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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:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
- --------------------------------------------------------------------------------
(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:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / 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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(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 10, 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 10, 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 17, 1997
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
431 College Boulevard
Oceanside, California 92057
(760) 630-2011
_______________
PROXY STATEMENT
_______________
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 10, 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 17, 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. Although shareholder approval of the Financing Proposal is a
condition to closing the Equity Financing, there can be no assurance that the
Equity Financing will occur even if shareholder approval is obtained. See
"Conditions to Closing the Equity Financing."
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 will likely result in the delisting of
the Company's securities from trading on the Nasdaq SmallCap Market and could
make it impossible for the Company to continue operations and/or force the
Company to seek protection under federal bankruptcy law. 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.
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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).
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
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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 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."
The obligations of Acquisition Partners to complete the Equity Financing
are subject to a number of conditions, including the continued listing of the
Company's securities on the Nasdaq SmallCap Market. See "The Financing Proposal
- -- Special Considerations -- NASDAQ LISTING" for a discussion of certain risks
relating to pending proceedings of the Company with The Nasdaq Stock Market,
Inc. regarding the possible delisting of the Company's securities from trading
on the Nasdaq SmallCap Market.
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.
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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 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
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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.
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
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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 will likely result in the delisting of the
Company's securities from trading on the Nasdaq SmallCap Market and could
make it impossible for the Company to continue operations and/or force the
Company to seek protection under federal bankruptcy laws;
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
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, Inc. 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.
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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
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 Equity Financing is set forth below. The opinion rendered by
HLHZ assumes that the Equity Financing is consummated substantially as described
in this Proxy Statement.
In a written opinion dated November 12, 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 Equity Financing is fair to the public shareholders
of 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 2002, 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, other than as represented in financial projections
provided to HLHZ by the Company, 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 $55,000 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
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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 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
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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 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.
See "The Financing Proposal -- Special Considerations -- NASDAQ LISTING"
for a discussion of certain risks relating to pending proceedings of The Nasdaq
Stock Market, Inc. with respect to the continued listing of the Company's
securities on the Nasdaq SmallCap Market.
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
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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, or (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. In addition, the original
Stock Purchase Agreement provided that the Company or Acquisition Partners could
terminate the Stock Purchase Agreement 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. However, Acquisition Partners
and Reel Partners have agreed to modify the termination provisions of the Stock
Purchase Agreement to change the December 7, 1997 deadline to December 11, 1997;
provided, that if shareholder approval of the Amendment is obtained such
deadline will be the earlier of (i) three business days following the Company's
receipt of a favorable resolution of the Company's pending appeal with The
Nasdaq Stock Market, Inc. ("Nasdaq") of Nasdaq's decision to delist the
Company's securities from trading on the Nasdaq SmallCap Market, or (ii) January
9, 1998. See "The Financing Proposal -- Special Considerations -- NASDAQ
LISTING."
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 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
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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.
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. In August 1997, the Company received notice from The
Nasdaq Stock Market, Inc. ("Nasdaq") stating that unless (i) the Company's
capital surplus equaled $2,000,000 or more and the market value of the public
float of the Company's Common Stock equaled $1,000,000 or more for ten
consecutive trading days, or (ii) the bid price of the Company's Common Stock
exceeded $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 Nasdaq, the Company's securities would be delisted from trading on
the Nasdaq SmallCap Market. Subsequent to receipt of such letter, the Company
submitted information to Nasdaq regarding the Financing Proposal and expressed
the Company's belief that the closing of the Equity Financing would enable the
Company to meet the Nasdaq SmallCap Market continued listing requirements.
On November 7, 1997, the Company received notice that Nasdaq had not
accepted the Company's plan of compliance with the Nasdaq SmallCap Market
listing requirements due primarily to the fact that there could be no assurance
that the Equity Financing would occur and that no alternative plan of compliance
was offered by the Company. In addition, Nasdaq indicated that its
determination that the Company had failed to demonstrate compliance with the
continued listing requirements of The Nasdaq SmallCap Market on a short or
long-term basis was based, in part, upon Nasdaq's belief that the Company's
long-term capital needs were in excess of the funds raised as a result of the
Equity Financing, its limited working capital and history of losses, as well as
its failure to comply with the covenants in its bank credit lines.
On or about November 12, 1997, the Company submitted an appeal of the
decision of Nasdaq and was informed that, pending resolution of the appeal, the
Company's securities would continue to be listed on the Nasdaq SmallCap Market.
As of November 14, 1997, the Company had not been notified of the date of the
appeal hearing. However,
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<PAGE>
based on conversations with representatives of Nasdaq, the Company believes that
the appeal hearing will be scheduled for mid-December 1997.
The terms of the Stock Purchase Agreement originally provided that such
agreement could be terminated by either the Company or Acquisition Partners if
the Closing shall not have occurred on or before December 7, 1997 (for reasons
other than delays due to Securities and Exchange Commission comments). However,
Acquisition Partners and Reel Partners have agreed to modify the termination
provisions of the Stock Purchase Agreement to provide that, notwithstanding the
December 7, 1997 deadline, the Stock Purchase Agreement may be not be terminated
by either party as a result of a failure to meet the December 7, 1997 deadline
unless (i) the shareholders of the Company do not approve the Financing Proposal
at the Meeting, or (ii) the pending appeal of the Company to Nasdaq results in a
final decision by Nasdaq to delist the Company's securities from trading on the
Nasdaq SmallCap Market.
The continued listing of the Company's Common Stock on the Nasdaq SmallCap
Market is a condition to the closing of the Equity Financing. Even if
shareholder approval of the Financing Proposal is obtained, in the event that
the Company is not able to maintain its Nasdaq SmallCap Market listing, there
can be no assurance that the Equity Financing will occur. Although the Company
believes that upon completion of the Equity Financing the Company will meet the
requirements for its securities to continue to be listed on the Nasdaq SmallCap
Market, there can be no assurance that The Nasdaq Stock Market appeal procedures
will result in a favorable decision for the Company. Moreover, 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's securities
will be delisted from the Nasdaq SmallCap Market. Any such delisting would have
a material adverse effect on price, liquidity and trading market for the
Company's Common Stock and on the Company's reputation and standing in the
motion picture theater industry. Subsequent to any such delisting, there can be
no assurance that the securities would be traded in any market. In addition, if
delisted from the Nasdaq SmallCap Market, the Company's Common Stock would be
considered a "penny-stock" security, as defined in the Securities Exchange Act
of 1934, as amended, and the Company's securities would be subject to the
"Penny-Stock Disclosure Rules" as provided in the Securities Enforcement
Remedies and Penny Stock Reform Act of 1990, as amended. To the extent that the
applicability of such "penny stock" rules to the Company's Common Stock results
in an unwillingness of broker-dealers or investors to trade or purchase the
Company's securities, the market price, liquidity and trading market for the
Company's securities would be materially adversely affected.
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 as
directed by 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.
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
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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.
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<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>
- ---------------------------
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<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 to SCP or other members of the Investor Group
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.
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<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 Managing General Partner of the 57
(3) 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) Managing Director of the general 34
partner of SCP Private Equity
Partners, L.P., a private equity
investment fund
Wayne B. Weisman (3) Partner of the general partner of 41
SCP Private Equity Partners, L.P.,
a private equity investment fund
- -------------------------
(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.
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<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.
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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.
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<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:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards
------------------------------------------------------------------ -------------------
Name and All Other Securities
Principal Position Annual Underlying
- ------------------ Year Salary Bonus Compensation Options/SARs
---- ------ ----- ------------
<S> <C> <C> <C> <C>
John Ellison, Jr. . . . . . . . . . . . 1997 $181,944 $50,000 --- (1) -0-
President and Chief Executive 1996 $167,620 $50,000 --- (1) -0-
Officer 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
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<PAGE>
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 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.
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<PAGE>
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.
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 24, 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 17, 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.
- 23 -
<PAGE>
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):
A-1
<PAGE>
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, 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
A-2
<PAGE>
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 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,
A-3
<PAGE>
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 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.
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(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 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.
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(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 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
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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 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.
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(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" 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,
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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.
(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
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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.
(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
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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 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
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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 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
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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").
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.
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(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.
(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").
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(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).
(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.
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"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 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.
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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 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.
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(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 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.
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(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 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
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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.
(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
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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.
(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
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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
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
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<PAGE>
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 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.
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(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)(l), 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.
(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.
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(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).
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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<PAGE>
AMENDMENT NO. 1 TO
STOCK PURCHASE AGREEMENT
THIS AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT (this "AMENDMENT") is made
and entered into as of November 13, 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. The Company, Lender and Buyer have previously entered into that
certain Stock Purchase Agreement, dated as of September 23, 1997 (the
"Agreement").
B. On November 7, 1997, the Company received notice from The Nasdaq Stock
Market, Inc. ("Nasdaq") of a decision to delist the Company's Common Stock from
trading on the Nasdaq SmallCap Market. On or about November 11, 1997, the
Company appealed such decision. However, it is expected that resolution of the
Company's appeal to Nasdaq (the "Appeal") will not occur until after December 7,
1997 and after the date of the special meeting of the Company's stockholders at
which the stockholders of the Company will consider the proposal to approve the
transactions contemplated by the Agreement (the "Stockholders Meeting").
C. Section 8(k)(i)(5) of the Agreement currently provides that the
Agreement may be terminated by either 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 (as defined in the Agreement), the date for the Closing shall be
extended to January 6, 1998.
D. In order to facilitate the resolution of the Appeal and the closing of
the transactions contemplated by the Agreement, the Company, Acquisition
Partners and Reel Partners wish to amend Section 8(k)(i)(5) in order to extend
the December 7, 1997 date as described in this Amendment.
AGREEMENTS
In consideration of 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
Amendment being incorporated herein by this reference thereto):
1. AMENDMENT OF SECTION 8(k)(i)(5). The Company, Acquisition Partners
and Reel Partners agree that Section 8(k)(i)(5) of the Agreement is hereby
amended to read as follows:
"(5) by either of Buyer or the Company if the Closing shall not have
been consummated on or before December 11, 1997; PROVIDED THAT, if
shareholder approval of the Amendment is obtained, such deadline will
automatically be extended to the earlier of (i) three business days
following the Company's receipt of a favorable resolution of the Company's
pending appeal with The Nasdaq Stock Market, Inc. ("Nasdaq") of Nasdaq's
decision to delist the Company's securities from trading on the Nasdaq
SmallCap Market, or (ii) January 9, 1998; PROVIDED FURTHER THAT, the party
terminating this Agreement shall only be entitled to do so if such party is
not then in default of this Agreement; AND PROVIDED FURTHER THAT, if there
is a Delayed Proxy, the date for the Closing shall be automatically
extended to January 9, 1998."
2. EFFECT OF AMENDMENT. Except as amended herein, all of the terms,
conditions, covenants and agreements of the Agreement shall remain in full force
and effect. In the event of any inconsistency or conflict between the terms of
this Amendment and the terms of the Agreement, the terms of this Amendment shall
control.
3. MISCELLANEOUS.
(a) GOVERNING LAW. This Amendment 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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(b) COUNTERPARTS. This Amendment 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.
(c) SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns.
(d) 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 Amendment and the consummation of the
transactions contemplated hereby.
(e) NO STRICT CONSTRUCTION. The language used in this Amendment 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.
(f) ARBITRATION. The parties agree that all disputes, claims and
other matters in controversy arising under this Amendment shall be submitted to
binding arbitration in accordance with the provisions and procedures set forth
in the Agreement.
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/ Alan Grossberg
---------------------------------------------------
Alan Grossberg, Senior Vice 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
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"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.
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);
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(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;
(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.
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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.
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
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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 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
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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.
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
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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.
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.
B-7
<PAGE>
(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).
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
B-8
<PAGE>
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.
<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.
