NEWSLETTER

 

March 17, 2000

 

Dear Intertainment Shareholder,

We would like to use the opportunity today to provide you with information on the future

prospects and the competitive advantages of Intertainment AG:

  1. The cooperation with Franchise Pictures as a deliverer of films as well as our distribution partners, the major studios Twentieth Century Fox and Warner Brothers
  2. The significant revenue and income jump in profit for the year 2000
  3. The advantage of early finalization of our cooperation agreements
  4. The quality of films acquired by Intertainment

 

 

  1. The cooperation with Franchise Pictures as a deliverer of films as well as our distribution partners, the Major studios Twentieth Century Fox and Warner Brothers
  2. To explain the structure of our cooperative agreements, we need to clarify how the film business and the position of producers has changed in the last two years.

    The suitable parallel is a review of the beginning of film production in Hollywood, a time when the big film stars worked as completely regular employees at the Major studios.

    The payment to the stars was not dependent on the success of their films, rather as with employees in other branches, by the contractually agreed salary level. When a film studio did not require the services of a star, they would allow them to work "on loan" at another studio. This was the status of the studio system in "old Hollywood".

    The breakdown of this system occurred when the stars decided to become unattached and be represented by independent agents, which allowed them to negotiate their fee on each film.

    Consequently, with every successful film the stars fee would rise for the next one.

    The producers who produced at the at the behest of the major studios were never in the situation to copy what the stars did, because they never had the financial ability to independently finance budgets of $50 million or more without the financing of studios.

    The producers stayed attached to the studios, although they have the contacts with the biggest stars (Bruce Willis, Wesley Snipes, Sylvester Stallone, Cameron Diaz, Jack Nicholson etc.) produced the films and because of that brought a large part of the actual work.

    The Studio determined the projects and was a quasi bank providing the financing.

    For over two years now the power base has changed between the studios and their employed producers.

    Now the best producers, themselves famous in their area, are able to put together money and financing outside the studio system. The financing possibilities present themselves from film funds, public companies, convertible bonds and other capital market instruments.

    Now producers can produce a film without dependence on a studio and can leave behind their status as employees the way the big films stars of the past did.

    They became unattached producers.

    The producers advantage is that they now own the copyright to their work, can build up a library of their life’s work, and can profit from each films income instead of being employees subject to salary. The most successful ones are unattached, therefore the studios have lost the basis of the highest valued films.

    This is the reason why we did the output deal with Franchise Pictures, with whom we closed the already known deal for a minimum of 60 films, so called A films (with stars and higher quality).

    Franchise Pictures is more than just a producer - Franchise is a holding structure under which the founder Elie Samaha takes in the best producers that have left the studios.

    What Elie Samaha realized early is that these producers who were attached to the studios and could now produce independent high value films, were not familiar with the structure of international film financing.

    In their capacity as producers they are all very good, but because of the earlier attachment to the studios, they had never had to concern themselves with the acquisition of production financing.

    Because of that Elie Samaha had the thought to put together a consortium of partners who could finance the film projects and influence the production. The partners are:

     

    Territory

    Franchise Pictures North America

    Intertainment Europe

    Gaga Asia

    Village Roadshow Australia/NewZealand

    And further partners to come in Latin America and the Middle East.

    For their financial involvement the partners receive the exploitation rights (cinema, video, Pay TV, Free TV, Music Publishing, Merchandising, hotel, airline...) for their respective territories. Intertainment additionally holds the Internet rights.

    In the case of Intertainment this includes Europe, Eastern Europe, China and Russia.

    Franchise is a roof under which one can find the best producers who can find financing structures in place. The reason to move under this roof, in contrast to the studio system, is the ability of the producers to hold the copyright of the films and to participate in successful films financially.

    The producers bring not only their track record and expertise along, they also bring their personal connections to film stars and directors. With all the producers who leave the Major Studios, the number of top-quality films held by the studios is also lessened.

    The new situation for the studios is not only that they have allowed the best producers to become independent, but also that they have built up world-wide distribution networks for which they must find other films and additionally which are endangered by internet distribution. The reason for the Time Warner/AOL Deal - in addition to a premium for the Time Warner shareholders and the access to the cable network of Time Warner for AOL - is that Warner had the top of their own film production overdone and their own asset building had reached a flattering curve and the business politics required a change from the classical film business to the dominating distribution platform of the 21st century, the Internet.

    Because Intertainment holds a long-term and constant high-value film stock for European territories, the contract between Intertainment and Warner Brothers for distribution came into existence. Warner Brothers distributes 12 films yearly to which Intertainment holds the European rights.

    Also for 20th Century Fox, the basis for a similar contract to Warner Brothers for over 10 years was the fact that Intertainment is in the position to deliver high - quality films on a constant basis.

    Both studios allow Intertainment the ability to access their enormous European distribution network for a maximum fee of 10%-15%.

    The two contracts with the Major studios represent a very successful partnership for both sides.

    This allowed Intertainment a sudden pan-European expansion without the need to build an expensive and time consuming local distribution structure in the individual territories - lean management - and without the requirement to distribute within an alliance of European firms.

    The revenues from all the European countries flow to Intertainment.

    We are proud of our partnerships. There is nothing similar in all of Europe.

    For analysts and fund managers we can offer contacts to the president of both studios for references.

  3. The significant revenue and income jump for the year 2000
  4. The basis for the significant increase from 1999 to 2000 is relatively simple.

    In 1999 Intertainment was still a firm that exploited film licenses in TV and Video exclusively in Germany.

    We have made public in the year 1999 at our year - end, revenues of the level of 27,1 Million Euro and EBITDA at a level of EURO 14,5 Mio. These results come from TV and Video exploitation in Germany.

    In 2000 Intertainment distributes together with partners 20th Century Fox and Warner Brothers the acquired film rights not just in Germany and not just on TV and Video but in all of Europe and in cinema, Television and Video.

    This includes the UK, France, Germany, Italy, Spain, Belgium, Netherlands, Luxembourg, Denmark, Sweden, Norway, Finland, Portugal and Eastern Europe.

    Alone from this years American Film market, a closing was made with the Spanish firm Manga in the amount of 22.4. Million EURO (in itself almost the entire 1999 Intertainment revenues) which consisted in major part of Free TV rights for the Spanish territory.

    We expect additional results from Spain from the exploitation of theatrical, Video and Pay TV rights.

    More will be found in closing negotiations covering other territories. Here one will find Free TV rights in addition to the revenue from theatrical, Video and Pay TV rights marketed through both of the Major studios.

    The plausibility and conclusiveness of Intertainment revenues should be clear in view of the additional territories in which we distribute and the additional rights we exploit through Warner Brothers and Twentieth Century Fox.

    We confirm our prognosis for revenues in the year 2000 in the amount of 148 Million EURO and hope to go over this.

     

  5. The advantage of early finalization of our cooperation agreements in light of increasing prices for film rights

Intertainment concluded long – term contracts in May 1999, at a time when most of the media companies were not yet at the stock market and before the much – discussed price war existed. Also we have acquired the entire European rights, which provides a significant discount in comparison to acquiring rights for each independent country.

This long-term price obligation ensures good price conditions for the next 10 years.

 

  1. The Quality of films acquired by Intertainment

Intertainment acquires essentially the so - called A - films. The first film to come out of our expansion, "Whole Nine Yards" with Bruce Willis, held the Box office No.1 spot for three weeks in its US debut. It has a predicted US box office of $60 Million.

Battlefield Earth, an $80 Million dollar science – fiction-production, starts in American theaters on May 12th,the trailer does not only run in all American theaters but also on the start page of AOL in the USA. In a short time, Battlefield Earth has generated over 4 Million hits on this site.

Films are following with Wesley Snipes, Sylvester Stallone, Cameron Diaz, Jack Nicholson, etc.

The best argument for the quality of our films is that no Major studio would limit its distribution capacity for about 20 films a year if the 10% - 15% distribution fee did not make it worthwhile.

Naturally it is correct that our film library existing from prior to the IPO with somewhere around 200 films is primarily composed of films with smaller and medium sized budgets. Our business at that time was closely focused on television and yet every individual film was a financial success.

This is our indication that supports the fact that Intertainment has the right "taste" for acquisition.

The question of the level of the capitalization of Intertainment should not be based on the past, but on the future growth potential of the firm. To the already described quality and quantitative growth comes an addition growth push in the form of an already occurred and future participation:

At the end of last year we acquired a 26% interest in Sightsound.com.

Sigthsound.com was the first company in the world to offer a film for direct viewing in the Internet.

The firm has not only the technology, but also an exclusive patent for digital downloading on the Internet.

That the patent of Sightsound.com is quasi a monopolistic position in the Entertainment -Internet area, we can expect that the patent will be legally challenged and could be rejected by the US Supreme Court.

The decision on the "one click" patent of amazon.com increases the chances of the Sighthsound.com patent to be successfully defended.

A final determination will most likely not occur until the end of 2001 at the earliest.

But even without the exclusiveness Sightsound.com can be the recipient of attractive studio level films.

Franchise Pictures, which holds the Internet rights for North America on the big productions, has recently taken a share in Sightsound.com.

The IPO for Sightsound.com is envisioned for summer of this year. With regard to the European Internet rights held by Intertainment, we are looking forward to a participation in local Internet providers in each local territory, preferably in a pre-IPO status, in return for internet rights in our film.

 

Dear Stockholders:

We hope that this memorandum gives you a better view of the future development and potential of Intertainment.

Also the analysts have a positive perception of the Intertainment stock - seven buy studies against one sell study, which is from June 1999.

With best regards

Rüdiger Baeres

CEO

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