Santa Monica Pictures, LLC, Perry Lerner, Tax Matters Partner - Page 271

                                       - 38 -                                         
               not be sufficient to offset the entire gain and some of                
               Group’s NOLs are subject to limitations which prevent                  
               their use to offset MGM’s income on the deemed asset                   
               sale).  After waiting for at least one year, Investor                  
               would buy CDR’s other 49.5% interest.  Again the LLC                   
               would not make an election under section 754 of the                    
               Code to adjust the basis of its assets.  As a result of                
               these transactions, Investor would own 99% of the LLC,                 
               and Group and Holdings could be liquidated into the                    
               LLC.  The capital loss on the liquidation (which would                 
               be approximately $1.4 billion) would be allocated to                   
               Investor.                                                              
               In June 1996, Houlihan Lokey prepared a “Pro-Forma Library             
          Valuation” as of August 31, 1996, valuing New MGM’s film library            
          at $2.6 billion, an amount greatly in excess of MGM’s capital and           
          debt.23  Mr. Lerner testified that it was a valuation which “we             
          thought was fairly good, a fairly good guess at what the assets             
          were worth”, but that Safari wanted to prepare its bid below this           
          estimate in hopes of getting a discount.  Accordingly, Safari               
          submitted a $1.2 billion bid, which it believed was the high bid.           
               D.  Kerkorian Moves in and Buys MGM                                    
               Safari was one of a number of bidders for New MGM.  New                
          MGM’s management was interested in finding parties who would fund           
          the acquisition of New MGM and retain existing management.  New             
          MGM’s management met with Messrs. Lerner and Ackerman to discuss            
          the possibility of doing a transaction with the management group.           
          New MGM’s management, however, decided against it; they lacked              

               23 Mr. Lerner testified that this valuation did not take               
          into account corporate taxes, overhead, and remake rights of                
          several important pictures such as the “James Bond”, “Pink                  
          Panther”, and “Rocky” movies.                                               





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