<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 3)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
CINERGI PICTURES ENTERTAINMENT INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Not applicable
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
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/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
2308 BROADWAY
SANTA MONICA, CALIFORNIA 90404
December 1, 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting (the "Special
Meeting") of Stockholders of Cinergi Pictures Entertainment Inc. (the "Company")
to be held on Tuesday, December 23, 1997 at 10:00 a.m. local time, at 2308
Broadway, Santa Monica, California. At the Special Meeting you will be asked:
1. To consider and vote upon a proposal (the "Asset Sale Proposal") to
approve the sale of substantially all of the Company's assets, including
substantially all of the Company's film library, pursuant to two
agreements: (i) a Purchase and Sale Agreement dated April 3, 1997, as
amended (the "Library Sale Agreement"), between the Company, its primary
subsidiary and Walt Disney Pictures and Television and (ii) an Assignment
Agreement dated as of July 14, 1997, as amended (the "Assignment
Agreement), between the Company, its primary subsidiary and Twentieth
Century Fox Film Corporation (collectively, the "Asset Sales"); and
2. To consider and vote upon a proposal (the "Merger Proposal") to approve
an Agreement of Merger, dated as of September 2, 1997, as amended (the
"Merger Agreement"), providing for the merger ("Merger") of CPEI
Acquisition, Inc. ("Buyer"), a Delaware corporation, with and into the
Company. Buyer is wholly owned by Andrew G. Vajna ("Vajna"), Chairman of
the Board of Directors, President and Chief Executive Officer of the
Company, and Valdina Corporation N.V. ("Valdina"), a corporation
indirectly beneficially owned by Mr. Vajna. Pursuant to the Merger,
shares of Company common stock, par value $.01 per share (other than
shares owned by Vajna, Valdina and shares as to which statutory
dissenter's rights are perfected), will be converted into the right to
receive $2.52 in cash (which has been adjusted upwards from an original
price of $2.30). Although the Merger Agreement provides for potential
further upward adjustments to the merger consideration, the Company does
not presently believe that there is a significant likelihood of any such
further upward adjustments.
THE BOARD OF DIRECTORS OF THE COMPANY (THE "BOARD") HAS APPROVED THE ASSET
SALES. THE BOARD BELIEVES THAT THE TERMS OF THE ASSET SALES ARE FAIR TO,
EXPEDIENT AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF THE COMPANY AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE ASSET SALE PROPOSAL.
THE BOARD (EXCLUDING MR. VAJNA, WHO ABSTAINED FROM THE VOTE) HAS ALSO
UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT, BASED IN PART UPON THE
RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD (THE "SPECIAL COMMITTEE")
CONSISTING OF ONE DIRECTOR NOT EMPLOYED BY OR OTHERWISE AFFILIATED WITH THE
COMPANY. THE BOARD, BASED IN PART ON THE RECOMMENDATION OF THE SPECIAL
COMMITTEE, BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF,
THE STOCKHOLDERS OF THE COMPANY (OTHER THAN MR. VAJNA AND VALDINA), AND
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE MERGER PROPOSAL.
Stockholders of record who comply with the procedures specified in Section
262 ("Section 262") of the Delaware General Corporation Law, which are described
in the accompanying Proxy Statement, have the right to dissent from the Merger
and to have their shares of common stock appraised by the Delaware Court of
Chancery and to receive payment of the "fair value" of such shares as determined
by such Court in lieu of the merger consideration otherwise payable pursuant to
the Merger Agreement. The text of Section 262 is attached as Appendix D to the
accompanying Proxy Statement.
Enclosed is a Notice of Special Meeting of Stockholders and a Proxy
Statement, which contains detailed information concerning the Asset Sales and
Merger. Whether or not you plan to attend the Special Meeting, we urge you to
read this material carefully. Your vote is important. We request that, as soon
as possible, you mark, date, sign and return the enclosed proxy in the envelope
provided, which requires no postage if mailed in the United States. Facsimile
copies of the proxy, properly completed and duly executed, will also be accepted
at (213) 553-9738. A stockholder who executes and returns a proxy has
<PAGE>
the power to revoke it at any time before it is voted by providing written
notice thereof to the Secretary of the Company, by submitting a subsequent
proxy, or by voting in person at the Special Meeting. The giving of a proxy does
not affect a stockholder's right to attend and vote in person at the Special
Meeting. A stockholder's presence at the Special Meeting, without further
action, however, will not itself revoke the stockholder's proxy.
Thank you for your consideration and continued support.
Sincerely,
Warren Braverman
CHIEF OPERATING OFFICER, CHIEF
FINANCIAL
OFFICER AND EXECUTIVE VICE PRESIDENT
(ii)
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
2308 BROADWAY
SANTA MONICA, CA 90404
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 23, 1997
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of the
Stockholders of Cinergi Pictures Entertainment Inc. (the "Company") will be held
on Tuesday, December 23, 1997, at 10:00 a.m. local time, at 2308 Broadway, Santa
Monica, California, for the following purposes:
1. To consider and act upon a proposal (the "Asset Sale Proposal") to
approve the sale of substantially all of the Company's assets, including
the sale of substantially all of the Company's film library (the "Asset
Sales"), pursuant to (i) that certain Purchase and Sale Agreement dated
April 3, 1997, as amended (the "Library Sale Agreement"), between the
Company, its primary subsidiary and Walt Disney Pictures and Television
("Disney" is used herein to refer to Walt Disney Pictures and Television
and/or its affiliates, including The Walt Disney Company, as applicable)
and (ii) that certain Assignment Agreement dated as of July 14, 1997, as
amended (the "Assignment Agreement"), between the Company, its primary
subsidiary and Twentieth Century Fox Film Corporation. Pursuant to the
Library Sale Agreement, the Company has agreed to sell to Disney
substantially all of the films in the Company's motion picture library
and certain other assets in exchange for, among other things, the
cancellation of Disney's equity interest in the Company (555,556 shares
of common stock and a warrant to purchase 150,000 shares at $9.00 per
share), the cancellation of outstanding loans from Disney to the Company
(approximately $40,387,000 in principal and accrued interest as of
November 15, 1997), and the assumption by Disney of certain specified
obligations and liabilities of the Company. Pursuant to the Assignment
Agreement, the Company has agreed to sell to Twentieth Century Fox Film
Corporation the Company's rights in Die Hard With A Vengeance in exchange
for $11,250,000 in cash.
2. To consider and act upon a proposal (the "Merger Proposal") to approve
an Agreement of Merger, dated as of September 2, 1997, as amended (the
"Merger Agreement"), among Andrew G. Vajna ("Vajna"), Chairman of the
Board of Directors, President and Chief Executive Officer of the Company,
Valdina Corporation N.V. ("Valdina"), a corporation organized under the
laws of the Netherlands Antilles, CPEI Acquisition, Inc. ("Buyer"), a
Delaware corporation wholly owned by Vajna and Valdina, and the Company
providing for a merger pursuant to which Buyer will be merged with and
into the Company and the Company will become wholly owned by Vajna and
Valdina (the "Merger"). Pursuant to the Merger, shares of Company common
stock, par value $.01 per share (other than shares owned by Vajna,
Valdina and shares as to which statutory dissenters' rights are
perfected), will be converted into the right to receive $2.52 in cash
(which has been adjusted upwards from an original price of $2.30 and
which is subject to potential further upward adjustment as provided in
the Merger Agreement). Valdina is indirectly beneficially owned by Vajna.
3. To transact such other business as may properly come before the Special
Meeting and any adjournments thereof.
THE BOARD OF DIRECTORS OF THE COMPANY (THE "BOARD") HAS APPROVED THE ASSET
SALES. THE BOARD BELIEVES THAT THE TERMS OF THE ASSET SALES ARE FAIR TO,
EXPEDIENT AND IN THE BEST INTERESTS OF, THE STOCKHOLDERS OF THE COMPANY AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE ASSET SALE PROPOSAL.
THE BOARD (EXCLUDING MR. VAJNA, WHO ABSTAINED FROM THE VOTE) HAS ALSO
UNANIMOUSLY APPROVED THE MERGER AND THE MERGER AGREEMENT, BASED IN PART ON THE
RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD (THE "SPECIAL COMMITTEE")
CONSISTING OF ONE DIRECTOR NOT EMPLOYED BY OR OTHERWISE AFFILIATED WITH THE
COMPANY.
(iii)
<PAGE>
THE BOARD, BASED IN PART ON THE RECOMMENDATION OF THE SPECIAL COMMITTEE,
BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE
STOCKHOLDERS OF THE COMPANY (OTHER THAN VAJNA AND VALDINA), AND RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE MERGER PROPOSAL.
The Board has fixed the close of business on November 7, 1997 (the "Record
Date") as the record date for the determination of stockholders entitled to
notice of, and to vote at, the Special Meeting. Accordingly, only stockholders
of record as of the close of business on the Record Date will be entitled to
notice of and to vote at the Special Meeting and any adjournments thereof.
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. FACSIMILE COPIES OF THE PROXY, PROPERLY COMPLETED AND DULY EXECUTED,
WILL ALSO BE ACCEPTED AT (213) 553-9738. A COMPANY 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 THE COMPANY OR BY
SUBMITTING A SUBSEQUENT PROXY OR BY VOTING IN PERSON AT THE COMPANY 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 ITSELF REVOKE THE STOCKHOLDER'S PROXY.
By Order of the Board of Directors,
Erick Feitshans,
SECRETARY
December 1, 1997
(iv)
<PAGE>
PROXY STATEMENT
FOR
CINERGI PICTURES ENTERTAINMENT INC.
SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 23, 1997
INTRODUCTION
This Proxy Statement of Cinergi Pictures Entertainment Inc., a Delaware
corporation (the "Company"), is being furnished to stockholders of the Company
("Stockholders") in connection with the solicitation of proxies by the Board of
Directors (the "Board") for use at a special meeting of Stockholders (the
"Special Meeting") to be held on Tuesday, December 23, 1997, at 10:00 a.m. local
time, at 2308 Broadway, Santa Monica, California, and any postponement or
adjournment thereof.
The Stockholders will be asked to consider and act upon a proposal (the
"Asset Sale Proposal") to approve a sale of substantially all the Company's
assets, including substantially all of the Company's film library, pursuant to
(i) that certain Purchase and Sale Agreement dated April 3, 1997, as amended
(the "Library Sale Agreement"), between the Company, its primary subsidiary and
Walt Disney Pictures and Television ("Disney" is used herein to refer to Walt
Disney Pictures and Television and/or its affiliates, including The Walt Disney
Company, as applicable) and (ii) that certain Assignment Agreement dated as of
July 14, 1997, as amended (the "Assignment Agreement"), between the Company, its
primary subsidiary and Twentieth Century Fox Film Corporation ("Fox").
Pursuant to the terms of the Library Sale Agreement, the Company will sell
to Disney substantially all of the films in the Company's motion picture library
and certain other assets (referred to herein as the "Film Library Sale"). The
film library being sold to Disney includes primarily all of the Company's rights
(except certain minimum guarantee payments) to the following eleven motion
pictures: MEDICINE MAN; TOMBSTONE; RENAISSANCE MAN; COLOR OF NIGHT; JUDGE DREDD;
THE SCARLET LETTER; NIXON; EVITA (excluding soundtrack rights); AMANDA; THE
SHADOW CONSPIRACY; and AN ALAN SMITHEE FILM. In consideration for the assets
being sold to Disney, Disney has agreed to relinquish its equity interest in the
Company (555,556 shares of common stock (with an aggregate market value of
approximately $1,076,390 based on the closing price of the Company's common
stock, par value $.01 per share ("Company Common Stock"), on April 3, 1997, the
date of the Library Sale Agreement) and a warrant to purchase 150,000 shares of
common stock at a price of $9.00 per share) and cancel its outstanding loans to
the Company (approximately $40,387,000 as of November 15, 1997). In addition,
Disney has agreed to assume with respect to the films and rights therein being
sold to Disney (the "Film Library"), all residuals and participation obligations
(other than certain guild obligations arising from or related to the production
of the films in the Film Library), as well as all scheduled obligations relating
to the Company's existing exploitation agreements. Upon consummation of the Film
Library Sale, the Company's twenty-five film domestic distribution arrangement
with Disney, under which the Company has delivered nine films, will be
terminated. The Company currently expects to consummate the Film Library Sale,
subject to Stockholder approval and the satisfaction or waiver of all conditions
set forth in the Library Sale Agreement, as soon as practicable after the
Special Meeting. Although the Film Library Sale does not include the Company's
rights ("Soundtrack Rights") in the soundtrack to EVITA (the "EVITA
Soundtrack"), the Company has accepted a separate offer from Disney to purchase
the Soundtrack Rights for $1,500,000 in cash in a transaction conditioned upon
and anticipated to be consummated concurrently with the Film Library Sale (the
"Soundtrack Sale").
Pursuant to the Assignment Agreement, the Company has agreed to sell to Fox
the Company's rights in DIE HARD WITH A VENGEANCE in exchange for $11,250,000 in
cash. The Company currently expects to consummate this transaction, subject to
Stockholder approval and the satisfaction or waiver of all conditions set forth
in the Assignment Agreement, concurrently with the consummation of the Film
Library Sale.
THIS PROXY STATEMENT IS DATED DECEMBER 1, 1997, AND IS FIRST
BEING DISTRIBUTED TO THE STOCKHOLDERS ON DECEMBER 1, 1997.
<PAGE>
THE BOARD, WHICH HAS APPROVED THE ASSET SALES, BELIEVES THAT THE TERMS OF
THE ASSET SALES ARE FAIR TO, EXPEDIENT AND IN THE BEST INTERESTS OF, THE
STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ASSET
SALE PROPOSAL.
The Stockholders will also be asked to consider and act upon a proposal to
approve the Agreement of Merger, dated as of September 2, 1997, as amended (the
"Merger Agreement"), among Andrew G. Vajna, Chairman of the Board, President and
Chief Executive Officer of the Company ("Vajna"), Valdina Corporation N.V.
("Valdina"), CPEI Acquisition, Inc. ("Buyer"), a Delaware corporation wholly
owned by Vajna and Valdina, and the Company providing for a merger pursuant to
which Buyer will be merged with and into the Company and the Company will become
wholly owned by Vajna and Valdina (the "Merger"). Valdina, a corporation
organized under the laws of The Netherlands Antilles is indirectly beneficially
owned by Vajna (see "CERTAIN INFORMATION REGARDING THE COMPANY--Principal
Stockholders of the Company").
Pursuant to the Merger Agreement, at the effective time of the Merger (the
"Effective Time"), each share ("Share") of Company Common Stock (other than
Shares owned by Vajna or Valdina, treasury Shares, or Shares as to which
statutory dissenters' rights are perfected) will be converted into the right to
receive $2.52 in cash (the "Purchase Price"), which has been adjusted upwards
from an original price of $2.30 (the "Original Purchase Price") and which is
subject to potential further upward adjustment as provided in the Merger
Agreement (as it may be further adjusted, the "Adjusted Purchase Price").
Although the Merger Agreement provides for potential further upward adjustments
to the Purchase Price, the Company does not presently believe that there is a
significant likelihood of any such further upward adjustments. The Company
currently expects to consummate the Merger, subject to Stockholder approval and
the satisfaction or waiver of all conditions set forth in the Merger Agreement
(including, without limitation, consummation of the transactions contemplated by
the Library Sale Agreement and the Assignment Agreement), as soon as practicable
after the Special Meeting. The term "Merger Consideration" as used herein means
the Purchase Price or Adjusted Purchase Price, as the case may be.
The Company has established a toll-free telephone number which Stockholders
may use to call D.F. King & Co., Inc. ("D.F. King"), the Company's proxy
solicitation agent, to obtain the current dollar amount of the Merger
Consideration on a per Share basis. The toll-free number is (800) 628-8510. In
addition, the Company and Vajna will issue a press release no later than five
business days prior to the Special Meeting, setting forth the exact dollar
amount of the final Adjusted Purchase Price. Facsimile copies of the enclosed
proxy, properly completed and duly executed, will be accepted at (213) 553-9738,
including after announcement of the final Adjusted Purchase Price. A Stockholder
who executes and returns a proxy has the power to revoke it at any time before
it is exercised at the Special Meeting (including after announcement of the
final Adjusted Purchase Price) by delivering written notice thereof to the
Secretary of the Company, by duly executing and submitting a subsequent proxy,
or by voting in person at the Special Meeting. The giving of a proxy does not
affect a Stockholder's right to attend and vote in person at the Special
Meeting. A Stockholder's presence at the Special Meeting, without further
action, however, will not itself revoke the Stockholder's proxy.
THE BOARD (EXCLUDING MR. VAJNA, WHO ABSTAINED FROM THE VOTE) HAS UNANIMOUSLY
APPROVED THE MERGER AND THE MERGER AGREEMENT, BASED IN PART UPON THE
RECOMMENDATION OF A SPECIAL COMMITTEE OF THE BOARD CONSISTING OF ONE DIRECTOR
NOT EMPLOYED OR OTHERWISE AFFILIATED WITH THE COMPANY (THE "SPECIAL COMMITTEE").
THE BOARD, BASED IN PART ON THE RECOMMENDATION OF THE SPECIAL COMMITTEE,
BELIEVES THAT THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE
STOCKHOLDERS (OTHER THAN VAJNA AND VALDINA) AND RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" THE MERGER PROPOSAL.
Neither the Special Committee nor the Board sought or received a fairness
opinion in connection with their consideration of the Merger. Both the Special
Committee and the Board believed that, (i) in light of the sale of substantially
all of the assets of the Company either as a result of arms' length negotiations
or independent bidding, (ii) in light of the financial expertise of the sole
member of the Special Committee, as
2
<PAGE>
well as Jefferson Capital Group, Ltd. ("Jefferson Capital"), an investment
banking concern which has acted as the Company's financial advisor in connection
with the Asset Sales and the Merger, and (iii) given that the Company's assets
at the time of the Merger will consist primarily of cash, the possible benefit
of a fairness opinion would be marginal and the significant expense thereof
would not be justified and, therefore, the obtaining of a fairness opinion would
not be in the best interests of the Stockholders.
The sole member of the Special Committee is Gregory R. Paul. Mr. Paul is not
an employee of, and is not otherwise affiliated with, the Company. Mr. Paul is a
Managing Director of BT Alex. Brown Incorporated, an affiliate of Bankers Trust
Company, and has specialized since 1985 in the financing of media and
entertainment companies. Although Dianne Caplan Lebovits and R. Timothy
O'Donnell are also non-employee directors of the Company, the Board determined
that in light of certain relationships between such persons and the Company, it
would not be appropriate for such persons to serve on the Special Committee. Ms.
Lebovits is the former General Counsel, Secretary, and an Executive Vice
President of the Company, having served in such capacities from March 1990
through August 1996 when she returned to private legal practice. Mr. O'Donnell
is the President and majority stockholder of the Company's financial advisor,
Jefferson Capital, which is receiving certain fees in connection with the Asset
Sales and the Merger, including fees contingent upon consummation of the Asset
Sales and the Merger.
In accordance with the Delaware General Corporation Law (the "DGCL"),
approval of each of the Asset Sale Proposal and the Merger Proposal requires the
affirmative vote of the holders of a majority of the outstanding Shares. As of
November 7, 1997 (the "Record Date") members of the Board, including Vajna,
owned an aggregate of 6,836,318 Shares (including Shares owned by Valdina), or
approximately 50.8% of the Shares outstanding on the Record Date. Pursuant to
the terms of the Library Sale Agreement, members of the Board who are also
Stockholders have agreed, in effect, to vote their shares in favor of the Asset
Sale Proposal. As a result, if the members of the Board who own Shares do in
fact cast their votes in favor of the Asset Sale Proposal, approval of the Asset
Sale Proposal is assured.
As of the Record Date, Vajna beneficially owned (including Shares owned by
Valdina) or controlled the right to vote 6,821,318 Shares (or approximately
50.7% of the Shares outstanding as of such date). Pursuant to the terms of the
Merger Agreement, Vajna and Valdina have agreed to vote such Shares in favor of
the Merger Proposal. As a result, receipt of the statutorily required vote in
favor of the Merger Proposal is assured.
HOWEVER, THE MERGER AGREEMENT ALSO PROVIDES, AS A CONDITION TO THE CLOSING
OF THE MERGER, THAT THE COMPANY SHALL HAVE OBTAINED THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE SHARES VOTED AT THE SPECIAL MEETING ON THE MERGER PROPOSAL
(INCLUDING ABSTENTIONS, BUT EXCLUDING BROKER NON-VOTES), WHETHER IN PERSON OR BY
PROPERLY EXECUTED PROXY, WITHOUT TAKING INTO ACCOUNT THOSE SHARES OWNED BY
VAJNA, VALDINA OR ANY AFFILIATE OF VAJNA OR VALDINA (THE "MAJORITY OF THE
MINORITY VOTE"). ALTHOUGH NOT REQUIRED BY THE MERGER AGREEMENT, SHARES OWNED BY
THE COMPANY'S EXECUTIVE OFFICERS AND DIRECTORS AND THE SHARES OWNED BY DISNEY
WILL ALSO NOT BE CONSIDERED PART OF THE MINORITY VOTE IN DETERMINING WHETHER THE
MAJORITY OF THE MINORITY VOTE HAS BEEN OBTAINED. "SEE MERGER
AGREEMENT--CONDITIONS" FOR ADDITIONAL INFORMATION REGARDING THE CONDITIONS TO
THE PARTIES' OBLIGATIONS TO CONSUMMATE THE MERGER.
Approval of the Merger Proposal by the Stockholders is not a condition to
the Asset Sales. However, consummation, in all material respects, of the
transactions contemplated by the Library Sale Agreement and the Assignment
Agreement is a condition to the Merger. The Company currently anticipates that
the Merger will be consummated shortly after consummation of the Asset Sales
assuming all conditions to the Merger are then satisfied or waived. No
determination has been made by the Company as to its course of conduct in the
event that the Asset Sales and/or the Merger are not consummated, as the Company
would consider all strategic alternatives reasonably available to it at the
time. However, given the background and reasons for the Asset Sales and the
Merger, and given the reductions in personnel and other overhead which have been
implemented, the Company anticipates that it is likely that significant
consideration would be given at any such time to a dissolution and winding up of
the Company pursuant to Delaware
3
<PAGE>
law. See "SPECIAL FACTORS RELATING TO THE MERGER--Recommendation of the Special
Committee and the Board; Fairness of the Merger."
There were 79 holders of record of Company Common Stock on the Record Date.
Except where the context otherwise requires, the terms "Cinergi" and the
"Company" refer to Cinergi Pictures Entertainment Inc. and its wholly owned
subsidiaries.
This Proxy Statement constitutes the notice required by Section 262(d) of
the DGCL.
------------------------
STOCKHOLDERS ARE URGED TO READ CAREFULLY THIS PROXY STATEMENT IN ITS
ENTIRETY. ALTHOUGH, AS INDICATED ABOVE, APPROVAL OF PROPOSAL NO. 1 (THE ASSET
SALE PROPOSAL) IS LIKELY ASSURED, THE COMPANY RECOMMENDS THAT STOCKHOLDERS READ
CAREFULLY THE ASSET SALE PROPOSAL (WHICH BEGINS ON PAGE 34 PRIOR TO READING
PROPOSAL NO. 2 (THE MERGER PROPOSAL), AS THE COMPANY BELIEVES THAT AN
UNDERSTANDING OF THE ASSET SALES DESCRIBED UNDER PROPOSAL NO. 1 IS IMPORTANT TO
AN UNDERSTANDING OF THE MERGER AND ITS BACKGROUND. FOR STOCKHOLDERS WHO
NEVERTHELESS WISH TO REVIEW THE MERGER PROPOSAL FIRST, IT BEGINS ON PAGE 61.
------------------------
THE TRANSACTIONS DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION
PASSED UPON THE FAIRNESS OR THE MERITS OF SUCH TRANSACTIONS NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
THIS PROXY STATEMENT CONTAINS "FORWARD-LOOKING STATEMENTS." SUCH STATEMENTS
MAY 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. CERTAIN
RISKS AND UNCERTAINTIES ARE DISCUSSED IN APPROPRIATE SECTIONS OF THIS PROXY
STATEMENT. THE RISKS HIGHLIGHTED IN THIS PROXY STATEMENT SHOULD NOT BE ASSUMED
TO BE THE ONLY THINGS THAT COULD AFFECT FUTURE PERFORMANCE OF THE COMPANY OR ANY
FORWARD-LOOKING STATEMENTS. THE COMPANY DOES NOT HAVE A POLICY OF UPDATING OR
REVISING FORWARD-LOOKING STATEMENTS AND THUS IT SHOULD NOT BE ASSUMED THAT
SILENCE BY MANAGEMENT OF THE COMPANY OVER TIME MEANS THAT ACTUAL EVENTS ARE
BEARING OUT AS ESTIMATED IN SUCH FORWARD-LOOKING STATEMENTS.
------------------------
THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS PROVIDED BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 DOES NOT APPLY TO FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SUCH ACT MADE IN CONNECTION WITH A GOING
PRIVATE TRANSACTION SUCH AS THE MERGER.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY.................................................................................................. 7
THE SPECIAL MEETING...................................................................................... 32
Record Date and Persons Entitled to Vote at the Special Meeting........................................ 32
Quorum................................................................................................. 32
Vote Required.......................................................................................... 32
Appraisal Rights....................................................................................... 33
Proxies................................................................................................ 33
Other.................................................................................................. 33
PROPOSAL NO. 1:
SALE OF SUBSTANTIALLY ALL OF
THE ASSETS OF THE COMPANY............................................................................... 34
Parties to the Asset Sales............................................................................. 34
Background and Reasons for the Library Sale Agreement.................................................. 35
Background and Reasons for the Assignment Agreement.................................................... 39
Recommendation of the Board............................................................................ 41
The Library Sale Agreement............................................................................. 43
The Assignment Agreement............................................................................... 49
Appraisal Rights Inapplicable.......................................................................... 51
Regulatory Approvals................................................................................... 51
Accounting Treatment................................................................................... 51
Certain Federal Income Tax Consequences................................................................ 51
Interests of Certain Persons in the Asset Sales........................................................ 52
Certain Additional Information Regarding Transactions with Disney...................................... 52
Certain Additional Information Regarding Transactions with Fox......................................... 53
Operations of the Company Pending and Following the Asset Sales........................................ 54
CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS............................................................. 55
PROPOSAL NO. 2:
THE MERGER.............................................................................................. 61
Parties to the Merger.................................................................................. 61
SPECIAL FACTORS RELATING TO THE MERGER.................................................................. 62
Background and Reasons for the Merger.................................................................. 62
Recommendation of the Special Committee and the Board; Fairness of the Merger.......................... 67
Purpose and Structure of the Merger.................................................................... 71
Operations Pending the Merger.......................................................................... 72
Plans for the Company Following the Merger............................................................. 72
Regulatory Approvals................................................................................... 73
Accounting Treatment................................................................................... 73
Certain Federal Income Tax Consequences................................................................ 73
Fees and Expenses...................................................................................... 74
Financing of the Transaction........................................................................... 74
Interests of Certain Persons in the Merger............................................................. 75
Certain Transactions Involving the Company's Common Stock.............................................. 77
Certain Transactions With Vajna and Certain Related Stockholders....................................... 78
</TABLE>
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<TABLE>
<S> <C>
THE MERGER AGREEMENT.................................................................................... 81
The Merger; Effective Time of the Merger............................................................... 81
Conversion of Company Common Stock into Merger Consideration........................................... 81
Adjustments to Purchase Price.......................................................................... 81
Surrender of Company Common Stock Certificates......................................................... 85
Representations and Warranties......................................................................... 86
Conditions to the Merger............................................................................... 86
Agreements of the Company, Buyer, Vajna and Valdina.................................................... 87
Termination; Fees and Expenses......................................................................... 89
Amendments; Waivers.................................................................................... 89
Appraisal Rights....................................................................................... 90
RIGHTS OF DISSENTING STOCKHOLDERS....................................................................... 91
CERTAIN INFORMATION REGARDING THE COMPANY................................................................ 94
Business of the Company................................................................................ 94
Market Prices and Dividends on Company Common Stock.................................................... 98
Principal Stockholders of the Company.................................................................. 99
Directors and Executive Officers of the Company........................................................ 100
Executive Compensation................................................................................. 101
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED).............................................. 109
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY..................................................... 114
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................................................. 115
General................................................................................................ 115
Results of Operations.................................................................................. 116
Liquidity and Capital Resources........................................................................ 120
INDEX TO FINANCIAL STATEMENTS........................................................................... F-1
Inside
Back
AVAILABLE INFORMATION.................................................................................... Cover
APPENDICES:
Appendix A -- The Library Sale Agreement............................................................... A-1
Appendix B -- The Assignment Agreement................................................................. B-1
Appendix C -- The Merger Agreement..................................................................... C-1
Appendix D -- Section 262 of the Delaware General Corporation Law...................................... D-1
</TABLE>
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION, THE FINANCIAL STATEMENTS, INCLUDING
THE NOTES THERETO, AND THE PRO FORMA INFORMATION CONTAINED ELSEWHERE IN THIS
PROXY STATEMENT AND THE APPENDICES HERETO. STOCKHOLDERS ARE URGED TO READ THIS
PROXY STATEMENT AND THE APPENDICES HERETO IN THEIR ENTIRETY BEFORE VOTING ON THE
MATTERS DISCUSSED HEREIN.
THE SPECIAL MEETING OF STOCKHOLDERS
The Special Meeting will be held at 10:00 a.m. local time on Tuesday,
December 23, 1997, at 2308 Broadway, Santa Monica, California. At the Special
Meeting, including any adjournments thereto, the Stockholders will be asked to
consider and act upon (i) a proposal to approve the sale of substantially all of
the Company's assets, including the sale of substantially all of the Company's
film library, pursuant to the Library Sale Agreement and the Assignment
Agreement (the "Asset Sale Proposal"), (ii) a proposal to approve the Merger
Agreement (the "Merger Proposal"), and (iii) such other matters as may properly
come before the Special Meeting. See "INTRODUCTION," "THE SPECIAL MEETING,"
"PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY,"
"SPECIAL FACTORS RELATING TO THE MERGER" AND "THE MERGER AGREEMENT."
The Board has fixed the close of business on November 7, 1997 as the Record
Date for the determination of Stockholders entitled to receive notice of, and to
vote at, the Special Meeting. The presence, in person or by properly executed
proxy, of a majority of the outstanding Shares as of the Record Date is
necessary to constitute a quorum to transact business at the Special Meeting.
Stockholders are entitled to one vote at the Special Meeting for each Share held
of record by them on the Record Date. Each of the Asset Sale Proposal and the
Merger Proposal require the affirmative vote of the majority of the outstanding
Shares entitled to vote thereon. In addition, the Merger Agreement requires that
the Company obtain the Majority of the Minority Vote. As of the Record Date,
there were 13,446,874 Shares outstanding. See "THE SPECIAL MEETING."
THE ASSET SALE PROPOSAL
PARTIES TO THE ASSET SALES
THE COMPANY. The Company, formed in November 1989, is an independent
producer and distributor of motion pictures. See "PROPOSAL NO. 1: SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--Parties to the Asset Sales" and
"CERTAIN INFORMATION REGARDING THE COMPANY."
TWENTIETH CENTURY FOX FILM CORPORATION. Fox, an indirect wholly owned
subsidiary of The News Corporation Limited which is a diversified international
communications company incorporated under the laws of Australia, is engaged in
the business of filmed entertainment. The Company and Fox jointly own DIE HARD
WITH A VENGEANCE which was produced by the Company and initially released
domestically by Fox in May 1995. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL
OF THE ASSETS OF THE COMPANY--Parties to the Asset Sales."
THE WALT DISNEY COMPANY. Disney is a diversified international
entertainment company. In 1990, the Company entered into a distribution
agreement and certain related agreements with Disney (collectively, and as it
has been amended, the "Domestic Distribution Agreement") pursuant to which
Disney has distributed most of the Company's motion pictures in the United
States and its possessions, Canada and Latin America (the "Americas"). Disney
owns 555,556 Shares (the "Disney Shares") and a warrant to purchase 150,000
Shares at an exercise price of $9.00 per Share (the "Disney Warrant"). See
"PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--Parties
to the Asset Sales."
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BACKGROUND AND REASONS FOR THE LIBRARY SALE AGREEMENT
The Company was formed to develop, finance, produce and license "event"
motion pictures for exhibition in domestic and international theatrical markets
and for later worldwide release in all media, including home video and pay and
free television. The Company has generally financed the production costs of its
motion pictures through loans obtained under a credit facility the Company had
with The Chase Manhattan Bank ("Chase") and a syndicate of lenders (under which
the commitment to lend expired on August 31, 1997), advances and production
loans from Disney pursuant to the Domestic Distribution Agreement, and direct
investments by the Company, as necessary.
In early 1996, in light of the disappointing financial results of three of
the Company's four 1995 releases (JUDGE DREDD, THE SCARLET LETTER and NIXON),
the Board and management initiated an overall strategic review of the Company's
goals and principal business strategies to ascertain whether those goals and
strategies remained consistent with, among other things, the continuing increase
in production and releasing costs, the development projects available in the
marketplace, an increased number of motion pictures released by motion picture
companies domestically, and the Company's financial capabilities. At the time
the strategic review was initiated, the Company's primary goal had been to
produce and arrange for the release of three to five commercially successful
"event" motion pictures per year, and the Company's primary business strategy
had been to seek to limit the financial risk to the Company inherent in any one
motion picture project while preserving potential returns through the strategic
use of the Domestic Distribution Agreement and through pre-licensing of
international distribution rights on a picture-by-picture basis or pursuant to
selected international output agreements. See "PROPOSAL NO. 1: SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--Background and Reasons for the
Library Sale Agreement." In connection with the Company's strategic review, the
Board and management also considered various strategic alternatives in order to
maximize stockholder value.
At the end of May 1996, the Company retained the investment banking firm of
Jefferson Capital Group, Ltd. (of which R. Timothy O'Donnell, a director of the
Company, is President and majority stockholder) ("Jefferson Capital") to assist
the Company in its strategic review (including discussions with third parties)
and advise the Board with respect to the Company's strategic alternatives.
In connection with its engagement, Jefferson Capital, among other things,
assisted the Company in supplying information to, and organized a series of
confidential meetings with, potential investors, merger partners and purchasers.
From April 1996 through Fall 1996, the Company held periodic discussions with a
number of companies regarding a potential investment in, merger with or purchase
of the Company, and exchanged some information in connection with certain of
these discussions. Ten companies entered into confidentiality agreements with
the Company. No written proposal or letter of intent was executed by the Company
with any of such parties.
In Fall 1996, the Company also approached Disney to ascertain its interest
in an acquisition of the Company. Although Disney again indicated that it was
not interested in an acquisition of the Company (the Company had previously
approached Disney in July 1996), Disney indicated that it would be interested in
a transaction involving the acquisition of the Company's film library and
termination of the Domestic Distribution Agreement. In late December 1996,
Disney sent to the Company a proposed letter of intent. Discussions were held
between the Company, Disney and their respective representatives from late
January 1997 through February 1997.
At a meeting of the Board held on February 21, 1997, the Board discussed the
potential transaction with Disney and the strategic alternatives available to
the Company, including continuing to produce motion pictures, the sale of the
Company or a portion of the Company to another company, and winding down the
Company's operations and dissolving. Although the Board believed the Company
should continue after the meeting to solicit and respond to overtures regarding
an investment in or purchase of the Company, in view of the results to such
point in time of the Company's discussions with third parties regarding an
investment in or acquisition of the Company, the Board did not view the
likelihood in the then foreseeable future of the Company receiving a proposal
for an investment or acquisition on terms
8
<PAGE>
advantageous to the Company to be significant. The Board also believed that in
light of, among other things, the disappointing financial results of three of
the Company's four 1995 releases and the 1997 release of THE SHADOW CONSPIRACY
and the continuing increase in motion picture production and releasing costs
which could necessitate increased direct investment in the Company's motion
pictures if the Company were to produce additional "event" motion pictures, that
it would be in the best interests of the Stockholders to consider the winding
down of the Company's operations. The Board also considered continuing to
produce smaller budget films but believed that, in the current releasing
environment, production of smaller budget films, with which the Company had
significantly less experience, posed significant risk, including that of
dissipating the Company's remaining assets. The Board also believed that
Disney's desire to reach an agreement with the Company to terminate the Domestic
Distribution Agreement, as well as both changes in management at Disney which
had occurred since the Domestic Distribution Agreement had originally been
entered into and the increased production by Disney itself of large budget
"event" motion pictures, could negatively impact the distribution of the
Company's films by Disney if the Company were to continue to produce films for
distribution by Disney pursuant to the Domestic Distribution Agreement. Given
the prior inability of the Company to negotiate an alternative to the Domestic
Distribution Agreement with either Disney or another major studio, the Board
believed that for the then foreseeable future the likelihood of the Company
successfully obtaining an alternative distribution arrangement to the Domestic
Distribution Agreement, on terms more advantageous to the Company than the
Domestic Distribution Agreement, was not significant. As a result of the
foregoing, the Board authorized continued negotiations regarding a sale of the
Company's film library to Disney.
On April 2, 1997, the Board approved the Library Sale Agreement with Disney
which was executed on April 3, 1997. On August 27, 1997 and November 4, 1997,
the Board approved amendments to the Library Sale Agreement with Disney which,
among other things, modified the prior arrangements between the Company and
Disney with respect to AN ALAN SMITHEE FILM and extended the date by which the
Film Library Sale must be consummated or the parties can terminate the Library
Sale Agreement. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF
THE COMPANY-- Background and Reasons for the Library Sale Agreement." The
amendments were subsequently entered into by the parties thereto.
BACKGROUND AND REASONS FOR THE ASSIGNMENT AGREEMENT
The Company's initial negotiations with Disney regarding the Film Library
Sale had contemplated that the film rights to be acquired by Disney would
include the Company's rights in DIE HARD WITH A VENGEANCE. During the course of
negotiations, however, Disney and the Company agreed that such rights would not
be part of the film rights to be sold to Disney. As a result, in March 1997, the
Company initiated discussions with Fox regarding the acquisition by Fox of the
Company's rights in DIE HARD WITH A VENGEANCE. Negotiations were held between
the Company and Fox through early July 1997. On July 2, 1997, the Board approved
the Assignment Agreement, subject to Fox indicating that it had completed its
due diligence. On July 14, 1997, Fox indicated that it had completed its due
diligence, and on July 15, 1997 the Assignment Agreement was executed. On August
27, the Board approved an amendment to the Assignment Agreement which reduced
the amount of insurance coverage required to be maintained by the Company for
Fox's benefit in connection with the transactions contemplated by the Assignment
Agreement. The amendment was entered into on August 27, 1997. See "PROPOSAL NO.
1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--Background and
Reasons for the Assignment Agreement."
RECOMMENDATION OF THE BOARD
The Board believes that the consummation of the Asset Sales is expedient and
in the best interests of the Company and the Stockholders, and unanimously
recommends that the Stockholders vote "FOR" the Asset Sale Proposal. The Board
believes that the terms of each of the Library Sale Agreement and the Assignment
Agreement (collectively, the "Asset Sale Agreements") are fair to, and in the
best interests of,
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<PAGE>
the Company and the Stockholders. In recommending that the Stockholders approve
the Asset Sale Proposal, the Board considered a number of factors, including
without limitation, the following: (i) that the Asset Sale Agreements were the
result of arms-length negotiations; (ii) that the Company has incurred net
losses in six of the seven full fiscal years since its formation and anticipates
continuing operating losses; (iii) the increase in the industry average of
direct negative and print and advertising costs of 69.9% and 114.5%,
respectively, from 1989 (the year of the Company's formation) through 1996; (iv)
the significant risk of continued operations, including that of dissipating the
Company's remaining assets; (v) the Board's belief that Disney desires to
terminate, with the agreement of the Company, the Domestic Distribution
Agreement; (vi) the lack of strategic alternatives available to the Company in
view of the Company's disappointing operating results and efforts to implement
other strategic alternatives without success; (vii) the significant reduction of
the Company's liabilities resulting from the Asset Sales; and (viii) the
existence of a substantial amount of cash and cash equivalents of the Company
and the additional cash to be received in connection with the Assignment
Agreement. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY--Recommendation of the Board."
THE LIBRARY SALE AGREEMENT
THE FILM LIBRARY. Pursuant to the Library Sale Agreement, the Company has
agreed to sell to Disney substantially all of the films in the Company's motion
picture library. Specifically, the Company has agreed to sell primarily all of
the Company's rights to the following eleven motion pictures: MEDICINE MAN,
TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT, JUDGE DREDD, THE SCARLET LETTER,
NIXON, AMANDA, EVITA (excluding the Company's rights in the soundtrack), THE
SHADOW CONSPIRACY and AN ALAN SMITHEE FILM.
Pursuant to the Library Sale Agreement, the rights being sold to Disney
include the right to receive all worldwide "overages" and other payments of any
kind paid or payable to or collected by the Company after January 1, 1997 which
arise from the exploitation by the Company of the films being sold to Disney.
The Company, however, will retain all minimum guarantees paid or payable to the
Company pursuant to contracts in existence as of January 1, 1997 with respect to
the films being sold to Disney. Although the Film Library Sales does not include
the Company's rights ("Soundtrack Rights") in the soundtrack to EVITA (the
"EVITA Soundtrack"), the Company has accepted a separate offer from Disney to
purchase the Soundtrack Rights for $1,500,000 in cash in a transaction
conditioned upon and anticipated to be consummated concurrently with the Film
Library Sale (the "Soundtrack Sale").
CONSIDERATION FOR FILM LIBRARY. In exchange for the assets being sold to
Disney, Disney has agreed to:
- Transfer the Disney Shares and Disney Warrant to the Company.
- Assume the outstanding loans previously made by Disney to the Company
(under which an aggregate of $40,387,000 in principal and accrued
interest was outstanding as of November 15, 1997).
- Assume all residuals and participation obligations relating to the
Film Library (other than certain guild obligations arising from or
related to the production of the films in the Film Library).
- Assume all obligations of the Company under the Company's existing
exploitation agreements with respect to the Film Library which are to
be performed on or after the closing of the Film Library Sale,
provided such obligations have been listed on schedules provided to
Disney.
TERMINATION OF DOMESTIC DISTRIBUTION AGREEMENT. Upon consummation of the
Film Library Sale, the Domestic Distribution Agreement with Disney will be
terminated, including substantially all of the audit rights of the Company and
Disney thereunder.
TREATMENT OF CERTAIN OTHER PROJECTS AND ARRANGEMENTS. The Library Sale
Agreement also addresses the terms by which Disney and the Company will resolve
certain other arrangements and agreements between them.
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TERMINATION; MISCELLANEOUS. The Library Sale Agreement may be terminated by
either party if, among other things, the closing of the transactions
contemplated by such agreement have not occurred by December 24, 1997. The
Library Sale Agreement also contains, among other things, representations,
warranties, conditions and indemnification provisions. See "PROPOSAL NO. 1: SALE
OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--The Library Sale Agreement."
THE ASSIGNMENT AGREEMENT
BACKGROUND REGARDING EXISTING RIGHTS. The Company and Fox jointly own DIE
HARD WITH A VENGEANCE pursuant to certain existing agreements. Pursuant to such
agreements, Fox received the right to distribute DIE HARD WITH A VENGEANCE in
all media in the United States and Canada (including territories and
possessions), Japan, the Bahamas, Bermuda and the Panama Canal Zone and
worldwide in certain ancillary media (the "Fox Territories"). The Company
controls the remaining international distribution rights to the film, while Fox
controls all sequel rights to the film. In 1994, the Company granted Disney
distribution rights in DIE HARD WITH A VENGEANCE until June 2020 in a portion of
the international territories for which the Company controls distribution
rights: the Benelux region, French speaking Europe and Africa, German speaking
Europe, the United Kingdom and Ireland, Spain, Central and South America,
Scandinavia, Taiwan, Switzerland, Portugal and Greece (the "Disney
Territories"). The Company has also licensed to an aggregate of approximately
thirty subdistributors (the "International Subdistributors") the right, in the
aggregate, to distribute the film in certain of the international territories
for which the Company controls distribution rights and which were not licensed
to Disney (the "Subdistributor Territories").
ASSIGNMENT OF RIGHTS AND TREATMENT OF RELATED RIGHTS AND
OBLIGATIONS. Pursuant to the Assignment Agreement, the Company has agreed to
assign to Fox all of the rights in DIE HARD WITH A VENGEANCE (including the
right to receive any overages from Fox with respect to the Fox Territories),
subject to the terms of the Company's existing exploitation agreements relating
to such rights, including the Company's license of distribution rights to Disney
with respect to the Disney Territories and to International Subdistributors with
respect to the Subdistributor Territories. Pursuant to the Assignment Agreement,
the Company, which upon consummation of the Film Library Sale will relinquish
the right to overages payable by Disney with respect to DIE HARD WITH A
VENGEANCE, was still entitled to receive any overages under the Company's
existing exploitation Agreements with International Subdistributors. However, as
indicated under "CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS--Summit
Transactions," the Company subsequently sold substantially all of such remaining
rights to receive DIE HARD WITH A VENGEANCE overages.
Fox will continue to be responsible for the payment of residuals relating to
distribution of the film in those territories for which Fox currently controls
distribution rights, and, as the Company's existing exploitation agreements
expire (including the Company's agreements with Disney and the International
Subdistributors) and the distribution rights in those territories revert to Fox,
Fox will become responsible for the payment of residuals in the applicable
territories covered by such exploitation agreements. The Company, however, will
be responsible for all participations due to profit participants in the film
except those arising from distribution of DIE HARD WITH A VENGEANCE in the
Disney Territories.
CONSIDERATION FOR THE RIGHTS BEING ASSIGNED. In exchange for the Company's
assignment of rights to Fox and the other representations, warranties and
agreements of the Company pursuant to the Assignment
Agreement, Fox has agreed to pay to the Company the sum of $11,250,000 in cash.
CONDITIONS; TERMINATION; MISCELLANEOUS. The transactions contemplated by
the Assignment Agreement are conditioned on, among other things, consummation of
the transactions contemplated by the Library Sale Agreement. The Assignment
Agreement will automatically terminate in the event the Library Sale Agreement
terminates. The Assignment Agreement also contains, among other things,
representations, warranties, conditions and indemnification provisions. See
"PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--The
Assignment Agreement."
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REGULATORY APPROVALS
To the best knowledge of the Company, there are no federal or state
regulatory requirements which must be complied with, nor are there any such
governmental consents or approvals that must be obtained in connection with the
consummation of the Asset Sales other than compliance with the Hart-Scott-Rodino
Anti-Trust Improvement Act of 1976, as amended, which has been completed.
ACCOUNTING TREATMENT
The Asset Sale will be accounted for as a sale of assets and a transfer of
certain liabilities. The Company expects to record a gain upon the consummation
of the Asset Sales as the net book value of the assets being sold pursuant to
the Asset Sales are less than the consideration to be received, including the
liabilities transferred.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Asset Sales will not have any federal income tax consequences to the
Stockholders. The Asset Sales, however, will result in gross income on a tax
basis of approximately $50,000,000 to the Company. Since the Company had a
federal net operating loss carry forward of $59,406,000 as of December 31, 1996,
has incurred a tax operating loss of approximately $22,000,000 for the nine
months ended September 30, 1997, and will incur additional tax operating losses
through the Effective Time, the gross income generated by the Asset Sales will
be completely offset by such net operating losses and no federal income tax
would be payable thereon. Notwithstanding the carryover of the federal net
operating loss to the current year, because of other adjustments in 1997, the
Company would be subject to a federal alternative minimum tax of approximately
$600,000 assuming the Asset Sales are consummated in 1997. If, however, the
Asset Sales were not consummated until 1998, the Company would not be subject to
a federal alternative minimum tax in 1997 but would be subject to a federal
alternative minimum tax in 1998 substantially larger in size as compared to the
alternative minimum tax of approximately $600,000 if the Asset Sales are
consummated in 1997. Moreover, because of limitations on the carryover of net
operating losses under the California Revenue and Taxation Code, the Company
currently estimates that there will be a California income tax liability for
1997 of between approximately $400,000 and $500,000 assuming the Asset Sales are
consummated in 1997. If, however, the Asset Sales were not consummated until
1998, the Company would not be subject to a California income tax liability in
1997 but would be subject to a California income tax liability in 1998
substantially larger in size as compared to the California income tax liability
of between approximately $400,000 and $500,000 if the Asset Sales are
consummated in 1997.
INTERESTS OF CERTAIN PERSONS IN THE ASSET SALES
R. Timothy O'Donnell, a director of the Company, is the President and
majority stockholder of Jefferson Capital, a privately-held investment banking
concern initially retained by the Company in connection with the Company's
strategic review. Jefferson Capital's services have also included, among other
things, assisting the Company with respect to the Asset Sales and the Merger.
Upon retention of Jefferson Capital, in May 1996, the Company paid Jefferson
Capital a fee of $75,000 and agreed to reimburse Jefferson Capital for expenses
(amounting to approximately $58,000 through November 15, 1997). Jefferson
Capital received an additional payment of $300,000 upon execution of the Merger
Agreement, and will receive a further payment of $300,000 if the Asset Sales and
the Merger are consummated.
In addition, the Merger Agreement provides that consummation of the Asset
Sales is a condition to the Merger. As indicated under "SPECIAL FACTORS RELATING
TO THE MERGER--Interests of Certain Persons in the Merger," certain of the
Company's officers, directors and Stockholders have certain interests in the
Merger. See also "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE
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ASSETS OF THE COMPANY--Interests of Certain Persons in the Asset Sales" and
"CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS."
OPERATIONS OF THE COMPANY PENDING AND FOLLOWING THE ASSET SALES
On a pro forma basis, an aggregate of approximately 87% of the total assets
of the Company reflected on the balance sheet of the Company at September 30,
1997 (excluding cash, but including restricted cash) is being transferred by the
Company to Disney and Fox pursuant to the Asset Sales. The Company does not
presently intend to commence production in the future on any additional motion
pictures pending the Asset Sales and the Merger. Further, the commitment to lend
under the Company's credit facility expired August 31, 1997, the credit facility
was paid off in November 1997 and, pursuant to the terms of the Library Sale
Agreement, the Domestic Distribution Agreement will terminate upon the closing
of the Film Library Sale. Following execution of the Library Sale Agreement and
the Assignment Agreement, the Company concluded a number of arrangements with
respect to assets which were not included as part of the Asset Sales, including:
(i) twenty-one development projects which are wholly owned by the Company (the
"Development Projects"); (ii) nineteen development projects (the "Stone
Projects") funded by the Company under its "first look" arrangement with Oliver
Stone and certain of his affiliates ("Stone"); (iii) visual effects equipment
which was part of the Company's visual effects facility located in leased space
in Lenox, Massachusetts (the "Visual Effects Facility"); (iv) the Soundtrack
Rights; (v) the right to receive any overages from International Subdistributors
pursuant to the Company's existing exploitation agreements with respect to DIE
HARD WITH A VENGEANCE (the "International DHWV Overages"); and (vi)
approximately $760,000 in miscellaneous receivables as of September 30, 1997
(the "Miscellaneous Receivables") (not including payments to be received with
respect to AN ALAN SMITHEE FILM). Except for preparing for the Special Meeting
and the potential closings of the Asset Sales and the Merger, the Company does
not currently intend to engage in any significant business operations pending
consummation of the Asset Sales and the Merger. In addition, the Library Sale
Agreement and the Merger Agreement restrict the Company's operations pending the
Film Library Sale and the Merger, respectively. See "PROPOSAL NO. 1: SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY-- Operations of the Company
Pending and Following the Asset Sales" and "THE MERGER AGREEMENT--Agreements of
the Company, Buyer, Vajna and Valdina."
The Company currently anticipates that the Merger will be consummated
shortly after consummation of the Asset Sales assuming all conditions to the
Merger are then satisfied or waived. Pending the Merger, the cash proceeds from
consummation of the Asset Sales and the Company's other cash resources will
primarily be held as cash or invested in short term government securities. No
determination has been made by the Company as to its course of conduct in the
event that the Assets Sales and/or the Merger are not consummated, as the
Company would consider all strategic alternatives reasonably available to it at
the time. However, given the background and reasons for the Asset Sales and the
Merger, and given the reductions in personnel and other overhead which have been
implemented, the Company anticipates that it is likely that significant
consideration would be given at any such time to a dissolution and winding up of
the Company pursuant to Delaware law. See "SPECIAL FACTORS RELATING TO THE
MERGER-- Recommendation of the Special Committee and the Board; Fairness of the
Merger."
CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS
SOLICITATION OF BIDS FOR DEVELOPMENT PROJECTS
In addition to the Asset Sales pursuant to the Library Sale Agreement and
the Assignment Agreement, the Company completed a solicitation of bids for the
Development Projects, in which Vajna was the prevailing bidder. In June 1997,
the Company instructed its financial advisor, Jefferson Capital, to solicit cash
bids from qualified buyers for the purchase of the Development Projects, as a
group. The Company received an initial bid of $4,750,000 (the "Initial Bid") for
the Development Projects from Vajna. Vajna also agreed to assume all third party
payments related to the Development Projects and made by the
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Company after May 1, 1997. Additional qualified bids ("Qualified Bids") were
required to be at least 15% higher than the Initial Bid. If the Company had
received one or more Qualified Bids, the Development Projects were to be sold to
the final highest bidder according to an auction process, however, no additional
Qualified Bids were received and Vajna was declared the winning bidder. The sale
of the Development Projects to Vajna is subject to consummation of the Film
Library Sale and the transactions contemplated by the Assignment Agreement. As
the parties to the Merger negotiated the Merger Consideration on the basis of a
value for the Development Projects equal to the Initial Bid, the Development
Projects will merely be part of the assets of the Company at the time of the
Merger and no separate cash consideration will be paid to the Company for such
projects. The Company received a valuation report with respect to the
Development Projects. See "CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS."
THE STONE PROJECTS
In July 1997, the Company also instructed Jefferson Capital to solicit cash
bids from qualified buyers with respect to a group of five Stone Projects (the
"Five Stone Projects"), which were being offered for sale by the Company subject
to certain rights of Stone as a producer and/or director attached to the
project. Vajna did not submit a bid for the Five Stone Projects.
During the course of the bid solicitation, the Company also entered into
discussions with Stone regarding a settlement of the "first look" arrangement
with Stone. In September 1997, the Company entered into a Termination Agreement
(the "Termination Agreement") with Stone in order to terminate the "first look"
arrangement between Stone and the Company and their respective obligations
thereunder. No offers for the Five Stone Projects had been received by the
Company at the time the Termination Agreement was executed. Pursuant to the
Termination Agreement, the Company transferred to Stone all but one of the Stone
Projects. The agreement requires Stone to reimburse the Company for certain
funds expended by the Company in connection with the development projects being
transferred to Stone in the event such projects are actually produced. Pursuant
to the Termination Agreement, the Company was relieved of $961,000 in
obligations it otherwise would have had to Stone under the "first look"
arrangement (which is net of certain expenses incurred by the Company in
connection with the Termination Agreement and certain payments made by the
Company to or for the benefit of Stone pursuant to such agreement).
EVITA SOUNDTRACK RIGHTS
In addition to soliciting bids for the Development Projects and the Five
Stone Projects, the Company also sought buyers for the Soundtrack Rights. Vajna
expressed interest in the Soundtrack Rights, but did not make a firm offer to
purchase the rights. The distributor of the Evita Soundtrack, Warner Bros., also
declined to make an offer. The Company negotiated with Disney with respect to
the sale of the Soundtrack Rights to Disney and, on November 19, 1997, the Board
approved the acceptance of Disney's offer to purchase the Soundtrack Rights in
exchange for $1,500,000 in cash. The Soundtrack Sale is conditioned upon and
anticipated to be consummated concurrently with consummation of the Film Library
Sale.
SUMMIT TRANSACTIONS
Summit Entertainment N.V. ("Summit N.V.") and Summit Entertainment L.P.
("Summit L.P.") (collectively with their affiliates, "Summit"), international
sales agents unaffiliated with the Company, have assisted the Company as sales
agents in the international pre-licensing of the Company's films. In November
1997, pursuant to agreements between the Company and Summit dated as of
September 10, 1997 (the "Summit Agreements"), the Company and Summit concluded a
series of transactions, including primarily (i) the purchase by Summit N.V., in
exchange for the payment of $400,000 to the Company, of the Company's rights in
the International DHWV Overages (other than those relating to exploitation
agreements with respect to the territories of Italy and Hungary), (ii) the
purchase by Summit N.V., in exchange for the payment of an additional $400,000
to the Company, of the Miscellaneous Receivables,
14
<PAGE>
(iii) the termination of Summit's sales agency relationships with the Company
and the settlement of the Company's obligations in connection therewith in
exchange for an aggregate payment by the Company to Summit (which, pursuant to
an additional agreement with Summit, includes certain amounts payable to Summit
with respect to a past Company production) of approximately $827,000
(collectively, the "Summit Transactions").
VISUAL EFFECTS FACILITY
In September 1997, the subsidiary of the Company which operated the
Company's Visual Effects Facility shut down the operations of the facility and
thereafter entered into agreements pursuant to which it transferred the assets
of the Visual Effects Facility to a third party in exchange primarily for the
assumption by such third party of certain obligations of the subsidiary.
SUMMARY OF CERTAIN INFORMATION REGARDING THE MERGER
PARTIES TO THE MERGER
VAJNA. Vajna is the Chairman of the Board, President and Chief Executive
Officer of the Company as well as a substantial Stockholder in the Company. See
"CERTAIN INFORMATION REGARDING THE COMPANY--Directors and Executive Officers of
the Company" and "--Principal Stockholders of the Company." Vajna's address is
2308 Broadway, Santa Monica, California 90404 (telephone number: 310-315-6000.
CPEI ACQUISITION, INC. Buyer is a Delaware corporation formed in July 1997
in connection with, and solely for the purposes of, effecting the Merger. Vajna
is the sole director and officer of Buyer. All of the stock of Buyer is owned by
Vajna (86%) and Valdina (14%). Except as it relates to the consummation of the
Merger, Buyer is not engaged in any business activity. Buyer's principal
executive offices are located at 2308 Broadway, Santa Monica, California 90404
(telephone number: 310-315-6000).
VALDINA CORPORATION N.V. Valdina is a corporation, formed in 1990 under the
laws of the Netherlands Antilles, which finances feature film production.
Valdina is indirectly beneficially owned 100% by Vajna. Valdina's principal
executive offices are located at Polarisweg 35, Suite 6, Willemstad, Curacao,
Netherlands Antilles (telephone number: 011-599-9-461-7799)
THE COMPANY. The Company, formed in November 1989, is an independent
producer and distributor of motion pictures. See "CERTAIN INFORMATION REGARDING
THE COMPANY" and "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY--Parties to the Asset Sales."
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a Certificate of Merger
with the Secretary of State of the State of Delaware. The date and time of such
filing (the "Effective Time") is expected to occur as soon as practicable after
the Special Meeting, subject to the satisfaction or waiver of the conditions
precedent to the Merger set forth in the Merger Agreement, including among
others, consummation of the transactions contemplated by the Library Sale
Agreement and the Assignment Agreement. See "THE MERGER AGREEMENT."
CONVERSION OF SHARES INTO MERGER CONSIDERATION
At the Effective Time, by virtue of the Merger and without any action on the
part of any holder of Shares, each Share issued and outstanding immediately
prior to the Effective Time (other than (x) Shares held in the Company's
treasury (all of which will be canceled), (y) Shares held by Buyer, Vajna or
Valdina (all of which will remain outstanding) and (z) Shares which have not
been voted for approval and adoption of the Merger Agreement and with respect to
which appraisal has been properly demanded in accordance with Section 262 of the
DGCL ("Dissenting Shares")) will be converted into the right to receive $2.52 in
15
<PAGE>
cash, which was adjusted upwards from the Original Purchase Price of $2.30 and
which is subject to potential further upward adjustment as provided in the
Merger Agreement. Although the Merger Agreement provides for potential further
upward adjustments to the Purchase Price, the Company does not presently believe
that there is a significant likelihood of any such further upward adjustments.
ADJUSTMENTS TO PURCHASE PRICE
The Merger Agreement contains four categories of adjustments to the Original
Purchase Price of $2.30 per Share: the Stone Adjustment, the EVITA Soundtrack
Adjustment, the Non-Smithee Accounts Receivable Adjustment, and the Basket
Adjustment (each an "Adjustment"). The Adjustments are described below. Each
Adjustment provided the potential for an upward adjustment to the Original
Purchase Price (effective at the Effective Time) upon the occurrence of the
event or events specified in the Adjustment. Each of the Stone Adjustment, the
EVITA Soundtrack Adjustment and the Non-Smithee Accounts Receivable Adjustment
is an independent Adjustment, with the calculation thereof unaffected by any of
the other Adjustments. The Merger Agreement provides that if any such Adjustment
results in a positive amount (in excess of any applicable threshold), there is
to be a positive adjustment to the Purchase Price. As indicated below, certain
events have already occurred between the date of the Merger Agreement and the
date of this Proxy Statement resulting in an aggregate of $.22 of adjustments to
the Original Purchase Price (i.e., a Purchase Price, as of the date of this
Proxy Statement, of $2.52 per Share) pursuant to the Stone Adjustment, the EVITA
Soundtrack Adjustment and the Non-Smithee Accounts Receivable Adjustment. No
further adjustments are possible pursuant to those three Adjustments.
Unlike the Stone Adjustment, the EVITA Soundtrack Adjustment and the
Non-Smithee Accounts Receivable Adjustment, the Basket Adjustment consists of
three sub-adjustments (the SGA Sub-Adjustment, Smithee Accounts Receivable
Sub-Adjustment, and MassIllusion Sub-Adjustment; each a "Sub-Adjustment"),
which, in determining whether there will be an adjustment to the Purchase Price
resulting from the Basket Adjustment, will only be considered as a group. Each
Sub-Adjustment can be a positive or negative amount. If the sum of the
Sub-Adjustments is a positive amount, a positive adjustment to the Purchase
Price from the Basket Adjustment will result. If the sum of the Sub-Adjustments
is a negative amount, there will be no adjustment to the Purchase Price as a
result of the Basket Adjustment. The Merger Agreement does not provide for any
downward adjustments to the Purchase Price.
Each of the Adjustments are measured in some manner with respect to the
Adjustment Date. The Merger Agreement provides that the "Adjustment Date" is
that date which is ten business days before the date of the Special Meeting, as
such date is initially set by the Board, or as such date may be changed due to
the adjourment, delay or other rescheduling of the Special Meeting; provided,
however, that if, after the Adjustment Date, the Special Meeting is adjourned,
delayed or otherwise rescheduled to a date which is less than ten business days
from the date on which it was determined that the Special Meeting will be
adjourned, delayed or otherwise rescheduled, then, in such case, the Adjustment
Date will not be changed but will remain the date which is ten business days
before the date the Special Meeting was set to occur prior to such adjourment,
delay or other rescheduling of the Special Meeting. Provided that the Special
Meeting is not adjourned, delayed or otherwise rescheduled, the Adjustment Date
will be December 9, 1997.
Although the Adjustment Date has not occurred as of the date of this Proxy
Statement, the Company does not believe that there is a significant likelihood
of an adjustment to the Purchase Price as a result of the Basket Adjustment. As
there are no further adjustments possible pursuant to the other Adjustments, the
Company, therefore, does not believe that there is a significant likelihood of
any further upward adjustments to the Purchase Price of $2.52 per Share.
The Adjustments were determined by negotiations between the parties to the
Merger Agreement. See "SPECIAL FACTORS RELATING TO THE MERGER--Background and
Reasons for the Merger." The various thresholds contained in certain of the
Adjustments were also determined by negotiations
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<PAGE>
between the parties to the Merger Agreement. In general, such thresholds
represent economic assumptions regarding the Company and its operations agreed
to by the parties to the Merger Agreement and upon which negotiations with
respect to the Merger Consideration were based.
STONE ADJUSTMENT. The Merger Agreement provides that in the event the
Company enters into an agreement (the "Stone Agreement") prior to the Adjustment
Date (A) to sell the Five Stone Projects or (B) to settle its obligations
pursuant to its "first look" arrangement with Stone, there will be a positive
adjustment (a "Gross Adjustment") equal to the sum of (X) the aggregate purchase
price, if any, payable to the Company pursuant to the Stone Agreement, and (Y)
the aggregate amount of liabilities and other obligations assumed or forgiven by
the purchaser (or party or parties with which the Company settles its
obligations) pursuant to the Stone Agreement. As a result of the settlement of
the Company's "first look" arrangement with Stone pursuant to the Termination
Agreement, the Company has been relieved of $961,000 in obligations it would
otherwise have had to Stone under such arrangement. This has resulted in a Gross
Adjustment pursuant to the Stone Adjustment of $961,000, or approximately $.0745
per Share (see "Calculation of Purchase Price Adjustment" below).
EVITA SOUNDTRACK ADJUSTMENT. The Merger Agreement provides that in the
event the sum of (A) the aggregate amount of all monies received by the Company
(as royalties or otherwise) in respect of the EVITA Soundtrack from September 2,
1997 through the Adjustment Date and (B) the aggregate purchase price payable to
the Company pursuant to any agreement for the sale of the Soundtrack Rights (an
"Evita Agreement") entered into by the Company prior to the Adjustment Date,
exceeds $1,500,000 (such excess being referred to herein as the "Soundtrack
Amount"), there will be a Gross Adjustment equal to the Soundtrack Amount. The
$1,500,000 threshold represents the negotiated agreement of the parties to the
Merger Agreement as to the amount of future overages that such parties then
estimated the Company was reasonably likely to obtain from the Soundtrack
Rights.
After September 2, 1997, the Company received $1,760,000 in overages with
respect to the EVITA Soundtrack, resulting in a Gross Adjustment of $260,000 or
approximately $.0201 per Share. On November 19, 1997, the Board approved
Disney's offer to purchase the Soundtrack Rights for a purchase price of
$1,500,000 in cash, resulting in an additional Gross Adjustment equal to the
purchase price of $1,500,000 or approximately $.1164 per share. When considered
with the adjustment resulting from the receipt of the overages, the total Gross
Adjustment resulting from the EVITA Soundtrack Adjustment was $1,760,000 or
approximately $.1365 per Share.
NON-SMITHEE ACCOUNTS RECEIVABLE ADJUSTMENT. The Merger Agreement provides
that in the event the aggregate amount of monies collected by the Company in
connection with certain outstanding accounts receivable (the "Non-Alan Smithee
Receivables") from July 1, 1997 through the Adjustment Date (the "Measurement
Period") is in excess of $1,573,000 (such excess amount being referred to as the
"Non-Alan Smithee Receivables Amount"), there will be a Gross Adjustment equal
to the Non-Alan Smithee Receivables Amount. The $1,573,000 threshold generally
represents the amount of Non-Alan Smithee Receivables reflected on the Company's
balance sheet at June 30, 1997 less a reserve of $400,000 for doubtful
collections that was negotiated between the parties to the Merger Agreement. As
all of the Non-Alan Smithee Receivables which have not previously been collected
(i.e., the Miscellaneous Receivables) were transfered to Summit as part of the
Summit Transactions, the aggregate amount of Non-Alan Smithee Receivables
collected by the Company during the Measurement Period and the Non-Alan Smithee
Receivables Amount became fixed (and not subject to further adjustment) at
$1,743,000 and $170,000, respectively, and resulted in an additional Gross
Adjustment of $170,000 or approximately $.0132 per Share. When considered with
adjustments (discussed above) resulting from the settlement of the "first look"
arrangement with Stone, the receipt by the Company of $1,760,000 in overages
with respect to the EVITA Soundtrack, and the acceptance of Disney's offer to
purchase the Soundtrack Rights and taking into account the parties' agreement as
to rounding, the total adjustment to the Original Purchase Price was $.22
resulting in the Purchase Price of $2.52. The Non-Alan Smithee Receivables do
not include any receivables
17
<PAGE>
relating to AN ALAN SMITHEE FILM, for which there is a different potential
adjustment (described below) as part of the Basket Adjustment.
BASKET ADJUSTMENT. The Merger Agreement provides that the Purchase Price
will also be adjusted upwards in the event the sum of the following
Sub-Adjustments (which may be either positive or negative) results in a positive
number.
SGA SUB-ADJUSTMENT. There will be a positive sub-adjustment equal to the
amount, if any, by which the Company Expense Amount is less than $6,493,000. If
instead, the Company Expense Amount is greater than $6,493,000, there will be a
negative sub-adjustment equal to the amount by which the Company Expense Amount
is greater than $6,493,000. The positive or negative sub-adjustment referred to
in the immediately preceding two sentences is referred to in this Proxy
Statement as the "SGA Sub-Adjustment." "Company Expense Amount" is defined in
the Merger Agreement to mean the aggregate Expenses paid or incurred during the
Measurement Period by the Company. "Expenses" is defined in the Merger Agreement
to consist of the following: salaries of Company personnel, severance payments,
rent, utilities, accounting and legal fees and expenses, and other expenses
which have generally been included as selling, general and administrative
expenses in the Company's audited financial statements. "Expenses," however,
does not include, among other things, (A) any expenses incurred by the Company
with respect to the Company's development projects, (B) any expenses incurred by
the Company with respect to (or funds provided by the Company to) Cinergi
Productions Inc. (California), a California corporation and a wholly owned
subsidiary of the Company ("CPI"), or the Visual Effects Facility which had been
operated by CPI, or (C) any expenses incurred by CPI. The Company Expense Amount
will be computed on a consolidated basis (but excluding for such purpose CPI)
and otherwise in a manner generally consistent with preparation of the Company's
financial statements for the fiscal year ended December 31, 1996. The $6,493,000
threshold represents the negotiated agreement of the parties to the Merger
Agreement as to the amount of Company Expenses that such parties then estimated
the Company was reasonably likely to incur through the date on which the parties
then anticipated the Merger would occur (November 30, 1997). As the Merger will
not be occurring until after such date and the Company Expenses are exceeding
the parties' expectations, the Company anticipates that the Company Expense
Amount will exceed $6,493,000 resulting in a negative sub-adjustment.
SMITHEE ACCOUNTS RECEIVABLE SUB-ADJUSTMENT. There will be a positive
sub-adjustment equal to the amount, if any, by which the aggregate amount of
monies collected by the Company during the Measurement Period with respect to
certain outstanding accounts receivable with respect to AN ALAN SMITHEE FILM
(the "Alan Smithee Receivables") exceeds $8,690,000. If instead, the aggregate
amount of monies collected by the Company during the Measurement Period with
respect to the Alan Smithee Receivables is less than $8,690,000, there will be a
negative sub-adjustment equal to the amount by which the aggregate amount of
monies collected by the Company during the Measurement Period with respect to
the Alan Smithee Receivables is less than $8,690,000. The positive or negative
sub-adjustment referred to in the immediately preceding two sentences is
referred to in this Proxy Statement as the "Smithee Accounts Receivable Sub-
Adjustment." The $8,690,000 threshold generally represents the amount of Alan
Smithee Receivables reflected on the Company's balance sheet at June 30, 1997
reduced by (i) $375,000 in accounts receivable that the parties to the Merger
Agreement agreed were uncollectable and (ii) a reserve of $400,000 for further
doubtful collections that was negotiated between the parties to the Merger
Agreement. The Company currently anticipates that the aggregate amount of monies
to be collected by the Company during the Measurement Period with respect to the
Alan Smithee Receivables will be less than $8,690,000 resulting in a negative
sub-adjustment.
MASSILLUSION SUB-ADJUSTMENT. There will be a positive sub-adjustment equal
to the amount, if any, by which the MassIllusion Expense Amount is less than
$1,300,000. If instead, the MassIllusion Expense Amount is greater than
$1,300,000, there will be a negative sub-adjustment equal to the amount by which
the MassIllusion Expense Amount exceeds $1,300,000. The positive or negative
sub-adjustment referred to
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<PAGE>
in the immediately preceding two sentences is referred to in this Proxy
Statement as the "MassIllusion Sub-Adjustment." "MassIllusion Expense Amount" is
defined in the Merger Agreement to mean (a) the aggregate amount of monies
provided by the Company, directly or indirectly, to CPI or to any third parties
on behalf of CPI during the Measurement Period ("Disbursed Amounts"), plus (b)
the aggregate amount of expenses borne by the Company during the Measurement
Period with respect to CPI (including with respect to the Visual Effects
Facility which had been operated by CPI) ("Borne Expenses"), less (from the sum
of (a) and (b)) the recovery by the Company, in any manner whatsoever
(including, without limitation, reimbursements by CPI to the Company), of any of
the Disbursed Amounts or Borne Expenses. The $1,300,000 threshold represents the
negotiated agreement of the parties to the Merger Agreement as to the then
estimated amount of the MassIllusion Expense Amount. The Company currently
anticipates that the MassIllusion Expense Amount will be less than $1,300,000
resulting in a positive sub-adjustment.
CALCULATION OF BASKET ADJUSTMENT. To the extent the sum of the SGA
Sub-Adjustment, the Smithee Accounts Receivable Sub-Adjustment and the
MassIllusion Sub-Adjustment (collectively, the "Basket Adjustment") results in a
positive amount (such number being referred to in this Proxy Statement as the
"Basket Adjustment Amount"), there will be a Gross Adjustment equal to the
Basket Adjustment Amount. To the extent the Basket Adjustment is a negative
amount, there will be no adjustment to the Purchase Price. Although the Company
currently anticipates a positive MassIllusion Sub-Adjustment, the Company
believes that anticipated negative SGA and Smithee Accounts Receivable
Sub-Adjustments will exceed such positive amount, resulting in a negative Basket
Adjustment and no adjustment to the Purchase Price as a result of the Basket
Adjustment.
The Company's chief financial officer, or other appropriate accounting
officer, as the case may be, will calculate both the Expenses and the
MassIllusion Expense Amount for the Measurement Period and forward such
calculation to Vajna and the Special Committee no later than 6:00 p.m., Los
Angeles time, on the day after the Adjustment Date. To the extent there is a
disagreement between Vajna and the Special Committee with respect to the
calculation of Expenses and/or the MassIllusion Expense Amount, the parties will
immediately forward such calculation(s) to an independent accountant, retired
judge or other party mutually acceptable to Vajna and the Special Committee,
whose determination as to the proper calculation of Expenses and/or the
MassIllusion Expense Amount will be rendered no later than six business days
prior to the Special Meeting and will be final and binding on all the parties to
the Merger Agreement.
CALCULATION OF PURCHASE PRICE ADJUSTMENT. The aggregate per Share
adjustment to the Purchase Price (the "Total Adjustment Amount") will be
calculated by dividing (i) the aggregate dollar amount of the Gross Adjustments
resulting from the Adjustments by (ii) the total number of issued and
outstanding Shares as of the Adjustment Date (including Shares held by Vajna and
Valdina but excluding the Disney Shares). The Total Adjustment Amount will be
rounded off to the nearest whole penny. Except for the Stone Adjustment, the
EVITA Soundtrack Adjustment, the Non-Smithee Accounts Receivable Adjustment and
the Basket Adjustment, there are no other possible positive adjustments to the
Purchase Price.
PRESS RELEASE REGARDING FINAL ADJUSTED PURCHASE PRICE. The Company and
Vajna will issue a press release no later than five business days prior to the
Special Meeting, setting forth the exact dollar amount of the Total Adjustment
Amount and the final Adjusted Purchase Price.
TOLL-FREE NUMBER FOR MERGER CONSIDERATION INFORMATION. The Company has
established a toll-free telephone number which Stockholders may use to call D.F.
King & Co., Inc. ("D.F. King"), the Company's proxy solicitation agent, to
obtain the current dollar amount of the Merger Consideration on a per Share
basis. The toll-free number is (800) 628-8510.
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<PAGE>
SUMMARY TABLE OF PURCHASE PRICE ADJUSTMENTS(1)
<TABLE>
<CAPTION>
PER SHARE
ADJUSTMENT
(GROSS
ADJUSTMENT
STATUS OR DIVIDED BY
ESTIMATED 12,891,318
STATUS AS SHARES) TO
OF ADJUSTMENT AS ORIGINAL
NOVEMBER OF NOVEMBER GROSS AMOUNT OF PURCHASE
BASIS OF AMOUNT OF 15, 15, ADJUSTMENT ADJUSTMENT PRICE OF
ADJUSTMENT ADJUSTMENT THRESHOLD 1997(2) 1997?(2) TO DATE FIXED?(3) $2.30
- ------------------------ ---------------------- ---------- ----------- -------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. STONE ADJUSTMENT Adjustment for the -- $ 961,000 Yes $ 961,000 Yes $.0745
amount of obligations
relieved by settlement
of the "first look"
arrangement with
Stone.
2. EVITA SOUNDTRACK Adjustment for monies $1,500,000 $3,260,000 Yes $1,760,000 Yes $.1365
ADJUSTMENT received with respect
to EVITA Soundtrack in
excess of Threshold
from 9/2/97 through
Adjustment Date.
3. NON-SMITHEE ACCOUNTS Adjustment for amount $1,573,000 $1,743,000 Yes $ 170,000 Yes $.0132
RECEIVABLE ADJUSTMENT of Non-Alan Smithee
Receivables collected
in excess of Threshold
from 7/1/97 through
the Adjustment Date
(the "Measurement
Period").
4. BASKET ADJUSTMENT (to
be calculated as of
Adjustment Date):
a. SGA Positive (or negative) $6,493,000 $4,837,000
Sub-Adjustment sub-adjustment to the
extent the Company
Expense Amount during
the Measurement Period
is less than (or
greater than) Thresh- TO THE EXTENT THE SUM OF THE SGA SUB-ADJUSTMENT,
old. SMITHEE ACCOUNTS RECEIVABLE SUB-ADJUSTMENT AND
MASSILLUSION SUB-ADJUSTMENT RESULTS IN A POSITIVE
AMOUNT, THERE
b. Smithee Positive (or negative) $8,690,000 $2,908,000(4) WILL BE A POSITIVE GROSS ADJUSTMENT EQUAL TO SUCH
Accounts sub-adjustment to the POSITIVE AMOUNT. IF SUCH SUM RESULTS IN A NEGATIVE
Receivable extent the amount of AMOUNT, THERE WILL BE NO POSITIVE OR NEGATIVE
Sub-Adjustment Alan Smithee Receiv- ADJUSTMENT. ALTHOUGH THE COMPANY CURRENTLY
ables collected during ANTICIPATES A POSITIVE MASSILLUSION
the Measurement Period SUB-ADJUSTMENT, THE COMPANY BELIEVES THAT
is greater than (or ANTICIPATED NEGATIVE SGA AND SMITHEE ACCOUNTS
less than) Threshold. RECEIVABLE SUB-AJUSTMENTS WILL EXCEED SUCH
POSITIVE AMOUNT, RESULTING IN A
c. MassIllusion Positive (or negative) $1,300,000 $ 407,000 NEGATIVE BASKET ADJUSTMENT AND NO ADJUSTMENT TO
Sub-Adjust- sub-adjustment to the THE PURCHASE PRICE AS A RESULT OF THE BASKET
ment extent the ADJUSTMENT.
MassIllusion Expense
Amount is less than
(or greater than)
Threshold.
With respect to the sum of the Sub-Adjustments: No (3,233,000 (5) No --
------
------
TOTAL ADJUSTMENTS (through date of this Proxy Statement): $ .22(6)
------
------
ADJUSTED PURCHASE PRICE (through date of this Proxy Statement): $ 2.52
</TABLE>
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FOOTNOTES TO SUMMARY TABLE OF PURCHASE PRICE ADJUSTMENTS
(1) The table is a summary of certain information regarding the Adjustments to
the Purchase Price contained elsewhere in this Proxy Statement. Reference is
made to, and the table is qualified in its entirety by, the more detailed
information contained elsewhere in this Proxy Statement and in the Merger
Agreement (Appendix "C"). Stockholders are urged to read this Proxy
Statement and the Appendices hereto in their entirety.
(2) The status shown for the EVITA Soundtrack Adjustment is as of November 19,
1997, the date the Board approved the acceptance of Disney's offer for the
Soundtrack Sale.
(3) If an Adjustment is fixed, there is no potential for any additional
adjustments resulting therefrom.
(4) Many of the Alan Smithee Receivables are not collectable until delivery of
the film to Disney and various international distributors is completed. The
Company has only recently begun delivering the film to distributors. The
number shown does not include $3,725,000 to be paid to the Company by Disney
upon completion of delivery of the film to Disney, which is currently
anticipated to occur by early December 1997.
(5) Although the Adjustment Date has not occurred as of the date of this Proxy
Statement, the Company does not believe that there is a significant
likelihood of an adjustment to the Purchase Price as a result of the Basket
Adjustment. As there are no further adjustments possible pursuant to the
other Adjustments (which have become fixed), the Company, therefore, does
not believe that there is a significant likelihood of any further upward
adjustments to the Purchase Price of $2.52 per Share. Not later than five
business days prior to the Special Meeting, the Company will issue a press
release setting forth the exact dollar amount of all the Adjustments and the
final Adjusted Purchase Price. The Company has also established a toll-free
number (800-628-8510) which Stockholders may call to obtain the current
dollar amount of the Merger Consideration on a per Share basis.
(6) The aggregate per Share adjustment to the Purchase Price (the "Total
Adjustment Amount") will be calculated by dividing (i) the aggregate dollar
amount of the Gross Adjustments resulting from the Adjustments by (ii) the
total number of issued and outstanding Shares as of the Adjustment Date
(including Shares held by Vajna and Valdina but excluding the Disney
Shares). The Total Adjustment Amount will be rounded off to the nearest
whole penny.
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BACKGROUND AND REASONS FOR THE MERGER
In early 1997, during the course of the Company's negotiations with Disney
regarding the Film Library Sale, the Company asked its financial advisor,
Jefferson Capital, and the Company's outside counsel, Gipson Hoffman & Pancione,
P.C., to consider various strategic alternatives for the business and operations
of the Company assuming an agreement with Disney was reached.
At the meeting of the Board held on February 21, 1997, the Board discussed
the strategic alternatives available to the Company, including the Film Library
Sale, continuing to produce motion pictures, acquisition of the Company or a
portion of the Company by another company, and winding down the Company's
operations and dissolving. The Board believed that in light of, among other
things, the disappointing financial results of three of the Company's four 1995
releases and the 1997 release of THE SHADOW CONSPIRACY and the continuing
increase in motion picture production and releasing costs, which could
necessitate increased direct investment in the Company's motion pictures if the
Company were to produce additional "event" motion pictures, that it would be in
the best interests of the Stockholders to consider the winding down of the
Company's operations. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE
ASSETS OF THE COMPANY--Background and Reasons for the Library Sale Agreement."
The Board discussed means of winding down the operations of the Company,
including a dissolution under the statutory procedures set forth in Delaware law
or the sale of additional assets followed by the sale of the corporate entity
and any remaining assets and liabilities. The Board believed that a statutory
dissolution could take substantially longer and result in more expenses than a
sale, reducing the amount of any cash payment to the Stockholders.
At the Board meeting held on April 2, 1997 (at which the Library Sale
Agreement with Disney was approved), the Board engaged in further discussion of
the Company's strategic alternatives assuming consummation of the Film Library
Sale. At such meeting, the Board authorized Warren Braverman, Executive Vice
President, Chief Operating Officer, Chief Financial Officer and a Director of
the Company, and R. Timothy O'Donnell, the President and majority stockholder of
Jefferson Capital and a Director of the Company, to negotiate with other parties
regarding the sale of the assets and provision for the liabilities that would
remain assuming consummation of the Film Library Sale. The Board further
authorized Mr. Braverman and Mr. O'Donnell, in consultation with the Special
Committee, to discuss the sale of assets to and the assumption of liabilities by
Vajna as a means of winding down the operations of the Company in an expeditious
manner that would maximize stockholder value.
On May 19, 1997, Vajna's legal advisors met with Mr. Braverman, Mr.
O'Donnell and the Company's outside counsel to discuss various matters relating
to a possible acquisition by Vajna of the Company's publicly-held Shares.
On May 30, 1997, counsel to Vajna sent a letter to the Board presenting
discussion points regarding, among other things, a merger between the Company
and an acquisition entity to be owned by Vajna, which would take place after the
sale of most of the Company's assets. The letter indicated that all outstanding
Shares owned by persons other than Vajna would be acquired or redeemed for cash
based on their proportionate share of the net worth of the Company at the time
of the merger, and the entity owned (or controlled) by Vajna would become the
sole owner of the Company which it was anticipated would, at that time, have
certain residual assets and liabilities.
From June through the start of September, Vajna and his advisors, on the one
hand, and the Company and the Special Committee and their respective advisors,
on the other hand, held a series of discussions and negotiations regarding the
proposed Merger and the terms and conditions of the Merger Agreement.
On September 2, 1997, the Board approved the terms and conditions of the
Merger Agreement and the Merger. On September 3, 1997, the Merger Agreement was
executed. On November 19, 1997, the Board approved Amendment No. 1 to the
Agreement of Merger (the "Amendment") which amends the Merger Agreement to
provide that any disagreements regarding certain calculations underlying
potential adjustments to the Merger Consideration will be forwarded to an
independent accounting firm, retired
22
<PAGE>
judge or other party mutually acceptable to Vajna and the Special Committee. The
Amendment was subsequently executed by the parties to the Merger Agreement. See
"SPECIAL FACTORS RELATING TO THE MERGER--Recommendation of the Special Committee
and the Board; Fairness of the Merger." See also "SPECIAL FACTORS RELATING TO
THE MERGER--Background and Reasons for the Merger."
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD; FAIRNESS OF THE MERGER
On September 2, 1997, the Special Committee reported that it had determined
(i) that the Merger is fair to, and in the best interests of, the Stockholders
(other than Vajna and Valdina) and (ii) to recommend that the Board approve and
adopt the Merger Agreement and the transactions contemplated thereby, including
the Merger. The Special Committee consists of one director, Gregory R. Paul, who
is not employed by or otherwise affiliated with the Company. At a meeting held
on the same day, the members of the Board (excluding Vajna, who abstained from
the vote) unanimously determined, based in part on the recommendation of the
Special Committee, that the Merger is fair to, and in the best interests of, the
Stockholders (other than Vajna and Valdina), approved and adopted the Merger
Agreement and the transactions contemplated thereby, including the Merger, and
determined to recommend that the Stockholders approve and adopt the Merger
Agreement. Vajna abstained from the vote due to his ownership interest in Buyer.
Of the six members of the Board at such time, three were not employees of the
Company: Gregory R. Paul, R. Timothy O'Donnell and Dianne Caplan Lebovits (the
former General Counsel of the Company who returned to private legal practice in
August 1996). On November 19, 1997, the Amendment to the Merger Agreement was
unanimously approved by the four members of the Board at such time other than
Vajna, who abstained from the vote (Messrs. Paul, O'Donnell and Braverman and
Ms. Lebovits).
In reaching the conclusions described above, the Special Committee and the
Board considered a number of factors, including, without limitation, the
following: (a) the Company's historical financial losses and anticipated
continuing operating losses; (b) increasing production costs and print and
advertising costs; (c) the significant risk of continued operations, including
that of dissipating the Company's remaining assets; (d) the termination of the
Domestic Distribution Agreement upon consummation of the Film Library Sale and
the August 1997 expiration of the commitment to lend under the Company's credit
facility; (e) the lack of strategic alternatives available to the Company in
view of the Company's disappointing operating results and efforts to implement
other strategic alternatives without success; (f) the existence of a substantial
amount of cash and cash equivalents of the Company and the additional cash to be
received in connection with the Assignment Agreement; (g) the Board's belief
that the Merger can be consummated more expeditiously and result in less
expenses than a dissolution of the Company under Delaware law, resulting in a
larger payment to the Stockholders in exchange for their equity interests in the
Company; (h) the historical market prices and net book value of the Shares; (i)
the amount of outstanding Shares beneficially owned by Vajna; (j) the terms and
conditions of the Merger Agreement; (k) that the Merger Consideration consists
entirely of cash; (l) the possible conflicts of interest of Vajna, certain
directors and members of management of the Company; and (m) that Stockholders
have the right to dissent from the Merger and demand appraisal of the fair value
of their Shares under the DGCL. See "SPECIAL FACTORS RELATING TO THE
MERGER--Recommendations of the Special Committee and the Board; Fairness of the
Merger." In addition, the Board considered the recommendation of the Special
Committee.
SURRENDER OF COMMON STOCK CERTIFICATES
Promptly after the Effective Time, a letter of transmittal and a notice of
consummation of the Merger and instructions with respect to the surrender of
certificates ("Certificates") previously representing Shares will be sent to
each record holder of Shares immediately prior to the Effective Time. The letter
of transmittal will set forth the procedure for surrendering such Certificates
to ChaseMellon Shareholder
23
<PAGE>
Services ("the Paying Agent"). Each holder of a Certificate or Certificates
(other than Certificates for Dissenting Shares, Shares held in the treasury of
the Company or Shares owned by Buyer, Vajna or Valdina) will be entitled to
receive, upon surrender to the Paying Agent of the Certificate or Certificates
for cancellation, together with such letter of transmittal duly executed, and
subject to any required backup withholding (within the meaning of Section 3406
of the Internal Revenue Code of 1986, as amended (the "Code")), the aggregate
amount of cash into which the Shares previously represented by such Certificate
or Certificates are converted in the Merger. Until surrendered to the Paying
Agent, each Certificate (other than Certificates for Dissenting Shares, Shares
held in the treasury of the Company or Shares owned by Buyer, Vajna or Valdina)
shall be deemed for all corporate purposes to evidence only the right to receive
upon such surrender the aggregate amount of cash into which the Shares
represented thereby shall have been converted, subject to any required backup
withholding (within the meaning of Section 3406 of the Code). No interest will
accrue or be paid on the cash payable upon the surrender of the Certificate or
Certificates. See "THE MERGER AGREEMENT--Surrender of Company Common Stock
Certificates." STOCKHOLDERS SHOULD NOT RETURN ANY CERTIFICATES WITH THE FORM OF
PROXY ACCOMPANYING THIS PROXY STATEMENT.
TREATMENT OF STOCK OPTIONS AND WARRANTS
The Merger Agreement requires that prior to the Effective Time, the Company
must (i) terminate the Company's 1994 Basic Stock Option and Stock Appreciation
Rights Plan and 1994 Special Stock Option and Stock Appreciation Rights Plan
(collectively, the "Option Plans"), and any unexercised options issued
thereunder, and (ii) cancel the Company's outstanding warrants. Upon
consummation of the Film Library Sale and the transactions contemplated by the
Assignment Agreement, the Option Plans and all unexercised options previously
granted under the Option Plans will terminate.
CONDITIONS TO THE MERGER; TERMINATION
The obligations of each party to effect the Merger are subject to the
fulfillment and/or waiver, at or prior to the Effective Time, of certain
conditions, including: (a) the Merger Agreement shall have been approved and
adopted by the requisite vote of the Stockholders under the DGCL; (b) the
consummation of the Merger shall not be prohibited by any statute, rule or
regulation; (c) 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 Merger and no
governmental action shall have been commenced or threatened which seeks to
prohibit the Merger; (d) certain litigation, proceedings and investigations
shall not be pending, threatened or in existence; (e) the Company shall have
obtained the Majority of the Minority Vote at the Special Meeting; (f) the
percentage of Shares demanding appraisal in accordance with Section 262 of the
DGCL to the total number of Shares outstanding immediately prior to the
Effective Time shall not exceed 15%; (g) the transactions contemplated by the
Library Sale Agreement shall have been consummated in all material respects; and
(h) the transactions contemplated by the Assignment Agreement shall have been
consummated in all material respects. See "THE MERGER AGREEMENT--Conditions to
the Merger; Termination."
The Merger Agreement may be terminated and the transactions contemplated
thereby abandoned (a) by the mutual written consent of the Special Committee, on
behalf of the Company, and the Board of Directors of Buyer; (b) by the Company
or Buyer if the Library Sale Agreement terminates; (c) by the Company, acting
through the Special Committee, or Buyer if, without a breach or violation of the
Merger Agreement by the terminating party, the Merger has not been consummated
by December 31, 1997 (the "Expiration Date"), provided, however, that if the
date by which the transactions contemplated by the Library Sale Agreement must
be consummated as provided in the Library Sale Agreement is extended by the
parties to such agreement, then the Expiration Date will automatically, without
any action required on the part of the parties to the Merger Agreement, be
extended by the same period of time; and (d) by the Company if the Board, based
on the recommendation of the Special Committee, shall have failed to
24
<PAGE>
recommend or withdrawn, modified or amended in any material resect its approval
or recommendation of the Merger or failed to hold the Special Meeting by
December 31, 1997. See "THE MERGER AGREEMENT--Conditions to the Merger,"
"--Termination; Fees and Expenses" and "--Amendments; Waivers."
REGULATORY APPROVALS
To the best knowledge of the Company, there are no federal or state
regulatory requirements which must be complied with, nor are there any such
governmental consents or approvals that must be obtained in connection with the
consummation of the Merger other than compliance with certain federal securities
laws.
ACCOUNTING TREATMENT
The Merger will be accounted for at historical cost as a combination of
entities under common control.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE STOCKHOLDERS
The Merger, pursuant to which Shares (other than Shares owned by Buyer,
Vajna or Valdina, Shares held in treasury, or Shares as to which statutory
dissenters' rights are perfected) will be converted into the right to receive
cash, will be a taxable transaction to the Stockholders whose Shares have been
so converted. Gain or loss would generally be realized and recognizable by each
such Stockholder in an amount equal to the difference between the Merger
Consideration received and the basis of the Shares owned by such Stockholder.
EACH STOCKHOLDER IS URGED TO CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE MERGER,
INCLUDING THE APPLICABILITY OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
MANAGEMENT; OWNERSHIP OF SHARES/OPTIONS. As a result of Vajna's beneficial
ownership of approximately 50.7% of the outstanding Shares (including Shares
owned by Valdina and Shares for which Vajna holds a proxy to vote), Vajna (and,
as a result, Buyer) would be deemed to control the Company. In addition, Vajna,
who is an officer, director and the beneficial owner of Buyer, is also the
Chairman of the Board, President and Chief Executive Officer of the Company.
As of the Record Date, the executive officers and directors of the Company
(other than Vajna) owned an aggregate of 387,341 Shares (Warren Braverman:
373,591 Shares; Dianne Caplan Lebovits: 2,500 Shares; and R. Timothy O'Donnell:
11,250 Shares) and held options (and also a warrant in the case of Mr.
O'Donnell) to purchase an aggregate of 85,000 Shares (of which options to
purchase an aggregate of 15,000 Shares were exercisable at prices below $2.52
per Share, and held by Dianne Caplan Lebovits: options to purchase 5,000 such
Shares; R. Timothy O'Donnell: options to purchase 5,000 such Shares; and Gregory
R. Paul: options to purchase 5,000 such Shares). If the Merger is consummated at
the Purchase Price of $2.52 per Share, such persons will receive an aggregate of
approximately $983,899 (Warren Braverman: $941,449; Dianne Caplan Lebovits:
$8,900; R. Timothy O'Donnell: $30,950; and Gregory R. Paul: $2,600) for their
Shares (including Shares issuable upon exercise of the options which have
exercise prices below $2.52 per Share, but, for purposes of such calculation,
deducting the exercise price of such options). See "CERTAIN INFORMATION
REGARDING THE COMPANY--Principal Stockholders of the Company" and "--Executive
Compensation."
INDEMNIFICATION. The Merger Agreement provides for the survival of all
rights to indemnification now existing in favor of the directors and executive
officers of the Company and the maintenance of a policy of directors' and
officers' liability insurance for a period of four years. See "THE MERGER
25
<PAGE>
AGREEMENT." The directors, officers and employees of the Company are also
indemnified against certain actions, claims and liabilities pursuant to the
Company's Certificate of Incorporation and Bylaws and, in the case of each
director, pursuant to indemnification agreements with the Company. See "CERTAIN
INFORMATION REGARDING THE COMPANY--Executive Compensation."
SEVERANCE ARRANGEMENTS. In connection with the Merger, the Company and
Vajna have mutually agreed to terminate the Employment Agreement between Vajna
and the Company, dated as of January 1, 1994, as amended (the "Vajna Employment
Agreement"), effective as of the Effective Time. Upon termination of the Vajna
Employment Agreement at the Effective Time, Vajna will be paid an amount equal
to the sum of (i) one hundred percent of the fixed annual compensation that
would otherwise have been payable to Vajna in the ordinary course from the
Effective Time through December 31, 1997 had the Vajna Employment Agreement not
been terminated at the Effective Time, and (ii) $500,000 (representing fifty
percent of the fixed annual compensation that would otherwise have been payable
to Vajna in the ordinary course from January 1, 1998 through December 31, 1998
had the Vajna Employment Agreement not been terminated at the Effective Time),
and (iii) $344,666 representing producer's performance fees earned under the
Vajna Employment Agreement with respect to DIE HARD WITH A VENGEANCE. Assuming
the Merger occurs on or about December 29, 1997, it is anticipated that, at the
Effective Time, Vajna will receive an aggregate amount of approximately $844,666
in consideration for the termination of the Vajna Employment Agreement. See "THE
MERGER AGREEMENT" and "CERTAIN INFORMATION REGARDING THE COMPANY--Executive
Compensation."
In connection with the Merger, the Company and certain officers of the
Company, including Warren Braverman, Chief Operating Officer, Chief Financial
Officer, Executive Vice President and a Director of the Company, have agreed to
certain severance arrangements. See "SPECIAL FACTORS RELATING TO THE
MERGER--Interests of Certain Persons in the Merger," "THE MERGER AGREEMENT" and
"CERTAIN INFORMATION REGARDING THE COMPANY--Executive Compensation."
Assuming the Merger occurs on or about December 29, 1997, it is anticipated
that, at the Effective Time, Mr. Braverman will receive an aggregate of
approximately $666,500 pursuant to his severance agreement. In addition, the
Company will forgive a $450,000 loan (bearing interest at the rate of 6% per
annum) which was made to Mr. Braverman in 1994. As of November 15, 1997, an
aggregate of $554,000 in principal and accrued interest was outstanding under
such loan. Monies which are held pursuant to the Company's Deferred Compensation
Plan for the account of Mr. Braverman will not be effected by the Merger.
The Company paid Fred Feitshans an aggregate of $250,000 in severance upon
his resignation as President of Production in July 1997. The Company also paid
Randolph M. Paul an aggregate of $220,000 in severance upon his resignation as
Senior Vice President, Business Advisor, and as a Director in September 1997.
The Company also forgave a $50,000 loan (bearing interest at 7% per annum) which
was made to Mr. Paul in January 1997. As of the date of his resignation, an
aggregate of approximately $52,500 was outstanding under such loan (including
accrued interest).
OTHER. For serving on certain committees of the Board, including on the
Special Committee, Gregory R. Paul receives an aggregate of $20,000 per year.
The Company also reimburses Mr. Paul and the Company's other directors for
travel expenses incurred in connection with their activities on behalf of the
Company. For serving on the Special Committee, Mr. Paul also received $50,000.
R. Timothy O'Donnell, a director of the Company, is the President and
majority stockholder of a privately-held investment banking concern, which is
the Company's financial advisor and which is receiving certain fees in
connection with the Merger. See "SPECIAL FACTORS RELATING TO THE MERGER--Fees
and Expenses," "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY--Interests of Certain Persons in the Asset Sales" and "SPECIAL FACTORS
RELATING TO THE MERGER--Interests of Certain Persons in the Merger." Jefferson
Capital acts as an investment advisor to an affiliate of Valdina which until
October 31, 1997 was indirectly owned
26
<PAGE>
49.9% by Vajna and 50.1% by The Mong Family Trust, which benefits certain
descendants of Mong Hing Yan, including the son of Mr. Vajna. Since October 31,
1997, such affiliate has been indirectly beneficially owned 100% by Vajna. In
each of the past five years, Jefferson Capital has received less than $50,000 in
investment advisory fees from such entity.
The foregoing interests of the Company's directors and executive officers,
and any possible conflicts of interest they may pose, were considered by the
Special Committee and the Board in connection with their determination to
approve the Merger. See "SPECIAL FACTORS RELATING TO THE MERGER-- Recommendation
of the Special Committee and the Board; Fairness of the Merger."
OPERATIONS PENDING AND FOLLOWING THE MERGER
The Company's plans pending the Merger are substantially the same as those
pending the Asset Sales. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE
ASSETS OF THE COMPANY-- Operations of the Company Pending and Following the
Asset Sales." At the time of the Merger, it is anticipated that substantially
all of the Company's assets will have been sold and substantially all of the
Company's previous operations will have ceased. See "Summary Table Regarding
Treatment of the Company's Non-Cash Assets." The commitment to lend under the
Company's credit facility has terminated. It is further anticipated that the
Domestic Distribution Agreement will have terminated by the Effective Time, and
the Company will have only minimal personnel remaining at such time. The
Company's employment agreements with Vajna and Mr. Braverman will terminate at
the Effective Time pursuant to their respective severance arrangements. As a
result, any operations conducted by the Company following the Merger will in
large part represent start-up operations. Notwithstanding the foregoing, Vajna
and/or affiliates of Vajna, in each case alone or with other entities (including
potentially the Company), are likely to seek to acquire, produce and arrange for
the financing and distribution of motion picture projects (including the
Development Projects) pursuant to new arrangements following the Merger. Upon
consummation of the Merger, Buyer intends to terminate the registration of the
Company's Common Stock under the Exchange Act and delist the Company's Common
Stock from the NASDAQ National Market System. The Company will also cease to
file periodic reports with the Commission, and the Company will be relieved of
the obligation to comply with the proxy rules of Regulation 14A under Section 14
of the Exchange Act.
APPRAISAL RIGHTS
Stockholders who, not later than the date of the Special Meeting, deliver to
the Company a written demand for appraisal rights, who do not vote in favor of
the Merger and who comply with all other applicable requirements of Section 262
of the DGCL ("Section 262"), will have the right to dissent from the Merger and
to have their Shares appraised by the Delaware Court of Chancery and to receive
payment of the "fair value" of such Shares as determined by such court, rather
than the Merger Consideration. The procedure for perfecting appraisal rights is
summarized under the caption "RIGHTS OF DISSENTING STOCKHOLDERS," and the
pertinent provisions of Section 262 are included as Appendix "D" to this Proxy
Statement.
27
<PAGE>
SUMMARY TABLE REGARDING TREATMENT OF THE
COMPANY'S NON-CASH ASSETS
The following table sets forth how the Company's material non-cash assets
have been or will be treated in the Asset Sales, in certain other arrangements
preceding the Asset Sales, and in the Merger. The left column lists the material
non-cash assets of the Company prior to such transactions, the middle column
indicates the acquiring party, and the right column describes in general terms
the consideration received or to be received by the Company with respect to each
particular transaction. The table is only a summary of certain information
regarding the Asset Sales, certain arrangements concerning assets not being
transferred in the Asset Sales, and the Merger. The table, for instance, does
not include the treatment of certain other projects and arrangements between the
Company and Disney (such as termination of the Domestic Distribution Agreement
and certain arrangements with respect to AN ALAN SMITHEE FILM). See "PROPOSAL
NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--The Library Sale
Agreement." The table also does not include the treatment of any receivables
relating to AN ALAN SMITHEE FILM. Reference is made to, and this table is
qualified in its entirety by, the more detailed information contained elsewhere
in this Proxy Statement and in the Appendices hereto. Stockholders are urged to
read this Proxy Statement and the Appendices hereto in their entirety.
<TABLE>
<CAPTION>
ASSET ACQUIRING PARTY IN CONSIDERATION FOR:
- ------------------------------------- ----------------------------------- -------------------------------------
<S> <C> <C>
The Company's Film Library (eleven .............. Disney ............. Transfer to the Company of the Disney
films including the right to Shares (555,556 Shares with an
receive any overages with respect aggregate market value of
to such films but excluding the approximately $1,076,390 based on
right to receive any minimum the closing price of the Company's
guarantees payable with respect to Shares on April 3, 1997, the date
such films and excluding the EVITA of the Library Sale Agreement) and
Soundtrack) Disney Warrant (a warrant to
Right to receive any overages with purchase 150,000 Shares at an
respect to exploitation of DIE HARD exercise price of $9.00 per Share).
WITH A VENGEANCE in the Disney Assumption of outstanding loans
Territories previously made by Disney to the
Company (approximately $40,387,000
as of November 15, 1997).
Assumption of all residuals and
participations relating to the Film
Library (other than certain guild
obligations arising from or related
to the production of the films in
the Film Library).
Assumption of all obligations of the
Company under the Company's
existing exploitation agreements
with respect to the Film Library
which are to be performed on or
after the closing of the Film
Library Sale, provided such
obligations have been listed on
schedules provided to Disney.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
ASSET ACQUIRING PARTY IN CONSIDERATION FOR:
- ------------------------------------- ----------------------------------- -------------------------------------
<S> <C> <C>
The Company's Rights in DIE HARD WITH
A VENGEANCE (other than the
Company's right to receive any ............... Fox ............... $11,250,000 cash
International DHWV Overages)
Settlement of the Company's "first
look" arrangement with Stone
pursuant to which the Company was
relieved of $961,000 in obligations
it otherwise would have had to
Stone under such arrangement (which
Stone Projects .............. Stone .............. is net of certain expenses incurred
by the Company in connection with
the settlement and certain payments
made by the Company to or for the
benefit of Stone pursuant to such
settlement).
Assumption of approximately $900,000
in obligations and liabilities,
Visual Effects Facility assets (and management of certain other
certain liabilities associated ........ Mass.Illusion LLC ........ liabilities and obligations, and
therewith) the contribution of $200,000
thereto.
EVITA Soundtrack .............. Disney ............. $1,500,000 cash
Right to receive any International
DHWV Overages (other than the right
to receive any overages with ........... Summit N.V. ........... $400,000
respect to exploitation agreements
relating to Italy or Hungary)
Miscellaneous Receivables ........... Summit N.V. ........... $400,000
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
ASSET ACQUIRING PARTY IN CONSIDERATION FOR:
- ------------------------------------- ----------------------------------- -------------------------------------
<S> <C> <C>
In the Merger, each Share (other than
Shares owned by Vajna or Valdina,
treasury Shares, or Shares as to
Development Projects which dissenters' rights are
One Stone Project The assets shown on the left are perfected) will be converted into
Right to receive International DHWV anticipated to be the remaining the right to receive $2.52 in cash,
Overages with respect to material non-cash assets of the which has been adjusted upwards
exploitation agreements Company from an Original Purchase Price of
$2.30 (and which is subject to
potential further upward adjustment
as provided in the Merger
Agreement although the Company does
not currently anticipate that there
is a significant likelihood of any
relating to Italy and Hungary further such upward adjustments).
Miscellaneous furnishings and ..... ..... Assuming no further Purchase Price
fixtures (including computers, immediately after the Merger. adjustments and no exercises of
related computer equipment, and Upon consummation of the Merger outstanding options, it is
artwork) the Company will be 100% owned currently estimated that holders of
Automobile by Vajna and Valdina. such Shares will receive an
aggregate of $16,234,699 upon
conversion of the Shares into the
Merger Consideration.
</TABLE>
30
<PAGE>
SUMMARY CONDENSED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
The following summary financial data for the five years ended December 31,
1996 are derived from the audited consolidated financial statements of the
Company. The financial data for the nine month periods ended September 30, 1996
and 1997 are derived from unaudited condensed consolidated financial statements.
The unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending December 31, 1997. The data should be read in conjunction with the
audited consolidated financial statements and the unaudited condensed
consolidated financial statements of the Company, related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Total revenue..................... $ 39,566 $ 9,006 $ 109,028 $ 192,880 $ 133,000 $ 89,772 $ 59,209
(Loss) income from operations..... (7,744) (2,672) 2,912 (16,762) (16,364) (2,172) (19,725)
Net (loss) income................. (10,804) (4,823) 2,895 (16,062) (15,905) (1,647) (22,787)
(Loss) income per common share.... -- (.64) .30 (1.23) (1.12) (.12) (1.69)
Weighted average shares
outstanding..................... -- 7,518 9,494 13,025 14,169 14,192 13,448
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.............................. $ 1,985 $ 1,840 $ 2,665 $ 29,832 $ 27,364 $ 11,032 $ 26,073
Restricted cash................... 1,000 500 -- -- 5,654 -- 5,169
Film costs, net of amortization... 18,665 115,108 223,827 160,756 103,792 144,684 53,424
Total assets...................... 27,102 119,992 253,891 206,257 156,548 176,378 96,158
Total debt........................ 32,711 93,991 143,146 73,202 47,420 64,494,000 53,060,000
Stockholders' (deficiency)
equity.......................... (14,808) (18,506) 44,434 51,717 36,607 50,070 16,371
PER SHARE DATA:
Net book value per common share..... $ (2.32) $ (2.90) $ 4.41 $ 3.96 $ 2.80 $ 3.83 $ 1.25
Common shares outstanding........... 6,383 6,383 10,075 13,075 13,075 13,075 13,075
</TABLE>
31
<PAGE>
THE SPECIAL MEETING
RECORD DATE AND PERSONS ENTITLED TO VOTE AT THE SPECIAL MEETING
The Board has fixed the close of business on November 7, 1997 as the Record
Date for the determination of Stockholders entitled to receive notice of and to
vote at the Special Meeting. Only holders of record of Company Common Stock at
the close of business on the Record Date will be entitled to notice of, and to
vote at, the Special Meeting. At the close of business on the Record Date, the
Company had outstanding 13,446,874 Shares.
QUORUM
The presence, in person or by properly executed proxy, of a majority of the
outstanding Shares as of the Record Date is necessary to constitute a quorum to
transact business at the Special Meeting. Those Shares present, in person or by
proxy, including Shares as to which authority to vote on any proposal being
considered at the Special Meeting is withheld, Shares abstaining as to any
proposal being considered at the Special Meeting, and broker non-votes on any
proposal being considered at the Special Meeting, will be considered present at
the Special Meeting for purposes of establishing a quorum.
VOTE REQUIRED
Stockholders are entitled to one vote at the Special Meeting for each Share
held of record by them on the Record Date. Each of the Asset Sale Proposal and
the Merger Proposal require the affirmative vote of the holders of a majority of
the outstanding Shares entitled to vote thereon for passage.
As of the Record Date, members of the Board, including Vajna, owned an
aggregate of 6,836,318 Shares (including Shares owned by Valdina), or
approximately 50.8% of the Shares outstanding on the Record Date. Pursuant to
the terms of the Library Sale Agreement, members of the Board who are also
Stockholders have agreed, in effect, to vote their Shares in favor of the Asset
Sale Proposal. As a result, if the members of the Board who own Shares do in
fact cast their votes in favor of the Asset Sale Proposal, approval of the Asset
Sale Proposal is assured.
As of the Record Date, Vajna beneficially owned (including Shares owned by
Valdina) or controlled the right to vote 6,821,318 Shares (or approximately
50.7% of the Shares outstanding as of such date). See "CERTAIN INFORMATION
REGARDING THE COMPANY--Principal Stockholders of the Company." Pursuant to the
terms of the Merger Agreement, Vajna and Valdina have agreed to vote such Shares
in favor of the Merger Proposal. As a result, receipt of the statutorily
required vote in favor of the Merger Proposal is assured. However, the Merger
Agreement also provides, as a condition to the closing of the Merger, that the
Company shall have obtained the Majority of the Minority Vote i.e., the
affirmative vote of a majority of the Shares voted at the Special Meeting on the
Merger Proposal (including abstentions, but excluding broker non-votes), whether
in person or by properly executed proxy, without taking into account those
shares owned by Vajna, Valdina, any affiliate of Vajna or Valdina, any executive
officer or director of the Company, or Disney. As of the Record Date, an
aggregate of 6,055,000 Shares (or approximately 45% of the Shares outstanding as
of such date) were owned by parties other than Vajna, Valdina, any affiliate of
Vajna or Valdina, any executive officer or director of the Company, or Disney
and thus are entitled to be included in the Majority of the Minority Vote
provided such Shares are voted on the Merger Proposal at the Special Meeting in
person or by properly executed proxy (including abstentions, but excluding
broker non-votes).
As of the Record Date, all directors and executive officers of the Company,
including Vajna, beneficially owned an aggregate of 6,836,318 Shares (including
Shares owned by Valdina), or approximately 50.8% of those Shares outstanding on
the Record Date. See "CERTAIN INFORMATION REGARDING THE COMPANY--Principal
Stockholders of the Company." The Company has been informed that all such
persons intend to vote their Shares in favor of the Asset Sale Proposal and the
Merger Proposal.
32
<PAGE>
APPRAISAL RIGHTS
Stockholders who comply with the procedures specified in Section 262 of the
DGCL will be entitled to dissent from the Merger and to have their Shares
appraised by the Delaware Court of Chancery and to receive payment of the "fair
value" of such Shares as determined by such Court rather than the Merger
Consideration. See "RIGHTS OF DISSENTING STOCKHOLDERS." Stockholders intending
to dissent from the Merger should NOT vote their shares in favor of the Merger
Proposal. A vote in favor of the Merger Proposal will constitute a waiver of
such Stockholder's appraisal rights. Appraisal rights are not available with
respect to the Asset Sales.
PROXIES
When a proxy card is returned, properly signed and dated, the Shares
represented thereby will be voted in accordance with the instructions on the
proxy card. Facsimile copies of the proxy, properly completed and duly executed,
will be accepted at (213) 553-9738. If a Stockholder does not attend the Special
Meeting and does not return the signed proxy card, such holder's Shares will not
be voted and this will have the effect of a vote against matters to be voted on
at the Special Meeting for purposes of determining whether the statutorily
required vote is obtained, however, it will have no effect on determining
whether the Majority of the Minority Vote has been obtained. Stockholders are
urged to mark the box on the proxy card to indicate how the Shares represented
by the proxy card are to be voted. Abstentions will have the effect of a vote
"against" the matter being voted upon. If a Stockholder returns a signed proxy
card but does not indicate how his or her Shares are to be voted, such Shares
will be voted "FOR" approval of the Asset Sales and "FOR" approval of the Merger
Proposal. The proxy card also confers discretionary authority on the individuals
appointed by the Board and named on the proxy card to vote the Shares
represented thereby on any other matter that is properly presented for action at
the Special Meeting. However, proxy cards voted against the Asset Sale Proposal
or the Merger Proposal may not be used by management to vote in favor of an
adjournment of the Special Meeting pursuant to such discretionary authority. A
Stockholder who has given a proxy may revoke it at any time prior to its
exercise at the Special Meeting by delivering an instrument of revocation to the
Secretary of the Company, by duly executing and submitting a proxy bearing a
later date, or by appearing at the Special Meeting and voting in person. The
mere presence at the Special Meeting of the person who has given a proxy will
not revoke such proxy. In addition, brokers who hold Shares as nominees will not
have discretionary authorization to vote such Shares on any of the matters to be
voted thereon in the absence of instructions from the beneficial owners and,
therefore, the failure of the beneficial owners to give such instructions will
have the effect of a vote "against" such matters for purposes of determining
whether the statutorily required vote is obtained, however, it will have no
effect on determining whether the Majority of the Minority Vote has been
obtained.
Proxies will be solicited through the use of the mails. In addition, certain
directors, officers and employees of the Company may solicit proxies (for no
additional compensation) by personal interview, telephone, telex, telegram or
similar means of communication. Arrangements have also been made with brokerage
firms and other custodians, nominees and fiduciaries for the forwarding of
solicitation material by such persons to the beneficial owners of Shares, and
the Company will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in connection
therewith. In addition, the Company has retained D.F. King to assist in the
solicitation of proxies from the Company's Stockholders. D.F. King will receive
for such service a fee of approximately $4,000 plus reimbursement of reasonable
out-of-pocket expenses. The Company will bear all such costs of solicitation.
OTHER
Representatives of Ernst & Young LLP are expected to attend the Special
Meeting, will have an opportunity to make a statement if they desire to do so,
and will be available to respond to appropriate questions.
33
<PAGE>
PROPOSAL NO. 1
SALE OF SUBSTANTIALLY ALL OF
THE ASSETS OF THE COMPANY
Pursuant to Proposal No. 1, the Stockholders are being asked to approve the
sale of substantially all of the Company's assets, including the sale of
substantially all of the Company's film library, pursuant to the Library Sale
Agreement with Disney and the Assignment Agreement with Fox.
PARTIES TO THE ASSET SALES
CINERGI PICTURES ENTERTAINMENT INC. The Company is an independent producer
and distributor of motion pictures. See "CERTAIN INFORMATION REGARDING THE
COMPANY." The Company's executive offices are located at 2308 Broadway, Santa
Monica, California 90404 (telephone number: 310-315-6000). Since the Company's
formation in November 1989 it has produced the following twelve motion pictures:
<TABLE>
<CAPTION>
DOMESTIC
THEATRICAL
MOTION PICTURE RELEASE DATE
- -------------------------------- ------------------
<S> <C>
MEDICINE MAN February 1992
TOMBSTONE December 1993
RENAISSANCE MAN June 1994
COLOR OF NIGHT August 1994
DIE HARD WITH A VENGEANCE May 1995
JUDGE DREDD June 1995
THE SCARLET LETTER October 1995
NIXON December 1995
AMANDA July 1996 (1)
EVITA December 1996
THE SHADOW CONSPIRACY January 1997
AN ALAN SMITHEE FILM -- (2)
</TABLE>
--------------------------------------
(1) AMANDA has not been released theatrically (except in Spain).
The date shown is the date AMANDA (which did not meet the
criteria under the Company's domestic distribution arrangement
with Disney to be distributed thereunder) was delivered to
Family Channel Pictures, the owner of all rights to distribute
the film in the United States and Canada. The Company controls
the distribution rights to the film for the rest of the world
and has used an unaffiliated international sales company to
assist in international distribution of the film.
(2) The Company has recently begun delivering the film to
distributors. The domestic theatrical release date has not yet
been scheduled.
TWENTIETH CENTURY FOX FILM CORPORATION. Fox, an indirect wholly owned
subsidiary of The News Corporation Limited which is a diversified international
communications company incorporated under the laws of Australia, is engaged in
the business of filmed entertainment, i.e., the production, financing,
acquisition and distribution of motion pictures and television programming. The
Company and Fox jointly own DIE HARD WITH A VENGEANCE which was produced by the
Company and initially released domestically by Fox in May 1995.
THE WALT DISNEY COMPANY. Disney is a diversified international
entertainment company. In 1990, the Company entered into a distribution
agreement and certain related agreements with Disney (collectively, and as it
has been amended, the "Domestic Distribution Agreement") pursuant to which
Disney has distributed most of the Company's motion pictures in the United
States and its possessions, Canada and
34
<PAGE>
Latin America (the "Americas"). In connection with an April 1994 amendment to
the Domestic Distribution Agreement, the Company granted Disney a warrant to
purchase 150,000 Shares at an exercise price of $9.00 per Share (the "Disney
Warrant"). In conjunction with the Company's initial public offering in June
1994, Disney also purchased 555,556 Shares (the "Disney Shares") at the initial
public offering price of $9.00 per share. In addition, the Company and Disney
have engaged in certain other transactions (including the license by the Company
to Disney of certain of the Company's rights in DIE HARD WITH A VENGEANCE). See
"The Library Sale Agreement" and "Certain Additional Information Regarding
Transactions with Disney" below.
BACKGROUND AND REASONS FOR THE LIBRARY SALE AGREEMENT
The Company was formed to develop, finance, produce and license "event"
motion pictures for exhibition in domestic and international theatrical markets
and for later worldwide release in all media, including home video and pay and
free television. "Event" motion pictures, which feature major film stars, high
quality production values and other exploitable qualities which appeal to the
largest segment of the motion picture audiences in both the United States and
international markets, also typically involve direct negative costs (excluding
capitalized interest and overhead) substantially in excess of the industry
average direct negative cost. The industry average direct negative cost in 1996
for members of the Motion Picture Association of America ("MPAA"), an industry
trade association which includes the major studios with which the Company
competes, was $39,835,000 (an increase of approximately 16.2% from 1994 and
approximately 69.9% from 1989) and the industry average prints and advertising
costs per picture in 1996 for members of the MPAA was $19,838,000 (an increase
of approximately 23.4% from 1994 and approximately 114.5% from 1989).
The Company has generally financed the production costs of its motion
pictures through loans obtained under a credit facility the Company had with The
Chase Manhattan Bank ("Chase") and a syndicate of lenders (under which the
commitment to lend expired August 31, 1997), advances and production loans from
Disney pursuant to the Domestic Distribution Agreement, and direct investments
by the Company, as necessary. Typically the Company obtained advances (before
commencement and during production of its motion pictures, but generally payable
upon delivery of the applicable film) from pre-licensing of distribution rights,
pursuant to single picture or output agreements, as well as pursuant to the
Domestic Distribution Agreement, in an amount equal to a substantial percentage
of the aggregate direct negative cost of each motion picture. For motion
pictures with budgeted direct negative costs exceeding approximately
$40,000,000, however, such advances available from third parties and Disney
would not typically cover the direct production costs of such films, thereby
necessitating direct investment by the Company.
In light of the apparently continuing increases in the cost of motion
picture production which could have necessitated increasing direct investment by
the Company in its films if it chose to continue to produce higher budget
"event" motion pictures, in 1995 the Company "greenlighted" (initiated pre-
production on) three films with relatively smaller budgets on average than those
of the Company's then recent past productions. The average direct negative cost
of the three motion pictures greenlighted in 1995 and scheduled by the Company
at that time to be released in 1996 (AMANDA, EVITA and THE SHADOW CONSPIRACY)
was approximately $35,529,000 which was substantially less than the average
direct negative cost of the four motion pictures released by the Company in 1995
(DIE HARD WITH A VENGEANCE, JUDGE DREDD, THE SCARLET LETTER and NIXON) of
$64,297,000.
In Fall 1995, the Company also initiated discussions with Disney regarding a
potential restructuring of the Domestic Distribution Agreement which would have
taken into account the increased cost of producing and releasing motion
pictures. Pursuant to the terms and conditions of the Domestic Distribution
Agreement, in exchange for exclusive distribution rights in all media throughout
the Americas, Disney is required to advertise, promote and exploit in all such
media, twenty-five "qualified" motion pictures produced by the Company that meet
certain criteria (of which nine films have been delivered to Disney). The
Domestic Distribution Agreement obligates Disney to provide the Company with
advances and loans
35
<PAGE>
for the production of qualified motion pictures. However, the amount of advances
and loans Disney is required to provide the Company pursuant to the Domestic
Distribution Agreement is based upon scaled percentages of each film's budgeted
direct negative cost, and is subject to certain maximums and other limitations
under the Domestic Distribution Agreement. In general terms, due to such
maximums, loans and advances from Disney represent a smaller percentage of a
film's budgeted cost at higher budget levels. Subject to the terms of the
Domestic Distribution Agreement, Disney is also obligated to advance amounts to
cover the costs of the initial theatrical release of each such motion picture in
the United States and Canada, including specified minimum amounts to cover the
costs of manufacturing release prints, advertising and publicity. Disney is
entitled to receive certain specified percentages of gross revenues generated in
each media as distribution fees and is entitled to recoup the amounts advanced
to the Company, together with interest thereon, as well as its costs of
distribution. The Company proposed (i) increasing the amount of the percentages
of a film's budgeted cost that loans and advances from Disney could represent,
(ii) increasing the applicable maximums, and (iii) reducing Disney's
distribution fees.
The Company's discussions with Disney regarding a potential restructuring of
the Domestic Distribution Agreement continued periodically through early 1996.
As an agreement could not be reached with Disney to restructure the Domestic
Distribution Agreement, the Company, with Disney's assent, approached certain of
the other major motion picture studios in early 1996 to ascertain their interest
in entering into an arrangement to distribute the Company's films domestically
in the event the Company and Disney agreed to terminate the Domestic
Distribution Agreement. Although discussions were held, no agreement was reached
by the Company with respect to an alternative domestic distribution arrangement
to the Company's arrangement with Disney.
In early 1996, in light of the disappointing financial results of three of
the Company's four 1995 releases (JUDGE DREDD, THE SCARLET LETTER and NIXON),
the Board and management initiated an overall strategic review of the Company's
goals and principal business strategies to ascertain whether those goals and
strategies remained consistent with, among other things, the continuing increase
in production and releasing costs, the development projects available in the
marketplace, an increased number of motion pictures released by motion picture
companies domestically, and the Company's financial capabilities. At the time
the strategic review was initiated, the Company's primary goal had been to
produce and arrange for the release of three to five commercially successful
"event" motion pictures per year. The Company's primary business strategy had
been to seek to limit the financial risk to the Company inherent in any one
motion picture project while preserving potential returns through the strategic
use of the Domestic Distribution Agreement and through pre-licensing of
international distribution rights on a picture-by-picture basis or pursuant to
selected international output agreements. Specifically, as noted above, the
Company sought to obtain advances from pre-licensing of distribution rights,
pursuant to single picture or output agreements, as well as pursuant to the
Domestic Distribution Agreement, in an amount equal to a substantial percentage
of the aggregate direct negative costs of each motion picture. Additional
strategies included (i) to create over time, through the production of motion
pictures, a library of certain rights in "event" motion pictures which would
have the capability of generating revenues from the worldwide exploitation of
such rights in existing and future media and markets, and (ii) to develop
long-term relationships with key talent who had demonstrated the ability to
attract widespread audience interest, domestically and in key international
markets.
In connection with the strategic review, the Board and management also
considered various strategic alternatives in order to maximize stockholder
value. The Board and management considered raising additional capital in public
financings but concluded that raising additional capital in the public markets
on terms advantageous to the Company was not feasible due to the Company's
recent financial performance and the Company's then current stock price. The
Board and management also considered the sale of a partial interest in the
Company or of the entire Company.
At the end of May 1996, the Company retained the investment banking firm of
Jefferson Capital Group, Ltd. ("Jefferson Capital") (of which R. Timothy
O'Donnell, a director of the Company, is President and majority stockholder) to
assist the Company in its strategic review (including discussions
36
<PAGE>
with third parties) and advise the Board on the Company's strategic
alternatives. Jefferson Capital has substantial experience in advising
independent motion picture and similar entertainment companies including: LIVE
Entertainment Inc., an independent producer and distributor of motion pictures
(Jefferson Capital has advised such company in a variety of matters including
with respect to its pre-packaged reorganization under Chapter 11 of the U.S.
Bankruptcy Code); Overseas FilmGroup, Inc., an independent worldwide distributor
of motion pictures (Jefferson Capital advised such company with respect to its
1996 merger with Entertainment/Media Acquisition Corporation); All American
Communications Inc., a diversified entertainment company specializing in the
production and distribution of television programming (Jefferson Capital has
advised such company in a variety of matters including with respect to its
purchase of Freemantle, Inc.); and Carolco Pictures Inc., a former independent
producer of motion pictures (Jefferson Capital has advised such company in a
series of financial restructurings and with respect to its liquidation pursuant
to federal bankruptcy proceedings) . On June 6, 1996, the Company publicly
announced that its strategic review included discussions with third parties
regarding the sale of a partial interest in the Company or of the entire Company
and that Jefferson Capital had been retained to assist in the strategic review.
In connection with its engagement, Jefferson Capital assisted the Company in
supplying information to and organized a series of confidential meetings with
potential investors, merger partners and purchasers. From April 1996 through
Fall 1996, the Company had periodic discussions with a number of companies
regarding a potential investment in, merger with or purchase of the Company, and
exchanged some information in connection with certain of these discussions. Ten
companies entered into confidentiality agreements with the Company. No written
proposal or letter of intent was executed by the Company and any of such
parties. The Company engaged in substantive negotiations with New Regency
Productions Inc., an independent motion picture production company ("New
Regency") unaffiliated with the Company, and in June 1996 received a proposed
term sheet from New Regency suggesting for discussion purposes a cash tender by
New Regency for the Company's Common Stock other than Common Stock owned by
Vajna or Valdina which New Regency proposed would be exchanged for stock in New
Regency. Under the discussion proposal, the cash tender price and share exchange
ratio were to be based on a value of the Company of $45,000,000 and a value of
New Regency of $810,000,000. Although not stated in the discussion proposal,
assuming a total equity valuation of $45,000,000 for the Company, the cash
tender price would have been approximately $3.17 per Share. The discussion
proposal was subject to a variety of conditions including the execution of
definitive documentation and the satisfactory completion of due diligence by New
Regency. New Regency and the Company engaged in substantive negotiations with
respect to New Regency's proposal during May and June 1996. In July 1996,
despite the Company's expressed desire of finalizing a transaction based on the
general terms of the discussion proposal, New Regency abandoned its discussions
with the Company. New Regency indicated it was doing so due to New Regency's
then ongoing discussions with the domestic distributor of New Regency's films
regarding New Regency's domestic distribution arrangement.
On July 2, 1996, in connection with consideration of New Regency's proposal
in particular (given that the New Regency discussion proposal provided for
consideration for Vajna and Valdina (New Regency Stock, as well as a possible
employment agreement for Vajna) different from that to be provided to the
Company's other Stockholders (cash)), and potential business combinations and
other strategic alternatives in general, the Board formed the Special Committee.
The Special Committee consists of the director Gregory R. Paul, who is not
employed by or otherwise affiliated with the Company, as the committee's sole
member. On the same date, the Special Committee retained the law firm of Cahill
Gordon & Reindel as outside counsel to the Special Committee.
The Company also engaged in substantive discussions with Phoenix Pictures
Inc., an independent motion picture production company ("Phoenix"), and in
October 1996 received a proposed letter of intent from Phoenix with respect to a
proposed merger of the Company with a subsidiary of Phoenix whereby the Company
would have become a subsidiary of Phoenix and the Company's operations
curtailed. Pursuant to the proposed merger, in exchange for their Company Common
Stock, the Stockholders of the Company
37
<PAGE>
would have received a class of stock different than that to be held by the
existing stockholders and management of Phoenix which would have had one vote
per share (versus ten votes per share for the class to be held by existing
Phoenix stockholders and management). Pursuant to the Phoenix proposal, the
exchange ratio would have been based on the relationship of the net present
value of the Company's free cash (which was not defined in the proposal) to
$70,725,000, subject to certain adjustments. Under the Phoenix proposal, after
the proposed merger the Stockholders of the Company would have owned a minority
of the issued and outstanding voting securities of Phoenix. The Company
terminated discussions with Phoenix because the Company did not believe that the
transaction envisioned by Phoenix would be in the best interests of the
Company's Stockholders as it would result in the Stockholders receiving equity
in another independent film company--one which had been recently formed, did not
have an extensive track record, and could, in the Company's view, face many of
the same factors that had led the Company to initiate its strategic
review--pursuant to an exchange ratio which valued Phoenix at a substantial
premium to book value.
In July 1996, the Company had approached Disney to ascertain whether it
would be interested in acquiring the Company. Disney had indicated it was not
interested in an acquisition of the Company. In Fall 1996, the Company again
approached Disney to ascertain its interest in an acquisition of the Company.
Although Disney again indicated that it was not interested in an acquisition of
the Company, Disney indicated that it would be interested in a transaction
involving the acquisition of the Company's film library and termination of the
domestic distribution arrangement between Disney and the Company. Additional
discussions were held between the Company and Disney through December 1996. In
late December 1996, Disney sent to the Company a proposed letter of intent.
Disney and the Company subsequently agreed that rather than negotiate a letter
of intent, to instead negotiate a definitive agreement. Discussions were held
between the Company and its representatives and Disney and its representatives
from late January 1997 through February 1997. Warren Braverman, Chief Operating
Officer, Chief Financial Officer, Executive Vice President and a Director of the
Company, was primarily responsible for negotiating this transaction on behalf of
the Company. Mr. Braverman was assisted by Randolph M. Paul, who was then
serving as Senior Vice President, Business Affairs and as a Director of the
Company.
At a meeting of the Board held on February 21, 1997, the Board discussed the
potential transaction with Disney and the strategic alternatives available to
the Company including continuing to produce motion pictures, the acquisition of
the Company or a portion of the Company by another company in the entertainment
industry or which desired to enter the entertainment industry, and winding down
the Company's operations and dissolving. Although the Board believed the Company
should continue after the meeting to solicit and respond to overtures regarding
an investment in or purchase of the Company, in view of the results to such
point in time of the Company's discussions with third parties regarding an
investment in or acquisition of the Company, the Board did not view the
likelihood in the then foreseeable future of the Company receiving a proposal
for an investment or acquisition on terms advantageous to the Company to be
significant. The Board also believed that in light of, among other things, the
disappointing financial results of three of the Company's four 1995 releases and
the 1997 release of THE SHADOW CONSPIRACY and the continuing increase in motion
picture production and releasing costs which could necessitate increased direct
investment in the Company's motion pictures if the Company were to produce
additional "event" motion pictures, that it would be in the best interests of
the Stockholders to consider the winding down of the Company's operations. The
Board also considered continuing to produce smaller budget films but believed
that, in the current releasing environment, production of smaller budget films,
with which Company management had significantly less experience, posed
significant risk, including that of dissipating the Company's remaining assets.
The Board also believed that Disney's desire to reach an agreement with the
Company to terminate the Domestic Distribution Agreement, as well as both the
changes in management at Disney which had occurred since the Domestic
Distribution Agreement had originally been entered into and the increased
production by Disney itself of large budget "event" motion pictures, could
negatively impact the distribution of the Company's films by Disney in the event
the
38
<PAGE>
Company were to continue to produce films for distribution by Disney pursuant to
the Domestic Distribution Agreement. Given the prior inability of the Company to
negotiate an alternative to the Domestic Distribution Agreement with either
Disney or another major studio, the Board believed that for the then foreseeable
future the likelihood of the Company successfully obtaining an alternative
distribution arrangement, on terms more advantageous to the Company than the
Domestic Distribution Agreement, was not significant. As a result of the
foregoing, the Board authorized continued negotiations with Disney regarding a
sale of the Company's film library to Disney.
After the February 21st Board meeting, the Company and its representatives
continued to negotiate with Disney and its representatives through the beginning
of April 1997.
On April 2, 1997, the Board approved the Library Sale Agreement with Disney
which was executed on April 3, 1997. Execution of the Library Sale Agreement was
publicly announced the same day. Concurrent with such announcement, the Company
also announced, among other things, that it did not presently intend to commence
production on any additional motion pictures. Pursuant to the Library Sale
Agreement, Disney conducted additional due diligence relating to the film
library through late August 1997. On August 27, 1997 and November 4, 1997, the
Board approved amendments to the Library Sale Agreement with Disney which, among
other things, modified the prior arrangements between the Company and Disney
with respect to AN ALAN SMITHEE FILM and extended the date by which the Film
Library Sale must be consummated or the parties can terminate the Library Sale
Agreement. The amendments were subsequently entered into by the parties thereto.
The book value of the Film Library at September 30, 1997 was approximately
$38,493,000. The Board did not seek a third party appraisal of the Film Library
given, among other things, management's expertise in valuing film properties and
given that the negotiations with respect to the Film Library Sale were conducted
at arms' length between the Company and Disney.
Consummation of the transactions contemplated by the Library Sale Agreement
is conditioned on, among other things, the Stockholders' approval of the Asset
Sale Proposal. Neither consummation of the transactions contemplated by the
Assignment Agreement or the Merger is a condition to the Film Library Sale.
BACKGROUND AND REASONS FOR THE ASSIGNMENT AGREEMENT
As indicated above, the Company and Fox jointly own DIE HARD WITH A
VENGEANCE, which was produced by the Company and initially released domestically
by Fox in May 1995. The rights of the Company and Fox with respect to DIE HARD
WITH A VENGEANCE are governed by a Memorandum of Agreement dated as of September
9, 1992 and a One Picture Theatrical Motion Picture License Agreement dated as
of April 15, 1994 (collectively, the "Die Hard Agreements"). Pursuant to the Die
Hard Agreements, in August 1994, the Company was paid $30,000,000 in advances by
Fox which received the right to distribute DIE HARD WITH A VENGEANCE in all
media in the United States and Canada (including territories and possessions),
Japan, the Bahamas, Bermuda and the Panama Canal Zone and worldwide in certain
ancillary media (the "Fox Territories"). The Company controls the remaining
international distribution rights to the film, while Fox controls all sequel
rights to the film. In 1994, in exchange for aggregate advances of $23,200,000
which were paid in 1995, the Company granted Disney distribution rights in DIE
HARD WITH A VENGEANCE until June 2020 in a portion of the international
territories for which the Company controls distribution rights: the Benelux
region, French speaking Europe and Africa, German speaking Europe, the United
Kingdom and Ireland, Spain, Central and South America, Scandinavia, Taiwan,
Switzerland, Portugal and Greece (the "Disney Territories"). The Company has
also licensed to an aggregate of approximately thirty subdistributors (the
"International Subdistributors") the right, in the aggregate, to distribute the
film in certain of the international territories for which the Company controls
distribution rights and which were not licensed to Disney (the "Subdistributor
Territories"). In most cases, the Company received an advance from the
respective International Subdistributor.
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In general, Fox, Disney and the International Subdistributors are obligated
to pay all costs associated with distribution of the picture in the respective
territories for which they have distribution rights and are entitled to receive
certain specified percentages of gross revenues generated in each media in such
territories as distribution fees, and then to recoup the amounts advanced to the
Company, together with interest thereon, as well as their costs of distribution.
Under the Company's agreements with Fox, Disney and the International
Subdistributors, the Company was thereafter entitled, with certain exceptions,
to receive overages, i.e., the remainder of all revenues generated by the
picture in excess of Fox's, Disney's and the International Subdistributor's
ongoing distribution fees and costs. Fox, Disney and the Company are responsible
for all residuals arising from exploitation of DIE HARD WITH A VENGEANCE in the
territories for which they have distribution rights to the film. The Company is
also responsible for residuals arising from exploitation of the film in the
Subdistributor Territories. Residuals represent payments which motion picture
producers must make to various entertainment guilds and unions when the producer
exploits a motion picture in markets other than the motion picture's primary
intended market. Residuals are generally calculated as a percentage of the gross
revenues derived from exploiting the picture in these ancillary markets. The
Company is obligated to pay participations associated with the distribution of
the film in the territories for which the Company controls distribution rights
to the film, as well as in the Fox Territories, the Disney Territories and the
Subdistributor Territories. However, upon consummation of the Film Library Sale,
Disney will be obligated to pay participations associated with distribution of
DIE HARD WITH A VENGEANCE in the Disney Territories. Participations represent
rights granted by a motion picture producer to key creative talent involved in
the production of a particular motion picture to participate in the revenues
generated by such motion picture, in many cases payable only after the producer
has recouped its costs of production (including capitalized interest and
overhead) but in some cases payable before the producer has recouped such costs.
The Company's initial negotiations with Disney regarding the Film Library
Sale had contemplated that the film rights to be acquired by Disney would
include the Company's rights in DIE HARD WITH A VENGEANCE. During the course of
negotiations, however, Disney and the Company agreed that such rights would not
be part of the film rights to be sold to Disney. As a result, in March 1997, the
Company initiated discussions with Fox regarding the acquisition by Fox of the
Company's rights in DIE HARD WITH A VENGEANCE. Negotiations were held between
the Company and Fox through early July 1997. As with the Library Sale Agreement,
Mr. Braverman led the negotiations on behalf of the Company with the assistance
of Mr. Randolph M. Paul. On July 2, 1997, the Board of Directors approved the
Assignment Agreement with Fox, subject to Fox indicating that it had completed
its due diligence. On July 14, 1997, Fox indicated that it had completed its due
diligence, and on July 15, 1997 the Assignment Agreement was executed. Execution
of the Assignment Agreement was publicly announced on July 16, 1997. On August
27, the Board approved an amendment to the Assignment Agreement which reduced
the amount of insurance coverage required to be maintained by the Company for
Fox's benefit in connection with the transactions contemplated by the Assignment
Agreement. The amendment was entered into on August 27, 1997.
The book value of the Company's rights in DIE HARD WITH A VENGEANCE at
September 30, 1997 was approximately $10,645,000. The Board did not seek a third
party appraisal of the Company's rights in DIE HARD WITH A VENGEANCE given,
among other things, management's expertise in valuing film properties, and given
that the negotiations with respect to such rights were conducted at arms' length
between the Company and Fox.
Consummation of the transactions contemplated by the Assignment Agreement is
conditioned on, among other things, the Stockholders' approval of the Asset Sale
Proposal and the consummation of the transactions contemplated by the Library
Sale Agreement. Consummation of the Merger is not a condition to the
transactions contemplated by the Assignment Agreement.
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RECOMMENDATION OF THE BOARD
The Board believes that the consummation of the Asset Sales is expedient and
in the best interests of the Company and the Stockholders, and unanimously
recommends that the Stockholders vote "FOR" the Asset Sale Proposal. The Board
believes that the terms of each of the Library Sale Agreement and the Assignment
Agreement (collectively, the "Asset Sale Agreements") are fair to, and in the
best interests of, the Company and the Stockholders. In recommending that the
Stockholders approve the Asset Sale Proposal, the Board considered a number of
factors, including, without limitation, the following:
(a) Arms-length Negotiations. That the Asset Sale Agreements were the
result of arms-length negotiations between the Company and Disney and Fox,
respectively. In the Board's opinion, Fox was desirous of reaching an
agreement with the Company to obtain the Company's rights in DIE HARD WITH A
VENGEANCE, and Disney was desirous of reaching an agreement with the Company
to obtain the Film Library and terminate the Domestic Distribution
Agreement. Accordingly, the Board believes its negotiations were at
arms-length and produced a fair price.
(b) Operating Losses and Limited Prospects for Profitable
Operations. The net losses incurred by the Company in six of the seven full
fiscal years since the Company's formation, including the $16,062,000 net
loss incurred by the Company for the year ended December 31, 1995, the
$15,905,000 net loss incurred by the Company for the year ended December 31,
1996, the $12,953,000 net loss incurred by the Company during the six months
ended June 30, 1997, and anticipated continuing operating losses, combined
with the Board's belief that there is a substantial risk that the Company
would not be able to operate profitably before depleting substantially all
of its remaining assets. The Company incurred net losses for the quarter and
the nine months ended September 30, 1997 of $9,833,000 and $22,787,000,
respectively.
(c) Increasing Production and Releasing Costs. The increase in the
industry average direct negative costs for members of the MPAA which
includes the major studios with which the Company competes of 69.9% from
1989 (the year of the Company's formation) through 1996 and the
corresponding increase in the industry average prints and advertising costs
per picture for members of the MPAA of 114.5% over the same period, and the
apparent continuing increase of such costs which could necessitate
increasing direct investment by the Company in its films if it were to
continue to produce "event" motion pictures.
(d) Risks of Continued Operations. The significant risk of continued
operations, including that of dissipating the Company's remaining assets, in
light of: the disappointing audience acceptance of many of the Company's
past productions; the apparent continuing increase in production and
releasing costs which could necessitate increased direct investment by the
Company in its films if it were to continue to produce "event" motion
pictures; the relatively less amount of experience of management of the
Company in general, and Vajna, in particular, in producing smaller budget
films as compared to larger budget or "event" films; the competitive
releasing environment and the presence of numerous competitors many of which
have significantly greater financial and other resources than the Company;
the Board's belief that Disney desires to terminate, with the agreement of
the Company, the Domestic Distribution Agreement; and the August 31, 1997
expiration of the commitment to lend under the Company's credit facility.
(e) Domestic Distribution Agreement. The Board's belief that Disney
desires to terminate, with the agreement of the Company, the Domestic
Distribution Agreement, and Disney's position, as expressed to the Company,
that in the event the Company were to engage in an alternative transaction
to the Film Library Sale that included the sale of stock to a third party,
Disney believed it would have the right to terminate the Domestic
Distribution Agreement. The Library Sale Agreement includes a provision
requiring the Company to give written notice to any third party interested
in a purchase of stock of the Company in an alternative transaction to the
Film Library Sale, that Disney has informed
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the Company that Disney believes that the consummation of such alternative
transaction would give Disney the right to terminate the Domestic
Distribution Agreement.
(f) Lack of Strategic Alternatives. The lack of strategic alternatives
available to the Company in view of the Company's disappointing operating
results and efforts to implement other strategic alternatives without
success. The Company had been considering various strategic alternatives
since late 1995 and had been unable to (i) negotiate a restructuring of the
Domestic Distribution Agreement with Disney, (ii) obtain an alternative
domestic distribution arrangement with another major studio, (iii) attract a
significant investment in the Company, or (iv) enter into an agreement for a
merger or other business combination or acquisition of the Company, in each
case on terms advantageous to the Company and the Stockholders. Based upon
the Company's unsuccessful pursuit of strategic alternatives since late 1995
and anticipated continuing operating losses, the Board believes that it had
exhausted its identified realistic strategic alternatives and that the
Company would be unable to attract a significant investment in the Company
or enter into an agreement for a merger or other business combination or
acquisition of the Company that the Board believed would be in the best
interests of the Company and the Stockholders.
(g) Reduction of Liabilities. The significant reduction of the
Company's liabilities resulting from the Asset Sales, including the
assumption by Disney of (i) the Company's outstanding loans from Disney, and
(ii) residuals, participations and scheduled liabilities relating to the
Film Library. The total liabilities of the Company reflected on the balance
sheet of the Company at September 30, 1997 is, on a pro forma basis, being
reduced by an aggregate of approximately $71,007,000 (including $2,141,000
of deferred revenue) or approximately 88% as a result of the Asset Sales.
(h) Existence of Cash Assets. The existence of a substantial amount of
cash and cash equivalents of the Company and the potential use of such cash
in combination with the cash consideration to be received in connection with
consummation of the Assignment Agreement to make a cash payment to the
Stockholders in exchange for their equity interests in the Company pursuant
to the proposed Merger. At June 30, 1997, the Company had cash and cash
equivalents of approximately $30,274,000 (exclusive of restricted cash). At
September 30, 1997, the Company had cash and cash equivalents of
approximately $26,073,000 (exclusive of restricted cash). If the Company
were to delay the Asset Sales, the Company believes that anticipated
continuing operating losses would reduce the Company's cash position and
would, most likely, reduce the amount of any future cash payment to the
Company's Stockholders in exchange for their equity interests in the
Company.
In view of the wide variety of factors considered in connection with its
evaluation of the proposed Asset Sales, the Board did not find it practical to,
and did not, quantify or otherwise attempt to assign relative weights to the
specific factors considered in reaching its determination. On balance, the Board
viewed the factors set forth in items (a) - (f) as favorable to their decision,
and the factors set forth in items (g) and (h) as neutral to their decision. The
Board viewed the factors set forth in items (a) - (h) as supportive of their
determination that the Asset Sales are expedient and in the best interests of
the Stockholders, and the factors set forth in item (a) as supportive of their
determination that the Asset Sales are fair to the Stockholders. In addition,
the Board considered as negative, to the extent the Company was to continue
operations (including motion picture production), the fact that, as a result of
the Asset Sales, (i) the Domestic Distribution Agreement would be terminated,
making the production and distribution of motion pictures difficult in the
absence of an alternative domestic distribution arrangement, and (ii) the
Company would no longer be able to exploit the Film Library. As the Company has
determined not to commence production on additional motion pictures in light of
the Film Library Sale, the favorable factors noted above were believed to
outweigh such negative factors. The factors discussed above represent the
material factors considered by the Board in connection with the Asset Sales.
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THE LIBRARY SALE AGREEMENT
Set forth below is a description of the material terms of the Library Sale
Agreement. The description of the Library Sale Agreement and the other
information regarding the Library Sale Agreement contained herein are only
summaries of certain provisions of the Library Sale Agreement and are qualified
in their entirety by reference to the Library Sale Agreement which is included
as Appendix "A" to this Proxy Statement.
THE FILM LIBRARY. Pursuant to the Library Sale Agreement, the Company has
agreed to sell to Disney substantially all of the films in the Company's motion
picture library. Specifically, the Film Library being sold to Disney includes
primarily all of the Company's rights to the following eleven motion pictures:
MEDICINE MAN, TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT, JUDGE DREDD, THE
SCARLET LETTER, NIXON, AMANDA, EVITA (excluding the Company's rights in the
soundtrack), THE SHADOW CONSPIRACY and AN ALAN SMITHEE FILM.
Pursuant to the Library Sale Agreement, the rights being sold to Disney
include the right to receive all worldwide "overages" and other payments of any
kind paid or payable to or collected by the Company after January 1, 1997 which
arise from the exploitation by the Company of the films being sold to Disney.
The Company, however, will retain all minimum guarantees paid or payable to the
Company pursuant to contracts in existence as of January 1, 1997 with respect to
the films being sold to Disney. Prior to the commencement of production of a
motion picture, the Company has generally entered into license agreements with
distributors pursuant to which distributors acquire the right to distribute such
motion picture (or series of motion pictures pursuant to an "output agreement")
in a certain geographic territory and media for a specific term. Minimum
guarantees represent fixed amounts required to be paid to the Company by
distributors of the Company's films prior to or upon delivery of the film to the
distributor. Generally, once the distributor has recouped an amount equal to its
minimum guarantee and costs of distribution, the distributor is entitled to
retain ongoing distribution fees computed as a percentage of the gross revenues
generated from the distribution of the motion picture. The Company is thereafter
entitled to receive "overages," i.e., all remaining revenues received by the
distributor from distribution of the picture in such territory in excess of the
ongoing distribution fee retained by the distributor. From January 1, 1997
through November 15, 1997, the Company has received approximately $255,000 in
overages which will be paid to Disney upon consummation of the Film Library
Sale, along with any overages received by the Company after November 15, 1997.
Although the Film Library Sale does not include the Company's rights
("Soundtrack Rights") in the soundtrack to EVITA (the "EVITA Soundtrack"), the
Company has accepted a separate offer from Disney to purchase the Soundtrack
Rights for $1,500,000 in cash in a transaction conditioned upon and anticipated
to be consummated concurrently with the Film Library Sale (the "Soundtrack
Sale").
CONSIDERATION FOR FILM LIBRARY. In exchange for the assets being sold to
Disney, Disney has agreed to:
- TRANSFER THE DISNEY SHARES AND DISNEY WARRANT TO THE COMPANY.
The Disney Shares represent approximately 4% of the issued and
outstanding Shares.
- ASSUME THE OUTSTANDING LOANS PREVIOUSLY MADE BY DISNEY TO THE
COMPANY.
Pursuant to the Domestic Distribution Agreement with Disney, the
Company has outstanding term loans from Disney (the proceeds of which
were used to finance a portion of the production costs of five of the
Company's films) under which an aggregate $40,387,000 in principal and
accrued interest was outstanding as of November 15, 1997. Each Disney
term loan bears interest at the prime rate in effect from time to time
(8.5% at November 15, 1997) plus 1.5% and is to be repaid with accrued
interest on or before the earlier of (i) four years after the loan
proceeds were first made available to the Company or (ii) three years
after the initial domestic theatrical release of such picture.
Although one such loan was scheduled to mature in May 1997, Disney
agreed that no repayment of such loan (or any other term loan)
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is required unless the Library Sale Agreement is terminated. Each of
the loans is secured by rights to distribute the respective motion
picture in the Americas and, except for one term loan which is
personally guaranteed by Vajna, certain other distribution rights
related to the other motion pictures financed by Disney.
- ASSUME ALL RESIDUALS AND PARTICIPATION OBLIGATIONS RELATING TO THE
FILM LIBRARY (OTHER THAN CERTAIN GUILD OBLIGATIONS ARISING FROM OR
RELATED TO THE PRODUCTION OF THE FILMS IN THE FILM LIBRARY.
The obligation to pay residuals arising out of Disney's exploitation
of the Company's motion pictures in the Americas has previously been
assumed by Disney pursuant to the Domestic Distribution Agreement
(subject to Disney's right to recoup such payments). The residuals and
participation obligations being assumed by Disney constitute
substantially all of the Company's residuals and participation
obligations (other than certain residuals and participation
obligations relating to DIE HARD WITH A VENGEANCE).
- ASSUME ALL OBLIGATIONS OF THE COMPANY UNDER THE COMPANY'S EXISTING
EXPLOITATION AGREEMENTS WITH RESPECT TO THE FILM LIBRARY WHICH ARE TO
BE PERFORMED ON OR AFTER THE CLOSING OF THE FILM LIBRARY SALE,
PROVIDED SUCH OBLIGATIONS HAVE BEEN LISTED ON SCHEDULES PROVIDED TO
DISNEY.
The Company has arranged for international distribution of its films
(in territories other than Canada and Latin America) by licensing them
to various local or international distributors (including in some
circumstances Disney) either on a picture-by-picture basis or pursuant
to selected output agreements. Upon consummation of the Film Library
Sale, Disney will acquire all of the rights and benefits (in addition
to assumption of scheduled liabilities) arising under the Company's
existing exploitation agreements with respect to the Film Library.
However, with respect to the Company's output agreements, Disney will
not acquire the right (or have any obligation) to have any additional
motion pictures of Disney or its affiliates be distributed by the
distributors who are party to such output agreements.
TERMINATION OF DOMESTIC DISTRIBUTION AGREEMENT. Upon consummation of the
Film Library Sale, the Domestic Distribution Agreement with Disney will be
terminated, including substantially all of the audit rights of the Company and
Disney thereunder. Pursuant to the Domestic Distribution Agreement, in exchange
for exclusive distribution rights in all media throughout the Americas, Disney
is required, subject to the terms and conditions of the Domestic Distribution
Agreement, to advertise, promote and exploit in all such media 25 "qualified"
motion pictures produced by the Company that meet certain criteria specified in
the Domestic Distribution Agreement. In general, "qualified" motion pictures
have budgets exceeding $25,000,000, feature star performers meeting certain
criteria, and do not include foreign language films or films receiving ratings
from the MPAA more restrictive than "R." During the term of the Domestic
Distribution Agreement, Disney also has the right to elect to distribute any
non-qualified motion pictures produced by the Company. Disney exercised this
right in the case of AN ALAN SMITHEE FILM. The Domestic Distribution Agreement
provides that its term extends until the Company has delivered 25 qualified
motion pictures, although Disney's right to distribute in the Americas motion
pictures produced during the term of the Domestic Distribution Agreement
continues in perpetuity if Disney continues to actively exploit the motion
pictures. The Company has delivered nine films to date which count toward the 25
qualified motion pictures. AN ALAN SMITHEE FILM will count as the tenth such
film.
The Domestic Distribution Agreement obligates Disney to provide the Company
with advances and loans (at the Company's option, subject to certain conditions)
for the production of qualified motion pictures based upon scaled percentages of
each film's budgeted direct negative cost, subject to certain maximums and the
other terms of the Domestic Distribution Agreement. Subject to the terms of the
Domestic Distribution Agreement, Disney is also obligated to advance amounts to
cover the costs of the initial theatrical release of each such motion picture in
the United States and Canada, including specified minimum amounts to cover the
costs of manufacturing release prints, advertising and publicity. All advances
and distribution costs are recoupable out of the revenues generated by the
motion picture in the
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Americas, except that distribution costs expended for home video distribution
and Latin American distribution are recoupable only out of the respective
revenues generated in each such media or market. As set forth in the Domestic
Distribution Agreement, Disney is entitled to receive certain specified
percentages of gross revenues generated in each media as distribution fees and
is entitled to recoup the amounts advanced to the Company, together with
interest thereon, as well as its costs of distribution. The Company is
thereafter entitled to receive the remainder of all revenues received by Disney
generated by the Company's films in excess of Disney's ongoing distribution
fees. The repayment of each production loan made by Disney with respect to each
qualified motion picture is secured by certain rights in such qualified picture
and all proceeds from the exploitation of such qualified motion picture in all
media in the Americas. The Domestic Distribution Agreement provides that it may
be terminated by Disney in the event that the Company fails to deliver a
qualified picture to Disney for a period of three years or in the event of the
loss of Vajna's services; provided, however, that if the loss of Vajna's
services is due to death or disability, Disney may not terminate the Domestic
Distribution Agreement with respect to qualified pictures for which the Company
has already engaged certain creative elements. Pursuant to the Library Sale
Agreement, in the event the Company were to commence pre-production or
production on a motion picture during the term of the Library Sale Agreement,
the motion picture would not be considered a "qualified" motion picture under
the Domestic Distribution Agreement, and, accordingly, Disney would not be
obligated to finance or distribute such motion picture.
TREATMENT OF CERTAIN OTHER PROJECTS AND ARRANGEMENTS. In addition to the
Domestic Distribution Agreement, the Company has certain other agreements and
arrangements with Disney. The Library Sale Agreement provides for the following
treatment of those arrangements:
AN ALAN SMITHEE FILM. Under existing agreements with Disney, Disney was
obligated to pay the Company $5,000,000 upon the delivery of AN ALAN SMITHEE
FILM to Disney by the Company. Pursuant to the Library Sale Agreement, Disney
will instead pay the reduced amount of $3,725,000 to the Company upon delivery
of the film. In addition, to the extent that the Company receives any fixed cash
minimum guarantees with respect to AN ALAN SMITHEE FILM ("Excess Minimum
Guarantees") other than those minimum guarantees the Company has scheduled under
existing exploitation agreements with parties other than Disney, then the
Company, at the closing of the Film Library Sale, must account for and remit
such Excess Minimum Guarantees to Disney. The Company does not presently
anticipate, as of the date of this Proxy Statement, that there will be any
significant Excess Minimum Guarantees.
DIE HARD WITH A VENGEANCE OVERAGES. If the Film Library Sale is
consummated, the Company will relinquish its rights to all overages otherwise
payable by Disney to the Company after January 1, 1997 from the distribution of
DIE HARD WITH A VENGEANCE in the Disney Territories (i.e., those international
territories for which distribution rights were previously licensed by the
Company to Disney). In 2020, the distribution rights granted by the Company to
Disney will revert to Fox. Disney is responsible for all residuals (and, upon
consummation of the Film Library Sale, will be responsible for participation
obligations) arising from exploitation of DIE HARD WITH A VENGEANCE in the
Disney Territories during the term for which it has been granted distribution
rights to the film.
OLIVER STONE FIRST LOOK ARRANGEMENT. The Company had a "first-look"
arrangement with Oliver Stone and certain of his affiliated entities
(collectively, "Stone") pursuant to which Stone submitted to the Company all
theatrical motion picture projects owned or controlled by Stone for the
Company's development and consideration of possible production. As consideration
for Stone's submitting such projects to the Company, the Company paid certain
amounts annually to Stone for overhead and development. Disney reimbursed the
Company for all amounts payable to Stone through February 10, 1997. In September
1997, the Company entered into the Termination Agreement with Stone in order to
terminate the first look arrangement. Pursuant to such agreement, the Company
(i) transferred to Stone all but one of the Stone Projects and (ii) made certain
payments to, or for the benefit of Stone. As a result of the Termination
Agreement, the Company was relieved of $961,000 in obligations the Company
otherwise
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would have had with respect to the first look arrangement. See "ARRANGEMENTS
CONCERNING OTHER ASSETS--The Stone Projects." In the event the Film Library Sale
is not consummated, Disney would be obligated to reimburse the Company for all
amounts paid to Stone after February 10, 1997 in connection with the first look
arrangement.
DEEP RISING. The Company and Disney have an arrangement whereby the Company
is financially obligated to pay Disney the lesser of 50% of the cost of the
motion picture currently entitled DEEP RISING or $22,500,000 (the "Cost
Amount"), in exchange for (i) a 50% equity participation in DEEP RISING, and
(ii) a sales fee for international distribution of such motion picture. If the
Film Library Sale is consummated, the Company (a) will no longer have any
interest in the film as it will no longer serve as sales agent with respect to
the film, (b) will relinquish the equity participation and sales fee, (c) will
remit to Disney all minimum guarantees received by the Company with respect to
DEEP RISING while it served as a sales agent with respect to the film and which
were not previously remitted to Disney, and (d) will no longer be obligated to
pay the Cost Amount.
SMOKE AND MIRRORS. Through November 15, 1997, Disney had advanced
approximately $2,625,000 (which accrues interest at $528 per day) to assist in
the development of the Company's motion picture project SMOKE AND MIRRORS. If
the Film Library Sale is consummated, Disney will receive a right of first
negotiation to acquire or participate in the financing and distribution of such
project, and Disney will also be entitled to reimbursement of its costs and
expenses (including interest) in the project in the event it is made into a
film.
EATERS OF THE DEAD. In July 1996, the Company assigned to Disney the
development project Eaters of the Dead in exchange for the following in the
event a theatrical motion picture based on the project is produced and released:
$767,298 (plus interest) representing reimbursement of the Company's development
costs relating to the project, $1,500,000 if the Company provides the executive
producing services of Vajna in connection with the production, and a
participation interest in the motion picture. If the Library Sale is
consummated, Disney will not be obligated to make any such payments (or grant
any participation) to the Company with respect to EATERS OF THE DEAD. Disney has
informed the Company that production of EATERS OF THE DEAD has commenced.
JUDGE DREDD AND EVITA SALE-LEASEBACKS. In 1995 and 1996, respectively, the
Company completed sale-leaseback transactions with respect to JUDGE DREDD and
EVITA. The sale-leaseback transactions may be unwound in certain circumstances
relating to British tax treatment of the transactions, and the Company could be
liable for certain unwind costs. Disney has agreed, upon consummation of the
Film Library Sale to assume all of the rights and obligations under the
applicable leases of the Company's subsidiaries that are the lessees in such
sale-leaseback transactions, however, the Company would remain a guarantor of
payment of the unwind costs and certain other potential liabilities.
UP CLOSE AND PERSONAL. The Company has assisted Disney in the international
pre-licensing of the Disney motion picture UP CLOSE AND PERSONAL. Upon
consummation of the Film Library Sale, the Company will no longer assist Disney
in pre-licensing the film or be paid any fees with respect thereto. All sales
agency fees paid to the Company by Disney in 1994, 1995 and 1996 for
pre-licensing such film were paid by the Company to Summit International Ltd.
(collectively with its affiliates, "Summit"), an international sales company
unaffiliated with the Company which has assisted the Company as a sales agent in
the international pre-licensing of the Company's films and was utilized by the
Company in connection with the pre-licensing of UP CLOSE AND PERSONAL.
REPRESENTATIONS AND WARRANTIES. The Library Sale Agreement contains
representations and warranties by the Company and Disney relating to, among
other things: (a) due organization, valid existence and good standing of the
Company and Disney and other similar corporate matters; (b) the authorization
and enforceability of the Library Sale Agreement; and (c) the consents required
to effectuate the Film Library
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Sale. The Library Sale Agreement contains additional representations and
warranties, including representations and warranties by the Company with respect
to the Film Library and representations and warranties by Disney with respect to
Disney's ownership of the Disney Shares and Disney Warrant.
CERTAIN COVENANTS. Prior to the closing of the Film Library Sale or
termination of the Library Sale Agreement, the Company is permitted to continue
operating in the ordinary course of business and may enter into transactions
that will not materially adversely affect the Film Library. Without Disney's
consent, however, the Company may not further license or exploit or agree to
license or exploit the Film Library or modify existing agreements relating to
the Film Library. The Company has also agreed to obtain errors and omissions
insurance for each of the motion pictures being sold to Disney, with a term of
five years following the closing of the Film Library Sale and with aggregate
liability limits with respect to each film of not less than $3,000,000. In
addition, the Company and Disney have agreed to make all filings and use
reasonable efforts to obtain all approvals necessary to consummate the Film
Library Sale.
CONDITIONS TO THE FILM LIBRARY SALE. The obligations of the Company and
Disney to consummate the Film Library Sale are subject to the satisfaction or
waiver of a number of conditions, including, among other things: (a) approval of
the Film Library Sale by the Company's Stockholders; (b) the expiration or
termination of any applicable waiting period under the Hart-Scott-Rodino
Anti-Trust Improvements Act of 1976, as amended; (c) the other party's
representations and warranties being true and correct in all material respects
at the closing; (d) the other party having performed and complied in all
material respects with the undertakings and covenants required by the Library
Sale Agreement to be performed or complied with by it prior to or at the
closing; (e) the absence of any pending litigation, claim, action,
investigation, or proceeding which might restrain, delay, challenge or
invalidate any part of the Film Library Sale; and (f) the receipt of required
consents and approvals.
The Company's obligation to consummate the Film Library Sale is subject to
certain additional conditions including, among other things: Disney's release of
all guarantees and security interests granted Disney in connection with the term
loans from Disney, and Disney's execution of agreements with each of the
entertainment guilds effectuating Disney's assumption of the Company's residuals
obligations with respect to the Film Library. Disney's obligation to consummate
the Film Library Sale is also subject to certain additional conditions,
including, among other things, (i) no material adverse changes in the Film
Library; (ii) the release by the lenders under the Company's credit facility of
their liens against the Film Library; (iii) termination of all sales agency
agreements between the Company and Summit; (iv) the grant of a security interest
in certain assets to Disney to secure certain of the obligations to Disney
relating to SMOKE AND MIRRORS and to certain Stone projects; (v) the completion
by the Company and delivery to Disney of AN ALAN SMITHEE FILM; and (vi) the
receipt by Disney of various acknowledgments and consents required with respect
to Disney's assumption of the rights and obligations of the applicable
subsidiaries of the Company under the leases in the JUDGE DREDD and EVITA
sale-leaseback transactions.
INDEMNIFICATION. The Library Sale Agreement provides that the Company and
Disney will each indemnify and hold harmless the other party and its directors,
officers, employees, affiliates (and the affiliates' directors, officers, and
employees), agents and assigns of the other from and against any and all losses
relating to any breach of the representations, warranties, covenants or
agreements made in or pursuant to the Library Sale Agreement or related
agreements (subject to certain limitations contained in the Library Sale
Agreement). The Company has also agreed to indemnify Disney against losses
incurred by Disney as a result of any claim asserted by any stockholder of the
Company with respect to the Film Library Sale or the Film Library, or as a
result of any liabilities not expressly assumed by Disney. In addition, Disney
has also agreed to indemnify the Company against losses incurred by the Company
as a result of the liabilities which Disney is expressly assuming as part of the
Film Library Sale. The representations and warranties of the Company and Disney
contained in the Library Sale Agreement will generally survive the Closing for
eighteen months, with certain limited exceptions.
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<PAGE>
ALTERNATIVE TRANSACTIONS. Pursuant to the Library Sale Agreement, the
Company has agreed that, until the closing of the Film Library Sale or the
termination of the Library Sale Agreement, it will not, and will not permit any
of its affiliates or representatives to, solicit any inquiries or the making of
any proposal which constitutes, or may reasonably be expected to lead to, an
alternative transaction with a third party ("Alternative Transaction"). However,
the Company may, and may permit its representatives to: (a) furnish information
to persons making unsolicited inquiries or proposals related to a possible
Alternative Transaction; and (b) enter into negotiations or discussions with
such persons. In addition, prior to the Stockholders' approval of the Asset Sale
Proposal, the Company may enter into one or more agreements providing for one or
more possible Alternative Transactions; provided that: (i) within five days of
the commencement of any negotiations or discussions with a third party relating
to a possible Alternative Transaction, the Company gives Disney notice in
writing of the start of the negotiations or discussions; (ii) if the Company
commences negotiations or discussions with a third party for a possible
Alternative Transaction on or after the thirty-first day following the date of
the Library Sale Agreement, Disney may terminate the Library Sale Agreement at
any time after receipt of such notice; and (iii) within five business days of
the commencement of negotiations or discussions with a third party relating to a
possible Alternative Transaction consisting of a sale of the stock of the
Company ("Third Party Stock Sale"), but in any event prior to signing a
definitive agreement with respect to such Third Party Stock Sale, the Company is
required to notify the possible buyer in the Third Party Stock Sale that Disney
has informed the Company that Disney believes the consummation of the Third
Party Stock Sale gives Disney the right to terminate the Domestic Distribution
Agreement. If the Company determines that all Alternative Transactions cannot or
will not be consummated, the Company must give written notice to Disney of such
fact. If Disney has any right to terminate the Library Sale Agreement under
these provisions and has not done so, Disney will have five business days from
the time it receives such notice from the Company to notify the Company whether
Disney will terminate the Library Sale Agreement or proceed with consummation of
the Film Library Sale. If Disney does not have a right to terminate under these
provisions, or if Disney has such a right and elects not to exercise it, the
Company and Disney must proceed to consummate the Film Library Sale. The Closing
date, however, would be extended by the number of days the Company spent
pursuing the Alternative Transaction. Notwithstanding the foregoing, the Library
Sale Agreement expressly provides that nothing contained in such agreement will
prohibit the Company or the members of its Board of Directors from complying
with its and their (a) fiduciary duties and (b) obligations under applicable
state and federal law or rules and regulations promulgated thereunder.
AMENDMENTS; TERMINATION. The Library Sale Agreement may be amended only by
written consent of the parties. The Library Sale Agreement terminates
automatically if: (i) prior to approval of the Film Library Sale by the
Company's Stockholders, the Company's Board receives an unsolicited offer from a
third party to take part in an Alternative Transaction, (ii) the Company's Board
determines, in the exercise of its fiduciary duties under applicable law, that
the Alternative Transaction would be more beneficial to the Company or the
Company's Stockholders than the Film Library Sale; (iii) the Alternative
Transaction and the Film Library Sale cannot both be consummated in accordance
with their respective terms, and (iv) the Alternative Transaction is
subsequently consummated.
The Library Sale Agreement may be terminated at any time prior to Closing:
(a) upon mutual written consent of the Company and Disney; (b) by either the
Company or Disney if the other party materially breaches its respective
representations, warranties or covenants and fails to cure any such breach
within thirty days of receiving written notice of the breach; (c) by the Company
or Disney if the conditions to its obligations to close have not been satisfied
in all material respects by the date of Closing; (d) by Disney if the Company
commences negotiations for an Alternative Transaction, or (e) by Disney or the
Company if the closing has not occurred by December 24, 1997 (unless the Library
Sale Agreement has, by its terms, been extended to accommodate an Alternative
Transaction).
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<PAGE>
If the Library Sale Agreement is terminated, all obligations of Disney and
the Company thereunder will terminate without liability of either party to the
other except (i) certain provisions, including the indemnification provisions,
will survive such termination, (ii) the Company will remain liable for losses
incurred by Disney (with certain exceptions) as the result of the breach by the
Company of the Company's representations and warranties or certain specified
covenants in the Library Sale Agreement or because the Company intentionally
refuses to proceed with the closing or intentionally prevents the closing from
taking place (other than because the Company is pursuing an Alternative
Transaction), and (iii) Disney will remain liable for losses incurred by the
Company as a result of the breach by Disney of certain specified covenants. In
addition, if the Library Sale Agreement is terminated as a result of the breach
by one party of the agreement, then, subject to certain limitations, the
non-breaching party may also seek damages and pursue any other available legal
remedies.
Disney is entitled to certain other rights if the Film Library Sale
terminates as the result of an Alternative Transaction which is consummated. If
the Alternative Transaction involves the sale of any of the Company's assets
that would otherwise have been sold to Disney pursuant to the Library Sale
Agreement, then: (a) Disney's obligations under the Domestic Distribution
Agreement with respect to motion pictures not yet completed and/or delivered by
the Company to Disney for distribution will terminate, (b) the Domestic
Distribution Agreement will remain in full force and effect with respect to
previously delivered motion pictures, and (c) the term loans from Disney (under
which an aggregate $40,387,000 in principal and accrued interest was outstanding
as of November 15, 1997) will immediately become due and payable by the Company.
If, however, the Alternative Transaction involves the sale of stock of the
Company, the Company has agreed to pay all reasonable out-of-pocket expenses
incurred by Disney incident to the negotiation, preparation and performance of
the Library Sale Agreement.
CLOSING DATE. The Library Sale Agreement provides that, unless Disney and
the Company consent to a different date, the closing of the Film Library Sale
will take place within 5 business days after the receipt of the last consent or
approval required for either Disney or the Company to consummate the Film
Library Sale. The Company currently anticipates that the closing of the Film
Library Sale will occur as soon as practicable after the Special Meeting,
subject to the satisfaction or waiver of the conditions precedent to the Film
Library Sale set forth in the Library Sale Agreement.
THE ASSIGNMENT AGREEMENT
Set forth below is a description of the material terms of the Assignment
Agreement. The description of the Assignment Agreement and the other information
regarding the Assignment Agreement contained herein are only summaries of
certain provisions of such agreement and are qualified in their entirety by
reference to the Assignment Agreement which is included as Appendix "B" to this
Proxy Statement.
ASSIGNMENT OF RIGHTS AND TREATMENT OF RELATED RIGHTS AND
OBLIGATIONS. Pursuant to the Assignment Agreement, the Company has agreed to
assign to Fox the Company's rights in DIE HARD WITH A VENGEANCE (including the
right to receive any overages from Fox with respect to the Fox Territories),
subject to the terms of the Company's existing exploitation agreements relating
to such rights, including the Company's license of distribution rights to Disney
with respect to the Disney Territories and to International Subdistributors with
respect to the Subdistributor Territories. Pursuant to the Assignment Agreement,
the Company, which upon consummation of the Film Library Sale will relinquish
the right to overages payable by Disney with respect to DIE HARD WITH A
VENGEANCE, was still entitled to receive any overages under the Company's
existing exploitation agreements with International Subdistributors. However, as
indicated under "CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS--Summit
Transactions," the Company subsequently sold substantially all of such remaining
rights to receive DIE HARD WITH A VENGEANCE overages.
Fox will continue to be responsible for the payment of residuals relating to
distribution of the film in those territories for which Fox currently controls
distribution rights, and, as the Company's existing
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<PAGE>
exploitation agreements expire (including the Company's agreements with Disney
and the International Subdistributors) and the distribution rights in those
territories revert to Fox, Fox will become responsible for the payment of
residuals in the applicable territories covered by such exploitation agreements.
The Company, however, will be responsible for all participations due to profit
participants in the film except those arising from distribution of DIE HARD WITH
A VENGEANCE in the Disney Territories. The profit participations relating to the
film include primarily a "producer's performance fee" due to Vajna under his
employment agreement with the Company of $344,666 which is to be paid to Vajna
upon consummation of the Merger. The Company currently anticipates, subject to,
among other things, actual future revenues generated by the film, that the
Company's residuals and participation obligations with respect to such film will
be approximately $811,000.
CONSIDERATION FOR THE RIGHTS BEING ASSIGNED. In exchange for the Company's
assignment of rights to Fox and the other representations, warranties and
agreements of the Company pursuant to the Assignment Agreement, Fox has agreed
to pay to the Company the sum of $11,250,000 in cash.
CONDITIONS TO THE ASSIGNMENT AGREEMENT. The parties' obligations to
consummate the transactions under the Assignment Agreement are conditioned on
the Stockholders' approval of the Asset Sales and the consummation of the
transactions contemplated by the Library Sale Agreement.
REPRESENTATIONS AND WARRANTIES. The Assignment Agreement contains
representations and warranties by the Company and Fox relating to, among other
things: (a) due organization, valid existence and good standing of the Company
and Fox and other similar corporate matters; and (b) the authorization and
enforceability of the Assignment Agreement. The Assignment Agreement also
contains additional representations and warranties by the Company with respect
to the rights being assigned to Fox and certain materials provided to Fox in
connection with its due diligence review.
INDEMNIFICATION. The Assignment Agreement provides that the Company and Fox
will each indemnify and hold harmless the other party and its parents,
subsidiaries, affiliates, stockholders, directors, officers, employees and
agents against all third party claims and losses resulting from the exploitation
of its rights in DIE HARD WITH A VENGEANCE and for any breach of its
representations, warranties and/or agreements in the Assignment Agreement. The
Company has agreed to further indemnify Fox from any claim or action against Fox
based on any liability or obligation of the Company not expressly assumed by Fox
pursuant to the Assignment Agreement, or initiated by the Company or a
stockholder or creditor of the Company relating to the Assignment Agreement or
with respect to the assignment of rights to Fox thereunder, other than an action
to enforce the Assignment Agreement. Fox has also agreed to indemnify the
Company against any claim or action against the Company relating to any
obligation or liability assumed by Fox pursuant to the Assignment Agreement.
CERTAIN COVENANTS. Pursuant to the Assignment Agreement, the Company agreed
that it or any successor in interest will maintain liquid assets of at least
$500,000 for five years after the closing of the Assignment Agreement to provide
additional security to Fox with respect to the Company's obligations to Fox
under the Assignment Agreement. The Company further agreed that if the liquid
assets of the Company or any successor in interest fall below such level during
the five year period then the Company, in order to secure its obligations under
the Assignment Agreement, will either (i) grant Fox a security interest in
$250,000 worth of acceptable collateral, (ii) obtain a letter of credit in favor
of Fox in the amount of $250,000 from a bank with $200,000,000 or more of
assets, or (iii) provide a personal guarantee of Vajna in the amount of
$250,000. The Company has also agreed to maintain for five years from the date
of closing errors and omissions insurance for DIE HARD WITH A VENGEANCE covering
Fox and its affiliates, and to maintain for four years from the date of closing
directors' and officers' liability insurance with coverage up to $500,000 naming
Fox as an additional insured. Fox has agreed not to interfere with Disney's or
the International Subdistributors' exercise of their respective distribution
rights to DIE HARD WITH A VENGEANCE. In addition, the Company and Fox have
agreed to perform such further acts and execute such further
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<PAGE>
documents as may be reasonably necessary or appropriate to carry out the intent
of the Assignment Agreement.
AMENDMENTS; TERMINATION. The Assignment Agreement may be amended only by
written consent of the parties. In the event the Library Sale Agreement
terminates, the Assignment Agreement will automatically terminate without
liability of either party to the other.
CLOSING. The transactions contemplated by the Assignment Agreement are
scheduled to close concurrently with the closing of the Film Library Sale.
APPRAISAL RIGHTS INAPPLICABLE
Under Delaware law, the Stockholders do not possess any appraisal rights in
relation to the Asset Sales. However, Stockholders who follow certain procedures
under Delaware law will be entitled to dissent from the Merger and have their
Shares appraised by the Delaware Court of Chancery. See "THE MERGER
AGREEMENT--Dissenter's Rights" and "RIGHTS OF DISSENTING STOCKHOLDERS."
REGULATORY APPROVALS
To the best knowledge of the Company, there are no federal or state
regulatory requirements which must be complied with, nor are there any such
governmental consents or approvals that must be obtained in connection with
consummation of the Asset Sales other than compliance with the Hart-Scott-Rodino
Anti-Trust Improvement Act of 1976, as amended, which has been completed.
ACCOUNTING TREATMENT
The Asset Sales will be accounted for as a sale of assets and a transfer of
certain liabilities. The Company expects to record a gain upon the consummation
of the Asset Sales as the net book value of the assets being sold pursuant to
the Asset Sales are less than the consideration to be received, including the
liabilities transferred.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Asset Sales will not have any federal income tax consequences to the
Stockholders. The Asset Sales, however, will result in gross income on a tax
basis of approximately $50,000,000 to the Company. Since the Company had a
federal net operating loss carry forward of $59,406,000 as of December 31, 1996,
has incurred a tax operating loss of approximately $22,000,000 for the nine
months ended September 30, 1997, and will incur additional tax operating losses
through the Effective Time of the Merger, the gross income generated by the
Asset Sales will be completely offset by such net operating losses and no
federal income tax would be payable thereon. Notwithstanding the carryover of
the federal net operating loss to the current year, because of other adjustments
in 1997, the Company would be subject to a federal alternative minimum tax of
approximately $600,000 assuming the Asset Sales are consummated in 1997. If,
however, the Asset Sales were not consummated until 1998, the Company would not
be subject to a federal alternative minimum tax in 1997 but would be subject to
a federal alternative minimum tax in 1998 substantially larger in size as
compared to the alternative minimum tax of approximately $600,000 if the Asset
Sales are consummated in 1997. Moreover, because of limitations on the carryover
of net operating losses under the California Revenue and Taxation Code, the
Company currently estimates that there will be a California income tax liability
for 1997 of between approximately $400,000 and $500,000 assuming the Asset Sales
are consummated in 1997. If, however, the Asset Sales were not consummated until
1998, the Company would not be subject to a California income tax liability in
1997 but would be subject to a California income tax liability in 1998
substantially larger in size as compared to the California income tax liability
of between approximately $400,000 and $500,000 if the Asset Sales are
consummated in 1997.
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<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE ASSET SALES
In considering the recommendation of the Board with respect to the Library
Sale Agreement and the Assignment Agreement and the Asset Sales contemplated
thereby, Stockholders should be aware that certain of the Company's executive
officers, directors and Stockholders have certain interests that present actual
or potential conflicts of interest in connection therewith and have interests
that may be different from, or in addition to, the interests of the Stockholders
generally, including those referred to below. The Board was aware of these
actual or potential conflicts of interest and considered them along with the
other matters described under "Recommendation of the Board" above.
R. Timothy O'Donnell, a director of the Company, is the President and owner
of sixty percent of the stock of Jefferson Capital (which has one other
stockholder), an investment banking concern which is the Company's financial
advisor. As indicated under "Background and Reasons for the Library Sale
Agreement," the Company retained Jefferson Capital to assist the Company in its
strategic review. Jefferson Capital's services have also included assisting the
Company with respect to the Asset Sales and the Merger. Upon retention of
Jefferson Capital, in May 1996, the Company paid Jefferson Capital a fee of
$75,000 and has agreed to reimburse Jefferson Capital for expenses (amounting to
approximately $58,000 through November 15, 1997). Jefferson Capital received an
additional payment of $300,000 which was contingent upon execution of the Merger
Agreement, and will receive a further payment of $300,000 if the Asset Sales and
the Merger are consummated.
In addition, the Merger Agreement provides that consummation of the Asset
Sales is a condition to the Merger. As indicated under "SPECIAL FACTORS RELATING
TO THE MERGER--Interests of Certain Persons in the Merger," certain of the
Company's officers, directors and Stockholders have certain interests in the
Merger. See "CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS."
CERTAIN ADDITIONAL INFORMATION REGARDING TRANSACTIONS WITH DISNEY
Over the past three years, Disney has represented the Company's most
important business relationship. In 1994, 1995 and 1996, Disney accounted for
$43,207,000 (40%), $57,808,000 (30%) and $43,454,000 (33%), respectively, of the
Company's consolidated revenues in such years. The following chart shows for
each of the years 1994, 1995 and 1996, and for the nine months ended September
30, 1997: (i) the amount borrowed by the Company from Disney, (ii) the repayment
of amounts borrowed, (iii) interest paid to Disney by the Company on outstanding
borrowings, (iv) advances and minimum guarantees paid by Disney to the Company,
(v) overages paid by Disney to the Company with respect to previously released
films, and (vi) distribution fees earned by Disney.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------- NINE MONTHS ENDED
1994 1995 1996 SEPTEMBER 30, 1997
------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
Company Borrowings.................... $ 13,860,000 $ 13,865,000 $ 7,907,000 $ 1,119,000
Repayment of Loans.................... 5,832,000 12,155,000 575,000 0
Interest Paid to Disney............... 1,157,000 585,000 0 0
Advances & Minimum Guarantees Paid to
Company.............................. 31,421,000 68,185,000 15,168,000 2,708,000
Overages Paid to Company.............. 4,213,000 18,003,000 3,016,000 23,000
Disney Distribution Fees.............. 12,484,000 36,356,000 14,909,000 10,445,000*
</TABLE>
--------------------------------
* Amount shown is for the six months ended June 30, 1997 (the latest
practicable date for which figures are available) with respect to
fees relating to DIE HARD WITH A VENGEANCE.
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In addition to the transactions between Disney and the Company described
elsewhere under Proposal No. 1, including those for which provision has been
made in the Library Sale Agreement, since January 1, 1994, Disney and the
Company have engaged in certain additional transactions. In 1994, Disney bonded
two pictures for the Company, receiving fees of $650,000 in connection
therewith. In the same year, Disney purchased a previously written-off film
project from the Company for payment of the Company's costs in the project of
approximately $4,145,000.
In 1995, the Company assisted Disney in the international pre-licensing of
the motion picture UP CLOSE AND PERSONAL (utilizing the services of Summit) and
received a co-producer credit on and participation interest in the film which
was released domestically by Disney in March 1996. In the same year, the term
loan for JUDGE DREDD (under which $7,500,000 was then outstanding) was canceled
as consideration for the Company's sale to Disney of an equity interest in JUDGE
DREDD. As additional consideration to Disney for its purchase of an equity
interest in JUDGE DREDD, the Company also assigned to Disney substantially all
of its profit participation in UP CLOSE AND PERSONAL.
In 1995, the Company, separate and apart from the Domestic Distribution
Agreement, also licensed to Disney certain distribution rights to NIXON in
Japan, China, Switzerland and German speaking Europe in exchange for an advance
of $8,875,000. In 1995, in connection with the Company's decision to produce
EVITA, the Company became obligated to repay the development costs previously
expended on such project by certain parties, including approximately $3,900,000
by Disney. In early 1997, such amount was offset against production advances
otherwise due to the Company from Disney, and unused availability under the term
loans with Disney for NIXON, EVITA and THE SHADOW CONSPIRACY was reduced.
In 1996, the Company, separate and apart from the Domestic Distribution
Agreement, also licensed to Disney certain distribution rights to EVITA in Spain
in exchange for an advance of $3,000,000.
In February 1997, after commencement of principal photography, the Company
ceased production of the motion picture BROADWAY BRAWLER and entered into
discussions with certain parties involved with the production, including Disney,
a performer in the film and an affiliate of such individual, regarding
settlement of various obligations ("Shutdown Costs") incurred in connection with
the production and shut down of the film. As a result of agreements entered into
among such parties, on May 15, 1997, the Company was relieved of the obligation
to repay $3,000,000 in advances which had been made by Disney as part of funding
production of the film, the Company transferred its BROADWAY BRAWLER production
subsidiary and the Company's rights in the film to the performer's affiliate,
the Company was paid an aggregate of approximately $11,821,000 by the
performer's affiliate representing Shutdown Costs incurred or committed to by
the Company and payment for the transfer of the production subsidiary and the
film rights, and the Company was indemnified by the performer's affiliate for
additional Shutdown Costs the Company may bear, subject to certain limited
exceptions and limitations. Disney agreed to guarantee the obligations of the
performer and his affiliate.
CERTAIN ADDITIONAL INFORMATION REGARDING TRANSACTIONS WITH FOX
Over the past two years, Fox has represented the Company's most important
business relationship other than the Company's business relationship with
Disney. In 1995 and 1996, Fox accounted for $44,053,000 (23%) and $12,937,000
(10%), respectively, of the Company's consolidated revenues in such years. In
addition to the $30,000,000 in advances paid to the Company by Fox in 1994 with
respect to DIE HARD WITH A VENGEANCE (see "--Background and Reasons for the
Assignment Agreement"), in 1994, 1995 and 1996 and for the nine months ended
September 30, 1997, Fox paid the Company approximately $0, $19,000,000,
$7,990,000 and $0, respectively, in overages with respect to the distribution of
such film in the Fox Territories. During the same periods, Fox earned
approximately $0, $24,640,000, $27,550,800 and $0, respectively, in distribution
fees with respect to the distribution of the film in the Fox Territories.
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OPERATIONS OF THE COMPANY PENDING AND FOLLOWING THE ASSET SALES
On a pro forma basis, an aggregate of approximately 87% of the total assets
of the Company reflected on the balance sheet of the Company at September 30,
1997 (excluding cash, but including restricted cash) is being transferred by the
Company to Disney and Fox pursuant to the Asset Sales. The Company does not
presently intend to commence production in the future on any additional motion
pictures pending the Asset Sales and the Merger. See "--Background and Reasons
for the Library Sale Agreement." Further, the commitment to lend under the
Company's credit facility expired August 31, 1997, the credit facility was paid
off in November 1997 and, pursuant to the terms of the Library Sale Agreement,
the Domestic Distribution Agreement (the Company's current means of distributing
its motion pictures in the Americas and a primary source of financing the
production of the Company's motion pictures) will terminate upon the closing of
the Film Library Sale.
Certain assets of the Company were not included in the assets being sold as
part of the Asset Sales, including, among other things:
- Twenty-one development projects which are wholly owned by the Company
(the "Development Projects");
- Nineteen development projects (the "Stone Projects") funded by the
Company under its "first look" arrangement with Oliver Stone and
certain of his affiliates ("Stone");
- Visual effects equipment which was part of the Company's visual
effects facility located in leased space in Lenox, Massachusetts (the
"Visual Effects Facility");
- The Soundtrack Rights;
- Right to receive any overages from International Subdistributors
pursuant to the Company's existing exploitation agreements with
respect to DIE HARD WITH A VENGEANCE (the "International DHWV
Overages"); and
- Certain miscellaneous assets including, among other things,
approximately $760,000 in miscellaneous receivables as of September
30, 1997 (the "Miscellaneous Receivables")(not including payments to
be received with respect to AN ALAN SMITHEE FILM), an automobile and
certain furnishings and artwork.
Following execution of the Library Sale Agreement and the Assignment
Agreement, the Company concluded a number of agreements with respect to the
foregoing assets. The Company solicited bids for the Development Projects
pursuant to a competitive bidding process in which Vajna was the prevailing
bidder, entered into agreements with respect to the sale of the Miscellaneous
Receivables and most of the International DHWV Overages, settled the Company's
"first look" arrangement with Stone and transferred all but one of the Stone
Projects to Stone in connection therewith, and accepted an offer from Disney to
purchase the Soundtrack Rights. The subsidiary of the Company which operated the
Visual Effects Facility shut down the operations of the facility and transferred
the assets of the Visual Effects Facility to a third party. See "CERTAIN
ARRANGEMENTS CONCERNING OTHER ASSETS." Except for preparing for the Special
Meeting and the potential closings of the Asset Sales and the Merger, the
Company does not currently intend to engage in any significant business
operations pending consummation of the Asset Sales and the Merger. In addition,
the Library Sale Agreement and the Merger Agreement restrict the Company's
operations pending the Film Library Sale and the Merger, respectively. See
"--The Library Sale Agreement" and "THE MERGER AGREEMENT--Agreements of the
Company, Buyer, Vajna and Valdina." The Company has also implemented reductions
in overhead, including reductions in personnel, to achieve levels of overhead
commensurate with the Company's current level of activity. See "CERTAIN
INFORMATION REGARDING THE COMPANY--Business of the Company--Employees" and
"MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
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The Company currently anticipates that the Merger will be consummated
shortly after consummation of the Asset Sales assuming all conditions to the
Merger are then satisfied or waived. See "THE MERGER AGREEMENT." Pending the
Merger, the cash proceeds from consummation of the Asset Sales and the Company's
other cash resources will primarily be held as cash or invested in short term
government securities. No determination has been made by the Company as to its
course of conduct in the event that the Assets Sales and/or the Merger are not
consummated, as the Company would consider all strategic alternatives reasonably
available to it at the time. However, given the background and reasons for the
Asset Sales and the Merger, and given the reductions in personnel and other
overhead which have been implemented, the Company anticipates that it is likely
that significant consideration would be given at any such time to a dissolution
and winding up of the Company pursuant to Delaware law. See "SPECIAL FACTORS
RELATING TO THE MERGER--Recommendation of the Special Committee and the Board;
Fairness of the Merger."
CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS
SOLICITATION OF BIDS FOR DEVELOPMENT PROJECTS. In addition to the Asset
Sales pursuant to the Library Sale Agreement and the Assignment Agreement, the
Company completed a solicitation of bids for the Development Projects, in which
Vajna was the prevailing bidder. In June, 1997, the Company instructed its
financial advisor, Jefferson Capital, to solicit cash bids from qualified buyers
for the purchase of the Development Projects, as a group. At such time, the
Company issued a press release indicating that it was soliciting bids for the
Development Projects. Letters soliciting interest in the Development Projects
and containing information on such projects were also sent to more than 90
parties. As indicated in the letters soliciting bids, the Company had received
an initial bid of $4,750,000 (the "Initial Bid") for the Development Projects
from Vajna. As part of such bid, Vajna also agreed to assume all third party
payments related to the Development Projects and made by the Company after May
1, 1997. Additional qualified bids ("Qualified Bids") were required to be at
least 15% higher than the Initial Bid and submitted during a fifty-three day
bidding window.
In determining the amount of his Initial Bid, Vajna considered the
development costs previously expended on the various projects as well as those
the Company had obligated itself (and thus the prevailing bidder) to expend on
the projects in the future. Vajna considered the valuation report described
below, but as he was primarily interested in only three projects he assigned no
significant value to the other projects. Vajna was primarily interested in I
SPY, based on the 1960's television series by the same name about two CIA agents
posing as a tennis pro and his coach, SMOKE & MIRRORS, an adventure story, and
TRAPPED, a feature film treatment written by Joe Eszterhas, the writer of, among
other films, BASIC INSTINCT and FLASHDANCE. The foregoing projects appealed to
Vajna because of a variety of factors, including his perception of the overall
quality and perceived commercial appeal of the material and, with respect to I
SPY, the name recognition of the project.
The 15% overbid requirement was negotiated between Vajna and the Special
Committee. See "SPECIAL FACTORS RELATING TO THE MERGER--Background and Reasons
for the Merger." Vajna indicated to Jefferson Capital and the Special Committee
that he believed an overbid requirement was relatively common in auction
situations, useful in facilitating an auction process as it encourages initial
bids, and fair in that it does not penalize the party who is the initial bidder.
In the absence of an overbid requirement, a subsequent bidder could "free ride"
on the due diligence and other work done by the initial bidder to calculate an
initial bid, by such subsequent bidder doing no diligence and merely bidding
slightly higher than the initial bid. No potential bidder for the Development
Projects indicated to the Company that it objected to the overbid requirement or
that it was an impediment to such party submitting a bid.
If the Company had received one or more Qualified Bids, the Development
Projects would have been sold to the final highest bidder according to an
auction process. However, no additional Qualified Bids were received and Vajna
was declared the winning bidder. The sale of the Development Projects to Vajna
is subject to consummation of the Film Library Sale and the transactions
contemplated by the Assignment
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Agreement. As the parties to the Merger negotiated the Merger Consideration on
the basis of a value for the Development Projects equal to the Initial Bid, the
Development Projects will merely be part of the assets of the Company at the
time of the Merger. As such, Vajna will not be required to actually deliver to
the Company an amount of cash equal to the Initial Bid; however, the
Stockholder's (other than Vajna and Valdina) share of the Development Projects
purchase price will be included, in effect, in the Merger Consideration actually
paid out to Stockholders from Company funds after the Effective Time (as the
negotiation of the Merger Consideration took into account the purchase of the
Development Projects at a price equal to the Initial Bid).
VALUATION REPORT WITH RESPECT TO DEVELOPMENT PROJECTS. In April 1997, a
committee of the Board consisting of two outside directors, Mr. O'Donnell and
Mr. Gregory R. Paul (the "Development Projects Committee"), retained Alice P.
Neuhauser on behalf of the Company to provide valuation services with respect to
the Development Projects. Ms. Neuhauser has served since August 1996 as the
President, Chief Financial Officer and Secretary of Carolco Pictures Inc.
("Carolco"), a company which had engaged in the financing, production and
leasing of motion pictures prior to filing in November 1995 in the U.S.
Bankruptcy Court for the Central District of California, a voluntary petition
for relief under the provisions of the U.S. Bankruptcy Code. She is also the
President, Chief Executive Officer and Secretary of The Carolco Liquidating
Trust which was formed in June 1997 to complete the liquidation of Carolco which
resulted from Carolco's bankruptcy filing. Prior to being appointed to her
current position with Carolco, Ms. Neuhauser was employed by Carolco in various
financial capacities beginning in April 1988. She holds a Masters in Business
Administration from U.C.L.A.
Ms. Neuhauser's experience in the valuation of assets such as the
Development Projects stems from her experience at Carolco during the last eight
years as Carolco sold and acquired motion picture projects. For the last two
years, Ms. Neuhauser has had primary responsibility for the marketing and
selling of Carolco's film projects as part of the liquidation of Carolco.
Timothy O'Donnell, a director of the Company, was also involved in these sales
as a representative of Jefferson Capital, which also serves as Carolco's
financial advisor. Ms. Neuhauser was proposed by Mr. O'Donnell and was
ultimately selected by the Committee due to her experience in film project
valuation. Mr. Vajna knew Ms. Neuhauser as he served as Co-Chairman of the Board
of Directors of Carolco until November 1989 (approximately 18 months after Ms.
Neuhauser began her employment at Carolco).
On May 14, 1997, Ms. Neuhauser issued a report to the Development Projects
Committee in which she concluded that a sale of the Development Projects
conducted over a period of less than 12 months would generate approximately
$5,000,000. She further concluded that, with a marketing period of 12 to 18
months, a sale of the Development Projects could generate up to $7,000,000, but
with the higher value reduced by the costs of maintaining both the sales process
and a corporate presence. Ms. Neuhauser's report was prepared and issued prior
to the Company's receipt of the Initial Bid. Her report did not address the
merits or fairness of the Initial Bid nor did the Company obtain a fairness
opinion with respect to the Initial Bid from any other party.
In performing her valuation, Ms. Neuhauser relied on the Development
Projects Committee's instruction that the Company planned to sell the
Development Projects as a package rather than sell each project individually. At
that time, she was not requested to and did not solicit third party indications
of interest in acquiring all or a portion of the Development Projects. Ms.
Neuhauser's report covered a group of twenty-three development projects (the
Development Projects and two additional projects), however, she subsequently
indicated to the Development Projects Committee that the conclusions in her
report were applicable, without any material changes, to the twenty-one
Development Projects.
In connection with her valuation of the Development Projects, Ms. Neuhauser
reviewed relevant development cost and other information furnished to her by the
Company, including information provided during conversations with Company
management. With respect to the development expenses, she reviewed the amount of
previously expended costs, future non-contingent obligations (such as additional
option
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payments and writer payments) and payments contingent on commencement of
production. Ms. Neuhauser also reviewed the agreements provided to her by the
Company with respect to certain talent attached to the projects and with respect
to the underlying rights in the projects. She received information on the genre
and format of the underlying literary material, but did not actually read the
underlying literary material itself or make any evaluation of its literary
content. She relied, with the Development Projects Committee's assent and
without independent verification, on the accuracy and completeness of all
historical costs as set forth in the respective accounting statements and on
other information that was furnished or otherwise communicated to her by the
Company.
In rendering her opinion on the value of the Development Projects, Ms.
Neuhauser considered certain factors and performed certain analyses she deemed
relevant as follows:
(I) DIRECT COSTS ASSOCIATED WITH THE DEVELOPMENT PROJECTS. Ms.
Neuhauser's report noted that unproduced motion picture projects are
generally valued by the direct costs associated with the projects through
the date of valuation. As an example, she indicated that "turnaround"
clauses typically provide various parties a right to reacquire projects
which do not get produced by another party (the "transferor") for a price
equal to reimbursement of the costs expended on the project by the
transferor, plus interest. Ms. Neuhauser calculated the aggregate direct
costs for the Development Projects as approximately $11,500,000. However,
Ms. Neuhauser's report noted that, unlike sales which would occur in the
ordinary course of business, (1) the purchase of the Development Projects
was not to be structured as an option with only a portion of the cost paid
up-front by the buyer (a structure preferred by buyers because it enables
them to defer the costs until there is a greater certainty of the project
going into production), and (2) the sale of the Development Projects would
not be driven by the interests of a buyer which actively sought out the
rights, but instead was seller-motivated. She also noted that certain of the
Development Projects had high contingent payments because of the Company's
backloading of certain costs associated with development which a prospective
buyer would factor into its bid by discounting the bid.
(II) GENRE AND FORMAT OF UNDERLYING LITERARY MATERIAL. Ms. Neuhauser
reviewed the genre and format of the underlying literary material to gauge
the potential demand for the Development Projects. She viewed action
adventure projects as being most attractive to purchasers, romantic dramas
as least attractive and other genres at various levels of desirability in
between. With respect to format, a draft screenplay was considered by Ms.
Neuhauser to be more desirable than a treatment, i.e., a story summary.
(III) TALENT ATTACHED TO DEVELOPMENT PROJECTS. Ms. Neuhauser evaluated
the prior credits of the writers, directors and producers attached to the
Development Projects based upon her industry knowledge and data she obtained
from computer data bases.
(IV) UNIQUE INTEREST CHARACTERISTICS. Ms. Neuhauser evaluated whether
there were any unique characteristics of the Development Projects which
could provide additional value because of their interest to buyers, such as
franchise potential or previous television series exposure.
After analyzing the above factors, Ms. Neuhauser considered two alternative
methods of assessing the value of the Development Projects. The first method was
to evaluate each of the Development Projects individually, assign a value to
each and then aggregate the value of all of the Development Projects. Ms.
Neuhauser's report rejected this approach because the uncertainties inherent in
the motion picture development and production process which affect the viability
of a project and thus its value (such as availability of talent, cyclicality of
genres, and politics within a motion picture studio) are difficult to assess for
an individual project. As a result, Ms. Neuhauser did not compute a valuation
for the Development Projects utilizing this first methodology. Ms. Neuhauser's
report concluded that a value based on the package as a whole would spread the
uncertainties among all the Development Projects providing a means of
diversification that would minimize the impact of such uncertainties in
calculating value. In addition, assigning a value to each Development Project
assumes that every project could in fact be sold at its
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assigned value and Ms. Neuhauser believed that it was extremely unlikely that
any prospective buyer would be interested in each of the Development Projects.
In Ms. Neuhauser's view, since the Development Projects were to be sold as a
package, it was much more likely that a prospective buyer would only agree to a
price based almost entirely on the values placed on the few Development Projects
which it was seeking to put into development (with a small value factored in for
the rest of the Development Projects which the buyer could then re-sell or, for
example, provide to another division of the buyer such as a television
division).
Ms. Neuhauser therefore concluded that it was more appropriate to use a
second valuation alternative which involved placing a value on what she
considered the top few individual projects (based on the factors described
above) and adding in a minimum amount for the remaining projects (based upon,
for example, their potential resale value). Under this approach, the strength of
the top Development Projects would essentially define the value of the package.
She felt that certain prospective buyers would have greater interest in some
Development Projects than others although this interest would vary by buyer.
Based on her prior experience, she determined that, for a relatively quick sale
(less than 12 months), the top two or three Development Projects would drive the
sale and that, with a longer marketing period of between 12 and 18 months, a
buyer could be found who would be interested in four to six of the Development
Projects.
In connection with Ms. Neuhauser's analysis, she ascribed significant value
to two specific development projects: (i) the feature film project based on the
1960's television series entitled "I Spy," and (ii) TRAPPED, a feature film
treatment written by Joe Eszterhas, the writer of, among other films BASIC
INSTINCT and FLASHDANCE. Based on the foregoing, Ms. Neuhauser concluded that a
sale of the Development Projects conducted over a period of less than 12 months
would generate approximately $5,000,000.
THE REPORT AND ANALYSIS OF MS. NEUHAUSER SUMMARIZED HEREIN WERE NOT PREPARED
WITH THE ASSISTANCE OF, OR REVIEWED BY, INDEPENDENT ACCOUNTANTS. THIS SUMMARY OF
THE REPORT AND ANALYSIS OF MS. NEUHAUSER IS INCLUDED IN THIS PROXY STATEMENT
SOLELY BECAUSE SUCH REPORT WAS FURNISHED BY MS. NEUHAUSER TO THE DEVELOPMENT
PROJECTS COMMITTEE. SUCH REPORT AND ANALYSIS ARE BASED UPON A VARIETY OF
ASSUMPTIONS AND OTHER SIMILAR MATTERS AND ARE SUBJECT TO SIGNIFICANT
UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL,
AND, THEREFORE, SUCH REPORT AND ANALYSIS ARE INHERENTLY IMPRECISE AND THERE CAN
BE NO ASSURANCE THAT ANY VALUATION THEREIN COULD BE REALIZED.
The summary set forth above is a description of the material terms of Ms.
Neuhauser's report, the material analyses performed by Ms. Neuhauser, and the
material factors considered by Ms. Neuhauser in connection with her analyses and
report. However, it is only a summary and does not purport to be a complete
description of Ms. Neuhauser's analyses or written report. Ms. Neuhauser's
written report regarding the value of the Development Projects is available for
inspection and copying at the principal executive offices of the Company during
its regular business hours by any interested Stockholder of the Company or his
or her representative who has been so designated in writing. A copy of Ms.
Neuhauser's written report will be transmitted by the Company to any interested
Stockholder of the Company or his or her representative who has been so
designated in writing upon written request and at the expense of the requesting
Stockholder. Ms. Neuhauser has consented to the use of her name and discussion
of her valuation report in this Proxy Statement.
The Company paid Ms. Neuhauser $25,000 for her services and advice, in
addition to reimbursing her expenses. The Company has also agreed to indemnify
Ms. Neuhauser against, among other things, any losses, claims, liabilities and
expenses (including liabilities and expenses under federal securities laws) that
she might suffer as a result of her engagement to render the valuation report or
the inclusion of the report in this Proxy Statement. The Company also retained
Ms. Neuhauser (and an individual assisting her) to assist the Company in the
solicitation of bids for the Development Projects and, in connection therewith,
the Company paid to Ms. Neuhauser and such individual an aggregate fee of
$25,000 (and agreed to pay certain additional amounts if the Company had
received a Qualified Bid in excess of the Initial Bid). See
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also "The Stone Projects" immediately below for information regarding certain
additional fees paid by the Company to Ms. Neuhauser and such individual.
THE STONE PROJECTS. In July 1997, the Company also instructed Jefferson
Capital to solicit cash bids from qualified buyers with respect to a group of
five Stone Projects (the "Five Stone Projects"), which were being offered for
sale by the Company subject to certain rights of Stone as a producer and/or
director attached to the project. Vajna did not submit a bid for the Five Stone
Projects. If the Company had received one or more bids of at least $1,000,000,
the Five Stone Projects would have been sold to the final highest bidder
according to an auction process substantially the same as that for the
Development Projects. No valuation report was obtained with respect to the Stone
Projects or the Five Stone Projects. The Company also retained Ms. Neuhauser
(and an individual assisting her) to assist the Company in the attempted sale of
the Five Stone Projects. Under the terms of such arrangement, Ms. Neuhauser and
such individual would have received an amount equal to 10% of any qualified bid
received by the Company in excess of $1,000,000. In light of the settlement of
the "first look" arrangement with Stone described below, the Company agreed to
pay Ms. Neuhauser and such individual an aggregate of $75,000 for their services
in assisting the Company in the attempted sale of the Five Stone Projects.
Under the Company's first look arrangement with Stone, Stone could attempt
to arrange for the production of those Stone Projects other than the Five Stone
Projects with other companies. If any of the Stone Projects other than the Five
Stone Projects were produced by Stone, Stone was required to reimburse the
related actual costs (plus interest) of the Company and Disney (which funded the
first-look arrangement with Stone through February 1997).
During the course of soliciting bids for the Five Stone Projects, the
Company entered into discussions with Stone regarding a settlement of the first
look arrangement with Stone. In September 1997, the Company entered into a
Termination Agreement (the "Termination Agreement") with Stone in order to
terminate the "first look" arrangement between Stone and the Company and their
respective obligations thereunder. No offers for the Five Stone Projects had
been received by the Company at the time the Termination Agreement was executed.
Pursuant to the Termination Agreement, the Company transferred to Stone all but
one of the Stone Projects. The agreement requires Stone to reimburse the Company
for certain funds expended by the Company in connection with the development
projects being transferred to Stone in the event such projects are actually
produced. Pursuant to the Termination Agreement, the Company was relieved of
$961,000 in obligations it otherwise would have had to Stone under the "first
look" arrangement (which is net of certain expenses incurred by the Company in
connection with the Termination Agreement and certain payments made by the
Company to or for the benefit of Stone pursuant to such agreement).
EVITA SOUNDTRACK RIGHTS. In addition to soliciting bids for the Development
Projects and the Five Stone Projects, the Company also sought buyers for the
Soundtrack Rights. Vajna expressed interest in the Soundtrack Rights, but did
not make a firm offer to purchase the rights. The distributor of the Evita
Soundtrack, Warner Bros., also declined to make an offer. The Company negotiated
with Disney with respect to the sale of the Soundtrack Rights to Disney and, on
November 19, 1997, the Board approved the acceptance of Disney's offer to
purchase the Soundtrack Rights in exchange for $1,500,000 in cash. The
Soundtrack Sale is conditioned upon and anticipated to be consummated
concurrently with consummation of the Film Library Sale.
SUMMIT TRANSACTIONS. In November 1997, pursuant to agreements between the
Company and Summit dated as of September 10, 1997 (the "Summit Agreements"), the
Company and Summit concluded a series of transactions, including primarily (i)
the purchase by Summit N.V., in exchange for the payment of $400,000 to the
Company, of the Company's rights in the International DHWV Overages (other than
those relating to exploitation agreements with respect to the territories of
Italy and Hungary), (ii) the purchase by Summit N.V., in exchange for the
payment of an additional $400,000 to the Company, of the Miscellaneous
Receivables and (iii) the termination of Summit's sales agency relationships
with the
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Company and the settlement of the Company's obligations in connection therewith
in exchange for an aggregate payment by the Company to Summit (which, pursuant
to an additional agreement with Summit, includes certain amounts payable to
Summit with respect to a past Company production) of approximately $827,000
(collectively, the "Summit Transactions").
VISUAL EFFECTS FACILITY. In September 1997, Cinergi Productions Inc.
(California) ("CPI"), the wholly owned subsidiary of the Company which operated
the Company's Visual Effects Facility, shut down the operations of the Visual
Effects Facility and, subsequent thereto, entered into an acquisition agreement
(the "Asset Acquisition Agreement") with Mass.Illusions LLC, an unaffiliated
third party ("MassLLC"). Pursuant to the Asset Acquisition Agreement, CPI
transferred the assets of the Visual Effects Facility to MassLLC in
consideration of the assumption by MassLLC of approximately $900,000 in
obligations and liabilities of CPI, including certain payroll and related
obligations, the agreement of MassLLC to manage, on behalf of CPI, the
resolution of certain other CPI liabilities and obligations, and the
contribution by MassLLC of $200,000 thereto. In connection with this
transaction, CPI also assigned to MassLLC all of CPI's rights, duties and
obligations under a production services agreement relating to a motion picture
for which CPI had been engaged to create visual effects. In consideration of
such assignment, MassLLC agreed to indemnify CPI in connection with any claims
or actions initiated by any third party with respect to the production services
agreement.
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PROPOSAL NO. 2
THE MERGER
Pursuant to Proposal No. 2, the Stockholders are being asked to approve the
Merger Agreement among the Company, Buyer, Vajna and Valdina, pursuant to which
Buyer will merge with and into the Company, with the Company surviving the
Merger (the "Surviving Corporation"). As a result of the Merger, the Company
will become wholly owned by Vajna and Valdina (which is indirectly beneficially
owned 100% by Vajna). Pursuant to the Merger, Shares (other than Shares owned by
Vajna, Valdina and Shares as to which statutory dissenters' rights are
perfected), will be converted into the right to receive $2.52 in cash, which has
been adjusted upwards from the Original Purchase Price of $2.30 and which is
subject to potential further upward adjustment as provided in the Merger
Agreement. Although the Merger Agreement provides for potential further upward
adjustments to the Purchase Price, the Company does not presently believe that
there is a significant likelihood of any further upward adjustments.
PARTIES TO THE MERGER
VAJNA. Vajna is the Chairman of the Board, President and Chief Executive
Officer of the Company as well as a substantial stockholder in the Company. See
"CERTAIN INFORMATION REGARDING THE COMPANY--Principal Stockholders of the
Company." See also "CERTAIN INFORMATION REGARDING THE COMPANY--Directors and
Executive Officers of the Company" for certain information regarding the
business experience of Vajna. Vajna's address is 2308 Broadway, Santa Monica,
California 90404 (telephone number: 310-315-6000).
CPEI ACQUISITION INC. CPEI Acquisition Inc. (or "Buyer") is a Delaware
corporation formed in July 1997 in connection with, and solely for the purposes
of, effecting the Merger. Vajna is the sole director and officer of Buyer. All
of the stock of Buyer is owned by Vajna (86%) and Valdina (14%). Except as it
relates to the consummation of the Merger, Buyer is not engaged in any business
activity. Buyer's principal executive offices are located at 2308 Broadway,
Santa Monica, California 90404 (telephone number: 310-315-6000).
VALDINA CORPORATION N.V. Valdina is a corporation, formed in 1990 under the
laws of the Netherlands Antilles, which finances feature film production.
Valdina is indirectly beneficially owned 100% by Vajna. Myron Dania, a citizen
of the Netherlands Antilles, is the sole Managing Director of Valdina having
served in such position since April 1991. Mr. Dania also serves as the Managing
Director of certain Company subsidiaries which are Netherlands Antilles'
corporations and receives an aggregate of approximately $5,000 per year from the
Company for such services. The address of Valdina's principal executive offices
(and Mr. Dania's business address) is Polarisweg 35, Suite 6, Willemstad,
Curacao, Netherlands Antilles (telephone number: 011-599-9-461-7799).
THE COMPANY. The Company, formed in November 1989, is an independent
producer and distributor of motion pictures. See "CERTAIN INFORMATION REGARDING
THE COMPANY" and "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY--Parties to the Asset Sales."
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SPECIAL FACTORS RELATING TO THE MERGER
The following is a summary of certain factors relating to the Merger,
including the background of, and the recommendations of the Special Committee
and the Board with respect to, the Merger.
BACKGROUND AND REASONS FOR THE MERGER
In early 1997, during the course of the Company's negotiations with Disney
regarding the Film Library Sale, the Company asked its financial advisor,
Jefferson Capital, and the Company's outside counsel, Gipson Hoffman & Pancione,
P.C., to consider various strategic alternatives for the business and operations
of the Company assuming an agreement with Disney was reached. During January and
February 1997, Jefferson Capital consulted with the Special Committee and its
counsel, management of the Company and the Company's outside counsel with
respect to a series of such potential alternatives. During such period,
Jefferson Capital and the Company's outside counsel regularly informed the
Special Committee and its counsel and Vajna and his advisors of the progress of
consideration of the various strategic alternatives. On February 19, 1997, a
meeting was held at the offices of the Company's outside counsel attended by,
among others, the Company's outside counsel, certain officers of the Company
(other than Vajna), and Ronald L. Blanc of Blanc Williams Johnston & Kronstadt,
counsel to Vajna. Mr. O'Donnell participated by telephone. The purpose of the
meeting was to update the attendees on the status of discussions regarding the
strategic alternatives available to the Company and to exchange information
regarding the Company and its assets, liabilities, and current operations.
At the meeting of the Board held on February 21, 1997, the Board discussed
the strategic alternatives available to the Company including the Film Library
Sale, continuing to produce motion pictures, acquisition of the Company or a
portion of the Company by another company in the entertainment industry or which
desired to enter the entertainment industry, and winding down the Company's
operations and dissolving. As indicated under "PROPOSAL NO. 1: SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--Background and Reasons for the
Library Sale Agreement," the Board believed that in light of, among other
things, the disappointing financial results of three of the Company's four 1995
releases and the 1997 release of THE SHADOW CONSPIRACY and the continuing
increase in motion picture production and releasing costs, which could
necessitate increased direct investment in the Company's motion pictures if the
Company were to continue to produce additional "event" motion pictures, that it
would be in the best interests of the Stockholders to consider the winding down
of the Company's operations. In addition to authorizing continued negotiations
with Disney with respect to the Film Library Sale, the Board discussed means of
winding down the operations of the Company including a dissolution under the
statutory procedures set forth in Delaware law or the sale of additional assets
followed by the sale of the corporate entity and any remaining assets and
liabilities. The Board believed that a statutory dissolution would take
substantially longer and result in more expenses that would ultimately reduce
any cash payment to the Stockholders, than the latter alternative. The Board
instructed the Company's advisors to give further consideration to the Company's
various alternatives assuming consummation of the Film Library Sale.
After the February 21st Board meeting, the Company and its representatives
continued to negotiate with Disney and its representatives with respect to the
Film Library Sale through the beginning of April 1997. The Company's initial
negotiations with Disney regarding the Film Library Sale had contemplated that
the film rights to be acquired by Disney would include the Company's rights in
DIE HARD WITH A VENGEANCE. During the course of negotiations, however, Disney
and the Company agreed that such rights would not be a part of the film rights
to be sold to Disney. As a result, in March 1997, the Company initiated
discussions with Fox regarding the acquisition by Fox of the Company's rights in
DIE HARD WITH A VENGEANCE.
At the Board meeting held on April 2, 1997 at which the Library Sale
Agreement with Disney was approved, the Board engaged in further discussion of
the Company's strategic alternatives assuming consummation of the Film Library
Sale. At such meeting, the Board authorized Mr. Braverman and
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Mr. O'Donnell to negotiate with other parties regarding the sale of the assets
and provision for the liabilities that would remain assuming consummation of the
Film Library Sale. The Board further authorized Mr. Braverman and Mr. O'Donnell,
in consultation with the Special Committee, to discuss the sale of assets to and
the assumption of liabilities by Vajna as a means of winding down the operations
of the Company in an expeditious manner that would maximize stockholder value.
On April 3, 1997, concurrently with the Company's public announcement of the
execution of the Library Sale Agreement, the Company also announced that it did
not intend to commence production on any additional motion pictures, that it was
in the process of considering its alternatives assuming consummation of the Film
Library Sale including disposition of additional assets, and that it anticipated
that any decision made regarding its alternatives assuming consummation of the
Film Library Sale would effectively result, after provision for the Company's
remaining liabilities, in a cash payment to the Stockholders in exchange for
their equity interests in the Company.
Subsequent to the April 3rd announcement, Mr. O'Donnell, the Company's
outside counsel, and the Special Committee and its counsel began a series of
preliminary discussions, at times assisted by Mr. Braverman and at times with
Vajna and his advisors, regarding a possible transaction between Vajna and the
Company that would enable the Company to resolve such liabilities and assets of
the Company that were not being assumed or transferred pursuant to the Library
Sale Agreement, the Assignment Agreement, or other potential transactions then
under consideration. In connection with these discussions and throughout the
duration of the negotiations relating to the Merger, the primary role of the
Special Committee and its counsel was to represent the interests of the
unaffiliated Stockholders (i.e., Stockholders other than Vajna, Valdina or any
of their affiliates) and, in consultation with and with the assistance of Mr.
O'Donnell, outside counsel to the Company, and, at times, Mr. Braverman,
negotiate a transaction which, in light of the facts and circumstances, was fair
and in the best interests of such unaffiliated Stockholders.
On May 19, 1997, Mr. O'Donnell, Mr. Braverman and the Company's outside
counsel met with Vajna's legal advisors: Harry M. Brittenham of Ziffren,
Brittenham, Branca & Fischer and Mr. Blanc. In March 1997, Mr. Brittenham had
resigned as a member of the Board, as he had been asked by Vajna to represent
Vajna in any potential transactions with the Company. Also participating in the
May 19th meeting by telephone was counsel to the Special Committee, and also
present at the meeting were certain officers of the Company. Vajna did not
attend the meeting. Prior to the meeting and upon consultation with the Special
Committee and its counsel, Mr. O'Donnell had proposed to Vajna's legal advisors
that Vajna initiate a tender offer for the Shares he did not already own based
upon the belief of the Special Committee and its counsel that this would be the
most expeditious manner in which the Stockholders could receive a cash payment
in exchange for their equity interests in the Company. At the meeting, Vajna's
advisors rejected such proposal and instead proposed an alternative single step
transaction in which an entity controlled by Vajna would merge with the Company
and the Stockholders (other than Vajna) would receive cash in exchange for their
equity interests in the Company. The persons present at the meeting discussed
the general structure and potential terms of a single-step merger transaction.
Vajna's advisors rejected the tender offer proposal in favor of a single-step
merger transaction because of the perceived efficiency of a single-step merger
transaction, as opposed to a two-step transaction (i.e., a tender offer followed
by subsequent merger to convert into merger consideration the Shares of any
Stockholders who did not tender their Shares in the tender offer). In addition,
Vajna's advisors were concerned that a tender offer followed by a subsequent
merger would be viewed by some Stockholders as coercive. Vajna's advisors also
noted that in a single-step merger transaction, all Stockholders would be
afforded the opportunity to perfect appraisal rights under applicable Delaware
law.
On May 30, 1997, counsel to Vajna sent a letter to the Board indicating the
terms under which Vajna would agree, subject to various conditions, to purchase
most of the motion picture development projects currently owned by the Company
and cancel his existing employment agreement with the Company, which has a term
ending December 31, 1998. The purchase price proposed by Vajna for the
development projects
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was $4,750,000; however Vajna proposed that the Company would be free, for a
period of 60 days, to solicit higher bids from third parties subject to a 15%
minimum over-bid requirement and a right on the part of Vajna to match any
qualified overbid. See "CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS." Under his
proposal for termination of the employment agreement, Vajna would have received
a portion of the amounts otherwise payable to him through December 31, 1998 and
a payment in settlement of certain other benefits and compensation, and he would
have been free to enter into other employment, including motion picture
production, subject to, among other things, completion of the Film Library Sale.
The letter from counsel to Vajna to the Board also presented discussion points
regarding a merger between the Company and an acquisition entity to be owned by
Vajna, which would take place after the sale of most of the Company's assets.
The letter indicated that all outstanding Shares owned by persons other than
Vajna would be acquired or redeemed for cash based on their proportionate share
of the net worth of the Company at the time of the merger, and Vajna would
become the sole owner of the Company which it was anticipated would, at that
time, have certain residual assets and liabilities.
On June 3, 1997, the Board met to discuss the status of the Film Library
Sale, the discussions with Fox regarding the Company's rights in DIE HARD WITH A
VENGEANCE, and the receipt of the letter from counsel to Vajna. At the meeting,
the Board confirmed that the Special Committee would have authority to, among
other things, consider the terms of a transaction with Vajna, and recommend to
the Board approval or disapproval of such a transaction. After the Board
meeting, the Special Committee held a telephonic meeting with counsel to the
Special Committee, Mr. O'Donnell and outside counsel to the Company and
discussed the letter from counsel to Vajna. The Special Committee indicated
that, after consideration, it believed that, in light of the contemplated sale
of substantially all of the assets of the Company either as the result of arms'
length negotiations or independent bidding and given that the Company's assets
at the time of a merger with an entity controlled by Vajna would consist
predominantly of cash, the possible benefits of obtaining a fairness opinion
with respect to such a merger transaction with Vajna would be marginal and the
significant expense thereof would not be justified and, therefore, the obtaining
of a fairness opinion would not be in the best interests of the Stockholders. In
making such determination, the Special Committee also noted that it would be
able to rely upon its own financial expertise and would be able to review the
work of Jefferson Capital, which has substantial experience in similar
transactions, including those which required the evaluation by Jefferson Capital
of entertainment assets and liabilities.
After the Special Committee meeting, Mr. O'Donnell spoke with counsel to
Vajna regarding certain items in its letter to the Board. Among other things,
Mr. O'Donnell requested that Vajna raise his bid for the development projects to
$5,000,000. Vajna's counsel rejected such request, as well as a request by Mr.
O'Donnell that the 15% overbid requirement be reduced. It was agreed, however,
that in the event of an overbid, rather than Vajna having the right to match any
such overbid, an auction process would be initiated.
On June 11, 1997, Jefferson Capital, after consultation with the Special
Committee and its counsel, sent a letter to counsel for Vajna. The letter from
Jefferson Capital indicated provisional acceptance of Vajna's proposal to
purchase the Development Projects subject to revised over-bid procedures,
additional provisions on reimbursement of the Company for development
expenditures, successful negotiation and execution of a binding agreement of
purchase and sale if Vajna should be the successful bidder for the Development
Projects, and other conditions. The letter from Jefferson Capital also suggested
revised terms for termination of Vajna's employment agreement. With respect to a
potential merger between the Company and an entity controlled by Vajna, the
letter from Jefferson Capital suggested that the parties attempt to negotiate
and agree upon a definitive merger agreement rather than continuing to refine
the letter of discussion points from counsel to Vajna to the point that it would
become a formal binding offer to the Company. The letter indicated that the
Company's outside counsel had been instructed to begin preparation of a draft
merger agreement.
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Thereafter, Jefferson Capital, after consultation with the Special Committee
and its counsel, and the Company's outside counsel, prepared and distributed
bidding procedures and an information package on the Development Projects to be
sent to potential bidders for the development projects.
On June 24, 1997, the Company publicly announced that (i) it had instructed
Jefferson Capital to solicit cash bids from qualified buyers for the purchase of
the Development Projects, (ii) it had received an initial bid for the
Development Projects from Vajna, (iii) it was in discussions with Fox regarding
the sale to Fox of the Company's rights in DIE HARD WITH A VENGEANCE, and (iv)
negotiations had commenced with Vajna with respect to a potential merger with an
entity controlled by Vajna that would occur after the sale of substantially all
of the assets of the Company.
On July 1, 1997, the Company's outside counsel, after consultation with the
Special Committee and its counsel, and Jefferson Capital, delivered a draft of
the Merger Agreement to Vajna and his counsel. Copies of the draft were also
delivered to, among others, the Special Committee and its counsel and Jefferson
Capital.
On July 2, 1997, the Board of Directors approved the Assignment Agreement
with Fox, subject to Fox indicating that it had completed its due diligence.
On July 10, 1997, counsel to Vajna met with Mr. O'Donnell and the Company's
outside counsel to discuss a timetable for completion of the Merger Agreement
and to provide their comments on the draft Merger Agreement for forwarding to
the Special Committee and its counsel. Also present at various times during the
meeting were representatives of the Company's independent auditors and various
officers of the Company (other than Vajna).
On July 14, 1997, Fox indicated that it had completed its due diligence with
respect to the Assignment Agreement, and on July 15, 1997 the Assignment
Agreement was executed. Execution of the Assignment Agreement was publicly
announced on July 16, 1997.
On August 1, 1997, the Company's outside counsel, after consultation with
Jefferson Capital and counsel to the Special Committee, delivered a revised
draft of the Merger Agreement to Vajna and his counsel. Copies of the draft were
also delivered to, among others, the Special Committee and its counsel and
Jefferson Capital.
On August 7, 1997, counsel to Vajna met with, among others, the Company's
outside counsel and various officers of the Company (other than Vajna) to
discuss a revised timetable for completion of the Merger Agreement, to provide
comments on the latest draft of the Merger Agreement for forwarding to the
Special Committee and its counsel and Jefferson Capital, and to review draft
preliminary proxy materials.
On August 20, 1997, Jefferson Capital, after consultation with the Special
Committee, met with counsel to Vajna to discuss the terms of the Merger.
Negotiations continued between Vajna and his counsel, on the one hand, and
Jefferson Capital in consultation with the Special Committee and its counsel, on
the other hand, through the start of September 1997. Discussions focused in part
on the financial position of the Company, including the amount and potential
variability of various anticipated Company revenues and expenses and the amount
of appropriate reserves for expenses. During negotiations, management of the
Company prepared various financial information which included estimates and
forecasts of sources and uses of cash by the Company, as well as anticipated
Company liabilities and expenses. The materials prepared by management were
reviewed by Vajna and his counsel, Jefferson Capital, and the Special Committee
and its counsel and generally provided a framework for the final stage of the
negotiations between the parties.
The material prepared by management generally considered (i) the pro forma
effect on the cash reflected on the Company's balance sheet at June 30, 1997 of
the Asset Sales and contemplated or anticipated related transactions and events
(including, among other things, the termination of the
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Company's sales agency relationships with Summit, the sale of the International
DHWV Overages, the sale of the Development Projects for the Initial Bid, and
settlement of certain litigation involving Laurence Fishburne (See "CERTAIN
INFORMATION REGARDING THE COMPANY--Business of the Company--Legal Proceedings"))
and (ii) the estimated effect of continuing operations on such cash (including,
among other things, payment of those accounts payable and accrued expenses
reflected on the Company's balance sheet at June 30, 1997, ongoing overhead and
severance, professional fees and expenses necessary to complete the Merger
(legal, accounting and financial advisor fees and expenses), income taxes,
insurance premiums, collection of accounts receivable, receipt of overages with
respect to the EVITA Soundtrack, and expenses associated with the Visual Effects
Facility). Management assumed for such purposes that the Merger would be
consummated on or about November 30, 1997.
The last materials prepared by management during such period calculated a
pro forma cash balance at November 30, 1997 (the assumed date of the Merger) of
$29,721,000 (approximately $2.306 per share), taking into account various
assumed events and reserves, the amounts of which were negotiated between the
parties. The materials also indicated a range of possible pro forma cash
balances at November 30, 1997 (from $30,821,000 or approximately $2.39 per share
to $34,521,000 or approximately $2.678 per share) depending on the actual
results of the events considered by management as most likely to cause a
significant variance in the calculations: the amount of monies realized from a
sale of the EVITA Soundtrack, a sale of the Five Stone Projects (or the amount
of Company obligations relieved by a settlement of the "first look" arrangement
with Stone), and the expenses to be borne by the Company with respect to its
subsidiary which operated the Visual Effects Facility.
The discussions between the parties generated, in part, by review of such
materials, led to the agreement of the parties that there would be a base merger
price subject to adjustment upon the occurrence of certain events. Negotiations
then focused primarily on the number of adjustments that there would be to the
Purchase Price, the nature of such adjustments and any thresholds contained
therein, how such adjustments would relate to each other and to the Purchase
Price (e.g., would negative adjustments offset positive adjustments), and the
amount of the Purchase Price. After additional negotiation, the parties reached
preliminary agreement upon the Original Purchase Price of $2.30 per Share and
continued to discuss the number and nature of the adjustments.
As described in greater detail under "THE MERGER AGREEMENT--Adjustments to
Purchase Price," the parties ultimately agreed upon three independent
adjustments (the calculation of each unaffected by any other adjustment) and a
"basket" of additional sub-adjustments (which are to be considered together).
One adjustment provided for a positive adjustment to the extent the Five Stone
Projects were sold or if any liabilities or other obligations were forgiven in a
settlement of the "first look" arrangement with Stone. As the Original Purchase
Price was based on the full amount of the Company's commitment under the "first
look" arrangement to Stone from July 1, 1997 through the February 1998
expiration of the commitment (approximately $1,570,000), the adjustment
contained no threshold. A second adjustment provided for an adjustment in the
event monies received by the Company with respect to the EVITA Soundtrack (as
overages or from a sale), exceeded $1,500,000. The $1,500,000 threshold
represents the negotiated agreement of the parties as to the amount of future
overages that such parties at that time estimated the Company was likely to
obtain from the Soundtrack Rights. The negotiations with respect to the Original
Purchase Price assumed the receipt of such $1,500,000. A third adjustment
provided for an adjustment in the event the collection of certain accounts
receivable (other than those relating to AN ALAN SMITHEE FILM) exceeded
$1,573,000. The $1,573,000 threshold generally represents the amount of such
receivables reflected on the Company's balance sheet at June 30, 1997 less a
reserve of approximately $400,000 for doubtful collections that was negotiated
between the parties.
As part of the negotiations, it was agreed that there would be a "basket" of
three additional sub-adjustments (i.e., a negative adjustment with respect to
one can offset a positive adjustment from another, but there cannot be an
overall downward adjustment to the merger consideration even if the aggregate
effect of such adjustments is a negative amount). One such sub-adjustment
generally measures the
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variance between the aggregate amount of certain Company expenses pending the
Merger and a threshold of $6,493,000. The $6,493,000 threshold represents the
negotiated agreement of the parties as to the amount of such expenses that the
parties at that time estimated the Company was reasonable likely to incur
through the date on which the parties then anticipated the Merger would occur
(on or about November 30, 1997). The threshold was composed of an estimate of
ongoing overhead and severance payments through November 30, 1997 (approximately
$5,009,000) and an estimate of the professional fees and expenses necessary to
complete the Merger (approximately $1,484,000).
A second sub-adjustment generally measures the variance between the amount
of receivables collected with respect to AN ALAN SMITHEE FILM during a specified
period and a threshold of $8,690,000 which generally represents the amount of
such receivables reflected on the Company's balance sheet at June 30, 1997
reduced by (i) $375,000 in account receivables that the parties agreed were
uncollectable, and (ii) a negotiated reserve of $400,000 for further doubtful
collections. The last sub-adjustment generally measures the variance between the
amount of monies provided by the Company to or on behalf of the Company's
subsidiary that operated the Visual Effects Facility during a specified period
and $1,300,000, an estimate by the parties as to the potential further expenses
that would be borne by the Company with respect to such subsidiary pending the
Merger.
As part of such negotiations, the parties thereto generally estimated that
the potential aggregate amount of adjustments to the Original Purchase Price
could possibly range from approximately $.09 to approximately $.38 with a
mid-range of approximately $.215. Through the date of this Proxy Statement there
has been an aggregate $.22 of upward adjustments to the Original Purchase Price
and, as described under "THE MERGER AGREEMENT--Adjustments to Purchase Price,"
further upward adjustments to the Merger Consideration are unlikely.
The Special Committee met with its counsel, Jefferson Capital and the
Company's outside counsel on multiple occasions after August 20, 1997 through
the start of September 1997. During such period, multiple drafts of the Merger
Agreement were circulated by the Company's outside counsel, after consultation
with Jefferson Capital and the Special Committee, to among others, Mr. Vajna and
his counsel, Jefferson Capital, the Special Committee and its counsel, and the
Board. The Board met on August 27, 1997 and August 29, 1997 to, among other
things, discuss the Merger, the Merger Agreement and the status of the Merger
negotiations.
On September 2, 1997, the Board of Directors approved the Merger Agreement
and the Merger, based in part on the recommendation of the Special Committee. On
September 3, 1997, the Merger Agreement was executed. Execution of the Merger
Agreement was publicly announced on September 4, 1997.
The Merger Agreement provided that, in the event of disagreements regarding
certain calculations underlying potential adjustments to the Merger
Consideration, such disagreements would be forward for resolution to the
Company's independent accountants. However, Ernst & Young LLP, the Company's
independent auditors, determined that they could not perform such function based
on auditing standards set forth by the American Institute of Certified Public
Accountants. As a result, on November 19, 1997, the Board of Directors approved
Amendment No. 1 to the Agreement of Merger (the "Amendment") which amends the
Merger Agreement to provide that any such disagreements shall be forwarded to an
independent accounting firm, retired judge or other party mutually acceptable to
Vajna and the Special Committee. The Amendment was subsequently executed by the
parties to the Merger Agreement.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD; FAIRNESS OF THE MERGER
THE COMPANY. On September 2, 1997, the Special Committee reported that it
had determined (i) that the Merger is fair to, and in the best interests of, the
Stockholders (other than Vajna and Valdina) and (ii) to recommend that the Board
approve and adopt the Merger Agreement and the transactions contemplated
thereby, including the Merger. The Special Committee consists of one director,
Gregory R. Paul,
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who is not employed by or otherwise affiliated with the Company. Mr. Paul is a
Managing Director of BT Alex. Brown Incorporated, an affiliate of Bankers Trust
Company, and has specialized since 1985 in the financing of media and
entertainment companies. At a meeting also held on September 2, 1997, the
members of the Board (excluding Vajna, who abstained from the vote), based in
part on the recommendation of the Special Committee, unanimously determined that
the Merger is fair to, and in the best interests of, the Stockholders (other
than Vajna and Valdina), approved and adopted the Merger Agreement and the
transactions contemplated thereby, including the Merger, and determined to
recommend that the Stockholders approve and adopt the Merger Agreement. Vajna
abstained from the vote due to his ownership interest in Buyer. Of the six
members of the Board at such time, three were not employees of the Company
(Gregory R. Paul, R. Timothy O'Donnell, and Dianne Caplan Lebovits (the former
General Counsel of the Company who returned to private legal practice in August
1996)). The Special Committee and the Board did not consider any formal
financial projections in connection with their determination to approve and
recommend the proposed Merger, given the proposed Assets Sales and the Company's
determination not to commence production on any additional motion pictures. The
Special Committee and the Board, however, did review various financial
information, including estimates and forecasts of sources and uses of cash by
the Company pending the Merger, as well as anticipated liablities and expenses
of the Company during such period. On November 19, 1997, the Amendment to the
Merger Agreement was unanimously approved by the four members of the Board at
such time other than Vajna, who abstained from the vote (Messrs. Paul, O'Donnell
and Braverman and Ms. Lebovits).
In reaching the conclusions to approve the Merger Agreement described above,
the Special Committee and the Board considered a number of factors, including
but not limited to the following:
(a) Operating Losses and Limited Prospects for Profitable
Operations. The net losses incurred by the Company in six of the seven full
fiscal years since the Company's formation and anticipated continuing
operating losses, combined with the Board's belief that there is a
substantial risk that the Company would not be able to operate profitably
before depleting substantially all of its remaining assets. See "PROPOSAL
NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY--Recommendation of the Board."
(b) Increasing Production and Releasing Costs. The increases in the
industry average direct negative costs per picture and the industry average
print and advertising costs per picture for members of the MPAA, and the
apparent continuing increase of such costs which could necessitate
increasing direct investment by the Company in its films if it were to
continue to produce "event" motion pictures. See "PROPOSAL NO. 1: SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--Recommendation of the
Board."
(c) Risks of Continued Operations. The significant risk of continued
operations, including that of dissipating the Company's remaining assets, in
light of: the disappointing audience acceptance of many of the Company's
past productions; the apparent continuing increase in production and
releasing costs which could necessitate increased direct investment by the
Company in its films if it were to continue to produce "event" motion
pictures; the relatively less amount of experience of management of the
Company in general, and Vajna, in particular, in producing smaller budget
films compared to larger budget or "event" films; the competitive releasing
environment and the presence of numerous competitors many of which have
significantly greater financial and other resources than the Company. See
"PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY--Recommendation of the Board."
(d) Termination of Certain Agreements. The termination of the Domestic
Distribution Agreement upon consummation of the Film Library Sale, and the
August 31, 1997 expiration of the commitment to lend under the Company's
credit facility. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE
ASSETS OF THE COMPANY--The Library Sale Agreement" and "CERTAIN ARRANGEMENTS
CONCERNING OTHER ASSETS." As a result, any continued operations after the
Film Library Sale would in large part represent start-up operations.
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(e) Lack of Strategic Alternatives. The lack of strategic alternatives
available to the Company in view of the Company's disappointing operating
results and efforts to implement other strategic alternatives without
success. The Company had been considering various strategic alternatives
since late 1995 and had been unable to (i) negotiate a restructuring of the
Domestic Distribution Agreement with Disney, (ii) obtain an alternative
domestic distribution arrangement with another major studio, (iii) attract a
significant investment in the Company, or (iv) enter into an agreement for a
merger or other business combination or acquisition of the Company, in each
case on terms advantageous to the Company and the Stockholders. Based upon
the Company's unsuccessful pursuit of strategic alternatives since late 1995
and anticipated continuing operating losses, the Board believes that it had
exhausted its identified realistic strategic alternatives and that it was
unlikely the Company would be able to attract a significant investment in
the Company or enter into an agreement for a merger or other business
combination or acquisition of the Company with a party other than Vajna that
would provide for a price in excess of the Merger Consideration. See
"PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY--Recommendation of the Board."
(f) Existence of Cash Assets. The existence of a substantial amount of
cash and cash equivalents and the cash consideration to be received in
connection with consummation of the Assignment Agreement. If the Company
were to delay the Merger, the Company believes that anticipated continuing
operating losses would reduce the Company's cash position and would, most
likely, reduce the amount of any future cash payment to the Stockholders in
exchange for their equity interests in the Company. See "PROPOSAL NO. 1:
SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--Recommendation of
the Board."
(g) Dissolution Alternative. The most viable alternative to the Merger
after consummation of the Asset Sales is the dissolution of the Company
under Delaware law, the disposition of the Company's remaining assets as
part of such dissolution, and the subsequent distribution of the net
proceeds to the Stockholders after provision for the Company's remaining
liabilities. The Board believes that the Merger can be consummated more
expeditiously and result in less expenses than such a dissolution, resulting
in a larger cash payment to the Stockholders in exchange for their equity
interests in the Company.
(h) Historical Market Price of Common Stock; Net Book Value per
Share. The historical market prices of the Shares, including the fact that
the Shares traded as high as $11.375 in the first quarter of 1995 and as low
as $.375 in the second quarter of 1997 and the fact that the $2.30 per Share
Original Purchase Price represented a 26.9% premium to the market price of
the Shares on September 3, 1997 (the "Pre-Announcement Price"), the day
prior to the public announcement of the terms of the Merger (see "CERTAIN
INFORMATION REGARDING THE COMPANY--Market Prices and Dividends on Company
Common Stock"). Also, the net book value per Share. The Original Purchase
Price represented a 19.8% premium to the net book value per Share ($1.92) as
of June 30, 1997.
(i) Vajna Ownership. Vajna's beneficial ownership of approximately 48%
of the outstanding Shares (including for such purpose Shares owned by
Valdina but not including any Shares for which Vajna only holds a proxy to
vote) and the effects of such ownership on the alternatives available to the
Company including the fact that, as a practical matter, no such strategic
alternative could be effected without the support of Vajna.
(j) Terms and Conditions of Merger Agreement. The terms and conditions
of the Merger Agreement, including the Merger Consideration adjustment
provisions, that the Merger is conditioned upon the Majority of the Minority
Vote, and that, after the Merger, the Surviving Corporation will be
responsible for, among other things, contingent and unknown liabilities of
the Company. See "THE MERGER AGREEMENT."
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(k) Nature of Merger Consideration. The consideration to be paid to
the Stockholders in the Merger is all cash.
(l) Possible Conflicts of Interests. The possible conflicts of
interest of Vajna and certain directors and members of management of the
Company discussed below under "SPECIAL FACTORS RELATING TO THE
MERGER--Interests of Certain Persons in the Merger."
(m) Appraisal Rights. That Stockholders have the right to dissent from
the Merger and demand appraisal of the fair value of their Shares under the
DGCL. See "SPECIAL FACTORS RELATING TO THE MERGER--Appraisal Rights."
In addition, the Board considered the recommendation of the Special
Committee.
The Special Committee and the Board also recognized that, while consummation
of the Merger would result in Stockholders receiving a minimum of $2.30 in cash
for each of their Shares, it would also eliminate the opportunity for current
Stockholders (other than Vajna and Valdina) to participate in the benefit of any
increases in the Company's value following the Merger. In light of, among other
things, the Company's agreements to sell substantially all of its assets to
Disney and Fox, the anticipated termination of the Domestic Distribution
Agreement upon consummation of the Film Library Sale, and the August 31, 1997
expiration of the commitment to lend under the Company's credit facility, the
Special Committee and the Board concluded that this factor was not significant
and would not justify the Stockholders foregoing the receipt of a cash payment
for their Shares pursuant to the Merger.
As mentioned above, the Special Committee and the Board considered the
alternative of dissolving the Company under Delaware law in determining whether
the Merger was fair to the Stockholders from a financial point of view. Given
that substantially all of the Company's assets are to be sold in arms-length
transactions with Disney and Fox, that third party bids were solicited (but not
received) for the Development Projects, and that after the consummation of the
transactions contemplated by the Library Sale Agreement and the Assignment
Agreement, a substantial portion of the Company's assets will consist of cash,
the Company did not seek a formal appraisal of the liquidation value of the
Company for purposes of evaluating the Merger or considering the alternative of
a dissolution and winding up of the Company under Delaware law. The Board
believed that there could be no assurance in a dissolution as to when any
distributions would be made to the Stockholders or as to the amount of any such
distribution. As part of the Merger, the Surviving Corporation will continue to
be subject to the liabilities and obligations of the Company at the Effective
Time, including unknown and contingent liabilities. The Surviving Corporation
will also be bound by the potential indemnification obligations of the Company
under the Library Sale Agreement and the Assignment Agreement. In connection
with a dissolution under Delaware law, the Company would be required to dispose
of its remaining assets and make provision for contingent claims, pending claims
and unknown claims (which based on facts known to the Company are likely to
arise or become known within ten years of dissolution). The Board believed that
in light of such obligation that any preliminary distribution in a dissolution
would be smaller than the cash consideration to be paid upon consummation of the
Merger. The Board also considered that most of the representations and
warranties of the Company under the Library Sale Agreement survive for eighteen
months following the closing of the Film Library Sale (and certain
representations and warranties survive for a longer period). The Board further
believed that it was likely that a dissolution would take substantially longer
to complete than the Merger and, therefore, it was likely that the expenses
associated with a dissolution would be in excess of those associated with the
Merger.
In view of the wide variety of factors considered in connection with their
evaluation of the Merger, neither the Special Committee nor the Board found it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors they considered in reaching their
determinations, however, the Special Committee and the Board did assign
significant weight to factors (a) - (e) and (m). On balance, the Special
Committee and the Board viewed the factors set forth in items (a) - (g), (k) and
(m) as favorable to their decision, the factors set forth in items (h), (i) and
(j) as having both favorable and
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unfavorable aspects, and the factors set forth in item (l) as neutral to their
determination. The Special Committee and the Board viewed the factors set forth
in items (a) - (k) as supportive of their determination that the Merger is in
the best interests of the Stockholders, and the factors set forth in items (a),
(e), (h), (j), (k) and (m) as supportive of their determination that the Merger
is fair to the Stockholders. The factors discussed above represent the material
factors considered by the Special Committee and the Board in connection with the
Merger.
VAJNA/BUYER/VALDINA. Vajna, Buyer and Valdina each regard the Merger as an
opportunity to provide a cash payment to the Stockholders in exchange for their
equity interests in the Company in a fair and expeditious manner. Vajna, Buyer
and Valdina have concluded that the Merger is fair to the Stockholders (other
than Vajna and Valdina) based upon the following factors: (i) each of the
factors referred to above as having been taken into account by the Board,
including without limitation, increasing production and releasing costs, the
significant risk of continued operations (including that of dissipating the
Company's remaining assets), and the lack of strategic alternatives available to
the Company in view of the Company's disappointing operating results and efforts
to implement other strategic alternatives without success; and (ii) that the
terms of the Merger, including the Merger Consideration, are the result of
negotiations intended to be arms' length. Vajna, Buyer and Valdina did not find
it practicable, and did not, quantify or otherwise attach relative weights to
the specific factors considered by them. However, Vajna, Buyer and Valdina gave
significant weight to all of the factors discussed in (a) through (h) and (j)
through (m) above. On balance, Vajna, Buyer and Valdina each viewed the factors
set forth in items (a) - (g), (k) and (m) as favorable to their conclusion, the
factors set forth in items (h) and (j) as having both favorable and unfavorable
aspects, and the factors set forth in items (i) and (l) as neutral to their
conclusion.
Vajna, Buyer and Valdina believe that the financial and business prospects
of the Company, if it were to continue as an operational motion picture
production company, are highly risky and uncertain, particularly in light of the
Company's disappointing past operating results and the Company's efforts to
implement other strategic alternatives without success. As indicated under
"Plans for the Company Following the Merger" below, Vajna and/or affiliates of
Vajna, in each case alone or with other entities (including potentially the
Company), are likely to seek to acquire, produce and arrange for the financing
and distribution of motion picture projects (including the Development Projects)
pursuant to new arrangements following the Merger. As part thereof, such parties
would need to arrange for new sources of financing and distribution of any such
projects. Ultimately the future prospects of the Company after the Merger will
depend on whether the Company produces any motion picture projects, the ability
of the Company to obtain financing and distribution arrangements if it produces
motion picture projects, and the ultimate audience acceptance of any completed
motion pictures. Vajna has recently acquired a fifty percent interest in the
rights to produce a sequel to the motion picture TERMINATOR 2. There can be no
assurance that such motion picture will be produced. The producer and director
of TERMINATOR 2 have indicated to Mr. Vajna that they do not wish to participate
in such project. Production of such project, which would likely have a budget in
excess of approximately $125,000,000, would also require obtaining significant
production funds.
PURPOSE AND STRUCTURE OF THE MERGER
The purpose of the Merger, in light of the Company's decision to sell
substantially all of the assets of the Company pursuant to the Asset Sales, is
to provide a cash payment to the Stockholders (other than Vajna and Valdina) in
exchange for their equity interests in the Company, in a manner which the
Company and Vajna believe is more expeditious and will result in lower expenses
than the most viable alternative acceptable to the Company and Vajna, a
dissolution under Delaware law.
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Consummation of the Merger will terminate the equity interests in the
Company of the Stockholders other than Vajna and Valdina (which is indirectly
beneficially owned 100% by Vajna). Following the Merger, the interest of Vajna
in the Company's net book value and net income will increase to 100%. Vajna and
Valdina, as the sole stockholders of the Surviving Corporation, will thereafter
benefit from any increases in the value of the Surviving Corporation and will
also bear the risk of any decreases in the value of the Surviving Corporation.
See "THE MERGER AGREEMENT--The Merger; Effective Time of the Merger."
OPERATIONS PENDING THE MERGER
The Company's plans pending the Merger are substantially the same as those
pending the Asset Sales. See "Operations of the Company Pending and Following
the Asset Sales" under Proposal No. 1. The Merger Agreement and the Library Sale
Agreement restrict the Company's operations pending the Merger and the Film
Library Sale, respectively. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF
THE ASSETS OF THE COMPANY--The Library Sale Agreement" and "THE MERGER
AGREEMENT--Agreements of the Company, Buyer, Vajna and Valdina."
Pending consummation of the Merger, the Merger Agreement permits Vajna to
enter into a producer agreement, employment agreement, consulting agreement or
other similar agreement which provides that he will render services to a third
party. However, without the prior written consent of the Special Committee,
Vajna's obligations under any such agreement to render services to a third party
must be subject to consummation of the Merger and his services must remain
exclusive to the Company to the extent provided by his employment agreement with
the Company. Vajna's employment agreement permits him to be involved in the
management of certain corporations in which he has direct or indirect ownership
interests. In light of the Company's present intention not to commence
production on any additional motion pictures, Vajna has expanded his activities
on behalf of such corporations. The Company believes such activities will not
materially interfere with his activities on behalf of the Company. See
"Interests of Certain Persons in the Merger--Severance Arrangements" below.
PLANS FOR THE COMPANY FOLLOWING THE MERGER
At the time of the Merger, it is anticipated that substantially all of the
Company's assets will have been sold and substantially all of the Company's
previous operations will have ceased. See "Summary Table Regarding Treatment of
the Company's Non-Cash Assets" beginning on page 28 of this Proxy Statement for
a list of the Company's non-cash assets anticipated to be remaining immediately
after the Merger. The commitment to lend under the Company's credit facility has
terminated. It is further anticipated that the Domestic Distribution Agreement
will have terminated by the Effective Time, and the Company will have only
minimal personnel remaining at such time. The Company's employment agreements
with Vajna (Chairman of the Board of Directors of the Company, President and
Chief Executive Officer) and Mr. Braverman (Chief Operating Officer, Chief
Financial Officer, Executive Vice President and a Director of the Company) will
terminate at the Effective Time pursuant to their respective severance
arrangements. As a result, any operations conducted by the Company following the
Merger will in large part represent start-up operations.
Upon consummation of the Merger, Buyer intends to terminate the registration
of the Company's Common Stock under the Exchange Act and delist the Company's
Common Stock from the NASDAQ National Market System. The Company will also cease
to file periodic reports with the Commission, and the Company will be relieved
of the obligation to comply with the proxy rules of Regulation 14A under Section
14 of the Exchange Act.
Except as disclosed in this Proxy Statement, neither Buyer, Vajna nor
Valdina has any present plans or proposals that would result in an extraordinary
material corporate transaction following the Merger such as a subsequent merger,
reorganization, liquidation, or sale or transfer of assets involving the Company
or
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any of its subsidiaries, or any material changes in the Company's corporate
structure or business or the composition of its management. However, from time
to time following the Merger, depending on the circumstances then existing,
Vajna may review the Company's businesses, operations, policies, corporate
structure and management, and consider if any changes would be desirable.
Notwithstanding the foregoing, Vajna and/or affiliates of Vajna, in each
case alone or with other entities (including potentially the Company), are
likely to seek to acquire, produce and arrange for the financing and
distribution of motion picture projects (including the Development Projects)
pursuant to new arrangements following the Merger. See "Recommendation of the
Special Committee and the Board; Fairness of the Merger--Vajna/Buyer/Valdina."
REGULATORY APPROVALS
To the best knowledge of the Company, there are no federal or state
regulatory requirements which must be complied with, nor are there any such
governmental consents or approvals that must be obtained in connection with the
consummation of the Merger other than compliance with certain federal securities
laws.
ACCOUNTING TREATMENT
The Merger will be accounted for at historical cost as a combination of
entities under common control.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
TAX CONSEQUENCES TO THE STOCKHOLDERS. The Merger, pursuant to which the
Shares (other than Shares owned by Vajna or Valdina, treasury Shares, or Shares
as to which statutory dissenters' rights are perfected) will be converted into
the right to receive cash, will be a taxable transaction to the Stockholders
whose Shares are converted. Gain or loss will be realized and recognizable by
each such Stockholder in an amount equal to the difference between the Merger
Consideration received and the basis of the Shares owned by such Stockholder.
The foregoing discussion may not be applicable to Stockholders who acquired
their Shares pursuant to the exercise of employee stock options or other
compensation arrangements or who are not citizens of the United States or who
are otherwise subject to special tax treatment under the Code.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER IS BASED ON EXISTING TAX LAW AS OF THE DATE OF THIS PROXY STATEMENT,
WHICH MAY DIFFER ON THE DATE OF THE CONSUMMATION OF THE MERGER. EACH STOCKHOLDER
IS URGED TO CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE
PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS FOR WHICH
NO INFORMATION HAS BEEN PROVIDED HEREIN.
TAX CONSEQUENCES TO THE COMPANY. Upon consummation of the Asset Sales, the
Company estimates that it will have a remaining federal net operating loss of
approximately $30,000,000, taking into account anticipated additional net
operating losses between October 1, 1997 and the Effective Time of the Merger.
Because of the "ownership change" rules of Section 382(g) of the Internal
Revenue Code of 1986, as amended (the "Code"), and the conversion of Shares to
cash pursuant to the Merger, the amount of losses realized by the Company before
the Merger available to offset taxable income of the Company after the Merger
will be limited under Section 382(b) of the Code. In addition, if the Company
does not continue its same business enterprise at all times during the two year
period following the Effective Time, Section 382(c) of the Code would disallow
all net operating loss carryforwards. As a result, it is uncertain at this time
(a) whether the Surviving Corporation to be owned by Vajna and Valdina will be
able to utilize
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any portion of the net operating loss of the Company incurred prior to the
Merger, and (b) if such loss may be utilized, how much in any post-Merger period
may be applied to offset post-Merger taxable income under the Section 382(b)
limitation.
FEES AND EXPENSES
The Company has retained Jefferson Capital in connection with the Company's
strategic review, the Asset Sales and the Merger. In connection therewith, in
May 1996, the Company paid Jefferson Capital a fee of $75,000 and has agreed to
reimburse Jefferson Capital for expenses (amounting to approximately $58,000
through November 15, 1997). Jefferson Capital received an additional payment of
$300,000 which was contingent upon execution of the Merger Agreement, and
Jefferson Capital will receive a further payment of $300,000 if the Asset Sales
and the Merger are consummated. In addition, the Company has agreed to indemnify
Jefferson Capital against certain liabilities and expenses in connection with
the Merger, including liabilities under federal securities law. See "PROPOSAL
NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--Interests of
Certain Persons in the Asset Sales."
The Company has retained D.F. King & Co., Inc. to act as Proxy Solicitor and
ChaseMellon Shareholder Services ("ChaseMellon") to act as Paying Agent in
connection with the Merger. The Proxy Solicitor and ChaseMellon will each
receive reasonable and customary compensation for their services, will be
reimbursed for certain reasonable out-of-pocket expenses and will be indemnified
against certain liabilities and expenses in connection with the Merger,
including liabilities under federal securities laws. In addition, brokers,
dealers, commercial banks and trust companies will, upon request, be reimbursed
by the Company for customary mailing expenses incurred by them in forwarding
material to their customers.
The Company currently estimates that the expenses incurred by the Company in
connection with the Merger will be approximately as set forth below:
<TABLE>
<S> <C>
Financial Advisor fees and expenses(1).......................... $ 765,000
Paying Agent fees and expenses.................................. 7,600
Proxy Solicitor fees and expenses............................... 5,000
Legal fees and expenses(2)...................................... 700,000
Accounting fees and expenses.................................... 150,000
Printing, mailing, and distribution expenses.................... 100,000
Filing fees..................................................... 15,259
Miscellaneous................................................... 55,000
---------
Total........................................................... $1,797,859
---------
---------
</TABLE>
--------------------------------------
(1) Includes payment for services rendered in connection with the
Company's strategic review and the Asset Sales, as well as the
Merger.
(2) Does not include approximately $675,000 in legal fees and
expenses incurred in connection with the Asset Sales.
FINANCING OF THE TRANSACTION
The maximum amount required by Buyer to purchase all of the outstanding
Shares (other than the Disney Shares and Shares owned by Vajna and Valdina) at a
Purchase Price of $2.52 per Share is currently estimated by the Company to be
approximately $16,234,699. Buyer intends to obtain all funds needed to purchase
the Shares from the cash on hand at the Company as of the Effective Time of the
Merger.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Special Committee and the Board
with respect to the Merger Agreement and the Merger contemplated thereby,
Stockholders should be aware that certain members of the Board (none of whom,
however, were members of the Special Committee) have certain interests that
present actual or potential conflicts of interest in connection with the Merger
and have interests in the Merger which are different from, or in addition to,
the interests of the Stockholders generally, including those referred to below.
The Special Committee and the Board were aware of these actual or potential
conflicts of interest and considered them along with other matters described
under "SPECIAL FACTORS RELATING TO THE MERGER--Recommendation of the Special
Committee and the Board; Fairness of the Merger."
MANAGEMENT; OWNERSHIP OF SHARES/OPTIONS. As a result of Vajna's beneficial
ownership of approximately 50.7% of the outstanding Shares (including Shares
owned by Valdina and Shares for which Vajna holds a proxy to vote), Vajna (and,
as a result, Buyer) would be deemed to control the Company. In addition, Vajna,
who is an officer, director and the beneficial owner of Buyer, is also the
Chairman of the Board, President and Chief Executive Officer of the Company.
As of the Record Date, the executive officers and directors of the Company
(other than Vajna) owned an aggregate of 387,341 Shares (Warren Braverman:
373,591 Shares; Dianne Caplan Lebovits: 2,500 Shares; and R. Timothy O'Donnell:
11,250 Shares) and held options (and also a warrant in the case of Mr.
O'Donnell) to purchase an aggregate of 85,000 Shares (of which options to
purchase an aggregate of 15,000 Shares were exercisable at prices below $2.52
per Share, and held by Dianne Caplan Lebovits: options to purchase 5,000 such
Shares; R. Timothy O'Donnell: options to purchase 5,000 such Shares, and Gregory
R. Paul: options to purchase 5,000 such Shares). If the Merger is consummated at
a Purchase Price of $2.52 per Share, such persons will receive an aggregate of
approximately $983,899 (Warren Braverman: $941,449; Dianne Caplan Lebovits:
$8,400; R. Timothy O'Donnell: $30,950; and Gregory R. Paul: $2,600) for their
Shares (including Shares issuable upon exercise of options which have exercise
prices below $2.52 per Share, but, for purposes of such calculation, deducting
the exercise price of such options). See "THE MERGER AGREEMENT" for a discussion
relating to the treatment of options in the Merger. See "CERTAIN INFORMATION
REGARDING THE COMPANY--Principal Stockholders of the Company" and "--Executive
Compensation."
INDEMNIFICATION. The Merger Agreement provides for the survival of all
rights to indemnification now existing in favor of the directors and executive
officers of the Company and the maintenance of a policy of directors' and
officers' liability insurance for a period of four years. See "THE MERGER
AGREEMENT." The directors, officers and employees of the Company are also
indemnified against certain actions, claims and liabilities pursuant to the
Company's Certificate of Incorporation and Bylaws and, in the case of each
director, pursuant to indemnification agreements with the Company. See "CERTAIN
INFORMATION REGARDING THE COMPANY--Executive Compensation."
SEVERANCE ARRANGEMENTS. In connection with the Merger, the Company and
Vajna have mutually agreed to terminate the Employment Agreement between Vajna
and the Company, dated as of January 1, 1994, as amended (the "Vajna Employment
Agreement"), effective as of the Effective Time. Prior to consummation of the
Merger or earlier termination of the Merger Agreement, Vajna will continue to
receive his fixed annual compensation in accordance with the terms of the Vajna
Employment Agreement. Upon termination of the Vajna Employment Agreement at the
Effective Time, Vajna will be paid an amount equal to the sum of (i) one hundred
percent of the fixed annual compensation that would otherwise have been payable
to Vajna in the ordinary course from the Effective Time through December 31,
1997 had the Vajna Employment Agreement not been terminated at the Effective
Time, (ii) $500,000 (representing fifty percent of the fixed annual compensation
that would otherwise have been payable to Vajna in the ordinary course from
January 1, 1998 through December 31, 1998 had the Vajna Employment Agreement not
been terminated at the Effective Time), and (iii) $344,666 representing
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producer's performance fees earned under the Vajna Employment Agreement with
respect to DIE HARD WITH A VENGEANCE. Assuming the Merger occurs on or about
December 29, 1997, it is anticipated that, at the Effective Time, Vajna will
receive an aggregate amount of approximately $844,666 in consideration for the
termination of the Vajna Employment Agreement. Notwithstanding anything in the
Vajna Employment Agreement to the contrary, all of the terms and provisions of
the Vajna Employment Agreement (including, without limitation, all provisions
regarding termination and compensation upon termination) will terminate as of
the Effective Time and neither the Company nor Vajna will have any further
obligation to the other with respect to the Vajna Employment Agreement except as
expressly set forth in the Merger Agreement. The Vajna Employment Agreement will
continue in full force and effect if the Merger is not consummated or if the
Merger Agreement is otherwise terminated. See "THE MERGER AGREEMENT" and
"CERTAIN INFORMATION REGARDING THE COMPANY--Executive Compensation."
In connection with the Merger, the Company and Warren Braverman, Chief
Operating Officer, Chief Financial Officer, Executive Vice President and a
Director of the Company, have agreed to the material terms of a severance
arrangement pursuant to which Mr. Braverman's employment agreement with the
Company will be terminated, effective as of the Effective Time. Upon termination
of Mr. Braverman's employment agreement at the Effective Time, Mr. Braverman
will be paid an amount equal to (i) one hundred percent of the fixed annual
compensation that would otherwise have been payable to Mr. Braverman in the
ordinary course from the Effective Time through December 31, 1997 had his
employment agreement not been terminated at the Effective Time, plus (ii)
$598,000 (representing fifty percent of the fixed annual compensation that would
otherwise have been payable to him in the ordinary course from January 1, 1998
through December 31, 1999 had his employment agreement not been terminated at
the Effective Time), plus (iii) $48,000 (representing certain automobile and
health benefits that would otherwise have been payable to him in the ordinary
course from January 1, 1998 through December 31, 1999 had his employment
agreement not been terminated at the Effective Time), less (iv) $18,000
(representing the principal amount of a non-interest bearing loan previously
extended by the Company to him which will, as a result, be deemed repaid at the
Effective Time). Mr. Braverman will also be paid for his accrued unused vacation
time (approximately $20,000). Assuming the Merging occurs on or about December
29, 1997, it is anticipated that, at the Effective Time, Mr. Braverman will
receive an aggregate of approximately $666,500 pursuant to the foregoing in
consideration for termination of his employment agreement. The Company and Mr.
Braverman have also agreed to enter into a mutual release at the Effective Time.
See "THE MERGER AGREEMENT" and "CERTAIN INFORMATION REGARDING THE
COMPANY--Executive Compensation." In addition, the Company will also forgive a
loan extended to Mr. Braverman in 1994 in connection with the purchase by Mr.
Braverman of 372,341 Shares of the Company. Mr. Braverman acquired such Shares
in 1994 in exchange for payment of the aggregate par value of such Shares in
cash and a full recourse promissory note in the principal amount of $450,000
(approximately $1.21 per Share), bearing interest at the rate of 6% per annum,
secured by a pledge of the 372,341 Shares purchased, and payable on December 31,
1998, or, in the event of the earlier termination of Mr. Braverman's employment
with the Company, upon the date any such Shares vested and could be sold without
restriction under the Securities Act of 1933, as amended, or pursuant to Rule
144 thereunder. See "CERTAIN INFORMATION REGARDING THE COMPANY--Principal
Stockholders of the Company." As of November 15, 1997, an aggregate of $554,000
in principal and accrued interest was outstanding under such promissory note.
Such 372,341 Shares and an additional 1,250 Shares owned by Mr. Braverman will
be converted into the Merger Consideration pursuant to the Merger. Monies which
are held pursuant to the Company's Deferred Compensation Plan for the account of
Mr. Braverman will not be effected by the Merger.
The Company also entered into severance arrangements with two other former
directors and/or executive officers of the Company: Fred Feitshans and Randolph
M. Paul. Pursuant to such arrangements, the Company paid Mr. Feitshans an
aggregate of $250,000 in severance upon his resignation as President of
Production in July 1997. The Company has also paid Mr. Paul an aggregate of
$220,000 in severance
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upon his resignation as Senior Vice President, Business Affairs, and as a
Director in September 1997 and forgave a $50,000 loan (bearing interest at the
rate of 7% per annum) which was made to Mr. Paul in January 1997. As of the date
of his resignation, an aggregate of approximately $52,500 was outstanding under
such loan (including accrued interest).
OTHER. For serving on certain committees of the Board, Gregory R. Paul
receives an aggregate of $20,000 per year. The Company also reimburses Mr. Paul
and the Company's other directors for travel expenses incurred in connection
with their activities on behalf of the Company. For serving on the Special
Committee, Mr. Paul also received $50,000.
R. Timothy O'Donnell, a director of the Company, is the President and
majority stockholder of a privately-held investment banking concern which is the
Company's financial advisor and which is receiving certain fees in connection
with the Merger. See "--Fees and Expenses" and "PROPOSAL NO. 1: SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--Interests of Certain Persons in
the Asset Sales." Jefferson Capital acts as an investment advisor to an
affiliate of Valdina which until October 31, 1997 was indirectly owned 49.9% by
Vajna and 50.1% by The Mong Family Trust, which benefits certain descendants of
Mong Hing Yan, including the son of Mr. Vajna. Since October 31, 1997, such
affiliate has been indirectly beneficially owned 100% by Vajna. In each of the
past five years, Jefferson Capital has received less than $50,000 in investment
advisory fees from such entity.
The foregoing interests of the Company's executive officers and directors,
and any possible conflicts of interest they may pose, were considered by the
Special Committee and the Board in connection with their determination to
approve the Merger. See "SPECIAL FACTORS RELATING TO THE MERGER-- Recommendation
of the Special Committee and the Board; Fairness of the Merger."
CERTAIN TRANSACTIONS INVOLVING THE COMPANY'S COMMON STOCK
In addition to the Company's initial public offering in June 1994, the
Company sold an additional 3,000,000 Shares in an underwritten public offering
in May 1995 at a price of $8.50 per share (exclusive of underwriting discounts
and commissions) with aggregate proceeds to the Company (after expenses and
underwriting discounts and commissions) of approximately $23,450,000.
Since January 1, 1995, Vajna has purchased an aggregate of 54,000 Shares in
open market transactions at prices ranging from approximately $3.18 through
$6.25 per share (consisting of a purchase of 10,000 Shares for $6.25 per Share
in January 1995 and purchases of an aggregate 44,000 Shares in December 1995 for
an average purchase price of approximately $3.52 per Share).
On October 31, 1997, as a result of the redemption of certain shares in a
foreign corporation by such corporation as described below (the "Redemption"),
Vajna became the beneficial owner (as determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as amended ("Rule 13d-3")) of
6,821,318 Shares (approximately 50.7%) of the Company's Common Stock. Those
6,821,318 Shares include not only the 5,491,531 Shares that Vajna owns directly,
but also (i) 372,341 Shares (the "Proxy Shares") owned by Mr. Braverman, which
Vajna has the right to vote pursuant to an irrevocable proxy and (ii) 957,446
Shares (the "Valdina Shares") owned by Valdina which, as a result of such
Redemption, became indirectly beneficially owned 99.8% by Vajna and 0.2% by The
Mong Family Trust which benefits certain descendants of Mong Hing Yan, including
the son of Vajna (the "Trust"). Vajna subsequently purchased the 0.2% of Valdina
owned by the Trust. Prior to effectiveness of the Redemption, Vajna beneficially
owned (as determined in accordance with Rule 13d-3) 5,863,872 Shares
(approximately 43.6%) of the Company's Common Stock including the Proxy Shares,
but excluding the Valdina Shares as to which Vajna had disclaimed beneficial
ownership because, prior to the Redemption, Valdina was indirectly beneficially
owned 49.9% by Vajna and 50.1% by the Trust and Vajna did not have voting,
investment or dispositive power with respect to the Valdina Shares. On October
31, 1997, Valdina's indirect Dutch parent corporation ("Valdina Parent
Corporation"), which was then owned 49.9% by Vajna and 50.1% by a corporation
indirectly wholly owned by the Trust (the "Trust Subsidiary"), acted to redeem
substantially all
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of the interest of the Trust Subsidiary in Valdina Parent Corporation. The
consideration for the Redemption was the transfer by Valdina Parent Corporation
to the Trust Subsidiary of Valdina Parent Corporation's right and interest in a
portion (70,000,000 Netherlands Guilders) of a pre-existing promissory note
originally made by Vajna in favor of Valdina Parent Corporation in 1995 in an
unrelated transaction. As of October 31, 1997, according to exchange rates
published in the WALL STREET JOURNAL, one Netherlands Guilder could be exchanged
for approximately .51 US Dollars. Valdina Parent Corporation's indirect interest
in the Valdina Shares represented only a portion of Valdina Parent Corporation's
assets, and in the redemption no allocation was made by the parties thereto of
the value of the assigned note to the Valdina Shares as opposed to other direct
or indirect assets of Valdina Parent Corporation.
On December 30, 1996 and January 2, 1997, respectively, the Company
repurchased 372,341 Shares held by Dianne Caplan Lebovits, a Director and former
executive officer of the Company, and 372,341 Shares held by the law firm of
Ziffren, Brittenham, Branca & Fischer ("ZBBF"), which provides legal services to
the Company. Harry M. Brittenham, a partner in ZBBF, was a member of the Board
from July 1994 until March 13, 1997. Ms. Lebovits and ZBBF had each originally
acquired 372,341 Shares pursuant to separate Stock Purchase Agreements dated as
of January 1, 1994 (each an "Original Purchase Agreement") and in exchange for
payment of the aggregate par value of such Shares in cash and a full recourse
secured promissory note in the principal amount of $450,000, bearing interest at
the rate of 6% per annum, and secured by a pledge of the 372,341 Shares
purchased (each a "Purchase Note"). The principal of each note was payable to
the Company on December 31, 1998 or, in the event of the earlier termination of
the purchaser's relationship with the Company (continued employment by the
Company with respect to Ms. Lebovits and continued engagement by the Company
with respect to ZBBF), upon the date any Shares vested and could be sold without
restrictions under the Securities Act of 1933, as amended, or pursuant to Rule
144 thereunder. Ms. Lebovits subsequently split her Purchase Note into two
separate notes (the "Purchase Notes"), one secured by new collateral consisting
of marketable securities and one secured by Shares. Pursuant to the terms of the
repurchase, in consideration for the sale by ZBBF of its 372,341 Shares to the
Company, the Company canceled the Purchase Note of ZBBF under which $450,000 was
then outstanding. Pursuant to the terms of Ms. Lebovits' Original Purchase
Agreement, 51,714 Shares held by Ms. Lebovits which were not vested at the time
of her resignation as Executive Vice President, General Counsel and Corporate
Secretary of the Company in August 1996, were repurchased at the original
purchase price (approximately $1.21 per share) by reducing the aggregate balance
due under her Purchase Notes by approximately $62,500. In consideration for the
sale by Ms. Lebovits to the Company of the other 320,627 Shares repurchased, the
Company canceled the remaining balances of her Purchase Notes under which
approximately $468,000 was then outstanding (after the $62,500 reduction).
CERTAIN TRANSACTIONS WITH VAJNA AND CERTAIN RELATED STOCKHOLDERS
Prior to January 1, 1994, the Company and certain other entities which are
now wholly-owned subsidiaries of the Company were wholly-owned by Vajna. As of
January 17, 1994, Vajna contributed all of the capital stock of these entities
to the Company. Shortly thereafter, the Company acquired all of the outstanding
stock of one of the Company's principal subsidiaries (the "Principal
Subsidiary") from Valdina for consideration consisting of a $3,300,000
promissory note (the "Valdina Note") of the Company (bearing interest at the
rate of 6% per annum, with principal and interest originally due January 17,
1995) and 957,446 Shares. The maturity date of the Valdina Note was subsequently
extended first until July 17, 1996 and then until January 17, 1997. The interest
rate after January 17, 1996 was 7% per annum. The Valdina Note, under which an
aggregate of approximately $3,540,000 in principal and accrued interest was
outstanding as of November 15, 1997, is currently due and payable in its
entirety. Pursuant to the Merger Agreement, the Company has agreed to pay the
Valdina Note in full on or prior to the closing of the Merger. See "THE MERGER
AGREEMENT." In conjunction with the foregoing transactions, Valdina received
certain "piggyback" registration rights with respect to its Shares, which, with
certain exceptions, require the Company to use its best efforts to include in
any of the Company's registration statements any shares requested by Valdina to
be included. The Company agreed to pay all registration expenses incurred
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by the Company, and Valdina agreed to pay all expenses directly incurred on its
behalf in connection with any such registration. The Company has also agreed to
certain indemnification provisions in favor of Valdina in connection with any
such registration.
From inception of the Company through June 1994, the Company's operations
were funded in large part through loans to the Company and its subsidiaries
provided by Vajna, Valdina and Valdi Corporation N.V. ("Valdi"), the corporate
parent of Valdina Parent Corporation. At December 31, 1993, such outstanding
loans aggregated $36,661,000 (the "Prior Loans"). In addition, Vajna directly or
indirectly guaranteed (for no fee) all loans from third parties to the Company
to finance production of each of its motion pictures. All amounts loaned to the
Company by Vajna, Valdina and Valdi were payable on demand and bore interest at
a rate of 10% per annum. On January 16, 1994, Valdina and Valdi contributed
$12,535,000 of their Prior Loans to the capital of the Principal Subsidiary. On
January 17, 1994, Vajna contributed $21,126,000 of Prior Loans to the capital of
the Company. As a result, $3,000,000 of Prior Loans from Vajna (bearing interest
at a rate of 6% per annum and originally due January 17, 1995) remained
outstanding. Such loans were paid in full by the Company by December 1995.
From January 1994 through early June 1994, Vajna, Valdina and Valdi loaned
an additional $6,696,689 to the Company to fund development, pre-production and
overhead expenses. Such amount (plus interest of $148,686 at the rate of 6% per
annum) was repaid in June 1994. The indebtedness owed to Disney pursuant to the
term loan agreements to finance TOMBSTONE (which has been paid off) and COLOR OF
NIGHT (which will terminate upon consummation of the Film Library Sale) were
guaranteed by Vajna, and the guarantee which remains with respect to COLOR OF
NIGHT is secured by certain of his real property. In addition, Valdi had
guaranteed repayment of certain project loans obtained from one of the Company's
commercial lenders to finance the production of TOMBSTONE, RENAISSANCE MAN and
COLOR OF NIGHT and a $10,000,000 loan obtained from such lender to provide
interim financing to fund the pre-production costs of JUDGE DREDD, DIE HARD WITH
A VENGEANCE and THE SCARLET LETTER. These loans were later refinanced through
the Company's credit facility, relieving Valdi of the guaranty.
In 1994, in order to assist the Company in obtaining financing for and
completion bonds on certain films, Valdi entered into an arrangement with the
Company (which has since expired) whereby Valdi undertook to have letters of
credit issued for the benefit of the Company's lenders to provide additional
collateral under the Company's credit facility. Valdi is owed a facility fee of
$110,220 in connection therewith. In addition, as of November 15, 1997, the
Company has non-interest bearing receivables of $261,000 from Valdi and an
affiliate representing amounts due from Valdi and/or its affiliate to reimburse
the Company for financial planning and related services provided to such
entities. The Company previously forgave an additional $33,000 of such
receivables.
Valdi beneficially owns approximately 84.7% of Intercom KFT ("Intercom"), a
distributor of motion pictures in Hungary to which the Company licenses
Hungarian distribution rights to its motion pictures in various media. The
Company and Intercom have an agreement in principle for an output agreement for
the Hungarian distribution of all of the Company's films, beginning with NIXON.
The agreement in principle provides for a distribution fee to Intercom of 17.5%
of the gross receipts of Intercom from distribution of such films. Prior to
reaching such agreement in principal in late 1995, the Company entered into
separate license agreements with Intercom on a picture-by-picture basis which
provided for a distribution fee of 20% of gross receipts to Intercom plus
reimbursement of distribution expenses. During the Company's fiscal years ended
December 31, 1994, 1995 and 1996, Intercom received distribution fees of
approximately $12,000, $106,000 and $189,000, respectively, with respect to
distribution of various of the Company's films. In addition, Intercom has
assisted the Company by paying to the Hungarian tax authorities on behalf of the
Company value added taxes incurred by the Company in connection with its
distribution of films through its Hungarian subsidiary, Cinergi Productions KFT
("CPKFT"). Intercom subsequently files for and receives the refund of such
taxes. In 1996, the Company paid Intercom approximately $349,000, representing
the aggregate accrued interest on amounts advanced in 1996 and certain prior
years by Intercom to the Hungarian tax authorities from the date of payment of
each such advance until receipt by
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Intercom of the applicable refund, and Intercom's out of pocket costs incurred
in connection with Intercom's activities on behalf of the Company in 1996 and
prior years. During 1995, Wondervale Ltd., a United Kingdom corporation which
was owned by Valdina Parent Corporation, provided certain production services in
connection with the production of JUDGE DREDD and EVITA for fees of $75,000 and
$50,000, respectively. In October 1996, the Company acquired Wondervale Ltd.
from Valdina Parent Corporation for $5,000.
The Company leases the building housing its corporate headquarters in Santa
Monica, California from Vajna. During the calendar years 1994, 1995 and 1996,
the Company made total lease payments of $462,000 per year to Vajna under a
lease which provided for monthly rental payments of $38,500 (approximately $1.75
per square foot) and expired on May 1, 1996. Subsequent thereto, the Company has
been leasing its corporate headquarters on the same general terms and at the
same rental rate, but on a month-to-month basis. The Company has substantially
reduced the amount of space it leases from Vajna in its corporate headquarters
building (from 19,359 square feet to 6,157 square feet). See "CERTAIN
INFORMATION REGARDING THE COMPANY--Business of the Company--Properties." The
Company and its affiliates have also obtained air charter services from a
corporation owned by Vajna. During the Company's fiscal years ended December 31,
1994, 1995 and 1996, the Company incurred air charter expenses to such
corporation in the amount of $1,199,000, $747,000 and $229,000, respectively,
pursuant to a protocol approved by the independent members of the Company's
Board of Directors. At November 15, 1997, no amounts were owed by the Company
for such air charter expenses. During 1994, 1995 and 1996, Vajna also received
financial planning, legal and related services from the Company on terms
approved by the Company's Audit Committee. In consideration for such services,
Vajna agreed to pay the Company $175,000 for 1994, $171,000 for 1995, and
$142,000 for 1996 (the Audit Committee determined reimbursement of an aggregate
additional $162,000 in such services over such periods would not be required).
In May 1997, the Company loaned $150,000 to Vajna for certain personal expenses
relating to the Cannes Film Festival. The loan bears interest at a rate of 7%
per annum, was due June 9, 1997, and is currently due and payable.
Vajna has agreed to pay (or cause to be paid) in full to the Company, at or
prior to the closing of the Merger, all amounts owed by him and his affiliates
to the Company pursuant to various of the foregoing transactions (an aggregate
of approximately $809,000 as of November 15, 1997).
The Company also has a Tax Reimbursement Agreement with Vajna, and in
connection therewith Vajna loaned the Company $10,000,000 in May 1994. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." The Tax Reimbursement Agreement and related loan to the Company
will not be affected by the Merger. For financial reporting purposes, the loan
payable and a receivable from Vajna (created to take into account a possible
payment from Vajna in accordance with the Tax Reimbursement Agreement) are
netted against one another pursuant to a legal right of offset in such
agreements.
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THE MERGER AGREEMENT
Set forth below is a description of the material terms of the Merger
Agreement. The description of the Merger Agreement and the other information
regarding the Merger Agreement contained herein are only summaries of certain
provisions of the Merger Agreement and are qualified in their entirety by
reference to the Merger Agreement which is included as Appendix "C" to this
Proxy Statement.
THE MERGER; EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of a Certificate of Merger
with the Delaware Secretary of State. The Effective Time is expected to occur as
soon as practicable after the satisfaction or waiver of the conditions to the
Merger set forth in the Merger Agreement. See "--Conditions to the Merger." As
of the Effective Time, Buyer will be merged with and into the Company in
accordance with the applicable provisions of the DGCL. Following the Merger, the
Company will be the Surviving Corporation and the separate corporate existence
of Buyer will cease.
The Bylaws of the Surviving Corporation will be identical to those of the
Company. The Certificate of Incorporation of the Company will be amended and
restated at the Effective Time and become the Restated Certificate of
Incorporation of the Surviving Corporation. In addition, the directors and
officers of Buyer immediately prior to the Effective Time will be the directors
and officers of the Surviving Corporation.
CONVERSION OF COMPANY COMMON STOCK INTO MERGER CONSIDERATION.
At the Effective Time, by virtue of the Merger and without any action on the
part of any holder of Shares, (i) each Share issued and outstanding immediately
prior to the Effective Time (other than (x) Shares held in the Company's
treasury (all of which will be canceled), (y) Shares held by Vajna or Valdina
(all of which will remain outstanding) and (z) Shares which have not been voted
for approval and adoption of the Merger Agreement and with respect to which
appraisal has been properly demanded in accordance with Section 262 of the DGCL
("Dissenting Shares")) will be converted into and represent the right to receive
the Purchase Price or the Adjusted Purchase price, as the case may be, and (ii)
each share of Buyer common stock, par value $.01 per share, issued and
outstanding immediately prior to the Effective Time will be canceled.
ADJUSTMENTS TO PURCHASE PRICE
The Merger Agreement contains four categories of adjustments to the Original
Purchase Price of $2.30 per Share: the Stone Adjustment, the EVITA Soundtrack
Adjustment, the Non-Smithee Accounts Receivable Adjustment, and the Basket
Adjustment (each an "Adjustment"). The Adjustments are described below. Each
Adjustment provided the potential for an upward adjustment to the Original
Purchase Price (effective at the Effective Time), upon the occurrence of the
event or events specified in the Adjustment. Each of the Stone Adjustment, the
EVITA Soundtrack Adjustment and the Non-Smithee Accounts Receivable Adjustment
is an independent Adjustment, with the calculation thereof unaffected by any of
the other Adjustments. The Merger Agreement provides that if any such Adjustment
results in a positive amount (in excess of any applicable threshold), there is
to be a positive adjustment to the Purchase Price. As indicated below, certain
events have already occurred between the date of the Merger Agreement and the
date of this Proxy Statement resulting in an aggregate of $.22 of adjustments to
the Original Purchase Price (i.e., a Purchase Price, as of the date of this
Proxy Statement, of $2.52 per Share) pursuant to the Stone Adjustment, the EVITA
Soundtrack Adjustment and the Non-Smithee Accounts Receivable Adjustment. No
further adjustments are possible pursuant to those three Adjustments.
Unlike the Stone Adjustment, the EVITA Soundtrack Adjustment and the
Non-Smithee Accounts Receivable Adjustment, the Basket Adjustment consists of
three sub-adjustments (the SGA Sub-Adjustment, Smithee Accounts Receivable
Sub-Adjustment, and MassIllusion Sub-Adjustment; each a "Sub-
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Adjustment"), which, in determining whether there will be an adjustment to the
Purchase Price resulting from the Basket Adjustment, will only be considered as
a group. Each Sub-Adjustment can be a positive or negative amount. If the sum of
the Sub-Adjustments is a positive amount, a positive adjustment to the Purchase
Price from the Basket Adjustment will result. If the sum of the Sub-Adjustments
is a negative amount, there will be no adjustment to the Purchase Price as a
result of the Basket Adjustment. The Merger Agreement does not provide for any
downward adjustments to the Purchase Price.
Each of the Adjustments are measured in some manner with respect to the
Adjustment Date. The Merger Agreement provides that the "Adjustment Date" is
that date which is ten business days before the date of the Special Meeting, as
such date is initially set by the Board, or as such date may be changed due to
the adjournment, delay or other rescheduling of the Special Meeting; provided,
however, that if, after the Adjustment Date, the Special Meeting is adjourned,
delayed or otherwise rescheduled to a date which is less than ten business days
from the date on which it was determined that the Special Meeting will be
adjourned, delayed or otherwise rescheduled, then, in such case, the Adjustment
Date will not be changed but will remain the date which is ten business days
before the date the Special Meeting was set to occur prior to such adjournment,
delay or other rescheduling of the Special Meeting. Provided that the Special
Meeting is not adjourned, delayed or otherwise rescheduled, the Adjustment Date
will be December 9, 1997.
Although the Adjustment Date has not occurred as of the date of this Proxy
Statement, the Company does not believe that there is a significant likelihood
of an adjustment to the Purchase Price as a result of the Basket Adjustment. As
there are no further adjustments possible pursuant to the other Adjustments, the
Company, therefore, does not believe that there is a significant likelihood of
any further upward adjustments to the Purchase Price of $2.52 per Share.
The Adjustments were determined by negotiations between the parties to the
Merger Agreement. See "SPECIAL FACTORS RELATING TO THE MERGER--Background and
Reasons for the Merger." The various thresholds contained in certain of the
Adjustments were also determined by negotiations between the parties to the
Merger Agreement. In general, such thresholds represent economic assumptions
regarding the Company and its operations agreed to by the parties to the Merger
Agreement and upon which negotiations with respect to the Merger Consideration
were based. In addition to the description of the Adjustments set forth below, a
table summarizing the Adjustments is set forth in the Summary on page 20 of this
Proxy Statement.
STONE ADJUSTMENT. The Merger Agreement provides that in the event the
Company enters into an agreement (the "Stone Agreement") prior to the Adjustment
Date (A) to sell the Five Stone Projects or (B) to settle its obligations
pursuant to its "first look" arrangement with Stone, there will be a positive
adjustment (a "Gross Adjustment") equal to the sum of (X) the aggregate purchase
price, if any, payable to the Company pursuant to the Stone Agreement, and (Y)
the aggregate amount of liabilities and other obligations assumed or forgiven by
the purchaser (or party or parties with which the Company settles its
obligations) pursuant to the Stone Agreement. As a result of the settlement of
the Company's "first look" arrangement with Stone pursuant to the Termination
Agreement, the Company has been relieved of $961,000 in obligations it would
otherwise have had to Stone under such arrangement. This has resulted in a Gross
Adjustment pursuant to the Stone Adjustment of $961,000, or approximately $.0745
per Share (see "Calculation of Purchase Price Adjustment" below).
EVITA SOUNDTRACK ADJUSTMENT. The Merger Agreement provides that in the
event the sum of (A) the aggregate amount of all monies received by the Company
(as royalties or otherwise) in respect of the EVITA Soundtrack from September 2,
1997 through the Adjustment Date and (B) the aggregate purchase price payable to
the Company pursuant to any agreement for the sale of the Soundtrack Rights (an
"Evita Agreement") entered into by the Company prior to the Adjustment Date,
exceeds $1,500,000 (such excess being referred to herein as the "Soundtrack
Amount"), there will be a Gross Adjustment equal to the Soundtrack Amount. The
$1,500,000 threshold represents the negotiated agreement of the parties to the
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Merger Agreement as to the amount of future overages that such parties then
estimated the Company was reasonably likely to obtain from the Soundtrack
Rights.
After September 2, 1997, the Company received $1,760,000 in overages with
respect to the EVITA Soundtrack, resulting in a Gross Adjustment of $260,000 or
approximately $.0201 per Share. On November 19, 1997, the Board approved
Disney's offer to purchase the Soundtrack Rights for a purchase price of
$1,500,000 in cash, resulting in an additional Gross Adjustment equal to the
purchase price of $1,500,000 or approximately $.1164 per share. When considered
with the adjustment resulting from the receipt of the overages, the total Gross
Adjustment resulting from the EVITA Soundtrack Adjustment was $1,760,000 or
approximately $.1365 per Share.
NON-SMITHEE ACCOUNTS RECEIVABLE ADJUSTMENT. The Merger Agreement provides
that in the event the aggregate amount of monies collected by the Company in
connection with certain outstanding accounts receivable (the "Non-Alan Smithee
Receivables") from July 1, 1997 through the Adjustment Date (the "Measurement
Period") is in excess of $1,573,000 (such excess amount being referred to as the
"Non-Alan Smithee Receivables Amount"), there will be a Gross Adjustment equal
to the Non-Alan Smithee Receivables Amount. The $1,573,000 threshold generally
represents the amount of Non-Alan Smithee Receivables reflected on the Company's
balance sheet at June 30, 1997 less a reserve of $400,000 for doubtful
collections that was negotiated between the parties to the Merger Agreement. As
all of the Non-Alan Smithee Receivables which have not previously been collected
(i.e., the Miscellaneous Receivables) were transferred to Summit as part of the
Summit Transactions, the aggregate amount of Non-Alan Smithee Receivables
collected by the Company during the Measurement Period and the Non-Alan Smithee
Receivables Amount became fixed (and not subject to further adjustment) at
$1,743,000 and $170,000, respectively, and resulted in an additional Gross
Adjustment of $170,000 or approximately $.0132 per Share. When considered with
adjustments (discussed above) resulting from the settlement of the "first look"
arrangement with Stone, the receipt by the Company of $1,760,000 in overages
with respect to the EVITA Soundtrack, and the acceptance of Disney's offer to
purchase the Soundtrack Rights and taking into account the parties' agreement as
to rounding, the total adjustment to the Original Purchase Price was $.22
resulting in the Purchase Price of $2.52. The Non-Alan Smithee Receivables do
not include any receivables relating to AN ALAN SMITHEE FILM, for which there is
a different potential adjustment, as described below.
BASKET ADJUSTMENT. The Purchase Price will also be adjusted upwards in the
event the sum of the following Sub-Adjustments (which may be either positive or
negative) results in a positive number.
SGA SUB-ADJUSTMENT. There will be a positive sub-adjustment equal to the
amount, if any, by which the Company Expense Amount is less than $6,493,000. If
instead, the Company Expense Amount is greater than $6,493,000, there will be a
negative sub-adjustment equal to the amount by which the Company Expense Amount
is greater than $6,493,000. The positive or negative sub-adjustment referred to
in the immediately preceding two sentences is referred to in this Proxy
Statement as the "SGA Sub-Adjustment." "Company Expense Amount" is defined in
the Merger Agreement to mean the aggregate Expenses paid or incurred during the
Measurement Period by the Company. "Expenses" is defined in the Merger Agreement
to consist of the following: salaries of Company personnel, severance payments,
rent, utilities, accounting and legal fees and expenses, and other expenses
which have generally been included as selling, general and administrative
expenses in the Company's audited financial statements. "Expenses," however,
does not include, among other things, (A) any expenses incurred by the Company
with respect to the Company's development projects, (B) any expenses incurred by
the Company with respect to (or funds provided by the Company to) Cinergi
Productions Inc. (California), a California corporation and a wholly owned
subsidiary of the Company ("CPI"), or the Visual Effects Facility which had been
operated by CPI, or (C) any expenses incurred by CPI. The Company Expense Amount
will be computed on a consolidated basis (but excluding for such purpose CPI)
and otherwise in a manner generally consistent with preparation of the Company's
financial statements for the fiscal year ended December 31, 1996.
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The $6,493,000 threshold represents the negotiated agreement of the parties
to the Merger Agreement as to the amount of Company Expenses that such parties
then estimated the Company was reasonably likely to incur through the date on
which the parties then anticipated the Merger would occur (on or about November
30, 1997). As the Merger will not be occurring until after such date and the
Company Expenses are exceeding the parties' expectations, the Company
anticipates that the Company Expense Amount will exceed $6,493,000 resulting in
a negative sub-adjustment.
SMITHEE ACCOUNTS RECEIVABLE SUB-ADJUSTMENT. There will be a positive
sub-adjustment equal to the amount, if any, by which the aggregate amount of
monies collected by the Company during the Measurement Period with respect to
certain outstanding accounts receivable with respect to AN ALAN SMITHEE FILM
(the "Alan Smithee Receivables") exceeds $8,690,000. If instead, the aggregate
amount of monies collected by the Company during the Measurement Period with
respect to the Alan Smithee Receivables is less than $8,690,000, there will be a
negative sub-adjustment equal to the amount by which the aggregate amount of
monies collected by the Company during the Measurement Period with respect to
the Alan Smithee Receivables is less than $8,690,000. The positive or negative
sub-adjustment referred to in the immediately preceding two sentences is
referred to in this Proxy Statement as the "Smithee Accounts Receivable Sub-
Adjustment."
The $8,690,000 threshold generally represents the amount of Alan Smithee
Receivables reflected on the Company's balance sheet at June 30, 1997 reduced by
(i) $375,000 in accounts receivable that the parties to the Merger Agreement
agreed were uncollectable and (ii) a reserve of $400,000 for further doubtful
collections that was negotiated between the parties to the Merger Agreement. The
Company currently anticipates that the aggregate amount of monies to be
collected by the Company during the Measurement Period with respect to the Alan
Smithee Receivables will be less than $8,690,000 resulting in a negative
sub-adjustment.
MASSILLUSION SUB-ADJUSTMENT. There will be a positive sub-adjustment equal
to the amount, if any, by which the MassIllusion Expense Amount is less than
$1,300,000. If instead, the MassIllusion Expense Amount is greater than
$1,300,000, there will be a negative sub-adjustment equal to the amount by which
the MassIllusion Expense Amount exceeds $1,300,000. The positive or negative
sub-adjustment referred to in the immediately preceding two sentences is
referred to in this Proxy Statement as the "MassIllusion Sub-Adjustment."
"MassIllusion Expense Amount" is defined in the Merger Agreement to mean (a) the
aggregate amount of monies provided by the Company, directly or indirectly, to
CPI or to any third parties on behalf of CPI during the Measurement Period
("Disbursed Amounts"), plus (b) the aggregate amount of expenses borne by the
Company during the Measurement Period with respect to CPI (including with
respect to the Visual Effects Facility which had been operated by CPI) ("Borne
Expenses"), less (from the sum of (a) and (b)) the recovery by the Company, in
any manner whatsoever (including, without limitation, reimbursements by CPI to
the Company), of any of the Disbursed Amounts or Borne Expenses.
The $1,300,000 threshold represents the negotiated agreement of the parties
to the Merger Agreement as to the then estimated amount of the MassIllusion
Expense Amount. The Company currently anticipates that the MassIllusion Expense
Amount will be less than $1,300,000 resulting in a positive sub-adjustment.
CALCULATION OF BASKET ADJUSTMENT. To the extent the sum of the SGA
Sub-Adjustment, the Smithee Accounts Receivable Sub-Adjustment and the
MassIllusion Sub-Adjustment (collectively, the "Basket Adjustment") results in a
positive amount (such number being referred to in this Proxy Statement as the
"Basket Adjustment Amount"), there will be a Gross Adjustment equal to the
Basket Adjustment Amount. To the extent the Basket Adjustment is a negative
amount, there will be no adjustment to the Purchase Price. Although the Company
currently anticipates a positive MassIllusion Sub-Adjustment, the Company
believes that anticipated negative SGA and Smithee Accounts Receivable
Sub-Adjustments will exceed such positive amount, resulting in a negative Basket
Adjustment and no adjustment to the Purchase Price as a result of the Basket
Adjustment.
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The Company's chief financial officer, or other appropriate accounting
officer, as the case may be, will calculate both the Expenses and the
MassIllusion Expense Amount for the Measurement Period and forward such
calculation to Vajna and the Special Committee no later than 6:00 p.m., Los
Angeles time, on the day after the Adjustment Date. To the extent there is a
disagreement between Vajna and the Special Committee with respect to the
calculation of Expenses and/or the MassIllusion Expense Amount, the parties will
immediately forward such calculation(s) to an independent accountant, retired
judge or other party mutually acceptable to Vajna and the Special Committee,
whose determination as to the proper calculation of Expenses and/or the
MassIllusion Expense Amount will be rendered no later than six business days
prior to the Special Meeting and will be final and binding on all the parties to
the Merger Agreement.
CALCULATION OF PURCHASE PRICE ADJUSTMENT. The aggregate per Share
adjustment to the Purchase Price (the "Total Adjustment Amount") will be
calculated by dividing (i) the aggregate dollar amount of the Gross Adjustments
resulting from the Adjustments by (ii) the total number of issued and
outstanding Shares as of the Adjustment Date (including Shares held by Vajna and
Valdina but excluding Disney Shares). The Total Adjustment Amount will be
rounded off to the nearest whole penny. Except for the Stone Adjustment, the
EVITA Soundtrack Adjustment, the Non-Smithee Accounts Receivable Adjustment and
the Basket Adjustment, there are no other possible positive adjustments to the
Purchase Price.
PRESS RELEASE REGARDING FINAL ADJUSTED PURCHASE PRICE. The Company and
Vajna will issue a press release no later than five business days prior to the
Special Meeting, setting forth the exact dollar amount of the Total Adjustment
Amount and the final Adjusted Purchase Price.
TOLL-FREE NUMBER FOR MERGER CONSIDERATION INFORMATION. The Company has
established a toll-free telephone number which Stockholders may use to call D.F.
King, the Company's proxy solicitation agent, to obtain the current dollar
amount of the Merger Consideration on a per Share basis. The toll-free number is
(800) 628-8510.
SURRENDER OF COMPANY COMMON STOCK CERTIFICATES.
Promptly after the Effective Time, a letter of transmittal and a notice of
consummation of the Merger and instructions with respect to the surrender of
certificates ("Certificates") previously representing Shares will be sent to
each record holder of Shares immediately prior to the Effective Time. The letter
of transmittal will set forth the procedure for surrendering such Certificates
to ChaseMellon Shareholder Services ("the Paying Agent"). Each holder of a
Certificate or Certificates (other than Certificates for Dissenting Shares,
Shares held in the treasury of the Company or Shares owned by Buyer, Vajna or
Valdina) will be entitled to receive, upon surrender to the Paying Agent of the
Certificate or Certificates for cancellation, together with such letter of
transmittal duly executed, and subject to any required backup withholding
(within the meaning of Section 3406 of the Code), the aggregate amount of cash
into which the Shares previously represented by such Certificate or Certificates
are converted in the Merger. Until surrendered to the Paying Agent, each
Certificate (other than Certificates for Dissenting Shares, Shares held in the
treasury of the Company or Shares owned by Buyer, Vajna or Valdina) will be
deemed for all corporate purposes to evidence only the right to receive upon
such surrender the aggregate amount of cash into which the Shares represented
thereby shall have been converted, subject to any required backup withholding
(within the meaning of Section 3406 of the Code). No interest will accrue or be
paid on the cash payable upon the surrender of the Certificate or Certificates.
If payment is to be made to a person other than the person in whose name the
Certificate surrendered is registered, it will be a condition of payment that
the Certificate so surrendered is properly endorsed or otherwise in proper form
for transfer and that the person requesting such payment pays any transfer or
other taxes required by reason of the payment to a person other than the
registered holder of the Certificate surrendered or establishes to the
satisfaction of the Surviving Corporation that such tax has been paid or is not
applicable.
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Concurrent with the Effective Time, Buyer, if necessary, will deposit or
cause to be deposited with the Paying Agent in trust for the benefit of the
Stockholders (other than Vajna and Valdina) an amount of cash which, together
with the cash on hand at the Company as of such date, will equal the aggregate
cash consideration payable to the Stockholders (other than Vajna and Valdina)
pursuant to the terms of the Merger Agreement. Amounts made available to the
Paying Agent and not exchanged for Certificates representing Shares within six
months after the Effective Time will be returned by the Paying Agent to the
Surviving Corporation, which will thereafter act as Paying Agent subject to the
rights of holders of unsurrendered Certificates representing Shares.
Notwithstanding the foregoing, neither the Paying Agent nor any party to the
Merger Agreement will be liable to a holder of Shares for any cash delivered to
a public official pursuant to applicable abandoned property laws, or for any
interest thereon. If Certificates are not surrendered prior to six years after
the Effective Time (or, in any particular case, prior to such earlier date on
which the consideration payable in respect of such Shares would otherwise
escheat to or become the property of any governmental unit or agency), any
consideration payable in respect of such Certificate will, to the extent
permitted by applicable law, become the property of the Surviving Corporation,
free and clear of all claims of interest of any person previously entitled
thereto.
STOCKHOLDERS SHOULD NOT RETURN ANY CERTIFICATES WITH
THE FORM OF PROXY ACCOMPANYING THIS PROXY STATEMENT.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties thereto including, among others, representations as to due organization
and existence, corporate authority, enforceability of the Merger Agreement, the
consents required to effectuate the Merger, no violation of the charter or
bylaws of the Company or Buyer or applicable law relating to the Merger, and the
accuracy of information included in certain materials in connection with the
Merger. In addition, the Merger Agreement contains additional representations
and warranties of the Company, including, among others, as to the Company's
capitalization, as well as the accuracy of the Company's public filings
(including the financial statements contained therein).
CONDITIONS TO THE MERGER
The respective obligations of each party to effect the Merger are subject to
the fulfillment and/or waiver, at or prior to the Effective Time, of the
following conditions:
(a) The Merger Agreement shall have been approved and adopted by the
requisite vote under the DGCL of the Stockholders;
(b) The consummation of the Merger shall not be prohibited by any statute,
rule or regulation enacted, promulgated or deemed applicable to the Merger by
any government or governmental agency that prohibits or makes illegal
consummation of the Merger;
(c) 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 the
Merger Agreement and which is in effect as of the closing of the Merger 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 the Merger Agreement;
(d) No litigation, proceeding or investigation shall be pending, threatened
or in existence which, if adversely determined, could result in:
(i) the issuance of a preliminary or permanent injunction or other order
which would restrain, prevent or require rescission of the Merger Agreement
or the transactions contemplated thereby;
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(ii) liability to the Company, Vajna, Valdina, Buyer or any officers,
directors, employees or agents of any of them arising from the Merger
Agreement or the transactions contemplated thereby; or
(iii) the consummation of the transactions contemplated by the Merger
Agreement being unlawful;
(e) The Company shall have obtained the Majority of the Minority Vote;
(f) The percentage of Shares demanding appraisal in accordance with Section
262 of the DGCL to the total number of Shares outstanding immediately prior to
the Effective Time shall not exceed 15%;
(g) The transactions contemplated by the Library Sale Agreement, shall have
been consummated in all material respects; and
(h) The transactions contemplated by the Assignment Agreement shall have
been consummated in all material respects.
The obligations of Buyer, Vajna and Valdina to consummate the Merger
pursuant to the Merger Agreement are further subject to the satisfaction or
waiver at or prior to the Effective Time of the following conditions:
(a) The Option Plans and all unexercised stock options shall have been
terminated; and
(b) The Company shall have performed in all material respects each of its
obligations under the Merger Agreement required to be performed by it on or
prior to the Effective Time, including without limitation, the cancellation and
termination of the Company's outstanding warrants (the Disney Warrant and a
warrant held by Jefferson Capital to purchase 50,000 Shares at $9.00 per Share)
as required in the Merger Agreement.
The obligations of the Company to consummate the Merger pursuant to the
Merger Agreement are further subject to the satisfaction or waiver at or prior
to the Effective Time of the following conditions:
(a) Buyer, Vajna and Valdina shall have performed in all material respects
their respective obligations under the Merger Agreement required to be performed
by them on or prior to the Effective Time;
(b) All of the representations and warranties of Vajna, Buyer and Valdina in
the Merger Agreement shall be true and correct as of the Effective Time as if
such representations and warranties were made as of such time; and
(c) Buyer shall have deposited with the Paying Agent the cash amount
required pursuant to the Merger Agreement.
AGREEMENTS OF THE COMPANY, BUYER, VAJNA AND VALDINA
The Merger Agreement contains a number of covenants and agreements,
including without limitation, the following:
BEST EFFORTS. The Company, Buyer, Vajna and Valdina have each agreed in the
Merger Agreement, subject to the terms and conditions thereof, to use their best
efforts to do all things necessary, proper or advisable to consummate and make
effective as promptly as practicable the transactions contemplated by the Merger
Agreement, and to cooperate with each other in connection with the foregoing,
including using their best efforts to (i) obtain all necessary waivers, consents
and approvals from other parties to material agreements, leases and other
contracts, (ii) obtain all necessary consents, approvals and authorizations as
are required to be obtained under any federal, state or foreign law or
regulation, (iii) lift or rescind any injunction or restraining order or other
order adversely affecting the ability of the parties to consummate the
transactions contemplated by the Merger Agreement, (iv) effect any necessary
registrations and filings and submissions of information requested by
governmental authorities, and (v) fulfill all conditions to the
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Merger Agreement. Vajna and Valdina have also agreed to vote or cause to be
voted all Shares owned by them (and any of their affiliates) in favor of
approval of the Merger and the adoption of the Merger Agreement. In addition,
Vajna has agreed to assist the Company in good faith and use commercially
reasonable best efforts to collect the Alan Smithee Receivables and the Non-Alan
Smithee Receivables.
OPERATIONS PENDING MERGER. The Company has agreed that, prior to the
Effective Time, unless Buyer has otherwise consented in writing or unless
otherwise approved by a majority of the entire Board, or except as otherwise
expressly contemplated by the Merger Agreement, the Library Sale Agreement or
the Assignment Agreement, neither the Company nor any of its subsidiaries shall
directly or indirectly: (i) declare or pay any dividend or make any distribution
with respect to any shares of its capital stock; (ii) purchase or otherwise
acquire, or propose to purchase or otherwise acquire, any outstanding shares of
its capital stock; (iii) propose or adopt any amendments to its charter
documents or bylaws; (iv) issue, sell, pledge, dispose of or encumber any
capital stock of the Company or any of its subsidiaries (other than pursuant to
stock options outstanding on the date of the Merger Agreement); (v) except in
the ordinary course of business consistent with past practice, sell, pledge,
dispose of or encumber any material asset of the Company or any of its
subsidiaries (including, without limitation, any material indebtedness owed to
them or any material claims held by them); (vi) incur any long-term indebtedness
for borrowed money or issue any debt securities in a material amount or assume,
guarantee or endorse any material obligations of any other person except for
obligations of any wholly owned subsidiary; (vii) approve, adopt or amend any
agreement, plan, program or arrangement which provides any benefits to any
employee of the Company; (viii) except in the ordinary and usual course of
business, increase the compensation of any employee of the Company; or (ix)
authorize or propose any of the foregoing, or enter into any contract or
arrangement to do any of the foregoing.
INDEMNIFICATION. Buyer and the Company have agreed that all rights to
indemnification existing in favor of the present or former directors or officers
of the Company or any of its subsidiaries as provided in the Company's or any of
its subsidiaries' charter documents in effect as of the date of the Merger
Agreement, with respect to matters occurring prior to the Effective Time, will
survive the Merger and will generally continue in full force and effect after
the Effective Time. Buyer, Vajna and the Company have also agreed that all
rights to indemnification existing in favor of the present or former directors
or officers of the Company or any of its subsidiaries in any indemnification
agreement between such person and the Company or any such subsidiary will
survive the Merger and continue in full force and effect in accordance with the
terms of such agreement. The Company has also agreed to purchase a policy of
directors' and officers' liability insurance covering, among other things,
matters occurring prior to the Effective Time. Vajna has agreed to cause the
Company to maintain such insurance policy for a period of four years from the
Effective Time. To the extent the Company purchases insurance which covers
matters relating to the activities of the Surviving Corporation following the
Effective Time, Vajna and Buyer have agreed to reimburse the Company for the
premiums paid with respect thereto.
STOCK OPTIONS. The Company has agreed to terminate, at or prior to the
Effective Time, the Option Plans and all stock options issued thereunder.
SEVERANCE. The Company and Vajna have agreed to terminate the Vajna
Employment Agreement, effective as of the Effective Time. See "SPECIAL FACTORS
RELATING TO THE MERGER-- Interests of Certain Persons in the Merger." The
Company and Warren Braverman have also agreed to a severance arrangement
pursuant to which Mr. Braverman's employment agreement will be terminated as of
the Effective Time. See "SPECIAL FACTORS RELATING TO THE MERGER--Interests of
Certain Persons in the Merger." The Company has also agreed to certain severance
arrangements with Fred Feitshans and Randolph Paul. See "SPECIAL FACTORS
RELATING TO THE MERGER--Interests of Certain Persons in the Merger."
PAYMENT OF OUTSTANDING OBLIGATIONS. Vajna has agreed to pay in full, and
has agreed to cause his affiliates to pay in full, at or prior to the closing of
the Merger, all amounts owed by him or them, as the
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case may be, to the Company and its subsidiaries. The Company has agreed to pay
in full, at or prior to the closing of the Merger, the outstanding principal
amount (and any accrued interest thereon) under the Valdina Note. See "SPECIAL
FACTORS RELATING TO THE MERGER--Certain Transactions with Vajna and Certain
Related Stockholders."
TERMINATION; FEES AND EXPENSES
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, whether prior to or after approval by the
Stockholders: (i) by mutual written consent of the Special Committee, on behalf
of the Company, and the Board of Directors of Buyer; (ii) by the Company or
Buyer if the Library Sale Agreement terminates; (iii) by the Company, acting
through the Special Committee, or Buyer if, without a breach or violation of the
Merger Agreement by the terminating party, the Merger has not been consummated
by December 31, 1997 (the "Expiration Date"), provided, however, that if the
date by which the transactions contemplated by the Library Sale Agreement must
be consummated as provided in the Library Sale Agreement is extended by the
parties to such agreement, then the Expiration Date will automatically, without
any action required on the part of the parties to the Merger Agreement, be
extended by the same period of time; or (iv) by the Company, if the Board, based
on the recommendation of the Special Committee, has failed to recommend, or
withdrawn, modified or amended in any material respect, its approval or
recommendation of the Merger or failed to hold the Special Meeting prior to
December 31, 1997.
In the event of any such termination, the Merger Agreement will become void
and have no effect, and there will be no liability on the part of Buyer, Vajna,
Valdina or the Company, except that (i) obligations pursuant to the Merger
Agreement relating to the obligation of each party to pay its own costs and
expenses will survive such termination, and (ii) the termination of the Merger
Agreement will not relieve any party from liability for any willful breach of
the Merger Agreement.
The Merger Agreement provides that whether or not the Merger is consummated,
all costs and expenses incurred in connection with the Merger Agreement, the
Merger and the consummation of the transactions contemplated thereby will be
paid by the party incurring such expenses.
AMENDMENTS; WAIVERS
The Merger Agreement may not be amended except by action of the Board (with
the assent of the Special Committee) on behalf of the Company and the Board of
Directors of Buyer on behalf of Buyer, Vajna and Valdina. Any amendment will be
set forth in a written instrument signed by each of the Company, Buyer, Vajna
and Valdina. However, after approval of the Merger Agreement by the
Stockholders, no amendment may be made without further approval of the
Stockholders which would: (i) decrease the Merger Consideration; or (ii) change
any other terms and conditions of the Merger Agreement if any of the changes,
alone or in the aggregate, would materially adversely affect the Stockholders.
At any time prior to the Effective Time, whether before or after approval of the
Merger by the Stockholders, Buyer, Vajna, Valdina or the Company, may (i) extend
the time for the performance of any of the obligations or other acts of any
other party to the Merger Agreement, (ii) waive any inaccuracies in the
representations and warranties contained in the Merger Agreement or in any
document, certificate or writing delivered pursuant to the Merger Agreement, or
(iii) waive compliance with any of the agreements of any other party or with any
conditions to its own obligations; provided that neither Buyer, Vajna or Valdina
(each a "Buyer Party"), may extend the time for performance of any obligation
of, waive any inaccuracy in any representation or warranty of, or waive
compliance with any agreement or condition with respect to any Buyer Party.
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APPRAISAL RIGHTS
In the event of the Merger, Stockholders who do not vote in favor of the
Merger and have otherwise complied with the requirements of Section 262 of the
DGCL will be entitled to dissent and demand appraisal of their Shares
outstanding immediately prior to the Effective Time. Pursuant to the Merger
Agreement, Dissenting Shares (i.e., Shares which are outstanding immediately
prior to the Effective Time and which have not been voted for approval of the
Merger and the adoption of the Merger Agreement and with respect to which
appraisal has been properly demanded in accordance with Section 262) will not be
converted into the right to receive the Merger Consideration at or after the
Effective Time unless and until the holder of such Shares withdraws his or her
demand for such appraisal (in accordance with Section 262(k) of the DGCL) or
becomes ineligible for appraisal. If a holder of Dissenting Shares withdraws (in
accordance with Section 262(k) of the DGCL) his or her demand for such appraisal
or becomes ineligible for appraisal, then, as of the Effective Time or the
occurrence of such event, whichever last occurs, such holder's Dissenting Shares
will cease to be Dissenting Shares and will be converted into and represent the
right to receive the Merger Consideration. The Company has agreed to give Buyer
(i) prompt notice of any written demands for appraisal, withdrawals of demands
for appraisal and any other instruments served pursuant to Section 262 and
received by the Company and (ii) the opportunity to direct all negotiations and
proceedings with respect to demands for appraisal under Section 262. The Company
will not voluntarily make any payment with respect to any demands for appraisal
and will not, except with the prior written consent of Buyer, settle or offer to
settle any such demands.
Set forth below under "RIGHTS OF DISSENTING STOCKHOLDERS" is additional
information regarding dissenters' appraisal rights under the DGCL including a
summary of the steps required to be taken to perfect such rights.
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RIGHTS OF DISSENTING STOCKHOLDERS
Stockholders who, not later than the date of the Special Meeting, deliver to
the Company a written demand for appraisal rights, who do not vote in favor of
the Merger and who comply with all other applicable requirements of Section 262
of the DGCL, will have the right to dissent from the Merger and to have their
Shares appraised by the Delaware Court of Chancery and to receive payment of the
"fair value" of such Shares as determined by such court, rather than the Merger
Consideration. Set forth below is a summary description of Section 262. Section
262 is reprinted in its entirety as Appendix "D" to this Proxy Statement. All
references in Section 262 and in this summary to a "Stockholder" are to the
record holder of Shares as to which appraisal rights are asserted. A person
having a beneficial interest in Shares that are held of record in the name of
another person, such as a broker or nominee, must act promptly to cause the
record holder to follow the steps summarized below properly and in a timely
manner to perfect whatever appraisal rights the beneficial owner may have.
THE FOLLOWING SUMMARY IS NOT A COMPLETE STATEMENT OF THE LAW RELATING TO
APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPENDIX "D."
THIS SUMMARY AND APPENDIX "D" SHOULD BE REVIEWED CAREFULLY BY ANY STOCKHOLDER
WHO WISHES TO PRESERVE THE RIGHT TO APPRAISAL BECAUSE FAILURE TO COMPLY STRICTLY
WITH THE PROCEDURES SET FORTH HEREIN AND THEREIN WILL RESULT IN THE LOSS OF
APPRAISAL RIGHTS.
WRITTEN DEMAND FOR APPRAISAL. In accordance with Section 262, any
Stockholder entitled to appraisal rights may demand in writing from the Company
the appraisal of the fair value of such Stockholder's Shares. Such demand must
reasonably inform the Company of the identity of the Stockholder and that the
Stockholder intends thereby to demand the appraisal of the fair value of such
Stockholder's Shares. A written demand for appraisal of Shares must be delivered
to the Company 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 are owned of record in a fiduciary capacity, such as by
a trustee, guardian or custodian, the demand must be executed by the fiduciary.
If Shares are owned of record by more than one person, as in a joint tenancy or
tenancy in common, the 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 as a nominee for others,
may exercise appraisal rights with respect to the Shares held for all or less
than all of the beneficial owners of Shares as to which the holder is the record
owner. In such case, the written demand must set forth the number of Shares
covered by the demand. Where the number of Shares is not expressly stated, the
demand will be presumed to cover all Shares outstanding in the name of the
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
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the statutory requirements with respect to the delivery of written demand prior
to the taking of the vote on the Merger Agreement.
A Stockholder who elects to exercise appraisal rights must mail or deliver
the written demand for appraisal to: Cinergi Pictures Entertainment Inc.,
Attention: Secretary, 2308 Broadway, Santa Monica, California 90404, or should
deliver such demand to the Company in person at the Special Meeting. The written
demand for appraisal should specify the Stockholder's name and mailing address
and the number of the Company's Shares of Common Stock owned by the Stockholder,
and should state that the Stockholder is thereby demanding appraisal in
accordance with Section 262 of the DGCL. Any Stockholder (other than a record
owner who is acting as a nominee holder for different beneficial owners) seeking
to exercise appraisal rights for a portion, but not all, of such Stockholder's
Shares should consult with legal counsel before taking any such action. The
Company believes that Delaware law has not clearly addressed the ability of such
a Stockholder to exercise appraisal rights with respect to a portion, but not
all, of such Stockholder's Shares. Stockholders should be aware of the risk
that, should a Stockholder seek to exercise appraisal rights with respect to a
portion, but not all, of such Stockholder's Shares, the Company may assert that
by doing so such Stockholder has waived such Stockholder's appraisal rights and
a Delaware Court may find that such Stockholder has so waived such Stockholder's
appraisal rights.
OTHER PROCEDURES. Within 10 days after the Effective Time, the Company, as
the surviving corporation in the Merger, 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.
Within 120 days after the Effective Time, any Stockholder who has complied
with the required conditions of Section 262 is entitled, upon written request,
to receive from the Company 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 the Company and the
aggregate number of holders of such Shares. Such statement must be mailed within
10 days after the written request therefor has been received by the Company or
within 10 days after expiration of the period for delivery of demands for
appraisal under Section 262, whichever is later.
Within 120 days after the Effective Time, either the Company, as the
surviving corporation in the Merger, or any Stockholder who has complied with
the required conditions of Section 262 may file a petition in the Delaware Court
of Chancery demanding a determination of the fair value of the Shares of all
such 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 Stockholders are entitled to appraisal rights and thereafter will appraise
the Shares 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 the fair value.
Stockholders considering whether to seek appraisal rights should bear in
mind that the fair value of their Shares determined under Section 262 could be
more than, the same as, or less than the value of the Merger Consideration to be
paid pursuant to the Merger.
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 Stockholder, the Court may order that all
or a portion of the expenses incurred by any Stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorneys' fees
and the fees and expenses of experts, 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 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 subject to such demand or to receive
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payment of dividends or other distributions on such Shares, 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 Stockholder will
have the right to withdraw his or her demand for appraisal and to accept the
Merger Consideration. After this period, a Stockholder may withdraw his or her
demand for appraisal only with the written consent of the Company. If no
petition for appraisal is filed with the Delaware Court of Chancery within 120
days after the Effective Time, Stockholders' rights to appraisal will cease and
they will be entitled to receive only the Merger Consideration. Inasmuch as the
Company has no obligation to file such a petition, any 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 will
be dismissed as to any 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.
FAILURE TO TAKE ANY REQUIRED STEP IN CONNECTION WITH THE EXERCISE OF
APPRAISAL RIGHTS MAY RESULT IN THE TERMINATION OR WAIVER OF SUCH RIGHTS.
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CERTAIN INFORMATION REGARDING THE COMPANY
BUSINESS OF THE COMPANY
MOTION PICTURE PRODUCTION AND FINANCING. As indicated under "PROPOSAL NO.
1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY," the Company has
produced twelve motion pictures to date. Of such films, EVITA, based on the
music of Andrew Lloyd Weber, starring Madonna and Antonio Banderas and directed
by Alan Parker, was released in 1996 (Christmas Day), and THE SHADOW CONSPIRACY,
directed by George Cosmatos, was released in 1997 (January 31). In addition,
AMANDA was completed by the Company in 1996 and delivered to Family Channel
Pictures, Inc. ("FCP") in July 1996 for domestic distribution and to Summit
(which has been assisting the Company in the international distribution of the
film) in connection with the film's international distribution. FCP has not yet
obtained domestic theatrical distribution of the film. See "Distribution of
Motion Pictures--Other Production and Distribution Arrangements." The Company
has recently completed post-production on AN ALAN SMITHEE FILM, a satirical look
at the making of big budget action/adventure Hollywood films, and begun delivery
of the film to distributors. In February 1997, the Company also commenced
principal photography on the film BROADWAY BRAWLER, starring Bruce Willis,
however, due to circumstances beyond the Company's control, production by the
Company on such film ceased permanently approximately three weeks after
commencement of principal photography. See "PROPOSAL NO. 1: SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--Certain Additional Information
Regarding Transactions with Disney." The Company does not presently intend to
commence production on any additional motion pictures. See "PROPOSAL NO. 1: SALE
OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY-- Background and Reasons for
the Library Sale Agreement" and "--Recommendation of the Board."
The Company does not own or operate sound stages and related production
facilities generally referred to as a "studio" and instead has generally
utilized, as needed in the production of its motion pictures, creative and
technical personnel (such as screenwriters, directors and performers),
production and editing facilities and laboratories available in the market. The
Company acquired certain visual effects equipment to complete the visual effects
for JUDGE DREDD and also used such equipment for visual effects for DIE HARD
WITH A VENGEANCE. The Company's subsidiary which operated the Visual Effects
Facility recently shut down the operations of the Visual Effects Facility and
transferred the assets and certain liabilities associated therewith to a third
party. See "CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS--Visual Effects
Facility."
The Company has generally financed the production costs of its motion
pictures through loans obtained under a credit facility which the Company had
with Chase and a syndicate of lenders, advances and loans from Disney pursuant
to the Domestic Distribution Agreement, and direct investments by the Company,
as necessary. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." In connection with such financing, the Company would
assign the right to receive minimum guarantees for such motion picture to its
lenders as collateral to secure loans used to finance a portion of the
production costs of the motion picture. This manner of financing (referred to
herein as "pre-licensing") guaranteed a minimum return from distribution in each
such territory which is the subject of a license agreement prior to completion
of a picture, while still generally allowing the Company to retain the right to
share in overages.
DISTRIBUTION OF MOTION PICTURES IN THE AMERICAS. The Company has not
engaged in domestic theatrical distribution of its motion pictures due to the
substantial costs involved. Instead, in July 1990, the Company entered into the
Domestic Distribution Agreement. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL
OF THE ASSETS OF THE COMPANY--Parties to the Asset Sales" for additional
information regarding the Domestic Distribution Agreement. Upon consummation of
the Film Library Sale, the Domestic Distribution Agreement will be terminated.
OTHER PRODUCTION AND DISTRIBUTION ARRANGEMENTS. As indicated under
"PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY--Background and Reasons for the
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Assignment Agreement," the Company and Twentieth Century Fox jointly own DIE
HARD WITH A VENGEANCE. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE
ASSETS OF THE COMPANY--Background and Reasons for the Assignment Agreement" for
additional information regarding the distribution arrangements with respect to
DIE HARD WITH A VENGEANCE. As AMANDA did not meet the criteria under the
Domestic Distribution Agreement to be a "qualified" motion picture, in 1995 the
Company entered into a production and distribution agreement with FCP granting
FCP all distribution rights in the U.S. and Canada to the film AMANDA in
exchange for payment of approximately one-half of the negative cost of the
picture, while the Company retained the distribution rights for the rest of the
world. The Company used Summit to assist in the international distribution of
the film. The Company financed AMANDA by borrowings under its credit facility
and assigned to the lenders thereunder, FCP's payment due on delivery of the
motion picture and minimum guarantees from international distributors. In 1996,
AMANDA was delivered to FCP for domestic distribution and to Summit in
connection with the film's international distribution. FCP has not yet obtained
domestic theatrical distribution of AMANDA, which, if not obtained, could
adversely affect certain foreign revenues ultimately realized by the Company
from the exploitation of the international distribution rights to AMANDA in the
event the Film Library Sale is not consummated. In addition to the foregoing,
the Company and Disney have an arrangement with respect to the motion picture
tentatively entitled DEEP RISING. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL
OF THE ASSETS OF THE COMPANY--The Library Sale Agreement--Treatment of Certain
Other Projects and Arrangements."
INTERNATIONAL DISTRIBUTION. The Company has arranged for international
distribution of its motion pictures (in territories other than Canada and Latin
America) by licensing them to various local distributors in those territories
either on a picture-by-picture basis or pursuant to selected output agreements.
Under the Domestic Distribution Agreement, Disney receives the exclusive
distribution rights in all media in the territories of Canada and Latin America
for all qualified motion pictures. In the past, the Company has generally
arranged for international distribution of motion pictures on a
territory-by-territory basis by entering into licensing agreements with
distributors (including, in some circumstances, affiliates of Disney) in
territories such as England, France, Germany, Japan, Italy, Australia and
others. The Company has either entered into such agreements directly or has
utilized the services of Summit. Under such license agreements, the Company
typically receives a minimum guarantee prior to the release of the picture in a
particular territory, which is then recouped by the distributor out of the
revenues generated by the picture in such territory. The distributor typically
receives certain fees for its distribution of the picture and recoups its costs
of distribution and minimum guarantee before remitting the remaining revenues
received by it to the Company. The Company must rely on the distributor's
ability to successfully exploit the film in order to receive any proceeds in
excess of any applicable minimum guarantee. Often the Company has obtained
letters of credit from acceptable banks guaranteeing payment of the minimum
guarantees under the license agreements.
The Company has output agreements with distributors in certain major
territories whereby the distributor agrees for a period of years or for a
specified number of pictures to advance or guarantee, in many cases backed by
letters of credit, a portion of the final budget of each motion picture produced
by the Company and available for release during the term of the relevant
agreement in exchange for the right to distribute in a particular territory all
such motion pictures. These output agreements include an output agreement in
Australia, New Zealand and Greece with Village Roadshow Netherlands B.V., in
Scandinavia with AB Svensk Filmindustri, in Italy with Medusa Film S.p.A., in
the United Kingdom with Entertainment Film Distributors Ltd. and in South Korea
with SKC America, Inc. See Note 13 of Notes to Consolidated Financial Statements
for certain geographic information regarding the Company's operations.
Upon consummation of the Film Library Sale, Disney will acquire all of the
rights and benefits arising under the Company's existing exploitation agreements
with respect to the films and rights therein being sold to Disney and will
assume scheduled liabilities under such existing exploitation agreements. With
respect to the Company's output agreements, Disney will not acquire the right
(or have any obligation) to
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have any additional motion pictures of Disney or its affiliates be distributed
by the distributors party to the Company's output agreements.
MAJOR CUSTOMERS. In 1996, Disney and Fox accounted for $43,454,000 (or 33%)
and $12,937,000 (or 10%), respectively, of the Company's consolidated revenues.
In 1995, Disney and Fox accounted for $57,808,000 (or 30%) and $44,053,000 (or
23%), respectively, of the Company's consolidated revenues. In 1994, Disney was
the only customer that accounted for more than 10% of the Company's consolidated
revenues with $43,207,000 (or 40%). See Note 13 of Notes to the Company's
Consolidated Financial Statements.
EMPLOYEES. The Company, like other independent production companies, has
not maintained a substantial staff of creative or technical personnel. As the
Company does not presently intend to commence production on any additional
motion pictures, management of the Company has been implementing reductions in
personnel to achieve staff size commensurate with the Company's current level of
activity. At November 1, 1997, the Company employed a total of eleven full time
employees, a reduction of nineteen employees since the beginning of 1997. The
Company and certain of its subsidiaries are 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
Employees.
PROPERTIES. The Company leases the building housing its corporate
headquarters in Santa Monica, California from Vajna under a lease which expired
in May 1996. Subsequent thereto, the Company has been leasing its corporate
headquarters on the same general terms but on a month-to-month basis. The
Company has substantially reduced the amount of space it leases in its corporate
headquarters. See "SPECIAL FACTORS RELATING TO THE MERGER--Certain Transactions
With Vajna and Certain Related Stockholders."
COMPETITION. Motion picture production and distribution 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. The Company competes with several
"major" film studios (Disney, Fox, Paramount Pictures Corporation, Universal
Pictures, Columbia Pictures, Tri-Star Pictures, Warner Bros. Inc. and MGM/UA)
which are dominant in the motion picture industry, as well as numerous
independent motion picture and television production companies, television
networks and pay television systems for the acquisition of literary properties,
the services of performing artists, directors, producers and other creative and
technical personnel and production financing. Many of the organizations with
which the Company competes have significantly greater financial and other
resources than does the Company. In addition, the Company's films compete for
audience acceptance and exhibition outlets with motion pictures produced and
distributed by other companies, including numerous motion pictures distributed
by Disney which has distributed the Company's motion pictures in the Americas.
As a result, the success of any of the Company's films 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. In addition, there have been significant technological developments
effecting the entertainment industry in general, and the motion picture industry
in particular. These developments have resulted in the availability of
alternative and competing forms of leisure time entertainment, including
pay/cable television services, satellite television and home entertainment
equipment such as videocassettes, video games, computers, and now digital video
discs. Such technological developments have also resulted in the creation of
additional revenue sources through the licensing of rights with respect to such
new media, however, the theatrical success of a motion picture remains a crucial
factor in generating revenues in other media such as videocassettes and
television.
REGULATION. Audiovisual works, such as television programs and motion
pictures, are not included under the terms of the General Agreement on Trade and
Tariffs Treaty. As a result, many countries (including members of the European
Union) are able to enforce quotas that restrict the amount of United
96
<PAGE>
States produced television programming which may be aired on television in such
countries. Although these quotas generally apply only to television programming
and not to theatrical exhibition of motion pictures, there can be no assurance
that additional or more restrictive theatrical or television quotas will not be
enacted or that existing quotas will not be more strictly enforced. Additional
or more restrictive quotas or more stringent enforcement of existing quotas
could materially and adversely limit the ability of the Company to exploit fully
its motion picture library (in the event the Asset Sales are not consummated).
Motion pictures and 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. The Company takes
appropriate and reasonable measures to secure, protect and maintain or obtain
agreements to secure, protect and maintain copyright protection for all Company
pictures under the laws of applicable jurisdictions. Extensive unauthorized
misappropriation of videocassette rights to motion pictures, which may include
Company pictures, is an industry-wide problem. Motion picture piracy is
extensive in many parts of the world. Voluntary industry embargoes or United
States government trade sanctions to combat piracy, if enacted, could impact the
amount of revenue that the motion picture industry realizes from the
international exploitation of its motion pictures. If not enacted or if other
measures are not taken, the motion picture industry 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. The Company has
submitted its pictures for such ratings. 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. Management's policy was to
produce motion pictures for which there would be no material restrictions on
exhibition in any major territories or media. There can be no assurance that
current and future restrictions on the content of motion pictures may not limit
or affect the Company's ability to exhibit certain of its pictures in certain
territories and media (in the event the Asset Sales are not consummated).
LEGAL PROCEEDINGS. In December 1995, the U.S. Attorney for the Central
District of California served subpoenas ("Subpoenas") on the Company relating to
a grand jury investigation of federal tax aspects of various transactions
involving Vajna and certain other persons and entities (the "Investigation").
The Company believes the Investigation is focusing primarily on (i) the 1988 and
1989 personal tax returns of Vajna and the tax returns of certain other persons
and entities, and (ii) the ongoing audits of Vajna's tax returns since 1990 by
the Internal Revenue Service. The Company has not been identified by the U.S.
Attorney as being a target of the Investigation; however, there can be no
assurance that the Company's status will not change in the future. The Company
engaged counsel to represent it in connection with the Investigation and is in
the process of responding to the Subpoenas. Given the uncertainty of the
Investigation, there is currently no basis upon which to estimate the impact, if
any, the Investigation may have on the Company.
On August 25, 1997, the Company settled legal proceedings brought by
Laurence Fishburne and The LOA Productions, Inc., Mr. Fishburne's loan-out
corporation ("LOA"), against the Company, a subsidiary of the Company and
Randolph M. Paul, former Senior Vice President, Business Affairs and a former
Director of the Company (the "Fishburne Litigation"). The action, for breach of
oral contract, fraud and deceit, and civil conspiracy, was originally filed on
July 11, 1994. The plaintiffs had claimed that the Company entered into an oral
contract for Mr. Fishburne to appear in the motion picture, DIE HARD WITH A
VENGEANCE, but repudiated the contract the following day. Plaintiffs claimed
damages of $1,750,000, representing the fixed compensation to which they allege
they were entitled, additional compensatory damages of up to $350,000 and
general and punitive damages. Trial had been scheduled for August 25, 1997 in
Los Angeles Superior Court.
Pursuant to the terms of the settlement, the Company paid LOA $750,000 and
entered into certain agreements with the plaintiffs and an entity controlled by
Mr. Fishburne which provide the Company with
97
<PAGE>
a non-exclusive option (the "Option") to acquire certain rights ("Rights") to a
play and related screenplay both written by Mr. Fishburne. The Company has also
established a letter of credit in the amount of $600,000, the amount which must
be paid to the entity controlled by Mr. Fishburne if the Company does not
exercise the Option, if the Company does not meet certain other time deadlines,
or if the Company fails to match any bona fide third party offers for the
Rights. If, during the term of the Option, the Company takes certain actions
which will result in the Option becoming exclusive, exercises the Option, or
successfully matches any bona fide third party offers for the Rights, then the
Company will also incur additional obligations such as those with respect to the
financing and development of the Rights.
The Company is a party to various other legal proceedings arising in the
ordinary course of its business. The Company does not currently believe that any
such proceedings will have a material adverse effect on the Company's operations
or financial condition.
MARKET PRICES AND DIVIDENDS ON COMPANY COMMON STOCK
MARKET PRICE. Since the Company's initial public offering in June 1994, the
Shares have been traded on the National Association of Securities Dealers
Automated Quotation National Market System ("NASDAQ/NMS"). The following table
sets forth the high and low reported bid prices for Shares on the NASDAQ/NMS in
each of the periods indicated. The prices represent quotations between dealers
without adjustment for mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1995
First Quarter................. $11 3/8 $ 5 7/8
Second Quarter................ 11 1/4 5 7/8
Third Quarter................. 6 5/8 3 3/8
Fourth Quarter................ 6 2 17/32
Fiscal 1996
First Quarter................. $ 2 11/16 $ 1 1/16
Second Quarter................ 3 5/16 1 1/16
Third Quarter................. 2 3/8 1 9/16
Fourth Quarter................ 2 3/16 1 7/16
Fiscal 1997
First Quarter................. $ 2 1/16 $ 1 1/16
Second Quarter................ 1 1/2 3/8
Third Quarter................. 2 1/8 1 1/8
Fourth Quarter (through
November 24, 1997).......... 2 9/32 2 1/16
</TABLE>
On April 3, 1997, the last full trading day prior to the first public
announcement by the Company of the execution of the Library Sale Agreement, the
closing bid price for the Shares on the NASDAQ/NMS was $1 5/16. On July 15,
1997, the last full trading day prior to the first public announcement by the
Company of the execution of the Assignment Agreement, the closing bid price for
the Shares on the NASDAQ/NMS was $1 7/32.
On June 23, 1997, the last full trading day prior to the first public
announcement by the Company that it had commenced negotiations with Vajna
regarding the Merger, the closing bid price for the Shares on the NASDAQ/NMS was
$ 3/4. On September 3, 1997, the last full trading day prior to the first public
announcement by the Company of the terms of the Merger, the closing bid price
for the Shares on the NASDAQ/NMS was $1 13/16.
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<PAGE>
HOLDERS. As of November 15, 1997, there were approximately 79 holders of
record of the Company's Common Stock, and there were 13,446,874 Shares issued
and outstanding of the 20,000,000 shares authorized.
DIVIDENDS. Since the Company's incorporation in November 1989, the Company
has not paid cash dividends in respect of Shares. The Company has no present
intention to pay any cash dividends in respect of Shares.
PRINCIPAL STOCKHOLDERS OF THE COMPANY
The following table sets forth certain information regarding the beneficial
ownership of Shares as of November 15, 1997 by (i) each person known to the
Company to be the beneficial owner of more than 5% of the outstanding Shares,
(ii) each director of the Company, (iii) each "Named Executive" of the Company
included in the "Summary Compensation Table" under "Executive Compensation"
below, and (iv) all current executive officers and directors of the Company as a
group. Unless otherwise indicated in the footnotes following the table, the
persons as to whom the information is given had sole voting and investment power
over the Shares shown as beneficially owned by them, subject to community
property laws where applicable.
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK PERCENT OF COMMON
BENEFICIALLY STOCK BENEFICIALLY
NAME OWNED (1)(2) OWNED (1)(2)
- ----------------------------------------------------- ---------------- ---------------------
<S> <C> <C>
Andrew G. Vajna...................................... 6,821,318 (3)(4) 50.7%
Valdina Corporation N.V.............................. 957,446 (5) 7.1%
Warren Braverman..................................... 373,591 (6) 2.8%
Dianne Caplan Lebovits............................... 7,500 (7) *
Fred R. Feitshans.................................... 0 (12) *
Randolph M. Paul..................................... 0 (13) *
R. Timothy O'Donnell................................. 76,250 (9) *
Gregory R. Paul...................................... 15,000 (8) *
The Walt Disney Company.............................. 705,556 (10) 5.2%
All current executive officers & directors as a group
(five persons)..................................... 6,921,318 (11) 51.1%
</TABLE>
- ------------------------
* Less than 1%
(1) The number of shares and percentages in this table and accompanying
footnotes are based on 13,446,874 Shares of Common Stock outstanding as of
November 15, 1997.
(2) The Shares underlying immediately exercisable options, warrants or rights,
or immediately convertible securities, or Shares underlying options,
warrants, rights or convertible securities that become exercisable or
convertible within 60 days of November 15, 1997, 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.
(3) Includes the 957,446 Shares owned by Valdina which is indirectly
beneficially owned 100% by Vajna. See "SPECIAL FACTORS RELATING TO THE
MERGER -- Certain Transactions Involving the Company's Common Stock." See
footnote 5 below. Also includes the right to vote 372,341 Shares pursuant
to an irrevocable proxy granted to Vajna by Mr. Braverman (which continues
during Mr. Braverman's ownership of the Shares for the maximum period
permitted by applicable law). See footnote 6 below.
99
<PAGE>
(4) The business address of Vajna is in care of the Company, 2308 Broadway,
Santa Monica, California 90404.
(5) Valdina is indirectly beneficially owned 100% by Vajna. The address of
Valdina is Polarisweg 35, Suite 6, Willemstad, Curacao, Netherlands
Antilles.
(6) Of the Shares indicated, 372,341 Shares are subject in the event of
transfer to a right of first refusal in favor of Vajna at the then current
market price. Such right of first refusal will not apply to the Merger. In
addition, Mr. Braverman has granted the right to vote such 372,341 Shares
to Vajna pursuant to an irrevocable proxy (which continues during Mr.
Braverman's ownership of the shares for the maximum period permitted by
applicable law).
(7) Includes 5,000 Shares subject to immediately exercisable options granted
under the Company's 1994 Special Stock Option and Stock Appreciation Rights
Plan.
(8) Represents Shares subject to immediately exercisable options.
(9) Includes 50,000 Shares issuable pursuant to a warrant held by Jefferson
Capital, of which Mr. O'Donnell is President and majority stockholder. Also
includes 15,000 Shares subject to immediately exercisable options granted
under Company's 1994 Special Stock Option and Stock Appreciation Rights
Plan.
(10) Includes 150,000 Shares issuable pursuant to the Disney Warrant. See
"PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY--Parties to the Asset Sales." The address of The Walt Disney
Company is 500 South Buena Vista Street, Burbank, California 91521.
(11) Includes 957,446 Shares owned by Valdina, 50,000 Shares issuable pursuant
to a warrant held by Jefferson Capital (see footnote 9 above) and an
aggregate of 35,000 Shares underlying options granted to Ms. Lebovits, Mr.
Gregory R. Paul and Mr. O'Donnell (see footnotes 7, 8 and 9 above).
(12) Mr. Feitshans resigned as President of Production in July 1997. The
information regarding his ownership of Shares is as of the date of his
resignation.
(13) Mr. Randolph M. Paul resigned as Senior Vice President, Business Affairs
and a Director of the Company in September 1997. The information regarding
his ownership of Shares is as of the date of his resignation.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following information regarding the business experience during the past
five years of the directors and executive officers of the Company (all of whom
are U.S. citizens) has been provided to the Company by such individuals. Unless
otherwise indicated, each person has a business address of 2308 Broadway, Santa
Monica, California 90404.
ANDREW G. VAJNA founded the Company in November 1989 and has served as
Chairman of the Board of Directors, President and Chief Executive Officer of the
Company since such date. He is the producer of MEDICINE MAN, THE SCARLET LETTER,
NIXON, AN ALAN SMITHEE FILM and EVITA, and he is executive producer of
TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT, JUDGE DREDD, THE SHADOW CONSPIRACY
and DIE HARD WITH A VENGEANCE. Mr. Vajna co-founded the motion picture company
Carolco Pictures Inc. ("Carolco") in 1986 (and Carolco's predecessor in 1975)
and served as Co-Chairman of its Board of Directors until November 1989 when he
sold virtually all of his interest at that time in Carolco. During such period,
Mr. Vajna was co-executive producer of many well known films, including FIRST
BLOOD, RAMBO: FIRST BLOOD PART II and TOTAL RECALL. In 1982, Mr. Vajna was a
founder and subsequently served as President of the American Film Marketing
Association.
100
<PAGE>
WARREN BRAVERMAN joined the Company in March 1990 and has served as Chief
Operating Officer, Chief Financial Officer, Executive Vice President and a
Director of the Company since such date. From 1985 through February 1990, Mr.
Braverman was the Chief Financial Officer and Executive Vice President of
Carolco, and he served as a director of Carolco from 1986 through February 1990.
DIANNE CAPLAN LEBOVITS joined the Company in March 1990 and has served as a
Director of the Company since such date. Ms. Lebovits also served as General
Counsel, Executive Vice President and Corporate Secretary of the Company from
March 1990 until her resignation from such positions in August 1996. After her
resignation from the Company, Ms. Lebovits returned to, and is currently in,
private legal practice. From 1984 through 1988, Ms. Lebovits was a principal in,
and from 1989 until joining the Company "of counsel" to, the law firm of Gipson
Hoffman & Pancione, P.C. in Los Angeles, California.
R. TIMOTHY O'DONNELL became a Director of the Company in March 1994. He is
currently President of Jefferson Capital, a privately-held investment banking
group which he co-founded in August 1989. Mr. O'Donnell serves on the board of
directors of Shorewood Packaging Corporation (a specialty packaging company),
and All American Communications Inc. (a diversified entertainment company). The
address of Jefferson Capital is One James Center, Suite 1400, 901 East Cary
Street, Richmond, Virginia 23219.
GREGORY R. PAUL became a Director of the Company in March 1994. Mr. Paul is
a Managing Director of BT Alex. Brown Incorporated, an affiliate of Bankers
Trust Company. Mr. Paul joined Bankers Trust Company in 1981. Since 1985, Mr.
Paul has specialized in the financing of media and entertainment companies. The
address of BT Alex. Brown Incorporated is One Bankers Trust Plaza, 130 Liberty
Street, 30th Floor, New York, New York 10006.
EXECUTIVE COMPENSATION
The following "Summary Compensation Table" sets forth individual
compensation information with respect to Vajna, the Company's Chief Executive
Officer, and four other executive officers of the Company during the fiscal year
ended December 31, 1996 whose total salary and bonus compensation during fiscal
1996 was in excess of $100,000, including three individuals who were serving as
executive officers at the end of fiscal 1996 (Messrs. Braverman, Feitshans and
Randolph M. Paul) and Ms. Lebovits, who resigned as an executive officer and
employee of the Company in August 1996. Mr. Feitshans resigned as an executive
officer and employee of the Company in July 1997. Randolph M. Paul resigned as a
director, executive officer and employee of the Company in September 1997. Such
five executives are referred to herein as the "Named Executives." The Summary
Compensation Table includes compensation information with respect to the Named
Executives for services rendered as executive officers to the Company and its
subsidiaries during the fiscal years ended December 31, 1994, 1995 and 1996.
Following the Summary Compensation Table are certain additional charts and
tables detailing other aspects of the compensation of the Named Executives
including (i) an Option/SAR Grants Table that includes information regarding
individual grants of options made to the Named Executives during fiscal 1996
along with the grant date present value of such options, (ii) a table that
indicates whether any of the Named Executives exercised options in fiscal 1996
and includes the number and value of unexercised options held by the Named
Executives at December 31, 1996, and (iii) a Long-Term Incentive Plans ("LTIP")
Table that includes information on LTIPs awarded to the Named Executives.
101
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------
AWARDS
ANNUAL COMPENSATION -------------------------
--------------------------------------- SECURITIES PAYOUTS
OTHER ANNUAL RESTRICTED UNDERLYING ----------- ALL OTHER
NAME AND COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) AWARDS($) SARS(#) PAYOUTS($) ($)
- ------------------------- ---- ---------- ------------ ------------ ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANDREW G. VAJNA 1996 $1,000,000 $250,000(1) $224,421(2) -0- -0- $293,147(4) $33,350(5)
CHAIRMAN OF THE BOARD, 1995 1,000,000 250,000(1) 86,000(3) -0- -0- 32,278(4) 33,350(5)
PRESIDENT AND CHIEF 1994 1,000,000 250,000(1) 67,963(3) -0- -0- -0- 16,700(5)
EXECUTIVE OFFICER
WARREN BRAVERMAN 1996 $ 531,000 $150,000 (12) -0- -0- -0- $ 5,760(9)
CHIEF OPERATING OFFICER, 1995 508,000 150,000 130,000(8) -0- -0- -0- 4,260(9)
CHIEF FINANCIAL OFFICER 1994 465,000 96,000(10) 300,000(8) $450,000(11) -0- -0- 4,260(9)
AND EXECUTIVE VICE
PRESIDENT
DIANNE CAPLAN LEBOVITS 1996 $ 250,000 $ 50,000 (12) -0- 5,000 -0- $ 2,656(9)
EXECUTIVE VICE PRESIDENT, 1995 387,000 100,000 130,000(8) -0- -0- -0- 4,260(9)
GENERAL COUNSEL AND 1994 350,000 100,000(13) 300,000(8) $450,000(11) -0- -0- 4,260(9)
CORPORATE SECRETARY
(THROUGH AUGUST 1996)
FRED R. FEITSHANS 1996 $ 500,000 -0- (12) -0- 10,000 -0- -0-
PRESIDENT OF PRODUCTION 1995 500,000 -0- (12) -0- 50,000 -0- -0-
(THROUGH JULY 1997) 1994 500,000 -0- (12) -0- 10,000(14) -0- -0-
RANDOLPH M. PAUL 1996 $ 215,089 $ 12,000 (12) -0- 5,000 -0- -0-
SENIOR VICE PRESIDENT, 1995 177,000 10,000 (12) -0- 10,000 -0- -0-
BUSINESS AFFAIRS 1994 168,759 12,500 (12) -0- 4,000(15) -0- -0-
(THROUGH SEPTEMBER
1997)
</TABLE>
- ------------------------
(1) Represents commencement fees paid pursuant to Vajna's employment agreement
(described under "Employment Agreements" below) in the amount of $125,000
for each of THE SHADOW CONSPIRACY and EVITA in 1996, for each of THE SCARLET
LETTER and NIXON in 1995 and for each of DIE HARD WITH A VENGEANCE and JUDGE
DREDD in 1994. Although principal photography commenced on a third motion
picture during 1995 (THE SHADOW CONSPIRACY), Vajna's employment agreement
limits his commencement fees to $250,000 per year. The employment agreement
permits the carryover of such fees to future years during the term of the
agreement, subject to the $250,000 yearly maximum. Vajna has agreed to
forego his commencement fee for AMANDA. Vajna received a commencement fee
for AN ALAN SMITHEE FILM in 1997.
(2) Includes the cost of past financial planning, legal and related services
provided by the Company to Vajna in the amount of $162,000 and for which the
Company's Audit Committee determined reimbursement by Vajna will not be
required.
(3) Includes legal fees in the amount of $50,000 incurred by Vajna and paid by
the Company pursuant to Vajna's employment agreement. Also includes in 1995,
Company paid health insurance and medical reimbursements for Vajna and his
family in the amount of $23,000.
(4) Represents Producer's performance fees paid in connection with TOMBSTONE.
See the "Long-Term Incentive Plans--Awards in Last Fiscal Year" table below.
(5) Represents Company paid term life insurance for which designees of Vajna
are the beneficiaries.
(8) Represents the amount paid by the Company on behalf of the Named Executive
to assist the Named Executive in discharging federal and state income taxes
in connection with the stock purchase disclosed in the "Restricted Stock
Awards" column and described in footnote 11 below. Perquisites
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<PAGE>
with respect to such Named Executive did not exceed the lesser of $50,000 or
10% of such executive officer's salary and bonus.
(9) Represents imputed interest for the fiscal year (at the applicable federal
rate) on an outstanding $50,000 non-interest bearing loan to the Named
Executive and on an $18,000 non-interest bearing advance.
(10) Represents a bonus equal to 3% of the Company's earnings before interest
and taxes (but exclusive of investment income) earned pursuant to Mr.
Braverman's employment agreement.
(11) Represents the difference between the price paid by the Named Executive for
372,341 restricted Shares purchased from the Company in 1994 and the value
of such Shares on the date of purchase, which was prior to the establishment
of a public trading market for the Shares. All of Mr. Braverman's shares are
vested. Ms. Lebovits' Shares have been repurchased by the Company. See
"SPECIAL FACTORS RELATING TO THE MERGER--Certain Transactions Involving the
Company's Common Stock."
(12) Perquisites with respect to such Named Executive did not exceed the lesser
of $50,000 or 10% of such executive officer's salary and bonus.
(13) Paid pursuant to Ms. Lebovits' employment contract which expired on March
12, 1995.
(14) Represents an option for 5,000 Shares granted in 1994 and an option for an
identical number of underlying Shares granted upon cancellation of such
prior grant as part of a stock option cancellation and reissuance program.
(15) Represents an option for 2,000 Shares granted in 1994 and an option for an
identical number of underlying Shares granted upon cancellation of such
prior grant as part of a stock option cancellation and reissuance program.
103
<PAGE>
OPTION/SAR GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------- GRANT DATE
NUMBER OF % OF TOTAL VALUE
SECURITIES OPTIONS/SARS -----------
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) DATE VALUE(2)($)
-------------------------- -------------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Andrew G. Vajna 0 -- -- -- --
Warren Braverman 0 -- -- -- --
Dianne Caplan Lebovits 5,000(3) (4) $ 2.00(6) 12/1/06 $ 8,800
Fred R. Feitshans 10,000(5) 20% $ 2.00(6) 9/18/06 $ 17,600
Randolph M. Paul 5,000(5) 10% $ 2.00(6) 9/18/06 $ 8,800
</TABLE>
- ------------------------
(1) Although the Company's stock option plans provide for the granting of stock
appreciation rights, no grant of such rights has been made by the Company.
(2) These values were established using the modified Black-Scholes stock option
valuation model which modifies the Black-Scholes model to include the impact
of the right to exercise options prior to their maturity. The actual value,
if any, an executive may realize upon exercise of such options will depend
upon the excess of the stock price over the exercise price on the date the
option is exercised. Therefore, there can be no assurance that the value
realized by an executive will be at or near the value estimated by this
Black-Scholes model. The estimated values under the model are based on
arbitrary assumptions as to variables and as to interest rates, stock price
volatility and future dividend yield. The above model assumes a period of
three years after grant until exercise, a volatility of the stock price
equal to that experienced in 1996 (standard deviation 0.9425), an interest
rate of 6.48% (rate as of the grant date of U.S. Treasury Notes with a term
of three years) and a dividend yield of 0%.
(3) Options for these shares vested immediately on the date of grant (December
2, 1996).
(4) These options were granted after Ms. Lebovits resigned as Executive Vice
President, General Counsel and Corporate Secretary of the Company and
represent an automatic grant of options pursuant to the Company's 1994
Special Stock Option and Stock Appreciation Rights Plan to Ms. Lebovits as a
non-employee member of the Board. See "Board Fees" below.
(5) Options for one-third of these shares were to vest one year after the date
of grant (September 18, 1996), options for another one-third were to vest
two years after the date of grant and options for the final one-third were
to vest three years after the date of grant. All such options held by Mr.
Feitshans and Mr. Randolph M. Paul terminated upon the dates of their
respective resignations.
(6) Market price of the Shares on the date of grant (September 18, 1996 in the
case of Messrs. Feitshans and Paul and December 2, 1996 in the case of Ms.
Lebovits).
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF NEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 31, 1996 DECEMBER 31, 1996
--------------------- ---------------------
SHARES ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE (#) UNEXERCISABLE ($)
- --------------------------------- ------------------------- ----------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Andrew G. Vajna 0 $ 0 0(2) $ 0
Warren Braverman 0 0 0(2) 0
Dianne Caplan Lebovits 0 0 5,000/0 0/0
Fred R. Feitshans 0 0 30,001/34,999 0/0
Randolph M. Paul 0 0 7,000/10,000 0/0
</TABLE>
- ------------------------
(1) Although the Company's stock option plans provide for the granting of stock
appreciation rights, no grant of such rights has been made by the Company.
(2) The Named Executive did not hold any options at December 31, 1996.
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
NUMBER OF SHARES, PERFORMANCE OR UNDER NON-STOCK PRICE-BASED PLANS
UNITS OR OTHER OTHER PERIOD UNTIL -------------------------------------------
RIGHTS MATURATION OR THRESHOLD TARGET MAXIMUM
NAME (#) PAYOUT ($ OR #) ($ OR #) ($ OR #)
- ------------------------------------ --------------------- --------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Andrew G. Vajna (1) (1) (3) (2) (3)
Warren Braverman 0 -- -- -- --
Dianne Caplan Lebovits 0 -- -- -- --
Fred R. Feitshans 0 -- -- -- --
Randolph M. Paul 0 -- -- -- --
</TABLE>
- ------------------------
(1) Pursuant to his employment agreement, Vajna is entitled to receive
producer's performance fees with respect to each of the Company's motion
pictures for which principal photography has commenced after January 1, 1993
but before December 31, 1998, in an amount equal to three percent of "Gross
Receipts" commencing at "Actual Break-Even" (as defined in Vajna's
employment agreement and described below under "Employment Agreements") and
payable solely out of the Company's receipts from the exploitation of such
motion picture in excess of Actual Break-Even.
(2) As of December 31, 1996, Vajna had earned producer's performance fees only
on TOMBSTONE ($32,278 and $293,147 in such fees were paid in 1995 and 1996,
respectively). See "Summary Compensation Table" above. As of September 30,
1997, Vajna had also earned $344,666 in producer's performance fees relating
to DIE HARD WITH A VENGEANCE which will be paid at the Effective Time. See
"SPECIAL FACTORS RELATING TO THE MERGER--Interests of Certain Persons in the
Merger."
(3) Not Applicable.
BOARD FEES. Pursuant to one of the Company's stock option plans, each
member of the Compensation Committee of the Board and each other member of the
Board who is not employed by the Company receives an automatic annual grant on
December 1 of each year of non-qualified stock options to purchase 5,000 Shares
at the fair market value of such Shares on the date of grant. In addition, each
member of the Board who is not employed by the Company receives $20,000 per
year, and the Company reimburses all
105
<PAGE>
directors for travel expenses incurred in connection with their activities on
behalf of the Company. For serving on the Special Committee, Mr. Paul will also
receive $50,000. Directors of the Company are not otherwise compensated for
serving on the Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The Company's
Compensation Committee was established in March 1994 and currently consists of
Gregory R. Paul and R. Timothy O'Donnell. Harry M. Brittenham, formerly a
Director of the Company, was appointed to the Compensation Committee in May 1996
but attended no meetings of such committee and took no action as a member of
such committee prior to his resignation from such committee as of September 1,
1996.
INDEMNIFICATION. Pursuant to Article Tenth of the Company's Restated
Certificate of Incorporation, and Article V of the Company's Bylaws, indemnity
agreements entered into between the Company and certain of its officers and
directors, and the provisions of Section 145 of the DGCL, the Company has been
advancing the expenses of certain of its employees, officers and directors other
than Vajna ("Indemnitees") which they may incur in connection with the
Investigation described under "Business of the Company--Legal Proceedings." The
Indemnitees have undertaken to reimburse the Company for their expenses if it is
ultimately determined that they are not entitled to be indemnified. In addition,
Vajna has undertaken to reimburse the Company under certain circumstances with
respect to the expenses of the Indemnitees. Given the current uncertainty
regarding the scope and duration of the Investigation and the amount of expenses
which may be incurred by the Indemnitees in connection with the Investigation,
there is no basis upon which to estimate the financial impact which the
foregoing may have on the Company. The Company also advanced the expenses of
certain of its employees, officers and directors in connection with certain
purported class action lawsuits which were dismissed in January 1997. See "THE
MERGER AGREEMENT-- Agreements of the Company, Buyer, Vajna and Valdina"
regarding the survival of such indemnification rights following the Merger.
VAJNA EMPLOYMENT AGREEMENT. The Vajna Employment Agreement provides that
Vajna shall serve as Chairman of the Board of Directors, Chief Executive
Officer, and a member of the Executive (or comparable) Committee, for a term
which commenced as of January 1, 1994 and ends December 31, 1998 (the "Term").
Although Vajna's production services are exclusive to the Company during the
Term, the agreement permits Vajna to continue to be actively involved in the
management of certain corporations in which he has a direct or indirect
ownership interest and which include Intercom KFT, a distributor of motion
pictures in Hungary to which the Company licenses Hungarian distribution rights
in various media for its motion pictures and Blackburn International Casino KFT,
the operator of a casino in Hungary. See "SPECIAL FACTORS RELATING TO THE
MERGER--Operations Pending the Merger." As compensation for his services, Vajna
receives fixed compensation of $1,000,000 per year. Vajna is also entitled to
receive a commencement fee of $125,000 for each motion picture produced by the
Company for which principal photography commences after January 1, 1994, up to a
maximum of $250,000 per year (but with carryovers of such fees allowed subject
to the yearly maximum). Vajna is also entitled to receive certain producer's
performance fees with respect to each of the Company's motion pictures for which
principal photography has commenced after January 1, 1993 but before the end of
the Term. Vajna's agreement also provides for such additional incentive
compensation as may be approved by the Board, demand registration rights for
Shares held by Vajna or his affiliates, and certain fringe benefits, including
reimbursement of Vajna's personal, legal and accounting expenses in an amount
not to exceed $50,000 per year.
Pursuant to the terms of the agreement, if the agreement is terminated by
Vajna due to a material breach by the Company or by the Company other than for
"Cause," "Death," or "Disability" (as such terms are defined in the agreement),
Vajna will receive a payment equal to 200% of the aggregate of all fixed annual
compensation discounted to its then present value at a discount rate of five
percent per annum with respect to each future payment, plus any commencement
fees, producer's performance fees and additional incentive compensation due and
payable to Vajna as of the date of termination. Vajna is also entitled to
receive any commencement fees and producer's performance fees to which he may
106
<PAGE>
thereafter become entitled relating to motion pictures for which principal
photography commenced prior to termination. Vajna will also be entitled, under
limited circumstances, to acquire from the Company all rights to certain
projects in development at the time of such termination upon reimbursement of
all costs incurred by the Company in connection with the projects, plus
interest, and payment to the Company of a percentage of the revenues thereafter
generated by each such project.
In connection with the Merger and pursuant to the terms of the Merger
Agreement, Vajna and the Company have agreed to terminate the Vajna Employment
Agreement effective as of the Effective Time. See "SPECIAL FACTORS RELATING TO
THE MERGER--Interests of Certain Persons in the Merger" for a discussion of the
specific terms of such termination arrangement. See also "THE MERGER
AGREEMENT--Agreements of the Company, Buyer, Vajna and Valdina."
BRAVERMAN EMPLOYMENT AGREEMENT. Mr. Braverman's employment agreement with
the Company (the "Braverman Employment Agreement") provides that Mr. Braverman
will serve as Chief Operating Officer of the Company from January 1, 1994
through December 31, 1999. Under the agreement, Mr. Braverman receives an annual
base salary of $556,000 for 1997, $584,000 for 1998 and $613,000 for 1999
("Fixed Annual Compensation"). Pursuant to the last amendment, Mr. Braverman
also received a signing bonus of $600,000 of which $300,000 was used to fully
repay two loans previously made by the Company to Mr. Braverman (a $250,000 loan
bearing interest at 7% per annum, which matured December 31, 1996 and a $50,000
interest free loan maturing September 30, 1997). Mr. Braverman is also entitled
to annual incentive compensation in an amount equal to 3% of the Company's
earnings before interest and taxes (but exclusive of investment income) ("EBIT")
until Mr. Braverman has received $1,000,000 of such incentive compensation, 2%
of EBIT for the next $1,000,000 of such incentive compensation, and 1% of EBIT
thereafter ("Incentive Compensation").
If Mr. Braverman's employment is terminated by the Company for any reason
other than material breach, death or disability or by Mr. Braverman due to a
material breach by the Company, Mr. Braverman is entitled to receive all (i)
Fixed Annual Compensation, (ii) Incentive Compensation and (iii) health
insurance benefits due under the agreement through the term.
In connection with the Merger, the Company and Mr. Braverman have agreed to
a severance arrangement which provides for, among other things, the termination
of the Braverman Employment Agreement effective as of the Effective Time. See
"SPECIAL FACTORS RELATING TO THE MERGER--Interests of Certain Persons in the
Merger" for additional information regarding this severance arrangement.
STOCK OPTION PLANS. The Company has two stock-based incentive compensation
plans for the Company's employees and certain other persons providing services
to the Company: the Cinergi Pictures Entertainment Inc. 1994 Basic Stock Option
and Stock Appreciation Rights Plan (the "Basic Plan") and the Cinergi Pictures
Entertainment Inc. 1994 Special Stock Option and Stock Appreciation Rights Plan
(the "Special Plan") (collectively, the "Option Plans"). All of the Company's
regular full-time employees, and all other persons (including directors and
consultants) providing services to the Company on a regular or substantial
basis, are eligible to participate in the Basic Plan. The Special Plan is
designed to provide alternative procedures in meeting special requirements
imposed by federal income tax law relating to compensation expense deductions
for making grants to certain key or highly compensated employees. Accordingly,
only officers, directors who are also employed by the Company, and non-clerical
salaried employees of the Company are eligible to participate in the Special
Plan. As of November 15, 1997, options to purchase an aggregate of 28,750 shares
of Common Stock were outstanding under the Option Plans (of which options to
purchase an aggregate 11,750 shares of Common Stock are vested and exercisable
at exercise prices below the $2.52 Purchase Price). Upon consummation of the
Film Library Sale and the transactions contemplated by the Assignment Agreement,
the Option Plans and all unexercised options previously granted under the Option
Plans will terminate.
107
<PAGE>
DEFERRED COMPENSATION PLAN. Under the Company's Deferred Compensation Plan,
the executive officers of the Company may elect by written notice to the Company
on or before the close of the fiscal year to credit to an account such portion
of the employee's base annual compensation and/or incentive compensation for the
succeeding year as may be selected by the employee. Amounts credited to this
account shall be kept in cash or invested in mutual funds, stocks, bonds,
securities or such other assets as may be selected by the Board or an investment
advisor selected by the Company. The return (if any) or loss from these
investments will be credited or debited (as the case may be) to such account. To
date, Mr. Braverman is the only executive officer of the Company who has elected
to participate in the Deferred Compensation Plan.
108
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
The following unaudited Pro Forma Condensed Consolidated Balance Sheet is
based upon the historical balance sheet of the Company at September 30, 1997
giving effect to the Asset Sales, the Merger and certain specified additional
transactions taking place in connection therewith, under the assumptions and
adjustments set forth below and in the accompanying Notes to Unaudited Pro Forma
Condensed Consolidated Balance Sheet. The unaudited Pro Forma Condensed
Consolidated Balance Sheet gives effect to the Asset Sales, the Merger and such
additional transactions, as if the Asset Sales, the Merger and such specified
additional transactions had each occurred on September 30, 1997.
The unaudited Pro Forma Condensed Consolidated Balance Sheet reflects: (1)
the Film Library Sale, (2) the transactions contemplated by the Assignment
Agreement, (3) the Soundtrack Sale, (4) certain of the transactions contemplated
by the Summit Agreements, (5) payment of the estimated 1997 income tax
liabilities of the Company, (6) payments after September 30, 1997 primarily of
estimated legal and accounting fees and expenses relating to the Asset Sales and
other asset dispositions described under "CERTAIN ARRANGEMENTS CONCERNING OTHER
ASSETS," (7) refund of deposits previously received by the Company with respect
to a motion picture (BROADWAY BRAWLER) that ceased production, (8) payment by
the Company of the Valdina Note, payment by Vajna and his affiliates of certain
amounts owed to the Company and payment by Warren Braverman of certain amounts
owed to the Company, (9) payments in connection with the settlement of the
Fishburne Litigation, (10) the write-off of remaining leasehold improvements in
connection with the anticipated expiration of the lease with respect to the
Company's principal offices, (11) payment of the net premiums associated with
the directors and officers insurance required by the Merger Agreement, (12)
payment of the severance due to certain of the Company's executive officers,
(13) payments after September 30, 1997 of the estimated professional fees and
expenses (legal, accounting and financial advisor fees and expenses) to be
incurred by the Company in connection with the Merger, (14) conversion of the
outstanding Shares (other than Shares owned by Vajna or Valdina) into the Merger
Consideration, assuming for such purpose that the Purchase Price is $2.52 per
Share (i.e., that no further adjustments to the Purchase Price occur), that no
outstanding stock options are exercised, and that no Stockholders perfect
appraisal rights. THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DOES NOT OTHERWISE REFLECT ANY ADJUSTMENTS FOR GENERAL OVERHEAD COSTS OR
OPERATIONAL EXPENSES OF THE COMPANY AFTER SEPTEMBER 30, 1997 (INCLUDING, AMONG
OTHER THINGS, SALARIES OF COMPANY PERSONNEL, SEVERANCE FOR OFFICERS AND
EMPLOYEES OTHER THAN THE COMPANY'S EXECUTIVE OFFICERS, RENT AND UTILITIES),
WHICH COSTS AND EXPENSES MAY BE SUBSTANTIAL.
As consummation of the Asset Sales will essentially eliminate substantially
all of the revenue producing assets of the Company resulting in no revenue and
cost of sales for the Company, pro forma condensed consolidated statements of
operations for the year ended December 31, 1996 and for the nine months ended
September 30, 1997 have not been presented.
THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET MAY NOT
REPRESENT THE FINANCIAL POSITION OF THE COMPANY (I) WHICH ACTUALLY WOULD HAVE
BEEN OBTAINED IF THE TRANSACTIONS DESCRIBED ABOVE HAD OCCURRED AS OF SEPTEMBER
30, 1997 OR (II) WHICH MAY BE OBTAINED IN THE FUTURE, INCLUDING AT THE ACTUAL
DATE OF THE MERGER. THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AND NOTES THERETO SHOULD BE READ IN CONJUNCTION WITH THE HISTORICAL FINANCIAL
STATEMENTS OF THE COMPANY, INCLUDING NOTES THERETO, WHICH ARE INCLUDED ELSEWHERE
IN THIS PROXY STATEMENT.
109
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ASSET SALES
& OTHER
ASSET
FILM ESTIMATED DISPOSITIONS
LIBRARY ASSIGNMENT SOUNDTRACK SUMMIT 1997 INCOME FESS &
AS SALE AGREEMENT SALE AGREEMENTS TAXES EXPENSES
REPORTED (1) (2) (3) (4) (5) (6)
---------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents............ 26,073,000 (1,422,000) 11,250,000 1,500,000 (27,000) (1,100,000) (448,000)
Restricted cash...................... 5,169,000 (4,547,000) (6,000)
Accounts receivable.................. 7,367,000 (6,367,000) (800,000)
Accounts receivable, related
parties........................... 849,000
Film costs, less accumulated
amortization...................... 53,424,000 (38,493,000) (10,645,000)
Property and equipment, at cost less
accumulated depreciation.......... 427,000
Other assets......................... 2,849,000 (957,000)
---------- ---------- ----------- ----------- ----------- ----------- -----------
TOTAL ASSETS......................... 96,158,000 (51,786,000) 605,000 1,500,000 (833,000) (1,100,000) (448,000)
---------- ---------- ----------- ----------- ----------- ----------- -----------
---------- ---------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable..................... 3,156,000 (50,000) (833,000) (9,000)
Accrued interest..................... 0
Accrued residuals & participations... 13,837,000 (13,025,000)
Deferred revenue..................... 2,141,000 (2,141,000)
Loans payable........................ 7,753,000 (7,753,000)
Notes and amounts payable to related
parties........................... 53,350,000 (48,038,000)
---------- ---------- ----------- ----------- ----------- ----------- -----------
TOTAL LIABILITIES.................... 80,237,000 (71,007,000) 0 0 (833,000) 0 (9,000)
---------- ---------- ----------- ----------- ----------- ----------- -----------
---------- ---------- ----------- ----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock...................... 0
Common stock......................... 135,000
Treasury stock....................... 0 (1,400,001)
Additional paid-in capital........... 68,095,000
Retained (deficit) earnings.......... (51,859,000) 20,621,001 605,000 1,500,000 (1,100,000) (439,000)
---------- ---------- ----------- ----------- ----------- ----------- -----------
TOTAL STOCKHOLDER'S
EQUITY............................. 16,371,000 19,221,000 605,000 1,500,000 0 (1,100,000) (439,000)
---------- ---------- ----------- ----------- ----------- ----------- -----------
Receivable from Shareholder.......... (450,000)
---------- ---------- ----------- ----------- ----------- ----------- -----------
15,921,000 19,221,000 605,000 1,500,000 0 (1,100,000) (439,000)
TOTAL LIABILITIES
& STOCKHOLDERS' EQUITY............. 96,158,000 (51,786,000) 605,000 1,500,000 (833,000) (1,100,000) (448,000)
---------- ---------- ----------- ----------- ----------- ----------- -----------
---------- ---------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
PRO FORMA DIRECTORS
AS ADJUSTED RETURN OF SETTLEMENT AND EXECUTIVE
FOR ASSET BROADWAY RELATED OF WRITE-OFF OF OFFICERS OFFICERS
SALES AND BRAWLER PARTY FISHBURNE LEASEHOLD INSURANCE SEVERANCE
OTHER ASSET DEPOSITS PAYMENTS LITIGATION IMPROVEMENTS PREMIUMS PAYMENTS
DISPOSITIONS (7) (8) (9) (10) (11) (12)
----------- ----------- --------- ----------- ------------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............ 35,826,000 (2,763,000) (699,000) (1,731,166)
Restricted cash...................... 616,000 (16,000) (600,000)
Accounts receivable.................. 200,000
Accounts receivable, related
parties........................... 849,000 (748,000) (101,000)
Film costs, less accumulated
amortization...................... 4,286,000
Property and equipment, at cost less
accumulated depreciation.......... 427,000 (187,000)
Other assets......................... 1,892,000 (1,801,000)
----------- ----------- --------- ----------- ------------- ----------- -----------
TOTAL ASSETS......................... 44,096,000 (16,000) (5,312,000) (600,000) (187,000) (699,000) (1,832,166)
----------- ----------- --------- ----------- ------------- ----------- -----------
----------- ----------- --------- ----------- ------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable..................... 2,264,000 (16,000) (600,000)
Accrued interest..................... 0
Accrued residuals & participations... 812,000 (344,666)
Deferred revenue..................... 0
Loans payable........................ 0
Notes and amounts payable to related
parties........................... 5,312,000 (5,312,000)
----------- ----------- --------- ----------- ------------- ----------- -----------
TOTAL LIABILITIES.................... 8,388,000 (16,000) (5,312,000) (600,000) 0 (344,666)
----------- ----------- --------- ----------- ------------- ----------- -----------
----------- ----------- --------- ----------- ------------- ----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock...................... 0
Common stock......................... 135,000
Treasury stock....................... (1,400,001)
Additional paid-in capital........... 68,095,000
Retained (deficit) earnings.......... (30,671,999) (187,000) (699,000) (1,937,500)
----------- ----------- --------- ----------- ------------- ----------- -----------
TOTAL STOCKHOLDER'S
EQUITY............................. 36,158,000 0 0 0 (187,000) (699,000) (1,937,500)
----------- ----------- --------- ----------- ------------- ----------- -----------
Receivable from Shareholder.......... (450,000) 450,000
----------- ----------- --------- ----------- ------------- ----------- -----------
35,708,000 0 0 0 (187,000) (699,000) (1,487,500)
TOTAL LIABILITIES
& STOCKHOLDERS' EQUITY............. 44,096,000 (16,000) (5,312,000) (600,000) (187,000) (699,000) (1,832,166)
----------- ----------- --------- ----------- ------------- ----------- -----------
----------- ----------- --------- ----------- ------------- ----------- -----------
Pro forma
book value
$ per
share: 2.542
<CAPTION>
PRO FORMA
ESTIMATED AS ADJUSTED
MERGER CONVERSION OF FOR ASSET
PRFESSIONAL SHARES INTO SALES &
FEES & MERGER OTHER ASSET
EXPENSES CONSIDERATION DISPOSITIONS
(13) (14) & MERGER
----------- ------------- -----------
ASSETS
Cash and cash equivalents............ (1,073,000) (16,234,699) 13,325,135
Restricted cash...................... 0
Accounts receivable.................. 200,000
Accounts receivable, related
parties........................... 0
Film costs, less accumulated
amortization...................... 4,286,000
Property and equipment, at cost less
accumulated depreciation.......... 240,000
Other assets......................... 91,000
----------- ------------- -----------
TOTAL ASSETS......................... (1,073,000) (16,234,699) 18,142,135
----------- ------------- -----------
----------- ------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable..................... (369,000) 1,279,000
Accrued interest..................... 0
Accrued residuals & participations... 467,334
Deferred revenue..................... 0
Loans payable........................ 0
Notes and amounts payable to related
parties........................... 0
----------- ------------- -----------
TOTAL LIABILITIES.................... (369,000) 0 1,746,334
----------- ------------- -----------
----------- ------------- -----------
STOCKHOLDERS' EQUITY
Preferred stock...................... 0
Common stock......................... 135,000
Treasury stock....................... (1,400,001)
Additional paid-in capital........... (16,234,699) 51,860,301
Retained (deficit) earnings.......... (704,000) (34,199,499)
----------- ------------- -----------
TOTAL STOCKHOLDER'S
EQUITY............................. (704,000) (16,234,699) 16,395,801
----------- ------------- -----------
Receivable from Shareholder.......... 0
----------- ------------- -----------
(704,000) (16,234,699) 16,395,801
TOTAL LIABILITIES
& STOCKHOLDERS' EQUITY............. (1,073,000) (16,234,699) 18,142,135
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
See notes to unaudited pro forma condensed consolidated balance sheet.
110
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
Note 1: The adjustment reflects consummation of the Film Library Sale
(including the Company's arrangements with Disney with respect to AN ALAN
SMITHEE FILM) and delivery of AN ALAN SMITHEE FILM to distributors (including
Disney). Pursuant to the Library Sale Agreement, the Company has agreed to sell
to Disney substantially all of the films in the Company's motion picture library
and certain other assets principally in exchange for the transfer of the Disney
Shares and Disney Warrant to the Company, the assumption by Disney of the
outstanding loans previously made by Disney to the Company, the assumption by
Disney of all residuals and participation obligations relating to the Film
Library, and the assumption by Disney of all obligations of the Company under
the Company's existing exploitation agreements with respect to the Film Library
which are to be performed on or after the closing of the Film Library Sale and
which have been listed on schedules provided to Disney. See "PROPOSAL NO. 1:
SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--The Library Sale
Agreement." The following details this adjustment:
<TABLE>
<S> <C>
Cash used in the transaction................................... $(1,422,000)
Payment to Disney for minimum guarantees received with respect
to DEEP RISING and certain other restricted cash............. (4,547,000)
Reduction of amounts owed from Disney.......................... (6,367,000)
Write off of sales agency fees incurred in connection with DEEP
RISING and AN ALAN SMITHEE FILM.............................. (957,000)
Net book value of the Film Library............................. (38,493,000)
Assumption of obligations of the Company under the Company's
existing exploitation agreements with respect to the Film
Library...................................................... 50,000
Assumption of residuals and participation obligations related
to the Film Library.......................................... 13,025,000
Assumption of obligations of the Company under the Company's
existing exploitation agreements with respect to the Film
Library...................................................... 2,141,0000
Payment of loan payable to bank for AN ALAN SMITHEE FILM....... 7,753,000
Assumption of the outstanding loans (including accrued
interest) previously made by Disney to the Company and
assumption of obligations of the Company under the Company's
existing exploitation agreements with respect to the Film
Library...................................................... 48,038,000
Transfer of the Disney Shares and Disney Warrant to the
Company...................................................... 1,400,001
Gain on transaction............................................ (20,621,001)
</TABLE>
Note 2: The adjustment reflects consummation of the transactions
contemplated by the Assignment Agreement. Pursuant to the Assignment Agreement,
the Company has agreed to assign to Fox the Company's rights in DIE HARD WITH A
VENGEANCE in exchange for $11,250,000 in cash. See "PROPOSAL NO. 1: SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--The Assignment Agreement."
Note 3: The adjustment reflects consummation of the transactions
contemplated by the Soundtrack Sale. Pursuant to the Soundtrack Sale, the
Company has agreed to assign to Disney the Company's rights in the EVITA
Soundtrack in exchange for $1,500,000 in cash.
Note 4: The adjustment reflects certain of the payments required to be made
by the Summit Agreements: payment by the Company to Summit of an aggregate
$827,000 primarily to settle the Company's obligations in connection with
termination of the sales agency relationship between Summit and the Company, and
payment by Summit to the Company of $400,000 in exchange for the Company's
111
<PAGE>
rights in the International DHWV Overages (other than those relating to
exploitation agreements with respect to the territories of Italy and Hungary).
See "CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS--Summit Transactions."
Note 5: The adjustment reflects payment of the estimated 1997 income tax
liabilities of the Company including estimated payment of federal alternative
minimum income tax ($600,000) and California franchise income tax ($500,000).
See "CERTAIN INFORMATION REGARDING THE COMPANY--Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Liquidity and
Capital Resources--Certain Tax Matters."
Note 6: The adjustment reflects payments after September 30, 1997 of
$448,000 in estimated legal and accounting fees and expenses incurred by the
Company in connection with the Asset Sales and other asset dispositions
described under "CERTAIN ARRANGEMENTS CONCERNING OTHER ASSETS." Additional legal
fees and accounting expenses incurred by the Company in connection with the
Asset Sales are reflected in "September 30, 1997, As Reported." See "SPECIAL
FACTORS RELATING TO THE MERGER--Fees and Expenses."
Note 7: The adjustment reflects the refund of deposits of minimum
guarantees to foreign distributors previously received by the Company with
respect to a motion picture (BROADWAY BRAWLER) that ceased production.
Note 8: The adjustment reflects certain payments required to be made by the
Merger Agreement: payment by the Company of the Valdina Note under which an
aggregate of approximately $3,511,000 in principal and accrued interest was
outstanding as of September 30, 1997, payment by Vajna and his affiliates of
approximately $730,000 in amounts owed to the Company, and payment by Warren
Braverman of approximately $18,000 in amounts owed to the Company. See "THE
MERGER AGREEMENT-- Agreements of the Company, Buyer, Vajna and Valdina."
Note 9: Pursuant to the terms of the settlement of the Fishburne
Litigation, in August 1997 the Company paid Mr. Fishburne's loan-out corporation
$750,000 and entered into certain agreements which provide the Company with a
non-exclusive Option to acquire certain Rights to a play and related screenplay.
The adjustment assumes the payment of $600,000, an amount which must be paid by
the Company if it does not exercise the Option, if the Company does not meet
certain deadlines, or if the Company fails to match any bona fide third party
offers for the Rights. See "CERTAIN INFORMATION REGARDING THE COMPANY--Business
of the Company--Legal Proceedings."
Note 10: The adjustment reflects the anticipated expiration by the Company
of the lease with respect to its principal offices and the related write-off of
remaining leasehold improvements in connection therewith.
Note 11: The Merger Agreement requires the Company to purchase, to the
extent available, a policy of directors' and officers' liability insurance and
to maintain such insurance policy for four years after the Effective Time. The
adjustment reflects the remaining premiums to be paid after September 30, 1997
associated with such insurance, net of an anticipated refund of certain past
payments to the insurance carrier. See "THE MERGER AGREEMENT--Agreements of the
Company, Buyer, Vajna and Valdina."
Note 12: The adjustment reflects severance to be paid after September 30,
1997 or due to the Company's current (and one former) executive officer (Messrs.
Vajna ($844,666), Braverman ($666,500) and Randolph M. Paul ($220,000)). See
"SPECIAL FACTORS RELATING TO THE MERGER-- Interests of Certain Persons in the
Merger."
Note 13: The adjustment reflects payment of the estimated professional fees
and expenses (legal, accounting and financial advisor fees and expenses) to be
incurred by the Company in connection with the Merger.
112
<PAGE>
Note 14: The adjustment reflects conversion of 6,442,341 outstanding Shares
(which does not include the aggregate 6,448,977 Shares owned by Vajna and
Valdina or the 555,556 Disney Shares) into the Merger Consideration pursuant to
the Merger, assuming for such purpose that the Purchase Price is $2.52 per Share
(i.e., no further adjustments to the Purchase Price occur), that no outstanding
stock options are exercised, and that no Stockholders perfect appraisal rights.
As of September 30, 1997, 13,446,874 Shares were issued and outstanding. See
"PROPOSAL NO. 2: THE MERGER."
113
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The selected consolidated financial data set forth below as of December 31,
1995 and 1996 and for each of the three years in the period ended December 31,
1996 are derived from the Company's Consolidated Financial Statements included
elsewhere in this Proxy Statement. The selected consolidated financial data set
forth below as of December 31, 1992, 1993 and 1994 and for the periods ended
December 31, 1992 and 1993 are derived from audited financial statements not
included herein. The Consolidated Financial Statements as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31, 1996
have been audited by Ernst & Young LLP, independent auditors, whose report with
respect thereto appears elsewhere in this Proxy Statement. The selected
financial data set forth below as of September 30, 1996 and 1997 and for the
nine months ended September 30, 1996 and 1997 are derived from unaudited
consolidated financial statements but include all adjustments (consisting of
only normal recurring adjustments) which management considers necessary for a
fair presentation of results for these periods. The following financial data and
the accompanying Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Feature films........................... $ 39,566 $ 8,064 $ 108,517 $ 192,582 $ 132,940 $ 89,712 $ 59,186
Fee income.............................. -- 942 511 298 60 60 23
--------- --------- --------- --------- --------- --------- ---------
Total Revenues.......................... 39,566 9,006 109,028 192,880 133,000 89,772 59,209
Costs and Expenses:
Amortization of film costs, residuals
and participations.................... 39,447 7,899 103,422 204,544 139,612 86,954 62,198
Selling, general and administrative
expenses.............................. 7,863 3,779 2,694 5,098 9,752 4,990 14,071
Provision for impairment of long-lived
assets................................ -- -- -- -- -- -- 2,665
--------- --------- --------- --------- --------- --------- ---------
Operating (loss) income................. (7,744) (2,672) 2,912 (16,762) (16,364) (2,172) (19,725)
Interest expense........................ (3,774) (1,875) (281) (241) (448) (176) (4,362)
Interest income......................... 568 111 264 941 907 701 1,300
--------- --------- --------- --------- --------- --------- ---------
(Loss) income before equity in income
(loss) of affiliated company.......... (10,950) (4,436) 2,895 (16,062) (15,905) (1,647) $ (22,787)
Equity in income (loss) of affiliated
company............................... 146 (387) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net (loss) income....................... $ (10,804) $ (4,823) $ 2,895 $ (16,062) $ (15,905) $ (1,647) $ (22,787)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net (loss) income per share............. $ (.64) $ .30 $ (1.23) $ (1.12) $ ( .12) $ (1.69)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average number of shares
outstanding........................... 7,518 9,494 13,025 14,169 14,192 13,448
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................. $ 1,985 $ 1,840 $ 2,665 $ 29,832 $ 27,364 $ 11,032 26,073
Restricted cash.................. 1,000 500 -- -- 5,654 -- 5,169
Film costs, net of
amortization................... 18,665 115,108 223,827 160,756 103,792 144,684 58,424
Total assets..................... 27,102 119,992 253,891 206,257 156,548 176,378 96,158
Total debt....................... 32,711 93,991 143,146 73,202 47,420 64,494,000 53,060,000
Stockholders' (deficiency)
equity......................... (14,808) (18,506) 44,434 51,717 36,607 50,070 16,371,000
PER SHARE DATA:
Net book value per common
share.......................... $ (2.32) $ (2.90) $ 4.41 $ 3.96 $ 2.80 3.83 1.25
Common shares outstanding........ 6,383 6,383 10,075 13,075 13,075 13,075 13,075
</TABLE>
114
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
On April 3, 1997, the Company entered into the Library Sale Agreement with
Disney pursuant to which it will sell to Disney, subject to certain conditions,
the Film Library. On July 15, 1997, the Company entered into the Assignment
Agreement with Fox pursuant to which the Company will transfer to Fox, subject
to certain conditions, its rights in DIE HARD WITH A VENGEANCE. On September 4,
1997, the Company announced the execution of the Merger Agreement. The Company
has also announced that it does not presently intend to commence production on
any additional motion pictures.
The Company's determination to halt the commencement of production on
additional motion pictures, and to effect the Asset Sales and the Merger follows
a year long strategic review initiated by the Company to assess its goals and
business strategies. The strategic review included discussions with other
parties regarding the sale of an interest in the Company or of the entire
Company. See "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE
COMPANY--Background and Reasons for the Library Sale Agreement."
In light of, among other things, the disappointing financial results of
three of the Company's four 1995 releases (JUDGE DREDD, THE SCARLET LETTER and
NIXON) and the 1997 release of THE SHADOW CONSPIRACY, and the continuing
increase in motion picture production and releasing costs which could
necessitate increased direct investment by the Company in its motion pictures if
it were to produce additional "event" motion pictures, the Company determined
the Assets Sales and the Merger to be in the best interests of the Company's
Stockholders. See "SPECIAL FACTORS RELATING TO THE MERGER--Background of the
Merger" and "--Recommendation of the Special Committee and the Board; Fairness
of the Merger."
The Company reflects advances and minimum guarantees as income for financial
reporting purposes when a picture is available for exploitation in the
applicable media or territory. See Note 2 of Notes to the Company's Consolidated
Financial Statements for the year ended December 31, 1996. As a matter of custom
and practice and contractual requirements, the Company delays the exploitation
of home video rights and television rights for a period of time after initial
theatrical distribution in the applicable territory. This results in a delay in
the recognition of advances and minimum guarantees from those media as income
for financial reporting purposes.
Costs accumulated in the production of a film ("unamortized film costs"),
including direct negative costs, marketing costs, capitalized interest and
overhead, represent a major component of the Company's assets. Unamortized film
costs are amortized in the proportion that gross revenues realized bear to
management's estimate of total gross revenues expected to be received.
Currently, based on the Company's estimate of future revenues, approximately 92%
of unamortized released film costs at December 31, 1996 will be amortized during
the three year period ending December 31, 1999. For purposes of determining the
total amortization of film costs for each motion picture, the Company includes
its estimated obligations to pay residuals and participations.
The following table sets forth the unamortized film costs for the last three
years:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -------------
1994 1995 1996 1997
---------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Released films (net of amortization).......................... $ 30,082 $ 101,238 $ 52,077 $ 36,827
Completed, not released....................................... -- -- 37,025 11,529
Production & development...................................... 193,745 59,518 14,690 5,068
---------- ---------- ---------- -------------
Film costs, net of amortization............................. $ 223,827 $ 160,756 $ 103,792 $ 53,424
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
</TABLE>
115
<PAGE>
A substantial portion of the unamortized film costs attributable to
RENAISSANCE MAN, COLOR OF NIGHT and TOMBSTONE were amortized in 1994 due to the
domestic theatrical release and international availability of these pictures in
1994.
The decrease in unamortized film costs in 1995 reflects the domestic
theatrical release and international availability of DIE HARD WITH A VENGEANCE,
JUDGE DREDD, and THE SCARLET LETTER, and the resulting amortization of a
substantial portion of the unamortized film costs attributable to such pictures.
Although NIXON was initially released on December 20, 1995 and is, therefore,
included in "Released Films" in the amount of $43,000,000, no revenues were
recognized in 1995. Unamortized film costs for 1995 also includes the production
costs of AMANDA, THE SHADOW CONSPIRACY and EVITA incurred through December 31,
1995.
The decrease in unamortized film costs in 1996 reflects the domestic
theatrical release and international availability of EVITA and the international
availability of NIXON (as described above). Although THE SHADOW CONSPIRACY was
initially released on January 31, 1997, it was completed in 1996, available for
release as of December 31, 1996 and accordingly included in "Completed, not
Released" rather than "Released Films" in the amount of $37,000,000, which
reflects an adjustment to reduce the film cost to its net realizable value.
Unamortized film costs for 1996 also includes the production costs of THE SHADOW
CONSPIRACY, AN ALAN SMITHEE FILM and BROADWAY BRAWLER incurred through December
31, 1996.
The decrease in unamortized film costs in the first nine months of 1997
primarily reflects that the Company has not commenced production on additional
motion pictures in 1997.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Feature film revenues decreased from $89,712,000 for the nine months ended
September 30, 1996 to $59,186,000 for the nine months ended September 30, 1997.
Feature film revenues for the nine months ended September 30, 1996 consisted
mainly of the domestic home video availability of THE SCARLET LETTER and NIXON,
international availability of domestic and international availability of AMANDA,
and continuing domestic and international revenues from TOMBSTONE AND DIE HARD
WITH A VENGEANCE. Feature film revenues for the nine months and September 30,
1997 resulted mainly from revenues from the theatrical release of THE SHADOW
CONSPIRACY and the domestic home video availability of EVITA and THE SHADOW
CONSPIRACY and the receipt of overages with respect to the EVITA Soundtrack.
Amortization of film costs, residuals and participations decreased from
$86,954,000 for the nine months ended September 30, 1996 to $62,198,000 for the
nine months ended September 30, 1997 primarily due to the decrease in feature
film revenue recognized for the nine months ended September 30, 1997 as compared
to the nine months ended September 30, 1996. This amortization decrease was
reduced due to the transfer of all but one of the Stone Projects to Stone in
September 1997 as part of the settlement of the Company's "first look"
arrangement with Stone. See "Liquidity and Capital Resources." The Company
estimates the total projected revenues to be received from the exploitation of a
motion picture in all territories and media. As results from a motion picture
are recognized, the percentage of revenues recognized to total projected
revenues is applied to film costs for such motion picture to record
amortization. Where applicable, unamortized film costs for a picture are written
down to net realizable value for such picture based upon the Company's appraisal
of current market conditions.
Selling, general and administrative ("SG&A") expenses (excluding production
overhead costs capitalized to film costs) increased from $4,990,000 for the nine
months ended September 30, 1996 to $14,071,000 for the nine months ended
September 30, 1997. The increase is due to (i) severance payments to certain
executive officers and other employees (approximately $770,000), (ii) payments
made by the Company to terminate the sales agency relationship with Summit
(approximately $827,000), (iii) costs and expenses
116
<PAGE>
incurred by the Company during the nine months ended September 30, 1997 in
connection with negotiation of the Asset Sales and the Merger and the
preparation of this Proxy Statement (approximately $1,459,000), and (iv)
payments made in connection with the settlement of the Fishburne Litigation
(approximately $1,350,000 exclusive of legal fees). The remainder of such
increase (approximately $3,457,000) is due primarily to no production overhead
being capitalized into film costs in the nine months ended September 30, 1997 in
light of the Library Sale Agreement and the Assignment Agreement and the
Company's current intention not to commence production on additional motion
pictures. In 1996 and prior periods, the Company capitalized production overhead
incurred in connection with the production of a motion picture by adding such
costs to the capitalized film costs of the motion picture. The total of SG&A
expenses and production overhead costs capitalized to film costs increased from
$9,261,000 for the nine months ended September 30, 1996 to $14,071,000 for the
nine months ended September 30, 1997.
The provision for impairment of long-lived assets reflects a write down of
the Company's visual effects equipment under provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121).
In April 1997, the Company announced that (i) the Company had entered into the
Library Sale Agreement, (ii) the Company did not presently intend to commence
production of any additional motion pictures and (iii) the Company was
considering its alternatives assuming consummation of the Film Library Sale. The
Company's visual effects assets were not included in the Asset Sales. In light
of the foregoing and due to operating losses of the Visual Effects Facility, the
Company determined that a write-down to net realizable value of the visual
effects assets was required under SFAS No. 121. Accordingly, the Company
recognized a non-cash charge of $2,665,000 at June 30, 1997 for the impairment
of the visual effects long-lived assets. The provision for impairment was
calculated based upon the excess of the carrying amount of the visual effects
assets over the estimated fair value of the visual effects assets. In September
1997, the visual effects assets were sold for aggregate consideration
approximating the book value of such assets.
Interest expense increased from $176,000 for the nine months ended September
30, 1996 to $4,362,000 for the nine months ended September 30, 1997 primarily
because no interest expense for the nine months ended September 30, 1997 was
capitalized to film costs in light of the Library Sale Agreement and the
Assignment Agreement and the Company's current intention not to commence
production on additional motion pictures. In 1996 and prior periods, the Company
capitalized applicable interest expense incurred in connection with the
production of each motion picture. The Company determined the amount of interest
expense to be capitalized to each motion picture in production by multiplying
the average cumulative film cost of each motion picture in a given period by the
overall effective interest rate paid by the Company on the aggregate amount of
debt outstanding for such period. Interest expense, including interest
capitalized to film costs, decreased from $5,015,000 for the nine months ended
September 30, 1996 to $4,362,000 for the nine months ended September 30, 1997 as
a result of lower average outstanding production loan balances during the nine
months ended September 30, 1997 compared to the comparable period in 1996.
Interest income increased from $701,000 for the nine months ended September
30, 1996 to $1,300,000 for the nine months ended September 30, 1997 primarily
due to higher cash balances during the nine months ended September 30, 1997
compared to the nine months ended September 30, 1996.
As a result of the above, the Company incurred a net loss for the nine
months ended September 30, 1997 of $22,787,000 as compared to a net loss of
$1,647,000 for the nine months ended September 30, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Feature film revenues decreased from $192,582,000 for the year ended
December 31, 1995 to $132,940,000 for the year ended December 31, 1996 primarily
because of the lower revenues associated with NIXON, AMANDA and EVITA in 1996 as
compared to the revenues from DIE HARD WITH A VENGEANCE, JUDGE
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<PAGE>
DREDD and THE SCARLET LETTER in 1995. Feature film revenues for the year ended
December 31, 1995 consisted mainly of domestic and international revenues from
the theatrical release of DIE HARD WITH A VENGEANCE, JUDGE DREDD and THE SCARLET
LETTER and domestic and certain international home video revenue from DIE HARD
WITH A VENGEANCE. Although NIXON was initially released on December 20, 1995, no
revenues were recognized until 1996. Feature film revenues in 1995 also included
$5,000,000 received in October 1995 from a major studio in exchange for an actor
relinquishing an acting commitment to the Company. Feature film revenues for the
year ended December 31, 1996 consisted mainly of domestic and international
revenues from the theatrical release of NIXON, home video revenues from NIXON
and international revenues from the theatrical release of EVITA. Feature film
revenues in 1996 also included certain domestic television revenues from
TOMBSTONE, certain domestic revenues from THE SCARLET LETTER and AMANDA and
continuing domestic and foreign overages from DIE HARD WITH A VENGEANCE.
Amortization of film costs, residuals and participations decreased from
$204,544,000 for the year ended December 31, 1995 to $139,612,000 for the year
ended December 31, 1996 primarily due to the decrease in feature film revenue
recognized in the year ended December 31, 1996 as compared to the year ended
December 31, 1995. The amortization of film costs, residuals and participations
for the year ended December 31, 1996 included $10,086,000 of adjustments to
reduce the cost of two films (EVITA and THE SHADOW CONSPIRACY) released in 1996
and 1997, respectively, to their net realizable values compared to $32,452,000
of adjustments for the year ended December 31, 1995 to reduce the costs of three
films released in 1995 (JUDGE DREDD, THE SCARLET LETTER and NIXON) to their net
realizable value. It has been the Company's policy to write-off development
costs incurred on projects which do not enter production within three years
after development costs are first incurred and to capitalize these costs to
motion pictures currently in production. In 1996, development costs of
$3,246,000 were written off and were allocated to current motion pictures in
production as compared to write-offs of such costs of $668,000 in 1995.
SG&A expenses (excluding production overhead costs capitalized to film
costs) increased from $5,098,000 for the year ended December 31, 1995 to
$9,752,000 for the year ended December 31, 1996. The difference is primarily
because indirect costs attributable to the Visual Effects Facility were included
in general and administrative expense in the year ended December 31, 1996. For
the year ended December 31, 1995, substantially all of the indirect costs
attributable to the Visual Effects Facility were included in film costs, as the
special effects for JUDGE DREDD, which was in production during such period,
were primarily created at the facility. The increase in overhead during the year
ended December 31, 1996 was also due to approximately $1,461,000 in legal
expenses in connection with the Investigation and lawsuits described in Note 10
of Notes to the Company's Consolidated Financial Statements for the year ended
December 31, 1996. Production overhead being capitalized to film costs increased
from $6,591,000 in the year ended December 31, 1995 to $7,918,000 in the year
ended December 31, 1996, and the total of SG&A expenses and production overhead
costs capitalized to film costs increased from $11,689,000 for the year ended
December 31, 1995 to $17,670,000 for the year ended December 31, 1996, primarily
due to the factors described above.
Interest expense increased from $241,000 for the year ended December 31,
1995 to $448,000 for the year ended December 31, 1996 because certain interest
expense paid to a related party was not capitalizable. Interest expense,
including interest capitalized to film costs, decreased from $11,106,000 for the
year ended December 31, 1995 to $6,836,000 for the year ended December 31, 1996.
This decrease was due to the lower average outstanding balance of the Company's
production loans in the year ended December 31, 1996 as compared to the year
ended December 31, 1995. Four films were in various stages of production during
the year ended December 31, 1996 as compared to six films during the year ended
December 31, 1995.
Fee income decreased from $298,000 for the year ended December 31, 1995 to
$60,000 for the year ended December 31, 1996. Fee income represents fees earned
in connection with an arrangement to collect accounts receivable on behalf of
and to distribute motion pictures produced by an unrelated third party.
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<PAGE>
As a result of the above, the Company had a net loss for the year ended
December 31, 1996 of $15,905,000 as compared to a net loss of $16,062,000 for
the year ended December 31, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Feature film revenues increased from $108,517,000 for the year ended
December 31, 1994 to $192,582,000 for the year ended December 31, 1995 primarily
because of the higher revenues associated with DIE HARD WITH A VENGEANCE, JUDGE
DREDD and THE SCARLET LETTER as compared to the revenues from TOMBSTONE,
RENAISSANCE MAN and COLOR OF NIGHT in 1994. Feature film revenues for the year
ended December 31, 1994 include domestic and international revenues from the
release of TOMBSTONE, RENAISSANCE MAN and COLOR OF NIGHT, the domestic home
video revenues from TOMBSTONE and domestic pay television and international
television revenues for MEDICINE MAN. Feature film revenues for the year ended
December 31, 1995 include principally domestic and international revenues from
the theatrical release of DIE HARD WITH A VENGEANCE, JUDGE DREDD and THE SCARLET
LETTER and domestic and certain international home video revenue from DIE HARD
WITH A VENGEANCE. Although NIXON was initially released on December 20, 1995, no
revenues were recognized until 1996. Feature film revenues in 1995 also included
$5,000,000 received in October 1995 from a major studio in exchange for an actor
relinquishing an acting commitment to the Company.
Amortization of film costs, residuals and participations increased from
$103,422,000 for the year ended December 31, 1994 to $204,544,000 for the year
ended December 31, 1995 primarily due to the increase in feature film revenues
recognized in the year ended December 31, 1995 as compared to the year ended
December 31, 1994. The amortization of film costs, residuals and participations
for the year ended December 31, 1995 included $32,452,000 of adjustments to
reduce the cost of two films released in 1994 (COLOR OF NIGHT and RENAISSANCE
MAN) and three films released in 1995 (JUDGE DREDD, THE SCARLET LETTER and
NIXON) to their net realizable value compared to $6,343,000 of adjustments for
the year ended December 31, 1994 to reduce the costs of the two films released
in 1994 indicated above to their net realizable value. In addition, in 1995,
development costs of $668,000 were written off and were allocated to current
motion pictures in production as compared to write-offs of such costs of
$1,187,000 in 1994.
SG&A expenses (excluding production overhead costs capitalized to film
costs) increased from $2,694,000 for the year ended December 31, 1994 to
$5,098,000 for the year ended December 31, 1995. This difference is primarily
due to a substantial portion of the overhead attributable to the Company's
Visual Effects Facility, which was acquired in late 1994, not being capitalized
into film costs in 1995. Production overhead being capitalized to films
decreased from $7,236,000 for year ended December 31, 1994 as compared to
$6,591,000 for the year ended December 31, 1995. The total of SG&A expenses and
production overhead costs capitalized to film costs increased from $9,930,000
for the year ended December 31, 1994 to $11,689,000 for the year ended December
31, 1995 primarily due to the overhead costs associated with operations of the
Visual Effects Facility.
Interest expense decreased from $281,000 for the year ended December 31,
1994 to $241,000 for the year ended December 31, 1995. This decrease was due
primarily to a greater percentage of total interest expense being capitalized to
film costs due to the Company's having more films in production in 1995.
Interest expense of $5,465,000 was capitalized into film costs in 1994 compared
to $10,865,000 in 1995. Interest expense, including interest capitalized into
film costs, increased from $5,746,000 for the year ended December 31, 1994 to
$11,106,000 for the year ended December 31, 1995. This increase was due to the
larger average outstanding balances of the Company's production loans in the
year ended December 31, 1995 as compared to the year ended December 31, 1994.
Six films were in various stages of production during 1995 as compared to only
three films in 1994.
Fee income decreased from $511,000 for the year ended December 31, 1994 to
$298,000 for the year ended December 31, 1995. Fee income represented fees
earned in connection with an arrangement to collect accounts receivable on
behalf of, and to distribute motion pictures produced by, an unrelated third
119
<PAGE>
party. See Note 6 of Notes to the Company's Consolidated Financial Statements
for the year ended December 31, 1996.
Interest income increased from $264,000 for the year ended December 31, 1994
to $941,000 for the year ended December 31, 1995 due to higher cash balances
during 1995 resulting from the Company's public offering of Common Stock which
was completed in May 1995.
As a result of the above, the Company had a net loss for the year ended
December 31, 1995 of $16,062,000 as compared to net income of $2,895,000 for the
year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a $50,000,000 revolving credit facility with Chase and a
syndicate of lenders, under which the commitment to lend expired August 31,
1997. In light of the Company's intention not to commence production on any
additional motion pictures, the Company did not seek to extend the commitment to
lend prior to its expiration, nor has the Company sought to obtain a new credit
facility either before or after expiration of the commitment to lend under the
credit facility. As of September 30, 1997, approximately $7,753,000 in
borrowings were outstanding under the credit facility, net of cash retained from
the collection of deposits of minimum guarantees. On November 14, 1997, the
Company paid off the outstanding balance under the credit facility
(approximately $5,639,000 in principal and accrued interest on such date).
The Company previously entered into term loan agreements with Disney to
finance a portion of the costs of COLOR OF NIGHT, THE SCARLET LETTER, NIXON, THE
SHADOW CONSPIRACY and EVITA. Each loan must be repaid with accrued interest on
or before the earlier of (i) four years after the loan proceeds are first made
available to the Company or (ii) three years after the initial domestic
theatrical release of the applicable picture. Each of these loans are secured by
rights to distribute the respective motion picture in the Americas and, except
for the term loan with respect to COLOR OF NIGHT which is personally guaranteed
by Vajna, certain other distribution rights related to other motion pictures
financed by Disney. The COLOR OF NIGHT term loan with a balance of $4,510,000 at
September 30, 1997 was scheduled to mature in May 1997, however, Disney has
agreed pursuant to the Library Sale Agreement that no repayment of such loan or
any other term loan is required unless the Library Sale Agreement is terminated.
None of the remaining currently outstanding term loans with Disney mature in the
ordinary course in the next twelve months. At September 30, 1997, the aggregate
amount outstanding under all term loans from Disney plus accrued interest was
approximately $39,995,000.
The Company also has an outstanding promissory note in favor of Valdina
which is currently due and payable and under which an aggregate of $3,511,000 in
principal and accrued interest was outstanding at September 30, 1997.
The Company and Disney have an arrangement with respect to the motion
picture tentatively entitled Deep Rising. See "PROPOSAL NO. 1: SALE OF
SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY--The Library Sale Agreement."
Pursuant to the Library Sale Agreement, upon consummation of the Film Library
Sale, the Company (a) will no longer have any interest in the film as it will no
longer serve as sales agent with respect to the film, (b) will relinquish its
equity participation in the film and sales fee, (c) will remit to Disney all
minimum guarantees received by the Company with respect to DEEP RISING while it
served as sales agent with respect to the film and which were not previously
remitted to Disney, and (d) will no longer be obligated to pay the Cost Amount
(the lessor of fifty percent of the cost of the film or $22,500,000). In the
event the Film Library Sale is not consummated, the Company currently
anticipates that it will have obtained sufficient advances and minimum
guarantees with respect to its interest in the film to satisfy the Cost Amount.
As described under "PROPOSAL NO. 1: SALE OF SUBSTANTIALLY ALL OF THE ASSETS
OF THE COMPANY--The Library Sale Agreement," the Company had a "first look"
arrangement with
120
<PAGE>
Stone. Disney has reimbursed the Company for all amounts payable to Stone
through February 10, 1997. In September 1997, the Company entered into the
Termination Agreement with Stone in order to terminate the "first look"
arrangement. Pursuant to such agreement, the Company (i) transferred to Stone
all but one of the Stone Projects and (ii) made certain payments to, or for the
benefit of Stone. As a result of the Termination Agreement, the Company was
relieved of $961,000 in obligations the Company otherwise would have had with
respect to the "first look" arrangement. See "CERTAIN ARRANGEMENTS CONCERNING
OTHER ASSETS--The Stone Projects." In the event the Film Library Sale is not
consummated, Disney would be obligated to reimburse the Company for all amounts
paid to Stone after February 10, 1997 in connection with the "first look"
arrangement (approximately $992,000). See "CERTAIN ARRANGEMENTS CONCERNING OTHER
ASSETS."
In November 1997, pursuant to the Summit Agreements, the Company and Summit
concluded the Summit Transactions, a series of transactions including primarily
(i) the purchase by Summit N.V., in exchange for the payment of $400,000 to the
Company, of the Company's rights in the International DHWV Overages (other than
those relating to exploitation agreements with respect to the territories of
Italy and Hungary), (ii) the purchase by Summit N.V., in exchange for the
payment of an additional $400,000 to the Company, of the Miscellaneous
Receivables, and (iii) the termination of Summit's sales agency relationships
with the Company and the settlement of the Company's obligations in connection
therewith in exchange for an aggregate payment by the Company to Summit (which,
pursuant to an additional agreement with Summit, includes certain amounts
payable to Summit with respect to a past Company production) of approximately
$827,000.
On November 19, 1997, the Board approved the acceptance of an offer from
Disney to purchase the Soundtrack Rights in exchange for $1,500,000 in cash. The
Soundtrack Sale is conditioned upon and is anticipated will be consummated
concurrently with consummation of the Film Library Sale.
At September 30, 1997, the Company had cash on hand of approximately
$26,073,000 (exclusive of restricted cash of approximately $5,169,000 consisting
primarily of amounts due to Disney from deposits received in connection with the
international distribution of DEEP RISING).
As the Company does not presently intend to commence production on any
additional motion pictures, management of the Company has been implementing
reductions in personnel to achieve staff size commensurate with the Company's
current level of activity. The Company has reduced the number of its full time
employees by approximately 63% (to eleven employees) since the beginning of
1997. The Company also reduced the amount of space it leases in its corporate
headquarters building by approximately sixty percent beginning October 1, 1997.
In addition, in September 1997, the subsidiary of Company which operated the
Visual Effects Facility shut down the operations of such facility and,
subsequent thereto, transferred the assets thereof and certain liabilities
associated therewith to an unaffiliated third party. See "CERTAIN INFORMATION
REGARDING THE COMPANY--Business of the Company-- Motion Picture Production and
Financing."
The Company believes that its existing capital, funds from operations and
other available sources of capital (including cash on hand), will be sufficient
to enable the Company to fund its overhead related expenditures and reduced
level of activities pending consummation of the Asset Sales and the Merger.
Except for preparing for the Special Meeting and preparing for the potential
closings of the Asset Sales and the Merger, the Company does not currently
intend to engage in any significant business operations pending consummation of
the Asset Sales and the Merger. No determination has been made by the Company as
to its course of conduct in the event that the Asset Sales and/or the Merger are
not consummated, as the Company would consider all strategic alternatives
reasonably available to it at the time. However, the Company anticipates that it
is likely that significant consideration would be given at any such time to a
dissolution and winding up of the Company pursuant to Delaware law. The Company
might need to seek additional sources of capital following the Merger or in the
event the Asset Sales
121
<PAGE>
and/or the Merger are not consummated, depending on the course of action chosen
to be taken, and the business operations, if any, chosen to be conducted by the
Company at such time.
INFLATION. Management believes that neither the Company's operating
revenues nor costs have materially increased in the last fiscal year due to
inflation or general price changes and, in particular, management believes that
no material increases in revenue were attributable to increases in ticket prices
for admission to motion picture theatres.
CERTAIN TAX MATTERS. The Company and each of its domestic subsidiaries were
S Corporations from their incorporation through the tax year ended December 31,
1993. Taxable income and the loss of the Company for 1993 and prior years was
included in the computation of the taxable income or loss of Vajna, the
Company's sole stockholder during those years. The corporate income tax returns
of the Company for its 1990, 1991, 1992 and 1993 fiscal years are currently
under audit by the Internal Revenue Service ("IRS") and California Franchise Tax
Board, and returns for the 1995 and 1996 fiscal years remain open to audit. The
Company anticipates no federal tax liability and only minimal, if any,
California tax liability as a result of any income tax audits for pre-1994 years
because of the S Corporation election in effect for such years. In the absence
of the agreement described below, Vajna, the sole stockholder during such
period, and not the Company would be responsible for any tax liability assessed
as a result of such audits of pre-1994 years.
The Company received approximately $20,000,000 of advances (the "Advances")
during the fiscal year ended December 31, 1993. The Advances were received in
connection with motion pictures that were released during the fiscal year ending
December 31, 1994. Consistent with its financial accounting for the Advances and
prior tax reporting practices, the Company did not include the Advances in its
1993 taxable income, and instead included such amounts--and deducted the related
costs--in computing its taxable income for the year in which the underlying
motion pictures were released, in this case 1994. It is possible, however, that
the IRS will challenge the Company's tax treatment of the Advances, and if the
IRS were successful in that challenge, the Company would be required to include
the Advances in the computation of its 1993 taxable income without an offsetting
deduction in 1993 for costs associated with those motion pictures. As a result
of the S Corporation election then in effect, such an adjustment (a "Tax
Adjustment") to the Company's 1993 taxable income would cause a corresponding
increase in the taxable income of Vajna and, therefore, a significant increase
in Vajna's tax liability for 1993. However, if the Company has cumulative
taxable income in 1994 through 1997 (exclusive of the Advances), it would obtain
a benefit from the Tax Adjustment in the form of a reduction in its 1994 taxable
income and related tax liability as it would not be required to include the
Advances in its 1994 taxable income.
In order to alleviate the additional tax burden on Vajna relating solely to
the Tax Adjustment for the Advances, the Company and Vajna entered into a Tax
Reimbursement Agreement (the "Tax Agreement"), dated as of December 30, 1993.
Pursuant to the terms of the Tax Agreement, the Company paid Vajna $10,000,000
(the "Reimbursement Payment") on June 8, 1994. Such amount represents the tax
liability which could be imposed on Vajna, exclusive of interest and penalties,
if the Advances are included in 1993 taxable income. The tax associated with the
increase in taxable income to Vajna resulting from the Tax Adjustment will
exceed the potential reduction in taxes realized by the Company due to the
difference between personal and corporate tax rates and approximately $1,500,000
of the Reimbursement Payment is intended to reimburse Vajna for such difference.
In order to assist the Company in funding the Reimbursement Payment, Vajna
loaned $10,000,000 to the Company on May 12, 1994 in exchange for a promissory
note (the "Stockholder Note").
The Tax Agreement provides that Vajna will be required to repay all of the
Reimbursement Payment to the Company in the following circumstances: (i) a final
determination by the IRS or the courts either that the Company is not required
to make a Tax Adjustment or is required to include the Advances in 1993 taxable
income but also is permitted to deduct all capitalized costs incurred with
respect to the Advances in 1993, (ii) lapse of the applicable statutes of
limitation with no Tax Adjustment having been made or (iii)
122
<PAGE>
the Company does not have cumulative taxable income for the period 1994 through
1997 taking into account the Advances, even if Vajna is assessed additional
taxes with respect to the Tax Adjustment. The Tax Agreement also provides for a
pro rata repayment of the Reimbursement Payment by Vajna if the Company earns
cumulative taxable income for the 1994 through 1997 period (including the
Advances in 1994 income for this purpose) that is greater than zero but less
than $20,000,000. If, on the other hand, there is a Tax Adjustment and the
Company has earned cumulative taxable income for the 1994 through 1997 period of
$20,000,000 or more (treating income relating to the Advances as taxable income
in 1994), then Vajna will not be required to repay any portion of the
Reimbursement Payment. The Tax Agreement also permits the Company after April
15, 1995 to amend its 1993 tax return with Vajna's concurrence to take into
account the Advances in 1993; provided, however, that Vajna will be subject to
the obligation to repay the Reimbursement Payment in the same manner as set
forth above. For purposes of calculating cumulative taxable income for the
period 1994 through 1997, the effect of any post-1997 net operating loss
carrybacks will not be taken into account. From January 1, 1994 through December
31, 1996, the Company had a cumulative taxable loss (treating income relating to
the Advances as taxable income in 1994) in excess of $20,000,000.
In the event Vajna repays all or any portion of the Reimbursement Payment to
the Company, then, until December 31, 2010, the Company will be obligated to
return to Vajna a portion (up to 100%) of the Reimbursement Payment equal to the
reduction in taxes thereafter realized by the Company to the extent a net
operating loss in 1994 (or carried back to 1994) is subsequently utilized to
reduce the Company's tax obligations. Such determination will be made on March
15, 2011 and any amount to be paid by Vajna as a result will be paid at that
time.
Interest and principal under the Stockholder Note will become due and
payable on April 30, 1998 unless it has not been finally determined whether
Vajna will have to pay some or all of the Reimbursement Payment pursuant to the
Tax Agreement, in which case the maturity date will be extended. The Stockholder
Note, which bears interest at a floating rate equal to the federal short term
rate plus two percent (2%) per annum, is subject to offset against amounts that
may be owed to the Company by Vajna pursuant to the Tax Agreement. If at the
maturity date of the Stockholder Note it has not been finally determined whether
Vajna will have to repay some or all of the Reimbursement Payment, then the
maturity date of the Stockholder Note will be extended to coincide with the date
the Company receives a tax refund as a result of including the Advances in 1993
taxable income and not in 1994 taxable income.
For financial reporting purposes, pursuant to the Company's agreement with
Vajna described above, should the Company not receive the tax benefit as
described above, the Company may offset the $10,000,000 loan payable to Vajna
against a receivable from Vajna created to reflect the possibility that the
Company will not get such benefit. Pursuant to the legal right of offset, such
loan payable and corresponding receivable are netted against one another for
financial reporting purposes.
At December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $59,406,000 which expires in 2011. Since the
Company has incurred a tax operating loss of approximately $22,000,000 for the
nine months ended September 30, 1997 and will incur additional operating losses
through the Effective Time of the Merger, the approximately $50,000,000 of tax
basis gross income resulting from the Asset Sales will be completely offset by
such net operating losses and no federal income tax would be payable thereon.
Notwithstanding the carryover of the federal net operating loss to the current
year, because of other adjustments in 1997, the Company would be subject to a
federal alternative minimum tax of approximately $600,000 assuming the Asset
Sales are consummated in 1997. If, however, the Asset Sales were not consummated
until 1998, the Company would not be subject to a federal alternative minimum
tax in 1997 but would be subject to a federal alternative minimum tax in 1998
substantially larger in size as compared to the alternative minimum tax of
approximately $600,000 if the Asset Sales are consummated in 1997. Moreover,
because of limitations on the carryover of net operating losses under the
California Revenue and Taxation Code, the Company currently estimates that there
will be a California income tax liability for 1997 of between approximately
$400,000 and $500,000 assuming the Asset Sales are consummated in 1997. If,
however, the Asset Sales were not consummated until 1998, the Company would not
be subject to a California income tax liability in 1997 but would be subject to
a California income tax liability in 1998 substantially larger in size as
compared to the California income tax liability of between approximately
$400,000 and $500,000 if the Asset Sales are consummated in 1997.
123
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CINERGI PICTURES ENTERTAINMENT INC.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Unaudited Financial Statements:
Condensed Consolidated Balance Sheets--December 31, 1996 and September 30, 1997.......................... F-2
Condensed Consolidated Statements of Operations--nine months ended September 30, 1996 and 1997........... F-4
Condensed Consolidated Statements of Cash Flow--nine months ended September 30, 1996
and 1997............................................................................................... F-5
Notes to Condensed Consolidated Financial Statements (Unaudited)......................................... F-7
Audited Financial Statements:
Report of Independent Auditors........................................................................... F-14
Consolidated Balance Sheets--December 31, 1995 and 1996.................................................. F-15
Consolidated Statement of Operations--years ended December 31, 1994, 1995 and 1996....................... F-16
Consolidated Statement of Shareholders' Equity--years ended December 31, 1994, 1995 and 1996............. F-17
Consolidated Statements of Cash Flows--years ended December 31, 1994, 1995 and 1996...................... F-18
Notes to Consolidated Financial Statements............................................................... F-20
</TABLE>
F-1
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------- SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents......................................................... $ 27,364,000 $ 26,073,000
Restricted cash................................................................... 5,654,000 5,169,000
Accounts receivable............................................................... 10,850,000 7,367,000
Accounts receivable, related parties.............................................. 799,000 849,000
Film costs, less accumulated amortization......................................... 103,792,000 53,424,000
Property and equipment, at cost, less accumulated depreciation.................... 4,819,000 427,000
Other assets...................................................................... 3,270,000 2,849,000
-------------- -------------
TOTAL ASSETS.................................................................. $ 156,548,000 $ 96,158,000
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable................................................................ $ 2,141,000 $ 3,156,000
Accrued interest................................................................ 23,000 0
Accrued residuals & participations.............................................. 13,045,000 13,837,000
Deferred revenue................................................................ 46,568,000 2,141,000
Capital lease obligation........................................................ 291,000 --
Loans payable................................................................... 6,026,000 7,753,000
Notes and amounts payable to related parties.................................... 49,747,000 53,350,000
-------------- -------------
TOTAL LIABILITIES............................................................. $ 117,841,000 $ 80,237,000
-------------- -------------
-------------- -------------
</TABLE>
F-2
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
DECEMBER 31, --------------
1996
-------------- (UNAUDITED)
<S> <C> <C>
Common Stock with certain redemption features, $.01 par value, 744,682 (1996) and
0 (1997) shares issued and outstanding less notes receivable from related
parties amounting to $900,000 (1996) and $0 (1997)............................. $ 2,100,000 $ --
Commitments & Contingencies (Note 4)............................................. -- --
STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value, 5,000,000 shares authorized, no shares issued
and outstanding.............................................................. -- --
Common Stock, $.01 par value, 20,000,000 shares authorized, 13,074,533 (1996)
and 13,446,874 (1997) shares issued and outstanding.......................... 131,000 135,000
Additional Paid-in Capital..................................................... 65,548,000 68,095,000
Retained Deficit............................................................... (29,072,000) (51,859,000)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY................................................... 36,607,000 16,371,000
Receivable from shareholder.................................................. -- (450,000)
-------------- --------------
$ 36,607,000 $ 15,921,000
-------------- --------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY......................................... $ 156,548,000 $ 96,158,000
-------------- --------------
-------------- --------------
</TABLE>
NOTE: The balance sheet at December 31, 1996 has been derived from the audited
consolidated financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting principals
for complete financial statements.
See notes to condensed consolidated financial statements.
F-3
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
1996 1997 1996 1997
------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues
Feature films.................................. $ 30,160,000 $ 15,649,000 $ 89,712,000 $ 59,186,000
Fee income..................................... 29,000 0 60,000 23,000
------------- -------------- -------------- ---------------
30,189,000 15,649,000 89,772,000 59,209,000
Cost and expenses:
Amortization of film costs, residuals &
participations............................... 28,543,000 17,785,000 86,954,000 62,198,000
Selling, general & administrative expenses..... 2,111,000 6,210,000 4,990,000 14,071,000
Provision for impairment of long lived assets.... -- -- -- 2,665,000
------------- -------------- -------------- ---------------
Operating loss................................... (465,000) (8,346,000) (2,172,000) (19,725,000)
Interest expense................................. -- (1,970,000) (176,000) (4,362,000)
Interest income.................................. 171,000 483,000 701,000 1,300,000
------------- -------------- -------------- ---------------
Net loss......................................... $ (294,000) $ (9,833,000) $ (1,647,000) $ (22,787,000)
------------- -------------- -------------- ---------------
------------- -------------- -------------- ---------------
Net loss per share............................... $ (0.02) $ (0.73) $ (0.12) $ (1.69)
------------- -------------- -------------- ---------------
------------- -------------- -------------- ---------------
Weighted average number of shares outstanding.... 14,192,000 13,447,000 14,192,000 13,448,000
------------- -------------- -------------- ---------------
------------- -------------- -------------- ---------------
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................................................... $ ( 1,647,000) $ (22,787,000)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation.................................................................... 901,000 1,821,000
Provision for impairment of long-lived assets................................... -- 2,665,000
Amortization of unearned compensation........................................... 938,000 --
Film cost amortization.......................................................... 81,317,000 54,502,000
Changes in operating assets and liabilities:
Accounts receivable............................................................. (3,786,000) 3,483,000
Accounts receivable, related parties............................................ (357,000) (50,000)
Film cost additions............................................................. (65,245,000) (4,134,000)
Other assets.................................................................... (58,000) 421,000
Accounts payable & accrued expenses and interest................................ 1,198,000 992,000
Accrued residuals and participations payable.................................... 1,212,000 792,000
Deferred revenue................................................................ (21,753,000) (44,426,000)
-------------- --------------
Net cash used in operating activities............................................. (7,280,000) (6,721,000)
INVESTING ACTIVITIES
Purchase of property and equipment................................................ (112,000) (110,000)
Proceeds from the sale of property and equipment.................................. -- 16,000
-------------- --------------
Net cash used in investing activities............................................. (112,000) (94,000)
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
FINANCING ACTIVITIES
Increase in loans payable......................................................... $ 32,196,000 $ 20,124,000
Payments on loans payable......................................................... (42,396,000) (18,397,000)
Decrease in restricted cash....................................................... -- 485,000
Increase in notes and amounts payable to related parties.......................... 615,000 4,089,000
Payments on notes and amounts payable to related parties.......................... (718,000) (486,000)
Payments on capital lease obligation.............................................. (1,105,000) (291,000)
-------------- --------------
Net cash (used in) provided by financing activities............................... (11,408,000) 5,524,000
-------------- --------------
(Decrease) increase in cash....................................................... (18,800,000) (1,291,000)
Cash and cash equivalents at beginning of year.................................... 29,832,000 27,364,000
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 11,032,000 $ 26,073,000
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes.................................................................... $ 23,000 $ 18,400
NINE MONTHS ENDED SEPTEMBER 30, 1997
</TABLE>
In January 1997, the Company repurchased 372,341 shares of Common Stock of
the Company in exchange for the forgiveness of a note amounting to $450,000.
NINE MONTHS ENDED SEPTEMBER 30, 1996
Visual effects equipment amounting to $1,580,000 was purchased under a
capital lease agreement.
Accrued interest of $575,000 relating to production loans owed to a third
party was offset against monies owed to the Company by such third party.
See notes to condensed consolidated financial statements.
F-6
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 1--PREPARATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Cinergi Pictures Entertainment Inc. (the "Company" or "CPEI") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in CPEI's Annual Report on
Form 10-K for the year ended December 31, 1996 ("Annual Report") filed with the
Securities and Exchange Commission.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
NET LOSS PER COMMON SHARE. The per share data for the three and nine month
periods ended September 30, 1996 and 1997 are based on the weighted average
number of common and common share equivalents outstanding during the period.
Common Stock with certain redemption features are considered common share
equivalents. Stock options and warrants are considered common share equivalents
if dilutive.
RECENT DEVELOPMENTS. In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective for
annual and interim financial statements issued for periods ending after December
15, 1997 and early adoption is not permitted. When adopted, the statement will
require restatement of prior years' earnings per share ("EPS"). SFAS No. 128 was
issued to simplify the standards for calculating EPS previously found in APB No.
15, Earnings Per Share. SFAS No. 128 replaces the presentation of primary EPS
with a presentation of basic EPS. The new rules also require dual presentation
of basic and diluted EPS on the face of the statement of operations for
companies with a complex capital structure. For the Company, basic EPS will
exclude the dilutive effects of stock options and warrants. Diluted EPS for the
Company will reflect all potential dilutive securities. Under the provisions of
SFAS No. 128, basic and diluted EPS would have been the same as the reported
amounts.
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income. The
statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The statement applies to all enterprises that provide a full set of
general-purpose financial statements. The statement becomes effective for all
financial statements for fiscal years beginning after December 15, 1997, with
earlier application permitted. Further, in June 1997, FASB issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. The
statement changes the way public companies report segment information in annual
financial statements and also requires those companies to report selected
segment information in inteirm financial reports to shareholders. The proposal
supersedes FASB Statement No. 14 on segments and does not apply to nonpublic
enterprises or to not-for-profit organizations. The statement becomes effective
for all financial statements for fiscal years beginning after December 15, 1997,
with earlier adoption permitted. The Company does not believe the adoption of
SFAS No. 130 and SFAS No. 131 will have a material effect on the Company's
financial statements.
F-7
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 3--FILM COSTS
Film costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- -------------
<S> <C> <C>
Released, less amortization................................... $ 52,077,000 $ 36,827,000
Completed, not released....................................... 37,025,000 11,529,000
In production................................................. 9,373,000 --
Development................................................... 5,317,000 5,068,000
-------------- -------------
$ 103,792,000 $ 53,424,000
-------------- -------------
-------------- -------------
</TABLE>
NOTE 4--COMMITMENTS AND CONTINGENCIES
In December 1995, the U.S. Attorney for the Central District of California
served subpoenas ("Subpoenas") on the Company relating to a grand jury
investigation of federal tax aspects of various transactions involving Andrew G.
Vajna, President, Chief Executive Officer and Chairman of the Board of Directors
of the Company, and certain other persons and entities (the "Investigation").
The Company believes the Investigation is focusing primarily on (i) the 1988 and
1989 personal tax returns of Mr. Vajna and the tax returns of certain other
persons and entities, and (ii) the ongoing audits of Mr. Vajna's tax returns
since 1990 by the Internal Revenue Service. The Company has not been identified
by the U.S. Attorney as being a target of the Investigation; however, there can
be no assurance that the Company's status will not change in the future. The
Company engaged counsel to represent it in connection with the Investigation and
is in the process of responding to the Subpoenas. Given the uncertainty of the
Investigation, there is currently no basis upon which to estimate the impact, if
any, the Investigation may have on the Company.
Pursuant to Article Tenth of the Company's Restated Certificate of
Incorporation, Article V of the Company's Bylaws, indemnity agreements entered
into between the Company and certain of its officers and directors, and the
provisions of Section 145 of the Delaware General Corporation Law, the Company
is advancing the expenses of certain of its employees, officers and directors
other than Mr. Vajna ("Indemnitees") which they may incur in connection with the
Investigation. As of November 10, 1997, the Company had advanced an aggregate of
$294,000 on behalf of the Indemnitees. The Indemnitees have undertaken to
reimburse the Company for their expenses if it is ultimately determined that
they are not entitled to be indemnified. In addition, Mr. Vajna has undertaken
to reimburse the Company under certain circumstances with respect to the
expenses of the Indemnitees. Given the current uncertainty regarding the scope
and duration of the Investigation and the amount of expenses which may be
incurred by the Indemnitees in connection with the Investigation, there is no
basis upon which to estimate the financial impact which the foregoing may have
on the Company.
On August 25, 1997, the Company settled legal proceedings brought by
Laurence Fishburne and The LOA Productions, Inc., Mr. Fishburne's loan-out
corporation ("LOA"), against the Company, a subsidiary of the Company and
Randolph M. Paul, former Senior Vice President, Business Affairs and a former
Director of the Company (the "Fishburne Litigation"). The action, for breach of
oral contract, fraud and deceit, and civil conspiracy, was originally filed on
July 11, 1994. The plaintiffs had claimed that the
F-8
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 4--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Company entered into an oral contract for Mr. Fishburne to appear in the motion
picture, DIE HARD WITH A VENGEANCE, but repudiated the contract the following
day. Plaintiffs claimed damages for $1,750,000, representing the fixed
compensation to which they allege they were entitled, additional compensatory
damages of up to $350,000 and general and punitive damages.
Pursuant to the terms of the settlement, the Company paid LOA $750,000 and
entered into certain agreements with plaintiffs and an entity controlled by Mr.
Fishburne which provide the Company with a non-exclusive option (the "Option")
to acquire certain rights ("Rights") to a play and related screenplay both
written by Mr. Fishburne. The Company also established a letter of credit in the
amount of $600,000, the amount which must be paid to the entity controlled by
Mr. Fishburne if the Company does not exercise the Option, if the Company does
not meet certain other time deadlines, or if the Company fails to match any bona
fide third party offers for the Rights. If, during the term of the Option, the
Company takes certain actions which will result in the Option becoming
exclusive, exercises the Option, or successfully matches any bona fide third
party offers for the Rights, then the Company will also incur additional
obligations such as those with respect to the financing and developing of the
Rights.
The Company is a party to various other legal proceedings arising in the
ordinary course of its business. The Company does not currently believe that any
such proceedings will have a material adverse effect on the Company's operations
or financial condition.
On April 3, 1997, the Company entered into a Purchase and Sale Agreement (as
it has been amended, the "Library Sale Agreement") with Walt Disney Pictures and
Television, a subsidiary of The Walt Disney Company, to sell to Walt Disney
Pictures and Television substantially all of the films in the Company's motion
picture library and certain other assets (referred to herein as the "Film
Library Sale"; "Disney" is used herein to refer to Walt Disney Pictures and
Television and/or its affiliates, including The Walt Disney Company, as
applicable). In exchange for the assets being sold to Disney, Disney has agreed
to relinquish its equity interest in the Company (555,556 shares of the
Company's Common Stock and a warrant to purchase 150,000 shares of the Company's
Common Stock at an exercise price of $9.00 per share) and cancel its outstanding
loans to the Company (approximately $39,995,000 as of September 30, 1997). In
addition, Disney has agreed to assume with respect to the films and rights
therein being sold to Disney all residuals and participation obligations, as
well as all scheduled obligations relating to the Company's existing
exploitation agreements. Pursuant to the Library Sale Agreement, Disney will pay
$3,725,000 to the Company upon delivery of AN ALAN SMITHEE FILM to Disney (a
reduction of $1,275,000 from Disney's original payment obligation pursuant to
existing agreements between the Company and Disney). To the extent that the
Company receives any fixed cash minimum guarantees with respect to AN ALAN
SMITHEE FILM ("Excess Minimum Guarantees") other than those minimum guarantees
the Company has scheduled under existing exploitation agreements with parties
other than Disney, then the Company, at the closing of the Film Library Sale,
must account for and remit such Excess Minimum Guarantees to Disney. The Company
does not currently anticipate that there will be any significant Excess Minimum
Guarantees.
The film library being sold to Disney includes primarily all of the
Company's rights (except minimum guarantee payments) to the following eleven
motion pictures: MEDICINE MAN, TOMBSTONE, RENAISSANCE MAN, COLOR OF NIGHT, JUDGE
DREDD, THE SCARLET LETTER, NIXON, EVITA (excluding soundtrack rights), AMANDA,
THE SHADOW CONSPIRACY, AND AN ALAN SMITHEE FILM. Disney will also retain
overages otherwise payable to the Company by Disney after January 1, 1997 with
respect to certain distribution rights to DIE HARD WITH A
F-9
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 4--COMMITMENTS AND CONTINGENCIES (CONTINUED)
VENGEANCE previously licensed to Disney. In addition, upon consummation of the
Film Library Sale, the Company's twenty-five film domestic distribution
arrangement with Disney, under which nine films have been delivered, will be
terminated.
The Film Library Sale is subject to numerous conditions, including, among
other things, the approval of the Company's stockholders. The Library Sale
Agreement and related Film Library Sale may also be terminated by the Company or
Disney in certain circumstances, including, among other things, upon failure to
consummate the Film Library Sale by December 24, 1997. Members of the Company's
Board of Directors who are also stockholders in the Company have agreed to vote
their shares in favor of the transaction in accordance with the terms of the
Library Sale Agreement.
On April 3, 1997, the Company also announced that it did not presently
intend to commence production on any additional motion pictures (although the
Library Sale Agreement does not preclude the Company, pending consummation of
the Film Library Sale, from commencing production on films that would not be
distributed by Disney) and that it was in the process of considering its
alternatives assuming consummation of the Film Library Sale to Disney.
On July 15, 1997, the Company entered into an Assignment Agreement (as it
has been amended, the "Assignment Agreement") with Twentieth Century Fox Film
Corporation ("Fox") to sell to Fox, subject to certain conditions, the Company's
rights in DIE HARD WITH A VENGEANCE in exchange for $11,250,000 in cash. The
Company owns DIE HARD WITH A VENGEANCE with Fox. Fox controls all sequel rights
to the film, as well as distribution rights to the film in the United States,
Canada and Japan (and certain additional minor territories), and worldwide in
certain ancillary media. Pursuant to the Assignment Agreement, the Company will
relinquish the right to receive overages from those territories and media for
which Fox controls distribution rights.
Fox will receive the Company's rights in DIE HARD WITH A VENGEANCE subject
to the terms of the Company's existing exploitation agreements relating to such
rights, including the Company's agreements with Disney. The Company, which
controlled distribution rights to DIE HARD WITH A VENGEANCE in international
territories other than those for which Fox controls distribution rights, has
previously granted Disney distribution rights to the film in a portion of those
international territories. Pursuant to the Library Sale Agreement, the Company
has agreed, upon consummation of the Film Library Sale, to relinquish overages
payable by Disney after January 1, 1997 with respect to DIE HARD WITH A
VENGEANCE. Pursuant to the Assignment Agreement, the Company was still entitled
to receive any overages under its existing exploitation agreements which relate
to DIE HARD WITH A VENGEANCE and are with parties other than Disney and Fox.
However, as indicated below, the Company subsequently sold substantially all of
such remaining rights to receive DIE HARD WITH A VENGEANCE overages.
Pursuant to the Assignment Agreement, Fox will continue to be responsible
for the payment of residuals relating to distribution of the film in those
territories for which Fox currently controls distribution rights, and, as the
Company's existing exploitation agreements expire (including the Company's
agreements with Disney) and the distribution rights in those territories revert
to Fox, Fox will become responsible for the payment of residuals in the
applicable territories covered by any exploitation agreements. The Company,
however, will continue to be responsible for all participations due to profit
participants in the film (other than those associated with distribution of the
film in the territories licensed
F-10
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 4--COMMITMENTS AND CONTINGENCIES (CONTINUED)
to Disney, for which Disney is responsible). The Company currently anticipates,
subject to, among other things, actual future revenues generated by the film,
that the Company's residuals and participation obligations with respect to such
film will not exceed approximately $812,000.
The sale of the Company's rights in DIE HARD WITH A VENGEANCE to Fox is
subject to several conditions including, among other things, consummation of the
Film Library Sale to Disney and applicable approval of the Company's
stockholders. If the Library Sale Agreement terminates, the Assignment Agreement
will automatically also terminate.
In June 1997, the Company instructed its financial advisor, Jefferson
Capital Group, Ltd., to solicit cash bids from qualified buyers for the purchase
of the Company's slate of twenty-one wholly-owned development projects. The
Company received an initial bid for the development projects of $4,750,000 (plus
the reimbursement of certain of the Company's costs related to such projects)
from Mr. Vajna. Additional qualified bids were required to be at least fifteen
percent higher than the initial bid and submitted to the Company by noon,
eastern time, on August 19, 1997. As no additional qualified bids were received
by the bidding deadline, Mr. Vajna was the prevailing bidder. The sale of such
development projects to Mr. Vajna is subject to consummation of the Film Library
Sale and the transactions contemplated by the Assignment Agreement. As the
parties to the Merger (described below) negotiated the merger consideration on
the basis of a value for such development projects equal to Mr. Vajna's bid,
such development projects will merely be part of the assets of the Company at
the time of the Merger and no separate cash consideration will be paid to the
Company for such projects.
In September 1997, Mr. Vajna, Valdina Corporation N.V. ("Valdina"), CPEI
Acquisition, Inc. ("Buyer"), a Delaware corporation wholly owned by Mr. Vajna
and Valdina, and the Company entered into an Agreement of Merger (the "Merger
Agreement") pursuant to which Buyer will be merged with and into the Company and
the Company will become wholly owned by Mr. Vajna and Valdina (the "Merger").
Valdina, a corporation organized under the laws of The Netherlands Antilles is
indirectly beneficially owned 99.8% by Mr. Vajna and 0.2% by a trust which
benefits certain persons including the son of Mr. Vajna. Pursuant to the Merger
Agreement, at the effective time of the Merger (the "Effective Time"), each
share ("Share") of Company Common Stock (other than Shares owned by Mr. Vajna or
Valdina, treasury Shares, or Shares as to which statutory dissenters' rights are
perfected) will be converted into the right to receive $2.41 in cash (the
"Purchase Price"). The Purchase Price has been adjusted upwards from an original
price of $2.30 (the "Original Purchase Price") and is subject to potential
further upward adjustment as provided in the Merger Agreement. The Merger is
subject to the satisfaction or waiver of numerous conditions, and the Merger
Agreement may be terminated and the Merger abandoned in certain circumstances.
The Company had a "first-look" arrangement with Oliver Stone and certain of
his affiliated entities ("Stone") pursuant to which Stone submitted the Company
all theatrical motion picture projects owned or controlled by Stone for the
Company's development and consideration of possible production and, as
consideration for Stone's submitting such projects to the Company, the Company
paid certain amounts annually to Stone for overhead and development. Disney
reimbursed the Company for all amounts payable to Stone through February 10,
1997. In September 1997, the Company entered into a Termination Agreement (the
"Termination Agreement") with Stone in order to terminate the "first-look"
arrangement between the Company and Stone and their respective obligations
thereunder. Pursuant to such agreement,
F-11
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 4--COMMITMENTS AND CONTINGENCIES (CONTINUED)
the Company (i) transferred to Stone all but one of the nineteen development
projects funded by the Company under the "first look" arrangement with Stone and
(ii) made certain payments to, or for the benefit of Stone. As a result of the
Termination Agreement, the Company was relieved of $961,000 in obligations the
Company otherwise would have had with respect to the "first-look" arrangement.
In the event the Film Library Sale is not consummated, Disney would be obligated
to reimburse the Company for all amounts paid to Stone after February 10, 1997
in connection with the "first-look" arrangement (approximately $992,000).
In 1996, the Company and Disney entered into a Financing and Distribution
Agreement whereby the Company is financially obligated to pay to Disney the
lesser of 50% of the cost of the motion picture tentatively entitled "DEEP
RISING" or $22,500,000 (the "Cost Amount"), in exchange for (i) a 50% equity
participation in such motion picture and (ii) a sales fee for international
distribution of such motion picture. Pursuant to the Library Sale Agreement,
upon consummation of the Film Library Sale, the Company (a) will no longer have
any interest in the film as it will no longer serve as sales agent with respect
to the film, (b) will relinquish its equity participation in the film and sales
fee, (c) will remit to Disney all minimum guarantees received by the Company
with respect to DEEP RISING while it served as sales agent with respect to the
film and which were not previously remitted to Disney, and (d) will no longer be
obligated to pay the Cost Amount.
The Company and Summit Entertainment N.V. ("Summit N.V.") and Summit
Entertainment L.P. ("Summit L.P.") (collectively with their affiliates,
"Summit"), international sales agents unaffiliated with the Company, have
entered into agreements dated as of September 10, 1997 (the "Summit Agreements")
which primarily provide for (i) the purchase by Summit N.V., in exchange for the
payment of $400,000 to the Company, of the Company's rights to receive any
overages from international subdistributors (other than Disney and Fox) pursuant
to the Company's existing exploitation agreements with respect to DIE HARD WITH
A VENGEANCE (other than those overages relating to exploitation agreements with
respect to the territories of Italy and Hungary), (ii) the purchase by Summit
N.V., in exchange for the payment of an additional $400,000 to the Company, of
approximately $760,000 in miscellaneous receivables outstanding as of September
30, 1997 (not including any receivables relating to AN ALAN SMITHEE FILM), and
(iii) the termination of Summit's sales agency relationships with the Company
and the settlement of the Company's obligations in connection therewith in
exchange for an aggregate payment by the Company to Summit (which, pursuant to
an additional agreement with Summit, includes certain amounts payable to Summit
with respect to a past Company production) of approximately $827,000. The
foregoing transactions with Summit were consummated in November 1997.
In September 1997, Cinergi Productions Inc. (California) ("CPI"), the wholly
owned subsidiary of the Company which operated the Company's visual effects
facility, shut down the operations of such facility and, subsequent thereto,
transferred the assets thereof to an unaffiliated third party (the "Purchaser")
in consideration of the assumption by the Purchaser of approximately $900,000 in
obligations and liabilities of CPI, including certain payroll and related
obligations, the agreement of the Purchaser to manage, on behalf of CPI, the
resolution of certain other CPI liabilities and obligations, and the
contribution by the Purchaser of $200,000 thereto. In connection with this
transaction, CPI also assigned to the Purchaser all of CPI's rights, duties and
obligations under a production services agreement relating to a motion picture
for which CPI had been engaged to create visual effects. In consideration of
such assignment, the
F-12
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 1997
NOTE 4--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Purchaser agreed to indemnify CPI in connection with any claims or actions
initiated by any third party with respect to the production services agreement.
NOTE 5--PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS No. 121). In April 1997, the Company announced
that (i) the Company had entered into the Library Sale Agreement with Disney to
sell to Disney substantially all of the films in the Company's motion picture
library and certain other assets, (ii) the Company did not presently intend to
commence production of any additional motion pictures, and (iii) the Company was
considering its alternatives assuming consummation of the Film Library Sale. The
Company's visual effects assets are not included in the Film Library Sale. In
light of the foregoing and due to operating losses of the visual effects
facility, the Company determined that a write-down to net realizable value of
the visual effects assets was required under SFAS No. 121. Accordingly, the
Company recognized a non-cash charge of $2,665,000 at June 30, 1997 for the
impairment of the visual effects long-lived assets. The provision for impairment
was calculated based upon the excess of the carrying amount of the visual
effects assets over the estimated fair value of the visual effects assets.
NOTE 6--SUBSEQUENT EVENTS AND OTHER MATTERS
On November 14, 1997, the Company paid off the outstanding balance under its
revolving credit facility (approximately $5,639,000 in principal and accrued
interest on such date). The commitment to lend under the credit facility had
previously expired in August 1997.
F-13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Cinergi Pictures Entertainment Inc.
We have audited the accompanying consolidated balance sheets of Cinergi
Pictures Entertainment Inc. and subsidiaries as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cinergi
Pictures Entertainment Inc. and subsidiaries at December 31, 1995 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
April 11, 1997
F-14
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS (Note 5)
Cash and cash equivalents........................................................ $ 29,832,000 $ 27,364,000
Restricted cash (Note 1)......................................................... -- 5,654,000
Accounts receivable (including $745,000 (1995) and $3,074,000 (1996) from a
related party)................................................................. 7,494,000 10,850,000
Accounts receivable, related parties (Note 7).................................... 682,000 799,000
Film costs, less accumulated amortization (Note 3)............................... 160,756,000 103,792,000
Property and equipment, at cost, less accumulated depreciation (Note 4).......... 4,381,000 4,819,000
Other assets..................................................................... 3,112,000 3,270,000
-------------- --------------
Total assets................................................................. $ 206,257,000 $ 156,548,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable............................................................... $ 1,785,000 $ 2,141,000
Accrued interest............................................................... 81,000 23,000
Accrued residuals and participations........................................... 8,781,000 13,045,000
Deferred revenue (including $44,949,000 (1995) and $29,582,000 (1996) from a
related party) (Notes 2 and 10).............................................. 68,791,000 46,568,000
Loans payable (Note 5)......................................................... 41,578,000 6,026,000
Capital lease obligation....................................................... -- 291,000
Notes and amounts payable to related parties (Note 7).......................... 31,624,000 49,747,000
-------------- --------------
Total liabilities............................................................ 152,640,000 117,841,000
Common Stock, with certain redemption features, $.01 par value, 1,117,023 (1995)
and 744,692 (1996) shares issued and outstanding, less notes receivable from
related parties amounting to $1,350,000 (1995) and $900,000 (1996) (Note 9).... 1,900,000 2,100,000
Commitments and contingencies (Note 10)
Stockholders' equity (Notes 1 and 9):
Preferred Stock, $.01 par value, 5,000,000 shares authorized, no shares
issued....................................................................... -- --
Common Stock, $.01 par value, 20,000,000 shares authorized, 13,075,000 (1995)
and 13,075,000 (1996) shares issued and outstanding.......................... 131,000 131,000
Additional paid-in capital..................................................... 64,753,000 65,548,000
Retained deficit............................................................... (13,167,000) (29,072,000)
-------------- --------------
Total stockholders' equity....................................................... 51,717,000 36,607,000
-------------- --------------
Total liabilities and stockholders' equity................................... $ 206,257,000 $ 156,548,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-15
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Feature films (including $43,207,000 (1994), $57,808,000
(1995) and $43,454,000 (1996) from a related party)......... $ 108,517,000 $ 192,582,000 $ 132,940,000
Fee income (Note 6)........................................... 511,000 298,000 60,000
-------------- -------------- --------------
109,028,000 192,880,000 133,000,000
Costs and expenses:
Amortization of film costs, residuals and participations...... 103,422,000 204,544,000 139,612,000
Selling, general and administrative expense (including
$102,000 (1994), $93,000 (1995) and $274,000 (1996) from
related parties) (Notes 7 and 10)........................... 2,694,000 5,098,000 9,752,000
-------------- -------------- --------------
Operating income (loss)......................................... 2,912,000 (16,762,000) (16,364,000)
Interest expense (including $91,000 (1994), $61,000 (1995) and
$323,000 (1996) from related parties) Notes 5 and 7).......... (281,000) (241,000) (448,000)
Interest income (including $81,000 (1994), $85,000 (1995) and
$98,000 (1996) from a related party) (Note 7)................. 264,000 941,000 907,000
-------------- -------------- --------------
Net income (loss)............................................... $ 2,895,000 $ (16,062,000) $ (15,905,000)
-------------- -------------- --------------
-------------- -------------- --------------
Net income (loss) per share..................................... $.30 $(1.23) $(1.12)
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average number of shares outstanding................... 9,494,000 13,025,000 14,169,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
F-16
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------------ PAID-IN (DEFICIT)
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------ ---------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993........... 6,383,000 $ 64,000 $ 10,256,000 $ (28,826,000) $ (18,506,000)
Additional capital contribution...... -- -- 33,661,000 -- 33,661,000
Distribution......................... -- -- -- (3,300,000) (3,300,000)
Reclassification of Subchapter S
retained deficit................... -- -- (32,126,000) 32,126,000 --
Issuance of Common Stock in initial
public offering.................... 3,692,000 37,000 29,647,000 -- 29,684,000
Net income........................... -- -- -- 2,895,000 2,895,000
------------ ---------- -------------- -------------- --------------
Balance at December 31, 1994........... 10,075,000 101,000 41,438,000 2,895,000 44,434,000
Issuance of Common Stock in public
offering........................... 3,000,000 30,000 23,315,000 -- 23,345,000
Net loss............................. -- -- -- (16,062,000) (16,062,000)
------------ ---------- -------------- -------------- --------------
Balance at December 31, 1995........... 13,075,000 131,000 64,753,000 (13,167,000) 51,717,000
Repurchase of Common Stock, with
certain redemption features.......... -- -- 795,000 -- 795,000
Net loss............................. -- -- -- (15,905,000) (15,905,000)
------------ ---------- -------------- -------------- --------------
Balance at December 31, 1996........... 13,075,000 $ 131,000 $ 65,548,000 $ (29,072,000) $ 36,607,000
------------ ---------- -------------- -------------- --------------
------------ ---------- -------------- -------------- --------------
</TABLE>
See accompanying notes.
F-17
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996
--------------- --------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................. $ 2,895,000 $ (16,062,000) $ (15,905,000)
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation................................................. 402,000 731,000 1,251,000
Amortization of unearned compensation........................ 1,250,000 650,000 1,076,000
Amortization of film costs................................... 94,246,000 200,591,000 129,843,000
Changes in operating assets and liabilities:
Accounts receivable........................................ (20,074,000) 12,939,000 (3,356,000)
Accounts receivable, related parties....................... (704,000) 267,000 (198,000)
Film costs additions....................................... (202,965,000) (137,520,000) (73,454,000)
Other assets............................................... (2,577,000) 227,000 (158,000)
Accounts payable and accrued interest...................... 2,223,000 (1,219,000) 298,000
Accrued residuals and participations....................... 7,925,000 311,000 4,264,000
Deferred revenue........................................... 10,406,000 15,285,000 (22,223,000)
--------------- --------------- --------------
Net cash (used in) provided by operating activities............ (106,973,000) 76,200,000 21,438,000
INVESTING ACTIVITIES
Purchase of property and equipment............................. (1,402,000) (2,434,000) (587,000)
--------------- --------------- --------------
Net cash used in investing activities.......................... (1,402,000) (2,434,000) (587,000)
FINANCING ACTIVITIES
Increase in loans payable...................................... 140,748,000 77,380,000 37,899,000
Payments on loans payable...................................... (69,622,000) (146,709,000) (73,451,000)
Decrease (Increase) in restricted cash......................... 500,000 -- (5,654,000)
Increase in notes and amounts payable to related parties....... 20,496,000 16,291,000 19,493,000
Payments on notes and amounts payable to related parties....... (12,106,000) (16,906,000) (795,000)
Proceeds from public offering.................................. 29,684,000 23,345,000 --
Payments on capital lease obligations.......................... -- -- (811,000)
--------------- --------------- --------------
Net cash provided by (used in) financing activities............ 109,700,000 (46,599,000) (23,319,000)
--------------- --------------- --------------
Increase (Decrease) in cash.................................... 1,325,000 27,167,000 (2,468,000)
Cash and cash equivalents at beginning of year................. 1,340,000 2,665,000 29,832,000
--------------- --------------- --------------
Cash and cash equivalents at end of year....................... $ 2,665,000 $ 29,832,000 $ 27,364,000
--------------- --------------- --------------
--------------- --------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized)......................... $ -- $ -- $ 808,000
--------------- --------------- --------------
--------------- --------------- --------------
Income taxes................................................. $ 2,000 $ 60,000 $ 23,000
--------------- --------------- --------------
--------------- --------------- --------------
</TABLE>
F-18
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NONCASH OPERATING AND FINANCING ACTIVITIES
1994:
Notes and amounts payable to related parties decreased by $33,661,000 and
additional paid-in capital increased by $33,661,000 due to a capital
contribution by Mr. Vajna, Valdina Corporation N.V. (Valdina) and Valdi
Corporation N.V. (Valdi) (See Note 1).
Notes and amounts payable to related parties increased by $3,300,000 and
retained deficit decreased by $3,300,000 due to a distribution to Valdina (see
Note 1).
Two executive officers and a law firm engaged by the Company purchased an
aggregate of 1,117,000 shares of Common Stock of the Company in exchange for
three notes totaling $1,350,000 (see Note 9).
1995:
In 1995, a term loan of $7,500,000 and accrued interest amounting to
$585,000 for one motion picture was canceled as consideration for the Company's
sale to Buena Vista Pictures Distribution, Inc. (BVPD) of an equity interest in
the picture.
During 1995, the Company and BVPD mutually agreed to reduce a term loan from
BVPD relating to one motion picture by $4,655,000 by offsetting the present
value of certain funds due to the Company from BVPD.
1996:
In December 1996, the Company repurchased 372,341 shares of Common Stock of
the Company from a former executive officer through the forgiveness of a note
and accrued interest due from the former executive officer amounting to
$531,000.
During 1996, the Company and BVPD mutually agreed to reduce a term loan from
BVPD relating to one motion picture by $575,000 by offsetting certain funds due
to the Company from BVPD.
During 1996, the Company entered into a capital lease agreement for special
effects equipment amounting to approximately $1,102,000 (see Note 10).
See accompanying notes.
F-19
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BASIS OF FINANCIAL STATEMENT PRESENTATION AND ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Cinergi Pictures Entertainment Inc. and subsidiaries (the Company). The Company
is engaged in the business of developing, financing, producing and licensing
feature-length motion pictures worldwide. All significant intercompany balances
and transactions have been eliminated.
In January 1994, Andrew G. Vajna, Chairman of the Board of Directors,
President and Chief Executive Officer of the Company, contributed to the Company
all of the Common Stock of certain domestic corporations which were previously
100% owned by Mr. Vajna. Further, in January 1994, the Company acquired all the
outstanding Common Stock of the foreign corporation from Valdina, a company
indirectly beneficially owned 49.9% by Mr. Vajna, in consideration for 18 shares
(pre-split) of Company Common Stock and a note in the principal amount of
$3,300,000 (of which $600,000 in principal amount was paid) at 6% due January
17, 1995. The maturity date of the note was subsequently extended until July 17,
1996, from which date the promissory note was due on demand until January 17,
1997 and is currently due and payable in its entirety. The note bears interest
at the rate of 7% per annum after January 17, 1996. At December 31, 1995 and
1996, accrued interest relating to this obligation amounted to $396,000 and
$655,000, respectively.
Mr. Vajna has entered into an employment agreement with the Company for a
five year term commencing January 1, 1994, pursuant to which he will receive
base compensation of $1,000,000 per year. In addition, Mr. Vajna may also
receive commencement fees and producer's performance fees with respect to motion
pictures produced by the Company.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenues in accordance with the provisions of
Statement of Financial Accounting Standards (FAS) No. 53. Minimum guaranteed
amounts from theatrical exhibition and revenues from home video, television and
pay television license agreements are recognized when the applicable license
period begins for each motion picture and such motion picture is made available
to the distributor for exploitation pursuant to the terms of the applicable
license agreement. Amounts in excess of the minimum guarantee under such license
agreements and other amounts (where no minimum guarantee was given) are
recognized when earned. Accounts receivable represent amounts due from domestic
and international distributors. Cash collected in advance of the time of
availability is recorded as deferred revenue.
F-20
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Once completed, a typical theatrical film will generally be made available
for licensing as follows:
<TABLE>
<CAPTION>
MONTHS
AFTERINITIAL
DOMESTIC
THEATRICAL APPROXIMATE
MARKETPLACE RELEASE RELEASE PERIOD
- -------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Domestic theatrical..................................... 4 - 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.
FILM COSTS
Costs incurred in connection with the acquisition of story rights, the
development of stories, production, print and advertising costs (which benefit
future periods) and allocable interest and production overhead are capitalized
as film costs. Film costs are stated at the lower of cost or net realizable
value. The individual film forecast method is used to amortize film costs. Costs
accumulated in the production of a film are amortized in the proportion that
gross revenues realized bear to management's estimate of the total gross
revenues expected to be received. Estimated liabilities for residuals and
participations are accrued as the Company amortizes film cost inventories and
expensed in the same manner as film cost inventories. Revenue estimates on a
film-by-film basis are reviewed periodically by management and are revised, if
warranted, based upon management's appraisal of current market conditions.
Unamortized film costs are written down to net realizable value based on this
appraisal, where applicable.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost and are depreciated or amortized
over their estimated useful lives (which range from 5 to 10 years) using the
following methods:
<TABLE>
<S> <C>
Double declining
Editing equipment.................................. balance
Double declining
Office furniture and equipment..................... balance
Double declining
Computer equipment................................. balance
Computer software.................................. Straight-line
Vehicles........................................... Straight-line
Leasehold improvements............................. Straight-line
Special effects equipment.......................... Straight-line
</TABLE>
F-21
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company records its income tax provision in accordance with Statement of
Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes."
Deferred income taxes are provided on transactions which are reported in the
financial statements in different periods than they are for income tax purposes.
NET INCOME (LOSS) PER COMMON SHARE
The per share data are based on the weighted average number of common and
common share equivalents outstanding during the period. Common Stock with
certain redemption features are considered common share equivalents. Stock
options and warrants are considered common share equivalents if dilutive. Fully
diluted amounts for each period do not materially differ from the amounts
presented herein.
FOREIGN CURRENCY TRANSLATION
All of the Company's transactions are expressed in U.S. dollars.
CONCENTRATION OF CREDIT RISKS AND CASH EQUIVALENTS
The Company licenses various rights in its motion pictures to distributors
throughout the world. Generally, upon the Company's delivery of the picture to
the distributor, the minimum guarantee is received in full. In most instances,
letters of credit secure the payment of minimum guarantees from international
distributors prior to delivery.
The Company places its temporary cash investments with high credit quality
financial institutions and mutual funds. Generally, the investments made mature
within 30 days and therefore are subject to little risk. The Company has not
incurred any losses related to these investments.
As of December 31, 1995 and 1996, the Company had no significant
concentration of credit risk.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1996, the carrying value of the Company's financial
instruments, which consist primarily of loans payable, approximates the fair
value thereof.
RESTRICTED CASH
At December 31, 1996, restricted cash represents cash collections made by
the Company on behalf of BVPD (see Note 10) and cash subject to restrictions
relating to film production in connection with the Company's distribution
agreement with BVPD.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting
for Stock Based Compensation", encourages, but does not require companies to
recognize expense for stock-based awards based on their fair value on the date
of grant. The Company has elected to continue to account for its stock
compensation arrangements under the provision of APB 25, "Accounting for Stock
Issued to Employees."
F-22
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accordingly, compensation expense for stock compensation arrangements" is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount the recipient of the stock award
must pay to acquire the stock. If the Company measured compensation expense
using the fair value method prescribed in FAS 123, there would be no material
impact on reported net loss or loss per share.
3. FILM COSTS
Film costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1996
---------------- ------------
<S> <C> <C>
Released, less amortization............................... $ 101,238,000(1) $ 52,077,000
Completed, not released................................... -- 37,025,000
In production............................................. 53,545,000 9,373,000
Development............................................... 5,973,000 5,317,000
---------------- ------------
$ 160,756,000 $103,792,000
---------------- ------------
---------------- ------------
</TABLE>
- ------------------------
(1) Includes approximately $43 million in connection with the motion picture
"Nixon", which was released in December 1995 for which no revenues were
recognized in 1995.
Interest capitalized into film costs during the years ended December 31,
1995 and 1996 totaled $10,865,000 and $6,156,000, respectively. Based on the
Company's estimate of future revenues, approximately 92% of unamortized released
film costs at December 31, 1996 will be amortized during the three years ending
December 31, 1999.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Editing equipment................................................. $ 130,000 $ 130,000
Office furniture and equipment.................................... 765,000 769,000
Computer equipment and software................................... 371,000 433,000
Vehicles.......................................................... 260,000 260,000
Leasehold improvements............................................ 932,000 932,000
Special effects equipment, including $1,102,000 in equipment under
capital lease (1996)............................................ 3,555,000 5,179,000
------------ ------------
6,013,000 7,703,000
Less accumulated depreciation and amortization.................... 1,632,000 2,884,000
------------ ------------
$ 4,381,000 $ 4,819,000
------------ ------------
------------ ------------
</TABLE>
F-23
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
5. LOANS PAYABLE
The Company entered into a Credit, Security, Pledge and Guaranty Agreement
dated as of August 16, 1994 with Chase Manhattan Bank (Chase) and a syndicate of
lenders (collectively, the Lenders) which provides the Company with a revolving
credit facility initially in the amount of $150,000,000, but which has been
reduced to $50,000,000 on March 31, 1997 (the Credit Facility). Under the Credit
Facility, the Lenders have committed to make loans available until August 31,
1997, although the Lenders will continue to make loans to finance any motion
picture in which principal photography has commenced or that has otherwise
satisfied certain conditions prior to such date. The Credit Facility, which is
secured by substantially all of the assets of the Company (including $5,000,000
of "key man" life insurance on Mr. Vajna), matures on February 28, 1999. The
amount available under the Credit Facility for borrowing at any time is limited
in accordance with a formula based upon the value of collateral in the Company's
borrowing base as defined in the agreement. As of December 31, 1995 and 1996,
approximately $41,578,000 and $6,026,000, respectively, in borrowings were
outstanding under the Credit Facility. The interest rate payable to Lenders on
borrowings under the Credit Facility is selected by the Company as either (i)
1.5% above the London Interbank Offering Rate (LIBOR) (5.5% at December 31,
1996) in effect from time to time for one, two, three or six months (if
available as determined by Chase) as selected by the Company, or (ii) a rate
equal to the greatest of the prime rate (8.25% at December 31, 1996) plus 0.5%,
the base CD rate (5.55% at December 31, 1996) plus 1.5% and the federal funds
rate (6.26% at December 31, 1996) plus 1%, as such rates are in effect from time
to time. Interest is payable quarterly. The commitment fee on the average daily
unused portion of the commitment is 3/8 of one percent per annum. The Credit
Facility also requires the Company to meet certain financial ratios. At December
31, 1996, the Company is not in compliance with three covenants under the Credit
Facility (the minimum consolidated net worth covenant, the limitation on capital
expenditures and the limitation on unallocated overhead costs) and is therefore
in default under the Credit Facility. The Company intends to seek waivers of
such defaults from the lenders under the Credit Facility, however, there can be
no assurance that lenders under the Credit Facility will grant such waivers. If
the lenders were to accelerate the amounts outstanding under the Credit Facility
as a result of such defaults, such acceleration would also constitute a default
under the Company's term loan agreements with BVPD described below. The Company,
however, believes that it currently has sufficient resources to satisfy the
amounts outstanding under the Credit Facility in the event the lenders were to
accelerate the amounts outstanding thereunder as a result of such defaults. The
Credit Facility restricts the Company's ability to declare and pay dividends.
6. FEE INCOME
On November 24, 1992, the Company and The Summit Group (M.E.V.) N.V.
(Summit) entered into a sales agency agreement, collection agency agreement and
a consulting services agreement (collectively, the Sovereign Agreement) with
Sovereign Pictures, Inc. (Sovereign) whereby the Company agreed to perform
certain services for Sovereign for a fee. Such services consisted of sale of
product, collection of accounts receivable, and resolution of Sovereign
liabilities. The Company and Summit agreed to share all fees earned equally. The
term of the agreement is for 15 years. The Company earned fees totaling
$511,000, $298,000 and $60,000 for the years ended December 31, 1994, 1995 and
1996, respectively, in connection with the Sovereign Agreement.
F-24
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
7. RELATED PARTY TRANSACTIONS
The Company incurred air charter expenses from Airborne Charter Inc. (ACI),
a company owned 100% by Mr. Vajna, amounting to $1,199,000, $747,000 and
$229,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Of
such amounts, the Company capitalized to film costs $1,199,000 (1994), $580,000
(1995) and $226,000 (1996). A liability in connection with unpaid air charter
expenses of $195,000 to ACI was included in notes and amounts payable to related
parties at December 31, 1995.
Mr. Vajna also received financial planning, legal and related services from
the Company on terms approved by the Company's Audit Committee.
The Company had notes payable to Mr. Vajna aggregating $24,126,000 at
December 31, 1993. The notes bore interest at 10% and were payable on demand.
Such funds were used to fund operations and development of motion picture
properties. On January 17, 1994, Mr. Vajna contributed $21,126,000 of such
amount to equity which resulted in a balance of $3,000,000 at December 31, 1994.
In December 1995, the Company paid Mr. Vajna the full amount of the note and
related accrued interest.
During 1995 and 1996, the Company entered into term loan agreements with
BVPD to finance three motion pictures. The maximum amount to be borrowed is
based upon a certain percentage of each production budget. Each loan bears
interest at the prime rate in effect from time to time (8.25% at December 31,
1996) plus 1.5% and shall be repaid with accrued interest on or before the
earlier of (i) four years after the loan proceeds are first made available to
the Company or (ii) three years after the initial domestic theatrical release of
such picture. The loans are secured by certain distribution rights of the
Company and one of the loans is also guaranteed by Mr. Vajna. In 1995, a term
loan of $7,500,000 and accrued interest amounting to $585,000 for one motion
picture was canceled as consideration for the Company's sale to BVPD of an
equity interest in the picture. As additional consideration to BVPD for its
purchase of an equity interest in this picture, the Company also assigned to
BVPD substantially all of its profit participation in another motion picture.
During 1995, the Company and BVPD mutually agreed to reduce a term loan from
BVPD relating to one motion picture by $4,655,000 by offsetting the present
value of certain funds due to the Company from BVPD. In 1996, the Company and
BVPD mutually agreed to reduce a term loan from BVPD relating to one motion
picture by $575,000 by offsetting certain funds due to the Company from BVPD. At
December 31, 1995 and 1996, the aggregate principal loan balances including
accrued interest were $26,314,000 and $36,564,000, respectively. In connection
with the Company's decision to produce Evita, the Company became obligated to
pay the development costs previously expensed on such project by certain
partners, including $3,900,000 by Disney. Such amount will be offset against
obligations of Disney to the Company.
Interest expense incurred by the Company in connection with these
obligations amounted to $1,849,000, $2,844,000 and $2,882,000 in 1994, 1995 and
1996, respectively. Of such amounts $1,758,000, $2,783,000 and $2,797,000 were
capitalized to film costs, respectively.
The Company has a nonqualified deferred compensation plan in which one key
officer participates. Such obligation at December 31, 1995 and December 31, 1996
was $1,230,000 and $1,475,000, respectively (which includes bonuses or partial
bonuses of $150,000 and $75,000 for the years ended December 31, 1995 and 1996,
respectively).
The Company leases office space from Mr. Vajna under an agreement which
expired on April 30, 1996 (see Note 10).
F-25
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
7. RELATED PARTY TRANSACTIONS (CONTINUED)
R. Timothy O'Donnell, a Director of the Company, is the President of
Jefferson Capital Group, Ltd. (Jefferson Capital), a privately-held investment
banking group, which provided financial advisory services to the Company in
connection with the issuance of common stock in the initial public offering
(Offering) and the sale of common stock to BVPD. In connection therewith, the
Company reimbursed Jefferson Capital's expenses amounting to $20,000, paid
Jefferson Capital a $150,000 fee and issued a warrant to purchase 50,000 shares
of Common Stock, expiring in June 1999, at an exercise price per share equal to
$9.00, the initial public offering price. Jefferson Capital was retained by the
Company in 1996 to assist the Company in its strategic review. In connection
therewith, the Company paid Jefferson Capital a retainer of $75,000 and
reimbursed Jefferson Capital's expenses amounting to $13,000. In the event the
Film Library Sale or other dispositions of assets or similar transactions are
consummated, Jefferson Capital will also be entitled to additional fees based
upon the size of such transactions.
In 1994, the Company sold a previously written off project to BVPD for the
Company's costs in the project of approximately $4,145,000.
Ziffren, Brittenham & Branca (Ziffren), a law firm of which a director is a
partner, received an annual retainer of $250,000 for each of the years ended
December 31, 1994 and 1995 in connection with legal services rendered for the
Company. For the year ended December 31, 1996, Ziffren was paid $156,000.
The Company had noninterest bearing receivables of $100,000 and $50,000 from
executive officers at December 31, 1995 and December 31, 1996, respectively, and
at those respective dates had additional noninterest bearing receivables of
$197,000 and $246,000, respectively, from Mr. Vajna and other entities owned or
partially owned by Mr. Vajna. In 1994, an additional loan amounting to $250,000
was made to a key officer bearing interest at 7% due December 31, 1996. Such
loan and noninterest bearing receivable were paid on January 2, 1997 pursuant to
an amendment to such key officer's employment agreement. Interest receivable
amounting to $135,000 and $81,000 was outstanding at December 31, 1995 and 1996,
respectively, from two executive officers and Ziffren. Further, at December 31,
1996, a noninterest bearing advance of $18,000 was due from a key officer.
The Company entered into an agreement with Twentieth Century Fox for the
production of "Die Hard, With a Vengeance." The Company granted Buena Vista
International, Inc. (BVI), an affiliate of BVPD, certain distribution rights in
such motion picture in certain foreign territories (including Belgium, France,
Germany, the United Kingdom, Spain, Latin America, Scandinavia, Taiwan,
Switzerland, Portugal and Greece) for an aggregate of $23,200,000 in advances to
be paid upon delivery of such picture to BVI. Such amount was recognized as
revenue in 1995.
In order to assist the Company in obtaining financing for and completion
bonds on the pictures "Die Hard, With a Vengeance," "Judge Dredd" and "The
Scarlet Letter," Valdi entered into a Reimbursement and Term Loan Agreement
(Letter of Credit Facility) dated as of August 16, 1994 whereby Valdi undertook
to have letters of credit issued for the benefit of Chase in an amount not to
exceed $22,044,000 to provide additional collateral for the Company's Credit
Facility with respect to the financing of the pictures listed above. The Letter
of Credit Facility and the letter of credit provided thereunder expired on
November 15, 1995 without any monies having been drawn thereunder. There is no
obligation on the part of any stockholder or affiliate of the Company to
guarantee borrowings under the Credit Facility or any other future loan obtained
by the Company or to enter into any future arrangements similar to the Letter of
Credit Facility.
F-26
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
7. RELATED PARTY TRANSACTIONS (CONTINUED)
In consideration for providing the Letter of Credit Facility, the Company
agreed to pay Valdi a one time facility fee of $110,220 and a utilization fee.
As no amounts were drawn under the Letter of Credit Facility prior to its
expiration, no utilization fees were paid to Valdi.
Valdi beneficially owns approximately 84.7% of Intercom KFT ("Intercom"), a
distributor of motion pictures in Hungary to which the Company licenses
Hungarian distribution rights to its motion pictures in various media. The
Company and Intercom have an agreement in principle for an output agreement for
the Hungarian distribution of all of the Company's films, beginning with
"Nixon." The agreement in principle provides for a distribution fee to Intercom
of 17.5% of the gross receipts of Intercom from distribution of such films plus
reimbursement of distribution expenses. During the Company's fiscal year ended
December 31, 1996, Intercom received distribution fees of approximately $189,000
with respect to this distribution arrangement with the Company. In addition,
Intercom has assisted the Company by paying to the Hungarian tax authorities on
behalf of the Company value added taxes incurred by the Company in connection
with its distribution of films through its Hungarian subsidiary, Cinergi
Productions KFT ("CPKFT"). Intercom subsequently files for and receives the
refund of such taxes. During 1996, the Company paid Intercom approximately
$349,000 representing the aggregate accrued interest on amounts advanced by
Intercom to the Hungarian tax authorities from the date of payment of each such
advance until receipt by Intercom of the applicable refund and Intercom's out of
pocket costs incurred in connection with Intercom's activities on behalf of the
Company in 1996 and in prior years.
8. INCOME TAXES
The components of pretax income (loss) for the Company are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
------------ -------------- --------------
<S> <C> <C> <C>
Domestic....................................... $ (394,000) $ (16,062,000) $ (15,905,000)
International.................................. 3,289,000 -- --
------------ -------------- --------------
$ 2,895,000 $ (16,062,000) $ (15,905,000)
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
Current and noncurrent deferred income taxes generally reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the
F-27
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
8. INCOME TAXES (CONTINUED)
amounts used for income tax purposes. Significant components of the Company's
current and noncurrent deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Current and noncurrent deferred tax liabilities:
Film costs................................................... $ 6,904,000 $ 6,813,000
Amortization of film costs................................... 27,075,000 23,457,000
------------- -------------
33,979,000 30,270,000
Current and noncurrent deferred tax assets:
Accruals not currently deductible............................ 1,091,000 1,381,000
Deferred revenues............................................ 25,835,000 17,815,000
Net operating loss carryover................................. 12,915,000 22,574,000
Other........................................................ 38,000 38,000
------------- -------------
39,879,000 41,808,000
Valuation allowance............................................ (5,900,000) (11,538,000)
------------- -------------
33,979,000 30,270,000
------------- -------------
Net deferred tax............................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
A reconciliation of income tax computed at the statutory federal income tax
rate to income tax expenses for the Company is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Provision assuming federal income tax rate of 35%.............. $ (5,622,000) $ (5,567,000)
Effect of net operating loss for which no benefit was
received..................................................... 5,622,000 5,567,000
Non-deductible items without tax benefit and other............. -- --
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
At December 31, 1996, the Company had a federal net operating loss carryover
of approximately $59,406,000 which expires in 2011.
9. STOCKHOLDERS' EQUITY
On January 1, 1994, two executive officers of the Company and Ziffren each
purchased 372,341 shares of Common Stock from the Company. The two executive
officers and Ziffren are hereafter referred to as "Purchasers."
Each Purchaser acquired the Common Stock in exchange for payment of the
aggregate par value of such shares (pre-split) in cash and a full recourse
promissory note in the amount of $450,000 (approximately $1.21 per share of
Common Stock). The principal of each note is payable to the Company on December
31, 1998 or upon the earlier termination of Purchaser's relationship with the
Company. Each
F-28
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
9. STOCKHOLDERS' EQUITY (CONTINUED)
promissory note accrues interest at the rate of 6% per annum, payable annually,
and is secured by a pledge of all of the Common Stock so purchased by the
Purchaser. The Company paid on behalf of each of the executive officers $300,000
in 1994 and $130,000 in 1995, to assist them in discharging federal and state
income taxes relating to the stock purchase transaction.
Each of the Purchasers has granted to Mr. Vajna the right to vote the Common
Stock purchased pursuant to an irrevocable proxy which continues during such
Purchaser's ownership of the shares for the maximum period permitted by
applicable law. Each of the Purchasers also received certain "piggyback"
registration rights which, with certain exceptions, require the Company to use
its best efforts to include in any of the Company's registration statements any
shares requested by such Purchaser to be so included. The Purchaser will pay all
expenses directly incurred on its behalf in connection with such registration.
Until January 1, 1997, the Company was obligated to repurchase the Common
Stock purchased by each Purchaser, except for vested shares, at the original
purchase price if such Purchaser's relationship with the Company terminated for
any reason other than death, disability or discharge without cause. Until such
date, such shares could not be transferred to third parties. For one executive
officer and Ziffren, one-third of the shares vested free of such restrictions
for each full year of continued employment from and after December 31, 1993 (or,
in the case of Ziffren, the continued engagement of Ziffren by the Company for
each full year from and after December 31, 1993). For the other executive
officer (Other Executive Officer), two-thirds of the shares vested as of
December 31, 1995, and the remaining balance vested monthly until the Other
Executive Officer resigned in August 1996 (see below). Also, in the case of the
executive officers, all shares of the Common Stock were to vest upon their
death, disability or discharge without cause.
On December 30, 1996 the Company repurchased the 372,341 shares held by the
Other Executive Officer. The 51,714 shares of the Common Stock held by the other
executive officer that were not vested at the time of resignation were
repurchased at the original purchase price (approximately $1.21 per share) by
reducing the aggregate balance due under the Other Executive Officer's
promissory note to the Company by approximately $62,500. In consideration for
the sale to the Company of the remaining 320,627 shares, the Company canceled
the remaining balance of the Other Executive Officer's promissory note of
approximately $468,000 (after the $62,500 reduction).
The aggregate difference between the fair value of the Common Stock
purchased on January 1, 1994 and the $1.21 consideration given per share was
$3,750,000 and was recognized as expense using the straight-line method over the
vesting period of the related shares. The promissory notes amounting to
$1,350,000 and $900,000 at December 31, 1995 and 1996, respectively, have been
netted against Common Stock with certain redemption features in the balance
sheet.
In January 1997, the shares held by Ziffren were repurchased by the Company
and the Company cancelled the promissory note from Ziffren amounting to
$450,000.
The Preferred Stock is issuable in one or more series by the Board of
Directors which may fix, among other things, the designation of and number of
shares to comprise each series and the relative rights, preferences and
privileges of shares of each series, including the dividends payable thereon,
voting rights, conversion rights, the price and terms on which shares may be
redeemed, the amounts payable upon such shares in the event of voluntary or
involuntary liquidation and any sinking fund provisions for redemption of
purchases of such shares. The Board of Directors, without stockholder approval,
may issue Preferred
F-29
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
9. STOCKHOLDERS' EQUITY (CONTINUED)
Stock with voting and/or conversion rights which could adversely affect the
voting power of the holders of the Common Stock, or which could be used as a
defensive measure in connection with an attempted hostile takeover of the
Company.
Such shares could be privately placed with purchasers who might align
themselves with the Board of Directors in opposing a hostile takeover bid. In
addition, the Board could authorize holders of a series of Preferred Stock to
vote as a class, either separately or with the holders of Common Stock, on any
merger, sale or exchange of assets by the Company or any other extraordinary
corporate transaction. The Board could also issue Preferred Stock having terms
that could discourage an acquisition attempt or other transaction that some
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock. Although the Company has no present intention to
issue any shares of Preferred Stock, there can be no assurance that the Company
will not do so in the future.
10. COMMITMENTS AND CONTINGENCIES
The Company has employment contracts with Mr. Vajna and one of its key
officers with the longest term extending through 1999. Collectively, these
agreements provide for minimum annual compensation of approximately $1,500,000
that can be increased for incentives based on the Company's achieving specified
levels of earnings or the receipt of specific revenues attributable to the
commencement of production and distribution of its motion pictures. Pursuant to
an amendment to the agreement with the key officer dated January 1, 1997, the
key officer received a signing bonus of $600,000, of which $300,000 was used to
fully repay two loans previously made by the Company (see Note 7). In addition,
Mr. Vajna is entitled to receive additional amounts payable solely out of the
revenues of each picture produced after January 1, 1993 after "actual
breakeven," as defined in his employment agreement with the Company.
At December 31, 1995 and 1996, the Company had commitments totaling
$1,985,000 and $3,205,000 (excluding amounts to Mr. Stone (see below)),
respectively in connection with motion picture projects in development and
certain other assets.
The Company has leases for certain equipment and office space which expire
through 1998. The Company leases its office space from Mr. Vajna under an
agreement which expired in 1996. Since such expiration, the Company has been
leasing its office space from Mr. Vajna on a month-to-month basis. Rent expense
paid in connection with this lease amounted to $462,000 for each of the years
ended December 31, 1994, 1995 and 1996. Total rent expense for the years ended
December 31, 1994, 1995 and 1996 was $581,000, $702,000 and $868,000,
respectively. Of such amounts, the Company capitalized to film costs $508,000
(1994), $497,000 (1995) and $383,000 (1996). Future minimum payments under
noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 82,000
1998.............................................................. 30,000
Thereafter........................................................ --
---------
$ 112,000
---------
---------
</TABLE>
During 1996, the Company entered into a one year capital lease for certain
special effects equipment. Such lease, which expires in March 1997, includes an
option to purchase the leased equipment for
F-30
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
$153,000. Future minimum lease payments under this capital lease amount to
$291,000. Amortization of assets recorded under this lease is included in
depreciation expense.
In 1990, the Company entered into a distribution agreement and certain
related agreements with BVPD (collectively, the BVPD Agreement) whereby BVPD
agreed to distribute certain motion pictures produced by the Company in the
United States and its possessions, Canada and Latin America. At December 31,
1995 and 1996, $44,949,000 and $29,582,000, respectively, in advances had been
recorded as deferred revenue in connection with the BVPD Agreement. The advances
for each motion picture bear interest at the Bank of America prime rate (8.25%
at December 31, 1996) plus 1.5%.
In connection with an April 1994 amendment of the BVPD Agreement, the
Company granted BVPD a warrant to purchase 150,000 shares of the Company's
Common Stock at an exercise price equal to $9.00 per share, the initial public
offering price, expiring in June 1999. BVPD also purchased concurrently with the
Offering at $9.00 per share, the initial public offering price, 555,556 shares
of Common Stock for approximately $5,000,000.
The Company and each of its domestic subsidiaries have been S Corporations
from their incorporation through the tax year ended December 31, 1993. As a
result, the Company and its domestic subsidiaries were not subject to federal
income taxes and were subject to a reduced rate of state income taxes through
that date. In addition, due to the S Corporation elections, the Company and its
domestic subsidiaries have no net operating loss carryforwards for federal and
state tax purposes for years prior to 1994. Rather, taxable income and loss of
the Company for 1993 and prior years was included in the computation of the
taxable income or loss of Mr. Vajna, the Company's sole stockholder during those
years. Effective January 1, 1994, the Company and each of the domestic
subsidiaries revoked their S Corporation elections. The Company therefore
expects that it will be subject to federal and state corporate income tax in
1994 and future tax years.
The corporate income tax returns of the Company for its 1990, 1991, 1992 and
1993 fiscal years are currently under audit by the Internal Revenue Service
(IRS) and California Franchise Tax Board, and returns for the 1993 and 1994
fiscal years remain open to audit. The Company anticipates no federal tax
liability and only minimal, if any, California tax liability as a result of any
income tax audits for pre-1994 years because of the S Corporation election in
effect for such years. In the absence of the agreement described below, Mr.
Vajna, the sole stockholder of the Company during such period, and not the
Company would be responsible for any tax liability assessed as a result of such
audits of pre-1994 years.
The Company received approximately $20,000,000 of advances (the Advances)
during the fiscal year ended December 31, 1993. The Advances were received in
connection with motion pictures that were released during the fiscal year ending
December 31, 1994. Consistent with its financial accounting for the Advances and
prior tax reporting practices, the Company did not include Advances in its 1993
taxable income, and instead included such amounts - and deducted the related
costs - in computing its taxable income for the year in which the underlying
motion pictures were released, in this case 1994. It is possible, however, that
the IRS will challenge the Company's tax treatment of the Advances, and if the
IRS were successful in that challenge, the Company would be required to include
the Advances in the computation of its 1993 taxable income without an offsetting
deduction in 1993 for costs associated with those motion pictures. As a result
of the S Corporation election then in effect, such an adjustment (an Adjustment)
to the Company's 1993 taxable income would cause a corresponding increase in the
taxable income of
F-31
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Mr. Vajna and, therefore, a significant increase in Mr. Vajna's tax liability
for 1993. However, if the Company has cumulative taxable income in 1994 through
1997 (exclusive of the Advances), it would obtain a benefit from the Adjustment
in the form of a reduction in its 1994 taxable income and related tax liability
as it would not be required to include the Advances in its 1994 taxable income.
Therefore, should Mr. Vajna's tax liability for 1993 increase as a result of
the Adjustment (i.e., acceleration of 1994 income into 1993) and only if the
Company does have cumulative taxable income in 1994 through 1997 (exclusive of
the Advances) and thereby obtains a corresponding decrease in its tax liability,
the Company has agreed to reimburse Mr. Vajna for the increase in his 1993
income tax liability. For purposes of calculating cumulative taxable income for
the period 1994 through 1997, the effect of any post-1997 net operating loss
carrybacks will not be taken into account.
In order to allow the reimbursement, if required, to be paid to Mr. Vajna
under tax free provisions of the tax law, the Company paid $10,000,000 to Mr.
Vajna in June 1994. Mr. Vajna loaned the Company $10,000,000 to assist in
funding the distribution.
From January 1, 1994 through December 31, 1996, the Company had a cumulative
taxable loss (treating income relating to the Advances as taxable income in
1994) in excess of $20,000,000.
Should the Company not receive the tax benefit as described above, the
Company may offset the $10,000,000 loan payable to Mr. Vajna against a
receivable from Mr. Vajna created to reflect the possibility that the Company
will not get such benefit. Pursuant to the legal right of offset, such loan
payable and corresponding receivable will be netted against one another for
financial reporting purposes.
In 1995, the Company completed a transaction structured as a sale-leaseback
with respect to its motion picture "Judge Dredd." The Company sold its interest
in "Judge Dredd" to British corporation Lloyds Commercial Leasing Ltd. and
concurrently leased the film back pursuant to a 12 year lease. The Company
retained approximately $3,000,000 of the sale proceeds (after payment of related
expenses) and placed the remainder of the sale proceeds (an amount sufficient to
satisfy the anticipated aggregate lease payments over the term of the lease
assuming certain adjustments do not occur) on deposit with ABN AMRO Bank (the
ABN Bank) to be used as security for a guaranty of the lease payments issued by
the ABN Bank. The amount retained by the Company reduced unamortized film costs.
Under the original terms of such transaction, depending on the level of the UK
corporate tax rate over various time periods, the Company could have been liable
for additional lease payments or entitled to a return of a portion of the amount
on account at the ABN Bank. In October 1996, the parties to such transaction
agreed to amend the terms of such transaction to eliminate the adjustments for
changes in the UK corporate tax rate. As a result, in October 1996, $1,388,000
(net of related fees) of the funds on account at the ABN Bank were returned to
the Company.
In 1996, the Company also completed a sale-leaseback transaction with
respect to its motion picture "Evita." The Company sold its interest in "Evita"
to Lloyds General Leasing Limited (Lloyds General) and concurrently leased the
film back pursuant to a 15 year lease. The Company retained approximately
$5,769,000 of the sale proceeds (after payment of related expenses) and placed
the remainder of the sale proceeds (an amount sufficient to satisfy the
anticipated aggregate lease payments over the term of the lease assuming certain
adjustments do not occur) on deposit with the ABN Bank to be used as security
for a guaranty of the lease payments issued by the ABN Bank. The amount retained
by the Company reduced unamortized film costs. The sale-leaseback transactions
with respect to "Judge Dredd" and "Evita" may be
F-32
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
unwound by Lloyds General in certain circumstances relating to British tax
treatment of the transactions, and the Company could be liable for certain
unwind costs which could be substantial, although based upon Lloyds General's
discussion with British taxing authorities prior to the respective transactions,
the Company believes it unlikely the transactions will be unwound. Pursuant to
the Library Sale Agreement (see Note 12), Disney has agreed, upon consummation
of the Film Library Sale, to either acquire the Company's subsidiaries that are
the lessees in such sale-leaseback transactions or assume all of such
subsidiaries rights and obligations under such leases; however, the Company
would remain responsible for any of the foregoing unwind costs.
In December 1995, the U.S. Attorney for the Central District of California
served subpoenas (Subpoenas) on the Company relating to a grand jury
investigation of federal tax aspects of various transactions involving Andrew G.
Vajna, President, Chief Executive Officer and Chairman of the Board of Directors
of the Company, and certain other persons and entities (the Investigation). The
Company believes the Investigation is focusing primarily on (i) the 1988 and
1989 personal tax returns of Mr. Vajna and the tax returns of certain other
persons and entities, and (ii) the ongoing audits of Mr. Vajna's tax returns
since 1990 by the Internal Revenue Service. The Company has not been identified
by the U.S. Attorney as being a target of the Investigation; however, there can
be no assurance that the Company's status will not change in the future. The
Company engaged counsel to represent it in connection with the Investigation and
is in the process of responding to the Subpoenas. Given the uncertainty of the
Investigation, there is currently no basis upon which to estimate the impact, if
any, the Investigation may have on the Company.
Pursuant to Article Tenth of the Company's Restated Certificate of
Incorporation, Article V of the Company's Bylaws, indemnity agreements entered
into between the Company and certain of its officers and directors, and the
provisions of Section 145 of the Delaware General Corporation Law, the Company
is advancing the expenses of certain of its employees, officers and directors
other than Mr. Vajna (Indemnitees) which they may incur in connection with the
Investigation. The Indemnitees have undertaken to reimburse the Company for
their expenses if it is ultimately determined that they are not entitled to be
indemnified. In addition, Mr. Vajna has undertaken to reimburse the Company
under certain circumstances with respect to the expenses of the Indemnitees.
Given the current uncertainty regarding the scope and duration of the
Investigation and the amount of expenses which may be incurred by the
Indemnitees in connection with the Investigation, there is no basis upon which
to estimate the financial impact which the foregoing may have on the Company.
In connection with the Investigation, the Company has determined to advance
the expenses of the Indemnitees which the Indemnitees may incur in connection
with the Investigation. As of December 31, 1996, the Company had advanced an
aggregate of $154,000 on behalf of the Indemnitees.
In February 1997, the Company ceased production on one of its motion
pictures after commencement of principal photography. The Company is currently
in discussions with certain parties involved in the production of "Broadway
Brawler" regarding settlement of various obligations in connection therewith
including, among other things, debt incurred under the Credit Facility in
connection with production of the film (approximately $8.3 million at March 31,
1997) and advances (approximately $3 million at March 31, 1997) received from
BVPD as part of funding production (repayment of which is guaranteed in both
cases by the completion guarantor for the film), as well as shutdown costs and
other commitments made in connection with production of the film (approximately
$4.7 million at March 31, 1997). The completion
F-33
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
guarantor for "Broadway Brawler" guaranteed completion and delivery of a motion
picture containing certain essential elements. As the motion picture could not
be completed with such essential elements, the completion guarantor is required
to pay an amount equal to the amount loaned by the Lenders and advanced by BVPD
to make the motion picture and such additional amounts as were required to
complete delivery of the motion picture and which had been committed prior to
the shut down. Management of the Company believes, although no assurances can be
given, that a settlement of the obligations relating to "Broadway Brawler" will
be reached. In the event a settlement is not reached, management believes a
substantial portion of any obligations the Company might otherwise have with
respect to "Broadway Brawler" will be borne by the completion guarantor.
The Company had an output agreement in France with Le Film Office ("LFO")
(which expired after the delivery of "Evita"). Pursuant to the output agreement
with LFO, a $3,071,000 advance was payable to the Company upon delivery of "The
Shadow Conspiracy" to LFO. On August 27, 1996, LFO filed for and obtained a
temporary restraining order in California Superior Court in Los Angeles,
California (the "Court"), restraining the Company, Summit (the international
sales company handling the international distribution of "The Shadow
Conspiracy") and Chase (one of the lenders under the Company's Credit Facility),
from drawing down the letter of credit securing LFO's advance on the basis of
LFO's allegations that the Company failed to give proper notice to LFO for
extending the delivery date of "The Shadow Conspiracy". On September 20, 1996,
the Court issued a preliminary injunction against the Company, Summit and Chase.
The parties agreed to stay the Court proceedings and submit the dispute to
binding arbitration by the American Film Marketing Association, as required by
the output agreement. However, LFO filed a motion with the Court seeking to
dismiss the arbitration and proceed with the litigation in Court. On April 10,
1997, such motion was denied by the Court. An arbitration hearing is scheduled
for April 17, 1997. The Company believes that LFO's allegations are without
merit and intends to defend them vigorously. In light of the disappointing
domestic box office performance of "The Shadow Conspiracy" and the adverse
publicity generated in France by LFO's refusing to accept delivery of "The
Shadow Conspiracy", in the event the Company does not prevail in the
arbitration, it believes that it will be difficult to obtain alternative
distribution of "The Shadow Conspiracy" in France. In addition, even if an
alternative distribution arrangement is obtained, it is unlikely any such
arrangement will provide for an advance on delivery or otherwise be on terms as
advantageous as those under the Company's output agreement with LFO.
Accordingly, if the Company does not prevail in the arbitration, the Company
could be required to write down the carrying value of the film by an amount
equal to the difference between the amount of LFO advance not received and
amounts actually received by the Company pursuant to alternative distribution
arrangements, if any.
Trial is scheduled for August 11, 1997, in Los Angeles Superior Court, in a
lawsuit by Laurence Fishburne and the LOA Productions, Inc., Mr. Fishburne's
loan-out corporation, against the Company, a subsidiary of the Company and
Randolph M. Paul, Senior Vice President, Business Affairs and a Director of the
Company. The action, for breach of oral contract, fraud and deceit, and civil
conspiracy and declaratory relief, was originally filed on July 11, 1994. The
plaintiffs claim that the Company entered into an oral contract for Mr.
Fishburne to appear in the motion picture, "Die Hard, with a Vengeance," but
repudiated the contract the following day. On September 4, 1994, the Company
successfully demurred to all of the plaintiffs' causes of action except the
breach of contract claim, and on November 29, 1994, the Company successfully
demurred to an amended complaint for bad faith denial of existence of contract.
On December 29, 1994, the Company and the other defendants answered the First
Amended Complaint for
F-34
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
breach of contract, fraud and deceit and civil conspiracy. Summary adjudication
has been obtained in favor of Mr. Vajna, who was named as an additional
defendant in the original complaint. Plaintiffs are claiming damages of
$1,750,000, representing the fixed compensation to which they alleged they are
entitled, additional compensatory damages of up to $350,000 and general and
punitive damages. The Company believes it has meritorious defenses and is
defending the action vigorously.
The Company has a "first-look" arrangement with Oliver Stone and certain of
his affiliated entities pursuant to which Mr. Stone submits to the Company all
theatrical motion picture projects owned or controlled by Mr. Stone for the
Company's development and consideration of possible production and, as
consideration for Mr. Stone's submitting such projects to the Company, the
Company pays certain amounts annually to Mr. Stone for overhead and development.
Disney has reimbursed the Company for all amounts paid to Mr. Stone ($2,685,000
in 1996); however, pursuant to the Library Sale Agreement, the Company will be
responsible for all future payments due to Mr. Stone for the duration of the
arrangement, which expires February 10, 1998. The Company currently estimates
the payments due under Mr. Stone's agreement during such period will be
approximately $1,875,000.
In 1996, the Company and Hollywood Pictures Company (HPC), as subsidiary of
The Walt Disney Company, entered into a Financing and Distribution Agreement
whereby the Company is financially obligated to pay to HPC the lesser of 50% of
the cost of the motion picture tentatively entitled "Deep Rising" or
$22,500,000, in exchange for (i) a 50% equity participation in such motion
picture and (ii) a sales fee for international distribution of such motion
picture. In connection with the Library Sale Agreement (see Note 12), upon
consummation of the Film Library Sale, the Company will no longer be obligated
to pay the latter amount, will relinquish the equity participation and sales
fee, and will no longer serve as sales agent with respect to such motion
picture. At December 31, 1996, the Company had an obligation to BVPD in
connection with this arrangement amounting to $3,675,000.
The Company is a party to various other legal proceedings arising in the
ordinary course of its business. The Company does not currently believe that any
such proceedings will have a material adverse effect on the Company's operations
or financial condition.
11. STOCK OPTION PLANS
In 1994, the Company adopted two stock option plans. The Basic Stock Option
and Stock Appreciation Rights Plan (the Basic Plan) is for regular full-time
employees, directors and consultants. The Special Stock Option and Stock
Appreciation Rights Plan (the Special Plan) is for certain key or highly
compensated employees and is designed to provide alternative procedures for
meeting special requirements imposed by federal income tax law in connection
with making grants to certain key or highly compensated employees. Furthermore,
grants of options or stock appreciation rights (SARs) under the Special Plan
will reduce the maximum amount of options and SARs that can be issued in the
aggregate and to the recipient under the Basic Plan. Both the Basic Plan and the
Special Plan provide for the grant of "incentive stock options" (ISOs) and
"nonqualified stock options" (NSOs) to acquire the Company's Common Stock, as
well as SARs entitling the recipient on exercise to receive payment of increases
in the market value of the Company's Common Stock from the date of grant to the
date of exercise. ISOs may only be issued to employees of the Company and its
subsidiaries, whereas NSOs and SARs may be issued to employees and other
persons. The maximum number of shares subject to the Basic Plan and the Special
F-35
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
11. STOCK OPTION PLANS (CONTINUED)
Plan are 500,000 and both plans by their terms will expire on December 31, 2003
unless terminated sooner by the Company.
On October 28, 1994, the Company's compensation committee, which consisted
of two outside Directors of the Company adopted a program for the cancellation
of certain options granted under the Basic Plan and Special Plan prior to such
date (the Reissuance Date) and the reissuance of new options for the same number
of shares for which the old options could have been exercised with exercise
prices equal to the closing price of the Company's Common Stock on the
Reissuance Date.
A summary of stock option activity under all plans relating to certain
employees and other persons who provide services to the Company is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE
SHARES PRICE
--------- -----------------
<S> <C> <C>
Balance at January 1, 1994....................................... -- $ --
Granted.......................................................... 78,350(1) 7.26
--------- -----
Balance at December 31, 1994..................................... 78,350 7.26
Granted.......................................................... 129,000(2) 3.96
Canceled......................................................... (8,350) 6.73
--------- -----
Balance at December 31, 1995..................................... 199,000 $ 5.14
Granted.......................................................... 66,000(3) 2.00
Canceled......................................................... (10,500) 4.17
--------- -----
Balance at December 31, 1996..................................... 254,500 $ 4.37
--------- -----
--------- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Exercisable..................................................... 78,350 98,334 128,660
Weighted Average Exercise Price................................. $ 7.26 $ 6.43 $ 5.45
</TABLE>
- ------------------------
(1) These options fully vested on the date of grant.
(2) Options relating to 1994 service vest one-third on the date of grant,
one-third one year after the date of grant, and one-third two years after
the date of grant. Options relating to 1995 service vest one-third one year
after the date of grant, one-third two years after the date of grant, and
one-third three years after the date of grant. Certain options granted under
the Special Plan vest in full on the date of grant.
(3) These options vest one-third one year after the date of grant, one-third two
years after the date of grant, and one-third three years after the date of
grant.
F-36
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
11. STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------ OPTIONS EXERCISABLE
NUMBER WEIGHTED- ------------------------
OUTSTANDING AVERAGE WEIGHTED- WEIGHTED-
AT REMAINING AVERAGE AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE 1996 LIFE PRICE EXERCISABLE PRICE
- ------------------------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$2.00......................... 66,000 9.9 years $ 2.00 15,000 $ 2.00
3.88......................... 109,500 9.0 years 3.88 40,540 3.88
4.88......................... 10,000 8.9 years 4.88 10,000 4.88
6.63......................... 10,000 7.9 years 6.63 10,000 6.63
6.88......................... 29,000 7.8 years 6.88 23,120 6.88
8.00......................... 30,000 2.3 years 8.00 30,000 8.00
</TABLE>
At December 31, 1996, 1995 and 1994, 78,350, 199,000 and 254,500 shares of
Common Stock were reserved for future issuance under the Basic Plan and Special
Plan. Options to purchase 421,650 (1994), 301,000 (1995) and 245,000 (1996) were
available for grant under the Basic Plan and Special Plan.
12. SUBSEQUENT EVENTS
On April 3, 1997, the Company entered into a Purchase and Sale agreement
(the "Library Sale Agreement") with Walt Disney Pictures and Television, a
subsidiary of The Walt Disney Company, to sell to Walt Disney Pictures and
Television substantially all of the films in the Company's motion picture
library and certain other assets (referred to herein as the "Film Library Sale";
"Disney" is used herein to refer to Walt Disney Pictures and Television and/or
its affiliates, including The Walt Disney Company, as applicable). In exchange
for the assets being sold to Disney, Disney has agreed to relinquish its equity
interest in the Company (555,556 shares of the Company's Common Stock and a
warrant to purchase 150,000 shares of the Company's Common Stock at an exercise
price of $9.00 per share) and cancel its outstanding loans and outstanding
interest to the Company (approximately $36,654,000 as of December 31, 1996). In
addition, Disney has agreed to assume with respect to the films and rights
therein being sold to Disney all residuals and participation obligations, as
well as all scheduled obligations relating to the Company's existing
exploitation agreements. Disney has also agreed to assume the outstanding debt
under the Company's credit facility relating to the soon to be completed "An
Alan Smithee Film," (one of the films included in the Film Library Sale) up to a
maximum amount of $10,000,000 (which the Company anticipates will not be
exceeded), and the Company has agreed to transfer to Disney all minimum
guarantee payments and any overages paid or to be paid with respect to such
film.
The film library being sold to Disney includes primarily all of the
Company's rights (except minimum guarantee payments for films other than "An
Alan Smithee Film") to the following eleven motion pictures: "Medicine Man,"
"Tombstone," "Renaissance Man," "Color of Night," "Judge Dredd," "The Scarlet
Letter," "Nixon," "Evita" (excluding soundtrack rights, which will be retained
by the Company), "Amanda," "The Shadow Conspiracy," and "An Alan Smithee Film."
Disney will also retain overages otherwise payable to the Company by Disney
after January 1, 1997 with respect to certain distribution rights to "Die Hard,
With a Vengeance" previously licensed to Disney. In addition, upon consummation
of
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<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
12. SUBSEQUENT EVENTS (CONTINUED)
the Film Library Sale, the Company's twenty-five film domestic distribution
arrangement with BVPD, under which nine films have been delivered, will be
terminated.
The Film Library Sale is subject to numerous conditions, including, among
other things, completion of certain due diligence by Disney, expiration of any
applicable Hart-Scott-Rodino waiting period, and the approval of the Company's
stockholders. The Library Sale Agreement and related Film Library Sale may also
be terminated by the Company or Disney in certain circumstances, including,
among other things, upon failure to consummate the Film Library Sale by
September 15, 1997. Management of the Company (including Chairman of the Board
and Chief Executive Officer, Andrew G. Vajna), which owns approximately 43.7% of
the outstanding Common Stock of the Company, has agreed to vote its shares in
favor of the transaction in accordance with the terms of the Library Sale
Agreement.
On April 3, 1997, the Company also announced that it does not presently
intend to commence production on any additional motion pictures (although the
Library Sale Agreement does not preclude the Company, pending consummation of
the Film Library Sale, from commencing production on films that would not be
distributed by Disney) and that it is in the process of considering its
alternatives assuming consummation of the Film Library Sale to Disney. Such
alternatives include disposing of those assets which are not being sold to
Disney, in one or a series of transactions.
Not included in the Film Library Sale to Disney are the Company's slate of
approximately forty development projects, the Company's visual effects facility,
and Cinergi's rights in "Die Hard, With a Vengeance" (which the company owns
with Twentieth Century Fox which controls the sequel rights to the film).
13. GEOGRAPHICAL INFORMATION
The Company's operations are principally developing, financing, producing
and licensing feature-length motion pictures worldwide. In 1994, the Company
earned revenues from one significant customer of approximately $43,207,000
(40%). In 1995, the Company earned revenues from two significant customers of
approximately $57,808,000 (30%) and $44,053,000 (23%). In 1996, the Company
earned revenues from two significant customers of approximately $43,454,000
(33%) and $12,937,000 (10%).
Export revenues by geographic area are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Europe....................................... $ 45,200,000 $ 72,648,000 $ 41,964,000
Asia......................................... 16,248,000 51,970,000 19,377,000
South America................................ 4,058,000 3,813,000 4,428,000
Other........................................ 4,373,000 9,897,000 4,927,000
-------------- -------------- -------------
Total export revenue......................... $ 109,028,000 $ 192,880,000 $ 70,696,000
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
F-38
<PAGE>
CINERGI PICTURES ENTERTAINMENT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Certain quarterly financial information is presented below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(1)(2) YEAR
------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1995:
Revenues......................... $ 12,706,000 $ 50,960,000 $ 51,528,000 $ 77,686,000 $ 192,880,000
Gross profit (loss).............. 905,000 (8,936,000) (8,162,000) 4,529,000 (11,664,000)
Operating income (loss).......... 336,000 (9,756,000) (9,217,000) 1,875,000 (16,762,000)
Net income (loss)................ 233,000 (9,435,000) (9,059,000) 2,199,000 (16,062,000)
Net income (loss) per share...... .02 (.76) (.64) .15 (1.23)
1996:
Revenues......................... $ 37,116,000 $ 22,467,000 $ 30,189,000 $ 43,228,000 $ 133,000,000
Gross profit (loss).............. 781,000 391,000 1,646,000 (9,430,000) (6,612,000)
Operating income (loss).......... (695,000) (1,012,000) (465,000) (14,192,000) (16,364,000)
Net income (loss)................ (637,000) (716,000) (294,000) (14,258,000) (15,905,000)
Net income (loss) per share...... (.04) (.05) (.02) (1.01) (1.12)
</TABLE>
- ------------------------
(1) In the fourth quarter of 1995, the Company revised its revenue and certain
cost estimates related to released films, the effect of which decreased the
net income in the quarter ended December 31, 1995, by approximately
$3,700,000.
(2) In the fourth quarter of 1996, the Company revised its revenue and certain
cost estimates related to released films, the effect of which decreased the
net income in the quarter ended December 31, 1996, by approximately
$5,964,000.
F-39
<PAGE>
APPENDIX A
THE FOLLOWING COMPOSITE PURCHASE AND SALE AGREEMENT IS A COMPOSITE OF (I)
THE PURCHASE AND SALE AGREEMENT, DATED APRIL 3, 1997, AS ORIGINALLY ENTERED INTO
BETWEEN THE COMPANY, A SUBSIDIARY OF THE COMPANY AND DISNEY, AND (II) TWO
AMENDMENTS TO SUCH PURCHASE AND SALE AGREEMENT. THE PURCHASE AND SALE AGREEMENT,
DATED APRIL 3, 1997, WAS FILED AS EXHIBIT 2.1 TO THE COMPANY'S CURRENT REPORT ON
FORM 8-K, DATED APRIL 3, 1997, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON APRIL 4, 1997, THE FIRST AMENDMENT TO PURCHASE AND SALE AGREEMENT, DATED AS
OF AUGUST 26, 1997, WAS FILED AS EXHIBIT 2.2 TO THE COMPANY'S CURRENT REPORT ON
FORM 8-K DATED AUGUST 25, 1997, FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON SEPTEMBER 5, 1997, AND THE SECOND AMENDMENT TO PURCHASE AND SALE
AGREEMENT WAS FILED AS EXHIBIT 2.4 TO THE COMPANY'S QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997. THE COMPANY WILL PROVIDE WITHOUT
CHARGE TO EACH STOCKHOLDER TO WHOM A COPY OF THIS PROXY STATEMENT HAS BEEN
DELIVERED, ON WRITTEN OR ORAL REQUEST, A COPY OF THE PURCHASE AND SALE AGREEMENT
AND EACH OF THE AMENDMENTS THERETO (NOT INCLUDING ANY EXHIBITS OR SCHEDULES
OTHER THAN THOSE INCLUDED HEREIN WITH THE COMPOSITE PURCHASE AND SALE
AGREEMENT). REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO: CINERGI PICTURES
ENTERTAINMENT INC., ATTENTION: SECRETARY, 2308 BROADWAY, SANTA MONICA,
CALIFORNIA 90404 (TELEPHONE NUMBER: 310-315-6000).
COMPOSITE
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT (the "AGREEMENT") is made and entered into
this 3rd day of April, 1997, by and between Cinergi Pictures Entertainment Inc.,
a Delaware corporation, f/k/a Cinergi Productions, Inc. ("CINERGI") and Cinergi
Productions N.V. Inc., a Delaware corporation (collectively, "SELLER"), and Walt
Disney Pictures and Television, a California corporation ("BUYER").
RECITALS
A. WHEREAS, Seller owns or has other rights with respect to the Assets (as
such term is defined on Schedule A hereto, together with certain other
capitalized terms), including without limitation the Pictures listed on Exhibit
A hereto.
B. WHEREAS, Buyer is willing to purchase all of Seller's right, title and
interest in, to and under the Assets, and Seller is willing to sell such right,
title and interest, all on the terms and conditions set forth herein.
NOW, THEREFORE, based on the above premises and in consideration of the
mutual covenants and agreements contained herein, the parties agree as follows:
1. Agreement to Purchase and Sell.
1.1 Acquisition. On the terms and subject to the conditions of this
Agreement, on the Closing Date, Seller shall sell to Buyer, and Buyer shall
purchase from Seller, the following assets (collectively, the "ASSETS"):
(a) All of Seller's right, title and interest of every kind and
nature whatsoever in, to and under the Film Assets, including, without
limitation:
(i) Subject only to the Existing Third Party Exploitation
Rights, the sole and exclusive right, commencing on the Closing Date
and continuing in perpetuity, to Exploit the Film Assets, including
without limitation the right to exercise all Exploitation rights in
and to the Pictures;
(ii) All Physical Properties;
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(iii) All rights and remedies (including, without limitation, the
benefit of all representations, warranties, indemnifications and
other covenants) under the Existing Exploitation Agreements and all
other agreements with respect to the Assets;
(iv) All Accounts Receivable;
(v) All rights pursuant to that certain Letter Agreement dated
as of August 1, 1994 by and between Cinergi Productions N.V. Inc. and
Buena Vista International, Inc. (the "BVI DIE HARD DISTRIBUTION
AGREEMENT") in and to the motion picture entitled "DIE HARD III" in
all media and in all territories, during the twenty-five (25) year
term of the BVI Die Hard Distribution Agreement, including without
limitation, all of Seller's rights to payments thereunder (the "BVI
DIE HARD RIGHTS");
(b) At Buyer's election, either (a) stock of J.D. Distribution Inc.
and E.P. Distribution Inc., or (b) an assignment and assumption by Buyer,
or an entity or entities designated by Buyer, of J.D. Distribution Inc.'s
and E.P. Distribution Inc.'s rights and obligations under the
sale/leaseback agreements, provided that Buyer notifies Seller of its
election prior to the Closing Date;
(c) All monies received by Seller for "DEEP RISING" a/k/a "TENTACLES"
and all cash held in the "DEEP RISING" a/k/a "TENTACLES" account (the
"TENTACLES ACCOUNT"); and
(d) Rights to fund and acquire rights in and to the motion picture
development project presently entitled "SMOKE AND MIRRORS", which rights
are subject to Section 2.12 below (the "SMOKE PROJECT").
1.2 Closing.
(a) Time and Place. The closing (the "CLOSING") of the Transaction
shall take place at the offices of Buyer within five (5) business days
after the last consent or approval required for either Seller or Buyer to
consummate the Transaction is received by Seller or Buyer, as applicable,
or at such other time and place as to which the parties agree (the
"CLOSING DATE"); provided, however, that if the Closing has not occurred
on or before December 24, 1997, either party may terminate this Agreement
and the transactions contemplated by this Agreement unless extended to
accommodate an Alternative Transaction pursuant to the terms of Section
5.8.
1.3 Transfer. At the Closing, Seller shall transfer the Assets to
Buyer in accordance with this Agreement.
1.4 Allocation of Consideration; Sales Tax. (a) Buyer will allocate
the Purchase Price among the Assets and provide Seller with a copy of such
allocation. The parties agree (i) to report the Transaction for federal,
state, local and other tax purposes in accordance with such allocation and
(ii) not to take any position inconsistent with such allocation on its tax
return without the written consent of the other. Buyer shall be responsible
for all sales, use, transfer, stamp and similar taxes, if any, incurred as a
result of this Agreement and the consummation of the Transaction.
(b) If Buyer elects to acquire the stock of a subsidiary of Seller
pursuant to Section 1.1(b), (i) Seller shall join Buyer in making (x) the
elections provided for in Section 338(g) and Section 338(b)(10) of the
Code with respect to Seller and (y) such other similar elections as may
be necessary to achieve substantially the same results to the parties for
state and local income or franchise tax purposes (collectively, the "338
ELECTIONS"); (ii) Seller and Buyer shall comply fully with all filing and
other requirements necessary to effectuate the 338 Elections on a timely
basis and agree to cooperate in good faith with each other in the
preparation and timely filing of any tax returns required to be filed in
connection with the making of the 338 Elections, including the exchange
of information and the joint preparation and filing of Form 8023 and
related schedules; and (iii) any income, deduction, gain or loss
recognized as a result of, and in accordance with, the 338 Elections
shall be included in the consolidated federal income tax return of Seller
(and the
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<PAGE>
consolidated, combined or unitary state or local income or franchise tax
return of Seller) for its taxable period that includes the Closing Date.
2. Consideration and General Terms.
2.1 Consideration. The consideration for the sale of the Assets
hereunder shall be the consideration provided for in Sections 2.2, 2.3, 2.4,
2.5 and 2.6 below.
2.2 Assumption of Certain Liabilities. Buyer will assume, pay and
perform only the following obligations and liabilities of Seller arising in
connection with the Film Assets: (a) the outstanding principal and interest
as of the Closing Date on the loans made to Seller by Buyer or any Affiliate
of Buyer relating to the motion pictures "COLOR OF NIGHT", "SCARLET LETTER",
"NIXON", "EVITA" and "SHADOW CONSPIRACY" (the "DISNEY LOANS"); (b) all Guild
Obligations (other than Guild Obligations arising from or related to the
production of the Pictures ("EXCLUDED GUILD OBLIGATIONS")) arising in
connection with the Exploitation of the Pictures arising prior to or after
the Closing Date and all Participation Obligations relating to the Pictures
arising prior to or after the Closing Date; provided that Buyer's
Participation Obligations with respect to the motion picture entitled "DIE
HARD III" shall be limited to Buyer's and/or Buyer's Affiliate's Pro Rata
Share of the Participation Obligations arising only from Buyer's or Buyer's
Affiliate's exercise of Buyer's or Buyer's Affiliate's rights under the BVI
Die Hard Distribution Agreement as described in Section 2.13 below, and
Buyer's Guild Obligations with respect to the motion picture entitled "DIE
HARD III" shall be limited to the Guild Obligations arising from Buyer's or
Buyer's Affiliate's exploitation of its rights under the BVI Die Hard
Distribution Agreement; and (c) those certain obligations pursuant to
Existing Exploitation Agreements that are to be performed in accordance with
the terms of such Existing Exploitation Agreements on or after the Closing
Date, but only if such obligations are specifically listed on Schedule 2.2
attached hereto. Buyer shall not assume and shall not be liable for any
other liabilities or obligations except as expressly set forth in the
preceding sentence, including without limitation the following excluded
liabilities (collectively, the "EXCLUDED LIABILITIES"): (1) any claims
against Seller or any obligations or liabilities of Seller (including,
without limitation, all claims, obligations and liabilities relating to the
claims described on Schedule 3.14 attached hereto) which arise from facts,
circumstances, conditions, actions or failures to take actions existing or
occurring prior to the Closing Date regardless of whether any suit, claim or
proceeding related thereto was commenced prior to the Closing Date, other
than the liabilities assumed in (a), (b) or (c) above (for the avoidance of
any doubt, Buyer shall not assume and shall not be liable for any obligation
to pay any amounts whatsoever to Laurence Fishburne or The LAO Productions,
Inc., or any successor in interest or person or entity claiming through
them, in connection with any claims brought by such parties or on their
behalf against Seller or any Seller Affiliate, including without limitation
the existing lawsuit brought by Laurence Fishburne and The LAO Productions,
Inc. against Seller, Andrew Vajna and Randolph Paul in the Superior Court of
California, Los Angeles County, Case No. SC 031787, in connection with the
motion picture entitled "DIE HARD III"); (2) any claims against Seller or
Seller's Affiliates or any obligations or liabilities of Seller or Seller's
Affiliates arising from or related to the Evita Warner Bros. Soundtrack
Rights or arising under the Evita Warner Bros. Soundtrack Agreement, in
either case, whether or not such obligations and liabilities arise before or
after the Closing Date; (3) any obligations or liabilities to the
shareholders of Seller, in their capacities as shareholders, whether or not
such obligations and liabilities arise before or after the Closing Date; (4)
any obligation to pay any amounts whatsoever to any licensee/lessee under an
Exploitation Agreement, or to repay or refund to any licensee/lessee under
an Exploitation Agreement any amounts previously paid to or on behalf of
Seller or any Seller's Affiliate or paid to or on behalf of any other
licensor/lessor under an Exploitation Agreement, including, without
limitation, minimum guarantee payments, except where the obligation to make
any such payment to any licensee/lessee constitute damages directly
attributable to Buyer's failure to perform an obligation assumed by Buyer
pursuant to Section 2.2(c) above; and, notwithstanding the foregoing, Buyer
shall be obligated to pay or refund amounts received from licensees/lessees
under
A-3
<PAGE>
Exploitation Agreements in connection with the motion pictures entitled "UP
CLOSE AND PERSONAL" and "DEEP RISING" a/k/a "TENTACLES" if and only to the
extent that (i) such amounts were actually received by Buyer and (ii) such
repayment obligation arises because the cost of production of such motion
picture is less than the amount stated in the relevant Exploitation
Agreement as the cost of production for such motion picture; (5) any
obligations or liabilities under any so-called "output" distribution
agreements with respect to any motion pictures other than obligations under
Existing Exploitation Agreements with respect to the Pictures listed on
Exhibit A hereto and then only to the extent such obligations are assumed by
Buyer pursuant to Section 2.2(c) above; (6) any Excluded Guild Obligations;
and (7) any obligations or liabilities for unpaid compensation for services
rendered or rights granted and/or any other production costs incurred in
connection with the Assets other than obligations or liabilities for unpaid
compensation for services rendered or rights granted and/or any other
production costs incurred in connection with the motion pictures entitled
"UP CLOSE AND PERSONAL" and "DEEP RISING" a/k/a "TENTACLES".
2.3 Non Disturbance. Buyer will not interfere with the rights of
existing licensees under Existing Exploitation Agreements, including without
limitation all rights of access in and to the Physical Properties. However,
if any such licensees are in default under Existing Exploitation Agreements,
Buyer reserves the right to exercise any of Seller's rights and remedies
pursuant to such Existing Exploitation Agreements.
2.4 Termination of Distribution Agreements and Sales Agency Agreements;
Audit Rights. Except as expressly set forth in this Agreement, all of
Buyer's and Buyer's Affiliates' respective rights, obligations and
liabilities and all of Seller's rights, and Seller's obligations and
liabilities arising after the Closing Date, under the distribution and sales
agency agreements set forth on Schedule 2.4 attached hereto shall terminate
on the Closing Date including without limitation (i) all of Seller's audit
rights (except with respect to the Smoke Project) or claims for payments
thereunder whether arising prior to or following the Closing Date; (ii) all
of Buyer's audit rights except with respect to the following motion
pictures: "DEEP RISING" a/k/a "TENTACLES", and "UP CLOSE AND PERSONAL"; and
(iii) all of Seller's and Summit's rights to receive any sales agency or
distribution fees or other compensation thereunder. Notwithstanding any
termination of the distribution agreements or sales agency agreements listed
on Schedule 2.4 hereto, (x) Seller shall remain responsible for the
production, completion and delivery of and the payment of all expenses
necessary to produce, complete and deliver "AN ALAN SMITHEE FILM" except for
such costs and expenses, if any, which Buyer's Affiliate is responsible for
pursuant to existing agreements and (y) Buyer and Buyer's Affiliates shall
retain all rights and Seller shall remain obligated and liable for any
breach of any representation, warranty or covenant by Seller existing on or
prior to the Closing Date and any indemnification relating thereto under the
distribution agreements set forth on Schedule 2.4. As of the date of this
Agreement, Buyer does not have any knowledge of any breach by Seller of any
representation, warranty or covenant under the distribution agreements
listed on Schedule 2.4; provided, however, this sentence shall not be
interpreted as a waiver by either Buyer or Buyer's Affiliates of any rights
either Buyer or Buyer's Affiliates may have if in fact Seller has breached
or does breach said representations, warranties or covenants.
2.5 Termination of Loan Agreements and Guarantees. Any and all loan
documents, including without limitation that certain Letter Agreement dated
July 13, 1990, as amended, between Buena Vista Pictures Distribution, Inc.
and Seller or Seller's Affiliates and that certain Letter Agreement dated
April 8, 1994, as amended, between Buena Vista Pictures Distribution, Inc.
and Seller (collectively, the "MASTER LOAN AGREEMENTS"), guarantees and all
security interests related thereto entered into or granted in connection
with the Disney Loans shall terminate on the Closing Date and Buyer shall
execute and deliver to Seller any and all documents necessary to effectuate
such termination.
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<PAGE>
2.6 Surrender of Stock. At the Closing, Buyer shall transfer, or shall
cause Buyer's Affiliates to transfer, to Seller all shares of, and all
warrants with respect to, common stock in Cinergi owned by Buyer or Buyer's
Affiliates as of the date hereof (the "CINERGI STOCK").
2.7 "Eaters of the Dead". Neither Seller nor any of Seller's
Affiliates nor any of their respective employees, agents or representatives
(including, without limitation, Andrew Vajna) shall be entitled to any
compensation or other payment of any kind or nature (including, without
limitation, reimbursement of development costs, producer fees or contingent
compensation) in connection with the motion picture presently entitled
"EATERS OF THE DEAD", and all such amounts shall be retained by Buyer or
Buyer's Affiliates. Andrew Vajna shall, however, be entitled to an executive
producer credit for the motion picture "EATERS OF THE DEAD", if produced,
pursuant to that certain agreement between Buyer and Seller dated as of July
3, 1996. Seller acknowledges that Buyer owns and shall own all rights in and
to the motion picture project entitled "EATERS OF THE DEAD" and all
derivative works based thereon, including without limitation, any resulting
motion picture, and accordingly, any and all payments of any kind that
Seller might receive in connection with such motion picture shall be held in
trust for Buyer and shall be immediately paid to Buyer. Buyer agrees to
indemnify and hold harmless Seller for any Losses it incurs with respect to
such motion picture other than Losses for any claims caused by any actions
or inactions of Seller, and, if "EATERS OF THE DEAD" is produced, financed
and/or distributed by Buyer and/or any Buyer Affiliate, Seller and Andrew
Vajna shall be covered as additional insureds on Buyer's or Buyer's
Affiliates' errors and omissions insurance policy in effect for the motion
picture entitled "EATERS OF THE DEAD". Subsequent to the Closing, except as
otherwise set forth in this Agreement, neither party shall have any further
obligations to the other party with respect to this motion picture.
2.8 "Deep Rising" a/k/a "Tentacles". Seller acknowledges that Buyer
owns all rights in and to the motion picture entitled "DEEP RISING" a/k/a
"TENTACLES", including without limitation any rights that Seller may have to
receive payments of any kind, whether in the form of minimum guarantees,
license fees, sales agency fees, distribution fees or otherwise, from
sub-distributors or any other party with respect to such motion picture, and
accordingly, any and all payments of any kind that Seller might receive in
connection with such motion picture shall be held in trust for Buyer and
shall be immediately paid to Buyer. Buyer agrees to indemnify and hold
harmless Seller for any Losses it incurs with respect to such motion picture
other than Losses for any claims caused by any actions or inactions of
Seller, and Seller shall be covered as an additional insured on Buyer's or
Buyer's Affiliates' errors and omissions insurance policy in effect for the
motion picture entitled "DEEP RISING" a/k/a "TENTACLES". Subsequent to the
Closing, except as otherwise set forth in this Agreement, neither party
shall have any further obligations to the other party with respect to this
motion picture, including without limitation, pursuant to that unsigned
Financing and Distribution Agreement dated as of April 22, 1996.
2.9 "Up Close and Personal". Seller acknowledges that Buyer owns all
rights in and to the motion picture entitled "UP CLOSE AND PERSONAL",
including without limitation any rights that Seller may have to receive
payments of any kind, whether in the form of minimum guarantees, license
fees, sales agency fees, distribution fees or otherwise, from
sub-distributors or any other party with respect to such motion picture, and
accordingly, any and all payments of any kind that Seller might receive in
connection with such motion picture shall be held in trust for Buyer and
shall be immediately paid to Buyer. Buyer agrees to indemnify and hold
harmless Seller for any Losses it incurs with respect to such motion picture
other than Losses for any claims caused by any actions or inactions of
Seller, and Seller shall be covered as an additional insured on Buyer's or
Buyer's Affiliates' errors and omissions insurance policy in effect for the
motion picture entitled "UP CLOSE AND PERSONAL". Subsequent to the Closing,
except as otherwise set forth in this Agreement, neither party shall have
any further obligations to the other party, and Buyer shall have no further
obligations to Summit, with respect to
A-5
<PAGE>
this motion picture, including without limitation, pursuant to that certain
letter dated May 19, 1994 from Buyer's Affiliate to Seller.
2.10 Oliver Stone Reimbursement Obligations. Buyer shall be entitled
to recoup all monies advanced by Buyer or Buyer's Affiliates for the
"Overhead", the "Producer Advance" and the "Development Fund" referred to in
that certain unsigned letter agreement dated as of August 1, 1995, by and
between Seller and Buena Vista Pictures Distribution, Inc. (the
"BUYER/SELLER STONE AGREEMENT") as set forth in, and in accordance with, the
Buyer/Seller Stone Agreement, except as Buyer's or Buyer's Affiliates'
recoupment rights are modified by this Section 2.10. Seller shall, prior to
the Closing, grant to Buyer first priority security interest(s) and
mortgage(s) of copyright in those Oliver Stone projects for which monies
from the Development Fund were or are expended, which security interest(s)
and mortgage(s) of copyright (a) shall secure Buyer's recoupment rights
regarding the "Development Fund" under the Buyer/Seller Stone Agreement and
hereunder; and (b) shall be released on a project by project basis by Buyer
upon Buyer's recoupment of all monies advanced from the "Development Fund"
(plus interest) for the applicable project by Buyer or Buyer's Affiliates.
For purposes of this Section 2.10, the terms "Overhead", "Producer Advance"
and "Development Fund" shall have the same meaning as set forth in the
Buyer/Seller Stone Agreement. Seller shall not terminate or amend the "First
Look Deal" defined and referred to in the Buyer/Seller Stone Agreement in
any way that would have a material adverse effect on Buyer's or Buyer's
Affiliates' rights under this Section 2.10 without the prior written consent
of Buyer. Notwithstanding Buyer's or Buyer's Affiliates' recoupment rights
under the Buyer/Seller Stone Agreement, for each motion picture, if any,
that is produced and/or directed by Oliver Stone and produced, financed
and/or distributed by Seller, Seller's Affiliate, any entity owned or
controlled by Andrew Vajna or Andrew Vajna individually, Buyer shall be
entitled to recoup "Overhead", the "Producer Advance" and the "Development
Fund" as follows: (x) Buyer shall be entitled to recoup "Overhead", and the
"Producer Advance" to the extent the "Producer Advance" is not recouped
pursuant to (y) below, funded or reimbursed by Buyer at a rate of Two
Million Dollars ($2,000,000) per picture (up to a total of Six Million
Dollars ($6,000,000)); (y) Buyer shall be entitled to recoup the "Producer
Advance" pursuant to and in accordance with paragraph 11 of the "First Look
Deal" (up to a total of One Million Dollars ($1,000,000)); and (z) Buyer
shall be entitled to recoup the "Development Fund" sums (plus interest), if
any, that are expended by Buyer pursuant to the Buyer/Seller Stone Agreement
to the extent that any such sums were expended in connection with such
motion picture. Each such recoupment payment shall be payable upon
commencement of principal photography of the applicable motion picture, if
any. Buyer acknowledges that notwithstanding the provisions of this Section
2.10 and the terms of the Buyer/Seller Stone Agreement, neither Buyer nor
Buyer's Affiliates are entitled to reimbursement by Seller under paragraph 4
of the Buyer/Seller Stone Agreement of (1) the Five Hundred Thousand Dollars
($500,000) for each motion picture that Oliver Stone directs for a third
party unrelated to Seller; or (2) the amount that Oliver Stone is entitled
to take as a credit against and reduction of the unrecouped "Overhead".
Buyer further acknowledges that Buyer's and Buyer's Affiliates' only
recoupment rights are as set forth in the Buyer/Seller Stone Agreement, as
modified by and under this Section 2.10, and that neither Buyer nor Buyer's
Affiliates shall be entitled to seek reimbursement for monies expended by
any of them pursuant to the Buyer/Seller Stone Agreement from Seller,
provided that Seller causes any applicable third parties to assume the
reimbursement obligation to Buyer as part of any transfer or assignment of
rights to the applicable Oliver Stone project. Except for Buyer or Buyer's
Affiliates recoupment rights, (i) each of Seller and Buyer acknowledges that
neither Buyer or Buyer's Affiliates nor Seller or Seller's Affiliates shall
have any further rights or obligations pursuant to the Buyer/Seller Stone
Agreement; and (ii) each of Seller and Buyer acknowledges that neither Buyer
nor Buyer's Affiliates shall have any other rights in the motion pictures
produced pursuant to the Buyer/Seller Stone Agreement.
2.11 Accounting and Payment of Receivables. At least ten (10) days
prior to the Closing Date, Seller shall provide Buyer with an accounting of
all worldwide overages and other payments of any
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kind from Exploitation of the Film Assets that have been paid, credited or
otherwise collected by Seller or Seller's agents or representatives on or
after January 1, 1997 (the "ACCOUNTING"). The amount reflected in the
Accounting, excluding the Excluded Receivables, shall be paid by Seller to
Buyer by wire or other transfer of immediately available funds to an account
designated by Buyer on or before the Closing Date. After the Closing, Seller
agrees that if it receives any other payments which are intended to be
included in the Assets purchased by Buyer hereunder, Seller shall promptly
remit such amounts to Buyer.
2.12 Smoke Project. If Seller goes forward with the production of the
Smoke Project, or if Seller abandons or sells its interest or part thereof
in the Smoke Project, or otherwise transfers or disposes of rights therein
or seeks financing and/or distribution of a motion picture based thereon,
Buyer shall have a right of first negotiation with respect thereto;
provided, however, if Buyer does not enter into an agreement with Seller
with respect thereto, Seller can sell all or part of its interest so offered
to Buyer in the Smoke Project to a third party on terms no less favorable to
Seller than those offered to Buyer. If Seller desires to sell all or part of
its interest in the Smoke Project to a third party on terms that are less
favorable to Seller than those last offered by Seller to Buyer, Seller must
first offer those less favorable terms to Buyer and Buyer shall have ten
(10) business days to accept such offer. If the Smoke Project is produced by
Seller or a third party, unless Buyer agrees otherwise, Buyer shall be
entitled to immediate reimbursement in full of all of Buyer's and Buyer's
Affiliates' costs and expenses (including interest) on the Smoke Project,
which reimbursement obligation will be secured by the security interest
described in Section 7.22 below. If the Smoke Project is produced by Seller
or a third party with Buyer's involvement, Buyer shall cooperate with Seller
or said third party in obtaining production financing for the Smoke Project,
including without limitation, the subordination of Buyer's liens subject to
customary non-disturbance rights, or if Buyer or Buyer's Affiliates
participate in the production financing for the Smoke Project, Buyer or
Buyer's Affiliates shall enter into mutually satisfactory inter-creditor
agreements with any other participants to such production financing. Seller
has notified Buyer that Seller desires to solicit third party offers to
acquire a package of development projects owned or controlled by Seller
including among such development projects the Smoke Project. Buyer has
agreed that notwithstanding Seller's obligations to accord Buyer the rights
described above with respect to the Smoke Project on a stand-alone basis,
Seller may only solicit offers and sell the Smoke Project in a package with
other development projects owned or controlled by Seller (the "PACKAGE") on
and subject to the following terms and conditions:
(1) If a third party other than Buyer acquires the Package, the third
party acquirer of the Package (the "PACKAGE BUYER") will agree to
accord Buyer a 45-day good faith right of first negotiation (as
described above) with respect to the terms and conditions on which
(i) Buyer and the Package Buyer (or any successor or assign of the
Package Buyer) will co-produce and/or co-finance the Smoke Project
and (ii) Buyer will acquire distribution rights to the motion picture
based on the Smoke Project in agreed upon territories and media;
(2) Buyer's security interest in the Smoke Project described in Section
7.22 will secure all of Buyer's rights and Seller's obligations under
this Section 2.12 including Buyer's reimbursement rights described
above and Buyer's rights described in Subsection (1) of this Section
2.12 and such security interest shall be perfected prior to any sale
or transfer of rights in the Smoke Project to the Package Buyer; and
(3) If the Smoke Project is not sold as part of a package of development
projects, Seller shall remain obligated to accord Buyer the rights
described above in this Section 2.12 and Seller shall otherwise
comply with all of Seller's obligations under this Section 2.12.
2.13 BVI Die Hard Distribution Agreement. After the Closing, the BVI
Die Hard Distribution Agreement shall be modified as follows: (a) except as
provided in (e) below, neither Buyer nor Buyer's Affiliates shall have any
obligations to make further payments of any kind whatsoever to
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Seller pursuant to the BVI Die Hard Distribution Agreement, and all payments
that would otherwise be payable to Seller pursuant to the BVI Die Hard
Distribution Agreement shall be retained by Buyer for Buyer's own account;
(b) neither Buyer nor Buyer's Affiliates shall have a right of first
negotiation under the BVI Die Hard Distribution Agreement at the end of the
term of such agreement; (c) notwithstanding anything to the contrary
contained in the BVI Die Hard Distribution Agreement, Buyer and Buyer's
Affiliates acknowledge and agree that all Persons, other than Fox, entitled
to Participation Obligations with respect to the motion picture entitled
"DIE HARD III" shall have the right to directly audit Buyer and/or Buyer's
Affiliates pursuant to the provisions relating to and on the same terms as
Seller's audit rights in the BVI Die Hard Distribution Agreement; (d) if and
to the extent that Fox waives its rights to participate in worldwide
revenues from the exploitation of the motion picture entitled "DIE HARD
III", Buyer and/or Buyer's Affiliates shall waive its or their right to
participate in such revenues; and (e) Buyer and/or Buyer's Affiliates shall
pay only Buyer's or Buyer's Affiliates' Pro Rata Share of Participation
Obligations for the motion picture entitled "DIE HARD III" arising from
Buyer's or Buyer's Affiliates' exercise of Buyer's or Buyer's Affiliates'
rights under the BVI Die Hard Distribution Agreement, which Pro Rata Share
shall be payable by Buyer or Buyer's Affiliates upon receipt of an invoice
from Seller or Seller's designee (the "INVOICING PARTY") stating the amount
of Buyer's and/or Buyer's Affiliates' Pro Rata Share of such Participation
Obligations. The Invoicing Party shall deliver such invoice
contemporaneously with its delivery of statements to participants. Said
invoices shall also show the calculation of Buyer's and/or Buyer's
Affiliates' Pro Rata Share and shall be accompanied by supporting
documentation reasonably satisfactory to Buyer or Buyer's Affiliates. Seller
acknowledges and agrees that Buyer and/or Buyer's Affiliates shall have the
right to audit the calculation and documentation in support thereof. For
purposes of this Section 2.13, the term "PRO RATA SHARE", as of the date of
any calculation, shall be defined as a fraction, the numerator of which
shall be a number equal to the cumulative amount of minimum guarantees and
overages that Seller (v) has received as of the Closing Date and (w)
otherwise would be entitled to receive from Buyer or Buyer's Affiliates
pursuant to the BVI Die Hard Distribution Agreement as of the date of such
calculation, and the denominator of which shall be a number equal to the
cumulative amount of worldwide minimum guarantees and overages that Seller
(x) has received as of the Closing Date, (y) receives after the Closing Date
and (z) otherwise would be entitled to receive from the worldwide
exploitation of the motion picture entitled "DIE HARD III" as of the date of
such calculation. Any and all audit rights of Buyer and/or Buyer's
Affiliates in connection with revenues from the territories covered by the
BVI Die Hard Distribution Agreement may only be asserted against the
Invoicing Party. Except as modified by this Section 2.13, the BVI Die Hard
Distribution Agreement shall remain in full force and effect and Buyer
and/or Buyer's Affiliates shall retain all of its or their rights contained
therein. Upon the expiration of the BVI Die Hard Rights, Buyer or Buyer's
Affiliates shall terminate all of Buyer's or Buyer's Affiliates' liens,
encumbrances or claims on the BVI Die Hard Rights.
2.14 Delivery of Missing Schedules; Due Diligence Period.
(a) In the event that Schedules 2.2, 2.4, 3.2, 3.4, 3.10, 3.11, 3.13,
3.14, 3.16 or 7.11 (the "SELLER PREPARED SCHEDULES"), or any of them,
have not been delivered to Buyer on or prior to the date of this
Agreement (the "MISSING SCHEDULES"), the Missing Schedules shall be
delivered to Buyer on or before April 15, 1997 (the "SCHEDULE DELIVERY
DATE").
(b) Provided that Seller fully complies with Sections 3.4 and 5.3
below, Buyer shall have until May 15, 1997 (the "DUE DILIGENCE PERIOD")
to review all contracts, accounting books and records and documents
relevant to the Assets or the Transaction. If Seller does not fully
comply with its obligations to provide access and/or deliver documents
under Sections 3.4 and 5.3 (as reasonably and in good faith determined by
Buyer), the Due Diligence Period shall be extended by the number of days
that Buyer is denied the access or documents to which it is entitled
pursuant to Sections 3.4 and 5.3. Buyer agrees that it shall give Seller
prompt written notice of
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such denial of access and the number of days in which the Due Diligence
Period is being extended. On or prior to the expiration of the Due
Diligence Period, Buyer shall provide Seller with written notice of
whether Buyer elects to terminate this Agreement or proceed with the
Closing of the Transaction (the "DUE DILIGENCE PERIOD NOTICE"); provided,
however, if Seller has not received the Due Diligence Period Notice by
the expiration of the Due Diligence Period, Seller shall, at any time
thereafter, give Buyer written notice of such failure and Buyer shall
have five (5) days from its receipt of such notice from Seller to deliver
the Due Diligence Period Notice to Seller. If Seller has not received the
Due Diligence Period Notice within said five (5) day period, this
Agreement shall be deemed to have been approved and remains in full
force. Notwithstanding anything to the contrary contained herein, Buyer
shall only have the right to terminate this Agreement pursuant to this
Section 2.14(b) under the following circumstances: (i) if the Seller
Prepared Schedules contain a disclosure of an obligation, liability or
any other fact that is either different from the information previously
delivered or communicated to Buyer with respect to the Assets or the
Transaction or previously undisclosed to Buyer, and such obligation,
liability or fact has a Material Adverse Effect on the Assets, on Seller
or on the Transaction; or (ii) if during Buyer's review of the contracts,
accounting books and records and other documents relevant to the Assets
or the Transaction, Buyer discovers any fact relating to the Assets or
the Transaction that has not previously been disclosed to Buyer by
Seller, in the Seller Prepared Schedules or otherwise, that could have a
Material Adverse Effect on the Assets or Seller.
2.15 "An Alan Smithee Film". Seller shall complete the motion picture
entitled "AN ALAN SMITHEE FILM" and fully deliver said motion picture prior
to Closing to Buyer in accordance with the terms of the Alan Smithee
Distribution Agreement and to each of the foreign distributors who have
entered into an Exploitation Agreement including, without limitation,
Existing Exploitation Agreements with respect to said motion picture. As
provided in that certain Amendment to the Alan Smithee Distribution
Agreement dated as of September 17, 1997, as the same shall be amended to
reflect the provisions of this Section 2.15, upon delivery of "AN ALAN
SMITHEE FILM" in compliance with the terms of the Alan Smithee Distribution
Agreement, as amended, Buyer shall pay to Seller a sum of Three Million
Seven Hundred Twenty Five Thousand Dollars ($3,725,000), which payment
(along with other minimum guarantee payments received by Seller with respect
to such motion picture) shall be used by Seller to pay off the outstanding
principal and interest owing by Seller under the Credit, Security, Pledge
and Guaranty Agreement dated as of August 16, 1994, between Cinergi
Productions N.V. Inc. and The Chase Manhattan Bank, as Agent ("CHASE") (the
"CHASE CREDIT AGREEMENT"). Buyer agrees that Seller may retain (subject to
repayment in full of the Chase Credit Agreement) all fixed cash minimum
guarantees payable to Seller under Existing Exploitation Agreements only for
"AN ALAN SMITHEE FILM" listed on Schedule 2.15 hereof. To the extent that
Seller receives any fixed cash minimum guarantees with respect to "AN ALAN
SMITHEE FILM" other than those minimum guarantees listed on Schedule 2.15,
then Seller shall account for and remit such additional amounts to Buyer on
the Closing Date and thereafter in accordance with Section 2.11 of this
Agreement. Seller agrees that Seller will not amend any of the terms or
provisions of any of such Existing Exploitation Agreements in any way that
would decrease, delay or otherwise adversely affect payment of any amounts
(other than the minimum guarantees provided for in such Existing
Exploitation Agreements as specified in Schedule 2.15 hereof) otherwise
payable pursuant to such Existing Exploitation Agreements.
2.16 Guild Settlement Negotiations. Seller has notified Buyer that
Seller is presently in settlement discussions with certain unions and guilds
regarding claims asserted by the unions and guilds against Seller. Seller
agrees to keep Buyer advised as to the status of all such negotiations and
will not object to Buyer's attendance at or other participation in any such
negotiations. Seller agrees that it will not enter into any settlement
agreement with the unions and guilds without Buyer's prior written approval.
If notwithstanding the foregoing, Seller enters into a settlement agreement
with the unions and guilds which is not approved by Buyer, Seller's
obligations under any such settlement agreement(s) shall be Excluded Guild
Obligations for purposes of Section 2.2.
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2.17 Participation Settlement Negotiations. Seller has notified Buyer
that Seller is presently in settlement discussions with certain third
parties regarding participation claims asserted by the third parties against
Seller. Seller agrees to (1) notify Buyer of any participation claims which
may be asserted by any third parties against Seller and (2) keep Buyer
advised as to the status of all such negotiations, discussions and claims,
including any legal proceedings, and will not object to Buyer's attendance
at or other participation in any such discussions, negotiations or
proceedings. Seller agrees that any payment made by Seller or any agreement
entered into by Seller to pay or settle any amounts or claims which could be
an assumed liability of Buyer under the terms of Section 2.2 of this
Agreement, including without limitation, participation obligations, shall
require the prior written consent of the Buyer. If notwithstanding the
foregoing, Seller makes any payments, takes, or omits to take, any action
with respect to any legal proceedings, or enters into a settlement agreement
with respect to any amounts or claims which could be an assumed liability
and which is not approved by Buyer, Seller's obligations with respect to
such payments or under any such agreement shall be Excluded Liabilities for
purposes of Section 2.2.
3. Representations and Warranties of Seller. As a material inducement for
Buyer to enter into this Agreement, Seller represents and warrants that each of
the following statements is true and correct as of the date hereof and on the
Closing Date:
3.1 Existence and Rights. Cinergi, and each of its subsidiaries party
hereto, (a) is a corporation duly organized and validly existing in good
standing under the laws of the state of its incorporation and (b) has the
corporate power and adequate authority, licenses and rights to own its
properties, to carry on its business as now conducted and to make and carry
out the Transaction.
3.2 Agreements Authorized. The execution, delivery and performance by
Seller of this Agreement and the Related Agreements to which Seller is a
party has been duly authorized by all necessary action on the part of
Seller, including without limitation the approval by Seller's board of
directors, but excluding approval by Seller's stockholders, and, except as
set forth on Schedule 3.2, does not require notice to, or the consent or
approval of, any governmental or other regulatory authority or any other
Person, except where Seller's failure to give such notices or obtain such
consents or approvals does not have a Material Adverse Effect on the Assets
or Seller. Each of this Agreement and the Related Agreements to which Seller
is a party has been or when delivered at Closing will have been duly
executed and delivered by Seller and is or will be a legal, valid and
binding obligation of Seller, enforceable in accordance with its terms,
except only to the extent limited by bankruptcy, insolvency, reorganization,
receivership, moratorium and other similar laws affecting the rights and
remedies of creditors generally.
3.3 No Conflict. The execution, delivery and, subject to obtaining the
consents in Schedule 3.2, performance by Seller of this Agreement and the
Related Agreements to which Seller is a party will not (a) breach or
constitute grounds for the occurrence or declaration of a default under or
allow another party a right to terminate, accelerate or cancel any
agreement, indenture, undertaking or other instrument to which Seller is a
party or by which Seller or any of the Assets may be bound or affected which
breach or default would have a Material Adverse Effect on the Assets or
Seller; (b) violate any provision of law or any regulation or any order,
judgment, or decree of any court or other agency or government that would
have a Material Adverse Effect on the Assets or Seller; (c) violate any
provision of the charter or bylaws of Seller; or (d) result in the creation
or imposition of (or the obligation to create or impose) any lien, charge or
encumbrance on, or security interest in, any of the Assets that would have a
Material Adverse Effect on the Assets or Seller, other than as contemplated
by the Transaction.
3.4 Conveyance of All Interests; Existing Exploitation Agreements;
Chain-of-Title Documents. On the Closing Date, Seller will convey to Buyer
all of Seller's right, title and interest of every kind and nature
whatsoever in and to the Assets. Seller's rights to Exploit the Pictures and
the Picture
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Rights related thereto are subject only to the Existing Exploitation
Agreements and any liens in favor of SAG and DGA on the Pictures securing
obligations with respect to the Pictures under the applicable collective
bargaining agreement (the "GUILD LIENS"). True, correct and complete copies
(including all amendments, if any) of the Existing Exploitation Agreements
and other agreements listed on Schedule 3.4 have been provided to Buyer or
will be provided to Buyer within thirty (30) days from the date hereof.
Schedule 3.4 accurately sets forth all of the Existing Exploitation
Agreements. Except as otherwise noted on Schedule 3.4, Seller is not in
default under any Existing Exploitation Agreement and each Existing
Exploitation Agreement remains in full force and effect and shall remain in
full force and effect after the Closing Date in accordance with its terms.
True, correct and complete copies (including all amendments, if any) of all
chain-of-title documents establishing Seller's interest in the Film Assets
have been provided to Buyer or will be provided to Buyer prior to
commencement of the Due Diligence Period.
3.5 Rights Unimpaired. Except only for the rights licensed to third
parties under the Existing Exploitation Agreements, (a) Seller has not done,
nor authorized to be done, any act or thing by which any Exploitation of the
Film Assets has been or will be in any way materially adversely affected or
impaired and (b) Seller has not conveyed, transferred, licensed, assigned or
otherwise disposed of any right, title or interest Seller ever had in the
Film Assets.
3.6 Non-Infringement and Litigation. Neither the Film Assets nor any
portion thereof nor the exercise of any rights to Exploit the Film Assets,
will violate or infringe upon the trademark, trade name, copyright, patent,
or any literary, dramatic, musical, artistic, or personal right or any right
of privacy, publicity, property right or any other right of any Person or
entity or defame any Person or entity. Seller has not entered into, and will
not enter into, any agreement which is inconsistent with any of the
provisions of this Agreement, and will not exercise any right or take any
action or license or authorize any other Person to exercise any right or
take any action or license which could have a Material Adverse Effect on the
Assets. Seller has provided Buyer with notice of, and copies of, any and all
papers, documents and pleadings served or delivered to Seller or any of its
Affiliates regarding any claims, actions or litigations, either threatened,
pending or concluded (including, without limitation, those described on
Schedule 3.14 attached hereto), which might reasonably be expected to
adversely affect any of the Assets or which seek to prevent, restrict or
delay the consummation of the Transaction. Except for such matters that
would not have a Material Adverse Effect on the Assets or Seller, there are
no orders, writs, judgments, injunctions, decrees, determinations or awards
against the Assets or Seller, or any of Seller's other assets or properties.
3.7 Licenses. Seller owns or has proper and effective licenses in
perpetuity for each Picture (which ownership and licenses will be
transferred by Seller to Buyer at the Closing) for (a) the use of the sound
recording systems employed in the production of the Pictures, (b) the use of
any copyrighted music or copyrighted sound recordings and (c) the use of any
patented processes, methods and inventions employed in the production
thereof. Notwithstanding the foregoing, the parties agree that any breach by
Seller of this representation and warranty will not constitute a breach of
this Agreement if such breach is covered by Seller's applicable errors and
omissions insurance policy (which policy must comply with the requirements
of Section 5.7 below), and Buyer agrees that it will first attempt to
recover for any such breach from such errors and omissions insurance policy
before pursuing its other remedies against Seller under this Agreement for
Seller's breach of this representation and warranty.
3.8 Clearance. Seller has obtained proper and effective licenses or
grants of authority to use the results of the services of performers and
other persons connected with the production of the Pictures to Exploit the
Film Assets (which licenses and grants will be transferred by Seller to
Buyer on the Closing Date). Notwithstanding the foregoing, the parties agree
that any breach by Seller of this representation and warranty will not
constitute a breach of this Agreement if such breach is covered by Seller's
applicable errors and omissions insurance policy (which policy must comply
with the
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requirements of Section 5.7 below), and Buyer agrees that it will first
attempt to recover for any such breach from such errors and omissions
insurance policy before pursuing its other remedies against Seller under
this Agreement for Seller's breach of this representation and warranty.
3.9 Copyrights. Good and sufficient copyright notice is affixed to the
Pictures. Each Picture has been registered with the United States Copyright
Office in Seller's name and Seller's rights in each Picture have been
registered with the Copyright Office, provided, however, that with respect
to the motion picture presently entitled "AN ALAN SMITHEE FILM", only the
screenplay for said motion picture has been registered with the Copyright
Office in Seller's name.
3.10 Bankruptcy; Liens/Encumbrances. Seller has not become subject to
voluntary or involuntary bankruptcy proceedings. Except only as specified on
Schedule 3.10 and the Guild Liens, there are no liens, encumbrances or
claims on the Assets or any portion thereof or upon any revenues or
receivables from the Exploitation of the Film Assets except for such liens,
encumbrances or claims that will not have a Material Adverse Effect on the
Assets or Seller.
3.11 Music. Except as set forth in Schedule 3.11, all non-dramatic
music rights (so called "small rights") contained in the Pictures are (a)
available by license from American Society for Composers, Authors and
Publishers ("ASCAP"), Broadcast Music Inc. ("BMI"), or SESAC, Inc. or (b) in
the public domain, or (c) controlled by Seller directly or through licenses
(in which event at the Closing Seller will transfer all such licenses to
Buyer).
3.12 Credits. The credits contained in the main and end titles of the
Pictures as delivered to Buyer shall comply with all contractual obligations
to third parties who rendered services in connection with the Pictures and
all applicable Guild agreements.
3.13 Insurance Claims. Except as set forth on Schedule 3.13, no
insurance claims have been made and are currently outstanding and unsettled
as of the date of this Agreement on the producer's errors and omissions
policies or any other insurance policies that Seller maintains with respect
to the Pictures. Except as set forth on Schedule 3.13, no claim with respect
to any of the Pictures under any errors and omissions policy has required a
payment by the insurance company or Seller and no claim with respect to any
of the Pictures that would be covered under any errors and omissions policy
has been asserted.
3.14 Contingencies; Proceedings. Except as set forth in Schedule 3.14,
(a) there is no litigation, arbitration, other proceeding, written audit
request or, to the knowledge of Seller, investigation, pending against
Seller or any of its officers or directors (in their capacities as such)
which in any way could have a Material Adverse Effect on the Assets or
Seller, and (b) Seller does not know of any threats of any such litigation,
arbitration, other proceedings or written audit requests, the results of
which could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Assets or Seller.
3.15 Compliance with Law. Seller has conducted and is conducting its
business in compliance with all applicable laws and regulations in all
material respects and has obtained all necessary licenses, permits and other
approvals of any governmental authority, except where Seller's failure to do
so could not have a Material Adverse Effect on the Assets or Seller.
3.16 Commissions. Except as set forth in Schedule 3.16, neither Seller
nor any of its officers, directors, agents or employees have employed or
incurred any liability to any broker, finder or agent for any brokerage
fees, finder's fees, commissions or other similar payments with respect to
the Transaction. Seller hereby agrees that all such amounts payable to
brokers, finders or agents are and shall be the sole obligation of Seller
and Seller hereby indemnifies and holds Buyer harmless from any claims
arising from such obligations.
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3.17 Accuracy of Information Furnished. No statement or information
with respect to the Assets contained in any schedule, certificate or other
document or information furnished, or to be furnished, in writing by or on
behalf of Seller to Buyer, including without limitation the Accounting,
contains or will contain any untrue statement of a material fact.
3.18 "An Alan Smithee Film". Seller has obtained, or by the time
Seller delivers the motion picture presently entitled "AN ALAN SMITHEE FILM"
to Buyer, Seller shall have obtained, all written releases or other grants
of necessary rights from all applicable Persons with respect to such motion
picture and Seller has fully complied in all respects with all requirements
of its errors and omissions insurance policy in effect for such motion
picture, including without limitation compliance with such policy's
clearance procedures. In addition, no third party Exploitation Agreement
with respect to this motion picture contains any domestic or other
theatrical release requirement except any such requirements to which Buyer
has expressly agreed pursuant to the terms of the Alan Smithee Distribution
Agreement.
3.19 Guild Liens. Except for Guild Liens with respect to claims
related to "residuals", "reuse", "rerun" or "supplemental market" payments,
there are no claims that have been asserted or are assertable by the Guilds
against the Pictures. This representation and warranty shall not apply to
any claims that may be assertable as the result of actions of Buyer or
Buyer's Affiliates.
3.20 Evita Warner Bros. Soundtrack Rights. All of Seller's agreements
with third party participants in connection with the motion picture entitled
"EVITA", including without limitation, any agreement with, or for the
services of, Andrew Vajna, specifically exclude from the calculation of each
such participation any revenues derived from the exploitation of the Evita
Warner Bros. Soundtrack Rights, and Seller shall be solely liable for any
payments to such third party participants and/or any other party in
connection with the "EVITA" soundtrack. Seller acknowledges that Buyer's
obligations hereunder to assume and pay Participation Obligations in
connection with the motion picture entitled "EVITA" shall not include any
Participation Obligations arising in whole or in part from the exploitation
of the Evita Warner Bros. Soundtrack Rights.
4. Representations and Warranties of Buyer. As a material inducement for
Seller to enter into this Agreement, Buyer hereby represents and warrants that
each of the following statements is true and correct as of the date hereof:
4.1 Existence and Rights. Buyer (a) is a corporation duly organized
and validly existing in good standing under the laws of the State of
California and (b) has the corporate power and adequate authority, licenses
and rights to own its properties, to carry on its business as now conducted
and to make and carry out the Transaction.
4.2 Agreements Authorized. The execution, delivery and performance of
this Agreement and the Related Agreements to which Buyer is a party by
Buyer, has been duly authorized by all necessary action on the part of Buyer
and, except as set forth on Schedule 4.2, does not require notice to, or the
consent or approval of, any governmental or other regulatory authority or
any other Person, except where Buyer's failure to give such notices or
obtain such consents or approvals does not have a Material Adverse Effect on
Buyer. Each of this Agreement and the Related Agreements to which Buyer is a
party has been or when delivered at Closing will have been duly executed and
delivered by Buyer and is a legal, valid and binding obligation of Buyer,
enforceable in accordance with its terms, except to the extent limited by
bankruptcy, insolvency, reorganization, receivership, moratorium and other
similar laws affecting the rights and remedies of creditors generally.
4.3 No Conflict. The execution, delivery and, subject to obtaining the
consents in Schedule 4.2, performance by Buyer of this Agreement and the
Related Agreements to which Buyer is a party will not (a) breach or
constitute grounds for the occurrence or declaration of a default under or
allow another party a right to terminate, accelerate or cancel any material
agreement, indenture,
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undertaking or other instrument to which Buyer is a party or by which Buyer
may be bound or materially affected; (b) violate any provision of law or any
regulation or any order, judgment, or decree of any court or other agency or
government that could have a Material Adverse Effect on Buyer; or (c)
violate any provision of the charter or bylaws of Buyer.
4.4 Commissions. Neither Buyer nor any of its officers, directors,
agents or employees have employed or incurred any liability to any broker,
finder or agent for any brokerage fees, finder's fees, commissions or other
similar payments with respect to the Transaction.
4.5 Cinergi Stock. Buyer owns all of the Cinergi Stock beneficially
and of record and free and clear of any Encumbrance. At the Closing, Buyer
will transfer good and marketable title to, and complete ownership of, the
Cinergi Stock, free of any Encumbrance.
4.6 Full Investigation. Upon expiration of the Due Diligence Period,
Buyer will confirm that no representation or warranty relating to the Assets
has been made by Seller other than as set forth in this Agreement and that
Buyer is entering into this Agreement based on (a) Buyer's review of the
Seller Prepared Schedules, (b) Buyer's own evaluation of the Assets and
Buyer's review of the properties, books, records, contracts and documents
relating thereto as provided to Buyer by Seller; and (c) Seller's
representations and warranties as set forth in this Agreement.
4.7 Smoke Project. As of March 1, 1997, Buyer had expended a total of
Two Million Four Hundred Eighty-Seven Thousand Six Hundred Ninety-Two
Dollars ($2,487,692) in connection with the Smoke Project, consisting of One
Million Eight Hundred Sixty-Seven Thousand Seven Hundred Eighty-Seven
Dollars ($1,867,787) for costs and expenses and Six Hundred Nineteen
Thousand Nine Hundred Five Dollars ($619,905) in interest. For each day
after March 1, 1997, additional interest shall accrue at the rate of Five
Hundred Twenty-Eight Dollars ($528) per day. Seller acknowledges that Buyer
will not make any further payment in connection with the Smoke Project
unless Buyer otherwise agrees in writing. Buyer acknowledges that Seller may
audit the above figures in connection with the Smoke Project.
5. Covenants of Seller.
5.1 Conduct of Business Prior to Closing. Seller agrees that until the
Closing Date, or earlier termination of this Agreement, unless Buyer
otherwise consents in writing and except for the Transaction, it will:
(a) Except as expressly permitted in Section 5.8 below, not offer,
license or sell or agree to offer, license or sell any rights or property
(tangible or intangible) which are included in the Assets or modify,
amend, terminate, rescind or cancel or grant any waiver with respect to
any existing agreements (including without limitation any Existing
Exploitation Agreements) with respect to the Assets or expand any rights
or property (tangible or intangible) with respect to the Assets granted
to any Person or accelerate the time for payments of any amounts owing to
Seller under any such agreements without first securing the written
consent of Buyer; provided, however, that Seller may continue to operate
in the ordinary course of its business and enter into transactions that
will not have a Material Adverse Effect on the Assets without first
securing the written consent of Buyer; in any event, however, Seller
shall not offer, license or sell, or agree to offer, license or sell, in
the ordinary course of its business or otherwise, any rights or property
(tangible or intangible) which are included in the Assets in the
territories set forth on Schedule 5.1 without first securing the written
consent of Buyer;
(b) And after the Closing Date it will, promptly notify Buyer with
respect to the receipt of any notice of the type described in Section
3.6;
(c) Not enter into any Exploitation Agreements relating to the
Exploitation of any Film Assets without securing the prior written
consent of Buyer, and provided further, that if Buyer
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consents to any such Exploitation Agreements, then any Proceeds of such
Exploitation Agreements received by Seller prior to the Closing Date
shall be used by Seller only to pay for budgeted production costs of the
motion picture entitled "AN ALAN SMITHEE FILM";
(d) Not transfer or encumber or agree to transfer or encumber any of
the Assets in any way, except as specifically permitted herein; Buyer
acknowledges and agrees that the sale by Seller of any rights in the
motion picture entitled "DIE HARD III" other than the BVI Die Hard Rights
shall not constitute a sale of any Assets hereunder, so long as such sale
does not have a Material Adverse Effect on any of the BVI Die Hard
Rights; Buyer further acknowledges that anything that Buyer has agreed to
in this Agreement will not constitute a Material Adverse Effect on the
BVI Die Hard Rights;
(e) Maintain its Books and Records in accordance with past practices
and policies, except for such changes of which it will advise Buyer as
are required to comply with generally accepted accounting principles or
applicable law;
(f) Deliver to Buyer each month a statement detailing the agreements
or other transactions entered into in accordance with this Section 5.1
with respect to the Assets; and
(g) Agree that (i) no motion picture on which Seller and/or Seller's
Affiliates commence pre-production or production will be deemed to be a
"Qualified Picture" (as that term is defined in the Disney Distribution
Agreement) under the Disney Distribution Agreement and neither Seller or
Seller's Affiliates, on the one hand, nor Buyer or Buyer's Affiliates, on
the other hand, will have any rights or obligations with respect to such
motion picture against the other party; and (ii) if Seller produces any
such motion picture, there will not be any cross-collateralization with
respect to or against the Assets.
5.2 Representations True. Seller shall not perform any act to make any
of its representations or warranties set forth in this Agreement untrue or
incorrect on and as of the Closing Date. Without Buyer waiving any rights it
may have, Seller will inform Buyer promptly upon discovery that any of its
representations or warranties ceases to be true or correct in any material
respect.
5.3 Access. Seller will (a) upon reasonable prior notice permit Buyer
and its authorized representatives and agents to have access during normal
business hours and on Saturdays to all contracts, accounting books and
records and documents relevant to the Assets or the Transaction, whether in
Seller's possession or control or the possession or control of Seller's
Representatives, and to make extracts from and copies of such contracts,
books and records and documents, subject only to third party confidentiality
rights (and Seller shall use all reasonable efforts to obtain as soon as
possible waivers by such third parties to permit such access), (b) furnish
to Buyer or its authorized representatives and agents such other information
with respect to the business or properties of Seller relating to the Assets
or the Transaction as Buyer may from time to time reasonably request, (c)
otherwise reasonably cooperate in the examination or audit of Seller by
Buyer and (d) confer with Buyer to keep it informed with respect to
operational matters of a material nature affecting the Assets or the
Transaction and to report on the general status of the business of Seller as
it relates to the Assets or the Transaction, except to the extent restricted
by confidentiality obligations to third parties that are not Affiliates of
Seller.
5.4 Permits. Seller will make all filings with governmental bodies and
other regulatory authorities and use reasonable efforts to obtain all
permits, approvals, authorizations and consents of all third parties
necessary for Seller to consummate the Transaction (including without
limitation, consents of any guarantor) without being in violation of any law
or otherwise materially adversely affecting any of the Assets.
5.5 Delivery of Books and Records and other Files. As soon as possible
after the Closing, to the extent available and to the extent Seller has
access during normal business hours and has not
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theretofore done so, Seller and Seller's attorneys shall deliver to a
location specified by Buyer original copies of all Books and Records that
relate solely to the Assets or accurate copies of all Books and Records that
relate to the Assets in addition to other businesses or properties of Seller
unrelated to the Assets.
5.6 Best Efforts. Seller shall use its best efforts to effect the
Closing.
5.7 Errors and Omissions Insurance. Seller shall obtain errors and
omissions insurance for each of the Pictures with a reputable insurance
company approved by Buyer and shall maintain such coverage for at least five
(5) years after the Closing Date with liability limits of not less than
$1,000,000 for each occurrence and $3,000,000 in the aggregate with a
$25,000 deductible, naming Buyer and each of its Affiliates and their
respective directors, officers and employees as beneficiary and named
insured thereunder. On the Closing Date, Seller shall deliver to Buyer
appropriate certificates of insurance reflecting the foregoing, it being
understood and agreed that such policies shall in no way limit Seller's
indemnity under Section 10 hereof.
5.8 No Solicitation. Until the earlier of the Closing or the
termination of this Agreement, Seller shall not, and shall not permit any of
its Affiliates to, nor shall it authorize or permit any of its officers,
directors, employees, investment bankers, financial advisors, attorneys,
accountants or other representatives retained by it or any of its Affiliates
("REPRESENTATIVES") to, solicit any inquiries or the making of any proposal
which constitutes, or may reasonably be expected to lead to, any Alternative
Transaction; provided, however, that Seller may, and may permit its
Representatives to (a) furnish information to Persons making unsolicited
inquiries or proposals related to a possible Alternative Transaction or (b)
enter into negotiations or discussions with such Persons. Additionally,
prior to Seller's stockholder's approval of the Transaction, Seller may
enter into one or more agreements providing for one or more possible
Alternative Transactions; provided that (i) within five (5) days of the
commencement of any negotiations or discussions with a third party relating
to a possible Alternative Transaction, Seller gives Buyer notice in writing
of the start of any such negotiations or discussions; (ii) if Seller
commences negotiations or discussions with a third party for a possible
Alternative Transaction on or after the thirty-first day following the date
of this Agreement, Buyer shall have the right, but not the obligation, to
terminate this Agreement at any time after receipt of such notice; and (iii)
within five (5) business days of the commencement of any negotiations or
discussions with a third party relating to a possible Alternative
Transaction that consists of a sale of the stock of Seller, but in any
event, prior to the execution of a definitive purchase agreement with
respect to such possible Alternative Transaction, Seller shall give the
stock purchaser in the possible Alternative Transaction written notice that
Buyer has informed Seller that Buyer believes that the consummation of the
possible Alternative Transaction will give Buyer the right to terminate the
Disney Distribution Agreement. If at any point Seller determines that all
Alternative Transactions cannot or will not be consummated for any reason,
Seller must give Buyer written notice of such fact and, if Buyer has the
right to terminate this Agreement pursuant to (ii) above, and has not
already exercised such right, Buyer shall have five (5) business days from
the date it receives such notice to notify Seller whether Buyer elects to
terminate this Agreement or proceed with the consummation of the Transaction
in accordance with the terms of this Agreement. In the event that Buyer
elects to consummate the Transaction (or does not have the right to
terminate this Agreement pursuant to (ii) above), the parties shall proceed
to consummate the Transaction in accordance with the terms of this
Agreement, provided, however the Closing Date set forth in Section 1.2 above
shall be extended by the number of days Seller has spent pursuing said
Alternative Transaction. Nothing contained in this Agreement shall prohibit
Seller or the members of its Board of Directors from complying with its and
their (a) fiduciary duties; and (b) obligations under applicable state and
federal law or rules and regulations promulgated thereunder.
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5.9 Stockholders' Meeting; Proxy Statement.
(a) Meeting of Stockholders of Seller. Seller shall take all action
it deems necessary, in accordance with the General Corporation Law of
Delaware and its respective Certificate of Incorporation and By-Laws, or
as Seller otherwise deems advisable, to convene a meeting of its
stockholders as soon as reasonably practicable to consider and vote
whether or not to approve the Transaction; provided, that Seller's
obligations in this sentence shall be suspended after it receives, and so
long as it is pursuing, an offer for a possible Alternative Transaction.
Subject to the provisions of Section 5.8 and the following sentence, (i)
the Proxy Statement shall contain the recommendation of Seller's Board of
Directors in favor of approval of the Transaction and any other
transaction for which approval may also be sought by Seller's Board of
Directors at the stockholders' meeting; (ii) such Board of Directors
shall recommend that the stockholders of Seller vote to approve the
Transaction and any other transaction for which approval may also be
sought by Seller's Board of Directors at the stockholders' meeting; (iii)
members of such Board of Directors who are also stockholders of Seller
shall vote their shares to approve the Transaction; and (iv) Seller shall
use its reasonable best efforts to solicit from stockholders of Seller
proxies in favor of such approval. Nothing contained in this Agreement
shall prohibit Seller or the members of its Board of Directors from
complying with its and their (a) fiduciary duties; and (b) obligations
under applicable state and federal law or rules and regulations
promulgated thereunder.
(b) Proxy Statements; Other Filings. As soon as reasonably
practicable, Seller shall prepare, and Seller shall file with the SEC
under the Exchange Act, and shall use all reasonable efforts to have
cleared by the SEC and promptly thereafter shall mail to its
stockholders, a proxy statement and a form of proxy with respect to the
meeting of the Seller's stockholders referred to in clause (a) above;
provided, that Seller's obligations in this sentence shall be suspended
after it receives, and so long as it is pursuing, an offer for a possible
Alternative Transaction. The term "PROXY STATEMENT" shall mean each such
proxy statement and all related proxy materials including, without
limitation, the notice of meeting, letter to stockholders and form of
proxy at the time such statement and materials initially are mailed to
Seller's stockholders, and all amendments and supplements thereto, if
any, similarly filed and mailed. Buyer agrees to cooperate with Seller in
the preparation of the Proxy Statement by, among other things, using its
best efforts to provide such information to Seller regarding Buyer and
the Transaction as may be reasonably requested by Seller. In connection
with Seller's preparation of the Proxy Statement, Buyer shall be entitled
to review and make recommendations with respect to the description of the
Transaction to be contained in the Proxy Statement and Seller shall not
unreasonably refuse to comply with such recommendation to the extent that
failure to so comply might materially and adversely affect Buyer. As soon
as reasonably practicable after the date hereof, Seller shall promptly
prepare and file any other filings required to be filed by it under the
Exchange Act or any other federal or state law relating to the
Transaction; provided, that Seller's obligations in this sentence shall
be suspended after it receives, and so long as it is pursuing, an offer
for a possible Alternative Transaction. Seller shall notify Buyer
promptly of the receipt of any written comments of the SEC, of any
request by the SEC for amendments or supplements to the Proxy Statement,
and of any request by the SEC with respect to any other filings. Seller
shall use its best reasonable efforts to obtain and furnish the
information required to be included in the Proxy Statement and any other
filings. Seller, after consultation with Buyer, shall use its reasonable
best efforts to respond promptly to any comments made by the SEC with
respect to the Proxy Statement and any preliminary version thereof.
Seller agrees that the information provided and to be provided by it for
use in the Proxy Statement and any other filings shall, on the date such
Proxy Statement is first mailed to Seller's stockholders, or on the date
any other filing is filed with the relevant governmental official and in
each case on the date of the meeting of Seller's stockholders referred to
in clause (a) above, be true and correct in all material respects and
shall not omit to
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state any material fact required to be stated therein in order to make
the information set forth therein not false or misleading, and Seller
agrees to correct any such information provided by it for use in the
Proxy Statement or any other filing which shall have become materially
false or misleading; provided, however, that no representation, covenant
or agreement is made by Seller under this sentence with respect to
information supplied by or on behalf of Buyer expressly for inclusion in
the Proxy Statement or other filings. Buyer covenants to Seller that the
information supplied by it expressly for inclusion in the Proxy Statement
and any other filings shall, on the date such Proxy Statement is first
mailed to Seller's stockholders, or on the date any other filing is
filed, and in each case on the date of the meeting of Seller's
stockholders referred to in clause (a) above, be true and correct in all
material respects and shall not omit to state any material fact required
to be stated therein in order to make the information set forth therein
not false or misleading, and Buyer agrees to promptly notify Seller (and
provide corrected information to Seller) in the event any such
information provided by Buyer expressly for use in the Proxy Statement or
any other filing becomes materially false or misleading.
6. Covenants of Buyer.
6.1 Representations True. Buyer shall not perform any act to make any
of its representations or warranties set forth in this Agreement untrue or
incorrect on and as of the Closing Date. Without Seller waiving any rights
it may have, Buyer will inform Seller promptly upon discovery that any of
its representations or warranties ceases to be true or correct in any
material respect.
6.2 Permits. Buyer will make all filings with governmental bodies and
other regulatory authorities and use reasonable efforts to obtain all
permits, approvals, authorizations and consents of all third parties
necessary for Buyer to consummate the Transaction (including without
limitation, consents of any guarantor) without being in violation of any law
or otherwise materially adversely affecting any of the Assets.
6.3 Best Efforts. Buyer shall use its best efforts to effect the
Closing.
6.4 Disney Loans. Other than the Disney Loans, there are no other
outstanding loans made by Buyer or Buyer's Affiliates to Seller or Seller's
Affiliates. Buyer and Buyer's Affiliates agree that Seller shall have no
repayment obligations with respect to the Disney Loans after the date hereof
unless this Agreement is terminated; provided that upon such termination,
all amounts that would otherwise have been due and payable on or prior to
such termination (including interest after any applicable due date) shall be
immediately due and payable. Notwithstanding the foregoing, Buyer and
Buyer's Affiliates agree that no late payment fees or increased interest
charges that might otherwise be payable with respect to the Disney Loans
shall apply to the period commencing with the applicable due date for any
such loan and ending with the date that is three (3) business days after the
termination of this Agreement.
7. Conditions Precedent to Obligations of Buyer. The obligations of Buyer
to consummate this Agreement and the Transaction are subject to the fulfillment,
prior to or as of the Closing Date, of each of the following conditions, each of
which may only be waived by Buyer in writing:
7.1 Representations and Warranties. The representations and warranties
of Seller contained in Section 3 shall be true and correct in all material
respects at and as of the Closing Date and Seller shall have delivered to
Buyer a certificate in form and substance satisfactory to Buyer, dated the
Closing Date, to such effect.
7.2 Covenants. Seller shall have complied in all material respects
with all covenants contained herein to be complied with by it prior to or at
the Closing, and Seller shall have delivered to Buyer a certificate in form
and substance satisfactory to Buyer, dated the Closing Date, to such effect.
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7.3 No Injunction or Litigation. Buyer shall not be prohibited by any
statute, rule, regulation, order, ruling, consent, decree, judgment or
injunction of a court or regulatory agency of competent jurisdiction from
consummating the Transaction. No litigation, claim, action, investigation or
proceeding instituted by any governmental body or other regulatory authority
or any other Person shall be pending to restrain, delay, challenge or
invalidate any part of the Transaction.
7.4 Consents Obtained. Seller shall have obtained all of the consents
and approvals required for the execution, delivery and performance of this
Agreement by it, including, without limitation, consents of any guarantor
with respect to, and consents required under the terms of, any Existing
Exploitation Agreement or any other agreement listed in Schedule 3.4, and
any related notices of assignment and acknowledgments, except for such
consents and approvals that would not have a Material Adverse Effect on the
Assets or Seller.
7.5 Release of Liens. Chase shall have released all of its liens in
the Assets in connection with the Chase Credit Agreement.
7.6 Participations and Guild Obligations. Seller shall have delivered
to Buyer a true and complete statement setting forth all Participation
Obligations relating to the Film Assets and all Guild Obligations with
respect to the Film Assets with the level of detail reasonably satisfactory
to Buyer.
7.7 Existing Exploitation Agreements. Seller shall have delivered to
Buyer true and complete copies of all Existing Exploitation Agreements
relating to the Pictures.
7.8 Assignments of Copyright. Seller shall have executed and delivered
to Buyer Assignments of Copyright relating to all copyrights and rights and
interests in copyrights domestic and foreign included in the Film Assets
substantially in the form of Schedule 7.8.
7.9 Bill of Sale. Seller shall have executed and delivered to Buyer a
Bill of Sale substantially in the form of Schedule 7.9.
7.10 Physical Properties. Seller shall have transferred legal
ownership to Buyer in and to all Physical Properties owned by Seller,
subject to lab access letters in favor of third parties pursuant to Existing
Exploitation Agreements ("OWNED ELEMENTS"). With respect to the Owned
Elements, Seller shall have delivered to Buyer agreements, in form and
substance reasonably satisfactory to Buyer, executed by Seller and any
Person holding any of the Assets pursuant to which Seller acknowledges that
as of the Closing Date, legal ownership and title to the applicable Physical
Property has been conveyed to Buyer ("LAB NOTICES"). Seller shall have
transferred to Buyer all of Seller's rights of access to and use of all
Physical Properties which Seller has in and to Physical Properties not owned
by Seller relating to the Film Assets ("ACCESS PICTURE PROPERTIES"). With
respect to Access Picture Properties, Seller shall have delivered to Buyer
agreements, in form and substance reasonably satisfactory to Buyer, executed
by Seller and any Person holding any of the Assets pursuant to which Seller
acknowledges that as of the Closing Date, all of Seller's access rights to
the applicable Access Picture Properties have been conveyed to Buyer
("ACCESS NOTICES"). Prior to and following the Closing, Seller agrees to
assist Buyer, as needed, in obtaining possession of any Physical Properties
transferred to Buyer hereunder, including without limitation assisting Buyer
in gaining access to and inspecting the Physical Property prior to the
Closing Date.
7.11 Additional Notices. Seller shall have delivered to Buyer fully
executed copies of (a) notices to and acknowledgments by all Persons party
to the Existing Exploitation Agreements in form and substance reasonably
acceptable to Buyer ("NOTICES AND ACKNOWLEDGMENTS OF ASSIGNMENT"); (b) all
documentation required to transfer Seller's interests in any sale-leaseback
transactions to Buyer; (c) all documentation required by applicable
financial institutions to transfer the bank or similar accounts and letters
of credit listed on Schedule 7.11 hereto into the name of Buyer; (d) all
documentation required to effectuate Buyer's interests in all musical
compositions with the applicable
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performing rights societies; and (e) all documentation required to assign
any security interests held by Seller to Buyer.
7.12 Legal Opinion. Buyer shall have received a legal opinion of
Gipson Hoffman Pancione P.C., counsel to Seller, in a form reasonably
satisfactory to Buyer and its counsel.
7.13 Financial Statements. Buyer shall have received the audited
balance sheet of Seller as of December 31, 1996 and the related statements
of income and cash flows for the fiscal year ended on that date and notes
related thereto and any financial statements filed with the SEC prepared
after December 31, 1996 by Seller or Seller's accountants.
7.14 Stockholder Authorization. The Transaction shall have been
approved by Seller's stockholders in accordance with Section 5.9.
7.15 Completion of "AN ALAN SMITHEE FILM". The motion picture
presently entitled "AN ALAN SMITHEE FILM" shall have been completed and
delivered by Seller.
7.16 Outstanding Accounts Receivable. Seller shall have delivered to
Buyer a list of all Accounts Receivable which shall be true and correct in
all material respects.
7.17 Related Agreements; Closing Documents. Seller shall have executed
and delivered each of the Related Agreements and each and every other
document required to be delivered at Closing as set forth in this Agreement,
each in form and substance reasonably satisfactory to Buyer and Buyer's
counsel. Seller shall have executed and delivered any and all documents
necessary or appropriate to assign all security interests in favor of Seller
with respect to the Assets, any portion thereof or any revenues or Accounts
Receivable from the Film Assets.
7.18 Further Assurances. Seller shall have executed and delivered, and
shall have caused all third parties to execute and deliver, any and all
documents necessary to transfer title in the Assets to Buyer and to confirm
Buyer's ownership rights in and to the Assets.
7.19 No Adverse Changes. During the period commencing on the date
hereof and ending on the Closing Date, there shall not have been any change
that could constitute a Material Adverse Effect on the Assets or Seller.
7.20 HSR Act. Any waiting period (and any extension thereof) under the
HSR Act applicable to the purchase of the Assets contemplated hereby shall
have expired or shall have been terminated.
7.21 Summit Sales Agency Agreement. Buyer shall have received
reasonably satisfactory evidence of the termination of any and all sales
agency agreements between Seller and Summit relating to the Assets and of
the release of Seller's obligations thereunder with respect to the Assets.
7.22 Smoke Project. Seller shall have executed and delivered to Buyer
such security agreements and filed such Uniform Commercial Code financing
statements and copyright mortgages required by Buyer in order to grant to
Buyer a first priority security interest in all underlying properties in and
to the Smoke Project, including without limitation all Literary Property and
derivative works based thereon (which derivative works shall include any
resulting motion picture). If Buyer does not fund and acquire rights in the
Smoke Project, Buyer agrees that it will take such actions as are necessary
to release such security interests upon receipt by Buyer of payment in full
of all of Buyer's or Buyer's Affiliates' costs and expenses (including
interest) in connection with the Smoke Project.
7.23 Accounting. Buyer shall have approved the accuracy of the
Accounting delivered to Buyer pursuant to Section 2.11.
7.24 Oliver Stone Security Interest. Seller shall have executed and
delivered to Buyer such security agreements and filed such Uniform
Commercial Code financing statements and copyright
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mortgages required by Buyer in order to grant to Buyer the first priority
security interests described in Section 2.10.
7.25 Sale/Leaseback Transactions. Buyer shall have received an
acknowledgment and consent executed by each of Lloyds Commercial Leasing
Limited and Lloyds General Leasing Limited (collectively, "LLOYDS"), in form
and substance reasonably satisfactory to Buyer, whereby Lloyds acknowledges
that either Buyer or the entity or entities designated by Buyer shall
replace the current lessees under the leases with respect to the motion
pictures entitled "JUDGE DREDD" and "EVITA." Buyer shall also have received
such other amendments and/or modifications to the other agreements that
constitute part of the sale/leaseback documentation as Buyer reasonably
deems necessary to reflect the assignment and assumption by Buyer or Buyer's
designee and to otherwise effectuate said assignment and assumption. In
addition, Buyer shall have received an acknowledgment executed by Seller, in
form and substance reasonably satisfactory to Buyer, in which Seller
acknowledges that it has waived all of its rights of subrogation pursuant to
its guaranty of each lessee's obligations under the leases and that
notwithstanding said waiver and said assignment/assumption by Buyer or
Buyer's designee, each guaranty will remain in full force and effect and
enforceable against Seller and Seller's successor(s) in interest for the
full term of the applicable lease.
8. Conditions Precedent to Obligations of Seller. The obligations of
Seller to consummate this Agreement and the Transaction are subject to the
fulfillment, prior to or as of the Closing Date, of each of the following
conditions, each of which may be waived by Seller in writing:
8.1 Representations and Warranties. The representations and warranties
of Buyer contained in Section 4 shall be true and correct in all material
respects at and as of the Closing Date and Buyer shall have delivered to
Seller a certificate, in form and substance satisfactory to Seller, dated
the Closing Date, to such effect.
8.2 Covenants. Buyer shall have complied in all material respects with
all covenants contained herein to be complied with by it prior to or at the
Closing, and Buyer shall have delivered to Seller a certificate in form and
substance satisfactory to Seller, dated the Closing Date, to such effect.
8.3 No Injunction or Litigation. Seller shall not be prohibited by any
statute, rule, regulation, order, ruling, consent, decree, judgment or
injunction of a court or regulatory agency of competent jurisdiction from
consummating the Transaction. No litigation, claim, action, investigation or
proceeding instituted by any governmental body or other regulatory authority
or any other Person shall be pending to restrain, delay, challenge or
invalidate any part of the Transaction.
8.4 Consents Obtained. Buyer shall have obtained all of the consents
and approvals required for the execution, delivery and performance of this
Agreement by it, except for such consents and approvals that would not have
a Material Adverse Effect on Buyer.
8.5 Assumption of Liabilities. Buyer shall have assumed the
liabilities set forth in Section 2.1, other than the Excluded Liabilities
and shall have taken all actions necessary to evidence such assumption.
8.6 HSR Act. Any waiting period (and any extension thereof) under the
HSR Act applicable to the purchase of the Assets contemplated hereby shall
have expired or shall have been terminated.
8.7 Release of Guarantees. Buyer shall have released, or caused
Buyer's Affiliate to release, any guarantees or security interests executed
or granted in connection with the Disney Loans.
8.8 Related Agreements; Closing Documents. Buyer shall have executed
and delivered each of the Related Agreements to which it is a party and each
and every other document required to be delivered at Closing as set forth in
this Agreement.
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8.9 Legal Opinion. Seller shall have received a legal opinion of
O'Melveny & Myers LLP, counsel to Buyer, in a form reasonably satisfactory
to Seller and its counsel.
8.10 Guild Assumption Agreements. Buyer and Seller shall have entered
into agreements with each of SAG, WGA, DGA, AFM, and IATSE pursuant to which
Buyer shall have assumed Seller's Guild Obligations (the "GUILD ASSUMPTION
AGREEMENTS"). The Guild Assumption Agreements shall be in the form required
under the applicable collective bargaining agreement or in such other form
acceptable to the Guilds and Buyer.
8.11 Stockholder Authorization. The Transaction shall have been
approved by Seller's stockholders in accordance with Section 5.9.
9. Termination.
9.1 Grounds for Termination. This Agreement may, under subsections
(a), (b), (c), (d), (f) or (g), or shall, under subsection (e), be
terminated at any time prior to the Closing Date and not thereafter (a) by
mutual written consent of Buyer and Seller; (b) by either Buyer or Seller if
there has been a material breach of the representations, warranties or
covenants of the other party set forth herein, provided if such breach is
curable, it is not cured within thirty (30) days after the delivery of
written notice of the breach by the non-breaching party; (c) by Buyer if the
conditions stated in Section 7 cannot be or have not been satisfied in all
material respects by the Closing Date; (d) by Seller if the conditions
stated in Section 8 cannot be or have not been satisfied in all material
respects by the Closing Date; (e) without any further action by either party
if prior to Seller's stockholders approval of the Transaction, Seller's
Board of Directors receives an unsolicited offer from a third party to take
part in an alternative transaction (the "ALTERNATIVE TRANSACTION") and
Seller's Board of Directors determines, in the exercise of its fiduciary
duties under applicable law, that the Alternative Transaction would be more
beneficial to Seller or Seller's stockholders than the Transaction, such
Alternative Transaction and the Transaction cannot both be consummated in
accordance with their respective terms and the Alternative Transaction is
consummated; (f) by Buyer pursuant to Section 5.8 if negotiations commence
for an Alternative Transaction on or after the thirty-first day after the
date of this Agreement; or (g) by Buyer pursuant to the terms of Section
2.14.
9.2 Effect of Termination. (a) If this Agreement is terminated as
provided in Section 9.1, all obligations of the parties hereunder will
terminate without liability of any party to any other party, except (i) that
the obligations set forth in Sections 10, 11.2 and 11.5, and the provisions
of Sections 11.3, 11.7, 11.8, 11.10, 11.11, 11.12 and 11.13 will survive any
such termination; (ii) that Seller will be liable for Losses incurred by
Buyer caused by and resulting from any breach by Seller of the covenants
contained in Section 5.1(a), 5.1(c), 5.8 or 5.9, or because Seller
intentionally or willfully refuses to proceed with the Closing or
intentionally or willfully prevents the Closing from taking place (unless
Seller refuses to proceed with the Closing or prevents the Closing from
taking place because it is consummating or pursuing an Alternative
Transaction in accordance with the terms of Section 5.8); (iii) that Seller
will be liable for Losses incurred by Buyer (excluding only those Losses
resulting or arising from the continuation of the Disney Distribution
Agreement) caused by and resulting from any breach by Seller of the
covenants contained in Sections 5.1(b), 5.1(d), 5.1(e), 5.1(f), 5.2, 5.3,
5.4, 5.5, 5.6 or 5.7 or any breach by Seller of the representations and
warranties contained in Section 3 (unless Seller refuses to proceed with the
Closing or prevents the Closing from taking place because it is consummating
or pursuing an Alternative Transaction in accordance with the terms of
Section 5.8); (iv) that Buyer will be liable for Losses incurred by Seller
caused by and resulting from any breach by Buyer of the covenants contained
in Section 6; and (v) that if the termination of this Agreement is pursuant
to Section 9.1(b), (c) or (d), except as provided in (ii) and (iii) above,
nothing herein shall prejudice the ability of the non-breaching party from
seeking damages from any Person for any breach of this Agreement, including
without limitation attorneys' fees and the right to pursue any remedy at law
or in equity.
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(b) In addition to any and all other rights of Buyer hereunder, if this
Agreement is terminated pursuant to Section 9.1(e) or Section 9.1(f), in
each case, Buyer shall have the following rights and remedies only if the
Alternative Transaction is consummated, as of the date of such consummation:
(i) If the Alternative Transaction consists of a sale of any of the
Assets, the parties agree that (x) all of Buyer's or Buyer's Affiliates
obligations under the Disney Distribution Agreement with respect to
motion pictures not yet completed and/or delivered by Seller shall
terminate; (y) all rights of Buyer or Buyer's Affiliates and obligations
of Seller under the Disney Distribution Agreement and the Alan Smithee
Distribution Agreement with respect to the Previously Delivered Motion
Pictures shall remain unmodified, and the Disney Distribution Agreement
and the Alan Smithee Distribution Agreement with respect to the
Previously Delivered Motion Pictures, and any security agreements,
mortgages of copyright or other agreements entered into between Buyer or
Buyer's Affiliates and Seller or Seller's Affiliates with respect to the
Previously Delivered Motion Pictures shall remain unmodified and in full
force and effect; and (z) the Master Loan Agreements shall terminate
immediately and the Disney Loans shall be immediately due and payable in
full by Seller.
(ii) If the Alternative Transaction consists of a sale of the stock
of Seller, the parties agree that Seller shall pay all of the reasonable
out-of-pocket expenses incurred by Buyer incident to the negotiation,
preparation and performance of this Agreement and the transactions
contemplated hereby, including without limitation due diligence costs and
the fees, expenses and disbursements of accountants and counsel.
9.3 Rights to Proceed. Subject to Sections 9.1 and 9.2, if any of the
conditions specified in Article 7 have not been satisfied, Buyer will have
the right to proceed with the Transaction without waiving any of its rights
hereunder to seek damages for any breach of a representation, warranty or
covenant. Subject to Sections 9.1 and 9.2, if any of the conditions
specified in Article 8 have not been satisfied, Seller will have the right
to proceed with the Transaction without waiving any of its rights hereunder
to seek damages for any breach of a representation, warranty or covenant.
9.4 Specific Performance. The Assets are uniquely suited for the
purposes and needs of Buyer. If Seller should breach any of its
representations, warranties or covenants under this Agreement, the parties
each acknowledge that the remedy at law would be inadequate to compensate
Buyer. Accordingly, Buyer, in addition to any other available rights or
remedies, may at its sole option sue in equity for specific performance, and
Seller expressly waives the defense that a remedy in damages will be
adequate. Notwithstanding the foregoing, Buyer shall not be entitled to
specific performance hereunder unless and until it has tendered all amounts
due pursuant to Section 2, subject to any right of offset which Buyer may
have.
9.5 Survival of Representations and Warranties. The representations
and warranties contained herein and any investigation or due diligence
conducted by the parties, including without limitation any claims or notices
received from third parties shall survive the Closing for eighteen (18)
months; provided, however, that (a) Seller's representations and warranties
pursuant to Section 3.16 and Buyer's representations and warranties pursuant
to Section 4.4 shall survive until the expiration of the applicable statute
of limitations relating thereto; and (b) all claims asserted within such
eighteen (18) month period shall survive even if such claims are not
resolved within such eighteen (18) month period.
10. Indemnification.
10.1 Obligations of Seller. Seller agrees to indemnify and hold
harmless Buyer and its directors, officers, employees, Affiliates (and
directors, officers and employees of such Affiliates), agents and assigns
from and against any and all Losses of Buyer arising from, under or related
to, or as a result of (a) subject to the limitations set forth in Section
9.2(a)(ii) and (iii), any breach of any of the representations, warranties,
covenants or agreements made by Seller in or pursuant to this Agreement or
the Related Agreements, (b) subject to the limitations set forth in Section
9.2(a)(ii) and
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(iii), any other breach by Seller of this Agreement, (c) any claims asserted
by any shareholder of Seller (whether or not such claim is asserted directly
against Buyer) with respect to the Transaction or the Assets or (d) the
Excluded Liabilities.
10.2 Obligations of Buyer. Buyer agrees to indemnify and hold harmless
Seller and its directors, officers, employees, Affiliates (and directors,
officers and employees of such Affiliates), agents and assigns from and
against any Losses of Seller arising from, under or related to, or as a
result of (a) any breach of any of the representations, warranties,
covenants or agreements made by Buyer in or pursuant to this Agreement or
the Related Agreements, (b) any other breach by Buyer of this Agreement, (c)
the liabilities assumed by Buyer in Section 2.2 above.
10.3 Procedure.
(a) Notice. Any party seeking indemnification (an "INDEMNIFIED
PARTY") with respect to any Loss shall give written notice thereof to the
party required to provide indemnity hereunder (the "INDEMNIFYING PARTY").
Notwithstanding the foregoing, the rights of any Indemnified Party to be
indemnified in respect of any Loss resulting from the asserted liability
shall not be adversely affected by the Indemnified Party's failure to
give or delay in giving notice unless (and then only to the extent that)
the Indemnifying Party is materially prejudiced thereby).
(b) Defense. If any claim, demand or liability is asserted by any
third party against any Indemnified Party, the Indemnifying Party shall
be entitled to participate therein and defend any action or proceeding
brought against the Indemnified Party in respect of matters embraced by
the indemnity, and the Indemnifying Party shall have the right to conduct
and control the defense subject to the Indemnified Party's approval in
writing of outside counsel selected by the Indemnifying Party. After
notice from the Indemnifying Party to the Indemnified Party of its
election to assume the defense of such claim or action, the Indemnifying
Party shall not be liable to the Indemnified Party under this Section 10
for any legal or other expenses subsequently incurred by the Indemnified
Party in connection with the defense thereof other than reasonable costs
of investigation. In any action defended by the Indemnifying Party the
Indemnified Party shall have the right to be represented by its own
counsel at its own expense unless (1) the employment of such counsel
shall have been authorized in writing by the Indemnifying Party or (2)
the Indemnifying Party shall not have properly employed counsel
reasonably satisfactory to such Indemnified Party to have charge of the
defense of such action; in each of such cases such fees and expenses
shall be paid by the Indemnifying Party. In addition, if the named
parties to any such action, suit or proceeding (including any impleaded
parties) shall include both such Indemnified Party and Indemnifying
Party, and such Indemnified Party shall have been advised by counsel that
there may be one or more legal defenses available to it which are
different from, or additional to, those available to the Indemnifying
Party, and if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to
assume the defense of such action, suit or proceeding on behalf of such
Indemnified Party, and the Indemnified Party may participate in the
defense of such action, suit or proceeding and such fees and expenses
shall be paid by the Indemnifying Party; it being understood, however,
that the Indemnifying Party shall not, in connection with any one such
action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel for
all such Indemnified Parties). The Indemnifying Party will not, without
Indemnified Party's written consent, settle or compromise any
indemnifiable claim or consent to the entry of any judgment in respect
thereof unless such settlement, compromise or consent includes an
unconditional release of the Indemnified Party from all liability in
respect of such Indemnifiable Claim. The parties shall cooperate in the
defense of all third party claims which may give rise to Indemnifiable
Claims hereunder.
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10.4 Survival. This Section 10 shall survive any termination of this
Agreement.
11. Miscellaneous.
11.1 Complete Agreement; Modifications. This Agreement, and any
documents referred to herein or executed contemporaneously herewith pursuant
hereto, constitute the parties' entire agreement with respect to the subject
matter hereof and supersede all agreements, representations, warranties,
statements, promises and understandings, whether oral or written, with
respect to the subject matter hereof. This Agreement may not be amended,
altered or modified except by a writing signed by the parties.
11.2 Expenses. Subject to Section 9.2, the parties hereto will each
pay all of their own expenses incurred in connection with the authorization,
preparation, execution and performance of this Agreement and the
Transaction, including, without limitation, all fees and expenses of their
respective agents, representatives, counsel and accountants.
11.3 Remedies Not Exclusive; No Termination. Except as expressly
stated to the contrary herein, no remedy conferred by any of the specific
provisions of this Agreement is intended to be exclusive of any other
remedy, and each and every remedy will be cumulative and will be in addition
to every other remedy given hereunder or now or hereafter existing at law or
in equity or by statute or otherwise. The election of any one or more
remedies will not constitute a waiver of the right to pursue other available
remedies.
11.4 Cooperation. Each party hereto agrees, both before and after the
Closing, to execute any and all further documents and writings and perform
such other reasonable actions which may be or become reasonably necessary or
expedient to effectuate and carry out the Transaction (which shall include
any obligation to make payments). If at any time after the Closing, Seller
receives any payment that is part of the Assets, it will hold such payment
in trust and pay it to Buyer within five (5) business days of its receipt by
Seller. If at any time after the Closing, Buyer receives any payment that is
not part of the Assets, it will hold such payment in trust and pay it to
Seller within five (5) business days of its receipt by Buyer.
11.5 Confidentiality Obligations. From and after the date hereof, each
party hereto shall strictly maintain the confidential nature of, and not
make any public announcement or disclose to any third party or use for any
purpose other than in connection with the Transaction without prior written
consent of the other party, (a) any confidential information learned about
the other or its Affiliates in the course of the Transaction, or (b) the
existence or terms of, or information relating to, this Agreement (including
the Purchase Price), the Related Agreements or any other documents signed at
the Closing Date, unless and to the extent necessary to carry out the
Transaction or as permitted by this Section 11.5. Each party shall be
responsible for any breach of this Section 11.5 by its Affiliates,
directors, officers, employees, agents or advisors. These restrictions on
use and obligations of confidentiality will not apply to any information (i)
to the extent the receiving party is required to disclose such information
by law or applicable regulation, including any securities laws and
regulations and the regulations of any securities exchange, or under court
or government order (in which case no public announcement shall be made
without prior consultation with the other party), (ii) then in the public
domain by acts not attributable to such party, (iii) hereafter received by
the receiving party from a third party source on an unrestricted basis, (iv)
known to the receiving party prior to the date of disclosure hereunder
except to the extent subject to a prior confidentiality agreement, or (v)
necessary to enforce this Agreement provided that all reasonable steps are
taken to limit the amount of disclosure. If the Closing occurs, Buyer shall
be released from any obligations under this Section 11.5 with regard to the
Assets and the Transaction. Seller shall not disclose any confidential
information about the Assets before or after Closing without the prior
written consent of Buyer except as provided in clauses (i), (ii), (iii) or
(v) of the fourth sentence of this Section 11.5. Upon any termination of
this Agreement pursuant to Section 9.1, Buyer and Seller each agree to
return or destroy any and all materials containing any confidential
information.
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11.6 Notices. All notices under this Agreement will be in writing and
will be delivered by personal service, facsimile or certified mail (postage
prepaid) to such address as may be designated from time to time by the
relevant party, and which will initially be as set forth below. Any notice
delivered by personal service will be deemed delivered when it is actually
delivered and received by the relevant party. Any notice sent by facsimile
will be deemed delivered when the confirmation of the successful
transmission of the facsimile is printed by the facsimile machine and
received by the sending party. Any notice sent by certified mail will be
deemed to have been given three (3) days after the date on which it is
mailed. No objection may be made to the manner of delivery of any notice
actually received in writing by an authorized agent of a party. Notices will
be addressed as follows or to such other address as the party to whom the
same is directed will have specified in conformity with the foregoing:
If to Buyer:
Walt Disney Pictures and Television
500 S. Buena Vista Street
Burbank, CA 91521
Attn: Business and Legal Affairs
Fax No.: (818) 843-7109
With a copy to:
Walt Disney Pictures and Television
500 S. Buena Vista Street
Burbank, CA 91521
Attn: Corporate Legal
Fax No.: (818) 563-3366
If to Seller:
Cinergi Pictures Entertainment Inc.
Cinergi Productions N.V. Inc.
2308 Broadway
Santa Monica, CA 90404
Attn: Warren Braverman
Fax No.: (310) 828-0443
With a copy to:
Gipson Hoffman & Pancione
1901 Avenue of the Stars
Suite 1100
Los Angeles, CA 90067-6002
Attn: Robert H. Steinberg, Esq.
Fax No.: (310) 556-8945
11.7 Third Party Benefits. None of the provisions of this Agreement
will be for the benefit of, or enforceable by, any third-party beneficiary.
11.8 Governing Law; Jurisdiction; Service of Process. This Agreement
has been negotiated and entered into in the State of California, and all
questions with respect to the Agreement and the rights and liabilities of
the parties will be governed by the laws of that state, regardless of the
choice of law provisions of California or any other jurisdiction. Any and
all disputes between the parties which may arise pursuant to this Agreement
will be heard and determined before an appropriate federal or state court
located in Los Angeles, California. The parties hereto acknowledge that such
court has the
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jurisdiction to interpret and enforce the provisions of this Agreement and
the parties waive any and all objections that they may have as to personal
jurisdiction or venue in any of the above courts. The parties hereby agree
that service of all process in any such proceeding in any such court may be
made by registered or certified mail, return receipt requested, to the
applicable party at its address provided in Section 11.6, such service being
hereby acknowledged by the applicable party to be sufficient for personal
jurisdiction in any action against such party in any such court and to be
otherwise effective and binding service in every respect. Nothing herein
shall affect the right to serve process in any other manner permitted by
law.
11.9 Waivers Strictly Construed. With regard to any power, remedy or
right provided herein or otherwise available to any party hereunder (a) no
waiver or extension of time will be effective unless expressly contained in
a writing signed by the waiving party; and (b) no alteration, modification
or impairment will be implied by reason of any previous waiver, extension of
time, delay or omission in exercise, or other indulgence.
11.10 Illegality; Severability. Nothing herein contained shall be
construed to require the performance by either party of any act contrary to
law. If any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction or other authority to be invalid,
void or unenforceable, (i) the remainder of the terms, provisions, covenants
and restrictions of this Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated, and (ii) to the
fullest extent possible, the provisions of this Agreement (including without
limitation, all portions of any section of this Agreement containing such
provision held to be invalid, illegal or unenforceable that are not
themselves invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal
or unenforceable.
11.11 Relationship of Parties. Nothing herein contained shall be
deemed to constitute a partnership between or joint venture by the parties,
nor shall either party be deemed the agent of the other. Neither party shall
hold itself out contrary to the provisions hereof.
11.12 Successors and Assigns. This Agreement shall inure to the
benefit of and shall be binding on the parties, and their respective
successors and assigns except that Seller may not assign its rights or
obligations under this Agreement without the prior written consent of Buyer.
Seller may assign its rights and obligations under this Agreement without
the prior written consent of Buyer if the assignment is made pursuant to a
merger, consolidation or sale of all or substantially all of Seller's
assets; provided, however, if said assignment occurs prior to the Closing,
Seller's successor/assignee must assume Seller's obligations hereunder and
Buyer must be reasonably satisfied that said successor/assignee is at least
as able to perform Seller's obligations pursuant to this Agreement as
Seller. Any assignment made by Seller pursuant to this Section 11.12 shall
not release Seller from any of its obligations or liabilities hereunder and
any assignment made in violation of this Section shall be null and void.
Buyer may assign its rights and obligations under this Agreement to any
Affiliate.
11.13 Rules of Construction.
(a) Headings. The Article and Section headings in this Agreement
are inserted only as a matter of convenience, and in no way define,
limit, or extend or interpret the scope of this Agreement or of any
particular Article or Section.
(b) Tense and Case. Throughout this Agreement, as the context may
require, references to any word used in one tense or case shall include
all other appropriate tenses or cases.
11.14 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which will be deemed an original, but all
of which together will constitute one and the same instrument.
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11.15 Disclosure Schedule. Disclosure of information in any section of
this Agreement or the disclosure schedule shall not be deemed disclosure for
purposes of any other Section of this Agreement or the disclosure schedule.
11.16 Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be
construed as if drafted jointly by the parties and no presumption or burden
of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
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IN WITNESS WHEREOF, the parties hereto have duly caused the execution of
this Agreement by its authorized representative as of the date first above
written.
CINERGI PICTURES ENTERTAINMENT INC.,
f/k/a CINERGI PRODUCTIONS, INC.
By: /s/ Warren Braverman
-----------------------------------
Name: Warren Braverman
Title: EXECUTIVE VICE PRESIDENT
CINERGI PRODUCTIONS N.V. INC.
By: /s/ Warren Braverman
-----------------------------------
Name: Warren Braverman
Title: EXECUTIVE VICE PRESIDENT
WALT DISNEY PICTURES AND TELEVISION
By: /s/ Robert S. Moore
-----------------------------------
Name: Robert S. Moore
Title: EXECUTIVE VICE PRESIDENT
Each of the undersigned members of Seller's Board of Directors, in their
capacities as shareholders of Seller, hereby acknowledges, and agrees to comply
with, the terms of Section 5.9(a)(iii).
/s/ Andrew Vajna
--------------------------------------
Andrew Vajna
Dated: April 3, 1997
/s/ Warren Braverman
--------------------------------------
Warren Braverman
Dated: April 3, 1997
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<PAGE>
To the extent that the rights of either of the undersigned are affected by
this Agreement, each of the undersigned acknowledges and consents to any such
modifications.
BUENA VISTA INTERNATIONAL, INC.
By: /s/ L. Kaplan
-----------------------------------
Name: L. Kaplan
Title: SENIOR VICE
PRESIDENT/GENERAL MANAGER
BUENA VISTA PICTURES DISTRIBUTION,
a division of ABC, INC.
By: /s/ Phillip L. Barlow
-----------------------------------
Name: Phillip L. Barlow
Title: PRESIDENT--DISTRIBUTION
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<PAGE>
LIST OF SCHEDULES AND EXHIBITS
<TABLE>
<S> <C>
Schedule A Definitions
Schedule 2.2 Assumed Obligations with respect to Existing Exploitation Agreements
Schedule 2.4 Distribution and Sales Agency Agreements
Schedule 3.2 Required Notices and Consents (Seller)
Schedule 3.4 Existing Exploitation Agreements
Schedule
3.10 Permitted Liens
Schedule
3.11 Music Rights
Schedule
3.13 Insurance Claims
Schedule
3.14 Litigation
Schedule
3.16 Commissions
Schedule 4.2 Required Notices and Consents (Buyer)
Schedule 5.1 Territories Requiring Buyer's Prior Written Consent
Schedule 7.8 Form of Assignment of Copyright
Schedule 7.9 Form of Bill of Sale
Schedule
7.11 Bank Accounts
Exhibit A Pictures
</TABLE>
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<PAGE>
SCHEDULE A
DEFINITIONS
For all purposes of the Agreement to which this is attached as Schedule A,
except as otherwise expressly provided or unless the context otherwise requires,
(a) the terms defined in this Schedule have the meanings assigned to
them in this Schedule and include the plural as well as the singular,
(b) all accounting terms not otherwise defined herein have the meanings
assigned under generally accepted accounting principles in the United
States,
(c) pronouns of either gender or neuter shall include, as appropriate,
the other pronoun forms, and
(d) the words "HEREIN," "HEREOF" and "HEREUNDER" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision.
As used in the Agreement and the Exhibits and Schedules delivered pursuant
to the Agreement, the following definitions shall apply:
"338 ELECTIONS" is defined in Section 1.4.
"ACCESS NOTICES" is defined in Section 7.10.
"ACCESS PICTURE PROPERTIES" is defined in Section 7.10.
"ACCOUNT" shall have the meaning given to such term in the Uniform
Commercial Code.
"ACCOUNTING" is defined in Section 2.11.
"ACCOUNTS RECEIVABLE" means all accounts receivable, unpaid advances and
guarantees, rights to payment, proceeds, letters of credit, claims
(including claims for past due amounts and audit claims whether due or
arising prior to or subsequent to the Closing Date), recoveries or
consideration of any nature whatsoever under the Existing Exploitation
Agreements and all other agreements with respect to the Assets. Without
limiting the generality of the foregoing, the term "Accounts Receivable"
shall expressly include all domestic and non-domestic overages or other
payments or rights to payments paid or payable after January 1, 1997,
whether or not paid, credited or otherwise collected, on the Film Assets.
Notwithstanding the foregoing, the term "Accounts Receivable" shall
expressly exclude (a) with respect to the motion picture entitled "AN ALAN
SMITHEE FILM" all contractual minimum guarantees payable pursuant to the
Existing Exploitation Agreements in the amounts specified on Schedule 2.15
hereof, and (b) with respect to all other Pictures all contractual minimum
guarantees payable pursuant to a contract in existence as of January 1, 1997
(the "EXCLUDED RECEIVABLES"); provided, however, notwithstanding the
foregoing, the term "Accounts Receivable" shall include (x) the contractual
minimum guarantees due with respect to the motion pictures presently
entitled, "UP CLOSE AND PERSONAL", "DEEP RISING" a/k/a "TENTACLES", and (y)
the contractual minimum guarantees due with respect to the motion picture
entitled "AN ALAN SMITHEE FILM" payable pursuant to any contract other than
the Existing Exploitation Agreements listed on Schedule 2.15 hereof.
"AFFILIATE" means, with regard to any Person, any other Person directly
or indirectly controlling or controlled by or under direct or indirect
common control with such first Person.
"AGENCY FILMS" means all motion pictures listed in EXHIBIT A hereto and
identified on Exhibit A as "Agency Films".
"AGREEMENT" is defined in the introductory paragraph and means the
Agreement to which this is attached as Schedule A, as amended or
supplemented together with all Exhibits and Schedules attached or
incorporated by reference therein.
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"ALAN SMITHEE DISTRIBUTION AGREEMENT" means that certain Distribution
Agreement dated as of October 2, 1996 by and between Seller and Buena Vista
Pictures Distribution, Inc.
"ALTERNATIVE TRANSACTION" is defined in Section 9.1(e).
"ANCILLARY RIGHTS" means all ancillary, subsidiary or allied rights now
known and unknown, including without limitation publishing, novelization,
music publishing, soundtrack recording, screenplay, publication,
sponsorship, commercial tie-up, character, live stage, theme park and
merchandising rights of every kind and nature whatsoever derived from,
appurtenant to or related to the Pictures, Picture Rights, the Literary
Property, the title or titles of the Pictures, or said Literary Property,
the characters appearing in the Pictures, Picture Rights or said Literary
Property and/or the names or characteristics of said characters.
"ASCAP" is defined in Section 3.11.
"ASSETS" is defined in Section 1.1.
"BILL OF SALE" means the Bill of Sale in the form attached hereto as
Schedule 7.9.
"BMI" is defined in Section 3.11.
"BOOKS AND RECORDS" means all of Seller's files, books and records
(including, without limitation, financial books and records), data bases,
ledger cards, files, correspondence, computer programs, tapes, disks and
related data processing software that at any time evidence or contain
information relating to any of the Assets or are otherwise necessary or
helpful in the Exploitation, ownership or collection thereof or realization
thereupon, continuity lists, dialogue lists, spotting lists, synchronization
licenses, contracts, correspondence and business affairs and legal files
relating to the development, acquisition, production and Exploitation of the
Pictures and the Picture Rights, cast lists, artwork, press books, story
synopses, credit requirements lists, posters, advertising and publicity
materials and all versions thereof and all of Seller's rights of access to
the foregoing, contracts, agreements, assignments, documents or other
papers, including originally executed copies of such contracts, agreements,
assignments, documents or other papers relating to the Pictures and the
Picture Rights.
"BUYER" is defined in the introductory paragraph.
"BUYER/SELLER STONE AGREEMENT" is defined in Section 2.10.
"BVI DIE HARD DISTRIBUTION AGREEMENT" is defined in Section 1.1(a)(v).
"BVI DIE HARD RIGHTS" is defined in Section 1.1(a)(v).
"CHASE" is defined in Section 2.2.
"CHASE CREDIT AGREEMENT" is defined in Section 2.15.
"CHATTEL PAPER" shall have the meaning given to such term in the Uniform
Commercial Code.
"CODE" means the Internal Revenue Code of 1986, as amended and any
successor thereto and the Treasury Regulations promulgated thereunder.
"CINERGI" is defined in the introductory paragraph.
"CINERGI FILMS" means all motion pictures listed in EXHIBIT A hereto and
identified on Exhibit A as "Cinergi Films".
"CINERGI STOCK" is defined in Section 2.6.
"CLOSING" means the consummation of the Transaction contemplated by the
Agreement.
"CLOSING DATE" is defined in Section 1.2.
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"DISNEY DISTRIBUTION AGREEMENT" means that certain Distribution
Agreement dated as of July 9, 1990, as amended, among Seller, Buyer and
Buyer's Affiliates.
"DISNEY LOANS" is defined in Section 2.2.
"DOCUMENT" shall have the meaning given to such term in the Uniform
Commercial Code.
"DUE DILIGENCE PERIOD" is defined in Section 2.14(b).
"DUE DILIGENCE PERIOD NOTICE" is defined in Section 2.14(b).
"ENCUMBRANCE" means any claim, charge, easement, encumbrance, lease,
covenant, security interest, lien, option, pledge, rights of others, or
restriction (whether on voting, sale, transfer, disposition or otherwise),
whether imposed by agreement, understanding, law, equity or otherwise,
except for any restrictions on transfer generally arising under any
applicable federal or state securities law.
"EVITA WARNER BROS. SOUNDTRACK AGREEMENT" means that unsigned letter
agreement dated as of June 12, 1995 by and between Warner Bros. Records Inc.
and Cinergi Service, Inc.
"EVITA WARNER BROS. SOUNDTRACK RIGHTS" means only Seller's or Seller's
Affiliates' rights under the Evita Warner Bros. Soundtrack Agreement (or any
substitute or replacement agreement or additional similar agreement)
regarding the "EVITA" soundtrack.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCLUDED GUILD OBLIGATIONS" is defined in Section 2.2.
"EXCLUDED LIABILITIES" is defined in Section 2.2.
"EXCLUDED RECEIVABLES" is defined in the definition of Accounts
Receivable.
"EXISTING EXPLOITATION AGREEMENTS" means the Exploitation Agreements in
effect as of the date hereof and are listed on Schedule 3.4 hereto.
"EXISTING THIRD PARTY EXPLOITATION RIGHTS" means the Exploitation rights
sold, licensed or granted to third parties pursuant to Existing Exploitation
Agreements.
"EXPLOITATION" and the correlative "EXPLOIT" means:
(a) The right, under copyright and otherwise, to release, sell,
exhibit, distribute, subdistribute, lease, sublease, market, exploit,
license, sublicense, broadcast, transmit, reproduce, advertise,
publicize, perform or otherwise exploit and derive revenues from the
Pictures and Picture Rights in perpetuity, throughout the universe, in
any and all languages and versions, on any and all sizes and gauges of
film, videotape or other material and by any and every means and media,
now known or which may hereafter be developed (including, without
limitation, theatrical, non-theatrical, all forms of television
(including free, pay, basic cable and satellite) and video devices, all
interactive and computer assisted media; and in connection with any such
uses (whether the same be for profit or otherwise) to use and perform all
sound and music synchronized therewith.
(b) The right to manufacture and procure such positive prints and
preprint and other materials and to cause the performance of such
laboratory work with respect to the Pictures as Buyer may require and to
cause trailers of the Pictures to be produced, manufactured, exhibited
and distributed by every means, method or device now or hereafter known.
(c) The right to advertise, publicize and exploit the Pictures and
Picture Rights by such means in such media now known and unknown, and to
such extent as Buyer may deem desirable. Such rights shall include
without limitation, with respect to all Persons appearing in or rendering
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services in connection with the Pictures, the right to issue and
authorize publicity concerning them and the right to use, reproduce,
transmit, broadcast, exploit, publicize and exhibit their names,
photographs, likenesses, transcriptions, films and other reproductions
thereof in connection with the distribution, exhibition, advertising and
exploitation of the Pictures.
(d) The right to exercise Sequel and Remake Rights and other
Ancillary Rights.
"EXPLOITATION AGREEMENT" means any agreement relating to the sale,
grant, license or other conferral to any Person of any right to release,
sell, distribute, subdistribute, lease, sublease, market, license,
sublicense, exhibit, broadcast, transmit, reproduce, publicize, or otherwise
Exploit any Pictures or Picture Rights or any rights in any Pictures or
Picture Rights.
"FILM ASSETS" means all right, title and interest of every kind and
nature without limitation in and to the Pictures and Picture Rights,
including without limitation all tangible and intangible property and rights
relating thereto and all Proceeds (as defined below in this Schedule A)
thereof now known and unknown other than the Excluded Receivables. Without
limiting the generality of the foregoing, the term "Film Assets" shall
include all tangible and intangible rights now known and unknown and
property related to the Pictures and Picture Rights, including, without
limitation, the following:
1. All rights of every kind and nature (including, without
limitation, copyrights) in and to any literary, trademark, service mark,
literary property right, personal right, musical, dramatic or other
literary material of any kind or nature upon which, in whole or in part,
any Pictures or Picture Rights is or may be based, or from which it is or
may be adapted or inspired or which may be or has been used or included
in any Pictures or Picture Rights including, without limitation, all
scripts, outlines, books, titles, concepts, manuscripts or other
properties or materials of any kind or nature in whatever state of
completion and all drafts, versions and variations thereof (collectively,
the "LITERARY PROPERTY");
2. All tangible personal property, Goods and other physical
properties of every kind or nature of or relating to Pictures or Picture
Rights and all versions thereof, including, without limitation, all
Physical Properties relating to the development, production, completion,
delivery, exhibition, distribution or other exploitation of any Pictures
or Picture Rights, and all versions thereof or any part thereof;
3. All rights of every kind or nature in and to any and all music
and musical compositions created for, used in or to be used in connection
with any Pictures or Picture Rights including, without limitation, all
copyrights therein and all rights to perform, copy, record, rerecord,
produce, publish, reproduce or synchronize any or all of said music and
musical compositions as well as all other rights to exploit such music
including record, sound track recording, and music publishing rights;
4. All Ancillary Rights;
5. All rights of every kind or nature, present and future, in and to
all agreements relating to the development, production, completion,
delivery and Exploitation of any Pictures, including, without limitation,
all agreements for the services of writers, directors, cast, producers,
special effects personnel, musicians, animators, cameramen and other
creative, artistic and technical staff and agreements for the use of
studio space, equipment, facilities, locations, animation services,
special effects services and laboratory contracts;
6. All rights to receive development cost reimbursements plus
interest and any other sums relating to development costs of the
Pictures;
7. All insurance and insurance policies heretofore or hereafter
placed upon any Pictures, Picture Rights, the Physical Properties or the
insurable properties thereof and/or any person or
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persons engaged in the development, production, completion, delivery or
exploitation of any Pictures or Pictures Rights and the proceeds thereof;
8. All copyrights, rights in copyrights, interests in copyrights,
applications for copyrights, and renewals and extensions of copyrights,
domestic and foreign, heretofore or hereafter obtained upon any Pictures,
Picture Rights or the Literary Property or any part thereof, and the
right to make publication thereof for copyright purposes, to register
claims under copyright, and the right to renew and extend such
copyrights, and the right to sue for past, present and future
infringements of copyright;
9. All rights to produce, acquire, lease, sublease or Exploit any
Pictures, Picture Rights, the Literary Property and any and all rights
therein in perpetuity, without limitation, in any manner and in any media
whatsoever throughout the universe by any and all means, methods,
processes or devices now known or hereafter conceived, devised or
created, including, without limitation, all contract rights, General
Intangibles, Accounts, Chattel Paper, Documents, Instruments, letters of
credit and other rights of any kind except only the Excluded Receivables
(and all Proceeds and products of any of the foregoing) arising out of or
in connection with any Existing Exploitation Agreement (the "ASSIGNED
EXPLOITATION AGREEMENTS"), including without limitation (a) all rights of
the Seller to receive moneys due or to become due pursuant to the
Assigned Exploitation Agreements and all audit claims with respect
thereto, except only the Excluded Receivables; (b) all rights of the
Seller to receive proceeds of any insurance, indemnity, warranty or
guaranty with respect to the Assigned Exploitation Agreements; (c) all
claims of the Seller for damages arising out of or for breach of or
default under the Assigned Exploitation Agreements; (d) all rights of the
Seller to terminate, amend, supplement, modify or exercise rights or
options under any Assigned Exploitation Agreement, all rights of the
Seller to perform thereunder and to compel performance and otherwise
exercise any and all rights and remedies under the Assigned Exploitation
Agreements; and (e) all rights of the Seller in, to and under all
security agreements, leases and other documents (including without
limitation all drawing documents relating to any letters of credit) and
contracts securing, guaranteeing or otherwise relating to any such
Assigned Exploitation Agreements, Accounts, contract rights, Chattel
Paper, Documents, Instruments, letters of credit, General Intangibles or
other obligations;
10. Any pledgeholder, laboratory access, or film warehousing
agreements relating to any Pictures or Picture Rights and any and all
documents, receipts or books and records, including, without limitation,
documents or receipts of any kind or nature issued by any pledgeholder,
warehouseman or bailee with respect to any Pictures, Picture Rights and
any Physical Property relating thereto;
11. The title or titles of any Pictures or Picture Rights and all
rights of Seller to the exclusive use thereof including rights protected
pursuant to trademark, service mark, unfair competition and/or other
laws, rules or principles of law or equity;
12. The following collection accounts:
a. All deposit and other accounts listed on Schedule 7.11 to the
Agreement (the "COLLECTION ACCOUNTS") and any extension or renewal of
such accounts and all certificates and instruments, if any, from time
to time representing or evidencing such accounts with any bank or
other financial institution;
b. All monies on deposit in any Collection Account, all account
investments relating thereto from time to time and all certificates
and instruments, if any, from time to time representing or evidencing
such account investments (the "ACCOUNT INVESTMENTS"); and
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c. All interest, dividends, cash, instruments and other property
from time to time received, receivable or otherwise distributed or
distributable in respect of or in exchange for any or all of the
Collection Accounts.
13. Any and all tangible and intangible personal property including
without limitation General Intangibles not elsewhere included in this
definition, constituting or relating to any Pictures or Picture Rights
which may arise in connection with the creation, production, completion,
delivery, financing, ownership, possession or exploitation of any
Pictures or Picture Rights;
14. All proceeds, products, rents and profits of or from any and all
of the foregoing Film Assets and, to the extent not otherwise included,
all payments under insurance or any indemnity, warranty or guaranty,
payable by reason of loss or damage to or otherwise with respect to any
of the foregoing Film Assets excluding only the Excluded Receivables
(collectively "PROCEEDS"). For purposes of this Schedule A, the term
Proceeds includes whatever is receivable or received when Film Assets or
proceeds are sold, exchanged, collected or otherwise disposed of, whether
such disposition is voluntary or involuntary.
"FOX" shall mean Twentieth Century Fox.
"GOODS" shall have the meaning given to such term in the Uniform
Commercial Code.
"GENERAL INTANGIBLES" shall have the meaning given to such term in the
Uniform Commercial Code, and in any event shall include without limitation,
all United States and foreign inventions, processes, formulae, computer
software, designs, trade secrets, rights in proprietary information,
licenses, patents, patent rights, patent applications, copyrights, copyright
rights, copyright applications, trademarks, trademark rights, trademark
applications, and all related goodwill, service marks, service mark rights,
service mark applications, and all related goodwill, trade names, trade name
rights, business names, and other like business property rights, all
renewals and extensions thereof and all applications to acquire, renew or
extend any such rights on file or for which application may at any time be
made in the future, contracts, franchises, licenses, permits, subscriptions
and other agreements and all rights thereunder, rights granted by others
which permit the Seller to sell or market items of personal property,
documents, good will, judgments, causes in action and claims, whether or not
inchoate (including without limitation the right to sue for past, present
and future infringement), and all other general intangibles and intangible
property and all rights thereunder.
"GUILD" means any guild, craft, union or labor organization having
jurisdiction over any Person rendering services or granting any rights in
any capacity in connection with the Pictures.
"GUILD ASSUMPTION AGREEMENTS" is defined in Section 8.10.
"GUILD LIENS" is defined in Section 3.4.
"GUILD OBLIGATIONS" means all obligations, liabilities and/or
commitments of any kind or nature arising under or in connection with any
contract, collective bargaining agreement or other document or instrument
with any Guild or the members of any Guild, including, without limitation,
any obligation or liability to make any payments pursuant to any such
contracts, agreements, documents or instruments arising in connection with
or as a result of the development, acquisition, production or Exploitation
of any Picture or any Picture Rights, including, without limitation, any
so-called "residual", "reuse", "rerun" or "supplemental market" payments.
"HSR ACT" means the Hart-Scott-Rodino Anti-Trust Improvements Act of
1976, as amended, and rules and regulations thereunder.
"INDEMNIFIABLE CLAIM" means any Loss for or against which any party is
entitled to indemnification under this Agreement.
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"INDEMNIFIED PARTY" is defined in Section 10.3 and means the party
entitled to indemnity hereunder.
"INDEMNIFYING PARTY" is defined in Section 10.3 and means the party
obligated to provide indemnification hereunder.
"INSTRUMENT" shall have the meaning given to such term in the Uniform
Commercial Code.
"INVOICING PARTY" is defined in Section 2.13.
"LAB NOTICES" is defined in Section 7.10.
"LICENSED FILMS" means all motion pictures listed in EXHIBIT A hereto
and identified on Exhibit A as "Licensed Films".
"LLOYDS" is defined in Section 7.25.
"LOSS" or "LOSSES" means any action, cost, damage, obligation,
disbursement, expense, liability, loss and settlement payments, including
without limitation attorneys', accountants and other professional fees and
costs.
"MASTER LOAN AGREEMENTS" is defined in Section 2.5.
"MATERIAL ADVERSE EFFECT" with respect to the Assets means any effect
which would materially prejudice or derogate from the Assets or otherwise
materially alter or diminish the value of the Assets or Buyer's rights and
remedies with respect to the Assets or would materially increase the
liabilities assumed by Buyer pursuant to this Agreement. "Material Adverse
Effect" with respect to any Person means any effect which renders a Person
insolvent or which would materially diminish the ability of such Person to
perform its obligations under this Agreement or to consummate the
Transaction.
"MISSING SCHEDULES" is defined in Section 2.14(a).
"NOTICES AND ACKNOWLEDGMENTS OF ASSIGNMENT" is defined in Section 7.11.
"OWNED ELEMENTS" is defined in Section 7.10.
"PACKAGE" is defined in Section 2.12.
"PACKAGE BUYER" is defined in Section 2.12.
"PARTICIPATION OBLIGATIONS" means all financial obligations for
contingent compensation incurred or assumed by Seller in connection with the
Exploitation of the Pictures or Picture Rights in the nature of gross
participations, net profit or net proceeds participations or so-called
deferments based upon the Exploitation of any Picture, any Picture Rights,
any Sequel and Remake Rights or Ancillary Rights acquired by Buyer.
"PERSON" means an association, a corporation, an individual, a
partnership, a joint stock company, a joint venture, a limited liability
company, a trust or any other entity or organization, or a government or any
political subdivision or agency thereof.
"PHYSICAL PROPERTIES" means all tangible properties of every kind or
nature of or relating to the Pictures or Picture Rights, and all versions
and copies thereof owned by Seller or to which Seller has a right of access
or use including, without limitation, all Books and Records, scripts, the
Literary Property, exposed film, developed film, positives, negatives,
prints, answer prints, special effects, preprint materials (including
interpositives, negatives, videotapes, duplicate negatives, internegatives,
color reversals, intermediates, lavenders, fine grain master prints and
matrices, video masters and all other forms of preprint elements which may
be used to produce prints or other copies or additional preprint elements,
whether now known or hereafter devised), foreign language dubbed and
subtitled versions, sound tracks, recordings, audio and video tapes and
discs of all types and gauges, cutouts,
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trims, all contracts, credit lists, music licenses, all promotional
materials relating to any Pictures or Picture Rights, including, without
limitation, transparencies, posters, press books, publicity kits, still
photographs and promotional trailers and any and all other physical
properties of every kind and nature relating to any Pictures in whatever
state of completion, and all duplicates, drafts, versions, variations and
copies of each thereof.
"PICTURE RIGHTS" means: (a) any rights, whether arising under written
contracts or otherwise, to sell, produce, acquire, distribute,
subdistribute, act as sales agent for, exhibit, lease, sublease, license,
sublicense or otherwise Exploit Pictures, including all rights under
so-called sales agency, license, "pick up" or "sale-leaseback" arrangements
and other contracts and agreements relating to the acquisition of Pictures
or any interest therein in any market, territory or media, now known or
unknown, by any means, method, process or device, now known or hereafter
developed, (b) all rights to sell trailer and advertising accessories
relating to Pictures, (c) all Sequel and Remake Rights relating to Pictures,
and (d) any rights to Exploit any element or component of Pictures or any
Ancillary Rights relating to Pictures, including without limitation music
publishing rights relating to any music embodied in or written for Pictures,
including the right to grant licenses to print, perform or mechanically
reproduce such music. Notwithstanding anything to the contrary contained
herein, (i) the term "Picture Rights" with respect to the motion picture
entitled "EVITA" shall exclude the Evita Warner Bros. Soundtrack Rights; and
(ii) the term "Picture Rights" with respect to the motion picture entitled
"DIE HARD III" shall be limited to the BVI Die Hard Rights.
"PICTURES" means the Cinergi Films, the Licensed Films, the Agency Films
and the Reimbursement Films; provided, however, (i) the term "Pictures" with
respect to the motion picture entitled "EVITA" shall exclude the Evita
Warner Bros. Soundtrack Rights; and (ii) the term "Pictures" with respect to
the motion picture entitled "DIE HARD III" shall be limited to the BVI Die
Hard Rights.
"PREVIOUSLY DELIVERED MOTION PICTURES" means those motion pictures
completed and delivered by Seller to Buyer prior to the Closing Date
pursuant to the Disney Distribution Agreement and the Alan Smithee
Distribution Agreement.
"PRO RATA SHARE" is defined in Section 2.13.
"PROXY STATEMENT" is defined in Section 5.9(b).
"PURCHASE PRICE" means the value of the assumed obligations under
Section 2.2 and the value of the stock and warrants surrendered under
Section 2.6.
"REIMBURSEMENT FILMS" means all motion pictures listed in Exhibit A
hereto and identified on Exhibit A as "Reimbursement Films".
"RELATED AGREEMENTS" means the Agreement, the Bill of Sale, the
Assignments of Copyright, the Guild Assumption Agreements, the Lab Notices,
the Access Notices, the Account Notices, the Notices and Acknowledgments of
Assignment, letters of credit transfer documents, transfer documents for the
Collections Accounts and any documents executed or delivered under Section
7.17.
"REPRESENTATIVES" is defined in Section 5.8.
"SCHEDULE DELIVERY DATE" is defined in Section 2.14(a).
"SEC" means the Securities and Exchange Commission or any similar
successor entity.
"SELLER" is defined in the introductory paragraph.
"SELLER PREPARED SCHEDULES" is defined in Section 2.14(a).
"SEQUEL AND REMAKE RIGHTS" means all rights to develop, produce or
exploit remakes, sequels, prequels and any other motion picture, television
program or series of programs or other production
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based in whole or in part on a Picture, the title of a Picture, any Picture
Rights, any underlying Literary Property or any material included in a
Picture.
"SMOKE PROJECT" is defined in Section 1.1(d).
"SUMMIT" means Summit Entertainment Ltd.
"TENTACLES ACCOUNT" is defined in Section 1.1(c).
"TRANSACTION" means the transactions contemplated by the Agreement and
the Related Agreements.
"UNIFORM COMMERCIAL CODE" means the Uniform Commercial Code in effect in
the State of California as of the date hereof.
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EXHIBIT A
PICTURES
"UP CLOSE AND PERSONAL" (the "Agency Films")
"MEDICINE MAN", "TOMBSTONE", "RENAISSANCE MAN", "COLOR OF NIGHT", "SCARLET
LETTER", "NIXON", "DIE HARD III"*, "SHADOW CONSPIRACY", "AMANDA" and "AN ALAN
SMITHEE FILM" (collectively, the "Cinergi Films")
"JUDGE DREDD", "EVITA"** and "DEEP RISING" (a/k/a "TENTACLES")
(collectively, the "Licensed Films")
"EATERS OF THE DEAD" (the "Reimbursement Films")
- ------------------------
*Rights with respect to the Picture entitled "DIE HARD III" shall be limited to
the BVI Die Hard Rights as set forth in Sections 1.1(a)(v)of this Agreement
and in the definitions of Pictures and Picture Rights.
**Rights with respect to the Picture entitled "EVITA" shall not include the
Evita Warner Bros. Soundtrack Rights as set forth in the definition of
Pictures and Picture Rights.
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APPENDIX B
ASSIGNMENT AGREEMENT
This Agreement dated as of July 14, 1997 ("ASSIGNMENT AGREEMENT") between
TWENTIETH CENTURY FOX FILM CORPORATION, a Delaware corporation ("FOX"), on the
one hand, and CINERGI PRODUCTIONS INC. now named CINERGI PICTURES ENTERTAINMENT
INC., a Delaware corporation ("CPEI") and CINERGI PRODUCTIONS N.V. INC., a
Delaware corporation ("CPNV"), previously known as CINERGI PRODUCTIONS N.V., on
the other hand (collectively, "CINERGI"), is made with reference to the
following facts:
A. Fox and Cinergi entered into a One Picture Theatrical Motion Picture
License Agreement dated as of April 15, 1994 ("ONE PICTURE LICENSE") with
respect to the production of a Theatrical Motion Picture entitled "DIE HARD WITH
A VENGEANCE" f/k/a "DIE HARD 3" ("PICTURE"), whereby Fox transferred certain
rights to Cinergi and Cinergi assumed all obligations of Fox in connection
therewith as such rights related to the Picture.
B. Fox and Cinergi entered into a Memorandum of Agreement, dated as of
September 9, 1992, as amended ("FOX AGREEMENT"), relating to the financing,
distribution and exploitation of the Picture. Pursuant to the Fox Agreement, all
of the distribution and exploitation rights in and to the Picture were divided
into the "FOX RIGHTS" as set forth on Exhibit "A" attached hereto, and the
"CINERGI RIGHTS", as set forth on Exhibit "B" attached hereto.
C. Cinergi and Buena Vista International Inc. ("BVI") entered into that
certain agreement dated as of September 10, 1992 ("BVI AGREEMENT"), whereby
Cinergi licensed certain of the Cinergi Rights to BVI to distribute and exploit
the Picture in certain foreign territories ("BVI RIGHTS") , which rights are set
forth and attached hereto as Exhibit "C".
D. Cinergi engaged Summit Entertainment L.P. and Summit UK Ltd. as sales
agents (collectively "SUMMIT") to license certain of the Cinergi Rights in the
Picture to subdistributors in certain foreign territories ("SUMMIT RIGHTS")
pursuant to the "SUMMIT AGREEMENT(S)". With respect to the Summit Agreements,
each subdistributor, and a summary of certain of the respective distribution
rights, territories and terms are set forth and attached hereto as Exhibit "D".
E. Fox and Cinergi now wish to enter into an agreement to transfer to Fox
certain rights and obligations of Cinergi in connection with the Picture.
NOW, THEREFORE, in consideration of the following covenants and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. CONDITIONS PRECEDENT: Except for those obligations which vest upon the
signature of this Assignment Agreement or conditions which must be satisfied
upon the signature of this Assignment Agreement, as more fully set forth below
in Paragraph 16., Fox and Cinergi's obligations under this Assignment Agreement
are conditioned upon the following "CONDITIONS PRECEDENTS": (a) a due diligence
review by Fox, to be completed to Fox's satisfaction within 5 business days of
the date of this Assignment Agreement, of the relevant portions of all documents
and agreements (including, but not limited to, agreements with third party
distributors, status of residual payments, etc.), to be provided by Cinergi, as
required by Fox in connection with the Picture and the Assignment Agreement; (b)
the approval of Cinergi's stockholders of the sale of substantially all of the
assets of Cinergi; (c) consummation of all of the transactions contemplated by
the Purchase and Sale Agreement dated April 3, 1997 between Cinergi and Walt
Disney Pictures and Television ("WDPT")(the "LIBRARY AGREEMENT", as such
agreement may be amended from time to time by the parties thereto), including
without limitation the delivery by Cinergi and WDPT to one another of all
consideration to be delivered at the closing under the Library Agreement (the
"WDPT CLOSING").
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2. CLOSING: The closing of this Assignment Agreement ("FOX CLOSING") and
the assignment of rights hereunder shall take place concurrently with the WDPT
Closing of the Library Agreement. Cinergi represents and warrants that the
Library Agreement has been signed by the parties thereto. If the Library
Agreement terminates or is terminated prior to the Fox Closing, then this
Assignment Agreement will automatically terminate. If this Assignment Agreement
is terminated pursuant to the provisions of this Paragraph, then all of the
obligations of the parties hereto will terminate without liability of either
party to the other and neither party shall have any remedies at law or at equity
against the other. Except as set forth in the immediately preceding two
sentences, neither party shall have the right to terminate this Assignment
Agreement and if either party is in breach of this Assignment Agreement, each
party's remedies shall be as provided in Paragraph 18.(c).
3. ASSIGNMENT OF RIGHTS: At the Fox Closing at which payment of the
Purchase Price (as hereinafter defined in Paragraph 11.) is required to be made
for the Fox Closing to be effective, Cinergi shall irrevocably and perpetually
transfer and assign to Fox, its successors, assigns and licensees, in perpetuity
and throughout the universe, all of Cinergi's present and future right, title
and interest in and to the Picture ("GRANTED RIGHTS"), subject to the license of
the BVI Rights during the BVI Term (as hereinafter defined) and the license of
the Summit Rights during the Summit Terms (as hereinafter defined) and Cinergi's
right to receive certain revenues derived under the Summit Agreements (as more
specifically described below), which Granted Rights include without limitation
those rights derived as follows:
(a) DOCUMENTS: The Granted Rights include any and all of the rights
either granted to Cinergi or held by Cinergi in connection with the Picture
in or under the following documents:
(i) The Fox Agreement, which rights include, without limitation, (A)
the Cinergi Rights; (B) Cinergi's copyright ownership in the Picture and
all elements thereof (copyright in the Picture and all elements thereof
are currently vested jointly in Fox and Cinergi), including, without
limitation, all advertising, promotional and marketing materials in
connection with the Picture (e.g., press kits, EPKs, movie posters, web
sites, and promotional films); (C) the right to retain or receive any
amounts pursuant to Paragraphs 8.(a)(ii), 8.(b)(ii) and 8.(c)(ii) of the
Fox Agreement; and (D) any right or interest in connection with any
Sequel or Remake of the Picture, including without limitation, any right
of first negotiation/last refusal or any right to receive passive
payments. The parties hereto acknowledge and agree that (1) Fox shall
have no obligation to remit to or share with any party, including
Cinergi, any revenue from the exploitation of the Fox Rights, (2) Fox
shall have no obligation whatsoever to account to, render accounting
statements to, or make payment to any third party participants or to
Cinergi, other than to pay the Purchase Price to Cinergi, (3) Cinergi
shall have no obligation whatsoever to account to, render accounting
statements to, or make payment to Fox, (4) Cinergi shall have no
obligation to remit to or share with Fox, any revenue from the
exploitation of the Cinergi Rights, including without limitation the BVI
Rights and the Summit Rights, or pursuant to Paragraph 9.(b) of the Fox
Agreement, and (5) Cinergi shall have no obligation to pay the Fox Rights
Fee as set forth in Paragraph 10. of the Fox Agreement and no obligation
to remit to or share with any party, including Fox, any revenue from the
exploitation of the Cinergi Rights.
(ii) One Picture License. The parties hereto acknowledge and agree
that Fox assumes no obligations in connection with the rights granted to
Cinergi pursuant to the One Picture License, and that Cinergi's
obligation to indemnify Fox in connection with Cinergi's assumption of
obligations under the One Picture License remains in full force and
effect, until such time as the Cinergi Rights are fully exploitable by
Fox.
(iii) The BVI Agreement, pursuant to which Cinergi has licensed the
BVI Rights to BVI until the termination of the current term (or earlier
termination, if applicable) ("BVI TERM") of exploitation of the BVI
Rights, to expire on June 1, 2020, following which the BVI Rights will
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automatically revert to Fox in accordance with this Assignment Agreement.
During the BVI Term, Fox will not be entitled to receive any monies in
connection with the BVI Rights, including those amounts which would have
been Cinergi's share of the overages.
(iv) The Summit Agreements, pursuant to which Cinergi has licensed
the Summit Rights until the termination of the current terms of each
license agreement (or earlier termination, if applicable) ("SUMMIT
TERM(S)") of exploitation of the Summit Rights, to expire as set forth in
the respective license agreements between Summit and each of the
licensees ("SUMMIT AGREEMENTS"), as substantially set forth on Exhibit
"D" attached hereto, following which the Summit Rights will automatically
revert to Fox, as each respective term ends, in accordance with this
Assignment Agreement. If a Summit Term terminates early, then Cinergi may
relicense the respective Cinergi Rights subject to such early
termination, provided that the new license period does not extend beyond
the current term of such licensed rights; and, if any of the Cinergi
Rights are not licensed as of the date hereof, then Cinergi may license
such rights hereafter, provided that the terms for such license(s) shall
not extend beyond May 31, 2002. In either of the foregoing instances,
Cinergi will provide Fox with a copy of any such new license agreement.
During the Summit Term(s), Fox will not be entitled to receive any monies
in connection with the Summit Rights.
(b) COPYRIGHT REVENUES: Without limiting Cinergi's right to receive
monies derived directly from the distribution and the exploitation of the
Cinergi Rights and BVI's right to receive monies derived directly from the
distribution and exploitation of the BVI Rights, Cinergi grants to Fox the
exclusive right to collect all royalties, fees and other revenues which
Cinergi, or the current registered copyright owner of the Granted Rights, is
otherwise entitled to collect by reason of any statute, governmental
regulation, operation of law, or in any other manner, for, based upon or in
connection with, in whole or in part, or directly or indirectly, any use of
the Picture pursuant to any exercise of the Granted Rights ("COPYRIGHT
REVENUES"), including the recording and/or retransmission of the signal
embodying the Picture, as well as the secondary transmission or
retransmission of the Picture, by any means now known or hereafter devised.
(c) OTHER REVENUES: With the exception of the continuing revenue from
the Summit Rights until the end of the Summit Term(s) (which shall be the
sole property of Cinergi), all consideration payable to Cinergi by WDPT for
the Library Agreement (which shall be the sole property of Cinergi), and
BVI's rights to receive revenues from the BVI Agreement pursuant to
Paragraph 3.(a)(iii) hereof (which shall be the sole property of BVI), any
and all other revenues of any kind or nature, in connection with the
Picture, from any and all sources whether or not referred to herein, are
expressly assigned to Fox, and Cinergi, or Cinergi's successors in interest,
shall immediately upon receipt thereof, transfer such revenues to Fox.
Cinergi shall have no rights with respect to the Picture or any revenues
therefrom except as expressly set forth in this Assignment Agreement.
4. PARTICIPANT ACCOUNTING: The parties acknowledge and agree that Fox is
not assuming any obligation to pay any "PARTICIPATIONS" in the so-called
"back-end" of the Picture (e.g., "net profits", "gross receipts", etc.) at any
time, and that Cinergi will remain solely liable for any such participations and
for any audit claims by all third party participants in connection with any and
all participation statements and payments made by Cinergi. The participation
statement rendered by Fox dated November, 1996 is the last statement to be
rendered by Fox to Cinergi in connection with the Picture and Cinergi waives any
and all rights it may have to audit or challenge any participation statement
rendered by Fox to Cinergi with respect to the Picture. Cinergi shall have no
obligation to render any further participation statements to Fox and Fox waives
any and all rights it may have to audit or challenge any participation
statements rendered by Cinergi to Fox in connection with the Picture. Any
participations (or settlements or buy-outs in lieu of Cinergi paying such
participation) paid by Cinergi to participants in the Picture after Cinergi's
receipt of the Purchase Price (as defined below) will take into account the
receipt by Cinergi of the Purchase Price. Cinergi and Fox each releases and
discharges the other and each of the other's parents, subsidiaries, affiliates,
shareholders, directors, officers, employees and agents (the "Fox Parties" and
the
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"Cinergi Parties", respectively) from and against any and all claims,
liabilities, contracts, agreements, causes of action, costs, expenses and
obligations of every kind and nature whatsoever, known or unknown, contingent or
fixed, liquidated or unliquidated, against any of either the Cinergi Parties or
the Fox Parties, respectively, in connection with each party's accounting or
obligation to account to any party in connection with the Picture. Each party
waives all rights it may have or claim to have under the provisions of
California Civil Code section 1542 or under any equivalent statutory or
decisional authority or law of any jurisdiction. Section 1542 of the California
Civil Code provides as follows:
A general release does not extend to claims which the creditor does not
now know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtors.
Each party understands that the facts with respect to which the foregoing
release is given may hereafter turn out to be other than or different from the
facts now known to it or believed by it to be true, and it therefore expressly
assumes the risk of the facts turning out to be different and agrees that the
foregoing release shall be in all respects effective and not subject to
termination or rescission by any such difference in facts.
5. RESIDUAL ACCOUNTING: Cinergi will deliver any additional documents and
records as required by Fox as reasonably necessary in connection with residual
accounting for the Picture. The parties acknowledge and agree that Fox is
assuming no liability for guild and union residuals for the Cinergi Rights and
that Fox will have no obligation in connection therewith until such time as Fox
commences receiving revenues derived from Fox's exploitation of the former
Cinergi Rights. Fox will enter into the appropriate guild and union assumption
agreements as required. Prior to such time, Cinergi, or Cinergi's licensees,
shall remain obligated for the residual accounting for the Cinergi Rights.
6. CINERGI'S REPRESENTATIONS: Each of CPEI and CPNV hereby represent and
warrant that each of the following statements is true and correct as of the date
hereof and as of the payment of the Purchase Price at the Closing:
(a) EXISTENCE: Each of CPEI and CPNV (i) is a corporation duly
organized and validly existing in good standing under the laws of the State
of Delaware and (ii) has the corporate power and adequate authority to make
and carry out the transactions contemplated by this Assignment Agreement.
(b) AGREEMENT AUTHORIZED: The execution, delivery and performance of
this Assignment Agreement has been duly authorized by all necessary
corporate action on the part of each of CPEI and CPNV, except for any
applicable approval of CPEI's stockholders, which if required by applicable
law will be sought by CPEI at the same time it seeks stockholder approval of
the transactions contemplated by the Library Agreement. This Assignment
Agreement has been duly executed and delivered by each of CPEI and CPNV and
is a legally valid and binding obligation of each of CPEI and CPNV,
enforceable against each of CPEI and CPNV in accordance with its terms,
except as their respective obligations may be affected by bankruptcy,
insolvency, reorganization, receivership, moratorium or similar laws, or by
equitable principles relating to or limiting creditors' rights or remedies
generally.
(c) NO CLAIMS/EXCLUSIVE PROPRIETOR/NO IMPAIRMENT: Subject to the terms
and conditions of the BVI Agreement and the Summit Agreement(s): Cinergi is
the exclusive proprietor, throughout the universe, of the Granted Rights;
Cinergi has not assigned, licensed or in any manner encumbered, materially
diminished or impaired the Granted Rights; Cinergi has not committed any act
by which the Granted Rights will be materially diminished or impaired or
omitted to perform any material or commercially reasonable act necessary to
preserve the Granted Rights; and to the best of Cinergi's knowledge, there
are no outstanding claims or litigation pending against or involving the
Granted Rights and none of the Granted Rights have been granted or assigned
by
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Cinergi or any party acting with the authority of or on behalf of Cinergi to
any party other than to Fox; upon the assignment to Fox of the Granted
Rights, Fox will be the only owner of the Granted Rights, free and clear of
all claims, liens (with the exception of customary guild liens with respect
to the payment of residuals and BVI's lien), rights and interests of any
person or entity.
(d) ALL REQUIRED DOCUMENTATION HAS BEEN SUPPLIED: All necessary
information has already been supplied to Fox regarding payment of residuals,
and that the pages from the BVI Agreement provided to Fox are the only
materially relevant pages thereof with respect to the Granted Rights, and
that there are no other materially relevant documents which would in any
manner effect the transfer of the Granted Rights to Fox. Exhibit "D" is a
true and accurate representation of (i) all license agreements with respect
to the Summit Rights, and (ii) all material information thereon including,
without limitation, the "trigger dates" and "expiry dates" of each license
agreement listed thereon.
7. FOX'S REPRESENTATIONS: Fox hereby represents and warrants that each of
the following statements is true and correct as of the date hereof and as of the
payment of the Purchase Price at the Closing:
(a) EXISTENCE: Twentieth Century Fox Film Corporation (i) is a
corporation duly organized and validly existing in good standing under the
laws of the State of Delaware and (ii) has the corporate power and adequate
authority to make and carry out the transactions contemplated by this
Assignment Agreement.
(b) AGREEMENT AUTHORIZED: The execution, delivery and performance of
this Assignment Agreement has been duly authorized by all necessary
corporate action on the part of Fox. This Assignment Agreement has been duly
executed and delivered by Fox and is a legal, valid and binding obligation
of Fox, enforceable against Fox in accordance with its terms, except as
Fox's obligations may be affected by bankruptcy, insolvency, reorganization,
receivership, moratorium or similar laws, or by equitable principles
relating to or limiting creditors' rights or remedies generally.
8. FULL INVESTIGATION: Fox hereby confirms that no representation or
warranty relating to the Granted Rights has been made by Cinergi other than as
set forth in this Assignment Agreement and that Fox is entering into this
Assignment Agreement based on (a) Fox's review of the exhibits and schedules
hereto, (b) Fox's own evaluation of the Granted Rights, and (c) Cinergi's
representations and warranties as set forth in this Assignment Agreement.
9. COOPERATION: Cinergi may request that Fox provide certain information
to Cinergi regarding Fox and the transactions contemplated by this Assignment
Agreement in connection with the preparation by Cinergi of a proxy statement (or
similar materials) to be distributed to Cinergi's stockholders, and Fox will use
reasonable good faith efforts to supply such information to Cinergi, as is
reasonably required by Cinergi. In connection with Cinergi's preparation of such
proxy materials, Fox shall be entitled to review and make recommendations with
respect to the description of Fox and the description of the transactions
contemplated by this Assignment Agreement to be contained in the proxy
materials.
10. PUBLIC ANNOUNCEMENTS: Fox and Cinergi will consult with each other
before issuing any press release or any public statement with respect to this
Assignment Agreement 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.
11. CONSIDERATION: As consideration in full for the foregoing assignment
of rights and for the representations, warranties and agreements made herein by
Cinergi, Fox agrees to pay Cinergi the sum of $11,250,000 ("PURCHASE PRICE"),
payable to Cinergi at Closing by wire transfer of immediately available funds to
an account designated by Cinergi.
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12. INDEMNIFICATION:
(a) Cinergi hereby agrees to indemnify, defend, and hold harmless the Fox
Parties against all third party claims, demands, causes of action, losses,
liabilities, damages, judgments, deficiencies, costs and expenses, including
without limitation reasonable attorneys', accountants' and expert witnesses'
fees and the costs and expenses of enforcing this indemnification (whether or
not litigation is commenced) incurred, arising out of or resulting from: (i)
Cinergi's exploitation of the Cinergi Rights prior to the time that Fox has the
right to commence exploitation thereof, respectively; (ii) any breach by Cinergi
of any of Cinergi's representations, warranties and/or agreements contained in
this Assignment Agreement; (iii) the assertion of any claim or demand, or the
commencement or prosecution of any suit, action or other proceeding against any
of the Fox Parties based on or arising from any obligation or liability of
Cinergi which Fox has not expressly agreed to assume under the terms of this
Assignment Agreement; and (iv) the assertion of any claim or demand, or the
commencement or prosecution of any suit, action or other proceeding against any
of the Fox Parties respecting or relating to this Assignment Agreement or the
assignment of the Granted Rights hereunder, by or on behalf of Cinergi, any
creditor or shareholder of Cinergi, any representative (including, without
limitation, a trustee or receiver) of Cinergi, or any representative of
creditors or shareholders of Cinergi, other than an action to enforce this
Assignment Agreement.
(b) Fox hereby agrees to indemnify, defend, and hold harmless the Cinergi
Parties against all third party claims, demands, causes of action, losses,
liabilities, damages, judgments, deficiencies, costs and expenses, including
without limitation reasonable attorneys', accountants' and expert witnesses'
fees and the costs and expenses of enforcing this indemnification (whether or
not litigation is commenced) incurred, arising out of or resulting from: (i)
Fox's exploitation of the Fox Rights; (ii) Fox's exploitation of the Cinergi
Rights subsequent to the time that Fox has the right to commence exploitation
thereof, respectively; (iii) any breach by Fox of any of Fox's representations,
warranties and/or agreements contained in this Assignment Agreement; (iv) the
assertion of any claim or demand, or the commencement or prosecution of any
suit, action or other proceeding against Cinergi based on or arising from any
obligation or liability assumed by Fox pursuant to this Assignment Agreement.
13. SECURITY FOR CINERGI'S OBLIGATIONS: Cinergi or its successor in
interest shall at all times for a period of 5 years from the Fox Closing
maintain liquid assets of at least $500,000 to provide additional security to
Fox to secure Cinergi's obligations hereunder. If the liquid assets of Cinergi
or Cinergi's successor in interest fall below such level during such 5 year
period, Cinergi shall grant Fox a security interest in $250,000 worth of
collateral, subject to the mutual approval of Fox and Cinergi, or in lieu
thereof, at Cinergi's election, either a letter of credit in favor of Fox in the
amount of $250,000 from a bank with $200,000,000 or more of assets, or Andy
Vajna's personal guarantee in the amount of $250,000.
14. INSURANCE: Cinergi will continue to maintain for 5 years from the date
hereof a policy of errors and omissions insurance for the Picture naming Fox and
it's parents, subsidiaries affiliates and licensees as additional insureds.
Cinergi will also maintain directors and officers insurance for 4 years from the
date hereof, with coverage up to $10,000,000, naming the Fox Parties as
additional insureds, and Cinergi will provide Fox with satisfactory certificates
of insurance evidencing same.
15. ADDITIONAL DOCUMENTATION: Both parties agree to perform such other and
further acts and to execute, acknowledge and deliver such other and further
documents and instruments as may reasonably be deemed necessary or appropriate
by the other to carry out the intent of this Assignment Agreement.
16. OBLIGATIONS VESTING ON SIGNATURE: Notwithstanding anything to the
contrary contained in this Assignment Agreement, prior to the Closing, upon
signature of this Assignment Agreement the parties shall perform certain
obligations in accordance with Paragraphs 1.(a), 9., 10., 12.(a)(iv), 14., and
15.
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17. QUIET ENJOYMENT: Fox shall not take any actions which in any way
disturb or interfere with BVI's full and unencumbered exercise of the BVI Rights
pursuant to the BVI Agreement or in any way disturb or interfere with Cinergi's
sublicensees full and unencumbered exercise of the Summit Rights pursuant to the
Summit Agreements. In addition, Cinergi and Cinergi's exclusive licensees may
continue to use all marketing materials (in their possession) for the Picture
during their respective license terms, notwithstanding the assignment of rights
in such materials to Fox pursuant to Paragraph 3.
18. RETURN OF MATERIALS: Cinergi has give Summit and BVI written notice
that upon termination of the current Summit Terms and the BVI Term,
respectively, all right, title interest and possession in and to the physical
materials delivered to each licensee shall be transferred to Fox, and that
Summit and BVI are obligated to return all physical materials to Fox, including
without limitation, all internegatives, neutral backgrounds, alternative
language tracks and dubbed or subtitled versions, as well as video cassettes or
video discs remaining unsold. All physical materials shall be delivered to
Twentieth Century Fox Film Corporation, Library Services, 10201 Pico Boulevard,
Los Angeles California, 90035.
19. MISCELLANEOUS:
(a) INTERPRETATION: This Assignment Agreement may be amended or
modified only by the written agreement of Cinergi and Fox. Nothing contained
herein shall require the commission of any act or the payment of any
compensation which is contrary to any law, governmental rule or regulation.
If there shall exist any conflict between this Assignment Agreement and any
such law, governmental rule or regulation, the latter shall prevail, and the
provision(s) hereof affected shall be curtailed, limited or eliminated only
to the extent necessary to remove such conflict and, as so modified, this
Assignment Agreement shall continue in full force and effect. This
Assignment Agreement shall be deemed to have been drafted by all the parties
hereto, since all parties were assisted by their counsel in reviewing and
agreeing thereto, and no ambiguity shall be resolved against any party by
virtue of its participation in the drafting of this Assignment Agreement.
(b) GOVERNING LAW: This Assignment Agreement shall be deemed to have
been negotiated and entered into, and shall be construed in accordance with
the laws of the State of California (or United States federal law if there
is no California law applicable) as to agreements which are fully
negotiated, signed and performed within California. All actions, proceedings
or litigation arising from this Assignment Agreement shall be instituted and
prosecuted solely within the State of California. Fox and Cinergi hereby
consent to the jurisdiction of the state courts of California and the
federal courts located in the State of California as to any matter arising
out of or relating to this Assignment Agreement.
(c) REMEDIES: Cinergi recognizes and confirms that in the event of a
failure or omission by Cinergi constituting a breach of its obligations
under this Assignment Agreement, whether or not material, the damages, if
any, caused Cinergi are not irreparable or sufficient to entitle Cinergi to
injunctive or other equitable relief. Consequently, Cinergi's rights and
remedies shall be limited to the right, if any, to obtain damages at law and
Cinergi shall not have any right in such event to terminate or rescind this
Assignment Agreement or any of the rights granted to Fox hereunder or to
enjoin or restrain the advertising, promotion, distribution, exhibition or
exploitation of the rights granted hereunder and/or any of Fox's rights
pursuant to this Assignment Agreement. Notwithstanding the foregoing the
parties hereto acknowledge and agree that (1) the termination of the
Assignment Agreement pursuant to Paragraph 2., shall not constitute a breach
of this Assignment Agreement; (2) if all of the Conditions Precedent have
been satisfied and thereafter Fox fails to pay the Purchase Price, Cinergi
can bring an action for specific performance for the Fox Closing to occur
and for payment of the Purchase Price, or a remedy at law for damages.
(d) ASSIGNMENT: This Assignment Agreement is non-assignable by
Cinergi, except to another company wholly-owned by Cinergi or the survivors
in-interest of Cinergi. This Assignment Agreement may be assigned by Fox,
provided that Fox will remain liable for all of the obligation's of
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Fox hereunder, including payment of the Purchase Price if all of the
Conditions Precedent have been satisfied.
20. ENTIRE AGREEMENT: Except as expressly amended by this Assignment
Agreement, the Fox Agreement, as amended, and the One Picture License remain in
full force and effect and together with this document expresses the binding and
entire agreement between Fox and Cinergi and shall replace and supersede all
prior arrangements and representations, either oral or written, as to the
subject matter hereof.
The parties have signed this Assignment Agreement as of the day and year
written above.
<TABLE>
<S> <C> <C> <C>
CINERGI PICTURES ENTERTAINMENT INC. TWENTIETH CENTURY FOX FILM CORPORATION
("CPEI") ("Fox")
/s/ RANDY PAUL /s/ ROBERT B. COHEN
---------------------------------------- ----------------------------------------
Title SENIOR VICE PRESIDENT Robert B. Cohen
By By
Title EXECUTIVE VICE PRESIDENT LEGAL
AFFAIRS
CINERGI PRODUCTIONS N.V. INC.
("CPNV")
/S/ RANDY PAUL
----------------------------------------
Randolph M. Paul
BY
Title SENIOR VICE PRESIDENT
</TABLE>
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SHORT FORM ASSIGNMENT
"DIE HARD WITH A VENGEANCE"
ASSIGNMENT: For good and valuable consideration, receipt of which is hereby
acknowledged, the undersigned, CINERGI PRODUCTIONS INC. now named CINERGI
PICTURES ENTERTAINMENT INC. and CINERGI PRODUCTIONS N.V. now named CINERGI
PRODUCTIONS N.V. INC. (COLLECTIVELY, "CINERGI"), does hereby transfer and assign
to TWENTIETH CENTURY FOX FILM CORPORATION ("FOX"), its successors and assigns
forever, all of Cinergi's present and future right, title and interest in and to
"DIE HARD WITH A VENGEANCE" (the "PICTURE") ("GRANTED RIGHTS"), including (a)
the copyright in the Picture and all elements thereof, (b) the copyright in all
advertising, promotional and marketing materials in connection with the Picture
(e.g., press kits, EPKs, movie posters, web sites, and promotional films), (c)
all sequel and remake rights and other analogous and allied rights, and all
copyrights in connection therewith, (d) all tangible and intangible properties
respecting the Picture whether in existence or known now or in the future, and
(e) all of Cinergi's present and future right, title and interest in and to any
of the literary material or underlying properties upon which the Picture was
based, including and any and all synopses, treatments, scenarios, screenplays
(but excluding the right to license certain international rights of distribution
to the Picture, which have limited terms, as well as the right to receive
proceeds in connection with such international distribution rights).
CONTROLLING DOCUMENT: This transfer and assignment is subject to all the
terms and conditions of the Assignment Agreement dated as of July 14, 1997
between Cinergi and Fox.
IN WITNESS WHEREOF, the undersigned has executed this document on
, 199 , effective as of , 199 , the date of the
closing of the aforesaid Assignment Agreement between Cinergi and Fox.
CINERGI PICTURES ENTERTAINMENT INC.
By ______________________________________
Title
CINERGI PRODUCTIONS N.V. INC.
By ______________________________________
Title
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EXHIBIT "A"
FOX RIGHTS
"FOX RIGHTS": All rights not specifically granted to Cinergi are retained
by Fox, including:
(a) Distribution Rights: Fox shall have the sole and exclusive right
under copyright to exercise in the Licensed Territory all rights of
Theatrical Distribution, Theatricial Exhibition, Non-Theatrical
Distribution, Non-Theatrical Exhibition, Free Television Distribution, Free
Television Exhibition, Pay Television Distribution, Pay Television
Exhibition, and Home Video Distribution and Home Video Exhibition with
respect to the Picture and trailers thereof and excerpts and clips
therefrom, in any and all languages and versions, including dubbed,
subtitled and narrated versions, using any form of Motion Picture Copy.
(b) Other Rights: Fox shall have the sole and exclusive right to
exercise worldwide all other rights in addition to the Fox Distribution
Rights with respect to Picture including, without limitation, Commercial
Tie-In Rights; Legitimate Stage Rights; Literary Publishing Rights; Live
Television Rights; Merchandising Rights; Music Publishing Rights; Radio
Rights; Remake Rights; Sequel Motion Picture Rights; and Soundtrack
Recording Rights; and the right to license clips from the Picture for other
Motion Pictures (collectively, "OTHER RIGHTS", also known as "ANCILLARIES")
with respect to the Picture, and any Literary Material or musical material
upon which the Picture is based.
(c) "Licensed Territory": The Licensed Territory shall consist of
Japan, the United States and Canada including territories and possessions,
Bahamas, Bermuda, Panama Canal Zone and all ships and airlines owned by
entities whose principal offices for licensing rights of Non-Theatrical
Exhibition are located in the Licensed Territory. With respect to
Ancillaries, the Licensed Territory will be the entire world.
All capitalized words herein are as defined in the Fox Glossary, attached to
the Memorandum of Agreement.
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EXHIBIT "B"
CINERGI RIGHTS
"CINERGI RIGHTS": Cinergi shall have the sole and exclusive right under
copyright to exercise in all areas of the world other than the Licensed
Territory all rights of Theatrical Distribution, Theatrical Exhibition,
Non-Theatrical Distribution, Non-Theatrical Exhibition, Free Television
Distribution, Free Television Exhibition, Pay Television Distribution, Pay
Television Exhibition, and Home Video Distribution and Home Video Exhibition
with respect to the Picture and trailers thereof and excerpts and clips
therefrom (solely for marketing purposes), in any and all languages and
versions, including dubbed, subtitled and narrated versions, using any form of
Motion Picture Copy.
All capitalized words herein are as defined in the Fox Glossary, attached to
the Memorandum of Agreement.
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EXHIBIT "C"
BVI RIGHTS
As of August 1, 1994
Cinergi Productions, N.V.
Polarisweg 35. St. 6
Willemstad, Curacao
Netherlands, Antilles
Gentlemen:
The following sets forth the principal terms of the agreement between Buena
Vista International, Inc. ("BVI") and Cinergi Productions, N.V. ("Cinergi") with
respect to the acquisition of exclusive distribution and other rights by BVI to
the full length theatrical motion picture tenantively entitled "Die Hard III"
(the "Picture").
1. Intentionally Omitted.
2. Distribution.
a. Cinergi does hereby irrevocably grant, assign and license to BVI the
exclusive right, title and interest in and to the Picture and each of its
elements and all exclusive rights to distribute, exhibit, market and exploit the
Picture in any and all manner and in all media, now known or hereafter devised
including, without limitation, theatrical, non-theatrical, all forms of home
video cassettes/discs, cartridges, tapes or similar devices now known or
hereafter devised to be used in conjunction with a reproduction apparatus which
causes the picture to be visible on the screen of a television receiver,
television monitor or comparable device now known or hereafter devised in a
private residence for viewing at the place of origin of such exhibition ("Home
Video Devices") and all forms of television including, without limitation,
standard, non-standard, subscription, pay television, cable and basic cable,
satellite, etc. (including pay-per-view), fiber optic and digital delivery
systems, etc. ("Television"); the right to advertise, publicize and promote the
Picture including, without limtiation, the right to excerpt and/or synopsize the
Picture and/or screenplay for the Picture [provided, that any such excerpt
and/or synopsis shall not exceed Two Thousand Five Hundred (2,500) words in
length]; commercial tie-ins (subject to (i) the rights of Fox under the Fox
Agreement and (ii) the rights of principal talent under their respective
agreements with Cinergi [copies of which Cinergi agrees to deliver pursuant to
the delivery provisions of subparagraph 3.a. below]); subject to the prior
consent of Cinergi and Fox, the right to change the title of the Picture; the
right to finance, produce and distribute a "making of" promotional film (subject
to the rights and approvals of all persons who provide services to the Picture
[of which Cinergi shall deliver a written account pursuant to the delivery
provisions of subparagraph 3.a. below], the applicable rights of Fox [of which
Cinergi shall deliver a written account pursuant to the delivery provisions of
subparagraph 3.a. below] and applicable guild and union requirements); the right
to cut or edit the Picture for legal and censorship reasons, time parameters and
standards and practices requirements of airlines, television stations and
broadcasters; the right to subtitle and dub the Picture into foreign languages;
the right with respect to all persons appearing in the Picture or performing
production services therein to issue and authorize publicity concerning such
persons and the right to use, reproduce, transmit, broadcast, exploit, publicize
and exhibit their names and likenesses (subject to third party agreements with
Cinergi, of which Cinergi shall deliver a written account of pertinent points
pursuant to the delivery provisions of subparagraph 3.a. below) in
transcriptions, advertising, distribution and exploitation of the Picture in the
following territories: (i) Benelux (i.e. Belgium, the Netherlands and
Luxembourg) (in the French, German, Dutch and Flemish languages); (ii)
Scandinavia (i.e. Finland, Sweden, Norway, Iceland and Denmark); (iii) Central
and South America (i.e. Antigua, Argentina, Barbuda, Belize, Bolivia, Brazil,
Cayman Islands, Chile, Columbia, Costa Rica,
B-12
<PAGE>
Dominica, Dominican Republic, Ecuador, El Salvador, French Guiana, Grenada,
Guadeloupe, Guatemala, Guyana, Haiti, Honduras, Jamaica, Martinique, Mexico,
Montserrat, Netherlands Antilles, Nicaragua, Panama (excluding the Canal Zone),
Peru, Saint Lucia, St. Kitts & Nevis, St. Vincent/Grenadines, Surinam, Tobago,
Trinidad, Turks and Caicos Islands, and Venezuela); (iv) French-speaking Europe
and Africa (i.e. Algeria, Andorra, Benin, Bukina Faso, Burundi, Cameroon,
Central African Empire, Chad, Congo, Corsica, Dahomey, Djibouti, France, French
military forces stationed in West Germany, Gabon, Guinea, Ivory Coast, Mali,
Mauritania, Monaco (Monte Carlo), Morocco, Nigeria (English language excluded),
Ruanda, Senegal, Togo, Tunisia, Zaire); (v) German-speaking Europe (i.e.
Germany, Austria); (vi) the United Kingdom and Eire and (vii) Spain, Switzerland
(in the Italian, French and German languages, excluding Italian language Home
Video Device rights and Italian language Television rights), Taiwan, Portgual,
Greece, and all of the respective territories, protectorates and possessions of
all of the aforementioned, including planes and ships owned by entities whose
principal offices for licensing rights of planes and ships are located in the
respective nations (altogether, the "BVI Territory"). Cinergi shall have the
right to distribute the Picture in all media, throughout the world, except for
the BVI Territory ("Cinergi Territory"). Each party shall be solely responsible
for all distribution costs and expenses in connection with the Picture in its
respective territory including, without limitation, advertising costs and costs
associated with the manufacture of prints and Home Video Devices.
b. The terms of this Agreement (the "Term") shall commence as of the date
hereof and terminate Twenty Five (25) years from the initial theatrical release
of the Picture in any country of the BVI Territory.
B-13
<PAGE>
EXHIBIT "D"
DATE: 7 July 1997 Last Contract Log #97-2834 Last Amendment = EE433
<TABLE>
<CAPTION>
PICTURE TERRITORY DISTRIBUTOR
- -------------- -------------------------- --------------------
<S> <C> <C> <C>
Die Hard WAV Africa--East AF
Die Hard WAV Africa--West AF
Die Hard WAV Albania EE
Die Hard WAV Australia/N.Z. FE Village Roadshow
Die Hard WAV Baltics (LAT, LITH, EST) EE Nika-L Ltd.
Die Hard WAV Bangladesh FE Star TV (PSTV)
Die Hard WAV Bulgaria EE
Die Hard WAV Burma FE Star TV (PSTV)
Die Hard WAV China FE Mairim
Die Hard WAV C.I.S. EE Ekaterinburg Art
Die Hard WAV Croatia EE Oscar Vision (TH/V)
Die Hard WAV Czech Republic EE Lumiere (Intersonic)
Die Hard WAV Hong Kong FE Intercontinental
Die Hard WAV Hungary EE Intercom
Die Hard WAV India, Nepal, Bhutan FE Distant Horizon Ltd.
Die Hard WAV India, Nepal, Bhutan FE Star TV (PSTV)
Die Hard WAV Indonesia FE Crystal Corporation
Die Hard WAV Israel EU A.D. Matalon
Die Hard WAV Italy EU Cecchi Gori
Die Hard WAV Malaysia FE Sunny Film
Die Hard WAV Middle East EU Jaguar
Die Hard WAV Middle East EU Paramount Pictures
Die Hard WAV Middle East EU Star TV (PSTV)
Die Hard WAV Pakistan/Afganistan FE Star TV (PSTV)
Die Hard WAV Philippines FE Solar Films
Die Hard WAV Poland EE Filmwell Int'l
Die Hard WAV Romania EE Media Pro
Die Hard WAV Romania EE CME (FTTV)
Scenecast
Die Hard WAV Serbia&Mont Only EE (Tuckvision)
Die Hard WAV Singapore/Brun. FE Shaw Renters
Die Hard WAV Singapore/Brun. FE TCS (FTV)
Die Hard WAV Slovakia EE Lumiere (Intersonic)
Die Hard WAV Slovakia EE CME (FTTV)
Die Hard WAV Slovenia & Macedonia EE Oscar (TH/V)
Die Hard WAV Slovenia EE CME (FTTV)
Die Hard WAV South Africa/Zim AF Ster-Kinekor
Die Hard WAV South Korea FE Dong-A (Dai-Ichi)
Die Hard WAV Sri Lanka FE Lakshmi Pictures
Die Hard WAV Sri Lanka FE Star TV (PSTV)
Die Hard WAV Switz--Italian EU Cecchi-gori--V.Tv.
Die Hard WAV Thailand FE Apex International
Die Hard WAV Turkey EU Ozen Film
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
PAY TV
S ---------------------------------
TH NT PV CV A - H HV PPV TER CAB SAT
- --------- --------- --------- --------- --- --------- --------- --- --- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NR
NR
NR
X X X X NR X X X X X X
X X X NR X X
NR STAR*
NR
NR STAR*
X X X X NR X X X X X
X X X X NR X X
OSC OSC OSC OSC NR OSC OSC
LUM LUM LUM LUM NR LUM LUM
X X X X NR X X X X X
X X X X NR X X X X X
DH DH DH DH NR DH DH STAR*
DH DH DH DH NR DH DH STAR*
X X X X NR X X X X X
X X X X NR X X X X
X X X X NR X X X X X X
X X X X NR X X X X
JAG JAG JAG JAG NR JAG JAG JAG JAG PPI/STAR*
JAG JAG JAG JAG NR JAG JAG JAG JAG PPI
JAG JAG JAG JAG NR JAG JAG JAG JAG STAR*
NR STAR*
X X X X NR X X X X X X
X X X X NR X X X X X
MP MP MP MP NR MP MP
MP MP MP MP NR MP MP
X X X X NR X X
SHAW SHAW SHAW SHAW NR SHAW SHAW
SHAW SHAW SHAW SHAW NR SHAW SHAW
LUM LUM LUM LUM NR LUM LUM
LUM LUM LUM LUM NR LUM LUM
OSC OSC OSC OSC NR OSC OSC
OSC OSC OSC OSC NR OSC OSC
X X X X NR X X X X X X
X X X X NR X X X X X
LAK LAK LAK LAK NR LAK LAK STAR*
LAK LAK LAK LAK NR LAK LAK STAR*
NR X X X X
X X X X NR X X X X
X X X X NR X X X X X X X
<CAPTION>
FTV
-------------------------------
TH TER CAB SAT
- --------- --------- --- ---
<S> <C> <C> <C>
X X X X
X
X X X X
X
OSC
LUM
X X X
X X X X
DH
DH
X X X X
X X X
X X X X
X X X
JAG JAG JAG
JAG JAG JAG
JAG JAG JAG
X X X X
X X X X
MP CME*
MP CME*
X
SHAW TCS TCS TCS
SHAW TCS TCS TCS
LUM
LUM CME*
OSC CME*
OSC CME*
X X X X
X X X X
LAK
LAK
X X X
X X X
X X X X
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
TERM EXPIRY TBD = TO BE DETERMINED
----------------- # OF TV TRIGGER TRIGGER ----------------------
NOTES TRIGGER EVENT * YRS RUNS (IN DAYS) DATE TYPE EXPIRY DATE EST/ ACT
- ---------------------- ----------------- ---------- --------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEL F & T 12 16-May-95 DEL 16-May-07 A
NOD PRINT 5 18-Aug-95 PAY 18-Aug-00 E
START DATE 10 months 1-Apr-97 1-Feb-98 A
START DATE 10 months 1-Apr-97 1-Feb-98 A
DEL PRINT 11 26-May-95 DEL 26-May-06 A
DEL PRINT 5 20-Feb-97 PAY 20-Feb-02 E
NOD PRINT 5 22-May-95 NOD 22-May-00 A
NOD PRINT 5 19-May-95 NOD 19-May-00 A
NOD PRINT 7 17-May-95 NOD 17-May-02 A
NOD PRINT 7 8-Jun-95 DEL 8-Jun-02 A
NOD PRINT 7 19-May-95 NOD 19-May-02 A
START DATE 10 months 1-Apr-97 1-Feb-98 A
NOD PRINT 7 30-May-95 NOD 30-May-02 A
NOD PRINT 7 22-May-95 NOD 22-May-02 A
DEL FS by L/C 25 9-Jun-95 DEL 9-Jun-20 A
DEL PRINT 7 1-Jun-95 DEL 1-Jun-02 A
DEL PRINT 5 16-Jun-95 DEL 16-Jun-00 A
START DATE 15 months 18-Nov-96 18-Feb-98 A
START DATE 10 months 1-Apr-97 1-Feb-98 A
START DATE 10 months 1-Apr-97 1-Feb-98 A
DEL PRINT 7 30-May-95 DEL 30-May-02 A
NOD PRINT 7 22-May-95 NOD 22-May-02 A
NOD PRINT 5 26-Jul-95 NOD 26-Jul-00 A
NOD 3 2 TBA NOD TBA
NOD PRINT 5 19-May-95 NOD 19-May-00 A
NOD F & T 5 18-May-95 NOD 18-May-00 A
\\\ \\\ \\\ \\\ \\\ \\\ 19-Nov-99 A
NOD PRINT 5 19-May-95 NOD 19-May-00 A
NOD 3 2 TBA NOD TBA
NOD PRINT 5 22-May-95 NOD 22-May-00 A
NOD 3 2 TBA NOD TBA
DEL PRINT 7 8-Jun-95 DEL 8-Jun-02 A
DEL PRINT & D 7 30-May-95 DEL 30-May-02 A
NOD PRINT 5 15-Jan-97 PAY 15-Jan-02 E
NOD PRINT 5 15-Jan-97 PAY 15-Jan-02 E
DEL FS by L/C 25 9-Jun-95 DEL 9-Jun-20 A
NOD PRINT 7 18-May-95 NOD 18-May-02 A
DEL F & T 7 30-Aug-95 PAY 30-Aug-02 A
<CAPTION>
NOTES NOTES
- ---------------------- ---------
<S> <C>
</TABLE>
B-16
<PAGE>
AMENDMENT TO
ASSIGNMENT AGREEMENT
This is an Amendment dated August 26, 1997 ("Amendment") to that certain
Assignment Agreement dated as of July 14, 1997 ("Assignment Agreement") between
TWENTIETH CENTURY FOX FILM CORPORATION, a Delaware corporation ("Fox"), on the
one hand, and CINERGI PRODUCTIONS INC. now named CINERGI PICTURES ENTERTAINMENT
INC., a Delaware corporation ("CPEI") and CINERGI PRODUCTIONS N.V. INC., a
Delaware corporation ("CPNV"), previously known as CINERGI PRODUCTIONS N.V., on
the other hand (collectively, "Cinergi"), with respect to "DIE HARD WITH A
VENGEANCE" f/k/a "DIE HARD 3" ("Picture")
Fox and Cinergi wish to amend the insurance provision of the Assignment
Agreement. Therefore, in consideration of the following covenants and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Paragraph 14. of the Assignment Agreement is hereby amended so that the
obligation of Cinergi to maintain directors and officers insurance will be
reduced to coverage in the amount of $500,000.
2. Except as expressly amended by this Amendment, the Assignment Agreement shall
remain in full force and effect. This Amendment shall in all respects be
governed by the law of the State of California applicable to agreements executed
in and to be wholly performed within the State of California.
The parties have signed this Amendment to the Assignment Agreement as of the day
and year first written above.
<TABLE>
<S> <C> <C> <C>
CINERGI PICTURES ENTERTAINMENT INC. TWENTIETH CENTURY FOX FILM CORPORATION
("CPEI") ("Fox")
/s/ WARREN BRAVERMAN /s/ ROBERT B. COHEN
---------------------------------------- ----------------------------------------
Title EXECUTIVE VICE PRESIDENT Robert B. Cohen
By By
Title EXECUTIVE VICE PRESIDENT LEGAL
AFFAIRS
CINERGI PRODUCTIONS N.V. INC.
("CPNV")
/s/ RANDOLPH M. PAUL
----------------------------------------
Randolph M. Paul
By
Title SENIOR VICE PRESIDENT
</TABLE>
B-17
<PAGE>
APPENDIX C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT OF MERGER
AMONG
ANDREW G. VAJNA,
VALDINA CORPORATION N.V.,
CPEI ACQUISITION INC.
AND
CINERGI PICTURES ENTERTAINMENT INC.
DATED AS OF SEPTEMBER 2, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
C-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE I THE MERGER...................................................................................... 1
SECTION 1.1. MERGER..................................................................................... 1
SECTION 1.2. EFFECTS OF THE MERGER...................................................................... 1
SECTION 1.3. CERTIFICATE OF INCORPORATION AND BYLAWS.................................................... 1
SECTION 1.4. DIRECTORS.................................................................................. 1
SECTION 1.5. OFFICERS................................................................................... 1
SECTION 1.6. CONVERSION OF SHARES....................................................................... 2
SECTION 1.7. ADJUSTMENTS TO PURCHASE PRICE.............................................................. 2
SECTION 1.8. STOCKHOLDERS' MEETING OF THE COMPANY....................................................... 4
SECTION 1.9. CONSUMMATION OF THE MERGER................................................................. 5
ARTICLE II DISSENTING SHARES; PAYMENT FOR SHARES.......................................................... 5
SECTION 2.1. DISSENTING SHARES.......................................................................... 5
SECTION 2.2. PAYMENT FOR SHARES......................................................................... 5
SECTION 2.3. CLOSING OF THE COMPANY'S TRANSFER BOOKS.................................................... 6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................................. 6
SECTION 3.1. CORPORATE ORGANIZATION..................................................................... 6
SECTION 3.2. CAPITALIZATION............................................................................. 6
SECTION 3.3. AUTHORITY RELATIVE TO THIS AGREEMENT....................................................... 7
SECTION 3.4. CONSENTS AND APPROVALS; NO VIOLATIONS...................................................... 7
SECTION 3.5. COMMISSION FILINGS AND FINANCIAL STATEMENTS................................................ 8
SECTION 3.6. PROXY STATEMENT; SCHEDULE 13E-3............................................................ 8
SECTION 3.7. NO BROKER OR FINDER FEES................................................................... 8
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER AND VAJNA.............................................. 9
SECTION 4.1. CORPORATE ORGANIZATION..................................................................... 9
SECTION 4.2. AUTHORITY RELATIVE TO THIS AGREEMENT....................................................... 9
SECTION 4.3. CONSENTS AND APPROVALS; NO VIOLATIONS...................................................... 9
SECTION 4.4. OTHER DOCUMENTS; PROXY STATEMENT; SCHEDULE 13E-3........................................... 10
ARTICLE V COVENANTS....................................................................................... 10
SECTION 5.1. CONDUCT OF BUSINESS OF THE COMPANY......................................................... 10
SECTION 5.2. NOTIFICATION OF CERTAIN MATTERS............................................................ 10
SECTION 5.3. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE........................................ 11
SECTION 5.4. EMPLOYEE PLANS............................................................................. 11
SECTION 5.5. WARRANTS................................................................................... 11
SECTION 5.6. PUBLICITY.................................................................................. 11
SECTION 5.7. BEST EFFORTS............................................................................... 11
SECTION 5.8. TERMINATION OF VAJNA EMPLOYMENT AGREEMENT; SEVERANCE ARRANGEMENTS.......................... 12
SECTION 5.9. VAJNA RECEIVABLES.......................................................................... 12
SECTION 5.10. VALDINA PROMISSORY NOTE.................................................................... 13
ARTICLE VI CONDITIONS..................................................................................... 13
SECTION 6.1. CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER................................ 13
SECTION 6.2. CONDITIONS TO THE OBLIGATIONS OF BUYER, VAJNA AND VALDINA TO EFFECT THE MERGER............. 14
SECTION 6.3. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY............................................... 14
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER............................................................. 14
SECTION 7.1. TERMINATION................................................................................ 14
SECTION 7.2. EFFECT OF TERMINATION...................................................................... 14
SECTION 7.3. AMENDMENT.................................................................................. 15
SECTION 7.4. EXTENSION, WAIVER.......................................................................... 15
ARTICLE VIII MISCELLANEOUS................................................................................ 15
SECTION 8.1. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS................................. 15
SECTION 8.2. FEES AND EXPENSES.......................................................................... 15
SECTION 8.3. NOTICES.................................................................................... 15
SECTION 8.4. APPLICABLE LAW............................................................................. 17
SECTION 8.5. INTERPRETATION............................................................................. 17
SECTION 8.6. ENTIRE AGREEMENT; ASSIGNMENT............................................................... 17
SECTION 8.7. SEVERABILITY............................................................................... 17
SECTION 8.8. PARTIES IN INTEREST........................................................................ 17
SECTION 8.9. SPECIFIC PERFORMANCE....................................................................... 17
SECTION 8.10. COUNTERPARTS............................................................................... 17
</TABLE>
C-3
<PAGE>
AGREEMENT OF MERGER
AGREEMENT OF MERGER (this "Agreement"), dated as of September 2, 1997, by
and among Andrew G. Vajna ("Vajna"), Valdina Corporation N.V., a Netherlands
Antilles corporation ("Valdina"), CPEI Acquisition Inc., a Delaware corporation
("Buyer"), and Cinergi Pictures Entertainment Inc., a Delaware corporation (the
"Company").
WHEREAS, the Board of Directors of the Company, based in part on the
recommendation of a Special Committee of the Board of Directors of the Company
(the "Special Committee"), and the Board of Directors and stockholders of Buyer
have each approved the acquisition of the Company by Buyer upon the terms and
subject to the conditions set forth herein;
WHEREAS, in furtherance thereof, the Board of Directors of the Company,
based in part on the recommendation of the Special Committee, and the Board of
Directors and stockholders of Buyer have each approved the merger (the "Merger")
of Buyer with and into the Company in accordance with the General Corporation
Law of the State of Delaware (the "GCL"), pursuant to which the shares (the
"Shares") of Company common stock, $.01 par value per share ("Common Stock")
(other than Shares owned by Vajna, Valdina or the Company and Shares owned by
holders of Dissenting Shares (as defined in Section 2.1 hereof)), shall be
converted into the right to receive the Merger Consideration (as defined in
Section 1.6 hereof); and
WHEREAS, the Board of Directors of the Company, based in part on the
recommendation of the Special Committee, has (i) determined that the Merger is
fair to and in the best interests of the stockholders of the Company (other than
Vajna, Valdina or Buyer), and (ii) resolved to approve and adopt this Agreement
and the transactions contemplated hereby and, subject to the terms and
conditions set forth herein, to recommend that the stockholders of the Company
approve and adopt this Agreement and the transactions contemplated hereby,
including without limitation, the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions herein
contained, and intending to be legally bound hereby, Vajna, Valdina, Buyer and
the Company hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. MERGER. Upon the terms and subject to the conditions hereof,
Buyer will be merged with and into the Company (the "Merger") in accordance with
the applicable provisions of the GCL as soon as practicable after the
satisfaction or waiver of the conditions to the Merger set forth in Article VI
hereof. Following the Merger, the Company shall be the surviving corporation
(sometimes hereinafter referred to as the "Surviving Corporation") and the
separate existence of Buyer shall cease. The name of the Surviving Corporation
shall be "Cinergi Pictures Entertainment Inc."
SECTION 1.2. EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in Section 259 of the GCL. As of the Effective Time (as defined in Section
1.9 hereof), the Company shall be wholly owned by Vajna and Valdina.
SECTION 1.3. CERTIFICATE OF INCORPORATION AND BYLAWS. At the Effective
Time, (i) the Certificate of Incorporation of the Company, as amended and
restated pursuant to the Restated Certificate of Incorporation attached hereto
as Exhibit A, shall be the Certificate of Incorporation of the Surviving
Corporation, and (ii) the Bylaws of the Company shall be the Bylaws of the
Surviving Corporation.
SECTION 1.4. DIRECTORS. The directors of Buyer immediately prior to the
Effective Time shall be the initial directors of the Surviving Corporation until
their respective successors are duly elected or appointed and qualified in the
manner provided in the Certificate of Incorporation and Bylaws of the Surviving
Corporation, or otherwise as provided by law.
C-4
<PAGE>
SECTION 1.5. OFFICERS. The officers of Buyer immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation until
their respective successors are duly elected or appointed and qualified in the
manner provided in the Certificate of Incorporation and Bylaws of the Surviving
Corporation, or otherwise as provided by law.
SECTION 1.6. CONVERSION OF SHARES. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder of Shares, (i) each
Share issued and outstanding immediately prior to the Effective Time (other than
Shares owned by Vajna, Valdina and any Dissenting Shares) shall be converted
into and represent the right to receive $2.30 in cash (the "Purchase Price"),
subject to adjustment as provided in Section 1.7 hereof (as adjusted, the
"Adjusted Purchase Price"); (ii) each Share owned and held in the treasury of
the Company immediately prior to the Effective Time, shall be canceled and
extinguished, and no payment will be made in respect of those Shares; and (iii)
each share of common stock, par value $.01 per share, of Buyer then issued and
outstanding shall be canceled. All Shares owned by Vajna and Valdina shall
remain outstanding. For purposes of this Agreement, the term "Merger
Consideration" shall mean the Purchase Price or Adjusted Purchase Price, as the
case may be.
SECTION 1.7. ADJUSTMENTS TO PURCHASE PRICE.
(a) For purposes hereof, "Adjustment Date" shall mean that date which is ten
business days before the date of the special meeting (the "Special Meeting") of
the Company's stockholders called by the Company to consider and vote upon the
approval and adoption of this Agreement, as such date of the Special Meeting is
initially set by the Board of Directors of the Company, or as such date may be
changed due to the adjournment, delay or other rescheduling of the Special
Meeting; provided, however, that if, after the Adjustment Date, the Special
Meeting is adjourned, delayed or otherwise rescheduled to a date which is less
than ten business days from the date on which it is determined that the Special
Meeting will be adjourned, delayed or otherwise rescheduled, then, in such case,
the Adjustment Date shall not be changed but shall remain the date which is ten
business days before the date the Special Meeting was set to occur prior to such
adjournment, delay or other rescheduling of the Special Meeting.
(b) The Purchase Price payable pursuant to Section 1.6 hereof shall be
adjusted upwards:
(i) In the event the Company enters into an agreement (the "Stone
Agreement") prior to the Adjustment Date (A) to sell the development
projects listed on Schedule 1.7(b) (i) hereto (the "Stone Projects") or (B)
to settle its obligations pursuant to its "first look" arrangement with
Oliver Stone and certain of his affiliates. In such event, the Purchase
Price shall be adjusted upwards by an amount equal to the sum of (X) the
aggregate purchase price, if any, payable to the Company pursuant to the
Stone Agreement, and (Y) the aggregate amount of liabilities and other
obligations assumed or forgiven by the purchaser (or party or parties with
which the Company settles its obligations) pursuant to the Stone Agreement,
divided by the total number of issued and outstanding Shares as of the
Adjustment Date (including Shares held by Vajna and Valdina);
(ii) In the event the sum of (A) the aggregate amount of all monies
received by the Company (as royalties or otherwise) in respect of the
soundtrack for EVITA (the "Soundtrack") from the date hereof through the
Adjustment Date and (B) the aggregate purchase price payable to the Company
pursuant to any agreement for the sale of the Company's rights in the
Soundtrack (an "Evita Agreement") entered into by the Company prior to the
Adjustment Date, exceeds $1,500,000 (such excess being referred to herein as
the "Soundtrack Amount"). In such event, the Purchase Price shall be
adjusted upwards by an amount equal to the Soundtrack Amount divided by the
total number of issued and outstanding Shares as of the Adjustment Date
(including Shares held by Vajna and Valdina). Any Evita Agreement shall be
approved by the Board of Directors of the Company (with the assent of the
Special Committee). In the event the Company does not enter into an Evita
Agreement prior to the Adjustment Date, the Special Committee and the
Company shall use their best efforts to monetize the Company's rights in the
Soundtrack and distribute, subsequent to the Effective Time, the proceeds in
C-5
<PAGE>
connection therewith to the stockholders of the Company immediately prior to
the Effective Time; and
(iii) In the event the aggregate amount of monies collected by the
Company in connection with the outstanding accounts receivable listed on
Schedule 1.7(b)(iii) hereto (the "Non-Alan Smithee Receivables") from July
1, 1997 through the Adjustment Date (the "Measurement Period") is in excess
of $1,573,000 (such excess amount being referred to as the "Non-Alan Smithee
Receivables Amount"). In such event, the Purchase Price shall be adjusted
upwards by an amount equal to the Non-Alan Smithee Receivables Amount
divided by the total number of issued and outstanding Shares as of the
Adjustment Date (including Shares held by Vajna and Valdina).
(c) The Purchase Price payable pursuant to Section 1.6 hereof shall also be
adjusted upwards in accordance with Section 1.7(e) in the event the sum of the
possible adjustments (whether positive or negative) set forth in subparagraphs
(i), (ii) and (iii) below result in a positive number.
(i) There shall be a positive adjustment equal to the amount, if any, by
which the Company Expense Amount is less than $6,493,000. If instead, the
Company Expense Amount is greater than $6,493,000, there shall be a negative
adjustment equal to the amount by which the Company Expense Amount is
greater than $6,493,000. For purposes hereof, "Company Expense Amount" shall
mean the aggregate Expenses paid or incurred during the Measurement Period
by the Company, and "Expenses" shall consist of the following: salaries of
Company personnel, severance payments, rent, utilities, accounting and legal
fees and expenses, and other expenses which have generally been included as
selling, general and administrative expenses in the Company's audited
financial statements. "Expenses" will not include, among other things, (A)
any expenses incurred by the Company with respect to the Company's
development projects, (B) any expenses incurred by the Company with respect
to (or funds provided by the Company to) Cinergi Productions Inc.
(California), a California corporation and a wholly owned subsidiary of the
Company ("CPI"), or the visual effects facility operated by CPI, or (C) any
expenses incurred by CPI. The Company Expense Amount shall be computed on a
consolidated basis (but excluding for such purpose CPI) and otherwise in a
manner generally consistent with preparation of the Company's financial
statements for the fiscal year ended December 31, 1996; and
(ii) There shall be a positive adjustment equal to the amount, if any,
by which the aggregate amount of monies collected by the Company during the
Measurement Period with respect to the outstanding accounts receivable with
respect to AN ALAN SMITHEE FILM listed on Schedule 1.7(c)(ii) hereto (the
"Alan Smithee Receivables") is in excess of $8,690,000. If instead, the
aggregate amount of monies collected by the Company during the Measurement
Period with respect to the Alan Smithee Receivables is less than $8,690,000,
there shall be a negative adjustment equal to the amount by which the
aggregate amount of monies collected by the Company during the Measurement
Period with respect to the Alan Smithee Receivables is less than $8,690,000.
(iii) There shall be a positive adjustment equal to the amount, if any,
by which the MassIllusion Expense Amount is less than $1,300,000. If
instead, the MassIllusion Expense Amount is greater than $1,300,000, there
shall be a negative adjustment equal to the amount by which the MassIllusion
Expense Amount is greater than $1,300,000. For purposes hereof,
"MassIllusion Expense Amount" shall mean (a) the aggregate amount of monies
provided by the Company, directly or indirectly, to CPI or to any third
parties on behalf of CPI during the Measurement Period ("Disbursed
Amounts"), plus (b) the aggregate amount of expenses borne by the Company
during the Measurement Period with respect to CPI (including with respect to
the visual effects facility operated by CPI) ("Borne Expenses"), less (from
the sum of (a) and (b)) the recovery by the Company, in any manner
whatsoever (including, without limitation, reimbursements by CPI to the
Company), of any of the Disbursed Amounts or Borne Expenses.
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(d) The Company's chief financial officer, or other appropriate accounting
officer, as the case may be, shall calculate both the Expenses and the
MassIllusion Expense Amount for the Measurement Period as contemplated herein
and forward such calculation to Vajna and the Special Committee no later than
6:00 p.m., Los Angeles time, on the day after the Adjustment Date. To the extent
there is a disagreement between Vajna and the Special Committee with respect to
the calculation of Expenses and/or the MassIllusion Expense Amount, the parties
shall immediately forward such calculation(s) to the Company's independent
accountants, whose determination as to the proper calculation of Expenses and/or
the MassIllusion Expense Amount shall be rendered no later than six business
days prior to the Special Meeting and shall be final and binding on all the
parties hereto.
(e) To the extent the sum of the adjustments as provided in subparagraphs
(i), (ii) and (iii) of Section 1.7(c) above result in a positive amount (such
number being referred to as the "Adjustment Amount"), the Purchase Price shall
be adjusted upwards by an amount equal to the Adjustment Amount divided by the
total number of issued and outstanding Shares as of the Adjustment Date
(including Shares held by Vajna and Valdina). To the extent the sum of the
adjustments as provided in (i), (ii) and (iii) above results in a negative
amount, there shall be no adjustment to the Purchase Price (it being understood
that under no circumstances shall any "negative amount" resulting from Section
1.7(c) reduce any positive adjustment resulting from Section 1.7(b)). Except as
set forth in Section 1.7(b) and 1.7(c) there shall be no other positive
adjustments to the Purchase Price.
(f) In the event of an adjustment to the Purchase Price resulting from a
transaction contemplated by Section 1.7(b)(i) or (ii), the Company and Vajna
shall promptly thereafter issue a press release through a nationally recognized
news wire service setting forth, among other things, the material terms
underlying the particular transaction giving rise to the adjustment and the
specific dollar amount of the adjustment to the Purchase Price. In addition, the
Company and Vajna shall issue a press release no later than five business days
prior to the Special Meeting, setting forth the exact dollar amount of the
Merger Consideration.
SECTION 1.8. STOCKHOLDERS' MEETING OF THE COMPANY. (a) In connection with
the Merger, the Company shall, in accordance with applicable law and its
Certificate of Incorporation and Bylaws:
(i) duly call, give notice of, convene and hold the Special Meeting as
soon as practicable after the execution of this Agreement, to consider and
vote upon the approval and adoption of the Agreement;
(ii) prepare and file with the Securities and Exchange Commission (the
"Commission") a preliminary proxy statement relating to this Agreement and
the Merger and use its best efforts (A) after consultation with Buyer, to
respond promptly to any comments made by the staff of the Commission with
respect to such preliminary proxy statement and cause a definitive proxy
(together with any amendments or supplements thereto, the "Proxy Statement")
to be mailed to its stockholders at the earliest practicable time, and (B)
to obtain the necessary approvals by its stockholders of this Agreement and
the Merger, except to the extent that the Board of Directors of the Company
shall have determined in good faith, based on the recommendation of the
Special Committee and upon advice of the Company's outside counsel, that
obtaining such approvals would violate its fiduciary duties under applicable
law; and
(iii) include in the Proxy Statement the recommendations of the Special
Committee and the Company's Board of Directors that the stockholders of the
Company vote in favor of the approval and adoption of this Agreement, except
to the extent that the Board of Directors of the Company shall have
determined in good faith, based on the recommendation of the Special
Committee and upon advice of the Company's outside counsel, that such
recommendation would violate its fiduciary duties under applicable law.
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(b) Buyer will provide the Company with the information concerning Buyer and
its affiliates required under the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder (the "Exchange Act"), to be
included in the Proxy Statement.
(c) Each of Vajna and Valdina will vote or cause to be voted at the Special
Meeting all Shares owned by such party (and any of their affiliates) in favor of
the approval and adoption of this Agreement.
SECTION 1.9. CONSUMMATION OF THE MERGER. Upon the terms and subject to the
conditions of this Agreement, as soon as practicable after the satisfaction or
waiver of the conditions to the Merger set forth in Article VI hereof, the
Company (or Buyer, if appropriate) shall execute in the manner required by the
GCL and file with the Secretary of State of the State of Delaware a certificate
of merger, as required by the GCL, and the parties shall take all such other and
further actions as may be required by law to make the Merger effective. Prior to
the filing referred to in this Section 1.9, a closing (the "Closing") will be
held at the offices of Gipson Hoffman & Pancione, P.C., Los Angeles, California
(or such other place as the parties may agree) for the purpose of confirming all
of the foregoing. The time the Merger becomes effective in accordance with
applicable law is referred to herein as the "Effective Time."
ARTICLE II
DISSENTING SHARES; PAYMENT FOR SHARES
SECTION 2.1. DISSENTING SHARES. Notwithstanding anything in this Agreement
to the contrary, Shares which are outstanding immediately prior to the Effective
Time and which have not been voted for approval and adoption of this Agreement
and the Merger and with respect to which appraisal shall have been properly
demanded in accordance with Section 262 of the GCL ("Dissenting Shares") shall
not be converted into the right to receive the Merger Consideration at or after
the Effective Time unless and until the holder of such Shares withdraws his or
her demand for such appraisal (in accordance with Section 262(k) of the GCL) or
becomes ineligible for such appraisal. If a holder of Dissenting Shares shall
withdraw (in accordance with Section 262(k) of the GCL) his or her demand for
such appraisal or shall become ineligible for such appraisal, then, as of the
Effective Time or the occurrence of such event, whichever last occurs, such
holder's Dissenting Shares shall cease to be Dissenting Shares and shall be
converted into and represent the right to receive the Merger Consideration. The
Company shall give Buyer (a) prompt notice of any written demands for appraisal,
withdrawals of demands for appraisal and any other instruments served pursuant
to Section 262 of the GCL and received by the Company and (b) the opportunity to
direct all negotiations and proceedings with respect to demands for appraisal
under Section 262. The Company will not voluntarily make any payment with
respect to any demands for appraisal and will not, except with the prior written
consent of Buyer, settle or offer to settle any such demands.
SECTION 2.2. PAYMENT FOR SHARES. Prior to the Effective Time, Buyer shall
authorize the Company's transfer agent or a commercial bank organized under the
laws of the United States or any state thereof with capital, surplus and
undivided profits of at least $50,000,000 to act as Paying Agent hereunder (the
"Paying Agent"). As soon as practicable after the Effective Time, the Paying
Agent shall mail to each record holder, as of the Effective Time, of an
outstanding certificate or certificates which immediately prior to the Effective
Time represented Shares (the "Certificates") a form letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Paying Agent) and instructions for use in effecting the surrender of the
Certificates for payment therefor. Each holder of a Certificate or Certificates
shall be entitled to receive, upon surrender to the Paying Agent of the
Certificate or Certificates for cancellation, together with such letter of
transmittal duly executed, and subject to any required backup withholding
(within the meaning of Section 3406 of the Internal Revenue Code of 1986, as
amended (the "Code")), the aggregate amount of cash into which the Shares
previously represented by such Certificate or Certificates shall have been
converted in the Merger. When and as needed, Buyer shall make available to the
Paying Agent
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sufficient funds to make all payments pursuant to the preceding sentence. Until
surrendered to the Paying Agent, each Certificate (other than Dissenting Shares,
Shares held in the treasury of the Company and Shares owned by Vajna and
Valdina) shall be deemed for all corporate purposes to evidence only the right
to receive upon such surrender the aggregate amount of cash into which the
Shares represented thereby shall have been converted, subject to any required
backup withholding (within the meaning of Section 3406 of the Code). No interest
shall accrue or be paid on the cash payable upon the surrender of the
Certificate or Certificates. If payment is to be made to a person other than the
person in whose name the Certificate surrendered is registered, it shall be a
condition of payment that the Certificate so surrendered shall be properly
endorsed or otherwise in proper form for transfer and that the person requesting
such payment shall pay any transfer or other taxes required by reason of the
payment to a person other than the registered holder of the Certificate
surrendered or establish to the satisfaction of the Surviving Corporation that
such tax has been paid or is not applicable. Any cash delivered or made
available to the Paying Agent pursuant to this Section 2.2 and not exchanged for
Certificates representing Shares within six months after the Effective Time
pursuant to this Section 2.2 shall be returned by the Paying Agent to the
Surviving Corporation, which shall thereafter act as Paying Agent subject to the
rights of holders of unsurrendered Certificates representing Shares under this
Article II. Notwithstanding the foregoing, neither the Paying Agent nor any
party hereto shall be liable to a holder of Shares for any cash delivered to a
public official pursuant to applicable abandoned property laws, or for any
interest thereon. If Certificates are not surrendered prior to four years after
the Effective Time (or, in any particular case, prior to such earlier date on
which the consideration payable in respect of such Shares would otherwise
escheat to or become the property of any governmental unit or agency), any
consideration payable in respect of such Certificate shall, to the extent
permitted by applicable law, become the property of the Surviving Corporation,
free and clear of all claims of interest of any person previously entitled
thereto.
SECTION 2.3. CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective
Time, the stock transfer books of the Company shall be closed and no transfer of
Shares shall thereafter be made. If, after the Effective Time, Certificates are
presented to the Surviving Corporation or the Paying Agent, they shall be
canceled and exchanged for cash as provided in Section 2.2 hereof, subject to
applicable law in the case of Dissenting Shares.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Buyer, Vajna and Valdina as
follows:
SECTION 3.1. CORPORATE ORGANIZATION. Each of the Company and, to the best
of its knowledge, its subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power to carry on its business as
it is now being conducted. To the best knowledge of the Company, the Company and
its subsidiaries are duly qualified as foreign corporations to do business, and
are in good standing, in each jurisdiction where the character of their
properties owned or leased or the nature of their activities makes such
qualification necessary, except for failures to be so qualified or in good
standing which would not, in the aggregate, have a material adverse effect on
the financial condition, assets or liabilities of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect").
SECTION 3.2. CAPITALIZATION. (a) The authorized capital stock of the
Company consists of 20,000,000 shares of common stock, par value $.01 per share,
and 5,000,000 shares of preferred stock, par value $.01 per share. To the best
knowledge of the Company, as of September 2, 1997, (i) 13,446,874 Shares were
issued and outstanding, all of which were validly issued, fully paid,
nonassessable and free of preemptive rights, (ii) pursuant to the Option Plans
(as defined in Section 5.4 hereof), there were outstanding Employee Options (as
defined in Section 5.4 hereof) to purchase an aggregate of 82,250 Shares, (iii)
there were outstanding warrants, calls, rights and other securities to purchase
an aggregate of
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200,000 Shares, (iv) 744,682 Shares were held in the Company's treasury, and
(iv) no shares of preferred stock were issued or outstanding. To the best
knowledge of the Company, since December 31, 1996, the Company has not (x)
issued any shares of its capital stock (y) granted any Employee Options, or (z)
granted any options, warrants, calls, rights, or other securities convertible or
exchangeable into shares of capital stock. Except as set forth in this Section
3.2 and except for this Agreement and the transactions contemplated hereby, to
the best knowledge of the Company, there are not now, and at the Effective Time
there will not be, any shares of capital stock of the Company issued or
outstanding or any subscriptions, options, warrants, calls, rights, convertible
or exchangeable securities or other agreements, commitments or rights of any
character relating to issued or unissued capital stock or other securities of
the Company, or otherwise obligating the Company to issue, transfer or sell, or
cause to be issued, transferred or sold, or to make any payments in respect of,
shares of capital stock or other securities of the Company.
(b) To the best knowledge of the Company, Exhibit 21 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996 sets forth the
name and jurisdiction of incorporation of each significant subsidiary of the
Company. To the best knowledge of the Company, all of the outstanding shares of
capital stock of each subsidiary have been validly issued and are fully paid and
non-assessable and free of preemptive rights and are owned, directly or
indirectly, by the Company free and clear of all liens, charges, claims or
encumbrances. To the best knowledge of the Company, there are not now, and at
the Effective Time there will not be, any subscriptions, options, warrants,
calls, rights, convertible or exchangeable securities or other agreements,
commitments or rights of any character relating to issued or unissued capital
stock or other securities of any subsidiary, or otherwise obligating the Company
or any subsidiary to issue, transfer or sell, or cause to be issued, transferred
or sold, or to make any payments in respect of, shares of capital stock or other
securities of any subsidiary other than as may be required by the Library Sale
Agreement (as defined in Section 6.1(g) hereof).
(c) Except as set forth on Schedule 3.2(c) hereto, to the best knowledge of
the Company, there are not now, and at the Effective Time there will not be, any
voting trusts or other agreements or understandings to which the Company or any
subsidiary is a party or is bound with respect to the voting of capital stock of
the Company or any subsidiary.
SECTION 3.3. AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has the
requisite corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the Company
and the consummation by it of the transactions contemplated hereby have been
duly authorized by the Board of Directors of the Company and no other corporate
proceedings on the part of the Company are necessary to authorize the execution,
delivery and performance by the Company of this Agreement or the consummation by
the Company of the transactions contemplated hereby (other than, with respect to
the Merger, the approval of this Agreement and the Merger by the stockholders of
the Company, to the extent required by applicable law). This Agreement has been
duly and validly executed and delivered by the Company and constitutes a valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms except (i) as its obligations may be affected by
bankruptcy, insolvency, reorganization, receivership, moratorium or similar
laws, or by equitable principles relating to or limiting creditors' rights or
remedies generally, and (ii) 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 therefor may be brought.
SECTION 3.4. CONSENTS AND APPROVALS; NO VIOLATIONS. (a) Except for (i)
compliance with applicable federal securities laws, (ii) compliance with any
applicable state securities, takeover or "blue sky" laws, (iii) the filing of a
certificate of merger and other appropriate merger documents, if any, as
required by the GCL, and (iv) compliance with the Hart-Scott-Rodino Antitrust
Improvement Act of 1976, as amended, and the rules and regulations promulgated
thereunder (the "HSR Act"), including, without limitation, the filing of a
pre-merger notification report thereunder, if applicable, the execution,
delivery and performance
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by the Company of this Agreement and the consummation by the Company of the
transactions contemplated hereby require no notice to, filing with, or
authorization, consent or approval of, any domestic or foreign public body or
authority, except for notices, filings, authorizations, consents or approvals
the failure of which to obtain would not, in the aggregate (x) have a Material
Adverse Effect, or (y) materially impair or delay the ability of the Company to
perform its obligations hereunder or to consummate the transactions contemplated
hereby.
(b) Neither the execution, delivery or performance of this Agreement by the
Company, nor the consummation by the Company of the transactions contemplated
hereby, will (i) conflict with or result in a breach of any provision of the
charter documents or bylaws of the Company or any subsidiary, or (ii) subject to
compliance with the statutes and regulations referred to in Section 3.4(a)
hereof, to the best knowledge of the Company, violate any judgment, ruling,
order, writ, injunction, decree, statute, rule or regulation applicable to the
Company or any subsidiary or any of their respective properties or assets,
except, in the case of clause (ii) above, for such violations which would not,
in the aggregate (x) have a Material Adverse Effect, or (y) materially impair or
delay the ability of the Company to perform its obligations hereunder or to
consummate the transactions contemplated hereby.
SECTION 3.5. COMMISSION FILINGS AND FINANCIAL STATEMENTS. To the best
knowledge of the Company, the Company has heretofore filed all forms, reports,
statements, schedules and other materials with the Commission required to be
filed pursuant to the Exchange Act or other federal securities laws since June
17, 1994 (the "SEC Reports"). To the best knowledge of the Company, as of their
respective dates, the SEC Reports (including, without limitation, all financial
statements included therein, exhibits and schedules thereto and documents
incorporated by reference therein) complied in all material respects with all
applicable requirements of the Exchange Act and other federal securities laws
and did not 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 made therein, in light of the circumstances under which they were
made, not misleading. To the best knowledge of the Company, the audited
consolidated financial statements and unaudited consolidated interim financial
statements of the Company and its subsidiaries (including the related notes)
included or incorporated by reference in the SEC Reports fairly present the
consolidated financial position of the Company and its consolidated subsidiaries
as of the respective dates thereof and the consolidated statements of income and
cash flows for the respective periods then ended, in each case in accordance
with generally accepted accounting principles applied on a consistent basis
during the periods involved except as otherwise noted therein and except for
normal year-end adjustments and accruals in the case of unaudited financial
statements.
SECTION 3.6. PROXY STATEMENT; SCHEDULE 13E-3. To the best knowledge of the
Company, the Proxy Statement and related materials distributed to the Company's
stockholders in connection with the Merger will comply in all material respects
with the provisions of applicable federal securities laws and will not, at the
date of filing with the Commission, at the time of the first mailing and at the
time of the Special Meeting, 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 made therein, in light of the circumstances under
which they were made, not misleading, except that no representation is made by
the Company with respect to information supplied by Buyer, Vajna or Valdina for
inclusion in the Proxy Statement or related materials. None of the information
supplied by the Company for inclusion in the Rule 13e-3 Transaction Statement on
Schedule 13E-3 with respect to the Merger (the "Schedule 13E-3"), at the time
such Schedule 13E-3 or any amendments or supplements thereto are filed with the
Commission, will 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 made therein, in light of the circumstances under which they
were made, not misleading. The Company agrees to correct promptly any
information in the Proxy Statement or related materials or any information
provided by it for use in the Schedule 13E-3 if and to the extent that it shall
have become false or misleading in any material respect and further agrees to
take all steps necessary to cause the Proxy Statement or related materials as so
corrected to be filed with the
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Commission and disseminated to the holders of Shares, in each case as and to the
extent required by applicable federal securities laws.
SECTION 3.7. NO BROKER OR FINDER FEES. The Company represents, as to
itself, its subsidiaries and its affiliates, that no agent, broker, investment
banker or other firm or person is or will be entitled to any broker's or
finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement, except (a) the fees and
expenses payable by the Company to Jefferson Capital Group, Ltd., and Alice P.
Neuhauser and Frank Stewart as specified in the Company's agreements with such
persons, and (b) any agents brokers, investment bankers and other firms and
persons retained by Buyer, Vajna or Valdina, the fees and expenses of which will
be paid by Buyer.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND VAJNA
Buyer, Vajna and Valdina hereby jointly and severally represent and warrant
to the Company as follows:
SECTION 4.1. CORPORATE ORGANIZATION. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
SECTION 4.2. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Buyer and
Valdina has the requisite corporate power and authority to execute and deliver
this Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by each of Buyer and Valdina and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors (or comparable governing body with respect to Valdina) and
stockholders of Buyer and Valdina, and no other corporate proceedings on the
part of Buyer or Valdina are necessary to authorize the execution, delivery and
performance of this Agreement by Buyer or Valdina or the consummation by Buyer
or Valdina of the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by each of Buyer, Vajna and Valdina and
constitutes a valid and binding obligation of each of Buyer, Vajna and Valdina,
enforceable against each of Buyer, Vajna and Valdina in accordance with its
terms except (i) as their respective obligations may be affected by bankruptcy,
insolvency, reorganization, receivership, moratorium or similar laws, or by
equitable principles relating to or limiting creditors' rights or remedies
generally, and (ii) 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 therefor may be brought.
SECTION 4.3. CONSENTS AND APPROVALS; NO VIOLATIONS. (a) Except for (i)
compliance with applicable federal securities laws, (ii) compliance with any
applicable state securities, takeover or "blue sky" laws, (iii) the filing of a
certificate of merger and other appropriate merger documents, if any, as
required by the GCL, and (iv) compliance with the HSR Act, including, without
limitation, the filing of a pre-merger notification report thereunder, if
applicable, the execution, delivery and performance by Buyer, Vajna and Valdina
of this Agreement and the consummation by Buyer, Vajna and Valdina of the
transactions contemplated hereby require no notice to, filing with, or
authorization, consent or approval of, any domestic or foreign public body or
authority, except for notices, filings, authorizations, consents or approvals
the failure of which to obtain would not, in the aggregate, materially impair or
delay the ability of Buyer, Vajna or Valdina to perform their obligations
hereunder or to consummate the transactions contemplated hereby.
(b) Neither the execution, delivery or performance of this Agreement by each
of Buyer, Vajna and Valdina, nor the consummation of the transactions
contemplated hereby, will (i) conflict with or result in a breach of any
provision of the charter documents or bylaws of Buyer or the comparable
organizational and governing documents of Valdina, or (ii) result in a breach or
violation of any provision of, or constitute a
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default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination or amendment of, or
accelerate the performance required by, or result in the creation of any lien,
security interest, charge or encumbrance upon any of the properties or assets of
Buyer, Vajna or Valdina, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease, contract, agreement or
other instrument or obligation to which Buyer, Vajna or Valdina is a party or to
which Buyer, Vajna or Valdina or any of their properties or assets may be
subject, or (iii) subject to compliance with the statutes and regulations
referred to in Section 4.3(a) hereof, to the best knowledge of Buyer, Vajna and
Valdina, violate any judgment, ruling, order, writ, injunction, decree, statute,
rule or regulation applicable to Buyer, Vajna or Valdina, or any of their
properties or assets, except, in the case of each of clauses (ii) and (iii)
above, for such violations, conflicts, breaches, defaults, terminations,
amendments, accelerations or creations of liens, security interests, charges or
encumbrances which would not, in the aggregate, materially impair or delay the
ability of Buyer, Vajna or Valdina to perform their obligations hereunder or to
consummate the transactions contemplated hereby.
SECTION 4.4. OTHER DOCUMENTS; PROXY STATEMENT; SCHEDULE 13E-3. None of the
information supplied by Buyer, Vajna or Valdina for inclusion in the Proxy
Statement or related materials or the Schedule 13E-3, at the respective times
such Proxy Statement and Schedule 13E-3, or any amendments or supplements
thereto, are filed with the Commission and, in the case of the Proxy Statement,
at the time of the first mailing and at the time of the Special Meeting, will
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 light of the
circumstances under which they were made, not misleading. Buyer, Vajna and
Valdina agree to correct promptly any information provided by them for use in
the Proxy Statement or related materials or the Schedule 13E-3 if and to the
extent that it shall have become false or misleading in any material respect and
further agree to take all steps necessary to cause the Schedule 13E-3 as so
corrected to be filed with the Commission, as and to the extent required by
applicable federal securities laws.
ARTICLE V
COVENANTS
SECTION 5.1. CONDUCT OF BUSINESS OF THE COMPANY. The Company covenants and
agrees that prior to the Effective Time, unless Buyer shall otherwise agree in
writing or unless such action shall have been approved by a majority of the
entire Board of Directors of the Company or except as otherwise expressly
contemplated by this Agreement, the Library Sale Agreement or the Fox Assignment
Agreement (as defined in Section 6.1(h) hereof), or as set forth on Schedule 5.1
hereto, none of the Company or any of its subsidiaries shall directly or
indirectly: (i) declare or pay any dividend or make any distribution with
respect to any shares of its capital stock; (ii) purchase or otherwise acquire,
or propose to purchase or otherwise acquire, any outstanding shares of its
capital stock; (iii) propose or adopt any amendments to its charter documents or
bylaws; (iv) issue, sell, pledge, dispose of or encumber any capital stock of
the Company or of any of its subsidiaries (other than pursuant to Employee
Options outstanding on the date hereof); (v) except in the ordinary and usual
course of business consistent with past practice, sell, pledge, dispose of or
encumber any material asset of the Company or of any of its subsidiaries
(including, without limitation, any material indebtedness owed to them or any
material claims held by them); (vi) incur any long-term indebtedness for
borrowed money or issue any debt securities in a material amount or assume,
guarantee or endorse any material obligations of any other person except for
obligations of any wholly owned subsidiary; (vii) approve, adopt or amend any
agreement, plan, program or arrangement which provides any benefits to any
employee of the Company; (viii) except in the ordinary and usual course of
business consistent with past practice, increase, directly or indirectly, the
compensation of any employee of the Company; or (ix) authorize or propose any of
the foregoing, or enter into any contract, agreement, commitment or arrangement
to do any of the foregoing.
SECTION 5.2. NOTIFICATION OF CERTAIN MATTERS. The Company shall give
prompt notice to Buyer, and Buyer shall give prompt notice to the Company, of
the occurrence, or failure to occur, of any event
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which occurrence or failure to occur would be likely to cause (a) any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect or (b) any material failure of the Company,
on the one hand, or Buyer, Vajna or Valdina, on the other hand, as the case may
be, to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement; provided, however, that
no such notification shall affect the representations or warranties of the
parties or the conditions to the obligations of the parties hereunder.
SECTION 5.3. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. (a)
Buyer and the Company agree that all rights to indemnification now existing in
favor of the present or former directors or officers of the Company or any of
its subsidiaries as provided in the Company's Certificate of Incorporation and
Bylaws, or in the certificate or articles of incorporation, bylaws or similar
documents of any of such subsidiaries, in effect as of the date hereof shall,
with respect to matters occurring prior to the Effective Time, survive the
Merger and continue in full force and effect. Vajna, Buyer and the Company
further agree that all rights to indemnification now existing in favor of the
present or former directors or officers of the Company or any of its
subsidiaries in any indemnification agreement between such person and the
Company or any such subsidiary, as the case may be, shall also survive the
Merger and continue in full force and effect in accordance with the terms of
such agreement. Prior to the Closing, the Company shall purchase, to the extent
available, a policy of directors' and officers' liability insurance with
material terms of coverage as set forth on Schedule 5.3 hereto, which policy
shall cover, among other things, matters occurring prior to the Effective Time.
Vajna shall cause the Company to maintain such insurance policy for a period of
four years from the Effective Time. To the extent the Company purchases
insurance which covers matters relating to the activities of the Surviving
Corporation following the Effective Time, Vajna or Buyer shall reimburse the
Company for the premiums paid in respect thereof.
SECTION 5.4. EMPLOYEE PLANS. (a) The Company shall terminate, at or prior
to the Effective Time (the date of such termination being hereafter referred to
as the "Termination Date"), the Company's (i) 1994 Basic Stock Option Plan and
Stock Appreciation Rights Plan and (ii) 1994 Special Stock Option and Stock
Appreciation Rights Plan (collectively, the "Option Plans"), and any options
issued thereunder ("Employee Options") which have not been exercised as of the
Termination Date.
(b) Prior to the Effective Time, the Company shall use its best efforts to
terminate all employee benefit plans, programs or arrangements and to take any
other action reasonably necessary in connection therewith.
SECTION 5.5. WARRANTS. Prior to the Effective Time, the Company shall take
all action necessary to terminate and cancel all warrants, rights, calls and
other securities exchangeable or convertible into Shares ("Warrants") which are
issued and outstanding as of the date hereof.
SECTION 5.6. PUBLICITY. Neither the Company nor Buyer, Vajna or Valdina
shall issue or cause the publication of any press release or other public
announcement with respect to this Agreement, the Merger or the other
transactions contemplated hereby without prior consultation with the other
parties, except as may be required by law or any listing agreement with the
National Association of Securities Dealers, Inc.
SECTION 5.7. BEST EFFORTS. Subject to the terms and conditions hereof,
each of the parties hereto agrees to use its best efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by the Merger and this Agreement, and to cooperate
with each other in connection with the foregoing, including, without limitation,
using its best efforts to (a) obtain all necessary waivers, consents and
approvals from other parties to material agreements, leases and other contracts,
(b) obtain all necessary consents, approvals and authorizations as are required
to be obtained under any federal, state or foreign law or regulation, (c) lift
or rescind any injunction or restraining order or other order adversely
affecting the ability of the parties to consummate the transactions contemplated
hereby, (d) effect any necessary registrations and filings and submissions of
information requested by governmental authorities, including, without
limitation, all filings with the Commission under applicable federal
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<PAGE>
securities laws, and (e) fulfill all conditions to this Agreement. In
furtherance of and not in limitation of the foregoing, (X) the Company shall
permit Buyer to participate in the defense and settlement of any claim, suit or
cause of action relating to the Merger, this Agreement or the other transactions
contemplated hereby and the Company shall not settle or compromise any such
claim, suit or cause of action without Buyer's prior written consent, and (Y)
Vajna shall assist the Company in good faith and using commercially reasonable
best efforts to collect the Alan Smithee Receivables and the Non-Alan Smithee
Receivables.
SECTION 5.8. TERMINATION OF VAJNA EMPLOYMENT AGREEMENT; SEVERANCE
ARRANGEMENTS. The Company and Vajna are parties to that certain Employment
Agreement, dated as of January 1, 1994, between Vajna and the Company (then
known as "Cinergi Productions Inc."), as amended by that certain letter
agreement, dated as of December 16, 1994, from the Company to Vajna and accepted
by Vajna as of January 3, 1995, with a term ending December 31, 1998 (as
amended, the "Employment Agreement"). The Company and Vajna mutually agree to
terminate the Employment Agreement effective, automatically and without any
further action on the part of the parties hereto, as of the Effective Time.
Notwithstanding anything in the Employment Agreement to the contrary, all of the
terms and provisions of the Employment Agreement (including, without limitation,
all provisions regarding termination and compensation upon termination) shall
terminate as of the Effective Time and neither the Company nor Vajna will have
any further obligation to the other with respect to the Employment Agreement
except as hereinafter expressly set forth in this Agreement.
(b) Upon termination of the Employment Agreement at the Effective Time,
Vajna shall be paid an amount, subject to applicable legal wage withholdings and
deductions, equal to the sum of (i) one hundred percent of the Fixed Annual
Compensation that would otherwise have been payable to Vajna in the ordinary
course from the Effective Time through December 31, 1997 had the Employment
Agreement not been terminated at the Effective Time, (ii) $500,000 (representing
fifty percent of the Fixed Annual Compensation that would otherwise have been
payable to Vajna in the ordinary course from January 1, 1998 through December
31, 1998 had the Employment Agreement not been terminated at the Effective
Time), and (iii) producer's performance fees in the amount of $344,666 in
connection with DIE HARD WITH A VENGEANCE.
(c) Prior to consummation of the Merger or earlier termination of this
Agreement, (i) Vajna shall continue to receive his Fixed Annual Compensation in
accordance with the terms of the Employment Agreement, and (ii) Vajna may enter
into a producers agreement, employment agreement, consulting agreement or other
similar agreement which provides that Vajna will render services to a third
party; provided, however, that, without the prior written consent of the Special
Committee, (a) all Vajna's obligations under such an agreement to render
services to a third party must be subject to consummation of the Merger, and (b)
Vajna's Production Services and all other services shall remain exclusive to the
Company to the extent provided by the Employment Agreement. The Employment
Agreement shall continue in full force and effect if the Merger is not
consummated or this Agreement is otherwise terminated.
(d) Capitalized terms used in Sections 5.8(a), (b) or (c) and not defined
therein shall have the meanings assigned to them in the Employment Agreement.
(e) On or prior to the Closing, the Company shall make any and all payments,
and take any and all actions required pursuant to the terms of any other
severance arrangements approved by the Board of Directors of the Company with
respect to persons other than Vajna (including, without limitation, the
severance arrangements relating to Warren Braverman, Chief Operating Officer,
Chief Financial Officer and Executive Vice President of the Company).
SECTION 5.9. VAJNA RECEIVABLES. On or prior to the Closing, Vajna shall
pay to the Company all monies owed to the Company and its subsidiaries by him,
and shall cause to be paid to the Company all monies owed to the Company and its
subsidiaries by his affiliates and related parties. Vajna acknowledges
C-15
<PAGE>
and agrees that, as of June 30, 1997, the aggregate amount of his obligations to
the Company and the obligations of his affiliates and related parties to the
Company was $710,000, and that such amount may change after such date if any
additional monies become owed by Vajna, his affiliates and/or his related
parties or if such parties repay any owed amounts.
SECTION 5.10. VALDINA PROMISSORY NOTE. On or prior to the Closing, the
Company shall pay in full to Valdina the principal amount outstanding (and any
accrued interest thereon) under that certain promissory note payable to Valdina,
originally dated January 17, 1994, as subsequently amended and extended.
ARTICLE VI
CONDITIONS
SECTION 6.1. CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE
MERGER. The respective obligations of Buyer, Vajna, Valdina and the Company to
consummate the Merger are subject to the satisfaction or waiver at or prior to
the Effective Time of each of the following conditions:
(a) This Agreement shall have been approved and adopted by the
affirmative vote of the holders of a majority of the outstanding Shares
entitled to vote thereon;
(b) The consummation of the Merger shall not be prohibited by any
statute, rule or regulation enacted, promulgated or deemed applicable to the
Merger by any government or governmental agency that prohibits or makes
illegal consummation of the Merger;
(c) 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 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;
(d) No litigation, proceeding or investigation shall be pending,
threatened or in existence which, if adversely determined, could result in:
(i) 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;
(ii) liability to the Company, Vajna, Valdina, Buyer or any
officers, directors, employees or agents of any of them arising from this
Agreement or the transactions contemplated hereby; or
(iii) the consummation of the transactions contemplated hereby being
unlawful; and
(e) The Company shall have obtained, in connection with the Merger, the
affirmative vote of a majority of the Shares voted (including abstentions
but excluding broker non-votes) at the Special Meeting with respect to the
proposal to approve this Agreement, without taking into account those Shares
owned by Vajna, Valdina or any affiliate of Vajna or Valdina.
(f) The percentage of Dissenting Shares to the total number of Shares
issued and outstanding immediately prior to the Effective Time shall not
exceed 15%.
(g) The transactions contemplated by that certain Purchase and Sale
Agreement between the Company, Cinergi Productions, N.V. Inc. and Walt
Disney Pictures and Television, dated April 3, 1997, as amended (the
"Library Sale Agreement"), shall have been consummated in all material
respects; and
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<PAGE>
(h) The transactions contemplated by that certain Assignment Agreement
dated as of July 14, 1997 between Twentieth Century Fox Film Corporation, on
the one hand, and the Company and Cinergi Productions N.V. Inc., on the
other hand, as amended (the "Fox Assignment Agreement"), (including, without
limitation, the payment by Twentieth Century Fox Film Corporation to the
Company of $11,250,000 in immediately available funds) shall have been
consummated in all material respects.
SECTION 6.2. CONDITIONS TO THE OBLIGATIONS OF BUYER, VAJNA AND VALDINA TO
EFFECT THE MERGER. The obligations of Buyer, Vajna and Valdina to consummate the
Merger pursuant to this Agreement are further subject to the satisfaction or
waiver at or prior to the Effective Time of the following conditions:
(a) The Option Plans, and all Employee Options which have not been
exercised as of the Termination Date, shall have been terminated as provided
in Section 5.4 hereof; and
(b) The Company shall have performed in all material respects each of
its obligations under this Agreement required to be performed by it on or
prior to the Effective Time, including without limitation, the cancellation
and termination of Warrants as required pursuant to Section 5.5 hereof.
SECTION 6.3. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The Obligations
of the Company to consummate the Merger pursuant to this Agreement are further
subject to the satisfaction or waiver at or prior to the Effective Time of the
following conditions:
(a) Buyer, Vajna and Valdina shall have performed in all material
respects their respective obligations under this Agreement required to be
performed by them on or prior to the Effective Time;
(b) All of the representations and warranties of Vajna, Valdina and
Buyer in this Agreement shall be true and correct as of the Effective Time
as if such representations and warranties were made as of such time; and
(c) Buyer shall have deposited with the Paying Agent, the cash amount
required pursuant to Section 2.2 hereof.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1. TERMINATION. This Agreement may be terminated and the Merger
contemplated hereby may be abandoned at any time prior to the Effective Time,
whether prior to or after approval by the stockholders of the Company:
(a) by mutual written consent of the Board of Directors of the Company
(with the assent of the Special Committee) on behalf of the Company and the
Board of Directors of Buyer, on behalf of Buyer, Vajna and Valdina;
(b) by the Company or Buyer, on behalf of Buyer, Vajna and Valdina, if
the Library Sale Agreement terminates or is terminated;
(c) by the Company acting through the Board of Directors (with the
assent of the Special Committee) on the one hand, or Buyer, on behalf of
Buyer, Vajna and Valdina, on the other hand, if, without a breach or
violation of this Agreement by the terminating party or parties, the Merger
shall not have been consummated by December 31, 1997 (the "Expiration
Date"); provided, however, that if the date by which the transactions
contemplated by the Library Sale Agreement must be consummated as provided
in the Library Sale Agreement is extended by the parties to such agreement,
then the Expiration Date shall automatically, without any action required on
the part of the parties hereto, be extended by the same period of time; or
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<PAGE>
(d) by the Company if the Board of Directors of the Company, based on
the recommendation of the Special Committee, shall have failed to recommend,
or withdrawn, modified or amended in any material respect its approval or
recommendation of the Merger or failed to hold the Special Meeting prior to
December 31, 1997.
SECTION 7.2. EFFECT OF TERMINATION. In the event of the termination of
this Agreement as provided in Section 7.1 hereof, except as provided in Section
8.1 hereof, this Agreement shall forthwith become void and have no effect, and
there shall be no liability on the part of Buyer, Vajna, Valdina or the Company.
Nothing contained in this Section 7.2 shall relieve any party from liability for
any willful breach of this Agreement.
SECTION 7.3. AMENDMENT. This Agreement may not be amended except by action
by the Board of Directors of the Company (with the assent of the Special
Committee) on behalf of the Company and the Board of Directors of Buyer, on
behalf of Buyer, Vajna and Valdina. Any such amendment shall be set forth in a
written instrument signed on behalf of each of the parties hereto; provided,
however, that after any approval of this Agreement by the stockholders of the
Company, no amendment may be made without the further approval of the
stockholders of the Company which would: (i) decrease the Merger Consideration;
or (ii) change any other terms and conditions of this Agreement if any of the
changes, alone or in the aggregate, would materially adversely affect the
stockholders of the Company.
SECTION 7.4. EXTENSION, WAIVER. At any time prior to the Effective Time,
whether before or after approval of this Agreement by the stockholders of the
Company, any party hereto may (a) extend the time for the performance of any of
the obligations or other acts of any other party hereto, (b) waive any
inaccuracies in the representations and warranties of the other party contained
herein or in any document, certificate or writing delivered pursuant hereto, or
(c) waive compliance with any of the agreements of the other party or with any
conditions to its own obligations. Any agreement on the part of a party hereto
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party by a duly authorized
officer of the Company, Buyer or Valdina, or with respect to Vajna, only if
signed by Vajna individually. Notwithstanding the foregoing, the parties agree
that, under no circumstances shall Buyer, Vajna or Valdina (collectively, the
"Vajna Parties") be permitted to extend the time for performance of any
obligation of, waive any inaccuracy in any representation or warranty of, or
waive compliance with any agreement or condition with respect to any Vajna
Party. Any extension or waiver granted by the Company pursuant to this Section
7.4 shall be approved by the Board of Directors of the Company (with the assent
of the Special Committee).
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1. NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. Subject to the last sentence of Section 7.2 hereof, the
representations, warranties and agreements in this Agreement shall terminate at
the Effective Time or the termination of this Agreement pursuant to Section 7.1
hereof, as the case may be, except that the agreements set forth in Section 5.3
shall survive the Closing and the agreement set forth in Section 8.2 hereof
shall survive the Closing or termination. Notwithstanding the foregoing, this
Section 8.1 shall not limit any covenant or agreement of the parties hereto
which by its terms contemplates performance after the Effective Time.
SECTION 8.2. FEES AND EXPENSES. All costs and expenses incurred in
connection with the Merger, this Agreement and the consummation of the
transactions contemplated hereby shall be paid by the party incurring such
expenses, regardless of whether the Merger shall be consummated.
SECTION 8.3. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered
personally or sent by cable, telegram, telecopy or telex, or by registered or
certified mail (postage prepaid, return receipt requested), or by overnight
delivery
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<PAGE>
service (capable of verified receipt), to the respective parties at the
following addresses or at such other addresses as shall be specified by the
parties by like notice and such notice, or communication shall be deemed to have
been given or made as of the date so delivered or mailed:
(a) If to Buyer, Vajna or Valdina:
Cinergi Pictures Entertainment Inc.
2308 Broadway
Santa Monica, California 90404
Attention: Andrew G. Vajna
Telecopy No.: (310) 315-6015
with copies to:
Valdina Corporation N.V.
Castorweg 22-24, Suite 10
P.O. Box 155
Curacao, Netherlands Antilles
Attention: Myron Dania
Telecopy No.: (011) 599-94615948
Ziffren, Brittenham, Branca & Fischer
2121 Avenue of the Stars, 32nd Floor
Los Angeles, California 90067
Attention: Skip Brittenham
Telecopy No.: (310) 553-7068
Blanc Williams Johnston & Kronstadt
1900 Avenue of the Stars, Suite 1700
Los Angeles, California 90067
Attention: Ronald L. Blanc
Telecopy No.: (310) 552-1191
(b) If to the Company:
Cinergi Pictures Entertainment, Inc.
2308 Broadway
Santa Monica, California 90404
Attention: Warren Braverman, Chief Operating Officer
Telecopy No.: (310) 898-3861
Gregory R. Paul
Managing Director
BT Securities Corporation
One Bankers Trust Plaza
130 Liberty Street, 30th Floor
New York, New York 10006
Telecopy No.: (212) 250-7218
C-19
<PAGE>
with copies to:
Cahill, Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: John Schuster
Telecopy No.: (212) 269-5420
Gipson Hoffman & Pancione, P.C.
1901 Avenue of the Stars, Suite 1100
Los Angeles, California
Attention: John R. McHale
Telecopy No.: (310) 556-8945
SECTION 8.4. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 8.5. INTERPRETATION. When a reference is made in this Agreement to
subsidiaries of the Company, the word "subsidiaries" means any corporation more
than 50 percent of whose outstanding voting securities, or any partnership,
joint venture or other entity more than 50 percent of whose total equity
interest, is directly or indirectly owned by the Company; provided, however,
that for purposes of this Agreement, the Company shall not be deemed to be an
affiliate or a subsidiary of Buyer, Vajna or Valdina. The descriptive headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
SECTION 8.6. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (a) contains the
entire agreement among Buyer, Vajna, Valdina and the Company with respect to the
Merger and the other transactions contemplated hereby and supersedes all prior
agreements and undertakings, both written and oral, among the parties, or any of
them, with respect to these matters; and (b) shall not be assigned to any third
party by any party hereto.
SECTION 8.7. SEVERABILITY. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
SECTION 8.8. PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and their respective
successors, legal representatives and assigns, and, except for any third party
rights conferred by virtue of Section 5.3 hereof, nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 8.9. SPECIFIC PERFORMANCE. The parties hereto agree that if any of
the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist, and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof, in addition to any other remedy at law or equity.
SECTION 8.10. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed or caused this
Agreement to be executed as of the date first written above.
/s/ ANDREW G. VAJNA
-----------------------------------------
Andrew G. Vajna
VALDINA CORPORATION N.V.
By: /s/ MYRON DANIA
-----------------------------------------
Name: Myron Dania
Title: MANAGING DIRECTOR
CPEI ACQUISITION INC.
By: /s/ ANDREW G. VAJNA
-----------------------------------------
Name: Andrew G. Vajna
Title: PRESIDENT
CINERGI PICTURES ENTERTAINMENT INC.
By: /s/ WARREN BRAVERMAN
-----------------------------------------
Name: Warren Braverman
Title: CHIEF OPERATING OFFICER, CHIEF
FINANCIAL OFFICER AND EXECUTIVE VICE
PRESIDENT
C-21
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
<TABLE>
<S> <C>
Exhibit A Restated Certificate of Incorporation of Cinergi Pictures
Entertainment Inc.
Schedule Stone Projects
1.7(b)(i)
Schedule Non-Alan Smithee Receivables
1.7(b)(iii)
Schedule Alan Smithee Receivables
1.7(c)(ii)
Schedule 3.2(c) Agreements with Respect to the Voting of Capital Stock
Schedule 5.1 Conduct of Business of the Company
Schedule 5.3 Directors' and Officers' Insurance
</TABLE>
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<PAGE>
EXHIBIT A
RESTATED CERTIFICATE
OF
INCORPORATION
OF
CINERGI PICTURES ENTERTAINMENT INC.
(Original Certificate of Incorporation Filed November 22, 1989)
(Pursuant to Section 245 of the
Delaware General Corporation Law)
------------------------
CINERGI PICTURES ENTERTAINMENT INC., 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 November 22, 1989, and as previously
amended and restated on April 14, 1994, is hereby further amended and restated
to read in its entirety as follows:
FIRST: The name of the corporation (hereinafter called the "Corporation")
is:
Cinergi Pictures Entertainment Inc.
SECOND: The registered office of the Corporation and place of business in
the State of Delaware is to be located at 15 East North Street, in the City of
Dover 19903-0899, County of Kent. The name of its registered agent at that
address is Paracorp Incorporated.
THIRD: The nature of the business, and the objects and purposes proposed to
be transacted, promoted and carried on, are to do any and all things herein
mentioned, as fully and to the same extent as natural persons might or could do,
and in any part of the world, including without limitation:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH: The Corporation is authorized to issue one class of stock,
designated "Common Stock." The total number of shares of Common Stock which the
Corporation is authorized to issue is Seven Million (7,000,000) shares, par
value $0.01 per share, itemized as follows:
<TABLE>
<CAPTION>
CLASS NUMBER OF SHARES PAR VALUE PER SHARE
- ---------- --------------------- ---------------------------
<S> <C> <C>
Common 7,000,000 $ 0.01
</TABLE>
FIFTH: In furtherance and not in limitation of the power conferred by the
laws of the State of Delaware:
A. The Board of Directors of the Corporation is expressly authorized to
adopt, amend or repeal the Bylaws of the Corporation.
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B. Election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
C. The books of the Corporation may be kept at such place within or
without the State of Delaware as the Bylaws of the Corporation may provide
or as may be designated from time to time by the Board of Directors of the
Corporation.
SIXTH: The Corporation reserves the right to amend or repeal any provision
contained in this certificate of incorporation, in the manner now or hereafter
prescribed by status, and all rights conferred upon a stockholder herein are
granted subject to this reservation.
SEVENTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by paragraph (7) of subsection
(b) of Section 102 of the General Corporation Law of the State of Delaware, as
the same may be amended and supplemented.
EIGHTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditor or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all creditors or class of creditors, and/or on all the
stockholders or class of stockholders of this Corporation, as the case may be,
and also on this Corporation.
NINTH: 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 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.
IN WITNESS WHEREOF, the undersigned has executed this Restated Certificate
of Incorporation this day of , 1997.
<TABLE>
<S> <C> <C>
CINERGI PICTURES ENTERTAINMENT INC.
By:
-----------------------------------------
Name: Andrew G. Vajna
Title: Chief Executive Officer
</TABLE>
ATTEST:
- ------------------------
Name:
Title: Secretary
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<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMENDMENT NO. 1
TO
AGREEMENT OF MERGER
AMONG
ANDREW G. VAJNA,
VALDINA CORPORATION N.V.,
CPEI ACQUISITION INC.
AND
CINERGI PICTURES ENTERTAINMENT INC.
NOVEMBER 23, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<PAGE>
AMENDMENT NO. 1 TO AGREEMENT OF MERGER
THIS AMENDMENT NO. 1 TO THE AGREEMENT OF MERGER (this "Amendment") is dated
as of November 23, 1997, by and among Andrew G. Vajna, Valdina Corporation N.V.,
a Netherlands Antilles corporation ("Valdina"), CPEI Acquisition Inc., a
Delaware corporation ("Buyer"), and Cinergi Pictures Entertainment Inc., a
Delaware corporation (the "Company").
WHEREAS, Vajna, Valdina, Buyer and the Company entered into an Agreement of
Merger dated as of September 2, 1997 (the "Merger Agreement"); and
WHEREAS, the parties to the Merger Agreement desire to amend Section 1.7
thereof as provided herein.
NOW, THEREFORE, based on the above premises and in consideration of the
mutual consents and agreements contained herein, the parties hereto agree as
follows:
1. DEFINITIONS. All terms not otherwise defined herein shall have the
meanings ascribed to such terms in the Merger Agreement.
2. AMENDMENT TO SECTION 1.7(D). Section 1.7(d) of the Merger Agreement is
hereby amended in its entirety to read as follows:
"The Company's chief financial officer, or other appropriate accounting
officer, as the case may be, shall calculate both the Expenses and the
MassIllusion Expense Amount for the Measurement Period as contemplated
herein and forward such calculation to Vajna and the Special Committee
no later than 6:00 p.m., Los Angeles time, on the day after the
Adjustment Date. To the extent there is a disagreement between Vajna and
the Special Committee with respect to the calculation of Expenses and/or
the MassIllusion Expense Amount, the parties shall immediately forward
such calculation(s) to an independent accounting firm, retired judge or
other party mutually acceptable to the Special Committee and Vajna,
whose determination as to the proper calculation of Expenses and/or the
MassIllusion Expense Amount shall be rendered no later than six business
days prior to the Special Meeting and shall be final and binding on all
the parties hereto."
3. COUNTERPARTS. This Amendment may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
4. NO OTHER CHANGES. Except as expressly modified by the provisions of
this Amendment, the Merger Agreement shall remain unchanged in all respects and
in full force and effect.
C-26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
<TABLE>
<S> <C> <C>
/s/ ANDREW G. VAJNA
-----------------------------------------
ANDREW G. VAJNA
VALDINA CORPORATION N.V.
By: /s/ MYRON DANIA
-----------------------------------------
Name: Myron Dania
Title: MANAGING DIRECTOR
CPEI ACQUISITION INC.
By: /s/ ANDREW G. VAJNA
-----------------------------------------
Name: Andrew G. Vajna
Title: PRESIDENT
CINERGI PICTURES ENTERTAINMENT INC.
By: /s/ WARREN BRAVERMAN
-----------------------------------------
Name: Warren Braverman
Title: CHIEF OPERATING OFFICER, CHIEF
FINANCIAL OFFICER AND EXECUTIVE VICE
PRESIDENT
</TABLE>
C-27
<PAGE>
APPENDIX D
TITLE 8, DELAWARE CODE
Section 262 of the Delaware General Corporation Law. Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 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 subsection
(f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) 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.
D-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to 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 constituent corporation who has
complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228 or
Section 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. 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 such holder's 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
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been
D-2
<PAGE>
given shall, in the absence of fraud, be prima facie evidence to the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given;
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on
D-3
<PAGE>
the list filed by the surviving or resulting corporation pursuant to subsection
(f) of this section and who has submitted his certificates of stock to the
Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
D-4
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information and reporting requirements of the
Exchange Act, and in accordance therewith files periodic reports, proxy
statements and other documents and information with the SEC. The Company's
officers, directors and principal stockholders are also presently subject to
filing requirements, as well as certain restrictions, imposed under the Exchange
Act. Such reports, proxy statements and other documents and information may be
inspected and copied 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 regional offices of the SEC located at 7 World Trade Center, 13th Floor,
New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W.
Washington, D.C. 20549 at prescribed rates. In addition, copies of such material
can be obtained from the SEC's Web Site (http://www.sec.gov).
<PAGE>
Cinergi Pictures Entertainment Inc.
Special Meeting of Stockholders
December 23, 1997
THIS REVOCABLE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER 23, 1997.
The undersigned stockholder of Cinergi Pictures Entertainment Inc. (the
"Company") hereby nominates, constitutes and appoints Warren Braverman and
Erick J. Feitshans, and each of them, the agent and proxy of the undersigned,
each with full power of substitution, to vote all shares of Common Stock of
the Company which the undersigned is entitled to vote at the Special Meeting
of Stockholders of the Company to be held at 2308 Broadway, Santa Monica,
California on December 23, 1997 at 10:00 a.m. Pacific Standard time, and at
any and all postponements or adjournments thereof, as fully and with the same
force and effect as the undersigned might or could do if personally present
thereat.
Please mark, sign, date and return this proxy card promptly using the
enclosed envelope or fax both sides of this proxy card to ChaseMellon
Shareholder Services at (213) 553-9738.
THE PROXY WILL BE VOTED AS DIRECTED BELOW. IN THE ABSENCE OF ANY DIRECTION,
THIS PROXY WILL BE VOTED FOR PROPOSAL 1 (THE ASSET SALE PROPOSAL) AND FOR
PROPOSAL 2 (THE MERGER PROPOSAL).
(CONTINUED ON REVERSE SIDE)
IMPORTANT: PLEASE DATE AND SIGN THE PROXY CARD ON REVERSE SIDE
- -------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
<PAGE>
This revocable proxy will be voted as directed below. In the absence of any
direction, this proxy will be voted FOR (i) the Asset Sale Proposal and (ii)
the Merger Proposal.
Please mark your vote as indicated in this example. [X]
The Board of Directors recommends a vote "FOR" the Asset Sale Proposal.
1. Asset Sale Proposal. The Sale of substantially all of the Company's
assets, including substantially all of the Company's Film Library, pursuant
to the Library Sale Agreement and the Assignment Agreement.
For Against Abstain
[ ] [ ] [ ]
The Board of Directors recommends a vote "FOR" the Merger Proposal.
2. Merger Proposal. The merger of CPEI Acquisition Inc., a corporation
wholly owned by Andrew G. Vajna and Valdina Corporation, N.V., with and
into the Company.
For Against Abstain
[ ] [ ] [ ]
3. To transact such other business as may properly come before the
Special Meeting or any postponements or adjournments thereof. IN THEIR
DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER MATTERS AS
MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY POSTPONEMENTS OR
ADJOURNMENTS THEREOF; PROVIDED, HOWEVER, THAT PROXY CARDS VOTED AGAINST
THE ASSET SALE PROPOSAL OR THE MERGER PROPOSAL MAY NOT BE USED BY THE
PROXIES TO VOTE IN FAVOR OF A POSTPONEMENT OR ADJOURNMENT PURSUANT TO
SUCH DISCRETIONARY AUTHORITY.
Mark this box if you plan to attend the Special Meeting. [ ]
Signature(s)
--------------------------------------------------------------------
--------------------------------------------------------------------
Date
--------------------------------------------------------------------
Note: Please sign as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
- -------------------------------------------------------------------------------
- FOLD AND DETACH HERE -
