Schedule 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934, as amended.
Filed by the registrant /x/
Filed by a party other than the registrant / /
Check the appropriate box:
/x/ Preliminary proxy statement
/ / Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
Entertainment/Media Acquisition Corporation
(Name of Registrant as Specified in its Charter)
Jeffrey A. Rochlis
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check appropriate box):
/ / $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1),
or 14a-6(j)(2).
/ / $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
/x/ Fee computed on table below per Exchange Act Rule 14a-6(i)(4) and
0-11:
(1) Title of each class of securities to which transaction
applies: Entertainment/Media Acquisition Corporation Common
Stock
(2) Aggregate number of securities to which transaction applies:
3,177,778 shares of Entertainment/Media Acquisition
Corporation Common Stock
<PAGE>
(3) Per unit 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): The amount on which the filing fee of
$4,056.69 is calculated was determined pursuant to Rule 0-
11(c) of the Exchange Act by multiplying 1/50th of 1% by the
sum of (a) $5.2815, the average of the high and low price of
a share of Common Stock of Entertainment/Media Acquisition
Corporation on August 16, 1996, multiplied by 3,177,778, the
number of shares of Common Stock of Entertainment/Media
Acquisition Corporation that will be transferred in the
transaction, (b) $1,500,000 in cash that will be transferred
in the transaction and (c) $2,000,000 representing a note
that will be transferred in the transaction.
(4) Proposed maximum aggregate amount of transaction:
$20,283,434.51
(5) Total fee paid: $4,056.69
/ / Fee previously paid with preliminary materials.
/ / Check box if any part of the fee is offset 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>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
_________ __, 1996
To the Stockholders of Entertainment/Media Acquisition Corporation:
The special meeting in lieu of the annual meeting ("EMAC Meeting")
of the stockholders of Entertainment/Media Acquisition Corporation
(respectively, the "EMAC Stockholders" and "EMAC") will be held on _______ __,
1996 at______.m. local time, at_________________________________, California
90210. At this meeting, you will be asked:
1. to consider and act upon a proposal to approve an Agreement of
Merger ("Merger Agreement") providing for the merger ("Merger")
of Overseas Filmgroup, Inc. ("Overseas Filmgroup"), a Delaware
corporation, with and into EMAC;
2. to elect two Class I, two Class II and three Class III
directors to hold office commencing upon the effective time of
the Merger until the 1997, 1998 and 1999 Annual Meetings of
Stockholders, respectively, or until their respective
successors have been duly elected and qualified;
3. to consider and act upon a proposal to approve amendments to,
and restatement of, EMAC's Certificate of Incorporation to,
among other things, change its name to "Overseas Filmgroup,
Inc.," increase the authorized capital stock and enact certain
anti-takeover provisions;
4. to consider and act upon a proposal to approve the 1996 Basic
Stock Option and Stock Appreciation Rights Plan;
5. to consider and act upon a proposal to approve the 1996 Special
Stock Option Plan and Agreement; and
6. to ratify and approve the appointment of Price Waterhouse LLP
as independent accountants for 1996.
If the Merger is not consummated, the current directors of EMAC
will continue as the directors of EMAC, the EMAC Certificate of Incorporation
will not be amended and restated and the 1996 Basic Stock Option and Stock
Appreciation Rights Plan and the 1996 Special Stock Option Plan and Agreement
will not be implemented, notwithstanding stockholder approval of such
proposals. In addition, pursuant to its Restated Certificate of Incorporation,
if a Business Combination (as defined in the accompanying Proxy Statement) is
not consummated by February 16, 1997, EMAC will be liquidated.
Upon the Merger, the outstanding Overseas Filmgroup common stock
("Overseas Common Stock") will be converted into an aggregate of (i) 3,177,778
shares of EMAC Common Stock, par value $.001 per share ("EMAC Common Stock"),
(ii) $1,500,000 in cash, subject to adjustment in certain circumstances, and
(iii) a secured promissory note in the amount of $2,000,000. No fractional
share of EMAC Common Stock will be issued as a result of the Merger. Each
holder of Overseas Common Stock who is entitled to receive a fractional share
of EMAC Common Stock will receive one whole share of EMAC Common Stock for
such fraction. In addition, the two principal stockholders and senior
executive officers of Overseas Filmgroup will be granted options, upon
consummation of the Merger, to purchase an aggregate of 2,200,000 shares of
EMAC Common Stock pursuant to the 1996 Special Stock Option Plan and
Agreement. All of the foregoing is more fully described in the attached Proxy
Statement, which you are encouraged to read in its entirety.
The affirmative vote of the holders of a majority of the
outstanding shares of EMAC Common Stock is required to approve the Merger
Agreement; provided, however, that if the holders of 20% or more of the shares
of EMAC Common Stock, excluding those persons who were stockholders prior to
the consummation of EMAC's initial public offering (the "Initial Stockholders"
and the "IPO," respectively), vote against the approval of the
<PAGE>
Entertainment/Media Acquisition Corporation
Merger Agreement and exercise their redemption rights, the Merger will not be
consummated. The Initial Stockholders, who own an aggregate of approximately
19% of the outstanding shares of EMAC Common Stock and who are the directors
and executive officers of EMAC, have agreed to vote their shares of EMAC
Common Stock (i) in accordance with the majority in interest of all other EMAC
Stockholders on the proposal to approve the Merger Agreement and (ii) in favor
of the other proposals being submitted to the EMAC Stockholders. EMAC
Stockholders who vote against the Merger Agreement have the right to demand
that EMAC redeem their shares of EMAC Common Stock for cash if the Merger is
approved and consummated. Under Delaware law, EMAC Stockholders also have a
statutory right of appraisal. These redemption and appraisal rights are more
fully described in the attached Proxy Statement.
After careful consideration of the terms and conditions of the
proposed Merger Agreement, the Board of Directors of EMAC has determined that
the Merger Agreement and the transactions contemplated thereby are in the best
interests of EMAC and its stockholders. The Board of Directors of EMAC
unanimously recommends that its stockholders vote "FOR" the approval and
adoption of the Merger Agreement and the transactions contemplated thereby and
the other proposals being submitted to the EMAC Stockholders. As described in
the Proxy Statement under "Conflicts of Interest," certain members of the
Board of the Directors of EMAC have various conflicts of interest arising out
of certain agreements with EMAC and their ownership of EMAC Common Stock.
Enclosed is a Notice of EMAC Meeting and a Proxy Statement
containing detailed information concerning the Merger Agreement and the
transactions contemplated thereby. Whether or not you plan to attend the EMAC
Meeting, we urge you to read this material carefully. Your vote is important.
We request that you mark, date, sign and return the enclosed proxy as soon as
possible. An EMAC Stockholder who executes and returns a proxy has the power
to revoke it at any time before it is voted by providing written notice
thereof to the Secretary of EMAC, by submitting a subsequent proxy, or by
voting in person at the EMAC Meeting. The giving of a proxy does not affect a
stockholder's right to attend and vote in person at the EMAC Meeting. A
stockholder's presence at the EMAC Meeting without further action, however,
will not in itself revoke the stockholder's proxy.
Sincerely,
Stephen K. Bannon
Chairman of the Board
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that the special meeting in lieu of the
annual meeting (the "EMAC Meeting") of the stockholders of Entertainment/Media
Acquisition Corporation (respectively, the "EMAC Stockholders" and "EMAC")
will be held on _______ __, 1996 at _______ _.m., local time, at
_____________________, _____________, California 90210, for the following
purposes:
1. To consider and act upon a proposal to approve an Agreement of
Merger ("Merger Agreement") providing for the merger ("Merger")
of Overseas Filmgroup, Inc. ("Overseas Filmgroup"), a Delaware
corporation, with and into EMAC. As a result of the Merger, the
outstanding shares of Overseas Common Stock will be converted
into an aggregate of (i) 3,177,778 shares of EMAC Common Stock,
par value $.001 per share (the "EMAC Common Stock"), (ii)
$1,500,000 in cash, subject to adjustment in certain
circumstances, and (iii) a secured promissory note in the
amount of $2,000,000.
2. To elect two Class I, two Class II, and three Class III
directors to hold office commencing upon the effective time of
the Merger until the 1997, 1998 and 1999 annual meetings of
stockholders, respectively, or until their respective
successors have been duly elected and qualified.
3. To consider and act upon a proposal to approve amendments to,
and restatement of, EMAC's Certificate of Incorporation to,
among other things, change its name "Overseas Filmgroup, Inc.,"
increase the authorized capital stock and enact certain
anti-takeover provisions.
4. To consider and act upon a proposal to approve the 1996 Basic
Stock Option and Stock Appreciation Rights Plan.
5. To consider and act upon a proposal to approve the 1996 Special
Stock Option Plan and Agreement.
6. To ratify and approve the appointment of Price Waterhouse LLP
as independent accountants for 1996.
7. To transact such other business as may properly come before the
EMAC Meeting and any adjournments thereof.
The affirmative vote of the holders of a majority of the
outstanding shares of EMAC Common Stock is required to approve the Merger
Agreement; provided, however, that if the holders of 20% or more of the shares
of EMAC Common Stock, excluding those persons who were stockholders prior to
the consummation of EMAC's initial public offering (the "Initial Stockholder"
and the "IPO," respectively), vote against approval of the Merger Agreement
and exercise their redemption rights, the Merger will not be consummated. The
Initial Stockholders, who own an aggregate of approximately 19% of the
outstanding shares of EMAC Common Stock and who are the directors and
executive officers of EMAC, have agreed to vote their shares in accordance
with the majority in interest of all other EMAC Stockholders on the proposal
to approve the Merger Agreement. If the Merger is not consummated, the current
directors of EMAC will continue to be the directors of EMAC, the EMAC
Certificate of Incorporation will not be amended and restated, and the EMAC
1996 Basic Stock Option and Stock Appreciation Rights Plan and the EMAC
Special Stock Option Plan and Agreement will not be implemented,
notwithstanding stockholder approval of such proposals. In addition, pursuant
to its Restated Certificate of Incorporation, if a Business Combination (as
defined in the accompanying Proxy Statement) is not consummated by February
16, 1997, EMAC will be liquidated. Stockholders who vote against the Merger
Agreement have the right to demand that EMAC redeem their shares for cash if
the Merger is approved and consummated. Under Delaware law, EMAC Stockholders
also have a statutory right of appraisal. These rights are mutually exclusive
of each other. These redemption and appraisal rights are more fully described
in the attached Proxy Statement.
<PAGE>
THE BOARD OF DIRECTORS OF EMAC HAS UNANIMOUSLY APPROVED THE TERMS
OF THE PROPOSED MERGER AND RECOMMENDS THAT EMAC STOCKHOLDERS VOTE TO APPROVE
AND ADOPT THE MERGER AGREEMENT AND THE OTHER PROPOSALS BEING SUBMITTED TO THE
EMAC STOCKHOLDERS. AS DESCRIBED IN THE PROXY STATEMENT UNDER "CONFLICTS OF
INTEREST," CERTAIN MEMBERS OF THE BOARD OF DIRECTORS OF EMAC HAVE VARIOUS
CONFLICTS OF INTEREST ARISING OUT OF CERTAIN AGREEMENTS WITH EMAC AND THEIR
OWNERSHIP OF EMAC COMMON STOCK.
Only stockholders of record as of the close of business on
__________ __, 1996 will be entitled to notice, of and to vote at the EMAC
Meeting and any adjournments thereof. A list of EMAC Stockholders as of the
record date will be available for inspection during normal business hours for
ten days prior to the EMAC Meeting at 202 North Canon Drive, Beverly Hills,
California 90210.
By order of the Board of Directors,
Scot K. Vorse, Secretary
______________, 1996
EACH STOCKHOLDER IS URGED TO COMPLETE, SIGN AND RETURN THE
ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES. AN EMAC STOCKHOLDER WHO EXECUTES AND RETURNS A
PROXY HAS THE POWER TO REVOKE IT AT ANY TIME BEFORE IT IS VOTED, BY PROVIDING
WRITTEN NOTICE THEREOF TO THE SECRETARY OF EMAC OR BY SUBMITTING A SUBSEQUENT
PROXY OR BY VOTING IN PERSON AT THE EMAC MEETING. THE GIVING OF A PROXY DOES
NOT AFFECT A STOCKHOLDER'S RIGHT TO ATTEND AND VOTE IN PERSON AT THE MEETING.
A STOCKHOLDER'S PRESENCE AT THE MEETING, WITHOUT FURTHER ACTION, HOWEVER, WILL
NOT IN ITSELF REVOKE THE STOCKHOLDER'S PROXY.
<PAGE>
PRELIMINARY PROXY STATEMENT
FOR
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
________ __,1996
INTRODUCTION
This Proxy Statement of Entertainment/Media Acquisition
Corporation, a Delaware corporation ("EMAC"), is being furnished to holders of
EMAC common stock, par value $.001 per share (respectively, the "EMAC
Stockholders" and the "EMAC Common Stock"), at the close of business on
________ __, 1996 (the "EMAC Record Date") in connection with the solicitation
of proxies by EMAC's Board of Directors (the "EMAC Board") for use at the
Special Meeting in lieu of Annual Meeting of EMAC Stockholders (the "EMAC
Meeting") to be held on ___________ __, 1996 at _____________________,
_____________, California, at __:__ _.m., local time, and any adjournment
thereof.
The EMAC Stockholders will be asked to consider and act upon a
proposal to approve a plan of merger pursuant to an Agreement of Merger dated
July 2, 1996 (the "Merger Agreement"), providing for the merger (the "Merger")
of Overseas Filmgroup, Inc., a Delaware corporation ("Overseas Filmgroup"),
with and into EMAC. Upon consummation of the Merger, EMAC will be the
surviving corporation (the "Surviving Corporation"), and will change its name
to "Overseas Filmgroup, Inc." Upon consummation of the Merger, the current
holders (the "Overseas Stockholders") of Overseas Filmgroup common stock, no
par value per share (the "Overseas Common Stock"), will own in the aggregate
3,177,778 shares of EMAC Common Stock, representing approximately 55% of the
EMAC Common Stock outstanding upon consummation of the Merger (assuming no
exercise of outstanding options and warrants of EMAC and no exercise by EMAC
Stockholders of their redemption or appraisal rights), and the current
Overseas Filmgroup officers and management will be the officers and management
of EMAC. As a result of the Merger, there will be a change of control of EMAC.
The Overseas Stockholders approved the Merger Agreement on June 30, 1996.
The EMAC Stockholders also will be asked to elect seven persons to
become directors of the Surviving Corporation upon consummation of the Merger;
to act upon a proposal to approve amendments to, and restatement of, EMAC's
Restated Certificate of Incorporation (the "EMAC Certificate of
Incorporation"); to approve the 1996 Basic Stock Option and Stock Appreciation
Rights Plan (the "1996 Stock Option Plan"); to approve the 1996 Special Stock
Option Plan and Agreement (the "Management Option Plan" and, together with the
1996 Stock Option Plan, the "Option Plans"); and to ratify and approve the
appointment of Price Waterhouse LLP as independent accountants for the
Surviving Corporation for 1996. If the Merger is not consummated, the current
directors of EMAC will continue as the directors of EMAC, the EMAC Certificate
of Incorporation will not be amended and restated and the Option Plans will
not be implemented, notwithstanding stockholder approval of such proposals. In
addition, pursuant to the EMAC Certificate of Incorporation, if a Business
Combination (as defined hereinafter) is not consummated by February 16, 1997,
EMAC will be liquidated.
The EMAC Common Stock is quoted on the OTC Bulletin Board. On
_______, 1996, the last reported bid and asked prices were ________ and
___________ per share, respectively. EMAC has applied to have the EMAC Common
Stock, the EMAC Warrants and the EMAC Units (as hereinafter defined) listed
for trading on the Nasdaq National Market, effective upon the consummation of
the Merger, under the symbols "OSFG," "OSFGW" and "OSFGU," respectively. There
can be no assurance that the EMAC Common Stock, the EMAC Warrants or the EMAC
Units will be approved for quotation on the Nasdaq National Market at that
time or in the future.
AVAILABLE INFORMATION
EMAC is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and,
accordingly, files reports, proxy statements and other information with the
Securities
<PAGE>
Exchange Commission ("SEC"). Such reports, proxy statements and other
information filed with the SEC are available for inspection and copying at the
public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices located at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center,
New York, New York 10048. Copies of such documents may also be obtained from
the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Securities and Exchange
Commission also maintains a site on the World Wide Web that contains reports,
proxy and information statements and other information regarding registrants
that file electronically. The address for such site is http://www.sec.gov.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INTRODUCTION............................................................................................................... 1
AVAILABLE INFORMATION...................................................................................................... 1
SUMMARY ............................................................................................................... 7
The Parties ................................................................................................... 7
Risk Factors................................................................................................... 8
The EMAC Meeting............................................................................................... 9
The Merger ................................................................................................... 11
Effective Time................................................................................................. 11
Conversion of Overseas Common Stock............................................................................ 11
Restricted Disposition of Merger Shares; Registration Rights................................................... 11
Recommendation of the Board of Directors....................................................................... 12
Election of Directors of the Surviving Corporation............................................................. 12
Interests of Certain Persons in the Merger..................................................................... 12
The Merger Agreement........................................................................................... 12
Exchange of Stock Certificates................................................................................. 13
Fractional Shares.............................................................................................. 13
Management after the Merger.................................................................................... 13
Options to be Granted under Management Option Plan............................................................. 14
Dividends ................................................................................................... 14
Absence of Regulatory Filings and Approvals.................................................................... 14
Accounting Treatment........................................................................................... 14
Certain Federal Income Tax Consequences........................................................................ 14
Market Price Data; Nasdaq National Market Listing Application.................................................. 15
RISK FACTORS............................................................................................................... 16
General Risks Related to the Motion Picture Industry........................................................... 16
Significant Changes in the Motion Picture Industry............................................................. 16
Certain Considerations Regarding First Look Pictures........................................................... 17
Dependence on Key Executives................................................................................... 17
Increasing Acquisition, Production and Marketing Costs......................................................... 18
Increased Motion Picture Investment by Overseas Filmgroup...................................................... 18
Certain Considerations Relating to the Receipt of Minimum Guarantees by Overseas Filmgroup..................... 19
Ability to Achieve Acquisition and Distribution Goals.......................................................... 19
Competition ................................................................................................... 20
Certain Risks Associated with International Distribution....................................................... 20
Fluctuation of Operating Results; Anticipated Loss............................................................. 20
Concentration of Ownership by Principal Stockholders........................................................... 21
Potential Adverse Effect on Market Price Resulting from Securities Eligible for Future Sales................... 21
Possible Volatility of Securities Prices....................................................................... 21
Potential Adverse Impact of Anti-takeover Provisions........................................................... 22
Dividends Unlikely............................................................................................. 22
Current Prospectus and State Blue Sky Registration Required To Exercise Warrants............................... 22
OTC Bulletin Board............................................................................................. 23
THE EMAC MEETING........................................................................................................... 24
Purpose of the EMAC Meeting.................................................................................... 24
Voting Rights.................................................................................................. 24
3
<PAGE>
Page
Solicitation and Revocation of Proxies......................................................................... 26
THE MERGER ............................................................................................................... 26
General ................................................................................................... 26
Background of the Merger....................................................................................... 26
Reasons for the Merger; Recommendations........................................................................ 28
The Merger Agreement........................................................................................... 30
Effective Time................................................................................................. 33
Interests of Certain Persons in the Merger..................................................................... 33
Exchange of Stock Certificates................................................................................. 33
Fractional Shares.............................................................................................. 34
Management after the Merger.................................................................................... 34
Employment Agreements.......................................................................................... 34
Absence of Regulatory Filings and Approvals.................................................................... 35
Accounting Treatment........................................................................................... 35
Certain Federal Income Tax Consequences........................................................................ 36
Restricted Disposition of Merger Shares; Registration Rights................................................... 36
Agreement of EMAC Stockholders................................................................................. 37
Redemption Rights and Appraisal Rights......................................................................... 37
DESCRIPTION OF EMAC CAPITAL STOCK.......................................................................................... 42
General ................................................................................................... 42
Units ................................................................................................... 42
Common Stock................................................................................................... 42
Preferred Stock................................................................................................ 42
EMAC Warrants.................................................................................................. 42
Bridge Warrants................................................................................................ 43
UPOs ................................................................................................... 43
Dividends ................................................................................................... 44
Transfer Agent, Warrant Agent and Registrar.................................................................... 44
Limitation of Liability and Indemnification Matters............................................................ 44
MARKET PRICES OF EMAC'S SECURITIES......................................................................................... 45
Nasdaq National Market Listing................................................................................. 45
Stock Price Performance Comparison............................................................................. 45
EMAC COMPARATIVE PER SHARE DATA............................................................................................ 47
SELECTED FINANCIAL DATA OF EMAC............................................................................................ 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF EMAC.......................................................................................... 49
SELECTED FINANCIAL DATA OF OVERSEAS FILMGROUP.............................................................................. 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF OVERSEAS FILMGROUP............................................................................ 52
Overview ................................................................................................... 52
Results of Operations.......................................................................................... 53
Liquidity and Capital Resources................................................................................ 56
Inflation ................................................................................................... 58
Certain Tax Related Matters.................................................................................... 59
4
<PAGE>
Page
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF EMAC AND OVERSEAS
FILMGROUP...................................................................................................... 60
UNAUDITED PRO FORMA COMBINED BALANCE SHEET................................................................................. 61
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER
31, 1995....................................................................................................... 64
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME SIX MONTHS ENDED
JUNE 30, 1996.................................................................................................. 65
ELECTION OF DIRECTORS OF THE SURVIVING CORPORATION......................................................................... 68
Compensation of Directors...................................................................................... 70
Board Meetings and Committees.................................................................................. 70
Compliance With Section 16(a) of the Exchange Act.............................................................. 70
APPROVAL OF AMENDMENTS TO EMAC CERTIFICATE OF INCORPORATION................................................................ 70
APPROVAL OF THE MANAGEMENT OPTION PLAN..................................................................................... 71
Description of the Management Option Plan...................................................................... 71
General Provisions............................................................................................. 73
Proposed Option Grants......................................................................................... 74
New Plan Benefits.............................................................................................. 74
Federal Income Tax Consequences................................................................................ 74
Deductibility of Executive Compensation........................................................................ 75
Accounting Treatment........................................................................................... 75
Shareholder Approval........................................................................................... 75
APPROVAL OF THE 1996 STOCK OPTION PLAN..................................................................................... 75
Description of the 1996 Stock Option Plan...................................................................... 76
Discretionary Option Grant Program............................................................................. 77
Stock Appreciation Rights Program.............................................................................. 78
Automatic Option Grant Program................................................................................. 78
General Provisions............................................................................................. 79
New Benefits Under the 1996 Stock Option Plan.................................................................. 80
Federal Income Tax Consequences of Options Granted under the 1996 Stock Option Plan............................ 80
Stock Appreciation Right....................................................................................... 81
Deductibility of Executive Compensation........................................................................ 81
Accounting Treatment........................................................................................... 81
Shareholder Approval........................................................................................... 82
BUSINESS OF EMAC........................................................................................................... 83
General ................................................................................................... 83
Competition ................................................................................................... 84
Employees ................................................................................................... 84
Facilities ................................................................................................... 84
Legal Proceedings.............................................................................................. 84
MANAGEMENT OF EMAC......................................................................................................... 85
Directors and Executive Officers............................................................................... 85
Executive and Director Compensation............................................................................ 86
5
<PAGE>
Page
CERTAIN TRANSACTIONS RELATING TO EMAC...................................................................................... 86
PRINCIPAL STOCKHOLDERS OF EMAC............................................................................................. 87
MOTION PICTURE INDUSTRY.................................................................................................... 90
General ................................................................................................... 90
Significant Changes in the Motion Picture Industry............................................................. 91
Motion Picture Production...................................................................................... 92
Motion Picture Distribution.................................................................................... 93
BUSINESS OF OVERSEAS FILMGROUP............................................................................................. 97
General ................................................................................................... 97
Strategy ................................................................................................... 97
Motion Picture Distribution.................................................................................... 98
Acquisition of Rights, Production and Financing................................................................104
Film Library of Distribution Rights............................................................................108
Major Customers................................................................................................108
Employees ...................................................................................................108
Competition ...................................................................................................109
Regulation ...................................................................................................109
Executive Offices..............................................................................................110
Legal Proceedings..............................................................................................110
MANAGEMENT OF OVERSEAS FILMGROUP...........................................................................................111
Directors and Executive Officers...............................................................................111
Executive Compensation.........................................................................................112
CERTAIN TRANSACTIONS RELATING TO OVERSEAS FILMGROUP........................................................................112
PRINCIPAL STOCKHOLDERS OF OVERSEAS FILMGROUP...............................................................................115
INFORMATION CONCERNING INDEPENDENT AUDITORS OF EMAC........................................................................117
OTHER MATTERS..............................................................................................................117
LEGAL OPINIONS.............................................................................................................117
1997 STOCKHOLDER PROPOSALS.................................................................................................117
EMAC ANNUAL REPORT ON FORM 10-K............................................................................................118
INDEX TO FINANCIAL STATEMENTS..............................................................................................F-1
APPENDICES
Appendix A: Merger Agreement (without exhibits)
Appendix B: Delaware General Corporation Law, Section 262
Appendix C: EMAC Restated Certificate of Incorporation
</TABLE>
6
<PAGE>
SUMMARY
The following is a summary of certain significant matters
discussed elsewhere in this Proxy Statement. This summary is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Proxy Statement and the Appendices hereto. The reader is cautioned that
forward looking statements are contained in this summary and in other sections
of this Proxy Statement. All forward-looking statements are necessarily
speculative and there are certain risks and uncertainties that could cause
actual events or results to differ materially from those referred to in such
forward looking statements. EMAC Stockholders are urged to read the entire
Proxy Statement, including the Appendices hereto.
THE PARTIES
EMAC
EMAC was incorporated on December 9, 1993 as a Specified Purpose
Acquisition Company(R) ("SPAC(R)"), the objective of which is to merge with or
acquire an operating business ("Target Business") in the entertainment and
media industry ("Entertainment/Media Industry") by merger, exchange of stock,
stock or asset acquisition or other similar type of transaction ("Business
Combination"). The Entertainment/Media Industry encompasses those companies
which create, produce, deliver, distribute and/or market entertainment
products and includes broadcast television, cable television, filmed
entertainment, publishing, radio broadcasting, recorded music, theme parks,
and video games and interactive multimedia software. EMAC completed its
initial public offering ("IPO") in February 1995, and derived proceeds of
approximately $11,340,000 after payment of underwriting discounts and the
Underwriter's non-accountable expense allowance. Ninety percent (90%) of that
amount ($10,206,000) was placed in a trust account ("Trust Fund") and will be
released to EMAC upon consummation of a Business Combination subject to
reduction in certain circumstances. As of August 1, 1996, there was
approximately $11,024,000 held in the Trust Fund (including accrued interest),
which, together with additional interest earned thereon after that date, will
be released to EMAC upon consummation of the Merger, subject to adjustment in
certain circumstances. The net proceeds from the IPO that were not placed in
escrow, and the interest earned thereon, are being used by EMAC in its pursuit
of a Business Combination. Other than its IPO and the pursuit of a Business
Combination, EMAC has not engaged in any business to date. The mailing address
of EMAC's principal executive office is 202 North Canon Drive, Beverly Hills,
California 90210, and its telephone number is (310) 276-7929. "SPAC(R)" and
"Specified Purpose Acquisition Company(R)" are registered service marks of GKN
Securities Corp., the managing underwriter of the IPO. See "BUSINESS OF EMAC."
Overseas Filmgroup
Overseas Filmgroup is an independent film company which
specializes in the acquisition and worldwide license or sale of distribution
rights to independently produced, feature films in a wide variety of genres
(including action, "art-house," comedy, drama, foreign language, science
fiction and thrillers). Overseas Filmgroup has a library of distribution
rights in various media and markets to over 175 feature films. See "BUSINESS
OF OVERSEAS FILMGROUP -- Film Library of Distribution Rights" below. Most of
such motion pictures have had direct negative costs between $1,000,000 and
$6,000,000. This is substantially below the average direct negative cost of
films produced by the major studios, which was approximately $36,400,000 in
1995.
Overseas Filmgroup's primary focus has been the licensing of
distribution rights (such as theatrical, video, pay television, free
television, satellite and other rights) to foreign sub-distributors in the
major international territories or regions. These activities accounted for
approximately 69% of Overseas Filmgroup's total revenues in 1995. Overseas
Filmgroup has been increasingly active, however, in the domestic (United
States) market due to its increasing acquisition of worldwide, rather than
more limited, distribution rights. Overseas Filmgroup engages directly in
domestic theatrical distribution (booking motion pictures with theatrical
exhibitors, manufacturing release prints from the film negative, and promoting
such motion pictures with advertising and publicity campaigns) through
Overseas Filmgroup's domestic theatrical releasing division, First Look
Pictures. First Look Pictures has released
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such films as Antonia's Line (winner of the 1996 Academy Award for Best
Foreign Language Film), The Scent of Green Papaya (which was nominated for the
1994 Academy Award for Best Foreign Language Film), The Secret of Roan Inish
(the critically acclaimed film by the noted director, John Sayles) and Party
Girl (which Overseas Filmgroup believes was the first theatrical motion
picture broadcast over the Internet).
Overseas Filmgroup began its operations by acting primarily as a
foreign sales agent, licensing distribution rights in markets outside the
United States to independently produced films which were fully financed and
continued to be owned by others, in exchange for a sales agency fee.
Currently, Overseas Filmgroup generally acquires from independent producers
the distribution rights in a film for a specified term in one or more
territories and media and receives a distribution fee in connection with its
licensing activities. Often Overseas Filmgroup commits to pay an independent
producer a minimum guaranteed payment (a "minimum guarantee") at or after
delivery of the completed film to Overseas Filmgroup, ranging from
approximately $100,000 to $5,000,000 or more and representing in amount
varying portions, including at times all or substantially all of a film's
production costs. These minimum guarantees may enable the independent producer
to obtain financing for its project and often results in Overseas Filmgroup
controlling more of the distribution rights in film and receiving more
favorable distribution terms. Overseas Filmgroup also selectively produces
certain of the motion pictures distributed by it, generally acquiring fully
developed projects ready for pre-production and contracting out pre-production
and production activities.
Overseas Filmgroup's primary strategies are to (i) seek to limit
risk by continuing to balance the methods it uses for acquiring distribution
rights; (ii) maintain a cost consciousness in its acquisition, financing,
production and distribution activities; (iii) continue to develop First Look
Pictures with the goal of achieving broader theatrical distribution and
exposure for its releases, which, among other things, may increase potential
revenues from ancillary media and foreign markets; (iv) gradually and
selectively acquire rights to or produce films which have greater production
values (often through offering greater creative opportunity to talent than
major studios offer or as a result of larger budgets) and greater potential
for more wide-spread audience appeal; and (v) seek both to develop
relationships with emerging talent and to maintain relationships with
independent producers with reputations for producing high quality films while
also controlling costs.
Overseas Filmgroup's offices are located at 8800 Sunset Boulevard,
Los Angeles, California 90069, and its telephone number is (310) 855-1199. On
or before the Effective Time (as hereinafter defined) of the Merger, the
interests of Ellen Dinerman Little and Robert B. Little, the principal
stockholders of Overseas Filmgroup, in the following companies, which are
currently wholly or partially owned by Ms. Little and/or Mr. Little, will be
transferred to Overseas Filmgroup and such companies will become wholly owned
subsidiaries of the Surviving Corporation (the "Overseas Subsidiaries"):
Jacaranda Music, Inc., a Delaware corporation, Walrus Pictures, Inc., a
California corporation, Overseas Filmgroup (U.K.) Ltd., a United Kingdom
corporation, Intrastate Film Distributors, Inc., a Delaware corporation, Alien
Towers, Inc., a California corporation, Code 99 Productions, Inc., a
California corporation, Enough Rope, Inc., a California corporation, Positive,
Inc., a California corporation, and Road to Ruin, Inc., a California
corporation. See "CERTAIN TRANSACTIONS RELATING TO OVERSEAS FILMGROUP."
RISK FACTORS
EMAC Stockholders should carefully consider certain risk factors
in evaluating the Merger. See "RISK FACTORS" beginning on page 16.
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THE EMAC MEETING
The EMAC Meeting will be held on _____________, at __:__ _.m.,
local time, at _____________. At the EMAC Meeting, EMAC Stockholders will be
asked (i) to consider and act upon the proposal to approve the Merger
Agreement, dated as of July 2, 1996, among EMAC, Overseas Filmgroup, and Ellen
Dinerman Little and Robert B. Little; (ii) to elect two Class I, two Class II
and three Class III directors to the EMAC Board to hold office commencing the
Effective Time (as hereinafter defined) of the Merger until the 1997, 1998 and
1999 annual meetings of stockholders, respectively, or until their respective
successors have been duly elected and qualified (see "ELECTION OF DIRECTORS OF
THE SURVIVING CORPORATION"); (iii) to consider and act upon a proposal to
amend and restate the EMAC Certificate of Incorporation; (iv) to consider and
act upon proposals to approve the Option Plans; and (v) to ratify and approve
the appointment of Price Waterhouse LLP as independent accountants for 1996.
If the Merger is not consummated, the current directors of EMAC will continue
as the directors of EMAC, the EMAC Certificate of Incorporation will not be
amended and restated, and the Option Plans will not be implemented,
notwithstanding stockholder approval of such proposals. In addition, pursuant
to the EMAC Certificate of Incorporation, if a Business Combination is not
consummated by February 16, 1997, EMAC will be liquidated.
The presence at the EMAC Meeting, in person or by general or
limited proxy, of a majority of all of the shares of EMAC Common Stock
entitled to vote will constitute a quorum at the meeting. Shares of record
held by a broker or nominee that are returned to EMAC but not voted on any
matter will be treated as shares present for purposes of determining the
presence of a quorum on all matters, but will not be treated as shares
entitled to vote on the matter as to which authority is withheld. Pursuant to
the EMAC Certificate of Incorporation, the affirmative vote of a majority of
the outstanding shares of EMAC Common Stock is required to approve the Merger
Agreement; provided, however, that if the holders of 20% or more of the shares
of EMAC Common Stock, excluding those persons who were stockholders prior to
the consummation of the IPO (the "Initial Stockholders"), vote against the
approval of the Merger Agreement and exercise their redemption rights, EMAC
will not consummate the Merger. If a quorum is present, directors will be
elected by a plurality of the votes cast at the EMAC Meeting; "plurality"
means that the nominees who receive the largest number of votes cast are
elected as the directors up to the maximum number of directors to be elected.
Any shares not voted "FOR" a particular director (whether as a result of a
direction to withhold authority or a broker nonvote) will not be counted for
purposes of determining a plurality. If a quorum is present, the affirmative
vote of a majority of the shares of EMAC Common Stock present in person or
represented at the EMAC Meeting and entitled to vote is required to approve
the proposed amendments to, and restatement of, the EMAC Certificate of
Incorporation, each of the Option Plans and the appointment of Price
Waterhouse LLP as independent accountants for 1996.
Holders of record of shares of EMAC Common Stock as of the close
of business on the EMAC Record Date will be entitled to cast one vote for each
share of EMAC Common Stock held as of such date. At such date, there were
2,600,000 shares of EMAC Common Stock outstanding and entitled to vote. With
respect to the proposal to approve the Merger Agreement, the Initial
Stockholders, who owned an aggregate of approximately 19% of the shares of
EMAC Common Stock outstanding on such date and who are the directors and
executive officers of EMAC, have agreed that they will vote their shares (i)
in accordance with the majority in interest of all other EMAC Stockholders
(the "Public Stockholders") with respect to approval of the Merger Agreement
and (ii) in favor of the other proposals being submitted to the EMAC
Stockholders. THE EMAC BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSALS
BEING SUBMITTED TO THE EMAC STOCKHOLDERS. CERTAIN MEMBERS OF THE EMAC BOARD
HAVE VARIOUS CONFLICTS OF INTEREST ARISING OUT OF CERTAIN AGREEMENTS WITH EMAC
AND THEIR OWNERSHIP OF SHARES OF EMAC COMMON STOCK. SEE "THE EMAC MEETING" AND
"THE MERGER -- INTERESTS OF CERTAIN PERSONS IN THE MERGER."
Redemption Rights and Appraisal Rights
In accordance with the EMAC Certificate of Incorporation, EMAC is
required to offer each Public Stockholder the right to have his or her shares
of EMAC Common Stock redeemed by EMAC if such stockholder
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complies with the requirements set forth in the EMAC Certificate of
Incorporation, including voting against the Merger Agreement, and the Merger
Agreement is approved and consummated. The Initial Stockholders have agreed to
waive any redemption rights they may have as EMAC Stockholders. Therefore, the
per share redemption price ("Redemption Price") will be equal to the amount in
the Trust Fund as of the EMAC Record Date, divided by the number of shares of
EMAC Common Stock held by the Public Stockholders. As of the EMAC Record Date,
such amount was approximately $_______ per share. Holders of EMAC Common Stock
also have a statutory right of appraisal under Delaware law with respect to
the Merger. These rights are mutually exclusive of each other and the amount
that a holder of EMAC Common Stock would be entitled to receive upon
perfection of appraisal rights could be less than, equal to or greater than
the Redemption Price. See "THE MERGER -- EMAC Redemption Rights" and "THE
MERGER -- EMAC Appraisal Rights."
THE EMAC CERTIFICATE OF INCORPORATION GIVES A RIGHT OF REDEMPTION
TO THE PUBLIC STOCKHOLDERS OF EMAC. ANY PUBLIC STOCKHOLDER DESIRING TO
EXERCISE ITS RIGHT OF REDEMPTION MUST DO ALL OF THE FOLLOWING: (1) VOTE
AGAINST THE PROPOSAL TO APPROVE THE MERGER AGREEMENT; (2) NOTIFY EMAC IN
WRITING BY _____________, 1996 OF THE ELECTION TO REDEEM; AND (3) RETURN TO
EMAC BY ___________, 1996 A LETTER OF TRANSMITTAL AND STOCK CERTIFICATE, ALL
IN ACCORDANCE WITH THE PROCEDURES DESCRIBED HEREIN. THE FAILURE BY A
STOCKHOLDER TO PERFORM ALL OF SUCH REQUIREMENTS IN ACCORDANCE WITH SUCH
PROCEDURES WILL TERMINATE ITS RIGHT TO REDEMPTION WITH RESPECT TO THE MERGER.
UNDER DELAWARE LAW, EMAC STOCKHOLDERS HAVE A STATUTORY RIGHT OF
APPRAISAL. STOCKHOLDERS ELECTING TO EXERCISE THEIR APPRAISAL RIGHTS MUST NOT,
AMONG OTHER THINGS, VOTE FOR ADOPTION OF THE MERGER AGREEMENT. A VOTE BY A
STOCKHOLDER AGAINST ADOPTION OF THE MERGER AGREEMENT IS NOT REQUIRED IN ORDER
FOR THAT STOCKHOLDER TO EXERCISE APPRAISAL RIGHTS. HOWEVER, IF A STOCKHOLDER
RETURNS A SIGNED PROXY BUT DOES NOT SPECIFY A VOTE AGAINST ADOPTION OF THE
MERGER AGREEMENT OR A DIRECTION TO ABSTAIN, THE PROXY, IF NOT REVOKED, WILL BE
VOTED FOR ADOPTION OF THE MERGER AGREEMENT, WHICH WILL HAVE THE EFFECT OF
WAIVING THAT STOCKHOLDER'S APPRAISAL RIGHTS.
If the Merger is consummated and the maximum number of shares of
EMAC Common Stock entitled to be redeemed and to participate in the Trust Fund
without preventing the Merger are redeemed, the amount of funds available from
the Trust Fund to the Surviving Corporation (as hereinafter defined) upon
consummation of the Merger will be reduced by approximately $_____________. In
addition, the Trust Fund could be further reduced if any EMAC Stockholders
exercise their appraisal rights. Any redemption of a significant number of
shares of EMAC Common Stock or significant amount of EMAC Stockholders
exercising appraisal rights will adversely impact the ability of the Surviving
Corporation to fund the expansion of its business and to implement its current
business plan, and could reduce the currently projected amount of time during
which the Surviving Corporation may be able to operate without the need to
raise additional financing. See "THE MERGER -- EMAC Redemption Rights" and
"THE MERGER -- EMAC Appraisal Rights."
Liquidation If No Business Combination
If EMAC does not consummate a Business Combination on or before
February 16, 1997 (the "Liquidation Date"), EMAC will be dissolved and will
distribute to the Public Stockholders who have not waived their rights to
participate in the Trust Fund, who hold an aggregate of 2,100,000 shares of
EMAC Common Stock, in proportion to their respective equity interests in EMAC,
an aggregate sum equal to the amount in the Trust Fund, inclusive of any
interest thereon, plus any remaining net assets of EMAC. The Initial
Stockholders have waived their respective rights to participate in any such
liquidation distribution.
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THE MERGER
Upon consummation of the Merger, EMAC will be the Surviving
Corporation, will change its name to "Overseas Filmgroup, Inc.," and will
succeed to Overseas Filmgroup's operations. The Overseas Stockholders will
become stockholders in the Surviving Corporation. See "THE MERGER."
Consummation of the Merger is subject to a number of conditions. See "THE
MERGER -- Conditions to the Merger."
EFFECTIVE TIME
Following the satisfaction or waiver of all conditions to the
Merger, the Merger will be consummated on the date and time of filing of the
Articles of Merger and all other necessary documents with the Secretary of
State of the State of Delaware ("Effective Time"). It is anticipated that,
assuming all conditions are met, the Merger will occur on or about
________________ ____, 1996. See "THE MERGER -- Effective Time."
CONVERSION OF OVERSEAS COMMON STOCK
Pursuant to the provisions of the Merger Agreement, the Overseas
Common Stock will be converted into an aggregate of (i) 3,177,778 shares of
EMAC Common Stock ("Merger Shares"); (ii) $1,500,000 in cash, subject to
adjustment in certain circumstances; and (iii) a secured promissory note in
the amount of $2,000,000 (the "Merger Note") (collectively, the "Merger
Consideration"). The Merger Note will be payable over a five-year period, with
principal and interest payable monthly, and will bear interest at the rate of
9% per annum. To secure the payment of the Merger Note, at the Closing the
Surviving Corporation and Ellen Dinerman Little and Robert B. Little will
enter into a Security Agreement (the "Security Agreement") whereby the
Surviving Corporation will grant Ms. Little and Mr. Little a security
interest, subordinate to the security interest of Overseas Filmgroup's
commercial lenders, in substantially all of its assets. In addition, pursuant
to the Merger Agreement, EMAC has agreed that the Surviving Corporation will
repay, on or before December 31, 1996, a $3,500,000 loan to Overseas Filmgroup
which is guaranteed by the Overseas Stockholders.
Because the market price of EMAC Common Stock is subject to
fluctuation, the market value of the shares of EMAC Common Stock that Overseas
Stockholders will receive in the Merger may increase or decrease prior to the
Merger. In the event that the average of the mean between the closing bid and
asked prices for shares of EMAC Common Stock for the three trading days prior
to the Closing Date (the "Average Price") is less than $5.20 per share of EMAC
Common Stock, then in addition to the Merger Consideration per share of
Overseas Common Stock, each Overseas Stockholder shall be entitled to receive
an amount of cash equal to the difference between $5.20 and the Average Price,
multiplied by the 3,177,778 Merger Shares, and such amount shall be deemed
included as part of the Merger Consideration.
As a result of the Merger, the Overseas Stockholders will own in
the aggregate approximately 55% of the shares of EMAC Common Stock outstanding
upon consummation of the Merger, assuming none of the outstanding options or
warrants of EMAC are exercised and no holders of EMAC Common Stock exercise
their redemption or appraisal rights. All shares of EMAC Common Stock
outstanding as of the consummation of the Merger will remain issued and
outstanding. See "THE MERGER -- Conversion of Shares."
RESTRICTED DISPOSITION OF MERGER SHARES; REGISTRATION RIGHTS
The Merger Shares are being issued to the Overseas Stockholders in
a private placement and have not been registered under the Securities Act of
1933, as amended (the "Securities Act"). The Merger Shares will constitute
"restricted securities" under the Securities Act. As a result, the Merger
Shares will not be freely transferable under the Securities Act for a period
of two years following consummation of the Merger, and then only in accordance
with Rule 144 promulgated under the Securities Act or an effective
registration statement thereunder.
Pursuant to a Lock-Up and Registration Rights Agreement to be
entered into with the Overseas Stockholders at the Closing (the "Lock-Up and
Registration Rights Agreement"), each of the Overseas Stockholders
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will agree, subject to certain exceptions, not to sell or otherwise dispose of
any Merger Shares for a period commencing on the Closing and ending in three
equal installments on February 16, 1998, February 16, 1999 and February 16,
2000.
Pursuant to the Lock-up and Registration Rights Agreement, the
Overseas Stockholders will have certain demand and "piggyback" registration
rights. See "THE MERGER -- Restricted Disposition of Merger Shares; Registration
Rights."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The EMAC Board has unanimously approved the Merger Agreement and
determined that the terms of the proposed Merger are fair to and in the best
interests of the EMAC Stockholders and unanimously recommends to the EMAC
Stockholders that they vote "FOR" the approval and adoption of the Merger
Agreement. Members of the EMAC Board have various conflicts as a result of
their ownership of EMAC Common Stock. In addition, the EMAC Board unanimously
recommends a vote "FOR" each of the nominees for director of the Surviving
Corporation, the approval of the amendments to, and restatement of, the EMAC
Certificate of Incorporation, the approval of each of the Option Plans and
ratification of the appointment of Price Waterhouse LLP as independent
accountants. See "THE MERGER -- Interests of Certain Persons in the Merger,"
"THE MERGER -- Background of the Merger," and "THE MERGER -- Reasons for the
Merger; Recommendations."
The EMAC Board has not sought or obtained a fairness opinion
regarding the Merger. However, the EMAC Board has determined, in accordance
with certain requirements related to its IPO, that the fair market value of
Overseas Filmgroup is equal to at least 80% of the net assets of EMAC.
ELECTION OF DIRECTORS OF THE SURVIVING CORPORATION
Pursuant to the Merger Agreement, the EMAC Board has nominated the
following individuals for election to the EMAC Board at the Special Meeting:
(i) Ellen Dinerman Little, Robert B. Little, William F. Lischak and Alessandro
Fracassi, each designated by the Overseas Stockholders; and (ii) Stephen K.
Bannon, Scot K. Vorse and Jeffrey A. Rochlis, each designated by the current
EMAC Board. The election of such individuals is a condition to both EMAC's and
Overseas Filmgroup's obligations to consummate the Merger. These nominees, if
elected, will become directors of the Surviving Corporation upon consummation
of the Merger. Messrs. Bannon, Vorse and Rochlis currently serve as EMAC
directors. Ms. Little and Mr. Little's designees will represent four of the
seven members of the Surviving Corporation's Board and the designees of EMAC
will represent three of the seven members of the Surviving Corporation's
Board. See "ELECTION OF DIRECTORS OF THE SURVIVING CORPORATION."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Each of the directors of EMAC beneficially owns EMAC Common Stock.
The directors of EMAC have agreed that if EMAC were to dissolve as a result of
its failure to complete a Business Combination, they would not participate in
any distribution of the assets of EMAC. Thus, unless EMAC completes the
Merger, the EMAC Common Stock held by its current directors, in all
likelihood, will have no value. See "THE MERGER -- Interests of Certain
Persons in the Merger."
THE MERGER AGREEMENT
The Merger Agreement sets forth the principal terms on which the
Merger will be consummated and the rights of the Overseas Stockholders to
receive the Merger Consideration. The Merger Agreement contains
representations, warranties and agreements of the parties, sets forth certain
indemnification obligations of the parties, and provides specific conditions
to the consummation of the Merger and terms under which the Merger may be
terminated or abandoned. Conditions to the consummation of the Merger include,
among others, obtaining requisite stockholder approval of the Merger
Agreement, the EMAC Certificate of Incorporation and the Option Plans; the
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election of the directors of the Surviving Corporation as described under
"ELECTION OF DIRECTORS OF THE SURVIVING CORPORATION"; the execution and
delivery of the Merger Note and Security Agreement, the LockUp and
Registration Rights Agreement, the Employment Agreements, the Non-Competition
Agreements, the Stockholders' Voting Agreement and the Tax Reimbursement
Agreement (as such terms are defined herein); EMAC's applying to the Nasdaq
National Market for the listing of EMAC Common Stock, EMAC Warrants and EMAC
Units; transfer to Overseas Filmgroup of the interests in the Overseas
Subsidiaries not currently owned by it; and extension by the Lender of
Overseas Filmgroup's credit facility. The Overseas Stockholders approved the
Merger Agreement on June 30, 1996. See "THE MERGER -- The Merger Agreement."
EXCHANGE OF STOCK CERTIFICATES
Any stock certificate that, prior to the Effective Time,
represented outstanding shares of Overseas Common Stock will, after the
Effective Time and prior to surrender, be deemed to evidence ownership of the
Merger Consideration for which such shares of Overseas Common Stock were
exchanged in the Merger (subject to the provisions governing fractional
shares).
From and after the Merger, certificates representing EMAC
securities will continue to represent securities of the Surviving Corporation
and will not be exchanged, notwithstanding the change of name of EMAC to
"Overseas Filmgroup, Inc." See "THE MERGER -- Exchange of Stock Certificates."
FRACTIONAL SHARES
No fractional share of EMAC Common Stock will be issued as a
result of the Merger. Each Overseas Stockholder entitled to receive a
fractional share of EMAC Common Stock will receive one whole share of EMAC
Common Stock for such fraction. See "THE MERGER -- Fractional Shares."
MANAGEMENT AFTER THE MERGER
As a result of the Merger, Overseas Filmgroup will be merged with
and into EMAC, EMAC will be the Surviving Corporation, will change its name to
"Overseas Filmgroup, Inc." and will succeed to the operations of Overseas
Filmgroup. The Board of Directors and management of the Surviving Corporation
will be subject to certain operating guidelines (the "Operating Guidelines")
agreed upon pursuant to the Merger Agreement. These Operating Guidelines set
forth the authority and responsibilities of officers of the Surviving
Corporation, the structure and responsibilities of the Board of Directors and
committees of the Surviving Corporation, and other general business matters.
See "THE MERGER -- Management after the Merger."
Pursuant to a Stockholders' Voting Agreement (the "Stockholders'
Voting Agreement") to be entered into at the Closing among EMAC, Ellen
Dinerman Little and Robert B. Little, and the Initial Stockholders, these
parties will agree to use their best efforts to cause the Board of Directors
of the Surviving Corporation to consist of seven members, including four
individuals designated by Ms. Little and Mr. Little and three individuals
designated by the Initial Stockholders. The Stockholders' Voting Agreement
will terminate eight and one-half years from the Effective Time, or sooner if
the employment of Ms. Little, Mr. Little and Mr. Lischak is terminated. In
addition, if Ms. Little and Mr. Little, or the Initial Stockholders, fall
below certain stock ownership thresholds, such group's right to designate
directors, but not their obligation to vote for the designees of the other
group, will terminate. See "THE MERGER -- Management after the Merger."
Pursuant to five-year employment agreements with the Surviving
Corporation to be entered into at the Closing (the "Employment Agreements"),
Ellen Dinerman Little and Robert B. Little will serve as Co-Chairs and
Co-Chief Executive Officers, Ms. Little will also serve as President and Mr.
Lischak shall serve as Chief Operating Officer, Chief Financial Officer and
Secretary of the Surviving Corporation. In addition, Ms. Little and Mr. Little
will each enter into a Non-Competition Agreement (the "Non-Competition
Agreements"), pursuant to which he or she will agree, subject to certain
exceptions, for a period of five years from the Closing Date, not to engage in
any business that competes with the Surviving Corporation. See "THE MERGER --
Employment Agreements."
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The director nominees of Ms. Little and Mr. Little and the current
management of Overseas Filmgroup will be in a position to direct the business
affairs of the Surviving Corporation after the Merger.
OPTIONS TO BE GRANTED UNDER MANAGEMENT OPTION PLAN
At the Closing, Ellen Dinerman Little and Robert B. Little will be
granted options under the Management Option Plan to purchase an aggregate of
2,200,000 shares of EMAC Common Stock. Each will receive two options: (i) an
option to purchase 537,500 shares at an exercise price of $5.00 per share,
vesting 100,000 shares at the Closing and 87,500 shares on each of the first
five anniversary dates of the Closing; and (ii) an option to purchase 562,500
shares at an exercise price of $8.50 per share, vesting 112,500 shares on each
of the first five anniversary dates of the Closing. See "APPROVAL OF THE
MANAGEMENT OPTION PLAN."
DIVIDENDS
EMAC does not intend to pay any cash dividends for the foreseeable
future, as all available cash will be utilized to further the growth of the
Surviving Corporation's business subsequent to the Effective Time. In
addition, it is anticipated that the Surviving Corporation's credit facility
will impose substantial restrictions on the payment of cash dividends. See
"DESCRIPTION OF EMAC CAPITAL STOCK -- Dividends" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OVERSEAS
FILMGROUP -- Liquidity and Capital Resources."
ABSENCE OF REGULATORY FILINGS AND APPROVALS
Other than certain filings to be made and approvals to be obtained
under certain state securities or "blue sky" laws, there are no federal or
state regulatory requirements that must be complied with or approvals obtained
in connection with the Merger. See "THE MERGER -- Absence of Regulatory
Filings and Approvals."
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, the Merger will
be treated as a recapitalization of Overseas Filmgroup by an exchange of
Overseas Common Stock for the net assets of EMAC, consisting primarily of
cash. The Surviving Corporation will reflect, in its consolidated financial
statements, the assets, liabilities and equity of Overseas Filmgroup at their
historical book values. Assets and liabilities of EMAC will be reflected at
their fair market value at the Effective Time of the Merger which will
approximate their historical book values. Accordingly, the results of
operations and financial position of the Surviving Corporation, for periods
and dates prior to the Merger, will be the historical results of operations
and financial position of Overseas Filmgroup for such period and dates. See
"THE MERGER -- Accounting Treatment." Following the Merger, the fiscal year of
the Surviving Corporation will be changed from November 30 (EMAC's fiscal
year) to December 31 (Overseas Filmgroup's fiscal year), effective for the
fiscal year ending December 31, 1996.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger by Overseas Filmgroup is conditioned
upon the receipt by Overseas Filmgroup of an opinion of Brobeck, Phleger &
Harrison LLP that, among other things, for federal income tax purposes, (i)
the Merger will constitute a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"); (ii)
EMAC and Overseas Filmgroup will each be a "party to the reorganization"
within the meaning of Section 368(b) of the Code; and (iii) no gain or loss
will be recognized by EMAC or Overseas Filmgroup in the Merger. The tax
opinion to be received will be based on various representations of EMAC,
Overseas Filmgroup and the Overseas Stockholders, and will be subject to
various assumptions and qualifications and is not binding on the Internal
Revenue Service. See "THE MERGER -- Certain Federal Income Tax Consequences."
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In addition, consummation of the Merger is conditioned upon EMAC's
entering into a Tax Reimbursement Agreement with the Overseas Stockholders,
pursuant to which the Surviving Corporation will indemnify the Overseas
Stockholders for any federal income tax liabilities (including penalties and
interest) of the Overseas Stockholders arising from any adjustments to the
income, deductions or credits of Overseas Filmgroup for periods prior to the
Merger, together with any federal and state income tax arising from such
indemnity payments. The Surviving Corporation's reimbursement obligations are
limited to $150,000, except with respect to adjustments to Overseas
Filmgroup's income, deductions or credits which are reasonably expected to
result in decreases to the Surviving Corporation's income or increases in its
deductions or credits after the Merger. In addition, the Surviving Corporation
will reimburse the Overseas Stockholders for up to $400,000 of federal income
taxes payable for the short 1996 S corporation taxable year of Overseas
Filmgroup ending at the time of the Merger. See "THE MERGER -- The Merger
Agreement -- Indemnification" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OVERSEAS FILMGROUP -- Certain
Tax Related Matters."
MARKET PRICE DATA; NASDAQ NATIONAL MARKET LISTING APPLICATION
EMAC Common Stock, as well as EMAC Warrants and EMAC Units, each
consisting of one share of EMAC Common Stock and two warrants to purchase EMAC
Common Stock ("EMAC Units"), are traded in the over-the-counter market and
quoted on the OTC Bulletin Board, an interdealer automated quotation system
sponsored and operated by the National Association of Securities Dealers, Inc.
("NASD"). On July 1, 1996, the last full trading day prior to public
announcement of the execution and delivery of the Merger Agreement, the high
bid prices of EMAC Units, EMAC Common Stock and EMAC Warrants, as reported on
the OTC Bulletin Board, were $6, $51/8 and $15/16, respectively. On ________,
1996, the most recent date for which it was practicable to obtain market price
information prior to the printing of this Proxy Statement, such high bid
prices were $___, $___ and $___, respectively. See "MARKET PRICES OF EMAC'S
SECURITIES." EMAC has applied to have the EMAC Common Stock, EMAC Warrants and
the EMAC Units listed for inclusion on the Nasdaq National Market, effective
upon consummation of the Merger, under the symbols "OSFG," "OSFGW" and
"OSFGU," respectively. There can be no assurance that the EMAC Common Stock,
the EMAC Warrants or the EMAC Units will be approved for quotation on the
Nasdaq National Market at that time or in the future.
There has been no public market for the Overseas Common Stock.
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RISK FACTORS
The discussion in this Proxy Statement regarding Overseas
Filmgroup and the entertainment industry (including "THE MOTION PICTURE
INDUSTRY," "BUSINESS OF OVERSEAS FILMGROUP" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OVERSEAS
FILMGROUP") contains "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements consist of
any statement other than a recitation of historical fact and can be identified
by the use of forward-looking terminology such as "may," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The reader is cautioned that all
forward looking statements are necessarily speculative and there are certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in such forward looking statements. The
discussion below highlights some of the more important risks regarding
Overseas Filmgroup. Additional risks and uncertainties regarding Overseas
Filmgroup, EMAC, the Merger and related transactions are also discussed
elsewhere in appropriate sections of this Proxy Statement. The risks
highlighted below and in such other sections should not be assumed to be the
only things that could affect future performance. Overseas Filmgroup does not
have a policy of updating or revising forward looking statements and thus it
should not be assumed, if the Merger is consummated, that silence by
management of the Surviving Corporation over time means that actual events are
bearing out as estimated in such forward looking statements.
GENERAL RISKS RELATED TO THE MOTION PICTURE INDUSTRY
The motion picture industry is highly speculative and inherently
risky. There can be no assurance of the economic success of any motion picture
since the revenues derived from the production and distribution of a motion
picture (which do not necessarily bear a direct correlation to the production
or distribution costs incurred) depend primarily upon its acceptance by the
public, which cannot be predicted. The commercial success of a motion picture
also depends upon the quality and acceptance of other competing films released
into the marketplace at or near the same time, the availability of alternative
forms of entertainment and leisure time activities, general economic
conditions and other tangible and intangible factors, all of which can change
and cannot be predicted with certainty. Therefore, there is a substantial risk
that some or all of the motion pictures released, distributed or produced by
Overseas Filmgroup will not be commercially successful, resulting in costs not
being recouped or anticipated profits not being realized.
SIGNIFICANT CHANGES IN THE MOTION PICTURE INDUSTRY
The entertainment industry in general, and the motion picture
industry in particular, are dynamic industries which have undergone
significant changes. Some of the most recent changes, which are further
described in this Proxy Statement under "THE MOTION PICTURE INDUSTRY -
Significant Changes in the Motion Picture Industry," include changes in the
relative contributions of the components of total motion pictures industry
revenues (including an increase in the revenues generated from the licensing
of rights in ancillary (other than domestic theatrical) media, ownership
changes, consolidation and rapid technological change. Overseas Filmgroup has
not benefitted from some of these changes. For instance, to date, Overseas
Filmgroup has not realized any significant revenues from the newest revenue
sources such as computer and video games and other interactive media. In
addition, some of the changes in the motion picture industry have had a
negative impact upon Overseas Filmgroup. For example, despite the expansion in
the market for videocassettes for home use, retail video stores increasingly
have been purchasing fewer copies of videocassettes of motion pictures which
have not been theatrically released and more copies of major studio theatrical
hits. Because Overseas Filmgroup distributes a number of films that are not
released theatrically, this trend has had a negative impact on Overseas
Filmgroup and led, in part, to Overseas Filmgroup establishing its own
domestic theatrical distribution operation. It is not possible to predict what
changes or trends will continue in the motion picture industry, what new
changes or trends might occur, and the overall effect these factors will have
on the potential revenue from and profitability of feature-length motion
pictures and the business of Overseas Filmgroup.
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CERTAIN CONSIDERATIONS REGARDING FIRST LOOK PICTURES
Although Overseas Filmgroup historically did not generally
directly exploit the motion pictures that it distributed but licensed the
distribution rights to domestic and foreign sub-distributors, Overseas
Filmgroup increasingly engages directly in theatrical distribution in the
United States through its First Look Pictures' operations. Domestic theatrical
distribution, which involves the licensing and booking of motion pictures to
theatrical exhibitors in the United States, the promotion of these motion
pictures through advertising and publicity campaigns and the manufacture of
release prints from the film negative, is very competitive. A substantial
majority of the motion picture screens in the United States are typically
committed at any one time to between 10 and 15 films distributed nationally by
each of the major studio distributors that can command greater access to
available screens. Although some exhibitors specialize in the exhibition of
independent, specialized motion pictures and "art- house" films, there is
intense competition for screen availability for these films as well. The
number of motion pictures released theatrically in the United States has
increased in recent years, thereby increasing competition for exhibition
outlets and audiences. Domestic theatrical distribution, which often requires
substantial expenditures for marketing and the manufacturing of release
prints, is also very risky. The success of a domestic theatrical release by
First Look Pictures can be affected by a number of factors outside of its
control, including audience and critical acceptance, the success of competing
films in release, awards won by First Look Pictures' releases or that of its
competition, inclement weather, and competing televised events (such as
sporting and news events). Payment by a national theater chain in the United
States is typically made on the close of the engagement in all such chain's
theaters. Since First Look Pictures typically releases its films on a more
limited basis than a distributor of national, wide releases and since First
Look Pictures' specialized or "art-house" releases can have extended runs,
payment to Overseas Filmgroup by theater chains is often not made for four to
nine months from initial release, or longer. In addition, First Look Pictures'
releases are exhibited by a substantial number of independent theater owners
for which it can be comparatively more difficult to monitor and enforce timely
payment than with respect to national theater chains. Overseas Filmgroup often
commits to spend at least a minimum amount on prints and advertising with
respect to motion pictures distributed theatrically through First Look
Pictures. Generally, in addition to receiving a distribution fee, Overseas
Filmgroup is entitled to recoup its prints and advertising expenditures. As a
result of the foregoing factors, and depending upon audience acceptance of the
films distributed through First Look Pictures, Overseas Filmgroup may not in
some circumstances (including with respect to four of the past eight First
Look Pictures releases) recoup all of its distribution expenses or derive any
profit from its domestic theatrical distribution activities.
DEPENDENCE ON KEY EXECUTIVES
Ellen Dinerman Little and Robert B. Little are the founders and
senior executive officers of Overseas Filmgroup and, upon consummation of the
Merger, will serve as the Surviving Corporation's Co-Chairs of the Board and
Co-Chief Executive Officers. Ellen Dinerman Little will also be President of
the Surviving Corporation. Each of these executives have over 21 years of
experience in the motion picture industry and extensive relationships with the
motion picture community, including creative talent and the leading domestic
and international distributors. Virtually all decisions concerning the conduct
of the business of Overseas Filmgroup, including the motion picture properties
and rights to be acquired by Overseas Filmgroup and the arrangements to be
made for the distribution, production and financing of motion pictures by
Overseas Filmgroup, are made or are significantly influenced by these key
executives. The loss of either of their services for any reason would have a
material adverse effect on the Surviving Corporation's business and operations
and its prospects for the future. In addition, it is anticipated that
amendments to Overseas Filmgroup's credit facility will become effective upon
consummation of the Merger, containing covenants and similar provisions
requiring Ms. Little and Mr. Little's continued involvement with, and/or
effective control of, the Surviving Corporation.
A condition to consummation of the Merger is that the Surviving
Corporation shall be named as the beneficiary under an aggregate of $1,700,000
of "key man" life insurance on the life of Robert B. Little and $3,700,000 on
the life of Ellen Dinerman Little. Upon consummation of the Merger, the
Surviving Corporation will also enter into employment agreements with these
executives and with William F. Lischak, the Chief Operating Officer and Chief
Financial Officer of Overseas Filmgroup, for terms ending five years from the
date the Merger is consummated. Under certain circumstances, these employment
agreements may be terminated earlier by the Surviving Corporation or the
executives.
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INCREASING ACQUISITION, PRODUCTION AND MARKETING COSTS
The costs of producing and marketing motion pictures have
increased dramatically in recent years. The average direct negative cost in
1995 for films released by the major United States production studios was
$36,400,000, an increase of 6.4% from 1994 and 65% from 1989. Direct negative
costs include production costs of acquiring or developing the screenplay, the
compensation of creative and other production personnel, film studio and
location rentals, equipment rentals, film stock and other costs incurred in
principal photography, and post-production costs including the creation of
special effects and music, but exclude distribution expenses, such as the
costs of advertising and release prints, capitalized interest and overhead.
The average marketing cost per picture in 1995 for films released by the major
studios was $17,700,000, an increase of 10.6% from 1994 and 92% from 1989.
These costs will likely continue to increase in the future, thereby increasing
the capital required for the operations of motion picture producers and
distributors (both the major studios and independent film companies, including
Overseas Filmgroup), and the risk borne by such parties. The motion pictures
distributed, financed or produced by Overseas Filmgroup typically have had
direct negative costs substantially below the average for the major studios.
For 1994, 1995 and the first six months of 1996, the average direct negative
costs of motion pictures distributed by Overseas Filmgroup were approximately
$1,880,000, $2,000,000 and $2,800,000, respectively. The average print and
advertising costs associated with the three motion pictures distributed by
First Look Pictures from January 1, 1995 through June 30, 1996 were
approximately $1,300,000. Overseas Filmgroup may from time to time in the
future distribute, finance or produce motion pictures with substantially
larger direct negative costs and marketing costs. Such costs may in certain
circumstances be substantially in excess of the average direct negative and
marketing costs of the films historically distributed by Overseas Filmgroup.
In addition, as part of Overseas Filmgroup's overall business strategy, it
intends to gradually and selectively acquire rights to, finance or produce
films which Overseas Filmgroup believes have greater production values (often
as a result of larger budgets) and greater potential for more widespread
audience appeal. As a result, management of Overseas Filmgroup anticipates
that in the future its costs and expenses (including those of acquiring
distribution rights) may rise significantly.
INCREASED MOTION PICTURE INVESTMENT BY OVERSEAS FILMGROUP
Overseas Filmgroup typically acquires distribution rights in a
motion picture for a specified term in one or more territories and media. In
some circumstances, Overseas Filmgroup also acquires the copyright to the
motion picture. The arrangements Overseas Filmgroup enters into to acquire
rights often includes Overseas Filmgroup agreeing to pay an advance or minimum
guarantee for the rights acquired and/or agreeing to advance print and
advertising costs, obligations which are independent of the actual financial
performance of the motion picture being distributed. The risks incurred by
Overseas Filmgroup dramatically increase to the extent Overseas Filmgroup
takes such actions. Overseas Filmgroup committed to pay an advance or minimum
guarantee or advance print and advertising costs with respect to approximately
9 films in 1995 (for an aggregate commitment in excess of the aggregate
"pre-sale" or "pre-license" commitment obtained from sub-distributors with
respect to such films of approximately $9,040,000) and approximately 5 films
in the first six months of 1996 (for an aggregate commitment in excess of the
"pre-sale" or "pre-license" commitment obtained from sub-distributors with
respect to such films of approximately $8,800,000), compared to approximately
6 films in 1994 (for an aggregate commitment in excess of the "pre-sale" or
"pre-license" commitment obtained from sub-distributors with respect to such
films of approximately $3,430,000). While Overseas Filmgroup generally works
with independent producers who have already developed projects, Overseas
Filmgroup also incurs significant risk to the extent it engages in development
or production activities itself, given the costs and risk associated with such
activities, including the uncertainty of whether any particular development
project will eventually result in a completed film. Although Overseas
Filmgroup may, in certain circumstances, reduce some of the foregoing risks by
sub-licensing certain distribution rights in exchange for minimum guarantees
from sub-licensees such as foreign sub-distributors (see "-- Certain
Considerations Relating to the Receipt of Minimum Guarantees by Overseas
Filmgroup" below), the risks incurred by Overseas Filmgroup are generally
greater the greater the "investment" by Overseas Filmgroup in a motion
picture. This "investment" by Overseas Filmgroup in a motion picture includes
the cost of acquisition of the distribution rights (including any advance or
minimum guarantee paid to the producer), the amount of the production
financed, and/or the marketing and distribution costs borne. For a variety of
reasons, including (i) the likelihood of continued industry-wide increases in
acquisition, production and marketing costs (see "-- Increasing Acquisition,
Production and Marketing Costs" above); (ii) Overseas Filmgroup's intent to
gradually and selectively acquire rights to or produce films which have
greater production values (often as a result of larger budgets); and
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(iii) Overseas Filmgroup's increasing role as the principal financier of a
greater portion of the motion pictures it distributes, the "investment" by
Overseas Filmgroup in the motion pictures it distributes in the future and the
associated risks faced by Overseas Filmgroup are likely to increase.
CERTAIN CONSIDERATIONS RELATING TO THE RECEIPT OF MINIMUM GUARANTEES BY
OVERSEAS FILMGROUP
Overseas Filmgroup does not always receive a minimum guarantee
from the licensing of distribution rights to sub-distributors, thus increasing
Overseas Filmgroup's reliance on the actual financial performance of the film
being distributed. In some circumstances, whether Overseas Filmgroup receives
a minimum guarantee depends upon the media. See "BUSINESS OF OVERSEAS
FILMGROUP - Motion Picture Distribution." For example, Overseas Filmgroup is
increasingly (particularly with respect to motion pictures which have not been
theatrically released) entering into video distribution arrangements with
sub-distributors where no minimum guarantee is paid to Overseas Filmgroup.
Even if Overseas Filmgroup does obtain minimum guarantees from its
sub-distributors, such minimum guarantees do not assure the profitability of
Overseas Filmgroup's motion pictures or Overseas Filmgroup's operations.
Additional revenues may be necessary from distribution of a motion picture in
order to enable Overseas Filmgroup to recoup any investment in such motion
picture in excess of the aggregate minimum guarantees obtained from such
sub-distributors, pay for distribution costs, pay for ongoing acquisition and
development of other motion pictures by Overseas Filmgroup and cover general
overhead. While the pre-licensing of distribution rights to sub-distributors
in exchange for minimum guarantees may reduce some of the risk to Overseas
Filmgroup from unsuccessful films, it may also result in Overseas Filmgroup
receiving lower revenues with respect to highly successful films than if such
licensing of distribution rights were made upon different terms that, for
example, might have provided lower minimum guarantees to Overseas Filmgroup
but also provided a lower distribution fee (i.e., a lower percentage of gross
revenues) to the sub-distributor.
ABILITY TO ACHIEVE ACQUISITION AND DISTRIBUTION GOALS
Assuming consummation of the Merger, Overseas Filmgroup currently
intends to acquire rights to and distribute approximately 12 to 18 films per
year. Overseas Filmgroup, alone or in conjunction with others, currently
intends to selectively finance (typically by agreeing to pay the independent
producer a minimum guarantee for the distribution rights to be acquired by
Overseas Filmgroup) all or a portion of the production costs of, or produce,
an aggregate of approximately 6 to 10 of these films. No assurance can be
given that such goals will be met in future periods or that the number of
films acquired, distributed and/or financed will not exceed such estimated
ranges. The acquisition, production, completion and distribution of motion
pictures is subject to numerous uncertainties, including financing
requirements, personnel availability and the release schedule of competing
films.
RENEWAL OR REFINANCING OF CREDIT FACILITY
Overseas Filmgroup's operations are supported by a credit facility
from Coutts & Co. and Berliner Bank A.G. London Branch that is reviewed on an
annual basis. The commitment to lend under the credit facility expired on May
9, 1996, however, Coutts and Berliner have continued to lend under the credit
facility and have executed a commitment letter whereby they have agreed,
subject to definitive documentation, to amend the credit facility to, among
other things: (i) extend the credit facility to May 9, 1997, the date of the
next annual review, and (ii) subject to consummation of the Merger and other
conditions, increase the amount available under the credit facility. Certain
advances made under the credit facility are due upon expiration of the
commitment to lend while certain others are due one year after the advance of
funds. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF OVERSEAS FILMGROUP -- Liquidity and Capital
Resources." In order to have sufficient funds available to maintain its
acquisition, distribution, finance and production activities, the Surviving
Corporation will need to renew or refinance the credit facility on or before
May 9, 1997. There can be no assurance that the Surviving Corporation will be
able to renew or refinance its credit facility on terms similar to the
existing terms, or at all. Failure to do so would have a material adverse
effect on the business, financial condition and operations of the Surviving
Corporation.
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COMPETITION
Motion picture production, finance and distribution are highly
competitive businesses in the United States and internationally, with
competition coming both from companies within the motion picture industry and
companies in other entertainment media. Many of these competitors have
significantly greater financial and other resources than Overseas Filmgroup.
Overseas Filmgroup's ability to compete successfully depends in large part
upon the continued availability of independently-produced, domestic and
foreign, motion pictures and Overseas Filmgroup's ability to identify and
acquire distribution rights and distribute such motion pictures successfully.
A number of formerly independent motion picture companies have been acquired
in recent years by major entertainment companies. See "THE MOTION PICTURE
INDUSTRY - General." These transactions have significantly increased
competition for the acquisition of distribution rights to independently
produced motion pictures by eliminating some available sources of
independently produced films and providing greater financial resources to
other previously independent companies engaged in the business of acquiring
distribution rights to independently produced films. See "BUSINESS OF OVERSEAS
FILMGROUP - Competition."
CERTAIN RISKS ASSOCIATED WITH INTERNATIONAL DISTRIBUTION
A significant portion of Overseas Filmgroup's revenue
(approximately 69% in 1995) is from the distribution of motion pictures and
the licensing of distribution rights in territories outside the United States.
The Surviving Corporation's financial results and results of the operations
could be negatively affected by such factors as changes in foreign currency
exchange rates and currency controls, trade protection measures, motion
picture piracy, content regulation, longer accounts receivable collection
patterns, changes in regional or worldwide economic or political conditions or
natural disasters. See "BUSINESS OF OVERSEAS FILMGROUP - Motion Picture
Distribution" and "- Regulation." Because Overseas Filmgroup's contracts are
typically denominated in U.S. dollars, advances and minimum guarantees of
sublicense fees payable to Overseas Filmgroup by foreign sub-distributors, and
advances and minimum guarantees to be paid by Overseas Filmgroup to foreign
producers in connection with the acquisition of distribution rights, are
generally unaffected by exchange rate fluctuations. However, to the extent
Overseas Filmgroup's agreements with foreign sub-distributors require such
sub-distributors to pay Overseas Filmgroup a percentage of revenues in excess
of any advance or minimum guarantee, fluctuations in the currencies in which
such revenues are received by the sub-distributor may affect the amount of
U.S. dollars received by Overseas Filmgroup in excess of any minimum
guarantee. Exchange rate fluctuations could also affect the ability of
sub-distributors to bid for and acquire rights to motion pictures distributed
by Overseas Filmgroup. Management of Overseas Filmgroup does not believe
exchange rate fluctuations have had a material effect on Overseas Filmgroup's
results of operations in the past, although no assurances can be given that
these fluctuations will not have a material impact on its results of
operations in the future.
FLUCTUATION OF OPERATING RESULTS; ANTICIPATED LOSS
Most of Overseas Filmgroup's revenues are derived from the
exploitation of the relatively limited number of motion pictures distributed
by Overseas Filmgroup (compared to the number of films distributed by the
major studios). The number of motion pictures for which Overseas Filmgroup
acquires distribution rights may vary significantly from quarter to quarter.
The number of motion pictures which Overseas Filmgroup distributes, including
its First Look Pictures' releases, also may vary significantly from quarter to
quarter, to uncertainties in the release schedules of such motion pictures. In
addition, the audience response to the motion pictures that Overseas Filmgroup
distributes is unpredictable. As a result of the foregoing, Overseas
Filmgroup's revenues, expenses and earnings have historically fluctuated and
are likely to continue to fluctuate significantly from quarter to quarter.
Accordingly, Overseas Filmgroup's (and the Surviving Corporation's) revenues,
expenses and earnings in any particular period may not be indicative of the
results for any future period. Management of Overseas Filmgroup anticipates
that, primarily as a result of a one-time, non-recurring charge to income
resulting from the termination of Overseas Filmgroup's federal S-Corporation
status upon consummation of the Merger, the Surviving Corporation will incur a
net loss for the quarter ending December 31, 1996. Such accounting charge will
also significantly reduce the Surviving Corporation's earnings for the year
ending December 31, 1996, and could result in a loss for such period. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF OVERSEAS FILMGROUP."
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CONCENTRATION OF OWNERSHIP BY PRINCIPAL STOCKHOLDERS
Upon consummation of the Merger (assuming no exercise of
outstanding EMAC options or warrants), Ellen Dinerman Little and Robert B.
Little will beneficially own approximately 55% of the outstanding common stock
of the Surviving Corporation (including for this purpose shares of common
stock for which they have been granted proxies). The executive officers and
directors of the Surviving Corporation, including Ms. Little and Mr. Little,
will, in the aggregate, beneficially own approximately 65.1% of the
outstanding Common Stock of the Surviving Corporation at the Effective Time of
the Merger. As a result of this concentration of ownership, as well as certain
provisions of the Surviving Corporation's Restated Certificate of
Incorporation and Bylaws and provisions of certain of the agreements being
entered into in connection with the Merger, it is anticipated that these
stockholders will be able to exercise control over matters requiring
stockholders' approval, including the election of directors, and significant
corporate transactions, including mergers, consolidations and sales of all or
substantially all of the assets of the Surviving Corporation, subject in each
case to the Stockholders' Voting Agreement and Operating Guidelines being
entered into and adopted, respectively, in conjunction with the Merger. In
addition, these factors are likely to have the effect of discouraging third
parties from acquiring substantial blocks of the Surviving Corporation's
common stock. Such concentration of ownership also could tend to limit the
price that investors might be willing to pay in the future for shares of
common stock as it may reduce the possibility of a change in control of the
Surviving Corporation. A change in control of an issuer frequently occurs at a
premium over the historical trading prices of the issuer's publicly traded
common stock.
POTENTIAL ADVERSE EFFECT ON MARKET PRICE RESULTING FROM SECURITIES ELIGIBLE
FOR FUTURE SALES
Sales of substantial amounts of shares of common stock of the
Surviving Corporation (including shares issued upon the exercise of
outstanding options and warrants) in the public market or the prospect of such
sales could adversely affect the market price of the common stock of the
Surviving Corporation. Upon consummation of the Merger, the Surviving
Corporation will have outstanding 5,777,778 shares of common stock, assuming
no exercise of existing options and warrants. Of those shares, 2,100,000
shares are freely tradable without restriction. An additional 500,000 shares
are held by the Initial Stockholders and have been placed in escrow pursuant
to which the holders thereof have agreed not to sell or otherwise transfer
their respective shares of EMAC Common Stock until February 16, 1998. The
remaining 3,177,778 shares, which constitute the Merger Shares, are subject to
the Lock-Up and Registration Rights Agreement, pursuant to which 1,059,260
shares, 1,059,259 shares and 1,059,259 shares will be available for resale in
the public market on February 16, 1998, February 16, 1999 and February 16,
2000, respectively, or earlier in limited circumstances, provided such shares
are registered under the Securities Act pursuant to certain "piggyback" and
demand registration rights or are resold pursuant to Rule 144 under the
Securities Act ("Rule 144"). In addition, there are outstanding (i) 4,200,000
EMAC Warrants, which entitle the holder to purchase one share of EMAC Common
Stock for each EMAC warrant held at any time commencing on the consummation of
the Merger and ending on February 16, 2002, (ii) 300,000 Bridge Warrants which
are identical to the EMAC Warrants except that they are redeemable by the
Surviving Corporation beginning 90 days after the consummation of the Merger
and (iii) 200,000 UPOs consisting of one share of EMAC Common Stock and two
EMAC Warrants. Notwithstanding the above, any shares that are purchased by
"affiliates" of the Surviving Corporation, as that term is defined in Rule
144, will be subject to the resale limitations of Rule 144. The Surviving
Corporation intends to file a registration statement on Form S-8 under the
Securities Act covering the sale of an aggregate of 2,750,000 shares which are
reserved for issuance under the Option Plans. See "THE MERGER -- Restricted
Disposition of Merger Shares; Registration Rights," "DESCRIPTION OF EMAC
CAPITAL STOCK," "APPROVAL OF THE MANAGEMENT OPTION PLAN" and "APPROVAL OF THE
1996 STOCK OPTION PLAN."
POSSIBLE VOLATILITY OF SECURITIES PRICES
The trading prices of the Surviving Corporation's securities could
be subject to wide fluctuations in response to variations in operating results
which may be affected by variations from period-to-period in the number of
motion pictures for which the Surviving Corporation acquires distribution
rights and the number of motion pictures which the Surviving Corporation
distributes. See "BUSINESS OF OVERSEAS FILMGROUP -- Motion Picture
Distribution." The operating results of the Surviving Corporation also may be
affected by the release schedule of the motion pictures distributed by the
Surviving Corporation, the commercial success of such motion
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pictures and other events or factors. In addition, the stock market has
experienced significant price and volume fluctuations which have affected the
market price for many companies and which have often been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of the Surviving Corporation's securities.
In addition, factors not within the control of the Surviving Corporation,
including public statements from securities analysts and others concerning the
Surviving Corporation's operations, public acceptance of the motion pictures
distributed by the Surviving Corporation, interest rates and changes in
general economic conditions, could also have a significant impact on the
future market prices for the Surviving Corporation's securities, which may be
volatile.
POTENTIAL ADVERSE IMPACT OF ANTI-TAKEOVER PROVISIONS
The Surviving Corporation's Restated Certificate of Incorporation,
the Bylaws of the Surviving Corporation and the provisions of the DGCL contain
provisions that may be deemed to have the effect of discouraging a third party
from pursuing a nonnegotiated takeover of the Surviving Corporation because
they have the effect of delaying, deterring or preventing a change in control
of the Surviving Corporation. Such provisions may have an adverse impact on
the price of the securities of the Surviving Corporation that are traded in
the public market. See "DESCRIPTION OF EMAC CAPITAL STOCK." The Surviving
Corporation's Restated Certificate of Incorporation authorizes the issuance of
"blank check" preferred stock with such rights and preferences as may be
determined from time to time by the board of directors of the Surviving
Corporation, without stockholder approval. In the event of issuance, the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Surviving
Corporation even though such an attempt might be economically beneficial to
the stockholders of the Surviving Corporation. The Surviving Corporation's
Restated Certificate of Incorporation also provides for staggered terms for
members of the Surviving Corporation's Board of Directors. The Surviving
Corporation is subject to provisions of the DGCL, which, subject to certain
exceptions, will prohibit the Surviving Corporation from engaging in any
"business combination" with a person who, together with affiliates and
associates, owns 15% or more of the Surviving Corporation's Common Stock (an
"Interested Stockholder") for a period of three years following the date that
such person became an Interested Stockholder, unless the business combination
is approved in a prescribed manner as was the Merger. These provisions of
Delaware law and of the Surviving Corporation's Restated Certificate of
Incorporation and Bylaws may have the effect of delaying, deterring or
preventing a change in control of the Surviving Corporation, may discourage
bids for the Surviving Corporation's common stock at a premium over market
price and may adversely affect the market price, and the voting and other
rights of the holders, of the Surviving Corporation's common stock. In
addition, the acceleration of vesting of options granted under the Option
Plans in the event of a change in the ownership or control of the Surviving
Corporation may be seen as an anti-takeover provision and may have the effect
of discouraging a merger proposal, a takeover attempt or other efforts to gain
control of the Surviving Corporation.
DIVIDENDS UNLIKELY
EMAC has not paid any dividends on shares of EMAC Common Stock to
date. After the consummation of the Merger, the payment of cash dividends will
be contingent upon the Surviving Corporation's consolidated revenues and
earnings, if any, capital requirements and general financial condition. The
payment of any dividends after consummation of the Merger will be subject to
the discretion of the Surviving Corporation's Board of Directors, and it is
unlikely that cash dividends will be paid in the foreseeable future. In
addition, it is anticipated that the credit facility of the Surviving
Corporation will impose substantial restrictions on the payment of cash
dividends. See "DESCRIPTION OF EMAC CAPITAL STOCK -- Dividends" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF OVERSEAS FILMGROUP -- Liquidity and Capital Resources."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS
EMAC will not be able to issue shares of EMAC Common Stock upon
exercise of the outstanding EMAC Warrants, Bridge Warrants and UPOs (as
defined hereinafter) unless there is then a current prospectus relating to
such shares of EMAC Common Stock, and unless such shares of EMAC Common Stock
are qualified for sale or exempt from qualification under applicable state
securities laws of the jurisdictions in which the various holders of
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the Warrants, Bridge Warrants and UPOs reside. EMAC has undertaken, and
currently intends, to file and keep current a prospectus which will permit the
purchase and sale of the shares of EMAC Common Stock underlying the EMAC
Warrants, Bridge Warrants and UPOs, but there can be no assurance that EMAC
will be able to do so. Although EMAC intends to seek to qualify for sale the
shares of EMAC Common Stock underlying the EMAC Warrants, Bridge Warrants and
UPOs in those states in which the securities are to be offered, no assurance
can be given that such qualification will occur. The EMAC Warrants, Bridge
Warrants and UPOs may be deprived of any value and the market for the
Warrants, Bridge Warrants and UPOs may be limited if a current prospectus
covering the shares of EMAC Common Stock issuable upon the exercise of the
EMAC Warrants, Bridge Warrants and UPOs is not kept effective or if such
shares of EMAC Common Stock are not qualified or exempt from qualification in
the jurisdictions in which the holders of the EMAC Warrants, Bridge Warrants
and UPOs then reside. See "DESCRIPTION OF EMAC CAPITAL STOCK."
OTC BULLETIN BOARD
EMAC's securities are traded in the over-the-counter market on the
OTC Bulletin Board (an NASD sponsored and operated interdealer automated
quotation system for equity securities not included in the Nasdaq SmallCap
Market or Nasdaq National Market), as well as in the NQB Pink Sheets published
by the National Quotation Bureau Incorporated. There can be no assurance that
the OTC Bulletin Board will be recognized by the brokerage community as an
acceptable trading medium. In the absence of such recognition, the liquidity
and stock price of EMAC's securities in the secondary market may be adversely
affected, and there can be no assurance that a public market for the
securities of the Surviving Corporation will develop or be sustained. EMAC has
applied to have the EMAC Common Stock, the EMAC Warrants and the EMAC Units
listed for trading on the Nasdaq National Market. There can be no assurance
that the EMAC Shares, the EMAC Warrants and the EMAC Units will be approved
for quotation on the Nasdaq National Market at the Effective Time of the
Merger or in the future.
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THE EMAC MEETING
This Proxy Statement is being furnished to holders of EMAC Common
Stock in connection with the solicitation of proxies by the EMAC Board for use
at the EMAC Meeting to be held on ___________ __, 1996, at _________,
_____________, California at __:__ __.m., local time, and any adjournment
thereof.
This Proxy Statement, the Notice of Meeting and the accompanying
form of proxy is first being mailed to EMAC Stockholders on or about
________________, 1996.
PURPOSE OF THE EMAC MEETING
At the EMAC Meeting, EMAC Stockholders will be asked to consider
and act upon a proposal to approve the Merger Agreement, providing for the
Merger of Overseas Filmgroup with and into EMAC. As a result of the Merger,
outstanding shares of Overseas Common Stock will be converted into an
aggregate of (i) 3,177,778 shares of EMAC Common Stock; (ii) $1,500,000 in
cash, subject to adjustment in certain circumstances; and (iii) a secured
promissory note in the amount of $2,000,000. In lieu of any fractional share
resulting from the Merger, Overseas Stockholders will receive one whole share
of EMAC Common Stock. None of the currently outstanding shares of EMAC Common
Stock will be converted or otherwise changed as a result of the Merger.
Assuming (i) none of the outstanding EMAC Warrants, Bridge Warrants or UPOs
(as hereinafter defined) is exercised, and (ii) no holder of shares of EMAC
Common Stock exercises its right of redemption or appraisal for such shares,
immediately after the Effective Time of the Merger, the Overseas Stockholders
will own approximately 55% of the then outstanding shares of EMAC Common
Stock.
EMAC Stockholders will also be asked to consider and vote upon the
election of seven directors to the Board of Directors of the Surviving
Corporation, and proposals to approve amendments to, and restatement of, the
EMAC Certificate of Incorporation, the Option Plans, and the appointment of
Price Waterhouse LLP as independent auditors. If the Merger is not
consummated, the current directors of EMAC will continue as the EMAC Board,
the EMAC Certificate of Incorporation will not be amended, and the Option
Plans will not be implemented, notwithstanding the EMAC Stockholders electing
all the persons nominated as directors and approving such other proposals. In
addition, pursuant to the EMAC Certificate of Incorporation, if a Business
Combination is not consummated by February 16, 1997, EMAC will be liquidated.
Approval of the Merger Agreement and the Option Plans by EMAC Stockholders and
election of the persons nominated as directors of the Surviving Corporation
are among the conditions to the consummation of the Merger by EMAC under the
terms of the Merger Agreement. See "THE MERGER -- The Merger Agreement."
THE EMAC BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE MERGER
AGREEMENT, EACH OF THE PERSONS NOMINATED FOR ELECTION TO THE BOARD OF THE
SURVIVING CORPORATION, THE AMENDMENTS TO, AND RESTATEMENT OF, THE EMAC
CERTIFICATE OF INCORPORATION, THE OPTION PLANS AND THE APPOINTMENT OF PRICE
WATERHOUSE LLP. CERTAIN DIRECTORS OF EMAC HAVE VARIOUS CONFLICTS ON INTEREST
ARISING OUT OF CERTAIN AGREEMENTS WITH EMAC AND THEIR OWNERSHIP OF SHARES OF
EMAC COMMON STOCK.
VOTING RIGHTS
The EMAC Board has fixed _____________ __, 1996 as the EMAC Record
Date for the determination of EMAC Stockholders entitled to notice of and to
vote at the EMAC Meeting. Accordingly, only holders of record of shares of
EMAC Common Stock at the close of business on the EMAC Record Date will be
entitled to vote at the EMAC Meeting. At the close of business on the EMAC
Record Date, there were 2,600,000 shares of EMAC Common Stock outstanding,
each of which is entitled to one vote on each matter properly submitted to a
vote at the EMAC Meeting.
The presence at the EMAC Meeting, in person or by general or
limited proxy, of a majority of the outstanding shares entitled to vote will
constitute a quorum at the meeting. Shares of record held by a broker or
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nominee that are returned to EMAC but not voted on any matter will be treated
as shares present for purposes of determining the presence of a quorum on all
matters, but will not be treated as shares entitled to vote on the matter as
to which authority is withheld. Pursuant to the EMAC Certificate of
Incorporation, the affirmative vote of a majority of the outstanding shares of
EMAC Common Stock is required to approve the Merger Agreement; provided,
however, that if holders of 20% or more of the shares of EMAC Common Stock
held by EMAC's Public Stockholders vote against the approval of the Merger
Agreement and such Public Stockholders exercise their redemption rights, EMAC
will not consummate the Merger. If a quorum is present, directors will be
elected by a plurality of the votes cast at the EMAC Meeting; "plurality"
means that the nominees who receive the largest number of votes cast are
elected as the directors up to the maximum number of directors to be elected.
Any shares not voted "FOR" a particular director (whether as a result of a
direction to withhold authority or a broker nonvote) will not be counted for
purposes of determining a plurality. If a quorum is present, the affirmative
vote of a majority of the shares of EMAC Common Stock present in person or
represented by proxy at the EMAC Meeting and entitled to vote is required to
approve the proposed amendments to, and restatement of, the EMAC Certificate
of Incorporation. If a quorum is present, the affirmative vote of a majority
of shares present in person or represented by proxy at the EMAC Meeting and
entitled to vote is required to approve each of the Option Plans. If a quorum
is present, the affirmative vote for a majority of the shares of EMAC Common
Stock present in person or represented by proxy at the EMAC Meeting and
entitled to vote is required to approve the appointment of Price Waterhouse
LLP.
Abstentions may be specified on each of the proposals to approve
the Merger Agreement, to approve the amendments to the EMAC Certificate of
Incorporation, to approve the Option Plans and to approve the appointment of
Price Waterhouse LLP. The EMAC Stockholders who abstain will be considered
present and entitled to vote at the EMAC Meeting but will not be counted as
votes cast in the affirmative. Abstentions on the proposal to approve the
Merger Agreement will have the effect of a negative vote because this proposal
requires the affirmative vote of a majority of the shares of EMAC Common
Stock, but such stockholders will not be entitled to exercise any redemption
rights in connection with the proposed Merger. Abstentions on the proposal to
approve the amendments to, and restatement of, the EMAC Certificate of
Incorporation will also have the effect of a negative vote because this
proposal requires the approval of a majority of the shares entitled to vote.
Abstentions on the proposals to approve the Option Plans and the appointment
of Price Waterhouse LLP as independent auditors will not have the effect of a
negative vote because these proposals only require the affirmative vote of a
majority of shares present in person or represented by proxy at the EMAC
Meeting and entitled to vote.
On the proposal to approve the Merger Agreement, if authority is
withheld by brokers or nominees holding the shares in "street name," the
effect will be that of a vote against the proposal because these proposals
must be approved by a majority of the shares of EMAC Common Stock. On the
proposals to approve the amendment to the EMAC Certificate of Incorporation,
to elect the directors, to approve each of the Option Plans and to ratify and
approve the appointment of Price Waterhouse LLP, if authority is withheld by
brokers or nominees holding the shares in "street name," there will be no
effect on the vote because such shares will not be considered entitled to vote
on the matters.
As of August 1, 1996, EMAC's Initial Stockholders, who are also
the directors and executive officers of EMAC, beneficially owned 500,000
shares of EMAC Common Stock, constituting approximately 19% of the then
outstanding shares of EMAC Common Stock. All such Initial Stockholders have
agreed to vote their shares of EMAC Common Stock in accordance with the
majority in interest of the Public Stockholders on the Merger Agreement.
Consequently, if a majority of the outstanding shares of EMAC Common Stock
held and voted by EMAC's Public Stockholders is voted in favor of the Merger
Agreement, EMAC's Initial Stockholders will vote their shares of EMAC Common
Stock in favor of the Merger Agreement. The Initial Stockholders have also
advised EMAC that they intend to vote their shares in favor of the other
proposals being submitted to the EMAC Stockholders.
Each EMAC Stockholder can vote personally or by proxy; a person
acting as a proxy need not be a stockholder.
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SOLICITATION AND REVOCATION OF PROXIES
The EMAC Board is making the solicitation of proxies from its
stockholders hereby. All shares represented by properly executed proxies will
be voted and will be voted in accordance with the directions on the proxies,
unless such proxies are revoked prior to the vote. PROPERLY EXECUTED PROXIES
CONTAINING NO INSTRUCTIONS REGARDING ANY PARTICULAR MATTER SPECIFIED THEREIN
WILL BE VOTED "FOR" THE APPROVAL OF SUCH MATTER. The EMAC Board does not know
of any other matters which may come before the meeting of its stockholders. If
any other matters are properly presented for action at the EMAC Meeting, the
named proxies will vote in accordance with their best judgment on such
matters. EMAC will bear the cost of solicitation of proxies for the EMAC
Meeting. In addition to the use of the mails, proxies may be solicited by
telephone or in person by directors and officers and employees of EMAC who
will not be specially compensated for such services. Additional solicitation
of proxies of the stockholders of EMAC will be made in the same manner as by
EMAC under special engagement and direction of _________________________ at a
cost of approximately $______, plus expenses, which amount will be paid by
EMAC. EMAC will request that the Notice of Annual Meeting, this Proxy
Statement, the proxy and related materials, if any, be forwarded to beneficial
owners and will reimburse banks, brokers and other persons for their
reasonable out-of-pocket expenses in handling such matters.
A stockholder of EMAC who executes and returns a proxy has the
power to revoke it at any time before it is voted. The giving of a proxy does
not affect a stockholder's right to attend and vote in person at the EMAC
Meeting. A stockholder's presence at the meeting, however, will not in itself
revoke the stockholder's proxy. An EMAC Stockholder giving a proxy pursuant to
this solicitation may revoke such proxy by delivering a written revocation to
the Secretary of EMAC, c/o Bannon & Co., Inc., at 202 North Canon Drive,
Beverly Hills, California 90210. No revocation by written notice, however,
will be effective unless and until such notice is received by the Secretary of
EMAC prior to the date of the EMAC Meeting or by the inspector of election at
the EMAC Meeting prior to the closing of the polls.
THE MERGER
GENERAL
The following is a summary of certain aspects of the Merger.
Although EMAC believes that all material provisions of the Merger Agreement
have been set forth in this Proxy Statement, this summary does not discuss all
the elements of that agreement and is qualified in its entirety by reference
to the Merger Agreement, a copy of which is attached to this Proxy Statement
as Appendix A and is incorporated herein by reference. Stockholders are urged
to read the Merger Agreement carefully. Copies of the exhibits to the Merger
Agreement may be obtained upon written request to EMAC at 202 North Canon
Drive, Beverly Hills, California 90210, Attn: Secretary.
Pursuant to the Merger Agreement, Overseas Filmgroup will merge
with and into EMAC. The Surviving Corporation will succeed to the operations
conducted by Overseas Filmgroup prior to the Merger.
BACKGROUND OF THE MERGER
The terms of the Merger Agreement are the result of arm's-length
negotiations between representatives of EMAC and Overseas Filmgroup. The
following is a brief discussion of the background of these negotiations, the
Merger and related transactions.
EMAC was formed in December 1993. Following the consummation of
EMAC's IPO in February 1995, from which EMAC derived net proceeds of
approximately $11,340,000 after payment of underwriting discounts and the
underwriter's non-accountable expense allowance. EMAC's officers and directors
commenced an active search for a prospective Target Business following the
guidelines set forth below. Ninety percent (90%) of such net proceeds were
placed in the Trust Fund immediately following the IPO. In accordance with
EMAC's Certificate of Incorporation, these funds will be released from the
Trust Fund either upon the consummation of a Business
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Combination or upon the liquidation of EMAC, which liquidation must occur by
February 16, 1997 unless EMAC has consummated a Business Combination on or
before that date. As of August 1, 1996, the Trust Fund held approximately
$11,024,000.
During the period from February 1995 through June 1996, EMAC
evaluated a number of prospective Target Businesses in the Entertainment/Media
Industry. In evaluating each prospective Target Business, EMAC's officers and
directors considered, among other factors, all or a majority of the following:
(a) financial condition and results of operations of the
Target Business;
(b) costs associated with consummating the Business
Combination;
(c) growth potential;
(d) experience and skill of management and availability of
additional personnel;
(e) capital requirements;
(f) competitive position;
(g) stage of development of the Target Business's
products, processes or services;
(h) degree of current or potential market acceptance of
these products, processes or services; and
(i) proprietary features and degree of intellectual
property or other protection of these products,
processes or services.
On March 13, 1995, Stephen K. Bannon, Chairman of the Board of
Directors of EMAC, conducted an initial meeting at the Overseas Filmgroup
offices in Los Angeles, California, with Robert B. Little and William F.
Lischak, executive officers of Overseas Filmgroup, to discuss a merger and
commence preliminary due diligence activities in respect of both EMAC and
Overseas Filmgroup. Shortly thereafter, Mr. Bannon also held an initial
meeting with Ellen Dinerman Little, an executive officer of Overseas
Filmgroup.
On March 24, 1995, Mr. Bannon and Scot K. Vorse, Vice President -
Finance, Treasurer, Secretary and a director of EMAC, met with Ms. Little and
Messrs. Little and Lischak. It was agreed that EMAC and Mr. Lischak would
develop a working plan to determine the value of Overseas Filmgroup and
proceed with plans to determine whether a Business Combination would be
appropriate. During the next several months, several meetings involving
executive officers of both Overseas Filmgroup and EMAC were held during which
extensive due diligence was performed. Officers of EMAC gave particular focus
to Overseas Filmgroup's operations, projections and financial statements.
On October 18, 1995, Messrs. Bannon and Vorse of EMAC, along with
Ms. Little and Messrs. Little and Lischak, discussed general terms for a
proposed merger. They determined that a merger between EMAC and Overseas
Filmgroup should be negotiated and, if such negotiations were successful, an
agreement of merger should be executed and presented to the EMAC Stockholders
for their approval.
Messrs. Bannon and Vorse and Mr. R. Timothy O'Donnell of Jefferson
Capital, Inc., financial advisor to Overseas Filmgroup, together with the
executive officers of Overseas Filmgroup, formulated the various exchange
ratios for the Overseas Common Stock. The exchange ratios took into
consideration the parties' valuation of Overseas Filmgroup, the cash value per
share of shares of EMAC Common Stock, the allocation of Merger Consideration
among stock, cash and promissory notes, and the number of outstanding shares
of Overseas Common Stock.
On February 16, 1996, Ms. Little and Messrs. Little and Lischak of
Overseas Filmgroup, Messrs. Bannon and Vorse of EMAC, Mr. O'Donnell of
Jefferson Capital, Inc., representatives of counsel to, and the accountants
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for, each of the parties, and a representative of Overseas Filmgroup's
commercial lenders met to discuss a timetable for consummation of the proposed
transaction and the responsibilities of each party and its advisors in
completing the process. In mid-February 1996, counsel for each of Overseas
Filmgroup and EMAC commenced their due diligence reviews of the companies, and
EMAC's counsel commenced the preparation of the Merger Agreement. On several
occasions from late February through early July 1996, Messrs. Bannon and Vorse
and Ms. Little and Messrs. Little and Lischak held telephone conferences and
face-to-face meetings, in most instances with their respective counsel and
other advisors, to negotiate and finalize certain representations and
warranties, covenants, conditions precedent to the Merger and termination and
indemnification provisions contained in the Merger Agreement, as well as the
terms of the other agreements called for by the Merger Agreement. Each of the
parties also prepared and exchanged various disclosure schedules to the Merger
Agreement that clarified the outstanding obligations of each of the parties to
third parties and prepared and delivered financial statements of their
respective companies.
On May 2, 1996, the EMAC Board reviewed the material terms of the
Merger Agreement and the transactions contemplated thereby. The EMAC Board
unanimously approved the Merger Agreement and the related transactions,
subject to satisfactory completion of the due diligence investigation and
receipt of additional financial information.
On June 30, 1996, the Board of Directors of Overseas Filmgroup and
the Overseas Stockholders approved the Merger and related agreements and
transactions by unanimous written consent.
EMAC, Overseas Filmgroup, and Ellen Dinerman Little and Robert B.
Little entered into the Merger Agreement on July 2, 1996 and announced the
execution of the Merger Agreement through a press release on the same date.
REASONS FOR THE MERGER; RECOMMENDATIONS
The EMAC Board believes that the Merger is in the best interest of
its stockholders and unanimously recommends to its stockholders that they vote
"FOR" the approval and adoption of the Merger Agreement. In making its
determination to approve the Merger Agreement and the Merger, the EMAC Board
reviewed and discussed the results of its business, financial and legal due
diligence investigation of Overseas Filmgroup and analyzed the business and
prospects of Overseas Filmgroup and other factors relevant to the proposed
transaction. In reaching its conclusion to approve the Merger Agreement, the
EMAC Board considered the following material factors:
(1) Information concerning Overseas Filmgroup's business
operations, earnings, assets, liabilities and financial
conditions, and current economic and industry conditions.
Specifically, the EMAC Board found the following factors
significant: (i) Overseas Filmgroup's 12-year operating history;
(ii) the achievement of profitability in each year since 1987, the
first year in which accountants reviewed or audited its financial
statements, and generally consistent growth in revenues and
profits; (iii) the value of Overseas Filmgroup's film library,
consisting of over 170 feature films; (iv) Overseas Filmgroup's
reputation in the international film distribution market; and (v)
Overseas Filmgroup's relationship with the creative community,
including independent producers, directors and actors.
(2) An examination of financial information regarding
Overseas Filmgroup and other filmed entertainment companies,
including a review of historical revenue, income from operations,
earnings before taxes and operating margin (income from operations
divided by revenue). Overseas Filmgroup's revenue has grown from
approximately $14.7 million in 1992 to approximately $21.7 million
in 1995, a compound annual growth rate of approximately 13.8%.
Income from operations has grown from approximately $1.4 million
in 1992 to approximately $2.6 million in 1995. Earnings before
taxes has grown from approximately $1.7 million in 1992 to
approximately $2.9 million in 1995. Overseas Filmgroup's operating
margin over the last four years has ranged from 8.8% in 1993 to
12.1% in 1995. The historical financial information of Overseas
Filmgroup compared generally favorably with the historical
financial information of other filmed entertainment companies.
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(3) The extensive experience, operating capabilities and
track record of Ellen Dinerman Little and Robert B. Little, the
co-founders and senior executive officers of Overseas Filmgroup,
and the following factors relating to their continued involvement
in the Surviving Corporation: (i) Ms. Little and Mr. Little have
each agreed to enter into five-year Employment Agreements and
Non-Competition Agreements with the Surviving Corporation upon the
consummation of Merger; (ii) Ms. Little and Mr. Little have each
agreed not to sell any Merger Shares they receive in the Merger
until February 16, 1998 (with these restrictions generally lapsing
in three equal installments on February 16, 1998, 1999 and 2000);
(iii) upon the consummation of the Merger, Ms. Little and Mr.
Little will be granted stock options to purchase an aggregate of
2,200,000 shares of EMAC Common Stock, such options to vest over
five years; and (iv) following the Merger, Ms. Little and Mr.
Little will own approximately 55% of the Surviving Corporation,
(assuming that none of the outstanding options and warrants of the
Surviving Corporation are exercised and no EMAC Stockholder
exercises any redemption or appraisal rights).
(4) Overseas Filmgroup's strategy, including (i) maintaining
a cost conscious and risk limiting approach in its operations;
(ii) continuing to develop its First Look Pictures U.S. theatrical
releasing operation; (iii) acquiring rights to or financing films
with greater production values; and (iv) developing and
maintaining relationships with independent producers, directors
and emerging and established talent. Following the Merger, this
strategy will be supported by the capital of the Surviving
Corporation, as well as the credit facility of the Surviving
Corporation.
(5) The proposed terms, timing and conditions of the Merger
Agreement. Specifically, the EMAC Board considered and determined
that, as a whole, the terms of the Merger Agreement were
reasonable and the Merger could be consummated on a timely basis.
(6) Certain potential negative factors, including: (i)
Overseas Filmgroup's dependence on Ms. Little and Mr. Little; (ii)
the fact that approximately 69% of Overseas Filmgroup's revenues
are derived from international markets; (iii) potential
competition from large, integrated international entertainment
companies; and (iv) the possibility that Overseas Filmgroup's
business plan and strategy could lead to greater risks of doing
business.
The EMAC Board did not find it practicable to quantify the
relative importance ascribed to the factors referred to above. However the
EMAC Board believed that the factors discussed in paragraphs (1) through (5)
supported its decision to approve the Merger Agreement and significantly
outweighed the factors referred to in paragraph (6). The EMAC Board concluded
that, notwithstanding the potentially negative factors, a Merger with Overseas
Filmgroup is in the best interests of EMAC and its stockholders and is
consistent with EMAC's business objective of effecting a Business Combination
with a suitable Target Business in the Entertainment/Media Industry.
The EMAC Board did not seek or obtain a fairness opinion regarding
the Merger. However, the EMAC Board determined, in accordance with certain
requirements related to its IPO, that the fair market value of Overseas
Filmgroup is equal to at least 80% of the net assets of EMAC.
In reaching its conclusion to approve the Merger Agreement and the
Merger, the EMAC Board also was aware of certain conflicts of interest of
EMAC's directors, officers and significant stockholders, including that unless
EMAC consummates the Merger, such persons' shares of EMAC Common Stock would
have no value. See "THE MERGER -- Interests of Certain Persons in the Merger."
THE EMAC BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
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THE MERGER AGREEMENT
Merger Consideration
Pursuant to the provisions of the Merger Agreement, the Overseas
Common Stock will be converted into an aggregate of (i) 3,177,778 Merger
Shares; (ii) $1,500,000 in cash, subject to adjustment in certain
circumstances; and (iii) a secured promissory note in the amount of
$2,000,000. The Merger Note will be payable over a five-year period, with
principal and interest payable monthly, and will bear interest at the rate of
9% per annum. To secure the payment of the Merger Note, at the Closing the
Surviving Corporation and Ellen Dinerman Little and Robert B. Little will
enter into a Security Agreement whereby the Surviving Corporation will grant
Ms. Little and Mr. Little a security interest, subordinate to the security
interest of Overseas Filmgroup's commercial lenders, in substantially all of
its assets. In addition, pursuant to the Merger Agreement, EMAC has agreed
that the Surviving Corporation will repay, on or before December 31, 1996, a
$3,500,000 loan to Overseas Filmgroup which is guaranteed by the Overseas
Stockholders.
Because the market price of EMAC Common Stock is subject to
fluctuation, the market value of the shares of EMAC Common Stock that Overseas
Stockholders will receive in the Merger may increase or decrease prior to the
Merger. In the event that the average of the mean between the closing bid and
asked prices for shares of EMAC Common Stock for the three trading days prior
to the Closing Date (the "Average Price") is less than $5.20 per share of EMAC
Common Stock, then in addition to the Merger Consideration per share of
Overseas Common Stock, each Overseas Stockholder shall be entitled to receive
an amount of cash equal to the difference between $5.20 and the Average Price,
multiplied by the 3,177,778 Merger Shares, and such amount shall be deemed
included as part of the Merger Consideration.
The shares of EMAC Common Stock outstanding at the Effective Time
will not be changed as a result of the Merger. All such shares of EMAC Common
Stock will remain issued and outstanding, assuming no holder of EMAC Common
Stock exercises its right of redemption or appraisal regarding such shares.
Representations and Warranties
The Merger Agreement contains representations and warranties by
EMAC and by Overseas Filmgroup and the Overseas Stockholders relating to,
among other things, (a) due organization, valid existence and good standing of
EMAC and of Overseas Filmgroup and the Overseas Subsidiaries, and similar
corporate matters; (b) the authorization, performance and enforceability of
the Merger Agreement; (c) governmental authorization and other consents
required to effect the Merger; (d) the capital structure of each of EMAC and
Overseas Filmgroup; (e) financial statements; (f) title to assets and related
matters; (g) leases; (h) personal property; (i) accounts receivable; (j) the
absence of undisclosed liabilities; (k) taxes; (l) legal proceedings and
compliance with laws; (m) contracts; (n) insurance coverage; (o) intellectual
property; (p) benefit plans; (q) corporate records; (r) absence of material
changes; (s) business relationships with affiliates; and (t) in the case of
Overseas Filmgroup, its film library assets. In addition, the Merger Agreement
contains representations and warranties of the Overseas Stockholders regarding
their shares of Overseas Common Stock, investor suitability and transfer
restrictions on the Merger Shares.
Conduct of Business Prior to the Merger
Each of EMAC and Overseas Filmgroup has agreed that, prior to the
Merger, it will generally conduct its operations only in the ordinary course
of business, except as specifically agreed by the parties. Overseas Filmgroup
has also agreed that it will not, except as specifically agreed, (a) change or
amend governing instruments; (b) incur material liabilities other than in the
ordinary course of business; (c) discharge or satisfy any material encumbrance
or liability except in accordance with its terms; (d) merge, consolidate with
or acquire all or substantially all the assets of, or otherwise acquire the
business operations, of any person, corporation, partnership or other legal
entity; or (e) sell or encumber assets outside the ordinary course of
business.
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Certain Covenants
Pursuant to the Merger Agreement, each of EMAC, Overseas Filmgroup
and the Overseas Stockholders has agreed that he, she or it will, among other
things, (a) consult with the other parties prior to making any press releases
regarding the Merger and any matters contained in the Merger Agreement; (b)
promptly inform the other parties of certain events related to the Merger
Agreement and the transactions contemplated thereby; (c) use their respective
best efforts to take all necessary actions or cause to be done all things
necessary to consummate the transactions contemplated by the Merger Agreement
as soon as practicable including seeking or making all required filings,
orders, consents or authorizations required under applicable law or consents
from any governmental bodies or parties to any material contracts; (d) give
each of the other parties full access, without unreasonably interfering with
its business operations, to all of its books, contracts and records; and (e)
not solicit or initiate proposals from, provide information to or hold
discussions with any party concerning any sale of assets or any material
portion of any capital stock of EMAC or Overseas Filmgroup or any merger,
consolidation, business combination, liquidation or similar transaction. In
addition, EMAC has agreed (i) to cause a meeting of the EMAC Stockholders to
be duly called and held to approve the Merger; (ii) to file an application to
include EMAC Common Stock on the Nasdaq National Market; (iii) to file a
registration statement with the SEC covering the Common Stock subject to the
Option Plans; and (iv) to pay bonuses totalling not more than $175,000 to
certain employees of Overseas Filmgroup who will continue as employees of the
Surviving Corporation.
The Merger Agreement also provides that EMAC will, among other
things, use its best efforts to cause the election of Ellen Dinerman Little,
Robert B. Little, William F. Lischak and Alessandro Fracassi, each a designee
of Ms. Little and Mr. Little, and Stephen K. Bannon, Scot K. Vorse and Jeffrey
A. Rochlis, each a designee of the EMAC Board to serve as members of the Board
of Directors of the Surviving Corporation commencing at the Effective Time of
the Merger. Messrs. Little and Bannon would serve as Class I directors until
the 1997 annual meeting of stockholders or until their successors are elected
and qualified. Ms. Little and Mr. Vorse would serve as Class II directors
until the 1998 annual meeting of stockholders or until their successors are
elected and qualified. Messrs. Lischak, Rochlis and Fracassi would serve as
Class III directors until the 1999 annual meeting of stockholders or until
their successors are elected and qualified. The Merger Agreement further
provides that, from and after the Effective Time of the Merger, the following
persons will be the executive officers of the Surviving Corporation: Ellen
Dinerman Little and Robert B. Little as Co-Chairs of the Board and Co-Chief
Executive Officers; Ms. Little as President; William F. Lischak as Chief
Operating Officer, Chief Financial Officer and Secretary; and Stephen K.
Bannon as Vice-Chairman of the Board. In addition, an Executive Committee of
the Board of Directors will be formed with the following members: Mr. Bannon
(Chair), Ms. Little and Mr. Little.
Conditions to the Merger
The obligations of EMAC, Overseas Filmgroup and the Overseas
Stockholders to consummate the Merger are subject to, among other matters,
satisfaction of the following conditions (unless waived where permissible):
(a) approval of the Merger by the Overseas Stockholders (which was obtained on
June 30, 1996) and the EMAC Stockholders, with the holders of less than 20% of
the outstanding shares of EMAC Common Stock having exercised their redemption
or appraisal rights; (b) election of the seven persons nominated for election
as directors of the Surviving Corporation to serve commencing immediately upon
consummation of the Merger; (c) approval of the amendments to, and restatement
of, the EMAC Certificate of Incorporation; (d) approval of each of the Option
Plans by the EMAC Stockholders; (e) the representations and warranties of the
other parties being true and correct in all material respects at the Closing;
(f) performance and compliance in all material respects with the undertakings
and covenants required by the Merger Agreement to be performed or complied
with by the other parties prior to the Closing, including transfer to Overseas
Filmgroup of the interests in the Overseas Subsidiaries not currently owned by
it, the extension by the lenders of Overseas Filmgroup's credit facility; (g)
obtaining all consents and approvals necessary to consummate the Merger; (h)
absence of any pending, threatened or existing, litigation, proceeding or
investigation regarding the transactions proposed by the Merger Agreement; and
(i) receipt of the required legal opinions.
The obligations of EMAC, Overseas Filmgroup and the Overseas
Stockholders to consummate the Merger are also subject to, and conditioned
upon, execution and delivery of (a) the Merger Note; (b) the Security
Agreement; (c) five-year Non-Competition Agreements from Ellen Dinerman Little
and Robert B. Little; (d) five-
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year Employment Agreements with each of Ms. Little, Mr. Little and William F.
Lischak; (e) the option agreements pursuant to the Management Option Plan to
each of Ms. Little and Mr. Little; (f) the Stockholders' Voting Agreement
among EMAC, Ms. Little, Mr. Little and Mr. Lischak, and the Initial
Stockholders; (g) a Tax Reimbursement Agreement between EMAC and the Overseas
Stockholders; (h) the Lock-Up and Registration Rights Agreement; and (i) an
indemnity agreement with each director and executive officer of the Surviving
Corporation (the "Indemnity Agreement").
Indemnification
The Merger Agreement provides that, from and after the Effective
Time, EMAC will indemnify, defend and hold harmless the Overseas Stockholders,
and Ellen Dinerman Little and Robert B. Little (subject to the next paragraph)
will indemnify, defend and hold harmless EMAC, and each of their respective
directors, officers, employees, agents or advisors (including, in the case of
indemnification by EMAC, the directors, officers, employees, agents and
advisors of Overseas Filmgroup prior to the Merger) against all demands,
claims, losses, damages, liabilities, judgments, settlements, fines,
penalties, costs and expenses ("Losses") asserted against, imposed upon or
incurred by the indemnified parties as a result of (i) breaches of the
representations or warranties of the indemnifying party contained in the
Merger Agreement or (ii) the breach of, or failure to perform, any covenant or
agreement of the indemnifying party contained in the Merger Agreement. The
indemnification obligations of Ms. Little and Mr. Little to EMAC may be
satisfied by the surrender of shares of EMAC Common Stock equal in value to
such obligation.
The indemnification obligations of Ms. Little and Mr. Little to
EMAC will not apply to the first $350,000 of Losses, if any, incurred by EMAC
as a result of breaches of the representations and warranties of the Overseas
Stockholders regarding the film library assets of Overseas Filmgroup. In
addition, the indemnification obligations of Ms. Little and Mr. Little to EMAC
will not apply to the first $150,000 of Losses, if any, incurred by EMAC as a
result of breaches of all other representations and warranties of the Overseas
Stockholders, other than the representations relating to such film library
assets. Under the Merger Agreement, the indemnification obligations of the
Overseas Stockholders to EMAC are limited to a dollar amount equal to the
aggregate of (i) the value from time to time of the Merger Shares issued to
the Overseas Stockholders and (ii) the unpaid principal amount of, and
interest on, the Merger Note. The indemnification obligations of Ms. Little
and Mr. Little and EMAC terminate 15 days following delivery of the Surviving
Corporation's audited financial statements for the year ending December 31,
1997, but no later than the second anniversary of the Effective Time of the
Merger.
In addition to the indemnification provisions contained in the
Merger Agreement, EMAC has entered into a Tax Reimbursement Agreement with the
Overseas Stockholders. The Tax Reimbursement Agreement provides that the
Surviving Corporation will indemnify the Overseas Stockholders for any federal
income tax liabilities (including penalties and interest) of the Overseas
Stockholders arising from any adjustment to the income, deductions or credits
of Overseas Filmgroup for periods prior to the Merger, together with any
federal and state income tax arising from such indemnity payments. The
Surviving Corporation's reimbursement obligations are limited to $150,000,
except with respect to adjustments to Overseas Filmgroup's income, deductions
or credits which are reasonably expected to result in decreases to the
Surviving Corporation's income or increases in its deductions or credits after
the Merger. In addition, the Surviving Corporation will reimburse the Overseas
Stockholders for up to $400,000 of federal income taxes payable for the short
1996 S corporation taxable year of Overseas Filmgroup ending at the time of
the Merger.
Amendments; Waiver; Termination
The Merger Agreement may be changed or modified by written
agreement of the parties. In addition, each party may at any time waive the
other party's compliance with certain terms and conditions of the Merger
Agreement. The Merger Agreement may be terminated at any time prior to the
Effective Time (a) either by EMAC or by Overseas Filmgroup or by Ellen
Dinerman Little and Robert B. Little if there has been a material breach of
representations and warranties, or a failure to comply with covenants, by the
other party; (b) either by EMAC or by Overseas Filmgroup or Ms. Little and Mr.
Little if the Merger Agreement, the Option Plans, the amendments to, and
restatement of, the EMAC Certificate of Incorporation and the election of the
nominated directors of the Surviving Corporation are not approved by the EMAC
Stockholders; (c) by mutual consent of EMAC and Overseas
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Filmgroup; or (d) by either EMAC or Overseas Filmgroup if the Closing of the
Merger has not occurred by October 31, 1996.
If the Merger Agreement is terminated (a) by Overseas Filmgroup or
by Ms. Little and Mr. Little because the EMAC Stockholders fail to approve the
Merger or 20% or more of the shares of EMAC Common Stock held by Public
Stockholders are voted against the Merger and such stockholders exercise their
redemption or appraisal rights, or (b) by Overseas Filmgroup or Ms. Little and
Mr. Little because of a material breach by EMAC of any of its representations
and warranties or covenants, then EMAC must reimburse Overseas Filmgroup and
Ms. Little and Mr. Little for their reasonable out-of-pocket fees and expenses
incurred from and after February 10, 1996 in connection with the proposed
Merger. If the Merger Agreement is terminated for any other reason, then
Overseas Filmgroup, the Overseas Stockholders and EMAC shall each be solely
responsible for their own expenses incurred in connection with the proposed
Merger.
EFFECTIVE TIME
EMAC and Overseas Filmgroup anticipate filing a Certificate of
Merger and all other documents required for the Merger with the Secretary of
State of the State of Delaware as soon as practicable after (i) the voting
upon the matters to be considered at the EMAC Meeting and (ii) satisfaction,
or waiver, of the conditions contained in the Merger Agreement. The Merger
will be consummated on the date and time of such filing. It is anticipated
that, assuming all conditions are met, the Merger will occur on or about
________________ ____, 1996.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
No director or officer of Overseas Filmgroup has a personal or
business relationship with EMAC. In considering recommendations of the EMAC
Board with respect to the Merger, however, stockholders should be aware that
certain directors, officers and employees of EMAC and Overseas Filmgroup have
an interest in the consummation of the Merger, as described below.
As contemplated by the Merger Agreement, Ms. Little, and Messrs.
Little and Lischak are being nominated as directors of the Surviving
Corporation effective only upon consummation of the Merger. Each of these
persons is an executive officer or director of Overseas Filmgroup and will
continue as executive officers and directors of the Surviving Corporation
after the Merger. Each of these individuals (i) beneficially owns shares of
Overseas Common Stock that will be converted into shares of EMAC Common Stock
and other Merger Consideration upon consummation of the Merger; (ii) will have
a five-year Employment Agreement with the Surviving Corporation; and (iii) in
the case of Ms. Little and Mr. Little, will each receive options to purchase
1,100,000 shares of EMAC Common Stock pursuant to the Management Option Plan.
Each of the directors of EMAC owns shares of EMAC Common Stock.
The directors have agreed that if EMAC were to dissolve as a result of its
failure to complete a Business Combination, they would not participate in any
distribution of the assets of EMAC. Thus, unless EMAC completes the Merger,
the shares of EMAC Common Stock held by its current directors, in all
likelihood, will have no value.
EXCHANGE OF STOCK CERTIFICATES
Any stock certificate that, prior to the Effective Time,
represented outstanding shares of Overseas Common Stock will, after the
Effective Time and prior to surrender, be deemed to evidence ownership of the
Merger Consideration for which such shares of Overseas Common Stock were
exchanged in the Merger (subject to the provisions governing fractional
shares).
From and after the Effective Time, certificates representing EMAC
securities will continue to represent such securities of the Surviving
Corporation and will not be exchanged, notwithstanding the change of name of
EMAC to "Overseas Filmgroup, Inc."
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FRACTIONAL SHARES
No fractional share of EMAC Common Stock will be issued as a
result of the Merger. Each Overseas Stockholder entitled to receive a
fractional share of EMAC Common Stock will receive one whole share of EMAC
Common Stock in lieu of such fractional share.
MANAGEMENT AFTER THE MERGER
As contemplated by the Merger Agreement, at the Effective Time,
the Board of Directors of the Surviving Corporation will consist of Ellen
Dinerman Little, Robert B. Little, William F. Lischak, and Alessandro
Fracassi, designees of Ms. Little and Mr. Little; and Stephen K. Bannon, Scot
K. Vorse and Jeffrey A. Rochlis, designees of the EMAC Board. In addition,
after the Effective Time, the current officers of Overseas Filmgroup will be
appointed to similar positions with the Surviving Corporation. See "MANAGEMENT
OF OVERSEAS FILMGROUP -- Directors and Executive Officers." Ms. Little and
Messrs. Little and Lischak will each enter into five-year Employment
Agreements with the Surviving Corporation. Operating Guidelines for the Board
of Directors and management of the Surviving Corporation following the Merger
have also been established. These Operating Guidelines set forth the authority
and responsibilities of officers of the Surviving Corporation, the structure
and responsibilities of the Board of Directors and the Executive Committee of
the Surviving Corporation, and other general business matters. The director
nominees of the Overseas Stockholders and the current management of Overseas
Filmgroup will be in a position to direct the business affairs of the
Surviving Corporation after the Merger.
Pursuant to the Stockholders' Voting Agreement, Ms. Little, Mr.
Little and Mr. Lischak, the Initial Stockholders, and the Surviving
Corporation will agree, following the Merger, to use their best efforts to
cause the Board of Directors of the Surviving Corporation to consist of seven
members, including four individuals designated by Ms. Little and Mr. Little
and three individuals designated by the Initial Stockholders. Pursuant to the
Stockholders' Voting Agreement, each stockholder who is a party thereto will
also agree that the following actions will require the affirmative vote of at
least 75% of the authorized number of directors of the Surviving Corporation:
(i) any amendment to the EMAC Certificate of Incorporation or Bylaws that
would change the voting rights of stockholders, the number or classes of
directors, or the notice and quorum requirements for meetings of the Board of
Directors, committees or shareholders; (ii) a merger or sale of all or
substantially all of the assets of the Surviving Corporation; (iii) the
designation or issuance of any Preferred Stock and (iv) any amendments to the
Operating Guidelines. The Stockholders' Voting Agreement will terminate eight
and one-half years from the Effective Time or sooner if the employment of Ms.
Little, Mr. Little and Mr. Lischak is terminated. In addition, the right of
Ms. Little and Mr. Little, and of the Initial Stockholders, to designate
directors (but not the obligation to vote for the designees of others) will
terminate (i) as to Ms. Little and Mr. Little, (A) if they (and Mr. Lischak)
own less than 794,444 shares of EMAC Common Stock, they will be entitled to
designate only two directors, and (B) if they (and Mr. Lischak) own less than
20,000 shares, they will not be entitled to designate any director; or (ii) as
to the Initial Stockholders, (A) if they own less than 175,000 shares of EMAC
Common Stock, they will be entitled to designate only two directors, (B) if
they own less than 125,000 shares, they will be entitled to designate only one
director, and (C) if they own less than 20,000 shares, they will not be
entitled to designate any director.
EMPLOYMENT AGREEMENTS
Upon consummation of the Merger, Ms. Little, Mr. Little and
William F. Lischak will each enter into an Employment Agreement and Ms. Little
and Mr. Little will each enter into a Non-Competition Agreement with the
Surviving Corporation for a five-year term beginning on the Effective Time of
the Merger.
Ms. Little's and Mr. Little's Employment Agreements provide for
them to serve as Co-Chairs of the Board of Directors and Co-Chief Executive
Officers of the Surviving Corporation. Ms. Little will also serve as President
of the Surviving Corporation. Pursuant to these Employment Agreements, they
will each receive fixed annual compensation of $125,000, an annual bonus of
$25,000, plus such additional bonus, if any, as may be awarded to them by the
Surviving Corporation's Board of Directors or compensation or similar
committee, with Ms. Little and Mr. Little abstaining from any vote thereon.
The Employment Agreements also provide for certain benefits including, among
other things, life, disability and health insurance, and an automobile
allowance. In the event that the relevant Employment Agreement is terminated
by Ms. Little or Mr. Little for Good Reason (as defined), or by
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the Surviving Corporation other than for Cause (as defined), she or he will
receive (a) a lump-sum payment equal to 250% of the greater of (i) the
aggregate of all Fixed Annual Compensation to which she or he would otherwise
have been entitled through the balance of the term or (ii) an amount equal to
the fixed annual compensation and annual bonus for one full year; (b) a
lump-sum payment equal to 250% of the aggregate of all annual bonuses to which
she or he would otherwise have been entitled through the balance of the term;
(c) such additional payments as may be necessary to take into account and
reimburse her or him for certain excise taxes which may be applicable to
payments and benefits relating to such termination; (d) for the remainder of
the term, life, disability and health insurance and other benefits
substantially similar to those received prior to termination; and (e)
automatic vesting of any stock options held. In the event of the death or
permanent disability of Ms. Little or Mr. Little, she or he will be entitled
to a disability benefit or death benefit to the deceased's estate equal to the
product of two times (i) the aggregate fixed annual compensation that they
were entitled to receive for the full employment year in which the disability
or death occurs, plus (ii) an amount equal to the annual bonus.
Mr. Lischak's Employment Agreement will provide for his services
as Chief Operating Officer and Chief Financial Officer of the Surviving
Corporation. Under the agreement, Mr. Lischak will receive an annual base
salary of $175,000 for each of the first two years of the term, $200,000 for
the third and fourth years of the term and $225,000 in the final year of the
term. In addition, Mr. Lischak will also be entitled to a guaranteed bonus of
$50,000 per year payable in quarterly installments, plus such additional
bonus, if any, as may be awarded to Mr. Lischak by the Surviving Corporation's
Board of Directors or compensation or similar committee. Mr. Lischak will also
be entitled to certain benefits including, among other things, certain health,
life and disability insurance benefits, and an automobile allowance. In the
event of a material uncured breach by the Surviving Corporation of his
Employment Agreement, Mr. Lischak will be entitled to terminate the Employment
Agreement and to receive his base salary, fixed annual bonus, health, life and
disability insurance benefits due under the agreement through the remainder of
the five-year term, and any stock options held by Mr. Lischak will vest on the
date of termination.
In addition to their Employment Agreements, each of Ellen Dinerman
Little and Robert B. Little will enter into a Non-Competition Agreement,
pursuant to which he or she will agree, for a period of five years beginning
on the Effective Time of the Merger, not to (i) own, manage, operate or
control any business that competes with the business of the Surviving
Corporation (other than motion picture production activities and activities
that are specifically permitted under the Employment Agreements, and other
than the right to hold de minimis investments in publicly-held companies) or
(ii) solicit any employee or interfere with the relationship of the Surviving
Corporation with any employee, customer, supplier or lessee. The
non-competition obligations terminate earlier than the five-year term if the
individual party's employment is terminated by him or her for Good Reason or
by the Surviving Corporation other than for Cause (as such terms are defined),
or if the Surviving Corporation fails to pay any amount due under the Merger
Note at a time when Ms. Little and Mr. Little do not control a majority of the
Board of Directors of the Surviving Corporation.
ABSENCE OF REGULATORY FILINGS AND APPROVALS
Other than certain filings to be made and approvals obtained under
certain state securities or "blue sky" laws, there are no federal or state
regulatory requirements that must be complied with or approval obtained in
connection with the Merger.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, the Merger will
be treated as a recapitalization of Overseas Filmgroup by an exchange of
Overseas Common Stock for the net assets of EMAC, consisting primarily of
cash. The Surviving Corporation will reflect, in its consolidated financial
statements, the assets, liabilities and equity of Overseas Filmgroup at their
historical book values. Assets and liabilities of EMAC will be reflected at
their fair market value at the Effective Time of the Merger, which will
approximate their historical book values. Accordingly, the results of
operations and financial position of the Surviving Corporation, for periods
and dates prior to the Merger, will be the historical results of operations
and financial position of Overseas Filmgroup for such period and dates.
Following the Merger, the fiscal year of the Surviving Corporation will be
changed from
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November 30 (EMAC's fiscal year) to December 31 (Overseas Filmgroup's fiscal
year), effective for the fiscal year ending December 31, 1996.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a discussion prepared by Brobeck, Phleger &
Harrison LLP, counsel to EMAC that summarizes the material federal income tax
consequences of the Merger to EMAC and Overseas Filmgroup. In satisfaction of
a condition to the consummation of the Merger, Brobeck, Phleger & Harrison LLP
will deliver to EMAC, Overseas Filmgroup and the Overseas Stockholders a tax
opinion (the "Tax Opinion"), consistent with the following discussion. The
following discussion and the Tax Opinion are based upon provisions of the
Code, regulations, administrative rulings, and judicial decisions presently in
effect, all of which are subject to change (possibly with retroactive effect)
or to different interpretations. Neither the discussion nor the Tax Opinion
addresses any state, local or foreign tax considerations, or any federal
estate, gift, employment, excise or other non-income tax considerations.
No ruling from the Internal Revenue Service ("IRS") has been or
will be sought with respect to the tax consequences of the Merger. The Tax
Opinion is not binding on the IRS, nor will it preclude the IRS from taking a
contrary position. In rendering the Tax Opinion, Brobeck, Phleger & Harrison
LLP will be relying on the accuracy of certain representations of EMAC,
Overseas Filmgroup and the Overseas Stockholders.
In the opinion of Brobeck, Phleger & Harrison LLP, the federal
income tax consequences of the Merger to EMAC will be, among others, as
follows:
(i) The Merger will constitute a "reorganization" within
the meaning of Section 368(a)(1)(A) of the Code.
(ii) EMAC and Overseas Filmgroup will each be a "party to
the reorganization" within the meaning of Section
368(b) of the Code.
(iii) No gain or loss will be recognized by EMAC or Overseas
Filmgroup upon the Merger.
A stockholder of EMAC who exercises redemption or appraisal rights
with respect to shares of EMAC Common Stock and who receives payment for such
stock in cash should generally recognize capital gain or loss (if such shares
were held as a capital asset at the Effective Time of the Merger) measured by
the difference between the stockholder's tax basis in such shares and the
amount of cash received, provided that such payment is neither essentially
equivalent to a dividend nor has the effect of a distribution of a dividend.
RESTRICTED DISPOSITION OF MERGER SHARES; REGISTRATION RIGHTS
The Merger Shares are being issued to the Overseas Stockholders in
a private placement and have not been registered under the Securities Act. The
Merger Shares will constitute "restricted securities" under the Securities
Act. As a result, the Merger Shares will not be freely transferable under the
Securities Act for a period of two years following the consummation of the
Merger, and then only in accordance with Rule 144 promulgated under the
Securities Act or an effective registration statement thereunder.
Pursuant to the Lock-Up and Registration Rights Agreement to be
entered into with the Overseas Stockholders at the Closing, each of the
Overseas Stockholders will agree not to sell, or otherwise dispose of (except
for estate planning purposes and other limited exceptions), any Merger Shares
for a period commencing on the Effective Time and ending in three equal
installments on February 16, 1998, February 16, 1999 and February 16, 2000.
The lock-up will terminate earlier (i) with respect to an individual Overseas
Stockholder, if such Overseas Stockholder's employment with the Surviving
Corporation is terminated Without Cause (as defined) by the Surviving
Corporation or for Good Reason (as defined) by such Overseas Stockholder; (ii)
with respect to 10% of the Merger Shares subject to the Lock-Up and
Registration Rights Agreement if both Ellen Dinerman Little and Robert B.
Little are deceased; (iii) with respect to any Merger Shares held by Mr.
Lischak that are purchased by Ms. Little or Mr. Little or their designees
pursuant to any right of first refusal or repurchase agreement; (iv) with
respect to any
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Merger Shares surrendered in satisfaction of any indemnification obligation of
the Overseas Stockholders under the Merger Agreement; and (v) with respect to
a number of Merger Shares equal in value to the outstanding principal balance
(plus interest) of the Note, if the Surviving Corporation fails to pay any
amount due under the Merger Note.
Pursuant to the Lock-Up and Registration Rights Agreement, the
Overseas Stockholders will have the right on three occasions (but not more
than once in any 18-month period), on or after February 16, 1998 (or any
earlier termination of the lock-up period), to require the Surviving
Corporation, at its expense, to file a registration statement under the
Securities Act for the registration of a minimum of 250,000 of the Merger
Shares released to the Overseas Stockholders under this agreement. These
demand rights will terminate, as to one demand, eight years after the
Effective Time; as to the second demand, 12 years after the Effective Time;
and as to the third demand, 15 years following the Effective Time. In
addition, the Overseas Stockholders will have unlimited "piggyback" rights in
connection with registration statements filed by the Surviving Corporation
under the Securities Act for a period of eight years following the Closing.
AGREEMENT OF EMAC STOCKHOLDERS
The Initial Stockholders, who own an aggregate of approximately
19% of the shares of EMAC Common Stock outstanding and who are the directors
and executive officers of EMAC, have agreed that they will vote their shares
in accordance with the majority in interest of all other EMAC Stockholders on
the proposal to approve the Merger Agreement and in favor of the other
proposals being submitted to EMAC Stockholders. See "BUSINESS OF EMAC --
General."
REDEMPTION RIGHTS AND APPRAISAL RIGHTS
The following sets forth a description of the redemption and
appraisal rights that EMAC Stockholders have in respect of the Merger. These
rights are mutually exclusive of each other. Upon proper exercise of
redemption rights, a holder of EMAC Common Stock would be entitled to receive,
pursuant to the EMAC Certificate of Incorporation and in lieu of the Merger
Consideration, approximately $____ per share in cash. The amount that a holder
of EMAC Common Stock would receive upon perfection of his or her appraisal
rights in respect thereof would be determined as set forth below, and such
amount could be less than, equal to, or greater than the Redemption Price.
EMAC Redemption Rights
The EMAC Certificate of Incorporation provides each Public
Stockholder with redemption rights. Any Public Stockholder of EMAC may demand
that EMAC redeem his or her shares of EMAC Common Stock for cash by voting
against the Merger Agreement and properly complying with the procedures set
forth below. The Initial Stockholders have waived any redemption rights they
may have by being stockholders of EMAC.
The EMAC Certificate of Incorporation provides that each Public
Stockholder who votes against the Merger Agreement may demand that EMAC redeem
such shares at the Redemption Price equal to approximately $_______ (the
amount in the Trust Fund as of the EMAC Record Date), divided by 2,100,000
(the number of shares of EMAC Common Stock held by the Public Stockholders),
which Redemption Price is approximately $____ per share of EMAC Common Stock.
Any Public Stockholder desiring to exercise his or her right of redemption
("Redeeming Stockholder") must do all of the following: (i) vote against the
proposal to approve the Merger Agreement; (ii) notify EMAC in writing by
__________, 1996 of the election to have such stockholder's shares redeemed
("Redemption Notice"); and (iii) return to EMAC by _________, 1996 a letter of
transmittal and stock certificate, all in accordance with the procedures
described herein. THE FAILURE OF A REDEEMING STOCKHOLDER TO PERFORM ALL OF
SUCH REQUIREMENTS IN ACCORDANCE WITH SUCH PROCEDURES WILL TERMINATE THE
REDEEMING STOCKHOLDER'S REDEMPTION RIGHTS WITH RESPECT TO THE MERGER.
A Redeeming Stockholder must vote by proxy or in person against
the proposal to approve the Merger Agreement. A stockholder who fails to vote
against the proposal to approve the Merger Agreement, either by returning a
valid proxy or by voting in person, will be foreclosed from exercising the
right to have his or her shares
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of EMAC Common Stock redeemed. A stockholder who executes and returns an
unmarked proxy will have the shares voted "FOR" the Merger Agreement, and as a
consequence thereof, such stockholder will be foreclosed from exercising the
rights to have his or her shares of EMAC Common Stock redeemed. The redemption
rights will not be affected by a stockholder's vote on any other proposal
being submitted to EMAC Stockholders for approval at the EMAC Meeting. Since a
Public Stockholder must vote against the proposal to approve the Merger
Agreement in order to have a right of redemption, a Public Stockholder who
purchases shares of EMAC Common Stock after the EMAC Record Date will not have
any redemption rights with respect to such shares because he or she will not
be entitled to vote such shares.
The Redemption Notice must state that the Redeeming Stockholder
elects to have all of his or her shares of EMAC Common Stock redeemed if the
Merger becomes effective, and must specify the number of shares of EMAC Common
Stock held by such holder and the address to which EMAC should send a letter
of transmittal and instructions regarding redemption. A Redeeming Stockholder
may not elect redemption for less than all of his or her shares of EMAC Common
Stock.
EMAC MUST RECEIVE ANY REDEMPTION NOTICES NOT LATER THAN
__________, 1996, AT THE FOLLOWING ADDRESS: ENTERTAINMENT/MEDIA ACQUISITION
CORPORATION, ATTENTION: SECRETARY, 202 NORTH CANON DRIVE, BEVERLY HILLS,
CALIFORNIA 90210. A Redeeming Stockholder should send his or her Redemption
Notice in a manner that assures that such notice is received by EMAC by such
date.
The Redemption Notice must be signed by the Redeeming Stockholder
exactly as the holder's name appears on the proxy card accompanying this Proxy
Statement. Joint owners must all sign. If the signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation
or other person acting in a fiduciary or representative capacity, such person
should so indicate when signing.
Upon timely receipt of a properly completed Redemption Notice,
EMAC will mail to the Redeeming Stockholder a letter of transmittal and
instructions to be used by such holder in forwarding certificates representing
the shares of EMAC Common Stock to be redeemed ("EMAC Certificates"). A
REDEEMING STOCKHOLDER MUST RETURN A PROPERLY COMPLETED TRANSMITTAL LETTER,
TOGETHER WITH ANY EMAC CERTIFICATE LISTED ON THE TRANSMITTAL LETTER, TO EMAC
AT THE ADDRESS SPECIFIED ABOVE NOT LATER THAN __________, 1996.
Since only holders of record may exercise redemption rights,
persons who beneficially own shares held of record by fiduciaries, nominees or
others and who wish to exercise their redemption rights must instruct the
record holders of their shares to satisfy the conditions described herein.
Concurrently with the consummation of the Merger, The United
States Trust Company of New York, as trustee ("Trustee"), as directed by EMAC,
will distribute to EMAC's transfer agent an amount equal to the Redemption
Price multiplied by the number of shares owned by the Redeeming Stockholders.
As soon as practicable thereafter, the transfer agent will then distribute
such amount to the Redeeming Stockholders as their respective interests may
appear. Upon payment of the aggregate Redemption Price, the Redeeming
Stockholders will cease to have any interest with respect to their shares of
EMAC Common Stock.
Any Redeeming Stockholder may withdraw his or her demand for
redemption at any time prior to the date of the EMAC Meeting. No Redeeming
Stockholder may withdraw his or her demand, however, after the EMAC Meeting.
EMAC Appraisal Rights
When the Merger is effected, EMAC Stockholders who comply with the
procedures prescribed in Section 262 of the DGCL ("Section 262") will be
entitled to a judicial determination of the "fair value" of their shares
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) and to receive from EMAC payment of such fair value
in cash. Shares of EMAC Common Stock that are outstanding immediately prior to
the Effective Time and with respect to which appraisal shall have been
properly demanded in accordance with Section 262 shall not be converted into
the right to receive the Merger Consideration at or after the Effective
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<PAGE>
Time unless and until the holder of such shares withdraws his or her demand
for such appraisal or becomes ineligible for such appraisal.
The following is a brief summary of the statutory procedures to be
followed by an EMAC Stockholder in order to dissent from the Merger and
perfect appraisal rights under Delaware law. THIS SUMMARY IS NOT INTENDED TO
BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION 262, THE
TEXT OF WHICH IS INCLUDED AS APPENDIX B OF THIS PROXY STATEMENT. ANY
STOCKHOLDER CONSIDERING DEMANDING APPRAISAL IS ADVISED TO CONSULT LEGAL
COUNSEL.
Written Demand for Appraisal. A written demand for appraisal of
shares of EMAC Common Stock must be delivered to EMAC by a stockholder seeking
appraisal before the taking of the vote on the Merger Agreement. This written
demand must be separate from any proxy or vote abstaining from or voting
against adoption of the Merger Agreement. Voting against adoption of the
Merger Agreement, abstaining from voting or failing to vote with respect to
adoption of the Merger Agreement will not constitute a demand for appraisal
within the meaning of Section 262.
STOCKHOLDERS ELECTING TO EXERCISE THEIR APPRAISAL RIGHTS UNDER
SECTION 262 MUST NOT VOTE FOR ADOPTION OF THE MERGER AGREEMENT. A VOTE BY A
STOCKHOLDER AGAINST ADOPTION OF THE MERGER AGREEMENT IS NOT REQUIRED IN ORDER
FOR THAT STOCKHOLDER TO EXERCISE APPRAISAL RIGHTS. HOWEVER, IF A STOCKHOLDER
RETURNS A SIGNED PROXY BUT DOES NOT SPECIFY A VOTE AGAINST ADOPTION OF THE
MERGER AGREEMENT OR A DIRECTION TO ABSTAIN, THE PROXY, IF NOT REVOKED, WILL BE
VOTED FOR ADOPTION OF THE MERGER AGREEMENT, WHICH WILL HAVE THE EFFECT OF
WAIVING THAT STOCKHOLDER'S APPRAISAL RIGHTS.
A demand for appraisal must be executed by or for the stockholder
of record, fully and correctly, as such stockholder's name appears on the
stock certificates. If shares of EMAC Common Stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, such demand
must be executed by the fiduciary. If shares of EMAC Common Stock are owned of
record by more than one person, as in a joint tenancy or tenancy in common,
such demand must be executed by all joint owners. An authorized agent,
including an agent 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 and expressly disclose the fact that, in exercising the demand,
he or she is acting as agent for the record owner.
A record owner, such as a broker, who holds shares of EMAC Common
Stock as a nominee for others, may exercise appraisal rights with respect to
the shares of EMAC Common Stock held for all or less than all beneficial
owners of shares of EMAC Common Stock as to which the holder is the record
owner. In such case, the written demand must set forth the number of shares of
EMAC Common Stock covered by such demand. Where the number of shares of EMAC
Common Stock is not expressly stated, the demand will be presumed to cover all
shares of shares of EMAC Common Stock outstanding in the name of such record
owner. Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct the record owner to comply strictly with the
statutory requirements with respect to the delivery of written demand prior to
the taking of the vote on the Merger.
An EMAC Stockholder who elects to exercise appraisal rights must
mail or deliver the written demand for appraisal to: Entertainment/Media
Acquisition Corporation, Attention: Secretary, 202 North Canon Drive, Beverly
Hills, California 90210, or should deliver such demand to EMAC in person at
the EMAC Meeting. The written demand for appraisal should specify the
stockholder's name and mailing address and the number of EMAC Shares covered
by the demand, and should state that the stockholder is thereby demanding
appraisal in accordance with Section 262.
Other Procedures. Within 10 days after the Effective Time, EMAC
must provide notice as to the date of effectiveness of the Merger to all
stockholders who have duly and timely delivered demands for appraisal and who
have not voted for adoption of the Merger Agreement (a "Dissenting
Stockholder").
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Within 120 days after the Effective Time, any Dissenting
Stockholder is entitled, upon written request, to receive from EMAC a
statement setting forth the aggregate number of shares not voted in favor of
adoption of the Merger Agreement and with respect to which demands for
appraisal have been received by EMAC, the number of holders of such shares.
Such statement must be mailed within 10 days after the written request
therefor has been received by EMAC.
Within 120 days after the Effective Time, either EMAC or any
Dissenting Stockholder may file a petition in the Delaware Court of Chancery
demanding a determination of the fair value of each share of EMAC Common Stock
of all Dissenting Stockholders. If a petition for an appraisal is timely
filed, after a hearing on such petition, the Delaware Court of Chancery will
determine which EMAC Stockholders are entitled to appraisal rights and
thereafter will appraise the shares of EMAC Common Stock owned by such
stockholders, determining the fair value of such shares, exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest to be paid, if any, upon the amount
determined to be fair value. In determining fair value, the Delaware Court of
Chancery is to take into account all relevant factors. In Weinberger v. UOP,
Inc., et al., the Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court"
should be considered and that "[f]air price obviously requires consideration
of all relevant factors involving the value of a company." The Delaware
Supreme Court stated that in making this determination of fair value the court
and the appraiser may consider "all factors and elements which reasonably
might enter into the fixing of value," including "market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other
factors which were known or which could be ascertained as of the date of
merger and which throw any light on future prospects of the merged
corporation." The Delaware Supreme Court has construed Section 262 to mean
that "elements of future value, including the nature of the enterprise, which
are known or susceptible of proof as of the date of the merger and not the
product of speculation, may be considered." However, the court noted that
Section 262 provides that fair value is to be determined "exclusive of any
element of value arising from the accomplishment or expectation of the
merger."
Stockholders considering whether to seek appraisal rights should
bear in mind that the fair value of their shares of EMAC Common Stock
determined under Section 262 could be more than, the same as, or less than (i)
the value of the Merger Consideration to be exchanged in the Merger or (ii)
the consideration they would receive pursuant to their redemption rights if
they did not seek appraisal of their shares.
The cost of the appraisal proceeding may be determined by the
Delaware Court of Chancery and taxed upon the parties as the Court deems
equitable in the circumstances. Upon application of a Dissenting Stockholder,
the Court may order that all or a portion of the expenses incurred by any
Dissenting Stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, be charged pro rata against the value of all shares entitled to
appraisal. In the absence of such a determination or assessment, each party
bears its own expenses.
A Dissenting Stockholder who has duly demanded appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote for any purpose the shares of EMAC Common Stock subject to such demand or
to receive payment of dividends or other distributions on such shares of EMAC
Common Stock, except for dividends or other distributions payable to
stockholders of record at a date prior to the Effective Time.
At any time within 60 days after the Effective Time, any
Dissenting Stockholder will have the right to withdraw his or her demand for
appraisal and to accept the Merger Consideration. After this period, a
Dissenting Stockholder may withdraw his or her demand for appraisal only with
the consent of EMAC. If no petition for appraisal is filed with the Delaware
Court of Chancery within 120 days after the Effective Time, Dissenting
Stockholders' rights to appraisal shall cease and they shall be entitled to
receive the Merger Consideration. Inasmuch as EMAC has no obligation to file
such a petition, any EMAC Stockholder who desires such a petition to be filed
is advised to file it on a timely basis. However, no petition timely filed in
the Delaware Court of Chancery demanding appraisal shall be dismissed as to
any EMAC Stockholder without the approval of the Delaware Court of Chancery,
and such approval may be conditioned upon such terms as the Delaware Court of
Chancery deems just.
40
<PAGE>
Failure to take any required step in connection with the exercise
of appraisal rights may result in the termination or waiver of such rights.
41
<PAGE>
DESCRIPTION OF EMAC CAPITAL STOCK
GENERAL
EMAC is authorized to issue 20,000,000 shares of Common Stock, par
value $.001 per share, and 1,000,000 shares of Preferred Stock, par value
$.001 per share. As of July 31, 1996, there were outstanding 2,600,000 shares
of EMAC Common Stock, held of record by six stockholders (approximately ___
beneficial holders), 4,500,000 EMAC Warrants held of record by eight holders
(approximately __ beneficial holders) including 300,000 Bridge Warrants held
of record by seven holders and 200,000 UPOs. No shares of Preferred Stock are
currently outstanding.
UNITS
In its IPO, EMAC issued 2,100,000 EMAC Units ("Unit"). Each EMAC
Unit consisted of one share of EMAC Common Stock and two EMAC Warrants (as
defined below), each EMAC Warrant entitling the holder to purchase one share
of EMAC Common Stock. The securities constituting the Units began trading on
February 17, 1995 and currently also trade separately.
COMMON STOCK
The holders of shares of EMAC Common Stock are entitled to one
vote for each share held of record on all matters to be voted on by
stockholders. There is no cumulative voting with respect to the election of
directors. The holders of shares of EMAC Common Stock are entitled to receive
dividends when, as and if declared by the EMAC Board out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up
of EMAC, the holders of EMAC Common Stock (except for the Initial Stockholders
who have agreed to waive their rights to share in any distribution relating to
a liquidation of EMAC due to the failure of EMAC to consummate a Business
Combination by February 16, 1997) are entitled to share ratably in all assets
remaining available for distribution to them after payment of liabilities and
after provision has been made for each class of stock, if any, having
preference over EMAC Common Stock. Holders of EMAC Common Stock, as such, have
no conversion, preemptive or other subscription rights, and, except as
described under "BUSINESS OF EMAC -- General -- Redemption Rights," there are
no redemption provisions applicable to the EMAC Common Stock. All of the
outstanding shares of EMAC Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The EMAC Certificate of Incorporation authorizes the issuance of
1,000,000 shares of preferred stock ("Preferred Stock") with such
designations, rights and preferences as may be determined from time to time by
the EMAC Board. Accordingly, the EMAC Board is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of shares of EMAC Common Stock. The Preferred Stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of EMAC. Although EMAC has no
commitments as of the date of this Proxy Statement to issue any shares of
Preferred Stock, there can be no assurance that EMAC will not do so in the
future.
EMAC WARRANTS
Each outstanding EMAC Warrant entitles the registered holder to
purchase one share of EMAC Common Stock at a price of $5.00 per share, subject
to adjustment in certain circumstances, at any time commencing on the
consummation of the Merger and ending at 5:00 p.m., New York City time, on
February 16, 2002, at which time the EMAC Warrants will expire. The EMAC
Warrants are separable and transferable from the shares of EMAC Common Stock.
EMAC may call the EMAC Warrants for redemption, in whole and not in part, only
with the consent of GKN Securities Corp. if such call is made prior to one
year after the consummation of the Merger (or another Business Combination),
at a price of $.01 per EMAC Warrant upon not less than 30 days' prior written
notice, if the last sale price of the EMAC Common Stock has been at least
$8.50 per share ("Warrant Redemption
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<PAGE>
Price") for the 20 consecutive trading days ending on the third day prior to
the date on which the notice of redemption is given. The warrantholders shall
have exercise rights until the close of business on the date fixed for
redemption.
The EMAC Warrants are issued in registered form under a Warrant
Agreement between EMAC and Continental Stock Transfer & Trust Company, as
Warrant Agent.
The exercise price, number of shares of EMAC Common Stock issuable
on exercise of the EMAC Warrants and Warrant Redemption Price are subject to
adjustment in certain circumstances including in the event of a stock
dividend, recapitalization, reorganization, merger or consolidation of EMAC.
The EMAC Warrants, however, are not subject to adjustment for issuance of
shares of EMAC Common Stock at a price below their exercise price.
After the Effective Time of the Merger, the Surviving Corporation
has the right, in its sole discretion, to decrease the exercise price of the
EMAC Warrants for a period of not less than 30 days on not less than 30 days'
prior written notice to the warrantholders and to extend the expiration date
of the Warrants on five business days' prior written notice to the
warrantholders.
The EMAC Warrants may be exercised upon surrender of the EMAC
Warrant certificate on or prior to the expiration date at the offices of the
Warrant Agent, with the exercise form on the reverse side of the Warrant
certificate completed and executed as indicated, accompanied by full payment
of the exercise price (by certified check, payable to EMAC) for the number of
EMAC Warrants being exercised. The warrantholders do not have the rights or
privileges of holders of shares of EMAC Common Stock prior to the exercise of
the EMAC Warrants.
No EMAC Warrants will be exercisable unless at the time of
exercise EMAC has filed with the SEC a current prospectus covering the shares
of EMAC Common Stock issuable upon exercise of such Warrants and such shares
have been registered or qualified for sale or determined to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of such EMAC Warrants. Although EMAC intends to have
all shares so qualified for sale in those states where the holders of Warrants
reside and to maintain a current prospectus relating thereto until the
expiration of the EMAC Warrants, subject to the terms of the Warrant
Agreement, there can be no assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the EMAC
Warrants. If a warrantholder exercises all EMAC Warrants then owned of record
by him or her, however, EMAC will pay to such warrantholder, in lieu of the
issuance of any fractional share that is otherwise issuable to such
warrantholder, an amount in cash based on the market value of the Stock on the
last trading day prior to the date of exercise.
BRIDGE WARRANTS
In February 1994, EMAC raised $150,000 in a Bridge Financing
("Bridge Financing"). In connection therewith, seven investors were issued an
aggregate of 300,000 Bridge Warrants ("Bridge Warrants"). The Bridge Warrants
are identical to the EMAC Warrants, except that they are redeemable by EMAC
beginning 90 days after the consummation of the Merger (or another Business
Combination). The holders of the Bridge Warrants have agreed not to transfer
the Bridge Warrants until after the consummation of the Merger (or another
Business Combination).
UPOs
In connection with the IPO, EMAC sold to GKN Securities Corp., the
underwriter of the IPO, for an aggregate of $100 consideration, the right to
purchase up to an aggregate of 200,000 Units. The Units issuable upon exercise
of the UPOs are identical to the Units described above, except that the
Warrants contained therein are exercisable at a price of $5.85 per share and
expire on February 16, 2000. The UPOs are exercisable initially at $9.90 per
Unit ("Exercise Price") for a period of four years commencing on February 16,
1995. The UPOs granted to the holders thereof contain certain "piggyback" and
demand registration rights for periods of seven and
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five years, respectively, from February 16, 1995, with respect to registration
under the Securities Act of the securities directly and indirectly issuable
upon exercise of the UPOs.
DIVIDENDS
EMAC does not intend to pay any cash dividends for the foreseeable
future, as all available cash will be utilized to further the growth of the
Surviving Corporation's business subsequent to the Effective Time. In
addition, it is anticipated that the credit facility of the Surviving
Corporation will impose substantial restrictions on the payment of cash
dividends.
TRANSFER AGENT, WARRANT AGENT AND REGISTRAR
The transfer and warrant agent and registrar for the EMAC Common
Stock and EMAC Warrants is Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The EMAC Certificate of Incorporation provides that directors of
EMAC shall not be personally liable to EMAC or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the directors' duty of loyalty to EMAC or its stockholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under Section 174 of the DGCL
relating to prohibited dividends or distributions or the repurchase or
redemption of stock; or (iv) for any transaction from which the director
derives an improper personal benefit. If the DGCL is amended to authorize
further elimination or limitation of directors' liability, then the liability
of directors of EMAC shall automatically be limited to the fullest extent
provided by law. The Certificate of Incorporation and the Bylaws of EMAC also
contain provisions to indemnify the directors, officers, employees or other
agents to the fullest extent permitted by the DGCL. These provisions may have
the practical effect in certain cases of eliminating the ability of
stockholders to collect monetary damages from directors. EMAC believes that
these provisions in the Certificate of Incorporation and Bylaws of EMAC are
necessary to attract and retain qualified persons as directors and officers.
At the Effective Time, each of the directors and executive
officers of the Surviving Corporation will enter into an indemnity agreement
with the Surviving Corporation under which the Surviving Corporation will be
obligated to indemnify them, to the fullest extent permitted by law, for
acting in such capacity. The indemnity agreement will also set forth the
notice and other procedural requirements for such indemnification.
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MARKET PRICES OF EMAC'S SECURITIES
EMAC Units, EMAC Common Stock and EMAC Warrants are each quoted on
the OTC Bulletin Board under the symbols EMACU, EMAC and EMACW, respectively.
The following table sets forth the high and low closing bid quotations for the
periods indicated since such Units commenced public trading on February 16,
1995 and since such Common Stock and Warrants commenced public trading on
February 17, 1995. EMAC has never paid cash dividends on EMAC Common Stock.
<TABLE>
<CAPTION>
EMAC UNITS EMAC COMMON STOCK EMAC WARRANTS
---------- ----------------- -------------
FISCAL 1995 HIGH LOW HIGH LOW HIGH LOW
----------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter (from
February 17, 1995 -
February 28, 1995)...................... $ 5 7/8 $ 5 7/8 $ 4 1/4 $ 4 1/4 $ 3/4 $ 3/4
Second Quarter ........................... 5 3/4 5 1/2 4 3/8 4 1/4 3/4 1/2
Third Quarter ............................ 5 1/2 5 1/2 4 1/2 4 1/4 1/2 1/2
Fourth Quarter............................ 5 1/2 5 1/2 4 9/16 4 3/8 5/8 1/2
FISCAL 1996
-----------
First Quarter............................. 5 5/8 5 1/2 4 11/16 4 9/16 5/8 5/8
Second Quarter ........................... 6 5 5/8 5 5 3/4 5/8
</TABLE>
On July 1, 1996, the last full trading day prior to the public
announcement of execution of the Merger Agreement, the high bid prices of EMAC
Units, EMAC Stock and EMAC Warrants, as reported on the OTC Bulletin Board,
were $6, $51/8 and $15/16, respectively. On _______, 1996, the most recent
date for which it was practicable to obtain market price information prior to
the printing of this Proxy Statement, such high bid prices were $___, $___ and
$___, respectively. The above quotations represent prices between dealers and
do not include retail markups or markdowns or commissions. They may not
necessarily represent actual transactions.
NASDAQ NATIONAL MARKET LISTING
EMAC has applied to have the EMAC Common Stock, EMAC Warrants and
EMAC Units listed on the Nasdaq National Market upon consummation of the
Merger. In order to qualify to be included in the Nasdaq National Market, a
company must, among other things, satisfy a specified pretax income test. For
EMAC to satisfy this requirement at this time, the NASD would either need to
consider EMAC and Overseas Filmgroup as a combined company on a pro forma
basis during EMAC's past fiscal year or to waive the requirement. There is no
assurance that this approval will occur upon consummation of the Merger or
thereafter. If EMAC's application is not approved, EMAC currently intends to
reapply for inclusion in the Nasdaq National Market promptly after it has
satisfied the listing requirements. The listing of the EMAC Common Stock, EMAC
Warrants and EMAC Units on the Nasdaq National Market is not a condition to
the Merger.
STOCK PRICE PERFORMANCE COMPARISON
The following graph compares cumulative total return of EMAC
Common Stock with the cumulative total return of (i) the Standard & Poor's
SmallCap Index ("S&P Index"), (ii) the Russell 2000 Index and (iii) an
industry peer group index ("Peer Index") consisting of ten other publicly held
SPAC(R)s. The graph assumes $100 was invested on February 17, 1995 (the date
EMAC Common Stock began trading on the OTC Bulletin Board) in shares
45
<PAGE>
of EMAC Common Stock, the stocks comprising the S&P Index, the stocks
comprising the Russell 2000 Index and the stocks comprising the Peer Index.
EMAC has used an index of other SPAC(R) stocks equally weighted
for an industry peer group due to the unique business purpose of SPAC(R)s and
the features of their securities and rights of their security holders. The
Peer Index is composed of Financial Services Acquisition Corporation,
Restructuring Acquisition Corporation, Silver Diner Development, Inc.,
Productivity Technologies Corp., Network Systems, Inc., Niagara Corporation,
Source Media, Inc., Bogen Communications International Inc., Kellstrom
Industries, Inc. and Zydeco Energy, Inc.
<TABLE>
<CAPTION>
S&P
EMAC SPAC(R) SPAC(R) Small S&P Russell Russell
Date EMAC Index Average Index Cap Index 2000 Index
---- ---- ----- ------- ------ ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2/17/95 $ 4.75 100.00 5.23 100.00 96.13 100.00 254.71 100.00
2/24/95 4.75 100.00 5.21 99.58 96.23 100.10 255.47 100.30
3/31/95 4.75 100.00 5.31 101.49 98.34 102.30 260.77 102.38
4/28/95 4.53 95.37 5.19 99.18 100.46 104.50 266.17 104.50
5/26/95 4.41 92.84 5.32 101.70 102.11 106.22 270.57 106.23
6/30/95 4.50 94.74 5.47 104.65 107.42 111.74 283.63 111.35
7/28/95 4.75 100.00 5.42 103.65 115.39 120.04 299.23 117.48
8/25/95 4.67 98.32 5.32 101.62 117.65 122.39 304.36 119.49
9/29/95 4.75 100.00 5.74 109.73 120.86 125.73 310.38 121.86
10/27/95 4.66 98.11 5.68 108.58 113.65 118.23 294.55 115.64
11/24/95 4.56 96.00 5.53 105.62 116.72 121.42 302.26 118.67
12/29/95 4.75 100.00 5.32 101.72 121.10 125.98 315.97 124.05
1/26/96 4.75 100.00 5.56 106.27 119.86 124.69 311.22 122.19
2/23/96 4.70 98.95 5.83 111.39 125.58 130.64 325.76 127.89
3/29/96 4.63 97.47 5.72 109.37 127.70 132.84 330.77 129.86
4/26/96 4.78 100.63 5.78 110.44 134.72 140.14 347.83 136.56
5/31/96 4.81 101.26 6.72 128.48 139.61 145.23 361.85 142.06
6/28/96 5.31 111.79 6.52 124.68 134.03 139.43 346.61 136.08
7/26/96 5.13 108.00 6.09 116.42 124.37 129.38 314.57 123.50
</TABLE>
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EMAC COMPARATIVE PER SHARE DATA
The following table sets forth certain unaudited data concerning
certain historical per share data of EMAC and certain unaudited data
concerning pro forma per share data of the Surviving Corporation. This data
should be read in conjunction with the audited financial statements and other
historical and pro forma financial information for EMAC and Management's
Discussion and Analysis of Financial Condition for EMAC included elsewhere in
this Proxy Statement. The unaudited financial information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the Merger had been
consummated, nor is it necessarily indicative of future operating results or
financial position.
Historical Pro Forma (1)
---------- -------------
Book value per share at May 31, 1996 $4.33 $2.29
Cash dividends per share
Year Ended November 30, 1995 0 0
Six Months Ended May 31, 1996 0 0
Net income per share
Year Ended November 30, 1995 .06 .28
Six Months Ended May 31, 1996 .03 .16
(1) Assumes no redemption or appraisal of shares of EMAC Common Stock.
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SELECTED FINANCIAL DATA OF EMAC
The selected financial data with respect to EMAC as of, and for
the year ended, November 30, 1995 and the period from December 9, 1993
(inception) to November 30, 1994 have been derived from EMAC's financial
statements which have been audited by BDO Seidman, LLP, independent auditors.
The financial statements which appear elsewhere herein, include a description
of the EMAC Certificate of Incorporation, which provides for EMAC's mandatory
dissolution and liquidation if a Business Combination is not consummated by
February 16, 1997. The unaudited financial data of EMAC for the six months
ended May 31, 1995 and 1996 have been derived from the unaudited condensed
financial statements of EMAC, which appear herein and which, in the opinion of
the management of EMAC, include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results of
unaudited interim periods. Results for the interim periods are not necessarily
indicative of the results that may be expected for the entire fiscal year. The
selected financial data set forth below should be read in conjunction with the
financial statements of EMAC, together with the related notes thereto,
included elsewhere herein, and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF EMAC."
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
DECEMBER 9, DECEMBER 9,
1993 1993
(INCEPTION) FOR THE SIX MONTHS (INCEPTION)
THROUGH YEAR ENDED ENDED MAY 31, THROUGH
NOVEMBER 30, NOVEMBER 30, -------------------- MAY 31,
1994 1995 1995 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Interest income ......................... $ 0 $ 475,084 $ 161,179 $ 284,981 $ 760,065
Total expenses and taxes ................ 45,815 343,069 136,960 211,235 600,119
Net income (loss) ....................... 45,815 132,015 24,219 73,746 159,946
Net income (loss) per share ............. (.09) .06 .02 .03
Weighted average common shares
outstanding ........................... 500,000 2,093,699 1,584,615 2,600,000
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------
1994 1995 MAY 31, 1996
---- ---- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .......................... $ 35,062 $ 501,763 $ 239,687
U.S. Government security deposited
in Trust Fund and accrued
interest thereon ................................. 0 10,667,644 10,930,166
Total assets ....................................... 199,537 11,273,022 11,472,907
Total liabilities .................................. 205,352 96,722 222,861
Common Stock, subject to possible
conversion ....................................... -- 2,132,462 2,184,940
Stockholders' equity (deficit) ..................... (5,815) 9,043,838 9,065,106
Total liabilities, common stock
subject to possible conversion
and stockholders' equity ......................... 199,537 11,273,022 11,472,907
</TABLE>
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF EMAC
The following discussion and analysis provides information that
management believes is relevant to an assessment and understanding of EMAC's
results of operations and financial condition. The discussion should be read
in conjunction with the audited financial statements of EMAC and Notes
thereto.
In February 1994, EMAC raised $150,000 in Bridge Financing in
order to pay certain organizational expenses, the costs of the Bridge
Financing and certain costs of the IPO. Seven investors in the Bridge
Financing loaned an aggregate of $150,000 to EMAC and were issued promissory
notes in that amount, bearing interest at the rate of 10% per annum and
payable at the consummation of the IPO.
The IPO was consummated on February 27, 1995, and raised net
proceeds of $11,050,100 after payment of the IPO expenses.
EMAC's management has broad discretion with respect to the
specific application of the net proceeds of the IPO, although substantially
all of the net proceeds of this offering are intended to be applied toward
consummating a Business Combination with an operating business in the
entertainment and media industry. There is no assurance that EMAC will be able
to successfully effect a Business Combination. A majority of the net proceeds
($10,206,000) was placed in an interest-bearing Trust Fund until the earlier
of (i) the consummation of a Business Combination or (ii) the liquidation of
EMAC. The Trust Fund indenture limits investments to United States government
securities. The remaining proceeds are being used to pay for business, legal
and accounting due diligence on prospective acquisitions and continuing
general and administrative expenses in addition to other expenses.
In the event EMAC does not consummate a Business Combination
within 18 months from the consummation of the IPO, or 24 months if certain
criteria are met, EMAC will be dissolved and will distribute to all Public
Stockholders, in proportion to their respective equity interests in EMAC, an
aggregate sum equal to the amount in the Trust Fund plus any remaining net
assets of EMAC. Upon the signing of the Merger Agreement with Overseas
Filmgroup, such extension criteria were satisfied.
Substantially all of EMAC's working capital needs subsequent to
the IPO have been attributable to the identification, evaluation and selection
of a suitable target business and the structuring, negotiation and
consummation of the proposed business combination with Overseas Filmgroup.
Such working capital needs have been satisfied from the net proceeds of the
IPO not deposited in the Trust Fund.
During the six-month period ended May 31, 1996, EMAC incurred
expenses of $160,535, including expenses related to general and
administrative, insurance, and occupancy and excluding taxes. EMAC received
$284,981 in interest income from the Trust Fund and from cash and cash
equivalents not held in the Trust Fund during this period. During the six
months ended May 31, 1995, such expenses were $136,960 and $161,179 was
received from the Trust Fund and from cash and cash equivalents not held in
the Trust Fund; during the year ended November 30, 1995, such expenses were
$284,069 and $475,084 was received from the Trust Fund and from cash and cash
equivalents not held in the Trust Fund; during the period from December 9,
1993 (inception) to November 30, 1994, such expenses were $45,815 and no funds
were received from the Trust Fund; and during the period from December 9, 1993
(inception) to May 31, 1996, such expenses were $490,419 and $760,065 was
received from the Trust Fund and from cash and cash equivalents not held in
the Trust Fund.
49
<PAGE>
SELECTED FINANCIAL DATA OF OVERSEAS FILMGROUP
The following tables set forth certain historical financial data
for Overseas Filmgroup. The selected financial data with respect to Overseas
Filmgroup as of, and for the five years ended, December 31, 1995 have been
derived from Overseas Filmgroup's financial statements which have been audited
by Price Waterhouse LLP, independent accountants. The unaudited consolidated
financial data of Overseas Filmgroup for the six months ended June 30, 1995
and 1996 have been derived from the unaudited consolidated financial
statements of Overseas Filmgroup that appear herein and which, in the opinion
of the management of Overseas Filmgroup, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results for such periods. Results for the six months ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the entire
fiscal year. The selected financial data set forth below should be read in
conjunction with the Financial Statements of Overseas Filmgroup, together with
the related notes thereto included elsewhere herein, and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
OVERSEAS FILMGROUP."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996(1)
---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues ......................... $15,947,482 $14,722,483 $17,951,977 $20,734,094 $21,672,510 $10,198,897 $15,751,970
Film costs ....................... 12,499,257 11,121,888 13,962,255 16,395,902 16,320,694 7,775,254 12,506,663
Selling, general and
administrative ............... 2,041,889 2,234,774 2,401,509 2,151,214 2,721,745 1,136,986 1,662,152
Income from operations ........... 1,406,336 1,365,821 1,588,213 2,186,978 2,630,071 1,286,657 1,583,155
Income before income taxes ....... 1,682,927 1,636,989 1,997,872 2,441,960 2,894,066 1,350,904 1,663,062
Net income ....................... 1,592,927 1,562,989 1,697,244 2,145,473 2,461,161 1,140,904 1,540,424
Pro forma net income (2) ......... 1,745,610 1,008,688
Pro forma net income per
share (2)(3) ................... .42 .24
Weighted average number of
shares outstanding (3) ......... 4,180,635 4,180,635
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1996(1)
----------------------------------------------------------- ------------------------
PRO
1991 1992 1993 1994 1995 ACTUAL FORMA(4)
---- ---- ---- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Film costs, net of
accumulated
amortization ................. $ 2,699,746 $ 7,837,619 $10,808,032 $12,377,123 $17,349,071 $27,327,904 $27,327,904
Total assets ..................... 16,351,193 19,506,942 20,311,146 24,684,518 28,954,796 39,635,885 39,635,885
Notes payable, banks ............. 3,000,000 3,000,000 3,700,000 6,058,279 7,421,893 17,013,163 17,013,163
Total liabilities ................ 9,999,437 12,020,416 11,993,609 14,874,057 17,506,422 26,991,887 36,856,887
Total equity ..................... 6,351,756 7,486,526 8,317,537 9,810,461 11,448,374 12,643,998 2,778,998
</TABLE>
50
<PAGE>
NOTES TO SELECTED FINANCIAL DATA OF OVERSEAS FILMGROUP
(1) Includes Overseas Filmgroup and its majority-owned subsidiaries on
a consolidated basis. Prior to January 1, 1996, Overseas Filmgroup
had no subsidiaries. Overseas Filmgroup will acquire the remaining
interests in its majority-owned subsidiaries for nominal
consideration concurrently with the Merger. See "CERTAIN
TRANSACTIONS RELATING TO OVERSEAS FILMGROUP" and Note 4 to the
Unaudited Interim Financial Statements of Overseas Filmgroup
included elsewhere in this Proxy Statement.
(2) Since January 1, 1989 (including the periods presented), Overseas
Filmgroup has operated as an S- Corporation under Subchapter S of
the Code. The amounts shown reflect a pro forma charge which
represents the estimated federal income taxes that would have been
reported under FAS No. 109 had Overseas Filmgroup been a C
Corporation during the periods presented. Additionally, the
amounts shown reflect a pro forma interest charge related to the
Merger Note as described in note 4 below. See note 2 to the
Unaudited Interim Financial Statements of Overseas Filmgroup
included elsewhere in this Proxy Statement.
(3) Pro forma net income per share is not indicative of what actual
net income per share would have been if the Merger had occurred on
January 1, 1995 or 1996. Pro forma net income per share is
computed by dividing pro forma net income by the weighted average
number of shares outstanding during the period, adjusted to
reflect (i) 3,177,778 shares which treats the 100 currently
outstanding shares of Overseas Filmgroup as if they had been
recapitalized and (ii) 1,487,288 shares representing the number of
new shares that would have to be issued at a pro forma "initial
public offering (IPO)" price of $3.54 per share to pay the pro
forma distribution of $5,265,000 as of June 30, 1996 described in
Note 2 to the Unaudited Interim Financial Statements of Overseas
Filmgroup. The pro forma IPO price is based on the ratio of the
net assets of EMAC of $11,250,046 as of May 30, 1996 (the most
recent interim period of EMAC) to the 3,177,778 new shares that
would be issued if the Merger were consummated on that date.
Historical earnings per share has not been presented in view of
the prior periods S-Corporation status.
(4) Adjusted to reflect a pro forma declaration of $5,265,000 in
distributions payable to shareholders, representing the Merger
cash consideration ($1,500,000), retroactive effect of the
shareholder distribution made on July 8, 1996 ($3,500,000) and
reimbursement of certain federal income taxes payable by the
Overseas Filmgroup shareholders through June 30, 1996 ($265,000),
the Merger Note of $2,000,000 and the cumulative effect of FAS No.
109 consisting of deferred tax liabilities of $2,600,000 at June
30, 1996 resulting from the termination of Overseas Filmgroup's
status as an S-Corporation.
51
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF OVERSEAS FILMGROUP
OVERVIEW
The operations of Overseas Filmgroup were established in 1980 by
Ellen Dinerman Little and Robert B. Little, its directors, principal
stockholders and senior executive officers. Overseas Filmgroup specializes in
the acquisition and worldwide license or sale of distribution rights to
independently-produced feature films in a wide variety of genres. Overseas
Filmgroup obtains rights to motion pictures at various stages of completion
(either completed, in production or in development) and licenses distribution
rights (including theatrical, video, pay television, free television,
satellite and other ancillary rights) to such motion pictures to various
sub-distributors in the United States and in foreign markets, as well as
directly distributing certain motion pictures in the domestic theatrical
market. The licensing of distribution rights to foreign distributors and
sub-distributors in the major international territories or regions has
historically been Overseas Filmgroup's primary focus, accounting for a
substantial portion of Overseas Filmgroup's total revenues. In fiscal 1993,
1994 and 1995, and for the six months ended June 30, 1996, approximately 63%,
78%, 69% and 73% of Overseas Filmgroup's revenues were derived from such
activities. Overseas Filmgroup is treated for federal income tax purposes as
an S-Corporation under the Internal Revenue Code of 1986, as amended.
In situations where, prior to the availability of a motion
picture, Overseas Filmgroup is paid a minimum guarantee or other payment from
the licensing of distribution rights to foreign or domestic sub-distributors,
the minimum guarantee or other payment is recorded as deferred revenue and is
recognized at such time as the motion picture is available for release by the
sub-distributor. In most other cases, revenue is recognized at such time as
the motion picture is available for release by the sub-distributor and
revenues are earned pursuant to the terms of Overseas Filmgroup's agreement
with the sub-distributor. The timing of actual cash payments by
sub-distributors to Overseas Filmgroup of minimum guarantees and other amounts
earned by Overseas Filmgroup varies in accordance with the contractual terms
of each agreement. Certain payments to Overseas Filmgroup are made prior to
the recognition of income while other payments to Overseas Filmgroup are made
after revenue is recognized. When Overseas Filmgroup distributes a motion
picture directly to the domestic theatrical market, revenue is recognized over
the period of exhibition of the motion picture. However, cash payments to
Overseas Filmgroup by a theatrical exhibitor typically are not made until the
close of the film's engagement in the exhibitor's theaters or chain of
theaters. Revenues from the direct license by Overseas Filmgroup of
distribution rights to a pay television service are recognized at such time as
the motion picture is available for showing by such service and the license
agreement begins. Cash payments to Overseas Filmgroup from such services are
generally made from between 60 and 90 days after the initial airing of the
film on the pay television service.
Film costs represent a major component of Overseas Filmgroup's
assets. Film costs represent those costs incurred in the acquisition and
distribution of motion pictures or in the acquisition of distribution rights
to motion pictures. This includes minimum guarantees paid to producers or
other owners of film rights, recoupable distribution and production costs, and
capitalized interest and overhead. Overseas Filmgroup amortizes film costs
using the individual film forecast method under which film costs are amortized
for each film in the ratio that revenue earned in the current period for such
film bears to management's estimate of the total revenue to be realized from
all media and markets for such film. Management of Overseas Filmgroup
regularly reviews its revenue and cost forecasts and revises such estimates
for each film, as necessary, when warranted by management's appraisal of
current market conditions. This may result in a change in the rate of
amortization and write-downs to net realizable value. Net income in future
years is in part dependent upon Overseas Filmgroup's amortization of its film
costs and may be significantly affected by periodic adjustments in such
amortization.
52
<PAGE>
The following table sets forth Overseas Filmgroup's unamortized
film costs as of December 31, 1993, 1994 and 1995 and at June 30, 1996:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1993 1994 1995 JUNE 30, 1996
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Films in release, net of accumulated
amortization................................ $ 7,888,095 $ 9,456,441 $12,162,975 $18,802,145
Films not yet available for release........... 2,919,937 2,920,682 5,186,096 8,525,759
----------- ----------- ----------- -----------
$10,808,032 $12,377,123 $17,349,071 $27,327,904
=========== =========== =========== ===========
</TABLE>
The increases in unamortized film costs from fiscal 1993 to 1994 and from
fiscal 1994 to 1995 generally reflect expansion of Overseas Filmgroup's
operations, including increased acquisition of motion picture rights,
financing of motion picture production and licensing of distribution rights.
Of the increase in unamortized film costs from December 31, 1995 to June 30,
1996, a significant portion (approximately $5,791,000) was due to three of
Overseas Filmgroup's majority owned subsidiaries, each of which commenced
operations during such period. Based upon Overseas Filmgroup's estimate as of
December 31, 1995 of projected gross revenues, approximately 75% of
unamortized film costs applicable to films released as of such date are
expected to be amortized over the three-year period ending December 31, 1998.
Overseas Filmgroup directly distributes certain motion pictures in
the domestic theatrical market under the name "First Look Pictures." Prior to
June 1995, Overseas Filmgroup's domestic theatrical operations were conducted
by First Look Pictures, Inc. ("FLP Inc."), which was owned by Ellen Dinerman
Little and Robert B. Little. In anticipation of a merger of FLP Inc. with
Overseas Filmgroup, in January 1995 Overseas Filmgroup entered into a sales
agency arrangement with FLP Inc. whereby Overseas advanced all costs of
overhead as well as distribution and releasing costs on behalf of FLP Inc. in
exchange for First Look Inc.'s assignment of all income relating to the motion
pictures it released. FLP Inc. was merged into Overseas Filmgroup in June
1995.
Due to differences in the number of motion pictures for which
Overseas Filmgroup acquires distribution rights, differences in the number of
motion pictures distributed by Overseas Filmgroup, uncertainties in release
schedules, and the unpredictability of audience responses, Overseas
Filmgroup's revenues and earnings have historically fluctuated and are likely
to continue to fluctuate significantly from quarter to quarter. As a result,
results of operations for the six months ended June 30, 1996 are not
necessarily indicative of the results of operations that may be expected for
the entire fiscal year. Management of Overseas Filmgroup anticipates that,
primarily as a result of a one-time, non-recurring charge to income resulting
from the termination of Overseas Filmgroup's federal S-Corporation status upon
of consummation of the Merger (see "Certain Tax Related Matters" below), the
Surviving Corporation will incur a net loss for the quarter ending December
31, 1996. Such accounting charge will also significantly reduce the Surviving
Corporation's earnings for the year ending December 31, 1996, and could result
in a loss for such period, depending upon the other results of operations of
Overseas Filmgroup for such period.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to Six Months Ended
June 30, 1995
Revenues increased by $5,553,073 (54.4%) to $15,751,970 for the
six months ended June 30, 1996 from $10,198,897 for the six months ended June
30, 1995. This increase was primarily due to a greater number of larger budget
films (generally exhibiting higher production values) becoming available for
distribution. During the six months ended June 30, 1996, 11 motion pictures
each generated in excess of $200,000 in revenues, with an aggregate of
$13,092,688, or 83%, of total revenues, for such period attributable to those
films. During the comparable period in 1995, nine motion pictures each
generated in excess of $200,000 in revenues, with an aggregate of $7,801,316,
or 76%, of total revenues, for such period attributable to those films.
53
<PAGE>
Film costs as a percentage of revenues increased to 79.4% for the
six months ended June 30, 1996 from 76.2% for the six months ended June 30,
1995. This increase was primarily due to lower gross margins on the motion
pictures generating the most significant portion of revenues during the six
months ended June 30, 1996 compared to the motion pictures generating the most
significant portion of revenues during the comparable period in 1995. Gross
margins vary from film to film based upon many factors including the amount of
Overseas Filmgroup's investment in a particular film. In some cases, Overseas
Filmgroup is entitled to only a distribution fee based upon a percentage of
the film's gross revenues in a particular territory or territories and media.
In other circumstances, Overseas Filmgroup may have a substantial investment
in the film (for example, as a result of minimum guarantee commitments, rights
acquisition costs, or print and advertising commitments) and is dependent upon
the film's actual performance in order to generate a positive gross margin.
Other factors that impact gross margins include market acceptance of a film,
the budget of the film, and management of Overseas Filmgroup's analysis of the
motion picture's prospects (which under the individual film forecast method
impacts the rate of amortization).
Selling, general and administrative expenses, net of amounts
capitalized, increased by $525,166 (46%) to $1,662,152 for the six months
ended June 30, 1996 from $1,136,986 for the six months ended June 30, 1995.
This increase was primarily due to increased personnel costs, including a
greater number of personnel in the six months ended June 30, 1996 and
increased compensation paid in such period to Overseas Filmgroup's
shareholders. Additionally, there was greater bad debt expenses for the six
months ended June 30, 1996 and lower capitalization of overhead during such
period. Overseas Filmgroup capitalizes certain overhead costs incurred in
connection with its acquisition of rights to a motion picture by adding such
costs to the capitalized film costs of the motion picture.
Other income decreased by $75,614 (42%) to $104,291 for the six
months ended June 30, 1996 from $179,905 for the six months ended June 30,
1995. Other income in such periods represented primarily volume discounts from
suppliers and the decrease was primarily due to decreased volume discounts.
Overseas Filmgroup is an S-Corporation for federal income tax
purposes and, accordingly, was not subject to federal income taxes. See
"Certain Tax Related Matters" below. Overseas Filmgroup's tax provision
includes current state income taxes as well as foreign tax withholdings on
revenues generated in certain countries that are required to withhold taxes on
film royalties paid to a U.S. company. Overseas Filmgroup's effective tax rate
was 7.3% for the six months ended June 30, 1996 compared to 15.5% for the six
months ended June 30, 1995.
As a result of the above, Overseas Filmgroup had net income for
the six months ended June 30, 1996 of $1,540,424 compared to net income of
$1,140,904 for the six months ended June 30, 1995, an increase of 35%.
Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994
Revenues increased by $938,416 (4.5%) to $21,672,510 for the year
ended December 31, 1995 from $20,734,094 for the year ended December 31, 1994.
This increase was primarily due to domestic theatrical revenues generated by
the two motion pictures released by Overseas Filmgroup through First Look
Pictures in 1995, The Secret of Roan Inish and Party Girl. The operations of
First Look Pictures, previously independent of Overseas, were combined with
Overseas Filmgroup in 1995. See "Overview" above. During the year ended
December 31, 1995, eight motion pictures each generated in excess of $200,000
in revenues, with an aggregate of $12,022,643, or 55%, of total revenues, for
such period attributable to those films. During the comparable period in 1994,
15 motion pictures each generated in excess of $200,000 in revenues, with an
aggregate of $13,727,936, or 66%, of total revenues for such period
attributable to those films.
Film costs decreased $75,208 to $16,320,694, or 75.3% of revenues,
for the year ended December 31, 1995 from $16,395,902, or 79.1% of revenues,
for the year ended December 31, 1994. The decrease in the ratio of film costs
to revenues was primarily due to both higher distribution fees associated with
those motion pictures generating significant revenues released theatrically in
the year ended December 31, 1995 (including motion pictures released
theatrically in the United States by First Look Pictures) compared to the
prior year, as well as higher gross profit margins generated by Overseas
Filmgroup during the fiscal year ended December 31, 1995 on motion pictures
54
<PAGE>
in which Overseas Filmgroup owned an interest in the copyright compared to the
gross margins on such films in the prior year.
Selling, general and administrative expenses, net of amounts
capitalized, increased by $570,531 (26.5%) to $2,721,745 for the year ended
December 31, 1995 from $2,151,214 for the year ended December 31, 1994. This
increase was primarily due to Overseas Filmgroup's absorption of the
operations of First Look Pictures, including space and personnel costs. Also,
primarily as a result of a general expansion in Overseas Filmgroup's
operations, including an increase in the number of films financed by Overseas
Filmgroup, Overseas Filmgroup hired additional staff and leased additional
office space in the year ended December 31, 1995.
Interest expense, net of capitalized interest, decreased by
$129,559 (24.7%) to $394,762 for the year ended December 31, 1995 from
$524,321 for the year ended December 31, 1994. The decrease was primarily due
to interest rate reductions on certain borrowings and capitalization of
certain interest costs which previously had been expensed.
Other income decreased by $116,161 (26.8%) to $317,917 for the
year ended December 31, 1995 from $434,078 for the year ended December 31,
1994. Other income in such periods represented primarily volume rebates from
suppliers, equipment usage fees relating to computerized editing systems and,
in 1994, a one-time, non-recurring reversal of excess state income tax
accrual. The decrease was primarily due to the reversal in 1994 of the excess
state income tax accrual.
Overseas Filmgroup's effective tax rate was 15% in 1995 compared
to 12.1% in 1994.
As a result of the above, Overseas Filmgroup had net income for
the year ended December 31, 1995 of $2,461,161 compared to net income of
$2,145,473 for the prior year, an increase of 14.7%.
Year Ended December 31, 1994 Compared to Year Ended
December 31, 1993
Revenues increased by $2,782,117 (15.5%) to $20,734,094 for the
year ended December 31, 1994 from $17,951,977 for the year ended December 31,
1993. This increase was primarily due to increased exploitation by Overseas
Filmgroup of older releases in its motion picture library, including a license
of television rights to 30 films (all of which had been in release for more
than two years) to a sub-distributor in Spain for which $1,200,000 in revenues
were recognized in 1994, and distribution arrangements in both Latin America
and France for which an aggregate of approximately $1,800,000 in revenues were
recognized in 1994. During the year ended December 31, 1993, 12 motion
pictures each generated in excess of $200,000 in revenues, with an aggregate
of $13,745,769, or 77%, of total revenues for such period attributable to
those films.
Film costs increased $2,433,647 to $16,395,902, or 79.1% of
revenues, for the year ended December 31, 1994 from $13,962,255, or 77.8% of
revenues, for the year ended December 31, 1993. This increase in film costs
was primarily due to increased acquisition of motion picture rights in 1994
compared to 1993 and the write-off in 1994 of a substantially greater amount
of development costs related to various projects than in 1993.
Selling, general and administrative expenses, net of amounts
capitalized, decreased by $250,295 (10.5%) to $2,151,214 for the year ended
December 31, 1994 from $2,401,509 for the year ended December 31, 1993. This
decrease was primarily due to the adoption by Overseas Filmgroup in 1994 of a
policy of capitalizing to film costs certain overhead costs associated with
its acquisition of films rights. This accounting policy coincided with and was
a result of the general change in Overseas Filmgroup's primary business
activity from that of a sales agent that licenses motion pictures on behalf of
their owner to that of a distributor that itself acquires rights in a given
film for a specified term in a particular territory or territories and media.
In 1994, $808,945 of such costs were capitalized to film costs. The total of
selling, general and administrative expenses, including overhead costs
capitalized to film costs, of $2,960,159 for the year ended December 31, 1994
represented an increase of $558,650 from total selling, general and
administrative expenses of $2,401,509 in 1993, primarily due to increased
compensation and related costs resulting from an increase in the number of
Overseas Filmgroup personnel.
55
<PAGE>
Interest expense, net of capitalized interest, increased by
$284,218 (118%) to $524,321 for the year ended December 31, 1994 from $240,103
for the year ended December 31, 1993. This increase was primarily due to the
establishment of a credit facility with Coutts & Co. and borrowings
thereunder.
Other income increased by $120,136 (38.3%) to $434,078 for the
year ended December 31, 1994 from $313,942 for the year ended December 31,
1993. Other income in such periods represented primarily volume discounts from
suppliers, equipment usage fees relating to computerized editing systems, and,
in 1994, the non-recurring reversal of the excess state income tax accrual.
The increase was primarily due to the reversal in 1994 of the excess state
income tax accrual.
Overseas Filmgroup's effective tax rate was 12.1% in 1994 compared
to 15% in 1993.
As a result of the above, Overseas Filmgroup had net income for
the year ended December 31, 1994 of $2,145,473 (an increase of 26.4%) compared
to net income of $1,697,244 for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Overseas Filmgroup requires capital for the acquisition of film
rights, the funding of distribution costs and expenses, the repayment of debt,
and the payment of ongoing overhead costs. The principal sources of funds for
Overseas Filmgroup's operations have been cash flow from operations and bank
borrowings, primarily through Overseas Filmgroup's revolving credit facility
described below.
Overseas Filmgroup's cash flows provided by/(used in) operating,
investing and financing activities in 1993, 1994 and 1995, and for the first
six months of 1996 were as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30, 1996
------------------------------------------------------------- -----------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C> <C>
Operating................... $16,194,117 $16,471,868 $21,218,941 $9,383,980
Investing................... (16,822,398) (17,199,813) (21,376,982) (21,117,782)
Financing................... (166,233) 1,705,730 540,366 9,472,118
</TABLE>
Cash flow from operations consists primarily of cash collections generated by
the sale, license or other exploitation of distribution and other film rights
by Overseas Filmgroup. Investing activities include expenditure on films,
property and equipment and other activities that utilize cash. Investing
activities consist primarily of additions to film costs. Financing activities
include bank or other borrowings, and other activities that give rise to
additional cash to Overseas Filmgroup, decreased by distributions to the
stockholders of Overseas.
Since January 1, 1989, Overseas Filmgroup has been treated for
federal income tax purposes as an S- Corporation under the Internal Revenue
Code of 1986, as amended. Ms. Little and Mr. Little, the principal
stockholders of Overseas Filmgroup, each currently earns $90,000 per year in
salary. During the fiscal years ended December 31, 1993, 1994 and 1995 and
from January 1, 1996 through June 30, 1996, Overseas Filmgroup made aggregate
S-Corporation distributions to its stockholders of $866,233, $652,549,
$823,248 and $344,800. In July 1996, a $3,500,000 distribution was made to the
stockholders of Overseas Filmgroup as described below. Management of Overseas
Filmgroup anticipates that additional distributions from earnings generated by
Overseas Filmgroup after June 30, 1996 will be made to Overseas Filmgroup's
existing stockholders prior to consummation of the Merger. Management of
Overseas Filmgroup estimates that the amount of such additional distributions
after June 30, 1996 will aggregate approximately $58,000 per month. Management
of Overseas Filmgroup anticipates that the Surviving Corporation in the Merger
will retain future earnings to finance the expansion and development of its
business and not pay dividends on its capital stock. In addition, management
of Overseas Filmgroup anticipates that the amended Credit Facility described
below will impose substantial restrictions on the payment of cash dividends.
For further information regarding cash flows of Overseas, See "Consolidated
Statement of Cash Flows" in Overseas Filmgroup's financial statements included
in this Proxy Statement.
56
<PAGE>
During the next twelve months, Overseas Filmgroup currently
intends to acquire rights to and distribute approximately 12 to 18 films
(including approximately eight films to be distributed by Overseas Filmgroup
in the domestic theatrical market through its First Look Pictures operations).
Overseas Filmgroup, alone or in conjunction with others, currently intends to
selectively finance (typically by agreeing to pay a minimum guarantee in
connection with acquisition of distribution rights by Overseas Filmgroup) all
or a portion of the production costs of, or produce, approximately six to 10
of such films. No assurance can be given that such goals will be met (or that
such goals will not be exceeded). As of June 30, 1996, Overseas Filmgroup had
contractual obligations of $17,021,995, which provided for advances, minimum
guarantee payments, and prints and advertising spending (as well as an
additional $6,440,000 of obligations contingent upon completion and delivery
of certain motion pictures). Overseas Filmgroup also has a $325,000 loan
guarantee. As of June 30, 1996, Overseas Filmgroup also had deferred income
relating to distribution commitments and guarantees from sub-distributors of
approximately $1,879,700. For several reasons, including (i) the likelihood of
continued industry-wide increases in acquisition, production and marketing
costs, (ii) Overseas Filmgroup's intent to gradually and selectively acquire
rights to or produce films that have greater production values (often as a
result of larger budgets), and (iii) Overseas Filmgroup's increasing role as
the principal financier of a greater portion of the motion pictures it
distributes by providing minimum guarantee commitments, the capital required
by Overseas Filmgroup in its operations is likely to increase in the future.
See "Certain Considerations Relating to Overseas - Increasing Acquisition,
Production and Marketing Costs," "- Increased Risk with Increased Motion
Picture Investment."
Overseas Filmgroup has a revolving credit facility (the "Credit
Facility") under an agreement (the "Syndication Agreement") with Coutts & Co.
("Coutts"), as agent and a lender, and Berliner Bank A.G. London Branch
("Berliner"), as a lender. The Syndication Agreement currently provides for
total borrowings of $21,000,000, of which up to $4,000,000 may be borrowed on
a revolving basis for Overseas Filmgroup's working capital needs (the
"Operating Facility"), up to $1,000,000 is available (the "Local Facility") to
be issued as letters of credit to secure a local bank line of credit (the
"Local Line"), and up to $16,000,000 may be borrowed to fund the acquisition
of motion pictures or to fund distribution costs, including print and
advertising costs, associated with motion pictures acquired by Overseas
Filmgroup (the "Film Facilities"). The amount available under the Film
Facilities has been temporarily increased to $18,000,000 in connection with
the commitment of Coutts and Berliner to increase the Credit Facility upon
consummation of the Merger, as described below. The Syndication Agreement,
which is secured by substantially all of the assets of Overseas Filmgroup and
its majority-owned subsidiaries, contains a number of covenants and
requirements, including covenants that require Overseas Filmgroup to maintain
certain consolidated net worth and covenants that restrict distributions and
the creation or incurrence of indebtedness. The interest rate payable on
borrowings under the Syndication Agreement is 3% above the London Inter-Bank
Offered Rate ("LIBOR") in effect from time to time for one, three or six
months, as requested by Overseas Filmgroup. In addition, there is a commitment
fee on the daily unused portion of the Operating Facility of 1% per annum, and
fees with respect to the Local Facility of 2% of the face amount of issued
letters of credit. Fees on the Film Facilities include 2% of the amount of
cash advances or, in most circumstances, 2% of the face amount of each letter
of credit issued under the Film Facilities, as well as a percentage of gross
receipts of the film acquired or financed payable from Overseas Filmgroup's
net earnings from the film, which amounted in 1995 to $32,214.
Overseas Filmgroup borrows Film Facilities' funds on a
film-by-film basis, with each such Film Facility treated as a separate loan,
generally maturing 12 months after the first drawdown. Coutts must approve
each separate Film Facility, such approval to be granted in its sole
discretion. Amounts available under the Film Facilities are also available to
be issued as letters of credit or bank guarantees. As of June 30, 1996, an
aggregate of approximately $18,300,000 was outstanding under the Film
Facilities (including approximately $7,355,000 in face amount of letters of
credit and bank guarantees) and Operating Facility at an average interest rate
on the outstanding amounts of approximately 8.4375%. As of June 30, 1996,
$1,000,000 in face amount of letters of credit had been issued under the Local
Facility to secure a line of credit that Overseas Filmgroup has received from
Mercantile National Bank (under which $355,000 was outstanding as of June 30,
1996 bearing interest at the prime rate which was 8.25% per annum on August
19, 1996). If the letters of credit are drawn upon, Overseas Filmgroup must
repay the amounts advanced by the banks upon demand.
Amounts outstanding under the Operating Facility must be repaid on
the date that the commitment to lend under the Syndication Agreement expires.
The commitment of the banks to lend under the Syndication Agreement, which is
reviewed on an annual basis, expired on May 9, 1996; however, Coutts and
Berliner have continued to
57
<PAGE>
lend monies in accordance with the Credit Facility and have executed a
commitment letter (the "Commitment Letter") whereby they have agreed to amend
the Credit Facility, subject to preparation and execution of definitive
documentation, to provide, among other things, that the commitment to lend
will expire on May 9, 1997, the date of the next annual review. Pursuant to
the Commitment Letter, Coutts and Berliner have also committed, subject to
negotiation and execution of the definitive documentation and to consummation
of the Merger, to increase the amounts available under the Operating Facility
to $5,000,000 and, assuming that EMAC has actual cash balances on the
Effective Time of the Merger of $11,000,000 or more, to increase the amounts
available under the Film Facilities to $21,000,000. In the event that EMAC
does not have such cash balances, the increase in Film Facilities will be
reduced by the difference between $11,000,000 and the actual cash balances of
EMAC on such date (subject to a maximum reduction of $2,200,000). The amended
facility will contain revised covenants, representations and defaults to be
negotiated, which will include requirements that 30% of the amount outstanding
under the Film Facilities (including issued but unexercised letters of credit)
be collateralized by cash or receivables acceptable to the banks, provisions
requiring Ellen Dinerman Little's and Robert B. Little's continued involvement
with, and/or effective control of, the Surviving Corporation, and a
requirement that the aggregate key man life insurance on Ms.
Little, Mr. Little and Mr. Lischak be increased to $6,750,000.
Two majority owned production subsidiaries of Overseas Filmgroup,
which will be wholly owned by the Surviving Corporation upon consummation of
the Merger, have borrowed an aggregate of approximately $6,200,000 from a
local lender. Such loans, which each bear interest at an annual rate of 1%
over LIBOR and mature in the fourth quarter of 1996, are secured by letters of
credit issued pursuant to the Film Facilities. At June 30, 1996, an aggregate
of approximately $5,900,000 was outstanding under such loans at an average
interest rate on the amounts outstanding of approximately 6.5% per annum.
In July 1996, Overseas Filmgroup borrowed $3,500,000 from Coutts
(the "July Loan"). Such loan, which matures on December 31, 1996, bears
interest at 616% per annum, subject to adjustment at September 30, 1996, and
is secured by the personal guarantees of the existing stockholders of Overseas
Filmgroup and $3,500,000 in funds on deposit with Coutts provided by such
stockholders. Proceeds of the loan were used to make a distribution to the
stockholders of Overseas Filmgroup in July 1996. The existing stockholders of
Overseas Filmgroup are not obligated to provide any funds to Overseas
Filmgroup or to guarantee or secure the Credit Facility or any borrowings of
Overseas Filmgroup in the future.
As of June 30, 1996, Overseas had cash and cash equivalents of
$125,193. Additionally, Overseas Filmgroup had restricted cash of $179,723
held by Overseas Filmgroup's primary lender, Coutts & Co., to be applied
against future debt, supported by issued letters of credit, related to certain
motion picture acquisitions.
Overseas Filmgroup believes that its existing capital, funds from
operations, borrowings under the Credit Facility, and other available sources
of capital will be sufficient to enable Overseas Filmgroup to fund its planned
acquisition, distribution and overhead expenditures for the next 12 months. If
the Merger is consummated, management of Overseas Filmgroup anticipates that a
portion of the funds currently held by the Surviving Corporation will, after
payment of the cash portion of the Merger Consideration to the stockholders of
Overseas Filmgroup, satisfaction of any redemption and appraisal rights
obligations to the stockholders of EMAC, and payment of expenses relating to
the Merger, be used to repay the July Loan and possibly reduce debt under the
Credit Facility. In the event that the commitment to lend under the Credit
Facility, as amended in connection with the Merger, is not renewed by Coutts
and Berliner upon its expiration in May 1997, management of Overseas Filmgroup
anticipates that the Surviving Corporation will seek to refinance the Credit
Facility by obtaining a replacement facility from another lender or group of
lenders, although no assurances can be given that a replacement facility will
be entered into or that a replacement facility (or a renewal of the amended
Credit Facility) will be entered into on terms or in amounts similar to the
amended Credit Facility.
INFLATION
Management of Overseas Filmgroup believes that neither Overseas
Filmgroup's operating revenues nor costs materially increased in the last
fiscal year due to general economic inflation or general price changes. In
particular, management believes that no material increases in revenue were
attributable to increases in ticket prices for admission to motion picture
theaters. As indicated under "Certain Considerations Relating to Overseas
58
<PAGE>
Filmgroup," costs associated with the production (such as the salaries of
recognizable cast) and distribution (such as print and advertising costs) of
motion pictures have increased in recent years. Such cost increases may affect
results of operations of Overseas Filmgroup (or the Surviving Corporation) in
the future.
CERTAIN TAX RELATED MATTERS
Since 1989, Overseas Filmgroup has been treated for federal income
tax purposes as an S-Corporation. As a result, Overseas Filmgroup's taxable
income from such date through the day preceding the date of termination of
Overseas Filmgroup's S-Corporation status has been or will be taxed for
federal purposes directly to Overseas Filmgroup's stockholders, rather than to
Overseas Filmgroup. Pursuant to the Tax Reimbursement Agreement to be entered
into among the Surviving Corporation, Ellen Dinerman Little, Robert B. Little
and William F. Lischak upon consummation of the Merger, the Surviving
Corporation will reimburse the stockholders of Overseas Filmgroup for up to
$400,000 of federal income taxes payable for the short 1996 S-Corporation
taxable year ending at the time of termination of Overseas Filmgroup's
S-Corporation status (which will occur on or shortly prior to consummation of
the Merger). As a result of the termination of Overseas Filmgroup's
S-Corporation status, the Surviving Corporation will experience a one-time,
non-recurring accounting charge to income for deferred income taxes resulting
from such termination. Had the termination occurred on June 30, 1996, the
one-time, non-recurring charge to income would have been approximately
$2,600,000, however, the actual charge may be greater depending upon the
actual date of the Merger and Overseas Filmgroup's results of operations and
financial information on such date.
Overseas Filmgroup has been subject to California state corporate
income tax. In addition, certain foreign jurisdictions require tax withholding
on revenues to be paid to Overseas Filmgroup by foreign sub-distributors in
such territories. Overseas Filmgroup's effective tax rate has fluctuated from
period to period depending upon the relative proportion of sales to foreign
territories that require tax withholding compared to sales to those which do
not. The Surviving Corporation will be subject to federal and state corporate
income tax following consummation of the Merger, as well as applicable foreign
tax withholding.
The corporate income tax returns of Overseas Filmgroup for its
1992 and 1993 fiscal years are currently under audit by the Internal Revenue
Service ("IRS") and returns for the 1994 fiscal year and 1995 fiscal year
(which is currently on extension for filing) remain open to audit. In the
absence of the Tax Reimbursement Agreement, the stockholders of Overseas
Filmgroup during such periods, and not Overseas Filmgroup (or the Surviving
Corporation) would be responsible for any tax liability assessed as a result
of any federal income tax audits of pre- Merger periods because of the
S-Corporation election in effect for such periods. The Tax Reimbursement
Agreement provides that the Surviving Corporation will indemnify the existing
stockholders of Overseas for any federal income tax liabilities (including
penalties and interest) of any of them arising from any adjustments to the
income, deductions or credits of Overseas Filmgroup for periods prior to the
Merger, together with any federal and state income tax arising from the
indemnity payments. The Surviving Corporation's reimbursement obligations are
limited to $150,000, except with respect to adjustments to Overseas
Filmgroup's income, deductions or credits that are reasonably expected to
result in decreases to the Surviving Corporation's income or increases in its
deductions or credits after the Merger. In addition, such limitation shall not
apply to the Surviving Corporation's obligation to reimburse the existing
stockholders of Overseas Filmgroup for up to $400,000 of federal income taxes
payable for the short 1996 S-Corporation taxable year ending at the time of
the Merger.
59
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
OF EMAC AND OVERSEAS FILMGROUP
The following unaudited pro forma combined financial statements
are based upon the financial statements of Overseas Filmgroup and EMAC,
combined and adjusted to give effect to the Merger. The Merger Agreement
provides that all of the outstanding shares of Overseas Common Stock will be
converted into shares of EMAC Common Stock plus additional consideration,
including cash and a secured promissory note. The unaudited pro forma
financial statements reflect a recapitalization of Overseas Filmgroup, with
the issuance of shares by Overseas Filmgroup for the net assets of EMAC,
consisting primarily of cash. These pro forma combined financial statements
conform to Overseas Filmgroup's fiscal year since the operations of the
Surviving Corporation will primarily be those of Overseas Filmgroup. This
presentation is considered a more accurate reflection of results and would not
be materially different if EMAC's fiscal year of November 30 were the basis of
presentation. The pro forma adjustments are described in the accompanying
notes to the unaudited pro forma financial statements.
The unaudited pro forma combined statements of income for the six
months ended June 30, 1996 and for the year ended December 31, 1995 give
effect to the Merger as if it had occurred on January 1, 1995. The unaudited
pro forma combined statement of income for the six-month period ended June 30,
1996 was prepared based on the unaudited statement of income of Overseas
Filmgroup for the six months ended June 30, 1996 and of EMAC for the six
months ended May 31, 1996. The unaudited pro forma statement of income for the
year ended December 31, 1995 was prepared based on the statement of income of
Overseas Filmgroup for the year ended December 31, 1995 and of EMAC for the
year ended November 30, 1995.
The unaudited pro forma combined balance sheet at June 30, 1996
gives effect to the Merger as if it had occurred on such date and was prepared
based on the unaudited balance sheets of Overseas Filmgroup as of June 30,
1996 and of EMAC as of May 31, 1996.
The unaudited pro forma combined financial statements are not
necessarily indicative of the results of operations or financial position of
the Surviving Corporation that would have occurred had the Merger occurred at
the beginning of each period presented or on the date indicated, nor are they
necessarily indicative of future operating results or financial position. They
should be read in conjunction with the Overseas Filmgroup and EMAC audited
financial statements and unaudited interim financial statements, including
notes thereto, which are included herein.
60
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
as of June 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL Assuming No Redemption (A)
ASSETS OVERSEAS EMAC ADJUSTMENTS COMBINED
------ -------- ---- ----------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 304,916 $ 239,687 F $ (239,687) $ 304,916
U.S. government securities 10,930,166 B (5,000,000)
H (506,333)
B (265,000)
F (5,158,833)
Accounts receivable 11,014,923 11,014,923
Film costs, net of accumulated amortization 27,327,904 27,327,904
Fixed assets, net of accumulated depreciation 422,880 422,880
Other assets 565,262 303,054 H (566,000) 302,316
------------ ------------ -------------- ------------
$ 39,635,885 $ 11,472,907 $ (11,735,853) $ 39,372,939
============ ============ ============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 2,261,980 $ 222,861 H $ (272,333) $ 2,212,508
Payable to producers 5,707,044 5,707,044
Notes payable, banks 17,013,163 F (5,398,520) 11,614,643
Deferred income taxes 130,000 G 2,600,000 2,730,000
Deferred revenue 1,879,700 1,879,700
Notes payable, shareholders C 2,000,000 2,000,000
------------ ------------ -------------- ------------
TOTAL LIABILITIES 26,991,887 222,861 (1,070,853) 26,143,895
------------ ------------ -------------- ------------
Common stock subject to possible
conversion, 419,999 shares 2,184,940 D (2,184,940)
Stockholders' Equity:
- ---------------------
Common stock 500 2,180 E 3,178 5,778
D 420
E (500)
Additional paid-in capital 170,000 9,047,741 B (1,500,000)
C (2,000,000)
D 2,184,520
E (3,178)
E 500
E 15,185
E 4,948,182
H (800,000) 12,062,950
Retained earnings 12,473,498 15,185 B (3,500,000)
E (15,185)
E (4,948,182)
B (265,000)
G (2,600,000) 1,160,316
------------ ------------ -------------- ------------
TOTAL STOCKHOLDER EQUITY 12,643,998 9,065,106 (8,480,060) 13,229,044
------------ ------------ -------------- ------------
$ 39,635,885 $ 11,472,907 $ (11,735,853) $ 39,372,939
============ ============ ============== ============
</TABLE>
(RESTUBBED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
Assuming Maximum Redemption (A)
ASSETS ADJUSTMENTS COMBINED
------ ----------- --------
<S> <C> <C> <C>
Cash and cash equivalents F-1 $ (239,687) $ 304,916
U.S. government securities B (5,000,000)
D-1 (2,184,940)
H (506,333)
B (265,000)
F-1 (2,973,893)
Accounts receivable 11,014,923
Film costs, net of accumulated amortization 27,327,904
Fixed assets, net of accumulated depreciation 422,880
Other assets H (566,000) 302,316
-------------- ------------
$ (11,735,853) $ 39,372,939
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses H $ (272,333) $ 2,212,508
Payable to producers 5,707,044
Notes payable, banks F-1 (3,213,580) 13,799,583
Deferred income taxes G 2,600,000 2,730,000
Deferred revenue 1,879,700
Notes payable, shareholders C 2,000,000 2,000,000
-------------- ------------
TOTAL LIABILITIES 1,114,087 $ 28,328,835
-------------- ------------
Common stock subject to possible
conversion, 419,999 shares D-1 (2,184,940)
Stockholders' Equity:
- ---------------------
Common stock E 3,178 5,358
D
E (500)
Additional paid-in capital B (1,500,000)
C (2,000,000)
E (3,178)
E 500
E 15,185
E 4,948,182
H (800,000) 9,878,430
Retained earnings B (3,500,000)
E (15,185)
E (4,948,182)
B (265,000)
G (2,600,000) 1,160,316
-------------- ------------
TOTAL STOCKHOLDER EQUITY (10,665,000) 11,044,104
-------------- ------------
$ (11,735,853) $ 39,372,939
============== ============
</TABLE>
61
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
A. The unaudited pro forma combined balance sheet is presented, in
the first instance, assuming that no EMAC Stockholder exercises redemption
rights (see "THE MERGER -- Redemption Rights and Appraisal Rights") and, in
the second instance, assuming that holders of 419,999 shares of EMAC Common
Stock exercise redemption rights (representing the maximum number of shares
with respect to which redemption can be effected pursuant to the EMAC
Certificate of Incorporation). Pursuant to the EMAC Certificate of
Incorporation, EMAC may not consummate a Business Combination if holders with
respect to 20% or more in interest of the EMAC Common Stock vote against the
Business Combination and request redemption of such shares. The unaudited pro
forma combined condensed Balance Sheet is presented in both instances assuming
no EMAC Stockholder exercises appraisal rights under Delaware law.
There were 100 shares of Overseas Common Stock outstanding as of
June 30, 1996. On a pro forma basis after the Merger, assuming no redemption
of shares of EMAC Common Stock, 5,777,778 shares of EMAC Common Stock will be
outstanding, which assumes 2,600,000 of previously outstanding shares and
3,177,778 shares issued in exchange for outstanding shares of Overseas Common
Stock. Where the maximum redemption of 419,999 shares of EMAC Common Stock as
permitted by the EMAC Certificate of Incorporation is assumed, 5,357,779
shares of EMAC Common Stock would be outstanding as of June 30, 1996, on a pro
forma basis.
Because the market price of EMAC Common Stock is subject to
fluctuation, the market value of the shares of EMAC Common Stock that Overseas
Stockholders will receive in the Merger may increase or decrease prior to the
Merger. In the event that the average of the mean between the closing bid and
asked prices for shares of EMAC Common Stock for the three trading days prior
to the Closing Date is less than $5.20 per share of EMAC Common Stock, then in
addition to the Merger Consideration per share of Overseas Common Stock, each
Overseas Stockholder shall be entitled to receive an amount of cash equal to
the difference between $5.20 and the Average Price, multiplied by the
3,177,778 Merger Shares, and such amount shall be deemed included as part of
the Merger Consideration. Payment of additional Merger Consideration is not
anticipated if the market price of EMAC Common Stock remains at or near its
current level ($5.188 on August 12, 1996).
B. Represents the release of restricted cash from the Trust Fund as
a result of the Merger, which is then used to pay Merger Consideration
($1,500,000), to repay debt used to fund distributions made to Overseas
Stockholders ($3,500,000) and to reimburse the Overseas Stockholders for
certain federal income taxes ($265,000).
C. Represents issuance of the Merger Note as Merger Consideration
paid to the Overseas Stockholders.
D. Represents the reclassification of EMAC Common Stock subject to
possible redemption on the basis of unaudited pro forma combined balance sheet
assumption that no EMAC stockholders will exercise their redemption rights.
D-1. Represents the release of restricted cash from the Trust Fund to
pay shareholders of EMAC assumed to have exercised their redemption rights.
E. Represents the recapitalization of stockholders' equity based
upon the issuance of EMAC Common Stock in exchange for Overseas Common Stock.
This includes a reclassification of remaining S Corporation retained earnings
to additional paid-in capital. The amount which is not reclassified represents
Overseas Filmgroup's C Corporation retained earnings prior to January 1, 1989,
the effective date of Overseas Filmgroup's initial S Corporation election.
F. Represents the release of restricted cash from the Trust Fund as
a result of the Merger and other EMAC cash used to repay debt of Overseas
Filmgroup concurrent with the Merger.
62
<PAGE>
F-1. Represents the release of restricted cash from the Trust Fund as
a result of the Merger and other EMAC cash used to repay debt of Overseas
Filmgroup concurrent with the Merger in the instance where the EMAC
Stockholders have exercised their redemption rights for the maximum number of
shares of EMAC Common Stock.
G. Represents the recognition of a deferred federal income tax
liability and the related earnings impact on Overseas Filmgroup upon
termination of S Corporation status and conversion to C Corporation status for
federal income tax purposes upon consummation of the Merger.
H. Represents the impact of total estimated expenses of $800,000 by
EMAC and Overseas Filmgroup in connection with the Merger.
63
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL Assuming No Redemption (A)
OVERSEAS EMAC ADJUSTMENTS COMBINED
-------- ---- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 21,672,510 $ 21,672,510
Expenses:
Film costs 16,320,694 F $ (96,000) 16,224,694
Selling, general and
administrative expenses 2,721,745 $ 284,069 B 350,000 3,310,147
C (45,667)
------------ ---------- ----------- ------------
Total expenses 19,042,439 284,069 208,333 19,534,841
------------ ---------- ----------- ------------
Income (loss) from operations 2,630,071 (284,069) (208,333) 2,137,669
------------ ---------- ----------- ------------
Other income (expense) 263,995 475,084 D (475,084)
E 150,450 414,445
------------ ---------- ----------- ------------
Income before income taxes 2,894,066 191,015 (532,967) 2,552,114
Provision for income taxes 432,905 59,000 G 442,095 934,000
------------ ---------- ----------- ------------
Net income $ 2,461,161 $ 132,015 $ (975,062) $ 1,618,114
============ ========== =========== ============
Earnings per share $ 0.06 $ 0.28
========== ============
Weighted average number of
common shares and common share
equivalents outstanding 2,093,699 H 5,777,778
========== ============
</TABLE>
(RESTUBBED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
Assuming Maximum Redemption
(A)
ADJUSTMENTS COMBINED
----------- --------
<S> <C> <C> <C> <C>
Revenues $ 21,672,510
Expenses:
Film costs 16,320,694
Selling, general and
administrative expenses B $ 350,000 3,310,147
C (45,667)
------------- ------------
Total expenses 304,333 19,630,841
------------- ------------
Income (loss) from operations (304,333) 2,041,669
------------- ------------
Other income (expense) D (475,084)
E 11,450 275,445
------------- ------------
Income before income taxes (767,967) 2,317,114
Provision for income taxes G 359,095 851,000
------------- ------------
Net income $ (1,127,062) $ 1,466,114
============= ============
Earnings per share $ 0.27
============
Weighted average number of
common shares and common share
equivalents outstanding I 5,357,779
============
</TABLE>
64
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL Assuming No Redemption (A)
OVERSEAS EMAC ADJUSTMENTS COMBINED
-------- ---- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 15,751,970 $ 15,751,970
Expenses:
Film costs 12,506,663 F $ (48,000) 12,458,663
Selling, general and
administrative expenses 1,662,152 $ 160,535 B 175,000 1,967,687
C (30,000)
------------ ------------ ------------ ------------
Total expenses 14,168,815 160,535 97,000 14,426,350
------------ ------------ ------------ ------------
Income (loss) from operations 1,583,155 (160,535) (97,000) 1,325,620
------------ ------------ ------------ ------------
Other income (expense) 79,907 284,981 D (284,981)
E 80,406 160,313
------------ ------------ ------------ ------------
Income before income taxes 1,663,062 124,446 (301,575) 1,485,933
Provision for income taxes 122,638 50,700 G 368,662 542,000
------------ ------------ ------------ ------------
Net income $ 1,540,424 $ 73,746 $ (670,237) $ 943,933
============ ============ ============ ============
Primary earnings per share $ 0.03 $ 0.16
============ ============
Fully diluted earnings per share J 0.14
============
Weighted average number of
common shares and common share
equivalents outstanding (primary) 2,600,000 H 5,777,778
============ ============
Weighted average number of
common shares and common share
equivalents outstanding (fully
diluted) J 10,247,222
============
</TABLE>
(RESTUBBED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
Assuming Maximum Redemption (A)
ADJUSTMENTS COMBINED
----------- --------
<S> <C> <C> <C> <C>
Revenues $ 15,751,970
Expenses:
Film costs 12,506,663
Selling, general and
administrative expenses B $ 175,000 1,967,687
C (30,000)
------------- ------------
Total expenses 145,000 14,474,350
------------- ------------
Income (loss) from operations (145,000) 1,277,620
------------- ------------
Other income (expense) D (284,981)
E 80,406 160,313
------------- ------------
Income before income taxes (349,575) 1,437,933
Provision for income taxes G 350,662 524,000
------------- ------------
Net income $ (700,237) $ 913,933
============= ============
Primary earnings per share $ 0.17
============
Fully diluted earnings per share J 0.14
============
Weighted average number of
common shares and common share
equivalents outstanding (primary) I 5,357,779
============
Weighted average number of
common shares and common share
equivalents outstanding (fully
diluted) J 9,911,223
============
</TABLE>
65
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
A. The unaudited pro forma combined Statement of Income is
presented, in the first instance, assuming that no EMAC Stockholder exercises
redemption rights (see "The Merger -- Redemption Rights and Appraisal Rights")
and, in the second instance, assuming that holders of 419,999 shares of EMAC
Common Stock exercise redemption rights (representing the maximum number of
shares with respect to which redemption can be effected pursuant to the EMAC
Certificate of Incorporation). Pursuant to the EMAC Certificate of
Incorporation, EMAC may not consummate a Business Combination if holders with
respect to 20% or more in interest of the EMAC Common Stock vote against the
Business Combination and request redemption of such shares. The unaudited pro
forma combined Statement of Income is presented in both instances assuming no
EMAC Stockholder exercises appraisal rights under Delaware law.
Upon consummation of the Merger, four companies which are owned
in whole (or 99%) by Ellen Dinerman Little and Robert B. Little (the principal
shareholders of Overseas Filmgroup) will be transferred to Overseas Filmgroup
for nominal consideration. These companies, which will become wholly owned
subsidiaries of the Surviving Corporation, do not have significant assets,
liabilities or operations. See "CERTAIN TRANSACTIONS RELATING TO OVERSEAS
FILMGROUP."
B. For the year ended December 31, 1995, and six months ended June
30, 1996, represents the increased salaries to be paid to certain officers and
senior management pursuant to the Employment Agreements and otherwise.
C. For the year ended December 31, 1995, and six months ended June
30, 1996, represents the elimination of EMAC fees and occupancy costs payable
to Bannon & Co. which will terminate on the date of the Merger.
D. For the year ended December 31, 1995, and six months ended June
30, 1996, represents the elimination of interest income on EMAC's investment
in a U.S. government security deposited in the Trust Fund, and other interest
income on EMAC's short term investments which will be liquidated upon
consummation of the Merger to pay the cash portion of the Merger Consideration
and repay debt of Overseas Filmgroup.
E. For the year ended December 31, 1995, and six months ended June
30, 1996, represents (i) the elimination of $317,000 and $167,393,
respectively, of interest expense on debt assumed repaid with funds available
upon consummation of the Merger, assuming no redemption, and $178,000 and
$167,393, respectively, assuming maximum redemption, and, (ii) interest
expense of $166,550 and $86,987, respectively, paid on the Merger Note.
F. For the year ended December 31, 1995, and six months ended June
30, 1996, represents the reduction of film cost expense resulting from the
reduction of capitalized interest relating to debt on film acquisitions.
G. For the year ended December 31, 1995, and six months ended June
30, 1996, represents the income tax provision at an effective rate of
approximately 36.4% on the pro forma combined income before taxes.
H. This weighted average number of common shares and common share
equivalents is based upon 2,600,000 shares of EMAC Common Stock currently
outstanding and the issuance of 3,177,778 shares as part of the Merger
Consideration.
I. This weighted average number of common shares and common share
equivalents is based upon 2,600,000 shares of EMAC Common Stock currently
outstanding, the issuance of 3,177,778 shares as part of the Merger
Consideration and, in the second instance only, the redemption of 419,999
shares upon consummation of the Merger.
J. Fully diluted earnings per share gives effect to dilutive
warrants and options that will be outstanding upon consummation of the Merger.
The dilutive effect is based on the June 30, 1996 market price of EMAC Common
Stock. Using the treasury stock method, $4,469,444 and 4,553,444 net new
shares are added to
66
<PAGE>
total common shares outstanding in the first and second instance,
respectively. Net income using the treasury stock method is increased by
$490,000 and $465,000 in the first and second instance, respectively.
67
<PAGE>
ELECTION OF DIRECTORS OF THE SURVIVING CORPORATION
Pursuant to the Merger Agreement, Ellen Dinerman Little, Robert B.
Little, William F. Lischak and Alessandro Fracassi have been designated by Ms.
Little and Mr. Little, and Messrs. Bannon, Vorse and Rochlis have been
designated by the EMAC Board as candidates for election to the Board of
Directors of the Surviving Corporation to serve commencing at the Effective
Time. Robert B. Little and Stephen K. Bannon will serve as Class I directors
until the 1997 annual meeting of stockholders or until their respective
successors have been elected and qualified. Ellen Dinerman Little and Scot K.
Vorse will serve as Class II directors until the 1998 annual meeting of
stockholders or until their respective successors have been elected and
qualified. William F. Lischak, Jeffrey A. Rochlis and Alessandro Fracassi will
serve as Class III directors until the 1999 annual meeting of Stockholders or
until their respective successors have been elected and qualified. If the
Merger Agreement is not approved and the Merger is not consummated, the
current directors of EMAC will continue as the EMAC Board.
Unless otherwise specified in the form of proxy, the proxies
solicited by the management of EMAC will be voted "FOR" the election of the
candidates listed below. In case any of these nominees become unavailable for
election to the Board of Directors, an event that is not anticipated, the
persons named as proxies, or their substitutes, shall have full discretion and
authority to vote or refrain from voting for any other nominee in accordance
with their judgment (although the election of the following directors is a
condition to both EMAC's and Overseas Filmgroup's obligations to consummate
the Merger). The election of directors requires a plurality of those shares
voted at the meeting with respect to the election of directors.
<TABLE>
<CAPTION>
Name Age Director Since Current Position
- ---- --- -------------- ----------------
<S> <C> <C> <C>
Ellen Dinerman Little 54 1984 (Overseas President, Director and Secretary of
Filmgroup) Overseas Filmgroup
Robert B. Little 51 1987 (Overseas Chairman of the Board and Chief
Filmgroup) Executive Officer of Overseas Filmgroup
William F. Lischak 39 -- Chief Operating Officer and Chief Financial
Officer of Overseas Filmgroup
Stephen K. Bannon 42 1993 (EMAC) Chairman of the Board of EMAC
Scot K. Vorse 35 1995 (EMAC) Vice President--Finance, Treasurer,
Secretary and Director of EMAC
Jeffrey A. Rochlis 50 1993 (EMAC) President, Chief Executive Officer and
Director of EMAC
Alessandro Fracassi 45 -- President of Racing Pictures s.r.l.
</TABLE>
At the Closing, EMAC, Ellen Dinerman Little, Robert B. Little and
William F. Lischak, and the Initial Stockholders will enter into the
Stockholders' Voting Agreement whereby they will agree to use their best
efforts to cause the Board of Directors of the Surviving Corporation to
consist of seven members, including four individuals designated by Ms. Little
and Mr. Little and three individuals designated by the EMAC Board. The
Stockholders' Voting Agreement will terminate eight and one-half years from
the Effective Time or sooner if the employment of Ms. Little, Mr. Little and
William F. Lischak is terminated. In addition, if Ms. Little and Mr. Little or
the Initial Stockholders as a group, falls below certain stock ownership
thresholds, such stockholders' right to designate directors, but not their
obligation to vote for the designees of the other groups, will terminate.
ELLEN DINERMAN LITTLE co-founded the predecessor of Overseas
Filmgroup in February 1980 and served as its President and Director, as well
as the President and a Director of Overseas Filmgroup since its incorporation
in January 1984. Ms. Little is a founding member of The Archive Council, an
industry support group for the University of California at Los Angeles (UCLA)
Archive Film Preservation Program, serves on the Board of Directors of the
Antonio David Blanco Scholarship Fund, an endowment fund that annually
benefits deserving students in the UCLA Department of Film and Television, and
has been an active participant in the American Film
68
<PAGE>
Marketing Association, having served on various of its committees. Ms. Little
is Executive Producer of Richard III, which was nominated for two Academy
Awards.
ROBERT B. LITTLE co-founded the predecessor of Overseas Filmgroup
in February 1980 and has served as Chairman of the Board of Overseas Filmgroup
since February 1987 and its Chief Executive Officer since February 1990. Mr.
Little was a founding member of the American Film Marketing Association, the
organization which established the American Film Market, and served multiple
terms on its Board of Directors. In 1993, Mr. Little served on the City of Los
Angeles Entertainment Industry Task Force, a task force composed of industry
leaders focused on maintaining and enhancing Los Angeles's reputation as the
entertainment capital of the world. Mr. Little is also a founding member of
The Archive Council and a member of the Board of Directors of the Antonio
David Blanco Scholarship Fund.
WILLIAM F. LISCHAK has served as Overseas Filmgroup's Chief
Operating Officer since September 1990 and its Chief Financial Officer since
September 1988. Mr. Lischak, a certified public accountant, previously had
worked in public accounting, including from 1982 to 1988 with the accounting
firm of Laventhol & Horwath. Mr. Lischak has taught courses in the extension
program at UCLA in accounting, finance and taxation for motion pictures and
television.
ALESSANDRO FRACASSI, a designee of Ms. Little and Mr. Little to be
a director of the Surviving Corporation, founded Racing Pictures s.r.l. (an
Italian motion picture production and distribution company) in 1976 and has
served as its President since such date. Mr. Fracassi has extensive experience
in the field of Pan-European motion picture and television production. He has
served as a Vice President of the Italian Producers Association, an Italian
entertainment industry trade group. Additionally, Mr. Fracassi and his family
are active investors in various privately held businesses in Italy.
STEPHEN K. BANNON has been Chairman of the Board of EMAC since its
inception. Since June 1991 Mr. Bannon has been the Chief Executive Officer of
Bannon & Co., an investment banking firm that specializes in the
entertainment, media and communications industries. As part of an investment
banking assignment, from April 1, 1994 to December 31, 1995, Mr. Bannon served
as acting Chief Executive Officer of SBV, a division of Decisions Investment
Corp., which operates the Biosphere 2 project near Oracle, Arizona. Bannon &
Co. is a registered broker-dealer under the Exchange Act, and Mr. Bannon is a
registered principal with the NASD. Bannon & Co. succeeded to the business of
Talbott, Bannon & Co., of which Mr. Bannon was a general partner from January
1990 to June 1991. From 1985 to 1990, Mr. Bannon was employed in various
capacities by Goldman, Sachs & Co., most recently as Vice President,
Investment Banking, where his responsibilities included advising clients on
mergers and acquisitions and corporate finance in the Entertainment/Media
Industry.
SCOT K. VORSE has been Vice President--Finance, Treasurer,
Secretary and a Director of EMAC since January 1995. Since June 1991, Mr.
Vorse has been an Executive Vice President and the Chief Financial Officer of
Bannon & Co. Mr. Vorse is a registered principal with the NASD. From 1985 to
May 1991, Mr. Vorse was employed in various capacities by Goldman, Sachs &
Co., most recently as Vice President--Corporate Finance, where his
responsibilities included advising clients on mergers and acquisitions and
private and public financings.
JEFFREY A. ROCHLIS has been President, Chief Executive Officer and
a Director of EMAC since its inception. Mr. Rochlis is the founding principal
of Rochlis & Associates, a firm established in 1989 which specializes in new
product/business development in the Entertainment/Media Industry. From 1987
through 1989, Mr. Rochlis served as the Executive Vice President of Walt
Disney Imagineering, responsible for the development of new Disney theme parks
and attractions around the world. From 1985 through 1987, he served as
Executive Vice President of The Walt Disney Studios, responsible for finance,
administration, operations and new business development for Walt Disney,
Touchstone and Buena Vista motion picture, television and home video divisions
worldwide. From 1983 through 1985, Mr. Rochlis was the President and Chief
Operating Officer of the video game company, Sega Enterprises, Inc. Mr.
Rochlis served as a Director of Paramount Pictures Corporation from 1983
through 1985.
69
<PAGE>
The proposed amendments to the EMAC Certificate of Incorporation
provide for staggered terms for members of the board of directors of the
Surviving Corporation. Each director shall serve for a term ending on the date
of the third annual meeting following the annual meeting at which such
director was elected. This and other provisions may have the effect of
delaying, detaining or preventing a change of control of the Surviving
Corporation, may discourage bids for the Surviving Corporation's common stock
at a premium over market price, and may adversely affect the market price of
the Surviving Corporation's common stock.
COMPENSATION OF DIRECTORS
Directors currently do not receive any compensation from EMAC for
their service as members of the EMAC Board. After the Effective Time of the
Merger, directors of the Surviving Corporation will not receive any
compensation from the Surviving Corporation for their service as members of
the board of directors of the Surviving Corporation. Each of the directors of
the Surviving Corporation who are not full-time employees of the Surviving
Corporation will be granted an option to purchase 5,000 shares of EMAC Common
Stock at the Effective Time, at an exercise price equal to the fair market
value on the date of grant. Such options will vest on the first anniversary of
the date of grant and expiring on the earlier to occur of the third
anniversary of the date on which the director ceases to be a director or the
tenth anniversary of the date of grant. In addition, on the date of each
annual shareholders meeting, beginning with the 1997 annual meeting, each
individual who is to continue to serve as a non-employee member of the Board
of Directors of the Surviving Corporation will automatically be granted at
that meeting a stock option to purchase 5,000 shares of EMAC Common Stock,
provided such individual has served as a non-employee member of the Board of
Directors of the Surviving Corporation for at least six (6) months.
BOARD MEETINGS AND COMMITTEES
During 1995, the EMAC Board met or took other action three times.
There are no standing audit, nominating or compensation committees of the EMAC
Board. The Board of Directors of EMAC has no compensation policies required to
be disclosed as none of its executive officers receives any compensation.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the officers, directors
and persons who beneficially own more than ten percent of a registered class
of equity securities of EMAC ("ten percent stockholders") to file reports of
ownership and changes in ownership with the SEC. Officers, directors and ten
percent stockholders also are required to furnish EMAC with copies of all
Section 16(a) forms they file. Based solely on its review of the copies of
such forms furnished to it, and written representations that no other reports
were required, EMAC believes that during the fiscal year ended November 30,
1995, all its officers, directors and ten percent stockholders complied with
the Section 16(a) reporting requirements except that such parties did not
timely file their initial Form 3 filings.
APPROVAL OF AMENDMENTS TO EMAC CERTIFICATE OF INCORPORATION
Although EMAC believes that the material provisions of the
amendments to, and restatement of, the EMAC Certificate of Incorporation are
set forth below, reference should be made to the text of such EMAC Certificate
of Amendment for the form of amendments, a copy of which is attached to this
Proxy Statement as Appendix C and is incorporated herein by reference.
As amended, Article First would change EMAC's name to "Overseas
Filmgroup, Inc."
Article Fourth would be amended to increase the authorized capital
stock to 27,000,000 shares, of which 25,000,000 would be EMAC Common Stock and
2,000,000 would be series preferred stock, which may be issued, from time to
time, by the Board of Directors of the Surviving Corporation by resolution.
Article Fifth, containing a provision specific to EMAC's
incorporation, would be deleted and replaced with a new Article Fifth which
would specify various provisions relating to the board of directors of the
Surviving
70
<PAGE>
Corporation. As proposed, the Board of Directors of the Surviving Corporation
would be divided into three classes and each director would serve for a term
ending on the date of the third annual meeting following the annual meeting at
which such director was elected (and until such director's successor was
elected and qualified). In order to establish the classified board of
directors, certain of the directors elected at the EMAC Meeting would serve
initial terms of less than three years. See "ELECTION OF DIRECTORS OF THE
SURVIVING CORPORATION." In addition, the proposals would permit the removal of
directors, with or without cause, only by the affirmative vote of the holders
of a majority of the combined voting power of all then outstanding shares
entitled to vote generally in the election of directors, and would require the
affirmative vote of a supermajority (662/3%) of such stockholders to alter,
amend or repeal Article Fifth.
Article Sixth, containing provisions particular to the operation
of a SPAC(R) prior to the consummation of a Business Combination, would be
deleted and replaced with a new Article Sixth, which would specify that
meetings of stockholders may be held and the books of the Corporation may be
kept outside of Delaware as provided in the Bylaws.
Article Seventh, containing provisions relating to the Board of
Directors, which would be replaced substantially by the new Article Fifth,
would be deleted and replaced by a new Article Seventh relating to EMAC's
corporate existence.
The substance of Article Eighth will now be contained in Articles
Ninth and Tenth. The new Article Eighth would contain provisions providing
that EMAC Stockholders shall have no preemptive rights.
THE EMAC BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
THE AMENDMENTS TO THE EMAC CERTIFICATE OF INCORPORATION. The affirmative vote
of a majority of the outstanding shares of EMAC Common Stock entitled to vote
is required to approve the amendments to the EMAC Certificate of
Incorporation. If the Merger is not consummated, the EMAC Certificate of
Incorporation will not be amended and restated notwithstanding stockholder
approval of such proposal. Approval of the amendments to the EMAC Certificate
of Incorporation by the EMAC Stockholders is a condition to the Merger.
APPROVAL OF THE MANAGEMENT OPTION PLAN
The EMAC Stockholders are being asked to approve the Management
Option Plan that EMAC Board has adopted for the Surviving Corporation's two
principal executive officers: Ellen Dinerman Little and Robert B. Little. Each
of those individuals will be granted two options under the Management Option
Plan at the Effective Time of the Merger to purchase a total of 1,100,000
shares of EMAC Common Stock. Shareholder approval of the Management Option
Plan will also constitute shareholder approval of these option grants.
The following is a summary of the principal features of the
Management Option Plan and the options to be granted thereunder. Copies of the
Management Option Plan may be obtained upon request to EMAC at 202 North Canon
Drive, Beverly Hills, California 90210, Attn: Secretary.
DESCRIPTION OF THE MANAGEMENT OPTION PLAN
Structure. The Management Option Plan serves as the primary
vehicle for providing equity incentives to the Surviving Corporation's two
principal executive officers, Ellen Dinerman Little and Robert B. Little, is a
condition to consummation of the Merger and is required by their respective
Employment Agreements. Ms. and Mr. Little are husband and wife and serve as
the Co-Chairs of the Board and Co-Chief Executive Officers of the Surviving
Corporation; Ms. Little will also serve as the President of the Surviving
Corporation. Each of them will be granted two options for a total of 1,100,000
shares each of EMAC Common Stock at the Effective Time of the Merger: one
option for 537,500 shares of EMAC Common Stock at an exercise price of $5.00
per share ("Option Grant A"), and one option for 562,500 shares at an exercise
price of $8.50 per share ("Option Grant B"). Both Option Grant A and Option
Grant B will be non-statutory options under the federal tax laws.
71
<PAGE>
Option Grant A will be immediately exercisable on the Effective
Time of the Merger for 100,000 shares of common stock of the Surviving
Corporation and will become exercisable for the balance of the option shares
in a series of five (5) successive equal annual installments upon the
optionee's completion of each year of service with the Surviving Corporation
over the five (5)-year period measured from the Effective Time of the Merger.
Option Grant B will become exercisable in a series of five (5) successive
equal annual installments upon the optionee's completion of each year of
service with the Surviving Corporation over the five (5)-year period measured
from the Effective Time of the Merger.
Share Reserve. The maximum number of shares of EMAC Common Stock
reserved for issuance under the Management Option Plan is 2,200,000, subject
to adjustment in the event of certain changes in the Surviving Corporation's
capital structure. As a result, all shares initially reserved for issuance
will be subject to the options to be issued to Ms. Little and Mr. Little. The
shares issuable under the Management Option Plan may be made available either
from the Surviving Corporation's authorized but unissued common stock or from
common stock reacquired by the Surviving Corporation, including shares
purchased in the open market.
Eligibility. Only Ms. Little and Mr. Little are eligible to
participate in the Management Option Plan. The maximum number of shares of
EMAC Common Stock for which each such individual may be granted stock options
over the term of the Management Option Plan is 1,100,000 shares of EMAC Common
Stock, subject to adjustment in the event of certain changes in the Surviving
Corporation's capital structure.
Terms and Conditions of Options. The terms and conditions of the
options to be granted to Ellen Dinerman Little and Robert B. Little under the
Management Option Plan may be summarized as follows:
Each option to be granted will have a term of seven (7) years and
will accordingly expire on the close of business on the seventh anniversary of
the Effective Time. The exercise price may be paid in cash, with shares of
EMAC Common Stock or through the cancellation of any indebtedness of the
Surviving Corporation owed to the optionee, or a combination of the foregoing.
In addition, the option may be exercised through a same-day sale program
pursuant to which the shares purchased under the option are sold immediately,
with a portion of the sale proceeds delivered to the Surviving Corporation in
payment of the option exercise price.
Upon the optionee's cessation of service, the Group A and Group B
options held by that individual will immediately terminate to the extent those
options are not at that time exercisable for one or one or more option shares.
However, the options will immediately become exercisable for all the option
shares in the event the optionee's service is terminated by the Surviving
Corporation other than for Cause or by the optionee for Good Reason.
A termination for Cause will be deemed to occur if the optionee's
service is terminated by reason of his or her willful and continued failure
substantially to perform his or her material duties in good faith after the
optionee has been notified of the deficiencies in his or her performance and
given an opportunity to correct those deficiencies. The optionee will be
deemed to have terminated employment for Good Reason if such termination
occurs by reason of (i) a material breach by the Surviving Corporation of any
of its obligations under its employment agreement with the optionee or certain
other specified agreements in effect between the Surviving Corporation and the
optionee, (ii) an assignment to optionee of duties inconsistent with his or
her position with the Surviving Corporation, (iii) a reduction in his or her
level of compensation (including salary, bonus and benefits) or (iv) a change
in control or ownership of the Surviving Corporation without the optionee's
consent or any fundamental change to the business of the Surviving Corporation
effected without his or her consent so that the Surviving Corporation is no
longer principally involved in the distribution of motion pictures.
The Group I and Group II options held by the optionee will also be
subject to up to two (2) years' acceleration in the event the optionee's
service terminates by reason of death or disability.
72
APITAL PRINTING SYSTEMS]
<PAGE>
Special Acceleration Event
The Surviving Corporation may call the Group A Options for
redemption, in whole or in part, at a redemption a price of $0.01 per share of
EMAC Common Stock subject to the Group A Option (a "Redemption Call"). The
Redemption Call may be made: (i) at the time the Surviving Corporation calls
for redemption of all the Surviving Corporation's outstanding Redeemable
Common Stock Purchase Warrants (the "Warrant Call") or (ii) at any time after
the Warrant Call. However, a Redemption Call pursuant to clause (ii) may only
be made if the fair market value per share of EMAC Common Stock is at least
$8.50 (the "Threshold Market Price," subject to adjustment in the event of
certain changes in the Surviving Corporation's capital structure) on each of
the twenty (20) consecutive trading days ending on the third business day
prior to the date on which notice of such Redemption Call is given. Any Group
A Options subject to a Redemption Call, to the extent not otherwise at the
time fully exercisable, will accelerate and become exercisable for all the
option shares and may be exercised for any or all of those option shares at
any time prior to the actual redemption date specified for the Group A
Options.
GENERAL PROVISIONS
Option Assignability and Shareholder Rights. Options are not
assignable other than by will or the laws of inheritance following the
optionee's death and may be exercised only by the optionee during his or her
lifetime. No optionee will have any shareholder rights with respect to the
shares of EMAC Common Stock subject to his or her options until those options
are exercised and the optionee has become a holder of record of the purchased
shares.
Adjustments for Fundamental Corporate Changes. In the event of any
of the following transactions effecting a fundamental change to the Surviving
Corporation:
o consolidation with another company
o acquisition of the Surviving Corporation by merger or asset sale
o a capital reorganization or other
reclassification of the Surviving Corporation's
capital stock in which the holders of the EMAC
Common Stock become entitled to receive stock,
securities, cash or other property in exchange
for such EMAC Common Stock,
each option at the time outstanding under the Management Option
Plan will continue in effect and will be appropriately adjusted to apply to
the number and class of securities which would have been issuable to the
optionee upon consummation of such transaction had the option been exercised
immediately prior to such transaction. In addition, the exercise price payable
per share under the option will be equitably adjusted, provided that the
aggregate exercise price payable for the securities subject to that option
will remain the same.
Changes in Capitalization. In the event any change is made to the
outstanding shares of EMAC Common Stock by reason of any recapitalization,
stock dividend, stock split, combination of shares, exchange of shares or
other change in corporate structure effected without the Surviving
Corporation's receipt of consideration, appropriate adjustments will be made
to (i) the maximum number and/or class of securities issuable under the
Management Option Plan, (ii) the number and/or class of securities for which
any one person may be granted stock options under the Management Option Plan,
(iii) the Threshold Market Price for purposes of the Redemption Call and (iv)
the number and/or class of securities and the exercise price per share in
effect under each outstanding option in order to prevent the dilution or
enlargement of benefits thereunder.
Special Tax Election
The Committee may, in its discretion, provide the holders of
outstanding options under the Management Option Plan with the right to have
the Surviving Corporation withhold a portion of the shares of EMAC Common
Stock otherwise issuable to such individuals in satisfaction of the income and
employment tax liability incurred by
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them in connection with the exercise of those options. Alternatively, the plan
administrator may allow such individuals to deliver existing shares of EMAC
Common Stock in satisfaction of such tax liability.
Plan Amendment. No amendment to the Management Option Plan or any
outstanding option may adversely affect the rights of any optionee without his
or her consent. In addition, certain amendments may also require shareholder
approval pursuant to applicable laws and regulations.
PROPOSED OPTION GRANTS
The table below shows, as to each of the anticipated executive
officers of the Surviving Corporation and the various indicated groups, the
following information with respect to stock options to be granted under the
Management Option Plan at the Effective Time of the Merger: (i) the number of
shares of EMAC Common Stock subject to these options and (ii) the weighted
average exercise price payable per share under such options.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE OF
NAME AND ANTICIPATED POSITION WITH SURVIVING CORPORATION OPTION SHARES GRANTED OPTIONS
- -------------------------------------------------------- ------------- ---------------
<S> <C> <C>
Ellen Dinerman Little 1,100,000 $6.79
Co-Chair, Co-Chief Executive
Officer and President
Robert B. Little 1,100,000 $6.79
Co-Chair and Co-Chief Executive
Officer
All executive officers of the Surviving Corporation as 2,200,000 $6.79
a group (___ persons)
All directors (other than executive officers) of the 0 0
Surviving Corporation as a group
All employees, including officers who are not 0 0
executive officers, of the Surviving Corporation as a
group
</TABLE>
NEW PLAN BENEFITS
The 1,100,000 share option grants to be made to each of Ms. Little
and Mr. Little under the Management Option Plan are subject to shareholder
approval of the Management Option Plan at the EMAC Meeting.
FEDERAL INCOME TAX CONSEQUENCES
The options to be granted under the Management Option Plan are
non-statutory options which are not intended to satisfy the requirements for
incentive stock options under Section 422 of the Code. Accordingly, the
Federal income tax treatment for such non-statutory options may be summarized
as follows:
No taxable income is recognized by the optionee upon the grant of
the non-statutory option. However, the optionee will recognize ordinary
income, in the year in which the option is exercised, equal to the excess of
the fair market value of the purchased shares on the exercise date over the
exercise price paid for the shares, and the optionee will be required to
satisfy the tax withholding requirements applicable to such income.
The Surviving Corporation will, subject to the limitation
discussed below, be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Surviving Corporation in which such ordinary income is recognized
by the optionee.
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DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Surviving Corporation anticipates that any compensation deemed
paid by it in connection with the exercise of the Group B Options will qualify
as performance-based compensation for purposes of Section 162(m) of the Code
and will not have to be taken into account for purposes of the $1 million
limitation per covered individual on the deductibility of the compensation
paid to certain executive officers of the Surviving Corporation. Accordingly,
all compensation deemed paid with respect to those Group B Options will remain
deductible by the Surviving Corporation without limitation under Section
162(m) of the Code.
The Group A Options will not qualify as performance-based grants
under Section 162(m) of the Code. Accordingly, any compensation deemed paid by
the Surviving Corporation in connection with the exercise of the Group A
Options will have to be taken into account for purposes of the $1 million
limitation per covered individual on the deductibility of the compensation
paid to certain executive officers of the Surviving Corporation. As a result,
the Surviving Corporation may not be allowed an income tax deduction for all
or part of the compensation deemed paid in connection with the exercise of
those Group A Options.
ACCOUNTING TREATMENT
Under current accounting principles, neither the grant nor the
exercise of the Group B Options will result in any charge to the Surviving
Corporation's reported earnings, so long as the exercise price ($8.50 per
share) is not less than the fair market value of the option shares on the
grant date. Based upon the current market price of EMAC Common Stock ($5.1888
per share at August 12, 1996) it is not anticipated that the grant of the
Group B options will result in a charge to earnings. However, the Surviving
Corporation must disclose, in footnotes and pro-forma statements to the
Surviving Corporation's financial statements, the impact those options would
have upon the Surviving Corporation's reported earnings were the value of
those options at the time of grant treated as a compensation expense. In the
event that the Group A Options are granted at an exercise price below the fair
market value of the option shares on the grant date, the Surviving Corporation
will have to record an immediate compensation expense equal to the difference
between the exercise price of $5.00 per share and the fair market value on the
date of grant for the 100,000 shares of EMAC Common Stock immediately
exercisable under each of those options and must amortize the additional
compensation expense attributable to the remaining shares subject to each
Group A Option over the five (5)-year vesting period in effect for those
shares.
In addition, the number of outstanding options under the
Management Option Plan, whether Group A or Group B Options, may be a factor in
determining the Surviving Corporation's earnings per share.
SHAREHOLDER APPROVAL
THE EMAC BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
THE MANAGEMENT OPTION PLAN. The affirmative vote of a majority of shares
present in person or represented by proxy at the EMAC Meeting and entitled to
vote is required to approve the Management Option Plan. Such approval will
also constitute approval of the two option grants to be made to each of Ellen
Dinerman Little and Robert B. Little. If the Merger is not consummated, the
Management Option Plan will not be implemented, notwithstanding EMAC
Stockholder approval of such proposal. Approval of the Management Option Plan
by the EMAC Stockholders is a condition to the Merger.
APPROVAL OF THE 1996 STOCK OPTION PLAN
The EMAC Stockholders are being asked to approve the
implementation of the 1996 Stock Option Plan. The 1996 Stock Option Plan was
adopted by the Board on May 2, 1996 and will become effective immediately upon
shareholder approval at the EMAC Meeting.
The 1996 Stock Option Plan is designed to serve as a comprehensive
equity incentive program to attract and retain the services of individuals
essential to the Surviving Corporation's long-term growth and financial
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success. Accordingly, officers and other employees, non-employee members of
the Board of the Directors of the Surviving Corporation and consultants and
other advisors in the service of the Surviving Corporation or any parent or
subsidiary corporation will have the opportunity to acquire a meaningful
equity interest through their participation in the 1996 Stock Option Plan.
The following is a summary of the principal features of the 1996
Stock Option Plan and does not purport to be a complete description of all the
provisions of the 1996 Stock Option Plan. Copies of the 1996 Stock Option Plan
may be obtained upon request to EMAC at 202 North Canon Drive, Beverly Hills,
California 90210, Attn:
Secretary.
DESCRIPTION OF THE 1996 STOCK OPTION PLAN
Structure. The 1996 Stock Option Plan is composed of three
separate equity incentive programs: (i) a discretionary option grant program
under which eligible individuals in the Surviving Corporation's employ or
service may, at the discretion of the plan administrator, be granted options
to purchase shares of EMAC Common Stock, (ii) a stock appreciation rights
program under which such individuals will have the opportunity to share in the
appreciation in the market value of the EMAC Common Stock over their period of
service with the Surviving Corporation (the "Stock Appreciation Rights
Program"), and (iii) an automatic option grant program under which eligible
non-employee members of the Board of Directors of the Surviving Corporation
will automatically receive option grants to purchase shares of EMAC Common
Stock at designated intervals over their period of board service (the
"Automatic Option Grant Program").
Administration. The Compensation Committee will administer the
Discretionary Option Grant and Stock Appreciation Rights Programs in effect
under the 1996 Stock Option Plan. The members of the Compensation Committee
will qualify both as "outside directors" for purposes of Internal Revenue Code
Section 162(m) and as "non-employee directors" for purposes of Rule 16b-3
under the Securities Exchange Act of 1934, as amended (the "1934 Act").
However, the Board of Directors of the Surviving Corporation may assume
responsibility for administration of those two programs with respect to
individuals who are not executive officers or directors of the Surviving
Corporation subject to the short-swing profit restrictions of Section 16 of
the Exchange Act or may delegate such administrative responsibility to a
secondary committee of one or more members of the Board of Directors of the
Surviving Corporation. Each entity, whether the Compensation Committee, the
Board of Directors of the Surviving Corporation or any secondary committee,
will, with respect to its administrative functions under the 1996 Stock Option
Plan, be referred to in this summary as the "Plan Administrator."
Each Plan Administrator will, within the scope of its
administrative authority under the Discretionary Stock Option Grant and Stock
Appreciation Rights Programs, have full power and authority (subject to the
express provisions of the 1996 Stock Option Plan) to select the eligible
individuals who are to receive stock options or stock appreciation rights
under those programs and to determine the time or times when such options or
stock appreciation rights are to be granted, the number of shares of EMAC
Common Stock to be subject to such options or rights, the time or times when
those options or rights are to become exercisable, the maximum term for which
each such option or stock appreciation right is to remain outstanding and the
remaining terms and conditions of each such grant.
Administration of the Automatic Option Grant Program will be
self-executing, in accordance with the express provisions of that program, and
no Plan Administrator will exercise any discretion with respect to that
program.
Eligibility. Regular full-time employees of the Surviving
Corporation (or its parent or subsidiary corporations, whether now existing or
subsequently established), non-employee members of the Board of Directors of
the Surviving Corporation and independent consultants and other persons who
provide services on a regular or substantial basis to the Surviving
Corporation (or such parent or subsidiary corporation) will be eligible to
participate in the Discretionary Option Grant and Stock Appreciation Rights
Programs. Only non-employee members of the Board of Directors of the Surviving
Corporation will be eligible to participate in the Automatic Option Grant
Program.
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As of August 1, 1996, ___________ individuals who are expected to
become executive officers of the Surviving Corporation, approximately _________
other individuals who are expected to be employees of the Surviving Corporation
and four non-employee members of the Board of Directors of the Surviving
Corporation are expected to be eligible to participate in one or more of the
programs under the 1996 Stock Option Plan.
Share Reserve. The maximum number of shares of EMAC Common Stock
reserved for issuance under the 1996 Stock Option Plan will be 550,000 shares.
The shares issuable under the 1996 Stock Option Plan will be made available
from the Surviving Corporation's authorized but unissued shares of common
stock or shares repurchased by the Surviving Corporation, including shares
repurchased on the open market. However, no one participant in the 1996 Stock
Option Plan may receive stock option grants and separately exercisable or
concurrently exercisable stock appreciation rights for more than 200,000
shares of common stock in the aggregate over the term of the 1996 Stock Option
Plan.
Shares subject to any outstanding options or stock appreciation
rights under the 1996 Stock Option Plan which expire or terminate prior to
exercise will be available for subsequent issuance. However, the shares of
EMAC Common Stock underlying stock appreciation rights exercised under the
1996 Stock Option Plan will reduce the number of shares available for
subsequent issuance, whether the distribution on the exercised right is paid
in cash or in shares of EMAC Common Stock.
Changes in Capitalization. In the event any change is made to the
outstanding shares of EMAC Common Stock by reason of any reorganization,
recapitalization, reclassification, stock dividend, stock split or other
similar transaction, appropriate adjustments will be made to (i) the maximum
number and/or class of securities issuable under the 1996 Stock Option Plan,
(ii) the number and/or class of securities for which any one person may be
granted stock options and separately exercisable or concurrently exercisable
stock appreciation rights under the 1996 Stock Option Plan, (iii) the number
and/or class of securities for which grants are subsequently to be made under
the Automatic Option Grant Program to new and continuing non-employee members
of the Board of Directors of the Surviving Corporation and (iv) the number
and/or class of securities and the exercise price per share in effect under
each outstanding option and stock appreciation right in order to prevent the
dilution or enlargement of benefits thereunder.
Valuation. For purposes of establishing the exercise price for
stock option grants, the base price in effect for stock appreciation rights
and for all other valuation purposes under the 1996 Stock Option Plan, the
fair market value per share of EMAC Common Stock on any relevant date under
the 1996 Stock Option Plan will be the average of the highest bid and lowest
asked prices per share of EMAC Common Stock on the relevant date, as such
prices are reported on the OTC Bulletin Board (or the closing sale price on
the Nasdaq National Market, if EMAC's listing application is approved). The
average of the highest bid and lowest asked prices of EMAC Common Stock
on ,__________ 1996 was $ __________ per share.
DISCRETIONARY OPTION GRANT PROGRAM
The options granted under the Discretionary Option Grant Program
may be either incentive stock options under the Federal tax laws or
non-statutory options. The exercise price per share will be determined by the
Plan Administrator and must be at least one hundred percent (100%) of the fair
market value per share of EMAC Common Stock on the grant date for each
incentive stock option granted under the 1996 Stock Option Plan. No option
will have a term in excess of ten (10) years. The exercise price may be paid
in cash, with shares of EMAC Common Stock or through the cancellation of any
indebtedness of the Surviving Corporation owed to the optionee. In addition,
the option may be exercised through a same-day sale program pursuant to which
the shares purchased under the option are sold immediately, with a portion of
the sale proceeds delivered to the Surviving Corporation in payment of the
option exercise price.
Upon cessation of service in certain circumstances, the optionee
will have a limited period of time in which to exercise his or her outstanding
incentive stock options to the extent those options are at the time
exercisable for one or more option shares. The Plan Administrator will have
complete discretion to extend the period following the optionee's cessation of
service during which his or her outstanding options may be exercised and/or to
accelerate
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the exercisability of those options in whole or in part. Such discretion may
be exercised at any time while the options remain outstanding, whether before
or after the optionee's actual cessation of service.
The Plan Administrator will have the authority to effect, on one
or more separate occasions, the cancellation of outstanding options under the
Discretionary Grant Program which have exercise prices in excess of the then
current market price of EMAC Common Stock and to issue replacement options
with an exercise price based on the market price of EMAC Common Stock at the
time of the new grant.
STOCK APPRECIATION RIGHTS PROGRAM
Three types of stock appreciation rights are authorized for
issuance under the 1996 Stock Option Plan:
o Tandem stock appreciation rights which provide the
holders with the right to surrender their options for
an appreciation distribution from the Surviving
Corporation equal in amount to the excess of (a) the
fair market value of the shares of EMAC Common Stock
subject to the surrendered option over (b) the
aggregate exercise price payable for those shares.
Such appreciation distribution may, at the discretion
of the Plan Administrator, be made in cash or in
shares of EMAC Common Stock.
o Concurrent stock appreciation rights which will
automatically be exercised for an appreciation
distribution at the same time the underlying stock
option is exercised for shares of EMAC Common Stock.
Accordingly, the option holder will, upon the option
exercise, receive both the purchased shares of EMAC
Common Stock and the appreciation distribution payable
on those shares. The amount of the distribution
payable per purchased option share will not exceed the
fair market value of that share on the exercise date,
less the option exercise price paid for such share.
The distribution may, in the discretion of the Plan
Administrator, be made in cash or in shares of EMAC
Common Stock.
o Independent stock appreciation rights which will be
free-standing rights not tied to any underlying stock
option and will entitle the holder upon exercise to an
appreciation distribution from the Surviving
Corporation equal to the fair market value of the
shares of EMAC Common Stock subject to the exercised
right, less the base price in effect for those shares.
The appreciation distribution payable on the exercised
rights may, in the discretion of the Plan
Administrator, be made in cash or in shares of EMAC
Common Stock.
The base or exercise price in effect for each such stock
appreciation right will be determined by the Plan Administrator at the time
the right is granted, but in no event will such price be less than the fair
market value of the underlying shares of EMAC Common Stock on the grant date.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, an automatic option
grant for 5,000 shares of EMAC Common Stock will be made to (i) each
individual who is serving as a non-employee member of the Board of Directors
of the Surviving Corporation on the date of the EMAC Meeting, (ii) each
individual who first becomes a non-employee member of the Board of Directors
of the Surviving Corporation at any time after the EMAC Meeting, whether
through election by the shareholders or appointment by the Board of Directors
of the Surviving Corporation, and (iii) each non-employee director at each
subsequent annual meeting of stockholders following his or her appointment so
long as he or she has served at least six months. There will be no limit on
the number of such 5,000 share option grants any one non-employee member of
the Board of Directors of the Surviving Corporation may receive over his or
her period of service on the Board of Directors of the Surviving Corporation.
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Each option granted under the Automatic Option Grant Program will
be subject to the following terms and conditions:
o The exercise price per share will be equal to 100% of
the fair market value per share of EMAC Common Stock
on the automatic grant date.
o Each option will have a maximum term equal to the
lesser of (i) ten (10) years measured from the grant
date or (ii) three (3) years following termination of
service to the Board of Directors of the Surviving
Corporation.
o Each option will become exercisable for all the option
shares upon the optionee's completion of one (1) year
of service to the Board of Directors of the Surviving
Corporation measured from the grant date.
o The option will immediately become exercisable for all
the option shares upon an acquisition of the Surviving
Corporation by merger or asset sale or a hostile take-
over of the Surviving Corporation (whether effected
through a successful tender offer for more than 50% of
the outstanding voting securities or a change in a
majority of the Board of Directors of the Surviving
Corporation through one or more contested elections).
Each option as so accelerated will terminate
immediately after the Board of Directors of the
Surviving Corporation is acquired, unless the option
is assumed by the successor entity.
GENERAL PROVISIONS
Option Assignability and Shareholder Rights. Options are not
assignable other than by will or the laws of inheritance following the
optionee's death and may be exercised only by the optionee during his or her
lifetime. No optionee will have any shareholder rights with respect to the
shares of EMAC Common Stock subject to his or her options until those options
are exercised and the optionee has become a holder of record of the purchased
shares.
Vesting Acceleration. In the event that the Surviving Corporation
is acquired by merger or asset sale, each outstanding option and stock
appreciation right under the 1996 Stock Option Plan which is not to be assumed
or replaced by the successor corporation will automatically accelerate in full
and may be exercised in whole or in part immediately prior to the effective
date of the acquisition. The Plan Administrator will also have the discretion
to provide for the automatic acceleration of outstanding options and stock
appreciation rights upon an acquisition, whether or not those options and
stock appreciation rights are to be assumed or replaced in the acquisition.
Any options or stock appreciation rights which are assumed in the acquisition
will become fully exercisable with respect to the underlying shares in the
event the individual's service with the Surviving Corporation or the acquiring
entity is involuntarily terminated within eighteen (18) months following such
acquisition and will remain so exercisable until the earlier of (i) the
expiration of the one-year period measured from the individual's termination
date or (ii) the expiration date of the option or stock appreciation right.
The Plan Administrator will also have discretion, exercisable either at the
time the option or stock appreciation right is granted or at any time while
the option or stock appreciation right remains outstanding, to structure such
option or stock appreciation right so that it will become fully exercisable
with respect to the underlying shares upon a hostile change in control of the
Surviving Corporation (whether by successful tender offer for more than 50% of
the outstanding voting stock or by proxy contest for the election of members
of the Board of Directors of the Surviving Corporation) or upon termination of
the individual's service, whether involuntarily or through a resignation for
good reason, within a designated period following such change in control.
All outstanding options and stock appreciation rights will
terminate immediately following the acquisition of the Surviving Corporation,
except to the extent assumed by the successor entity. Each option or stock
appreciation assumed in connection with the acquisition will be appropriately
adjusted so as to apply to the same number and class of securities as would
have been issued, in consummation of such acquisition, had the option or stock
appreciation right been exercised immediately prior to the acquisition.
Appropriate adjustments will also be
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made to the exercise price payable per share under each assumed option and the
base price per share in effect under each assumed stock appreciation right and
to the class and number of securities available for future issuance under the
1996 Stock Option Plan on both an aggregate and a per-participant basis.
The acceleration of vesting in the event of a change in the
ownership or control of the Surviving Corporation may be seen as an
anti-takeover provision and may have the effect of discouraging a merger
proposal, a takeover attempt or other efforts to gain control of the Surviving
Corporation.
Financial Assistance. The Plan Administrator may institute a loan
program to assist one or more optionees in financing the exercise of their
outstanding options through full-recourse, interest-bearing promissory notes
payable to the Surviving Corporation and secured by the purchased shares.
However, the maximum amount of financing provided the optionee may not exceed
the exercise price payable for the issued shares plus all applicable taxes
incurred in connection with the acquisition of the shares.
Special Tax Election
The Plan Administrator may, in its discretion, provide one or more
holders of outstanding options or stock appreciation rights under the 1996
Stock Option Plan with the right to have the Surviving Corporation withhold a
portion of the shares of EMAC Common Stock otherwise issuable to such
individuals in satisfaction of the income and employment tax liability
incurred by them in connection with the exercise of those options or the
receipt of any appreciation distribution paid in shares of EMAC Common Stock.
Alternatively, the Plan Administrator may allow such individuals to deliver
existing shares of EMAC Common Stock in satisfaction of such tax liability.
Amendment and Termination. The Board of Directors of the Surviving
Corporation may amend or modify the 1996 Stock Option Plan in any or all
respects whatsoever. However, certain amendments may require shareholder
approval pursuant to applicable laws and regulations.
Unless sooner terminated by the Board of Directors of the
Surviving Corporation, the 1996 Stock Option Plan will in all events terminate
ten years after the Effective Time of the Merger. Any options outstanding at
the time of such termination will remain in force in accordance with the
provisions of the instruments evidencing such grants.
NEW BENEFITS UNDER THE 1996 STOCK OPTION PLAN
No options or stock appreciation rights have been granted to date
under the 1996 Stock Option Plan. On the date of the EMAC Meeting, each of the
following individuals who are to continue to serve as non-employee members of
the Board of Directors of the Surviving Corporation will receive an option
grant for 5,000 shares of EMAC Common Stock under the Automatic Option Grant
Program with an exercise price equal to the fair market value of the option
shares on that date: Stephen K. Bannon, Alessandro Fracassi, Jeffrey A.
Rochlis and Scot K. Vorse.
FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE 1996 STOCK OPTION
PLAN
Options granted under the 1996 Stock Option Plan may be either
incentive stock options which satisfy the requirements of Section 422 of the
Code or non-statutory options which are not intended to meet such
requirements. The Federal income tax treatment for the two types of options
differs as follows:
Incentive Options. No taxable income is recognized by the optionee
at the time of the option grant, and no taxable income is generally recognized
at the time the option is exercised. The optionee will, however, recognize
taxable income in the year in which the purchased shares are sold or otherwise
disposed of. For Federal tax purposes, dispositions are divided into two
categories: (i) qualifying and (ii) disqualifying. A qualifying disposition
occurs if the sale or other disposition is made after the optionee has held
the shares for more than two (2) years after the option grant date and more
than one (1) year after the exercise date. If either of these two holding
periods is not satisfied, then a disqualifying disposition will result.
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Upon a qualifying disposition of the shares, the optionee will
recognize long-term capital gain in an amount equal to the excess of (i) the
amount realized upon the sale or other disposition of the purchased shares
over (ii) the exercise price paid for those shares. If there is a
disqualifying disposition of the shares, then the excess of (i) the fair
market value of the shares on the exercise date over (ii) the exercise price
paid for those shares will be taxable as ordinary income to the optionee. Any
additional gain or loss recognized upon the disposition will be taxable as a
capital gain or loss.
If the optionee makes a disqualifying disposition of the purchased
shares, then the Surviving Corporation will be entitled to an income tax
deduction, for the taxable year in which such disposition occurs, equal to the
excess of (i) the fair market value of such shares on the option exercise date
over (ii) the exercise price paid for the shares. In no other instance will
the Surviving Corporation be allowed a deduction with respect to the
optionee's disposition of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an
optionee upon the grant of a non-statutory option. The optionee will in
general recognize ordinary income, in the year in which the option is
exercised, equal to the excess of the fair market value of the purchased
shares on the exercise date over the exercise price paid for the shares, and
the optionee will be required to satisfy the tax withholding requirements
applicable to such income.
The Surviving Corporation will be entitled to an income tax
deduction equal to the amount of ordinary income recognized by the optionee
with respect to the exercised non-statutory option. The deduction will in
general be allowed for the taxable year of the Surviving Corporation in which
such ordinary income is recognized by the optionee.
STOCK APPRECIATION RIGHT
No taxable income is recognized upon the receipt of a stock
appreciation right. The holder will recognize ordinary income, in the year in
which the right is exercised, equal to the appreciation distribution paid with
respect to the exercised right, and the holder will be required to satisfy the
tax withholding requirements applicable to such income.
The Surviving Corporation will be entitled to an income tax
deduction equal to the amount of ordinary income recognized by the holder in
connection with the exercise of the stock appreciation right. The deduction
will be allowed for the taxable year of the Surviving Corporation in which
such ordinary income is recognized.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Surviving Corporation anticipates that any compensation deemed
paid by it in connection with disqualifying dispositions of incentive stock
option shares or exercises of non-statutory options granted with an exercise
price equal to the fair market value of the option shares on the grant date
will qualify as performance-based compensation for purposes of Section 162(m)
of the Code and will not have to be taken into account for purposes of the $1
million limitation per covered individual on the deductibility of the
compensation paid to certain executive officers of the Surviving Corporation.
Accordingly, all compensation deemed paid with respect to those options will
remain deductible by the Surviving Corporation without limitation under
Section 162(m) of the Code.
Options granted under the 1996 Stock Option Plan with an exercise
price less than the fair market value of the option shares on the grant date
will not qualify as performance-based compensation under Section 162(m) of the
Code. Accordingly, any compensation deemed paid by the Surviving Corporation
in connection with the exercise of those below-market grants will have to be
taken into account for purposes of the $1 million limitation, and the
Surviving Corporation may not be allowed an income tax deduction for all or
part of that compensation.
ACCOUNTING TREATMENT
Under current accounting principles, neither the grant nor the
exercise of options with an exercise price equal to the fair market value of
the option shares on the grant date will result in any charge to the Surviving
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Corporation's reported earnings. However, the Surviving Corporation must
disclose, in footnotes and pro-forma statements to the Surviving Corporation's
financial statements, the impact those options would have upon the Surviving
Corporation's reported earnings were the value of those options at the time of
grant treated as a compensation expense. Options granted with an exercise
price below the fair market value of the option shares on the grant date will
result in a direct compensation expense to the Surviving Corporation in an
amount equal to the discount. Such expense would have to be amortized against
the Surviving Corporation's reported earnings over the vesting period in
effect for those options.
In addition, the number of outstanding options under the 1996
Stock Option Plan, whether or not granted with a below-market exercise price,
may be a factor in determining the Surviving Corporation's earnings per share.
Outstanding stock appreciation rights will result in a
compensation expense to be charged against the Surviving Corporation's
reported earnings. Accordingly, at the end of each fiscal quarter, the amount
(if any) by which the fair market value of the shares of EMAC Common Stock
subject to those outstanding stock appreciation rights has increased from the
prior quarter-end will be accrued as compensation expense, to the extent such
fair market value is in excess of the aggregate exercise price in effect for
those rights.
SHAREHOLDER APPROVAL
THE EMAC BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
THE MANAGEMENT OPTION PLAN. The affirmative vote of a majority of shares
present in person or represented by proxy at the EMAC Meeting and entitled to
vote is required to approve the 1996 Stock Option Plan. If such approval is
obtained, the 1996 Stock Option Plan will become effective at the Effective
Time of the Merger. If the Merger is not consummated, the 1996 Stock Option
Plan will not be implemented, notwithstanding EMAC Stockholder approval of
such proposal. Approval of the 1996 Stock Option Plan by the EMAC Stockholders
is a condition to the Merger.
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BUSINESS OF EMAC
GENERAL
EMAC was formed in December 1993 as a SPAC(R), with the objective
of acquiring an operating business in the Entertainment/Media Industry. To
date, EMAC's efforts have been limited to organizational activities,
completion of its IPO and the evaluation of possible Business Combinations.
A SPAC(R) is an entity incorporating the following selected
investor safeguards. Immediately after the consummation of a Business
Combination, these provisions will no longer be applicable.
Offering Proceeds Held in Trust
The proceeds of EMAC's IPO consummated in February 1995, after
payment of underwriting discounts and the underwriter's non-accountable
expense allowance, were $11,340,000. Ninety percent (90%) of such amount
($10,206,000) was placed in the Trust Fund and invested in government
securities. The remaining proceeds of the IPO have been used by EMAC in its
pursuit of a Business Combination. The Trust Fund will not be released until
the earlier of the consummation of a Business Combination or the liquidation
of EMAC. At __________, 1996, the Trust Fund held $___________. If the Merger
is consummated, the Trust Fund will be released to EMAC, less amounts paid to
redeem shares entitled thereto in the Merger. See "THE MERGER -- Conversion of
Shares; Registration Rights" and "THE MERGER -- EMAC Redemption Rights."
Fair Market Value of Target Business
EMAC will not acquire a Target Business unless the EMAC Board,
acting on its own or with the assistance of financial advisors, determines
that the fair market value of such business is at least 80% of the net assets
of EMAC at the time of such acquisition. Any determination as to the fair
market value of a business will be based upon standards generally accepted by
the financial community, such as earnings and potential therefor, cash flow
and book value. The EMAC Board determined that the fair market value of
Overseas Filmgroup was in excess of 80% of the net assets of EMAC after
reviewing Overseas Filmgroup's historical operating results, the
capitalization of Overseas Filmgroup, the balance sheet and statement of
operations, the potential of the business of Overseas Filmgroup and the stage
of development of Overseas Filmgroup's business.
Stockholder Approval of Business Combination
EMAC will proceed with the Merger only if a majority of all of the
outstanding shares of EMAC Common Stock are voted in favor of the Merger. The
Initial Stockholders have agreed to vote their shares of EMAC Common Stock in
accordance with the vote of the majority in interest of the Public
Stockholders with respect to any merger. If 20% or more in interest of the
EMAC Stockholders (excluding, for this purpose, the Initial Stockholders) vote
against the Merger and request redemption of their shares, EMAC will not
consummate the Merger.
Redemption Rights
Each Public Stockholder has the right to his or her shares of EMAC
Common Stock redeemed if such stockholder votes against the Business
Combination and the Business Combination is approved and consummated.
The per share Redemption Price is equal to approximately
$__________ (the amount in the Trust Fund as of the EMAC Record Date), divided
by 2,100,000 (the number of shares of EMAC Common Stock held by the Public
Stockholders entitled to participate in a distribution from the Trust Fund).
Concurrently with the consummation of the Business Combination, the Trustee,
as directed by EMAC, will distribute to EMAC's transfer agent an amount equal
to the Redemption Price multiplied by the number of shares owned by the
Redeeming Stockholders. As soon as practicable thereafter, the transfer agent
will then distribute such amount to the Redeeming Stockholders as their
respective interests may appear. The Initial Stockholders have waived any
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redemption rights they may have by being EMAC Stockholders. Unless such rights
are properly exercised prior to the Effective Time of the Merger, no EMAC
Stockholders shall have any rights to any amounts in the Trust Fund or to
redeem his or her shares after the Merger. See "THE MERGER -- EMAC Redemption
Rights."
Liquidation if No Business Combination
If EMAC does not consummate a Business Combination by February 16,
1997, EMAC will be dissolved and will distribute to the Public Stockholders
holding 2,100,000 shares of EMAC Common Stock entitled to participate in a
distribution from the Trust Fund, in proportion to their ownership of such
shares, an aggregate sum equal to the amount in the Trust Fund, plus any
remaining net assets of EMAC. At August 1, 1996, that aggregate amount was
approximately $11,024,000, or approximately $5.25 per share of EMAC Common
Stock held by the Public Stockholders entitled to participate in the Trust
Fund. The Initial Stockholders have waived their respective rights to
participate in any liquidation distribution.
COMPETITION
If the Merger is consummated, EMAC will become subject to
competition from competitors of Overseas Filmgroup. See "BUSINESS OF OVERSEAS
FILMGROUP -- Competition."
EMPLOYEES
EMAC has no employees.
FACILITIES
Pursuant to a written agreement with EMAC, Bannon & Co., Inc., an
affiliate of EMAC of which Messrs. Bannon and Vorse, officers and directors of
EMAC, are officers, directors and stockholders, makes available to EMAC a
small amount of office space as well as certain office and secretarial
services as required by EMAC from time to time. This agreement will terminate
upon consummation of the Merger. EMAC pays Bannon & Co., Inc.
a fee of $5,000 per month for such services.
LEGAL PROCEEDINGS
There are no legal proceedings pending against EMAC.
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MANAGEMENT OF EMAC
DIRECTORS AND EXECUTIVE OFFICERS
The following individuals are the current directors and executive
officers of EMAC:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen K. Bannon................... 42 Chairman of the Board
Jeffrey A. Rochlis.................. 50 President, Chief Executive Officer and Director
Scot K. Vorse....................... 35 Vice President--Finance, Treasurer, Secretary and Director
Barbara Boyle....................... 60 Director
Bernard G. Hoberman................. 73 Director
John Hyde........................... 54 Director
Gary M. Stein....................... 39 Director
</TABLE>
For biographical information regarding the individual members of the
EMAC Board nominated by EMAC for election as directors of the Surviving
Corporation, see "ELECTION OF EMAC DIRECTORS OF THE SURVIVING CORPORATION."
BARBARA BOYLE has been a Director of EMAC since March 1994. Ms.
Boyle is a partner in Boyle-Taylor Productions, a company she founded in
February 1992 to produce feature-length motion pictures and television films.
Since its inception, Boyle-Taylor Productions has produced Phenomenon for Walt
Disney Pictures & Television, Bottle Rocket for Columbia Pictures
Entertainment Corporation and Mrs. Munck for Showtime Networks, Inc. From 1988
to June 1992, Ms. Boyle served as President of Sovereign Pictures, Inc.
("Sovereign"), a firm which Ms. Boyle co-founded and which financed and
distributed approximately 25 films in the international market, including My
Left Foot, Cinema Paradiso, Reversal of Fortune, Impromptu, Hamlet, and The
Commitments. Prior to the creation of Sovereign, Ms. Boyle was Executive Vice
President of Production of RKO Pictures. From 1982 through 1986, she was
Senior Vice President of Worldwide Production at Orion Pictures Corporation.
From 1974 to 1982, Ms. Boyle was the Chief Operating Officer and Executive
Vice President of New World Pictures, Inc.
BERNARD G. HOBERMAN has been a Director of EMAC since its
inception. Mr. Hoberman has been a private investor since 1986. From 1979 to
1986, Mr. Hoberman was President of ABC Radio, which included six traditional
(music and news) radio networks, a talk radio network, Watermark (a production
company), and 14 owned and operated, as well as 2,000 affiliated, stations.
Mr. Hoberman has served on the boards of directors of various industry
organizations including the National Association of Broadcasters and, in 1988,
was the recipient of the National Association of Broadcasters' National Radio
Award for Outstanding Industry Leadership.
JOHN HYDE has been a Director of EMAC since March 1994. Mr. Hyde
is currently Chairman and Chief Executive Officer of Crossroads V
Communications ("Crossroads"). Crossroads provides financial and operations
consulting assistance to financially distressed companies utilizing the crisis
management skills collectively acquired by management in their consultation
with and representation, operation and restructuring of various entertainment
companies on a going concern or liquidation basis. Prior to his involvement
with Crossroads, Mr. Hyde was Chairman and Chief Executive Officer of MCEG
Sterling Incorporated from 1990 to 1995. Mr. Hyde has also been President and
principal stockholder of Producers Sales Organization since 1986, a company
engaged in the production and distribution of motion pictures. He is also a
partner in Cinecorp/Bakshi-Hyde Ventures, a company engaged in similar
activities. In addition, he has, in his career, been involved in various
capacities in the distribution of more than 500 films and the production of
approximately 22 motion pictures, including Short Circuit, 9 1/2 Weeks, Das
Boot, Clan of the Cave Bear and The Neverending Story.
GARY M. STEIN has been a Director of EMAC since December 1994.
Since March 1990 Mr. Stein has been the Executive Vice President--Corporate
and Financial Development of Lancit Media Productions, Ltd. ("Lancit"), a
publicly held company that is a recognized leader in the creation and
production of high quality
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children's television series such as "The Puzzle Place" and "Reading Rainbow,"
the winner of the 1996 Emmy Award for outstanding children's series. Lancit is
also engaged, through a subsidiary, in the licensing of popular
character-based properties, including Sonic the Hedgehog and Carmen Sandiego.
From 1987 to 1989, Mr. Stein served as a financial consultant to several
Entertainment/Media Industry clients, and from 1984 to 1987, Mr. Stein was
Senior Analyst--Investment Banking at Rosenkrantz, Lyon and Ross, a New York
Stock Exchange-member securities firm now known as Josephthal, Lyon and Ross,
where he helped form the firm's corporate finance division.
EXECUTIVE AND DIRECTOR COMPENSATION
No executive officer has received any cash compensation for
services rendered from EMAC since its inception. Prior to the consummation of
a Business Combination, if any, none of EMAC's officers, directors or Initial
Stockholders will receive any compensation other than the $5,000 per month
administrative fee payable to Bannon & Co., Inc. and reimbursement for any
out-of-pocket expenses incurred in connection with activities on behalf of
EMAC. There is no limit on the amount of such out-of-pocket expenses incurred
in connection with activities on behalf of EMAC, and there will be no review
of the reasonableness of such expenses by anyone other than the Board of
Directors, which includes persons who may seek reimbursement of expenses.
Under no circumstances can the amount of such reimbursable expenses, together
with all of EMAC's other expenses related to the investigation and selection
of a Target Business and the negotiation of an agreement to acquire the Target
Business, be in excess of the amount of the net proceeds of the IPO not held
in the Trust Fund. None of EMAC's officers, directors or Initial Stockholders
or their respective affiliates will receive any consulting or finder's fees or
other compensation in connection with introducing EMAC to, or evaluating, a
Target Business or consummating a Business Combination.
CERTAIN TRANSACTIONS RELATING TO EMAC
Bannon & Co., Inc., an affiliate of EMAC of which Messrs. Bannon
and Vorse, officers and directors of EMAC, are officers, directors and
stockholders, makes available to EMAC a small amount of office space, as well
as certain office and secretarial services, as required by EMAC from time to
time in consideration of $5,000 per month. Payments to Bannon & Co., Inc.
totalled $75,667 for the period from February 27, 1995 (the date such services
commenced) through May 31, 1996. In addition, the Initial Stockholders receive
reimbursement for any out-of-pocket expenses incurred in connection with the
activities on behalf of EMAC. Management believes that, given EMAC's
relationship with the principals of Bannon & Co., Inc., until the consummation
of a Business Combination, EMAC will rely heavily on administrative services
to be provided by Bannon & Co., Inc. and its principals. Management believes
that the arrangement with Bannon & Co., Inc. is on terms at least as favorable
as would be available from an unaffiliated third party.
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<PAGE>
PRINCIPAL STOCKHOLDERS OF EMAC
The following table sets forth certain information regarding
beneficial ownership of shares of EMAC Common Stock as of __________ 1996 by
(i) each stockholder known by EMAC to be the beneficial owner of more than 5%
of the outstanding shares of EMAC Common Stock; (ii) each director of EMAC;
and (iii) all directors and executive officers as a group. Except as otherwise
indicated, EMAC believes that the beneficial owners of the shares of EMAC
Common Stock listed below, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
Number of Shares of Percent of Common Stock
Common Stock of the of the Surviving
Number of shares of Percent of EMAC Surviving Corporation Corporation Beneficially
EMAC Common Stock Common Stock Beneficially Owned upon Owned upon
Beneficially Owned Prior Beneficially Owned Prior Consummation of the Consummation
Principal Stockholders to the Merger (1) to the Merger(1) Merger(1) of the Merger(1)
- ---------------------- ----------------------- ------------------------ ----------------------- ------------------------
<S> <C> <C> <C> <C>
Kingdon Capital Management ....... 249,000 9.6% 249,000 4.3%
Corporation (2)
152 West 57th Street
New York, New York 10019
Woodland Venture Fund(3) ......... 240,000(4) 9.2 240,000(4) 4.2
Seneca Ventures(3) ............... 240,000(5) 9.2 240,000(5) 4.2
Woodland Partners(3) ............. 240,000(6) 9.2 240,000(6) 4.2
Barry Rubenstein(3) .............. 240,000(7) 9.2 240,000(7) 4.2
Marilyn Rubenstein(3) ............ 240,000(8) 9.2 240,000(8) 4.2
Woodland Services Corp.(3) ....... 240,000(9) 9.2 240,000(9) 4.2
Stephen K. Bannon ................ 292,647(10) 11.3 292,647(10) 5.1
c/o Bannon & Co., Inc. .......
202 North Canon Drive
Beverly Hills, CA 90210
Scot K. Vorse .................... 292,647(10) 11.3 292,677(10) 5.1
c/o Bannon & Co., Inc. .......
202 North Canon Drive
Beverly Hills, CA 90210
Gary M. Stein .................... 292,647(10) 11.3 292,677(10) 5.1
345 East 80th Street
New York, New York 10021
Sparta Partners III .............. 292,647(11) 11.3 292,677(11) 5.1
c/o Bannon & Co., Inc. .......
202 North Canon Drive
Beverly Hills, CA 90210
Jeffrey A. Rochlis ............... 132,353 5.1 132,353 2.3
Rochlis & Demyer
3304 O Street, N.W
Washington, D.C. 20007
Barbara Boyle .................... 25,000 1.0 25,000 *
557 Spoleto Drive
Pacific Palisades, CA 90272
Bernard G. Hoberman .............. 25,000(12) 1.0 25,000(12) *
10110 Empyrean Way
Los Angeles, CA 90067
John Hyde ........................ 25,000 1.0 25,000 *
10595 Ashton Avenue #304
Los Angeles, CA 90024
All Officers and Directors as a
group (7 persons) .............. 500,000 19.2 500,000(13) 8.7
</TABLE>
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- -------------------------
* Less than 1%
(1) Excludes shares of EMAC Common Stock issuable upon exercise of (i) EMAC
Warrants issued in the IPO; (ii) an option issued to the underwriters of
the IPO to purchase 200,000 UPOs; and (iii) 300,000 Bridge Warrants.
(2) The named entity has informed EMAC of its stockholdings in a Schedule 13D
filed with the SEC in March 1995.
(3) The named individuals and entities have informed EMAC of their
stockholdings in a Schedule 13D filed with the SEC in February 1995. The
named individuals and entities constitute a "group" as that term is
defined in Section 13(d)(3) of the Exchange Act. The address of all of
the named individuals and entities is 39 Woodland Road, Roslyn, New York
11576.
(4) Woodland Venture Fund (the "Fund"), a limited partnership the general
partners of which are Barry Rubenstein and Woodland Services Corp., has
sole power to vote and dispose of 55,000 shares of EMAC Common Stock, and
may be deemed to have shared power to vote and to dispose of 185,000
shares of EMAC Common Stock. The Fund disclaims beneficial ownership of
those 185,000 shares, as follows: 60,000 shares owned by Woodland
Partners, 40,000 shares held in Barry Rubenstein's Rollover IRA account,
60,000 shares owned individually by Marilyn Rubenstein, and 25,000 shares
owned by Seneca Ventures.
(5) Seneca Ventures ("Seneca"), a limited partnership the general partners of
which are Barry Rubenstein and Woodland Services Corp., has sole power to
vote and dispose shares of 25,000 shares of EMAC Common Stock, and may be
deemed to have shared power to vote and to dispose of 215,000 shares of
EMAC Common Stock. Seneca disclaims beneficial ownership of those 215,000
shares, as follows: 60,000 shares owned by Woodland Partners, 40,000
shares held in Barry Rubenstein's Rollover IRA account, 60,000 shares
owned individually by Marilyn Rubenstein, and 55,000 shares owned by the
Fund.
(6) Woodland Partners, a general partnership the general partners of which
are Barry and Marilyn Rubenstein, has sole power to vote and dispose of
60,000 shares of EMAC Common Stock, and may be deemed to have shared
power to vote and to dispose of 180,000 shares of EMAC Common Stock.
Woodland Partners disclaims beneficial ownership of those 180,000 shares,
as follows: 40,000 shares held in Barry Rubenstein's Rollover IRA
account, 60,000 shares owned by Marilyn Rubenstein, 25,000 shares owned
by Seneca, and 55,000 shares owned by the Fund.
(7) Barry Rubenstein has sole power to vote and dispose of 40,000 shares of
EMAC Common Stock held in his Rollover IRA account. By virtue of being a
general partner of Woodland Partners, Seneca, and the Fund, and husband
of Marilyn Rubenstein, Barry Rubenstein may be deemed to have shared
power to vote and to dispose of 200,000 shares. Mr. Rubenstein disclaims
beneficial ownership of 118,931 shares, as follows: 6,000 shares held by
Woodland Partners (which represents his wife's interest in Woodland
Partners), 60,000 shares owned individually by his wife, Marilyn
Rubenstein, 19,500 shares owned by Seneca, and 33,431 shares owned by the
Fund.
(8) Marilyn Rubenstein, by virtue of being a general partner of Woodland
Partners, and wife of Barry Rubenstein, may be deemed to have shared
power to vote and to dispose of 180,000 shares of EMAC Common Stock.
Marilyn Rubenstein has sole power to vote and dispose of 60,000 shares.
Mrs. Rubenstein disclaims beneficial ownership of 171,629 shares, as
follows: 54,000 shares held by Woodland Partners (which represents her
husband's equity interest in Woodland Partners), 40,000 shares owned
individually be her husband, Barry Rubenstein, 22,629 shares owned by
Seneca, and 55,000 shares owned by the Fund.
(9) Woodland Services Corp. ("Services"), by virtue of being a general
partner of the Fund and Seneca, may be deemed to have shared power to
vote and to dispose of 240,000 shares of EMAC Common Stock. Services
disclaims beneficial ownership of 239,884 shares, as follows: 60,000
shares owned by Woodland Partners,
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40,000 shares held is Mr. Rubenstein's Rollover IRA account, 60,000
shares held individually by Marilyn Rubenstein, 54,926 shares owned by
the Fund, and 24,958 shares owned by Seneca.
(10) Represents the 292,647 shares of EMAC Common Stock owned by Sparta
Partners III of which Messrs. Bannon, Vorse and Stein are general
partners.
(11) Sparta Partners III is a general partnership, of which Messrs. Bannon,
Vorse and Stein are general partners.
(12) Includes 25,000 shares of EMAC Common Stock owned by the Hoberman Family
Trust Dated 9/18/92, Bernard G. Hoberman and Jacklyn A. Hoberman, as
Trustees.
(13) Includes only shares of common stock of the Surviving Corporation that
will be held by current officers and directors of EMAC.
The shares of EMAC Common Stock owned as of the date hereof by all
of the foregoing stockholders, with the exception of Kingdon Capital
Management Corporation and the group consisting of Woodland Venture Fund,
Seneca Ventures, Woodland Partners, Barry Rubenstein, Marilyn Rubenstein and
Woodland Services Corp., have been placed in escrow with Continental Stock
Transfer & Trust Company, as escrow agent, until February 16, 1998. During
such escrow period, such persons will not be able to sell or otherwise
transfer their respective shares EMAC Common Stock, however, such persons will
retain voting rights with respect to their shares.
All of EMAC's stockholders prior to the IPO, including all of the
officers and directors of EMAC, have agreed to vote all of the shares of EMAC
Common Stock owned by them immediately prior to the IPO in accordance with the
vote of a majority of all other shares of EMAC Common Stock voted on any
Business Combination.
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MOTION PICTURE INDUSTRY
GENERAL
The motion picture industry consists of two principal activities
which are described in greater detail below: production, which involves the
development, financing and production of motion pictures; and distribution,
which involves the promotion and exploitation of feature-length motion
pictures in a variety of media, including theatrical exhibition, home video,
television and other ancillary markets, both domestically and internationally.
The United States motion picture industry is dominated by the "major studios,"
including The Walt Disney Company, Paramount Pictures Corporation, Warner
Brothers Inc., Universal Pictures, Twentieth Century Fox, Columbia Pictures,
Tri-Star Pictures and MGM/UA. The major studios, which have historically
produced and distributed the vast majority of high grossing theatrical motion
pictures released annually in the United States, are typically large
diversified corporations that have strong relationships with creative talent,
theatrical exhibitors and others involved in the entertainment industry, and
also extensive motion picture libraries. Motion picture libraries, consisting
of motion picture copyrights and distribution rights owned or controlled by a
film company, can be valuable assets capable of generating revenues from
worldwide commercial exploitation in existing media and markets, and
potentially in future media and markets resulting from new technologies and
applications. The major studios' motion picture libraries provide a stable
source of earnings which offset the variations in the financial performance of
their new motion picture releases and other aspects of their motion picture
operations.
During the past 15 years, "independent" production and
distribution companies have played an important role in the production of
motion pictures for the worldwide feature film market, including New Line
Cinema Corporation (The Mask, Teenage Mutant Ninja Turtles and the Nightmare
on Elm Street series), Miramax Films Corporation (Pulp Fiction, Il Postino
(the Postman) and Like Water for Chocolate), Majestic Films, Limited (the
international distributor of Dances with Wolves and Driving Miss Daisy),
Gramercy Pictures (Four Weddings and a Funeral and Dead Man Walking), and
Orion Pictures (The Silence of the Lambs). There are also a large number of
smaller production and distribution companies (many with financial and other
ties to the major studios) that produce or distribute motion pictures. In
contrast to the major studios, the independent production and distribution
companies generally produce or distribute fewer motion pictures and do not own
production studios, national or worldwide distribution organizations, or
associated businesses or extensive film libraries which can generate gross
revenues sufficient to offset overhead, service debt or generate significant
cash flow.
The motion picture industry is a world-wide industry. In addition
to the production and distribution of motion pictures in the United States,
domestic motion picture producers and distributors generate substantial
revenues from the production and exploitation of motion pictures
internationally. In recent years, there has been a substantial increase in the
amount of filmed entertainment revenue generated by U.S. motion picture
distributors from foreign sources. From 1985 to 1995, international revenues
of U.S. motion picture distributors from filmed entertainment grew from
approximately $1.76 billion (comprising approximately 31.4% of total revenues
of U.S. motion picture distributors from filmed entertainment in 1985) to
approximately $9.05 billion (comprising approximately 49.3% of total revenues
of U.S. motion picture distributors from filmed entertainment in 1995). This
growth has been due to a number of factors, including, among other things, the
general worldwide acceptance of and demand for motion pictures produced in the
United States, the privatization of many foreign television industries, growth
in the number of foreign households with videocassette players, and growth in
the number of foreign theater screens.
Many countries and territories, such as Great Britain, France,
Italy, Australia, Germany, Spain, China, Russia, Hong Kong and Japan have
substantial indigenous film industries. In a number of these countries, as in
the United States, the film (and in some cases the entertainment) industry is
dominated by a small number of companies, often large, diversified companies
with production and distribution operations. However, like in the United
States, in most of such countries there are also smaller, independent, motion
picture production and distribution companies. Foreign distribution companies
not only distribute motion pictures produced in their countries or regions but
also films licensed or sub-licensed from American production companies and
distributors. In addition, film companies in many foreign countries produce
films not only for local distribution, but also for
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export to other countries, including the United States. While most foreign
language films distributed in the United States are released on a limited
basis, some foreign language films, such as Like Water for Chocolate, Il
Postino (the Postman) and Antonia's Line, and foreign English-language films,
such as Four Weddings and a Funeral, Crocodile Dundee and The Crying Game
appeal to a wider U.S. audience.
SIGNIFICANT CHANGES IN THE MOTION PICTURE INDUSTRY
The motion picture industry has undergone significant changes over
the past 15 years. Among the major changes, total film industry revenues of
U.S. motion picture companies (including revenues from domestic theatrical
distribution) have increased substantially, and the relative contributions of
the components of such total revenues have changed dramatically over that
period. There has also been a substantial increase in the revenues generated
from the licensing of rights in ancillary (other than domestic theatrical)
media, such as home video, cable and pay- per-view. However, the theatrical
success of a motion picture remains a significant factor in generating
revenues in foreign markets and in other media such as television and
videocassettes. For example, despite the expansion in the market for
videocassettes for home use (which has slowed recently), retail video stores
have been increasingly purchasing fewer copies of videocassettes of motion
pictures which have not been theatrically released, and purchasing more copies
of major studio theatrical hits. The chart below illustrates the growth in
overall filmed entertainment revenues of U.S. motion picture distributors
along with a breakdown of revenue sources from 1985 as compared to 1995.
MOTION PICTURE INDUSTRY ESTIMATED SOURCES OF REVENUES
1985 AND 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1985 1995
------------------------------ ------------------------------
Amount % of Total Amount % of Total
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Domestic revenues:
Theatrical rentals ................................. $ 1,612 28.7% $ 2,660 14.5%
Home video ......................................... 1,136 20.2 4,332 23.6
Television (cable, syndication, network and pay-per-
view) ......................................... 1,103 19.7 2,307 12.6
------- ----- ------- -----
3,851 68.6 9,299 50.7
------- ----- ------- -----
International revenues:
Theatrical rentals ................................. 887 15.8 2,410 13.1
Home video ......................................... 564 10.0 3,760 20.5
Television (cable, syndication, network and pay-per-
view) ......................................... 313 5.6 2,885 15.7
------- ----- ------- -----
1,764 31.4 9,055 49.3
------- ----- ------- -----
Total revenues .......................................... $ 5,615 100.0% $18,354 100.0%
======= ===== ======= =====
</TABLE>
Reprinted from MOTION PICTURE INVESTOR, Jan. 21, 1992, and June 27, 1996.
(C)1992, 1996 Paul Kagan Associates, Inc. (PKA). Reprinted with permission of
PKA. Data as shown are estimates compiled prior to Jan. 21, 1992, and June 27,
1996, respectively, by PKA from sources believed by PKA to be reliable and
from analysis conducted by PKA. PKA makes no warranty as to actual fact or
accuracy of the estimates, nor any representation that new estimates, based
upon information available after the above estimates were compiled, would
yield similar results.
Over the past 15 years, there have also been significant changes
in the ownership of the major studios as well as of numerous independent film
companies (some of which have gone out of business or were sold due to
financial reasons). There has also been significant consolidation as major
studios have acquired independent film companies (often to obtain their
production or distribution expertise and the benefit of their film libraries),
as well as related entertainment companies (including, for example, television
networks), or have been acquired themselves. Transactions in recent years
between independent film companies and major entertainment companies include:
the acquisition of Miramax Films Corporation by The Walt Disney Company in
June 1993; the acquisition of Castle
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Rock Entertainment by Turner Broadcasting System Inc. in December 1993; the
acquisition of New Line Cinema Corporation by Turner Broadcasting System Inc.
in January 1994; the acquisition of Republic Pictures by Spelling
Entertainment Group Inc. in April 1994 and the subsequent acquisition of
Spelling Entertainment Group, Inc. by Blockbuster Entertainment in August
1994; the acquisition of Orion Pictures and MCEG Sterling by Metromedia
International Telecommunications in November 1995; and the acquisition of The
Samuel Goldwyn Company by Metromedia International Telecommunications in July
1996. These transactions have significantly increased competition for the
acquisition of motion picture distribution rights.
There have also been rapid technological changes over the past 15
years. Although technological developments have resulted in the creation of
additional revenue sources from the licensing of rights with respect to such
new media, such developments have also resulted in the popularity and
availability of alternative and competing forms of leisure time entertainment,
including pay/cable television services and home entertainment equipment such
as videocassette, video games and computers. It is not possible to predict
what changes or trends will continue in the entertainment. For instance, there
can be no assurance that the increase in total motion picture revenues, or the
components thereof, will continue in the future or if such increases do
continue, continue at the same rate as in the past. In addition, it is not
possible to predict what new changes or trends might occur and the overall
effect these factors will have on the potential revenue from and profitability
of feature length motion pictures.
MOTION PICTURE PRODUCTION
The production of a motion picture begins with the screenplay
adaptation of a popular novel or other literary work acquired by the producer
or the development of an original screenplay having its genesis in a story
line or scenario conceived by a writer and acquired by the producer. In the
development phase, the producer typically seeks production financing and
tentative commitments from a director, the principal cast members and other
creative personnel. A proposed production schedule and budget are also
prepared during this phase. Upon completing the screenplay and arranging
financing commitments, pre-production of the motion picture begins. In this
phase, the producer engages creative personnel to the extent not previously
committed; finalizes the filming schedule and production budget; obtains
insurance and secures completion guaranties, if necessary; establishes filming
locations and secures any necessary studio facilities and stages; and prepares
for the start of actual filming. Principal photography (the actual filming of
the screenplay) generally extends from seven to 16 weeks for a film produced
by a major studio and often for a significantly shorter period (sometimes as
little as four to eight weeks) for low budget films and films produced by
independent production companies, depending in each case upon such factors as
budget, location, weather and complications inherent to the screenplay.
Following completion of principal photography (the post-production phase), the
motion picture is edited, opticals, dialogue, music and any special effects
are added, and voice, effects and music sound tracks and pictures are
synchronized. This results in the production of a negative from which release
prints of the motion picture are made.
Production costs consist of acquiring or developing the
screenplay, compensation of creative and other production personnel, film
studio and location rentals, equipment rentals, film stock and other costs
incurred in principal photography, and post-production costs, including the
creation of special effects and music. Distribution expenses, which consist
primarily of the costs of advertising and preparing release prints, are not
included in direct production costs and vary widely depending upon the extent
of the release and the nature of the promotional activities. The major studios
generally fund production costs from cash flow generated by motion pictures
and related activities or, in some cases, from unrelated businesses or through
off-balance sheet methods. Substantial overhead costs, consisting largely of
salaries and related costs of the production staff and physical facilities
maintained by the major studios, also must be funded. Independent production
companies generally avoid incurring overhead costs as substantial as those
incurred by the major studios by hiring creative and other production
personnel and retaining the other elements required for pre-production,
principal photography and post-production activities on a picture-by-picture
basis. As a result, these companies do not own sound stages and related
production facilities, and, accordingly, do not have the fixed payroll,
general administrative and other expenses resulting from ownership and
operation of a studio. Independent production companies may also finance their
production activities on a picture-by-picture basis. Sources of funds for
independent production companies include bank loans, "pre-licensing" of
distribution rights, equity offerings and joint ventures. Independent
production companies
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generally attempt to obtain all or a substantial portion of their financing of
a motion picture prior to commencement of principal photography, at which
point substantial production costs begin to be incurred and require payment.
As part of obtaining financing for its films, the independent
production company is often required by its lenders and distributors who
advance production funds to obtain a completion bond or production completion
insurance from an acceptable completion guarantor which names the lenders and
applicable distributors as beneficiaries. The guarantor assures the completion
of the particular motion picture on a certain date, and if the motion picture
cannot be completed for the agreed upon budgeted cost, the completion
guarantor is obligated to pay the additional costs necessary to complete the
picture by the agreed upon delivery date. If the completion guarantor fails to
timely complete and deliver such motion picture on or before the agreed upon
delivery date, the completion guarantor is required to pay the lenders and
distributor, if applicable, an amount equal to the aggregate amount the
lenders and distributor have loaned or advanced to the independent producer.
In connection with the production and distribution of a motion
picture, major studios and independent production companies generally grant
contractual rights to actors, directors, screenwriters, owners of rights and
other creative and financial contributors to share in net revenues from a
particular motion picture. Except for the most sought-after talent, these
third-party participations are generally payable after all distribution fees,
marketing expenses, direct production costs and financing costs are recouped
in full.
Major studios and independent film companies in the United States
typically incur obligations to pay residuals to various guilds and unions
including the Screen Actors Guild, the Directors Guild of America and the
Writers Guild of America. Residuals are payments required to be made by the
motion picture producer to the various guilds and unions (on a
picture-by-picture basis) arising from the exploitation of a motion picture in
markets other than the primary intended market for such picture. Residuals are
calculated as a percentage of the gross revenues derived from the exploitation
of the picture in these ancillary markets. The guilds and unions typically
obtain a security interest in all rights of the producer in the motion picture
being exploited to ensure satisfaction of the residuals obligation. This
security interest is usually subordinate to the security interest of the
lenders financing the production cost of the motion picture and the completion
bond company guaranteeing completion of the motion picture. Under a producer's
agreement with the guilds and unions, the producer of a motion picture may
transfer the obligation to pay the residuals to a distributor if the
distributor assumes the obligation to make the residual payment. If the
distributor does not assume those obligations, the producer is obligated to
pay those residuals.
MOTION PICTURE DISTRIBUTION
General. Distribution of a motion picture involves domestic and
international licensing of the picture for (a) theatrical exhibition, (b)
videocassettes and laser discs (and, in the future, digital video discs), (c)
presentation on television, including pay-per-view, basic and premium cable,
network, syndication, or satellite, (d) marketing of the other rights in the
picture and underlying literary property, which may include books, CD-ROM,
merchandising and soundtracks, and (e) non-theatrical exhibition, which
includes airlines, hotels and armed forces facilities. Although releases by
the major studios typically are licensed and fully exploited in all of the
foregoing media, often films produced or distributed by independent film
companies are not exploited in all such media. For example, certain films may
not receive theatrical exhibition in the United States or various other
territories and may instead go straight to home video release or instead first
"premiere" or otherwise be exploited on a pay television service (in certain
circumstances followed by a theatrical release).
Production companies with distribution divisions, such as the
major studios, typically distribute their motion pictures themselves.
Production companies without distribution divisions may retain the services of
sales agents or distributors to exploit the motion pictures produced by them
in various media and territories, or in all media and territories.
Distribution companies may directly exploit distribution rights licensed to,
or otherwise acquired by them, for example, by booking motion pictures with
theatrical exhibitors or selling videocassettes to video retailers.
Alternatively, they may grant sub-licenses to domestic or foreign
sub-distributors to exploit completed motion pictures.
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Acquisition of Distribution Rights. A sales agent does not
generally acquire distribution rights from the producer or other owner of
rights in the motion picture, but instead acts as an agent on behalf of the
producer or rights owner to license distribution rights to such motion picture
to sub-distributors on behalf of the producer or rights owner in exchange for
a sales agency fee, typically computed as a percentage of gross revenues from
licenses obtained by the sales agent. A distributor generally licenses and
takes a grant of distribution rights from the producer or other rights owner
of the motion picture for a specified term in a particular territory or
territories and media, generally in exchange for a distribution fee calculated
as a percentage of gross revenues generated by exploitation of the motion
picture by the distributor. The distributor often agrees to pay the producer
of the motion picture a certain advance or minimum guarantee upon the delivery
of the completed motion picture, which amount is to be recouped by the
distributor out of revenues generated from the exploitation of the motion
picture in particular media or territories. In general, after receiving its
ongoing distribution fee and recouping the advance or minimum guarantee plus
its distribution costs, the distributor pays the remainder of revenues in
excess of its ongoing distribution fee to the producer of such motion picture.
Obtaining license agreements with a distributor or distributors prior to
completion of a motion picture and which provide for payment of a minimum
guarantee (often referred to as the "pre-licensing" or "pre-selling" of film
rights), may enable the producer to obtain financing for its project by using
the contractual commitment of the distributor to pay the advance or minimum
guarantee as collateral to borrow production funding. In some circumstances,
the distributor is entitled to recoup any unrecouped costs and advances from a
film licensed to such distributor from the revenues from another film or films
licensed to such distributor.
In addition to obtaining distribution rights in a motion picture
for a limited duration, a distributor may also acquire all or a portion of the
copyright in such motion picture or license certain distribution rights in
perpetuity. Both major studios and independent film companies often acquire
motion pictures for distribution through a customary industry arrangement
known as a "negative pickup," under which the studio or independent film
company agrees to pay a specified minimum guaranteed amount to an independent
production company in exchange for all rights to the film upon completion of
production and delivery of the film. The independent production company
normally finances production of the motion picture pursuant to financing
arrangements with banks and other lenders in which the lender receives an
assignment of the production company's right to payment of the minimum
guarantee and is granted a security interest in the film and in the production
company's rights under its arrangement with the studio or independent film
company. When the major studio or independent film company "picks up" the
completed motion picture, it pays the minimum guarantee or assumes 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 net revenues
from distribution of the motion picture.
The Distribution Cycle. Motion pictures which are released
theatrically typically play in theaters for up to six months or longer
following their initial release. In contrast, successful independent
"art-house" films which are released on a limited basis often have
substantially longer release periods than national, wide release major studio
films. 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
international markets. As a general matter, a motion picture which is released
theatrically is typically available for distribution during its initial
distribution cycle as follows:
<TABLE>
<CAPTION>
MONTHS AFTER INITIAL
DOMESTIC THEATRICAL APPROXIMATE
MARKETPLACE RELEASE RELEASE PERIOD
- ----------- ------- --------------
<S> <C> <C>
Domestic theatrical .............................. -- 1-6 months
International theatrical ......................... -- 6-12 months
Domestic home video (initial release)............. 4-6 months 6 months
Domestic pay-per-view............................. 6-9 months 2 months
International video (initial release)............. 6-12 months 6-12 months
Domestic pay television........................... 12-15 months 18 months
International television (pay or free)............ 18-24 months 12-36 months
Domestic free television*......................... 30-33 months 1-5 years
</TABLE>
* Includes network, barter syndication, syndication and basic cable.
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In general, if a film is not released theatrically in the United
States and instead is released straight to domestic home video, television
exploitation generally does not commence until six to eight months after such
video release. Thereafter, the same general release patterns indicated in the
table above typically apply. If a film "premieres" on United States pay
television (which generally means that no other distribution of the film in
the United States has occurred), the pay television service typically is
licensed a four to six week exclusive airing period. The license will
generally provide for limited airings (sometimes defined as five to eight
"exhibition days" with multiple airings on each "exhibition day" allowed). The
provisions of such license also usually provide for the pay television service
to receive subsequent airing periods following a period in which the film can
be released on video (typically a 10- to 12-month period) or sometimes even
theatrically and a period when the film may be broadcast on free television.
A substantial portion of a film's ultimate revenues are generated
in a film's initial distribution cycle (generally the first five years after
the film's initial domestic theatrical release). Commercially successful
motion pictures, however, may continue to generate revenues after the film's
initial distribution cycle from the relicensing of distribution rights in
certain media, including television and home video, and from the licensing of
distribution rights with respect to new media and technologies.
Theatrical. The theatrical distribution of a motion picture,
whether in the United States or internationally, involves the licensing and
booking of the motion picture to theatrical exhibitors, the promotion of the
picture through advertising and publicity campaigns and the manufacture of
release prints from the film negative. Expenditures on these activities,
particularly on promotion and advertising, are often substantial and may have
a significant impact on the ultimate success of the film's theatrical release.
In addition, such expenditures can vary significantly, depending upon the
number of screens on which the motion picture is to be exhibited and the
ability to exhibit motion pictures during peak exhibition seasons. With a
release by a major studio, the vast majority of these costs (primarily
advertising costs) are incurred prior to the first weekend of the film's
domestic theatrical release, so there is not necessarily a correlation between
these costs and the film's ultimate box office performance. In addition, the
ability to distribute a picture during peak exhibition seasons, including the
summer months and the Christmas holidays, and in the most popular theaters may
affect the theatrical success of a picture. Films distributed theatrically by
an independent film company are sometimes released on a more limited basis
which in some circumstances allows the distributor to defer certain marketing
costs until it is able to assess the initial public acceptance of the film.
While arrangements for the exhibition of a film vary greatly,
there are certain economic relationships generally applicable to theatrical
distribution. Theater owners (the "exhibitors") retain a portion of the
admissions paid at the box office ("gross box office receipts"). The share of
the gross box office receipts retained by an exhibitor generally includes a
fixed amount per week (in part to cover overhead), plus a percentage of
receipts that escalates over time. Although these percentages vary widely, in
Overseas' experience, an exhibitor's share of a particular film's revenues
will generally be approximately 60% to 65% of gross box office receipts. The
balance ("gross film rentals") is remitted to the distributor. The distributor
then retains a distribution fee from the gross film rentals and recoups the
costs incurred in distributing the film, which consist primarily of the cost
of marketing and advertising and the cost of release prints for exhibition.
The balance of gross film rentals, after deducting distribution fees and
distribution costs recouped by the distributors ("net film rentals"), is then
applied against the recoupment of any advance paid for the distribution rights
(with interest thereon) and the balance is remitted to the producer or other
rights owner of the film.
Home Video. A motion picture released theatrically typically
becomes available for videocassette distribution within four to six months
after its initial domestic theatrical release. As indicated above, certain
films may not be released theatrically and instead may initially be released
to home video. Home video distribution consists of the promotion and sale of
videocassettes to local, regional and national video retailers which rent or
sell videocassettes to consumers primarily for home viewing. Most films are
initially made available in videocassette form at a wholesale price of
approximately $50 to $75 per videocassette and are sold at that price
primarily to wholesalers who then sell to video rental stores at a price of
approximately $75 to $105 per videocassette, which rent the cassettes to
consumers. Owners of films do not share in rental income. Following the
initial marketing period, selected films may be remarketed at a wholesale
price of $10 to $15 or less for sale to consumers. These
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"sell-through" arrangements are used most often with films that will appeal to
a broad marketplace or to children. A few major releases with broad appeal may
be initially offered by a film company at a price designed for sell-through
rather than rental when it is believed that the ownership demand by consumers
will result in a sufficient level of sales to justify the reduced margin on
each cassette sold. Home video arrangements in international territories are
similar to those in domestic territories except that the wholesale prices may
differ.
Television. Television rights for films released theatrically are,
if such films have broad appeal, generally licensed first to pay-per-view for
an exhibition period within six to nine months following initial domestic
theatrical release, then to pay television approximately 12 to 15 months after
initial domestic theatrical release, thereafter in certain cases to free
television for an exhibition period, and then to pay television again. These
films are then syndicated to either independent stations or basic cable
outlets. Pay-per-view allows subscribers to pay for individual programs. Pay
television allows cable television subscribers to view such services as
HBO/Cinemax, Showtime/The Movie Channel or Encore Media Services offered by
their cable system operators for a monthly subscription fee. Pay-per-view and
pay television is now delivered not only by cable, but also by satellite
transmission, and films are generally licensed in both such media. Certain
films which are not initially released in the domestic theatrical market may
"premiere" instead on pay television followed in some circumstances by
theatrical release. Groups of motion pictures are often packaged and licensed
as a group for exhibition on television over a period of time and, therefore,
revenues from these television licensing "packages" may be received over a
period that extends beyond five years from the initial domestic theatrical
release of a particular film. Motion pictures are also licensed and "packaged"
by producers and distributors for television broadcast in international
markets by government owned or privately owned television studios and
networks. Pay television is less developed outside the United States, but is
experiencing significant growth. The prominent foreign pay television services
include Canal+, Premiere, STAR TV, British Sky Broadcasting and the
international operations of several U.S. cable services including HBO, the
Disney Channel and Turner Broadcasting.
Non-Theatrical and Other Rights. Films may be licensed for use by
airlines, schools, public libraries, community groups, the military,
correctional facilities, ships at sea and others. Music contained in a film
may be licensed for sound recording, public performance and sheet music
publication. Rights in motion pictures may be licensed to merchandisers for
the manufacture of products such as video games, toys, T-shirts, posters and
other merchandise. Rights may also be licensed to create novels from a
screenplay and to generate other related book publications, as well as
interactive games on such platforms as CD-ROM, CD-I or other proprietary
platforms.
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BUSINESS OF OVERSEAS FILMGROUP
GENERAL
Overseas Filmgroup is an independent film company which
specializes in the acquisition and worldwide license or sale of distribution
rights to independently produced, feature films in a wide variety of genres
(including action, "art-house," comedy, drama, foreign language, science
fiction and thrillers). Overseas Filmgroup has a library of distribution
rights in various media and markets to over 175 feature films. See "--Film
Library of Distribution Rights" below. Most of such motion pictures have had
direct negative costs between $1,000,000 and $6,000,000. This is substantially
below the average direct negative cost of films produced by the major studios,
which was approximately $36,400,000 in 1995.
Overseas Filmgroup's primary focus has been the licensing of
distribution rights (such as theatrical, video, pay television, free
television, satellite and other rights) to foreign sub-distributors in the
major international territories or regions. These activities accounted for
approximately 69% of Overseas Filmgroup's total revenues in 1995. Overseas
Filmgroup has been increasingly active, however, in the domestic (United
States) market due to its increasing acquisition of worldwide, rather than
more limited, distribution rights. Overseas Filmgroup engages directly in
domestic theatrical distribution (booking motion pictures with theatrical
exhibitors, manufacturing release prints from the film negative, and promoting
such motion pictures with advertising and publicity campaigns) through
Overseas Filmgroup's domestic theatrical releasing division, First Look
Pictures. First Look Pictures has released such films as Antonia's Line
(winner of the 1996 Academy Award for Best Foreign Language Film), The Scent
of Green Papaya (which was nominated for the 1994 Academy Award for Best
Foreign Language Film), The Secret of Roan Inish (the critically acclaimed
film by the noted director, John Sayles) and Party Girl (which Overseas
Filmgroup believes was the first theatrical motion picture broadcast over the
Internet).
Overseas Filmgroup began its operations by acting primarily as a
foreign sales agent, licensing distribution rights in markets outside the
United States to independently produced films which were fully financed and
continued to be owned by others, in exchange for a sales agency fee.
Currently, Overseas Filmgroup generally acquires from independent producers
the distribution rights in a film for a specified term in one or more
territories and media and receives a distribution fee in connection with its
licensing activities. Often Overseas Filmgroup commits to pay an independent
producer a minimum guaranteed payment (a "minimum guarantee") at or after
delivery of the completed film to Overseas Filmgroup, ranging from
approximately $100,000 to $5,000,000 or more and representing in amount
varying portions, including at times all or substantially all of a film's
production costs. These minimum guarantees may enable the independent producer
to obtain financing for its project and often results in Overseas Filmgroup
controlling more of the distribution rights in film and receiving more
favorable distribution terms. Overseas Filmgroup also selectively produces
certain of the motion pictures distributed by it, generally acquiring fully
developed projects ready for pre-production and contracting out pre-production
and production activities.
STRATEGY
Overseas Filmgroup's primary strategies are to:
o seek to limit risk by continuing to balance the methods it uses for
acquiring distribution rights;
o maintain a cost consciousness in its acquisition, financing,
production and distribution activities;
o continue to develop First Look Pictures with the goal of achieving
broader theatrical distribution and exposure for its releases,
which, among other things, may increase potential revenues from
ancillary media and foreign markets;
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o gradually and selectively acquire rights to or produce films which
have greater production values (often through offering greater
creative opportunity to talent than major studios offer or as a
result of larger budgets) and greater potential for more wide-spread
audience appeal; and
o seek both to develop relationships with emerging talent and to
maintain relationships with independent producers with reputations
for producing high quality films while also controlling costs.
MOTION PICTURE DISTRIBUTION
International Distribution. Management of Overseas Filmgroup has
considerable expertise in international distribution. Ellen Dinerman Little
and Robert B. Little, the founders and senior executive officers of Overseas
Filmgroup, have substantial experience in the business of licensing motion
pictures for distribution outside the United States and have been active in
international motion picture sales since 1975. Over the past 21 years, they
have developed, through their foreign sales activities, relationships with
distributors in most significant territories. In addition, Overseas Filmgroup
is a founding member of the American Film Marketing Association which sponsors
the American Film Market, one of the three major annual international film
markets attended by significant international and regional distributors.
Overseas Filmgroup generally participates annually with a sales office at all
three major film markets (the American Film Market, the Cannes Film Festival
and MIFED), as well as the major television (NAPTE, MIP, MIPCOM) and video
(VSDA) markets.
With respect to international territories, Overseas Filmgroup
licenses distribution rights in various media (such as theatrical, video, pay
television, free television, satellite and other rights) to foreign
sub-distributors on either an individual rights basis or grouped in various
combinations of rights (which sometimes includes rights in all media). These
rights are licensed by Overseas Filmgroup to numerous sub-distributors in
international territories or regions either on a picture-by-picture basis or,
in certain circumstances, with respect to a number of motion pictures pursuant
to output arrangements. Currently, the most important international
territories for Overseas Filmgroup are Japan, Germany, the United Kingdom,
France, Italy, Canada, Australia, South Korea, Brazil, Spain, the Benelux
countries and Scandinavia. See Note 9 of Notes to Overseas Filmgroup's
Financial Statements for certain geographical information regarding Overseas
Filmgroup's foreign distribution activities.
The terms of Overseas Filmgroup's license agreements with foreign
sub-distributors vary depending upon the territory and media involved and
whether the agreement relates to a single or multiple motion picture. Most of
Overseas Filmgroup's license agreements provide that Overseas Filmgroup will
receive a minimum guarantee from the foreign sub-distributor with all or a
majority of such minimum guarantee paid prior to, or upon delivery of, the
film to the sub-distributor for release in the particular territory. The
remainder of any unpaid minimum guarantee is generally payable at specified
intervals after delivery of the film to the sub-distributor. The minimum
guarantee is recouped by the sub-distributor out of the revenues generated
from exploitation of the picture in such territory. The foreign
sub-distributor retains a negotiated distribution fee (generally measured as a
percentage of the gross revenues generated from its distribution of the motion
picture), recoups its distribution expenses and the minimum guarantee and
ultimately (after recoupment by the sub-distributor of the minimum guarantee
and recovery of its distribution expenses) remits to Overseas Filmgroup the
remainder of any receipts in excess of the distributor's ongoing distribution
fee. Overseas Filmgroup must rely on the foreign sub-distributor's ability to
successfully exploit the film in order to receive any proceeds in excess of
the minimum guarantee.
In certain situations, Overseas Filmgroup does not receive a
minimum guarantee from the foreign sub- distributor and instead negotiates
terms which usually result, in effect, in an allocation of gross revenues
between the sub-distributor and Overseas Filmgroup. Typically the terms of
such an arrangement provide for the sub- distributor to retain an ongoing
distribution fee (calculated as a percentage of gross receipts of the
sub-distributor in the territory), recoup its expenses and pay remaining
receipts in excess of the ongoing distribution fee to Overseas Filmgroup.
Alternatively, such as often with respect to video rights, the terms may
provide for a royalty to be paid to Overseas Filmgroup calculated as a
percentage of the gross receipts of the sub-distributor from exploitation of
the video rights (without deduction for the sub-distributor's distribution
expenses).
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Overseas Filmgroup has entered into several output arrangements
with local foreign distributors in certain territories whereby the foreign
sub-distributor receives the right, typically for a specified period and/or a
specified number of motion pictures, to distribute in a particular territory,
in designated media, motion pictures released by Overseas Filmgroup. These
output arrangements include agreements with Medusa Communications Ltd. in the
United Kingdom and Ireland and with Bealestreet Pictures International B.V. in
South Africa and certain adjoining territories, and an agreement in principle
with Cinepix Film Properties Inc. in Canada. In some circumstances, a minimum
guarantee is paid by the foreign sub-distributor to Overseas Filmgroup;
generally on a picture-by-picture basis with each minimum guarantee having
been either pre-negotiated or computed as a stipulated percentage of the
production cost or acquisition cost of each picture. Overseas Filmgroup enters
into output arrangements with foreign sub-distributors which Overseas
Filmgroup believes have the ability to make the recurring payments.
Nevertheless, in certain instances foreign sub-distributors encounter
financial difficulties that may preclude timely payment, and as a result
Overseas Filmgroup may be forced to terminate or renegotiate output
agreements.
Domestic Distribution. Overseas Filmgroup has increasingly
obtained domestic distribution rights to films. From January 1, 1995 through
June 30, 1996, various distribution rights in approximately 21 films,
including various domestic distribution rights in 14 films, became available
for the first time to Overseas Filmgroup for licensing or distribution.
Overseas Filmgroup exploits its domestic distribution rights in a variety of
ways. In 1994, Overseas Filmgroup's domestic theatrical releasing operation,
First Look Pictures, was established. Not all of the films distributed by
Overseas Filmgroup, however, receive domestic theatrical release by First Look
Pictures or otherwise. Some films are licensed by Overseas Filmgroup to
domestic sub-distributors for release directly on video or, in certain
circumstances, Overseas Filmgroup licenses directly to the pay television
services for "premiere" on pay television (cable and/or satellite). Of the 14
films which first became available to Overseas Filmgroup for licensing or
distribution between January 1, 1995 and June 30, 1996 and in which Overseas
Filmgroup controls various domestic distribution rights, five were (or are
currently intended to be) released theatrically (all by First Look Pictures),
three premiered (or are intended to premiere) on pay television and six were
(or are intended to be) released directly to video.
In March 1996, Overseas Filmgroup entered into an output
arrangement for domestic video rights with BMG Video, an affiliate of the
international entertainment company Bertelsmann Music Group. This arrangement
covers, subject to certain conditions, twelve specified films, including
Antonia's Line and Infinity, and also generally any film delivered to Overseas
Filmgroup prior to December 31, 1996 (or December 31, 1997 in the event
Overseas Filmgroup and BMG Video mutually elect to renew the term for an
additional year). Films for which Overseas Filmgroup sells all domestic rights
to a single company may be excluded from this arrangement at Overseas
Filmgroup's election. The first two films to be released by BMG Video under
this arrangement are currently expected to be made available to retail video
stores in September and October 1996. Under this agreement, BMG Video receives
exclusive video distribution rights in the United States and certain related
territories, including Puerto Rico and the U.S. Virgin Islands, with respect
to each film for a five-year period following video release. BMG Video has
agreed to pay Overseas Filmgroup an overall advance, as well as to provide
minimum guarantees with respect to each film. Under this arrangement, BMG
Video will deduct a varying distribution fee based upon a negotiated
percentage of its gross receipts from exploitation of the video rights of each
film, recoup its distribution costs and the minimum guarantee, and remit any
remaining receipts to Overseas Filmgroup in excess of BMG Video's ongoing
distribution fee. In the event this output arrangement is not extended,
management of Overseas Filmgroup will seek to obtain another domestic video
output arrangement, although there can be no assurance that any new
arrangement, if obtained, will be on terms similar to its arrangement with BMG
Video.
In addition to its output arrangement with BMG Video, Overseas
Filmgroup licenses distribution rights directly to pay television services
including HBO, Showtime and Encore, as well as smaller services, including
pay- per-view services. Although Overseas Filmgroup has not engaged in
significant licensing or syndication of domestic free television rights except
as part of a license of rights in multiple media, it controls these rights to
a significant portion of the films in its library. In those circumstances
where Overseas Filmgroup has licensed such television rights separately from
other rights, Overseas Filmgroup has typically licensed these rights under
terms which provide for no minimum guarantee to be paid to Overseas Filmgroup,
but for all revenues to be paid to Overseas Filmgroup in excess of a
distribution fee for the sub-distributor.
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In some cases, Overseas Filmgroup will license the right to
distribute a film domestically in multiple media to a major studio, a division
of a major studio, or an independent distributor. Although the terms of such
licenses vary, typically Overseas Filmgroup will be paid a minimum guarantee.
The sub-distributor then retains a distribution fee (measured as a percentage
of the gross receipts received by the sub-distributor from exploitation of the
film), recoups its distribution costs and the advance paid to Overseas
Filmgroup, and ultimately remits to Overseas Filmgroup the remainder of any
receipts in excess of an ongoing distribution fee. See "THE MOTION PICTURE
INDUSTRY -- Motion Picture Distribution."
First Look Pictures. Overseas Filmgroup, from its Los Angeles
offices, directly distributes some of the motion pictures for which it
controls domestic rights to theaters throughout the United States under the
name First Look Pictures. Although many of First Look Pictures's upcoming
releases are intended to appeal to a wide audience, most of the eight First
Look Pictures releases to date have been foreign language films, "art-house"
films and other specialized motion pictures generally characterized by
underlying literary and artistic elements intended to appeal primarily to
sophisticated audiences. Specialized motion pictures can have crossover
commercial potential as well. For example, The Secret of Roan Inish - directed
by John Sayles, while aimed at the traditional specialized film audience, had
elements which management of Overseas Filmgroup believes appealed to a wider
audience.
Films distributed theatrically in the United States by First Look
Pictures are typically released on a limited basis (initially less than 100
screens). Films released by First Look Pictures on a limited basis are
typically released first in selected cities, and then often in new cities or
regions. Releasing a film initially in only selected cities allows management
to assess the initial public acceptance of the film and weigh the likelihood
of success of further release against the costs involved before determining
whether to expand the release. In some circumstances, films are released in
new cities as prints become available from cities where the engagement has
closed, reducing the number of prints needed and the aggregate cost of such
prints. Releasing a film on a limited basis can also provide other advantages,
such as reducing or eliminating the need for widespread national advertising.
Films released theatrically in the United States on a national, wide release
basis (on generally 1,500 to 2,500 screens initially) require significantly
greater expenditures for prints and advertising. In select circumstances,
Overseas Filmgroup may release appropriate films with more mass market appeal
on a wide release basis either through First Look Pictures or, more likely, by
licensing such film to a domestic distributor with more significant financial
resources. The Prophecy, which was financed and acquired by Overseas Filmgroup
(which also owns the copyright), was licensed by Overseas Filmgroup to
Miramax, an affiliate of The Walt Disney Company, and released nationwide in
1995 on approximately 1,600 screens.
The cost to First Look Pictures to distribute a specialized motion
picture or "art-house" film on a limited-release basis has in the past
typically ranged from approximately $300,000 to $2,000,000, although in the
future these costs may exceed such range. Expenditures for prints, marketing
and advertising represent a substantial portion of the costs of releasing a
film. Costs for prints, marketing and advertising for the three films released
by First Look Pictures from January 1, 1995 through June 30, 1996 averaged
approximately $1,300,000. In connection with the acquisition of domestic
theatrical rights to a film, Overseas Filmgroup sometimes commits to spend a
minimum amount for prints and advertising costs. These costs are in addition
to the direct production or acquisition costs and other distribution expenses
of such films. Although First Look Pictures may at times utilize standard
broadcast television advertising, First Look Pictures typically supports its
limited releases with local newspaper and some cable television advertising.
First Look Pictures also relies on national publicity, such as reviews in
national publications or articles and appearances of the film's principal
artists on radio and television talk shows. In contrast, distributors of
national, wide release films must rely primarily upon expensive national
advertising campaigns, including substantial television advertising, to
attract theatergoers.
Management of Overseas Filmgroup believes that it benefits in
several ways by theatrically distributing films in the United States directly
through First Look Pictures. The domestic theatrical success of a motion
picture can be a significant factor in generating revenues from distribution
of the motion picture in ancillary media and foreign markets. For example,
retail video stores have been increasingly purchasing fewer copies of
videocassettes of motion pictures that have not been theatrically released.
See "RISK FACTORS -- Significant Changes in the Motion Picture Industry." In
addition, Overseas Filmgroup believes it is generally able to obtain more
favorable distribution terms in its agreements with foreign sub-distributors
and domestic sub-distributors in other media with
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respect to motion pictures that have been theatrically released in the United
States. Management of Overseas Filmgroup believes that, in some cases, its
First Look Pictures operations enable Overseas Filmgroup to achieve domestic
theatrical release for films that might not otherwise be released in U.S.
theaters. Overseas Filmgroup also believes that by theatrically releasing
films itself in the United States, it can manage, often more effectively than
an unaffiliated distributor, the timing and marketing of a film's theatrical
release. As a result, even if Overseas Filmgroup does not recoup all of its
marketing, advertising and print costs from a First Look Pictures' release,
Overseas Filmgroup believes it can often obtain greater overall revenues and
achieve an overall profit on such films through increased revenues in
ancillary and foreign markets.
From January 1, 1995 through June 30, 1996, First Look Pictures
released the following motion pictures. First Look Pictures anticipates
releasing four additional films in 1996.
RELEASED
<TABLE>
<CAPTION>
RELEASE DATE AND
MAJOR CREATIVE DOMESTIC BOX OFFICE
TITLE ELEMENTS STORYLINE RECEIPTS
----- -------- --------- --------
<S> <C> <C> <C>
The Secret of Roan Inish Director: John Sayles A magical tale of a girl Released in February
(Lone Star, City of whose search for her 1995 with domestic box
Hope, Eight Men missing baby brother office receipts of
Out, Return of the brings an Irish legend to approximately
Secaucus Seven). life. $5,880,000.
Cast: John Lynch (In
the Name of the
Father).
Party Girl Director: Daisy Von A screwball comedy for Released in June 1995
Scherler Mayer; the '90's. Torn with domestic box office
Cast: Parker Posey between the high-drama/ receipts of approximately
(Sleep With Me, low fashion world of $461,000.
Dazed and nightclubs and DJ's and
Confused). the tedious reliability of
a career as a librarian, a
spirited young woman
takes the painful climb
to self-knowledge.
Antonia's Line Director: Marleen A celebration of the Released in February
Gorris; (Mrs. universal power of 1996 with domestic box
Dalloway) women and family ties. office receipts through
Cast: Willeke van Winner of the 1996 June 30, 1996 of
Ammelrooy. Academy Award for approximately
Best Foreign Language $3,420,000. To continue
Film. in release through August
1996.
</TABLE>
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UPCOMING RELEASES
<TABLE>
<CAPTION>
MAJOR CREATIVE ESTIMATED DOMESTIC
TITLE ELEMENTS STORYLINE THEATRICAL RELEASE DATE
----- -------- --------- -----------------------
<S> <C> <C> <C>
The Big Squeeze Director: Marcus In this modern-day Fall 1996
DeLeon; fable, a devilishly clever
Cast: Lara Flynn scam twists and turns
Boyle (Threesome, through love, lust,
Twin Peaks), Danny jealously and betrayal
Nucci (The Rock, until destiny plays its
Eraser), Peter hand.
Dobson (The
Frighteners).
Infinity Director: Matthew A love story about the Fall 1996
Broderick; brilliant young scientist,
Cast: Matthew Richard Feynman and
Broderick (Cable the girl of his dreams,
Guy, Ferris Arline Greenbaum, set
Bueller's Day Off against the backdrop of
and Broadway's World War II and his
How to Succeed in work on the Atomic
Business Without bomb. Feynman won
Really Trying), the Nobel Prize for
Patricia Arquette physics in 1965.
(Beyond Rangoon,
True Romance).
Bitter Sugar Writer/Director: Living in the volatile, Fall 1996
(Azucar Amarga) Leon Ichaso modern-day Havana, an
(Federal Hill) idealistic honor student
Cast: Rene Lavan falls in love with a
(One Life to Live), beautiful dancer with
Mayte Vilan (The radically opposite
Specialist). political views.
johns Director: Scott Silver A dark comic drama Fall 1996
Cast: Lukas Haas about two hustlers
(Mars Attacks, working the dirty, sun-
Witness) and David scorched pavements of
Arquette (Beautiful Hollywood's Santa
Girls, Wild Bill, Monica Blvd.
Buffy the Vampire
Slayer).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
MAJOR CREATIVE ESTIMATED DOMESTIC
TITLE ELEMENTS STORYLINE THEATRICAL RELEASE DATE
----- -------- --------- -----------------------
<S> <C> <C> <C>
The Designated Mourner Writer: Wallace Straight from the Spring 1997
Shawn (My Dinner National Theatre in
With Andre) London, the film
Director: David captures a three way
Hare (Damage) conversation in which
Cast: Mike Nichols the characters (a
(acclaimed director snobbish father,
of The Graduate, pretentious daughter and
Birdcage and her middlebrow
Postcards from the boyfriend) debate the
Edge), Miranda emotional and
Richardson (The intellectual bankruptcy
Crying Game, of high culture in the
Damage). modern world.
A Brother's Kiss Director: Seth Zvi Headstrong and hot- Spring 1997
Rosenfeld tempered, a man down
Cast: John on his luck falls in with
Leguizamo the wrong people. His
(Executive Decision, brother, an NYPD
The Fan), Cathy officer, is torn between
Moriarty (Casper, loyalty to his uniform
Raging Bull), Rosie and the person who
Perez (White Men protected him as a kid
Can't Jump), on the tough streets of
Marisa Tomei (My NY.
Cousin Vinny).
Slaves to the Director: Kristine Set against the Seattle Spring 1997
Underground Peterson "grunge rock" scene, a
Cast: Molly Gross, young girl named Shelly
Marisa Ryan. is growing up in a
confused world.
This is the Sea Director: Mary Beneath the calm of a Spring 1997
McGuckian (Words truce in Northern
on a Window Pane); Ireland, two young
Cast: Richard Harris lovers, mindful only of
(The Field, Patriot the present peace,
Games), Gabriel struggle to sustain a
Byrne (The Usual relationship that is
Suspects, Little tragically threatened by
Women), John forces beyond their
Lynch (In the Name control.
of the Father, The
Secret of Roan
Inish).
</TABLE>
There can be no assurance that any of the pictures scheduled for
release by First Look Pictures in 1996 or thereafter will actually be released
or released in accordance with the anticipated schedule set forth above. The
motion picture business is subject to numerous uncertainties, including
financing requirements, personnel availability and the release schedule of
competing films. In addition, there can be no assurance that the motion
pictures
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scheduled for release but which are not yet completed will necessarily involve
all of the creative elements and artists listed above.
ACQUISITION OF RIGHTS, PRODUCTION AND FINANCING
Overseas Filmgroup acquires distribution rights from a large
variety of independent production companies and producers. Overseas Filmgroup
generally acquires distribution rights to single films, as compared to
acquiring films pursuant to multi-picture acquisition agreements with
independent film companies or producers. Overseas Filmgroup commits to acquire
rights to motion pictures at various stages in the completion of a film, from
films completed and ready for release to developed (or undeveloped) film
projects for which Overseas Filmgroup may arrange financing and/or production
services to complete. In acquiring rights, Overseas Filmgroup generally seeks
to obtain rights to commercially appealing motion pictures with substantially
lower direct negative costs than motion pictures released by the major
studios. The films distributed by Overseas Filmgroup have generally had direct
negative costs ranging from $1,000,000 to $6,000,000, although, from time to
time, Overseas Filmgroup may acquire rights to, or produce, motion pictures
with direct negative costs above or below such range.
In certain circumstances, Overseas Filmgroup acquires limited
distribution or sales rights and, in other circumstances, acquires worldwide
rights (sometimes including the copyright) to such films. Generally, this
depends upon whether Overseas Filmgroup agrees to pay the producer or other
owner of rights in the film (the "rights owner") a substantial minimum
guarantee. As part of its acquisition of theatrical, video and/or television
distribution rights, Overseas Filmgroup may obtain rights to exploit ancillary
rights, such as music or sound track rights, merchandising rights, or rights
to produce computer or video games, CD-ROMs or other interactive media
products. Although Overseas Filmgroup may license such rights to
sub-distributors, historically Overseas Filmgroup has not derived any
significant revenues from these ancillary rights.
In its initial years of operations, Overseas Filmgroup would
typically negotiate to be appointed as the sales agent for a particular motion
picture to license, on behalf of the rights owner, distribution rights in the
film to various distributors for exploitation on a territory-by-territory
basis. In exchange for its services as sales agent, Overseas Filmgroup would
be entitled to a sales agency fee which typically has ranged from
approximately 10% to 25% of the gross revenues from resulting licenses or
sales. In such circumstances, Overseas Filmgroup generally advances limited
funds toward the marketing and distribution of the film (historically ranging
from approximately $50,000 to $100,000). Overseas Filmgroup now enters into
such arrangements much less frequently.
In some circumstances, Overseas Filmgroup acts in much the same
manner as a sales agent but, rather than licensing or selling distribution
rights to a film to a third party on behalf of the rights owner, Overseas
Filmgroup itself licenses distribution rights to the film from the rights
owner for exploitation by Overseas Filmgroup for a given term in a given
territory (or territories) and media. The remainder of this arrangement (the
fee structure and funds provided for marketing and distribution) remains
similar to that of a sales agency. Overseas Filmgroup generally prefers to
enter into this type of distribution arrangement than a sales agency
arrangement because it receives an actual license of the distribution rights
which can serve as collateral for loans and provide other benefits to Overseas
Filmgroup.
In both a sales agency arrangement and the distribution
arrangement described above, the amounts payable by Overseas Filmgroup to the
rights owner depend upon the success of Overseas Filmgroup in distributing the
film and the financial performance of the film itself. In acquiring
distribution rights to a completed or incomplete film, however, Overseas
Filmgroup will sometimes agree to pay the rights owner a minimum guarantee
that is independent of the financial performance of the film. Historically,
these minimum guarantees paid by Overseas Filmgroup have ranged from
approximately $100,000 to $5,000,000, although in some circumstances they may
exceed such amounts. A minimum guarantee may be payable in full at the time of
delivery of the completed film to Overseas Filmgroup as in a typical negative
pickup or in installments following complete delivery of the film to Overseas
Filmgroup, depending upon the particular arrangement. The rights owner may
also receive additional payments as a result of Overseas Filmgroup's
exploitation of the distribution rights to the film. After receiving a
distribution fee (generally a percentage of gross receipts from exploitation
of the distribution rights) and recovering its distribution expenses and
minimum guarantee, Overseas Filmgroup pays the remainder of revenues in excess
of an ongoing distribution fee to the rights owner. Overseas Filmgroup
typically receives a larger share of gross
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receipts from the distribution of motion pictures for which it has provided a
minimum guarantee than when it does not. In addition, at times the minimum
guarantee paid by Overseas Filmgroup may represent, in amount, all or a
substantial portion of the film's production costs. In those circumstances,
such as a typical negative pickup entered into by Overseas Filmgroup, Overseas
Filmgroup generally receives worldwide distribution rights in all media and
generally will also obtain ownership of copyright to the film, with the
production company from which Overseas Filmgroup acquired the rights receiving
a production fee and generally a participation in net revenues from
distribution of the motion picture.
Overseas Filmgroup's commitment to pay a minimum guarantee with
respect to films that have not begun production often enables the production
company or producer to obtain financing for its project, if needed. In some
cases, Overseas Filmgroup's contractual commitment to pay a minimum guarantee
upon delivery of a film serves as sufficient collateral for a bank to lend
production funds. The bank will typically insure delivery of the film to
Overseas Filmgroup by the purchase of a completion guaranty. In order to
enable the production company or producer to borrow production funding, it may
also be necessary for Overseas Filmgroup to secure its purchase or acquisition
commitment, which it generally does by obtaining the issuance of a letter of
credit from Overseas Filmgroup's primary lender, Coutts & Co., a subsidiary of
National Westminster Bank plc. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OVERSEAS FILMGROUP --
Liquidity and Capital Resources." In certain situations, the production
company or producer of a film may initially obtain funds from other
distribution companies which obtain distribution rights in certain media or
territories (for example, the domestic distribution rights or distribution
rights in Japan), from accessing foreign governmental film industry incentive
programs (such as programs offered in the past by England, Canada, Australia
and New Zealand) or by using its own resources or other resources available to
it, and then subsequently approach Overseas Filmgroup to supply the remaining
funds necessary to complete or co-finance the film in exchange for Overseas
Filmgroup's obtaining the remaining distribution rights to the motion picture.
In order to fund the acquisition costs of the films for which it acquires
rights, Overseas Filmgroup relies primarily on: (i) its credit facility with
Coutts & Co.; (ii) other lenders willing to finance the contractual minimum
guarantee obligations of Overseas Filmgroup to the film's producers or rights
owner, (iii) working capital; and (iv) pre-sales (minimum guarantees obtained
from sub-distributors who have licensed rights to the film from Overseas
Filmgroup).
Of the 16 completed films which first became available to Overseas
Filmgroup for distribution in 1995, three films, with average direct negative
costs of approximately $2,500,000, were produced by Overseas Filmgroup through
various production companies controlled by Overseas Filmgroup and to which
Overseas Filmgroup provided all or substantially all of the production funds
through various financing arrangements such as minimum guarantee commitments
and negative pickups. Distribution rights to three additional films became
available to Overseas Filmgroup in the first six months of 1996 and three
films are currently in production or post-production. Typically, Overseas
Filmgroup's production subsidiaries obtain production financing by obtaining
production loans using Overseas Filmgroup's minimum guarantee commitment as
collateral, at times secured by a letter of credit issued under Overseas
Filmgroup's credit facility. Overseas Filmgroup attempts to minimize the risks
associated with its development and production activities in a variety of
ways. Overseas Filmgroup does not maintain a substantial staff of creative or
technical personnel. Overseas Filmgroup also does not own or operate sound
stage and related production facilities generally referred to as a "studio"
and does not have the fixed payroll, general and administrative and other
expenses resulting from ownership of a studio. In addition, Overseas Filmgroup
generally attempts to acquire fully developed projects ready for
pre-production, with when feasible, completed scripts and directors and/or
cast members who are committed to or are interested in the project. Many
projects also have a producer involved or committed. However, if at the time
of acquisition by Overseas Filmgroup of rights in a project, a producer is not
formally or informally committed to a project. Overseas Filmgroup also may
engage a production services company to supervise and arrange all
pre-production, production and post-production activities in exchange for a
production fee and a participation in net revenues from the film. Overseas
Filmgroup typically will arrange for a production services company with whom
Overseas Filmgroup has previously worked to be engaged to provide such
production services on the project. Overseas Filmgroup has and seeks
relationships with independent producers with reputations and experience
producing quality films efficiently with controlled costs. Overseas Filmgroup
also seeks to work with emerging talent seeking the opportunity to gain
experience in the industry. For example, Greg Widen (who wrote Backdraft and
Highlander) directed his first feature, The Prophecy,
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<PAGE>
for Overseas Filmgroup, which was released by Miramax in September 1995 on
over 1,600 screens. Roland Emmerich (who directed Independence Day, Stargate
and Universal Soldier) directed his first two features, Ghostchase and Moon
44, for Overseas Filmgroup, and Matthew Broderick (the actor known for his
work in Glory, Ferris Bueller's Day Off and winning his second Tony Award for
the Broadway play How to Succeed in Business Without Really Trying) directed
his first film for Overseas Filmgroup entitled Infinity.
The following chart provides certain information regarding
completed motion pictures first made available to Overseas Filmgroup for
distribution between January 1, 1995 and June 30, 1996. For purposes of the
chart, "Sales Agency" refers to those situations where Overseas Filmgroup
licenses distribution rights to third parties on behalf of the rights owner;
"Straight Distribution" refers to those situations where Overseas Filmgroup
itself licenses distribution rights to a film from the rights owner for
exploitation by Overseas Filmgroup for a given term in a given territory (or
territories) and media; "Minimum Guarantee" refers to those situations where
Overseas Filmgroup acquires rights to a film in exchange for an agreement by
Overseas Filmgroup to pay a minimum guaranteed amount upon (or after) delivery
of the film to Overseas Filmgroup for exploitation; "Negative Pickup" refers
to those situations where, upon payment of the minimum guarantee, Overseas
Filmgroup acquires worldwide rights in all media, including copyright
ownership; and "Minimum P&A Commitment" refers to those situations where, as
part of its acquisition of rights, Overseas Filmgroup commits to spend a
minimum amount on prints and advertising in connection with domestic
theatrical release of the film. The chart includes acquisitions of rights from
unaffiliated production companies or other rights owners, as well as from
production companies owned or controlled by Overseas Filmgroup.
<TABLE>
<CAPTION>
Motion Picture Title Genre Type of Acquisition Territories Acquired Selected Cast
-------------------- ----- ------------------- -------------------- -------------
<S> <C> <C> <C> <C>
Fist of the North Star Action Negative Pickup World, including Gary Daniels (Rage),
copyright ownership Costas Mandylor
(Picket Fences), Chris
Penn (Mulholland
Falls, Reservoir
Dogs)
No Way Back Action Negative Pickup World, including Russell Crowe
copyright ownership (Virtuosity, The Quick
and the Dead)
One Good Turn Suspense/Thriller Negative Pickup World, including Suzy Amis (Titanic,
copyright ownership The Usual Suspects)
Shortcut to Paradise Drama Minimum Guarantee World, excluding Charles Dance (Last
Spain, Portugal, Action Hero, Alien
Puerto Rico, the 3), Assumpta Serna
United States and (The Craft, Wild
Canada Orchid)
Comfortably Numb Drama Straight Distribution World, excluding the Dana Ashbrook (Twin
United States, Peaks: Fire Walk
English-language With Me)
Canada, and Pakistan
Condition Red Drama Straight Distribution World, excluding the James Russo (Bad
United States and Girls, My Own
Canada, Finland, Private Idaho), Cynda
television in German- Williams (The Tie
speaking Europe and that Binds, Mo'
French-speaking Better Blues)
territories
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
Motion Picture Title Genre Type of Acquisition Territories Acquired Selected Cast
-------------------- ----- ------------------- -------------------- -------------
<S> <C> <C> <C> <C>
Playmaker Thriller Sales Agency World, excluding the Jennifer Rubin
United States and (Screamers, The
Canada (subject to Crush)
prior licenses in
certain territories)
Dead Badge Action Sales Agency World, excluding the Olympia Dukakis
United States (subject (Mr. Holland's Opus,
to prior licenses in Moonstruck)
certain territories)
The Break Family/Drama Straight Distribution World, excluding the Vincent Van Patten,
United States and Rae Dawn Chong
English-speaking (Power of Attorney,
Canada The Color Purple),
Martin Sheen
(American President,
Wall Street)
Manhattan Merengue Music/Dance Straight Distribution World, excluding Lumi Cavazos (Bottle
Drama Puerto Rico and the Rocket, Like Water
Dominican Republic For Chocolate)
Girl in a Cadillac Romantic Minimum Guarantee World, excluding the Erika Eleniak (The
Comedy/Adventure United States and Beverly Hillbillies,
English-speaking Under Siege)
Canada
Pharaoh's Army Civil War Straight Distribution World, excluding the Kris Kristofferson
Drama United States and (Lone Star, A Star is
Canada Born)
Boston Kickout Drama Minimum Guarantee World, excluding the John Simm, Emer
United Kingdom McCourt
Party Girl Comedy Minimum World Parker Posey (Sleep
Guarantee, plus With Me, Dazed and
Minimum P&A Confused)
Commitment
The Secret of Roan Inish Art-house Minimum P&A World, excluding Directed by John
Commitment video and television Sayles (Lone Star,
in the United States Return of the
and English-speaking Secaucus Seven),
Canada John Lynch (In the
Name of the Father)
Antonia's Line Art-house Minimum U.S. and English- Directed by Marleen
Guarantee, plus speaking Canada Gorris (Mrs.
Minimum P&A only Dalloway)
Commitment
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Motion Picture Title Genre Type of Acquisition Territories Acquired Selected Cast
-------------------- ----- ------------------- -------------------- -------------
<S> <C> <C> <C> <C>
Infinity Drama Negative Pickup World including Matthew Broderick
copyright ownership (Glory, Broadway's
How to Succeed in
Business Without
Really Trying),
Patricia Arquette
(Beyond Rangoon,
True Romance)
Back to Back Action Negative Pickup World including Michael Rooker
copyright ownership (Tombstone,
Cliffhanger)
Downhill Willie Comedy Minimum Guarantee World, excluding Keith Coogan
U.S. and Canada (Adventures in
Babysitting), Estelle
Harris (Seinfeld)
The Big Squeeze Romantic Negative Pickup World including Lara Flynn Boyle
(a.k.a. Body of a Caper copyright ownership (Twin Peaks), Danny
Woman) Nucci (The Rock)
Mesmer Historical Straight Distribution World, excluding Alan Rickman (Sense
Drama Canada, German and Sensibility, Die
speaking Europe and Hard)
Poland
Scorpion Spring Drama Straight Distribution World, excluding Matthew
South Africa, United McConaughey (A
States and Canada Time to Kill, Lone
Star)
</TABLE>
FILM LIBRARY OF DISTRIBUTION RIGHTS
Overseas Filmgroup's film library consists of rights to a broad
range of films, most of which were produced since 1980. As of June 30, 1996,
Overseas Filmgroup had various distribution rights to over 175 motion pictures
(including approximately 60 motion pictures in which Overseas Filmgroup owns
an interest in the copyright and approximately 50 motion pictures for which
Overseas Filmgroup acts as sales agent on behalf of the producer or other
owner of rights in the film). Overseas Filmgroup's distribution rights
generally range from 12 to 25 years or more from the date of acquisition, and
typically extend to many, if not all, media of exhibition worldwide or in
specified territories.
MAJOR CUSTOMERS
Since January 1, 1993, only three customers have accounted for
more than 10% of Overseas Filmgroup's revenues in any full fiscal year:
Columbia/TriStar and its affiliates in 1995 with $4,366,246 (or 20.1%),
Miramax Film Corporation in 1994 with $3,000,000 (or 14.5%) and Twentieth
Century Fox in 1993 with $2,850,000 (or 15.9%).
EMPLOYEES
At June 30, 1996, Overseas Filmgroup employed a total of 42
full-time employees and two part-time employees. Certain subsidiaries of
Overseas Filmgroup are, for certain films, subject to the terms in effect from
time to time of various industry-wide collective bargaining agreements,
including the Writers Guild of America, the Directors Guild of America, the
Screen Actors Guild and the International Alliance of Theatrical Stage
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Employees. In certain circumstances, Overseas Filmgroup also assumes a
production company's obligation to pay residuals to these various guilds and
unions. A strike, job action or labor disturbance by the members of any of
these organizations could have a material adverse effect on the production of
a motion picture within the United States. These organizations have all
engaged in strikes and similar activities. Overseas Filmgroup believes that
its current relationship with its employees is satisfactory.
COMPETITION
Motion picture distribution, finance and production are highly
competitive businesses. The competition comes from both companies within the
same business and companies in other entertainment media which create
alternative forms of leisure entertainment. Overseas Filmgroup competes with
major film studios (including The Walt Disney Company, Paramount Pictures
Corporation, Universal Pictures, Columbia Pictures, Tri-Star Pictures,
Twentieth Century Fox, Warner Brothers Inc. and MGM/UA) and their affiliates
(including such previously independent companies as Miramax and New Line
Cinema) which are dominant in the motion picture industry. Overseas Filmgroup
also competes with numerous independent motion picture production and
distribution companies, as well as numerous foreign motion picture production
and distribution companies. Many of the organizations with which Overseas
Filmgroup competes have significantly greater financial and other resources
than does Overseas Filmgroup. Overseas Filmgroup's ability to compete
successfully depends upon the continued availability of independently
produced, domestic and foreign motion pictures and Overseas Filmgroup's
ability to identify and acquire distribution rights and to distribute motion
pictures successfully. A number of formerly independent motion picture
companies have been acquired in recent years by major entertainment companies.
See "THE MOTION PICTURE INDUSTRY -- General." These recent transactions have
significantly increased competition for the acquisition of distribution rights
to independently produced motion pictures.
Films distributed or financed by Overseas Filmgroup also compete
for audience acceptance and exhibition outlets with motion pictures
distributed and produced by other companies. As a result, the success of any
of the films distributed or financed by Overseas Filmgroup is dependent not
only on the quality and acceptance of that particular film, but also on the
quality and acceptance of other competing films released into the marketplace
at or near the same time.
REGULATION
In 1994, the United States was unable to reach agreement with its
major international trading partners to include audio-visual works, such as
television programs and motion pictures, under the terms of the General
Agreement on Trade and Tariffs Treaty ("GATT"). The failure to include
audiovisual works under GATT allows many countries (including members of the
European Union, which consists of Belgium, Denmark, Germany, Greece, Spain,
France, Ireland, Italy, Luxembourg, The Netherlands, Portugal and the United
Kingdom) to continue enforcing quotas that restrict the amount of United
States produced television programming which may be aired on television in
such countries. The Council of Europe has adopted a directive requiring all
member states of the European Union to enact laws specifying that broadcasters
must reserve a majority of their transmission time (exclusive of news, sports,
game shows and advertising) for European works. The directive does not itself
constitute law, but must be implemented by appropriate legislation in each
member country. In addition, France requires that original French programming
constitute a required portion of all programming aired on French television.
These quotas generally apply only to television programming and not to
theatrical exhibition of motion pictures, but quotas on the theatrical
exhibition of motion pictures could also be enacted in the future. There can
be no assurance that additional or more restrictive theatrical or television
quotas will not be enacted or that countries with existing quotas will not
more strictly enforce such quotas. Additional or more restrictive quotas or
more stringent enforcement of existing quotas could materially and adversely
affect the business of Overseas Filmgroup by limiting the ability of Overseas
Filmgroup to exploit fully its rights in motion pictures internationally and,
consequently, to assist or participate in the financing of such motion
pictures.
Distribution rights to motion pictures are granted legal
protection under the copyright laws of the United States and most foreign
countries, which laws provide substantial civil and criminal sanctions for
unauthorized duplication and exhibition of motion pictures. Motion pictures,
musical works, sound recordings, art work, still photography and motion
picture properties are separate works subject to copyright under most
copyright laws,
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<PAGE>
including the United States Copyright Act of 1976, as amended. Management of
Overseas Filmgroup is aware of reports of extensive unauthorized
misappropriation of videocassette rights to motion pictures, which may include
motion pictures distributed by Overseas Filmgroup. Motion picture piracy is an
industry-wide problem. The MPAA, an industry trade association, operates a
piracy hotline and investigates all reports of such piracy. Depending upon the
results of such investigations, appropriate legal action may be brought by the
owner of the rights. Depending upon the extent of the piracy, the Federal
Bureau of Investigation may assist in these investigations and related
criminal prosecutions.
Motion picture piracy is an international as well as a domestic
problem. Motion picture piracy is extensive in many parts of the world,
including South America, Asia (including Korea, China and Taiwan), the
countries of the former Soviet Union and other former Eastern bloc countries.
In addition to the MPAA, the Motion Picture Export Association, the American
Film Marketing Association and the American Film Export Association monitor
the progress and efforts made by various countries to limit or prevent piracy.
In the past, these various trade associations have enacted voluntary embargoes
of motion picture exports to certain countries in order to pressure the
governments of those countries to become more aggressive in preventing motion
picture piracy. In addition, the United States government has publicly
considered trade sanctions against specific countries which do not prevent
copyright infringement of United States produced motion pictures. There can be
no assurance that voluntary industry embargoes or United States government
trade sanctions will be enacted. If enacted, such actions could impact the
amount of revenue that Overseas Filmgroup realizes from the international
exploitation of motion pictures depending upon the countries subject to such
action and the duration of such action. If not enacted or if other measures
are not taken, the motion picture industry (including Overseas Filmgroup) may
continue to lose an indeterminate amount of revenues as a result of motion
picture piracy.
The Code and Ratings Administration of the MPAA assigns ratings
indicating age-group suitability for theatrical distribution of motion
pictures. Overseas Filmgroup sometimes, although not always, submits its
motion pictures for such ratings. In certain circumstances, motion pictures
that Overseas Filmgroup does not submit for rating to the Code and Ratings
Administration of the MPAA might have received restrictive ratings had such
motion pictures been submitted for rating, including, in some circumstances,
the most restrictive rating, which prohibits theatrical attendance by persons
below the age of seventeen. Unrated motion pictures (or motion pictures
receiving the most restrictive rating) may not be exhibited by certain
theatrical exhibitors or in certain locales, thereby potentially reducing the
total revenues generated by such films. United States television stations and
networks, as well as foreign governments, impose additional restrictions on
the content of motion pictures which may restrict in whole or in part
theatrical or television exhibition in particular territories. There can be no
assurance that current and future restrictions on the content of motion
pictures may not limit or affect Overseas Filmgroup's ability to exhibit
certain motion pictures in certain territories and media.
EXECUTIVE OFFICES
Overseas Filmgroup's principal executive offices are located at
8800 Sunset Boulevard, Third Floor, Los Angeles, California 90069 and consist
of approximately 10,000 square feet leased by Overseas Filmgroup, the lease
for which expires in September 1997. Overseas Filmgroup does not maintain any
studio facilities or own any real estate, and its lease is with an
unaffiliated party.
LEGAL PROCEEDINGS
Neither Overseas Filmgroup nor any of the Overseas Subsidiaries
is, as of the date of this Proxy Statement, a party to any litigation.
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MANAGEMENT OF OVERSEAS FILMGROUP
DIRECTORS AND EXECUTIVE OFFICERS
The following individuals are the current directors and executive
officers of Overseas Filmgroup and will serve as directors and executive
officers of the Surviving Corporation after the Merger:
<TABLE>
<CAPTION>
Name Age Current Position with Overseas Filmgroup
- ---- --- ----------------------------------------
<S> <C> <C>
Robert B. Little.......................................... 51 Chairman of the Board and Chief Executive Officer
Ellen Dinerman Little..................................... 54 Director, President and Secretary
William F. Lischak........................................ 39 Chief Operating Officer and Chief Financial Officer
Richard S. Guardian....................................... 40 Senior Vice President, Worldwide Distribution
MJ Peckos................................................. 41 Senior Vice President, Domestic Distribution and
Marketing
Mansour Mostaedi.......................................... 45 Senior Vice President, Finance and Accounting
</TABLE>
Currently, each director of Overseas Filmgroup serves until the next annual
meeting of stockholders or such later dates as their successors are elected
and have qualified, and all officers of Overseas Filmgroup serve at the
discretion of the Board of Directors. After the Merger, the Surviving
Corporation will have a classified Board of Directors and certain members of
management of the Surviving Corporation will have employment agreements that
will provide for their service as directors and executive officers. See "THE
MERGER -- Employment Agreements." Ellen Dinerman Little and Robert B. Little
are married to each other.
Pursuant to the Merger Agreement and certain related agreements,
Ellen Dinerman Little, Robert B. Little and William F. Lischak will serve as
directors of the Surviving Corporation after the Merger. For certain
biographical information for these individuals, see "ELECTION OF DIRECTORS OF
THE SURVIVING CORPORATION." The following is certain biographical information
regarding the other executive officers of Overseas Filmgroup.
RICHARD S. GUARDIAN became Senior Vice President, Worldwide
Distribution, of Overseas Filmgroup in August 1994. He joined Overseas
Filmgroup as General Manager, Sales and Marketing in January 1991 and became
Vice President, Sales and Marketing in August 1992. Mr. Guardian also
previously served in a variety of other positions in the motion picture
industry, including as Distribution and Marketing Manager for the independent
film company, De Laurentiis Entertainment Group, Ltd., and North American
Manager for the Australian Film Commission.
MJ PECKOS became Senior Vice President, Domestic Distribution and
Marketing of Overseas Filmgroup in May 1995. From January 1995 through April
1995, Ms. Peckos served as Vice President of Advertising for Dazu Advertising,
a graphic design firm which is active in the entertainment industry. Prior to
that, she served from January 1992 to November 1994 as Senior Vice President
of Marketing & Distribution for Academy Entertainment, an independent film
company, and from July 1991 to December 1992 as Co-Managing Director of CLG
Films, also a independent film company. Ms. Peckos also previously served with
several other companies in the motion picture industry including The Samuel
Goldwyn Company, MGM and Warner Bros.
MANSOUR MOSTAEDI became Senior Vice President, Finance and
Accounting of Overseas Filmgroup in March 1996. Previously, he served as Vice
President, Finance and Accounting of Overseas Filmgroup (beginning October
1994) and Controller (beginning March 1991).
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth individual compensation information
with respect to Overseas Filmgroup's Chief Executive Officer, Robert B.
Little, Overseas Filmgroup's President, Ellen Dinerman Little, and each of the
two other executive officers of Overseas Filmgroup during the fiscal year
ended December 31, 1995 (i) whose total salary and bonus compensation during
1995 was in excess of $100,000, (ii) who was serving as an executive officer
of Overseas Filmgroup at the end of 1995 and (iii) who will continue to serve
as an executive officer of the Surviving Corporation upon consummation of the
Merger (William F. Lischak and Richard S. Guardian). Such four executives are
referred to herein as the "Named Overseas Filmgroup Executives." None of the
Named Overseas Filmgroup Executives currently serve under an employment
agreement, and Overseas Filmgroup currently does not have a stock option plan,
although it does have a 401(k) Plan, which, in accordance with the Merger
Agreement, will be assumed and continued by the Surviving Corporation after
the Merger. Upon consummation of the Merger, Ellen Dinerman Little, Robert B.
Little and William F. Lischak will enter into employment agreements with the
Surviving Corporation. See "THE MERGER -- Employment Agreements."
<TABLE>
<CAPTION>
Annual Compensation*
------------------------------------------------------------------------
Other Annual All Other
Name and Compensation Compensation
Principal Position Year Salary ($) Bonus ($) ($) ($)
- ------------------ ---- ---------- --------- --- ---
<S> <C> <C> <C> <C> <C>
Robert B. Little ......... 1995 $ 90,000 $ 0 $ 37,709(1) $ 16,455(2)
Chairman of the Board
and Chief Executive
Officer
Ellen Dinerman Little .... 1995 90,000 0 38,720(3) 30,134(2)
President and Secretary
William F. Lischak ....... 1995 117,329 75,090 --(4) 519(5)
Chief Operating Officer
and Chief Financial
Officer
Richard Guardian ......... 1995 108,468 53,636 --(4) 488(5)
Senior Vice President
</TABLE>
*This table does not include distributions made to the stockholders
of Overseas Filmgroup during 1995. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF OVERSEAS FILMGROUP -- Liquidity
and Capital Resources."
(1) Includes $13,959 for automobile lease and maintenance expenses and
$23,750 representing one-half the cost of a home sound system.
(2) Represents life insurance premiums paid by Overseas Filmgroup for the
benefit of such Named Overseas Filmgroup Executive.
(3) Includes $14,970 for automobile payments and $23,750 representing one-
half the cost of a home sound system.
(4) Perquisites with respect to such Named Overseas Filmgroup Executive did
not exceed the lesser of $50,000
or 10% of such executive officer's salary and bonus.
(5) Represents Overseas Filmgroup's 1995 contributions on behalf of such
Named Overseas Filmgroup Executive pursuant to Overseas Filmgroup's
401(k) Plan.
CERTAIN TRANSACTIONS RELATING TO OVERSEAS FILMGROUP
Four companies controlled by Ellen Dinerman Little and Robert B.
Little, the directors, senior executive officers and principal stockholders of
Overseas Filmgroup, the assets, liabilities and operations of which are not
significant in relation to Overseas Filmgroup - Jacaranda Music, Inc., a
Delaware corporation ("Jacaranda") which licenses certain music publishing
rights to music contained in films owned, controlled or licensed by Overseas
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<PAGE>
Filmgroup, Walrus Pictures, Inc., a California corporation ("Walrus"), which
owns the trademarked rights to the name and a design for "Walrus Pictures,"
Overseas Filmgroup (U.K.) Ltd., a company organized under the laws of the
United Kingdom ("Overseas UK"), which in the past has acted as a satellite
office for international licensing of Overseas Filmgroup's film library and
Intrastate Film Distributors, Inc. ("Intrastate"), which in the past has
engaged writer's services for Overseas films -- will be transferred to
Overseas Filmgroup for nominal consideration as part of the Merger. Ms. Little
and Mr. Little also own a 21% minority interest in each of the following
Overseas Filmgroup subsidiaries which were incorporated for use as production
companies for the films indicated: Alien Towers, Inc. ("Iron Clad" - in
development), Code 99 Productions, Inc. ("Code 99" - in pre-production),
Enough Rope, Inc. ("Slaves to the Underground" - in post-production),
Positive, Inc. ("Countdown" - in post-production), and Road to Ruin, Inc.
("Road to Ruin" a.k.a. "Drive" - in post-production). The interests of Ms.
Little and Mr. Little in such companies will also be transferred to Overseas
for nominal consideration as part of the Merger. Since January 1, 1995, Ms.
Little and Mr. Little have not received any distributions, fees or other
payments from any of the foregoing companies.
Neo Motion Pictures, Inc., a California corporation ("Neo")
involved in the production of motion pictures, has, on a non-exclusive basis,
provided production services with respect to approximately 12 motion pictures
for Overseas Filmgroup over the past 7 years. With respect to each of the
films for which Overseas Filmgroup arranges for Neo to provide production
services ("Produced Films"), Neo generally receives, a fee of $75,000 to
$150,000 (but which could in some circumstances be more), an overhead
allowance, plus in certain instances a net profit participation. From January
1, 1995 through June 30, 1996, Neo received $150,000 as overhead allowance and
$410,666 in production fees with respect to Produced Films. Mr. Little
performs consulting services to Neo. In accordance with the Employment
Agreement to be entered into by him with the Surviving Corporation, he is
permitted to continue such consulting services to Neo after consummation of
the Merger. As of June 30, 1996, Neo owed Mr. Little $269,121 in accrued but
unpaid consulting fees. Mr. Little also has had an option to acquire a 50%
interest in Neo for a purchase price of less than $60,000, which is being
renewed. Mr. Little has agreed in principle to grant a portion of his interest
in such option to the Surviving Corporation on terms to be determined. In May
1996, Overseas Filmgroup guaranteed payment by Neo of two promissory notes, in
an aggregate principal amount of $325,000, each payable on May 9, 1997.
Alessandro Fracassi, a designee of Ms. Little and Mr. Little to be
a director of the Surviving Corporation, is the sole owner of Original Film
Company, an Italian corporation ("Original"), which owns or controls
distribution rights to 13 motion pictures for which Overseas Filmgroup has
been acting as sales agent pursuant to various agreements. In exchange for
licensing distribution rights to such films on behalf of Original, Overseas
receives a sales agency fee ranging from 5% to 15% of the revenues generated
by such licensing, depending on the film. From January 1, 1995 through June
30, 1996, sales or licenses of distribution rights to such films by Overseas
have generated less than $50,000 in gross revenues. During such period, Mr.
Little was also a co-owner of Original.
Mr. Fracassi is also the President and owner of Racing Pictures
srl, an Italian corporation ("Racing Pictures") which is engaged in the
production and distribution of motion pictures. In 1990 and 1991, Overseas
Filmgroup licensed to Racing Pictures various distribution rights (primarily
Italian television and video distribution rights) to approximately 82 motion
pictures which Overseas Filmgroup owns or for which Overseas Filmgroup
controls various distribution or sales agency rights. The licenses, which have
terms of six to twelve years, obligated Racing Pictures to pay aggregate
minimum guarantees of approximately $2,900,000 to Overseas Filmgroup. With
respect to video distribution rights granted to Racing Pictures pursuant to
such licenses, Overseas Filmgroup is entitled to a 25% royalty on all gross
receipts of Racing Pictures relating to Racing Pictures' exploitation of such
video distribution rights. With respect to television rights granted to Racing
Pictures pursuant to such licenses, Racing Pictures is entitled to a
distribution fee of 25% of gross receipts from exploitation of such television
rights and recoupment of all Racing Pictures' distribution expenses. Overseas
Filmgroup is entitled to the balance of the gross receipts of Racing Pictures
from exploitation of the television rights. Both the video royalty payable to
Overseas Filmgroup and Overseas Filmgroup's share of the gross receipts from
Racing Pictures' exploitation of the television rights are applied first to
Racing Pictures' recoupment of the minimum guarantees. As of January 1, 1995,
$2,207,000 of the minimum guarantees owed to Overseas Filmgroup had been paid,
while the remainder of $693,000 was past due. From January 1, 1995 through
June 30, 1996, an additional $140,000 was paid to Overseas Filmgroup
(including a portion through offset of amounts owed by Overseas Filmgroup to
affiliates of Racing Pictures). Payment of the $553,000 in remaining minimum
guarantees, which are non-interest bearing, is being extended to June 30,
1998. Upon payment by Racing Pictures of the remaining minimum guarantees,
Overseas
113
<PAGE>
Filmgroup would be entitled to retain approximately $97,500 of the total
amount as distribution fees, with the remainder of such amount to be paid to
the various parties from which Overseas Filmgroup acquired distribution rights
to the films licensed to Racing Pictures.
114
<PAGE>
PRINCIPAL STOCKHOLDERS OF OVERSEAS FILMGROUP
The following table sets forth certain information regarding
beneficial ownership of common stock of Overseas Filmgroup as of August 12,
1996, and the anticipated beneficial ownership of common stock of the
Surviving Corporation upon consummation of the Merger, by (i) each current
stockholder of Overseas Filmgroup (Ellen Dinerman Little, Robert B. Little and
William F. Lischak), (ii) each current director of Overseas Filmgroup (Ellen
Dinerman Little and Robert B. Little), (iii) each of the Named Overseas
Filmgroup Executives, and (iv) all current executive officers and directors of
Overseas Filmgroup as a group. The number of shares and percentages in the
table and accompanying footnotes are based upon 100 shares of common stock of
Overseas Filmgroup outstanding as of August 12, 1996, and 5,777,778 shares of
common stock of the Surviving Corporation assumed to be outstanding
immediately after consummation of the Merger. The shares of common stock
underlying immediately exercisable options, warrants or rights, or immediately
convertible securities, or shares of common stock underlying options,
warrants, rights or convertible securities that become exercisable or
convertible within 60 days of consummation of the Merger, are deemed to be
outstanding for the purpose of calculating the number and percentage
beneficially owned by the holder of such options, warrants, rights or
convertible securities, but are not deemed to be outstanding for the purpose
of computing the percentage beneficially owned by any other person. Unless
otherwise indicated in the footnotes following the table, the person as to
whom the information is given had, based upon information furnished by such
persons, sole voting and investment power over the shares of common stock
shown as beneficially owned by them, subject to community property laws were
applicable.
<TABLE>
<CAPTION>
Number of Shares Percent of
of Common Stock Common Stock of
of the Surviving the Surviving
Number of Shares Corporation Corporation
of Overseas Percent of Overseas Beneficially Owned Beneficially
Common Stock Common Stock Upon Owned Upon
Beneficially owned Beneficially Owned Consummation of Consummation of
Prior to Merger Prior to Merger the Merger the Merger
--------------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
Ellen Dinerman Little(2).......... 100(1) 100% 3,277,778(1)(4)(5) 55.8%
Robert B. Little(2)............... 100(1) 100% 3,277,778(1)(4)(5) 55.8%
William F. Lischak(2)............. 7.85(3) 7.9% 249,560(3)(5) 4.3%
Richard Guardian.................. 0 0% 17,500(6) *
All current executive
officers and directors of
Overseas Filmgroup as a
group (6 persons)................ 100(7) 100% 3,417,778(7) 56.8%
</TABLE>
- --------------------------
*Less than 1%
(1) Includes shares of Overseas Common Stock held (or to be held upon
consummation of the Merger) by Ellen Dinerman Little and Robert B.
Little as community property, and also includes the right to vote
approximately 7.85 shares of Overseas Common Stock prior to consummation
of Merger (and 249,560 shares of common stock of the Surviving
Corporation upon consummation of the Merger) pursuant to an irrevocable
proxy granted to Ms. Little and Mr. Little by Mr. Lischak. Such proxy
will continue upon consummation of the Merger during Mr. Lischak's
ownership of the shares, until the fifth anniversary of the Merger (the
"Expiration Date"); provided, however, that such proxy terminates
earlier if the Littles own or control less than 5 percent of the
outstanding voting power of the Surviving Corporation, or if the shares
to which the proxy relates are sold in the public market. In addition
until the Expiration Date, Ms. Little and Mr. Little also have, under
certain circumstances, certain rights to acquire (while the shares are
held by Mr. Lischak) the 249,560 shares of common stock of the Surviving
Corporation into which Mr. Lischak's Overseas Filmgroup common stock
will be converted. See footnote 3 below.
(2) Such persons' business address is in care of Overseas Filmgroup, 8800
Sunset Boulevard, Los Angeles, California 90069.
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<PAGE>
(3) All of the shares indicated are subject in the event of transfer
(including voluntary and certain involuntary transfers) to a right of
first refusal or option to purchase at (post-Merger) the then current
market price (and a right of repurchase at (post-Merger) $2.00 per share
in the event Mr. Lischak's employment with the Surviving Corporation
terminates for a reason other than death, disability or the Surviving
Corporation's material breach of Mr. Lischak's employment agreement) in
favor of Ellen Dinerman Little and Robert B. Little during Mr. Lischak's
ownership of such shares until the Expiration Date. In addition, Mr.
Lischak has granted the right to vote all such shares to the Littles
pursuant to an irrevocable proxy which continues during Mr. Lischak's
ownership of the shares until the Expiration Date, subject to earlier
termination in certain circumstances. See footnote 1 above. All of such
shares are also currently pledged to the Littles to secure a note given
to the Littles by Mr. Lischak for the purchase price of such shares.
(4) Includes 100,000 shares of common stock subject to immediately
exercisable options to be granted to such person under the Management
Option Plan upon consummation of the Merger. Does not include (i)
1,000,000 shares of common stock subject to options to be granted to
such person under the Management Option Plan upon consummation of the
Merger, the exercisability of which will be subject to certain vesting
requirements or (ii) any shares of common stock subject to options to be
granted to such person's spouse upon consummation of the Merger. See
"APPROVAL OF THE MANAGEMENT OPTION PLAN."
(5) All of the shares indicated (other than any shares underlying options)
will be subject to the restrictions on transfer contained in the Lock-up
and Registration Rights Agreement described herein under "THE MERGER --
Restricted Disposition of Merger Shares; Registration Rights."
(6) Upon consummation of the Merger, options will be granted to certain
employees of the Surviving Corporation under the 1996 Stock Option Plan.
The Littles intend to recommend a grant to Mr. Guardian of options to
purchase 35,000 shares of common stock of the Surviving Corporation. Of
such amount, options to purchase 17,500 shares of common stock will be
immediately exercisable and are included as shares of common stock to be
beneficially owned by Mr. Guardian upon consummation of the Merger.
(7) Includes an aggregate of 240,000 shares of common stock underlying
immediately exercisable options to be granted upon consummation of the
Merger to Ellen Dinerman Little, Robert B. Little, Richard B. Guardian
and two additional executive officers of Overseas Filmgroup who will
also be executive officers of the Surviving Corporation (MJ Peckos and
Mansour Mostaedi).
116
<PAGE>
INFORMATION CONCERNING INDEPENDENT AUDITORS OF EMAC
BDO Seidman, LLP has served as EMAC's independent auditors since its
inception. EMAC has requested that a representative of BDO Seidman, LLP attend
the EMAC Meeting. BDO Seidman, LLP's engagement with EMAC included the audit
of EMAC's financial statements for its year ended November 30, 1995 and the
audit of its financial statements for the period December 9, 1993 (inception)
through November 30, 1994. A representative of BDO Seidman, LLP will have an
opportunity to make a statement at the EMAC Meeting, if he or she desires, and
will be available to respond to appropriate questions of stockholders.
Price Waterhouse LLP has served as Overseas Filmgroup's independent auditors
since 1990. A representative of Price Waterhouse LLP will have an opportunity
to make a statement at the EMAC Meeting if he or she so desires, and will be
available to respond to appropriate questions of stockholders.
The EMAC Board has recommended and approved the appointment, subject to
stockholder ratification, of Price Waterhouse LLP to be the independent
auditors of the Surviving Corporation from and after the Effective Time. THE
EMAC BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS FOR THE
SURVIVING CORPORATION FOR 1996.
The proposed change of accountants is based on the EMAC's Board's desire to
provide continuity of independent auditors in performing such services for the
Overseas Filmgroup business. BDO Seidman, LLP's reports did not contain
adverse opinions or disclaimer opinions and were not qualified as to
uncertainty, audit scope, or accounting principles. There were no
disagreements with BDO Seidman, LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures
which, if not resolved to BDO Seidman, LLP's satisfaction, would have caused
them to make reference to the subject matter of the disagreement in connection
with their report.
Following the Merger, the fiscal year of the Surviving Corporation will be
changed from November 30 (EMAC's fiscal year) to December 31 (Overseas
Filmgroup's fiscal year), effective for the fiscal year ending December 31,
1996.
OTHER MATTERS
The EMAC Board is not aware of any matters not set forth herein that may come
before the meetings. If, however, further business properly comes before that
meeting, the persons named in the proxies will vote the shares represented
thereby in accordance with their judgment.
LEGAL OPINIONS
Brobeck, Phleger & Harrison LLP, New York, New York, will render an opinion
with respect to the validity of the shares of EMAC Common Stock to be issued
in connection with the Merger and with respect to tax matters. Gipson Hoffman
& Pancione, P.C., Los Angeles, California, will render an opinion with respect
to certain matters in connection with the Merger.
1997 STOCKHOLDER PROPOSALS
In order for stockholder proposals for the 1997 Annual Meeting of
Stockholders of the Surviving Corporation to be eligible for inclusion in the
Proxy Statement of the Surviving Corporation, they must be received by the
Surviving Corporation at its principal office at 8800 Sunset Boulevard, Third
Floor, Los Angeles, California 90069 by ________, 1997.
117
<PAGE>
EMAC ANNUAL REPORT ON FORM 10-K
EMAC will furnish without charge to each holder of shares of Stock whose
proxy is being solicited, upon the written request of such holder, a copy of
EMAC's annual report on Form 10-K for the fiscal year ended November 30, 1995,
including the financial statements and schedules thereto, but excluding
exhibits. Requests for copies of such report should be directed to EMAC,
Attention: Secretary.
118
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EMAC
<S> <C>
Report of Independent Certified Public Accountants.......................................................F-2
Balance Sheet............................................................................................F-3
Statement of Operations..................................................................................F-4
Statement of Common Stock, Common Stock Subject to Possible Conversion, Preferred
Stock, Additional Paid-in Capital and Retained Earnings.......................................F-5
Statement of Cash Flows..................................................................................F-6
Summary of Accounting Policies...........................................................................F-7
Notes to Financial Statement.............................................................................F-9
Overseas Filmgroup
Report of Independent Accountants.......................................................................F-14
Balance Sheet...........................................................................................F-15
Statement of Income.....................................................................................F-16
Statement of Shareholders' Equity.......................................................................F-17
Statement of Cash Flows.................................................................................F-18
Notes to Financial Statements...........................................................................F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Entertainment/Media Acquisition Corporation
Beverly Hills, California
We have audited the accompanying balance sheets of Entertainment/Media
Acquisition Corporation (a corporation in the development stage) as of
November 30, 1994 and 1995, and the related statements of operations, common
stock, common stock subject to possible conversion, preferred stock,
additional paid-in capital and retained earnings (deficit), and cash flows for
the period December 9, 1993 (inception) to November 30, 1994 and the year
ended November 30, 1995. These financial statements 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 financial position of Entertainment/Media
Acquisition Corporation as of November 30, 1994 and 1995, and the results of
its operations and its cash flows for the period December 9, 1993 (inception)
to November 30, 1994 and the year ended November 30, 1995, in conformity with
generally accepted accounting principles.
BDO Seidman, LLP
January 19, 1996
New York, New York
F-2
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
November 30 November 30, 1996
1994 1995 (unaudited)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 35,062 $ 501,763 $ 239,687
U.S. Government security deposited in Trust Fund and
accrued interest thereon (Note 1) -- 10,667,644 10,930,166
Prepaid expenses and other current assets -- 70,633 23,832
Deferred merger costs (Note 7) -- -- 257,880
Deferred registration and financing costs 164,475 -- --
Organization costs, less accumulated amortization of
$-0-, $5,820 and $17,460 -- 32,982 21,342
- -------------------------------------------------------------------------------------------------------
$ 199,537 $ 11,273,022 $ 11,472,907
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and taxes $ 57,852 $ 96,722 $ 222,861
Notes payable at discount amount (face value $150,000)
(Note 3) 147,500 -- --
Commitment (Note 4)
Common stock, subject to possible conversion, 419,999
shares at conversion value in 1995 and 1996 (Note 1) -- 2,132,462 2,184,940
Common stock, $.001 par value - shares authorized
20,000,000; outstanding 500,000, 2,600,000 and
2,600,000 (which includes 419,999 shares subject to
possible conversion in 1995 and 1996) (Notes 2 and 6) 500 2,180 2,180
Additional paid-in capital 39,500 9,047,741 9,047,741
Retained earnings (deficit) accumulated during the
development stage (45,815) (6,083) 15,185
- -------------------------------------------------------------------------------------------------------
$ 199,537 $ 11,273,022 $ 11,472,907
=======================================================================================================
See accompanying summary of accounting policies
and notes to financial statements.
</TABLE>
F-3
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period Period
December 9, December 9,
1993 1993
(inception) to Year ended Six months ended May 31, (inception) to
November November ---------------------------- May 31,
30, 1994 30, 1995 1995 1996 1996
- ---------------------------------------------------------------- --------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
INCOME:
Interest $ - $ 475,084 $ 161,179 $ 284,981 $760,065
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES:
General and
administrative
expenses 7,482 131,313 74,551 61,175 199,970
Insurance - 74,100 27,300 46,800 120,900
Occupancy (Note 4) - 45,667 15,000 30,000 75,667
Amortization of
financing costs,
debt discount
and organization
costs 25,833 10,987 7,107 11,640 48,460
State franchise taxes - 18,433 9,433 10,920 29,353
Interest (Note 3) 12,500 3,569 3,569 - 16,069
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 45,815 284,069 136,960 160,535 490,419
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME
(LOSS) BEFORE
TAXES ON
INCOME (45,815) 191,015 24,219 124,446 269,646
TAXES ON INCOME:
Federal - 39,000 - 38,000 77,000
State - 20,000 - 12,700 32,700
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR
THE PERIOD $ (45,815) $ 132,015 $ 24,219 $ 73,746 $159,946
===========================================================================================================================
NET INCOME (LOSS) PER
SHARE $ (.09) $ .06 $ .02 $ .03
===========================================================================================================================
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 500,000 2,093,699 1,584,615 2,600,000
===========================================================================================================================
See accompanying summary of accounting policies
and notes to financial statements.
</TABLE>
F-4
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF COMMON STOCK, COMMON STOCK SUBJECT TO POSSIBLE CONVERSION,
PREFERRED STOCK, ADDITIONAL PAID-IN CAPITAL AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
Period December 9, 1993
(inception)
to May 31, 1996
Common stock, subject
Common stock to possible conversion
------------------------------- ------------------------
Number Number
of shares Amount of shares Amount
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 9, 1993 (INCEPTION) - -
Original issuance of common stock 500,000 500 - -
Issuance of warrants to purchase common
stock - - - -
Net loss for the period - - - -
- ----------------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 30, 1994 500,000 500 - -
Sale of 2,100,000 units, net of underwriting
discount and offering expenses 1,680,001 1,680 419,999 2,040,179
Accretion of conversion value of common
stock - - - 92,283
Net income for the year - - - -
- ----------------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 30, 1995 2,180,001 2,180 419,999 2,132,462
Accretion of conversion value of common
stock (unaudited) - - - 52,478
Net income for the period (unaudited) - - - -
- ----------------------------------------------------------------------------------------------------------------
BALANCE, MAY 31, 1996 (UNAUDITED) 2,180,001 $2,180 419,999 $2,184,940
================================================================================================================
</TABLE>
F-5
[TABLE CONTINUED]
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF COMMON STOCK, COMMON STOCK SUBJECT TO POSSIBLE CONVERSION,
PREFERRED STOCK, ADDITIONAL PAID-IN CAPITAL AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
Retained
earnings
(deficit)
accumulated
Additional during the
paid-in development
Preferred stock capital stage
--------------------------
Number
of shares Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 9, 1993 (INCEPTION) - $ - $ - $ -
Original issuance of common stock - - 24,500 -
Issuance of warrants to purchase common
stock - - 15,000 -
Net loss for the period - - - (45,815)
- ------------------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 30, 1994 - - 39,500 (45,815)
Sale of 2,100,000 units, net of underwriting
discount and offering expenses - - 9,008,241 -
Accretion of conversion value of common
stock - - - (92,283)
Net income for the year - - - 132,015
- ------------------------------------------------------------------------------------------------------------------
BALANCE, NOVEMBER 30, 1995 - - 9,047,741 (6,083)
Accretion of conversion value of common
stock (unaudited) - - - (52,478)
Net income for the period (unaudited) - - - 73,746
- ------------------------------------------------------------------------------------------------------------------
BALANCE, MAY 31, 1996 (UNAUDITED) - $9,047,741 $ -
==================================================================================================================
See accompanying summary of accounting policies
and notes to financial statements.
</TABLE>
F-5
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period December 9, 1993
(inception) to Year ended
November 30, 1994 November 30, 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (45,815) $ 132,015
- ------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization 25,833 10,987
Decrease (increase) in prepaid expenses - (70,633)
Increase (decrease) in accrued interest on notes payable 12,500 (12,500)
Increase in accrued expenses and taxes 45,352 51,370
- ------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 83,685 (20,776)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 37,870 111,239
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
U.S. Government security deposited in Trust Fund and accrued interest
thereon - (10,667,644)
Deferred merger costs - -
- ------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES - (10,667,644)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and issuance of warrants 150,000 -
Proceeds from public offering of 2,100,000 units, net of underwriting
discount and offering expenses - 11,050,100
Repayment of notes payable - (150,000)
Proceeds from sale of shares of common stock to founding stockholders 25,000 -
Deferred registration and financing costs (177,808) 161,808
Organization costs - (38,802)
- ------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,808) 11,023,106
- ------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,062 466,701
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 35,062
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 35,062 501,763
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest $ - $ 16,069
Income taxes $ - $ 1,690
- ------------------------------------------------------------------------------------------------------------
</TABLE>
[TABLE CONTINUED]
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period December 9, 1993
Six months ended May 31, (inception) to May 31, 1996
------------------------
1995 1996
- ----------------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 24,219 $ 73,746 $ 159,946
- ----------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization 7,107 11,640 48,460
Decrease (increase) in prepaid expenses (118,100) 46,801 (23,832)
Increase (decrease) in accrued interest on notes payable (12,500) - -
Increase in accrued expenses and taxes 93,141 126,139 222,861
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS (30,352) 184,580 247,489
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (6,133) 258,326 407,435
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
U.S. Government security deposited in Trust Fund and accrued interest
thereon (10,366,053) (262,522) (10,930,166)
Deferred merger costs - (257,880) (257,880)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (10,366,053) (520,402) (11,188,046)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and issuance of warrants - - 150,000
Proceeds from public offering of 2,100,000 units, net of underwriting
discount and offering expenses 11,050,100 - 11,050,100
Repayment of notes payable (150,000) - (150,000)
Proceeds from sale of shares of common stock to founding stockholders - - 25,000
Deferred registration and financing costs 161,808 - (16,000)
Organization costs (38,802) - (38,802)
- ----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 11,023,106 - 11,020,298
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 650,920 (262,076) 239,687
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,062 501,763 -
==================================================================================================================================
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 685,982 $239,687 $ 239,687
==================================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest $ 16,069 $ - $ 16,069
Income taxes $ 1,465 $ 60,000 $ 61,690
==================================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to financial statements.
F-6
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
SUMMARY OF ACCOUNTING POLICIES
(INFORMATION AS OF MAY 31, 1996 AND FOR THE SIX
MONTHS ENDED MAY 31, 1996 AND 1995 IS UNAUDITED.)
INCOME TAXES The Company follows Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes". SFAS No. 109 is an asset and liability approach
that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of
events that have been recognized in the Company's
financial statements or tax returns. Deferred taxes have
not been material to date. Taxes on income for the year
ended November 30, 1995 are based on taxable income
reduced by a deduction of a net operating loss
carryforward from the period ended November 30, 1994 of
approximately $30,000.
ORGANIZATION COSTS Organization costs are being amortized over 60 months.
NET INCOME (LOSS) Net income (loss) per common share is computed on the
PER SHARE basis of the weighted average number of common shares
outstanding during the period, including common stock
equivalents (unless anti-dilutive) which would arise from
the exercise of stock warrants and options.
CASH EQUIVALENTS For purposes of the statements of cash flows,
the Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be
cash equivalents.
TRUST FUND U.S. Government security deposited in Trust Fund at
November 30, 1995 represents a U.S. Treasury Bill
purchased on November 16, 1995 and maturing on February
15, 1996. The cost of the security was $10,643,367. U.S.
Government security deposited in Trust Fund at May 31,
1996 represents a U.S. Treasury Bill purchased on May 16,
1996 and maturing on July 11, 1996. The cost of the
security was $10,906,232.
F-7
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
SUMMARY OF ACCOUNTING POLICIES
(INFORMATION AS OF MAY 31, 1996 AND FOR THE SIX
MONTHS ENDED MAY 31, 1996 AND 1995 IS UNAUDITED.)
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
INTERIM RESULTS The accompanying balance sheet as of May 31, 1996 and the
related statements of operations, common stock, common
stock subject to possible conversion, preferred stock,
additional paid-in capital, retained earnings (deficit)
and cash flows for the periods ending May 31, 1995 and
1996 are unaudited. In the opinion of management, these
financial statements have been prepared on the same basis
as the audited financial statements and include all
adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of
financial data for such periods. The interim operating
results are not necessarily indicative of the results for
a full year.
F-8
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MAY 31, 1996 AND FOR THE SIX
MONTHS ENDED MAY 31, 1996 AND 1995 IS UNAUDITED.)
1. ORGANIZATION Entertainment/Media Acquisition Corporation (the
AND BUSINESS "Company") was incorporated in Delaware on December 9, 1993
OPERATIONS with the objective of acquiring an operating business
engaged in the entertainment/media industry. The Company's
founding stockholders purchased 625,000 common shares,
$.001 par value, for $25,000. The Company has selected
November 30 as its fiscal year-end. During December 1994,
125,000 shares were returned to the Company, for no
consideration, by the founding stockholders which reduced
the common stock outstanding to 500,000 shares and
adjusted the founding stockholders' percentage ownership
to 20% of the common stock expected to be outstanding
after the Company's initial public offering ("Offering").
This return of shares has been retroactively reflected in
the financial statements.
The registration statement for the Company's Offering was
effective February 16, 1995. The Company consummated the
Offering on February 27, 1995 and raised net proceeds of
$11,050,100 (Note 2). The Company's management has broad
discretion with respect to the specific application of the
net proceeds of this offering, although substantially all
of the net proceeds of this offering are intended to be
generally applied toward consummating a business
combination with an operating business engaged in the
entertainment/media industry ("Business Combination").
Furthermore, there is no assurance that the Company will
be able to successfully effect a Business Combination.
$10,206,000 was placed in an interest-bearing trust
account ("Trust Fund") until the earlier of (i) the
consummation of a Business Combination or (ii) liquidation
of the Company. The Trust Fund indenture limits
investments to U.S. Government securities with maturities
of 180 days or less. The remaining proceeds are being used
to pay for business, legal and accounting due diligence on
prospective acquisitions, and continuing general and
administrative expenses in addition to other expenses.
F-9
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MAY 31, 1996 AND FOR THE SIX
MONTHS ENDED MAY 31, 1996 AND 1995 IS UNAUDITED.)
The Company has signed a definitive agreement for the
acquisition of a target business and will submit such
transaction for stockholder approval (see Note 7). All of
the Company's stockholders prior to the Offering,
including all of the officers and directors of the Company
("Initial Stockholders") have agreed to vote the shares of
common stock owned by them immediately prior to the
effective date of the Offering in accordance with the vote
of the majority of all other shares of common stock
("Public Shares") voted on in any Business Combination.
The holders of the Public Shares are referred to herein as
the "Public Stockholders". After consummation of the
Company's first Business Combination, this voting
safeguard will no longer be applicable.
With respect to the first Business Combination which is
approved and consummated, any Public Stockholder who voted
against the Business Combination may demand that the
Company convert his shares into cash. The per share
conversion price will equal the amount in the Trust Fund
as of the record date for determination of stockholders
entitled to vote on the Business Combination divided by
the number of shares held by Public Stockholders. The
Company will not consummate a Business Combination if 20%
or more in interest of the Public Stockholders exercise
their conversion rights. Accordingly, Public Stockholders
holding 19.99% of the aggregate number of shares owned by
all Public Stockholders may have their shares converted to
cash in the event of a Business Combination. Such Public
Stockholders are entitled to receive their per-share
interest in the Trust Fund computed without regard to
shares held by Initial Stockholders. Accordingly, a
portion of the net proceeds from the Offering (19.99% of
the amount held in the Trust Fund) has been classified as
common stock subject to possible conversion in the
accompanying balance sheet at the conversion value.
F-10
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MAY 31, 1996 AND FOR THE SIX
MONTHS ENDED MAY 31, 1996 AND 1995 IS UNAUDITED.)
The Company's Certificate of Incorporation provides for
mandatory liquidation of the Company in the event that the
Company does not consummate a Business Combination within
18 months from the date of the consummation of the
Offering, or 24 months from the consummation of the
Offering if certain extension criteria have been
satisfied. Upon the signing of the definitive merger
agreement (Note 7), such extension criteria were
satisfied. In the event of liquidation, it is likely that
the per-share value of the residual assets remaining
available for distribution (including Trust Fund assets)
will be less than the initial public offering price per
share in the Offering (assuming no value is attributed to
the Warrants contained in the Units to be offered in the
Offering discussed in Note 2).
2. PUBLIC OFFERING On February 27, 1995, the Company sold 2,100,000 units
("Units") in the Offering which included 100,000 units of
the 300,000 units subject to the underwriter's
overallotment option. Each Unit consists of one share of
the Company's common stock, $.001 par value, and two
Redeemable Common Stock Purchase Warrants ("Warrants").
Each Warrant entitles the holder to purchase from the
Company one share of common stock at an exercise price of
$5.00 during the period commencing on the later of one
year from the effective date of the Offering or the
consummation of a Business Combination and ending seven
years from the effective date of the Offering. The
Warrants will be redeemable at a price of $.01 per Warrant
upon 30 days notice at any time, only in the event that
the last sale price of the common stock is at least $8.50
per share for 20 consecutive trading days ending on the
third day prior to date on which notice of redemption is
given. In connection with this Offering, the Company
issued to the underwriter an option to purchase 200,000
units at an exercise price of $9.90 per unit. In addition,
the warrants underlying such units are exercisable at
$5.85 per share.
F-11
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MAY 31, 1996 AND FOR THE SIX
MONTHS ENDED MAY 31, 1996 AND 1995 IS UNAUDITED.)
3. NOTES PAYABLE The Company issued an aggregate of $150,000 of promissory
notes to certain accredited investors. These notes bore
interest at the rate of 10% per annum and were repaid on
the consummation of the Company's Offering with accrued
interest thereon of $16,069. In addition, the investors
were issued 300,000 warrants (valued at $.05 per warrant -
aggregate $15,000) which are identical to the Warrants
discussed in Note 2, except that they are only redeemable
by the Company beginning 90 days after the consummation of
a Business Combination.
4. COMMITMENT The Company presently occupies office space provided by a
company affiliated with certain officers and directors of
the Company. Such company has agreed that, until the
acquisition of a target business by the Company, it will
make such office space, as well as certain office and
secretarial services, available to the Company, as may be
required by the Company from time to time. The Company has
been paying $5,000 per month for such services commencing
on the effective date of the Offering.
5. PREFERRED STOCK The Company is authorized to issue 1,000,000 shares of
preferred stock with such designations, voting and other
rights and preferences as may be determined from time to
time by the Board of Directors.
6. COMMON STOCK At May 31, 1996, 5,100,000 shares of common stock were
reserved for issuance upon exercise of redeemable
warrants, underwriter's warrants and options.
F-12
<PAGE>
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MAY 31, 1996 AND FOR THE SIX
MONTHS ENDED MAY 31, 1996 AND 1995 IS UNAUDITED.)
7. PROPOSED MERGER On July 2, 1996, the Company entered into a definitive
merger agreement with Overseas Filmgroup, Inc., an
independent distribution company that specializes in the
acquisition and worldwide license and sale of distribution
rights to independently produced foreign and domestic
feature films. The merger consideration, to be paid to
Overseas Filmgroup shareholders, consists of (i) 3,177,778
shares of the Company's common stock, (ii) $1.5 million in
cash and (iii) a $2.0 million, 9%, five-year note. In
addition, $3.5 million in loans will be repaid.
The merger is subject to a number of conditions, including
approval by the stockholders of the Company.
F-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Overseas Filmgroup, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Overseas Filmgroup, Inc. (the
"Company") at December 31, 1995, 1994 and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. These
financial statements 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Los Angeles, California
April 8, 1996
F-14
<PAGE>
OVERSEAS FILMGROUP, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30, 1996
------------ -------------
1994 1995 Actual Pro Forma
---- ---- ------ ---------
ASSETS (Note 2)
- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,050,828 $ 2,433,153 $ 125,193 $ 125,193
Restricted cash (Note 2) -- 133,446 179,723 179,723
Accounts receivable, net of allowance for
doubtful accounts of $1,000,000 in
1996, 1995 and 1994 9,108,221 8,181,552 11,014,923 11,014,923
Related party receivables (Note 3) 435,088 -- -- --
Other receivables 300,000 324,000 84,478 84,478
Film costs, net of accumulated amortization 12,377,123 17,349,071 27,327,904 27,327,904
(Note 4)
Fixed assets, net of accumulated 217,990 384,321 422,880 422,880
depreciation (Note 5)
Other assets 195,268 149,253 480,784 480,784
--------------- --------------- -------------- --------------
$ 24,684,518 $ 28,954,796 $ 39,635,885 $39,635,885
=============== =============== ============== ==============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Cash Overdraft -- -- $ 225,648 $ 225,648
Accounts payable and accrued expenses $ 1,075,691 $ 796,908 2,036,332 2,036,332
Payable to producers 5,855,327 6,976,621 5,707,044 5,707,044
Notes payable (Note 6) 6,058,279 7,421,893 17,013,163 17,013,163
Deferred income taxes payable (Note 7) 120,000 130,000 130,000 2,730,000
Deferred revenue 1,764,760 2,181,000 1,879,700 1,879,700
Distributions payable to shareholders -- -- -- 5,265,000
(Note 2)
Note payable to shareholders (Note 2) -- -- -- 2,000,000
--------------- --------------- -------------- --------------
14,874,057 17,506,422 26,991,887 36,856,887
=============== =============== ============== ==============
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, no par value, 2,000 shares
authorized;
100 shares issued and outstanding 500 500 500 500
Additional paid-in capital 170,000 170,000 170,000 1,618,182
Retained earnings 9,639,961 11,277,874 12,473,498 1,160,316
--------------- --------------- -------------- --------------
9,810,461 11,448,374 12,643,998 2,778,998
--------------- --------------- -------------- --------------
$ 24,684,518 $ 28,954,796 $39,635,885 $39,635,885
=============== =============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE>
<TABLE>
<CAPTION>
OVERSEAS FILMGROUP, INC.
STATEMENT OF INCOME
(Unaudited)
Year Ended December 31, Six Months Ended June 30,
------------------------------------------------------- -------------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $17,951,977 $ 20,734,094 $21,672,510 $10,198,897 $15,751,970
Expenses:
Film costs 13,962,255 16,395,902 16,320,694 7,775,254 12,506,663
Selling, general and
administrative
expenses 2,401,509 2,151,214 2,721,745 1,136,986 1,662,152
------------------ -------------- ---------------- ------------
-------------
Total expenses 16,363,764 18,547,116 19,042,439 8,912,240 14,168,815
------------------ -------------- ------------- ---------------- ------------
Income from operations 1,588,213 2,186,978 2,630,071 1,286,657 1,583,155
Other income (expense):
Interest income 335,820 345,225 340,840 101,029 191,187
Interest expense (240,103) (524,321) (394,762) (216,687) (215,571)
Other income 313,942 434,078 317,917 179,905 104,291
------------------ -------------- ------------- ---------------- ------------
Total other income 409,659 254,982 263,995 64,247 79,907
------------------ -------------- ------------- ---------------- ------------
Income before income
taxes 1,997,872 2,441,960 2,894,066 1,350,904 1,663,062
Income tax provision
(Note 7) 300,628 296,487 432,905 210,000 122,638
------------------ -------------- ------------- ---------------- ------------
Net income $ 1,697,244 $ 2,145,473 $ 2,461,161 $1,140,904 $1,540,424
=================== ============== ============= =============== ============
Unaudited pro forma information (Note 2)
Income before taxes
and additional
interest expense 2,894,066 1,663,062
Additional interest
expense 166,550 86,987
------------ -----------
Income before
income taxes 2,727,516 1,576,075
Income tax provision 981,906 567,387
------------ -----------
Pro forma net
income $1,745,610 $1,008,688
============ ===========
Pro forma net
income per share .42 .24
============ ===========
Weighted average
number of common
shares outstanding 4,180,635 4,180,635
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
OVERSEAS FILMGROUP, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------------------
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 100 $500 $170,000 $7,316,026 $ 7,486,526
Net income 1,697,244 1,697,244
Distributions to shareholder (866,233) (866,233)
-------- ----------- ------------ -------------- ---------------
Balance at December 31, 1993 100 500 170,000 8,147,037 8,317,537
Net income 2,145,473 2,145,473
Distributions to shareholder (652,549) (652,549)
-------- ----------- ------------ -------------- ---------------
Balance at December 31, 1994 100 500 170,000 9,639,961 9,810,461
Net income 2,461,161 2,461,161
Distributions to shareholders
(823,248) (823,248)
-------- ----------- ------------ -------------- ---------------
Balance at December 31, 1995 100 500 170,000 11,277,874 11,448,374
Net income (unaudited) 1,540,424 1,540,424
Distributions to shareholders (344,800) (344,800)
(unaudited)
-------- ----------- ------------ -------------- ----------------
Balance at June 30, 1996 (unaudited) 100 $ 500 $ 170,000 $ 12,473,498 $ 12,643,998
======== =========== ============ ============== ================
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
<TABLE>
<CAPTION>
OVERSEAS FILMGROUP, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
--------------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income $1,697,244 $2,145,473 $2,461,161 $1,140,904 $1,540,424
Adjustments to reconcile net
income to net cash provided by
operating activities--
Amortization of film costs 13,749,753 15,487,542 16,115,927 7,493,640 12,283,939
Depreciation of fixed assets 57,396 81,453 122,776 57,000 66,449
Change in assets and liabilities -
Increase in restricted cash - - (133,446) - (46,277)
Decrease (increase) in accounts
receivable 1,457,455 (1,693,153) 926,669 (878,411) (2,833,371)
Decrease (increase) in related party
receivables (38,793) 117,901 435,088 - -
(Increase) decrease in
other receivables 22,698 (82,568) (24,000) 373,155 239,522
Decrease (increase) in
other assets (24,829) (106,949) 46,015 (33,326) (331,531)
(Decrease) increase in
accounts payable and
accrued expenses (4,153) 243,381 (278,783) 654,882 (10,575)
Increase (decrease) in
payable to producers (1,177,010) (24,302) 1,121,294 (880,857) (1,269,577)
Increase in deferred
income taxes payable 25,000 -- 10,000 - -
(Decrease) in other
liabilities (205,100) -- -- - -
Increase (decrease) in
deferred revenue 634,456 303,090 416,240 228,308 (301,300)
----------------- ------------- -------------- ------------- -------------
Net cash provided by operating
activities
16,194,117 16,471,868 21,218,941 8,155,295 9,337,703
----------------- ------------- -------------- ------------- -------------
Cash flows from investing activities:
Additions to film costs (16,720,166) (17,056,633) (21,087,875) (9,300,240) (21,012,774)
Purchase of fixed
assets (102,232) (143,180) (289,107) (103,965) (105,007)
----------------- ------------- -------------- ------------- -------------
Net cash used in investing activities
(16,822,398) (17,199,813) (21,376,982) (9,404,205) (21,117,781)
----------------- ------------- -------------- ------------- -------------
Cash flows from financing activities:
Cash overdraft 299,430 225,648
Net borrowings (repayments)
under line of credit 700,000 2,358,279 1,363,614 (638,779) 9,591,270
Distributions to shareholder (866,233) (652,549) (823,248) (378,995) (344,800)
----------------- ------------- -------------- ------------- -------------
Net cash provided by (used in)
financing activities (166,233) 1,705,730 540,366 (718,344) 9,472,118
----------------- ------------- -------------- ------------- -------------
Net increase (decrease) in cash (794,514) 977,785 382,325 (1,967,254) (2,307,960)
----------------- ------------- -------------- ------------- -------------
Cash and cash equivalents at
beginning of year 1,867,557 1,073,043 2,050,828 2,050,828 2,433,153
----------------- ------------- -------------- ------------- -------------
Cash and cash equivalents at
end of year
$ 1,073,043 $ 2,050,828 $ 2,433,153 $ 83,574 $ 125,193
================= ============= ============== ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 270,936 $ 557,654 $ 849,632 $ 471,503 $ 786,710
Income taxes $ 15,000 $ 41,973 $ 30,130 $ 21,000 $ 55,000
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
OVERSEAS FILMGROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF ORGANIZATION:
Overseas Filmgroup, Inc., ("Overseas" or the "Company") was established on
February 11, 1980. The Company acquires distribution rights from independent
producers and is involved in financing the production of motion picture films.
These motion pictures are distributed through sub-distributors in the foreign
markets as well as the United States. The Company also directly distributes
certain films in the domestic theatrical market under the name First Look
Pictures.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenues
Revenues from nonrefundable guarantees payable by sub-distributors are
recognized when the film becomes available for release in accordance with
Statement of Financial Accounting Standards No. 53, "Financial Reporting by
Producers and Distributors of Motion Picture Films". Amounts received in
advance of the film being available are recorded as deferred revenue. Revenues
from theatrical distribution of films are recognized on the dates of
exhibition.
Film Costs and Amortization
Film costs represent those costs incurred in the acquisition and distribution
of motion pictures or in the acquisition of distribution rights to motion
pictures which include advances, minimum guarantees paid to producers,
recoupable distribution and production costs, foreign withholding taxes, legal
expenses, interest and overhead costs. These costs have been capitalized in
accordance with Statement of Financial Accounting Standards No. 53. Film costs
are amortized using the individual film forecast method whereby expense is
recognized in the proportion that current year revenues bear to management's
estimate of ultimate revenue from all markets.
Film costs are valued at the lower of unamortized cost or estimated net
realizable value. Revenue and cost forecasts for films are reviewed by
management on a regular basis and revised when warranted by changing
conditions. When estimates of total revenues and costs indicate that a film
will result in an ultimate loss additional amortization is provided to fully
recognize such loss.
F-19
<PAGE>
Cash
The Company considers all highly liquid instruments purchased with a maturity
of less than three months to be cash equivalents. The carrying value of the
Company's cash and cash equivalents approximate fair value due to their
short-term nature.
Restricted Cash
Restricted cash consists of cash held in a collection account which is
restricted for the payment of film facilities in compliance with the Credit
Facility (Note 6).
Fixed Assets
Fixed assets are recorded at cost and include improvements that significantly
add to the productive capacity or extend the useful life of the asset. Costs
of maintenance and repairs are charged to expense. Depreciation is provided
over the estimated useful lives of the assets which range from 5 to 7 years
using methods which approximate straight line.
Payable to Producers
Payable to producers represents an accrual on a film-by-film basis of the
producers' share of revenues recognized by the Company in excess of the
recoupable costs incurred by the Company. The producers' share of revenue is
expensed in conjunction with the amortization of film costs. Payments to
producers are typically made based on actual cash collections.
Income Taxes
Effective January 1, 1989 Overseas elected "S" Corporation status for federal
income tax reporting purposes. Income and losses of an "S" corporation flow
directly to the shareholder of the corporation and are not taxed at the
corporate level. The Company is subject to normal taxation at the state level.
During fiscal 1993 the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". The standard requires, among
other provisions, that existing deferred tax assets and liabilities be
adjusted to reflect the effect of changes in tax laws and/or rates. The
adoption did not have a material impact on the Company's financial condition.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash and accounts receivable. The Company places its cash
with a financial institution and, at times, such amounts may be in excess of
the FDIC insurance limits. Concentration of credit risk with respect to
accounts receivable is limited due to the large number and general dispersion
of trade accounts which constitute the Company's customer base. The Company
performs credit evaluations of its customers and generally does not require
collateral. At December 31, 1995 the Company has a trade receivable from one
sub-distributor which represents approximately 12% of the Company's accounts
receivable.
F-20
<PAGE>
Use of Estimates in the Preparation of Financial Statements
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. Management estimates ultimate revenues and costs for feature films for
each market based on public acceptance and historical results for similar
products. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to amounts reported in prior periods
to conform with the current year presentation.
Unaudited Pro Forma Balance Sheet
As discussed in Note 10, the Company entered into a definitive merger
agreement (the "Merger") with Entertainment/Media Acquisition Corporation
("EMAC"). The accompanying unaudited pro forma balance sheet as of June 30,
1996 is presented to reflect the impact of the Company's change in federal
income tax status from S Corporation to C Corporation as a result of the
Merger. The pro forma column reflects an increase in the deferred tax
liability of $2,600,000 to account for the Company's net taxable temporary
differences existing at June 30, 1996 assuming the Company ceased to be
treated as an S Corporation on that date. On the actual date that the Company
terminates its S Corporation status a charge to earnings will be recorded for
the tax effect associated with the change. Had the Company elected to
terminate its S Corporation status on December 31, 1993, 1994, 1995 or June
30, 1996, the charge to earnings would have been $1,539,000, $1,828,000,
$2,390,000 or $2,600,000, respectively. The effect of the change may vary
based upon the actual date the Company ceases to be treated as an S
Corporation and may be greater, depending upon the Company's results of
operations and financial information as of the date of termination of the
Company's S Corporation status.
Pro forma deferred tax liabilities were calculated using the asset and
liability approach in accordance with SFAS 109 and at June 30, 1996 are
comprised of the following:
Allowance for doubtful accounts $ 85,000
Depreciation and fixed assets (16,000)
Film costs 2,531,000
----------
Deferred tax liability $2,600,000
==========
Additionally, the unaudited pro forma balance sheet includes an adjustment to
reflect a distribution payable of $5,265,000 (comprised of a $3,500,000
distribution paid to the Company's shareholders in July 1996 (see Note 10),
$1,500,000 cash consideration to be paid to the Company's shareholders upon
consummation of the Merger ("Merger Cash") and $265,000 representing
reimbursement of certain 1996 federal income taxes payable by the Company's
shareholders for the short 1996 S Corporation taxable year of Overseas
Filmgroup ending June 30, 1996) and a $2,000,000 five-year note payable to
shareholders bearing interest at the rate of 9% ("Merger Note") which will be
issued to the Company's shareholders upon
F-21
<PAGE>
consummation of the Merger. The pro forma balance sheet does not give effect
to S Corporation distributions that may be paid from S Corporation earnings
generated subsequent to June 30, 1996.
The unaudited pro forma balance sheet includes the reclassification of
remaining S Corporation retained earnings to additional paid in capital. The
amount of retained earnings which is not reclassified represents the Company's
C Corporation retained earnings prior to January 1, 1989, the effective date
of the Company's initial S Corporation election.
The following provides a summary reconciliation of the effects of the
unaudited pro forma adjustments to the Company's retained earnings as of June
30, 1996:
Unaudited balance as of June 30, 1996 12,473,498
Declared distribution to shareholders (3,500,000)
Pro forma distribution to shareholders (Merger Cash) (1,500,000)
Pro forma distribution to shareholders (Merger Note) (2,000,000)
Pro forma distribution to shareholders
(tax reimbursement) (265,000)
Pro forma income tax charge (2,600,000)
Reclassification of remaining S
Corporation retained earnings (1,448,182)
----------
1,160,316
==========
The unaudited pro forma balance sheet as of June 30, 1996 does not give effect
to the adjustments, such as the merger of EMAC assets and liabilities with the
Company and the recapitalization, that will occur upon the completion of the
merger transaction.
Unaudited Pro Forma Statement of Income
Pro forma net income reflects pro forma interest expense on the $2,000,000
Merger Note (assumed to be outstanding from the beginning of the period
presented) and a pro forma income tax provision, using an effective income tax
rate of 36%, to account for the estimated income tax expense of the Company as
if it had been subject to normal federal and state income taxes for the
period.
Pro forma earnings per share for the six month period ended June 30, 1996 and
year ended December 31, 1995 have been computed using weighted average common
shares outstanding of 4,180,635. Such pro forma shares outstanding have been
computed as the sum of (i) 3,177,778 shares which treats the 100 shares of the
Company currently outstanding as if they had been recapitalized and (ii)
1,002,857 shares representing the number of new shares that would have to be
issued at a pro forma "initial public offering (IPO)" price of $5.25 per share
to pay the pro forma distribution of $5,265,000 as of June 30, 1996 described
above. The June 30, 1996 market price of EMAC common stock of $5.25 is used as
the pro forma IPO price. Historical earnings per share have not been presented
in view of the prior period S Corporation status.
F-22
<PAGE>
Interim Results (Unaudited)
The accompanying consolidated balance sheet as of June 30, 1996 and the
related consolidated statements of income, shareholders' equity and cash flows
for the periods ended June 30, 1996 and 1995 are unaudited. These consolidated
financial statements have been prepared on the same basis as the audited
financial statements and in accordance with generally accepted accounting
principles for interim financial information. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation have been included. Operating results for
the these interim periods are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
NOTE 3 - RELATED PARTY TRANSACTIONS:
On June 20, 1995 the Company entered into a merger agreement with First Look
Pictures, Inc. ("First Look"), a domestic theatrical distributor which was
100% owned by the Company's shareholders. The net assets of First Look of
$412,395, primarily consisting of unamortized film costs, were purchased
through the forgiveness of the Company's advance, which represented the
funding of First Look since its inception. The merger has been accounted for
as a transaction between entities under common control and therefore the net
assets of First Look have been recorded at book value.
During the period from January 1, 1995 through the date of the merger First
Look distributed certain of the Company's films ("the Films") pursuant to a
sales agency agreement. Revenues of $2,215,566 and expenses of $203,208,
representing First Look's overhead costs, have been recorded by Overseas in
connection with this agreement. Additionally, Overseas funded the distribution
costs of the Films in the amount of $2,322,955 on behalf of First Look.
The related party receivable balance at December 31, 1994 represents amounts
owed from First Look to fund certain distribution and overhead costs.
NOTE 4 - FILM COSTS:
Film costs consist of the following:
December 31,
----------------------------
1995 1994
---- ----
Films in release, net of accumulated amortization $12,162,975 $9,456,441
Films not yet available for release 5,186,096 2,920,682
------------ ------------
$17,349,071 $12,377,123
=========== ===========
Interest costs capitalized to films were $744,176, $568,537, and $459,074
during the years ended December 31, 1995, 1994 and 1993, respectively. Based
on the Company's estimates of
F-23
<PAGE>
projected gross revenues as of December 31, 1995, approximately 75% of
unamortized film costs applicable to films in release are expected to be
amortized during the next three years.
Consolidation of Film Production Companies (Unaudited)
The Company has consolidated all majority-owned subsidiaries in the
accompanying consolidated financial statements. During the six month period
ended June 30, 1996, three film production companies in which Overseas has a
79% ownership interest commenced operations. Each of these companies was
formed for the sole purpose of producing one feature film in which Overseas
has acquired distribution rights.
Two companies have been financed with short term bank debt of $3,700,000 and
$2,500,000 and one company has been financed by advances from Overseas. The
bank debt bears interest at the rate of LIBOR plus 1%. Outstanding borrowings
and accrued interest are guaranteed by letters of credit issued on behalf of
Overseas. Upon delivery of the films to Overseas the letters of credit will be
converted to additional borrowings under the Credit Facility.
At June 30, 1996, the three consolidated film production companies had
combined capitalized film costs of $5,791,000, which includes capitalized
interest of $110,000, and combined short term bank debt of $5,852,000.
The remaining 21% interest in these companies is owned personally by the
principal shareholders of Overseas.
NOTE 5 - FIXED ASSETS:
Fixed assets consist of the following:
December 31,
-------------------------------------
1995 1994
---- ----
Furniture and fixtures $221,360 $185,905
Office equipment 189,203 141,162
Computer equipment 447,038 314,210
Leasehold improvements 149,388 91,575
Automobiles 14,970 --
---------- ----------
1,021,959 732,852
Less accumulated depreciation (637,638) (514,862)
---------- ---------
Net fixed assets $384,321 $217,990
========== =========
F-24
<PAGE>
NOTE 6 - NOTES PAYABLE:
The Company has a $21,000,000 credit facility with a two-bank syndicate (the
"Credit Facility"). The Credit Facility provides several levels of credit
including $16,000,000 of film financing, $4,000,000 of working capital and a
$1,000,000 guarantee facility. The Company maintains a $1,000,000 working
capital credit line ("Credit Line") with another bank which is guaranteed by
the guarantee facility portion of the Credit Facility and expires during May
1996.
Outstanding balances are summarized as follows:
December 31,
-------------------------
1995 1994
---- ----
Credit Facility:
Film Financing $2,421,893 $2,058,279
Working Capital 4,000,000 3,000,000
Guarantee Facility -- --
Credit Line 1,000,000 1,000,000
---------- ----------
$7,421,893 $6,058,279
========== ==========
Interest on the Credit Facility is payable monthly at a rate of LIBOR plus 3%
(5.72%, 5.66% and 5.53% for one, three and six month LIBOR, respectively at
December 31, 1995). The interest rate is set at the commencement of each
drawdown and is revised each one, three or six months as requested by the
Company at the date of the drawdown. Interest on the Credit Line is payable
monthly at the bank's prime rate (8.5% at December 31, 1995).
The Credit Facility requires the Company to pay closing fees on each film
facility drawdown, a commitment fee for unused portions of the working capital
credit facility, commissions on cash received on financed films, and an annual
management fee. The Credit Facility is collateralized by a security interest
in the Company's assets and contains various covenants including the
restriction of dividends and the maintenance of certain financial ratios. The
Credit Facility has no specified maturity, however the bank's commitment to
lend is reviewed on an annual basis. The carrying value of the Company's notes
payable approximates their fair value due to the fact that the interest rate
is reset periodically and the lack of a specified maturity.
F-25
<PAGE>
NOTE 7 - INCOME TAXES
The provision for income taxes consists of the following:
Years ended December 31,
-----------------------------------------------
1995 1994 1993
---- ---- ----
Current
State 70,000 70,000 45,000
Foreign 352,905 226,487 230,628
--------- -------- --------
422,905 296,487 275,628
--------- -------- --------
Deferred
State 10,000 -- 25,000
-------- -------- --------
432,905 296,487 300,628
======== ======== ========
The deferred taxes relate primarily to differences arising from the
amortization of film costs for book and tax purposes. The foreign withholding
taxes are substantially recouped from the producers share of revenue.
The State of California tax rate is reconciled to the Company's effective tax
rate as follows:
Years ended December 31,
--------------------------------------
1995 1994 1993
---- ---- ----
Statutory rate 9.3% 9.3% 9.3%
Foreign taxes 12.2 9.3 11.5
Income not subject to state tax (6.5) (6.6) (5.7)
Other 0.1 (0.1) -
--- ---- ------
Effective tax rate 15.0% 12.1% 15.0%
===== ===== ======
F-26
<PAGE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
As of December 31, 1995 and June 30, 1996 (unaudited), the Company has
outstanding letters of credit issued under its Credit Facility of $7,127,000
and $1,155,000, respectively. The letters of credit secure the Company's
acquisition commitments with respect to certain motion pictures or
distribution rights to certain motion pictures. Upon delivery of the motion
picture to the Company these letters of credit will be converted to film
facilities through the issuance of debt under the terms of the Credit
Facility.
Additionally, the Company is committed under agreements with producers to pay
minimum guarantees and print and advertising expenses of $2,500,000 and
$5,325,000, respectively, for the future distribution rights to certain motion
pictures.
Total rental expense under various leases for the years ended December 31,
1995, 1994 and 1993 amounted to $228,053, $168,704 and $172,697, respectively.
Minimum annual rental payments under noncancelable leases are as follows:
1996 $ 292,351
1997 192,187
1998 14,718
In May 1996, the Company guaranteed payment by a film production company of
two promissory notes totaling $325,000, each payable on May 9, 1997.
NOTE 9 - FOREIGN SALES AND SIGNIFICANT CUSTOMERS:
The Company's foreign export revenues are summarized as follows:
Years ended December 31,
------------------------------------------------------
1995 1994 1993
---- ---- ----
Western Europe $ 7,475,888 $ 7,005,708 $ 7,657,407
Asia 2,411,261 3,574,100 3,026,388
Latin America 1,446,968 1,491,500 1,190,578
Eastern Europe 1,094,053 728,000 350,000
Other 1,792,603 2,611,876 1,717,676
----------- ----------- -----------
$14,220,773 $15,411,184 $13,942,049
=========== =========== ===========
F-27
<PAGE>
Revenue from a single customer accounted for $4,366,246, $3,000,000 and
$2,850,000 of the Company's total revenues for the years ended December 31,
1995, 1994 and 1993, respectively (one separate customer in each year).
NOTE 10 - SUBSEQUENT EVENTS (UNAUDITED):
On July 2, 1996 the Company entered into a definitive merger agreement
("Merger Agreement") with Entertainment/Media Acquisition Corporation
("EMAC"). The merger transaction is subject to the approval of the
stockholders of EMAC. The Merger Agreement provides for, among other things,
the merger of the Company with and into EMAC, with EMAC surviving the Merger.
At the effective time of the Merger, the outstanding share of common stock of
the Company will be converted to (i) 3,177,778 shares of EMAC stock, (ii)
$1,500,000 in cash, and (iii) a $2,000,000 secured promissory note. In
addition, the $3,500,000 Short Term Credit Facility (see below) will be
repaid. The Merger Agreement also encompasses several other agreements
including, but not limited to, employment agreements for key employees, stock
options granted to certain of the Company's shareholders, an employee stock
option plan and a stockholders' voting agreement.
For accounting and financial reporting purposes, the Merger will be treated as
an issuance of shares by the Company for the net assets of EMAC, consisting
primarily of cash. The surviving corporation will reflect in its consolidated
financial statements the assets and liabilities of both companies at their
book values, and the historical earnings of the Company will be presented as
the historical earnings of the surviving entity.
On July 5, 1996 the Company borrowed $3,500,000 from the two bank syndicate
under an additional credit facility ("Short Term Credit Facility") which
matures on December 31, 1996. The borrowing is guaranteed by the shareholders
of Overseas and is secured by $3,500,000 of cash collateral. Interest is
payable at the fixed rate of 6.56% through September 30, 1996.
On July 8, 1996 the Company made a $3,500,000 distribution to its
shareholders.
The Company has received a commitment letter whereby the two bank syndicate
which provides the Company's Credit Facility has agreed to amend its terms,
subject to formal documentation. The amendment provides for a temporary
$2,000,000 increase in the Film Facility (to $18,000,000) and an expiration
date of May 6, 1997 for the commitment to lend under the Credit Facility. The
two bank syndicate provided an additional commitment to increase the Credit
Facility to $27,000,000, which may be adjusted under certain circumstances,
subject to the consummation of the merger and formal documentation. Certain
covenants will also be modified to provide for the merger related transactions
described above.
The Company's Credit Line was extended to August 8, 1996 pursuant to a formal
agreement with its bank. Upon maturity, the Company obtained a credit line
from another bank with an interest rate of 7% and a maturity date of July 1,
1997. The Company drew down this credit line to pay down the previous Credit
Line.
F-28
<PAGE>
APPENDIX A
----------
AGREEMENT OF MERGER
among
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(a Delaware corporation),
OVERSEAS FILMGROUP, INC.
(a Delaware corporation),
and
ELLEN DINERMAN LITTLE and ROBERT B. LITTLE
July ____, 1996
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS.......................................... 1
ARTICLE II THE MERGER.......................................... 8
2.1 The Merger........................................... 8
2.2 Effective Time....................................... 8
2.3 Effects of the Merger................................ 8
2.4 Amended and Restated Certificate of Incorporation
and Bylaws .......................................... 8
2.5 Directors and Officers; Operations after the Merger.. 8
2.6 Closing.............................................. 9
ARTICLE III CONVERSION OF SHARES AND OTHER MATTERS............. 9
3.1 Conversion of the Overseas Shares.................... 9
3.2 Surrender and Payment................................ 10
3.3 Adjustments.......................................... 10
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF OVERSEAS AND THE
OVERSEAS STOCKHOLDERS..................................... 10
4.1 Corporate Status..................................... 10
4.2 Authorization........................................ 11
4.3 Consents and Approvals............................... 11
4.4 Capitalization and Stock Ownership................... 11
4.5 Financial Statements................................. 12
4.6 Title to Assets and Related Matters.................. 12
4.7 Real Property Leases................................. 13
4.8 Personal Property.................................... 13
4.9 Non-Real Estate Leases............................... 13
4.10 Accounts Receivable.................................. 13
4.11 Liabilities.......................................... 14
4.12 Taxes................................................ 14
4.13 Subsidiaries......................................... 15
4.14 Legal Proceedings and Compliance with Law............ 15
4.15 Contracts............................................ 15
4.16 Insurance............................................ 17
4.17 Intellectual Property................................ 17
4.18 Employee Relations................................... 18
4.19 ERISA................................................ 18
4.20 Corporate Records.................................... 20
4.21 Absence of Certain Changes........................... 20
4.22 Finder's Fees........................................ 20
4.23 Accuracy of Information.............................. 20
4.24 Overseas Disclosure Schedule......................... 21
4.25 Certain Business Relationships with Affiliates....... 21
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Page
4.26 Overseas Film Library................................ 21
4.27 Representations and Warranties of the Stockholders of
Overseas ............................................ 23
ARTICLE V REPRESENTATIONS AND WARRANTIES OF EMAC............... 25
5.1 Corporate Status..................................... 25
5.2 Authorization........................................ 25
5.3 Consents and Approvals............................... 25
5.4 Capitalization and Stock Ownership................... 26
5.5 Financial Statements................................. 27
5.6 SEC Reports.......................................... 27
5.7 Trust Funds.......................................... 28
5.8 Fair Market Value.................................... 28
5.9 Assets; Leases; Accounts Receivable.................. 28
5.10 Liabilities.......................................... 28
5.11 Taxes................................................ 28
5.12 Subsidiaries......................................... 29
5.13 Legal Proceedings and Compliance with Law............ 29
5.14 Contracts............................................ 29
5.15 Insurance............................................ 30
5.16 Intellectual Property................................ 30
5.17 Employee Relations................................... 30
5.18 ERISA................................................ 31
5.19 Corporate Records.................................... 31
5.20 Absence of Certain Changes........................... 31
5.21 Rule 419............................................. 31
5.22 Finder's Fees........................................ 31
5.23 Accuracy of Information.............................. 31
5.24 Certain Business Relationships with Affiliates....... 32
5.25 EMAC Disclosure Schedule............................. 32
ARTICLE VI COVENANTS OF OVERSEAS AND THE OVERSEAS
STOCKHOLDERS.............................................. 32
6.1 Operation of the Business............................ 32
6.2 Access............................................... 33
6.3 No Other Negotiations................................ 33
6.4 Maintenance of the Assets............................ 33
6.5 Employees and Business Relations..................... 33
6.6 Confidentiality...................................... 33
6.7 Expenses............................................. 33
6.8 No Securities Transactions........................... 33
6.9 Fulfillment of Conditions............................ 34
6.10 Financial Statements................................. 34
6.11 Overseas Subsidiaries................................ 34
6.12 Disclosure of Certain Matters........................ 34
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Page
ARTICLE VII COVENANTS OF EMAC.................................. 34
7.1 Operation of the Business of EMAC.................... 34
7.2 Stockholders' Meeting................................ 35
7.3 Access............................................... 35
7.4 No Other Negotiations................................ 36
7.5 Maintenance of the Assets............................ 36
7.6 Confidentiality...................................... 36
7.7 Appointment of Directors and Officers................ 36
7.8 Expenses............................................. 37
7.9 No Securities Transactions........................... 37
7.10 Fulfillment of Conditions............................ 37
7.11 Disclosure of Certain Matters........................ 37
7.12 Resignations......................................... 37
7.13 Nasdaq National Market Listing Application........... 37
7.14 Stock Option Plans................................... 38
7.15 Continuation of Employee Benefit Plans............... 38
7.16 EMAC Stockholders.................................... 39
7.17 Repayment of Loan.................................... 39
ARTICLE VIII COVENANTS OF EMAC, OVERSEAS AND THE OVERSEAS
STOCKHOLDERS.............................................. 39
8.1 Miscellaneous Covenants.............................. 39
8.2 Overseas Employee Bonuses............................ 40
8.3 Voting Agreement..................................... 41
8.4 Cooperation.......................................... 41
ARTICLE IX CONDITIONS PRECEDENT TO THE MERGER.................. 41
9.1 Conditions to Each Party's Obligations............... 41
9.2 Conditions to Obligations of EMAC.................... 43
9.3 Conditions to Obligations of Overseas and the
Overseas Stockholders ............................... 45
ARTICLE X INDEMNIFICATION...................................... 47
10.1 Indemnification by the Overseas Stockholders......... 47
10.2 Limitations on Indemnification....................... 47
10.3 Indemnification by EMAC.............................. 48
10.4 Indemnification Procedures........................... 48
10.5 Survival............................................. 50
10.6 Satisfaction of Indemnification Obligations.......... 50
ARTICLE XI PUBLIC ANNOUNCEMENTS................................ 50
ARTICLE XII TERMINATION........................................ 50
12.1 Grounds for Termination.............................. 50
12.2 Payment of Expenses upon Termination................. 51
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Page
12.3 Effect of Termination................................ 52
ARTICLE XIII CONTENTS OF AGREEMENT, AMENDMENT, PARTIES IN
INTEREST, ASSIGNMENT, ETC................................. 52
ARTICLE XIV INTERPRETATION..................................... 53
ARTICLE XV NOTICES............................................. 53
ARTICLE XVI GOVERNING LAW...................................... 54
ARTICLE XVII COUNTERPARTS...................................... 55
EXHIBITS
Exhibit A -- Certificate of Merger
Exhibit B -- EMAC Special Management Option Plan
Exhibit C -- EMAC 1996 Basic Stock Option Plan
Exhibit D -- Lischak Employment Agreement
Exhibit E -- Lock-up and Registration Rights Agreement
Exhibit F -- Form of Non-Competition Agreement
Exhibit G -- Form of Non-Disclosure Agreement
Exhibit H -- Overseas Stockholders' Employment Agreement
Exhibit I -- Stockholders' Voting Agreement
Exhibit J -- Tax Reimbursement Agreement
Exhibit K -- Operating Guidelines
Exhibit L -- Form of Merger Note
Exhibit M -- Form of Security Agreement
Exhibit N -- Amended and Restated Certificate of Incorporation of EMAC and
Form of By-Laws
Exhibit O -- Opinion of Gipson, Hoffman & Pancione
Exhibit P -- Opinion of Deborah Chiaramonte, Esq.
Exhibit Q -- Opinion of Brobeck, Phleger & Harrison LLP
Exhibit R -- Merger Consideration
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AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER is made as of July __, 1996 by and among
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION, a Delaware corporation ("EMAC"),
OVERSEAS FILMGROUP, INC., a Delaware corporation ("Overseas") and each of
ELLEN DINERMAN LITTLE and ROBERT B. LITTLE (Ellen Dinerman Little and Robert
B. Little are sometimes collectively referred to herein as the "Overseas
Stockholders").
Background
----------
The Overseas Stockholders own approximately 92% of the outstanding
capital stock of Overseas. EMAC, Overseas and the Overseas Stockholders desire
to merge Overseas with and into EMAC (the "Merger") in accordance with the
Delaware General Corporation Law, as amended (the "DGCL"), and on the terms
and conditions set forth herein.
Witnesseth
----------
NOW, THEREFORE, in consideration of the respective covenants contained
herein and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
For convenience, certain terms used in more than one part of this
Agreement are listed in alphabetical order and defined or referred to below
(such terms as well as any other terms defined elsewhere in this Agreement
shall be equally applicable to both the singular and plural forms of the terms
defined).
"Affiliates" means, with respect to a particular Person, Persons
controlling, controlled by or under common control with that Person, as well
as any executive officer, directors and majority-owned entities of that
Person.
"Agreement" means this Agreement and the exhibits and schedules hereto.
"Annual Report" is defined in Section 5.6(a).
"Assets" means all of the assets, properties, real and personal,
tangible and intangible, wherever situated and whether or not reflected in the
most recent financial statements of the referenced party that are owned or
purported to be owned by said party.
"Average Price" is defined in Section 3.1(c).
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"Benefit Plans" means all employee benefit plans of a Representing Party
within the meaning of Section 3(3) of ERISA.
"Business" means the entire business and operations of Overseas or EMAC,
respectively, unless otherwise specified.
"Certificate of Merger" is defined in Section 2.2 and shall be in the
form attached hereto as Exhibit A.
"Closing" means the consummation of the steps necessary to effect the
Merger (other than the delivery of the Certificate of Merger to the Secretary
of State of Delaware and the filing thereof) in accordance with the terms of
this Agreement.
"Closing Date" is defined in Section 2.6.
"Closing EMAC Disclosure Schedule" is defined in Section 5.25.
"Closing Overseas Disclosure Schedule" is defined in Section 4.24.
"Code" means the Internal Revenue Code of 1986, as amended, and the
Regulations promulgated thereunder.
"Contract" means any written or oral contract, agreement, lease,
instrument or other commitment that is binding on any Person or its property
under applicable law.
"Court Order" means any judgment, decree, injunction, order or ruling of
any federal, state, local or foreign court or governmental or regulatory body
or authority that is binding on any Person or its property under applicable
law.
"Default" means (i) a breach, default or violation or (ii) the
occurrence of an event that with the passage of time or the giving of notice,
or both, would constitute a breach, default or violation.
"Definitive Proxy Statement" is defined in Section 7.2.
"DGCL" is defined above in the Background section.
"Distribution" means the contemplated distribution prior to the Closing
by Overseas to the stockholders of Overseas of $3,500,000 as described on
Schedule 9.3(l) hereto.
"Effective Time" is defined in Section 2.2.
"EMAC" is defined in the Preamble to this Agreement.
"EMAC Balance Sheet" is defined in Section 5.5.
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"EMAC Balance Sheet Date" is defined in Section 5.5.
"EMAC Common Stock" means the Common Stock, $0.001 par value per share,
of EMAC.
"EMAC Designees" is defined in Section 7.7(a)(ii).
"EMAC Disclosure Schedule" means the Disclosure Schedule provided by
EMAC in connection with this Agreement.
"EMAC Indemnified Party" is defined in Section 10.1.
"EMAC Losses" is defined in Section 10.1.
"EMAC Minor Contracts" is defined in Section 5.14.
"EMAC Option Plans" means the EMAC Stock Option Plan and the Special
Management Option Plan.
"EMAC Special Management Option Plan" means the EMAC 1996 Special Stock
Option Plan and Agreement, covering 2,200,000 shares of EMAC Common Stock,
attached hereto as Exhibit B.
"EMAC Stock Option Plan" means the EMAC 1996 Basic Stock Option Plan,
covering 550,000 shares of EMAC Common Stock, attached hereto as Exhibit C.
"EMAC Stockholders" is defined in Section 5.2.
"EMAC Stockholders' Meeting" is defined in Section 7.2.
"EMAC Unit" means the units issued by EMAC consisting of one EMAC Share
and two EMAC Warrants.
"EMAC Warrants" means the warrants issued by EMAC entitling the holders
thereof to purchase shares of EMAC Common Stock at a price of $5.00 per share
and exercisable until February 16, 2002.
"Encumbrances" means any lien, mortgage, security interest, pledge or
other charge or encumbrance of any nature whatsoever on any property or
property interest.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Act" is defined in Section 5.3.
"Existing Shares" is defined in Section 4.4.
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"Fair Market Value" is defined in Section 7.14.
"Film Library" is defined in Section 4.26(b).
"Film Library Threshold Amount" is defined in Section 10.2(a).
"GAAP" means United States generally accepted accounting principles.
"GKN" means GKN Securities Corp.
"Governmental Permits" is defined in Section 4.14(b).
"Gross Participations" is defined in Section 4.26(a).
"Indemnitor" is defined in Section 10.4(a).
"Initial EMAC Stockholders" is defined in Section 5.3.
"Intellectual Property" is defined in Section 4.17(a).
"IRS" is defined in Section 4.19(c).
"Liability" means any direct or indirect liability, indebtedness,
obligation, expense, claim, loss, damage, deficiency, or guaranty or
endorsement of or by any Person, absolute or contingent, accrued or unaccrued,
due or to become due, liquidated or unliquidated.
"Lischak Employment Agreement" means the form of Employment Agreement to
be entered into with William F. Lischak, attached hereto as Exhibit D.
"Litigation" means any lawsuit, action, arbitration, administrative or
other legal proceeding, criminal prosecution or governmental investigation or
inquiry.
"Loan" is defined in Section 7.17.
"Lock-up and Registration Rights Agreement" is the Lock-up and
Registration Rights Agreement attached hereto as Exhibit E.
"Major Media" is defined in Section 4.26(a).
"Master Avail" is defined in Section 4.26(e).
"Material Adverse Effect" means with respect to EMAC a material adverse
effect on the financial condition or results of operations of EMAC.
"Material Adverse Effect", when
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used with respect to Overseas, the Overseas Subsidiaries or any subsidiary of
Overseas means a material adverse effect on the financial condition or results
of operations of Overseas, together with all of the Subsidiaries of Overseas,
taken as a whole.
"Merger" is defined above in the Background section.
"Merger Cash" is defined in Section 3.1(b).
"Merger Consideration" is defined in Section 3.1(b).
"Merger Note" is defined in Section 3.1(b).
"Merger Shares" is defined in Section 3.1(b).
"Non-Competition Agreement" is the form of Non-Competition Agreement
attached hereto as Exhibit F.
"Non-Disclosure Agreement" is the form of Non-Disclosure Agreement
attached hereto as Exhibit G.
"Non-Film Library Threshold Amount" is defined in Section 10.2(a).
"Non-Real Estate Leases" is defined in Section 4.9.
"Non-Redeemable Option" refers to the Group B options to be granted (and
as defined) in the EMAC Special Management Option Plan.
"Operating Guidelines" is defined in Section 2.5.
"Ordinary course" or "ordinary course of business" means the ordinary
course of business that is consistent with past practices.
"Original EMAC Disclosure Schedule" is defined in Section 5.25.
"Original Overseas Disclosure Schedule" is defined in Section 4.24.
"Overseas" is defined in the Preamble to this Agreement and, solely for
purposes of Section 4.19(d), in such Section 4.19(d).
"Overseas Balance Sheet" is defined in Section 4.5.
"Overseas Balance Sheet Date" is defined in Section 4.5.
"Overseas Common Stock" means the Common Stock, $0.01 par value per
share, of Overseas.
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"Overseas Designees" is defined in Section 7.7(a)(i).
"Overseas Disclosure Schedule" means the disclosure schedule provided by
Overseas in connection with this Agreement.
"Overseas Employees" is defined in Section 8.2
"Overseas Films" is defined in Section 4.26(c).
"Overseas Film Library" is defined in Section 4.26(b).
"Overseas Financial Statements" is defined in Section 4.5.
"Overseas Minor Contracts" is defined in Section 4.15(a).
"Overseas Share" means a share of Overseas Common Stock.
"Overseas Stockholders" is defined in the Preamble to this Agreement.
"Overseas Stockholders' Employment Agreement" means the form of
Employment Agreement to be entered into with each of the Overseas
Stockholders, attached hereto as Exhibit H.
"Overseas Stockholders Indemnified Party" is defined in Section 10.3.
"Overseas Subsidiaries" means the following companies: Jacaranda Music,
Inc., a Delaware corporation; Walrus Pictures, Inc., a California corporation;
and Overseas Filmgroup (U.K.) Ltd., a United Kingdom corporation.
"Payment Date" is defined in Section 10.4(c).
"Person" means any natural person, corporation, partnership,
proprietorship, association, trust or other legal entity.
"Preliminary Proxy Statement" is defined in Section 7.2.
"Proxy Statement" is defined in Section 7.2.
"Real Estate Leases" is defined in Section 4.7.
"Real Property" is defined in Section 4.7.
"Record Date" is defined in Section 7.16.
"Redeemable Special Management Option" refers to the Group A options to
be granted (and as defined) in the EMAC Special Management Option Plan.
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"Regulation" means any statute, law, ordinance, regulation, order or
rule of any federal, state, local, foreign or other governmental agency or
body or of any other type of regulatory body that is binding on any Person or
its property, including those covering environmental, energy, safety, health,
transportation, bribery, recordkeeping, zoning, anti- discrimination,
antitrust, wage and hour, and price and wage control matters.
"Representing Party" means Overseas and the Overseas Stockholders when
used in connection with terms used in Article IV, and EMAC when used in
connection with terms used in Article V.
"Required Consents" is defined in Section 4.3.
"Restated Certificate" is defined in Section 7.2.
"SEC" means the Securities and Exchange Commission.
"SEC Reports" is defined in Section 5.6(a).
"Securities Act" means the Securities Act of 1933, as amended, and the
Regulations promulgated thereunder.
"Security Agreement" is defined in Section 3.1(b).
"Selected Contract" is defined in Section 4.26(a).
"Selected Films" is defined in Section 4.26(a).
"Stockholders' Voting Agreement" means the Stockholders' Voting Agreement
attached hereto as Exhibit I.
"Subsidiary," with respect to any Person, means a corporation the voting
securities of which, in an amount sufficient to elect at least a majority of
its Board of Directors, are owned directly or indirectly by such Person.
"Surviving Corporation" is defined in Section 2.1.
"Syndication Agreement" is defined in Section 9.1(j).
"Tax" is defined in Section 4.12.
"Tax Reimbursement Agreement" means the Tax Reimbursement Agreement
attached hereto as Exhibit J.
"Termination Date" is defined in Section 12.1(b).
"Third Party Claim" is defined in Section 10.4(b).
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"Transaction Documents" means this Agreement, the Certificate of Merger,
the Merger Note, the Security Agreement, the Overseas Stockholder Employment
Agreements, the Lischak Employment Agreement, the Lock-up and Registration
Rights Agreement, the Non-Competition Agreements, the Stockholders' Voting
Agreement, the EMAC Option Plans, the Tax Reimbursement Agreement.
"Transactions" means the Merger and the other related transactions
contemplated by the Transaction Documents.
"Trust Account" is defined in Section 5.7.
"Trust Company" is defined in Section 5.7.
"Unit Purchase Option" means the option issued by EMAC entitling GKN
Securities Corp., the underwriter of EMAC's initial public offering, to
purchase 200,000 EMAC Units at a price of $9.90 per Unit and exercisable until
February 16, 2000.
"Welfare Plan" is defined in Section 4.19(g).
ARTICLE II
THE MERGER
2.1 The Merger. Upon the terms and subject to the conditions hereof, and
in accordance with the relevant provisions of the DGCL, Overseas shall merge
with and into EMAC at the Effective Time. Following the Merger, EMAC shall
continue as the surviving corporation (the "Surviving Corporation") and shall
continue its existence under the laws of the State of Delaware, and the
separate corporate existence of Overseas shall cease.
2.2 Effective Time. As soon as practicable on or after the Closing Date,
after the satisfaction or waiver of all conditions to the Merger, EMAC and
Overseas shall file with the Secretary of State of the State of Delaware the
Certificate of Merger in accordance with the DGCL (the "Certificate of
Merger"). The Merger shall become effective at such time as the Certificate of
Merger is so filed (the "Effective Time").
2.3 Effects of the Merger. The Merger shall have the effect set forth in
Section 259 of the DGCL, a copy of which is attached hereto as Exhibit 2.3.
2.4 Amended and Restated Certificate of Incorporation and Bylaws. The
Restated Certificate and bylaws of EMAC as amended and restated as of the
Closing Date in accordance with Section 7.2 of this Agreement shall be the
Restated Certificate and bylaws, respectively, of the Surviving Corporation at
the Effective Time.
2.5 Directors and Officers; Operations after the Merger. The persons
who are appointed and elected in accordance with Section 7.7 of this Agreement
shall be the directors
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and officers of the Surviving Corporation at the Effective Time. Such persons
shall hold such positions as directors and officers until their successors are
elected or appointed in accordance with the Restated Certificate and the
bylaws of the Surviving Corporation. The Directors of the Surviving
Corporation shall be in such classes as set forth in Section 7.7(b). The
Operating Guidelines attached hereto as Exhibit K shall serve as general
operating guidelines for the Surviving Corporation following the Effective
Time (the "Operating Guidelines") until otherwise properly amended or
modified.
2.6 Closing. Unless this Agreement shall have been terminated and the
Transactions abandoned pursuant to Article XII, subject to satisfaction or
waiver of the conditions to the Merger set forth in Article IX, the Closing
shall take place as promptly as practicable (and in any event within five
business days) after satisfaction or waiver of the conditions to the Merger
set forth in Article IX, at the offices of Gipson, Hoffman & Pancione, 1901
Avenue of the Stars, Suite 1100, Los Angeles, California 90067, unless the
parties hereto agree in writing to another date or place. The date on which
the Closing occurs is referred to herein as the "Closing Date."
ARTICLE III
CONVERSION OF SHARES AND OTHER MATTERS
3.1 Conversion of the Overseas Shares.
(a) Each Overseas Share that, immediately prior to the Effective
Time, is held by Overseas as treasury stock or by any Subsidiary of Overseas
shall be cancelled, and no consideration shall be delivered with respect
thereto.
(b) Except as otherwise provided in Sections 3.1(c) and 3.2(a), the
Overseas Shares outstanding immediately prior to the Effective Time shall be
converted, as of the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, into, in the aggregate (to be
allocated among the holders of Overseas Shares in accordance with Exhibit R
hereto): (i) 3,177,778 shares of EMAC Common Stock (the "Merger Shares"), (ii)
$1,500,000, in immediately available funds payable at the Closing by certified
check or by wire transfer, at the option of the Overseas Stockholders (the
"Merger Cash"), and (iii) a note in the principal amount of $2,000,000 with
the terms and conditions set forth in the form of Merger Note attached hereto
as Exhibit L (the "Merger Note") (collectively, the "Merger Consideration").
The Merger Note will be secured by all of the assets of the Surviving
Corporation in accordance with the form of Security Agreement attached hereto
as Exhibit M (the "Security Agreement").
(c) In the event that the average of the mean between the closing
bid and asked prices for EMAC Common Stock as quoted on the NASD Electronic
Bulletin Board for the three trading days prior to the Closing Date (the
"Average Price") is less than $5.20 per share of EMAC Common Stock, then in
addition to the Merger Consideration per Overseas Share pursuant to Section
3.1(b), each holder of an Overseas Share shall be entitled
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to receive additional Merger Cash per Overseas Share equal to the difference
between $5.20 and the Average Price multiplied by the 3,177,778 Merger Shares
and such amount shall be deemed included as part of the Merger Consideration.
(d) No fractional shares of EMAC Common Stock shall be issued in
the Merger. All fractional shares of EMAC Common Stock that a holder of
Overseas Shares would otherwise be entitled to receive as a result of the
Merger shall be aggregated and if a fractional share of EMAC Common Stock
results from such aggregation, such holder shall be entitled to receive, in
lieu thereof, a full share of EMAC Common Stock.
3.2 Surrender and Payment. At the Closing, each holder of Overseas
Shares shall surrender to EMAC the Overseas Shares held in their names, as set
forth in Exhibit R in exchange for the Merger Consideration, which Merger
Consideration shall be distributed as set forth in Exhibit R. No transfer
taxes shall be payable by any holder of Overseas Shares in connection with
such exchange.
3.3 Adjustments. If at any time during the period between the date of
this Agreement and the Effective Time, the outstanding shares of capital stock
of EMAC or Overseas shall have been changed into a different number of shares
or a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
the Merger Consideration shall be correspondingly adjusted to reflect such
stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares; provided, however, that neither EMAC nor
Overseas shall take any such action without the prior written consent of the
other.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF OVERSEAS AND
THE OVERSEAS STOCKHOLDERS
Overseas and the Overseas Stockholders jointly and severally hereby
represent and warrant to EMAC as follows:
4.1 Corporate Status. Overseas is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
Overseas is qualified to do business as a foreign corporation in California
and any jurisdiction where it is required to be so qualified, except where the
failure to so qualify would not have a Material Adverse Effect. Each of the
Overseas Subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and is
duly qualified to do business as a foreign corporation in any jurisdiction
where it is required to be so qualified, except where the failure to so
qualify would not have a Material Adverse Effect. The copies of the
Certificate of Incorporation and bylaws of Overseas and Overseas Subsidiaries
that have been delivered to EMAC have been duly adopted, and are current,
correct and complete.
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4.2 Authorization. Overseas has the requisite power and authority to
execute and deliver the Transaction Documents to which it is or will be a
party and to perform the Transactions to be performed by it. Such execution,
delivery and performance by Overseas have been duly authorized by all
necessary corporate action, including the approval by the stockholders of
Overseas as required by the DGCL. The Transaction Documents to be executed and
delivered by Overseas or the Overseas Stockholders have been, or will be on
the Closing Date, duly and validly executed and delivered by such party or
parties. The Transaction Documents executed on or before the date hereof
constitute, and the Transaction Documents to be executed after the date hereof
will constitute, legally valid and binding obligations of Overseas and the
Overseas Stockholders, to the extent they are parties thereto, enforceable
against each such party in accordance with their respective terms, except that
the remedies of specific performance, injunction and other forms of equitable
relief are subject to certain tests of equity jurisdiction, equitable defenses
and the discretion of the court before which any proceeding may be brought.
4.3 Consents and Approvals. Except for the consents specified in Section
4.3 of the Overseas Disclosure Schedule (the "Required Consents"), the
approval of the Merger Agreement by the holders of a majority of the issued
and outstanding Overseas Shares, and the filing of the Certificate of Merger
in accordance with the DGCL, neither the execution and delivery by Overseas or
the Overseas Stockholders of the Transaction Documents to which either is or
will be a party, nor the performance of the Transactions to be performed by
Overseas or the Overseas Stockholders will require any filing to be made by
Overseas, or any consent or approval to be obtained by Overseas or constitute
a Default under (a) any Regulation or Court Order to which Overseas or any of
the Overseas Subsidiaries is subject, (b) the Certificate of Incorporation or
bylaws, or other comparable organizational documents with respect to any
foreign corporation, of Overseas or any of the Overseas Subsidiaries, or (c)
any Contract, Governmental Permit or other document to which Overseas or any
of the Overseas Subsidiaries is a party or by which the properties or other
assets of Overseas or any of the Overseas Subsidiaries is subject, except
where the aggregate effect of any such Defaults or the failure to make or
obtain any such filings, consents or approvals would not have a Material
Adverse Effect.
4.4 Capitalization and Stock Ownership. The total authorized capital
stock of Overseas consists of 2,000 shares of Overseas Common Stock, of which
100 shares are issued and outstanding (the "Existing Shares"). Neither
Overseas nor any of the Overseas Subsidiaries has any shares of capital stock
that are issued and held by Overseas or the Overseas Subsidiaries,
respectively, as treasury stock. There are no existing options, warrants,
calls, subscriptions, commitments, arrangements or other rights of any
character (including conversion or preemptive rights) relating to the
issuance, acquisition or registration of any issued or unissued capital stock
or other securities of Overseas and the Overseas Subsidiaries, and, except as
set forth in Section 4.4 of the Overseas Disclosure Schedule, the Overseas
Stockholders have not agreed or committed to transfer any Overseas Shares held
by them on or prior to the Effective Time. All of the outstanding shares of
Overseas Common Stock and the common stock of the Overseas Subsidiaries are
duly and validly authorized and issued, fully paid and non-assessable. Section
4.4 of the Overseas Disclosure Schedule correctly lists the record owners of
all of the Existing Shares and the
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number of Existing Shares owned of record and beneficially by each such
holder. Except where the aggregate effect of any such noncompliance would not
have a Material Adverse Effect or as set forth in Section 4.4 of the Overseas
Disclosure Schedule, Overseas complied with all applicable federal and state
securities Regulations in connection with the offer and issuance of all of the
Existing Shares and there are no rescission rights relating thereto. Except as
set forth in Section 4.4 of the Overseas Disclosure Schedule, there are no
shareholder agreements, agreements among securityholders, voting trusts or
other agreements or understandings to which Overseas is a party, or, to the
knowledge of Overseas, to which any securityholder of Overseas is a party,
including, without limitation, any agreements or understandings with respect
to (i) the voting of the capital stock of Overseas and of each of the Overseas
Subsidiaries, respectively, (ii) the relative rights and obligations of the
securityholders of Overseas and of each of the Overseas Subsidiaries,
respectively, (iii) any buy-sell or rights of first refusal regarding Overseas
and of each of the Overseas Subsidiaries, respectively, and/or the interests
of any securityholders therein, (iv) relations among the securityholders of
Overseas and of each of the Overseas Subsidiaries, respectively, or (v)
representation on Overseas' Board of Directors or the Board of Directors of
any of the Overseas Subsidiaries.
4.5 Financial Statements. Overseas has delivered to EMAC complete copies
of the financial statements of Overseas consisting of a balance sheet as of
December 31, 1993, 1994 and 1995 and the related statements of income,
shareholders' equity and cash flows for the periods then ended, and the
footnotes thereto (to which the representations and warranties contained in
this Agreement shall be qualified and subject), which financial statements
have been audited by the firm of Price Waterhouse LLP. All such audited
financial statements (including the footnotes thereto), together with the
financial statements referred to in Section 6.10 (when delivered) (including
the footnotes thereto), are referred to herein collectively as the "Overseas
Financial Statements." The Overseas Financial Statements fairly present in
conformity with GAAP applied on a consistent basis the financial position and
assets and liabilities of Overseas as of the dates thereof and Overseas'
results of operations and cash flows for the periods then ended (on a
consolidated basis in the case of the financial statements referred to in
Section 6.10), except for normal year-end adjustments and accruals in the case
of the unaudited financial statements to be delivered under Section 6.10. The
audited balance sheet as of December 31, 1995 is referred to herein as the
"Overseas Balance Sheet," and December 31, 1995 is referred to herein as the
"Overseas Balance Sheet Date."
4.6 Title to Assets and Related Matters. Overseas and each of the
Overseas Subsidiaries, respectively, has good and marketable title to, or
valid leasehold interests in, all of its tangible personal property which have
a cost or fair market value equal to or in excess of $10,000, free from any
Encumbrances except those specified in Section 4.6 of the Overseas Disclosure
Schedule and any Encumbrances (including for this purpose, defects of title)
that, in the aggregate, are not material to Overseas and the Overseas
Subsidiaries, taken as a whole. All tangible personal property of Overseas and
each of the Overseas Subsidiaries, respectively, is generally suitable for the
purposes for which it is used, free from any known defects, except such
defects that, in the aggregate, would not have a
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Material Adverse Effect. Neither Overseas nor any of the Overseas Subsidiaries
owns any Real Property.
4.7 Real Property Leases. Section 4.7 of the Overseas Disclosure
Schedule lists all real estate leased by Overseas and each of the Overseas
Subsidiaries, respectively, and contains a general description of the
improvements (including buildings and other structures) located on such real
estate (collectively, the "Real Property"). Section 4.7 of the Overseas
Disclosure Schedule lists any leases under which any such Real Property is
possessed (the "Real Estate Leases"). To the knowledge of Overseas and the
Overseas Stockholders, except as set forth in Section 4.7 of the Overseas
Disclosure Schedule, (i) neither Overseas nor any of the Overseas
Subsidiaries, respectively, is currently in Default under any of the Real
Estate Leases, and (ii) neither Overseas nor the Overseas Stockholders is
aware of any Default by any of the lessors thereunder, except in the case of
(i) and (ii) such Defaults that, in the aggregate, would not have a Material
Adverse Effect.
4.8 Personal Property. Overseas has delivered to EMAC a fixed asset
schedule, describing all material items of tangible personal property of
Overseas that were included in the Overseas Balance Sheet and all items of
tangible personal property of the Overseas Subsidiaries material to Overseas
and the Overseas Subsidiaries, taken as a whole. Except as set forth in
Section 4.8 of the Overseas Disclosure Schedule, since the Overseas Balance
Sheet Date, neither Overseas nor any of the Overseas Subsidiaries,
respectively, has acquired or disposed of any items of tangible personal
property other than (a) items having acquisition costs (per item) of less than
$30,000 or (b) acquisitions or dispositions in the ordinary course. All of
such personal property is in good operating condition, reasonable wear and
tear excepted, except such defects that, in the aggregate, would not have a
Material Adverse Effect.
4.9 Non-Real Estate Leases. Section 4.9 of the Overseas Disclosure
Schedule lists all material tangible Assets (other than Real Property) that
are used as of the date of this Agreement in the operation of the Business and
that are possessed by Overseas and each of the Overseas Subsidiaries,
respectively, under an existing lease, including all machinery, equipment,
fixtures, furniture and computers that are material to the Business. Section
4.9 of the Overseas Disclosure Schedule also lists the leases under which such
assets and property are possessed. All of such leases and any leases of such
types that are entered into after the date of this Agreement are referred to
herein as the "Non-Real Estate Leases." Overseas and each of the Overseas
Subsidiaries, respectively, is not in Default under any of the Non-Real Estate
Leases, and Overseas and each of the Overseas Subsidiaries, respectively, is
not aware of any Default by any of the lessors thereunder, except for such
Defaults that, in the aggregate, would not have a Material Adverse Effect.
4.10 Accounts Receivable. The accounts receivable of Overseas reflected
in the Overseas Balance Sheet are bona fide accounts receivable created in the
ordinary course of business, and, to the knowledge of Overseas and the
Overseas Stockholders, are collectible within periods of time normally
prevailing in the industry at the aggregate recorded amounts thereof, subject
to the allowance for doubtful accounts that is included in the Overseas
Balance Sheet.
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4.11 Liabilities. Except as specified in Section 4.11 of the Overseas
Disclosure Schedule, Overseas and each of the Overseas Subsidiaries,
respectively, has no Liabilities, and none of the Assets of Overseas nor any
of the Overseas Subsidiaries, respectively, is subject to any Liabilities,
except (a) to the extent reflected on or provided for in the Overseas Balance
Sheet, (b) intercompany accounts, (c) Liabilities which are not material
either individually or in the aggregate, and which are not required to be
reflected on or provided for on the Overseas Balance Sheet, (d) Liabilities
incurred since the Overseas Balance Sheet Date that, individually or in the
aggregate, are not material to the Business of Overseas or the material
Assets, (e) Liabilities under any Contracts that were not required under GAAP
to have been specifically disclosed or reserved for on the Overseas Balance
Sheet, (f) Liabilities under, or contemplated by, or in connection with this
Agreement, (g) Liabilities incurred after the Overseas Balance Sheet Date that
are not prohibited by Section 6.1, (h) Liabilities incurred since the Overseas
Balance Sheet Date that are approved in writing by EMAC, (i) deferred federal
tax liabilities accruable on termination of the status of Overseas as a
Subchapter S corporation under the Code, and (j) Liabilities which accrue as a
function of the licensing, sale or collection of the Overseas Film Library or
any Assets therein or related thereto, and (k) Liabilities incurred after the
Overseas Balance Sheet Date that are reflected on or provided for in the
Overseas March 31, 1996 or June 30, 1996 Balance Sheet.
4.12 Taxes. Except as set forth in Section 4.12 of the Overseas
Disclosure Schedule, Overseas and each of the Overseas Subsidiaries,
respectively, (a) has duly filed all foreign, federal, state, local and other
Tax returns that are required to be filed and that were due, and (b) has paid,
or set up an adequate reserve for the payment of, all material Taxes with
respect to all periods through December 31, 1995; provided, however, that Tax
or Taxes for purposes of this sentence shall not include any Federal, state,
local or foreign income, profits or franchise taxes (an "Income Tax") assessed
against the Company for a period prior to January 1, 1996, to the extent that
it is reasonable to expect that as a result of such assessment the Company
will obtain an increase in deductions or tax credits or a decrease in income
or profits for purposes of such Income Tax for a period after December 31,
1995. Except as set forth in Section 4.12 of the Overseas Disclosure Schedule,
all Taxes and other assessments and levies that Overseas and each of the
Overseas Subsidiaries, respectively, has been required by law to withhold or
to collect for periods prior to December 31, 1995 have been duly withheld and
collected and have been paid over to the proper governmental authorities or
are properly held by Overseas and each of the Overseas Subsidiaries,
respectively, for such payment. Except as set forth in Section 4.12 of the
Overseas Disclosure Schedule, there are no proceedings or other actions
pending, and to the knowledge of Overseas and the Overseas Stockholders, no
proceedings or other actions threatened, for the assessment and collection of
additional taxes of any kind for any period for which returns have or should
have been filed. For purposes of this Agreement, the term "Tax" or "Taxes"
shall include all Federal, state, local, and foreign income, profits,
franchise, gross receipts, payroll, sales, employment, use, property,
withholding, excise and other Taxes, duties and governmental assessments of
any nature whatsoever imposed upon Overseas or any of the Overseas
Subsidiaries (but not the Overseas Stockholders or William F. Lischak)
together with all interest, penalties and additions imposed with respect to
such amounts.
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4.13 Subsidiaries. Except as specified in Section 4.13 of the Overseas
Disclosure Schedule, Overseas does not own, directly or indirectly, any
interest or investment (whether equity or debt) in any corporation,
partnership, business, trust, joint venture or other legal entity.
4.14 Legal Proceedings and Compliance with Law.
(a) Except as disclosed in Section 4.14(a) of the Overseas
Disclosure Schedule, there is no Litigation that is pending or, to Overseas'
and the Overseas Stockholders' knowledge, threatened against Overseas or any
of the Overseas Subsidiaries, respectively, except any threatened Litigation
that, individually or in the aggregate, would not have a Material Adverse
Effect. Neither Overseas nor any of the Overseas Subsidiaries is in Default
under any applicable Regulations, except for any Defaults that would not have
a Material Adverse Effect. Neither Overseas nor any of the Overseas
Subsidiaries is in Default with respect to any applicable Court Order.
(b) Overseas and each of the Overseas Subsidiaries, respectively,
has obtained and is in full compliance with all governmental permits,
licenses, registrations, certificates of occupancy, approvals and other
authorizations that are required for the complete operation of the Business of
Overseas and each of the Overseas Subsidiaries, respectively, as currently
operated, except such items as to which the failure to obtain or to comply, in
the aggregate, would not have a Material Adverse Effect (the "Governmental
Permits"). All of the Governmental Permits are listed in Section 4.14(b) of
the Overseas Disclosure Schedule, along with their respective expiration
dates. All of the Governmental Permits are currently valid and in full force,
and to the knowledge of Overseas and the Overseas Stockholders, no revocation,
cancellation or withdrawal thereof has been threatened.
(c) To the best of the knowledge of Overseas and the Overseas
Stockholders, neither Overseas nor any of the Overseas Subsidiaries, nor any
of their officers or directors is the subject of any investigation, inquiry or
proceeding before the Securities and Exchange Commission or any state
securities commission.
4.15 Contracts.
(a) Section 4.15 of the Overseas Disclosure Schedule lists each
Contract of the following types to which Overseas and each of the Overseas
Subsidiaries, respectively, as of the date of this Agreement, is a party, or
by which it is bound, excluding (x) any Contract relating to any item in the
Overseas Film Library (including, without limitation, any Contract relating to
the development, production, distribution, exploitation, acquisition, or
licensing of Overseas Films, the Overseas Film Library or any component
thereof), (y) any Contract that may be terminated by Overseas or any of the
Overseas Subsidiaries, respectively, on not more than one month's notice
without any liability on the part of Overseas or any of the Overseas
Subsidiaries, respectively, and (z) any Contract under which the executory
obligation (including any remaining payments) of Overseas or any of the
Overseas Subsidiaries, respectively, involves an amount or, in the case of
security agreements, secures
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an amount, of less than $50,000 (such excluded Contracts referred to in
clauses (y) and (z) are referred to in this Section 4.15 collectively as
"Overseas Minor Contracts") and excluding this Agreement, the Transaction
Documents and the other Contracts expressly referred to herein:
(i) Contracts with any present or former securityholder,
director, officer, employee, partner or consultant of
Overseas or any of the Overseas Subsidiaries,
respectively, or Affiliate thereof, including, without
limitation, registration rights agreements,
indemnification agreements, shareholder agreements and
voting agreements;
(ii) Contracts for the future purchase of, or payment for,
supplies or products, or for the lease of any material
Asset from or the performance of services by a third
party;
(iii) Contracts to perform services;
(iv) Contracts to lease to or to operate for any other party any
material Asset;
(v) Any notes, debentures, bonds, conditional sale agreements,
equipment trust agreements, letter of credit agreements,
reimbursement agreements, loan agreements, security
agreements or other Contracts for the borrowing or lending
of money or security therefor (including loans to or from
officers, directors, partners, stockholders or Affiliates
of Overseas or any of the Overseas Subsidiaries, or any
members of their immediate families), agreements or
binding arrangements for a line of credit or for a
guarantee of, or other binding undertaking in connection
with, the indebtedness of any other Person;
(vi) Any other Contracts (other than Overseas Minor Contracts,
Contracts excluded by 4.15(a)(x) and those Contracts
described in any of (i) through (v) above) not made in
the ordinary course of business.
(b) To Overseas' and the Overseas Stockholders' knowledge, neither
Overseas nor any of the Overseas Subsidiaries is in Default under any
Contract, which Default, together with all other such Defaults under
Contracts, would result in a Material Adverse Effect. Neither Overseas nor any
of the Overseas Subsidiaries has received any written communication from, or
given any written communication to, any other party indicating that Overseas
or such other party, as the case may be, is in Default under any Contract
where such Default is reasonably likely to have a Material Adverse Effect.
Overseas and each of the Overseas Subsidiaries has delivered or made available
to EMAC or
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its counsel true and complete copies of all Contracts identified on the
Overseas Disclosure Schedule.
4.16 Insurance. Section 4.16 of the Overseas Disclosure Schedule lists
all policies or binders of insurance held by or on behalf of Overseas and each
of the Overseas Subsidiaries or relating to the Business or any of its Assets,
as of the date of this Agreement, and the Overseas Disclosure Schedule
specifies with respect to each policy the insurer, the amount of the coverage,
the type of insurance, the expiration date, the policy number and any pending
claims thereunder. To Overseas' and the Overseas Stockholders' knowledge,
there is no Default with respect to any such policy or binder, nor has there
been any failure by Overseas or any of the Overseas Subsidiaries to give any
notice or present any claim under any such policy or binder with respect to a
known claim in a timely fashion or in the manner or detail required by the
policy or binder, except for any of the foregoing that would not, individually
or in the aggregate, have a Material Adverse Effect. There is no notice of
nonrenewal or cancellation with respect to, or disallowance of any claim
under, any such policy or binder that has been received by Overseas or any of
the Overseas Subsidiaries, respectively, except for any of the foregoing that
would not, individually or in the aggregate, have a Material Adverse Effect.
4.17 Intellectual Property.
(a) Section 4.17 of the Overseas Disclosure Schedule sets forth all
trademarks, servicemarks, trade names, patents, and all applications therefor,
owned by Overseas or any of the Overseas Subsidiaries, respectively (the
"Intellectual Property"). Except as set forth in Section 4.17 of the Overseas
Disclosure Schedule, all of the Intellectual Property is owned or otherwise
lawfully used by Overseas or any of the Overseas Subsidiaries, respectively,
except where the failure to own or use such Intellectual Property would not
have a Material Adverse Effect, and, to the knowledge of Overseas and the
Overseas Stockholders, Overseas' and each of the Overseas Subsidiaries' use of
the Intellectual Property does not infringe upon or unlawfully or wrongfully
use any trademark, trade name, service mark, or patent owned or claimed by
another Person or knows of any infringement or unlawful use by another person
of any of the Intellectual Property. Neither Overseas nor any of the Overseas
Subsidiaries is in Default, except for any Default that would not have a
Material Adverse Effect, and has not received any notice of any claim of
infringement or any other claim or proceeding, with respect to any such
Intellectual Property. No current or former employee of Overseas or any of the
Overseas Subsidiaries, and to the knowledge of the Overseas Stockholders no
other Person owns or has any proprietary, financial or other interest, direct
or indirect, in whole or in part, in any of the Intellectual Property, or in
any application therefor except for such interest that may arise by virtue of
such person's ownership (in whole or in part) of any Affiliate of Overseas or
any of the Overseas Subsidiaries.
(b) To Overseas' and the Overseas Stockholders' knowledge, no
employee or consultant of Overseas or any of the Overseas Subsidiaries is
subject to any agreement (other than agreements with Overseas) limiting the
freedom of such employee to compete in
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any line of business similar to Overseas' Business, with any person or entity,
in any geographic area.
4.18 Employee Relations. Neither Overseas nor any of the Overseas
Subsidiaries is (a) a party to, involved in or, to Overseas' or the Overseas
Stockholders' knowledge, threatened by, any labor dispute or unfair labor
practice charge or (b) currently negotiating any collective bargaining
agreement, and neither Overseas nor any of the Overseas Subsidiaries,
respectively, has experienced any work stoppage during the last three years.
Overseas has delivered to EMAC a complete and correct list of the names and
1995 and 1996 salaries, bonus and other cash compensation of all employees
(including officers) of Overseas and each of the Overseas Subsidiaries,
respectively, whose total cash compensation for 1995 exceeded, or whose total
compensation for 1996 is expected to exceed, $60,000.
4.19 ERISA.
(a) Section 4.19 of the Overseas Disclosure Schedule contains a
complete list of all Benefit Plans sponsored or maintained by Overseas and
each of the Overseas Subsidiaries, respectively, or under which they may be
obligated. Overseas has delivered to EMAC or EMAC has had access to (i)
accurate and complete copies of all Benefit Plan documents and all summary
plan descriptions, summary annual reports and insurance contracts, if any (ii)
accurate and complete summaries of all unwritten Benefit Plans, (iii) accurate
and complete copies of the most recent financial statements and actuarial
reports with respect to all Benefit Plans for which financial statements or
actuarial reports are required or have been prepared and (iv) accurate and
complete copies of all annual reports for all Benefit Plans (for which annual
reports are required) prepared within the last three years. Each Benefit Plan
providing benefits that are funded through an insurance policy is indicated by
the word "insured" placed next to the listing of said Benefit Plan in Section
4.19 of the Overseas Disclosure Schedule.
(b) All Benefit Plans conform (and at all times have conformed) in
all material respects to, and are being administered and operated (and have at
all time been administered and operated) in material compliance with, the
requirements of ERISA, the Code and all other applicable Regulations. All
returns, reports and disclosure statements required to be made under ERISA and
the Code with respect to all Benefit Plans have been timely filed or
delivered. There have not been any "prohibited transactions," as such term is
defined in Section 4975 of the Code or Section 406 of ERISA involving any of
the Benefit Plans, that could subject Overseas or any of the Overseas
Subsidiaries to any material penalty or Tax imposed under the Code or ERISA.
(c) Except as is set forth in Section 4.19 of the Overseas
Disclosure Schedule, any Benefit Plan that is intended to be qualified under
Section 401(a) of the Code and exempt from Tax under Section 501(a) of the
Code has been determined by the Internal Revenue Service ("IRS") to be so
qualified, and such determination remains in effect and has not been revoked.
To the knowledge of Overseas and the Overseas Stockholders, nothing has
occurred since the date of any such determination that is reasonably likely to
affect adversely such qualification or exemption, or result in the imposition
of excise Taxes or
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income Taxes on unrelated business income under the Code or ERISA with respect
to any Benefit Plan.
(d) Neither Overseas nor any of the Overseas Subsidiaries has a
defined benefit plan subject to Title IV of ERISA. Neither Overseas nor any of
the Overseas Subsidiaries has a current or contingent obligation to contribute
to any multiemployer plan (as defined in Section 3(37) of ERISA). For purposes
of this Section 4.19(d), the term "Overseas" and the "Overseas Subsidiaries"
shall include any corporation that is a member of any controlled group of
corporations (as defined in Section 414(b) of the Code) that includes Overseas
or any of the Overseas Subsidiaries, any trade or business (whether or not
incorporated) that is under common control (as defined in Section 414(c) of
the Code) with Overseas or any of the Overseas Subsidiaries, any organization
(whether or not incorporated) that is a member of an affiliated service group
(as defined in Section 414(m) of the Code) that includes Overseas or any of
the Overseas Subsidiaries and any other entity required to be aggregated with
Overseas or any of the Overseas Subsidiaries pursuant to the regulations
issued under Section 414(o) of the Code.
(e) There are no pending or, to the knowledge of Overseas or the
Overseas Stockholders, threatened claims by or on behalf of any Benefit Plans,
or by or on behalf of any individual participants or beneficiaries of any
Benefit Plans, alleging any breach of fiduciary duty on the part of Overseas
or any of the Overseas Subsidiaries, or any of their officers, directors or
employees under ERISA or any other applicable employee benefit plan
regulations, or claiming benefit payments other than those made in the
ordinary operation of such plans, nor is there, to the knowledge of Overseas
and the Overseas Stockholders, any basis for such claim. To the knowledge of
Overseas, the Benefit Plans are not the subject of any investigation, audit or
action by the IRS, the Department of Labor or the Pension Benefit Guaranty
Corporation ("PBGC").
(f) Overseas and each of the Overseas Subsidiaries, respectively,
has made all required contributions under the Benefit Plans including the
payment of any premiums payable to the PBGC and other insurance premiums.
(g) Except as set forth in Section 4.19(g) of the Overseas
Disclosure Schedule, with respect to any Benefit Plan that is an employee
welfare benefit plan (within the meaning of Section 3(l) of ERISA) (a "Welfare
Plan"), (i) each Welfare Plan for which contributions are claimed as
deductions under any provision of the Code is in material compliance with all
applicable requirements pertaining to such deduction, (ii) with respect to any
welfare benefit fund (within the meaning of Section 419 of the Code) related
to a Welfare Plan, there is no disqualified benefit (within the meaning of
Section 4976(b) of the Code) that would result in the imposition of a Tax
under Section 4976(a) of the Code, (iii) any Benefit Plan that is a group
health plan (within the meaning of Section 498OB(g)(2) of the Code) complies,
and in each and every case has complied, with all of the material requirements
of Section 4980B of the Code, ERISA, Title XXII of the Public Health Service
Act and the applicable provisions of the Social Security Act and (iv) all
Welfare Plans may be amended or terminated at any time on or after the Closing
Date, except in the case of (i),
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(ii), (iii) and (iv) where such noncompliance, imposition of a Tax, amendment
or termination would not have a Material Adverse Effect.
4.20 Corporate Records. The minute books of Overseas and each of the
Overseas Subsidiaries, respectively, contain complete, correct and current
copies of its Certificate of Incorporation and bylaws, or other comparable
organizational documents with respect to any foreign corporation, and, in all
material respects, of all minutes of meetings, resolutions and other official
proceedings of its Board of Directors and stockholders. The stock record list
of Overseas is complete, correct and current.
4.21 Absence of Certain Changes. Except as set forth in Section 4.21 of
the Overseas Disclosure Schedule, since the Overseas Balance Sheet Date,
Overseas and each of the Overseas Subsidiaries, respectively, has generally
conducted its Business in the ordinary course and there has not been:
(a) any material adverse change in its Business;
(b) any distribution or payment declared or made in respect of its
capital stock by way of dividends (other than dividends on the Overseas Shares
in accordance with the business practice of Overseas), purchase or redemption
of shares or otherwise;
(c) any increase in the compensation payable or to become payable
to any director, officer, employee or agent, except for merit and seniority
increases for employees made in the ordinary course of business and in the
aggregate not exceeding $50,000 on an annualized basis, nor any other change
in any employment or consulting arrangement that is material;
(d) any material sale, assignment or transfer of Assets, or any
additions to or transactions involving any material Assets, other than those
made in the ordinary course of business;
(e) other than in the ordinary course of business, any waiver or
release of any claim or right or cancellation of any material debt held; or
(f) any payments to any Affiliate of Overseas or any of the
Overseas Subsidiaries other than compensation, reimbursements of expenses or
other payments in the ordinary course of business.
4.22 Finder's Fees. Except as set forth in Section 4.22 of the Overseas
Disclosure Schedule, neither Overseas nor any of the Overseas Subsidiaries is,
nor will any of them be, obligated to pay to any Person retained by it any
commission or finder's or similar fee in connection with the Transactions.
4.23 Accuracy of Information. No representation or warranty by Overseas
or any Overseas Stockholder in any Transaction Document, including in any
schedules and exhibits thereto, contains any untrue statement of a material
fact or, taken together with all
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Transaction Documents, omits to state any material fact necessary in order to
make the statements made herein or therein, in light of the circumstances
under which they were made, not misleading.
4.24 Overseas Disclosure Schedule. The Overseas Disclosure Schedule as
in effect on the date of this Agreement (the "Original Overseas Disclosure
Schedule") shall be amended as of the Closing Date to be true and correct as
of the Closing Date and a copy thereof, as so amended (the "Closing Overseas
Disclosure Schedule"), certified by the President of Overseas to be true and
correct, shall be delivered to EMAC on the Closing Date. Any disclosure made
pursuant to any Section of this Article IV or the Overseas Disclosure Schedule
(Original or Closing) will be deemed made as to the other Sections in this
Article IV to which it applies if the import of the disclosure to such other
Sections is reasonably ascertainable on its face to a person who is not
familiar with the affairs of Overseas.
4.25 Certain Business Relationships with Affiliates. Except as set forth
in Schedule 4.25, or except for any transaction among Overseas and any
Subsidiaries of Overseas or any transaction among Subsidiaries of Overseas, no
Affiliate of Overseas or of any Overseas Subsidiary (a) owns any property or
right, tangible or intangible, which is used in the business of Overseas or
any Overseas Subsidiary, (b) has any claim or cause of action against Overseas
or any Subsidiary, or (c) owes any money to Overseas or any Overseas
Subsidiary where such property, claim, cause of action or debt is in excess of
$25,000.
4.26 Overseas Film Library.
(a) As used herein, (i) "Selected Films" shall mean the thirty-four
motion pictures listed on Schedule 4.26(a) hereto, (ii) "Major Media" shall
mean theatrical, free and pay television and home video, (iii) "Selected
Contract" shall mean an executory acquisition/distribution Contract to which
Overseas, as of the date of this Agreement, is a party under which Overseas
acquires copyright rights, distribution rights and/or agency rights in the
Major Media with respect to the Selected Films from third parties (other than
Overseas Minor Contracts as defined in Section 4.15), and (iv) "Gross
Participations" shall mean participations granted by Overseas to a third party
with respect to a Selected Film, which are measured as a percentage of gross
receipts of a licensee from exploitation by such licensee of the Selected Film
in a particular media and which arise at a time prior to Overseas' sharing in
such gross receipts from exploitation of the Selected Film in such media.
Schedule 4.26(b) contains a list of the Selected Contracts.
(b) Notwithstanding anything else contained in this Agreement to
the contrary (and subject to the references to Section 4.10 of this Agreement
in subsection (d) below), the parties hereto acknowledge and agree that the
only representations or warranties made by Overseas or the Overseas
Stockholders in this Agreement, the Transaction Documents or otherwise with
respect to the Film Library (as defined below) owned, controlled or
distributed by Overseas, in whole or in part (the "Overseas Film Library"),
the components thereof, Contracts related thereto, or the Intellectual
Property contained therein, are the representations and warranties set forth
in this Section 4.26, and no other
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representations or warranties with respect to the Overseas Film Library, the
components thereof, Contracts related thereto, or Intellectual Property
contained therein, are set forth in this Agreement, or in any of the
Transaction Documents or in any other agreements nor shall any such
representations or warranties be implied by operation of law or otherwise. As
used herein, "Film Library" shall mean all full-length theatrical motion
pictures, shorts, cartoons, trailers, short subjects, television programs or
series of all kinds, made-for-television features, and all other audiovisual
works of any kind or character, and all other rights associated therewith,
together with all negative and positive film, soundtracks, optical and
advertising materials and supplies associated therewith and rights in
underlying rights in and to literary, musical and dramatic material,
including, without limitation, all sequel and remake rights and all rights to
novelization, merchandising, characters and serialization customarily
associated in the motion picture production and distribution industry as being
a part of a film library, and also including, but not limited to, the right to
receive royalties, revenues, and profits of every kind.
(c) To the best knowledge and belief of Overseas and the Overseas
Stockholders, Schedule 4.26(c) hereto lists all motion pictures which Overseas
owns or has any rights to distribute, license or sublicense excluding motion
pictures for which Overseas does not have any rights in the Major Media and
the failure of which to include in such list would not have a Material Adverse
Effect. The motion pictures listed on Schedule 4.26(c) are referred to herein
as the "Overseas Films." Schedule 4.26(d) hereto lists all copyrights which
Overseas owns.
(d) To Overseas' and the Overseas Stockholders' actual knowledge,
Overseas is not in Default under any Selected Contract, which Default would
result in a Material Adverse Effect. Except as set forth in Schedule 4.26(e),
no executive officer of Overseas has, within the twelve months preceding the
date of this Agreement, received any written communication from, or given any
written communication to, any other party to a Selected Contract (other than
Selected Contracts for which accounts receivable related thereto are covered
by the representations and warranties contained in Section 4.10 herein)
expressly indicating that Overseas or such other party, as the case may be,
has breached or violated or is in default under such Selected Contract (other
than breaches, violations or defaults relating to the past due payment of
money) where such breach, violation or default is reasonably likely to have a
Material Adverse Effect. Nothing in the foregoing sentence shall be deemed to
broaden or expand, in any manner whatsoever, the representations and
warranties contained in Section 4.10 herein. Overseas has delivered or made
available to EMAC or its counsel true and complete copies of all Selected
Contracts.
(e) Schedule 4.26(f) hereto contains a general summary by Overseas
(commonly referred to by Overseas as its "Master Avail") of rights in the
Major Media licensed by Overseas to third parties with respect to the Selected
Films, including the territories licensed, the name of the licensee, the
licensed rights and the duration of such licensed rights. Overseas has
reviewed such Schedule in good faith and believes it to be an accurate
summary; however, the parties hereto acknowledge and agree that such summary
is meant to be a general summary only.
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(f) Except as disclosed in Schedule 4.26(g), (i) there is no suit,
action or proceeding pending against Overseas, or to the actual knowledge of
Overseas, threatened against Overseas that involves a claim of infringement of
any copyright with respect to any Overseas Film, and (ii) Overseas has no
actual knowledge of any existing infringement by any other person of any
copyright held by Overseas with respect to any Overseas Film except in the
case of (i) and (ii), suits, actions, proceedings, existing infringement and
claims of infringement which would not have a Material Adverse Effect.
(g) Overseas has in full force and effect one or more valid,
blanket "errors and omissions" policy(ies) of insurance. True and complete
copies of such blanket policy(ies) are attached hereto as Schedule 4.26(h).
(h) Overseas has not granted Gross Participations with respect to
the Selected Films other than as listed on Schedule 4.26(i) or such Gross
Participations as would not have a Material Adverse Effect.
(i) To Overseas' and the Overseas Stockholders' knowledge, Overseas
holds the rights to the Overseas Films which it purports to hold necessary for
the operation of Overseas' Business, including, but not limited to,
proprietary rights, copyright rights, distribution rights and/or agency rights
(except where the failure to hold such rights would not have a Material
Adverse Effect), and, to the knowledge of Overseas and the Overseas
Stockholders, no Person has any conflicting rights to the Overseas Films that
would have a Material Adverse Effect.
4.27 Representations and Warranties of the Stockholders of Overseas.
Each of the stockholders of Overseas, which for purposes of this Section 4.27
only, shall include Ellen Dinerman Little, Robert B. Little and William F.
Lischak, hereby, severally but not jointly, represents and warrants to EMAC
that:
(a) Except as set forth on Schedule 4.27, such stockholder of
Overseas has, and on the Closing Date will have, good and valid title to the
Existing Shares owned by such stockholder as specified on Schedule 4.4, free
and clear of all liens, pledges, encumbrances and claims whatsoever and the
full right, power and authority to deliver such Existing Shares for conversion
in the Merger.
(b) Purchase Entirely for Own Account. The Merger Shares to be
received by such stockholder of Overseas will be acquired for investment for
such stockholder's own account, not as a nominee or agent, and not with a view
to the resale or distribution of any part thereof, and that such stockholder
has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, such stockholder
of Overseas further represents that, except as set forth on Schedule 4.27, he
or she does not have any contract, undertaking, agreement or arrangement with
any Person to sell, transfer or grant participations to such Person or to any
third person, with respect to any of the Merger Shares except for wills,
estate planning documents and the Lock-up and Registration Rights Agreement.
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(c) Disclosure of Information. Such stockholder represents that he
or she has had an opportunity to ask questions and receive answers from EMAC
regarding the terms and conditions of the offering of the Merger Shares and
the business, properties, prospects and financial condition of EMAC. Nothing
in the foregoing or any other provision of this Section 4.27, however, limits
or amends or modifies in any manner whatsoever the representations and
warranties of EMAC in the Transaction Documents, including, without
limitation, Article V of this Agreement or the right of Overseas or such
stockholder of Overseas to rely thereon, nor does the foregoing affect in any
manner whatsoever the indemnification obligations of EMAC and the other rights
and remedies of such stockholders and Overseas contained herein in the
Transaction Documents, at law, in equity or otherwise.
(d) Investment Experience. Such stockholder of Overseas
acknowledges that he or she is able to fend for himself or herself, can bear
the economic risk of his or her investment in the Merger Shares, and has such
knowledge and experience in financial and business matters that he or she is
capable of evaluating the merits and risks of an investment in the Merger
Shares.
(e) Restricted Securities. Such stockholder of Overseas understands
that the Merger Shares he or she is acquiring are characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from EMAC in a transaction not involving a public offering and that,
under such laws and applicable regulations, such securities may be resold
without registration under the Securities Act only in certain limited
circumstances. In this connection, such stockholder represents that he or she
is familiar with SEC Rule 144, as presently in effect, and understands the
resale limitations imposed thereby and by the Securities Act.
(f) In the Event that the transfer agent of the Surviving
Corporation requires an opinion from the attorneys of the Overseas
Stockholders concerning the compliance of any sale of EMAC Common Stock by the
Overseas Stockholders with relevant securities laws, the Overseas Stockholders
shall cause such opinion to be provided; provided, however, that the Surviving
Corporation shall pay for such opinion.
(g) Disposition of Merger Shares. Without in any way limiting the
representations set forth above, such stockholder of Overseas may dispose of
all or any portion of the Merger Shares provided that the disposition is
permitted by state and federal securities law, and the disposition is not
otherwise restricted by the Lock-Up (as such term is defined in the Lock-Up
and Registration Rights Agreement).
(h) Legends. It is understood that the certificates evidencing the
Merger Shares may bear one or all of the following legends:
(i) "These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an opinion of counsel
reasonably satisfactory to the company that such registration is not required
or unless sold pursuant to Rule 144 of such Act."
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(ii) The shares represented by this certificate are subject to
certain restrictions upon transfer as set forth in an agreement dated
________, between the corporation and the registered holder, a copy of which
is on file at the principal office of the corporation.
The Company will promptly remove the foregoing legends from the
certificates representing Merger Shares upon written request from the holder
thereof, provided that such legends are no longer required by applicable law
or agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF EMAC
EMAC hereby represents and warrants to Overseas and the Overseas
Stockholders as follows:
5.1 Corporate Status. EMAC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. EMAC is
qualified to do business as a foreign corporation in California and in any
other jurisdictions where it is required to be so qualified, except where the
failure to so qualify would not have a Material Adverse Effect. The
Certificate of Incorporation and bylaws of EMAC that have been delivered to
Overseas and the Overseas Stockholders have been duly adopted and are current,
correct and complete.
5.2 Authorization. EMAC has the requisite power and authority to execute
and deliver the Transaction Documents to which it is or will be a party and to
perform the Transactions to be performed by it. Such execution, delivery and
performance by EMAC have been duly authorized by all necessary corporate
action including approval of the Board of Directors of EMAC, except for
approval by the holders of EMAC stock (the "EMAC Stockholders") required by
EMAC's Certificate of Incorporation and the DGCL, which will be solicited in
accordance with the provisions thereof, Section 7.2 of this Agreement, and all
applicable state and federal law. Upon receipt of EMAC Stockholder approval in
accordance with Section 7.2 hereof, such execution, delivery and performance
by EMAC will have been duly authorized by all necessary corporate action. The
Transaction Documents to be executed and delivered by EMAC have been, or will
be on the Closing Date, duly and validly executed and delivered. The
Transaction Documents executed on or before the date hereof constitute, and
the Transaction Documents to be executed after the date hereof will
constitute, legally valid and binding obligations of EMAC, enforceable in
accordance with their respective terms, except that the remedies of specific
performance, injunction and other forms of equitable relief are subject to
certain tests of equity jurisdiction, equitable defenses and the discretion of
the court before which any proceeding may be brought.
5.3 Consents and Approvals. Neither the execution and delivery by EMAC
of the Transaction Documents to which it is or will be a party, nor the
performance of the Transactions to be performed by EMAC, will require any
filing, consent or approval or
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constitute a Default under (a) any Regulation or Court Order to which EMAC is
subject, (b) the Certificate of Incorporation or bylaws of EMAC or (c) any
Contract, Governmental Permit or other document to which EMAC is a party or by
which the properties or other assets of EMAC may be subject, other than (i)
the approval of the Merger Agreement by not less than 80% of the shares of
EMAC Common Stock issued and outstanding on the record date for the EMAC
Stockholders Meeting (as defined in Section 7.2) which are held by EMAC
Stockholders other than those Persons listed in Section 5.3 of the EMAC
Disclosure Schedule (the "Initial EMAC Stockholders"); (ii) the approval of
the EMAC Option Plans by a majority of the shares of EMAC Common Stock issued
and outstanding on such record date; (iii) the filing of the Certificate of
Merger in accordance with the DGCL; (iv) compliance with any applicable
requirements of the Securities Act and securities laws of the various states
in connection with the issuance of the Merger Shares; and (v) compliance with
any applicable requirements of the Securities Exchange Act of 1934, as
amended, and the Regulations promulgated thereunder (the "Exchange Act") in
connection with the solicitation of the approval of the EMAC Stockholders, and
except in those cases under (a), (b) and (c) above where the aggregate effect
of any such Defaults would not have a Material Adverse Effect.
5.4 Capitalization and Stock Ownership.
(a) The total authorized capital stock of EMAC consists of
20,000,000 shares of EMAC Common Stock, 2,600,000 shares of which are issued
and outstanding, and 1,000,000 shares of preferred stock, $0.001 par value per
share, none of which is issued and outstanding. EMAC does not have any shares
of capital stock that are issued and held by EMAC as treasury stock. Except as
specified in Section 5.4(a) of the EMAC Disclosure Schedule, there are no
existing options, warrants, calls, subscriptions, commitments, arrangements or
other rights of any character (including conversion or preemptive rights)
relating to the issuance, acquisition or registration of any issued or
unissued capital stock or other securities of EMAC. All of the outstanding
shares of EMAC Common Stock are duly and validly authorized and issued, fully
paid and non-assessable. All of the outstanding options, warrants and units to
purchase EMAC securities have been duly and validly authorized and issued and
sufficient numbers of shares of EMAC Common Stock have been reserved for
issuance upon exercise of such securities. EMAC has complied with all
applicable Regulations in connection with the offer, sale and issuance of all
of the shares of EMAC Common Stock, options and warrants to purchase shares of
EMAC Common Stock and EMAC Units issued by EMAC since its formation, except
where the aggregate effect of any such noncompliance would not have a Material
Adverse Effect. All outstanding shares of EMAC Common Stock and all
outstanding EMAC Warrants were issued pursuant to a registration statement
declared effective under the Securities Act. There are no rescission rights
relating to any of the securities of EMAC. Except as set forth in Section
5.4(a) of the EMAC Disclosure Schedule, there are no shareholder agreements,
agreements among securityholders, voting trusts or other agreements or
understandings to which EMAC is a party, or, to EMAC's knowledge, to which any
securityholder of EMAC is a party, including without limitation, any
agreements or understandings with respect to (i) the voting of the capital
stock of EMAC, (ii) the relative rights and obligations of the securityholders
of EMAC, (iii) any buy-sell or rights of first refusal regarding EMAC and/or
the interests of
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any securityholders therein, (iv) relations among the securityholders of EMAC,
or (v) representation on EMAC's Board of Directors.
(b) All of the Merger Shares will, upon issuance in accordance with
the terms of this Agreement, constitute validly authorized, issued and
outstanding, fully paid and non-assessable shares of EMAC Common Stock free
from all liens, pledges, encumbrances and claims created by, or as the result
of actions of EMAC. Based on the representations made by the stockholders of
Overseas in Section 4.25 of this Agreement, the Merger Shares will be issued
in compliance with the Securities Act and the Exchange Act and any and all
applicable state "blue sky" or securities laws.
5.5 Financial Statements. The audited consolidated financial statements
and the unaudited consolidated financial statements of EMAC included in EMAC's
Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q that are
referred to in Section 5.6 fairly present, in conformity with GAAP applied on
a consistent basis, the consolidated financial position and assets and
liabilities of EMAC as of the dates thereof and EMAC's consolidated results of
operations and cash flows for the periods then ended (subject, in the case of
any unaudited interim financial statement, to normal, recurring year-end
adjustments that were not material in amount). The balance sheet of EMAC as of
February 29, 1996, which is included in such financial statements, is referred
to herein as the "EMAC Balance Sheet," and the date thereof is referred to
herein as the "EMAC Balance Sheet Date."
5.6 SEC Reports.
(a) EMAC has delivered to Overseas and the Overseas Stockholders
true, correct and complete copies of (i) EMAC's Annual Report on Form 10-K for
the period ended November 30, 1995 (the "Annual Report"), (ii) EMAC's
Quarterly Reports on Form 10-Q for the quarters ended February 28, 1995, May
31, 1995, August 31, 1995 and February 29, 1996, (iii) EMAC's prospectus,
dated February 16, 1995, relating to its initial public offering of
securities, and (iv) all other reports, documents and proxy statements filed
by EMAC under the Securities Act and the Exchange Act (all of such materials,
together with any exhibits, amendments or supplements thereto and documents
incorporated by reference therein, are referred to herein as the "SEC
Reports").
(b) As of its filing date or, if applicable, its effective date,
each SEC Report complied in all material respects with the requirements of the
Regulations applicable to such SEC Report, including the Securities Act and
the Exchange Act.
(c) As of its filing date or, if applicable, its effective date,
each SEC Report filed pursuant to the Securities Act or the Exchange Act did
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not misleading. EMAC
has filed all reports under the Exchange Act that were required to be filed as
of the date hereof and will have filed all such reports required to have been
filed through the Effective Time and has otherwise materially complied with
all requirements of the Securities Act and the Exchange Act.
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(d) EMAC is not required to register as an investment company under
the Investment Company Act of 1940.
(e) To the best of the knowledge of EMAC, neither EMAC nor any of
its respective officers or directors is the subject of any investigation,
inquiry or proceeding before the SEC or any state securities commission or
administrative agency.
5.7 Trust Funds. As of the Effective Time, EMAC will have an amount
invested in government securities or in money market or other cash equivalent
accounts in a trust account (the "Trust Account") with the United States Trust
Company of New York (the "Trust Company") of no less than (i) $10.9 million,
minus (ii) the amount of funds, if any, to be applied to the redemption of
shares of EMAC Common Stock pursuant to Article SIXTH of the EMAC Restated
Certificate of Incorporation as in effect on the date of this Agreement. Upon
consummation of the Merger and notice thereof to the trustee, the trust
account will terminate and the funds and government securities held in such
trust account will be thereupon released to EMAC without any restriction upon
the use thereof and, except as set forth in Section 5.7 of the EMAC Disclosure
Schedule, free from any Encumbrances.
5.8 Fair Market Value. The Board of Directors of EMAC has determined in
good faith that the fair market value of the business of Overseas is at least
80% of the net assets of EMAC.
5.9 Assets; Leases; Accounts Receivable. Except as set forth on Schedule
5.9 of the EMAC Disclosure Schedule, EMAC has no Assets other than cash and
cash equivalents and none of such Assets are subject to any Encumbrances. EMAC
is not a party to any Real Estate Leases. To the knowledge of EMAC, EMAC is
not currently in Default under any such Real Estate Leases. EMAC has no
accounts receivable.
5.10 Liabilities. EMAC has no Liabilities and none of the Assets of EMAC
is subject to any Liabilities, except (a) to the extent specifically disclosed
or provided for in the EMAC Balance Sheet, (b) Liabilities incurred since the
EMAC Balance Sheet Date that, individually or in the aggregate, are not
material to EMAC, (c) Liabilities under, contemplated by or in connection with
this Agreement, (d) Liabilities incurred after the date of this Agreement that
are not prohibited by Section 7.1, and (e) Liabilities incurred since the EMAC
Balance Sheet Date that are approved in writing by Overseas.
5.11 Taxes. Except as set forth in Schedule 5.11, EMAC has duly filed
all foreign, federal, state, local and other Tax returns that are required to
be filed and that were due, and has paid all material Taxes and assessments
that have become due pursuant to such returns, pursuant to any assessment
received or are otherwise due or will be due with respect to all periods
through the Effective Date (other than estimated tax payments for 1996 that
are not yet due). All Taxes and other assessments and levies that EMAC has
been required by law to withhold or to collect have been duly withheld and
collected and have been paid over to the proper governmental authorities or
are properly held by EMAC for such payment. There are no proceedings or other
actions pending, and to the knowledge of EMAC, no
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proceedings or other actions are threatened, for the assessment and collection
of additional Taxes of any kind for any period for which returns have or
should have been filed.
5.12 Subsidiaries. EMAC does not own, directly or indirectly, any
interest or investment (whether equity or debt) in any corporation,
partnership, business, trust, joint venture or other legal entity, nor does
EMAC have any agreement or obligation to acquire any such interest or
investment.
5.13 Legal Proceedings and Compliance with Law.
(a) There is no Litigation that is pending or, to EMAC's knowledge,
threatened against or related to EMAC. There has been no Default under any
Regulations applicable to EMAC, except for any Defaults that would not have a
Material Adverse Effect. There has been no Default with respect to any Court
Order applicable to EMAC.
(b) No Governmental Permits are required for the complete operation
of the business of EMAC as currently operated.
5.14 Contracts.
(a) Section 5.14 of the EMAC Disclosure Schedule lists each
Contract of the following types to which EMAC, as of the date of this
Agreement, is a party, or by which it is bound, excluding (y) any Contract
that may be terminated by EMAC on not more than one month's notice without any
liability on the part of EMAC and (z) other than with respect to paragraphs
(v) and (vi) below, any Contract under which the executory obligation
(including any remaining payments) of EMAC involves an amount of less than
$25,000 (such excluded Contracts referred to in clauses (y) and (z) are
referred to in this Section 5.14 collectively as "EMAC Minor Contracts") and
excluding this Agreement and the other Contracts expressly referred to herein:
(i) Contracts with any present or former securityholder,
director, officer, employee, partner or consultant of EMAC or
Affiliate thereof including, without limitation, registration
rights agreements, indemnification agreements, shareholder
agreements and voting agreements;
(ii) Contracts for the future purchase of, or payment for,
supplies, or for the lease of any asset from or the performance of
services by a third party;
(iii) Contracts to perform services;
(iv) Contracts to lease to or to operate for any other party
any asset;
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(v) Any notes, debentures, bonds, conditional sale agreements,
equipment trust agreements, letter of credit agreements,
reimbursement agreements, loan agreements, security agreements or
other Contracts for the borrowing or lending of money or security
therefor (including loans to or from officers, directors, partners,
stockholders or Affiliates of EMAC or any members of their
immediate families), agreements or arrangements for a line of
credit or for a guarantee of, or other undertaking in connection
with, the indebtedness of any other Person;
(vi) Contracts for the acquisition of any business,
corporation, other entity or assets or letters of intent with respect
thereto; and
(vii) Any other Contracts (other than EMAC Minor Contracts and
those described in any of (i) through (vi) above).
(b) EMAC is not a party to any Contract other than this Agreement.
(c) To the knowledge of EMAC, EMAC is not in Default under any
Contract, which Default, together with all other such Defaults under
Contracts, could result in a Material Adverse Effect. EMAC has not received
any communication from, or given any communication to, any other party
indicating that EMAC or such other party, as the case may be, is in Default
under any Contract where such Default could have a Material Adverse Effect.
5.15 Insurance. Section 5.15 of the EMAC Disclosure Schedule lists all
policies or binders of insurance held by or on behalf of EMAC or relating to
the Business or Assets of EMAC, as of the date of this Agreement, and the EMAC
Disclosure Schedule specifies with respect to each policy the insurer, the
amount of the coverage, the type of insurance, the risks insured, the
expiration date, the policy number and any pending claims thereunder. To the
knowledge of EMAC, there is no Default with respect to any such policy or
binder, nor has there been any failure to give any notice or present any claim
under any such policy or binder in a timely fashion or in the manner or detail
required by the policy or binder, except for any of the foregoing that would
not, individually or in the aggregate, have a Material Adverse Effect. There
is no notice of nonrenewal or cancellation with respect to, or disallowance of
any claim under, any such policy or binder that has been received by EMAC,
except for any of the foregoing that would not, individually or in the
aggregate, have a Material Adverse Effect.
5.16 Intellectual Property. EMAC does not own or use any trademarks,
servicemarks, trade names, trade secrets, copyrights, patents or any
applications therefor.
5.17 Employee Relations. EMAC is not (a) a party to, involved in or, to
the knowledge of EMAC, threatened by, any labor dispute or unfair labor practice
charge or (b) currently negotiating any collective bargaining agreement, and
EMAC has not experienced
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any work stoppage during the last three years. EMAC does not employ any Person
nor has EMAC paid any salary, bonus or other cash compensation to any Person,
including officers of EMAC.
5.18 ERISA. EMAC does not sponsor, maintain nor is it obligated under
any Benefit Plans. EMAC does not have any Contract, plan, trust, program,
policy, arrangement, practice, custom or understanding, in each case whether
formal or informal, that provides benefits of economic value to any present or
former employee or present or former beneficiary, dependent or assignee of any
such employee or former employee which, individually or in the aggregate with
any other thereof, is material.
5.19 Corporate Records. The minute books of EMAC contain complete,
correct and current copies of its Certificate of Incorporation and bylaws and
of all minutes of meetings, resolutions and other proceedings of its Board of
Directors and stockholders.
5.20 Absence of Certain Changes. Since the EMAC Balance Sheet Date, EMAC
has generally conducted its Business in the ordinary course and there has not
been:
(a) any material adverse change in its Liabilities;
(b) any distribution or payment declared or made in respect of its
capital stock by way of dividends, purchase or redemption of shares or
otherwise;
(c) any increase in the compensation payable or to become payable
to any director, officer, employee or agent, nor any other change in any
employment or consulting arrangement that is material;
(d) any sale, assignment or transfer of its Assets, or any additions
to or transactions involving any of its Assets;
(e) any waiver or release of any claim or right or cancellation of
any debt held; or
(f) any payments to any Affiliate of EMAC, except as specified in
Section 5.20 of the EMAC Disclosure Schedule.
5.21 Rule 419. EMAC is not subject to the provisions of Rule 419
promulgated pursuant to the Securities Act.
5.22 Finder's Fees. EMAC is not nor will it be obligated to pay to any
Person retained by EMAC any commission or finder's or similar fee in connection
with the Transactions.
5.23 Accuracy of Information. No representation or warranty by EMAC in
any Transaction Document, including any schedules or exhibits thereto,
contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make the
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statements made herein or therein, in light of the circumstances under which
they were made, not misleading.
5.24 Certain Business Relationships with Affiliates. No Affiliate of
EMAC or of any Subsidiary (a) owns any property or right, tangible or
intangible, which is used in the business of EMAC or any Subsidiary, (b) has
any claim or cause of action against EMAC or any Subsidiary, or (c) owes any
money to EMAC or any Subsidiary. Section 5.24 of the EMAC Disclosure Schedule
describes any transactions or relationships between EMAC and any Affiliate
thereof that are not otherwise reflected in the EMAC Disclosure Schedule or
contemplated by this Agreement.
5.25 EMAC Disclosure Schedule. The EMAC Disclosure Schedule as in effect
on the date of this Agreement (the "Original EMAC Disclosure Schedule") shall
be amended as of the Closing Date to be true and correct as of the Closing
Date and a copy thereof, as so amended (the "Closing EMAC Disclosure
Schedule"), certified by the President of EMAC to be true and correct, shall
be delivered to EMAC on the Closing Date. Any disclosure made pursuant to any
Section of this Article V or the EMAC Disclosure Schedule (Original or
Closing) will be deemed made as to the other Sections in this Article V to
which it applies if the import of the disclosure to such other Sections is
reasonably ascertainable on its face to a person who is not familiar with the
affairs of EMAC.
ARTICLE VI
COVENANTS OF OVERSEAS AND THE OVERSEAS STOCKHOLDERS
6.1 Operation of the Business. From the date hereof to the Effective
Time, except as set forth in Schedule 6.1, Overseas shall conduct its Business
solely in the ordinary course and, except as set forth in Schedule 6.1, shall
refrain from the following actions in furtherance of and in addition to such
restriction (except as contemplated by this Agreement or as approved by EMAC
in writing): amending its Certificate of Incorporation or bylaws; merging or
consolidating with, or acquiring all or substantially all of, or otherwise
acquiring any material business operations of, any Person; selling or
otherwise disposing of any material Assets other than in the ordinary course;
entering into amending, modifying or supplementing any Contract or otherwise
incurring any Liability, other than in the ordinary course, if Overseas'
executory obligation in any such individual case, or series of related cases,
exceeds $100,000; discharging or satisfying any material Encumbrance or paying
or satisfying any material Liability except pursuant to the terms thereof or
otherwise in the ordinary course or compromising, settling or otherwise
modifying any material claim otherwise than in the ordinary course or
litigation; making any capital expenditure other than in the ordinary course
involving in any individual case, or series of related cases, more than
$50,000; or issuing any securities; and agreeing, whether in writing or
otherwise, to do any of the foregoing; provided, however, that the foregoing
shall not restrict Overseas' ability to enter into any Contract or incur any
Liability that is described on the Overseas Disclosure Schedule. EMAC agrees
that the Overseas Stockholders may transfer their shares in Overseas to a
living trust or other estate planning vehicle; provided that such transferee
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agrees to be bound by all the terms and conditions of the Transaction
Documents to which the Overseas Stockholders are a party.
6.2 Access. Overseas shall give EMAC and its accountants, counsel and
other representatives full access, during normal business hours and without
unreasonably interfering with business operations, to all properties, books,
Contracts and records and shall furnish to EMAC all such documents, records
and information as EMAC shall from time to time reasonably request.
6.3 No Other Negotiations. Until the earlier of the Closing or the
termination of this Agreement, neither Overseas nor the Overseas Stockholders
shall (a) solicit, encourage, or respond to, directly or indirectly, any
inquiries, discussions or proposals for, (b) continue, propose or enter into
any negotiations or discussions looking toward or (c) enter into any agreement
or understanding providing for any acquisition of any capital stock of
Overseas or of any material part of its Assets or the Business, other than as
contemplated or authorized hereby, nor shall Overseas or the Overseas
Stockholders provide any information to any Person (other than as contemplated
by Section 6.2) for the purpose of evaluating or determining whether to make
or pursue any such inquiries or proposals with respect to any such
acquisition. Overseas shall immediately notify EMAC of any such inquiries or
proposals or requests for information for such purpose.
6.4 Maintenance of the Assets. Overseas shall continue to maintain and
service its Assets consistent with past practice. Overseas shall not directly
or indirectly, sell or encumber all or any material part of its Assets, other
than sales or encumbrances in the ordinary course of business, or initiate or
participate in any discussions or negotiations or enter into any agreement to
do any of the foregoing.
6.5 Employees and Business Relations. Overseas shall use reasonable
efforts to keep available the services of its current employees and agents and
to maintain its relations and goodwill with its suppliers, customers,
distributors and any others having business relations with it.
6.6 Confidentiality. Overseas and the Overseas Stockholders will
continue to abide by and be bound by the Non-Disclosure Agreement.
6.7 Expenses. Except as provided in Section 12.2 or as otherwise agreed
to in writing by the parties, the Surviving Corporation shall pay all of the
legal, accounting and other expenses incurred by Overseas or the Overseas
Stockholders in connection with the Transaction (and the Overseas Stockholders
shall have no responsibility therefor), and EMAC shall pay any fees referred
to in Section 4.22 or Schedule 4.22 of the Agreement.
The provisions of this Section 6.7 shall survive the Merger.
6.8 No Securities Transactions. Neither Overseas nor the Overseas
Stockholders shall engage in any transactions involving the securities of EMAC
prior to the Effective Date, and Overseas shall use its reasonable best
efforts to require each Affiliate of Overseas to comply with the foregoing
requirement.
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6.9 Fulfillment of Conditions. Overseas and the Overseas Stockholders
shall use their reasonable best efforts to fulfill the conditions specified in
Article IX to the extent that the fulfillment of such conditions is within
their control. The foregoing obligation includes (a) the execution and
delivery of the Transaction Documents and (b) taking or refraining from such
actions as may be necessary to fulfill such conditions (including using their
reasonable best efforts to conduct the Business in such manner that on the
Closing Date the representations and warranties of Overseas and the Overseas
Stockholders contained herein shall be accurate as though then made, except as
contemplated by the terms hereof).
6.10 Financial Statements. Overseas will deliver to EMAC, no later than
July 5, 1996, the unaudited consolidated financial statements of Overseas as
of and for the quarter ending March 31, 1996.
6.11 Overseas Subsidiaries. On or before or concurrently with the
Closing, Overseas will own 100% of the capital stock of each of the Overseas
Subsidiaries, respectively, free and clear of all liens, pledges, encumbrances
and claims whatsoever except as set forth on Section 6.11 of the Overseas
Disclosure Schedule. EMAC agrees that the purchase price for each of the
Overseas Subsidiaries shall be as set forth on Section 6.11 of the Overseas
Disclosure Schedule and that the purchase price shall be paid by Overseas.
6.12 Disclosure of Certain Matters. During the period from the date
hereof through the Closing Date, Overseas and the Overseas Stockholders shall
give EMAC prompt written notice of any event or development that occurs and is
known to them that (a) is an event of the type listed in Section 6.1, (b)
gives Overseas any reason to believe that any of the conditions set forth in
Article IX will not be satisfied prior to the Termination Date, (c) is of a
nature that is or is reasonably likely to be materially adverse to the
operations, prospects or condition (financial or otherwise) of Overseas, or
(d) would require any amendment or supplement to the Proxy Statement.
ARTICLE VII
COVENANTS OF EMAC
7.1 Operation of the Business of EMAC. From the date hereof to the
Effective Time, EMAC shall conduct its business solely in the ordinary course,
and shall refrain from the following actions in furtherance of and in addition
to such restriction (except as contemplated by this Agreement or as approved
by Overseas and the Overseas Stockholders in writing): amending its
Certificate of Incorporation or bylaws; merging or consolidating with, or
acquiring all or substantially all of, or otherwise acquiring any business
operations of, any Person; selling or otherwise disposing of any Assets other
than in the ordinary course; entering into any Contract or otherwise incurring
any Liability, even if in the ordinary course, if EMAC's executory obligation
in any such individual case, or series of related cases, exceeds $5,000;
amending the terms of any existing Contract; discharging or satisfying any
Encumbrance or paying or satisfying any material Liability except pursuant to
the terms thereof or compromising, settling or otherwise modifying any
material claim or
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litigation; making any capital expenditure involving in any individual case,
or series of related cases, more than $10,000; issuing any securities other
than in connection with the exercise of any warrants or other rights that are
outstanding on the date hereof, or decreasing the exercise price of any
outstanding EMAC Warrant or the Unit Purchase Option issued to GKN, except if
required pursuant to the terms thereof; and agreeing, whether in writing or
otherwise, to do any of the foregoing; provided, however, that the foregoing
shall not restrict EMAC's ability to enter into any Contract or incur any
Liability that is described on the EMAC Disclosure Schedule.
7.2 Stockholders' Meeting. EMAC shall cause a meeting of its
stockholders (the "EMAC Stockholders' Meeting") to be duly called and held as
soon as reasonably practicable for the purpose of voting on (a) the approval
of this Agreement, the Merger and the other Transaction Documents as required
by the Certificate of Incorporation of EMAC or otherwise, (b) the adoption of
a proposed Amended and Restated Certificate of Incorporation of EMAC (the
"Restated Certificate") and By-laws, a copy of which is attached to this
Agreement as Exhibit N, (c) the election of directors of EMAC in accordance
with Section 7.7 and (d) the adoption of the EMAC Option Plans. The directors
of EMAC shall recommend to the EMAC Stockholders that they vote in favor of
the adoption of such matters. In connection with the EMAC Stockholders'
Meeting, EMAC will file a preliminary proxy statement (the "Preliminary Proxy
Statement") with the SEC and will use reasonable best efforts to receive and
respond to the comments of the SEC and to cause the definitive Proxy Statement
and all other proxy materials (the "Definitive Proxy Statement") to be mailed
to the EMAC Stockholders, all at the earliest practicable time. EMAC will
notify Overseas and the Overseas Stockholders promptly of the receipt of the
comments of the SEC, if any, on the Preliminary Proxy Statement, and of any
request by the SEC for amendments or supplements to the Preliminary and
Definitive Proxy Statements (collectively, the "Proxy Statement") or for
additional information, and will supply Overseas and the Overseas Stockholders
with copies of all correspondence between EMAC or its representatives, on the
one hand, and the SEC or members of its staff, on the other hand, with respect
to the Preliminary and Definitive Proxy Statements. The Company will notify
Overseas and the Overseas Stockholders, both orally and in writing, at least
24 hours prior to the mailing of the Definitive Proxy Statement to the EMAC
Stockholders. In connection with the EMAC Stockholders' Meeting, EMAC (a) will
use reasonable best efforts to obtain the necessary approvals by its
stockholders of this Agreement, the Transactions and the foregoing, and (b)
will otherwise comply with all legal requirements applicable to such meeting
and solicitation and issuance of Merger Shares, including compliance of all
federal and state securities laws. EMAC will pay all expenses of filing,
printing and distributing the Proxy Statement.
7.3 Access. EMAC shall give Overseas and its accountants, counsel and
other representatives full access, during normal business hours and without
unreasonably interfering with business operations, to all properties, books,
Contracts and records of EMAC and shall furnish to Overseas all such
documents, records and information as Overseas shall from time to time
reasonably request.
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7.4 No Other Negotiations. Until the earlier of the Closing or the
termination of this Agreement, EMAC shall not (a) solicit, encourage or
respond to, directly or indirectly, any inquiries, discussions or proposals
for, (b) continue, propose or enter into any negotiations or discussions
looking toward or (c) enter into any agreement or understanding providing for
any acquisition of any capital stock of EMAC, acquisition of capital stock of
another entity or other business combination with any other entity, other than
as contemplated or authorized hereby, nor shall EMAC provide any information
to any Person for the purpose of evaluating or determining whether to make or
pursue any such inquiries or proposals with respect to any such acquisition.
EMAC shall immediately notify Overseas of any such inquiries or proposals or
requests for information for such purpose. EMAC shall use its best efforts to
cause the directors, officers, employees, agents and other representatives and
Affiliates of EMAC to comply with the provisions of this Section .
7.5 Maintenance of the Assets. EMAC shall continue to maintain and
service its Assets consistent with past practice. EMAC shall not, directly or
indirectly, sell or encumber all or any material part of its Assets, or
initiate or participate in any discussions or negotiations or enter into any
agreement to do any of the foregoing.
7.6 Confidentiality. EMAC shall continue to abide by and be bound by
the Non-Disclosure Agreement.
7.7 Appointment of Directors and Officers. EMAC shall use reasonable
best efforts so that, at the Effective Time,
(a) the Board of Directors of EMAC shall consist of a total of seven
members, namely:
(i) four persons who shall be designated by Overseas: Ellen
Dinerman Little, Robert B. Little, William F. Lischak and a fourth designee to
be selected by the Overseas Stockholders prior to filing the Proxy Statement
(such persons are collectively referred to as the "Overseas Designees"); and
(ii) three persons who shall be designated by EMAC: Stephen K.
Bannon, Scot K. Vorse and a third designee to be selected by EMAC prior to
filing the Proxy Statement (such persons are collectively referred to as the
"EMAC Designees").
(b) Robert B. Little and Stephen K. Bannon shall be designated
Class I Directors to serve until the EMAC annual stockholders' meeting in
1997; Ellen Dinerman Little and Scot K. Vorse shall be designated Class II
Directors to serve until the EMAC annual stockholders' meeting in 1998; and
William F. Lischak and the remaining two Directors shall be designated Class
III Directors to serve until the EMAC annual stockholders' meeting in 1999.
(c) The following Persons and the persons listed on Schedule 7.7
shall be elected to the following respective offices and/or Board positions of
EMAC:
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Ellen Dinerman Little Co-Chairman of the Board, Co-Chief Executive Officer,
Co-President, Member of Executive Committee
Robert B. Little Co-Chairman of the Board, Co-Chief Executive Officer,
Co-President Member of Executive Committee
Stephen K. Bannon Vice Chairman of the Board, Chairman of Executive
Committee
William F. Lischak Chief Operating Officer and Chief Financial Officer
7.8 Expenses. Except as set forth in Section 12.2, EMAC shall pay all of
the legal, accounting and other expenses incurred by EMAC in connection with
the Transaction. The provisions of this Section shall survive the Merger.
7.9 No Securities Transactions. Neither EMAC nor the Initial EMAC
Stockholders shall engage in any transactions involving the securities of EMAC
prior to the Effective Date and EMAC shall use its reasonable best efforts to
require each Affiliate of EMAC, including the Initial EMAC Stockholders, to
comply with the foregoing.
7.10 Fulfillment of Conditions. EMAC shall use its reasonable best
efforts to fulfill the conditions specified in Article IX to the extent that
the fulfillment of such conditions is within EMAC's control. The foregoing
obligation includes (a) the execution and delivery of the Transaction
Documents and (b) taking or refraining from such actions as may be necessary
to fulfill such conditions (including conducting the Business of EMAC in such
manner that on the Closing Date the representations and warranties of EMAC
contained herein shall be accurate as though then made).
7.11 Disclosure of Certain Matters. During the period from the date
hereof through the Closing Date, EMAC shall give Overseas prompt written
notice of any event or development that occurs that (a) had it existed or been
known on the date hereof would have been required to be disclosed under this
Agreement, (b) would cause any of the representations and warranties of EMAC
contained herein to be inaccurate or otherwise misleading, (c) gives EMAC any
reason to believe that any of the conditions set forth in Article IX will not
be satisfied prior to the Termination Date, (d) is of a nature that is or may
be materially adverse to the operations, prospects or condition (financial or
otherwise) of EMAC or, to the knowledge of EMAC, Overseas before or after the
Transactions or (e) would require any amendment or supplement to the Proxy
Statement.
7.12 Resignations. At the Closing, EMAC shall deliver to Overseas the
irrevocable and unconditional resignations of those officers and directors of
EMAC set forth on Schedule 7.12.
7.13 Nasdaq National Market Listing Application. EMAC will file with
Nasdaq, as promptly as practicable after the date hereof, an application to
list on the Nasdaq National Market, subject to the Closing, upon official
notice of issuance, the EMAC Common Stock
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and the EMAC Warrants, including the Merger Shares. Overseas will cooperate in
the preparation of such listing application.
7.14 Stock Option Plans. On the Closing Date, EMAC shall register and
maintain the registration of the EMAC Option Plans and the Common Stock to be
issued thereunder with the SEC and shall apply to have such Common Stock
listed on the Nasdaq National Market; provided that such listing requirement
shall be conditioned on EMAC's having previously obtained approval to list its
Common Stock on the Nasdaq National Market. In the event that such application
is rejected, EMAC shall apply to have such Common Stock listed on the American
Stock Exchange, or in the event that such application is rejected, EMAC shall
apply to have such Common Stock listed on the Nasdaq Small Cap Market. EMAC
will use its reasonable best efforts to cause its Board of Directors to grant
options to purchase an aggregate of 125,000 shares of Common Stock of EMAC to
such employees of EMAC who were formerly employees of Overseas as shall be set
forth on Schedule 7.14 to this Agreement. Such options shall be granted at an
exercise price equal to the Fair Market Value of the EMAC Common Stock on the
date of grant. "Fair Market Value" shall be defined as the closing price of
EMAC Common Stock on the trading day immediately preceding such date. The
closing price shall be the last reported sales price regular way (or, in case
no such reported sale takes place on such day, the last reported sales price
regular way for the most recent day for which such information is available
shall be used), in each case on the principal national securities exchange or
in the Nasdaq National Market on which the shares of EMAC Common Stock are
listed or admitted to trading, or if not listed or admitted to trading
thereon, the average of the closing bid and asked prices of EMAC Common Stock
in the over-the-counter market as reported by Nasdaq or any comparable system,
or if Common Stock is not listed on Nasdaq or a comparable system, the average
of the closing bid and asked prices on such day in the domestic
over-the-counter market as reported on the NASD Electronic Bulletin Board, or,
if not reported on such Bulletin Board, in the "pink sheets" published by the
National Quotation Bureau, Incorporated. If at any time EMAC Common Stock is
not listed on any national securities exchange or quoted in the Nasdaq System
or the over-the-counter market or reported on the NASD Electronic Bulletin
Board or in the "pink sheets" published by the National Quotation Bureau,
Incorporated, the Fair Market Value on such day shall be the fair market value
thereof reasonably determined in good faith by the members of the board of
directors of EMAC, excluding the Overseas Stockholders, and reasonably agreed
to in good faith by the Overseas Stockholders based upon such information and
advice as they mutually consider appropriate. Such options shall vest in
installments no sooner than the following schedule (the final such schedule to
be recommended by Overseas prior to the Closing): (i) fifty percent (50%) on
the Closing Date; (ii) twenty-five percent (25%) on December 31, 1997; and
(iii) the remaining twenty-five percent (25%) on December 31, 1998.
7.15 Continuation of Employee Benefit Plans. EMAC shall assume, and,
following the Closing, EMAC shall continue in effect, Overseas' 401(k) Plan
and Overseas' Profit Sharing Plan identified in Schedule 4.19 and the present
funding thereof.
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7.16 EMAC Stockholders. Within ten (10) days following the record date
for the EMAC Stockholders' Meeting (the "Record Date"), EMAC shall deliver to
Overseas a list of EMAC Stockholders as of the Record Date certified by EMAC's
transfer agent.
7.17 Repayment of Loan. The Surviving Corporation shall fully repay the
$3,500,000 loan to Overseas identified on Schedule 7.17 (for which the
stockholders of Overseas have provided collateral) (the "Loan") in accordance
with the terms of the loan documents related thereto and shall otherwise
comply with all the terms and conditions of such Loan.
ARTICLE VIII
COVENANTS OF EMAC, OVERSEAS
AND THE OVERSEAS STOCKHOLDERS
8.1 Miscellaneous Covenants.
(a) EMAC covenants to Overseas that (i) the Proxy Statement will
comply in all material respects with the applicable provisions of the Exchange
Act and the Securities Act and (ii) will not at the time such document is
declared effective by the SEC, at the time of the mailing of the Proxy
Statement and any amendments thereof or supplements thereto, and at the time
of the meetings of stockholders of EMAC to be held in connection with the
Transactions, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, or necessary to correct any statement in any earlier
filing with the SEC of such Proxy Statement or any amendment thereof or any
supplement thereto or any earlier communication to the stockholders of EMAC or
Overseas with respect to the Transactions; provided, however, that no
representation, covenant or agreement is made by EMAC under clause (ii) hereof
with respect to information supplied in writing by or on behalf of Overseas
expressly for inclusion in the Proxy Statement.
(b) Overseas covenants to EMAC that the information supplied by it
in writing expressly for inclusion in the Proxy Statement will not, at the
time of the mailing of the Proxy Statement and any amendments thereof or
supplements thereto, and at the time of the EMAC Stockholders' Meeting to be
held in connection with the Transactions contemplated by this Agreement,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or necessary to correct any statement in any earlier filing
with the SEC of such Proxy Statement or any amendment thereof or any
supplement thereto or any earlier communication to the stockholders of EMAC
with respect to the Transactions.
(c) To the extent permitted by applicable Regulations, EMAC,
Overseas and the Overseas Stockholders shall cooperate with each other in
scheduling meetings with and making presentations to EMAC stockholders prior
to the EMAC Stockholders' Meeting.
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(d) Overseas shall use its best efforts to cause to be delivered to
EMAC a letter of Price Waterhouse, dated the date of the Proxy Statement, and
addressed to EMAC, in form and substance reasonably satisfactory to EMAC (with
such changes to which EMAC shall consent, it being understood that such
consent shall not be unreasonably withheld) to the effect that:
(i) they are independent certified public accountants with
respect to Overseas within the meaning of the Securities Act and
Exchange Act, including the applicable published Regulations thereunder;
(ii) the financial statements of Overseas certified by them and
included in the Proxy Statement comply as to form in all material
respects with the applicable accounting requirements of the Securities
Act and Exchange Act, including the published Regulations thereunder;
and
(iii) they have carried out procedures to a specified date not
more than five business days prior to the date of the Proxy Statement
that do not constitute an audit in accordance with GAAP of the financial
statements of Overseas, as follows: (A) read the unaudited financial
statements of Overseas included in the Proxy Statement, (B) read the
unaudited financial statements of Overseas for the period from the date
of the most recent financial statements included in the Proxy Statement
through the date of the latest available interim financial statements,
(C) read the minutes of the meetings of stockholders and Boards of
Directors of Overseas from the date of the most recent financial
statements of Overseas included in the Proxy Statement to such date not
more than five business days prior to the date of the Proxy Statement
and (D) consulted with certain officers of Overseas responsible for
financial and accounting matters as to whether any of the changes or
decreases referred to below has occurred, and based on such procedures,
nothing has come to their attention that would cause them to believe
that (1) any unaudited financial statements of Overseas included in the
Proxy Statement do not comply as to form in all material respects with
the applicable accounting requirements of the Securities Act, the
Exchange Act and of the published Regulations thereunder; (2) such
unaudited financial statements are not fairly presented in conformity
with GAAP (except as permitted by Form 10-Q promulgated by the SEC)
applied on a basis substantially consistent with that of the audited
financial statements of Overseas included in the Proxy Statement; (3) as
of such date not more than five business days prior to the date of the
Proxy Statement, there was not, except as set forth in such letter, any
change in capital stock, treasury stock or long-term debt of Overseas.
8.2 Overseas Employee Bonuses. Promptly after the Closing Date, EMAC
shall pay bonuses to individuals who are employees of Overseas on the
Effective Date (the "Overseas Employees") in an aggregate amount not to exceed
$175,000. Any such bonuses agreed, mutually by the Overseas Stockholders and
EMAC, to be paid to Overseas Employees promptly after the Closing Date in
excess of such amount will be paid by EMAC
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but will reduce the Merger Cash payable to the stockholders of Overseas by
such amount in excess of $175,000.
8.3 Voting Agreement. Each of the Overseas Stockholders agrees to vote
their shares of Overseas Common Stock (or execute a written consent in lieu
thereof) in favor of the Merger and the Transaction Documents, both in their
capacities as directors and stockholders of Overseas. EMAC shall use their
best efforts to cause each of the Founders (as such term is defined in the
Stockholders' Voting Agreement) to vote their shares of EMAC Common Stock in
favor of the Merger and the Transaction Documents at the EMAC Stockholders'
Meeting.
8.4 Cooperation. Each of the parties hereto will cooperate with the
other and execute and deliver to the other such other instruments and
documents and take such other actions as may be reasonably requested from time
to time by the other party hereto as necessary to carry out, evidence and
confirm the intended purposes of this Agreement. EMAC shall promptly furnish
to the Overseas Parties copies of all reports and other information given by
it to its stockholders.
ARTICLE IX
CONDITIONS PRECEDENT TO THE MERGER
9.1 Conditions to Each Party's Obligations. The respective obligations
of each party to consummate the Merger and related Transactions shall be
subject to the fulfillment or waiver, on or before the Closing Date, of each
of the following conditions. If any of the conditions set forth below are not
satisfied on or before the Closing Date and the parties nonetheless consummate
the Merger and related Transactions, said condition shall be deemed waived,
and there shall be no liability on the part of either party with respect to
said condition.
(a) Approval by EMAC Stockholders. The Merger and the other matters
referred to in Section 7.2 of this Agreement shall have been approved by the
stockholders of EMAC in accordance with EMAC's Certificate of Incorporation as
in effect on the date hereof, and not more than an aggregate of 20% of the
number of shares of EMAC Common Stock outstanding as of the Record Date and
owned by Persons other than the Initial EMAC Stockholders shall take one or
more of the following actions: (i) demand conversion of said EMAC Common Stock
into cash pursuant to EMAC's certificate of incorporation or (ii) demand
appraisal rights pursuant to the DGCL.
(b) No Litigation, Governmental Order or Regulation.
(i) No court of competent jurisdiction shall have issued (and
such issuance shall not be threatened or pending) any injunction,
restraining order or other order which prohibits the consummation
of the transactions contemplated by this Agreement and which is in
effect as of the Closing Date
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and no governmental action or proceeding shall have been commenced
or threatened seeking an injunction, restraining order or other
order which seeks to prohibit the consummation of the transactions
contemplated by this Agreement.
(ii) No litigation, proceeding or investigation shall be
pending, threatened or in existence which, if adversely determined,
would result in:
(1) The issuance of a preliminary or permanent injunction
or other order which would restrain, prevent or require
rescission of this Agreement or the transactions contemplated
hereby;
(2) Liability to EMAC, Overseas, the Overseas Stockholder
or any officers, directors, employees or agents of any of them
arising from this Agreement or the transactions contemplated
hereby; or
(3) The consummation of the transactions contemplated
hereby being unlawful.
(c) EMAC Option Plans. The EMAC Stockholders shall have approved
(i) the EMAC Option Plans and (ii) any options thereunder which, under EMAC's
Certificate of Incorporation, the DGCL or SEC Regulations, require EMAC
Stockholder approval. The EMAC Option Plans shall be registered in accordance
with Section 7.14.
(d) Directors and Officers. As of the Closing Date: (A) the Board
of Directors of EMAC shall consist solely of the Overseas Designees and the
EMAC Designees, and (B) the only officers of EMAC shall be the Persons
specified as officers in Section or Schedule 7.7.
(e) Lock-up and Registration Rights Agreement. The Lock-up and
Registration Rights Agreement shall have been duly executed and delivered by
the parties thereto.
(f) Employment Agreements; Special Management Option Agreements.
Each of Ellen Dinerman Little and Robert B. Little, on the one hand, and EMAC,
on the other, shall have executed and delivered an Overseas Stockholder
Employment Agreement and William F. Lischak and EMAC shall have executed and
delivered the Lischak Employment Agreement. EMAC shall have granted to each of
Ellen Dinerman Little and Robert B. Little, at the Effective Time, a
Redeemable Special Management Option to purchase 537,500 shares of EMAC Common
Stock and a Non-Redeemable Special Management Option to purchase 562,500
shares of EMAC Common Stock pursuant to the EMAC Special Management Option
Plan.
(g) Stockholders' Voting Agreement. The Stockholders' Voting
Agreement shall have been duly executed and delivered by the parties thereto.
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(h) Resignations. The officers and directors of EMAC identified on
Schedule 7.12 shall have submitted their irrevocable and unconditional
resignations effective on the Closing Date, as officers and directors of EMAC.
(i) Indemnity Agreement. EMAC shall have entered into an Indemnity
Agreement with each director and executive officer of EMAC in form and
substance reasonably satisfactory to the Overseas Stockholders.
(j) Relationships with Lenders. The Syndication Agreement dated as
of May 9, 1994 among Coutts & Co., Berliner Bank AG London Branch and Overseas
(the "Syndication Agreement") shall have been renewed for an aggregate amount
equal to or greater than the amount available under said agreement immediately
prior to its renewal. Such lenders shall have entered into an agreement with
Overseas and the Overseas Stockholders as to the relative rights and
obligations of such lenders, Overseas and the Overseas Stockholders with
respect to the Merger Note and the indebtedness under the Syndication
Agreement.
9.2 Conditions to Obligations of EMAC. The obligations of EMAC to
consummate the Merger and related Transactions shall be subject to the
satisfaction or waiver, on or before the Closing Date, of each of the
following conditions. If any of the conditions set forth below are not
satisfied on or before the Closing Date, or any changes are made from the
Original Overseas Disclosure Schedule to the Closing Overseas Disclosure
Schedule, and EMAC nonetheless consummates the Merger and related
Transactions, said condition shall be deemed waived, and there shall be no
liability with respect to said condition.
(a) Representations and Warranties True. Except for changes
contemplated by this Agreement, (i) the representations and warranties of
Overseas and the Overseas Stockholders contained herein shall be true and
correct in all material respects at and as of the date hereof and (ii) such
representations and warranties shall be true and correct in all material
respects at and as of the Closing Date as though such representations and
warranties were made again at and as of the Closing Date, except to the extent
that such representations and warranties are made herein as of a specific date
prior to the Closing Date. Notwithstanding the preparation and delivery of the
Closing Overseas Disclosure Schedule, the representations and warranties of
Overseas for purposes of Section 9.2(a)(i) shall be such representations and
warranties incorporating the Original Overseas Disclosure Schedule.
(b) Performance. Overseas and the Overseas Stockholders shall have
performed and complied in all material respects with the agreements contained
in this Agreement required to be performed or complied with by it on or prior
to the Closing Date.
(c) Approval by Overseas Stockholders. The Merger shall have been
approved and adopted by the stockholders of Overseas in accordance with the
DGCL and the Certificate of Incorporation and by-laws of Overseas.
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(d) Consents and Approvals. Overseas and the Overseas Stockholders
shall have obtained all Overseas third-party consents and approvals necessary,
proper or advisable to consummate the Merger, except for those which, if not
obtained, would not have a Material Adverse Effect.
(e) Legal Opinion. EMAC shall have received (i) an opinion of
Gipson, Hoffman & Pancione, outside counsel to Overseas, dated as of the
Closing Date, covering the matter set forth in Exhibit O and (ii) an opinion
of Deborah Chiaramonte, Esq. in-house counsel to Overseas, dated as of the
Closing Date, substantially in the form attached hereto as Exhibit P.
(f) Non-Competition Agreements. The Non-Competition Agreement shall
have been duly executed and delivered by each of the Overseas Stockholders.
(g) Certificates. Overseas shall have furnished to EMAC a
certificate of the chief executive officer of Overseas, dated the Closing
Date, certifying compliance as of the Closing Date with the conditions set
forth in paragraphs (a), (b) and (c) of this Section
in all material respects.
(h) Life Insurance. The Surviving Corporation or EMAC shall be
named as the beneficiary under the life insurance policies set forth in
Schedule 9.2(h) for the amounts set forth in said Schedule. The cash value
under such policies at the time that EMAC is named beneficiary under such
policies (approximately $128,000 as of the date of this Agreement) shall be
paid by the Surviving Corporation to the Overseas Stockholders at the Closing
by execution of an unsecured promissory note of the Surviving Corporation in
favor of the Overseas Stockholders for such amount, with a maturity date of
one year after the Closing, at an interest rate of 9% per annum (with
principal and interest payable at maturity) and with such other terms
reasonably acceptable to the Overseas Stockholders.
(i) Subsidiaries. The Overseas Subsidiaries shall be wholly owned
subsidiaries of Overseas.
(j) Other Documents. EMAC shall have received executed copies of
all Transaction Documents to which Overseas or the Overseas Stockholders is a
party to the extent that they shall not have been received prior to the
Closing. EMAC shall have received all other documents required under the terms
of any of the Transaction Documents and any other documents reasonably
requested on or prior to the Closing Date.
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9.3 Conditions to Obligations of Overseas and the Overseas
Stockholders. The obligations of Overseas and the Overseas Stockholders to
consummate the Merger and related Transactions shall be subject to the
satisfaction or waiver, on or before the Closing Date, of each of the following
conditions. If any of the conditions set forth below is not satisfied on or
before the Closing Date, or any changes are made from the Original EMAC
Disclosure Schedule to the Closing EMAC Disclosure Schedule, and Overseas and
the Overseas Stockholders nonetheless consummate the Merger and related
Transactions, said condition shall be deemed waived, and there shall be no
liability with respect to said condition.
(a) Representations and Warranties True. Except for changes
contemplated by this Agreement, (i) the representations and warranties of EMAC
contained herein shall be true and correct in all material respects at and as
of the date hereof and (ii) such representations and warranties shall be true
and correct in all material respects at and as of the Closing Date as though
such representations and warranties were made again at and as of the Closing
Date, except to the extent that such representations and warranties are made
herein as of a specific date prior to the Closing Date. Notwithstanding the
preparation and delivery of the Closing EMAC Disclosure Schedule, the
representations and warranties of EMAC for purposes of Section 9.3(a)(i) shall
be such representations and warranties incorporating the Original EMAC
Disclosure Schedule.
(b) Performance. EMAC shall have performed and complied in all
material respects with the agreements contained in this Agreement required to
be performed or complied with by it on or prior to the Closing Date.
(c) Consents and Approvals. EMAC shall have obtained all
third-party consents and approvals and made all filings necessary, proper or
advisable to consummate the Merger, except for those which, if not obtained,
would not have a Material Adverse Effect or a material adverse effect on
consummation of the Transactions.
(d) Trust Funds. At the Effective Time, EMAC will have an amount in
government securities invested in the Trust Account with the Trust Company of
no less than (i) $10.9 million, minus (ii) the amount of funds, if any, to be
applied to the redemption of shares of EMAC Common Stock pursuant to Article
SIXTH of the EMAC Restated Certificate of Incorporation as in effect on the
date of this Agreement, with no restrictions on the use thereof such that such
funds and government securities may be used to pay the Merger Consideration,
and the Overseas Stockholders shall have received a certification from the
Chairman or President of EMAC to such effect, together with confirmation from
the Trust Company of the availability of such funds.
(e) Merger Notes and Security Agreements. EMAC shall have delivered
to the Overseas Stockholders the Merger Cash, the Merger Shares, the Merger
Note and the Security Agreement in accordance with Section 3.1(b) of this
Agreement.
(f) Legal Opinion. Overseas shall have received an opinion of
Brobeck, Phleger & Harrison LLP, counsel to EMAC, dated as of the Closing Date
covering the matter set forth on Exhibit Q.
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(g) Tax Opinion. Overseas shall have received an opinion of
Brobeck, Phleger & Harrison LLP, counsel to EMAC, dated as of the Closing
Date, to the effect that for federal income tax purposes (i) the Merger will
constitute a "reorganization' within the meaning of Section 368(a)(1)(A) of
the Code; (ii) each of EMAC and Overseas will be a "party to the
reorganization" within the meaning of Section 368(b) of the Code; (iii) no
gain or loss will be recognized to the holders of Overseas Shares upon the
receipt of the Merger Shares in exchange for their Overseas Shares pursuant to
the Merger; (iv) the tax basis of the Merger Shares received by the holders of
Overseas Shares will be the same as the basis of the Overseas Shares exchanged
therefor; (v) the holding period of the Merger Shares in the hands of the
holders of Overseas Shares will include the holding period of their Overseas
Shares exchanged therefor, provided that the Overseas Shares are held as a
capital asset at the Effective Time of the Merger and (vi) no gain or loss
will be recognized by EMAC and Overseas in the Merger.
(h) Other Documents. Overseas shall have received executed copies
of all Transaction Documents to which EMAC is a party to the extent that they
shall not have been received prior to the Closing. Overseas shall have
received all other documents required under the terms of any of the
Transaction Documents and any other documents reasonably requested on or prior
to the Closing Date.
(i) Certificates. EMAC shall have furnished to Overseas a
certificate of the chief executive officer of EMAC, dated the Closing Date,
certifying compliance as of the Closing Date with the conditions set forth in
paragraph (a) of Section 9.1 and paragraphs (a) and (b) of this Section 9.3 in
all material respects.
(j) Nasdaq National Market Application. EMAC shall have applied
for the listing, effective upon the Effective Date, of EMAC Common Stock on the
Nasdaq National Market.
(k) Tax Reimbursement Agreement. EMAC and the Overseas
Stockholders shall have executed and delivered the Tax Reimbursement Agreement.
(l) Distribution. The Distribution shall have been made to the
stockholders of Overseas. Neither the Distribution nor the Loan shall have
been rescinded, and no action (or state of facts with respect thereto)
prohibited by Section 9.1(b) shall exist with respect to the Distribution or
the Loan. No action shall have been taken by the lenders under the Loan to
enforce the Loan or the security interest securing such Loan (including,
without limitation, taking action to declare a default or an event of default,
accelerate such Loan or foreclose on the security interest or collateral
securing such Loan).
(m) EMAC 1996 Special Stock Option Plan and Agreement. The EMAC
1996 Special Stock Option Plan shall have been approved by the EMAC
Stockholders and the Board of Directors of EMAC. EMAC and the Overseas
Stockholders shall have executed and delivered the EMAC 1996 Special Stock
Option Agreement.
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(n) Amendment to Unit Purchase Options. The Unit Purchase Options
shall have been amended in the manner provided by Overseas to EMAC.
ARTICLE X
INDEMNIFICATION
10.1 Indemnification by the Overseas Stockholders. Subject to the
provisions of Sections 10.1 and 10.2, each of the Overseas Stockholders shall
severally, and jointly, indemnify, defend and hold harmless EMAC, and any
director, officer, employee, agent or advisor of EMAC, or any of its
respective successors or assigns (an "EMAC Indemnified Party"), from and
against any and all demands, claims, actions, causes of action, assessments,
losses, damages, liabilities, judgments, settlements, fines, penalties,
sanctions, costs and expenses (including, without limitation, reasonable
attorneys' fees and disbursements, interest and penalties, and all other
reasonable costs of investigating and defending third party claims as incurred
but not including special, punitive, speculative or consequential damages)
(collectively, "EMAC Losses") asserted against, resulting to, imposed upon or
incurred by any EMAC Indemnified Party, directly or indirectly, by reason of
or resulting from:
(i) the failure of any of the representations and warranties of
Overseas or the Overseas Stockholders contained in or made pursuant to Article
IV hereof to have been true when made and (unless made as of a specified date
only) as of the Closing Date; and
(ii) the breach or failure to perform any covenant or agreement
of Overseas or the Overseas Stockholders contained in or made pursuant to this
Agreement.
10.2 Limitations on Indemnification.
(a) The indemnification in favor of the EMAC Indemnified Parties
contained in Section 10.1 hereof with respect to the representations and
warranties of Overseas and the Overseas Stockholder contained in Section 4.26
of this Agreement shall not be effective until the aggregate dollar amount of
all Losses indemnified against under such Section exceeds $350,000 (the "Film
Library Threshold Amount"), and then only to the extent such aggregate amount
exceeds the Film Library Threshold Amount. The indemnification in favor of the
EMAC Indemnified Parties for Losses related to all other matters indemnified
against under Section 10.1, other than as set forth in the preceding sentence,
shall not become effective until the aggregate dollar amount of such Losses
exceeds $150,000 (the "Non-Film Library Threshold Amount") and then only to
the extent such aggregate amount exceeds the Non-Film Library Threshold
Amount. Any payments made to the Overseas Stockholders by the EMAC Parties
under paragraph 2 of the Tax Reimbursement Agreement shall be credited against
the Non-Film Library Threshold Amount.
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(b) The indemnification in favor of the EMAC Indemnified Parties
shall be limited to an amount equal to the aggregate of (i) the value from
time to time of the Merger Shares issued to the Overseas Stockholders and (ii)
the unpaid principal and interest from time to time on the Merger Note. Any
amounts paid under the Merger Notes shall no longer be subject to this Article
X. The Surviving Corporation shall have no right to offset against any
payments under the Merger Note the amount of any rights, claims or damages it
may have against Overseas or the Overseas Stockholders, and nothing herein
shall be deemed to permit any offset by EMAC against the Merger Note to
satisfy any indemnification obligation of the Overseas Stockholders under
Section 10.1. Except with respect to claims based on wilful or intentional
fraud, the rights of EMAC Indemnified Parties and the Overseas Stockholders
Indemnified Parties (as defined below) under this Article X shall be the
exclusive remedy of such Indemnified Parties with respect to claims resulting
from or relating to any misrepresentation, breach of warranty or failure to
perform any covenant or agreement under this Agreement.
10.3 Indemnification by EMAC. Subject to the provisions of this Section
10.3, EMAC shall indemnify, defend and hold harmless the Overseas
Stockholders, and any director, officer, employee, agent, advisor or
stockholder of Overseas or any of their respective successors or assigns (an
"Overseas Stockholders Indemnified Party"), from and against any and all
demands, claims, actions, causes of action, assessments, losses, damages,
liabilities, judgments, settlements, fines, penalties, sanctions, costs and
expenses (including, without limitation, reasonable attorneys' fees and
disbursements, interest and penalties, and all other reasonable costs of
investigating and defending third party claims as incurred) (collectively,
"Overseas Losses") asserted against, resulting to, imposed upon or incurred by
any Overseas Stockholders Indemnified Party, directly or indirectly, by reason
of or resulting from:
(i) the failure of any of the representations and warranties
of EMAC contained in or made pursuant to Article V hereof to have been true
when made and (unless made as of a specified date only) as of the Closing
Date; and
(ii) the breach or failure to perform any covenant or
agreement of EMAC contained in or made pursuant to this Agreement.
10.4 Indemnification Procedures.
(a) Notice. If any legal proceeding shall be threatened or
instituted or any claim or demand shall be asserted by any EMAC Indemnified
Party or any Overseas Stockholders Indemnified Party, or any EMAC Indemnified
Party or any Overseas Stockholder Indemnified Party becomes aware of any facts
giving rise to a potential claim, in respect of which indemnification may be
sought under the provisions of this Agreement, the Party seeking
indemnification (the "Claiming Party") shall promptly cause written notice of
the assertion of any such claim, demand or proceeding of which it has
knowledge to be forwarded to the Party from whom it is claiming
indemnification (the "Indemnitor"). Such notice shall contain a reference to
the provisions hereof in respect of which such claim is being made, and shall
specify, in reasonable detail, the basis for the claim and the amount of
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such Loss if determinable at such time. The Claiming Party's failure to give
the Indemnitor prompt notice shall not preclude the Claiming Party from
seeking indemnification from the Indemnitor unless the Claiming Party's
failure has materially prejudiced the Indemnitor's ability to defend the
claim, demand or proceeding.
(b) Third Party Claims. Subject to the provisions of Sections 10.1,
10.2 and 10.3 hereof, if the Claiming Party seeks indemnification from the
Indemnitor as a result of a claim or demand being made by a third party (a
"Third Party Claim"), the Indemnitor shall have the right to promptly assume
the control of the defense of such Third Party Claim, including, at its own
expense, employment by it of counsel reasonably satisfactory to the Claiming
Party. The Claiming Party may, in its sole discretion and at its own expense,
employ counsel to represent it in the defense of the Third Party Claim, and in
such event counsel for the Indemnitor shall cooperate with counsel for the
Claiming Party in such defense, provided that the Indemnitor shall direct and
control the defense of such Third Party Claim or proceeding. The Indemnitor
shall not consent to the entry of any judgment, except with the written
consent of the Claiming Party, and shall not enter into any settlement of such
Third Party Claim without the written consent of the Claiming Party which (i)
does not include as an unconditional term thereof the release of the Claiming
Party from all liability in respect of such Third Party Claim and (ii) results
in the imposition on the Claiming Party of any remedy other than money
damages; provided, however, that the Claiming Party shall not unreasonably
withhold or delay its consent to the entry of any judgment or any settlement
of a Third Party Claim. If the Indemnitor elects not to exercise its rights to
assume the defense of the Third Party Claim, or if injunctive relief is
sought, the Claiming Party may, but shall have no obligation to, defend
against such Third Party Claim or legal proceeding in such reasonable manner
as it may deem appropriate, provided that the Claiming Party shall not
compromise or settle such Third Party Claim or proceeding without the
Indemnitor's consent.
(c) Payment. After any final judgment or award shall have been
rendered by a court, arbitration board or administrative agency of competent
jurisdiction and the time in which to appeal therefrom shall have expired, or
a settlement shall have been consummated, or the Claiming Party and the
Indemnitor shall arrive at a mutually binding agreement with respect to each
separate matter alleged to be indemnified by the Indemnitor hereunder, the
Claiming Party shall forward to the Indemnitor notice of any sums due and
owing by it with respect to such matter and the Indemnitor shall pay all of
the sums so owing to the Claiming Party by wire transfer, certified or bank
cashier's check within ten (10) days after the date of such notice (the
"Payment Date"); provided, however, that any amounts otherwise payable under
this Article X shall be reduced by any amounts recovered from third parties
and amounts actually paid to the Indemnified Parties under any policy or
policies of insurance covering the EMAC Losses or the Overseas Losses as the
case may be; and provided, further, that if such payment is made by the
surrender of EMAC Common Stock pursuant to Section 10.6, such payment shall be
made on the earliest possible date after the Payment Date on which the
transfer of EMAC Common Stock for such purposes will not result in a violation
(based on voluntary transactions occurring prior to such date but not
thereafter) of Section 16(b) of the Exchange Act.
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10.5 Survival. The representations, warranties, covenants and agreements
of EMAC and the Overseas Stockholders set forth in this Agreement shall
survive the Closing and the consummation of the Merger and the other
Transactions contemplated hereby and continue until the earlier of two years
after the Closing Date or fifteen (15) days following the delivery of the
consolidated audited financial statements of the Surviving Corporation for the
fiscal year ending December 31, 1997. Notwithstanding the foregoing, the
representations contained in Sections 4.12 and 5.11 relating to tax matters
shall continue until the expiration of the applicable statute of limitations
relating to such representations, and the representations contained in Section
5.4(b) shall survive indefinitely. If a notice is given in accordance with
Section 10.4 before the expiration of the applicable period, then
(notwithstanding the expiration of such time period) the representation,
warranty, covenant or agreement shall survive until, but only for purposes of,
the resolution of such claim.
10.6 Satisfaction of Indemnification Obligations. Any obligations of the
Overseas Stockholders under Section 10.1 of this Agreement to indemnify the
EMAC Indemnified Parties may be satisfied, at the option of the Overseas
Stockholders, by either (a) payment in cash in the amount of the Losses
incurred, or (b) delivery of a number of shares of EMAC Common Stock for
cancellation by EMAC having a Fair Market Value equal to such Losses as of the
date of delivery. In the event that any Merger Shares are to be released to
EMAC under this Section 10.6, such number of Merger Shares shall automatically
be released from the Lock-Up (as such term is defined in the Lock-Up and
Registration Rights Agreement).
ARTICLE XI
PUBLIC ANNOUNCEMENTS
EMAC, Overseas, and the Overseas Stockholders will consult with each
other before issuing any press release or making any public statement with
respect to this Agreement and the Transactions and, except as may be required
by applicable law or stock exchange regulations, will not issue any such press
release or make any such public statement prior to such consultation.
ARTICLE XII
TERMINATION
12.1 Grounds for Termination. This Agreement may be terminated at any
time prior to the Closing Date:
(a) by mutual written consent of EMAC and Overseas;
(b) by either EMAC or Overseas, if the Closing has not occurred by
October 31, 1996 (the "Termination Date"); provided, however, that the right
to terminate
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this Agreement under this paragraph (b) of Section 12.1 shall not be available
to any party that has breached any of the covenants to be performed by it, her
or him in this Agreement;
(c) by Overseas and the Overseas Stockholders, (i) if EMAC shall
have breached any of its covenants in Article VII or VIII hereof in any
respect and such breach results in a Material Adverse Effect upon Overseas,
the Overseas Stockholders or EMAC, or (ii) if the representations and
warranties of EMAC contained in this Agreement shall not be true and correct
in all material respects, at the time made, or (iii) if such representations
and warranties shall not be true and correct in all material respects at and
as of the Closing Date as though such representations and warranties were made
again at and as of the Closing Date, except to the extent that such
representations are made herein as of a specific date prior to the Closing
Date, and in any such event, if such breach is subject to cure, EMAC have not
cured such breach within 10 business days of Overseas' notice of an intent to
terminate;
(d) by EMAC, (i) if Overseas or the Overseas Stockholders shall
have breached any of their covenants in Article VI or VIII hereof in any
respect and such breach results in a Material Adverse Effect upon Overseas or
EMAC, or (ii) if the representations and warranties of Overseas and the
Overseas Stockholders contained in this Agreement shall not be true and
correct in all material respects, at the time made, or (iii) if such
representations and warranties shall not be true and correct in all material
respects at and as of the Closing Date as though such representations and
warranties were made again at and as of the Closing Date, except to the extent
that such representations are made herein as of a specific date prior to the
Closing Date, and in any such event, if such breach is subject to cure,
Overseas or the Overseas Stockholders has not cured such breach within 10
business days of any notice by either of EMAC of an intent to terminate; or
(e) by EMAC, the Overseas Stockholders or Overseas, if, at the EMAC
Stockholders' Meeting (including, any adjournments thereof), this Agreement
and the Merger, the EMAC Option Plans, the Restated Certificate, By-laws or
the Directors nominated pursuant to Section 7.7 shall fail to be approved and
adopted by the affirmative vote of the holders of EMAC Common Stock required
under EMAC's present Certificate of Incorporation, or if an aggregate of 20%
or more of the number of shares of EMAC Common Stock outstanding as of the
record date for the EMAC Stockholders' Meeting held by Persons other than the
Initial EMAC Stockholders take one or more of the following actions: (i)
demand conversion of said EMAC Common Stock into cash pursuant to EMAC's
certificate of incorporation or (ii) demand appraisal rights pursuant to the
DGCL.
12.2 Payment of Expenses upon Termination.
(a) Except as set forth in Section 6.7 or in Section 12.2(b) below
or in the last sentence of Section 7.2, in the event that this Agreement is
terminated pursuant to Section 12.1, Overseas, the Overseas Stockholders and
EMAC shall each be solely responsible for their own expenses incurred in
connection with this Agreement, the Merger and the Transaction.
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(b) In the event that this Agreement is terminated pursuant to
Section 12.1(c) or 12.1(e), in addition to any other liabilities hereunder,
EMAC shall reimburse Overseas and the Overseas Stockholders for their
out-of-pocket fees and expenses incurred from and after February 10, 1996
(including, without limitation, the fees and expenses of each of their
attorneys, accountants and financial advisors) in connection with the
negotiation, documentation and performance of this Agreement, the Transaction
and the Transaction Documents up to an amount not exceeding the amount of cash
and the proceeds of any other Assets of EMAC remaining in EMAC (other than any
amounts remaining in the Trust Account) immediately prior to the liquidation
of EMAC pursuant to Article SIXTH of the Certificate of Incorporation of EMAC
in effect on the date of this Agreement and after the payment by EMAC of its
expenses and other obligations related to these Transactions (including
without limitation the fees and expenses of its attorneys and accountants,
printing fees and filing fees) and the liquidation and dissolution of EMAC.
(c) If any party terminates this Agreement pursuant to Section
12.1, all obligations of the parties hereunder shall terminate without any
liability of any party to any other party (except for any liability for
damages or equitable relief of any party for willful breaches of this
Agreement, which liability shall not be limited by this Article XII,
including, without limitation, Section 12.2(b)); provided, however, that the
provisions of Section 12.3 shall survive any such termination.
12.3 Effect of Termination. If this Agreement is terminated pursuant to
Section 12.1, the agreements contained in Sections 6.6, 6.7, 7.6, 7.8, 12.2
and the last sentence of Section 7.2 shall survive the termination hereof.
ARTICLE XIII
CONTENTS OF AGREEMENT, AMENDMENT,
PARTIES IN INTEREST, ASSIGNMENT, ETC.
This Agreement, together with the schedules and exhibits hereto, sets
forth the entire understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings
of the parties in connection therewith. There are no representations and
warranties other than those expressly set forth or referred to herein. This
Agreement may be amended, modified or supplemented only by a written
instrument duly executed by each of the parties hereto. This Agreement shall
be binding upon and inure to the benefit of and be enforceable by the
respective heirs, legal representatives, successors and permitted assigns of
the parties hereto. No party hereto shall assign this Agreement or any right,
benefit or obligation hereunder. This Agreement shall not confer any rights or
remedies upon any Person other than the parties hereto and their permitted
assigns. Any term or provision of this Agreement may be waived at any time by
the party entitled to the benefit thereof by a written instrument duly
executed by such party. The parties hereto shall execute and deliver any and
all documents and take any and all other actions that may be deemed reasonably
necessary by their respective counsel to complete the Transactions.
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ARTICLE XIV
INTERPRETATION
Unless the context of this Agreement clearly requires otherwise, (a)
references to the plural include the singular, the singular the plural, the
part the whole, and (b) "including" has the inclusive meaning frequently
identified with the phrase "but not limited to." The section and other
headings contained in this Agreement are for reference purposes only and do
not control or affect the construction of this Agreement or the interpretation
thereof in any respect. Section, subsection, schedule and exhibit references
are to this Agreement unless otherwise specified. Each accounting term used
herein that is not specifically defined herein shall have the meaning given to
it under GAAP.
ARTICLE XV
NOTICES
All notices that are required or permitted hereunder shall be in writing
and shall be sufficient if personally delivered or sent by mail, facsimile
message (confirmed by person or machine) or Federal Express or other
nationally recognized overnight delivery service. Any notices shall be deemed
given upon the earlier of the date when received at, or the third day after
the date when sent by registered or certified mail or the first business day
after the date when sent by Federal Express or other nationally recognized
overnight delivery service to, the address or fax number set forth below,
unless such address or fax number is changed by notice to the other party
hereto:
If to EMAC:
Entertainment/Media Acquisition Corporation
c/o Bannon & Co.
202 North Canon Drive
Beverly Hills, CA 90210
Attention: Stephen K. Bannon, Chairman of the Board
Tel. No. (310) 276-3555
Fax. No. (310) 276-0583
with required copies to:
Brobeck, Phleger & Harrison LLP
1301 Avenue of the Americas
New York, NY 10019
Attention: Ellen B. Corenswet
Tel. No. (212) 237-2526
Fax. No. (212) 586-7878
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Rosenfeld, Meyer & Susman
9601 Wilshire Blvd., 4th Floor
Beverly Hills, CA 90210
Attention: P. John Burke
Tel. No. (310) 246-3228
Fax. No. (310) 271-6430
If to Overseas Filmgroup, Inc., Ellen Dinerman Little or Robert B. Little:
Overseas Filmgroup, Inc.
8800 Sunset Boulevard
Los Angeles, CA 90069
Attention: Ellen Dinerman Little
Robert B. Little
William F. Lischak
Tel. No. (310) 855-1199
Fax. No. (310) 855-0849
with a required copy to:
Gipson, Hoffman & Pancione
1901 Ave. of the Stars
Suite 1100
Los Angeles, CA 90067
Attention: John McHale
Tel. No. (310) 557-8815
Fax. No. (310) 556-8945
ARTICLE XVI
GOVERNING LAW
This Agreement shall be construed and interpreted in accordance with the
law of the State of Delaware, without regard to its provisions concerning
conflicts of law. Each of the parties hereto consents to the jurisdiction of,
and confers exclusive jurisdiction on, any court or tribunal located in Los
Angeles County, California (in the case of state courts) or the Central
District of California (in the case of federal courts), over any action, suit
or proceeding arising out of or relating to this Agreement or any other
Transaction Document to which it is a party. Each party hereby irrevocably
waives, and agrees not to assert as a defense in any such action, suit or
proceeding, any objection which he, she or it may now or hereafter have to
venue of any such action, suit or proceeding brought in any court or tribunal
located in Los Angeles County, California or the Central District of
California and hereby irrevocably waives any claim that any such action, suit
or proceeding brought in any such court or tribunal has been brought in an
inconvenient forum.
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ARTICLE XVII
COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be binding as of the date first written above, and all of which
shall constitute one and the same instrument. Each such copy shall be deemed
an original, and it shall not be necessary in making proof of this Agreement
to produce or account for more than one such counterpart.
55
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the day and year first written above.
ENTERTAINMENT/MEDIA ACQUISITION
CORPORATION
By:
--------------------------------
Title: Chairman of the Board
By:
--------------------------------
Title: Chief Executive Officer and
President
OVERSEAS FILMGROUP, INC.
By:
--------------------------------
Title: Chairman of the Board
OVERSEAS STOCKHOLDERS
--------------------------------------
Ellen Dinerman Little
--------------------------------------
Robert B. Little
The undersigned is executing this Agreement solely for purposes of, and
with the understanding that he is bound by, the provision of Section 4.27 of
this Agreement.
--------------------------------------
William F. Lischak
56
<PAGE>
APPENDIX B
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
ss. 262. 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 ss. 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 ss. 251, ss. 252, ss. 254, ss. 257, ss. 258, ss. 263
or ss. 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
stockholders of the surviving corporation as provided in subsections (f) or
(g) of ss. 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
ss.ss. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
<PAGE>
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 ss. 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 subsection (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
<PAGE>
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 ss. 228
or 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal rights
of the effective date of the merger or consolidation and that appraisal rights
are available for any or all of the shares of the constituent corporation, and
shall include in such notice a copy of this section. The notice shall be sent
by certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation.
Any stockholder entitled to appraisal rights may, within 20 days after the
date of mailing of the notice, demand in writing from the surviving or
resulting corporation the 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.
(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
<PAGE>
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,
<PAGE>
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>
APPENDIX C
RESTATED CERTIFICATE
OF
INCORPORATION
OF
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
(Original Certificate of Incorporation Filed December 9, 1993)
(Pursuant to Section 245 of the
Delaware General Corporation Law)
---------------------
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION, a corporation organized and
existing under the Delaware General Corporation Law,
DOES HEREBY CERTIFY:
That this Restated Certificate of Incorporation was duly adopted in
accordance with Sections 242 and 245 of the Delaware General Corporation Law,
and that its original Certificate of Incorporation, as filed with the
Secretary of State of the State of Delaware on December 9, 1993, is hereby
further amended and restated to read in its entirety as follows:
FIRST: The name of the corporation (hereinafter called the "Corporation")
is OVERSEAS FILMGROUP, INC.
SECOND: The address, including street, number, city and county, of the
registered office of the Corporation in the State of Delaware is 1013 Centre
Road, Wilmington, Delaware 19805; and the name of the registered agent of the
Corporation in the State of Delaware at such address is Corporation Service
Company.
THIRD: The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may now or hereafter be organized under the
General Corporation Law of the State of Delaware.
FOURTH: The aggregate number of shares of capital stock of the
Corporation (referred to herein as "Shares") which the Corporation shall have
authority to issue is 27,000,000 Shares, of which 25,000,000 will be common
stock having a par value of $0.001 per share (the "Common Stock") and
2,000,000 will be series preferred stock having a par value of $0.001 per
share (the "Series Preferred Stock"). The Series Preferred Stock may be
issued, from time to time, in one or more series as authorized by the Board of
Directors. Prior to issuance of a series, the Board of Directors by resolution
(the "Preferred Stock Designation") shall designate it from other series and
classes of stock of the Corporation, shall specify the number of shares to be
included in the series, and shall fix the terms, rights, restrictions and
qualifications of the shares of a series, including any preferences, voting
powers, dividend rights and redemption, sinking fund and conversion rights.
Subject to the express terms of the Series Preferred Stock outstanding at the
time, the Board of Directors may increase (but not above the total number of
authorized shares of the class) or decrease (but not below the number of
shares thereof then outstanding) the number of shares or alter the Preferred
Stock Designation or classify or re-classify
-1-
<PAGE>
any unissued shares of a particular series of Series Preferred Stock by fixing
or altering in any one or more respects from time to time before issuing the
shares, any terms, rights, restrictions and qualifications of the shares.
FIFTH:
A. Management Vested in the Board of Directors. The management of the
business and the conduct of the affairs of the Corporation shall be vested in
its Board of Directors. In furtherance of and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to make,
repeal, alter, amend and rescind the Bylaws of the Corporation, subject to any
specific limitation on such power provided by any Bylaws adopted by the
stockholders. The number of directors which shall constitute the whole Board
of Directors shall be fixed by, or in the manner provided in, the Bylaws of
the Corporation from time to time. The phrase "whole Board" and the phrase
"total number of directors" shall be deemed to have the same meaning, to wit,
the total number of directors which the Corporation would have if there were
no vacancies. Elections of directors need not be by written ballot.
B. Board of Directors Divided in Classes. The Board of Directors shall
be and is divided into three classes: Class I, Class II and Class III. The
number of directors in each class shall be the whole number contained in a
quotient arrived at by dividing the authorized number of directors by three.
If a fraction is also contained in such quotient and if such fraction is
one-third (1/3), the extra director shall be a member of Class III. If the
fraction is two-thirds (2/3), one of the extra directors shall be a member of
Class III and the other shall be a member of Class II. Each director shall
serve for a term ending on the date of the third annual meeting following the
annual meeting at which such director was elected (and until such director's
successor shall have been elected and qualified); provided, however, that the
first directors elected to Class I shall serve for a term ending on the date
of the first annual meeting next following January 1, 1997 (and until such
director's successor shall have been elected and qualified), the directors
elected to Class II shall serve for a term ending on the date of the second
annual meeting next following January 1, 1997 (and until such director's
successor shall have been elected and qualified), and the term of the
directors elected to Class III shall serve for a term ending on the date of
the third annual meeting next following January 1, 1997 (and until such
director's successor shall have been elected and qualified). Advance notice of
stockholder nominations for the election of directors shall be given in the
manner provided in the Bylaws of the Corporation.
C. Appointment of New Directors. Except as otherwise provided, newly
created directors resulting from any increase in the number of directors and
any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes shall be filled by the affirmative
vote of a majority of the remaining directors then in office, even though less
than a quorum of the Board of Directors. Any director elected in accordance
with the preceding sentence shall hold office for the remainder of the full
term of directors in the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
D. Removal of Directors. Subject to the rights of any shares having a
preference over the Common Stock as to dividends or upon liquidation to elect
directors under specified circumstances, any director may be removed from
office, with or without cause, but only by the affirmative vote of the holders
of a majority of the combined voting power of all then outstanding shares
entitled to vote generally in the election of directors, voting together as a
single class.
-2-
<PAGE>
E. Vote Required to Repeal or Amend this Article FIFTH. Notwithstanding
anything contained in this Restated Certificate of Incorporation to the
contrary, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the combined voting power of all then
outstanding shares entitled to vote, voting together as a single class, shall
be required to alter, amend or repeal this Article FIFTH or to adopt any
provision inconsistent therewith.
SIXTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the Corporation may be
kept outside the State of Delaware at such place or places as may be
designated from time to time by the Bylaws of the Corporation.
SEVENTH: The Corporation is to have perpetual existence.
EIGHTH: No holder of any Shares shall be entitled as of right to
subscribe for, purchase, or otherwise acquire any Shares of any capital stock
of the Corporation which the Corporation proposes to issue or any rights or
options which the Corporation proposes to grant for the purchase of Shares of
any class of the Corporation or for the purchase of any Shares, bonds,
securities or obligations of the Corporation which are convertible into or
exchangeable for, or which carry any rights to subscribe for, purchase, or
otherwise acquire Shares of any class of capital stock of the Corporation; and
any and all of such Shares, bonds, securities or obligations of the
Corporation, whether now or hereafter authorized or created, may be issued, or
may be reissued or transferred if the same have been reacquired and have
treasury status, and any and all of such rights and options may be granted by
the Board of Directors to such persons, firms, corporations and associations,
and for such lawful consideration, and on such terms, as the Board of
Directors in its discretion may determine, without first offering the same, or
any thereof, to any said holder.
NINTH: No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
an improper personal benefit. If the Delaware General Corporation Law is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extend permitted by
the Delaware General Corporation Law, as so amended. Any repeal or
modification of this Article NINTH by the stockholders of the Corporation
shall not adversely affect any right or protection of a director of the
Corporation with respect to events occurring prior to the time of such repeal
or modification.
TENTH: The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may
be amended and supplemented, indemnify any and all persons whom it shall have
the power to indemnify under said section from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action
in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such
person.
-3-
<PAGE>
ELEVENTH: From time to time any of the provisions of this Restated
Certificate of Incorporation may be amended, altered or repealed, and other
provisions authorized by the laws of the State of Delaware at the time in
force may be added or inserted in the manner and at the time prescribed by
said laws, and all rights at any time conferred upon the stockholders of the
Corporation by this Restated Certificate of Incorporation are granted subject
to the provisions of this Article ELEVENTH.
Signed as of [ ], 1996
ENTERTAINMENT/MEDIA ACQUISITION CORPORATION
By:
---------------------------------------
Name:
Title:
ATTEST:
- ------------------------------------
Name:
Title:
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