PRER14A 1 dprer14a.htm FORM PRER14A FOR GENIUS PRODUCTS, INC. Form PRER14A for Genius Products, Inc.
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(Rule 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

Filed by the Registrant  x

 

Filed by a Party other than the Registrant  ¨

 

Check the appropriate box:

 

x       

   Preliminary Proxy Statement   

¨        

   Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

¨        

   Definitive Proxy Statement      

¨        

   Definitive Additional Materials          

¨        

   Soliciting Material Pursuant to §240.14a-11(c) or §240.14a-12          

 

GENIUS PRODUCTS, INC.

(Name of Registrant as Specified in Its Charter)

 

N/A

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (check the appropriate box):

 

¨ No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) or 0-11.

 

  (1) Title of each class of securities to which transaction applies:

 

 
  (2) Aggregate number of securities to which transaction applies:

 

 
  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 
  (4) Proposed maximum aggregate value of transaction:

 

 

 

 
  (5) Total fee paid:

 

 

 

 

 

x Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration number, or the Form or Schedule and date of filing.

 

  (1) Amount previously Paid:

 

 
  (2) Form, schedule or Registration Statement No.:

 

 
  (3) Filing party:

 

 
  (4) Date filed:

 

 


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LOGO

 

February 14, 2006

 

Dear Stockholder:

 

You are cordially invited to attend a Special Meeting of Stockholders of Genius Products, Inc. (the “Company”) to be held at the Del Mar Hilton Hotel, 15575 Jimmy Durante Boulevard, Del Mar, California 92014 at 9:00 a.m. local time on March 16, 2006, to consider and vote on the following proposals:

 

Proposal 1:    To approve the contribution of substantially all of the Company’s assets to The Weinstein Company Holdings LLC or another company designated by The Weinstein Company LLC, pursuant to a Master Contribution Agreement, dated as of December 5, 2005, by and among the Company, The Weinstein Company LLC and The Weinstein Company Holdings LLC.
Proposal 2:    To approve the amendment and restatement of the Company’s certificate of incorporation in the form attached as Appendix E to this Proxy Statement, and to approve the sub-proposals described in the attached Notice of Special Meeting of Stockholders.
Proposal 3:    To approve an amendment and restatement of our 2004 Stock Incentive Plan to increase the number of shares of common stock available for issuance under the plan from 7,500,000 shares to 13,500,000 shares.
Proposal 4:    To approve adjournments of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the meeting to approve one or more of the proposals described above.

 

We encourage you to vote on all the matters listed in the enclosed Notice of Special Meeting of Stockholders. The Board of Directors unanimously recommends a vote FOR each of the proposals and sub-proposals listed in the Notice.

 

Whether or not you plan to attend the Special Meeting in person, it is important that your shares be represented and voted at the meeting. After reading the enclosed Notice and Proxy Statement, please submit your proxy or voting instructions by telephone, or by using a traditional proxy or instruction card. If you choose to vote by traditional proxy or instruction card, please sign, date and mail the card in the envelope provided.

 

All stockholders of record on February 3, 2006 are invited to attend the Special Meeting. No ticket is required for admission.

 

I look forward to greeting those of you who are able to attend the Special Meeting in person. Thank you for your continued support.

 

Sincerely,

/S/    TREVOR DRINKWATER        
Trevor Drinkwater
Chief Executive Officer

 

This Proxy Statement is dated February 14, 2006 and is first being mailed to stockholders of Genius Products on or about that date.

 

YOUR VOTE IS IMPORTANT. PLEASE PROMPTLY SUBMIT YOUR PROXY

BY TELEPHONE OR MAIL.


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GENIUS PRODUCTS, INC.

740 Lomas Santa Fe, Suite 210

Solana Beach, California 92075

 


 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

 

A Special Meeting (the “Special Meeting”) of the Stockholders of Genius Products, Inc. (the “Company”) will be held at the Del Mar Hilton Hotel, 15575 Jimmy Durante Boulevard, Del Mar, California 92014 at 9:00 a.m. local time on March 16, 2006, for the following purposes:

 

Proposal 1:    A proposal to approve the contribution of substantially all of the Company’s assets to The Weinstein Company Holdings LLC or another company designated by The Weinstein Company LLC (“TWC”), pursuant to a Master Contribution Agreement, dated as of December 5, 2005, by and among the Company, TWC and The Weinstein Company Holdings LLC (the “Transaction”).
Proposal 2:    A proposal to approve the amendment and restatement of the Company’s certificate of incorporation, in the form attached as Appendix E to this Proxy Statement, with the following sub-proposals:
    

•      2A—a proposal to approve a provision restricting the acts or activities in which the Company may engage to certain limitations arising under the Transaction documents;

 

•      2B—a proposal to approve the increase of the number of authorized shares of common stock from 100,000,000 to 300,000,000 shares and the increase of the number of authorized shares of all classes of stock from 110,000,000 to 310,000,000 shares;

 

•      2C—a proposal to approve a provision authorizing Series W Preferred Stock and establishing the rights, preferences and powers, and the qualifications, limitations and restrictions, of Series W Preferred Stock;

 

•      2D—a proposal to modify the rights, preferences and powers, and the qualifications, limitations and restrictions, of Common Stock;

 

•      2E—a proposal to approve a provision by which the Company elects out of the Delaware law restricting business combinations with interested stockholders; and

 

•      2F—a proposal to approve a provision by which the Company renounces the Company’s interest or expectancy in, or in being offered the opportunity to participate in, corporate opportunities engaged in by TWC (including its affiliates and related persons).

Proposal 3:    A proposal to approve an amendment and restatement of our 2004 Stock Incentive Plan to increase the number of shares of common stock available for issuance under the plan from 7,500,000 shares to 13,500,000 shares.
Proposal 4:    A proposal to approve adjournments of the Special Meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the meeting to approve one or more of the proposals described above.

 

Only stockholders of record at the close of business on February 3, 2006 are entitled to notice of, and to vote at, the meeting and any adjournments thereof. All stockholders are cordially invited to attend the meeting in person.

 

If stockholders wish to approve the Transaction, then they must approve Proposal 1 relating to the Transaction and Proposal 2 relating to the amendment and restatement of our certificate of incorporation, including each of the related sub-proposals included in Proposal 2.

 

WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, YOU ARE URGED TO FILL IN THE ENCLOSED PROXY AND TO SIGN AND FORWARD IT IN THE ENCLOSED BUSINESS REPLY


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ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING IN ORDER THAT THE PRESENCE OF A QUORUM MAY BE ASSURED. ANY STOCKHOLDER WHO SIGNS AND SENDS IN A PROXY MAY REVOKE IT BY EXECUTING A NEW PROXY WITH A LATER DATE, BY WRITTEN NOTICE OF REVOCATION TO THE SECRETARY OF THE COMPANY AT ANY TIME BEFORE IT IS VOTED, OR BY ATTENDING THE MEETING AND VOTING IN PERSON.

 

YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF STOCK THAT YOU HOLD. YOUR COOPERATION IN PROMPTLY RETURNING YOUR PROXY WILL HELP LIMIT EXPENSES INCIDENT TO PROXY SOLICITATION.

 

       

By Order of the Board of Directors

Solana Beach, California

February 14, 2006

      /S/    TREVOR DRINKWATER        
     

Trevor Drinkwater

Member of the Board, President and Chief Executive Officer


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TABLE OF CONTENTS

 

SUMMARY OF THE TRANSACTION

   3

The Companies

   3

The Transaction

    

The Contribution Agreement

    

Excluded Assets

   6

Contingent Dividend Right

   6

The LLC Agreement

   6

Issuance to Genius Products of Class G Units in the Distributor

    

The Distribution Agreement

    

Ownership of Class W Units in the Distributor

    

Issuance to TWC of Series W Preferred Stock in Genius Products

    

Termination Provisions

   7

Restrictions on Competing Transactions

   7

Restrictions on our Business Following the Closing

   8

Reasons for the Transaction

   8

Risk Factors

   8

Recommendation of our Board of Directors

   8

Opinion of Genius Products’ Financial Advisor to Our Board of Directors

   8

Our Directors and Executive Officers Following the Transaction

    

Interests of Directors, Executive Officers and Affiliates

   8

Equity Financing

    

No Appraisal Rights

   9

Location, Time and Date of The Special Meeting

   9

Record Date and Voting Rights for the Special Meeting

   9

QUESTIONS AND ANSWERS ABOUT THE TRANSACTION

   10

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING

   14

SELECTED CONSOLIDATED FINANCIAL DATA

   17

NOTE REGARDING PRO FORMA FINANCIAL INFORMATION

    

RISK FACTORS

   24

Risks Related to the Transaction

   24

Risks Related to Our Business Following the Transaction

   26

CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION

   30

PROPOSAL 1: APPROVAL OF THE CONTRIBUTION OF SUBSTANTIALLY ALL OF OUR ASSETS PURSUANT TO THE CONTRIBUTION AGREEMENT

   31

The Transaction

   31

The Companies

   32

Background of the Transaction

   34

Regulatory Matters

   39

Reasons for the Transaction

   39

Recommendation of our Board of Directors

   40

Opinion of Genius Products’ Financial Advisor to Our Board of Directors

   41

Interests of Directors, Executive Officers and Affiliates

   49

No Appraisal Rights

   50

Certain United States Federal Income Tax Consequences

   50

 

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MATERIAL AGREEMENTS AND DOCUMENTS RELATING TO THE TRANSACTION

   51

SERIES W PREFERRED STOCK TO BE ISSUED TO TWC

   51

THE CONTRIBUTION AGREEMENT

   54

Assets to be Contributed by Genius Products

   54

Excluded Assets

   54

Assumed Liabilities

   55

Excluded Liabilities

   55

Consideration

   56

Closing Date

   56

Assets and Liabilities of the Distributor

   56

Creation of New Distributor

   57

Representations and Warranties

   57

Pre-Closing Covenants

   58

Additional Agreements

   60

Contingent Dividend Right

   60

Conditions to Closing

   61

Termination

   63

Termination Fees

   64

Survival of Covenants, Representations and Warranties

   65

Indemnification by TWC

   65

Indemnification by Genius Products

   66

Limitations on Indemnification

   66

Expenses

   67

THE LLC AGREEMENT

   67

Purposes of the Distributor

   67

Term

   67

Remuneration to Members

   68

Voting Rights

   68

Admission of Additional Members

   68

Withdrawals or Resignations

   68

Members’ Meetings; Quorum; Votes

   68

Devotion of Time; Company Opportunities; Other Activities

   68

Content Acquisition Opportunities

   69

Classes of Units

   71

Capital Accounts

   72

Initial Contributions by Genius Products

   72

Additional Capital Contributions

   72

Withdrawal of Capital Contributions

   73

Repurchase of Class W Units

   73

Redemption Rights of Holder of Class W Units

   74

Redemptions

   77

Management through the Managing Member

   77

Limitations on the Authority of the Managing Member

   77

Officers

   78

Right of First Negotiation for Genius Products Financings

   78

Distributions

   79

Tax Distributions

   79

Allocations of Net Income and Net Losses

   79

Distributions in Kind

   79

 

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Liability for Amounts Distributed

  80

Performance of Duties; Liability of Members

  80

Exculpation and Indemnification

  80

Insurance

  80

Transfer of Interests

  81

Restrictions on Transfer

  81

Dissolution and Winding Up

  81

Accounting, Records and Reporting by Members

  82

Amendments

  82

Costs

  83

THE DISTRIBUTION AGREEMENT

  83

Grant of Rights

  83

Certain Important Defined Terms

  83

Exclusivity

  85

Manufacturing

  85

Marketing and Advertising

  86

Distribution

  86

Approvals and Controls; Restrictions

  87

Delivery of Materials

  89

Expenses

  89

Application of Gross Receipts

  90

Deemed Distribution Fee

  90

True-Up Payments

  91

Returned Units

  91

Subdistributor/Sublicensee Fees

  91

Excessive Sales to Wholesalers

  91

Security Interest

  91

Accounting and Payment

  92

No Minimum Sales Warranty

  92

Proprietary Rights

  92

Representations and Warranties

  92

Indemnity

  93

Early Termination

  93

Buy-Back Right

  95

Most Favored Nations

  95

ADDITIONAL AGREEMENTS RELATED TO THE TRANSACTION

  95

Voting Agreements

  95

Services Agreement

  96

Registration Rights Agreement

  96

REQUIRED VOTE

  97

PROPOSAL 2, INCLUDING SUB-PROPOSALS 2A-2F—APPROVAL OF THE AMENDMENT AND RESTATEMENT OF OUR CERTIFICATE OF INCORPORATION

  98

Sub-Proposal 2A—Approval of a provision restricting the acts or activities in which the Company may engage to certain limitations arising under the Transaction documents

  98

Sub-Proposal 2B—Approval of the increase of the number of authorized shares of common stock from 100,000,000 to 300,000,000 shares and the increase of the number of authorized shares of all classes of stock from 110,000,000 to 310,000,000 shares

  98

 

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Sub-Proposal 2C—Approval of a provision authorizing Series W Preferred Stock and establishing the rights, preferences and powers, and the qualifications, limitations and restrictions, of Series W Preferred Stock

   100

Sub-Proposal 2D—Approval of the modification of the rights, preferences and powers, and the qualifications, limitations and restrictions, of Common Stock

   100

Sub-Proposal 2E—Approval of a provision by which the Company elects out of the Delaware law restricting business combinations with interested stockholders

   101

Sub-Proposal 2F—Approval of a provision by which the Company renounces the Company’s interest or expectancy in, or in being offered the opportunity to participate in, corporate opportunities engaged in by TWC (including its affiliates and related persons)

   101

PROPOSAL 3: APPROVAL OF AN AMENDMENT AND RESTATEMENT OF OUR 2004 STOCK INCENTIVE PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK AVAILABLE FOR ISSUANCE UNDER THE PLAN FROM 7,500,000 SHARES TO 13,500,000 SHARES

   104

PROPOSAL 4: APPROVAL OF ADJOURNMENTS OF THE SPECIAL MEETING, IF NECESSARY, TO PERMIT FURTHER SOLICITATION OF PROXIES IF THERE ARE NOT SUFFICIENT VOTES AT THE TIME OF THE MEETING TO APPROVE ONE OR MORE OF THE PROPOSALS DESCRIBED ABOVE

   109

BUSINESS OF GENIUS PRODUCTS

   110

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   117

EXECUTIVE COMPENSATION

   126

SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT

   131

MARKET PRICE AND DIVIDEND DATA

   133

STOCKHOLDER PROPOSALS FOR THE 2006 ANNUAL MEETING

   133

EXPERTS

   134

OTHER MATTERS

   134

WHERE YOU CAN FIND MORE INFORMATION

   134

INDEX TO FINANCIAL STATEMENTS OF GENIUS PRODUCTS

   FS-1

APPENDICES

    

APPENDIX A—MASTER CONTRIBUTION AGREEMENT

    

APPENDIX B—OPINION OF JEFFERIES & COMPANY, INC.

    

APPENDIX C—AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF GENIUS PRODUCTS, LLC

    

APPENDIX D—DISTRIBUTION AGREEMENT

    

APPENDIX E—AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

    

APPENDIX F—2004 STOCK INCENTIVE PLAN, AS AMENDED

    

 

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GENIUS PRODUCTS, INC.

740 Lomas Santa Fe, Suite 210

Solana Beach, California 92075

 


 

PROXY STATEMENT

 


 

Solicitation of Proxies

 

This Proxy Statement is furnished in connection with the solicitation of proxies by the board of directors of Genius Products, Inc., a Delaware corporation (the “Company” or “Genius Products”), for use at the Special Meeting of Stockholders to be held at the Del Mar Hilton Hotel, 15575 Jimmy Durante Boulevard, Del Mar, California 92014 on March 16, at 9:00 a.m. local time and at any and all adjournments thereof (the “Special Meeting”), for the purposes set forth in the accompanying Notice of Special Meeting of Stockholders. Accompanying this Proxy Statement is the board of directors’ proxy for the Special Meeting, which you may use to indicate your vote as to the proposals described in this Proxy Statement.

 

In addition to these mailed proxy materials, our officers, directors and employees and The Altman Group, 1200 Wall Street West, Third Floor, Lyndhurst, NJ, 07071 may also solicit proxies in person, by telephone, or by other means of communication. Officers, directors and employees will not be paid any additional compensation for soliciting proxies, but The Altman Group will be paid its customary fee of approximately $6,500 plus out-of-pocket expenses if it solicits proxies. We also may reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

 

Revocation of Proxies

 

All Proxies that are properly completed, signed and returned to us prior to the Special Meeting, and that have not been revoked, will be voted in favor of the proposals described in this Proxy Statement unless otherwise directed. A stockholder may revoke his or her proxy at any time before it is voted either by filing with the Secretary of the Company, at its principal executive offices, a written notice of revocation or a duly executed proxy bearing a later date or by attending the Special Meeting and expressing a desire to vote his or her shares in person.

 

Record Date and Voting

 

The close of business on February 3, 2006 has been fixed as the record date for the determination of stockholders entitled to notice of and to vote at the Special Meeting and any adjournment of the Special Meeting. As of the record date, we had outstanding 60,438,154 shares of common stock, par value $.0001 per share.

 

Each stockholder of record is entitled to one vote for each share held on all matters to come before the meeting. All proxies that are returned will be counted by the Inspector of Elections in determining the presence of a quorum and on each issue to be voted on for which a vote was cast. An abstention from voting or a broker non-vote will not be counted in the voting process. Abstentions will be counted towards the vote total for each proposal, and will have the same effect as “Against” votes. Broker non-votes will not be counted for purposes of determining whether any of the proposals are approved and will have the same effect as “Against” votes on those proposals that must be approved by a majority of our outstanding shares of common stock (Proposals 1 and 2, including Sub-Proposals 2A-2F).

 

Stockholders may revoke any proxy before it is voted by attendance at the meeting and voting in person, by executing a new proxy with a later date, or by giving written notice of revocation to the Secretary of the Company.

 

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The shares represented by proxies that are returned properly signed will be voted in accordance with each stockholder’s directions. If the proxy card is signed and returned without direction as to how they are to be voted, the shares will be voted as recommended by our board of directors.

 

Mailing of Proxy Statement and Proxy Card

 

Our principal executive offices are located at 740 Lomas Santa Fe, Suite 210, Solana Beach, California 92075. This Proxy Statement is dated February 14, 2006, and this Proxy Statement and the accompanying proxy card are first being mailed to stockholders on or about that date.

 

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SUMMARY OF THE TRANSACTION

 

This summary highlights selected information from this Proxy Statement relating to the Transaction (Proposal 1) and related matters, but does not contain all of the information that may be important to you. To better understand the Transaction and related matters, you should read this entire document carefully, including the Master Contribution Agreement attached as Appendix A and incorporated by reference into this Proxy Statement (the “Contribution Agreement”), the opinion of Jefferies & Company, Inc. attached as Appendix B and the other documents attached as appendices to this Proxy Statement.

 

In addition, important business and financial information about Genius Products is contained in this Proxy Statement. You may obtain copies of our public filings with the Securities and Exchange Commission without charge by following the instructions in the section entitled “Where You Can Find More Information”.

 

We have included page references parenthetically to direct you to a more complete description of the topics presented in this summary.

 

The Companies (See pages 32 - 34)

 

Genius Products, Inc.

 

Genius Products is an entertainment company that produces, publishes and distributes films, videos and music on digital video discs (“DVDs”), video cassettes or (“VHS”), and compact discs (“CDs”), under a variety of branded names and non-branded names. Our products are sold at traditional, direct response, mail order and internet retailers nationwide and, to a lesser extent, internationally.

 

Genius Products is a publicly traded corporation incorporated in the State of Delaware. Our common stock trades on the Over-the-Counter Bulletin Board under the symbol, “GNPI.OB”. For more information, please visit our website at www.geniusproducts.com; however, the information on our website is not a part of this Proxy Statement. Our address is 740 Lomas Santa Fe, Suite 210, Solana Beach, California 92075, and our telephone number is (858) 793-8840.

 

The Weinstein Company LLC

 

The Weinstein Company LLC (“TWC”) is a newly-formed motion picture company founded by brothers Robert Weinstein and Harvey Weinstein (together, the ‘‘Weinsteins’’). From 1979 to March 2005, the Weinsteins were Co-Chairmen of Miramax Film Corp., a company they founded and, in 1993, sold to Walt Disney Pictures and Television (“Disney”). On March 29, 2005, the Weinsteins and Disney jointly announced the termination of the Weinsteins’ employment contracts with Disney.

 

As part of the Disney separation, Disney, Miramax and an affiliate of TWC entered into an agreement which, among other things, gives the TWC affiliate the right to acquire from Miramax (i) Miramax’s rights to more than 80 films and film projects, a number of which have been released, are complete and ready for release or are in post-production, and a majority of which are in development; (ii) the rights to produce, co-finance and co-distribute sequels to a number of established film franchises, including Scary Movie (the next installment of which, Scary Movie 4, is in production), Scream and Spy Kids series; and (iii) Miramax’s rights to 12 television projects in varying stages of development and production. The agreement also assigns to the TWC affiliate the Dimension Films name, under which more than 60 films have been theatrically released to date. The Miramax name and the Miramax Library (which includes both Miramax and Dimension titles) remain property of Disney. In addition, TWC has, to date, separately acquired rights to more than 25 additional projects from various parties, a number of which are completed or in post-production.

 

Summary of the Transaction (See pages 31 - 32)

 

On December 5, 2005, Genius Products and TWC entered into the Master Contribution Agreement, a copy of which is attached as Appendix A to this Proxy Statement. Under the Contribution Agreement, we have agreed with TWC to form a new business venture (referred to as the “Distributor”) that will operate all of the existing businesses of Genius Products and become the exclusive distributor of digital video discs (“DVDs”) and other forms of home video for certain filmed entertainment products produced by TWC.

 

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The Contribution Agreement provides that, on or prior to the closing, the following events will occur (referred to as the “Transaction”):

 

    TWC will enter into the Distribution Agreement with an existing company, which is currently an affiliate of TWC named “The Weinstein Company Holdings LLC”. The Weinstein Company Holdings LLC will then transfer away substantially all of its assets and liabilities, other than the Distribution Agreement, and become the Distributor. Immediately prior to closing the Distributor will be wholly-owned by TWC’s affiliates and investors;

 

    The name of the Distributor will be changed to “Genius Products, LLC”;

 

    We will contribute substantially all of our existing operations, assets (including cash) and certain of our liabilities to the Distributor in exchange for a 30% equity interest in the Distributor in the form of Class G Units;

 

    We will become the managing member of the Distributor, although TWC will have the ability to control us and appoint a majority of our board of directors (as describe further below);

 

    The remaining 70% equity interest in the Distributor will be held by TWC’s affiliates and investors, and will take the form of Class W Units in the Distributor. The holders of Class W Units will have the right to require that the Distributor redeem their Units for up to 70% of the outstanding common stock of Genius Products (with such percentage subject to adjustment based on certain events) or, under certain circumstances, cash; and

 

    We will amend our Certificate of Incorporation to authorize Series W Preferred Stock and issue to TWC 100 shares of Series W Preferred Stock. These shares will have no material economic value but will immediately give TWC certain control rights over our company, including a 70% voting interest and the right to elect five out of seven directors on our Board of Directors (three of whom must be independent directors).

 

The following documents will be adopted or executed in connection with the closing of the Transaction:

 

    The Distributor will adopt an Amended and Restated Limited Liability Company Agreement in the form attached as Appendix C to this Proxy Statement (the “LLC Agreement”);

 

    The Distributor will enter into the Distribution Agreement with TWC in the form attached as Appendix D to this Proxy Statement (the “Distribution Agreement”);

 

    Genius Products will adopt an amended and restated certificate of incorporation in the form attached as Appendix E to this Proxy Statement; and

 

    We will enter into the other documents and agreements described below under Proposal 1 (beginning on page 95).

 

Following the closing, the Distributor will carry on our existing business, and our primary asset will consist of our 30% equity interest in the Distributor, evidenced by our Class G Units in the Distributor. Since our entire business will be conducted by the Distributor, our current stockholders will only be entitled to benefit from 30% of the net profits, if any, that are generated by the Distributor, including net profits from our existing businesses that we are contributing to the Distributor and from the new business of distributing home video products for TWC’s films. However our management believes that owning a 30% equity interest in the Distributor, with its future prospects as a home video distributor for TWC’s films, is more attractive for our stockholders than owning 100% of Genius Products’ existing business.

 

Following the closing, Genius Products, Inc. will remain a publicly-traded company and our existing shares of common stock will remain outstanding and held by our public stockholders. Although TWC is not a public

 

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company, we do not intend that the Transaction will be part of any “going private” transaction or series of transactions by Genius Products. We will remain a separate company from TWC following the closing, and TWC’s capital will not be available to us.

 

The following diagram illustrates the structure of the Transaction and the relationships among the parties to the Transaction as of the closing of the Transaction:

 

LOGO

 

LOGO

 

We expect to finance the business of the Distributor after closing through its cash flow from operations and the cash contributed from Genius Products at closing. On December 6, 2005, we closed a $32 million private placement financing in which we issued 16,000,000 shares of our common stock at a purchase price of $2.00 per share and five-year warrants to purchase 4,800,000 shares of common stock with an exercise price of $2.40 per share. The closing of this financing was a condition to the closing of the Transaction. We intend that these funds will be contributed to the Distributor at closing and be used to finance the operations of the Distributor in the future. We have agreed with the investors in the private placement financing to register for resale with the Securities and Exchange Commission their shares of common stock purchased in the financing and shares issuable upon exercise of warrants issued to them in the financing. We have registered these shares for resale; however Genius Products will not receive any portion of the proceeds from the sale of these shares by the investors.

 

Accounting Policies Relating to the Transaction (See pages 23)

 

At the closing of the Transaction, Genius will contribute to the Distributor all of its operating business, including substantially all of its assets and certain liabilities, and receive a 30% equity interest in the Distributor. Genius Products will record its contribution of assets and liabilities to the Distributor at historical values with no gain or loss. After closing, all of our operating businesses, including the existing businesses of Genius Products and the new business of distributing content provided by TWC under the Distribution Agreement, will be conducted by the Distributor.

 

We expect that, after closing of the Transaction, Genius Products will consolidate its financial statements with those of the Distributor. Therefore, after closing, all revenues of the Distributor are expected to be reflected in the consolidated statements of operations of Genius Products. Revenues from home video sales will be

 

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recorded based upon the gross amount billed to customers, as opposed to the net amount retained after payments under the Distribution Agreement and to other licensors. All of the net income of the Distributor will be reflected in the consolidated statements of operations of Genius Products; however, we will record a minority interest in earnings before taxes with respect to the Class W Units of the Distributor to reflect the Class W Units’ 70% share of the earnings of the Distributor. After subtracting the minority interest, our share of the earnings before taxes of the Distributor will amount to 30%.

 

Excluded Assets (See pages 54 - 55)

 

The assets excluded from the assets to be contributed by Genius Products in the Transaction include, among other things:

 

    certain claims, demands, rights or causes of action, and any cash, assets or other property recovered by Genius Products therefrom;

 

    any recovery of cash, assets or other property received by Genius Products that represents a return of or on any amounts or obligations previously paid or incurred by Genius Products in connection with the excluded liabilities described below on page 55;

 

    benefit plans and contracts of insurance of Genius Products for employee group medical, dental and life insurance plans;

 

    all insurance policies of Genius Products, to the extent that the parties mutually agree that any such items should not be transferred to the Distributor, and subject to the obligation of the Distributor to reimburse Genius Products for the costs thereof as provided in the Services Agreement described below under “Services Agreement”, to the extent that the Distributor receives the benefits of these plans, contracts and policies; and

 

    all rights of Genius Products under the Contribution Agreement and the other agreements relating to the Transaction.

 

Contingent Dividend Right (See pages 60 - 61)

 

The Contribution Agreement provides that, within 30 days following the closing of the Transaction or such later time as is practicable, we will issue to our stockholders of record on the date of the closing (to the extent practicable) an instrument (the “Contingent Dividend Right”) entitling the holder to receive from Genius Products cash payments from time to time after the closing solely based on cash received by Genius Products from the exercise or conversion, after the closing of the Transaction, of options, warrants or other convertible securities that were issued and outstanding as of the closing date. These cash payments will only be made when, as and if declared by the board of directors of Genius Products pursuant to a vote of a committee of the board consisting only of directors not appointed by TWC, but we will have no obligation to make or declare such payments. For the reasons discussed on page 61, we cannot provide a reliable estimate of the future value or cash proceeds likely to be paid to holders of the Contingent Dividend Rights.

 

The LLC Agreement (See pages 67 - 83 and Appendix C)

 

At the closing of the Transaction, we would become party to the LLC Agreement, which governs the ownership and management of the Distributor. Under the LLC Agreement, Genius Products would be the initial Managing Member of the Distributor, with the power and authority to manage and direct the business and affairs of the Distributor under the terms and conditions of the LLC Agreement. However, the LLC Agreement requires that Genius Products obtain TWC’s approval before taking many actions. The LLC Agreement also provides that many content acquisition opportunities must first be presented to TWC before Genius Products may pursue those opportunities.

 

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In addition, the LLC Agreement provides that TWC or its designee will become the Managing Member of the Distributor, instead of Genius Products, if we become insolvent or bankrupt, if we violate the membership interest transfer restrictions in the LLC Agreement or a lender forecloses on a security interest granted with respect to our Class G Units in the Distributor.

 

Redemption Rights under the LLC Agreement (See pages 73 - 77)

 

Under the LLC Agreement, each holder of Class W Units (consisting of TWC’s affiliates and investors) will have the right to require the Distributor to redeem all or a portion of their Class W Units in exchange for new shares of common stock of Genius Products which would give such holders 70% of our outstanding common stock after giving effect to the issuance of the new shares (with such percentage subject to adjustment based on certain events) or, under certain circumstances, cash. Although the new shares of common stock would dilute our existing stockholders, we would receive in exchange for our new shares an equivalent pro rata amount of Class W Units in the Distributor (subject to certain adjustments), so that the indirect pro rata interests of our pre-redemption stockholders in the Distributor (our primary operating asset) would remain substantially unchanged.

 

At the request of the Distributor and with the consent of the holder of Class W Units requesting redemption, the Distributor may deliver cash in lieu of Genius common stock for the redeemed Class W Units. If the Distributor makes this election, the cash redemption price would likely be funded by either existing cash of the Distributor or by the sale by Genius Products of new shares of common stock to investors and the contribution of the cash proceeds to the Distributor by Genius.

 

Class G Units and Class W Units in the Distributor (See page 71)

 

At the closing of the Transaction, we will receive Class G Units representing a 30% equity interest in the Distributor as of the closing of the Transaction. We will not acquire any ownership in TWC or any of its affiliates as a result of the Transaction, other than the Distributor. The TWC parties will hold Class W Units in the Distributor following the closing of the Transaction, representing an initial 70% equity interest in the Distributor, which may be increased following the closing if we are required to satisfy our indemnification obligations under the Contribution Agreement. The Class W Units will give the holders a $60 million liquidation preference, which is the right to receive the first $60 million in proceeds resulting from any liquidation of the Distributor before Genius Products receives any of the proceeds.

 

Termination Provisions of Contribution Agreement (See pages 63 - 65)

 

The Contribution Agreement contains customary termination provisions which, under certain circumstances in the event of a termination under the Contribution Agreement, may subject us to liability for the payment of a $4,000,000 termination fee or reimbursement of expenses, and includes a provision which permits either party to terminate the agreement if the transaction fails to close by April 15, 2006.

 

Restrictions on Competing Transactions (See page 60)

 

The Contribution Agreement contains customary covenants restricting us prior to the closing from, among other things, soliciting, encouraging or accepting any competing business combination transaction, and our board of directors from withdrawing or modifying its approval or recommendation of the Transaction, subject to the board’s fiduciary obligations.

 

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Restrictions on our Business Following the Closing (See pages 68 - 69)

 

Following the closing of the Transaction, we will be required to devote all of our time and business efforts to serving as the managing member of the Distributor and the other “Genius Permitted Activities” listed below on pages 68 - 69. The Distributor’s activities will be limited to the performance of the Distribution Agreement and the conduct of the business currently conducted by us. In addition, we and the Distributor will be required to offer to TWC the opportunity to acquire new content of which we become aware, before we or the Distributor would be permitted to exploit such new content.

 

Reasons for the Transaction (See pages 39 - 40)

 

We are proposing to enter into the Transaction because we believe that the Transaction is in the best interests of Genius Products and our stockholders. In reaching the decision to approve the Transaction and our entry into the Contribution Agreement and related agreements and documents, our board of directors and a special committee of independent directors considered a variety of factors, including:

 

    Current working capital constraints have hindered our progress in taking full advantage of our position in the retail market by impeding our ability to acquire high quality content;

 

    TWC currently has rights to over 80 projects in various stages of development resulting from the separation from Disney described above, many of which the Distributor will have the exclusive right to distribute in the United States;

 

    The Weinsteins have an established track record as film producers, as demonstrated by their work with Miramax and Disney;

 

    TWC is well financed, having raised a total of approximately $1.2 billion to date, including $490 million in equity, a $500 million film securitization and approximately $200 million from other commercial relationships (although none of these funds will be available to the Distributor); and

 

    The distribution rights available from TWC present an opportunity to transform our product offering and accelerate our revenue and earnings growth.

 

For additional information regarding the reasons for the Transaction, please see the section entitled, “The Transaction—Reasons for the Transaction”, beginning on page 39.

 

Risk Factors (See pages 24 - 29)

 

The Transaction may not achieve the expected benefits for our company because of risks and uncertainties, including those discussed in the section below entitled “Risk Factors”, beginning on page 24, which we urge you to read and consider carefully.

 

Recommendation of our Board of Directors (See pages 40 - 41)

 

Our board of directors unanimously approved the Transaction, the Contribution Agreement and related agreements and documents, and unanimously recommends that our stockholders vote “FOR” each of the proposals in this Proxy Statement.

 

Opinion of Genius Products’ Financial Advisor to our Board of Directors (See pages 41 - 49 and Appendix B)

 

In connection with the Transaction, our financial advisor, Jefferies & Company, Inc., referred to herein as “Jefferies”, rendered its opinion to our board of directors to the effect that, as of December 5, 2005, based upon Jefferies’ review of drafts of the relevant transaction documents as described in the opinion, and based upon the

 

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qualifications, limitations and assumptions set forth in the opinion, the consideration to be received by Genius Products pursuant to the Contribution Agreement is fair, from a financial point of view, to Genius Products. A copy of Jefferies’ opinion is attached as Appendix B to this Proxy Statement. We urge you to read this opinion carefully in its entirety for information with respect to the assumptions made, matters considered and limits of review in connection with the opinion.

 

Our Directors Following the Transaction (See page 52)

 

Effective as of the closing of the Transaction, our board of directors will be reconstituted to consist of seven directors, the holders of shares of our Series W Preferred Stock (initially, TWC) will have the right to elect five directors (three of whom at the time of their election must be independent directors) and the holders of our common stock will have the right to elect the remaining two directors. If the Transaction closes, then we expect that one or more of the directors elected by our stockholders at our 2005 annual meeting of stockholders may resign from our board of directors and five individuals selected by the TWC parties will be appointed to the board. As of the date of this Proxy Statement, we do not know which directors may remain on or be appointed to our board following the closing of the Transaction and which directors may resign.

 

Interests of Directors, Executive Officers and Affiliates (See pages 49 - 50)

 

Some of our directors and executive officers have agreements or arrangements providing them with interests in the Transaction that are different from, or in addition to, the interests of our stockholders.

 

As described below, Trevor Drinkwater, Rodney Satterwhite, Michael Radiloff and Mitch Budin are parties to employment agreement amendments under which they will each receive a grant of additional stock options, rights to severance payments upon termination and other benefits. These employment agreement amendments only become effective upon the closing of the Transaction.

 

In addition, the vesting of all unvested stock options outstanding at the time of the closing of the Transaction, including options held by our directors and executive officers, automatically will accelerate upon the closing of the Transaction. However, pursuant to their employment agreement amendments, each of Messrs. Budin, Satterwhite and Radiloff have agreed to waive the accelerated vesting of a portion of their existing stock options, and Mr. Drinkwater has agreed to restrictions on the sale or transfer of a portion of the shares of our common stock represented by his existing stock options.

 

No Appraisal Rights (See page 50)

 

Under the applicable provisions of the Delaware General Corporation Law, our stockholders will have no right to seek appraisal of their shares of common stock in connection with the Transaction.

 

Location, Time and Date of The Special Meeting (See pages 1, 15)

 

The Special Meeting will be held at the Del Mar Hilton Hotel, 15575 Jimmy Durante Boulevard, Del Mar, California 92014 at 9:00 a.m. local time on Friday, March 20, 2006.

 

Record Date and Voting Rights for the Special Meeting (See pages 15 - 16)

 

Holders of record of our common stock at the close of business on February 3, 2006 will be entitled to vote at the Special Meeting or any adjournment of the Special Meeting. On the record date, 60,438,154 shares of our common stock were outstanding and entitled to vote at the Special Meeting and at any adjournments thereof. Each share of our common stock is entitled to one vote on each matter to be voted upon at the Special Meeting.

 

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QUESTIONS AND ANSWERS ABOUT THE TRANSACTION

 

What is the Transaction?

 

The Transaction is summarized above in the section entitled, “Summary of the Transaction”. For additional information regarding the Transaction, please see the section below entitled “Proposal 1—The Transaction”.

 

What is Genius Products contributing in the Transaction?

 

We will be contributing substantially all of our assets and certain liabilities to a new business venture that will be named Genius Products, LLC (referred to in this Proxy Statement as the “Distributor”), and we will receive in return a 30% equity interest in the Distributor and become the managing member of the Distributor. The other 70% of the equity of the Distributor will be held by TWC’s affiliates and investors. Following the closing, the Distributor will continue to carry on our existing business using our current assets and employees (who are expected to transfer to the Distributor), and the Distributor will also launch the new business of distributing DVDs and home video products for TWC’s films.

 

What is TWC contributing in the Transaction?

 

TWC will enter into an exclusive Distribution Agreement with the Distributor prior to the closing of the Transaction (for details regarding the Distribution Agreement, please see the section below entitled “Proposal 1—Material Agreements And Documents Relating To The Transaction—4. Distribution Agreement”). We believe that the Distribution Agreement is a valuable and highly sought-after right and, when combined with our employees, management team and existing distribution business, will help transform the Distributor into a large and well-recognized entertainment distributor.

 

Will our stockholders retain control of Genius Products?

 

No. Following the closing, Genius Products, Inc. will remain a publicly-traded company and our existing shares of common stock will remain outstanding and held by our public stockholders. However, at closing we will amend our Certificate of Incorporation to authorize Series W Preferred Stock and issue to TWC 100 shares of Series W Preferred Stock. These shares will have no material economic value but will immediately give TWC certain control rights over our company, including a 70% voting interest and the right to elect five out of seven directors on our Board of Directors (three of whom must be independent directors).

 

As discussed further below, TWC’s affiliates and investors will be able to redeem their 70% interest in the Distributor for new shares of our common stock, but in the case of such a redemption the voting rights of the Series W Preferred Stock will be reduced so that the aggregate voting rights of TWC, its affiliates and investors in Genius Products will remain unchanged (initially at 70%).

 

How will the redemption rights of the TWC affiliates and investors operate?

 

The 70% interest in the Distributor that will be held by TWC’s affiliates and investors will take the form of Class W Units in the Distributor. The holders of Class W Units will have the right to require that the Distributor redeem their Units for 70% of the outstanding common stock of Genius Products (with such percentage subject to adjustment based on certain events) or, under certain circumstances, cash. If the Class W Units are redeemed for stock, Genius Products will issue new shares of common stock in exchange for the Class W Units being redeemed. Although the new shares of common stock will dilute our existing stockholders, we will receive in exchange for our new shares an equivalent pro rata amount of Class W Units in the Distributor (subject to certain adjustments), so that the indirect pro rata interests of our pre-redemption stockholders in the Distributor (our primary operating asset) will remain substantially unchanged.

 

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At the request of the Distributor and with the consent of the holder of Class W Units requesting redemption, the Distributor may deliver cash in lieu of Genius common stock for the redeemed Class W Units. If the Distributor makes this election, the cash redemption price would likely be funded by either existing cash of the Distributor or by the sale by Genius Products of new shares of common stock to investors and the contribution of the cash proceeds to the Distributor by Genius.

 

Will any of the consideration that we receive in the Transaction be distributed to our stockholders?

 

No. We will receive Class G Units as part of our contribution of assets to the Distributor. However, we are not permitted to distribute to our stockholders any of these Class G Units in the Distributor.

 

Will Genius Products or its stockholders acquire any ownership interest in TWC as a result of the Transaction?

 

No. Neither Genius Products nor its stockholders will acquire any ownership interest in TWC as a result of the Transaction. We will remain a separate company from TWC, and TWC’s capital will not be available to us. We expect to finance the business of the Distributor after closing through its cash flow from operations and the cash contributed from Genius Products at closing.

 

Why are we proposing to undertake the Transaction?

 

We are proposing to undertake the Transaction because we believe that the Transaction is in the best interests of Genius Products and our stockholders. Although our current stockholders will only be entitled to benefit from 30% of the net profits, if any, that are generated by the Distributor, our management believes that owning a 30% equity interest in the Distributor is more attractive than owning 100% of Genius Products’ existing business. In reaching this decision, our board of directors considered a variety of factors, including:

 

    Current working capital constraints have hindered our progress in taking full advantage of our position in the retail market by impeding our ability to acquire high quality content;

 

    TWC currently has rights to over 80 projects in various stages of development resulting from the separation from Disney described below, many of which the Distributor will have the exclusive right to distribute in the United States;

 

    The Weinsteins have an established track record as film producers, demonstrated by their work with Miramax and Disney;

 

    TWC is well financed, having raised a total of approximately $1.2 billion to date, including $490 million in equity, a $500 million film securitization and approximately $200 million from other commercial relationships (although none of these funds are expected to be available to the Distributor); and

 

    The distribution rights available from TWC present an opportunity to transform Genius Products’ product offering and accelerate our revenue and earnings growth.

 

For additional information regarding the reasons for the Transaction, please see the section entitled “The Transaction—Reasons for the Transaction”.

 

Are there risks that the stockholders of Genius Products should consider in connection with the Transaction?

 

Yes. The Transaction may not achieve the expected benefits for our company because of the risks and uncertainties discussed in the section below entitled “Risk Factors”, which we urge you to read and consider

 

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carefully. Our board of directors identified and considered a variety of potentially negative factors in its deliberations concerning the Transaction, including:

 

    Following the closing of the Transaction, our business, results of operations and financial condition will depend substantially on the quality and financial performance of TWC’s theatrical releases;

 

    If we do not achieve target home video distribution rates for TWC’s films or meet other performance criteria following the closing of the Transaction, TWC may terminate the Distribution Agreement, which would have a material adverse effect on our business, results of operations and financial condition;

 

    As a result of the Transaction and the related issuance to TWC of shares of Series W Preferred Stock in Genius Products, TWC will gain the ability to control Genius Products and to appoint a majority of our board of directors. The Series W Preferred Stock to be issued to TWC will provide TWC at least a majority of the total voting power of our outstanding stock;

 

    The TWC parties’ ownership of Class W Units in the Distributor will give them the right to receive the first $60 million in proceeds resulting from any liquidation of the Distributor, before Genius Products receives any of the proceeds;

 

    The ownership interests of our current stockholders in our assets will be significantly diluted as a result of the Transaction;

 

    Under the Distribution Agreement, the Distributor would assume the financial risk of customers’ nonpayment or delay in payment, which could have a material adverse effect on our business, results of operations and financial condition;

 

    The Transaction would make it difficult for another party to acquire Genius Products or otherwise effectuate a change of control; and

 

    Various other risks associated with the Transaction and the businesses of Genius Products, TWC and the Distributor described in the section below entitled “Risk Factors”.

 

Will the stockholders of Genius Products have dissenters’ or appraisal rights relating to the Transaction?

 

No. The Delaware General Corporation Law governs stockholders’ rights in connection with the Transaction. Under the applicable provisions of the Delaware General Corporation Law, our stockholders will have no right to seek appraisal of their shares of common stock in connection with the Transaction.

 

Have any stockholders of Genius Products committed to vote in favor of the Transaction?

 

Yes. Certain stockholders of Genius Products who beneficially own or control approximately 32.6% of our common stock have entered into agreements with TWC to vote their shares in favor of the proposals described in this Proxy Statement. These stockholders also delivered proxies to TWC entitling it to vote those shares in favor of the Transaction at the Special Meeting. See the section entitled, “Proposal 1—Additional Agreements related to the Transaction”.

 

When is the closing of the Transaction expected to occur?

 

We are working with TWC to complete the Transaction as quickly as possible and expect to complete the Transaction shortly after obtaining the requisite stockholder approval at the Special Meeting. However, we cannot predict the exact timing of the closing of the Transaction because the Transaction is subject to several conditions. For a description of the conditions to the closing of the Transaction, see the section entitled, “Proposal 1—The Contribution Agreement—Conditions to Closing”.

 

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What will happen if the Transaction is not approved?

 

We will not proceed with the Transaction if it is not approved by our stockholders. In some circumstances, if the Contribution Agreement is terminated, we would become liable for the payment of a $4,000,000 termination fee or reimbursement of expenses. Under the Contribution Agreement, we would be liable for the $4,000,000 termination fee if:

 

    Either we or TWC terminates the Contribution Agreement based on our board’s receipt of a superior proposal as defined in the Contribution Agreement;

 

    TWC terminates the Contribution Agreement because of our uncured material breach of the Contribution Agreement, which was willful and knowing;

 

    TWC terminates the Contribution Agreement under circumstance in which our board of directors changes or does not affirm its approval of this Transaction or approves a competing transaction, or other types of alternative competing transactions are commenced; or

 

    Either we or TWC terminates the Contribution Agreement because the closing has not occurred on or prior to April 15, 2006 and (i) a competing transaction proposal is disclosed prior to April 15, 2006 and (ii) within 12 months after such termination we enter into a definitive agreement with the person or group making the competing superior proposal.

 

In addition, we would be liable for the payment of TWC’s expenses, not to exceed $750,000, if either we or TWC terminates the Contribution Agreement because (i) our stockholders do not approve the Transaction and our proposed amended and restated certificate of incorporation, or (ii) we announce our intention to disclose confidential information of TWC or such information is required to be disclosed. Either party may terminate the Contribution Agreement if the Transaction fails to close by April 15, 2006.

 

If the Transaction is not completed, we will continue to own the assets that we otherwise would have contributed to the Distributor in connection with the Transaction. However, subject to any stockholder approval requirements under Delaware law, we may engage in one or more alternative transactions with TWC or we may decide to pursue other strategic partners to acquire all or a portion the assets that we otherwise would have contributed in the Transaction.

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING

 

What proposals will stockholders be voting on at the Special Meeting?

 

The following matters are scheduled to be voted on at the Special Meeting:

 

Proposal 1:    A proposal to approve the contribution of substantially all of the Company’s assets to The Weinstein Company Holdings LLC or another company designated by The Weinstein Company LLC, pursuant to a Master Contribution Agreement, dated as of December 5, 2005, by and among the Company, TWC and The Weinstein Company Holdings LLC.
Proposal 2:    A proposal to approve the amendment and restatement of the Company’s certificate of incorporation, in the form attached as Appendix E to this Proxy Statement, with the following sub-proposals:

 

    2A—a proposal to approve a provision restricting the acts or activities in which the Company may engage to certain limitations arising under the Transaction documents;

 

    2B—a proposal to approve the increase of the number of authorized shares of common stock from 100,000,000 to 300,000,000 shares and the increase of the number of authorized shares of all classes of stock from 110,000,000 to 310,000,000 shares;

 

    2C—a proposal to approve a provision authorizing Series W Preferred Stock and establishing the rights, preferences and powers, and the qualifications, limitations and restrictions, of Series W Preferred Stock;

 

    2D—a proposal to modify the rights, preferences and powers, and the qualifications, limitations and restrictions, of Common Stock;

 

    2E—a proposal to approve a provision by which the Company elects out of the Delaware law restricting business combinations with interested stockholders; and

 

    2F—a proposal to approve a provision by which the Company renounces the Company’s interest or expectancy in, or in being offered the opportunity to participate in, corporate opportunities engaged in by TWC (including its affiliates and related persons).

 

Proposal 3:    A proposal to approve an amendment and restatement of our 2004 Stock Incentive Plan to increase the number of shares of common stock available for issuance under the plan from 7,500,000 shares to 13,500,000 shares.
Proposal 4:    A proposal to approve adjournments of the Special Meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the meeting to approve one or more of the proposals described above.

 

If any other matter is properly presented for approval at the Special Meeting, your proxy (one of the individuals named on your proxy card) will vote your shares in his or her discretion.

 

How many votes are needed to approve each proposal?

 

The votes required to approve each proposal are as follows:

 

    Proposal 1: To be approved, Proposal 1 must receive a “For” vote from the majority of our outstanding shares of common stock, voting either in person or by proxy.

 

    Proposal 2: To be approved, Proposal 2 (including each related sub-proposal) must receive a “For” vote from the majority of our outstanding shares of common stock, voting either in person or by proxy.

 

    Proposal 3: To be approved, Proposal 3 must receive a “For” vote from the majority of our outstanding shares of common stock present either in person or by proxy at the Special Meeting.

 

    Proposal 4: To be approved, Proposal 4 must receive a “For” vote from the majority of our outstanding shares of common stock present either in person or by proxy at the Special Meeting.

 

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What is the quorum requirement?

 

A quorum of stockholders is necessary to hold a valid meeting. Under our bylaws, a quorum will be present if the holders of at least a majority of the outstanding shares of common stock are represented at the meeting in person or by proxy. On the record date, there were 60,438,154 shares of common stock outstanding. Thus, at least 30,219,078 shares must be represented in person or by proxy at the annual meeting to have a quorum.

 

Your shares will be counted toward the quorum only if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you vote in person at the meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. If there is no quorum, the chairman of the meeting or a majority of the votes present at the meeting may adjourn the meeting to another date.

 

Who is soliciting my proxy?

 

Genius Products’ board of directors.

 

How does the Genius Products board of directors recommend that I vote on the matters proposed?

 

Genius Products’ board of directors recommends that stockholders vote “FOR” each of the matters submitted at the Special Meeting. If you wish to approve the Transaction, then you must approve Proposal 1 relating to the Transaction and Proposal 2 relating to the amendment and restatement of our certificate of incorporation, including each of the related sub-proposals included in Proposal 2.

 

Can I still sell my shares in Genius Products?

 

Yes. Neither the Contribution Agreement nor the Transaction will affect your right to sell or otherwise transfer your shares in Genius Products.

 

Who is entitled to vote at the Special Meeting?

 

Only holders of record of common stock as of the close of business on February 3, 2006 will be entitled to notice of the Special Meeting and will be entitled to vote at the Special Meeting.

 

Where and when is the Special Meeting?

 

The Special Meeting will be held at the Del Mar Hilton Hotel, 15575 Jimmy Durante Boulevard, Del Mar, California 92014 at 9:00 a.m. local time on March 16, 2006.

 

Where can I vote my shares?

 

You can vote your shares where indicated by the instructions set forth on the proxy card, or you can attend and vote your shares in person at the Special Meeting.

 

If my shares are held in “street name” by my broker, will my broker vote my shares for me?

 

Your broker may not be permitted to exercise voting discretion with respect to the matters to be acted upon. Thus, if you do not give your broker or nominee specific instructions, your shares may not be voted on those matters, and will not be counted in determining the number of shares necessary for approval. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares.

 

May I change my vote after I have mailed my signed proxy card?

 

Yes. Just send in a written revocation or a later dated, signed proxy card before the Special Meeting or attend the Special Meeting and vote in person. Simply attending the Special Meeting, however, will not revoke your proxy—you would have to vote at the Special Meeting in order to revoke your proxy.

 

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What does it mean if I receive more than one proxy card?

 

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

 

What do I need to do now?

 

Please vote your shares as soon as possible, so that your shares may be represented at the Special Meeting. You may vote by signing and dating your proxy card and mailing it in the enclosed return envelope, or you may vote in person at the Special Meeting.

 

How are votes counted?

 

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “For”, “Against” and “Abstain” votes, abstentions and broker non-votes. “Broker non-votes” occur when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that proposal and has not received instructions with respect to that proposal from the beneficial owner (despite voting on at least one other proposal for which it does have discretionary authority or for which it has received instructions). Abstentions will be counted towards the vote total for each proposal, and will have the same effect as “Against” votes. Broker non-votes will not be counted for purposes of determining whether any of the proposals are approved and will have the same effect as “Against” votes on those proposals that must be approved by a majority of our outstanding shares of common stock (Proposals 1 and 2, including Sub-Proposals 2A-2F).

 

Who is paying for this proxy solicitation?

 

We will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, our officers, directors and employees and The Altman Group, 1200 Wall Street West, Third Floor, Lyndhurst, NJ, 07071 may also solicit proxies in person, by telephone, or by other means of communication. Officers, directors and employees will not be paid any additional compensation for soliciting proxies, but The Altman Group will be paid its customary fee of approximately $6,500 plus out-of-pocket expenses if it solicits proxies. We also may reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

 

Whom should I contact if I have questions?

 

If you have any questions about any of the proposals on which you are voting, or would like additional copies of this proxy statement, without charge, you may call or write to:

 

Corporate Secretary

Genius Products, Inc.

740 Lomas Santa Fe, Suite 210

Solana Beach, California 92075

Telephone: (858) 793-8840

Facsimile: (858) 436-4430

 

You may also obtain additional information about us from documents filed with or furnished to the United States Securities and Exchange Commission, referred to as the “SEC”, by following the instructions in the section entitled, “Where You Can Find More Information”.

 

How can I find out the results of the voting at the Special Meeting?

 

Preliminary voting results will be announced at the annual meeting. Final voting results are expected to be published in our quarterly report on Form 10-Q for the quarter ending March 31, 2006.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

The following table sets forth selected summary historical financial data of Genius Products. The information presented below is derived from our audited financial statements as of December 31, 2000, 2001, 2002, 2003 and 2004 and our unaudited financial statements as of September 30, 2004 and 2005. This information is only a summary. You should read it together with our historical financial statements and accompanying notes contained elsewhere in this Proxy Statement. Historical results are not necessarily indicative of future results.

 

    YEAR ENDED DECEMBER 31,

    NINE MONTHS ENDED
(unaudited)


 
    2000

    2001

    2002

    2003

    2004

    2004

    2005

 

Statement of Operations data:

                                                       

Net revenues

  $ 1,344,016     $ 1,348,768     $ 2,143,700     $ 3,068,506     $ 16,629,932     $ 10,206,403     $ 14,783,979  

Total costs of revenues

    1,042,856       645,043       1,591,547       2,149,510       13,893,434       7,723,133       13,501,019  

Operating expenses

                                                       

Product development

    522,804       335,984       384,883       428,465       956,521       624,093       720,975  

Sales and marketing

    566,805       414,897       382,465       1,020,860       2,166,785       1,596,391       1,687,062  

General and administrative

    1,818,083       2,285,976       2,536,878       2,081,651       5,107,547       2,865,246       6,579,977  

Restructuring1

    —         —         —         —         —         —         2,745,422  
   


 


 


 


 


 


 


Total costs and expenses

    3,950,548       3,681,900       4,895,773       5,680,486       22,124,287       12,808,863       25,234,455  

Loss from operations

    (2,606,532 )     (2,333,132 )     (2,752,073 )     (2,611,980 )     (5,494,355 )     (2,602,460 )     (10,450,476 )

Interest expense and other, net

    (25,160 )     (93,100 )     (35,209 )     (129,896 )     (551,013 )     (440,178 )     (158,763 )

Loss before provision for income taxes

    (2,631,692 )     (2,426,232 )     (2,787,282 )     (2,741,876 )     (6,045,368 )     (3,042,638 )     (10,609,239 )

Provision for income taxes

    (1,600 )     (800 )     (800 )     (800 )     (800 )     (800 )     (17,150 )
   


 


 


 


 


 


 


Net loss

  $ (2,633,292 )   $ (2,427,032 )   $ (2,788,082 )   $ (2,742,676 )   $ (6,046,168 )   $ (3,043,438 )   $ (10,626,389 )
   


 


 


 


 


 


 


Basic and diluted net loss per common share

  $ (0.80 )   $ (0.48 )   $ (0.20 )   $ (0.16 )   $ (0.25 )   $ (0.13 )   $ (0.28 )
   


 


 


 


 


 


 


Basic and diluted weighted average common shares

    3,304,868       5,016,717       13,838,743       17,574,405       23,826,584       23,364,187       37,767,552  
   


 


 


 


 


 


 


    DECEMBER 31,

    SEPTEMBER 30,

 
    2000

    2001

    2002

    2003

    2004

    2004

    2005

 

Balance Sheet data:

                                                       

Cash and cash equivalents

  $ 54,928     $ 27,998     $ 745,993     $ 941,332     $ 1,223,881     $ 3,011,363     $ 331,313  

Total assets

    917,008       894,612       2,283,029       5,575,128       12,996,166       13,397,426       46,674,832  

Redeemable common stock

    473,860       499,450       465,777       490,932       395,172       390,347       409,646  

Total shareholders’ equity

  $ (695,213 )   $ (701,384 )   $ 1,053,360     $ 2,722,554     $ 4,431,860     $ 7,350,415     $ 30,210,223  

1 As disclosed in the Form 10-Q that we filed on November 14, 2005, during the quarter ended September 30, 2005, Genius Products executed a restructuring plan for the purpose of reorganizing its executive management team and terminating an exclusive agreement with a financial advisor.

 

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GENIUS PRODUCTS, INC. AND SUBSIDIARIES

 

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

 

The following tables present the unaudited pro forma consolidated financial information of Genius Products and its subsidiaries, adjusted to give effect to the proposed Transaction with TWC. The unaudited pro forma consolidated financial information should be read in conjunction with, and is qualified in its entirety by reference to, Genius Products’ consolidated financial statements and the notes thereto and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, each of which is included elsewhere in this Proxy Statement.

 

The unaudited pro forma consolidated statement of operations for the year ended December 31, 2004 and the nine months ended September 30, 2005 gives effect to the Transaction as if it had occurred as of January 1, 2004. The unaudited pro forma consolidated balance sheet as of September 30, 2005 gives effect to the Transaction as if it had occurred as of December 31, 2004. The pro forma adjustments are described in the accompanying notes and are based upon available information and certain assumptions that management believes are reasonable. The pro forma financial information does not purport to represent what the results of operations or financial condition of Genius Products actually would have been had the Transaction occurred on such dates or to project its results of operations or financial condition for any future date or period.

 

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GENIUS PRODUCTS, INC. AND SUBSIDIARIES

 

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

 

YEAR ENDED DECEMBER 31, 2004

 

     Historical

    Pro Forma
Adjustments


    Pro Forma

 

Revenues:

                        

Video and DVD

   $ 15,967,711     $ —       $ 15,967,711  

Theatrical

     —                 —    

Audio

     2,946,237               2,946,237  

Royalties, licensing, distribution and other

     420,299               420,299  
    


 


 


Gross revenues

     19,334,247       —         19,334,247  

Sales returns, discounts and allowances

     (2,704,315 )     —         (2,704,315 )
    


 


 


Net revenues

     16,629,932       —         16,629,932  

Costs and expenses

                        

Cost of revenues:

                        

Video and DVD

     11,722,315               11,722,315  

Theatrical

     —                 —    

Audio

     1,235,851               1,235,851  

Amortization of production masters and film library

     681,404               681,404  

Warehouse expense and other

     253,864               253,864  
    


 


 


Total cost of revenues

     13,893,434       —         13,893,434  
    


 


 


Gross profit

     2,736,498       —         2,736,498  

Operating expenses:

                        

Product development

     956,521               956,521  

Sales and marketing

     2,166,785               2,166,785  

General and administrative

     5,107,547               5,107,547  

Restructuring

     —                 —    
    


 


 


Total operating expenses

     8,230,853       —         8,230,853  
    


 


 


Loss from operations

     (5,494,355 )     —         (5,494,355 )

Interest expense and other, net

     (551,013 )     —         (551,013 )
    


 


 


Loss before provision for income tax and minority interest

     (6,045,368 )     —         (6,045,368 )

Provision for income tax

     800       —         800  

Minority interest

     —         (4,232,318 )4     (4,232,318 )
    


 


 


Net loss

   $ (6,046,168 )   $ 4,232,318     $ (1,813,850 )
    


 


 


 

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GENIUS PRODUCTS, INC. AND SUBSIDIARIES

 

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

 

NINE MONTHS ENDED SEPTEMBER 30, 2005

 

     Historical

    Pro Forma
Adjustments


    Pro Forma

 

Revenues:

                        

Video and DVD

   $ 13,301,381             $ 13,301,381  

Theatrical

     1,176,975               1,176,975  

Audio

     3,381,426               3,381,426  

Royalties, licensing and other

     460,392               460,392  
    


 


 


Gross revenues

     18,320,174       —         18,320,174  

Sales returns, discounts and allowances

     (3,536,195 )             (3,536,195 )
    


 


 


Net revenues

     14,783,979       —         14,783,979  

Costs and expenses

                        

Cost of revenues:

                        

Video and DVD

     7,919,497               7,919,497  

Theatrical

     1,687,650               1,687,650  

Audio

     2,117,010               2,117,010  

Amortization of production masters and film library

     1,667,207               1,667,207  

Warehouse expense and other

     109,655               109,655  
    


 


 


Total cost of revenues

     13,501,019       —         13,501,019  
    


 


 


Gross profit

     1,282,960       —         1,282,960  

Operating expenses:

                        

Product development

     720,975               720,975  

Sales and marketing

     1,687,062               1,687,062  

General and administrative

     6,579,977               6,579,977  

Restructuring

     2,745,422               2,745,422  
    


 


 


Total operating expenses

     11,733,436       —         11,733,436  
    


 


 


Loss from operations

     (10,450,476 )     —         (10,450,476 )

Interest expense and other, net

     (158,763 )             (158,763 )
    


 


 


Loss before provision for income tax and minority interest

     (10,609,239 )     —         (10,609,239 )

Provision for income tax

     17,150               17,150  

Minority interest

     —         (7,438,472 )3     (7,438,472 )
    


 


 


Net loss

   $ (10,626,389 )   $ 7,438,472     $ (3,187,917 )
    


 


 


 

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GENIUS PRODUCTS, INC. AND SUBSIDIARIES

 

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

 

AS OF SEPTEMBER 30, 2005

 

     Historical

    Pro Forma
Adjustments


    Pro Forma

 

ASSETS

                        

Current assets:

                        

Cash and equivalents

   $ 331,313             $ 331,313  

Accounts receivable, net

     5,649,464               5,649,464  

Inventories, net

     5,103,105               5,103,105  

Prepaid royalties

     1,755,023               1,755,023  

Prepaid expenses

     713,318               713,318  
    


 


 


Total current assets

     13,552,223       —         13,552,223  

Property and equipment, net

     301,226               301,226  

Production masters, net

     3,615,641               3,615,641  

Film library, net

     16,270,146               16,270,146  

Goodwill

     12,361,258               12,361,258  

Deposits and other

     574,338               574,338  
    


 


 


Total assets

   $ 46,674,832     $ —       $ 46,674,832  
    


 


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                        

Current liabilities:

                        

Accounts payable

   $ 8,583,594             $ 8,583,594  

Notes payable

     4,000,000               4,000,000  

Accrued expenses

     3,235,852               3,235,852  

Customer deposits

     184,767               184,767  

Debentures payable

     50,750               50,750  

Redeemable common stock

     409,646               409,646  
    


 


 


Total current liabilities

     16,464,609       —         16,464,609  

Minority interest

     —         21,147,1561       21,147,156  

Stockholders’ equity

                        

Preferred stock, $.0001 par value; 10,000,000 shares authorized; no shares outstanding

     —         —         —    

Common stock, $.0001 and $.001 par value; 100,000,000 shares authorized; 42,871,136 and 25,208,512 shares outstanding

     4,287               4,287  

Committed common stock

     1,490,683               1,490,683  

Additional paid-in capital

     60,919,003       (28,585,628 )2     32,333,375  

Accumulated deficit

     (32,203,750 )     7,438,4723       (24,765,278 )
    


 


 


Total stockholders’ equity

     30,210,223       (21,147,156 )     9,063,067  
    


 


 


Total liabilities and stockholders’ equity

   $ 46,674,832     $ —       $ 46,674,832  
    


 


 


 

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Notes to Unaudited Pro Forma Consolidated Financial Statements

 

(1) Represents TWC’s 70% minority interest in stockholders’ equity at September 30, 2005.

 

(2) Represents TWC’s 70% minority interest in stockholders’ equity before net loss for the nine months ended September 30, 2005.

 

(3) Represents TWC’s 70% minority interest in the net loss for the nine months ended September 30, 2005.

 

(4) Represents TWC’s 70% minority interest in the net loss for the year ended December 31, 2004.

 

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ACCOUNTING POLICIES RELATING TO THE TRANSACTION

 

General

 

At the closing of the Transaction, Genius will contribute to the Distributor all of its operating business, including substantially all of its assets and liabilities, and receive a 30% equity interest in the Distributor. Genius Products will record such contributions to the Distributor at historical values with no gain or loss, since the economic substance of the Transaction is a contribution of capital to an entity. The consolidated balance sheet of Genius will be unchanged as a result of consolidation of the financial statements of Genius with those of the Distributor (see “Consolidation” below). The Distributor will be treated as a partnership for U.S. federal income tax purposes. Accordingly, the book accounting for the Distributor will follow its tax status as a partnership.

 

Consolidation

 

We expect that, after closing of the Transaction, Genius Products will consolidate its financial statements with those of the Distributor. Therefore, after closing, all revenues of the Distributor are expected to be reflected in the consolidated statements of operations of Genius Products. All of the net income of the Distributor is expected to be reflected in the consolidated statements of operations of Genius Products; however, we expect to record a minority interest in earnings before taxes with respect to the Class W Units of the Distributor to reflect the Class W Units’ 70% share of earnings of the Distributor, and record a corresponding liability for this minority interest on the consolidated balance sheet. After subtracting the minority interest, our share of the earnings before taxes and shareholders’ equity of the Distributor would amount to 30%.

 

We evaluated whether to consolidate the Distributor’s financial statements with those of Genius under FASB Interpretation No. 46R—“Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51.” This interpretation explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. Based upon our evaluation of the Transaction under FIN 46R, we believe that (i) our role as the managing member of the Distributor and our control over its operating decisions means that Genius Products is the primary beneficiary of the Distributor and (ii) the Distributor is, in substance, a subsidiary of Genius Products and should be consolidated.

 

Gross Revenues

 

Revenues from home video sales will be recorded by the Distributor based upon the gross amount billed to customers, as opposed to the net amount retained after payments under the Distribution Agreement and to other licensors, since the Distributor is the primary obligor from the sales of home video products and it bears substantially all of the customer, inventory and product pricing risks.

 

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RISK FACTORS

 

The business in which we are currently engaged, and in which we will be engaged following the Transaction, is rapidly changing and involves a high degree of risk. We urge you to consider carefully the following risks before deciding whether to approve the proposals to be voted upon by our stockholders at the Special Meeting. These factors should be considered in conjunction with the other information included in this Proxy Statement, including the risks discussed in under the caption “Risk Factors”.

 

Risks Related to the Transaction

 

The issuance of Series W Preferred Stock in the Transaction will give TWC control over Genius Products. TWC may use its control to take actions that other stockholders believe are not in their best interests or the best interests of Genius Products.

 

As a result of the Transaction and the related issuance of shares of Series W Preferred Stock in Genius Products, TWC will gain the ability to control Genius Products and to appoint a majority of our board of directors. The Series W Preferred Stock to be issued to TWC will provide TWC at least a majority of the total voting power of our outstanding stock until the interests of the TWC parties and their affiliates in Genius Products or the Distributor falls below 20%. TWC may use its control over Genius Products to cause Genius Products to take actions that other stockholders believe are not in their best interests or the best interests of Genius Products. In addition, the LLC Agreement and the Registration Rights Agreement will provide the TWC parties a right of first negotiation to acquire any additional securities we may wish to issue in a debt or equity financing after the closing, which could result in an increase of their effective control over us.

 

The anticipated benefits of the Transaction will depend substantially on the success of TWC’s theatrical releases.

 

Our ability to realize the anticipated benefits of the Transaction will depend substantially on the performance of TWC’s theatrical releases because the success of home video distribution is generally directly related to how well the applicable film performs at the box office. Neither we nor TWC can predict the box office performance of any of TWC’s motion pictures because box office performance depends primarily upon the public’s acceptance of the motion pictures, which cannot be accurately predicted. The economic performance of a motion picture also depends upon the public’s acceptance of competing films, the availability of alternative forms of entertainment and leisure time activities, general economic conditions and other tangible and intangible factors, all of which can change and cannot be predicted with certainty.

 

In general, the economic performance of a motion picture is dependent on its domestic theatrical performance, which is a key factor in predicting revenue from other distribution channels, such as home video, and is determined by many factors, including TWC’s ability to produce content and develop stories and characters that appeal to a broad audience, and the effective marketing of the motion picture. If TWC is unable to produce films that gain acceptance from a sufficiently broad audience or to effectively market such films, the commercial success of its films in home video release will be in doubt, which could result in the Distributor not recouping costs or not realizing anticipated profits, which could adversely affect our business, financial condition and results of operations. There are no assurances that TWC will be able to produce, or market effectively, films that will be commercially successful in home video release. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

 

Our net operating losses carryforwards may be substantially limited as a result of TWC’s redemption rights or other transactions.

 

Our net operating loss carryforwards through September 30, 2005 were over $30 million for U.S. federal income tax purposes. These losses are subject to substantial annual limitations on their utilization under the Internal Revenue Code. Moreover, the use of such net operating loss carryforwards would be subject to further

 

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substantial limitations if there were an “ownership change”, as defined in Section 382 of the Internal Revenue Code, with respect to our stock. Under the limitation, we generally could only use in each taxable year an amount of our net operating losses realized prior to the ownership change equal to our fair market value immediately preceding the ownership change multiplied by the “long-term tax-exempt rate” generally in effect as of the date of the ownership change, with increases for “built-in gains” in assets recognized within five-years of the ownership change. The Internal Revenue Service publishes the long-term tax-exempt rate monthly; the long-term tax-exempt rate for ownership changes occurring in January 2006 is 4.40%. However, to the extent that the utilization of our loss carryforwards is already subject to an annual limitation under the Internal Revenue Code prior to the Transaction, the Transaction would not operate to increase the annual limitation on the utilization of such losses.

 

An ownership change results, in general, if the percentage of our stock owned by certain persons has increased by more than 50% during a prescribed period. For this purpose, determinations of the percentage of our stock held by any person are made on the basis of value. Pursuant to the LLC Agreement, the TWC parties generally have the right (the “Rights”) to have their Class W Units redeemed, which can be satisfied with our common stock. Under the Rights, the TWC parties could acquire up to 70% of our common stock as of the closing of the Transaction. If the Rights were exercised in full and funded predominantly with our common stock, the resulting acquisition of our common stock by the TWC parties would cause us to experience an ownership change under Section 382 of the Internal Revenue Code. For purposes of determining whether an ownership change has occurred, an option is treated as exercised on the date of issuance if a principal purpose of the issuance or structuring of the option is to avoid or ameliorate the impact of an ownership change and the holder of the option has an ownership interest in the corporation of more than 50%, determined as if the holder had exercised the option. The Internal Revenue Service may contend that a principal purpose of the issuance or structuring of the Rights was to avoid or ameliorate the impact of an ownership change and that an ownership change will therefore result from the issuance of the Rights. Even if the Internal Revenue Service does not contend that the issuance of the Rights results in an ownership change, our net operating losses are already subject to substantial limitation under Section 382 of the Internal Revenue Code and may be subject to further limitation as result of other transactions, such as future issuances of our stock.

 

Our depreciation deductions for U.S. federal income tax purposes with respect to our assets will be limited as a result of the Transaction.

 

The LLC Agreement provides that income and deductions of the Distributor, including depreciation deductions, will be allocated among of the members of the Distributor using the “traditional” method prescribed by Treasury regulations. This method requires that when the Distributor has income, gain, loss, or deduction attributable to property contributed to the Distributor or the Distributor’s existing properties revalued upon entry of new members, it must make appropriate allocations to the members to avoid shifting the U.S. federal income tax consequences of any built-in gain or loss in such properties from one member to another member. As a result, it is not likely that we will share in the depreciation or amortization deductions attributable to our assets (or the Distributor’s home video distribution rights under the Distribution Agreement) following the Transaction, which will increase the taxable income (or reduce the loss) attributable to our assets as compared to what our income (or loss) would have been had we not engaged in the Transaction.

 

There is a risk that Genius Products’ share of the U.S. federal income tax liability of the Distributor will exceed our share of the cash flow from the Distributor.

 

The U.S. federal income tax on a member’s allocable share of the Distributor’s taxable income may exceed the cash flow distributed to such member from the Distributor. Therefore, it is possible that we may have to use funds from sources other than the Distributor to pay our tax liability. In addition, the gain recognized on a sale of our LLC interest may exceed the cash proceeds from the sale. However, we are not permitted to transfer our LLC interest under the terms of the LLC Agreement.

 

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There is a risk that income and losses of the Distributor could be reallocated.

 

The Internal Revenue Service could challenge the allocation among the members of the Distributor of income, gains, losses, deductions and credits as lacking substantial economic effect or as not being allocated in accordance with the members’ interests in the Distributor and, therefore, possibly allocate a different share of such items to the members. To the extent that such challenges to the allocation of various items were upheld, the tax treatment of Genius Products’ investment in the Distributor could be adversely affected. In addition, such a reallocation during the life of the Distributor could result in the understatement of income for members which could result in the imposition of interest and penalties.

 

There is a risk that the Distributor may be required to make disproportionate distributions to the TWC parties.

 

In general, the Distributor must make distributions to members proportionate to their units. However, there is a risk that the Distributor will be audited resulting in additional taxes, penalties and interest payable by a member with respect to its units. In this event, the Distributor is required to make an additional distribution to such member (or former member following redemption of all of its units) equal to an amount intended to approximate such taxes, penalties and interest. Under this requirement, the TWC parties could receive distributions from the Distributor that are disproportionate to their ownership of the Distributor at the time the distribution is made (although it would have been proportional to their ownership at the time the events giving rise to the tax liability occurred), and could require the Distributor to make payments to them following the redemption of all of their Class W Units. The Distributor generally must follow tax positions on its tax returns advocated by TWC.

 

The Transaction, if completed, would make it difficult or impossible for another party to acquire Genius Products or otherwise effectuate a change of control without the consent of TWC.

 

The significant control and financial rights that we intend to grant to TWC in connection with the Transaction would make it difficult or impossible for another party to acquire Genius Products or to otherwise effectuate a change of control without the consent of TWC. Accordingly, acquisitions and other change of control transactions that could increase the value of our stock or otherwise benefit our stockholders may not be possible following the closing of the Transaction for as long as TWC continues to hold its position in our company.

 

There is a risk that the $60 million liquidation preference to be granted to TWC would eliminate or significantly reduce the proceeds available for distribution to our stockholders in the case of an acquisition or liquidation.

 

The TWC parties’ ownership of the Class W Units will give the TWC parties’ the right to receive the first $60 million in proceeds resulting from any liquidation of the Distributor, before Genius Products receives any of the proceeds. After payment of this liquidation preference to the TWC parties, there may be little or no proceeds remaining for distribution to our stockholders in the case of an acquisition or liquidation involving Genius Products or the Distributor.

 

Risks Related to Our Business Following the Transaction

 

Following the Transaction, our business, results of operations and financial condition will depend principally on the success of our relationship with TWC.

 

We anticipate that, following the Transaction, a substantial majority of our revenues will be derived from the distribution rights accorded the Distributor under the Distribution Agreement. Our business, results of operations and financial condition will therefore depend principally on the success of the relationship between TWC’s personnel and those of the Distributor (which will consist primarily of our personnel following the

 

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closing). Any deterioration in or termination of that relationship would have a material adverse effect on our business, results of operations and financial condition. There can be no assurance that the Distributor will be successful in maintaining and developing its relationship with TWC following the closing.

 

If the Distributor does not achieve target home video distribution rates for TWC’s films or meet other performance criteria following the closing of the Transaction, TWC may terminate the Distribution Agreement, which would have a material adverse effect on our business, results of operations and financial condition.

 

TWC has the right to terminate the Distribution Agreement if the Distributor does not achieve target home video distribution rates for TWC’s films or meet other performance criteria following the closing of the Transaction. We cannot assure you that the Distributor will have the financial and other resources necessary to perform adequately. Accordingly, we are subject to the risk that TWC may terminate the Distribution Agreement, which would have a material adverse effect on our business, results of operations and financial condition.

 

If we cannot ramp up our operations quickly to accommodate the new business from TWC following the closing of the Transaction, our business will suffer.

 

The integration of the new titles that the Distributor will have the right to distribute under the Distribution Agreement will require significant management attention and expansion of our operations and employee base (which will be operated by the Distributor following the closing). Following the closing, the Distributor must maintain adequate operational, financial and management information systems, and motivate and effectively manage an increasing number of employees and base of operations. Our future success will also depend in part on the Distributor’s ability to retain or hire qualified employees to operate its expanded businesses efficiently.

 

There is a risk that our business may be adversely affected because we and the Distributor will be required to present content acquisition opportunities to TWC before we may pursue those opportunities.

 

Subject to limited exceptions, if we or the Distributor are presented with a content acquisition opportunity, then we or the Distributor, as applicable, must present the content acquisition opportunity to TWC and the TWC parties will have the right to engage in the content acquisition opportunity. This requirement significantly restricts our future business opportunities and may have a material adverse effect on our business, results of operations and financial condition.

 

If we cease to serve as the managing member of the LLC, then we could become subject to the Investment Company Act of 1940, which could have a material adverse effect on our business.

 

The LLC Agreement provides that TWC or its designee will become the Managing Member of the Distributor, instead of Genius Products, if we become insolvent or bankrupt, if we violate the membership interest transfer restrictions in the LLC Agreement or a lender forecloses on a security interest granted with respect to our Class G Units in the Distributor. If we cease to serve as the managing member of the LLC, then we could become subject to the Investment Company Act of 1940 (the “1940 Act”), which could have a material adverse effect on our business.

 

Under the 1940 Act, a company may be deemed to be an investment company if it owns investment securities with a value exceeding 40% of its total assets, subject to certain exclusions. Investment companies are subject to registration under, and compliance with, the 1940 Act unless a particular exclusion or SEC safe harbor applies. If we ceased to serve as the managing member of the LLC and were deemed an investment company, we would become subject to the requirements of the 1940 Act. As a consequence, among other things, we would likely incur significant expenses and could be prohibited from engaging in our business or issuing our securities as we have in the past. We also might be subject to civil and criminal penalties for noncompliance.

 

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The ownership interests of our current stockholders in our business will be significantly diluted as a result of the Transaction.

 

As described above, the issuance to TWC of Series W Preferred Stock will give TWC, immediately following the closing, at least a majority of the total voting power of our outstanding stock. In addition, we will only have a 30% interest in the Distributor, in contrast to the 70% interest in the Distributor to be held by the TWC parties. Accordingly, the ownership interests of our current stockholders in our business will be significantly diluted as a result of the Transaction. Furthermore, if the TWC parties redeemed their entire interest in the Distributor for shares of common stock of Genius Products, then the TWC parties would own and have the right to vote at least 70% of our shares of common stock.

 

TWC’s success depends largely on Robert Weinstein and Harvey Weinstein.

 

TWC is substantially dependent upon the services of Robert Weinstein and Harvey Weinstein, and, therefore, TWC’s business, results of operations and financial condition could be adversely affected if TWC should lose the services of either of these individuals. TWC has entered into employment agreements with the Weinsteins. However, these agreements cannot assure TWC of the continued services of the Weinsteins. The loss of the services of either of the Weinsteins could have a material adverse effect on TWC’s ability to produce and distribute motion pictures, which could have a material adverse effect on the business, operating results and financial condition of the Distributor and its ability to profit from the sale of home video products. This, in turn, would have a material adverse effect on our business, results of operations and financial condition.

 

The motion picture industry is rapidly evolving, and recent trends have shown that audience response to both traditional and emerging distribution channels is volatile and difficult to predict. Neither we nor TWC can accurately predict the effect that changing audience demands, technological change or the availability of alternative forms of entertainment may have on our business or the motion picture industry

 

The entertainment industry in general, and the motion picture industry in particular, continues to undergo significant changes, due both to shifting consumer tastes and to technological developments. Recently, some film distributors have experienced lower-than-expected box office revenues from their theatrical releases. While this is likely due to the combined effect of several independent factors, including a failure on the part of some studios adequately to adjust to the changing expectations of movie audiences, it is also likely that new technologies are also playing a role. These new technologies, such as video-on-demand and Internet distribution of films, have provided motion picture companies with new channels through which to distribute their films. However, accurately forecasting market demand within these new channels has proven challenging. Recently, Pixar Studios and DreamWorks Animation experienced unexpectedly low DVD sales, which caused them to lower their forecasts of revenue and profitability, and some industry analysts have suggested that this may signal that the DVD distribution channel is maturing more rapidly than anticipated.

 

Our business model is impacted by both theatrical and non-theatrical distribution channels, and therefore could be affected by these recent trends. We cannot accurately predict the overall effect that shifting audience tastes, technological change or the availability of alternative forms of entertainment may have on our business. In addition to uncertainty regarding the growth of the DVD market, we similarly cannot be certain that other developing distribution channels, such as video-on-demand and Internet distribution of films, will attain expected levels of public acceptance or, if such channels are accepted by the public, that we will be successful in exploiting the business opportunities they provide. Moreover, to the extent that these emerging distribution channels gain popular acceptance, it is possible that demand for delivery through DVDs will decrease. Under the Distribution Agreement, we will not have the right to distribute films from TWC through these other distribution channels.

 

Following the Transaction, the Distributor would assume the financial risk of customers’ nonpayment or delay in payment under the Distribution Agreement, which could have a material adverse effect on our business, results of operations and financial condition.

 

The Distribution Agreement provides that the Distributor will bear (and will not be entitled to recoup as distribution expenses) all bad debt expense and collection costs. If the bad debt expense and collection costs are

 

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significant, then they could have a material adverse effect on the Distributor’s business, results of operations and financial condition, which, in turn, would have a material adverse effect on our business, results of operations and financial condition.

 

We have a history of significant losses, and we may never achieve or sustain profitability.

 

We have incurred operating losses in every quarter since we commenced operations. As of September 30, 2005, we had an accumulated deficit of approximately $32.2 million. Our net loss for the nine months ended September 30, 2005 was approximately $10.6 million, our net loss for the year ended December 31, 2004 was approximately $6.0 million and our net loss for the year ended December 31, 2003 was approximately $2.7 million. We cannot provide assurances that we will achieve profitability in the future, even after the closing of the Transaction. Our continued operating losses may have a material adverse effect upon the value of our common stock and may jeopardize our ability to continue our operations.

 

The loss of any of our major customers could harm us.

 

During the third quarter and the nine months ended September 30, 2005, two customers accounted for 10% or more of gross revenues. Wal-Mart and Anderson accounted for 39% and 13% of net revenues for the third quarter ended September 30, 2005, and 23% and 14% of net revenues for the nine months ended September 30, 2005, respectively. These customers are expected to continue to be the major customers of the Distributor following the closing as a result of the Transaction. The loss of any of these significant customers could have a material adverse effect upon the business of the Distributor and our business, results of operations and financial condition.

 

Our products are subject to returns.

 

Major distributors to which we sell have in the past returned significant amounts of products to us if it has not sold in accordance with their expectations or if we have newer versions of the product available. We expect that they will continue to do so in the future and anticipate a certain level of returns, accounting for such when recognizing revenue based upon our historic return rates and estimates of returns based upon new product introduction. If product returns experienced by the Distributor are significantly greater than we anticipate, it will negatively impact our business, results of operations and financial condition and those of the Distributor.

 

There is a risk that the rate at which our inventory becomes obsolete will exceed our estimated allowances.

 

Our estimated allowances for obsolete or unmarketable inventory are based upon management’s understanding of market conditions and forecasts of future product demand, all of which are subject to change. If the actual amount of obsolete or unmarketable inventory significantly exceeds our estimated allowances, it could have a material adverse effect upon the business of the Distributor and our business, results of operations and financial condition.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING INFORMATION

 

This Proxy Statement contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, among other things, our goals, plans and projections regarding our financial position, results of operations, market position, product development and business strategy. These statements may be identified by the use of words such as “will”, “may”, “estimate”, “expect”, “intend”, “plan”, “believe”, “should”, “would”, “could” or the negative of these terms and other terms of similar meaning in connection with any discussion of future operating or financial performance. All forward-looking statements are based on our current views with respect to future events, are based on assumptions and involve inherent risks and uncertainties, including factors that could delay, divert or change any of them, and could cause action outcomes and results to differ materially from current expectations. Also, these forward-looking statements present our estimates and assumptions only as of the date of this Proxy Statement.

 

These factors include, among other things, our ability to complete the Transaction, the manner in which TWC exercises its control over Genius Products, the quality and financial performance of TWC’s theatrical releases, the Distributor’s ability to perform its obligations under the Distribution Agreement, whether TWC exercises its rights to terminate the Distribution Agreement in certain circumstances, the tax treatment of the Transaction, the effect of changing audience demands and technological change, and the availability of alternative forms of entertainment. Other such risks and uncertainties include our ability to grow our business, to obtain additional licenses and to meet anticipated release schedules, as well as other matters described in our filings with the SEC. For further details and a discussion of these and other risks and uncertainties, see “Risk Factors” above in this Proxy Statement and the risks discussed in our most recent Annual Report on Form 10-KSB under the caption “Risk Factors”. Unless otherwise required by law, we undertake no obligation to publicly update any forward- looking statement, whether as a result of new information, future events or otherwise.

 

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PROPOSAL 1

APPROVAL OF THE CONTRIBUTION OF SUBSTANTIALLY ALL OF OUR ASSETS

PURSUANT TO THE CONTRIBUTION AGREEMENT

 

The Transaction

 

On December 5, 2005, Genius Products and TWC entered into the Master Contribution Agreement, a copy of which is attached as Appendix A to this Proxy Statement. Under the Contribution Agreement, we have agreed with TWC to form a new business venture (referred to as the “Distributor”) that will operate all of the existing businesses of Genius Products and become the exclusive distributor of digital video discs (“DVDs”) and other forms of home video for certain filmed entertainment products produced by TWC.

 

The Contribution Agreement provides that, on or prior to the closing, the following events will occur (referred to as the “Transaction”):

 

    TWC will enter into the Distribution Agreement with an existing company, which is currently an affiliate of TWC named “The Weinstein Company Holdings LLC”. The Weinstein Company Holdings LLC will then transfer away substantially all of its assets and liabilities, other than the Distribution Agreement, and become the Distributor. Immediately prior to closing the Distributor will be wholly-owned by TWC’s affiliates and investors;

 

    The name of the Distributor will be changed to “Genius Products, LLC”;

 

    We will contribute substantially all of our existing operations, assets (including cash) and certain of our liabilities to the Distributor in exchange for a 30% equity interest in the Distributor in the form of Class G Units;

 

    We will become the managing member of the Distributor, although TWC will have the ability to control us and appoint a majority of our board of directors (as describe further below);

 

    The remaining 70% equity interest in the Distributor will be held by TWC’s affiliates and investors, and will take the form of Class W Units in the Distributor. The holders of Class W Units will have the right to require that the Distributor redeem their Units for up to 70% of the outstanding common stock of Genius Products (with such percentage subject to adjustment based on certain events) or, under certain circumstances, cash; and

 

    We will amend our Certificate of Incorporation to authorize Series W Preferred Stock and issue to TWC 100 shares of Series W Preferred Stock. These shares will have no material economic value but will immediately give TWC certain control rights over our company, including a 70% voting interest and the right to elect five out of seven directors on our Board of Directors (three of whom must be independent directors).

 

The following documents will be adopted or executed in connection with the closing of the Transaction:

 

    The Distributor will adopt an Amended and Restated Limited Liability Company Agreement in the form attached as Appendix C to this Proxy Statement (the “LLC Agreement”);

 

    The Distributor will enter into the Distribution Agreement with TWC in the form attached as Appendix D to this Proxy Statement (the “Distribution Agreement”);

 

    Genius Products will adopt an amended and restated certificate of incorporation in the form attached as Appendix E to this Proxy Statement; and

 

    We will enter into the other documents and agreements described below under Proposal 1 (beginning on page 15).

 

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Following the closing, the Distributor will carry on our existing business, and our primary asset will consist of our 30% equity interest in the Distributor, evidenced by our Class G Units in the Distributor. Since our business will be conducted by the Distributor, our current stockholders will only be entitled to benefit from 30% of the net profits, if any, that are generated by the Distributor, including net profits from our existing businesses that we are contributing to the Distributor and from the new business of distributing home video products for TWC’s films.

 

Following the closing, Genius Products, Inc. will remain a publicly-traded company and our existing shares of common stock will remain outstanding and held by our public stockholders. Although TWC is not a public company, we do not intend that the Transaction will be part of any “going private” transaction or series of transactions by Genius Products. We will remain a separate company from TWC, and TWC’s capital will not be available to us. We expect to finance the business of the Distributor after closing through its cash flow from operations and the cash contributed from Genius Products at closing.

 

We expect to finance the business of the Distributor after closing through its cash flow from operations and the cash contributed from Genius Products at closing. On December 6, 2005, we closed a $32 million private placement financing in which we issued 16,000,000 shares of our common stock at a purchase price of $2.00 per share and five-year warrants to purchase 4,800,000 shares of common stock with an exercise price of $2.40 per share. The closing of this financing was a condition to the closing of the Transaction. We intend that these funds will be contributed to the Distributor at closing and be used to finance the operations of the Distributor in the future.

 

If the Transaction is consummated, it is expected that the principal executive offices of the Distributor will be located in Genius Products’ offices in Santa Monica, California.

 

The Companies

 

Genius Products, Inc.

 

Genius Products is an entertainment company that produces, publishes and distributes films, videos and music on digital video discs (“DVDs”), video cassettes (“VHS”), and compact discs (“CDs”), under a variety of branded names and non-branded names. Our products are sold at traditional, direct response, mail order and internet retailers nationwide and, to a lesser extent, internationally.

 

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Through our branded distribution network, we currently own or have the rights to publish DVDs, VHS and CDs under the trademarked brands described in the following table. These brands include both proprietary and licensed brands. We also offer non-branded DVDs and other products as described below. We intend to continue to build our Branded Distribution Network by developing additional branded products through both internal development and licenses from third parties.

 

Proprietary DVD/VHS


  

Licensed DVD/VHS


  

Licensed Music


  

Audio


Genius Entertainment®

  

TV Guide®

  

Beatrix Potter™

  

The Twilight Zone™

Wellspring

  

AMC® Movies

  

Guess How Much I Love You™

  

Zero Hour

Movie / TV Classics

  

AMC Monsterfest™

  

Curious George®

    

Baby Genius® *

  

AMC TV for Movie People™

  

Spot the Dog™

    
              

Proprietary Music


Kid Genius® *

  

Bazooka®

  

Raggedy Ann and Andy™

  

Baby Genius® *

Wee Worship™ *

  

Hollywood Classics™

  

Paddington Bear™

  

Kid Genius® *

    

IFILM®

  

Rainbow Fish™

  

Wee Worship™ *

    

National Lampoon®

  

The Snowman™

  

Tranquility

    

Sundance Channel Home Entertainment™

  

The Little Tikes® *

    
    

Spectrum Connections™

  

Tonka®

    
    

Jillian Michaels

  

My Little Pony®

    
    

NBC News Presents

  

Jay Jay the Jet Plane®

    
    

The Secret World of Benjamin Bear

         
    

Planet X®

         
    

Mission Odyssey™

         
    

Altair™

         
    

Shirley Temple Storybook Collection

         

* On December 31, 2005, we sold our rights in these lines of business to Klaus Moeller, our founder and former CEO. For more details, see “Business of Genius Products—Recent Development” below.

 

For the fiscal year ended December 31, 2004, our net revenues were $16,629,932 and our net loss was $6,046,168. For the nine months ended September 30, 2005, our net revenues were $14,783,979 and our net loss was $10,626,389.

 

We were incorporated in the State of Nevada on January 8, 1996 under the name Salutations, Inc., or Salutations. In September 1997, Salutations acquired all of the outstanding shares of a company called International Trade and Manufacturing Corporation, or ITM, a Nevada corporation founded in 1992. Immediately after the acquisition, Salutations assumed all of the operations and businesses of ITM and changed its name to International Trading and Manufacturing Corporation, or ITMC. In October 1999, we changed our name from International Trading and Manufacturing Corporation to Genius Products, Inc. to reflect our primary business of producing, publishing and distributing audio and video products. On March 2, 2005, we changed our state of incorporation from the State of Nevada to the State of Delaware through a merger with a newly formed subsidiary in Delaware.

 

Genius Products is a publicly traded corporation. Our principal executive offices are located at 740 Lomas Santa Fe, Suite 210, Solana Beach, California 92075, and our telephone number is (858) 793-8840. Our common stock trades on the Over-the-Counter Bulletin Board under the symbol, “GNPI.OB”. For more information, please visit our website at www.geniusproducts.com; however, the information on our website is not a part of this Proxy Statement.

 

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The Weinstein Company LLC

 

The Weinstein Company LLC (“TWC”) is a newly-formed motion picture company founded by brothers Robert Weinstein and Harvey Weinstein (together, the ‘‘Weinsteins’’). From 1979 to March 2005, the Weinsteins were Co-Chairmen of Miramax Film Corp., a company they founded and, in 1993, sold to Walt Disney Pictures and Television (“Disney”). On March 29, 2005, the Weinsteins and Disney jointly announced the termination of the Weinsteins’ employment contracts with Disney.

 

As part of the Disney separation, Disney, Miramax and an affiliate of TWC entered into an agreement which, among other things, gives the TWC affiliate the right to acquire from Miramax (i) Miramax’s rights to more than 80 films and film projects, a number of which have been released, are complete and ready for release or are in post-production, and a majority of which are in development; (ii) the rights to produce, co-finance and co-distribute sequels to a number of established film franchises, including the Scary Movie (the next installment of which, Scary Movie 4, is in production), Scream and Spy Kids series; and (iii) Miramax’s rights to 12 television projects in varying stages of development and production. The agreement also assigns to the TWC affiliate the Dimension Films name, under which at least 60 films have been theatrically released to date that have grossed, in aggregate, at least $2 billion at the domestic box office. The Miramax name and the Miramax Library (which includes both Miramax and Dimension titles) remain property of Disney. In addition, TWC has, to date, separately acquired rights to more than 25 additional projects from various parties, a number of which are completed or in post-production.

 

TWC will be the Weinsteins’ primary film production vehicle. To that end, the Weinsteins have entered into employment agreements with TWC. The Weinsteins do, however, anticipate continuing to hold certain entertainment-related investments, including passive investments in several completed films, and continuing to be involved in non-film-related activities, at times actively, apart from TWC.

 

The principal executive offices of TWC are currently located at 375 Greenwich Street, New York, New York 10013, and their telephone number is (212) 941-3800.

 

Background of the Transaction

 

Over approximately the past two years, our current and former management and board of directors have sought to transform our company into a distributor of higher margin content by developing our branded distribution network, launching retail programs with major national retailers and obtaining libraries of high value content from third parties. In March 2005, we acquired the rights to the Wellspring Library, and in 2004 and 2005 we acquired the home video distribution rights to numerous additional film and video titles. In 2005, we also actively considered potential acquisitions of whole video and music libraries other than the Transaction.

 

In late March 2005, following our acquisition of the Wellspring Library from American Vantage Companies, Stephen K. Bannon, our current chairman, and Trevor Drinkwater, our president and chief executive officer, met with representatives of Goldman Sachs & Co. to explain the positioning of Genius as an independent distributor of home video. This meeting included a discussion of Genius Products as an alternative independent distributor for a company expected to be established by Robert and Harvey Weinstein.

 

On March 29, 2005, the Weinsteins and Disney jointly announced the termination of their employment contracts with Disney and set October 1, 2005 as the expected launch date for their new company.

 

On April 29, 2005, Messrs. Bannon and Drinkwater met with a representative of TWC, and made a formal presentation proposing Genius Products as an independent distributor of TWC films and possible fee structures that might apply to such a relationship. Also on that date, Mr. Bannon met with representatives of Goldman Sachs & Co. to discuss the proposal.

 

From May through July 2005, Messrs. Bannon and Drinkwater held additional meetings with TWC’s senior management regarding the proposed terms and structure of a potential distribution relationship between TWC

 

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and Genius Products. Also during this period, Messrs. Bannon and Drinkwater held discussions and briefings from time to time with other members of the board of directors of Genius Products regarding a possible distribution relationship with TWC.

 

On July 19, 2005, Messrs. Bannon and Drinkwater met with Robert Weinstein and discussed the details of a potential distribution relationship. Shortly after this meeting, we delivered a written proposal for Genius to act as a distributor of TWC’s films. After this proposal was delivered to TWC, TWC informed our management that they were reviewing a number of alternative transactions, many of which consisted of significant monetary advances, and that TWC required a revised proposal from Genius Products which allowed TWC to obtain a controlling equity interest in our company. Our management learned that TWC was considering proposals from major and other independent distributors.

 

On August 12, 2005, our board of directors held a meeting at which members of management briefed the board regarding potential content acquisition opportunities. The board reviewed the status of ongoing discussions for the potential acquisition of another content library. The board also discussed the possibility of acquiring distribution rights to TWC’s films, and determined to give that transaction a high priority.

 

In August 2005, we retained Jefferies & Company, Inc., or “Jefferies,” to act as our exclusive financial advisor for a potential transaction with TWC and, if necessary, provide a fairness opinion regarding such transaction. In August 2005, our management, Jefferies and our corporate counsel, Morrison & Foerster LLP, worked to develop a revised term sheet for a potential transaction involving a substantial equity interest in Genius Products, which was delivered to TWC on or about August 15, 2005.

 

In mid-August 2005, we were notified by TWC that our proposal was under serious consideration by TWC. Our management informally informed our board of this fact and we began non-exclusive negotiations with TWC to sign a definitive letter of intent. TWC commenced preliminary due diligence of our company in August 2005, and we began due diligence of TWC’s film library and future development plans, including its release schedule of films.

 

On September 7, 2005, our board of directors held a meeting at which Messrs. Bannon and Drinkwater made a presentation to the board regarding a potential transaction involving TWC in the form being negotiated with TWC. Messrs. Bannon and Drinkwater provided an overview of negotiations to date with TWC and representatives of Goldman Sachs. Messrs. Bannon and Drinkwater reviewed with the board the proposed terms of the transaction, as reflected in a draft letter of intent that had been prepared to document the parties’ initial understandings. The Jefferies representatives discussed Jefferies’ preliminary analysis of the potential transaction involving issuance of an equity interest to TWC. Members of the board asked various questions regarding the proposed terms, including the proposed respective ownership percentages of Genius Products and TWC, the proposed distribution fee and TWC’s termination rights.

 

The Jefferies representatives then engaged in additional discussion with the board regarding their preliminary analysis of various components of the proposed transaction and made suggestions regarding changes to the proposed terms that would be beneficial to Genius Products. The Jefferies representatives also reviewed with the board a proposed timeline for the transaction. The members of the board asked numerous questions and made various comments regarding the proposed transaction with TWC. The board also discussed with Messrs. Bannon and Drinkwater potential alternatives to the transaction with TWC, including a proposed acquisition of another film library and a retail music business, both of which involved issuance of equity in Genius Products.

 

The board deferred any action relating to the proposed letter of intent, pending additional consideration of the proposed transaction and alternative transactions. Management indicated that additional information would be prepared and provided to the board to assist the board in its deliberations. In particular, the board asked for additional information comparing the proposed transaction with TWC and the other alternative transactions then under consideration. Mr. Bannon invited the other members of the board to contact the Jefferies representatives directly with any questions and requested that another board meeting be scheduled for September 8, 2005.

 

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On September 8, 2005, our board of directors held a meeting at which the board engaged in additional discussions regarding the proposed transaction with TWC. Messrs. Bannon and Drinkwater presented a general overview of the transaction, a summary of which had been distributed to the members of the board prior to the meeting. Messrs. Bannon and Drinkwater discussed with the board the potential benefits to Genius Products from the transaction, including, among other things:

 

    Providing access to highly marketable content;

 

    Enhancing our position with retailers;

 

    Enhancing our ability to attract substantial distribution opportunities and content libraries; and

 

    Enhancing our ability to hire and retain qualified personnel.

 

The board discussed at length the effects of the proposed transaction and the proposed letter of intent on Genius Products and our stockholders, including various risks and uncertainties relating to the transaction. The board also discussed TWC’s business and prospects.

 

The board then engaged in an extensive discussion regarding various alternative transactions then under consideration. Representatives of Cappello Capital Corporation joined the meeting by telephone and made a presentation to the board regarding a significant proposed merger transaction, which would be an alternative to the transaction with TWC. The board discussed the potential benefits and risks of this alternative transaction and certain other alternative transactions, comparing the benefits and risks to those associated with the TWC transaction.

 

The board discussed the ability to pursue the transaction with TWC and one or more alternative transactions concurrently. The board discussed the exclusive dealing provision in the letter of intent and whether it would restrict our ability to negotiate alternative transactions concurrently with the negotiation of the TWC transaction.

 

Following further discussion, our board of directors authorized our management to enter into the letter of intent, in substantially the form presented to the board. The board also directed management to continue to explore alternative transactions, subject to and to the extent permitted under the restrictions in the letter of intent.

 

On October 3, 2005, we retained Mark Bisgeier to assist us as special counsel with respect to the terms of a Distribution Agreement proposed to be entered with TWC under the letter of intent.

 

On September 19, 2005, we entered into the letter of intent with TWC. The letter of intent was non-binding, except for confidentiality obligations and provisions restricting our ability to participate in negotiations or solicit proposals or offers relating to alternative transactions. These provisions are subject to the board’s fiduciary duties and our payment of a $1.5 million “break-up” fee to TWC to pursue an alternative transaction deemed to be more favorable to our stockholders from a financial point of view than the transaction with TWC. TWC was not bound to exclusively negotiate with us under the terms of the letter of intent.

 

On September 26, 2005, our board of directors held a meeting. At this meeting, the board reviewed and discussed the letter of intent that had been signed. The board engaged in a detailed discussion regarding the terms and proposed structure of a transaction with TWC. The board also discussed the status of an alternative transaction that had been discussed at prior board meetings, in light of the restrictions contained in the letter of intent.

 

Following additional discussion, it was proposed that the board establish a special committee of independent directors to review draft agreements and other materials, deliberate and make recommendations to the full board of directors regarding the transaction with TWC. The board and counsel discussed the directors’ fiduciary duties and those of the special committee relative to the transaction. Thereafter, the board established the special committee of independent directors, consisting of James Ellis and Michael Koss (the “Special Committee”). The members of the Special Committee did not receive any additional compensation for their service on the Special Committee.

 

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Effective September 26, 2005, Charles Rivkin and Robert Graziano resigned from our board of directors in order to devote their full attention to positions that each of them had recently accepted with other companies.

 

Between September 23, 2005 and September 28, 2005, our counsel and counsel for TWC exchanged initial drafts of the proposed Contribution Agreement, Distribution Agreement and LLC Agreement. From these dates through December 5, 2005, our legal advisors and members of our management negotiated, through meetings and telephone calls, the provisions of these and other key agreements as well as the structure of a possible transaction with management of TWC and counsel and representatives of TWC. During the period of negotiation of these agreements, our management briefed individual members of our board from time to time concerning the progress and substance of the negotiations, and received feedback from the board members.

 

Beginning in late September 2005, representatives of TWC and representatives of Goldman Sachs & Co. conducted ongoing due diligence of our company and held numerous meetings with members of our management.

 

On October 19, 2005, the Special Committee held a meeting at which the members of the Special Committee discussed the status of the transaction with TWC with representatives of Morrison & Foerster LLP and Jefferies. The Jefferies representatives provided an updated overview of their analysis of the transaction, the current terms and potential revisions that would benefit Genius Products. The Special Committee also discussed the proposed structure of the transaction. The Special Committee also discussed that TWC’s membership interests would be redeemable by TWC for common stock in Genius Products, and that TWC would be granted immediate majority voting control over Genius Products by the creation of a special series of preferred stock. The Special Committee also discussed the distribution rights that would be granted to the Distributor by TWC, and various conditions to the closing of the transaction.

 

On October 19, 2005, following the meeting of the Special Committee, the board of directors held a meeting at which the board reviewed the status of the transaction and the drafts of the transaction documents that were circulated to the board prior to the meeting.

 

On October 25, 2005, the board of directors held meetings at which Messrs. Bannon and Drinkwater updated the board regarding the status of negotiations with TWC and related matters.

 

On October 25, 2005, Herbert Hardt was appointed as a new independent member of our board of directors and was appointed chairman of our Audit Committee. Mr. Hardt was also appointed to serve on the Special Committee.

 

On November 7, 2005, our compensation committee held a meeting in Solana Beach at which the compensation committee discussed proposed modifications to executive employment arrangements in connection with the transaction with TWC. Additional meetings and briefings were held with members of the compensation committee regarding the terms of such modifications.

 

On November 10, 2005, we engaged Roth Capital Partners to act as investment banker to raise new equity financing for Genius Products. The equity financing commitments were required to be received prior to execution of definitive transaction agreements with TWC, and the financing was required to close prior to completion of the transaction with TWC. In November 2005, our management made presentations to, and held meetings with, prospective investors.

 

On each of November 16 and November 23, 2005, the Special Committee held meetings at which the Special Committee received an update and discussed the status of negotiations and revised deal terms with management and representatives of Morrison & Foerster LLP. Representatives of Jefferies also participated in the November 23 meeting.

 

On November 25, 2005, our board held a meeting at which the board received an update and discussed the status of negotiations and revised deal terms.

 

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On November 27, 2005, our board held a meeting at which the following occurred. Prior to the meeting, the directors were provided current drafts of the Contribution Agreement, LLC Agreement and Distribution Agreement and related materials.

 

    Our management and representatives of Morrison & Foerster LLP updated the board on the status of negotiations and revised deal terms, as well as the results of our due diligence review of TWC, including the reviews conducted by our advisors, and the board discussed the same;

 

    Our management reviewed with the board TWC’s business, financial condition and prospects (including the findings of our advisors) and the potential risks and benefits of the potential transaction with TWC, and discussed various financial measures relating to the transaction and strategic alternatives to the transaction. The board also discussed the financial prospects and likelihood of success if Genius Products remained independent and did not conduct the transaction with TWC;

 

    Our management reviewed with the board the financing options available to us and the terms and conditions of the proposed private placement of common stock and warrants, to be closed following public announcement of our entry into the Contribution Agreement;

 

    Representatives of Morrison & Foerster LLP advised the board of its fiduciary obligations in connection with its consideration of the proposed TWC transaction;

 

    Representatives of Jefferies provided certain financial analyses relating to the transaction and delivered orally to the board its opinion described below under “Opinion of Genius Products’ Financial Advisor to Our Board of Directors”; and

 

    Members of the Special Committee each indicated that they were in favor of the proposed TWC transaction.

 

On November 28 and November 30, 2005, our board held meetings at which the board received an update and discussed the status of negotiations and revised deal terms.

 

On November 28, 2005, The Weinstein Company Holdings LLC’s board of representatives approved The Weinstein Company Holdings’ and TWC’s entry into the Contribution Agreement, LLC Agreement, Distribution Agreement and the other transaction documents to which either The Weinstein Company Holdings or TWC is a party, subject in the case of the LLC Agreement, the Distribution Agreement and the other transaction agreements, to the satisfaction of the conditions to closing described in the Contribution Agreement.

 

On December 1, 2005, our board approved the Transaction, our entry into the Contribution Agreement and the LLC Agreement, certain modifications to executive employment agreements in connection with the Transaction, and the other transaction documents to which Genius Products is a party. The board resolved to recommend that our stockholders approve the Transaction and related matters. All directors were present for the meeting and voted to approve these matters. Also at this meeting, our board approved the terms of a proposed equity financing transaction arranged by Roth Capital Partners, which involved a private placement of 16,000,000 shares of our common stock at $2.00 per share and five-year warrants to purchase 4,800,000 shares of our common stock at an exercise price of $2.40 per share. Following this meeting we received binding purchase commitments from the participants in this financing.

 

On December 5, 2005, Jefferies rendered to our board its written opinion as investment bankers to the effect that, as of that date and based upon and subject to the various considerations and assumptions set forth therein, the consideration to be received by Genius Products pursuant to the draft Contribution Agreement delivered by Genius Products prior to 11:00 pm EST on December 4, 2005 was fair, from a financial point of view, to Genius Products.

 

On December 5, 2005, the Contribution Agreement was executed and delivered on behalf of Genius Products, TWC and The Weinstein Company Holdings LLC. In addition, the parties executed and delivered an interim distribution agreement and interim security agreement under which they will operate prior to the closing of the Transaction.

 

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On December 5, 2005, the parties issued a joint press release announcing the execution of the Contribution Agreement, and on December 6, 2005 our management held a conference call to discuss the Transaction.

 

On December 6, 2005, we closed the private equity financing transaction arranged by Roth Capital Partners, in which we realized gross proceeds of $32 million before deducting commissions and other expenses. Also on such date, voting agreements and proxies were executed with the participants in the financing and certain other stockholders.

 

Regulatory Matters

 

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations promulgated thereunder, the Transaction may not be consummated unless certain filings have been submitted to the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) and the U.S. Federal Trade Commission (“FTC”), and certain waiting periods have expired or are otherwise earlier terminated by the Antitrust Division and the FTC.

 

The parties intend to submit the required filings to the Antitrust Division and the FTC. Prior to the scheduled expiration of the waiting period, the Antitrust Division and the FTC have the right to request additional information from Genius Products and TWC. Any such request would have the effect of extending the waiting period and could delay the closing of the transaction.

 

The Antitrust Division and the FTC frequently scrutinize the legality under the antitrust laws of transactions such as the Transaction. The Antitrust Division, the FTC, state antitrust authorities or a private person or entity could seek to enjoin the transactions contemplated by the Contribution Agreement under federal or state antitrust laws at any time before completion or to compel rescission or divestiture at any time subsequent to completion. We believe that the consummation of the Transaction will not violate the antitrust laws. There can be no assurance, however, that a challenge to the Transaction on antitrust grounds will not be made, or, if such a challenge is made, what the result will be.

 

Reasons for the Transaction

 

Our board of directors believes that the Transaction has the potential to significantly enhance our position as distributor of high-quality content to the home video market. In deciding to approve the Transaction and our entry into the Contribution Agreement, LLC Agreement, Distribution Agreement and related agreements, our board of directors and the Special Committee consulted with senior members of our management team and advisors regarding the strategic and operational aspects of the Transaction and the results of due diligence efforts undertaken by management and our advisors. In addition, our board of directors and the Special Committee held numerous discussions with representatives of Jefferies and our other advisors regarding the Transaction. Our board of directors and the Special Committee also consulted with Jefferies as to the fairness, from a financial point of view to Genius Products, of the consideration to be received by Genius Products in the Transaction. Our board of directors and the Special Committee also consulted with representatives of Morrison & Foerster LLP regarding legal due diligence matters and the terms of the Contribution Agreement, LLC Agreement, Distribution Agreement and related agreements.

 

In reaching the decision to approve the Transaction and our entry into the Contribution Agreement, LLC Agreement and related agreements, our board of directors and the Special Committee considered a variety of factors, including:

 

    Current working capital constraints have hindered our progress in taking full advantage of our position in the retail market by impeding our ability to acquire high quality content;

 

    TWC currently has rights to over 80 projects in various stages of development resulting from the separation from Disney described above, many of which the Distributor will have the exclusive right to distribute in the United States;

 

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    The Weinsteins have an established track record as film producers, demonstrated by their work with Miramax and Disney;

 

    TWC is well financed, having raised a total of approximately $1.2 billion to date, including $490 million in equity, a $500 million film securitization and approximately $200 million from other commercial relationships (although none of these funds will be available to the Distributor); and

 

    The distribution rights available from the Distributor present an opportunity to transform Genius Products’ product offering and accelerate our revenue and earnings growth.

 

In addition, our board of directors and the Special Committee also identified and considered a variety of potentially negative factors in its deliberations concerning the Transaction, including:

 

    Following the Transaction, our business, results of operations and financial condition will depend substantially on the quality and box office performance of TWC’s theatrical releases;

 

    If we do not achieve target home video distribution rates for TWC’s films or meet other performance criteria following the Transaction, TWC may terminate the Distribution Agreement, which would have a material adverse effect on our business, results of operations and financial condition;

 

    As a result of the Transaction and the related issuance to TWC of shares of Series W Preferred Stock in Genius Products, TWC will gain the ability to control Genius Products and to appoint a majority of our board of directors. The Series W Preferred Stock to be issued to TWC will provide TWC 70% of the total voting power of our outstanding stock;

 

    The ownership interests of Genius’ current stockholders in our assets will be significantly diluted as a result of the Transaction;

 

    Under the Distribution Agreement, the Distributor would assume the financial risk of customers’ nonpayment or delay in payment, which could have a material adverse effect on our business, results of operations and financial condition; and

 

    Various other risks associated with the Transaction and the businesses of Genius Products, TWC and the Distributor described in the section below entitled “Risk Factors”.

 

Our board of directors and the Special Committee concluded, however, that these factors could potentially be managed or mitigated and that, overall, the negative factors associated with the Transaction were outweighed by the potential benefits of the Transaction.

 

It was not practical to, and thus our board of directors and Special Committee did not, quantify, rank or otherwise assign relative weights to the wide variety of factors it considered in evaluating the Transaction, nor did the board or Special Committee determine that any one factor was of particular importance in deciding that the Transaction is in the best interests of Genius Products and our stockholders. This discussion of information and material factors considered by our board of directors and the Special Committee is intended to be a summary rather than an exhaustive list. In considering these factors, individual members of the board or Special Committee may have given different weight to different factors. The board and Special Committee conducted an overall analysis of the factors described above, and overall considered the factors to support its decision in favor of the Transaction. The decision of each member of our board of directors was based upon his own judgment, in light of all of the information presented, regarding the overall effect of the Transaction on our stockholders as compared to any potential alternative transactions or courses of action. After considering this information, all members of our board of directors unanimously approved the Transaction and recommended that our stockholders approve the Transaction.

 

Recommendation of our Board of Directors

 

Following the unanimous recommendation of the Special Committee of independent directors that was formed in connection with our board of director’s evaluation of the Transaction, our board of directors has

 

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determined that the Transaction is in the bests interests of Genius Products and our stockholders. Our board has unanimously approved the Transaction and the Contribution Agreement and unanimously recommends that our stockholders vote in favor of the proposal to approve the contribution of substantially all of our assets to the Distributor pursuant to the Contribution Agreement, and the other proposals contemplated by the Contribution Agreement and this Proxy Statement.

 

Opinion of Genius Products’ Financial Advisor to Our Board of Directors

 

The Company engaged Jefferies & Company, Inc. on August 8, 2005 to serve as the Company’s financial adviser, an engagement which subsequently included rendering an opinion to the board and the Special Committee of independent directors as to the fairness, from a financial point of view, to the Company of the consideration to be received by Genius pursuant to the Contribution Agreement. On November 27, 2005, Jefferies rendered to the board its oral opinion as investment bankers to the effect that, as of that date and based upon and subject to various considerations and assumptions described by Jefferies, the consideration to be received by the Company pursuant to the Contribution Agreement in its current form was fair, from a financial point of view, to the Company. On December 5, 2005, Jefferies rendered to the board its written opinion as investment bankers to the effect that, as of that date and based upon and subject to the various considerations and assumptions set forth therein, the consideration to be received by the Company pursuant to the draft Contribution Agreement delivered by the Company prior to 11:00 pm EST on December 4, 2005 was fair, from a financial point of view, to the Company. The two opinions were in substance the same except for the description of the deal structure and the date. The Company does not intend to request an updated opinion from Jefferies.

 

The full text of the Jefferies opinion, which sets forth the assumptions made, matters considered and limitations on the scope of review undertaken by Jefferies in rendering its opinion, is attached to this Proxy Statement as Appendix B. The Company and the board encourage stockholders to read the Jefferies opinion carefully and in its entirety. The summary of the Jefferies opinion in this Proxy Statement is qualified in its entirety by reference to the full text of the Jefferies opinion.

 

The Jefferies opinion was provided to our board of directors and the Special Committee in connection with their consideration of the Transaction and addresses only the fairness, from a financial point of view and as of the date of the Jefferies opinion, of consideration to be received by the Company, and did not address any other aspect of the transaction. The amount of the consideration to be received by Genius Products under the Contribution Agreement was determined through negotiations between the Company and TWC. The Jefferies opinion does not constitute a recommendation as to how any stockholder should vote on the transaction or any matter relevant to the Contribution Agreement. No limitations were imposed by the board upon Jefferies with respect to the investigations made or procedures followed by it in rendering its opinion.

 

In connection with its opinion, Jefferies, among other things:

 

    reviewed drafts delivered to Jefferies prior to 11:00 pm EST on December 4 of (i) the Contribution Agreement, (ii) the LLC Agreement, (iii) the Distribution Agreement, (iv) a Security Agreement between the Company and TWC, (v) the Amended and Restated Certificate of Incorporation of Genius Products, Inc., (vi) the Registration Rights Agreement, (vii) an Interim Distribution Agreement between the Company and TWC, (viii) the Services Agreement, and (ix) the Securities Purchase Agreement, dated December 5, 2005, between the Company and the investors party thereto (collectively, the “Transaction Documents”);

 

    considered certain financial and other information relating to the Company, TWC and the Distributor that was publicly available or furnished to Jefferies by the Company, including financial forecasts prepared by the Company in consultation with TWC;

 

    discussed with members of the Company’s management the business, operations, historical financial results and future prospects of the Company and the Distributor;

 

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    discussed with certain members of TWC management the business plans, resources and prospects of TWC;

 

    considered certain financial and securities data of the Company and compared that data with similar data for other publicly-held companies in businesses Jefferies deemed reasonably similar to those of the Company; and

 

    performed certain discounted cash flow analyses, an accretion/(dilution) analysis, certain sensitivity analyses, an analysis of film library acquisition values and an analysis of certain comparable publicly-traded companies in businesses Jefferies deemed reasonably similar to those of the Company.

 

In addition, Jefferies conducted such other quantitative reviews, analyses and inquiries relating to the Company and TWC and considered such other information, financial studies, analyses, investigations, and financial, economic and market criteria as it deemed relevant and appropriate in rendering its opinion.

 

Jefferies’ opinion was based on prevailing interest rates, dividend rates, market conditions, and other circumstances and conditions existing as of the date thereof, and its opinion did not represent Jefferies’ view as to the price at which the Company’s common stock would trade, or the value of the Class G Units, at any future date.

 

In its review and analysis and in rendering its opinion, Jefferies assumed and relied upon, but did not assume any responsibility to independently investigate or verify, the accuracy, completeness and fair presentation of all financial and other information that was provided to Jefferies by the Company or that was publicly available (including, without limitation, the information described in the bullet points above), or that was otherwise reviewed by Jefferies. Jefferies’ opinion was expressly conditioned upon such information, whether written or oral, being complete, accurate and fair in all respects material to its analysis.

 

With respect to the financial forecasts provided to and examined by Jefferies, Jefferies noted that projecting future results of any company is inherently subject to uncertainty. The Company informed Jefferies, however, and Jefferies assumed, that such financial forecasts were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of the Company as to the future performance of the Company, the Distributor and TWC, respectively. Jefferies expressed no opinion as to the Company’s financial forecasts or the assumptions on which they were made, including without limitation, the effect, if any, that the restrictions on the conduct of the Distributor’s business contained in the Transaction Documents would have on the Company’s legacy businesses as conducted by the Distributor. In addition, in rendering its opinion Jefferies assumed that each of the Company, the Distributor and TWC would perform in accordance with such financial forecasts for all periods specified therein.

 

Jefferies assumed, with the consent of the Company’s board, that the Transaction would be consummated in accordance with the terms described in the Transaction documents, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary regulatory or third party approvals, consents and releases for the Transaction, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on the Company or the Transaction. Representatives of the Company advised Jefferies, and Jefferies further assumed, that the final terms of the Transaction documents would not vary materially from those set forth in the drafts it reviewed.

 

In its review, Jefferies did not obtain any independent evaluation or appraisal of the assets or liabilities of, nor did it conduct a comprehensive physical inspection of any of the assets of, the Company, the Distributor or TWC, nor was Jefferies furnished with any such evaluations or appraisals or reports of such physical inspections, nor did Jefferies assume any responsibility to obtain any such evaluations, appraisals or inspections. Jefferies’ opinion was based on economic, monetary, regulatory, market and other conditions existing and which could be evaluated as of the date thereof. Jefferies made no independent investigation of any legal or accounting matters affecting the Company, the Distributor or TWC, and Jefferies assumed the correctness in all respects material to

 

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its analysis of all legal and accounting advice given to the Company, and its board of directors, including, without limitation, advice as to the legal, accounting and tax consequences of the terms of the Transaction to the Company.

 

In rendering its opinion, Jefferies also assumed with the consent of the board of directors that the issuance of the Series W Preferred Stock and the Class G Units under the applicable Transaction Documents would not conflict in any manner with the certificate of incorporation or by-laws of the Company, as amended from time to time, the LLC Agreement and applicable Delaware law.

 

Jefferies’ opinion did not address the fairness of the Transaction to any person or entity that became a stockholder of the Company after the date thereof as a result of the pre-closing equity financing required pursuant to the Contribution Agreement (the “Equity Financing”).

 

Jefferies assumed that the common stock issued in the Equity Financing would be issued at the price Jefferies was informed would be specified in the related Stock Purchase Agreements.

 

Jefferies’ opinion did not constitute a view regarding the solvency of the Company, TWC or the Distributor prior to or subsequent to the Transaction. Jefferies did not perform any procedures to determine the solvency of the Company, the Distributor or TWC. As such, its opinion did not constitute a solvency opinion, and should not be relied upon for such purposes.

 

Jefferies’ opinion did not address, and should not be construed to address, either the underlying business decision to effect the Transaction or whether the consideration to be received by the Company in the Transaction represents the highest price obtainable. Jefferies expressed no view as to the federal, state or local tax consequences of the Transaction and assumed, based upon discussions with the Company’s management, that the Transaction will not adversely affect the ability of the Company to utilize its accrued net operating losses.

 

Jefferies’ opinion assumed that there would be no change of control of the Company or the Distributor during the term of the Distribution Agreement.

 

Jefferies’ opinion assumed that the Distributor would be consolidated with the Company for accounting purposes.

 

Jefferies’ opinion was effective as of the date thereof, and Jefferies has no obligation to update the opinion. Jefferies’ analyses must be considered as a whole. Considering any portion of such analyses or the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying the conclusions expressed therein. Jefferies expressly disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting its opinion of which Jefferies becomes aware after the date thereof.

 

Jefferies’ opinion was for the use and benefit of the board of directors of the Company in its consideration of the Transaction, and its opinion did not address the relative merits of the Transaction as compared to any alternative transactions that might be available to the Company. Jefferies’ opinion did not constitute a recommendation as to how any holder of shares of the Company Common Stock should vote on any matter relevant to the Transaction. Jefferies expressed no opinion as to the price at which the Company’s common stock would trade at any future time.

 

In preparing its opinion, Jefferies performed a variety of financial and comparative analyses. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analysis and the applications of those methods to the particular circumstances and, therefore, is not necessarily susceptible to partial analysis or summary description. Jefferies believes that its analyses must be considered as a whole. Considering any portion

 

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of its analyses and of the factors considered by it, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying the conclusion expressed in its opinion. In addition, Jefferies may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that the range of valuation resulting from any particular analysis described below should not be taken to be Jefferies’ view of the Company’s actual value. Accordingly, the conclusions reached by Jefferies are based on all analyses and factors taken as a whole and also on the application of Jefferies’ own experience and judgment.

 

In performing its analyses, Jefferies made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the Company’s and Jefferies’ control. The analyses performed by Jefferies are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of businesses or assets do not purport to be appraisals or to necessarily reflect the prices at which businesses or assets may actually be sold and are inherently subject to uncertainty. The analyses performed were prepared solely as part of Jefferies’ analysis of the fairness to the Company, from a financial point of view, of the consideration to be received by the Company pursuant to the Contribution Agreement and were provided to the board in connection with the delivery of Jefferies’ opinion.

 

The following is a summary of the material financial and comparative analyses performed by Jefferies that were presented to the board on December 5, 2005 in connection with the delivery of its opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand Jefferies’ financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data described below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Jefferies’ financial analyses.

 

Historical Trading Analysis. Jefferies reviewed the share price trading history of the Company’s common stock for the two-year period ending December 2, 2005. Jefferies noted that over the indicated period the high and low prices for shares of Genius were:

 

    $2.90 and $1.15 for the last 24 month period

 

Discounted Cash Flow Analysis. Jefferies performed certain discounted cash flow analyses to estimate the present value of the free cash flows of the Company, the present value of the free cash flows projected to be received by the Distributor under the Distribution Agreement and the present value of the free cash flows of the projected incremental business that Genius expects to derive as a result of the Distribution Agreement.

 

In Jefferies’ discounted cash flow analysis, Jefferies estimated the present value of the free cash flows of the Company through the fiscal year ending December 31, 2010 using Company management’s financial projections. Jefferies also calculated the terminal value of the enterprise at December 31, 2010 by multiplying projected EBITDA in the fiscal year ending December 31, 2010 by multiples ranging from 5.0x to 7.0x. To discount the projected free cash flows and the terminal value to present value, Jefferies used discount rates ranging from 17.5% to 20.5%. To determine the implied total equity value for the Company, Jefferies subtracted debt and added cash to the implied enterprise value for the Company. After accounting for the vesting of in-the-money options, this analysis indicated a range of implied enterprise values for the Company of approximately $63.1 million to $83.7 million, and a range of implied values per share of the Company’s fully-diluted common stock of approximately $1.22 to $1.62.

 

In the Distribution Agreement discounted cash flow analysis, Jefferies estimated the present value of the free cash flows of the Company’s projections for home video distribution of product covered under the Distribution Agreement through the fiscal year ending December 31, 2014 using Company management’s financial projections. Jefferies assumed that the term of the Distribution Agreement was 5 years at a 5% distribution fee. Jefferies also assumed that at the end of the 5th year, there was a 50% probability of renewal for

 

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three years and a 50% probability of termination, and factored these assumptions into its analysis. The perpetual right to distribute titles released during the distribution agreement term was valued at $125,000 per title. Due to the discrete term of the Distribution Agreement, Jefferies did not assume a terminal value for the enterprise. To discount the projected free cash flows and the perpetual distribution rights to present value, Jefferies used discount rates ranging from 12.5% to 17.5%. This analysis indicated a range of implied enterprise values for the Distribution Agreement of approximately $101.2 million to $112.3 million.

 

In the incremental business discounted cash flow analysis, Jefferies estimated the present value of the free cash flows of the Company’s projections for incremental Genius Products business contingent on the Distribution Agreement through the fiscal year ending December 31, 2010 using Company management’s financial projections. Jefferies also calculated the terminal value of the enterprise at December 31, 2010 by multiplying projected EBITDA in the fiscal year ending December 31, 2010 by multiples ranging from 4.0x to 7.0x. To discount the projected free cash flows and the terminal value to present value, Jefferies used discount rates ranging from 17.5% to 20.5%. This analysis indicated a range of implied enterprise values for the incremental business of approximately $54.1 million to $89.1 million.

 

Relative Value Analysis. Based on the Discounted Cash Flow Analyses described above, Jefferies performed the following analyses to determine the relative percentage contributions of each party to the Distributor:

 

A. Range of Implied TWC Parties’ Ownership Based on DCF Valuations. In this analysis, TWC’s contribution to the Distributor was calculated as the net present value of the Distribution Agreement and the net present value of the incremental business Genius Products expects to receive as a result of the Distribution Agreement. The analysis considered the TWC parties’ implied ownership of the combined company at various exit multiples and discount rates and was calculated assuming that the incremental Genius business is valued at exit multiples from 4.0x to 7.0x EBITDA and the Distribution Agreement is discounted at a 15.0% discount rate. This resulted in an implied percentage ownership of Genius Products by the TWC parties after redemption of Class W Units of the Distributor from 66.6% to 74.6%.

 

B. Range of Implied TWC Parties’ Ownership Including Dilutive Effect of New Equity Raise Based on DCF Valuations. In this analysis, TWC’s contribution to the LLC was calculated as the net present value of the Distribution Agreement and the net present value of the incremental business Genius expects to receive as a result of the Distribution Agreement less the dilutive effect of the new $32 million equity raise to the entire capitalization structure. The analysis considered the TWC parties’ implied ownership of Genius Products after redemption of Class W Units of the Distributor in exchange for Genius Common Stock at various exit multiples and discount rates and was calculated assuming that the incremental Genius business is valued at exit multiples from 4.0x to 7.0x EBITDA, the Distribution Agreement is discounted at a 15.0% discount rate, and incorporating the dilutive effect of a new $32 million equity raise. This resulted in an implied percentage ownership of Genius Products by the TWC parties after redemption of Class W Units of the Distributor from 59.1% to 66.1%.

 

C. Range of Implied TWC Parties’ Ownership Based on TWC DCF Valuation and Genius’ Public Market Equity Value. In this analysis, TWC’s contribution to the LLC was calculated as the net present value of the Distribution Agreement and the net present value of the incremental business Genius expects to receive as a result of the Distribution Agreement. Genius’ contribution to the LLC was calculated as its current equity market capitalization based on its December 2, 2005 closing price of $2.35, its 15-day average closing price of $2.09 and its 30-day average closing price of $1.87. The analysis considered the TWC parties’ implied ownership of Genius Products after redemption of Class W Units of the Distributor in exchange for Genius Common Stock at various exit multiples and discount rates and was calculated assuming that the incremental Genius business is valued at exit multiples from 4.0x to 7.0x EBITDA and the Distribution Agreement is discounted at a 15.0% discount rate. With the current equity value of Genius based on the December 2, 2005 closing price, this resulted in an implied percentage ownership of Genius Products by the TWC parties after redemption of Class W Units of the Distributor ranging between 61.1% and 65.6%. With the current equity value of Genius based on the 15-day average closing price, this resulted in an implied percentage ownership of Genius Products by the TWC parties after redemption of Class W

 

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Units of the Distributor ranging between 63.9% and 68.3%. With the current equity value of Genius based on the 30-day average closing price, this resulted in an implied percentage ownership of Genius Products by the TWC parties after redemption of Class W Units of the Distributor ranging between 66.3% and 70.5%.

 

D. Range of Implied TWC Parties’ Ownership Based on TWC DCF Valuation and Genius’ Public Market Equity Value Including Dilutive Effect of New Equity Raise. In this analysis, TWC’s contribution to the LLC was calculated as the net present value of the Distribution Agreement and the net present value of the incremental business Genius expects to receive as a result of the Distribution Agreement less the dilutive effect of the new $32 million equity raise to the entire capitalization structure. Genius’ contribution to the LLC was calculated as its current equity market capitalization based on its December 2, 2005 closing price of $2.35, its 15-day average closing price of $2.09 and its 30-day average closing price of $1.87. The analysis considered the TWC parties’ implied ownership of Genius Products after redemption of Class W Units of the Distributor in exchange for Genius Common Stock at various exit multiples and discount rates was calculated assuming that the incremental Genius business is valued at exit multiples from 4.0x to 7.0x EBITDA, the Distribution Agreement is valued at a 15.0% discount rate, and incorporating the dilutive effect of a new $32 million equity raise. With the current equity value of Genius based on the December 2, 2005 closing price, this resulted in an implied percentage ownership of Genius Products by the TWC parties after redemption of Class W Units of the Distributor ranging between 54.4% and 59.3%. With the current equity value of Genius based on the 15-day average closing price, this resulted in an implied percentage ownership of Genius Products by the TWC parties after redemption of Class W Units of the Distributor ranging between 56.7% and 61.4%. With the current equity value of Genius based on the 30-day average closing price, this resulted in an implied percentage ownership of Genius Products by the TWC parties after redemption of Class W Units of the Distributor ranging between 58.6% and 63.2%.

 

E. Relative Value Analysis. In this analysis, Jefferies compared the DCF valuation of Genius’ standalone business to the implied value of a 22% interest in Genius Products after redemption of Class W Units of the Distributor, in exchange for Genius Common Stock which represented the implied ownership percentage of the existing Genius stockholders after adjusting for the $32 new equity raise and assuming all TWC share equivalents are converted to Genius shares. The DCF valuation of Genius’ standalone business was between $63.1 and $83.7 at exit multiples of EBITDA between 5.0x and 7.0x and using a discount rate between 17.5% and 20.5%. The DCF valuation of a 22% interest in Genius Products after redemption of Class W Units of the Distributor was between $73.9 and $92.9 at exit multiples of EBITDA between 7.0x and 9.0x and using a discount rate between 16.0% and 18.0%.

 

Pro Forma Accretion/(Dilution Analysis) to Genius Stockholders. Accretion/(Dilution) Analysis was used to consider the pro forma earnings per share impact of the transaction to current Genius stockholders. The following table shows the calculated pro forma EPS accretion/(dilution) assuming the anticipated financial reporting structure:

 

     2006

    2007

    2008

    2009

    2010

 

Basic Accretion/ (Dilution) Consolidated Case versus Standalone

   (38.4 )%   12.0 %   11.5 %   8.1 %   20.1 %

Fully-Diluted Accretion/ (Dilution) Consolidated Case versus Standalone

   (35.9 )%   16.5 %   16.0 %   12.4 %   25.0 %

 

The following table shows the calculated pro forma EPS accretion/(dilution) assuming that TWC converts all of its units into Genius shares:

 

     2006

    2007

    2008

    2009

    2010

 

Basic Accretion/ (Dilution) Consolidated Case versus Standalone

   (55.0 )%   (7.3 )%   (0.7 )%   0.8 %   13.3 %

Fully-Diluted Accretion/ (Dilution) Consolidated Case versus Standalone

   (53.2 )%   (3.6 )%   3.3 %   4.9 %   17.9 %

 

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Comparable Library Valuation Analysis. Using publicly available information, Jefferies reviewed the historical prices paid for libraries of motion picture content. Jefferies reviewed 29 such acquisitions from August 2, 1985 to September 23, 2004. The mean and median implied price paid per title in each of the reviewed library acquisitions are $590,000 and $300,000, respectively.

 

Jefferies performed a discounted cash flow analysis to estimate the present value of the free cash flows to the Company as a result of the perpetual home video rights for product released during the term of the Distribution Agreement. Based on management’s projections and assuming that the films released to the theater in any given year are released for home video distribution 50% in the current year and 50% in the following year and that no revenues are collected after 2020, the current value of the perpetual rights to home video sales at a 15% discount rate is estimated to be $17.1 million.

 

Using these two analyses, Jefferies estimated the present value of perpetual rights to be $20.3 million based on $125,000 per title released during the projected period.

 

Comparable Company Analysis. Using publicly available information and information provided by Company management, Jefferies analyzed the trading multiples of the Company’s common stock and the corresponding trading multiples of the following companies, which were selected because they engage in distribution businesses that are reasonably similar to that of the Company. These companies included Handleman Company, Ingram Micro Incorporated, Navarre Corporation and Source Interlink Companies Incorporated.

 

Jefferies used the results of this analysis to determine the appropriate terminal EBITDA multiple for the Discounted Cash Flow Analysis of the standalone Genius business.

 

In its analysis, Jefferies derived and compared multiples for the Company and the selected companies, calculated as follows:

 

    the enterprise value divided by earnings before interest, taxes, depreciation and amortization, or “EBITDA,” for the latest-twelve-month period, or “LTM,” which is referred to as “Enterprise Value/LTM EBITDA,”

 

    the enterprise value divided by estimated EBITDA for calendar year 2005, which is referred to as “Enterprise Value/CY 2005E EBITDA,”

 

    the enterprise value divided by estimated EBITDA for calendar year 2006, which is referred to as “Enterprise Value/CY 2006E EBITDA,” and

 

    the enterprise value divided by estimated EBITDA for calendar year 2007, which is referred to as “Enterprise Value/CY 2007E EBITDA”

 

This analysis indicated the following:

 

Comparable Public Companies Multiples

 

     High

    Low

    Mean

    Median

    Genius

 

Enterprise Value/LTM EBITDA

   17.6 x   3.7 x   9.5 x   8.4 x   NM x

Enterprise Value/CY 2005E EBITDA

   8.3 x   3.5 x   6.4 x   6.9 x   NM x

Enterprise Value/CY 2006E EBITDA

   8.1 x   3.8 x   6.0 x   6.1 x   8.0 x

Enterprise Value/CY 2007E EBITDA

   3.6 x   3.6 x   3.6 x   3.6 x   7.9 x

 

No company utilized in the comparable company analysis is identical to the Company. In evaluating the selected companies, Jefferies made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the Company’s and Jefferies’ control. Mathematical analysis, such as determining the mean or median, is not in itself a meaningful method of using comparable company data.

 

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Sensitivities Analysis. Based on the Discounted Cash Flow Analysis described above, Jefferies performed certain discounted cash flow analyses to estimate the present value of the free cash flows of the Company based on reduced sales of 10% and 20%, and the present value of the free cash flows of the projected incremental business that Genius expects to derive as a result of the Distribution Agreement based on reduced sales of 10% and 20%.

 

The DCF valuation of Genius’ standalone business based on reduced sales of 10% was between $57.5 and $76.2 at exit multiples of EBITDA between 5.0x and 7.0x and using a discount rate between 17.5% and 20.5%. The DCF valuation of Genius’ standalone business based on reduced sales of 20% was between $52.0 and $68.6 at exit multiples of EBITDA between 5.0x and 7.0x and using a discount rate between 17.5% and 20.5%.

 

The range of implied TWC percentage ownership based on DCF valuations of the TWC business and the incremental business that Genius expects to derive as a result of the Distribution Agreement based on reduced sales of 10% and 20% are shown below. In this analysis, TWC’s contribution to the LLC was calculated as the net present value of the Distribution Agreement and the net present value of the incremental business Genius expects to receive as a result of the Distribution Agreement.

 

The implied TWC parties’ percentage ownership ranged between 57.5% and 61.0% including the $32 million equity raise, the incremental deal valued at an exit multiple of 5.0x and 10% reduced sales. The implied TWC parties’ percentage ownership ranged between 54.2% and 57.6% including the $32 million equity raise, the incremental deal valued at an exit multiple of 5.0x and 20% reduced sales.

 

Consideration of Selected Comparable Transactions Analysis. While comparable transactions analysis is a commonly used valuation methodology, Jefferies did not employ such an analysis for the purposes of its opinion. Comparable transactions analysis is most appropriate for transactions that are materially similar in their nature and structure. Given the number of specific and unique characteristics of the Transaction, Jefferies considered a selected comparable transactions analysis inappropriate for valuing the consideration to be received by the Company pursuant to the Master Contribution Agreement.

 

Consideration of Premiums Analysis. While premiums analysis is a commonly used valuation methodology, Jefferies did not employ such an analysis for the purposes of its opinion. Premiums analysis is most appropriate for transactions that entail a discrete offer price in the form of cash or stock as consideration in exchange for a company’s equity securities. Given the form of consideration in the Transaction, Jefferies did not consider a premiums analysis appropriate for providing a relative comparison of the consideration to be received by the Company pursuant to the Master Contribution Agreement.

 

Jefferies’ opinion was one of many factors taken into consideration by the Genius Products board of directors in making its determination to approve the Transaction and should not be considered determinative of the views of the board or management with respect to the Transaction or the transaction consideration.

 

Jefferies was selected by the board based on Jefferies’ qualifications, expertise and reputation. Jefferies is an internationally recognized investment banking and advisory firm. Jefferies, as part of its investment banking business, is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements, financial restructurings and other financial services.

 

As noted in Jefferies’ opinion, in February 2004 Jefferies advised Wellspring Media, Inc. (“Wellspring”) on its sale to the American Vantage Companies, which included its film library (the “Wellspring Library”). Jefferies holds a secured negotiable promissory note made by Wellspring as part of Jefferies’ fee in that transaction. Jefferies also represented American Vantage Companies in the sale of its subsidiary, American Vantage Media, to Genius Products. The Wellspring promissory note is now an obligation of Genius Products as a result of our acquisition of Wellspring from American Vantage Companies. The Wellspring promissory note matures on February 3, 2006.

 

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Jefferies subsequently represented American Vantage Companies in the private placement to certain investors of 3,125,000 shares of Genius Products’ stock received by American Vantage Companies in the sale of American Vantage Media and is currently engaged by American Vantage Companies to act as placement agent in connection with any other resale of shares of Genius Products’ stock owned by American Vantage Companies.

 

Stephen K. Bannon, who is our chairman, served as a managing director and head of media and entertainment investment banking of Jefferies from July 2000 to April 2002.

 

Effective February 1, 2006, Genius Products hired John Mueller as its Chief Financial Officer and Executive Vice President. Mr. Mueller previously served as Senior Vice President of Media and Entertainment Investment Banking for Jefferies, and was actively involved in providing Jefferies’ services to Genius Products in connection with the Transaction. Genius Products did not discuss any position with Mr. Mueller or determine to hire Mr. Mueller until after Jefferies rendered its fairness opinion to Genius.

 

In the ordinary course of business, Jefferies and its affiliates may trade or hold such securities of the Company for its own account and for the accounts of its customers and, accordingly, may at any time hold long or short positions in those securities.

 

Pursuant to an engagement letter between the Company and Jefferies dated August 8, 2005, as amended on December 3, 2005, the Company agreed to pay Jefferies a customary fee for its services in connection with the Transaction, a portion of which became payable to Jefferies upon delivery of its opinion, and the remainder of which shall be payable to Jefferies contingent upon consummation of the Transaction. Jefferies will also be reimbursed for reasonable expenses incurred, including the fees and disbursements of Jefferies’ counsel. The Company has agreed to indemnify Jefferies against liabilities arising out of or in connection with the services rendered or to be rendered by it under its engagement.

 

Interests of Directors, Executive Officers and Affiliates

 

In considering the recommendation of our board of directors to vote in favor of the contribution of substantially all of our assets in connection with the Transaction, stockholders should be aware that some of our executive officers and directors may have interests in the Transaction that may be different from, or in addition to, their interests as stockholders. Our board of directors was aware of these interests and considered them, among other things, in making its recommendations.

 

Employment Agreement Amendments Effective Upon Closing

 

Mr. Drinkwater, Rodney Satterwhite, Michael Radiloff and Mitch Budin are parties to employment agreement amendments under which they will receive rights to severance payments upon termination or other benefits. These employment agreement amendments only become effective upon the closing of the Transaction.

 

Effective December 5, 2005, we entered into an amendment to the employment agreement with Mr. Drinkwater, pursuant to which the following changes were made to his employment agreement. The first two bullet points will only become effective upon closing of the Transaction:

 

    Three-year term, with up to two one-year extensions at our option;

 

    Base compensation of $425,000 in year one, $475,000 in year two, $525,000 in year three, $625,000 in year four (if applicable), and $675,000 in year five (if applicable), plus annual bonuses in each year of up to 50% of base salary based on performance factors to be determined by the Company’s board of directors; and

 

    Additional stock options to acquire 1,000,000 shares, vesting in equal installments over five years.

 

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Effective December 5, 2005, we entered into an amendment to the employment agreement with Mr. Satterwhite, pursuant to which the following changes were made to his employment agreement. The first bullet point will only become effective upon closing of the Transaction:

 

    Two-year term, with a one-year extension at our option; and

 

    Additional stock options to acquire 75,000 shares, vesting in equal installments over five years.

 

Effective December 5, 2005, we entered into an amendment to the employment agreement with Mr. Radiloff, pursuant to which the following changes were made to his employment agreement. The first bullet point will only become effective upon closing of the Transaction:

 

    Two-year term, with a one-year extension at our option; and

 

    Additional stock options to acquire 75,000 shares, vesting in equal installments over five years.

 

Effective December 5, 2005, we entered into an amendment to the employment agreement with Mr. Budin, pursuant to which the following changes were made to his employment agreement. The first bullet point will only become effective upon closing of the Transaction:

 

    Two-year term, with a one-year extension at our option; and

 

    Additional stock options to acquire 75,000 shares, vesting in equal installments over five years.

 

Acceleration of Vesting of Stock Options Upon Closing

 

In addition, the vesting of all unvested stock options outstanding at the time of the closing of the Transaction, including options held by our directors and executive officers, automatically will accelerate upon the closing of the Transaction. However, pursuant to their employment agreement amendments, each of Messrs. Budin, Satterwhite and Radiloff have agreed to waive the accelerated vesting of a portion of their existing stock options, and Mr. Drinkwater has agreed to restrictions on the sale or transfer of a portion of the shares of our common stock represented by his existing stock options.

 

No Appraisal Rights

 

Under the applicable provisions of the Delaware General Corporation Law, our stockholders will have no right to seek appraisal of their shares of common stock in connection with the Transaction.

 

Certain United States Federal Income Tax Consequences

 

The Transaction presents certain tax risks to us described under “Risk Factors—Risks Related to the Transaction” above.

 

EACH HOLDER OF OUR COMMON STOCK IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION, AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES.

 


 

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MATERIAL AGREEMENTS AND DOCUMENTS

RELATING TO THE TRANSACTION

 

This section contains summaries of the principal terms and conditions of the material agreements and other material documents related to the Transaction listed below:

 

1. Article IV(B) of our proposed amended and restated certificate of incorporation, which authorizes the Series W Preferred Stock to be issued to TWC in connection with the Transaction and establishes the rights, preferences and powers, and the qualifications, limitations and restrictions, of the Series W Preferred Stock;

 

2. The Contribution Agreement;

 

3. The LLC Agreement;

 

4. The Distribution Agreement; and

 

5. Additional agreements related to the Transaction, including the Voting Agreements, the Services Agreement and the Registration Rights Agreement.

 

We encourage you to read the appendices to this Proxy Statement in their entirety. These appendices include complete copies of our proposed Amended and Restated Certificate of Incorporation (Appendix E), the Contribution Agreement (Appendix A), the LLC Agreement (Appendix C) and the Distribution Agreement (Appendix D). The summaries below are qualified by the actual terms and conditions set forth in these appendices. While we believe that these summaries cover the material terms of the relevant documents, these summaries may not contain all of the information that you believe to be important. You should refer to the full text of the documents for details of the Transaction and the terms and conditions of the documents.

 

1. Series W Preferred Stock To Be Issued To TWC

 

As a condition to the closing of the Transaction, we are required to issue 100 shares of Series W Preferred Stock to or as directed by TWC or an affiliate of TWC. Under Article IV(B) of our proposed amended and restated certificate of incorporation attached hereto as Appendix E, the Series W Preferred Stock will provide TWC significant rights, preferences and powers not available to our other stockholders.

 

Voting. The holders of the Series W Preferred Stock will have the following voting rights:

 

    General. Except as required by our certificate of incorporation or applicable law, the holders of the shares of Series W Preferred Stock will be entitled to vote on all matters submitted to a vote of our stockholders, voting together with the holders of common stock (and of any other shares of our capital stock entitled to vote at a meeting of stockholders) as one class.

 

    Voting Power When Threshold Amount Held. So long as the “TWC Holders” (which means the members of the Distributor other than Genius Products) and their permitted transferees (i) own the shares of Series W Preferred Stock, and (ii) collectively beneficially own or have the right to beneficially own upon conversion, exchange, or redemption of Class W Units pursuant to the LLC Agreement at least 20% of our outstanding common stock (assuming conversion, exchange or redemption of the Class W Units and excluding shares of common stock issuable upon exercise of outstanding options, warrants or other convertible securities of Genius Products) (the “Threshold Amount”), the Series W Preferred Stock will have the following voting rights:

 

    Majority Voting Power. Except as otherwise required in our certificate of incorporation or by applicable law, as of each record date for the determination of stockholders entitled to vote on any matter (a “Record Date”), the shares of Series W Preferred Stock will, in the aggregate, have voting rights and powers equal to the greatest of:

 

    100 votes;

 

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    the number of votes attributable to the number of shares of common stock that TWC Holders and their permitted transferees beneficially own, including without limitation those shares of common stock which they have the right to acquire, upon conversion, exchange or redemption of Class W Units pursuant to the LLC Agreement, less the number of votes attributable to the shares of common stock which TWC Holders and their permitted transferees may vote directly; and

 

    the number of votes that, together with all other votes entitled to be directly cast by the holders of the shares of Series W Preferred Stock on such Record Date, whether by virtue of beneficial ownership of our capital stock, proxies, voting trusts or otherwise, entitle the holders of the shares of Series W Preferred Stock to exercise one vote more than one-half of all votes entitled to be cast as of such Record Date by all holders of our capital stock.

 

Each holder of Series W Preferred Stock will be entitled to notice of any stockholders’ meeting in accordance with our bylaws.

 

    Board of Directors. Our board of directors will consist of seven directors, and at any meeting for the election or removal of directors, however such meeting is called and regardless of whether such meeting is a special or annual meeting of stockholders, or at any adjournment thereof, or in connection with any written consent of stockholders, the holders of Series W Preferred Stock (voting separately as a single class) will be entitled to elect five (5) directors (the “Series W Directors”), three (3) of whom at the time of their election must be independent directors (under applicable listing standards), and to remove, without cause, from office any Series W Director and to fill any vacancy caused by the resignation, death or removal of any Series W Director. Vacancies on the board resulting from the death, resignation or removal of a Series W Director may be filled by the remaining Series W Directors, to hold office until a qualified successor is elected by the holders of Series W Preferred Stock at the next regular or special meeting of the stockholders. So long as TWC and each of its affiliates and permitted transferees owns or has a right to own the Threshold Amount, the holders of our common stock (voting separately as a single class) will be entitled to elect two (2) directors (the “At-Large Directors”), and to remove, without cause, from office any At-Large Director and, in the absence of any At-Large Directors, to fill any vacancy caused by the resignation, death or removal of any At-Large Director. Vacancies on the board resulting from the death, resignation or removal of an At-Large Director may be filled by the remaining At-Large Director, to hold office until a qualified successor is elected by the holders of common stock at the next regular or special meeting of the stockholders.

 

    Protective Provisions. In addition to the right of holders of shares of Series W Preferred Stock to vote together with the holders of common stock, the holders of shares of Series W Preferred Stock also have special rights under the protective provisions in the proposed amended and restated certificate of incorporation. These protective provisions provide that Genius Products will not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series W Preferred Stock voting as a separate class:

 

    take actions in contravention of or engage in activities inconsistent with the rights, duties and obligations of the Company under the LLC Agreement;

 

    cause the Distributor to take actions in contravention of or engage in activities inconsistent with the rights, duties and obligations of the Distributor under the Distribution Agreement (as amended, modified or supplemented from time to time);

 

    create or assume any indebtedness or liability, or provide any indirect financial assistance, or assume any mortgage, charge or other encumbrance on any property;

 

    sell, lease, exchange or dispose of, by any means, property or assets having a value in excess of $100,000;

 

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    enter into or effect any conversion, consolidation or merger;

 

    take any action to liquidate or dissolve Genius Products;

 

    enter into, amend or waive any contract with a member of the Distributor or with any party that is not arm’s length;

 

    engage, remove or replace the independent auditors;

 

    guarantee the liabilities or debts of any person other than a subsidiary of Genius Products;

 

    declare or make any dividends or distributions, except dividends or distributions payable solely to holders of common stock;

 

    appoint or remove (i) the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, or any other executive level officer or employee or (ii) any other employee whose base compensation is in excess of $150,000 per year;

 

    change the size of our board of directors;

 

    approve the annual or quarterly budget for Genius Products or the Distributor, or vary more than 10% from the amount budgeted for any material line item therein;

 

    engage in any debt or equity financing, refinancing, recapitalization or other capital raising transaction;

 

    approve or enter into any contracts, agreements, understandings or arrangements outside the ordinary course or providing for payments by or to Genius Products or any of its subsidiaries of obligations in excess of $100,000 per year;

 

    commence or settle any litigation;

 

    license any item of product outside the ordinary course or on terms other than fair market value;

 

    approve or adopt any material employee compensation plan or arrangement;

 

    create any subsidiaries other than the Distributor;

 

    amend our amended and restated certificate of incorporation or bylaws, including in either case by way of consolidation or merger;

 

    authorize or issue any shares of capital stock or any instrument exercisable or convertible for shares of capital stock, other than issuances of common stock upon exercise or conversion of securities exercisable or convertible for common stock in existence on the date that the amended and restated certificate of incorporation is filed with the Delaware Secretary of State; or

 

    permit any of our subsidiaries, including, without limitation, the Distributor, to do any of the foregoing.

 

Notwithstanding the foregoing, no such approval of holders of Series W Preferred Stock will be required for any action approved by the vote or consent of a committee of the board of directors composed only of At-Large Directors, or the holders of at least a majority of the outstanding shares of common stock, in each case in accordance with the common stock special voting provisions described in Sub-Proposal 2D below.

 

    Vote Below Threshold Amount. At such time as TWC Holders and their permitted transferees collectively beneficially no longer own or have the right to beneficially own, upon conversion, exchange or redemption of Class W Units pursuant to the LLC Agreement, the Threshold Amount, the voting rights of the holders of the Series W Preferred Stock described above will immediately terminate and each share of Series W Preferred Stock shall entitle the holder thereof to the number of votes represented by the number of shares of common stock into which all Class W Units held by TWC Holders and their permitted transferees would be converted, exchanged or redeemed pursuant to the LLC Agreement, divided by the number of shares of Series W Preferred Stock outstanding at the record date for such vote.

 

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    Vote Required for Certificate of Incorporation or Bylaw Amendment. Without the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series W Preferred Stock voting as a separate class, we will not amend, alter or repeal any provision of our certificate of incorporation or bylaws (by merger or otherwise) so as to adversely affect the preferences, rights or powers of the Series W Preferred Stock.

 

Dividend Provisions. The holders of outstanding shares of Series W Preferred Stock will be entitled to receive dividends, when, as and if declared by the board of directors, out of our assets legally available therefor, as may be declared from time to time by our board of directors.

 

Liquidation. In the event of the liquidation, dissolution, winding up or sale or other disposition of all or substantially all of the assets of Genius Products, whether voluntary or involuntary (“Liquidation”), the holders of Series W Preferred Stock will be entitled to receive with respect to each shares of Series W Preferred Stock, after payment of or provision for payment of the debts and other liabilities of Genius Products, cash or any other assets of Genius Products in an amount (or having a fair market value) equal to $0.01 plus all accrued but unpaid dividends up to and including the date of Liquidation (the “Liquidation Preference”). The fair market value of any of our assets and the proportion of cash and other assets distributed by Genius Products to the holders of the Series W Preferred Stock will be reasonably determined in good faith by our board of directors.

 

Conversion. The Series W Preferred Stock will not be convertible into any other class of stock of the Corporation.

 

Common Stock Provisions. Article IV(C) of our proposed amended and restated certificate of incorporation attached hereto as Appendix E includes provisions that modify the rights, preferences and powers, and the qualifications, limitations and restrictions, of our common stock to include the right to elect two “At-Large Directors” and certain “Special Voting Provisions,” consisting of matters which may only be approved by the At-Large Directors or by the vote of holders of a majority of our outstanding common stock. For a discussion of these common stock provisions see below under “Sub-Proposal 2D” on page     .

 

2. The Contribution Agreement

 

This section of the Proxy Statement describes selected portions of the Contribution Agreement.

 

Assets to be Contributed by Genius Products

 

At the closing of the Transaction, Genius Products will contribute to the Distributor substantially all of its assets, except for the Excluded Assets described below.

 

Excluded Assets

 

The following assets are excluded from the assets to be contributed by Genius Products in the Transaction:

 

    corporate seals, certificates of incorporation, minute books, stock transfer records or other records related to the corporate organization of Genius Products;

 

    certain claims, demands, rights or causes of action, and any cash, assets or other property recovered by Genius Products therefrom;

 

    any recovery of cash, assets or other property received by Genius Products that represents a return of or on any amounts or obligations previously paid or incurred by Genius Products in connection with the excluded liabilities described below under “Excluded Liabilities”;

 

    benefit plans and contracts of insurance of Genius Products for employee group medical, dental and life insurance plans;

 

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    all insurance policies of Genius Products, to the extent that the parties mutually agree that any such items should not be transferred to the Distributor, and subject to the obligation of the Distributor to reimburse Genius Products for the costs thereof as provided in the Services Agreement described below under “Services Agreement”, to the extent that the Distributor receives the benefits of these plans, contracts and policies; and

 

    all rights of Genius Products under the Contribution Agreement and the other agreements relating to the Transaction.

 

Assumed Liabilities

 

At the closing of the Transaction, the Distributor will assume Genius Products’ liabilities:

 

    to the extent reserved, reflected or accrued on Genius Products’ balance sheet as of September 30, 2005;

 

    under the contributed assets that related to periods after the closing;

 

    arising after September 30, 2005 in the ordinary course of business in connection with activities permitted by the Contribution Agreement, except for liabilities and obligations arising out of legal violations and except for liabilities and obligations arising out of legal proceedings relating to any transactions, events or other circumstances occurring or existing on or prior to the closing; or

 

    arising under any contract, agreement or commitment which is being assigned to the Distributor under the Contribution Agreement other than liabilities relating to any breach of such contract, agreement or commitment occurring prior to the closing date.

 

Excluded Liabilities

 

Notwithstanding the foregoing, the liabilities to be assumed by the Distributor do not include the following liabilities (collectively, the “Excluded Liabilities”), unless the terms of the Contribution Agreement specifically state that any such liability or obligation will transfer to or be the responsibility of the Distributor:

 

    all liabilities arising out of the ownership or operation of our business or the ownership, use, possession or condition of the transferred assets prior to the closing, other than (i) those which have been reserved, reflected or accrued on Genius Products’ balance sheet as of September 30, 2005, (ii) those arising after September 30, 2005 in the ordinary course of business in connection with activities permitted by the Contribution Agreement, except for liabilities and obligations arising out of legal violations and except for liabilities and obligations arising out of legal proceedings relating to any transactions, events or other circumstances occurring or existing on or prior to the closing, and (iii) those arising under any contract, agreement or commitment which is being assigned to the Distributor under the Contribution Agreement other than liabilities relating to any breach of such contract, agreement or commitment occurring prior to the closing;

 

    all liabilities arising out of any violation or alleged violation by Genius Products of any legal requirement prior to, on or following the closing of the Transaction, whether or not reserved, reflected or accrued on Genius Products’ balance sheet as of September 30, 2005, except for (i) such liabilities and obligations arising out of any violation or alleged violation by the Distributor or any of its subsidiaries on or following the closing, or (B) such liabilities and obligations of the Distributor or any of its subsidiaries arising out of the Transaction agreements or any of the transactions contemplated thereby;

 

    all liabilities arising out of any legal action or legal proceeding commenced against Genius Products or any subsidiary on or prior to the closing of the Transaction, and any legal action or legal proceeding commenced against Genius Products or any subsidiary following the closing of the Transaction to the extent relating to any transactions, events or other circumstances of Genius Products or any subsidiary occurring or existing on or prior to the closing, whether or not reserved, reflected or accrued on Genius Products’ balance sheet as of September 30, 2005;

 

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    all liabilities and obligations of Genius Products or any subsidiary arising out of the excluded assets described above, other than prospective liabilities arising after the closing of the Transaction under Genius Products’ employee benefit plans;

 

    with respect to contracts assignable to the Distributor as transferred assets but that are not assigned as of the Closing because of (i) a failure to receive any necessary consent, approval or waiver of a third party, (ii) because that assignment would violate the rights of any third party in such transferred asset, which violation would adversely affect the expected benefits or increase the expected costs or liabilities to the Distributor under the transferred asset, or (iii) otherwise affect adversely the rights of the Distributor in the Transferred Asset (together, the “Unassigned Contracts”), all amounts by which the aggregate value of the benefit that would otherwise be received by the Distributor under the Unassigned Contracts or any portion thereof, to the extent such amounts exceed the benefits received by the Distributor under alternate arrangements, exceeds $500,000, such aggregate value to be calculated based on the discounted future revenues reasonably expected to be received under such unassigned contracts as of the closing date;

 

    all liabilities and obligations under or arising in connection with our December 2005 private placement financing, including, without limitation, any liabilities, obligations, damages or interest relating to our failure to file or keep effective a registration statement with respect to, or to otherwise effect the registration of, registrable securities pursuant to any registration rights agreement, warrant or other agreement entered into in connection with the financing;

 

    the registration rights agreement described below under “Additional Agreements Related to the Transaction—Registration Rights Agreement”; and

 

    burdens, obligations or liabilities (i) of Genius Products or any subsidiary for taxes imposed with respect to all periods prior to the closing, and (ii) of Genius Products for taxes for all periods after the closing, other than taxes, if any, for which the Distributor is obligated to reimburse Genius Products pursuant to the Services Agreement described below under “Additional Agreements Related to the Transaction—Services Agreement”.

 

Consideration

 

We will receive Class G Units in the Distributor in exchange for the contribution of substantially all of our assets to the Distributor. The Class G Units that we receive will represent a 30% equity interest in the Distributor as of the closing of the Transaction. The Class G Units are described below in the section entitled, “The LLC Agreement—Classes of Units”.

 

Closing Date

 

The closing date will be determined by the parties, following satisfaction or waiver of the closing conditions described below under “Conditions to Closing”. The Contribution Agreement may be terminated by either Genius Products or TWC if (i) the closing has not occurred on or prior to April 15, 2006 for any reason and (ii) the terminating party is not, on the date of termination, in material breach of any material provision of the Contribution Agreement. The Contribution Agreement may be terminated in additional situations, as described below in the section entitled, “Termination”.

 

Assets and Liabilities of the Distributor

 

Subject to the terms and conditions of the Contribution Agreement, at the closing (and prior to our contribution of assets to the Distributor), the Distributor is required to ensure that:

 

    the Distributor will hold no assets other than the home video distribution rights with respect to certain entertainment properties of TWC evidenced by the Distribution Agreement; and

 

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    the Distributor will have or be subject to no liabilities other than arising under the Distribution Agreement or the Contribution Agreement, provided that to the extent assets or liabilities cannot be transferred, the Distributor may enter into alternate arrangements.

 

Creation of New Distributor

 

Notwithstanding anything to the contrary contained herein, at TWC’s election prior to the closing, TWC may cause Genius Products to make the contributions described above to a newly formed Delaware limited liability company (“New Distributor”), TWC will contribute or cause to be contributed to the New Distributor the Distribution Agreement and the ownership of New Distributor will be as provided above with the contributor of the Distribution Agreement receiving the Class W Units described above, and such changes will be made to the Contribution Agreement as the context requires, and the parties will cooperate to take such actions as are necessary to implement those changes.

 

Representations and Warranties

 

The Contribution Agreement contains representations and warranties by Genius Products relating to:

 

    our corporate organization and related matters;

 

    our capital structure;

 

    the authorization, execution, delivery, performance and enforceability of the Contribution Agreement and the other documents relating to the Transaction to which we are a party, and related matters;

 

    our reports and financial statements filed with the Securities and Exchange Commission;

 

    the absence of any undisclosed liabilities;

 

    the absence of undisclosed adverse changes in our business since September 30, 2005;

 

    the obtaining of the required governmental approvals and consents;

 

    the absence of conflicts, violations or breaches of law or agreements resulting from the execution, delivery and performance by us of the Contribution Agreement and the other documents relating to the Transaction to which we are a party;

 

    litigation involving us;

 

    our compliance with applicable law and regulations;

 

    our tax returns and other tax matters;

 

    our trademarks and intellectual property rights;

 

    our material contracts;

 

    finders’ and brokers’ fees payable by us in connection with the Transaction;

 

    our contracts relating to the licensing, distribution or exhibition of audio, video and/or audiovisual works in our product library;

 

    the contents of our product library and our related rights;

 

    our insurance policies, coverage and claims;

 

    our employee benefit plans and other employment matters;

 

    labor matters affecting us;

 

    title to our properties and other assets;

 

    the opinion of our financial advisor, Jefferies;

 

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    the absence of restrictions on our business activities;

 

    environmental matters affecting us, as well as our compliance with applicable environmental laws;

 

    our compliance with the Sarbanes-Oxley Act and related requirements;

 

    our compliance with listing requirements applicable to our common stock;

 

    the application to the Transaction of takeover protections;

 

    the accuracy of our disclosure to TWC;

 

    our receipt of binding commitments for equity and debt financing;

 

    affiliate contracts and affiliated transactions; and

 

    our compliance with the Foreign Corrupt Practices Act.

 

The Contribution Agreement also contains representations and warranties by TWC relating to:

 

    TWC’s organization as a limited liability company and related matters;

 

    the authorization, execution, delivery, performance and enforceability of the Contribution Agreement and the other documents relating to the Transaction to which TWC is a party, and related matters;

 

    the obtaining of the required governmental approvals and consents;

 

    the absence of conflicts, violations or breaches of law or agreements resulting from the execution, delivery and performance by TWC of the Contribution Agreement and the other documents relating to the Transaction to which TWC is a party;

 

    litigation involving TWC;

 

    TWC’s compliance with applicable law and regulations;

 

    finders’ and brokers’ fees payable by TWC in connection with the Transaction;

 

    the Distributor’s organization as a limited liability company and related matters; and

 

    the accuracy of TWC’s disclosure to us.

 

Pre-Closing Covenants

 

During the period from the date of the Contribution Agreement until the closing of the Transaction, TWC has agreed not to:

 

    engage in any action or enter into any transaction or permit any action to be taken or transaction to be entered into that could reasonably be expected to materially adversely affect TWC’s ability to deliver products covered by the Distribution Agreement or otherwise perform its material obligations under the Distribution Agreement;

 

    fail to comply in all material respects with applicable legal requirements where the failure to so comply could be reasonably expected to have, individually or in the aggregate, a material adverse effect on TWC;

 

    engage in any action or enter into any transaction or permit any action to be taken or transaction to be entered into that could reasonably be expected to delay the consummation of, or otherwise adversely affect any of the transactions contemplated under the Contribution Agreement;

 

    take any action that would, or could reasonably be expected to, result in any representations and warranties of TWC set forth in the Contribution Agreement to be untrue or any condition to the Transaction not to be satisfied; or

 

    announce an intention, enter into any formal or information agreement or arrangement, or otherwise make a commitment to do any of the foregoing.

 

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During the period from the date of the Contribution Agreement until the closing of the Transaction, unless TWC otherwise agrees in writing and except as specifically permitted, contemplated or required by the Contribution Agreement or other transaction documents, and except for those actions reasonably taken in furtherance of the Contribution Agreement or other transaction documents, we have agreed to conduct our business in the ordinary course consistent with past practice and not to:

 

    amend or otherwise change our certificate of incorporation or bylaws;

 

    with limited exceptions, issue, sell, pledge, dispose of, grant or encumber shares of our capital stock (or rights to acquire shares of our capital stock) or any material assets;

 

    declare or pay dividends or other distributions;

 

    reclassify, combine, split, subdivide or redeem or repurchase our capital stock;

 

    increase the compensation payable or to become payable or the benefits provided to our directors, officers or employees, or grant any severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee, or establish or amend any employee benefit, bonus or other plan or arrangement for the benefit of any director, officer or employee;

 

    take any action with respect to accounting policies or procedures;

 

    fail to maintain our books, account and records in the usual, regular and ordinary manner, in accordance with generally accepted accounting principles applied on a consistent basis;

 

    fail to comply in all material respects with applicable legal requirements where the failure to so comply could be reasonably expected to have, individually or in the aggregate, a material adverse effect on Genius Products;

 

    engage in any action or enter into any transaction or permit any action to be taken or transaction to be entered into that could reasonably be expected to materially delay the consummation of, or otherwise adversely affect any of the transactions contemplated under the Contribution Agreement, except as required by applicable law or delays to secure any required governmental approvals;

 

    take any action that would, or could reasonably be expected to, result in any representations and warranties of Genius Products set forth in the Contribution Agreement to be untrue or any condition to the Transaction not to be satisfied; or

 

    take any action that could reasonably be expected to cause our shares of common stock to cease to be quoted on the OTCBB;

 

    issue any bonds, debentures, notes or other indebtedness, or refinance, replace or amend the terms of any such indebtedness;

 

    incur or guarantee any indebtedness for borrowed money;

 

    authorize any single capital expenditure or series of related capital expenditures in excess of $25,000 or capital expenditures which are, in the aggregate, reasonably likely to result in aggregate capital expenditures in excess of $250,000 for the period following the date of the Contribution Agreement and prior to the closing;

 

    whether or not in the ordinary course of business, make any expenditure of cash or case equivalents or commitment in excess of $75,000 individually or in the aggregate relating to the acquisition of library products, provided that we are required to promptly notify TWC of any expenditure or commitment for the acquisition of library products not exceeding $75,000 individually or in the aggregate;

 

    make any expenditure or investment of cash or cash equivalents in excess of $5,000 individually or $25,000 in the aggregate which is not otherwise contemplated by the Contribution Agreement and not made in the ordinary course of our business;

 

    settle or compromise any pending or threatened suit, action or claim, or commence any suit, action or claim involving a cash payment or compromise of a claim in excess of $25,000;

 

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    adopt a plan for complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization;

 

    with limited exceptions, pay, discharge or satisfy any material claims, liabilities or obligations;

 

    enter into, amend or otherwise modify a contract relating to various items specified in the Contribution Agreement;

 

    sell, transfer or license to any person or otherwise extend, amend or modify any intellectual property rights, or acquire such rights;

 

    except as may be required by law, make any material tax election, make or change any method of accounting with respect to taxes, file any amended tax returns or settle or compromise any material federal, state, local or foreign tax liability;

 

    sell, lease, license, encumber or otherwise dispose of any properties or assets;

 

    acquire any business or enter into any joint ventures, strategic partnerships or alliances;

 

    take any affirmative action, or fail to take any action, as a result of which any of various changes or events specified in the Contribution Agreement would be reasonably likely to occur; or

 

    announce an intention, enter into any formal or information agreement or arrangement, or otherwise make a commitment to do any of the foregoing.

 

In addition, we have agreed not to solicit, accept or furnish any information to any person in connection with any transaction proposal that would compete with the Transaction. However, in response to a bona fide unsolicited proposal with respect to a proposal for an alternative transaction, if our board of directors determines, in its good faith judgment, taking into account the advice of its financial advisor and outside counsel, that the proposal is for a transaction that constitutes or could reasonably be expected to constitute a proposal that is more favorable to our stockholders than the Transaction, then we are permitted to furnish information to the person making such alternative proposal and participate in discussions or negotiations with such person.

 

Additional Agreements

 

The Contribution Agreement also provides that:

 

    We are required to call a stockholders’ meeting in accordance with applicable law and our certificate of incorporation and bylaws as promptly as practicable for the purpose of voting upon the approval of the Transaction;

 

    We are required to use commercially reasonable efforts to take all lawful action necessary or advisable to solicit from our stockholders proxies in favor of the approval of the transactions contemplated by the Contribution Agreement and take all other reasonable action necessary or advisable to secure the requisite vote of stockholders in favor of such approval;

 

    Our board of directors is required to recommend that our stockholders vote in favor of the approval and adoption of the Contribution Agreement and the Transaction, and such recommendation must be included in this Proxy Statement; and

 

    TWC may elect prior to the closing to substitute a newly-formed Delaware limited liability company as the Distributor, in place of utilizing The Weinstein Company Holdings LLC or one of its existing affiliates as the Distributor.

 

Contingent Dividend Right

 

The Contribution Agreement provides that, within 30 days following the closing of the Transaction or such later time as is practicable, we will issue to our stockholders of record on the date of the closing (to the extent

 

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practicable) an instrument (the “Contingent Dividend Right”) entitling the holder to receive from Genius Products cash payments from time to time after the closing solely based on cash received by Genius Products from the exercise or conversion, after the closing of the Transaction, of options, warrants or other convertible securities that were issued and outstanding as of the closing date.

 

These cash payments will only be made when, as and if declared by the board of directors of Genius Products pursuant to a vote of a committee of the board consisting only of At-Large Directors (as such term is defined above under “Series W Preferred Stock To Be Issued To TWC—Voting”), but we will have no obligation to make or declare such payments. Furthermore, the issuance of Contingent Dividend Rights will be subject to any requirement that we may have to first register or qualify their issuance with the SEC and any state “blue-sky” securities authorities as applicable.

 

As of February 3, 2006, we had outstanding options, warrants and convertible securities to acquire a maximum of 32,993,175 shares with a gross exercise price of $62,226,596. However, the foregoing estimate of gross exercise price assumes that all outstanding instruments are exercised for cash, even though some instruments have “cashless exercise” features, so the actual gross exercise price will likely be less. Also we expect that our company will need to retain a portion of the gross exercise price received upon exercise of these instruments to pay for expenses not reimbursed by the Distributor pursuant to the Services Agreement. As a result, we cannot provide a reliable estimate of the future value or cash proceeds likely to be paid to holders of the Contingent Dividend Rights. We expect that the Contingent Dividend Rights will be registered under the Securities Exchange Act and may trade sporadically on the over the counter market. We do not intend to apply for listing of the Contingent Dividend Rights on any stock exchange or Nasdaq. There is no guarantee that a liquid market will develop for trading in the Contingent Dividend Rights.

 

Conditions to Closing

 

Our obligations to consummate the Transaction are subject to the satisfaction, on or prior to the closing, of each of the following conditions, among others, any of which we may waive:

 

    The continued accuracy of all of TWC’s representations and warranties in the Contribution Agreement;

 

    TWC’s performance in all material respects of all covenants and obligations in the Contribution Agreement required to be performed by TWC on or prior to the closing date;

 

    No legal proceeding that, if determined adversely, could reasonably be expected to have a material adverse effect on TWC, will be pending against TWC, except as disclosed to us in writing prior to the date of the Contribution Agreement;

 

    Since the date of the Contribution Agreement, there shall not have occurred any events or changes (other than those contemplated under the Contribution Agreement) which (i) have had or could reasonably be expected to, individually or in the aggregate, have a material adverse effect on TWC, (ii) have materially adversely affected TWC’s ability to produce or acquire motion pictures or perform any of its obligations under the Contribution Agreement or the Distribution Agreement, or (iii) have materially adversely affected TWC’s film release schedule;

 

    TWC shall have executed and delivered the Distribution Agreement, and there shall have occurred no events or changes which have had or could reasonably be expected to have, individually or in the aggregate, a material adverse effect on TWC’s ability to deliver products under the Distribution Agreement or otherwise perform its material obligations under the Distribution Agreement;

 

    TWC shall have executed and delivered the LLC Agreement, which shall be the limited liability company agreement of the Distributor immediately following the closing; and

 

    The Distributor shall have executed and delivered the Services Agreement described below under “Additional Agreements Related to the Transaction”.

 

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TWC’s obligations to consummate the Transaction are subject to the satisfaction, on or prior to the closing, of each of the following conditions, among others, any of which we may waived:

 

    The continued accuracy of all of our representations and warranties in the Contribution Agreement;

 

    Our performance in all material respects of all covenants and obligations in the Contribution Agreement required to be performed by us on or prior to the closing date;

 

    No material legal proceeding, and no legal proceeding initiated by a stockholder of Genius Products relating to the complainant’s rights as a stockholder of Genius Products, shall be pending against us, except as disclosed in any of our reports filed with the SEC during calendar year 2005 and prior to the date of the Contribution Agreement;

 

    Since the date of the Contribution Agreement, there shall not have occurred any events or changes (other than those contemplated under the Contribution Agreement or any of the other transaction agreements) which have had or could reasonably be expected to have, individually or in the aggregate, a material adverse effect on us;

 

    We shall have issued 100 shares of Class W Preferred Stock to or as directed by TWC or an affiliate of TWC, as described above under “Series W Preferred Stock To Be Issued To TWC”;

 

    We shall have executed and delivered the Registration Right Agreement described below under “Additional Agreements Related to the Transaction”;

 

    We shall have executed and delivered the LLC Agreement, which shall be the limited liability company agreement of the Distributor immediately following the closing;

 

    The employment agreements of Trevor Drinkwater, Rodney Satterwhite, Michael Radiloff and certain other individuals agreed to by Genius Products and TWC, or the amendments thereto, shall be in full force and effect;

 

    The opinion of Jefferies & Company, Inc. shall not have been modified or withdrawn;

 

    The holders of a majority of our outstanding common stock shall have approved the Transaction and related matters;

 

    The amended and restated certificate of incorporation attached hereto as Appendix E shall have been duly filed with the Delaware Secretary of State;

 

    Our board of directors shall comprise seven members, five of whom shall have been designated by TWC or an affiliate of TWC in accordance with the amended and restated certificate of incorporation;

 

    Genius Products shall have received and have available to it not less than $25 million in cash from new equity financing, with the proceeds available for immediate use by and contributed to the Distributor, on terms and conditions not less favorable to Genius Products or the Distributor in any respect from those contained in the financing commitments previously delivered to TWC. This condition has been satisfied as a result of our closing, on December 6, 2005, of a $32 million private placement financing in which we issued 16,000,000 shares of our common stock and five-year warrants to purchase 4,800,000 shares of common stock with an exercise price of $2.40 per share;

 

    Genius Products shall have received a binding director’s and officer’s liability policy of insurance on terms and conditions, and with applicable coverages and exclusions, in such amounts as have been previously agreed by Genius Products and TWC;

 

    All Excluded Liabilities of any of our subsidiaries shall have been transferred to, and assumed by, Genius Products, in a manner contemplated by the Contribution Agreement or the transaction agreements; and

 

    All consents, waivers or approvals required to be obtained in connection with the consummation of the transactions contemplated by the Contribution Agreement shall have been obtained, except where the failure to receive such consents, waivers or approvals would not have a material adverse effect on Genius Products or TWC.

 

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Each party’s obligations to consummate the Transaction are subject to the satisfaction, on or prior to the closing, of each of the following conditions, among others, any of which we may waived:

 

    The Contribution Agreement and the transactions contemplated thereby, including the amended and restated certificate of incorporation in the form of Appendix E attached hereto, shall have been approved by the requisite vote of our stockholders;

 

    All waiting periods (and any extensions thereof) applicable to the Transaction under federal antitrust laws shall have expired or been terminated;

 

    All consents, waivers or approvals required to be obtained in connection with the consummation of the transactions contemplated by the Contribution Agreement shall have been obtained, except where the failure to receive such consents, waivers or approvals would not have a material adverse effect on Genius Products or TWC; and

 

    There shall not be in effect any order issued by any governmental authority preventing the consummation of the transactions contemplated by the Contribution Agreement, nor shall any legal proceeding be pending that seeks any of the foregoing. There shall not be any legal requirement prohibiting the parties from consummating the transactions contemplated by the Contribution Agreement.

 

Termination

 

At any time prior to the closing, the Contribution Agreement may be terminated by the mutual written consent of Genius Products and TWC, or by Genius Products or TWC by delivery of written notice to the other explaining the reason for such termination (without prejudice to other remedies which may be available to the parties under this Agreement, at law or in equity):

 

    by either Genius Products or TWC if (i) the non-terminating party is in material breach of any material covenant contained in the Contribution Agreement and such breach shall not have been cured within fifteen (15) days of receipt by such party of written notice from the terminating party of such breach and (ii) the terminating party is not, on the date of termination, in material breach of any material covenant contained in the Contribution Agreement;

 

    by either Genius Products or TWC if (i) the closing has not occurred on or prior to April 15, 2006 for any reason and (ii) the terminating party is not, on the date of termination, in material breach of any material provision of the Contribution Agreement;

 

    by either Genius Products or TWC if, at our stockholders’ meeting (or any adjournment or postponement thereof), the requisite vote of our stockholders do not approve the Contribution Agreement and the transactions contemplated hereby, including approving the amended and restated certificate of incorporation in the form attached hereto as Appendix E;

 

    by TWC if (i) our board of directors or a committee withdraws or modifies its approval of the Transaction or approves a competing transaction or letter of intent or other agreement relating to a competing transaction (each such item, an “Adverse Recommendation Change”), (ii) the board of directors of Genius Products or any committee thereof fails to recommend (or reconfirm its recommendation promptly upon request) to our stockholders that they give the required approvals, (iii) tender or exchange offer or other solicitation or proposal that would constitute an alternative competing transaction proposal is commenced on or after the date of the Contribution Agreement and our board of directors or any committee thereof fails to recommend against acceptance of such tender or exchange offer or other solicitation or proposal by our stockholders (including by means of taking no position with respect to the acceptance of such tender or exchange offer by our stockholders) within ten business days from the commencement thereof or (iv) our board of directors or any committee thereof resolves to take any of the foregoing actions;

 

    by TWC if Genius Products gives TWC a Termination Notice, as contemplated below;

 

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    by Genius Products if the board of TWC or its affiliates, or any committee thereof, whether or not permitted pursuant to the terms hereof, revokes, amends, modifies, withdraws or otherwise changes its approval or recommendation of advisability of the Contribution Agreement or the transactions contemplated hereby or resolves to take any such actions;

 

    by Genius Products if (i) our board of directors has received a superior proposal; (ii) in light of such superior proposal our board of directors shall have determined in good faith, after consultation with outside counsel, that it is necessary for our board of directors to withdraw or modify its approval or recommendation of the Contribution Agreement or transactions contemplated hereby in order to comply with its fiduciary duty to our stockholders under applicable legal requirements (any such determination, a “Superior Proposal Determination”); (iii) Genius Products has notified TWC in writing that it has made a Superior Proposal Determination (a “Termination Notice”) and shall have provided to TWC in writing the final terms and conditions of, such Superior Genius Proposal; (iv) Genius Products is in compliance with the exclusive dealing requirements described above; (v) Genius Products has previously paid or concurrently pays the fees and expenses due as described below; and (vi) our board of directors concurrently approves, and Genius concurrently or promptly thereafter enters into, a definitive agreement providing for the implementation of such Superior Genius Proposal, provided that it has complied with all of the foregoing provisions, including the notice provision; or

 

    by TWC if (i) Genius Products announces its intention to disclose publicly any confidential, proprietary or other non-public information of, regarding or affecting TWC or any of its affiliates or any of their respective officers, directors, members or managers or (ii) any of such information is required to be disclosed pursuant to any legal requirement, which disclosure described in (i) or (ii), or the effects thereof, will be or could reasonably be likely to be, in the reasonable judgment of TWC, materially adverse to TWC or any of its affiliates or any of their respective officers, directors, members or managers.

 

Termination Fees

 

Genius Products is required to pay to TWC or its designee a fee in the amount of $4,000,000 (the “Genius Termination Fee”) which shall be inclusive of reasonable and customary out-of-pocket costs and expenses (including, without limitation, costs or expenses of lenders, legal counsel, investment bankers, consultants, accountants and other advisors) paid or incurred in connection with consummating the transactions contemplated by this Agreement (“TWC Expenses”), if:

 

    Genius Products terminates the Contribution Agreement based in our board’s receipt of a superior proposal, as described above, or TWC terminates the Contribution Agreement based in our board’s receipt of a superior proposal;

 

    TWC terminates the Contribution Agreement because of our uncured material breach (so long as the breach or failure to perform giving rise to such right of termination was a willful and knowing breach or failure to perform);

 

    TWC terminates the Contribution Agreement under the circumstance in which (i) our board of directors or a committee withdraws or modifies its approval of the Transaction or approves a competing transaction or letter of intent or other agreement relating to a competing transaction (each such item, an “Adverse Recommendation Change”), (ii) the board of directors of Genius Products or any committee thereof fails to recommend (or reconfirm its recommendation promptly upon request) to our stockholders that they give the required approvals, (iii) a tender or exchange offer or other solicitation or proposal that would constitute an alternative competing transaction proposal is commenced on or after the date of the Contribution Agreement and our board of directors or any committee thereof fails to recommend against acceptance of such tender or exchange offer or other solicitation or proposal by our stockholders (including by means of taking no position with respect to the acceptance of such tender or exchange offer by our stockholders) within ten business days from the commencement thereof or (iv) our board of directors or any committee thereof resolves to take any of the foregoing actions; or

 

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    Genius Products or TWC terminates the Contribution Agreement because the closing has not occurred on or prior to April 15, 2006, but only if (A) a competing transaction proposal shall have been publicly disclosed or disclosed to Genius prior to April 15, 2006 and (B) within 12 months after such termination Genius Products (or any of our subsidiaries) enters into a definitive agreement with respect to a superior proposal with the person or group (or any affiliate of such person or any member of such group) that made the competing transaction proposal referred to in clause (A) above, or consummates a transaction that constitutes a superior proposal with such person or group (or any affiliate of such person or any member of such group).

 

Genius Products will pay to TWC or its designee an amount necessary to reimburse TWC for its TWC Expenses, not to exceed $750,000, if Genius Products or TWC terminates the Contribution Agreement because (i) our stockholders do not approve the Transaction and our proposed amended and restated certificate of incorporation, or (ii) we announce our intention to disclose confidential information or such information is required to be disclosed, as described above.

 

Genius Products will pay to TWC or its designee the Genius Termination Fee less the amount of TWC Expenses paid as described above if Genius Products or TWC terminates the Contribution Agreement because our stockholders do not approve the Transaction and our proposed amended and restated certificate of incorporation, but only if (A) a competing transaction proposal shall have been publicly disclosed prior to the meeting of our stockholders to approve the Transaction, and (B) within 12 months after such termination Genius Products (or any of our subsidiaries) enters into a definitive agreement with respect to, or consummates, a competing transaction proposal.

 

Survival of Covenants, Representations and Warranties

 

The covenants and agreements contained in the Contribution Agreement will survive until satisfied unless the Contribution Agreement explicitly provides for a specific termination date. All representations and warranties of the parties to the Contribution Agreement or any other agreement relating to the Transaction will survive the closing and terminate on the 18 month anniversary of the closing date (the “Survival Date”); provided, that:

 

    certain representations and warranties of the parties will survive until 90 days after all applicable statutes of limitations, including waivers and extensions, have expired, including representations and warranties relating to organization and qualification, subsidiaries, authority, capitalization, tax matters, the Foreign Corrupt Practices Act and no prior activities; and

 

    any claim for indemnification based upon a breach of any such representation or warranty and asserted prior to the Survival Date by written notice will survive until final resolution of such claim.

 

If an indemnification claim or claims are asserted prior to the expiration of the representation or warranty that is the basis for that claim or claims, then those claims will survive until their final resolution.

 

Indemnification by TWC

 

Subject to the limitations described below, TWC is required to indemnify, defend and hold harmless the Distributor, Genius Products and its affiliates and their respective representatives (all such persons being referred to hereinafter as a “Genius Indemnified Person”) from and against any and all damages, whether or not involving a third party claim, including attorneys’ fees (collectively, “Genius Damages”), arising out of, relating to or resulting from:

 

    any breach of a representation or warranty of TWC contained in the Contribution Agreement or in any other agreement relating to the Transaction;

 

    any breach of or failure to perform a covenant of TWC contained in the Contribution Agreement or in any other agreement relating to the Transaction; and

 

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    any “Excluded Distributor Liability” as such term is defined in the Contribution Agreement, which includes certain liabilities of The Weinstein Company Holdings LLC which may arise outside of the context of its business as the Distributor. Such indemnification for “Excluded Distributor Liabilities” will be eliminated if TWC elects prior to the closing to substitute a newly formed Delaware limited liability company as the Distributor in place of The Weinstein Company Holdings LLC, as discussed above under “—Additional Agreements”.

 

Indemnification by Genius Products

 

Subject to the limitations described below, Genius Products is required to indemnify, defend and hold harmless the Distributor and TWC and its affiliates and their respective (all such persons being referred to hereinafter as a “TWC Indemnified Person”), from and against any and all damages, whether or not involving a third-party claim, including attorneys’ fees (collectively, “TWC Damages”), arising out of, relating to or resulting from

 

    any breach of a representation or warranty of Genius Products contained in the Contribution Agreement or in any other agreement relating to the Transaction;

 

    any breach of or failure to perform a covenant of Genius Products contained in the Contribution Agreement or in any other agreement relating to the Transaction; and

 

    any Excluded Liability, paid, payable or asserted against the Distributor or any TWC Indemnified Person or to which the Distributor or any TWC Indemnified Person may become subject.

 

Limitations on Indemnification

 

Notwithstanding anything herein to the contrary, TWC will not be obligated to indemnify any Genius Indemnified Person to the extent that the aggregate of all Genius Damages exceeds $15,000,000 (the “Indemnification Cap”). However, the Indemnification Cap will not apply to any TWC indemnification obligation arising out of, relating to or resulting from (i) fraud or intentional misrepresentation or breach of warranty by TWC or (ii) an Excluded Distributor Liability.

 

Genius Products shall not be obligated to indemnify any TWC Indemnified Person to the extent that the aggregate of all TWC Damages exceeds the Indemnification Cap. However, the Indemnification Cap will not apply to any indemnification obligation arising out of, relating to or resulting from (i) fraud or intentional misrepresentation or breach of warranty by Genius, (ii) with respect to breaches of particular representations and warranties specified in the Contribution Agreement or (iii) any Excluded Liabilities.

 

Genius Products will not be entitled to seek indemnification for Genius Damages unless and until the aggregate amount of all Genius Damages exceeds $200,000 (the “Threshold Amount”), at which point TWC will be liable for all Genius Damages in excess of the Threshold Amount, subject to the other provisions of the Contribution Agreement. However, the Threshold Amount will not apply (i) with respect to breaches of particular representations and warranties specified in the Contribution Agreement, (ii) in cases of fraud or intentional misrepresentation, or (iii) any Excluded Distributor Liability, as described under “—Indemnification by TWC”.

 

The Distributor or TWC will not be entitled to seek indemnification for TWC Damages arising out of breaches of representations and warranties unless and until the aggregate amount of all TWC Damages exceeds the Threshold Amount, at which point Genius Products will be liable for all TWC Damages in excess of the threshold amount, subject to the other provisions of the Contribution Agreement. However, the Threshold Amount will not apply (i) with respect to breaches of particular representations and warranties specified in the Contribution Agreement, (ii) in cases of fraud or intentional misrepresentation and (iii) with respect to any Excluded Liabilities.

 

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If, following the closing of the Transaction, (i) Genius Products conducts a debt or equity financing in order to raise funds to satisfy an indemnification obligation of Genius Products under the Contribution Agreement, then the ratio setting forth the number of shares of our common stock into which Class W Units may be converted or exchanged at any time will be adjusted, as provided in the LLC Agreement or (ii) the Distributor satisfies directly any liability for which it is entitled to indemnification by Genius Products under the Contribution Agreement, then additional Class W Units will be issuable by the LLC Agreement, as provided in the LLC Agreement.

 

Expenses

 

Subject to the termination fee provisions describe above, whether or not the Transaction is consummated, each party is required to pay it own costs and expenses in connection with the Contribution Agreement and the related agreements, including without limitation the fees and expenses of its advisers, accountants and legal counsel. However, the parties will share equally all fees and expenses incurred in connection with any filings under federal antitrust laws. If the closing occurs, all costs and expenses of Genius Products and TWC incurred in connection with the Contribution Agreement and the other related agreements will be paid or reimbursed by the Distributor.

 

3. The LLC Agreement

 

This section of the Proxy Statement describes selected portions of the LLC Agreement. References below to “members” of the Distributor refer to persons admitted to the Distributor as members in accordance with the Delaware Limited Liability Company Act. The LLC Agreement provides that the initial members of the Distributor will be Genius Products, TWC and the other TWC parties.

 

References below to the “managing member” of the Distributor refer to the member responsible for managing the Distributor. The initial managing member will be Genius Products. TWC or its designee will become the managing member of the Distributor, instead of Genius Products, if we become insolvent or bankrupt, if we violate the membership interest transfer restrictions in the LLC Agreement or a lender forecloses on a security interest granted with respect to our Class G Units in the Distributor. See below under the section entitled, “Transfer of Interests”.

 

Purposes of the Distributor

 

The purpose of the Distributor will be to:

 

    distribute certain home video products of TWC and perform marketing, promotion and advertising services in connection with that distribution, pursuant to the terms of the Distribution Agreement

 

    engage in the business currently conducted by Genius Products; and

 

    conduct such other lawful acts, businesses or activities as the managing member and the holders of a majority of the outstanding Class W Units may agree in their sole discretion.

 

The Distributor will have the power to do any and all acts necessary or advisable for the furtherance of its business and activities.

 

Term

 

The term of the Distributor will be perpetual, unless earlier terminated following the occurrence of any event identified in the provisions of the LLC Agreement relating to the dissolution and winding up of the Distributor. Upon such event, the Distributor will be dissolved and its affairs wound up in accordance with such provisions.

 

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Remuneration to Members

 

No member will receive any interest, salary, compensation, draw or reimbursement with respect to its capital contributions or its capital account. A member may receive compensation or reimbursement for services rendered or expenses incurred on behalf of the Distributor or otherwise in its capacity as a member, as provided in or contemplated by the LLC Agreement or as may otherwise be authorized by the managing member subject to Class W Prior Approval, as defined below under “Limitations on the Authority of the Managing Member”. Genius Products will not be entitled to any compensation for services rendered to the Distributor solely in its capacity as managing member, except for reimbursement for reasonable expenses actually incurred by it on behalf of the Distributor.

 

Voting Rights

 

Except as provided in the LLC Agreement or the certificate of formation, members will have no voting, approval or consent rights with respect to any matter, act, decision or document involving the Distributor or its business.

 

Admission of Additional Members

 

No new or substitute members may be admitted to the Distributor, except in accordance with the approval requirements and transfer restrictions set forth in the LLC Agreement, as described below. Unless so admitted to the Distributor as a member, no person will be, or will be considered, a member. The Distributor may elect to deal only with persons so admitted as members (including their duly authorized representatives).

 

Withdrawals or Resignations

 

No Member may withdraw or resign from the Company except pursuant to the provisions of the LLC Agreement relating to transfers of interests, as described below.

 

Members’ Meetings; Quorum; Votes

 

The managing member, any member holding thirty percent (30%) or more of the outstanding units of the Distributor or the holders of a majority of outstanding Class W Units, may call for a meeting of the members from time to time by written notice to the other members; provided, however, that meetings of the members will not otherwise be required. At any members’ meeting, the managing member will appoint a person to preside at the meeting and a person to act as secretary of the meeting. The secretary of the meeting will prepare minutes of the meeting, which will be placed in the minute books of the Company. The members may act without a meeting if the action to be taken is reduced to writing and approved and signed in advance by members holding units sufficient to authorize or take such action at a meeting of the members. The presence in person or by proxy of members holding a majority of the outstanding units, including members holding a majority of the outstanding Class W Units, will constitute a quorum for any meeting of members. Unless otherwise provided herein or under applicable law, each member will be entitled to cast one vote for each unit it holds. Except as otherwise provided in the LLC Agreement, the affirmative vote of a majority of the outstanding units will be effective to take any action by the members.

 

Devotion of Time; Company Opportunities; Other Activities

 

Genius Products is required to devote all of its time and business efforts to (the “Genius Permitted Activities”):

 

    promoting the business and interests of the LLC, including serving as the managing member under the LLC Agreement, conducting financing activities in furtherance of the business of the Distributor and performing its obligations under the LLC Agreement and under the Contribution Agreement;

 

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    holding the Class G Units and enforcing, fulfilling and managing Genius Products’ rights, duties, liabilities and obligations as a member holding Class G Units;

 

    maintaining the status of Genius Products as a public reporting company with publicly traded securities;

 

    prosecuting, enforcing, exploiting, defending, settling, fulfilling and managing our rights, duties, liabilities and obligations arising in, under or from any of (i) the Excluded Assets, Excluded Liabilities or Contingent Dividend Rights, as described above under “—The Contribution Agreement,” (ii) such other assets, liabilities and agreements that Genius may acquire or become subject to, and (iii) such securities as Genius Products may issue;

 

    conducting Genius Capital Transactions solely to fund activities of Genius Products that are not provided for or reimbursed by the Distributor, provided that such activities constitute Genius Permitted Activities other than under this paragraph (collectively, “Genius Exclusive Capital Transactions”);

 

    complying with all legal requirements (as such term is defined in the Contribution Agreement) that Genius Products is or may become subject to; and

 

    doing everything necessary, suitable, convenient or proper for, or in connection with, or incident to, the accomplishment of any of the foregoing activities.

 

Except for Genius Permitted Activities, Genius Products is not permitted to engage in any other business or conduct any other activities.

 

TWC, its affiliates and their respective officers, directors, members, managers, employees, partners and agents (the “TWC Persons”), will devote whatever time, effort and skill as they deem appropriate for the operation of the Distributor. Notwithstanding any duty (contractual, fiduciary or otherwise) existing at law or in equity, the TWC Persons are free to own interests in other businesses and undertakings and to pursue and engage other businesses, investments, activities and opportunities (collectively, “Other Interests”). The Distributor and the managing member are fully aware that the TWC Persons are engaged, and in the future will be engaged, in and conduct Other Interests which are, directly or indirectly, in competition with the Distributor or with each other, including as contemplated below under “Content Acquisition Opportunities”.

 

Other than as expressly set forth in the Distribution Agreement, notwithstanding any duty (contractual, fiduciary or otherwise) existing at law or in equity, neither TWC nor any TWC Person will have any obligation to offer the Distributor, the managing member or any other member or their respective affiliates any Other Interests or the right to participate therein.

 

None of the Distributor, the managing member nor their respective affiliates will have any rights in any Other Interests in which TWC or any TWC Person engages outside of the Distributor by virtue of TWC’s or any TWC Person’s relationship to the Distributor or otherwise. Notwithstanding any duty (contractual, fiduciary or otherwise) existing at law or in equity, TWC and the TWC Persons will not be required to disclose to the Distributor, the managing member or any other member the existence or nature of any such Other Interests. The Distributor, the managing member and each member will waive any conflict of interest related to such Other Interests, and the Distributor, the managing member and each member will agree that it will have no claim under fiduciary duty or any other principles to such Other Interests.

 

Content Acquisition Opportunities

 

The Distributor and the managing member agree that it is intended that the Distributor will not engage in Content Acquisition Opportunities (as defined below), other than as described below and as provided in the LLC Agreement. The term “Content Acquisition Opportunity” means the acquisition of any distribution or other rights in any audio, visual and/or audiovisual works of any kind or character, including, without limitation, motion pictures.

 

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If the managing member or the Distributor is presented with a Content Acquisition Opportunity, the Distributor or the managing member, as applicable, will promptly present such Content Acquisition Opportunity to TWC and the TWC Persons will have the right to engage in the Content Acquisition Opportunity as provided herein.

 

If TWC or any TWC Person determines to engage in the Content Acquisition Opportunity, then, notwithstanding any duty (contractual, fiduciary or otherwise) existing at law or in equity, it may do so on whatever terms it deems appropriate without any further obligation to the Company (other than under the Distribution Agreement) or the managing member, and the Distributor and the managing member will be prohibited from engaging in such Content Acquisition Opportunity.

 

If TWC notifies the Distributor that it or the TWC Persons do not desire to engage in such Content Acquisition Opportunity, or if TWC or a TWC Person does not respond within the required time period, then the Distributor (but not the managing member) will be free to engage in such Content Acquisition Opportunity for its own account without any further obligation to TWC, subject to any applicable required approvals described below under “Limitations on the Authority of the Managing Member”.

 

However, if the terms or elements of the Content Acquisition Opportunity are modified so as to differ from the terms presented to TWC in any material respect that is more favorable to the Distributor, the Distributor and the managing member will be required to again present the Content Acquisition Opportunity to TWC in accordance with these provisions. Neither TWC nor any TWC Person will have any obligation to present any Content Acquisition Opportunity to the Distributor or Genius Products.

 

For the avoidance of doubt, notwithstanding any duty (contractual, fiduciary or otherwise) existing at law or in equity, neither TWC nor any TWC Person will have any obligation to present any Content Acquisition Opportunity to the Distributor or the managing member.

 

Notwithstanding the foregoing, Genius Products and the managing member will not be required to offer any Content Acquisition Opportunity that both:

 

    is consistent with the business currently conducted by Genius Products; and

 

    requires aggregate fixed payments (e.g., advances, fixed purchase price, etc.) of less than $75,000 for any individual acquisition or series of related acquisitions. However, in no event will all fixed payments related to such qualifying Content Acquisition Opportunities in any year exceed the lesser of (a) $2,000,000 in the aggregate or (b) the amount budgeted for acquisitions as set forth in the Distributor’s annual budget.

 

Notwithstanding the business currently conducted by Genius Products, the Distributor is not permitted to enter into any Content Acquisition Opportunity that is competitive with TWC business (e.g., feature films) and is not permitted to enter into any such Content Acquisition Opportunity without specific prior written approval from TWC and without first presenting such Content Acquisition Opportunity to TWC as described above.

 

Any Content Acquisition Opportunity entered into by the Distributor is required to be on customary industry terms (e.g., customary royalties or distribution fees) and the Distributor will not structure any Content Acquisition Opportunity so as to avoid or circumvent its obligation to offer such Content Acquisition Opportunity to TWC or the TWC Persons or otherwise in a manner that frustrates the intent of the requirements of the LLC Agreement, including but not limited to offering terms that are not consistent with industry standards. By way of example, the Distributor is not permitted to achieve an advance within the $75,000 and $2 million limits set forth above by offering non-standard terms in other areas, such as higher than customary royalties or lower than customary distribution fees.

 

The provisions described above under this section entitled “Content Acquisition Opportunities” will terminate upon the termination or expiration of the Distribution Agreement (or any successor or replacement agreement with TWC).

 

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Classes of Units

 

The total number of Class G Units initially issued to Genius Products will represent 30% of the total units of the Distributor. Additional Class G Units will be granted to such persons, at such times and in such amounts, in accordance with the LLC Agreement and as the managing member may determine with Class W Prior Approval in accordance with the requirements described below under “Limitations on the Authority of the Managing Member”.

 

The total number of Class W Units initially held by the TWC parties will represent 70% of the total units of the Distributor. Additional Class W Units will be granted to such persons, at such times and in such amounts, as the managing member may determine with Class W Prior Approval in accordance with the requirements described below under “Limitations on the Authority of the Managing Member”.

 

If the Distributor pays, discharges or otherwise satisfies or assumes any liability or obligation for which it is entitled to indemnification from Genius Products pursuant to the Contribution Agreement, the Distributor will redeem from Genius Products (without any further payment to Genius Products) a number of Class G Units, and issue to the holders of Class W Units (without any further payment by such holders) a number of additional Class W Units, in an amount equal to the following formula:

 

U = (L * P) / V

 

where:

 

U

   =    the number of Class G Units to be redeemed from Genius Products and Class W Units to be issued to the holders of Class W Units as described above;

L

  

=

   the amount paid, discharged or otherwise satisfied or assumed by the Distributor in satisfaction of such liability or obligation;

P

  

=

   the percentage interest of the holders of Class W Units TWC immediately prior to the redemption of Genius Products’ Class G Units and the issuance of additional Class W Units as described above; and

V

  

=

   the lesser of the volume weighted 30-day trailing average or the market price of Genius Products’ common stock as of the date of the Distributor’s satisfaction, payment, discharge or assumption of such liability or obligation (whichever occurs first).

 

If TWC or any TWC Person pays, discharges or otherwise satisfies or assumes any liability or obligation for which it is entitled to indemnification from Genius Products pursuant to the Contribution Agreement, the Distributor will redeem from Genius Products (without any further payment to Genius Products) a number of Class G Units, and issue to the holders of Class W Units (without any further payment by such holders) a number of additional Class W Units, in an amount equal to the following formula:

 

U = L / V

 

where:

 

U

   =    the number of Class G Units to be redeemed from Genius Products and Class W Units to be issued to the holders of Class W Units as described above;

L

   =    the amount paid, discharged or otherwise satisfied or assumed by TWC or any TWC party in satisfaction of such liability or obligation; and

V

   =    the lesser of the volume weighted 30-day trailing average or the market price of Genius Products’ common stock as of the date of TWC’s or any TWC Person’s satisfaction, payment discharge or assumption of such liability or obligation (whichever occurs first).

 

Examples illustrating how these formulas operate are included in Exhibit 4.1 to the LLC Agreement, a copy of which is attached as Appendix C.

 

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Capital Accounts

 

A separate capital account will be maintained for each member in accordance with Exhibit D attached to the LLC Agreement. No member will be personally liable for or be required to restore any deficit capital account balance.

 

Initial Contributions by Genius Products

 

Concurrently with the execution of the LLC Agreement, Genius will, pursuant to the Contribution Agreement, contribute to the Distributor all of the assets, rights and properties required to be contributed by Genius Products therein, whether tangible or intangible, including its right, title and interest in and to any real property.

 

Additional Capital Contributions

 

Genius Products will contribute to the Distributor as an additional capital contribution the net proceeds (including, without limitation, cash, securities, assets or other property) received from any of the following transactions (a “Genius Capital Transaction”):

 

    any private placement, public offering or other sale or disposition of our common stock, or securities convertible into or exchangeable for our common stock, or upon the exercise, conversion or exchange of a convertible security; or

 

    the sale of property, incurrence of indebtedness, recapitalization or refinancing, or from any other capital raising transaction.

 

However, the consideration received by Genius Products after the closing from the exercise of options, warrants or other convertible securities that are issued and outstanding as of the closing date (or any property acquired solely with such consideration) will not be required to be contributed to the Distributor. In addition, if the Genius Capital Transaction is the issuance of indebtedness, such indebtedness will not be contributed as capital but instead should be loaned to the Distributor on terms agreed upon by the members.

 

Not later than three (3) business days following the consummation of any Genius Capital Transaction, Genius Products is required to transfer the net proceeds to the Distributor. Except to the extent that such Genius Capital Transaction constituted an Indemnification Issuance (as defined below) or a Genius Exclusive Capital Transaction or the payment of the exercise price from the exercise, conversion or exchange of a convertible security outstanding on the closing of the Transaction, following receipt of the net proceeds or assets or other value received from a Genius Capital Transaction, the managing member will promptly cause the Distributor to issue to Genius Products a number of additional Class G Units equal to the number of shares of our common stock actually issued in the Genius Capital Transaction covered by the first bullet point under the above definition.

 

However, if Genius has issued a convertible security in the Genius Capital Transaction, the Distributor will instead provide Genius Products with the contingent right to be issued a number of additional Class G Units only upon the exercise or conversion of such convertible security and contribute to the Distributor the net proceeds received therefrom (the amount of such Class G Units so issuable equal to the number of shares of our common stock actually issued upon such exercise or conversion)

 

For purposes of calculating the number of additional Class G Units issuable to Genius Products pursuant to this provision, there will be disregarded any (1) declaration or payment of a dividend on our outstanding common stock in our common stock or distribution to holders of our outstanding common stock in shares of our common stock, (2) split or subdivision of our outstanding common stock or (3) reverse stock split or other combination of our common stock into a smaller number of shares of our common stock, that may have occurred after the closing of the Transaction. For example, if there occurs a 2-for-1 stock split of our common stock after the

 

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closing of the Transaction and Genius Products thereafter issues 100 new shares in a Genius Capital Transaction, the Distributor would only issue 50 Class G Units in connection with the contribution of net proceeds from that Genius Capital Transaction.

 

For purposes of clarification, in no event will any Class G Units be issued to Genius Products in connection with an Indemnification Issuance or Genius Exclusive Capital Transaction, whether or not Genius Products contributes the proceeds therefrom to the Distributor. The term “Indemnification Issuance” means our issuance of shares of common stock in connection with the satisfaction of an indemnification obligation to the Distributor or any TWC Person pursuant to the Contribution Agreement.

 

No member will be required to lend any funds to the Distributor or to make any additional contribution of capital to the Distributor, except as otherwise required by applicable law, any binding agreement entered into after the closing of the Transaction or by the provisions described above in this section entitled, “Additional Capital Contributions”. Any member or affiliate of a member may, with the consent of the managing member and subject to the provisions of the LLC Agreement and any other senior loan, credit or financing agreement of the Distributor, lend or advance money to the Distributor or a subsidiary, make loans to the Distributor or a subsidiary or guaranty any loans made to the Distributor or a subsidiary by a third party lender or any affiliate of any member that is a commercial lending institution, and any such loan or guaranty by a member or an affiliate of a member will not be considered to be a capital contribution unless otherwise provided in the agreement relating to such loan or guaranty or as otherwise determined by the managing member. It is contemplated that the Distributor may engage in borrowing in connection with the operations of its business, provided, however, that Genius Products will not be entitled to create any pledge, lien, encumbrance or restriction of any kind upon its rights or interests under the Distribution Agreement without TWC’s prior written consent in its sole discretion.

 

Withdrawal of Capital Contributions

 

Except as otherwise provided in or contemplated by the LLC Agreement, no member will demand or receive a return of any capital contributions or otherwise withdraw from the Distributor without the consent of all members. Under circumstances requiring a return of any capital contributions, no member will have the right to receive property other than cash except as may be specifically provided herein.

 

Repurchase of Class W Units

 

Company Repurchase Right. At any time prior to December 31, 2009, if either:

 

    TWC terminates the Distribution Agreement in accordance with the terms described below on page              under “—The Distribution Agreement” because the “Annual Video Ratio” is less than 60% or the “Semi-Annual Video Ratio” is less than 60% and the Video Ratio or Semi-Annual Video Ratio, as applicable, giving rise to such termination is more than 50%, (as calculated pursuant to the terms of the Distribution Agreement); or

 

    TWC enters bankruptcy and does not (i) continue to substantially perform its obligations under the Distribution Agreement, or (ii) provide for TWC’s obligations being assumed under the Distribution Agreement by or through a successor, affiliate or other person;

 

then, in either such case, the Distributor may repurchase from the TWC parties (proportionally in accordance with their respective percentage interests) a portion of the Class W Units owned by them on the closing of the Transaction as provided below (the “Company Repurchase Right”).

 

The purchase price to be paid to the TWC parties for the repurchase of Class W Units upon the exercise of the Company Repurchase Right will be an amount equal to 75% of the cash amount that the TWC parties would receive upon a redemption of tendered units as described below under “Redemption of Holder of Class W Units”, where the number of tendered units will be deemed to equal the number of Class W Units to be repurchased.

 

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The portion of the Class W Units subject to the Company Repurchase Right during any calendar year will be determined as follows:

 

Year of Term


   Portion of Units
Subject to Repurchase


1/1/06 – 12/31/06

   60%

1/1/07 – 12/31/07

   30%

1/1/08 – 12/31/08

   20%

1/1/09 – 12/31/09

   10%

 

No Company Repurchase Right. For purposes of clarification, if at any time prior to December 31, 2009, TWC terminates the Distribution Agreement for the reasons described above and at the Annual Video Ratio or Semi-Annual Video Ratio, as applicable, giving rise to such termination is less than 50% (as calculated pursuant to the terms of the Distribution Agreement), then the Distributor will have no Company Repurchase Right to repurchase any portion of the Class W Units then held by the TWC parties.

 

Repurchase Procedure. The managing member will determine in its discretion whether the Distributor will exercise the Company Repurchase Right by the majority vote of Genius Products’ independent board members. Promptly following any termination of the Distribution Agreement giving rise to the Company Repurchase Right, but in any event within fifteen (15) business days thereafter (the “Repurchase Right Expiration Date”), the Distributor will send a written notice (the “Repurchase Notice”) to the TWC parties setting forth: (i) whether the Distributor is exercising its Company Repurchase Right, (ii) the portion of the TWC parties’ Class W Units then subject to the Company Repurchase Right that the Distributor wishes to repurchase and (iii) the managing member’s calculation of the higher of the volume weighted 30-day trailing average or the market price for the Class W Units that it is offering to repurchase, and its methodology in arriving at such calculation. Following receipt of the Repurchase Notice, TWC will confirm the managing member’s calculation of the higher of the volume weighted 30-day trailing average or the market price to be paid for the Class W Units then being repurchased, and TWC and the managing member will in good faith agree upon the date of the closing for such repurchase, such closing to occur not later than sixty (60) days after the Repurchase Right Expiration Date.

 

At the closing of the Distributor’s repurchase of the TWC parties’ Class W Units, the Distributor will deliver the repurchase price to be paid for the Class W Units being repurchased to or as directed by TWC in immediately available funds by wire transfer or certified check. The Company Repurchase Right will terminate and be of no further force or effect if the Distributor has not exercised that right on or before the Repurchase Right Expiration Date, and any Class W Units for which the Distributor does not exercise its Company Repurchase Right as indicated in a Repurchase Notice will no longer be subject to a Company Repurchase Right and will be held by the TWC parties free and clear of any claims or rights in favor of the Distributor arising under the repurchase provisions described above.

 

Disputes Regarding Termination. Any disputes regarding a termination of the Distributor’s rights to distribute covered product under the Distribution Agreement will be resolved pursuant to the terms of the Distribution Agreement and not under the LLC Agreement. Unless grounds exist to exercise the Company Repurchase Right other than termination of the Distribution Agreement (i.e., a repurchase triggered by the circumstance described in the second bullet point above under “Company Repurchase Right”), until the final resolution of any such dispute, the Distributor may not exercise its Company Repurchase Right with respect to any portion of the TWC parties’ Class W Units as otherwise provided above, and they will retain full title and ownership of all Class W Units then held by them, free and clear of any liens, claims, encumbrances or rights of set off of any kind, and will be entitled to exercise all of its rights and receive all of the benefits as a holder of all of its Class W Units hereunder (including, without limitation, the right to receive distributions or to decide upon a Class W Prior Approval). The repurchase procedures upon exercise of a Company Repurchase Right (other than the running of the period for the managing member’s determination of whether to exercise the Company Repurchase Right that ends on the Repurchase Right Expiration Date) will be stayed until the final resolution of any suit properly filed by the Distributor or TWC in good faith pursuant to the terms of the Distribution

 

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Agreement and thereafter actively prosecuted that disputes or seeks declaratory relief regarding TWC’s right to terminate the Distribution Agreement. Notwithstanding any dispute regarding a termination of the Distribution Agreement that may have occurred or be ongoing, the valuation date for the determination of the cash amount payable upon exercise of a Company Repurchase Right will be the date of the event giving rise to the Company Repurchase Right.

 

Redemption Rights of Holder of Class W Units

 

Each holder of Class W Units will have the right (subject to the terms and conditions set forth herein) to require the Distributor to redeem all or a portion of the Class W Units held by such Tendering Party (as defined below) and not subject to a Company Repurchase Right under the provisions described above (such Class W Units being hereafter “Tendered Units”) in exchange (a “Redemption”) for a number of shares of our common stock calculated as determined below.

 

Any Redemption will be exercised pursuant to a Notice of Redemption (as defined below) delivered to the Distributor and the managing member by a holder of Class W Units when exercising the Redemption right (the “Tendering Party”). The Tendering Party shall submit such information, certification or affidavit as the managing member may reasonably require in connection with the restrictions and limitations of our certificate of incorporation to any such acquisition.

 

On the Specified Redemption Date (as defined below) the Tendering Party will transfer such number of the Tendered Units to the Distributor in exchange for a number of shares of our common stock (and rights, if applicable) equal to the Genius Common Stock Amount on the Specified Redemption Date.

 

As used in the LLC Agreement:

 

    the term “Notice of Redemption” means any notice given from time to time to the Distributor by a holder of Class W Units that such holder elects to exercise its right (subject to the terms and conditions set forth herein) to require the Distributor to redeem the number of Class W Units held by such holder as specified in such notice. However, no Notice of Redemption may be given prior to the earlier of (i) one year and three months from the date of the closing of the Transaction and (ii) the date that TWC Holdings or its subsidiaries holds 100% of the outstanding Class W units, provided, however, that in no event may any notice of redemption be given prior to the one-year anniversary of the closing of the Transaction.

 

    the term “Specified Redemption Date” means the later of (i) the tenth business day after the receipt by the managing member of a Notice of Redemption or (ii) in the case the managing member elects (with the Tendering Party’s consent as provided below) to conduct an Offering Funding (as defined below), the business day following the date of the closing of the Offering Funding. However, the Specified Redemption Date, as well as the closing of a Redemption, or an acquisition of Tendered Units by the Distributor with cash as described below, on any Specified Redemption Date, may be deferred, in the managing member’s sole and absolute discretion, for up to 60 days in the aggregate as may reasonably be required to effect, as applicable, compliance with federal securities laws or other applicable laws.

 

    the term “Genius Common Stock Amount” means a number of shares of our common stock equal to the product of (i) the number of Tendered Units and (ii) the Adjustment Factor (as defined below). The Genius Common Stock Amount is subject to appropriate adjustment if we issue to holders of our common stock certain rights, options, warrants or convertible or exchangeable securities, or other securities or property.

 

    the term “Adjustment Factor” means 1.0, subject to appropriate adjustment for dividends, stock splits, reverse stock splits, distributions, Indemnification Issuances, certain stock issuances and other items specified in the definition contained in the LLC Agreement. For illustrative purposes, examples of adjustments to the Adjustment Factor are set forth on Exhibit C attached to the LLC Agreement. A copy of the LLC Agreement (including Exhibit C attached to the LLC Agreement) is attached to this Proxy Statement as Appendix C.

 

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Genius Products unconditionally agrees to deliver to the Distributor such number of shares of our common stock (and rights, if applicable) sufficient to enable the Distributor to meet its obligation under these provisions. The Genius Common Stock Amount will be delivered to the Distributor and issued in the name of the Tendering Party on the Specified Redemption Date. The shares of our common stock issued pursuant to these provisions will bear registration rights under the Registration Rights Agreement described below in the section entitled, “Additional Agreements Related to the Transaction—Registration Rights Agreement”.

 

Notwithstanding anything to the contrary contained above, if a Tendering Party receives shares of our common stock as provided above, and after the receipt of such shares, Genius Products takes actions that would have caused an adjustment to the Adjustment Factor if such actions had occurred prior to the issuance of the shares to the Tendering Party, then the managing member will cause additional shares to be issued to the Tendering Party to the same extent as if the Adjustment Factor had been so adjusted at the time of the original issuance.

 

Notwithstanding the foregoing, at the request of the Distributor and with the consent of the Tendering Party, which may be withheld in the Tendering Party’s sole discretion:

 

    The Distributor may deliver to the Tendering Party an amount equal to the Cash Amount (as defined below) in lieu of the Genius Common Stock Amount payable on the Specified Redemption Date; or

 

    the managing member on behalf of the Distributor may elect to raise funds for the payment of the Cash Amount either (i) by contribution by Genius Products of funds from the proceeds of a private placement or registered public offering (each, an “Offering Funding”) by Genius Products of a number of shares of our common stock (“Offering Funding Shares”) or (ii) from any other sources (including, but not limited to, the sale of any property and the incurrence of additional debt) available to Genius Products or the Distributor.

 

As used in the LLC Agreement, the term “Cash Amount” means an amount of cash equal to the product of (i) the greater of the volume weighted 30-day trailing average or market price of a share of our common stock and (b) the Genius Common Stock Amount, determined as of the applicable Valuation Date.

 

Promptly upon the Distributor’s receipt of the Notice of Redemption, the managing member will give notice (a “Single Funding Notice”) to all holders of Class W Units and having Redemption rights pursuant to the provisions described above and request that all such holders elect whether or not to effect a Redemption of their Class W Units to be funded through an Offering Funding (if an Offering Funding has been requested by the Distributor) or otherwise.

 

If any such holder of Class W Units elects to effect such a Redemption, it will give notice thereof and of the number of Class W Units to be made subject thereto in writing to the managing member within 10 business days after receipt of the Single Funding Notice, and such holder of Class W Units will be treated as a Tendering Party for all purposes of the provisions described above.

 

A Tendering Party will have no right to receive distributions with respect to any Tendered Units (other than the Cash Amount) paid after delivery of the Notice of Redemption, whether or not the Distributor’s record date for such distribution precedes or coincides with such delivery of the Notice of Redemption. However, if the Distributor elects to fund the Cash Amount with the proceeds of an Offering Funding as described above, and the Tendering Party has consented to an Offering Funding, then the Tendering Party’s right to receive distributions will not be suspended as provided above and such Tendering Party will have the right to receive distributions actually made hereunder prior to the date of the closing of the Offering Funding whose proceeds are used to pay the Cash Amount.

 

Notwithstanding anything herein to the contrary, with respect to any Redemption pursuant to the provisions described above in this section entitled, “Redemption Rights of Holder of Class W Units”:

 

    To the extent Genius Products provides shares of our common stock or funding to pay the Cash Amount, each Class W Unit acquired by the Distributor as described above will be transferred to Genius Products and be converted into and deemed to be a Class G Unit.

 

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    No Tendering Party may effect a Redemption for less than 500 Class W Units or, if such Tendering Party holds (as a member or, economically, as an assignee) less than 500 Class W Units, all of the Class W Units held by such Tendering Party.

 

    The consummation of such Redemption will be subject to the expiration or termination of the applicable waiting period, if any, under federal antitrust laws.

 

    The Tendering Party will continue to own all Class W Units subject to any Redemption, and be treated as a member or an assignee, as applicable, with respect to such Class W Units for all purposes of the LLC Agreement, until such Class W Units are either paid for by the Distributor or transferred to the managing member and paid for, by the issuance of shares of our common stock, on the Specified Redemption Date, except to the extent that the Tendering Party otherwise obtains indicia of ownership of our common stock.

 

Redemptions

 

Except with respect to the Class W Units as provided above, without the Class W Prior Approval, the Distributor is prohibited from acquiring, by purchase, redemption or otherwise, any units of any class or type of any member or holder without offering to purchase, on the same terms and conditions, a proportionate share of the units of such class or type of all other applicable members or holders.

 

Management through the Managing Member

 

The management of the Distributor is vested in the managing member (which will initially be Genius Products), which has the power and authority to manage and direct the business and affairs of the Distributor under the terms and conditions of the LLC Agreement. Except as otherwise expressly provided in the LLC Agreement, the members will not participate in the control of the Distributor and will have no right, power or authority to act for or on behalf of or otherwise bind, the Distributor. Except as expressly provided in the LLC Agreement or required by any non-waiveable provisions of applicable law, members will have no right to vote on or consent to any other matter, act, decision or document involving the Distributor or its business. The managing member will be deemed to owe the same fiduciary duties to the members that directors of Delaware corporations owe to that corporation’s stockholders under Delaware law.

 

Limitations on the Authority of the Managing Member

 

The managing member’s authority to run the business and affairs of the Distributor is subject only to the limitations described in this section. For so long as the TWC parties and their transferees beneficially own units comprising at least 20% of the outstanding units of the Distributor, the managing member is not permitted to take any actions on behalf of the Distributor (directly or through a subsidiary) without the prior approval of TWC with respect to any of the following matters (a “Class W Prior Approval”):

 

    taking or purporting to take actions in contravention of or engaging in activities inconsistent with the LLC Agreement or the Distribution Agreement;

 

    creating or assuming any indebtedness or liability, or providing any indirect financial assistance, or assuming any mortgage, charge or other encumbrance on any property of the Distributor;

 

    selling, leasing, exchanging or disposing of, by any means, property or assets of the Distributor having a value in excess of $100,000;

 

    entering into or effecting any conversion, consolidation or merger involving the Distributor;

 

    to the fullest extent permitted by law, taking any action to liquidate or dissolve the Distributor;

 

    entering into, amending or waiving any contract with a member or with any party that is not at arm’s length, including amending any provision of, or making any election under, the Services Agreement described below;

 

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    engaging, removing or replacing the Distributor’s independent auditors;

 

    guaranteeing the liabilities or debts of any other person than a subsidiary of the Distributor;

 

    requiring any guarantee from any member;

 

    declaring or making any distribution, including any distribution in-kind of securities or other non-cash assets;

 

    issuing or granting any Class G Units, Class W Units or any other units, membership interests or economic interests in the Distributor (other than as provided in the LLC Agreement);

 

    utilizing subdistributors, or licensees, or outsourcing any functions relating to the Distributor’s performance under the Distribution Agreement;

 

    appointing or removing (A) the Distributor’s Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, or any other executive level officer or employee and (B) any other employee whose compensation is in excess of $150,000 per year;

 

    approving the annual or quarterly budget for the Distributor, or varying more than 10% from the amount budgeted for any particular line item therein;

 

    engaging in any debt or equity financing, refinancing, recapitalization or other capital raising transaction;

 

    approving or entering into any contracts, agreements, understandings or arrangements outside the ordinary course or providing for payments by or to the Distributor or obligations in excess of $100,000 per year;

 

    commencing or settling any litigation;

 

    licensing any item of product outside the ordinary course or on terms other than fair market value;

 

    approving or adopting any material employee compensation plan or arrangement; and

 

    creating any subsidiary or taking any of the actions described above with respect to any subsidiary.

 

In addition, the Distributor generally must follow tax positions on its tax returns advocated by TWC.

 

Officers

 

The day-to-day management of the Distributor will be vested in the officers of the Distributor under the supervision of the managing member. The initial president and chief executive officer of the Distributor will be Trevor Drinkwater, subject to the terms of any employment agreement between the Distributor and Mr. Drinkwater in effect as of the closing of the Transaction.

 

Right of First Negotiation for Genius Products Financings

 

Notwithstanding anything to the contrary herein, if Genius Products decides to raise additional capital, whether by conducting a private placement, public offering or other sale or disposition of equity or debt securities, from any other incurrence of additional indebtedness or from the sale of any property, Genius Products is required first to deliver a written notice thereof to TWC. The notice must set forth in reasonable detail all material terms and conditions of the proposed capital raising transaction. TWC will then have the option of negotiating with Genius to acquire the securities or property to be issued or sold in such capital raising transaction. If TWC elects to negotiate with Genius Products, Genius Products and TWC will negotiate in good faith to reach an agreement for the sale of the proposed properties or securities to TWC for a 60 day period following notification. If, by the last day of the sixty (60) day period, Genius Products and TWC have not reached an agreement or a non-binding term sheet or letter of intent for the sale of Genius Products’ properties or securities to TWC, Genius Products will be free to conduct such capital raising transaction with such other

 

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parties as it desires on the same terms and conditions in all material respects that were presented to TWC, provided, that Genius Products is required to re-offer any transaction or financing to TWC as provided above if the terms at which such financing or transaction are proposed to be accomplished are materially less favorable to Genius Products in any respect than the terms of the transaction or financing initially presented to TWC.

 

Distributions

 

Subject to tax distributions described below, available cash will be distributed to the members and applicable holders pro rata to each holder of units in accordance with its respective percentage interest, at such times as the managing member determines in its sole discretion, subject to Class W Prior Approval in accordance with the provisions described above under, “Limitations on the Authority of the Managing Member”.

 

Tax Distributions

 

During each fiscal year or within 45 days after the end thereof, the Distributor is required to make distributions to each member from available cash pro rata in accordance with their respective percentage interests in an aggregate amount equal to the minimum amount which, if distributed to the members in accordance with their respective percentage interests, would provide each member with an amount at least equal to (A) the product of (i) the sum of the amount of net capital gain and the net amount of all items taxable at ordinary income rates (or deductible from ordinary income) allocable to such member on such member’s Schedule K-1 to the Distributor’s Form 1065 for such fiscal year, and (ii) the highest combined effective federal, state and local tax rate applicable to an individual resident in New York City, over (B) the aggregate amount of distributions received by such member during such fiscal year.

 

If, as a result of an audit adjustment, amended return, or other cause that affects amount of income, gain, loss or deduction previously reported or that should have been reported on a member’s or former member’s Schedule K-1 to the Distributor’s Form 1065 with respect to a prior fiscal year, additional taxes, interest or penalties (collectively, “Back Taxes”) are imposed on such member or former member with respect to such prior fiscal year, the annual target tax distributions of each member for such prior fiscal year will be recalculated by including such member’s back taxes and each member or former member will receive a distribution equal to the additional tax distribution it would have received for such prior fiscal year based on the recalculated annual target distributions.

 

Allocations of Net Income and Net Losses

 

All allocations of net income, net losses and any other items of income, gain, loss, deductions and credit of the Distributor are to be made in accordance with the provisions of Exhibit D attached to the LLC Agreement. Exhibit D provides generally that, except as otherwise provided in the LLC Agreement, the net income or net losses of the Distributor for each fiscal year or other period for which allocations are made hereunder, and, if appropriate, items thereof, will be allocated among the members as required so that the closing balance in each member’s adjusted capital account as of the end of such fiscal year (or shorter period for which allocations are being made hereunder), is, as nearly as possible, equal to the amount that would be distributed to such member if the Distributor were dissolved, its affairs wound up and its assets sold for cash in an amount equal to their respective gross asset values, all of the Distributor’s liabilities were satisfied (limited with respect to each nonrecourse liability to the fair market value of the asset securing such liability), and the net assets of the Distributor were distributed to the members in the order of priority described below in the section entitled, “Payment of Liabilities and Liquidating Distributions Upon Dissolution”.

 

Distributions in Kind

 

The Distributor may, in the sole discretion of the managing member and subject to TWC’s rights described above in the section entitled, “Limitations on the Authority of the Managing Member”, make distributions of securities or other non-cash assets.

 

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Liability for Amounts Distributed

 

The members agree that, except as otherwise expressly provided herein or required by applicable law, no member will have an obligation to return money or other property paid or distributed to such member, whether or not such distribution was in violation of the Delaware Limited Liability Company Act. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of the LLC Agreement, any member is obligated to make any such return, such obligation will be the obligation of such member and not of any other person.

 

Performance of Duties; Liability of Members

 

Except as provided in the LLC Agreement, the members will not be liable to the Distributor or to any other member or any other person bound by the LLC Agreement for any loss or damage sustained by the Distributor or a member, unless the loss or damage shall have been the result of actually proven fraud, deceit, gross negligence, reckless or intentional misconduct or a knowing violation of law by such member. The managing member is required to perform its managerial duties in good faith, in a manner that it reasonably believes to be in the best interests of the Distributor and its members, and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

 

Exculpation and Indemnification

 

To the fullest extent permitted by applicable law, the Distributor is required to defend, indemnify, protect and hold harmless any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that such person:

 

    is or was a member, managing member, officer, director, employee, consultant or other agent or affiliate of the Distributor or that, being or having been such a member, managing member, officer, employee or agent or affiliate of such parties, such person is or was serving at the request of the Distributor as a manager, director, officer, employee, consultant or other agent of another limited liability company, corporation, partnership, joint venture, trust or other enterprise; or

 

    is or was an officer, director, member, employee, consultant or other agent or affiliate of a member, managing member or any of their respective affiliates (all such persons being referred to hereinafter as a “Covered Person”);

 

Nevertheless, any such Covered Person will not be entitled to indemnification if the loss or damage was the result of fraud, deceit, gross negligence, reckless or intentional misconduct or a knowing violation of law by such Covered Person.

 

The managing member will be authorized, on behalf of the Distributor, to enter into indemnity agreements from time to time with any Covered Person entitled to be indemnified by the Distributor hereunder, upon such terms and conditions as the managing member deems appropriate in its business judgment. The indemnification rights set forth herein will be in addition to, and will not be exclusive of, any other rights to which such Covered Person may be entitled by contract or otherwise under applicable law.

 

Insurance

 

The Distributor will have the power to purchase and maintain insurance on behalf of any person who is or was a Covered Person against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as a Covered Person, whether or not the Distributor would have the power to indemnify such person against such liability under the LLC Agreement or under applicable law.

 

The Distributor is required to obtain and maintain such insurance policies covering the members, managing member and officers of the Distributor as are, in the good faith determination of the managing member,

 

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consistent with its exculpation and indemnification obligations set forth herein. The coverage amounts and other terms of each of the insurance policies will be determined and/or changed by the managing member from time to time, provided, that the members, managing member and officers of the Distributor will be listed as named insureds.

 

Transfer of Interests

 

Subject to the restrictions on transfer described below, each of the TWC parties (with TWC’s prior written consent which may be withheld in its sole discretion) may transfer all or any portion of their units, membership interest or economic interest to any other party in its sole discretion. However, through December 31, 2009, the TWC parties are not permitted to transfer that portion of its Class W Units that remain subject to the Company Repurchase Right described above under “Repurchase of Class W Units—Company Repurchase Right”, other than to a permitted transferee.

 

Except with the written approval of TWC, which it may withhold in its sole discretion, to the fullest extent permitted by law, Genius Products may not transfer all or any portion of its units to any person, by operation of law or otherwise. Upon any transfer by Genius Products in violation of the LLC Agreement, TWC or its designee will become the managing member.

 

Subject to certain conditions, a member or holder will be entitled to pledge its membership interest, economic interest or units as security for a loan or other financing. TWC or its designee will become the managing member immediately upon any foreclosure of any security interest granted with respect to Class G Units.

 

Restrictions on Transfer

 

Notwithstanding any other provision of the LLC Agreement:

 

    no member is permitted to transfer any unit, or any interest therein; and

 

    neither the Distributor nor any member shall enter into any financial instrument or contract the value of which is determined in whole or in part by reference to the Distributor and which would be treated as an “interest in a partnership” for purposes of Treasury Regulation Section 1.7704-1;

 

if the effect of such Transfer, or of such financial instrument or contract, would be to cause, or create a material risk of causing, (A) the Distributor to be classified as a publicly traded partnership, or (B) the Distributor to terminate for federal income tax purposes. In furtherance of the foregoing, unless otherwise consented to by TWC and the managing member in writing in their sole discretion, any transfer of a unit or interest therein must satisfy one or more safe harbor provisions of Treasury Regulations Section 1.7704-1 including Sections 1.7704-1(e), (f), (g), (h) and (j), relating to “publicly traded partnerships”. To the fullest extent permitted by law, any transfer made in violation of this restriction will be null and void and will not be recognized by the Distributor.

 

Dissolution and Winding Up

 

The Distributor will be dissolved, its assets will be disposed of, and its affairs wound up upon the first to occur of the following:

 

    the entry of a decree of judicial dissolution pursuant to the Delaware Limited Liability Company Act;

 

    the approval of the managing member with Class W Prior Approval;

 

    the sale of all or substantially all of the assets of the Distributor or any similar transaction with similar effect;

 

    the happening of any other event that makes it unlawful or impossible to carry on the business of the Distributor; or

 

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    at any time there are no members of the Distributor, unless the Distributor is continued in accordance with the Delaware Limited Liability Company Act.

 

Upon the occurrence of any dissolution event, the Distributor will continue solely for the purpose of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors.

 

After satisfaction of the liabilities of the Distributor to creditors (whether by payment or the making of reasonable provision for payment thereof), including debts and liabilities to members who are creditors of the Distributor and expenses of liquidation, the remaining assets will be distributed to the members as follows:

 

    First, to the holders of Class W Units in an aggregate amount equal to the product of the Floor Amount per Class W Unit and the number of Class W Units then outstanding, pro-rata in accordance with their percentage interests (the “Class W Liquidating Distribution Preference”). The term “Floor Amount” means an amount per Class W Unit equal to $60 million divided by the number of Class W Units issued as of the closing.

 

    Second, to the holders of Class G Units pro-rata in accordance with their percentage interests until the holders of Class G Units have received aggregate distributions equal to the product of (x) their aggregate percentage interest (based on all outstanding units of the Distributor) and (y) the aggregate amount of the Class W Liquidating Distribution Preference and the amount distributed to the holders of Class G Units under this provision.

 

    Thereafter, pro-rata to the holders of all units in accordance with their respective percentage interests.

 

Accounting, Records and Reporting by Members

 

The Distributor will engage a reputable third party public accounting firm chosen by the managing member subject to Class W Prior Approval to conduct an audit of the financial statements of the Distributor on an annual basis, unless the managing member elects to do so on a more frequent basis.

 

The managing member will cause to be delivered to each member

 

    a monthly financial statement of the Distributor (within ten (10) days following the end of each month);

 

    a quarterly financial statement of the Distributor (within twenty (20) days following the end of each quarter); and

 

    annual audited financial statements of the Distributor (within seventy (70) days following the end of each fiscal year).

 

Such other reports as determined by the managing member to be necessary will be prepared by the managing member or authorized officers of the Distributor, and will contain such information and cover such matters as determined by the managing member and will be distributed to the members at such times as determined by the managing member.

 

Amendments

 

All amendments to the LLC Agreement are required to be in writing and will not be effective unless approved by Genius Products and TWC; provided, however, that any such amendment which disproportionately disadvantages one member relative to another member will not be effective without the written concurrence of such disadvantaged member. However, the managing member is permitted to make certain specific amendments without the consent of or execution by the members, such as amendments to Exhibit A to the LLC Agreement (which lists members and their membership interests) following any issuance, redemption, repurchase, reallocation or transfer of units in accordance with the LLC Agreement.

 

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Costs

 

The Distributor is responsible for and is required to reimburse each of Genius Products and TWC for all of their respective expenses, including, without limitation, expenses of lenders, legal counsel, investment bankers, consultants, accountants and other advisors, incurred at any time in connection with pursuing or consummating the transactions contemplated by the LLC Agreement, the Distribution Agreement and the Contribution Agreement.

 

4. The Distribution Agreement

 

This section of the Proxy Statement describes selected portions of the Distribution Agreement.

 

Grant of Rights

 

Subject to the limitations described below, to the extent that TWC or any TWC Controlled Affiliate controls such rights, TWC will, during the Output Term, grant to the Distributor the right, during the License Term in the United States (and its territories and possessions including Puerto Rico, U.S. Virgin Islands and Guam), to design, manufacture (subject to the terms described below under “Manufacturing”), distribute, advertise, publicize, promote and market Videograms of the Covered Product in English, Spanish and such other languages as may be approved by TWC in writing on a product-by-product basis.

 

Certain Important Defined Terms

 

The Distribution Agreement contains several significant defined terms that are material in understanding the terms of the Distribution Agreement. Following is a summary of the respective definitions of many of the significant defined terms used in the Distribution Agreement, which are presented in alphabetical order for ease of reference. For the exact definitions, please refer to the actual text of the Distribution Agreement, which is attached as Appendix D.

 

    the term “Adjusted Net Contribution” means the amount calculated on each Measurement Date on a Measured Film by Measured Film basis equal to (i) with respect to a Measured Film whose Initial Home Video Release Date occurred less than six months prior to the end of the applicable Measurement Period, the Net Contribution (determined as described below under the section entitled “Application of Gross Receipts”) for such Measured Film divided by .85; (ii) with respect to a Measured Film whose initial home video release date occurred at least six months but less than ten months prior to the end of the applicable Measurement Period, the Net Contribution for such Measured Film divided by .90; and (iii) with respect to a Measured Film whose initial home video release date occurred at least ten months prior to the end of the applicable Measurement Period, 100% of the Net Contribution for such Measured Film. Notwithstanding that the Adjusted Net Contribution will be calculated after the end of each Measurement Period, the Adjusted Net Contribution with respect to any Measured Film shall include the Net Contribution for such Measured Film (adjusted as provided above) and any Distributor Credit for such Measured Film earned by TWC, in each case, through the earlier of (a) the date that is 12 months after the initial home video release date of the applicable Measured Film and (b) the end of the applicable Measurement Period. For purposes of clarification, the Distributor Credit is used here solely for the purpose of calculating the Annual Video Ratio and no portion of any Distributor Credit shall be payable to Distributor;

 

    the term “Annual Measurement Period” means, with respect to each calendar year of the Output Term, the period commencing on January 1 of such calendar year and continuing through and including December 31 of such year;

 

   

the term “Annual Video Ratio” means, for the applicable Annual Measurement Period, the ratio (expressed as a percentage) of (a) the aggregate Adjusted Net Contribution for all applicable Measured Films to (b) the aggregate of domestic theatrical box office revenues for all such Measured Films (as

 

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reported by Nielsen EDI), such box office revenues calculated for each such Measured Film through the date that is 12 months after the date of such Measured Film’s initial theatrical release in the Territory;

 

    the term “Covered Product” means all Motion Pictures, excluding Excluded Product, for which (i) TWC or a TWC Controlled Affiliate owns or controls the right to distribute Videograms embodying such Motion Pictures in the Territory; and (ii) TWC or any TWC Controlled Affiliate elects, in its sole discretion, to release during the Output Term for distribution by means of Videograms in the Territory, in each case subject to any and all existing restrictions and agreements and any restrictions and agreements existing at the time such Motion Picture is licensed to or acquired by Licensor or any TWC Controlled Affiliate;

 

    the term “Distributor Credit” means, with respect to TWC’s exercise of its rights to engage a duplicator and/or replicator in connection with the manufacture of Videograms, the payments actually received by TWC and not returnable from such duplicator and/or replicator which are directly attributable to the volume of Videograms of Covered Product duplicated and/or replicated. For purposes of clarification, the Distributor Credit is used herein solely for the purpose of calculating the Annual Video Ratio and no portion of any Distributor Credit will be payable to the Distributor;

 

    the term “Excluded Product” means (i) any motion picture for which TWC or an affiliate does not own or control, at the time of initial theatrical release of such motion picture in the United States, the right to distribute Videograms in the United States, including without limitation because of co-finance arrangements, split-rights arrangements or for any other reason or (ii) any motion picture acquired by TWC or any TWC Controlled Affiliate as part of a library or slate of motion pictures in a transaction or series of transactions where the purchase price for such library or slate of motion pictures is in excess of $100,000,000;

 

    the term “License Term” means, with respect to each Covered Product licensed to Distributor during the Output Term on a product-by-product basis, the shorter of (i) perpetuity, or (ii) the full term of rights to distribute such Covered Product by means of Videograms in the Territory owned or controlled by TWC or any TWC Controlled Affiliate, subject only to early termination of the Distribution Agreement and TWC’s buy back rights, as described below;

 

    the term “Output Term” means the period commencing on the effective date of the Distribution Agreement and continuing through and including (a) December 31, 2010 if TWC does not extend the Output Term no more than three months before December 31, 2010, or (b) December 31, 2013 if TWC does so extend the Output Term;

 

    the term “Semi-Annual Adjusted Net Contribution” means the amount calculated on each Semi-Annual Measurement Date on a Semi-Annual Measured Film by Semi-Annual Measured Film basis and shall mean the Net Contribution for such Semi-Annual Measured Film divided by .85. Notwithstanding that the Semi-Annual Adjusted Net Contribution will be calculated after the end of each Semi-Annual Measurement Period, the Semi-Annual Adjusted Net Contribution with respect to any Semi-Annual Measured Film will include the Semi-Annual Net Contribution for such Semi-Annual Measured Film (adjusted as provided above) and any Distributor Credit for such Semi-Annual Measured Film earned by TWC, in each case, through the earlier of (a) the date that is six (6) months after the initial home video release date of the applicable Semi-Annual Measured Film and (b) the end of the applicable Semi-Annual Measurement Period. For purposes of clarification, the Distributor Credit is used here solely for the purpose of calculating the Semi-Annual Video Ratio and no portion of any Distributor Credit shall be payable to the Distributor.

 

   

the term “Semi-Annual Measured Films” shall mean, (i) with respect to each Semi-Annual Measurement Period commencing on January 1, all Covered Product that has (a) had its initial home video release date on or after October 1 of the calendar year preceding the applicable Semi-Annual Measurement Period but before April 1 of the calendar year of the applicable Semi-Annual Measurement Period and (b) been theatrically released after November 1, 2005; and (ii) with respect to each Semi-Annual Measurement Period commencing on July 1, all Covered Product that has (a) had its

 

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initial home video release date on or after April 1 of the calendar year of the applicable Semi-Annual Measurement Period but before October 1 of such calendar year and (b) been theatrically released after November 1, 2005. By way of example, with respect to the Semi-Annual Measurement Period commencing on January 1, 2008 and ending on June 30, 2008, the Semi-Annual Measured Films shall be all Covered Product which have been theatrically released after November 1, 2005 and which have had their respective initial home video release dates on or after October 1, 2007 but before April 1, 2008. By way of further example, with respect to the Semi-Annual Measurement Period commencing on July 1, 2009 and ending on December 31, 2009, the Semi-Annual Measured Films will be all Covered Product which have been theatrically released after November 1, 2005 and which have had their respective initial home video release dates on or after April 1, 2009 but before October 1, 2009;

 

    the term “Semi-Annual Measurement Period” means, with respect to each calendar year of the Output Term beginning with calendar year 2007, each six month period commencing on either January 1 or July 1 of such calendar year, as applicable;

 

    the term “Semi-Annual Video Ratio” means, for the applicable Semi-Annual Measurement Period, the ratio (expressed as a percentage) of (a) the aggregate Semi-Annual Adjusted Net Contribution for all applicable Semi-Annual Measured Films to (b) the aggregate of domestic theatrical box office revenues for all such Semi-Annual Measured Films (as reported by Nielsen EDI), such box office revenues calculated for each such Semi-Annual Measured Film through the date that is six months after the date of such Semi-Annual Measured Film’s initial theatrical release in the Territory;

 

    the term “Territory” means the United States and its territories and possessions, including Puerto Rico, the U.S. Virgin Islands and Guam;

 

    the term “TWC Controlled Affiliate” means any affiliate of TWC existing as of the date of the Distribution Agreement or any entity in which TWC thereafter creates, establishes or acquires a controlling interest, directly or indirectly, for a purchase price of less than $100,000,000; and

 

    the term “Videograms” means videocassettes, videodiscs, videotape, DVD, Universal Media Disc (“UMD”), CD-ROM or other similar hard carrier devices now known or hereafter devised and designed to be used in conjunction with a personal reproduction apparatus which causes a visual image (whether or not synchronized with sound) to be seen on the screen of a television receiver, computer screen, hand-held device or any similar device now known or hereafter devised.

 

Exclusivity

 

With respect to the distribution by means of Videograms of the Covered Product, the Distributor’s rights in the United States will be exclusive to the Distributor.

 

Manufacturing

 

TWC reserves the right to directly engage a duplicator and/or replicator in connection with the manufacture of Videograms embodying the Covered Product. Until such time, if ever, as TWC exercises such right, the Distributor will engage duplicators and/or replicators for the manufacture of Videograms in accordance with the Distribution Agreement.

 

If TWC elects to exercise its right to so directly engage a duplicator and/or replicator for Videograms of Covered Products, the Distributor will advance and recoup, in accordance with the provisions described below under “Applications of Gross Receipts”, all amounts required to be paid by TWC to its duplicator and/or replicator with respect to Videograms of Covered Products pursuant to the terms of the Distribution Agreement.

 

With respect to Covered Product, except during the periods that TWC elects to exercise its rights with respect to Videogram duplication/replication as described above, the Distributor will arrange for the manufacture, packaging and delivery of the finished goods to the Distributor’s distribution centers. However, all

 

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matters relating to the Distributor’s manufacture and distribution of the Covered Product in the United States will be subject to meaningful, good faith consultation with, and reasonable approval by, TWC. The Distributor will advance and recoup, in accordance with the provisions described below under “Applications of Gross Receipts”, all costs and expenses incurred in connection with the manufacturing, packaging and delivery of such store-ready finished goods to the Distributor’s warehouse facilities and fulfillment/distribution centers.

 

Marketing and Advertising

 

Subject to meaningful, good faith consultation with the Distributor, TWC will designate the initial release date in the United States for each Covered Product and the Distributor will initially release Videograms of such Covered Product on such date, subject to TWC’s timely delivery of the related materials and TWC’s timely approval, pursuant to the terms of the Distribution Agreement, of any and all materials and plans required for the distribution by the Distributor.

 

The budget for (i) the development and implementation of the marketing strategy of each Covered Product, (ii) the creation, placement and distribution of all marketing, advertising and promotional materials for each Covered Product; (iii) the marketing expense budget for the initial release of each Covered Product in the United States; and (iv) all other matters relating to the advertising, marketing and promotion of the Covered Product (including without limitation, media spends, media buys and rebates) will be subject to TWC’s and the Distributor’s mutual prior written approval and, in the event of any disagreement, TWC’s decision will control.

 

Without limiting the foregoing, the Distributor will be responsible for the advertisement, promotion, and merchandising efforts in respect of Videograms of Covered Product, including the preparation of artwork and design layouts of all types, the furnishing of merchandising posters and displays for distribution by the Distributor, and the furnishing of reasonably sufficient quantities of demonstration samples to the Distributor’s sales staff, subject in all respects to TWC’s approval rights.

 

The Distributor will have the right to market, promote and advertise in the United States its distribution of Videograms of the Covered Product with respect to each Covered Product in any and all media. Distributor will advance and recoup, in accordance with the provisions described below under “Application of Gross Receipts”, all costs and expenses incurred in connection with the reproduction, delivery and shipment of any advertising materials.

 

Distribution

 

As between the Distributor and TWC, TWC will be solely responsible for, and will pay or cause to be paid all costs, expenses and charges incurred in connection with:

 

    The acquisition, development, financing and production of Covered Product, including all creative and artistic aspects and paying any and all related costs, expenses or charges; and

 

    The procurement of all necessary rights, licenses, consents, authorizations and clearances necessary for the Distributor to distribute Videograms of the Covered Product as and to the extent contemplated by the Distribution Agreement; and the payment of all royalties, fees, costs and other sums payable to any person in connection therewith.

 

The Distributor is required to perform in a conscientious and first-class manner to the fullest extent of its ability and on a “label blind” and non-discriminatory basis, all services customary, necessary and appropriate in connection with the manufacture, distribution, sale and other exploitation of Covered Product under the Distribution Agreement.

 

The Distributor is required to keep TWC fully informed on a regular basis regarding the Distributor’s manner of distribution, sales methods and policies, including without limitation the Distributor’s distribution pattern and wholesale and retail distribution channels and outlets. The Distributor is required to consider in good faith TWC’s suggested improvements or changes to such manner of distribution, sales methods and policies.

 

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Approvals and Controls; Restrictions

 

The Distributor’s exercise of the rights is subject to, and requited to be exercised in accordance with, the following:

 

    General. All marketing materials, media spends, media buys, returns policies and rebates, refunds, credits and discounts provided to the Distributor’s customers with respect to the Covered Product will be subject to TWC’s prior written approval.

 

    Subdistribution/Outsourcing. Other than as permitted under the Distribution Agreement (e.g., for manufacturing, physical packaging, etc.) the Distributor will not be entitled to outsource any functions or engage any subdistributors to distribute, sell or otherwise exploit the Covered Product or to sublicense any of its rights under the Distribution Agreement in the United States, or any portion thereof, without TWC’s express prior written approval.

 

    Manufacturing Levels. Subject to consultation with the Distributor, TWC will have the right on an ongoing and continuous basis to designate the number of Videogram units manufactured and to be shipped.

 

    Suggested Retail List Price. Subject to consultation with the Distributor TWC will designate the suggested retail list price for each Covered Product on an ongoing and continuous basis and will provide the Distributor with notice of any changes to such suggested retail list prices thereafter.

 

    Sales Efforts. Subject to TWC’s control over manufacturing levels as described above and, if applicable, TWC’s control over the manufacturing of Videograms as described above, the Distributor is required to commence in good faith to manufacture, distribute and sell Covered Product in order to effectuate the marketing plan no later than the initial release date designated by TWC for each such Covered Product and will continue thereafter to diligently and continuously so manufacture, distribute and sell Covered Product as necessary, in the Distributor’s good faith business judgment, to meet consumer demand. The Distributor, in exercising the rights and licenses granted hereunder, is required to use all commercially reasonable efforts in its good faith business judgment to promote and maximize the sale of the Videograms of Covered Product throughout the United States.

 

    Reserve for Returns/Bad Debt. The Distributor will be entitled to establish and maintain a reserve for returns for each Covered Product in an amount equal to seventeen and one-half percent (17 1/2%) of net receipts attributable to such Covered Product, provided that all such reserves not constituting actual returns will be liquidated within five (5) months of establishment. TWC and the Distributor will review and discuss the reserve for returns annually for possible adjustments based on a review of the Distributor’s prior 12 months’ returns and forecasts of future returns, provided that any failure of the parties to reach an agreement with respect to such adjustments will not be a breach of the Distribution Agreement nor will it give rise to any right or remedy of either party; provided further that no such adjustments will be made (and the 17 1/2% reserve will continue to apply) unless agreed to in writing by both parties. No reserve for returns will be taken on or established with respect to any non-returnable Videograms distributed, sold or otherwise exploited by the Distributor hereunder. The Distributor will bear (and will not be entitled to recoup as distribution expenses) all bad debt expense and collection costs. TWC will have approval rights over the Distributor’s returns policy.

 

    Cutting and Editing. The Distributor generally is prohibited from cutting, editing, adding to, altering or deleting Covered Product or related packaging or advertising material.

 

    Security; Copy Protection. The Distributor is required to institute and employ “state-of-the-art” security systems, measures and procedures at least equal to such systems, measures and procedures of other first-class providers of services of the type provided hereunder to prevent loss, damage, theft, pirating, unauthorized exhibition, copying or duplication of any of Covered Product or materials delivered by TWC.

 

    No Approval Over Content. The Distributor will not have any control or approval rights relating to the content or rating of any Covered Product delivered to the Distributor under the Distribution Agreement.

 

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    Payment of Additional Expenses. Except as expressly provided in the Distribution Agreement, the Distributor will be solely responsible for any and all costs and expenses arising in connection with the exercise of the rights granted to the Distributor under the Distribution Agreement.

 

    Dedicated Staff. The Distributor is required to create and maintain a dedicated sales, marketing and operational unit of a commercially reasonable size for the sales, marketing and distribution of Covered Product in the United States giving regard to a target cumulative Video Ratio of 70%. The size, level and personnel of such dedicated unit will be subject to TWC’s prior written approval and the Distributor agrees to consider in good faith candidates proposed by TWC for all such positions, provided that the Distributor will determine in its sole discretion all salary levels and other compensation with respect such candidates. The cost of such dedicated staff will be borne exclusively by the Distributor (in accordance with and subject to its general overhead budget) and no costs or expenses related to such staff will be charged to TWC as a distribution expense or otherwise. Without limiting the generality of the foregoing, TWC will have the right to designate one senior level executive of Distributor who will be subject to Distributor’s approval (not to be unreasonably withheld or delayed) and who will be Distributor’s primary contact with TWC. This senior executive will be responsible for keeping TWC fully informed on an ongoing and continuous basis regarding all matters of Distributor’s distribution of Videograms of Covered Product hereunder and is required to be reasonably available to TWC to facilitate the same.

 

    Standard of Care. The Distributor is required to distribute Videograms of the Covered Product with no less than the same degree of effort, quality of service and standard of care that U.S. major motion picture studios apply to their distribution of Videograms of their own comparable motion pictures or programs. Without limiting the generality of the foregoing, the percentage of the Distributor’s aggregate annual sales attributable to direct sales to retailers (as opposed to sales to wholesale distributors) is required to be not be less than that of U.S. major motion picture studios. Any and all bonuses (excluding annual corporate bonuses not tied to sales targets), incentive plans and sales commission structures for the Distributor’s employees and all other persons and entities involved in distributing Videograms of Covered Product are required to be designed and implemented (i) so as not to have an unfair or adverse discriminatory impact on Covered Product and (ii) to provide no less than an “equal incentive” to all bonus plan participants to sell the Covered Product as compared to other motion pictures distributed by means of Videograms by the Distributor. Compliance with the foregoing obligations is of the essence, entitling TWC to terminate the Distributor’s right to distribute the Covered Product in the event of any material breach of such obligations.

 

   

Content Acquisition Opportunities. If the Distributor is presented with a content acquisition opportunity, the Distributor is required to promptly present such content acquisition opportunity to TWC and TWC or any TWC Controlled Affiliate will have the right to engage in the content acquisition opportunity in accordance with the terms and conditions of the Distribution Agreement. If TWC or any TWC Controlled Affiliate determines to engage in the content acquisition opportunity, it may do so on whatever terms it deems appropriate without any further obligation to the Distributor (other than under the Distribution Agreement) and the Distributor will be prohibited from engaging in such content acquisition opportunity. Neither TWC nor any TWC Controlled Affiliate will have an obligation to present any content acquisition opportunity to the Distributor. Notwithstanding the foregoing, the Distributor will not be required to offer any content acquisition opportunity that both (i) is consistent with Distributor’s current business and is not competitive with TWC’s business, and (ii) requires aggregate fixed payments (e.g., advances, fixed purchase price, etc.) of less than $75,000 for any individual acquisition or series of related acquisitions. However, in no event may all fixed payments related to such qualifying content acquisition opportunities in any year exceed $2,000,000 in the aggregate. The Distributor does not intend to enter into any content acquisition opportunity that is competitive with TWC’s business (e.g., feature films) and is not permitted to enter into any such content acquisition opportunity without specific prior written approval from TWC and without first presenting such content acquisition opportunity to TWC. Any content acquisition opportunity entered into by the Distributor is required to be on customary industry terms and the Distributor is prohibited from

 

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structuring any content acquisition opportunity so as to avoid or circumvent its obligation to offer such content acquisition opportunity to TWC as required under the Distribution Agreement, including but not limited to offering terms that are not consistent with industry standards. By way of example, the Distributor is not permitted to achieve an advance within the $75,000 and $2 million limits set forth above by offering non-standard terms in other areas, such as non-customary royalties or distribution fees.

 

Delivery of Materials

 

For each Covered Product, TWC will deliver to such location in the United States as the Distributor may at any time designate the materials (including video masters and related print and sound elements) necessary for the Distributor to create first class Videograms embodying such Covered Product. If the delivery materials are not technically acceptable to the Distributor in the Distributor’s reasonable good faith business judgment based on the Distributor’s then-current standards applied on a non-discriminatory basis for motion pictures with similar characteristics (e.g., age, gauge, etc.), then the Distributor is required to notify TWC in writing within 21 days of the Distributor’s receipt of such delivery materials of any such defects in said delivery materials and, if TWC agrees such defect exists and needs to be remedied in order for the Distributor to exploit the rights granted hereunder, TWC will promptly replace the defective delivery materials at TWC’s sole cost and expense. Otherwise, the Distributor is required to create Videograms of the Covered Product based on the delivery materials delivered by TWC.

 

Expenses

 

The provisions in the Distribution Agreement governing expenses include the following:

 

    Distribution Expenses. The Distributor will advance all distribution expenses relating to the distribution of Covered Product. Recoupable distribution expenses (including all costs of manufacturing Videogram units) will be recouped by the Distributor on a Covered Product-by-Covered Product basis only as units are sold and will be limited to only direct, auditable, out-of-pocket, customary and reasonable costs and expenses actually paid by the Distributor to third parties in arm’s length transactions (and not directly or indirectly reimbursed or credited to Distributor, including by way of rebates, credits and/or discounts) in connection with units sold and not returned. Distribution expenses will include, without limitation, necessary DVD mastering costs (including authoring, compression and copyright encryption) and film-to-tape transfer costs (if applicable). Distribution expenses will not include, and the Distributor will solely bear out of its distribution fee, all costs and expenses of sales, creative services (other than creative services outsourced to third parties at the written direction of TWC), inventory and category management in connection with the distribution of Covered Product, and all costs associated with unsold units.

 

    Marketing Expenses. All marketing expenses will be advanced and recouped by the Distributor on a Covered Product-by-Covered Product basis as units are sold. Recoupable marketing expenses will be limited to only those direct, auditable, out-of-pocket, customary and reasonable costs and expenses actually paid by the Distributor to third parties in arm’s length transactions (and not directly or indirectly reimbursed or credited to Distributor, including by way of rebates, credits and/or discounts) in accordance with the marketing budget. Notwithstanding the foregoing, the out-of-pocket costs and expenses actually paid by the Distributor to third parties in connection with any outsourced marketing or other services will not constitute recoupable expenses unless such outsourcing is approved in writing by TWC in advance. The Distributor will bear (and will not be entitled to recoup as marketing expenses or distribution expenses or otherwise) all costs and expenses incurred by the Distributor in excess of the amounts set forth in the marketing budget, unless TWC requests or approves in writing such cost increases in accordance with the terms of the Distribution Agreement.

 

   

No Cross-Collateralization. Gross receipts and expenses relating to the Distributor’s exploitation of each Covered Product will not be cross-collateralized with the gross receipts or expenses of any other

 

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Covered Product or any other motion pictures, programs or other products. As the sole and limited exception to the preceding sentence, if and to the extent the Distributor does not recoup all expenses in connection with an item of direct-to-video Covered Product because TWC requires the Distributor to increase the marketing budget or manufacturing level for such item of Covered Product above that prepared or otherwise approved by the Distributor in its reasonable good faith business judgment (taking into account customary marketing expenditure and manufacturing levels for comparable motion pictures in the entertainment industry during the 12 month period immediately preceding such Covered Products’ anticipated initial home video release date), then the Distributor will be entitled to recoup from net contribution otherwise payable to TWC under the LLC Agreement in connection with other Covered Product the amount of marketing and/or manufacturing expenses in connection with such Covered Product designated by TWC in excess of the amount so approved by the Distributor in its reasonable good faith business judgment. By way of example, if the Distributor approves $100,000 in marketing expenses in its reasonable good faith business judgment in connection with a direct-to-video Covered Product and TWC directs the expenditure of $150,000 in marketing expenses, and if the Distributor does not recoup all expenses in connection with such Covered Product, then the Distributor will be entitled to recoup the unrecouped expenses up to a cap of $50,000 from net contribution otherwise payable to TWC under the Distribution Agreement.

 

Application of Gross Receipts

 

The gross receipts of every kind and nature from any and all sources actually received by or credited to the Distributor or any affiliate or subsidiary from the distribution of the Covered Products on a Covered Product-by-Covered Product basis, less all related refunds, credits (other than credits for cooperative advertising) and discounts, are referred to as “Net Receipts”. Net Receipts are to be applied on an ongoing and continuous basis in the following order:

 

    First, the Distributor will deduct and retain an amount sufficient to maintain a reserve for returns equal to (and not in excess of) 17.5% of Net Receipts, as such percentage may be adjusted as described above under the section entitled, “Reserve for Returns/Bad Debt”;

 

    Second, from the remaining Net Receipts, the Distributor will deduct and retain for itself a distribution fee of 5% of such remaining net receipts, provided that upon liquidating the reserve for returns as described above under the section entitled “Reserve for Returns/Bad Debt”, the Distributor will deduct and retain for itself from such liquidated reserve (i.e., the Net Receipts constituting such reserve and deducted as described above which have not been returned or credited to customers within the applicable return reserve period and are therefore part of Net Receipts) a distribution fee of 5% of such liquidated reserve;

 

    Third, from the remaining Net Receipts the Distributor will deduct and retain for itself all expenses in connection with such Covered Product that the Distributor has the right to recoup as described above under the section entitled, “Expenses”;

 

    Fourth, from the remaining Net Receipts the Distributor will deduct and retain for itself amounts equal to any Licensor True-Up Payments (as defined below) then payable to the Distributor; and

 

    Fifth, the Distributor will remit to TWC all remaining Net Receipts. The amount thus remitted to TWC is referred to as the “Net Contribution”.

 

Deemed Distribution Fee

 

Within ninety (90) days after the end of each full calendar year, the Distributor will calculate the Deemed Distribution Fee Percentage and the Deemed Distribution Fee Amounts for the period commencing on the effective date of the Distribution Agreement and continuing through and including December 31st of the calendar year in question (the “Measurement Period”).

 

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The “Deemed Distribution Fee Percentage” will be equal to, with respect to the Net Receipts of all Covered Product during the applicable Measurement Period, (a) 3% if the cumulative Video Ratio is less than or equal to 50.00% for the applicable Measurement Period, (b) 4% if the cumulative Video Ratio is greater than 50.00% and less than or equal to 60.00% for the applicable Measurement Period, (c) 5% if the cumulative Video Ratio is greater than 60.00% and less than or equal to 75.00% for the applicable Measurement Period, and (d) 6% if the cumulative Video Ratio is greater than 75.00% for the applicable Measurement Period. The “Deemed Distribution Fee Amounts” will equal the product of the Deemed Distribution Fee Percentage multiplied by the cumulative Net Receipts for the applicable Measurement Period.

 

TWC and the Distributor will from time to time review and discuss in good faith possible adjustment to the cumulative Video Ratio levels based on then-customary industry standards for Video Ratios, manufacturing levels and suggested retail prices for Videogram units, provided that any failure of the parties to reach an agreement with respect to such adjustment will not constitute a breach of the Distribution Agreement or give rise to any right or remedy of the parties; provided further that no such adjustment will be made unless agreed to in writing by both parties.

 

True-Up Payments

 

If the Deemed Distribution Fee Amounts for the applicable Measurement Period exceed the actual distribution fee amounts for the applicable Measurement Period, then the Distributor will be entitled to deduct such excess (a “Licensor True-Up Payment”) from Net Contribution otherwise payable to TWC on a prospective basis. If the actual distribution fee amounts for the applicable Measurement Period exceed the Deemed Distribution Fee Amounts for the applicable Measurement Period, then the Distributor will pay the amount of such excess (a “Distributor True-Up Payment”) to TWC ratably in six (6) monthly installments commencing 30 days after the Measurement Date for the applicable Measurement Period.

 

Returned Units

 

Notwithstanding anything to the contrary contained in the Distribution Agreement, no distribution fees will be payable on any Videogram which is sold and returned, and to the extent any distribution fees are charged on units that are ultimately returned, the Distributor agrees to disgorge any distribution fee charged with respect to such Videogram in the accounting period in which the Videogram is so returned.

 

Subdistributor/Sublicensee Fees

 

Unless otherwise agreed by the parties in writing, distribution fees payable to the Distributor will be inclusive of any fees paid or payable to any affiliates and any subdistributors and sublicensees.

 

E xcessive Sales to Wholesalers

 

The Distributor has advised TWC that the Distributor intends to distribute Videograms of the Covered Product throughout the United States directly to retailers (i.e., Net Receipts will be calculated as 100% of amounts paid by retailers (less all related refunds, credits and discounts) without the deduction of any agents’ or other third party fees). If more than fifteen percent (15%) of the Net Receipts in any consecutive six month period are Net Receipts from wholesalers (as opposed to Net Receipts directly from retailers) then the Distributor will not be entitled to a distribution fee with respect to such Net Receipts in excess of such 15% and the Distributor is required to immediately rebate to TWC any such distribution fee then previously deducted by the Distributor.

 

Security Interest

 

The Distributor will grant to TWC a security interest to secure amounts owing to TWC under the Distribution Agreement.

 

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Accounting and Payment

 

The Distributor will render or cause to be rendered to TWC monthly accounting statements within 45 days after the last day of the applicable calendar month. The statements are required to indicate (on an aggregate and Covered Product-by-Covered Product basis) the number of Videograms sold and returned, gross receipts, Net Receipts, distribution expenses, marketing expenses, applicable distribution fees, and Net Contribution. The statements shall also be required to include (i) a breakdown by the Distributor’s top 15 accounts, (ii) a breakdown of the Distributor’s calculation of the reserve for returns, including any liquidation thereof and (iii) a breakdown of the Distributor’s calculation of the percentage of the Distributor’s sales attributable to direct sales to retailers and the Distributor’s sales to wholesale distributors.

 

All monies due and payable to TWC pursuant to the Distribution Agreement and shown to be due on each monthly statement are required be paid to TWC at the time the next monthly accounting statement is due to TWC. If the Distributor fails to pay any amount due and payable in accordance with the preceding sentence and does not cure such failure within five business days thereafter, then, without waiving any of TWC’s other rights or remedies under the Distribution Agreement, the Distributor will be obligated to pay interest on such unpaid amounts at an annual rate equal to the prime rate announced from time to time by TWC’s senior lender plus two percent from the date such amount was due and payable until the date such payment actually is made by the Distributor.

 

No Minimum Sales Warranty

 

Neither TWC nor the Distributor makes any representation or warranty of any kind or nature with respect to the quantities of Covered Product that may be sold or returned, or the gross receipts or Net Contribution that will or may be derived by the Distributor or TWC pursuant to the Distribution Agreement. The extent of sales and returns of Videograms under the Distribution Agreement, and the amount of gross receipts that may be derived, is speculative.

 

Proprietary Rights

 

The Covered Product and related proprietary materials and all copyrights, trademarks and other proprietary rights in and to the Covered Product and related proprietary materials are and will remain owned exclusively by TWC. In addition, TWC will own the copyrights, trademarks and other proprietary rights in any and all artwork and designs created or used by the Distributor in connection with the distribution of Covered Product, which incorporate or otherwise include any elements of any of the Covered Product or the related proprietary material.

 

The Distributor is required to promptly take all reasonable legal steps necessary (subject to TWC’s prior written approval with respect to the institution of any legal proceeding), to protect the interests of TWC and the Distributor in the Videogram distribution of Covered Product in the United States, and to obtain redress and restrain any third party from any unauthorized reproduction, exhibition, distribution or other use of the Covered Product in the United States or from the duplication of any prints or the doing of any act which infringes upon any of TWC’s or the Distributor’s rights in the Covered Product in the United States or any materials manufactured or delivered under the Distribution Agreement. All direct, auditable, out-of-pocket expenses incurred by the Distributor in connection with this provision will be deemed recoupable distribution expenses attributable to the applicable Covered Product.

 

Representations and Warranties

 

The Distribution Agreement contains customary representations and warrants from TWC and the Distributor, including representations relating to due organization, authorization and no conflicts or legal violations. In addition, TWC is required to make representations relating to, among other things, TWC’s rights to the Covered Products, and the Distributor is required to make representations relating to the Distributor’s compliance with law and non-infringement of third party rights in connection with the performance of the Distribution Agreement.

 

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Indemnity

 

Each party agrees to defend, indemnify and hold harmless the other party (and its affiliates, and its and their respective successors, assigns, licensees, officers, directors, employees and representatives) against and from any and all claims, liabilities, damages, costs and expenses (including reasonable attorneys’ fees and court costs) arising from or related to any breach by the indemnifying party of any of its undertakings, representations, warranties, covenants or agreements under the Distribution Agreement, and/or arising from or related to any and all third party claims which, if proven, would constitute a breach.

 

TWC further agrees to indemnify and hold harmless the Distributor (and its affiliates, and its and their respective successors, assigns, licensees, officers, directors, employees and representatives) against and from any and all claims, liabilities, damages, costs and expenses (including reasonable attorneys’ fees and court costs) arising from or related to the acquisition, development, financing, production, distribution, exhibition, marketing and/or any other exploitation of any and all Covered Products, excepting only claims arising solely out of a breach of any of the Distributor’s representations, warranties or agreements under the Distribution Agreement or any other matter for which the Distributor is obligated to indemnify TWC under the Distribution Agreement.

 

The Distributor further agrees to defend, indemnify and hold harmless TWC (and its affiliates, and its and their respective successors, assigns, licensees, officers, directors, employees and representatives) against and from any and all claims, liabilities, damages, costs and expenses (including reasonable attorneys’ fees and court costs) arising from or related to (i) the Distributor’s distribution of such Covered Products under the Distribution Agreement, excepting only claims arising solely out of a breach of any of TWC’s representations, warranties or agreements under the Distribution Agreement, and (ii) any unauthorized use by Distributor of the advertising materials.

 

Early Termination

 

Subject to the notice and cure provisions described below, TWC will have the right to terminate the Distribution Agreement and all of the Distributor’s rights in and to the Covered Product without prejudice to any rights which TWC may have, whether pursuant to the provisions of the Distribution Agreement or otherwise in law, or in equity, or otherwise, upon the occurrence of any one or more of the following events:

 

    If the Distributor is in material breach of any of its covenants, obligations, warranties or representations under the Distribution Agreement or under any of the security documents;

 

    If the Distributor is unable to pay its debts when due, makes any assignment for the benefit of creditors, or files any petition under the bankruptcy or insolvency laws of any jurisdiction, county or place, or has or suffers a receiver or trustee to be appointed for its business or property, or is adjudicated a bankrupt or an insolvent;

 

    If the Annual Video Ratio is less than 60% (as calculated on any Measurement Date). However, if TWC does not exercise its termination right with respect to this provision within 90 days after receipt of the Distributor’s calculation of the Annual Video Ratio which will be provided to TWC no later than the applicable Measurement Date, then the termination right with respect to such calendar year will be deemed waived;

 

   

If the Semi-Annual Video Ratio is less than 60% (as calculated for any Semi-Annual Measurement Period). However, if TWC does not exercise its termination right with respect to this provision within 90 days after receipt of Distributor’s calculation of the Semi-Annual Video Ratio (which shall be provided to TWC no later than the applicable Semi-Annual Measurement Date), then such termination right with respect to such Semi-Annual Measurement Period will be deemed waived. Notwithstanding the preceding sentence, the threshold of 60% set forth in the preceding sentence may be reduced to 57.5% for one and only one Semi-Annual Measurement Period during the Output Term designated by the Distributor (it being understood and agreed that this sentence will apply to the Semi-Annual Video Ratio only and not the Annual Video Ratio). The Semi-Annual Video Ratio will be calculated within

 

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15 days after June 30 and December 31 of each calendar year of the Output Term beginning with calendar year 2007 with respect to the preceding six month period commencing on either January 1 or July 1 of such calendar year, as applicable;

 

    If the Distributor fails to fully comply with the liquidity and coverage ratios set forth on Schedule B attached to the Distribution Agreement;

 

    If the Distributor incurs any indebtedness for borrowed money outside of the ordinary course or for an amount in excess of $10 million in year 2006 or, in any year thereafter, the amount of the Distributor’s cash flow for the then-preceding calendar year (and in any event for an amount in excess of $10 million) without prior written approval of TWC;

 

    If the Distributor intentionally or repeatedly distributes, sells or otherwise exploits (or authorizes any third party to sell or otherwise exploit) Videograms embodying the Covered Product outside the United States;

 

    If either the Distributor or Genius Products experiences a change of control event; or

 

    if a change of control of the Distributor occurs that is not the direct result of TWC selling all or substantially all of its ownership interest in the Distributor to any person or group of persons.

 

Upon the occurrence of any of the events described above, TWC will give notice of termination (if TWC elects to terminate) in writing to the Distributor; provided, that TWC will not be required to give notice with respect to any event under the second, eighth or ninth bullet point above to the extent prohibited or restricted by applicable law. The Distributor will have 15 days from the date of receiving notice to correct any default which is curable with the payment of money and 30 days as to any other default which is capable of cure. However; the Distributor will have no right to cure with respect to any event listed above, except under the first bullet point above. Failing a timely cure by the Distributor as described above, the Distribution Agreement will immediately terminate.

 

Upon the occurrence of a change of control of TWC or a change of control of Distributor that is a direct result of TWC selling all of substantially all of its ownership interest in Distributor, TWC will have the right to terminate the Output Term. However, any such termination will not become effective prior to January 1, 2009. TWC will irrevocably elect to exercise its rights to terminate the Output Term by delivering written notice to the Distributor within 90 days of the consummation of the TWC change of control event, which notice shall specify a termination date (the “TWC Change of Control Termination Date”).

 

If TWC terminates the Output Term pursuant to this provision, then TWC will pay to the Distributor the net present value of the Termination Penalty (such net present value to be calculated by allocating the Termination Penalty in equal monthly installments over the number of whole months remaining between the TWC Change of Control Termination Date and the expiration of the Output Term, and then discounting such installments back to the TWC Change of Control Termination Date using a discount rate equal to TWC’s weighted average cost of capital at the time of the TWC Change of Control Termination Date). The term “Termination Penalty” means the product of (i) the average annual Net Receipts (such average to be calculated after adjustment for actual returns and by reference to all calendar years ending before the TWC Change of Control Termination Date), multiplied by (ii) .025, multiplied by (iii) .7, multiplied by (iv) a fraction, the numerator of which shall be the number of whole months remaining between the TWC Change of Control Termination Date and the expiration of the Output Term and the denominator of which shall be 24. In addition, TWC will have the right (but not the obligation) to exercise its buy-back rights pursuant to and in accordance with the provisions described below under “Buy-Back Right”.

 

From and after the early termination of the term of the Distribution Agreement as described above, all rights granted to the Distributor under the Distribution Agreement will revert to TWC and neither the Distributor nor its successors or permitted assigns will have any right whatsoever after the termination date to manufacture, sell, ship, market, distribute or otherwise use any of the Videograms embodying the Covered Product or the related proprietary materials.

 

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Buy-Back Right

 

At any time after the expiration or earlier termination of the Output Term, upon 30 days written notice to the Distributor, TWC will have the right to buy back from the Distributor all distribution and other rights granted under the Distribution Agreement with respect to any or all Covered Products. The amount payable by TWC for such rights will be an amount equal to 2.5% of the Projected Net Receipts for such Covered Product. “Projected Net Receipts” will equal the net present value of the future Net Receipts (after the deduction of the higher of (i) a 17 1/2% reserve for returns (as such percentage may be adjusted as described above) or (ii) the actual projected percentage of returns) projected by the Distributor (“Distributor Projections”) with respect to the applicable Covered Product. The discount rate used to calculate the Projected Net Receipts will be the Distributor’s weighted average cost of capital at the time of the buy-back.

 

If the parties cannot agree as to the Projected Net Receipts, each party will hire its own independent third-party appraiser to provide an appraisal with respect to the Projected Net Receipts. If the higher of the two appraisals is within 10% of the lower appraisal, the average of the two appraisals will be the amount used as the Projected Net Receipts to determine the buy-back purchase price. If the higher of the two appraisals is not within 10% of the lower appraisal, then the two appraisers will mutually appoint a third independent appraiser to provide a third appraisal (the “Final Appraisal”) with respect to the Projected Net Receipts. The Final Appraisal will be averaged with the one of two prior appraisals which is closest to the Final Appraisal and such averaged amount will be used as the Projected Net Receipts to determine the buyback purchase price.

 

If TWC exercises its buy-back rights, then the early termination provisions described above will apply, except that TWC will be obligated to purchase from the Distributor any non-obsolete inventory of Videograms not in excess of the manufacturing levels previously approved by TWC.

 

Most Favored Nations

 

If at any time following the effective date of the Distribution Agreement the Distributor enters into a home video distribution agreement with a third party which grants more favorable terms regarding the net cost of distribution (taking into account distribution fee, fee structure, advances, etc.) and/or grants more favorable terms with respect to operating controls and/or approvals, the Distributor agrees to grant to TWC the benefit of the more favorable terms.

 

The Distributor will have its third-party agreements audited by the Distributor’s outside auditor at the end of each year in order to verify compliance with this provision, and the auditor will issue a statement to TWC that either Distributor is in compliance (i.e., no more favorable third-party agreements) or is not, in which case the auditor will provide details of the applicable more favorable provisions of third-party agreements that must be granted to TWC, as well as a calculation of any amounts that may be due to TWC under such more favorable provisions; but the auditor need not disclose to TWC any of Distributor’s confidential information.

 

5. Additional Agreements Related To The Transaction

 

Voting Agreements

 

In connection with the execution of the Contribution Agreement, TWC received executed Voting Agreements and proxies from certain stockholders of Genius Products pursuant to which these stockholders agreed to vote their shares in favor of the transactions contemplated by the Contribution Agreement, certain changes to our Certificate of Incorporation to accommodate these transactions and an increase of six million shares in our 2004 Stock Incentive Plan. TWC received executed Voting Agreements and proxies from holders of approximately 32.6% of our outstanding shares.

 

In connection with the Voting Agreements, each of the relevant stockholders also delivered to TWC an irrevocable proxy coupled with an interest and appointed Lawrence Madden and Irwin Reiter, executive officers

 

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of TWC, as attorneys-in-fact to vote all the shares beneficially owned by such stockholders in accordance with the provisions of the Voting Agreements. Each such stockholder also agreed not to transfer any of his or her respective shares in Genius Products except (i) to a relative, (ii) where required by law or (iii) the sale by such stockholder of up to 25% of his or her respective shares subject to the Voting Agreement, provided that such stockholder must obtain from the transferee an agreement to be bound by the applicable Voting Agreement, other than with respect to sales of shares conducted on our primary public trading market or exchange.

 

Services Agreement

 

At the Closing, Genius Products and the Distributor will enter into a Services Agreement pursuant to which the Distributor will agree to render certain services to us or on our behalf. The Distributor will provide to Genius Products such services as shall be reasonably necessary or appropriate to enable us to:

 

    serve as the managing member of the Distributor and perform our obligations as managing member under and in the manner contemplated in the Contribution Agreement, LLC Agreement and Registration Rights Agreement;

 

    continue as a public reporting company following the closing; and

 

    comply with all other legal, regulatory and contractual obligations and requirements applicable to us in connection with the foregoing.

 

The Services Agreement provides examples of services that will be performed by the Distributor pursuant to the Services Agreement. In addition, to the extent that any of the services are not provided to us as contemplated in the Services Agreement, we will have the right to obtain any of the services ourselves and obtain reimbursement from the Distributor for the reasonable costs thereof.

 

Registration Rights Agreement

 

At the Closing, Genius Products and TWC will also enter into a Registration Rights Agreement pursuant to which we will agree to register for resale at our own expense the shares of our common stock issuable upon redemption of the TWC parties’ Class W Units in the Distributor.

 

Under the Registration Rights Agreement, we will grant to the holders of such shares:

 

    five demand registration rights;

 

    unlimited “piggyback” registration rights (i.e., the right to have shares registered if we decide to file a registration statement for other shares, subject to customary limitations); and

 

    unlimited Form S-3 registration rights.

 

The Registration Rights Agreement also provides that, without the prior written consent of the holders of at least a majority of the registrable securities then outstanding, we are not permitted to enter into any agreement with any holder or prospective holder of any of our securities that would grant to such holder or prospective holder registration rights superior to or on parity with those granted under the Registration Rights Agreement.

 

The registration rights under the Registration Rights Agreement terminate for each holder after such time at which all registrable securities held by such holder can be sold without restriction (including volume and manner-of-sale restrictions) on a single day without registration in compliance with Rule 144 under the Securities Act and such holder has received, upon such holder’s request, an opinion of counsel to Genius Products to that effect.

 

Under the Registration Rights Agreement, subject to certain limitations, we also grant to the TWC (on behalf of itself and the other holders of registrable securities) a right of first offer with respect to future sales by

 

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Genius Products or any of its subsidiaries of any shares of, or securities convertible into or exercisable for any shares of, any class of our or any of our subsidiaries’ capital stock to any person or entity.

 

Required Vote

 

To be approved, Proposal 1 must receive a “For” vote from the majority of our outstanding shares of common stock, voting either in person or by proxy.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” PROPOSAL 1.

 

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PROPOSAL 2, INCLUDING SUB-PROPOSALS 2A – 2F

APPROVAL OF THE AMENDMENT AND RESTATEMENT

OF OUR CERTIFICATE OF INCORPORATION

 

In connection with the Transaction, we agreed with TWC that, subject to the approval of our stockholders, we would amend and restate our certificate of incorporation to implement a number of changes, as described below. At the special meeting you will be asked to consider and vote to approve our amended and restated certificate of incorporation.

 

In order to comply with applicable rules of the SEC relating to proxy statements, we are also presenting Sub-Proposals 2A through 2F to our stockholders as separate proposals for approval. As a matter of state law, only the approval of the amended and restated certificate of incorporation, as a whole, is required. However, because we are required to present the sub-proposals separately and because all of the revisions to our existing certificate of incorporation that are reflected in the amended and restated certificate of incorporation are considered by Genius Products and TWC to be integral parts of the Transaction, the approval of Proposal 2 and each of the Sub-Proposals 2A through 2F is a condition to completion of the Transaction. Accordingly, a vote against Proposal 2 or any of the related Sub-Proposals 2A through 2F is effectively a vote against the Transaction.

 

SUB-PROPOSAL 2A—A proposal to approve a provision restricting the acts or activities in which the Company may engage to certain limitations arising under the Transaction documents.

 

Article III of our proposed amended and restated certificate of incorporation attached as Appendix E includes provisions that restrict the acts or activities in which the Company may engage to certain limitations arising under the Transaction documents. In particular, Article III states that the Company’s purpose is to engage in any lawful act or activity for which corporations may be organized under Delaware law, subject to:

 

    the limitation on business and activities of the Company contained in the LLC Agreement, as described above on page 68 under the caption, “Proposal 1—The LLC Agreement—Devotion of Time; Company Opportunities; Other Activities”; and

 

    receipt of prior approval for certain activities of the Company from the holders of Series W Preferred Stock to the extent required under the amended and restated certificate of incorporation, as described above on page 51 under the caption, “Proposal 1—Series W Preferred Stock to be Issued to TWC”.

 

SUB-PROPOSAL 2B—A proposal to approve the increase of the number of authorized shares of common stock from 100,000,000 to 300,000,000 shares and the increase of the number of authorized shares of all classes of stock from 110,000,000 to 310,000,000 shares.

 

Article IV, Section (A) of our proposed amended and restated certificate of incorporation attached as Appendix E includes provisions that increase the authorized number of shares of our common stock from 100,000,000 shares to 300,000,000 and increase the number of authorized shares of all classes of stock from 110,000,000 to 310,000,000.

 

Our certificate of incorporation currently authorizes us to issue 100,000,000 shares of common stock, $0.0001 par value per share. The certificate of incorporation also authorizes us to issue 10,000,000 shares of preferred stock, but the proposed amended and restated certificate of incorporation would not affect this authorization. The primary reason for the proposed increase in our authorized shares is to accommodate the shares issuable to the TWC parties should they exercise their right to require Genius Products to redeem all or a portion of its Class W Units in the Distributor for shares of our common stock. Such right is discussed further above under “Proposal 1—LLC Agreement—Redemption Rights of Holder of Class W Units.”

 

As of the record date, 60,438,154 shares of our common stock were outstanding, 20,126,268 shares of common stock were reserved for issuance upon the exercise of outstanding stock options or other equity

 

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compensation awards (including options issued under our 2004 Stock Incentive Plan) and 12,866,907 shares of common stock were reserved for issuance upon the exercise of outstanding warrants. In addition, if TWC exercises its right in full to require Genius Products to redeem all of its Class W Units in the Distributor for shares of our common stock as of the closing date, unless we pay cash in connection with this redemption we would be required to issue to TWC 141,022,359 shares of our common stock, subject to adjustment as provided in the LLC Agreement, based upon the number of shares of our common stock outstanding as of the Record Date.

 

The primary reason for the proposed increase in our authorized shares is to accommodate the shares issuable to the TWC parties should they exercise their right to require Genius Products to redeem all or a portion of their Class W Units in the Distributor for shares of our common stock. In addition, our board of directors believes that it is desirable to increase the number of authorized shares of common stock to ensure that there is a sufficient number available to provide our company with adequate flexibility to issue common stock for other corporate purposes that may be identified in the future. The additional shares could be used, among other things, for the declaration of stock splits or stock dividends, for acquisitions of other companies, for public or private financings to raise additional capital, for the issuance of stock under options granted or to be granted under various stock incentive plans or other benefit plans for our employees and non-employee directors, and the issuance of stock under warrants granted or to be granted in the future. There are currently no commitments or agreements for the issuance of additional shares of common stock, except as described in this Proxy Statement.

 

If the proposed amended and restated certificate of incorporation is adopted, the newly authorized shares would be unreserved and available for issuance without further stockholder action, except as required by applicable laws and regulations. All of the additional shares resulting from the proposed increase in our authorized common stock would be of the same class if and when they are issued, and holders would have the same rights and privileges as holders of shares of common stock presently issued and outstanding, including the same dividend, voting and liquidation rights.

 

The holders of our common stock do not have preemptive rights to subscribe to additional securities that may be issued by our company, which means that current stockholders do not have a prior right to purchase any additional shares in connection with a new issuance of capital stock of our company in order to maintain their proportionate ownership of our common stock. Accordingly, if our board of directors elects to issue additional shares of common stock, such issuance could have a dilutive effect on the earnings per share, voting power and equity ownership of current stockholders.

 

The proposed increase in the authorized number of shares of common stock could have an anti-takeover effect. The availability for issuance of additional shares of common stock could discourage, or make more difficult, efforts to obtain control of our company because such shares could be issued to dilute the voting power of a person seeking control. For example, it may be possible for our board of directors to delay or impede a merger, tender offer, or proxy contest that it determines is not in the best interests of our company and stockholders by causing such additional authorized shares to be issued to holders who might side with the board in opposing such a takeover or change in control. By potentially discouraging unsolicited takeover attempts, the proposed amended and restated certificate of incorporation may limit the opportunity for our stockholders to dispose of their shares at the higher price generally available in takeover attempts or under a merger proposal and may also have the effect of permitting our current management, including the current board of directors, to retain its position and resist changes that stockholders may wish to make if they are dissatisfied with the conduct of our business.

 

It should be noted that the issuance of additional shares of common stock could have a detrimental effect upon existing holders of our common stock since such issuance may, among other things, have a dilutive effect on the earnings per share of common stock and the voting rights of holders of the common stock. Although authorization of additional shares of common stock is recommended by the board of directors for the reasons stated herein, and not because of any possible anti-takeover effect, such additional authorization of shares of common stock could be used by incumbent management to make more difficult, and thereby discourage, an attempt to acquire control of the Company, even though our stockholders may deem such an acquisition

 

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desirable. For example, the shares could be privately placed with purchasers who might support the board of directors in opposing a hostile takeover bid. The issuance of new shares could also be used to dilute the stock ownership and voting power of a third party seeking to remove the directors, replace incumbent directors, accomplish certain business combinations or alter, amend or repeal portions of our certificate of incorporation.

 

SUB-PROPOSAL 2C—A proposal to approve a provision authorizing Series W Preferred Stock and establishing the rights, preferences and powers, and the qualifications, limitations and restrictions, of Series W Preferred Stock.

 

Article IV, Section (B) of our proposed amended and restated certificate of incorporation attached hereto as Appendix E includes provisions that authorize Series W Preferred Stock and establish the rights, preference and powers, and the qualifications, limitations and restrictions, of Series W Preferred Stock.

 

As explained above in Proposal 1, as a condition to the closing of the Transaction, we are required to issue to TWC 100 shares of Series W Preferred Stock. The terms of the Series W Preferred Stock include the rights, preferences and powers described above in the section entitled, “Proposal 1—Series W Preferred Stock to be Issued to TWC.”

 

Under our existing certificate of incorporation, our board of directors is authorized to create or provide for any series of Preferred Stock, and to fix the designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof. Accordingly, even if our stockholders do not approve this Proposal 3, our board of directors would be permitted to create the Series W Preferred Stock and determine the rights, preferences and powers of the Series W Preferred Stock.

 

Nevertheless, we wish to solicit the approval of our stockholders with respect to the authorization of the Series W Preferred Stock because the shares of Series W Preferred Stock that we plan to issue to TWC in connection with the Transaction will give TWC significant rights, preferences and powers not held by our other stockholders, as described above in the section entitled, “Proposal 1—Series W Preferred Stock to be Issued to TWC.”

 

SUB-PROPOSAL 2D—A proposal to modify the rights, preferences and powers, and the qualifications, limitations and restrictions, of Common Stock.

 

Article IV(C) of our proposed amended and restated certificate of incorporation attached hereto as Appendix E includes provisions that modify the rights, preferences and powers, and the qualifications, limitations and restrictions, of our common stock to include the right to elect two “At-Large Directors” and certain “Special Voting Provisions,” consisting of matters which may be approved by the At-Large Directors or by the vote of holders of a majority of our outstanding common stock, without giving effect to any of the voting rights granted to holders of shares Series W Preferred Stock.

 

Article IV(C) provides that, so long as the TWC parties and their permitted transferees collectively beneficially own or have the right to beneficially own upon conversion, exchange, or redemption of Class W Units pursuant to the LLC Agreement, at least the Threshold Amount (as defined above on page 51), the holders of common stock (voting separately as a single class) will be entitled to elect two directors of Genius Products, referred to as the “At-Large Directors,” and to remove, without cause, from office any At-Large Director and, in the absence of any At-Large Directors, to fill any vacancy caused by the resignation, death or removal of any At-Large Director. Vacancies on the board resulting from the death, resignation or removal of an At-Large Director may be filled by the remaining At-Large Director, to hold office until a qualified successor is elected by the holders of common stock at the next regular or special meeting of the stockholders.

 

Article IV(C) also provides that, so long as the TWC parties and their permitted transferees collectively beneficially own or have the right to beneficially own upon conversion, exchange, or redemption of Class W Units pursuant to the LLC Agreement, at least the Threshold Amount, the following matters may be approved by

 

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the vote or consent of a committee of the board of directors composed only of At-Large Directors, or the holders of at least a majority of the outstanding shares of Common Stock, without giving effect to any of the voting rights granted to holders of shares Series W Preferred Stock:

 

    defending, settling, fulfilling or otherwise managing any of our liabilities, duties or obligations arising in, under or from any of the Excluded Liabilities (defined above on page 55 under “—Excluded Liabilities” and in the Contribution Agreement);

 

    prosecuting and managing our interest, rights or remedies arising in, under or from any of the Excluded Assets (defined above on page 54 under “—Assets” and in the Contribution Agreement);

 

    declaring or making dividends or distributions payable solely to holders of our common stock;

 

    making payments to the holders of the Contingent Dividend Right under the terms thereof; and

 

    undertaking a Genius Capital Transaction (defined above on page 72 under “LLC Agreement—Additional Capital Contributions” and in the LLC Agreement); and

 

    solely to fund our activities not provided for or reimbursed by the Distributor, provided that such activities are permitted to be taken by us under the LLC Agreement following the closing of the Transaction.

 

SUB-PROPOSAL 2E—A proposal to approve a provision by which the Company elects out of the Delaware law restricting business combinations with interested stockholders.

 

Article IX of our proposed amended and restated certificate of incorporation attached hereto as Appendix E includes provisions that provide that, to the fullest extent permitted by law, the Company elects not to be governed by Section 203 of the Delaware General Corporation Law.

 

Section 203 restricts our ability to engage, directly or indirectly, in a business combination transaction with an “interested stockholder”. An interested stockholder is one that holds 15% or more of our voting stock. Specifically, under Section 203, we cannot engage in a business combination with any interested stockholder for three years after the interested stockholder became an interested stockholder, unless:

 

    Prior to such time, the board of directors approved the business combination or the transaction that resulted in the interested stockholder becoming an interested stockholder;

 

    Upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our outstanding voting stock, excluding shares owned by our directors who are also officers and shares held in employee stock plans in which participants do not have the confidential right to determine whether their plan shares will be tendered in a tender or exchange offer; or

 

    The board approves the business combination, and stockholders holding at least two-thirds of our voting stock authorize it at an annual or special meeting.

 

Section 203 permits corporations to elect not to be governed by Section 203, provided that the stockholders approve such election.

 

If Section 203 does not govern us, we may more easily enter into business combinations with persons or entities that hold substantial percentages of our capital stock, including TWC or its affiliates.

 

SUB-PROPOSAL 2F—A proposal to approve a provision by which the Company renounces the Company’s interest or expectancy in, or in being offered the opportunity to participate in, corporate opportunities engaged in by TWC (including its affiliates and related persons).

 

Article V of our proposed amended and restated certificate of incorporation attached hereto as Appendix E includes provisions by which the Company renounces the Company’s interest or expectancy in, or in being offered the opportunity to participate in, corporate opportunities engaged in by TWC (including its affiliates and related persons).

 

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We believe that the waiver of fiduciary duties reflected in this Sub-Proposal 2F is appropriate and reasonable, because otherwise our issuance of Series W Preferred Stock to TWC in connection with the Transaction and the appointment of directors to our board of directors by TWC may restrict the activities of TWC and/or these directors, and expose them to liability for their other activities after the consummation of the Transaction. It is not our intent to cause TWC or its director nominees to be subject to liability for activities conducted by TWC that are competitive with Genius Products following the Transaction. Accordingly, our board of directors believes that it is in the best interests of Genius Products and its stockholders to waive such fiduciary duties in order to facilitate the consummation of the Transaction, in recognition of the fact that TWC currently engages in, and may in the future engage in, the same or similar lines of business and have interests in the same areas or types of corporate opportunities, and in recognition of the benefits to be derived by Genius Products and the Distributor through their respective continued contractual, corporate and business relations with TWC.

 

The proposed amendment to our certificate of incorporation reflected in this Sub-Proposal 2F provides, among other things, that:

 

    Genius Products renounces any interest or expectancy in, or in being offered the opportunity to participate in, any corporate opportunity which may be engaged in by Authorized Persons, their affiliates or their respective directors, officers and employees or to which such persons may have access to the fullest extent permitted by the Delaware General Corporation Law.

 

    “Authorized Person” is defined to include TWC, any successor by operation of law (including by merger) of an Authorized Person, any person or entity which acquires all or substantially all of the assets of an Authorized Person in a single transaction or series of related transactions and any subsidiary of any person or entity describe above.

 

    To the fullest extent permitted by applicable law, no director, officer, employee, or stockholder of Genius Products, in such capacity, that is an Authorized Person, an affiliate of an Authorized Person or any of their respective directors, officers, or employees, acting in his or her capacity as such, will have any obligation to Genius Products to refrain from competing with Genius Products, making investments in competing businesses or otherwise engaging in any commercial activity that competes with Genius Products.

 

    To the fullest extent permitted by applicable law, Genius Products will not have any right, interest or expectancy with respect to any such particular investments or activities undertaken by any Authorized Person, any affiliate of an Authorized Person or any of their respective directors, officers or employees and such investments or activities will not be deemed wrongful or improper, and no such person will be obligated to communicate, offer or present any potential transaction, matter or opportunity to Genius Products, even if such potential transaction, matter or opportunity is of a character that, if presented to Genius Products, could be taken by Genius Products.

 

    If an Authorized Person, any affiliate of an Authorized Person or any of their respective directors, officers or employees acquires knowledge of a potential transaction or matter which may be a corporate opportunity for both the Authorized Person and Genius Products, the Authorized Person, affiliate of an Authorized Person and their respective directors, officers and employees, will have no duty to communicate or offer such corporate opportunity to Genius Products and will not be liable to Genius Products or its stockholders for breach of any fiduciary duty by reason of the fact that an Authorized Person or any director, officer, or employee of an Authorized Person, acting in his or her capacity as such, pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person, or does not communicate information regarding such corporate opportunity to Genius Products, and Genius Products renounces any interest or expectancy in such corporate opportunity.

 

    Nothing in the amendment will limit or otherwise prejudice any contractual rights Genius Products may have or obtain against any Authorized Person, any affiliate of an Authorized Person or any of their respective directors, officers, or employees.

 

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    Notwithstanding anything contained in our certificate of incorporation to the contrary, in addition to any other vote of stockholders required by law or our certificate of incorporation, the affirmative vote of the holders of at least 80 percent of the outstanding shares of the Series W Preferred Stock, voting together as a single class, will be required to amend, repeal or adopt any provision inconsistent with the foregoing.

 

REQUIRED VOTE

 

To be approved, Proposal 2, including Sub-Proposals 2A – 2F, must receive a “For” vote from the majority of our outstanding shares of common stock, voting either in person or by proxy. The approval of Proposal 2, including Sub-Proposals 2A – 2F, is a condition to completion of the Transaction, and thus a vote against Proposal 2, or any of Sub-Proposals 2A through 2F, effectively will be a vote against the Transaction.