Santa Monica Pictures, LLC, Perry Lerner, Tax Matters Partner - Page 85

                                        -168-                                         
          redemption price equal to the sum of the preferred capital                  
          accounts for all holders of preferred interests.120  In explaining          
          the conversion feature, Mr. Lerner testified:  “Credit Lyonnais             
          was very concerned that the company would become increasingly               
          valuable over the period of time that we were adding film                   
          libraries to it, and they wanted the opportunity to convert from            
          a preferred stock position, which had fixed value plus return, to           
          a full equity position”.  He added, “They were willing to let’s             
          say remain in a preferred position for awhile, but ultimately               
          they wanted the option to get more of the animal, which is to say           
          increase their interests to a level where they could participate            
          in what we thought would be the equity build up of the                      
          investment.”                                                                
               We cannot agree that the conversion right denotes any long-            
          term commitment on the part of Generale Bank and CLIS, or that it           
          otherwise lent economic substance to the banks’ purported SMP               
          interests.  The conversion feature appears in the initial draft             
          term sheet that Shearman & Sterling prepared at the request of              
          Mr. Lerner.  This item does not appear to have been an item that            
          was specifically negotiated by CDR or Mr. Geary or one that they            
          really cared about.  Indeed, Mr. Geary testified that although              
          the conversion feature was always part of the deal between                  

               120 Amendment No. 1 credited $3,125,000 to Generale Bank’s             
          preferred capital account and $1,875,000 to CLIS’s preferred                
          capital account.                                                            





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