used herein, unless the context otherwise clearly requires:
"Company" refers to LIVE Entertainment Inc. and its consolidated
subsidiaries and "Parent" refers to Film Holdings Co. and its
consolidated subsidiaries. Capitalized terms not defined in this
Proxy Statement have the respective meanings specified in the
Merger Agreement.
---------------------------
All information contained in this Proxy Statement concerning
Parent has been supplied by Parent and has not been independently
verified by the Company. Except as otherwise indicated, all other
information contained in this Proxy Statement has been supplied by
the Company.
<PAGE>
TABLE OF CONTENTS
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
The Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . .1
Parties to the Merger Agreement . . . . . . . . . . . . . . . . . . .1
The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
The Merger Agreement. . . . . . . . . . . . . . . . . . . . . . . . .3
Appraisal Rights of Dissenting Stockholders . . . . . . . . . . . . .4
Source and Amount of Funds. . . . . . . . . . . . . . . . . . . . . .4
Interests of Certain Persons in the Merger. . . . . . . . . . . . . .5
Market Prices of Common Stock . . . . . . . . . . . . . . . . . . . .5
Security Ownership of Certain Beneficial Owners and Management . . .5
Selected Consolidated Financial Data. . . . . . . . . . . . . . . . .5
THE SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Date, Place and Time. . . . . . . . . . . . . . . . . . . . . . . . .7
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Record Date; Voting Rights. . . . . . . . . . . . . . . . . . . . . .7
Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . .8
Required Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Appraisal Rights of Dissenting Stockholders . . . . . . . . . . . . .8
PARTIES TO THE MERGER AGREEMENT. . . . . . . . . . . . . . . . . . . . . .9
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Parent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Merger Sub. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Background of the Merger. . . . . . . . . . . . . . . . . . . . . . .9
The Canyon Proposal . . . . . . . . . . . . . . . . . . . . . . . . 11
Negotiations with the Buyer Group . . . . . . . . . . . . . . . . . 13
The Buyer Group's Reasons for the Merger; Operations
of the Company After the Merger . . . . . . . . . . . . . . . . . 15
Reasons for the Merger; Recommendation of the Board . . . . . . . . 15
Opinion of Financial Advisor. . . . . . . . . . . . . . . . . . . . 19
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . 22
Accounting Treatment. . . . . . . . . . . . . . . . . . . . . . . . 23
Delisting and Deregistration of Common Stock and Series B
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . 23
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Conversion of Securities. . . . . . . . . . . . . . . . . . . . . . 24
Payment of Merger Consideration . . . . . . . . . . . . . . . . . . 25
Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Representations and Warranties. . . . . . . . . . . . . . . . . . . 27
Conduct of the Business Pending the Merger. . . . . . . . . . . . . 28
No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Additional Agreements . . . . . . . . . . . . . . . . . . . . . . . 30
Conditions Precedent to the Merger. . . . . . . . . . . . . . . . . 31
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 32
Indemnification; Insurance. . . . . . . . . . . . . . . . . . . . . 33
Amendment; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . 33
STOCKHOLDER AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 33
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS. . . . . . . . . . . . . . . 34
SOURCE AND AMOUNT OF FUNDS . . . . . . . . . . . . . . . . . . . . . . . 36
INTERESTS OF CERTAIN PERSONS IN THE MERGER . . . . . . . . . . . . . . . 37
MARKET PRICES OF COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . 39
MARKET PRICES OF SERIES B PREFERRED STOCK. . . . . . . . . . . . . . . . 40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . 41
Beneficial Ownership of Common Stock and Series C Preferred Stock . 41
Beneficial Ownership of Series B Preferred Stock. . . . . . . . . . 44
SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 47
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 47
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . 50
Impact of Inflation and Other Matters . . . . . . . . . . . . . . . 52
ADDITIONAL INFORMATION ABOUT THE COMPANY AND ITS BUSINESS. . . . . . . . 52
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Recent Developments for the Company . . . . . . . . . . . . . . . . 53
Entertainment Production, Marketing and Distribution Operations . . 54
Acquisition of Motion Picture Distribution Rights by the Company. . 60
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Regulation Affecting the Company. . . . . . . . . . . . . . . . . . 63
Major Customers . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 64
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . 65
STOCKHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING. . . . . . . . . . . . 65
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . .F-1
ANNEX A AGREEMENT AND PLAN OF MERGER
ANNEX B SECTION 262 OF THE DGCL
ANNEX C OPINION OF FINANCIAL ADVISOR
<PAGE>
SUMMARY
The following is a summary of certain information contained
elsewhere in this Proxy Statement and the Annexes hereto.
Reference is made to, and this summary is qualified in its entirety
by, the more detailed information contained in this Proxy Statement
and the Annexes hereto.
The Special Meeting
Date, Place and Time. The Special Meeting will be held at 10:00
a.m., local time, on July 9, 1997, at the Wyndham Bel Age Hotel,
1020 North San Vicente Boulevard, West Hollywood, California.
Purpose. To consider and vote upon the Merger Proposal and to
transact such other business as may properly come before the
Special Meeting. See "THE SPECIAL MEETING -- Purpose."
Record Date; Voting Rights. Only holders of Common Stock and
Series C Preferred Stock at the close of business on June 6, 1997
(the "Record Date") are entitled to receive notice of and to vote
at the Special Meeting and any adjournment or postponement thereof.
At the close of business on the Record Date, there were 2,452,467
shares of Common Stock and 15,000 shares of Series C Preferred
Stock outstanding, each of which entitles the registered holder
thereof to one vote and 79.16 votes, respectively, on each matter
voted upon at the Special Meeting. See "THE SPECIAL MEETING --
Record Date; Voting Rights."
Required Vote. Approval of the Merger Proposal will require the
affirmative vote of the holders of a majority of the outstanding
shares of Common Stock and Series C Preferred Stock entitled to
vote thereon, voting together as a single class. At the close of
business on the Record Date, Pioneer was the beneficial and record
owner of 637,844 shares of Common Stock and 15,000 shares of Series
C Preferred Stock, representing approximately 50.3% of the voting
power of the Common Stock and Series C Preferred Stock taken
together, outstanding at such time (Pioneer's percentage of the
outstanding voting power of the Common Stock and Series C Preferred
Stock will increase to approximately 50.7% as of June 30, 1997).
Pursuant to the Stockholder Agreement, Pioneer has agreed to vote
its shares of Common Stock and Series C Preferred Stock in favor of
the Merger Proposal. The aforementioned stockholder has sufficient
voting power to approve the Merger Proposal, regardless of the vote
of any other stockholder of the Company. See "THE SPECIAL MEETING
- -- Required Vote," "THE STOCKHOLDER AGREEMENT" and "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
Parties to the Merger Agreement
LIVE Entertainment Inc. The Company is a diversified entertainment
company, specializing in the domestic and international marketing
and distribution of filmed entertainment with its primary focus on
motion pictures. The Company distributes to the theatrical, non-
theatrical, home video, interactive and television markets both
domestically and internationally. Its principal executive offices
are located at 15400 Sherman Way, Suite 500, Van Nuys, California
91406 and its telephone number is (818) 908-0303. See "PARTIES TO
THE MERGER AGREEMENT -- The Company" and "ADDITIONAL INFORMATION
ABOUT THE COMPANY AND ITS BUSINESS."
Film Holdings Co. Parent was incorporated solely for the purpose
of consummating the Merger. Parent has minimal assets and no
business and has carried on no activities which are not directly
related to its formation and its execution of the Merger Agreement.
Parent is controlled by Richland, Gordon & Co. and affiliates of
Bain Capital, Inc. Richland, Gordon & Co. is an Illinois
corporation, of which Alan D. Gordon is the sole shareholder. Bain
Capital, Inc. is a Delaware corporation, of which W. Mitt Romney is
the sole shareholder and sole director. Geoffrey S. Rehnert and
Joseph J. Pretlow are the Bain Capital, Inc. employees principally
responsible for the participation of Bain Capital, Inc. in this
transaction. The address of the principal executive office of Parent
is c/o Bain Capital, Inc., Two Copley Place, Boston, Massachusetts 02116
and its telephone number is (617) 572-3000. Parent owns no stock of
the Company , and neither Bain Capital, Inc. nor Richland, Gordon & Co.
is affiliated with the Company or Pioneer. See "PARTIES TO THE
MERGER AGREEMENT -- Parent."
Film Acquisition Co. Merger Sub was incorporated solely for the
purpose of consummating the Merger. Merger Sub has minimal assets
and no business and has carried on no activities which are not
directly related to its formation and its execution of the Merger
Agreement. The address of the principal executive offices is c/o
Bain Capital, Inc., Two Copley Place, Boston, Massachusetts 02116
and its telephone number is (617) 572-3000. See "PARTIES TO THE
MERGER AGREEMENT -- Merger Sub."
The Merger
Recommendation of the Board. The Board has determined that the
Merger is in the best interests of the Company and its stockholders
and has unanimously approved the Merger Agreement and the
transactions contemplated thereby, including the Merger. The Board
unanimously recommends that the Company's stockholders vote "FOR"
the Merger Proposal. See "THE MERGER -- Reasons for the Merger;
Recommendation of the Board."
Operations of the Company should the Merger not be consummated.
Should the Merger not be consummated, the Company will have to seek
alternative sources of financing to enable it to replace its
existing credit facility with Foothill Capital Corporation and to
preserve its cash in order to meet required payments of $20,000,000
due in March 1998 and March 1999 on its $40,000,000 issue of Senior
Subordinated Notes due 1999 ("Increasing Rate Notes"). This may
require a cutback in the Company's film production and acquisition
activities pending, and subject to, receipt of additional capital.
There is no assurance that such additional capital will be
available.
Opinion of Financial Advisor. Houlihan Lokey Howard & Zukin
("Houlihan Lokey") has assisted the Steering Committee of the Board
and the Board of Directors in its examination of the fairness, from
a financial point of view, of the Common Stock Merger Price to the
holders of Common Stock other than Pioneer and delivered its oral
opinion to the Board on April 17, 1997 to the effect that, as of
the date of such opinion, the Common Stock Merger Price was fair,
from a financial point of view, to the holders of Common Stock
other than Pioneer. Houlihan Lokey has advised the Board that the
Common Stock Merger Price of $6.00 per share implies a Total Invested
Capital ("TIC") value of the Company of approximately $96 million,
as estimated by Houlihan Lokey as of March 31, 1997, which is at the
higher end of the range of fair TIC values of $71 million to
$100 million, calculated by Houlihan Lokey. The TIC value of a
business or asset is defined as the value of equity (common and
preferred) plus funded debt and contingent liabilities. Houlihan
Lokey confirmed its oral opinion in writing on June 6, 1997.
The full text of such written opinion is attached hereto as Annex C.
Holders of Common Stock are urged to read the written opinion in its
entirety as such opinion is subject to the limitations and based on
the assumptions set forth therein. See "THE MERGER -- Opinion
of Financial Advisor."
Certain Federal Income Tax Consequences. In general, each holder
of Common Stock will recognize gain or loss for federal income tax
purposes equal to the difference, if any, between the cash received
pursuant to the Merger or pursuant to the exercise of dissenters'
rights under the General Corporation Law of the State of Delaware
(the "DGCL") and such holder's adjusted tax basis for its Common
Stock. Such gain or loss generally will be treated as a capital
gain or capital loss provided the Common Stock was a capital asset
in the hands of such holder. Such transaction may also be taxable
under applicable state, local and foreign tax laws and may be
subject to backup withholding. All stockholders are urged to
consult their own tax advisors. See "THE MERGER -- Certain Federal
Income Tax Consequences."
Accounting Treatment. The Company understands that the Merger
will be accounted for by Parent as a "purchase" under generally
accepted accounting principles. See "THE MERGER -- Accounting
Treatment."
The Merger Agreement
Conversion of Securities. At the Effective Time of the Merger (as
hereinafter defined) (i) each issued and outstanding share of
Common Stock other than shares owned by Parent, the Company or
their subsidiaries or by stockholders exercising dissenters'
rights, will be converted into the right to receive $6.00 in cash
per share, the Common Stock Merger Price, (ii) each issued and
outstanding share of Series B Preferred Stock other than shares
owned by Parent, the Company or their subsidiaries, will be
converted into the right to receive $10.00 in cash per share plus
accrued and unpaid dividends, the Series B Merger Price, and (iii)
each issued and outstanding share of Series C Preferred Stock will
be converted into the right to receive the $944.8624 in cash per
share, the Series C Merger Price, all as more fully described in
the accompanying Proxy Statement. See "THE MERGER AGREEMENT --
Conversion of Securities." Pioneer, the holder of 637,844 shares
of Common Stock and 15,000 shares of Series C Preferred Stock, will
receive an aggregate of $18 million for its Common Stock and Series
C Preferred Stock in the Merger. Company directors affiliated with
Pioneer were informed of and involved in the negotiations with
Parent for the Merger as more fully described in "THE MERGER --
Negotiations with the Acquisition Group." Of the Company's 13
current Board members, five are affiliated with Pioneer.
Payment of Merger Consideration. As soon as reasonably practical
after the Effective Time, American Stock Transfer & Trust Company
(the "Exchange Agent") will mail to each holder of record of shares
of Common Stock, Series B Preferred Stock and Series C Preferred
Stock a letter of transmittal and related instructions to effect
the surrender of certificates representing such shares in exchange
for the consideration therefor in accordance with the Merger
Agreement. Pioneer may arrange to receive the consideration in
respect of the Common Stock and Series C Preferred Stock it owns at
the Closing (as defined below) directly from Parent, but will
receive exactly the same consideration, $6.00 per share, for each
share of Common Stock it owns as will be received by the
unaffiliated holders of the Company's Common Stock. No additional
consideration other than the payment for the Series C Preferred
Stock and Common Stock held by Pioneer is being paid or provided to
Pioneer in connection with the Merger, although Pioneer is an
indemnified party under the Merger Agreement. See "THE MERGER
AGREEMENT -- Payment of Merger Consideration and "Indemnification;
Insurance."
Stock Options. As of the Effective Time, each option to purchase
Common Stock (referenced in the Merger Agreement as "Company
Option Securities") with an exercise price less than the Common
Stock Merger Price will be canceled in exchange for, before any
income tax and other required withholdings, cash equal to the
product of (i) the difference between the Common Stock Merger Price
and the exercise price of such Company Option Security, and (ii)
the number of shares of Common Stock covered by such Company Option
Security. Each Company Option Security with an exercise price
greater than or equal to the Common Stock Merger Price will be
canceled without payment of consideration. At the Closing of the
Merger, it is expected that there will be outstanding 678,330
Company Option Securities with an exercise price lower than the
Common Stock Merger Price (this number may be lower if Company
Option Securities are exercised prior to the Closing of the
Merger), and the average exercise price of such Company Option
Securities will be $3.61 per share. See "THE MERGER AGREEMENT --
Stock Options."
Pioneer Voting Obligation. Pursuant to the Stockholder Agreement,
Pioneer has agreed to vote its Common Stock and Series C Preferred
Stock in favor of the Merger Proposal and against certain specified
transactions inconsistent therewith. See "THE STOCKHOLDER
AGREEMENT."
No Solicitation. Except as permitted in the Merger Agreement, the
Company has agreed that prior to the Effective Time it will not,
directly or indirectly, (i) solicit, initiate or encourage the
initiation of any inquiries or proposals regarding any Acquisition
Proposal (as hereinafter defined) or (ii) engage in negotiations or
discussions concerning, or provide any nonpublic information to any
person relating to, any Acquisition Proposal or (iii) agree to,
approve or recommend any Acquisition Proposal; provided, however,
that the Company may, under specified circumstances relating to an
Acquisition Proposal, respond to certain unsolicited written
proposals from third parties. When the Merger Agreement was
signed, the Company terminated discussions with CPI Securities L.P.
for an alternative financing. No other acquisition or financing
discussions were underway at such time. See "The MERGER --
Background of the Merger" and "THE MERGER AGREEMENT -- No
Solicitation."
Termination. The Merger Agreement may be terminated at any time
prior to the Effective Time: (i) by mutual written agreement of
the Company and Parent; (ii) by the Company or Parent, , if the
Merger is not consummated by July 31, 1997; (iii) by the Company
or Parent, if the Merger is enjoined or prohibited; (iv) by the
Company or Parent if the other party is in material default of its
obligations under the Merger Agreement; or (v) by the Company or
Parent if (a) the Board of Directors of the Company withdraws,
modifies or changes, or resolves to withdraw, modify or change, its
recommendation of the Merger Agreement or the Merger in a manner
adverse to Parent or (b) the Board of Directors of the Company
approves and recommends to the stockholders of the Company an
Acquisition Proposal or (c) a tender or exchange offer for 50% or
more of the outstanding shares of Common Stock is commenced (other
than by Parent or its affiliates) and the Board of Directors
recommends that stockholders tender their shares in such tender or
exchange offer. See "THE MERGER AGREEMENT -- Termination."
Fees and Expenses. The Merger Agreement provides for the payment
by the Company to Parent of a fee in the amount of $3 million plus
out-of-pocket expenses not to exceed $1 million following a
termination of the Merger Agreement under certain circumstances.
See "THE MERGER AGREEMENT -- Fees and Expenses."
Appraisal Rights of Dissenting Stockholders
Under the DGCL, holders of shares of Common Stock have the right to
dissent from the Merger and to receive payment of the fair value of
their shares upon full compliance with Section 262 of the DGCL.
See "APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS" and Annex B
hereto.
Source and Amount of Funds
Parent and Merger Sub intend to finance the payment of the Merger
Price and all costs and expenses relating to the Merger through a
portion of the Company's cash on hand, the proceeds from the
issuance of $15 million of senior subordinated secured notes, a $15
million equity contribution from the Buyer Group, which includes $5
million from Richland, Gordon & Co. and $10 million from affiliates
of Bain Capital, Inc. and borrowings under a new $120 million
senior credit facility. The Bain Capital, Inc., affiliates
involved in the transaction are three investment limited partnerships
and one general partnership, each managed by Bain Capital, Inc., the
partners of which are individual and institutional investors and
employees (or partnerships of employees) of Bain Capital, Inc.
See "SOURCE AND AMOUNT OF FUNDS."
Interests of Certain Persons in the Merger
Directors and executive officers of the Company have interests in
the Merger in addition to their interests solely as stockholders of
the Company. Those interests relate only to the receipt of cash in
exchange for Company Option Securities held by them and the
provision of indemnification after the Merger. All 678,330 Company
Option Securities held by employees, executive officers and
directors with an exercise price of less than the Common Stock
Merger Price will be "cashed out" as part of the Merger for total
consideration of approximately $1,618,000. Directors and named
executive officers of the Company own an aggregate of 561,276
Company Option Securities with option prices less than the Common
Stock Merger Price having an average exercise price of $3.64. Upon
the Closing of the Merger, directors and named executive officers
will receive an aggregate of approximately $1,327,000 in respect of
such Company Option Securities. Of such persons, Chairman of the
Board and Chief Executive Officer Roger A. Burlage will receive
$801,371 in cancellation of his Company Option Securities, Company
executive Elliot Slutzky will receive $106,750 in cancellation of
his Company Option Securities, Company executive Ann Dubinet will
receive $112,500 in cancellation of her Company Option Securities,
Company Director and Chief Financial Officer Ronald B. Cushey will
receive $97,750 in cancellation of his Company Option Securities,
and former Company executive Paul Almond will receive $97,000 in
cancellation of his Company Option Securities. In addition, one
other non-director executive officer will receive $57,000 in
cancellation of his Company Option Securities. Only Messrs.
Burlage and Cushey have contractual provisions which accelerate
vesting of their Company Option Securities in the event of the
Merger. Acceleration of vesting of the Company Option Securities
held by other non-director executive officers is a result of
negotiations with the Buyer Group. Directors other than Messrs.
Burlage and Cushey will receive $54,750 in cancellation of their
Company Option Securities. All non-employee director options were
vested when granted and may be exercised at any time. See
"INTERESTS OF CERTAIN PERSONS IN THE MERGER," "THE MERGER AGREEMENT
- -- Stock Options" and "-- Indemnification." It is expected that
current Company executives will continue with the Company after the
Merger.
Market Prices of Common Stock
The Common Stock is traded on The Nasdaq National Market System
under the symbol "LIVE." On April 17, 1997, the day the Merger
Agreement was signed and the day before public announcement of the
Merger, the last reported sale price of Common Stock, as reported
by The Nasdaq National Market System was $5.625 per share. On
June 13, 1997, the last trading day prior to the date of this Proxy
Statement, the last reported sale price of Common Stock, as
reported by The Nasdaq National Market System was $5.625 per share.
For additional information concerning historical market prices of
the Common Stock, see "MARKET PRICES OF COMMON STOCK."
Security Ownership of Certain Beneficial Owners and Management
At the close of business on the Record Date, Pioneer was the
beneficial and record owner of 637,844 shares of Common Stock and
15,000 shares of Series C Preferred Stock, representing
approximately 50.3% of the voting power of the Common Stock and
Series C Preferred Stock taken together, outstanding at such time.
See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
Selected Consolidated Financial Data
Certain selected historical consolidated financial data of the
Company are set forth under "SELECTED CONSOLIDATED FINANCIAL DATA."
That data should be read in conjunction with the financial
statements and related notes also included in this Proxy Statement.
See "SELECTED CONSOLIDATED FINANCIAL DATA" and "CONSOLIDATED
FINANCIAL STATEMENTS."
<PAGE>
THE SPECIAL MEETING
Date, Place and Time
The Special Meeting will be held at 10:00 a.m., local time, on
July 9, 1997, at the Wyndham Bel Age Hotel, 1020 North San Vicente
Boulevard, West Hollywood, California.
Purpose
At the Special Meeting, holders of Common Stock and Series C
Preferred Stock of the Company will consider and vote upon the
Merger Proposal. The stockholders of the Company will also
transact such other business as may properly come before the
Special Meeting.
The Board has determined that the Merger is in the best
interests of the Company and its stockholders and has unanimously
approved the Merger Agreement and the transactions contemplated
thereby, including the Merger. The Board unanimously recommends
that the Company's stockholders vote "FOR" the Merger Proposal.
See "THE MERGER -- Reasons for the Merger; Recommendation of the
Board."
Record Date; Voting Rights
Only holders of record of Common Stock and Series C Preferred
Stock at the close of business on the Record Date, June 6, 1997,
are entitled to receive notice of and to vote at the Special
Meeting and any adjournment or postponement thereof. The holders
of Common Stock and Series C Preferred Stock are entitled to vote
together as a single group. At the close of business on the Record
Date, there were 2,452,467 shares of Common Stock outstanding,
each of which entitles the registered holder thereof to one vote on
each matter voted upon at the Special Meeting, and 15,000 shares
of Series C Preferred Stock outstanding, each of which entitles the
registered holder thereof to 79.16 votes on each matter voted upon
at the Special Meeting.
Quorum
A majority of the outstanding shares of Common Stock and
Series C Preferred Stock taken together must be represented in
person or by proxy at the Special Meeting in order to constitute a
quorum for the transaction of business. Abstentions and broker
non-votes are counted for purposes of determining the presence or
absence of a quorum for the transaction of business.
If a quorum is not present or represented at the Special
Meeting, the stockholders entitled to vote at the Special Meeting,
whether present in person or represented by proxy, shall only have
the power to adjourn the Special Meeting for the purpose of
allowing additional time for soliciting and obtaining additional
proxies or votes. At any subsequent reconvening of the Special
Meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the original convening of the
Special Meeting, except for any proxies which have theretofore
effectively been revoked or withdrawn. At such time as a quorum is
present or represented by proxy, the Special Meeting will reconvene
without notice to stockholders, other than an announcement at the
prior adjournment of the Special Meeting, unless the adjournment
is for more than thirty days or a new record date has been set.
Proxies
All shares of Common Stock represented by properly executed
proxies in the enclosed form which are received in time for the
Special Meeting and have not been revoked will be voted in
accordance with the instructions indicated in such proxies. If no
instructions are indicated, such shares will be voted FOR the
Merger Proposal. In addition, the persons designated in such
proxies will have discretion to vote upon such other matters as may
properly come before the Special Meeting, including, without
limitation, for those proxies from persons voting in favor of the
Merger Proposal the right to vote for any adjournment thereof
proposed by the Board to solicit additional proxies.
Any proxy in the enclosed form may be revoked by the
stockholder executing it at any time prior to its exercise by
giving written notice thereof to the Secretary of the Company, by
signing and returning a later dated proxy or by voting in person at
the Special Meeting. Attendance at the Special Meeting will not in
and of itself constitute the revocation of a proxy.
Solicitation of Proxies
Proxies are being solicited hereby on behalf of the Board of
Directors of the Company. The entire cost of proxy solicitation
for the Special Meeting, including the reasonable expenses of
brokers, fiduciaries and other nominees in forwarding solicitation
material to beneficial owners, will be borne by the Company. In
addition to the use of the mail, solicitation may be made by
telephone or otherwise by directors, officers and regular employees
of the Company. Such directors, officers and regular employees
will not be additionally compensated for such solicitation, but may
be reimbursed for out-of-pocket expenses incurred in connection
therewith. If undertaken, the expense of such solicitation would be
nominal.
Required Vote
Approval of the Merger Proposal will require the affirmative
vote of the holders of a majority of the outstanding shares of
Common Stock and Series C Preferred Stock, voting together as a
single class. At the close of business on the Record Date, Pioneer
was the beneficial and record owner of 637,844 of Common Stock and
15,000 shares of Series C Preferred Stock, representing
approximately 50.3% of the voting power of the Common Stock and
Series C Preferred Stock taken together, outstanding at such time.
(Pioneer's percentage of the outstanding voting power of the Common
Stock and Series C Preferred Stock will increase to approximately
50.7% as of June 30, 1997). Pursuant to the Stockholder Agreement,
Pioneer has agreed to vote its shares of Common Stock and Series C
Preferred Stock in favor of the Merger Proposal. The
aforementioned stockholder has sufficient voting power to approve
the Merger Proposal, regardless of the vote of any other
stockholder of the Company. In addition, although they have not
formally committed to do so, the members of the Company's Board of
Directors have also agreed to vote any shares they own in favor of
the Merger Proposal. See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
Abstentions and broker non-votes with respect to the Merger
Proposal will have the effect of votes cast against it.
Appraisal Rights of Dissenting Stockholders
Under the DGCL, holders of shares of Common Stock have the
right to dissent from the Merger and to receive payment of the fair
value of their shares upon full compliance with Section 262 of the
DGCL. See "APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS" and Annex
B hereto.
PARTIES TO THE MERGER AGREEMENT
The Company
The Company is a diversified entertainment company,
specializing in the domestic and international marketing and
distribution of filmed entertainment with its primary focus on
motion pictures. The Company primarily acquires rights to produce
and distribute theatrical motion pictures, children's films, and
special interest programs which are marketed and distributed to the
theatrical, non-theatrical, home video, interactive and television
markets both domestically and internationally through its operating
divisions, including LIVE Film and Mediaworks, LIVE International,
LIVE Theatrical, LIVE Home Video, LIVE Television and LIVE
Interactive. Its principal executive offices are located at 15400
Sherman Way, Suite 500, Van Nuys, California 91406 and its
telephone number is (818) 908-0303. The Company was organized in
1988. See "ADDITIONAL INFORMATION ABOUT THE COMPANY AND ITS
BUSINESS."
Parent
Parent was incorporated solely for the purpose of consummating
the Merger. Parent has minimal assets and no business and has
carried on no activities which are not directly related to its
formation and its execution of the Merger Agreement. Parent is
controlled by Richland, Gordon & Co. and affiliates of Bain
Capital, Inc. The address of the principal executive office is c/o
Bain Capital, Inc., Two Copley Place, Boston, Massachusetts 02116
and its telephone number is (617) 572-3000.
Merger Sub
Merger Sub was incorporated solely for the purpose of
consummating the Merger. Merger Sub has minimal assets and no
business and has carried on no activities which are not directly
related to its formation and its execution of the Merger Agreement.
The address of the principal executive office is c/o Bain Capital,
Inc., Two Copley Place, Boston, Massachusetts 02116 and its
telephone number is (617) 572-3000.
THE MERGER
Background of the Merger
The Merger culminates a series of events which began in 1993
when former management of the Company successfully guided LIVE
through a prepackaged Chapter 11 reorganization which resulted in
the conversion of $110 million of senior subordinated debt and $20
million of preferred stock into $40 million of Increasing Rate
Senior Subordinated Notes due 1999 (the "Increasing Rate Notes")
and Series B Preferred Stock having a liquidation value of $60
million. Since the Company's successful reorganization, the
Company has purchased in open market transactions and retired
approximately 2,177,500 shares of the Series B Preferred Stock at
an average price of approximately $4.27 per share. Management
believed, however, that the Company's capital structure required
simplification to enable the Company to achieve its long-term
business strategy.
In March 1996 the Company retained Carreden Group Incorporated
("Carreden") to act as its exclusive financial advisor in
connection with a restructuring of the Company's capital structure
to replace or extend the term of the outstanding Increasing Rate
Notes and to reduce or eliminate the dilutive effect of the Series
B Preferred Stock by means of an exchange offer and to replace the
Company's then current $30 million revolving credit facility with
a larger less restrictive facility. The Company's management and
its advisors believed that an exchange offer for the Series B
Preferred Stock was necessary for the Company to refinance the
Increasing Rate Notes (of which $20 million is due in 1998 and the
remaining $20 million is due in 1999), and to secure a new credit
facility to replace its existing credit facility with Foothill
Capital Corporation (the "Foothill Credit Facility") which is due
in March 1998. Without prompt action, by 1998 the Series B
Preferred Stock would have had the right to convert into a
substantial majority of the Company's Common Stock.
Carreden was engaged to assist the Company in refinancing the
Increasing Rate Notes and the Series B Preferred Stock. They were
not engaged to sell the Company. Carreden contacted more than 60
financing sources in 1996, and was able to secure 21 signed
confidentiality agreements with potential lenders. After meeting
with many of these sources, Carreden received two proposals for $50
million of senior bank financing and two proposals for $50 million
of subordinate debt financing. Both bank proposals were acceptable
to the Company, and after considerable negotiations, the Company
selected the proposal submitted by Imperial Bank. One potential
subordinate debt lender conducted preliminary due diligence and
then withdrew. The other proposal was from CPI Securities, L.P.
("Canyon") and would have provided the Company with $50 million of
senior subordinated debt, but at a potential cost of between 25%
and 40% of the fully diluted equity of the Company. Carreden also
approached Bain Capital, Inc. (the "Acquisition Group") for
mezzanine financing in late July 1996, but by mid-October the
Acquisition Group decided to discuss a purchase of the entire
Company. Carreden's response was that the Company was not for sale
and suggested that the Acquisition Group purchase $50 million of
Common Stock instead for $6.00 per share. This was rejected by the
Acquisition Group.
In November 1996, the Acquisition Group sent an unsigned
proposal to Company director Melvin Pearl which provided for a
purchase of all the equity securities of the Company for $6.00 per
share for the Common Stock, $10.00 per share for the Series B
Preferred Stock (its liquidation value) and $20 million for all of
the Company's Series C Preferred Stock ($1,333.33 per share) which
will have a liquidation value per share of $1,235.33 on June 30,
1997. While Carreden and the Company continued to believe that the
Company could complete a recapitalization, the proposal put forth
by the Acquisition Group appeared on its face to be superior to the
recapitalization proposals being discussed and therefore merited
serious consideration. Two face to face meetings between the Acquisition
Group and members of management took place in November and December
1996 during which time Company management discussed with the
Acquisition Group its views as to the proper way to grow the
Company's business, increase its film production and acquisition
schedules, and the uses to which additional capital resources could
be put. Management, Melvin Pearl (Chairman of the Steering
Committee) and Carreden met with representatives of majority
stockholder Pioneer in New York on November 26, 1996 to discuss the
informal indication of interest from the Acquisition Group with
respect to acquiring the Company. Meetings between Pioneer and the
Acquisition Group were held in Los Angeles on January 14, 1997 and
in Boston on February 14, 1997. At these meetings, representatives
of the Acquisition Group discussed with representatives of the
Company and Pioneer a number of substantive issues, including the
price to be paid in the proposed transaction, the amount of the
break-up fee and the circumstances under which it would be paid by
the Company, the conduct of the Company's business prior to the
Closing of the transaction, and the financial ability of the
ultimate entity chosen as the purchaser to fulfill its obligations
under the any acquisition agreement. After receiving indications
of interest from the Company for a sale of the Company on the terms
discussed rather than a recapitalization, in December 1996 the
Acquisition Group began to conduct due diligence reviews of the
Company and its business. Neither Carreden nor the Company
actively sought out other acquisition proposals, although Carreden
believed that the Company's need for new financing (which was well
known in the film industry and financial community after the
Company Schedule 13E-4 was filed in August 1996) would have
attracted interest from any other potential acquiror.
At the same time the Acquisition Group was conducting due
diligence, representatives of Canyon and Carreden began new
negotiations to provide the capital necessary to replace the
Company's Increasing Rate Notes and to refinance and exchange the
Company's Series B Preferred Stock. By January, the Acquisition
Group had completed most of its due diligence but did not continue
to press its offer. Believing that the Acquisition Group would not
proceed, on February 11, 1997, the Company and Canyon agreed upon
a revised proposal which called for the exchange of the Company's
Series B Preferred Stock and Series C Preferred Stock for a
combination of cash and Common Stock and the refinancing of the
Company's $40 million issue of Increasing Rate Notes as further
described below (the "Canyon Proposal").
On October 17, 1996, the Company contacted Houlihan, Lokey
Howard & Zukin ("Houlihan Lokey") to evaluate and consider the
fairness to the holders of the Company's Common Stock (other than
Pioneer) of any exchange offer it might make to the holders of the
Company's Series B Preferred Stock, and determine what to set as
the Company's Common Stock value to be used in any such offer.
Thus, Houlihan Lokey had occasion to review the Canyon Proposal
while it was being considered in early 1997. Although no report
was issued, Houlihan Lokey orally suggested $4.50 per share would
be an appropriate value to use in the Canyon Proposal.
The Canyon Proposal
Under the Canyon Proposal, the Company would offer the "Common
Stock Consideration" or the "Cash and Common Stock Consideration"
for all 3,819,802 issued and outstanding shares of Series B
Preferred Stock (with a liquidation preference of $38,198,020).
The Company would also seek the consent of the holders of the
Series B Preferred Stock to amendments to the terms of the Series
B Preferred Stock, which amendments would have likely substantially
reduced the value thereof for those holders who did not accept the
exchange offer.
The Company was also to exchange shares of Common Stock and
cash for all of the Company's Series C Preferred Stock held by
Pioneer and offer to exchange a portion of a new $50 million issue
of 13.5% Senior Subordinated Secured Notes due 2003 (the "New
Notes"), Common Stock and Anti-Dilution Rights (as hereinafter
defined) for a portion of the Increasing Rate Notes.
As part of the Canyon Proposal, the Company was to distribute
to the holders of its Common Stock, and to the holders of Series B
Preferred Stock and Series C Preferred Stock who received Common
Stock in the exchanges, warrants (the "Recap Warrants") enabling
such holders to purchase up to 4,444,444 additional shares of
Common Stock at $4.50 per share for a period ending 12 months after
the consummation of the Canyon Proposal. To the extent exercised,
the net proceeds therefrom were to be used to offer to repurchase
New Notes.
The Company would also replace the Foothill Credit Facility
with a new combined credit and production facility in the principal
amount of up to $80 million to be provided by a group of banks led
by Imperial Bank.
The Common Stock Consideration for each share of Series B
Preferred Stock was equal to 2.67 shares of the Company's Common
Stock. The Cash and Common Stock Consideration for each share of
Series B Preferred Stock was the Liquidation Premium times $10.00
plus $10.00 per share in total value comprised of a varying Cash
Portion and the remainder in Common Stock valued at $4.50 per
share.
If half of the shares (plus one share) of Series B Preferred
Stock were tendered, the Cash Portion would equal $8.50 per share
of Series B Preferred Stock, and the remaining $2.00 per share of
Series B Preferred Stock would be paid in Common Stock valued at
$4.50 per share. If all of the shares of Series B Preferred Stock
were tendered, the Cash Portion would equal $5.00 per share of
Series B Preferred Stock and the remaining $6.50 per share of
Series B Preferred Stock would be paid in Common Stock valued at
$4.50 per share. For tenders of between 50% and 100% of the shares
of Series B Preferred Stock, the Cash Portion would equal $3.50
divided by the percentage of Series B Preferred Stock tendering,
plus $1.50 (varying from a minimum of $5.00 to a maximum of $8.50
per share). In all cases the remainder would be paid in Common
Stock valued at $4.50 per share.
The Liquidation Premium would equal 5% if half (plus one
share) of the shares of Series B Preferred Stock were tendered in
the Canyon Proposal (whether tendered for the Common Stock
Consideration, the Cash and Common Stock Consideration, or a
combination of both), increasing to 15% if all of the shares of
Series B Preferred Stock are tendered in the Canyon Proposal
(whether tendered for either the Common Stock Consideration, the
Cash and Common Stock Consideration, or a combinations of both) in
accordance with the following formula: Liquidation Premium equals
20% times the percentage tendering, less 5%.
This is indicated in the chart below:
Common Stock Cash and
Consideration Common Stock Consideration
Percentage Liquidation Common Stock Cash Common Stock
Tendering Premium Portion Portion
100% 15% 2.67 shares $5.00 1.444 shares
75% 10% 2.67 shares $6.167 1.074 shares
50% 5% 2.67 shares $8.50 0.444 shares
For the Canyon Proposal to have become effective (i) holders
of more than 50% of the aggregate number of shares of Series B
Preferred Stock would have had to agree to the exchange and grant
a consent to amend the terms of the Series B Preferred Stock and
(ii) the holders of the Company's Common Stock and Series C
Preferred Stock would also have had to consent to the Canyon
Proposal.
Pioneer, the holder of all of the issued and outstanding
Series C Preferred Stock (convertible as of June 30, 1997, into
1,217,069 shares of Common Stock), would have been asked to accept
as part of the Canyon Proposal the conversion of all of its Series
C Preferred Stock into a combination of Common Stock and $3 million
in cash, totaling in value more than the liquidation value of its
Series C Preferred Stock.
Concurrently with the transactions contemplated above, the
Company would offer, and Canyon would purchase, a minimum of $25
million in principal amount of New Notes. Canyon would also stand-
by to purchase an additional $25 million in principal amount of New
Notes. The New Notes were to bear interest at 13.5% per annum,
would be secured by a third lien on substantially all of the assets
of the Company, and would be due in 2003 with mandatory sinking
fund payments beginning in 2001. The opportunity to exchange up to
$25 million of the Increasing Rate Notes for a like amount of New
Notes was also to be offered to the holders of the Increasing Rate
Notes. All purchasers of New Notes were to receive additional
shares of Common Stock totaling between 20% to 25% of the fully
diluted Common Stock of the Company (the "New Notes Shares") after
completion of the various transactions included in the Canyon
Proposal. Finally, the purchasers of the New Notes were also to
receive anti-dilution rights (the "Anti-Dilution Rights") to
maintain their percentage of stock ownership at a constant level
after the exercise, if any, of the Recap Warrants described above.
If all of the holders of the Company's Series B Preferred
Stock elected to take the all Common Stock offer, Pioneer converted
as described above, $25 million of the Increasing Rate Notes
converted into the New Notes, and no Recap Warrants were exercised,
the Company's Common Stock would have been held as of June 30, 1997
as follows:
Unaffiliated Common Stockholders 1,810,423 shares 8.57%
Former Holders of Series B Preferred Stock 10,186,139 shares 48.19%
Pioneer (with respect to its Common Stock
and Series C Preferred Stock) 4,913,231 shares 23.24%
Former Holders of Increasing Rate Notes 1,056,862 shares 5.00%
Canyon 3,170,586 shares 15.00%
TOTAL 21,137,241 shares 100%
If only half of the holders of the Company's Series B
Preferred Stock elected to participate, and all chose the Cash and
Common Stock Offer, Pioneer converted as described above, none of
the holders of the Increasing Rate Notes converted into the New
Notes, and all the Recap Warrants and Anti-Dilution Rights were
exercised, the Company's Common Stock after the Canyon Proposal
would have been held as of June 30, 1997 as follows:
Unaffiliated Common Stockholders 2,967,378 shares 19.52%
Former Holders of Series B Preferred Stock 1,391,298 shares 9.15%
Pioneer (with respect to its Common Stock
and Series C Preferred Stock) 7,040,508 shares 46.32%
Former Holders of Increasing Rate Notes 0 shares 0%
Canyon 3,799,728 shares 25.00%
TOTAL 15,198,912 shares 100%
As the unaffiliated Common stockholders currently hold
approximately 1,811,000 shares representing approximately 74% of
the Company's Common Stock out of a total of 2,452,000 shares, the
Canyon Proposal would have resulted in substantial dilution to
these holders, although they would have continued to own an
interest in the Company.
Negotiations with the Buyer Group
The Company's management and Carreden continued to refine the
Canyon Proposal and draft formal documents to implement the same
during the period between February and April 1997. In the later
part of March, the Acquisition Group, acting on behalf of
affiliates, joined by affiliates of Richland, Gordon & Co.
(collectively the "Buyer Group") renewed its due diligence efforts,
and requested that the Company agree to reimburse the Buyer Group
for its out-of-pocket costs if the Buyer Group were to make a
formal offer which was rejected by the Company. The Company
refused and no formal proposal was made by the Buyer Group at that
time. The Canyon Proposal was formally presented to the full Board
at a Meeting on April 2, 1997, at which time management was
authorized to pay to Canyon $833,000 to secure an extension of the
Canyon Proposal while the Company and Carreden continued to
negotiate with the Buyer Group to document the Merger. The Board
also authorized a Steering Committee consisting of John Lloyd (a
director elected by the holders of the Series B Preferred Stock),
Gregory Pierson (a director and employee of Pioneer), Melvin Pearl
(an independent director) and Company Chairman and Chief Executive
Officer Roger Burlage to work with Company management and Carreden
to negotiate with the Buyer Group. Parallel to the negotiations
with Canyon, the Company also negotiated a commitment with a group
of banks led by Imperial Bank in Los Angeles for a new $80,000,000
senior debt revolving loan and production facility. On April 4,
1997, the Company paid to Imperial Bank $250,000 to secure its
continued commitment to have the combined revolving loan and
production facility remain available for acceptance by the Company
through April 18, 1997. Because the Buyer Group Proposal had not
yet been fully negotiated and no documents had been signed on April
2, Carreden and the Board deemed it in the best interests of the
Company and its stockholders to continue to maintain the
flexibility provided by the Canyon Proposal and the Imperial Bank
financing while it negotiated with representatives of the Buyer
Group.
During the Company's negotiations with Canyon, Imperial Bank
and the Buyer Group, the Company received on March 19, 1996 a
preliminary proposal from the Internal Revenue Service ("IRS") in
connection with an audit of the Company's film amortization
policies and certain international tax issues for the period 1989
through 1991. The IRS proposed adjustments to the tax returns
filed in those years. The Company believes the proposed
adjustments, including the additional state and federal tax and
substantial interest, may total approximately $16 million for those
periods. The Company had previously recorded an $8 million reserve
in prior years to provide for an unfavorable outcome of the tax
audit and recorded an additional tax accrual of $8 million in the
1996 financial statements. The Company had not included a tax
payment in its cash flow forecasts for 1997 and 1998. Neither
Canyon nor Imperial Bank revised their proposals in light of the
IRS audit, but the Buyer Group withdrew the first proposal made by
the Acquisition Group and, after substantial negotiations with
representatives of Pioneer, submitted a revised proposal which
resulted in the same terms to the holders of the Company's Common
Stock and Series B Preferred Stock, but resulted in a $5.8 million
decrease in the amount payable to Pioneer in respect of the Series
C Preferred Stock. (Pioneer agreed to receive $944.8624 per share
of Series C Preferred Stock which will have a liquidation value per
share of $1,235.33 on June 30, 1997).
The Company's Steering Committee and management, after
confirming Pioneer's willingness to take less consideration for its
Series C Preferred Stock, concluded that the modified Buyer Group
proposal represented the best offer available to the holders of the
Company's Common Stock, particularly in light of the tax audit and
the potential for substantial dilution to the holders of the
Company's Common Stock inherent in the Canyon Proposal as described
above (the only other alternative available to the Company at that
time) and the uncertainty of success of the Canyon Proposal, which
required acceptance by a majority of the holders of the Company's
Series B Preferred Stock. The conclusion was also based upon the
oral advice of Carreden and Houlihan, Lokey (which had been
originally retained to review an exchange offer) who had used a
value for the Company's Common Stock of $4.50 per share in the
Canyon Proposal.
During the week of April 14, Company management, members of
the Steering Committee, Carreden and Company counsel met with
representatives of the Buyer Group and its counsel to negotiate the
details of the Merger Agreement and Stockholder Agreement. Also
during that week the Company and its representatives reviewed the
terms of the financing available to the Buyer Group to consummate
the Merger. A key consideration for the Steering Committee was the
ability of Parent, which is controlled by the Buyer Group but which
had no material assets, to close the transaction. In this regard,
the Committee reviewed four commitment letters provided to Parent
for a total of $150 million of financing (see "Source of Funds").
The Steering Committee was able to receive from Bain Capital, Inc.
a letter obligating Bain Capital, Inc. to use its reasonable best
efforts to cause Parent and Merger Sub to perform their obligations
under the Merger Agreement. The completed Merger Agreement was
presented to a meeting of the full Steering Committee at 11:00 a.m.
on April 17. Present at the meeting were Melvin Pearl, Gregory
Pierson, John Lloyd, Roger Burlage, Company Executive Vice
President and Chief Financial Officer Ronald Cushey,
representatives of Carreden and Company counsel. The terms of the
Merger Agreement were reviewed with the Steering Committee and a
presentation to the Steering Committee was made by Houlihan Lokey
as to the fairness, from a financial point of view, of the Common
Stock Merger Price to the holders of Common Stock other than
Pioneer. In addition to the Houlihan Lokey presentation, the
Steering Committee met with representatives of the Buyer Group and
interviewed by telephone representatives of The Chase Manhattan
Bank, the proposed senior lender to the Buyer Group and with
Canyon, which had agreed to provide the Buyer Group with $15
million of subordinated debt, to satisfy themselves as to the
availability of adequate financing for the Buyer Group to complete
the Merger.
Having received satisfactory answers to all of their questions
and concerns and after considering the Houlihan Lokey opinion and
the other alternatives available to the Company and its
stockholders, the Steering Committee unanimously approved the
Merger Agreement and resolved to recommend the proposal to the full
Board of Directors.
Later that afternoon, at a meeting of the entire Board, the
Steering Committee presented its report summarizing the terms of
the Merger Agreement, the history of the Company's negotiations
with the Buyer Group and with Canyon, the availability of
alternatives to the Merger Agreement, and the conclusions and
recommendations of the Steering Committee with respect to the
Merger. Houlihan Lokey repeated its prior analysis for the full
Board and responded to questions from the Board. After
considerable deliberation and additional questions and answers, the
full Board voted unanimously to approve the Merger Agreement and to
recommend favorable action on the Merger Agreement to the Company's
stockholders and approved the other actions necessary to consummate
the Merger.
Failure of the Company to consummate the Merger or otherwise
recapitalize the Company at this time would have a number of
adverse effects on the Company's business and operations. The
Company will have insufficient working capital to execute its
business plan as now contemplated and will likely have to cut back
on the number of theatrical acquisitions and productions it
undertakes. The Company will have to reconsider whether it can
continue to pay cash dividends on the Series B Preferred Stock.
The Company will have to devote a substantial portion of its cash
flow to create a fund to repay the Increasing Rate Notes, of which
$20 million are due in March 1998 and the remaining $20 million in
March 1999. Finally, the Company will have to replace the Foothill
Credit Facility which is due in March 1998 and which may be
difficult to accomplish in view of the need to retire the
Increasing Rate Notes and the uncertainty of the future composition
of the Company's equity structure. The Company's cash needs if the
Merger is not completed may require that it substantially reduce
its film production and acquisition activities while it seeks
alternative financing.
The Buyer Group's Reasons for the Merger -- Operations of the
Company after the Merger
The Buyer Group has informed the Company that it believes that
the Company is an attractive acquisition candidate on both a stand-
alone basis and as a platform for the acquisition of additional
entities in the entertainment industry. On a stand-alone basis,
the Buyer Group intends to continue the Company's operations in a
manner substantially similar to its current plans, with increasing
emphasis on the exploitation of the Company's extensive film
library and control of costs in new film acquisition and
production. In addition, the Buyer Group intends to aggressively
pursue synergistic acquisition opportunities for the Company in the
entertainment industry.
Reasons for the Merger; Recommendation of the Board
The Board of Directors of the Company has determined that the
Merger is in the best interests of the Company and its stockholders
and has unanimously approved the Merger Agreement and the
transactions contemplated thereby, including the Merger. The Board
unanimously recommends that the Company's stockholders vote "FOR"
the Merger Proposal.
In determining to recommend that the Company's stockholders
vote FOR the Merger Proposal, the Board considered a number of
factors, including the following:
(i) The current and historical financial condition,
results of operations and resources of the Company, including
the need to replace the Foothill Credit Facility, refinance
the Increasing Rate Notes and to retire or exchange the Series
B Preferred Stock. The Merger Proposal, if consummated, would
serve to replace the Foothill Credit Facility with a larger
credit facility and redeem the Increasing Rate Notes and the
Series B Preferred Stock, thereby achieving several of the
goals of the Company's recapitalization plan.
(ii) The projected financial condition, results of
operations, prospects and strategic objectives of the Company
in the filmed entertainment industry, as well as the risks
involved in achieving those objectives given the given current
economic and market conditions. Consummation of the Merger
Proposal would remove from the Company's stockholders the
substantial risks inherent in the filmed entertainment
industry, although it would also eliminate the ability of the
stockholders to participate in any future growth in the value
of the Company.
(iii) The efforts conducted by the Company with the
assistance of Carreden in exploring alternative transactions
since March 1996 as described above under "-- Background of
the Merger." It was clear to the Board of Directors that only
one alternative transaction was available, the Canyon
Proposal, and that the Canyon Proposal was not as favorable to
the holders of the Company's Common Stock as the Merger
Proposal. In addition, the Board considered the potential
opposition of the holders of the Series B Preferred Stock to
the Canyon Proposal and the fact that the members of the
Company's Board of Directors elected by the holders of the
Company's Series B Preferred Stock agreed that if given a
choice between the Canyon Proposal and the Merger Proposal,
the holders of the Series B Preferred Stock would have
accepted the Merger Proposal overwhelmingly and voted against
the Canyon proposal. (The success of the Canyon Proposal was
dependant upon a majority vote in favor thereof by the holders
of the Series B Preferred Stock.)
(iv) The Board's view, after consultation with
management, counsel to the Company and Carreden, regarding the
likelihood of the existence of other viable purchasers on
terms as favorable as those in the Merger Agreement. While
Carreden did not actively seek other purchasers for the
Company, the financing sources was to proceed with the Buyer
Group's proposal contacted by Carreden included entities which
would have been potential merger candidates and none of such
persons came forward with any serious indications of interest
in an acquisition or merger.
(v) The oral opinion of Houlihan Lokey delivered to the
Steering Committee and the Board on April 17, 1997 to the
effect that, as of the date of such opinion, the Common Stock
Merger Price was fair, from a financial point of view, to the
holders of Common Stock other than Pioneer. Houlihan Lokey
confirmed its oral opinion in writing on [June 6, 1997]
("Written Opinion"). The full text of the Written Opinion,
which sets forth the assumptions made, matters considered and
limitations on the review undertaken, is attached hereto as
Annex C and should be read carefully in its entirety.
(vi) The relative lack of trading volume in the Common
Stock. Because of the lack of trading volume of the Company's
Common Stock, if a substantial number of stockholders desired
to liquidate their positions in the Company at the same time,
the price of the Company's Common Stock would likely decline
substantially. Because any increase in the Common Stock
market price after the Merger was announced was assumed to be
due to the fact of the Merger, no price adjustment in the
Merger Agreement was requested by the Company.
(vii) The availability of appraisal rights under
Section 262 of the DGCL for Dissenting Shares. Appraisal
rights would allow any stockholder who believed that the $6.00
Common Stock Merger Price was insufficient to seek an
opportunity to so assert under Delaware law.
(viii) The terms and conditions of the Merger
Agreement and the course of the negotiations resulting in the
execution thereof (including the terms of the Merger Agreement
that permit the Company, in response to an unsolicited written
proposal from a third party regarding an Acquisition Proposal,
to furnish information to and engage in discussions and
negotiations with such third party, if the Board determines in
good faith, after consultation with outside counsel, that
taking such action would be consistent with their fiduciary
duties to the Company's stockholders). The members of the
Board noted that the Merger Agreement provides that, under
certain circumstances, the Company would be obligated to pay
Parent a termination fee of $3 million and reasonable out-of-
pocket expenses up to $1 million. (Despite the provisions in
the Merger Agreement which allow the Company to respond to
unsolicited third party offers, no such third party offer has
been forthcoming in the more than six weeks that the Merger
Proposal has been publicly known.)
(ix) The requirement by Parent, as a condition to the
transaction, that Pioneer agree to vote its shares of Common
Stock and Series C Preferred Stock in favor of the Merger
Proposal and against certain specified transactions
inconsistent therewith, the stated desire of Pioneer to
proceed with the Merger; and the effect of the Pioneer voting
obligation on any other third party proposal. Pioneer was in
favor of the transaction despite the fact that the price being
paid for its Series C Preferred Stock was substantially less
than the amount to which Pioneer would be entitled upon a
liquidation of the Company.
(x) The likelihood that the Merger would be consummated,
including the likelihood of satisfying the conditions to the
consummation of the Merger contained in the Merger Agreement,
the experience, reputation and financial condition of persons
controlling Parent and the risks to the Company if the Merger
were not consummated. Management of the Company and the
Steering Committee were familiar with the reputation of Bain
Capital, Inc. in consummating transactions and were satisfied,
after their due diligence, that the sources of financing for
the Merger Proposal would be available at the Closing.
(xi) The recommendation of the Company's management with
respect to the Merger.
(xii) The superiority of the Merger Proposal, which
provided a Common Stock Merger Price of $6.00 per share, to
the Canyon Proposal, which had used a value for the Company's
Common Stock of $4.50 per share, as more fully described below.
The Board decided not to pursue the Canyon Proposal in light of
the Merger Proposal because of the superiority of the Merger Proposal
in a number of respects including: (i) the fact that the indicated value
of the Company's Common Stock (for purposes of calculating the offer to
be made to the holders of the Series B Preferred Stock) in the
Canyon Proposal was in the range of $4.50 per share while the
Merger Proposal included an all cash offer of $6.00 per share;
(ii) the fact that the Canyon Proposal was uncertain of acceptance
in that it required both the approval and cooperation of Pioneer
(which had never given final approval as a stockholder to the Canyon
Proposal) as well as a vote by the holders of a majority of the
Series B Preferred Stock (which, according to the members of the
Company's Board of Directors elected by the Series B Preferred Stock,
was not certain to be received); (iii) the fact that the holders
of the Company's Common Stock, despite an indicated value of $4.50 per
share for the Common Stock in the Canyon Proposal, would not likely
have been able to receive such a value in the period after the closing
of the Canyon Proposal (if indeed it did close) due to market pressures
if a substantial number of shareholders attempted to sell their Common
Stock; and (iv) the fact that the holders of the Series B Preferred Stock
would have not supported the Canyon Proposal over a proposal which would
have given them $10.00 in cash (also according to the members of the
Company's Board of Directors elected by the Series B Preferred Stock).
The Board also considered the fact that the Company was faced with
a loss in the fourth quarter of 1996 due to the tax audit and was likely
to have weak operating results in the first quarter of 1997 which would put
further pressure on the Company's Common Stock price (which had traded in
the $4.00 per share range before the announcement of the Merger Proposal
and the disclosure of the results of the tax audit) as further evidence
of the superiority of a $6.00 offer to an offer which would have provided
no cash for the holders of Common Stock and only limited cash to the holders
of the Series B and Series C Preferred Stock. The Board was also mindful
that an all cash offer of $6.00 per share provided certainty of value
to the holders of the Common Stock in contrast to the speculative nature
of a continuing interest in the Company. The only advantage the Board was
able to note in the Canyon Proposal over the Merger Proposal was that it
did allow the holders of the Company's Common Stock to continue to retain an
equity interest in the Company. However, that equity interest would have
been, as noted above, substantially diluted as a result of the issuance of
additional Common Stock to the holders of the Series B and Series C Preferred
Stock due to the exchange offer and to Canyon and the holders of the
Increasing Rate Notes as compensation for providing the new subordinated
debt. It was uncertain how long it would have taken, if ever, for the
Common Stock price after consummation of the Canyon Proposal to reach the
$6.00 per share offered by the Merger Proposal.
The foregoing discussion of the information and factors
considered by the Board is not meant to be exhaustive but includes
all material factors considered by it. The Board did not believe
there were any material negative factors inherent in the Merger
Proposal when compared to the alternatives available to the
Company. In view of the variety of factors considered, the Board
did not find it practical to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors
considered in reaching its determination.
In their deliberations, the Board of Directors was aware that
the Merger Proposal provided for the immediate vesting of all
unvested employee Company Option Securities and the "cashing out"
of those Option Securities and the Company Option Securities held
by directors upon consummation of the Merger. However, as the
Company Option Securities held by the non-employee members of the
Board (11 out of 13 members) were fully vested in any case, and
none of the non-employee Board members held a material number of
options, no consideration was given to their ability to "cash out"
such options at the $6.00 per share Common Stock Merger Price.
The Board was also aware of the interests and involvement of
Pioneer in connection with the Merger negotiations and the
potential for conflict. However, while Pioneer was the holder of
sufficient votes to block any proposal requiring a vote of the
holders of the Company's Common Stock, it did not control the Board
as only five members of the Company's 13 member Board of Directors
were affiliated with Pioneer. Any conflict between the Company and
Pioneer was further minimized by insuring that a majority of the
Company's Steering Committee would not be affiliated with Pioneer.
The Steering Committee, which negotiated the final terms of the
Merger Proposal, included representatives of all four
constituencies of the Board, one of its members was a Board member
elected by the holders of the Series B Preferred Stock, one of its
members was an independent director, one of its members was
affiliated with Pioneer and one of its members was the Company's
Chairman and Chief Executive Officer. All Steering Committee
Members believed the Merger Proposal to be superior to the Canyon
Proposal. In the final analysis, the Board did not believe that
Pioneer used its position as a majority stockholder to better its
economic position in connection with the Merger Proposal and,
indeed, it was Pioneer's willingness to reduce the consideration it
was to receive for its Series C Preferred Stock from $20 million to
less than $15 million after the tax audit results became known
which enabled the Company to proceed with the Merger Proposal and
maintain the Common Stock Merger Price at $6.00 per share.
Neither the Board nor the Steering Committee performed a
formal independent analysis of the financial fairness of the Merger
Proposal but did conclude, even prior to the Houlihan Lokey
presentations, that the Merger Proposal represented a superior
alternative to the Canyon Proposal for the holders of the Company's
Common Stock, even after considering the loss of potential future
stock appreciation.
Opinion of Financial Advisor
Houlihan Lokey assisted the Steering Committee and the Board
in its examination of the fairness, from a financial point of view,
of the Common Stock Merger Price to the holders of Common Stock
other than Pioneer. On April 17, 1997, Houlihan Lokey rendered its
oral opinion to the Steering Committee and the Board to the effect
that, as of such date, the Common Stock Merger Price was fair, from
a financial point of view, to the holders of Common Stock other
than Pioneer. Houlihan Lokey confirmed its oral opinion on June 6,
1997 in the Written Opinion. The full text of the Written Opinion
is attached hereto as Annex C. Holders of Common Stock are urged to
read the Written Opinion in its entirety as the Written Opinion is
subject to and based on the assumptions set forth therein.
The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analysis or summary
description. The following is a brief summary and general
description of the valuation methodologies followed and the analysis
applied by Houlihan Lokey. The summary describes all of the
material aspects of the analyses performed by Houlihan Lokey.
However, the summary does not purport to be a complete statement of
the analyses and procedures applied, the judgements made or the
conclusion reached by Houlihan Lokey, or a complete description of
its presentation. Houlihan Lokey believes, and so advised the
Steering Committee and the Board, that its analyses must be
considered as a whole, and that selecting portions of its analyses
and of the factors considered by it, without considering all
factors and analyses, could create an incomplete view of the
process underlying its analyses and opinion.
In connection with rendering the Written Opinion, Houlihan
Lokey reviewed, among other things, certain financial and other
information regarding the Company that was publicly available or
furnished to Houlihan Lokey by the Company, including certain
financial analyses, financial forecasts, reports and other
information prepared by management and representatives of the
Company. Houlihan Lokey discussed with the Company's senior
management the Company's current and historical financial condition
and results of operations and the Company's projected financial
condition, results of operations, prospects and strategic
objectives. Houlihan Lokey was not asked to, and did not,
independently conduct a solicitation of interest in the Company
from third parties.
In determining whether the Merger was fair from a financial
point of view, Houlihan Lokey:
(i) assessed the fair market value of the Company using
standard valuation methodologies used in the
entertainment industry and other industries;
(ii) analyzed the fair value of the Series B and Series C
Preferred Stock and compared such values to the
consideration offered; and
(iii) reviewed comparable transactions within the film
production industry and other industries.
In arriving at its opinion, Houlihan Lokey performed
Discounted Cash Flow ("DCF"), underlying asset and various market
multiple analyses in order to develop indications for the Total
Invested Capital ("TIC") value of the Company. The TIC value of a
business or asset is defined as the value of equity (common and
preferred) plus funded debt and contingent liabilities. After
concluding a range of TIC values for the Company, Houlihan Lokey
subtracted (i) the book value of the Company's net funded debt,
(ii) the Company's estimates for any contingent liabilities and
(iii) the liquidation value of the Series B Preferred Stock in
order to arrive at value indications for the Series C Preferred
Stock and Common Stock as a whole. Houlihan Lokey then subtracted
a range of values for the Series C Preferred Stock to arrive at a
range of per share value indications for the Common Stock.
Houlihan Lokey reviewed the relative treatment of the Common
Stock, Series C Preferred Stock and Series B Preferred Stock under
the Merger Proposal, with particular focus on the relative
treatment between the Common Stock and Series C Preferred Stock.
Houlihan Lokey noted that Series C Preferred Stock received
consideration representing a 24% discount to its stated liquidation
value plus accrued dividends.
In addition to performing the analyses described above,
Houlihan Lokey reviewed the historical trading of the Common Stock.
Houlihan Lokey noted that the Common Stock had a daily average
trading price of $4.06 per share between June 28, 1996 and April
11, 1997, and did not trade at or above $6.00 per share between
June 28, 1996 and April 11, 1997.
The various analyses performed by Houlihan Lokey all supported
the conclusion that a Common Stock Merger Price of $6.00 would be
fair to the holders of Common Stock (other than Pioneer), from a
financial point of view. Houlihan Lokey has consented to the
Company's reference to their opinion herein and to the disclosure
of the analyses performed by Houlihan Lokey in connection with
their opinion in, and the inclusion of their opinion as an exhibit
to, this Proxy Statement.
Discounted Cash Flow Analysis. The procedure discounts to
present value the estimated future earnings or cash flows to be
generated from the business or asset. Provision is also made for
the value of the enterprise or asset at the termination of the
forecast period. The cash flows projected are analyzed on a "debt-
free" basis (before cash payments to interest bearing debt and
equity investors) and, when discounted at an appropriate rate,
yield TIC value indications for the business or asset. Houlihan
Lokey prepared its DCF analysis through the use of forecasts
provided by the Company. The Company provided Houlihan Lokey with
forecasts on an aggregate basis for the film library and on a by-
title basis for current productions for the years 1997 to 1999.
With respect to future productions, the Company provided Houlihan
Lokey with various information on the types of films planned for
production and distribution including estimated production costs
and genre. Houlihan Lokey used discount rates ranging from 15.0%
to 16.5%, which were determined on the basis of an analysis of
comparable companies and on several factors such as the inflation
rate, interest rates, the inherent business risks of the Company
and the cost of capital. Houlihan Lokey used the Gordon Growth
Formula to determine a range of terminal values for the Company at
the end of the forecasted period. The Gordon Growth Formula values
future cash flows through a mathematical expression for the present
value of a cash flow stream growing at a constant rate and
discounted at a constant rate. Houlihan Lokey used a perpetual
growth rate of 0% and a range of discount rates from 15.0% to 16.5%
in its calculation of the Company's terminal value. Through the
application of this analysis, Houlihan Lokey concluded that the
Company's TIC value was fairly stated in a range of between $85
million and $100 million.
Underlying Asset Analysis. In valuing the Company's
underlying assets, Houlihan Lokey applied DCF methodologies
identical to those described above in order to value the Company's
existing film library as a separate, stand-alone asset. In this
analysis, Houlihan Lokey did not give consideration to cash flows
associated with the Company's forecasted future productions.
Estimated distribution costs were deducted and the estimated
tangible value of any of the Company's assets and liabilities not
included in the library valuation was added to the value of the
library to arrive at a value for the Company's underlying assets.
Through the application of this analysis, Houlihan Lokey concluded
that the Company's TIC value was fairly stated in a range of
between $78 million and $83 million.
Selected Comparable Public Company Analysis. The selected
comparable public company analysis involved the multiplication of
various earnings and cash flow measures by appropriate risk-
adjusted multiples. Multiples were determined through an analysis
of certain publicly traded companies. Houlihan Lokey reviewed
publicly traded companies in the entertainment industry and selected
companies that were of similar size to the Company and that are
involved in either the production and distribution of films and
television programming or the distribution of home video cassettes,
or both. These companies were also selected on the basis of
operational and economic similarity with the principal business
operations of the Company. A comparative risk analysis between the
Company and the selected public companies typically forms the basis
for the selection of appropriate risk adjusted multiples for the
Company. The risk analysis incorporates both quantitative and
qualitative risk factors which relate to, among other things, the
nature of the industry in which the Company and other comparative
companies are engaged.
The selected public companies used for comparison with the
Company were Image Entertainment, Inc., Kushner-Locke Co., Spelling
Entertainment Group, Inc., Trimark Holdings, Inc., and Unapix
Entertainment, Inc. (collectively the "Selected Companies"). Using
publicly available information for each of the Selected Companies,
Houlihan Lokey analyzed the current market price per share as a
multiple of (i) latest twelve months ("LTM") earnings per share
("EPS"), (ii) 1997 estimated EPS, and (iii) book value, for which
the Selected Companies yielded median multiples of 23.0x, 15.8x and
1.07x, respectively, and mean multiples of 30.0x, 16.9x and 1.40x,
respectively. Houlihan Lokey also calculated TIC Value as a
multiple of (i) LTM revenue, (ii) LTM earnings before interest,
taxes, depreciation and amortization ("EBITDA") and (iii) 1997
estimated EBITDA, for which the Selected Companies yielded median
multiples of 0.82x, 11.4x and 10.4x, respectively, and mean
multiples of 1.02x, 11.4x and 10.4x, respectively. The 1997
earnings estimates were based on the mean of publicly available
earnings estimates made by research analysts as provided by First
Call Investor Service. The multiples resulting from the analysis
of the Selected Companies were applied to the corresponding results
(and estimated 1997 results) of the Company and, based on both the
quantitative results of this analysis and qualitative judgments as
further described below, implied a range of TIC values for the
Company of approximately $71 million to $91 million.
Because of the volatility and wide range of profitability
associated with individual film titles and the inherent differences
between the business, operations and prospects of the Company and
the Selected Companies, Houlihan Lokey believed that it was
inappropriate to, and therefore did not, rely solely on the
quantitative results of the analysis, and accordingly also made
qualitative judgments concerning differences between the financial
and operating characteristics of the Company and the Selected
Companies that would affect the public trading values of the
Company and the Selected Companies.
Selected Comparable Transaction Analysis. Using publicly
available information, Houlihan Lokey compared selected financial
data for the Company with similar data for four selected
transactions in the film production industry and one transaction in
the educational programming industry. Transactions reviewed by
Houlihan Lokey in the film production industry included the
acquisition of The Samuel Goldwyn Company by Metromedia
International Group, Inc., the merger of Orion Pictures Corp., MCEG
Sterling Inc., The Actava Group, Inc. and Metromedia International
Telecommunications, Inc., the acquisition of RHI Entertainment,
Inc. by Hallmark Cards, Inc. and the acquisition of New Line Cinema
Corp. by Turner Broadcasting System, Inc. The one transaction
reviewed by Houlihan Lokey in the educational programming industry
was the acquisition of Westcott Communications Inc. by K-III
Communications Corp. The selected financial data analyzed by
Houlihan Lokey included (i) TIC value as a multiple of LTM revenue
and (ii) TIC value as a multiple of LTM EBITDA. Such analysis
yielded the following multiples with respect to transactions within
the film production industry: (i) a range of 1.26x to 12.43x with
a median of 1.86x for the ratio of TIC Value to LTM revenue and
(ii) a range of 20.50x to 36.60x with a median of 28.55x for the
ratio of TIC Value to LTM EBITDA. With respect to the Educational
Programming transaction, the analysis yielded multiples of 4.95x
for the ratio of TIC Value to LTM revenue and 14.00x for the ratio
of TIC Value to LTM EBITDA.
The Common Stock Merger Price of $6.00 per share implies a TIC
value of approximately $96 million, as estimated by Houlihan Lokey
as of March 31, 1997, which is at the higher end of the range of
fair TIC values calculated by Houlihan Lokey in its analyses of $71
million to $100 million.
Because the market conditions, rationale and circumstances
surrounding each of the transactions analyzed were specific to each
transaction and because of the inherent differences between the
business, operations and prospects of the Company and the acquired
businesses analyzed, Houlihan Lokey believed that a purely
quantitative comparable transaction analysis would not be
particularly meaningful. Houlihan Lokey believed that an
appropriate use of a comparable transaction analysis in this
instance would involve qualitative judgments concerning differences
between the characteristics of these transactions and the Merger
that would affect the acquisition values of the Company and the
acquired businesses described above.
In rendering its opinion, Houlihan Lokey relied, without
independent verification, on the accuracy and completeness of all
financial and other information publicly available or furnished to
Houlihan Lokey by or on behalf of the Company. Except for its
valuation of the Company's film library, Houlihan Lokey did not
make an independent evaluation or appraisal of any of the Company's
assets or liabilities. The opinion is based on all economic,
market and business and financial conditions relevant to the
Company and existing on the date of the opinion which could be
evaluated by Houlihan Lokey. The Company did not place any
limitation upon Houlihan Lokey with respect to the procedures
followed or factors considered by Houlihan Lokey in rendering the
opinion.
Houlihan Lokey also considered in its analysis the
representation from the Company and Carreden that neither the
Company nor Carreden received any offers to acquire the Company,
other than the Merger, since Carreden's retention by the Company as
Financial Advisor in March 1996.
Houlihan Lokey is nationally a recognized financial advisory
firm with substantial experience in transactions similar to the
proposed Merger. As part of its financial advisory business,
Houlihan Lokey is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions,
leveraged buyouts, restructurings, employee benefit plans, private
placements and valuation for estate, corporate and other purposes.
Houlihan Lokey had previously provided services to the Company but
is not under contract or in specific discussions to provide future
financial advisory services to the Company.
As compensation for its services to the Company in connection
with the Merger, the Company agreed to pay Houlihan Lokey a
retainer fee of $50,000 at the commencement of its engagement and
$150,000 upon rendering its opinion to the Board of Directors of
the Company, plus out-of-pocket expenses. No portion of the fee
paid to Houlihan Lokey was contingent upon the conclusion reached
in its final opinion. In addition, the Company has agreed to
reimburse Houlihan Lokey for reasonable out-of-pocket expenses,
including the fees and expenses of its legal counsel, and to
indemnify Houlihan Lokey against certain liabilities, including
liabilities under the federal securities laws, relating to, arising
out of or in connection with the engagement.
Certain Federal Income Tax Consequences
The following is a general summary of the material federal
income tax consequences of the Merger to beneficial owners of
Common Stock and to holders of options to purchase Common Stock,
and is based upon current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), existing, proposed, temporary and
final regulations thereunder and current administrative rulings and
court decisions, all of which are subject to change (possibly on a
retroactive basis). No attempt has been made to comment on all
federal income tax consequences of the Merger that may be relevant
to particular holders, including those that are subject to special
tax rules such as dealers in securities, mutual funds, insurance
companies, tax-exempt entities, holders who do not hold their
Common Stock as capital assets and holders that, for federal income
tax purposes, are non-resident alien individuals, foreign
corporations, foreign partnerships or foreign estates or trusts.
The tax discussion set forth below is included for general
information only. It is not intended to be, nor should it be
construed to be, legal or tax advice to any particular holder.
Holders are advised and expected to consult with their own legal
and tax advisers regarding the federal income tax consequences of
the Merger in light of their particular circumstances, and any
other consequences to them of the Merger under state, local and
foreign tax laws.
In general, each holder of Common Stock will recognize gain or
loss for federal income tax purposes equal to the difference, if
any, between the cash received pursuant to the Merger or pursuant
to the exercise of dissenters' rights under the DGCL and such
holder's adjusted tax basis for its Common Stock. In general, such
gain or loss will be capital gain or loss and will be long-term
capital gain or loss if the holder has held its Common Stock for
more than one year as of the Effective Time.
Unless a holder of Common Stock entitled to receive cash
payments pursuant to the Merger complies with certain reporting and
certification procedures, or otherwise demonstrates to the
satisfaction of the Exchange Agent under the Merger Agreement that
it is an exempt recipient under applicable withholding provisions
of the Code and the Treasury regulations promulgated thereunder,
such holder may be subject to federal backup withholding at a rate
of 31% with respect to all such cash payments which such holder is
entitled to receive. Backup withholding is not an additional tax.
Rather, the tax liability of persons subject to 31% backup
withholding will be reduced by the amount of tax withheld.
Pursuant to the Merger Agreement, each option to purchase
Common Stock with an exercise price less than the Closing Per Share
Amount will be canceled in exchange for cash in the manner
described herein under "THE MERGER AGREEMENT -- Stock Options."
Each option to purchase Common Stock with an exercise price greater
than or equal to the Closing Per Share Amount will be canceled
without payment of consideration. Each holder of an option to
purchase Common Stock will recognize ordinary income (subject to
applicable wage withholding) on any amounts paid in exchange for
the surrender and cancellation of such option.
Consummation of the Merger will result in a change of control
under Internal Revenue Code Section 382 limiting the future use of
the Company's existing NOL carry forwards.
Accounting Treatment
The Company understands that the Merger will be accounted for
by Parent as a "purchase" under generally accepted accounting
principles.
Delisting and Deregistration of Common Stock and Series B Preferred
Stock
If the Merger is consummated neither the Common Stock nor the
Series B Preferred Stock will be publicly traded and therefore will
be deregistered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
THE MERGER AGREEMENT
The description of the Merger Agreement contained in this
Proxy Statement discusses the material aspects thereof, but does
not purport to be complete in every respect. It is qualified in
its entirety by reference to the Merger Agreement, a copy of which
is attached hereto as Annex A and incorporated herein by reference.
Effective Time
At the time of the closing under the Merger Agreement (the
"Closing"), a Certificate of Merger (the "Certificate of Merger")
will be filed with the Secretary of State of the State of Delaware.
The Merger will become effective at the time of such filing (the
"Effective Time"). The date of the Closing is hereinafter
referred to as the Closing Date.
The Merger
At the Effective Time, Merger Sub will be merged with and into
the Company, with the Company continuing as the surviving
corporation (in such capacity, the "Surviving Corporation"). As a
result of the Merger, the separate corporate existence of Merger
Sub will cease and the Surviving Corporation will succeed to all
the rights and be responsible for all the obligations of the
Company and Merger Sub in accordance with the DGCL.
At the Effective Time, the Certificate of Incorporation and
the By-laws of the Company as in effect immediately prior thereto,
will become the Certificate of Incorporation and By-laws,
respectively, of the Surviving Corporation, until thereafter
amended in accordance with applicable law.
The directors of Merger Sub immediately prior to the Effective
Time will become the directors of the Surviving Corporation and the
officers of the Company immediately prior to the Effective Time
will be the officers of the Surviving Corporation, each to hold
office in accordance with the Certificate of Incorporation and By-
laws of the Surviving Corporation.
Conversion of Securities
Common Stock. At the Effective Time, by virtue of the Merger
and without any further action on the part of any stockholder of
the Company or Merger Sub:
(i) each issued and outstanding share of Common Stock
and any associated stockholder rights (other than shares held
by dissenting stockholders, the Company, Parent or any of
their subsidiaries) shall be canceled and converted into the
right to receive $6.00 per share, the Common Stock Merger
Price;
(ii) each share of Common Stock held by the Company,
Parent or any of their subsidiaries will be canceled without
consideration;
(iii) each dissenting stockholder shall become
entitled to receive the "fair value" of such shares judicially
determined and paid in cash in accordance with Section 262 of
the Delaware General Corporation Law (see "DISSENTERS' RIGHTS
OF APPRAISAL"); and
(iv) each issued and outstanding share of common stock,
par value $.01 per share, of the Merger Sub shall be converted
into one share of common stock of the Surviving Corporation.
Series B Preferred Stock. At the Effective Time, by virtue of
the Merger and without any further action on the part of any
stockholder of the Company or Merger Sub:
(i) each issued and outstanding share of Series B
Preferred Stock (other than shares held by the Company, Parent
or any of their subsidiaries) shall be canceled and converted
into the right to receive $10.00 per share plus accrued and
unpaid dividends, the Series B Merger Price; and
(ii) each share of Series B Preferred Stock held by the
Company, Parent or any of their subsidiaries will be canceled
without consideration.
Series C Preferred Stock. At the Effective Time, by virtue of
the Merger and without any further action on the part of any
stockholder of the Company or Merger Sub:
(i) each issued and outstanding share of Series C
Preferred Stock shall be canceled and converted into the right
to receive $944.8624 per share, the Series C Merger Price.
Shares of Common Stock which immediately prior to the
Effective Time are held by persons who have properly exercised and
perfected appraisal rights under Section 262 of the DGCL (the
"Dissenting Shares") will not be converted into the right to
receive the Common Stock Merger Price. The holders of Dissenting
Shares will be entitled to receive such consideration as shall be
determined pursuant to Section 262 of the DGCL; provided, however,
that if any such holder fails to perfect or shall withdraw or lose
such holder's right to appraisal and payment under the DGCL, each
of such holder's shares of Common Stock will be deemed to have been
converted as of the Effective Time into the right to receive the
applicable Common Stock Merger Price, without any interest thereon,
and such shares will no longer be Dissenting Shares.
After the Effective Time, holders of Common Stock, Series B
Preferred Stock and Series C Preferred Stock will cease to have
rights with respect thereto, except the right to receive the
applicable Merger Price in respect of each such share or with
respect to Common Stock and the right to perfect appraisal rights
in respect thereof. No transfer of shares of Common Stock, Series
B Preferred Stock and Series C Preferred Stock will be made on the
stock transfer books of the Surviving Corporation after the
Effective Time.
Payment of Merger Consideration
Prior to the Effective Time, the Company will appoint the
Exchange Agent under the Merger Agreement. At the Closing,
immediately prior to the Effective Time, Parent will cause Merger
Sub to deposit with the Exchange Agent, on behalf of the
stockholders of the Company, an aggregate amount in cash equal to
the applicable Merger Price multiplied by the respective number of
shares of Common Stock, Series B Preferred Stock and Series C
Preferred Stock outstanding as of the Closing (such aggregate
amount, the "Exchange Fund").
As soon as reasonably practical after the Effective Time, the
Exchange Agent will mail to each holder of record of certificate(s)
which immediately prior to the Effective Time represented
outstanding shares of Common Stock, Series B Preferred Stock and
Series C Preferred Stock ("Certificates"): (i) a letter of
transmittal (a "Letter of Transmittal") which will specify that
delivery shall be effected, and risk of loss and title to each such
Certificate shall pass only upon delivery of such Certificate to
the Exchange Agent, contain a representation in a form reasonably
satisfactory to Parent as to the good and marketable title to the
Common Stock, Series B Preferred Stock and Series C Preferred Stock
represented by such Certificate(s) free and clear of any lien, and
contain such other provisions as the Company and Parent may
reasonably specify; and (ii) instructions to effect the surrender
of such Certificate(s) in exchange for an amount equal to the
product of the applicable Merger Price and the number of shares of
Common Stock, Series B Preferred Stock and Series C Preferred
Stock, as the case may be, represented by such Certificate.
Upon surrender to the Exchange Agent of a Certificate for
cancellation, together with a duly executed Letter of Transmittal
and such other documents as the Exchange Agent may reasonably
require, the Exchange Agent will deliver the applicable Merger
Price in respect of the shares of Common Stock, Series B Preferred
Stock or Series C Preferred Stock, as the case may be, represented
by such Certificate, without interest. The Exchange Agent will
promptly surrender such Certificate to the Surviving Corporation
for cancellation.
Any portion of the Exchange Fund that remains unclaimed for
one year after the Closing Date will be delivered by the Exchange
Agent to the Surviving Corporation, upon demand, and any holder of
a Certificate who has not theretofore surrendered such Certificate
as described above may thereafter look only to the Surviving
Corporation for delivery of the applicable Merger Price in respect
of the shares of Common Stock, Series B Preferred Stock or Series
C Preferred Stock, as the case may be, represented by such
Certificate, without interest, subject in all events to all
applicable escheat and other similar laws.
If the amount to be paid from the Exchange Fund upon surrender
of a Certificate is to be delivered to a person other than the
person in whose name such Certificate is registered, it will be a
condition of such delivery that such Certificate be properly
endorsed or accompanied by appropriate stock powers, in either case
signed exactly as the name of the record holder appears on such
Certificate, and shall otherwise be in proper form for transfer,
and that the person requesting such delivery pay to the Exchange
Agent or the Surviving Corporation, as the case may be, any
transfer or other tax required by law as a result of such delivery,
or establish to the satisfaction of the Exchange Agent and the
Surviving Corporation that such tax has been paid or is not
payable.
The Exchange Agent or the Surviving Corporation will be
entitled to deduct and withhold from the Merger Price in respect of
the shares of Common Stock, Series B Preferred Stock and Series C
Preferred Stock , as the case may be, represented by Certificates
such amounts as the Company reasonably determines are required to
be deducted and withheld under the Code, or under any provision of
state, local or foreign tax law. To the extent that amounts are so
withheld by the Exchange Agent or the Surviving Corporation, such
withheld amounts will be treated as having been paid to the person
for whom such deduction and withholding was made.
Notwithstanding the foregoing, Pioneer may arrange to receive
the applicable Merger Price in respect of the Common Stock and
Series C Preferred Stock it owns at the Closing directly from
Parent. The amount deposited with the Exchange Agent will be
reduced to the extent that Pioneer receives such Merger Price at
the Closing.
Holders of Common Stock should not forward their stock
certificates with the enclosed proxy card, nor should they return
their stock certificates to the Exchange Agent until they have
received a Letter of Transmittal.
Stock Options
As of the Effective Time, each Company Option Security with an
exercise price less than the Common Stock Merger Price, will be
canceled in exchange for, and the holder of such Company Option
Security will be entitled to receive at the Closing (or thereafter,
if necessary) upon surrender of such Company Option Security for
cancellation, and before any income tax and other required
withholdings, cash equal to the product of (i) the difference
between the Common Stock Merger Price and the exercise price of
such Company Option Security, and (ii) the number of shares of
Common Stock covered by such Company Option Security. Each Company
Option Security with an exercise price greater than or equal to the
Common Stock Merger Price will be canceled without payment of
consideration. At April 30, 1997 there were an aggregate of
approximately 680,000 shares of Common Stock issuable upon exercise
of outstanding stock options at exercise prices ranging from $2.75
to $14.38.
Warrants
As of the Effective Time and in accordance with their
respective terms, each warrant issued by the Company will be
assumed by the Surviving Corporation and the holder thereof will be
entitled to receive upon surrender of such warrant together with
the payment of the exercise price therefor, cash equal to the
product of (i) the Common Stock Merger Price and (ii) the number of
shares of Common Stock covered by such warrant. At April 30, 1997,
there were an aggregate of 473,666 shares of Common Stock issuable
pursuant to outstanding warrants at exercise prices ranging from
$10.00 to $72.50.
Representations and Warranties
The Merger Agreement contains various representations and
warranties of the Company relating to, among other things, the
following matters (which representations and warranties are
subject, in certain cases, to specified exceptions): (i) the due
organization, power and standing of, and similar corporate matters
with respect to, the Company and its significant subsidiaries; (ii)
the capital structure of the Company; (iii) the authorization,
execution, delivery, performance and enforceability of the Merger
Agreement; (iv) the absence of any conflict with the Company's
certificate of incorporation and by-laws, as well as certain laws,
agreements, contracts, licenses and permits; (v) the absence of any
governmental or regulatory consent, approval or authorization
required in connection with consummation of the Merger and the
transactions contemplated by the Merger Agreement by the Company;
(vi) compliance with applicable laws and certain agreements,
contracts, licenses and permits; (vii) reports and other documents
filed with the Securities and Exchange commission and other
regulatory authorities and the accuracy of the information
contained therein; (viii) the absence of certain changes or events
involving the Company since January 1, 1997; (ix) the absence of
litigation which, if adversely determined, would have a material
adverse effect on the Company; (x) the administration of and
liabilities with respect to the Company's employee benefit plans;
(xi) the Company's employment and severance agreements; (xii) the
absence of any labor disputes involving the Company; (xiii) the
absence of any material misstatement or omission by the Company in
this Proxy Statement; (xiv) the Company's title to its properties
and use of its leased properties; (xv) the payment of taxes and the
filing of tax returns by the Company; (xvi) the Company's
compliance with applicable environmental laws and permits; (xvii)
the Company's intellectual property rights; (xviii) interested
party transactions; (xix) the adequacy of insurance maintained by
the Company;
The Merger Agreement contains various representations and
warranties of Parent and Merger Sub relating, among other things,
to: (i) their organization, existence and good standing; (ii)
corporate power, authority and similar corporate matters; (iii)
the authorization, execution, delivery and enforceability of the
Merger Agreement; (iv) consents and approvals; (v) brokers',
finders' or similar fees in connection with the Merger Agreement;
(v) the absence of conflicts, violations and defaults under the
Certificate of Incorporation and By-laws of Parent and Merger Sub,
respectively, and certain other laws and documents; and (vi) their
financing commitments.
Except for the agreements relating to effecting the Merger,
indemnification and fees and expenses, none of the representations,
warranties, covenants, agreements and certifications of the Company
contained in or pursuant to the Merger Agreement will survive the
Effective Time, and, from and after the Effective Time, Parent will
not be entitled to make any claim for breach of any such
representations, warranties, covenants or certifications.
Conduct of the Business Pending the Merger
The Company has agreed that from the date of the Merger
Agreement and until the termination of the Merger Agreement or the
Effective Time (whichever first occurs), it will:
(i) conduct its business and shall cause the businesses
of its subsidiaries to be conducted only in, and the Company
and its subsidiaries shall not take any action except in, the
ordinary course of business and in a manner consistent with
past practice; and the Company shall use all reasonable
efforts to preserve substantially intact the business
organization of the Company and its subsidiaries, to keep
available the services of the present officers, employees and
consultants of the Company and its subsidiaries and to
preserve the present relationships of the Company and its
subsidiaries with customers, suppliers and other persons with
which the Company or any of its subsidiaries has significant
business relations;
(ii) not amend or otherwise change the Certificate of
Incorporation or By-Laws of the Company or similar
organizational documents of any of its subsidiaries;
(iii) not issue, sell, pledge, dispose of or
encumber, or authorize the issuance, sale, pledge, disposition
or encumbrance of, any shares of capital stock of any class,
or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or
any other ownership interest (including, without limitation,
any phantom interest) in the Company or any of its
subsidiaries (except for the issuance of shares of Company
Stock issuable pursuant to Company Option Securities
outstanding on the date hereof or upon conversion of Series B
Preferred Stock outstanding on the date hereof);
(iv) not sell, pledge, dispose of or encumber any assets
of the Company or any of its subsidiaries (except for (i)
sales or licenses of assets in the ordinary course of business
and in a manner consistent with past practice, (ii)
dispositions of obsolete or worthless assets and (iii) sales
of immaterial assets not in excess of $500,000 in the
aggregate);
(v) not (a) except for regular quarterly dividends on
the Series B Preferred Stock in the amount of $0.25 per share,
declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any
combination thereof) in respect of any of its capital stock,
except that a wholly owned subsidiary of the Company may
declare and pay a dividend to its parent, (b) split, combine
or reclassify any of its capital stock or issue or authorize
or propose the issuance of any other securities or property in
respect of, in lieu of or in substitution for shares of its
capital stock, or (c) except with respect to outstanding
Company Option Securities the vesting of which will be
accelerated and which shall receive the consideration
described above at the Effective Time, amend the terms or
change the period of exercisability of, purchase, repurchase,
redeem or otherwise acquire, or permit any subsidiary to
purchase, repurchase, redeem or otherwise acquire, any of its
securities or any securities of its subsidiaries, including,
without limitation, shares of Common Stock or any Company
Option Security, or provide that upon the exercise or
conversion of any such Company Option Security the holder
thereof shall receive cash, or propose to do any of the
foregoing;
(vi) not (a) acquire (by merger, consolidation, or
acquisition of stock or assets) any corporation, partnership
or other business organization or division thereof, (b) incur
any indebtedness for borrowed money or issue any debt
securities, except for short-term, working capital and
commercial paper borrowings at any one time outstanding
incurred in the ordinary course of business consistent with
past practice and except for intercompany indebtedness between
the Company and any of its wholly owned subsidiaries or
between such wholly owned subsidiaries, (c) assume, guarantee
or endorse or otherwise as an accommodation become responsible
for the obligations of any person ("accommodate"), or make any
loans or advances, except in the ordinary course of business
consistent with past practice or in any case when such loans
or advances or accommodations do not exceed $1,000,000 in the
aggregate, (d) enter into or amend any material contract or
agreement (except with respect to certain specified
commitments), (e) authorize any capital expenditures (other
than for film assets) or purchase of fixed assets which are,
in the aggregate, in excess of $500,000 for the Company and
its subsidiaries taken as a whole or (f) enter into or amend
any contract, agreement, commitment or arrangement to effect
any of the matters prohibited by the provisions of the Merger
Agreement described in this clause (vi) provided, however,
that nothing shall restrict the Company from entering into
certain licensing, development or acquisition agreements or
completing existing commitments and transactions relating to
film assets;
(vii) not (a) increase the compensation payable or to
become payable to its officers or employees, except for
increases in salary or wages of employees of the Company or
its subsidiaries who are not officers of the Company in the
ordinary course of business in accordance with past practice,
(b) grant any severance or termination pay to, or enter into
any employment or severance agreement with any officer or
other employee of the Company or any of its subsidiaries who
is compensated in excess of $100,000 per year, or (iii)
establish, adopt, enter into or amend any collective
bargaining, bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other
plan, trust fund, policy or arrangement for the benefit of any
current or former directors, officers or employees, except, in
each case, as may be required by law;
(viii) except as may be required as a result of a
change in law or in generally accepted accounting principles,
not take any action to change accounting policies or
procedures (including, without limitation, procedures with
respect to revenue recognition, payments of accounts payable
and collection of accounts receivable);
(ix) not make any material tax election inconsistent with
past practice or settle or compromise any material federal,
state, local or foreign tax liability or agree to an extension
of a statute of limitations;
(x) not pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of business
and consistent with past practice of liabilities either
reflected or reserved against in the financial statements
contained in the Company SEC Reports filed prior to the date
of the Merger Agreement, or incurred in the ordinary course of
business and consistent with past practice;
(xi) not enter into any film exploitation agreements,
film asset acquisition agreements or other agreements, written
or oral, involving the production, acquisition or distribution
of films or film assets not permitted by the provisions of the
Merger Agreement described in clause (vi) above (but the
Company may discuss and negotiate such agreements); or
(xii) not take, or agree in writing or otherwise to
take, any of the actions described in (i) through (x) above,
or any action which would make any of the representations or
warranties of the Company contained in the Merger Agreement
untrue or incorrect or prevent the Company from performing or
cause the Company not to perform its covenants thereunder.
No Solicitation
The Company has agreed that prior to the earlier of the
Effective Time or the termination of the Merger Agreement it will
not, directly or indirectly, through any officer, director,
employee, representative or agent of the Company or any of its
subsidiaries, (i) solicit, initiate or encourage the initiation of
any inquiries or proposals regarding any merger, recapitalization,
sale of substantial assets, sale or exchange of shares of capital
stock (including without limitation by way of a tender offer) or
similar transactions involving the Company or any significant
subsidiaries of the Company other than the Merger (any of the
foregoing inquiries or proposals being hereinafter referred to as
an "Acquisition Proposal"), (ii) engage in negotiations or
discussions concerning, or provide any nonpublic information to any
person in connection with, any Acquisition Proposal or (iii) agree
to, approve or recommend any Acquisition Proposal; provided,
however, that the Board of Directors of the Company may respond to
and consider, negotiate, discuss, approve and recommend to the
stockholders of the Company a bona fide Acquisition Proposal not
solicited in violation of the Merger Agreement, provided the Board
of Directors of the Company determines in good faith (after
consultation with outside counsel) that the Acquisition Proposal
may present a more favorable alternative to the Company's
stockholders than the Merger and therefore that they should,
consistent with their duties as fiduciaries to the Company's
stockholders, respond to and negotiate such alternative Acquisition
Proposal. In the event the Board of Directors determines that such
Acquisition Proposal presents a more favorable alternative, the
Board of Directors may approve and recommend such Acquisition
Proposal and terminate the Company's obligations under the Merger
Agreement. However, in such event, the Company will be required to
pay to Parent a fee of $3 million plus Parent's documented out-of-
pocket expenses up to $1 million relating to the transactions
contemplated by the Merger Agreement.
The Company has agreed to immediately notify Parent after
receipt of any Acquisition Proposal, or any material modification
of or amendment to any Acquisition Proposal, or any request for
nonpublic information relating to the Company or any of its
subsidiaries in connection with an Acquisition Proposal or for
access to the properties, books or records of the Company or any
subsidiary by any person or entity that informs the Board of
Directors of the Company or such subsidiary that it is considering
making, or has made, an Acquisition Proposal. Such notice to
Parent shall be made orally and in writing, and shall indicate
whether the Company is providing or intends to provide the person
making the Acquisition Proposal with access to information
concerning the Company in accordance with the provisions of the
Merger Agreement described above.
If the Board of Directors of the Company receives a request
for material nonpublic information by a person who makes, or
indicates that it is considering making, a bona fide Acquisition
Proposal, and the Board of Directors determines in good faith
(after consultation with outside counsel) that it is required to
cause the Company to act as provided in the Merger Agreement in
order to discharge properly the directors' fiduciary duties, then,
provided such person has executed a confidentiality agreement
substantially similar to the one then in effect between the Company
and Parent, the Company may provide such person with access to
information regarding the Company.
The Company has also agreed to immediately cease and cause to
be terminated any existing discussions or negotiations with any
persons (other than Parent and Merger Sub) conducted heretofore
with respect to any Acquisition Proposal other than the
transactions contemplated by the Merger Agreement, provided,
however, that the Company may continue certain ongoing discussions
relating to financing arrangements as an alternative to the Merger
should the Merger fail to be consummated. The Company has agreed
not to release any third party from the confidentiality provisions
of any confidentiality agreement to which the Company is a party.
Additional Agreements
The Company agreed to prepare and file a preliminary proxy
statement with the Securities and Exchange Commission. The Company
will give Parent access to the Company's properties, books and
records and Parent has agreed to hold any non-public information in
confidence. Each of the Company, Parent and the Merger Sub have
agreed to take all actions necessary to comply promptly with all
legal requirements which may be imposed on them with respect to the
Merger.
Conditions Precedent to the Merger
The obligations of the Company, Parent and the Merger Sub to
consummate the Merger are conditioned, among other things, upon the
following: (i) Pioneer and Parent shall have fulfilled their
obligations under the stockholder agreement, dated as of April 17,
1997 by and among the Company, Parent and Pioneer (the"Stockholder
Agreement"); (ii) approval and adoption of the Merger Agreement by
a majority of the holders of the Common Stock and Series C
Preferred Stock, voting together as a single class; (iii) all
authorizations, consents, order or approvals, or filings with, or
expirations of waiting periods imposed by any governmental entity
necessary to consummation of the transactions contemplated by the
Merger Agreement shall have been filed, occurred or obtained; (iv)
the absence of any temporary restraining order, preliminary or
permanent injunction or other order issued by any court or other
restraint or prohibition preventing or restricting the consummation
of the Merger; and (v) Parent shall have obtained the necessary
financings described in the Commitment Letters.
The obligations of Parent and the Merger Sub to consummate the
Merger are subject to the additional conditions that: (i) the
representations and warranties of the Company set forth in the
Merger Agreement are true and correct in all material respects as
of the date on which the Effective Time occurs and that Parent and
Merger Sub shall have received an officers' certificate to such
effect; (ii) the Company shall have performed in all material
respects all its agreements and covenants under the Merger
Agreement and that Parent and Merger Sub shall have received an
officers' certificate to such effect; (iii) no event or change in
circumstances involving the Company or any of its subsidiaries
shall have occurred that will or is reasonably likely to have a
material adverse effect in the business, assets, financial
condition, prospects or results of operations of the Company and
its subsidiaries taken as a whole; and, subject to the Closing,
(iv) the Company shall have issued a notice of redemption relating
to the Increasing Rate Notes, terminated the Foothill Credit
Facility and canceled all outstanding unvested and nonexercisable
stock options in accordance with the provisions of the Merger
Agreement.
The obligation of the Company to consummate the Merger is
subject to the additional conditions that: (i) the representations
and warranties of Parent and the Merger Sub set forth in the Merger
Agreement are true and correct in all material respects as of the
date on which the Effective Time occurs and that the Company shall
have received an officers' certificate to such effect; (ii) Parent
and the Merger Sub shall have performed in all material respects
all their respective agreements and covenants under the Merger
Agreement and that the Company shall have received an officers'
certificate to such effect; and (iii) the Company shall have
received a solvency opinion from a nationally recognized valuation
firm selected by Parent which firm and opinion are both reasonably
satisfactory to the Company to the effect that: (i) the fair market
going concern value of all of the assets (including goodwill) of
the Company after the Merger will be greater than the total amount
of liabilities, including contingent, subordinated, absolute,
fixed, matured or unmatured and liquidated or unliquidated
liabilities, of the Company, and (ii) the present fair market going
concern value of the assets of the Company after the Merger
(including goodwill) is sufficient to pay the probable liability of
the Company on its debts as such debts become absolute and matured.
While certain conditions to the Closing of the Merger
Agreement may be waived upon the agreement of the parties,
conditions concerning the stockholders' vote, receipt of all
required permits and consents, availability of financing, and the
absence of court orders restraining the Closing are unlikely to be
waived or waivable. Other conditions pertaining to the conduct of
the Company's business pending the Closing, redemption of the
Increasing Rate Notes, and those pertaining to employee stock
options could be waived without effecting the Closing, although it
is not in the parties' present contemplation to agree to any such
waivers, nor does it appear that there is any need to do so.
Termination
The Merger Agreement may be terminated at any time prior to
the Closing, whether before or after approval of the Merger
Proposal by the Company's stockholders:
(i) by mutual written consent of the Company and Parent;
(ii) by either the Company or Parent if the Merger shall
not have been consummated by July 31, 1997 (provided such
consummation was not prevented by the failure of the
terminating party to fulfill one or more of its obligations
under the Merger Agreement.
(iii) by either the Company or Parent if a federal or
state court, or a governmental agency or commission, shall
have enjoined or prohibited the Merger;
(iv) by the Company or Parent if the other party is in
material default of its obligations under the Merger Agreement
(subject to certain notice and cure rights); and
(v) by the Company or Parent if (a) the Board of
Directors of the Company withdraws, modifies or changes its
recommendation of the Merger Agreement or the Merger in a
manner adverse to Parent or approves and recommends to the
stockholders of the Company an Acquisition Proposal or (b) a
tender or exchange offer for 50% or more of the outstanding
shares of Common Stock is commenced (other than by Parent or
its affiliates) and the Board of Directors recommends that
stockholders tender their shares in such tender or exchange
offer;
Should the Merger Agreement be terminated prior to Closing,
the Company and its management will concentrate their efforts on
refinancing the Company's existing Foothill Credit Facility which
expires on March 1, 1998, arranging for a refinancing source for
the Company's Increasing Rate Notes and attempting to negotiate an
exchange offer with the holders of the Company's Series B Preferred
Stock to avoid the potentially substantial dilutive effect of those
securities. It is unlikely that the Company will continue to pay
cash dividends on its Series B Preferred Stock should the Merger
Agreement fail to close as the Company will be required to preserve
its cash to meet its debt obligations (particularly under the
Increasing Rate Notes) and the Company will also likely have to
curtail its production schedule and motion picture acquisition
activities until alternative sources of financing are arranged. It
is not certain that such financing would be available under terms
acceptable to the Company. Failure to pay cash dividends on the
Series B Preferred Stock will result in the reduction of the
conversion price of such securities to the market price of the
Company's Common Stock.
Fees and Expenses
Regardless of whether the Merger is consummated, all expenses
incurred in connection with the transactions contemplated by the
Merger Agreement will be paid by the party incurring such expenses
(except that the Company has agreed to pay Parent a fee of $3
million plus Parent's documented out-of-pocket expenses up to $1
million relating to the transactions contemplated by the Merger
Agreement if the Merger Agreement is terminated (i) in connection
with an Acquisition Proposal, (ii) for failure to consummate the
Merger by July 31, 1997 due to a material failure of the Company to
comply with any of its agreements or covenants under the Merger
Agreement, or (iii) by mutual consent due to the Company's material
failure to comply with any of its agreements or covenants under the
Merger Agreement; provided, in each case that Parent is not in
material breach of the Merger Agreement at the time of such
termination). Expenses incurred in connection with preparing and
mailing this Proxy Statement will be borne by the Company.
Parent's out-of-pocket expenses will consist of legal, accounting
and other professional fees and expenses, expenses of the lenders
and other financing sources, and expenses incurred in connection
with Parent's due diligence investigation and negotiation of the
Merger Agreement.
Fees and expenses of the Company in connection with the
Merger, including filing fees, printing costs, fees paid to various
financing sources prior to acceptance of the Buyer Group Proposal,
attorneys' fees and costs, the fees of the Company's independent
accountants, fees of $1.8 million and out of pocket expenses to
Carreden, and fees of $200,000 and out of pocket expenses to
Houlihan Lokey, are expected to total approximately $4.5 million,
exclusive of fees and costs paid by the Buyer Group to secure its
financing and consummate the Merger.
Indemnification; Insurance
Pursuant to the Merger Agreement, all rights to
indemnification provided by the Company to its directors and
officers under the Company's Certificate of Incorporation and
Bylaws prior to the Effective Time will survive the Merger and
shall not be amended, repealed or otherwise modified for a period
of not less than five years from the Effective Time. Pursuant to
the Merger Agreement, Parent and the Surviving Corporation have
agreed, to the fullest extent permitted by law or the Surviving
Corporation's Certificate of Incorporation, to indemnify and hold
harmless each present and former director, officer or employee of
the Company or any of its subsidiaries and Pioneer against any
claim, action, suit, proceeding or investigation arising out of or
pertaining to the transactions contemplated by the Merger Agreement
or otherwise with respect to any acts or omissions occurring at or
prior to the Effective Time. Parent has agreed to cause the
Surviving Corporation to maintain, if available, directors' and
officers' liability insurance on comparable terms covering those
persons currently covered by the Company's policy for a period of
four years from the Effective Time, subject to certain maximum
premiums that must be paid by Parent or the Surviving Corporation.
Amendment; Waiver
No amendment, supplement, modification, waiver or termination
of the Merger Agreement will be binding unless executed in writing
by the party to be bound thereby. After approval of the Merger by
the stockholders of the Company, no amendment may be made which by
law requires further approval by such stockholders without such
further approval. No waiver of any of the provisions of the Merger
Agreement will be deemed to constitute a waiver of any other
provision of the Merger Agreement, whether or not similar, nor will
such waiver constitute a continuing waiver unless otherwise
expressly provided.
STOCKHOLDER AGREEMENT
Pioneer, the Company and Parent entered into a Stockholder
Agreement contemporaneously with the execution by the Company of
the Merger Agreement. The material terms of the Stockholder
Agreement are set forth below. A complete copy of the Stockholder
Agreement was included with an amendment to the Pioneer Schedule 13D
with respect to the Company filed by Pioneer on April 28, 1997,
with the Securities and Exchange Commission.
In order to induce Parent to enter into the Merger Agreement
and pursuant to the Stockholder Agreement, Pioneer granted Parent
an irrevocable proxy and agreed, during the period commencing on
the date of the Merger Agreement and continuing until the earlier
of the Effective Time and the termination of the Merger Agreement,
at every meeting of the stockholders of the Company, and on every
action or approval by written consent of the stockholders of the
Company, with respect to any of the following, that Pioneer will
vote all or cause to be voted the shares of Common Stock and Series
C Preferred Stock that it beneficially owns on the record date of
any such vote: (i) in favor of the Merger, the adoption of the
Merger Agreement and the approval of the terms thereof and (ii)
against the following actions (other than the Merger and the
transactions contemplated by the Merger Agreement): (a) any
merger, consolidation or other business combination involving the
Company or its subsidiaries; (b) a sale, lease or transfer of a
material amount of assets of the Company or its subsidiaries or a
reorganization, recapitalization, dissolution or liquidation of the
Company or its subsidiaries that under applicable law requires the
approval of the Company's stockholders; (c) (1) any change in the
majority of the Board of Directors of the Company; (2) any material
change in the present capitalization of the Company or any
amendment of the Company's Certificate of Incorporation that under
applicable law requires the approval of the Company's stockholders;
(3) any other material change in the Company's corporate structure
or business that under applicable law requires the approval of the
Company's stockholders; or (4) any other action that under
applicable law requires the approval of the Company's stockholders
which is intended, or could reasonably be expected, to impede,
interfere with, delay, postpone, or materially adversely affect the
consummation of the Merger or the transactions contemplated by the
Merger Agreement or the Stockholder Agreement. Pioneer has also
agreed that it will not (i) take any action to solicit or respond
to any inquiries or the making of an Acquisition Proposal that the
Company is not permitted to take pursuant to the terms of the
Merger Agreement, or (ii) enter into any agreement or take any
action the effect of which would prevent or disable Pioneer from
performing its obligations under the Stockholder Agreement. In
addition, Pioneer has agreed to pay Parent a topping fee equal to
50% of the excess of (i) the consideration received by Pioneer in
connection with an extraordinary transaction [as described more
fully in the Stockholder's Agreement] involving the Company or its
capital stock or assets that does not involve Parent or its
affiliates over (ii) the proportionate consideration payable to
Pioneer in connection with the Merger. Pioneer retained certain
"fiduciary out" rights similar to those available to the Board, but
the existence of such fiduciary out does not affect Pioneer's
obligation to pay to the Buyer Group the topping fee discussed
above.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Under the DGCL, any holder of Common Stock who does not wish
to accept the Common Stock Merger Price in respect of his or her
shares of Common Stock has the right (an "Appraisal Right") to
dissent from the Merger and to seek an appraisal of, and to be paid
the fair cash value (exclusive of any element of value arising from
the accomplishment or expectation of the Merger) for, his or her
shares of Common Stock provided that the stockholder fully complies
with the provisions of Section 262 of the DGCL ("Section 262").
The following is intended as a brief summary of the material
provisions of the statutory procedures required to be followed by
a stockholder in order to dissent from the Merger and perfect the
stockholder's Appraisal Right. This summary, however, is not a
complete statement of all applicable requirements and is qualified
in its entirety by reference to Section 262, the complete text of
which is attached hereto as Annex B.
If any holder of Common Stock elects to demand appraisal of
his or her shares of Common Stock, such holder must satisfy each of
the following conditions:
(i) the holder must deliver to the Company a written demand
for appraisal of his or her shares of Common Stock before the vote
with respect to the Merger is taken (this written demand for
appraisal must be in addition to and separate from any proxy or
vote abstaining from or against the Merger; voting against or
failing to vote for the Merger by itself does not constitute a
demand for appraisal within the meaning of Section 262); and
(ii) the holder must not vote in favor of the Merger Proposal
(an abstention or failure to vote will satisfy this requirement,
but a vote in favor, by proxy (including by returning an executed
but otherwise unmarked proxy card) or in person, will constitute a
waiver of the stockholder's Appraisal Right in respect of the
shares of Common Stock so voted and will nullify any previously
filed written demands for appraisal).
Within ten days after the Effective Time, the Company must
give written notice that the Merger has become effective to each
holder of Common Stock who so filed a written demand for appraisal
and who did not vote in favor of the Merger. Within 120 days after
the Effective Time, the Company or any stockholder who has complied
with the requirements of Section 262 may file a petition in the
Delaware Court of Chancery (the "Court of Chancery") demanding a
determination of the fair value of the shares of Common Stock held
by all stockholders entitled to appraisal. The Company does not
currently intend to file such a petition in the event there are
dissenting stockholders. Inasmuch as the Company has no obligation
to file such a petition, the failure of a stockholder to do so
within the period specified could nullify such stockholder's
previously written demand for appraisal. At any time within 60
days after the Effective Time, any stockholder who has demanded
appraisal has the right to withdraw the demand and to accept
payment of the Common Stock Merger Price in respect of his or her
shares of Common Stock. Within 120 days after the Effective Time,
any stockholder who has complied with the requirements of Section
262 is entitled, upon written request, to receive from the Company
a statement setting forth the aggregate number of shares of Common
Stock not voted in favor of the Merger Proposal and with respect to
which demands for appraisal have been received and the aggregate
number of holders of such shares.
If any stockholder fails to comply with the above provisions
and the Merger becomes effective, such stockholder will be entitled
to receive the Common Stock Merger Price in respect of his or her
shares of Common Stock as provided for in the Merger Agreement and
will have no Appraisal Rights with respect to such shares.
All demands for appraisal should be addressed to Ronald B.
Cushey, LIVE Entertainment Inc., 15400 Sherman Way, Suite 500, Van
Nuys, California 91406, before the vote on the Merger Proposal is
taken at the Special Meeting, and should be executed by, or on
behalf of, the holder of record of the shares of Common Stock. The
demand must reasonably inform the Company of the identity of the
stockholder and the intention of such stockholder to demand
appraisal of his or her shares of Common Stock.
To be effective, a demand for appraisal must be made by or in
the name of the registered stockholder, fully and correctly, as
such stockholder's name appears on his or her stock certificate(s)
and cannot be made by the beneficial owner if the beneficial owner
does not also hold the shares of Common Stock of record. The
beneficial holder must, in such cases, have the registered owner
submit the required demand in respect of such shares of Common
Stock.
If shares of Common Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of
a demand for appraisal should be made in such a capacity, and if
the shares of Common Stock are owned of record by more than one
person, as in joint tenancy or tenancy in common, the demand should
be executed by or for all joint owners. An authorized agent,
including one for two or more joint owners, may execute the demand
for appraisal for a stockholder of record; however, the agent must
identify the record owner or owners and expressly disclose the fact
that, in executing the demand, he or she is acting as agent for the
record owner. A record owner, such as a broker, who holds shares
of Common Stock as a nominee for others, may exercise his or her
right of appraisal with respect to the shares of Common Stock held
for one or more beneficial owners, while not exercising this right
for other beneficial owners. In such case, the written demand
should state the number of shares of Common Stock as to which
appraisal is sought. Where no number of shares of Common Stock is
expressly mentioned, the demand will be presumed to cover all
shares of Common Stock held in the name of such record owner.
If a petition for appraisal is duly filed by a stockholder and
a copy thereof is delivered to the Company, the Company will then
be obligated within 20 days thereafter to provide the Court of
Chancery with a duly verified list containing the names and
addresses of all stockholders who have demanded an appraisal of
their shares of Common Stock and with whom agreements as to the
value of their shares have not been reached. After notice to such
stockholders, the Court is empowered to conduct a hearing upon the
petition, to determine those stockholders who have complied with
Section 262 and who have become entitled to Appraisal Rights. The
Court may require the stockholders who have demanded payment for
their shares of Common Stock to submit their stock certificates to
the Register in Chancery for notation thereon of the pendency of
the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to
such stockholder.
After determining the stockholders entitled to an appraisal,
the Court of Chancery will appraise the shares of Common Stock,
determining their fair value exclusive of any element of value
arising from the accomplishment or expectation of the Merger. When
the value is so determined, the Court of Chancery will direct the
payment by the Company of such value, with interest thereon accrued
during the pendency of the proceeding if the Court of Chancery so
determines, to the stockholders entitled to receive the same, upon
surrender to the Company by such holders of the certificates
representing such shares of Common Stock. In determining fair
value, the Court of Chancery is required to take into account all
relevant factors.
Each Stockholder considering seeking appraisal should be aware
that the fair value of his or her shares of Common Stock determined
under Section 262 could be more, the same, or less than the Common
Stock Merger Price in respect thereof that he or she is entitled to
receive pursuant to the Merger Agreement if he or she does not seek
appraisal, and that opinions of financial advisors as to fairness
from a financial point of view are not necessarily opinions as to
fair value under Section 262.
Costs of the appraisal proceeding may be imposed upon the
parties thereto (that is, the Company and the stockholders
participating in the appraisal proceeding) by the Court of Chancery
as is deems equitable in the circumstances. Upon the application
of a stockholder, the Court of Chancery may order all or a portion
of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable
attorneys' fees and the fees and expenses of experts, to be charged
pro-rata against the value of all shares of Common Stock entitled
to appraisal.
Any stockholder who had demanded Appraisal Rights will not,
after the Effective Time, be entitled to vote shares of Common
Stock subject to such demand for any purpose or to receive payments
of dividends or any other distribution with respect to such shares
of Common Stock (other than with respect to payment as of a record
date prior to the Effective Time) or to receive the Common Stock
Merger Price in respect thereof that he or she is entitled to
receive pursuant to the Merger Agreement; however, if no petition
for appraisal is filed within 120 days after the Effective Time, or
if such stockholder delivers a written withdrawal of his or her
demand for appraisal and an acceptance of the Merger, either within
60 days after the Effective Time, or thereafter with written
approval of the Company, then the right of such stockholder to
appraisal will cease and such stockholder will be entitled to
receive the Common Stock Merger Price in respect of his or her
shares of Common Stock that he or she is entitled to receive
pursuant to the Merger Agreement, without interest.
Failure to follow the steps required by Section 262 for
perfecting Appraisal Rights may result in the loss of such rights.
In view of the complexity of Section 262, stockholders of the
Company who are considering dissenting from the Merger should
consult their legal advisors.
SOURCE AND AMOUNT OF FUNDS
Neither Parent nor Merger Sub has significant assets. Parent
and Merger Sub intend to finance the payment of the Merger Price
and all costs and expenses relating to the Merger through using a
portion of the Company's cash on hand, the issuance of $15 million
of senior subordinated secured notes due 2004 to Canyon, replacing
the Foothill Credit Facility with a $120 million senior credit
facility to be provided by The Chase Manhattan Bank and a $15
million equity contribution from Richland, Gordon & Co. and
affiliates of Bain Capital, Inc. In addition to the foregoing
financing, as of May 30, 1997, the Company had on hand
approximately $26 million. A substantial portion of these funds
will be used to pay a portion of the Merger consideration inasmuch
as the new senior credit facility to be provided by The Chase
Manhattan Bank will provide the Company with sufficient working
capital liquidity for its business needs after the Closing of the
Merger Agreement.
Each Commitment Letter received by Parent for the foregoing
financing specifically disclaims third party beneficiary status to
any person other than Parent, and therefor the Company may not
easily be able to enforce the Commitments should Parent refuse to
do so.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Directors and executive officers of the Company have interests
in the Merger in addition to their interests solely as stockholders
of the Company. Those interests relate to the receipt of cash in
exchange for outstanding options to purchase Common Stock and the
provision of indemnification after the Merger.
As described herein under "THE MERGER AGREEMENT -- Stock
Options," outstanding options to purchase Common Stock (including
unvested options) will be canceled in exchange for cash. Other
than with respect to these option payments, there are no change
of control payments. The current directors and executive
officers of the Company will receive the following amounts,
before any income tax and other required withholdings, upon
cancellation of the "in the money" options to purchase Common
Stock held by them:
Number of Number of Average Cash Consideration
Vested Unvested Option in Exchange for Vested
Name Options Options Price and Unvested Options
Roger Burlage* 108,000 228,276 $3.62 $801,371
Ronald B. Cushey* 16,000 23,000 3.49 97,750
Elliot Slutzky 14,067 29,933 3.57 106,750
Steven E. Mangel 16,667 5,333 3.41 57,000
Paul Almond 14,667 25,333 3.58 97,000
Ann Dubinet -0- 50,000 3.75 112,500
Robert L. Denton 4,017 833 3.44 12,438
Jay Burnham 5,000 -0- 3.70 11,500
Makoto Koshiba 3,000 -0- 4.08 5,750
Jonathan D. Lloyd 5,000 -0- 3.70 11,500
Charles MacDonald 1,000 -0- 4.75 1,250
Akira Niijima 2,000 -0- 4.88 2,250
Ryuichi Noda 3,000 -0- 3.83 6,500
Eiji Orii 1,000 -0- 4.75 1,250
Melvin Pearl 1,000 -0- 3.75 2,250
Gregory R. Pierson 4,000 -0- 3.75 9,000
Michael Jay Solomon 1,000 -0- 3.75 2,250
Charles A. Yamarone 1,000 -0- 4.75 1,250
Mr. Burlage is party to an employment agreement dated
January 1, 1997 with LIVE which provides that he will serve as
Chairman of the Board and Chief Executive Officer of LIVE from
January 1997 until December 2000. Mr. Burlage's salary per annum
during 1997, 1998, 1999 and 2000 will be $610,000, $671,000,
$738,000 and $812,000, respectively. Under the agreement, Mr.
Burlage will also receive incentive compensation equal to two
percent of the Company's earnings before interest and taxes in
excess of $10 million per annum, subject to certain exclusions,
limited to 100% of his base salary for the applicable year. As
part of the agreement, the Company agreed to pay for and/or
provide a life insurance policy, disability benefits, health
insurance benefits, and automobile benefits. If Mr. Burlage's
employment is terminated by LIVE for other than "good cause," he
will receive his salary, incentive compensation, life insurance,
health insurance and automobile benefits for the remainder of the
term of his employment agreement but, unless Mr. Burlage is
terminated after a change in control of the Company, all payments
pursuant to the provisions of the immediately preceding sentence
will be reduced, dollar for dollar, by the amount received by Mr.
Burlage from employment following termination of his agreement.
Under this Agreement, Mr. Burlage was granted options to purchase
183,276 shares of Company Common Stock at $3.75 per share. These
options vest on a change of control.
___________________
* Of the Unvested Options, only Mr. Burlage (as to 228,276
options at an average exercise price of $3.68 per share) and Mr.
Cushey (as to 23,000 options at an average exercise price of
$3.61 per share) have options that vest by contract upon a change
of control. All other unvested employee options will be vested
and "cashed out" with the agreement of Parent.
Mr. Cushey entered into an employment agreement with the
Company effective August 15, 1996 that contains a term through
December 31, 1999. Mr. Cushey is entitled to receive annual base
salaries of $210,000, $220,000, $230,000 and $240,000 during
1996, 1997, 1998 and 1999 respectively. If Mr. Cushey's
employment is terminated other than for cause, he will be
entitled to be paid the remaining balance of his salary in
accordance with its terms but, unless Mr. Cushey is terminated
after a change in control, all payments would be reduced by the
amounts earned by him from employment elsewhere after
termination. Under this Agreement, Mr. Cushey was granted
options to purchase 10,000 shares of Company Common Stock at
$3.75 per share. These options vest on a change of control.
Mr. Mangel entered into a three year employment agreement
with LIVE Film and Mediaworks ("LFM") effective July 1, 1994.
Mr. Mangel is entitled to receive an annual base salary of
$260,000 during the first year of the agreement with annual
increase of no less than 5%. His current annual salary is
$286,650. If Mr. Mangel's employment is terminated other than
for cause, he will be entitled to be paid the remaining balance
of his salary in accordance with its terms until he shall become
employed, in which case in certain circumstances he shall be paid
the difference (if less) between his new salary and his
compensation hereunder.
Ms. Dubinet entered into a three-year employment agreement
with LFM commencing September 12, 1996. Ms. Dubinet is entitled
to an annual salary of $350,000 for the first year, $375,000 for
the second year, and $400,000 for the third year. Ms. Dubinet
will participate in the Company's annual corporate bonus pool.
Ms. Dubinet is also entitled to receive certain performance
bonuses payable with respect to the Company's distribution
activities in domestic and foreign territories with respect to
certain films that she has brought to or acquires on behalf of
the Company in the future. Ms. Dubinet's percentage of revenues
varies from 2% of revenues in excess of a varying threshold
amount for certain acquisitions to up to 10% of revenues with
respect to other film acquisitions. In addition, distribution
fees with respect to certain preexisting films to which Ms.
Dubinet controls distribution rights are to be divided 25% to Ms.
Dubinet and 75% to the Company. Finally, the Company advanced to
an affiliate of Ms. Dubinet approximately $400,000 reflecting
commitments made by her in connection with existing films to
which the Company is acquiring distribution rights. The advance
is to be repaid, plus interest, out of fees earned from future
revenues from these films. Ms. Dubinet is to guaranty the
repayment of this advance. Ms. Dubinet is also entitled to
executive benefits comparable to those provided to other senior
executives, including life and health insurance, three weeks
vacation and reimbursement of travel and business expenses. Ms.
Dubinet has the right to terminate her employment agreement with
the Company in the event that Mr. Burlage ceases to be the Chief
Executive Officer of the Company prior to September 12, 1998.
Ms. Dubinet and the Company are completing a formal "long form"
employment agreement reflecting the foregoing terms.
Mr. Slutzky entered into an employment agreement with LFM
effective on August 15, 1996 and expiring on December 31, 1999.
Mr. Slutzky is entitled to annual base salaries of $300,000,
$320,000, $340,000 and $360,000 in 1996, 1997, 1998 and 1999,
respectively. If Mr. Slutzky's employment is terminated other
than for cause, he will be entitled to be paid the remaining
balance of his salary in accordance with its terms until he shall
become employed, in which case in certain circumstances he shall
be paid the difference (if less) between his new salary and his
compensation hereunder.
Mr. Almond entered into an employment agreement effective
August 15, 1995 and expiring on December 31, 1999. Mr. Almond is
entitled to receive annual base salaries of $215,250, $280,000,
$300,000 and $325,000 during 1996, 1997, 1998 and 1999,
respectively. If Mr. Almond's employment is terminated other
than for cause, he will be entitled to be paid the remaining
balance of his salary in accordance with its terms until he shall
become employed, in which case in certain circumstances he shall
be paid the difference (if less) between his new salary and his
compensation hereunder. Mr. Almond resigned from the Company at
the end of May 1997 for reasons unrelated to the Merger and is
now negotiating his severance agreement.
During the negotiations with the Buyer Group, proposals were
made by Company management which would have provided amendments
to the Employment Agreements of Company Chairman and Chief
Executive Officer Roger Burlage and Company Executive Vice
President and Chief Financial Officer Ronald Cushey and a new
consulting agreement with director Melvin Pearl. Discussed were
incentive compensation formulas providing for varying additional
payments depending upon the success of the Company after the
Merger. The discussions were not concluded, and at present there
are no agreements, commitments or understandings with respect to
any additional payments or amendments to the existing employment
agreements of Messrs. Burlage and Cushey or to any continuing
role by Mr. Pearl after the Merger, although such discussions may
be renewed in the future. It is not presently contemplated that
management of the Company will change after the Merger.
Each director and officer of the Company and its
subsidiaries (as well as Pioneer) will be entitled to
indemnification from the Surviving Corporation as described
herein under "THE MERGER AGREEMENT -- Indemnification."
MARKET PRICES OF COMMON STOCK
The Common Stock is traded on The Nasdaq National Market
System under the symbol "LIVE." On May 12, 1997, the Company
received a letter from the Nasdaq that due to losses incurred in
the first quarter of 1997, the Company's Common Stock might be
delisted from the Nasdaq National Market System. The Company has
requested that the Nasdaq defer this action pending the vote on
the Merger. On April 17, 1997, the day the Merger Agreement was
signed and the day before public announcement of the Merger, the
last reported sale price of Common Stock, as reported by The
Nasdaq National Market System was $5.625 per share. On June 13, 1997
the last trading day prior to the date of this Proxy Statement, the
last reported sale price of Common Stock, as reported by The Nasdaq
National Market System, was $5.625 per share. Stockholders
are urged to obtain current market quotations for the Common Stock.
The following table sets forth for the periods indicated the
high and low sales prices for the Common Stock.
Fiscal 1995 High Low
First Quarter. . . . . . . . . . . $4.000 $3.000
Second Quarter . . . . . . . . . . 5.000 3.500
Third Quarter. . . . . . . . . . . 4.375 3.500
Fourth Quarter . . . . . . . . . . 4.625 2.375
Fiscal 1996 High Low
First Quarter. . . . . . . . . . . $5.250 $2.750
Second Quarter . . . . . . . . . . 6.875 4.875
Third Quarter. . . . . . . . . . . 6.000 3.250
Fourth Quarter . . . . . . . . . . 4.250 3.750
Fiscal 1997 High Low
First Quarter. . . . . . . . . . . $5.000 $3.750
Second Quarter (through June 13, 1997) 5.875 4.375
There were approximately 1,123 record holders of the
Common Stock at the close of business on the Record Date. The
Company has not paid dividends on the Common Stock since its
organization and has no current intention to pay dividends.
MARKET PRICES OF SERIES B PREFERRED STOCK
The Series B Preferred Stock is traded on The Nasdaq SmallCap
Market. On April 17, 1997, the day before the public announcement
of the Merger, the last reported sale price of Series B Preferred
Stock, as reported by The Nasdaq SmallCap Market was $8.875 per
share. On June 13, 1997, the last trading day prior to the date
of this Proxy Statement, the last reported sale price of Series B
Preferred Stock, as reported by The Nasdaq SmallCap Market, was
$9.750 per share.
The following table sets forth for the periods indicated the
high and low sales prices for the Series B Preferred Stock.
Fiscal 1995 High Low
First Quarter. . . . . . . . . . . $4.6875 $3.7500
Second Quarter . . . . . . . . . . 5.5000 4.3750
Third Quarter. . . . . . . . . . . 7.0000 5.2500
Fourth Quarter . . . . . . . . . . 7.0000 6.1250
Fiscal 1996 High Low
First Quarter. . . . . . . . . . . $7.1250 $5.6250
Second Quarter . . . . . . . . . . 8.5000 6.7500
Third Quarter. . . . . . . . . . . 8.7500 7.1250
Fourth Quarter . . . . . . . . . . 9.1250 8.3125
Fiscal 1997 High Low
First Quarter. . . . . . . . . . . $9.2500 $8.2500
Second Quarter (through June 13, 1997) 9.9375 8.7500
There were approximately 105 record holders of the
Series B Preferred Stock at the close of business on the Record
Date. Through April 30, 1997, the Company paid quarterly cash
dividends on the Series B Preferred Stock. The dividend rate on
the Series B Preferred Stock increased to 10% per annum from 5%
per annum on May 1, 1996. If the Merger is not consummated, the
Company expects that it may no longer pay cash dividends on the
Series B Preferred Stock, although the dividend for the period
ending June 30, 1997, has been declared and will be paid in cash
on July 1, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and
Capital Resources."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 30, 1997, certain
information concerning the ownership of shares of Common Stock
and Series C Preferred Stock. The Series C Preferred Stock votes
on an as converted basis on all matters which may come before the
holders of Common Stock, voting together on such matters with the
Common Stock. As of April 30, 1997, the Series C Preferred Stock
was convertible into 1,187,384 shares of Common Stock (including
accrued but unpaid dividends through December 31, 1996). As of
June 30, 1997, the Series C Preferred Stock will become
convertible into 1,217,069 shares. Information is provided
concerning the ownership of Common Stock and Series C Preferred
Stock by (i) the holders known to the Company of more than 5% of
the outstanding shares of Common Stock or Series C Preferred
Stock, (ii) each executive officer and Director of LIVE and (iii)
all executive officers and Directors of LIVE as a group.
The table includes each person's, entity's and group's
beneficial ownership of Common Stock calculated in accordance
with Rule 13d-3(d)(1) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and includes shares of Common
Stock issued and outstanding as of April 30, 1997, as well as
shares for which beneficial ownership may be acquired within 60
days of that date. In accordance with Rule 13d-3(d)(1) under the
Exchange Act, any securities not outstanding but which are the
subject of options, warrants, rights, or conversion privileges
(or other arrangements which could result in the issuance of
additional shares of Common Stock by LIVE) exercisable within 60
days of April 30, 1997, are deemed to be outstanding for the
purpose of computing the percentage of outstanding stock of the
class owned by such person, but are not deemed to be outstanding
for the purpose of computing the percentage of the class owned by
any other person.
Certain members of the Board named in the table are
affiliated with one of the beneficial owners of more than 5% of
the Common Stock or Series C Preferred Stock (a "5% Owner"). In
certain circumstances, a 5% Owner may be deemed to beneficially
own Common Stock or Series C Preferred Stock held by such
Directors, and vice versa. For purposes of the table below, (i)
the beneficial ownership of a 5% Owner includes such Director's
ownership where indicated by footnote even though the 5% Owner
may disclaim beneficial ownership of such shares and (ii) the
beneficial ownership of the Director does not include such 5%
Owner's beneficial ownership solely by reason of such Director's
affiliation with such 5% Owner.
Beneficial Ownership of Common Stock and Series C Preferred Stock
Amount of Beneficial Ownership of
Common Stock as of April 30, 1997 (1)
Name of Beneficial Owner or
Identity of Group Number of Shares Percent
5% Owners
Pioneer . . . . . . . . . . . . . . . 1,867,913 (2) 50.7%
Le Studio (3) . . . . . . . . . . . . 257,606 7.0%
Elliott Associates, L.P. (4). . . . . 276,323 7.0%
Merrill Lynch & Co., Inc. (5) . . . . 251,800 6.4%
FMR Corp (6). . . . . . . . . . . . . 190,894 4.9%
Management
Roger A. Burlage (7). . . . . . . . . 108,000 2.9%
Jay Burnham (8) . . . . . . . . . . . 5,000 *
Ronald B. Cushey (9). . . . . . . . . 16,000 *
Ryuichi Noda (10) . . . . . . . . . . 3,000 *
Makoto Koshiba (11) . . . . . . . . . 3,000 *
Jonathan D. Lloyd (12). . . . . . . . 5,000 *
Charles MacDonald (13). . . . . . . . 2,000 *
Akira Niijima (14). . . . . . . . . . 2,000 *
Eiji Orii (15). . . . . . . . . . . . 1,000 *
Melvin Pearl (16) . . . . . . . . . . 6,000 *
Gregory R. Pierson (17) . . . . . . . 4,000 *
Michael Jay Solomon (18). . . . . . . 1,000 *
Charles A. Yamarone (19). . . . . . . 4,000 *
Paul Almond (20). . . . . . . . . . . 14,667 *
Steve Mangel (21) . . . . . . . . . . 16,801 *
Elliot Slutzky (22) . . . . . . . . . 20,067 *
Ann Dubinet . . . . . . . . . . . . . 0 *
Robert L. Denton (23) . . . . . . . . 4,017 *
All Executive Officers and Directors
as a group**(24). . . . . . . . . . . 215,552 5.2%
*Less than 1%
**18 persons comprised of all of those named above
All of the persons listed in the chart above have sole
voting power and sole investment power over the capital stock
they beneficially own unless otherwise indicated in the footnotes
below.
(1) The number of shares and percentages are based upon
3,669,536 possible votes (comprised of (i) the 2,452,467
votes which may be cast by all holders of outstanding Common
Stock and (ii) the 1,217,069 votes which may be cast by
Pioneer as the sole holder of the Series C Preferred Stock)
as of June 30, 1997. The shares of Common Stock underlying
immediately exercisable options, warrants or rights,
immediately convertible securities, or options, warrants,
rights or convertible securities that become exercisable or
convertible within 60 days of April 30, 1997 are deemed to
be outstanding for the purpose of calculating the number and
percentage owned by the holders of such options, warrants,
rights or convertible securities.
(2) Includes 1,217,069 shares of Common Stock issuable upon
conversion of the 15,000 shares of Series C Preferred Stock
held by Pioneer as of June 30, 1997. The Series C Preferred
Stock is entitled to vote together with the Common Stock on
all matters coming before the holders of the Common Stock as
if its holder had converted the Series C Preferred Stock
into Common Stock immediately prior to the relevant record
date. On that basis, Pioneer is entitled to cast 1,217,069
votes on matters coming before the holders of Common Stock
pursuant to its ownership of the Series C Preferred Stock.
Also includes options to purchase 13,000 shares of Common
Stock held by Pioneer affiliated Directors. The address of
Pioneer USA and PNA is 2265 East 220th Street, Long Beach,
California 90810. The address of Pioneer is 4-1 Meguro, 1
Chome, Meguro-ku, Tokyo 153, Japan.
(3) Represents shares of Common Stock indirectly owned by Le
Studio through its wholly-owned subsidiary Cinepole. In
their most recent Schedules 13D filed with the Commission,
Cinepole claimed shared voting power and shared investment
power over all of its 236,006 shares of Common Stock with Le
Studio and Le Studio's corporate parent, Canal+ S.A., and Le
Studio claimed shared voting power and shared investment
power over all of its 21,600 shares of Common Stock with
Canal+ S.A. The address of Cinepole is Surinameweg 2, NL -
2035 VA Haarlem, The Netherlands. The address of Le Studio
is 17, rue Dumont d'Urville, 75116 Paris, France. The
address of Canal+ S.A. is 85-89 Quai Andre Citroen, 75015
Paris, France.
(4) Includes 276,323 shares of Common Stock which may be
received within 60 days of April 30, 1997, upon conversion
of 414,485 shares of Series B Preferred Stock at $15.00 per
share. The address of Elliott Associates, L.P. ("Elliott")
is 712 Fifth Avenue, 36th Floor, New York, New York 10019.
(5) Includes 251,800 shares of Common Stock which may be
received within 60 days of April 30, 1997, upon conversion
of 377,700 shares of Series B Preferred Stock at $15.00 per
share. The address of Merrill Lynch & Co., Inc. is World
Financial Center, North Tower 250 Vesey Street, New York,
New York.
(6) Represents 190,894 shares of Common Stock which are issuable
upon exercise of presently exercisable warrants. FMR Corp.
is the parent of Fidelity Management & Research Company
which manages or advises funds that hold these warrants.
The address of FMR Corp. and Fidelity Management & Research
Company is 82 Devonshire Street, F7E, Boston, Massachusetts
02109.
(7) Includes 108,000 shares of Common Stock which are issuable
(i) upon exercise of presently exercisable options, warrants
and rights and (ii) upon exercise of options, warrants and
rights that become exercisable within 60 days of April 30,
1997 (collectively, "Option Shares").
(8) Includes 5,000 Option Shares.
(9) Includes 16,000 Option Shares.
(10) Although Mr. Noda may be deemed to own beneficially the
securities owned by Pioneer, Mr. Noda has disclaimed
beneficial ownership of such securities. Includes 3,000
Option Shares.
(11) Although Mr. Koshiba may be deemed to own beneficially the
securities owned by Pioneer, Mr. Koshiba has disclaimed
beneficial ownership of such securities. Includes 3,000
Option Shares.
(12) Includes 5,000 Option Shares.
(13) Includes 2,000 Option Shares.
(14) Although Mr. Niijima may be deemed to own beneficially the
securities owned by Pioneer, Mr. Niijima has disclaimed
beneficial ownership of such securities. Includes 2,000
Option Shares.
(15) Although Mr. Orii may be deemed to own beneficially the
securities owned by Pioneer, Mr. Orii has disclaimed
beneficial ownership of such securities. Includes 1,000
Option Shares.
(16) Includes 1,000 Option Shares.
(17) Although Mr. Pierson may be deemed to own beneficially the
securities owned by Pioneer, Mr. Pierson has disclaimed
beneficial ownership of such securities. Includes 4,000
Option Shares.
(18) Includes 1,000 Option Shares.
(19) Includes 2,000 Option Shares. Also includes 2,000 shares of
Common Stock which may be received upon the conversion (at
$15.00 per share) of 3,000 shares of Series B Preferred
Stock.
(20) Includes 14,667 Option Shares.
(21) Includes 16,667 Option Shares.
(22) Includes 14,067 Option Shares.
(23) Includes 4,017 Shares.
(24) Includes 202,418 Option Shares.
The following table sets forth, as of December 31, 1996, the
beneficial ownership of shares of the Company's Series B
Preferred Stock, by each stockholder who is known by the Company
to own more than 5% of the Series B Preferred Stock based upon
3,819,802 shares of the Series B Preferred Stock issued and
outstanding as of December 31, 1996. Although 6,000,000 shares
of Series B Preferred Stock were originally issued by the
Company, LIVE purchased approximately 2,177,500 shares through
December 1996. The Series B Preferred Stock is convertible into
Common Stock at $15.00 per share through July of 1997, at which
time the conversion price will be reduced to $13.75 per share for
the following three months.
Beneficial Ownership of Series B Preferred Stock
Shares of Percentage of
Name of Beneficial Series B Outstanding
Owner Preferred Series B
Stock Owned Preferred Stock
Elliott Associates, L.P.(1) 414,485 10.9%
Merrill Lynch & Co., Inc. (2) 377,700 9.9%
Metropolitan Life Insurance Company (3) 256,500 6.8%
(1) Elliott is a Delaware limited partnership and its principal
business is to purchase, sell, trade and invest in
securities. In its most recent Schedule 13D filed with the
Commission, Elliott claimed beneficial ownership over all
414,485 shares of Series B Preferred Stock owned by them and
indicated it has sole power to vote or direct the vote of,
and to dispose or direct the disposition of, the shares
owned. Elliott has informed the Company that its sole
general partner is Paul Singer. The address of Elliott is
712 Fifth Avenue, 36th Floor, New York, New York 10019.
(2) Represents shares of Series B Preferred Stock indirectly
owned by Merrill Lynch & Co., Inc. ("ML&Co.") and certain of
its subsidiaries and affiliates. In its most recent
Schedule 13G filed with the Commission, ML&Co. has provided
the following information. Three of the persons filing the
Schedule 13G, ML&Co., a Delaware corporation with its
principal place of business at World Financial Center, North
Tower, 250 Vesey Street, New York, New York, Merrill Lynch
Group, Inc., a Delaware corporation with its principal place
of business at World Financial Center, north Tower, 250
Vesey Street, New York, New York ("ML Group"), and Princeton
Services, Inc. a Delaware corporation with its principal
place of business at 800 Scudders Mill Road, Plainsboro, New
Jersey, ("PSI"), are parent holding companies pursuant to
the Securities Exchange Act of 1934 (the "1934 Act").
Pursuant to the instructions of Schedule 13G, the relevant
subsidiaries of ML&Co. are Merrill Lynch, Pierce, Fenner and
Smith, Incorporated, a Delaware corporation with its
principal place of business at 250 Vesey Street, New York,
New York ("MLPF&S"), ML Group, and PSI, which is the general
partner of Fund Asset Management, L.P. (d/b/a Fund Asset
Management "FAM"). The relevant subsidiary of ML Group is
PSI. ML&Co. may be deemed to be the beneficial owner of
certain of the reported securities of LIVE held by or deemed
to be beneficially owned by MLPF&S and ML Group. MLPF&S, a
wholly-owned direct subsidiary of ML&Co. and a broker-
dealer, registered under Section 15 of the 1934 Act, may be
deemed the beneficial owner of certain of the reported
securities held in accounts under which MLPF&S has
discretionary power. ML Group, a wholly-owned direct
subsidiary of ML&Co., may be deemed to be the beneficial
owner of certain of the reported securities of the Company
by virtue of its control of its wholly-owned subsidiary,
PSI. PSI, a wholly-owned direct subsidiary of ML Group, may
be deemed to be the beneficial owner of certain of the
reported securities of the Company by virtue of its being
the general partner of FAM. FAM is an investment adviser
registered under Section 203 of the Investment Advisers Act
of 1940 (the "Advisers Act"). FAM may be deemed to be the
beneficial owner of certain of the reported securities of
the Company by virtue of its acting as investment adviser to
one or more investment companies registered under Section 8
of the Investment Company Act of 1940 (the "Investment
Company Act"), and/or one or more private accounts. One
registered investment company advised by FAM, Merrill Lynch
Phoenix Fund, Inc. is the beneficial owner of certain of the
securities of the Company reported herein and is a reporting
person hereunder. Pursuant to the 1934 Act, ML&Co., ML
Group, and PSI disclaim beneficial ownership of the
securities of the Company reported in the Schedule 13G and
indicated the filing not be construed as an admission that
any such entity is, for the purposes of Section 13(d) or
13(g) of the 1934 Act, the beneficial owner of any
securities of the Company.
(3) Represents shares of Series B Preferred Stock indirectly
owned by Metropolitan Life Insurance Company
("Metropolitan") through its wholly-owned subsidiary State
Street Research & Management Company ("State Street
Research") and State Street Research's affiliate State
Street Research Investment Services, Inc. ("State Street
Services"). State Street Research and State Street Services
are investment advisers registered under the Investment
Advisers Act of 1940. In its most recent Schedule 13G filed
with the Commission, Metropolitan claimed sole voting power
and sole investment power over all 256,500 shares of Series
B Preferred Stock. In their most recent Schedule 13G filed
with the Commission, State Street Research and State Street
Services claimed that various of their clients are the
beneficial owners of all 256,500 shares of Series B
Preferred Stock held by them and State Street Research and
State Street Services disclaimed any beneficial interest in
those securities. The address of Metropolitan is One
Madison Avenue, New York, New York 10010. The address of
State Street Research and State Street Services is One
Financial Center, Boston, Massachusetts 02111-2690.
As of April 30, 1997, none of the Directors or executive
officers of the Company beneficially owned any shares of LIVE's
Series B Preferred Stock other than Mr. Yamarone, who owned 3,000
shares.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth the selected financial data
and other operating information of the Company and is derived
from the audited consolidated financial statements of the
Company. The data should be read in conjunction with the
consolidated financial statements, related notes and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Proxy
Statement. Certain re-classifications were made to the financial
information from 1992 through 1995 to conform to the 1996
presentations.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended
March 31,
1992 1993 1994(3) 1995 1996 1996 1997
(Amounts in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Net sales (1). . . . . . . . . $160,953 $143,735 $117,205 $140,112 $151,425 $22,553 $26,662
Operating (loss) profit. . . . (4,854) (21,177) (6,174) 10,826 4,034 997 (2,433)
Interest and other income
(expense), net. . . . . . . (14,424) (6,264) (3,300) 565 529 292 286
(Loss) income from continuing
operations . . . . . . . . . (17,460) (28,209) (9,674) 10,791 (3,437) 967 (2,447)
(Loss) income from discontinued
operations . . . . . . . . . 1,090 (22,083) (100) -- -- -- --
Extraordinary item . . . . . . 3,967 -- -- -- -- -- --
Net (loss) income . . . . . . (12,403) (50,292) (9,774) 10,791 (3,437) 967 (2,447)
Primary
(Loss) income per common share:
Continuing operations. . . . (8.20)(2) (13.15)(2) (8.05)(2) 1.34 (2) (3.03)(2) .10 (2) $ (1.47)
Discontinued operations. . . 45 (9.15) (0.04) -- -- -- --
Extraordinary item . . . . . 1.65 -- -- -- -- -- --
$(6.10)(2) $(22.30)(2) $(8.09)(2) $ 1.34 (2) $(3.03)(2) $(.10)(2) $ (1.47)(2)
Fully Diluted
Continuing operations. . . . (8.20)(2) (13.15)(2) (8.05)(2) .53 (2) (3.03)(2) .08 (2) (1.47)(2)
Discontinued operations. . . 45 (9.15) (0.04) -- -- -- --
Extraordinary item . . . . . 1.65 -- -- -- -- -- --
$(6.10)(2) $(22.30)(2) $(8.09)(2) $ .53 (2) $(3.03)(2) $ .08 (2) $ (1.47)(2)
</TABLE>
<TABLE>
<CAPTION
December 31, March 31
1992 1993 1994(3) 1995 1996 1997
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data
Cash and net receivables . . $ 33,183 $ 44,790 $ 26,214 $ 49,487 $ 49,898 $ 48,412
Inventories. . . . . . . . . 48,961 10,124 7,842 4,813 6,206 8,335
Total assets . . . . . . . . 297,048 253,549 156,794 149,445 143,757 140,934
Total obligations. . . . . . 207,989 242,807 121,077 111,425 115,290 116,057
Total stockholders' equity . 89,059 10,742 35,717 38,020 28,467 24,877
<FN>
(1) Net sales do not include sales of VCL/Carolco Communications
GmbH of $31,560,000, $28,511,000, $22,712,000 and $32,527,000
for the years ended December 31, 1992, 1993, 1994 and 1995,
respectively.
(2) Income (loss) per common share in 1992, 1993, 1994, 1995 and
1996 is net of preferred dividends of $2,397,000, $3,589,000,
$3,791,000, $3,027,000, and $3,952,000, respectively, and, for
1994 and 1995, is also net of accretion in the redemption value
of the Series B Preferred Stock of $6,000,000 and $4,509,000,
respectively. Income (loss) per common share for the three
months ended March 31, 1996 and 1997 is net of preferred
dividends of $669,000 and $1,142,000, respectively.
(3) The table does not include financial data of the Company's
Specialty Retail Division, which consisted of its formerly
wholly owned subsidiary, Strawberries Inc. ("Strawberries") and
Strawberries' wholly owned subsidiary, Waxie Maxie Quality Music
Co. ("Waxie Maxie"), subsequent to their sale in August 1994.
</FN>
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 1997 Compared to Three
Months Ended March 31, 1996
Continuing Operations
Net sales of the Company increased to $26,662,000 during
1997 compared to $22,553,000 during 1996. The increase of
$4,109,000, or 18.2%, is primarily attributable to increased
television, video rental and sell-through sales including the
video rental release of Trees Lounge in the first quarter of 1997
for which there was no comparable title released in the first
quarter of 1996. The increase was partially offset by a decrease
in international revenue.
Gross profits of the Company decreased $2,143,000, or 36.7%,
to $3,697,000 during 1997 compared to $5,840,000 during 1996. As
a percentage of sales, gross profit decreased to 13.9% during
1997 from 25.9% during 1996. The decrease in both the gross
profit dollars and as a percentage of sales is primarily due to
higher costs associated with the Company's theatrical releases,
including increased amortization of film costs related to
adjustments in projected value of certain film properties, in the
first quarter of 1997 and lower gross margins generated by the
increase in sell-through video sales.
Selling, general and administrative expenses of the Company
increased $1,287,000, or 33.3%, to $5,149,000 during 1997
compared to $3,862,000 during 1996. As a percentage of sales,
the amount increased to 19.3% during 1997 from 17.1% during 1996.
The dollar increase and percentage increase is primarily a result
of higher overhead costs associated with expansion of the
Company's business into theatrical, international and television
operations.
Interest and other income decreased $111,000 or 14.1% to
$678,000 during 1997 compared to $789,000 during 1996, which was
primarily the result of lower interest earned on cash balances in
the first quarter of 1997 compared to the first quarter of 1996.
Interest expense of the Company decreased $105,000, or
21.1%, to $392,000 during 1997 compared to $497,000 during 1996.
Included in interest expense for the three months ended March 31,
1996 is $170,021 related to the increase in the interest rate on
the Increasing Rate Notes from 10% to 12% per annum, which was
provided for in an amendment to the Indenture governing the
Increasing Rate Notes. The interest rate increase on the
Increasing Rate Notes was to occur in March 1996, and such
interest from and after that date is included in the carrying
value of the Increasing Rate Notes in accordance with Financial
Accounting Standards Board Statement No. 15, Accounting for
Debtors and Creditors for Troubled Debt Restructuring and
therefore not included in interest expense. The decrease was
partially offset by interest incurred on amounts outstanding
under the WEA distribution agreement.
Preferred dividends of $1,142,000 in 1997 and $699,000 in
1996 represents the cash dividend accrued on both the Series B
Preferred Stock (5% to May 1, 1996 and 10% thereafter) and the
Series C Preferred Stock (5%), as well as, in the case of the
Series C Preferred Stock, additional 5% dividends on accrued but
unpaid dividends.
Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995
Continuing Operations
Net sales of the Company increased to $151,425,000 during
1996 compared to $140,112,000 during 1995. The increase of
$11,313,000, or 8.1%, is primarily attributable to theatrical and
international sales including sales of The Substitute and The
Arrival and increased television revenue in 1996. The increase
was partially offset by a decrease in video rental sales. The
Company's home video division released 21 rental titles during
1996 compared to 24 rental titles in 1995.
Gross profits of the Company decreased $3,222,000 or 11.9%,
to $23,865,000 during 1996 compared to $27,087,000 during 1995.
As a percentage of sales, gross profit decreased to 15.8% during
1996 from 19.3% during 1995. The decrease in both gross profit
dollars and as a percentage of sales is primarily the result of
lower gross profits being generated on the Company's 1996
theatrical releases.
Selling, general and administrative expenses of the Company
increased $658,000, or 4.3%, to $15,907,000 during 1996 compared
to $15,249,000 during 1995. As a percentage of sales, the amount
decreased to 10.5% during 1996 from 10.9% during 1995. The
dollar increase is primarily a result of increased overhead costs
associated with expansion of the Company's business into
theatrical, international and television operations. The
decrease as a percentage of sales is primarily due to increased
sales in 1996.
Interest and other income decreased $366,000 or 15.1% to
$2,058,000 during 1996 compared to $2,424,000 during 1995, which
was primarily the result of a decrease in interest earned on cash
on hand.
Interest expense of the Company decreased $330,000, or
17.8%, to 1,529,000 during 1996 compared to $1,859,000 during
1995. Included in interest expense for the year ended December
31, 1995 is $563,315 related to the increase in the interest rate
on the Increasing Rate Notes from 10% to 12% per annum, which was
provided for in an amendment to the Indenture governing the
Increasing Rate Notes. The interest rate increase on the
Increasing Rate Notes was to occur in March 1996, and such
interest from and after that date is included in the carrying
value of the Increasing Rate Notes in accordance with Financial
Accounting Standards Board Statement No. 15, Accounting for
Debtors and Creditors for Troubled Debt Restructuring and
therefore not included in interest expense. The decrease was
partially offset by interest incurred on amounts outstanding
under the Company's distribution agreement with
Warner/Electra/Atlantic Corporation ("WEA") which handles
domestic distribution, billing and collections for the Company.
Preferred dividends of $3,952,000 in 1996 and $3,027,000 in
1995 represent the cash dividend accrued on both the Series B
Preferred Stock (5% to May 1, 1996 and 10% thereafter) and the
Series C Preferred Stock (5%), as well as, in the case of the
Series C Preferred Stock, additional 5% dividends on accrued but
unpaid dividends.
The effective income tax rate for 1996 was 175.3% compared
to an effective tax rate of 5.3% for 1995. The significant
increase is primarily due to the Company recording an additional
provision for income taxes of $7,100,000 in 1996 as a result of
certain adjustments proposed by the Internal Revenue Service in
connection with its examination of the Company's 1989 through
1991 tax returns.
Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994
Continuing Operations
Net sales of the Company increased to $140,112,000 during
1995 compared to $117,205,000 during 1994. The increase of
$22,907,000, or 19.5%, is primarily attributable to a stronger
video rental release schedule and increased sell-through sales
in 1995. This included increased sales on such sell-through
promotions as a Terminator package and the seasonal Christmas
product, and also the successful rental and sell-through release
of Stargate (which accounted for approximately 25% of the
Company's net sales for the year), for which there was no
comparable title released in 1994. The Company's home video
division released 24 rental titles during 1995 compared to 23
rental titles in 1994. The increase in revenue is also
attributable to increased theatrical, television and
international revenues in 1995.
Gross profits of the Company increased $11,663,000, or
75.6%, to $27,087,000 during 1995 compared to $15,424,000 during
1994. The increase in gross profit dollars was primarily related
to the increase in rental and sell-through sales noted above. As
a percentage of sales, gross profit increased to 19.3% during
1995 from 13.2% during 1994, primarily due to higher sales and
margins generated in 1995 primarily from the release of Stargate
and certain sell-through promotions.
Selling, general and administrative expenses of the Company
decreased $2,424,000, or 13.7%, to $15,249,000 during 1995
compared to $17,673,000 during 1994. As a percentage of sales,
the amount decreased to 10.9% during 1995 from 15.1% during 1994.
The dollar and percentage decrease is primarily a result of the
Company recording a reserve in 1994 of approximately $1,560,000
against a receivable owed to the Company by Carolco Pictures,
Inc. ("Carolco") and the recovery of a previously written off bad
debt from a former distributor of approximately $1,000,000 in
1995.
Interest and other income decreased $268,000 or 10.0% to
$2,424,000 during 1995 compared to $2,692,000 during 1994, which
was primarily the result of a decrease in interest earned on cash
on hand and letters of credit issued to secure film acquisitions
in 1994.
Interest expense of the Company decreased $4,133,000, or
69.0%, to $1,859,000 during 1995 compared to $5,992,000 during
1994. Interest expense decreased as a result of the repayment of
$37,000,000 of 12% Subordinated Secured Notes due 1994 (the "12%
Notes") during September and October of 1994 and a decrease in
the amortization of loan costs in 1995.
Preferred dividends of $3,027,000 in 1995 and $3,791,000 in
1994 represent the 5% cash dividend accrued on both the Series B
Preferred Stock and the Series C Preferred Stock, as well as, in
the case of the Series C Preferred Stock, additional 5% dividends
on accrued but unpaid dividends.
The effective income tax rate for 1995 was 5.3% compared to
an effective tax rate of 2.1% for 1994, primarily due to the
Company having income from continuing operations of $11,391,000
(1995) as compared to a loss from continuing operations of
$9,474,000 (1994).
Disposal of a Portion of a Line of Business
As a result of the Board of Directors' decision to dispose
of the Company's interests in VCL/Carolco Communications GmbH
("VCL"), the results of operations for VCL have been restated to
account for the sale of VCL as a disposal of a portion of a line
of business. Accordingly, a provision for losses during the
phase-out period totaling $3,885,000 for VCL had been accrued and
accounted for at December 31, 1993 and was not included in the
results of operations for 1994 and 1995. In November 1995, the
Company and certain of its affiliates, on the one hand, and Datty
Ruth, the owner of 19% of VCL, and Apricot Computer GmbH
(Apricot), on the other, consummated a transaction whereby the
Company's 81% interest in VCL, as well as all receivables owed by
VCL to the Company or its affiliates, was transferred to Ruth and
Apricot. The total consideration received by the Company and its
affiliates in connection with such transaction was approximately
$7,444,000, of which approximately $3,100,000 was received in
February 1995. The remaining $4,344,000 was received in November
1995. The Company reflected a gain of approximately $2,913,000 in
the quarter ended September 30, 1995, resulting from the
completion of this transaction.
Net sales of VCL increased to $32,257,000 during 1995
compared to $22,712,000 during 1994. The increase of $9,545,000,
or 42.0%, was due primarily to a stronger release schedule in
1995. For the year ended December 31, 1994, net revenues,
operating profits and identifiable assets relating to foreign
operations were $26,629,000, $2,945,000 and $33,262,000,
respectively. For the years ended December 31, 1995, net
revenues and operating profits relating to foreign operations
were $32,257,000 and $8,775,000 respectively.
Liquidity and Capital Resources
Historically, the Company has funded its operations through
a combination of cash generated from operations, bank borrowings,
advances from distributors under distribution agreements and the
proceeds from the issuance of debt instruments. For the three
months ended March 31, 1997 the Company generated positive cash
flow from operations of approximately $12,269,000 primarily due
to collections of accounts receivable.
Operating results of the Company can be significantly
affected in any one reporting period by the amount, quality, and
availability of film properties available for exploitation.
Movement of release and availability dates of films from one
quarter to another quarter, or year to year, can have a material
impact on the planned and potential operating results for the
periods affected.
The Company is party to an agreement with Broadway Video
Entertainment ("BVE") that granted the Company certain home video
rights to certain Christmas and other seasonal video programs.
This agreement expires at the end of 1997. BVE recently sold its
family entertainment library to Golden Books Family Entertainment
Inc. and the Company was unable to renew its license to
distribute these programs when the current agreement expires.
Programs under this contract provided approximately 9.7% of the
Company's total net revenues for 1996 and 1995, and approximately
16.7% and 13.3% of the company's gross profit for 1996 and 1995,
respectively.
The Company is currently under examination by the Internal
Revenue Service ("IRS") for the years ended 1989 through 1994 and
by the California Franchise Tax Board for the years ended 1988
through 1990. In connection with their examination the Company
has received certain proposed adjustments from the IRS for the
1989 through 1991 tax years, the impact of which may be to
significantly increase the Company's taxable income and related
tax liability in certain years under examination. The Company is
in the process of analyzing the proposed adjustments,
alternatives available to the Company and the potential impact
the proposed adjustments will have. While the outcome of the
examination is unknown, in the fourth quarter of 1996 the Company
recorded an additional provision for income taxes and interest
there on related to the years under examination of approximately
$7,100,000. Based on the most recent discussions between the
Company and the tax authorities the Company believes that, with
the additional provision for income taxes recorded in 1996, it
has provided adequate reserves to cover its income tax
liabilities at December 31, 1996 and March 31, 1997. The payment
date of the potential income tax liabilities accrued as of
December 31, 1996 related to the proposed IRS audit adjustments
is not known at this time, but may ultimately occur in the 1997
fiscal year.
On May 27, 1995, LIVE entered into a three year extension of
its distribution agreement with WEA. Under the terms of the
agreement, WEA advanced $10,000,000 to LIVE, recoupable from
distribution revenues during the three year term of the agreement
at $277,778 per month, plus interest at LIBOR plus 0.2%. On
October 21, 1996 LIVE amended the distribution agreement,
effective as of May 7, 1996, whereby LIVE assumed responsibility
of all sales and sales solicitation services which were
previously the responsibility of WEA. The amendment also
included a reduction in certain distribution fees charged by WEA,
as a result of the shift in sales and sales solicitation
responsibility, and an additional advance to LIVE of $10,000,000.
The additional advance is recoupable from distribution revenues
during the remaining term of the agreement at $476,190 per month
plus interest at LIBOR + 0.2%. In order to obtain the advances,
LIVE granted WEA a second priority security interest in
substantially all of LIVE's assets. As of March 31, 1997, there
was $11,310,000 outstanding under the advance, and the interest
rate on the advance at March 31, 1997 was 5.7%.
Investing activities generated a negative cash flow of
$420,000 during the three months ended March 31, 1997, primarily
as a result of the acquisition of property and equipment at the
Company.
LIVE experienced negative cash flows from financing
activities of $5,429,000 during the three months ended March 31,
1997 primarily due to interest and principal payments on long
term obligations and payment of dividends on the Series B
Preferred Stock.
LIVE and its affiliates are a party to a three-year
$30,000,000 revolving credit facility with Foothill Capital
Corporation (the "Foothill Credit Facility") that expires in
November 1997. In March 1997, an amendment was entered into that
extended the expiration date of the Foothill Credit Facility,
under the existing terms, to March 1, 1998. Borrowings available
under the Foothill Credit Facility are limited to $27,500,000
until additional participant lenders are added to the Foothill
Credit Facility, at which time the borrowings available will be
increased to a maximum $30,000,000. Borrowings under the
Foothill Credit Facility are secured by substantially all of the
assets of LIVE and its affiliates. Outstanding borrowings under
the Foothill Credit Facility bear interest at the rate of 2% per
annum above the highest of the Bank of America, Mellon Bank or
Citibank prime rate, payable monthly. In no event will interest
under the Foothill Credit Facility be less than 7% per annum.
The Foothill Credit Facility provided for a closing fee of
$500,000, an annual facility fee of 1/4 of 1% and a commitment
fee of 1/4 of 1% on any unused amount. The Foothill Credit
Facility also requires LIVE to meet certain financial ratios, and
as of March 31, 1997 the Company was in compliance with all such
financial ratios. There were no amounts outstanding under the
Foothill Credit Facility as of March 31, 1997.
The Company has not borrowed any funds under the Foothill
Credit Facility since it was obtained in November 1994, and the
Company has had substantial cash balances throughout the 1995 and
1996 fiscal years. As a result of the Company's upcoming
anticipated cash expenditures relating to the Merger and
theatrical releases and production/acquisition schedules for the
remainder of 1997, it is expected that the cash balances on hand
will be utilized and the Company will have to draw funds against
its credit facility to meet its anticipated future cash
expenditures. This will reduce the liquidity of the Company in
1997 when compared to the 1995 and 1996 cash and borrowing
positions. In connection with the Merger, the Company will
replace and expand the Foothill Credit Facility, which will
provide the Company with increased liquidity over a term beyond
March of 1998 and allow it to fulfill its present business plan.
If the Merger is not consummated and a new expanded credit
facility is not entered into, the Company believes it will be
able to extend the existing credit facility or find alternative
credit facility sources in order to allow it to continue its
business operations, although in a slightly reduced capacity.
Dividends on the Series C Preferred Stock, at the rate of 5%
per annum on the unreturned $15,000,000 liquidation value of the
Series C Preferred Stock, are due on June 30 and December 31 of
each year. Although the dividends scheduled to be paid on June
30 and December 31 of 1993, 1994, 1995 and 1996 were accrued by
LIVE, those dividends were not paid due to restrictions imposed
on LIVE by the terms of the Series B Preferred Stock, which
prohibit the payment of dividends on the Series C Preferred Stock
unless the aggregate amount of such dividends, together with all
cash dividends paid on the Series B Preferred Stock, does not
exceed the net income of LIVE (adding back specified net worth
exclusions) since the March 23, 1993 date of issuance of the
Series B Preferred Stock and Series C Preferred Stock. LIVE has
had a cumulative consolidated net loss for the period subsequent
to March 23, 1993. Thus, pursuant to the terms of the Series B
Preferred Stock, LIVE was prohibited from paying the June 30 and
December 31, 1993, 1994, 1995 and 1996 cash dividends on the
Series C Preferred Stock which, together with accrued and unpaid
dividends thereon, totaled approximately $3,078,000 as of March
31, 1997.
The unpaid Series C Preferred Stock dividend itself bears a
dividend of 5% per annum, and is due on the next regularly
scheduled dividend payment date for the Series C Preferred Stock.
These accrued and unpaid dividends will be eliminated in
connection with the Merger upon payment of the Series C Merger
Price.
As of March 31, 1997, the aggregate redemption price for the
Series B Preferred Stock was $38,198,000 ($10.00 per share).
Although LIVE has no obligation to redeem any Series B
Preferred Stock, subject to the availability of funds and the
prior approval of its Board of Directors and its lenders, LIVE
may acquire shares of its Series B Preferred Stock from time to
time, either through private purchases or through open market
purchases. Through March 31, 1997, LIVE acquired, and
subsequently retired, a total of 2,177,500 shares of the Series B
Preferred Stock at an average price of $4.27 per share.
Impact of Inflation and Other Matters
The inflation rate in recent years has been negligible.
Where manufacturers have increased prices, the Company generally
has been able to pass on such price increases within 90 to 180
days. As a result, inflation has not had a material impact on
the results of operations.
ADDITIONAL INFORMATION ABOUT THE COMPANY AND ITS BUSINESS
Business
Introduction
The Company was formed in 1988. Its largest ongoing
businesses are LIVE Film and Mediaworks Inc. (formerly LIVE Home
Video Inc.) ("LFM") and LIVE International ("LI"), which
primarily acquire rights to produce and distribute theatrical
motion pictures, children's films and special interest programs
which they market and distribute in all media to wholesalers,
retailers and consumers in the United States and internationally.
The Company's operations are primarily in a single business
segment, the worldwide distribution and sale of a broad variety
of film related entertainment software products.
Operating Structure
The following chart outlines the operating structure of the
Company as of December 31, 1996. All except LFM and LIVE
Theatrical Distribution are unincorporated divisions of the
Company's subsidiaries. As used herein the "Company" or "LIVE"
includes LFM, LI, or any of the operating entities listed below.
<TABLE>
LIVE Entertainment Inc.
<S> <C> <C> <C> <C> <C> <C>
LIVE LIVE Theatrical LIVE Home Video LIVE International LIVE Television LIVE Interactive LIVE Film and
Productions Distribution (home video (international (cable, pay, (interactive Mediaworks
(production and (theatrical distribution) distribution) pay per products (contracting
acquisition distribution view, network including entity for
of motion of motion television CD-ROM) productions,
picture picture product) licensing) acquisitions and
product) programming)
Family Home
Entertainment
(FHE)
(children's
programming)
</TABLE>
Recent Developments for the Company
Bankruptcy of Carolco Pictures Inc. ("Carolco")
On November 10, 1995, Carolco filed for bankruptcy under
Chapter 11 of the United States Bankruptcy Code. Carolco had
been a significant supplier of A+ motion picture product to the
Company, including the video rights to such hits as Terminator II,
Basic Instinct, Total Recall and the Rambo series. The last
motion picture provided to the Company by Carolco or its
affiliates was Cutthroat Island, which was released on home video
in April 1996. Because of the Carolco bankruptcy and the fact
that the output agreement between the Company and Carolco expired
in 1995 in any event, the Company does not expect to receive any
additional films from Carolco in the future.
Carolco has sold its film library and certain related assets
to Canal+ D.A. In connection with the sale, the Company and
Carolco have stipulated that certain contracts between the
Company and Carolco relating to the distribution by the Company
of the video rights to films produced by Carolco, and the
distribution by Carolco in foreign territories of films owned by
LIVE, would be assumed by Canal+ D.A. after the library sale is
completed. Portions of the distribution agreements between the
Company and Carolco pertaining to LIVE's right to remakes and
sequel rights to films in the Carolco library, however, were
severed from the distribution portions of the agreements and were
rejected by Carolco in the bankruptcy proceedings. This has left
LIVE with a damage claim in the Carolco bankruptcy, the recovery
of which cannot be reasonably estimated at this point in time.
New Distribution Agreements
On February 8, 1996, the Company and Pioneer LDC, Inc.
("PLDC") entered into an Output Deal Agreement (the "Pioneer
Output Agreement") for the distribution of the Company's
theatrical productions in Japan. The three year agreement
includes all theatrical films that LIVE produces and acquires
over the period, excluding two of LIVE's features released in
1996, The Substitute and The Arrival. PLDC has agreed to pay a
specified percentage of the applicable film's production or
acquisition cost to obtain such Japanese distribution rights.
PLDC is an affiliate of the Company's controlling stockholder,
Pioneer.
In addition, on February 14, 1996, the Company and Orion
Pictures Corporation ("Orion") entered into a Multiple Picture
Deal Output Agreement (the "Orion Agreement") for the theatrical
distribution by Orion in the United States and Canada of a
limited number of the Company's theatrical productions. The
Orion Agreement provided for Orion to theatrically release during
1996, for certain distribution fees, five motion pictures
acquired or produced by LIVE. Subsequent to the release of the
fifth picture in October 1996, the Orion Agreement ended and the
Company has now established its own in-house theatrical
distribution system. See " --Entertainment Production, Marketing
and Distribution Operations - General," for a further description
of titles included in the Orion Agreement and a discussion of the
Company's theatrical distribution operation.
Management Changes
Since the beginning of 1996, Anthony J. Scotti, Masao
Nomura, R. Timothy O'Donnell, Frans Afman and Roger Smith have
resigned from or decided not to stand for reelection to the Board
of Directors, and Messrs. Melvin Pearl, Charles MacDonald,
Michael Jay Solomon, Akira Niijima, Eiji Orii, Charles Yamarone
and Makoto Koshiba have been elected or appointed as Directors.
The departures of Messrs. Scotti, Nomura, O'Donnell, Afman and
Smith from the Board of Directors were not the result of any
dispute with the Company.
Entertainment Production, Marketing and Distribution Operations
General
Historically, the operations of the Company and VCL focused
on the acquisition and distribution of home video programming in
the United States and Canada (through LFM) and in German-speaking
Europe (through VCL), by marketing and distributing
videocassettes to wholesalers, retailers and consumers directly.
LIVE controls the United States and Canadian home video rights
(hereinafter referred to as "domestic home video rights") and
certain international and television rights to a catalog in
excess of 2,000 titles, inclusive of approximately 1,000 titles
acquired from Vestron Inc. ("Vestron") in 1991. (Vestron was an
independent home video supplier with approximately 1,000 titles
in its catalog, including such titles as Dirty Dancing, Platoon,
Hoosiers, the Smithsonian Series, the National Audubon Series and
others, and the rights to exploit all sequels to Dirty Dancing.)
Vestron is now a label owned and distributed by the Company.
As an independent distribution company, the Company acquires
distribution rights to programming from a variety of sources,
including production companies and independent producers.
Distribution rights which the Company may acquire include (a)
domestic: theatrical, home video, free television, pay television
(including cable and pay-per-view), and electronic publishing,
and (b) international: all media. The Company often acquires the
rights to completed motion pictures. However, in order to secure
rights to motion pictures which might not otherwise be available
to the Company (such as international, television and
interactive), and to acquire a wider array of distribution rights
on more favorable terms, the Company also secures the rights to
motion pictures prior to or during production.
During the past few years the Company has found it
increasingly difficult to acquire just the domestic home video
rights to quality motion picture productions on terms the Company
believed to be commercially attractive. This trend was
exacerbated by the bankruptcy of Carolco, its most reliable
source of A+ motion picture product, and by the acquisition by
major studios of a number of independent production and
distribution companies from whom the Company had acquired video
rights in the past, such as New Line Cinema Corporation and
Miramax Pictures. Thus, in early 1994, the Company announced
plans to expand its business activities into the theatrical
release of a limited number of motion pictures and the direct
licensing of international, television rights and other ancillary
rights to third parties rather than through intermediaries.
Further, in late 1994, the Company released its first interactive
product through its newly formed interactive division.
Examples of this activity include the Company's acquisition
of all rights to films which are intended to have worldwide
appeal, yet take advantage of the Company's historical strength
in the domestic home video market. In 1995 the Company entered
into agreements to acquire, upon completion, two major theatrical
motion pictures, The Substitute, an action thriller directed by
Robert Mandel and starring Tom Berenger, Ernie Hudson, Glenn
Plummber, and Diane Venora, and The Arrival, writer/director
David Twohy's sci-fi thriller, with Charlie Sheen, Ron Silver,
Terri Polo, and Lindsay Crouse. The two pictures were released
in the United States theatrical market in early 1996 through
Orion, who was responsible for the United States and Canadian
theatrical distribution of a package of five pictures produced by
the Company under the Orion Agreement through 1996. See "Recent
Developments for the Company - New Distribution Agreements."
Other motion pictures produced or acquired by the Company and
released theatrically by Orion through this package deal include
the hit German comedy Maybe...Maybe Not ("Der Bewegte Mann"),
which has garnered acclaim in festivals worldwide and stars Til
Schweiger, Trees Lounge, written and directed and starring indie
film favorite Steve Buscemi, with an ensemble cast including
Anthony LaPaglia, Chloe Sevigny and cameos by Mimi Rogers, Daniel
Baldwin, and Carol Kane, among others, with a special appearance
by Samuel Jackson, and Phat Beach, a black hip hop comedy.
To make all-rights acquisitions, the Company frequently
becomes involved with, and has active input on, projects at the
earliest possible date, from development through physical
production and completion of the finished film, and generally may
have input over all key production elements. Even with the
Company's involvement in the early production stages of a film's
development, it will continue to be difficult to predict the
theatrical acceptance of any particular motion picture the
Company may acquire or produce. The theatrical results of a
motion picture is a significant factor in generating revenues in
all media, including home video.
In 1996, the Company engaged Orion to handle the theatrical
distribution of its films. Orion had the infrastructure to book,
bill, collect and service the exhibition community that LIVE did
not possess. LIVE retained control over marketing decisions and
responsibility for the theatrical releasing costs. The Company
believes it experienced significant distribution quality and
targeted penetration problems, occurring occasionally in this type
of relationship with a third party distribution arrangement. In
order to address these problems, reduce the overall cost to the
Company for such distribution services, and take advantage of
additional opportunities that a LIVE owned and operated theatrical
distribution system could provide, the Company made the decision to
bring the domestic theatrical distribution operation in-house in
1997. This decision was made after detailed cost/benefit analysis,
and will thus allow the Company to better control and exploit the
theatrical distribution of its filmed product. LIVE anticipates
releasing between six to ten theatrical films each year, with eight
releases planned in 1997. The first such film released under
LIVE's theatrical distribution system was the limited regional
release "Hotel de Love" in January 1997. Other theatrical releases
in 1997 include "Dead Men Can't Dance", "Wishmaster" (produced by
Wes Craven), "Boys Night Out" (starring, Christopher Walken, Denis
Leary and Sean Patrick Flannery) and "Suicide Kings" (starring
Rebecca DeMornay). In addition, this decision may provide an
additional revenue stream to the Company in that other independent
film producers can utilize LIVE's theatrical distribution system in
a typical "rent-a-system" deal. Under this arrangement, LIVE will
service such films theatrically with little or no risk, and collect
a fee for doing so. In many cases this may provide opportunities
for the Company to distribute these films in other media such as in
the television and international markets.
The United States Motion Picture Industry
The United States motion picture industry encompasses the
production and theatrical exhibition of feature-length motion
pictures and the subsequent distribution of such pictures in home
video, television and other ancillary markets. The industry is
dominated by the major studios, including Universal Pictures,
Warner Bros., Twentieth Century Fox, MGM, Sony Pictures
Entertainment (including Columbia Pictures and Tri-Star Pictures),
Paramount Pictures and The Walt Disney Company, which historically
have produced and distributed the majority of theatrical motion
pictures released annually in the United States. There are also a
large number of smaller production companies that produce
theatrical motion pictures and have played an important role in the
production of motion pictures for the worldwide feature film
market.
The "majors" generally own their production studios and have
national or worldwide distribution organizations. Major studios
typically release films with direct production costs ranging from
$10,000,000 to $100,000,000 or more and provide a continual source
of motion pictures to the nation's theater exhibitors. The
independents do not own production studios and, with certain
exceptions, have more limited distribution capabilities than the
major studios. Independents typically produce fewer motion
pictures at substantially lower average production costs than major
studios.
Motion Picture Financing and Production
The Company is involved in the production and financing of a
variety of motion pictures. The typical cost of a motion picture
produced by a major studio for wide release averages more than
$36,000,000. The Company intends to keep its average production
budget to less than $20,000,000, although it may spend more for
titles it believes to have significant commercial potential.
Production costs consist of acquiring or developing the screenplay,
film studio rental, cinematography, post-production costs and the
compensation of creative and other production personnel.
Distribution expenses, which consist primarily of the costs of
advertising and release prints, are additional expenses and are not
included in direct production costs.
Independent production companies generally avoid incurring the
substantial overhead costs of the majors by hiring creative and
other production personnel and retaining the other elements
required for pre-production, principal photography and post-
production activities on a project-by-project basis. Unlike the
major studios, the independents also typically finance their
production activities from outside sources rather than out of cash
flow. Such sources include bank loans, "pre-sales", equity
offerings and joint ventures. Independents generally attempt to
complete their financing of a motion picture production prior to
commencement of principal photography, at which point substantial
production costs begin to be incurred and require payment.
"Pre-sales" are often used by independent film companies to
finance all or a portion of the direct production costs of a motion
picture. Pre-sales consist of fees paid to the producer by third
parties in return for the right to exhibit the completed motion
picture in theaters or to distribute it in home video, television,
foreign or other ancillary markets. Producers with distribution
capabilities, such as the Company, may retain some or all of the
rights to distribute the completed motion picture either
domestically or in one or more foreign markets. The Company
typically will license a motion picture's foreign rights among
several international licensees under such pre-sale agreements.
Both major studios and independent film companies often
acquire motion pictures for distribution through an industry
arrangement known as a "negative pickup," under which the studio or
independent film company agrees to acquire from an independent
production company all rights to a film upon completion of
production. The independent production company normally finances
production of the motion picture pursuant to financing arrangements
with banks or other lenders in which the lender is granted a
security interest in the film and the independent production
company's rights under its arrangement with the studio or
independent. When the studio or independent "picks up" the
completed motion picture, it assumes (and in the case of the
Company, most often simply pays) the production financing
indebtedness incurred by the production company in connection with
the film. In addition, the independent production company is paid
a production fee and generally is granted a participation in the
net profits from distribution of the motion picture. Examples of
films the Company has recently acquired through negative pickup
arrangements include Critical Care and The Substitute.
Both major studios and independent film companies generally
incur various third-party participations in connection with the
distribution and production of a motion picture. These
participations are contractual rights of actors, directors,
screenwriters, owners of rights and other creative and financial
contributors entitling them to share in revenues or net profits (as
defined in the respective agreements) from a particular motion
picture. Except for the most sought-after talent, participations
are generally payable after all distribution and marketing fees and
expenses, direct production costs and financing costs are paid in
full.
Motion Picture Distribution
Motion picture distribution encompasses the exploitation of
motion pictures in theaters and in ancillary markets such as home
video, pay-per-view, pay television, broadcast television, foreign
and other markets. Motion pictures may continue to play in
theaters for up to six months following their initial release.
Concurrently with their release in the United States, motion
pictures generally are released in Canada and may also be released
in one or more other foreign markets. The motion picture then
becomes available for distribution in other markets as follows:
Months After Approximate
Initial Release Release Period
Domestic home video 4-6 months ----
Domestic pay-per-view 4-6 months 3 months
Domestic pay television 6-10 months 12-21 months
Domestic network/basic cable 30-36 months 18-36 months
Domestic syndication 30-36 months 3-15 years
Foreign home video 6-12 months ----
Foreign television 18-24 months 18-30 months
The distributor typically acquires rights from the producer to
distribute a motion picture in one or more of the markets described
above. The distributor typically agrees to advance the producer a
non-refundable minimum royalty or guarantee, which is to be
recouped by the distributor out of profits generated from the
distribution of the motion picture in whatever markets it has
acquired. Generally, the producer also is entitled to receive a
participation equal to an agreed-upon percentage of all net
revenues received from distribution of the motion picture over and
above the advance once the advance is recouped. As noted, the
Company in the past generally acquired only domestic home video
rights, but now seeks to control or acquire all rights to films it
produces or licenses from third parties.
Theatrical Distribution
The theatrical distribution of a motion picture involves the
manufacture of release prints, the promotion of the picture through
advertising and publicity campaigns and the licensing of the motion
picture to theatrical exhibitors. The size and success of the
promotional advertising campaign can materially affect the revenues
realized from the theatrical release of a motion picture. The
costs incurred in connection with the distribution of a motion
picture can vary significantly, depending on the number of screens
on which the motion picture is to be exhibited, the actual cost and
scope of the media advertising expenditures and campaign and the
ability to exhibit motion pictures during peak exhibition seasons.
Competition among distributors for theaters during such seasons is
great. Similarly, the ability to exhibit motion pictures in the
most popular theaters in each area can affect theatrical revenues.
The distributor and theatrical exhibitor generally enter into
an arrangement providing for the exhibitor's payment to the
distributor of a percentage of the box office receipts for the
exhibition period, in some cases after deduction of the theater's
overhead, or a flat negotiated weekly amount. The distributor's
percentage of box office receipts generally ranges from an
effective rate of 35% to over 50%, depending upon the success of
the motion picture at the box office. Distributors carefully
monitor the theaters which have licensed the picture for exhibition
to ensure that the exhibitor promptly pays all amounts due the
distributor. Substantial delays in collection are not unusual.
When the Company acquired all rights to a motion picture having
theatrical potential, it previously engaged the services of a
theatrical distribution company to handle the theatrical exhibition
of the film in the United States. In the past, the Company has
used the services of MGM Pictures and Orion.
As noted above, in 1997 the Company began to distribute its
own motion picture releases in the United States theatrical market.
The Company's motion pictures will face significant competition
from films produced and distributed by others without the benefit
of an experienced distributor or proven distribution network. The
theatrical success of a motion picture can be a significant factor
in generating revenue in other media. Therefore, there is a
substantial risk that some or all of the Company's projects will
not be commercially successful, resulting in costs not being
recouped or anticipated profits not being realized. The Company's
film production activities require the initial expenditure of
significant funds, while revenues relating to such films and
programs are generated over an extended period of time. In
addition, as a result of the Company acquiring film product earlier
in its production stages, the possibility always exists that the
finished product may be different from that which was initially
envisioned. Theatrical distribution will require an increase in
overhead and the commitment of additional capital resources by the
Company. No assurances can be given that theatrical distribution
efforts by the Company will be successful.
The Company views theatrical distribution of films to be a
source of advertising and promotion to enhance the home video and
other distribution revenues to be received from the film. The
Company does not believe that theatrical distribution of its motion
picture products will be a source of material profits.
Home Video
The home video distribution business involves the promotion
and sale of videocassettes and videodiscs to distributors as well
as local, regional and national video retailers (e.g., video
specialty stores, convenience stores, record stores and other
outlets), which then rent or sell such videocassettes and
videodiscs to consumers primarily for private viewing.
Major feature films are usually scheduled for release in the
home video market within four to six months after theatrical
release to capitalize on the theatrical advertising and publicity
for the film. Promotion of new releases is generally undertaken
during the nine to twelve weeks before the release date.
Videocassettes of feature films are generally sold to domestic
wholesalers at approximately $50 to $60 per unit and generally are
rented by consumers for fees ranging from $1 to $5 per day.
Wholesalers who meet certain sales and performance objectives may
earn rebates, return credits and cooperative advertising
allowances. Selected titles, including certain made-for-video
programs, are priced significantly lower (at a wholesale price
ranging from $5 to $19 per unit) to encourage direct purchase by
consumers. Direct sale to consumers is referred to as the "priced-
for-sale" or "sell-through" market.
Overall growth in the domestic home video market has slowed as
growth in the number of new outlets and new VCR homes has
moderated. The growth in outlets designed to serve the rental
market has remained essentially flat for the past several years,
while the number of new outlets which offer videocassettes and
videodiscs for sale has increased. The sell-through market
continues to be a seasonal business, except for feature films
initially released on home video at prices generally below $30.
Furthermore, new technologies which satellite transmission and
telephone companies and others are developing could make competing
delivery systems economically viable and could alter the home video
marketplace.
See a more complete description of the Company's home video
distribution operations under "Acquisition of Motion Picture
Distribution Rights by the Company - Domestic Home Video
Distribution Rights."
Pay-per-view
Pay-per-view television allows cable television subscribers to
purchase individual programs, including recently released motion
pictures and live sporting, music or other events, on a "per use"
basis. The subscriber fees are typically divided among the program
distributor, the pay-per-view operator and the cable system
operator.
Pay Television
Pay television allows cable television subscribers to view
HBO, Cinemax, Showtime, The Movie Channel, Encore and other pay
television network programming offered by cable system operators
for a monthly subscription fee. The pay television networks
acquire a substantial portion of their programming from motion
picture distributors.
Broadcast and Basic Cable Television
Broadcast television allows viewers to receive, without
charge, programming broadcast over the air by affiliates of the
major networks (ABC, CBS, NBC and Fox), independent television
stations and cable and satellite networks and stations. In certain
areas, viewers may receive the same programming via cable
transmission for which subscribers pay a basic cable television
fee. Broadcasters or cable systems operators pay fees to
distributors for the right to air programming a specified number of
times.
Foreign Markets
In addition to their domestic distribution activities, some
motion picture distributors generate revenues from distribution of
motion pictures in foreign theatrical markets, home video,
television and other foreign markets. There has been a dramatic
increase in recent years in the worldwide demand for filmed
entertainment. This growth is largely due to the privatization of
television stations, introduction of direct broadcast satellite
services, growth of home video and increased cable penetration.
Other Markets
Revenues also may be derived from the distribution of motion
pictures to airlines, schools, libraries, hospitals and the
military, licensing of rights to perform musical works and sound
recordings embodied in a motion picture, and rights to manufacture
and distribute games, dolls, clothing and similar commercial
articles derived from characters or other elements of a motion
picture.
New Technologies
New means of delivery of entertainment product are constantly
being developed and offered to the consumer. The exact impact of
emerging technologies such as digital video discs ("DVD"), direct
broadcast satellites, the Internet, etc. on the Company's
operations cannot be determined at this time. However, in its role
as a producer and holder of entertainment copyrights, the Company
is positioning itself to take advantage of whatever delivery
options are available to it, and is constantly monitoring these new
media possibilities.
Acquisition of Motion Picture Distribution Rights by the Company
General
Distribution rights to motion pictures can encompass various
media (e.g., theatrical, home video, free or pay television,
electronic publishing, CD-ROM, interactive) and various markets or
territories (e.g., the United States and Canada, Great Britain and
Japan). In the past, the Company generally acquired only home
video rights and not the rights to broadcast or cablecast programs
or to exhibit programs on pay-per-view television or in movie
theaters or similar locations. Historically, where these other
rights were acquired, the Company exploited them by sublicensing
the rights to third parties whose principal businesses included
exploitation of such rights. In early 1994, the Company expanded
its business activities into the theatrical distribution of a
limited number of motion pictures and the direct licensing of
international and television rights to third parties rather than
through intermediaries. Now, where possible, the Company focuses
on the acquisition of worldwide distribution rights to a motion
picture in all media, or, where feasible, distribution rights in
all media for either the North American or international market
places.
The Company's decision process in acquiring a finished or an
unfinished movie is similar. The Company collects information
concerning new motion pictures being contemplated or entering the
production cycle. This information is obtained from trade sources
and from personal relationships and contacts. The acquisition
process focuses on productions which seem most likely to fit the
Company's requirements for worldwide marketability and profit
potential. Before the Company acquires distribution rights for any
motion picture, the Company analyzes not only the picture's
projected costs, revenues and scheduling, but also the effect of
these assumptions on overall Company performance. The Foothill
Credit Facility imposes limitations on the size of minimum
guarantees or production or acquisition cost the Company can incur
without the lender's approval.
When the Company acquires distribution rights to a motion
picture prior to its production, it controls its development
expenditures by making only limited commitments to advance funds
before completion. After acquisition of the rights of a motion
picture prior to its production, the Company typically has approval
rights over key product elements and maintains a production
supervisory staff to monitor the production process. Overhead and
general expenditures are kept at a minimum level, as the Company
does not own any production facilities or significant production
staff.
Domestic Theatrical Distribution Rights
Historically, LIVE only occasionally acquired theatrical
distribution rights to certain of its films. However, when such
rights were acquired - for films such as Tom and Jerry - The Movie,
Reservoir Dogs, Bad Lieutenant, American Heart, Light Sleeper and
Bob Roberts, for example - LIVE exploited the rights by
sublicensing them to third parties whose principal businesses was
theatrical distribution of such rights. Management of the Company
considers the theatrical distribution of a film extremely important
as a marketing tool which enhances video and international sales
and thus LIVE focuses on acquiring theatrical distribution rights
as part of the overall acquisition where possible, even if a film
ultimately will not be released theatrically. The Company released
theatrically five films during fiscal 1996, including The Arrival,
directed by David Twohy (writer of The Fugitive and Waterworld),
The Substitute, directed by Robert Mandel (director of School Ties,
fx and Big Shots), and Maybe . . . Maybe Not, in the United States
through its relationship with Orion. The Company generally targets
motion pictures for distribution on a national basis which can
result in substantial amounts being expended for the costs of
national advertising and the manufacturing of initial release
prints. The exception to this national focus would be that certain
motion pictures be targeted to various demographic audiences, as
opposed to the mainstream public, and such pictures would be
distributed on a more regional, less expensive, basis. While the
Company does not believe that theatrical distribution of its motion
pictures will be a source of material profits due to the risks
inherent in that business, management of LIVE believes that the
theatrical market has significant upside potential should any
particular film perform well. It is not uncommon for heavily
advertised films with theatrical losses to have increased
performance in video and other ancillary media that partially or
totally offset such losses. However, no assurance can be made as
to results with respect to any particular release.
The Company is in various stages of post production,
production, development and pre-production on a number of projects,
and intends to have many of these films distributed theatrically in
the United States. Of those films to which the Company holds
domestic theatrical distribution rights, LIVE intends to release
most through its own new theatrical distribution division. An
occasional film may be distributed in the future through third
parties.
Domestic Home Video Distribution Rights
LIVE has developed operating strategies which it believes
enhance sales and profit growth potential by focusing on securing
long-term access to commercially viable motion pictures primarily
for video release. It categorizes the feature films it releases on
video by reference to relative acquisition costs and expected unit
sales. "A+" titles generally are those films with some combination
of significant box office revenues, established stars, wide
theatrical distribution and/or large budgets. "A" titles usually
are feature films with cast or other elements which give them a
defined audience appeal and which also receive wide theatrical
distribution. Those films categorized as "B" titles generally
include a variety of more modestly budgeted films which, if
released theatrically, are done so on a limited or regional basis.
In addition to motion picture product, the Company also acquires
non-theatrical programming such as sports and fitness programming,
children's programming, special interest products and interactive
programs.
Pursuant to various agreements with independent motion picture
producers, the Company released on home video 21 feature film
titles during 1996. This included the successful video rental
releases of the major motion pictures The Arrival and The
Substitute. LIVE anticipates releasing on home video a total of
between 35 to 45 feature films in 1997 through 1998. Management
believes that, under current market conditions, "B" titles
generally will be available at favorable prices on a title by title
basis, either in the pre-production stage or as finished product.
LIVE also intends to continue to aggressively pursue opportunities
to acquire video rights in children's, budget line and special
interest programming.
In recent years, management of the Company decided to begin
releasing fewer rental titles per month than in prior years for a
number of reasons, among them being: (a) fewer titles being
purchased by LIVE as a result of lack of availability, and (b) a
shift in rental market tastes, with a much greater portion of video
store purchases being devoted to theatrically released "A" titles
than direct-to-video or direct-to-television "B" titles.
Management of the Company has addressed these issues by (i)
reducing its number of rental titles released per month,
particularly the direct-to-video "B" titles, allowing LIVE's
marketing and sales forces to place increased emphasis on a smaller
number of titles, (ii) acquiring more rights to films than only
domestic video rights (including theatrical, television,
international and CD-ROM) and diversifying its business to license
such additional rights directly rather than through intermediaries,
(iii) continuing LIVE's focus on the sell-through business,
exploiting the Company's library of over 2,000 titles including
children's and special interest programs and (iv) attempting to
release a higher percentage of "A" titles by increasing its efforts
to acquire films with greater theatrical release potential.
Management of LIVE believes that the decrease in revenues due
to fewer rental releases per month will eventually be compensated
for through a combination of increased ancillary revenues (such as
theatrical, television, international and CD-ROM) and higher
revenues per rental release due to a combination of increased focus
on fewer titles and a higher percentage of "A" title acquisitions.
There is no assurance that this will be the case, however.
Domestic home video rights, when acquired under exclusive
licenses without other rights, are typically acquired for a term of
15 years or more, in return for non-refundable advances against
future royalties which are generally based on either a percentage
of the Company's wholesale selling price or a percentage of profit
contribution derived from the sale of videocassettes. In most
instances, the advance is paid on or after the delivery of the
applicable picture to the Company, which typically occurs six to
twelve months prior to video release. Furthermore, the licenses
may require the film's producer or distributor to make certain
minimum print and advertising expenditures toward the theatrical
release of the motion picture. In those instances where the
Company pays a substantial portion of the royalty advance prior to
completion, a completion bond in favor of the Company guaranteeing
that a movie will be finished is almost always required, or the
funds are escrowed or secured by a letter of credit. Acquisition
costs vary substantially from title to title, depending on the
Company's assessment of the projected demand for the program.
LIVE, under its children's programming label, Family Home
Entertainment ("FHE"), has over the years built a substantial
library of children's titles. FHE has secured worldwide rights to
release videocassettes of the Teenage Mutant Ninja Turtles animated
television series. LIVE also has an agreement with Broadway Video
Entertainment granting it home video rights to programs including
Rudolph the Red Nosed Reindeer, Frosty the Snowman, Santa Claus is
Coming to Town, The Little Drummer Boy, Here Comes Peter Cottontail
and Frosty Returns through 1997. Broadway Video Entertainment
recently sold its family entertainment library to Golden Books
Family Entertainment Inc. and LIVE was unable to renew its license
to distribute these programs when the current agreement expires in
1997. See a further discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In
addition, license agreements have been secured for programming
featuring the products of major toy manufacturers including such
licensed characters as Robotech, Pound Puppies, G.I. Joe,
Transformers, JEM, Mapletown, Velveteen Rabbit, Strawberry
Shortcake, The Mad Scientist, Babar, Care Bears, Bucky O'Hare,
Hello Kitty and Friends, Phantom 2040, Papa Beaver, The Highlander
(animation), Enchanted Camelot, Skysurfer Strike Force, The Bears
Who Saved Christmas, Santa's Christmas Crash, Santa's Christmas
Snooze, Princess Gwenevere, Flash Gordon, The Littlest Pet Shop and
Baryshnikov Stories From Childhood. Management of the Company
intends to continue LIVE's emphasis on building and exploiting its
FHE library.
LIVE also distributes non-theatrical products such as the
Smithsonian Series and the Audubon Series. LIVE distributes music
videos, including those by Michael Jackson, the Rolling Stones and
the Doobie Brothers. Sports and fitness titles include the PGA
Tour, a Jose Canseco instructional tape and Paula Abdul and Marla
Maples fitness tapes.
LIVE maintains its own sales organization which prepares sales
and marketing plans for new release and catalog promotions and
works closely with wholesale distributors, rackjobbers and key
retailers in the United States. Pursuant to an agreement expiring
in May 1998, WEA handles all physical aspects of United States
distribution, billing and collections for the Company. The Company
has a similar arrangement with MCA Canada Ltd., with respect to the
Company's Canadian sales, marketing and distribution activities
under an agreement that expires in 1997, subject to a three year
option to extend in favor of LIVE.
Television Distribution Rights
Television distribution rights will be acquired by the Company
where available. Television networks, independent television
networks, television stations and cable system operators generally
license television series, films and film packages (consisting of
theatrically released feature films and made-for-television movies)
pursuant to agreements with distributors or syndicators that allow
a fixed number of telecasts over a prescribed period of time for a
specified cash license fee or for barter of advertising time. LIVE
distributes the television rights to films it acquires through its
own staff.
International Distribution Rights
International distribution rights include rights in various
media (e.g., television, theatrical and home video) and to various
territories (e.g., the United Kingdom, Japan and the Benelux
nations). To acquire these rights, the Company is required to pay
a minimum guarantee. The minimum guarantee, along with specific
recoupable marketing and other expenses, is recovered from the
motion picture's gross revenues before the producer begins to
participate in the net revenues. Historically, the Company only
occasionally acquired international distribution rights to certain
of its films, mainly through the acquisition of the Vestron
library. LIVE has for some time maintained a small in-house
international sales staff and utilized outside sales agents to
exploit those rights. However, often when international rights
were acquired (e.g., for films such as Light Sleeper), LIVE
exploited the rights by sublicensing them to third parties whose
principal businesses included the further sublicensing of such
rights, and the Company paid a fee for such sublicensing
activities. In 1996, the Company further expanded its sales force
to manage international sales and to more aggressively promote its
motion pictures at foreign film markets, including the Cannes Film
Festival in France, the American Film Market in Los Angeles and
MIFED in Italy.
Competition
Success in the entertainment marketplace is largely dependent
on a company's ability to acquire rights to programming at
attractive prices and upon the subsequent performance of this
programming in the marketplace. With the exception of certain
output agreements described above under "Acquisition of Motion
Picture Distribution Rights by the Company; Domestic Home Video
Distribution Rights," the Company generally acquires distribution
rights on a film-by-film basis. The Company faces significant
competition both in obtaining distribution rights and in selling
products. The Company's competitors for product acquisitions are
companies such as New Line, HBO and Trimark, and it competes with
these companies as well as major studios in the marketing of its
product. Certain of the Company's competitors, particularly those
affiliated with major studios or pay television broadcasters, have
significantly greater financial resources than the Company.
Competition for distribution rights is based primarily on the
amount of the advances which companies are willing to offer to
producers as well as on the producer's perception of the company's
marketing capabilities and its commitment to marketing the release
of a film.
Regulation Affecting the Company
Distribution rights to motion pictures are granted legal
protection under the copyright law of the United States and most
foreign countries, which provide substantial civil and criminal
sanctions for unauthorized duplication and exhibition of motion
pictures. The Company endeavors to maintain copyright protection
for all its films under the laws of all applicable jurisdictions.
United States television stations and networks as well as
foreign governments impose restrictions on the content of motion
pictures which may restrict in whole or in part exhibition on
television or in a particular territory. There can be no
assurance, therefore, that current or future restrictions on the
content of Company films may not limit or affect the Company's
ability to exhibit certain of such motion pictures in such media or
markets.
Major Customers
During the year ended December 31, 1994 two customers, Ingram
Entertainment and East Texas Distributors, accounted for 11.0% and
12.3%, respectively, of net sales of LIVE; during the year ended
December 31, 1995 the same two customers accounted for 17.4% and
16.6%, respectively, of net sales of LIVE; and during the year
ended December 31, 1996, one customer, East Texas Distributors,
accounted for 12.5% of the net sales of LIVE.
Employees
As of February 28, 1997, LIVE had 156 full-time regular
employees and one part-time employee. None of the Company's
employees are covered by a collective bargaining agreement and the
Company believes that its employee relations are good.
Properties
The Company's executive offices are leased in Van Nuys,
California. The Company believes that its office facilities are
adequate to meet its current and anticipated future needs.
Legal Proceedings
LIVE had been the defendant in two purported class action law
suits that were filed in 1992. The Company had requested the U.S.
District Court for the Central District of California to dismiss
both cases for non-prosecution due to the fact that the plaintiffs
had taken no action in either of these cases for over one year. On
April 8, 1996, the U.S. District Court granted LIVE's request and
dismissed both cases.
In May 1994, a breach of contract claim was filed in the
Supreme Court of New York, Erie County, against a subsidiary of the
Company in the Supreme Court of New York, Erie County, claiming
nonpayment of royalties from licensing of films in foreign
territories and deprivation of royalty payments as a result of
misallocation of certain values asserted with licensed film
properties. Films subject to the complaint were among the assets
of Vestron, Inc. purchased by the Company in July 1991, and the
period covered included the license periods both prior to, and
subsequent to, the acquisition date by the Company. The Company
filed a reply brief (including a Motion to Dismiss) on October 5,
1994, and such Motion to Dismiss was granted on the grounds of
forum non conviens. Plaintiff filed a complaint in New York on
March 22, 1995. The Company filed its answer, affirmative defenses
and counterclaim on April 20, 1995. Plaintiff filed a motion for
class certification on September 8, 1995 to which the Company filed
its opposition to the motion on November 6, 1995. After limited
pre-trial discovery, a motion for class certification was argued on
December 6, 1995. By order dated June 21, 1996 and filed on June
25, 1996, the Court in this action determined that the action
should be maintained as a class action under the provisions of
Section 901(a) of the New York Civil Practice Law and Rules.
The Company filed an appeal from the Order granting class
certification on July 19, 1996 and filed a Motion for
Decertification of the class on July 24, 1996. A hearing on the
motion was heard on September 4, 1996 and on December 24, 1996 the
Court denied the Company's Motion for Decertification. On February
7, 1997 the Company filed a combined appeal from the order granting
a class certification and the dismissal of the Motion for
Decertification, which was considered by the New York State
Appellate Division in April 1997. By its decision of April 25, 1997,
the New York State Appellate Division affirmed the decision of the
Supreme Court.
Management is unable to predict the ultimate outcome
of the above-described actions at this time. However, LIVE
and the other defendants believe that there is no factual
basis for these lawsuits and intend to defend them
vigorously. Accordingly, no provision for any liability which may
result has been made in LIVE's consolidated financial statements.
In the opinion of management, these actions, when finally concluded
and determined, will not have a material adverse effect upon LIVE's
financial position or results of operations.
Other than as described above, there are no material legal
proceedings to which LIVE or any of its subsidiaries are a party
other than ordinary routine litigation in the ordinary course of
business. In the opinion of management, resolution of these matters will
not have a material adverse impact on LIVE's financial position or
results of operations.
INDEPENDENT AUDITORS
Ernst & Young LLP are the Company's independent auditors.
Representatives of Ernst & Young LLP are expected to be present at
the Special Meeting to respond to appropriate questions of
stockholders and make a statement if they so desire.
STOCKHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING
If the Merger is not consummated, the Company will hold its
1997 Annual Meeting of its stockholders in accordance with its
Bylaws and the DGCL. Any proposals of stockholders to be presented
at the 1997 Meeting were required to have been received by the
Secretary of the Company for inclusion in the Company's Proxy
Statement and form of Proxy no later than December 1, 1996. No
such proposals were received.
OTHER MATTERS
The Board is not aware of any business which will be presented
at the Special Meeting other than those matters set forth in the
accompanying Notice of Special Meeting. If any other matters are
properly presented at the Special Meeting for action, it is
intended that the persons named in the accompanying Proxy and
acting thereunder will vote in accordance with their best judgment
on such matters.
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . F- 2
Consolidated Balance Sheets as of December 31, 1996 and 1995 . . . . . . F- 3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . F- 4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . F- 5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . F- 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F- 7
Condensed Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . F-26
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1996 (unaudited) . . . . . . . . . . . F-27
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1997 and 1996 (unaudited) . . . . . . . . . . . F-28
Notes to Condensed Consolidated Financial Statements (unaudited) . . . . F-29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
LIVE Entertainment Inc.
We have audited the accompanying consolidated balance sheets
of LIVE Entertainment Inc. and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These
financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above,
present fairly, in all material respects, the consolidated
financial position of LIVE Entertainment Inc. and subsidiaries at
December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
April 9, 1997
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
December 31,
1996 1995
ASSETS
ASSETS:
Cash and cash equivalents, including restricted cash
of $668 and $1,352 . . . . . . . . . . . . . . . . $ 41,992 $ 49,487
Accounts receivable, less allowances of $20,879
in 1996 . . . . . . . . . . . . . . . . . . . . . . 7,906 --
Inventories . . . . . . . . . . . . . . . . . . . . . 6,206 4,813
Property and equipment, net . . . . . . . . . . . . . 1,058 1,145
Film costs, net of accumulated amortization of
$610,067 and $526,590 . . . . . . . . . . . . . . . 62,633 66,700
Other assets. . . . . . . . . . . . . . . . . . . . . 1,940 1,353
Goodwill, net of accumulated amortization of
$43,967 and $40,042 . . . . . . . . . . . . . . . . 22,022 25,947
$143,757 $149,445
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . $ 5,177 $ 6,675
Accrual for returns and advertising net of
accounts receivable of $15,447 in 1995 . . . . . . -- 3,430
Accrued expenses. . . . . . . . . . . . . . . . . . . 3,918 7,737
Deferred revenue. . . . . . . . . . . . . . . . . . . 8,492 4,714
Notes payable . . . . . . . . . . . . . . . . . . . . 13,571 8,333
Increasing Rate Senior Subordinated Notes
due 1999, including capitalized interest of
$9,176 and $13,184. . . . . . . . . . . . . . . . . 49,176 53,184
Film obligations. . . . . . . . . . . . . . . . . . . 14,577 18,559
Dividends payable . . . . . . . . . . . . . . . . . . 4,033 2,309
Income taxes payable and deferred income taxes. . . . 16,346 6,484
Total liabilities. . . . . . . . . . . . . . . . . 115,290 111,425
STOCKHOLDERS' EQUITY:
Series B Cumulative Convertible Preferred Stock--
authorized 9,000,000 shares; $1.00 par value;
$38,198,000 liquidation preference (1996);
$41,970,000 liquidation preference (1995);
3,819,000 (1996) and 4,197,000 (1995)
shares outstanding . . . . . . . . . . . . . . . . 3,819 4,197
Series C Convertible Preferred Stock--15,000 shares
authorized and outstanding; $1.00 par value;
$15,000,000 liquidation preference . . . . . . . . 15 15
Common Stock -- authorized 24,000,000 shares
(1996 and 1995); $0.01 par value; 2,448,267
(1996) and 2,418,424 (1995) shares
outstanding . . . . . . . . . . . . . . . . . . . . 24 24
Additional paid-in capital. . . . . . . . . . . . . . 123,930 129,668
Retained deficit. . . . . . . . . . . . . . . . . . . (99,321) (95,884)
28,467 38,020
$143,757 $149,445
See notes to consolidated financial statements.
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Data)
Year Ended
December 31,
1996 1995 1994
Net sales. . . . . . . . . . . . . . . . . . $ 151,425 $ 140,112 $ 117,205
Cost of goods sold . . . . . . . . . . . . . 127,560 113,025 101,781
GROSS PROFIT. . . . . . . . . . . . . 23,865 27,087 15,424
Operating expenses:
Selling, general and administrative
expenses. . . . . . . . . . . . . . . . 15,907 15,249 17,673
Amortization of goodwill. . . . . . . . . 3,924 3,925 3,925
19,831 19,174 21,598
4,034 7,913 (6,174)
Disposal of VCL/Carolco Communications GmbH (VCL):
Net Sales . . . . . . . . . . . . . . . . -- 32,257 22,712
Costs and Expenses. . . . . . . . . . . . -- 32,257 22,712
-- -- --
Gain on disposal of VCL . . . . . . . . . -- 2,913 --
-- 2,913 --
OPERATING PROFIT (LOSS) . . . . . . . 4,034 10,826 (6,174)
Interest and other income . . . . . . . . 2,058 2,424 2,692
Interest expense. . . . . . . . . . . . . (1,529) (1,859) (5,992)
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES. . . 4,563 11,391 (9,474)
Income tax expense. . . . . . . . . . . . 8,000 600 200
(LOSS) INCOME FROM CONTINUING
OPERATIONS. . . . . . . . . . . . . . (3,437) 10,791 (9,674)
Discontinued Operations:
(Loss) from discontinued operations
net of income taxes . . . . . . . . . . -- -- (100)
(LOSS) FROM DISCONTINUED OPERATIONS . -- -- (100)
NET (LOSS) INCOME . . . . . . . . . . $ (3,437) $ 10,791 $ (9,774)
Net (loss) income per common share:
Primary:
Continuing operations . . . . . . . . . . $ (3.03) $ 1.34 $ (8.05)
Discontinued operations . . . . . . . . . -- -- (0.04)
Net (loss) income . . . . . . . . . . . . $ (3.03) $ 1.34 $ (8.09)
Weighted average number of shares
outstanding. . . . . . . . . . . . . . . . 2,441,055 2,436,309 2,418,003
Net (loss) income attributable to
common stock . . . . . . . . . . . . . . .$ (7,389) $ 3,255 $ (19,565)
Fully Diluted:
Continuing operations . . . . . . . . . .$ (3.03) $ .53 $ (8.05)
Discontinued operations . . . . . . . . . -- -- (0.04)
Net (loss) income . . . . . . . . . . . .$ (3.03) $ .53 $ (8.09)
Weighted average number of shares
outstanding. . . . . . . . . . . . . . . . 2,441,055 20,541,896 2,418,003
Net (loss) income attributable to
common stock . . . . . . . . . . . . . . .$ (7,389) $ 10,791 $ (19,565)
See notes to consolidated financial statements.
<PAGE>
<TABLE> LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar Amounts in Thousands)
<CAPTION>
Year Ended December 31,
1996 1995 1994
Shares Amounts Shares Amounts Shares Amounts
<S> <C> <C> <C> <C> <C> <C>
Series B Cumulative Convertible
Preferred Stock
Beginning balance . . . . . . . . . 4,197,000 $ 4,197 5,600,000 $ 5,600 1,000,000 $ 1,000
Repurchase of Series B Cumulative
Convertible Preferred Stock . . . . (378,000) (378) (1,400,000) (1,403) (400,000) (400)
Other . . . . . . . . . . . . . . . (3,000)
Transferred from current
liabilities . . . . . . . . . . . 5,000,000 5,000
Ending balance. . . . . . . . . . . 3,819,000 3,819 4,197,000 4,197 5,600,000 5,600
Series C Convertible Preferred
Stock
Beginning balance . . . . . . . . . 15,000 15 15,000 15 15,000 15
Ending balance. . . . . . . . . . . 15,000 15 15,000 15 15,000 15
Common Stock
Beginning balance . . . . . . . . . 2,418,424 24 2,418,720 24 2,418,003 24
Common Stock issued (repurchased) . 29,843 (296) 717
Ending balance. . . . . . . . . . . 2,448,267 24 2,418,424 24 2,418,720 24
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Additional Paid-in Capital
Beginning balance . . . . . . . . . . $ 129,668 $ 136,753 $ 106,604
Series B Cumulative Convertible
Preferred Stock dividend accrual. . . (3,081) (2,198) (3,000)
Series C Convertible Preferred Stock
dividend accrual . . . . . . . . . (871) (829) (791)
Common Stock issued (repurchased) . . 168 (1)
Series B Cumulative Convertible
Preferred Stock repurchase . . . . (1,954) (4,057) (1,060)
Series B Cumulative Convertible
Preferred Stock transferred from
current liabilities . . . . . . . . -- -- 35,000
Ending balance. . . . . . . . . . . . 123,930 129,668 136,753
Retained Earnings (Deficit)
Beginning balance . . . . . . . . . . (95,884) (106,675) (96,901)
Net (loss) income . . . . . . . . . . (3,437) 10,791 (9,774)
Ending balance. . . . . . . . . . . . (99,321) (95,884) (106,675)
Total Stockholders' Equity . . . . . . $ 28,467 $ 38,020 $ 35,717
See notes to consolidated financial statements.
</TABLE>
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Year Ended
December 31,
1996 1995 1994
OPERATING ACTIVITIES:
(Loss) Income from continuing operations. . $ (3,437) $ 10,791 $ (9,674)
Adjustments to reconcile net (loss) income
to net cash provided by (used for)
continuing operating activities:
Depreciation and amortization of
property and equipment. . . . . . . . 597 715 745
Amortization of goodwill . . . . . . . . . 3,925 3,925 3,925
Amortization of and adjustments to
film costs . . . . . . . . . . . . . . . 83,477 60,330 49,056
Income taxes payable and deferred
income taxes . . . . . . . . . . . . . . 9,862 (152) 624
(Increase) decrease in operating assets,
net of acquisitions:
Accounts receivable . . . . . . . . . . (11,336) 1,950 482
Inventories. . . . . . . . . . . . . . . . (1,393) 3,029 2,282
Receivable related to assets held
for sale . . . . . . . . . . . . . . . . -- 17,916 68,084
Receivable from stockholder. . . . . . . . -- -- 8,047
Film cost additions. . . . . . . . . . . . (79,410) (59,921) (58,096)
Other assets . . . . . . . . . . . . . . . (587) 1,090 420
Increase (decrease) in operating
liabilities, net of acquisitions:
Accounts payable, accrued expenses,
and deferred revenue . . . . . . . . . (1,539) 4,338 (1,707)
Accrual for returns and advertising. . . . -- 3,430 --
Liabilities related to assets held
for sale . . . . . . . . . . . . . . . . -- (13,542) (33,059)
Payments on film costs obligations . . . . (3,982) (1,217) 3,926
Cash (used for) provided by continuing
operating activities . . . . . . . . . (3,823) 32,682 35,055
Cash (used for) provided by
discontinued operations. . . . . . . . -- -- (100)
Cash (used for) provided by operating
activities . . . . . . . . . . . . . . (3,823) 32,682 34,955
INVESTING ACTIVITIES:
Acquisition of property and equipment . . . (510) (460) (459)
Cash used for investing activities . . . (510) (460) (459)
FINANCING ACTIVITIES:
Issuance of long-term obligations . . . . . 10,000 10,000 2,500
Payments on long-term obligations . . . . . (8,770) (8,689) (50,631)
Repurchase of Series B Cumulative
Convertible Preferred Stock . . . . . . . (2,332) (5,460) (1,460)
Dividends paid on Series B Preferred
Stock . . . . . . . . . . . . . . . . . . (2,228) (2,850) (2,999)
Issuance of Common Stock. . . . . . . . . . 168 -- --
Cash used for financing activities . . (3,162) (6,999) (52,590)
(Decrease) Increase in cash and
cash equivalents . . . . . . . . . . (7,495) 25,223 (18,094)
Cash and cash equivalents at
beginning of period . . . . . . . . 49,487 24,264 42,358
Cash and cash equivalents at end
of period . . . . . . . . . . . . . $ 41,992 $ 49,487 $ 24,264
See notes to consolidated financial statements.
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Note 1 - Summary of Significant Accounting Policies
Background and Operations: LIVE Entertainment Inc. ("LIVE"
or the "Company") was formed in 1988 and its largest ongoing
businesses are LIVE Film & Mediaworks Inc. ("LFM") (formerly LIVE
Home Video Inc.) and LIVE International ("LI"), which primarily
acquires rights to produce and distribute theatrical motion
pictures, children's films and special interest programs
(including CD-ROM) which they market and distribute in all media
to wholesalers, retailers and consumers in the United States and
Canada (LFM) and internationally (LI). As part of its
international activities, the Company also owned an 81% interest
in VCL/Carolco Communications GmbH ("VCL"), a home video
distribution and marketing company headquartered in Munich,
Germany. VCL's year-end is November 30. In November 1995, LIVE
disposed of its interest in VCL. The Company's continuing
operations are principally in a single business segment, the
production, distribution and retail sale of a broad variety of
film related entertainment software products.
Principles of Consolidation: The financial statements
include the accounts of the Company and its subsidiaries LFM, LI
and VCL. The financial statements reflect the Company's
interests in, and account for, VCL as a disposal of a portion of
a line of business. All significant intercompany balances and
transactions have been eliminated.
Cash Equivalents: Cash equivalents are all highly liquid
investments maturing in three months or less when purchased.
Restricted Cash: Restricted cash is cash required to be on
reserve for film production contingencies. Such restricted cash
is expected to be available to the Company within 12 months of
the balance sheet date.
Accounts Receivable Allowances: Accounts receivable are net
of allowances for doubtful accounts, sales returns and
advertising credits (1996). The accrual for returns and
advertising costs are net of accounts receivable (1995).
Inventory Valuation: LFM's inventory of duplicated
videocassettes and boxes is stated at the lower of cost or
market. All other inventories, which consist of videocassettes
and accessories, are stated at the lower of cost or market
determined by using an average cost which approximates the
first-in, first-out (FIFO) method.
Depreciation and Amortization: Property and equipment are
stated at cost and are depreciated over their estimated service
lives using accelerated and straight-line methods. Leasehold
improvements are amortized over the lesser of their estimated
useful lives or the terms of the related leases.
Film Costs: Acquisition, production, print and advertising
costs (which benefit future periods) are capitalized as film
costs. Film costs are stated at the lower of unamortized cost or
estimated net realizable value. In accordance with Financial
Accounting Standards Board Statement No. 53, the individual film
forecast method is used to amortize film costs. Films costs are
amortized in the proportion that gross revenues realized bear to
management's estimate of the total gross revenues expected to be
received. Estimated liabilities for residuals and participations
are accrued and expensed in the same manner as film costs are
amortized. Where film rights are acquired from producers for a
guaranteed minimum payment and the producer retains a
participation in the film profits, the film profits are allocated
to the Company until the guaranteed minimum payment is recovered,
after which the producer's share is accrued.
Revenue estimates on a film by film basis are reviewed
periodically by management and are revised, if warranted, based
upon management's appraisal of current market conditions. Based
on this review, if estimated future gross revenues from a film
are not sufficient to recover the unamortized film costs, other
direct distribution expenses, and participations, the unamortized
film cost shall be written down to net realizable value. In
unusual cases, such as a change in public acceptance of certain
types of films or actual costs substantially in excess of
budgeted costs, a write-down to net realizable value may be
required before the film is released.
Goodwill: Goodwill represents both the excess of
consideration paid for companies acquired in purchase
transactions over the estimated fair value of the net assets of
such companies and the application of pushdown accounting
associated with the purchase of LFM by Carolco Pictures Inc.
("Carolco") in 1986. Goodwill is being amortized principally on
a straight-line basis over 20 years. It is the Company's policy
to evaluate goodwill and recognize impairment if it is probable
that the recorded amounts are not recoverable from future cash
flows.
Income Taxes: The Company records its income tax provision
in accordance with the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Deferred income taxes are provided on transactions which
are reported in the financial statements in different periods
than they are for income tax purposes. Current and deferred
taxes are provided based on filing a consolidated tax return for
federal income tax purposes and combined state tax returns where
permitted by state taxing authorities.
Revenue Recognition: Minimum guaranteed amounts from
theatrical exhibition and revenues from home video, free
television and pay television license agreements are recognized
in accordance with Financial Accounting Standards Board No. 53,
when the license period begins for each motion picture, the
license fee and cost of each picture are known, such motion
pictures have been accepted and are available pursuant to the
terms of the noncancelable license agreements and the
collectability of the full license fee is reasonably assured.
Revenues from theatrical exhibition in excess of minimum
guaranteed amounts are recognized during the period of
exhibition. Cash collected in advance of the time of
availability is recorded as advance collections on contracts.
Once completed, a typical theatrical film will generally be
made available for license as follows:
Months After Approximate
Marketplace Initial Release Release Period
Domestic theatrical ---- 1-6 months
Domestic home video 4-6 months ----
Domestic pay-per-view 4-6 months 3 months
Domestic pay television 6-10 months 12-21 months
Domestic network/basic cable 30-36 months 18-36 months
Domestic syndication 30-36 months 3-15 years
Foreign home video 6-12 months ----
Foreign television 18-24 months 18-30 months
Video Cassette and Disc Sales Revenue and Returns
Recognition: Revenue from sales is generally recognized upon
delivery to the customer. However, in accordance with industry
practice, certain sales are made with the right to return unsold
items. An allowance is provided for the gross profit impact of
future sales returns, which reduces sales and cost of goods sold
accordingly.
Net (Loss) Income Per Common Share: Net (Loss) Income per
common share is based on the weighted average number of common
and common equivalent shares outstanding during the periods.
Common equivalent shares, consisting of outstanding stock options
and warrants, and convertible preferred stock are not included in
the 1994 and 1996 calculations as they are antidilutive. Primary
per share information has been determined on the basis of
2,441,055, 2,436,309, and 2,418,003 weighted average shares
outstanding for the years ended December 31, 1996, 1995 and 1994,
respectively. The net (loss) income per common share for the
year ended December 31, 1995 and 1994 gives effect to the
accretion of the redemption value of the Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock") of
$4,509,000 and $6,000,000 respectively. The net (loss) income
per common share for the years ended December 31, 1996, 1995 and
1994 gives effect to total dividends on both the Series B
Preferred Stock and the Series C Convertible Preferred Stock (the
"Series C Preferred Stock") of $3,952,000, $3,027,000, and
3,791,000 respectively. Fully diluted per share information for
the year ended December 31, 1995 has been determined on the basis
of 20,541,896 weighted average number of shares outstanding,
assuming conversion of the Series B Preferred Stock and the
Series C Preferred Stock.
Concentration of Credit Risk: The Company sells film
properties and videocassettes to wholesalers, retailers and
consumers worldwide. Sales by LFM are made to customers
nationwide. Sales by LI are made to customers in various
territories worldwide. Credit is extended to wholesalers and
retailers based on an evaluation of the customer's financial
condition, and generally collateral is not required. Credit
losses are provided for in the financial statements and
consistently have been within management's expectations. Credit
risk relating to the sale and distribution of videocassettes by
Warner-Elektra-Atlantic Corporation ("WEA") to LFM's customers
has been assumed by WEA under the terms of a three-year
distribution agreement (see Note 7).
The Company places its temporary cash investments with high
credit quality financial institutions and limits the amount of
credit exposure to any one financial institution. Generally, the
investments made mature within 30 to 90 days and therefore are
subject to little risk. The Company has not incurred any losses
related to these investments.
Fair Values of Financial Instruments: At December 31, 1996,
the carrying value of the Company's financial instruments, which
consist primarily of debt, approximates the fair value thereof.
Fair value of publicly held debt has been determined based on
quoted market prices.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Stock Based Compensation: The Company accounts for its stock
compensation arrangements under the provision of APB 25,
"Accounting for Stock Issued to Employees," and intends to
continue this method of accounting.
Re-classification: Certain re-classifications were made to
the 1994 and 1995 financial statements to conform to the 1996
presentation.
Note 2 - Series C Preferred Stock
On March 23, 1993, Pioneer Entertainment (USA) L.P.,
formerly Pioneer LDCA, Inc., ("Pioneer") received 15,000 shares
of the Company's Series C Preferred Stock, par value $1.00 per
share and in 1995 transferred these shares to its parent company,
Pioneer Electronic Corporation ("PEC").
The Series C Preferred Stock bears a cash dividend rate of
5% ($50 per share) per annum, payable semi-annually on June 30
and December 31 of each year. Although the June 30 and December
31 dividends were accrued by the Company during 1993, 1994, 1995,
and 1996, dividends totaling approximately $3,078,000 ($205.20
per share) (including dividends on the unpaid dividends) were not
paid due to restrictions imposed on the Company by the terms of
the Series B Preferred Stock, which prohibit the payment of
dividends on the Series C Preferred Stock unless the aggregate
amount of such dividends, together with all cash dividends paid
on the Series B Preferred Stock, does not exceed the net income
of the Company (adding back specified net worth exclusions) since
the March 23, 1993 date of issuance of the Series C Preferred
Stock and the Series B Preferred Stock. The Company has realized
cumulative consolidated net losses since the Series C Preferred
Stock and the Series B Preferred Stock were issued. Thus,
pursuant to the terms of the Series B Preferred Stock, the
Company is prohibited from paying the June 30 and December 31,
1993, 1994, 1995, and 1996 cash dividends on the Series C
Preferred Stock.
The Series C Preferred Stock ranks junior to the Series B
Preferred Stock and senior to all other classes of stock of the
Company. The Series C Preferred Stock is convertible into
1,187,384 shares of common equity of the Company (either Common
Stock or Series A Common Stock) at December 31, 1996. The number
of shares into which the Series C Preferred Stock is convertible
was determined by dividing the $15,000,000 liquidation preference
plus accrued dividends of approximately $3,078,000 of the Series
C Preferred Stock by $15.225, which was 140% of the average
closing price of the Company's Common Stock for the ten trading
days ending March 18, 1993, the date that was three business days
prior to the completion of the Company's financial restructuring
on March 23, 1993 ("Restructuring"). Holders of the Series C
Preferred Stock are entitled to vote with the holders of Common
Stock generally with each share entitled to as many votes as the
number of shares of Common Stock into which it may be converted.
The Series C Preferred Stock, in combination with the Company's
Common Stock owned by PEC, represents approximately 50% of the
voting equity of the Company (see Note 12). The Series C
Preferred Stock may only be redeemed in certain limited
circumstances in the event of increases in the trading price of
the Company's Common Stock or in the event of a merger of the
Company with another entity.
Note 3 - Discontinued Operations and Disposal of a Portion of a
Line of Business
On August 31, 1994, LIVE sold its entire interest in its
Specialty Retail Division, which consisted of its formerly wholly
owned subsidiary, Strawberries Inc. ("Strawberries") and
Strawberries' wholly owned subsidiary, Waxie Maxie Music Co.
("Waxie Maxie") to a group including Castle Harlan, Inc., the
President of the Specialty Retail Division, and other senior
managers of the Specialty Retail Division. The purchaser group
also included Jefferson Capital Group, Ltd. ("Jefferson
Capital"). The total purchase price paid to LIVE for the
Specialty Retail Division was $35,000,000 in cash, resulting in a
loss on disposal of $23,773,000, which was accrued in 1993. On
February 22, 1997, Strawberries filed for protection under
Chapter 11 of the United States Bankruptcy Code.
The Specialty Retail Division's revenues for the seven
months ended August 31, 1994 were $57,846,000. Losses from
operations for the same period were $3,339,000 which was accrued
in 1993, net of provision for income taxes of $100,000.
In March 1994, primarily as a result of the Company's desire
to focus its efforts on its core entertainment business, the
Board of Directors of the Company decided to dispose of the
Company's interest in VCL. In February 1995, the Company and
certain of its affiliates, on the one hand, and Datty Ruth, the
owner of 19% of VCL, and Apricot Computer GmbH ("Apricot"), on
the other, entered into a preliminary agreement whereby the
Company's 81% interest in VCL, as well as all receivables owed by
VCL to the Company or its affiliates, would be transferred to
Ruth and Apricot. The total consideration to be received by the
Company and its affiliates in connection with such transactions
was approximately $7,444,000, of which approximately $3,100,000
was received in February 1995. The remaining $4,344,000 was
received in November 1995, and a gain of approximately $2,913,000
was reflected in the quarter ended September 30, 1995, resulting
from the completion of this transaction.
Note 4 - Foreign Operations
For the year ended December 31, 1994, net revenues,
operating profits and identifiable assets relating to foreign
operations were $26,629,000, $2,945,000 and $33,262,000,
respectively. For the year ended December 31, 1995, net revenues
and operating profits relating to foreign operations were
$32,257,000 and $8,775,000.
<PAGE>
Note 5 - Film Costs
The components of film costs are as follows:
December 31,
1996 1995
(In Thousands)
Released . . . . . . . . . . . . . . . . . . . . $42,872 $20,476
In Production. . . . . . . . . . . . . . . . . . 7,637 21,884
Development. . . . . . . . . . . . . . . . . . . 2,386 5,096
Video Cassette and Disc. . . . . . . . . . . . . 9,738 19,244
TOTAL FILM COSTS. . . . . . . . . . . . . . . $62,633 $66,700
The Company estimates that 90.4% of its film costs will be
amortized during the three years ending December 31, 1999.
Note 6 - Property and Equipment
The components of property and equipment are as follows:
December 31,
1996 1995
(In Thousands)
Building and improvements. . . . . . . . . . . . $ 493 $ 456
Equipment and furniture. . . . . . . . . . . . . 7,051 6,578
7,544 7,034
Less accumulated depreciation and amortization . (6,486) (5,889)
$ 1,058 $ 1,145
Note 7 - Debt and Other Financing
Debt and other financing consist of the following:
December 31,
1996 1995
(In Thousands)
Distribution agreements . . . . . . . . . . . . $ 13,571 $ 8,333
Increasing Rate Senior Subordinated Notes
due 1999 (see Note 10), including
capitalized interest of $9,176 (1996)
and $13,184 (1995) . . . . . . . . . . . . . . 49,176 53,184
$ 62,747 $ 61,517
LIVE and its affiliates are a party to a three-year $30,000,000
revolving credit facility with Foothill Capital Corporation (the
"Foothill Credit Facility") expiring November 14, 1997. In March
1997, an amendment was entered into that extended the expiration
date of the Foothill Credit Facility, under the existing terms,
to March 1, 1998. Borrowings available under the Foothill Credit
Facility are limited to $27,500,000 until additional participant
lenders are added to the Foothill Credit Facility, at which time
the borrowings available will be increased to a maximum
$30,000,000. Borrowings under the Foothill Credit Facility are
determined under a borrowing base calculation, which includes
certain allowable accounts receivable, film rights and inventory
balances, and are secured by substantially all of the assets of
LIVE and its subsidiaries. Outstanding borrowings under the
Foothill Credit Facility bear interest at the rate of 2% per
annum above the highest of the Bank of America, Mellon Bank or
Citibank prime rate, payable monthly. In no event will interest
under the Foothill Credit Facility be less than 7% per annum.
The Foothill Credit Facility provided for a closing fee of
$500,000, an annual facility fee of 1/4 of 1% and a commitment
fee of 1/4 of 1% on any unused amount. The Foothill Credit
Facility also requires LIVE to meet certain financial ratios, and
as of December 31, 1996, the Company was in compliance with all
such financial ratios. There were no amounts outstanding under
the Foothill Credit Facility as of December 31, 1996.
On May 27, 1995, LFM entered into a three year extension of its
distribution agreement originally signed in May 1992 with WEA.
Under the terms of the extension, WEA advanced $10,000,000 to LFM
($20,000,000 had been advanced under the original agreement and
repaid entirely prior to the 1995 extension), recoupable from
distribution revenues during the three year term of the agreement
at $277,778 per month, including interest at LIBOR, plus 0.2%.
On October 21, 1996 LIVE amended the distribution agreement, to
be effective May 7, 1996, whereby LIVE assumed responsibility of
all sales and sales solicitation services which were previously
the responsibility of WEA. The amendment also included a
reduction in certain distribution fees shared by WEA, as a result
of the shift in sales and sales solicitation responsibility, and
an additional advance to LIVE of $10,000,000. The additional
advance is recoupable from distribution revenues during the
remaining term of the agreement at $476,190 per month plus
interest at LIBOR plus 0.2%. In order to obtain the advances,
LIVE granted WEA a second priority security interest in
substantially all of LIVE's assets. At December 31, 1996 and
1995 there was $13,571,000 and $8,333,000, respectively,
outstanding related to the WEA advances. The interest rate on
the advance at December 31, 1996 was 5.44%.
The future maturities of long-term obligations are as follows:
Year Ending December 31, (In Thousands)
1997 . . . . . . . . . . . . . . . . . . . . . . $ 13,472
1998 . . . . . . . . . . . . . . . . . . . . . . 28,026
1999 . . . . . . . . . . . . . . . . . . . . . . 21,249
$ 62,747
Interest paid for the years ended December 31 1996, 1995 and
1994 was $5,383,000, $5,131,021, and $8,621,000 respectively,
including $28,482, and $787,000 related to the Company's
discontinued operations in 1995 and 1994, respectively.
Note 8 - Leases
The Company generally conducts its operations through leased
office facilities. The Company also leases automobiles, computer
equipment, furniture, fixtures and other equipment. Most leases
require that the Company perform all necessary repairs and
maintenance, provide insurance and pay taxes assessed against the
leased property. The terms of leases range from month-to-month
to four years, some of which have renewal options. Certain rents
are adjusted for increases based upon the Consumer Price Index.
The leases are classified as operating leases.
Future minimum operating lease payments for the Company, as
of December 31, 1996 are:
(In Thousands)
1997 . . . . . . . . . . . . . . . . . . . . . . $ 1,176
1998 . . . . . . . . . . . . . . . . . . . . . . 1,167
1999 . . . . . . . . . . . . . . . . . . . . . . 619
2000 . . . . . . . . . . . . . . . . . . . . . . 118
Total net minimum lease payments . . . . . . . . $ 3,080
For the years ended December 31, 1996, 1995 and 1994, rent
expense under all operating leases aggregated $1,017,000,
$1,812,000, and $6,685,000 respectively, including $878,000 and
$5,760,000, related to the Company's discontinued operations in
1995 and 1994, respectively.
Note 9 - Film Costs Obligations
At December 31, 1996, the unrecorded future obligations for
undelivered film product approximates $20,721,356. Deposits made
for guaranteed delivery of undelivered film product are recorded
as film costs.
Certain agreements permit a reduction in the amount of film
right payments when stipulated conditions have not been met.
Many agreements also contain an obligation for the payment of
royalties above the minimum guarantee if sales exceed a
stipulated amount. At December 31, 1996, $11,787,000 of
royalties payable are included in film obligations.
Note 10 - Increasing Rate Senior Subordinated Notes Due 1999
On March 17, 1993, the United States Bankruptcy Court for
the Central District of California (the "Bankruptcy Court")
confirmed a prepackaged plan of reorganization (the "Prepackaged
Plan") for LIVE, providing for the issuance of $40,000,000 in
principal amount of Increasing Rate Senior Subordinated Notes due
1999 (the "LIVE Increasing Rate Notes"). The LIVE Increasing
Rate Notes mature on March 23, 1999. Interest accrued on the
LIVE Increasing Rate Notes from September 1, 1992 at 10% per
annum and was increased to 12% in November 1994 through an
amendment to the Indenture between the Company and American Stock
Transfer & Trust Company, as Trustee (the "Indenture") that
governed the terms of the notes.
Payment of the LIVE Increasing Rate Notes is secured only by
a lien on the Common Stock of LFM, subject and subordinate to a
lien under the Foothill Credit Facility and is subordinated to
all of the Company's present and future senior debt. The LIVE
Increasing Rate Notes are subject to mandatory redemption of
$20,000,000 of the principal amount on March 23, 1998 and are
redeemable at any time at par plus accrued interest.
The Indenture restricts the ability of the Company and its
Restricted Subsidiaries (as defined) to incur additional senior
debt and subsidiary senior debt, to make restricted payments and
restricted investments, to merge, consolidate or sell assets of
the Company or its Restricted Subsidiaries, to create liens other
than to secure senior debt, subsidiary senior debt and certain
other permitted debt, or to enter into certain transactions with
affiliates of the Company.
Interest to maturity of the LIVE Increasing Rate Notes of
$9,176,000 and $13,184,000 at December 31, 1996 and 1995,
respectively, has been included in the carrying value of the LIVE
Increasing Rate Notes, in accordance with Financial Accounting
Standards Board Statement No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings," and will not be
recognized as interest expense in current and future years.
<PAGE>
Note 11 - Income Taxes
As discussed in Note 1, the Company records its income tax
provision in accordance with SFAS No. 109.
Income (loss) From Continuing Operations Before Income Taxes is
as Follows:
December 31,
1996 1995 1994
(In Thousands)
Domestic . . . . . . . . . . . . $ 4,563 $ 11,391 $ (7,945)
Foreign. . . . . . . . . . . . . -- -- (1,529)
$ 4,563 $ 11,391 $ (9,474)
Income Tax Expense From Continuing Operations
December 31,
1996 1995 1994
(In Thousands)
Currently payable:
Federal. . . . . . . . . . . . $ -- $ 108 $ --
State. . . . . . . . . . . . . -- 172 (494)
Foreign. . . . . . . . . . . . -- -- 70
-- 280 (424)
Deferred:
Federal. . . . . . . . . . . . 6,000 48 624
State. . . . . . . . . . . . . 2,000 272 --
8,000 320 624
$ 8,000 $ 600 $ 200
Components of Deferred Income Taxes
December 31,
1996 1995 1994
(In Thousands)
Film costs . . . . . . . . . . . $ 8,007 $ 13 $ 368
Sales returns and other
allowances . . . . . . . . . . 197 290 35
Accelerated depreciation and
basis reduction . . . . . . . (35) (2) 3
Accruals not currently
deductible for tax purposes. . (169) 19 218
$ 8,000 $ 320 $ 624
<PAGE>
Reconciliation of Effective Rate of Income Taxes
Percentage of Income (Loss)
December 31,
1996 1995 1994
Tax provision. . . . . . . . . . . . . . $ 8,000 $ 600 $ 200
Book income (loss) . . . . . . . . . . . $ 4,563 $ 11,391 $ (9,474)
Effective tax rate . . . . . . . . . . . 175.3% 5.3% (2.1)%
Federal statutory rate . . . . . . . . . 35.0% 35.0% 35.0%
State income taxes . . . . . . . . . . . 28.9 3.9 (3.0)
Alternative minimum tax effect,
other. . . . . . . . . . . . . . . . . 117.1 (1.2) (1.2)
Utilized net operating loss. . . . . . . (34.0) (4.5) (17.6)
Loss related to foreign
operations . . . . . . . . . . . . . . -- (49.2) (0.7)
Foreign deemed dividend. . . . . . . . . -- 9.2 (0.1)
Goodwill amortization. . . . . . . . . . 28.3 12.1 (14.5)
Effective tax rate . . . . . . . . . . 175.3% 5.3% (2.1)%
Components of Deferred Tax Liabilities and Assets
1996 1995
Deferred tax liabilities:
Amortization of film costs and other . $(16,685) $ (8,451)
Total deferred tax liabilities . . . (16,685) (8,451)
Deferred tax assets:
Sales returns and other allowances . . 585 726
Accelerated depreciation . . . . . . 94 139
Accruals not currently deductible. . 1,319 322
Other. . . . . . . . . . . . . . . . -- 79
Tax effect of NOL carryforward . . . 8,953 12,319
Tax basis difference - debt. . . . . 3,706 4,614
14,657 18,199
Less valuation allowance . . . . . . (14,657) (16,332)
Net deferred tax assets. . . . . . . -- 1,867
Total deferred tax
assets/(liabilities) . . . . . . $(16,685) $ (6,584)
Income taxes paid for the years ended December 31, 1996 and
1995 and 1994 were $356,449, $421,936 , and $1,456,000,
respectively, including $580,000, related to the Company's
discontinued operations in 1994. The valuation allowance has
decreased $1,675,000 from $16,332,000, at December 31, 1995 to
$14,657,000 at December 31, 1996 primarily due to fluctuations in
temporary differences.
During 1995 and 1994, $3,000,000 and $3,874,000 of
undistributed earnings of the Company's foreign subsidiaries were
deemed remitted as a dividend in accordance with certain
provisions of the U.S. Internal Revenue Code ("I.R.C."). The
related taxes were provided for these deemed dividends in the
Company's U.S. tax provision. Effective September 13, 1994 LEI-
IVE Entertainment N.V. was domesticated as a Delaware corporation
under the name LIVE Entertainment International Inc. Such
reorganization did not result in United States or California tax
liability to the Company.
On March 17, 1993, the Bankruptcy Court confirmed the
Prepackaged Plan. In accordance with the I.R.C., this
reorganization has caused a "change in ownership" which resulted
in a limitation on the future utilization of the Company's net
operating loss carryforwards beginning with the year ending
December 31, 1993. The annual limitation is approximately
$1,600,000 per year subject to certain increases relating to
built-in gain items.
At December 31, 1996, approximately $26,000,000 of net
operating loss carryforwards are available for regular federal
tax return purposes. In accordance with Section 108 of the
I.R.C., the Company was required to reduce its "tax attributes"
due to the confirmation of the Prepackaged Plan. This resulted
in the reduction of net operating loss carryforwards by
approximately $35,000,000. Remaining federal net operating
losses of $26,000,000 for regular income tax purposes, of which
$20,000,000 are subject to annual limitations as described above,
will expire between the years 2006 and 2010. State net operating
loss carryforwards of $13,000,000 were absorbed by the reduction
in "tax attributes" due to the confirmation of the Prepackaged
Plan. Remaining net operating losses for state tax purposes of
$2,500,000 will expire between the years 2009 and 2010. For
federal Alternative Minimum Tax ("AMT") return purposes,
$1,000,000 of net operating loss carryforwards are available
after the reduction in "tax attributes." AMT net operating loss
carryforwards will expire in 2010. AMT credits of $2,000,000 and
foreign tax credits of $50,000 are available to offset future
regular federal income tax liabilities. The disposal of the
Specialty Retail Division on August 31, 1994 resulted in a
capital loss of approximately $30,000,000 for regular tax
purposes and $31,600,000 for AMT purposes, which may be carried
forward, but expire in 1999. State capital loss carryforwards
are $15,000,000 which expire in 1999. The disposal of VCL on
September 30, 1995, resulted in a capital loss of approximately
$10,000,000 for both regular tax and AMT purposes, which may be
carried forward but expire in 2000.
The Company is currently under examination by the Internal
Revenue Service ("IRS") for the years ended 1989 through 1994 and
by the California Franchise Tax Board for the years ended 1988
through 1990. In connection with their examination the Company
has received certain proposed adjustments from the IRS for the
1989 through 1991 tax years, the impact of which may be to
significantly increase the Company's taxable income and related
tax liability in certain years under examination. The Company is
in the process of analyzing the proposed adjustments,
alternatives available to the Company and the potential impact
the proposed adjustments will have. While the outcome of the
examination is unknown, in the fourth quarter of 1996 the Company
recorded an additional provision for income taxes and interest
there-on related to the years under examination of approximately
$7,100,000. Based on the most recent discussions between the
Company and the tax authorities the Company believes, that with
the additional provision for income taxes recorded in 1996, it
has provided adequate reserves to cover its income tax
liabilities at December 31, 1996.
Note 12 - Stockholders' Equity
The Series B Preferred Stock has a liquidation value of
$10.00 per share. Holders of the Series B Preferred Stock are
entitled to an annual dividend, payable quarterly, which accrued
from September 1, 1992 at 5% ($0.50 per share) if paid in cash or
8% if paid in kind ("PIK") and increased on May 1, 1996 to 10%
($1.00 per share) if paid in cash and 12% if PIK. Dividends of
$3,081,000 ($0.81 per share) in 1996, $2,198,000 ($0.52 per
share) in 1995, and $3,000,000 ($0.50 per share) in 1994 were
accrued on the Series B Preferred Stock and were paid beginning
in March 1993 and quarterly thereafter. The Company may redeem
the Series B Preferred Stock at any time at 100% of the
liquidation value, plus accrued dividends.
Although LIVE has no obligation to redeem any Series B
Preferred Stock, subject to the availability of funds and the
prior approval of its Board of Directors and its lenders, LIVE
may acquire shares of its Series B Preferred from time to time,
either through private purchases or through open market
purchases. On December 9, 1994, and March 7, 1995, LIVE
acquired, and subsequently retired, 400,000 shares and 1,400,000
shares, respectively, of the Series B Preferred Stock at average
prices under $4.00 per share. In addition, in March 1996 the
Company purchased 377,500 shares of the Series B Preferred Stock
at an average price of approximately $6.00 per share.
Holders of the Series B Preferred Stock are entitled to
elect four members, or under certain circumstances, a majority of
the Company's Board of Directors. No other voting rights exist.
In addition, commencing May 1, 1996, holders can convert the
Series B Preferred Stock into LIVE Common Stock. The conversion
price per share is obtained by dividing the liquidation value by
either the market price of the Common Stock or the "Floor Price."
The Floor Price is initially $20.00 per share of Common Stock,
decreasing $1.25 per share at the end of each three month period
thereafter. On September 1, 1998, the conversion price will be
reset to the lower of the market price or $5.00 per share,
resulting in the potential issuance of a minimum of approximately
7,600,000 shares of the Company's Common Stock based upon the
number of Series B Preferred Stock shares outstanding as of March
15, 1997.
See also a description of the Company's Series C Preferred
Stock in Note 2 - Series C Preferred Stock.
The Company's Stock Option and Stock Appreciation Rights
Plan (the "Plan") provides for the granting of incentive stock
options, non-qualified stock options and stock appreciation
rights ("SARs") to its officers, directors, key employees,
consultants and other persons. Options to purchase a maximum of
700,000 shares of the Company's Common Stock, of which 120,000
may be granted as SARs, are available under the Plan. The
options vest over varying periods and expire in 10 years.
During 1996 the Stock Option Committee of the Board of
Directors granted to certain current employees of LIVE and LFM a
total of 274,400 options of which 6,750 were subsequently
exercised or canceled at an average exercise price of $3.50, the
closing price of the Common Stock on The Nasdaq Stock Market's
National Market on the day of the grants. The options vest
ratably over periods ranging from two to three years.
On March 6, 1995, the Stock Option Committee of the Board
of Directors granted to all current employees and Directors of
LIVE and LFM (other than members of the Stock Option Committee)
who were holders of options pursuant to the Company's 1988 Stock
Option and Stock Appreciation Rights Plan, as amended (the "1988
Plan"), the option to agree to cancel certain options (the
"Canceled Options") and to receive in return therefor new options
(the "New Options") pursuant to the 1988 Plan, all on the
following terms and conditions: (i) the exercise price for the
New Options would equal $3.50, the closing price of the Common
Stock on the SmallCap Market on March 6, 1995, (ii) fifty percent
(50%) of the New Options would vest on March 6, 1996; the
remainder would vest on March 6, 1997, provided that no New
Options would vest earlier than the scheduled vesting date for
the corresponding Canceled Options, and (iv) all New Options
would expire on the expiration date of the corresponding Canceled
Options.
A summary of stock option transactions during the three
years ended December 31, 1996 follows:
Number of Option Price Weighted Avg
Shares Per Share Exercise Price
($) ($)
Stock options outstanding:
December 31, 1993. . . . . . 298,210 8.75 - 70.00 11.45
Canceled . . . . . . . . . (86,380) 8.75 - 70.00 12.45
Granted. . . . . . . . . . 86,570 2.75 - 15.63 13.13
December 31, 1994. . . . . . 298,400 8.75 - 70.00 11.64
Canceled . . . . . . . . . (297,600) 3.50 - 15.63 11.42
Granted. . . . . . . . . . 275,140 2.75 - 4.25 3.50
December 31, 1995. . . . . . 275,940 2.75 - 14.38 3.75
Canceled . . . . . . . . . (13,070) 3.25 - 3.50 3.44
Exercises. . . . . . . . . (29,850) 2.75 - 3.50 3.46
Granted. . . . . . . . . . 274,400 3.25 - 6.75 3.59
December 31, 1996. . . . . . 507,420 2.75 - 14.38 3.69
At December 31, 1996, 1995, and 1994, 137,135, 23,300, and
133,260 options were exercisable, at an average exercise price of
$4.03, $6.55, and $12.76 per share respectively. No stock
appreciation rights were outstanding. Options to purchase
138,530 (1996), 99,860 (1995), and 76,860 (1994) shares of the
Company's Common Stock were available for grant under the Plan.
At December 31, 1996, 1995, and 1994, 507,420, 275,940, and
298,400 shares of Common Stock were reserved for future issuances
related to options, respectively. At December 31, 1996, 1995,
and 1994, 3,370,128, 1,130,170, and 1,075,753 shares of Common
Stock were reserved for future issuances related to the
conversion of Preferred Stock, respectively.
Warrants to purchase 7,000 shares of the Company's Common
Stock were issued during 1990 and were outstanding as of December
31, 1996. These warrants are currently exercisable at $72.50 per
share (fair market value at the date of grant) and expire in
2000.
In 1993, the Company issued warrants to purchase 266,666 and
200,000 shares of the Company's Common Stock at a price of $10.00
and $13.60 per share, respectively. The warrants are exercisable
until March 1998 and the holders have been granted demand and
piggyback registration rights for the Common Stock underlying the
Warrants.
The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB25) and related Interpretations in accounting for its
employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation,"
("Statement 123") requires use of option valuation models that
were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is
recognized.
The 1988 Stock Option and Stock Appreciation Rights Plan, as
amended, (the "1988 Plan"), has authorized the grant of options
to management personnel for up to 700,000 shares of the Company's
common stock. All options granted have 10 year terms, vest and
become fully exercisable at the end of 3 years of continued
employment.
Pro forma information regarding net income and earnings per
share is required by Statement 123, and has been determined as if
the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995: risk-free interest rate of 6.1%
and 6.0%, respectively; dividend yields of 0% for both periods;
volatility factors of the expected market price of the Company's
Common Stock of .685 and .667 respectively, and an expected life
of the option of 5 years. The weighted average fair value of
options granted during the year was $2.23 and $2.13 for the years
ended December 31, 1996 and 1995 respectively.
The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable measure of the fair
value of its employee stock options.
<PAGE>
Had compensation expense for the options been determined on
the fair value at the grant dates for awards consistent with
Statement 123, the Company's net (loss) income, net (loss) income
attributable to Common Stock and net (loss) income per share
would be as follows (in thousands except for earnings per share
information):
1996 1995
Pro forma net (loss) income . . . . . $(3,747) $10,619
Pro forma net (loss) income
attributable to Common Stock:
Primary . . . . . . . . . . . . . $(7,699) $ 3,083
Fully Diluted . . . . . . . . . . $(7,699) $10,619
Pro forma (loss) earnings
per common share:
Primary . . . . . . . . . $ (3.15) $ 1.27
Fully diluted . . . . . . . $ (3.15) $ 0.52
Since compensation expense associated with option grants is
recognized over the vesting period, the initial impact of
applying Statement 123 on pro forma net (loss) income, pro forma
net (loss) income attributable to Common Stock, and pro forma net
(loss) income per share is not representative of the potential
impact on pro forma amounts in future years, when the effect of
the recognition of a portion of compensation expense from
multiple awards would be reflected.
The following table summarizes information about stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Avg
Range of Number Remaining Weighted Avg Number Weighted Avg
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$2.75 - $3.25 103,650 9.05 $3.22 28,000 $3.15
3.50 - 4.25 392,970 7.82 3.61 98,335 3.51
4.50 - 6.25 1,000 9.53 5.00 1,000 5.00
6.50 - 10.25 2,000 9.34 6.75 2,000 6.75
10.50 - 14.38 7,800 5.85 12.93 7,800 12.93
507,420 137,135
</TABLE>
Note 13 - Stockholders' Rights Plan
In July 1990, and as amended as of April 1, 1992 and August
13, 1996, the Board of Directors of LIVE adopted a Stockholders'
Rights Plan and declared a dividend of one preferred stock
purchase right (a "Right") for each outstanding share of Company
Common Stock. Among other provisions, each Right may be
exercised to purchase one one-hundredth share of LIVE's Series R
Junior Participating Cumulative Preferred Stock at an exercise
price of $90, subject to adjustment (the "Exercise Price"). The
Rights may only be exercised after a party, exclusive of LIVE,
Pioneer, or an approved 20% stockholder, or their affiliates, has
acquired or obtained the right to acquire 20% or more of the
Company's Common Stock or in the event certain mergers or sales
of assets by LIVE occur. The Rights, which do not have voting
rights, expire on July 19, 2000 and may be redeemed by the
Company at a price of $.01 per Right at any time prior to their
expiration or the acquisition of 20% of the Company's Common
Stock by any person other than LIVE, Pioneer or their affiliates.
In the event a party other than LIVE, Pioneer, or an
approved 20% stockholder, or their affiliates, acquires 20% or
more of the Company's outstanding Common Stock in accordance with
certain defined terms, each Right will entitle its holder to
purchase, at the Right's then Exercise Price, a number of shares
of Company Common Stock having a market value of twice the
Right's Exercise Price. The independent directors of LIVE may
elect to exchange the Rights at an exchange ratio of one share of
Company Common Stock per Right upon the occurrence of certain
defined acquisition events. If certain mergers or sales of
assets by LIVE occur, each Right shall entitle the holder to
purchase, at the Exchange Price, a number of shares of common
stock of the surviving corporation or purchaser (so long as it is
not LIVE) having a market price of two times the Exercise Price.
Note 14 - Related Party Transactions
In December 1994, as part of an agreement settling all open
accounts between them, LIVE and Carolco agreed that all
individual films previously delivered to LFM or LI under either
the Domestic Master Agreement or the German Master Agreement
would no longer be cross-collateralized with other films, either
within individual packages or among so called "film packages";
the companies also agreed that for purposes of their settlement
only, all such films would be deemed to have earned the minimum
distribution fee that was guaranteed to LFM and LI. In
connection with this agreement in 1994, LIVE wrote off the
remaining unpaid receivable amount of $6,211,000 that LIVE had
recorded in its financial records as owing from Carolco (of which
all but $2,177,000 was reserved for in prior years).
Pursuant to an agreement dated October 1995, which amended
and extended an original agreement dated October 1991, LFM
granted Pioneer a license for United States laser videodisc
rights to LFM's library of motion pictures (subject to certain
reserved rights) for a term ending in September 1998. Pioneer
paid LFM a total of $4,600,000 ($2,300,000 in March 1996 and
$2,300,000 in August 1996) under this agreement as a non-
returnable advance recoupable on a cross-collateralized basis
from all royalties payable to LFM under the agreement.
In September of 1996, as part of an employment agreement, an
employee was advanced fees of $400,000 reflecting commitments by
the employee in connection with existing films to which the
Company is acquiring distribution rights. The advance is to be
repaid, plus interest, out of fees earned from future revenues
from these films. The employee is to guaranty the repayment of
this advance.
On February 8, 1996, the Company and Pioneer LDC, Inc.
("PLDC") entered into an Output Deal Agreement (the "Pioneer
Output Agreement") for the distribution of the Company's
theatrical production in Japan. The three year agreement
includes all theatrical films that LIVE produces and acquires
over the period, excluding two of LIVE's features released in
1996, The Substitute and The Arrival. PLDC has agreed to pay a
specified percentage of the applicable film's production or
acquisition cost to obtain such Japanese distribution rights.
PLDC is an affiliate of the Company's controlling shareholder,
Pioneer Electronic Corporation.
In July 1994, a subsidiary of LFM and an affiliate of
Pioneer reached an agreement whereby the Pioneer affiliate will
receive the Japanese theatrical, video and television
distribution rights to the films Wagons East, Top Dog, The Beans
of Egypt, Maine and Goldy III.
In 1993, Jefferson Capital, (an affiliate of a former
director of the Company), and the then co-financial advisor,
received a $150,000 non-refundable retainer to assist the Company
in structuring and placing a long-term working capital facility
for LFM and to make recommendations regarding the Company's
capital structure. In addition, each of Jefferson Capital and
the co-financial adviser received warrants to purchase 3,333 and
2,941 shares of the Company's Common Stock at a price of $10.00
and $13.60 per share, respectively. In 1994 these parties
assisted the Company in negotiating and obtaining the Foothill
Credit Facility and received a total fee of $300,000 for such
services.
In October 1994, LIVE retained Jefferson Capital as its
advisor in connection with LIVE's efforts to obtain the agreement
of the holders of the LIVE Increasing Rate Notes to eliminate the
minimum net worth covenant contained in the Indenture. Jefferson
Capital received a total fee of $200,000 (one half paid in
October 1994 and the second half paid in November 1994) for
investment banking services provided in connection with such
efforts. Jefferson Capital's fee was not contingent upon the
success of LIVE's efforts to amend the Indenture. LIVE also
agreed to reimburse Jefferson Capital for its reasonable out-of-
pocket expenses, including legal fees, and to indemnify Jefferson
Capital against certain liabilities, including liabilities under
the federal securities laws, relating to or arising out of
services performed by Jefferson Capital for this engagement.
In August 1995, Jefferson Capital assisted the Company in
obtaining film project financing from a bank and received a total
fee of $50,000 for such services.
In connection with the Restructuring, a director of the
Company and Jefferson Capital received a total of $630,000, plus
expenses. The director received $92,000 of such amount.
Any and all agreements with Jefferson Capital were
terminated by the Company in May 1995.
In 1993, the Company's former Chairman of the Board was
issued warrants to purchase 2,941 shares of the Company's Common
Stock at a price of $13.60 per share.
The Company and the former Chairman of the Board are parties
to an agreement dated December 1993, pursuant to which the
Company agreed, for a term ending in June 1997, to pay the former
Chairman $25,000 per month, plus normal directors expenses and
other out-of-pocket expenses he may incur in connection with his
services to the Company, in return for the former Chairman making
himself available to the Company or any video subsidiary thereof
to act as a consultant for the period ending June 30, 1997. Such
compensation is payable as long as the former Chairman makes
himself available for such purpose, whether or not the Company
actually utilizes his services and whether or not any particular
Chief Executive Officer is in the Company's employ.
Note 15 - Incentive Savings Plan
The Company has established the LIVE Incentive Savings Plan,
a profit sharing and 401(k) savings plan, in which eligible
employees of LIVE and LFM may participate. Each employee who has
attained the age of 21 may become a participant as of the
beginning of each calendar quarter when such employee has
completed 1,000 hours of service in the relevant one-year
computation period. The Company, at the discretion of the Board
of Directors, may make annual contributions to the LIVE Incentive
Savings Plan. The Company's profit sharing contributions are
allocated to individual accounts of participants in proportion to
their compensation. A participant is fully vested in his or her
tax-deferred employee contributions at all times. A participant
whose employment terminates for any reason other than death or
disability is entitled only to the vested portion of the
contributions made by the Company on behalf of the plan
participant. The LIVE Incentive Savings Plan permits tax-
deferred voluntary employee contributions of an amount equal to
not more than 10% of compensation, to be matched by a LIVE
contribution in an amount equal to 50% of the employee's
voluntary contributions which do not exceed 6% of his or her
compensation. With certain exceptions, contributions made by the
Company vest equally over a period of four years. Company
contributions to the LIVE Incentive Savings Plan were $121,968,
$95,000, and $46,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
Note 16 - Major Customers, Suppliers, and Geographic Areas
During the year ended December 31, 1996, one customer
accounted for 12.5% of net sales of LIVE and during the year
ended December 31, 1995, two customers accounted for 17.4% and
16.6%, respectively, of net sales of LIVE. During the year ended
December 31, 1994, two customers accounted for 11.0% and 12.3%,
respectively, of net sales of LIVE.
The Company is party to a license agreement which granted
the Company certain home video rights to certain Christmas and
other seasonal video programs. This agreement expires at the end
of 1997. Programs under this agreement provided 9.7%, 9.7%, and
11.0% of the Company's total net revenue for the year ended
December 31, 1996, 1995, and 1994 respectively.
Export Revenue by Geographic area for the year ended December 31,
1996 consists of:
Europe $13,102
Asia 6,500
Latin America 1,232
Australia/New Zealand 1,459
Other 462
Total $22,755
Note 17 - Commitments and Contingencies
Employment and Separation Agreements:
The Company has employment agreements with certain of its
officers generally for a term of one to four years. Future
minimum payments under these contracts are approximately
$3,792,000, $3,432,000, $2,994,000, and $812,000 for the years
ending December 31, 1997, 1998, 1999, and 2000.
Legal Proceedings:
LIVE had been the defendant in two purported class action
law suits that were filed in 1992. The Company had requested the
U.S. District Court for the Central District of California to
dismiss both cases for non-prosecution due to the fact that the
plaintiffs had taken no action in either of these cases for over
one year. On April 8, 1996, the U.S. District Court granted
LIVE's request and dismissed both cases.
In May 1994, a breach of contract claim was filed against a
subsidiary of the Company, claiming nonpayment of royalties from
licensing of films in foreign territories and deprivation of
royalty payments as a result of misallocation of certain values
asserted with licensed film properties. Films subject to the
complaint were contained in the assets of Vestron, Inc. purchased
by the Company in July 1991, and the period covered included the
license periods both prior to, and subsequent to, the acquisition
date by the Company. The Company filed a reply brief (including
a Motion to Dismiss) on October 5, 1994, and such Motion to
Dismiss was granted on the grounds of forum non conviens.
Plaintiff filed a complaint in New York on March 22, 1995. The
Company filed its answer, affirmative defenses and counterclaim
on April 20, 1995. Plaintiff filed a motion for class
certification on September 8, 1995 to which the Company filed its
opposition to the motion on November 6, 1995. After limited pre-
trial discovery, a motion for class certification was argued on
December 6, 1995. By order dated June 21, 1996 and filed on June
25, 1996, the Court in this action determined that the action
should be maintained as a class action under the provisions of
901(a) of the New York Civil Practice Law and Rules. The
Company filed an appeal from the Order granting class
certification on July 19, 1996 and filed a Motion for
Decertification of the class on July 24, 1996. A hearing on the
motion was heard on September 4, 1996 and on December 24, 1996
the Court denied the Company's Motion for Decertification. On
February 7, 1997 the company filed a combined appeal from the
order granting a class certification and the dismissal of the
Motion for Decertification, which will be considered by the New
York State Appellate Division in April 1997.
Management is unable to predict the ultimate
outcome of the above-described actions at this time.
However, LIVE and the other defendants believe that there is no
factual basis for these lawsuits and intend to defend them
vigorously. Accordingly, no provision for any liability which
may result has been made in LIVE's consolidated financial
statements. In the opinion of management, these actions, when
finally concluded and determined, will not have a material
adverse effect upon LIVE's financial position or results of
operations.
Other than as described above, there are no material legal
proceedings to which LIVE or any of its subsidiaries are a party
other than ordinary routine litigation in the course of business.
In the opinion of management, resolution of these matters will not
have a material adverse impact on LIVE's financial position or
results of operations.
Note 18 - Rationalization
In March 1996, the Company retained the Carreden Group,
Incorporated ("Carreden") to act as its exclusive financial
advisor in connection with a review of the Company's current
capitalization. Carreden was retained to advise the Company's
Board of Directors in a review of the Company's business
operations and capital structure and to develop alternatives that
will accomplish the strategic and financial objectives of the
Company by securing for the Company a more stable and appropriate
capital base on which to operate in the future.
On August 21, 1996 the Company filed a Schedule 13E-4 with
the Securities and Exchange Commission which outlined a proposed
exchange offer and equity recapitalization plan (the "Equity
Rationalization"). In addition, the Company is seeking to
replace its existing $30,000,000 Foothill Credit Facility with a
larger working capital facility, and to refinance its current
outstanding $40,000,000 of LIVE Increasing Rate Notes. The
Company continues to negotiate financing terms for an exchange
offer. In addition, the Company has been approached about a
possible transaction involving the sale of the entire company.
Any such transactions would be subject to a number of conditions,
and there is no assurance that either of these transactions, or
any other transactions, will be finalized or completed. The
Company believes that the Equity Rationalization, if completed,
will simplify its existing complex capital structure, provide
additional liquidity for growth and expansion, and reduce the
cash dividend cost of its existing equity securities. Failure of
the Company to consummate an equity rationalization plan at this
time would require the Company to begin accumulating cash to
retire LIVE Increasing Rate Notes, of which $20,000,000 are due
in 1998 and the remaining $20,000,000 in 1999, and would
therefore reduce the funds available for the Company's
operations. The completion of the Equity Rationalization is
subject to completing satisfactory documentation for refinancing
sources of senior and subordinated debt, approval by the
Company's Board of Directors, shareholders, and regulatory
agencies, completion of legal documentation, and acceptance of
the tender offer if and when made. As such, no assurances can be
given that the Company's efforts will be successful.
<PAGE>
<TABLE>
Note 19 - Quarterly Financial Information (Unaudited)
Certain quarterly financial information is presented below:
<CAPTION>
FirstSecond ThirdFourth
QuarterQuarterQuarterQuarter Year
(Amounts in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
1996
Net sales . . . . . . . . . . . . .$ 22,553 $ 50,269 $ 36,440 $ 42,163 $151,425
Gross profit . . . . . . . . . . . . 5,840 7,294 6,349 4,382 23,865
Operating profit (loss). . . . . . . 997 2,117 1,281 (361) 4,034
Income (loss) before income taxes. . 1,289 2,325 1,209 (260) 4,563
Net income . . . . . . . . . . . . . 967 1,743 1,209 (7,356) (3,437)
Preferred dividends. . . . . . . . . 699 1,039 1,006 1,208 3,952
Net income (loss) attributable
to Common Stock . . . . . . . . . 268 704 203 (8,564) (7,389)
Net income (loss) per
common share:
Primary. . . . . . . . . . . . . 0.10 0.28 0.08 (3.50) (3.03)
Fully Diluted. . . . . . . . . . 0.08 0.17 0.08 (3.50) (3.03)
Fourth Quarter Adjustments
During the fourth quarter of 1996 the Company recorded an additional provision for income taxes of
$7,100,000 as a result of certain adjustments proposed by the Internal Revenue Service in connection with its
examination of the Company's 1989 through 1991 tax returns.
1995
Net sales (1). . . . . . . . . . . .$ 44,505 $ 22,456 $ 40,060 $ 33,091 $140,112
Gross profit . . . . . . . . . . . . 9,949 5,077 3,246 8,815 27,087
Operating profit . . . . . . . . . . 5,359 936 1,400 3,131 10,826
Income before income taxes . . . . . 5,404 1,159 1,595 3,233 11,391
Net income . . . . . . . . . . . . . 4,904 1,059 1,595 3,233 10,791
Accretion in redemption value of
Series B Preferred Stock. . . . . . 1,571 1,259 1,259 420 4,509
Preferred dividends. . . . . . . . . 859 716 696 756 3,027
Net income (loss) attributable
to Common Stock. . . . . . . . . . 2,474 (916) (360) 2,057 3,255
Net income (loss) per common share:
Primary. . . . . . . . . . . . . 1.02 (0.38) (0.15) 0.84 1.34
Fully Diluted. . . . . . . . . . 0.29 (0.38) (0.15) 0.21 0.53
<FN>
(1) Excludes net sales of VCL for each of the fiscal quarters of 1995
of $9,779, $8,446, $5,261 and $8,771, respectively.
</FN>
</TABLE>
<PAGE>
Note 20 - Subsequent Event (Unaudited)
On April 17, 1997, the Company signed a merger agreement
with Film Holdings Co., a Delaware Corporation ("Parent") and
Film Acquisition Co., a Delaware Corporation and wholly owned
subsidiary of Parent ("Merger Sub"). The merger agreement
provides for the merger of Merger Sub with and into the Company,
with the Company surviving as a wholly owned subsidiary of
Parent. Subject to the terms and conditions of the merger
agreement, upon consummation of the merger:
(i) each share of Common Stock of the Company other than
shares owned by Parent, the Company or their
subsidiaries or by shareholders exercising dissenters'
rights, will be converted into the right to receive
$6.00 per share in cash;
(ii) each share of Series B Preferred Stock of the
Company other than shares owned by Parent, the
Company or their subsidiaries will be converted
into the right to receive $10.00 per share in
cash, plus accrued and unpaid dividends;
(iii) each share of Series C Preferred Stock of the
Company will be converted into the right to
receive $944.8642 per share in cash;
(iv) the Company will issue a notice of redemption
relating to the Increasing Rate Notes.
The completion of the merger is subject to completing
satisfactory documentation for refinancing sources of senior and
subordinated debt, approval by the Company's Board of Directors,
shareholders and regulatory agencies and completion of legal
documentation. As such, no assurances can be given that the
Company's efforts will be successful.
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands)
March 31, December 31,
1997 1996
ASSETS
ASSETS:
Cash and cash equivalents, including
restricted cash of $1,109 and $668 . . . . $ 48,412 $ 41,992
Accounts receivable, less allowances of
$20,879 in 1996. . . . . . . . . . . . . . -- 7,906
Inventories. . . . . . . . . . . . . . . . . 8,335 6,206
Property and equipment, net. . . . . . . . . 1,335 1,058
Film costs, net of accumulated amortization
of $622,305 and $610,067 . . . . . . . . . 59,869 62,633
Other assets . . . . . . . . . . . . . . . . 1,942 1,940
Goodwill, net of accumulated amortization
of $44,948 and $43,967. . . . . . . . . . 21,041 22,022
$140,934 $143,757
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable. . . . . . . . . . . . . $ 6,538 $ 5,177
Accrual for returns and advertising
net of accounts receivable
of $14,984 in 1997. . . . . . . . . . . 6,515 --
Accrued expenses. . . . . . . . . . . . . 3,513 3,918
Deferred revenue. . . . . . . . . . . . . 8,109 8,492
Notes payable . . . . . . . . . . . . . . 11,310 13,571
Increasing Rate Senior Subordinated
Notes due 1999, including capitalized
interest of $6,963 and $9,176 . . . . . 46,963 49,176
Film obligations. . . . . . . . . . . . . 12,148 14,577
Dividends payable . . . . . . . . . . . . 4,220 4,033
Income taxes payable and deferred income
taxes . . . . . . . . . . . . . . . . . 16,741 16,346
Total liabilities. . . . . . . . . . 116,057 115,290
STOCKHOLDERS' EQUITY:
Series B Cumulative Convertible
Preferred Stock-- authorized
9,000,000 shares; $1.00 par value;
$38,198,020 liquidation preference;
3,819,802 shares outstanding . . . . . 3,819 3,819
Series C Convertible Preferred Stock--
15,000 shares authorized and
outstanding; $1.00 par value;
$15,000,000 liquidation preference. . . 15 15
Common Stock--authorized 24,000,000
shares; $0.01 par value; 2,448,193
and 2,448,267 shares outstanding. . . . 24 24
Additional paid-in capital. . . . . . . . 122,787 123,930
Retained deficit. . . . . . . . . . . . . (101,768) (99,321)
24,877 28,467
$140,934 $143,757
See notes to condensed consolidated financial statements.
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
Three Months Ended
March 31,
1997 1996
Net sales. . . . . . . . . . . . . . . . . . $ 26,662 $ 22,553
Cost of goods sold . . . . . . . . . . . . . 22,965 16,713
GROSS PROFIT. . . . . . . . . . . . . . 3,697 5,840
Operating Expenses:
Selling, general and administrative
expenses. . . . . . . . . . . . . . . 5,149 3,862
Amortization of goodwill. . . . . . . . 981 981
6,130 4,843
OPERATING (LOSS) PROFIT . . . . . . . . (2,433) 997
Interest and other income. . . . . . . . . . 678 789
Interest expense . . . . . . . . . . . . . . (392) (497)
(LOSS) INCOME BEFORE INCOME TAXES . . . (2,147) 1,289
Income tax expense . . . . . . . . . . . . . 300 322
NET (LOSS) INCOME . . . . . . . . . . . $ (2,447) $ 967
Net (loss) income per common share:
Primary. . . . . . . . . . . . . . . . . . . $ (1.47) $ .10
Fully diluted. . . . . . . . . . . . . . . . $ (1.47) $ .08
Weighted average number of shares outstanding:
Primary. . . . . . . . . . . . . . . . . . . 2,448 2,681
Fully diluted. . . . . . . . . . . . . . . . 2,448 11,860
See notes to condensed consolidated financial statements.
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Three Months Ended
March 31,
1997 1996
OPERATING ACTIVITIES:
Net (loss) income . . . . . . . . . . . $ (2,447) $ 967
Adjustments to reconcile net
(loss) income to net cash provided
by operating activities:
Depreciation and amortization of
property and equipment. . . . . . . 143 172
Amortization of goodwill . . . . . 981 981
Amortization of and adjustments
to film costs. . . . . . . . . . 12,238 11,521
Income taxes payable and deferred
income taxes . . . . . . . . . . 395 322
(Increase) decrease in operating assets:
Accounts receivable. . . . . . . . 7,906 --
Inventories. . . . . . . . . . . . (2,129) (968)
Other assets . . . . . . . . . . . (2) (258)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses
and deferred revenue . . . . . . . 573 2,089
Accrual for returns and
advertising. . . . . . . . . . . 6,515 6,145
Film cost additions. . . . . . . . (9,475) (15,145)
Payments on film obligations . . . (2,429) (5,167)
Cash provided by operating
activities . . . . . . . . . . 12,269 659
INVESTING ACTIVITIES:
Acquisition of property and equipment . (420) (63)
Cash (used for) investing
activities . . . . . . . . . . (420) (63)
FINANCING ACTIVITIES:
Payments on long-term obligations . . . (4,474) (2,677)
Repurchase of Series B Cumulative
Convertible Preferred Stock . . . . . -- (2,332)
Dividends paid on Series B Cumulative
Convertible Preferred Stock . . . . . (955) (477)
Issuance of Common Stock. . . . . . . . -- 53
Cash (used for) financing
activities . . . . . . . . . . (5,429) (5,433)
Increase (decrease) in cash and
cash equivalents . . . . . . . 6,420 (4,837)
Cash and cash equivalents at
beginning of period. . . . . . 41,992 49,487
Cash and cash equivalents at
end of period. . . . . . . . . $ 48,412 $ 44,650
See notes to condensed consolidated financial statements.
<PAGE>
LIVE ENTERTAINMENT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997
Note 1 - Summary of Significant Accounting Policies
Background and Operations: LIVE Entertainment Inc. ("LIVE" or
the "Company") was formed in 1988 and its largest ongoing
businesses are LIVE Film and Mediaworks Inc.("LFM") (formerly
LIVE Home Video Inc.), LIVE Theatrical Distribution Inc. ("LTD")
and LIVE International ("LI"), which primarily acquires rights to
produce and distribute theatrical motion pictures, children's
films and special interest programs (including CD-ROM) which they
market and distribute in all media to wholesalers, retailers and
consumers in the United States and Canada (LFM and LTD) and
internationally (LI). The Company's continuing operations are
principally in a single business segment, the production,
distribution and retail sale of a broad variety of film related
entertainment software products.
Basis of Presentation: The accompanying consolidated
financial statements and footnotes are unaudited and are
condensed, as contemplated by the Securities and Exchange
Commission under Rule 10-01 of Regulation S-X. Accordingly, they
do not contain all disclosures required by generally accepted
accounting principles, but in the opinion of management of LIVE
include all adjustments (consisting only of normal recurring
accruals) necessary to fairly state the financial position and
results of operations of LIVE. The financial statements include
the accounts of LIVE and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
LIVE suggests that these condensed consolidated financial
statements be read in conjunction with its consolidated financial
statements for the year ended December 31, 1996 and related notes
thereto included on Form 10-K filed with the Securities and
Exchange Commission.
Certain reclassifications of 1996 amounts have been made in
order to conform with the 1997 financial statement presentation.
Net (Loss) Income Per Common Share:
Primary:
Per share information has been determined on the basis of
2,448,193 and 2,681,137 weighted average number of shares
outstanding for the three months ended March 31, 1997 and 1996,
respectively. Common equivalent shares, consisting of
outstanding stock options and warrants, and convertible preferred
stock are not included in the March 31, 1997 calculations as they
are antidilutive. The net (loss) income per common share for the
three months ended March 31, 1997 and 1996 gives effect to
dividends of $1,142,000 and $699,000, respectively, on both the
Series B Cumulative Convertible Preferred Stock ("Series B
Preferred Stock") and the Series C Convertible Preferred Stock
("Series C Preferred Stock").
In February 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 128, Earnings Per Share, which is
effective for annual and interim financial statements issued for
periods ending December 15, 1997 and early adoption is not
permitted. When adopted, the statement will require restatement
of prior years' earnings per share ("EPS"). SFAS No. 128 was
issued to simplify the standards for calculating EPS previously
found in APB No. 15, Earnings Per Share. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS.
The new rules also require dual presentation of basic and diluted
EPS on the face of the statement of operations for companies with
a complex capital structure. For the Company, basic EPS will
exclude the dilutive effects of stock options and warrants.
Diluted EPS for the Company will reflect all potential dilutive
securities. Under the provisions of SFAS 128, basic EPS would
have been $0.01 higher than the amount reported in the first
quarter of 1996 and have no impact on the amount reported for the
first quarter of 1997. Diluted EPS would have been the same as
the reported amounts.
Fully Diluted:
Common equivalent shares, consisting of outstanding stock
options and warrants, and convertible preferred stock are not
included in the March 31, 1997 calculations as they are
antidilutive. Per share information has been determined on the
basis of 11,860,005 weighted average number of shares
outstanding for the three months ended March 31, 1996, assuming
conversion of the Series B Preferred Stock and the Series C
Preferred Stock.
Note 2 - Recent Developments
On April 17, 1997, LIVE entered into a definitive merger
agreement with an investor group. Pursuant to the terms of the
merger agreement, holders of LIVE's Series B Preferred Stock will
receive $10.00 per share in cash, plus accrued dividends, holders
of Series C Preferred Stock will receive $944.8624 per share in
cash, and holders of LIVE's Common Stock will receive $6.00 per
share in cash. LIVE's outstanding indebtedness under its $40
million Increasing Rate Senior Subordinated Notes due 1999 (the
"LIVE Increasing Rate Notes") will also be redeemed at par plus
accrued interest. The transaction is subject to customary terms
and conditions, including closing of the necessary financing
under commitment letters aggregating $150 million delivered by
the investor group. The transaction is also subject to approval
by holders of a majority of LIVE's outstanding Common and Series
C Preferred Stock at a special meeting which is expected to be
held in June or July.
In connection with the merger agreement, on May 1, 1997, the
Company filed a Confidential Preliminary Merger Proxy Statement
pursuant to Section 14(a) of the Securities Exchange Act of 1934
describing certain details of the merger agreement.
Note 3 - Litigation
In May 1994, a breach of contract claim was filed against a
subsidiary of the Company by certain Plaintiffs, on their own
behalf and on behalf of all persons similarly situated, claiming
nonpayment of royalties from licensing of films in foreign
territories and deprivation of royalty payments as a result of
misallocation of certain values asserted with licensed film
properties. Films subject to the complaint were contained in the
assets of Vestron, Inc. purchased by the Company in July 1991,
and the period covered included the license periods both prior
to, and subsequent to, the acquisition date by the Company. The
Company filed a reply brief (including a Motion to Dismiss) on
October 5, 1994, and such Motion to Dismiss was granted on the
grounds of forum non conviens. Plaintiff filed a complaint with
the New York Supreme Court, Erie County, on March 22, 1995. The
Company filed its answer, affirmative defenses and counterclaim
on April 20, 1995. Plaintiffs filed a motion for class
certification on September 8, 1995 to which the Company filed its
opposition to the motion on November 6, 1995. After limited pre-
trial discovery, a motion for class certification was argued on
December 6, 1995. By order dated June 21, 1996 and filed on June
25, 1996, the Supreme Court in this action determined that the
action could be maintained as a class action under the provisions
of Section 901(a) of the New York Civil Practice Law and Rules.
The Company filed an appeal from the Order granting class
certification on July 19, 1996 and filed a Motion for
Decertification of the class on July 24, 1996. A hearing on the
motion was heard on September 4, 1996 and on December 24, 1996
the Supreme Court denied the Company's Motion for
Decertification. On February 7, 1997 the company filed a
combined appeal from the order granting a class certification and
the dismissal of the Motion for Decertification, which was
considered by the New York State Appellate Division in April
1997. By its decision of April 25, 1997, the New York State
Appellate Division affirmed the decision of the Supreme Court.
Management is unable to predict the ultimate outcome of the
above-described action at this time. However, LIVE and the
other defendants believe that there is no factual basis for
this lawsuit and intend to defend it vigorously. Accordingly,
no provision for any liability which may result has been made
in LIVE's condensed consolidated financial statements.
In the opinion of management, this action, when finally
concluded and determined, will not have a material adverse
effect upon LIVE's financial position or results of operations.
Other than as described above, there are no legal proceedings
to which LIVE or any of its subsidiaries are a party other than
ordinary routine litigation in the course of business. In the
opinion of management, resolution of these matters will not have a
material adverse impact on LIVE's financial position or results
of operations.
ANNEX A
AGREEMENT AND PLAN OF MERGER
Execution Copy
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
LIVE ENTERTAINMENT INC.
FILM HOLDINGS CO.
AND
FILM ACQUISITION CO.
Dated April 17, 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I
THE MERGER
SECTION 1.1 The Merger. . . . . . . . . . . . . . . . . . . 1
SECTION 1.2 Effective Time. . . . . . . . . . . . . . . . . 2
SECTION 1.3 Effect of the Merger. . . . . . . . . . . . . . 2
SECTION 1.4 Certificate of Incorporation; By-Laws . . . . . 2
SECTION 1.5 Directors and Officers. . . . . . . . . . . . . 2
SECTION 1.6 Effect on Capital Stock.. . . . . . . . . . . . 2
SECTION 1.7 Exchange of Certificates. . . . . . . . . . . . 3
SECTION 1.8 Stock Transfer Books. . . . . . . . . . . . . . 4
SECTION 1.9 No Further Ownership Rights in Company Stock. . 4
SECTION 1.10 Lost, Stolen or Destroyed Certificates. . . . . 5
SECTION 1.11 Reserved. . . . . . . . . . . . . . . . . . . . 5
SECTION 1.12 Taking of Necessary Action; Further Action. . . 5
SECTION 1.13 Material Adverse Effect.. . . . . . . . . . . . 5
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 2.1 Organization and Qualification; Subsidiaries. . 5
SECTION 2.2 Certificate of Incorporation and By-Laws. . . . 6
SECTION 2.3 Capitalization. . . . . . . . . . . . . . . . . 6
SECTION 2.4 Authority Relative to this Agreement. . . . . . 7
SECTION 2.5 No Conflict; Required Filings and Consents. . . 7
SECTION 2.6 Compliance; Permits.. . . . . . . . . . . . . . 8
SECTION 2.7 SEC Filings; Financial Statements.. . . . . . . 8
SECTION 2.8 Absence of Certain Changes or Events. . . . . . 9
SECTION 2.9 No Undisclosed Liabilities. . . . . . . . . . . 9
SECTION 2.10 Absence of Litigation.. . . . . . . . . . . . . 9
SECTION 2.11 Employee Benefit Plans; Employment Agreements 10
SECTION 2.12 Labor Matters.. . . . . . . . . . . . . . . . 10
SECTION 2.13 Proxy Statement.. . . . . . . . . . . . . . . 10
SECTION 2.14 Reserved. . . . . . . . . . . . . . . . . . . 11
SECTION 2.15 Title to Property.. . . . . . . . . . . . . . 11
SECTION 2.16 Taxes.. . . . . . . . . . . . . . . . . . . . 11
SECTION 2.17 Environmental Matters.. . . . . . . . . . . . 12
SECTION 2.18 Intellectual Property.. . . . . . . . . . . . 12
SECTION 2.19 Interested Party Transactions.. . . . . . . . 13
SECTION 2.20 Insurance . . . . . . . . . . . . . . . . . . 13
SECTION 2.21 Reserved. . . . . . . . . . . . . . . . . . . 13
SECTION 2.22 Opinion of Financial Advisor. . . . . . . . . 13
SECTION 2.23 Brokers.. . . . . . . . . . . . . . . . . . . 13
SECTION 2.24 Change in Control Payments. . . . . . . . . . 14
SECTION 2.25 Expenses. . . . . . . . . . . . . . . . . . . 14
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
SECTION 3.1 Organization and Qualification; Subsidiaries. 14
SECTION 3.2 Charter and By-Laws . . . . . . . . . . . . . 14
SECTION 3.3 Reserved. . . . . . . . . . . . . . . . . . . 14
SECTION 3.4 Authority Relative to this Agreement. . . . . 14
SECTION 3.5 No Conflict, Required Filings and Consents. . 15
SECTION 3.6 Financing.. . . . . . . . . . . . . . . . . . 15
SECTION 3.7 Reserved. . . . . . . . . . . . . . . . . . . 15
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 4.1 Conduct of Business by the Company Pending
the Merger . . . . . . . . . . . . . . . . . 15
SECTION 4.2 No Solicitation . . . . . . . . . . . . . . . 17
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 HSR Act; Etc. . . . . . . . . . . . . . . . . 18
SECTION 5.2 Proxy Statement.. . . . . . . . . . . . . . . 18
SECTION 5.3 Stockholders Meeting. . . . . . . . . . . . . 19
SECTION 5.4 Access to Information; Confidentiality. . . . 19
SECTION 5.5 Consents; Approvals.. . . . . . . . . . . . . 19
SECTION 5.6 Actions Respecting Commitment Letters.. . . . 20
SECTION 5.7 Indemnification and Insurance.. . . . . . . . 20
SECTION 5.8 Notification of Certain Matters.. . . . . . . 21
SECTION 5.9 Further Action. . . . . . . . . . . . . . . 21
SECTION 5.10 Public Announcements. . . . . . . . . . . . . 21
SECTION 5.11 Conveyance Taxes. . . . . . . . . . . . . . . 21
SECTION 5.12 Warrant Agreements. . . . . . . . . . . . . . 21
ARTICLE VI
CONDITIONS TO THE MERGER
SECTION 6.1 Conditions to Obligation of Each Party to
Effect the Merger . . . . . . . . . . . . . . 21
SECTION 6.2 Additional Conditions to Obligations of
Parent and Merger Sub . . . . . . . . . . . . 22
SECTION 6.3 Additional Conditions to Obligations of
the Company . . . . . . . . . . . . . . . . . 22
ARTICLE VII
TERMINATION
SECTION 7.1 Termination . . . . . . . . . . . . . . . . . 23
SECTION 7.2 Effect of Termination . . . . . . . . . . . . 23
SECTION 7.3 Fees and Expenses . . . . . . . . . . . . . . 24
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Effectiveness of Representations, Warranties
and Agreements, Etc.. . . . . . . . . . . . . 24
SECTION 8.2 Notices . . . . . . . . . . . . . . . . . . . 25
SECTION 8.3 Definitions . . . . . . . . . . . . . . . . . 26
SECTION 8.4 Other Definitions.. . . . . . . . . . . . . . 27
SECTION 8.5 Amendment . . . . . . . . . . . . . . . . . . 28
SECTION 8.6 Waiver. . . . . . . . . . . . . . . . . . . . 28
SECTION 8.7 Headings. . . . . . . . . . . . . . . . . . . 28
SECTION 8.8 Severability. . . . . . . . . . . . . . . . . 28
SECTION 8.9 Entire Agreement. . . . . . . . . . . . . . . 28
SECTION 8.10 Assignment; Guarantee of Merger Sub . . . . . 28
SECTION 8.11 Parties in Interest.. . . . . . . . . . . . . 28
SECTION 8.12 Failure or Indulgence Not Waiver; Remedies
Cumulative . . . . . . . . . . . . . . . . . 29
SECTION 8.13 Governing Law . . . . . . . . . . . . . . . . 29
SECTION 8.14 Counterparts. . . . . . . . . . . . . . . . . 29
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated April 17, 1997 (this
"Agreement"), among Film Holdings Co., a Delaware corporation
("Parent"), Film Acquisition Co., a Delaware corporation and a
wholly owned subsidiary of Parent ("Merger Sub"), and LIVE
Entertainment Inc., a Delaware corporation (the "Company").
WITNESSETH:
WHEREAS, the Boards of Directors of Parent, Merger Sub and
the Company have each determined that it is advisable and in the
best interests of their respective stockholders for Parent to
enter into a business combination with the Company upon the terms
and subject to the conditions set forth herein;
WHEREAS, as a condition and inducement to Parent's and
Merger Sub's entering into this Agreement and incurring the
obligations set forth herein, concurrently with the execution and
delivery of this Agreement, Parent is entering into a Stockholder
Agreement (the "Stockholder Agreement") with Pioneer Electronic
Corporation (the "Stockholder"), pursuant to which, among other
things, the Stockholder has agreed to vote the shares of Company
Common Stock and Company Series C Preferred Stock (both as
defined below) then owned by it in favor of the Merger (as
defined below); and
WHEREAS, in furtherance of such combination, the Boards of
Directors of Parent, Merger Sub and the Company have each
approved the merger (the "Merger") of Merger Sub with and into
the Company in accordance with the applicable provisions of the
Delaware General Corporation Law (the "DGCL").
WHEREAS, pursuant to the Merger, (A) each outstanding share
(a "Share") of the Company's common stock, $0.01 par value (the
"Company Common Stock"), shall be converted into the right to
receive the Common Stock Merger Price (as defined in Section
1.7(b)), (B) each Share of the Company's Series B Cumulative
Convertible Preferred Stock, $1.00 par value (the "Company Series
B Preferred Stock"), shall be converted into the right to receive
the Series B Merger Price (as defined in Section 1.7(b)) and (C)
each Share of the Company's Series C Convertible Preferred Stock,
$1.00 par value (the "Company Series C Preferred Stock"), shall
be converted into the right to receive the Series C Merger Price
(as defined in Section 1.7(b)) (the Company Common Stock, Company
Series B Preferred Stock and the Company Series C Preferred Stock
are referred to collectively herein as the "Company Stock"), all
upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements herein contained, and intending
to be legally bound hereby, Parent, Merger Sub and the Company
hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 The Merger.
(a) Effective Time. At the Effective Time (as defined in
Section 1.2), and subject to and upon the terms and conditions of
this Agreement and the DGCL, Merger Sub shall be merged with and
into the Company, the separate corporate existence of Merger Sub
shall cease, and the Company shall continue as the surviving
corporation. The Company as the surviving corporation
immediately after the Effective Time is hereinafter sometimes
referred to as the "Surviving Corporation."
(b) Closing. Unless this Agreement shall have been
terminated and the transactions herein contemplated shall have
been abandoned pursuant to Section 7.1, and subject to the
satisfaction or waiver of the conditions set forth in Article VI,
the consummation of the Merger will take place as promptly as
practicable (and in any event within two business days) after
satisfaction or waiver of the conditions set forth in Article VI,
at the offices of Sidley & Austin, 555 West Fifth Street, Suite
4000, Los Angeles, California, unless another date, time or place
is agreed to in writing by the parties hereto.
SECTION 1.2 Effective Time. As promptly as practicable
after the satisfaction or waiver of the conditions set forth in
Article VI, the parties hereto shall cause the Merger to be
consummated by filing a certificate of merger as contemplated by
the DGCL (the "Certificate of Merger"), together with any
required related certificates, with the Secretary of State of the
State of Delaware, in such form as required by, and executed in
accordance with the relevant provisions of, the DGCL (the date
and time of such filing being hereinafter referred to as the
"Effective Time").
SECTION 1.3 Effect of the Merger. At the Effective Time,
the effect of the Merger shall be as provided in this Agreement,
the Certificate of Merger and the applicable provisions of the
DGCL. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of the Company and Merger Sub
shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub shall become
the debts, liabilities and duties of the Surviving Corporation.
SECTION 1.4 Certificate of Incorporation; By-Laws.
(a) Certificate of Incorporation. At the Effective Time,
the Certificate of Incorporation of the Company, as in effect
immediately prior to the Effective Time, shall be the Certificate
of Incorporation of the Surviving Corporation until thereafter
amended, subject to Section 5.7 hereof, in accordance with the
DGCL and such Certificate of Incorporation.
(b) By-Laws. The By-Laws of the Company, as in effect
immediately prior to the Effective Time, shall be the By-Laws of
the Surviving Corporation until thereafter amended in accordance
with the DGCL, the Certificate of Incorporation of the Surviving
Corporation and such By-Laws; provided, however, that the Board
of Directors of the Surviving Corporation shall consist of the
same number of directors as the number of directors of Merger Sub
immediately prior to the Effective Time.
SECTION 1.5 Directors and Officers. The directors of
Merger Sub immediately prior to the Effective Time shall be the
initial directors of the Surviving Corporation, each to hold
office in accordance with the Certificate of Incorporation and
By-Laws of the Surviving Corporation, and the officers of the
Company immediately prior to the Effective Time shall be the
initial officers of the Surviving Corporation, in each case until
their respective successors are duly elected or appointed and
qualified.
SECTION 1.6 Effect on Capital Stock. At the Effective
Time, by virtue of the Merger and without any action on the part
of either the Parent, Merger Sub, the Company or the holders of
any of the following securities:
(a) Conversion of Securities. Each Share issued and
outstanding immediately prior to the Effective Time (excluding
any Shares to be canceled pursuant to Section 1.6(b)) shall be
converted into the right to receive the Applicable Merger Price
(as defined in Section 1.7(b)).
(b) Cancellation. Each Share held in the treasury of the
Company and each Share owned by Parent, Merger Sub or any direct
or indirect wholly owned subsidiary of the Company or Parent
immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof,
cease to be outstanding, be canceled and retired without payment
of any consideration therefor and cease to exist.
(c) Stock Rights. Prior to the Effective Time, the Board
of Directors of the Company (or, if appropriate, any Committee
thereof) shall adopt appropriate resolutions and take all other
actions necessary to provide that, except as may be otherwise
agreed in writing between Merger Sub and any holder of any vested
and currently exercisable option to purchase Company Stock (each,
a "Company Option Security"), each such vested and currently
exercisable Company Option Security issued and outstanding
immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof,
(i) in the case of Company Option Securities (including those
unvested Company Option Securities which Parent agrees the
Company may cause to vest immediately prior to the Effective
Time) with a per share exercise price that is less than the
Applicable Merger Price (as defined in Section 1.7(b)), be
converted into the right to receive, upon the surrender of the
instrument evidencing such Company Option Security, a cash
payment equal to the product (the "Company Option Security
Price") of (A) the number of shares of Company Stock subject to
such Company Option Security and (B) the excess, if any, of the
Applicable Merger Price over the per share exercise price of the
Company Option Security, and each Company Option Security so
converted will, upon such payment, be canceled and, (ii) in the
case of all other Company Option Securities (except Company
warrants disclosed in Section 2.3 hereof which may continue after
the Effective Time), shall be canceled immediately prior to the
Effective Time without payment of any consideration therefor and
without any conversion thereof. Anything herein to the contrary
notwithstanding, no interest or dividends shall accrue or be
payable or paid on the Company Option Security Price to any
person hereunder.
(d) Capital Stock of Merger Sub. Each share of common
stock, $0.01 par value, of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into
and exchanged for one validly issued, fully paid and
nonassessable share of common stock, $0.01 par value, of the
Surviving Corporation.
SECTION 1.7 Exchange of Certificates.
(a) Exchange Agent. At or prior to the Effective Time,
Parent shall deposit, or shall cause to be deposited, to or for
the account of American Stock Transfer and Trust Company , or
such other bank or trust company as shall be designated by Parent
(the "Exchange Agent"), in trust for the benefit of the holders
of Company Stock, for exchange in accordance with this Section
1.7, through the Exchange Agent, an amount, in immediately
available funds, equal to the aggregate amount payable in
accordance with Section 1.7(b). The Exchange Agent shall agree
to hold such funds (together with earnings thereon, being
referred to herein as the "Exchange Fund") for delivery as
contemplated by this Section 1.7 and upon such additional terms
as may be agreed upon by the Exchange Agent, the Company and
Parent before the Effective Time. If for any reason (including
losses) the amount of funds in the Exchange Fund is inadequate to
pay the amounts to which holders of Company Stock shall be
entitled pursuant to this Section 1.7, Parent shall pay to the
Exchange Fund additional funds, also in immediately available
funds, for the payment thereof.
(b) Exchange Procedures. As soon as reasonably practicable
after the Effective Time, Parent will instruct the Exchange Agent
to mail to each holder of record of a certificate or certificates
which immediately prior to the Effective Time represented
outstanding Shares of Company Stock (each, a "Certificate") (i) a
letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other
provisions as Parent may reasonably specify), and (ii)
instructions to effect the surrender of the Certificates in
exchange for the Applicable Merger Price (as defined below).
Upon surrender of a Certificate for cancellation to the Exchange
Agent together with such letter of transmittal, duly executed,
and such other customary documents as may be required pursuant to
such instructions, the holder of such Certificate shall be
entitled to receive in exchange therefor (A) in the case of
holders of Company Common Stock, $6.00 per share of such Company
Common Stock in cash (the "Common Stock Merger Price"), (B) in
the case of holders of Company Series B Preferred Stock, $10.00
per share of such Company Series B Preferred Stock in cash (the
"Series B Merger Price") plus dividends thereon accrued and
unpaid through the Effective Time and (C) in the case of holders
of Company Series C Preferred Stock, $944.8624 per share of such
Company Series C Preferred Stock in cash (which amount will
include any accrued but unpaid dividends thereon through the
Effective Time) (the "Series C Merger Price"), the merger price
applicable to any given Share being referred to herein as (the
"Applicable Merger Price"), and the Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of
ownership of shares of Company Stock which is not registered in
the transfer records of the Company as of the Effective Time, the
Applicable Merger Price may be paid in accordance with this
Article I to a transferee if the Certificate evidencing such
Shares is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer pursuant
to this Section 1.7(b) and by evidence that any applicable stock
transfer taxes have been paid. Anything herein to the contrary
notwithstanding, no interest or dividends shall accrue or be
payable or paid on any portion of the Applicable Merger Price
payable to any holder of Company Stock or Company Option
Securities hereunder. At and after the Effective Time, each
holder of a Certificate to be canceled pursuant to Section 1.7(b)
or Dissenting Shares (as defined below) shall cease to have any
rights as a stockholder of the Company, except for the right to
surrender Certificates in the manner prescribed by Section 1.7(b)
in exchange for payment of the Applicable Merger Price or, in the
case of a holder of Dissenting Shares, the right to perfect the
right to receive payment for Dissenting Shares pursuant to
Section 262 of the DGCL. No transfer of Company Stock shall be
made on the stock transfer books of the Surviving Corporation at
or after the Effective Time.
(c) No Liability. At any time following one year after the
Effective Time, Parent shall be entitled to require the Exchange
Agent to deliver to Parent any remaining amount of the Exchange
Fund which had been made available to the Exchange Agent by or on
behalf of Parent and which has not been disbursed to holders of
Certificates, and thereafter such holders shall be entitled to
look to Parent only as general creditors thereof with respect to
the Applicable Merger Price payable upon due surrender of their
Certificates. Notwithstanding the foregoing, neither Parent,
Merger Sub nor the Company shall be liable to any holder of
Company Stock for any Applicable Merger Price delivered to a
public official pursuant to any applicable abandoned property,
escheat or similar law.
(d) Withholding Rights. Parent or the Exchange Agent shall
be entitled to deduct and withhold from the Applicable Merger
Price otherwise payable pursuant to this Agreement to any holder
of Company Stock such amounts as Parent or the Exchange Agent is
required to deduct and withhold with respect to the making of
such payment under the Internal Revenue Code of 1986, as amended
(the "Code"), or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by Parent or the
Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of
the shares of Company Stock in respect of which such deduction
and withholding was made by Parent or the Exchange Agent.
(e) Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary but only in the circumstances and to
the extent provided by the DGCL, shares of Company Stock which
are outstanding immediately prior to the Effective Time and which
are held by stockholders who were entitled to and did not vote
such shares in favor of the Merger or consent thereto in writing
and who shall have properly and timely delivered to the Company a
written demand for payment of the fair cash value of shares of
Company Stock in the manner provided in and complied with all of
the relevant provisions of Section 262 of the DGCL ("Dissenting
Shares") shall not be converted into or represent the right to
receive the Applicable Merger Price. Instead, the holders
thereof shall be entitled to payment of the fair cash value of
such shares in accordance with the provisions of Section 262 of
the DGCL; provided, however, that (i) if any holder of Dissenting
Shares shall subsequently deliver a written withdrawal of his
demand for payment of the fair cash value of such shares and the
Board of Directors of the Company or the Surviving Corporation,
as the case may be, shall consent thereto, or (ii) if any holder
fails to establish and perfect his entitlement to the relief
provided in such Section 262 or if the right of such holder to
receive the fair cash value of such shares of Company Stock as to
which he seeks relief otherwise terminates pursuant to Section
262 of the DGCL, such shares shall thereupon cease to be deemed
to be Dissenting Shares and shall be deemed to have been
converted into and represent the right to receive, upon the
surrender of the Certificates representing such shares, as of the
Effective Time, the Applicable Merger Price. The Company will
not settle any demand with respect to any Dissenting Shares
without the consent of Parent.
SECTION 1.8 Stock Transfer Books. At the Effective Time,
the stock transfer books of the Company shall be closed, and
there shall be no further registration of transfers of Company
Stock thereafter on the records of the Company.
SECTION 1.9 No Further Ownership Rights in Company Stock.
The Applicable Merger Price delivered upon the surrender for
exchange of Shares of Company Stock in accordance with the terms
hereof shall be deemed to have been issued in full satisfaction
of all rights pertaining to such Shares, and there shall be no
further registration of transfers on the records of the Surviving
Corporation of shares of Company Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be canceled and exchanged as provided in
this Article I.
SECTION 1.10 Lost, Stolen or Destroyed Certificates.
In the event any Certificates shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such
lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof and delivery of bond
in such sum as the Exchange Agent may reasonably direct as
indemnity against any claim that may be made against Parent or
the Exchange Agent with respect to the Certificates alleged to
have been lost, stolen or destroyed, such Applicable Merger Price
as may be required pursuant to Section 1.7.
SECTION 1.11 Reserved.
SECTION 1.12 Taking of Necessary Action; Further
Action. Each of Parent, Merger Sub and the Company will take all
such reasonable and lawful action as may be necessary or
appropriate in order to effectuate the Merger in accordance with
this Agreement as promptly as possible. If, at any time after
the Effective Time, any such further action is necessary or
desirable to carry out the purposes of this Agreement and to vest
the Surviving Corporation with full right, title and possession
to all assets, property, rights, privileges, powers and
franchises of the Company and Merger Sub, the officers and
directors of the Company and Merger Sub immediately prior to the
Effective Time are fully authorized in the name of their
respective corporations or otherwise to take, and will take, all
such lawful and necessary action.
SECTION 1.13 Material Adverse Effect. When used in
connection with the Company or any of its subsidiaries, or Parent
or any of its subsidiaries, as the case may be, the term
"Material Adverse Effect" means any change, effect or
circumstance that, individually or when taken together with all
other such changes, effects or circumstances that have occurred
prior to the date of determination of the occurrence of the
Material Adverse Effect, is or is reasonably likely to be
materially adverse to the business, assets (including intangible
assets), financial condition, prospects or results of operations
of the Company and its subsidiaries taken as a whole (excluding,
for purposes of this definition, general changes in the economy
or changes affecting the film industry in general and changes
caused by operations in accordance with the terms of this
Agreement).
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and
Merger Sub as follows:
SECTION 2.1 Organization and Qualification; Subsidiaries.
Each of the Company and each of its significant subsidiaries (as
defined in Section 8.3 or listed in Section 2.1 of the Company
Disclosure Schedule (as defined below)) is a corporation duly
organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the requisite
corporate power and authority and is in possession of all
franchises, grants, authorizations, licenses, permits, easements,
consents, certificates, approvals and orders ("Approvals")
necessary to own, lease and operate the properties it purports to
own, operate or lease and to carry on its business as it is now
being conducted except where the failure to possess the Approvals
has not had, and would not have, a Material Adverse Effect. Each
of the Company and each of its subsidiaries is duly qualified or
licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its
properties owned, leased or operated by it or the nature of its
activities makes such qualification or licensing necessary except
where the failure to be so qualified or licensed has not had, and
would not have, a Material Adverse Effect. Substantially all of
the business and operations of the Company and its subsidiaries
are conducted through, and substantially all of the properties
and assets of the Company and its subsidiaries are owned by, the
Company and its significant subsidiaries.
SECTION 2.2 Certificate of Incorporation and By-Laws. The
Company has heretofore furnished to Parent a complete and correct
copy of its Certificate of Incorporation and By-Laws as most
recently restated and subsequently amended to date. Such
Certificate of Incorporation and By-Laws are in full force and
effect. The Company is not in violation of any of the provisions
of its Certificate of Incorporation or By-Laws.
SECTION 2.3 Capitalization. The authorized capital stock
of the Company consists of (i) 24,000,000 shares of Company
Common Stock, (ii) 15,000,000 shares of Series A Common Stock and
(iii) 15,000,000 of Series Preferred Stock, of which (A)
9,000,000 shares are Company Series B Preferred Stock, (B) 15,000
shares are Company Series C Preferred Stock and (C) 500,000
shares are Series R Junior Participating Cumulative Preferred
Stock. As of March 31, 1997, (i) approximately 2,448,267 shares
of Company Common Stock were issued and outstanding, all of which
are validly issued, fully paid and nonassessable, and no shares
of Company Common Stock were held in treasury, (ii) no shares of
Company Common Stock were held by subsidiaries of the Company and
(iii) approximately 715,000 shares of Company Common Stock were
reserved for future issuance pursuant to outstanding stock
options granted under the Company Stock Option and Stock
Appreciation Rights Plan or similar plans (collectively, the
"Company Stock Option Plans") and approximately 476,567 shares of
Company Common Stock were reserved for issuance pursuant to
outstanding warrants. As of March 31, 1997, (i) 3,819,802 shares
of Company Series B Preferred Stock were issued and outstanding,
all of which are validly issued, fully paid and nonassessable,
and no shares of Company Series B Preferred Stock were held in
treasury, (ii) no shares of Company Series B Preferred Stock were
held by subsidiaries of the Company and (iii) no shares of
Company Series B Preferred Stock were reserved for future
issuance pursuant to outstanding warrants or stock options
granted under Company Stock Option Plans. As of March 31, 1997,
(i) 15,000 shares of Company Series C Preferred Stock were
validly issued, fully paid and nonassessable, (ii) no shares of
Company Series C Preferred Stock were held by subsidiaries of the
Company, and (iii) no shares of Company Series C Preferred Stock
were reserved for future issuance pursuant to outstanding
warrants or stock options granted under Company Stock Option
Plans. As of March 31, 1997, no shares of Series A Common Stock
were issued, held by subsidiaries of the Company, or reserved for
future issuance pursuant to outstanding warrants or stock options
granted under Company Stock Option Plans. As of March 31, 1997,
no shares of Company Series R Junior Participating Cumulative
Preferred Stock were issued, held by subsidiaries of the Company
or reserved for future issuance pursuant to outstanding warrants
or stock options granted under Company Stock Option Plans. No
material change in the capitalization of the Company has occurred
between March 31, 1997 and the date hereof. The Company also has
issued Preferred Stock Purchase Rights to its holders of Common
Stock in connection with the Rights Agreement, and Contingent
Payment Rights in connection with its 1991 acquisition of the
assets of Vestron, Inc. to the former holders of securities of
Vestron, Inc. Except as set forth in Section 2.3 of the written
disclosure schedule delivered on or prior to the date hereof by
the Company to Parent that is arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained
in this Article II or as discussed above (the "Company Disclosure
Schedule"), there are no options, warrants or other rights,
agreements, arrangements or commitments of any character relating
to the issued or unissued capital stock of the Company or any of
its subsidiaries or obligating the Company or any of its
subsidiaries to issue or sell any shares of capital stock of, or
other equity interests in, the Company or any of its
subsidiaries. None of the options, rights, agreements,
arrangements or commitments identified in Section 2.3 of the
Company Disclosure Schedule provide that a holder thereof or a
party thereto shall receive cash in respect of such options,
rights, agreements or arrangements absent action by the Board of
Directors or a committee thereof and no such action of the Board
of Directors or a committee thereof has been taken (except as may
be provided herein). True, correct and complete copies of the
forms of all options, warrants, rights, agreements, arrangements
or commitments identified in Section 2.3 of the Company
Disclosure Schedule have been delivered to Parent. All shares of
Company Stock subject to issuance as aforesaid, upon issuance on
the terms and conditions specified in the instruments pursuant to
which they are issuable, shall be duly authorized, validly
issued, fully paid and nonassessable. Except as disclosed in
Section 2.3 of the Company Disclosure Schedule, there are no
obligations, contingent or otherwise, of the Company or any of
its significant subsidiaries to repurchase, redeem or otherwise
acquire any shares of Company Stock or the capital stock of any
significant subsidiary or to provide funds to or make any
investment (in the form of a loan, capital contribution, guaranty
or otherwise) in any such subsidiary or any other entity. Except
as set forth in Section 2.3 of the Company Disclosure Schedule,
all of the outstanding shares of capital stock of each of the
Company's Significant Subsidiaries is duly authorized, validly
issued, fully paid and nonassessable, and all such shares (other
than directors' qualifying shares) are owned by the Company or
another subsidiary of the Company free and clear of all security
interests, liens, claims, pledges, agreements, limitations in the
Company's voting rights, charges or other encumbrances of any
nature whatsoever (collectively, "Liens").
SECTION 2.4 Authority Relative to this Agreement.
(a) The Company has all necessary corporate power and
authority to execute and deliver this Agreement and to perform
its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this
Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action, and no other
corporate proceedings on the part of the Company are necessary to
authorize this Agreement or to consummate the transactions so
contemplated (other than the adoption of this Agreement by the
holders of at least a majority of the outstanding shares of
Company Stock entitled to vote in accordance with the DGCL and
the Company's Certificate of Incorporation and By-Laws). This
Agreement has been duly and validly executed and delivered by the
Company and, assuming the due authorization, execution and
delivery by Parent and Merger Sub, as applicable, constitutes a
legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
(b) The Board of Directors of the Company has duly and
validly approved and taken all corporate action required to be
taken by the Board of Directors for the consummation of the
transactions contemplated by this Agreement, including, but not
limited to, all actions necessary to render the provisions of
Section 203 of the DGCL inapplicable to this Agreement, the
Merger and the Stockholder Agreement. The Board of Directors of
the Company has determined that it is advisable and in the best
interest of the Company's stockholders for the Company to enter
into a business combination with Parent upon the terms and
subject to the conditions of this Agreement, and will recommend,
or has resolved to recommend in the Proxy Statement, in each case
subject to Section 4.2 hereof, that the Company's stockholders
approve and adopt this Agreement and the Merger.
(c) The Board of Directors of the Company (or the requisite
members thereof, as the case may be) has (or have) (i) approved
the transactions contemplated by this Agreement for purposes of
Paragraph B of Article SEVENTH of the Certificate of
Incorporation of the Company and (ii) taken all action necessary
to ensure that such transactions will not (A) give rise to a
Distribution Date (as defined in the Rights Agreement) or (B)
cause any Rights (as defined in the Rights Agreement) to
otherwise become exercisable.
SECTION 2.5 No Conflict; Required Filings and Consents.
(a) The exhibit index to the Company's most recently filed
Annual Report on Form 10-K, as supplemented by Section 2.5(a) of
the Company Disclosure Schedule, includes each agreement,
contract or other instrument (including all amendments thereto)
to which the Company or any of its subsidiaries is a party or by
which any of them is bound and which would be required pursuant
to the Exchange Act and the rules and regulations thereunder to
be filed as an exhibit to an Annual Report on Form 10-K, a
Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
The Company has made available to the Parent on or prior to the
date hereof true, correct and complete copies of each such
agreement, contract, instrument and amendment.
(b) Except as disclosed in Section 2.5(b) of the Company
Disclosure Schedule, (i) neither the Company nor any of its
subsidiaries has breached, is in default under, or has received
written notice of any breach of or default under, any of the
agreements, contracts or other instruments referred to in Section
2.5(a), (ii) to the best knowledge of the Company, no other party
to any of the agreements, contracts or other instruments referred
to in Section 2.5(a) has breached or is in default of any of its
obligations thereunder, and (iii) each of the agreements,
contracts and other instruments referred to in Section 2.5(a) is
in full force and effect, except with respect to (i), (ii) and
(iii) in any such case for breaches, defaults or failures to be
in full force and effect that have not had, and would not have, a
Material Adverse Effect.
(c) Except as set forth in Section 2.5(c) of the Company
Disclosure Schedule, the execution and delivery of this Agreement
by the Company does not, and the performance of this Agreement by
the Company and the consummation of the transactions contemplated
hereby will not, (i) conflict with or violate the Certificate of
Incorporation or By-Laws of the Company, (ii) conflict with or
violate any federal, foreign, state or provincial law, rule,
regulation, order, judgment or decree (collectively, "Laws")
applicable to the Company or any of its significant subsidiaries
or by which its or any of their respective properties is bound or
affected, or (iii) result in any breach of or constitute a
default (or an event that with notice or lapse of time or both
would become a default) under, or impair the Company's or any of
its significant subsidiaries' rights or alter the rights or
obligations of any third party under, or give to others any
rights of termination, amendment, acceleration or cancellation
of, or result in the creation of a Lien on any of the properties
or assets of the Company or any of its significant subsidiaries
pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument
or obligation to which the Company or any of its significant
subsidiaries is a party or by which the Company or any of its
significant subsidiaries or its or any of their respective
properties is bound or affected, except in the case of clauses
(ii) and (iii) for any such conflicts, violations, breaches,
defaults or other occurrences that do not constitute a Material
Adverse Effect.
(d) The execution and delivery of this Agreement by the
Company does not, and the performance of this Agreement by the
Company will not, require any consent, approval, authorization or
permit of, or filing with or notification to, any domestic or
foreign governmental or regulatory authority except (i) for
applicable requirements, if any, of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), applicable "Blue Sky"
requirements, the pre-merger notification requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the filing and recordation of appropriate
merger or other documents as required by the DGCL, and (ii) where
the failure to obtain such consents, approvals, authorizations or
permits, and to make such filings or notifications, would not
prevent or delay consummation of the Merger, or otherwise prevent
or delay the Company from performing its obligations under this
Agreement, or would not constitute a Material Adverse Effect.
SECTION 2.6 Compliance; Permits.
(a) Except as disclosed in Section 2.6(a) of the Company
Disclosure Schedule, neither the Company nor any of its
significant subsidiaries is in conflict with, or in default or
violation of, (i) any Law applicable to the Company or any of its
significant subsidiaries or by which its or any of their
respective properties is bound or affected or (ii) any note,
bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the
Company or any of its significant subsidiaries is a party or by
which the Company or any of its subsidiaries or its or any of
their respective properties is bound or affected, except, in each
case of (i) or (ii), for any such conflicts, defaults or
violations which do not constitute a Material Adverse Effect.
(b) Except as disclosed in Section 2.6(b) of the Company
Disclosure Schedule or where such failure has not had, or would
not have, a Material Adverse Effect, the Company and its
significant subsidiaries hold all permits, licenses, easements,
variances, exemptions, consents, certificates, orders and
approvals from governmental authorities which are material to the
operation of the business of the Company and its subsidiaries
taken as a whole as it is now being conducted (collectively, the
"Company Permits") and the Company and its significant
subsidiaries are in compliance with the terms of the Company
Permits.
SECTION 2.7 SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports and documents
required to be filed with the Securities and Exchange Commission
(the "SEC") and has made available to Parent (i) its Annual
Report on Form 10-K for the fiscal year ended December 31, 1996,
(ii) all other reports or registration statements filed by the
Company with the SEC since January 1, 1996, (iii) all proxy
statements relating to the Company's meetings of stockholders
(whether annual or special) since January 1, 1996 and (iv) all
amendments and supplements to all such reports and registration
statements filed by the Company with the SEC pursuant to the
requirements of the Exchange Act ((i)-(iv) collectively, the
"Company SEC Reports"). The Company SEC Reports (i) were
prepared in all material respects in accordance with the
requirements of the Securities Act of 1933, as amended, or the
Exchange Act, as the case may be, and (ii) did not at the time
they were filed (or if amended or superseded by a filing prior to
the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. None
of the Company's subsidiaries is required to file any forms,
reports or other documents with the SEC.
(b) Each of the consolidated financial statements
(including, in each case, any related notes thereto) contained in
the Company SEC Reports was prepared in accordance with generally
accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in
the notes thereto), and each fairly presents in all material
respects the consolidated financial position of the Company and
its subsidiaries as at the respective dates thereof and the
consolidated results of its operations and cash flows and
stockholder equity for the periods indicated, except that the
unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are
not expected to be material in amount.
SECTION 2.8 Absence of Certain Changes or Events. Except
as set forth in Section 2.8(a) through Section 2.8(g) of the
Company Disclosure Schedule or the Company SEC Reports, since
January 1, 1997, the Company has conducted its business in the
ordinary course and there has not occurred: (a) any Material
Adverse Effect; (b) any amendments or changes in the Certificate
of Incorporation or By-laws of the Company or similar
organizational documents of its significant subsidiaries; (c) any
damage to, destruction or loss of any asset of the Company or any
of its subsidiaries (whether or not covered by insurance) that
constitutes a Material Adverse Effect; (d) any material change by
the Company in its accounting methods, principles or practices
except as required by any change in generally accepted accounting
principles; (e) any material revaluation by the Company of any of
its or any of its subsidiaries' assets, including, without
limitation, writing down the value of inventory or writing off
notes or accounts receivable other than in the ordinary course of
business; (f) any sale, pledge, disposition of or encumbrance
upon any assets of the Company or any of its subsidiaries (except
(i) sales, pledges, dispositions of or encumbrances upon assets
in the ordinary course of business and in a manner consistent
with past practice, (ii) dispositions of obsolete or worthless
assets and (iii) sales of immaterial assets not in excess of
$500,000 in the aggregate); or (g) any other action or event
prohibited by Section 2.8(f) that would have required the consent
of Parent pursuant to any of the following provisions of Section
4.1 had such action or event occurred after the date of this
Agreement: Section 4.1(d) (except that for purpose of this
Section 2.8(g), clause (iii) of Section 4.1(d) shall not apply to
the repurchase in the ordinary course of any options from any
employee of the Company or any of its subsidiaries who is not an
officer or director), and Sections 4.1(e) through Section 4.1(j),
except that with respect to Section 4.1(e) and Section 4.1(j)
only to the extent that the Company has outstanding on the date
hereof unpaid commitments in excess of $1,000,000 with respect to
any Film Asset.
SECTION 2.9 No Undisclosed Liabilities. Except as is
disclosed in Section 2.9 of the Company Disclosure Schedule,
neither the Company nor any of its subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise), except
liabilities (a) in the aggregate adequately reserved or provided
for in the Company's audited balance sheet (including any related
notes thereto) for the fiscal year ended December 31, 1996 (the
"1996 Company Balance Sheet"), (b) incurred in the ordinary
course of business and not required under generally accepted
accounting principles to be reflected on the 1996 Company Balance
Sheet, (c) incurred since December 31, 1996 in the ordinary
course of business consistent with past practice, or (d) incurred
in connection with this Agreement.
SECTION 2.10 Absence of Litigation. Except as set
forth in Section 2.10 of the Company Disclosure Schedule or the
Company's 1996 Form 10-K, there are no claims, actions, suits,
proceedings or investigations pending or, to the knowledge of the
Company, threatened against the Company or any of its
subsidiaries, or any properties or rights of the Company or any
of its subsidiaries, before any court, arbitrator or
administrative, governmental or regulatory authority or body,
domestic or foreign, the adverse resolution of which would have a
Material Adverse Effect.
SECTION 2.11 Employee Benefit Plans; Employment
Agreements. Except in each case as set forth in Section 2.11 of
the Company Disclosure Schedule, (i) neither the Company nor any
subsidiary has engaged in, and to their knowledge, no other
person has engaged in any transaction prohibited by Section 406
of ERISA and Section 4975 of the Code which could result in any
material liability of the Company or any of its subsidiaries;
(ii) all employee pension plans (as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), employee welfare plans (as defined in Section 3(1) of
ERISA) and bonus, stock option, stock purchase, incentive,
deferred compensation, supplemental retirement, severance and
other similar fringe or employee benefit plans, programs or
arrangements (collectively, the "Company Employee Plans") are in
compliance in all material respects with the requirements
prescribed by Laws (including ERISA and the Code) currently in
effect with respect thereto (including all applicable
requirements for notification to participants or the Department
of Labor, Pension Benefit Guaranty Corporation (the "PBGC"),
Internal Revenue Service (the "IRS") or the Secretary of the
Treasury), and the Company and each of its subsidiaries have
performed all material obligations required to be performed by
them under, are not in any respect in default under or violation
of, and have no knowledge of any material default or violation by
any other party to, any of the Company Employee Plans; (iii) each
Company Employee Plan intended to qualify under Section 401(a) of
the Code and each trust intended to qualify under Section 501(a)
of the Code is the subject of a favorable determination letter
from the IRS, and to the knowledge of the Company and its
subsidiaries, nothing has occurred which may be reasonably
expected to impair such determination; (iv) all contributions
required to be made by the Company or its subsidiaries to any
Company Employee Plan pursuant to Section 412 of the Code, or the
terms of the Company Employee Plan or any collective bargaining
agreement, have been made on or before their due dates (including
any extensions thereof); (v) with respect to each Company
Employee Plan, no "reportable event" within the meaning of
Section 4043 of ERISA (excluding any such event for which the 30-
day notice requirement has been waived under the regulations to
Section 4043 of ERISA) nor any event described in Section 4062,
4063 or 4041 of ERISA has occurred; (vi) neither the Company nor
any subsidiary has engaged in a withdrawal (including a partial
withdrawal) with respect to any multiemployer plan within the
meaning set forth in Section 3(37) of ERISA that has resulted in,
or could reasonably be expected to result in, any withdrawal
liability for the Company or any of its subsidiaries; and (vii)
neither the Company nor any of its subsidiaries has incurred,
or reasonably expects to incur, any liability under Title IV of
ERISA (other than liability for premium payments to the PBGC, and
contributions not in default to the respective plans, arising in
the ordinary course). Section 2.11 of the Company Disclosure
Schedule lists all employment and consulting agreements to which
the Company is a party that are in effect on the date hereof.
Notwithstanding the foregoing, to the extent any Company Employee
Plan is a "multi-employer plan" within the meaning of Section
3(37) of ERISA, the representations contained in clauses (ii),
(iii), (v) and (vi) are made only to the knowledge of the Company
and its subsidiaries.
SECTION 2.12 Labor Matters. Except as set forth in
Section 2.12 of the Company Disclosure Schedule: (i) there are
no claims or proceedings pending or, to the knowledge of the
Company or any of its subsidiaries, threatened, between the
Company or any of its subsidiaries and any of their respective
employees, which claims or proceedings constitute a Material
Adverse Effect; (ii) neither the Company nor any of its
subsidiaries is a party to any collective bargaining agreement or
other labor union contract applicable to persons employed by the
Company or its subsidiaries, nor does the Company or any of its
subsidiaries know of any activities or proceedings of any labor
union to organize any such employees; and (iii) neither the
Company nor any of its subsidiaries has any knowledge of any
strikes, slowdowns, work stoppages, lockouts, or threats thereof,
by or with respect to any employees of the Company or any of its
subsidiaries.
SECTION 2.13 Proxy Statement. The information
supplied by the Company for inclusion or incorporation by
reference in the proxy statement to be sent to the stockholders
of the Company in connection with the meeting of the stockholders
of the Company to consider the Merger (the "Company Stockholders
Meeting") (such proxy statement as amended or supplemented is
referred to herein as the "Proxy Statement"), will not, on the
date the Proxy Statement is first mailed to stockholders, at the
time of the Company Stockholders Meetings or at the Effective
Time, contain any statement which, at such time and in light of
the circumstances under which it shall be made, is false or
misleading with respect to any material fact, or shall omit to
state any material fact necessary in order to make the statements
made therein not false or misleading or omit to state any
material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the
Company Stockholders Meetings which has become false or
misleading. If at any time prior to the Effective Time any event
relating to the Company or any of its respective affiliates,
officers or directors should be discovered by the Company which
should be set forth in a supplement to the Proxy Statement, the
Company shall promptly inform Parent and Merger Sub.
Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to any information
supplied by Parent or Merger Sub which is contained or
incorporated by reference in any of the foregoing documents.
SECTION 2.14 Reserved.
SECTION 2.15 Title to Property. Except as set forth
in Section 2.15 of the Company Disclosure Schedule or where such
has not had, and would not have, a Material Adverse Effect, the
Company and each of its subsidiaries have good and defensible
title to all of their properties and assets, free and clear of
all liens, charges and encumbrances; and, to the knowledge of the
Company, all leases pursuant to which the Company or any of its
subsidiaries lease from others material amounts of real or
personal property, are in good standing, valid and effective in
accordance with their respective terms, and there is not, to the
knowledge of the Company, under any of such leases, any existing
material default or event of default (or event which with notice
or lapse of time, or both, would constitute a material default).
SECTION 2.16 Taxes.
(a) For purposes of this Agreement, "Tax" or "Taxes" shall
mean taxes, fees, levies, duties, tariffs, imposts, and
governmental impositions or charges of any kind in the nature of
(or similar to) taxes, payable to any federal, state, local or
foreign taxing authority, including (without limitation) (i)
income, franchise, profits, gross receipts, ad valorem, net
worth, value added, sales, use, service, real or personal
property, special assessments, capital stock, license, payroll,
withholding, employment, social security, workers' compensation,
unemployment compensation, utility, severance, production,
excise, stamp, occupation, premiums, windfall profits, transfer
and gains taxes, and (ii) interest, penalties, additional taxes
and additions to tax imposed with respect thereto; and "Tax
Returns" shall mean returns, reports, and information statements
with respect to Taxes required to be filed with the IRS or any
other federal, foreign, state or provincial taxing authority,
domestic or foreign, including, without limitation, consolidated,
combined and unitary tax returns.
(b) Other than as disclosed in Section 2.16(b) of the
Company Disclosure Schedule, or except where the failure to do so
has not had, and would not have, a Material Adverse Effect, (i)
the Company and its subsidiaries have filed all United States
federal income Tax Returns and all other Tax Returns required to
be filed by them, (ii) the Company and its subsidiaries have paid
and discharged all Taxes due in connection with or with respect
to the periods or transactions covered by such Tax Returns and
have paid all other Taxes as are due, except such as are being
contested in good faith by appropriate proceedings (to the extent
that any such proceedings are required) and with respect to which
the Company is maintaining adequate reserves, and (iii) there are
no other Taxes that would be due if asserted by a taxing
authority, except with respect to which the Company is
maintaining reserves to the extent currently required. Except as
disclosed in Section 2.16(b) of the Company Disclosure Schedule:
(i) there are no tax liens on any assets of the Company or any
subsidiary thereof; and (ii) neither the Company nor any of its
subsidiaries has granted any waiver of any statute of limitations
with respect to, or any extension of a period for the assessment
of, any Tax. The accruals and reserves for Taxes (including
deferred taxes) reflected in the 1996 Company Balance Sheet are
in all material respects adequate to cover all Taxes required to
be accrued through the date thereof (including interest and
penalties, if any, thereon and Taxes being contested) in
accordance with generally accepted accounting principles applied
on a consistent basis audited balance sheets of the Company for
prior fiscal years, and the accrual and reserves for Taxes
(including deferred taxes) reflected in the books and records of
the Company as of the last day of the Company's most recently
completed fiscal month end are in all material respects adequate
to cover all Taxes required to be accrued through such date
(including interest and penalties, if any, thereon and Taxes
being contested) in accordance with generally accepted accounting
principles applied on a consistent basis with the 1996 Company
Balance Sheet.
(c) The Company is not, and has not been, a United States
real property holding corporation (as defined in Section
897(c)(2) of the Code) during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code. To the best knowledge of
the Company, neither the Company nor any of its subsidiaries owns
any property of a character, the indirect transfer of which,
pursuant to this Agreement, would give rise to any material
documentary, stamp or other transfer tax.
SECTION 2.17 Environmental Matters. Except as set
forth in Section 2.17 of the Company Disclosure Schedule, the
Company and each of its subsidiaries: (i) have obtained all
Approvals which are required to be obtained under all applicable
federal, state, foreign or local laws or any regulation, code,
plan, order, decree, judgment, notice or demand letter issued,
entered, promulgated or approved thereunder relating to pollution
or protection of the environment, including laws relating to
emissions, discharges, releases or threatened releases of
pollutants, contaminants, or hazardous or toxic materials or
wastes into ambient air, surface water, ground water, or land or
otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants or hazardous or toxic materials or
wastes ("Environmental Laws") by the Company or its subsidiaries
or their respective agents; (ii) are in compliance with all terms
and conditions of such required Approvals, and also are in
compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and
timetables contained in applicable Environmental Laws; (iii) as
of the date hereof, are not aware of nor have received notice of
any past or present violations of Environmental Laws or any
event, condition, circumstance, activity, practice, incident,
action or plan which is reasonably likely to interfere with or
prevent continued compliance with Environmental Laws or which
would give rise to any common law or statutory liability, or
otherwise form the basis of any claim, action, suit or
proceeding, against the Company or any of its subsidiaries based
on or resulting from the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling, or the
emission, discharge or release into the environment, of any
pollutant, contaminant or hazardous or toxic material or waste;
and (iv) have taken all actions necessary under applicable
Environmental Laws to register any products or materials required
to be registered by the Company or its subsidiaries (or any of
their respective agents) thereunder.
SECTION 2.18 Intellectual Property.
(a) Except as set forth in Section 2.18(a) of the Company
Disclosure Schedule, the Company, directly or indirectly, owns,
or is licensed or otherwise possesses legally enforceable rights
to use, all patents, trademarks, trade names, service marks, and
any applications therefor, technology, know-how and tangible or
intangible proprietary information or material that are material
to the business of the Company and its subsidiaries as currently
conducted by the Company or its subsidiaries (the "Company
Intangible Property Rights").
(b) Either the Company or one of its subsidiaries is the
sole and exclusive owner of, or the exclusive or non-exclusive
licensee of, with all right, title and interest in and to (free
and clear of any liens or encumbrances not incurred in the
ordinary course of business, or except as disclosed in Section
2.18(b) of the Company Disclosure Statement or where such liens
or encumbrances have not had, and would not have, a Material
Adverse Effect), the Company Intangible Property Rights, and, in
the case of Company Intangible Property Rights owned by the
Company or any of its subsidiaries, has sufficient right to the
use thereof or the material covered thereby in connection with
the services or products in respect of which the Company
Intangible Property Rights are being used, except where such
failure has not had, and would not have, a Material Adverse
Effect. Except as set forth in Section 2.18(b) of the Company
Disclosure Schedule, and except where the adverse resolution of
the matters referred to in clauses (i), (ii) and (iii) below
would not have a Material Adverse Effect, no claims with respect
to the Company Intangible Property Rights have been asserted or,
to the knowledge of the Company, are threatened by any person (i)
to the effect that the manufacture, sale, licensing, or use of
any of the products of the Company or any of its subsidiaries as
now manufactured, sold or licensed or used or proposed for
manufacture, use, sale or licensing by the Company or any of its
subsidiaries infringes on any copyright, patent, trade mark,
service mark or trade secret, (ii) against the use by the Company
or any of its subsidiaries of any trademarks, service marks,
trade names, trade secrets, copyrights, patents, technology or
know-how and applications used in the business of the Company and
its subsidiaries as currently conducted or as proposed to be
conducted, or (iii) challenging the ownership by the Company or
any of its subsidiaries or the validity of any of the Company
Intangible Property Rights. All registered trademarks, service
marks and copyrights held by the Company are valid and
subsisting, except where such failure to be valid and subsisting
has not had, and would not have, a Material Adverse Effect.
Except as set forth on Schedule 2.18(b), to the knowledge of the
Company, there is no unauthorized use, infringement or
misappropriation of any of the Company Intangible Property Rights
by any third party, including any employee or former employee of
the Company or any of its subsidiaries where such use has not
had, and would have, a Material Adverse Effect. No Company
Intangible Property Right or product of the Company or any of its
subsidiaries is subject to any outstanding decree, order,
judgment or stipulation restricting in any manner the licensing
thereof by the Company or any of its subsidiaries. Neither the
Company nor any of its subsidiaries has entered into any
agreement (other than exclusive distribution agreements) under
which the Company or its subsidiaries is restricted from selling,
licensing or otherwise distributing any of its products to any
class of customers, in any geographic area, during any period of
time or in any segment of the market.
(c) Section 2.18(c) of the Company Disclosure Schedule
lists the Film Assets of the Company and its Subsidiaries as of
the date specified thereon, which list is accurate in all
material respects. The Company and its Subsidiaries have
sufficient right, title and interest in and to such Film Assets
to enable them to perform such Exploitation Agreements as have
been entered into by the Company and such Subsidiaries relating
to such Film Assets, except where such failure to possess such
right, title and interest in and to such Film Assets has not had,
and would not have, a Material Adverse Effect. To the best of
the Company's knowledge, neither the Film Assets nor the Company
or any Subsidiary's exploitation thereof violates or infringes,
or will violate or infringe upon any copyright, right privacy or
publicity, trademark, patent, trade name, performing right or any
literary, dramatic, musical, artistic, personal, private,
contract or copyright or any right of any other person or
contains any defamatory material in any manner, except for any
such violation or infringement which has not had, and would not
have, a Material Adverse Effect.
(d) The Company has made available to Parent documents
which accurately and completely identify as of the date hereof
all Laboratories at which material Masters relating to Films
Assets as to which the negative is owned by the Company are
located and the specific Masters that are located at each such
Laboratory.
(e) The Company has made available to Parent documents
which accurately and completely identify as of the date hereof
all material trademarks with respect to which the Company or any
of its Subsidiaries own any interest and describes the nature of
such interest.
SECTION 2.19 Interested Party Transactions. Except
as set forth in Section 2.19 of the Company Disclosure Schedule
or the Company's Annual Report on Form 10-K for 1996, since
December 31, 1996, no event has occurred that would be required
to be reported as a Certain Relationship or Related Transaction,
pursuant to Item 404 of Regulation S-K promulgated by the SEC.
SECTION 2.20 Insurance. The Company maintains fire
and casualty, general liability, business interruption, product
liability, professional liability and sprinkler and water damage
insurance policies with reputable insurance carriers, which it
believes provide full and adequate coverage for all normal risks
incident to the business of the Company and its subsidiaries and
their respective properties and assets and are in character and
amount similar to that carried by entities engaged in similar
business and subject to the same or similar perils or hazards.
SECTION 2.21 Reserved.
SECTION 2.22 Opinion of Financial Advisor. The
Company has been advised by its investment advisor, Houlihan
Lokey Howard & Zukin, that, in its opinion, as of the date
hereof, the Common Stock Merger Price set forth herein is fair to
the holders of the Company Common Stock (other than Pioneer
Electronic Corporation, as to which no opinion is rendered) from
a financial point of view.
SECTION 2.23 Brokers. Except as set forth in Section
2.23 of the Company Disclosure Schedule, no broker, finder or
investment banker or other party is entitled to any brokerage,
finder's or other similar fee or commission in connection with
the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company or its
subsidiaries or affiliates. The fees and expenses of the
entities listed on Section 2.23 of the Company Disclosure
Schedule will be paid by the Company. The Company has heretofore
furnished to Parent a complete and correct copy of all agreements
between the Company and the entities listed on Section 2.23 of
the Company's Disclosure Schedule pursuant to which such entities
would be entitled to any payment relating to the transactions
contemplated hereunder.
SECTION 2.24 Change in Control Payments. Except as
set forth on Section 2.24 of the Company Disclosure Schedule,
neither the Company nor any of its subsidiaries have any plans,
programs or agreements to which they are parties, or to which
they are subject, pursuant to which payments (or acceleration of
benefits) may be required upon, or may become payable directly or
indirectly as a result of, a change of control of the Company.
SECTION 2.25 Expenses. The Company has provided to
Parent a good faith estimate and description of the expenses of
the Company and its subsidiaries which the Company expects to
incur, or has incurred, in connection with the transactions
contemplated by this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby jointly and severally represent
and warrant to the Company as follows:
SECTION 3.1 Organization and Qualification; Subsidiaries.
Each of Parent and each of its significant subsidiaries is a
corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and has
the requisite corporate power and authority and is in possession
of all Approvals necessary to own, lease and operate the
properties it purports to own, operate or lease and to carry on
its business as it is now being conducted. Each of Parent and
each of its subsidiaries is duly qualified or licensed as a
foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned,
leased or operated by it or the nature of its activities makes
such qualification or licensing necessary. All of the business
and operations of Parent and its subsidiaries are conducted
through, and substantially all of the properties and assets of
Parent and its subsidiaries are owned by, Parent and its
significant subsidiaries.
SECTION 3.2 Charter and By-Laws. Parent has heretofore
furnished to the Company a complete and correct copy of its
Certificate of Incorporation and By-Laws, as most recently
restated and subsequently amended to date. Such Certificate of
Incorporation and By-Laws are in full force and effect. Parent
is not in violation of any of the provisions of its Certificate
of Incorporation or By-Laws.
SECTION 3.3 Reserved.
SECTION 3.4 Authority Relative to this Agreement. Each of
Parent and Merger Sub has all necessary corporate power and
authority to execute and deliver this Agreement and to perform
its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this
Agreement by Parent and Merger Sub and the consummation by Parent
and Merger Sub of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on
the part of Parent and Merger Sub, and no other corporate
proceedings on the part of Parent or Merger Sub (other than the
approval of the Merger in accordance with the DGCL). The Board
of Directors of Parent has determined that it is advisable and in
the best interest of Parent's stockholders for Parent to enter
into a business combination with the Company upon the terms and
subject to the conditions of this Agreement. This Agreement has
been duly and validly executed and delivered by Parent and Merger
Sub and, assuming the due authorization, execution and delivery
by the Company, constitutes a legal, valid and binding obligation
of Parent and Merger Sub enforceable against each of them in
accordance with its terms.
SECTION 3.5 No Conflict, Required Filings and Consents.
(a) The execution and delivery of this Agreement by Parent
and Merger Sub do not, and the performance of this Agreement by
Parent and Merger Sub and the consummation of the transactions
contemplated hereby will not, (i) conflict with or violate the
Certificate of Incorporation or By-Laws of Parent or Merger Sub,
(ii) conflict with or violate any Laws applicable to Parent or
any of its significant subsidiaries or by which its or their
respective properties are bound or affected, or (iii) result in
any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or
impair Parent's or any of its significant subsidiaries' rights or
alter the rights or obligations of any third party under, or give
to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien on any of
the properties or assets of Parent or any of its significant
subsidiaries pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Parent or any of its
significant subsidiaries is a party or by which Parent or any of
its significant subsidiaries or its or any of their respective
properties are bound or affected, except in the case of clauses
(ii) or (iii) for any such conflicts, violations, breaches,
defaults or other occurrences that do not constitute a Material
Adverse Effect.
(b) The execution and delivery of this Agreement by Parent
and Merger Sub does not, and the performance of this Agreement by
Parent and Merger Sub will not, require any consent, approval,
authorization or permit of, or filing with or notification to,
any governmental or regulatory authority, domestic or foreign,
except (i) for applicable requirements, if any, of the Exchange
Act, compliance with applicable "Blue Sky" requirements, the pre-
merger notification requirements of the HSR Act and the filing
and recordation of appropriate merger or other documents as
required by the DGCL, and (ii) where the failure to obtain such
consents, approvals, authorizations or permits, or to make such
filings or notifications would not (A) prevent or delay
consummation of the Merger,
(B) otherwise prevent Parent or Merger Sub from performing their
respective obligations under this Agreement, or (C) do not
constitute a Material Adverse Effect.
SECTION 3.6 Financing. Parent and Merger Sub have provided
the Company with commitment letters from the Chase Manhattan
Bank, CPI Securities L.P., Bain Capital Fund V and V-B, and Alan
D. Gordon, all dated April 17, 1997, in favor of Parent (the
"Commitment Letters"). The Commitment Letters are in full force
and effect as of the date hereof and Parent and Merger Sub have
no reason to believe that such Letters will not continue to be in
full force and effect prior to the Effective Time.
SECTION 3.7 Reserved.
ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 4.1 Conduct of Business by the Company Pending the
Merger. The Company covenants and agrees that, during the period
from the date of this Agreement and continuing until the earlier
of the termination of this Agreement or the Effective Time,
unless Parent shall otherwise agree in writing, the Company shall
conduct its business and shall cause the businesses of its
subsidiaries to be conducted only in, and the Company and its
subsidiaries shall not take any action except in, the ordinary
course of business and in a manner consistent with past practice;
and the Company shall use all reasonable efforts to preserve
substantially intact the business organization of the Company and
its subsidiaries, to keep available the services of the present
officers, employees and consultants of the Company and its
subsidiaries and to preserve the present relationships of the
Company and its subsidiaries with customers, suppliers and other
persons with which the Company or any of its subsidiaries has
significant business relations. By way of amplification and not
limitation, except as contemplated by this Agreement, neither the
Company nor any of its subsidiaries shall, during the period from
the date of this Agreement and continuing until the earlier of
the termination of this Agreement or the Effective Time, directly
or indirectly do, or propose to do, any of the following without
the prior written consent of Parent:
(a) amend or otherwise change the Certificate of
Incorporation or By-Laws of the Company or similar organizational
documents of any of its subsidiaries;
(b) issue, sell, pledge, dispose of or encumber, or
authorize the issuance, sale, pledge, disposition or encumbrance
of, any shares of capital stock of any class, or any options,
warrants, convertible securities or other rights of any kind to
acquire any shares of capital stock, or any other ownership
interest (including, without limitation, any phantom interest) in
the Company or any of its subsidiaries (except for the issuance
of shares of Company Stock issuable pursuant to Company Option
Securities outstanding on the date hereof or upon conversion of
Company Series B Preferred Stock outstanding on the date hereof);
(c) sell, pledge, dispose of or encumber any assets of the
Company or any of its subsidiaries (except for (i) sales or
licenses of assets in the ordinary course of business and in a
manner consistent with past practice, (ii) dispositions of
obsolete or worthless assets and (iii) sales of immaterial assets
not in excess of $500,000 in the aggregate);
(d) (i) except for regular quarterly dividends on the
Company Series B Preferred Stock in the amount of $0.25 per
share, declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any
combination thereof) in respect of any of its capital stock,
except that a wholly owned subsidiary of the Company may declare
and pay a dividend to its parent, (ii) split, combine or
reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities or property in
respect of, in lieu of or in substitution for shares of its
capital stock, or (iii) except with respect to outstanding
Company Options the vesting of which will be accelerated and
which shall receive the Company Option Security Price at the
Effective Time, amend the terms or change the period of
exercisability of, purchase, repurchase, redeem or otherwise
acquire, or permit any subsidiary to purchase, repurchase, redeem
or otherwise acquire, any of its securities or any securities of
its subsidiaries, including, without limitation, shares of
Company Stock or any Company Option Security, or provide that
upon the exercise or conversion of any such Company Option
Security the holder thereof shall receive cash, or propose to do
any of the foregoing;
(e) (i) acquire (by merger, consolidation, or acquisition
of stock or assets) any corporation, partnership or other
business organization or division thereof, (ii) incur any
indebtedness for borrowed money or issue any debt securities,
except for short-term, working capital and commercial paper
borrowings at any one time outstanding incurred in the ordinary
course of business consistent with past practice and except for
intercompany indebtedness between the Company and any of its
wholly owned subsidiaries or between such wholly owned
subsidiaries, (iii) assume, guarantee or endorse or otherwise as
an accommodation become responsible for the obligations of any
person ("accommodate"), or make any loans or advances, except in
the ordinary course of business consistent with past practice or
in any case when such loans or advances or accommodations do not
exceed $1,000,000 in the aggregate, (iv) enter into or amend any
material contract or agreement (except with respect to
commitments described on Section 4.1(e)(iv) of the Company
Disclosure Statement), (v) authorize any capital expenditures
(other than for Film Assets) or purchase of fixed assets which
are, in the aggregate, in excess of $500,000 for the Company and
its subsidiaries taken as a whole or (vi) enter into or amend any
contract, agreement, commitment or arrangement to effect any of
the matters prohibited by this Section 4.1(e), provided, however,
that nothing herein shall restrict the Company from, in
accordance with its past practice: (A) licensing foreign rights
to a Film Asset provided that any new domestic "prints and ads"
commitments with respect to such Film Right license does not
exceed $1,000,000, or (B) licensing domestic rights to Film
Assets provided that such Film Asset licenses, individually or in
the aggregate, do not involve commitments of more than
$5,000,000, do not involve a license of all or substantially all
of the Company's Film Assets, are in accordance with industry
standards and are at rates reflecting fair market value (however,
notwithstanding the foregoing, the Company shall in no event
enter into any so-called "output deals"), or (C) entering into
contracts to develop, acquire or produce Film Assets that,
individually or in the aggregate, do not require the Company to
expend more than $1,000,000, or (D) entering into any commitment
which, individually or in the aggregate, calls for total payments
(before or after the Effective Time) of not more than $1,000,000
and (E) completing the commitments and transactions respecting
Film Assets set forth on Section 4.1(e) of the Company Disclosure
Statement;
(f) (i) increase the compensation payable or to become
payable to its officers or employees, except for increases in
salary or wages of employees of the Company or its subsidiaries
who are not officers of the Company in the ordinary course of
business in accordance with past practice, (ii) grant any
severance or termination pay to, or enter into any employment or
severance agreement with any officer or other employee of the
Company or any of its subsidiaries who is compensated in excess
of $100,000 per year, or (iii) establish, adopt, enter into or
amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination,
severance or other plan, trust fund, policy or arrangement for
the benefit of any current or former directors, officers or
employees, except, in each case, as may be required by law;
(g) except as may be required as a result of a change in
law or in generally accepted accounting principles, take any
action to change accounting policies or procedures (including,
without limitation, procedures with respect to revenue
recognition, payments of accounts payable and collection of
accounts receivable);
(h) make any material tax election inconsistent with past
practice or settle or compromise any material federal, state,
local or foreign tax liability or agree to an extension of a
statute of limitations;
(i) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business and consistent
with past practice of liabilities either reflected or reserved
against in the financial statements contained in the Company SEC
Reports filed prior to the date of this Agreement, or incurred in
the ordinary course of business and consistent with past
practice;
(j) enter into any Exploitation Agreements, Film Asset
Acquisition Agreements or other agreements, written or oral,
involving the production, acquisition or distribution of Films or
Film Assets not permitted by Section 4.1(e)(A) through (D) above
(but the Company may discuss and negotiate such agreements); or
(k) take, or agree in writing or otherwise to take, any of
the actions described in Sections 4.1 (a) through (i) above, or
any action which would make any of the representations or
warranties of the Company contained in this Agreement untrue or
incorrect or prevent the Company from performing or cause the
Company not to perform its covenants hereunder.
SECTION 4.2 No Solicitation.
(a) The Company shall not, directly or indirectly, through
any officer, director, employee, representative or agent of the
Company or any of its subsidiaries, (i) solicit, initiate or
encourage the initiation of any inquiries or proposals regarding
any merger, recapitalization, sale of substantial assets, sale or
exchange of shares of capital stock (including without limitation
by way of a tender offer) or similar transactions involving the
Company or any significant subsidiaries of the Company other than
the Merger (any of the foregoing inquiries or proposals being
referred to herein as an "Acquisition Proposal"), (ii) except as
permitted herein, engage in negotiations or discussions
concerning, or provide any nonpublic information to any person
relating to, any Acquisition Proposal or (iii) except as
permitted herein, agree to, approve or recommend any Acquisition
Proposal. Nothing contained in this Section 4.2(a) shall prevent
the Board of Directors of the Company from responding to and
considering, negotiating, discussing, approving and recommending
to the stockholders of the Company a bona fide Acquisition
Proposal not solicited in violation of this Agreement, provided
the Board of Directors of the Company determines in good faith
(after consultation with outside counsel) that the Acquisition
Proposal may present a more favorable alternative to the
Company's Stockholders than the Merger and therefore that they
should, consistent with their duties as fiduciaries to the
Company's stockholders, respond to and negotiate such alternative
Acquisition Proposal. In the event the Board of Directors
determines that such Acquisition Proposal presents a more
favorable alternative, the Board of Directors may approve and
recommend such Acquisition Proposal and terminate the Company's
obligations hereunder (other than the provisions of Section 7.2
hereof) in accordance with the provisions of Section 5.2 or
Article VII. Nothing contained in this Section 4.2 shall
prohibit the Board of Directors of the Company from complying
with Rule 14e-2 promulgated under the Exchange Act with regard to
a tender or exchange offer.
(b) The Company shall immediately notify Parent after
receipt of any Acquisition Proposal, or any material modification
of or amendment to any Acquisition Proposal, or any request for
nonpublic information relating to the Company or any of its
subsidiaries in connection with an Acquisition Proposal or for
access to the properties, books or records of the Company or any
subsidiary by any person or entity that informs the Board of
Directors of the Company or such subsidiary that it is
considering making, or has made, an Acquisition Proposal. Such
notice to Parent shall be made orally and in writing, and shall
indicate whether the Company is providing or intends to provide
the person making the Acquisition Proposal with access to
information concerning the Company as provided in Section 4.2.
(c) If the Board of Directors of the Company receives a
request for material nonpublic information by a person who makes,
or indicates that it is considering making, a bona fide
Acquisition Proposal, and the Board of Directors determines in
good faith (after consultation with outside counsel) that it is
required to cause the Company to act as provided in this Section
4.2 in order to discharge properly the directors' fiduciary
duties, then, provided such person has executed a confidentiality
agreement substantially similar to the one then in effect between
the Company and Parent, the Company may provide such person with
access to information regarding the Company.
(d) The Company shall immediately cease and cause to be
terminated any existing discussions or negotiations with any
persons (other than Parent and Merger Sub) conducted heretofore
with respect to any of the foregoing, provided, however, that the
Company may continue its discussions with CPI Securities L.P.
and its affiliates relating to the alternative financing
arrangements that are set forth in the letter dated February 11,
1997, as amended April 2, 1997 and as of the date hereof (true
and complete copies of which have been delivered to Parent) as an
alternative to the Merger should the Merger fail to be
consummated. The Company agrees not to release any third party
from the confidentiality provisions of any confidentiality
agreement to which the Company is a party.
(e) The Company shall ensure that the officers, directors
and employees of the Company and its subsidiaries and any
investment banker or other advisor or representative retained by
the Company are aware of the restrictions described in this
Section 4.2.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 HSR Act; Etc. As promptly as practicable after
the date of the execution of this Agreement, the Company and
Parent shall file notifications under and in accordance with the
HSR Act. The Company and Parent shall respond as promptly as
practicable to any inquiries received from the Federal Trade
Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") for additional
information or documentation and shall respond as promptly as
practicable to all inquiries and requests received from any State
Attorney General or other governmental authority (foreign or
domestic) in connection with antitrust matters.
SECTION 5.2 Proxy Statement.
(a) As soon as practicable following the date of this
Agreement, the Company shall prepare and file a the Proxy
Statement and shall use its reasonable best efforts to have the
Proxy Statement cleared by the Commission as promptly as
reasonably practicable, and, in addition, shall also take any
action required to be taken under applicable law in connection
with the consummation of the transactions contemplated by this
Agreement. Parent, Merger Sub and the Company shall promptly
furnish to each other all information, and take such other
actions, as may reasonably be requested in connection with any
action by any of them in connection with the provisions of this
Section 5.2.
(b) Prior to the date of approval of the Merger by
Company's stockholders, each of Parent, Merger Sub and the
Company shall correct promptly any information provided by it to
be used specifically in the Proxy Statement that shall have
become false or misleading in any material respect and shall take
all steps necessary to file with the Commission and have cleared
by the Commission any amendment or supplement to the Proxy
Statement as so corrected to be disseminated to the stockholders
of Company to the extent required by applicable law. Without
limiting the generality of the foregoing, the Company shall
notify the Parent promptly of the receipt of the comments of the
Commission and of any request by the Commission for amendments or
supplements to the Proxy Statement, or for additional
information, and shall supply the Parent with copies of all
correspondence between Company or its representatives, on the one
hand, and the Commission or members of its staff, on the other
hand, with respect to the Proxy Statement. If at any time prior
to the Company Stockholders Meeting (as defined in Section 5.3)
any event should occur relating to Parent, Merger Sub or the
Company or their respective officers or directors which is
required to be described in an amendment or supplement to the
Proxy Statement, the parties shall promptly inform each other.
Whenever any event occurs which is required to be described in an
amendment or a supplement to the Proxy Statement, Parent, Merger
Sub and the Company shall, upon learning of such event, cooperate
in promptly preparing, filing and clearing with the Commission
and mailing to the stockholders of Company such amendment or
supplement; provided, however, that, prior to such mailing, (i)
Parent, Merger Sub and the Company shall consult with each other
with respect to such amendment or supplement, (ii) shall afford
each other reasonable opportunity to comment thereon and (iii)
each such amendment or supplement shall be reasonably
satisfactory to the other.
SECTION 5.3 Stockholders Meeting. The Company shall call
and hold the Company Stockholders Meeting as promptly as
practicable and in accordance with applicable laws for the
purpose of voting upon the approval of the Merger and the
adoption of the Merger Agreement. Unless otherwise required
under the standards set forth in Section 4.2 as determined by the
Company's Board of Directors in good faith, the Board of
Directors of the Company shall (i) recommend approval of the
transactions contemplated by this Agreement by the stockholders
of the Company and include in the Proxy Statement such
recommendation and (ii) use all reasonable efforts to solicit
from stockholders of the Company proxies in favor of adoption of
this Agreement and approval of the transactions contemplated
hereby, and shall take all other action necessary or advisable to
secure the vote or consent of stockholders to obtain such
approvals.
SECTION 5.4 Access to Information; Confidentiality. Upon
reasonable notice and subject to restrictions contained in
confidentiality agreements to which the Company is subject (from
which the Company shall use reasonable efforts to be released),
the Company shall (and shall cause each of its Subsidiaries to)
afford to the officers, employees, accountants, counsel and other
representatives of Parent reasonable access, during the period
prior to the Effective Time, to all its properties, books,
contracts, commitments and records and, during such period, the
Company shall (and shall cause each of its Subsidiaries to)
furnish promptly to Parent all information concerning its
business, properties and personnel as Parent may reasonably
request, and shall make available to Parent the appropriate
individuals (including attorneys, accountants and other
professionals) for such discussion of the Company's business,
properties and personnel as Parent may reasonably request.
Parent shall keep such information confidential in accordance
with the terms of the letter between the Parent and the Company
dated July 24, 1996 (the "Confidentiality Letter").
SECTION 5.5 Consents; Approvals. The Company and Parent
shall each use all reasonable efforts to obtain all Approvals,
and the Company and Parent shall make all filings (including,
without limitation, all filings with federal, state and local
governmental or regulatory agencies), required in connection with
the authorization, execution and delivery of this Agreement by
the Company and Parent and the consummation by them of the
transactions contemplated hereby, in each case as promptly as
practicable. The Company and Parent shall furnish promptly all
information required to be included in the Proxy Statement or for
any application or other filing to be made pursuant to the rules
and regulations of any federal, state or local governmental body
in connection with the transactions contemplated by this
Agreement.
SECTION 5.6 Actions Respecting Commitment Letters. Parent
and Merger Sub agree to perform all obligations required to be
performed by them in accordance with and pursuant to the
Commitment Letters and not to amend or terminate such Commitment
Letters if the effect thereof would be reasonably likely to
prevent the consummation of the transactions contemplated hereby
on or before July 31, 1997.
SECTION 5.7 Indemnification and Insurance.
(a) The By-Laws and Certificate of Incorporation of the
Surviving Corporation shall contain the provisions with respect
to indemnification set forth in the By-Laws and Certificate of
Incorporation of the Company on the date hereof, which provisions
shall not be amended, repealed or otherwise modified for a period
of five years from the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who on or
prior to the Effective Time were directors, officers, employees
or agents of the Company, unless such modification is required by
law.
(b) The Company shall, to the fullest extent permitted
under applicable law or under the Company's Certificate of
Incorporation or By-Laws and regardless of whether the Merger
becomes effective, indemnify and hold harmless, and, after the
Effective Time, Parent and the Surviving Corporation shall, to
the fullest extent permitted under applicable law or under the
Surviving Corporation's Certificate of Incorporation or By-Laws
as in effect at the Effective Time, indemnify and hold harmless,
each present and former director, officer or employee of the
Company or any of its subsidiaries and Pioneer Electronic
Corporation (collectively, the "Indemnified Parties") against any
costs or expenses (including attorneys' fees), judgments, fines,
losses, claims, damages, liabilities and amounts paid in
settlement in connection with any claim, action, suit, proceeding
or investigation, whether civil, criminal, administrative or
investigative, (x) arising out of or pertaining to the
transactions contemplated by this Agreement or (y) otherwise with
respect to any acts or omissions occurring at or prior to the
Effective Time, to the same extent as provided in the Company's
Certificate of Incorporation or By-Laws or any applicable
contract or agreement as in effect on the date hereof, in each
case for the period ending five years after the closing of the
Merger. In the event of any such claim, action, suit, proceeding
or investigation (whether arising before or after the Effective
Time), (i) any counsel retained by the Indemnified Parties for
any period after the Effective Time shall be reasonably
satisfactory to the Surviving Corporation, (ii) after the
Effective Time, the Surviving Corporation shall pay the
reasonable fees and expenses of such counsel, promptly after
statements therefor are received, and (iii) the Surviving
Corporation will cooperate in the defense of any such matter;
provided, however, that the Surviving Corporation shall not be
liable for any settlement effected without its written consent
(which consent shall not be unreasonably withheld); and provided,
further, that, in the event that any claim or claims for
indemnification are asserted or made within such five-year
period, all rights to indemnification in respect of any such
claim or claims shall continue until the disposition of any and
all such claims. The Indemnified Parties as a group may retain
only one law firm to represent them with respect to any single
action unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between
the positions of any two or more Indemnified Parties.
(c) For a period of four years after the Effective Time,
Parent shall cause the Surviving Corporation to maintain in
effect, if available, directors' and officers' liability
insurance covering those persons who are currently covered by the
Company's directors' and officers' liability insurance policy (a
copy of which has been made available to Parent) on terms
comparable to those now applicable to directors and officers of
the Company; provided, however, that in no event shall Parent or
the Surviving Corporation be required to expend in excess of 125%
of the annual premium currently paid by the Company for such
coverage; and provided, further, that if the premium for such
coverage exceeds such amount, Parent or the Surviving Corporation
shall purchase a policy with the greatest coverage available for
such 125% of the annual premium and, provided further, that the
Company may acquire "tail insurance" for periods after the
Effective Time for a maximum one time premium of $1,000,000 in
lieu of the insurance continuation provision set forth above.
The Company may request that Pioneer Electronic Corporation be
named as an additional insured if it can do so at no additional
cost.
(d) This Section 5.7 shall survive the consummation of the
Merger at the Effective Time, is intended to benefit the Company,
the Surviving Corporation and the Indemnified Parties, shall be
binding on all successors and assigns of Parent and the Surviving
Corporation and shall be enforceable by the Indemnified Parties.
SECTION 5.8 Notification of Certain Matters. The Company
shall give prompt notice to Parent, and Parent shall give prompt
notice to the Company, of (i) the occurrence or nonoccurrence of
any event the occurrence or nonoccurrence of which would be
likely to cause any representation or warranty contained in this
Agreement to become materially untrue or inaccurate or which may
make a condition to the closing of the Merger incapable of
fulfillment, or (ii) any failure of the Company, Parent or Merger
Sub, as the case may be, materially to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section shall not limit or otherwise
affect the remedies available hereunder to the party receiving
such notice; and provided, further that failure to give such
notice shall not be treated as a breach of covenant for the
purposes of Sections 6.2(b) or 6.3(b) unless the failure to give
such notice results in material prejudice to the other party.
SECTION 5.9 Further Action. Upon the terms and subject to
the conditions hereof each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all other things necessary, proper or
advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement, to
obtain in a timely manner all necessary waivers, consents and
approvals and to effect all necessary registrations and filings,
and otherwise to satisfy or cause to be satisfied all conditions
precedent to its obligations under this Agreement.
SECTION 5.10 Public Announcements. Parent and the
Company shall consult with each other before issuing any press
release with respect to the Merger or this Agreement and shall
not issue any such press release or make any such public
statement without the prior consent of the other party, which
shall not be unreasonably withheld; provided, however, that a
party may, without the prior consent of the other party, issue
such press release or make such public statement as may upon the
advice of outside counsel be required by law or the rules and
regulations of NASDAQ.
SECTION 5.11 Conveyance Taxes. Parent and the
Company shall cooperate in the preparation, execution and filing
of all returns, questionnaires, applications, or other documents
regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any
transfer, recording, registration and other fees, and any similar
taxes which become payable in connection with the transactions
contemplated hereby that are required or permitted to be filed at
or before the Effective Time.
SECTION 5.12 Warrant Agreements. The Surviving
Corporation will assume the Company's obligations pursuant to (i)
the Warrant Agreement of LIVE Entertainment Inc. dated as of
November 26, 1990, (ii) the Loan Fund Warrant Agreement as of
LIVE Entertainment Inc. dated as of March 23, 1993 and (iii) the
Class B Warrant Agreement of LIVE Entertainment Inc. dated as of
March 26, 1993.
ARTICLE VI
CONDITIONS TO THE MERGER
SECTION 6.1 Conditions to Obligation of Each Party to
Effect the Merger. The respective obligations of each party to
effect the Merger shall be subject to the satisfaction at or
prior to the Effective Time of the following conditions:
(a) Stockholder Agreement. The parties thereto shall have
fulfilled their respective obligations under the Stockholder
Agreement as of the Effective Time;
(b) Stockholder Approval. This Agreement and the Merger
shall have been approved and adopted by the requisite vote of the
stockholders of the Company;
(c) HSR Act, Etc. The waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired
or been terminated;
(d) No Injunctions or Restraints; Illegality. No statute,
rule, regulation, executive order, decree, ruling, temporary
restraining order, preliminary or permanent injunction or other
order shall have been enacted, entered, promulgated, enforced or
issued by any court or governmental authority of competent
jurisdiction or shall otherwise be in effect which prohibits,
restrains, enjoins or restricts the consummation of the Merger.
(e) Financing. The closing of the financings on
substantially the terms and conditions described in each of the
Commitment Letters shall have taken place on or prior to the
Effective Time.
SECTION 6.2 Additional Conditions to Obligations of Parent
and Merger Sub. The obligations of Parent and Merger Sub to
effect the Merger are also subject to the following conditions:
(a) Representations and Warranties. The representations
and warranties of the Company contained in this Agreement shall
have been true and correct in all respects at and as of the date
hereof, and Parent and Merger Sub shall have received a
certificate to such effect signed by the Chief Executive Officer
and the Chief Financial Officer of the Company.
(b) Agreements and Covenants. The Company shall have
performed or complied in all material respects with all
agreements and covenants required by this Agreement to be
performed or complied with by it at or prior to the Effective
Time, and Parent and Merger Sub shall have received a certificate
to such effect signed by the Chief Executive Officer and the
Chief Financial Officer of the Company;
(c) No Material Adverse Effect. There shall not have
occurred since the date hereof any event or change in
circumstances involving the Company or any of its Subsidiaries
that, individually or when taken together with all other such
events or changes in circumstances, will or is reasonably likely
to result in a Material Adverse Effect.
(d) Notice of Redemption. On and subject to the Effective
Time, the Company shall have (i) issued a Notice of Redemption
pursuant to the Indenture dated September 1, 1992 relating to the
Increasing Rate Secured Senior Subordinated Notes due 1999 of the
Company, (ii) terminated the credit facility maintained pursuant
to the terms of Amended and Restated Loan and Security Agreement
dated November 14, 1994 among Foothill Capital Corporation and
the Company Affiliates party thereto.
(e) Company Option Securities. Prior to the Effective
Time, all outstanding "out of the money" options issued pursuant
to Company Stock Option Plans shall have expired or been canceled
in accordance with Section 1.6(c) hereof.
SECTION 6.3 Additional Conditions to Obligations of the
Company. The obligation of the Company to effect the Merger is
also subject to the following conditions:
(a) Representations and Warranties. The representations
and warranties of Parent and Merger Sub contained in this
Agreement shall be true and correct in all respects on and as of
the Effective Time, except for (i) changes contemplated by this
Agreement, (ii) those representations and warranties which
address matters only as of a particular date (which shall have
been true and correct as of such date) with the same force and
effect as if made on and as of the Effective Time, and the
Company shall have received a certificate to such effect signed
by the President of Parent;
(b) Agreements and Covenants. Parent and Merger Sub shall
have performed or complied in all material respects with all
agreements and covenants required by this Agreement to be
performed or complied with by them on or prior to the Effective
Time, and the Company shall have received a certificate to such
effect signed by the Chief Executive Officer and the Chief
Financial Officer of Parent; and
(c) Solvency Opinion. Prior to the Effective Time, Parent
and Merger Sub shall have provided to the Company an opinion from
a nationally recognized valuation firm, which firm and opinion
are both reasonably satisfactory to the Company, to the effect
that as of the Effective Time, and taking into account the
transactions contemplated hereby:
(i) The fair market going concern value of all of the
assets (including goodwill) of the Surviving Corporation
will be greater than the total amount of liabilities,
including contingent, subordinated, absolute, fixed, matured
or unmatured and liquidated or unliquidated liabilities, of
the Company.
(ii) The present fair market going concern value of the
assets of the Surviving Corporation (including goodwill) is
sufficient to pay the probable liability of the Company on
its debts as such debts become absolute and matured.
ARTICLE VII
TERMINATION
SECTION 7.1 Termination. This Agreement may be terminated
at any time prior to the Effective Time, notwithstanding approval
thereof by the stockholders of the Company:
(a) by mutual written consent duly authorized by the Boards
of Directors of Parent and the Company; or
(b) by either Parent or the Company if the Merger shall not
have been consummated by July 31, 1997 (provided that the right
to terminate this Agreement under this Section 7.1(b) shall not
be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of or resulted in the
failure of the Merger to occur on or before such date); or
(c) by either Parent or the Company if a court of competent
jurisdiction or governmental, regulatory or administrative agency
or commission shall have issued a nonappealable final order,
decree or ruling or taken any other action having the effect of
permanently restraining order enjoining or otherwise prohibiting
the Merger (provided that the right to terminate this Agreement
under this Section 7.1(c) shall not be available to any party who
has not complied with its obligations under Section 5.9 and such
noncompliance materially contributed to the issuance of any such
order, decree or ruling or the taking of such action); or
(d) by either party if the other party is in material
default of its obligations hereunder and the defaulting party
fails to cure such default within five (5) business days of
receipt of written notice and demand to cure from the party not
in default; or
(e) by Parent or the Company, if (i) the Board of Directors
of the Company shall withdraw, modify or change its approval or
recommendation of this Agreement or the Merger in a manner
adverse to Parent or shall have resolved to do so in accordance
with Section 5.3 hereof; (ii) the Board of Directors of the
Company shall have approved and recommended to the stockholders
of the Company an Acquisition Proposal; or (iii) a tender offer
or exchange offer for 50% or more of the outstanding shares of
Company Common Stock is commenced (other than by Parent or an
affiliate of Parent) and the Board of Directors of the Company
recommends that the stockholders of the Company tender their
shares in such tender or exchange offer; provided, that, the
Company shall not be entitled to exercise any termination rights
under this Section 7.1(e) unless any action of the Board of
Directors of the Company is taken by the Board of Directors in
accordance with the standards set forth in Section 4.2.
SECTION 7.2 Effect of Termination. In the event of the
termination of this Agreement pursuant to Section 7.1, this
Agreement shall forthwith become void and there shall be no
liability on the part of any party hereto or any of its
affiliates, directors, officers or stockholders except (i) as set
forth in Section 7.3 hereof, and (ii) nothing herein shall
relieve any party from liability for any breach hereof occurring
prior to termination. The Confidentiality Letter shall survive
termination of this Agreement as set forth therein.
SECTION 7.3 Fees and Expenses.
(a) Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party
incurring such expenses, whether or not the Merger is
consummated.
(b) The Company shall pay Parent as the sole remedy of
Parent, Merger Sub or any of their affiliates a fee of $3,000,000
(the "Fee"), plus Parent's documented out-of-pocket expenses
relating to the transactions contemplated by this Agreement
(including, but not limited to, reasonable fees and expenses of
Parent's counsel, accountants and financing sources) up to a
maximum of $1,000,000 ("Expenses"), upon the termination of this
Agreement by Parent or the Company pursuant to Section 7.1(f).
(c) The Company shall pay Parent as the sole remedy of
Parent, Merger Sub or any of their affiliates the Fee plus the
Expenses if either Parent or the Company terminates this
Agreement pursuant to Section 7.1(b) if the failure of the Merger
to be consummated is due to the material failure of the Company
to comply with any of its agreements or covenants under this
Agreement.
(d) The Company shall pay Parent, as the sole remedy of
Parent, Merger Sub or any of their affiliates, the Fee plus the
Expenses if this Agreement is terminated pursuant to Section
7.1(a) as a result of the material failure of the Company to
comply with any of its agreements or covenants contained in this
Agreement.
(e) The Fee and/or Expenses payable pursuant to Sections
7.3(b); 7.3(c) or 7.3(d) shall be paid within one business day
after the first to occur of any of the events described in
Sections 7.3(b); 7.3(c) or 7.3(d). Notwithstanding the preceding
sentences, in no event shall the Company be required to pay any
such Fee and/or Expenses to Parent if, immediately prior to the
termination of this Agreement, Parent was in material breach of
any of its agreements or covenants under this Agreement.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Effectiveness of Representations, Warranties
and Agreements, Etc.
(a) Except as otherwise provided in this Section 8.1, the
representations, warranties and agreements of each party hereto
shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any other party hereto,
any person controlling any such party or any of their officers or
directors, whether prior to or after the execution of this
Agreement. The representations, warranties and agreements in
this Agreement shall terminate at the Effective Time or upon the
termination of this Agreement pursuant to Section 7.1, as the
case may be, except that the agreements set forth in Article I
and Section 5.7 shall survive the Effective Time indefinitely and
those set forth in Section 7.3 shall survive such termination
indefinitely. Nothing in this Section 8.1(a) shall relieve any
party for any breach of any representation, warranty or agreement
in this Agreement occurring prior to termination.
(b) Any disclosure made with reference to one or more
sections of the Company Disclosure Schedule or the Parent
Disclosure Schedule shall be deemed disclosed only with respect
to such section unless such disclosure is made in such a way as
to make its relevance to the information called for by another
Section of such schedule readily apparent in which case, such
disclosure shall be deemed to have been included in such other
Section, notwithstanding the omission of a cross reference
thereto.
(c) The Company will update the Company Disclosure Schedule
from time to time through a date which is not more than five
business days prior to the Effective Time (the "Final Company
Disclosure Schedule Date"). On the Final Company Disclosure
Schedule Date, the Company shall deliver to Parent a revised
Company Disclosure Schedule which will be true, correct and
complete as if the representations and warranties to which such
Company Disclosure Schedule refers were made on such Final
Company Disclosure Schedule Date.
SECTION 8.2 Notices. All notices and other communications
given or made pursuant hereto shall be in writing and shall be
deemed to have been duly given or made if and when delivered
personally or by overnight courier to the parties at the
following addresses or sent by electronic transmission, with
confirmation of receipt, to the telecopy numbers specified below
(or at such other address or telecopy number for a party as shall
be specified by like notice):
(a) If to Parent or Merger Sub:
Film Holdings Co.
c/o Bain Capital, Inc.
Two Copley Place
Boston, MA 02116
Telecopier No.: (617) 572-3000
Telephone No.: (617) 572-3274
Attention: Geoffrey S. Rehnert
With a copy to:
Ropes & Gray
One International Place
Boston, MA 02110
Telecopier No.: (617) 951-7050
Telephone No.: (617) 951-7371
Attention: David C. Chapin, Esq.
(b) If to the Company:
LIVE Entertainment Inc.
15400 Sherman Way
Suite 500
Van Nuys, CA 91406
Telecopier No.: 818/908-9539
Telephone No.: 818/778-3167
Attention: Chief Financial Officer
With a copy to:
Sidley & Austin
555 West Fifth Street
40th Floor
Los Angeles, CA 90013-1010
Telecopier No.: 213/896-6600
Telephone No.: 213/896-6013
Attention: Gary J. Cohen, Esq.
SECTION 8.3 Definitions. For purposes of this Agreement, the term:
(a) "Affiliates" means a person that directly or
indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the first
mentioned person;
(b) "Beneficial Owner" with respect to any shares of
Company Common Stock means a person who shall be deemed to be the
beneficial owner of such shares (i) which such person or any of
its affiliates or associates (as such term is defined in Rule
12b-2 of the Exchange Act) beneficially owns, directly or
indirectly, (ii) which such person or any of its affiliates or
associates has, directly or indirectly, (A) the right to acquire
(whether such right is exercisable immediately or subject only to
the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or (B) the right to
vote pursuant to any agreement, arrangement or understanding, or
(iii) which are beneficially owned, directly or indirectly, by
any other persons with whom such person or any of its affiliates
or associates has any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of any
shares;
(c) "Business Day" means any day other than a day on which
banks in The Commonwealth of Massachusetts or the State of
California are required or authorized to be closed;
(d) "Control" (including the terms "controlled by" and
"under common control with") means the possession, directly or
indirectly or as trustee or executor, of the power to direct or
cause the direction of the management or policies of a person,
whether through the ownership of stock, as trustee or executor,
by contract or credit arrangement or otherwise;
(e) "Exploitation Agreements" means all agreements pursuant
to which the Company or any of its Subsidiaries has granted to
any Person, or any Person has acquired from the Company or any of
its Subsidiaries, rights to exploit all or any of the Company's
or Subsidiary's distribution rights in any Film Assets.
(f) "Film" means any and every motion picture, tape or
other recording of moving images by any means, manner, process or
device now known or hereafter devised.
(g) "Film Asset Acquisition Agreements" means all
agreements, licenses, instruments, writings and understandings
evidencing any Film Assets or any rights therein or thereto
acquired by the Company or pursuant to which such Film Assets and
rights were acquired by or granted to the Company.
(h) "Film Assets" means all rights and interests granted to
or acquired by the Company in connection with or related to the
distribution or exploitation of, or otherwise respecting, any
Films, including but not limited to any distribution rights,
license rights and rights as a subdistributor or sublicensee in
all media, including without limitation, distribution, license,
subdistribution and sublicense rights; all rights to distribute,
license, subdistribute, sublicense, copy, exhibit, transmit,
broadcast, package, edit, reformat, advertise or exploit a Film,
in any and all media, and any syndication, television or cable
television rights; all copyrights or interests in any copyright
on or relating to a Film; and any collateral, allied, subsidiary
or merchandising rights appurtenant or related to a Film.
(i) "Generally Accepted Accounting Principles" shall mean
United States generally accepted accounting principles.
(j) "Laboratory" means each laboratory where any Masters are
located.
(k) "Masters" means all film negatives, masters, prints,
pre-print and/or soundtrack materials and other physical
materials relating to any Film.
(l) "Person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or
group (as defined in Section 13(d)(3) of the Exchange Act);
(m) "Rights Agreement" means the Rights Agreement dated
July 19, 1990 between the Company and American Stock Transfer &
Trust Company, as amended;
(n) "Significant Subsidiary" means any subsidiary of the
Company or Parent, as the case may be, that constitutes a
Significant Subsidiary within the meaning of Rule 1-02 of
Regulation S-X of the SEC; and
(o) "Subsidiary" or "Subsidiaries" of the Company, Parent
or any other person means any corporation, partnership, joint
venture or other legal entity of which the Company, the Surviving
Corporation, Parent or such other person, as the case may be
(either alone or through or together with any other subsidiary),
owns, directly or indirectly, more than 50% of the stock or other
equity interests the holders of which are generally entitled to
vote for the election of the board of directors or other
governing body of such corporation or other legal entity.
SECTION 8.4 Other Definitions. The following terms are
defined in the Sections hereof listed below:
"1996 Company Balance Sheet" Section 2.9
"Acquisition Proposal" Section 4.2(a)
"Agreement" Preamble
"Antitrust Division" Section 5.1
"Applicable Merger Price" Section 1.7(b)
"Approvals" Section 2.1
"Certificate" Section 1.7(b)
"Certificate of Merger" Section 1.2
"Code" Section 1.7(d)
"Commitment Letters" Section 3.6
"Common Stock Merger Price" Section 1.7(b)
"Company" Preamble
"Company Common Stock" Recitals
"Company Disclosure Schedule" Section 2.3
"Company Employee Plans" Section 2.11
"Company Intangible Property Rights" Section 2.18(a)
"Company Option Security" Section 1.6(c)
"Company Option Security Price" Section 1.6(c)
"Company Permits" Section 2.6(b)
"Company SEC Reports" Section 2.7(a)
"Company Series B Preferred Stock Recitals
"Company Series C Preferred Stock Recitals
"Company Stock" Recitals
"Company Stockholders Meeting" Section 2.13
"Company Stock Option Plans" Section 2.3
"Confidentiality Letter" Section 5.4
"DGCL" Recitals
"Dissenting Shares" Section 1.7(e)
"Effective Time" Section 1.2
"Environmental Laws" Section 2.17
"ERISA" Section 2.11
"Exchange Agent" Section 1.7(a)
"Exchange Fund" Section 1.7(a)
"Expenses" Section 7.3(b)
"Fee" Section 7.3(b)
"Final Company Disclosure Schedule Date" Section 8.1(b)
"FTC" Section 5.1
"HSR Act" Section 2.5(d)
"Indemnified Parties" Section 5.7(b)
"IRS" Section 2.11
"Laws" Section 2.5(c)
"Liens" Section 2.3
"Material Adverse Effect" Section 1.13
"Merger" Recitals
"Merger Sub" Preamble
"Parent" Preamble
"PBGC" Section 2.11
"Proxy Statement" Section 2.13
"Series B Merger Price" Section 1.7(b)
"Series C Merger Price" Section 1.7(b)
"Share" Recitals
"Stockholder" Recitals
"Stockholder Agreement" Recitals
"Surviving Corporation" Section 1.1(a)
"Tax" or "Taxes" Section 2.16
"Tax Returns" Section 2.16
SECTION 8.5 Amendment. This Agreement may be
amended by the parties hereto by action taken by or on behalf of
their respective Boards of Directors at any time prior to the
Effective Time; provided, however, that, after approval of the
Merger by the stockholders of the Company, no amendment may be
made which by law requires further approval by such stockholders
without such further approval. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
SECTION 8.6 Waiver. At any time prior to the Effective
Time, any party hereto may with respect to any other party hereto
(a) extend the time for the performance of any of the obligations
or other acts, (b) waive any inaccuracies in the representations
and warranties contained herein or in any document delivered
pursuant hereto, or (c) waive compliance with any of the
agreements or conditions contained herein. Any such extension or
waiver shall be valid only if set forth in an instrument in
writing signed by the party or parties to be bound thereby.
SECTION 8.7 Headings. The headings contained in this
Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 8.8 Severability. If any term or other provision
of this Agreement is invalid, illegal or incapable of being
enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected
in any manner adverse to any party. Upon such determination that
any term or other provision is invalid, illegal or incapable of
being enforced, the parties hereto shall negotiate in good faith
to modify this Agreement so as to effect the original intent of
the parties as closely as possible in an acceptable manner to the
end that the transactions contemplated hereby are fulfilled to
the fullest extent possible.
SECTION 8.9 Entire Agreement. This Agreement constitutes
the entire agreement and supersedes all prior agreements and
undertakings (other than the Confidentiality Letter), both
written and oral, among the parties, or any of them, with respect
to the subject matter hereof.
SECTION 8.10 Assignment; Guarantee of Merger Sub
Obligations. This Agreement shall not be assigned by operation
of law or otherwise, except that Parent and Merger Sub may assign
all or any of their rights hereunder to any direct wholly owned
subsidiary of Parent provided that no such assignment shall
relieve the assigning party of its obligations hereunder. Parent
guarantees the full and punctual performance by Merger Sub of all
the obligations hereunder of Merger Sub or any such assignees.
SECTION 8.11 Parties in Interest. This Agreement
shall be binding upon and inure solely to the benefit of each
party hereto, and nothing in this Agreement, express or implied,
is intended to or shall confer upon any other person any right,
benefit or remedy of any nature whatsoever under or by reason of
this Agreement, including, without limitation, by way of
subrogation, other than Section 5.7 (which is intended to be for
the benefit of the Indemnified Parties and may be enforced by
such Indemnified Parties).
SECTION 8.12 Failure or Indulgence Not Waiver;
Remedies Cumulative. No failure or delay on the part of any
party hereto in the exercise of any right hereunder shall impair
such right or be construed to be a waiver of, or acquiescence in,
any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right
preclude any other or further exercise thereof or of any other
right. All rights and remedies existing under this Agreement are
cumulative to, and not exclusive of, any rights or remedies
otherwise available.
SECTION 8.13 Governing Law. This Agreement shall be
governed by, and construed in accordance with, the internal laws
of the State of Delaware applicable to contracts executed and
fully performed within the State of Delaware.
SECTION 8.14 Counterparts. This Agreement may be
executed in one or more counterparts, and by the different
parties hereto in separate counterparts, each of which when
executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, Parent, Merger Sub and the Company have
caused this Agreement to be executed as of the date first written
above by their respective officers thereunto duly authorized.
LIVE Entertainment Inc.
By:
Title: President
Film Holdings Co.
By:
Title:
Film Acquisition Co.
By:
Title:
<PAGE>
ANNEX B
SECTION 262 OF THE DGCL
Appraisal Rights. (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of
a demand pursuant to subsection (d) of this section with respect
to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to Section 228 of this title shall be
entitled to an appraisal by the Court of Chancery of the fair
value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what
is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument
issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation,
which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of
any class or series of stock of a constituent corporation in a
merger or consolidation to be effected pursuant to Sections 251
(other than a merger effected pursuant to subsection (g) of
Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under
this section shall be available for the shares of any class
or series of stock, which stock, or depository receipts in
respect thereof, at the record date fixed to determine the
stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of
merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national
market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or (ii)
held of record by more than 2,000 holders; and further
provided that no appraisal rights shall be available for any
shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the
vote of the holders of the surviving corporation as provided
in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for
the shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms
of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title
to accept for such stock anything except:
a. Shares of stock of the corporation surviving
or resulting from such merger or consolidation, or
depository receipts in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of
stock or depository receipts at the effective date of
the merger or consolidation will be either listed on a
national securities exchange or designated as a
national market system security on an interdealer
quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or
fractional depository receipts described in the
foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional
shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under
Section 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be
available for the shares of any class or series of its stock as a
result of an amendment to its certificate of incorporation, any
merger or consolidation in which the corporation is a constituent
corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those
set forth in subsections (d) and (e) of this section, shall apply
as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be
submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsections
(b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand
for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor
of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved
pursuant to Section 228 or Section 253 of this title, each
constituent corporation, either before the effective date of
the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of
stock of such constituent corporation that are entitled to
appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a
copy of this section; provided that, if the notice is given
on or after the effective date of the merger or
consolidation, such notice shall be given by the surviving
or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are
entitled to appraisal rights. Any stockholder entitled to
appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving
or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably
informs the corporation of the identify of the stockholder
and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation
shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any
class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date
of the merger or consolidation or (ii) the surviving or
resulting corporation shall send a second notice to all such
holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such
second notice need only to be sent to each stockholder who
is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that
is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive such
notice, each constituent corporation may fix, in advance, a
record date that shall be not more than 10 days prior to the
date the notice is given; provided that, if the notice is
given on or after the effective date of the merger or
consolidation, the record date shall be the effective date.
If no record date is fixed and the notice is given prior to
the effective date, the record date shall be the close of
business on the next day preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger
or consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof
and who is otherwise entitled to appraisal rights, may file a
petition in the Court of Chancery demanding a determination of
the value of the stock of all such stockholders. Notwithstanding
the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the
terms offered upon the merger or consolidation. Within 120 days
after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections
(a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting
from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation
or within 10 days after expiration of the period for delivery of
demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after such
service file in the office of the Register in Chancery in which
the petition was filed a duly verified list containing the names
and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting
corporation. If the petition shall be filed by the surviving or
resulting corporation, the petition shall be accompanied by such
a duly verified list. The Register in Chancery, if so ordered by
the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown
on the list at the addresses therein stated. Such notice shall
also be given by 1 or more publications at least 1 week before
the day of the hearing, in a newspaper of general circulation
published in the City of Wilmington, Delaware or such publication
as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs
thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this section
and who have become entitled to appraisal rights. The Court may
require the stockholders who have demanded an appraisal for their
shares and who hold stock represented by certificates to submit
their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the
Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an
appraisal, the Court shall appraise the shares, determining their
fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation,
together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such
fair value, the Court shall take into account all relevant
factors. In determining the fair rate of interest, the Court may
consider all relevant factors, including the rate of interest
which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon
application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other
pretrial proceedings and may proceed to trial upon the appraisal
prior to the final determination of the stockholder entitled to
an appraisal. Any stockholder whose name appears on the list
filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is
finally determined that he is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or
resulting corporation to the stockholders entitled thereto.
Interest may be simple or compound, as the Court may direct.
Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender
to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court
of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in
the circumstances. Upon application of a stockholder, the Court
may order all or a portion of the expenses incurred by any
stockholder in connection with the appraisal proceeding,
including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the
value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal
rights as provided in subsection (d) of this section shall be
entitled to vote such stock for any purpose or to receive payment
of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the
merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written
withdrawal of his demand for an appraisal and an acceptance of
the merger or consolidation, either within 60 days after the
effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder
to an appraisal shall cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been
converted had they assented to the merger or consolidation shall
have the status of authorized and unissued shares of the
surviving or resulting corporation.
<PAGE>
ANNEX C
FAIRNESS OPINION
June 6, 1997
To the Board of Directors of
LIVE Entertainment, Inc.
We understand that LIVE Entertainment, Inc. ("LIVE" or the
"Company") has entered into an Agreement and Plan of Merger,
dated April 17, 1997 (the "Merger Agreement"), among Film
Holdings Co., a Delaware corporation ("Parent"), Film Acquisition
Co., a Delaware corporation and wholly owned subsidiary of Parent
("Merger Sub") and the Company. The Merger Agreement provides
for the merger of Merger Sub with and into the Company, with the
Company surviving as a wholly owned subsidiary of Parent (the
"Transaction"). Subject to the terms and conditions of the
Merger Agreement, upon consummation of the Transaction:
(i) each share of Common Stock, par value $.01 per share,
of the Company ("Common Stock"), other than shares
owned by Parent, the Company or their subsidiaries or
by shareholders exercising dissenters' rights, will be
converted into the right to receive $6.00 per share in
cash (the "Common Stock Merger Price");
(ii) each share of Series B Cumulative Convertible Preferred
Stock, par value $1.00 per share, of the Company (the
"Series B"), other than shares owned by Parent, the
Company or their subsidiaries, will be converted into
the right to receive $10.00 per share in cash, plus
accrued and unpaid dividends; and
(iii) each share of Series C Convertible Preferred
Stock, par value $1.00 per share, of the Company
(the "Series C") will be converted into the right
to receive $944.8624 per share in cash.
We further understand that, at the close of business on April 17,
1997, Pioneer Electronic Corporation ("Pioneer") was the
beneficial and record owner of 637,844 shares of Common Stock and
15,000 shares of Series C, representing approximately 50.3% of
the outstanding voting power of the Common Stock and Series C,
taken together (Pioneer's percentage of the outstanding voting
power of the Common Stock and Series C will increase to
approximately 50.7% as of June 30, 1997). Pioneer has agreed to
vote its shares of Common Stock and Series C in favor of the
Transaction.
Houlihan Lokey Howard & Zukin ("Houlihan Lokey"), as part of its
investment banking business, is regularly engaged in the
valuation of businesses and their securities in connection with
recapitalizations, mergers and acquisitions, underwritings,
private placements and valuations for corporate and other
purposes. In the past, an affiliate of Houlihan Lokey has been
involved in providing certain financial advisory services to the
Company and has received fees in connection therewith customary
with those in the industry. Houlihan Lokey expects this
relationship to continue. Houlihan Lokey is also receiving a fee
from the Company to render the opinion expressed herein.
You have requested our opinion (the "Opinion") as to the fairness
of the Common Stock Merger Price, from a financial point of view,
to the holders of the common stock of the Company (other than
Pioneer Electronics Corporation, as to which we render no
opinion). This Opinion does not address the other aspects of the
Transaction or the Company's underlying business decision to
effect the Transaction. We have not been requested to, and did
not, initiate any discussions with third parties with respect to
alternatives to the Transaction. We have not been asked to
express an opinion as to the relative merits of the Transaction
compared to any alternative business strategies that might exist
for the Company.
In connection with this Opinion, we have made such reviews,
analyses and inquiries as we have deemed necessary and
appropriate under the circumstances. Among other things, we
have:
1) reviewed LIVE's annual reports to shareholders and
audited financial statements filed with the Securities
and Exchange Commission ("SEC") on Form 10-K for the
fiscal years ended December 31, 1994, 1995 and 1996.
2) reviewed copies of the following documents and
agreements:
(i) Agreement and Plan of Merger By and Among Live
Entertainment, Inc., Film Holdings Co. and Film
Acquisition Co. dated April 17, 1997;
(ii) Certificate of Designations, Preferences and
Relative, Participating, Optional or Other Special
Rights of Series B Cumulative Convertible
Preferred Stock of Live Entertainment Inc., dated
December 15, 1992; and
(iii) Amended Certificate of Designations, Preferences
and Rights of Series C Convertible Preferred Stock
of Live Entertainment Inc., dated December 31,
1992.
3) reviewed certain other publicly available filings of the
Company for the years 1994, 1995 and 1996.
4) met with certain members of the senior management of LIVE
to discuss the operations, financial condition, future
prospects and projected operations and performance of the
Company.
5) reviewed projections prepared by LIVE dated January 23,
1997 for the fiscal year ending December 31, 1997 through
the fiscal year ending December 31, 1999.
6) reviewed the historical market prices and trading volume
for LIVE's publicly traded securities, which include the
Common Stock and the Series B.
7) reviewed certain publicly available financial data for
certain companies that we deem comparable to LIVE.
8) reviewed various financial schedules detailing the
historic financial performance of the Company's film
entertainment rights and various other rights
availability schedules.
9) considered the fact that Carreden Group Incorporated did
not receive any offers to acquire the Company, other than
the Transaction, since its retention by the Company as
financial advisor in March 1996.
10) conducted such other studies, analyses and inquiries
as we have deemed appropriate.
For purposes of this Opinion, we have relied upon and assumed,
without independent verification, that the financial forecasts
and projections provided to us have been reasonably prepared and
reflect the best currently available estimates of senior
management of the Company as to the future financial results and
condition of the Company and that there has been no material
change in the assets, financial condition, business or prospects
of the Company from that reflected in the documents set forth
above.
We have not independently verified the accuracy and completeness
of the information supplied to us with respect to the Company and
do not assume any responsibility with respect to it. Except for
our valuation of the Company's film library, we have not made an
independent evaluation or appraisal of any of the properties,
assets or liabilities (contingent or otherwise) of the Company.
Our opinion is necessarily based on business, economic, market
and other conditions as they exist and can be evaluated by us at
the date of this letter.
This Opinion has been delivered to the Board of Directors of the
Company and does not constitute a recommendation to any holder of
the Company's Common Stock, Series C or Series B as to whether
such holder should approve the Transaction. No opinion is
expressed herein as to the price at which the Common Stock or the
Series B may trade at any time. This Opinion is necessarily
based on economic, market and other conditions and circumstances
as they exist on, and the information made available to us as of,
the date hereof (including, without limitation, the market prices
of the Common Stock and the Series B).
This Opinion has been prepared for the Board of Directors
of the Company in its consideration of the fairness of the Common
Stock Merger Price, from a financial point of view, to the
holders of the Common Stock of the Company (other than Pioneer
Electronic Corporation) and may not be used for any other purpose
or referred to without our prior written consent. Without
limiting the foregoing, we hereby consent to your reference to
our opinion in, to the disclosure of the analyses performed by
Houlihan Lokey in connection with our opinion in, and the
inclusion of our opinion as an exhibit to, the Proxy Statement
to be filed in connection with the Transaction.
Based upon, and subject to, the foregoing, and in reliance
thereon, it is our opinion that the Common Stock Merger Price is
fair to the holders of the Common Stock of the Company (other
than Pioneer Electronic Corporation, as to which we render no
opinion) from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN CAPITAL
<PAGE>
LIVE ENTERTAINMENT INC.
15400 Sherman Way, Suite 500
Van Nuys, California 91406
This Proxy is being solicited on behalf of the Board of Directors
for the Special Meeting of Stockholders to be held on July 9, 1997
Roger A. Burlage and Ronald B. Cushey, or either of them,
with full power of substitution to each, hereby are appointed
proxies and are authorized to vote, as hereinafter specified, all
shares of Common Stock, $.01 par value, that the undersigned is
entitled to vote at the Special Meeting of Stockholders of LIVE
Entertainment Inc. ("LIVE"), to be held at 10:00 a.m., local
time, on July 9, 1997, at the Wyndham Bel Age Hotel, 1020 North
San Vicente Boulevard, West Hollywood, California, or at any
adjournment thereof.
Please mark, date and sign this proxy and return it promptly
in the accompanying business reply envelope.
THIS PROXY, IF SIGNED AND RETURNED, WILL BE VOTED
AS SPECIFIED ON THE REVERSE SIDE. IF NO
SPECIFICATION IS MADE, YOUR SHARES WILL BE VOTED
FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE MERGER.
IMPORTANT: PLEASE SIGN AND DATE ON THE REVERSE SIDE.
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE MERGER.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
1. Approve and adopt the Agreement
and Plan of Merger, dated April 17,
1997 (the "Merger Agreement"), among
Film Holdings Co., a Delaware
corporation, Film Acquisition Co., a
Delaware corporation and wholly
owned subsidiary of Film Holdings
Co. and LIVE, and the transactions
contemplated thereby, including the
Merger (as defined therein).
The proxies named herein will have discretion to vote upon such
other matters as may properly come before the Special Meeting,
provided, however, that the proxies may not vote to adjourn the
Special Meeting with respect to votes cast against the Merger.
The undersigned acknowledges receipt of the Notice of Special
Meeting of Stockholders to be held on July 9, 1997 and the
related Proxy Statement.
PLEASE SIGN BELOW EXACTLY AS NAME APPEARS HEREON. JOINT OWNERS
SHOULD EACH SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS
SUCH. IF SIGNING IN THE NAME OF A CORPORATION OR PARTNERSHIP,
PLEASE SIGN FULL CORPORATE OR PARTNERSHIP NAME AND INDICATE TITLE
OF AUTHORIZED SIGNATORY.
Signature _________________________________________ Dated __________
Signature _________________________________________ Dated __________
