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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
CINEMASTAR LUXURY THEATERS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ 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:
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(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:
------------------------------------------------------------------------
/ / 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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CINEMASTAR LUXURY THEATERS, INC.
431 College Boulevard
Oceanside, California 92057
(760) 630-2011
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 3, 1997
To the Shareholders of CinemaStar Luxury Theaters, Inc.:
You are cordially invited to attend a Special Meeting of Shareholders of
CinemaStar Luxury Theaters, Inc., a California corporation (the "Company"),
which will be held at the CinemaStar Ultraplex 10 at the Perris Plaza, 1688
North Perris Boulevard, Perris, California, at 10:00 a.m., Pacific Standard
Time, on Wednesday, December 3, 1997, to consider and act upon the following
matters, all as more fully described in the accompanying Proxy Statement
which is incorporated herein by this reference:
1. To consider and take action concerning approval of a single, unified
proposal (the "Financing Proposal") described in the accompanying Proxy
Statement, which provides for:
(a) Approval of an equity financing transaction (the "Equity
Financing") pursuant to which the Company will issue and sell (i)
17,684,464 shares of Common Stock (subject to adjustment in certain
circumstances) for an aggregate purchase price of $15,000,000, and (ii)
warrants to purchase an additional 1,630,624 shares of Common Stock at an
exercise price of not more than $0.848202 per share, in accordance with
the terms of a Stock Purchase Agreement, dated as of September 23, 1997,
by and among the Company, Reel Partners, L.L.C. ("Reel Partners"), and
CinemaStar Acquisition Partners, L.L.C. ("Acquisition Partners"), a copy
of which is included as Appendix A to the attached Proxy Statement;
(b) Ratification of a bridge financing transaction (the "Bridge
Financing") pursuant to which the Company received $3,000,000 in bridge
financing from Reel Partners and issued and sold (i) a $3,000,000
Convertible Secured Promissory Note in favor of Reel Partners, a copy of
which is included as Appendix B to the attached Proxy Statement, that is
convertible, at the option of Reel Partners, into 3,000,000 shares of
Company Common Stock (subject to adjustment in certain circumstances),
(ii) warrants to purchase 3,000,000 shares of Company Common Stock at an
exercise price of $0.848202 per share, and (iii) an additional warrant to
purchase 1,500,000 shares of Company Common Stock at an exercise price of
$0.848202, which warrant will be canceled upon consummation of the Equity
Financing; and
(c) Approval of an amendment and restatement of the Articles of
Incorporation of the Company (the "Amended Articles") which will (i)
increase the authorized number of shares of Company Common Stock from
15,000,000 to 60,000,000 shares, and (ii) eliminate the authorized shares
of Company Preferred Stock, none of which is currently outstanding. A
copy of the form of Amended Articles is included as Appendix C to the
attached Proxy Statement.
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Shareholders of record of the Company's common stock at the close of
business on October 29, 1997, the record date fixed by the Board of
Directors, are entitled to notice of, and to vote at, the meeting.
THOSE WHO CANNOT ATTEND ARE URGED TO SIGN, DATE, AND OTHERWISE COMPLETE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. ANY
SHAREHOLDER GIVING A PROXY HAS THE RIGHT TO REVOKE IT ANY TIME BEFORE IT IS
VOTED.
BY ORDER OF THE BOARD OF DIRECTORS
Jon Meloan, Vice President, Secretary and General Counsel
Oceanside, California
November __, 1997
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
431 College Boulevard
Oceanside, California 92057
(760) 630-2011
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PROXY STATEMENT
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INTRODUCTION
This Proxy Statement (the "Proxy Statement") is being furnished to
shareholders of CinemaStar Luxury Theaters, Inc., a California corporation
(the "Company"), in connection with the solicitation of proxies by the Board
of Directors of the Company (the "Board") from holders of record of the
Company's outstanding shares of common stock (the "Company Common Stock"), as
of the close of business on October 29, 1997 (the "Record Date") for use at
the Special Meeting of Shareholders of the Company (the "Meeting") to be held
on Wednesday, December 3, 1997, at 10:00 a.m., Pacific Standard Time, at the
CinemaStar Ultraplex 10 at the Perris Plaza, 1688 North Perris Boulevard,
Perris, California, and at any adjournment or postponement thereof. This
Proxy Statement is first being mailed to the Company's shareholders on
approximately November __, 1997.
MATTERS FOR CONSIDERATION AT THE MEETING
At the Meeting, holders of shares of Company Common Stock will be asked
to consider and vote upon the following matters:
1. To consider and take action concerning approval of a single, unified
proposal (the "Financing Proposal") described in the accompanying Proxy
Statement, which provides for:
(a) Approval of an equity financing transaction (the "Equity
Financing") pursuant to which the Company will issue and sell (i)
17,684,464 shares of Common Stock (subject to adjustment in certain
circumstances) for an aggregate purchase price of $15,000,000, and (ii)
warrants to purchase an additional 1,630,624 shares of Common Stock at an
exercise price of not more than $0.848202 per share, in accordance with
the terms of a Stock Purchase Agreement (the "Stock Purchase Agreement"),
dated as of September 23, 1997, by and among the Company, Reel Partners,
L.L.C. ("Reel Partners"), and CinemaStar Acquisition Partners, L.L.C.
("Acquisition Partners"), copy of which is attached as Appendix A to this
Proxy Statement;
(b) Ratification of a bridge financing transaction (the "Bridge
Financing") pursuant to which the Company received $3,000,000 in bridge
financing from Reel Partners and issued and sold (i) a $3,000,000
Convertible Secured Promissory Note in favor of Reel Partners, a copy of
which is attached as Appendix B to this Proxy Statement, that is
convertible, at the option of Reel Partners, into 3,000,000 shares of
Company Common Stock (subject to adjustment in certain circumstances),
(ii) warrants to purchase 3,000,000 shares of Company Common Stock at an
exercise price of $0.848202 per share, and (iii) an additional warrant to
purchase 1,500,000 shares of Company Common Stock at an exercise price of
$0.848202, which warrant will be canceled upon consummation of the Equity
Financing; and
(c) Approval of an amendment and restatement of the Articles of
Incorporation of the Company (the "Amended Articles") which will (i)
increase the authorized number of shares of Company Common Stock from
15,000,000 to 60,000,000 shares, and (ii) eliminate the authorized shares
of Company Preferred Stock, none of which is currently outstanding. A
copy of the form of Amended Articles is attached as Appendix C to this
Proxy Statement.
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE FOR THE FINANCING PROPOSAL.
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Shareholder approval of the Amended Articles is required under applicable
law and is a condition to closing the Equity Financing. Although the Company
does not believe that shareholder approval of the Equity Financing or
ratification of the Bridge Financing is required under applicable law, the
Board has made shareholder approval of the Equity Financing a condition to
the Equity Financing because of the importance of the Equity Financing to the
Company and its shareholders. The Board has retained discretion, even if
shareholder approval of the Financing Proposal is obtained, to abandon, defer
or modify the terms of the Equity Financing or to modify the terms of the
Bridge Financing, provided that following shareholder approval the Board will
not make any changes in the terms of any elements of the Equity Financing or
Bridge Financing unless the Board determines that such changes would not be
materially adverse to the Company's shareholders. If shareholder approval of
the Financing Proposal is obtained and the transactions contemplated thereby
are completed, in the event of a legal challenge to the Financing Proposal,
the Board intends to assert shareholder approval of the Financing Proposal as
an affirmative defense against any such challenge.
In the event that shareholder approval of the Financing Proposal is not
obtained, the $3,000,000 Convertible Secured Promissory Note (the "Bridge
Note") and the warrants to purchase an aggregate of 4,500,000 shares issued
in connection with the Bridge Financing will remain outstanding and
enforceable against the Company. In such event, it is likely that the
Company will not have the ability to repay its obligations under the Bridge
Note and will be required to immediately locate an alternate source of
financing to meet its obligations under the Bridge Note and to fund its
operations. There can be no assurance that the Company will be able to
obtain such financing at all or on terms that are favorable to the Company.
The Company's failure to obtain sufficient financing within the requisite
time frame could make it impossible for the Company to continue operations,
force the Company to seek protection under federal bankruptcy law, and/or
adversely affect the listing of the Company's Common Stock on the Nasdaq
SmallCap Market. See "The Financing Proposal --Recommendation of the Board;
Reasons for Financing Proposal" and "-- Special Considerations."
VOTING RIGHTS AND PROXY INFORMATION
Only holders of record of shares of Company Common Stock as of the close
of business on the Record Date will be entitled to notice of and to vote at
the Meeting or any adjournment or postponement thereof. Such holders of
shares of Company Common Stock are entitled to one vote per share on any
matter which may properly come before the Meeting. The presence, either in
person or by properly executed proxy, of the holders of a majority of the
then outstanding shares of Company Common Stock is necessary to constitute a
quorum at the Meeting and to permit action to be taken by the shareholders at
such Meeting. The affirmative vote of the holders of at least a majority of
the outstanding shares of Company Common Stock is required to approve of the
Financing Proposal. Under the Company's bylaws and California law, shares
represented by proxies that reflect abstentions or "broker non-votes" (i.e.,
shares held by a broker or nominee which are represented at the Meeting, but
with respect to which such broker or nominee is not empowered to vote on a
particular proposal) will be counted as shares that are present and entitled
to vote for purposes of determining the presence of a quorum. Any shares not
voted (whether by abstention, broker non-vote or otherwise) will have the
same effect as votes against the Financing Proposal. As of the close of
business on the Record Date, there were [8,019,182] shares of Company Common
Stock outstanding and entitled to vote at the Meeting.
Proxies duly executed and returned by shareholders and received by the
Company before the Meeting will be voted "FOR" the Financing Proposal, unless
a contrary choice is specified in the proxy. Where a specification is
indicated as provided in the proxy, the shares represented by the proxy will
be voted and cast in accordance with the specification made. As to other
matters, if any, to be voted upon, the persons designated as proxies will
take such actions as they, in their discretion, may deem advisable. The
persons named as proxies were selected by the Board and each of them is an
officer and/or director of the Company.
In the event that a quorum is not present at the time the Meeting is
convened, or if for any other reason the Company believes that additional
time should be allowed for the solicitation of proxies, the Company may
adjourn the Meeting with or without a vote of the shareholders. If the
Company proposes to adjourn the Meeting by a vote of the shareholders, the
persons named in the enclosed form of proxy will vote all shares of Company
Common Stock for which they have voting authority in favor of such
adjournment.
Your execution of the enclosed proxy will not affect your right as a
shareholder to attend the Meeting and to vote in person. Any shareholder
giving a proxy has the right to revoke it at any time by either (a) filing
with the Secretary of the Company at or before the Meeting a written notice
of revocation bearing a later date than the proxy, (b) duly executing a
subsequent proxy relating to the same shares of the Company Common Stock and
delivering it to the Secretary of the Company at or before the Meeting, or
(c) attending the Meeting and voting in person (although attendance at the
Meeting will not in and of itself constitute a revocation of a proxy).
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A form of proxy is being furnished herewith by the Company to each
shareholder, and, in each case, is solicited on behalf of the Board for use
at the Meeting. The entire cost of soliciting these proxies will be borne by
the Company. The Company may pay persons holding shares in their names or
the names of their nominees for the benefit of others, such as brokerage
firms, banks, depositaries, and other fiduciaries, for costs incurred in
forwarding soliciting materials to their principals. In that regard, the
Company has retained MacKenzie Partners, Inc., New York, New York to deliver
soliciting materials to such record holders for distribution by them to their
principals and to assist the Company in collecting proxies from such holders.
The costs of these services, excluding out-of-pocket expenses, is not
expected to exceed $7,500. Members of the Management of the Company may also
solicit some shareholders in person, or by telephone, telegraph or telecopy,
following solicitation by this Proxy Statement, but will not be separately
compensated for such solicitation services.
NO APPRAISAL RIGHTS
Shareholders of the Company will not be entitled to appraisal or
dissenter's rights under California law in connection with the Financing
Proposal.
THE FINANCING PROPOSAL
THE DETAILED TERMS OF, AND CONDITIONS TO, THE FINANCING PROPOSAL AND
CERTAIN RELATED TRANSACTIONS ARE CONTAINED IN THE STOCK PURCHASE AGREEMENT,
THE CONVERTIBLE SECURED PROMISSORY NOTE AND THE AMENDED ARTICLES, COPIES OF
WHICH (WITHOUT EXHIBITS) ARE ATTACHED HERETO AS APPENDIX A, B AND C,
RESPECTIVELY. THE STATEMENTS MADE IN THIS PROXY STATEMENT WITH RESPECT TO THE
TERMS AND CONDITIONS OF THE FINANCING PROPOSAL AND THE TRANSACTIONS RELATED
THERETO ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE MORE COMPLETE
INFORMATION SET FORTH IN SUCH DOCUMENTS, WHICH ARE INCORPORATED HEREIN BY
THIS REFERENCE.
SUMMARY
The Financing Proposal is a single, unified proposal consisting of
approval of the Equity Financing, ratification of the Bridge Financing, and
approval of the Amended Articles, each of which is summarized below:
THE EQUITY FINANCING. The Stock Purchase Agreement provides that,
subject to the satisfaction or waiver of certain conditions, including, among
others, the approval of the Amended Articles and the Equity Financing by the
shareholders of the Company, Acquisition Partners will purchase 17,684,464
shares of Company Common Stock for total consideration of $15,000,000
($0.848202 per share). At the closing of the Equity Financing (the
"Closing"), Acquisition Partners will also receive warrants to purchase
1,630,624 shares of Company Common Stock at an exercise price equal to the
lesser of (i) $0.848202 per share or (ii) the average closing price of a
share of Company Common Stock over the five trading days immediately
preceding the date of the Closing (the "Purchase Warrant"). In addition,
upon execution of the Stock Purchase Agreement, Acquisition Partners received
an additional warrant to purchase 1,000,000 shares of Company Common Stock at
an exercise price of $0.848202 per share (the "Signing Warrant"). Each of the
Purchase Warrant and Signing Warrant are exercisable immediately upon
issuance, have terms of 10 years from the date of issuance, grant the holder
certain demand and piggy-back registration rights, and provide for
anti-dilution adjustments to the exercise price and number of shares
underlying such warrants in the event of certain merger, exchange or
reorganization transactions or issuances of shares of Common Stock (or
securities convertible into Common Stock) at an issue price of less than the
exercise price of the warrant.
Under the terms of the Stock Purchase Agreement, the Company may be
obligated to issue additional shares of Company Common Stock to Acquisition
Partners with respect to certain expenses, liabilities and operating losses
of the Company arising or disclosed after August 31, 1997 or arising prior to
August 31, 1997 and not disclosed or quantified before August 31, 1997. In
particular, there shall be an adjustment in the number of shares of Common
Stock sold which adjustment shall be based on the dollar amount of the
following (the "Dollar Adjustment") (i) any liabilities of the Company in
existence on the date of Closing that were not disclosed to Acquisition
Partners on the date of the Stock Purchase Agreement, (ii) any lease
termination costs or filing fees, legal fees or other transaction expenses
incurred and paid by the Company from August 31, 1997 until the Closing
(which costs, fees or expenses were not disclosed as a liability of the
Company under (i) above), (iii) any negative cash flow from operations of the
Company from August 31, 1997 through Closing (excluding Bridge Financing
Proceeds used during such period), plus (iv) any negative operating cash flow
incurred in connection with the Company's operations in Tijuana, Mexico and
San Bernardino, California operations for the three years following the
Closing or until the sale of such operations by the Company. In the event
that there is a Dollar Adjustment amount at the time of Closing, the number
of shares of Common Stock issuable to
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Acquisition Partners at Closing shall be increased from 17,684,464 shares to
a number equal to the quotient obtained by dividing (A) $15 million by (B)
the difference between (1) $0.848202 and (2) a fraction, the numerator of
which is the Dollar Adjustment, and the denominator of which is 8,019,182.
In the event that the Company does not incur any unexpected losses,
liabilities or expenses during the period from August 31, 1997 until Closing,
there will be no substantial adjustment in the number of shares to be issued
to Acquisition Partners at Closing. However, in the event that there are
significant unexpected losses, liabilities or expenses, the number of shares
issuable to Acquisition Partners and the dilution to existing shareholders
will increase substantially.
Upon completion of the Equity Financing, Acquisition Partners will own
approximately 69% of the outstanding shares of Company Common Stock.
Pursuant to the terms of the Stock Purchase Agreement, effective with the
Closing, the Board of Directors of the Company will be reconstituted to
reflect the majority interest in the Company of Acquisition Partners. In
particular, upon Closing, the number of directors will be increased to seven
members, three of which are presently directors of the Company and four of
which will be designated by Acquisition Partners. See "The Financing
Proposal -- Management of the Company after Closing of the Equity Financing."
In the event that the Closing of the Equity Financing does not occur as a
result of failure by the shareholders of the Company to approve the Financing
Proposal or for any other reasons other than Acquisition Partners' breach of
the Stock Purchase Agreement, the Company will be required to pay a
termination fee (the "Break Fee") equal to $600,000. In the event that (i)
the Stock Purchase Agreement is terminated prior to Closing as a result of
the Company's breach of the non-solicitation provisions of the Stock Purchase
Agreement or (ii) prior to September 23, 1998, and the Company consummates a
financing transaction arising out of any proposal received during the
non-solicitation period, then the Break Fee shall equal $800,000.
It is expected that the proceeds of the Equity Financing will be used by
the Company (i) to repay certain indebtedness, including certain bank loans,
obligations to trade creditors, lease obligations and the Company's
obligations under the Bridge Note, (ii) for the development and/or completion
of additional theater locations and for (iii) general working capital.
THE BRIDGE FINANCING. Concurrent with the signing of the Stock Purchase
Agreement, the Company entered into the Bridge Financing pursuant to which
the Company received a $3,000,000 bridge loan from Reel Partners, an
affiliate of Acquisition Partners, to facilitate the completion of certain
projects and to pay off certain indebtedness. The Convertible Secured
Promissory Note (the "Bridge Note") evidencing such financing is convertible,
at the option of the holder, into 3,000,000 shares of Company Common Stock at
$1.00 per share (subject to adjustment in certain circumstances).
Under the terms of the Bridge Note, interest accrues daily on the unpaid
principal amount at a per annum rate of 14%. Accrued interest is due and
payable in monthly installments beginning October 1, 1997. The amount of any
late payments shall bear interest at 14% per annum plus 2% per annum for each
month that the payment is late. All principal and accrued but unpaid interest
on the Bridge Note is due and payable, at the option of Reel Partners, on the
earlier of (i) March 23, 1998, (ii) immediately prior to certain merger,
reorganization or change of control transactions, or (iii) the date of the
Closing or the date of termination of the Stock Purchase Agreement for
certain reasons, including any material breach of the Stock Purchase
Agreement by the Company or the final, non-appealable entry of an order or
injunction of a court or other authority preventing the consummation of the
transactions contemplated by the Stock Purchase Agreement.
The Company's obligations under the Bridge Note are secured by the
Company's grant of a security interest in substantially all of the Company's
assets at its Mission Grove 14 theater complex and Mission Marketplace 13
theater complex, and by the Company's grant of deeds of trust secured by the
leases of those two theater complexes.
The Bridge Note contains covenants of the Company which include, among
others, that the Company shall not (i) declare or pay any dividends,
distribute assets, or redeem capital stock, (ii) consolidate or merge with or
transfer all or substantially all of its properties or assets to another
entity while the Stock Purchase Agreement is in effect prior to Closing, and
thereafter unless the Bridge Note shall be repaid in full prior to or in
connection therewith, (iii) incur indebtedness other than trade payables in
the normal course of business, (iv) modify or amend the Articles of
Incorporation or Bylaws of the Company (other than as contemplated by the
Stock Purchase Agreement) or the terms of any employment agreement with any
management personnel, (v) settle any material litigation or indebtedness, or
(vi) enter into any contracts, leases or other agreements having terms in
excess of six months and involving monthly payments in excess of $5,000. In
addition, the Company agreed to use the proceeds of the Bridge Financing for
purposes specified in the Stock Purchase Agreement. In particular, the
proceeds of the Bridge Financing were required to be and have or
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will be applied as follows: (i) $505,000 for repayment of loan obligations to
Pacific Concessions, Inc. with respect to a loan dated August 26, 1997, (ii)
approximately $2,380,000 for use in connection with the development of the
Company's Tijuana, Mexico theater complex and expansion of the Mission Market
Place theater complex, and (iii) the remainder (and any funds not otherwise
applied) to working capital.
As part of the Bridge Financing, the Company issued to Reel Partners a
warrant to purchase 3,000,000 shares of Company Common Stock at an exercise
price of $0.848202 per share (the "First Bridge Warrant"), and a second
warrant to purchase 1,500,000 shares of Company Common Stock at an exercise
price of $0.848202 per share (the "Second Bridge Warrant"). The Second
Bridge Warrant will be canceled upon completion of the Equity Financing or
upon termination of the Stock Purchase Agreement as a result of certain
breaches by Acquisition Partners. Each of the First Bridge Warrant and
Second Bridge Warrant (if not earlier canceled) have terms of 10 years,
provide the holder with certain piggy-back and demand registration rights,
and provide for anti-dilution adjustments to the exercise price and number of
shares underlying such warrants in the event of certain merger, exchange or
reorganization transactions or issuances of shares of Common Stock (or
securities convertible into Common Stock) at an issue price of less than the
exercise price of the warrant. The First Bridge Warrant is exercisable
immediately upon grant. The Second Bridge Warrant is not exercisable unless
and until the Stock Purchase Agreement is terminated without consummation of
the transactions contemplated thereby so long as such termination is not due
to certain breaches by Acquisition Partners.
THE AMENDED ARTICLES. As a condition to the Closing, the Company has
agreed to amend its Articles of Incorporation to increase the number of
authorized shares of Company Common Stock from 15,000,000 to 60,000,000. The
Company does not currently have a sufficient number of authorized shares to
complete the Equity Financing or to permit the exercise of all outstanding
options and warrants. The Amended Articles will allow for the actual and
contingent issuances of Common Stock in connection with the Equity Financing
and the exercise of outstanding warrants and options to purchase Common
Stock, including the various warrants issued to Reel Partners and Acquisition
Partners in connection with the Bridge Financing and Equity Financing. In
addition, the Amended Articles will serve to cure the Company's
non-compliance with its obligations under agreements governing its
outstanding publicly-traded warrants and certain other warrants resulting
from the Company's failure to maintain a sufficient number of authorized but
unissued shares of Common Stock to permit the exercise of all such warrants.
The Amended Articles will also eliminate the 100,000 authorized shares of
Company Preferred Stock, none of which is currently outstanding.
RECOMMENDATION OF THE BOARD; BACKGROUND AND REASONS FOR THE FINANCING PROPOSAL
The Company's Board has approved the Financing Proposal and has directed
that the Financing Proposal be submitted to the shareholders of the Company
for approval. Shareholder approval is required under applicable law to adopt
the Amended Articles. However, the Company does not believe that shareholder
approval of the Equity Financing or ratification of the Bridge Financing is
required under applicable law. The Board has made shareholder approval of
the Equity Financing a condition to closing of the Equity Financing because
of the importance of the Equity Financing to the Company and its
shareholders. The Board believes that, given the financial condition of the
Company and other factors discussed below, the Financing Proposal and the
transactions contemplated thereby are in the best interests of the Company
and its shareholders and has unanimously approved the Bridge Financing, the
Equity Financing and the Amended Articles. THE BOARD UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS VOTE FOR THE FINANCING PROPOSAL.
BACKGROUND TO THE FINANCING PROPOSAL. Over the past several years, the
Company has pursued an aggressive expansion plan pursuant to which the
Company has entered into lease and other binding commitments with respect to
the development or expansion of theater locations. These substantial
economic commitments require that the Company locate sources of new
financing. The Bridge Financing and the Company's decision to pursue the
Equity Financing are the culmination of the Company's efforts over the past
two years to locate a source of long term financing. Although the Company
was able to obtain some short term financing, the Company was unable to
locate a source of significant equity financing to meet its long term capital
needs.
In order to meet its need for capital, beginning at the end of calendar
1995, the Company began to explore possible sources of equity or long term
debt financing. Despite its efforts to locate a source of such long term
financing, the Company was only able to obtain capital through the sale in
April and May 1996 of an aggregate of $1,000,000 of debentures convertible
into Common Stock at a discount to the market price. Subsequent to receiving
such financing the Company continued to search for a source of significant
long term equity or debt financing. However, the Company was unsuccessful in
these efforts and in August 1996, the Company raised an additional $2,000,000
through the sale of convertible debentures having floating conversion rates
tied to the price of the Company's Common Stock. By May 1997, all
outstanding debentures had been converted into an aggregate of 1,512,540
shares of Common Stock.
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Subsequent to completion of the sale of debentures, the Company commenced
a "warrant call" with respect to its Redeemable Warrants which was completed
in November 1996. In the warrant call, the Company offered holders of its
outstanding Redeemable Warrants the opportunity to exercise such Redeemable
Warrants at a reduced price of $3.50 per share and, upon exercise, to receive
a Class B Redeemable Warrant to purchase an equal number of shares of Common
Stock at an initial exercise price of $6.50 per share. A total of only
226,438 Redeemable Warrants were exercised as a result of such warrant call
which resulted in gross proceeds of approximately $792,500.
In September 1996, the Company engaged a national investment banking firm
in an effort to raise approximately $20,000,000 through a private placement
of equity securities. In November 1996, the Company made presentations to a
number of prospective institutional investors located through such investment
bank. However, the Company was unable to reach any definitive agreement with
any of such investors. The engagement of the investment banking firm
terminated in March 1997.
In April 1997, in order to meet its immediate needs for financing, the
Company amended the terms of its concession arrangements with Pacific
Concessions, Inc. and, in connection therewith, received a $2,000,000 loan.
Such loan bears interest at the prime rate plus 2% and is due and payable in
two $1,000,000 installments in April 1998 and 1999, respectively. In August
1997, the Company borrowed an additional $500,000 from Pacific Concessions,
Inc. which loan was repaid with the proceeds of the Bridge Loan. As part of
these loan transactions, the Company made certain amendments to its
concession agreement with Pacific Concession, Inc. which reduced the portion
of profits from concession sales retained by the Company. Such concession
profits are a significant component of the Company's cash flow and profit
margins.
In early 1997 the Company received an expression of interest from several
competing theater chains to acquire an equity interest in the Company.
However, no formal offers were made by any potential acquirors.
In September 1996, the Company retained The Watley Group, LLC to locate a
source of long term debt or equity financing. After contacting a number of
potential financing sources through The Watley Group, LLC, the Investors (as
defined below) were the only parties to make a definitive offer to finance
the Company. The Company retained an investment banking firm in order to
assist the Company in negotiating with the Investors and to advise the Board
of Directors as to the reasonableness of the Financing Proposal.
As described above, the Company has pursued a variety of possible
financing options over the past two years. However, although the Company was
successful in raising a limited amount of financing during such period, the
Company has been unable to locate sources of long term financing other than
the financing contemplated by the Financing Proposal. Without the proceeds
of Equity Financing, the Company believes it is unlikely that it will be able
to locate alternative sources of financing in the time frame required for the
Company to meet its financial commitments. If the Financing Proposal is not
approved and alternative sources of financing are not located in a timely
manner and on reasonable terms, there can be no assurance that the Company
will be able to continue operations, or that the Company will not be forced
to seek protection under federal bankruptcy law.
REASONS FOR THE BOARD'S RECOMMENDATION. The Board has evaluated the
financial, legal, market, operational and management considerations bearing
on the Financing Proposal. Based on this evaluation, the Board believes that
the Financing Proposal is in the best interests of the Company and its
shareholders both in the immediate future and in the long run. The Board
weighed a variety of factors in reaching this decision, the most important of
which were the immediate and potential future benefits to the Company of the
Financing Proposal which the Board believes will contribute to the future
success of the Company. In particular, the Board believes that the Financing
Proposal will have the following actual or potential benefits, each of which
the Board considered significant:
1. The transactions contemplated by the Financing Proposal will
satisfy the Company's immediate need for capital to repay its outstanding
obligations and will provide the Company with a source of capital with
which to operate and expand its business. Any failure by the Company to
obtain an infusion of capital could make it impossible for the Company to
continue operations, force the Company to seek protection under federal
bankruptcy laws, and/or affect the Company's listing on the Nasdaq
SmallCap Market;
2. The expertise of Acquisition Partners, Reel Partners and their
respective affiliates in real estate development, the entertainment
industry (including motion picture exhibition) and in managing public
corporations will assist the Company in its efforts to efficiently
operate and expand its business and will assist the Company in attracting
other qualified directors and management personnel; and
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3. The increase in the number of authorized number of shares of
Common Stock from 15,000,000 shares to 60,000,000 shares contemplated by
the Amended Articles will permit the Company to reserve a sufficient
number of shares of Common Stock to permit the issuance of shares and
warrants in connection with the transactions contemplated by the
Financing Proposal and the exercise of all outstanding options and
warrants;
Other factors considered by the Board in recommending approval of the
Financing Proposal were (i) the Board's judgment as to the likelihood of
identifying alternative financing sources, (ii) economic and market
conditions (including an industry trend toward consolidation), (iii) the
financial condition and results of operations of the Company, including the
existence of defaults or potential defaults by the Company under the terms of
the Company's material loan and lease agreements.
If the Financing Proposal is approved, the increased number of authorized
shares of Common Stock resulting from the adoption of the Amended Articles
will be available to consummate the Equity Transaction, for issuance of
shares upon exercise of outstanding options and warrants, and for issuances
from time to time for such purposes and consideration as the Board of
Directors may approve, and no further vote of the shareholders of the Company
will be required for such issuance, except as provided under California law,
the rules of any national securities exchange on which the Company Common
Stock is listed at such time or the rules of the Nasdaq Stock Market, if
applicable. The availability of additional shares of Company Common Stock
for issuance without the delay and expense of obtaining the approval of
shareholders at a special meeting will afford the Company greater flexibility
in acting upon proposed transactions or financings involving the issuance or
sale of Common Stock.
In the event that the Financing Proposal is not approved by the
shareholders or in the event that the Equity Transaction is not consummated
for any reason, the Company will not have a sufficient number of authorized
but unissued shares of Common Stock to permit the valid issuance of shares of
Common Stock underlying the Company's outstanding options, warrants and
convertible securities. Pursuant to the requirements of the Stock Purchase
Agreement, the Board has agreed to reserve out of the Company's authorized
but unissued Common Stock, such number of shares of Common Stock necessary to
permit the valid issuance of the following (listed in order of reservation
priority): (i) Common Stock issuable upon exercise of the First Bridge
Warrant, (ii) Common Stock issuable upon exercise of the Second Bridge
Warrant, (iii) Common Stock issuable upon conversion of the Bridge Note, then
(iv) all other outstanding options, warrants, or convertible securities of
the Company; provided, however, that the priority of share reservations
specified above shall only apply to the extent that such reservation is
lawful and does not cause the Company to be in violation of its obligations
under existing agreements.
In addition to increasing the number of shares of authorized Common
Stock, the Amended Articles eliminate the 100,000 shares of authorized but
unissued shares of Preferred Stock of the Company, including 25,000 shares
designated Series A Preferred Stock. The Board determined that elimination
of the Preferred Stock was advisable due to the fact that such Series A
Preferred Stock was created prior to the Company's initial public offering in
order to meet the requirements of certain private placement financing
transactions and is no longer necessary. Moreover, due to the language of
the current Articles of Incorporation and the requirements of California law,
the remaining 75,000 shares of authorized but unissued Preferred Stock may
not be designated or issued without the consent of a majority of the
outstanding shares of Common Stock. Accordingly, such Preferred Stock serves
no practical purpose.
The Board also considered the opinion of Houlihan, Lokey, Howard & Zukin,
the Company's valuation consultant, regarding the fairness of the
transactions contemplated by the Financing Proposal.
The Board has unanimously approved the Financing Proposal and recommends
that the shareholders vote FOR adoption and approval of the Financing
Proposal.
OPINION OF VALUATION CONSULTANT
[DRAFT LANGUAGE SUBJECT TO DELIVERY OF HLHZ OPINION]:
In reaching its decision to recommend the Financing Proposal, the Board
considered, among other things, the advice of its valuation consultant,
Houlihan Lokey Howard & Zukin ("HLHZ"). A summary of the opinion rendered by
HLHZ with respect to the Financing Proposal is set forth below. The opinion
rendered by HLHZ assumes that the Financing Proposal is consummated
substantially as described in this Proxy Statement.
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In a written opinion dated October ___, 1997, HLHZ stated that, based
upon the considerations set forth therein and on other factors it deemed
relevant, it was of the opinion that the consideration received and to be
received by the Company in connection with the Financing Proposal is fair to
the Company from a financial point of view.
In rendering its opinion, HLHZ made such reviews, analyses and inquiries
as it deemed necessary and appropriate under the circumstances, including a
review of the Company's annual reports and filings with the Securities and
Exchange Commission, a review of material agreements, meetings with members
of senior management of the Company to discuss operations, financial
condition, future prospects and projected operations and performance, visits
to certain theaters of the Company, review of forecasts and projections
prepared by management through fiscal ________ , review of historical market
prices and trading volume for the Company's publicly traded securities,
review of the documents relating to the Financial Proposal, and review of
other publicly available financial data for the Company and certain companies
that HLHZ deems comparable to the Company.
HLHZ relied upon and assumed, without verification, that the financial
forecasts and projections have been reasonably prepared and reflect the best
currently available estimates of the future financial results and condition
of the Company, and that there has been no material change in the assets,
financial conditions, business or prospects of the Company since the date of
the most recent financial statements made available to HLHZ.
In addition, HLHZ did not independently verify the accuracy and
completeness of the information supplied to it, and did not make any physical
inspection or independent appraisal of any of the properties or assets of the
Company. HLHZ's opinion is based on business, economic, market and other
conditions as they exist and can be evaluated at the date its opinion was
rendered.
The Company will pay HLHZ a fee of $_______ for services rendered in
connection with the Financing Proposal, including services it has conducted
to render its opinion.]
INTERESTS OF CERTAIN PERSONS IN THE FINANCING PROPOSAL
John Ellison, Jr., Alan Grossberg and Russell Seheult (and Jerry Willits
with respect to the lease of the Company's Chula Vista 10 theater complex,
and Eileen Seheult the former wife of Russell Seheult, with respect to
certain lease and bank obligations incurred or guaranteed by Mr. and Ms.
Seheult on behalf of the Company) have personally guaranteed, on a joint and
several basis, all significant obligations of the Company pursuant to its
theater leases and certain loans. As of March 31, 1997, such guaranteed
obligations involved aggregate future payments by the Company of over
$80,000,000. In addition to such guarantees, John Ellison, Jr., Alan
Grossberg and Russell Seheult have periodically made loans to the Company in
order to help fund the Company's operations on terms that the Company
believes are more favorable to the Company than available from third party
sources. As of September 30, 1997, the aggregate amount due to such
individuals under currently outstanding loans is $94,863.15. See "Management
- -- Certain Relationships and Related Transactions."
Upon completion of the Equity Financing, it is expected that the personal
guarantees of the above-referenced individuals (the "Guarantors") will
continue in full force and effect. However, the Guarantors will benefit from
approval of the Financing Proposal to the extent that completion of the
Equity Financing will strengthen the financial condition of the Company and
reduces the risk that the Company will be unable to meet its financial
commitments under (i) loans made to the Company by any of the Guarantors, or
(ii) obligations guaranteed by the Guarantors. Similarly, pursuant to the
terms of a Loan Agreement, dated April 1, 1996, between the Company and John
Ellison, Jr., the Company has agreed to loan the sum of $1,000 per week to
Mr. Ellison commencing on Friday, April 5, 1996. Mr. Ellison will benefit
from approval of the Financing Proposal to the extent that completion of the
Equity Financing will strengthen the financial condition of the Company and
reduce the risk that the Company will be unable to fund such loans in the
future. In addition, certain of the Company's obligations to the Guarantors
or guaranteed by the Guarantors may be repaid with the proceeds at the Equity
Financing.
Each of the members of the Company's Board of Directors is a party to a
long-term employment or consulting agreement with the Company. In addition,
the Company previously has entered into indemnification agreements with each
member of the Board of Directors pursuant to which the Company is required to
indemnify each such director against certain claims and defense costs
arising out of past, present or future act, omissions or breaches of duty
(other than acts or omissions which are knowingly fraudulent, deliberately
dishonest or arise from willful misconduct). As a result, each director of
the Company will benefit from approval of the Financing Proposal to the
extent that completion of the Equity Financing will strengthen the financial
condition of the Company and thereby (i) reduce the risk that the Company
will not be able to meet its obligations under the employment, or consulting
agreements, (ii) reduce the risk that the Company
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will not be able to meet its indemnification obligations, if any, with
respect to any potential claims against the Company, its directors or
officers, giving rise to such right to indemnification. See "The Financing
Proposal -- Conditions of the Equity Financing" for a description of
limitations on the Company's indemnification obligations to certain directors
relating to certain potential securities law claims.
CONDUCT OF BUSINESS PRIOR TO CLOSING OF THE EQUITY FINANCING
Pursuant to the terms of the Stock Purchase Agreement, the Company has
agreed to a number of restrictions on the operation of its business prior to
the earlier of the Closing or termination of the Stock Purchase Agreement.
In particular, among other things, the Company has agreed (i) not to issue or
sell any additional shares of its capital stock, (ii) to conduct its business
in the ordinary course of business in substantially the same manner as
conducted in the past, (iii) cease or cause any existing discussions or
negotiations with any persons with respect to any merger, financing (other
than financing in the ordinary course of business consistent with past
practices not to exceed $100,000 in the aggregate and not involving
securities convertible into or exchangeable for equity securities of the
Company), consolidation, sale of substantial assets, or sale of capital
stock, or (iv) except as contemplated by the Stock Purchase Agreement or as
consented to in writing by Acquisition Partners, make any payments, for
indebtedness or otherwise, in excess of $5,000.
In addition, as described in "Summary -- THE BRIDGE FINANCING" above, the
Company is subject to certain other covenants and restrictions so long as the
Bridge Note remains outstanding.
CONDITIONS TO CLOSING OF THE EQUITY FINANCING
The obligations of the Company to consummate the Equity Transaction are
subject to the following conditions, among others: (i) the representations
and warranties of Acquisition Partners made in the Stock Purchase Agreement
shall be true and correct in all material respects, (ii) no temporary
restraining order, preliminary or permanent injunction or other such order,
or statute, rule, regulation or other restraint shall be issued or adopted
which serves to prevent the consummation of the Equity Financing, (iii)
expiration of any applicable Hart Scott Rodino Anti Trust Improvements Act
waiting period, (iv) approval of the Amended Articles by the shareholders of
the Company, (v) all written consents (other than governmental
authorizations) required for material contracts of the Company to remain in
full force and effect shall have been obtained (except where such failure
would not have a material adverse effect on the Company), (vi) all
governmental authorizations, permits, approvals and consents of securities or
blue sky commissions and any other governmental body or agency that may
reasonably be necessary for consummation of the Equity Financing, shall have
been obtained, except where the failure to comply would not have a material
adverse effect on the Company or not be reasonably likely to subject the
Company or its officers or directors to substantial penalties or criminal
liability, and (vii) there must not have been commenced or threatened against
the Company, or against any person or entity affiliated with the Company, any
action or proceeding brought by any entity not affiliated with the Company
involving any challenge to, or seeking damages or other relief in connection
with, or that may have the effect of preventing, delaying, making illegal or
otherwise interfering with the Equity Financing.
The obligations of Acquisition Partners to consummate the Equity
Transaction are subject to the following conditions, among others:(i) the
representations and warranties of the Company made in the Stock Purchase
Agreement shall be true and correct in all material respects, (ii) no
temporary restraining order, preliminary or permanent injunction or other
such order, legal or regulatory restrain or prohibition preventing the
consummation of the Equity Financing shall be in effect, (iii) no litigation
shall be in effect against the Company pursuant to which damages in excess of
$500,000 are being sought, (iv) expiration of any applicable Hart Scott
Rodino Anti Trust Improvements Act waiting period, (iv) approval of the
Amended Articles by the shareholders of the Company, (v) the Company's Common
Stock shall be authorized for quotation on the Nasdaq SmallCap Market and
shall not have been suspended, (vi) there must not have been commenced or
threatened against the Company, or against any person or entity affiliated
with the Company, any action or proceeding brought by any entity not
affiliated with the Company involving any challenge to, or seeking damages or
other relief in connection with, or that may have the effect of preventing,
delaying, making illegal or otherwise interfering with the Equity Financing,
(vii) neither consummation nor performance of the Equity Financing will,
directly or indirectly, materially contravene, conflict with, or result in
material violation of, or cause Acquisition Partners or Reel Partners to
suffer any material adverse consequence under any applicable legal
requirement or order in existence or published, introduced or otherwise
formally proposed before any governmental entity or instrumentality, (viii)
the Company shall have received all written consents, assignments, waivers,
authorizations or other certificates from the Company's lessors, reasonably
deemed necessary by Buyer to provide for the continuation in full force and
effect of any and all material contracts and leases of the Company and for
the Company to consummate the Equity Financing, (ix) the Company will
demonstrate to the reasonable satisfaction of Buyer that it can be released,
without liability or potential liability to the Company and at a cost not to
exceed $25,000 in the aggregate, from any obligations with respect to
currently or
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previously contemplated sites which have never been operated other than San
Bernardino, California and Tijuana, Mexico, (x) four of the Company's seven
directors shall have been appointed to the Board of Directors of the Company,
(x) the Amended Articles shall be the Articles of Incorporation of the
Company, (xi) since August 31, 1997, no material adverse change shall have
occurred with respect to the Company or the operation of its business and no
event or circumstance occurring or existing prior to such time shall be
disclosed or discovered after September 23, 1997 which would constitute a
material adverse change if it had occurred after June 30, 1997, (xii) each of
John Ellison, Jr., Russell Seheult and Jerry Willits shall have waived
certain rights to indemnification for violations of Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and for
rights to reimbursement of expenses of separate counsel that they may have
with respect to alleged violations of federal or state securities laws
arising primarily as a result of violations of Section 16 of the Exchange
Act, (xiii) the termination of any agreements with officers, directors and
their affiliates other than as provided in the Stock Purchase Agreement,
(xiv) no default under the Bridge Note or related documents shall have
occurred, and (xv) receipt of an opinion of counsel to the Company as to
certain matters relating to the Company and the Equity Financing.
Each party may waive conditions to its obligations to consummate the
transaction.
ANTI-DILUTION ADJUSTMENTS TO PUBLIC WARRANTS
The terms of the Company's publicly traded Redeemable Warrants (Nasdaq:
LUXYW) and Class B Redeemable Warrants (Nasdaq: LUXYZ) contain anti-dilution
provisions that provide for adjustments in the exercise price and number of
shares issuable upon exercise of such warrants in the event of issuances of
Common Stock (or securities convertible into Common Stock) at a price per
share below the exercise price of such warrants. Pursuant to such
anti-dilution provisions and as a result of the signing of the Stock Purchase
Agreement with Acquisition Partners and the concurrent completion of the
Bridge Financing, the exercise price of the Company's Redeemable Warrants was
reduced from the $5.32 price in effect immediately prior to such transactions
to $3.70 per share. Concurrently, the number of shares of Common Stock
issuable upon exercise of each Redeemable Warrant was increased from
1.1657318 to 1.6216216 shares of Common Stock. Similarly, the exercise
price of the Class B Redeemable Warrant was automatically reduced to $4.06
from a pre-Bridge Financing exercise price of $5.90 and the number of shares
of Common Stock issuable upon exercise of each Class B Redeemable Warrant was
increased from 1.1016967 to 1.6009852 shares of Common Stock .
Additional adjustments will occur upon completion of the Equity
Financing. In particular, upon Closing and assuming the repayment of the
Bridge Note, the as adjusted exercise price of the Redeemable Warrants and
Class B Redeemable Warrants will be approximately $2.56 and $2.78,
respectively. Concurrently, the number of shares of Common Stock issuable
upon exercise of each Redeemable Warrant and Class B Redeemable Warrant will
be adjusted to 2.34375 and 2.3381295 shares, respectively.
AMENDMENT AND TERMINATION OF THE STOCK PURCHASE AGREEMENT; BREAK FEE
The Stock Purchase Agreement may be amended only in writing signed by the
Company, Acquisition Partners and Reel Partners. The observance of any
provision of the Stock Purchase Agreement may be waived, in writing, by the
parties not bound by such provision.
The Stock Purchase Agreement may be terminated at any time prior to
Closing, whether before or after approval of the Financing Proposal by the
shareholders (a) by mutual consent of the parties, (b) by Acquisition
Partners, if any fact or series of facts not known or existing prior to the
date of the Stock Purchase Agreement become known which, in the aggregate
could, in the reasonable opinion of Acquisition Partners, have a material
adverse effect on the Company or the operation of its business, (c) by the
Company or Acquisition Partners if there is a material breach by the other
party of any covenant or agreement of the Company under the Stock Purchase
Agreement, (d) by the Company or Acquisition Partners if any representation
or warranty of the other party is not true and correct in all material
respects, (e) by the Company or Acquisition Partners if any permanent
injunction or other final order of a court or other authority prevents the
consummation of the Equity Financing, (f) by either the Company or
Acquisition Partners if the Closing shall not have occurred on or before
December 7, 1997 or, in the event of a delay caused by comments or delays by
the Securities and Exchange Commission, by January 6, 1998; provided that the
party terminating shall only be entitled to do so if such party is not then
in default of the Stock Purchase Agreement.
In the event that the Closing of the Equity Financing does not occur for
reasons other than as a result of a breach of the Stock Purchase Agreement by
Acquisition Partners or Reel Partners, the Company will be required to pay a
termination fee (the "Break Fee") equal to $600,000. In the event that (i)
the Stock Purchase Agreement is terminated prior to Closing as a result of
the Company's breach of the non-solicitation provisions of the Stock Purchase
Agreement
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or (ii) prior to September 23, 1998, the Company consummates a merger,
consolidation, sale of assets, sale of capital stock, financing transaction
(other than financing in the ordinary course of business, consistent with
past practices, not to exceed $100,000 in the aggregate and not involving
securities convertible into capital stock of the Company), or any similar
transaction, arising out of any proposal received during the non-solicitation
period, then the Break Fee shall equal $800,000.
MANAGEMENT OF THE COMPANY SUBSEQUENT TO CLOSING OF THE EQUITY FINANCING
Upon consummation of the Equity Financing, the number of directors of the
Company will be increased from four to seven. Prior to the Closing, but
conditional upon the consummation of the Equity Financing, Jerry Willits and
Russell Sehuelt will resign as directors of the Company and the current
members of the Company's Board will appoint Winston J. Churchill, Jack R.
Crosby, Thomas G. Rebar, and Wayne B. Weisman (collectively, the "Director
Designees") as directors of the Company. As a result of the foregoing, the
Board of Directors of the Company immediately following the Closing will
consist of the four Director Designees, John Ellison, Jr., Alan Grossberg and
Jon Meloan. See "Management" for further information concerning the current
directors of the Company and the Director Designees.
Acquisition Partners and the Company have begun a search for the
purposes of identifying and hiring a qualified chief financial officer for
the Company. In addition, representatives of Acquisition Partners are
discussing with management of the Company the possibility of making certain
changes in the management of the Company. However, no agreement has been
reached or decision made with respect to whether such change will be made or,
if so, the nature and timing of such change.
INFORMATION REGARDING ACQUISITION PARTNERS AND REEL PARTNERS
Upon consummation of the Equity Financing, Acquisition Partners will
control approximately 69% of the outstanding shares of Company Common Stock,
and Acquisition Partners and Reel Partners (collectively, the "Investors")
will have the right to acquire additional shares of Company Common Stock upon
exercise of warrants issued to them in connection with the Bridge Financing
and the Equity Financing. In addition, in connection with the consummation
of the Equity Financing, Acquisition Partners will have the right to
designate four of the seven members of the Company's Board of Directors.
On October 3, 1997, the Investors and certain affiliates thereof
(collectively, the "Investor Group") filed a Schedule 13D with the Securities
and Exchange Commission stating that the Investor Group had acquired warrants
to purchase Company Common Stock and had entered into the Stock Purchase
Agreement for purposes of investment. Based on the information contained in
such Schedule 13D, the Investor Group consists of Reel Partners, Acquisition
Partners and their respective members and/or control persons. Reel Partners
is a Delaware limited liability company which has the following members: (i)
Rust Cinema Investors, L.L.C., a Texas limited liability company controlled
by the Sharp Irrevocable Intervivos Trust, (ii) JW Bridge Investors, L.L.C.,
a Delaware limited liability company controlled by James Villanueva and
Warren Schlichting, and (iii) SCP Private Equity Partners, L.P., a Delaware
limited partnership ("SCP"). SCP's general partner is SCP Private Equity
Management, L.P., a Delaware limited partnership ("SCP Management"). SCP
Management's general partners are (a) Safeguard Capital Management, Inc., a
Delaware corporation controlled by Safeguard Scientifics, Inc., a publicly
traded Delaware corporation, (b) Winston J. Churchill, a Director Designee,
and (c) Samuel A. Plum.
Acquisition Partners is a Delaware limited liability company which is
controlled by SCP and which has the following members: (i) SCP, (ii) the
Sharp Irrevocable Intervivos Trust, (iii) James Villanueva, and (iv) Warren
Schlichting.
Based on disclosure contained in the above-referenced Schedule 13D, Reel
obtained the necessary funds to finance the Bridge Financing from each of its
member's capital contributions. The Company has been informed by Acquisition
Partners that Acquisition Partners has or will obtain the necessary funds to
finance the Equity Financing from each of its member's capital contributions.
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SPECIAL CONSIDERATIONS
In addition to the factors discussed above relating to the Financing
Proposal, shareholders should consider the following in making their decision
whether to vote in favor of the Financing Proposal:
FINANCIAL CONDITION OF THE COMPANY. The Company's independent certified
public accountants expressed substantial doubt about the Company's ability to
continue as a going concern in their independent auditors' report on the
Company's consolidated financial statements for the year ended March 31,
1997. Moreover, immediately prior to the Bridge Financing the Company was,
and currently is, in default of certain financial covenants contained in its
bank loan agreements and is in violation of certain covenants in several
other financing agreements and leases. Such covenants prohibit the Company
from incurring other indebtedness or further encumbering property, and/or
require security interest to be of first priority. In addition, the Company
has had aggressive expansion plans requiring substantial additional capital
and, despite its efforts, prior to entering into the Stock Purchase Agreement
and Bridge Financing, the Company had been unsuccessful in its efforts to
locate a source of financing for its current operations and expansion plans.
Although the Bridge Financing provided the Company with immediate liquidity,
in the event that the Financing Proposal is not approved by the shareholders
and the Equity Financing is not completed, the Company will be required to
repay the Bridge Financing and certain other fees and expense and will need
to immediately locate alternative sources of capital. Any failure by the
Company to complete the Equity Financing or locate alternative sources of
financing could make it impossible for the Company to continue operations,
force the Company to seek protection under federal bankruptcy law, and/or
adversely affect the Company's listing on the Nasdaq SmallCap Market.
NASDAQ LISTING. The Company has received notice from The Nasdaq Stock
Market stating that unless (i) the Company's capital surplus equals
$2,000,000 or more and the market value of the public float of the Company's
Common Stock equals $1,000,000 or more for ten consecutive trading days, or
(ii) the bid price of the Company's Common Stock exceeds $1.00 for a period
of ten consecutive trading days, prior to November 5, 1997, and, if such
tests are not met prior to such date, the Company is unable to submit (prior
to November 5, 1997) a proposal for achieving compliance acceptable to the
Nasdaq Stock Market, the Company's Common Stock will be delisted from trading
on the Nasdaq Small Cap Market. The Company has been in discussions with
representatives of The Nasdaq Stock Market and, based on these conversations,
believes that any action to delist the Company's Common Stock from trading
will be delayed until Closing of the Equity Financing or termination of the
Stock Purchase Agreement. The Company believes that upon completion of the
Equity Financing the Company will meet the requirements to continue listing
its Common Stock on the Nasdaq Small Cap Market. However, in the event that
the Equity Financing is not completed and the Company is unable to locate
alternate sources of equity capital, it is likely that the Company Common
Stock will be delisted from the Nasdaq Small Cap Market. Any such delisting
would have a material adverse effect on the value of the outstanding shares
of Company Common Stock and on the Company's reputation and standing in the
motion picture theater industry.
FINDER'S FEE. Pursuant to the terms of an Agreement, dated September 15,
1996 and amended May 15, 1997 and further amended as of October 24, 1997,
between the Company and The Watley Group, LLC ("Watley"), upon the Closing of
the Equity Financing, Watley will receive a cash fee equal to $962,250. In
addition, Watley shall purchase for cash at Closing, for a purchase price of
$0.12 per warrant, warrants to purchase 10% of the total number shares issued
to Acquisition Partners at such Closing at an exercise price per share equal
to $0.848202. Assuming that there are no adjustments to the number of shares
issued to Acquisition Partners, Watley would purchase at Closing warrants to
purchase 1,768,446 shares of Common Stock. The terms and conditions of the
warrant to be purchased by and issued to Watley will be substantially
identical to those contained in the Purchase Warrant. The Company has been
informed that Watley has agreed to pay $150,000 of its cash fee to members of
the Investor Group to reimburse such members for legal expenses and other
costs incurred in connection with the negotiation and closing of the Equity
Financing and Bridge Financing. In addition, the Company has been informed
that all but 750,000 of the warrants to be issued to Watley at Closing will
be transferred by Watley at the instruction of Acquisition Partners.
CONTROL BY INVESTOR GROUP. Upon completion of the Equity Financing, it
is expected that Acquisition Partners will own or control approximately 69%
of the issued and outstanding shares of Company Stock and that the Investor
Group will have the right to purchase an additional 5,630,624 shares of
Company Common Stock underlying the Signing Warrant, First Bridge Warrant and
Purchase Warrant which would bring the ownership percentage of the Investor
Group to approximately 74.4%. In addition, upon completion of the Equity
Financing, the current officers and directors of the Company will own or
control an additional 8.5% of the issued and outstanding shares of Company
Common Stock. As a result, in the event the Financing Proposal is approved
and the Closing of the Equity Financing occurs, the Investor Group, or the
Investor Group and members of current management acting together, will be in
a position to materially influence, if not control, the outcome of all
matters requiring shareholder approval, including the election of directors.
13
<PAGE>
REGISTRATION RIGHTS OF INVESTOR GROUP. Pursuant to the terms of the
Stock Purchase Agreement, the Company is required to file with the Securities
and Exchange Commission, and use its best efforts to have declared effective,
a registration statement pursuant to which the Company will register for
resale by Acquisition Partners and/or Reel Partners (i) the shares of Company
Common Stock issued to Acquisition Partners at Closing (or subsequent to
Closing pursuant to any adjustments required by the Stock Purchase
Agreement), (ii) the shares of Common Stock issuable upon any conversion of
the Bridge Note, (iii) the First Bridge Warrant, the Second Bridge Warrant
(if not canceled), the Signing Warrant, the Purchase Warrant, and (iv) the
shares of Company Common Stock issuable upon exercise of the warrants
described in (iii). In addition, each of the Signing Warrant and the
warrants issued to Reel Partners in connection with the Bridge Financing
include piggy-back and demand registration provisions which would grant the
holders thereof the right to cause the Company to register such warrants and
the shares of Common Stock underlying such warrants in the event that the
Equity Financing is not completed. Any such registration and any actual or
anticipated sale of shares by members of the Investor Group could have a
material adverse affect on the market for the Company's Common Stock and
could serve to depress the price of the Company's Common Stock or limit any
potential depreciation thereof.
14
<PAGE>
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The Company has outstanding voting securities consisting of only
Common Stock, of which 8,019,182 shares were outstanding as of the close of
business on the Record Date. Only shareholders of record on the books of the
Company at the close of business on the Record Date will be entitled to vote
at the Meeting. Each share of Company Common Stock is entitled to one vote.
Representation at the Meeting by the holders of a majority of the outstanding
Common Stock of the Company, either by personal attendance or by proxy, will
constitute a quorum.
The following table sets forth certain information regarding the
beneficial ownership of the Company Common Stock as of the Record Date and
immediately following completion of the Equity Financing as to (a) each
director and each Director Designee, (b) each executive officer identified in
the Summary Compensation Table below, (c) all executive officers and current
directors of the Company as a group, and (d) each person known to the Company
to beneficially own five percent or more of the outstanding shares of Company
Common Stock.
<TABLE>
<CAPTION>
As Of Record Date Upon Closing
-------------------------- -------------------------
Number of Percent of Number of Percent of
Title of Class Beneficial Owner(1) Shares(2) Class(2) Shares(2) Class(2)
- -------------- ------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
CURRENT DIRECTORS AND/OR
EXECUTIVE OFFICERS:
Common Stock Russell Seheult 749,270(3) 9.14% 749,270(3) 2.90%
Common Stock John Ellison, Jr. 882,935(4) 10.89 882,935(4) 3.42
Common Stock Alan Grossberg 802,725(4) 9.90 802,725(4) 3.11
Common Stock Jerry Willits 98,515(5) 1.23 98,515(5) *
Common Stock Jon Meloan 18,929(6) * 16,929(6) *
DIRECTOR DESIGNEES:
Common Stock Winston J. Churchill(7) 1,000,000(8) 11.09 20,315,088(9) 71.70
Common Stock Jack R. Crosby 75,000(10) * 75,000(10) *
Common Stock Thomas G. Rebar -0- -0- -0- -0-
Common Stock Wayne B. Weisman -0- -0- -0- -0-
INVESTOR GROUP:
Common Stock CinemaStar Acquisition 1,000,000(8) 11.09 20,315,088(9) 71.70
Partners, L.L.C.(7)
Common Stock Reel Partners, L.L.C.(7) 7,500,000(11) 48.33 3,000,000(12) 10.45
Current directors and 2,555,874 30.42%
executive officers as a
group (6 persons)
</TABLE>
____________________
15
<PAGE>
(1) The address of each of Messrs. Seheult, Ellison and Grossberg is c/o the
Company, 431 College Boulevard, Oceanside, California 92057. The
address of each of Mr. Crosby, Acquisition Partners and Reel Partners is
c/o Rust Capital, Ltd., 327 Congress Avenue, Suite 200, Austin, Texas
78701. The address of Messrs. Churchill, Rebar and Weisman is c/o SCP
Private Equity Partners, L.P., 800 The Safeguard Building, 435 Devon
Park Drive, Wayne, Pennsylvania 19087.
(2) Shares of Common Stock which a person has the right to acquire within 60
days are deemed outstanding in calculating the percentage ownership of
the persons, but not deemed outstanding as to any other person.
Percentages are calculated based on 8,019,182 shares of Common Stock
issued and outstanding prior to Closing and 25,703,646 shares of Common
Stock issued and outstanding upon Closing. Ownership of less than 1% of
the outstanding shares of Common Stock is indicated by an asterisk.
(3) Includes shares issuable upon exercise of outstanding options to acquire
176,250 shares of Common Stock.
(4) Includes shares issuable upon exercise of outstanding options to acquire
88,125 shares of Common Stock. Does not include 320,900 shares of
Common Stock beneficially owned by Mr. Grossberg's former wife with
respect to which Mr. Grossberg has no beneficial ownership but exercises
voting control pursuant to the terms of a divorce settlement.
(5) Includes shares issuable upon exercise of outstanding options to acquire
11,750 shares of Common Stock.
(6) Consists of shares issuable upon exercise of outstanding options to
acquire 18,929 shares of Common Stock.
(7) On October 3, 1997, the Investors and Winston J. Churchill, Samuel A.
Plum, Safeguard Capital Management, Inc., and SCP Private Equity
Partners, L.P., filed a Schedule 13D with the Securities and Exchange
Commission stating that the such persons had acquired warrants to
purchase Company Common Stock and had entered into the Stock Purchase
Agreement for purposes of investment in the Company. Based on the
information contained in such Schedule 13D, the Company believes that
Reel Partners is a Delaware limited liability company which has the
following members: (i) Rust Cinema Investors, L.L.C., a Texas limited
liability company controlled by the Sharp Irrevocable Intervivos Trust,
(ii) JW Bridge Investors, L.L.C., a Delaware limited liability company
controlled by James Villanueva and Warren Schlichting, and (iii) SCP
Private Equity Partners, L.P., a Delaware limited partnership ("SCP").
SCP's general partner is SCP Private Equity Management, L.P., a Delaware
limited partnership ("SCP Management"). SCP Management's general
partners are (a) Safeguard Capital Management, Inc., a Delaware
corporation controlled by Safeguard Scientifics, Inc., a publicly traded
Delaware corporation, (b) Winston J. Churchill, a Director Designee, and
(c) Samuel A. Plum. Acquisition Partners is a Delaware limited
liability company which is controlled by SCP and which has the following
members: (i) SCP, (ii) the Sharp Irrevocable Intervivos Trust, (iii)
James Villanueva, and (iv) Warren Schlichting.
(8) Consists of up to 1,000,000 shares of Common Stock issuable upon
exercise of the Signing Warrant held in the name of Acquisition Partners.
(9) Consists of 17,684,464 shares of Common Stock issuable in connection
with the Closing of the Equity Financing, 1,000,000 shares of Common
Stock issuable upon exercise of the Signing Warrant, and 1,630,624
shares of Common Stock issuable upon exercise of the Purchase Warrant.
Does not include warrants which the Company has been informed may be
transferred from The Watley Group, LLC at the instruction of Acquisition
Partners subsequent to Closing. See "The Financing Proposal -- Special
Considerations -- FINDER'S FEE."
(10) Consists of 75,000 shares of Common Stock acquired by Rust Capital,
Ltd., an affiliate of Mr. Crosby.
(11) Consists of up to 3,000,000 shares of Common Stock issuable upon
conversion of the Bridge Note, 3,000,000 shares of Common Stock issuable
upon exercise of the First Bridge Warrant, and 1,500,000 shares of
Common Stock issuable upon exercise of the Second Bridge Warrant. As of
the Record Date, the Second Bridge Warrant was not currently exercisable
but may become so within 60 days following the Record Date. See "The
Financing Proposal --Summary -- The Bridge Financing."
(12) Assumes repayment of the Bridge Note and cancellation of the Second
Bridge Warrant.
MANAGEMENT
Upon consummation of the Equity Financing, the number of directors of the
Company will be increased from four to seven. Prior to the Closing, but
conditional upon the consummation of the Equity Financing, Russell Seheult
and Jerry Willits will resign as a director of the Company and the current
members of the Company's Board will appoint Winston J. Churchill, Jack R.
Crosby, Thomas G. Rebar, and Wayne B. Weisman (collectively, the "Director
Designees") as directors of the Company. As a result of the foregoing, the
Board of Directors of the Company immediately following the Closing will
consist of the following persons: John Ellison, Jr., Alan Grossberg, Jon
Meloan, and the Director Designees.
16
<PAGE>
The following table sets forth certain information concerning the
Company's current directors and executive officers and the Director Designees:
Name(1) Principal Occupation Age
------------------------ ------------------------------------- -----
Russell Seheult (2) Chairman of the Board, 45
anesthesiologist and dental
surgeon
John Ellison, Jr. President, Chief Executive Officer 55
and Director of the Company
Alan Grossberg Acting Chief Financial Officer, 46
Senior Vice President and Director
of the Company
Jerry Willits (2) Vice President and Director of the 57
Company
Jon Meloan Vice President, General Counsel, 62
Secretary and Director of the
Company
Katherine McKeever Vice President of Advertising and 37
Marketing of the Company
Winston J. Churchill (3) Managing General Partner of the 57
general partner of SCP Private
Equity Partners, L.P., a private
equity investment fund
Jack R. Crosby (3) Chairman and CEO of Tescorp, Inc., 71
an owner and operator of cable
television, and president of Rust
Capital, Ltd., a small business
investment corporation
Thomas G. Rebar (3) Vice President and Managing 34
Director of the general partner of
SCP Private Equity Partners, L.P.,
a private equity investment fund
Wayne B. Weisman (3) Vice President of CIP Capital 41
Management, Inc., a partner of the
general partner of CIP Capital,
L.P., a small business investment
company
____________________
(1) The Company does not have a nominating committee of the Board of
Directors. The Company does not currently have a standing audit or
compensation committee although it is expected that such committees will
be activated subsequent to the Closing.
(2) Effective upon the Closing, Mr. Seheult and Mr. Willits will resign as
directors of the Company.
(3) Not currently a director of the Company but will be appointed a director
effective upon Closing.
JOHN ELLISON JR. co-founded and became a director of the Company in April
1989 and has been its President since February 1992 and an officer since
1989. Prior to February 1992, Mr. Ellison was a Vice President of the
Company. Mr. Ellison has over 35 years of experience in the motion picture
theater and exhibition business. He has managed theater operations and
expansion programs for several theater chains and, prior to forming the
Company, he owned and operated the largest locally-owned theater chain in San
Diego County, which he sold to Edwards Cinemas in 1985.
ALAN GROSSBERG co-founded and became a director of the Company in April
1989 and has been its Senior Vice President and Chief Financial Officer since
that time. Mr. Grossberg has over 20 years of experience in theater and
entertainment management. Mr. Grossberg previously has acquired and sold
several theater and cinema complexes in San Diego County. Mr. Grossberg also
has owned a film booking and licensing company which has previously provided
films booking and related services to the Company.
JERRY WILLITS has been the Company's Vice President since 1992 and a
director since July 1994. For at least four years prior to joining the
Company, Mr. Willits owned and operated two theaters in San Diego County. Mr.
Willits formerly served as an officer of the Theater & Entertainment
Association of Greater San Diego.
JON MELOAN joined the Company in March 1991 as its Secretary and General
Counsel and became a director in July 1994 and a Vice President in 1997. From
1989 to 1991, Mr. Meloan was an independent business consultant. Prior to
1989, Mr. Meloan served as senior counsel with Honeywell Inc. Mr. Meloan has
over 22 years experience as a corporate lawyer.
17
<PAGE>
RUSSELL SEHEULT is an anesthesiologist and dental surgeon who has been a
director of the Company since June 1991 and has served as Chairman of the
Board of Directors since February 1992. Since 1993 he has operated an
outpatient dental surgery clinic in Redlands, California. For at least three
years prior to joining the dental clinic, Dr. Seheult was an anesthesiologist
in Loma Linda, California and served as head of anesthesiology at Loma Linda
Hospital in Loma Linda, California.
KATHERINE MCKEEVER was appointed as the Company's Vice President of
Operations in June 1995. In January 1997, Ms. McKeever was promoted to the
position of Vice President of Advertising and Marketing. Prior to such
appointment she served as Director of Advertising and Marketing of the
Company from January 1993. Prior to 1993 she directed marketing activities
for SoCal Cinemas, Inc. for over 5 years. Ms. McKeever has also worked in
advertising production and promotions for national consumer product brands.
WINSTON J. CHURCHILL has been the Managing General Partner of SCP Private
Equity Management, L.P., the general partner of SCP Private Equity Partners,
L.P. ("SCP"), a private equity investment fund, since SCP's inception in
1996. Mr. Churchill founded Churchill Investment Partners, Inc. in 1989 and
CIP Capital, Inc. in 1990, each of which is an investment and venture capital
fund, and continues to be a principal of each. From 1989 to 1993 he served as
Chairman of the Finance Committee of the $24 billion Pennsylvania Public
School Employees' Retirement System. From 1984 to 1989, Mr. Churchill was a
general partner of Bradford Associates, a private investment firm in
Princeton, New Jersey. Prior to that time, he practiced law at the
Philadelphia firm of Saul, Ewing, Remick & Saul for 16 years and was a member
of its executive committee. Mr. Churchill is Chairman of the Board of Central
Sprinkler Corporation, a manufacturer and distributor of automatic fire
sprinkler systems and components, and IBAH, Inc., a publicly traded clinical
research company for the medical and biotechnology industry. He is also a
director of Geotek Communications, Inc., a publicly traded provider of
wireless communications systems and services, and Tescorp, Inc., a publicly
traded company which owns and operates cable television systems in Argentina.
JACK R. CROSBY has been Chairman of the Board of Directors of the
Tescorp, Inc., a publicly traded company which owns and operates cable
television systems in Argentina, since its inception in 1980, and became
Chief Executive Officer in 1991. Mr. Crosby is the General Partner of Rust
Group, L.P., a Texas limited partnership holding certain of Mr. Crosby's
business assets, and he is the president of Rust Investment Corp., the
general partner of Rust Capital, Ltd. ("Rust Capital"), an investment limited
partnership with its headquarters in Austin, Texas. Mr. Crosby presently
serves as a director of Prime Cable, Inc. ("Prime Cable") of Austin, Texas.
Prime Cable and its affiliates own and operate cable television systems in
Chicago, Illinois, Las Vegas, Nevada, Anchorage, Alaska and other markets.
Mr. Crosby also serves as a director of three other publicly traded
companies: National Dentex Corporation, a manufacturer of dental appliances,
and DSI Toys, Inc., a toy manufacturer and distributor, and Heartland
Wireless Communications, Inc., a wireless television company. From 1982
through early 1985, he served as a director of Orion Pictures. As a
principal of the Rust Group, L.P., Mr. Crosby participated in the purchase of
selected motion picture theaters from Wometco Theaters, Inc. in 1990 before
selling them in 1994.
THOMAS G. REBAR is currently Managing Director of the general partner of
SCP, which positions he has held since June 1996. From 1989 until joining
SCP in 1996, Mr. Rebar served as Senior Vice President of Charterhouse Inc.,
an investment banking firm. Prior to joining Charterhouse, Inc., Mr. Rebar
was a member of the corporate finance department at Bankers Trust Company.
WAYNE B. WEISMAN has been a partner of SCP Private Equity Management,
L.P., the general partner of SCP, since the inception of SCP in 1996. Since
1991, Mr. Weisman has served as Vice President of CIP Capital Management,
Inc., the general partner of CIP Capital, L.P., a small business investment
company, or in a similar capacity in the predecessors to such entities. From
1992 to 1994, he served as a director and Executive Vice President of
Affinity Biotech, Inc., and Vice President and General Counsel of its
successor, IBAH, Inc. From 1987 to 1990, Mr. Weisman ran an independent
investment management and advisory firm. He formerly practiced law with the
Philadelphia firm of Saul, Ewing, Remick & Saul. Mr. Weisman is currently a
director of Microleague Multimedia, Inc., a publicly traded publisher of
multimedia products.
There were four meetings of the Board of Directors of the Company during
the last fiscal year. Each director attended at least 75% or more of the
aggregate number of meetings of the Board of Directors and committees of the
Board of Directors on which he served which were held during the last fiscal
year.
18
<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers and persons who own
more than 10% of a registered class of the Company's equity securities to
file various reports with the Securities Exchange Commission and the National
Association of Securities Dealers concerning their holdings of, and
transactions in, securities of the Company. Copies of these filings must be
furnished to the Company.
Based on a review of the copies of such forms furnished to the Company,
the Company notes that each of John Ellison, Jr. and Jerry Willits did not
timely file a Form 4 Statement of Changes in Beneficial Ownership in
connection with a sale of 1,000 shares of Common Stock in December 1996 by
each of them as a result of a margin call. Similarly, Russell Seheult did
not timely file Form 4 Statements of Changes in Beneficial Ownership in
connection with sales of Common Stock in December 1996, January 1997 and
February 1997 as a result of a series of margin calls. The Company has been
informed that each of Messrs. Ellison, Willits and Seheult filed the
requisite notices subsequent to their respective due dates.
COMPENSATION OF DIRECTORS
Directors prior to June 3, 1995 received no cash compensation for serving
on the Board of Directors. The Board of Directors at the June 3, 1995 Board
Meeting approved payment of $1,000 per Board Member for attending each Board
Meeting, effective with the June 3, 1995 meeting. It is anticipated there
will be not less than four Board Meetings per year to coincide with review
and approval of quarterly and annual financial statement filings.
In the fiscal years ended March 31, 1997, 1996 and 1995, Russell Seheult
received $43,200, $26,000 and $20,500 in consulting fees. In August 1994, the
Company entered into a five year consulting agreement with Mr. Seheult
pursuant to which Mr. Seheult is currently entitled to receive $52,000 per
year. In December 1996, the Company extended the term of the consulting
agreement for a period of five years commencing December 5, 1996. In
addition, in July 1994, Mr. Seheult was granted an option to purchase 176,250
shares of Common Stock under the Company's Stock Option Plan at a price of
$2.55 per share.
During fiscal 1997, Walter Schlotter, a former director of the Company,
provided consulting services to the Company. Such services were not provided
pursuant to a written agreement. Mr. Schlotter has indicated that he
believes he is entitled to $27,500 for such services. The Company is in the
process of discussing a settlement of such obligations with Mr. Schlotter.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
John Ellison, Jr., Alan Grossberg and Russell Seheult (and Jerry Willits
with respect to the lease of the Chula Vista 10, and Eileen Seheult the
former wife of Russell Seheult, with respect to certain lease and bank
obligations incurred or guaranteed by Mr. and Ms. Seheult on behalf of the
Company) have personally guaranteed, on a joint and several basis, all
significant obligations of the Company pursuant to its theater leases and
certain loans. Certain of these obligations of the Company are secured by
real or personal property pledged by such individuals. As of March 31, 1997,
such guaranteed obligations involved aggregate future payments by the Company
of over $80,000,000.
In January 1994, Messrs. Seheult, Ellison, Grossberg and Willits and
certain third parties unaffiliated with the Company formed Nickelodeon
Cinemas Internacionales, S.A. de C.V., a Mexican corporation ("Nickelodeon
Mexico"). In July 1994, Messrs. Seheult, Ellison, Grossberg, and Willits
contributed, for no additional consideration, 18.6%, 18.6%, 18.6% and 4.2%,
respectively, totaling 60.0% of the outstanding equity in Nickelodeon Mexico
to the Company, which constituted all of such individuals' equity in
Nickelodeon Mexico. The remaining 40% of Nickelodeon Mexico was owned by
unrelated third parties. An additional 15% ownership interest in Nickelodeon
Mexico was returned to the Company by a previous shareholder for
consideration of payment to him of legal fees amounting to approximately
$30,000, subsequently reduced to $15,000. In March 1996, the Company decided
to dissolve Nickelodeon Mexico. In April 1996, a new Mexican corporation was
formed and named CinemaStar Luxury Theaters, S.A. de C.V. ("CinemaStar
Mexico"). The Company obtained a 75% interest in CinemaStar Mexico. The
remaining 25% ownership interest is held by Atlantico y Asociados S.A. de
C.V., a Mexican corporation. The Company has loaned as of March 31, 1997 a
total of $566,104 to CinemaStar Mexico since its formation pursuant to a
promissory note bearing interest at an annual rate of 8%. All interest and
principal on such note is due in July 1999. The Company believes that the
terms of such note are more favorable than CinemaStar Mexico could receive
from a third party lender.
19
<PAGE>
The Company has entered into a Finders Fee Agreement, dated September 11,
1993, with Jon Meloan, the Company's General Counsel and Secretary, pursuant
to which Mr. Meloan is entitled to receive a fee of 4.5% of all funds raised
through Mr. Meloan's sources. The Finders Fee Agreement was terminated on May
24, 1995. No fees were paid to Mr. Meloan pursuant to such agreement. In
March 1995, the Company entered into a finder's fee agreement with Robert
Bailey pursuant to which the Company agreed to pay a fee of 5% to Mr. Bailey
for all funds raised from Mr. Bailey's sources. Mr. Bailey has agreed to pay
Jon Meloan 32% of any fees Mr. Bailey receives from the Company. No fee will
be payable to Mr. Meloan or Mr. Bailey in connection with any portion of the
Financing Proposal.
In January 1996, the Company borrowed $450,000 from Alan Grossberg
pursuant to a short-term note payable. At March 31, 1996, the outstanding
balance was $320,000, which amount was repaid in full in April 1996.
In April 1996, John Ellison, Jr. and Russell Seheult jointly obtained a
personal line of credit with Union Bank of California. From April 1996 until
June 1997, Mr. Seheult and Mr. Ellison borrowed funds under the line of
credit and advanced such funds to the Company. Pursuant to an arrangement
between the Company and Union Bank, payments on the loan were made directly
to Union Bank by the Company. In early June 1997, such line of credit was
not renewed by Mr. Ellison and Mr. Seheult and, as a result, Union Bank
debited the Company's account at Union Bank for approximately $99,000, the
outstanding principal balance of the line of credit as of the date of
termination. On June 19, 1997, Messrs. Ellison and Seheult entered into a
Business Note with Union Bank in the aggregate principal amount of $99,000,
the proceeds of which were advanced to the Company. Such note bears interest
at a rate of 10.25% per annum and calls for 60 equal payments of interest and
principal of approximately $2,100 per month. The Company makes monthly
payments on such note directly to Union Bank. As of September 30, 1997, the
outstanding balance of principal and interest on such note was $94,863.15.
Pursuant to the terms of a Loan Agreement, dated April 1, 1996, between
the Company and John Ellison, Jr., the Company agreed to loan the sum of
$1,000 per week to Mr. Ellison commencing on Friday, April 5, 1996. As of
September 30, 1997, the outstanding balance of principal and interest on such
loan was $82,607.34. Such loan bears interest at a rate of 8% per annum and
matures in March 2002.
The Company made loans in the principal amount of $19,500 to Jon Meloan
from July 1996 through February 1997. As of March 31, 1997, Mr. Meloan
executed a promissory note, dated March 31, 1997, in the principal amount of
$21,095.98 which represents the total principal amount of such loans with
accrued interest at a rate of 8% per annum through the date of such note.
Such Note is due and payable in full on August 15, 1998. As of September 30,
1997, the outstanding balance of principal and interest on such note was
$21,259.93. In addition, the Company has guaranteed the obligations of Jon
Meloan with respect to a loan in the aggregate principal amount of $22,500
made by North County Bank to Mr. Meloan.
20
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation of the
chief executive officer and all other executive officers of the Company whose
salary and bonus exceeded an annual rate of $100,000 during the fiscal year
ended March 31, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------------------------------ ------------
All Other Securities
Name and Annual Underlying
Principal Position Year Salary Bonus Compensation Options/SARs
- ------------------ ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
John Ellison, Jr. . . . . . . . . . . . 1997 $181,944 $50,000 --- (1) -0-
President and Chief Executive Officer 1996 $167,620 $50,000 --- (1) -0-
1995 $160,792 $50,000 --- (1) 88,125
Alan Grossberg . . . . . . . . . . . . 1997 $182,640(2) $30,000 --- (1) -0-
Acting Chief Financial Officer and 1996 $196,263(3) $15,000 --- (1) -0-
Executive Vice President 1995 $168,939(4) $15,000 --- (1) 88,125
Jerry Willits . . . . . . . . . . . . . 1997 $88,935 $15,000 --- (1) -0-
Vice President 1996 $77,500 $ 7,500 --- (1) -0-
1995 $66,200 $ -0- --- (1) 11,750
</TABLE>
__________________________
(1) Perquisites and other personal benefits did not in the aggregate reach
the lesser of $50,000 or 10 percent of the total of annual salary and
bonus reported in this table for any named executive officer.
(2) Includes $40,000 paid to Mr. Grossberg pursuant to the terms of a Film
Booking Agreement pursuant to which Mr. Grossberg previously provided
film booking services to the Company.
(3) Includes $52,000 paid to Mr. Grossberg pursuant to the terms of a Film
Booking Agreement pursuant to which Mr. Grossberg previously provided
film booking services to the Company.
(4) Includes $34,500 paid to Mr. Grossberg pursuant to the terms of a Film
Booking Agreement pursuant to which Mr. Grossberg previously provided
film booking services to the Company.
EMPLOYMENT AND CONSULTING AGREEMENTS
Effective August 25, 1994, the Company entered into five-year employment
agreements with each of Messrs. Ellison, Grossberg and Willits, pursuant to
which their base salaries are currently $216,817 and $217,646 and $90,750
respectively, subject to annual increases of 10%, 12% and 10% respectively.
In addition, Messrs. Ellison, Grossberg and Willits are entitled to receive
an annual bonus for each year of their respective employment. Mr. Ellison
and Mr. Grossberg's bonuses equal five percent of the Company's net income
(before payment of income taxes or bonuses to executive officers) over $2
million, if any, which shall be paid quarterly based on annualized results.
Mr. Willits' bonus will equal two percent of net income (before payment of
income taxes or bonuses to executive officers) of income over $2 million, if
any, which shall be paid quarterly based on annualized results. In addition,
if the Company has net income (before payment of income taxes, but after
payment of other bonuses to executive officers) in any year over $7 million,
there will be an additional payment of $500,000 to each of Mr. Ellison and
Mr. Grossberg and $200,000 to Mr. Willits. No bonuses have been paid to date
pursuant to such bonus formulas. Each of Messrs. Ellison, Grossberg and
Willits also receive an automobile allowance of up to $650 per month. The
Company has also agreed to pay maintenance, gasoline (to the extent the usage
is business-related), and cellular telephone service for such automobile.
Additionally, the employment agreements also give Messrs. Ellison, Grossberg
and Willits the right to participate in any and all group, life, disability,
income, health or accident insurance programs applicable to any personnel of
the Company, subject only to the eligibility restrictions of such programs.
Messrs. Ellison and Grossberg are also entitled, at the Company's expense, to
a disability income insurance policy covering each which provides for a
monthly payment (in the event of a disability) of at least $10,000. In the
event that Mr. Ellison or Mr. Grossberg is terminated or is not reelected or
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appointed as a director or executive officer of the Company for any reason
other than for an uncured breach of his obligations under the employment
agreement or his conviction of a felony involving moral turpitude, he shall
have the right to receive his annual salary and bonuses for the remainder of
the term of the contract. In December 1995, the Employment Agreements of
each of Messrs. Ellison and Grossberg were extended for a period of five
years commencing December 5, 1996. Pursuant to such amendments, Mr.
Grossberg's base salary was increased by $52,000 per year and his separate
agreement to provide film booking services to the Company (described below)
was terminated.
In August 1994, Alan Grossberg entered into a Film Booking Agreement
pursuant to which he has agreed to provide film booking and licensing
services to the Company for five years at an annual fee $52,000 per year. The
contract was assignable by Mr. Grossberg to any entity owned or controlled by
Mr. Grossberg, The Company believes that the terms of the Film Booking
Agreement were at least as favorable to the Company as would be available to
the Company in a third-party transaction. Effective December 5, 1996, the
Film Booking Agreement was terminated.
OPTION GRANTS DURING FISCAL 1997
No stock options were granted to the officers identified in the Summary
Compensation Table during the fiscal year ended March 31, 1997.
OPTION EXERCISES IN FISCAL 1997 AND YEAR-END OPTION VALUES
The following table sets forth information concerning stock options which
were exercised during, or held at the end of, fiscal 1997 by the officers
named in the Summary Compensation Table:
OPTION EXERCISES AND YEAR-END VALUE TABLE(1)
<TABLE>
<CAPTION>
Number of Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired at Fiscal Year End at Fiscal Year End(2)
on Value ---------------------------- ------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John Ellison, Jr. 0 $0 88,125 0 $-0- $0
Alan Grossberg 0 $0 88,125 0 $-0- $0
Jerry Willits 0 $0 11,750 0 $-0- $0
</TABLE>
__________________________
(1) There were no option exercises during fiscal 1997.
(2) Valued based on an assumed price of $1.00 per share of Common Stock.
In July 1994, the Company adopted the CinemaStar Luxury Theaters, Inc.
Stock Option Plan (the "Option Plan") under which a maximum of 587,500 shares
of Common Stock of the Company may be issued pursuant to incentive and
non-qualified stock options granted to officers, key employees or consultants
of the Company.
The Option Plan is administered by the Board of Directors or, in the
discretion of the Board of Directors, by a committee of not less than two
individuals, each of whom must be a disinterested member of the Board of
Directors, with authority to determine employees to whom options will be
granted, the timing and manner of grants of options, the exercise price, the
number of shares covered by and all of the terms of options, and all other
determinations necessary or advisable for administration of the Option Plan.
The purchase price for the shares subject to any incentive stock option
granted under the Option Plan shall not be less than 100% of the fair market
value of the shares of Common Stock of the Company on the date the option is
granted. No option shall be exercisable after the earliest of the following:
the expiration of 10 years after the date the option is granted; three
months after the date the optionee's employment (if the optionee is an
employee of the Company) with the Company terminates, if termination is for
any reason other than permanent disability or death; or one year after the
date the optionee's employment (if the optionee is an employee of the
Company) terminates, if termination is a result of death or permanent
disability. Unless sooner terminated by the Board of Directors, the Option
Plan expires on December 31, 2003.
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SHAREHOLDER PROPOSALS
Pursuant to the provisions of the Company's Bylaws, shareholders who
desired to present proposals for action at the Meeting were required to
provide written notice containing, among other things, a reasonably detailed
description of such shareholder's proposal, no later than the close of
business on the tenth (10th) day following the date on which the first public
disclosure (whether by mailing of a notice to shareholders, press release or
otherwise) of the date of the Meeting was made. No such notices were
received by the Company.
Shareholders who wish to present proposals for action at the next
Annual Meeting of Shareholders of the Company should submit their proposals
in writing to the Secretary of the Company at the address of the Company set
forth on the first page of this Proxy Statement. Proposals must be received
by the Secretary no later than November 15, 1997, for inclusion in the proxy
statement and proxy card for the next Annual Meeting of Shareholders of the
Company.
OTHER MATTERS
The Management of the Company does not know of any other matters
which are to be presented for action at the Meeting. Should any other
matters come before the Meeting or any adjournment thereof, the persons named
in the enclosed proxy will have the discretionary authority to vote all
proxies received with respect to such matters in accordance with their
collective judgment.
ANNUAL REPORT AND QUARTERLY REPORTS
A copy of the Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1997 and a copy of any Quarterly Reports on Form 10-QSB
for any quarterly periods for which such forms have been filed subsequent to
the end of fiscal 1997, each as filed with the Securities and Exchange
Commission (exclusive of Exhibits), will be furnished without charge to any
person from whom the accompanying proxy is solicited upon written request to
CinemaStar Luxury Theaters, Inc., 431 College Boulevard, Oceanside,
California 92057, Attention: Alan Grossberg. If Exhibit copies are
requested, a copying charge of $.20 per page will be made.
BY ORDER OF THE BOARD OF DIRECTORS
Jon Meloan
Vice President, Secretary and General Counsel
Oceanside, California
November __, 1997
SHAREHOLDERS ARE URGED TO SPECIFY THEIR CHOICES AND TO DATE, SIGN, AND RETURN
THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE. PROMPT RESPONSE IS HELPFUL AND
YOUR COOPERATION WILL BE APPRECIATED.
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APPENDIX A
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "AGREEMENT") is made and entered into
as of September 23, 1997, by and among CinemaStar Luxury Theaters, Inc., a
California corporation (the "COMPANY"), Reel Partners, L.L.C., a Delaware
limited liability company ("LENDER"), and CinemaStar Acquisition Partners,
L.L.C., a Delaware limited liability company (the "BUYER").
RECITALS
A. Contemporaneously with the execution of this Agreement, Lender is
loaning to the Company the aggregate principal amount of Three Million Dollars
($3,000,000) (the "BRIDGE LOAN"), pursuant to the terms and conditions of that
certain Convertible Secured Promissory Note (the "NOTE"), dated the date hereof,
issued to Lender by the Company, which Note is, at the option of the holder
thereof, convertible into one share of Common Stock (as hereinafter defined) for
each dollar of such Bridge Loan (the "CONVERSION SHARES"). As part of the
Bridge Loan, the Company has issued to Lender (i) a warrant (the "FIRST BRIDGE
WARRANT") to purchase Three Million (3,000,000) shares of Common Stock, no par
value, of the Company (the "COMMON STOCK"), subject to adjustment and on the
terms and conditions set forth in that certain Warrant to Purchase Common Stock,
dated the date hereof, issued to Lender by the Company (the "FIRST WARRANT
SHARES") and (ii) a warrant (the "SECOND BRIDGE WARRANT") to purchase One
Million Five Hundred Thousand (1,500,000) shares of Common Stock, subject to
adjustment and on the terms and conditions set forth in that certain Warrant to
Purchase Common Stock, dated the date hereof, issued to Lender by the Company
(the "SECOND WARRANT SHARES") which Second Bridge Warrant shall be canceled upon
the Closing (as hereinafter defined) or if this Agreement is terminated by the
Company in connection with SECTION 8(k)(i)(4) hereof.
B. Subject to the terms and conditions herein, Buyer, an affiliate of
Lender, hereby desires to purchase from the Company, and the Company hereby
desires to issue and sell to Buyer, 17,684,464 shares of Common Stock (the
"SHARES"), at a purchase price of eighty four and eight thousand two hundred and
two ten thousandths Cents ($.848202) per share, for an aggregate purchase price
of Fifteen Million and 00/100th Dollars ($15,000,000) and warrants (the
"PURCHASE WARRANT") exercisable for 1,630,624 shares of Common Stock (the
"PURCHASE WARRANT SHARES") at an exercise price of eighty four and eight
thousand two hundred and two ten thousandths Cents ($.848202) per share, for an
aggregate exercise price of One Million Three Hundred Eighty Three Thousand
Ninety Eight and 54/100ths Dollars ($1,383,098.54) (collectively, the
"PURCHASE"). Subsequent to the consummation of the foregoing sale of shares of
Common Stock and Purchase Warrant, subject to the terms and conditions herein,
the Company may issue to Buyer additional shares of Common Stock (in an amount
to be determined as set forth herein) as consideration for the decreased value
of the Shares resulting from certain expenses, liabilities and operating losses
of the Company incurred and/or discovered and/or disclosed after August 31, 1997
(the "ADJUSTMENT SHARES").
C. In addition to the issuance of the First Bridge Warrant and the Second
Bridge Warrant to Lender, the Company is issuing to Buyer upon execution of this
Agreement a warrant (the "SIGNING WARRANT") to purchase One Million (1,000,000)
shares of Common Stock, subject to adjustment and on the terms and conditions
set forth in that certain Warrant to Purchase Common Stock, dated the date
hereof, issued to Buyer by the Company (the "SIGNING WARRANT SHARES") as
consideration for Buyer executing and delivering this Agreement on the date
hereof.
AGREEMENTS
In consideration of the premises and the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereby agree as follows (the Recitals to
this Agreement being incorporated herein by this reference thereto):
1. AUTHORIZATION AND SALE OF SHARES, WARRANT SHARES AND ADJUSTMENT
SHARES.
(a) AUTHORIZATION OF SHARES AND WARRANT SHARES. At or prior to
Closing, the Company shall duly authorize the issuance and sale of the Shares.
At or prior to the Closing, the Company shall have duly authorized and reserved
for issuance the Conversion Shares, the First Warrant Shares, the Second Warrant
Shares,
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the Signing Warrant Shares, the Purchase Warrant Shares and the
Adjustment Shares (the First Warrant Shares, the Second Warrant Shares, the
Signing Warrant Shares and the Purchase Warrant Shares may be collectively
referred to as the "WARRANT SHARES").
(b) SALE OF SHARES AND PURCHASE WARRANTS. Subject to the
satisfaction of the terms and conditions herein set forth and in reliance upon
the respective representations and warranties of the parties set forth herein,
at the Closing the Company shall issue and sell to Buyer, and Buyer shall
purchase from the Company, the Shares and Purchase Warrant, free and clear of
any liens, taxes, restrictions and charges which result from actions taken by
the Company and other than those imposed in accordance with applicable laws, for
an aggregate purchase price of Fifteen Million One Thousand and 00/100ths
Dollars ($15,001,000) (the "PURCHASE PRICE"), or $15,000,000 for the Shares and
$1,000 for the Purchase Warrant. The number of Warrant Shares exercisable under
the Purchase Warrants is subject to adjustment and other terms and conditions
set forth in the Purchase Warrants.
(c) ISSUANCE OF NOTE, FIRST BRIDGE WARRANT, SECOND BRIDGE WARRANT AND
SIGNING WARRANT. Contemporaneously with the execution of this Agreement, the
Company shall issue and deliver to Lender the Note, the First Bridge Warrant and
the Second Bridge Warrant, and to Buyer the Signing Warrant. The number of
Warrant Shares exercisable under the First Bridge Warrant, the Second Bridge
Warrant and the Signing Warrant is subject to adjustment and the other terms and
conditions set forth in the First Bridge Warrant, the Second Bridge Warrant and
the Signing Warrant, respectively.
(d) CLOSING. The consummation of the purchase and sale of the Shares
and the Purchase Warrants pursuant to this Agreement (the "CLOSING") shall take
place in the office of Katten Muchin & Zavis, Los Angeles, California, at a time
and date to be agreed upon by the parties, which, unless otherwise agreed, shall
be no later than five (5) business days after the satisfaction or waiver of the
conditions set forth in SECTIONS 5 AND 6 (the "CLOSING DATE").
(e) CLOSING DELIVERIES. At the Closing, (i) Buyer shall pay the
Purchase Price to the Company by wire transfer of immediately available funds in
accordance with the Company's written wire instructions, (ii) the Company shall
deliver to Buyer a certificate in form acceptable to Buyer, duly executed by the
Company and registered in the name of Buyer, representing the Shares (the
"CERTIFICATE"), (iii) the Company shall deliver to Buyer the Purchase Warrant
substantially in the form attached as Exhibit 1(e), duly executed by the
Company, and (iv) the parties shall deliver to each other the other agreements
and documents required to satisfy the conditions set forth in SECTIONS 5 AND 6.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to Lender and Buyer as follows, as
of the date hereof and, with respect to Buyer, as of the Closing Date or as to
such other date as expressly provided for herein (provided that the Company
shall be obligated to update Buyer and Lender with respect to any information of
which it becomes aware prior to the Closing which would alter any such
representation or warranty):
(a) ORGANIZATION AND QUALIFICATION. The Company and its subsidiaries
(a complete list of which, along with the record and beneficial ownership of
such subsidiaries, is set forth in SCHEDULE 2(a)) are corporations duly
organized and validly existing in good standing under the laws of the
jurisdiction in which they are incorporated, and have the requisite corporate
power to own their properties and to carry on their business as now being
conducted. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary.
(b) AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER INSTRUMENTS.
Except as set forth on SCHEDULE 2(b), (i) the Company has the requisite
corporate power and authority to enter into and perform this Agreement and to
issue the Note, the First Bridge Warrant, the Second Bridge Warrant, the
Signing Warrant and the Purchase Warrant (the First Bridge Warrant, the
Second Bridge Warrant, the Signing Warrant and the Purchase Warrant may be
collectively referred to as the "WARRANTS"), and the Shares, the Warrant
Shares, the Conversion Shares, the Purchase Warrant Shares and the Adjustment
Shares in accordance with the terms hereof and thereof, (ii) the execution
and delivery of this Agreement, the Note and the Warrants by the Company and
the consummation by it of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Note and the Warrants, the
reservation for issuance and the issuance of (a) the Warrants Shares issuable
upon exercise of the Warrants and (b) the Conversion Shares issuable upon
conversion of the Note, and the issuance of the Adjustment Shares upon the
determination of the Adjustment Shares, have been duly authorized by all
necessary corporate action on the part of the Company, (iii) this Agreement,
the Note and the Warrants have been duly and validly executed and
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delivered by the Company, and (iv) this Agreement, the Note and the Warrants
constitute the valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, and except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies. Notwithstanding anything to the contrary contained
herein, the issuance of the Shares, the Warrant Shares, the Conversion Shares
and the Adjustment Shares will not be authorized for issuance unless and
until the shareholders of the Company approve the Amendment (as hereinafter
defined) and to that extent the Company will not have the requisite corporate
power and authority to issue such Shares, Warrant Shares, Conversion Shares
and Adjustment Shares.
(c) CAPITALIZATION. As of the date hereof, the authorized capital
stock of the Company consists of (x) 15,000,000 shares of Common Stock, of
which as of the date hereof, 8,019,182 shares are issued and outstanding,
587,500 shares are reserved for issuance pursuant to the Company's stock
option plans, and 6,605,636 shares are reserved for issuance pursuant to
securities exercisable or exchangeable for, or convertible into, shares of
Common Stock, and (y) 100,000 shares of Preferred Stock, of which 25,000 are
designated Series A Convertible Preferred Stock and none of which are issued
and outstanding. Except as disclosed in SCHEDULE 2(c), all of such
outstanding shares have been, or upon issuance will be, validly issued and
are, or will be, fully paid and nonassessable. Except as disclosed in
SCHEDULE 2(c), no shares of Common Stock are subject to preemptive rights or
any other similar rights or any liens or encumbrances suffered by the
Company. Except as disclosed in SCHEDULE 2(c) and except as contemplated
hereunder, (i) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to,
or securities or rights convertible into, any shares of capital stock of the
Company or any of its subsidiaries, or contracts, commitments, understandings
or arrangements by which the Company or any of its subsidiaries is or may
become bound to issue additional shares of capital stock of the Company or
any of its subsidiaries or options, warrants, scrip, rights to subscribe to,
calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, any shares of capital stock of the Company or any
of its subsidiaries, (ii) there are no outstanding debt securities, (iii)
there are no agreements or arrangements under which the Company or any of its
subsidiaries is obligated to register the sale of any of their securities
under the 1933 Act, and (iv) there are no outstanding securities of the
Company or its subsidiaries which contain any redemption or similar
provisions and there are not any contracts, commitments, understandings or
arrangements which the Company or any of its subsidiaries is or may become
bound to redeem a security of the Company or its subsidiaries. Except as
disclosed in SCHEDULE 2(c), there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Note, the Shares, the Warrants, the Warrant Shares, the Conversion Shares
or the Adjustment Shares as described in this Agreement. The Company has
furnished to Buyer true and correct copies of the Company's Articles of
Incorporation, as amended (the "ARTICLES OF INCORPORATION"), and the
Company's By-laws, as amended (the "BY-LAWS"), and the terms of all
securities convertible into or exercisable for Common Stock and the material
rights of the holders thereof in respect thereto.
(d) ISSUANCE OF SECURITIES. Immediately following the issuance of the
Note and the First Bridge Warrant, the Second Bridge Warrant and the Signing
Warrant, and assuming shareholder approval of the Amendment had been obtained as
of the date hereof, the authorized capital stock of the Company would consist of
60,000,000 shares of Common Stock, of which 8,019,182 shares would be issued and
outstanding, 587,500 shares would be reserved for issuance pursuant to the
Company's stock option plans, and 17,590,695 shares would be reserved for
issuance pursuant to securities exercisable or exchangeable for, or convertible
into, shares of Common Stock (including 3,000,000 shares of Common Stock
reserved for issuance upon conversion of the Note and 4,500,000 shares reserved
for issuance upon exercise of the First Bridge Warrant and the Second Bridge
Warrant and 1,000,000 shares reserved for issuance upon exercise of the Signing
Warrant). Immediately following the Closing and assuming no exercise of
outstanding warrants or options, no conversion of the Note and no issuance of
Adjustment Shares, the authorized capital stock of the Company will consist of
60,000,000 shares of Common Stock, of which 25,703,646 shares will be issued and
outstanding, 587,500 shares will be reserved for issuance pursuant to the
Company's stock option plans, 19,904,615 shares will be reserved for issuance
pursuant to securities exercisable or exchangeable for, or convertible into,
shares of Common Stock (including 5,630,624 shares reserved for issuance upon
exercise of the Warrants other than the Second Bridge Warrants), and 10,000,000
shares will be reserved for issuance as Adjustment Shares.
(e) NO CONFLICTS. Except as disclosed in SCHEDULE 2(e), the
execution, delivery and performance of this Agreement, the Note and the
Warrants by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation,
the issuance and the reservation for issuance of the Shares, the Warrant
Shares, the Conversion Shares and the Adjustment Shares) will not (i) subject
to shareholder approval of the Amendment, result in a violation of the
Articles of Incorporation or By-laws or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become
a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material
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agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or, assuming compliance with the conditions set
forth in this Agreement and subject to the receipt of requisite shareholder
approval, result in a violation of any law, rule, regulation, order, judgment
or decree (including federal and state securities laws and regulations and
the rules and regulations of the principal market or exchange on which the
Common Stock is traded or listed) applicable to the Company or any of its
subsidiaries or by which any property or asset of the Company or any of its
subsidiaries is bound or affected. Except as disclosed in SCHEDULE 2(e),
neither the Company nor its subsidiaries is in violation of any term of or in
default under the Articles of Incorporation or By-laws or their
organizational charter or by-laws, respectively, or any material contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
subsidiaries. The business of the Company and its subsidiaries is not being
conducted, and shall not be conducted, in violation of any law, ordinance,
regulation of any governmental entity. Except as disclosed in SCHEDULE 2(e),
the Company is not in violation of the listing requirements of the Nasdaq
SmallCap Market ("NASDAQ") and does not reasonably anticipate that the Common
Stock will be delisted from Nasdaq in the foreseeable future. Except as
disclosed in SCHEDULE 2(e), the Company and its subsidiaries are unaware of
any facts or circumstances which might give rise to any of the foregoing.
(f) NO CONSENT. No consent, approval, order or authorization of,
or registration, declaration or filing with, any government authority or
instrumentality or any private third party is required by or with respect to
the Company in connection with the execution and delivery of this Agreement,
the Note or the Warrants or the consummation of the transactions contemplated
hereby or thereby, except (i) as set forth on SCHEDULE 2(f), (ii) the filing
(the "HSR FILING") of the notification report under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR ACT"), and the
expiration of any waiting period required thereunder, (iii) the receipt by
the Company of a permit pursuant to California Corporations Code Section
25116 (the "USURY PERMIT") to exempt the issuance to Buyer of the Note, the
First Bridge Warrant and the Second Bridge Warrant from the provisions of
California usury laws (which has been obtained and is in effect as of the
date hereof), (iv) the filing of the Amendment with the California Secretary
of State, (v) the filing of the Proxy Statement (as hereinafter defined) with
the Securities Exchange Commission ("SEC") in accordance with the Securities
Exchange Act of 1934, as amended (the "1934 ACT"), (vi) the filing of a Form
8-K with the SEC with respect to the transactions contemplated hereby, and
(vii) such other consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and
state securities laws.
(g) SEC DOCUMENTS. Since February 7, 1995, the Company has filed
all reports, schedules, forms, statements and other documents required to be
filed by it with the SEC pursuant to the reporting requirements of the 1934
Act (all of the foregoing filed prior to the date hereof and all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the "SEC
DOCUMENTS"). The Company has delivered to the Buyer or its representative
true and complete copies of the SEC Documents as of their respective filing
dates. As of their respective dates, and with respect to the Form 10-KSB
filed with respect to the Company's fiscal year ended March 31, 1997, as of
the date hereof and the date of Closing, the SEC Documents complied and will
comply in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with
the SEC, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. Except as disclosed in SCHEDULE 2(g), as of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto.
(h) FINANCIAL STATEMENTS. Except as disclosed in SCHEDULE 2(h), the
audited, consolidated balance sheets at March 31, 1997, 1996, and 1995 of the
Company and its subsidiaries and their related consolidated statements of
operations, stockholders equity and cash flows, for each of the years then
ended, including the related notes to consolidated financial statements and
auditors' reports thereon (the "CONSOLIDATED FINANCIAL STATEMENTS") provided to
Buyer prior to the date hereof: (i) are complete and correct in all material
respects and are consistent with the books and records of the Company and its
subsidiaries; (ii) present fairly on a GAAP (as hereinafter defined) basis the
consolidated financial condition of the Company at the dates thereof and
represent fairly the results of operations and cash flows for each of the years
then ended; and (iii) have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied consistently with respect to the
immediately preceding fiscal year, except as set forth in the notes to the
Consolidated Financial Statements or in the auditors' reports thereon. The
unaudited, consolidated balance sheet at June 30, 1997 of the Company and its
subsidiaries and related consolidated statements of operations and cash flows
for the three (3) months then ended: (i) are complete and correct in all
material respects and are consistent with the books and records of the Company
and its subsidiaries; and (ii) have
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been prepared in conformity with GAAP, applied consistently with
Consolidated Financial Statements, subject to normal year-end adjustments.
(i) ABSENCE OF CERTAIN CHANGES. Except as disclosed in SCHEDULE
2(i), since June 30, 1997, the Company and its subsidiaries have, in all
material respects, conducted their respective businesses in the ordinary
course of business consistent with past custom and practices and have
incurred no material liabilities other than in the ordinary course of
business consistent with past custom and practice and there has been no
material adverse change and no material adverse development in the business,
properties, operations, financial condition or results of operations of the
Company or its subsidiaries, other than the Liabilities, Expenses and
Operating Losses (each as hereinafter defined) set forth on EXHIBIT 4(w).
(j) ABSENCE OF LITIGATION AND ORDERS. Except as disclosed in
SCHEDULE 2(j), there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company or any of
its subsidiaries, threatened against or materially affecting the Company, any
of its subsidiaries or any of their respective assets. Except as disclosed
in SCHEDULE 2(j), there are no outstanding orders, judgments, injunctions,
awards or decrees of any such bodies or entities against the Company or its
subsidiaries.
(k) ARM'S LENGTH TRANSACTIONS. The Company acknowledges and agrees
that Buyer and Lender are acting solely in the capacity of arm's length
purchaser with respect to this Agreement and the transactions contemplated
hereby. The Company further acknowledges that neither Lender nor Buyer is
acting as a financial advisor or fiduciary of the Company (or in any similar
capacity) with respect to this Agreement and the transactions contemplated
hereby and any advice given by Buyer, Lender or any of their representatives
or agents in connection with this Agreement and the transactions contemplated
hereby is merely incidental to their respective acquisition of the Note, the
Shares, the Warrants, the Warrant Shares, the Conversion Shares and the
Adjustment Shares. The Company further represents to Buyer and Lender that
the Company's decision to enter into this Agreement has been based on the
independent evaluation by the Company and its representatives.
(l) NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR
CIRCUMSTANCES. Except as disclosed in SCHEDULE 2(l), no material event,
liability, development or circumstance has occurred or exists, or is
contemplated to occur, with respect to the Company or its subsidiaries or
their respective business, properties, prospects, operations or financial
condition, which has not been publicly announced to the extent required by
applicable state or federal securities laws and disclosed in writing to the
Buyer and Lender other than (i) the Liabilities, Expenses and Operating
Losses set forth on EXHIBIT 4(w); (ii) obligations under this Agreement and
(iii) subject to the provisions of SECTION 4(s), liabilities or obligations
of the Company incurred in the ordinary course of business and not in excess
of $150,000 in the aggregate.
(m) EMPLOYEE RELATIONS. Neither the Company nor any of its
subsidiaries is involved in any union labor dispute nor, to the knowledge of
the Company or any of its subsidiaries, is any such dispute threatened. None
of the Company's or its subsidiaries' employees is a member of a union and
the Company and its subsidiaries believe that their relations with their
employees are satisfactory. The Company and its subsidiaries have complied
in all material respects with all applicable laws relating to the employment
of labor, including provisions thereof relating to wages, hours, equal
opportunity, collective bargaining, social security and other taxes.
(n) INTELLECTUAL PROPERTY RIGHTS. The Company and its subsidiaries
own or possess adequate rights or licenses to use all trademarks, trade
names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their
respective businesses as now conducted. Except as set forth on SCHEDULE
2(n), none of the Company's trademarks, trade names, service marks, service
mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, government authorizations, trade secrets or
other intellectual property rights have expired or terminated, or are
expected to expire or terminate in the near future. The Company and its
subsidiaries do not have any knowledge of any infringement by the Company or
its subsidiaries of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark
registrations, trade secret or other similar rights of others, or of any such
development of similar or identical trade secrets or technical information by
others and, except as set forth on SCHEDULE 2(n), there is no claim, action
or proceeding being made or brought against, or to the Company's knowledge,
being threatened against, the Company or its subsidiaries regarding
trademark, trade name, patents, patent rights, invention, copyright, license,
service names, service marks, service mark registrations, trade secret or
other infringement; and the Company and its subsidiaries are unaware of any
facts or circumstances which might give rise to any of the foregoing. The
Company
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and its subsidiaries have taken reasonable security measures to protect the
secrecy, confidentiality and value of all of their intellectual properties.
(o) ENVIRONMENTAL LAWS. The Company and its subsidiaries are (i) in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval.
(p) INSURANCE. The Company and each of its subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as are disclosed in SCHEDULE 2(p). Except as disclosed in
SCHEDULE 2(p), neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
(q) COMPLIANCE WITH LAW. Except for possible violations disclosed in
SCHEDULE 2(q) (to the extent that such violations have occurred), the business
of the Company and its subsidiaries has been and is presently being conducted so
as to comply in all material respects with all applicable federal, state, local
and foreign governmental laws, rules, regulations and ordinances. Except as
disclosed in SCHEDULE 2(q), the Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.
(r) INTERNAL CONTROLS. Except as disclosed in SCHEDULE 2(r), the
Company maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization, (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences and (v) transactions are recorded as
necessary to permit proper accounting to the Company's film distributors
pursuant to the agreements relating thereto. The Company has in existence and
has had in existence at all times since the Company has been subject to the 1934
Act (i) a policy complying with the requirements of Section 21A(b)(1)(B) of the
1934 Act and (ii) a policy complying with the requirements of the Civil Rights
Act of 1964, Title VII, 42 U.S.C. Section 2000e ET SEQ. and the California Fair
Employment and Housing Act, Cal. Gov't Code, Section 12,900 ET SEQ.
(s) AGREEMENTS. Attached as SCHEDULE 2(s) is a list which includes
each agreement, lease and instrument (including any and all amendments thereto)
to which the Company and its subsidiaries is a party as of the date hereof and
which is or, immediately following the consummation of the transactions
contemplated by this Agreement, will be, material to the business, condition or
results of operations of the Company, on a consolidated basis. Except as
disclosed in SCHEDULE 2(s), each agreement and instrument listed therein is in
full force and effect and constitutes a legal, valid and binding obligation of
the Company and relevant subsidiary, and the Company or the relevant subsidiary
is not in default or breach in any material respect of (with or without the
giving of notice or the passage of time) any such material agreement or
instrument. To the best of Company's knowledge, no other person is in default
or in breach of (with or without the giving of notice of the passage of time)
any such agreement or instrument. The Company has furnished to Buyer true and
correct copies of all items set forth on SCHEDULE 2(s).
(t) TAX STATUS. Except as set forth on SCHEDULE 2(t), the Company
and each of its subsidiaries has timely made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject and has timely paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply. There are no
unpaid taxes in any material amount claimed to be due by the taxing authority of
any jurisdiction, and the officers of the Company know of no basis for any such
claim. No audit or other administrative proceeding or court proceeding is
presently
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pending with respect to any taxes or tax returns of the Company or its
subsidiaries, and, to the knowledge of the Company, no such audit or
proceeding is threatened.
(u) CERTAIN TRANSACTIONS. Except as set forth on SCHEDULE 2(u), none
of the officers, directors, or employees of the Company is presently a party to
any transaction with the Company or any of its subsidiaries (other than for
services as employees, officers and directors, all of which have been disclosed
on SCHEDULE 2(s)), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner. The Company has furnished to Buyer true and correct copies
of all items set forth on SCHEDULE 2(u).
(v) Intentionally omitted.
(w) REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The
registration statement (including any amendments or supplements thereto, the
"REGISTRATION STATEMENT"), pursuant to which the Warrants, the Shares, Warrant
Shares, Conversion Shares and/or Adjustment Shares will be registered with the
SEC shall not, at the time the Registration Statement is filed with the SEC and
at the time it becomes effective under the 1933 Act, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements included therein not misleading. The proxy
statement required in connection with the transactions contemplated by this
Agreement to be sent to the stockholders of the Company in connection with the
meeting of stockholders to be called to approve the Amendment (the
"STOCKHOLDERS' MEETING") (such proxy statement as amended or supplemented is
referred to herein as the "PROXY STATEMENT") shall not, on the date the Proxy
Statement is first mailed to the Company's stockholders, at the time of the
Stockholders' Meeting and at the time of Closing, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading, or omit to
state any material affect necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Stockholders'
Meeting which has become false or misleading. The Proxy Statement will comply
as to form in all material respects with the provisions of the 1934 Act and the
rules and regulations thereunder. If at any time prior to the Closing any event
relating to the Company, its subsidiaries, or any of their respective
affiliates, officers or directors should be discovered by the Company which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, the Company will promptly inform Buyer and
Lender.
(x) STOCKHOLDER VOTE. Except as disclosed in SCHEDULE 2(x), no
officer or director of the Company or any of its subsidiaries and no member of
the management of Company has any actual knowledge that any stockholder of the
Company currently intends not to vote to approve of this Agreement and the
transactions contemplated hereby (including approval of the Amendment).
(y) ILLEGAL PAYMENTS. Neither the Company nor any of its subsidiaries
has made or committed to make any payments for illegal political contributions
or made any bribes, kickback payments or other similar illegal payments to any
person or entity.
(z) EMPLOYEE BENEFIT PLANS. Except as set forth in SCHEDULE 2(z),
neither the Company nor any Plan Affiliate (as hereinafter defined) has
maintained, sponsored, adopted, made contributions to or obligated itself to
make contributions to or to pay any benefits or grant rights under or with
respect to any "EMPLOYEE PENSION BENEFIT PLAN" (as defined in Section 3(2) of
ERISA, as hereinafter defined), "EMPLOYEE WELFARE BENEFIT PLAN" (as defined
in Section 3(1) of ERISA), "MULTI-EMPLOYER PLAN" (as defined in Section 3(37)
of ERISA), plan of deferred compensation, medical plan, life insurance plan,
long-term disability plan, dental plan or other plan providing for the
welfare of any of the Company or its subsidiary's employees or former
employees or beneficiaries thereof, personnel policy (including, but not
limited to, vacation time, holiday pay, bonus programs, moving expense,
reimbursement programs and sick leave) excess benefit plan, bonus or
incentive plan (including, but not limited to, stock options, restricted
stock, stock bonus and deferred bonus plans), salary reduction agreement,
change-of-control agreement, employment agreement, consulting agreement or
any other benefit, program or contract (collectively, "EMPLOYEE BENEFIT
PLANS"), whether or not written or pursuant to a collective bargaining
agreement, which could give rise to or result in the Company or such Plan
Affiliate having any debt, liability, claim or obligation of any kind or
nature, whether accrued, absolute, contingent, direct, indirect, known or
unknown, perfected or inchoate or otherwise and whether or not due or to
become due. Correct and complete copies of all Employee Benefit Plans
previously have been furnished to the Buyer. The Employee Benefit Plans are
in substantial compliance with governing documents and agreements and with
applicable laws. As used herein, "ERISA" shall mean the Employee Retirement
Income Security Act of 1974, as amended. As used herein, with respect to any
person (the "FIRST PERSON"), "PLAN AFFILIATE"
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shall mean any other person or entity with whom the First Person constitutes
or has constituted all or part of a controlled group, or which would be
treated with the First Person as under common control or whose employees
would be treated or have been treated as employed by the First Person, under
Section 414 of the Internal Revenue Code of 1986, as amended, and any
regulations, administrative rulings and case law interpreting the foregoing.
(aa) NO MISREPRESENTATION. None of the representations and warranties
of the Company set forth in this Agreement, in any of the certificates,
schedules, lists, documents, exhibits, or other instruments delivered, or to be
delivered, to Buyer or Lender as contemplated by any provision hereof, contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements contained herein or therein not misleading. To
the knowledge of the Company, there is no material fact which has not been
disclosed to Buyer which materially adversely affects or could reasonably be
anticipated to materially adversely affect its business or the Company's ability
to consummate the transactions contemplated hereby.
(ab) BOOKS AND RECORDS. The books of account, minute books, stock
record books, and other records of the Company and each of its subsidiaries,
respectively, all of which have been made available to the Buyer and Lender, are
complete and correct in all material respects and have been maintained in
accordance with sound business practices. Without limiting the generality of
the foregoing, the minute books of the Company and each of its subsidiaries,
respectively, contain complete and accurate records of all meetings held of, and
corporate action taken by, the stockholders, the boards of directors, and
committees of the boards of directors of the Company and each of its
subsidiaries, respectively, and no meeting of any such stockholders, board of
directors, or committee has been held for which minutes have not been prepared
and are not contained in such minute books. At the Closing, all of those books
and records will be in the possession of the Company and each of its
subsidiaries, respectively.
(ac) CONDITION AND SUFFICIENCY OF ASSETS. To the knowledge of the
Company, the equipment and other tangible personal property used by the Company
and each of subsidiaries, respectively, in the conduct of their respective
business, and the heating, ventilation, and air-conditioning systems at each of
the Company's and each of its subsidiaries', respectively, facilities, are in
good operating condition and repair (ordinary wear and tear excepted), are
adequate for the uses to which they are being put, are not in need of
maintenance or repairs except for ordinary, routine maintenance and repairs that
are not material in nature or cost, and are sufficient for the continued conduct
of the their respective businesses immediately after the Closing in
substantially the same manner as conducted prior to the Closing.
(ad) RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement,
judgment, injunction, order or decree binding upon the Company or its
subsidiaries or their properties (including, without limitation, their
intellectual properties) which has or could reasonably be expected to have the
effect of prohibiting or materially impairing any material current or currently
proposed business practice of the Company, any acquisition of material property
by the Company or the conduct of business by the Company as currently conducted
or as proposed to be conducted by the Company.
(ae) TITLE. The Company and its subsidiaries have good, valid and
marketable title to, or, in the case of leased properties and assets, valid
leasehold interests in, all of its properties and assets (whether real, personal
or mixed, and whether tangible or intangible), necessary for the conduct of its
business, free and clear of any liens or encumbrances except as reflected in
SCHEDULE 2(ae) and except for liens for taxes not yet due and payable.
(af) BROKERS' AND FINDERS' FEES. Except as disclosed in
SCHEDULE 2(af), the Company has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders' fees or agents' commissions
or any similar charges in connection with this Agreement or any transaction
contemplated hereby.
(ag) BANK ACCOUNTS. SCHEDULE 2(ag) attached hereto contains a
complete and accurate list of each bank at which the Company and each of its
subsidiaries, respectively, has an account or safe deposit box, the number of
each such account or box, and the names of all persons authorized to draw on
such accounts or to have access to such boxes.
(ah) CHANGE OF CONTROL PAYMENTS. Except as set forth on SCHEDULE
2(ah), neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will (i) result in any payment
(including, without limitation, severance, unemployment compensation, golden
parachute, bonus or otherwise) becoming due to any director, officer or employee
of the Company or any of its subsidiaries from the Company or any of its
subsidiaries, under any Employee Benefit Plan or otherwise, (ii) materially
increase any benefits otherwise payable under any Employee Benefit Plan, or
(iii) result in the acceleration of the time of payment or vesting of any such
benefits.
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(ai) BOARD APPROVAL. The Board of Directors of the Company has, on or
prior to the date hereof, unanimously approved this Agreement and the issuance
of the Note, the Shares, the Warrants, the Warrant Shares, the Conversion Shares
and the Adjustment Shares and all of the transactions contemplated hereby or
thereby. Prior to the execution hereof, the Company has delivered to Buyer and
Lender a complete and accurate copy of resolutions of the Board of Directors
relating to the approval of this Agreement and the transactions contemplated
hereby, certified by the Secretary of the Company.
3. LENDER'S AND BUYER'S REPRESENTATIONS AND WARRANTIES.
Each of Buyer and Lender represents and warrants to the Company as
follows, as of the date hereof and as of the Closing Date:
(a) ORGANIZATION AND POWER. Lender is a limited liability company
duly organized, validly existing and in good standing under the laws of
Delaware, and has requisite power to own its properties and to carry on its
business as now being conducted. Buyer is a limited partnership duly organized,
validly existing and in good standing under the laws of Delaware, and has the
requisite power to own its properties and to carry on its business as now being
conducted. SCHEDULE 3(a) contains a complete and accurate list of each member
and "controlling person" of Buyer and each member and "controlling person" of
Lender.
(b) AUTHORIZATION; ENFORCEMENT. This Agreement has been duly and
validly authorized, executed and delivered on behalf of each of Buyer and Lender
and is a valid and binding agreement of each of Buyer and Lender enforceable in
accordance with its terms, subject as to enforceability to general principles of
equity and to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors' rights and remedies.
(c) REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS. The
information supplied by Buyer and Lender for inclusion in the Registration
Statement, as set forth in any writing supplied by Buyer, Lender or any of their
respective legal counsel for the purpose of inclusion in the Registration
Statement, shall not at the time the Registration Statement is filed with the
SEC and at the time it becomes effective under the Securities Act of 1933, as
amended (the "1933 ACT"), 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 such statements therein, in light of the circumstances under which
they are made, not misleading. The information supplied by or concerning Buyer
or Lender or their respective agents or representatives for inclusion in the
Proxy Statement, as set forth in any writing supplied by Buyer, Lender or any of
their respective legal counsel for the purpose of inclusion in the Proxy
Statement, shall not, on the date the Proxy Statement is first mailed to the
Company's stockholders, at the time of the Stockholders' Meeting and on the
Closing Date, 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
such statements therein, in light of the circumstances under which they are
made, not false or misleading; or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Stockholders' Meeting which has become false or
misleading. If at any time prior to the Closing Date any event relating to the
Buyer, Lender or any of their respective affiliates, officers or directors
should be discovered by the Buyer or Lender, which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement,
the Buyer or Lender shall promptly inform the Company. Notwithstanding the
foregoing, neither the Buyer nor Lender makes any representation or warranty
with respect to any information supplied by or concerning the Company or its
subsidiaries or any of their respective officers, directors or affiliates which
is contained in any of the foregoing documents.
(d) NO CONFLICTS. The execution, delivery and performance of this
Agreement by the Buyer and the Lender and the consummation by the Buyer and
Lender of the transactions contemplated hereby (including the acceptance of the
Note and the Warrants by Lender and the conversion and/or exercise thereof) will
not (i) result in a violation of the respective Certificate of Formation or
Operating Agreement of the Buyer and the Lender or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument to which the Buyer, Lender or any of their respective subsidiaries is
a party, or, assuming compliance with the conditions set forth in this
Agreement, result in a violation of any law, rule, regulation, order, judgment
or decree applicable to the Buyer, Lender or any of their respective
subsidiaries or by which any property or asset of the Buyer, Lender or any of
their respective subsidiaries is bound or affected. Neither the Buyer, Lender
nor their respective subsidiaries is in violation of any term of or in default
under their respective charter documents, or any material contract, agreement,
mortgage, indebtedness, indenture, instrument, judgment, decree or order or any
statute, rule or regulation applicable to the Buyer, Lender or their respective
subsidiaries. The business of the Buyer, Lender and their respective
subsidiaries is not being conducted, and shall not be conducted, in violation of
any law, ordinance, regulation of any governmental entity.
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(e) NO CONSENT. No consent, approval, order or authorization of, or
registration, declaration or filing with, any government authority or
instrumentality or any private third party is required by or with respect to the
Buyer or Lender in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby, except (i) the HSR
Filing, if any, (ii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state security laws and (iii) the receipt of the Usury Permit.
(f) NO MISREPRESENTATION. None of the representations and warranties
of the Buyer or Lender set forth in this Agreement, in any of the certificates,
schedules, lists, documents, exhibits, or other instruments delivered, or to be
delivered, to the Company, if any, as contemplated by any provision hereof,
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained herein or therein not
misleading.
(g) BROKERS' AND FINDERS' FEES. Except as disclosed in SCHEDULE
2(af), neither the Buyer nor Lender has incurred, nor will either of them
incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
(h) INVESTMENT REPRESENTATIONS. Each of Lender and Buyer hereby
represents to the Company that (i) it is acquiring the Note, the Warrants and
the Shares, as applicable, purchased hereunder or acquired pursuant hereto for
its own account with the present intention of holding such securities for
purposes of investment, and that it has no intention of selling such securities
in a public distribution in violation of the federal securities laws or any
applicable state securities laws; and (ii) each of Lender and Buyer is an
"ACCREDITED INVESTOR" as such term is defined under Rule 501 of the Securities
Act of 1933, as amended, is able to bear the economic risk of an investment in
the Note, the Warrants and the Shares being acquired by it, can afford to
sustain a total loss on such investment and has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of the proposed investment, and has had the opportunity to ask questions
and receive such answers and information as has been requested by Lender and
Buyer in order to make its investment decision.
(i) FINANCING AVAILABLE. Buyer has sufficient available capital or
binding commitments for such capital to enable it to fulfill its obligations
under this Agreement and to consummate the transactions contemplated hereby.
(j) NO NASD MEMBERSHIP. Except as set forth on SCHEDULE 3(a),
neither Buyer, Lender, any of their respective associates or affiliates, nor any
person appointed as a director pursuant to Section 6(r) of this Agreement, are
(i) members of the National Association of Securities Dealers, Inc. (the "NASD")
or persons associated with a member of the NASD, (ii) owners of stock or other
securities of any NASD member (other than securities purchased in the open
market), or (iii) lenders to any NASD member. For purposes of this subjection
(j), the terms "member" and "person associated with a member" shall have the
meanings ascribed to them in the By-Laws of the NASD.
(k) PRIOR LITIGATION OR VIOLATIONS OF LAW. Neither Buyer, Lender,
any person appointed as a director pursuant to Section 6(r) of this Agreement,
nor any partner or member thereof nor any affiliate of any such person (i) has
been convicted in a criminal proceeding during the past five years, or is the
named defendant subject to a criminal proceeding which is presently pending,
(ii) was the subject of any court order, judgment or decree, not subsequently
reversed, suspended or vacated, which permanently or temporarily enjoined or
otherwise limited such person from any of the following activities: (A) acting
as a futures commission merchant, introducing broker, commodity trading advisor,
commodity pool operator, floor broker, leverage transaction merchant, any other
person regulated by the Commodity Futures Trading Commission, or an associated
person of any of the foregoing, or as an investment adviser, underwriter, broker
or dealer in securities, or as an affiliated person, director or employee of any
investment company, bank, savings and loan association or insurance company, or
engaging in or continuing any conduct or practice in connection with such
activity, (B) engaging in any type of business practice, or (C) engaging in any
activity in connection with the purchase or sale of any security of commodity or
in connection with any violation of U.S. or foreign Federal or State securities
laws or U.S. or foreign Federal commodities laws, (iii) has, during the past
five years, been the subject of any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any U.S. or foreign Federal or State
authority barring, suspending or otherwise limiting for more than 60 days such
person's right to engage in any of the activities described in (ii) above or
such person's right to be associated with persons engaged in any such
activities, (iv) has, during the past five years, been found by a court in a
civil action or by the SEC or any similar non-U.S. regulatory authority to have
violated any U.S. or non-U.S. Federal or State securities law and such judgment
or finding has not subsequently been reversed, suspended or vacated, (v) has,
during the past five years, been found by a court in a civil action or by the
Commodity Futures Trading Commission
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to have violated any Federal commodities law, and such judgment or finding
has not been subsequently reversed, suspended or vacated, (vi) is the subject
of a pending indictment or a conviction within the past ten years of any
crime or offense involving the purchase or sale of a security or arising out
of such person's conduct as an underwriter, broker, dealer or investment
advisor, (vii) is the subject of a pending proceeding for, or the entry
during the past ten years of, a temporary or permanent injunction enjoining
or restraining any such person with respect to conduct or practices in
connection with the purchase or sale of securities, or involving the making
of a false filing with the SEC or any state, or arising out of that person's
conduct as an underwriter, broker, dealer or investment advisor, (viii) is
the subject of an SEC or other non-U.S. regulatory administrative order still
in effect imposing sanctions against such person in connection with the SEC's
or any non-U.S. regulatory agency's authority to regulate the activities of
broker-dealers and investment advisors or the naming of those persons as the
cause of such an order, (ix) is the subject of a postal fraud order entered
within the past five years or to a restraining order or preliminary
injunction relating to postal fraud orders, (x) has been suspended or
expelled from membership in a Canadian or U.S. securities exchange or from a
Canadian or U.S. association of securities dealers because of conduct
inconsistent with just and equitable principles of trade or (xi) is the
subject of any currently effective state administrative enforcement order by
any state administrator within the past five years in which fraud or deceit,
including, but not limited to misrepresentations, was found.
4. ADDITIONAL AGREEMENTS.
(a) BEST EFFORTS AND FURTHER ASSURANCES. Prior to the Closing, each
of the parties to this Agreement shall each use its best efforts to effectuate
the transactions contemplated hereby and to fulfill and cause to be fulfilled
the conditions to Closing under this Agreement (including resolution of any
litigation prompted hereby). Prior to and after the Closing, each party hereto,
at the reasonable request of another party hereto, shall execute and deliver
such other instruments and do and perform such other acts and things as may be
necessary or desirable for effecting completely the consummation of the
transactions contemplated hereby.
(b) USE OF PROCEEDS. The Company will use the proceeds of the Bridge
Loan as set forth on EXHIBIT 4(b). The Company will use the proceeds from the
sale of the Shares, the First Purchase Warrant and the Second Purchase Warrant
to repay, immediately upon Closing, the Bridge Loan in full; to make certain
capital expenditures related to the development and expansion of certain
theaters; to retire certain indebtedness; for working capital; and for general
corporate purposes.
(c) RESERVATION OF WARRANT SHARES, CONVERSION SHARES AND ADJUSTMENT
SHARES. Prior to the Closing, the Company shall use its best efforts to obtain
shareholder approval to increase the authorized shares of Common Stock and shall
thereafter take all action necessary to at all times have authorized, and
reserved for the purpose of issuance, (i) no less than the number of shares of
Common Stock needed to provide for the issuance of the Shares, the Warrant
Shares and Conversion Shares, and (ii) no less than 10,000,000 shares of Common
Stock to provide for the issuance of the Adjustment Shares.
(d) PROXY STATEMENT/REGISTRATION STATEMENT. As promptly as
practicable after the execution of this Agreement, the Company shall prepare,
and file with the SEC, the Proxy Statement, and the Company shall prepare and
file with the SEC the Registration Statement; provided that it shall not be a
condition to Closing that the Registration Statement shall have been filed prior
to the Closing Date. The Company shall use its best efforts to have the
Registration Statement declared effective as soon after the Closing Date as
practicable and to keep such Registration Statement effective and current for a
period of at least three (3) years. The Proxy Statement shall also include the
recommendations of the Board of Directors of the Company in favor of the
transactions contemplated by this Agreement which shall not be withdrawn,
modified or withheld except in compliance with the fiduciary duties of the
Company's Board of Directors under applicable law.
(e) MEETING OF STOCKHOLDERS. Promptly after the date hereof, the
Company shall take all action necessary in accordance with California law and
the Articles of Incorporation and Bylaws to convene the Stockholders' Meeting to
be held as promptly as practicable, which Stockholders' Meeting shall occur no
later than December 7, 1997. The Company shall prepare and submit to its
stockholders the Proxy Statement in connection with the Stockholders' Meeting in
accordance with applicable laws and SEC rules and regulations. If the SEC shall
make written comments to the Proxy Statement, and by reason of such comments the
Company is delayed in releasing a final Proxy Statement for a period in excess
of ten business days (a "DELAYED PROXY"), the date for stockholder approval
shall be extended to January 6, 1998 and the date for the Closing of the
Purchase shall likewise be extended.
(f) LISTING. Prior to the Closing, the Company's Common Stock shall
be listed on Nasdaq and the issuance of the Shares, Warrant Shares, Conversion
Shares and Adjustment Shares shall be listed on Nasdaq
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upon the effectiveness of the Registration Statement. Subsequent to the
Closing Date, the Company shall maintain the Common Stock's authorization for
quotation on Nasdaq. The Company shall promptly provide to Buyer and Lender
copies of any notices it receives from Nasdaq regarding the continued
eligibility of the Common Stock for listing on Nasdaq. The Company shall pay
all fees and expenses in connection with satisfying its obligations under
this SECTION 4(f).
(g) TRANSACTIONS WITH AFFILIATES. So long as Buyer owns shares of
Common Stock with an aggregate market value equal to or greater than $50,000,
the Company shall not, and shall cause each of its subsidiaries not to, enter
into, amend, modify or supplement, or permit any subsidiary to enter into,
amend, modify or supplement, any agreement, transaction, commitment or
arrangement with any of its or any subsidiary's officers, directors, person
who were officers or directors at any time during the previous two years,
stockholders who beneficially own 5% or more of the Common Stock, or
affiliates or with any individual related by blood, marriage or adoption to
any such individual or with any entity in which any such entity or individual
owns a 5% or more beneficial interest (each a "RELATED PARTY"), except for
(i) employment and other arrangements and benefit programs as set forth in
SCHEDULES 2(s) and 2(z), (ii) any agreement, transaction, commitment or
arrangement on an arms-length basis on terms no less favorable than terms
which would have been obtainable from a person other than such Related Party,
or (iii) any agreement, transaction, commitment or arrangement which is
approved by a majority of the disinterested directors of the Company.
Notwithstanding the foregoing, the Company agrees that it will, prior to
Closing, terminate, without damage or penalty to the Company, any agreement
with its officers or directors which is not subject to subparagraph (i) above
and involve the payment of money. For purposes hereof, any director who is
also an officer of the Company or any subsidiary of the Company shall not be
a disinterested director with respect to any such agreement, transaction,
commitment or arrangement. "AFFILIATE" for purposes hereof means, with
respect to any person or entity, another person or entity that, directly or
indirectly, (i) has a 5% or more equity interest in that person or entity,
(ii) has 5% or more common ownership with that person or entity, (iii)
controls that person or entity, or (iv) shares common control with that
person or entity. "CONTROL" or "CONTROLS" for purposes hereof means that a
person or entity has the power, direct or indirect, to conduct or govern the
policies of another person or entity.
(h) CONDUCT OF THE BUSINESS. During the period from the date of this
Agreement and continuing until the Closing, the Company agrees that:
(i) The Company shall not issue, sell, transfer or
otherwise dispose of or in any way encumber any shares of its capital stock
(other than shares issuable upon exercise of existing options or warrants) or
take any action inconsistent with the approval and consummation of this
Agreement or the transactions contemplated hereby.
(ii) The Company and its subsidiaries shall carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and use all reasonable
efforts to preserve intact its present business organization, keep available
the services of their present officers and employees and preserve their
relationships with clients, customers, suppliers and others having business
dealings with them, to the end that their goodwill and ongoing businesses
shall not be impaired in any material respect at the Closing.
(iii) The Company shall not undertake any action that
will result in a breach, nor will it omit to take any action required in
order to avoid a breach, of its representations, warranties and covenants
hereunder.
(iv) The Company shall promptly advise Buyer and Lender
orally and in writing of any change or event having, or which, insofar as can
reasonably be foreseen, could have, a material adverse effect on the Company.
The Company shall promptly make available copies of all filings made with any
state, federal or local governmental entity in connection with this Agreement
and the transactions contemplated hereby.
(i) NO SOLICITATION.
(i) The Company shall immediately cease and cause to be
terminated any existing discussions or negotiations with any persons
conducted heretofore with respect to any merger, financing (other than any
financing in the ordinary course of business consistent with previous
practices not to exceed $100,000 in the aggregate and not involving the
issuance of securities convertible into or exchangeable or exercisable for
equity securities of the Company), consolidation, sale of substantial assets,
sale of shares of capital stock (including without limitation by way of a
tender offer) or similar transaction involving the Company or any of its
subsidiaries, as the case may be (any of the foregoing inquiries or proposals
other than the transactions contemplated hereby arising prior to the date
hereof (whether initiated before or after the date hereof being referred to
as an "ACQUISITION PROPOSAL").
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Except for negotiations prior to the date hereof between the Company and
Pacific Concessions, Inc. with respect to certain bridge financing of which
Buyer is aware, from June 20, 1997 through the date hereof, and from the date
hereof until the Closing Date or termination of this Agreement pursuant to
the provisions of SECTION 8(k)(i) hereof (the "EXCLUSIVITY PERIOD"), the
Company has not and shall not, directly or indirectly, through any of its
officers, directors, employees, representatives or agents, initiate, solicit
or encourage the initiation of, any inquiries or proposals regarding any
Acquisition Proposal. Nothing contained in this SECTION 4(i) shall prevent
the Board of Directors of the Company from considering, negotiating,
approving and recommending to the stockholders of the Company a bona fide
Acquisition Proposal, provided that the Board of Directors determines in good
faith (upon advice of independent counsel) that it is required to do so in
order to discharge properly its fiduciary duties, and provided further that
any such action by the Board of Directors will give rise to the obligation of
the Company to pay the Break Fee (as hereinafter defined) in the event the
Company completes a transaction with a party other than Buyer as a result of
such Acquisition Proposal.
(ii) The Company shall immediately notify Buyer after
receipt of any Acquisition Proposal, or any modification of or amendment to
any Acquisition Proposal, or any request for non-public information relating
to Company in connection with an Acquisition Proposal or for access to the
properties, books or records of the Company by any person or entity that
informs the Board of Directors of the Company that it is considering making,
or has made, an Acquisition Proposal.
(iii) The Company shall ensure that its officers,
directors and employees and any investment banker or any other representative
or adviser retained by it are aware of the restrictions imposed by this
SECTION 4(i).
(iv) The Company shall pay to Buyer a fee (the
"NON-CLOSING BREAK FEE") of $600,000 within ten (10) days of the first to
occur of any of the following (provided that the Closing has not occurred),
which Non-Closing Break Fee is the Buyer's sole remedy with respect to the
following:
(1) if the Closing does not occur other than as a
result of the Buyer's breach of this Agreement.
(v) The Company shall pay to Buyer a fee (the
"EXCLUSIVITY BREAK FEE" and, together with the Non-Closing Break Fee, the
"BREAK FEE") of $800,000 within ten (10) days of the following, which
Exclusivity Break Fee is the Buyer's sole remedy with respect to the
following:
(1) if this Agreement is terminated as a result of the
Company's breach of any of the provisions of this SECTION 4(i); or
(2) if on or before the one (1) year anniversary of
the date hereof, the Company consummates a transaction pursuant to an
Acquisition Proposal arising prior to or during the Exclusivity Period with a
party other than Buyer.
(vi) Notwithstanding anything to the contrary contained
in (iv) or (v) above, (1) in no event shall Buyer be entitled to receive both
the Non-Closing Break Fee and the Exclusivity Break Fee, and (2) in addition
to any payment of the Break Fee, nothing in this SECTION 4(i) shall limit (A)
Buyer's right to seek indemnification under SECTION 7 of this Agreement from
the Company with respect to claims made against Buyer by third parties (other
than third parties engaged or retained by Buyer) or (B) Lender's right to
seek indemnification under SECTION 7 of this Agreement from the Company due
to a breach by the Company of the Note, the First Bridge Warrant, the Second
Bridge Warrant or the Signing Warrant or otherwise in connection with the
Bridge Loan. The parties acknowledge that the Break Fee represents the
parties best estimate of what the Buyer's damages will be in the event of the
Company's breach of the provisions of this SECTION 4(i) but that such damages
will be difficult or impossible to determine at such time and that therefore,
subject to the limitations in this SUBSECTION 4(i)(vi), the Break Fee shall
constitute liquidated damages.
(j) ACCESS. Prior to the Closing, the Company shall afford to Buyer,
Lender, their respective counsel, accountants and other representatives, free
and full access to all of the offices, facilities, properties, equipment,
inventories, books, contracts, commitments, records, customer information, list
of employees and records, and other relevant records of the Company during
normal business hours and shall furnish such persons with all information
(including financial and operating data) concerning the business, assets and
financial condition of the Company as Buyer shall reasonably request, and the
Company shall assist Buyer, Lender, their respective counsel, accountants and
representatives, in their examination of such materials.
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(k) CONFIDENTIALITY. Buyer and Lender agree that any information or
material that is obtained from the Company will be used solely by Buyer and
Lender or their respective representatives for the purposes of evaluating the
Company and its business in connection with the transactions contemplated
hereby. Buyer and Lender agree that they will not disclose any information
which it receives from the Company to any third party, except (i) as required by
applicable law or legal process, (ii) as may be consented to in writing by the
Company, (iii) as may be disclosed by Buyer and Lender to their respective
representatives when such representative needs to know such information for the
purposes of preparing for and evaluating the transactions contemplated hereby,
or (iv) after such information has become or is generally available or has been
disclosed to Buyer or Lender from sources other than the Company and not subject
to a confidentiality agreement. Buyer and Lender agree that if the transaction
contemplated hereby is not consummated for any reason, Buyer and Lender shall
return or destroy all materials received from the Company or to the party
furnishing such material.
(l) LEGAL REQUIREMENTS. Prior to the Closing, each of Buyer and
the Company shall take all reasonable actions necessary or desirable to
comply promptly with all legal requirements which may be imposed on them with
respect to the consummation of the transactions contemplated by this
Agreement (including furnishing all information required under the HSR Act
and in connection with approvals of or filings with any governmental
authority or instrumentality, and prompt resolution of any litigation
prompted hereby) and will promptly cooperate with and furnish information to
any party hereto necessary in connection with such requirements imposed upon
any of them or their respective subsidiaries in connection with the
consummation of the transactions contemplated by this Agreement, and will
take all reasonable actions necessary to obtain (and will cooperate with the
other parties hereto in obtaining) any consent, approval, order or
authorization of, or any registration, declaration or filing with, any
governmental authority or instrumentality or other public or private third
party required to be obtained or made in connection with the taking of any
action contemplated by this Agreement.
(m) AMENDMENT TO ARTICLES OF INCORPORATION. At or prior to the
Closing, the Company shall adopt and file with the Secretary of State of
California an amendment to its Articles of Incorporation, increasing its
authorized shares of Common Stock to 60,000,000 shares, in form acceptable to
Buyer and Lender (the "AMENDMENT").
(n) EXPENSES. Subject to the provisions of SECTION 8(k)(ii), all
fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, whether or not the Closing occurs; PROVIDED, HOWEVER, that prior to
the date hereof Buyer had received from the Company, as partial compensation
for such fees and expenses, 75,000 shares of newly-issued Common Stock.
(o) BLUE SKY LAWS. The Company shall take such steps as may be
necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable to the issuance of the Note, the Shares,
the Warrants, the Warrant Shares, the Conversion Shares and the Adjustment
Shares pursuant hereto. Buyer and Lender shall, at the Company's expense, use
its commercially reasonable efforts to assist the Company as may be necessary
to comply with securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of the Shares, the Warrants, the
Warrant Shares, the Conversion Shares and the Adjustment Shares pursuant
hereto.
(p) Intentionally omitted.
(q) Intentionally omitted.
(r) REDEEMABLE WARRANTS. The Company shall not initiate any actions
with respect to its existing redeemable warrants without the prior written
consent of the Buyer.
(s) PROHIBITED PAYMENTS. Prior to the Closing, except for payments
made in accordance with SCHEDULE 4(s), the Company shall obtain the written
consent of the Buyer prior to making any payment, for indebtedness or otherwise,
in excess of $5,000. Any consent of Buyer required by this Section 4(s) shall
not be unreasonably withheld and any decision by Buyer regarding such consent
shall be made by the close of business on the tenth (10th) business day
following the day on which the Company has received written confirmation that
delivery of such request has been received by Buyer. Failure of Buyer to
approve or deny a request within such time period (provided the notice
provisions have been complied with) shall automatically be deemed an approval of
such request.
(t) DIRECTOR EXPENSES. After the Closing, the Company shall reimburse
any director designated by Buyer, as set forth in SECTION 6(r) hereof or
otherwise, for all reasonable expenses incurred by such directors in executing
their duties as members of the board of directors of the Company, including,
with limitation, travel expenses (provided that any first or business class air
travel must be approved by the Company in advance).
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(u) REQUIRED CONSENTS. Prior to the Closing, the Company shall
exercise its commercially reasonable efforts in obtaining any consents or
waivers which the Buyer deems necessary, in its sole and absolute discretion,
for the consummation of the transactions contemplated hereby, including, without
limitation, as may be necessary so as not to result in a default of any material
contract or agreement.
(v) SEC DOCUMENTS. Prior to and after the Closing, the Company
shall, if requested by Buyer or Lender, amend its most recent SEC Documents, the
Proxy Statement and/or the Registration Statement to reflect such changes as
Buyer reasonably deems necessary or appropriate, to the extent such amendments
relate to items not in existence or not known as of the date hereof. In
addition, Buyer may suggest amendments to such documents, which the Company
shall consider in good faith, if such amendments relate to items in existence
and known as of the date hereof.
(w) ISSUANCE OF ADJUSTMENT SHARES.
(i) for purposes of this Agreement, each of the following terms
shall have the following meaning:
"LIABILITIES" shall mean existing liabilities of the Company
(whether or not contingent, whether or not liquidated in amount and whether
or not disclosed) in existence at the Closing other than liabilities
reflected on Exhibit 4(w). Liabilities include without limitation any
liability, damages, costs, losses or expense relating to, arising from or
incurred in connection with any cause of action based on actions or
omissions occurring prior to the Closing regardless of when such cause of
action may be asserted, and all expenditures for assets having a useful
life in excess of one year (whether such expenditure is to be made pursuant
to a contract in force at or before the time of Closing or, while not
contracted for, has been reflected in any budget approved by the Company's
board of directors or any committee thereof) to be used in the operations
of theaters at San Bernardino or Tijuana.
"EXPENSES" shall mean all expenses of the transactions
contemplated by this Agreement to be paid by the Company hereunder,
including, but not limited to, costs of the Registration Statement, the
Proxy Statement, the Stockholder Meeting, the listing of the Shares, the
Warrant Shares, the Conversion Shares and the Adjustment Shares on Nasdaq,
one-half of the HSR Filing fee, legal and accounting fees and expenses,
brokerage fees, the cost of a "fairness opinion" in excess of $50,000, and
the costs of termination of all of the Company's contemplated but not yet
operating sites other than San Bernardino, California and Tijuana, Mexico,
to the extent such costs and expenses exceed $25,000.
"OPERATING CASH FLOW" shall mean all cash flow from operations of
the Company and its subsidiaries, determined in accordance in GAAP, for the
period from August 31, 1997 through Closing, excluding any amounts of the
Bridge Loan proceeds used in the Company's operations during that time.
"THEATER OPERATING LOSSES" shall mean all negative operating cash
flow incurred in connection with the Company's operations in Tijuana,
Mexico and San Bernardino, California, including any costs of termination
of such operations, if any, from the Closing Date to the earlier to occur
of (i) with respect to each such operation, a sale by the Company of such
operation (whether individually or in connection with any other sale of
some or all of the assets or equity interests of the Company) and (ii) the
third anniversary of the Closing; provided that, Operating Losses shall be
measured only after the earlier of such events has occurred; and provided
further that, for purposes hereof, Operating Losses shall include any
losses on disposition of assets suffered by the Company in connection with
any sale of either such operation.
With respect to each of the above definitions, if an item is
included in one then it shall not be included in another.
(ii) Intentionally omitted.
(iii) Subsequent to the Closing, the Company shall issue to
Buyer, as set forth in subparagraph (iv) below, additional shares (the
"ADJUSTMENT SHARES") of Common Stock as consideration for the decreased value of
the Shares to account for (W) Liabilities, (X) any negative Operating Cash Flow,
(Y) Expenses incurred and paid after August 31, 1997 and (Z) Theater Operating
Losses (all amounts set forth items (W)-(Z) being collectively referred to as
the "POST-CLOSING ADJUSTMENT AMOUNT").
(iv) The number of Adjustment Shares issued shall be calculated
as the difference, if any, between (I) the quotient obtained by dividing (A)
$15,000,000 by (B) the difference between (t) $.848202 and (u) the
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quotient obtained by dividing (1) the amount of the Post-Closing Adjustment
Amount by (2) 8,019,182 (such SUBSECTION (B) shall in no event be less than
.01) and (II) 17,684,464. The determination of the Post-Closing Adjustment
Amount and the Adjustment Shares, if any, shall be made from time to time
(subject to the limitation with respect to Operating Losses set forth in the
definition thereof) by the Company upon the delivery of a written request (a
"Request") of the Buyer; provided that Buyer shall have the right to review
any such determination. Any such determination shall be made within five (5)
days of the delivery of the Request therefor and any delivery of Adjustment
Shares shall be made within ten (10) days after the determination of the
Adjustment Shares pursuant to a Request. The members of the Company's Board
of Directors that are not designated by Buyer pursuant to Section 6(r) hereof
shall make such determination. If Buyer and the Company do not agree on the
number of Adjustment Shares to be issued, each party shall, at the Company's
expense, mutually appoint Arthur Andersen & Company or another public
accounting firm mutually agreed to by Buyer and the Company (the "DESIGNATED
ACCOUNTANT") to resolve any disputes; provided that neither the Company,
Lender or Buyer or their respective affiliates shall have engaged such
accountants on any matters involving fees in excess of $100,000. The
Designated Accountant shall make the determination of the correct number of
Adjustment Shares within thirty (30) days of such Designated Accountant's
appointment.
(x) UNDISCLOSED EQUITY SECURITIES. In the event that, and whenever,
the representation contained in the fourth sentence of PARAGRAPH 2(c) hereof
proves to have been incorrect as of the Closing due to the existence as of the
Closing Date of securities of the kind described in CLAUSE (i) thereof, Buyer
shall be entitled to receive securities with terms identical to those whose
existence gives rise to such right in an amount such that, following issuance to
Buyer, Buyer shall have that number of shares or other units of such securities
that when divided by the sum of (A) the number of such shares or other units
whose existence gives rise to the adjustment in question and (B) the number of
shares or other units of such securities issued to Buyer, yields a percentage
equal to the percentage that the number of Shares equals to the total number of
shares of Common Stock outstanding following the Purchase of the Shares.
5. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL THE SHARES.
The obligation of the Company hereunder to issue and sell the Shares
and Purchase Warrant at the Closing (and the Adjustment Shares subsequent to the
Closing) is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion:
(a) Buyer shall have executed this Agreement and delivered the same
to the Company.
(b) Simultaneously with the Closing, Buyer shall have delivered to
the Company the Purchase Price by wire transfer of immediately available funds
pursuant to the wire instructions provided by the Company.
(c) The representations and warranties of the Buyer shall be true and
correct in all material respects; provided that, such representations and
warranties shall be considered true and correct in all material respects unless
all misrepresentations and breaches of warranty, taken in the aggregate, would
be deemed important (though not necessarily dispositive) by a reasonable,
prudent seller in making a decision whether or not to enter into an agreement to
sell specified securities of the Company, and provided further that in
determining the existence of any misrepresentation or breach of warranty any
qualification for materiality contained in the representation or warranty in
question shall be ignored, and Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by such
Buyer at or prior to the Closing Date. The Company shall have received a
certificate, executed by the general partner of the Buyer, dated as of the
Closing Date, to the foregoing effect and as to such other matters as may be
reasonably required by the Company.
(d) No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal or regulatory restraint or prohibition preventing the consummation of the
transactions contemplated hereby shall be in effect, so long as none of the
foregoing were initiated by the Company.
(e) Any applicable waiting period under the HSR Act shall have
expired or been terminated.
(f) Buyer shall have delivered to the Company a certificate
evidencing the organization and good standing of Buyer and each of its
subsidiaries in the state of such entity's state of organization issued by
the Secretary of State of the state of organization as of a date within ten
(10) days of the Closing, and similar certificates
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of good standing from each jurisdiction in which such entities are qualified
as foreign entities as of a date within ten (10) days of the Closing.
(g) Buyer shall have delivered to the Company certified copies of its
Certificate of Formation as in effect at the Closing.
(h) The Company's shareholders shall have duly approved the
Amendment, all in accordance with applicable laws and regulatory requirements.
(i) No statute, rule, regulation, executive order, decree,
injunction or restraining order shall have been enacted, promulgated or
enforced (and not repealed, superseded or otherwise made inapplicable) by any
court or governmental authority which prohibits the consummation of the
Purchase (each party agreeing, at the Company's expense, to use reasonable
best efforts to have any such order, decree or injunction lifted).
(j) All written consents, assignments, waivers or authorizations
("CONSENTS") other than governmental authorizations, that are required as a
result of the Purchase for the continuation in full force and effect of any
material contracts or leases of the Company shall have been obtained, other
than those Consents the failure of which to obtain would not have a material
adverse effect on the Company.
(k) There shall have been obtained any and all governmental
authorizations, permits, approvals and consents of securities or blue sky
commissions of any jurisdiction and of any other governmental body or agency,
that may reasonably be deemed necessary so that the consummation of the
Purchase will be in compliance with applicable laws, the failure to comply
with which would have a material adverse effect on the Company or would be
reasonably likely to subject the Company or any of its directors or officers
to substantial penalties or criminal liability.
(l) Since the date of this Agreement, there must not have been
commenced or threatened against the Company, or against any person or entity
affiliated with the Company, any action or proceeding brought by any entity
not affiliated with the Company (i) involving any challenge to, or seeking
damages or other relief in connection with, any of the transactions
contemplated by this Agreement, or (ii) that may have the effect of
preventing, delaying, making illegal, or otherwise interfering with any of
such transactions.
6. CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE.
The obligations of Buyer hereunder to purchase the Shares and the
Purchase Warrants at the Closing is subject to the satisfaction, at or before
the Closing Date, of each of the following conditions, provided that these
conditions are for Buyer's sole benefit and may be waived by such Buyer at
any time in its sole discretion:
(a) The Company shall have executed this Agreement, the Note and
the Warrants and delivered the same to Buyer or Lender, as applicable.
(b) Simultaneously with the Closing, the Company shall have
delivered to Buyer the Shares and the Purchase Warrant, each registered in
Buyer's name, or the name of its nominee, free and clear of any liens, taxes,
restrictions and charges.
(c) No proceeding having the effect of suspending the effectiveness
of the Proxy Statement shall have been initiated or threatened in writing by
the SEC. All requests for additional information on the part of the SEC
shall have been complied with to the reasonable satisfaction of Buyer.
(d) The Company's Common Stock shall be authorized for quotation on
Nasdaq and trading in the Common Stock shall not have been suspended by the
SEC or Nasdaq.
(e) The representations and warranties of the Company shall be true
and correct in all material respects; provided that, such representations and
warranties shall be considered true and correct in all material respects unless
all misrepresentations and breaches of warranty, taken in the aggregate, would
be deemed important (though not necessarily dispositive) by a reasonable,
prudent investor in making a decision whether or not to invest in the securities
of the Company, and provided further that in determining the existence of any
misrepresentation or breach of warranty any qualification for materiality
contained in the representation or warranty in question shall be ignored, and
the Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Closing Date. Buyer shall have received a certificate, executed by the
Chief
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Executive Officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably requested
by Buyer.
(f) Buyer shall have received the opinion of the Company's counsel,
dated as of the Closing Date, in substantially the form of EXHIBIT 6(f) and,
subject to Buyer's acceptance in its reasonable discretion, with such
qualifications, exceptions and limitations as are customary in opinions
delivered by seller's counsel under similar circumstances (provided that
exceptions accepted by Buyer in the Company's counsel's opinion delivered to
Lender in connection with the Bridge Loan shall be deemed accepted for
purposes hereof).
(g) This Agreement, and the issuance of the Note, the Shares, the
Warrants, the Warrant Shares, the Conversion Shares and the Adjustment Shares
and the other transactions contemplated hereby, shall have been approved and
authorized by the Company's Board of Directors and, to the extent required,
the Company's shareholders.
(h) The Company shall have delivered to Buyer the Certificate,
registered in Buyer's name, or the name of its nominee, fully paid and
non-assessable, free and clear of any liens, taxes, restrictions and charges.
(i) The Company shall have delivered a certificate evidencing the
incorporation and good standing of the Company and each of its subsidiaries
in the state of such corporation's state of incorporation issued by the
Secretary of State of the state of incorporation as of a date within ten (10)
days of the Closing, and similar certificates of good standing from each
jurisdiction in which such corporations are qualified as foreign corporations
as of a date within ten (10) days of the Closing.
(j) The Company shall have delivered certified copies of the
Articles of Incorporation and Bylaws, each as in effect at the Closing, and
certified copies of the certificates of incorporation and bylaws for each of
the Company's subsidiaries, each as in effect as of the Closing.
(k) The Company shall have delivered to Buyer such other documents
relating to the transactions contemplated by this Agreement as Buyer or its
counsel may reasonably request.
(l) Since the date of this Agreement, there must not have been
commenced or threatened against Buyer or Lender, or against any person or
entity affiliated with Buyer or Lender, any action or proceeding brought by
any entity not affiliated with Buyer or Lender (i) involving any challenge
to, or seeking damages or other relief in connection with, any of the
transactions contemplated by this Agreement, or (ii) that may have the effect
of preventing, delaying, making illegal, or otherwise interfering with any of
such transactions.
(m) Neither the consummation nor the performance of any of the
transactions contemplated by this Agreement by the Company will, directly or
indirectly (with or without notice of lapse of time), materially contravene,
or conflict with, or result in a material violation of, or cause Buyer or
Lender or any person or entity affiliated with Buyer or Lender to suffer any
material adverse consequence under, (i) any applicable legal requirement or
order, or (ii) any legal requirement or order that has been published,
introduced or otherwise formally proposed before any governmental entity or
instrumentality.
(n) No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal or regulatory restraint or prohibition preventing the
consummation of the transactions contemplated hereby shall be in effect nor
shall any other litigation be in effect against the Company pursuant to which
damages in excess of $500,000 are being sought.
(o) Any applicable waiting period under the HSR Act shall have
expired or been terminated.
(p) Buyer shall have received all written consents, assignments,
waivers, authorizations or other certificates, including, without limitation,
from the Company's lessors, reasonably deemed necessary by Buyer to provide
for the continuation in full force and effect of any and all material
contracts and leases of the Company and for the Company to consummate the
transactions contemplated hereby; PROVIDED, HOWEVER, that it shall not be a
condition to Closing that the Company obtain consents, waivers or
authorizations with respect to (i) defaults under material contracts or
leases that will be cured by application of the proceeds of the sale of the
Shares to which Buyer has consented prior to Closing, or (2) contracts that
will be terminated upon application of the proceeds of the sale of the Shares
to which Buyer has consented prior to Closing.
(q) The Company will demonstrate to the reasonable satisfaction of
Buyer that it can be released at a cost not to exceed $25,000 in the
aggregate to Buyer or Company from any obligations with respect to
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its currently or previously contemplated sites which have never been operated
other than San Bernardino, California and Tijuana, Mexico, without liability
or potential liability to the Company.
(r) Effective upon the Closing, four of the Company's seven directors
shall have been designated by Buyer and elected to the Board of Directors of the
Company, and the Company shall have delivered to Buyer resolutions of the
Company's shareholders (certified by an officer of the Company) evidencing such
election.
(s) The Company shall have delivered to Buyer a certified copy of the
Amendment, duly filed with the Secretary of State of California.
(t) Since August 31, 1997, no material adverse change shall have
occurred with respect to the Company or the operation of its business and no
event or circumstance occurring or existing prior to such time shall be
disclosed or discovered after the date hereof which would constitute a
material adverse change if it had occurred after June 30, 1997; PROVIDED that
payment of the items set forth on EXHIBIT 4(w) shall not be deemed to
constitute a basis for determining the existence of any such material adverse
change.
(u) Each of John Ellison, Jr., Russell O. Seheult and Jerry Willits
shall have waived (i) any and all rights of indemnification any of them have
or may have against the Company now or in the future with respect to any
actions taken prior to the date hereof and relating to any violation or
alleged violation by them of Section 16 of the 1934 Act and (ii) any and all
rights for expenses of separate counsel that any of them have or may have
against the Company now or in the future with respect to any actions taken
prior to the date hereof and relating to any violation or alleged violation
by them of Rule 10b-5 under the 1934 Act, Section 5 of the 1933 Act or any
related federal securities laws or any similar or related state securities
laws, which violation or alleged violation arise(s) primarily as a result of
violations of Section 16 of the 1934 Act.
(v) Intentionally omitted.
(w) Intentionally omitted.
(x) The agreements required to be terminated pursuant to SECTION
4(g) shall have been terminated without damage or penalty to the Company.
(y) No material default or event of default shall have occurred and
be continuing with respect to the Bridge Loan which would not be cured as a
result of the Closing.
(z) The Company shall have amended its most recent SEC Documents to
reflect such changes as Buyer shall have reasonably deemed necessary or
appropriate, if any, to the extent permitted to be required by Buyer pursuant
to SECTION 4(v) hereof.
7. INDEMNIFICATION.
(a) The Company shall defend, protect, indemnify and hold harmless
Buyer, Lender and each other holder of the Notes, the Shares, the Warrants,
the Warrant Shares, the Conversion Shares and/or Adjustment Shares and all of
their officers, directors, employees and agents (including, without
limitation, those retained in connection with the transactions contemplated
by this Agreement) (collectively, the "BUYER INDEMNITEES") from and against
any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Buyer Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"),
incurred by any Buyer Indemnitee as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or
warranty made by the Company in this Agreement, the Note or the Warrants or
any other certificate, instrument or document contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company
contained in this Agreement, the Warrants, the Note or any other certificate,
instrument or document contemplated hereby or thereby, or (c) any cause of
action, suit or claim brought or made against such Buyer Indemnitee and
arising out of or resulting from the execution, delivery, performance or
enforcement of this Agreement or any other instrument, document or agreement
executed pursuant hereto by any of the Buyer Indemnitees, any transaction
financed or to be financed in whole or in part, directly or indirectly, with
the proceeds of the issuance of the Shares, the Warrant Shares or the Bridge
Loan or the status of Buyer or holder of the Shares, the Warrants, the
Warrant Shares or Adjustment Shares as an investor in the Company. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law.
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(b) Lender and Buyer shall severally defend, protect, indemnify and
hold harmless the Company and its officers, directors, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (the "COMPANY INDEMNITEE") from and
against any and all Indemnified Liabilities incurred by any Company Indemnitee
as a result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by Buyer or Lender in this
Agreement or any other certificate, instrument or document contemplated hereby,
and (b) any breach of any covenant, agreement or obligation of Buyer or Lender
contained in this Agreement or any other certificate, instrument or document
contemplated hereby.
(c) Any party entitled to indemnification under this SECTION 7 (an
"INDEMNIFIED PARTY") shall give written notice to the party from which
indemnification is sought (the "INDEMNIFYING PARTY") of any claim with
respect to which it seeks indemnification within fifteen (15) days of
learning of such claim; provided that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this SECTION 7 except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder,
the indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between
it and the indemnifying party may exist in respect of such action, proceeding
or claim, to assume the defense thereof, with counsel reasonably satisfactory
to the indemnified party. In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any
indemnification notice to notify, in writing, such person of its election to
defend, settle or compromise, at its sole cost and expense, any action,
proceeding or claim (or discontinues its defense at any time after it
commences such defense), then the indemnified party may, at its option, in
good faith, defend, settle or otherwise compromise or pay such action or
claim without prior consent of the indemnifying party and the indemnifying
party will be liable for all costs, expenses, settlement amounts or other
losses paid or incurred in connection therewith. In any event, unless and
until the indemnifying party elects in writing to assume and does so assume
the defense of any such claim, proceeding or action, the indemnified party's
costs and expenses arising out of the defense, settlement or compromise of
any such action, claim or proceeding shall be losses subject to
indemnification hereunder. To the extent not prejudicial to the interests of
the indemnified party, the indemnified party shall cooperate fully with the
indemnifying party in connection with any negotiation or defense of any such
action or claim by the indemnifying party and shall furnish to the
indemnifying party all information reasonably available to the indemnified
party which relates to such action or claim. The indemnifying party shall
keep the indemnified party fully apprised at all times as to the status of
the defense or any settlement negotiations with respect thereto. If the
indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with
counsel of its choice at its sole cost and expense. Anything in this SECTION
7 to the contrary notwithstanding, the indemnifying party shall not, without
the indemnified party's prior written consent, settle or comprise any claim
or consent to entry of any judgment in respect thereof which imposes
injunctive or other equitable relief against the indemnified party, which
imposes any future obligation on the indemnified party or which does not
include, as an unconditional term thereof, the giving by the claimant or the
plaintiff to the indemnified party of a release from all liability in respect
of such claim. The indemnification required by this SECTION 7 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred. The indemnity agreements contained herein
shall be in addition to:
(i) any cause of action or similar right of the indemnified
party against the indemnifying party or others, and
(ii) any liabilities the indemnifying party may be subject
to pursuant to the law.
(d) The representations and warranties and indemnities provided in
this Agreement shall survive indefinitely and are in no way intended to limit
the Buyer's rights under SECTION 4(w) hereof; PROVIDED, HOWEVER, that Buyer
shall not be permitted, by virtue of more than one of this SECTION 7(d) and
SECTION 4(w) to receive compensation with respect of its damages to the extent
Buyer has received adequate recourse under the other such provision; PROVIDED,
HOWEVER, that the applicability of one such section shall not invalidate the
applicability of the other.
8. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California without
regard to the principles of conflict of laws.
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<PAGE>
(b) COUNTERPARTS. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof.
(c) HEADINGS. The headings of this Agreement are for convenience
of reference and shall not form part of, or affect the interpretation of,
this Agreement.
(d) SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, the party for whose benefit
such provision is included shall have the right to determine that such
invalidity or unenforceability shall not affect the validity or
enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
(e) ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes all
other prior oral or written agreements between the Buyer, Lender, the
Company, their affiliates and persons acting on their behalf with respect to
the matters discussed herein, and this Agreement and the instruments
referenced herein including, without limitation, any documents evidencing or
relating to the Bridge Loan, contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company, Buyer nor
Lender makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or
amended other than by an instrument in writing signed by the party to be
charged with enforcement.
(f) NOTICES. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i)
upon receipt, when delivered personally; (ii) upon receipt, when sent by
facsimile, provided a copy is mailed by U.S. certified mail, return receipt
requested; (iii) three (3) days after being sent by U.S. certified mail,
return receipt requested, or (iv) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
CinemaStar Luxury Theaters, Inc.
431 College Boulevard
Oceanside, California 92057
Telephone: 619-630-2011
Facsimile: 619-630-8593
Attention: Chief Executive Officer
With a copy to:
Jeffer, Mangels, Butler & Marmaro, LLP
2121 Avenue of the Stars, 10th Floor
Los Angeles, California 90067
Telephone: 310-203-8080
Facsimile: 310-203-0567
Attention: Joel I. Bennett, Esq.
If to Buyer and/or Lender:
Rust Capital, L.P.
327 Congress Avenue
Suite 200
Austin, Texas 78701
Telephone: 512-476-2995
Facsimile: 512-474-1610
Attention: Jack R. Crosby
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<PAGE>
With a copy to:
Katten Muchin & Zavis
1999 Avenue of the Stars
Suite 1400
Los Angeles, CA 90067-6042
Telephone: (310) 788-4400
Facsimile: (310) 788-4471
Attention: Craig D. Crockwell, Esq.
(g) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns. The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Buyer
including by merger or consolidation. Buyer may assign some or all of its
rights hereunder to an entity or entities under common control with Buyer
without the consent of the Company, PROVIDED, HOWEVER, that any such
assignment shall not release Buyer from its obligations hereunder unless such
obligations are assumed by such assignee and the Company has consented to
such assignment and assumption.
(h) NO THIRD PARTY BENEFICIARIES. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
(i) PUBLICITY. The Company and Buyer shall have the right to
approve before issuance any press releases or any other public statements
with respect to the transactions contemplated hereby; PROVIDED, HOWEVER, that
the Company shall be entitled, without the prior approval of any Buyer, to
make any press release or other public disclosure with respect to such
transactions as is required by applicable law and regulations (although Buyer
shall be consulted by the Company in connection with any such press release
or other public disclosure prior to its release and shall be provided with a
copy thereof).
(j) FURTHER ASSURANCES. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out
the intent and accomplish the purposes of this Agreement and the consummation
of the transactions contemplated hereby.
(k) TERMINATION.
(i) This Agreement may be terminated at any time prior to
the Closing, whether before or after approval of the matters presented in
connection therewith, by Buyer or the Company:
(1) by the Buyer, if any fact or series of facts not
known or existing prior to the date hereof become known which, in the
aggregate, could, in the Buyer's reasonable opinion, have a material adverse
effect on the Company or the operation of its business;
(2) by mutual consent;
(3) by the Buyer (A) if there has been a material
breach of any covenant or agreement on the part of the Company set forth in
this Agreement, (B) if any representation or warranty of the Company is not
true and correct in all material respects; provided that, such
representations and warranties shall be considered true and correct in all
material respects unless all misrepresentations and breaches of warranty,
taken in the aggregate, would be deemed important (though not necessarily
dispositive) by a reasonable, prudent investor in making a decision whether
or not to invest in the securities of the Company, and provided further that
in determining the existence of any misrepresentation or breach of warranty
any qualification for materiality contained in the representation or warranty
in question shall be ignored, or (C) if any permanent injunction or other
order of a court or other competent authority preventing the consummation of
the sale of the Share shall have become final and non-appealable;
(4) by the Company (X) if there has been a material
breach of any covenant or agreement on the part of Buyer set forth in this
Agreement, (Y) if any representation or warranty of the Buyer is not true and
correct in all material respects; provided that, such representations and
warranties shall be considered true and correct in all material respects
unless all misrepresentations and breaches of warranty, taken in the
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aggregate, would be deemed important (though not necessarily dispositive) by
a reasonable, prudent seller in making a decision whether or not to enter
into an agreement to sell specified securities of the Company, and provided
further that in determining the existence of any misrepresentation or breach
of warranty any qualification for materiality contained in the representation
or warranty in question shall be ignored, or (Z) if any permanent injunction
or other order of a court or other competent authority preventing the
consummation of the sale of the Shares shall have become final or
non-appealable; or
(5) by either of Buyer or the Company if the Closing
shall not have been consummated on or before December 7, 1997; PROVIDED THAT,
the party terminating this Agreement shall only be entitled to do so if such
party is not then in default of this Agreement; PROVIDED FURTHER THAT, if
there is a Delayed Proxy, the date for the Closing shall be extended to
January 6, 1998.
(ii) Each party's right of termination under this SECTION
8(k) is in addition to any other rights it may have under this Agreement or
otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to this SECTION 8(k),
all further obligations of the parties under this Agreement will terminate,
except that the obligations in SECTIONS 4(i), 4(k) AND 7 shall survive;
PROVIDED, HOWEVER, that, subject to the liquidated damages provisions of
SECTION 4(i), if this Agreement is terminated by a party because of the
breach of this Agreement by the other party or because one or more of the
conditions to the terminating party's obligations under this Agreement is not
satisfied as a result of the other party's failure to comply with its
obligations under this Agreement, the terminating party's right to pursue all
legal remedies will survive any such termination unimpaired and such party
shall be entitled to be reimbursed for its expenses incurred prior to the
date of such termination in connection with the transactions contemplated by
this Agreement.
(l) PLACEMENT AGENT. The Company shall be responsible for the
payment of any fees or commissions payable to The Watley Group, LLC and
represents that no other placement agent's fees or broker's commissions are
payable in connection with or relating to or arising out of the transactions
contemplated hereby as a result of the actions of the Company. The Company
shall pay, and hold Buyer harmless against, any liability, loss or expense
(including, without limitation, attorneys' fees and out of pocket expenses)
arising in connection with any claim contrary to the Company's representation
hereunder.
(m) NO STRICT CONSTRUCTION. The language used in this Agreement
will be deemed to be the language chosen by the parties to express their
mutual intent, and no rules of strict construction will be applied against
any party.
(n) ARBITRATION.
(i) The parties agree that all disputes, claims and
other matters in controversy arising under this Agreement, or the performance
or breach hereof, shall be submitted to binding arbitration in accordance
with the provisions and procedures of this SECTION 8.
(ii) The arbitration provided for in this SECTION 8
shall take place in Los Angeles County, California, in accordance with the
provisions of Title 9, Sections 1280 ET SEQ. of the California Code of Civil
Procedure, except as provided to the contrary hereunder. The arbitration
shall be held before and decided by a single neutral arbitrator. The single
neutral arbitrator shall be selected from a list of retired judges of the
Superior Court of the State of California for the County of Los Angeles by a
process mutually agreed upon the parties. If no agreement can be reached as
to the process for selecting the arbitrator or if agreed method fails, the
arbitrator shall be appointed in accordance with the provisions of California
Code of Civil Procedure Section 1281.6.
(iii) The parties shall mutually agree upon the date and
location of the arbitration, subject to the availability of the arbitrator.
If no agreement can be reached as to the date and location of the
arbitration, the arbitrator shall appoint a time and place in accordance with
the provisions of California Code of Civil Procedure Section 1282.2(a)(1),
except that the arbitrator shall give not less than 30 days notice of the
hearing unless the parties mutually agree to shorten time for such notice.
(iv) The parties shall be entitled to undertake
discovery in the arbitration in accordance with the provisions of subsections
(a) through (d) of California Code of Civil Procedure Section 1283.05. In
conjunction with these procedures, the parties shall be entitled to request
and obtain production of documents in discovery in the arbitration in
accordance with the same rights, remedies and procedures, and shall be
subject to all of the same duties, liabilities and obligations as if the
subject matter of the arbitration were pending in a civil action before a
Superior Court of the State of California. The parties hereby agree that any
discovery taken hereunder shall be permitted without first securing leave of
the arbitrator and shall be kept to a reasonable minimum.
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(v) The decision of the arbitrator may be confirmed
pursuant to the provisions of California Code of Civil Procedure Section
1285, and shall not be appealable for any reason, it being understood that a
petition to vacate an award for any of the reasons set forth California Code
of Civil Procedure Section 1286.2 shall not be permitted.
(vi) The details and/or existence of any dispute, claims
and other matters in controversy to be arbitrated hereunder, as well as the
arbitration proceedings themselves and any discovery taken in connection with
the arbitration, shall be kept strictly confidential and shall not be
disclosed or discussed with any third party.
(vii) The arbitrator may award to the prevailing party,
if any, as determined by the arbitrator, part or all of the prevailing
party's costs and fees. "COSTS AND FEES" means all reasonable pre-award
expenses of the arbitration, including the arbitrator's fees, administrative
fees, travel expenses, out-of-pocket expenses such as photocopy, telecopy and
telephone charges, witness fees and attorneys' fees.
(viii) Notwithstanding the foregoing, the Buyer shall be
entitled to specifically enforce its rights and the obligations of the
Company hereunder, provided that such enforcement shall be in accordance with
the arbitration procedures set forth in this SECTION 8(n).
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IN WITNESS WHEREOF, Buyer, Lender and the Company have caused this Stock
Purchase Agreement to be duly executed as of the date first written above.
COMPANY:
CINEMASTAR LUXURY THEATERS, INC.
By: /s/ John Ellison, Jr.
------------------------------
John Ellison, Jr., President
BUYER:
CINEMASTAR ACQUISITION PARTNERS, L.L.C.
By: /s/ Neil Austrian
-------------------------------
Neil Austrian, Vice President
LENDER:
REEL PARTNERS, L.L.C.
By: /s/ Neil Austrian
-------------------------------
Neil Austrian, Vice President
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APPENDIX B
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE ACT OR IN A TRANSACTION
WHICH, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY,
QUALIFIES AS AN EXEMPT TRANSACTION UNDER THE ACT AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER.
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
CONVERTIBLE SECURED PROMISSORY NOTE
September 23, 1997 $3,000,000
CINEMASTAR LUXURY THEATERS, INC., a California corporation (the
"Company"), hereby promises to pay to the order of REEL PARTNERS, L.L.C., a
Delaware limited liability company (the "Holder"), THREE MILLION DOLLARS
($3,000,000), together with interest thereon calculated in accordance with
the provisions of this Note.
1. PAYMENT OF INTEREST. Interest (computed on the basis of a 360-day
year of twelve 30-day months) shall accrue on a daily basis on the unpaid
principal amount of this Note from time to time outstanding at a per annum
rate of fourteen percent (14%). The Company shall pay to the Holder all
accrued interest hereunder monthly with payments due on the first (1st) day
of each month (each, an "Interest Payment Date"), beginning October 1, 1997.
Unless prohibited under applicable law, any payment due hereunder, including
any accrued interest, which is payable hereunder and which is not paid on the
date on which it is payable, shall bear interest at the same rate at which
interest is then accruing on the principal amount of this Note, plus an
additional two percent (2.0%) for each month such payment remains unpaid.
Any accrued interest which for any reason has not theretofore been paid,
shall be paid in full in immediately available funds on the date on which the
final principal payment on this Note is paid. Interest shall accrue on any
principal payment due under this Note and, to the extent permitted by
applicable law, on any interest which has not been paid on the date on which
it is payable, until such time as payment therefor is actually delivered to
the holder of this Note.
2. PAYMENT OF PRINCIPAL ON NOTE.
2.1 SCHEDULED PAYMENT. The Company shall pay the outstanding
principal amount of this Note (PLUS accrued and unpaid interest, if any,
referred to in SECTION 1 above) to the Holder on March 23, 1998 (the
"Maturity Date").
2.2 PAYMENT ON NON-BUSINESS DAYS. If any payment on this Note
shall become due on a Saturday, Sunday or a bank or legal holiday under the
laws of the State of California, such payment shall be made on the next
succeeding business day and such extension of time shall in such case be
included in computing any interest due in connection with such payment.
2.3 OPTIONAL AND MANDATORY PREPAYMENT. The principal amount of
this Note may be prepaid in whole or in part (together with all accrued and
unpaid interest thereon) by the Company at its option at any time subsequent
to the Purchase Determination Date (as hereinafter defined) and prior to the
Maturity Date; PROVIDED that written notice of such prepayment is given to
the Holder at least 5 business days prior to repayment. The principal amount
of this Note shall, at the option of the Holder, be subject to mandatory
prepayment (i) immediately prior to any consolidation or merger of the
Company with or into any other corporation or other entity or person, or any
other corporate reorganization in which the Company shall not be the
continuing or surviving entity of such consolidation, merger or
reorganization or any transaction or series of related transactions by the
Company in which in excess of fifty percent (50%) of the Company's voting
power is transferred, or a sale of all or substantially all of the assets of
the Company occurs or (ii) upon or subsequent to the Purchase Determination
Date. As used herein, the term "Purchase Determination Date" means the
earlier to occur of (x) the date upon which the transactions contemplated by
that certain Stock Purchase Agreement of even date herewith by and among the
Company, Holder and an affiliate of Holder (the "Purchase Agreement") are
consummated pursuant to the terms thereof and (y) the date the Purchase
Agreement is terminated as a result of the provisions of Sections 8(k)(i)(1)
or (3) of the Purchase Agreement.
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3. SECURITY INTERESTS. This Note is secured by and is entitled to all
the benefits under (i) that certain Security Agreement of even date herewith
between the Company and Holder (the "Security Agreement") and (ii) those
certain Leasehold Deeds of Trust of even date herewith from the Company to
Holder (the "Deeds of Trust"). The collateral granted to Holder pursuant to
the Security Agreement and the Deeds of Trust is collectively, the
"Collateral."
4. COVENANTS.
4.1 NEGATIVE COVENANTS. Without the prior written consent of
Holder:
(a) The Company shall not declare or pay any dividends on, or
purchase, redeem or acquire its capital stock, return any capital to
holders of capital stock as such, or distribute assets to capital
stockholders as such.
(b) Neither the Company nor any material subsidiary may
consolidate with, merge with or transfer all, or substantially all, of
its properties or assets to another entity (i) prior to the Purchase
Determination Date and (ii) thereafter, unless all amounts outstanding
hereunder shall, at the option of the Holder, be paid in full immediately
prior thereto or concurrently therewith.
(c) Except as contemplated by the Purchase Agreement, neither
the Company nor any material subsidiary may incur indebtedness other than
trade payables in the normal course of business.
(d) Neither the Company nor any material subsidiary may modify
or otherwise change or amend its by-laws or Articles of Incorporation
except as contemplated by the Purchase Agreement.
(e) Neither the Company nor any material subsidiary may
modify, amend or alter the terms of any employment agreement with any
management personnel except as contemplated by the Purchase Agreement.
(f) Neither the Company nor any material subsidiary may enter
into any agreement for the settlement of any indebtedness or of existing
or potential litigation except as contemplated by the Purchase Agreement
or except as does not involve the incurrence of any monetary or material
non-monetary obligation for the Company.
(g) Neither the Company nor any material subsidiary may enter
into any contracts, leases or other agreements which have (i) a term in
excess of six (6) months and (ii) a monthly payment obligation in excess
of $5,000.00.
(h) Neither the Company nor any material subsidiary may take
any action which, in the reasonable judgment of Holder, (i) materially
diminishes the value of the Collateral or (ii) impairs the Company's
ability to repay any amounts which may be due and owing hereunder;
provided that no use of the proceeds of this Loan described in Exhibit
4(b) of the Purchase Agreement and no payment made in accordance with
Schedule 4(s) of the Purchase Agreement shall be deemed a violation of
this covenant.
4.2 AFFIRMATIVE COVENANT. The proceeds of the Loan shall be used
as set forth on Exhibit 4(b) to the Purchase Agreement.
5. EVENTS OF DEFAULT.
5.1 DEFINITION. For purposes of this Note, an Event of Default
shall be deemed to have occurred if, during the period beginning on the date
hereof and ending on the date on which the entire principal balance of and
all accrued and unpaid interest on this Note is paid and/or converted as
herein provided:
(a) the Company fails to pay on any Interest Payment Date the
full amount of interest then accrued and payable with respect to the Note
(and such failure continues for a period of ten days from delivery of
notice thereof);
(b) the Company fails to pay when due on the Maturity Date or
the date of a mandatory prepayment under SECTION 2.3 hereof, as the case
may be, the full amount of any principal payment (together with any
accrued and unpaid interest thereon) on the Note;
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(c) the Company or any subsidiary makes an assignment for the
benefit of creditors or admits in a filing its inability to pay its debts
generally as they become due; or an order, judgment or decree is entered
adjudicating the Company or any subsidiary bankrupt or insolvent, or any
order for relief with respect to the Company or any subsidiary is entered
under the Bankruptcy Code; or the Company or any subsidiary petitions or
applies to any tribunal for the appointment of a custodian, trustee,
receiver or liquidator of the Company or of any substantial part of the
assets of the Company or any subsidiary, or commences any proceeding
(other than a proceeding for the voluntary liquidation and dissolution of
any subsidiary) relating to the Company or any subsidiary under any
bankruptcy reorganization, arrangement, insolvency, readjustment of debt,
dissolution or liquidation law of any jurisdiction; or any such petition
or application is filed, or any such proceeding is commenced, against the
Company or any subsidiary and either (A) the Company or any such
subsidiary by any act indicates its approval thereof, consent thereto or
acquiescence therein or (B) such petition, application or proceeding is
not dismissed within 60 days;
(d) an Event of Default shall have occurred under either (i)
the Security Agreement or (ii) either Deeds of Trust after giving effect
to notice cures therein; or
(e) the Company or any material subsidiary fails to comply
with any provisions of SECTION 4 hereof.
5.2 CONSEQUENCES OF EVENTS OF DEFAULT. If any Event of Default
under SECTION 5.1(c) above has occurred, then all amounts outstanding under
this Note shall immediately become due and payable, or if any other Event of
Default has occurred the Holder may declare (by written notice delivered to
the Company) all or any portion of the outstanding principal amount of this
Note due and payable and demand immediate payment of all or any portion of
the outstanding principal amount of the Note. If the Holder demands
immediate payment of all or any portion of this Note pursuant to the terms of
this SECTION 5.2, the Company shall pay the Holder the principal amount of
this Note requested to be paid plus accrued interest thereon immediately upon
the initial declaration of acceleration.
6. CONDITIONS OF FUNDING OF LOAN. The Company hereby represents and
warrants that simultaneous with the execution and delivery hereof:
(a) the Company is executing and delivering to Holder the
Purchase Agreement;
(b) the Company is executing and delivering to Holder the
Security Agreement, the Deeds of Trust and UCC-1 Financing Statements
relating to the Collateral as Holder deems necessary;
(c) the representations and warranties set forth on EXHIBIT A
(which representations and warranties are incorporated herein by
reference thereto as though made herein) and in the Purchase Agreement
are true, complete and correct in all material respects as of the date
hereof and no Event of Default exists as of the date hereof;
(d) the Holder has received an opinion of Jeffer, Mangels,
Butler and Marmaro, LLP, in connection with the transactions contemplated
hereunder; and
(e) the Company has delivered to Holder the First Bridge
Warrant and the Second Bridge Warrant (as such terms are defined in the
Purchase Agreement).
7. CONVERSION.
7.1 VOLUNTARY CONVERSION. The Holder of this Note has the right,
at the Holder's option, at any time prior to payment in full of the principal
balance of this Note, to convert this Note, in accordance with the provisions
of this SECTION 7, in whole or in part, into fully paid and nonassessable
shares of the Common Stock of the Company (the "Stock"). The number of
shares of Stock into which this Note may be converted ("Conversion Shares")
shall be determined by dividing the aggregate principal amount then
outstanding, together with all accrued interest to the date of conversion, by
the Conversion Price in effect at the time of such conversion. The
Conversion Price shall initially be equal to $1.00.
7.2 NO ADJUSTMENT OF CONVERSION PRICE. Any provision herein to the
contrary notwithstanding, no adjustment in the Conversion Price shall be made
in respect of the issuance of additional shares of Common Stock unless the
consideration per share for an additional share of Common Stock issued or
deemed to be issued by the Company is less than the Conversion Price in
effect on the date of, and immediately prior to, such issue.
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7.3 DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. In the
event the Company at any time or from time to time after the date hereof
shall issue any rights to subscribe for or to purchase, or any options for
the purchase of, Common Stock or any stock or other securities convertible
into or exchangeable for Common Stock (such rights or options being herein
called "Options" and such convertible or exchangeable stock or securities
being herein called "Convertible Securities") or shall fix a record date for
the determination of holders of any class of securities then entitled to
receive any such Options or Convertible Securities, then the maximum number
of shares (as set forth in the instrument relating thereto without regard to
any provisions contained therein designed to protect against dilution) of
Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of
such Convertible Securities, shall be deemed to be additional shares of
Common Stock issued as of the time of such issue or, in case such a record
date shall have been fixed, as of the close of business on such record date.
In addition, if the purchase price provided for in any Options, the
additional consideration, if any, payable upon the issue, conversion or
exchange of any Convertible Securities, or the rate at which any Convertible
Securities are convertible into or exchangeable for shares of Common Stock
change at any time, the Conversion Price in effect at the time of such change
shall be readjusted to the Conversion Price which would have been in effect
at such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or changed
conversion rate, as the case may be, at the time initially granted, issued or
sold and the number of Conversion Shares acquirable hereunder shall be
correspondingly readjusted. Upon the expiration of any Option or the
termination of any right to convert or exchange any Convertible Securities
without the exercise of such Option or right, the Conversion Price then in
effect and the number of Conversion Shares acquirable hereunder shall be
adjusted to the Conversion Price and the number of Conversion Shares in
effect at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued.
7.4 ADJUSTMENT OF THE CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK. Except as provided for in SECTION 7.5, in the event
the Company shall issue additional shares of Common Stock (including
additional shares of Common Stock deemed to be issued pursuant to SECTION
7.3) without consideration (PROVIDED that, for purposes hereof, an issuance
for no consideration shall be deemed to be any issuance for a per share
consideration of $.01)or for a consideration per share less than the
Conversion Price in effect on the date of and immediately prior to such
issue, then the Conversion Price shall be reduced, concurrently with such
issue to a price equal to:
(i) if such issuance is prior to the Purchase Agreement Date, the
consideration per share at which such additional shares of Common Stock are
issued or deemed issued; and
(ii) if such issuance is after the Purchase Agreement Date, the amount
determined by dividing (1) the sum of (x) the product derived by multiplying
the Conversion Price in effect immediately prior to such issue or sale times
the number of fully-diluted shares of Common Stock deemed outstanding
immediately prior to such issue or sale, plus (y) the consideration, if any,
received by the Company upon such issue or sale, by (2) the number of
fully-diluted shares of Common Stock deemed outstanding immediately after
such issue or sale.
For purposes hereof, the "Purchase Agreement Date" shall mean the date of the
closing of the transactions contemplated by the Stock Purchase Agreement by
and among the Company, the original holder of this Warrant and CinemaStar
Acquisition Partners, L.L.C. dated September 23, 1997, or the date of
termination of such Stock Purchase Agreement.
7.5 ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND FOR
COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that the Company
at any time or from time to time after the date hereof shall, subject to the
provisions of this Note, declare or pay, without consideration, any dividend
on the Common Stock payable in Common Stock or in any right to acquire Common
Stock for no consideration, or shall effect a subdivision of the outstanding
shares of Common Stock into a greater number of shares of Common Stock (by
stock split, reclassification or otherwise than by payment of a dividend in
Common Stock or in any right to acquire Common Stock), or in the event the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common
Stock, then the Conversion Price in effect immediately prior to such event
shall, concurrently with the effectiveness of such event, be proportionately
decreased or increased, as appropriate. In the event that the Company shall
declare or pay, without consideration, any dividend on the Common Stock
payable in any right to acquire Common Stock for no consideration, then the
Company shall be deemed to have made a dividend payable in Common Stock in an
amount of shares equal to the maximum number of shares issuable upon exercise
of such rights to acquire Common Stock.
7.6 ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the
Common Stock issuable upon conversion of this Note shall, subject to the
provisions of this Note, be changed into the same or a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for in SECTION 7.5 above or a merger or other
reorganization of the
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Company), the Conversion Price then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be proportionately
adjusted so that this Note shall be convertible into, in lieu of the number
of shares of Common Stock which the holders would otherwise have been
entitled to receive, a number of shares of such other class or classes of
stock equivalent to the number of shares of Common Stock that would have been
subject to receipt by the holders upon conversion of this Note immediately
before that change.
7.7 NO IMPAIRMENT. The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions
of this SECTION 7 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the Holder against
impairment.
7.8 CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this SECTION
7.8, the Company, at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
Holder a certificate executed by the Company's President or Chief Financial
Officer setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon the written request at any time of Holder, furnish or cause to be
furnished to Holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of this Note.
8. NOTICE OF CERTAIN EVENTS. Subject in all cases to the provisions of
this Note, in the event that:
(a) the Company shall declare any cash dividend upon its Common
Stock, or
(b) the Company shall declare any dividend upon its Common Stock
payable in stock or make any special dividend or other distribution to
the holders of its Common Stock, or
(c) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class
or other rights, or
(d) there shall be any capital reorganization or reclassification
of the capital stock of the Company, including any subdivision or
combination of its outstanding shares of Common Stock, or consolidation
or merger of the Company with, or sale or lease of all or substantially
all of its assets to, another corporation, or
(e) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in connection with such event, the Company shall give to the Holder:
(1) at least 20 days' prior written notice of the date on
which the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up; and
(2) in the case of any such reorganization, reclassification,
consolidation, merger, sale, lease, dissolution, liquidation or
winding up, at least 20 days' prior written notice of the date when
the same shall take place.
Such notice in accordance with the foregoing clause (1) shall also
specify, in the case of any such dividend, distribution or subscription
rights, the date on which the holders of Common Stock shall be entitled
thereto, and such notice in accordance with the forgoing clause (2) shall
also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be.
Each such written notice shall be given by telecopy and promptly followed
by first class mail, postage prepaid, addressed to the Holder at the
address of the Holder as shown on the books of the Company and shall be
effective three (3) days after mailing.
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9. RESERVATION OF SHARES, FRACTIONAL SHARES.
(a) The Company hereby agrees that at all times it shall reserve
for issuance and delivery upon conversion of this Note such number of
shares of its Common Stock as shall be required for issuance and delivery
upon conversion of this Note. To the extent that such reserved shares
are not sufficient for purposes of this Note, the Company agrees to use
its best efforts to ensure that such reserved shares are available. The
Company hereby agrees that it shall take all such actions as may be
necessary to assure that such Conversion Shares may be so issued without
violation of any applicable law or governmental regulation.
(b) No fractional shares shall be issued upon conversion of this
Note. With respect to any fraction of a share called for upon conversion
of this Note, the Company shall pay to Holder an amount in cash equal to
such fraction multiplied by the then current market value of a share of
Common Stock, determined as follows:
(i) if the Common Stock is listed on a national
securities exchange or admitted to unlisted trading privileges on
such exchange the current value shall be the last reported sale
price of the Common Stock on such exchange on the last business day
prior to the date of conversion of this Note or if no such sale is
made on such day, the average closing bid and asked prices for such
day on such exchange; or
(ii) if the Common Stock is not listed or admitted to
unlisted trading privileges the current value shall be the mean of
the last reported bid and ask prices reported by the National
Quotation Bureau, Inc., on the last business day prior to the date
of the conversion of this Note; or
(iii) if the Common Stock is not so listed or admitted
to unlisted trading privileges and bid and ask prices are not so
reported, the current value shall be an amount determined in such
reasonable manner as may be prescribed by the Board of Directors of
the Company.
10. REGISTRATION. The Holder acknowledges that upon any conversion of
this Note, the Conversion Shares issued to the Holder will not be registered
under the Securities Act of 1933 (the "Act"), and may not be transferred
except pursuant to an effective registration under the Act or in a
transaction which, in the opinion of counsel reasonably satisfactory to the
Company, qualifies as an exempt transaction under the Act and the rules and
regulations promulgated thereunder. The Holder further acknowledges receipt
of a copy of Section 260.141.11 of the Rules of the Commissioner of
Corporations of California.
11. AMENDMENT AND WAIVER. Except as otherwise expressly provided
herein, the provisions of this Note may be amended, and the Company may take
any action herein prohibited, or omit to perform any act herein required to
be performed by it, only if the Company has obtained the written consent of
the Holder.
12. CANCELLATION. After all principal and accrued interest at any time
owed on this Note has been paid in full, this Note shall be surrendered to
the Company for cancellation and shall not be reissued.
13. MANNER OF PAYMENT. If any payment of principal or interest on this
Note shall become due on a Saturday, Sunday or a bank or legal holiday under
the laws of the State of California, such payment shall be made on the next
succeeding business day and such extension of time shall in such case be
included in computing interest in connection with such payment. Payments of
principal and interest are to be delivered to the Holder at the address
indicated on the Company's records, to such other address or to the attention
of such other person as specified by prior written notice to the Company or
by wire transfer of immediately available federal funds to an account
designated, in writing, by the Holder.
14. NOTE EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office
of the Company, for a new note containing the same terms and conditions and
representing in the aggregate the principal amount of this Note, and any such
new Note will represent such portion of such principal amount as is
designated by the Holder at the time of such surrender. The date the Company
initially issues this Note will be deemed to be the "DATE OF ISSUANCE" of any
such new note regardless of the number of times any new note or notes shall
be issued.
15. WAIVER OF NOTICE. To the extent permitted by law, the Company
hereby waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement
of this Note.
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16. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Agreement shall be governed by, the
laws of the State of California, without giving effect to provisions thereof
regarding conflict of laws.
17. EXPENSES. If an Event of Default has occurred, the Company shall
pay the Holder all costs and expenses, including reasonable attorney's fees,
incurred by the holder in enforcing its rights hereunder. In addition, if
any dispute shall arise between the parties hereto, the Company shall pay the
Holder all costs and expenses, including reasonable attorney's fees, incurred
by the Holder in connection with such dispute; PROVIDED, HOWEVER, that upon
resolution of such dispute by means of a judgment, mediation or arbitration,
the prevailing party shall be the party entitled to receive reimbursement
from the other party all reasonable fees and expenses in connection with such
dispute.
18. REGISTRATION RIGHTS.
18.1 DEMAND REGISTRATION.
(a) REQUESTS FOR REGISTRATION. Subject to the terms of this
Agreement, the Holder may, at any time subsequent to the Closing under
the Purchase Agreement or termination of the Purchase Agreement,
whichever is earlier, request registration under the Act of all or part
of its Registrable Shares (as hereinafter defined) on Form S-1 or Form
SB-2 or any similar long-form registration ("Long-Form Registrations")
or, if available, on Form S-2 or S-3 or any similar short-form
registration ("Short-Form Registrations"). All registrations requested
pursuant to this SECTION 18.1 are referred to herein as "Demand
Registrations."
(b) PAYMENT OF EXPENSES FOR DEMAND REGISTRATIONS. The Company
will pay all registration expenses for the first two Demand Registrations
(whether a Long-Form Registration or a Short-Form Registration). A
registration will not count as one of the Company paid Demand
Registrations until it has become effective and the holders of
Registrable Shares are able to register and are permitted to sell at
least 90% of the Registrable Shares requested to be included in such
registration; PROVIDED, HOWEVER, that in any event the Company will pay
all registration expenses in connection with any registration initiated
as a Demand Registration. In a Demand Registration other than the first
two Demand Registrations, the registration expenses of such registration
shall be borne by the holders of Registrable Shares to be registered
thereunder.
(c) SHORT-FORM REGISTRATIONS. In addition to the Long-Form
Registrations provided pursuant to SECTION 18.1(A) above, the holders of
Registrable Shares will be entitled to request an unlimited number of
Short-Form Registrations, PROVIDED, HOWEVER, that the aggregate offering
value of the Registrable Shares requested to be registered in any
Short-Form Registration must be reasonably expected to equal at least
$500,000. Demand Registrations will be Short-Form Registrations whenever
the Company is permitted to use any applicable short form. If a
Short-Form Registration is to be an underwritten public offering, and if
the underwriters for marketing or other reasons request the inclusion in
the registration statements of information which is not required under
the Act to be included in a registration statement on the applicable form
for the Short-Form Registration, the Company will provide such
information as may be reasonably requested for inclusion by the
underwriters in the Short-Form Registration.
(d) PRIORITY. The Company will not include in any Demand
Registration any securities which are not Registrable Shares without the
written consent of the Holder. If a Demand Registration is an
underwritten public offering and the managing underwriters advise the
Company in writing that in their opinion the inclusion of the number of
Registrable Shares and other securities requested to be included creates
a substantial risk that the price per share of Common Stock will be
reduced, the Company will include in such registration, prior to the
inclusion of any securities which are not Registrable Shares, the number
of Registrable Shares requested to be included which in the opinion of
such underwriters can be sold without creating such a risk.
(e) SELECTION OF UNDERWRITERS. The Holder shall have the
right to select the investment banker(s) and manager(s) to administer any
Demand Registration, subject to the Company's approval which will not be
unreasonably withheld.
(f) COMPANY REGISTRATION. Notwithstanding anything to the
contrary herein, if after September 23, 1997 the Company has filed a
registration statement under the Act with respect to an underwritten
offering of shares of the Common Stock, then any Demand Registration
shall be delayed for a period of 90 days following the effective date of
such registration statement (or, at the option of the parties requesting
such Demand Registration, the Demand Registration may be withdrawn).
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For purposes hereof, "Registrable Shares" means at any time (i) any
shares of Common Stock then outstanding which were issued upon conversion of
this Note; (ii) any shares of Common Stock then issuable upon conversion of
this Note; (iii) any shares of Common Stock then outstanding which were
issued as, or were issued directly or indirectly upon the conversion or
exercise of other securities issued as, a dividend or other distribution with
respect or in replacement of any shares referred to in (i) or (ii); and (iv)
any shares of Common Stock then issuable directly or indirectly upon the
conversion or exercise of the securities which were issued as a dividend or
other distribution with respect to or in replacement of any shares referred
to in (i) or (ii); PROVIDED, HOWEVER, that Registrable Shares shall not
include any shares which have been registered pursuant to the Securities Act
or which have been sold to the public pursuant to Rule 144 of the Commission
under the Securities Act.
18.2 PARTICIPATION IN REGISTERED OFFERINGS ("PIGGYBACK RIGHTS"). If
the Company at any time or times proposes or is required to register any of
its Common Stock or other equity securities (whether such Common Stock or
other equity securities are owned by the Company or another holder entitled
to demand registration) for public sale for cash under the Act (other than on
Forms S-4 and S-8 or similar registration forms), it will at each such time
or times give written notice to the Holder of its intention to do so. Upon
the written request of the Holder given within 20 days after receipt of any
such notice, the Company shall use its best efforts to cause to be included
in such registration any Registrable Shares held by the Holder (or its
permitted transferees) and requested to be registered under the Act and any
applicable state securities laws; PROVIDED, that if such registration is an
underwritten public offering and the managing underwriter advises that less
than all of the shares and Registrable Shares to be registered should be
offered for sale so as not materially and adversely to affect the price or
salability of the offering, the Holder and any other securities holders
entitled to piggyback rights with respect to such registration shall reduce
on a pro rata basis the number of their shares of Common Stock (as if
converted) to be included in the registration statement as required by the
managing underwriter to the extent requisite to permit the sale or other
disposition (in accordance with the intended method of disposition thereof as
aforesaid) by the prospective seller or sellers of the securities so
registered.
18.3 SECTION SURVIVES. The rights granted to Holder pursuant to
this SECTION 18 shall survive any conversion, in whole or in part, of this
Note into Conversion Shares.
IN WITNESS WHEREOF, the Company has executed and delivered this Note and
the Holder has accepted this Note as of the date first written above.
CINEMASTAR LUXURY THEATERS, INC.
By: /s/ John Ellison, Jr.
----------------------------------------
John Ellison, Jr., President
Acknowledged and Agreed by Holder in its capacity
as such and not as maker, endorser, guarantor,
accommodation party or otherwise:
REEL PARTNERS, L.L.C.
By: /s/ Neil Austrian
----------------------------------------
Neil Austrian, Vice President
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EXHIBIT A
GENERAL WARRANTIES AND REPRESENTATIONS
1. AUTHORIZATION, VALIDITY AND ENFORCEABILITY. The Company and each of
its subsidiaries, as applicable, has the corporate power and authority to
execute, deliver and perform the Note, the Security Agreement and the Deeds
of Trust, together with all transactions related thereto or contemplated
thereby, to which it is a party, to incur the indebtedness related thereto,
and to grant the security interest to the Holder in the Collateral. Each
such entity has taken all necessary corporate action to authorize its
execution, delivery and performance of such agreements to which it is a
party. Except for the consent of Winick Leasing (a/k/a Creative Capital
Leasing, Inc.), no consent, approval or authorization of, or declaration or
filing with, any public authority, and no consent of any other person, is
required in connection with the execution, delivery and performance of each
of such documents, except for those which have already been duly obtained.
Each of such documents has been duly executed and delivered by each such
entity and constitutes the legal, valid and binding obligation of such
entity, enforceable against such entity in accordance with its terms without
defense, setoff or counterclaim, except as such enforceability may be limited
by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies.
Except as set forth on the Disclosure Schedules to the Purchase Agreement,
the execution, delivery and performance of each of such agreements by such
entity, as applicable, does not and will not conflict with, or constitute a
violation or breach of, or constitute a default under, or result in the
creation or imposition of any lien upon the property of such person by reason
of the terms of (a) any other contract, mortgage, lien, lease, agreement,
indenture or instrument to which such party is a party or which is binding
upon it, (b) any judgment, law, statute, rule or governmental regulation
applicable to such entity, or (c) the articles of incorporation or by-laws of
such entity.
2. VALIDITY AND PRIORITY OF SECURITY INTEREST. The provisions of the
Security Agreement and the Deeds of Trust create a legal and valid lien on
all the Collateral in favor of the Holder and such security interest
constitutes perfected and continuing liens on all of the Collateral,
enforceable against the Holder.
3. PRIORITY. Upon filing of the Deeds of Trust and the applicable
UCC-1 Financing Statements, Lender will have (i) a perfected leasehold deed
of trust which is senior to all other liens in the leasehold estate on the
lease for the Company's Mission Marketplace facility and (ii) a perfected
junior lien on fixed assets and equipment located at the Company's Mission
Marketplace facility, junior only to (A) the purchase money lien in favor of
Winick Leasing and (B) the blanket lien in favor of First National Bank,
(iii) a perfected leasehold deed of trust which is junior only to an
unperfected lien on the leasehold estate in favor of First National Bank on
the lease for the Company's Mission Grove facility and (iv) a perfected lien
on the fixed assets and equipment located at the Company's Mission Grove
facility, junior only to (A) the first priority lien in favor of the landlord
which secures the lease payments (which the landlord will not enforce so long
as the Lender cures any defaults under the lease) and (B) the blanket lien in
favor of First National Bank which is referred to in the description of
Mission Marketplace.
4. ORGANIZATION AND QUALIFICATION. The Company: (i) is duly
incorporated and organized and validly existing and in good standing under
the laws of the State of California; (ii) is qualified to do business as a
foreign corporation and is in good standing in the states in which
qualification is necessary in order for it to own or lease its property and
conduct its business; and (iii) has all requisite power and authority to
conduct its business and to own its property.
B-9
<PAGE>
APPENDIX C
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CINEMASTAR LUXURY THEATERS, INC.
FIRST. The name of the corporation is:
CINEMASTAR LUXURY THEATERS, INC.
SECOND. The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the
trust company business or the practice of a profession permitted to be
incorporated by the California Corporations Code.
THIRD: The corporation is authorized to issue Sixty Million (60,000,000)
shares of capital stock, all of which are designated "Common Stock,"
and shall be without par value.
FOURTH. The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California
law.
FIFTH. The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) for breach
of duty to the corporation and its shareholders through bylaw
provisions or through agreements with the agents, or both, in excess
of the indemnification otherwise permitted by Section 317 of the
California Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the California
Corporations Code.
C-1
<PAGE>
(FRONT)
PROXY
CINEMASTAR LUXURY THEATERS, INC.
431 College Boulevard
Oceanside, California 92057
(760) 630-2011
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John Ellision Jr. and Jon Meloan,. as
Proxies, each with the power to appoint his substitute, and hereby authorizes
them or either of them to represent and to vote as designated below, all the
shares of common stock of CinemaStar Luxury Theaters, Inc. held of record by the
undersigned on October 29, 1997, at the Special Meeting of Shareholders to be
held on December 3, 1997, or any adjournment thereof.
1. APPROVAL OF THE FINANCING PROPOSAL
____ FOR ____ AGAINST ____ ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
(BACK)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
Dated: ________________________, 1997
_______________________________
Signature
_______________________________
Signature if held jointly
Please sign exactly as name appears below. When
shares are held by joint tenants, both should
sign. When signing as attorney, as executor,
administrator, trustee, or guardian, please give
full title as such. If a corporation, please sign
in full corporate name by President or other
authorized officer. If a partnership, please sign
in partnership name by authorized person.
PLEASE READ, SIGN, DATE, AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
