Think Entertainment Shareholder Action Group - Latest Update From Mark Hardy

To the Shareholders:

My apologies for the length and complexity of this update, but there is little choice if I am to keep you as informed as possible. Please read it and email me with any queries – I will not be able to respond to lengthy telephone enquiries.

For reasons that will become apparent as you read this update, I am not yet in a position to convene the AGM.

The last date by which the Companies Act requires the AGM to be held by 5th November 2005, and I fully expect to convene it before that date so long as adequate cash resources exist to meet the substantial costs involved of notifying more than 35,000 shareholders of record – such resources are not available to me at the moment - and before anybody asks my own fees remain unpaid as well.

On 9th June I attended the meeting of creditors convened by the liquidators of NewScreen Media Group plc., and they were confirmed in office. The meeting also passed a resolution to appoint a formal creditors committee under the provisions of the Insolvency Act.

The meeting was triggered by my formal notification to the liquidators that Think no longer considered itself bound by the terms of the indemnities given to NSMG in relation to the loan note holders, and also because Think had not, and would no longer, pay the other creditors it had assumed at the time of the reorganisation – and is claiming for repayment of monies it has already paid out to those creditors and note holders.

The principal ground for my decision to repudiate the indemnity was that, in my judgment and based upon evidence I have discovered since my appointment, but which was clearly known to and in the possession of the directors and officers at the time, Think had been induced into entering into the indemnity agreement by prior false utterances, negligence, and breaches of fiduciary duty by the then directors of both companies.

The directors vigorously deny any such impropriety, and have advised the liquidators that they relied upon the advice of professional advisers during the preparation of the declaration of solvency upon which you as shareholders relied. I have seen correspondence from the professional advisers in the months leading up to both the declaration and the FourPoint transaction, that gives me grave cause for concern as to the directors bone fides in carrying out their then continuing fiduciary duty. However, it now falls to the liquidators to investigate the matter, and they have statutory powers to compel attendance and the giving of evidence under oath in the preparation of their report to the DTI as to the conduct of the directors. I will be giving them any and all assistance as they may require.

Think has also made a claim as a creditor in the NSMG liquidation representing the shortfall in the value of the assets declared by the directors and for the costs of the transaction that should never have occurred in the first place because, in my judgment, the overvaluing and realisability of the assets within the terms of the statutory declaration was known to the directors at the time, but was not disclosed to you as shareholders when you were asked to vote on the proposal.

The duty of the liquidators is now to enquire into the affairs of the company, to gather in the assets, to distribute monies firstly to creditors and any surplus thereafter to the shareholders. I believe that the directors are personally liable for the consequences of what I say is a clearly and knowingly false and misleading declaration of solvency, and eventually there will not only be payment in full to all the loan note holders, but there will also be substantial sums paid to Think as both a creditor and sole shareholder of NSMG.

The liquidators are also obliged by law to report to the Department of Trade and Industry on the conduct of the directors. They also have the power to revisit the administration process and acts leading up to that event back to the very incorporation of Just Group if necessary.

The propriety of the expenditure of the £5,800,000 new share money will also fall to be investigated by the liquidators if they deem it appropriate, and they have authority to demand repayment of any monies that they may decide were improperly applied. I will however, and as promised, be including a detailed analysis of the monies spent with the notice convening the AGM, and you will be able to make representations to the liquidators as to areas you believe they should investigate.

So what does all this mean in simple English?

Subject to the liquidators determination that I have proper grounds for repudiation of the indemnities:

1. Think will have eliminated the majority of its debts, other than current payables.
2. Think’s remaining assets are:
a. The FourPoint library
b. 4 subsidiary companies:
i. Think Entertainment Ltd. – Merlin and Suzy’s Zoo
ii. NSMG Licensing: - B.U.M IP and tax losses
iii. NSMG Entertainment: - Jellies IP and tax losses
iv. Lime TV:- Worthless
c. Claims against the directors and professional advisers for negligence in the Fourpoint transaction. Ordinary Damages in excess of £1million, and exemplary damages against the professional advisers that will fall to be assessed by the Court.
d. Claims against Fourpoint for matters arising in the business asset acquisition agreement. This is unlikely to realise cash.

If the liquidators contest my repudiation of the indemnities, and were to assert claims against Think, then Think will immediately apply to the High Court to have any such claim adjudicated at an early hearing. If Think were not to prevail then it would almost certainly have to be placed in compulsory liquidation on the statutory grounds of “Public Interest” if nothing else. Members’ voluntary liquidation is not an option, not least as nobody in their right mind would sign a declaration of solvency, and it would be in everybody’s best interest to have a compulsory liquidation where another liquidator has further statutory powers of compulsion and investigation.

The dichotomy is now to evaluate whether Think’s asset base is capable of forming the basis of any ongoing business that could continue to trade, or whether it should voluntarily cease trading and ask the High Court to wind it up anyway.

At this stage I should inform you that last week I was approached by a trade purchaser asking to carry out due diligence on the IP rights –other than the Fourpoint library – with a view to making an offer to acquire the rights in return for a share of future income, if any, and a percentage (to be agreed) of any collectible debts relating to prior invoices. Many of you are aware that the many millions of pounds of uncollected invoiced debts on the books of the subsidiaries prior to administration are properly regarded as largely uncollectible, and have knowingly been so for many years.

I believe the trade purchaser is genuine in their expression of interest, and I have reviewed their reputation and credibility to perform if we move to a deal, and it is beyond doubt. Should this proposal come to a conditional contract being agreed, then, whether or not required by statute or best practice, I will seek prior shareholder approval to the transaction at a General Meeting.

It has been made clear to me that the offer will not involve significant cash on signature, but will be cash flow against future sales and collections if and when made.

I have also asked professional advisers to solicit offers for the two tax loss subsidiaries, and if such a buyer could be found, this may influence the attractiveness or structure of any trade purchaser transaction.

I also continue to explore options on the Suzy’s Zoo and Merlin matters, but am constrained by lack of cash and production resources as well as others understandable reluctance to deal with Think.

So far as the FourPoint library is concerned, it continues to disappoint. Contrary to earlier expectations and hopes, it is still not producing any cash flow whatsoever at the present time. I am hopeful that this will be reversed and I am insisting that estimated sales volumes be included in the two distribution contracts that I am presently renegotiating.

One option that I am exploring at the moment is to sell the FourPoint library to a special purpose vehicle that would form the core of a much larger “library” that might just prove to be capable of being profitably run.

I have met, and continue to meet, with the principals of FourPoint and have reached a tentative deal to resolve disputes, but it remains to be finalised.

If all these matters were to conclude, then Think would end up as a dormant company with some cash in the bank and some future cash flow streams. In my judgment even if this happy state were to occur, the costs of running and maintaining the very large public company shareholder base would not be justifiable, so something has to be proposed to eliminate the majority of your holdings – a take-over or liquidation are the only options that would satisfy the need to act in the interests of all, but a take over would be a brave and costly act.

In my judgment, there is no possibility that the shares could ever be listed for trading on any recognised exchange and at least 95% of the shareholders will never receive any meaningful value as the vast number of shares in issue are unlikely to be worth more than small fractions of a penny per share.

So as shareholders you have some interesting decisions to take, and you should fully recognise that it is only the repudiation of the debt indemnity as a result of the improper acts of your then directors, that has left you with any value whatsoever. It is fair to say that whatever the improper acts of the FourPoint principals, they have lost more than the original shareholders of JUST/NSMG who took on shares in Think that were of negative value at the outset. FourPoint started with 100% of the library, and now have only a 25% interest in it, and have given you 75%.

Given that nobody has put their name forward to be a director of Think, and the existing directors will resign at the AGM at the conclusion of which my power of attorney will also lapse, the best solution is probably to ask you all to exchange your shares for an interest in a trust or special purpose vehicle. This would collect any cash and distribute it to you or a charity of your choice after a fixed period of, say, 10 years, but in the meantime it would not have the excessive costs of maintaining the shareholder administration costs (£100,000 per annum is the minimum) and would avoid the costs of liquidation.

Hindsight has shown that the rescue of Just Group was the most misguided way to approach salvaging value, if any, from Butt Ugly Martians etc. As somebody said to me the other day, “this is the company that just will not die” – well perhaps it is time to do so, and in the absence of viable proposals for salvage and going forward, it will be for you to decide at the AGM when I will table appropriate motions for you to vote on.

Mark Hardy
For and on behalf of Think Entertainment plc