<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------
FOR QUARTER ENDED MARCH 31, 1995 COMMISSION FILE NUMBER 0-17295
THE KUSHNER-LOCKE COMPANY
(Exact name of registrant as specified in its charter)
California 95-4079057
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
11601 Wilshire Blvd., 21st Floor, Los Angeles, CA 90025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 445-1111
Securities registered pursuant to Section 12(b) of the Act:
Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
10% Convertible Subordinated Debentures, Series A
13 3/4% Convertible Subordinated Debentures, Series B
Common Stock Purchase Warrants
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Number of shares of registrant's common stock outstanding as of May 2, 1995:
31,972,687
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1995
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Condensed Consolidated Statements of Stockholders' Equity
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. OTHER INFORMATION
Items 1 through 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 10.1
10.2
10.3
10.4
(b) Reports on Form 8-K: None
2
<PAGE>
PART I
ITEM 1.
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
MARCH 31, SEPTEMBER 30,
1995 1994
(UNAUDITED) (AUDITED)
------------ ------------
<S> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 8,805,000 $ 15,681,000
Accounts receivable, net of allowance for
doubtful accounts . . . . . . . . . . . . . . . . . . . . . . 7,219,000 6,177,000
Other receivables. . . . . . . . . . . . . . . . . . . . . . . 1,007,000 295,000
Film costs, net of accumulated amortization. . . . . . . . . . 40,405,000 30,688,000
Property and equipment, at cost, net of
accumulated depreciation and amortization . . . . . . . . . . 521,000 437,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 979,000 976,000
------------- -------------
$ 58,936,000 $ 54,254,000
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities . . . . . . . . . . . $ 2,295,000 $ 2,385,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . . ----- 10,000
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 14,770,000 9,600,000
Deferred film license fees . . . . . . . . . . . . . . . . . . 817,000 364,000
Contractual obligations, principally participants'
share payable and talent residuals. . . . . . . . . . . . . . 1,310,000 1,216,000
Production advances. . . . . . . . . . . . . . . . . . . . . . ----- 82,000
Convertible subordinated debentures
due 2000, net . . . . . . . . . . . . . . . . . . . . . . . . 20,621,000 22,056,000
------------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . 39,813,000 35,713,000
------------- -------------
Stockholders' equity:
Common stock, no par value. Authorized
80,000,000 shares: issued and outstanding
31,972,687 shares at March 31, 1995 and
30,069,101 shares at September 30, 1994. . . . . . . . . . . 20,281,000 18,696,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (1,158,000) (155,000)
------------- -------------
Total stockholders' equity. . . . . . . . . . . . . . . . . 19,123,000 18,541,000
------------- -------------
$ 58,936,000 $ 54,254,000
------------- -------------
------------- -------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- ------------------------------
1995 1994 1995 1994
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating revenues . . . . . . . . . . . . . . $ 6,176,000 $ 12,953,000 $ 11,614,000 $ 28,965,000
Costs related to operating revenues. . . . . . 4,871,000 11,369,000 9,168,000 26,008,000
Selling, general and administrative
expenses. . . . . . . . . . . . . . . . . . . 984,000 742,000 1,977,000 1,443,000
------------ ------------- ------------- -------------
Earnings from operations . . . . . . . . . . 321,000 842,000 469,000 1,514,000
Interest income. . . . . . . . . . . . . . . . 70,000 9,000 136,000 17,000
Interest expense . . . . . . . . . . . . . . . (833,000) (457,000) (1,592,000) (782,000)
------------ ------------- ------------- -------------
Earnings (loss) before income taxes and
cumulative effect of a change in
accounting principle. . . . . . . . . . . . . (442,000) 394,000 (987,000) 749,000
Provision for income taxes . . . . . . . . . . 16,000 149,000 16,000 284,000
------------ ------------- ------------- -------------
Earnings (loss) before cumulative effect of a
change in accounting for income taxes. . . . (458,000) 245,000 (1,003,000) 465,000
Cumulative effect of a change in
accounting for income taxes . . . . . . . . . ----- ----- ----- 394,000
------------ ------------- ------------- -------------
Net earnings (loss). . . . . . . . . . . . . $ (458,000) $ 245,000 $ (1,003,000) $ 859,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Earnings (loss) per common and common
equivalent share:
Earnings before cumulative effect of a
change in accounting principle. . . . . . . . $(.01) $.01 $(.03) $.02
Cumulative effect of a change in accounting
for income taxes. . . . . . . . . . . . . . . $.---- $.---- $.---- $.01
------ ------ ------ ----
Net earnings (loss). . . . . . . . . . . . . . $(.01) $.01 $(.03) $.03
------ ------ ------ ----
------ ------ ------ ----
Weighted average number of common and
common equivalent shares outstanding. . . . . 31,973,000 29,001,000 31,159,000 29,024,000
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
---------------------------------
1995 1994
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (1,003,000) $ 859,000
Adjustments to reconcile net earnings (loss) to net cash
used by operating activities:
Cumulative effect of a change in accounting principle . . . . . ----- (394,000)
Amortization of film costs. . . . . . . . . . . . . . . . . . . 9,088,000 25,510,000
Depreciation and amortization . . . . . . . . . . . . . . . . . 120,000 146,000
Amortization of capitalized issuance costs and warrants . . . . 210,000 54,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . ----- 284,000
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . (1,042,000) (2,440,000)
Other receivables . . . . . . . . . . . . . . . . . . . . . . . (712,000) (539,000)
Increase in film costs. . . . . . . . . . . . . . . . . . . . . (18,805,000) (25,774,000)
Accounts payable and accrued liabilities. . . . . . . . . . . . (100,000) (2,493,000)
Due to officers . . . . . . . . . . . . . . . . . . . . . . . . ----- 31,000
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . ----- -----
Deferred film license fees. . . . . . . . . . . . . . . . . . . 453,000 193,000
Contractual obligations . . . . . . . . . . . . . . . . . . . . 94,000 360,000
Production advances . . . . . . . . . . . . . . . . . . . . . . (82,000) (1,785,000)
------------ ------------
Net cash used by
operating activities. . . . . . . . . . . . . . . . . . . . . (11,779,000) (5,988,000)
Cash flows from investing activities:
Increase in property and equipment, net . . . . . . . . . . . . . (204,000) (13,000)
Increase in other assets. . . . . . . . . . . . . . . . . . . . . (3,000) (495,000)
------------ ------------
Net cash used by investing activities. . . . . . . . . . . . . (207,000) (508,000)
Cash flows from financing activities:
Increase in notes payable . . . . . . . . . . . . . . . . . . . . 7,770,000 12,500,000
Repayment of notes payable. . . . . . . . . . . . . . . . . . . . (2,600,000) (7,100,000)
Net proceeds from issuance of debentures. . . . . . . . . . . . . ----- 14,218,000
Repayment of debentures and other . . . . . . . . . . . . . . . . (60,000) (37,000)
------------ ------------
Net cash and restricted cash provided by financing
activities. . . . . . . . . . . . . . . . . . . . . . . . . . 5,110,000 19,581,000
Net increase in cash and restricted cash . . . . . . . . . . . . . (6,876,000) 13,085,000
Cash and cash equivalents at beginning of period . . . . . . . . . 15,681,000 6,542,000
------------ ------------
Cash, cash equivalents and restricted cash at end of period. . . . $ 8,805,000 $ 19,627,000
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
Supplemental disclosure of non-cash financing activity:
During the six months ended March 31, 1995, $1,850,000 of convertible
subordinated debentures before unamortized capitalized issuance costs of
$205,000 were converted into 1,903,586 shares of common stock.
See accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
NUMBER OF ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1994 (audited). . 30,069,101 $ 18,696,000 $ (155,000) $ 18,541,000
Conversion of convertible debentures. . . 1,903,586 1,585,000 1,585,000
Net (loss). . . . . . . . . . . . . . . . (1,003,000) (1,003,000)
------------ ------------ ------------- -------------
Balance at March 31, 1995 (unaudited) . . 31,972,687 $ 20,281,000 $ (1,158,000) $ 19,123,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The Kushner-Locke Company (the "Company") is principally engaged
in the development, production and distribution of television series, pilots,
movies-for-television, mini-series and animated programming. Last year, the
Company expanded its operations into similar activities for feature films,
and into related business lines in ancillary markets for its product such as
merchandising, home video and interactive/multimedia applications for
characters and story ideas developed by the Company. Recently, the Company
entered into various joint ventures and partnerships with established
companies having expertise in their respective fields including music
exploitation; infomercials; cable distribution; CD-ROM formatted product; and
development of interactive game product.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements
presented include the accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have been eliminated.
These unaudited consolidated financial statements and notes thereto
have been condensed and, therefore, do not contain certain information
included in the Company's annual consolidated financial statements and notes
thereto. The unaudited condensed consolidated financial statements should be
read in conjunction with the Company's annual consolidated financial
statements and notes thereto.
The unaudited condensed consolidated financial statements reflect,
in the opinion of management, all adjustments, all of which are of a normal
recurring nature, necessary to present fairly the financial position of the
Company as of March 31, 1995, the results of its operations for the three and
six month periods ended March 31, 1995 and 1994, and its cash flows for the
six month periods ended March 31, 1995 and 1994. Interim results are not
necessarily indicative of results to be expected for a full fiscal year.
Certain reclassifications have been made to conform prior year
balances with the current presentation.
RESTRICTED CASH
During the quarter ended March 31, 1995, the Company had no
restricted cash, reserves on its line of credit, or outstanding Letters of
Credit. For the comparitive period ending March 31, 1994, the Company had
$14,331,000 of restricted cash held in escrow pending the stockholders
approval to increase the authorized number of shares of Common Stock from
50,000,000 to 80,000,000.
INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Incomes
Taxes." This statement supersedes SFAS 96, "Accounting for Income Taxes."
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
8
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company elected to reflect the cumulative effect of adopting
this pronouncement as a change in accounting principle at the beginning of
fiscal 1994 with a credit to earnings of $394,000. Prior year financial
statements were not restated.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common and common equivalent share is based
upon the weighted average number of shares of common stock outstanding plus
common equivalent shares consisting of all outstanding warrants and dilutive
stock options. The weighted average number of common and common equivalent
shares outstanding for the calculation of primary earnings per share was
31,973,000 and 29,001,000 for the quarters ended March 31, 1995 and 1994,
respectively, and 31,159,000 and 29,024,000 for the six months ending
March 31, 1995 and 1994, respectively. The inclusion of the additional
shares assuming the conversion of the Company's Convertible Subordinated
Debentures would have been anti-dilutive for all periods.
(2) FILM COSTS
Film costs consist of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1995 1994
-------------- ---------------
<S> <C> <C>
In process or development. . . . . . . . . . . . . . . . . . . . . $ 7,547,000 $ 5,177,000
Released, net of accumulated amortization. . . . . . . . . . . . . 32,858,000 25,511,000
-------------- ---------------
$ 40,405,000 $ 30,688,000
-------------- ---------------
-------------- ---------------
</TABLE>
(3) NOTES PAYABLE
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1995 1994
--------------- ---------------
<S> <C> <C>
Note payable to bank, secured by substantially all
Company assets, interest at prime (9% at
March 31, 1995) plus 1.25%, payable
monthly, outstanding principal balance due
September 1995. . . . . . . . . . . . . . . . . . . . . $ 12,919,000 $ 9,600,000
Note payable to bank, secured by certain film rights,
interest at prime (9% at March 31, 1995)
plus 3%, payable monthly, outstanding
principal balance due February 1996 . . . . . . . . . . 1,851,000 -----
--------------- ---------------
$ 14,770,000 $ 9,600,000
--------------- ---------------
--------------- ---------------
</TABLE>
9
<PAGE>
(4) CONVERTIBLE SUBORDINATED DEBENTURES
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1995 1994
--------------- ---------------
<S> <C> <C>
Series A Convertible Subordinated
Debentures due December 15, 2000
bearing interest at 10% per annum
payable June 15 and December 15,
net of unamortized capitalized issuance
costs and warrants of $15,000 and
$17,000, respectively . . . . . . . . . . . . . . . . . $ 82,000 $ 80,000
Series B Convertible Subordinated
Debentures due December 15, 2000
bearing interest at 13-3/4% per annum
payable monthly, net of unamortized
capitalized issuance costs of $389,000
and $423,000, respectively. . . . . . . . . . . . . . . 2,972,000 2,938,000
Convertible Subordinated Debentures
due December 15, 2000, bearing interest
at 8% per annum payable February 1 and
August 1, net of unamortized capitalized
issuance costs of $1,544,000 and
$1,887,000, respectively. . . . . . . . . . . . . . . . 13,043,000 14,550,000
Convertible Subordinated Debentures
due July 1, 2002, bearing interest at 9%
per annum payable January 1 and July 1,
net of unamortized capitalized issuance
costs of $526,000 and $562,000, respectively. . . . . . 4,524,000 4,488,000
--------------- ---------------
$ 20,621,000 $ 22,056,000
--------------- ---------------
--------------- ---------------
</TABLE>
SERIES A DEBENTURES
As of March 31, 1995, the Company had outstanding $82,000 principal
amount of Series A Debentures. The Debentures are recorded net of
underwriting discounts, expenses associated with the offering and warrants
totaling $15,000 which will be amortized using the interest method to
interest expense over the term of the Debentures. Approximately $2,000 of
capitalized issuance costs have been amortized to interest expense for the
six months ended March 31, 1995.
SERIES B DEBENTURES
As of March 31, 1995, the Company had outstanding $2,972,000
principal amount of Series B Debentures due 2000. The Debentures are
recorded net of underwriting discounts and expenses associated with the
offering totaling $389,000, which will be amortized using the interest method
to interest expense over the term of the Debentures. Approximately $34,000
of capitalized issuance costs had been amortized as interest expense for the
six months ended March 31, 1995.
10
<PAGE>
(4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
8% DEBENTURES
As of March 31, 1995, the Company had outstanding $13,043,000
principal amount of 8% Debentures. The Debentures are recorded net of
unamortized underwriting discounts and expenses associated with the offering
totaling $1,544,000, which are amortized using the interest method to
interest expense over the term of the Debentures. Approximately $138,000 of
capitalized issuance costs had been amortized as interest expense for the six
months ended March 31, 1995.
9% DEBENTURES
As of March 31, 1995, the Company had outstanding $4,524,000
principal amount of 9% Debentures. The Debentures are recorded net of
unamortized underwriting discounts and expenses associated with the offering
totaling $526,000, which are amortized using the interest method to interest
expense over the term of the Debentures. Approximately $36,000 of
capitalized issuance costs had been amortized as interest expense for the six
months ended March 31, 1995.
(5) INCOME TAXES
Income taxes for the three and six month periods ended March 31, 1995
and 1994 were computed using the effective income tax rate estimated to be
applicable for the full fiscal year, which is subject to ongoing review and
evaluation by management.
(6) CONTINGENCIES
The Company is involved in certain legal proceedings and claims
arising out of the normal conduct of its business. Management of the Company
believes that the ultimate resolution of these matters will not have a
material adverse effect upon the Company's financial position or results of
operation.
The Company is in negotiation or has entered into distribution
agreements with third parties for television and film product which would or
will obligate the Company to pay a minimum guaranteed advance against
revenues upon delivery of the applicable product to the Company. If such
third parties use the Company's distribution agreement as collateral for a
production loan, then the Company may be obligated to make such payments to
financial institutions or others.
11
<PAGE>
PART I
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues are currently derived primarily from
the production of television programming for the major U.S. television
networks and from the production or the acquisition of distribution rights
from third party producers of films to be released in the U.S. by studios,
pay cable, videocassette companies, basic cable channels and first-run
syndication, as well as from licensing of all rights to the programs and
films in international territories. While the Company generally finances all
or a substantial portion of the budgeted production costs of its programming
and films through domestic and foreign licensing and other arrangements, the
Company typically retains rights in its programming and films which may be
exploited in future periods or in additional territories. The Company's
feature film division generally produces low and medium budget films for
theatrical and/or home video or cable release, but may produce one or more
major theatrical films if the Company is able to obtain an
acceptable domestic studio to release the film theatrically in the U.S.
The Company's revenues and earnings are significantly affected by
accounting policies required for the industry and management's estimates of
the ultimate realizable value of its programs. Production advances received
prior to delivery or completion of a program are treated as deferred revenues
and are generally recognized as revenue on the date the program is delivered
or available for delivery. Cash received from licenses in advance of
availability of the program is recorded as deferred film license fees.
Deferred film license fees are recognized as revenue on the date of
availability and/or delivery of the program.
Production costs for a program (including allocated overhead) are
capitalized as film costs, net of accumulated amortization, and are amortized
each period in the ratio that the current period's gross revenues from all
sources for the program bear to management's estimate of anticipated total
gross revenues for such program from all sources. In the event management
reduces its estimate of the future gross revenues associated with a
particular program, which had previously been expected to yield greater future
proceeds, a significant write-down and a corresponding decrease in the
Company's earnings for the quarter and fiscal year in which such write-down
is taken could result.
Gross profits for any period are a function in part of the number of
programs and films delivered in that period and the recognition of costs in
that period. Because initial licensing revenues and related costs generally
are recognized either when the program or film has been delivered or is
available for delivery, significant fluctuations in revenues and net earnings
may occur from period to period. Accordingly, year-to-year comparisons of
quarterly results may not be meaningful and quarterly operating results
during the course of a fiscal year may not be indicative of the results that
may be expected for the entire fiscal year.
A small number of television programs historically have accounted for
a significant portion of the Company's revenues in any given fiscal period.
Thus, a change in the amount of entertainment product delivered or available
from period to period may materially affect a given period's results of
operations and year-to-year results may not be comparable.
12
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1995 AND 1994
The Company's operating revenues for the quarter ended March 31, 1995
were $6,176,000, a decrease of $6,777,000 (approximately 52%) from
$12,953,000 for the quarter ended March 31, 1994. This decrease was due
primarily to the timing of delivery and the availability of film and television
programming. In the previous year, the Company was delivering the episodic
television series "HARTS OF THE WEST" to CBS from which it recognized
approximately $5,287,000 in revenues for the quarter ending March 31, 1994.
Last year the Company also delivered or had available distribution rights
to the television movie "TO SAVE THE CHILDREN" and the mini-series "JFK:
RECKLESS YOUTH" and recognized an additional $3,661,000.
The Company recognized approximately $4,285,000 of revenues during
the second quarter of fiscal 1995 from the delivery and/or availability of a
movie for CBS entitled "LADY KILLER," starring Judith Light and Jack Wagner,
and three direct-to-video titles: "LAST GASP," starring Robert Patrick
for WarnerVision and "PLANET OF THE DINO KNIGHTS" and "THE HUMAN PETS," two
fantasy adventure stories for Paramount Pictures Corporation, which are first
in a series of six films to be known under the name "JOSH KIRBY: TIME
WARRIOR." Continuing sales of licenses for completed product from the
Company's library of titles to international distributors accounted for the
majority of remaining revenues for the period.
The Company's current projects in pre-production include (a) the
feature film "THE LEGEND OF PINOCCHIO" starring Martin Landau and Jonathan
Taylor Thomas, (b) the feature film "THE NESTING" starring Jeff Fahey for
Warner Vision, (c) the feature film "THE GRAVE" starring Gabrielle Anwar, Eric
Roberts and Craig Sheffer, and (d) a four-hour mini-series for the ABC
television network entitled "INNOCENT VICTIMS" starring Hal Holbrook and
Ricky Schroder. In production as of May 1, 1995 are (a) two animated
feature films for Buena Vista Home Video, a division of The Walt Disney
Company, that are sequels to the successful direct-to-video title "BRAVE
LITTLE TOASTER", (b) the four remaining "JOSH KIRBY: TIME WARRIOR" fantasy
adventure films for Paramount Pictures Corporation consisting of "EGGS FROM
70 MILLION B.C.", "TRAPPED IN TOYWORLD", "JOURNEY TO THE MAGIC CAVERN" and
"LOST WORLD OF THE GIANTS", (c) three adult thrillers made primarily for cable
release under the brand name "TWILIGHT", and (d) two infomercials through the
Company's joint venture called TVFirst of which one is in the area of personal
motivation and one is related to a popular style of music. In addition, the
Company has acquired domestic cable rights for a package of films, a portion
of which are scheduled to be delivered during fiscal 1995, for distribution
through a joint venture called KLC/New City.
Costs relating to operating revenues decreased to $4,871,000 in the
second quarter of fiscal 1995 as compared to $11,369,000 in the second
quarter of fiscal 1994. As a percentage of operating revenues, costs
relating to operating revenues were approximately 79% for the three months
ended March 31, 1995 as compared to approximately 88% for the comparable
period ended March 31, 1994. The decreased costs relate to the release
and/or delivery of fewer titles, and a change in the product mix to projects
with higher profit margins.
Selling, general and administrative expenses for the quarter ended
March 31, 1995 increased to $984,000 as compared to $742,000 for the
comparable quarter ended March 31, 1994. The Company is funding overhead
and development costs associated with its entry into new business segments of
interactive/multimedia, cable and infomercials, which are conducted through
joint ventures or partnerships. The Company has also incurred increased
overhead costs associated with the establishment of a theatrical film
international sales subsidiary.
Interest expense for the quarter ended March 31, 1995 was $833,000 as
compared to $457,000 for the comparable quarter ended March 31, 1994. The
increase was primarily due to incurring interest costs for the full period on
the Company's four issues of Convertible Subordinated Debentures verses
having only the Series A and B debt outstanding for the entire three month
period in 1994. Interest costs were also affected by an increased usage of the
revolving line of credit associated with increased production and acquisition
financing of non-network movies and additional transactional production loans
secured by specific projects.
The Company's estimated effective income tax rate was approximately
0% and 38% for the three month periods ending March 31, 1995 and 1994,
respectively.
The Company reported net losses of $458,000, $-.01 per share, in the
second quarter of fiscal 1995 compared to net earnings of $245,000, $0.01 per
share, in the second quarter of fiscal 1994. The decrease in net earnings in
the current period primarily reflects the reduced number of television
programs delivered and films released in the current period as compared to the
prior year period, as augmented by higher interest expense and increased
overhead associated with the Company's expansion into non-television related
marketing and distribution channels.
13
<PAGE>
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1995 AND 1994
The Company's operating revenues for the six months ended March 31,
1995 were $11,614,000 as compared to $28,965,000 for the comparable period
ended March 31, 1994. This decrease was due primarily to the Company having
two episodic series in production for television networks last year during
the six month period ending March 31, 1994. During the six months
ended March 31, 1995, the Company recognized approximately $7,934,000 from
the delivery of the CBS television movie "DANGEROUS INTENTIONS", starring
Donna Mills, and the feature film "WES CRAVEN PRESENTS: THE MIND RIPPER" to
WarnerVision, as well as the CBS television movie "LADY KILLER" and the films
"LAST GASP," AND "JOSH KIRBY: TIME WARRIOR"-"PLANET OF THE DINO KNIGHTS" and
"THE HUMAN PETS."
During the six months ended March 31, 1994, the Company recognized
approximately $21,662,000 of revenues from the delivery and/or availability
of certain episodes of the CBS series "HARTS OF THE WEST" and "SWEATING
BULLETS"; the CBS television movie "TO SAVE THE CHILDREN" ; and the ABC
mini-series "JFK: RECKLESS YOUTH" and continuing sales on completed titles in
the Company's library of product.
Costs relating to operating revenues were $9,168,000 during the six
months ended March 31, 1995 as compared to $26,008,000 during the six months
ended March 31, 1994. As a percentage of operating revenues, costs relating
to operating revenues were approximately 79% for the six months ended March
31, 1995 compared to approximately 90% for the comparable period ended March
31, 1994. The decreased percentage during the six months ended March 31,
1995 resulted primarily from the lower rate of amortization of costs
associated with having four non-television movies in the current period
changing the product mix. Theatrical product generally has a longer life
cycle and more channels of distribution in which it can be marketed verses
typical television programs.
Selling, general and administrative expenses for the six months ended
March 31, 1995 increased to $1,977,000 as compared to $1,443,000 for the
comparable six months ended March 31, 1994 due to increased overhead
associated with the Company's diversification and expansion of distribution
activities.
Interest expense for the six months ended March 31, 1995 was
$1,592,000 as compared to $782,000 for the six months ended March 31, 1994.
The increase was primarily due to the effect of carrying the full interest
costs associated with the issuance of $22,510,000 of the 8% and 9%
Convertible Subordinated Debentures in March and July of 1994 and increased
usage of the bank credit facility to fund production of non-network
television programming, as well as transactional production loans for direct
to video and cable movies.
The Company's estimated effective income tax rate was approximately
0% and 38% for the six month periods ending March 31, 1995 and 1994,
respectively.
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," under
which deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements'
carrying amounts of existing assets and liabilities and their respective
bases. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that includes the
enactment date. As a result of adopting this pronouncement, the Company
recognized a one-time gain of $394,000 during the six months ended March 31,
1994.
The Company reported losses of $1,003,000, $.03 per share, in the six
months ended March 31, 1995 compared to net earnings of $859,000, $0.03 per
share, in the six months ended March 31, 1994. The decrease in net earnings
in the current period primarily reflected a combined effect of a reduction in
the number of network television episodic shows produced and delivered in the
current period verses the previous period, and the increases in staff
associated with increased distribution activities in the current period and
higher interest expense in the current period resulting from the issuance of
the 8% and 9% Convertible Subordinated Debentures.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $8,805,000 at March 31, 1995
from $15,681,000 at September 30, 1994 as a result of investment of the
proceeds of the 8% and 9% Convertible Subordinated Debentures into the
development, production and acquisition of television programs and feature
films, and expansion of the Company's business into related areas. At March
31, 1995, the Company had negative net liquid assets of approximately $34,000
consisting of cash, cash equivalents, accounts receivable and other
receivables, less accounts payable, accrued liabilities and the current
portion of notes payable.
The Company's production and distribution operations are capital
intensive. The Company has funded its working capital requirements through
receipt of installment license payments from U.S. television networks and
cable services and international licensing, as well as other operating
revenues, and proceeds from debt and equity financing, and has relied upon
its line of credit and transactional production loans to provide bridge
production financing prior to receipt of license fees. The Company funds
production and acquisition costs out of its working capital, including the
line of credit, and through certain pre-sale of rights in international
markets. In addition, the recent expansion of the Company's international
distribution business and the establishment of a new feature film division
are expected to significantly increase the Company's working capital
requirements and use of transactional production loans.
The Company experienced net negative cash flows from operating
activities during the six months ended March 31, 1995 of $11,779,000 which were
partially offset by borrowing on the Company's line of credit and other debt
financing, but still resulted in a $6,876,000 depletion of cash balances. As
the Company expands production and distribution activities and increases its
debt service burdens, it will continue to experience net negative cash flows
from operating activities, pending receipt of licensing revenues and sales
from its library.
The Company's current line of credit with Imperial Bank provides for
borrowings up to $15,000,000 based on specified percentages of eligible
domestic and international receivables and net film costs balances through
September 1995. The line of credit is secured by substantially all of the
Company's assets and bears interest at an annual rate of prime (9% as of May
1, 1995) plus 1.25%. At March 31, 1995, the outstanding loan balance was
$12,919,000, which included $79,000 of accrued interest. As of May 1, 1995,
the Company had drawn down $9,040,000 under the line of credit and had
$3,800,000 additional availability. During March 1995, the Company received a
written commitment from Imperial Bank to extend the $15,000,000 revolving
credit facility until September 1995 to accommodate discussions for a long
term renewal and potential increase of the facility.
The credit agreement with Imperial Bank contains various financial
and other covenants to which the Company must adhere. These covenants, among
other things, require the maintenance of minimum net income and various
financial ratios which are reported to the bank on a quarterly basis and
include limitations on additional indebtedness, liens, investments,
disposition of assets, guarantees, deficit financing, affiliate transactions,
the use of proceeds and prohibit payment of dividends and repayment of
subordinated debt. The outstanding credit agreement also contains a
provision permitting the bank to declare an event of default if the services
of Messrs. Locke or Kushner are not available to the Company unless a
replacement acceptable to the bank is named. During the period ended March 31,
1995 the Company was in violation of a certain covenant contained in the
credit agreement and has obtained a waiver from Imperial Bank with respect to
such covenant.
The Company expects to propose an extension and increase of the
current line of credit arrangement with Imperial Bank or find suitable
alternative financing. However, there is no assurance that such financing will
be available to the Company or that the terms thereof will be satisfactory.
If the line of credit is not extended or suitable alternative financing is not
obtained, the Company would be required to use its working capital, to the
extent available, or other assets to repay the then outstanding balances under
the line of credit. Such use of working capital would significantly reduce
the Company's liquidity and could impact the Company's ability to expand or
maximize its revenue from overall production and distribution of new feature
film and television programming. The Company believes that its ability to
obtain additional financing or capital including its ability to increase its
current line of credit will be a significant factor in whether the Company
will successfully expand its production and distribution activities.
From December 1990 through April 1991, the Company sold an aggregate
of $5,700,000 principal amount of Series A Debentures due 2000 and an
aggregate of $6,000,000 principal amount of Series B Debentures due 2000. In
connection with the issuance of certain of the Series A Debentures, the
Company issued warrants to purchase an aggregate of 2,100,000
15
<PAGE>
shares of common stock at an exercise price of $2.00 per share. As of March
31, 1995, approximately $82,000 principal amount of Series A Debentures and
$2,972,000 of Series B Debentures were outstanding. The Series A Debentures
are convertible into shares of common stock at the rate of approximately
$1.27 per share and the Series B Debentures into shares of common stock at
the rate of approximately $1.54 per share. The decrease in Series A and
Series B Debentures has resulted primarily from conversions to common stock.
The Company has the right to redeem the Series A and Series B Debentures at
redemption prices at 103% of par after September 30, 1993 and declining to
par after September 30, 1997. The indentures under which the Company's
Series A and Series B Debentures were issued contain various covenants to
which the Company must adhere. These covenants, among other things, also
impose certain limitations on additional indebtedness and dividend payments
by the Company.
In November 1992, the Company completed an offering of 8,050,000
shares of its common stock for which the Company received net proceeds of
approximately $6,640,000.
During March and April 1994, the Company sold $16,137,000 principal
amount of 8% Convertible Subordinated Debentures due 2000. In connection
with the issuance of the 8% Debentures, the Company issued warrants to
purchase up to 10% of the aggregate principal amount of such Debentures sold
at an exercise price equal to 120% of the principal amount of such
Debentures. During April, 1994, an additional $300,000 principal amount of
8% Debentures were sold. The 8% Debentures are convertible into shares of
common stock at the rate of $.975 per share, subject to customary
anti-dilutive provisions and provisions in the event of certain payment
defaults. The Company has the right to redeem the 8% Debentures at
redemption prices commencing at 102.7% of par on or after February 1, 1998
and declining to par on or after February 1, 2000. The Debentures are
subordinated in right of payment to all Senior Indebtedness (as defined) of
the Company and rank pari passu with the Company's Series A, Series B
Debentures and 9% Debentures. The fiscal agency agreement, under which the
Company's 8% Debentures were issued, contains various covenants to which the
Company must adhere.
During July 1994, the Company sold $5,050,000 principal amount of 9%
Convertible Subordinated Debentures due 2002. In connection with the
issuance of the 9% Debentures, the Company issued warrants to purchase up to
9% of the aggregate principal amount of such Debentures sold at an exercise
price equal to 120% of the principal amount of such Debentures. The 9%
Debentures are convertible into shares of common stock at the rate of $1.58
per share, subject to customary anti-dilutive provisions and provisions in
the event of certain payment defaults. The Company has the right to redeem
the 9% Debentures at redemption prices commencing at 103% of par on or after
July 1, 1998 and declining to par on or after July 1, 2000. The Debentures
are subordinated in right of payment to all Senior Indebtedness (as defined)
of the Company and rank pari passu with the Company's Series A, Series B and
8% Debentures. The fiscal agency agreement, under which the Company's 9%
Debentures were issued, contains various covenants to which the Company must
adhere.
In September 1994, the Company filed a registration statement
covering an aggregate of 21,388,064 shares of common stock comprising the
shares of common stock issuable upon conversion of the 8% Convertible
Subordinated Debentures and the 9% Convertible Subordinated Debentures and
certain warrants related thereto.
In October 1994, the Company obtained a production loan in the amount
of $1,950,000 from Imperial Bank to cover a portion of the production budget
of the "JOSH KIRBY: TIME WARRIOR" series. The loan bears interest at an
annual rate of Prime (9% as of May 1, 1995) plus 3% payable monthly. The loan
is secured solely by the rights, title and assets of the production company
related to the film series. The loan matures in February 1996. At March 31,
1995, the outstanding loan balance was $1,851,000 under the "TIME WARRIORS"
production loan.
In December 1994, the Company advanced August Entertainment, Inc.
("August") $650,000. August is majority owned by Gregory Cascante. Mr.
Cascante joined the Company in September 1994 as head of its new
international film distribution division in addition to his responsibilities
at August. The agreement is secured by all of the assets of August,
including a pledge of all sales commissions due to August from the producers
thereof on the films "SLEEP WITH ME", "NOSTRADAMUS" and "LAWNMOWER MAN II".
While the right of August to receive such commissions with respect to the films
"NOSTRADAMUS" and "LAWNMOWER MAN II" is subordinate to the interests of the
production lenders on such films, The Allied Entertainment Group PLC, and its
subsidiaries which produced the films, has guaranteed payment of such
commissions to the extent they would be payable had there been no production
loans on those two films. The loan bears interest at the lesser of (a) prime
(9% at May 1, 1995) plus 2% or (b) 10%. Repayment of principal and
interest on such advance is secured by collection of commissions and a
general pledge of all other assets as collateral. The loan matures in
December 1996.
16
<PAGE>
The Company has entered into a letter agreement dated as of February 6,
1995 with Savoy Pictures, Inc. ("Savoy") relating to the development,
production, financing and distribution of a live-action feature-length
theatrical motion picture currently titled "THE LEGEND OF PINOCCHIO." Pursuant
to the letter agreement, the Company and Savoy have agreed to co-finance the
picture on a 50/50 basis up to a budget of $25,000,000 (which budget has been
subsequently increased by an additional $1,350,000 to be financed by Savoy).
It is currently expected that the film, which is in pre-production, will
commence principal photography in July 1995. The film will be distributed
domestically by Savoy and in foreign territories by the Company.
In order to fund the Company's up to $12,500,000 share of the
budgeted negative costs, the Company has assisted the film's production company
in obtaining a commitment letter from Newmarket Capital Group, L.P.
("Newmarket") which provides, subject to various conditions precedent, for
financing in the amount of 50% of the film's budget up to $12,500,000, a
portion of which shall be reserved to pay the lender's financing fees and
costs. It is expected that a substantial portion of the obligations of the
production company to Newmarket under the loan facility, other than the
portion of the loan covered by certain foreign pre-sales, will be guaranteed
by the Company.
There can be no assurance that "THE LEGEND OF PINOCCHIO," which
represents the Company's biggest budget theatrical motion picture to date,
will be completed, that the Company or producer will consummate the Newmarket
financing or alternate financing, or that the picture will be successful.
The Company is in the process of applying for a completion bond and expects
such instrument to be in place before principal photography. The Company's
ability to complete this project is materially dependent upon both funding by
Savoy and the obtaining of financing against foreign pre-sales and remaining
foreign rights.
Management believes that the Company's existing working capital
together with anticipated cash from operations, borrowings under its line of
credit (subject to and as proposed by the Company to be extended and
increased) and transactional production loans, together with and subject to
obtaining pre-sales and/or production financing for its production and
distribution activities as necessary, will provide adequate sources of
funding to satisfy anticipated working capital requirements for at least the
next twelve months. However, the Company is actively seeking additional
financing, possibly through the issuance of additional debt or equity
securities, additional bank financing, or other means available to the Company
to increase its available working capital as the Company deems necessary. In
addition to expanding production and its distribution business, whether
internally or by acquisition, the Company may also consider acquisition
possibilities from time to time, including film libraries and companies
ancillary to the Company's business, subject to the availability of financing
as necessary.
The Company's business and operations have not been materially
affected by inflation.
17
<PAGE>
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted FASB 109 "Accounting for Income Taxes" relating
to, among other things, deferred income tax liabilities in the first quarter
of fiscal 1994. The Company elected to reflect the cumulative effect of
adopting this pronouncement as a change in accounting principle at the
beginning of fiscal 1994 with a credit to earnings of $394,000.
The Company provides no post-employment benefits. Accordingly,
Statement of Financial Accounting Standards Nos. 106, "Post Employment
Benefits Other than Pensions," will have no impact on the Company.
18
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON 8-K
(a) Exhibits: Exibits filed as part of this report are listed in the
Exhibit Index, which follows the signature pages hereto.
(b) Reports on Form 8-K: None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: May 15, 1995 /s/Peter Locke
------------------------- -------------------------------------
Peter Locke
Co-Chairman of the Board
and Chief Executive Officer
Dated: May 15, 1995 /s/Donald Kushner
------------------------- -------------------------------------
Donald Kushner
Co-Chairman of the Board, President,
Chief Operating Officer and Secretary
Dated: May 15, 1995 /s/Lenore Nelson
------------------------- -------------------------------------
Lenore Nelson
Chief Financial Officer, Executive
Vice President and Assistant Secretary
20
<PAGE>
PART II
EXHIBIT INDEX
ITEM 6 (a). EXHIBIT INDEX
10.1 Letter Agreement, dated, March 23, 1995, by and between
Woodenhead Productions, Ltd and Newmarket Capital Group. L.P.
10.2 Modification and Extension of Restated Credit Agreement, dated
March 24, 1995, by and between Imperial Bank and the
Kushner-Locke Company.
10.3 Letter Agreement dated February 6, 1995 by and between Savoy
Pictures, Inc. and KL Features, Inc. *
10.4 Letter Agreement dated May 12, 1995 by and between Imperial Bank
and The Kushner-Locke Company.
* Confidential Treatment Requested.
21
<PAGE>
EXHIBIT 10.1
[NEWMARKET CAPITAL GROUP, L.P. LETTERHEAD]
March 23, 1995
TERMS OF OFFER
BORROWER: Woodenhead Productions, Ltd., a Bahamian single
purpose corporation (or a U.K. company acting as
assignee of Woodenhead) formed to produce the
motion picture currently entitled "THE LEGEND
OF PINOCCHIO" (the "Picture").
LENDER: Newmarket Capital Group, L.P. and/or such other
lenders, if any, to which Newmarket may syndicate.
AGGREGATE LOAN
AMOUNT: 50% of the budget for the Picture, up to US
$12,500,000 (Twelve Million Five Hundred
Thousand United States dollars) (the "Commitment
Amount"), of which a certain portion shall be
available solely as a reserve to pay interest and fees
(including the commitment fee), costs and expenses
(including legal fees) of the Lender, the exact
amount of which shall be determined by the Lender
prior to the initial advance under the loan facility,
based on the cash flow schedule, distributor payment
dates and final repayment date.
PURPOSE: To provide financing for production of the Picture,
to star Martin Landau, to be directed by Steve
Barron, to be produced by Raju Patel and to be
executive produced by Peter Locke and Donald
Kushner.
DISBURSEMENT: Disbursement of the loan shall be made in accordance
with the budget and cash flow schedule for Picture
approved by the completion guarantor.
COMMITMENT FEE: To be payable upon loan closing as follows:
1) A fee in the amount of 2% of that portion of
the loan collateralized (at loan closing) by
Acceptable Pre-sales (as defined below).
<PAGE>
2) A fee in the amount of 1.25% of that portion
of the loan collateralized (at loan closing) by
the amount of the Kushner-Locke Stand-by
Letter of Credit (as defined below).
3) A fee in the amount of 2.5% of that portion
of the loan collateralized (at loan closing) by
the amount of the Kushner-Locke Corporate
Guarantee (as defined below).
4) The fee in the amount of 3.5% of that
portion of the loan collateralized (at loan
closing) by Estimates for future territorial
rights sales (as defined below).
5) The Lender shall also be entitled to the fees
set forth in the section entitled "REPLACEMENT
OF COLLATERAL" below.
ACCEPTABLE PRE-SALES: Either 1) executed contracts supported by letters of
credit in form and substance and issued by banks
satisfactory to Lender, 2) executed contracts from
distributors considered by Lender in its sole
discretion to be "undoubted" or 3) the net value of
other executed distribution contracts after the face
value of the minimum guarantees payable thereunder
has been reduced by a discount factor determined by
Lender in its sole discretion. The value of all such
contracts shall be reduced by the amount of any
withholding taxes payable in connection therewith.
In addition, all of such executed contracts must be
accompanied by a fully executed customary Notice
of Assignment and Distributor's Acceptance in form
and substance satisfactory to Lender.
KUSHNER-LOCKE STAND-BY
LETTER OF CREDIT: A Letter of Credit naming Lender as beneficiary
thereunder, issued by a bank satisfactory to Lender
and drawable no later than thirty days prior to the
Maturity Date of the facility, in face amount equal to
one-third (1/3) of the amount by which the
Commitment Amount exceeds Acceptable Pre-Sales
2
<PAGE>
as of the closing date, and subject to reduction
pursuant to the section entitled "REPLACEMENT
OF COLLATERAL" as set out below.
KUSHNER-LOCKE
CORPORATE GUARANTEE: A Guarantee in form and substance satisfactory to
Lender, unconditionally guarantying all of the
obligations of Borrower to Lender under the
Facility, up to an amount which is equal to two-
thirds (2/3) of the amount by which the Commitment
Amount exceeds Acceptable Pre-Sales as of the
closing date, subject to the provisions regarding
Estimates set out in such section below and subject
to reduction pursuant to the section entitled
"REPLACEMENT OF COLLATERAL" set out below.
ESTIMATES: Written estimates from Kushner-Locke International
("Sales Agent") setting forth the amount it expects
in good faith to receive from the territories for
which no executed distribution agreements exist on
the closing date, which estimates shall be delivered
to Lender on or before the closing date. Lender
agrees that up to one half of the value of the
Kushner-Locke Corporate Guarantee may be
replaced by the value of the Estimates delivered to
the Lender at closing, provided that:
OPTION (1): the Kushner-Locke Stand-By Letter of
Credit has a face value of no less than $1,000,000; or
OPTION (2): the Acceptable Pre-Sales in place at
closing date plus Estimates equate to 110% of the
Aggregate Loan Amount and so long the "rolling
average" of all pre-sales made up to the date of
closing shall be no less than 100% of the original
minimum estimates set forth for the pre-sales in the
territories sold as set forth in Sales Agent's
schedule of Estimates.
INTEREST RATE: 2.0% per annum in excess of 1- or 3-month Libor
Rate, at Borrower's option, payable monthly in arrears.
3
<PAGE>
COLLECTION FEE: 1% of all sums collected into the Collection Account
in excess of the amount required to fully repay all of
the obligations of the Borrower to the Lender.
TERM MATURITY: 30 September 1996 or such earlier date as may be
agreed when taking into account the bonded delivery
date, including any required period for force majeure
and exigencies, a further 120 day period to account
for delivery to Kushner-Locke and onward delivery
to and collection of payments from foreign
subdistributors.
SOURCE OF PRINCIPAL
REPAYMENT: From all minimum guaranties, participations and
other proceeds from the distribution and exploitation
of the Picture in all media, worldwide (excluding
proceeds payable by Savoy Pictures, Inc. ("Savoy")
pursuant to its Distribution Agreement with
Borrower relating to domestic distribution of the
Picture (the "Savoy Distribution Agreement") and
excluding proceeds from the Czech Republic and
Slovakia and any Eurimage payments or other
European subsidies payable to any co-production
partner or which must be used as budgeted
expenses), but including proceeds payable by
distributors ("Distributors") pursuant to the
Distribution Agreements described on Exhibit A
hereto, which must be Acceptable Pre-Sales of no
less than $5,500,000 by closing (and the average of
the minimum guarantees payable under such
Acceptable Pre-Sales shall equal no less than the
average minimum Estimates for the applicable
territories as delivered to Lender).
Borrower will open a US dollar collection account
at Bank of America or such other bank as is
approved by Lender in its sole discretion (the
"Collection Account") into which all Distributors of
the Picture will be directed to pay the minimum
guarantees and other proceeds from exploitation of
the Picture. All amounts borrowed hereunder shall
be repaid in US dollars.
4
<PAGE>
DOCUMENTATION: a. A loan agreement containing customary terms and
conditions, including without limitation delivery
of weekly cost reports during principal
photography and monthly cost reports thereafter
and all customary documentation relating thereto.
b. Security Agreement giving Lender a first priority
security interest (in the relevant jurisdiction)
in and to all of Borrower's assets, including
without limitation the Picture and all right,
title and interest of Borrower in the Picture,
including a mortgage of copyright in favor of the
Lender and an undertaking to assign all future
distribution agreements, if any, relating to the
Picture.
c. Legal assignment of all existing and future
distribution agreements relating to the Picture,
including without limitation the distribution
agreements with the Distributors relating to the
Picture described in Source of Principal
Repayment above.
All distribution agreements must be in a form
pre-approved by the Lender and must include
appropriate AFMA arbitration provisions.
d. Pledge of production bank accounts giving Lender
a first priority security interest in and to the
production bank accounts including notices to
production bank evidencing such security interest.
e. A completion guarantee from either Film Finances,
Inc. or International Film Guarantors, in form
acceptable to Lender, which covers the entire
loan, including financing costs and provides for a
"strike price" equal to the amount of the budget
for the Picture (less any interest/fee/cost
reserve set out in the budget for the Picture)
provided that Lender is satisfied regarding the
5
<PAGE>
cash flow arrangements made by Savoy or such other
amount as Lender may agree in its sole discretion.
The completion guarantor will undertake to
deliver the Picture to all distributors in place
at the time of closing of the facility (including
those distributors listed in Source of Principal
Repayment above), to deliver all elements of the
Picture that are required to trigger payment of
all minimum guarantees including, without
limitation, all L/C trigger documents and to adopt
all future deals subject to the completion
guarantor's right to pre-approve the delivery
terms.
To the extent that any distributor requires
more than a notification of availability as a
contractual requirement of its obligation to
pay, only essential elements of the Picture
covered by the completion guarantee may be
included as conditions for payment in such
distribution contracts for the Picture.
f. All usual insurance coverage for this type of
production, including essential element
insurance, if applicable, and E&O coverage
with Lender named as additional insured or
loss payee as applicable and a related notice
to insurer.
g. Customary Interparty Agreement among Borrower,
Completion Guarantor, Sales Agent and Lender
(which provides for deferral by Sales Agent of all
Sales Agent's fees and expenses, until the Lender
has been repaid in full.
h. Customary Intercreditor Agreement between
Lender and Savoy (or Savoy's financier, if
applicable) regarding relative security positions.
i. Customary Laboratory Pledgeholder Agreements.
6
<PAGE>
j. Customary Notices of Assignment and Acceptance and
Acknowledgments among Lender, Borrower, Completion
Guarantor, Sales Agent and each of the Distri-
butors as sales are achieved.
k. Production budget, cashflow schedule and screen-
play all as approved by completion guarantor and
lender.
l. Any other reasonable documentation required by
Lender in its sole discretion.
SECURITY: All Borrower's assets including, without limitation,
all of Borrower's right, title and interest in the
Picture and legal assignment of all current and any
future distribution agreements (excluding the Savoy
Agreement) relating thereto.
REPLACEMENT OF
COLLATERAL: Lender agrees that upon delivery to Lender of
Acceptable Pre-Sales (in the case of option (1)
below and subject to the requirements stated
therein) or any additional pre-sales made between
Sales Agent and distributors (in the case of option
(2) below and subject to the requirements stated
therein) in form and substance satisfactory to
Lender, Lender shall (at the election of the
Borrower) reduce (less any withholding taxes or
other deductions which distributor may be entitled
to make) the amount of the Kushner-Locke Corporate
Guarantee and/or the Kushner-Locke Stand-by Letter of
Credit in the manner described in the applicable
Option (1) or (2) below.
Prior to any reductions as described below in the
Kushner-Locke Corporate Guarantee and/or Kushner-Locke
Stand-by Letter of Credit, the Completion Guarantor
must agree in writing to guarantee the delivery of the
Picture pursuant to any distribution agreement being
used as replacement collateral as amended by the
applicable Notice of Assignment and Acceptance.
7
<PAGE>
Immediately upon any substitution of the Kushner-
Locke Stand-by Letter of Credit, the Lender shall be
entitled to an additional fee of three quarters of one-
percent (0.75%) of the amount by which the
Kushner-Locke Stand-by Letter of Credit is
reduced, which amount the Lender shall be entitled
to advance out of the interest/fee/cost reserve for
the Picture.
OPTION (1): Provided that all of the Estimates
which are being banked have first been replaced with
Acceptable Pre-Sales, the face amount of the Kushner-
Locke Stand-By Letter of Credit and the amount of the
Kushner-Locke Corporate Guarantee shall be reduced on
a pro rata and pari passu basis in an amount equal to
all Acceptable Pre-Sales delivered by Borrower to
Lender subsequent to the closing date provided that at
the time of such reduction, the amount of the
Acceptable Pre-Sales together with the amount of the
Estimates for remaining unsold territories shall at
all times equal or exceed 110% of the Commitment
Amount.
OPTION (2): Provided that all of the Estimates
which are being banked have first been replaced with
Acceptable Pre-Sales, the amount of the Kushner-
Locke Corporate Guaranty and then, subsequently
the face amount of the Kushner-Locke Stand-By
Letter of Credit, shall be reduced by the face amount
of any executed distribution agreements delivered to
Lender (together with applicable Notices of
Assignment) so long as (1) the "rolling average"
of all pre-sales made up to the date of such reduction
shall be no less than 110% of the minimum estimates
set forth for the pre-sales in the territories sold as
set forth in the Sales Agent's schedule of Estimates,
(2) the pre-sales in the "Major Territories" (i.e.,
U.K., Germany, France, Spain, Italy, Japan and
Australia) are all Acceptable Pre-Sales and (3) the
Kushner-Locke Stand-By Letter of Credit shall in no
event be reduced to less than $750,000. Lender agrees
that it shall release the final $750,000 of the
Kushner-Locke Stand-By Letter of Credit at such time
as Acceptable Pre-Sales equal and/or exceed the
Commitment Amount.
8
<PAGE>
CONDITIONS PRECEDENT: a. All of the documentation referred to above to be
completed and executed in form and substance
satisfactory to Lender and its counsel.
b. Executed Distribution Agreement between
Savoy and Borrower in form and substance
satisfactory to Lender and providing, inter
alia, for the payment of a minimum guarantee
in an amount equal to the budget of the
Picture less Lender's commitment payable
during production (in accordance with the
approved cashflow for the Picture) pro rata
and pari passu with drawdown under the loan.
c. Executed Distribution Agreements and/or
binding Deal Memoranda in form and substance
satisfactory to Lender with each of the
Distributors.
d. Executed U.K./France Co-Production Agreement in
form and substance satisfactory to Lender, if
applicable.
e. Executed Sales Agency Agreement between Sales
Agent and Borrower in form and substance
satisfactory to Lender.
f. Statement by Sales Agent setting forth the
amount of the minimum guaranties for the
Acceptable Pre-Sales together with estimates
for the unsold distribution rights in the
Picture (other than the U.S. and Canada and
the Czech Republic and Slovakia) which aggregate
to no less than 110% of the Commitment Amount.
g. Approval of chain of title for the Picture by
counsel to the Lender.
h. Kushner-Locke Corporate Guarantee.
9
<PAGE>
i. Kushner-Locke Stand-By Letter of Credit.
j. Forward exchange contracts to protect against
currency fluctuations or other arrangements
acceptable to Lender to provide sufficient U.S.
currency at closing to meet "strike price" set
out in the completion guaranty.
k. Closing to occur no later than June 30, 1995,
with no material adverse changes affecting the
Borrower, Savoy, Kushner-Locke, the Sales Agent,
Distributors, any bank(s) issuing letters of
credit in favor of Lender, Completion Guarantor,
or the Picture prior thereto.
OTHER CONDITIONS: To the extent that the Commitment Amount is not
fully collateralized at closing, the Sales Agent will
be required to warrant its best efforts to sell all
unsold territories of the Picture in a timely manner
for minimum guarantees and on terms at least in line
with its "Worst Case" estimates. It will consult
regularly with the Lender and its representatives on
the status and progress of all negotiations in the
principal unsold territories, and will obtain the
Lender's approval for all future sales in those
principal territories. It will be an event of default
under the loan agreement if the Commitment
Amount is not fully collateralized by Acceptable
Pre-Sales and the Kushner-Locke Stand-By Letter
of Credit by November 30, 1995 and the Lender will
then have the right (but not the obligation) to
replace the Sales Agent for the then unsold
territories.
FURTHER INVESTIGATION: As a result of further investigation by the Lender and
its counsel, information of which the Lender is not
currently aware may be revealed and/or certain
impediments to closing may come to the Lender's
attention, and while our mutual efforts will be
directed at closing this transaction, the Lender may
require the structure of this transaction to be altered
or modified.
10
<PAGE>
COSTS AND EXPENSES: Based solely upon the mutual execution of this
Terms of Offer, Borrower agrees that all reasonable
legal and out of pocket costs incurred by the Lender
in respect to this facility will be reimbursed by
Borrower, whether or not this transaction is
hereafter documented and executed and whether or
not this transaction is hereafter documented and
executed and whether or not the facility is drawn
down.
This proposal will remain open until [ , 1995] and if Borrower has not
indicated its acceptance of the terms hereof by execution in the space provided
below and our receipt thereof by the end of business on such date, this offer
will automatically expire and be of no further force and effect. Lender's
commitment to lend hereunder will expire and be of no further force and effect
if the transaction described herein does not close by [ , 1995].
NEWMARKET CAPITAL GROUP, L.P.
By: BFB, LLC.
Its Managing General Partner
By: [Signature of ]
Its: C.O.O.
ACCEPTED AND AGREED:
WOODENHEAD PRODUCTIONS, LTD.
By:
Its:
11
<PAGE>
EXHIBIT 10.2
[IMPERIAL BANK LETTERHEAD]
March 24, 1995
Mr. Donald Kushner
The Kushner-Locke Company
11601 Wilshire Blvd., 21st Floor
Los Angeles, CA 90025
RE: Modifications to the Borrowing Base Structure and Three Month Extension
of the Third Amended and Restated Credit Agreement (the "Credit Agree-
ment") among Kushner-Locke Company and Imperial Bank, dated as of
February 9, 1990 and as amended and restated as of December 14, 1990,
May 1, 1992, August 31, 1993, August 15, 1994 and December 21,
1994.
Dear Mr. Kushner:
You have requested that Imperial Bank as Agent modify the borrowing base
structure of the Credit Agreement as of 3/31/95 based on the projected proforma
borrowing base numbers provided to the Bank through the term of the credit
facility. Upon review of these numbers, we agree to modify the borrowing base
structure as outlined below.
Additionally, we have requested certain financial information from Lenore
Nelson to begin working on an extension of the credit facility. At this time,
we are also extending the maturity of the credit facility for 90 days until
September 30, 1995. This will allow time for the receipt and analysis of the
requested information, and the process of working out with you the details and
structure of the request. As you are aware, we would like to bring in another
bank to participate in the Company's credit facility. The short term extension
will also allow time for another bank to get comfortable with the Company's
numbers and projections, upon receipt of the information.
BORROWING BASE MODIFICATIONS:
The definition of "Borrowing Base Availability" shall now read, "at any
date of determination, the lesser of: (i) an amount equal to the sum of (a)
the lesser of the Tier 1 Borrowing Base or $15,000,000; plus (b) the lesser
of the Tier 2 Borrowing Base or $4,000,000; plus (c) the lesser of the Tier
3 Borrowing Base or $6,000,000; plus (d) the lesser of the Tier 4 Borrowing
Base or $2,500,000 for the month end reporting as of March, May, June, August
and September, 1995, or $4,000,000 for the month end reporting as of April
1995, or (ii) $15,000,000, minus, in both cases, (A) the aggregate then
outstanding principal amount of all Advances and Letter of Credit Usage under
the Credit Facility; and minus (B) the aggregate amount of any then imposed
Third Party Financing Reserve."
<PAGE>
The definition of "Tier 2 Borrowing Base" shall now include "at any
date of determination, including all foreign obligors, an amount equal to the
aggregate of the following..."
The definition of "Tier 3 Borrowing Base", section (a) shall now read
"Fifty percent (50%) of Borrower's Eligible Contract Receivables from Approved
Account Debtors or Approved Domestic Licensees with respect to Incomplete
Product..."
The definition of "Tier 4 Borrowing Base" shall be reinstated and shall
now include, "at any date of determination, an amount equal to the lesser of:
(a) Ten percent (10%) of the net book value of Completed Product that has
been released....; plus
(b) Ten percent (10%) of the net book value of Completed Product that has
been acquired...; or
(c) The amount of $2,500,000 for the Borrowing Base presented as of month
end in the month of March, May, June, July, August and September
1995 and the amount of $4,000,000 in the month of April 1995."
Notwithstanding anything to the contrary set forth in clauses (a), (b) or
(c) above..."
The foregoing modifications are without prejudice to the Bank's rights to
enforce all other terms and conditions of the Credit Agreement and these
modifications will not be effective beyond the date defined or in any other
manner obligate the Bank concerning this Revolving Facility.
If you agree to these modifications and extension, please execute the
enclosed copy of this letter. Please return the executed copy along with the
$16,000 fee for the 90 day extension (pro rata 1% loan fee) no later than
March 29, 1995 to become effective.
Sincerely yours,
[Signature of Janice Zeitinger]
Janice Zeitinger
Vice President
Acknowledged and agreed April 11, 1995
KUSHNER-LOCKE COMPANY
By: [Signature of Donald Kushner]
Title:
cc: Lenore Nelson, Ken Libkin, Morgan Rector
<PAGE>
EXHIBIT 10.3
[SAVOY PICTURES, INC. LETTERHEAD]
Dated: As of February 6, 1995
KL Features, Inc.
The Kushner-Locke Company
c/o Ziffren Brittenham Branca & Fischer
2121 Avenue of the Stars
Los Angeles, California 90067
RE: "PINOCCHIO"
Gentlemen:
This letter shall serve to confirm the agreement between Savoy Pictures,
Inc. ("Savoy"), on the one hand, and KL Features, Inc. and The Kushner-Locke
Company (collectively "K-L"), on the other hand, in connection with the
development, production, financing and distribution of a live-action
feature-length theatrical motion picture tentatively entitled "Pinocchio"
("Picture") to be based on the existing screenplay presently entitled "The
Legend of Pinocchio" written by Sherry Mills and Joyce Warren (the "Underlying
Materials"), as follows:
A. BASIC TERMS: The basic terms and conditions of the parties
agreement are as set forth in the InterOffice Memo ("Memo") which is
attached hereto as Exhibit "A" (and incorporated herein by this reference)
and which has been initialed by the parties hereto.
B. K-L REPRESENTATIONS: K-L hereby represents and warrants to Savoy as
follows: (i) K-L owns all right, title and interest in and to the Underlying
Materials and the Picture, free and clear of any and all third party claims,
liens or encumbrances; and (ii) K-L has the right to enter into this
Agreement and the consent of no other party is required in order to give
effect to the undertakings, representations and warranties of K-L hereunder.
C. INDEMNIFICATION: K-L hereby agrees to indemnify and hold harmless
Savoy (and Savoy's parent and affiliated companies, and its and their
respective officers, directors, employees, licensees and assigns)
(collectively, the "Savoy Indemnified Parties") from and against any loss,
liability, damage, claim, action, cause of action or expense (including
reasonable attorneys fees and court costs) which may be incurred by the
Savoy Indemnified Parties by reason of a breach of the representations and
warranties described in Paragraph B above.
The balance of the terms and conditions shall be negotiated in good faith by
the parties in accordance with Savoy's customary parameters for deals of this
type (but in any event consistent with the provisions set forth in the Memo).
However, unless and until a more formal agreement is entered into by the parties
hereto, this agreement shall constitute the legally binding obligation of the
parties hereto with respect to the subject matter hereof.
1
<PAGE>
Entered into as of this day of , 1995.
SAVOY PICTURES, INC.
By:
-----------------------------------
Its:
-----------------------------------
KL FEATURES, INC.
By: [Signature of Donald Kushner]
-----------------------------------
Its:
-----------------------------------
THE KUSHNER-LOCKE COMPANY
By: [Signature of Donald Kushner]
-----------------------------------
Its:
-----------------------------------
2
<PAGE>
[SAVOY PICTURES ENTERTAINMENT, INC. LETTERHEAD]
INTEROFFICE MEMO
TO: ROB FRIED
FROM: HARRIS MASLANSKY
DATE: JANUARY 12, 1995 (REVISED FEBRUARY 6, 1995)
SUBJECT: "PINOCCHIO" -- DEAL TERMS
- ------------------------------------------------------------------------------
Following is a summary of the basic deal terms for the production and
distribution of the above picture:
1. BUDGET AND PRODUCTION COST: The budget will not exceed $25M, including a
contingency approved by the bond company, bond fee, and financing charges
(including bank commitment and interest charges). The target budget will be
$XXX all-in with a maximum of $25M. Savoy and Kushner-Locke ("K-L") will
co-finance the negative cost portion of the budget including the bond and
contingency 50/50. If Savoy chooses to cash flow the picture, it will be
assumed that Savoy's advances bear interest at the same borrowing rate as
K-L is paying on its part. In addition, Savoy shall charge the picture with
an amount equal to the K-L bank commitment and financing charges to be
recouped as part of Savoy's contribution. It is contemplated that $XXX will
be the agreed-upon budgeted item for cast and that any cast breakage must be
approved by K-L and Savoy.
K-L must provide Savoy a satisfactory chain-of-title as a condition to
Savoy's obligation to proceed with any production funding in addition to the
$750K for development. Savoy to use good faith efforts to expeditiously
approved the chain-of-title, and will notify K-L of any prospective
problems. If K-L is unable to satisfy Savoy as the chain-of-title, K-L will
immediately reimburse Savoy for all monies advanced by Savoy.*
K-L will verify development spending to date and subject to the following.
Savoy will be responsible for advancing over an agreed-upon cash flow
schedule an amount equal to the already outstanding K-L development monies.
At the point that K-L and Savoy have each advanced an equal amount, Savoy
and K-L will together continue to advance development monies as agreed
pursuant to the cash flow schedule until each party has advanced in the
aggregate $750K.
K-L will have a period of 45 days from execution of the agreement, or the
point at which each party has advanced $750K, whichever is sooner, to
provide Savoy with satisfactory evidence that it has put in place its share
of the production financing. If at the expiration of this 45-day period, K-L
has not succeeded, despite having exercised good faith efforts, in providing
Savoy with satisfactory evidence that it has put in place its share of the
production financing, Savoy shall elect to take one of the following
options:
(a) to extend the period for 30 days by which K-L must satisfy Savoy with
satisfactory evidence; or
(b) to commit to remain involved for a period of 45 days in the development
and production of the picture with K-L in accordance with these deal
terms (at which point if K-L has provided satisfactory evidence that it
has put into place its share of the production financing, the parties
will proceed to production and, if K-L has not provided satisfactory
evidence, then Savoy may make the election under 1.(c)); or
(c) to terminate its involvement with the picture, in which case K-L shall
reimburse Savoy, with interest, for Savoy's investment in the picture and
Savoy shall assign to K-L all of Savoy's rights in the picture.
- ------------------------
* Savoy has approved Chain of Title.
<PAGE>
All pre-production costs as provided in the cash flow schedule will also be
borne 50/50. Producers fees, not including line producer fees, will not
exceed $XXX and neither party will charge overhead to the other.
2. RIGHTS: Savoy will have all motion picture and allied rights in perpetuity
throughout the Domestic territories (US and Canada excluding French Canada
for which Savoy will have the economic benefit, and their respective
territories and possessions and commonwealths including Puerto Rico as well
as US and Canadian military bases and embassies throughout the world and all
airlines and ships flying the flag of the US or Canada). Guarantees received
by K-L for French Canada will be considered part of Savoy's contribution to
the production costs and any overages will be paid over to Savoy and
accounted for as Gross receipts. K-L will be entitled to a XXX% sales
commission on the guarantees received for French Canada.
3. APPROVALS: Subject to the parameters of approved budget, K-L and Savoy have
mutual approval (with Savoy's decision final) of the budget, however,
notwithstanding the foregoing (budget cannot exceed $25M, and cast cannot
exceed $XXX without full mutual approval), cash flow schedule, production
schedule, screenplay, (approved -- however, a rewrite will be done and
material changes in the screenplay are subject to mutual approval, with
Savoy's decision final) additional writers, director (Steve Barron is
pre-approved), principal cast, principal crew and other key creative
elements including the special effects company and locations, the line
producer, UPM and production auditor. Attached is a list of pre-approved
elements. [Still waiting for approved list.] Each party agrees that it will
not exercise its approvals to frustrate production, nor act inconsistently
with the budget parameters.
Both IFG and Film Finances (Film Finances is subject to Savoy's approval of
the cut-through guarantee) are pre-approved for the completion bond.
4. KUSHNER-LOCKE PARTICIPATION IN THE DOMESTIC TERRITORY:
A. Gross Participation: K-L to receive XXX% of Adjusted Gross (which shall
mean Gross Proceeds less only costs incurred for conversion, checking,
claims, collections, copyright and royalties, residuals, trade dues,
licenses and taxes) to the extent that such participation would exceed
$XXX until "Initial Actual Breakeven."
B. Home Video: Royalties will be XXX% of wholesale list price for rental
units and XXX% of wholesale list price for sell-through units and no
distribution fee shall be charged.
C. Bonuses: K-L shall receive the following bonuses:
After CBE (the point at which Savoy has recovered all its distribution
expenses, all "pre-break Participations" if any, and its production
costs plus interest) with no distribution fee, K-L shall receive XXX% of
further Gross until it has received $XXX;
at $XXX of domestic theatrical film rentals (US and Canada), K-L shall
receive an additional $XXX;
at $XXX of domestic theatrical film rentals (US and Canada), K-L shall
receive an additional $XXX; and
at $XXX of domestic theatrical film rentals (US and Canada), K-L shall
receive an additional $XXX.
D. Net Participation: K-L to receive XXX% of XXX% of Net Proceeds with
Breakeven calculated with a XXX% fee.
5. THIRD PARTY PARTICIPATIONS: All Participations, deferments and bonuses
including those payable under "4" above on account of the Domestic
distribution will be paid by Savoy, and Participations under "4A" and "4C"
will be included as an additional expense in determining Net Profits. Once
Net Profits are reached, the Domestic share of all third party
Participations are to be borne from K-L's XXX%. All third party
Participations with respect to Domestic distribution shall be subject to
mutual approval however, K-L shall have approval of Participations outside
of the Domestic territories but shall not use that approval to frustrate
Savoy's decisions as to casting. Based upon
<PAGE>
the budgeted amount for cast, additional Participations may be granted by
Savoy to the approved cast without the additional approval of K-L as long as
those percentages do not exceed XXX% of the talent's existing precedent.
Savoy shall pay residuals, if any, for the Domestic territory. Foreign and
Domestic Participations will be uncrossed. K-L will have a hard floor of
XXX% of XXX% of Net Proceeds. All Foreign residuals and participations will
be borne by K-L.
6. REVENUES FROM OTHER RIGHTS: Merchandising, novelization, music publishing,
soundtrack album, commercial tie-ins, interactive games, CD-ROM, music
video, electronic games and other ancillary rights in the picture will be
split 50/50 on a worldwide basis between Savoy and K-L and will not be
included in paragraph "4" computations. Savoy and K-L will mutually
determine who is best suited to handle the exploitation of these rights
(Savoy has tie-breaker vote). However, neither party will charge a fee for
arranging the exploitation of these rights.
7. OTHER: Savoy to have final cut for the Domestic territory as well as the
right to designate the release title, Kushner, Locke, and Mortoff ("K/L/M")
to receive "Produced by" or "Executive Producer" credits as K-L elects, in
an order to be designated by K/L/M, which credits K/L/M agree may be share
with other designated third parties, with K/L/M's credits appearing in first
position as between K/L/M and such third party (-ies). K/L/M's credits shall
be accorded both on-screen and in paid advertising, subject to Savoy's
standard "excluded ads provisions." Savoy to receive customary releasing and
presentation credits in the Domestic territory. K-L's NON-animated logo to
appear on-screen in main titles immediately following the Savoy animated
logo and production credits to appear on-screen in main titles immediately
after Savoy's standard "excluded ad provisions." K-L to be consulted
regarding the initial Domestic theatrical advertising campaign and general
release pattern as well as the creation of the trailers and one-sheets/
posters. Savoy's decisions final.*
K-L and Savoy to have mutual approval of initial press release and
announcements.
8. FOREIGN RELEASE: Foreign theatrical release can be day and date with
Savoy's Domestic theatrical release. However, K-L will have an outside date
of four months after delivery, or XXXX, whichever is sooner.
CC: Steven Burkow
Victor Kaufman
Lew Korman
Donald Kushner
Peter Locke
Larry Mortoff
Jessica Roddy
Bruce Tobey
- ------------------------
* If prior to release of the picture, Savoy allows a third party
production/financing entity the use of an animated logo on screen for the
theatrical motion picture, Savoy agrees that it will allow K-L the use of its
animated logo in the main titles."
<PAGE>
EXHIBIT 10.4
[IMPERIAL BANK LETTERHEAD]
May 12, 1995
Mr. Donald Kushner
The Kushner-Locke Company
11601 Wilshire Blvd., 21st Floor
Los Angeles, CA 90025
RE: Waiver of Section 5.1 MINIMUM NET INCOME (replacing Interest
Coverage Ratio) of the Third Amended and Restated Credit Agreement
among Kushner-Locke Company and Imperial Bank, dated as of February 9,
1990 and as amended and restated as of December 14, 1990, May 1, 1992,
August 31, 1993, August 15, 1994, December 21, 1994 and March 24, 1995.
Dear Mr. Kushner:
You have requested that Imperial Bank as Agent temporarily waive the default
of the minimum net income covenant for the period ended 3/31/95. The Bank has
given its approval and is willing to do so and hereby grants the waiver of
the default under this covenant for this period.
Section 5.1 MINIMUM NET INCOME required that Kushner-Locke achieve a
breakeven for the period ended 3/31/95. According to Kushner-Locke's draft
10Q provided by the Company, the Company will incur a net loss of -$458M for
the period.
The foregoing temporary waiver to Section 5.1 is without prejudice to the
Bank's right to enforce all other terms and conditions of the Third Amended
and Restated Credit Agreement and this waiver will not be effective beyond
the date defined or in any other manner obligate the Bank concerning this
Revolving Facility.
If you agree to this waiver, please execute the enclosed copy of this letter.
Kindly return the executed copy along with a check for $3,000 for the waiver
fee no later than May 15, 1995 for it to become effective.
Sincerely,
[Signature of Janice Zeitinger]
Janice Zeitinger
Vice President
cc: Lenore Nelson, Ken Libkin, Morgan Rector
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 8,805,000
<SECURITIES> 0
<RECEIVABLES> 8,876,000
<ALLOWANCES> 650,000
<INVENTORY> 40,405,000<F1>
<CURRENT-ASSETS> 0<F2>
<PP&E> 1,827,000
<DEPRECIATION> 1,306,000
<TOTAL-ASSETS> 58,936,000
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 14,770,000
<COMMON> 20,281,000
0
0
<OTHER-SE> (1,158,000)
<TOTAL-LIABILITY-AND-EQUITY> 58,936,000
<SALES> 0
<TOTAL-REVENUES> 11,614,000
<CGS> 0
<TOTAL-COSTS> 9,168,000
<OTHER-EXPENSES> 1,977,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,592,000
<INCOME-PRETAX> (987,000)
<INCOME-TAX> 16,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,003,000)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
<FN>
<F1>Included as inventory, were completed film costs,
productions in progress and development costs.
<F2>The Company does not issue classified balance sheets.
<F3>The Company does not issue classified balance sheets.
</FN>
</TABLE>
