<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 11, 1996
REGISTRATION NO. 333-5089
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE KUSHNER-LOCKE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-4079057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
11601 WILSHIRE BLVD., 21ST FLOOR
LOS ANGELES, CALIFORNIA 90025
(310) 445-1111
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DONALD KUSHNER
CO-CHIEF EXECUTIVE OFFICER AND SECRETARY
THE KUSHNER-LOCKE COMPANY
11601 WILSHIRE BLVD., 21ST FLOOR
LOS ANGELES, CALIFORNIA 90025
(310) 445-1111
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
Barry L. Dastin, Esq. Felice F. Mischel, Esq.
Russ A. Cashdan, Esq. Gregory Sichenzia, Esq.
Kaye, Scholer, Fierman, Hays & Handler, LLP Schneck, Weltman, Hashmall & Mischel LLP
1999 Avenue of the Stars, Suite 1600 1285 Avenue of the Americas
Los Angeles, CA 90067 New York, New York 10019
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If the Registrant elects to deliver its latest annual report to
security-holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(1) of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ----------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ----------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
BE OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES TO BE REGISTERED REGISTERED (1) PER UNIT (1) OFFERING PRICE (1) FEE (1)
<S> <C> <C> <C> <C>
Units(2)................................ 4,370,000
Common Stock, no par value(2)........... 13,110,000
Class C Redeemable Common Stock Purchase
Warrants(2)............................ 4,370,000
Underwriter's Warrant(3)................ 1
Common Stock, no par value(3)........... 1,311,000
Class C Redeemable Common Stock Purchase
Warrants(3)............................ 4,370,000
Consultant's Warrant(4)................. 1
Common Stock, no par value(4)........... 131,100
Class C Redeemable Common Stock Purchase
Warrants(4)............................ 43,700
Common Stock, no par value(5)........... 1,331,734
Total................................. $14,390,000 $4,963
</TABLE>
(1) Pursuant to Rule 457(o) promulgated under the Securities Act of 1933, the
registration fee is calculated on the basis of the maximum aggregate
offering price of all the securities listed in the "Calculation of
Registration Fee" table. The number of shares, warrants and units are
included as estimates solely for purposes of calculating the registration
fee.
(2) An aggregate of $11,500,000 of Units (the "Units"), each Unit consisting of
two shares of common stock, no par value (the "Common Stock"), and one Class
C Redeemable Common Stock Purchase Warrant, will be offered to the public,
including an aggregate of $1,500,000 of Units which may be purchased to
cover over-allotments, if any.
(3) An aggregate of $1,150,000 of Units issuable upon exercise of the
Underwriter's Warrant plus such additional number of shares, if any, as may
be issuable pursuant to the anti-dilution provisions thereof.
(4) An aggregate of $115,000 of Units issuable upon exercise of the Consultant's
Warrant plus such additional number of shares, if any, as may be issuable
pursuant to the anti-dilution provisions thereof.
(5) An aggregate of $1,625,000 of Common Stock which may be sold from time to
time by certain Selling Security Holders.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<PAGE>
EXPLANATORY NOTE
This registration statement contains two prospectuses.
The first prospectus forming a part of this registration statement is to be
used in connection with an $11.5 million underwritten public offering of up to
units (the "Units"), each Unit consisting of two shares of common stock,
no par value (the "Common Stock"), of The Kushner-Locke Company (the "Company")
and one Class C Redeemable Common Stock Purchase Warrant (the "Warrants" or
"Class C Warrants"), including Units subject to the Underwriter's
Over-allotment Option, plus Units subject to warrants sold to the
Underwriter and a consultant of the Company. Such prospectus immediately follows
the Cross Reference Sheet.
The second prospectus forming a part of this registration statement is to be
used in connection with the sale by certain non-affiliated shareholders of the
Company of up to 1,331,734 shares of Common Stock. Such second prospectus will
consist of (i) the second cover page immediately following the first prospectus,
(ii) pages 3 through 49 of the first prospectus (other than the sections
entitled "Underwriting," "Concurrent Offering" and "Legal Matters") and pages
F-1 through F-30 of the first prospectus, (iii) pages SS-1 through SS-3 (which
will appear after "Description of Securities" in place of the sections entitled
"Underwriting," "Concurrent Offering" and "Legal Matters") and (iv) the back
cover page, which immediately follows the back inside cover page of the first
prospectus.
<PAGE>
THE KUSHNER-LOCKE COMPANY
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-2
<TABLE>
<CAPTION>
FORM S-2 REGISTRATION STATEMENT ITEM AND
HEADING HEADING IN PROSPECTUS
- ----------------------------------------- -----------------------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................ Facing Page; Cross Reference Sheet;
Outside Front Cover Page; Available
Information
2. Inside Front and Outside Back Cover
Pages of Prospectus............... Inside Front and Outside Back Cover
Pages
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges........................... Prospectus Summary; The Company;
Risk Factors; Selected Consolidated
Financial Data
4. Use of Proceeds.................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.... Underwriting
6. Dilution........................... Not Applicable
7. Selling Security Holders........... Concurrent Offering; Selling
Security Holders
8. Plan of Distribution............... Outside Front Cover Page;
Underwriting; Plan of Distribution
9. Description of Securities to be
Registered........................ Prospectus Summary; Capitalization;
Description of Securities
10. Interests of Named Experts and
Counsel........................... Not Applicable
11. Information with Respect to the
Registrant........................ Outside and Inside Front Cover
Pages; Prospectus Summary; The
Company; Risk Factors; Use of
Proceeds; Market For Common Stock
and Class A Warrants and
Dividends; Capitalization;
Selected Consolidated Financial
Data; Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Description of
Securities; Experts; Consolidated
Financial Statements
12. Incorporation of Certain
Information by Reference.......... Incorporation of Certain Documents
by Reference
13. Disclosure of Commission Position
on Indemnification of Securities
Act Liabilities . Underwriting
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 11, 1996
PROSPECTUS
THE KUSHNER-LOCKE COMPANY LOGO
THE KUSHNER-LOCKE COMPANY
UNITS
$ PER UNIT
EACH UNIT CONSISTING OF TWO SHARES OF COMMON STOCK AND
ONE CLASS C REDEEMABLE COMMON STOCK PURCHASE WARRANT
Each unit offered hereby consists of two shares of common stock, no par value
(the "Common Stock"), of The Kushner-Locke Company, a California corporation
(the "Company"), and one Class C Redeemable Common Stock Purchase Warrant (the
"Warrant" or the "Class C Warrant") of the Company (the "Units"). The shares of
Common Stock and Warrants offered hereby are expected to trade separately and
not as Units beginning on the effective date of the registration statement of
which this Prospectus is a part (the "Effective Date"). See "Underwriting." Each
Warrant expires on , 2001, five years after the Effective Date, and
entitles the holder, to purchase one share of Common Stock for 120% of the price
of the Common Stock component of the Unit on the Effective Date as agreed to by
the Company and the Underwriter. The exercise price of the Warrants is subject
to adjustment in certain events pursuant to the anti-dilution provisions
thereof.
The Warrants are redeemable at a price of $.10 per Warrant commencing one year
after the Effective Date (or sooner with the consent of the Underwriter) and
prior to their expiration; provided that (i) not less than 30 days prior written
notice of the date of redemption is given to the Warrant holders; (ii) the
closing high bid price (the "Closing Price"), for the 10 consecutive trading
days ending on the third business day prior to the date on which the Company
gives notice has been at least 150% of the then exercise price of the Warrants,
subject to adjustment for certain events; and (iii) Warrant holders shall have
exercise rights until the close of the business day preceding the date fixed for
redemption. See "Description of Securities -- Class C Warrants."
The Common Stock is traded on the Nasdaq National Market ("NNM") under the
symbol "KLOC" and on the Pacific Stock Exchange under the symbol "KLO." On July
9, 1996, the closing high bid price of the Common Stock as reported on the NNM
was $1.31 per share. Prior to this offering (the "Offering"), there has been no
public market for the Class C Warrants, and there can be no assurance that a
public market will develop or be sustained after the completion of the Offering.
The offering price of the Units and the exercise price of the Warrants were
established by negotiations between the Company and the Underwriter. See
"Underwriting." The Company intends to amend its NNM listing in connection with
the Common Stock and to apply for quotation of the Warrants on the NNM.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. PURCHASERS SHOULD CAREFULLY
CONSIDER THE MATTERS DESCRIBED UNDER "RISK FACTORS" ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO THE
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)(3)
<S> <C> <C> <C>
Per Unit......................... $ $ $
Total............................ $10,000,000 $1,000,000 $9,000,000
</TABLE>
(FOOTNOTES ON PG. 3)
The Units are offered on a "firm commitment" basis by the Underwriter when, as
and if issued to the Underwriter, subject to prior sale and certain other
conditions and legal matters. The Underwriter reserves the right to withdraw,
cancel or modify the Offering and to reject any order in whole or in part. It is
expected that delivery of the certificates will be made against payment at the
offices of Lew Lieberbaum & Co., Inc., 600 Old Country Road, Suite 518, Garden
City, New York 11530 on or about July , 1996.
LEW LIEBERBAUM & CO., INC.
The Date of this Prospectus is July , 1996
<PAGE>
[NARRATIVE DESCRIPTION OF PHOTOS]
[PHOTO OF COMPANY'S ANNUAL REPORT COVER PAGE]
[PHOTOS OF CERTAIN OF THE ACTORS AND ACTRESSES FROM SOME OF THE COMPANY'S
PRODUCTS, INCLUDING THE NAMES OF SUCH ACTORS AND ACTRESSES AND THE NAMES OF THE
APPLICABLE PRODUCTS]
2
<PAGE>
- ------------------------
(1) Does not include additional compensation to the Underwriter consisting of
(i) a non-accountable expense allowance equal to 3% of the Price to the
Public of the Units, or $300,000 ($345,000 if the Underwriter's
Over-allotment Option (as defined below) is exercised in full), of which
$56,000 has been paid to date; (ii) a warrant to be sold to the Underwriter
for nominal consideration to purchase one Unit for each 10 Units actually
sold in the Offering (the "Underwriter's Warrant"), at a price of $ per
Unit, subject to the anti-dilution provisions thereof, exercisable during
the four years commencing one year after the Effective Date; and (iii) a
two-year consulting agreement providing for fees totaling $144,000, of which
$72,000 is payable on the closing of the Offering and the balance of $72,000
is payable monthly at the rate of $6,000 commencing on the closing of the
Offering. In addition, the Company has agreed to pay a commission to the
Underwriter upon the exercise of the Warrants equal to 4% of the exercise
price per Warrant under certain circumstances and to indemnify the
Underwriter against certain liabilities, including those arising under the
Securities Act of 1933 (the "Securities Act"). See "Underwriting."
(2) After deducting Underwriting discounts and commissions, but before payment
of the Underwriter's non-accountable expense allowance in the amount of
$300,000 ($345,000 if the Over-allotment Option is exercised in full) and
other expenses of the Offering (estimated at $515,000) payable by the
Company. See "Underwriting."
(3) The Company has granted to the Underwriter an option, exercisable within 45
days after the Effective Date, to purchase up to additional Units,
upon the same terms and conditions set forth above, solely to cover
over-allotments, if any (the "Over-allotment Option"). If the Over-allotment
Option is exercised in full, the total Price to the Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $11,500,000,
$1,150,000 and $10,350,000, respectively. See "Underwriting."
------------------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Citicorp Center 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Company's Common Stock is listed on the NNM. Such materials can also
be inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
Additional information regarding the Company and the Units offered hereby is
contained in the Registration Statement on Form S-2 (of which this Prospectus is
a part) and the exhibits thereto filed with the Commission under the Securities
Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain
all the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information pertaining to the Company and the Units
offered hereby, reference is made to the Registration Statement, and to the
exhibits and schedules thereto and the financial statements filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
such statements are qualified in their entirety by reference to the copy of such
contract or other document filed as an exhibit to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference the following documents heretofore
filed with the Commission pursuant to the Exchange Act:
1. Annual Report of the Company on Form 10-K for the fiscal year ended
September 30, 1995;
2. Amendment to Annual Report of the Company on Form 10-K/A for the fiscal
year ended September 30, 1995;
3. Quarterly Report of the Company on Form 10-Q for the fiscal quarter
ended December 31, 1995;
4. Quarterly Report of the Company on Form 10-Q for the fiscal quarter
ended March 31, 1996; and
5. Proxy Statement of the Company, dated April 18, 1996.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute part of this Prospectus.
Copies of all documents incorporated by reference herein (other than
exhibits to such documents unless such exhibits are specifically incorporated by
reference herein) will be provided without charge to each person, including any
beneficial owner, who receives a copy of this Prospectus on the request of such
person made to The Kushner-Locke Company, 11601 Wilshire Blvd., 21st Floor, Los
Angeles, California 90025, tel: (310) 445-1111, Attention: Donald Kushner.
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL DATA APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE
"COMPANY" ARE TO THE COMPANY AND ITS SUBSIDIARIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN CERTAIN FORWARD LOOKING
STATEMENTS, INCLUDING BUT NOT LIMITED TO THOSE UNDER "CERTAIN FORWARD LOOKING
STATEMENTS," INCLUDED ELSEWHERE HEREIN. FACTORS THAT MIGHT CAUSE SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS."
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THE
OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
THE COMPANY
GENERAL
The Kushner-Locke Company (the "Company") is a leading independent
entertainment company principally engaged in the development, production and
distribution of original feature films and television programming. The Company's
feature films are developed and produced for the made-for-video, pay cable and
theatrical motion picture markets. The Company's television programming has
included television series, mini-series, movies-for-television, animation and
reality and game show programming for the major networks, cable television,
first-run syndication and international markets. The Company established its
feature film production operations in April 1993. In September 1994, the Company
employed certain new, experienced international theatrical film sales personnel
to expand the Company into foreign theatrical distribution. In 1995, the Company
formed KLC/New City Tele-Ventures ("KLC/New City") to acquire films for
distribution through emerging new delivery systems, including pay cable,
pay-per-view, basic cable, video-on-demand and satellite.
The Company's feature film activities can be grouped into three areas:
higher-budget films intended for wide-screen domestic theatrical release
(historically, no more than one project per year), low-to-moderate budget films
released direct-to-video or on pay cable television and films and film rights
acquired for distribution only. In certain cases, the Company's low-to-moderate
budget films may have a limited theatrical release or a pay cable premiere
before being released in home video. For fiscal 1996, in the higher-budget film
category, the Company's feature film THE ADVENTURES OF PINOCCHIO, starring
Martin Landau, Jonathan Taylor Thomas and a puppet from Jim Henson's Creature
Shop and budgeted at approximately $29 million, is scheduled to be released
theatrically on July 26, 1996 in the U.S. by New Line Pictures (a division of
Turner Entertainment Co., "New Line"). The Company's lower-budget feature slate
for 1996 includes approximately 20 films, including SERPENT'S LAIR starring Jeff
Fahey, THE GRAVE starring Gabrielle Anwar, Eric Roberts and Craig Sheffer,
FREEWAY executive produced by Oliver Stone and starring Reese Witherspoon,
Kiefer Sutherland and Brooke Shields, WHOLE WIDE WORLD starring Vincent
D'Onofrio and Renee Zewelleger and being distributed in the U.S. by Sony
Classics, THE LAST TIME I COMMITTED SUICIDE starring Keanu Reeves, five
children's fantasy adventure films for Paramount Pictures under Paramount
Pictures' Moonbeam label and two animated feature film sequels to the Company's
1988 video release THE BRAVE LITTLE TOASTER for a division of The Walt Disney
Company. The Company's distribution activities consist primarily of foreign
distribution of product produced, overseen or acquired by the Company and,
through KLC/ New City, domestic distribution of 60 low-budget feature films to
the pay-per-view, pay cable, basic cable and other ancillary markets.
On May 6, 1996, the Company and Decade Entertainment ("Decade") entered into
an agreement to produce four theatrical action motion pictures. The motion
pictures will be produced, subject to approval by the Company of certain
creative aspects of such movies, by Decade and executive produced by Joel Silver
(producer of EXECUTIVE DECISION and the LETHAL WEAPON and two DIE HARD action
pictures) and Richard Donner (director/producer of THE OMEN and SUPERMAN). Under
the agreement, the Company has agreed to guarantee payment of $3,200,000 per
picture payable upon the delivery of the "mandatory delivery items" (as defined
in such agreement) for each picture in consideration of
5
<PAGE>
receipt of foreign distribution rights. The agreement may be extended, at
Decade's option, to include a fifth picture. The initial two films under the
agreement are WHITE ROSE and MADE MEN, neither of which yet has a scheduled
release date.
Since its inception 1983, the Company has produced or distributed over 1,000
hours of original television programming, including various television series,
movies-for-television and mini-series. The Company's movies-of-the-week
currently in production or which have aired recently include PRINCESS IN LOVE,
starring Julie Cox in the book version of Princess Diana's affair, for CBS,
EVERY WOMAN'S DREAM starring Jeff Fahey for CBS, A HUSBAND, A WIFE AND A LOVER
starring Judith Light for CBS and ECHO starring Jack Wagner for ABC. In
addition, in pre-production for NBC is the fifth sequel (and the third produced
by the Company) to the JACK REED movies starring Brian Dennehy. The Company has
produced a one-hour prime time pilot as a potential mid-season replacement
series for ABC entitled THE GUN written and directed by Emmy award winner Jim
Sadwith starring Rosanna Arquette and Peter Horton. The pilot was co-executive
produced by Robert Altman (director of M*A*S*H., THE PLAYER and PRET-A-PORTER).
As of March 31, 1996, the Company had 10 movies-for-television and various
television series in different stages of development for potential production.
The Company's executive offices are located at 11601 Wilshire Boulevard,
Suite 2100, Los Angeles, California 90025, and its telephone number is (310)
445-1111.
THE OFFERING
<TABLE>
<S> <C>
Securities offered by the Units, each consisting of two shares of
Company.......................... Common Stock (the "Shares") and one Class C
redeemable Common Stock purchase warrant
entitling the holder to purchase one share
of Common Stock at a price of 120% of the
price of the Common Stock component of the
Unit on the Effective Date as agreed to by
the Company and the Underwriter (the
"Warrant" or the "Class C Warrant"). The
Warrants are exercisable until July , 2001.
See "Description of Securities." (1)
Securities Being Registered for
the Account of Selling Security
Holders.......................... 1,331,734 shares of Common Stock ("Selling
Security Holders' Shares") are being
registered pursuant to a separate prospectus
included in the registration statement of
which this Prospectus is a part and may be
sold by certain non-affiliated security
holders (the "Selling Security Holders").
The Company will not receive any proceeds
from the sale of the Selling Security
Holders' Shares but will receive proceeds
upon the exercise, if at all, of all or a
portion of warrants to purchase 700,000
shares of Common Stock included in the
Selling Security Holders' Shares. The
Selling Security Holders' Shares are not
being underwritten by the Underwriter.
Common Stock outstanding prior to
the offering..................... 40,218,618 shares (2)
Common Stock to be outstanding
after the offering............... shares (1)(2)
Estimated net proceeds............ $8,185,000 (1)(3)
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Use of proceeds................... To repay the 5% Convertible Subordinated
Notes and for general corporate purposes.
See "Use of Proceeds."
Risk Factors...................... An investment in the Units offered hereby
involves a high degree of risk. See "Risk
Factors."
Trading symbols:
Common Stock...................... KLOC (NNM); KLO (Pacific)
Class C Warrants
(Proposed NNM Symbol)............ KLOCZ (4)
</TABLE>
- ------------------------
(1) Does not include the sale of up to Units which are subject to the
Over-allotment Option. See "Underwriting."
(2) The number of outstanding shares of Common Stock is as of July 8, 1996, and
does not include approximately 13,195,094 shares of Common Stock reserved
for issuance in respect of possible conversion of the Company's outstanding
Convertible Subordinated Debentures, 4,122,096 shares of Common Stock
reserved for issuance in respect of outstanding options and 5,522,808 shares
of Common Stock reserved for issuance in respect of outstanding warrants.
Also does not include shares issuable upon exercise of the Warrants, or
Common Stock or Warrants issuable upon exercise of warrants sold to the
Underwriter and a consultant to the Company. If the Over-allotment Option is
exercised in full, and all outstanding options, warrants and convertible
securities are thereafter exercised or converted into Common Stock, the
Company would have approximately shares outstanding, assuming
approximately 631,734 Bonus Shares were issued in connection with the
repayment of the Company's 5% Convertible Subordinated Notes. See "Risk
Factors -- Limited Number of Shares of Common Stock Available After
Offering."
(3) After deducting expenses of the offering estimated at $815,000.
(4) The Company's Class A Warrants are currently trading on the NNM under the
symbol "KLOCW."
7
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands except per share amounts)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------------- --------------------
1995 1994 1993 1992 1991 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues.......... $ 20,407 $ 50,736 $ 42,487 $ 24,052 $ 28,006 $ 29,337 $ 11,614
Earnings (Loss) from
Operations................. (835) (7,424) (1,807) 1,529 3,152 3,004 469
Net Earnings (Loss)......... $ (3,975) $ (6,765) $ (1,826) $ 244 $ 1,445 $ 1,140 $ (1,003)
Net Earnings (Loss) Per
Common and Common
Equivalent Shares
Outstanding................ $ (0.13) $ (0.23) $ (0.06) $ 0.01 $ 0.08 $ 0.03 $ (0.03)
Weighted Average Shares
Outstanding................ 31,713 29,373 28,372 20,958 17,846 35,961 31,159
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT MARCH 31, 1996
------------------------------------------
ACTUAL PRO FORMA (1) AS ADJUSTED(2)
----------- ------------- --------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash and cash equivalents...................................... $ 3,060 $ 4,367 $ 11,052
Restricted Cash................................................ 2,420 2,420 2,420
Accounts Receivable, Net....................................... 18,484 18,484 18,484
Film Costs, Net of Accumulated Amortization.................... 75,022 75,022 75,022
Total Assets................................................... 102,184 103,491 110,176
Bank Line of Credit............................................ 15,000 15,000 15,000
Notes Payable.................................................. 16,690 16,690 16,690
Convertible Subordinated Debentures, Net....................... 16,110 17,417 16,110
Total Liabilities.............................................. 80,085 81,392 80,085
Stockholders' Equity........................................... $ 22,099 $ 22,099 $ 30,091
----------- ------------- --------------
----------- ------------- --------------
</TABLE>
- ------------------------
(1) On May 10, 1996 the Company completed an offering and sale of $1,500,000 of
its 5% Convertible Subordinated Notes (the "Bridge Notes") pursuant to a
private placement. As part of the transaction, purchasers of the Bridge
Notes have the right to receive payment in full of the Bridge Notes upon the
closing of this Offering together with issuance of shares of Common Stock
(the "Bonus Shares") equal in value to 50% of the principal amount of the
Bridge Notes as determined based on the closing high bid price per share of
Common Stock on the NNM on the Effective Date. The issuance of the Bonus
Shares will result in approximately a $750,000 charge to interest expense.
This interest expense will be amortized over the estimated term of the
Bridge Notes beginning in May 1996 and, in any event, will be fully
amortized at the date of issuance of the Bonus Shares. The Company incurred
$193,000 of issuance costs in connection with such transaction. See "Use of
Proceeds."
(2) Gives effect to the sale by the Company of $10 million of Units, net of
discounts, commissions and expenses of the Company in connection with the
Offering, and the repayment by the Company of the Bridge Notes.
8
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors, as
well as all of the other information set forth in this Prospectus, in evaluating
an investment in the Units.
1. LIQUIDITY AND FINANCING REQUIREMENTS. The Company's business is capital
intensive. The Company has experienced substantial negative cash flows from
operating activities over the past three fiscal years which have been offset by
equity and debt financings. As the Company expands its production and
distribution activities, it may continue to experience negative cash flows from
operating activities. In such circumstances, the Company may be required to fund
at least a portion of production and distribution costs, pending receipt of
anticipated future licensing revenues, from working capital, including its line
of credit, or from additional debt or equity financings from outside sources.
The Company will have a limited number of shares of Common Stock available after
the completion of this Offering which may restrict or preclude additional equity
financings. See "-- Limited Number of Shares of Common Stock Available After
Offering." The Company has outstanding approximately $4.8 million of corporate
guarantees on certain productions which project loans come due during the next
four months. Any required payments on such guarantees may negatively impact the
Company's liquidity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
Production/Distribution Loans." On June 25, 1996, the Company closed a $40
million syndicated revolving credit agreement with a group of banks led by
Chemical Bank ("Chemical"). See "The Company -- Recent Developments." If the
funds available to the Company under such new credit agreement based upon the
borrowing base formula set forth therein or from other sources prove to be
insufficient or unavailable for any reason, the Company may be required to seek
other sources of financing to meet its working capital requirements during the
next 12 months. There is no assurance that the Company will be able to obtain
such financing or that such financing, if available, will be on terms
satisfactory to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Summary."
2. VARIABILITY OF QUARTERLY RESULTS; PRIOR LOSSES. The Company's operating
revenues, cash flow and net earnings historically have fluctuated significantly
from quarter to quarter, depending in large part on the delivery or availability
dates of its programs and product and the amount of production costs incurred
and amortized in the period. Therefore, year-to-year comparisons of quarterly
results may not be meaningful and quarterly results during the course of a
fiscal year may not be indicative of results that may be expected for the entire
fiscal year. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Quarterly Results of Operations." In addition,
primarily as a result of significant net losses in fiscal 1993, 1994 and 1995,
the Company had an accumulated deficit of $3.0 million at March 31, 1996.
3. INCREASED INTEREST EXPENSE. Increased borrowing by the Company under
its new syndicated revolving credit agreement with Chemical will most likely
increase interest expense and adversely affect the results of operations of the
Company unless the Company is able to profitably use such increased borrowings.
4. DEPENDENCE ON A LIMITED NUMBER OF PROJECTS. The Company is dependent on
a limited number of television programs, films and other projects that change
from period to period for a substantial percentage of its revenues. The change
in projects from period to period is due principally to the opportunities
available to the Company and to audience response to its programs and films,
which are unpredictable and subject to change. For the six months ended March
31, 1996, 7 projects accounted for 60% of the total revenue for such fiscal
quarter. For the fiscal year ended September 30, 1995, 6 other projects
accounted for approximately 66% of the total revenue for such fiscal year. The
loss of a major project, unless replaced by new projects, or the failure or
less-than-expected performance of a major project (such as the Company's
upcoming major feature film release, THE ADVENTURES OF PINOCCHIO) could have a
material adverse effect on the Company's results of operations and financial
condition as well as the market price of the Company's securities. There is no
assurance that the
9
<PAGE>
Company will continue to generate the same level of new projects or that any
particular project released by the Company will be successful. See "The Company
- -- Certain Forward Looking Statements -- The Adventures of Pinocchio."
5. CERTAIN ACCOUNTING POLICIES; AMORTIZATION OF FILM COSTS. The Company
generally recognizes revenues when a program or film is either delivered or
available for delivery. Capitalized production costs are amortized each period
in the ratio that the current period's gross revenues bear to management's
estimate of anticipated total gross revenues from the program or film during its
useful life. Accordingly, in the event management reduces its estimate of the
future revenues of a program or film, a significant write-down and a
corresponding decrease in the Company's earnings in the quarter and fiscal year
in which such write-down is taken could result. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
6. LIMITED NUMBER OF SHARES OF COMMON STOCK AVAILABLE AFTER OFFERING. Upon
completion of this Offering, assuming full exercise of the Underwriter's
Over-allotment Option, there will be 77,632,406 shares of Common Stock issued
and outstanding or reserved for issuance (assuming 3,800,000 Units are sold in
this Offering and the Over-allotment Option is exercised in full) out of a total
of 80,000,000 shares of Common Stock authorized under the Company's Articles of
Incorporation. Accordingly, the Company will be substantially restricted in its
ability to issue additional shares of Common Stock, including issuances to raise
capital or acquire assets using Common Stock as the means of payment. The
Company can only increase its authorized capital stock by amending its Articles
of Incorporation. While the Company intends to increase its authorized but
unissued capital stock at its next meeting of shareholders, such an amendment
requires the approval of the shareholders and, even if approved, any delay in
approval could cause the Company to be unable to raise additional equity
required for its operations or to miss an available opportunity to raise
additional capital or to acquire assets or otherwise. In addition, there can be
no assurance that the shareholders of the Company will vote to increase the
authorized capital of the Company.
7. DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts
and abilities of Donald Kushner and Peter Locke, the Company's founders and
principal executive officers, and certain other members of senior management.
The Company has entered into employment agreements with each of Messrs. Kushner
and Locke, which agreements expire in September 1998. The Company is currently
in negotiations with Messrs. Kushner and Locke to extend their employment
agreements through September 2000. There is no assurance that such extension
will be agreed to or as to the terms such extensions will be made, although it
is likely that such executive officers will require increased compensation. The
Company has obtained and is the beneficiary of term life insurance policies on
each of the lives of Messrs. Kushner and Locke in the amount of $5,000,000. The
loss of the services of either Messrs. Kushner or Locke, or of other key
personnel, could have a material adverse effect on the business of the Company
if suitable replacements could not be found quickly. The new syndicated
revolving credit agreement with Chemical also includes as events of default the
failure of either Messrs. Kushner or Locke to be the Chief Executive Officer of
the Company or if any person or group acquires ownership or control of capital
stock of the Company having voting power greater than the voting power at the
time controlled by Messrs. Kushner and Locke combined (other than any
institutional investor able to report its holdings on Schedule 13G which holds
no more than 15% of such voting power). There is no assurance that such events
of default will not occur or that if it occurs, that the banks will waive such
default.
8. PRODUCTION DEFICITS. The revenues from pre-sales, output arrangements
and the initial licensing of television programming or film, particularly in the
case of license fees for network series, may be less than the associated
production costs. The ability of the Company to cover the production costs of
particular programming or films is dependent upon the availability, timing and
the amount of such revenues obtained from third parties, including revenues from
foreign or ancillary markets where available. In any event, the Company
generally is required to fund at least a portion of production costs, pending
receipt of such revenues, out of its lines of credit or its working capital,
which will include the net proceeds of this Offering. Although the Company's
strategy generally is not
10
<PAGE>
to commence principal photography without first obtaining commitments which
cover all or substantially all of the budgeted production costs, from time to
time the Company may commence principal photography without having obtained such
commitments. In the past, the Company has commenced principal photography on a
limited number of projects prior to first obtaining commitments which cover
substantially all of the budgeted production costs but was able subsequently to
obtain commitments to cover substantially all of such costs. Each such project
was one which the Company believed would be successful and for which the Company
determined it was necessary to begin principal photography on an expedited
basis. There is no assurance that the Company will be able to cover project
costs in the future if it was to undertake projects prior to obtaining adequate
pre-sales.
9. TELEVISION AND FEATURE FILM INDUSTRIES. The production and distribution
of television programs and feature films involves a substantial degree of risk.
The success of an individual television program or feature film depends upon
subjective factors, such as the personal tastes of the public and critics and
alternative forms of entertainment, and does not necessarily bear a direct
correlation to the costs of production and distribution. Therefore, there is a
risk that some or all of the Company's projects will not be successful,
resulting in costs not being recouped and losses being incurred. In addition,
typically for television projects, the networks pay license fees equal to
approximately 80-90% of the production budget as the project is being produced.
The remainder of the production budget is usually covered by foreign sales which
are typically paid when the project is made available or delivered to such
entities. However, with feature film production, approximately 40-50% of the
production budget is covered by domestic sales which are typically paid in
thirds upon the project being available for release in different media (see
"Business -- Motion Picture Distribution"). The remainder of the production
budget is usually financed by foreign sales which are typically paid when the
project is made available or delivered to such entities. Accordingly, as the
Company has shifted a significant portion of its product mix from its
traditional base of network-television programming to feature films (for the
first six months of fiscal 1996 approximately 48% of revenues were from feature
film activities versus approximately 34% of revenues for fiscal 1995 and 21% of
revenues for fiscal 1994), the Company has become subject to the increased risk
of feature film activities, including the longer lead times for completion of
new product and receipt of related cash flow from exploitation of such product.
10. COMPETITION. Competition in the television and motion picture
industries is intense. The Company competes with the major motion picture
studios, numerous independent producers of television programming and feature
films and the major U.S. networks for the services of actors, other creative and
technical personnel and creative material and, in the case of network television
programming, for a limited number of time slots for episodic series,
movies-of-the-week and mini-series. Many of the Company's principal competitors
have greater financial, distribution, technical and creative resources than the
Company.
11. GOVERNMENT REGULATION. The Federal Communications Commission ("FCC")
repealed its financial interest and syndication rules, effective as of September
21, 1995. Those FCC rules, which were adopted in 1970 to limit television
network control over television programming and thereby foster the development
of diverse programming sources, had restricted the ability of the three
established, major U.S. television networks (I.E., ABC, CBS and NBC), to own and
syndicate television programming. The ultimate impact of the repeal of the FCC's
financial interest and syndication rules on the Company's operations cannot be
predicated at the present time, although there has been an increase in in-house
productions of programming for the networks' own use and potentially a decrease
of programming from independent suppliers such as the Company.
Under the Telecommunications Act of 1996 enacted in February 1996 (the "1996
Act"), manufacturers of television set equipment will be required to equip all
new television receivers with a so-called "V-Chip" which would allow for
parental blocking of violent, sexually-explicit or indecent programming based on
a rating for any given program that would be broadcast along with the program.
Unless the television industry establishes a voluntary ratings system by
February 1998, the FCC is directed
11
<PAGE>
by the 1996 Act to develop a ratings system based upon the recommendations of an
advisory committee selected by the FCC. A coalition of various segments of the
entertainment industry has announced plans to devise a voluntary industry
ratings code for rating video programming with respect to violent, sexual or
indecent content. The industry coalition has announced its intent to have these
new guidelines in place before February 1997. Other provisions of the 1996 Act
revise the multiple broadcast ownership rules, allow local exchange telephone
companies to offer multichannel video programming service, subject to certain
regulatory requirements, and allow for cable companies to offer local exchange
telephone service.
The impact on the Company of the changes brought about by the 1996 Act and
by accompanying changes in FCC rules cannot be predicted at the present time,
although it is expected that there will be an increase in the demand for video
programming product as a result of the likelihood that these regulatory changes
will facilitate the advent of additional exhibition sources for such
programming. However, it is possible that recent alliances of certain program
producers and television station group owners, coupled with the recent FCC rule
revisions allowing a single television station licensee to own television
stations reaching up to 35% of the nation's television households, may place
additional competitive pressures on program suppliers, such as the Company, to
the extent they are unaligned with the major networks or any television station
group owners.
12. LABOR RELATIONS. The Company and certain of its subsidiaries are
parties to several collective bargaining agreements. The Company's union
contracts are industry-wide and its labor relations are not entirely dependent
on its activities or decisions alone. Future revenues and earnings could be
adversely affected by a labor dispute or strike.
13. BROAD DISCRETION AS TO USE OF PROCEEDS. The Company's management will
have complete discretion in determining the use of most of the net proceeds of
this Offering as the majority of the net proceeds will be added to working
capital. See "Use of Proceeds."
14. ABSENCE OF CASH DIVIDENDS. The Company has never paid any cash
dividends on the Common Stock and has no present intention to declare or pay
cash dividends.
15. NO ASSURANCE OF PUBLIC MARKET. The Common Stock is currently listed on
the NNM. The Class A Warrants are currently listed on the NNM under the symbol
"KLOCW." The Company expects the Class C Warrants to be listed on the NNM upon
consummation of this Offering. There can be no assurance that such listing will
be obtained, will be maintained, that an adequate trading market for the Class C
Warrants will develop after this Offering or, if any such market develops, that
it will be maintained. There can be no assurance that, in subsequent trading,
the Company's securities will not trade at a level below the price being offered
hereby.
16. SHARES AVAILABLE FOR FUTURE SALE. Substantially all of the
shares of Common Stock to be outstanding after this Offering, and, subject to
issuance, the 26,639,998 shares of Common Stock issuable upon exercise of
outstanding options or warrants (excluding the warrants being sold to the
Underwriter and a consultant to the Company) or issuable upon conversion of
outstanding convertible securities will be freely tradeable in the public
markets, in certain cases pursuant to a registration statement or available
exemption from registration. Of such shares issuable upon exercise or conversion
of outstanding securities, approximately 14,423,523 shares are issuable at or
below $1.27 per share, 5,991,466 additional shares are issuable at or below
$1.58 per share and 2,300,000 additional shares are issuable at or below $2.00
per share. Approximately 7,657,875 shares held by affiliates will be subject to
a six month lock-up in favor of the Underwriter. See "Underwriting." The
availability of shares for public sale, or the perception of such availability,
may have a depressive effect on the market price of the Common Stock.
17. CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE CLASS C
WARRANTS. Purchasers of the Class C Warrants will be able to exercise the Class
C Warrants only if a current prospectus relating to the securities underlying
the Class C Warrants is then in effect and only if such securities are qualified
for sale or exempt from qualification under the applicable securities laws of
the
12
<PAGE>
states in which the various holders of Class C Warrants reside. Although the
Units will not knowingly be sold to purchasers in jurisdictions in which they
are not registered or otherwise qualified for sale, purchasers may buy Common
Stock or Class C Warrants in the aftermarket or may move to jurisdictions in
which the shares of Common Stock issuable upon exercise of the Class C Warrants
are not so registered or qualified during the period that the Class C Warrants
are exercisable. The Company will be unable to issue the Common Stock to those
persons desiring to exercise their Class C Warrants if a current prospectus
covering the securities issuable upon the exercise of the Class C Warrants is
not kept effective or if such securities are not qualified or exempt from
qualification in the states in which the holders of the Class C Warrants reside.
In addition, the Class C Warrants may not be called for redemption unless a
current prospectus relating to the underlying securities is then in effect.
Although the Company will use its best efforts to maintain a current prospectus
covering the securities underlying the Class C Warrants, there can be no
assurance that the Company will be able to do so.
18. RELATIONSHIP OF UNDERWRITER TO TRADING. The Underwriter may act in a
brokerage capacity with respect to the purchase or sale of Common Stock or Class
C Warrants in the over-the-counter market where each will trade. Under Rule
10b-6 promulgated under the Exchange Act, except as described below the
Underwriter and any soliciting broker-dealer will be prohibited from engaging in
any market-making activities or soliciting brokerage activities with regard to
the Company's securities during a period beginning nine business days prior to
the commencement of any such solicitation and ending on the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter and soliciting broker-dealers may
have to receive a fee for soliciting the exercise of the Class C Warrants. As a
result, the Underwriter and soliciting broker-dealers may be unable to continue
to make a market for the Company's securities during certain periods while the
Class C Warrants are exercisable except for passive market making allowed in
accordance with Rule 10b-6A promulgated by the Commission under the Exchange
Act. Such a limitation, while in effect, could impair the liquidity and market
price of the Company's securities. See "Underwriting."
19. POSSIBLE REDEMPTION OF CLASS C WARRANTS. The Class C Warrants are
redeemable by the Company, at a redemption price of $.10 per Class C Warrant,
upon at least 30 days' prior written notice, commencing on July , 1997 (one
year after the Effective Date) (or sooner with the consent of the Underwriter),
if the average of the closing high bid prices of the Common Stock as reported on
the NNM (or the last sale prices if listed on a national securities exchange)
exceeds 150% of the then exercise price of the Class C Warrants (initially
$ ) for 10 consecutive trading days ending on the third day prior to
the date on which notice of redemption is given, and provided that a current
prospectus relating to the underlying securities is then in effect. If the Class
C Warrants are redeemed, Class C Warrant holders will lose their right to
exercise the Class C Warrants except during such 30 day redemption period.
Redemption of the Class C Warrants could force the holders to exercise the Class
C Warrants at a time when it may be disadvantageous for the holders to do so or
to sell the Class C Warrants at the then market value of the Class C Warrants at
the time of redemption. See "Description of Securities -- Class C Warrants."
13
<PAGE>
THE COMPANY
GENERAL
The Kushner-Locke Company (the "Company") is a leading independent
entertainment company principally engaged in the development, production and
distribution of original feature films and television programming. The Company's
feature films are developed and produced for the made-for-video, pay cable and
theatrical motion picture markets. The Company's television programming has
included television series, mini-series, movies-for-television, animation and
reality and game show programming for the major networks, pay cable television,
first-run syndication and international markets. The Company established its
feature film production operations in April 1993. In September 1994, the Company
employed certain new, experienced international theatrical film sales personnel
to expand the Company into foreign theatrical distribution. In 1995, the Company
formed KLC/New City Tele-Ventures ("KLC/New City") to acquire films for
distribution through emerging new delivery systems, including pay cable,
pay-per-view, basic cable, video-on-demand and satellite.
The Company's feature film activities can be grouped into three areas:
higher-budget films intended for wide-screen domestic theatrical release
(historically, no more than one project per year), low-to-moderate budget films
released direct-to-video or on cable television and films and film rights
acquired for distribution only. In certain cases, the Company's low-to-moderate
budget films may have a limited theatrical release or a cable premiere before
being released in home video. For fiscal 1996, in the higher-budget film
category, the Company's feature film THE ADVENTURES OF PINOCCHIO, starring
Martin Landau, Jonathan Taylor Thomas and a puppet from Jim Henson's Creature
Shop and budgeted at approximately $29 million, is scheduled to be released
theatrically on July 26, 1996 in the U.S. in July 1996 by New Line Pictures (a
division of Turner Entertainment, "New Line"). The Company's lower-budget
feature slate for 1996 includes approximately 20 films, including SERPENT'S LAIR
starring Jeff Fahey, THE GRAVE starring Gabrielle Anwar, Eric Roberts and Craig
Sheffer, FREEWAY executive produced by Oliver Stone and starring Reese
Witherspoon, Kiefer Sutherland and Brooke Shields, WHOLE WIDE WORLD starring
Vincent D'Onofrio and Renee Zewelleger and being distributed in the U.S. by Sony
Classics, THE LAST TIME I COMMITTED SUICIDE starring Keanu Reeves, five
children's fantasy adventure films for Paramount Pictures under Paramount
Pictures' Moonbeam label and two animated feature film sequels to the Company's
1988 video release THE BRAVE LITTLE TOASTER for a division of The Walt Disney
Company. The Company's distribution activities consist primarily of foreign
distribution of product produced, overseen or acquired by the Company and,
through the KLC/ New City joint venture, domestic distribution of 60 low-budget
feature films to the pay-per-view, pay cable, basic cable and other ancillary
markets.
On May 6, 1996, the Company and Decade Entertainment ("Decade") entered into
an agreement to produce four theatrical action motion pictures. The motion
pictures will be produced, subject to approval by the Company of certain
creative aspects of such movies, by Decade and executive produced by Joel Silver
(producer of EXECUTIVE DECISION and the LETHAL WEAPON and two DIE HARD action
pictures) and Richard Donner (director/producer of THE OMEN and SUPERMAN). Under
the agreement, the Company has agreed to guarantee payment of $3,200,000 per
picture payable upon the delivery of the "mandatory delivery items" (as defined
in such agreement) for each picture in consideration of receipt of foreign
distribution rights. The agreement may be extended, at Decade's option, to
include a fifth picture. The initial two films under the agreement are WHITE
ROSE and MADE MEN, neither of which yet has a scheduled release date.
Since its inception 1983, the Company has produced or distributed over 1,000
hours of original television programming, including various television series,
movies-for-television and mini-series. The Company's movies-of-the-week
currently in production or which have aired recently include PRINCESS IN LOVE
starring Julie Cox in the book version of Princess Diana's affair for CBS, EVERY
WOMAN'S DREAM starring Jeff Fahey for CBS, A HUSBAND, A WIFE AND A LOVER
starring Judith Light for CBS and ECHO starring Jack Wagner for ABC. In
addition, in pre-production for NBC is the fifth sequel to the JACK REED movies
starring Brian Dennehy. The Company has produced a one-hour prime time
14
<PAGE>
pilot for ABC as a potential mid-season replacement series entitled THE GUN
written and directed by Emmy award winner Jim Sadwith starring Rosanna Arquette
and Peter Horton. The pilot was co-executive produced by Robert Altman (director
of M*A*S*H., THE PLAYER and PRET-A-PORTER). As of March 31, 1996, the Company
had 10 movies-for-television and various television series in different stages
of development for potential production.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources -- Credit Facility."
RECENT DEVELOPMENTS
On June 25, 1996, the Company closed a $40 million syndicated revolving
credit agreement with a group of banks led by Chemical. Such agreement provides
for borrowings by the Company based on specified percentages of domestic and
international accounts and contracts receivable and a specified percentage of
the Company's book value of unamortized library film costs (as adjusted). In
addition, the Company will from time to time allocate a production tranche in
its line of credit for the Company's productions. Such tranche will allow the
Company to borrow up to 50% of the production deficit after accounting for
specified percentages of pre-sales, licensing fees and similar revenues from
third parties and a required Company equity participation. All loans made
pursuant to such agreement are secured by substantially all of the Company's
assets and bears interest, at the Company's option, either (i) at LIBOR (5.19%
as of July 9, 1996) plus 3% (for that portion of the borrowing base supported by
accounts or contracts receivable) or 4% (for that portion of the borrowing base
supported by unamortized library film costs or for loans made under the
production tranche) or (ii) at the Alternate Base Rate (which is the greater of
(a) Chemical's Prime Rate (8.25% as of July 9, 1996), (b) Chemical's Base CD
Rate (5.40% as of July 9, 1996) plus 1% or (c) the Federal Funds Effective Rate
(5.14% as of July 9, 1996) plus 1/2%) plus 2% (for that portion of the borrowing
base supported by accounts or contracts receivable) or 3% (for that portion of
the borrowing base supported by unamortized library film costs or for loans made
under the production tranche).
CERTAIN FORWARD LOOKING STATEMENTS
THE ADVENTURES OF PINOCCHIO. The Company's largest theatrical feature film
project to date is currently titled THE ADVENTURES OF PINOCCHIO. The film has a
current budgeted cost of approximately $29 million. Such film is scheduled to be
released domestically on July 26, 1996 in a wide theatrical release. The film
stars Academy Award winner Martin Landau as "Geppetto," Jonathan Taylor Thomas,
from the hit T.V. series "Home Improvement," as Pinocchio and a puppet from Jim
Henson's Creature Shop. While it is possible that THE ADVENTURES OF PINOCCHIO
may be a success, it is also possible that such film will not be widely accepted
by the viewing public and thus will not be economically successful for the
Company. It is also possible that the success of the film will be adversely
impacted by other, more popular summer feature film releases or by competition
from the Summer Olympics which will be held from July 19 to August 4, 1996.
The film is being distributed domestically through New Line Pictures (a
division of Turner Entertainment Co., "New Line"). The Company's only prior wide
release theatrical feature film, ANDRE, achieved $17 million in domestic box
office receipts (I.E., the total of theatrical ticket sales, which revenue is
allocated among various parties). While the Company has entered into licenses
and pre-sales which substantially cover its portion of the budgeted cost of THE
ADVENTURES OF PINOCCHIO, the film will have to achieve domestic and foreign box
office levels substantially in excess of the levels achieved by ANDRE for the
Company to realize significant additional profitability on the film. See "Risk
Factors -- Dependence on a Limited Number of Projects." In addition, while the
popular and better known Walt Disney animated version of the Carlo Collodi story
was successful, it is possible that the Company's live action version may not
be. The film is still in the post-production process and is currently in front
of preview and test audiences. It is anticipated that the film's target audience
will include children who will be off from school during the summer periods. It
is possible that a delay, if any, which precludes the release during the summer
months or limits the time during the summer during which the film is available
for viewing could have a negative effect on the success of the film. In
15
<PAGE>
addition, while the Company anticipates that sufficient funds for prints and
advertising will be devoted to the project commensurate with the funds usually
spent with the level of the screens to which the film is scheduled to be
released, if such amounts were not spent by New Line or were not spent in ways
that effectively promote and support the picture, the success of the film could
be negatively affected.
As part of its arrangement with New Line, the Company has retained primarily
the international distribution rights for the film and certain overages on the
picture. As part of its effort to fund its portion of the film's budget, the
Company has pre-sold most of the foreign markets and thus limited its potential
upside in the project above that which it otherwise would have had. The
agreements the Company has entered into for such pre-sales typically allow the
Company to participate in the revenues of the film only after the foreign
distributor has recouped its fees and costs. In addition, the Company will
participate in the domestic gross proceeds of the film in excess of certain
minimum amounts, which may not be exceeded. Further, the Company may participate
in certain other ancillary revenue streams related to the film. If the film does
not reach certain sales levels (domestically, internationally or in the
ancillary markets, including merchandising), including sales which would allow
for the recoupment of costs related to the realization of such revenues,
additional revenues to the Company would be limited or non-existent. In the
event the film is successful, the Company will be required to share its net
profits with certain third parties, including Newmarket Capital Group L.P.
("Newmarket"), the production lender for the film. The Company gave Newmarket a
net profit participation in the film in connection with an amendment to the
production loan agreement in which amendment Newmarket agreed to accept certain
presales of the film made by the Company. The Company has also entered into an
oral settlement agreement with a third party pursuant to which the Company has
paid $10,000 to such third party and given such third party ten percent of the
Company's net profit participation in connection with the film.
The foregoing are some of the potential issues which could impact the
success of THE ADVENTURES OF PINOCCHIO, and thus the Company. In addition, there
are many other events which could adversely affect this or any film which are
not specifically set forth herein. Any potential investor must be aware that the
production and distribution of feature films is a risky, unpredictable venture.
The actual results may differ materially based upon these or other factors. See
"Risk Factors -- Television and Feature Film Industries."
KLC/NEW CITY TELE-VENTURES; NEW CITY RELEASING. In 1995, the Company formed
KLC/ New City Tele-Ventures ("KLC/New City") with New City Releasing, Inc. ("New
City") to acquire films for distribution through the emerging new delivery
systems. The Company has begun preliminary discussions with New City in
connection with the possible acquisition by the Company of the 35% of the
KLC/New City joint venture it does not currently own and/or the possible
acquisition by the Company of all or a portion of New City itself. New City owns
the right to distribute certain third party programs and films through its
distribution channels. While such discussions are preliminary in nature and the
amount and type of consideration has not been agreed upon, the Company believes
that any such transaction would involve an option to acquire KLC/New City or New
City and/or a combination of cash and a stock for stock exchange (which may
require approval by the Company's shareholders) and a possible employment
agreement for New City's principals. Any such stock for stock exchange may
result in additional dilution of the Common Stock and additional shares which
may be available for public sale and could impact the trading value of the
Common Stock. The parties may determine, for various reasons, including
differences in valuation of the business, differences over control and
operational issues and differences over artistic issues to not proceed with any
such transaction. Accordingly, there is no assurance that any transaction will
be consummated with New City and, if consummated, upon what terms such
transaction would be consummated.
TVFIRST. In fiscal 1995 the Company entered into a partnership with David
Sams Industries, Inc. named TVFirst ("TVFirst") which creates and markets
infomercials. One of TVFirst's current projects is a Christian music
infomercial, in which a recording of Christian music sung by leading gospel
artists is marketed. TVFirst has purchased air time for such infomercial but
neither TVFirst
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<PAGE>
nor either of its partners (including the Company) had the excess available
resources to fund such purchases. Messrs. Locke and Kushner have loaned to
TVFirst $30,000 as of March 31, 1996 to enable TVFirst to purchase such air
time; subsequent loans by Messrs. Locke and Kushner have totaled an additional
$325,000 through May 10, 1996. Such loans, subject to final documentation, will
be guaranteed by the Company, will bear interest at a rate of prime (8.25% as of
July 8, 1996) plus 1% and are anticipated to be repaid within six months, or
possibly earlier based upon the cash flow of TVFirst. In addition, each lender
will also receive an additional amount equal to 10% of the principal amount
loaned by such lender, which amount will be payable on the repayment date.
Furthermore, each lender will receive a profit participation in the profits, if
any, related to the Christian music infomercial, up to an amount equal to 5% of
its principal amount, which amount will be payable on the first anniversary of
such repayment. There is no assurance that the infomercial will generate
revenues in excess of its programming and media costs. The foregoing transaction
was approved by a majority of the independent directors of the Company's Board
of Directors.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units, after deducting
underwriting commissions and expenses of the Offering payable by the Company,
are estimated to be approximately $8,185,000, assuming no exercise of the
Over-allotment Option. The Company will use $1,500,000 of the net proceeds of
the Offering to repay the Bridge Notes, anticipates using (depending upon market
conditions, market responses and similar factors) approximately $1 million to $2
million for additional investments in TVFirst in order to acquire additional air
time for the infomercial airing under the name KEEP THE FAITH (see "Business --
Joint Ventures to Exploit Ancillary Markets") and anticipates using (depending
upon available products, market conditions and similar factors) approximately $1
million to $2 million for additional investments in KLC/New City to acquire
additional products (see "Business -- Joint Ventures to Exploit Ancillary
Markets") with the remainder of such net proceeds to be added to working capital
including for the development and production of additional feature film and
television products. Any additional proceeds from the exercise of the Warrants
or from the exercise of the Over-allotment Option will be added to working
capital. All amounts added to working capital will be available for general
corporate purposes.
On May 10, 1996, in order to increase its working capital, the Company
completed an offering and sale of $1,500,000 of the Bridge Notes pursuant to a
private placement. As part of such transaction, the purchasers of the Bridge
Notes have the right to receive repayment in full of the Bridge Notes and
issuance of Bonus Shares equal in value to 50% of the principal amount of the
Notes so purchased based upon the closing high bid price of the Common Stock on
the NNM on the Effective Date. The proceeds from such transaction were used for
working capital purposes. The Bonus Shares are among the securities being
registered pursuant to the registration statement of which this prospectus is a
part. See "The Offering." The Bridge Notes bear interest at a rate of 5% per
annum and will mature upon the Effective Date of this Offering. The issuance of
the Bonus Shares will result in approximately a $750,000 charge to interest
expense. This interest expense will be amortized over the estimated term of the
Bridge Notes beginning in May 1996 and, in any event, will be fully amortized at
the date of issuance of the Bonus Shares.
The Company expects to continue to use a significant amount of its working
capital to finance its development, production and distribution activities,
including those of its feature film division, and to fund its obligations
pending collection of license fees. The amount of working capital required for
production activities will vary depending on, among other things, actual
production costs, the timing of payments from, among others, proceeds from
output arrangements, the networks and other third parties and the availability
of additional licensing revenue. Additionally, the Company has expanded its
distribution activities and may use a portion of the net proceeds to finance
distribution activities in international or other markets. Further, the Company
expects to use a portion of its working capital to fund the purchase of
additional air time by TVFirst. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Company from time to time considers the acquisition of assets or
businesses complimentary to its current operations and may use a portion of the
net proceeds for such purposes. However, the Company does not have pending any
agreements for the acquisition of any business nor has it allocated any portion
of the net proceeds of this Offering for any specific acquisitions.
Pending the application of the net proceeds of this Offering for the
purposes described above, the Company intends to invest the funds in short-term
interest-bearing instruments.
The Company will not receive any of the proceeds from the sales of the
Selling Security Holders' Shares.
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<PAGE>
MARKET FOR COMMON STOCK AND CLASS A WARRANTS AND DIVIDENDS
MARKET INFORMATION
The Company's Common Stock is quoted on the NNM under the symbol "KLOC."
Additionally, the stock is listed on the Pacific Stock Exchange under the symbol
"KLO." The Class A Warrants are quoted on the NNM under the symbol "KLOCW." The
following table sets forth the range of high and low closing prices for the
Common Stock and the Class A Warrants, as reported on the NNM, for the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK WARRANTS
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
FISCAL 1994
First Quarter (ended December 31, 1993)........................... $ 1.38 $ 0.84 $ 0.28 $ 0.19
Second Quarter (ended March 31, 1994)............................. 1.09 0.75 0.28 0.19
Third quarter (ended June 30, 1994)............................... 1.53 0.72 0.53 0.41
Fourth Quarter (ended September 30, 1994)......................... 1.91 0.88 0.28 0.22
FISCAL 1995
First Quarter (ended December 31, 1994)........................... $ 1.03 $ 0.69 $ 0.31 $ 0.19
Second Quarter (ended March 31, 1995)............................. 0.97 0.69 0.22 0.16
Third quarter (ended June 30, 1995)............................... 0.88 0.69 0.13 0.09
Fourth Quarter (ended September 30, 1995)......................... 0.81 0.50 0.19 0.13
FISCAL 1996
First Quarter (ended December 31, 1995)........................... $ 0.75 $ 0.47 $ 0.16 $ 0.09
Second Quarter (ended March 31, 1996)............................. 1.03 0.63 0.50 0.28
Third Quarter (ended June 30, 1996)............................... 1.50 0.91 0.53 0.28
Fourth Quarter (through July 10, 1996)............................ 1.44 1.22 .44 .34
</TABLE>
On July 9, 1996, the closing high bid price for the Common Stock as reported
on the NNM was $1.31 and the closing high bid price for the Class A Warrants was
$0.38. At July 8, 1996, there were approximately 780 record holders of the
Common Stock and 14 record holders of the Class A Warrants.
DIVIDENDS
The Company has never paid any cash dividends and has no present intention
to declare or to pay cash dividends. The payment of dividends also is restricted
by covenants in the Company's credit agreement and the indentures and fiscal
agency agreements under which the Company's Convertible Subordinated Debentures
were issued. It is the present policy of the Company to retain any earnings to
finance the growth and development of the Company's business.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996, on a pro forma basis to reflect the Bridge Notes and as adjusted to
give effect to the sale by the Company of the Units being offered hereby and the
application of the net proceeds therefrom (assuming no exercise of the
Underwriter's Over-allotment Option).
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
--------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term obligations (net of unamortized issuance costs):
5% Convertible Subordinated Notes (1)................................... $ 0 $ 1,307 $ 0
Notes payable (2)....................................................... 16,690 16,690 16,690
--------- ------------- -----------
--------- ------------- -----------
Long-term obligations, including current portion (net of unamortized
issuance costs):
Bank line of credit (3)................................................. 15,000 15,000 15,000
Series A, Convertible Subordinated Debentures due 2000, net (4)......... 76 76 76
Series B, Convertible Subordinated Debentures due 2000, net (4)......... 2,955 2,955 2,955
8% Convertible Subordinated Debentures due 2000, net (4)................ 8,482 8,482 8,482
9% Convertible Subordinated Debentures due 2002, net (4)................ 4,598 4,598 4,598
Stockholders' equity:
Common Stock, no par value; 80,000,000 shares authorized, 37,437,553
shares outstanding at March 31, 1996, 38,069,287 shares outstanding on
a pro forma basis and shares outstanding as adjusted (4)........ 25,089 25,089 33,274
Accumulated Deficit..................................................... (2,990) (2,990) (3,183)
--------- ------------- -----------
$ 69,900 $ 71,207 $ 77,892
--------- ------------- -----------
--------- ------------- -----------
</TABLE>
- ------------------------
(1) On May 10, 1996 the Company completed an offering and sale of $1,500,000 of
its Bridge Notes pursuant to a private placement. The Company incurred
$193,000 of issuance costs in connection with such transaction. As part of
the transaction, purchasers of the Bridge Notes have the right to receive
payment in full of the Bridge Notes on the closing of this Offering together
with the issuance of the Bonus Shares. See "Use of Proceeds."
(2) Represents short-term production obligations of entities presented on a
consolidated basis with the Company. Of such obligations, $4,826,667 was
guaranteed by The Kushner-Locke Company as of March 31, 1996 and the balance
is recourse to the related film assets. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Production/Distribution Loans."
(3) On June 25, 1996, the Company closed a $40 million syndicated revolving
credit agreement with a group of banks led by Chemical to replace its
previous $15 million revolving credit facility. See "The Company -- Recent
Developments" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
Credit Facility."
(4) As of March 31, 1996, an aggregate of 14,916,113 additional shares of Common
Stock were issuable upon conversion of the Company's outstanding Convertible
Subordinated Debentures, an aggregate of 5,472,808 additional shares of
Common Stock were issuable upon the exercise of the Company's outstanding
warrants and an aggregate of 4,647,096 additional shares of Common Stock
were issuable upon the exercise of the Company's outstanding options.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following selected financial data are derived from the consolidated
financial statements of The Kushner-Locke Company. The data should be read in
conjunction with the consolidated financial statements, related notes, and other
financial information included or incorporated by reference herein.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------------- --------------------
1995 1994 1993 1992 1991 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues............. $ 20,407 $ 50,736 $ 42,487 $ 24,052 $ 28,006 $ 29,337 $ 11,614
Earnings (Loss) from
Operations.................... (835) (7,424) (1,807) 1,529 3,152 3,004 469
Net Earnings (Loss)............ $ (3,975) $ (6,765) $ (1,826) $ 244 $ 1,445 $ 1,140 $ (1,003)
Net Earnings (Loss) Per Common
and Common Equivalent Shares
Outstanding................... $ (0.13) $ (0.23) $ (0.06) $ 0.01 $ 0.08 $ 0.03 $ (0.03)
Weighted Average Shares
Outstanding................... 31,713 29,373 28,372 20,958 17,846 35,961 31,159
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, AT MARCH 31, 1996
----------------------------------------------------- ------------------------------------------
1995 1994 1993 1992 1991 ACTUAL PRO FORMA(1) AS ADJUSTED(2)
--------- --------- --------- --------- --------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Cash and cash
equivalents........ $ 3,139 $ 15,681 $ 6,542 $ 2,491 $ 2,867 $ 3,060 $ 4,367 $ 11,052
Restricted Cash..... 1,162 -- -- -- -- 2,420 2,420 2,420
Accounts Receivable,
Net................ 7,864 6,177 5,360 2,936 2,970 18,484 18,484 18,484
Film Costs, Net of
Accumulated
Amortization....... 73,716 30,688 43,031 42,680 33,807 75,022 75,022 75,022
Total Assets........ $ 88,952 $ 54,254 $ 56,131 $ 49,847 $ 41,364 $ 102,184 $ 103,491 $ 110,176
Bank Line of
Credit............. $ 15,000 $ 15,000 $ 7,907 $ -- $ -- $ 15,000 $ 15,000 $ 15,000
Notes Payable....... 28,398 9,600 8,007 5,582 3,349 16,690 16,690 16,690
Convertible
Subordinated
Debentures, Net.... 17,745 22,056 4,296 4,942 4,985 16,110 17,417 16,110
Total Liabilities... $ 69,745 $ 35,713 $ 32,252 $ 31,674 $ 23,568 80,085 81,392 80,085
Stockholders'
Equity............. $ 19,207 $ 18,541 $ 23,879 $ 18,173 $ 17,796 $ 22,099 $ 22,099 $ 30,091
--------- --------- --------- --------- --------- ----------- ------------- --------------
--------- --------- --------- --------- --------- ----------- ------------- --------------
</TABLE>
- ------------------------
(1) On May 10, 1996 the Company completed an offering and sale of $1,500,000 of
its Bridge Notes pursuant to a private placement. As part of the
transaction, purchasers of the Notes have the right to receive payment in
full of the Bridge Notes upon the closing of this Offering together with the
issuance of the Bonus Shares. The issuance of Bonus Shares will result in
approximately a $750,000 charge to interest expense. This interest expense
will be amortized over the estimated term of the Bridge Notes beginning in
May 1996 and, in any event, will be fully amortized at the date of issuance
of the Bonus Shares. The Company incurred $193,000 of issuance costs in
connection with such transaction. See "Use of Proceeds."
(2) Gives effect to the sale by the Company of $10 million of Units, net of
discounts, commissions and expenses of the Company in connection with the
Offering, and the repayment by the Company of the Bridge Notes.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues are currently derived primarily from the production
or the acquisition of distribution rights of films released in the U.S. by
studios, pay cable, basic cable, and videocassette companies; and from the
development, production and distribution of television programming for the major
U.S. television networks, basic and pay cable television and first-run
syndication; as well as from the licensing of all rights to the films and
television programs in international territories. While the Company generally
finances all or a substantial portion of the budgeted production costs of its
programming through domestic and international licensing and other arrangements,
the Company typically retains rights in its programming which may be exploited
in future periods or in additional territories. In April 1993, the Company
established a feature film operation to produce low and medium budget films for
theatrical and/or home video or cable release. The Company produces a limited
number of higher-budget theatrical films to the extent the Company is able to
obtain an acceptable domestic studio to release the film theatrically in the
U.S.
The Company's revenues and results of operations are significantly affected
by accounting policies required for the industry and management's estimates of
the ultimate realizable value of its films and programs. Production advances
received prior to delivery or completion of a program are treated as deferred
revenues and are recorded as either production advances or deferred license
fees. Production advances are generally recognized as revenue on the date the
program is delivered or available for delivery. Deferred license fees are
recognized as revenue on the date of availability and/or delivery of the item of
product.
The Company generally capitalizes all costs incurred to produce a film,
including the interest expense funded under production loans. Such costs also
include the actual direct costs of production, certain exploitation costs and
production overhead. Capitalized exploitation or distribution costs include
those costs that clearly benefit future periods such as film prints and
prerelease and early release advertising that is expected to benefit the film in
future markets. These costs, as well as participation and talent residuals, are
amortized each period on an individual film or television program basis 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 film
or program from all sources. In the event management reduces its estimates of
the future gross revenues associated with a particular item of product, which
had 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-end could result.
Gross profits for any period are a function in part of the number of
programs 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 has been delivered or is available for delivery,
significant fluctuations in revenues and results of operations may occur from
period to period. Thus, a change in the amount of entertainment product
available for delivery from period to period has materially affected a given
period's revenues and results of operations and year-to-year results may not be
comparable. The continuing shift of the Company's product mix during the fiscal
year may further affect the Company's quarter to quarter or year to year results
of operations as new products may be amortized differently as determined by
length of product life cycle and the number of related revenue sources.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1996 AND 1995
The Company's operating revenues for the six months ended March 31, 1996
were $29,337,000, an increase of $17,723,000, or 153%, from $11,614,000 from the
comparable six month period ended March 31, 1995. This increase was due
primarily to the timing of delivery and/or availability of films and television
programs. The Company has shifted its current product mix towards a greater
percentage of feature films due to opportunities available to the Company.
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<PAGE>
The Company recognized approximately $10,534,000, or approximately 36% of
revenues during the first half of fiscal 1996 from the delivery and/or
availability of (a) the ABC network mini-series INNOCENT VICTIMS starring Hal
Holbrook and Rick Schroeder, and (b) the CBS network movie A HUSBAND, A WIFE AND
A LOVER starring Judith Light and Jay Thomas; and $7,101,000, or approximately
24% of revenues from the delivery and/or availability of five feature films: (a)
FREEWAY, executive produced by Oliver Stone and starring Kiefer Sutherland,
Reese Witherspoon and Brooke Shields, (b) NAKED SOULS starring Pamela Anderson,
Dean Stockwell and David Warner, (c) SERPENT'S LAIR, starring Jeff Fahey, (d)
THE GRAVE starring Gabrielle Anwar, Eric Roberts and Craig Sheffer, and (e) the
six JOSH KIRBY: TIME WARRIOR films for Paramount. The majority of remaining
revenues for the period came from a license to a German distributor of rights to
distribute portions of the Company's library in Germany, from continuing
licenses of completed product from the Company's library to domestic cable
channel operators and international sub-distributors, and from delivery and/or
availability of various product from the Company's library.
Operating revenues for the first half of fiscal 1995 were primarily
attributable to the delivery and/ or availability of the theatrical feature film
WES CRAVEN PRESENTS: MINDRIPPER, the two television movies for CBS entitled
DANGEROUS INTENTIONS and LADY KILLER, and three direct-to-video titles.
Costs relating to operating revenues were $24,365,000 during the first six
months of fiscal 1996 as compared to $9,168,000 during the comparable period of
fiscal 1995. The increase resulted from significantly greater revenues in
connection with increased production and distribution levels. This higher level
of operating activity resulted in the Company's increased staffing and
personnel, primarily in the feature film and international distribution
divisions, and the Company's funding of overhead and development costs
associated with joint ventures or partnerships related to interactive/multi-
media applications, cable distribution and infomercial production.
Interest expense for the first six months ended March 31, 1996 was
$1,904,000 as compared to $1,592,000 for the comparable period ended March 31,
1995. The increase was due to higher average borrowings under the Company's line
of credit primarily associated with increased production and acquisition
financing of non-network movies. Total notes payable increased to $31,690,000 at
March 31, 1996 from $14,770,000 at March 31, 1995. In the event the Company
enters into the $40 million line of credit with Chase and borrows amounts
thereunder in excess of the current outstanding balance under the Imperial Bank
facility, interest expense will most likely increase.
The Company's estimated effective income tax rate was approximately 1.75%
for the first six months ended March 31, 1996 compared to an estimated income
tax expense of approximately 0% for the first six months ended March 31, 1995.
The $20,000 tax expense in first half of fiscal 1996 consisted of minimum state
taxes related to certain active subsidiary companies.
The Company reported earnings of $1,140,000, or $.03 per share, for the
first six months ended March 31, 1996 as compared to a net loss of $(1,003,000),
or $(.03) per share, for the comparable six month period ended March 31, 1995.
Weighted number of common shares outstanding for the comparable periods were
35,961,000 in 1996 and 31,159,000 in a 1995. The earnings in the first half of
fiscal 1996 resulted primarily from the Company completing a portion of its film
and television projects in process and recognition of revenues on existing
contracts receivable ("pre-sales") made to third parties licensing the rights to
distribute those projects in certain media and territories. The loss in the
first half of fiscal 1995 resulted primarily from the delivery and/or
availability for delivery of fewer titles and ongoing fixed expenses related to
the Company's feature film, television and international distribution divisions.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1994
The Company's operating revenues for the fiscal year ended September 30,
1995 were $20,407,000, a decrease of $30,329,000, or 60%, from $50,736,000 from
the prior fiscal year. This
23
<PAGE>
decrease was due primarily to the timing of delivery and/or availability of
films and television programs. The Company has shifted its current product mix
towards a greater percentage of feature films due to opportunities available to
the Company. Feature films generally have a longer lead time than television
programs from the time of financial commitment to the recognition of related
revenues.
The Company recognized approximately $4,028,000 of revenues during fiscal
1995 from the delivery and/or availability of the three low budget feature films
LADY IN WAITING, THE LAST GASP and WES CRAVEN PRESENTS: MINDRIPPER to
WarnerVision and approximately $9,501,000 for the three television network
movies DANGEROUS INTENTIONS for CBS, LADY KILLER for CBS and JACK REED IV: A
KILLER AMONGST US for NBC. The majority of remaining revenues for the period
came from the release of six adult thriller direct-to-video films; from two of
the six fantasy adventure feature films for Paramount Pictures under the banner
JOSH KIRBY: TIME WARRIOR; and from continuing sales of licenses for completed
product from the Company's library of titles to international distributors.
Operating revenues for fiscal 1994 were primarily attributable to the
delivery and/or availability of the major theatrical feature film Andre of
approximately $9,992,000, the three network television movies TO SAVE THE
CHILDREN for CBS, GETTING GOTTI for CBS, and JACK REED III: A SEARCH FOR JUSTICE
for NBC of approximately $9,333,000, and the network mini-series JFK: RECKLESS
YOUTH for ABC of approximately $9,273,000. The Company also recognized
approximately $14,511,000 of revenues from the delivery and/or commencement of
distribution of fifteen episodes of the television series HARTS OF THE WEST for
CBS.
Costs relating to operating revenues were $17,404,000 during fiscal 1995 as
compared to $54,952,000 during fiscal 1994. As a percentage of operating
revenues, costs relating to operating revenues were approximately 85% for fiscal
1995 compared to approximately 108% for fiscal 1994. During the fourth quarter
of fiscal 1995, the Company revised its estimate of future revenue for certain
older television programs which resulted in reductions of the carrying value of
such programs and an expense of approximately $888,000 recorded during the
fourth quarter of fiscal 1995. Without such reductions, costs relating to
operating revenues would have been approximately $18,292,000, or approximately
90% of revenues for fiscal 1995. During the fourth quarter of fiscal 1994, the
Company revised its estimate of future revenue from programming no longer being
produced by the Company resulting in a write down expense of approximately
$7,800,000 for fiscal 1994. The major component of such reductions consisted of
the episodic series 1ST AND TEN starring O.J. Simpson. Without such reductions,
costs relating to operating revenues would have been $47,152,000, or
approximately 93% of revenues, for fiscal 1994.
Selling, general and administrative expenses increased to $3,838,000 in
fiscal 1995 from $3,280,000 in fiscal 1994. Expenses associated with increased
staffing and personnel, primarily in the feature film and international
distribution divisions, were the major factors contributing to the increase. In
addition, the Company funded overhead and development costs associated with its
entry into new business segments including interactive/multimedia, cable
distribution and infomercial production, which are conducted through joint
ventures or partnerships.
Interest expense for the year ended September 30, 1995 was $3,409,000 as
compared to $2,209,000 for the year ended September 30, 1994. The increase was
due to incurring interest costs for the full period on the Company's four issues
of Convertible Subordinated Debentures during the 1995 fiscal year; an increase
in amortization of capitalized issuance costs related to the Convertible
Subordinated Debentures and higher average borrowings under the Company's line
of credit associated with increased production and acquisition financing of
non-network movies. Total indebtedness for borrowed money increased to
$46,143,000 at September 30, 1995 from $31,656,000 at September 30, 1994. The
weighted average interest rate under the line of credit was 10% during fiscal
1995 compared to 7.81% in fiscal 1994, while the Convertible Subordinated
Debentures Series A, Series B, 8% and 9% bear interest fixed at 10%, 13 3/4%, 8%
and 9%, respectively.
24
<PAGE>
The Company's estimated effective income tax benefit was 0% for the year
ended September 30, 1995 compared to an estimated effective income tax benefit
of approximately 24% for the year ended September 30, 1994. The tax benefit in
fiscal 1994 was due to partial recognition of the benefit of deferred taxes
during the fiscal year ended September 30, 1994.
The Company reported a net loss of ($3,975,000), or ($.13) per share, for
the fiscal year ended September 30, 1995 and net loss of ($6,765,000), or ($.23)
per share, for the year ended September 30, 1994 when the Company reported a
loss before cumulative effect of a change in accounting principle from Statement
of Financial Accounting Standards (SFAS) No. 96 to SFAS No. 109 "Accounting for
Income Taxes" of ($7,159,000), or ($.24) per share. The losses in fiscal 1995
and 1994 resulted primarily from the above described non-cash reductions in the
carrying value of certain programs no longer being produced by the Company and
the increased interest expense and amortization of capitalized issuance costs.
The losses in fiscal 1995 were augmented by certain expenses associated with the
expansion of the Company's feature film and international distribution
divisions.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1994 AND 1993
The Company's operating revenues for the fiscal year ended September 30,
1994 were $50,736,000, an increase of $8,249,000, or 19%, from $42,487,000 from
the prior fiscal year. This increase was due primarily to the delivery and/or
availability of the feature film ANDRE, 15 episodes of the network prime-time
series HARTS OF THE WEST, the network television movies TO SAVE THE CHILDREN,
GETTING GOTTI, and JACK REED III: A SEARCH FOR JUSTICE and the network
mini-series JFK: RECKLESS YOUTH, as well as international distribution revenues
from HARTS OF THE WEST and JFK: RECKLESS YOUTH. Operating revenues during fiscal
1993 were primarily attributable to the delivery and/or availability for
additional markets of the late-night network series Sweating Bullets, the
network mini-series Family Pictures, the made-for-cable series 1ST AND TEN and a
pay-cable series for which the Company acted as a producer-for-hire.
During fiscal 1994 the Company recognized revenues from the delivery and/or
availability of the feature film ANDRE of approximately $9,992,000; from the
mini-series JFK: RECKLESS YOUTH of approximately $9,273,000; and recognized
approximately $14,511,000 of revenues from the delivery and/or commencement of
distribution of HARTS OF THE WEST during fiscal 1994 as compared to
approximately $3,061,000 for HARTS OF THE WEST during fiscal 1993.
Costs relating to operating revenues were $54,952,000 during fiscal 1994 as
compared to $41,497,000 during fiscal 1993. As a percentage of operating
revenues, costs relating to operating revenues were approximately 108% for
fiscal 1994 compared to approximately 98% for fiscal 1993. During the fourth
quarter of 1994, the Company revised its estimate of future revenue from certain
programming no longer being produced by the Company resulting in reductions of
the carrying value of such programs and expense of approximately $7,800,000
during the fourth quarter of fiscal 1994. The major component of such reductions
consisted of the episodic series 1ST AND TEN starring O.J. Simpson. Without such
reductions, costs relating to operating revenues would have been $47,152,000, or
approximately 93%, for fiscal 1994. During the fourth quarter of fiscal 1993,
the Company revised its ultimate revenue estimates in certain programming
resulting in increased amortization of approximately $4.3 million.
Selling, general and administrative expenses increased to $3,208,000 in
fiscal 1994 from $2,797,000 in fiscal 1993. Expenses associated with increased
staffing and personnel, primarily in the feature film division, were the major
factors contributing to the increase.
Interest expense for the year ended September 30, 1994 was $2,209,000 as
compared to $1,173,000 for the year ended September 30, 1993. Total
indebtedness, which consists of amounts due under the Company's line of credit
and Convertible Subordinated Debentures, increased to $31,656,000 at September
30, 1994 from $12,203,000 at September 30, 1993. The reason for the increase was
the additional interest and amortization of capitalized issuance costs related
to the issuance of the 8% and 9% Convertible Subordinated Debentures during
fiscal 1994 and higher average borrowings under the Company's line
25
<PAGE>
of credit. The weighted average interest rate under the line of credit was 7.81%
during fiscal 1994 compared to 7.25% in fiscal 1993, while the Convertible
Subordinated Debentures Series A, Series B, 8% and 9% bear interest fixed at
10%, 13 3/4%, 8% and 9%, respectively.
The Company's estimated effective income benefit was 24% for the year ended
September 30, 1994 compared to an estimated effective income tax benefit of
approximately 37% for the year ended September 30, 1993. The decrease was due to
recognition of the benefit of deferred tax assets during the fiscal year ended
September 30, 1994.
The Company reported a loss before cumulative effect of a change in
accounting principle of ($7,159,000), or ($.24) per share, and net loss of
($6,765,000), or ($.23) per share, for the year ended September 30, 1994 and
($1,826,000), or ($.06) per share, for the year ended September 30, 1993. The
losses in fiscal 1994 and 1993 resulted primarily from the above described
reductions in the carrying value of certain programs no longer being produced by
the Company and the increased interest expense and amortization of capitalized
issuance costs incurred as a result of the 8% and 9% Convertible Subordinated
Debenture offerings.
QUARTERLY RESULTS OF OPERATION
A large percentage of a film or television program's revenues is recognized
when the film or television program is delivered. As a result, significant
fluctuations in the Company's total revenues and net income can occur from
period to period depending on the delivery or availability dates of films and
television programs. Pursuant to the Company's accounting policy, as required
under generally accepted accounting principles, capitalized film and television
program costs are reviewed on a quarterly basis and any portion of such costs
that subsequently appear not to be fully recoverable from future revenues are
charged to expense during the period in which the loss becomes evident. As a
result, some quarters or years will have fluctuating levels of expenses due to
such losses.
The following table sets forth selected data by quarter included in the
Company's Consolidated Statements of Operations (unaudited). This information
has not been audited or reviewed by KPMG Peat Marwick LLP.
<TABLE>
<CAPTION>
QUARTER
ENDED IN QUARTERS ENDED IN 1995
1996 ---------------------------------------------------
------------ SEPTEMBER 30
MARCH 31 DECEMBER 31 (1) JUNE 30 MARCH 31
------------ ------------ ------------ --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating Revenues........ $ 13,230 $ 16,107 $ 6,889 $ 1,904 $ 6,176
Costs Related to Operating
Revenues................. 11,052 13,313 6,669 1,567 4,871
Selling, General and
Administrative Expenses.. 1,072 896 904 957 984
------------ ------------ ------------ --------- ---------
Earnings (Loss) from
Operations............... 1,106 1,898 (684) (620) 321
Interest Expense.......... (969) (875) (736) (917) (763)
Income Taxes (Benefit)
(2)...................... 9 11 (11) 26 16
------------ ------------ ------------ --------- ---------
Net Earnings (Loss)....... $ 128 $ 1,012 $ (1,409) $ (1,563) $ (458)
------------ ------------ ------------ --------- ---------
------------ ------------ ------------ --------- ---------
Net Earnings (Loss) Per
Common Share............. $ 0.003 $ 0.03 $ (0.13) $ (0.05) $ (0.01)
------------ ------------ ------------ --------- ---------
------------ ------------ ------------ --------- ---------
<CAPTION>
QUARTERS ENDED IN 1994 QUARTERS ENDED IN 1993
--------------------------------------------------- ---------------------------------------
SEPTEMBER 30 SEPTEMBER 30
DECEMBER 31 (1) JUNE 30 MARCH 31 DECEMBER 31 (1) JUNE 30
------------ ------------ --------- --------- ------------ ------------ ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues........ $ 5,438 $ 14,664 $ 7,107 $ 12,953 $ 16,012 $ 12,871 $ 5,533
Costs Related to Operating
Revenues................. 4,297 21,504 7,440 11,369 14,639 16,238 4,438
Selling, General and
Administrative Expenses.. 993 969 796 742 701 631 707
------------ ------------ --------- --------- ------------ ------------ ---------
Earnings (Loss) from
Operations............... 148 (7,809) (1,129) 842 672 (3,998) 388
Interest Expense.......... (693) (633) (614) (448) (317) (250) (245)
Income Taxes (Benefit)
(2)...................... -- (1,900) (661) 149 (259) (1,614) 57
------------ ------------ --------- --------- ------------ ------------ ---------
Net Earnings (Loss)....... $ (545) $ (6,542) $ (1,082) $ 245 $ 614 $ (2,634) $ 86
------------ ------------ --------- --------- ------------ ------------ ---------
------------ ------------ --------- --------- ------------ ------------ ---------
Net Earnings (Loss) Per
Common Share............. $ (0.02) $ (0.23) $ (0.04) $ 0.01 $ 0.02 $ (0.06) $ 0.003
------------ ------------ --------- --------- ------------ ------------ ---------
------------ ------------ --------- --------- ------------ ------------ ---------
</TABLE>
- ----------------------------------
(1) During the fourth quarter of fiscal 1995, the Company revised its estimate
of future revenues for ALADDIN, THE BARBARA DE ANGELIS SHOW, TRAIL WATCH,
SWEET BIRD OF YOUTH, and PIGASSO'S PLACE. During the fourth quarter of
fiscal 1994, the Company revised its estimate of future revenue for 1ST AND
TEN and SWEATING BULLETS and other programming no longer being produced by
the Company. These revised estimates resulted in a reduction in the carrying
value of such programs and amortization expense of approximately $7,800,000.
The major component of such reduction consisted of the episodic series 1ST
AND TEN starring O.J. Simpson. During the fourth quarter of fiscal 1993,
upon commencement of the domestic syndication of 1ST AND TEN, the Company
revised certain ultimate revenue estimates based on the initial results of
syndication. The revised ultimate revenue estimates on 1ST AND TEN and other
film and television programs resulted in increased amortization of film
costs of approximately $4.3 million in the fourth quarter of fiscal 1993.
26
<PAGE>
(2) In the quarter ended December 31, 1993, the provision for Income Taxes
included a benefit of $394,000 related to the cumulative effect of a change
in accounting principle.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
IMPAIRMENT OR DISPOSITION OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS No. 121 will be effective for fiscal years beginning after
December 15, 1995. The Company believes that adoption of SFAS No. 121 will not
have a material impact on the Company's financial statements.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 will be effective for
fiscal years beginning after December 15, 1995, and will require that the
Company either recognize in its financial statements costs related to its
employee stock-based compensation plans, such as stock option and stock purchase
plans, or make pro forma disclosures in a footnote to the financial statements.
The Company expects to continue to use the intrinsic value-based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS 123, to
account for all of its employee stock-based compensation plans. Therefore, in
its financial statements for fiscal 1996, the Company will make the required pro
forma disclosures in a footnote to the financial statements. SFAS No. 123 is not
expected to have a material effect on the Company's results of operations or
financial position.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $5,480,000 (including $2,420,000 of
restricted cash being used as collateral for certain production loans) at March
31, 1996 from $4,301,000, including $1,162,000 of restricted cash at September
30, 1995 primarily from additional collections from foreign pre-sales. At March
31, 1996, the Company had net negative liquid assets of approximately
($11,386,000) consisting of cash and cash equivalents, accounts receivable and
amounts due from affiliates less accounts payable and accrued liabilities,
short-term production loans and the $15,000,000 outstanding under the Company's
prior line of credit with Imperial Bank which was replaced by the new credit
facility with Chemical.
The Company's production and distribution operations are capital intensive.
The Company has funded its working capital requirements through receipt of
third-party domestic license payments 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 expansion of the Company's international distribution business and
the establishment of a feature film division have significantly increased the
Company's working capital requirements and use of related production loans.
The Company experienced net negative cash flows from operating activities
(resulting principally from the Company's expansion of production) of
$(2,816,000) during the six months ended March 31, 1996, which was offset by net
cash of $3,068,000 provided by financing activities from production loans and
slightly greater usage of the Company's revolving line of credit up to the
maximum amount of credit available. As a result primarily of the foregoing
factors, net unrestricted cash decreased during the six month period by $79,000
to $3,060,000 on March 31, 1996. Net cash used by operating activities was
$(30,420,000) during fiscal 1995 as the Company substantially increased its
investment in new film product. To the extent that 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, other revenues and sales from
its library.
27
<PAGE>
CREDIT FACILITY
On June 25, 1996, the Company closed a $40 million syndicated revolving
credit agreement with a group of banks led by Chemical. Such agreement provides
for borrowings by the Company based on specified percentages of domestic and
international accounts and contracts receivable and a specified percentage of
the Company's book value of unamortized library film costs (as adjusted). In
addition, the Company will from time to time allocate a production tranche in
its line of credit for the Company's productions. Such tranche will allow the
Company to borrow up to 50% of the production deficit after accounting for
specified percentages of pre-sales, licensing fees and similar revenues from
third parties and a required Company equity participation. All loans made
pursuant to such agreement are secured by substantially all of the Company's
assets and bears interest, at the Company's option, either (i) at LIBOR (5.19 %
as of July 9, 1996) plus 3% (for that portion of the borrowing base supported by
accounts or contracts receivable) or 4% (for that portion of the borrowing base
supported by unamortized library film costs or for loans made under the
production tranche) or (ii) at the Alternate Base Rate (which is the greater of
(a) Chemical's Prime Rate (8.25% as of July 9, 1996), (b) Chemical's Base CD
Rate (5.40% as of July 9, 1996) plus 1% or (c) the Federal Funds Effective Rate
(5.14% as of July 9, 1996) plus 1/2%) plus 2% (for that portion of the borrowing
base supported by accounts or contracts receivable) or 3% (for that portion of
the borrowing base supported by unamortized library film costs or for loans made
under the production tranche). The Company is required to pay a commitment fee
of .5% per annum of the unused portion of the credit line. This new credit
facility with Chemical replaces a $15 million line of credit the Company had
with Imperial Bank. As of March 31, 1996, the Company had drawn down $15,000,000
under the Imperial credit facility and had no further availability. As of June
25, 1996, the Company had drawn down $18,584,890 under the Chemical credit
facility out of a total borrowing base availability of $18,705,857. The Company
plans to refinance four non-recourse project loans under the Chemical credit
facility prior to July 31, 1996, which will increase the amount outstanding
under the credit facility by approximately $3.2 million and which is anticipated
will also increase the Company's overall unused borrowing base availability. See
"-- Production/Distribution Loans."
The outstanding credit agreement contains various covenants to which the
Company must adhere. These covenants, among other things, include limitations on
additional indebtedness, liens, investments, disposition of assets, guarantees,
deficit financing, capital expenditures, affiliate transactions and the use of
proceeds and prohibit payment of cash dividends and prepayment of subordinated
debt. In addition, the credit agreement requires the Company to maintain a
minimum liquidity level, limits overhead expenses and requires the Company to
meet certain ratios. The credit agreement also contains a provision permitting
the bank to declare an event of default if either of Messrs. Locke or Kushner
fails to be the Chief Executive Officer of the Company or if any person or group
acquires ownership or control of capital stock of the Company having voting
power greater than the voting power at the time controlled by Messrs. Kushner
and Locke combined (other than any institutional investor able to report its
holdings on Schedule 13G which holds no more than 15% of such voting power).
SECURITIES OFFERINGS
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. In connection with such offering, the Company issued warrants to
purchase up to 700,000 shares to the underwriter thereof at $1.25 per share.
During March and April 1994, the Company sold $16,437,000 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 Debentures sold at an exercise price equal
to 120% of the principal amount of the Debentures. The 8% Debentures are
convertible into shares of Common Stock at a rate of $.975 per share, subject to
customary anti-dilutive provisions and provisions in the event of certain
payment defaults. The Company will have the right to redeem the 8% Debentures at
redemption prices commencing at 102.7% of par on or after
28
<PAGE>
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 and
Series B 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 Debentures sold at an exercise price equal to 120%
of the principal amount of the Debentures. The 9% Debentures are convertible
into shares of Common Stock at a 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. As of March 31, 1996, approximately $9,273,000
principal amount of the 8% Debentures and $5,050,000 principal amount of 9%
Debentures were outstanding. Through July 8, 1996, an additional $1,212,000
aggregate principal amount of the 8% Debentures were converted into an aggregate
of 1,243,077 shares of Common Stock and $[50,000] aggregate principal amount of
the 9% Debentures were converted into an aggregate of [31,646] shares of Common
Stock.
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 issued to
underwriters. Since the end of the fiscal year (September 30, 1995) , primarily
as a result of the conversion of the 8% and 9% Debentures, the number of
outstanding shares of Common Stock has increased from 35,466,598 to 37,437,553
as of March 31, 1996 and 40,218,618 as of July 8, 1996.
In May 1996, the Company issued $1,500,000 of short-term Bridge Notes in a
private placement, which will be repaid at the closing of this Offering along
with the issuance of the Bonus Shares. See "Use of Proceeds."
Upon completion of this Offering, assuming full exercise of the
Underwriter's Over-allotment Option, there will be shares of Common
Stock issued and outstanding or reserved for issuance out of a total of
80,000,000 shares of Common Stock authorized under the Company's Articles of
Incorporation. Accordingly, the Company will be substantially restricted in its
ability to issue additional shares of Common Stock, including issuances to raise
capital or acquire assets using Common Stock as the means of payment. The
Company can only increase its authorized capital stock by amending its Articles
of Incorporation. While the Company intends to increase its authorized but
unissued capital stock at its next meeting of shareholders, such an amendment
requires the approval of the shareholders and, even if approved, any delay in
approval could cause the Company to be unable to raise additional equity
required for its operations or to miss an available opportunity to raise
additional capital or to acquire assets or otherwise. In addition, there can be
no assurance that the shareholders of the Company will vote to increase the
authorized capital of the Company.
PRODUCTION/DISTRIBUTION LOANS
The Company's other short term borrowings, totaling $16,689,455 as of March
31, 1996, consist of production loans from Newmarket Capital Group L.P.
("Newmarket"), Banque Paribas (Los Angeles Agency) ("Paribas") and Imperial Bank
("Imperial") to consolidated production entities controlled by the Company,
which loans are recourse to the related film assets. The Kushner-Locke Company
provides limited corporate guarantees for a portion of the Newmarket and Paribas
loans which are callable in the event that the production companies' loan
amounts (including a reserve for
29
<PAGE>
fees, interest and financing costs) are not adequately collateralized with
acceptable contracts receivable from third-party domestic and/or foreign
sub-distributors by certain dates or by the maturity date of the loan. Deposits
on the purchase price paid by these sub-distributors are held as restricted cash
collateral by the Lenders.
The table below shows production loans as of March 31, 1996. Corporate
guarantees have been reduced as of March 31, 1996 due to the Company reaching
certain sales milestones as allowed under the Newmarket loans. Three of the
production loans were scheduled to mature before April 1996. The Company
requested, and Newmarket agreed, to extend the maturity dates by approximately
90 days on the production loans for SERPENT'S LAIR, THE GRAVE and WHOLE WIDE
WORLD for customary delays in the process of delivering and collecting cash from
foreign territories.
<TABLE>
<CAPTION>
KUSHNER- LOCKE
AMOUNTS WEIGHTED CORPORATE
FILM LENDER LOAN AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY
- --------------------------- -------------- -------------- -------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
JOSH KIRBY: TIME WARRIOR Imperial $ 1,950,000 $ 545,000 9.60% $ 545,000* 5-01-96
THE ADVENTURES OF PINOCCHIO Newmarket $ 12,500,000 $ 10,976,701 8.75% $ 2,175,000 9-30-96
SERPENT'S LAIR Newmarket $ 1,005,000 $ 654,530 9.25% $ 345,000 7-19-96
THE GRAVE Newmarket $ 2,100,000 $ 1,603,228 10.25% $ 300,000 7-19-96
WHOLE WIDE WORLD Newmarket $ 1,550,000 $ 1,109,195 8.00% $ 500,000 7-19-96
FREEWAY Paribas $ 1,983,333 $ 1,800,802 7.00% $ 961,667 7-31-96
-------------- -------------- -------------
$ 21,088,333 $ 16,689,455 $ 4,826,667**
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
- ------------------------
* The JOSH KIRBY: TIME WARRIOR loan was repaid in full on May 15, 1996.
** As of June 30, 1996, the Company believes that The Kushner-Locke Company
corporate guarantees aggregated approximately $3.2 million and that the
guarantees in connection with SERPENT'S LAIR, THE GRAVE and WHOLE WIDE WORLD
have been substantially reduced to zero.
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 budget of the JOSH
KIRBY: TIME WARRIORS series. The Imperial loan accrued interest at Prime (8.25%
as of May 15, 1996) plus 3% payable monthly plus loan fees of $97,500 plus a net
profit participation. The loan was secured solely by the rights, title and
assets related to the film series which has been completed and is in the process
of being delivered to domestic and international sub-distributors. Collection of
cash from sales had been reducing the loan balance. The loan matured on May 1,
1996 and was repaid in full on May 15, 1996 within its grace period.
The Kushner-Locke Company entered into a long form agreement dated as of
February 6, 1995 with Savoy Pictures, Inc. ("Savoy") relating to the
development, production, financing and distribution of the live-action
feature-length theatrical motion picture THE ADVENTURES OF PINOCCHIO. The film
commenced principal photography in July 1995. The film will be distributed in
foreign territories by the Company. The film will be distributed domestically by
New Line Pictures (a subsidiary of Turner Entertainment Co.) which has acquired
the domestic and 50% of certain ancillary rights from Savoy. Pursuant to the
February 6, 1995 letter agreement, the Company licensed those domestic and
ancillary rights to Savoy in exchange for Savoy funding approximately 50% of the
budget to the production entity up to $25 million (which budget has been
subsequently increased to approximately $29 million, the majority of which has
been financed by Savoy in exchange for certain profit participations). In order
to fund the Company's approximately $13 million share of the budgeted negative
costs, the Company has assisted the film's production company, a consolidated
entity, in obtaining loan documentation from Newmarket Capital Group L.P.
("Newmarket") which agreed to provide for financing in the amount of 50% of the
film's original budget up to $12,500,000, a portion of which is reserved to pay
the lender's financing fees and costs. The loan bears interest at LIBOR plus 2%
and fees were determined on a sliding scale related to the amount of acceptable
contracts receivable at the time of
30
<PAGE>
initial funding. As of March 31, 1996 $2,175,000 of the obligations of the
production company to Newmarket under the loan facility, other than the portion
of the loan covered by more than $13 million of foreign pre-sales, was
guaranteed by the Company. Newmarket also has the right to certain profit
participations in connection with the film.
There is no assurance that THE ADVENTURES OF PINOCCHIO, which represents the
Company's biggest budget theatrical motion picture to date, will be successful.
The Company has obtained completion bond insurance to guaranty that the film
will be completed and delivered to the technical specifications of Savoy (as
assigned to New Line) and international sub-distributors. New Line has agreed to
accept the technical specifications ordered by Savoy as its delivery
requirements. The Company's ability to complete this project is materially
dependent upon both funding by Savoy (against domestic distribution rights it
licensed) and by Newmarket (against the Company's foreign pre-sales and
remaining foreign rights). See "Certain Forward Looking Statements."
In May and June 1995 the Company, in its role as worldwide distributor,
agreed to guaranty a proportion of two production loans to film producers, which
are consolidated entities, from Newmarket with respect to the feature films
SERPENT'S LAIR and THE GRAVE. The loans of $1,005,000 and $2,100,000 each bear
interest at an annual rate of Prime (8.25% as of July 8, 1996) plus 1% on the
first $500,000 advanced under the loan, then pricing options are at either (a)
Prime plus 1% or (b) LIBOR plus 3% on the remaining loan balance through
February 1, 1996 when the loans have a pricing increase to Prime + 3% through
the maturity date of such loans, plus loan fees of $60,000 per loan, plus a net
profit participation of 10% of the Company's net profit participation. The loans
are secured solely by the rights, title and assets of the production companies
related to those films. The loans matured on June 30, 1996. The Kushner-Locke
Company's corporate guaranty is reducible by substitution of contracts
receivable from sub-distributors, licensing rights to these films in certain
media and territories. Milestone dates for aggregate acceptable contracts
receivable were set by Newmarket within the loan documentation. In September and
December 1995, Newmarket granted waivers to the borrower for not reaching
certain milestones and amended its Loan and Security Agreements accordingly. At
March 31, 1996, the outstanding balance on the Company's corporate guaranty of
principal and interest for SERPENT'S LAIR was reduced to $345,000 and for THE
GRAVE was reduced to $300,000 as a result of reaching certain acceptable sales
levels.
In August 1995 the Company, in its role as worldwide distributor, agreed to
guaranty a portion of two other production loans to film producers, which are
consolidated entities, provided by Newmarket and Paribas, with respect to the
films WHOLE WIDE WORLD and FREEWAY. The $1,550,000 loan from Newmarket for WHOLE
WIDE WORLD bears interest at a rate of Prime (8.25% as of July 8, 1996) plus 1%
on the first $500,000 advanced under the loan, then pricing options are at
either (a) Prime plus 1% or (b) LIBOR plus 3% on the remaining loan balance
through February 1, 1996 when the loan has a pricing increase to Prime +3%
through the maturity date of June 30, 1996, plus loan fees of $60,000, plus a
net profit participation of 10% of the Company's net profit participation. The
Company's corporate guaranty is reducible by the substitution of acceptable
contracts receivable. Milestone dates for aggregate acceptable contracts
receivable were set by Newmarket within the loan documentation. In September
1995 and March 1996, Newmarket granted waivers to the borrower for not reaching
these milestones and amended its Loan and Security Agreement accordingly. As of
March 31, 1996 the Company's outstanding corporate guaranty of principal for
WHOLE WIDE WORLD was $500,000, and Newmarket required that the loan be repaid by
$500,000 of principal. The Paribus loan for $1,983,333 for FREEWAY bears
interest at either (a) Reference Rate (8.25% as of July 8, 1996) plus 1/2% or
(b) LIBOR + 2% until the maturity date of July 5, 1996. For this loan, there are
no milestone dates for aggregate contracts receivable and the Company's
corporate guaranty of $961,667 is not reducible during the life of the loan. The
amount of the difference between the cash collected and $961,667 is collectible
at the maturity date by Paribus from the Company.
On July 3, 1996, the borrowers under such loans sent letters to the lenders
requesting a pay off amount for each of the Newmarket and Paribus loans (other
than in connection with THE ADVENTURES OF PINOCCHIO). On July 3, 1996, such
borrowers received letters from Newmarket and Paribus, as
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<PAGE>
applicable, setting forth the applicable pay off amounts. The Kushner-Locke
Company anticipates that such loans will be repaid through the Company's line of
credit with Chemical after the transfer of the applicable films to the Company
and the inclusion of the receivables related to such films in its borrowing
base. The Company anticipates completing the necessary documentation in mid to
late July. The borrowers have not sought waivers in connection with these loans
and, thus, such loans are past due and are in default. To date the lenders have
not attempted to collect on such loans or the guarantees of The Kushner-Locke
Company related thereto. If the loans are not repaid, The Kushner-Locke Company
may be liable on its applicable guarantees. If The Kushner-Locke Company is
unable to meet its obligations under such guarantees, such would lead to a
default under its Convertible Subordinated Debentures and its credit facility
with Chemical and the possible acceleration of such indebtedness. If such
acceleration occurred and was not cured, the Company would be forced to
immediately repay all of such indebtedness, including possibly through the sale
of some or all of its assets.
On May 6, 1996, the Company and Decade entered into an agreement to produce
four theatrical action motion pictures. The motion pictures will be produced,
subject to approval by the Company of certain creative aspects of such movies,
by Decade and executive produced by Joel Silver and Richard Donner. Under the
agreement, the Company has agreed to guarantee payment of $3,200,000 per picture
payable upon the delivery of the "mandatory delivery items" for each picture in
consideration of receipt of foreign distribution rights. The agreement is for a
minimum of four feature-length motion pictures and may be extended, at Decade's
option, to include a fifth picture. The initial two films under the agreement
are WHITE ROSE and MADE MEN, neither of which yet has a scheduled release date.
RELATED PARTY TRANSACTIONS. In December 1994, the Company advanced August
Entertainment, Inc. ("August") $650,000 against distribution rights to
third-party product. August is majority owned by Gregory Cascante, who joined
the Company as head of its new international film distribution division. The
agreement is secured by all assets of August, including a pledge of all sales
commissions due to August from the producers thereof on the films SLEEP WITH ME,
LAWNMOWER MAN II and NOSTRADAMUS and certain restricted cash in escrow. While
the right of August to receive such commissions with respect to the film
LAWNMOWER MAN II is subordinate to the interests of the production lenders, The
Allied Entertainments Group PLC, and its subsidiaries which produced the film,
has guaranteed payment of such commissions to the extent they would be payable
had there been no production loan on that film. The loan bears interest at the
lesser of (a) Prime (8.25% at July 8, 1996) plus 2% or (b) 10%. Repayment of
principal and interest is by collection of commissions assigned as collateral.
As of March 31, 1996 the Company had been repaid approximately $170,000 toward
interest and principal and $528,000 principal amount remains outstanding. The
loan matures in December 1996.
Stuart Hersch, in addition to compensation paid to him as a member of the
Board of Directors of the Company, became a consultant to the Company effective
April 1, 1996 for which he is paid $7,500 per month. Mr. Hersch is assisting the
Company in analyzing potential strategic acquisitions and is providing the
Company consulting services in connection with the Company's involvement in
infomercials. This agreement is on a month-to-month basis as needed by the
Company. See Note 9 to "Notes to Consolidated Financial Statements to the
Audited Financial Statements." Effective on April 29, 1996, the Company hired
James L. Schwab as its new Chief Financial Officer replacing its previous Chief
Financial Officer after the term of her employment agreement expired.
In fiscal 1995 the Company entered into a partnership named TVFirst which
creates and markets infomercials. One of TVFirst's current projects is a
Christian music infomercial, in which a recording of Christian music sung by
leading gospel artists is marketed. TVFirst has purchased air time for such
infomercial but neither TVFirst nor either of its partners (including the
Company) had the excess available resources to fund such purchases. Messrs.
Locke and Kushner have loaned to TVFirst $30,000 as of March 31, 1996 to enable
TVFirst to purchase such air time; subsequent loans by Messrs. Locke and Kushner
have totaled an additional $325,000 through May 10, 1996. Such loans, subject to
final documentation, will be guaranteed by the Company, will bear interest at
the prime rate
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(8.25% as of July 8, 1996) plus 1% and are anticipated to be repaid within six
months, or possibly earlier based upon the cash flow of TVFirst. In addition,
each lender will also receive an additional amount equal to 10% of the principal
amount loaned by such lender, which amount will be payable on the repayment
date. Furthermore, each lender will receive a profit participation in the
profits, if any, related to the Christian music infomercial, up to an amount
equal to 5% of its principal amount, which amount will be payable on the first
anniversary of such repayment. There is no assurance that the infomercial will
generate revenues in excess of its programming and media costs. The foregoing
transaction was approved by a majority of the independent directors of the
Company's Board of Directors.
SUMMARY
Management believes that existing resources and cash generated from
operating activities, together with the net proceeds of this Offering and
amounts expected to be available under the new syndicated revolving credit
agreement with Chemical will be sufficient to meet the Company's working capital
requirements for at least the next twelve months.
The Company's business and operations have not been materially affected by
inflation.
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<PAGE>
BUSINESS
THE U.S. MOTION PICTURE INDUSTRY OVERVIEW
The business of the motion picture industry may be broadly divided into two
major segments: production, involving the development, financing and making of
motion pictures, and distribution, involving the promotion and exploitation of
completed motion pictures in a variety of media.
Historically, the largest companies, or the so-called "Majors" and
"mini-Majors," have dominated the motion picture industry by both producing and
distributing in the United States a majority of those theatrical motion pictures
which generate significant box office receipts. Over the past decade, however,
"Independents" or smaller film production and distribution companies, such as
the Company, have played an increasingly significant role in the production and
distribution of motion pictures to fill the increasing worldwide demand for
filmed entertainment product.
The Majors (and mini-Majors) include MCA Universal Pictures, Warner Bros.
Pictures, Metro-Goldwyn-Mayer Inc., New Line Pictures (a division of Turner
Entertainment Co.), Twentieth Century Fox Film Corporation, Paramount Pictures
Corporation, Sony Pictures Entertainment (including Columbia Pictures, TriStar
Pictures and Triumph Releasing) and The Walt Disney Company (Buena Vista
Pictures, Touchstone Pictures and Hollywood Pictures). Generally, the Majors own
their own production studios (including lots, sound stages and post-production
facilities), have a nationwide or worldwide distribution organization, release
pictures with direct production costs generally ranging from $25 million to $60
million, and provide a continual source of pictures to film exhibitors. In
addition, some of the Majors have divisions which are promoted as "Independent"
distributors of motion pictures. These "Independent" divisions of Majors include
Miramax Films (a division of The Walt Disney Company) and Sony Classics (a
division of Sony Pictures).
In addition to the Majors, the Independents engaged primarily in the
distribution of motion pictures produced by companies other than the Majors
include, among others, Trimark Holdings (through Trimark Pictures and Vidmark
Entertainment), Live Entertainment, October Films, Republic Pictures (a division
of Viacom), The Samuel Goldwyn Company and Fine Line Pictures (a division of New
Line Pictures). The Independents typically do not own production studios or
employ as large a development or production staff as the Majors.
MOTION PICTURE PRODUCTION AND FINANCING
The production of a motion picture usually involves four steps: development,
pre-production, production and post-production. The development stage includes
obtaining an original screenplay or a screenplay based on a pre-existing
literary work, or a screenplay may be acquired and rewritten. Creative personnel
may be contacted to determine availability and for planning the timing of the
project, or in some cases actually hired. In pre-production, a budget is
prepared, the remaining creative personnel, including a director, actors and
various technical personnel are hired, shooting schedules and locations are also
planned and other steps necessary to prepare the motion picture for principal
photography are completed. Production is the principal photography of the
project and generally continues for a period of not more than three months. In
post-production, the film is edited and synchronized with music and dialogue
and, in certain cases, special effects are added. The final edited synchronized
product, the negative, is used to manufacture release prints suitable for public
exhibition.
The production of a motion picture requires the financing of the direct
costs of production. Direct production costs include film studio rental,
cinematography, post-production costs and the compensation of creative and other
production personnel. Distribution costs (including costs of advertising and
release prints) are not included in direct production costs.
The Majors generally have sufficient cash flow from their motion picture and
related activities, or, in some cases, from unrelated businesses (E.G., theme
parks, publishing, electronics, merchandising) to pay or otherwise provide for
their production costs, and the studios themselves generally absorb the
considerable overhead costs involved in a production. Overhead costs are, in
substantial part, the
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salaries and related costs of the production staff and physical facilities which
the Majors maintain on a full-time basis. The Majors often enter into contracts
with writers, producers and other creative personnel for multiple projects or
for fixed periods of time.
Independent production companies generally avoid incurring substantial
overhead costs by hiring creative and other production personnel and retaining
the other elements required for pre-production, principal photography and
post-production activities on a project-by-project basis. Unlike the Major
studios, the Independents also typically finance their production activities
from various sources including bank loans, "pre-sales," equity offerings and
joint ventures. Independents generally attempt to complete their financing of a
motion picture production prior to commencement of principal photography, at
which point substantial production costs begin to be incurred and require
payment.
"Pre-sales" are often used by Independent film companies to finance all or a
portion of the direct production costs of a motion picture. Pre-sales consist of
fees or advances paid or guaranteed to the producer by third parties in return
for the right to exhibit the completed motion picture in theaters or to
distribute it in home video, television, international or other ancillary
markets. Producers with distribution capabilities may retain the right to
distribute the completed motion picture either domestically or in one or more
international markets. Other producers may separately license theatrical, home
video, television, international and all other distribution rights among several
licensees. Commitments in a pre-sale are typically subject to delivery and to
the approval of a number of prenegotiated factors, including script, production
budget, cast and director.
Both Major studios and Independent film companies often acquire motion
pictures for distribution through a customary industry arrangement known as a
"negative pickup" under which the studio or Independent film company agrees to
acquire from an Independent production company some or all rights to a film upon
completion of production. The Independent production company normally finances
production of the motion picture pursuant to financing arrangements with banks
or other lenders in which the lender is granted a security interest in the film
and the Independent production company's rights under its arrangement with the
studio or Independent. When the studio or Independent "picks up" the completed
motion picture, it may assume some or all of the production financing
indebtedness incurred by the production company in connection with the film. In
addition, the Independent production company is paid a production fee and
generally is granted a participation in the net profits from distribution of the
motion picture.
Both Major studios and Independent film companies generally incur various
third-party participations in connection with the distribution and production of
a motion picture. These participations are contractual rights of actors,
directors, screenwriters, producers, owners of rights and other creative and
financial contributors entitling them to share in revenues or net profits (as
defined in the respective agreements) from a particular motion picture. Except
for the most sought-after talent, participations are generally payable only
after all distribution and marketing fees and costs, direct production costs
(including overhead) and financing costs are paid in full.
MOTION PICTURE DISTRIBUTION
Distribution of a motion picture involves the domestic and international
licensing of the picture for (i) theatrical exhibition, (ii) home video, (iii)
presentation on television, including pay-per-view, video-on-demand, satellites,
pay cable, network, basic cable and syndication, (iv) non-theatrical exhibition,
which includes airlines, hotels, armed forces facilities and schools and (v)
marketing of the other rights in the picture, which may include books, CD-ROM,
merchandising and soundtrack recordings.
THEATRICAL DISTRIBUTION AND EXHIBITION. Theatrical distribution of motion
pictures is the exhibition of a film in a theater open to the public where an
admission fee is charged. Theatrical distribution involves the manufacture of
release prints; licensing of motion pictures to theatrical exhibitors; and
promotion of the motion picture through advertising and promotional campaigns.
The size and success of the promotional and advertising campaign may materially
affect the revenues realized from its theatrical release, generally referred to
as "box office gross." Box office gross represents the total
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amounts paid by patrons at motion picture theaters for a particular film, as
determined from reports furnished by exhibitors. The ability to exhibit films
during summer and holiday periods, which are generally considered peak
exhibition seasons, may affect the theatrical success of a film. Competition
among distributors to obtain exhibition dates in theaters during these seasons
is significant. In addition, the costs incurred in connection with the
distribution of a motion picture can vary significantly, depending on the number
of screens on which the motion picture is to be exhibited and the ability to
exhibit motion pictures during peak exhibition seasons. Similarly, the ability
to exhibit motion pictures in the most popular theaters in each area can affect
theatrical revenues. Exhibition arrangements with theater operators for the
first run of a film generally provide for the exhibitor to pay the greater of
90% of ticket sales in excess of fixed amounts relating to the theater's costs
of operation and overhead, or a minimum percentage of ticket sales which varies
from 40% to 70% for the first week of an engagement at a particular theater,
decreasing each subsequent week to 25% to 30% for the final weeks of the
engagement. The length of an engagement depends principally on the audience
response to the film.
Films with theatrical releases (which generally may continue for up to six
months) typically are made available for release in other media as follows:
<TABLE>
<CAPTION>
MONTHS AFTER APPROXIMATE
MARKET INITIAL RELEASE RELEASE PERIOD
- -------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Domestic home video............................... 4-6 months --
Domestic pay-per-view............................. 6-9 months 3 months
Domestic pay cable................................ 10-18 months 12-21 months
Domestic network or basic cable................... 30-36 months 18-36 months
Domestic syndication.............................. 30-36 months 3-15 years
International theatrical.......................... -- 4-6 months
International home video.......................... 6-12 months --
International television.......................... 18-24 months 18-30 months
</TABLE>
HOME VIDEO. The home video distribution business involves the promotion and
sale of videocassettes and videodiscs to local, regional and national video
retailers (including video speciality stores, convenience stores, record stores
and other outlets), which then rent or sell the videocassettes and videodiscs to
consumers for private viewing. In the last decade, home video has been one of
the fastest growing motion picture distribution media. In terms of total
distribution revenues generated, the domestic home video market is currently
larger than the domestic theatrical exhibition market.
Major feature films are usually scheduled for release in the home video
market within four to six months after theatrical release to capitalize on the
theatrical advertising and publicity for the film. Promotion of new releases is
generally undertaken during the nine to twelve weeks before the home video
release date. Videocassettes of feature films are generally sold to domestic
wholesalers either on a unit basis or pay-per-transaction basis. Unit based
sales typically involve the sales of individual videocassettes to wholesalers or
distributors at approximately $50 to $60 per unit and generally are rented by
consumers for fees ranging from $1 to $5 per day (with all rental fees retained
by the retailer). Sales involve the sale of a videocassette at a nominal price
($5-$10) with rental fees divided between the video retailer and the video
distributor. Wholesalers who meet certain sales and performance objectives may
earn rebates, return credits and cooperative advertising allowances. Selected
titles, including certain made-for-video programs, are priced significantly
lower to encourage direct purchase by consumers. The market for direct sale to
consumers is referred to as the "priced-for-sale" or "sell-through" market.
Technological developments including videoserver and compression
technologies, which regional telephone companies and others are developing could
make competing delivery systems economically viable and could significantly
impact the Company's home video revenues.
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<PAGE>
PAY-PER-VIEW. Pay-per-view television allows cable television subscribers
to purchase individual programs, primarily recently released theatrical motion
pictures, sporting events and music concerts, on a "per use" basis. The fee a
subscriber is charged is typically split among the program distributor, the
pay-per-view operator and the cable operator.
PAY CABLE. The domestic pay cable industry (as it pertains to motion
pictures) currently consists primarily of HBO/Cinemax, Showtime/The Movie
Channel, Encore/Starz and a number of regional pay services. Pay cable services
are sold to cable system operators for a monthly license fee based on the number
of subscribers receiving the service. These pay programming services are in turn
offered by cable system operators to subscribers for a monthly subscription fee.
The pay television networks generally acquire their film programming by
purchasing the distribution rights from motion picture distributors.
INTERNATIONAL MARKETS. The worldwide demand for motion pictures has
expanded significantly as evidenced by the development of new international
markets and media. This growth is primarily driven by the overseas privatization
of television stations, introduction of direct broadcast satellite services,
growth of home video and increased cable penetration. Accordingly, in September
1994 the Company established its own foreign theatrical distribution operations
for its own and third party product.
NON-THEATRICAL MARKETS. In addition to the distribution media described
above, a number of sources of revenue exist for motion picture distribution
through the exploitation of other rights, including the right to distribute
films to airlines, schools, libraries and hospitals.
MOTION PICTURE ACQUISITION
In addition to its own production activities, the Company is actively
engaged in the acquisition of rights to films and other programming from
Independent film producers, distribution companies and others for use in the
emerging new delivery systems. The Company is continually seeking to identify
and negotiate the acquisition of motion picture distribution rights in order to
maximize the number of films it can distribute. To be successful, the Company
must locate and track the development and production of numerous independent
feature films.
TYPES OF MOTION PICTURES ACQUIRED. The Company generally seeks to produce
or acquire motion pictures across a broad range of genres -- dramas, thriller,
comedy, science fiction, family, action, and fantasy/adventure, etc. -- which
will appeal to a targeted audience. Historically, the Company has not attempted
to acquire higher production budget (over $3.5 million) films because of the
interest that the Majors have shown in acquiring such films, and the associated
competition and higher production advances, minimum guarantees and other costs.
In most cases, the Company attempts to acquire rights to motion pictures with a
recognizable marquis "name" with public recognition, thereby enhancing promotion
of the motion pictures in the home video or international markets. The Company
believes that this approach enhances the marketability of a film and increases
the likelihood of generating a product capable of producing cash flow, ancillary
rights income and the possibility of a theatrical release.
METHOD OF ACQUISITIONS. The Company has typically acquired films on a
"pick-up" basis or "pre-buy" basis. Films acquired on a "pick-up" basis are
those films to which the Company has acquired distribution rights following
completion of most or all of the production and editing process. These films are
generally acquired after management of the Company has viewed the film to
evaluate its commercial viability.
Films acquired on a "pre-buy" basis are films to which the Company acquires
distribution rights prior to the completion of a substantial portion of
production and editing. The Company's willingness to acquire films on a pre-buy
basis will be based upon factors which generally include the track record and
reputation of the picture's producer, the quality and commercial value of the
screenplay, the "package" elements of the picture, including the director and
principal cast members, the budget of the picture and the genre of the picture.
Before making an acquisition offer on a film to be acquired on
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a pre-buy basis, the Company may work with the producer to modify certain of
these elements. If the matters considered are acceptable, the Company's
obligation to accept delivery and make payment will be conditioned upon receipt
of a finished film conforming to the script reviewed by the Company and other
specifications considered important by the Company.
SOURCES OF DISTRIBUTION RIGHTS. Typically, projects which may be suitable
for the Company are submitted directly to the Company for consideration. In
order to promote the submission of projects, the Company relies primarily on its
reputation as an Independent having significant access to the international
markets. The Company also relies upon the personal contacts of its senior
officers, which contacts have been generated through their prior business and
personal dealings with Independent production companies, Majors, other
Independents, entertainment, legal and accounting firms, business management
firms, talent agencies, production lenders and personal managers who are
actively involved in the production community.
ACQUISITION PROCESS. If the Company locates a motion picture which it
believes satisfies the criteria set forth above in "-- Types of Motion Pictures
Acquired" above for which it desires to acquire the distribution rights, the
Company may pay the production company granting those rights an advance or a
guaranteed minimum payment conditioned upon delivery of a completed film
(either, a "minimum guarantee") against a share or participation in the revenue
actually received by the Company from the exploitation of a film in each
licensed media. The minimum guarantee is generally paid prior to the film's
release. Typically, the Company will recoup the minimum guarantee and certain
other amounts from the production company's participation prior to paying the
production company additional amounts.
FILM LIBRARY. The Company's distribution rights generally range from seven
to 21 years from the date of acquisition, or continue in perpetuity, and
primarily extend to home video and free, basic cable and pay cable television
and international territories.
MULTI-PICTURE DISTRIBUTION. On May 6, 1996, the Company and Decade entered
into an agreement to produce four theatrical action motion pictures. The motion
pictures will be produced, subject to approval by the Company of certain
creative aspects of such movies, by Decade and executive produced by Joel Silver
and Richard Donner. Under the agreement, the Company has agreed to guarantee
payment of $3,200,000 per picture (out of the estimated $6 million to $7 million
budget) payable upon the delivery of the "mandatory delivery items" for each
picture in consideration of receipt of foreign distribution rights. The
agreement is for a minimum of four feature-length motion pictures and may be
extended, at Decade's option, to include a fifth picture. The initial two films
under the agreement are WHITE ROSE and MADE MEN, neither of which yet has a
scheduled release date.
COMPANY FEATURE FILM PRODUCTION
The Company's feature film division was established in April 1993 to develop
and produce low and medium budget films. The Company's low to medium budget
films to date have had production budgets ranging from approximately $1 million
to $3.5 million although the Company from time to time may release a higher
budget film or moderate budget film having higher budgets. The Company
anticipates that its low-budget films primarily will be targeted for direct
distribution to home video and cable television markets and that its
medium-budget films may be targeted for theatrical release. The Company
generally retains distribution rights outside of the U.S. with respect to such
films. The Company's films primarily will be distributed by third parties in the
U.S. market, but, in certain circumstances, the Company may undertake limited
U.S. distribution or co-distribution activities for films it produces or
acquires.
The Company's feature film strategy generally is to develop and produce
feature films when the production budgets for the films are expected to be
substantially covered through a combination of pre-sales, output arrangements,
equity arrangements and production loans with "gap" financing. To further limit
the Company's financing risk or to obtain production loans, the Company expects
to purchase completion bonds when necessary to guaranty the completion of
production.
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In fiscal 1995, the Company's feature film division delivered eleven films
for the home video market. The horror movie Wes Craven Presents: MINDRIPPER,
which premiered on HBO, the supernatural thriller LAST GASP and the detective
story LADY-IN-WAITING were all distributed by WarnerVision Home Video. The
Company also delivered to Paramount Pictures the six fantasy adventure films
(the TIME WARRIOR series) entitled THE HUMAN PETS, PLANET OF THE DINO-KNIGHTS,
TRAPPED IN TOYWORLD, JOURNEY TO THE MAGIC CAVERN, EGGS FROM 70 MILLION B.C. and
LOST WORLD OF THE GIANTS. In addition, the Company acquired six adult thriller
films for distribution purposes.
For 1996, the Company is currently producing, in a co-venture with Keswick
Films, Inc., THE BRAVE LITTLE TOASTER GOES TO MARS and THE BRAVE LITTLE TOASTER
GOES TO SCHOOL, two sequels to its successful animated film THE BRAVE LITTLE
TOASTER (for Buena Vista Home Video) and five children's fantasy adventure films
for Paramount Pictures under its Moonbeam label entitled GENIE, GULLIVER LOST IN
LILLIPUT, JOHNNIE MYSTO: BOY WIZARD, KID MIDAS and LITTLE GHOST. The Company
will be distributing internationally the live action feature THE ADVENTURES OF
PINOCCHIO, the approximately $29 million production which is scheduled for
domestic release by New Line Pictures on July 26, 1996, and four other feature
films entitled FREEWAY, THE GRAVE, WHOLE WIDE WORLD, and SERPENT'S LAIR. Another
upcoming film is THE LAST TIME I COMMITTED SUICIDE starring Keanu Reeves. The
Company's low budget feature slate for 1996 includes approximately 20 films,
including the projects described above. There is no assurance that any project
in development will lead to production commitments or that any feature films
which are produced or distributed will be commercially successful.
FILM SCHEDULE
The following films were released or delivered by the Company in fiscal
1995.
<TABLE>
<CAPTION>
DELIVERY/RELEASE
PICTURE INITIAL MEDIA DATE FILM TYPE PRINCIPAL TALENT
- -------------------------------- --------------- ---------------- ---------------------- --------------------
<S> <C> <C> <C> <C>
PLANET OF THE DINO-KNIGHTS Home Video Sep-95 Fantasy/Adventure Corbin Allred
THE HUMAN PETS Home Video Sep-95 Fantasy/Adventure Corbin Allred
TRAPPED IN TOYWORLD Home Video Sep-95 Fantasy/Adventure Corbin Allred
EGGS FROM 70 MILLION B.C. Home Video Sep-95 Fantasy/Adventure Corbin Allred
JOURNEY TO THE MAGIC CAVERN Home Video Sep-95 Fantasy/Adventure Corbin Allred
LOST WORLD OF THE GIANTS Home Video Sep-95 Fantasy/Adventure Corbin Allred
LAST GASP Pay Cable May-95 Horror Robert Patrick
WES CRAVEN PRESENTS: MINDRIPPER Pay Cable May-95 Horror Lance Henriksen
</TABLE>
The following films were released or delivered on are scheduled for release
or delivery by the Company in fiscal 1996. Unless otherwise indicated, each of
the films released or to be released theatrically, other than THE ADVENTURES OF
PINOCCHIO, are expected to have a limited theatrical release.
<TABLE>
<CAPTION>
ESTIMATED/ACTUAL
ACTUAL/ANTICIPATED DELIVERY/RELEASE
PICTURE INITIAL MEDIA DATE FILM TYPE PRINCIPAL TALENT
- --------------------------- ----------------- --------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
THE BRAVE LITTLE TOASTER Home Video Sep-96 Animated N/A
GOES TO MARS
THE BRAVE LITTLE TOASTER Home Video Sep-96 Animated N/A
GOES TO SCHOOL
GENIE Home Video Dec-96 Fantasy/Adventure N/A
GULLIVER LOST IN LILLIPUT Home Video Dec-96 Fantasy/Adventure N/A
INDECENT BEHAVIOR 3 Home Video Feb-96 Thriller Shannon Tweed
JOHNNIE MYSTO: BOY WIZARD Home Video Sep-96 Fantasy/Adventure N/A
KID MIDAS Home Video Sep-96 Fantasy/Adventure N/A
LITTLE GHOST Home Video Nov-96 Fantasy/Adventure N/A
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ESTIMATED/ACTUAL
ACTUAL/ANTICIPATED DELIVERY/RELEASE
PICTURE INITIAL MEDIA DATE FILM TYPE PRINCIPAL TALENT
- --------------------------- ----------------- --------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
NAKED SOULS Home Video Mar-96 Drama Pamela Anderson; Dean
Stockwell; David Warner
CAFE SOCIETY Pay Cable Feb-96 Drama Laura Flynn Boyle;
Peter Gallager
FREEWAY Pay Cable Feb-96 Drama Kiefer Sutherland;
Reese Witherspoon;
Brooke Shields
THE GRAVE Pay Cable Feb-96 Thriller Craig Sheffer;
Gabrielle Anwar; Eric
Roberts
SERPENT'S LAIR Pay Cable Feb-96 Thriller Jeff Fahey; Lisa B
THE LAST TIME I COMMITTED Theatrical Sep-96 Drama Keanu Reeves
SUICIDE
THE ADVENTURES OF PINOCCHIO Theatrical Jul-96 Fantasy/Adventure Martin Landau; Jonathan
Taylor Thomas
RED RIBBON BLUES Theatrical Feb-96 Drama Debbie Mazar
WHOLE WIDE WORLD Theatrical Mar-96 Drama Vincent D'Onofrio; Rene
Zewelleger
WAITING FOR SUNSET Theatrical Aug-96 Drama Robert Mitchum; Cliff
Robertson
WAITING FOR THE MAN Theatrical Jun-96 Action Jeff Fahey; Rae Dawn
Chong
</TABLE>
There is no assurance that any motion picture which has not yet been
released will be released, or that a change in the scheduled release dates of
any such films will not occur.
TELEVISION INDUSTRY OVERVIEW
The United States television market is the largest in the world, consisting
of the principal broadcast networks and their affiliates, independent television
stations and cable television networks. Expanding international television
broadcast, cable and satellite delivery systems offer further opportunities for
the exploitation of television programming.
DOMESTIC MARKET. The U.S. market for television programming primarily is
composed of four submarkets: the broadcast television networks (ABC, CBS, NBC
and Fox and emerging networks consisting of UPN and WBN), pay cable services
(such as HBO, The Disney Channel and Showtime/ The Movie Channel, Inc.), basic
cable services (such as USA Network, the Arts & Entertainment Network, Lifetime,
The Family Channel and Turner Broadcasting Network) and syndicators of first-run
programming (such as MCA, King World Productions and Multimedia, Inc.). The U.S.
television market currently is dominated by the three major networks, each of
which has approximately 200 affiliated stations and the Fox network, which has
approximately 125 affiliated stations. The affiliates broadcast network-supplied
programming and national commercials in return for payments by the major
networks. This relationship results in the networks being able to reach
virtually all of the significant television markets in the U.S. There are also a
significant number of independent commercial television stations in the U.S.
These stations offer an alternative to network distribution through syndication.
The network schedule provides affiliates with only a portion of their daily
program schedule, and the balance of the time is filled with programs acquired
through television syndication companies or produced locally by the station.
Cable services generally are classified as being in one of four categories:
telephone delivery (e.g., Disney TeleVentures arrangement with four phone
companies to deliver programming over telephone lines), superstations (e.g.,
Turner Broadcasting Network), pay cable services (e.g., HBO) and basic cable
networks (advertiser-supported, e.g., The Family
40
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Channel). The most successful cable networks reach more than 60% of the U.S.
television households. Recently developed digital compression technology
combined with fiber optics or small-sized satellite dishes may permit cable
companies, telephone companies or direct broadcast satellite systems to expand
the domestic television market up to 500 or more channels.
TELEVISION PROGRAMMING. Each of the three major television networks
currently broadcasts approximately 22 hours of prime-time programming and
approximately 30 hours of daytime programming each week. Prime-time programming
generally consists of half-hour series (often situation comedies), reality
shows, hour-length series, movies-for-television (films of two hours or less)
and mini-series (dramatic epics of three hours or more). The increased channel
capacity and large base of cable subscribers that have developed during the
1980s and 1990s have made possible the development of a number of pay cable and
basic cable networks which have become important purchasers of both original and
rerun television programming, including movies-for-television, mini-series and
series. Suppliers of television programming include the production divisions or
affiliated companies of the major networks, major film studios, station owners
and independent producers, such as the Company.
INTERNATIONAL MARKETS. The number of outlets for television programming
outside the U.S. has been increasing with the worldwide proliferation of
broadcast, cable and satellite delivery systems. Over the last ten years,
European governments have privatized television systems in several countries,
including Germany, Italy, France and Spain. The Company believes privatized
systems are more likely to broadcast American programming than government-owned
networks. In addition, both the number of pay and satellite television systems
in Europe and the number of subscribers to these systems have increased. Pay
television and satellite distribution systems also are developing in other
geographic areas, including many Asian countries. In international markets,
suppliers of programming may be subject to local content and quota requirements
which prohibit or limit the amount of American programming in particular
markets. See "Business -- Government Regulations."
COMPANY TELEVISION STRATEGY
The Company was founded in 1983 to engage in the business of developing and
producing, on a cost-effective basis, quality television programming with broad
appeal. The Company's television business has evolved from the production of
programs owned by third parties and typically airing on local television
stations in the first-run syndication market, such as the long-running daytime
series DIVORCE COURT, to the development, production and ownership of series,
movies-for-television and mini-series for major domestic and international
television networks and the expanding pay and basic cable markets. In August
1991, the Company implemented a key element of its business strategy by
establishing an international distribution operation for its own and acquired
television programming. The Company believes that through the control of the
distribution of its own programming this operation has increased its ability to
cover the cost of new programs and to retain the fees and profit potential
previously realized by third parties.
The Company's television strategy is principally focused on increasing the
amount of programming it provides to the major U.S. networks, primarily one-hour
series, movies-of-the week and mini-series, in part because the Company believes
network exhibition enhances a television program's potential value (both in
international markets and potential rerun syndication). In order to increase the
likelihood of developing programs that will be licensed by the networks, the
Company has made significant investments in expanding its roster of network
approved writers, producers and actors and acquiring literary materials and
rights. As of March 31, 1996, the Company had 10 movies-for-television and
various television series in different stages of development for potential
production which were being funded at least in part by the networks or other
third parties.
The Company believes that the worldwide proliferation of television delivery
systems has expanded the potential purchasers of television programming beyond
the major U.S. networks and other traditional purchasers of television
programming. As part of its strategy, the Company actively seeks
41
<PAGE>
to supply programming to these non-traditional purchasers. The Company has sold
original programming developed for pay cable (The Disney Channel and HBO) and
for basic cable (The Family Channel and the Arts & Entertainment Network).
To position itself for the perceived growth in this market, the Company is
actively acquiring various forms of U.S. cable, video-on-demand and satellite
rights from third party producers for time periods ranging from seven years to
perpetuity through its KLC/New City joint venture. The customary order for
release is a period of approximately six months of pay-per-view followed by
18-24 months of pay cable and 24 to 48 months of basic cable, which completes a
cycle.
In connection with its programming activities, the Company utilizes
licensing and co-production arrangements to fund the costs of production, and
generally retains additional licensing rights and, in the case of series, rerun
syndication rights which offer future upside profit potential. The Company
generally does not commence principal photography of its television programming
without first obtaining license or other revenue commitments or production
financing which equal all or a substantial portion of the budgeted production
costs. By obtaining license fees and other pre-committed revenues through the
efforts of its international television distribution division to cover a
substantial portion or all of its budgeted production costs, the Company
believes that it reduces many of the financial risks associated with an
individual production.
TELEVISION PROGRAM FINANCING
DEVELOPMENT COSTS. The Company generally finances project development costs
without third-party participation until the script commitment stage. Because of
the substantial likelihood that the significant costs in producing scripts and
pilots will not be recovered, the Company generally attempts to limit its
financial investment by obtaining financial commitments from networks or other
third parties to cover all or a substantial portion of these costs. See
"Business -- Television Projects in Development."
PROGRAM LICENSING. Generally, the Company will license to a network the
right to broadcast a program for a period ending the earlier of the second
broadcast of the program or four years from delivery in exchange for a license
fee equal to 70% to 90% of the program's budgeted production cost (any remaining
amount is referred to as the "production deficit"). The Company generally
retains all other rights to the program and will usually license certain rights
to international broadcasters, enabling the Company to recoup all, or a portion,
of the production deficit. In addition, the Company will typically license
additional domestic releases in other media to cover the remainder, if any, of
the production deficit. A production order sets forth the principal terms for a
license of the Company's product to a network and specifies the license fee to
be paid and the conditions to be met for payment. Production orders typically
are contingent on the producer's obtaining certain approvals from the network,
such as script, principal cast and director, prior to commencement of principal
photography. The Company usually receives its license fee in installments, e.g.,
one-third on or prior to commencement of principal photography, one-third upon
completion of principal photography and one-third upon delivery of the completed
program. International distribution typically involves licensing the rights to
exhibit programming in international territories to broadcasters within those
territories for a fixed license fee usually payable after the program has been
completed. Due to timing differences between the Company's receipt of license
fees and its payment of production costs, the Company generally is required to
fund at least a portion of its production costs from working capital or
financing of the contracts receivable, even if the original license fees equal
or exceed budgeted production costs.
In the case of first-run syndication programs, the license agreements with
the first-run syndicator generally provide that the Company is entitled to a
fixed license fee and a percentage of revenues from distribution after the
syndicator recoups the fixed license fee it pays the Company and deducts its
distribution fees and costs. The Company's operating revenues from first-run
syndication have not been material in the past three fiscal years.
An alternate first-run syndication revenue source is called "barter" sales.
A television station, in lieu of, or in combination with, licensing fees may
grant to the Company's distributor the right to sell
42
<PAGE>
advertising spots during the exhibition of the Company's television program. For
a program to be barterable, exhibition of the program on stations reaching at
least 70% of the U.S. television households and in most of the top ten major
metropolitan areas typically is required. The amount of the fee paid by the
advertiser is conditioned upon the program achieving certain agreed upon
ratings. If the specified rating is not achieved, the distributor is required to
"make good" by giving the advertiser additional advertising time or cash
payment, and the Company's share of barter revenues decreases. Bartering
arrangements were used for PIGASSO'S PLACE during the September 1994 season and
were used in the domestic rerun distribution of the first 26 episodes of
SWEATING BULLETS and of certain episodes of 1ST AND TEN. See "Rerun
Syndication."
While the Company seeks to cover most or all of its production costs with
license fees and other pre-committed revenues, it may finance some of the
production costs on its own and rely on subsequent licensing in international or
other ancillary markets to recoup the remaining production costs. In many cases,
additional profit potential from a television program initially shown on a
network or cable service is sought from subsequent reruns of the program on
local television stations, international delivery systems and cable services
after exhibition on a major network or cable service. In any event, any
production is subject to the risk of cost overruns, and there is no assurance
that the Company will be able to recover any investment it undertakes in a
deficit-financed project.
INTERNATIONAL CO-PRODUCTIONS. An international co-production is a joint
venture or partnership between entities in two or more countries which in
certain cases may take advantage of tax or nationality benefits in one or more
of the countries. In a typical co-production arrangement, the Company transfers
all or part of its copyright ownership in the project to third parties (the co-
production entities), which generally provide a portion of the production
financing and other services. Typically, the co-production partners grant
distribution rights to the Company. The revenues received by the Company from
its distribution of the project are allocated to the various parties for
recoupment of production funding, production fees, talent participations,
distribution fees and expenses. Any remaining receipts are distributed to the
various parties in accordance with their agreed-upon profit participation.
The Company has utilized co-productions with international producers in
certain cases in order to take advantage of alternative sources of financing for
its productions, to utilize international tax benefits, to pass foreign quota
restrictions and to benefit from lower production costs in certain foreign
countries.
PRODUCER-FOR-HIRE. In addition to developing and producing programs that it
owns, the Company may be hired as a producer-for-hire in connection with a
creative concept or literary property owned by another person. There are at
least two types of producer-for-hire arrangements. Under the first type of
arrangement, the Company receives a set package fee and agrees to deliver the
completed program for that fee. The Company's profit is the excess of the
package fee over its production costs. If production costs exceed the package
fee, the Company bears the deficit. Under the second type of producer-for-hire
arrangement, the Company furnishes personnel as a producer, receives a fixed fee
per episode and the production costs of the program are reimbursed directly by
the distributor. The Company's production of 860 episodes of DIVORCE COURT from
1984 to 1988 was on a producer-for-hire basis. The Company's current strategy
generally is rather to obtain ownership and control of distribution of its
television programming.
RERUN SYNDICATION. Domestic rerun syndication typically involves the
exhibition of programming on local television stations and cable services after
exhibition on a major network. Since production costs for network series may
exceed network license fees and other pre-committed revenues, some television
production companies may depend on successful syndication of their programming
for profitable operations. Generally, to be successful in rerun syndication, a
television series must have at least 66 episodes (the equivalent of three full
television seasons). In the past, the Company has licensed rerun syndication
distribution rights to 1ST AND TEN to HBO in consideration of certain advances.
HBO entered into an agreement with Western International Syndication ("WIS")
43
<PAGE>
pursuant to which WIS acquired certain exclusive rights (including rerun
syndication) to distribute 1ST AND TEN for a ten-year period. The Company also
licensed rerun syndication of the first 26 episodes of SWEATING BULLETS for a
one-year period to Multimedia, Inc.
TELEVISION PRODUCTION ACTIVITIES
As a producer of television programming, the Company first develops or
acquires literary properties either internally or from third parties. The
Company may undertake expenditures to refine the concept of an acquired property
and then attempts to interest one of the networks or another buyer in the
project. If the buyer is interested in a concept presented to it, the buyer will
usually order a script from the Company. Once the script has been delivered, the
buyer may order production of a single pilot episode or a limited number of
episodes, in the case of a series, or the entire production, in the case of a
movie-for-television or mini-series.
Once production is ordered, the Company and the buyer negotiate a financing
arrangement. The Company then undertakes pre-production activities in which a
budget is prepared, the screenplay is polished or rewritten, creative personnel
(including director and actors), a line producer and technical personnel are
engaged, filming is scheduled, locations are arranged and other steps are taken
to prepare the project for principal photography. By this point, the Company
generally has negotiated license fees and obtained other commitments to cover a
substantial portion of the budgeted production costs. Principal photography is
then completed, followed by post-production, in which the film is edited,
synchronized with music and dialogue and any special effects are added. In the
case of a series, if episodes are ordered and the ratings are sufficiently
strong, additional episodes may be ordered for the entire season and then for
additional seasons. The production of episodes for subsequent seasons is usually
dependent upon the audience ratings for the prior season.
In undertaking production of its programming, the Company hires writers,
directors, cast and crew members on a project-by-project basis. The terms of
employment and compensation are negotiated in light of an individual's previous
experience, the prevailing market conditions and, where applicable, collective
bargaining agreements. The Company also obtains locations, sets and post-
production personnel and facilities on an as-needed basis by paying prevailing
rates. The Company believes that production and post-production personnel and
facilities are in ample supply at competitive rates.
The production of animated programming is a labor intensive process that
commences with artistic sketches of the various characters and the story line.
Storyboards, models, songs and voice elements are then sent to various
production companies, typically in Asia, where drawings of the animation frames
are prepared. The frames are painted and then sequentially photographed to
create film. The film is then usually sent back to the United States, where
final editing of footage and mixing of sound effects, dialogue and music is
completed, although on occasion final editing and mixing may be completed in
Asia.
The following table summarizes the Company's television programming which
has aired, is in pre-production, or is scheduled to air after January 1, 1996,
the type of program and the network where such programming would be initially
exhibited:
<TABLE>
<CAPTION>
FIRST
TITLE TYPE OF PROGRAM EXHIBITION
- ----------------------------------------- --------------------- --------------
<S> <C> <C>
JACK REED IV: A KILLER AMONGST US Movie-of-the-week NBC
JACK REED V Movie-of-the-week NBC
PRINCESS IN LOVE Movie-of-the-week CBS
THE GUN One-hour Pilot ABC
ECHO Movie-of-the-week ABC
EVERY WOMAN'S DREAM Movie-of-the-week CBS
A HUSBAND, A WIFE AND A LOVER Movie-of-the-week CBS
INNOCENT VICTIMS Mini-series ABC
</TABLE>
44
<PAGE>
TELEVISION PROJECTS IN DEVELOPMENT
The Company's results of operations largely depend on its having adequate
access to program concepts, ideas and scripts that are capable of being
acquired, produced and successfully marketed. Such access is dependent upon
numerous factors, including the reputation and credibility of the Company in the
creative community, the relationships the Company has in the entertainment
industry and the Company's financial and other resources. In order to provide a
supply of ideas and projects, the Company from time to time enters into
agreements with producers and writers for the purpose of developing or acquiring
new programming. While the Company may finance the early development of its
projects, the Company typically does not proceed with the preparation of a
script or the production of a pilot, which involves a more significant financial
commitment, unless a network or other buyer has agreed to fund all or a
substantial portion of the costs associated therewith.
The following table sets forth, as of March 31, 1996, potential television
movies in various stages of development identified below:
<TABLE>
<CAPTION>
WORKING TITLE NETWORK TYPE OF PROGRAM
- ------------------------------ --------- ---------------------
<S> <C> <C>
HAPPY TRAILS CBS MOVIE-OF-THE-WEEK
IN HER SISTER'S NAME CBS MOVIE-OF-THE-WEEK
FAMILY IN FEAR NBC MOVIE-OF-THE-WEEK
FAST TRACK ABC MOVIE-OF-THE-WEEK
DOWN THE ROAD HBO ORIGINAL MOVIE
JACK REED VI NBC MOVIE-OF-THE-WEEK
COME HERE CBS MOVIE-OF-THE-WEEK
CHILDREN NBC MOVIE-OF-THE-WEEK
THE LIFE SHE LEFT BEHIND ABC MOVIE-OF-THE-WEEK
UNLAWFUL SEDUCTION ABC MOVIE-OF-THE-WEEK
</TABLE>
Although the Company has numerous projects in development, as is typical in
the industry, only a relatively small number of such projects are ultimately
produced (with the likelihood of production being more remote in the case of
television series), and it is rare for any projects in development to have
production commitments until late in the development process. There is no
assurance that the Company's efforts in developing or acquiring potential new
programs, including any of the projects in development described above, will
lead to production commitments or that any programs that are ultimately produced
will be successful.
TELEVISION DISTRIBUTION ACTIVITIES
DOMESTIC DISTRIBUTION. The Company's original programming generally has
been initially licensed to a network or cable broadcaster for a period expiring
on the earlier of two network broadcasts or a license period of up to four years
from delivery. Following the expiration of the license, the rights typically
revert to the Company's library and become available for additional licensing.
Further revenues may be sought from subsequent licensing in the domestic market
in other media, including syndication, cable and home video.
INTERNATIONAL DISTRIBUTION. In August 1991, the Company added experienced
personnel and commenced the distribution of its own television programming and,
to a lesser extent, acquired television programs in international markets. Prior
to such time the Company generally utilized third parties to arrange for the
distribution of its television programming in international markets. Programming
is distributed primarily to local international broadcasters and, where
appropriate, for the home video market, pay television and cable services. The
establishment of the Company's international television distribution operation
has increased its ability to cover the costs of new programs and to retain the
fees and profit potential previously realized by outside distributors through
the control of the distribution of its own television programming, including the
ability to package such product for distribution in different media. The Company
also believes the establishment of its international television distribution
operation will enable it to increase its activity as a distributor of programs
45
<PAGE>
produced by others. In December 1994, the Company expanded its activities in
international distribution by hiring personnel from August Entertainment, Inc.,
who are experienced in feature film sales. This combined division now gives the
Company more control over the marketing of its product line and allows the
Company to be more responsive to its customers on a more cost efficient basis.
In June 1995, the Company hired Marvina Anderson from World International
Network to enhance T.V. sales.
The Company's strategy has been to remove more of its business risks in
international territories by locking in its business relationships with strong
sub-distributors. The Company has recently entered into output arrangements in
certain foreign territories with broadcasters and distributors who have agreed
to license distribution rights in such territories for the Company's product for
the next three to five years at a fixed price for specified types of film or
television product.
LIBRARY
Since its inception in 1983, the Company has produced for itself and others
or acquired more than 1000 hours of television programming. In addition, as a
producer for hire, the Company produced 860 episodes of DIVORCE COURT, 65
episodes of the NIGHT GAMES game show, 34 episodes of the children's game show
THE KRYPTON FACTOR, the animated feature film POUND PUPPIES: THE LEGEND OF BIG
PAW, and the FAMILY DOG episode of Steven Spielberg's AMAZING STORIES.
The Company's current library includes a variety of movies-for-television,
television series, game shows and talk shows, as well as feature films, produced
or acquired by the Company since its inception. The following table sets forth,
as of July 10, 1996, certain programming in which the Company has ownership
rights, distribution rights or the right to share in future profit
participation:
FEATURE FILM
<TABLE>
<CAPTION>
TITLE NUMBER PRODUCED FIRST EXHIBITION
- --------------------------------------------- ---------------- ----------------------
<S> <C> <C>
ANIMALYMPICS 1 NBC
THE BRAVE LITTLE TOASTER 1 Disney Channel
ANDRE 1 Theatrical
ALIEN ABDUCTION 1 Home Video
CYBERELLA 1 Home Video
DEADLY EXPOSURE 1 Home Video
DREAM MASTER 1 Home Video
EGGS FROM 70 MILLION B.C. 1 Home Video
THE HUMAN PETS 1 Home Video
JOURNEY TO THE MAGIC CAVERN 1 Home Video
LADY-IN-WAITING 1 Home Video
LAST GASP 1 Home Video
LAST BATTLE FOR THE UNIVERSE 1 Home Video
OBLIVION 1 Home Video
PLANET OF THE DINO-KNIGHTS 1 Home Video
LOST WORLD OF THE GIANTS 1 Home Video
SENSATION 1 HBO
TRAPPED IN TOYWORLD 1 Home Video
WES CRAVEN PRESENTS: MINDRIPPER 1 Home Video
ANGEL OF PASSION 1 Cable/Home Video
BANISHED BEHIND BARS 1 Cable/Home Video
BARE EXPOSURE 1 Cable/Home Video
BIKINI DRIVE IN 1 Cable/Home Video
BLONDE HEAVEN 1 Cable/Home Video
CAGED HEARTS 1 Cable/Home Video
CALL GIRL 1 Cable/Home Video
CAVE GIRL ISLAND 1 Cable/Home Video
DONOR, THE 1 Cable/Home Video
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
TITLE NUMBER PRODUCED FIRST EXHIBITION
- --------------------------------------------- ---------------- ----------------------
<S> <C> <C>
ELKE'S EROTIC DREAM 1 Cable/Home Video
FORBIDDEN GAMES 1 Cable/Home Video
HARD BOUNTY 1 Cable/Home Video
ILLICIT DREAMS II 1 Cable/Home Video
IMPROPER CONDUCT 1 Cable/Home Video
INNOCENCE BETRAYED 1 Cable/Home Video
INTERNATIONAL BEACH 1 Cable/Home Video
IRRESISTIBLE IMPULSE 1 Cable/Home Video
JACKO 1 Cable/Home Video
JUNGLE LAW 1 Cable/Home Video
LAP DANCER 1 Cable/Home Video
LOVE ME TWICE 1 Cable/Home Video
LOVER'S CONCERTO 1 Cable/Home Video
LURID TALES 1 Cable/Home Video
MASSEUSE, THE 1 Cable/Home Video
MIAMI MODELS 1 Cable/Home Video
MIDNIGHT CONFESSIONS 1 Cable/Home Video
MIDNIGHT TEASE II 1 Cable/Home Video
MIDNIGHT TEMPTATIONS 1 Cable/Home Video
PETTICOAT PLANET 1 Cable/Home Video
PLEASURE IN PARADISE 1 Cable/Home Video
POWDER BURN 1 Cable/Home Video
PRELUDE TO LOVE 1 Cable/Home Video
PRIVATE OBSESSION 1 Cable/Home Video
SECOND SIGHT 1 Cable/Home Video
SEDUCTION OF INNOCENCE 1 Cable/Home Video
SENSUOUS SUMMER 1 Cable/Home Video
SIREN'S KISS 1 Cable/Home Video
SOFTBODIES, THE MOVIE 1 Cable/Home Video
SPIRIT OF THE NIGHT 1 Cable/Home Video
TARGET OF SEDUCTION 1 Cable/Home Video
TOTALLY EXPOSED 1 Cable/Home Video
UNDER LOCK AND KEY 1 Cable/Home Video
UNINHIBITED 1 Cable/Home Video
VIRTUAL DESIRE 1 Cable/Home Video
WAGER OF LOVE 1 Cable/Home Video
</TABLE>
TELEVISION MOVIES AND MINI-SERIES
<TABLE>
<CAPTION>
TITLE NUMBER PRODUCED FIRST EXHIBITION
- --------------------------------------------- ---------------- ----------------------
<S> <C> <C>
ALADDIN 1 International
GLORY YEARS 6 HBO
FAMILY PICTURES 1 ABC
JFK: RECKLESS YOUTH 1 ABC
WORLD WAR II: WHEN LIONS ROARED 1 NBC
CAROLINA SKELETONS 1 NBC
CONFESSIONS: TWO FACES OF EVIL 1 NBC
FATHER AND SON: DANGEROUS RELATIONS 1 NBC
FIRE IN THE DARK 1 CBS
GETTING GOTTI: THE DIANE GIACALONE STORY 1 CBS
GOOD COPS, BAD COPS 1 NBC
JACK REED III: A SEARCH FOR JUSTICE 1 NBC
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
TITLE NUMBER PRODUCED FIRST EXHIBITION
- --------------------------------------------- ---------------- ----------------------
<S> <C> <C>
JACK REED IV: A KILLER AMONGST US 1 NBC
DANGEROUS INTENTIONS 1 CBS
LADY KILLER 1 CBS
MURDER C.O.D. 1 NBC
KISS SHOT 1 CBS
LIBERACE: BEHIND THE MUSIC 1 CBS
OVERRULED 1 NBC
SINS OF THE MOTHER 1 CBS
SWEET BIRD OF YOUTH 1 NBC
TO SAVE THE CHILDREN 1 CBS
YOUR MOTHER WEARS COMBAT BOOTS 1 NBC
CANDLES IN THE DARK 1 Family Channel
CITY BOY 1 PBS
A HUSBAND, A WIFE AND A LOVER 1 CBS
INNOCENT VICTIMS 1 NBC
</TABLE>
TELEVISION SERIES/GAME SHOW
<TABLE>
<CAPTION>
TITLE NUMBER PRODUCED FIRST EXHIBITION
- ------------------------------------- ------------------------- ----------------------
<S> <C> <C>
SWEATING BULLETS 66 CBS
PIGASSO'S PLACE 13 Syndication
TEEN WOLF 21 CBS
MAPLETOWN 39 Syndication
CINEMATTRACTIONS 26 Syndication
1ST AND TEN 80 HBO
HARTS OF THE WEST 15 CBS
TRIAL WATCH 117 NBC
THE BARBARA DE ANGELIS SHOW 70 CBS
HEROES: MADE IN THE USA 38 Syndication
BIOGRAPHIES 4 A&E
RELATIVELY SPEAKING 90 Syndication
</TABLE>
At any given time, a significant portion of the Company's library will be
under license in many of the major domestic and international markets. For
example, in fiscal 1996 the Company licensed portions of its libraries in
Germany and Spain. Following the expiration of the licenses, rights generally
revert to the Company where the Company is the copyright owner for resale in the
second cycle.
JOINT VENTURES TO EXPLOIT ANCILLARY MARKETS
The Company has expanded its business through joint ventures and
partnerships into areas which exploit the characters and story ideas in its
feature films and television programs. These activities provide additional
sources of revenues in certain cases without significant additional associated
expenses. The Company is actively marketing the music used in its productions
through an arrangement with Cherry Lane Music, Inc., a music publisher. In
addition, the Company has entered into an agreement with Decca Records, a
division of Polygram, to distribute the soundtrack of THE ADVENTURES OF
PINOCCHIO, which includes two original recordings by Stevie Wonder. Concepts
used in films are being developed into CD-ROM computer games under an agreement
with IBM. Using its expertise as a television producer, the Company has two
infomercials in production through a partnership known as TVFirst. One
infomercial is a Christian music infomercial in which a recording of Christian
music sung by leading gospel artists is marketed. Such infomercial has begun
airing under the name KEEP THE FAITH. The Company believes that the results have
been favorable through July 10, 1996 and plans to increase acquisition of air
time for such infomercial. The other infomercial is a work-in-process on the
subject of personal relationships. Responding to the increased demand for
product by the pay-per-view, telephone delivery, pay cable and basic cable
services, the Company
48
<PAGE>
formed a joint venture called KLC/New City Tele-Ventures to acquire product from
third parties for distribution in the cable, pay service and satellite markets,
as well as other emerging markets. The joint venture has acquired over 60 films
for this purpose as of May 1, 1996.
GOVERNMENT REGULATIONS
In a decision released September 6, 1995, the FCC repealed its financial
interest and syndication rules effective as of September 21, 1995. Those FCC
rules, which were adopted in 1970 to limit television network control over
television programming and thereby foster the development of diverse programming
sources, had restricted the ability of the three established, major U.S.
television networks (i.e., ABC, CBS and NBC), to own and syndicate television
programming. The ultimate impact of the repeal of the FCC's financial interest
and syndication rules on the Company's operations cannot be predicted at the
present time, although there has been an increase in in-house productions of
programming for the networks' own use.
Under the 1996 Act, manufacturers of television set equipment will be
required to equip all new television receivers with a so-called "V-Chip" which
would allow for parental blocking of violent, sexually-explicit or indecent
programming based on a rating for any given program that would be broadcast
along with the program. Unless the television industry establishes a voluntary
ratings system by February 1998, the FCC is directed by the 1996 Act to develop
a ratings system based upon the recommendations of an advisory committee
selected by the FCC. A coalition of various segments of the entertainment
industry has announced plans to devise a voluntary industry ratings code for
rating video programming with respect to violent, sexual or indecent content.
The industry coalition has announced its intent to have these new guidelines in
place before February 1997. Other provisions of the 1996 Act revise the multiple
broadcast ownership rules, allow local exchange telephone companies to offer
multichannel video programming service, subject to certain regulatory
requirements, and allow for cable companies to offer local exchange telephone
service.
The impact on the Company of the changes brought about by the 1996 Act and
by accompanying changes in FCC rules cannot be predicted at the present time,
although it is expected that there will be an increase in the demand for video
programming product as a result of the likelihood that these regulatory changes
will facilitate the advent of additional exhibition sources for such
programming. However, it is possible that recent alliances of certain program
producers and television station group owners, coupled with the recent FCC rule
revisions allowing a single television station licensee to own television
stations reaching up to 35% of the nation's television households, may place
additional competitive pressures on program suppliers, such as the Company, to
the extent they are unaligned with the major networks or any television station
group owners.
In international markets, the Company's programming may be subject to local
content and quota requirements which prohibit or limit the amount of programming
produced outside of the local market. Although the Company believes these
requirements have not affected the Company's licensing of its programs in
international markets to date, such restrictions, or new or different
restrictions, could have an adverse impact on the Company's operations in the
future should opportunities to obtain foreign content not be available.
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 80,000,000 shares of
Common Stock. At July 8, 1996, the Company had 40,218,618 shares of Common Stock
issued and outstanding.
Each share of Common Stock entitles the holder thereof to vote on all
matters submitted to the shareholders; in electing directors, however, each
shareholder is entitled to cumulate votes for any candidate if, prior to the
voting, such candidate's name has been placed in nomination and any shareholder
has given notice of an intention to cumulate votes. The Common Stock is not
subject to redemption or to liability for further calls or assessment. Holders
of Common Stock will be entitled to
49
<PAGE>
receive such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor and to share pro rata in any
distribution to shareholders. The shareholders have no conversion, preemptive or
other subscription rights.
CLASS C WARRANTS
Each Class C Warrant shall entitle the holder thereof to purchase one share
of Common Stock until July , 2001. The exercise price of the Class C Warrants
shall be 120% of the price of the Common Stock component of the Unit on the
Effective Date as agreed to by the Company and the Underwriter. The Company may
redeem the Class C Warrants at a redemption price of $.10 per Class C Warrant
commencing one year after the date hereof (or earlier at the sole discretion of
the Underwriter) if notice of not less than 30 days is given and the closing
high bid price of the Common Stock as reported on the NNM if traded thereon, the
closing high bid price if listed on a national securities exchange (or other
reporting system that provides last sales prices), or if not traded thereon but
traded on the Nasdaq SmallCap Market, over the counter or on the bulletin board,
the average of the ask and bid price, has been at least 150% of the then
exercise price of the Class C Warrants on all ten of the trading days prior to
the third day prior to the day on which such notice is given.
The exercise price and number of Class C Warrants shall be subject to
adjustment upon the occurrence of certain events, including a merger,
acquisition, recapitalization or split-up of shares of the Company or the
issuance by the Company of a stock dividend. Holders of Class C Warrants will
not, as such, have any of the rights of shareholders of the Company. The Warrant
Agent for the Class C Warrants will be Corporate Stock Transfer.
CLASS A WARRANTS
Each Class A Warrant entitles the holder thereof to purchase one share of
Common Stock at any time prior to March 20, 1996 for $2.00. Prior to the
expiration date of the Class A Warrants, the Company extended the expiration
date thereof to March 20, 1997. No fractional shares will be issued upon the
exercise of the Class A Warrants. The number and kind of securities or other
property for which the Class A Warrants are exercisable are subject to
adjustments in certain events, such as mergers, reorganizations or stock splits.
At any time, upon thirty days' written notice, the Company may redeem all, but
not less than all, unexercised Class A Warrants for $0.25 per Class A Warrant.
All Class A Warrants not exercised or redeemed will expire on March 20, 1997.
Holders of Class A Warrants will not, as such, have any of the rights of
shareholders of the Company.
TRANSFER AGENT AND REGISTRAR; WARRANT AGENT FOR CLASS A WARRANTS
The Transfer Agent and Registrar for the Common Stock is Corporate Stock
Transfer, Denver, Colorado. The Warrant Agent for the Class A Warrants is
National City Bank of Minneapolis.
SHARES ELIGIBLE FOR FUTURE SALE
Substantially all of the shares of Common Stock to be outstanding
after this Offering, and, subject to issuance, the 26,639,998 shares of Common
Stock issuable upon exercise of outstanding options or warrants (excluding the
warrants being sold to the Underwriter and a consultant to the Company) or
issuable upon conversion of outstanding convertible securities will be freely
tradeable in the public markets, in certain cases pursuant to a registration
statement or available exemption from registration. Of such shares issuable upon
exercise or conversion of outstanding securities, approximately 14,423,532
shares are issuable at or below $1.27 per share, 5,991,466 additional shares are
issuable at or below $1.58 per share and 2,300,000 additional shares are
issuable at or below $2.00 per share. Approximately 7,657,875 shares held by
affiliates will be subject to a six month lock-up in favor of the Underwriter.
The availability of shares for public sale, or the perception of such
availability, may have a depressive effect on the market price of the Common
Stock.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
which is filed as an exhibit to the registration statement of which this
Prospectus is a part, the Underwriter has agreed to purchase from the Company
Units, each Unit consisting of two shares of Common Stock and one
Warrant at the price to the public less the underwriting discount set forth on
the cover page of this Prospectus.
The Underwriting Agreement provides that the Underwriter will be obligated
to purchase all of the Units offered hereby on a "firm commitment" basis, if any
are purchased. The Company has been advised by the Underwriter that it proposes
to offer the Units to the public initially at the public offering price set
forth on the cover page of this Prospectus. The Underwriter may allow a
concession not exceeding $. per Unit to selected dealers who are members of the
NASD, and to certain foreign dealers, and such dealers may reallot to NASD
members and to certain foreign dealers a concession not exceeding $. per Unit.
The Underwriting Agreement provides that the Company will pay a
non-accountable expense allowance of 3% of the gross proceeds of the offering to
the Underwriter, $56,000 of which has been paid as of the date of this
Prospectus. The Company has also granted to the Underwriter an option to
purchase up to additional Units during the 45 day period commencing with
the Effective Date, solely to cover over-allotments, if any, in the sale of the
Units offered hereby.
The Underwriting Agreement provides that the Underwriter has the right, for
a period of two years from the Effective Date, to nominate an individual to
serve on the Company's Board of Directors. The Underwriter has advised the
Company that it intends to designate a director to be named in the future to act
as its nominee to the Company's Board of Directors upon the closing of the
Offering. If the Underwriter does not designate a nominee to the Company's Board
of Directors, the Underwriter shall have the right to send a representative (who
need not be the same individual from meeting to meeting) to observe each meeting
of the Board of Directors. Such designee will be entitled to the same notices
and communications sent by the Company to its directors and to attend directors'
meetings, but will not be entitled to vote thereat.
Upon the exercise of the Class C Warrants more that one year after the date
of this Prospectus, and to the extent not inconsistent with the guidelines of
the NASD and the rules and regulations of the Commission, the Company has agreed
to pay to the Underwriter a solicitation fee equal to 4% of the exercise price
for the Class C Warrants exercised during the period commencing one year after
the Effective Date and ending on the fifth anniversary thereof. However, no
compensation will be paid to the Underwriter in connection with the exercise of
the Class C Warrants if (a) the market price of the underlying shares of Common
Stock is lower than the exercise price, (b) the Class C Warrants are held in a
discretionary account, (c) the Class C Warrants are exercised in an unsolicited
transaction, or (d) the disclosure of such compensation arrangements has not
been made in the documents provided to the customers both as part of the
original Offering and at the time of exercise. In addition, unless granted an
exemption by the Commission from Rule 10b-6 under the Exchange Act, the
Underwriter will be prohibited from engaging in any market making activities or
solicited brokerage activities with regard to the Company's securities until the
later of the termination of such solicitation activity or the termination by
waiver or otherwise of any right the Underwriter may have to receive a fee for
the exercise of the Class C Warrants following such solicitations. In addition,
the Company has agreed to pay to I. Friedman Equities, Inc., a consultant to the
Company since 1990, a fee equal to 1% of the gross proceeds from the exercise of
the Class C Warrants.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the registration statement of which this Prospectus is a part, including
liabilities under the Securities Act. To the extent that this section may
purport to provide exculpation from possible liabilities arising under the
federal securities laws, it is the opinion of the Commission that such
indemnification is contrary to public policy and unenforceable.
51
<PAGE>
In connection with the Offering, the Company has agreed to sell to the
Underwriter, for nominal consideration, the Underwriter's Warrants to purchase
one Unit for each 10 Units sold in the Offering. The Underwriter's Warrants are
exercisable at $ per Unit, subject to the anti-dilution provisions thereof, for
a period of four years commencing one year from the Effective Date. The
Underwriter's Warrants grants to the holders thereof certain "piggyback" and
demand registration rights for a period of five years from the Effective Date
with respect to the registration under the Securities Act of the securities
issuable upon exercise of the Underwriter's Warrants.
All of the officers and directors of the Company and shareholders holding
five percent or more of the outstanding shares of the Common Stock of the
Company, exclusive of institutional holders, have agreed not to sell publicly
any of their shares of Common Stock for a period of six (6) months following the
Effective Date without the prior written approval of the Underwriter. In
addition, the Selling Security Holders have agreed not to sell their 1,331,734
shares of Common Stock for a period of up to six (6) months following the
Effective Date without the prior written consent of the Underwriter.
The Company has agreed that it will not publicly sell or offer any of its
securities except (i) with respect to Common Stock issued upon exercise of
outstanding options and warrants, options issued under the Company's stock
option plan, the Warrants or the Underwriter's Warrants, or upon conversion of
the Company's Convertible Subordinated Debentures and Notes or (ii) pursuant to
a merger, acquisition or other business combination, for six (6) months
following the Effective Date, without the prior written approval of the
Underwriter.
The Company has engaged the Underwriter or its representative as its
financial consultant for a period of 24 months to commence on the Effective
Date, in consideration for which the Underwriter shall receive a consulting fee
of $144,000, $72,000 of which shall be paid on the completion of the Offering
and the balance ($72,000) shall be paid at the rate of $6,000 per month
commencing upon completion of the Offering.
The Company also has agreed to pay all expenses in connection with
qualifying the Units offered hereby for sale under the laws of such states as
the Underwriter may reasonably designate, including fees and expenses of counsel
retained for such purposes. The Company also has agreed to reimburse certain due
diligence costs of the Underwriter. Further, the Company has agreed to pay a fee
to I. Friedman Equities, Inc. for financial consultation services equal to 1% of
the gross proceeds of the offering. In addition, the Company will sell to I.
Friedman Equities, Inc., for nominal consideration, a warrant to purchase Units
equal to 1% of the Units sold in the Offering at an exercise price equal to
$ , subject to anti-dilution adjustments.
The offering price of the Units offered hereby and the terms of the Warrants
were determined by negotiation between the Company and the Underwriter. Factors
considered in determining such prices and terms include the current market price
of the Common Stock, the prevailing market conditions, the history of and the
prospects of the industry in which the Company competes, an assessment of the
Company's management, the prospects of the Company, its capital structure and
such other factors as were deemed relevant.
CONCURRENT OFFERING
Concurrently with the Offering, 1,331,734 shares of Common Stock,
representing the estimated number of Bonus Shares and shares of Common Stock
issuable upon exercise of a warrant issued to an underwriter as part of the
Company's November 1992 offering, are being registered under the Securities Act
for resale as part of the registration statement of which this Prospectus is a
part. The holders of such securities have agreed not to sell such securities for
a period of up to (6) months after the Effective Date without the prior written
consent of the Underwriter subject, in the case of shares of Common Stock
issuable upon exercise of certain warrants, to earlier release under certain
circumstances.
52
<PAGE>
LEGAL MATTERS
The validity of the Units offered hereby will be passed upon for the Company
by Kaye, Scholer, Fierman, Hays & Handler, LLP, 1999 Avenue of the Stars, Suite
1600, Los Angeles, California. Certain legal matters will be passed upon for the
Underwriter by Schneck, Weltman, Hashmall & Mischel LLP, 1285 Avenue of the
Americas, New York, New York.
EXPERTS
The consolidated financial statements of The Kushner-Locke Company at
September 30, 1995 and 1994, and for each of the three years in the period ended
September 30, 1995, appearing in this Prospectus and Registration Statement have
been audited by KPMG Peat Marwick LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein or incorporated by reference
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
53
<PAGE>
THE KUSHNER LOCKE COMPANY
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report.............................................. F-2
Annual Financial Statements:
Consolidated Balance Sheets as of September 30, 1995 and 1994........... F-3
Consolidated Statements of Operations for each of the Three Years Ended
September 30, 1995..................................................... F-4
Consolidated Statements of Cash Flows for each of the Three Years Ended
September 30, 1995..................................................... F-5
Consolidated Statements of Stockholders' Equity for Each of the Three
Years Ended September 30, 1995......................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Interim Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1996 (unaudited)
and September 30, 1995................................................. F-22
Condensed Consolidated Statements of Operations for the Six Months Ended
March 31, 1996 and 1995 (unaudited).................................... F-23
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
March 31, 1996 and 1995 (unaudited).................................... F-24
Condensed Consolidated Statements of Stockholder Equity for the Six
Months Ended March 31, 1996 (unaudited)................................ F-25
Notes to Condensed Consolidated Financial Statements.................... F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Kushner-Locke Company:
We have audited the accompanying consolidated balance sheets of The
Kushner-Locke Company and subsidiaries (the "Company") as of September 30, 1995
and 1994, and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the years in the three-year period ended
September 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Kushner-Locke
Company and subsidiaries as of September 30, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1995, in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 5 to consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standard Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," in 1994.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 12, 1996
F-2
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
-------------- --------------
<S> <C> <C>
Cash and cash equivalents........................................................ $ 3,139,000 $ 15,681,000
Restricted cash.................................................................. 1,162,000 --
Accounts receivable, net of allowance for doubtful accounts of $400,000 in 1995
and $650,000 in 1994............................................................ 7,864,000 6,177,000
Due from affiliates.............................................................. 309,000 187,000
Notes receivable from August Entertainment, Inc.................................. 676,000 32,000
Film costs, net of accumulated amortization...................................... 73,716,000 30,688,000
Property and equipment, at cost, net of accumulated depreciation and amortization
of $1,425,000 in 1995 and $1,187,000 in 1994.................................... 515,000 437,000
Other assets..................................................................... 1,571,000 1,052,000
-------------- --------------
$ 88,952,000 $ 54,254,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities......................................... $ 3,245,000 $ 2,385,000
Income taxes payable............................................................. -- 10,000
Notes payable.................................................................... 28,398,000 9,600,000
Deferred film license fees....................................................... 2,753,000 364,000
Contractual obligations, principally participants' share payable and talent
residuals....................................................................... 995,000 1,216,000
Production advances.............................................................. 16,609,000 82,000
Convertible subordinated debentures, net of deferred issuance costs.............. 17,745,000 22,056,000
-------------- --------------
Total liabilities........................................................ $ 69,745,000 $ 35,713,000
-------------- --------------
Stockholders' equity:
Common stock, no par value. Authorized 80,000,000 shares at September 30, 1995
and at September 30, 1994:
issued and outstanding 35,466,599 shares at September 30, 1995 and 30,069,101
shares at September 30, 1994.................................................. 23,337,000 18,696,000
Accumulated deficit............................................................ (4,130,000) (155,000)
-------------- --------------
Total stockholders' equity............................................... $ 19,207,000 $ 18,541,000
-------------- --------------
$ 88,952,000 $ 54,254,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Operating revenues............................................... $ 20,407,000 $ 50,736,000 $ 42,487,000
Costs related to operating revenues.............................. 17,404,000 54,952,000 41,497,000
Selling, general and administrative expenses..................... 3,838,000 3,208,000 2,797,000
-------------- -------------- --------------
Loss from operations............................................. (835,000) (7,424,000) (1,807,000)
Interest income.................................................. 300,000 197,000 78,000
Interest expense................................................. (3,409,000) (2,209,000) (1,173,000)
-------------- -------------- --------------
Loss before income taxes and cumulative effect of a change in
accounting principle............................................ (3,944,000) (9,436,000) (2,902,000)
Income tax expense (benefit)..................................... 31,000 (2,277,000) (1,076,000)
-------------- -------------- --------------
Loss before cumulative effect of a change in accounting
principle....................................................... (3,975,000) (7,159,000) (1,826,000)
Cumulative effect of a change in accounting for income taxes..... -- (394,000) --
-------------- -------------- --------------
Net loss......................................................... $ (3,975,000) $ (6,765,000) $ (1,826,000)
-------------- -------------- --------------
-------------- -------------- --------------
Loss per common and common equivalent share:
Loss before cumulative effect of a change in accounting for
income taxes.................................................. $ (.13) $ (.24) $ (.06)
Cumulative effect of a change in accounting for income taxes... -- $ .01 --
-------------- -------------- --------------
Net loss....................................................... $ (.13) $ (.23) $ (.06)
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average number of common and common equivalent shares
outstanding..................................................... 31,713,000 29,373,000 28,372,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (3,975,000) (6,765,000) (1,826,000)
Adjustments to reconcile net earnings (loss) to net cash
used by operating activities:
Cumulative effect of a change in accounting principle..... -- (394,000) --
Increase in restricted cash................................. (1,162,000) -- --
Amortization of film costs................................ 16,977,000 54,281,000 27,730,000
Depreciation and amortization............................. 239,000 250,000 180,000
Amortization of capitalized issuance costs and warrants... 414,000 222,000 100,000
Deferred income taxes..................................... -- (2,321,000) (926,000)
Accounts receivable, net.................................. (1,687,000) (817,000) (2,424,000)
Income taxes receivable................................... -- 25,000 (9,000)
Due from affiliates....................................... (766,000) (209,000) 11,000
Notes receivable from distributor......................... -- -- 1,000
Film costs................................................ (60,005,000) (41,938,000) (28,081,000)
Accounts payable and accrued liabilities.................. 860,000 (3,323,000) 3,005,000
Income taxes payable...................................... (10,000) 10,000 --
Deferred film license fees................................ 2,389,000 (266,000) (6,336,000)
Contractual obligations................................... (221,000) (1,134,000) 93,000
Production advances....................................... 16,527,000 (8,464,000) 2,963,000
--------------- --------------- ---------------
Net cash used by operating activities................... (30,420,000) (10,843,000) (5,519,000)
--------------- --------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment.......................... (317,000) (134,000) (178,000)
Decrease (increase) in other assets......................... (518,000) (442,000) 537,000
--------------- --------------- ---------------
Net cash provided (used) by investing activities........ (835,000) (576,000) 359,000
--------------- --------------- ---------------
Cash flows from financing activities:
Increase in notes payable................................... 21,398,000 31,600,000 22,500,000
Repayment of notes payable.................................. (2,600,000) (30,007,000) (20,075,000)
Net proceeds from issuance of common stock.................. -- -- 6,640,000
Net proceeds from exercise of options....................... -- 105,000 185,000
Net proceeds from issuance of debentures and warrants....... -- 18,911,000 --
Repayment of debentures..................................... (25,000) (37,000) (39,000)
Other....................................................... (60,000) (14,000) --
--------------- --------------- ---------------
Net cash provided by financing activities................. 18,713,000 20,558,000 9,211,000
--------------- --------------- ---------------
Net increase (decrease) in cash........................... (12,542,000) 9,139,000 4,051,000
Cash and cash equivalents at beginning of year................ 15,681,000 6,542,000 2,491,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Cash and cash equivalents at end of year...................... $ 3,139,000 $ 15,681,000 $ 6,542,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................... $ 2,952,000 $ 1,888,000 $ 1,260,000
--------------- --------------- ---------------
--------------- --------------- ---------------
Income taxes................................................ $ 27,200 $ 8,800 $ 8,800
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
F-5
<PAGE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
(1) In fiscal 1993, $844,000 of convertible subordinated debentures before
unamortized capitalized issuance costs of $137,000 were converted into
547,979 shares of common stock.
(2) In fiscal 1994, $1,537,000 of convertible subordinated debentures before
unamortized capitalized issuance costs of $201,000 were converted into
989,052 shares of common stock.
(3) In fiscal 1995, $5,260,000 of convertible subordinated debentures before
unamortized capitalized issuance costs of $559,000 were converted into
5,397,498 shares of common stock.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------
RETAINED
EARNINGS
NUMBER OF COMMON (ACCUMULATED
SHARES STOCK DEFICIT) TOTAL
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at September 30, 1992..................... 20,804,570 $ 9,737,000 $ 8,436,000 $18,173,000
Issuance of common stock.......................... 8,050,000 6,640,000 -- 6,640,000
Stock options exercised........................... 110,000 110,000 -- 110,000
Warrants exercised................................ 62,500 75,000 -- 75,000
Conversions of convertible debentures............. 547,979 707,000 -- 707,000
Net loss.......................................... -- -- (1,826,000) (1,826,000)
---------- ----------- ------------ -----------
Balance at September 30, 1993..................... 29,575,049 $17,269,000 $ 6,610,000 $23,879,000
Retirement of common stock........................ (600,000) -- -- --
Stock options exercised........................... 105,000 105,000 -- 105,000
Costs related to registration statement........... -- (14,000) -- (14,000)
Conversions of convertible debentures............. 989,052 1,336,000 -- 1,336,000
Net loss.......................................... -- -- (6,765,000) (6,765,000)
---------- ----------- ------------ -----------
Balance at September 30, 1994..................... 30,069,101 $18,696,000 $ (155,000) $18,541,000
Conversions of convertible debentures............. 5,397,498 4,641,000 -- 4,641,000
Net loss.......................................... -- -- (3,975,000) (3,975,000)
---------- ----------- ------------ -----------
Balance at September 30, 1995..................... 35,466,599 $23,337,000 $ (4,130,000) $19,207,000
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO 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 feature films, direct-to-video
films, television series, movies-for-television, mini-series and animated
programming. Last year, the Company expanded its operations into related
business lines in ancillary markets for its product such as merchandising, home
video, cable and interactive/multimedia applications for characters and story
ideas developed by the Company through various arrangements with established
companies having expertise in these respective fields.
Generally, theatrical films are first distributed in the theatrical and home
video markets. Subsequently, theatrical films are made available for world-wide
television network exhibition or pay television, television syndication and
cable television. Generally, television films are first licensed for network
exhibition and foreign syndication or home video, and subsequently for domestic
syndication or cable television. Certain films are produced and/or distributed
directly for initial exhibition by local television stations,
advertiser-supported cable television, pay television and/or home video. The
revenue cycle extends 7 to 10 years on film and television product.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The
Kushner-Locke Company, its subsidiaries and certain less than wholly-owned
entities where the Company has control. All material intercompany balances and
transactions have been eliminated.
Certain reclassifications have been made to conform prior year balances with
the current presentation.
REVENUE RECOGNITION
Revenues from feature film distribution agreements and/or from television
licensing agreements are recognized on the date the completed film or program is
delivered or becomes available for delivery, is available for exploitation in
the relevant media window purchased by that customer or by that licensee and
certain other conditions of sale have been met pursuant to criteria specified by
SFAS No. 53, Financial Reporting by Producers and Distributors of Motion Picture
Films. Revenues from barter transactions, whereby the program is exchanged for
television advertising time which is sold to product sponsors, are recognized
when the television program has aired and all conditions precedent have been
satisfied.
Producer fees received from production of films and television programs for
outside parties where the Company has no continuing ownership interest in the
project are recognized on a percentage-of-completion basis as determined by
applying the cost-to-cost method. The cost of such films and television series
is expensed as incurred.
ACCOUNTING FOR FILM COSTS
The Company generally capitalizes all costs incurred to produce a film,
including the interest expense funded under the production loans. Such costs
also include the actual direct costs of production, certain exploitation costs
and production overhead. Capitalized exploitation or distribution costs include
those costs that clearly benefit future periods such as film prints and
prerelease and early release advertising that is expected to benefit the film in
future markets. These costs, as well as participation and talent residuals, are
amortized each period on an individual film or television program basis 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 film
or program from all sources. Revenue estimates are reviewed quarterly and
adjusted where appropriate and the impact of such adjustments could be material.
F-8
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Film costs are stated at the lower of unamortized cost or estimated net
realizable value. Losses which may arise because unamortized costs of individual
films or television series exceed anticipated revenues are charged to operations
through additional amortization.
The Company capitalized interest of $631,174, $450,910 and $89,090 related
to film cost inventories for the years ended September 30, 1995, 1994 and 1993,
respectively.
PARTICIPANTS' SHARE PAYABLE AND TALENT RESIDUALS
The Company charges profit participations and talent residuals to expense in
the same manner as amortization of production costs, based on the ratio of
current period gross revenues to management's estimate of total ultimate gross
revenues, if it is anticipated they will be payable. Payments for profit
participations are made in accordance with the participants' contractual
agreements. Payments for talent residuals are remitted to the respective guilds
in accordance with the provisions of their union agreements or earlier, if
assessed.
PRODUCTION ADVANCES
The Company receives license fees for projects in the production phase.
Production advances are generally nonrefundable and are recognized as earned
revenue when the film or television program is available for delivery.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company provides for doubtful accounts based on historical collection
experience and periodically adjusts the allowance based on the aging of accounts
receivable and other conditions. Receivables are written off against the
allowance in the period they are deemed uncollectible.
PROPERTY AND EQUIPMENT
Property and equipment, at cost, is depreciated using the straight-line
method over the estimated useful lives of the assets (ranging from five to eight
years).
CASH AND CASH EQUIVALENTS
The Company considers certificates of deposit and other highly liquid
investments with original maturities of three months or less to be cash
equivalents.
RESTRICTED CASH
During the fiscal year ended September 30, 1995, the Company had $1,162,000
in restricted cash related to advances made by the Company to film producers for
the acquisition of distribution rights. These cash advances were being held in
escrow accounts as collateral by financial institutions providing production
loans to those producers.
INTERNATIONAL CURRENCY TRANSACTIONS
The majority of the Company's foreign sales transactions are payable in U.S.
dollars. Accordingly, international currency transaction gains and losses
included in the consolidated statements of operations for the three years ended
September 30, 1995 were not significant.
INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This
statement supersedes SFAS No. 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
F-9
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 operating results in the
period encompassing the enactment date.
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 results of operations of $394,000. Prior year consolidated
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 dilutive outstanding warrants and stock options.
The weighted average number of common and common equivalent shares outstanding
for the calculation of primary earnings per share was 31,713,000, 29,373,000 and
28,372,000 for the years ended September 30, 1995, 1994 and 1993, 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>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
In process or development............................................. $ 42,115,000 $ 5,177,000
Released, principally television productions, net of accumulated
amortization......................................................... 31,601,000 25,511,000
------------- -------------
$ 73,716,000 $ 30,688,000
------------- -------------
------------- -------------
</TABLE>
Based upon the Company's present estimates of anticipated future revenues at
September 30, 1995, approximately 76% of the film costs related to released
films and television series will be amortized during the three-year period
ending September 30, 1998.
(3) NOTES PAYABLE AND LIQUIDITY
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
Note payable to bank, secured by substantially all Company assets,
interest at prime (8.75% at September 30, 1995) plus 1.25%,
outstanding principal balance due January 1996....................... $ 14,804,000 $ 9,600,000
Notes payable, secured by certain film rights held by producers
payable through September 1996....................................... 13,594,000 --
------------- -------------
$ 28,398,000 $ 9,600,000
------------- -------------
------------- -------------
</TABLE>
The Imperial credit agreement, as amended and restated in August 1993, had
an original maturity date of June 2, 1995. The original maturity date was
extended in March 1995 to September 30, 1995, then subsequently extended in
September 1995 to December 29, 1995 and further extended in December 1995 to
January 31, 1996. During the beginning of this period, the Company initially
held discussions with Imperial Bank seeking a longer-term extension and increase
of the facility to $25,000,000 through a syndication to include additional
financial institutions. In September 1995,
F-10
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NOTES PAYABLE AND LIQUIDITY (CONTINUED)
however, the Company obtained a commitment letter from the U.S. division of a
major international financial institution to provide a new syndicated credit
facility to refinance the Company's existing line and provide credit
availability up to $30,000,000 (or the available borrowing base, if less).
Completion of the new facility was subject to negotiation and execution of
mutually satisfactory definitive credit documentation, among other conditions.
In January 1996, the Company decided to seek a longer-term extension of its
existing $15,000,000 credit line from Imperial Bank, in lieu of proceeding
further at such time with negotiations concerning documentation and completion
of a new facility. On January 12, 1996, Imperial Bank provided to the Company
its commitment to extend the existing credit line through December 31, 1996 and
the Company paid a loan fee to the bank in connection with such commitment and
agreed to issue warrants to purchase 500,000 shares of common stock to the bank
at an exercise price no less than fair market value at the time of the grant
thereof. Imperial Bank's commitment is subject to completion and effectiveness
of an amendment to the existing credit agreement satisfactory to the bank by
January 31, 1996, which amendment will eliminate existing financial covenants as
of September 30, 1995 and substitute revised net worth, liquidity and minimum
quarterly net income requirements. Imperial Bank has advised the Company that
based on its knowledge of the Company the bank believes it is highly probable
such documentation will be executed shortly.
Following completion and effectiveness of the amendment, the Company intends
to commence discussions with Imperial Bank concerning arranging or participating
in a multi-year increased syndicated credit facility to amend or replace the
existing facility by May 31, 1996 in which it is expected that Imperial Bank
would continue to participate in a decreased amount. If such facility is not in
place by such time, as required by Imperial Bank's commitment letter, the
existing line of credit will be reduced in size from $15,000,000 to $12,500,000
during the period from May 31, 1996 to October 31, 1996, and further reduced to
$10,000,000 prior to December 31, 1996 to the extent of excess available cash
flow.
The line is secured by substantially all of the Company's assets and bears
interest at an annual rate of Prime (8.5% at December 22, 1995) plus 1.25%. The
Company is required to pay a commitment fee of .5% per annum of the unused
portion of the credit line. As of September 30, 1995, the Company had drawn down
$14,804,000 under this facility out of a total eligible collateral at such date
of $16,233,000 but which was capped at the credit limit of $15,000,000.
The outstanding credit agreement described above contains various covenants
to which the Company must adhere. These covenants, among other things, require
the maintenance of minimum net worth 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 and the use of proceeds and prohibit payment
of dividends and prepayment of subordinated debt. The outstanding credit
agreement also contains a provision permitting the bank to declare an event of
default if the services of either of Messrs. Kushner or Locke are not available
to the Company unless a replacement acceptable to the bank is named. The Company
is in compliance with the non-financial terms and conditions of the outstanding
credit agreement and the bank has agreed to waive the violation, if any, of any
existing financial covenants for the period ending September 30, 1995 upon
completion of documentation.
While the Company believes that it will obtain a multi-year increased
syndicated credit facility by May 31, 1996, the Company has not received any
commitment for such facility. If the Company is unable to obtain such increased
credit facility, the Company will seek alternative financing. However,
F-11
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NOTES PAYABLE AND LIQUIDITY (CONTINUED)
there is no guarantee that alternative financing will be available on acceptable
terms. If such increased credit facility and/or alternative financing is not
available, Management believes that existing resources and cash generated from
operating activities, after a reduction of the level of Company's investment in
film costs, will be adequate to comply with the terms of the anticipated
extension of the credit facility through December 1996. To the extent that
existing resources and a reduction in the level of Company's investment in film
costs are not adequate, Management has the ability and intent to reduce
operating expenses. Further, while the Company has in any event received the
bank's commitment to extend the existing facility through December 31, 1996
(subject to reduction commencing May 31, 1996), such commitment is subject to
completion and effectiveness of the amendment by January 31, 1996. In the event
that the company does not receive an extension of its existing credit facility
or is unable to comply with the terms of the anticipated extension, the Company
would seek to restructure its obligations under the facility. This would have a
significant effect on the Company's operations.
The Company's other short term borrowings totaling $13,594,000 as of
September 30, 1995, consist of production loans from Newmarket Capital Group
L.P. ("Newmarket"), Banque Paribas (Los Angeles Agency) ("Paribas") and Imperial
Bank ("Imperial") to consolidated production entities. Newmarket's loans require
an interest rate of Prime (8.5% as of December 22, 1995) plus 1% on the first
$500,000 advanced under the loan, then pricing options are at either (a) Prime
plus 1% or (b) LIBOR plus 3% on the remaining loan balance plus loan fees of
$60,000 plus a net profit participation. The Paribas loan bears interest at
either (a) Reference Rate (8.5% as of December 22, 1995) plus 1/2% or (b) LIBOR
plus 2% plus loan fees of $120,000. The Imperial loan bears interest at Prime
(8.5% as of December 22, 1995) plus 3% plus loan fees of $97,500 plus a net
profit participation. The Kushner-Locke Company provides limited corporate
guarantees for a portion of the Newmarket and Paribas loans which are callable
in the event that the production companies' loan amounts (including a reserve
for fees, interest and financing costs) are not adequately collateralized with
acceptable contracts receivable from third party domestic and/or foreign
sub-distributors by certain dates or by the maturity date of the loan. Deposits
on the purchase price paid by these sub-distributors are held as restricted cash
collateral by the Lenders.
The table below shows production loans as of September 30, 1995. Any events
of default have been waived and all loans are in compliance with Lender's
covenants:
<TABLE>
<CAPTION>
AMOUNTS WEIGHTED
FILM LENDER LOAN AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY
- -------------------------------------------------- --------- ----------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
THE LEGEND OF PINOCCHIO........................... Newmarket $12,500,000 $ 7,596,000 8.75% $3,250,000 9-30-96
SERPENT'S LAIR.................................... Newmarket $ 1,005,000 $ 751,000 9.25% $ 345,000 2-28-96
THE GRAVE......................................... Newmarket $ 2,100,000 $ 1,343,000 10.25% $ 740,000 3-14-96
WHOLE WIDE WORLD.................................. Newmarket $ 1,550,000 $ 955,000 8.00% $ 500,000 3-31-96
FREEWAY........................................... Paribas $ 1,983,333 $ 1,225,000 7.00% $ 961,667 7-5-96
TIME WARRIORS..................................... Imperial $ 1,950,000 $ 1,724,000 9.60% $1,724,000 2-28-96
----------- ------------ ----------
$21,088,333 $ 13,594,000 $7,520,667
----------- ------------ ----------
----------- ------------ ----------
</TABLE>
F-12
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES
<TABLE>
<CAPTION>
SEPTEMBER 30, 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 $13,000 and $17,000, respectively.... $ 84,000 $ 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 $354,000 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 $1,058,000 and $1,887,000, respectively....................... 10,129,000 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 $490,000 and $561,000, respectively.................................... 4,560,000 4,488,000
-------------- --------------
$ 17,745,000 $ 22,056,000
-------------- --------------
-------------- --------------
</TABLE>
None of the Convertible Subordinated Debentures mature during the next five
fiscal years.
SERIES A DEBENTURES
During fiscal 1991, the Company sold $1,500,000 principal amount of Series A
Convertible Subordinated Debentures due 2000 and 4,200 units which represented
an additional $4,200,000 principal amount of Series A Debentures. Each unit
included warrants to purchase 500 shares of common stock of the Company at $2.00
per share. Each warrant has been valued for reporting purposes at $.25 (2.1
million warrants with a total value of $525,000) and is included in common
stock.
As of September 30, 1995, the Company had outstanding $97,000 principal
amount of Series A Debentures. The debentures are recorded net of unamortized
underwriting discounts, expenses associated with the offering and warrants
totaling $13,000 which are amortized using the interest method to interest
expense over the term of the debentures. Approximately $4,000 of capitalized
issuance costs have been amortized to interest expense for the year ended
September 30, 1995.
The Series A Debentures bear interest at 10% per annum, payable on June 15
and December 15 in each year. The Series A Debentures are convertible into
common stock of the Company at the rate of 788 shares for each $1,000 principal
amount of debentures, subject to adjustment under certain circumstances. As of
September 30, 1995, approximately $5,603,000 principal amount of Series A
Debentures and unamortized capitalized issuance costs and warrants of $1,744,000
had been converted into 4,865,754 shares of common stock of the Company.
The debentures are redeemable at the option of the Company in whole or in
part at 110% of the face amount of the debentures provided that the closing bid
price (or, if applicable, closing price) of the common stock has equaled or
exceeded 150% of the conversion price for the 20 consecutive trading days ending
five trading days prior to the date of notice of redemption. The Company may
also redeem the debentures at redemption prices commencing at 105% of par and
declining to par after September 30, 1997. The debentures are subordinated to
all existing and future "senior indebtedness." The term "senior indebtedness" is
defined to mean the principal of (and premium, if any) and interest on
F-13
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
any and all indebtedness of the Company that is (i) incurred in connection with
the borrowing of money from banks, insurance companies and similar institutional
lenders, (ii) issued as a result of a public offering of debt securities
pursuant to registration under the Securities Act of 1933, or (iii) incurred in
connection with the borrowing of money with an original principal amount of at
least $100,000 secured at least in advanced by companies engaged in the ordinary
course of their business in the entertainment industry. Senior indebtedness does
not include (i) the Series B Debentures, (ii) indebtedness to affiliates and
(iii) indebtedness expressly subordinated to or on parity with the Series A
Debentures, whether outstanding on the date of execution of the indenture or
thereafter created, incurred, assumed or guaranteed.
SERIES B DEBENTURES
During fiscal 1991, the Company sold $6,000,000 principal amount of Series B
Convertible Subordinated Debentures due 2000.
As of September 30, 1995 the Company had outstanding $3,326,000 principal
amount of Series B Debentures due 2000. The debentures bear interest at 13 3/4%
per annum. The Series B Debentures are recorded net of unamortized underwriting
discounts and expenses associated with the offering totaling $354,000, which are
amortized using the interest method to interest expense over the term of the
debentures. Approximately $69,000 of capitalized issuance costs had been
amortized as interest expense for the year ended September 30, 1995.
The terms of the Series B Debentures are generally similar to those of the
Series A Debentures other than with respect to the interest rates, except that
(i) interest is payable monthly on the Series B Debentures and (ii) the Series B
Debentures are convertible into common stock of the Company at $1.5444 per
share. The Series B Debentures rank pari passu (i.e., equally) in right of
payment with the Company's other debentures. Approximately $10,000 principal
amount of the Series B Debentures and unamortized costs of $1,000 had been
converted to 6,732 shares of common stock of the Company in fiscal year 1995. As
of September 30, 1995, approximately $2,508,000 principal amount of Series B
Debentures and unamortized capitalized issuance costs of $361,000 had been
converted into 1,618,357 shares of common stock of the Company. An additional
$166,000 principal amount of Series B Debentures were repurchased upon the death
of bondholders.
8% DEBENTURES
During fiscal 1994, the Company sold $16,437,000 principal amount of 8%
Convertible Subordinated Debentures due 2000. In connection with the issuance,
the Company issued warrants to purchase up to 10% of the aggregate principal
amount of debentures sold at an exercise price equal to 120% of the principal
amount of the debentures which are exercisable during the four year period
commencing March 10, 1995 for $9,613,700 principal amount and April 12, 1995 for
$30,000 principal amount.
As of September 30, 1995, the Company had outstanding $11,187,000 principal
amount of 8% Debentures. The debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$1,058,000 which are amortized using the interest method to interest expense
over the term of the debentures. Approximately $270,000 of capitalized issuance
costs had been amortized as interest expense for the year ended September 30,
1995. Approximately $5,250,000 principal amount of the 8% Debentures and
unamortized capitalized issuance costs of $559,000 had been converted into
5,390,766 shares of common stock of the Company in fiscal year 1995.
The terms of the 8% Debentures are generally similar to those of the Series
A Debentures, other than with respect to the interest rates, except that (i)
interest is payable on February 1 and August 1 in each year; (ii) the 8%
Debentures are convertible into common stock of the Company at $.975 per
F-14
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
share; and (iii) 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 8% Debentures rank pari passu
in right of payment with the Company's other debentures.
9% DEBENTURES
During fiscal 1994, the Company sold $5,050,000 principal amount of 9%
Convertible Subordinated Debentures due 2002. In connection with the issuance,
the Company issued warrants to purchase up to 9% of the aggregate principal
amount of debentures sold at an exercise price equal to 120% of the principal
amount of debentures which are exercisable during the four year period
commencing July 25, 1995.
As of September 30, 1995, the Company had outstanding $5,050,000 principal
amount of 9% Debentures. The debentures bear interest at 9% per annum. The
debentures are recorded net of unamortized underwriting discounts and expenses
associated with the offering totaling $490,000, which are amortized using the
interest method to interest expense over the term of the debentures.
Approximately $72,000 of capitalized issuance costs had been amortized as
interest expense for the year ended September 30, 1995
The terms of the 9% Debentures are generally similar to those of the Series
A Debentures, other than with respect to the interest rates, except that: (i)
interest is payable on January 1 and July 1 in each year; (ii) the 9% Debentures
are convertible into common stock of the Company at $1.58 per share; and (iii)
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 9% Debentures rank pari passu in right of payment with
the Company's other debentures.
(5) INCOME TAXES
As discussed in Note 1 of "Notes to Consolidated Financial Statements," the
Company adopted SFAS No. 109 as of October 1, 1993.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1995 1994 1993
------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $ -- $ (150,000)
State..................................................... 31,000 44,000 --
------- ----------- -----------
$31,000 $ 44,000 $ (150,000)
------- ----------- -----------
Deferred:
Federal................................................... $ -- $(2,036,000) $ (926,000)
State..................................................... -- (285,000) --
------- ----------- -----------
-- (2,321,000) (926,000)
------- ----------- -----------
Total income tax expense (benefit)...................... $31,000 $(2,277,000) $(1,076,000)
------- ----------- -----------
------- ----------- -----------
</TABLE>
F-15
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES (CONTINUED)
A reconciliation of the statutory Federal income tax rate to the Company's
effective rate is presented below:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate.......................................... (34)% (34)% (34)%
Change in valuation allowance.............................................. 34% 13 --
Other...................................................................... -- (3) (3)
---- ---- ----
-- (24)% (37)%
---- ---- ----
---- ---- ----
</TABLE>
Significant components of the Company's deferred tax assets and liabilities,
at September 30, 1995 and September 30, 1994 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1995 1994
----------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................................. $ 8,652,000 $ 2,598,000
Tax and general business tax credit carryforwards............................. 559,000 556,000
Allowance for doubtful accounts and other reserves............................ 145,000 289,000
Deferred film license fees.................................................... 995,000 134,000
Deferred rent................................................................. 65,000 81,000
----------- -------------
Total gross deferred assets................................................. 10,416,000 3,658,000
Valuation allowance......................................................... (3,679,000) (1,216,000)
----------- -------------
Net deferred tax assets..................................................... $ 6,737,000 $ 2,442,000
----------- -------------
----------- -------------
Deferred tax liabilities:
Film amortization............................................................. $ 6,701,000 $ 2,417,000
Depreciation.................................................................. 36,000 25,000
----------- -------------
Total deferred tax liabilities.............................................. $ 6,737,000 $ 2,442,000
----------- -------------
----------- -------------
</TABLE>
Deferred income taxes result from timing differences in the recognition of
revenue and expense for tax and financial reporting purposes. The sources of
these differences and the related tax effects are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------
<S> <C>
1993
---------------
Amortization of film costs.................................. $ (2,875,000)
Deferred film license fees.................................. 1,142,000
Allowance for doubtful accounts............................. 34,000
Deferred rent............................................... 31,000
Participant's share and talent residuals.................... 757,000
Other, net.................................................. (15,000)
---------------
$ (926,000)
---------------
---------------
</TABLE>
At September 30, 1995, the Company had net operating loss carryforwards of
approximately $24,631,000 for federal tax purposes. Such carryforwards expire in
fiscal 2010. For state tax purposes, the Company had net operating loss
carryforwards of $4,527,000 which expire in fiscal 1998 through
F-16
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES (CONTINUED)
2000. The Company's international tax credits, amounting to approximately
$386,000, expire in fiscal 1997 through 2000. The Company's general business
credit carryforwards, amounting to approximately $190,700, expire in fiscal 2002
and 2003. Finally, the Company's alternative minimum tax credit carryforwards,
amounting to approximately $173,000, have no expiration date.
(6) WARRANTS
In fiscal 1991, in connection with the Series A Convertible Subordinated
Debenture offering, the Company issued warrants to the underwriter to purchase
up to $150,000 principal amount of Series A Debentures for $1,200 for each
$1,000 principal amount of Series A Debentures purchased. The warrants are
exercisable through December 20, 1995. The Company issued warrants to the
underwriter to purchase up to 400 units of Series A Debentures at $1,200 per
unit. Each unit consists of $1,000 principal amount of Series A Debentures and
warrants to purchase 500 shares of common stock of the Company at $2.00 per
share. The underlying warrants are exercisable through March 20, 1996 and the
Company has agreed to extend the exercise period through March 20, 1997. The
Company issued 2,100,000 warrants valued at $525,000 to purchase common stock at
$2.00 per share. The warrants are exercisable through March 20, 1997 (as agreed
to be extended). As of September 30, 1995, no warrants had been exercised.
In fiscal 1992, in connection with its public offering of common stock, the
Company issued warrants to the underwriters of the offering to purchase 700,000
shares of common stock. The warrants are exercisable during the four-year period
commencing on November 13, 1993 at a price of $1.25 per share.
In fiscal 1994, in connection with the 8% Convertible Subordinated
Debentures offering, the Company issued warrants to the underwriter to purchase
up to 10% of the aggregate principal amount of debentures sold ($1,643,700) at
an exercise price equal to 120% of the principal amount of the debentures. The
warrants are exercisable during the four year period commencing March 10, 1995
for $1,613,700 principal amount and April 12, 1995 for $30,000 principal amount.
In connection with the 9% Convertible Subordinated Debenture offering, the
Company issued warrants to the underwriters to purchase up to 10% of the
aggregate principal amount of debentures sold ($505,000) at an exercise price
equal to 120% of the principal amount of the debentures. The warrants are
exercisable during the four year period commencing July 25, 1995. As of
September 30, 1995, no warrants had been exercised.
(7) OPTIONS
In fiscal 1989, the Board of Directors approved a stock incentive plan (the
"Plan") that covers directors, third party consultants and advisors, independent
contractors, officers and other employees of the Company. In May 1994, the
stockholders of the Company voted to increase the authorized number of shares
available under the Plan from 1,500,000 to 4,500,000. The Plan allows for the
issuance of options to purchase shares of the Company's common stock at an
option price at least equal to the fair value of the stock on the date of grant.
As of September 30, 1995, 4,299,500 stock options had been granted and were
outstanding under the Plan.
In fiscal 1994, the Company granted 3,369,500 unvested options to purchase
shares of common stock to certain employees entering into employment contracts
under the Plan.
In fiscal 1995, the Company granted 507,500 unvested options to purchase
shares of common stock to certain employees revising their employment contracts
under the Plan.
The schedule below includes stock options that the Company has granted as of
September 30, 1995:
F-17
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) OPTIONS (CONTINUED)
STOCK OPTIONS OUTSTANDING AS OF SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
-------------------------------
OUTSIDE
PRICE PLAN THE PLAN TOTAL EXERCISE
- --------------------------------------------------------------------------- --------- -------- --------- -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1992.............................................. 853,500 652,096 1,505,596
Granted Fiscal 1993........................................................ 43,500 -- 43,500 $1.00
Options Expired/Canceled................................................... (43,500) -- (43,500) $1.00
Options Exercised.......................................................... (110,000) -- (110,000) $1.00
--------- -------- ---------
Balance at September 30, 1993.............................................. 743,500 652,096 1,395,596
--------- -------- ---------
--------- -------- ---------
Granted Fiscal 1994........................................................ 3,369,500 20,000 3,389,500 $.75 - $1.16
Options Expired/Canceled................................................... (83,500) -- (83,500) $1.00 - $1.94
Options Exercised.......................................................... (105,000) -- (105,000) $1.00
--------- -------- ---------
Balance at September 30, 1994.............................................. 3,924,500 672,096 4,596,596
--------- -------- ---------
--------- -------- ---------
Granted Fiscal 1995........................................................ 507,500 -- 507,500 $.75 - $0.78
Options Expired/Canceled................................................... (132,500) -- (132,500) $.75 - $2.63
Options Exercised.......................................................... -- -- --
--------- -------- ---------
Balance at September 30, 1995.............................................. 4,299,500 672,096 4,971,596
--------- -------- ---------
--------- -------- ---------
Exercisable at September 30, 1995.......................................... 1,590,000 672,096 2,273,096
--------- -------- ---------
--------- -------- ---------
</TABLE>
F-18
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES
OFFICER COMPENSATION
In March 1994, Messrs. Kushner and Locke each amended his respective
employment agreement with the Company to (i) extend the term of the agreement to
five years from the effective date thereof (March 1999) and (ii) reduce the
maximum annual performance bonus that each may receive to 4% of pre-tax earnings
for the applicable period up to a maximum of $200,000 in fiscal 1994, $220,000
in fiscal 1995, $250,000 in fiscal 1996, $270,000 in fiscal 1997 and $290,000 in
fiscal 1998. In fiscal 1992, Messrs. Kushner and Locke elected to forego certain
executive production and incentive bonuses. Under the revised employment
agreements, Messrs. Kushner and Locke each have a base salary of $400,000 in
fiscal 1994 and $425,000 in fiscal 1995 through fiscal 1998, subject to
potential increase upon review by the Company's Board of Directors after fiscal
1995. Messrs. Kushner and Locke also are each entitled to 5% of the gross profit
(as defined) earned by the Company on a sale or other disposition of
substantially all rights of the Company to 1ST AND TEN (other than pay cable and
distribution rights heretofore granted to a pay cable network).
In order to induce Messrs. Kushner and Locke to amend their employment
agreements in March 1994, the Company granted to each as of March 10, 1994
options to purchase 900,000 shares of Common Stock at an exercise price per
share equal to $0.84 (the last reported sale price of the Common Stock on the
date of the initial closing of the 8% Debentures). The options vest over a five
year period, with 20% vesting at each anniversary of the date of grant (subject
to possible acceleration following a "change-in-control").
The Company also provides Messrs. Kushner and Locke with certain fringe
benefits, including payment of an amount equal to the premiums in respect of
$3,500,000 of term life insurance with beneficiaries to be designated by each
person and disability insurance for each person. After the employment agreements
expire or are terminated, Messrs. Kushner and Locke will be entitled to certain
payments should they continue to provide executive producer or consulting
services to the Company. The agreements permit Messrs. Kushner and Locke to
collect outside compensation to which they may be entitled and to provide
incidental and limited services outside of their employment with the Company and
to receive compensation therefor, so long as such activities do not materially
interfere with the performance of their duties under the agreements. Each of
Messrs. Kushner and Locke also may require the Company to change its name to
remove his name within one year after the expiration or termination of the term
of his employment, except for product released prior to such termination, and
except that the Company may continue to use such name for a period of one year
after such notice.
In fiscal 1992, in connection with the Company's public offering of common
stock, Messrs. Kushner and Locke deposited 600,000 shares of the Company's
common stock with an escrow agent. Under the agreement with the Company, as
revised, if a designated earnings before income taxes and extraordinary items
requirement was not met for the year ending September 30, 1993, Messrs. Kushner
and Locke would make capital contributions by releasing the shares of common
stock to the Company. Effective October 1, 1993, these shares were contributed
back to the Company for no consideration and retired.
In April 1994, Ms. Nelson entered into a two-year employment contract with
an option for a third year with the Company providing for a base salary of
$175,000 per year, subject to annual increases of 7 1/2% commencing in the
second year of the agreement. Ms. Nelson received a signing bonus equal to
$25,000 and is entitled to an incentive bonus equal to 1/2% of the Company's
pre-tax earnings, which incentive bonus cannot exceed 50% of Ms. Nelson's base
salary. The Company has also granted Ms. Nelson options to acquire an aggregate
of 225,000 shares of Common Stock at an exercise price of
F-19
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
$0.75 per share (the last reported sale price of the Common Stock on the date of
the grant); such options vest in installments of 75,000 shares over the three
year term of Ms. Nelson's employment agreement.
DIRECTOR COMPENSATION
During fiscal 1989, the Company entered into a consulting agreement with Mr.
Stuart Hersch to engage his services until September 30, 1994 as an executive
consultant. Pursuant to the consulting agreement the Company granted Mr. Hersch
stock options to purchase 854,192 shares of common stock at $1.555 per share,
the fair market value on the date the Company committed to make the grant.
During fiscal 1990, the consulting agreement was amended, reducing the options
granted to 427,096 shares. As of September 30, 1995, 427,096 options had vested.
In consideration of the elimination of certain demand registration rights,
the Company indemnified Mr. Hersch in the event Mr. Hersch sold 510,000 shares
of the Company's common stock to third parties at a price less than $1.75 per
share. The Company paid Mr. Hersch a total of $275,000 during the three-year
period ended September 30, 1994 related to such indemnification. Mr. Hersch was
paid $100,000 as a consulting fee under the amended consulting agreement during
each year in the three year period ended September 30, 1993.
EMPLOYEE BENEFIT PLANS
The Company participates in various multiemployer defined benefit and
defined contribution pension plans under union and industry agreements. These
plans include substantially all participating film production employees covered
under various collective bargaining agreements. The Company funds the costs of
such plans as incurred. Corporate employees not related to actual film
production may participate in a 401(k) retirement plan after one year of
employment, with an option for a 125 Flexible Savings plan which are each
administered by Mutual of Omaha. Costs related to the Employee Benefit Plans are
immaterial for the years presented.
LEASE
The Company is obligated under a noncancelable operating lease for office
space on the 20th and 21st floors at its principal executive offices and for
office space at 83 Maryleborne High Street in London at September 30, 1995 as
follows:
<TABLE>
<S> <C>
Fiscal 1996 (20th and 21st floors).................. $ 568,000
Fiscal 1997......................................... 561,000
Fiscal 1998......................................... 540,000
Fiscal 1999......................................... 540,000
Thereafter.......................................... 273,000
----------
Total minimum future lease rental payments.................. $2,482,000
----------
----------
</TABLE>
Rental expense for the years ended September 30, 1995, 1994 and 1993 was
approximately $505,000, $401,000 and $493,000, respectively.
CONTINGENCIES
On December 26, 1995, Guano Holdings Ltd. ("Guano") filed a complaint
against the Company, two of the Company's subsidiaries, an employee of the
Company, Savoy Pictures, Inc., and Allied Pinocchio Productions, Ltd. claiming
that Guano was entitled to be a partner in the film project entitled THE LEGEND
OF PINOCCHIO and that it is seeking approximately $5,000,000 as damages. While
this proceeding is in the preliminary stages and there can be no assurance that
the Company will be
F-20
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
successful on the merits of this lawsuit, the Company believes it has good and
meritorious defenses to the claims and that this action will not have a material
adverse effect on the Company's financial position or results of operations.
The Company is involved in certain other 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 operations.
In its normal course of business as a entertainment distributor, the Company
makes contractual down payments for the acquisition of distribution rights upon
signature of documentation. This initial advance for rights ranges for 10% to
30% of the total purchase price. The balance of the payment is generally due
upon the complete delivery by unrelated third party producers of acceptable film
and video materials and other proof of rights held and insurance policies that
may be required for the Company to begin exploitation of the product. As of
September 30, 1995 the Company had made contractual agreements for an aggregate
of $1,300,000 in payments due should those third party producers complete
delivery to the Company. About one half of these obligations have originated in
the Company's cable joint venture known as KLC/New City. These amounts are
payable over the next eighteen months.
(9) RELATED PARTY TRANSACTIONS
In fiscal 1993, the Company entered into a domestic home video distribution
agreement with the A*Vision Entertainment division of Atlantic Records, a
subsidiary of Time-Warner, Inc. for the feature film DEADLY EXPOSURE. Stuart
Hersch, a Director of the Company, has been president of A*Vision since August
1990. The distribution agreement provides for payment by A*Vision to the Company
of $250,000 in exchange for domestic home video rights, subject to certain
back-end participation rights of the Company, and payments by the Company to
A*Vision of 30% of the Company's net revenues derived from Canadian home video
and broadcast television exploitation of DEADLY EXPOSURE. The Company has paid
approximately $28,000 to A*Vision pursuant to such agreement.
In fiscal 1994, the Company entered into additional motion picture
distribution arrangements with A*Vision, which subsequently changed its name to
WarnerVision. WarnerVision and the Company share production costs and expenses
and any resulting net revenues after recoupment of investments. Under this
arrangement the Company entered into domestic home video distribution agreements
with WarnerVision for the feature films LADY-IN-WAITING and LAST GASP which
provided for the payment by WarnerVision to the Company of $510,000 and
$530,000, in exchange for participation rights with the Company in the revenues
derived from the exploitation of those two films. In fiscal 1994, the Company
also agreed for WarnerVision to license domestic home video distribution rights
to WES CRAVEN PRESENTS THE MINDRIPPER substituting a lower gross revenue
participation for the other net revenue participation. In fiscal 1995, the
Company entered into a $696,000 net revenue arrangement with WarnerVision
similar to DOUBLE EXPOSURE, LADY-IN-WAITING and LAST GASP for a fourth feature
film entitled SERPENT'S LAIR. Through September 30, 1995, the Company had
received approximately $1,986,000 towards these four films pursuant to these net
revenue financing and distribution arrangements. The Company believes that the
terms of the foregoing transactions are no less favorable to the Company than
those that could have been obtained in transactions with unaffiliated third
parties.
F-21
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) MAJOR CUSTOMERS AND EXPORT SALES
Revenues to major customers which exceeded 10% of net operating revenues
represented 45%, 51% and 48% of net operating revenues for the years ended
September 30, 1995, 1994 and 1993, respectively, and consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Television Network CBS............................ $6,045,000 $18,320,000 $ 8,110,000
Television Network ABC............................ -- 7,440,000 5,850,000
Television Network NBC............................ 3,105,000 -- --
Pay/Cable Television Network...................... -- -- 6,575,000
---------- ----------- -----------
$9,150,000 $25,760,000 $20,535,000
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
Accounts receivable from these major customers totaled $356,000, $235,000
and $168,000 at September 30, 1995, 1994 and 1993, respectively.
Domestic and international accounts receivable consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER
30
-----------------------
1995 1994
---------- -----------
<S> <C> <C>
Accounts Receivable:
Domestic........................................ $3,560,000 $ 2,465,000
International................................... 4,704,000 4,362,000
---------- -----------
8,264,000 6,827,000
Less: Allowance for Doubtful Accounts............. (400,000) (650,000)
---------- -----------
$7,864,000 $ 6,177,000
---------- -----------
---------- -----------
</TABLE>
Export sales by geographic areas were as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30
------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Europe............................................ $3,500,000 $ 6,643,000 $ 5,355,000
Canada............................................ 327,000 1,121,000 393,000
Other............................................. 2,408,000 2,486,000 1,456,000
---------- ----------- -----------
$6,235,000 $10,250,000 $ 7,204,000
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
Other sales were principally to customers in Asia, South America and
Australia.
(11) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1995, the Company revised its estimate of
future revenues for ALADDIN, THE BARBARA DE ANGELIS SHOW, TRAIL WATCH, SWEET
BIRD OF YOUTH, and PIGASSO'S PLACE. These revised estimates and, to a lesser
extent, revised estimates on other programming no longer being produced by the
Company were not material to the Statements of Operations. During the fourth
quarter of 1994, the Company revised its estimate of future revenue for 1ST AND
TEN and SWEATING BULLETS and other programming no longer being produced by the
Company. These revised estimates resulted in a reduction in the carrying value
of such programs and amortization expense of approximately $7,800,000. The major
component of this reduction resulted from developments surrounding O.J. Simpson,
who starred in the 1ST AND TEN series which was cancelled from Rerun
Syndication.
F-22
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
---------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash............................................................................ $ 3,060,000 $ 3,139,000
Restricted Cash................................................................. 2,420,000 1,162,000
Accounts receivable, net allowance for doubtful accounts........................ 18,484,000 7,864,000
Due from Affiliates............................................................. 233,000 309,000
Notes Receivable from August Entertainment, Inc................................. 657,000 676,000
Film costs, net of accumulated amortization..................................... 75,022,000 73,716,000
Property and equipment, at cost, net of accumulated depreciation and
amortization................................................................... 444,000 515,000
Other assets.................................................................... 1,864,000 1,571,000
---------------- --------------
$ 102,184,000 $ 88,952,000
---------------- --------------
---------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities........................................ $ 4,550,000 $ 3,245,000
Income taxes payable............................................................ -- --
Notes payables.................................................................. 31,690,000 28,398,000
Deferred film license fees...................................................... 5,041,000 2,753,000
Contractual obligations, principally participants' share payable and talent
residuals...................................................................... 4,421,000 995,000
Production advances............................................................. 18,273,000 16,609,000
Convertible Subordinated Debentures net of amortized issuance costs............. 16,110,000 17,745,000
---------------- --------------
$ 80,085,000 $ 69,745,000
---------------- --------------
Stockholders' Equity:
Common stock, no par value. Authorized 80,000,000 shares: issued and
outstanding 37,437,553 shares at March 31, 1996 and 35,466,599 shares at
September 30, 1995........................................................... 25,089,000 23,337,000
Accumulated Deficit........................................................... (2,990,000) (4,130,000)
---------------- --------------
22,099,000 19,207,000
---------------- --------------
$ 102,184,000 $ 88,952,000
---------------- --------------
---------------- --------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-23
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Operating revenues................................................................ $ 29,337,000 $ 11,614,000
Costs related to operating revenues............................................... 24,365,000 9,168,000
Selling, general and administrative expenses...................................... 1,968,000 1,977,000
-------------- --------------
Earnings from operations........................................................ 3,004,000 469,000
Interest Income................................................................... 60,000 136,000
Interest Expense.................................................................. (1,904,000) (1,592,000)
-------------- --------------
1,160,000 (987,000)
Provision for Income Taxes........................................................ 20,000 16,000
-------------- --------------
Net Earnings/(Loss)............................................................. $ 1,140,000 $ (1,003,000)
-------------- --------------
-------------- --------------
Net Earnings/(Loss) per common and common equivalent share:
Net Earnings/(Loss)............................................................. $ 0.03 $ (0.03)
-------------- --------------
-------------- --------------
Weighted average number of common and common equivalent shares outstanding........ 35,961,000 31,159,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-24
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------------
1996 1995
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
Cash Flow from operating activities:
Net Earnings/(Loss).......................................................... $ 1,140,000 $ (1,003,000)
Adjustments to reconcile net earnings to net cash used by operating
activities:
Increase in restricted cash................................................ (1,258,000) --
Amortization of film costs................................................. 24,195,000 9,088,000
Depreciation and amortization.............................................. 110,000 120,000
Amortization of capitalized issuance costs and warrants.................... 340,000 210,000
Accounts receivable, net................................................... (10,620,000) (1,042,000)
Other receivables.......................................................... 95,000 (712,000)
Increase in film costs..................................................... (25,501,000) (18,805,000)
Accounts payable and accrued liabilities................................... 1,305,000 (100,000)
Deferred film license fees................................................. 2,288,000 453,000
Contractual obligations.................................................... 3,426,000 94,000
Production advances........................................................ 1,664,000 (82,000)
--------------- ---------------
Net cash provided (used) by operating activities......................... (2,816,000) (11,779,000)
Cash flows from investing activites:
Purchase of property and equipment........................................... (38,000) (204,000)
Decrease (increase) in other assets.......................................... (293,000) (3,000)
--------------- ---------------
Net cash (used) by investing activities.................................. (331,000) (207,000)
Cash flows from financing activities:
Increase in notes payable.................................................... 3,292,000 7,770,000
Repayment of notes payable................................................... -- (2,600,000)
Repayment of debentures...................................................... -- (60,000)
Other........................................................................ (224,000) --
--------------- ---------------
Net cash provided by financing activities................................ 3,068,000 5,110,000
Net increase in cash......................................................... (79,000) (6,876,000)
Cash at beginning of period.................................................. 3,139,000 15,681,000
--------------- ---------------
Cash at end of period........................................................ $ 3,060,000 $ 8,805,000
--------------- ---------------
--------------- ---------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
-- 1 During the six months ended March 31, 1995, $650,000 of convertible
subordinated debentures before unamortized capitalized issuance costs
of $69,000 were converted into 666,666 shares of Common Stock.
-- 2 During the six months ended March 31, 1996, $1,714,000 of convertible
subordinated debentures before unamortized capitalized issuance costs
of $152,000 were converted into 1,757,947 shares of Common Stock.
See accompanying Notes to Condensed Consolidated Financial Statements.
F-25
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-----------------------------------------------------------------
NUMBER OF CAPITAL ACCUMULATED
SHARES STOCK DEFICIT TOTAL
------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995................ 35,466,598 $ 23,337,000 $ (4,130,000) $ 19,207,000
------------- -------------- ------------------ --------------
Conversions of convertible debentures........ 1,970,955 1,752,000 1,752,000
Net earnings................................. -- -- 1,140,000 1,140,000
------------- -------------- ------------------ --------------
Balance at March 31, 1996.................. 37,437,553 $ 25,089,000 $ (2,990,000) $ 22,099,000
------------- -------------- ------------------ --------------
------------- -------------- ------------------ --------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-26
<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 feature films, direct-to-video
films, television series, movies-for-television, mini-series and animated
programming.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of The Kushner-Locke Company, its subsidiaries and certain less than
wholly-owned entities where the Company has control. All material 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, 1996, the results of its operations for the three and six month
periods ended March 31, 1996 and 1995, and its cash flows for the six month
period ended March 31, 1996 and 1995. 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
As of March 31, 1996, the Company had $2,420,000 in restricted cash related
to advances received by the Company from film producers for the acquisition of
distribution rights. These cash advances were being held in escrow accounts as
collateral by financial institutions providing production loans to those
producers.
INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This
statement supersedes SFAS No. 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 operating results in the period encompassing the
enactment date.
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 dilutive outstanding warrants and stock options.
The weighted average number of common and common equivalent shares outstanding
for the calculation of primary earnings per share was 36,337,000 and 31,973,000
for the quarters ended March 31, 1996 and 1995, respectively, and 35,961,000 and
31,159,000 for the six months ending March 31, 1996 and 1995, respectively. The
inclusion of the
F-27
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
additional shares, assuming the conversion of the Company's convertible
subordinated debentures, would have been anti-dilutive for the three and the six
month periods ended March 31, 1996 and March 31, 1995, respectively.
(2) FILM COSTS
Film costs consist of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
-------------- --------------
<S> <C> <C>
In process or development.............................................. $ 36,467,000 $ 42,115,000
Released, principally television productions net of accumulated
amortization.......................................................... 38,555,000 31,601,000
-------------- --------------
$ 75,022,000 $ 73,716,000
-------------- --------------
-------------- --------------
</TABLE>
(3) NOTES PAYABLE
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
-------------- --------------
<S> <C> <C>
Note payable to bank, revolving credit facility secured by
substantially all Company assets, interest at prime (8.25% at May 10,
1996) plus 1.25%, outstanding principal balance due December 31,
1996.................................................................. $ 15,000,000 $ 14,804,000
Notes payable to banks and/or financial institutions consisting of six
production loans secured by certain film rights held by producers,
priced at different rates for each loan; approximately $3,903,000 due
before July 1996, $1,801,000 due before August 1996 and $10,986,000
due before October 1996............................................... 16,690,000 13,594,000
-------------- --------------
$ 31,690,000 $ 28,398,000
-------------- --------------
-------------- --------------
</TABLE>
F-28
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
-------------- --------------
<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 $11,000 and $13,000, respectively.... $ 76,000 $ 84,000
-------------- --------------
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 $320,000 and $354,000, respectively........................... 2,955,000 2,972,000
-------------- --------------
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 $791,000 and $1,058,000, respectively......................... 8,482,000 10,129,000
-------------- --------------
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 $453,000 and $490,000, respectively.................................... 4,597,000 4,560,000
-------------- --------------
$ 16,110,000 $ 17,745,000
-------------- --------------
-------------- --------------
</TABLE>
SERIES A DEBENTURES
As of March 31, 1996, the Company had outstanding $87,000 principal amount
of Series A Debentures. The Debentures are recorded net of unamortized
underwriting discounts, expenses associated with the offering and warrants
totaling $11,000 which are 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, 1996.
SERIES B DEBENTURES
As of March 31, 1996, the Company had outstanding $3,275,000 principal
amount of Series B Debentures due 2000. The Debentures are recorded net of
unamortized underwriting discounts and expenses associated with the offering
totaling $320,000, which are amortized using the interest method to interest
expense over the term of the Debentures. Approximately $17,000 of capitalized
issuance costs had been amortized as interest expense for the six months ended
March 31, 1996.
8% DEBENTURES
As of March 31, 1996, the Company had outstanding $9,273,000 principal
amount of 8% Debentures. The Debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$791,000 which are amortized using the interest method to interest expense over
the term of the debentures. Approximately $46,000 of capitalized issuance costs
had been amortized as interest expense for the six months ended March 31, 1996.
F-29
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
9% DEBENTURES
As of March 31, 1996, the Company had outstanding $5,050,000 principal
amount of 9% Debentures. The Debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$453,000, which are amortized using the interest method to interest expense over
the term of the Debentures. Approximately $18,000 of capitalized issuance costs
had been amortized as interest expense for the six months ended March 31, 1996.
(5) INCOME TAXES
Income taxes for the six month periods ended March 31, 1996 and 1995 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. Management believes that all taxable income for the fiscal year will
be offset by a deferred tax asset which will keep the effective federal tax rate
at approximately 0%.
(6) CONTINGENCIES
The Company is involved in certain legal proceedings and claims arising out
of the normal conduct of its business. Reference is made to the Company's annual
report on Form 10-K for the fiscal year ended September 30, 1995 for a
description of certain legal proceedings. 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 operations.
In its normal course of business as a entertainment distributor, the Company
makes contractual down payments for the acquisition of distribution rights upon
signature of documentation. This initial advance for rights ranges for 10% to
30% of the total purchase price. The balance of the payment is generally due
upon the complete delivery by third party producers of acceptable film or video
materials and proof of rights held and insurance policies that may be required
for the Company to begin exploitation of the product. As of March 31, 1996 the
Company had made contractual agreements for an aggregate of approximately
$1,238,000 in payments due should those third party producers complete delivery
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 instead of such third party
producers. These obligations have originated from the acquisition personnel in
the Company's cable joint venture known as KLC/New City Tele-Ventures. These
amounts are payable over the next twelve months.
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OFFERED BY THIS PROSPECTUS, OR
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY
PERSON IN ANY JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 4
Incorporation of Certain Documents By Reference........................... 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 9
The Company............................................................... 14
Use of Proceeds........................................................... 18
Market For Common Stock and Class A Warrants and Dividends................ 19
Capitalization............................................................ 20
Selected Consolidated Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 34
Description of Securities................................................. 49
Underwriting.............................................................. 51
Concurrent Offering....................................................... 52
Legal Matters............................................................. 53
Experts................................................................... 53
Index to Consolidated Financial Statements................................ F-1
</TABLE>
[LOGO]
THE KUSHNER-LOCKE COMPANY
UNITS
---------------------
PROSPECTUS
---------------------
[LOGO]
JULY , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 11, 1996
PROSPECTUS
THE KUSHNER-LOCKE COMPANY
1,331,734 SHARES
COMMON STOCK
------------------
This Prospectus relates to the registration by The Kushner-Locke Company
(the "Company"), at its expense, for the account of certain security holders
(the "Selling Security Holders") of 1,331,734 shares of the Company's common
stock, no par value, (the "Common Stock"), of which (i) 631,734 shares are
currently held by certain Selling Security Holders and (ii) 700,000 shares are
issuable by the Company upon the exercise, if at all, of certain warrants (the
"Selling Security Holder Warrants"). Such shares are not being underwritten in
an underwritten offering and the Company will not receive any proceeds from the
sale of such shares. The Company will receive proceeds upon the exercise, if at
all, of all or a portion of the Selling Security Holder Warrants. See "Selling
Security Holders." The shares of Common Stock held by the Selling Security
Holders or issuable upon exercise, if at all, of the Selling Security Holder
Warrants may be sold by the Selling Security Holders or their respective
permitted transferees (assuming, in the case of the shares of Common Stock
underlying the Selling Security Holder Warrants, that such warrants have been
exercised) commencing on the date of this Prospectus. Sales of the shares of
Common Stock held by the Selling Security Holders or issuable upon exercise, if
at all, of the Selling Security Holder Warrants may depress the price of the
Common Stock. See "Prospectus Summary -- The Offering," "Selling Security
Holders" and "Plan of Distribution."
Concurrently with the commencement of this Offering, the Company is offering
units (the "Units"), each Unit consisting of two shares of Common Stock and one
Class C redeemable Common Stock purchase warrant (the "Warrants"), each
exercisable to purchase one share of Common Stock at an exercise price of 120%
of the price of the Common Stock on the effective date of the registration
statement of which this Prospectus is a part (the "Effective Date") as agreed to
by the Company and the Underwriter. The Common Stock is traded on the NASDAQ
National Market ("NNM") under the symbol "KLOC" and on the Pacific Stock
Exchange under the symbol "KLO."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. PURCHASERS SHOULD CAREFULLY
CONSIDER THE MATTERS DESCRIBED UNDER "RISK FACTORS" ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The sale of the shares of Common Stock held by the Selling Security Holders
may be effected from time to time in transactions (which may include block
transactions by or for the account of the Selling Security Holders) in the
over-the counter market, on the NNM or in negotiated transactions, trough the
writing of options on such shares, through a combination of such methods of sale
or otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If any Selling
Security Holder sells his, her or its shares of Common Stock, or options
thereon, pursuant to this Prospectus at a fixed price or at a negotiated price
which is, in either case, other than the prevailing market price or in a block
transaction to a purchaser who resells, or if any Selling Security Holder pays
compensation to a broker-dealer that is other than the usual and customary
discounts, concessions or commissions, or if there are any arrangements either
individually or in the aggregate that would constitute a distribution of the
shares of Common Stock held by the Selling Security Holders, a post-effective
amendment to the Registration Statement of which this Prospectus is a part would
need to be filed and declared effective by the Securities and Exchange
Commission before such Selling Security Holder could make such sale, pay such
compensation or make such a distribution. The Company is under no obligation to
file a post-effective amendment to the Registration Statement of which this
Prospectus is a part under such circumstances.
------------------------
The date of this Prospectus is , 1996
<PAGE>
SELLING SECURITY HOLDERS
An aggregate of 1,331,734 shares of Common Stock are being registered in
this Offering for the accounts of the Selling Security Holders. The shares of
Common Stock owned by the Selling Security Holders may be sold by the Selling
Security Holders or their respective permitted transferees (assuming, in the
case of the shares of Common Stock underlying the Selling Security Holder
Warrants, that such warrants have been exercised) commencing on the date of this
Prospectus. Sales of such shares of Common Stock by the Selling Security Holders
or their respective transferees may depress the price of the Common Stock.
The following table sets forth certain information with respect to persons
for whom the Company is registering such shares of Common Stock for resale to
the public. The Company will not receive any of the proceeds from the sale of
such shares of Common Stock. The Company will receive proceeds upon the
exercise, if at all, of all or a portion of the Selling Security Holder
Warrants. None of the Selling Security Holders except Phillip Mittleman, who is
an employee of the Company, has had any position, office or material
relationship with the Company or its affiliates since the Company's inception.
The shares of Common Stock owned by the Selling Security Holders are not being
underwritten by the Underwriter in connection with this Offering. Selling
Security Holders may sell their shares through the Underwriter. The Selling
Security Holders have agreed not to sell the Selling Security Holders' Shares
for a period of up to six (6) months following the Effective Date without the
prior written consent of the Underwriter subject, in the case of Common Stock
issued upon exercise of certain of the Selling Security Holder Warrants, to
earlier release under certain circumstances.
<TABLE>
<CAPTION>
AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES OWNED
NAME OF SELLING SECURITY HOLDER (1) OWNED BEFORE OFFERING BEING REGISTERED AFTER OFFERING (2)
- ----------------------------------------------- --------------------- ---------------- ---------------------------
<S> <C> <C> <C>
Stanley & Marilyn Fishman 10,811 10,811 -0-
Gary Fuchs 5,405 5,405 -0-
Jerry W. Gunn 15,939 15,939 -0-
Moshe & Dan Levy 32,432 32,432 -0-
Alan D. Lips 10,811 10,811 -0-
Norman Laufer 10,811 10,811 -0-
Mitchell Kersch 10,811 10,811 -0-
Greg Supinsky 10,811 10,811 -0-
Nat Compton 5,405 5,405 -0-
Timothy E. Abbott 5,405 5,405 -0-
Rick Borchert 5,405 5,405 -0-
Albert & Sandra Kula 10,811 10,811 -0-
Richard David 10,811 10,811 -0-
Phillip Mittleman 86,486(3) 86,486 -0-
Dean Morehouse 21,622 21,622 -0-
K&K Realty 10,811 10,811 -0-
James Finstad 5,405 5,405 -0-
Marcus Finkel 21,622 21,622 -0-
John Kyle Jr. 10,811 10,811 -0-
James Lustig 42,135 42,135 -0-
Michael M. Arnouse 10,256 10,256 -0-
Eric Jackson 10,256 10,256 -0-
</TABLE>
SS-1
<PAGE>
<TABLE>
<CAPTION>
AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES OWNED
NAME OF SELLING SECURITY HOLDER (1) OWNED BEFORE OFFERING BEING REGISTERED AFTER OFFERING (2)
- ----------------------------------------------- --------------------- ---------------- ---------------------------
<S> <C> <C> <C>
Trans Euro Investments Ltd. 10,256 10,256 -0-
James D. Tate 10,256 10,256 -0-
Ronald P. Cohen 5,128 5,128 -0-
Yuet Yee Lam 5,128 5,128 -0-
Conrad Von Bibra FBO Edith Von Bibra 20,513 20,513 -0-
The Earnest Group 10,256 10,256 -0-
Camila Bellick 10,256 10,256 -0-
Stratton & Judy Sclavos 10,257 10,257 -0-
Richard Brooks 10,256 10,256 -0-
Arthur Luxenberg 20,513 20,513 -0-
Catfish, Ltd. 20,513 20,513 -0-
Jay & Bernice Salomon 10,256 10,256 -0-
Lawrence Michels 10,256 10,256 -0-
Neil T. Anderson 10,256 10,256 -0-
Perry Weitz 10,256 10,256 -0-
Herbert Cyrlin 20,513 20,513 -0-
Strathearn & Company 10,256 10,256 -0-
Robert & Lois Worton 10,256 10,256 -0-
Bruce & Linda Pollekoff 10,256 10,256 -0-
Thomas A. Peacock 20,513 20,513 -0-
John Divivier & Lisa Bottom 10,256 10,256 -0-
Michael Anthony DellaVecchia 10,256 10,256 -0-
Sanford D. Greenberg 357,000(4) 357,000 -0-
Robert L. Lemon 81,200(4) 81,200 -0-
Richard H. Kamerling 40,600(4) 40,600 -0-
Harvey S. Morrow 40,600(4) 40,600 -0-
Kenneth S. Bernstein 70,000(4) 70,000 -0-
Kenneth L. Greenberg 70,000(4) 70,000 -0-
Richard Frueh 40,600(4) 40,600 -0-
</TABLE>
- ------------------------
(1) Information set forth in the table regarding the Selling Security Holders'
securities is provided to the best knowledge of the Company based on
information furnished to the Company by the respective Selling Security
Holders and/or available to the Company through its stock ledgers.
(2) Assumes that each Selling Security Holder sells all of the shares of Common
Stock held by such Selling Security Holder.
(3) Phillip Mittleman also has options to acquire 200,000 shares of Common Stock
and is an employee of the Company.
(4) Represents shares of Common Stock issuable upon exercise of Selling Security
Holder Warrants.
SS-2
<PAGE>
PLAN OF DISTRIBUTION
The sale of the shares of Common Stock held by the Selling Security Holders
may be effected from time to time in transactions (which may include block
transactions by or for the account of the Selling Security Holders) in the
over-the-counter market, on the NNM or in negotiated transactions, through the
writing of options on such shares, through a combination of such methods of
sale, or otherwise. Sales may be made at fixed prices which may be changed, at
market prices prevailing at the time of sale, or at negotiated prices. If any
Selling Security Holder sells his, her or its shares of Common Stock, or options
thereon, pursuant to this Prospectus at a fixed price or at a negotiated price
which is, in either case, other than the prevailing market price or in a block
transaction to a purchaser who resells, or if any Selling Security Holder pays
compensation to a broker-dealer that is other than the usual and customary
discounts, concessions or commissions, or if there are any arrangements either
individually or in the aggregate that would constitute a distribution of the
shares of Common Stock held by the Selling Security Holders, a post-effective
amendment to the Registration Statement of which this Prospectus is a part would
need to be filed and declared effective by the Securities and Exchange
Commission before such Selling Security Holder could make such sale, pay such
compensation or make such a distribution. The Company is under no obligation to
file a post-effective amendment to the Registration Statement of which this
Prospectus is a part under such circumstances.
The Selling Security Holders may effect transactions in their shares of
Common Stock by selling their securities directly to purchasers, through
broker-dealers acting as agents for the Selling Security Holders or to
broker-dealers who may purchase the Selling Security Holders' securities as
principals and thereafter sell such securities from time to time in the
over-the-counter market, on the NNM, in negotiated transactions, or otherwise.
Such broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Security Holders and/or the
purchasers for whom such broker-dealers may act as agents or to whom they may
sell as principals or both.
The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of such securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
SS-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY PERSON IN ANY
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 4
Incorporation of Certain Documents By Reference........................... 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 9
The Company............................................................... 14
Use of Proceeds........................................................... 18
Market For Common Stock and Class A Warrants and Dividends................ 19
Capitalization............................................................ 20
Selected Consolidated Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 34
Description of Securities................................................. 49
Selling Security Holders.................................................. 51
Plan of Distribution...................................................... 52
Experts................................................................... 53
Index to Consolidated Financial Statements................................ F-1
</TABLE>
[LOGO]
THE KUSHNER-LOCKE COMPANY
1,331,734 SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JULY , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth costs and expenses, other than underwriting
discounts and commissions (and consultant fees of $100,000), payable in
connection with the sale and distribution of the securities being registered.
All amounts are estimated except the Securities and Exchange Commission
registration fee.
<TABLE>
<CAPTION>
ITEM
- -----------------------------------------------------------------
<S> <C>
Registration Fee................................................. $ 4,963
NASD Filing Fee.................................................. 35,000
Blue Sky fees and expenses....................................... 45,000
Legal fees and expenses.......................................... 175,000
Printing Expenses................................................ 50,000
Accounting fees and expenses..................................... 75,000
Transfer Agent and Registrar Fees................................ 3,000
Miscellaneous.................................................... 27,037
-----------
Total........................................................ $ 415,000
-----------
-----------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to provisions of the California General Corporation Law ("CGCL"),
the Articles of Incorporation of the registrant (the "Company"), as amended,
include a provision which eliminates the personal liability of its directors to
the Company and its shareholders for monetary damage to the fullest extent
permissible under California law. This limitation has no effect on a director's
liability (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law, (ii) for acts or omissions that a
director believes to be contrary to the best interests of the Company or its
shareholders or that involve the absence of good faith on the part of the
director, (iii) for any transaction from which a director derived an improper
personal benefit, (iv) for acts or omissions that show a reckless disregard for
the director's duty to the Company or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing his or her duties, of a risk of a serious injury to the Company or
its shareholders, (v) for acts or omissions that constitute an unexcused pattern
of inattention that amounts to an abdication of the director's duty to the
Company or its shareholders, (vi) under Section 310 of the CGCL (concerning
contracts or transactions between the Company and a director or (vii) under
Section 316 of the CGCL (concerning directors' liability for improper dividends,
loans and guarantees). The provision does not eliminate or limit the liability
of an officer for any act or omission as an officer, notwithstanding that the
officer is also a director or that his actions, if negligent or improper, have
been ratified by the Board of Directors. Further, the provision has no effect on
claims arising under federal or state securities or blue sky laws and does not
affect the availability of injunctions and other equitable remedies available to
the Company's shareholders for any violation of a director's fiduciary duty to
the Company or its shareholders.
The Company's Articles of Incorporation also authorize the Company to
indemnify is agents (as defined in Section 317 of the CGCL) for breach of duty
to the corporation and its shareholders through bylaw provisions, agreements or
both, in excess of the indemnification otherwise permitted by Section 317 of the
CGCL, subject to the limits on such excess indemnification set forth in Section
204 of the CGCL. The general effect of Section 317 of the CGCL and Article V of
the Company's bylaws, as amended, is to provide for indemnification of its
agents to the fullest extent permissible under California law. Reference is also
made to the indemnification provisions of the underwriting agreement which
provides for indemnification by the Underwriter of the Company and its officers
and directors for certain liabilities arising under the Securities Act or
otherwise.
II-1
<PAGE>
The Company maintains insurance coverage for each director and officer of
the Company for claims against such directors and officers for any alleged
breach of duty, neglect, error, misstatement, misleading statement, omission or
act in their respective capacities as directors and officers of the Company, or
any matter claimed against them solely by reason of their status as directors or
officers of the Company, subject to certain exceptions.
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement
3. Articles of Incorporation (A)
4.1 Indenture between the Company and National City Bank of
Minneapolis, as Trustee, dated as of December 1, 1990 pertaining
to 10% Convertible Subordinated Debentures Due 2000, Series A(E)
4.2 First Supplemental Indenture between the Company and National
City Bank of Minneapolis, as Trustee, dated as of March 15, 1991
pertaining to 10% Convertible Subordinated Debentures Due 2000,
Series A(F)
4.3 Indenture between the Company and National City Bank of
Minneapolis, as Trustee, dated as of December 1, 1990 pertaining
to 13 3/4% Convertible Subordinated Debentures Due 2000, Series
B(E)
4.4 Warrant agreement between the Company and City National Bank, as
Warrant Agent, dated as of March 19, 1991 pertaining to Common
Stock Purchase Warrants (F)
4.5 Form of Class C Redeemable Common Stock Purchase Warrant
4.6 Form of Underwriter's Warrant
5. Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP
10.1 Employment Agreement dated October 1, 1988 between the Company
and Donald Kushner (A)
10.1.1 Amendment dated August 18, 1992 to the Employment Agreement dated
October 1, 1988 between the Company and Donald Kushner (J)
10.1.2 Amendment dated January 20, 1994 to the Employment Agreement
dated October 1, 1988 between the Company and Donald Kushner (K)
10.1.3 Addendum dated July 1, 1994 to the Employment Agreement dated
October 1, 1988 between the Company and Donald Kushner (M)
10.2 Employment Agreement dated October 1, 1988 between the Company
and Peter Locke (A)
10.2.1 Amendment dated August 18, 1992 to the Employment Agreement dated
October 1, 1988 between the Company and Peter Locke (J)
10.2.2 Amendment dated January 20, 1994 to the Employment Agreement
dated October 1, 1988 between the Company and Peter Locke (K)
10.2.3 Addendum dated July 1, 1994 to the Employment Agreement dated
October 1, 1988 between the Company and Peter Locke (M)
10.3 1988 Stock Incentive Plan of the Company (A)
10.4 Form of Indemnification Agreement (A)
10.5 Kushner-Locke Shareholders' Cross-Purchase Agreement dated as of
October 1, 1988 between and among Donald Kushner, Rebecca Hight,
Peter Locke, Karen Locke, Peter Locke Productions, Inc. and
Twelfth Street Limited (A)
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.5.1 Amendment dated as of May 14, 1992 to the Kushner-Locke
Shareholders' Cross-Purchase Agreement dated as of October 1,
1988 between and among Donald Kushner, Rebecca Hight, Peter
Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth
Street Limited (I)
10.6 Kushner-Locke Trust Agreement dated as of October 1, 1988 between
and among Donald Kushner, Rebecca Hight, Peter Locke, Karen
Locke, Peter Locke Productions, Inc. and Twelfth Street Limited
(A)
10.6.1 Amendment dated May 14, 1992 to the Kushner-Locke Trust Agreement
dated as of October 1, 1988 between and among Donald Kushner,
Rebecca Hight, Peter Locke, Karen Locke, Peter Locke
Productions, Inc. and Twelfth Street Limited (I)
10.11.2 Third Amended and Restated Credit Agreement between the Company
and Imperial Bank, dated as of February 9, 1990, as amended and
restated on December 14, 1990, May 1, 1992 and August 31, 1993
(K)
10.11.3 Imperial Bank Waiver (K)
10.11.4 Amendment No. 1 dated March 10, 1994 between the Company and
Imperial Bank to the Third Amended and Restated Credit Agreement
dated February 9, 1990, as amended and restated on December 14,
1990, May 1, 1992 and August 31, 1993 (K)
10.12 Lease Agreement, dated as of November 1989, between the Company
and 11601 Wilshire Associates (G)
10.12.1 Amended Lease Agreement (G)
10.14 Warrant Agreement between the Company and Paulson Investment
Company, Inc. dated as of December 20, 1990 (C)
10.15 Warrant Agreement between the Company and Paulson Investment
Company, Inc. dated as of March 20, 1991 (F)
10.16 Warrant Agreement between the Company and Chatfield Dean & Co.,
Inc. dated as of November 13, 1992 (J)
10.17 Employment Agreement dated October 1, 1993 between the Company
and Lawrence Mortorff (K)
10.19 Fiscal Agency Agreement dated March 10, 1994 between and among
the Company, Bank America National Trust Company and Bank of
America National Trust and Savings Association (K)
10.19.1 Side letter between the Company and BankAmerica Trust Company to
the Fiscal Agency Agreement dated March 10, 1994 between and
among the Company, BankAmerica Trust Company and Bank of America
National Trust and Savings Association (K)
10.20 Warrant Agreement dated March 10, 1994 between the Company and
RAS Securities Corp. (K)
10.21 Warrant Agreement dated March 10, 1994 between the Company and I.
Friedman Equities, Inc. (K)
10.22 Fiscal Agency Agreement dated July 25, 1994 between and among the
Company, Bank America National Trust Company and Bank of America
National Trust and Savings Association (L)
10.24 Employment Agreement dated September 1, 1994 between the Company
and Gregory Cascante (M)
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.25 Employment Agreement dated September 1, 1994 between the Company
and Eleanor Powell (M)
10.26 Imperial Bank Commitment Letter regarding Waiver and Amendment of
Sections 5.9 and 5.11 of the Third Amended and Restated Credit
Agreement (M)
10.27 Loan and Security Agreement dated December 1, 1994 between the
Company and August Entertainment, Inc., and Guarantees between
the Company, August Entertainment, Inc. and the Allied
Entertainments Group PLC and certain of its subsidiaries (M)
10.28 Letter Agreement, dated March 23, 1995, by and between Woodenhead
Productions, Ltd. and Newmarket Capital Group, L.P. (N)
10.29 Modification and Extension of Restated Credit Agreement, dated
March 24, 1995, by and between Imperial Bank and The
Kushner-Locke Company (N)
10.30* Letter Agreement dated February 6, 1995 by and between Savoy
Pictures, Inc. and KL Features, Inc. (N)*
10.31 Letter Agreement dated May 12, 1995 by and between Imperial Bank
and The Kushner-Locke Company (N)
10.32 Guaranty, dated July 7, 1995, by and between The Kushner-Locke
Company and Newmarket Capital Group, L.P. for loan and interest
of Allied Pinocchio Productions, LTD. (THE LEGEND OF PINOCCHIO)
(O)
10.33 Guaranty, dated May 24, 1995, by and between The Kushner-Locke
Company and Newmarket Capital Group, L.P. for loan and interest
of Dayton Way Pictures II, Inc. (SERPENT'S LAIR) (O)
10.34 Guaranty, dated June 12, 1995 by and between The Kushner-Locke
Company and Newmarket Capital Group, L.P. for loan and interest
of Dayton Way Pictures, Inc. (THE GRAVE) (O)
10.35 Guaranty, dated July 31, 1995, by and between The Kushner-Locke
Company and Newmarket Capital Group, L.P. for loan and interest
of Dayton Way Pictures IV, Inc. (WHOLE WIDE WORLD) (P)
10.36 Guaranty, dated July 1995 by and between The Kushner-Locke
Company and Banque Paribas (Los Angeles Agency) for loan and
interest of Dayton Way Pictures III, Inc. (FREEWAY) (P)
10.37 Second Amendment to Loan and Security Agreement dated September
29, 1995 between Dayton Way Pictures, II, Inc. and Newmarket
Capital Group L.P. waiving contracts receivable milestone
(SERPENT'S LAIR) (P)
10.38 First Amendment to Loan and Security Agreement dated September
29, 1995 between Dayton Way Pictures, Inc. and Newmarket Capital
Group L.P. waiving contracts receivable milestone (THE GRAVE)
(P)
10.39 First Amendment to Loan and Security Agreement dated September
29, 1995 between Dayton Way Pictures IV, Inc. and Newmarket
Capital Group L.P. waiving contracts milestone (WHOLE WIDE
WORLD) (P)
10.40 Modification and Extension of Restated Credit Agreement, dated
September 29, 1995, by and between Imperial Bank and The
Kushner-Locke Company (P)
10.41 Letter Agreement dated December 5, 1995 from New Line Cinema to
The Kushner Locke Company summarizing New Line/Savoy deal
regarding THE LEGEND OF PINOCCHIO (P)
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.42 Modification and Extension of Restated Credit Agreement dated
December 22, 1995 by and between Imperial Bank and The
Kushner-Locke Company (P)
10.43 Letter regarding extension of Restated Credit Agreement dated
January 12, 1996 by and between Imperial Bank and The
Kushner-Locke Company (P)
10.44 Amendment to the 1988 Stock Incentive Plan dated May 17, 1994 (Q)
10.45 Amendment No. 3 dated December 31, 1995 between The Kushner-Locke
Company and Imperial Bank for the Third Amended and Restated
Credit Agreement dated as of February 9, 1990, as amended and
restated as of December 14, 1990, as of May 1, 1992 and as of
August 31, 1993 (Q)
10.46 First Amendment to Credit Documents dated December 22, 1995
between Allied Pinocchio Productions, Limited, Newmarket Capital
Group L.P., Bank of America National Trust and Savings
Association, The Kushner-Locke Company and Kushner-Locke
International, Inc. (THE LEGEND OF PINOCCHIO) (Q)
10.47 Third Amendment to Credit Documents dated December 22, 1995
between Dayton Way Pictures II, Inc., Newmarket Capital Group
L.P. and Kushner-Locke International, Inc., a division of The
Kushner-Locke Company (SERPENTS LAIR) (Q)
10.48 Second Amendment to Credit Documents dated December 22, 1995
between Dayton Way Pictures, Inc., Newmarket Capital Group L.P.
and Kushner-Locke International, Inc., a division of The
Kushner-Locke Company. (THE GRAVE) (Q)
10.49 Second Amendment to Credit Documents dated December 22, 1995
between Dayton Way Pictures IV, Inc. and Newmarket Capital Group
L.P. (WHOLE WIDE WORLD) (Q)
10.50 Cross Collateralization Agreement dated as of July 7, 1995
between The Kushner-Locke Company, Allied Pinocchio Productions
Ltd., Dayton Way Pictures, Inc., Dayton Way Pictures II, Inc.,
Dayton Way Pictures IV, Inc. and Newmarket Capital Group, L.P.
(Q)
10.51 First Amendment to Cross Collateralization Agreement dated
January 10, 1996 between The Kushner-Locke Company, Allied
Pinocchio Productions Ltd., Dayton Way Pictures, Inc., Dayton
Way Pictures II, Inc., Dayton Way Pictures IV, Inc. and
Newmarket Capital Group, L.P. (Q)
10.52 Waiver of Sections 6.1 LIMITATION ON INDEBTEDNESS, 6.6 LIMITATION
ON PREPAYMENT OF SUBORDINATED DEBT and 6.16 LIMITATION ON
ISSUANCE OF CAPITAL STOCK of the Third Amended and Restated
Credit Agreement (the "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, and December 31, 1995. (R)
10.53 Waiver of Sections 5.9 MINIMUM NET INCOME of the Third Amended
and Restated Credit Agreement (the "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, and December 31, 1995. (R)
10.54 Fourth Amendment to Employment Agreement between The
Kushner-Locke Company and Peter Locke dated February 13, 1996.
(R)
10.55 Fourth Amendment to Employment Agreement between The
Kushner-Locke Company and Donald Kushner dated February 13,
1996. (R)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
10.56 Letter Agreement, dated as of April 12, 1996, by and among The
Kushner-Locke Company, Chemical Bank and Chase Securities Inc.
(S)
10.57 Credit, Security, Guaranty and Pledge Agreement, dated as of June
19, 1996, among The Kushner-Locke Company, The Guarantors named
therein, Chemical Bank, as Agent, and Chemical Bank, as Fronting
Bank.
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included
in item 5)
</TABLE>
- ------------------------
* Confidential treatment granted.
(A) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-18, as amended, effective December 5, 1988 (Commission
File No. 33-25101-LA).
(B) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1989.
(C) Incorporated by reference from the Exhibit to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1990.
(D) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-37192), as initially filed on October 5,
1990 or as amended on November 30, 1990.
(E) Incorporated by reference from the Exhibits to the Company's Registration
Statements on Form S-1, as amended, effective November 30, 1990 (File No.
33-37192), and effective December 20, 1990 (File No. 33-37193).
(F) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, effective March 20, 1991.
(G) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1991.
(H) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1991.
(I) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1992.
(J) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-2, as amended, effective November 12, 1992 (Commission
File No. 33-51544).
(K) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1994.
(L) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1994.
(M) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal quarter ended September 30, 1994.
(N) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1995.
(O) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1995.
(P) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended September 30, 1995.
(Q) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended December 31, 1995.
(R) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1996.
(S) Incorporated by reference from the Company's Registration Statement on Form
S-2 (File No. 333-5089), as initially filed on June 3, 1996.
II-6
<PAGE>
ITEM 17. UNDERTAKINGS
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under Securities Act, may
be permitted to directors, officers, and controlling persons of the Company
pursuant to the provision described in Item 15 or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer, or controlling person of the Company in
the successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 2 to
Form S-2 registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, State of California, on
July 11, 1996.
THE KUSHNER-LOCKE COMPANY,
By: /s/ DONALD KUSHNER
-----------------------------------
Donald Kushner
CO-CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Form S-2 Registration Statement has been signed by the following
persons in the capacities and on the date indicated:
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
/s/ PETER LOCKE
------------------------------------------- Co-Chairman of the Board, Co-Chief July 11, 1996
Peter Locke Executive Officer and President
/s/ DONALD KUSHNER
------------------------------------------- Co-Chairman of the Board, Co-Chief July 11, 1996
Donald Kushner Executive Officer and Secretary
/s/ JAMES L. SCHWAB
------------------------------------------- Chief Financial Officer July 11, 1996
James L. Schwab
/s/ RENE ROUSSELET
------------------------------------------- Vice President of Finance and July 11, 1996
Rene Rousselet Controller (Chief Accounting Officer)
/s/ S. JAMES COPPERSMITH
------------------------------------------- Director July 11, 1996
S. James Coppersmith
/s/ STUART HERSCH
------------------------------------------- Director July 11, 1996
Stuart Hersch
/s/ MILTON OKUN
------------------------------------------- Director July 11, 1996
Milton Okun
</TABLE>
II-8
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE KUSHNER-LOCKE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3. Articles of Incorporation (A)
4.1 Indenture between the Company and National City Bank of
Minneapolis, as Trustee, dated as of December 1, 1990 pertaining
to 10% Convertible Subordinated Debentures Due 2000, Series A(E)
4.2 First Supplemental Indenture between the Company and National
City Bank of Minneapolis, as Trustee, dated as of March 15, 1991
pertaining to 10% Convertible Subordinated Debentures Due 2000,
Series A(F)
4.3 Indenture between the Company and National City Bank of
Minneapolis, as Trustee, dated as of December 1, 1990 pertaining
to 13 3/4% Convertible Subordinated Debentures Due 2000, Series
B(E)
4.4 Warrant agreement between the Company and City National Bank, as
Warrant Agent, dated as of March 19, 1991 pertaining to Common
Stock Purchase Warrants (F)
4.5 Form of Class C Redeemable Common Stock Purchase Warrant
4.6 Form of Underwriter's Warrant
5. Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP
10.1 Employment Agreement dated October 1, 1988 between the Company
and Donald Kushner (A)
10.1.1 Amendment dated August 18, 1992 to the Employment Agreement dated
October 1, 1988 between the Company and Donald Kushner (J)
10.1.2 Amendment dated January 20, 1994 to the Employment Agreement
dated October 1, 1988 between the Company and Donald Kushner (K)
10.1.3 Addendum dated July 1, 1994 to the Employment Agreement dated
October 1, 1988 between the Company and Donald Kushner (M)
10.2 Employment Agreement dated October 1, 1988 between the Company
and Peter Locke (A)
10.2.1 Amendment dated August 18, 1992 to the Employment Agreement dated
October 1, 1988 between the Company and Peter Locke (J)
10.2.2 Amendment dated January 20, 1994 to the Employment Agreement
dated October 1, 1988 between the Company and Peter Locke (K)
10.2.3 Addendum dated July 1, 1994 to the Employment Agreement dated
October 1, 1988 between the Company and Peter Locke (M)
10.3 1988 Stock Incentive Plan of the Company (A)
10.4 Form of Indemnification Agreement (A)
10.5 Kushner-Locke Shareholders' Cross-Purchase Agreement dated as of
October 1, 1988 between and among Donald Kushner, Rebecca Hight,
Peter Locke, Karen Locke, Peter Locke Productions, Inc. and
Twelfth Street Limited (A)
10.5.1 Amendment dated as of May 14, 1992 to the Kushner-Locke
Shareholders' Cross-Purchase Agreement dated as of October 1,
1988 between and among Donald Kushner, Rebecca Hight, Peter
Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth
Street Limited (I)
10.6 Kushner-Locke Trust Agreement dated as of October 1, 1988 between
and among Donald Kushner, Rebecca Hight, Peter Locke, Karen
Locke, Peter Locke Productions, Inc. and Twelfth Street Limited
(A)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------
<S> <C>
10.6.1 Amendment dated May 14, 1992 to the Kushner-Locke Trust Agreement
dated as of October 1, 1988 between and among Donald Kushner,
Rebecca Hight, Peter Locke, Karen Locke, Peter Locke
Productions, Inc. and Twelfth Street Limited (I)
10.11.2 Third Amended and Restated Credit Agreement between the Company
and Imperial Bank, dated as of February 9, 1990, as amended and
restated on December 14, 1990, May 1, 1992 and August 31, 1993
(K)
10.11.3 Imperial Bank Waiver (K)
10.11.4 Amendment No. 1 dated March 10, 1994 between the Company and
Imperial Bank to the Third Amended and Restated Credit Agreement
dated February 9, 1990, as amended and restated on December 14,
1990, May 1, 1992 and August 31, 1993 (K)
10.12 Lease Agreement, dated as of November 1989, between the Company
and 11601 Wilshire Associates (G)
10.12.1 Amended Lease Agreement (G)
10.14 Warrant Agreement between the Company and Paulson Investment
Company, Inc. dated as of December 20, 1990 (C)
10.15 Warrant Agreement between the Company and Paulson Investment
Company, Inc. dated as of March 20, 1991 (F)
10.16 Warrant Agreement between the Company and Chatfield Dean & Co.,
Inc. dated as of November 13, 1992 (J)
10.17 Employment Agreement dated October 1, 1993 between the Company
and Lawrence Mortorff (K)
10.19 Fiscal Agency Agreement dated March 10, 1994 between and among
the Company, Bank America National Trust Company and Bank of
America National Trust and Savings Association (K)
10.19.1 Side letter between the Company and BankAmerica Trust Company to
the Fiscal Agency Agreement dated March 10, 1994 between and
among the Company, BankAmerica Trust Company and Bank of America
National Trust and Savings Association (K)
10.20 Warrant Agreement dated March 10, 1994 between the Company and
RAS Securities Corp. (K)
10.21 Warrant Agreement dated March 10, 1994 between the Company and I.
Friedman Equities, Inc. (K)
10.22 Fiscal Agency Agreement dated July 25, 1994 between and among the
Company, Bank America National Trust Company and Bank of America
National Trust and Savings Association (L)
10.24 Employment Agreement dated September 1, 1994 between the Company
and Gregory Cascante (M)
10.25 Employment Agreement dated September 1, 1994 between the Company
and Eleanor Powell (M)
10.26 Imperial Bank Commitment Letter regarding Waiver and Amendment of
Sections 5.9 and 5.11 of the Third Amended and Restated Credit
Agreement (M)
10.27 Loan and Security Agreement dated December 1, 1994 between the
Company and August Entertainment, Inc., and Guarantees between
the Company, August Entertainment, Inc. and the Allied
Entertainments Group PLC and certain of its subsidiaries (M)
10.28 Letter Agreement, dated March 23, 1995, by and between Woodenhead
Productions, Ltd. and Newmarket Capital Group, L.P. (N)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------
<S> <C>
10.29 Modification and Extension of Restated Credit Agreement, dated
March 24, 1995, by and between Imperial Bank and The
Kushner-Locke Company (N)
10.30* Letter Agreement dated February 6, 1995 by and between Savoy
Pictures, Inc. and KL Features, Inc. (N)*
10.31 Letter Agreement dated May 12, 1995 by and between Imperial Bank
and The Kushner-Locke Company (N)
10.32 Guaranty, dated July 7, 1995, by and between The Kushner-Locke
Company and Newmarket Capital Group, L.P. for loan and interest
of Allied Pinocchio Productions, LTD. (THE LEGEND OF PINOCCHIO)
(O)
10.33 Guaranty, dated May 24, 1995, by and between The Kushner-Locke
Company and Newmarket Capital Group, L.P. for loan and interest
of Dayton Way Pictures II, Inc. (SERPENT'S LAIR) (O)
10.34 Guaranty, dated June 12, 1995 by and between The Kushner-Locke
Company and Newmarket Capital Group, L.P. for loan and interest
of Dayton Way Pictures, Inc. (THE GRAVE) (O)
10.35 Guaranty, dated July 31, 1995, by and between The Kushner-Locke
Company and Newmarket Capital Group, L.P. for loan and interest
of Dayton Way Pictures IV, Inc. (WHOLE WIDE WORLD) (P)
10.36 Guaranty, dated July 1995 by and between The Kushner-Locke
Company and Banque Paribas (Los Angeles Agency) for loan and
interest of Dayton Way Pictures III, Inc. (FREEWAY) (P)
10.37 Second Amendment to Loan and Security Agreement dated September
29, 1995 between Dayton Way Pictures, II, Inc. and Newmarket
Capital Group L.P. waiving contracts receivable milestone
(SERPENT'S LAIR) (P)
10.38 First Amendment to Loan and Security Agreement dated September
29, 1995 between Dayton Way Pictures, Inc. and Newmarket Capital
Group L.P. waiving contracts receivable milestone (THE GRAVE)
(P)
10.39 First Amendment to Loan and Security Agreement dated September
29, 1995 between Dayton Way Pictures IV, Inc. and Newmarket
Capital Group L.P. waiving contracts milestone (WHOLE WIDE
WORLD) (P)
10.40 Modification and Extension of Restated Credit Agreement, dated
September 29, 1995, by and between Imperial Bank and The
Kushner-Locke Company (P)
10.41 Letter Agreement dated December 5, 1995 from New Line Cinema to
The Kushner Locke Company summarizing New Line/Savoy deal
regarding THE LEGEND OF PINOCCHIO (P)
10.42 Modification and Extension of Restated Credit Agreement dated
December 22, 1995 by and between Imperial Bank and The
Kushner-Locke Company (P)
10.43 Letter regarding extension of Restated Credit Agreement dated
January 12, 1996 by and between Imperial Bank and The
Kushner-Locke Company (P)
10.44 Amendment to the 1988 Stock Incentive Plan dated May 17, 1994 (Q)
10.45 Amendment No. 3 dated December 31, 1995 between The Kushner-Locke
Company and Imperial Bank for the Third Amended and Restated
Credit Agreement dated as of February 9, 1990, as amended and
restated as of December 14, 1990, as of May 1, 1992 and as of
August 31, 1993 (Q)
10.46 First Amendment to Credit Documents dated December 22, 1995
between Allied Pinocchio Productions, Limited, Newmarket Capital
Group L.P., Bank of America National Trust and Savings
Association, The Kushner-Locke Company and Kushner-Locke
International, Inc. (THE LEGEND OF PINOCCHIO) (Q)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -----------------------------------------------------------------
<S> <C>
10.47 Third Amendment to Credit Documents dated December 22, 1995
between Dayton Way Pictures II, Inc., Newmarket Capital Group
L.P. and Kushner-Locke International, Inc., a division of The
Kushner-Locke Company (SERPENTS LAIR)(Q)
10.48 Second Amendment to Credit Documents dated December 22, 1995
between Dayton Way Pictures, Inc., Newmarket Capital Group L.P.
and Kushner-Locke International, Inc., a division of The
Kushner-Locke Company. (THE GRAVE) (Q)
10.49 Second Amendment to Credit Documents dated December 22, 1995
between Dayton Way Pictures IV, Inc. and Newmarket Capital Group
L.P. (WHOLE WIDE WORLD) (Q)
10.50 Cross Collateralization Agreement dated as of July 7, 1995
between The Kushner-Locke Company, Allied Pinocchio Productions
Ltd., Dayton Way Pictures, Inc., Dayton Way Pictures II, Inc.,
Dayton Way Pictures IV, Inc. and Newmarket Capital Group, L.P.
(Q)
10.51 First Amendment to Cross Collateralization Agreement dated
January 10, 1996 between The Kushner-Locke Company, Allied
Pinocchio Productions Ltd., Dayton Way Pictures, Inc., Dayton
Way Pictures II, Inc., Dayton Way Pictures IV, Inc. and
Newmarket Capital Group, L.P. (Q)
10.52 Waiver of Sections 6.1 LIMITATION ON INDEBTEDNESS, 6.6 LIMITATION
ON PREPAYMENT OF SUBORDINATED DEBT and 6.16 LIMITATION ON
ISSUANCE OF CAPITAL STOCK of the Third Amended and Restated
Credit Agreement (the "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, and December 31, 1995. (R)
10.53 Waiver of Sections 5.9 MINIMUM NET INCOME of the Third Amended
and Restated Credit Agreement (the "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, and December 31, 1995. (R)
10.54 Fourth Amendment to Employment Agreement between The
Kushner-Locke Company and Peter Locke dated February 13, 1996.
(R)
10.55 Fourth Amendment to Employment Agreement between The
Kushner-Locke Company and Donald Kushner dated February 13,
1996. (R)
10.56 Letter Agreement, dated as of April 12, 1996, by and among The
Kushner-Locke Company, Chemical Bank and Chase Securities Inc.
(S)
10.57 Credit, Security, Guaranty and Pledge Agreement, dated as of June
19, 1996, among The Kushner-Locke Company, the Guarantors named
therein, Chemical Bank, as Agent, and Chemical Bank, as Fronting
Bank
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included
in item 5)
</TABLE>
- ------------------------
* Confidential treatment granted.
(A) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-18, as amended, effective December 5, 1988 (Commission
File No. 33-25101-LA).
(B) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1989.
(C) Incorporated by reference from the Exhibit to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1990.
(D) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-37192), as initially filed on October 5,
1990 or as amended on November 30, 1990.
<PAGE>
(E) Incorporated by reference from the Exhibits to the Company's Registration
Statements on Form S-1, as amended, effective November 30, 1990 (File No.
33-37192), and effective December 20, 1990 (File No. 33-37193).
(F) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, effective March 20, 1991.
(G) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1991.
(H) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1991.
(I) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1992.
(J) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-2, as amended, effective November 12, 1992 (Commission
File No. 33-51544).
(K) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1994.
(L) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1994.
(M) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal quarter ended September 30, 1994.
(N) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1995.
(O) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1995.
(P) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended September 30, 1995.
(Q) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended December 31, 1995.
(R) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1996.
(S) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-2 (File No. 333-5089), as initially filed on June 3,
1996.
<PAGE>
EXHIBIT 1.1
Proof of July 8, 1996
[FORM OF UNDERWRITING AGREEMENT]
THE KUSHNER-LOCKE COMPANY
_______ Units consisting in the aggregate of Two Shares of
Common Stock and
One Class C Redeemable
Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
, 1996
Lew Lieberbaum & Co., Inc.
600 Old Country Road
Garden City, New York 11530
Dear Sirs:
The Kushner-Locke Company, a California corporation (the "Company"),
hereby confirms its agreement with Lew Lieberbaum & Co., Inc. ("you" or the
"Underwriter"), as follows:
i. DESCRIPTION OF THE SECURITIES.
The Company proposes to issue and sell to the Underwriter _______
units ("Units") consisting of two shares (the "Shares") of common stock, no par
value per share ("Common Stock"), and one Class C redeemable common stock
purchase warrants ("Warrants") of the Company (the Units and the Shares,
together with such Warrants, being sometimes referred to as the "Securities").
The Company proposes to grant to the Underwriter an option for forty-five days
from the Effective Date (as defined below) to purchase an amount of Units equal
to 15% of Units initially offered to the public _______ (the "Additional
Securities") solely for the purpose of covering over-allotments, if any. The
offering of Securities and Additional Securities contemplated hereby may
sometimes be referred to as the "Offering."
(a) THE WARRANTS.
Pursuant to and subject to certain conditions set forth in the
agreement (the "Warrant Agreement") between the Company, the Underwriter and
Corporate Stock Transfer, each Warrant will be exercisable during the period
commencing on the effective date of the Registration Statement, as defined in
Paragraph 2(a) hereof (the "Effective Date"), and expiring five years
thereafter, subject to prior redemption by the Company (as
<PAGE>
described below), at an initial exercise price (subject to adjustment as set
forth in the Warrant Agreement) equal to $____ per share (120% above the closing
high bid price of the Common Stock on the Nasdaq National Market (the "NNM") on
the Effective Date). The shares of Common Stock issuable upon the exercise of
Warrants are hereinafter referred to as "Warrant Shares."
As more fully provided in the Warrant Agreement, the Warrants will be
redeemable by the Company at a price of $.10 per Warrant, commencing one year
after the Effective Date (or earlier with the consent of the Underwriter not to
be unreasonably withheld) and prior to their expiration upon not less than 30
days' prior written notice to the holders of the Warrants, provided the closing
high bid price of the Common Stock as reported on the NNM if traded thereon, or
if not traded thereon, the closing sale price if listed on a national securities
exchange (or other reporting system that provides last sales prices), or if not
traded thereon but traded on either the Nasdaq SmallCap Market or over-the-
counter on the bulletin board, the average of the closing ask and bid price, has
been at least 150% of the then current Warrant exercise price (initially $___
per share, 120% of the closing high bid price on NNM on the Effective Date), for
a period of 10 trading days ending on the third day prior to the date on which
the Company gives notice of redemption, subject to the right of the holder to
exercise his purchase rights thereunder until redemption.
(b) UNDERWRITER'S SECURITIES.
The Company will sell, subject to the Underwriter's purchase of the
Units pursuant to the terms and conditions herein, to the Underwriter, for an
aggregate of $10.00, warrants to purchase up to one Unit for each ten Units sold
in the Offering excluding the Additional Securities (a maximum of ______ Units)
$________, 120% of the public offering price (the "Underwriter's Warrants").
The Underwriter's Warrants, Units and shares of Common Stock and Warrants
underlying the Units and shares of Common Stock issuable upon exercise of the
Warrants underlying the Units are hereinafter referred to collectively as the
"Underwriter's Securities." The Underwriter's Warrants shall be non-exercisable
and non-transferable (other than to officers and directors of the Underwriter
and to members of the selling group and their officers or partners) for a period
of 12 months following the Effective Date. Thereafter, the Underwriter's
Warrants shall be exercisable and transferable for a period of four years
(provided such transfer is in accordance with the Securities Act of 1933 (the
"Act") and any other applicable federal and state securities laws). If the
Underwriter's Warrants are not exercised during their term, they shall, by their
terms, automatically expire. The Underwriter's Securities shall be registered
for sale to the public and shall be included in the Registration Statement filed
in connection with the Offering.
2
<PAGE>
ii. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Underwriter that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission"), a registration statement, and one or more
amendments thereto, on Form S-2 (File No. 333-5089), including in each such
registration statement and each such amendment any related preliminary
prospectus, as such may be amended ("Preliminary Prospectus"), for the
registration of the Securities under the Act. The Company will, if required by
applicable law, file a further amendment to said registration statement in the
form to be delivered to you and will not, before the registration statement
becomes effective, file any other amendment thereto to which you shall have
reasonably objected in writing after having been furnished with a copy thereof
unless the Company or its outside counsel determines that such amendment is
required to be filed by applicable law. Except as the context may otherwise
require, such registration statement, as amended, on file with the Commission at
the time such registration statement becomes effective (including the
prospectus, financial statements, exhibits and all other documents, as amended,
filed as a part thereof), is hereinafter called the "Registration Statement,"
and the prospectus, in the form filed with the Commission, as such may be
amended, pursuant to Rule 424(b) of the General Rules and Regulations of the
Commission under the Act (the "Regulations") or, if no such filing is made, the
definitive prospectus used in the Offering, as such may be amended, is
hereinafter called the "Prospectus." The Company has delivered to you copies of
each Preliminary Prospectus as filed with the Commission.
(b) The Commission has not issued any orders preventing or
suspending the use of any Preliminary Prospectus, and, as of the date filed with
the Commission, each Preliminary Prospectus conformed in all material respects
with the requirements of the Act and did not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that this representation and warranty does
not apply to statements or omissions made in reliance upon and in conformity
with written information furnished to the Company by or on your behalf, or by or
on behalf of any Selling Shareholder named in the Preliminary Prospectus, for
use in such Preliminary Prospectus and; provided, further, however, that this
representation and warranty does not apply to statements or omissions that have
been cured in a subsequent preliminary prospectus or in the Prospectus.
3
<PAGE>
(c) When the Registration Statement becomes effective under the
Act and at all times subsequent thereto to and including the Closing Date
(hereinafter defined) and the Option Closing Date (hereinafter defined) and for
such longer periods as a Prospectus is required to be delivered in connection
with the sale of the Securities by the Underwriter, the Registration Statement
and Prospectus, and any amendment thereof or supplement thereto, will contain
all material statements which are required to be stated therein in accordance
with the Act and the Regulations, and will in all material respects conform to
the requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, will
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
provided, however, that this representation and warranty does not apply to
statements or omissions made in reliance upon and in conformity with written
information furnished to the Company by or on your behalf, or by or on behalf of
any Selling Shareholder named in the Registration Statement or Prospectus, for
use in the Registration Statement or Prospectus, or in any amendment thereof or
supplement thereto. It is understood that the statements set forth in the
Registration Statement or Prospectus with respect to (i) the amounts of the
selling concession and reallowance; (ii) the identity of counsel to the
Underwriter under the heading "Legal Matters"; (iii) the statements set forth
under the heading "Underwriting," including the information concerning the
National Association of Securities Dealers, Inc. ("NASD") affiliation of the
Underwriter; and (iv) the stabilization legend in the Prospectus constitute the
only information supplied by you for use in the Registration Statement or
Prospectus.
(d) The Company is, and at the Closing Date and the Option
Closing Date will be, a corporation duly incorporated, validly existing and in
good standing under the laws of the State of California. The Company's
subsidiaries are, and at the Closing Date and the Option Closing Date will be,
duly incorporated under the laws of the states of such incorporation. The
Company is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which its ownership or leasing of any of its properties or the
conduct of its business requires such qualification, except those jurisdictions
in which the failure to so qualify would not have a material adverse effect on
the business or operations of the Company and its subsidiaries taken as a whole
("Material Adverse Effect") and except as described in or contemplated by the
Registration Statement. The Company has all requisite corporate powers and
authority, and all necessary authorizations, approvals, orders, licenses,
certificates and permits of and from all applicable governmental regulatory
officials and bodies to own or lease its properties and conduct its business as
described in or
4
<PAGE>
contemplated by the Registration Statement except where the failure to have any
such powers, authority, certificates or permits would not have a Material
Adverse Effect and except as described in or contemplated by the Registration
Statement. The Company is doing business and has been doing business during the
period described in the Registration Statement in material compliance with all
such material authorizations, approvals, orders, licenses, certificates and
permits and all material federal, state and local laws, rules and regulations
concerning the business in which the Company is engaged, except where the
failure to comply with any such authorizations, approvals, orders, licenses,
certificates or permits or any such laws, rules or regulations would not have a
Material Adverse Effect and except as described in or contemplated by the
Registration Statement. The disclosures in the Registration Statement
concerning the effects of federal, state and local regulation on the Company's
business as currently conducted and as currently contemplated are correct in all
material respects and do not omit to state a material fact required to be stated
therein in light of the circumstances under which such disclosures were made.
The Company has all requisite corporate power and authority to enter into this
Agreement and carry out the provisions and conditions hereof, and all consents,
authorizations, approvals and orders required in connection therewith have been
obtained or will have been obtained prior to the Closing Date.
(e) This Agreement has been duly and validly authorized and
executed by the Company. The Securities (including the Units, the Shares and
the Warrants), the Warrant Shares underlying such Warrants, and the
Underwriter's Securities have been duly authorized (and, in the case of the
Shares and the Warrant Shares, have been duly reserved for issuance) and, when
issued and paid for in accordance with this Agreement (and, in the case of such
Warrant Shares, upon exercise of such Warrants and payment to the Company of the
exercise price therefor pursuant to the terms of the Warrant Agreement), the
Shares and such Warrant Shares will be validly issued, fully paid and non-
assessable; the Securities, Additional Securities, Warrant Shares (other than
Underwriter's Securities), and Underwriter's Securities are not and will not be
subject to the preemptive rights of any shareholder of the Company and conform
and at all times up to and including their issuance will conform in all material
respects to all statements with regard thereto contained in the Registration
Statement and Prospectus; and all corporate action required to be taken for the
authorization, issuance and sale of the Securities, the Additional Securities,
Warrant Shares (other than Underwriter's Securities) and Underwriter's
Securities has been taken, and this Agreement constitutes a valid and binding
obligation of the Company, enforceable in accordance with its terms, to issue
and sell, upon exercise in accordance with the terms thereof, the number and
kind of securities called for thereby.
5
<PAGE>
(f) The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof will not result in a breach or
violation of any material terms or provisions of, or constitute a default under,
the Certificate of Incorporation or by-laws, in each case as amended, of the
Company or of any material evidence of indebtedness, lease, contract or other
material agreement or instrument to which the Company is a party or by which the
Company or any of its properties is bound, or under any applicable law, rule,
regulation, judgment, order or decree of any applicable governmental body,
professional advisory body, administrative agency or court, domestic or foreign,
having jurisdiction over the Company or its properties, in each case except for
any breach, violation or default that would not have a Material Adverse Effect
and except as described in or contemplated by the Registration Statement, or
result in the creation or imposition of any material lien, charge or encumbrance
upon any of the material properties or assets of the Company; and no consent,
approval, authorization or order of any court or governmental or other
regulatory agency or body is required for the consummation by the Company of the
transactions on its part herein contemplated, except such as may be required
under the Act or under state securities or blue sky laws or under the rules and
regulations of the NASD, and except where the breach, violation or failure to
obtain such consent, approval, authorization or order would not have a Material
Adverse Effect and except as described in or contemplated by the Registration
Statement.
(g) Subsequent to the date hereof, and prior to the Closing Date
and the Option Closing Date, except for any securities issuable upon exercise of
any outstanding options and warrants, options pursuant to the Company's stock
option plan, upon conversion of any of the Company's convertible securities and
as part of a merger, acquisition or other business combinations and except as
otherwise described in or contemplated by the Registration Statement, the
Company will not issue or acquire any of its equity securities.
(h) The consolidated financial statements and related notes
thereto included in the Registration Statement and the Prospectus fairly present
in all material respects the consolidated financial position and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply; and such financial statements and related notes thereto
have been prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved (except as may be otherwise
noted therein).
(i) Except as described in or contemplated by the Registration
Statement, the Company is not, and at the Closing Date and at the Option Closing
Date the Company will not be, in violation or breach of, or default in, the due
performance and
6
<PAGE>
observance of any material term, covenant or condition of any material
indenture, mortgage, deed of trust, note, loan or credit agreement, or any other
material agreement or instrument evidencing an obligation for borrowed money, or
any other material agreement or instrument to which the Company is a party or by
which the Company may be bound or to which any of the property or assets of the
Company is subject, which violations, breaches, default or defaults, singularly
or in the aggregate, would have a Material Adverse Effect. The Company does not
have and at the Closing Date or Option Closing Date the Company will not have
taken any action in violation of the provisions of the Certificate of
Incorporation or by-laws, in each case as amended, of the Company, or any
applicable statute, order, rule or regulation of any court or regulatory
authority or governmental body having jurisdiction over or application to the
Company or its business or properties, except for any violations that,
singularly or in the aggregate, would not have a Material Adverse Effect and
except as described in or contemplated by the Registration Statement.
(j) The Company has, and at the Closing Date and at the Option
Closing Date will have, good and marketable title to all properties and assets
described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances, claims, security interests, restrictions and defects of
any material nature whatsoever, except for liens incurred in the ordinary course
of business (including, but not limited to, the credit facility with Chase,
loans or guarantees for the Company's products or productions and liens by
professional guilds) or as are described in or contemplated by the Registration
Statement and liens for taxes not yet due and payable or such as in the
aggregate will not have a Material Adverse Effect. All of the material leases
and subleases under which the Company is the lessor or sublessor of properties
or assets or under which the Company holds properties or assets as lessee as
described in the Prospectus are, and will on the Closing Date and the Option
Closing Date be, in full force and effect, and except as described in or
contemplated by the Registration Statement, the Company is not and will not be
in material default in respect of any of the terms or provisions of any of such
leases or subleases (except for defaults which would not have a Material Adverse
Effect), and no claim has been asserted by anyone adverse to rights of the
Company or the Subsidiaries as lessor, sublessor, lessee or sublessee under any
of the leases or subleases mentioned above, or affecting or questioning the
right of the Company to continue possession of the leased or subleased premises
or assets under any such lease or sublease, except as described in or
contemplated by the Registration Statement or such as in the aggregate would not
have a Material Adverse Effect, and the Company (including through wholly owned
subsidiaries) owns or leases all such material properties as are necessary to
its operations as now conducted and, except as otherwise stated in or
contemplated by the Registration
7
<PAGE>
Statement, as proposed to be conducted as set forth in the Prospectus (except
where the failure to own or lease such properties would not have a Material
Adverse Effect).
(k) The authorized, issued and outstanding capital stock of the
Company as of the date referenced in the Prospectus is, and the authorized,
issued and outstanding capital stock of the Company on the Closing Date will be,
as set forth in the Prospectus under "Capitalization" (in each case based on the
assumptions set forth therein and except that issuance and sale of the
Additional Securities, the issuance of the Warrant Shares, the issuance of the
Underwriter's Securities and the issuance of any shares of Common Stock issuable
upon the exercise of any options or warrants to purchase shares of Common Stock
(including the Company's stock option plan) or upon the conversion of any
convertible securities of the Company will not be reflected therein); the shares
of issued and outstanding capital stock of the Company set forth thereunder have
been (or as of the Closing Date will be) duly authorized and validly issued and
are (or as of the Closing Date will be) fully paid and non-assessable; except
for options granted pursuant to the Company's stock option plans, the Company's
publicly traded warrants, the Warrants, the Underwriter's Securities, the
Additional Securities, the Company's convertible securities, the warrants and
options described in or contemplated by the registration statement of the
Company on Form S-3 and as described in or contemplated by the Registration
Statement, no options, warrants or other rights to purchase, agreements or other
obligations to issue, or agreements or other rights to convert any obligation
into, any shares of capital stock of the Company have been granted or entered
into by the Company; and the Common Stock, the Warrants and all such options and
warrants conform in all material respects, to all statements relating thereto
contained in the Registration Statement and Prospectus.
(l) Except as described in or contemplated by the Registration
Statement, the Company does not own or control any capital stock or securities
of, or have any proprietary interest in, or otherwise participates in any other
corporation, partnership, joint venture, firm, association or business
organization (other than those disclosed in Exhibit [ ] attached hereto);
PROVIDED, HOWEVER, that this provision shall not be applicable to the
investment, if any, of the net proceeds from the sale of the Securities sold by
the Company or other funds thereof in interest-bearing savings accounts,
certificates of deposit, money market accounts, United States government
obligations or other similar short-term obligations or investments.
(m) To the best of the Company's knowledge, KPMG Peat Marwick
LLP, who have reported on the financial statements of the Company, are
independent accountants with respect to the Company as required by the Act and
the Regulations.
8
<PAGE>
(n) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money; or (ii) entered into any transaction other than
in the ordinary course of business; or (iii) declared or paid any dividend or
made any other distribution on or in respect of its capital stock; PROVIDED,
HOWEVER, that this provision shall not be applicable to any transaction between
or among the Company and its subsidiaries or any other corporation, partnership,
joint venture, firm, association or business organization set forth on Exhibit [
] attached hereto.
(o) There is no litigation or governmental proceeding pending or
to the knowledge of the Company threatened against, or involving the properties
or business of the Company which would reasonably be expected to be decided
against the Company and which decision would have a Material Adverse Effect,
except as described in or contemplated by the Registration Statement. Further,
except as described in or contemplated by the Registration Statement, there are
no pending actions, suits or proceedings related to environmental matters or
related to discrimination on the basis of age, sex, religion or race, nor is the
Company charged with or, to its knowledge, under investigation with respect to
any violation of any applicable statutes or regulations of any regulatory
authority having jurisdiction over its business or operations, which violations
would reasonably be expected to be decided against the Company and which
decision would have a Material Adverse Effect, and no labor disturbances by the
employees of the Company exist or, to the knowledge of the Company, have been
threatened.
(p) The Company has, and at the Closing Date and at the Option
Closing Date will have, filed all necessary federal, state and foreign income
and franchise tax returns or has requested extensions thereof (except in any
case where the failure so to file would not have a Material Adverse Effect), and
has paid all taxes which it believes in good faith were required to be paid by
it except for any such taxes that currently, or on the Closing Date or Option
Closing Date, as the case may be, are being contested in good faith or as
described in or contemplated by the Registration Statement.
(q) The Company has not at any time (i) made any contribution to
any candidate for political office, or failed to disclose fully any such
contribution, in violation of law, or (ii) made any illegal payment to any
state, federal, foreign governmental or professional regulatory agency, officer
or official or other person charged with similar public, quasi-public or
professional regulatory duties, other than payments or contributions required or
allowed by applicable law.
9
<PAGE>
(r) Except as described in or contemplated by the Registration
Statement, neither the Company nor any officer, director, employee or agent of
the Company has made any payment or transfer of any funds or assets of the
Company or conferred any personal benefit by use of the Company's assets or
received any funds, assets or personal benefit in violation of any law, rule or
regulation, which is required to be stated in the Registration Statement or
necessary to make the statements therein not misleading.
(s) On the Closing Date and on the Option Closing Date, all
transfer or other taxes, if any (other than income tax), which are required to
be paid, and are due and payable, in connection with the sale and transfer of
the Securities by the Company to the Underwriter will have been fully paid or
provided for by the Company as the case may be, and all laws imposing such taxes
will have been fully complied with in all material respects.
(t) There are no contracts or other documents of the Company
which are of a character required to be described in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement which have not
been so described or filed.
(u) The Company maintains a system of internal accounting
controls that it believes is sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specified
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; and (3) access to assets
is permitted only in accordance with management's general or specific
authorizations.
(v) Except as described in or contemplated by the Registration
Statement or for securities contemplated to be registered on a Form S-3 of the
Company, no holder of any securities of the Company has the right (which has not
been effectively waived or terminated) to require registration of any securities
because of the filing or effectiveness of the Registration Statement.
(w) The Company has not taken and at the Closing Date will not
have taken, directly or indirectly, any illegal action designed to cause or
result in, or which has constituted or which might reasonably be expected to
constitute, the illegal stabilization or manipulation of the price of the Common
Stock or the Warrants to facilitate the sale or resale of such securities.
(x) To the Company's knowledge, there are no claims for services
in the nature of a finder's origination fee
10
<PAGE>
with respect to the sale of the Securities hereunder, except as described in or
contemplated by the Registration Statement.
(y) No right of first refusal exists with respect to any sale of
the Securities by the Company except as may relate to the Underwriter.
(z) No statement, representation, warranty or covenant made by
the Company in this Agreement or made in any certificate or document required by
this Agreement to be delivered to the Underwriter was, when made, or as of the
Closing Date or as of the Option Closing Date will be materially inaccurate,
untrue or incorrect.
iii. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the Underwriter that:
(a) It will deliver to the Underwriter, without charge, two
conformed copies of each Registration Statement and of each amendment or
supplement thereto, including all financial statements and exhibits.
(b) The Company has delivered to the Underwriter, and each of
the Selected Dealers (as hereinafter defined) without charge, as many copies as
have been reasonably requested of each Preliminary Prospectus heretofore filed
with the Commission in accordance with and pursuant to the Commission's Rule 430
under the Act and will deliver to the Underwriter, without charge, on the
Effective Date, and thereafter from time to time during such reasonable period
as you may reasonably request if, in the reasonable written opinion of counsel
for the Underwriter, the Prospectus is required by law to be delivered in
connection with sales by the Underwriter or a Selected Dealer, as many copies of
the Prospectus (and, in the event of any amendment of or supplement to the
Prospectus, of such amended or supplemented Prospectus) as the Underwriter may
reasonably request for the purposes contemplated by the Act. The Company will
take all reasonable and necessary actions to furnish to the Underwriter, when
and as requested by the Underwriter, all necessary documents, exhibits,
information, applications, instruments and papers as may be reasonably required
in order to permit or facilitate the sale of the Securities.
(c) The Company has authorized the Underwriter to use, and make
available for use by prospective dealers, the Preliminary Prospectus, and
authorizes the Underwriter, all dealers selected by you in connection with the
distribution of the Securities (the "Selected Dealers") to be purchased by the
Underwriter and all Selected Dealers to whom any of such Securities may be sold
by the Underwriter or by any Selected Dealer, to use the Prospectus, as from
time to time amended or
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supplemented, in connection with the sale of the Securities in accordance with
the applicable provisions of the Act, the applicable Regulations and applicable
state law, until completion of the distribution of the Securities and for such
longer period as you may reasonably request if the Prospectus is required under
the Act, the applicable Regulations or applicable state law to be delivered in
connection with sales of the Securities by the Underwriter or the Selected
Dealers.
(d) The Company will use its best efforts to cause the
Registration Statement to become effective and will notify the Underwriter as
promptly as practicable, and confirm the notice in writing, upon the Company
becoming aware thereof: (i) when the Registration Statement or any post-
effective amendment thereto becomes effective; (ii) the receipt of any comments
from the Commission regarding the Registration Statement or the receipt of any
stop order or the initiation, or to the best of the Company's knowledge, the
threatening, of any proceedings for that purpose; and (iii) the suspension of
the qualification of the Securities and the Underwriter's Warrants, or
underlying securities, for offering or sale in any jurisdiction or of the
initiating, or to the best of the Company's knowledge the threatening, of any
proceeding for that purpose. If the Commission shall enter a stop order at any
time, the Company will make every reasonable effort to obtain the lifting of
such order as promptly as practicable.
(e) During the time when a prospectus relating to the Securities
is required to be delivered under the Act, the Company will use its best efforts
to comply with all requirements imposed upon it by the Act and the Securities
Exchange Act of 1934 (the "Exchange Act"), as now and hereafter amended and by
the Regulations, as from time to time in force, as necessary to permit the
continuance of sales and offers of the Securities in accordance with the
provisions hereof and the Prospectus and the Company shall use its best efforts
to keep the Registration Statement effective so long as a Prospectus is required
to be delivered in connection with the sale of the Securities or Additional
Securities by the Underwriter or by the Selected Dealers effecting transactions
therein in connection with the initial public offering thereof. If at any time
when a prospectus relating to the Securities is required to be delivered under
the Act, any event shall have occurred as a result of which, in the reasonable
opinion of counsel for the Company or counsel for the Underwriter, the
Prospectus as then amended or supplemented (or the prospectus contained in a new
registration statement filed by the Company pursuant to Paragraph 3(q)),
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, or
if, in the reasonable opinion of either such counsel, it is necessary at any
time to amend the Prospectus (or the prospectus contained in such
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new registration statement) to comply with the Act, the Company will notify you
promptly and prepare and file with the Commission an appropriate amendment or
supplement in accordance with Section 10 of the Act and will furnish to you
copies thereof.
(f) The Company will endeavor in good faith, in cooperation with
you, at or prior to the time the Registration Statement becomes effective, to
qualify the Securities for offering and sale under the securities laws or blue
sky laws of such jurisdictions as you may reasonably designate; PROVIDED,
HOWEVER, that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction or to make any changes in its capital structure or
articles of incorporation or in any other material aspects of its business or to
enter into any material agreement with any Blue Sky or state securities
commissioner. In each jurisdiction where such qualification shall be effected,
the Company will, unless you agree that such action is not at the time necessary
or advisable, use it best efforts to file and make such statements or reports at
such times as are or may reasonably be required by the laws of such jurisdiction
to continue such qualification until none of the Warrants are outstanding.
(g) The Company will make generally available (within the
meaning of Section 11(a) of the Act and the Regulations) to its security
holders, as soon as practicable, but in no event later than the first day of the
eighteenth full calendar month following the Effective Date, an earnings
statement of the Company, which will be in reasonable detail but which need not
be audited, covering a period of at least twelve months beginning after the
Effective Date, which earnings statements shall satisfy the requirements of
Section 11(a) of the Act and the Regulations as then in effect. The Company may
discharge this obligation in accordance with Rule 158 of the Regulations.
(h) During the period of two years commencing on the Effective
Date (unless the Company shall no longer have a class of equity securities
registered under Section 12(b) or 12(g) of the Exchange Act), the Company will
furnish to its shareholders an annual report (including financial statements
audited by its independent public accountants), in accordance with Rule 14a-3
under the Exchange Act, and, at its expense, furnish to the Underwriter (i)
within 105 days after the end of each fiscal year of the Company, a consolidated
balance sheet of the Company and its consolidated subsidiaries and a separate
balance sheet of each majority owned subsidiary of the Company the accounts of
which are not included in such consolidated balance sheet as of the end of such
fiscal year, and consolidated statements of operations, stockholder's equity and
cash flows of the Company and its consolidated subsidiaries and separate
statements of operations, stockholder's equity and cash flows of
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each of the majority owned subsidiaries of the Company the accounts of which are
not included in such consolidated statements, for the fiscal year then ended all
in reasonable detail and all certified by independent accountants (within the
meaning of the Act and the Regulations), (ii) within 50 days after the end of
each of the first three fiscal quarters of each fiscal year, similar balance
sheets for the Company as of the end of such fiscal quarter for the Company and
similar statements of operations, stockholder's equity and cash flows for the
Company for the fiscal quarter then ended, all in reasonable detail, and subject
to year end adjustment, all certified by the Company's principal financial
officer or the Company's principal accounting officer as having been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis, (iii) as soon as available, each report furnished to or filed with the
Commission or any securities exchange and each report and financial statement
furnished to the Company's shareholders generally, [and (iv) as soon as
available, such other material as the Underwriter may from time to time
reasonably request regarding the financial condition and operations of the
Company; PROVIDED, HOWEVER, that the Underwriter shall use such other material
only in connection with its activities as Underwriter hereunder and shall
otherwise keep such other material confidential.]
(i) For a period of eighteen months from the Closing Date, the
Company, at its expense, shall cause its regularly engaged independent certified
public accountants to review (but not audit), the Company's financial statements
for each of the first three quarters prior to the announcement of quarterly
financial information, the filing of the Company's 10-Q quarterly report and the
mailing, if any, of quarterly financial information to stockholders.
(j) Prior to the Closing Date or the Option Closing Date (if
any), the Company will not, directly or indirectly, without your prior written
consent, which shall not be unreasonably withheld or delayed, issue any press
release or other public announcement or hold any press conference with respect
to the Company or its activities with respect to the Offering (other than trade
releases issued in the ordinary course of the Company's business consistent with
past practices with respect to the Company's operations).
(k) The Company will deliver to you prior to filing, any
amendment or supplement to the Registration Statement or Prospectus proposed to
be filed after the Effective Date and will not file any such amendment or
supplement to which you shall reasonably object after being furnished such copy
unless counsel to the Company shall determine that such filing is required under
the Act or the Regulations.
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(l) During the period of 120 days commencing on the date hereof,
the Company will not at any time take, directly or indirectly, any illegal
action designed to, or which will constitute or which might reasonably be
expected to cause or result in illegal stabilization or manipulation of the
price of the Securities to facilitate the sale or resale of any of the
Securities.
(m) The Company will apply the net proceeds from the Offering
received by it substantially in the manner set forth under "Use of Proceeds" in
the Prospectus.
(n) The Company will use its best efforts to cause counsel for
the Company, the Company's accountants, and the officers and directors of the
Company to, respectively, furnish the opinions, the letters and the certificates
referred to in subsections of Paragraph 9 hereof, and, if the Company shall file
any amendment to the Registration Statement relating to the offering of the
Securities or any amendment or supplement to the Prospectus relating to the
offering of the Securities subsequent to the Effective Date, the Company will
use its best efforts to cause such counsel, such accountants, and such officers
and directors, respectively, to, at the time of such filing or at such
subsequent time as you shall reasonably specify, so long as Securities being
registered by such amendment or supplement are being underwritten by the
Underwriter, furnish to you such opinions, letters and certificates, each dated
the date of its delivery, of the same nature as the opinions, the letters and
the certificates referred to in said Paragraph 9, as you may reasonably request,
or, if any such opinion or letter or certificate cannot be furnished by reason
of the fact that such counsel or such accountants or any such officer or
director believes that the same would be inaccurate, the Company will use its
best efforts to have such counsel or such accountants or such officer or
director furnish an accurate opinion or letter or certificate with respect to
the same subject matter.
(o) The Company will comply in all material respects with all of
the provisions of any undertakings contained in the Registration Statement.
(p) The Company will reserve and keep available for issuance
that maximum number of its authorized but unissued shares of Common Stock which
are issuable upon exercise of the Warrants and issuable upon exercise of the
Underwriter's Warrants (including the underlying securities) outstanding from
time to time.
(q) During the period a Prospectus is required to be delivered
under the Act, the Company will timely prepare and file at its sole cost and
expense one or more post-effective amendments to the Registration Statement or a
new registration statement as required by law as will permit Warrant holders to
be
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furnished with a current prospectus in the event and at such time as the
Warrants are exercised, and the Company will use its best efforts and due
diligence to have the same be declared effective (with the intent that the same
be declared effective as soon as the Warrants become exercisable) and to keep
the same effective so long as the Warrants are outstanding. The Company will
deliver a draft of each such post-effective amendment or new registration
statement to the Underwriter at least ten days prior to the filing of such post-
effective amendment or registration statement.
(r) So long as any of the Warrants remain outstanding, the
Company will timely deliver and supply to its Warrant agent, as reasonably
requested thereby, sufficient copies of the Company's current Prospectus, as
will enable such Warrant agent to deliver a copy of such Prospectus to any
Warrant or other holder where such Prospectus delivery is by law required to be
made.
(s) So long as any of the Warrants remain outstanding, the
Company shall continue to employ the services of a firm of independent certified
public accountants reasonably acceptable to the Underwriter in connection with
the preparation of the financial statements to be included in any registration
statement to be filed by the Company hereunder, or any amendment or supplement
thereto. During the same period, the Company shall employ the services of a law
firm(s) reasonably acceptable to the Underwriter in connection with all legal
work of the Company, including the preparation of a registration statement to be
filed by the Company hereunder, or any amendment or supplement thereto. The
Company's current accounting firm, KPMG Peat Marwick LLP, and current law firm,
Kaye, Scholer, Fierman, Hays & Handler, LLP, are hereby acknowledged as being
acceptable to the Underwriter.
(t) So long as any of the Warrants remain outstanding, the
Company shall continue to appoint a Warrant agent for the Warrants, who shall be
reasonably acceptable to the Underwriter. The Underwriter hereby acknowledges
that Corporate Stock Transfer is acceptable as warrant agent.
(u) The Company agrees that it will, upon the Effective Date,
for a period of two years from the Effective Date, use its best efforts to cause
a designee of the Underwriter to be elected as a board member (the "Member") of
its Board of Directors where such Member shall attend meetings of the Board,
receive all notices and other correspondence and communications sent by the
Company to members of its Board of Directors and receive compensation equal to
the entitlement of other non-officer Directors. In addition, such Member shall
be entitled to receive reimbursement for all reasonable costs incurred in
attending such meetings including, but not limited to (if reasonably required in
connection with any meeting held outside the New York City metropolitan area),
food, lodging and
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transportation. The Company further agrees that, during said two year
period, it shall schedule no less than [four (4)] meetings of its Board of
Directors in each such year and such meetings shall be held quarterly each
year and advance notice of such meetings identical to the notice given to
directors shall be given to the Advisor. The Company will not increase or
authorize an increase in the compensation of the executive officers without
the express approval of the Compensation Committee or the entire Board of
Directors for a period of two years from the Effective Date. The
Compensation Committee shall be comprised of members of the Board of
Directors, including two delegates of the Company and, to the extent the
Underwriter designates a member of the Board, one from the Underwriter.
Further, during such two year period, the Company shall give notice to the
Underwriter with respect to any proposed acquisitions, mergers,
reorganizations or other similar transactions which the Underwriter agrees to
keep confidential. Alternatively to the Underwriter's right to designate a
Member, the Underwriter shall have the right during such two-year period, in
its sole discretion, to designate one person as an advisor ("Advisor") to the
Board of Directors who shall have the right to observe each meeting of the
Board of Directors and shall be entitled to receive the same compensation,
expense reimbursements and other benefits as set forth above for the Member.
Any designee or representative of the Underwriter who has not been elected or
appointed to the Board of Directors, but who shall be attending a meeting
thereof, shall be required to execute a confidentiality agreement
satisfactory to the Company.
The Company agrees, to the extent permitted by law, to indemnify
and hold the Underwriter and such Advisor or Member harmless against any and all
claims, actions, damages, costs and expenses, and judgments arising solely out
of the attendance and participation of your designee at any such meeting of the
Board of Directors. The Company will use its best efforts to obtain and
maintain a liability insurance policy affording coverage for the acts of its
officers and directors, which policy shall not exceed $50,000 per year in
premiums, and agrees, to include the Underwriter's designee Member or Advisor as
an insured under such policy.
(v) Upon the Closing Date, the Company shall have entered into
an agreement with the Underwriter in form reasonably satisfactory to the
Underwriter (the "Consulting Agreement"), pursuant to which the Underwriter will
be retained as a financial consultant for a twenty-four month period commencing
as of the Closing Date, and will be paid a fee of $6,000 a month for such term,
$72,000 shall be paid upon the Closing Date. The balance will be paid out
monthly in equal installments over the subsequent 12 months commencing one month
after the closing of the public offering.
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(w) The Company will use its best efforts to cause the Common
Stock and Warrants to be quoted on the NNM, not later than the Closing Date.
Thereafter, (unless the Company is acquired) the Company will use its best
efforts to maintain such listing or cause such securities to be listed on a
national securities exchange or in a comparable inter-dealer quotation system
for at least five years from the date of this Agreement (or until such earlier
date on which no Warrants remain outstanding).
(x) The Company will apply for listing in Standard and Poors
Corporation Reports or Moodys OTC Guide and shall use its best efforts to have
the Company included in such publications for at least five years from the
Closing Date (unless the Common Stock is listed on the New York Stock Exchange
or the American Stock Exchange or unless the Company shall no longer have a
class of equity securities registered under Section 12(b) or 12(g) of the
Exchange Act).
(y) The Company will use its best efforts to obtain from each
person who is currently an officer or director of the Company or a 5% or greater
stockholder of the Company, or family members of the forgoing, exclusive of
institutional holders, a written agreement, in form and substance reasonably
satisfactory to you and your counsel, to the effect that such person shall not
offer, sell or contract to sell, or otherwise dispose of in a public sale or
public offering, directly or indirectly, without your prior written consent,
which shall not be unreasonably withheld (or pursuant to such other agreement
with respect to the sale of capital stock as may be required by state "Blue Sky"
laws in order to qualify the Offering in any such State), any shares of the
Common Stock owned by such person or any securities convertible into, or
exchangeable for, or warrants to purchase or acquire, shares of Common Stock,
for a period of six months from the Effective Date, except as otherwise
described in or contemplated by the Registration Statement or as may be required
by applicable state blue sky-laws. For a period of six months from the
Effective Date, the Company shall not issue any shares of Common Stock or
preferred stock or any warrants, options or other rights to purchase Common
Stock or preferred stock without the consent of the Underwriter, which shall not
be unreasonably withheld, except for (i) the Securities and the Additional
Securities, (ii) the Underwriter's Securities, (iii) Warrant Shares, (iv)
securities issuable upon the exercise of other options or warrants outstanding
as of the Closing Date, (v) options to purchase shares of Common Stock pursuant
to the Company's stock option plan and shares of Common Stock issuable upon the
exercise of such options, (vi) shares of Common Stock issuable upon the
conversion of any convertible securities of the Company and (vii) a merger,
acquisition or other business combination. In addition, the Company shall not
file a new registration statement on form S-8 (or a comparable form) for the
registration of shares of Common Stock underlying stock options
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for a period of six (6) months from the Effective Date, without the underwriters
prior knowledge and at least 30 days notice.
(z) The Company agrees that it will employ the services of a
financial public relations firm reasonably acceptable to the Underwriter for a
period of at least twelve months following the Effective Date. The Underwriter
hereby acknowledges that Rick Roland Perry is acceptable.
iv. SALE, PURCHASE AND DELIVERY OF SECURITIES; CLOSING DATE; PUBLIC
OFFERING.
(a) On the basis of the warranties, representations and
agreements herein contained, and subject to the satisfaction or waiver of all
the terms and conditions of this Agreement, the Company agrees to issue and sell
to the Underwriter, and the Underwriter agrees to purchase from the Company, the
Securities at a price of $______ per Unit, less, in the case of each such Unit,
an underwriting discount of ten percent (10%) of the price for such Security.
The Underwriter may allow a concession not exceeding $. per share of Common
Stock and $. per Warrant to Selected Dealers who are members of the NASD,
and to certain foreign dealers, and such dealers may reallow to NASD members and
to certain foreign dealers a concession not exceeding $. per share of Common
Stock and $ per Warrant.
(b) Delivery of the Securities and payment therefor shall be
made at 10:00 A.M., New York time on the Closing Date, as hereinafter defined,
at the offices of the Underwriter at __________ or such other location as may be
agreed upon by you and the Company. Delivery of certificates for the Common
Stock and Warrants (in definitive form and registered in such names and in such
denominations as you shall request by written notice to the Company delivered at
least four business days' prior to the Closing Date), shall be made to you for
the account of the Underwriter against payment of the purchase price therefor by
certified or bank check or wire transfer payable in New York Clearing House
funds to the order of the Company. The Company will make such certificates
available for inspection at least one business day prior to the Closing Date at
such place as you shall designate.
(c) The "Closing Date" shall be , 1996, or such other
date not later than the fourth business day following the effective date of the
Registration Statement as you and the Company shall determine.
(d) The cost of original issue tax stamps, if any, in connection
with the issuance and delivery of the Securities by the Company to the
Underwriter shall be borne by the Company. The Company will pay and hold the
Underwriter, and any subsequent holder of the Securities, harmless from any and
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all liabilities with respect to or resulting from any failure or delay in paying
federal and state stamp taxes, if any, which are payable in connection with the
original issuance or sale to the Underwriter of the Securities or any portions
thereof.
(e) As soon, on or after the Effective Date, as the Underwriter
deems advisable, the Underwriter shall make a public offering of the Securities
(other than to residents of or in any jurisdiction in which qualification of the
Securities is required and has not become effective) at the initial public
offering prices and upon the other terms set forth in the Prospectus. The
Underwriter may from time to time increase or decrease the public offering
prices of the Securities after the distribution thereof has been completed to
such extent as the Underwriter, in its sole discretion, deems advisable.
v. SALE, PURCHASE AND DELIVERY OF ADDITIONAL SECURITIES; OPTION
CLOSING DATE.
(a) Upon the basis of the representations, warranties and
agreements herein contained, and subject to the satisfaction or waiver of all
the terms and conditions of this Agreement, the Company agrees to sell to the
Underwriter, and the Underwriter shall have the option (the "Option") to
purchase from the Company, the Additional Securities at the same price per Unit
as set forth in Paragraph 4(a) above. Additional Securities may be purchased
solely for the purpose of covering over-allotments made in connection with the
distribution and sale of the Units as contemplated by the Prospectus.
(b) The Option to purchase all or part of the Additional
Securities covered thereby is exercisable by you at any time and from time to
time before the expiration of a period of 45 calendar days from the date of the
Effective Date (the "Option Period") by written notice received by the Company
setting forth the number of Additional Securities for which the Option is being
exercised, the name or names in which the certificates for such Additional
Securities are to be registered and the denominations of such certificates.
Upon each exercise of the Option, the Company shall sell to the Underwriter the
aggregate number of Additional Securities specified in the notice exercising
such Option.
(c) Delivery of the Additional Securities with respect to which
Options shall have been exercised and payment therefor shall be made at 10:00
A.M., New York time on the Option Closing Date, as hereinafter defined, at the
offices of the Underwriter at _________ or at such other locations as may be
agreed upon by you and the Company. Delivery of certificates for Additional
Securities shall be made to you for the account of the Underwriter against
payment of the purchase price therefor by certified or bank check or wire
transfer in New York Clearing House Funds to the order of the Company. The
Company will make
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certificates for Additional Securities to be purchased at the Option Closing
Date available for inspection at least one business day prior to such Option
Closing Date at such place as you shall designate.
(d) The "Option Closing Date" shall be the date not later than
four business days after the end of the Option Period as you shall determine and
advise the Company by at least three full business days' notice, unless some
other time is agreed upon between you and the Company.
(e) The obligations of the Underwriter to purchase and pay for
Additional Securities at such Option Closing Date shall be subject to compliance
or waiver as of such date with all the conditions specified in Paragraph 9
herein and the delivery to you, or waiver of such requirement of opinions,
certificates and letters, each dated such Option Closing Date, substantially
similar in scope to those specified in Paragraph 9 herein.
(f) The cost of original issue tax stamps, if any, in connection
with the issuance and delivery of the Additional Securities by the Company to
the Underwriter shall be borne by the Company. The Company will pay and hold
the Underwriter, and any subsequent holder of Additional Securities, harmless
from any and all liabilities with respect to or resulting from any failure or
delay in paying federal and state stamp taxes, if any, which are payable in
connection with the original issuance or sale to the Underwriter of the
Additional Securities or any portion thereof.
vi. WARRANT SOLICITATION FEE.
Subject to the rules and regulations of the National Association of
Securities Dealers, Inc. (the "NASD"), the Company agrees to pay the Underwriter
a fee of four percent (4%) of the aggregate exercise price of the Warrants if:
(i) the market price of the Common Stock is greater than the exercise price of
the Warrants on the date of exercise; (ii) the exercise of the Warrants is
solicited by a member of the NASD; (iii) the Warrants are not held in a
discretionary account; (iv) the disclosure of compensation arrangements was made
both at the time of the Offering and at the time of the exercise of the Warrant;
and (v) the solicitation of the Warrant is not in violation of Rule 10b-6
promulgated under the Exchange Act. The Company agrees not to solicit the
exercise of any Warrants other than through the Underwriter and will not
authorize any other dealer to engage in such solicitation without the prior
written consent of the Underwriter which will not be unreasonably withheld. The
Warrant solicitation fee will not be paid in a non-solicited transaction. Any
request for exercise will be presumed to be unsolicited unless the customer
states in writing that the transaction was solicited and designates in writing
the broker/dealer to receive
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compensation for the exercise. The Company will not have any obligation to pay
any fee for the solicitation of Warrants other than to the Underwriter or I.
Friedman Equities, Inc. The Company will not pay any fee pursuant to this
Paragraph 6 for any exercise of Warrants during the twelve-month period
beginning on the Effective Date.
vii. REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITER.
The Underwriter represents and warrants to the Company that:
(a) The Underwriter is a member in good standing of the NASD,
and has complied with all NASD requirements concerning net capital and
compensation to be received in connection with the Offering.
(b) To the Underwriter's knowledge, there are no claims for
services in the nature of a finder's or origination fee with respect to the sale
of the Securities hereunder, which the Company is, or may become, obligated to
pay other than financial consulting fees payable to I. Friedman Equities, Inc.
viii. PAYMENT OF EXPENSES.
(a) The Company will pay and bear all of its costs, fees and
expenses incident to and in connection with: (i) the original issuance, sale
and delivery of the Units and Additional Securities, including all expenses and
fees incident to the preparation, printing and filing (including the mailing and
distribution of preliminary and final prospectuses) of the Registration
Statement (including all exhibits thereto), each Preliminary Prospectus, the
Prospectus, and amendments and post-effective amendments thereof and supplements
thereto, and this Agreement and related documents, Preliminary and Final Blue
Sky Memoranda, including the cost of preparing and copying all copies thereof in
quantities deemed reasonably necessary by the Underwriter; (ii) advertising
costs and expenses, including, but not limited to, the costs and expenses in
connection with the "road show," (to be held at the Garden City Hotel and the
Hotel Intercontinental in New York City), memorabilia and "tombstones," in The
Wall Street Journal, The Los Angeles Times and the Long Island Business News;
(iii) the printing, engraving, issuance and delivery of the Shares, Warrants,
Warrant Shares, Additional Securities, Underwriter's Warrants and the securities
underlying the Underwriter's Warrant, including any transfer or other taxes
payable thereon in connection with the original issuance thereof (excluding such
transfer or other taxes as may be payable in connection with the original
issuance of the securities underlying the Underwriter's Warrants or in
connection with the issuance of Common Stock upon the exercise of Warrants);
(iv) the qualification of the Common Stock and Warrants under the state
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securities or "Blue Sky" laws selected by the Underwriter and the Company, and
disbursements and reasonable fees of counsel for the Underwriter in connection
therewith up to a maximum of $20,000 plus the filing fees for such states; (v)
fees and disbursements of counsel and accountants for the Company; (vi) all
reasonable traveling and lodging expenses incurred by us and/or our counsel in
connection with reasonable visits to, and examination of, the Company's premises
not to exceed $3,000; (vii) other expenses and disbursements incurred on behalf
of the Company including transaction bibles and lucite cube mementos in such
reasonable quantities as the Underwriter may request; (viii) the filing fees
payable to the Commission and the NASD; and (ix) any listing of the Common Stock
and Warrants on a securities exchange or on NASDAQ.
(b) In addition to the expenses to be paid and borne by the
Company referred to in Paragraph 8(a) above, the Company shall reimburse you at
closing for expenses incurred by you in connection with the Offering (for which
you need not make any accounting), in the amount of 3% of the price to the
public of the Securities and Additional Securities sold in the Offering. This
3% non-accountable expense allowance shall cover the fees of your legal counsel,
but shall not include any expenses for which the Company is responsible under
Paragraph 8(a) above, including the reasonable fees and disbursements of your
legal counsel with respect to Blue Sky matters in accordance with Paragraph 8(a)
above. The Underwriter hereby acknowledges the receipt prior to the date hereof
of $56,000 of the amounts due pursuant to this Paragraph 8(b).
ix. CONDITIONS OF UNDERWRITER'S OBLIGATIONS.
The obligations of the Underwriter to consummate the transactions
contemplated by this Agreement shall be subject to the continuing accuracy in
all material respects of the representations and warranties of the Company
contained herein (except those representations and warranties that speak as of a
specific date) and the accuracy in all material respects of the written
statements of the Company and its officers and directors made pursuant to the
provisions hereof, as of the date hereof and as of the Closing Date (except
those representations and warranties that speak as of a specific date), and to
the performance by the Company, or the waiver thereof by the Underwriter, in all
material respects of its covenants and agreements hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., New York time, on the date following the date of this
Agreement, or such later date and time as shall be consented to in writing by
you and, on or prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement and no proceedings for that purpose
shall have been instituted or to your knowledge or the knowledge
23
<PAGE>
of the Company, shall be pending or contemplated by the Commission and any
request on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the Underwriter and
after the date hereof no amendment or supplement shall have been filed to the
Registration Statement or Prospectus without your prior consent, which shall not
have been unreasonably withheld or delayed.
(b) The Underwriter shall not have advised the Company that the
Registration Statement or the Prospectus or any amendment thereof or supplement
thereto contains an untrue statement of a fact which, in the Underwriter's
reasonable opinion, is material, or omits to state a fact which, in the
Underwriter's reasonable opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) Between the time of the execution and delivery of this
Agreement and the Closing Date, there shall be no litigation instituted against
the Company or any of its officers or directors, and between such dates there
shall be no proceeding instituted or, to the Company's knowledge, threatened
against the Company or any of its officers or directors, before or by any
federal, state or county commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, in which litigation or proceeding
an unfavorable ruling, decision or finding is reasonably possible and would have
a Material Adverse Effect.
(d) The representations and warranties of the Company contained
herein and in each certificate and document contemplated under this Agreement to
be delivered to you shall be true and correct in all material respects at the
Closing Date as if made at the Closing Date (except those representations and
warranties that speak as of a specific date, and all covenants and agreements
contained herein to be performed on the part of the Company, and all conditions
contained herein to be fulfilled or complied with by the Company, at or prior to
the Closing Date shall be performed, fulfilled or complied with in all material
respects or waived by the Underwriter.
(e) At the Closing Date, you shall have received the opinion of
Kaye, Scholer, Fierman, Hays & Handler, LLP, counsel to the Company and/or other
inside or outside counsel of the Company, dated as of such Closing Date,
addressed to the Underwriter and in form and substance satisfactory to counsel
to the Underwriter, substantially to the effect set forth in Exhibit A attached
hereto.
(f) On or prior to the Closing Date, counsel for the Underwriter
shall have been furnished such documents,
24
<PAGE>
certificates and opinions as they may reasonably require for the purpose of
enabling them to review the matters referred to in subparagraph (e) of this
Paragraph 9, or in order to evidence the accuracy, completeness or satisfaction
of any of the representations, warranties or conditions herein contained.
(g) Prior to the Closing Date:
(i) There shall have been no material adverse change in the
condition or prospects or the business activities, financial or otherwise, of
the Company and its subsidiaries taken as a whole from the latest dates as of
which such condition is set forth in the Registration Statement, except for any
such change described in or contemplated by the Registration Statement;
(ii) There shall have been no material transaction, outside
the ordinary course of business, entered into by the Company from the latest
date as of which the financial condition of the Company is set forth in the
Registration Statement and Prospectus which is material to the Company, which is
(x) required to be disclosed in the Prospectus or Registration Statement and is
not so disclosed, and (y) likely to have a Material Adverse Effect;
(iii) The Company shall not be in default under any material
provision of any instrument relating to any outstanding indebtedness, except as
described in or contemplated by the Registration Statement and except such as
will not have a Material Adverse Effect;
(iv) No material amount of the assets of the Company shall
have been pledged, mortgaged or otherwise encumbered, except as described in or
contemplated by the Registration Statement and except for liens incurred in the
ordinary course of business (including, but not limited to, the credit facility
with Chase, loans or guarantees for the Company's products or productions and
liens by professional guilds);
(v) Between the time of the execution and delivery of this
Agreement and the Closing Date, no action, suit or proceeding, at law or in
equity, shall have been pending or, to the Company's knowledge, threatened
against the Company or affecting any of its properties or businesses before or
by any court or federal or state commission, board or other administrative
agency wherein an unfavorable decision, ruling or finding is reasonably likely
and would have a Material Adverse Effect, except as described in or contemplated
by the Registration Statement;
(vi) No stop order shall have been issued under the Act and
no proceedings therefor shall have been
25
<PAGE>
initiated or, to the Company's knowledge, threatened by the Commission; and
(vii) Each of the representations and warranties of the
Company contained in this Agreement and in each certificate and document
contemplated under this Agreement to be delivered to you was, when originally
made and is at the time such certificate is dated (except for those
representations and warranties that speak as of a specific date), true and
correct in all material respects.
(h) At the Closing Date, you shall have received a certificate
of the Company signed by a Chief Executive Officer of the Company and the
principal financial officer of the Company, dated as of the Closing Date, to the
effect that the conditions set forth in subparagraph (g) above have been
satisfied in all material respects and that, as of the Closing Date, the
representations and warranties of the Company set forth in Paragraph 2 herein
are true and correct, as if made on and as of the Closing Date (except for those
representations and warranties that speak as of a specific date), in all
material respects. Any certificate signed by any officer of the Company and
delivered to you or to counsel for the Underwriter shall be deemed a
representation and warranty by the Company to the Underwriter as to the
statements made therein.
(i) At the time this Agreement is executed, and at the Closing
Date, you shall have received a letter, addressed to the Underwriter and in form
and substance reasonably satisfactory in all material respects to you and
counsel for the Underwriter, from KPMG Peat Marwick LLP dated as of the date of
this Agreement and as of the Closing Date, substantially in the form of EXHIBIT
B hereto.
(j) All proceedings taken in connection with the authorization,
issuance or sale of the Securities, Warrant Shares, Additional Securities and
the Underwriter's Securities as herein contemplated shall be reasonably
satisfactory in form and substance to you and to counsel to the Underwriter, and
the Underwriter shall have received from such counsel an opinion, dated as the
Closing Date with respect to such of these proceedings as you may reasonably
require.
(k) The obligation of the Underwriter to purchase Additional
Securities hereunder is subject to the accuracy of the representations and
warranties of the Company contained herein on and as of the Option Closing Date
in all material respects and to the satisfaction or waiver on or prior to the
Option Closing Date of the conditions set forth herein in all material respects.
(l) On the Closing Date there shall have been duly tendered to
you for your account the appropriate number of shares of Common Stock and
Warrants constituting the Securities.
26
<PAGE>
x. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Underwriter, each of its agents and
counsel and each person, if any, who controls the Underwriter ("controlling
person") within the meaning of either Section 15 of the Act or Section 20 of the
Exchange Act, against any and all losses, liabilities, claims, damages, actions
and expenses or liability, joint or several, whatsoever (including but not
limited to any and all expense whatsoever reasonably incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever), joint or several, to which it or such controlling persons may
become subject under the Act, the Exchange Act or under any other statute or at
common law or otherwise, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any Preliminary Prospectus or the Prospectus (as from time to time
amended and supplemented); in any post-effective amendment or amendments or any
new registration statement and prospectus in which is included the Warrant
Shares of the Company issued or issuable upon exercise of the Warrants, or
Warrant Shares issued or issuable upon exercise of the Underwriter's Warrants;
or in any application or other document or written communication (in this
Paragraph 10 collectively called "application") executed by the Company or based
upon written information furnished by the Company expressly to be included in an
application filed in any jurisdiction in order to qualify the Securities,
Warrant Shares, Additional Securities, Underwriter's Warrants and Underwriter's
Securities under the securities laws thereof or filed with the Commission or any
securities exchange; or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein
not misleading (in light of the circumstances under which they were made),
unless such statement or omission was made in reliance upon or in conformity
with written information furnished to the Company with respect to the
Underwriter by or on behalf of the Underwriter, or with respect to any of the
selling security holders set forth in the Registration Statement by or on behalf
of any of such selling security holders, expressly for use in any Preliminary
Prospectus, the Registration Statement or Prospectus, or any amendment or
supplement thereof, or in any application, as the case may be. Notwithstanding
the foregoing, the Company shall have no liability under this Paragraph 10(a) if
any such untrue statement or omission made in a Preliminary Prospectus, is
corrected in the Prospectus or any amendment or supplement thereto and the
Underwriter failed to deliver to the person or persons alleging the liability
upon which indemnification is being sought, at or prior to the written
confirmation of such sale, a copy of the Prospectus or such amendment or
supplement. This indemnity will be in addition to any liability which the
Company may otherwise have.
27
<PAGE>
(b) The Underwriter agrees to indemnify and hold harmless the
Company and each of the officers and directors of the Company who have signed
the Registration Statement, each of its agents and counsel, and each other
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing
indemnity from the Company to the Underwriter in Paragraph 10(a), but only with
respect to any untrue statement or alleged untrue statement of any material fact
contained in or any omission or alleged omission to state a material fact
required to be stated in any Preliminary Prospectus, the Registration Statement
or Prospectus (as from time to time amended and supplemented) or any post-
effective amendment or amendments or supplement thereof or necessary to make the
statements therein not misleading or in any new registration statement and
prospectus in which is included the Securities, the Additional Securities, the
Underwriters' Securities, the Warrant Shares of the Company issued or issuable
upon exercise of the Warrants, or the Warrant Shares issued or issuable upon
exercise of the Underwriter's Warrants or in any application made in reliance
upon, and in conformity with, written information furnished to the Company by
you expressly for use in the preparation of such Preliminary Prospectus, the
Registration Statement, the Prospectus or applications with respect to the
Underwriter or directly relating to the transactions effected or to be effected
by the Underwriter in connection with the Offering. This indemnity agreement
will be in addition to any liability which the Underwriter may otherwise have.
(c) If any action is brought against any indemnified party (the
party seeking such indemnifications hereinafter called the "Indemnitee") in
respect of which indemnity may be sought against another party pursuant to the
foregoing (the "Indemnitor"), the Indemnitor shall assume the defense of the
action, including the employment and fees of counsel (reasonably satisfactory to
the Indemnitee) and payment of expenses. Any Indemnitee shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such Indemnitee unless the employment of
such counsel shall have been authorized in writing by the Indemnitor in
connection with the defense of such action. If the Indemnitor shall have
employed counsel to have charge of the defense or shall previously have assumed
the defense of any such action or claim, the Indemnitor shall not thereafter be
liable to any Indemnitee in investigating, preparing or defending any such
action or claim. Each Indemnitee shall promptly notify the Indemnitor of the
commencement of any litigation or proceedings or any other action against the
Indemnitee in respect of which indemnification is to be sought.
(d) In order to provide for just and equitable contribution
under the Act in any case in which: (i) an Indemnitee makes a claim for
indemnification pursuant
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<PAGE>
to Paragraph 10 hereof, but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the time to appeal
has expired or the last right of appeal has been denied) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Paragraph 10 provides for indemnification of such case; or (ii)
contribution under the Act may be required on the part of an Indemnitor in
circumstances for which indemnification is provided under this Paragraph 10,
then, and in each such case, the Company and the Underwriter shall contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after any contribution from others) in such proportion so that the
Underwriter is responsible for the portion represented by dividing the total
compensation received by the Underwriter herein or in connection with the
Offering by the total purchase price of all Securities sold in the underwritten
public offering and the Company is responsible for the remaining portion;
provided, that in any such case, no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
The foregoing contribution agreement shall in no way affect the
contribution liabilities of any persons having liability under Section 11 of the
Act other than the Company and the Underwriter. If the full amount of the
contribution specified in this paragraph is not permitted by law, then the
Indemnitee and each person who controls the Indemnitee shall be entitled to
contribution from the Indemnitor to the full extent permitted by law. No
contribution shall be requested with regard to the settlement of any matter from
any party who did not consent in writing to such settlement.
(e) Within fifteen (15) days after receipt by any party to this
Agreement (or its representative) of notice of the commencement of any action,
suit or proceeding, such party will, if a claim for contribution in respect
thereof is made against another party (the "contributing party"), notify, in
accordance with Paragraph 13 hereof, the contributing party of the commencement
thereof, but the omission so to notify the contributing party will not relieve
it from any liability it may have to any other party other than for contribution
hereunder.
In case any such action, suit or proceeding is brought against any
party, and such party notifies, in accordance with Paragraph 13 hereof, a
contributing party of the commencement thereof within the aforesaid fifteen (15)
days, the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party seeking contribution without the written consent of such contributing
party. The
29
<PAGE>
indemnification provisions contained in this Paragraph 11 are in addition to any
other rights or remedies which either party hereto may have with respect to the
other or hereunder.
xi. REPRESENTATIONS, WARRANTIES, AGREEMENTS TO SURVIVE DELIVERY.
The respective indemnity and contribution agreements by the
Underwriter and the Company contained in Paragraph 10 hereof, and the covenants,
representations and warranties of the Company and the Underwriter set forth in
this Agreement required by its terms to be performed after the Closing Date,
shall remain operative and in full force and effect regardless of (i) any
investigation made by the Underwriter or on its behalf or by or on behalf of any
person who controls the Underwriter, or by the Company or any controlling person
of the Company or any director or any officer of the Company, (ii) acceptance of
any of the Securities and payment therefor, or (iii) with respect to Paragraph
10 hereof, any termination of this Agreement, and shall survive the delivery of
the Securities; and any successor of the Underwriter or the Company, or of any
person who controls you or the Company or any other indemnified party, as the
case may be, shall be entitled to the benefit of such respective indemnity and
contribution agreements. The respective indemnity and contribution agreements
by the Underwriter and the Company contained in Paragraph 10 above shall be in
addition to any liability which the Underwriter and the Company may otherwise
have.
xii. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
(a) This Agreement shall become effective at 10:00 A.M., New
York time, on the first full business day following the day on which you and the
Company receive notification that the Registration Statement became effective.
(b) This Agreement may be terminated by the Underwriter or the
Company by notifying the other party hereto at any time on or before the Closing
Date, if any domestic or international event or act or occurrence has materially
disrupted, or in such party's reasonable opinion will in the immediate future
materially disrupt, securities markets in the United States; or if trading in
securities generally on the New York Stock Exchange, the American Stock
Exchange, or in the over-the-counter market in the United States shall have been
suspended, or minimum or maximum prices for trading in securities generally
shall have been fixed, or maximum ranges for prices for securities shall have
been required, on the over-the-counter market by the NASD or NASDAQ or by order
of the Commission or any other governmental authority having jurisdiction; or if
the Company shall have sustained a loss material to the Company and its
subsidiaries taken as a whole by fire, flood, accident,
30
<PAGE>
hurricane, earthquake, theft, sabotage or other calamity or malicious act which,
whether or not such loss shall have been insured, will, in such party's
reasonable opinion, make it inadvisable to proceed with the offering, sale and
delivery of the Securities; or if there shall have been a material adverse
change in the conditions of the United States securities market in general, as
in such party's reasonable judgment would make it inadvisable to proceed with
the offering, sale and delivery of the Securities.
(c) If any party elects to terminate this Agreement as provided
in this Paragraph 12, the other party shall be notified promptly by such
terminating party by telephone or facsimile, confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding,
if this Agreement shall terminate or shall not be carried out within the time
specified herein solely by reason of any failure on the part of the Company to
perform any undertaking, or to satisfy any condition of this Agreement by it to
be performed or satisfied, the sole liability of the Company to the Underwriter,
in addition to the obligations assumed by the Company pursuant to Paragraph 8
herein, will be to reimburse the Underwriter on an accountable basis for the
following: (i) reasonable Blue Sky counsel fees and expenses to the extent set
forth in Paragraph 8(a)(iv); (ii) Blue Sky filing fees to that same extent; and
(iii) such other reasonable out-of-pocket expenses actually incurred by the
Underwriter (including the reasonable fees and disbursements of their counsel),
to the extent set forth in Paragraph 8(a), in connection with this Agreement and
the proposed offering of the Securities, but in no event to exceed the sum of
$100,000 less such amounts as shall have already been paid pursuant to Section
8(b) or otherwise. The Company shall not in any event be liable to the
Underwriter for the loss of anticipated profits from the transactions covered or
contemplated by this Agreement or the Registration Statement.
Anything in this Agreement to the contrary notwithstanding, if
this Agreement shall be terminated by you because you have exercised your rights
pursuant to Paragraph 12(b) above, the Company shall not be under any liability
to you except, on an accountable basis, for the portion of the non-accountable
expense allowance referred to in Paragraph 8(b) for which expenses have actually
been paid or incurred by you, and any balance will be returned by you to the
Company.
xiii. NOTICES.
All communications hereunder, except as herein otherwise specifically
provided, shall be in writing and, if sent to the Underwriter, shall be mailed,
delivered or telegraphed and confirmed to the Underwriter at Lew Lieberbaum &
Co., Inc., 600 Old Country Road, Garden City, New York 11530, Attention: Leonard
31
<PAGE>
Neuhaus, with a copy thereof to Felice F. Mischel, Esq., Schneck Weltman
Hashmall & Mischel LLP, 1285 Avenue of the Americas, New York, New York 10019,
and, if sent to the Company, shall be mailed, delivered or telegraphed and
confirmed to the Company at 11601 Wilshire Boulevard, 21st Floor, Los Angeles
California 90025, Attention: Donald Kushner, Co-Chairman of the Board, with a
copy thereof to Barry L. Dastin, Esq., Kaye, Scholer, Fierman, Hays & Handler,
LLP, 1999 Avenue of the Stars, Suite 1600, Los Angeles California 90067.
xiv. PARTIES.
This Agreement shall inure solely to the benefit of and shall be
binding upon, the Underwriter, the Company and the controlling persons,
directors and officers referred to in Paragraph 10 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained. No
purchaser of any of the Securities or Additional Securities from the Underwriter
shall be deemed a successor or assign by reason merely of such purchase.
xv. CONSTRUCTION.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York, without giving effect to the
rules governing conflict of laws, and shall supersede any agreement or
understanding, oral or in writing, express or implied, between the Company and
you relating to the sale of any of the Securities.
xvi. JURISDICTION AND VENUE.
The Company agrees that the courts of the State of New York shall have
jurisdiction over any litigation arising from this Agreement, and venue shall be
proper in the Supreme Court of New York, County of Nassau or in the United
States District Court for the Eastern District of New York.
xvii. COUNTERPARTS.
This agreement may be executed in counterparts.
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space
32
<PAGE>
provided below for that purpose, whereupon this letter shall constitute a
binding agreement between us.
Very truly yours,
THE KUSHNER-LOCKE COMPANY
By:
------------------------------
Donald Kushner, Co-Chairman
of the Board
Accepted as of the date first above
written:
LEW LIEBERBAUM & CO., INC.
By:
------------------------------
33
<PAGE>
EXHIBIT 4.5
Proof of July 8, 1996
[FORM OF PUBLIC WARRANT]
THE KUSHNER-LOCKE COMPANY
A CALIFORNIA CORPORATION
LEW LIEBERBAUM & CO., INC.
AND
CORPORATE STOCK TRANSFER
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
------- ----
1. APPOINTMENT OF WARRANT AGENT . . . . . . . . . . . . . . . . . 1
2. FORM OF WARRANT . . . . . . . . . . . . . . . . . . . . . . . 2
3. COUNTERSIGNATURE AND REGISTRATION . . . . . . . . . . . . . . 2
4. TRANSFERS AND EXCHANGES . . . . . . . . . . . . . . . . . . . 3
5. EXERCISE OF WARRANTS; PAYMENT OF WARRANT SOLICITATION FEE . . 3
6. PAYMENT OF TAXES . . . . . . . . . . . . . . . . . . . . . . . 6
7. MUTILATED OR MISSING WARRANTS . . . . . . . . . . . . . . . . 6
8. RESERVATION OF COMMON STOCK . . . . . . . . . . . . . . . . . 7
9. ADJUSTMENTS OF WARRANT PRICE AND NUMBER
OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . 7
10. FRACTIONAL INTERESTS . . . . . . . . . . . . . . . . . . . . . 10
11. NOTICES TO WARRANTHOLDERS . . . . . . . . . . . . . . . . . . 10
12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS . . . . . . . 11
13. REDEMPTION OF WARRANTS . . . . . . . . . . . . . . . . . . . . 11
14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT . . 12
15. DUTIES OF WARRANT AGENT . . . . . . . . . . . . . . . . . . . 12
16. CHANGE OF WARRANT AGENT . . . . . . . . . . . . . . . . . . . 14
17. IDENTITY OF TRANSFER AGENT . . . . . . . . . . . . . . . . . . 14
18. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
19. SUPPLEMENTS AND AMENDMENTS . . . . . . . . . . . . . . . . . . 16
20. NEW YORK CONTRACT. . . . . . . . . . . . . . . . . . . . . . . 16
21. BENEFITS OF THIS AGREEMENT . . . . . . . . . . . . . . . . . . 16
22. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . 16
23. WARRANTHOLDER NOT DEEMED A SHAREHOLDER . . . . . . . . . . . . 16
24. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . 17
i
<PAGE>
WARRANT AGENT AGREEMENT, dated as of , 1996, among THE
KUSHNER-LOCKE COMPANY, INC., a California corporation (the "Company"), LEW
LIEBERBAUM & CO., INC. ("Lieberbaum"), and CORPORATE STOCK TRANSFER, as
warrant agent (hereinafter called the "Warrant Agent").
WHEREAS, the Company proposes to issue and sell through a secondary
public offering (the "SPO") underwritten by Lieberbaum (the "Underwriter"), an
aggregate of up to _______ units ("Units") each consisting of two shares of
common stock, no par value per share of the Company (the "Common Stock"), and
one Class C Redeemable Common Stock Purchase Warrants (the "Warrants") and,
pursuant to the Underwriter's overallotment option (the "Underwriter's
Overallotment Option"), up to an additional ________ Units;
WHEREAS, each Warrant will entitle the holder to purchase one share of
Common Stock;
WHEREAS, in connection with the SPO the Company proposes to sell to
the Underwriter warrants (the "Underwriter's Option") to purchase up to _______
Units in accordance with that certain Underwriter's Warrant Agreement, dated
_______, 1996, by and between the Company and the Underwriter (the
"Underwriter's Warrant Agreement");
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and exercise of the Warrants;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants (the
"Warrant Certificates") and the respective rights and obligations thereunder of
the Company, the Underwriter, the holders of the Warrant Certificates and the
Warrant Agent, the parties hereto agree as follows:
Section 1. APPOINTMENT OF WARRANT AGENT. The Company hereby
appoints the Warrant Agent to act as Warrant Agent for the Company in accordance
with the instructions hereinafter set forth in this Agreement, and the Warrant
Agent hereby accepts such appointment.
Upon the execution and delivery of this Agreement by all of the
parties hereto and the payment of the aggregate Unit purchase price in
accordance with the Underwriting Agreement, dated ______, 1996, by and between
the Company and the Underwriter (the "Underwriting Agreement"), Warrant
Certificates representing _______ Warrants to purchase up to an aggregate of
________ shares of Common Stock (subject to modification and adjustment as
provided in Section 9 hereof) shall be executed by the Company and delivered to
the Warrant Agent.
Upon the exercise of the Underwriter's Overallotment Option and the
payment for the Units to be issued upon the exercise of the Underwriter's
Overallotment Option each in accordance with the Underwriting Agreement, Warrant
Certificates representing up to [ ] Warrants to purchase up to an aggregate of
[ ] shares of
<PAGE>
Common Stock (subject to modification and adjustment as provided in Section 9
hereof) shall be executed by the Company and delivered to the Warrant Agent.
Upon exercise of the Underwriter's Option and the payment of the
aggregate exercise price each in accordance with the Underwriter's Warrant
Agreement, Warrant Certificates representing up to [ ] Warrants to purchase up
to an aggregate of [ ] shares of Common Stock (subject to modification and
adjustment as provided in Section 9 hereof) shall be executed by the Company and
delivered to the Warrant Agent.
Section 2. FORM OF WARRANT CERTIFICATE. The text of the Warrant
Certificate and the form of election to purchase Common Stock and the form of
assignment each to be printed on the reverse thereof shall be substantially as
set forth in EXHIBIT A attached hereto (the provisions of which are hereby
incorporated herein). The Warrant Certificates may have such letters, numbers
or other marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange on which
the Warrants may be listed, or to conform to usage. Each Warrant shall
initially entitle the registered holder thereof to purchase one share of Common
Stock at a purchase price of [ ] dollars ($[ ]) (the "Warrant Price"), at any
time during the period (the "Exercise Period") commencing on ,
1996 (the date of the Company's prospectus (the "Prospectus") pursuant to which
the Warrants are being sold in the SPO) and expiring (the "Expiration Date") at
5:00 p.m. New York time, on , 2001 (five years after the date
of the Prospectus). The Warrant Price and the number of shares of Common Stock
issuable upon exercise of the Warrants are subject to adjustment upon the
occurrence of certain events, all as hereinafter provided. The Warrants shall
be executed on behalf of the Company by the manual or facsimile signature of the
present or any future Chairman or Co-Chairman of the Board, President or Vice
President of the Company, and attested to by the manual or facsimile signature
of the present or any future Secretary or Assistant Secretary of the Company.
The Warrant Certificates shall be dated as of the date of issuance by
the Warrant Agent either upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration date of the Warrants falls on a
day that is not a business day, then the Warrants shall expire at 5:00 p.m. New
York time on the next succeeding business day. For purposes hereof, the term
"business day" shall mean any day other than a Saturday, Sunday or a day on
which banking institutions in New York City, New York, are authorized or
obligated by law to be closed.
Section 3. COUNTERSIGNATURE AND REGISTRATION. The Warrant Agent
shall maintain books for the transfer and registration of the Warrants. Upon
the initial issuance of the Warrants, the Warrant Agent shall issue and register
the Warrants in the
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names of the respective holders thereof. The Warrant Certificates shall be
countersigned manually or by facsimile by the Warrant Agent (or by any successor
to the Warrant Agent then acting as warrant agent under this Agreement in
accordance with Section 16 hereof) and shall not be valid for any purpose unless
so countersigned. The Warrants may, however, be so countersigned by the Warrant
Agent (or by its successor as Warrant Agent) and be delivered by the Warrant
Agent, notwithstanding that the persons whose manual or facsimile signatures
appear thereon as proper officers of the Company shall have ceased to be such
officers at the time of such countersignature or delivery.
Section 4. TRANSFERS AND EXCHANGES. The Warrant Agent shall, from
time to time, register the transfer of any outstanding Warrants upon the books
to be maintained by the Warrant Agent for that purpose, upon surrender of the
Warrant Certificate evidencing such Warrants, with the form of assignment duly
completed and executed (with such signature guaranteed as set forth in the
Warrant Certificate) and such supporting documentation as the Warrant Agent or
Company may reasonably require, to the Warrant Agent at any time on or prior to
the Expiration Date and upon the payment to the Warrant Agent for the account of
the Company of an amount equal to any applicable transfer tax (as defined
below). Thereupon a new Warrant Certificate shall be issued to the transferee
and the surrendered Warrant Certificate shall be canceled by the Warrant Agent.
Warrant Certificates so canceled shall be delivered by the Warrant Agent to the
Company from time to time upon request. Any Warrant Certificate or Certificates
may be exchanged at the option of the holder thereof, when surrendered at the
office of the Warrant Agent, for another Warrant Certificate or Warrant
Certificates of different denominations of like tenor and representing in the
aggregate the same number of Warrants. No Warrant Certificates shall be issued
except for (i) Warrant Certificates initially issued hereunder in accordance
with Section 1 hereof, (ii) Warrant Certificates issued upon any transfer or
exchange of Warrant Certificates, (iii) Warrant Certificates issued in
replacement of lost, stolen, destroyed or mutilated Warrant Certificates
pursuant to Section 7 hereof, and (iv) at the option of the Board of Directors
of the Company, Warrant Certificates in such form as may be approved by its
Board of Directors, to reflect any adjustment or change in the exercise price or
the number of shares of Common Stock purchasable upon exercise of the Warrants
made pursuant to Section 9 hereof.
Section 5. EXERCISE OF WARRANTS; PAYMENT OF WARRANT SOLICITATION
FEE. Subject to the provisions of this Agreement, each registered holder of
Warrants shall have the right, at any time during the Exercise Period, to
exercise such Warrants and purchase the number of fully paid and non-assessable
shares of Common Stock specified in such Warrant Certificate upon presentation
and surrender of such Warrant Certificate to the Company at the corporate office
of the Warrant Agent, with the exercise form on the reverse thereof duly
completed and executed (with such signature guaranteed as set forth in the
Warrant Certificate), and upon payment to the Company of the Warrant Price,
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determined in accordance with the provisions of Sections 2, 9 and 10 of this
Agreement, for that number of shares of Common Stock in respect of which such
Warrants are then exercised and the payment of any applicable transfer tax or
similar charges imposed upon sale, assignment or other transfer (as used herein,
"transfer tax") of Common Stock. Payment of such Warrant Price and transfer
taxes shall be made in cash or by certified or bank check payable to the
Company. Subject to Section 6 hereof, upon such surrender of Warrant
Certificates and the receipt by the Warrant Agent for the benefit of the Company
of the Warrant Price and transfer taxes, the Warrant Agent on behalf of the
Company shall cause to be issued and delivered with all reasonable dispatch to
or upon the written order of the registered holder of such Warrants and in such
name or names as such registered holder may designate, a Warrant Certificate or
Warrant Certificates for the number of full shares of Common Stock so purchased
upon the exercise of such Warrants. Such Warrant Certificate or Warrant
Certificates shall be deemed to have been issued and any person so designated to
be named therein shall be deemed to have become a holder of record of such
shares of Common Stock immediately prior to the close of business on the date of
the surrender of such Warrant Certificate and the receipt by the Warrant Agent
for the benefit of the Company of the Warrant Price and transfer taxes as
aforesaid. The rights of purchase represented by the Warrants shall be
exercisable during the Exercise Period, at the election of the registered
holders thereof, either as an entirety or from time to time for a portion of the
shares specified therein and, in the event that any Warrant is exercised in
respect of less than all of the shares of Common Stock specified therein at any
time prior to the Expiration Date, a new Warrant Certificate or Certificates
will be issued to the registered holder for the remaining number of unexercised
Warrants specified in the Warrant Certificate so surrendered, and the Warrant
Agent is hereby irrevocably authorized to countersign and to deliver the
required new Warrant Certificate or Certificates pursuant to the provisions of
this Section and of Section 3 of this Agreement and the Company, whenever
requested by the Warrant Agent, will supply the Warrant Agent with Warrant
Certificates duly executed on behalf of the Company for such purpose. Upon the
exercise of any one or more Warrants, the Warrant Agent shall promptly notify
the Company in writing of such fact and of the number of securities delivered
upon such exercise and, subject to the provisions below, shall cause all
payments of an amount, in cash or by check made payable to the order of the
Company, equal to the aggregate Warrant Price for such Warrants, less any
amounts payable to the Underwriter as an Exercise Fee (as defined below) as
provided below in this Section 5, to be deposited promptly in the Company's bank
account. The Company and Warrant Agent shall determine, in their sole and
absolute discretion, whether a Warrant Certificate has been properly completed
for exercise by the registered holder thereof.
Anything in the foregoing to the contrary notwithstanding, no Warrant
will be exercisable and the Company shall not be obligated to deliver any
securities pursuant to the
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exercise of any Warrant unless at the time of exercise the Company has filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933 (the "Act") covering the securities issuable upon
exercise of such Warrant and such registration statement shall have been
declared and shall remain effective and shall be current, and such shares have
been registered or qualified or deemed to be exempt under the securities laws of
the state or other jurisdiction of residence of the holder of such Warrant and
the exercise of such Warrant in any state or other jurisdiction shall not
otherwise be unlawful. During the Exercise Period, the Company shall use its
reasonable best efforts to have a current registration statement on file with
the Securities and Exchange Commission covering the issuance of Common Stock
underlying the Warrants so as to permit the Company to deliver to each person
exercising a Warrant a prospectus meeting the requirements of Section 10(a)(3)
of the Act and otherwise complying therewith, and will deliver such prospectus
to each such person requesting such prospectus. During the Exercise Period, the
Company shall also use its reasonable best efforts to effect appropriate
qualifications of the Common Stock underlying the Warrants under the laws and
regulations of the states and other jurisdictions in which the Common Stock and
Warrants are sold by the Underwriter in the SPO in order to comply with
applicable laws in connection with the exercise of the Warrants.
(a) If at the time of exercise of any Warrant (i) the market
price of the Common Stock is equal to or greater than the then exercise price of
the Warrant, (ii) the exercise of the Warrant is solicited by the Underwriter
(provided, however, that the exercise of a Warrant shall be presumed to be
unsolicited by the Underwriter unless the Holder of the applicable Warrant
states in writing that the exercise was solicited by the Underwriter) and at
such time of solicitation and at the time of the exercise of such Warrant the
Underwriter is a member of the National Association of Securities Dealers, Inc.
("NASD"), (iii) the Warrant is not held in a discretionary account, (iv)
disclosure of the compensation arrangement is made in documents provided to the
holders of the Warrants as part of the original offering of the Warrants and at
the time of exercise, and (v) the solicitation of the exercise of the Warrant is
not in violation of Rule 10b-6 (as such rule or any successor rule may be in
effect as of such time of exercise) promulgated under the Securities Exchange
Act of 1934, then the Underwriter shall be entitled to receive from the Company,
with such amount payable solely by the Warrant Agent from the payments received
by it as part of the Warrant Price, following exercise of each of the Warrants
so exercised a fee of four percent (4%) of the aggregate exercise price of the
Warrants so exercised (the "Exercise Fee"); provided, however, that no Exercise
Fee shall be payable in connection with any exercise of a Warrant prior to the
date which is one year and a day after the date hereof or after the fifth
anniversary of the date hereof. The procedures for payment of the Exercise Fee
are set forth in Section 5(b) below.
(b) (1) Within five (5) days after the last day of each month
commencing with , 1997, the Warrant Agent
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will notify the Underwriter of each Warrant Certificate which has been properly
completed and executed for exercise by holders of Warrants during the
immediately preceding month. The Warrant Agent will provide the Underwriter
with such information, in connection with the exercise of each such Warrant, as
the Underwriter shall reasonably request.
(2) The Company hereby authorizes and instructs the Warrant
Agent to deliver to the Underwriter the Exercise Fee, if payable, in respect of
each due and proper exercise of Warrants, promptly after receipt by the Warrant
Agent from the Holder of such Warrants of the applicable Warrant Price, in the
amount of such Exercise Fee. In the event that an Exercise Fee is paid to the
Underwriter with respect to a Warrant which the Company or the Warrant Agent
determines is not duly and properly completed and executed for exercise or in
respect of which the Underwriter is not entitled to an Exercise Fee, the
Underwriter will, promptly after notification thereof by the Company or the
Warrant Agent, return such Exercise Fee to the Warrant Agent which shall
forthwith return such fee to the Company.
The Underwriter and the Company may at any time during business hours
examine the records of the Warrant Agent, including its ledger of original
Warrant Certificates returned to the Warrant Agent upon exercise of Warrants.
Notwithstanding any provision to the contrary, the provisions of paragraph 5(a)
and 5(b) may not be modified, amended or deleted without the prior written
consent of the Underwriter.
Section 6. PAYMENT OF TAXES. The Company will pay any documentary
stamp taxes attributable to the initial issuance of Common Stock issuable upon
the exercise of Warrants; provided, however, that the Company shall not be
required to pay any transfer tax involved in the issuance or delivery of any
Warrant Certificates or certificates of shares of Common Stock in a name other
than that of the registered holders of the Warrants in respect of which such
Warrants were originally issued, and in such case neither the Company nor the
Warrant Agent shall be required to issue or deliver any certificate for shares
of Common Stock or any Warrant Certificate until the person requesting the same
has paid to the Company the amount of such transfer tax or has established to
the Company's satisfaction that such transfer tax has been paid.
Section 7. MUTILATED OR MISSING WARRANT CERTIFICATES. In case any
of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company may, in its discretion, issue and the Warrant Agent shall countersign
and deliver in exchange and substitution for and upon cancellation of a
mutilated Warrant Certificate, or in lieu of and in substitution for a Warrant
Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor
and representing an equivalent right or interest, but only upon receipt of
evidence satisfactory to the Company and the Warrant Agent of such loss, theft
or destruction and, in case of a lost, stolen or destroyed Warrant, indemnity of
the Company and the Warrant Agent satisfactory to each of them. Applicants for
such substitute Warrant Certificates shall also comply with such other
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reasonable regulations and pay such reasonable charges as the Company or the
Warrant Agent may prescribe.
Section 8. RESERVATION OF COMMON STOCK. There have been reserved,
and the Company shall at all times keep reserved, out of its authorized shares
of Common Stock, that number of shares of Common Stock sufficient to provide for
the exercise of the rights of purchase represented by the Warrants, and the
transfer agent for the shares of Common Stock and every subsequent transfer
agent for any shares of Common Stock issuable upon the exercise of any of the
aforesaid rights of purchase are irrevocably authorized and directed at all
times to reserve such number of authorized shares of Common Stock as shall be
required for such purpose. The Company agrees that all shares of Common Stock
issued upon exercise of the Warrants shall be, at the time of delivery of the
certificates for such shares against payment of the Warrant Price therefor,
validly issued, fully paid and nonassessable. The Company will keep a copy of
this Agreement on file with the transfer agent for the shares of Common Stock
(which may be the Warrant Agent) and with every subsequent transfer agent during
the Exercise Period for any shares of Common Stock issuable upon the exercise of
the rights of purchase represented by the Warrants. The Warrant Agent is
irrevocably authorized to obtain from time to time from such transfer agent such
stock certificates required to issue shares of Common Stock upon due and proper
exercise of Warrant Certificates. The Company will supply such transfer agent
with duly executed stock certificates for that purpose. All Warrant
Certificates surrendered upon the due and proper exercise of the rights thereby
evidenced shall be canceled by the Warrant Agent and shall thereafter be
delivered to the Company, and such canceled Warrants shall constitute sufficient
evidence of the number of shares of Common Stock which have been issued upon the
exercise of such Warrants. Promptly after the date of expiration of the
Warrants, the Warrant Agent shall certify to the Company the total aggregate
amount of Warrants then outstanding, and thereafter no shares of Common Stock
shall be subject to reservation in respect of such Warrants which shall have
expired.
Section 9. ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF SECURITIES
(a) SUBDIVISION AND COMBINATION. In case the Company shall at any
time after the date of the closing of the sale of securities pursuant to the SPO
(the "Closing Date") subdivide or combine the outstanding shares of Common
Stock, the Warrant Price shall forthwith be proportionately decreased in the
case of subdivision or increased in the case of combination.
(b) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of
the Warrant Price pursuant to the provisions of this Section 9, the number of
shares of Common Stock issuable upon the exercise of the Warrants shall be
adjusted to the nearest full whole number by multiplying a number equal to
the Warrant Price in effect immediately prior to such adjustment by the
number of shares of Common Stock issuable upon exercise of the Warrants
immediately
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prior to such adjustment and dividing the product so obtained by the adjusted
Warrant Price.
(c) RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case of any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value to no par value, or from no par value to par value, or as
a result of a subdivision or combination), or in the case of any consolidation
of the Company with, or merger of the Company into, another corporation (other
than a consolidation or merger which does not result in any reclassification or
change of the outstanding shares of Common Stock, except a change as a result of
a subdivision or combination of such shares or a change in par value, as
aforesaid), or in the case of a sale or conveyance to another corporation of the
property of the Company as an entirety, the Holder shall thereafter have the
right, upon the exercise of its Warrants, to purchase the kind and number of
shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as if the
Holder were the owner of the shares of Common Stock underlying the Warrants
immediately prior to any such events at a price equal to the product of (x) the
number of shares issuable upon exercise of the Warrants and (y) the Warrant
Price in effect immediately prior to the record date for such reclassification,
change, consolidation, merger, sale or conveyance as if such Holder had
exercised the Warrant.
(d) NO ADJUSTMENT OF WARRANT PRICE IN CERTAIN CASES. Notwithstanding
anything herein to the contrary, no adjustment of the Warrant Price shall be
made:
(i) Upon the issuance or sale of the Underwriter's Option, the
shares of Common Stock or Warrants issuable upon the exercise of the
Underwriter's Option or the shares of Common Stock issuable upon exercise
of the Warrants underlying the Underwriter's Option; or
(ii) Upon the issuance or sale of (A) the shares of Common Stock
or Warrants issued by the Company in the SPO (including pursuant to the
Underwriter's Overallotment Option) or other shares of Common Stock or
warrants issued by the Company upon consummation of the SPO, (B) the shares
of Common Stock (or other securities) issuable upon exercise of Warrants;
or
(iii) Upon (A) the issuance of options pursuant to the Company's
employee stock option plan in effect on the date hereof or as hereafter
amended in accordance with the terms thereof or any other employee or
executive stock option plan approved by shareholders of the Company or the
issuance or sale by the Company of any shares of Common Stock pursuant to
the exercise of any such options, or (B) the issuance or sale by the
Company of any shares of Common Stock pursuant to the exercise of any
options or warrants issued and outstanding on the date of closing of the
sale of Common Stock and Warrants pursuant to the SPO or (C) the issuance
or sale by the Company of any shares of Common Stock upon the conversion
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of any convertible securities of the Company or (D) as part of a merger,
consolidation or other comparable acquisition or business combination; or
(iv) If the amount of said adjustment shall be less than two
cents (2CENTS) per share of Common Stock.
(e) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO OUTSTANDING
SECURITIES. In the event that the Company shall at any time after the Closing
Date and prior to the exercise and expiration of all Warrants declare a dividend
(other than a dividend consisting solely of shares of Common Stock or a cash
dividend or distribution payable out of current or retained earnings) or
otherwise distribute to the holders of Common Stock any monies, assets,
property, rights, evidences of indebtedness, securities (other than such a cash
dividend or distribution or dividend consisting solely of shares of Common
Stock), whether issued by the Company or by another person or entity, or any
other thing of value, the Holders of the unexercised Warrants shall thereafter
be entitled, in addition to the shares of Common Stock or other securities
receivable upon the exercise thereof, to receive, upon the exercise of such
Warrants, the same monies, property, assets, rights, evidences of indebtedness,
securities or any other thing of value that they would have been entitled to
receive at the time of such dividend or distribution as if the Holders were the
owners of the shares of Common Stock underlying such Warrants. At the time of
any such dividend or distribution, the Company shall make appropriate reserves
to ensure the timely performance of the provisions of this Section 9(e).
(f) SUBSCRIPTION RIGHTS FOR SHARES OF COMMON STOCK OR OTHER
SECURITIES. In case the Company shall at any time after the date hereof and
prior to the exercise of all the Warrants issue any rights to subscribe for
shares of Common Stock or any other securities of the Company to all the holders
of Common Stock, the Holders of the unexercised Warrants shall be entitled, in
addition to the shares of Common Stock or other securities receivable upon the
exercise of the Warrants, to receive such rights at the time such rights are
distributed to the other shareholders of the Company but only to the extent of
the number of shares of Common Stock, if any, for which the Warrants remain
exercisable.
(g) NOTICE IN EVENT OF DISSOLUTION. In case of the dissolution,
liquidation or winding-up of the Company, all rights under the Warrants shall
terminate on a date fixed by the Company, such date to be no earlier than ten
(10) days prior to the effectiveness of such dissolution, liquidation or
winding-up and not later than five (5) days prior to such effectiveness. Notice
of such termination of purchase rights shall be given to the last registered
holder of the Warrants, as the same shall appear on the books of the Company
maintained by the Warrant Agent, by registered mail at least thirty (30) days
prior to such termination date.
(h) COMPUTATIONS. The Company may retain a firm of independent
public accountants (who may be any such firm regularly employed by the Company)
to make any computation required under this Section 9, and any certificate
setting forth such computation
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signed by such firm shall be conclusive evidence of the correctness of any
computation made under this Section 9. In addition, the Chief Financial Officer
of the Company may make any computation required by this Section 9 and any
certificate setting forth such computation signed by the Chief Financial Officer
of the Company shall be conclusive evidence of the correctness of any
computation made under this Section 9.
Section 10. FRACTIONAL INTERESTS.
(a) The Warrants may only be exercised to purchase full shares of
Common Stock and the Company shall not be required to issue fractional shares of
Common Stock on the exercise of Warrants or Warrant Certificates evidencing a
fraction of a Warrant upon exercise of less than all of the Warrants of a
Holder. However, if a Warrantholder exercises all Warrants then owned of record
by him and such exercise would result in the issuance of a fractional share, the
Company will pay to such Warrantholder, in lieu of the issuance of any
fractional share otherwise issuable, an amount of cash based on the Market Price
on the last trading day prior to the exercise date;
(b) By accepting a Warrant Certificate, the Holder thereof expressly
waives any right to receive a Warrant Certificate evidencing any fractions of a
Warrant or to receive any fractional shares of securities upon exercise of a
Warrant.
Section 11. NOTICES TO WARRANTHOLDERS.
(a) Upon any adjustment of the Warrant Price and the number of shares
of Common Stock issuable upon exercise of a Warrant, then and in each such case,
the Company shall give written notice thereof to the Warrant Agent, which notice
shall state the Warrant Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of a Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based. The Company
shall also mail such notice to the holders of the Warrants at their respective
addresses appearing in the Warrant register. Failure to give or mail such
notice, or any defect therein, shall not affect the validity of the adjustments.
(b) In case at any time after the Closing Date:
(i) the Company shall pay dividends payable in stock upon its
Common Stock or make any distribution (other than regular cash dividends) to the
holders of Common Stock; or
(ii) the Company shall offer for subscription pro rata to all of
the holders of Common Stock any additional shares of stock of any class or other
rights; or
(iii) there shall be any capital reorganization or
reclassification (other than a reclassification involving merely the subdivision
or combination of outstanding capital stock of the Company) of the capital stock
of the Company, or consolidation or merger of the Company with, or sale of
substantially all of its assets to another corporation where the approval of the
Company's shareholders is required; or
(iv) there shall be a voluntary dissolution, liquidation or
winding-up of the Company; then in any one or more of such cases, the Company
shall give written notice to the Warrant
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Agent and the holders of the Warrants in the manner set forth in Section 11(a)
of the date on which (A) a record shall be taken for such dividend, distribution
or subscription rights, or (B) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding-up shall take
place, as the case may be. Such notice shall also specify the date as of which
the holders of Common Stock of record shall participate in such dividend,
distribution or subscription rights, or shall be entitled to exchange, if at
all, their Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, as the case may be. Such notice shall be given at
least ten (10) days prior to the action in question and not less than ten (10)
days prior to the record date in respect thereof. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of any of the
matters set forth in this Section 11(b).
(c) The Company shall cause copies of all financial statements and
reports, proxy statements and other documents that are sent to its shareholders
to be sent by first-class mail, postage prepaid, on the date of mailing to such
stockholders, to each registered holder of Warrants at his address appearing in
the Warrant register as of the record date for the determination of the
shareholders entitled to such documents.
Section 12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS.
(a) The Warrant Agent shall promptly forward to the Company all
monies received by the Warrant Agent for the purchase of shares of Common Stock
through the exercise of such Warrants.
(b) The Warrant Agent shall keep copies of this Agreement available
for inspection by holders of Warrants during normal business hours.
Section 13. REDEMPTION OF WARRANTS. The Warrants are redeemable by the
Company commencing 12 months after the date of the Prospectus, or earlier with
the consent of the Underwriter, in whole or in part, on not less than thirty
(30) days' prior written notice at a redemption price of $.10 per Warrant,
provided the closing high bid quotation of the Common Stock as reported on the
Nasdaq National Market, if traded thereon, or if not traded thereon, the closing
sale price if listed on a national securities exchange (or other reporting
system that provides last sales prices), or if not traded thereon but traded on
the Nasdaq SmallCap Market, over-the-counter or on the bulletin board, the
average of the ask and bid price has been at least 150% of the then Exercise
Price of the Warrants, for a period of 10 consecutive trading days ending on the
third day prior to the date on which the Company gives such notice of
redemption. Any redemption in part shall be made pro rata to all Warrant
holders. The redemption notice shall be mailed to the holders of the Warrants
at their respective addresses appearing in the Warrant register. Any such
notice mailed in the manner provided herein shall be conclusively presumed to
have been duly given in accordance with this Agreement whether or not the
registered holder of Warrants receives such notice. No
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failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
registered holder of a Warrant (i) to whom notice was not mailed or (ii) whose
notice was defective. An affidavit of the Warrant Agent or the Secretary or
Assistant Secretary of the Company that notice of redemption has been mailed
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. Holders of the Warrants will have exercise rights until the close of
business on the day immediately preceding the date fixed for redemption.
Section 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT.
Any corporation or company which may succeed to the corporate trust business of
the Warrant Agent by any merger or consolidation or otherwise shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided that
such corporation would be eligible for appointment as a successor Warrant Agent
under the provisions of Section 16 of this Agreement. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement, any of the Warrants shall have been countersigned but not delivered,
any such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent and deliver such Warrant Certificates so countersigned;
and in case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant Agent, and in all such cases such Warrant Certificates
shall have the full force provided in the Warrant Certificates and in the
Agreement.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant Certificates shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrant Certificates so countersigned; and in case at that time any
of the Warrant Certificates shall not have been countersigned, the Warrant Agent
may countersign such Warrant Certificates either in its prior name or in its
changed name; and in all such cases such Warrant Certificates shall have the
full force provided in the Warrant Certificates and in the Agreement.
Section 15. DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrant Certificates,
by their acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained herein and in the
Warrant Certificates shall be taken as statements of the Company, and the
Warrant Agent assumes no responsibility for the correctness of any of the same
except its countersignature on the Warrant Certificate and such statements or
recitals as describe the Warrant Agent or action taken or to be taken by it.
The Warrant Agent assumes no responsibility with respect to the
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distribution of the Warrant Certificates except as herein expressly provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants in this Agreement or in the Warrant
Certificates to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
any Warrant Certificate in respect of any action taken, suffered or omitted by
it hereunder in good faith and in accordance with the opinion or the advice of
such counsel.
(d) The Warrant Agent shall incur no liability or responsibility to
the Company or to any holder of any Warrant Certificate for any action taken in
reliance on any notice, resolution, waiver, consent, order, certificate or other
instrument reasonably believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and other charges incurred by the Warrant Agent in the
execution of this Agreement and to indemnify the Warrant Agent and save it
harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to involve
expenses unless the Company or one or more registered holders of Warrant
Certificates shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as the
Warrant Agent may consider proper, whether with or without any such security or
indemnity. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding, and any
such action, suit or proceeding instituted by the Warrant Agent shall be brought
in its name as Warrant Agent, and any recovery of judgment shall be for the
ratable benefit of the registered holders of the Warrants, as their respective
rights and interests may appear.
(g) The Warrant Agent and any stockholder, director, officer, partner
or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it were not the Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent
from acting in any other capacity for the Company or for any other legal entity.
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<PAGE>
(h) The Warrant Agent shall act hereunder solely as agent and its
duties shall be determined solely by the provisions hereof.
(i) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys, agents or employees, and the Warrant Agent shall not be
answerable or accountable for any such attorneys, agents or employees or for any
loss to the Company resulting from such neglect or misconduct, provided
reasonable care had been exercised in the selection and continued employment
thereof.
(j) Any request, direction, election, order or demand of the Company
shall be sufficiently evidenced by an instrument signed in the name of the
Company by its Chairman or Co-Chairman of the Board, President or a Vice
President or its Secretary or an Assistant Secretary or its Chief Financial
Officer or its Controller (unless other evidence in respect thereof be herein
specifically prescribed); and any resolution of the Board of Directors may be
evidenced to the Warrant Agent by a copy thereof certified by the Secretary or
an Assistant Secretary of the Company.
Section 16. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and be
discharged from its duties under this Agreement by giving to the Company notice
in writing, and to the holders of the Warrant Certificates notice by mailing
such notice to the holders at their respective addresses appearing on the
Warrant register, of such resignation, specifying a date when such resignation
shall take effect. The Company may remove the Warrant Agent by like notice to
the Warrant Agent from the Company and the like mailing of notice to the holders
of the Warrant Certificates. If the Warrant Agent shall resign or be removed or
shall otherwise become incapable of action, the Company shall appoint a
successor to the Warrant Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after such removal or after it
has been notified in writing of such resignation or incapacity by the resigning
or incapacitated Warrant Agent, then the Company agrees to perform the duties of
the Warrant Agent hereunder until a successor Warrant Agent is appointed. After
appointment and agreeing to be bound by the provisions of this Agreement as in
effect at such time, the successor Warrant Agent shall be vested with the same
powers, rights, duties and responsibility as if it had been originally named as
Warrant Agent without further act or deed and the former Warrant Agent shall
deliver and transfer to the successor Warrant Agent as soon as possible all
cancelled Warrants, records and property at the time held by it hereunder, and
execute and deliver any further assurance or conveyance necessary for the
purpose. Failure to file or mail any notice provided for in this Section,
however, or any defect therein, shall not affect the validity of the resignation
or removal of the Warrant Agent or the appointment of the successor Warrant
Agent, as the case may be.
Section 17. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment of
any transfer agent (other than Corporate Stock
14
<PAGE>
Transfer) for the shares of Common Stock or of any subsequent transfer agent for
the shares of Common Stock or other shares of the Common Stock issuable upon the
exercise of the rights of purchase represented by the Warrants, the Company will
file with the Warrant Agent a statement setting forth the name and address of
such transfer agent.
Section 18. NOTICES. Any notice pursuant to this Agreement to be given by
the Warrant Agent, or by the registered holder of any Warrant to the Company,
shall be sufficiently given if sent by first-class mail, postage prepaid,
addressed (until another is filed in writing by the Company with the Warrant
Agent) as follows:
The Kushner-Locke Company
11601 Wilshire Blvd., 21st Floor
Los Angeles, California 90025
Attention: Donald Kushner, Secretary
and a copy thereof to:
Kaye, Scholer, Fierman, Hays & Handler, LLP
1999 Avenue of the Stars, Suite 1600
Los Angeles, California 90067
Attention: Barry L. Dastin, Esq.
Any notice pursuant to this Agreement to be given by the Company or by the
registered holder of any Warrant to the Warrant Agent shall be sufficiently
given if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing by the Warrant Agent with the Company) as follows:
Corporate Stock Transfer
[ ]
[ ]
Attention: [ ]
Any notice pursuant to this Agreement to be given by the Warrant Agent or
by the Company to the Underwriter shall be sufficiently given if sent by first-
class mail, postage prepaid, addressed (until another address if filed in
writing with the Warrant Agent) as follows:
Lew Lieberbaum & Co., Inc.
600 Old Country Road
Garden City, New York 11530
Attention: Mr. Leonard Neuhaus
and a copy thereof to:
15
<PAGE>
Schneck Weltman Hashmall & Mischel LLP
1285 Avenue of the Americas
New York, New York 10019
Attention: Felice F. Mischel, Esq.
Section 19. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Agent
may from time to time, without the consent or concurrence of the registered
holders of the Warrants, supplement or amend this Agreement in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to add any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable and which shall
not be inconsistent with the provisions of the Warrant Certificates and which
shall not materially adversely affect the interest of the holders of Warrants;
and in addition the Company and the Warrant Agent may modify, supplement or
alter this Agreement (other than as otherwise prescribed in this Agreement) with
the consent in writing of the registered holders of the Warrants representing
not less than a majority of the Warrants then outstanding.
Section 20. NEW YORK CONTRACT. This Agreement and each Warrant issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and shall be construed in accordance with the laws of New York without
regard to the conflicts of law principles thereof.
Section 21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement or in
the Warrant Certificates shall be construed to give to any person or corporation
other than the Company, the Warrant Agent, and each of their respective
successors and assigns, and the registered holders of the Warrants any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Warrant Agent and the
registered holders of the Warrants.
Section 22. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 23. WARRANTHOLDER NOT DEEMED A SHAREHOLDER.
No Warrantholder, as such, shall be entitled to vote, receive dividends or
be deemed the holder of Common Stock or any other securities of the Company
which may at any time be issuable upon the exercise of the Warrants represented
thereby for any purpose whatever, nor shall anything contained herein or in any
Warrant Certificate be construed to confer upon any Warrantholder, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issuance of stock, reclassification of stock, change
of par value or change of stock to no par value,
16
<PAGE>
consolidation, merger, conveyance or otherwise), or to receive notice of
meetings or other actions affecting shareholders (except as provided in Section
11 hereof), or to receive dividends or subscription rights, or otherwise, until
such Warrant shall have been exercised in accordance with the provisions hereof
and the receipt of the Warrant Price and any other amounts payable upon such
exercise by the Warrant Agent (including, without limitation, any applicable
transfer taxes).
Section 24. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed an
original and such counterparts shall together constitute but one and the same
instruments.
17
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date first above written.
THE KUSHNER-LOCKE COMPANY
By:
----------------------------------
Name:
Title:
CORPORATE STOCK TRANSFER
By:
---------------------------------
Name:
Title:
LEW LIEBERBAUM & CO., INC.
By:
---------------------------------
Name:
Title:
18
<PAGE>
[FORM OF CLASS C REDEEMABLE COMMON STOCK PURCHASE WARRANT]
No. W VOID AFTER 5:00 P.M.,, NEW YORK,
------------ ON , 2001
-----------
WARRANTS
-----
CLASS C REDEEMABLE COMMON STOCK PURCHASE
WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
THE KUSHNER-LOCKE COMPANY
CUSIP [ ]
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class C Redeemable Common Stock Purchase Warrants (the "Warrants") specified
above. Each Warrant initially entitles the Registered Holder to purchase,
subject to the terms and conditions set forth in this Certificate and the
Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, no par value (the "Common Stock"), of The Kushner-Locke
Company, a California corporation (the "Company"), at any time from ___________,
1996 [the date of the Prospectus] (the "Initial Warrant Exercise Date"), and
prior to the Expiration Date (as hereinafter defined), upon the presentation and
surrender of this Warrant Certificate with the Exercise Form on the reverse
hereof duly executed, at the corporate office of Corporate Stock Transfer
[ ], as Warrant Agent, or its successor (the "Warrant Agent"),
accompanied by payment of $[ ], subject to adjustment (the "Exercise Price"),
in lawful money of the United States of America in cash or by certified or bank
check made payable to the Company plus any applicable transfer tax or similar
charge.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement, dated as of ____, 1996 [date of the Prospectus]
(the "Warrant Agreement"), among the Company, Lew Lieberbaum & Co., Inc. and the
Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common
19
<PAGE>
Stock subject to purchase upon the exercise of each Warrant represented hereby
are subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional share of Common Stock or Warrant
Certificates evidencing fractional Warrants will be issued. In the case of the
exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor for, in
the aggregate, the remaining number of unexercised Warrants evidenced hereby,
which the Warrant Agent shall countersign.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on
________, 2001 [the date which is the fifth anniversary of the Initial Warrant
Exercise Date]; provided, that if such date is not a business day, it shall mean
5:00 p.m., New York City time, on the next following business day. For purposes
hereof, the term "business day' shall mean any day other than a Saturday, Sunday
or a day on which banking institutions in New York City, New York, are
authorized or obligated by law to be closed.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of the Warrants represented hereby unless at the time of exercise
the Company has filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 (the "Act") covering the securities
issuable upon exercise of the Warrants represented hereby and such registration
statement has been declared and shall remain effective and shall be current, and
such securities have been registered or qualified or deemed to be exempt under
the securities laws of the state or other jurisdiction of residence of the
Registered Holder and the exercise of the Warrants represented hereby in any
state or other jurisdiction shall not otherwise be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon the presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
The Registered Holder, as such, shall not be, or be deemed to be, the
holder of Common Stock or any other security of the Company
20
<PAGE>
which may at any time be issuable upon the exercise of the Warrant evidenced
hereby for any purpose whatsoever, nor shall anything contained herein or in the
Warrant Agreement be construed to confer upon the Registered Holder hereof, as
such, any of the rights of a shareholder or security holder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as specifically provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed, in whole or in part, at the option of the Company, at a redemption
price of $.10 per Warrant, at any time commencing ________, 1997 [one year after
the date of the Prospectus] (or earlier at the sole discretion of the
Underwriter), provided that the closing high bid quotation of the Common Stock
as reported on the Nasdaq National Market, if traded thereon, or if not traded
thereon, the closing sale price if listed on a national exchange (or other
reporting system that provides last sales prices), or if not traded thereon but
traded on the Nasdaq SmallCap Market, over the counter or on the bulletin board,
the average of the ask and bid price, shall have for a period of 10 consecutive
trading days ending on the third day prior to the date on which the Company
gives the Notice of Redemption, as defined below, equaled or exceeded 150% of
the then Exercise Price. A notice of redemption (the "Notice of Redemption")
shall be given by the Company not later than the thirtieth day before the date
fixed for such redemption, all as provided in the Warrant Agreement. On and
after the date fixed for redemption, the Registered Holder shall have no right
with respect to this Warrant except to receive the $.10 per Warrant upon
surrender of this Certificate.
Under certain circumstances described in the Warrant Agreement, Lew
Lieberbaum & Co., Inc. shall be entitled to receive as a solicitation fee an
aggregate of four percent (4%) of the Exercise Price of the Warrants represented
hereby which are exercised.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without regard to the conflicts of law
principles thereof.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
21
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated ,
------------- ---------
SEAL THE KUSHNER-LOCKE COMPANY
By:
---------------------------
Chairman, Co-Chairman
President or Vice President
By:
--------------------------
Secretary or Assistant
Secretary
COUNTERSIGNED:
CORPORATE STOCK TRANSFER,
as Warrant Agent
By:
--------------------------------------
Authorized Officer
22
<PAGE>
EXERCISE FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
________ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
-------------------------
-------------------------
------------------------
(please print or type name and address)
and be delivered to
------------------------
------------------------
-------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by Lew Lieberbaum & Co.,
Inc. / /
2. The exercise of this Warrant was solicited by
3. If the exercise of this Warrant was not solicited, please check the
following box. / /
Dated: X
----------------------- -----------------------------
Signature of Registered Holder
23
<PAGE>
-----------------------------------
-----------------------------------
-----------------------------------
Address
---------------------------------
Social Security or Taxpayer
Identification Number
-----------------------------------
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE EXERCISE FORM MUST CORRESPOND TO THE NAME
AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION ON OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER
ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS
MEDALLION PROGRAM.
24
<PAGE>
ASSIGNMENT
To be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, , hereby sells, assigns and transfers
unto ----------------------
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
-----------------
-----------------
-----------------
(please print or type name and address)
_______________ of the Warrants represented by this Warrant Certificate, and
hereby irrevocably constitutes and appoints as its/his/her
attorney-in-fact to transfer this Warrant Certificate on the books of the
Company, with full power of substitution in the premises.
Dated: X
------------------ ---------------------------------
Signature of Registered Holder
X
--------------------------------
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE EXERCISE FORM MUST CORRESPOND TO THE NAME
AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION ON OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER
ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS
MEDALLION PROGRAM.
25
<PAGE>
EXHIBIT 4.6
Proof of July 8, 1996
[FORM OF UNDERWRITER'S WARRANT]
NO SALE OR TRANSFER OF THIS WARRANT OR THE SECURITIES
UNDERLYING THIS WARRANT MAY BE MADE UNTIL
THE EFFECTIVENESS OF A REGISTRATION STATEMENT
OR OF A POST-EFFECTIVE AMENDMENT THERETO
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"),
COVERING THIS WARRANT OR THE SECURITIES UNDERLYING
THIS WARRANT, OR UNTIL THE COMPANY IS IN RECEIPT OF AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF THE ACT. TRANSFER OF
THIS WARRANT IS RESTRICTED UNDER PARAGRAPH 2 BELOW.
UNDERWRITER'S WARRANT TO PURCHASE
COMMON STOCK AND/OR REDEEMABLE WARRANTS
THE KUSHNER-LOCKE COMPANY
(A CALIFORNIA CORPORATION)
Dated: , 1996
THIS CERTIFIES THAT, for value received, Lew Lieberbaum & Co., Inc.
(the "Underwriter") or its permitted registered assigns (the "Holder") is the
owner of options (the "Underwriter's Option") to purchase from The Kushner-Locke
Company, a California corporation (the "Company"), during the period and at the
prices hereinafter specified, up to _____ Units (a "Unit") each consisting of
two shares of the Company's common stock, no par value per share (the "Common
Stock"), and two Class C redeemable common stock purchase warrants (the
"Warrants" and, collectively with the Common Stock, the "Securities").
This Underwriter's Option is issued pursuant to an Underwriting
Agreement dated , 1996, between the Company and the Underwriter in
connection with a public offering through the Underwriter (the "Public
Offering") of Units and, pursuant to the Underwriter's overallotment option,
an additional Units. The Warrants (including those issuable pursuant to
the exercise of the Underwriter's Option) will be issued pursuant to and subject
to the terms and conditions set forth in an agreement by and among the Company,
the Underwriter and Corporate Stock Transfer (the "Warrant Agreement").
<PAGE>
1. EXERCISE OF THE UNDERWRITER'S OPTION.
(a) The rights represented by this Underwriter's Option shall be
exercisable at the prices and during the period specified below, upon the terms
and subject to the conditions as set forth herein:
(i) During the period from , 1996 to ,
1997, inclusive, the Holder shall have no right to purchase any Units
hereunder.
(ii) Between , 1997 and , 2001, inclusive,
the Holder shall have the option to purchase Units hereunder at a price of
$ per Unit, the purchase price of the Units being % of the public
offering prices for the Units set forth in the Prospectus forming a part of
the registration statement on Form S-2 (File No. 333-5089) of the Company, as
amended (the "Registration Statement").
(iii) After , 2001, the Holder shall have no right to
purchase any Units hereunder and this Underwriter's Option shall expire
effective at 5:00 p.m., New York time on such date.
(b) The rights represented by this Underwriter's Option may be
exercised at any time within the period above specified, in whole or in part, by
(i) the surrender of this Underwriter's Option (with the purchase form at the
end hereof properly executed) at the principal executive office of the Company
(or such other office or agency of the Company as it may designate by notice in
writing to the Holder at the address of the Holder appearing on the books of the
Company); (ii) payment to the Company of the exercise price then in effect for
the number of shares of Units specified in the above-mentioned purchase form
together with applicable stock transfer taxes, if any; and (iii) delivery to the
Company of a duly executed agreement signed by the person(s) designated in the
purchase form to the effect that such person(s) agree(s) to be bound by the
provisions of Paragraph 5 and subparagraphs (b), (c) and (d) of Paragraph 6
hereof. This Underwriter's Option shall be deemed to have been exercised, in
whole or in part to the extent specified, immediately prior to the close of
business on the date this Underwriter's Option is surrendered and payment is
made in accordance with the foregoing provisions of this Paragraph 1, and the
person or persons in whose name or names the certificates for the Securities
shall be issuable upon such exercise shall be deemed the holder or holders of
record of such Common Stock and Warrants at that time and date. The Common
Stock and Warrants so purchased shall be delivered to the Holder within a
reasonable time, not exceeding ten (10) business days, after the Company
receives the items required to be delivered by this Paragraph 1 to evidence the
Underwriter's exercise of the rights represented by this Underwriter's Option.
2. RESTRICTIONS ON TRANSFER.
This Underwriter's Option shall not be transferred, sold, assigned or
hypothecated for a period of one year commencing , 1996, and
thereafter it may be transferred only to successors of the Holder, and may be
assigned in whole or in part to any person who is an officer of the Underwriter
or an officer or
2
<PAGE>
partner of any other member of the selling group. Any such assignment shall be
effected by the Holder by (i) completing and executing the transfer form at the
end hereof and (ii) surrendering this Underwriter's Option with such duly
completed and executed transfer form for cancellation, accompanied by funds
sufficient to pay any transfer tax or similar charges imposed upon transfer,
sale or assignment (as used hereinafter "transfer tax") at the office or agency
of the Company referred to in Paragraph 1 hereof, accompanied by a certificate
(signed by a duly authorized representative of the Holder), stating that each
transferee is a permitted transferee under this Paragraph 2; whereupon the
Company shall issue, in the name or names specified by the Holder (including the
Holder), a new Underwriter's Option or Underwriter's Options of like tenor and
representing in the aggregate rights to purchase the same number of Units as are
then purchasable hereunder. The Holder acknowledges that this Underwriter's
Option may not be offered or sold except pursuant to an effective registration
statement under the Act or an opinion of counsel satisfactory to the Company
that an exemption from registration under the Act is available.
3. COVENANTS OF THE COMPANY
(a) The Company covenants and agrees that all Common Stock issuable
upon the exercise of this Underwriter's Option will, upon issuance thereof and
payment therefor in accordance with the terms hereof, and all Common Stock
issuable upon exercise of the Warrants underlying this Underwriter's Option,
will upon the issuance thereof and payment therefor in accordance with the terms
of the Warrant Agreement, be duly and validly issued, fully paid and
nonassessable and no personal liability will attach to the holder thereof by
reason of being such a holder, other than as set forth herein.
(b) The Company covenants and agrees that during the period within
which this Underwriter's Option may be exercised, the Company will at all times
have authorized and reserved a sufficient number of shares of Common Stock to
provide for the exercise of this Underwriter's Option and the Warrants included
therein.
(c) The Company covenants and agrees that for so long as the Units
shall be outstanding (unless the Securities shall no longer be registered under
Paragraph 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended) the
Company shall use its reasonable best efforts to cause the Company's Common
Stock and the Warrants to be listed on the NASDAQ National Market or listed on a
national securities exchange.
4. NO RIGHTS OF SHAREHOLDER.
This Underwriter's Option shall not entitle the Holder to any voting
rights or other rights as a shareholder of the Company, either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Underwriter's Option and are not
3
<PAGE>
enforceable against the Company except to the extent set forth herein.
5. REGISTRATION RIGHTS.
(a) During the period of four years from , 1997, the Company
shall advise the Holder, whether the Holder holds this Underwriter's Option or
has exercised this Underwriter's Option and holds Common Stock and Warrants, or
Common Stock underlying the Warrants (the "Warrant Shares"), by written notice
at least 20 days prior to the filing of any post-effective amendment to the
Registration Statement or of any new registration statement or post-effective
amendment thereto under the Act, covering any Securities of the Company, for its
own account or for the account of others, and upon the request of the Holder
made during such four-year period, include in any such post-effective amendment
or registration statement such information as may be required to permit a public
offering of any of the Common Stock or Warrants issuable hereunder, and/or the
Warrant Shares (the "Registerable Securities"); provided, that this Paragraph
5(a) shall not apply to any registration statement filed pursuant to Paragraph
5(b) hereof or to registrations of securities in connection with an employee
benefit plan or a merger, consolidation or other comparable acquisition or
business combination; and provided, further, that, notwithstanding the
foregoing, the Holder shall have no right to include any Registrable Securities
in any new registration statement or post-effective amendment thereto unless as
of the effective date thereof the Registration Statement (as it may hereafter be
amended or supplemented) or any new registration statement under which the
Registrable Securities are registered shall have ceased to be effective or the
prospectus contained in such Registration Statement shall have ceased to be
current. The Company shall supply the Holders a reasonable number of
prospectuses in order to facilitate the public sale or other disposition of the
Registerable Securities, use its reasonable best efforts to register and qualify
any of the Registerable Securities for sale in such states in which the Common
Stock and Warrants are offered and sold in the Public Offering as such Holder
reasonably designates and do any and all other acts and things which may be
necessary to enable such Holder to consummate the public sale of the
Registerable Securities, provided that the Company shall not be obligated to
execute or file any general consent to service of process or to qualify as a
foreign corporation to do business under the laws of any jurisdiction or make
any change in its capital structure or articles of incorporation or in any other
aspect of its business or to enter into material agreements with any blue sky or
state securities commission, and furnish indemnification in the manner provided
in Paragraph 6 hereof. The Holder shall furnish information reasonably
requested by the Company to be used in connection with such post-effective
amendments or registration statements, including its intentions with respect
thereto, and shall furnish indemnification as set forth in Paragraph 6. The
Company shall continue to advise the Holders of the Registerable
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Securities of its intention to file a registration statement or amendment
pursuant to this Paragraph 5(a) until the earliest of (i) , 2001; or (ii)
such time as all of the Registerable Securities have been registered and sold
under the Act; or (iii) all of the Registrable Securities have been otherwise
transferred, new certificates for them not bearing a legend restricting further
transfer shall have been delivered by the Company and subsequent public
distribution of them shall not require registration or qualification of them
under the Act, or (iv) in the opinion of legal counsel for the Company, the
Registrable Securities may be offered and sold by the holders thereof without
being registered under the Act and such Units, upon receipt by the purchasers
thereof pursuant to such sale, will not constitute "restricted securities" as
such term is defined in Rule 144 under the Act.
(b) If any fifty-one (51%) percent holder (as defined below) shall
give written notice to the Company at any time during the four (4) year period
beginning one (1) year from , 1996 to the effect that such holder
desires to register under the Act any Registerable Securities, under such
circumstances that a public distribution (within the meaning of the Act) of any
such Registerable Securities will be involved (and the Registration Statement or
any new registration statement under which such Registerable Securities are
registered shall have ceased to be effective or the Prospectus contained therein
shall have ceased to be current), then the Company will, as promptly as
practicable after receipt of such notice, at the Company's option, file a post-
effective amendment to the current Registration Statement or a new registration
statement pursuant to the Act to the end that the Registerable Securities may be
publicly sold under the Act as promptly as practicable thereafter and the
Company will use its reasonable best efforts to cause such registration to
become and remain effective as provided herein (including the taking of such
steps as are reasonably necessary to obtain the removal of any stop order);
provided, that all Holders of Registrable Securities to be so registered shall
furnish the Company with appropriate information in connection therewith as the
Company may reasonably request; and provided, further, that the Company shall
not be required to file such a post-effective amendment or registration
statement pursuant to this Paragraph 5(b) on more than one occasion in
connection with any of the Registrable Securities; and provided, further, that,
the registration rights of the 51% holder under this Paragraph 5(b) shall be
subject to the "piggyback" registration rights of other holders of Securities of
the Company to include such Securities in any registration statement or post-
effective amendment filed pursuant to this Paragraph 5(b); and provided,
further, that, the Company shall not be required to prepare and file any
registration statement or post-effective amendment in connection with any or all
of the Registrable Securities within 9 months of the filing or effectiveness of
any other registration statement. The Company will maintain such registration
statement or post-effective amendment current under the Act for a period of
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<PAGE>
at least nine months from the effective date thereof. The Company shall supply
the Holders of Registrable Securities included in the applicable Registration
Statement or post-effective amendment a reasonable number of prospectuses in
order to facilitate the public sale of the Registerable Securities, use its
reasonable best efforts to register and qualify any of the Registerable
Securities for sale in such states in which the Common Stock and Warrants are
offered and sold in the Public Offering as such holder reasonably designates and
furnish indemnification in the manner provided in Paragraph 6 hereof, provided
that the Company shall not be obligated to execute or file any general consent
to service of process or to qualify as a foreign corporation to do business
under the laws of any jurisdiction or make any change in its capital structure
or articles of incorporation or in any other aspect of its business or to enter
into material agreements with any blue sky or state securities commission.
(c) The Holder may, in accordance with Paragraphs 5(a) or (b), at
his, her or its option, and subject to the limitations set forth in Paragraph
1(a) hereof, request the registration of any of the Registerable Securities
prior to the exercise of this Underwriter's Option. The Holder may thereafter
exercise this Underwriter's Option at any time or from time to time, subject to
any other restrictions and limitations set forth herein, subsequent to the
effectiveness under the Act of the registration statement in which the Common
Stock underlying the Underwriter's Options and Warrants were included.
(d) The term "51% holder," as used in this Paragraph 5, shall include
any owner or combination of owners of Underwriter's Options or Registrable
Securities, if and to the extent of the exercise of the Underwriter's Options,
if the aggregate number of shares of Common Stock and Warrant Shares included in
and underlying the Underwriter's Options and Registerable Securities held of
record by it or them, would constitute a majority of the aggregate of such
shares of Common Stock and Warrant Shares underlying the Underwriter's Option
and Registrable Securities as of the date of the initial issuance of the
Underwriter's Option.
(e) The following provisions of this Paragraph 5 shall also be
applicable:
(i) Within fourteen (14) days after receiving any notice from a
51% holder pursuant to Paragraph 5(b), the Company shall give notice to the
other Holders of Underwriter's Options or Registerable Securities, advising that
the Company is proceeding with such post-effective amendment or registration and
offering to include therein the Registerable Securities of such other Holders,
provided that they shall furnish the Company with all information in connection
therewith as shall be necessary or appropriate and as the Company shall
reasonably request in writing. Following the effective date of such post-
effective amendment or registration, the Company shall, upon the request of any
Holder of Registerable Securities included in such post-effective amendment or
registration, forthwith supply such reasonable number of
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prospectuses meeting the requirements of the Act, as shall be reasonably
requested by such Holder. The Company shall use its reasonable best efforts to
qualify the Registerable Securities for sale in such states in which the Common
Stock and Warrants are offered and sold in the Public Offering as the 51% holder
shall reasonably designate at such times as the registration statement is
effective under the Act, provided that the Company shall not be obligated to
execute or file any general consent to service of process or to qualify as a
foreign corporation to do business under the laws of any jurisdiction or make
any change in its capital structure or articles incorporation or in any other
aspect of its business or to enter into material agreements with any blue sky or
state securities commission.
(ii) The Company shall bear the entire cost and expense of any
registration of Securities initiated by it under Paragraph 5(a) hereof
notwithstanding that the Registerable Securities subject to this Underwriter's
Option may be included in any such registration. The Company shall also comply
with the one request for registration made by the 51% holder pursuant to
Paragraph 5(b) hereof at the Company's own expense and without charge to any
holder of the Registerable Securities. Notwithstanding the foregoing, any
Holder whose Registerable Securities are included in any such registration
statement or post-effective amendment pursuant to this Paragraph 5 shall,
however, bear the fees of any counsel or other advisors retained by him, her or
it, any transfer taxes and underwriting discounts or commissions applicable to
the Registerable Securities sold by him, her or it pursuant thereto and, in the
case of a registration pursuant to Paragraph 5(a) hereof, any additional
registration or "blue sky" or state securities fees attributable to the
registration or qualification of such Holder's Registerable Securities.
(iii) If the underwriter or managing underwriter in any underwritten
offering made pursuant to Paragraph 5(a) hereof shall advise the Company that it
declines to include a portion or all of the Registerable Securities requested by
the Holders to be included in the registration statement, then distribution of
all or a specified portion of the Registerable Securities shall be excluded from
such registration statement (in case of an exclusion as to a portion of such
Registerable Securities, such portion to be allocated among such Holders in
proportion to the respective numbers of Registerable Securities requested to be
registered by each such Holder). In such event the Company shall give the
Holder prompt notice of the number of Registerable Securities excluded.
Further, in such event the Company shall, if requested in writing by a 51%
holder, commencing six (6) months after the completion of such underwritten
offering, file and use its reasonable best efforts to have declared effective,
at its sole expense (subject to the last sentence of Paragraph 5(a)(ii)), a
registration statement relating to such excluded Registrable Securities.
(iv) Notwithstanding anything to the contrary contained herein, the
Company shall have the right at any time after it shall
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<PAGE>
have given written notice pursuant to Paragraph 5(a) or 5(b) (irrespective of
whether a written request for inclusion of any Registerable Securities shall
have been made) to elect not to file or to delay any such proposed registration
statement or post-effective amendment thereto, or to withdraw the same after the
filing but prior to the effective date thereof. In addition, the Company may
delay the filing of any registration statement or post-effective amendment
requested pursuant to Paragraph 5(b) hereof by not more than 180 days if the
Company, prior to the time it would otherwise have been required to file such
registration statement or post-effective amendment thereto, determines in good
faith that the filing of the registration statement would require the disclosure
of non-public material information that, in its judgment, would be detrimental
to the Company if so disclosed or would otherwise adversely affect a financing,
acquisition, disposition, merger or other material transaction.
(v) If a registration pursuant to Paragraph 5(a) hereof involves an
underwritten offering, the Company shall have the right to select the investment
banker or investment bankers and manager or managers that will serve as
underwriter with respect to the underwritten offering. No Holder of
Registerable Securities may participate in any underwritten offering under this
Agreement unless such Holder completes and executes all questionnaires, powers
of attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwritten offering, in each case, in the form and
upon terms reasonably acceptable to the Company and the underwriters of such
underwritten offering. The requested registration pursuant to Paragraph 5(b)
hereof shall not involve an underwritten offering unless the Company shall first
give its written approval of each underwriter that participates in such
offering, such approval not to be unreasonably withheld.
6. INDEMNIFICATION.
(a) Whenever pursuant to Paragraph 5, a registration statement
relating to any Registerable Securities is filed under the Act, amended or
supplemented, the Company will indemnify and hold harmless each Holder of the
Registerable Securities covered by such registration statement, amendment or
supplement (such holder hereinafter referred to as the "Distributing Holder"),
each person, if any, who controls (within the meaning of the Act) the
Distributing Holder, and each officer, employee, partner or agent of the
Distributing Holder, if the Distributing Holder is a broker or dealer, and each
underwriter (within the meaning of the Act) of such Securities and each person,
if any, who controls (within the meaning of the Act) any such underwriter and
each officer, employee, agent or partner of such underwriter against any losses,
claims, damages or liabilities, joint or several, to which the Distributing
Holder, any such underwriter or any such other person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or
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<PAGE>
alleged untrue statement of any material fact contained in any such registration
statement or any preliminary prospectus or final prospectus constituting a part
thereof or any amendment or supplement thereto, or arise out of or are based
upon the omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading; and will reimburse the
Distributing Holder and each such underwriter or such other person for any
expenses reasonably incurred by the Distributing Holder, or underwriter or such
other person, in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will not
be liable in any such case (i) to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by or on behalf of such Distributing Holder, any other Distributing
Holder or any such underwriter for use in the preparation thereof, or (ii) such
losses, claims, damages or liabilities arise out of or are based upon any actual
or alleged untrue statement or omission made in or from any registration
statement or preliminary prospectus, but corrected in any subsequent preliminary
prospectus, registration statement or the final prospectus, as amended or
supplemented.
(b) Whenever pursuant to Paragraph 5 a registration statement
relating to the Registerable Securities is filed under the Act, or is amended or
supplemented, the Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement or such amendments or supplements thereto, and each
person, if any, who controls the Company (within the meaning of the Act) against
any losses, claims, damages or liabilities to which the Company or any such
director, officer or controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in any such registration statement or
any preliminary prospectus or final prospectus constituting a part thereof, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent, but only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by or on behalf of such Distributing Holder for use in the
preparation thereof; and will reimburse the Company
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<PAGE>
or any such director, officer or controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under this
Paragraph 6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Paragraph 6.
(d) In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party; provided, however, that, if the Company is an indemnifying
party it shall have the right to assume and control the defense thereof, and
after notice from the indemnifying party to such indemnified party of its
election to so assume the defense thereof, the indemnifying party will not be
liable to such indemnified party for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation.
7. ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF
SHARES OF COMMON STOCK.
(a) COMPUTATION OF ADJUSTED PRICE. Except as hereinafter
provided, in case the Company shall, at any time after the date of closing of
the sale of Units pursuant to the secondary public offering ("SPO") being
underwritten by the Underwriter (the "Closing Date"), issue or sell any shares
of Common Stock (other than the issuances or sales referred to in Paragraph 7(f)
hereof), including shares held in the Company's treasury and shares of Common
Stock issued upon the exercise of any options, rights or warrants to subscribe
for shares of Common Stock (other than the issuances or sales of Common Stock
pursuant to rights to subscribe for such Common Stock distributed pursuant to
Paragraph 7(j) hereof) and shares of Common Stock issued upon the direct or
indirect conversion or exchange of securities for shares of Common Stock, for an
aggregate consideration per share less than both the "Market Price" (as defined
in Paragraph 7(a)(vi) hereof) per share of Common Stock on the trading day
immediately preceding such issuance or sale and the Warrant Price in effect
immediately prior to such issuance or sale, or without consideration, then
forthwith upon such issuance or sale, the Warrant Price in respect of the Common
Stock issuable upon exercise of the Underwriter's Option (but not the exercise
price of the Warrants underlying the Underwriter's Option, which shall be
adjusted only in accordance with the Warrant Agreement) shall (until another
such issuance or
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<PAGE>
sale) be reduced to the price (calculated to the nearest full cent) determined
by multiplying the Warrant Price in effect immediately prior to such issuance or
sale by a fraction, the numerator of which shall be the sum of (1) the number of
shares of Common Stock outstanding immediately prior to such issuance or sale
multiplied by the Warrant Price immediately prior to such issuance or sale plus
(2) the aggregate consideration received by the Company upon such issuance or
sale and upon the sale of any applicable option, right or warrant, and the
denominator of which shall be the product of (x) the total number of shares of
Common Stock outstanding immediately after such issuance or sale, multiplied by
(y) the Warrant Price immediately prior to such issuance or sale; provided,
however, that in no event shall the Warrant Price be adjusted pursuant to this
computation to an amount in excess of the Warrant Price in effect immediately
prior to such computation, except in the case of a combination of outstanding
shares of Common Stock, as provided by Paragraph 7(c) hereof, or in the case of
a reclassification, consolidation, merger or other change of outstanding shares
of Common Stock, as provided by Paragraph 7(e) hereof. This Paragraph 7(a)
shall not be applicable to any sale or issuance covered by any other paragraph
or sub-paragraph of this Paragraph 7. For the purposes of this Paragraph 7, the
term "Warrant Price" shall mean the exercise price per share of Common Stock
issuable upon exercise of the Underwriter's Option (initially $ per
share), as adjusted from time to time pursuant to the provisions of this
Paragraph 7.
For the purposes of any computation to be made in accordance with this
Paragraph 7(a), the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of
Common Stock for a consideration part or all of which shall be cash, the amount
of the cash consideration therefor shall be deemed to be the amount of cash
received by the Company for such shares (or, if shares of Common Stock are
offered by the Company for subscription, the subscription price, or, if such
share of Common Stock shall be sold to underwriters or dealers for public
offering without a subscription offering, the public offering price) before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or others performing
similar services, or any expenses incurred in connection therewith.
(ii) In case of the issuance or sale (otherwise than
as a dividend or other distribution on any stock of the Company) of shares of
Common Stock for a consideration part or all of which shall be other than cash,
the amount of the consideration therefor other than cash shall be deemed to be
the value of such consideration as determined in good faith by the Board of
Directors of the Company.
(iii) Shares of Common Stock issuable by way of
dividend or other distribution on any stock of the Company
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shall be deemed to have been issued immediately after the opening of business on
the day following the record date for the determination of shareholders entitled
to receive such dividend or other distribution and shall be deemed to have been
issued without consideration.
(iv) The reclassification of Securities of the Company
other than shares of Common Stock into Securities including shares of Common
Stock shall be deemed to involve the issuance of such shares of Common Stock for
a consideration other than cash immediately prior to the close of business on
the date fixed for the determination of security holders entitled to receive
such shares, and the value of the consideration allocable to such shares of
Common Stock shall be determined as provided in subparagraph (ii) of this
Paragraph 7(a).
(v) The number of shares of Common Stock at any one
time outstanding shall include the aggregate number of shares issued or issuable
upon the exercise of options, rights, warrants and upon the conversion or
exchange of convertible or exchangeable securities.
(vi) As used herein, the phrase "Market Price" at any
date shall be deemed to be the last reported sale price, or, in case no such
reported sale takes place on such day, the average of the last reported sale
prices for the last three trading days, in either case as officially reported by
the principal securities exchange on which the Common Stock is listed or
admitted to trading or as reported in the NASDAQ National Market, or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange or quoted on the NASDAQ National Market, the average of the closing bid
and ask quotations as furnished by the National Association of Securities
Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer
reporting such information, or if the Common Stock is not quoted on NASDAQ, as
determined in good faith by resolution of the Board of Directors of the Company,
based on the best information available to it for the day immediately preceding
such issuance or sale, the day of such issuance or sale and the day immediately
after such issuance or sale. If the Common Stock is listed or admitted to
trading on a national securities exchange and also quoted on the NASDAQ National
Market, the Market Price shall be determined as hereinabove provided by
reference to the prices reported in the NASDAQ National Market; provided that if
the Common Stock is listed or admitted to trading on the New York Stock
Exchange, the Market Price shall be determined as hereinabove provided by
reference to the prices reported by such exchange.
(b) OPTIONS, RIGHTS, WARRANTS AND CONVERTIBLE AND
EXCHANGEABLE SECURITIES. Except in the case of the Company issuing rights to
subscribe for shares of Common Stock distributed pursuant to Paragraph 7(j)
hereof, if the Company shall at any time after the Closing Date issue options,
rights or warrants to subscribe for shares of Common Stock, or issue any
Securities
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<PAGE>
convertible into or exchangeable for shares of Common Stock, in each case other
than the issuances or sales referred to in Paragraph 7(f) hereof, (i) for a
consideration per share less than the lesser of (a) the Warrant Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, and (b) the Market Price on the trading
day immediately preceding such issuance, or (ii) without consideration, the
Warrant Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the case
may be, shall be reduced to a price determined by making a computation in
accordance with the provisions of Paragraph 7(a) hereof, provided that:
(i) The aggregate maximum number of shares of Common
Stock, as the case may be, issuable under all the outstanding options, rights or
warrants shall be deemed to be issued and outstanding at the time such
outstanding options, rights or warrants were issued, and for a consideration
equal to the minimum purchase price per share provided for in the options,
rights or warrants at the time of issuance, plus the consideration (determined
in the same manner as consideration received on the issue or sale of shares in
accordance with the terms of Paragraph 7(a) hereof), if any, received by the
Company for the options, rights or warrants, and if no minimum price is provided
in the options, rights or warrants, then the consideration shall be equal to
zero; provided, however, that upon the expiration or other termination of the
options, rights or warrants, if any thereof shall not have been exercised, the
number of shares of Common Stock deemed to be issued and outstanding pursuant to
this subparagraph (b) (and for the purposes of subparagraph (v) of Paragraph
7(a) hereof) shall be reduced by such number of shares as to which such options,
warrants and/or rights shall have expired or terminated unexercised, and such
number of shares shall no longer be deemed to be issued and outstanding, and the
Warrant Price then in effect shall forthwith be readjusted and thereafter be the
price which it would have been had adjustment been made on the basis of the
issuance only of shares actually issued upon the exercise of those options,
rights or warrants as to which the exercise rights shall not have expired or
terminated unexercised.
(ii) The aggregate maximum number of shares of Common
Stock issuable upon conversion or exchange of any convertible or exchangeable
securities shall be deemed to be issued and outstanding at the time of issuance
of such Securities, and for a consideration equal to the consideration
(determined in the same manner as consideration received on the issue or sale of
shares of Common Stock in accordance with the terms of Paragraph 7(a) hereof)
received by the Company for such Securities, plus the minimum consideration, if
any, receivable by the Company upon the conversion or exchange thereof;
provided, however, that upon the expiration or other termination of the right to
convert or exchange
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<PAGE>
such convertible or exchangeable securities (whether by reason of redemption or
otherwise), the number of shares deemed to be issued and outstanding pursuant to
this subparagraph (ii) (and for the purpose of subparagraph (v) of Paragraph
7(a) hereof) shall be reduced by such number of shares as to which the
conversion or exchange rights shall have expired or terminated unexercised, and
such number of shares shall no longer be deemed to be issued and outstanding,
and the Warrant Price then in effect shall forthwith be readjusted and
thereafter be the price which it would have been had adjustment been made on the
basis of the issuance only of the shares actually issued upon the conversion or
exchange of those convertible or exchangeable securities as to which the
conversion or exchange rights shall not have expired or terminated unexercised.
No adjustment will be made pursuant to this subparagraph (ii) upon the issuance
by the Company of any convertible or exchangeable securities pursuant to the
exercise of any option, right or warrant exercisable therefor, to the extent
that adjustments in respect of such options, rights or warrants were previously
made or will be made pursuant to the provisions of subparagraph (i) of this
subparagraph 7(b).
(iii) If any change shall occur in the price per share
provided for in any of the options, rights or warrants referred to in
subparagraph (i) of this Paragraph 7(b), or in the price per share at which the
Securities referred to in subparagraph (ii) of this Paragraph 7(b) are
convertible or exchangeable, or if any such option, rights or warrants are
exercised at a price greater than the minimum purchase price provided for in
such options, rights or warrants, or any such Securities are converted or
exercised for more than the minimum consideration receivable by the Company upon
such conversion or exchange, the options, rights or warrants or conversion or
exchange rights, as the case may be, shall be deemed to have expired or
terminated on the date when such price change became effective in respect of
shares not theretofore issued pursuant to the exercise or conversion or exchange
thereof, and the Company shall be deemed to have issued upon such date new
options, rights or warrants or convertible or exchangeable securities at the new
price in respect of the number of shares issuable upon the exercise of such
options, rights or warrants or the conversion or exchange of such convertible or
exchangeable securities; PROVIDED, HOWEVER, that no adjustment shall be made
pursuant to this subparagraph (iii) with respect to any change in the price per
share provided for in any of the options, rights or warrants referred to in
subparagraph (i) of this Paragraph 7(b), or in the price per share at which the
Securities referred to in subparagraph (ii) of this Paragraph 7(b) are
convertible or exchangeable, which change results from the application of the
anti-dilution provisions thereof in connection with an event for which, subject
to subparagraph (iv) of Paragraph 7(f), an adjustment to the Warrant Price and
the number of Securities issuable upon exercise of the Warrants will be required
to be made pursuant to this Paragraph 7.
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(c) SUBDIVISION AND COMBINATION. In case the Company shall
at any time after the Closing Date subdivide or combine the outstanding shares
of Common Stock, the Warrant Price shall forthwith be proportionately decreased
in the case of subdivision or increased in the case of combination.
(d) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of
the Warrant Price pursuant to the provisions of this Paragraph 7, the number of
shares of Common Stock (but not the number of Warrants, which are subject to
adjustment as set forth in the Warrant Agreement) issuable upon the exercise of
the Underwriter's Option shall be adjusted to the nearest full whole number by
multiplying a number equal to the Warrant Price in effect immediately prior to
such adjustment by the number of shares of Common Stock issuable upon exercise
of the Underwriter's Option immediately prior to such adjustment and dividing
the product so obtained by the adjusted Warrant Price.
(e) RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case of
any reclassification or change of the outstanding shares of Common Stock (other
than a change in par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination), or in the case of any
consolidation of the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger which does not result in any
reclassification or change of the outstanding shares of Common Stock, except a
change as a result of a subdivision or combination of such shares or a change in
par value, as aforesaid), or in the case of a sale or conveyance to another
corporation of the property of the Company as an entirety, the Holder shall
thereafter have the right, upon exercise of the Underwriter's Option, to
purchase the kind and number of shares of stock and other Securities and
property receivable upon such reclassification, change, consolidation, merger,
sale or conveyance as if the Holder were the owner of the shares of Common Stock
underlying the Underwriter's Option immediately prior to any such events (but
not the shares of Common Stock issuable upon exercise of any Warrants underlying
the Underwriter's Option) at a price equal to the product of (x) the number of
shares issuable upon exercise of the Underwriter's Option (but not the shares of
Common Stock issuable upon exercise of any Warrants underlying the Underwriter's
Option) and (y) the Warrant Price in effect immediately prior to the record date
for such reclassification, change, consolidation, merger, sale or conveyance as
if such Holder had exercised the Underwriter's Option.
(f) NO ADJUSTMENT OF WARRANT PRICE IN CERTAIN CASES.
Notwithstanding anything herein to the contrary, no adjustment of the Warrant
Price shall be made:
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(i) Upon the issuance or sale of the Underwriter's Option,
the shares of Common Stock or Warrants issuable upon the exercise of
the Underwriter's Option or the shares of Common Stock issuable upon
exercise of the Warrants underlying the Underwriter's Option; or
(ii) Upon the issuance or sale of (A) the shares of Common
Stock or Warrants issued by the Company in the Public Offering
(including pursuant to the Underwriter's overallotment option) or
other shares of Common Stock or warrants issued by the Company upon
consummation of the SPO, (B) the shares of Common Stock (or other
Securities) issuable upon exercise of Warrants; or
(iii) Upon (A) the issuance of options pursuant to the
Company's employee stock option plan in effect on the date hereof or
as hereafter amended in accordance with the terms thereof or any other
employee or executive stock option plan approved by shareholders of
the Company or the issuance or sale by the Company of any shares of
Common Stock pursuant to the exercise of any such options, or (B) the
issuance or sale by the Company of any shares of Common Stock pursuant
to the exercise of any options or warrants issued and outstanding on
the date of closing of the sale of Common Stock and Warrants pursuant
to the Public Offering or (C) the issuance or sale by the Company of
any shares of Common Stock upon the conversion of any convertible
securities of the Company or (D) as part of a merger, consolidation or
other corporate acquisition or business combination; or
(iv) Upon the issuance or sale of any Securities of the
Company in an underwritten transaction or in any transaction where the
price of the securities to be issued or sold in such transaction is
determined by an investment banker or placement agent; or
(v) If the amount of said adjustment shall be less than two
cents (2 CENTS) per share of Common Stock.
(g) ADJUSTMENT OF WARRANTS UNDERLYING UNDERWRITER'S OPTION.
With respect to the Warrants underlying the Underwriter's Option, the exercise
price of such Warrants and the number of shares of Common Stock purchasable
pursuant to such Warrants shall be automatically adjusted in accordance with the
applicable provisions of the Warrant Agreement, upon the occurrence, at any time
after the date hereof, of any of the events described in the Warrant Agreement
requiring such adjustment, with the same force and effect as if such Warrants
had been issued as of this date,
16
<PAGE>
whether or not such Warrants shall have been exercised (or exercisable) at the
time of the occurrence of such event and whether or not such Warrants shall be
issued and outstanding at the time of the occurrence of such event. Thereafter,
such Warrants shall be exercisable at such adjusted Warrant's exercise price for
such adjusted number of shares of Common Stock or other [UNITS], properties or
rights.
(h) REDEMPTION OF UNDERWRITER'S OPTION. Notwithstanding
anything to the contrary contained in this Agreement or elsewhere, the
Underwriters Option cannot be redeemed by the Company under any circumstances.
(i) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO
OUTSTANDING SECURITIES. In the event that the Company shall at any time after
the Closing Date and prior to the exercise and expiration of the Underwriter's
Option declare a dividend (other than a dividend consisting solely of shares of
Common Stock or a cash dividend or distribution payable out of current or
retained earnings) or otherwise distribute to the holders of Common Stock any
monies, assets, property, rights, evidences of indebtedness, Securities(other
than such a cash dividend or distribution or dividend consisting solely of
shares of Common Stock), whether issued by the Company or by another person or
entity, or any other thing of value, the Holders of the unexercised
Underwriter's Option shall thereafter be entitled, in addition to the shares of
Common Stock or other securities receivable upon the exercise thereof, to
receive, upon the exercise of such Underwriter's Option, the same monies,
property, assets, rights, evidences of indebtedness, Securities or any other
thing of value that they would have been entitled to receive at the time of such
dividend or distribution as if the Holders were the owners of the shares of
Common Stock underlying the Underwriter's Option (but not the shares of Common
Stock issuable upon exercise of any Warrants underlying the Underwriter's
Option). At the time of any such dividend or distribution, the Company shall
make appropriate reserves to ensure the timely performance of the provisions of
this Paragraph 7(i).
(j) SUBSCRIPTION RIGHTS FOR SHARES OF COMMON STOCK OR OTHER
SECURITIES. In case the Company shall at any time after the date hereof and
prior to the exercise of the Underwriter's Option in full issue any rights to
subscribe for shares of Common Stock or any other Securities of the Company to
all the holders of Common Stock of the Company, the Holders of the unexercised
Underwriter's Option shall be entitled, in addition to the shares of Common
Stock or other securities receivable upon the exercise of the Underwriter's
Option, to receive such rights at the time such rights are distributed to the
other shareholders of the Company but only to the extent of the number of shares
of Common Stock, if any, for which the Underwriter's Option remains exercisable.
17
<PAGE>
(k) NOTICE IN EVENT OF DISSOLUTION. In case of the dissolution,
liquidation or winding-up of the Company, all rights under the Underwriter's
Option shall terminate on a date fixed by the Company, such date to be no
earlier than ten (10) days prior to the effectiveness of such dissolution,
liquidation or winding-up and not later than five (5) days prior to such
effectiveness. Notice of such termination of purchase rights shall be given to
the last registered Holder of the Underwriter's Option, as the same shall appear
on the books and records of the Company, by registered mail at least thirty (30)
days prior to such termination date.
(l) COMPUTATIONS. The Company may retain a firm of independent
public accountants (who may be any such firm regularly employed by the Company)
to make any computation required under this Paragraph 7, and any certificate
setting forth such computation signed by such firm shall be conclusive evidence
of the correctness of any computation made under this Paragraph 7. In addition,
the Chief Financial Officer of the Company may make any computations required by
this Paragraph 7 and any certificate setting forth such computation signed by
the Chief Financial Officer of the Company shall be conclusive evidence of the
correctness of any computation made under this Paragraph 7.
8. FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractional shares of
Common Stock or fractional Warrants on the exercise of this Underwriter's
Option, provided, however, that if the Holder exercises the Underwriter's Option
in full, any fractional shares of Common Stock shall be eliminated by rounding
any fraction up to the nearest whole number of shares of Common Stock.
(b) The Holder of this Underwriter's Option, by acceptance hereof,
expressly waives his right to receive any fractional share of Common Stock or
fractional Warrant upon exercise of this Underwriter's Option.
9. REDEMPTION OF WARRANTS UNDERLYING THE UNDERWRITER'S OPTION
The Warrants underlying the Underwriter's Option are redeemable by
the Company upon the terms and conditions set forth in the Warrant Agreement.
10. MISCELLANEOUS.
(a) This Underwriter's Option shall be governed by and in accordance
with the laws of the State of New York without regard to the conflicts of law
principles thereof.
(b) All notices, requests, consents and other communications
hereunder shall be made in writing and shall be deemed to have been duly made
when delivered, or mailed by
18
<PAGE>
registered or certified mail, return receipt requested: (i) if to a Holder, to
the address of such Holder as shown on the books of the Company, or (ii) if to
the Company, 11601 Wilshire Boulevard, 21st Floor, Los Angeles, California
90025.
(c) The Company and the Underwriter may from time to time supplement
or amend this Underwriter's Option without the approval of any other Holders in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
add any other provisions in regard to matters or questions arising hereunder
which the Company and the Underwriter may deem necessary or desirable and which
the Company and the Underwriter deem not to materially adversely affect the
interest of the Holders.
(d) All the covenants and provisions of this Underwriter's Option by
or for the benefit of the Company and the Holders shall bind and inure to the
benefit of their respective successors and assigns hereunder.
(e) Nothing in this Underwriter's Option shall be construed to give
to any person or corporation other than the Company and the Underwriter and any
other registered Holder or Holders, any legal or equitable right, and this
Underwriter's Option shall be for the sole and exclusive benefit of the Company
and the Underwriter and any other Holder or Holders.
(f) This Underwriter's Option may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the Company has caused this Underwriter's Warrant
to be signed by its duly authorized officer and this Underwriter's Option to be
dated , 1996.
THE KUSHNER-LOCKE COMPANY
By:
Donald Kushner,
Co-Chief Executive Officer
Agreed, acknowledged and accepted this
____ day of ___________, 1996.
LEW LIEBERBAUM & CO., INC.
By:_________________________
[Name, title]
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<PAGE>
PURCHASE FORM
(To be signed only upon exercise of the Underwriter's Option)
The undersigned, the Holder of the foregoing Underwriter's Option,
hereby irrevocably elects to exercise the purchase rights represented by such
Underwriter's Option for, and to purchase thereunder,____ Units consisting of
two shares of Common Stock and one Warrant of The Kushner-Locke Company and
herewith makes payment of $________ therefor, and requests that the certificates
for Common Stock and Warrants be issued in the name(s) of, and delivered to
________________________________ whose address(es) is (are)
_____________________________________________ and whose social security or
taxpayer identification number is
.
Dated: __________________
_________________________
(Name of Holder)
_________________________*
(Signature of Holder)
_________________________
(Address)
* Signature must conform in all respects to name of registered Holder.
20
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Underwriter's Option)
For value received, the undersigned hereby sells, assigns, and
transfers unto _____________________ the right to purchase ______ Units
consisting of two shares of Common Stock and one Warrant of The Kushner-Locke
Company represented by the foregoing Underwriter's Option to the extent of
__________ Units, and appoints ________________, attorney to transfer such
rights on the books of The Kushner-Locke Company with full power of substitution
in the premises.
Dated: __________________
_________________________
(Name of Holder)
_________________________*
(Signature of Holder)
_________________________
(Address)
In the presence of:
_________________________
_________________________
* Signature must conform in all respects to name of registered Holder.
<PAGE>
EXHIBIT 5
[Kaye, Scholer, Fierman, Hays & Handler, LLP Letterhead]
July __, 1996
Board of Directors
The Kushner-Locke Company
11601 Wilshire Blvd., 21st Floor
Los Angeles, California 90025
Re: Registration Statement on Form S-2
----------------------------------
Gentlemen:
In connection with the Registration Statement on Form S-2 (as amended, the
"Registration Statement") filed by The Kushner-Locke Company, a California
corporation (the "Company"), with the Securities and Exchange Commission (the
"Commission") for the purpose of registering under the Securities Act of 1933,
as amended (the "Act"), units ("Units") consisting of two shares of the
Company's common stock, no par value (the "Common Stock"), and one of the
Company's Class C Redeemable Common Stock Purchase Warrants (the "Warrants"), we
have examined such corporate records, certificates and other documents, upon
which we have relied, and reviewed such questions of law as we have deemed
necessary or appropriate for the purposes of this opinion.
On the basis of such examination and review, we advise you that the Common
Stock issuable as part of the Units, upon the issuance, delivery and payment
therefore in the manner contemplated by the Registration Statement, and the
Common Stock issuable upon the exercise of the Warrants, upon the issuance,
delivery and payment therefore in the manner contemplated by the Registration
Statement, will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement, and to all references to our firm
included in such Registration Statement. In giving such opinion and consent, we
do not thereby admit that we come within the category of persons whose consent
is required under Section 7 of the Act or the rules and regulations of the
Commission thereunder.
Very truly yours,
<PAGE>
COMPOSITE COPY
_________________________________________________________________
_________________________________________________________________
CREDIT, SECURITY, GUARANTY AND PLEDGE AGREEMENT
DATED AS OF JUNE 19, 1996
AMONG
THE KUSHNER-LOCKE COMPANY
as Borrower,
THE GUARANTORS NAMED HEREIN
AND
THE LENDERS NAMED HEREIN
WITH
CHEMICAL BANK, AS AGENT
AND
CHEMICAL BANK, AS FRONTING BANK
_________________________________________________________________
_________________________________________________________________
<PAGE>
CREDIT, SECURITY, GUARANTY AND PLEDGE AGREEMENT,
dated as of June 19, 1996 (as amended, supplemented or
otherwise modified, renewed or replaced from time to
time, the "Credit Agreement"), among THE KUSHNER-LOCKE
COMPANY, a California corporation ("Borrower"), the
Guarantors named herein, the Lenders referred to herein,
CHEMICAL BANK, a New York banking corporation, as Agent
(the "Agent") for the Lenders and CHEMICAL BANK as
Fronting Bank (the "Fronting Bank").
INTRODUCTORY STATEMENT
All terms not otherwise defined above or in this Introductory
Statement are as defined in Article 1 hereof, or as defined elsewhere herein.
The Borrower has requested that the Lenders make available a
$40,000,000 three-year secured revolving credit facility, which will be used to
(i) refinance outstanding obligations as of the Closing Date under the Imperial
Credit Agreement; (ii) finance the production, acquisition and distribution of
television product (including, without limitation, infomercials), feature films
and video product and rights therein; and (iii) fund general working capital
requirements.
To provide assurance for the repayment of the Loans and other
Obligations of the Borrower hereunder, the Borrower and the Guarantors will
provide or will cause to be provided to the Agent for the benefit of the
Lenders, the following (each as more fully described herein):
(i) a security interest in the Collateral pursuant to Article 8
hereof;
(ii) a guaranty of the Obligations pursuant to Article 9 hereof;
and
(iii) a pledge of the Pledged Securities pursuant to the Article 10
hereof.
Subject to the terms and conditions set forth herein, the Agent is
willing to act as agent for the Lenders and each Lender is willing to make Loans
to the Borrower and participate in the Letters of Credit in amounts not in
excess of its Commitment hereunder, all as set forth on the Schedule of
Commitments.
<PAGE>
Accordingly, the parties hereto hereby agree as follows:
1. DEFINITIONS
For the purposes hereof unless the context otherwise requires, all
Section references herein shall be deemed to correspond with Sections herein,
the following terms shall have the meanings indicated, all accounting terms not
otherwise defined herein shall have the respective meanings accorded to them
under GAAP and all terms defined in the UCC and not otherwise defined herein
shall have the respective meanings accorded to them therein. Unless the context
otherwise requires, any of the following terms may be used in the singular or
the plural, depending on the reference:
"ACCEPTABLE DOMESTIC ACCOUNT DEBTOR" shall mean any Person listed
as such on Schedule 2 hereto (as modified from time to time in accordance with
Section 2.16).
"ACCEPTABLE FOREIGN ACCOUNT DEBTOR" shall mean any Person listed
as such on Schedule 2 hereto (as modified from time to time in accordance with
Section 2.16).
"ACCEPTABLE L/C" shall mean an irrevocable letter of credit which
(i) is in form and on terms acceptable to the Agent, (ii) is payable in Dollars
at an office of the issuing or confirming bank in New York City (or another city
acceptable to the Agent in its sole discretion), (iii) is payable to a
Collection Account for the item of Product to which the letter of credit
relates, (iv) is issued or confirmed by (a) any Lender; (b) any commercial bank
that has (or which is the principal operating subsidiary of a holding company
which has) as of the time such letter of credit is issued, public debt
outstanding with a rating of at least "A" (or the equivalent of an "A") from one
of the nationally recognized debt rating agencies; or (c) by any other bank
which the Required Lenders may in their sole discretion determine to be of
acceptable credit quality and (v) has an expiration date no earlier than two (2)
months after the "Outside Delivery Date" for an item of Product (as set forth in
the Completion Guarantee for such item of Product) to which the letter of credit
relates.
"AFFILIATE" shall mean any Person which, directly or indirectly,
is controlled by or is under common control with another Person. For purposes
of this definition, a Person shall be deemed to be "controlled by" another
Person if such latter Person possesses, directly or indirectly, power either to
direct or cause the direction of the management and policies of such controlled
Person whether by contract or otherwise.
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<PAGE>
"AFFILIATED GROUP" shall mean a group of Persons, each of which
is an Affiliate (other than by reason of having common directors or officers) of
some other Person in the group.
"AGENT" shall mean Chemical Bank, in its capacity as agent for
the Lenders hereunder or such successor Agent as may be appointed pursuant to
Section 12.12 of this Credit Agreement.
"ALLOWABLE AMOUNT" shall mean, with respect to any Person or
Affiliated Group, such amount as may be specified on Schedule 2 hereto as the
maximum aggregate exposure for such Approved Account Debtor which, unless
specified differently on Schedule 2, shall be unlimited for each Major Domestic
Account Debtor, $2,500,000 for each Major Foreign Account Debtor and $500,000
for each Acceptable Foreign Account Debtor and for each Acceptable Domestic
Account Debtor; PROVIDED, HOWEVER, that (i) the Agent may from time to time
by written notice to the Borrower (which notice shall be prospective only, i.e.
to the extent that reducing such Allowable Amount for any Approved Account
Debtor would otherwise result in a mandatory prepayment by the Borrower under
Section 2.9, such reduction shall not be given effect for purposes of such
mandatory prepayment, but such reduction shall nevertheless be effective for all
other purposes under this Credit Agreement immediately upon the Borrower's
receipt of such notice) decrease such amount as the Agent, acting in good faith,
may in its discretion deem appropriate or (ii) the Required Lenders may, by
written notice to the Borrower, increase such amount as they may in their
discretion deem appropriate.
"ALTERNATE BASE RATE" shall mean, for any day, a rate per annum
(rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of
(a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such
day plus 1% and (c) the Federal Funds Effective Rate in effect for such day plus
1/2 of 1%. For purposes hereof, "PRIME RATE" shall mean the rate of interest
per annum publicly announced from time to time by the Agent as its prime rate in
effect at its principal office in New York City. "BASE CD RATE" shall mean
the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii)
Statutory Reserves and (b) the Assessment Rate. "THREE-MONTH SECONDARY CD
RATE" shall mean, for any day, the secondary market rate for three-month
certificates of deposit reported as being in effect on such day (or, if such day
is not a Business Day, the next preceding Business Day) by the Board of
Governors of the Federal Reserve System of the United States through the public
information telephone line of the Federal Reserve Bank of New York (which rate
will, under current practices of the Board of Governors of the Federal Reserve
System of the United States, be published in Federal Reserve Statistical Release
H.15(519) during the week following such day), or, if such rate shall not be so
reported on such day or such next preceding Business Day, the average of the
secondary market quotations for three-month certificates of deposit of major
money center banks in New York City received at approximately 10:00 a.m., New
York City time, on
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<PAGE>
such day (or, if such day shall not be a Business Day, on the next preceding
Business Day) by the Agent from three New York City negotiable certificate of
deposit dealers of recognized standing selected by it. "STATUTORY RESERVES"
shall mean a fraction (expressed as a decimal), the numerator of which is the
number one and the denominator of which is the number one minus the aggregate of
the maximum reserve percentages (including any marginal, special, emergency or
supplemental reserves) expressed as a decimal established by the Board of
Governors of the Federal Reserve System of the United States and any other
banking authority to which the Agent is subject for new negotiable nonpersonal
time deposits in dollars of over $100,000 with maturities approximately equal to
three months. Statutory Reserves shall be adjusted automatically on and as of
the effective date of any change in any reserve percentage. "FEDERAL FUNDS
EFFECTIVE RATE" shall mean, for any day, the weighted average of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published on the next succeeding Business
Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day which is a Business Day, the average of the quotations for
the day of such transactions received by the Agent from three Federal funds
brokers of recognized standing selected by it. If for any reason the Agent
shall have determined (which determination shall be conclusive absent manifest
error) that it is unable to ascertain the Base CD Rate or the Federal Funds
Effective Rate or both for any reason, including the inability or failure of the
Agent to obtain sufficient quotations in accordance with the terms hereof, the
Alternate Base Rate shall be determined without regard to clause (b) or (c), or
both, of the first sentence of this definition, as appropriate, until the
circumstances giving rise to such inability no longer exist. Any change in the
Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary
CD Rate or the Federal Funds Effective Rate shall be effective on the effective
date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the
Federal Funds Effective Rate, respectively.
"ALTERNATE BASE RATE LOAN" shall mean a Loan based on the
Alternate Base Rate in accordance with the provisions of Article 2 hereof.
"APPLICABLE LAW" shall mean all provisions of statutes, rules,
regulations and orders of the United States or foreign governmental bodies or
regulatory agencies applicable to the Person in question, and all orders and
decrees of all courts and arbitrators in proceedings or actions in which the
Person in question is a party.
"APPLICABLE MARGIN" shall mean (i) with respect to that portion
of outstanding Loans (other than Loans under a Special Production Tranche) which
are supported by Tier 1 Borrowing Base, in the case of Alternate Base Rate Loans
2% per annum, or in the case of Eurodollar Loans, 3% per annum; (ii)
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<PAGE>
with respect to that portion of outstanding Loans which are supported by Tier 2
Borrowing Base, in the case of Alternate Base Rate Loans 3% per annum, or in the
case of Eurodollar Loans 4% per annum; and (iii) with respect to that portion,
if any, of outstanding Loans which were made under a Special Production Tranche,
in the case of Alternate Base Rate Loans, 3% per annum, or in the case of
Eurodollar Loans 4% per annum.
"APPROVED ACCOUNT DEBTORS" shall mean in the aggregate the Major
Domestic Account Debtors, Major Foreign Account Debtors, Acceptable Domestic
Account Debtors, and Acceptable Foreign Account Debtors initially identified as
such on Schedule 2 hereto.
"APPROVED COMPLETION GUARANTOR" shall mean a financially sound
and reputable completion guarantor approved by the Required Lenders. The
Required Lenders hereby pre-approve as a completion guarantor (i) The Motion
Picture Bond Co. (to the extent a completion guarantee is accompanied by a
London Guarantee Insurance Company "cut-through"), (ii) Fireman's Fund Insurance
Company, acting through its agent, International Film Guarantors L.P. (the
general partner of which is International Film Guarantors, Inc.), (iii) Cinema
Completions International Inc./Continental Casualty Company and (iv) Film
Finances, Inc. (but only for items of Product with a budget of $7,500,000 or
less and only to the extent the completion guarantee is accompanied by a Lloyd's
of London "cut-through"); PROVIDED, HOWEVER, that any such pre-approval may
be revoked by the Agent if deemed appropriate in its sole discretion or if so
instructed by the Required Lenders, at any time upon 30 days prior written
notice to the Borrower; but FURTHER, PROVIDED, that such pre-approval may
not be revoked with regard to an item of Product if a Completion Guarantee has
already been issued for such item of Product.
"APPROVED COUNTRY" shall refer to countries, as determined from
time to time in the sole and absolute discretion of the Agent, acting in good
faith which have an acceptable risk profile as measured by political and
economic stability; and, which are segregated by country risk as set forth in
Schedule 3 hereto.
"ASSESSMENT RATE" shall mean, for any day, the net annual
assessment rate (rounded upwards, if necessary, to the next higher 1/100 of 1%)
as most recently estimated by the Agent for determining the then current annual
assessment payable by the Agent to the Federal Deposit Insurance Corporation (or
any successor) for insurance by such Corporation (or such successor) of time
deposits made in Dollars at the Agent's domestic offices.
"ASSIGNMENT AND ACCEPTANCE" shall mean an agreement in the form
of Exhibit K hereto, executed by the assignor, assignee and other parties as
contemplated thereby.
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<PAGE>
"AUTHORIZED OFFICER" shall mean, with respect to the Borrower,
the Chairman, Vice-Chairman, President, Vice President-Finance, Controller or
Chief Operating Officer.
"BANKRUPTCY CODE" shall mean the Bankruptcy Reform Act of 1978,
as heretofore and hereafter amended, as codified at 11 U.S.C. Section 101 ET
SEQ.
"BORROWING" shall mean a group of Loans of a single interest rate
type and as to which a single Interest Period is in effect on a single day.
"BORROWING BASE" shall mean, at any date for which the amount
thereof is to be determined, an amount equal to:
(i) Tier 1 Borrowing Base; PLUS
(ii) Tier 2 Borrowing Base; PLUS
(iii) Tier 3 Borrowing Base; MINUS
(iv) to the extent not already deducted in computing the
foregoing, all amounts payable to third parties from or
with regard to the amounts otherwise included in the
Borrowing Base pursuant to (i), (ii) and (iii) above,
including without limitation remaining related acquisition
payments, set offs, profit participations, deferments,
residuals, commissions and royalties; MINUS
(v) the aggregate amount of all accrued but unpaid residuals
owed to any trade guild, to the extent that the obligation
of any Credit Party to pay such residuals is secured by a
security interest in any Eligible Receivable included in
the Borrowing Base, which security interest is not
subordinated to the security interests of the Lenders;
PROVIDED, HOWEVER, that the Borrowing Base credit attributable to any single
obligor shall never exceed 25% of the total Borrowing Base.
"BORROWING BASE CERTIFICATE" shall be as defined in Section 5.1(e).
"BORROWING CERTIFICATE" shall mean a borrowing certificate,
substantially in the form of Exhibit J hereto, to be delivered by the Borrower
to the Agent in connection with each Borrowing.
"BUDGETED NEGATIVE COST" shall mean, with respect to any item of
Product, the amount of the cash budget (stated in Dollars) for such item of
Product including all costs customarily
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<PAGE>
included in connection with the acquisition of all underlying literary and
musical rights with respect to such item of Product and in connection with the
preparation, production and Completion of such item of Product including costs
of materials, equipment, physical properties, personnel and services utilized in
connection with such item of Product, both "above-the-line" and
"below-the-line", any Completion Guarantee fee, and all other items customarily
included in negative costs, but excluding production fees and overhead charges
payable to a Credit Party, finance charges and interest expense.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or
other day on which banks are required or permitted to close in the State of New
York, State of California or in Amsterdam, The Netherlands; PROVIDED,
HOWEVER, that when used in connection with a Eurodollar Loan, the term
"Business Day" shall also exclude any day on which banks are not open for
dealings in Dollar deposits on the London Interbank Market.
"CAPITAL EXPENDITURES" shall mean, with respect to any Person for
any period, the sum of (i) the aggregate of all expenditures (whether paid in
cash or accrued as a liability) by such Person during that period which, in
accordance with GAAP, are or should be included in "additions to property, plant
or equipment or similar items included in cash flows" (including Capital Leases)
and (ii) to the extent not covered by clause (i) hereof, the aggregate of all
expenditures properly capitalized in accordance with GAAP by such Person to
acquire, by purchase or otherwise, the business, property or fixed assets of, or
stock or other evidence of beneficial ownership of, in part or in whole, of any
other Person (other than the portion of such expenditures allocable in
accordance with GAAP to net current assets).
"CAPITAL LEASE" shall mean any lease of any property (whether
real, personal or mixed) by that Person as lessee which, in accordance with
GAAP, is or should be accounted for as a capital lease on the balance sheet of
that Person.
"CASH COLLATERAL ACCOUNTS" shall be as defined in Section 11.1
hereof.
"CASH EQUIVALENTS" shall mean (i) marketable securities issued or
directly and fully guaranteed or insured by the United States of America or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States of America is pledged in support thereof) having maturities of
not more than twelve months from the date of acquisition, (ii) time deposits,
certificates of deposit, acceptances or prime commercial paper or repurchase
obligations for underlying securities of the types described in clause (i)
entered into with any Lender or any commercial bank having a short-term deposit
rating of at least A-2 or the equivalent thereof by Standard &
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<PAGE>
Poor's Corporation or at least P-2 or the equivalent thereof by Moody's
Investors Service, Inc. or (iii) commercial paper with a rating of A-1 or A-2 or
the equivalent thereof by Standard & Poor's Corporation or P-1 or P-2 or the
equivalent thereof by Moody's Investors Service, Inc. and in each case maturing
within twelve months after the date of acquisition.
"CHANGE IN CONTROL" shall mean either (i) any Person or group
(such term being used as defined in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended) acquiring ownership or control of capital
stock of the Borrower having voting power greater than the voting power at the
time controlled by Donald Kushner and Peter Locke combined (other than an
institutional investor eligible to report its holdings on Schedule 13G which
holds no more than 15% of such voting power) or (ii) at any time individuals who
at the date hereof constituted the Board of Directors of the Borrower (together
with any Directors whose election by such Board of Directors or whose nomination
for election by the shareholders of the Borrower, as the case may be, was
approved by a vote of the majority of the Directors still in office who were
either Directors at the date hereof or whose election or nomination for election
was previously so approved) ceasing for any reason to constitute a majority of
the Board of Directors of the Borrower then in office.
"CHANGE IN MANAGEMENT" shall mean that any Person other than
Donald Kushner or Peter Locke shall be the Chief Executive Officer of the
Borrower.
"CHEMICAL CLEARING ACCOUNT" shall mean the account of the Agent
(for the benefit of the Lenders) maintained at the office of the Agent at 270
Park Avenue, New York, New York 10017-2070, designated as the "Kushner-Locke
Agent Bank Clearing Account", Account No. 323-220568.
"CLOSING DATE" shall mean the earliest date on which all
conditions precedent to the making of the initial Loans as set forth in Section
4.1 have been satisfied or waived.
"CODE" shall mean the Internal Revenue Code of 1986 and the rules
and regulations issued thereunder, as heretofore amended, as codified at 26
U.S.C. Section 1 ET SEQ or any successor provision thereto.
"COLLATERAL" shall mean with respect to each Credit Party, all
of such Credit Party's right, title and interest in personal property, tangible
and intangible, wherever located or situated and whether now owned or hereafter
acquired or created, including but not limited to goods, accounts, intercompany
obligations, partnership and joint venture interests contract rights, documents,
chattel paper, general intangibles, goodwill,
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equipment, inventory, copyrights, trademarks, tradenames, insurance proceeds,
cash and bank accounts and any proceeds thereon, products thereof or income
therefrom, further including but not limited to all of such Credit Party's
right, title and interest in and to each and every item of Product the scenario,
screenplay or script upon which an item of Product is based, all of the
properties thereof, tangible and intangible, and all domestic and foreign
copyrights and all other rights therein and thereto, of every kind and
character, whether now in existence or hereafter to be made or produced, and
whether or not in possession of such Credit Party, including with respect to
each and every item of Product and without limiting the foregoing language, each
and all of the following particular rights and properties (to the extent they
are owned or hereafter created or acquired by such Credit Party):
(i) all scenarios, screenplays and/or scripts at every stage
thereof;
(ii) all common law and/or statutory copyright and other
rights in all literary and other properties (hereinafter called "said
literary properties") which form the basis of each item of Product and/or
which are and/or will be incorporated into each item of Product, all
component parts of each item of Product consisting of said literary
properties, all motion picture rights in and to the story, all treatments
of said story and said literary properties, together with all preliminary
and final screenplays used and to be used in connection with the item of
Product, and all other literary material upon which the item of Product is
based or from which it is adapted;
(iii) all rights in and to all music and musical compositions
used and to be used in each item of Product, including, each without
limitation, all rights to record, rerecord, produce, reproduce or
synchronize all of said music and musical compositions in and in
connection with motion pictures;
(iv) all tangible personal property relating to each item of
Product, including, without limitation, all exposed film, developed film,
positives, negatives, prints, positive prints, answer prints, special
effects, preparing materials (including interpositives, duplicate
negatives, internegatives, color reversals, intermediates, lavenders, fine
grain master prints and matrices, and all other forms of pre-print
elements), sound tracks, cutouts, trims and any and all other physical
properties of every kind and nature relating to such item of Product,
whether in completed form or in some state of completion, and all masters,
duplicates, drafts, versions, variations and copies of each thereof, in
all formats whether on film, videotape, disk or otherwise
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and all music sheets and promotional materials relating to such item of
Product (collectively, the "PHYSICAL MATERIALS");
(v) all collateral, allied, subsidiary and merchandising
rights appurtenant or related to each item of Product including, without
limitation, the following rights: all rights to produce remakes or
sequels or prequels to each item of Product based upon each item of
Product, said literary properties or the theme of each item of Product
and/or the text or any part of said literary properties; all rights
throughout the world to broadcast, transmit and/or reproduce by means of
television (including commercially sponsored, sustaining and subscription
or "pay" television) or by any process analogous thereto, now known or
hereafter devised, each item of Product or any remake or sequel or prequel
to the item of Product; all rights to produce primarily for television or
similar use a motion picture or series of motion pictures, by use of film
or any other recording device or medium now known or hereafter devised,
based upon each item of Product, said literary properties or any part
thereof, including, without limitation, based upon any script, scenario or
the like used in each item of Product; all merchandising rights including,
without limitation, all rights to use, exploit and license others to use
and exploit any and all commercial tieups of any kind arising out of or
connected with said literary properties, each item of Product, the title
or titles of each item of Product, the characters of each item of Product
or said literary properties and/or the names or characteristics of said
characters and including further, without limitation, any and all
commercial exploitation in connection with or related to each item of
Product, any remake or sequel thereof and/or said literary properties;
(vi) all statutory copyrights, domestic and foreign, obtained
or to be obtained on item of Product, together with any and all copyrights
obtained or to be obtained in connection with each item of Product or any
underlying or component elements of each item of Product, including, in
each case without limitation, all copyrights on the property described in
subparagraphs (i) through (v) inclusive, of this paragraph, together with
the right to copyright (and all rights to renew or extend such copyrights)
and the right to sue in the name of any of the Credit Parties for past,
present and future infringements of copyright;
(vii) all insurance policies and completion bonds connected
with each item of Product and all proceeds which may be derived therefrom;
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(viii) all rights to distribute, sell, rent, license the
exhibition of and otherwise exploit and turn to account each item of
Product, the Physical Materials and motion picture rights in and to said
story, other literary material upon which each item of Product is based or
from which it is adapted, and said music and musical compositions used or
to be used in each item of Product;
(ix) any and all sums, proceeds, money, products, profits or
increases, including money profits or increases (as those terms are used
in the UCC or otherwise) or other property obtained or to be obtained from
the distribution, exhibition, sale or other uses or dispositions of each
item of Product or any part of each item of Product, including, without
limitation, all proceeds, profits, products and increases, whether in
money or otherwise, from the sale, rental or licensing of each item of
Product and/or any of the elements of each item of Product including from
collateral, allied, subsidiary and merchandising rights;
(x) the dramatic, nondramatic, stage, television, radio and
publishing rights, title and interest in and to each item of Product, and
the right to obtain copyrights and renewals of copyrights therein;
(xi) the name or title of each item of Product and all rights
of such Credit Party to the use thereof, including, without limitation,
rights protected pursuant to trademark, service mark, unfair competition
and/or the rules and principles of law and of any other applicable
statutory, common law, or other applicable statutes, common law, or other
rule or principle of law;
(xii) any and all contract rights and/or chattel paper which
may arise in connection with each item of Product;
(xiii) all accounts and/or other rights to payment which such
Credit Party presently owns or which may arise in favor of such Credit
Party in the future, including, without limitation, any refund under a
completion guaranty, all accounts and/or rights to payment due from
exhibitors in connection with the distribution of each item of Product,
and from exploitation of any and all of the collateral, allied,
subsidiary, merchandising and other rights in connection with each item of
Product;
(xiv) any and all "general intangibles" (as that term is
defined in the UCC) not elsewhere included in this definition, including,
without limitation, any and all general intangibles consisting of any
right to payment which may arise in the distribution or exploitation of
any of the
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rights set out herein, and any and all general intangible rights in favor
of such Credit Party for services or other performances by any third
parties, including actors, writers, directors, individual producers and/or
any and all other performing or nonperforming artists in any way connected
with each item of Product, any and all general intangible rights in favor
of such Credit Party relating to licenses of sound or other equipment,
licenses for any photograph or photographic process, and all general
intangibles related to the distribution or exploitation of each item of
Product including general intangibles related to or which grow out of the
exhibition of each item of Product and the exploitation of any and all
other rights in each item of Product set out in this definition;
(xv) any and all goods including inventory (as that term is
defined in the UCC) which may arise in connection with the creation,
production or delivery of each item of Product and which goods pursuant to
any production or distribution agreement or otherwise are owned by such
Credit Party;
(xvi) all and each of the rights, regardless of denomination,
which arise in connection with the creation, production, completion of
production, delivery, distribution, or other exploitation of each item of
Product, including, without limitation, any and all rights in favor of
such Credit Party, the ownership or control of which are or may become
necessary or desirable, in the opinion of the Agent, in order to complete
production of each item of Product in the event that the Agent exercises
any rights it may have to take over and complete production of each item
of Product;
(xvii) any and all documents issued by any pledgeholder or
bailee with respect to the item of Product or any Physical Materials
(whether or not in completed form) with respect thereto;
(xviii) any and all production accounts or other bank accounts
established by such Credit Party with respect to such item of Product;
(xix) any and all rights of such Credit Party under contracts
relating to the production or acquisition of such item of Product; and
(xx) any and all rights of such Credit Party under
Distribution Agreements relating to each item of Product.
"COLLECTION ACCOUNTS" shall mean the accounts referred to in
Section 8.3.
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"COLLECTION BANK" shall mean Chemical Bank or such other bank
acceptable to the Agent.
"COMMITMENT" shall mean the commitment of each Lender to make
Loans to the Borrower and participate in Letters of Credit from the Initial Date
applicable to such Lender through the Commitment Termination Date up to an
aggregate amount, at any one time, not in excess of the amount set forth (i)
opposite its name in the Schedule of Commitments appearing in Schedule 1 hereto,
or (ii) in any applicable Assignment and Acceptance(s) to which it may be a
party, as the case may be, as such amount may be reduced from time to time in
accordance with the terms of this Credit Agreement.
"COMMITMENT FEE" shall have the meaning given such term in Section
2.5 hereof.
"COMMITMENT TERMINATION DATE" shall mean the earlier to occur of
(i) June 25, 1999 or (ii) such earlier date on which the Commitments shall
terminate in accordance with Section 2.6 or Article 7 hereof.
"COMPLETED" or "COMPLETION" shall mean with respect to any item
of Product, that (a) either (i) sufficient elements have been delivered by the
Borrower to, and accepted by, a Person (other than a Borrower or an Affiliate
thereof) to permit such Person to exhibit the item of Product theatrically in
the United States or (ii) the Borrower has certified to the Agent that an
independent laboratory has in its possession a complete final 35 mm composite
positive print or video master of the item of Product as finally cut, main and
end titled, edited, scored and assembled with sound track printed thereon in
perfect synchronization with the photographic action and fit and ready for
theatrical exhibition and distribution, provided that if such certification
shall not be verified to the Agent by such independent laboratory within 20
Business Days thereafter, such item of Product shall revert to being uncompleted
until the Agent receives such verification, and (b) if such item of Product was
acquired from a third party, the entire acquisition price or minimum advance
shall have been paid to the extent then due and there is no condition or event
(including, without limitation, the payment of money not yet due) the occurrence
of which might result in the Borrower losing any of its rights in such item of
Product.
"COMPLETION GUARANTEE" shall mean a completion guarantee, in the
Agent's customary form or otherwise in form and substance satisfactory to the
Agent, issued by an Approved Completion Guarantor which names the Agent for the
benefit of Lenders as a beneficiary thereof to the extent of the Borrower's
financial interest in an item of Product.
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"COMPLETION RESERVE" shall mean the portion of the Borrowing Base
that has been reserved for Completion of uncompleted product (including without
limitation, the payment of any portion of the acquisition price or minimum
advance for any item of Product acquired from a third party the nonpayment of
which would permit such third party to terminate the Borrower's rights in such
item of Product, but excluding all Designated Pictures) for which receivables
have been included in the Borrowing Base. The Completion Reserve shall be
calculated by subtracting the aggregate amounts applied to the strike prices of
self-produced product and acquisition prices and/or minimum guarantees for
acquired product from the aggregate strike prices, acquisition prices, and
minimum guarantees for all such items of Product.
"CONCENTRATION ACCOUNT" shall mean the account referred to in
Section 8.3.
"CONSOLIDATED" shall mean financial information of the Borrower
and its Subsidiaries consolidated in accordance with GAAP.
"CONSOLIDATED CAPITAL BASE" shall mean the sum of (i)
Stockholders' Equity and (ii) Subordinated Debt MINUS (x) the aggregate book
value of all items of Product with a negative cost of more than $1,500,000 which
remain unreleased more than 12 months after Completion.
"CONSOLIDATED INTEREST EXPENSE" shall mean for any period for
which such amount is being determined, total interest expense paid or payable in
cash (including that properly attributable to Capital Leases in accordance with
GAAP but excluding in any event all capitalized interest and amortization of
debt discount and debt issuance costs) of the Borrower and its Consolidated
Subsidiaries on a consolidated basis including, without limitation, all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing and net cash costs (or net profits)
under Interest Rate Protection Agreements, net of interest received in cash.
"CONSOLIDATED NET INCOME" shall mean, for any period for which
such amount is being determined, the net income (or loss) of the Borrower and
its Consolidated Subsidiaries during such period, determined on a Consolidated
basis for such period taken as a single accounting period in accordance with
GAAP, PROVIDED that there shall be excluded (i) income (or loss) of any Person
(other than a Consolidated Subsidiary) in which the Borrower or any of its
Consolidated Subsidiaries has an equity investment or comparable interest,
except to the extent of the amount of dividends or other distributions actually
paid to the Borrower or any of its Consolidated Subsidiaries by such Person
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during such period, (ii) the income (or loss) of any Person accrued prior to the
date it becomes a Consolidated Subsidiary of the Borrower or is merged into or
Consolidated with the Borrower or any of its Consolidated Subsidiaries or the
Person's assets are acquired by the Borrower or any of its Consolidated
Subsidiaries and (iii) the income of any Consolidated Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by that
Consolidated Subsidiary of its income is not at the time permitted by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Consolidated
Subsidiary.
"CONSOLIDATED SUBSIDIARIES" shall mean all Subsidiaries of a
Person which are required to be Consolidated with such Person for financial
reporting purposes in accordance with GAAP.
"CONTRIBUTION AGREEMENT" shall mean a Contribution Agreement
executed by the Guarantors substantially in the form of Exhibit H hereto, as the
same may be amended, supplemented or otherwise modified from time to time.
"CONTROLLED GROUP" shall mean all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with any Credit Party, are treated as a single
employer under Section 414(b), (c), (m) or (o) of the Code.
"CONVERTIBLE SUBORDINATED DEBENTURES" shall mean (i) the
Convertible Subordinated Debentures due 2000, Series A and Series B, (ii) the 8%
Convertible Subordinated Debentures due 2000 and (iii) the 9% Convertible
Subordinated Debentures due 2002, issued by the Borrower prior to the date
hereof.
"COPYRIGHT SECURITY AGREEMENT" shall mean the Copyright Security
Agreement, substantially in the form of Exhibit E-1 hereto as the same may be
amended or supplemented from time to time by delivery of a Copyright Security
Agreement Supplement or otherwise.
"COPYRIGHT SECURITY AGREEMENT SUPPLEMENT" shall mean a Supplement
to the Copyright Security Agreement substantially in the form of Exhibit E-2
hereto.
"CREDIT PARTY" shall mean the Borrower or any of the Guarantors.
"CURRENCY AGREEMENT" shall mean any foreign exchange contract,
currency swap agreement, futures contract, option contract, synthetic cap or
other similar agreement designed to protect the Borrower against fluctuations in
currency values.
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"DEFAULT" shall mean any event, act or condition which with notice
or lapse of time, or both, would constitute an Event of Default.
"DESIGNATED PICTURE" shall mean a theatrical motion picture
Project (including motion pictures intended for foreign theatrical release but
domestically released on cable television or direct-to-video) designated as such
by the Borrower in a written notice delivered to the Agent and meeting all of
the following criteria: (A) the Borrower shall have delivered a sources and
uses statement demonstrating to the satisfaction of the Agent that at least 45%
of the Budgeted Negative Cost of such Project will be covered by a minimum
guaranty under acceptable domestic distribution arrangement(s) and no more than
17% of the budget is to be funded from loans which are supported by the Unsold
Territory Credit for such Project, and (B) if such sources and uses statement
shows that any portion of the budget for such Picture is to be funded from loans
which are supported by the Unsold Territory Credit for such Project, the
Borrower shall also have delivered to the Agent satisfactory evidence that (a)
foreign presales have been concluded covering at least 19% of the budget and (b)
the Borrower has concluded presales for at least two (2) of the territories
listed in the definition of Estimated Value (at least one (1) of which shall be
either France, Germany, Italy, Japan or the United Kingdom); PROVIDED that the
Borrower may designate no more than six (6) Projects per year as Designated
Pictures. For purposes of this definition, "PROJECT" shall mean one or more
theatrical motion pictures which are financed and sold as a package, PROVIDED
that the total maximum Production Exposure of each Project is not more than
$20,000,000 and; PROVIDED, FURTHER, that no more than two (2) Projects per
year may have a Production Exposure of more than $7,500,000.
"DISTRIBUTION AGREEMENTS" shall mean (i) any and all agreements
entered into by a Credit Party pursuant to which such Credit Party has sold,
leased, licensed or assigned distribution rights or other exploitation rights to
any item of Product to an un-Affiliated Person and (ii) any agreement hereafter
entered into by a Credit Party pursuant to which such Credit Party sells,
leases, licenses or assigns distribution rights to an item of Product to an
un-Affiliated Person.
"DOLLARS" and "$" shall mean lawful money of the United States
of America.
"EBIT" shall mean, for any period, for the Borrower and its
Subsidiaries on a Consolidated basis, the sum for such period of (i)
Consolidated Net Income, (ii) interest expense and (iii) provision for income
taxes during such period, all as determined for such period in conformity with
GAAP.
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"ELIGIBLE ASSIGNEE" shall mean (i) a commercial bank organized
under the laws of the United States, or any State thereof, and having total
assets in excess of $1,000,000,000; (ii) a savings and loan association or
savings bank organized under the laws of the United States, or any State
thereof, and having a net worth of at least $100,000,000, calculated in
accordance with GAAP; (iii) a commercial bank organized under the laws of any
other country which is a member of the Organization for Economic Cooperation and
Development ("OECD"), or a political subdivision of any such country, and having
total assets in excess of $1,000,000,000, provided that such bank is acting
through a branch, subsidiary or agency located in the country in which it is
organized or another country which is also a member of the OECD; or (iv) the
central bank of any country which is a member of the OECD.
"ELIGIBLE L/C RECEIVABLE" shall have the same definition as an
Eligible Receivable with the additional provision that an Acceptable L/C be
delivered to the Agent for the full amount of the receivable but need not be
with an Approved Account Debtor.
"ELIGIBLE LIBRARY AMOUNT" shall be equal to the Borrower's share
(net of participations) of the sum of (i) the book value of film costs as
measured on a GAAP basis, minus; (ii) the book value of film costs for Product
which is encumbered by liens other than those of this facility and certain other
permitted liens arising in the ordinary course of production, minus; (iii) the
book value of film costs for Product which is not Completed, minus; (iv)
off-balance sheet receivables on Completed Product which are included in Tier 1
Borrowing Base, minus (v) production advances and deferred income to the extent
not already deducted.
"ELIGIBLE RECEIVABLES" shall mean, at any date at which the amount
thereof is to be determined, an amount equal to the sum of the present values
(discounted, in the case of amounts which are not due and payable within 12
months following the date of determination, on a quarterly basis at a rate of
interest equal to the greater of (x) the Alternate Base Rate in effect on the
date of the computation or (y) 10% per annum) of (a) all net amounts which
pursuant to a binding agreement are contractually required to be paid to any
Credit Party either unconditionally or subject only to normal delivery
requirements, and which are reasonably expected by the Borrower to be payable
and collected from Approved Account Debtors (including, without limitation,
amounts which a distributor has reported to a Credit Party in writing (and such
report has been forwarded to the Agent) will be paid to such Credit Party
following receipt by the distributor of sums contractually required to be paid
to the distributor from third parties) minus (b) the sum of (i) the following
items (based on the Borrower's then best estimates): third party profit
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participations, residuals, collection/ distribution expenses, commissions, home
video costs, foreign withholding, remittance and similar taxes chargeable in
respect of such accounts receivable, and any other projected expenses of such
Credit Party arising in connection with such amounts and (ii) the outstanding
amount of unrecouped advances made by a distributor to the extent subject to
repayment by or adjustment pursuant to approved Distribution Agreements, but
Eligible Receivables shall not include amounts which:
(i)
in the case of any single Approved Account Debtor, exceed the Allowable Amount
with respect to such Approved Account Debtor;
(ii) in the reasonable discretion of the Agent, are subject to
material conditions precedent to payment (including a material
performance obligation or a material executory aspect on the
part of the Borrower or any other party or obligations
contingent upon future events not within the Borrower's direct
control);
(iii) are attributable to receivables that are more than 90 days
past due;
(iv) are theatrical receivables due from any obligor in connection
with the theatrical exhibition, distribution or exploitation
of an item of Product that is still outstanding six months
after its creation;
(v) are in excess of $3,000,000 in the aggregate if they are to be
paid in a currency other than Dollars unless hedged in a
manner satisfactory to the Agent;
(vi) have been included in the Borrower's estimated bad debts;
(vii) are receivable from any obligor with respect to whom 10% or
more of the total receivable amount from such obligor 120 or
more days past due (other than the amounts that are being
disputed or contested in good faith);
(viii) are subject to a bona fide request for a material credit,
adjustment, compromise, offset, counterclaim or dispute;
PROVIDED, HOWEVER, that only the amount in question
shall be excluded from such receivable;
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(ix) are attributable to an item of Product in which the Borrower
cannot warrant sufficient title to the underlying rights to
justify such receivable;
(x) are not subject to a first perfected security interest under
the UCC (subject only to guild liens contemplated by clause
(v) of the definition of Borrowing Base) in favor of the Agent
(for the benefit of the Lenders);
(xi) are determined by the Agent in its sole discretion, acting in
good faith, upon written notice from the Agent to the Borrower
and effective 10 days subsequent to the Borrower's receipt of
such notice, to be unacceptable (it being understood that
certain unacceptable receivables may be made acceptable and
may be included in the Borrowing Base if secured by an
Acceptable L/C);
(xii) relate to items of Product as to which the Agent has not
received a fully executed Laboratory Access Letter or
Pledgeholder agreement for each laboratory holding physical
elements sufficient to fully exploit the rights held by the
Borrower in such item of Product;
(xiii) will be subject to repayment to the extent not earned by
performance;
(xiv) are attributable to items of Product which have not been
Completed (except that (1) if a Letter of Credit is issued in
order to support the Borrower's minimum payment obligation to
acquire distribution rights in such item of Product, amounts
attributable to such rights may be treated as Eligible
Receivables (even though the item of Product has not yet been
Completed), PROVIDED THAT (A) proof of Completion of such
item of Product must be presented in order to draw under the
Letter of Credit, (B) the portion of the Borrowing Base
attributable to such Eligible Receivables for such item of
Product does not exceed the amount of such Letter of Credit
for such item of Product, and (C) such amounts otherwise meet
all of the applicable criteria for inclusion as Eligible
Receivables, (2) if a Completion Guarantee has been issued for
such item of Product and the Borrower otherwise is in
compliance with Section 5.25, amounts attributable to such
item of Product may be treated as Eligible Receivables (even
though the item of Product has not yet been
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Completed), PROVIDED THAT (A) the portion of the Borrowing
Base attributable to such Eligible Receivables for such item
of Product does not exceed the amounts attributable to such
Completion Guarantee for such item of Product and (B) such
amounts otherwise meet all of the applicable criteria for
inclusion as Eligible Receivables, (3) with respect to an item
of Product being produced by a third party where a Credit
Party is not subject to a completion risk (i.e. payment by
such Credit Party is conditioned on delivery), amount
attributable to such item of Product may be treated as
Eligible Receivables (even though the item of Product has not
yet been Completed), PROVIDED THAT (A) the portion of the
Borrowing Base attributable to such Eligible Receivables for
such item of Product does not exceed the portion of the
Completion Reserve attributable to such item of Product and
(B) such amounts otherwise meet all of the applicable criteria
for inclusion as Eligible Receivables, and (4) if a Completion
Guarantee is not required for an item of Product being
produced by a Credit Party, amounts attributable to such item
of Product may be treated as Eligible Receivables (even though
the item of Product has not yet been Completed) provided that
such amounts otherwise meet all of the applicable criteria for
inclusion as Eligible Receivables). Without limiting the
foregoing, Eligible Receivables shall include amounts which
are attributable to items of Product acquired from a third
party pursuant to a Distribution Agreement if the entire
acquisition price or minimum advance shall have been paid to
the extent then due and there is no condition or event
(including, without limitation, the payment of money not yet
due) the occurrence of which might result in any Credit Party
losing its rights in such item of Product, PROVIDED that all
the conditions set forth in the definition of "Completed" have
been satisfied and such items of Product are not otherwise
excluded by clauses (i) through (xiii) and clause (xv) of this
definition; or
(xv) will not become due and payable until six months or more after
the scheduled final maturity of the Credit Agreement.
In the event the Agent notifies the Borrower that the Agent has
determined that a Person or Affiliated Group is to be deleted as an Approved
Account Debtor, no additional Eligible Receivable from such Person or Affiliated
Group may be included
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in the Borrowing Base subsequent to such notice unless the Agent thereafter
determines that such Person or Affiliated Group is an Approved Account Debtor.
In the event the Agent notifies the Borrower that the Agent has determined that
the Allowable Amount with respect to an Approved Account Debtor is to be
decreased, no additional Eligible Receivable from such Approved Account Debtor
may be included in the Borrowing Base if such inclusion would result in the
aggregate amount of Eligible Receivables from such Approved Account Debtor
exceeding the Allowable Amount after giving effect to such reduction unless the
Agent thereafter determines that the Allowable Amount may be increased.
No item shall constitute an Eligible Receivable unless the Borrower
shall have delivered to the Agent (A) executed copies of the Distribution
Agreements for eligible accounts receivable in excess of $100,000 or which are
requested by the Agent, (B) a summary checklist demonstrating the eligibility of
the receivable, showing a summary of the terms and conditions, and the
calculation for any possible deductions including but not limited to residuals
and participations, for all eligible accounts receivable in excess of $1,000,000
or which are requested by the Agent and (C) to the extent not already delivered
and requested by the Agent, copyright registration for the distribution rights,
chain-of-title documents, acceptable insurance and security filings with respect
to eligible accounts receivable.
"ENVIRONMENTAL LAWS" shall mean any and all federal, state, local
or municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees or requirements of any Governmental Authority regulating, relating to
or imposing liability or standards of conduct concerning any Hazardous
Material or environmental protection or health and safety, as now or may at
any time hereafter be in effect, including without limitation, the Clean
Water Act also known as the Federal Water Pollution Control Act ("FWPCA"), 33
U.S.C. Section 1251 ET SEQ., the Clean Air Act ("CAA"), 42 U.S.C. Sections
7401 ET SEQ., the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA"), 7 U.S.C. Sections 136 ET SEQ., the Surface Mining Control and
Reclamation Act ("SMCRA"), 30 U.S.C. Sections 1201 ET SEQ., the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C.
Section 9601 ET SEQ., the Superfund Amendments and Reauthorization Act of
1986 ("SARA"), Public Law 99-499, 100 Stat. 1613, the Emergency Planning and
Community Right to Know Act ("ECPCRKA"), 42 U.S.C. Section 11001 ET SEQ., the
Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 ET
SEQ., the Occupational Safety and Health Act as amended ("OSHA"), 29 Section
655 and Section 657, together, in each case, with any amendment thereto, and
the regulations adopted pursuant thereto.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as heretofore and hereafter amended, as
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codified at 29 U.S.C. Section 1001 ET SEQ. and the regulations promulgated
thereunder.
"ESTIMATED VALUE" shall mean with respect to any item of Product
and any Unsold Major Foreign Territory, the estimated value attributable to such
Major Foreign Territory, which value shall be calculated by multiplying the
percentage set forth below for such Major Foreign Territory times the final
budget for such item of Product:
Major
Foreign Estimated Value
Territory (Percentage of the Final Budget)
--------- --------------------------------
Australia 4%
Benelux 3%
France 8%
Germany 10%
Italy 8%
Japan 10%
Korea 5%
Scandinavia 3%
Spain 4%
United Kingdom 9%
The Agent (at its discretion) may reduce foregoing percentages proportionately
with respect to all remaining Unsold Major Foreign Territories for any item of
Product for which actual sales in the listed territories total less than the
aggregate estimate for such sold territories based on the foregoing percentages.
"EURODOLLAR LOAN" shall mean a Loan based on the LIBO Rate in
accordance with the provisions of Article 2 hereof.
"EVENT OF DEFAULT" shall have the meaning given such term in
Article 7 hereof.
"FEE LETTER" shall mean that certain letter agreement dated as of
April 12, 1996 between the Borrower and the Agent relating to the payment of
certain fees by the Borrower.
"FRONTING BANK" shall mean as defined in the initial paragraph
hereof.
"FUNDAMENTAL DOCUMENTS" shall mean this Credit Agreement, the
Notes, the Pledgeholder Agreements, the Laboratory Access Letters, the Copyright
Security Agreement, the Copyright Security Agreement Supplements, the Trademark
Security Agreement, the Instruments of Assumption and Joinder, the Notices of
Assignment and Irrevocable Instruction, UCC financing statements and any other
ancillary documentation which is required to be or
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is otherwise executed by any of the Credit Parties and delivered to the Agent in
connection with this Credit Agreement or any other Fundamental Document.
"GAAP" shall mean generally accepted accounting principles
consistently applied (except for accounting changes in response to FASB
releases, or other authoritative pronouncements).
"GOVERNMENTAL AUTHORITY" shall mean any federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality, or any court, in each case whether of the United States or a
foreign jurisdiction.
"GUARANTORS" shall mean all direct and indirect Subsidiaries of
the Borrower now existing or hereafter acquired or created, but excluding 50/50
joint ventures.
"GUARANTY" shall mean, as to any Person, any direct or indirect
obligation of such Person guaranteeing or intended to guaranty any Indebtedness,
Capital Lease, dividend or other monetary obligation ("primary obligation") of
any other Person (the "primary obligor") in any manner, whether directly or
indirectly, including, without limitation, any obligation of such Person,
whether or not contingent, (i) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (ii) to advance or
supply funds (a) for the purchase or payment of any such primary obligation or
(b) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, or (iii)
to purchase property, securities or services, in each case, primarily for the
purpose of assuring the owner of any such primary obligation; PROVIDED,
HOWEVER, that the term Guaranty shall not include endorsements for collection
or collections for deposit, in either case in the ordinary course of business.
The amount of any Guaranty shall be deemed to be an amount equal to the stated
or determinable amount of the primary obligation in respect of which such
Guaranty is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof (assuming such Person is required to
perform thereunder).
"HAZARDOUS MATERIALS" shall mean any flammable materials,
explosives, radioactive materials, hazardous materials, hazardous wastes,
hazardous or toxic substances, or similar materials defined in any Environmental
Law.
"IMPERIAL CREDIT AGREEMENT" shall mean the Third Amended and
Restated Credit Agreement dated as of February 9, 1990, as amended and restated
as of December 14, 1990, as of May 1, 1992 and as of August 31, 1993 among the
Borrower, the additional individual borrowers referred to therein, the lenders
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named therein and Imperial Bank, as agent, as the same has been amended through
the date hereof.
"INDEBTEDNESS" shall mean (without double counting), at any time
and with respect to any Person, (i) indebtedness of such Person for borrowed
money (whether by loan or the issuance and sale of debt securities) or for the
deferred purchase price of property or services purchased (other than amounts
constituting trade payables (payable within 90 days or such longer terms as may
be customary in the industry) arising in the ordinary course of business); (ii)
obligations of such Person in respect of letters of credit, acceptance
facilities, or drafts or similar instruments issued or accepted by banks and
other financial institutions for the account of such Person; (iii) obligations
of such Person under Capital Leases; (iv) deferred payment obligations of such
Person resulting from the adjudication or settlement of any claim or litigation
and (v) Indebtedness of others of the type described in clauses (i), (ii), (iii)
and (iv) hereof which such Person has (a) directly or indirectly assumed or
guaranteed in connection with a Guaranty or (b) secured by a Lien on the assets
of such Person, whether or not such Person has assumed such indebtedness.
Indebtedness shall not include non-refundable advances made by a third-party
distributor to "cash-flow" the production of an item of Product.
"INITIAL DATE" shall mean (i) in the case of the Agent, the date
hereof, (ii) in the case of each Lender which is an original party to this
Credit Agreement, the date hereof and (iii) in the case of any other Lender, the
effective date of the Assignment and Acceptance pursuant to which it became a
Lender.
"INSTRUMENTS OF ASSUMPTION AND JOINDER" shall mean the Instruments
of Assumption and Joinder substantially in the form of Exhibit L pursuant to
which Subsidiaries of the Borrower become parties to this Credit Agreement as
contemplated by Section 6.24.
"INTEREST PAYMENT DATE" shall mean (i) as to any Eurodollar Loan
having an Interest Period of one, two, three months, the last day of such
Interest Period, (ii) as to any Eurodollar Loan having an Interest Period of six
months, the last day of such Interest Period and, in addition, the date during
such Interest Period that would be the last day of an Interest Period commencing
on the same day as the first day of such Interest Period but having a duration
of three months and (iii) with respect to Alternate Base Rate Loans, the last
Business Day of each March, June, September and December (commencing the last
Business Day of June 1996).
"INTEREST PERIOD" shall mean as to any Eurodollar Loan, the period
commencing on the date of such Loan or the last day of the preceding Interest
Period and ending on the numerically
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corresponding day (or if there is no corresponding day, the last day) in the
calendar month that is one, two, three or six months thereafter as the Borrower
may elect; PROVIDED, HOWEVER, that (i) if any Interest Period would end on a
day which shall not be a Business Day, such Interest Period shall be extended to
the next succeeding Business Day, unless such next succeeding Business Day would
fall in the next calendar month, in which case, such Interest Period shall end
on the next preceding Business Day, (ii) no Interest Period may be selected
which would end later than the Maturity Date and (iii) no Interest Period of six
months may be selected unless consented to by all of the Lenders in their sole
discretion.
"INTEREST RATE PROTECTION AGREEMENTS" shall mean any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect any Credit Party against fluctuations in
interest rates.
"INVESTMENT" shall mean any stock, evidence of indebtedness or
other securities of any Person, any loan, advance, contribution of capital,
extension of credit or commitment therefor, including without limitation the
guarantee of loans made to others (except for current trade and customer
accounts receivable for services rendered in the ordinary course of business and
payable in accordance with customary trading terms in the ordinary course of
business), and any purchase of (i) any securities of another Person or (ii) any
business or undertaking of any Person or any commitment or option to make any
such purchase.
"KEYMAN LIFE INSURANCE" shall mean the Kushner Life Insurance and
the Locke Life Insurance.
"KEYMAN LIFE INSURANCE ASSIGNMENT" shall mean the Assignment to
the Agent of the Keyman Life Insurance as Collateral, in form and substance
satisfactory to the Agent.
"KLC/NEW CITY" shall mean KLC/New City, a California general
partnership, the general partners of which are the Borrower and New City
Releasing.
"KUSHNER LIFE INSURANCE" shall mean the keyman life insurance
policy on the life of Donald Kushner issued by Chubb Sovereign Life Insurance in
a face amount of not less than $5,000,000, which policy is in form and
substance satisfactory to the Agent, and any supplemental or replacement
policies relating thereto.
"L/C EXPOSURE" shall mean, at any time, the amount expressed in
Dollars of the aggregate face amount of all drafts which may then or thereafter
be presented by beneficiaries under
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all Letters of Credit then outstanding plus (without duplication) the face
amount of all drafts which have been presented under all Letters of Credit but
have not yet been paid or have been paid but not reimbursed.
"LABORATORY" shall mean any laboratory reasonably acceptable to
the Agent, which is located in the United States, Canada or the United Kingdom
and is a party to a Pledgeholder Agreement.
"LABORATORY ACCESS LETTER" shall mean a letter agreement among (i)
a Laboratory holding any elements of any Product to which a Credit Party has the
right of access, (ii) such Credit Party and (iii) the Agent, substantially in
the form of Exhibit G hereto or a form otherwise acceptable to the Agent.
"LENDER" and "LENDERS" shall mean the financial institutions
whose names appear at the foot hereof and any assignee of a Lender pursuant to
Section 13.3(b).
"LENDING OFFICE" shall mean, with respect to any of the Lenders,
the branch or branches (or affiliate or affiliates) from which any such Lender's
Eurodollar Loans or Alternate Base Rate Loans, as the case may be, are made or
maintained and for the account of which all payments of principal of, and
interest on, such Lender's Eurodollar Loans or Alternate Base Rate Loans are
made, as notified to the Agent from time to time.
"LETTER OF CREDIT" shall mean a letter of credit issued by the
Fronting Bank pursuant to Section 2.15.
"LIBO RATE" shall mean, with respect to the Interest Period for a
Eurodollar Loan, an interest rate per annum equal to the quotient (rounded
upwards to the next 1/100 of 1%) of (A) the average of the rates at which Dollar
deposits approximately equal in principal amount to the Agent's portion of such
Eurodollar Loan and for a maturity equal to the applicable Interest Period are
offered to the Lending Office of the Agent in immediately available funds in the
London Interbank Market for Eurodollars at approximately 11:00 a.m., London
time, two Business Days prior to the commencement of such Interest Period
divided by (B) one minus the applicable statutory reserve requirements of the
Agent, expressed as a decimal (including without duplication or limitation,
basic, supplemental, marginal and emergency reserves), from time to time in
effect under Regulation D or similar regulations of the Board of Governors of
the Federal Reserve System. It is agreed that for purposes of this definition,
Eurodollar Loans made hereunder shall be deemed to constitute Eurocurrency
Liabilities as defined in Regulation D and to be subject to the reserve
requirements of Regulation D.
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<PAGE>
"LICENSING AGREEMENTS" shall mean agreements between a Credit
Party and other Persons (who are not Affiliates of a Credit Party) pursuant to
which such Credit Party grants licenses to such other Persons to distribute,
broadcast or exhibit an item of Product.
"LIEN" shall mean any mortgage, copyright mortgage, pledge,
security interest, encumbrance, lien or charge of any kind whatsoever (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, and the filing of or agreement to give any financing statement under
the Uniform Commercial Code of any jurisdiction or the agreement to grant a
security interest at a future date).
"LOANS" shall mean the Loans made hereunder in accordance with the
provisions of Article 2, whether made as a Eurodollar Loan or an Alternate Base
Rate Loan, as permitted hereby.
"LOCKE LIFE INSURANCE" shall mean the keyman life insurance policy
on the life of Peter Locke issued by Chubb Sovereign Life Insurance in a face
amount not less than $5,000,000 as specified in, which policy is in form and
substance satisfactory to the Agent, and any supplemental or replacement
policies relating thereto.
"MAJOR DOMESTIC ACCOUNT DEBTOR" shall mean any Person listed as
such on Schedule 2 hereto (as modified from time to time in accordance with
Section 2.16).
"MAJOR FOREIGN ACCOUNT DEBTOR" shall mean any Person listed as
such on Schedule 2 hereto (as modified from time to time in accordance with
Section 2.16).
"MARGIN STOCK" shall be as defined in Regulation U of the Board of
Governors of the Federal Reserve System.
"MATURITY DATE" shall mean June 25, 1999 or such earlier date, if
any, on which the Loans shall become due and payable in accordance with the
provisions of Article 7 hereto.
"MULTIEMPLOYER PLAN" shall mean a plan described in Section
4001(a)(3) of ERISA.
"NOTICE OF ASSIGNMENT AND IRREVOCABLE INSTRUCTIONS" shall mean the
Notice of Assignment and Irrevocable Instructions substantially in the form of
Exhibit I or in such other form as shall be acceptable to the Agent, including
without limitation the inclusion of such notice and instructions in a
Distribution Agreement.
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"OBLIGATIONS" shall mean the obligation of the Borrower to make
due and punctual payment of principal of and interest on the Loans, the
Commitment Fee, reimbursement obligations in respect of Letters of Credit and
all other monetary obligations of the Borrower to the Agent, the Fronting Bank
or any Lender under this Credit Agreement, the Notes or any other Fundamental
Document or the Fee Letter and all amounts payable by the Borrower to any Lender
under any Interest Rate Protection Agreement or Currency Agreement, provided
that the Agent shall have received written notice at least 10 days prior to
execution of each such Interest Rate Protection Agreement or Currency Agreement.
"PAY-PER-VIEW ESTIMATES" shall mean with respect to the Borrower
or any Guarantor, the amount of all receivables which are estimated to be due to
the Borrower or such Guarantor from Approved Account Debtors in connection with
feature films which have aired on pay-per-view networks representing at least
10,000,000 addressable homes. The net amount of such estimated receivables for
each such feature film which may be included as Pay-Per-View Estimates shall be
the lesser of (i) the previous year's average pay-per-view amount paid per title
to the Borrower and the Guarantors for each feature film (which average for the
balance of 1996 shall be $75,000 per title) or (ii) the average pay-per-view
amount paid per title to the Borrower and the Guarantors for the last six (6)
feature films which have been available for pay-per-view exhibition for at least
six (6) months, reduced in each case by the amount of any advance or other
payment which may theretofore have been paid, or committed to be paid, to the
Borrower or any Guarantor with respect to the pay-per-view exhibition of such
feature film; PROVIDED HOWEVER, that the amount of the Pay-Per-Estimates for
all such feature films shall never exceed $3,000,000 in the aggregate.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor thereto.
"PERCENTAGE" shall mean, with respect to any Lender, its ratable
share expressed as a percentage equal to the ratio obtained by dividing the
applicable Commitment of such Lender by the applicable aggregate Commitments of
the Lenders.
"PERMITTED ENCUMBRANCES" shall mean Liens permitted under Section
6.2 hereof.
"PERSON" shall mean any natural person, corporation, division of a
corporation, partnership, trust, joint venture, association, company, estate,
unincorporated organization or government or any agency or political subdivision
thereof.
"PHYSICAL MATERIALS" shall be as defined in the definition of
"Collateral" hereof.
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<PAGE>
"PLAN" shall mean an employee benefit plan within the meaning of
Section 3(2) of ERISA, other that a Multiemployer Plan, maintained by the
Borrower or any member of the Controlled Group, or to which the Borrower or any
member of the Controlled Group contributes or is required to contribute or any
other plan covered by Title IV of ERISA that cover any employees of the Borrower
or any member of the Controlled Group.
"PLEDGED SECURITIES" shall mean all of the issued and outstanding
capital stock directly or indirectly owned or controlled by the Borrower, as
listed on Schedule 3.7(a).
"PLEDGEHOLDER AGREEMENT" shall mean a Laboratory Pledgeholder
Agreement among a Credit Party, the Agent, a third party completion guarantor
(if there is one), and one or more Laboratories, substantially in the form of
Exhibit D hereto, or in such other form as shall be acceptable to the Agent.
"PLEDGORS" shall mean those Credit Parties identified as such on
Schedule 3.7.
"PREPAYMENT DATE" shall be as defined in Section 2.12(j).
"PRINT AND ADVERTISING EXPENDITURES" shall mean the actual
out-of-pocket print and advertising expenditures associated with an item of
Product which the Borrower has undertaken to pay or has paid.
"PRODUCT" shall mean any motion picture, film or video tape
produced for theatrical, non-theatrical or television release or for release in
any other medium, in each case whether recorded on film, videotape, cassette,
cartridge, disc or on or by any other means, method, process or device whether
now known or hereafter developed, with respect to which a Credit Party (i) is
the initial copyright owner or (ii) acquires an equity interest or distribution
rights. The term "item of Product" shall include, without limitation, the
scenario, screenplay or script upon which such Product is based, all of the
properties thereof, tangible and intangible, and whether now in existence or
hereafter to be made or produced, whether or not in possession of the Credit
Parties, and all rights therein and thereto, of every kind and character.
"PRODUCTION ACCOUNT(s)" shall mean individually or collectively,
as the context so requires, each demand deposit account(s) established by a
Credit Party or Special Purpose Producer at a commercial bank located in the
United States or otherwise acceptable to the Agent, for the sole purpose of
paying the production costs of a particular item of Product or Designated
Picture, as the case may be, and as to which the Approved Completion Guarantor
for such item of Product or Designated Picture, as the case may be, has agreed
in writing
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that amounts deposited in such account shall be deemed available for production
of such item of Product or Designated Picture, as the case may be, for purposes
of the Completion Guarantee for such item of Product or Designated Picture, as
the case may be.
"PRODUCTION EXPOSURE" shall mean the Budgeted Negative Cost of an
item of Product (net of amounts being cash-flowed by a third party unrelated to
the Borrower pursuant to contractual arrangements acceptable to the Agent).
"PRO RATA SHARE" shall mean, with respect to any Obligation or
other amount, each Lender's pro rata share of such Obligation or other amount
determined in accordance with such Lender's Percentage.
"QUIET ENJOYMENT" shall be as defined in Section 8.13 hereof.
"REPORTABLE EVENT" shall mean any reportable event as defined in
Section 4043(c) of ERISA, other than a reportable event as to which provision
for 30-day notice to the PBGC would be waived under applicable regulations had
the regulations in effect on the Closing Date been in effect on the date of
occurrence of such reportable event.
"REQUIRED LENDERS" shall mean the Lenders holding in excess of 60%
of the aggregate unpaid principal amount of Loans and L/C Exposure then
outstanding or if no Loans and no Letters of Credit are then outstanding, the
Lenders holding in excess of 60% of the Total Commitments.
"RESTRICTED PAYMENT" shall mean (i) any distribution, dividend or
other direct or indirect payment on account of shares of any class of stock of,
partnership interest in, or any other equity interest of, a Credit Party, other
than a dividend, distribution or other payment payable solely in additional
shares of common stock, (ii) any redemption or other acquisition, re-acquisition
or retirement by a Credit Party of any class of its own stock or other equity
interest of a Credit Party or an Affiliate, now or hereafter outstanding, (iii)
any payment made to retire, or obtain the surrender of any outstanding warrants,
puts or options or other rights to purchase or acquire shares of any class of
stock of, or any equity interest of a Credit Party, now or hereafter outstanding
and (iv) any payment by a Credit Party of principal of, premium, if any, or
interest on, or any redemption, purchase, retirement, defeasance, sinking fund
or similar payment with respect to, any Subordinated Debt now or hereafter
outstanding.
"SCHEDULE OF COMMITMENTS" shall mean the schedule of the
commitments of the Lenders set forth in Schedule 1 hereto.
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"SPECIAL PRODUCTION TRANCHE" shall mean, with respect to each
Designated Picture, a portion of the Total Commitments in an amount equal to the
"strike price" or "production price" as set forth in the Completion Guarantee
for such Designated Picture, reduced by sums already expended or to be cash
flowed by an acceptable third party, which amount will be segregated and
designated as the "Special Production Tranche" for such Designated Picture.
"SPECIAL PURPOSE PRODUCER" shall mean a special purpose
corporation formed solely for the purpose of producing a particular motion
picture and controlled by the Borrower.
"STOCKHOLDERS' EQUITY" shall mean the Consolidated capital,
surplus and retained earnings of the Borrower and its Subsidiaries, subject to
intercompany eliminations and reduced by the outstanding amount of any note
received by the Borrower in payment for capital stock, all as determined in
accordance with GAAP.
"SUBORDINATED DEBT" shall mean all other Indebtedness of any of
the Credit Parties subordinated to the Obligations pursuant to written
agreements, containing interest rates, payment terms, maturities, amortization
schedules, covenants, defaults, remedies, subordination provisions and other
material terms in form and substance satisfactory to the Required Lenders.
"SUBSIDIARY" shall mean with respect to any Person, any
corporation, association, joint venture, partnership or other business entity
(whether now existing or hereafter organized) of which at least a majority of
the Voting Stock or other ownership interests having ordinary voting power for
the election of directors (or the equivalent) is, at the time as of which any
determination is being made, owned or controlled by such Person or one or more
subsidiaries of such Person or by such Person and one or more subsidiaries of
such Person.
"TIER 1 BORROWING BASE" shall mean, at any date of determination,
an amount equal to the aggregate (without double counting) of the following:
(i) Ninety percent (90%) of Borrower's Eligible L/C Receivables;
PLUS
(ii) Ninety percent (90%) of Borrower's Eligible Receivables from
Major Domestic Account Debtors; PLUS
(iii) Eighty-five percent (85%) of Borrower's Eligible Receivables
from Major Foreign Account Debtors; PLUS
(iv) Eighty-five percent (85%) of Borrower's Eligible Receivables
from Acceptable Domestic Account Debtors; PLUS
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(v) Eighty percent (80%) of Eligible Receivables from Acceptable
Foreign Account Debtors from the Approved Countries listed in Part A of
Schedule 3 hereto; PLUS
(vi) Fifty percent (50%) of Eligible Receivables from Acceptable
Foreign Account Debtors from the Approved Countries listed in Part B of Schedule
3 hereto; PLUS
(vii) Seventy-five percent (75%) of Pay-Per-View Estimates.
"TIER 2 BORROWING BASE" shall mean, at any date of determination,
an amount equal to fifteen percent (15%) of Eligible Library Amount, PROVIDED
such amount shall not exceed $7,500,000.
"TIER 3 BORROWING BASE" shall mean, at any date of determination,
an amount equal to the aggregate of the following:
(i) One hundred percent (100%) of Eligible Receivables from
Disney, Fox, Viacom/Paramount, Sony, Turner, Universal or Warner Bros. which
cover at least fifty percent (50%) of the budget of a Designated Picture being
funded under a Special Production Tranche; PLUS
(ii) Fifty percent (50%) of the Unsold Territory Credit for each
Designated Picture being funded under a Special Production Tranche.
"TOTAL COMMITMENTS" shall mean the aggregate amount of the
Commitments then in effect of all of the Lenders as such amount may be reduced
from time to time in accordance with the terms of this Credit Agreement.
"TOTAL UNSUBORDINATED LIABILITIES" shall mean, for the Borrower
and its Subsidiaries on a Consolidated basis, on the date such amount is being
determined, the sum of (i) all items which in accordance with GAAP should be
shown as liabilities on a balance sheet of the Borrower and its Subsidiaries on
a Consolidated basis (excluding Subordinated Debt) and (ii) obligations of the
Borrower and its Subsidiaries, on a Consolidated basis, under a negative pickup
and similar obligations, whether or not such obligations would be classified as
liabilities under GAAP.
"TRADEMARK SECURITY AGREEMENT" shall mean a Trademark Security
Agreement executed by the Credit Parties substantially in the form of Exhibit F
hereto, as the same may be amended, supplemented or otherwise modified from time
to time.
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"UCC" shall mean the Uniform Commercial Code as in effect in the
State of New York on the date of execution of this Credit Agreement.
"UNSOLD MAJOR FOREIGN TERRITORY" shall mean with respect to any
item of Product, each of the territories listed in the definition of "Estimated
Value" as to which no binding Distribution Agreement has been entered into for
such item of Product by the Borrower.
"UNSOLD TERRITORY CREDIT" shall mean with respect to any
Designated Picture being funded under the Special Production Tranche, the
aggregate determined on a territory-by-territory basis for each Unsold Major
Foreign Territory, of the lesser of (a) the Borrower's good faith estimate of
the minimum guarantee to be obtained with respect to such Unsold Major Foreign
Territory and (b) the Estimated Value of such Unsold Major Foreign Territory.
"VOTING STOCK" shall mean the capital stock of an entity having
ordinary voting power under ordinary circumstances to vote in the election of
directors of such entity.
2. THE LOANS
SECTION 2.1. LOANS.
(a) Each Lender, severally and not jointly, agrees, upon the terms
and subject to the conditions hereof, to make Loans to the Borrower, on any
Business Day and from time to time from the Closing Date to but excluding the
Commitment Termination Date, each in an aggregate principal amount which when
added to the aggregate principal amount of all Loans then outstanding to the
Borrower from such Lender, PLUS such Lender's Pro Rata Share of the then
current L/C Exposure does not exceed such Lender's Commitment. Subject to
Section 2.2, the Loans shall be made at such times as the Borrower shall
request.
(b) Subject to the terms and conditions of this Credit Agreement,
the Borrower may borrow, repay and re-borrow amounts constituting the
Commitments.
(c) No Loan shall be made which would result in the sum of the
aggregate amount of all outstanding Loans, PLUS the then current L/C Exposure,
PLUS the unused portion of the Special Production Tranche for each Designated
Picture, PLUS the Completion Reserve exceeding the lesser of (x) the then
current amount of the Borrowing Base and (y) the Total Commitments then in
effect.
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(d) Tier 3 Borrowing Base may only be used to support Special
Production Tranches and Loans thereunder, i.e. no Loan shall be made which would
result in the sum of the aggregate amount of all outstanding Loans (other than
Loans drawn under a Special Production Tranche for a Designated Picture) PLUS
the then current L/C Exposure, PLUS the Completion Reserve exceeding the then
current amount of the Borrowing Base (excluding the Tier 3 Borrowing Base).
SECTION 2.2. MAKING OF LOANS.
(a) Each Loan shall be an Alternate Base Rate Loan or a Eurodollar
Loan as the Borrower may request subject to and in accordance with this Section
2.2. The Borrower shall give the Agent at least four Business Days' prior
written, facsimile or telephonic (promptly confirmed in writing) notice of each
Borrowing which is to consist of Eurodollar Loans, and at least two Business
Days' prior written, facsimile or telephonic (promptly confirmed in writing)
notice of each Borrowing which is to consist of Alternate Base Rate Loans. Each
such notice in order to be effective must be received by the Agent not later
than 3:00 p.m., New York City time on the day required and shall specify the
date (which shall be a Business Day) on which such Loan is to be made, the
aggregate principal amount of the requested Loan, and, if applicable, the
portion of the Loan being made under a Special Production Tranche. Each such
notice shall be irrevocable and shall specify whether the Borrowing then being
requested is to consist of Alternate Base Rate Loans or Eurodollar Loans and in
the case of Eurodollar Loans, the Interest Period or Interest Periods with
respect thereto. If no election of an Interest Period is specified in such
notice in the case of a Borrowing consisting of Eurodollar Loans, such notice
shall be deemed to be a request for an Interest Period of one month. If no
election is made as to the type of Loan, such notice shall be deemed a request
for a Borrowing consisting of Alternate Base Rate Loans. No Borrowing shall
consist of Eurodollar Loans if after giving effect thereto an aggregate of more
than eight separate Eurodollar Loans would be outstanding hereunder with respect
to each Lender (determined in accordance with Section 2.8(c) hereof).
(b) The Agent shall promptly notify each Lender of its
proportionate share of each Borrowing under this Section 2.2, the date of such
Borrowing, the type of Loans being requested and the Interest Period or Interest
Periods applicable thereto. On the borrowing date specified in such notice,
each Lender shall make its share of the Borrowing available at the offices of
Chemical Bank, Agent Bank Services Department, 140 East 45th St., 29th Floor,
New York, NY 10017, Attention: Gloria Javier for credit to the Chemical Clearing
Account no later than 1:00 p.m. New York City time in Federal or other
immediately available funds. Upon receipt of the funds to be made available by
the Lenders to fund
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any Borrowing hereunder, the Agent shall disburse such funds by depositing the
requested amounts into an account maintained with the Agent by the Borrower
PROVIDED, HOWEVER, that (i) proceeds of the initial Loans which are used to
repay loans outstanding under the Imperial Credit Agreement shall be applied by
the Agent directly for such purpose, and (ii) if the Borrowing Certificate for
any particular Borrowing indicates that it is to be used to fund the production
of a Designated Picture, then the Agent shall deposit the proceeds of such Loan
directly into the Production Account for such Designated Picture.
(c) Each Lender may at its option fulfill its obligation to make
Eurodollar Loans by causing a foreign branch or affiliate to fund such
Eurodollar Loans, provided that any exercise of such option shall not affect the
obligation of the Borrower to repay Loans in accordance with the terms hereof.
Subject to the other provisions of this Section 2.2, Loans of more than one
interest rate type may be outstanding at the same time.
(d) Each Loan requested hereunder on any date shall be made by
each Lender in accordance with its respective Percentage.
(e) The amount of any Borrowing of new funds shall be in an
aggregate principal amount of $500,000 (or such lesser amount as shall equal the
available but unused portion of the Commitments) or such greater amount which is
an integral multiple of $100,000; PROVIDED, HOWEVER that the amount of any
Borrowing of new funds which shall be a Eurodollar Loan shall be in an aggregate
principal amount of $1,500,000 or such greater amount which is an integral
multiple of $100,000.
(f) Notwithstanding the provisions of clause (a) above and/or the
absence of a request from the Borrower that the Lenders make a Loan, the
Required Lenders may direct the Lenders to make Loans and apply the proceeds
thereof as follows:
(i) if the Approved Completion Guarantor for any item of Product
being produced by the Borrower or for which receivables are
included in the Borrowing Base shall take over production of
such item of Product pursuant to the Completion Guarantee with
respect to such item of Product, to make Loans with respect to
the production of such item of Product and pay the proceeds
thereof directly to the completion guarantor to be used to
finance the production and delivery of such item of Product
pursuant to the terms of the Completion Guarantee; and
(ii) if an Event of Default shall have occurred and be continuing,
to make Loans with respect to any item
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of Product being produced by the Borrower or for which
receivables are included in the Borrowing Base and pay the
proceeds thereof directly to Persons providing services in
connection with the production, delivery and distribution of
such Product so as to ensure Completion of such item of
Product and/or the collection of Eligible Receivables.
SECTION 2.3. NOTES.
(a) The Loans made by each Lender hereunder shall be evidenced by a
single promissory note substantially in the form of Exhibit A hereto (each a
"NOTE" and collectively the "NOTES") in the face amount of each such
Lender's Commitment, payable to the order of each such Lender, duly executed by
the Borrower and dated the Closing Date.
(b) Each of the Notes shall bear interest on the outstanding
principal balance thereof as set forth in Section 2.4 hereof. Each Lender and
the Agent on its behalf is hereby authorized by the Borrower, but not obligated,
to enter the amount of each Loan and the amount of each payment or prepayment of
principal or interest thereon in the appropriate spaces on the reverse of or on
an attachment to the Notes; PROVIDED, HOWEVER, that the failure of any
Lender or the Agent to set forth such Loans, principal payments or other
information shall not in any manner affect the obligations of the Borrower to
repay such Loans.
SECTION 2.4. INTEREST ON NOTES.
(a) In the case of a Eurodollar Loan, interest shall be payable at
a rate per annum (computed on the basis of the actual number of days elapsed
over a year of 360 days) equal to the LIBO Rate plus the Applicable Margin.
Interest shall be payable on each Eurodollar Loan on each applicable Interest
Payment Date, at maturity and on the date of a conversion of such Eurodollar
Loan to an Alternate Base Rate Loan. The Agent shall determine the applicable
LIBO Rate for each Interest Period as soon as practicable on the date when such
determination is to be made in respect of such Interest Period and shall notify
the Borrower and the Lenders of the applicable interest rate so determined.
Such determination shall be conclusive absent manifest error.
(b) In the case of an Alternate Base Rate Loan, interest shall be
payable at a rate per annum (computed on the basis of the actual number of days
elapsed over a year of 365/366 days, as the case may be, during such times as
the Alternate Base Rate is based upon the Prime Rate, and over a year of 360
days at all other times) equal to the Alternate Base Rate plus the Applicable
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Margin. Interest shall be payable on each Alternate Base Rate Loan on each
applicable Interest Payment Date, at maturity and on the date of a conversion of
such Alternate Base Rate Loan to a Eurodollar Loan.
(c) Anything in this Credit Agreement or the Notes to the contrary
notwithstanding, the interest rate on the Loans shall in no event be in excess
of the maximum permitted by Applicable Law.
SECTION 2.5. COMMITMENT FEES AND OTHER FEES.
(a) The Borrower agrees to pay to the Agent for the account of each
Lender on the last Business Day of each March, June, September and December in
each year (commencing on the last Business Day of June 1996) prior to the
Commitment Termination Date and on the Commitment Termination Date, an aggregate
fee (the "COMMITMENT FEES") of 1/2 of 1% per annum, computed on the basis of
the actual number of days elapsed over a year of 360 days, on the average daily
amount by which such Lender's Commitment, as such Commitment may be reduced in
accordance with the provisions of this Credit Agreement, exceeds the sum of the
principal balance such Lender's outstanding Loans plus its Percentage of L/C
Exposure during the preceding period or quarter.
(b) Such Commitment Fees shall commence to accrue from the Closing
Date.
(c) In addition, the Borrower agrees to pay to each of the Lenders
(including the Agent) on the Closing Date a one-time fee in an amount equal to
2% of its Commitment in consideration of such Lender's commitment to participate
in the Credit Agreement.
(d) In addition, the Borrower agrees to pay to the Agent on the
Closing Date any and all fees that are then due and payable pursuant to the Fee
Letter.
SECTION 2.6. OPTIONAL AND MANDATORY TERMINATION OR REDUCTION OF
COMMITMENTS.
(a) Upon at least three Business Days' prior written, facsimile or
telephonic notice (provided that such telephonic notice is immediately followed
by written confirmation) to the Agent, the Borrower may at any time in whole
permanently terminate, or from time to time in part permanently reduce, the
Commitments. In the case of a partial reduction, each such reduction of the
Commitments shall be in a minimum aggregate principal amount of $500,000 or an
integral multiple thereof; PROVIDED, HOWEVER, that the Commitments may not
be reduced by more than the amount of the then unused Commitments and may not
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be reduced to an amount less than the aggregate principal amount of the Loans
outstanding, PLUS the then current L/C Exposure, PLUS the Special Production
Tranche of each Designated Picture PLUS the Completion Reserve. Any partial
reduction of the Commitments shall be made among the Lenders in accordance with
their respective Percentages.
(b) Simultaneously with each such termination or reduction of the
Commitments, the Borrower shall pay to the Agent for the benefit of each Lender
all accrued and unpaid Commitment Fees on the amount of the Commitments so
terminated or reduced through the date of such termination or reduction.
(c) Any reduction of the Total Commitments pursuant to this Section
2.6 shall be pro rata in accordance with each Lender's Percentage and applied to
reduce the Commitment of each Lender.
SECTION 2.7. DEFAULT INTEREST; ALTERNATE RATE OF INTEREST.
(a) If the Borrower shall default in the payment of the principal
of, or interest on any Loan becoming due hereunder, whether at stated maturity,
by acceleration or otherwise, or the payment of any other amount becoming due
hereunder after written notification from the Agent to the Borrower of such
amount, the Borrower shall on demand from time to time pay interest, to the
extent permitted by law, on all Loans and overdue amounts outstanding up to the
date of actual payment of such defaulted amount (after as well as before
judgment) (i) for the remainder of the then current Interest Period for each
Eurodollar Loan, at 2% in excess of the rate then in effect for Eurodollar Loans
and (ii) for all periods subsequent to the then current Interest Period for each
Eurodollar Loan, for all Alternate Base Rate Loans and for all other overdue
amounts hereunder, at 2% in excess of the rate then in effect for Alternate Base
Rate Loans.
(b) In the event, and on each occasion, that on the day two
Business Days prior to the commencement of any Interest Period for a Eurodollar
Loan, (i) the Agent shall have received notice from any Lender of such Lender's
determination (which determination, absent manifest error, shall be conclusive)
that Dollar deposits in the amount of the principal amount of such Eurodollar
Loan are not generally available in the London Interbank Market or that the rate
at which such Dollar deposits are being offered will not adequately and fairly
reflect the cost to such Lender of making or maintaining the principal amount of
such Eurodollar Loan during such Interest Period or (ii) the Agent shall have
determined that reasonable means do not exist for ascertaining the applicable
LIBO Rate, the Agent shall, as soon as practicable thereafter, give written or
facsimile notice of such determination to the Borrower and the Lenders, and any
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request by the Borrower for a Eurodollar Loan (or conversion to or continuation
as a Eurodollar Loan pursuant to Section 2.8 hereof), made after receipt of such
notice, shall be deemed a request for an Alternate Base Rate Loan; PROVIDED,
HOWEVER, that in the circumstances described in clause (i) above such deemed
request shall only apply to the affected Lender's portion thereof. After such
notice shall have been given and until the circumstances giving rise to such
notice no longer exist, each request (or portion thereof, as the case may be)
for a Eurodollar Loan, to the extent such request relates to such affected
Lender's portion shall be deemed to be a request for an Alternate Base Rate
Loan.
SECTION 2.8. CONTINUATION AND CONVERSION OF LOANS.
The Borrower shall have the right, at any time, (i) to convert any
Eurodollar Loan or portion thereof to an Alternate Base Rate Loan or to continue
such Eurodollar Loan or a portion thereof for a successive Interest Period, or
(ii) to convert any Alternate Base Rate Loan or a portion thereof to a
Eurodollar Loan, subject to the following:
(a) the Borrower shall give the Agent prior notice of each
continuation or conversion hereunder of at least four Business Days for
continuation as or conversion to a Eurodollar Loan; such notice shall be
irrevocable and to be effective, must be received by the Agent on the day
required not later than 1:00 p.m., New York City time;
(b) no Event of Default or Default shall have occurred and be
continuing at the time of any conversion to a Eurodollar Loan or continuation of
any such Eurodollar Loan into a subsequent Interest Period;
(c) no Alternate Base Rate Loan may be converted to a Eurodollar
Loan and no Eurodollar Loan may be continued as a Eurodollar Loan if, after such
conversion, and after giving effect to any concurrent prepayment of Loans, an
aggregate of more than eight separate Eurodollar Loans would be outstanding
hereunder with respect to each Lender (for purposes of determining the number of
such Loans outstanding, Loans with different Interest Periods shall be counted
as different Loans even if made on the same date);
(d) if fewer than all Loans at the time outstanding shall be
continued or converted, such continuation or conversion shall be made pro rata
among the Lenders in accordance with the respective Percentage of the principal
amount of such Loans held by the Lenders immediately prior to such continuation
or conversion;
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(e) the aggregate principal amount of Loans continued as or
converted to Eurodollar Loans as part of the same Borrowing, shall be $1,500,000
or such greater amount which is an integral multiple of $100,000;
(f) accrued interest on the Eurodollar Loans (or portion thereof)
being continued or converted shall be paid by the Borrower at the time of
continuation or conversion;
(g) the Interest Period with respect to a new Eurodollar Loan
effected by a continuation or conversion shall commence on the date of such
continuation or conversion;
(h) if a Eurodollar Loan is converted to another type of Loan other
than on the last day of the Interest Period with respect thereto, the amounts
required by Section 2.9(b) shall be paid upon such conversion; and
(i) each request for a continuation as or conversion to a
Eurodollar Loan which fails to state an applicable Interest Period shall be
deemed to be a request for an Interest Period of one month.
In the event that the Borrower shall not give notice to continue or convert any
Eurodollar Loan as provided above, such Loan (unless repaid) shall automatically
be converted to an Alternate Base Rate Loan at the expiration of the then
current Interest Period. The Agent shall, after it receives notice from the
Borrower, promptly give the Lenders notice of any continuation or conversion.
SECTION 2.9. PREPAYMENT OF LOANS; REIMBURSEMENT OF LENDERS.
(a) Subject to the terms of paragraph (b) of this Section 2.9, the
Borrower shall have the right at its option at any time and from time to time to
prepay (i) any Alternate Base Rate Loan, in whole or in part, upon at least two
Business Days' prior written, telephonic (promptly confirmed in writing) or
facsimile notice to the Agent, in the principal amount of $500,000 or such
greater amount which is an integral multiple of $100,000 or the remaining
balance of such Loan if less than $500,000 and (ii) any Eurodollar Loan, in
whole or in part, upon at least four Business Days' prior written, telephonic
(promptly confirmed in writing) or facsimile notice, in the principal amount of
$1,500,000 or such greater amount which is an integral multiple of $100,000.
Each notice of prepayment shall specify the prepayment date, each Loan to be
prepaid and the principal amount thereof, shall be irrevocable and shall commit
the Borrower to prepay such Loan in the amount and on the date stated therein.
Such notice shall also specify the expected principal amount of Loans to be
outstanding after giving effect to such
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prepayment. All prepayments under this Section 2.9(a) shall be accompanied by
accrued but unpaid interest on the principal amount being prepaid to the date of
(but not including) prepayment.
(b) The Borrower shall reimburse each Lender on demand for any loss
incurred or to be incurred by any such Lender in the reemployment of the funds
released (i) by any prepayment (for any reason) of any Eurodollar Loan if such
Loan is repaid other than on the last day of the Interest Period for such Loan
or (ii) in the event that after the Borrower delivers a notice of borrowing
under Section 2.2(a) or Section 2.8(a) in respect of Eurodollar Loans, such Loan
is not made on the first day of the Interest Period specified in such notice of
borrowing for any reason other than (A) a suspension or limitation under Section
2.7(b) of the right of the Borrower to select a Eurodollar Loan or (B) a breach
by the Lenders of their obligation to fund such borrowing when they are
otherwise required to do so hereunder or (C) it shall be unlawful for any Lender
to make or maintain Eurodollar Loans pursuant to Section 2.11. Such loss shall
be the amount as reasonably determined by such Lender as the excess, if any, of
(I) the amount of interest which would have accrued to such Lender on the amount
so paid or not borrowed, continued or converted at a rate of interest equal to
the interest rate applicable to such Loan pursuant to Section 2.4 hereof, for
the period from the date of such payment or failure to borrow, continue or
convert to the last day (x) in the case of a payment other than on the last day
of the Interest Period for such Loan, of the then current Interest Period for
such Loan or (y) in the case of such failure to borrow, continue or convert, of
the Interest Period for such Loan which would have commenced on the date of such
failure to borrow, continue or convert, over (II) the amount realized or to be
realized by such Lender in reemploying the funds not advanced or the funds
received in prepayment or realized from the Loan not so continued or converted
during the period referred to above. Each Lender shall deliver to the Borrower
from time to time one or more certificates setting forth the amount of such loss
(and in reasonable detail the manner of computation thereof) as determined by
such Lender, which certificates shall be conclusive absent manifest error. The
Borrower shall pay such Lender the amounts shown on such certificate within ten
days of the Borrower's receipt of such certificate.
(c) In the event the Borrower fails to prepay any Loan on the date
specified in any prepayment notice delivered pursuant to Section 2.9(a), the
Borrower shall pay to the Agent for the account of the applicable Lender any
amounts required to compensate such Lender for any actual loss incurred by such
Lender as a result of such failure to prepay, including, without limitation, any
loss, cost or expenses incurred by reason of the
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acquisition of deposits or other funds by such Lender to fulfill deposit
obligations incurred in anticipation of such prepayment. Each Lender shall
deliver to the Borrower and the Agent from time to time one or more certificates
setting forth the amount of such loss (and in reasonable detail the manner of
computation thereof) as determined by such Lender, which certificates shall be
conclusive absent manifest error. The Borrower shall pay such Lender the
amounts shown on such certificate within ten days of the Borrower's receipt of
such certificate.
(d) Simultaneously with the delivery to the Agent of each Borrowing
Base Certificate and subject to the provisions of Section 2.15(i), the Borrower
shall prepay the Loans to the extent, if any, that either (x) the sum of the
Loans outstanding, PLUS the L/C Exposure, PLUS the unused portion of the
Special Production Tranche for each Designated Picture, PLUS the Completion
Reserve exceeds the lesser of (i) the Borrowing Base as set forth on such
Borrowing Base Certificate and (ii) the Total Commitments or (y) the sum of the
aggregate amount of al outstanding Loans (other than the Loans drawn under a
Special Production Tranche), PLUS the L/C Exposure, PLUS the Completion
Reserve exceeds the Borrowing Base (excluding the Tier 3 Borrowing Base) as set
forth on such Borrowing Base Certificate.
(e) Simultaneously with each termination and/or mandatory or
optional reduction of the Total Commitments pursuant to Section 2.6, the
Borrower shall pay to the Agent for the benefit of the Lenders the excess of the
aggregate outstanding principal amount of the Loans over the reduced Total
Commitments, all accrued and unpaid interest thereon and the Commitment Fees on
the amount of the Total Commitments so terminated or reduced through the date
thereof.
(f) Subject to the provisions of Section 2.9(g), on the last
Business Day of each week (or more frequently if determined by the Agent in its
sole discretion) in which the balance of cash receipts which have been
transferred into the Concentration Account is in excess of $250,000, the
outstanding principal amount of the Loans shall be prepaid in an amount equal to
the sum of items on deposit in each such Concentration Account which equals
$250,000 or such greater amount which is an integral multiple of $50,000.
(g) If on any day on which the Loans would otherwise be required to
be prepaid but for the operation of this Section 2.9(g) (each a "PREPAYMENT
DATE"), the amount of such required prepayment exceeds the then outstanding
aggregate principal amount of the Loans which consist of Alternate Base Rate
Loans, and no Default or Event of Default is then continuing, then on such
Prepayment Date the Agent at the request of the Borrower, shall transfer funds,
if any, from a Concentration Account referenced in Section 2.9(f) above into
the appropriate Cash
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Collateral Account identified by the Borrower in an amount equal to such excess.
If the Borrower makes such deposit (i) only the outstanding Alternate Base Rate
Loans shall be required to be prepaid on such Prepayment Date, and (ii) on the
last day of each Interest Period in effect after such Prepayment Date, the Agent
is irrevocably authorized and directed to apply funds from the appropriate Cash
Collateral Account (and liquidate investments held in such Cash Collateral
Account as necessary) to prepay Eurodollar Loans for which the Interest Period
is then ending until the aggregate of such prepayments equals the prepayment
which would have been required on such Prepayment Date but for the operation of
this Section 2.9(g).
(h) Unless otherwise designated in writing by the Borrower, all
prepayments shall be applied to the applicable principal payment set forth in
this Section 2.9, first to that amount of such applicable principal payment then
maintained as Alternate Base Rate Loans by the Borrower, and then, subject to
the provisions of Section 2.9(g), to that amount of such applicable principal
payment maintained as Eurodollar Loans by the Borrower in order of the scheduled
expiry of Interest Periods with respect thereto.
(i) All prepayments shall be accompanied by accrued but unpaid
interest on the principal amount being prepaid to the date of prepayment.
SECTION 2.10. CHANGE IN CIRCUMSTANCES.
(a) In the event that after the Initial Date any change in
Applicable Law or in the official interpretation or administration thereof
(including, without limitation, any request, guideline or policy not having the
force of law) by any authority charged with the administration or interpretation
thereof or, with respect to clause (ii), (iii) or (iv) below any change in
conditions, shall occur which shall:
(i) subject any Lender to, or increase the net amount of,
any tax, levy, impost, duty, charge, fee, deduction or withholding
with respect to any Eurodollar Loan (other than withholding tax
imposed by the United States of America or any political subdivision
or taxing authority thereof or any other tax, levy, impost, duty,
charge, fee, deduction or withholding (A) that is measured with
respect to the overall net income of such Lender or of a Lending
Office of such Lender, and that is imposed by the United States of
America, or by the jurisdiction in which such Lender or Lending
Office is incorporated, in which such Lending Office is located,
managed or controlled or in which such Lender has its principal
office (or any political subdivision or taxing authority thereof or
therein), or (B) that is
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imposed solely by reason of any Lender failing to make a declaration
of, or otherwise to establish, non-residence, or to make any other
claim for exemption, or otherwise to comply with any certification,
identification, information, documentation or reporting requirements
prescribed under the laws of the relevant jurisdiction, in those
cases where a Lender may properly make such declaration or claim or
so establish non-residence or otherwise comply); or
(ii) change the basis of taxation of any payment to any
Lender of principal or any interest on any Eurodollar Loan or other
fees and amounts payable to any Lender hereunder, or any combination
of the foregoing; other than withholding tax imposed by the United
States of America or any political subdivision or taxing authority
thereof or any other tax, levy, impost, duty, charge, fee, deduction
or withholding that is measured with respect to the overall net
income of such Lender or of a Lending Office of such Lender, and
that is imposed by the United States of America, or by the
jurisdiction in which such Lender or Lending Office is incorporated,
in which such Lending Office is located, managed or controlled or in
which such Lender has its principal office (or any political
subdivision or taxing authority thereof or therein); or
(iii) impose, modify or deem applicable any reserve, deposit
or similar requirement against any assets held by, deposits with or
for the account of or loans or commitments by an office of such
Lender with respect to any Eurodollar Loan; or
(iv) impose upon such Lender or the London Interbank Market
any other condition with respect to the Eurodollar Loans or this
Credit Agreement;
and the result of any of the foregoing shall be to increase the actual cost to
such Lender of making or maintaining any Eurodollar Loan hereunder or to reduce
the amount of any payment (whether of principal, interest or otherwise) received
or receivable by such Lender in connection with any Eurodollar Loan hereunder,
or to require such Lender to make any payment in connection with any Eurodollar
Loan hereunder, in each case by or in an amount which such Lender in its sole
judgment shall deem material, then and in each case the Borrower shall pay to
the Agent for the account of such Lender, as provided in paragraph (c) below,
such amounts as shall be necessary to compensate such Lender for such cost,
reduction or payment.
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(b) If at any time and from time to time after the Initial Date any
Lender shall have determined that the applicability of any law, rule, regulation
or guideline adopted pursuant to or arising out of the July 1988 report of the
Basle Committee on Banking Regulations and Supervisory Practices entitled
"International Convergence of Capital Measurement and Capital Standards", or
adoption after the Initial Date of any law, rule, regulation or guideline
regarding capital adequacy, or any change in any of the foregoing or in the
interpretation or administration of any of the foregoing by any Governmental
Authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Lender (or any Lending Office of
such Lender) or any Lender's holding company with any request or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on such Lender's capital or on the capital of such
Lender's holding company, if any, as a consequence of this Credit Agreement or
the Loans made or Letters of Credit issued or participated in by such Lender
pursuant hereto to a level below that which such Lender or such Lender's holding
company could have achieved but for such applicability, adoption, change or
compliance (taking into consideration such Lender's policies and the policies of
such Lender's holding company with respect to capital adequacy) by an amount
deemed by such Lender to be material, then from time to time the Borrower shall
pay to such Lender such additional amount or amounts as will compensate such
Lender or such Lender's holding company for any such reduction suffered with
respect to Loans made by such Lender hereunder.
(c) Each Lender shall deliver to the Borrower and the Agent from
time to time, one or more certificates setting forth the amounts due to such
Lender under paragraphs (a) and (b) above, the changes as a result of which such
amounts are due, the manner of computing such amounts and the manner of
computing the amounts allocable to Loans hereunder pursuant to paragraphs (a)
and (b) above. Each such certificate shall be conclusive in the absence of
manifest error. The Borrower shall pay to the Agent for the account of each
such Lender the amounts shown as due on any such certificate within ten Business
Days after its receipt of the same. No failure on the part of any Lender to
demand compensation under paragraph (a) or (b) above on any one occasion shall
constitute a waiver of its rights to demand compensation on any other occasion.
The protection of this Section 2.10(c) shall be available to each Lender
regardless of any possible contention of the invalidity or inapplicability of
any law, regulation or other condition which shall give rise to any demand by
such Lender for compensation thereunder.
(d) Each Lender agrees that, as promptly as practicable, after it
becomes aware of the occurrence of an event
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or the existence of a condition that (i) would cause it to incur any increased
cost hereunder or render it unable to perform its agreements hereunder for the
reasons specifically set forth in Section 2.7(b) or this Section 2.10 or Section
2.13 or Section 2.15(g) or (ii) would require the Borrower to pay an increased
amount under Section 2.7(b) or this Section 2.10 or Section 2.13 or Section
2.15(g), it will use reasonable efforts to notify the Borrower of such event or
condition and, to the extent not inconsistent with such Lender's internal
policies, will use its reasonable efforts to make, fund or maintain the affected
Loans of such Lender, or, if applicable, to participate in Letters of Credit as
required under Section 2.15, through another Lending Office of such Lender if as
a result thereof the additional monies which would otherwise be required to be
paid or the reduction of amounts receivable by such Lender thereunder in respect
of such Loans would be materially reduced, or such inability to perform would
cease to exist, or the increased costs which would otherwise be required to be
paid in respect of such Loans pursuant to Section 2.7(b) or this Section 2.10 or
Section 2.13 or Section 2.15(g) would be materially reduced or the taxes or
other amounts otherwise payable under Section 2.7(b) or this Section 2.10 or
Section 2.13 or Section 2.15(g) would be materially reduced, and if, as
determined by such Lender, in its discretion, the making, funding or maintaining
of such Loans through such other Lending Office would not otherwise materially
adversely affect such Loans or such Lender.
(e) In the event any Lender shall have delivered to the Borrower a
notice that (i) amounts are due to such Lender pursuant to this Section 2.10,
Section 2.13 or Section 2.15, (ii) any one or more Lenders have determined
pursuant to Section 2.11 that it may not make or maintain Eurodollar Loans at
such time or (iii) any of the events designated in paragraph (d) hereof have
occurred, the Borrower may (but subject in any such case to the payments
required by Section 2.9(b) and (c) and Section 2.13(e)), provided that there
shall exist no Default or Event of Default, upon at least five Business Days'
prior written or telecopier notice to such Lender and the Agent, but not more
than 30 days after receipt of notice from such Lender, identify to the Agent an
Eligible Assignee reasonably acceptable to the Agent which will purchase the
Commitment of such Lender, the amount of outstanding Loans and any
participations in Letters of Credit from such Lender providing such notice and
such Lender shall thereupon assign its Commitment, any Loans owing to such
Lender and any participations in Letters of Credit and the Note held by such
Lender to such replacement Eligible Assignee pursuant to Section 13.3 (it being
understood that any such replacement shall not release such replaced Lenders
from any liabilities to the Borrower for any breach by such Lender of any of its
obligations hereunder nor shall any such replacement impair in any manner any
rights or remedies the Borrower may have against such Lender for any such
breach). Such notice shall specify an effective date
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for such assignment and at the time thereof, the Borrower shall pay all accrued
interest, Commitment Fees and all other amounts (including without limitation
all amounts payable under this Section 2.10) owing hereunder to such Lender as
at such effective date for such assignment.
SECTION 2.11. CHANGE IN LEGALITY.
(a) Notwithstanding anything to the contrary contained elsewhere in
this Credit Agreement, if any change after the date hereof in Applicable Law,
guideline or order, or in the interpretation thereof by any Governmental
Authority charged with the administration thereof, shall make it unlawful for
any Lender to make or maintain any Eurodollar Loan or to give effect to its
obligations as contemplated hereby with respect to a Eurodollar Loan, then, by
written notice to the Borrower and the Agent, such Lender may (i) declare that
Eurodollar Loans will not thereafter be made by such Lender hereunder and/or
(ii) require that, subject to Section 2.9(b), all outstanding Eurodollar Loans
made by it be converted to Alternate Base Rate Loans, whereupon all of such
Eurodollar Loans shall automatically be converted to Alternate Base Rate Loans,
as of the effective date of such notice as provided in paragraph (b) below.
Such Lender's pro rata portion of any subsequent Eurodollar Loan shall, instead,
be an Alternate Base Rate Loan unless such declaration is subsequently
withdrawn.
(b) A notice to the Borrower by any Lender pursuant to paragraph
(a) above shall be effective for purposes of clause (ii) thereof, if lawful, on
the last day of the current Interest Period for each outstanding Eurodollar
Loan; and in all other cases, on the date of receipt of such notice by the
Borrower.
SECTION 2.12. MANNER OF PAYMENTS.
All payments of principal and interest by the Borrower in respect of
any Loans to it shall be pro rata among the Lenders holding such Loans in
accordance with the then outstanding principal amounts of such Loans held by
them and all Borrowings of any Loans by the Borrower hereunder shall be made pro
rata among the Lenders in accordance with their Commitments. All payments by
the Borrower hereunder and under the Notes shall be made in Dollars in Federal
or other immediately available funds at the office of Chemical Bank, Agent Bank
Services Department, 140 East 45th St., 29th Floor, New York, NY 10017,
Attention: Gloria Javier for credit to the Chemical Clearing Account no later
than 1:00 p.m., New York City time, on the date on which such payment shall be
due. Interest in respect of any Loan hereunder shall accrue from and including
the date of such Loan to but excluding the date on which such Loan is paid or
converted to a Loan of a different type.
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SECTION 2.13. UNITED STATES WITHHOLDING.
(a) Prior to the date of the initial Loans hereunder, and prior to
the effective date set forth in the Assignment and Acceptance with respect to
any Lender becoming a Lender after the date hereof, and from time to time
thereafter if requested by the Borrower or the Agent or required because, as a
result of a change in law or a change in circumstances or otherwise, a
previously delivered form or statement becomes incomplete or incorrect in any
material respect, each Lender organized under the laws of a jurisdiction outside
the United States shall provide, if applicable, the Agent and the Borrower with
complete, accurate and duly executed forms or other statements prescribed by the
Internal Revenue Service of the United States certifying such Lender's exemption
from, or entitlement to a reduced rate of, United States withholding taxes
(including backup withholding taxes) with respect to all payments to be made to
such Lender hereunder and under the Notes.
(b) The Borrower and the Agent shall be entitled to deduct and
withhold any and all present or future taxes or withholdings, and all
liabilities with respect thereto, from payments hereunder or under the Notes, if
and to the extent that the Borrower or the Agent in good faith determines that
such deduction or withholding is required by the law of the United States,
including, without limitation, any applicable treaty of the United States. In
the event that the Borrower or the Agent shall so determine that deduction or
withholding of taxes is required, it shall advise the affected Lender as to the
basis of such determination prior to actually deducting and withholding such
taxes. In the event the Borrower or the Agent shall so deduct or withhold taxes
from amounts payable hereunder, it (i) shall pay to or deposit with the
appropriate taxing authority in a timely manner the full amount of taxes it has
deducted or withheld; (ii) shall provide evidence of payment of such taxes to,
or the deposit thereof with, the appropriate taxing authority and a statement
setting forth the amount of taxes deducted or withheld, the applicable rate, and
any other information or documentation reasonably requested by the Lenders from
whom the taxes were deducted or withheld; and (iii) shall forward to such
Lenders any official tax receipts or other documentation with respect to the
payment or deposit of the deducted or withheld taxes as may be issued from time
to time by the appropriate taxing authority. Unless the Borrower and the Agent
have received forms or other documents satisfactory to them indicating that
payments hereunder or under the Notes are not subject to United States
withholding tax or are subject to such tax at a rate reduced by an applicable
tax treaty, the Borrower or the Agent may withhold taxes from such payments at
the applicable statutory rate in the case of payments to or for any Lender
organized under the laws of a jurisdiction outside the United States.
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(c) Each Lender agrees (i) that as between it and the Borrower or
the Agent, such Lender shall be the Person to deduct and withhold taxes, and to
the extent required by law it shall deduct and withhold taxes, on amounts that
such Lender may remit to any other Person(s) by reason of any undisclosed
transfer or assignment of an interest in this Credit Agreement to such other
Person(s) pursuant to Section 13.3(g) and (ii) to indemnify the Borrower and the
Agent and any officers, directors, agents, or employees of the Borrower or the
Agent against and to hold them harmless from any tax, interest, additions to
tax, penalties, reasonable counsel and accountants' fees, disbursements or
payments arising from the assertion by any appropriate taxing authority of any
claim against them relating to a failure to withhold taxes as required by law
with respect to amounts described in clause (i) of this paragraph (c) or arising
from the reliance by the Borrower or the Agent on any form or other document
furnished by such Lender and purporting to establish a basis for not
withholding, or for withholding at a reduced rate, taxes with respect to
payments hereunder.
(d) Each assignee of a Lender's interest in this Credit Agreement
in conformity with Section 13.3 shall be bound by this Section 2.13, so that
such assignee will have all of the obligations and provide all of the forms and
statements and all indemnities, representations and warranties required to be
given under this Section 2.13.
(e) Notwithstanding the foregoing, in the event that any additional
withholding taxes shall become payable solely as a result of any change in any
statute, treaty, ruling, determination or regulation occurring after the Initial
Date in respect of any sum payable hereunder or under any other Fundamental
Document to any Lender or the Agent (i) the sum payable by the Borrower shall be
increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
2.13) such Lender or the Agent (as the case may be) receives an amount equal to
the sum it would have received had no such withholding deductions been made,
(ii) the Borrower shall make such deductions and (iii) the Borrower shall pay
the full amount deducted to the relevant taxation authority or other authority
in accordance with Applicable Law.
(f) In the event that a Lender receives a refund of or credit for
taxes withheld or paid pursuant to clause (e) of this Section 2.13, which credit
or refund is identifiable by such Lender as being a result of taxes withheld in
connection with sums payable hereunder or under any other Fundamental Document,
such Lender shall promptly notify the Agent and the Borrower and shall remit to
the Borrower the amount of such refund or credit allocable to payments made
hereunder or under the other Fundamental Documents.
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(g) Each Lender agrees that, as promptly as practicable after it
becomes aware of the occurrence of an event that would cause the Borrower to pay
any amount pursuant to clause (e) of this Section 2.13, it will use reasonable
efforts to notify the Borrower of such event and, to the extent not inconsistent
with such Lender's internal policies, will use its reasonable efforts to make,
fund or maintain the affected Loans of such Lender through another Lending
Office of such Lender if as a result thereof the additional monies which would
otherwise be required to be paid by reason of Section 2.13(e) in respect of such
Loans would be materially reduced, and if, as determined by such Lender, in its
discretion, the making, funding or maintaining of such Loans through such other
Lending Office would not otherwise materially adversely affect such Loans or
such Lender.
SECTION 2.14. INTEREST ADJUSTMENTS.
If the provisions of this Credit Agreement or any Note would at any
time require payment by the Borrower to a Lender of any amount of interest in
excess of the maximum amount then permitted by the law applicable to any Loan,
the interest payments to that Lender shall be reduced to the extent necessary so
that such Lender shall not receive interest in excess of such maximum amount.
If, as a result of the foregoing, a Lender shall receive interest payments
hereunder or under a Note in an amount less than the amount otherwise provided
hereunder, such deficit (hereinafter called the "INTEREST DEFICIT") will, to
the fullest extent permitted by Applicable Law, cumulate and will be carried
forward (without interest) until the termination of this Credit Agreement.
Interest otherwise payable to a Lender hereunder and under a Note for any
subsequent period shall be increased by the maximum amount of the Interest
Deficit that may be so added without causing such Lender to receive interest in
excess of the maximum amount then permitted by the law applicable to the Loans.
The amount of any Interest Deficit relating to a particular Loan and
Note shall be treated as a prepayment penalty and shall, to the fullest extent
permitted by Applicable Law, be paid in full at the time of any optional
prepayment by the Borrower to the Lenders of all the Loans at that time
outstanding pursuant to Section 2.9(a) hereof. The amount of any Interest
Deficit relating to a particular Loan and Note at the time of any complete
payment of the Loans at that time outstanding (other than an optional prepayment
thereof pursuant to Section 2.9(a) hereof) shall be cancelled and not paid.
SECTION 2.15. LETTERS OF CREDIT.
(a) (i) Subject to the terms and conditions hereof and of
Applicable Law, the Fronting Bank agrees to issue Letters of Credit payable in
Dollars from time to time after the Closing
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Date and prior to the Commitment Termination Date upon the request of the
Borrower, PROVIDED, HOWEVER, that (A) the Borrower shall not request that
any Letter of Credit be issued if, after giving effect thereto, the sum of the
then current L/C Exposure, PLUS the aggregate Loans then outstanding, PLUS
the Special Production Tranche for each Designated Picture, PLUS the
Completion Reserve would exceed the lesser of the then current amount of the
Borrowing Base or the Total Commitments and (B) in no event shall the Fronting
Bank issue any Letter of Credit having an expiration date after the Commitment
Termination Date.
(ii) Immediately upon the issuance of each Letter of Credit, each
Lender shall be deemed to, and hereby agrees to, have irrevocably purchased from
the Fronting Bank a participation in such Letter of Credit in accordance with
such Lender's Percentage.
(iii) Each Letter of Credit may, at the option of the Fronting
Bank, provide that the Fronting Bank may (but shall not be required to) pay all
or any part of the maximum amount which may at any time be available for drawing
thereunder to the beneficiary thereof upon the occurrence and continuation of an
Event of Default and the acceleration of the maturity of the Loans, provided
that, if payment is not then due to the beneficiary, the Fronting Bank shall
deposit the funds in question in a segregated account with the Fronting Bank to
secure payment to the beneficiary and any funds so deposited shall be paid to
the beneficiary of the Letter of Credit if conditions to such payment are
satisfied or returned to the Fronting Bank for distribution to the Lenders (or,
if all Obligations shall have been paid in full in cash, to the Borrower) if no
payment to the beneficiary has been made and the final date available for
drawings under the Letter of Credit has passed. Each payment or deposit of
funds by the Fronting Bank as provided in this paragraph shall be treated for
all purposes of this Credit Agreement as a drawing duly honored by the Fronting
Bank under the related Letter of Credit.
(b) Whenever the Borrower desires the issuance of a Letter of
Credit, it shall deliver to the Fronting Bank a written notice no later than
1:00 p.m., New York City time, at least five Business Days prior to the proposed
date of issuance. Such notice shall specify (i) the proposed date of issuance
(which shall be a Business Day), (ii) the face amount of the Letter of Credit,
(iii) the expiration date of the Letter of Credit and (iv) the name and address
of the beneficiary. Such notice shall be accompanied by a brief description of
the underlying transaction and upon request of the Fronting Bank, the Borrower
shall provide additional details regarding the underlying transaction.
Concurrently with the giving of written notice of a request for the issuance of
a Letter of Credit, the Borrower shall specify a precise description of the
documents and the
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verbatim text of any certificate to be presented by the beneficiary of such
Letter of Credit which, if presented by such beneficiary prior to the expiration
date of the Letter of Credit, would require the Fronting Bank to make payment
under the Letter of Credit; PROVIDED, HOWEVER, that the Fronting Bank, in
its reasonable discretion, may require customary changes in any such documents
and certificates. Promptly after receipt of such notice, the Agent shall notify
each Lender of the issuance and the amount of each such Lender's respective
participation therein.
(c) The payment of drafts under any Letter of Credit shall be made
in accordance with the terms of such Letter of Credit and the Uniform Customs
and Practice for documentary Credits of the International Chamber of Commerce,
as adopted or amended from time to time. The Fronting Bank shall be entitled to
honor any drafts and accept any documents presented to it by the beneficiary of
such Letter of Credit in accordance with the terms of such Letter of Credit and
believed by the Fronting Bank in good faith to be genuine. The Fronting Bank
shall not have any duty to inquire as to the accuracy or authenticity of any
draft or other drawing documents which may be presented to it, but shall be
responsible only to determine in accordance with customary commercial practices
that the documents which are required to be presented before payment or
acceptance of a draft under any Letter of Credit have been delivered and that
they comply on their face with the requirements of that Letter of Credit.
(d) If the Fronting Bank shall make payment on any draft presented
under a Letter of Credit (regardless of whether a Default or Event of Default or
acceleration has occurred), the Fronting Bank shall give notice of such payment
to the Lenders and each Lender hereby authorizes and requests the Fronting Bank
to advance for its account pursuant to the terms hereof its share of such
payment based upon its participation in the Letter of Credit and agrees promptly
to reimburse the Fronting Bank in immediately available funds for the Dollar
equivalent of the amount so advanced on its behalf. If such reimbursement is
not made by any Lender in immediately available funds on the same day on which
the Fronting Bank shall have made payment on any such draft, such Lender shall
pay interest thereof to the Fronting Bank at a rate per annum equal to the
Fronting Bank's cost of obtaining overnight funds in the New York Federal Funds
Market. In the case of any draft presented under a Letter of Credit which is
required to be paid at any time on or before the Commitment Termination Date,
such payment of the unreimbursed draft shall constitute an Alternate Base Rate
Loan hereunder and interest shall accrue from the date the Fronting Bank makes
payment of a draft under the Letter of Credit.
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(e) If any draft is presented under a Letter of Credit, payment of
which is required to be made after the Commitment Termination Date (it being
understood that no Letter of Credit shall be issued which would expire after
June 25, 1999), then the Borrower will, upon demand by the Fronting Bank, pay to
the Fronting Bank, in immediately available funds, the full amount of such
draft. If such payment is not made by the Borrower and the Fronting Bank shall
make payment on any draft presented under a Letter of Credit, the Fronting Bank
shall give notice of such payment to the Lenders and each Lender hereby
authorizes and requests the Fronting Bank to advance for its account pursuant to
the terms thereof its share of such payment based upon its participation in the
Letter of Credit and agrees promptly to reimburse the Fronting Bank in
immediately available funds for the Dollar equivalent of the amount so advanced
on its behalf. If such reimbursement is not made by any Lender in immediately
available funds on the same day on which the Fronting Bank shall have made
payment on any such draft, such Lender shall pay interest thereon to the
Fronting Bank at a rate per annum equal to the Fronting Bank's cost of obtaining
overnight funds in the New York Federal Funds Market. Such payment shall
constitute an Alternate Base Rate Loan hereunder and interest shall accrue from
the date the Fronting Bank makes payment of a draft under the Letter of Credit
at the rate specified in Section 2.7.
(f) (i) The Borrower agrees to pay the following amount to the
Fronting Bank with respect to Letters of Credit issued by it hereunder:
(A) with respect to the issuance, amendment, transfer or any
other transaction related to each Letter of Credit and each drawing
made thereunder, documentary and processing charges in accordance
with the Fronting Bank's standard schedule for such charges in
effect at the time of such issuance, amendment, transfer or drawing,
as the case may be; and
(B) a fronting fee for the period from and including the
Closing Date to but excluding the Commitment Termination Date,
computed at a rate equal to 1/8 of 1% per annum of the face amount
of each Letter of Credit issued, such fee to be due and payable in
arrears on and through the last day of each fiscal quarter of the
Borrower, prior to the Commitment Termination Date, on the
Commitment Termination Date and on the expiration of the last
outstanding Letter of Credit.
(ii) The Borrower agrees to pay to the Agent for distribution to
each Lender in respect of their L/C Exposure, such Lender's Pro Rata Share of a
commission calculated at a rate per annum equal to the Applicable Margin for
Eurodollar Loans
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(calculated in the same manner as interest) of the face amount of each Letter of
Credit issued. Such commission shall be payable in arrears on and through the
last day of each fiscal quarter prior to the Commitment Termination Date and on
the later of the Commitment Termination Date and the expiration of the last
outstanding Letter of Credit.
(iii) Promptly upon receipt by the Fronting Bank of any amount
described in clause (ii) of this Section 2.15(f), or any amount described in
Section 2.15(e) previously reimbursed to the Fronting Bank by the Lenders, the
Fronting Bank shall distribute to each Lender its Pro Rata Share of such amount.
Amounts payable under clauses (i)(A) and (i)(B) of this Section 2.15(f) shall be
paid directly to the Fronting Bank and shall be for its exclusive use.
(g) If by reason of (i) any change in Applicable Law after the
Initial Date, or in the interpretation or administration thereof (including,
without limitation, any request, guideline or policy not having the force of
law) by any Governmental Authority charged with the administration or
interpretation thereof, or (ii) compliance by the Fronting Bank or any Lender
with any direction, request or requirement (whether or not having the force of
law) issued after the Initial Date by any Governmental Authority or monetary
authority (including any change whether or not proposed or published prior to
the Initial Date), including, without limitation, any modifications to
Regulation D occurring after the Initial Date:
(A) the Fronting Bank or any Lender shall be subject to any
tax, levy, duty, fee, charge, deduction or withholding with respect
to any Letter of Credit (other than withholding tax imposed by the
United States of America or any other tax, levy, impost, duty,
charge, fee, deduction or withholding (I) that is measured with
respect to the overall net income of the Fronting Bank or such
Lender or of a Lending Office of the Fronting Bank or such Lender,
and that is imposed by the United States of America, or by the
jurisdiction in which the Fronting Bank or such Lender is
incorporated, or in which such Lending Office is located, managed or
controlled or in which the Fronting Bank or such Lender has its
principal office (or any political subdivision or taxing authority
thereof or therein) or (II) that is imposed solely by reason of the
Fronting Bank or such Lender failing to make a declaration of, or
otherwise to establish, non-residence or to make any other claim for
exemption, or otherwise to comply with any certification,
identification, information, documentation or reporting requirements
prescribed under the laws of the relevant jurisdiction, in those
cases where the Fronting Bank or
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such Lender may properly make such declaration or claim or so
establish non-residence or otherwise comply);
(B) the basis of taxation of any fee or amount payable
hereunder with respect to any Letter of Credit shall be changed
(except as limited in clause (A) above);
(C) any reserve, deposit or similar requirement is or shall
be applicable, imposed or modified in respect of any Letter of
Credit issued by the Fronting Bank or participations therein
purchased by any Lender; or
(D) there shall be imposed on the Fronting Bank or any Lender
any other condition regarding this Section 2.15, any Letter of
Credit or any participation therein;
and the result of the foregoing is to increase the actual cost to the Fronting
Bank or any Lender of issuing, making or maintaining any Letter of Credit or of
purchasing or maintaining any participation therein, or to reduce the amount
receivable in respect thereof by the Fronting Bank or any Lender, in each case
by or in an amount which the Fronting Bank or any Lender shall reasonably deem
material, then and in any such case the Fronting Bank or such Lender may, at any
time, notify the Borrower, and the Borrower shall pay on demand such amounts as
the Fronting Bank or such Lender may specify to be necessary to compensate the
Fronting Bank or such Lender for such additional cost or reduced receipt.
Section 2.10(b), (c), (d) and Section 2.11 shall in all instances apply to the
Fronting Bank and any Lender with respect to Letters of Credit issued hereunder.
The determination by the Fronting Bank or any Lender, as the case may be, of any
amount due pursuant to this Section 2.15 as set forth in a certificate setting
forth the calculation thereof in reasonable detail shall, in the absence of
manifest error, be final, conclusive and binding on all of the parties hereto.
(h) If at any time when an Event of Default shall have occurred and
be continuing, any Letters of Credit shall remain outstanding, then the Required
Lenders or the Fronting Bank may, at their option, require the Borrower to
deliver to the Fronting Bank Cash Equivalents in an amount equal to the full
amount of the L/C Exposure or to furnish other security acceptable to the
Fronting Bank. Any amounts so delivered pursuant to the preceding sentence
shall be applied to reimburse the Fronting Bank for the amount of any drawings
honored under Letters of Credit; PROVIDED, HOWEVER, that if prior to the
Commitment Termination Date, no Event of Default is then continuing, the
Fronting Bank shall return all of such collateral relating to such deposit to
the Borrower if requested by it.
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(i) If at any time that any Letter of Credit is outstanding, the
L/C Exposure, PLUS Loans outstanding, PLUS the Special Production Tranche
for each Designated Picture, PLUS the Completion Reserve exceeds the Borrowing
Base, then the Required Lenders or the Fronting Bank may, at their option,
require (x) a prepayment of the Loans in accordance with Section 2.9(d) or (y)
the Borrower to deliver Cash Equivalents to the Fronting Bank in an amount
sufficient to eliminate such excess or to furnish other security for such excess
acceptable to the Fronting Bank. Any amounts so delivered pursuant to the
preceding sentence shall be applied to reimburse the Fronting Bank for the
amount of any drawings honored under Letters of Credit; PROVIDED, HOWEVER,
that if subsequent to any such deposit such excess is reduced to an amount less
than the amount of such deposited amounts and no Default or Event of Default is
then continuing, the Borrower shall be entitled to receive such excess
collateral if requested by it.
(j) Notwithstanding the termination of the Commitments and the
payment of the Loans, the obligations of the Borrower under this Section 2.15
shall remain in full force and effect until the Fronting Bank and the Lenders
shall have been irrevocably released from their obligations with regard to any
and all Letters of Credit.
(k) This Section 2.15 shall not be amended without the written
consent of the Fronting Bank and the Agent.
SECTION 2.16. PROVISIONS RELATING TO THE BORROWING BASE.
(a) The Agent may (and at the direction of the Required Lenders
shall) from time to time by written notice to the Borrower (which notice shall
be prospective only, i.e., to the extent that giving effect to such notice would
otherwise result in a mandatory prepayment by the Borrower under Section 2.9,
such notice shall not be given effect for purposes of such mandatory prepayment
but shall nevertheless be effective for all other purposes under this Credit
Agreement immediately upon the Borrower's receipt of such notice) delete any
Person from the initial Schedule of Approved Account Debtors or move a Person to
a category of Approved Account Debtor having a lower advance rate, in each case
as the Agent or the Required Lenders, acting in good faith, may in its or their
discretion deem appropriate or (ii) the Required Lenders may add, by written
notice to the Borrower, a Person to the list of Approved Account Debtors or move
an Approved Account Debtor to a category having a higher advance rate in each
case as they may in their discretion deem appropriate.
(b) In the event the Agent notifies the Borrower that a Person or
Affiliated Group is to be deleted as an Approved
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Account Debtor in accordance with Section 2.16(a), no additional Eligible
Receivables from such Person or Affiliated Group may be included in the
Borrowing Base subsequent to such notice unless the Agent thereafter notifies
the Borrower that such Person or Affiliated Group is reinstated as an Approved
Account Debtor in accordance with Section 2.16(a). In the event the Agent
notifies the Borrower that the Allowable Amount with respect to an Approved
Account Debtor is to be reduced in accordance with Section 2.16(a), no
additional Eligible Receivables from such Approved Account Debtor may be
included in the Borrowing Base subsequent to such notice if such inclusion would
result in the aggregate amount of Eligible Receivables from such Approved
Account Debtor being in excess of the Allowable Amount after giving effect to
such reduction unless the Agent thereafter notifies the Borrower that the
Allowable Amount may be increased in accordance with Section 2.16(a).
Notwithstanding the foregoing, (i) if a Person or Affiliated Group is deleted as
an Approved Account Debtor or the Agent notifies the Borrower that the Allowable
Amount with respect to an Approved Account Debtor is to be reduced more than 30
days after the Closing Date, even if such Person or Affiliated Group is deleted
as an Approved Account Debtor or the Allowable Amount set forth in Schedule 2
hereto with respect to an Approved Account Debtor has been reduced, an item that
was included as an Eligible Receivable on the most recent Borrowing Base
Certificate received by the Agent prior to any such deletion or reduction, may
continue to be included as an Eligible Receivable in any subsequent Borrowing
Base Certificate and (ii) if, within 30 days after the Closing Date, a Person or
Affiliated Group is deleted as an Approved Account Debtor or the Agent notifies
the Borrower that the Allowable Amount with respect to an Approved Account
Debtor is to be reduced, all Eligible Receivables from such deleted Person or
Affiliated Group and the amount of Eligible Receivables from such Approved
Account Debtor in excess of the Allowable Amount after giving effect to such
reduction shall be immediately excluded from the Borrowing Base.
(c) With respect to such items of Product as described in Section
5.25, no Eligible Receivables may be included in the Borrowing Base unless the
Borrower is in compliance with Section 5.25.
(d) Such portion of the Borrowing Base qualifying under Tier 3
Borrowing Base may only be used to support Loans made under a Special Production
Tranche.
(e) The Borrowing Base credit attributable to any single obligor
may not exceed 25% of the total Borrowing Base.
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3. REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES
In order to induce the Lenders to enter into this Credit Agreement
and to make the Loans and purchase participations in the Letters of Credit
provided for herein, the Credit Parties, jointly and severally, make the
following representations and warranties to, and agreements with, the Lenders,
all of which shall survive the execution and delivery of this Credit Agreement,
the issuance of the Notes, the making of the Loans and the issuance of the
Letters of Credit:
SECTION 3.1. CORPORATE EXISTENCE AND POWER.
Each of the Credit Parties (other than KLC/New City) is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and is in good standing as a foreign
corporation in all jurisdictions where the nature of its properties or business
so requires and where the failure to be in good standing as a foreign
corporation would render an Eligible Receivable unenforceable or would give rise
to a material liability of any Credit Party. KLC/New City is a duly organized
and existing general partnership under the laws of the State of California.
Each of the Credit Parties has the corporate power or partnership power, as the
case may be, and authority to own its respective properties and carry on its
respective businesses as now being conducted, to execute, deliver and perform,
as applicable, its obligations under this Credit Agreement, the Notes and the
other Fundamental Documents and other documents contemplated hereby to which it
is or will be a party as provided herein and to grant to the Agent, for the
benefit of the Lenders, a security interest in the Collateral as contemplated by
Article 8 hereof and in the Pledged Securities as contemplated by Article 10
hereof and guaranty the Obligations as contemplated by Article 9 hereof.
SECTION 3.2. CORPORATE AUTHORITY AND NO VIOLATION.
(a) The execution, delivery and performance of this Credit
Agreement and the other Fundamental Documents to which it is a party, by each
Credit Party and, in the case of the Borrower, the borrowings hereunder and the
execution and delivery of the Notes and, in the case of each Credit Party, the
grant to the Agent for the benefit of the Lenders of the security interest in
the Collateral and the Pledged Securities as contemplated herein and in the
other Fundamental Documents and, in the case of each Credit Party, the guaranty
of the Obligations as contemplated in Article 9 hereof (i) have been duly
authorized by all necessary corporate action or partnership action, as the case
may be, on the part of each such Credit Party, (ii) will not constitute a
violation by any Credit Party of any provision of Applicable Law in any material
respect, any order of any court or other agency of the United States or any
state thereof applicable
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to any of the Credit Parties or any of their respective properties or assets,
(iii) will not violate any provision of the Certificate of Incorporation or
By-Laws or joint venture agreement, as the case may be, of any of the Credit
Parties, or any material provision of any Distribution Agreement, Licensing
Agreement, indenture, agreement, bond, note or other similar instrument to which
any of the Credit Parties is a party or by which any of the Credit Parties or
their respective properties or assets are bound, (iv) will not be in conflict
with, result in a breach of or constitute (with due notice or lapse of time or
both) a default under or create any right to terminate any such Distribution
Agreement, Licensing Agreement, indenture, agreement, bond, note or other
instrument, and (v) will not result in the creation or imposition of any Lien,
charge or encumbrance of any nature whatsoever upon any of the properties or
assets of any of the Credit Parties other than pursuant to this Credit Agreement
or the other Fundamental Documents to which it is a party.
(b) Except as set forth on Schedule 3.2, there are no restrictions
on the transfer of any of the Pledged Securities other than as a result of this
Credit Agreement or applicable securities laws and the regulations promulgated
thereunder.
SECTION 3.3. GOVERNMENTAL APPROVAL.
All authorizations, approvals, registrations or filings with any
governmental or public regulatory body or authority of the United States or any
state thereof (other than UCC financing statements, the Copyright Security
Agreement, and the Trademark Security Agreement which have been delivered to the
Agent prior to the making of the initial Loan hereunder, in form suitable for
recording or filing with the appropriate filing office) required for the
execution, delivery and performance by any Credit Party of this Credit Agreement
and the other Fundamental Documents to which it is a party, and the execution
and delivery by the Borrower of the Notes, have been duly obtained or made, or
duly applied for and are in full force and effect, and if any such further
authorizations, approvals, registrations or filings should hereafter become
necessary, the Credit Parties will use their best efforts to obtain or make all
such authorizations, approvals, registrations or filings.
SECTION 3.4. BINDING AGREEMENTS.
This Credit Agreement and the other Fundamental Documents when
executed will constitute the legal, valid and binding obligations of the
respective Credit Parties, enforceable in accordance with their respective
terms, subject, as to the enforcement of remedies, to applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally and to general
principles of equity.
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SECTION 3.5. FINANCIAL STATEMENTS.
(i) The audited Consolidated balance sheets of the Borrower at
September 30, 1995, (ii) the unaudited Consolidated balance sheet of the
Borrower at December 31, 1995, and (iii) the unaudited Consolidated balance
sheet of the Borrower at March 31, 1996, together with the related statements of
cash flows and Stockholders' Equity and the related notes and supplemental
information for the audited statements, in the forms which have previously been
provided to the Lenders, have been prepared in accordance with GAAP, except as
otherwise indicated in the notes to such financial statements. All of such
financial statements fairly present the Consolidated financial condition or the
results of operations of the Borrower and its Consolidated Subsidiaries, at the
dates or for the periods indicated, subject in the case of unaudited statements
to changes resulting from normal year-end and audit adjustments, and (in the
case of balance sheets) reflect (including the notes thereto) all known
liabilities, contingent or otherwise, as of such dates required in accordance
with GAAP to be shown or reserved against, or disclosed in the notes to the
financial statements.
SECTION 3.6. NO MATERIAL ADVERSE CHANGE.
(a) There has been no material adverse change with respect to the
business, operations, performance, assets, properties or condition (financial or
otherwise) of the Credit Parties taken as a whole from March 31, 1996, except
for changes due to seasonality that are consistent with the corresponding
periods in prior years.
(b) No Credit Party has entered or is entering into the
arrangements contemplated hereby and by the other Fundamental Documents, or
intends to make any transfer or incur any obligations hereunder or thereunder,
with actual intent to hinder, delay or defraud either present or future
creditors. On and as of the Closing Date, on a pro forma basis after giving
effect to all Indebtedness (including the Loans) (i) each Credit Party expects
the cash available to such Credit Party, after taking into account all other
anticipated uses of the cash of such Credit Party (including the payments on or
in respect of debt referred to in clause (iii) of this Section 3.6(b)), will be
sufficient to satisfy all final judgments for money damages which have been
docketed against such Credit Party or which may be rendered against such Credit
Party in any action in which such Credit Party is a defendant (taking into
account the reasonably anticipated maximum amount of any such judgment and the
earliest time at which such judgment might be entered); (ii) the sum of the
present fair saleable value of the assets of each Credit Party will exceed the
probable liability of such Credit Party on its debts (including its Guaranties);
(iii) no Credit Party will have incurred or intends to, or believes that it
will, incur
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debts beyond its ability to pay such debts as such debts mature (taking into
account the timing and amounts of cash to be received by such Credit Party from
any source, and of amounts to be payable on or in respect of debts of such
Credit Party and the amounts referred to in clause (ii)); and (iv) each Credit
Party believes it will have sufficient capital with which to conduct its present
and proposed business and the property of such Credit Party does not constitute
unreasonably small capital with which to conduct its present or proposed
business. For purposes of this Section 3.6, "debt" means any liability on a
claim, and "claim" means (y) right to payment whether or not such right is
reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed (other than those being disputed in good faith), undisputed,
legal, equitable, secured or unsecured, or (z) right to an equitable remedy for
breach of performance if such breach gives rise to a payment, whether or not
such right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured or
unsecured.
SECTION 3.7. OWNERSHIP OF PLEDGED SECURITIES, ETC.
(a) Annexed hereto as Schedule 3.7(a) is a correct and complete
list as of the date hereof, of each Credit Party (other than KLC/New City)
showing, as to each, its name, the jurisdiction of incorporation, its authorized
capitalization, the number of shares of its capital stock outstanding and the
ownership of the capital stock of each such Credit Party; and
(b) Except as noted on Schedule 3.7(b), no Credit Party owns any
Voting Stock or beneficial interest, directly or indirectly, in any entity other
than in the Subsidiaries of the Borrower.
SECTION 3.8. COPYRIGHTS, TRADEMARKS AND OTHER RIGHTS.
(a) On the date hereof, the items of Product listed on Schedule
3.8(a) comprise all of the Product in which any Credit Party has any right,
title or interest in or to (either directly or through a joint venture or
partnership), and the character of the interests held by the Credit Party are
set forth across from the description of such item of Product. As to each item
listed on Schedule 3.8(a) hereto the Credit Party holding such interests has
duly recorded its interests in the United States Copyright Office and has
delivered copies of all such recordation to the Agent. To the best of each
Credit Party's knowledge, all items of Product and all component parts thereof
do not and will not violate or infringe upon any copyright, right of privacy,
trademark, patent, trade name, performing right or any literary, dramatic,
musical, artistic, personal, private, several, care, contract or copyright right
or any other right of any Person or contain any libelous or slanderous material
other than to an
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extent which is either not material or for which coverage is provided in
existing insurance policies. To the best of each Credit Party's knowledge,
there is no claim, suit, action or proceeding pending or threatened against any
Credit Party that involves a claim of infringement of any copyright with respect
to any item of Product listed on Schedule 3.8(a) and no Credit Party has
knowledge of any existing infringement by any other Person of any copyright held
by any Credit Party with respect to any item of Product listed on Schedule
3.8(a).
(b) Schedule 3.8(b) hereto (i) lists all the trademarks registered
by any Credit Party on the date hereof and identifies the Credit Party which
registered each such trademark and (ii) specifies as to each, the jurisdictions
in which such trademark has been issued or registered (or, if applicable, in
which an application for such issuance or registration has been filed),
including the respective registration or application numbers and applicable
dates of registration or application and (iii) specifies as to each, as
applicable, material licenses, sublicenses and other material agreements as of
the date hereof (other than any agreements which relate to the exploitation of a
item of Product), to which any Credit Party is a party and pursuant to which any
Credit Party is authorized to use such trademark. Each trademark set forth on
Schedule 3.8(b) shall be included on Schedule A to the Trademark Security
Agreement delivered to the Agent pursuant to Section 4.01.
SECTION 3.9. FICTITIOUS NAMES.
Except as disclosed on Schedule 3.9, none of the Credit Parties are
doing business or intend to do business other than under its full corporate
name, including, without limitation, under any trade name or other doing
business name.
SECTION 3.10. TITLE TO PROPERTIES.
As of the Closing Date, the Credit Parties have good title to each
of the properties and assets reflected on the latest balance sheets referred to
in Section 3.5 (other than such properties or assets disposed of in the ordinary
course of business since the date of such balance sheets) and all such
properties and assets are free and clear of Liens, except Permitted
Encumbrances.
SECTION 3.11. PLACES OF BUSINESS.
The chief executive office of each Credit Party is, on the Closing
Date, as set forth on Schedule 3.11 hereto, which offices in the United States
are the places where each Credit Party is "located" for the purpose of the UCC
and the Uniform Commercial Code in effect in any State in which any Credit Party
is so located. All of the places where each Credit Party keeps
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the records concerning the Collateral on the date hereof or regularly keeps any
goods included in the Collateral on the date hereof are also listed on Schedule
3.11 hereto.
SECTION 3.12. LITIGATION.
Except as set forth on Schedule 3.12 hereto, there are no actions,
suits or other proceedings at law or in equity by or before any arbitrator or
arbitration panel, or any Governmental Authority (including, but not limited to,
matters relating to environmental liability) or any investigation by any
Governmental Authority of the affairs of or threatened litigation action or
other proceedings against or affecting any Credit Party or of any of their
respective properties or rights which would have a significant likelihood of
materially and adversely affecting (i) the ability of any Credit Party to
perform its obligations under the Fundamental Documents to which it is a party,
(ii) the ability of any Credit Party to carry on its business, (iii) the
security interests granted to the Agent for the benefit of the Lenders under the
Fundamental Documents, (iv) the financial condition or business of the Credit
Parties taken as a whole or, (v) the Collateral. No Credit Party is in default
with respect to any order, writ, injunction, decree, rule or regulation of any
Governmental Authority binding upon such Person, which default would have a
material adverse effect upon the financial condition or the business of the
Credit Parties taken as a whole.
SECTION 3.13. FEDERAL RESERVE REGULATIONS.
No Credit Party is engaged principally or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying any Margin Stock. No part of the proceeds of the Loans will be used,
directly or indirectly, whether immediately, incidentally or ultimately (i) to
purchase or carry any Margin Stock or to extend credit to others for the purpose
of purchasing or carrying any Margin Stock, or (ii) for any other purpose, in
each case, violative of or inconsistent with any of the provisions of any
regulation of the Board of Governors of the Federal Reserve System, including,
without limitation, Regulations G, T, U and X thereto.
SECTION 3.14. INVESTMENT COMPANY ACT.
No Credit Party is, or will during the term of this Credit Agreement
be, (i) an "investment company", within the meaning of the Investment Company
Act of 1940, as amended or (ii) subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act or any foreign,
federal or local statute or any other Applicable Law of the United States of
America, any other jurisdiction, in each case limiting its ability to incur
indebtedness for money borrowed as contemplated hereby or by any other
Fundamental Document.
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SECTION 3.15. TAXES.
Each Credit Party has filed or caused to be filed all federal,
state, local and foreign tax returns which are required to be filed with any
Governmental Authority after giving effect to applicable extensions, and has
paid or have caused to be paid all taxes as shown on said returns or on any
assessment received by them in writing, to the extent that such taxes have
become due, except as permitted by Section 5.15 hereof. No Credit Party knows
of any material additional assessments or any basis therefor. The Credit
Parties reasonably believe that the charges, accrual and reserves on its books
in respect of taxes or other governmental charges are adequate.
SECTION 3.16. COMPLIANCE WITH ERISA.
Each Credit Party is in compliance in all material respects with the
provisions of ERISA and the Code applicable to Plans, and the regulations and
published interpretations thereunder, if any, which are applicable to it. As of
the date hereof, no Credit Party has, with respect to any Plan established or
maintained by it, engaged in a prohibited transaction which would subject it to
a material tax or penalty on prohibited transactions imposed by ERISA or Section
4975 of the Code. No material liability to the PBGC has been or is expected to
be incurred with respect to the Plans (other than for premiums not yet due) and
there has been no Reportable Event and no other event or condition that presents
a material risk of termination of a Plan by the PBGC. No Credit Party has
engaged in a transaction which would result in the incurrence by such Credit
Party of any liability under Section 4069 of ERISA. No Credit Party has taken
any action and no event has occurred with respect to any Multiemployer Plan
which would subject any Credit Party to material liability under either Section
4201 or 4204 of ERISA.
SECTION 3.17. AGREEMENTS.
(a) No Credit Party is in default in the performance, observance or
fulfillment of any of the material obligations, covenants or conditions
contained in any agreement or instrument (including the Distribution Agreements
and the Licensing Agreements) to which it is a party which would reasonably be
expected to result in any material adverse change in the business, properties,
assets, operations, or condition (financial or otherwise) of the Credit Parties
taken as a whole.
(b) Schedule 3.17 is a true and complete listing (in form
satisfactory to the Agent) as of the date on which this Credit Agreement is
executed by the Borrower of (i) all credit agreements, indentures, and other
agreements related to any Indebtedness for borrowed money of the Credit Parties,
(ii) all
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joint venture agreements to which the Credit Parties are a party (iii) all
material Distribution Agreements and the Licensing Agreements to which
the Credit Parties are party and (iv) all other contracts and agreements which
are material to any Credit Party, including but not limited to, guarantees and
employment agreements. The Credit Parties have delivered or made available to
the Agent a true and complete copy of each agreement listed on Schedule 3.17,
including all exhibits and schedules. For purposes of this Section 3.17, a
Distribution Agreement or other contract or agreement shall be deemed "material"
if the Credit Parties reasonably expect that prior to the Commitment Termination
Date any Credit Party would, pursuant to the terms thereof, (A) recognize net
revenues after the payment of third party shares in excess of $500,000 or (B)
incur liabilities or obligations (not covered by corresponding revenues) in
excess of $500,000.
SECTION 3.18. SECURITY INTEREST; OTHER SECURITY.
(a) This Credit Agreement and the other Fundamental Documents, when
executed and delivered and, upon the making of the initial Loan hereunder, will
create and grant to the Agent for the benefit of the Lenders (upon (i) the
filing of the appropriate UCC-1 financing statements, (ii) the filing of the
Copyright Security Agreements with the U.S. Copyright Office, (iii) the filing
of the Trademark Security Agreement with the U.S. Patent and Trademark Office
and (iv) delivery of the Pledged Securities to the Agent) valid and first
priority perfected security interests in the Collateral and the Pledged
Securities subject only to Permitted Encumbrances and except as priority may be
limited by bankruptcy, insolvency, or other laws affecting the enforcement of
creditors' rights generally.
(b) The Keyman Life Insurance is in full force and effect and the
Credit Parties know of no defense or offset to the full and timely payment
thereon which could be asserted by the insurer issuing such policy if a bona
fide claim were to be made.
(c) The Keyman Life Insurance Assignment constitutes a valid and
effective transfer to the Agent for the benefit of the Lenders for security
purposes of all right, title and interest of any of the Credit Parties in and to
the Keyman Life Insurance.
SECTION 3.19. DISCLOSURE.
Neither this Credit Agreement nor any other Fundamental Document nor
any agreement, document, certificate or statement furnished to the Agent for the
benefit of the Lenders by any Credit Party in connection with the transactions
contemplated hereby, at the time it was furnished or delivered contained any
untrue statement of a material fact regarding the Credit Parties or, when taken
together with such other agreements, documents,
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certificates and statements omitted to state a material fact necessary under the
circumstances under which it was made in order to make the statements contained
herein or therein not misleading. There is no fact known to any Credit Party
not constituting general industry conditions or not disclosed in such
agreements, documents, certificates and statements which materially and
adversely affects, or could reasonably be expected in the future to materially
and adversely affect, the business, assets or condition, financial or otherwise
of the Credit Parties taken as a whole.
SECTION 3.20. DISTRIBUTION RIGHTS.
Each Credit Party has sufficient right, title and interest in each
item of Product to enable it (i) to enter into and perform all of the
Distribution Agreements to which it is a party and other agreements generating
Eligible Receivables and accounts receivable reflected on the most recent
balance sheet delivered to the Lenders pursuant hereto, and (ii) to charge,
earn, realize and retain all fees and profits to which such Credit Party is
entitled thereunder, and is not in breach of any of its obligations under such
agreements, nor does any Credit Party have any knowledge of any breach or
anticipated breach by any other parties thereto, which breach in either case
either individually or when aggregated with all other such breaches would have a
material adverse effect on the Credit Parties taken as a whole.
SECTION 3.21. ENVIRONMENTAL LIABILITIES.
(a) Except as set forth on Schedule 3.21 hereto, no Credit Party
has used, stored, treated, transported, manufactured, refined, handled, produced
or disposed of any Hazardous Materials on, under, at or from any of their
properties or assets owned or leased by a Credit Party, in any manner which at
the time of the action in question violated any Environmental Law governing the
use, storage, treatment, transportation, manufacture, refinement, handling,
production or disposal of Hazardous Materials and to the best of the Credit
Parties' knowledge, no prior owner of such property or asset or any tenant,
subtenant, prior tenant or prior subtenant thereof has used Hazardous Materials
on or affecting such property or asset, or otherwise, in any manner which at the
time of the action in question violated any Environmental Law governing the use,
storage, treatment, transportation, manufacture, refinement, handling,
production or disposal of Hazardous Materials.
(b) To the best of each Credit Party's knowledge (i) no Credit
Party has any obligations or liabilities, known or unknown, matured or not
matured, absolute or contingent, assessed or unassessed, which would reasonably
be expected to have a materially adverse effect on the business or condition
(financial
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or otherwise) of the Credit Parties taken as a whole and (ii) no claims have
been made against any of the Credit Parties during the past five years and no
presently outstanding citations or notices have been issued against any of the
Credit Parties, which could reasonably be expected to have a materially adverse
effect on the business or condition (financial or otherwise) of the Credit
Parties taken as a whole which in either case have been or are imposed by reason
of or based upon any provision of any Environmental Law, including, without
limitation, any such obligations or liabilities relating to or arising out of or
attributable, in whole or in part, to the manufacture, processing, distribution,
use, treatment, storage, disposal, transportation or handling of any Hazardous
Materials by any Credit Party, or any of their employees, agents,
representatives or predecessors in interest in connection with or in any way
arising from or relating to any of the Credit Parties or any of their respective
owned or leased properties, or relating to or arising from or attributable, in
whole or in part, to the manufacture, processing, distribution, use, treatment,
storage, disposal, transportation or handling of any such substance, by any
other Person at or on or under any of the real properties owned or used by any
of the Credit Parties or any other location where such could have a materially
adverse effect on the business or condition (financial or otherwise) of the
Credit Parties taken as a whole.
SECTION 3.22. PLEDGED SECURITIES.
All of the Pledged Securities are duly authorized, validly issued
and fully paid, and are owned and held by the Pledgors, free and clear of any
liens, encumbrances, or security interests whatsoever other than those created
pursuant to this Credit Agreement or Permitted Encumbrances and there are no
restrictions on the transfer of the Pledged Securities other than as a result of
this Credit Agreement or applicable securities laws. Except as set forth on
Schedule 3.22, there are no outstanding rights, warrants, options, or agreements
to purchase or otherwise acquire any shares of the stock or securities or
obligations of any kind convertible into any shares of capital stock, of any
shares, of the issuers of the Pledged Securities. The Pledged Securities are
owned by the Persons specified on Schedule 3.7(a).
SECTION 3.23. COMPLIANCE WITH LAWS.
No Credit Party is in violation of any Applicable Law except for
such violations in the aggregate which would not have a material adverse effect
on the business condition (financial or otherwise) of the Credit Parties taken
as a whole. The borrowings hereunder, the intended use of the proceeds of the
Loans as described in the preamble hereto and as contemplated by
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Section 5.23 and any other transactions contemplated hereby will not violate any
Applicable Law.
4. CONDITIONS OF LENDING
SECTION 4.1. CONDITIONS PRECEDENT TO INITIAL LOANS OR LETTER OF
Credit.
The obligation of each Lender to make its initial Loan or issue and
participate in the initial Letter of Credit is subject to the following
conditions precedent:
(a) CORPORATE DOCUMENTS. At the time of the making of the
initial Loan, the Agent shall have received, with copies for each of the
Lenders:
(i) a copy of each Credit Party's certificate of
incorporation or joint venture agreement, certified as of a recent
date by the Secretary of State of such Credit Party's jurisdiction
of incorporation or organization, as the case may be;
(ii) a certificate of such Secretary of State, dated as of a
recent date as to the good standing of and payment of taxes by each
Credit Party or General Partner of such Credit Party, as the case
may be, which lists the charter documents on file in the office of
such Secretary of State;
(iii) a certificate dated as of a recent date as to the good
standing of each Credit Party issued by the Secretary of State of
each jurisdiction in which each Credit Party is qualified as a
foreign corporation; and
(iv) a certificate of the Secretary of each Credit Party or
in the case of KLC/New City, a certificate of one of its General
Partners, dated the date of the initial Loans and certifying (A)
that attached thereto is a true and complete copy of the by-laws of
such Credit Party or General Partner of such Credit Party, as the
case may be, as in effect on the date of such certification, (B)
that attached thereto is a true and complete copy of resolutions
adopted by the Board of Directors of such Credit Party or General
Partner of such Credit Party, as the case may be, authorizing (to
the extent applicable) the Borrowings hereunder, the execution,
delivery and performance in accordance with their respective terms
of this Credit Agreement, the Notes (if any) to be executed by it,
and any other documents required or contemplated hereunder or
thereunder and that such resolutions have not been amended,
rescinded or supplemented and are currently in
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effect, (C) that the certificate of incorporation of such Credit
Party or General Partner of such Credit Party, as the case may be,
has not been amended since the date of the last amendment thereto
indicated on the certificate of the Secretary of State furnished
pursuant to clause (i) above except to the extent specified in such
Secretary's certificate and (D) as to the incumbency and specimen
signature of each officer of such Credit Party or General Partner of
such Credit Party, as the case may be, executing (as applicable)
this Credit Agreement, the Notes or any other document delivered by
it in connection herewith or therewith (such certificate to contain
a certification by another officer of such Credit Party or General
Partner of such Credit Party, as the case may be, as to the
incumbency and signature of the officer signing the certificate
referred to in this clause (iv)); and (v) such additional
supporting documents as the Agent or its counsel or any Lender may
reasonably request.
(b) NOTES. On or before the date of the making of the initial
appropriate Loans, the Agent shall have received the Notes executed by the
Borrower.
(c) OPINIONS OF COUNSEL. The Agent shall have received the
written opinions dated the date hereof and addressed to the Agent and the
Lenders substantially in the form attached hereto as Exhibit B, in form and
substance satisfactory to Morgan, Lewis & Bockius LLP, of Kaye, Scholer,
Fierman, Hayes & Handler, LLP. and internal legal counsel to the Credit
Parties.
(d) PROJECTED FINANCIAL INFORMATION. The Credit Parties shall
have delivered to the Agent forecasted financial statements consisting of
balance sheets, cash flow statements, income statements and borrowing base
projections together with appropriate supporting details and a statement of the
underlying assumptions. Such projected statements shall cover a period
commencing on the Closing Date and ending at fiscal year end 1997 and shall have
been prepared on a basis consistent with the Borrower's past practices. All of
the foregoing shall have been prepared in good faith and shall represent the,
good faith opinion of the senior management of the Borrower of the most probable
course of its business as of the date of delivery of such projections to the
Agent.
(e) NO MATERIAL ADVERSE CHANGE. No material adverse change shall
have occurred with respect to the business, operations, performance, assets,
properties, condition (financial or otherwise) or prospects of the Credit
Parties taken as a whole
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from March 31, 1996 except for changes due to seasonality that are consistent
with the corresponding periods in prior years.
(f) INSURANCE. The Borrower shall have furnished the Agent with
(i) a summary of all existing insurance coverage, (ii) evidence acceptable to
the Agent that the insurance policies required by Section 5.6 have been obtained
and are in full force and effect and (iii) Certificates of Insurance with
respect to all existing insurance coverage which certificates shall name
Chemical Bank, as Agent, as the certificate holder and shall evidence the
Borrowers' compliance with Section 5.6(f) with respect to all insurance coverage
existing as of the Closing Date.
(g) BORROWING BASE CERTIFICATE. The Agent shall have received an
initial Borrowing Base Certificate substantially in the form of Exhibit C
hereto.
(h) SECURITY AND OTHER DOCUMENTATION. On or prior to the Closing
Date, the Agent shall have received fully executed copies of (i) a Pledgeholder
Agreement for each item of Product, for which a Credit Party has control over
any physical elements thereof as listed on Schedule 3.8(a) hereto; (ii) a
Copyright Security Agreement for each item of Product in which a Credit Party
has a copyrightable interest (as listed on Schedule 3.8(a) hereto) executed by
such Credit Party; (iii) a Trademark Security Agreement for each trademark in
which a Credit Party has any interest (as listed on Schedule 3.8(b) hereto)
executed by such Credit Party; (iv) a Laboratory Access Letter addressed to each
Laboratory where a Credit Party has access rights to any physical elements of
Product or; (v) appropriate UCC-1 financing statements relating to the
Collateral; and (vi) the Pledged Securities with appropriate undated stock
powers executed in blank.
(i) SECURITY INTERESTS IN COPYRIGHTS AND OTHER COLLATERAL. On or
prior to the Closing Date, the Agent shall have received evidence satisfactory
to it that each Credit Party has sufficient right, title and interest in and to
the Collateral and other assets which it purports to own (including appropriate
licenses under copyright), as set forth in its financial statements and in the
other documents presented to the Lenders to enable each such Credit Party to
perform the Distribution Agreements and Licensing Agreements to which each such
Credit Party is a party and as to each Credit Party to grant to the Agent for
the benefit of the Lenders the security interests contemplated by the
Fundamental Documents, and that all financing statements, copyright filings and
other filings under Applicable Law necessary to provide the Agent for the
benefit of the Lenders with a first priority perfected security interest in the
Pledged Securities, Keyman Life Insurance and Collateral (subject, as to
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the Collateral, to Permitted Encumbrances) have been filed or delivered to the
Agent in satisfactory form for filing.
(j) PAYMENT OF FEES. All fees and expenses then due and payable
by any Credit Party in connection with the transactions contemplated hereby or
by the Fee Letter shall have been paid including, but not limited to, fees and
expenses due and payable by the Borrower to the Agent and the Lenders.
(k) CERTIFICATE FROM THE BORROWER. The Agent shall have received
a certificate, signed by an Authorized Officer on behalf of the Borrower,
confirming that the Borrower has determined that the projected availability of
the Loans as determined by the Borrowing Base, together with funds from
internally generated sources and other available sources that are acceptable to
the Agent, is sufficient to finance the Borrower in a manner compatible with the
forecasted financial statements previously delivered to the Lenders.
(l) LITIGATION. No litigation, inquiry, injunction or
restraining order shall be pending, entered or threatened which in the Agent's
good faith judgment could reasonably be expected to materially and adversely
affect (i) the assets, operations, business or condition (financial or
otherwise) of the Borrower and its Subsidiaries taken as a whole, (ii) the
ability of the Borrower and its Subsidiaries to perform their respective
Obligations hereunder or (iii) the rights and remedies of the Lenders.
(m) EXISTING INDEBTEDNESS. Simultaneously with the making of
the initial Loans, all Indebtedness of the Borrower under the Imperial Credit
Agreement shall have been paid in full, the commitments of the banks thereunder
shall have been terminated and all security interests, liens and other
encumbrances granted thereunder shall have been released (or, at the Agent's
option, assigned to the Agent as an amendment and restatement of the existing
facility).
(n) UCC SEARCHES. The Agent shall have received UCC searches
satisfactory to it indicating that no other filings (other than in connection
with Permitted Encumbrances) with regard to the Collateral are of record in any
jurisdiction in which it shall be necessary or desirable for the Agent to make a
UCC filing in order to provide the Agent with a perfected security interest in
the Collateral.
(o) FINANCIAL STATEMENTS. The Agent and the Lenders shall have
received and be satisfied with the true and complete copies of all of the
financial statements referred to in Section 3.5.
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(p) ERISA. The Agent shall have received copies of all Plans of
the Credit Parties that are in existence on the Closing Date, and descriptions
of those that are committed to on the Closing Date.
(q) DELIVERY OF AGREEMENTS. The Agent shall have received and
be satisfied with the terms and provisions of (i) the Borrower's standard form
of Distribution Agreement and all significant existing Distribution Agreements
which are not on such standard form, (ii) all joint venture or partnership
agreements to which the Borrower or a Subsidiary is a party and (iii) all other
agreements listed on Schedule 3.17 to the extent requested by the Agent.
(r) CONTRIBUTION AGREEMENT. The Agent shall have received a
fully executed Contribution Agreement duly executed by all parties thereto.
(s) KEYMAN LIFE INSURANCE ASSIGNMENT. The Keyman Life Insurance
and the Keyman Life Insurance Assignment shall have been delivered to the Agent.
(t) PRO-FORMA COMPLIANCE. The Agent shall have received a
pro-forma compliance report dated the Closing Date or on the date on which the
most recent data was available confirming that the Borrower and its Subsidiaries
are in pro-forma compliance with all covenants set forth in Article 5 and
Article 6 hereof and in the other Fundamental Documents.
(u) STOCK OWNERSHIP. Neither Donald Kushner nor Peter Locke
shall have reduced his stock ownership in the Borrower since the most recent
proxy statement.
(v) NOTICES OF ASSIGNMENT AND IRREVOCABLE INSTRUCTIONS. The
Agent shall have received, with respect to each Eligible Receivable included in
the initial Borrowing Base Certificate, fully executed copies of the Notice of
Assignment and Irrevocable Instructions, subject to the provisions of Section
5.18(d).
(w) REQUIRED CONSENTS AND APPROVALS. The Agent shall be
satisfied that all required consents and approvals have been obtained with
respect to the transactions contemplated hereby from all Governmental
Authorities with jurisdiction over the business and activities of any Credit
Party as of the date hereof, and from any other entity whose consent or approval
the Agent in its reasonable discretion deems necessary to consummate the
transactions contemplated hereby.
(x) COMPLIANCE WITH LAWS. The Agent shall be satisfied that the
transactions contemplated hereby will not violate any provision of Applicable
Law, or any order of any
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court or other agency of the United States, any state thereof, Canada or the
United Kingdom applicable to any of the Credit Parties (as of the date hereof)
or any of their respective properties or assets.
(y) PRODUCTION LOAN AGREEMENTS. The Agent shall have received
and be satisfied with the terms of any production loan agreement to which a
Subsidiary of the Borrower is party which is not to be paid off on the Closing
Date, and shall have received from each such production lender an intercreditor
agreement in form and substance acceptable to the Agent.
(z) APPROVAL OF COUNSEL TO THE AGENT. All legal matters
incident to this Credit Agreement and the transactions contemplated hereby shall
be reasonably satisfactory to Morgan, Lewis & Bockius LLP, counsel to the Agent.
(aa) OTHER DOCUMENTS. The Agent shall have received such other
documentation as the Agent may reasonably request.
SECTION 4.2. CONDITIONS PRECEDENT TO EACH LOAN AND LETTER OF
CREDIT.
The obligation of the Lenders to make each Loan and to issue and
participate in each Letter of Credit (including the initial Loans and Letter of
Credit) is subject to the following conditions precedent:
(a) NOTICE. The Agent shall have received a notice with respect
to such Borrowing or the Fronting Bank shall have received a notice with respect
to such Letter of Credit as required by Article 2 hereof.
(b) BORROWING CERTIFICATE. The Agent shall have received a
Borrowing Certificate with respect to such Borrowing, duly executed by an
Authorized Officer of the Borrower.
(c) REPRESENTATIONS AND WARRANTIES. The representations and
warranties set forth in Article 3 hereof and in the other Fundamental Documents
shall be true and correct in all material respects on and as of the date of each
Borrowing and issuance of a Letter of Credit hereunder (except to the extent
that such representations and warranties expressly relate to an earlier date and
except to the extent that such changes have occurred without breach or default
under any of the terms or conditions hereof including without limitation
Articles 5 and 6 hereof) with the same effect as if made on and as of such date.
(d) NO EVENT OF DEFAULT. On the date of each Borrowing or the
issuance of each Letter of Credit hereunder, each Credit Party shall be in
compliance with all of the terms
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and provisions set forth herein to be observed or performed and no Event of
Default or Default shall have occurred and be continuing.
(e) ADDITIONAL DOCUMENTS. The Lenders shall have received from
the Borrower on the date of each Borrowing and issuance of a Letter of Credit
such documents and information as they may reasonably request relating to the
satisfaction of the conditions in this Section 4.2.
Each request for a Borrowing or for issuance of a Letter of Credit shall be
deemed to be a representation and warranty by the Borrower on the date of such
Borrowing or issuance of such Letter of Credit as to the matters specified in
paragraphs (c) and (d) of this Section.
5. AFFIRMATIVE COVENANTS
From the date hereof and for so long as the Commitments shall be in
effect or any amount remains outstanding under the Notes or any Letter of Credit
shall remain outstanding or any Obligations remain unpaid or unsatisfied, each
Credit Party agrees that, unless the Required Lenders shall otherwise consent in
writing, each of them will:
SECTION 5.1. FINANCIAL STATEMENTS AND REPORTS.
Furnish or cause to be furnished to the Agent in sufficient numbers
for distribution to the Lenders:
(a) Within 95 days after the end of each fiscal year of the
Borrower commencing with fiscal year 1996 (i) the audited consolidated balance
sheet of the Borrower and its Consolidated Subsidiaries as at the end of, and
the related statements of income, Stockholders' Equity and cash flow for, such
year, and the corresponding figures as at the end of, and for, the preceding
fiscal year, accompanied by an opinion of KPMG Peat Marwick LLP or such other
independent public accountants of recognized standing as shall be retained by
the Borrower and be reasonably satisfactory to the Lenders, which report and
opinion shall be prepared in accordance with generally accepted auditing
standards relating to reporting and which report and opinion shall contain no
material exceptions or qualifications except for qualifications relating to
accounting changes (with which such independent public accountants concur) in
response to FASB releases or other authoritative pronouncements and (ii) the
unaudited consolidating balance sheet of the Borrower and its Consolidated
Subsidiaries as at the end of, and the related unaudited consolidating
statements of income and cash flow for, such fiscal year certified by the chief
financial officer of the Borrower, on behalf of the Borrower;
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(b) Within 60 days after the end of each of the first three fiscal
quarters of each of its fiscal years the unaudited consolidated and
consolidating balance sheets of the Borrower and its Consolidated Subsidiaries
as at the end of, and the related unaudited consolidated and consolidating
statements of income and cash flow for, such quarter, and the corresponding
figures as at the end of, and for, the corresponding period in the preceding
fiscal year, together with a certificate signed by an Authorized Officer of the
Borrower, on behalf of the Borrower, to the effect that such financial
statements, while not examined by independent public accountants, reflect, in
the opinion of the Borrower, all adjustments necessary to present fairly the
financial position of the Borrower and its Consolidated Subsidiaries as at the
end of the fiscal quarter and the results of its operations for the quarter then
ended in conformity with GAAP;
(c) Simultaneously with the delivery of the statements referred to
in paragraphs (a) and (b) of this Section 5.1, a certificate of an Authorized
Officer of the Borrower, on behalf of the Borrower, in form and substance
satisfactory to the Agent (i) stating whether or not such Authorized Officer has
knowledge of any condition or event which would constitute an Event of Default
or Default has occurred and, if so, specifying each such condition or event and
the nature thereof, (ii) demonstrating in reasonable detail compliance with the
provisions of Sections 6.11, 6.14 through 6.20 and 6.23 hereof, (iii) specifying
the actual pay-per-view amount paid to the Borrower or any Guarantor during such
fiscal period for each feature film (together with appropriate supporting
detail) and (iv) certifying that all filings required under Section 5.9 hereof
have been made and listing each such filing that has been made since the date of
the last certificate delivered in accordance with this Section 5.1(c);
(d) Furnish to the Lenders, together with each set of audited
financial statements required by paragraph (a) above, a report from the
independent public accountants rendering the report thereon (i) stating that
such Person has made such examination or investigation as is necessary to enable
it to express an informed opinion as to the matters referred to in clauses (ii)
and (iii) of this Section 5.1(d), it being understood that no special audit
procedures are required hereby, (ii) stating whether, in connection with their
audit examination, any condition or event, at any time during or at the end of
the accounting period covered by such financial statements, which constitutes an
Event of Default has come to their attention, and if such a condition or event
has come to their attention, specifying the nature and period, if known, of
existence thereof and (iii) stating that the matters set forth in the compliance
certificate delivered therewith pursuant to clause (ii) of paragraph (c) above
for the applicable fiscal year are stated in accordance with the terms of this
Credit Agreement;
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(e) On or prior to the twenty-fifth day of each month, a
certificate ("BORROWING BASE CERTIFICATE") in the form of Exhibit C hereto,
setting forth the amount of each component included in the Borrowing Base as of
the last Business Day of the preceding month, attached to which shall be
detailed information including the calculation of each such component (the
Borrower, at its option, may furnish additional Borrowing Base Certificates
setting forth such information as of such other dates as it may deem
appropriate);
(f) Promptly upon their becoming available, copies of (i) all
management projections, studies or evaluations prepared by consultants for or
presented to any Credit Party's Board of Directors and (ii) all audits, studies,
reports or evaluations prepared for or submitted to any of the Credit Parties by
any outside professional firm or service, including, without limitation, the
comment letter submitted by the Credit Parties' accountants to management in
connection with their annual audit;
(g) Within 30 days after filing with the Internal Revenue Service,
copies of the actual corporate income tax return(s) of the Borrower and its
Consolidated Subsidiaries;
(h) Promptly upon their becoming available, copies of (i) all
registration statements, proxy statements, and all reports which the Borrower or
any other Credit Party shall file with any securities exchange or with the
Securities and Exchange Commission or any successor agency and (ii) all reports,
financial statements, press releases and other information which the Borrower or
any other Credit Party shall release, send or make available to its common
stockholders generally;
(i) Notice of (i) any substantive action taken by any Credit Party
in connection with the proposed issuance of any additional debt or equity
securities and (ii) the date on which such Credit Party expects to receive the
net cash proceeds from the issuance of such additional debt or equity
securities;
(j) Within 120 days after the end of each fiscal year of the
Borrower (commencing with fiscal year 1996), forecasted financial statements
consisting of balance sheets of the Borrower and its Subsidiaries, cash flow
statements and income statements together with appropriate supporting details
and a statement of underlying assumptions comparable to the projections
delivered to the Lenders pursuant to Section 4.1(d) hereof which cover the
succeeding two fiscal years, and which shall have been prepared in accordance
with GAAP;
(k) Deliver to the Agent within 60 days of the end of each fiscal
quarter (95 days in the case of fiscal year end) updated cash flow projections
for the ensuing four quarters in the format previously delivered to the Lenders
demonstrating that
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sufficient cash will be available from operations, borrowings under this Credit
Agreement and amounts committed to be funded by third parties approved by the
Agent as and when needed to fund all reasonably anticipated cash requirements;
and
(l) From time to time such additional information regarding the
financial condition or business of the Credit Parties or otherwise regarding the
Collateral, as any Lender may reasonably request for the purpose of assuring
itself as to compliance by the Credit Parties with the terms hereof.
SECTION 5.2. CORPORATE EXISTENCE.
Do or cause to be done all things necessary to preserve, renew and
keep in full force and effect its corporate existence, rights, material
licenses, material permits and material franchises, and comply with all
applicable statutes, regulations and orders of, and all applicable restrictions
imposed by, any Governmental Authority, except as otherwise permitted under
Section 6.7 and except that any Subsidiary of the Borrower may be liquidated or
dissolved if in the reasonable judgment of the Board of Directors of the
Borrower such Subsidiary is no longer necessary for the proper conduct of the
business of the Borrower.
SECTION 5.3. MAINTENANCE OF PROPERTIES.
Keep its tangible properties which are material to its business in
good repair, working order and condition (ordinary wear and tear excepted) and,
from time to time (i) make all necessary and proper repairs, renewals,
replacements, additions and improvements thereto and (ii) comply at all times
with the provisions of all material leases and other material agreements to
which it is a party so as to prevent any loss or forfeiture thereof or
thereunder unless compliance therewith is being currently contested in good
faith by appropriate proceedings; PROVIDED, HOWEVER, that nothing in this
Section 5.3 shall prevent any Credit Party from discontinuing the use, operation
or maintenance of such properties or disposing of them if such discontinuance or
disposal is, in the judgment of its Board of Directors, desirable in the conduct
of the business.
SECTION 5.4. NOTICE OF MATERIAL EVENTS.
(a) Promptly upon any executive officer of any Credit Party
obtaining knowledge of (i) any Default or Event of Default, or becoming aware
that any Lender has given notice or taken any other action with respect to a
claimed Event of Default, (ii) any material adverse change in the condition or
operations of the Borrower and its Subsidiaries taken as a whole, financial or
otherwise, (other than changes due to seasonality that are consistent with the
corresponding periods in prior years), (iii)
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any action or event which might materially and adversely affect the performance
of the Credit Parties' obligations under this Credit Agreement, the repayment of
the Notes, or the security interests granted to the Agent for the benefit of the
Lenders under this Credit Agreement or any other Fundamental Document, (iv) the
opening of any office of any Credit Party or the change of the executive office
or the principal place of business of any Credit Party or of the location of any
Credit Party's books and records with respect to the Collateral, (v) any change
in the name of any Credit Party, (vi) any other event which may materially and
adversely impact upon the amount or collectibility of accounts receivable of the
Credit Parties or otherwise materially decrease the value of the Collateral or
(vii) any Person giving any notice to any Credit Party or taking any other
action to enforce remedies with respect to a claimed default or event or
condition of the type referred to in paragraph (d) of Article 7, such Credit
Party shall promptly give written notice thereof to the Agent specifying the
nature and period of existence of any such condition or event, or specifying the
notice given or action taken and the nature of such claimed Event of Default or
condition and what action such Credit Party has taken, is taking and proposes to
take with respect thereto.
(b) Promptly upon any executive officer of any Credit Party
obtaining knowledge of (i) the institution of, or threat of, any action, suit,
proceeding, investigation or arbitration by any Governmental Authority or other
Person against or affecting any Credit Party or any of its assets, or (ii) any
material development in any such action, suit, proceeding, investigation or
arbitration (whether or not previously disclosed to the Lenders), which, in the
case of (i) or (ii) might have a significant likelihood of, materially, and
adversely affecting the Borrower and its Subsidiaries taken as a whole, such
Credit Party shall promptly give notice thereof to the Agent and provide such
other information as may be available to it to enable the Lenders to evaluate
such matters; and, in addition to the requirements set forth in clauses (i) and
(ii) of this subsection (b), such Credit Party upon request shall promptly give
notice of the status of any action, suit, proceeding, investigation or
arbitration covered by a report delivered to the Lenders pursuant to clause (i)
and (ii) above to the Lenders and provide such other information as may be
reasonably available to it to enable the Lenders to evaluate such matters. For
the purposes of this Section 5.4, the submittal or filing by a Credit Party of a
notice or report or an application for the issuance, modification or renewal of
any permit or the acknowledgment by a Governmental Authority of receipt of such
notice, report or application shall not constitute an "action", "suit",
"proceeding", "investigation" or "arbitration".
SECTION 5.5. MATERIAL ADVERSE EFFECT.
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Promptly report to the Agent and the Lenders, after any executive
officer of a Credit Party obtains knowledge of same, any event or series of
events which would have any change or effect that (i) has a materially adverse
effect on the business, assets, properties, operations or financial condition of
the Credit Parties taken as a whole, (ii) materially impairs the ability of a
Credit Party to perform its respective obligations under the Fundamental
Documents to which it is a party or (iii) materially impairs the validity or
enforceability of, or materially impairs the rights, remedies or benefits
available to the Lenders under, the Fundamental Documents.
SECTION 5.6. INSURANCE.
(a) Keep its assets which are of an insurable character insured (to
the extent and for the time periods consistent with normal industry practices)
by financially sound and reputable insurers against loss or damage by fire,
explosion, theft or other hazards which are included under extended coverage in
amounts not less than the insurable value of the property insured or such lesser
amounts, and with such self-insured retention or deductible levels, as are
consistent with normal industry practices.
(b) Maintain with financially sound and reputable insurers,
insurance against other hazards and risks and liability to Persons and property
to the extent and in the manner customary for companies in similar businesses.
(c) Maintain, or cause to be maintained, in effect during the
period from the commencement of principal photography of each item of Product
produced by any Credit Party, through the third anniversary of the date on which
such item of Product is Completed and/or as otherwise required by applicable
contracts, a so-called "Errors and Omissions" policy with respect to all items
of Product for which principal photography has commenced, and cause such Errors
and Omissions policy to provide coverage to the extent and in such manner as is
customary for items of Product of like type but, at minimum, to the extent and
in such manner as is required under all applicable contracts relating thereto.
(d) Maintain, or cause to be maintained, in effect during the
period from the commencement of principal photography of each item of Product
produced by any Credit Party, or from the date of acquisition of each item of
Product acquired by any Credit Party (i) until such time as the Agent shall have
been provided with satisfactory evidence of the existence of one negative or
master tape in one location and an interpositive or internegative or duplicate
master tape in another location of the final version of the Completed Product,
insurance on the negatives and sound tracks or master tapes of such item of
Product in an amount not less than the cost of re-shooting the
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principal photography of the item of Product, and (ii) until principal
photography of such item of Product has been concluded, a cast insurance policy
with respect to such item of Product, which provides coverage to the extent and
in such manner as is customary for a like type of Product, but at minimum, to
the extent required under all applicable contracts relating thereto.
(e) Maintain, or cause to be maintained, in effect distributor's
"Errors and Omissions" insurance to the extent and in amounts customary for
companies in similar businesses.
(f) Cause all such above-described insurance (excluding worker's
compensation insurance) to (i) provide for the benefit of the Lenders that 30
days' prior written notice of suspension, cancellation, termination,
modification, non-renewal or lapse or material change of coverage shall be given
to the Agent; (ii) name the Agent for the benefit of the Lenders as the loss
payee (except for "Errors and Omissions" insurance and other third party
liability insurance), PROVIDED, HOWEVER, that production insurance
recoveries received prior to Completion or abandonment of an item of Product may
be utilized to finance the production of such item of Product and property
insurance proceeds may be used to repair damage in respect of which such
proceeds were received; and (iii) to the extent that neither the Agent nor the
Lenders shall be liable for premiums or calls, name the Agent for the benefit of
the Lenders as an additional insured including, without limitation, under any
"Errors and Omissions" policy.
(g) Upon the request of the Agent, the Borrower will render to the
Agent a statement in such detail as the Agent may request as to all such
insurance coverage.
(h) So long as Donald Kushner is employed by the Borrower, maintain
or cause to be maintained the Kushner Life Insurance.
(i) So long as Peter Locke is employed by the Borrower maintain or
cause to be maintained the Locke Life Insurance:
SECTION 5.7. PRODUCTION.
Use its reasonably best efforts to cause any item of Product being
produced by any Credit Party to be produced in all material respects in
accordance with the standards set forth in, and within the time period
established in, all agreements with respect to such item of Product to which
such Credit Party is a party, subject to the terms and conditions of such
agreements.
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SECTION 5.8. MUSIC.
When an item of Product has been scored, if requested by the Agent,
deliver to the Agent, (a) written evidence of the music synchronization rights
obtained from the composer or the licensor of the music and (b) copies of all
music cue sheets with respect to such item of Product.
SECTION 5.9. COPYRIGHT.
(a) Within 90 days after the initial release or broadcast of each
item of Product, to the extent any Credit Party is or becomes the copyright
proprietor thereof or to the extent such interest is obtained by any Credit
Party, or any Credit Party otherwise acquires a copyrightable interest, take any
and all actions necessary to register the copyright for such item in the name of
such Credit Party (subject to a Lien in favor of the Agent for the benefit of
the Lenders pursuant to the Copyright Security Agreement) in conformity with the
laws of the United States and such other jurisdictions as the Agent may
reasonably specify, and immediately deliver to the Agent (i) written evidence of
the registration of any and all such copyrights for inclusion in the Collateral
under this Credit Agreement and (ii) a Copyright Security Agreement Supplement
relating to such item executed by such Credit Party.
(b) Obtain instruments of transfer or other documents evidencing
the interest of any Credit Party with respect to the copyright relating to items
of Product in which such Credit Party is not entitled to be the initial
copyright proprietor, and promptly record such instruments of transfer on the
United States Copyright Register and such other jurisdictions as the Agent may
specify.
SECTION 5.10. BOOKS AND RECORDS.
(a) Maintain or cause to be maintained at all times true and
complete books and records of its financial operations and provide the Agent and
its representatives access to such books and records and to any of its
properties or assets upon reasonable notice and during regular business hours in
order that the Agent may make such audits and examinations and make abstracts
from such books, accounts, records and other papers pertaining to the Collateral
(including, but not limited to, Eligible Receivables included in the Borrowing
Base) and upon notification to the Borrower may discuss the affairs, finances
and accounts with, and be advised as to the same by, officers and independent
accountants, all as the Agent may deem appropriate for the purpose of verifying
the accuracy of the Borrowing Base Certificate and the various other reports
delivered by any Credit Party to the Agent and/or the Lenders pursuant to this
Credit
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Agreement or for otherwise ascertaining compliance with this Credit Agreement or
any other Fundamental Document.
(b) If, prior to an Event of Default, the Agent wishes to
confirm with account debtors and other payors the amounts and terms of any or
all Eligible Receivables included in the Borrowing Base, the Agent will so
notify the Borrower. Within 10 days after receipt of such notice from the
Agent, the Borrower may, upon written notice to the Agent, elect to have such
confirmation made through the Credit Parties' auditors in conjunction with
its next annual audit. If the Borrower fails to timely make such election,
the Agent may proceed to make such confirmations directly with account
debtors and other payors. Each of the Credit Parties hereby agrees that,
upon the occurrence and during the continuance of an Event of Default, the
Agent shall be entitled to confirm directly with account debtors the amounts
and terms of all accounts receivable. The Agent hereby agrees to provide the
applicable Credit Party with copies of any written request sent by the Agent
to such account debtors.
SECTION 5.11. THIRD PARTY AUDIT RIGHTS.
Promptly notify the Agent of, and allow the Agent access to the
results of, all audits conducted by the Borrower of any third party licensee,
partnership and joint venture under any agreement with respect to any item of
Product included in the Collateral. The Borrower will exercise its audit rights
with respect to any third party licensees, partnerships and joint ventures under
any agreement with respect to an item of Product included in the Collateral upon
the reasonable request of the Agent, PROVIDED, HOWEVER, that if the Borrower
shall object to performing such audit, the audit shall not be undertaken and the
receivables in the Borrowing Base from such third party licensee, partnership or
joint venture in connection with the item of Product shall be eliminated from
the Borrowing Base. After an Event of Default has occurred and is continuing,
the Agent shall have the right to exercise through any Credit Party such Credit
Party's right to audit any obligor under an agreement with respect to any item
of Product included in the Collateral.
SECTION 5.12. OBSERVANCE OF AGREEMENTS.
Duly observe and perform all material terms and conditions of all
material agreements with respect to the exploitation of items of Product and
diligently protect and enforce the rights of the Credit Parties under all such
agreements in a manner consistent with prudent business judgment and subject to
the terms and conditions of such agreements.
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SECTION 5.13. FILM PROPERTIES AND RIGHTS; CREDIT PARTIES TO ACT AS
PLEDGEHOLDER.
Act as pledgeholder for the Agent for the benefit of the Lenders
with the same effect as if the Agent for the benefit of the Lenders were a
pledgee in possession of all property relating to items of Product which are now
or hereafter in the (actual or constructive) possession of any Credit Party,
subject to such access as shall be necessary to distribute such items of
Product.
SECTION 5.14. LABORATORIES; NO REMOVAL.
(a) To the extent any Credit Party has control over or rights to
receive any of the physical elements of any item of Product, deliver or cause to
be delivered to a Laboratory or Laboratories located within the United States
all negative and preprint material, master tapes and all sound track materials
with respect to each such item of Product and deliver to the Agent a fully
executed Pledgeholder Agreement with respect to such materials. To the extent
that any Credit Party has only rights of access to preprint material or master
tapes then the Credit Parties will deliver to the Agent a fully executed
Laboratory Access Letter covering such materials. Prior to requesting any such
laboratory to deliver such negative or other preprint or sound track material or
master tapes to another laboratory, any such Credit Party shall provide the
Agent with a Pledgeholder Agreement or Laboratory Access Letter, as appropriate,
executed by such other Laboratory and all other parties to such Pledgeholder
Agreement (other than the Agent). Each Credit Party hereby agrees not to remove
or cause the removal of the original negative and film or sound materials with
respect to any item of Product owned by such Credit Party or in which such
Credit Party has an interest (i) to a location outside the United States, other
than in Canada or the United Kingdom or (ii) to any state where UCC-1 financing
statements (or in the case of jurisdictions outside the United States, documents
similar in purpose and effect) have not been filed against such Credit Party
holding any rights to such item of Product.
(b) During production of any item of Product produced by any Credit
Party, such Credit Party shall promptly deliver the daily rushes for such item
of Product to the appropriate Laboratory.
(c) With respect to items of Product completed after the Closing
Date, as soon as practicable after completion, deliver to the Agent and the
Laboratories which are signatories to Pledgeholder Agreements a revised schedule
of Product on deposit with such Laboratories.
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SECTION 5.15. TAXES AND CHARGES; INDEBTEDNESS IN ORDINARY COURSE
OF BUSINESS.
Duly pay and discharge, or cause to be paid and discharged, before
the same shall become in arrears (after giving effect to applicable extensions),
all taxes, assessments, levies and other governmental charges, imposed upon any
Credit Party or its properties, sales and activities, or any part thereof, or
upon the income or profits therefrom, as well as all claims for labor,
materials, or supplies which if unpaid might by law become a Lien upon any
property of any Credit Party; PROVIDED, HOWEVER, that any such tax, assessment,
charge, levy or claim need not be paid if the validity or amount thereof shall
currently be contested in good faith by appropriate proceedings and if such
Credit Party shall have set aside on its books reserves (the presentation of
which is segregated to the extent required by GAAP) adequate with respect
thereto if reserves shall be deemed necessary; and PROVIDED, FURTHER, that such
Credit Party will pay all such taxes, assessments, levies or other governmental
charges forthwith upon the commencement of proceedings to foreclose any Lien
which may have attached as security therefor. The Credit Parties will promptly
pay when due, or in conformance with customary trade terms, all other
indebtedness incident to its operations in a manner consistent with such Credit
Party's past business practices.
SECTION 5.16. LIENS.
Defend the Collateral against any and all Liens howsoever arising,
other than Permitted Encumbrances.
SECTION 5.17. CASH RECEIPTS.
In the event any Credit Party receives (i) payment from any account
debtor or obligor, which payment should have been remitted to a Collection
Account or (ii) the proceeds of any sale of an item of Product, whether in the
form of cash or otherwise, such Credit Party shall immediately remit such
payment or proceeds to the Agent for deposit in the appropriate Collection
Account for application in accordance with Section 2.9(f).
SECTION 5.18. FURTHER ASSURANCES; SECURITY INTERESTS.
(a) Upon the request of the Agent, duly execute and deliver, or
cause to be duly executed and delivered, at the cost and expense of the Credit
Parties, such further instruments as may be appropriate in the reasonable
judgment of the Agent to carry out the provisions and purposes of this Credit
Agreement and the other Fundamental Documents.
(b) Upon the request of the Agent, promptly execute and deliver or
cause to be executed and delivered, at the cost
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and expense of the Credit Parties, such further instruments as may be
appropriate in the reasonable judgment of the Agent, to provide the Agent (for
the benefit of the Lenders) a perfected Lien in the Collateral and any and all
documents (including, without limitation, the execution, amendment or
supplementation of any financing statement and continuation statement or other
statement) for filing under the provisions of the UCC and the rules and
regulations thereunder, or any other statute, rule or regulation of any
applicable foreign, federal, state or local jurisdiction, and perform or cause
to be performed such other ministerial acts which are necessary or advisable,
from time to time, in order to grant and maintain in favor of the Agent (for the
benefit of the Lenders) the security interest in the Collateral contemplated
hereunder and under the other Fundamental Documents, subject only to Permitted
Encumbrances.
(c) Promptly undertake to deliver or cause to be delivered to the
Lenders from time to time such other documentation, consents, authorizations and
approvals in form and substance satisfactory to the Agent, as the Agent shall
deem reasonably necessary or advisable to perfect or maintain the Liens of the
Agent for the benefit of the Lenders.
(d) With respect to each Distribution Agreement, as promptly as
practicable execute and use reasonable commercial efforts to cause each party
thereto to duly execute and deliver to the Agent an original Notice of
Assignment and Irrevocable Instructions; provided that notices (rather than
executed counterparts) shall be sufficient except in the case of material
Distribution Agreements reasonably required by the Agent.
SECTION 5.19. RECEIVABLES AUDIT.
In connection with the annual audit by KPMG Peat Marwick LLP (or any
successor auditor) if so requested by the Agent arrange for account debtors to
confirm accounts receivables (both on and off balance sheet) directly to the
Agent.
SECTION 5.20. ERISA COMPLIANCE AND REPORTS.
Furnish to the Agent (a) as soon as possible, and in any event
within 30 days after any Credit Party knows that (i) any Reportable Event with
respect to any Plan has occurred, a statement of an executive officer of the
Credit Party, setting forth on behalf of such Credit Party details as to such
Reportable Event and the action which it proposes to take with respect thereto,
together with a copy of the notice, if any, required to be filed by the
applicable Credit Party of such Reportable Event given to the PBGC or (ii) an
accumulated funding deficiency has been incurred or an application has been made
to the Secretary of the Treasury for a waiver or modification of the minimum
funding standard or an extension of any amortization
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period under Section 412 of the Code with respect to a Plan, a Plan or
Multiemployer Plan has been or is proposed to be terminated, reorganized,
partitioned or declared insolvent under Title IV of ERISA, proceedings have been
instituted to terminate a Plan, a proceeding has been instituted pursuant to
Section 515 of ERISA to collect a delinquent contribution to a Multiemployer
Plan, or the Borrower or such Credit Party will incur any liability (including
any contingent or secondary liability) to or on account of the termination of or
withdrawal from a Plan or Multiemployer Plan under Sections 4062, 4063, 4201 or
4204 of ERISA, if the occurrence of any of the foregoing events would result in
a liability which is materially adverse to the financial condition of the
Borrower and its Subsidiaries taken as a whole or would materially and adversely
affect the ability of the Borrower to perform its obligations under this Credit
Agreement or the Notes, a statement of an executive officer of the Borrower,
setting forth details as to such event and the action the applicable Credit
Party proposes to take with respect thereto, (b) promptly upon reasonable
request of the Agent, copies of each annual and other report with respect to
each Plan and (c) promptly after receipt thereof, a copy of any notice any
Credit Party may receive from the PBGC relating to the PBGC's intention to
terminate any Plan or to appoint a trustee to administer any Plan.
SECTION 5.21. ENVIRONMENTAL LAWS.
(a) Promptly notify the Agent upon any Credit Party becoming aware
of any violation or potential violation or non-compliance with, or liability or
potential liability under any Environmental Laws which, when taken together with
all other pending violations would reasonably be expected to be materially
adverse to the Borrower and its Subsidiaries or any Credit Party, and promptly
furnish to the Agent all notices of any nature which any Credit Party may
receive from any Governmental Authority or other Person with respect to any
violation, or potential violation or non-compliance with, or liability or
potential liability under any Environmental Laws which, in any case or when
taken together with all such other notices, could reasonably be expected to have
a materially adverse effect on the Borrower and its Subsidiaries and the Credit
Parties taken as a whole.
(b) Comply with and use reasonable efforts to ensure compliance by
all tenants and subtenants with all Environmental Laws, and obtain and comply in
all material respects with and maintain and use best efforts to ensure that all
tenants and subtenants obtain and comply in all material respects with and
maintain any and all licenses, approvals, registrations or permits required by
Environmental Laws, except where failure to do so would not have a materially
adverse effect on the Borrower or any Credit Party.
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(c) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under all
Environmental Laws and promptly comply in all material respects with all lawful
orders and directives of all Governmental Authorities, except where failure to
do so would not have a materially adverse effect on the Borrower or any Credit
Party. Any order or directive whose lawfulness is being contested in good faith
by appropriate proceedings shall be considered a lawful order or directive when
such proceedings, including any judicial review of such proceedings, have been
finally concluded by the issuance of a final non-appealable order; provided,
however, that the appropriate Credit Party shall have set aside on its books
reserves (the presentation of which is segregated to the extent required by
GAAP) adequate with respect thereto if reserves shall be deemed necessary.
(d) Defend, indemnify and hold harmless the Agent and the Lenders,
and their respective employees, agents, officers and directors, from and against
any claims, demands, penalties, fines, liabilities, settlements, damages, costs
and expenses of whatever kind or nature, known or unknown, contingent or
otherwise, arising out of, or in any way related to the violation of or
non-compliance by any Credit Party with any Environmental Laws, or any orders,
requirements or demands of Governmental Authorities related thereto, including,
without limitation, reasonable attorney and consultant fees, investigation and
laboratory fees, court costs and litigation expenses, but excluding therefrom
all claims, demands, penalties, fines, liabilities, settlements, damages, costs
and expenses arising out of or resulting from (i) the gross negligence or
willful misconduct of any indemnified party or (ii) any acts or omissions of any
indemnified party occurring after any indemnified party is in possession of, or
controls the operation of, any property or asset.
SECTION 5.22. BANK ACCOUNTS.
Provide the Agent with notice of the opening of any bank accounts by
any Credit Party other than those listed on Schedule 5.22 hereof and execute
such forms of notice to the banks holding such accounts as reasonably requested
by the Agent.
SECTION 5.23. USE OF PROCEEDS.
Use the proceeds of the Loans solely to (i) refinance the
outstanding loans to the Borrower under the Imperial Credit Agreements, (ii)
finance the Borrower's production (both directly and through certain of the
Guarantors), acquisition, distribution and exploitation of feature length motion
pictures, television products (including, without limitation, infomercials) and
video products and rights therein, and (iii) for general working capital
purposes.
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SECTION 5.24. SECURITY AGREEMENTS WITH THE GUILDS.
Furnish to the Agent duly executed copies of (i) each security
agreement relating to an item of Product entered into by a Credit Party with any
guild and (ii) a subordination agreement (in form and substance satisfactory to
the Agent) from the applicable guild with respect to the security interest and
other rights granted to it pursuant to each such security agreement delivered to
the Agent pursuant to clause (i) above.
SECTION 5.25. UNCOMPLETED PRODUCTS.
With respect to items of Product for which any Credit Party is the
producer or has a financial interest which is subject to a completion risk (i.e.
payment by a Credit Party is not conditioned upon delivery), including
Designated Pictures, other than (i) any television series with a pattern budget
of $950,000 per episode or less (other than the television pilot or series
"Gun"), (ii) any single made-for-television movie of two hours or less having a
budget of $3,500,000 or less, and (iii) any television mini-series with a budget
of $7,500,000 or less, deliver to the Agent, not later than (A) five (5) days
prior to the commencement of principal photography of such item of Product and
(B) five (5) days prior to payment of the acquisition cost for a negative
pick-up, each of the following to the extent applicable (it being understood
that for purposes of clause B clauses (vi) and (vii) below shall not be
applicable), (i) the budget for such item of Product, (ii) a schedule
identifying all agreements executed by a Credit Party in connection with such
item of Product which provide for deferments of compensation or a gross or net
profit participation, (iii) copies of such of the foregoing agreements as the
Lenders may reasonably request, (iv) certificates or binders of insurance with
respect to such item of Product (and policies of insurance if requested by the
Agent), including all forms of insurance coverage required by Section 5.6
hereof, (v) copies of all instruments of transfer or other instruments (in
recordable form) ("Chain of Title" documents) necessary to establish, to the
reasonable satisfaction of the Agent, in the appropriate Credit Party ownership
of sufficient copyright rights in the literary properties upon which such item
of Product is to be based to enable such Credit Party to produce and/or
distribute such item of Product and to grant the Agent the security interests
therein which are contemplated by this Credit Agreement which documents shall
evidence to the Agent's satisfaction the Credit Party's rights in, and with
respect to, such item of Product, (vi) an executed Copyright Security Agreement
Supplement with respect to such item of Product, (vii) executed Pledgeholder
Agreements with respect to such item of Product, (viii) a schedule of sources
and uses demonstrating in detail that all cash necessary to complete and deliver
such item of Product will be available as and when needed from sources
acceptable to the Agent, and (ix) a Completion
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Guarantee with respect to such item of Product in form and substance
satisfactory to the Agent naming the Agent, for the benefit of the Lenders, as a
beneficiary thereof.
6. NEGATIVE COVENANTS
From the date hereof and for so long as the Commitments shall be in
effect or any amount remains outstanding under the Notes or any Letter of Credit
shall remain outstanding or any Obligations remain unpaid or unsatisfied, each
Credit Party agrees that, unless the Required Lenders shall otherwise consent in
writing, it will not and will not allow any of its Subsidiaries to:
SECTION 6.1. LIMITATIONS ON INDEBTEDNESS.
Incur, create, assume or suffer to exist any Indebtedness or permit
any partnership or joint venture in which any Credit Party is a general partner
to incur create, assume or suffer to exist any Indebtedness other than:
(a) the Indebtedness represented by the Notes and the other
Obligations;
(b) Indebtedness in respect of secured purchase money
financing and/or Capital Leases to the extent permitted by Section
6.2(b);
(c) unsecured liabilities for acquisitions of rights or
product incurred in the ordinary course of business and not
otherwise prohibited hereunder;
(d) liabilities relating to net or gross profit
participations, deferments and guild residuals with respect to items
of Product;
(e) Subordinated Debt, including the Convertible
Subordinated Debentures;
(f) existing Indebtedness listed on Schedule 3.17 hereto but
no increases, extensions or renewals thereof unless otherwise noted
on Schedule 3.17;
(g) Indebtedness incurred by a Special Purpose Producer
which is non-recourse to any Credit Party except to the extent of a
negative pick-up arrangement or short-fall guarantee; PROVIDED
that the aggregate amount of such recourse obligations together with
the aggregate amount of unrecouped advances (and the Borrower's
unfunded obligation to make further such advances) of the type
contemplated by Section 6.4(ii) does not exceed $7,500,000 at any
one time outstanding;
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(h) in the case of the Guarantors, the guarantees of the
Obligations pursuant to Article 9 hereof; and
(i) Investments permitted under Section 6.4 hereof.
SECTION 6.2. LIMITATIONS ON LIENS.
Incur, create, assume or suffer to exist any Lien on its revenue
stream, property or assets, whether now owned or hereafter acquired, except:
(a) Liens pursuant to written security agreements (in form
and substance acceptable to the Agent) in favor of guilds required
pursuant to terms of collective bargaining agreements;
(b) Liens (including in the form of Capital Leases) granted
to the Person financing the acquisition of property, plant or
equipment if (i) limited to the particular assets acquired; (ii) the
debt secured by the Lien does not exceed the amount financed for the
acquisition cost of a particular asset for which the Lien is
granted; (iii) such transaction does not otherwise violate this
Credit Agreement and (iv) the aggregate amount of all Indebtedness
secured by Liens permitted under this paragraph does not exceed
$500,000 at any one time outstanding;
(c) Liens to secure distribution, exhibition and/or
exploitation rights of licensees pursuant to License Agreements on
terms satisfactory to the Agent;
(d) deposits under worker's compensation, unemployment
insurance, old-age pensions and other Social Security laws or to
secure statutory obligations or surety or appeal bonds or
performance or other similar bonds incurred in the ordinary course
of business (other than Completion Guarantees);
(e) Liens for taxes, assessments or other governmental
charges or levies due and payable, the validity or amount of which
is currently being contested in good faith by appropriate
proceedings pursuant to the terms of Section 5.15 hereof;
(f) Liens incurred in the ordinary course of business with
regard to services rendered by Laboratories and production houses,
record warehouses and suppliers of materials and equipment which
secure trade payables;
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(g) Liens arising out of attachments, judgments or awards as
to which an appeal or other appropriate proceedings for contest or
review are promptly commenced (and as to which foreclosure and other
enforcement proceedings shall not have been commenced (unless fully
bonded or otherwise effectively stayed));
(h) Liens granted by a Special Purpose Producer which are
non-recourse to any Credit Party except to the extent of a negative
pick-up arrangement or short-fall guarantee permitted under Section
6.1(g) hereof;
(i) the Liens of the Agent and the Lenders under this Credit
Agreement, the other Fundamental Documents and other documents
contemplated hereby;
(j) existing Liens set forth on Schedule 6.2 hereto;
(k) customary liens in favor of Approved Completion
Guarantors in connection with Completion Guarantees;
(l) possessory Liens (other than those of Laboratories and
production houses) which (i) occur in the ordinary course of
business, (ii) secure normal trade debt which is not yet due and
payable and (iii) do not secure Indebtedness for borrowed money; and
(m) Liens arising by virtue of any statutory or common law
provision relating to banker's liens, rights of setoff or similar
rights with respect to deposit accounts of the Credit Parties.
SECTION 6.3. LIMITATION ON GUARANTEES.
Provide any Guaranty, either directly or indirectly, except (i)
negative pickup agreements and minimum guarantees to acquire product in the
ordinary course of business to the extent otherwise permitted hereunder, (ii)
for guarantees to the Agent and the Lenders in accordance with Article 9 hereof
and (iii) for existing Guarantees listed on Schedule 6.3 hereto.
SECTION 6.4. LIMITATIONS ON INVESTMENTS.
Make or permit to exist any Investment other than (i) in the case of
product acquisitions, in which case the Borrower may make advances toward the
purchase prior to the delivery of the product provided that the aggregate amount
of such advances (net of related presales) for all product may not exceed
$3,500,000; (ii) in the case of an advance against the purchase of rights made
to a Special Purpose Producer in which the Agent
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(for the benefit of the Lenders) has a security interest (subject only to the
security interest of the lender to the Special Purpose Producer in accordance
with Section 6.1(g) in all assets of the Special Purpose Producer and the
advances shall be limited to the amount covered by a Completion Guarantee, in
form and substance satisfactory to the Agent, in which the Agent is the
beneficiary; PROVIDED that the aggregate amount of such unrecouped advances (and
the Borrower's unfunded obligation to make further such advances) together with
recourse obligations of the type contemplated by Section 6.1(g) does not exceed
$7,500,000 at any one time outstanding; (iii) purchase of Cash Equivalents; (iv)
inter-company advances among the Borrower and the Guarantors and equity
investments by the Borrower or a Guarantor in another Guarantor; (v) scheduled
investments as of the Closing Date set forth on Schedule 6.4; (vi) nominal
payments to reacquire Special Purpose Producers after project loans are repaid
and the Designated Picture has been delivered; (vii) loans and advances to
officers and employees of the Borrower of not more than $250,000 in the
aggregate at any one time outstanding; and (viii) equity investments after the
date hereof in Special Purpose Producers and joint ventures not exceeding
$3,500,000 in the aggregate.
SECTION 6.5. RESTRICTED PAYMENTS.
Declare, make or incur any liability to make any Restricted Payments
other than interest and certain mandatory prepayments specified on Subordinated
Debt, but only if no Default would be continuing after giving effect to each
payment.
SECTION 6.6. LIMITATIONS ON LEASES.
Create, incur or assume combined lease expense (but specifically
excluding amounts included in the Budgeted Negative Cost of an item of Product)
for any twelve calendar months in excess of $1,000,000.
SECTION 6.7. CONSOLIDATION, MERGER, SALE OR PURCHASE OF ASSETS,
ETC.
Whether in one transaction or a series of transactions, wind up,
liquidate or dissolve its affairs, or enter into any transaction of merger or
consolidation, or sell or otherwise dispose of all or substantially all of its
property, stock or assets (other than permitted transactions between the
Borrower and its Subsidiaries), or agree to do or suffer any of the foregoing,
except that any Subsidiary of the Borrower may merge with and into another
Subsidiary of the Borrower or with and into the Borrower.
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SECTION 6.8. RECEIVABLES.
Sell, discount or otherwise dispose of notes, accounts receivable or
other obligations owing to any Credit Party except for the purpose of collection
in the ordinary course of business.
SECTION 6.9. SALE AND LEASEBACK.
Enter into any arrangement with any Person or Persons, whereby in
contemporaneous transactions any Credit Party sells essentially all of its
right, title and interest in an item of Product and acquires or licenses the
right to distribute or exploit such item of Product in media and markets
accounting for substantially all the value of such item of Product other than in
connection with "The Adventures of Pinocchio" provided that such arrangement
does not impair the collateral position of the Lenders and is evidenced by
documentation acceptable to the Agent in its sole discretion.
SECTION 6.10. PLACES OF BUSINESS; CHANGE OF NAME.
Change the location of its chief executive office or principal place
of business or any of the locations where it keeps any material portion of the
Collateral or its books and records with respect to the Collateral or change its
name without (i) giving the Agent 15 days prior written notice of such change
and (ii) filing any additional Uniform Commercial Code financing statements, and
such other documents requested by the Agent or which are otherwise necessary or
desirable to maintain perfection of the security interest of the Agent for the
benefit of the Lenders in the Collateral.
SECTION 6.11. LIMITATIONS ON CAPITAL EXPENDITURES.
Make or incur on a Consolidated basis any obligation to make Capital
Expenditures (other than amounts included in the Budgeted Negative Cost of an
item of Product) for any twelve consecutive months in excess of $500,000.
SECTION 6.12. TRANSACTIONS WITH AFFILIATES.
Effect any transaction with an Affiliate on a basis less favorable
to such Credit Party than would have been the case if such transaction had been
effected at arms-length (other than compensation paid to Peter Locke and Donald
Kushner pursuant to their respective employment agreements with the Borrower and
normal compensation to other members of the Borrower's Board of Directors).
SECTION 6.13. PROHIBITION OF AMENDMENTS OR WAIVERS.
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Amend, alter, modify, or waive, or consent to any amendment,
alteration, modification or waiver of (x) any Subordinated Debt indenture in any
manner whatsoever or (y) any key employment agreement, or other material
agreement to which any Credit Party is a party, or the terms thereof in any
manner which would change, alter or waive any material term thereof and which
might (i) materially and adversely affect the
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collectibility of accounts receivable that form part of the Borrowing Base, (ii)
materially and adversely affect the financial condition of any Credit Party,
(iii) materially and adversely affect the rights of the Lenders under this
Credit Agreement, the other Fundamental Documents and any other agreements
contemplated hereby, (iv) materially decrease the value of the Collateral, or
(v) decrease the amount of the Borrowing Base to less than the then outstanding
principal amount of the Loans.
SECTION 6.14. CONSOLIDATED CAPITAL BASE.
Permit Consolidated Capital Base at the end of any fiscal quarter to
be less than the sum of $33,000,000 PLUS 50% of the net earnings of the
Borrower and its Subsidiaries for each fiscal year ending after March 31, 1996
through the last day of the fiscal quarter immediately preceding the date of
determination PLUS 100% of the net proceeds of any equity issued by the
Borrower or Indebtedness (other than Subordinated Debt) converted into equity
(net of related amortization of costs) after the date hereof.
SECTION 6.15. INITIAL PRINT AND ADVERTISING EXPENDITURES.
Permit initial Print and Advertising Expenditures through the
theatrical opening of any item of Product to exceed $500,000.
SECTION 6.16. DEVELOPMENT COSTS.
Permit development costs (which have neither been sold, written off
nor allocated to an item of Product for which active preproduction has
commenced) to exceed $3,000,000 in the aggregate or $500,000 for any item of
Product.
SECTION 6.17. OVERHEAD EXPENSE.
Permit aggregate allocated and unallocated overhead expenses to
exceed $8,750,000 in fiscal year 1996, $9,000,000 in fiscal year 1997,
$9,500,000 in fiscal year 1998 and $10,000,000 in fiscal year 1999.
SECTION 6.18. TOTAL UNSUBORDINATED LIABILITIES TO CONSOLIDATED
CAPITAL BASE RATIO.
Permit the ratio of Total Unsubordinated Liabilities to Consolidated
Capital Base to be greater than 2 to 1 at any time.
SECTION 6.19. EBIT TO INTEREST EXPENSE RATIO.
Permit the ratio of EBIT to Consolidated Interest Expense to be less
than 1.5 to 1 for the rolling three quarter
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period ending June 30, 1996 and the rolling four quarter period ending September
30, 1996 or 2 to 1 for any rolling four quarter period thereafter.
SECTION 6.20. PROJECTED LIQUIDITY.
Permit "Projected Liquidity" to be less than $2,000,000 for any 12
month period beginning on the first day of each fiscal quarter, but projected on
a month-by-month basis. "PROJECTED LIQUIDITY" means for any period, the
amount by which (x) the sum of unrestricted cash on hand and unused availability
under the Credit Agreement at the beginning of each month during such period
plus cash receipts reasonably expected to be received during each month of such
period exceeds (y) projected cash disbursements for each month during such
period, including without limitation, cash expenditures to complete or acquire
product and net loan repayments, but excluding projected cash disbursements the
payments of which restricted cash is available.
SECTION 6.21. NO CHANGE IN BUSINESS.
Engage in any business activities other than (i) activities relating
to production and exploitation of theatrical motion pictures, television
programs, infomercials and videos and the rights therein (e.g., music
publishing, CD Roms, soundtrack album, merchandising, publishing, live-action or
animated television spin-offs and other exploitation of ancillary rights);
PROVIDED that the Borrower shall not engage in the domestic distribution of
theatrical motion pictures directly to exhibitors, except for the limited
release of certain specialty films or "HBO Premieres".
SECTION 6.22. ERISA COMPLIANCE.
Engage in a "prohibited transaction", as defined in Section 406 of
ERISA or Section 4975 of the Code, with respect to any Plan or Multiemployer
Plan or knowingly consent to any other "party in interest" or any "disqualified
person", as such terms are defined in Section 3(14) or ERISA and Section
4975(e)(2) of the Code, respectively, engaging in any "prohibited transaction",
with respect to any Plan or Multiemployer Plan maintained or contributed to by
any Credit Party; or permit any Plan maintained by any Credit Party to incur any
"accumulated funding deficiency", as defined in Section 302 of ERISA or Section
412 of the Code, unless such incurrence shall have been waived in advance by the
Internal Revenue Service; or terminate any Plan in a manner which could result
in the imposition of a Lien on any property of any Credit Party pursuant to
Section 4068 of ERISA; or breach or knowingly permit any employee or officer or
any trustee or administrator of any Plan maintained by any Credit Party to
breach any fiduciary responsibility imposed under Title I of ERISA with respect
to any Plan; engage in any transaction which would result in the incurrence of a
liability
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under Section 4069 of ERISA; or fail to make contributions to a Plan or
Multiemployer Plan which results in the imposition of a Lien on any property of
any Credit Party pursuant to Section 302(f) of ERISA or Section 412(n) of the
Code, if the occurrence of any of the foregoing events (alone or in the
aggregate) would result in a liability which is materially adverse to the
financial condition of the Credit Parties taken as a whole or would materially
and adversely affect the ability of the Borrower to perform its obligations
under this Credit Agreement or the Notes.
SECTION 6.23. ADDITIONAL LIMITATIONS ON PRODUCTION AND ACQUISITION
OF PRODUCT.
(a) Begin production on any item of Product unless there are
Eligible Receivables associated with such item of Product in an amount equal to
at least 40% of the production budget, unless the budget of the item of Product
is less than $1,000,000.
(b) Permit the ratio of (i) Eligible Receivables plus
non-refundable collections on an acquired item of Product to (ii) the purchase
price of the acquired item of Product to fall below 50% for all items of Product
acquired in the preceding 12 months, computed on an aggregate rolling four
quarters basis.
(c) Produce any item of Product with a Production Exposure in
excess of $7,500,000 (except for Designated Pictures funded under a Special
Production Tranche) without the Agent's approval, or enter into any agreement
obligating the Borrower to pay a minimum guarantee of more than $3,500,000 for
any item of Product produced by a third party without the Agent's approval.
(d) Acquire rights in an item of Product which is not in its first
cycle of exploitation with the exception of permitted library acquisitions not
to exceed $500,000 per year.
(e) Permit production and acquisition deficits (net of pre-sale
guarantees and completed pre-sales payable within 1 year after delivery) to
exceed: $6,000,000 in the aggregate at any time (i) for all television series
in production or acquired, which shall not exceed $150,000 for any single
episode of any television series or $300,000 for a pilot for a television
series; and (ii) for all single television movies or mini-series in production
or acquired, which shall not exceed $600,000 for any single such item of product
of two hours or less and $1,200,000 for any longer movie or mini-series.
SECTION 6.24. SUBSIDIARIES.
Acquire or create any new direct or indirect Subsidiary provided
however that the Borrower may incorporate additional Subsidiaries if (i) each
such Subsidiary executes an Instrument
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of Assumption and Joinder satisfactory to the Agent whereby such Subsidiary
becomes a Credit Party hereunder and the capital stock of such Subsidiary
becomes part of the Pledged Securities hereunder or (ii) the Borrower takes such
other action in connection with the stock of such Subsidiary as is deemed
appropriate by the Agent to protect the Lenders' security interest therein.
SECTION 6.25. BANK ACCOUNTS.
After the date hereof, open or maintain any bank account other than
(a) at the office of the Agent as contemplated by Section 8.3 hereof, (b) those
accounts listed on Schedule 5.22, (c) ordinary operating accounts opened at the
office of Metrobank or Comerica Bank or (d) a production account for a specific
item of Product which is in production, as to which the Agent shall have
received notice and as to which the Agent shall have been granted a perfected
first priority security interest in such account (subject to liens permitted
under Section 6.2(m)).
SECTION 6.26. HAZARDOUS MATERIALS.
Except as set forth on Schedule 3.21, cause or permit any of its
properties or assets to be used to generate, manufacture, refine, transport,
treat, store, handle, dispose, transfer, produce or process Hazardous Materials,
except in compliance in all material respects with all applicable Environmental
Laws, nor release, discharge, dispose or of permit or suffer any release or
disposal as a result of any intentional act or omission on its part of Hazardous
Materials onto any such property or asset in material violation of any
Environmental Law.
SECTION 6.27. USE OF PROCEEDS OF LOANS AND REQUESTS FOR LETTERS OF
CREDIT.
Use the proceeds of Loans or request any Letter of Credit hereunder
other than for the purposes set forth in, and as required by, Section 5.23
hereof.
SECTION 6.28. SPECIAL PRODUCTION TRANCHE.
Use the proceeds of Loans made under a Special Production Tranche
for purposes other than to fund production of the relevant Designated Picture
unless such Designated Picture has been completed and all costs of production
have been paid or provided for.
SECTION 6.29. INTEREST RATE PROTECTION AGREEMENTS, ETC.
Enter into any Interest Rate Protection Agreement or Currency
Agreement for other than bona fide hedging purposes.
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7. EVENTS OF DEFAULT
In the case of the happening and during the continuance of any of
the following events (herein called "EVENTS OF DEFAULT"):
(a) any representation or warranty made by any Credit Party in this
Credit Agreement or any other Fundamental Document or in connection with this
Credit Agreement or with the execution and delivery of the Notes or the
Borrowings hereunder, or any statement or representation made in any report,
financial statement, certificate or other document furnished by or on behalf of
any Credit Party to the Agent or any Lender under or in connection with this
Credit Agreement or any Fundamental Document and not corrected prior to the
Closing Date, shall prove to have been false or misleading in any material
respect when made or delivered;
(b) default shall be made in the payment of any principal of or
interest on the Notes or of any fees or other amounts payable by the Borrower
hereunder, when and as the same shall become due and payable, whether at the due
date thereof or at a date fixed for prepayment thereof or by acceleration
thereof or otherwise and in the case of payments of any amounts other than
principal, such default shall continue unremedied for five (5) days after
receipt by the Borrower of an invoice therefor;
(c) default shall be made by any Credit Party in the due observance
or performance of any covenant, condition or agreement contained in Section 5.4
or Article 6 of this Credit Agreement;
(d) default shall be made with respect to any payment of any
Indebtedness of any Credit Party in excess of $500,000 when due or the
performance of any other obligation incurred in connection with any such
Indebtedness, if the effect of such default is to accelerate the maturity of
such Indebtedness or to permit the holder thereof to cause such Indebtedness to
become due prior to its stated maturity and such default shall not be remedied,
cured, waived or consented to within the period of grace with respect thereto,
or any other circumstance which arises (other than the mere passage of time) by
reason of which the Borrower is required to redeem or repurchase or offer to
holders of the Convertible Subordinated Debentures, the opportunity to have
redeemed or repurchased, any such indebtedness;
(e) any Credit Party shall generally not pay its debts as they
become due or shall admit in writing its inability to pay its debts, or shall
make a general assignment for the benefit of creditors; or any Credit Party
shall commence any case, proceeding or other action seeking to have an order for
relief entered on its behalf as debtor or to adjudicate it a bankrupt or
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insolvent, or seeking reorganization, arrangement, adjustment, liquidation,
dissolution or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors or seeking
appointment of a receiver, trustee, custodian or other similar official for it
or for all or any substantial part of its property or shall file an answer or
other pleading in any such case, proceeding or other action admitting the
material allegations of any petition, complaint or similar pleading filed
against it or consenting to the relief sought therein; or any Credit Party shall
take any action to authorize any of the foregoing;
(f) any involuntary case, proceeding or other action against any
Credit Party shall be commenced seeking to have an order for relief entered
against it as debtor or to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution or composition
of it or its debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its property, and such case, proceeding or other action (i)
results in the entry of any order for relief against it or (ii) shall remain
undismissed for a period of sixty (60) days;
(g) final judgment(s) for the payment of money in excess of
$250,000 shall be rendered against any Credit Party which within thirty (30)
days from the entry of such judgment shall not have been discharged or stayed
pending appeal or which shall not have been discharged or bonded in full within
thirty (30) days from the entry of a final order of affirmance on appeal;
(h) failure to deliver a Borrowing Base Certificate to the Agent
within 10 Business Days of the date such Certificate was due pursuant to Section
5.1(e) hereof, PROVIDED, HOWEVER, that any failure to deliver a Borrowing
Base Certificate shall not give rise to an Event of Default under this clause
(i) in the event there are no outstanding Loans;
(i) a Change in Control shall occur;
(j) a Change in Management shall occur;
(k) as long as Donald Kushner is an employee of the Borrower, the
Kushner Life Insurance shall be cancelled or terminated and such insurance shall
remain cancelled or terminated for thirty (30) days provided, that the Locke
Life Insurance is not cancelled or terminated during such 30 day period; as long
as Peter Locke is an employee of the Borrower, the Locke Life Insurance shall be
cancelled or terminated and such insurance shall remain cancelled or terminated
for thirty
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(30) days provided, that the Kushner Life Insurance is not cancelled or
terminated during such 30 day period;
(l) default shall be made by any Credit Party in the due observance
or performance of any other covenant, condition or agreement to be observed or
performed pursuant to the terms of this Credit Agreement, or any other
Fundamental Document and such default shall continue unremedied for thirty (30)
consecutive days after any Credit Party obtains knowledge of such occurrence;
(m) a Reportable Event relating to a failure to meet minimum
funding standards or an inability to pay benefits when due shall have occurred
with respect to any Plan under the control of any Credit Party shall not have
been remedied within thirty (30) days after the occurrence of such Reportable
Event; or a trustee shall be appointed by a United States District Court to
administer such Plan, or the PBGC shall institute proceedings to terminate such
Plan and the Agent shall have notified the Borrower that the Required Lenders
have made a determination that on the basis of such Reportable Event,
appointment of trustee or commencement of proceedings, there are reasonable
grounds to believe that such occurrence would have a material adverse effect to
the financial condition of the Credit Parties taken as a whole or would
materially and adversely affect the ability of the Borrower to perform its
obligations under this Credit Agreement or the Notes; or
(n) this Credit Agreement, the Copyright Security Agreement, any
Copyright Security Agreement Supplement and the Trademark Security Agreement
(each a "SECURITY DOCUMENT") shall, for any reason, not be or shall cease to
be in full force and effect except as provided herein or therein and such event
would not enable the Lenders to obtain the material benefits of the Security
Documents or shall be declared null and void or any of the Security Documents
shall not give or shall cease to give the Agent the Liens, rights, powers and
privileges purported to be created thereby in favor of the Agent for the benefit
of the Lenders, superior to and prior to the rights of all third Persons (except
to the extent expressly permitted herein or therein) and subject to no other
Liens (except to the extent expressly permitted herein or therein) other than by
actions of the Agent or any Lender or by the failure of the Agent to take such
actions to continue the perfection of such Liens, or the validity or
enforceability of the Liens granted, to be granted, or purported to be granted,
by any of the Security Documents shall be contested by any Credit Party or any
of its Affiliates, PROVIDED that no such defect in the Security Documents
shall give rise to an Event of Default under this paragraph (o) unless such
defect or such failure shall affect Collateral that is or should be subject to a
Lien in favor of the Agent having an aggregate value in excess of $500,000;
then, in every such event and at any time thereafter during the continuance of
such event, the Agent may, or if directed by the
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Required Lenders shall, take either or both of the following actions, at the
same or different times: terminate forthwith the Commitments and/or declare the
principal of and the interest on the Loans and the Notes and all other amounts
payable hereunder or thereunder to be forthwith due and payable, whereupon the
same shall become and be forthwith due and payable, without presentment, demand,
protest, or other notice of any kind, all of which are hereby expressly waived,
anything in this Credit Agreement or in the Notes to the contrary
notwithstanding. If an Event of Default specified in paragraphs (e) or (f)
above shall have occurred, the Commitments shall automatically terminate and the
Loans and the Notes shall automatically become due and payable, both as to
interest and principal, without presentment, demand, protest, or other notice of
any kind, all of which are hereby expressly waived, anything in this Credit
Agreement or the Notes to the contrary notwithstanding. Such remedies shall be
in addition to any other remedy available to the Lenders pursuant to Applicable
Law or otherwise.
8. GRANT OF SECURITY INTEREST; REMEDIES
SECTION 8.1. SECURITY INTERESTS.
The Borrower, as security for the due and punctual payment of the
Obligations and the Guarantors, as security for their obligations under Article
9 hereof, hereby mortgage, pledge, assign, transfer, set over, convey and
deliver to the Agent (for the benefit of the Lenders) and grant to the Agent
(for the benefit of the Lenders) a security interest in the Collateral.
SECTION 8.2. USE OF COLLATERAL.
So long as no Event of Default shall have occurred and be
continuing, and subject to the various provisions of this Credit Agreement and
the other Fundamental Documents, a Credit Party may use the Collateral in any
lawful manner permitted hereunder.
SECTION 8.3. COLLECTION ACCOUNTS.
(a) The Borrower will establish a lockbox arrangement and related
collection bank accounts (each, a "COLLECTION ACCOUNT") and will direct all
Persons who become licensees, buyers or account debtors under receivables with
respect to any item included in the Collateral (other than DE MINIMIS
amounts and amounts in respect of items of Product which are assigned to
third-party lenders permitted under Section 6.1(g)) to make payments under or in
connection with the license agreements, sales agreements or receivables directly
to the appropriate lockbox or Collection Account. Upon agreement between the
Agent and the Borrower, a Collection Account may also serve as the Cash
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Collateral Account, PROVIDED that such Collection Account is in the name of the
Agent (for the benefit of the Lenders) and is under the sole dominion and
control of the Agent. To the extent practicable, the Credit Parties, will amend
existing agreements to direct all Persons who are licensees, buyers or account
debtors under receivables with respect to any item included in the Collateral,
to make payments under or in connection with the license agreements, sales
agreements or receivables directly to the appropriate lockbox or Collection
Account. Arrangements will be made in a manner satisfactory to the Agent to
periodically transfer all amounts in the Collection Accounts to a single
concentration account maintained by the Agent (the "Concentration Account").
(b) The Credit Parties will execute such documentation as may be
reasonably required by the Agent in order to provide for the deposit into the
Collection Accounts of all items received in the lockbox and to otherwise
effectuate the provisions of this Section 8.3.
(c) In the event a Credit Party receives payment from any Person
or proceeds under an Acceptable L/C, which payment should have been remitted
directly to a Collection Account, such Credit Party shall promptly remit such
payment or proceeds to a Collection Account to be applied in accordance with the
terms of this Credit Agreement.
(d) All such lockboxes and Collection Accounts shall be maintained
with the Agent or with such other financial institutions as may be approved by
the Agent, subject to the right of the Agent to at any time withdraw such
approval and transfer any such lockboxes and/or Collection Account(s) to the
Agent or another approved financial institution.
SECTION 8.4. CREDIT PARTIES TO HOLD IN TRUST.
Upon the occurrence and during the continuance of an Event of
Default, the Credit Parties will, upon receipt by them of any revenue, income,
profits or other sums in which a security interest is granted by this Article 8,
payable pursuant to any agreement or otherwise, or of any check, draft, note,
trade acceptance or other instrument evidencing an obligation to pay any such
sum, hold the sum in trust for the Lenders, and forthwith, without any notice or
demand whatsoever (all notices, demands, or other actions on the part of the
Lenders being expressly waived), endorse, transfer and deliver any such sums or
instruments or both, to the Agent to be applied to the repayment of the
Obligations in accordance with the provisions of Section 8.7 hereof.
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SECTION 8.5. COLLECTIONS, ETC.
Upon the occurrence and during the continuance of an Event of
Default, the Agent may, in its sole discretion, in its name or in the name of
any Credit Party or otherwise, demand, sue for, collect or receive any money or
property at any time payable or receivable on account of or in exchange for, or
make any compromise or settlement deemed desirable with respect to, any of the
Collateral, but shall be under no obligation so to do, or the Agent may extend
the time of payment, arrange for payment in installments, or otherwise modify
the terms of, or release, any of the Collateral, without thereby incurring
responsibility to, or discharging or otherwise affecting any liability of, any
Credit Party. The Agent will not be required to take any steps to preserve any
rights against prior parties to the Collateral. If any Credit Party fails to
make any payment or take any action required hereunder, the Agent may make such
payments and take all such actions as the Agent reasonably deems necessary to
protect the Lenders' security interests in the Collateral and/or the value
thereof, and the Agent is hereby authorized (without limiting the general nature
of the authority herein above conferred) to pay, purchase, contest or compromise
any Liens that in the judgment of the Agent appear to be equal to, prior to or
superior to the security interests of the Lenders in the Collateral and any
Liens not expressly permitted by this Credit Agreement.
SECTION 8.6. POSSESSION, SALE OF COLLATERAL, ETC.
Upon the occurrence and during the continuance of an Event of
Default, the Agent may enter upon the premises of any Credit Party or wherever
the Collateral may be, and take possession of the Collateral, and may demand and
receive such possession from any Person who has possession thereof, and the
Agent may take such measures as it may deem necessary or proper for the care or
protection thereof, including the right to remove all or any portion of the
Collateral, and with or without taking such possession may sell or cause to be
sold, whenever the Agent shall decide, in one or more sales or parcels, at such
prices as the Agent may deem best, and for cash or on credit or for future
delivery, without assumption of any credit risk, all or any portion of the
Collateral, at any broker's board or at public or private sale, without demand
of performance or notice of intention to sell or of time or place of sale
(except 15 days' written notice to the Credit Parties of the time and place of
any such public sale or sales and such other notices as may be required by
Applicable Law and cannot be waived), and the Agent or any other Person may be
the purchaser of all or any portion of the Collateral so sold and thereafter
hold the same absolutely, free (to the fullest extent permitted by Applicable
Law) from any claim or right of whatever kind, including any equity of
redemption, of any Credit Party, any such demand, notice, claim, right or equity
being hereby expressly waived and released. At
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any sale or sales made pursuant to this Article 8, the Agent may bid for or
purchase, free (to the fullest extent permitted by Applicable Law) from any
claim or right of whatever kind, including any equity of redemption, of any
Credit Party, any such demand, notice, claim, right or equity being hereby
expressly waived and released, any part of or all of the Collateral offered for
sale, and may make any payment on account thereof by using any claim for moneys
then due and payable to the Agent and the Lenders by any Credit Party hereunder
as a credit against the purchase price. The Agent shall in any such sale make
no representations or warranties with respect to the Collateral or any part
thereof, and neither the Agent nor any Lender shall be chargeable with any of
the obligations or liabilities of any Credit Party. Each Credit Party hereby
agrees (i) that it will indemnify and hold the Agent and the Lenders harmless
from and against any and all claims with respect to the Collateral asserted
before the taking of actual possession or control of the relevant Collateral by
the Agent pursuant to this Article 8, or arising out of any act of, or omission
to act on the part of, any party (other than the Agent or Lenders) prior to such
taking of actual possession or control by the Agent (whether asserted before or
after such taking of possession or control), or arising out of any act on the
part of any Credit Party, or its agents before or after the commencement of such
actual possession or control by the Agent; and (ii) neither the Agent nor any
Lender shall have liability or obligation to any Credit Party arising out of any
such claim except for acts of willful misconduct or gross negligence or not
taken in good faith. Subject only to the lawful rights of third parties, any
Laboratory which has possession of any of the Collateral is hereby constituted
and appointed by the Credit Parties as pledgeholder for the Agent and, upon the
occurrence of an Event of Default, each such pledgeholder is hereby authorized
(to the fullest extent permitted by Applicable Law) to sell all or any portion
of the Collateral upon the order and direction of the Agent, and each Credit
Party hereby waives any and all claims, for damages or otherwise, for any action
taken by such pledgeholder in accordance with the terms of the UCC not otherwise
waived hereunder. In any action hereunder, the Agent shall be entitled if
permitted by Applicable Law to the appointment of a receiver without notice, to
take possession of all or any portion of the Collateral and to exercise such
powers as the court shall confer upon the receiver. Notwithstanding the
foregoing, upon the occurrence of an Event of Default, and during the
continuation of such Event of Default, the Agent shall be entitled to apply,
without prior notice to the Credit Parties, any cash or cash items constituting
Collateral in the possession of the Agent to payment of the Obligations.
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SECTION 8.7. APPLICATION OF PROCEEDS ON DEFAULT.
During the continuance of an Event of Default, the balances in the
Chemical Clearing Account, Collection Account(s), Cash Collateral Account(s), or
in any account of any Credit Party with any Lender, all other income on the
Collateral, and all proceeds from any sale of the Collateral pursuant hereto
shall be applied first toward payment of the reasonable out-of-pocket costs and
expenses paid or incurred by the Agent in enforcing this Credit Agreement, in
realizing on or protecting any Collateral and in enforcing or collecting any
Obligations or any Guaranty thereof, including, without limitation, court costs
and the reasonable attorney's fees and expenses incurred by the Agent, and then
to the payment in full of the Obligations in such order as determined by the
Required Lenders, PROVIDED, HOWEVER, that, the Agent may in its discretion
apply funds comprising the Collateral to pay the cost (i) of completing any item
of Product owned in whole or in part by any Credit Party in any stage of
production and (ii) of making delivery to the distributors of such item of
Product. Any amounts remaining after such indefeasible payment in full shall be
remitted to the appropriate Credit Party or as a court of competent jurisdiction
may otherwise direct.
SECTION 8.8. POWER OF ATTORNEY.
Upon the occurrence of an Event of Default which is not waived in
writing by the Required Lenders, (a) each Credit Party does hereby irrevocably
make, constitute and appoint the Agent or any of its officers or designees its
true and lawful attorney-in-fact with full power in the name of the Agent or
such other Person to receive, open and dispose of all mail addressed to any
Credit Party, and to endorse any notes, checks, drafts, money orders or other
evidences of payment relating to the Collateral that may come into the
possession of the Agent with full power and right to cause the mail of such
Persons to be transferred to the Agent's own offices or otherwise, and to do any
and all other acts necessary or proper to carry out the intent of this Credit
Agreement and the grant of the security interests hereunder and under the
Fundamental Documents, and each Credit Party hereby ratifies and confirms all
that the Agent or its substitutes shall properly do by virtue hereof; (b) each
Credit Party does hereby further irrevocably make, constitute and appoint the
Agent or any of its officers or designees its true and lawful attorney-in-fact
in the name of the Agent or any Credit Party (i) to enforce all of each Credit
Party's rights under and pursuant to all agreements with respect to the
Collateral, all for the sole benefit of the Agent for the benefit of the Lenders
and to enter into such other agreements as may be necessary or appropriate in
the judgment of the Agent to complete the production, distribution or
exploitation of any item of Product which is included in the Collateral, (ii) to
enter into and perform such agreements as may be necessary in order to carry
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out the terms, covenants and conditions of the Fundamental Documents that are
required to be observed or performed by any Credit Party, (iii) to execute such
other and further mortgages, pledges and assignments of the Collateral, and
related instruments or agreements, as the Agent may reasonably require for the
purpose of perfecting, protecting, maintaining or enforcing the security
interests granted to the Agent on behalf of the Lenders hereunder, and (iv) to
do any and all other things necessary or proper to carry out the intention of
this Credit Agreement and the grant of the security interests hereunder and
under the other Fundamental Documents. The Credit Parties hereby ratify and
confirm in advance all that the Agent as such attorney-in-fact or its
substitutes shall properly do by virtue of this power of attorney. In the event
the Agent exercises the power of attorney granted herein, the Agent shall,
concurrently with such exercise, provide written notice to the Borrower and the
Lenders in accordance with Section 13.1.
SECTION 8.9. FINANCING STATEMENTS, DIRECT PAYMENTS.
Each Credit Party hereby authorizes the Agent to file UCC financing
statements and any amendments thereto or continuations thereof, any Copyright
Security Agreement, any Copyright Security Agreement Supplement, any Trademark
Security Agreement and any other appropriate security documents or instruments
and to give any notices necessary or desirable to perfect the Lien of the Agent
on behalf of the Lenders on the Collateral, in all cases without the signatures
of any Credit Party or to execute such items as attorney-in-fact for any Credit
Party. Each Credit Party further authorizes the Agent upon the occurrence of an
Event of Default, and during the continuation of such Event of Default, to
notify any account debtors that all sums payable to any Credit Party relating to
the Collateral shall be paid directly to the Agent.
SECTION 8.10. FURTHER ASSURANCES.
Upon the reasonable request of the Agent, each Credit Party hereby
agrees to duly and promptly execute and deliver, or cause to be duly executed
and delivered, at the cost and expense of the Credit Parties, such further
instruments as may be necessary or proper, in the judgment of the Agent, to
carry out the provisions and purposes of this Article 8, necessary, in the
judgment of the Agent, to perfect and preserve the Liens of the Agent for the
benefit of the Lenders hereunder and under the Fundamental Documents, and in the
Collateral or any portion thereof.
SECTION 8.11. TERMINATION.
The security interests granted under this Article 8 shall terminate
when all the Obligations have been indefeasibly fully paid and performed and the
Commitments shall have
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terminated and all Letters of Credit shall have expired or been terminated or
cancelled. Upon request by the Credit Parties (and at the sole expense of the
Credit Parties) after such termination, the Agent will take all reasonable
action and do all things reasonably necessary, including executing UCC
terminations, Pledgeholder Agreement terminations, termination letters to
account debtors and copyright reassignments, to release the security interest
granted to it hereunder.
SECTION 8.12. REMEDIES NOT EXCLUSIVE.
The remedies conferred upon or reserved to the Agent in this Article
8 are intended to be in addition to, and not in limitation of, any other remedy
or remedies available to the Agent. Without limiting the generality of the
foregoing, the Agent and the Lenders shall have all rights and remedies of a
secured creditor under Article 9 of the UCC.
SECTION 8.13. QUIET ENJOYMENT.
The Lenders acknowledge that their security interest hereunder is
subject to the rights of Quiet Enjoyment of parties to Distribution Agreements,
Licensing Agreements and other similar agreements, whether existing on the date
hereof or hereafter executed. For the purpose hereof, "QUIET ENJOYMENT" shall
mean in connection with the rights of licensees under Licensing Agreements and
distributors under Distribution Agreements, the Lenders' agreement that their
rights under this Credit Agreement and the Fundamental Documents and in the
Collateral are subject to the rights of such parties to distribute, exhibit
and/or to exploit the item of Product licensed to them, and to receive prints or
tapes or have access to preprint material or master tapes in connection
therewith and that even if the Lenders shall become the owner of the Collateral
in case of an Event of Default, the Lenders' ownership rights shall be subject
to the rights of said parties under such agreements, PROVIDED, HOWEVER, that
such licensee or such distributor shall not be in default under the relevant
License or Distribution Agreement and, PROVIDED, FURTHER that the Lenders
shall not be responsible for any liability or obligation of any Credit Party
under any License Agreement.
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SECTION 8.14. CONTINUATION AND REINSTATEMENT.
Each Credit Party further agrees that the security interest granted
hereunder shall continue to be effective or be reinstated, as the case may be,
if at any time payment or any part thereof, of principal or interest on any
Obligation is rescinded or must otherwise be restored by the Agent or the
Lenders upon the bankruptcy or reorganization of any Credit Party or otherwise.
9. GUARANTY
SECTION 9.1. GUARANTY.
(a) Each Guarantor unconditionally and irrevocably guarantees to
the Agent and the Lenders the due and punctual payment by, and performance of,
the Obligations (including interest accruing on and after the filing of any
petition in bankruptcy or of reorganization of the obligor whether or not post
filing interest is allowed in such proceeding). Each Guarantor further agrees
that the Obligations may be extended or renewed, in whole or in part, without
notice or further assent from it (except as may be otherwise required herein),
and it will remain bound upon this guaranty notwithstanding any extension or
renewal of any Obligation.
(b) Each Guarantor waives presentation to, demand for payment from
and protest to, as the case may be, the Borrower or any other Guarantor of any
of the Obligations, and also waives notice of protest for nonpayment. The
obligations of each Guarantor hereunder shall not be affected by (i) the failure
of the Agent or the Lenders to assert any claim or demand or to enforce any
right or remedy against the Borrower or any Guarantor or any other guarantor
under the provisions of this Credit Agreement or any other agreement or
otherwise; (ii) any extension or renewal of any provision hereof or thereof;
(iii) the failure of the Agent or the Lenders to obtain the consent of the
Guarantor with respect to any rescission, waiver, compromise, acceleration,
amendment or modification of any of the terms or provisions of this Credit
Agreement, the Notes or of any other agreement; (iv) the release, exchange,
waiver or foreclosure of any security held by the Agent for the Obligations or
any of them; (v) the failure of the Agent or the Lenders to exercise any right
or remedy against any other guarantor of the Obligations; or (vi) the release or
substitution of any Guarantor or guarantor. Without limiting the generality of
the foregoing or any other provision hereof, to the extent permitted by
applicable law, each Guarantor hereby expressly waives any and all benefits
which might otherwise be available to it under California Civil Code Sections
2809, 2810, 2819, 2839, 2845, 2849, 2850, 2899 and 3433.
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(c) Each Guarantor further agrees that this Guaranty constitutes a
guaranty of performance and of payment when due and not just of collection, and
waives any right to require that any resort be had by the Agent or the Lenders
to any security held for payment of the Obligations or to any balance of any
deposit, account or credit on the books of the Agent or the Lenders in favor of
the Borrower, any other Guarantor or to any other Person.
(d) Each Guarantor hereby expressly assumes all responsibilities to
remain informed of the financial condition of the Borrower, the Guarantors and
any other guarantors and any circumstances affecting the ability of the Borrower
to perform under this Credit Agreement.
(e) Each Guarantor's guaranty shall not be affected by the
genuineness, validity, regularity or enforceability of the Obligations, the
Notes or any other instrument evidencing any Obligations, or by the existence,
validity, enforceability, perfection, or extent of any collateral therefor or by
any other circumstance relating to the Obligations which might otherwise
constitute a defense to this Guaranty. The Agent and the Lenders make no
representation or warranty with respect to any such circumstances and have no
duty or responsibility whatsoever to each Guarantor in respect to the management
and maintenance of the Obligations or any collateral security for the
Obligations.
SECTION 9.2. NO IMPAIRMENT OF GUARANTY, ETC.
The obligations of each Guarantor hereunder shall not be subject to
any reduction, limitation, impairment or termination for any reason (except
payment of the Obligations), including, without limitation, any claim of waiver,
release, surrender, alteration or compromise, and shall not be subject to any
defense or set-off, counterclaim, recoupment or termination whatsoever by reason
of the invalidity, illegality or unenforceability of the Obligations. Without
limiting the generality of the foregoing, the obligations of each Guarantor
hereunder shall not be discharged or impaired or otherwise affected by the
failure of the Agent or the Lenders to assert any claim or demand or to enforce
any remedy under this Credit Agreement or any other agreement, by any waiver or
modification of any provision thereof, by any default, failure or delay, willful
or otherwise, in the performance of the Obligations, or by any other act or
thing or omission or delay to do any other act or thing which may or might in
any manner or to any extent vary the risk of such Guarantor or would otherwise
operate as a discharge of such Guarantor as a matter of law, unless and until
the Obligations are paid in full the Commitments have terminated and each
outstanding Letter of Credit has expired or otherwise been terminated.
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SECTION 9.3. CONTINUATION AND REINSTATEMENT, ETC.
(a) Each Guarantor further agrees that its guaranty hereunder shall
continue to be effective or be reinstated, as the case may be, if at any time
payment, or any part thereof, of principal of or interest on any Obligation is
rescinded or must otherwise be restored by the Agent or the Lenders upon the
bankruptcy or reorganization of the Borrower or a Guarantor, or otherwise. In
furtherance of the provisions of this Article 9, and not in limitation of any
other right which the Agent or the Lenders may have at law or in equity against
the Borrower or a Guarantor by virtue hereof, upon failure of the Borrower to
pay any Obligation when and as the same shall become due, whether at maturity,
by acceleration, after notice or otherwise, each Guarantor hereby promises to
and will, upon receipt of written demand by the Agent on behalf of the Lenders,
forthwith pay or cause to be paid to the Agent for the benefit of the Lenders in
cash an amount equal to the unpaid amount of all the Obligations with interest
thereon at a rate of interest equal to the rate specified in Section 2.7(a)
hereof, and thereupon the Agent shall assign such Obligation, together with all
security interests, if any, then held by the Agent in respect of such
Obligation, to the Guarantors making such payment; such assignment to be
subordinate and junior to the rights of the Agent on behalf of the Lenders with
regard to amounts payable by the Borrower in connection with the remaining
unpaid Obligations and to be pro tanto to the extent to which the Obligation in
question was discharged by the Guarantor or Guarantors making such payments.
(b) All rights of the Guarantors against the Borrower, arising as
a result of the payment by any Guarantor of any sums to the Agent for the
benefit of the Lenders or directly to the Lenders hereunder by way of right of
subrogation or otherwise shall in all respects be subordinated and junior in
right of payment to the prior final and indefeasible payment in full of all the
Obligations. If any amount shall be paid to such Guarantor for the account of
the Borrower, such amount shall be held in trust for the benefit of the Agent
and shall forthwith be paid to the Agent on behalf of the Lenders to be credited
and applied to the Obligations, whether matured or unmatured.
SECTION 9.4. LIMITATION ON GUARANTEED AMOUNT ETC.
Notwithstanding any other provision of this Article 9, the amount
guaranteed by the Guarantor hereunder shall be limited to the extent, if any,
required so that its obligations under this Article 9 shall not be subject to
avoidance under Section 548 of the Bankruptcy Code or to being set aside or
annulled under any applicable state law relating to fraud on creditors. In
determining the limitations, if any, on the amount of any Guarantor's
obligations hereunder pursuant to the preceding sentence, it is the intention of
the parties thereto that any rights of subrogation or contribution which such
Guarantor may
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have under this Article 9 (or as a result of the operation of Article 8 with
regard to assets of other Credit Parties) or any other agreement or under
Applicable Law shall be taken into account.
10. PLEDGE
SECTION 10.1. PLEDGE.
As security for the Obligations, each Pledgor hereby pledges,
hypothecates, assigns, transfers, sets over and delivers unto the Agent for the
benefit of the Lenders, a security interest in all Pledged Securities now owned
or hereafter acquired by it. On the Closing Date, the Pledgors shall deliver to
the Agent the definitive instruments representing all Pledged Securities,
accompanied by executed undated stock powers, duly endorsed or executed in blank
by the appropriate Pledgor, and such other instruments or documents as the Agent
on behalf of the Lenders or its counsel shall reasonably request.
SECTION 10.2. COVENANT.
Each Pledgor covenants that as stockholder of each of its respective
Subsidiaries it will not take any action to allow any additional shares of
common stock, preferred stock or other equity securities of any of its
respective Subsidiaries or any securities convertible or exchangeable into
common or preferred stock of such Subsidiaries to be issued, or grant any
options or warrants, unless such securities are pledged to the Agent (for the
benefit of the Lenders) as security for the Obligations.
SECTION 10.3. REGISTRATION IN NOMINEE NAME; DENOMINATIONS.
Upon the occurrence and during the continuation of an Event of
Default, the Agent shall have the right (in its sole and absolute discretion) to
hold the certificates representing any Pledged Securities (a) in its own name or
in the name of its nominee or (b) in the name of the appropriate Pledgor,
endorsed or assigned in blank or in favor of the Agent. The Agent shall have
the right to exchange the certificates representing Pledged Securities for
certificates of smaller or larger denominations for any purpose consistent with
this Credit Agreement.
SECTION 10.4. VOTING RIGHTS; DIVIDENDS; ETC.
(a) The appropriate Pledgor shall be entitled to exercise any and
all voting and/or consensual rights and powers accruing to owners of the Pledged
Securities or any part thereof for any purpose not inconsistent with the terms
hereof, at all times, except as expressly provided in (c) below.
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(b) Any dividends or distributions of any kind whatsoever (other,
so long as an Event of Default is not continuing, than cash) received by a
Pledgor, whether resulting from a subdivision, combination, or reclassification
of the outstanding capital stock of the issuer or received in exchange for
Pledged Securities or any part thereof or as a result of any merger,
consolidation, acquisition, or other exchange of assets to which the issuer may
be a party, or otherwise, shall be and become part of the Pledged Securities
pledged hereunder and shall immediately be delivered to the Agent to be held
subject to the terms hereof.
(c) Upon the occurrence and during the continuance of an Event of
Default and notice from the Agent of the transfer of such rights to the Agent,
all rights of the Pledgors to exercise the voting and/or consensual rights and
powers which it is entitled to exercise pursuant to this Section shall cease,
and all such rights shall thereupon become vested in the Agent, which shall have
the sole and exclusive right and authority to exercise such voting and/or
consensual rights until such time as such Event of Default has been cured. All
dividends and distributions which are received contrary to the provisions of
this subsection (c) shall be received in trust for the benefit of the Agent and
the Lenders and shall be delivered.
(d) If the Agent shall receive any cash pursuant to Section 10.4(c)
which but for the occurrence of an Event of Default the relevant Pledgor would
be entitled to retain for its own account under Section 10.4(b), then after and
so long as all Events of Default have been cured and only if the Obligations
have not been accelerated, the Agent shall pay over to such Pledgor any such
cash retained by it during the continuance of such Event of Default which has
not been applied to the Obligations pursuant to the terms hereof.
SECTION 10.5. REMEDIES UPON DEFAULT.
If an Event of Default shall have occurred and be continuing, the
Agent on behalf of the Lenders may sell the Pledged Securities, or any part
thereof, at public or private sale or at any broker's board or on any securities
exchange, for cash, upon credit or for future delivery as the Agent shall deem
appropriate subject to the terms hereof or as otherwise provided in the UCC.
The Agent shall be authorized at any such sale (if it deems it advisable to do
so) to restrict to the full extent permitted by Applicable Law the prospective
bidders or purchasers to Persons who will represent and agree that they are
purchasing the Pledged Securities for their own account for investment and not
with a view to the distribution or sale thereof, and upon consummation of any
such sale the Agent shall have the right to assign, transfer, and deliver to the
purchaser or purchasers thereof the Pledged Securities so sold. Each such
purchaser at any such sale shall hold the property sold absolutely, free from
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any claim or right on the part of the Pledgors. The Agent shall give ten (10)
days' written notice of its intention to make any such public or private sale,
or sale at any broker's board or on any such securities exchange, or of any
other disposition of the Pledged Securities. Such notice, in the case of public
sale, shall state the time and place for such sale and, in the case of sale at a
broker's board or on a securities exchange, shall state the board or exchange at
which such sale is to be made and the day on which the Pledged Securities, or
portion thereof, will first be offered for sale at such board or exchange. Any
such public sale shall be held at such time or times within ordinary business
hours and at such place or places as the Agent may fix and shall state in the
notice of such sale. At any such sale, the Pledged Securities, or portion
thereof, to be sold may be sold in one lot as an entirety or in separate
parcels, as the Agent may (in its sole and absolute discretion) determine. The
Agent shall not be obligated to make any sale of the Pledged Securities if it
shall determine not to do so, regardless of the fact that notice of sale of the
Pledged Securities may have been given. The Agent may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for
sale, and such sale may, without further notice, be made at the time and place
to which the same was so adjourned. In case the sale of all or any part of the
Pledged Securities is made on credit or for future delivery, the Pledged
Securities so sold shall be retained by the Agent until the sale price is paid
by the purchaser or purchasers thereof, but the Agent shall not incur any
liability in case any such purchaser or purchasers shall fail to take up and pay
for the Pledged Securities so sold and, in case of any such failure, such
Pledged Securities may be sold again upon like notice. At any sale or sales
made pursuant to this Section 10.5, the Agent (on behalf of the Lenders) may bid
for or purchase, free from any claim or right of whatever kind, including any
equity of redemption, of the Pledgors, any such demand, notice, claim, right or
equity being hereby expressly waived and released, any or all of the Pledged
Securities offered for sale, and may make any payment on the account thereof by
using any claim for moneys then due and payable to the Agent or any consenting
Lender by any Credit Party as a credit against the purchase price; and the
Agent, upon compliance with the terms of sale, may hold, retain and dispose of
the Pledged Securities without further accountability therefor to the Pledgors
or any third party (other than the Lenders). The Agent shall in any such sale
make no representations or warranties with respect to the Pledged Securities or
any part thereof, and shall not be chargeable with any of the obligations or
liabilities of the Pledgors with respect thereto. Each Pledgor hereby agrees
(i) it will indemnify and hold the Agent and the Lenders harmless from and
against any and all claims with respect to the Pledged Securities asserted
before the taking of actual possession or control of the Pledged Securities by
the Agent pursuant to this Credit Agreement or arising out of any act
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of, or omission to act on the part of, any party prior to such taking of actual
possession or control by the Agent (whether asserted before or after such taking
of possession or control), or arising out of any act on the part of any Pledgor,
their agents or Affiliates before or after the commencement of such actual
possession or control by the Agent and (ii) the Agent and the Lenders shall have
no liability or obligation arising out of any such claim. As an alternative to
exercising the power of sale herein conferred upon it, the Agent may proceed by
a suit or suits at law or in equity to foreclose upon the Collateral and Pledged
Securities under this Credit Agreement and to sell the Pledged Securities, or
any portion thereof, pursuant to a judgment or decree of a court or courts
having competent jurisdiction.
SECTION 10.6. APPLICATION OF PROCEEDS OF SALE AND CASH.
The proceeds of sale of the Pledged Securities sold pursuant to
Section 10.5 hereof shall be applied by the Agent on behalf of the Lenders as
follows:
(i) to the payment of all reasonable out-of-pocket costs and
expenses paid or incurred by the Agent in connection with such sale,
including, without limitation, all court costs and the reasonable
fees and expenses of counsel for the Agent in connection therewith,
and the payment of all reasonable out-of-pocket costs and expenses
paid or incurred by the Agent in enforcing this Credit Agreement, in
realizing or protecting any Collateral and in enforcing or
collecting any Obligations or any Guaranty thereof, including,
without limitation, court costs and the reasonable attorney's fees
and expenses incurred by the Agent in connection therewith; and
(ii) to the payment in full of the Obligations in such order
as determined by the Required Lenders;
PROVIDED, HOWEVER, that the Agent may in its discretion apply funds
comprising the Collateral to pay the cost (i) of completing any item of Product
owned in whole or in part by any Credit Party in any stage of production and
(ii) of making delivery to the distributors of such item of Product. Any
amounts remaining after such indefeasible payment in full shall be remitted to
the appropriate Pledgor, or as a court of competent jurisdiction may otherwise
direct.
SECTION 10.7. SECURITIES ACT, ETC.
In view of the position of each Pledgor in relation to the Pledged
Securities pledged by it, or because of other present or future circumstances, a
question may arise under the
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Securities Act of 1933, as amended, as now or hereafter in effect, or any
similar statute hereafter enacted analogous in purpose or effect (such Act and
any such similar statute as from time to time in effect being hereinafter called
the "Federal Securities Laws"), with respect to any disposition of the Pledged
Securities permitted hereunder, each Pledgor understands that compliance with
the Federal Securities Laws may very strictly limit the course of conduct of the
Agent if the Agent were to attempt to dispose of all or any part of the Pledged
Securities, and may also limit the extent to which or the manner in which any
subsequent transferee of any Pledged Securities may dispose of the same.
Similarly, there may be other legal restrictions or limitations affecting the
Agent in any attempt to dispose of all or any part of the Pledged Securities
under applicable Blue Sky or other state securities laws, or similar laws
analogous in purpose or effect. Under Applicable Law, in the absence of an
agreement to the contrary, the Agent may perhaps be held to have certain general
duties and obligations to the Pledgors to make some effort towards obtaining a
fair price even though the Obligations may be discharged or reduced by the
proceeds of a sale at a lesser price. Each Pledgor waives to the fullest extent
permitted by Applicable Law any such general duty or obligation to it, and the
Pledgors and/or the Credit Parties will not attempt to hold the Agent
responsible for selling all or any part of the Pledged Securities at an
inadequate price, even if the Agent shall accept the first offer received or
does not approach more than one possible purchaser. Without limiting the
generality of the foregoing, the provisions of this Section 10.7 would apply if,
for example, the Agent were to place all or any part of the Pledged Securities
for private placement by an investment banking firm, or if such investment
banking firm purchased all or any part of the Pledged Securities for its own
account, or if the Agent placed all or any part of the Pledged Securities
privately with a purchaser or purchasers.
SECTION 10.8. CONTINUATION AND REINSTATEMENT.
Each Pledgor further agrees that its pledge hereunder shall continue
to be effective or be reinstated, as the case may be, if at any time payment, or
any part thereof, of principal of or interest on any Obligation is rescinded or
must otherwise be restored by Agent or the Lenders upon the bankruptcy or
reorganization of any Pledgor or otherwise.
SECTION 10.9. TERMINATION.
The pledge referenced herein shall terminate when all of the
Obligations shall have been indefeasibly fully paid and the Commitments shall
have terminated, and all Letters of Credit shall have expired or been terminated
or cancelled, at which time the Agent shall assign and deliver to the
appropriate Pledgor, or to such Person or Persons as such Pledgor shall
designate, against receipt, such of the Pledged Securities (if any) as shall
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not have been sold or otherwise applied by the Agent pursuant to the terms
hereof and shall still be held by it hereunder, together with appropriate
instruments of reassignment and release. Any such reassignment shall be free
and clear of all Liens, arising by, under or through any Lender but shall
otherwise be without recourse upon or warranty by the Agent and at the expense
of the Pledgors.
11. CASH COLLATERAL ACCOUNT
SECTION 11.1. CASH COLLATERAL ACCOUNTS.
On or prior to the Closing Date, there shall be established with the
Agent a collateral account in the name of the Agent (the "CASH COLLATERAL
ACCOUNT"), into which the appropriate Credit Parties shall from time to time
deposit Dollars pursuant to the express provisions of this Credit Agreement
requiring or permitting such deposits. Except to the extent otherwise provided
in this Article 11, the Cash Collateral Account shall be under the sole dominion
and control of the Agent.
SECTION 11.2. INVESTMENT OF FUNDS.
(a) The Agent is hereby authorized and directed to invest and
reinvest the funds from time to time deposited in the Cash Collateral Account on
the instructions of the Borrower (provided that such notice may be given
verbally to be confirmed promptly in writing) or, if the Borrower shall fail to
give such instruction upon delivery of any such funds, in the sole discretion of
the Agent, PROVIDED that in no event may the Borrower give instructions to the
Agent to, or may the Agent in its discretion, invest or reinvest funds in the
Cash Collateral Account in other than Cash Equivalents described in clause (i)
of the definition of Cash Equivalents, or described in clauses (ii) and (iii) of
the definition of Cash Equivalents to the extent issued by Chemical Bank.
(b) Any net income or gain on the investment of funds from time to
time held in the Cash Collateral Account, shall be promptly reinvested by the
Agent as a part of the Cash Collateral Account and any net loss on any such
investment shall be charged against the Cash Collateral Account.
(c) Neither the Agent nor the Lenders shall be a trustee for the
Credit Parties, or shall have any obligations or responsibilities, or shall be
liable for anything done or not done, in connection with the Cash Collateral
Account, except as expressly provided herein and except that the Agent shall
have the obligations of a secured party under the UCC. The Agent and the
Lenders shall not have any obligation or responsibilities and shall not be
liable in any way for any investment decision made
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pursuant to this Section 11.2 or for any decrease in the value of the
investments held in the Cash Collateral Account.
SECTION 11.3. GRANT OF SECURITY INTEREST.
For value received and to induce the Lenders to make Loans from time
to time to the Borrower as provided for in this Credit Agreement, as security
for the payment of all of the Obligations, the Credit Parties hereby assign to
the Agent (for the benefit of the Lenders), and grant to the Agent (for the
benefit of the Lenders), a first and prior Lien upon all the Credit Parties'
rights in and to the Cash Collateral Account, all cash, documents, instruments
and securities from time to time held therein, and all rights pertaining to
investments of funds in the Cash Collateral Account and all products and
proceeds of any of the foregoing. All cash, documents, instruments and
securities from time to time on deposit in the Cash Collateral Account, and all
rights pertaining to investments of funds in the Cash Collateral Accounts shall
immediately and without any need for any further action on the part of any of
the Credit Parties, any Lender or the Agent, become subject to the Lien set
forth in this Section 11.3, be deemed Collateral for all purposes hereof and be
subject to the provisions of this Credit Agreement.
SECTION 11.4. REMEDIES.
At any time during the continuation of an Event of Default, the
Agent may sell any documents, instruments and securities held in the Cash
Collateral Account and may immediately apply the proceeds thereof and any other
cash held in the Cash Collateral Account to the satisfaction of the Obligations
in such order as the Agent may determine, but subject to the rights of the
Lenders. Any amounts remaining after such application shall be paid or
delivered to the Borrower or as a court of competent jurisdiction may direct.
12. THE AGENT AND THE FRONTING BANK
SECTION 12.1. ADMINISTRATION BY AGENT.
(a) The general administration of the Fundamental Documents and any
other documents contemplated by this Credit Agreement shall be by the Agent or
its designees. Except as otherwise expressly provided herein each of the
Lenders hereby irrevocably authorizes the Agent, at its discretion, to take or
refrain from taking such actions as agent on its behalf and to exercise or
refrain from exercising such powers under the Fundamental Documents, the Notes
and any other documents contemplated by this Credit Agreement as are expressly
delegated by the terms hereof or thereof, as appropriate, together with all
powers reasonably incidental thereto. The Agent shall have no
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duties or responsibilities except as set forth in the Fundamental Documents.
(b) The Lenders hereby authorize the Agent (in its sole
discretion):
(i) in connection with the sale or other disposition of any
asset included in the Collateral or all of the capital stock of any
Guarantor, to the extent undertaken in accordance with the terms of
this Credit Agreement, to release a Lien granted to it (for the
benefit of the Lenders) on such asset and/or release such Guarantor
from its obligations hereunder;
(ii) to determine that the cost to the Borrower or another
Credit Party is disproportionate to the benefit to be realized by
the Lenders by perfecting a Lien in a given asset or group of assets
included in the Collateral (other than any item which is to be
included in the Borrowing Base) and that the Borrower or other
Credit Party should not be required to perfect such Lien in favor of
the Agent (for the benefit of the Lenders);
(iii) to appoint subagents or Lenders to be the holder of
record of a Lien to be granted to the Agent (for the benefit of the
Lenders) or to hold on behalf of the Agent such collateral or
instruments relating thereto;
(iv) to grant the right of Quiet Enjoyment to licensees
pursuant to the terms of Section 8.13;
(v) in connection with an item of Product being produced by
a Credit Party, the principal photography of which is being done
outside the United States in a location other than Canada or the
United Kingdom, to approve arrangements with such Credit Party as
shall be satisfactory to the Agent with respect to the temporary
storage of the original negative film, the original sound track
materials or other physical materials of such Picture in a
production laboratory located outside the United States, other than
in Canada or the United Kingdom;
(vi) enter into guild subordination agreements with the
guilds with respect to the security interests in favor of the guilds
required pursuant to the terms of the collective bargaining
agreements;
(vii) to enter into subordination agreements (in such form as
the Agent may deem appropriate) in connection with transactions
permitted under Section
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6.1(g) whereby the claims of the Lenders against the Special Purpose
Producer which is the borrower in such transaction and/or Liens in
favor of the Agent (for the benefit of the Lenders) in their
respective assets may be subordinated to the claims and/or Liens of
third party lenders; and
(viii) to enter into subordination agreements in connection
with existing Liens set forth on Schedule 6.2 hereof in
substantially the same form as previously executed by Imperial Bank,
as agent, under the Imperial Credit Agreement.
SECTION 12.2. ADVANCES AND PAYMENTS.
(a) On the date requested by the Borrower for the funding of each
Loan, the Agent shall be authorized (but not obligated) to advance, for the
account of each of the Lenders, the amount of the Loan to be made by it in
accordance with its Percentage hereunder. Each of the Lenders hereby authorizes
and requests the Agent to advance for its account, pursuant to the terms hereof,
the amount of the Loan to be made by it, and each of the Lenders agrees
forthwith to reimburse the Agent in immediately available funds for the amount
so advanced on its behalf by the Agent. If any such reimbursement is not made
in immediately available funds on the same day on which the Agent shall have
made any such amount available on behalf of any Lender, such Lender shall pay
interest to the Agent at a rate per annum equal to the Agent's cost of obtaining
overnight funds in the New York Federal Funds Market for the first day following
the time when the Lender fails to make the required reimbursement, and
thereafter at a rate per annum equal to the Alternate Base Rate plus the
Applicable Margin for Alternate Base Rate Loans. If and to the extent that any
such reimbursement shall not have been made to the Agent, the Borrower agrees to
repay to the Agent forthwith on demand a corresponding amount with interest
thereon for each day from the date such amount is made available to the Borrower
until the date such amount is repaid to the Agent at the Alternate Base Rate
plus the Applicable Margin for Alternate Base Rate Loans.
(b) Any amounts received by the Agent in connection with this
Credit Agreement or the Notes the application of which is not otherwise provided
for, shall be applied, in accordance with each of the Lenders' Percentages,
first, to pay accrued but unpaid Commitment Fees, second, to pay accrued but
unpaid interest on the Notes, third, the principal balance outstanding on the
Notes and amounts outstanding under Currency Agreements and Interest Rate
Protection Agreements and fourth, to pay other amounts payable to the Agent.
All amounts to be paid to any of the Lenders by the Agent shall be credited to
the Lenders, after collection by the Agent, in immediately available funds
either by wire transfer or deposit in such Lender's correspondent account
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with the Agent, or as such Lender and the Agent shall from time to time agree.
SECTION 12.3. SHARING OF SETOFFS AND CASH COLLATERAL.
Each of the Lenders agrees that if it shall, through the exercise of
a right of banker's lien, setoff or counterclaim against any Credit Party,
including, but not limited to, a secured claim under Section 506 of Title 11 of
the United States Code or other security or interest arising from, or in lieu
of, such secured claim and received by such Lender under any applicable
bankruptcy, insolvency or other similar law, or otherwise, obtain payment in
respect of its Loans as a result of which the unpaid portion of its Loans and
L/C Exposure is proportionately less than the unpaid portion of any of the other
Lenders (a) it shall promptly purchase at par (and shall be deemed to have
thereupon purchased) from such other Lenders a participation in the Loans or
Letters of Credit of such other Lenders, so that the aggregate unpaid principal
amount of each of the Lenders' Loans and its participation in Loans and Letters
of Credit of the other Lenders shall be in the same proportion to the aggregate
unpaid principal amount of all Loans then outstanding and L/C Exposure as the
principal amount of its Loans and L/C Exposure prior to the obtaining of such
payment was to the principal amount of all Loans outstanding and L/C Exposure
prior to the obtaining of such payment and (b) such other adjustments shall be
made from time to time as shall be equitable to ensure that the Lenders share
such payment pro rata. If all or any portion of such excess payment is
thereafter recovered from the Lender which originally received such excess
payment, such purchase (or portion thereof) shall be cancelled and the purchase
price restored to the extent of such recovery. The Credit Parties expressly
consent to the foregoing arrangements and agree that any Lender or Lenders
holding (or deemed to be holding) a participation in a Note or Letters of Credit
may exercise any and all rights of banker's lien, setoff or counterclaim with
respect to any and all moneys owing by the Borrower to such Lender or Lenders as
fully as if such Lender or Lenders held a Note and was the original obligee
thereon or was the issuer of the Letter of Credit, in the amount of such
participation.
SECTION 12.4. NOTICE TO THE LENDERS.
Upon receipt by the Agent from any of the Credit Parties of any
communication calling for an action on the part of the Lenders, or upon notice
to the Agent of any Event of Default, the Agent will in turn immediately inform
the other Lenders in writing (which shall include facsimile communications) of
the nature of such communication or of the Event of Default, as the case may be.
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SECTION 12.5. LIABILITY OF AGENT.
(a) The Agent or the Fronting Bank, when acting on behalf of the
Lenders, may execute any of its duties under this Credit Agreement or the other
Fundamental Documents by or through its officers, agents, or employees and
neither the Agent, the Fronting Bank nor their respective officers, agents or
employees shall be liable to the Lenders or any of them for any action taken or
omitted to be taken in good faith, nor be responsible to the Lenders or to any
of them for the consequences of any oversight or error of judgment, or for any
loss, unless the same shall happen through its gross negligence or willful
misconduct. The Agent, the Fronting Bank and their respective directors,
officers, agents, and employees shall in no event be liable to the Lenders or to
any of them for any action taken or omitted to be taken by it pursuant to
instructions received by it from the Lenders or in reliance upon the advice of
counsel selected by it with reasonable care. Without limiting the foregoing,
neither the Agent, the Fronting Bank nor any of their respective directors,
officers, employees, or agents shall be responsible to any of the Lenders for
the due execution, validity, genuineness, effectiveness, sufficiency, or
enforceability of, or for any statement, warranty, or representation in, or for
the perfection of any security interest contemplated by, this Credit Agreement
or any related agreement, document or order, or shall be required to ascertain
or to make any inquiry concerning the performance or observance by the Borrower
or any Credit Party of the terms, conditions, covenants, or agreements of this
Credit Agreement or any related agreement or document.
(b) Neither the Agent, as agent for the Lenders hereunder, nor any
of its directors, officers, employees, or agents shall have any responsibility
to the Borrower or any other Credit Party on account of the failure or delay in
performance or breach by any of the Lenders of any of their respective
obligations under this Credit Agreement or the Notes or any related agreement or
document or in connection herewith or therewith.
(c) The Agent, as agent for the Lenders hereunder, shall be
entitled to rely on any communication, instrument, or document reasonably
believed by it to be genuine or correct and to have been signed or sent by a
Person or Persons believed by it to be the proper Person or Persons, and it
shall be entitled to rely on advice of legal counsel, independent public
accountants, and other professional advisers and experts selected by it.
SECTION 12.6. REIMBURSEMENT AND INDEMNIFICATION.
Each of the Lenders agrees (i) to reimburse the Agent in accordance
with such Lender's Percentage, for any expenses and fees incurred for the
benefit of the Lenders under the Fundamental Documents, including, without
limitation, counsel
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fees and compensation of agents and employees paid for services rendered on
behalf of the Lenders, and any other expense incurred in connection with the
operations or enforcement thereof not reimbursed by the Borrower, (ii) to
indemnify and hold harmless the Agent and any of its directors, officers,
employees, or agents, on demand, in accordance with each Lender's Percentage,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses, or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by, or asserted
against it or any of them in any way relating to or arising out of the
Fundamental Documents or any action taken or omitted by it or any of them under
the Fundamental Documents to the extent not reimbursed by the Borrower or any
other Credit Party (except such as shall result from their gross negligence or
willful misconduct) and (iii) to indemnify and hold harmless the Fronting Bank
and any of its directors, officers, employees, or agents, on demand, in the
amount of its Percentage, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs expenses or
disbursements of any kind or nature whatsoever which may be imposed on, incurred
by, or asserted against it or any of them in any way relating to or arising out
of the issuance of any Letters of Credit or the failure to issue Letters of
Credit if such failure or issuance was at the direction of Required Lenders
(except as shall result from the gross negligence or willful misconduct of the
Person to be reimbursed, indemnified or held harmless, as applicable). To the
extent indemnification payments made by the Lenders pursuant to this Section
12.6 are subsequently recovered by the Agent from a Credit Party, the Agent will
promptly refund such previously paid indemnity payments to the Lenders.
SECTION 12.7. RIGHTS OF AGENT.
It is understood and agreed that the Agent shall have the same
rights and powers as a Lender hereunder (including the right to give such
instructions) as the other Lenders and may exercise such rights and powers, as
well as its rights and powers under other agreements and instruments to which it
is or may be party, and engage in other transactions with any Credit Party, as
though it were not the Agent of the Lenders or the Fronting Bank under this
Credit Agreement.
SECTION 12.8. INDEPENDENT INVESTIGATION BY LENDERS.
Each of the Lenders acknowledges that it has decided to enter into
this Credit Agreement and to make the Loans and participate in the Letters of
Credit hereunder based on its own analysis of the transactions contemplated
hereby and of the creditworthiness of the Credit Parties and agrees that the
Agent and the Fronting Bank shall bear no responsibility therefor.
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SECTION 12.9. EXECUTION BY AGENT OF SECURITY DOCUMENTATION ON
BEHALF OF THE LENDERS.
The Agent hereby agrees to expressly indicate in all the security
documentation (including the UCC-1 Financing Statements, Copyright Security
Agreement, Trademark Security Agreement, Pledgeholder Agreements and any payment
instructions) that it obtains or executes that it is doing such on behalf of the
Lenders.
SECTION 12.10. AGREEMENT OF REQUIRED LENDERS.
Upon any occasion requiring or permitting an approval, consent,
waiver, election or other action on the part of the Required Lenders, action
shall be taken by the Agent for and on behalf or for the benefit of all Lenders
upon the direction of the Required Lenders and any such action shall be binding
on all Lenders. No amendment, modification, consent or waiver shall be
effective except in accordance with the provisions of Section 13.10 hereof.
SECTION 12.11. NOTICE OF TRANSFER.
The Agent may deem and treat any Lender which is a party to this
Credit Agreement as the owner of such Lender's respective portions of the Loans
and participations in Letters of Credit for all purposes, unless and until a
written notice of the assignment or transfer thereof executed by any such Lender
shall have been received by the Agent and become effective in accordance with
Section 13.3 hereof.
SECTION 12.12. SUCCESSOR AGENT.
The Agent may resign at any time by giving written notice thereof to
the Lenders and the Borrower, but such resignation shall not become effective
until acceptance by a successor Agent of its appointment pursuant hereto. Upon
any such resignation, the retiring Agent shall promptly appoint a successor
Agent from among the Lenders which is experienced and sophisticated in
entertainment industry lending, provided that such replacement is reasonably
acceptable (as evidenced in writing) to the Borrower and the Required Lenders.
If no successor Agent shall have been so appointed by the retiring Agent and
shall have accepted such appointment, within 30 days after the retiring Agent's
giving of notice of resignation, the Borrower may appoint a successor Agent
(which successor may be replaced by the Required Lenders; provided that such
replacement is experienced and is sophisticated in entertainment industry
lending and reasonably acceptable to the Borrower), which shall be either a
Lender or a commercial bank organized under the laws of the United States of
America or of any State thereof and having a combined capital and surplus of at
least $250,000,000 and which is experienced and sophisticated in entertainment
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industry lending. Upon the acceptance of any appointment as Agent hereunder by
a successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Credit Agreement, the other Fundamental Documents and any other credit
documentation. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article 12 shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent under this Credit Agreement.
13. MISCELLANEOUS
SECTION 13.1. NOTICES.
Notices and other communications provided for herein shall be in
writing and shall be delivered or mailed (or in the case of facsimile
communication, if by telegram, delivered to the telegraph company and, if by
telex, graphic scanning or other telegraphic or facsimile communications
equipment of the sending party hereto, delivered by such equipment) addressed,
if to the Agent or Chemical Bank, to it at 270 Park Avenue, New York, New York
10017, Attn: John J. Huber III, facsimile no.: (212) 270-2625, with a copy to
Chase Securities, Inc., 1800 Century Park East, Suite 400, Los Angeles,
California 90067, Attn: David Shaheen or if to any Credit Party at 11601
Wilshire Boulevard, 21st floor, Los Angeles, California, 90025, Attn: Donald
Kushner, facsimile no.: (310) 445-1142 or if to a Lender, to it at its address
set forth on the signature page, or such other address as such party may from
time to time designate by giving written notice to the other parties hereunder.
Any failure of the Agent or a Lender giving notice pursuant to this Section
13.1, to provide a courtesy copy to a party as provided herein, shall not affect
the validity of such notice. All notices and other communications given to any
party hereto in accordance with the provisions of this Credit Agreement shall be
deemed to have been given on the fifth Business Day after the date when sent by
registered or certified mail, postage prepaid, return receipt requested, if by
mail, or when delivered to the telegraph company, charges prepaid, if by
telegram, or upon receipt by such party, if by any telegraphic or facsimile
communications equipment, in each case addressed to such party as provided in
this Section 13.1 or in accordance with the latest unrevoked written direction
from such party.
SECTION 13.2. SURVIVAL OF AGREEMENT, REPRESENTATIONS AND
WARRANTIES, ETC.
All warranties, representations and covenants made by any of the
Credit Parties herein or in any certificate or other instrument delivered by it
or on its behalf in connection with
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this Credit Agreement shall be considered to have been relied upon by the Agent
and the Lenders and, except for any terminations, amendments, modifications or
waivers thereof in accordance with the terms hereof, shall survive the making of
the Loans and issuance of the Letters of Credit herein contemplated and the
execution and delivery to the Agent of the Notes regardless of any investigation
made by the Agent or the Lenders or on their behalf and shall continue in full
force and effect so long as any amount due or to become due hereunder is
outstanding and unpaid and so long as the Letter of Credit remains outstanding
and so long as the Commitments have not been terminated. All statements in any
such certificate or other instrument shall constitute representations and
warranties by the Credit Parties hereunder.
SECTION 13.3. SUCCESSORS AND ASSIGNS; SYNDICATIONS; LOAN SALES;
Participations.
(a) Whenever in this Credit Agreement any of the parties hereto is
referred to, such reference shall be deemed to include the successors and
assigns of such party (PROVIDED, HOWEVER, that neither the Borrower nor any
other Credit Party may assign its rights hereunder without the prior written
consent of all the Lenders), and all covenants, promises and agreements by or on
behalf of any of the Credit Parties which are contained in this Credit Agreement
shall inure to the benefit of the successors and assigns of the Lenders.
(b) Each of the Lenders may (but only with the prior written
consent of the Agent, which consent shall not be unreasonably withheld) assign
to an Eligible Assignee all or a portion of its interests, rights and
obligations under this Credit Agreement (including, without limitation, all or a
portion of its Commitment and the same portion of all Loans at the time owing to
it and the Notes held by it and its obligations and rights with regard to any
Letter of Credit); PROVIDED, HOWEVER, that (i) each assignment shall be of a
constant, and not a varying, percentage of the assigning Lender's rights and
obligations under this Credit Agreement, (ii) the parties to each such
assignment shall execute and deliver to the Agent, for its acceptance and
recording in the Register (as defined below), an Assignment and Acceptance,
together with any Note or Notes subject to such assignment and a processing and
recordation fee of $2,000 to be paid to the Agent by the assigning Lender and
(iii) an assignment involving a participation in any Letter of Credit shall
require the consent of the Fronting Bank, as the case may be, which shall not be
unreasonably withheld. Upon such execution, delivery, acceptance and recording,
from and after the effective date specified in each Assignment and Acceptance,
which effective date shall be not earlier than five Business Days after the date
of acceptance and recording by the Agent, (x) the assignee thereunder shall be a
party hereto and, to the extent
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provided in such Assignment and Acceptance, have the rights and obligations of a
Lender hereunder and (y) the assigning Lender thereunder shall, to the extent
provided in such Assignment and Acceptance, be released from its obligations
under this Credit Agreement except that notwithstanding such assignment any
rights and remedies available to the Borrower for any breaches by such assigning
Lender of its obligations hereunder while a Lender shall be preserved after such
assignment and such Lender shall not be relieved of any liability to the
Borrower due to any such breach (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of the assigning Lender's
rights and obligations under this Credit Agreement, such assigning Lender shall
cease to be a party hereto).
(c) Notwithstanding the other provisions of this Section 13.3, each
Lender may at any time make an assignment of its interests, rights and
obligations under this Credit Agreement to (i) any Affiliate of such Lender or
(ii) any other Lender hereunder, provided that after giving effect to such
assignment, the assignee's Percentage shall not exceed 50%.
(d) By executing and delivering an Assignment and Acceptance, the
assigning Lender thereunder and the assignee thereunder confirm to and agree
with each other and the other parties hereto as follows: (i) other than the
representation and warranty that it is the legal and beneficial owner of the
interest being assigned thereby free and clear of any adverse claim, the
assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Credit Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the Fundamental
Documents or any other instrument or document furnished pursuant hereto or
thereto; (ii) such assignor Lender makes no representation or warranty and
assumes no responsibility with respect to the financial condition of the Credit
Parties or the performance or observance by the Credit Parties of any of their
obligations under the Fundamental Documents; (iii) such assignee confirms that
it has received a copy of this Credit Agreement, together with copies of the
most recent financial statements delivered pursuant to Sections 5.1(a) and
5.1(b) (or if none of such financial statements shall have then been delivered,
then copies of the financial statements referred to in Section 3.5 hereof) and
such other documents and information as it has deemed appropriate to make its
own credit analysis and decision to enter into such Assignment and Acceptance;
(iv) such assignee will, independently and without reliance upon the assigning
Lender and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not taking
action under this Credit Agreement; (v) such assignee appoints and authorizes
the Agent to take such action as the Agent on its behalf and to exercise such
powers under this Credit Agreement as are delegated to the Agent
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by the terms hereof, together with such powers as are reasonably incidental
thereto; and (vi) such assignee agrees that it will be bound by the provisions
of this Credit Agreement and will perform in accordance with their terms all of
the obligations which by the terms of this Credit Agreement are required to be
performed by it as a Lender.
(e) The Agent shall maintain at its address at which notices are to
be given to it pursuant to Section 13.1 a copy of each Assignment and Acceptance
and a register for the recordation of the names and addresses of the Lenders and
the Commitments of, and principal amount of the Loans owing to, each Lender from
time to time (the "Register"). The entries in the Register shall be conclusive,
in the absence of manifest error, and the Credit Parties, the Agent and the
Lenders may treat each Person whose name is recorded in the Register as a Lender
hereunder for all purposes of the Fundamental Documents. The Register shall be
available for inspection by the Borrower or any Lender at any reasonable time
and from time to time upon reasonable prior notice.
(f) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an assignee together with any Notes subject to such
assignment, and the processing and recordation fees the Agent shall, if such
Assignment and Acceptance has been completed and is in the form of Exhibit K
hereto, (i) accept such Assignment and Acceptance, (ii) record
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the information contained therein in the Register and (iii) give prompt written
notice thereof to the Borrower. Within five (5) Business Days after receipt of
the notice, the Borrower, at its own expense, shall execute and deliver to the
Lender, in exchange for the surrendered Notes, new Notes to the order of such
assignee in an amount equal to the Commitments assumed by it pursuant to such
Assignment and Acceptance and new Notes to the order of the assigning Lender in
an amount equal to the Commitments retained by it hereunder. Such new Notes
shall be in an aggregate principal amount equal to the aggregate principal
amount of such retained Commitment, shall be dated the date of the surrendered
Notes and shall otherwise be in substantially the form of Exhibit A hereto. In
addition the Credit Parties will promptly, at their own expense, execute such
amendments to the Fundamental Documents to which it is a party and such
additional documents, and take such other actions as the Agent or the assignee
Lender may reasonably request in order to give such assignee Lender the full
benefit of the Liens contemplated by the Fundamental Documents.
(g) Each of the Lenders may without the consent of the Credit
Parties sell participations to one or more banks or other entities in all or a
portion of its rights and obligations under this Credit Agreement (including,
without limitation, all or a portion of its Commitment and the Loans owing to it
and the Note or Notes held by it); PROVIDED, HOWEVER, that (i) any such
Lender's obligations under this Credit Agreement shall remain unchanged, (ii)
such participant shall not be granted any voting rights under this Credit
Agreement, except with respect to proposed changes to interest rates, amount of
Commitments, final maturity of Loans, releases of all or substantially all the
Collateral and fees (as applicable to such participant), (iii) any such Lender
shall remain solely responsible to the other parties hereto for the performance
of such obligations, (iv) the participating banks or other entities shall be
entitled to the cost protection provisions contained in Sections 2.9, 2.10 and
2.13(e) hereof but a participant shall not be entitled to receive pursuant to
such provisions an amount larger than its share of the amount to which the
Lender granting such participation would have been entitled and (v) the Credit
Parties, the Agent and the other Lenders shall continue to deal solely and
directly with such Lender in connection with such Lender's rights and
obligations under this Credit Agreement.
(h) The Lenders may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
13.3, disclose to the assignee or participant or proposed assignee or
participant, any information relating to the Credit Parties furnished to the
Agent by or on behalf of the Credit Parties; provided that prior to any such
disclosure, each such assignee or participant or proposed assignee or
participant shall agree, by executing a confidentiality letter in form and
substance equivalent to the confidentiality letter executed by
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the Lenders in connection with information received by such Lenders relating to
this transaction to preserve the confidentiality of any confidential information
relating to the Borrower received from such Lender.
(i) Any assignment pursuant to paragraph (a) or (b) of this Section
13.3 shall constitute an amendment of the Schedule of Commitments as of the
effective date of such assignment.
(j) The Borrower consents that any Lender may at any time and from
time to time pledge or otherwise grant a security interest in any Loan or in any
of the Notes evidencing such Loans (or any part thereof) to any Federal Reserve
Bank.
SECTION 13.4. EXPENSES; DOCUMENTARY TAXES.
Whether or not the transactions hereby contemplated shall be
consummated, the Borrower agrees to pay all reasonable out-of-pocket expenses
incurred by the Agent or Chase Securities Inc. in connection with performance of
due diligence by the Agent in connection with the transactions hereby
contemplated and the syndication, preparation, execution, delivery, waiver or
modification and administration of this Credit Agreement and any other
documentation contemplated hereby, the Notes and the making of the Loans,
including but not limited to any internally allocated audit costs, the
reasonable fees and disbursements of Morgan, Lewis & Bockius LLP, counsel for
the Agent, and any other counsel that the Agent shall retain, fees and expenses
of technical or other consultants engaged by the Agent to the extent previously
approved by the Borrower. Such payments shall be made on the date of execution
of this Credit Agreement and thereafter on demand. In addition, the Borrower
agrees to pay all reasonable out-of-pocket expenses incurred by the Lenders in
the enforcement or protection of the rights of the Lenders in connection with
this Credit Agreement or the Notes, and with respect to any action which may be
instituted by any Person other than the Credit Parties against any Lender in
respect of the foregoing, or as a result of any transaction, action or
non-action arising from the foregoing, including but not limited to the
reasonable fees and disbursements of any counsel for the Lenders. Such payments
shall be made on demand after the date of execution of this Credit Agreement.
The Borrower agrees that it shall indemnify the Agent and the Lenders from and
hold them harmless against any documentary taxes, assessments or charges made by
any Governmental Authority by reason of the execution and delivery of this
Credit Agreement, the Notes or the issuance of Letters of Credit. The
obligations of the Borrower under this Section 13.4 shall survive the
termination of this Credit Agreement and/or the payment of the Loans and/or the
expiration of the Letters of Credit.
SECTION 13.5. INDEMNIFICATION OF LENDERS.
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The Borrower agrees (a) to indemnify and hold harmless the Lenders
(to the full extent permitted by law) from and against any and all claims,
demands, losses, judgments and liabilities (including liabilities for penalties)
of whatsoever nature, and (b) to pay to the Agent an amount equal to the amount
of all costs and expenses, including reasonable legal fees and disbursements,
and with regard to both (a) and (b) growing out of or resulting from any
litigation or other proceedings relating to the Collateral, this Credit
Agreement, the Copyright Security Agreements the Trademark Security Agreement
and the Pledgeholder Agreements, the making of the Loans, any attempt to audit,
inspect, protect or sell the Collateral, or the administration and enforcement
or exercise of any right or remedy granted to the Lenders hereunder or
thereunder but excluding therefrom all costs arising out of or resulting from
(i) the gross negligence or willful misconduct of the Lender or the Agent
claiming indemnification hereunder, (ii) litigation between the Borrower and the
Agent or the Lenders in connection with the Fundamental Documents or in any way
relating to the transactions contemplated hereby if, after final non-appealable
judgment, the Agent or the Lenders are not the prevailing party or parties in
such litigation and (iii) litigation among the Lenders or between the Agent and
the Lenders in connection with the Fundamental Documents or in any way relating
to the transactions contemplated hereby. The foregoing indemnity agreement
includes any reasonable costs incurred by the Lenders in connection with any
action or proceeding which may be instituted in respect of the foregoing by the
Agent, or by any other Person either against the Lenders or in connection with
which any officer or employee of the Lenders is called as a witness or deponent,
including, but not limited to, the reasonable fees and disbursements of Morgan,
Lewis & Bockius LLP, counsel to the Agent, and any out-of-pocket costs incurred
by the Lenders in appearing as a witness or in otherwise complying with legal
process served upon them. In no event shall the Lenders be liable to the
Borrower for any matter or thing in connection with this Credit Agreement other
than to make Loans and account for moneys actually received by them in
accordance with the terms hereof.
Whenever the provisions of this Credit Agreement or any other
Fundamental Document provide that, if any Credit Party shall fail to do any act
or thing which it has covenanted to do hereunder or any representation or
warranty of any of the Credit Parties shall be breached, the Agent may (but
shall not be obligated to) do the same or cause it to be done or remedy any such
breach and the Agent does the same or causes it to be done, there shall be added
to the Obligations hereunder the cost or expense incurred by the Agent in so
doing, and any and all amounts expended by the Agent in taking any such action
shall be repayable to it upon its demand therefor and shall bear interest at 4%
in excess of the Alternate Base Rate from time to time in effect from the date
advanced to the date of repayment.
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All indemnities contained in this Section 13.5 shall survive the
expiration or earlier termination of this Credit Agreement and shall inure to
the benefit of any Person who was a Lender notwithstanding such Person's
assignment of all its Loans and Commitments.
SECTION 13.6. CHOICE OF LAW.
THIS CREDIT AGREEMENT AND THE NOTES SHALL IN ALL RESPECTS BE
CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK
WHICH ARE APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH
STATE AND, IN THE CASE OF PROVISIONS RELATING TO INTEREST RATES, ANY APPLICABLE
LAW OF THE UNITED STATES OF AMERICA. EACH LETTER OF CREDIT SHALL BE GOVERNED
BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OR RULES
DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES ARE DESIGNATED,
THE UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (1993 REVISION),
INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM CUSTOMS")
AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF
NEW YORK.
SECTION 13.7. WAIVER OF JURY TRIAL.
TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE
WAIVED, EACH CREDIT PARTY HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT
(WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN
ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION
ARISING OUT OF OR BASED UPON THIS CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF
OR ANY FUNDAMENTAL DOCUMENT, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. EACH CREDIT PARTY
ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE LENDERS THAT THE PROVISIONS OF
THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDERS HAVE
RELIED, ARE RELYING AND WILL RELY IN ENTERING INTO THIS CREDIT AGREEMENT AND ANY
OTHER FUNDAMENTAL DOCUMENT. THE AGENT OR ANY LENDER MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION 13.7 WITH ANY COURT AS WRITTEN EVIDENCE OF
THE CONSENT OF THE BORROWER TO THE WAIVER OF ITS RIGHTS TO TRIAL BY JURY.
SECTION 13.8. NO WAIVER.
No failure on the part of the Agent or any Lender or the Fronting
Bank to exercise, and no delay in exercising, any right, power or remedy
hereunder, under the Notes or any other Fundamental Document or with regards to
Letters of Credit shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
All remedies hereunder are cumulative and are not exclusive of any other
remedies provided by law.
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SECTION 13.9. EXTENSION OF PAYMENT DATE.
Should any payment of principal of or interest on the Notes or any
other amount due hereunder become due and payable on a day other than a Business
Day, the due date of such payment thereof shall be extended to the next
succeeding Business Day and, in the case of principal, interest shall be payable
thereon at the rate herein specified during such extension.
SECTION 13.10. AMENDMENTS, ETC.
No modification, amendment or waiver of any provision of this Credit
Agreement, and no consent to any departure by the Credit Parties herefrom, shall
in any event be effective unless the same shall be in writing and signed by the
Required Lenders and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given; PROVIDED, HOWEVER,
that no such modification, waiver, consent or amendment shall, without the
written consent of all of the Lenders, (i) change the Commitment of any Lender,
(ii) amend or modify any provision of this Credit Agreement which provides for
the unanimous consent or approval of the Lenders, (iii) release any Collateral
or any of the Pledged Securities (except as contemplated herein) or release any
Guarantor from its obligations hereunder, (iv) alter the fixed scheduled
maturity or principal amount of any Loan, or the rate of interest payable
thereon, or the rate at which the Commitment Fees accrue or the fixed scheduled
maturity or amount of any other payment required to be made under this Credit
Agreement, (v) subordinate the Obligations hereunder to other Indebtedness or
subordinate the security interests of the Lenders in the Collateral except as
permitted by Section 11.1, (vi) amend the definition of "Required Lenders,"
(vii) amend the definition of "Borrowing Base" or any of the defined terms used
therein, (viii) amend the definition of "Applicable Margin", (ix) amend the
definition of "Collateral," (x) amend or modify Sections 2.1(c), 2.15(a)(i),
2.9(d) or 2.15(i) or (xi) amend this Section 13.10. No such amendment or
modification may adversely affect the rights and obligations of the Agent
hereunder without its prior written consent or the rights and obligations of the
Fronting Bank without its prior written consent. No notice to or demand on any
of the Credit Parties shall entitle such Credit Party to any other or further
notice or demand in the same, similar or other circumstances. Each holder of a
Note shall be bound by any amendment, modification, waiver or consent authorized
as provided herein, whether or not a Note shall have been marked to indicate
such amendment, modification, waiver or consent and any consent by any holder of
a Note shall bind any Person subsequently acquiring a Note, whether or not a
Note is so marked.
SECTION 13.11. SEVERABILITY.
Any provision of this Credit Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or
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<PAGE>
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
SECTION 13.12. SERVICE OF PROCESS.
EACH CREDIT PARTY (EACH A "SUBMITTING PARTY") HEREBY IRREVOCABLY
SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK AND TO
THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT
OF NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT
OF OR BASED UPON THIS CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF BROUGHT BY
THE AGENT OR A LENDER. THE SUBMITTING PARTY TO THE EXTENT PERMITTED BY
APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS
A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH
COURTS, ANY CLAIM THAT IT IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE
ABOVE-NAMED COURTS, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR
EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT
FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THIS
CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF MAY NOT BE ENFORCED IN OR BY SUCH
COURT, AND (B) HEREBY WAIVES THE RIGHT TO ASSERT IN ANY SUCH ACTION, SUIT OR
PROCEEDING ANY OFFSETS OR COUNTERCLAIMS EXCEPT COUNTERCLAIMS THAT ARE COMPULSORY
OR OTHERWISE ARISE FROM THE SAME SUBJECT MATTER. THE SUBMITTING PARTY HEREBY
CONSENTS TO SERVICE OF PROCESS BY MAIL AT ITS ADDRESS TO WHICH NOTICES ARE TO BE
GIVEN PURSUANT TO SECTION 13.1 HEREOF. THE SUBMITTING PARTY AGREES THAT ITS
SUBMISSION TO JURISDICTION AND CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR
THE EXPRESS BENEFIT OF THE AGENT, THE FRONTING BANK AND THE LENDERS. FINAL
JUDGMENT AGAINST THE SUBMITTING PARTY IN ANY SUCH ACTION, SUIT OR PROCEEDING
SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN ANY OTHER JURISDICTION (A) BY SUIT,
ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE
CONCLUSIVE EVIDENCE OF THE FACT AND THE AMOUNT OF INDEBTEDNESS OR LIABILITY OF
THE SUBMITTING PARTY THEREIN DESCRIBED OR (B) IN ANY OTHER MANNER PROVIDED BY OR
PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION, PROVIDED, HOWEVER, THAT THE
AGENT, THE FRONTING BANK OR A LENDER MAY AT ITS OPTION BRING SUIT, OR INSTITUTE
OTHER JUDICIAL PROCEEDINGS AGAINST THE SUBMITTING PARTY OR ANY OF ITS ASSETS IN
ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE
THE SUBMITTING PARTY OR SUCH ASSETS MAY BE FOUND.
SECTION 13.13. HEADINGS.
Section headings used herein and the Table of Contents are for
convenience only and are not to affect the construction of or be taken into
consideration in interpreting this Credit Agreement.
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<PAGE>
SECTION 13.14. EXECUTION IN COUNTERPARTS.
This Credit Agreement may be executed in any number of counterparts,
each of which shall constitute an original, but all of which taken together
shall constitute one and the same instrument.
SECTION 13.15. SUBORDINATION OF INTERCOMPANY ADVANCES.
(a) Each Credit Party hereby agrees that any Indebtedness or other
intercompany receivables or advances of any other Credit Party, directly or
indirectly, in favor of such Credit Party of whatever nature at any time
outstanding shall be completely subordinate in right of payment to the prior
payment in full of the Obligations, and that no payment on any such Indebtedness
shall be made (i) except intercompany receivables and advances permitted
pursuant to the terms hereof may be repaid in the ordinary course of business so
long as no Default or Event of Default, shall have occurred and be continuing
and (ii) except as specifically consented to by all the Lenders in writing,
until the prior payment in full all Obligations and termination of the
Commitments.
(b) In the event that any payment on any such indebtedness shall be
received by such Credit Party other than as permitted by Section 13.15(a) before
payment in full of all Obligations and termination of the Commitments, such
Credit Party shall receive such payments and hold the same in trust for, and
shall immediately pay over to, the Agent on behalf of the Lenders all such sums
to the extent necessary so that the Lenders shall have been paid all Obligations
owed or which may become owing.
SECTION 13.16. CONFIDENTIALITY.
Each of the Lenders understands that the information furnished to it
pursuant to this Credit Agreement will be received by it prior to the time that
such information shall have been made public, and each of the Lenders hereby
agrees that it will keep, and will direct its officers and employees to keep,
all the information provided to it pursuant to this Credit Agreement
confidential prior to its becoming public (through publication other than as a
result of action by one of the Lenders in violation of this Section 13.16)
subject, however, to (i) disclosure to officers, directors, employees,
representatives, agents, auditors, consultants, advisors, lawyers and affiliates
of such Lender, in the ordinary course of business who have been made aware of
the confidential nature of the information; (ii) disclosure to such officers,
directors, employees, agents and representatives of a prospective assignee or
participant as need to know such information in connection with the evaluation
of a possible participation in the Loans hereunder (who agrees in writing to be
bound by this provision
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<PAGE>
will be informed of the confidential nature of the material); (iii) the
obligations of the Lenders or a participant under Applicable Law, or pursuant to
subpoenas or other legal process, to make information available to governmental
agencies and examiners or to others and the right of the Lenders to use such
information in proceedings to enforce their rights and remedies hereunder or
under any other Fundamental Document or in any proceeding against the Lenders in
connection with this Agreement or under any other Fundamental Document or the
transactions contemplated hereunder; (iv) disclosure to the extent such
information (A) becomes publicly available other than as a result of a breach of
this Credit Agreement or (B) becomes available to a Lender or a participant on a
non-confidential basis, not in breach of any agreement or other obligation to
the Borrower, from a source other than the Borrower; (v) disclosure to the
extent the Borrower shall have consented to such disclosure in writing; or (vi)
each Lender's or participant's right to make information available (A) to any
corporation controlled by such Lender or participant or under common control
with such Lender or participant in connection with the sale of a participation
by such Lender or participant to such other corporation provided such transferee
agrees in writing to be bound by this provision or (B) in accordance with
Section 13.3(h) herein.
IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be duly executed as of the day and the year first written.
BORROWER:
THE KUSHNER-LOCKE COMPANY
By_______________________________
Name:
Title:
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<PAGE>
GUARANTORS:
KL PRODUCTIONS, INC.
KL INTERNATIONAL, INC.
ACME PRODUCTIONS, INC.
KUSHNER-LOCKE PRODUCTIONS, INC.
THE RELATIVES COMPANY
POST AND PRODUCTION SERVICES, INC.
L-K ENTERTAINMENT, INC.
INTERNATIONAL COURTROOM NEWS SERVICE
FAMILY PICTURES, INC.
TROPICAL HEAT, INC.
KL SYNDICATION, INC.
ANDRE PRODUCTIONS, INC.
TKLC NO.2, INC.
TWILIGHT ENTERTAINMENT, INC.
KLC FILMS, INC.
KL FEATURES, INC.
KLF GUILD CO.
KLF DEVELOPMENT CO.
KLTV GUILD CO.
KLTV DEVELOPMENT CO.
KUSHNER-LOCKE INTERNATIONAL, INC.
KL INTERACTIVE MEDIA, INC.
By______________________________
Name: Donald Kushner
Title: Authorized Signatory for each of
the foregoing
KLC/NEW CITY
By its General Partner
THE KUSHNER-LOCKE COMPANY
By______________________________
Name:
Title:
<PAGE>
LENDERS:
CHEMICAL BANK, individually and
as Agent
By_______________________________
Name:
Title:
Address: 270 Park Avenue
New York, NY 10017
Attn: John J. Huber III
DE NATIONALE INVESTERINGSBANK, N.V.
By________________________________
Name:
Title:
By________________________________
Name:
Title:
Address: 4 Carnegieplein
2501 BH The Hague
The Netherlands
The KG251
Attn: Lars van't Hoenderdaal
METROBANK
By________________________________
Name:
Title
Address: 10900 Wilshire Boulevard
Los Angeles, CA 90024
Attn: D. Jeffrey Andrick
<PAGE>
SCHEDULE OF 1
SCHEDULE OF COMMITMENTS
Revolving
---------
Lender Credit Loan Total
------ ----------- -----
Chemical Bank $15,000,000 $15,000,000
De Nationale $15,000,000 $15,000,000
Investeringsbank, N.V.
Metrobank $10,000,000 $10,000,000
<PAGE>
Schedule 2
APPROVED ACCOUNT DEBTORS
[LIST PROVIDED BY THE BORROWER]
<PAGE>
Schedule 3
APPROVED COUNTRIES
Country List A Country List B
- -------------- --------------
Austria Brazil
Australia Brunei
Belgium Chile
Canada Greece
Denmark Iceland
Finland Indonesia
France Israel
Germany Liechtenstein
Hong Kong Malaysia
Ireland Mexico
Italy Singapore
Japan South Africa
Luxembourg South Korea
Monaco Turkey
Netherlands Thailand
New Zealand
Norway
Portugal
Spain
Sweden
Switzerland
Taiwan
United Kingdom
<PAGE>
Schedule 4
GUARANTORS
----------
KL PRODUCTIONS, INC.
KL INTERNATIONAL, INC.
ACME PRODUCTIONS, INC.
KUSHNER-LOCKE PRODUCTIONS, INC.
THE RELATIVES COMPANY
POST AND PRODUCTION SERVICES, INC.
L-K ENTERTAINMENT, INC.
INTERNATIONAL COURTROOM NEWS SERVICE
FAMILY PICTURES, INC.
TROPICAL HEAT, INC.
KL SYNDICATION, INC.
ANDRE PRODUCTIONS, INC.
TKLC NO.2, INC.
TWILIGHT ENTERTAINMENT, INC.
KLC FILMS, INC.
KL FEATURES, INC.
KLF GUILD CO.
KLF DEVELOPMENT CO.
KLTV GUILD CO.
KLTV DEVELOPMENT CO.
KUSHNER-LOCKE INTERNATIONAL, INC.
KL INTERACTIVE MEDIA, INC.
KLC/NEW CITY, a California general partnership
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS............................................................ 2
2. THE LOANS.............................................................. 33
SECTION 2.1. Loans.................................................. 33
SECTION 2.2. Making of Loans........................................ 34
SECTION 2.3. Notes.................................................. 36
SECTION 2.4. Interest on Notes...................................... 36
SECTION 2.5. Commitment Fees and Other Fees......................... 37
SECTION 2.6. Optional and Mandatory Termination or Reduction of
Commitments.................................................... 37
SECTION 2.7. Default Interest; Alternate Rate of Interest........... 38
SECTION 2.8. Continuation and Conversion of Loans................... 39
SECTION 2.9. Prepayment of Loans; Reimbursement of Lenders.......... 40
SECTION 2.10. Change in Circumstances............................... 43
SECTION 2.11. Change in Legality.................................... 47
SECTION 2.12. Manner of Payments.................................... 47
SECTION 2.13. United States Withholding............................. 48
SECTION 2.14. Interest Adjustments.................................. 50
SECTION 2.15. Letters of Credit..................................... 50
SECTION 2.16. Provisions Relating to the Borrowing Base............. 56
3. REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES....................... 58
SECTION 3.1. Corporate Existence and Power.......................... 58
SECTION 3.2. Corporate Authority and No Violation................... 58
SECTION 3.3. Governmental Approval.................................. 59
SECTION 3.4. Binding Agreements..................................... 59
SECTION 3.5. Financial Statements................................... 60
SECTION 3.6. No Material Adverse Change............................. 60
SECTION 3.7. Ownership of Pledged Securities, etc................... 61
SECTION 3.8. Copyrights, Trademarks and Other Rights................ 61
SECTION 3.9. Fictitious Names....................................... 62
SECTION 3.10. Title to Properties.................................... 62
SECTION 3.11. Places of Business..................................... 62
SECTION 3.12. Litigation............................................. 63
SECTION 3.13. Federal Reserve Regulations............................ 63
SECTION 3.14. Investment Company Act................................. 63
SECTION 3.15. Taxes.................................................. 64
SECTION 3.16. Compliance with ERISA.................................. 64
SECTION 3.17. Agreements............................................. 64
SECTION 3.18. Security Interest; Other Security...................... 65
SECTION 3.19. Disclosure............................................. 65
SECTION 3.20. Distribution Rights.................................... 66
SECTION 3.21. Environmental Liabilities.............................. 66
SECTION 3.22. Pledged Securities..................................... 67
SECTION 3.23. Compliance with Laws................................... 67
4. CONDITIONS OF LENDING.................................................. 68
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<PAGE>
SECTION 4.1. Conditions Precedent to Initial Loans
or Letter of Credit............................................. 68
SECTION 4.2. Conditions Precedent to Each Loan and
Letter of Credit................................................ 73
5. AFFIRMATIVE COVENANTS.................................................. 74
SECTION 5.1. Financial Statements and Reports....................... 74
SECTION 5.2. Corporate Existence.................................... 77
SECTION 5.3. Maintenance of Properties.............................. 77
SECTION 5.4. Notice of Material Events.............................. 77
SECTION 5.5. Material Adverse Effect................................ 78
SECTION 5.6. Insurance.............................................. 79
SECTION 5.7. Production............................................. 80
SECTION 5.8. Music.................................................. 80
SECTION 5.9. Copyright.............................................. 81
SECTION 5.10. Books and Records...................................... 81
SECTION 5.11. Third Party Audit Rights............................... 82
SECTION 5.12. Observance of Agreements............................... 82
SECTION 5.13. Film Properties and Rights; Credit Parties to Act as
Pledgeholder................................................... 82
SECTION 5.14. Laboratories; No Removal.............................. 83
SECTION 5.15. Taxes and Charges; Indebtedness in Ordinary Course of
Business....................................................... 83
SECTION 5.16. Liens................................................. 84
SECTION 5.17. Cash Receipts......................................... 84
SECTION 5.18. Further Assurances; Security Interests................ 84
SECTION 5.19. Receivables Audit..................................... 85
SECTION 5.20. ERISA Compliance and Reports.......................... 85
SECTION 5.21. Environmental Laws.................................... 86
SECTION 5.22. Bank Accounts......................................... 87
SECTION 5.23. Use of Proceeds....................................... 87
SECTION 5.24. Security Agreements with the Guilds................... 87
SECTION 5.25. Uncompleted Products.................................. 88
6. NEGATIVE COVENANTS..................................................... 89
SECTION 6.1. Limitations on Indebtedness............................ 89
SECTION 6.2. Limitations on Liens................................... 90
SECTION 6.3. Limitation on Guarantees............................... 91
SECTION 6.4. Limitations on Investments............................. 91
SECTION 6.5. Restricted Payments.................................... 92
SECTION 6.6. Limitations on Leases.................................. 92
SECTION 6.7. Consolidation, Merger, Sale or Purchase of Assets, etc. 92
SECTION 6.8. Receivables............................................ 92
SECTION 6.9. Sale and Leaseback..................................... 93
SECTION 6.10. Places of Business; Change of Name..................... 93
SECTION 6.11. Limitations on Capital Expenditures.................... 93
SECTION 6.12. Transactions with Affiliates. ........................ 93
SECTION 6.13. Prohibition of Amendments or Waivers................... 93
SECTION 6.14. Consolidated Capital Base.............................. 94
SECTION 6.15. Initial Print and Advertising Expenditures............. 94
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<PAGE>
SECTION 6.16. Development Costs...................................... 94
SECTION 6.17. Overhead Expense....................................... 94
SECTION 6.18. Total Unsubordinated Liabilities to
Consolidated Capital Base Ratio................................. 94
SECTION 6.19. EBIT to Interest Expense Ratio........................ 94
SECTION 6.20. Projected Liquidity................................... 95
SECTION 6.21. No Change in Business................................. 95
SECTION 6.22. ERISA Compliance...................................... 95
SECTION 6.23. Additional Limitations on Production and
Acquisition of Product......................................... 96
SECTION 6.24. Subsidiaries.......................................... 97
SECTION 6.25. Bank Accounts......................................... 97
SECTION 6.26. Hazardous Materials................................... 97
SECTION 6.27. Use of Proceeds of Loans and Requests for Letters of
Credit......................................................... 97
SECTION 6.28. Special Production Tranche............................ 97
SECTION 6.29. Interest Rate Protection Agreements, etc.............. 98
7. EVENTS OF DEFAULT...................................................... 98
8. GRANT OF SECURITY INTEREST; REMEDIES...................................101
SECTION 8.1. Security Interests.....................................101
SECTION 8.2. Use of Collateral......................................101
SECTION 8.3. Collection Accounts....................................102
SECTION 8.4. Credit Parties to Hold in Trust........................102
SECTION 8.5. Collections, etc.......................................103
SECTION 8.6. Possession, Sale of Collateral, etc....................103
SECTION 8.7. Application of Proceeds on Default.....................105
SECTION 8.8. Power of Attorney......................................105
SECTION 8.9. Financing Statements, Direct Payments..................106
SECTION 8.10. Further Assurances.....................................106
SECTION 8.11. Termination............................................107
SECTION 8.12. Remedies Not Exclusive.................................107
SECTION 8.13. Quiet Enjoyment........................................107
SECTION 8.14. Continuation and Reinstatement.........................108
9. GUARANTY...............................................................108
SECTION 9.1. Guaranty...............................................108
SECTION 9.2. No Impairment of Guaranty, etc.........................109
SECTION 9.3. Continuation and Reinstatement, etc....................110
SECTION 9.4. Limitation on Guaranteed Amount etc....................110
10. PLEDGE................................................................111
SECTION 10.1. Pledge................................................111
SECTION 10.2. Covenant..............................................111
SECTION 10.3. Registration in Nominee Name; Denominations...........111
SECTION 10.4. Voting Rights; Dividends; etc.........................111
SECTION 10.5. Remedies Upon Default.................................112
SECTION 10.6. Application of Proceeds of Sale and Cash..............114
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<PAGE>
SECTION 10.7. Securities Act, etc...................................115
SECTION 10.8. Continuation and Reinstatement........................115
SECTION 10.9. Termination...........................................116
11. CASH COLLATERAL ACCOUNT...............................................116
SECTION 11.1. Cash Collateral Accounts..............................116
SECTION 11.2. Investment of Funds...................................116
SECTION 11.3. Grant of Security Interest............................117
SECTION 11.4. Remedies..............................................117
12. THE AGENT.............................................................118
SECTION 12.1. Administration by Agent...............................118
SECTION 12.2. Advances and Payments.................................119
SECTION 12.3. Sharing of Setoffs and Cash Collateral................120
SECTION 12.4. Notice to the Lenders.................................121
SECTION 12.5. Liability of Agent....................................121
SECTION 12.6. Reimbursement and Indemnification.....................122
SECTION 12.7. Rights of Agent.......................................122
SECTION 12.8. Independent Investigation by Lenders..................123
SECTION 12.9. Execution by Agent of Security Documentation
on behalf of the Lenders.......................................123
SECTION 12.10. Agreement of Required Lenders........................123
SECTION 12.11. Notice of Transfer...................................123
SECTION 12.12. Successor Agent......................................123
13. MISCELLANEOUS.........................................................124
SECTION 13.1. Notices...............................................124
SECTION 13.2. Survival of Agreement, Representations and
Warranties, etc................................................125
SECTION 13.3. Successors and Assigns; Syndications; Loan Sales;
Participations.................................................125
SECTION 13.4. Expenses; Documentary Taxes...........................129
SECTION 13.5. Indemnification of Lenders............................129
SECTION 13.6. CHOICE OF LAW.........................................131
SECTION 13.7. WAIVER OF JURY TRIAL..................................131
SECTION 13.8. No Waiver.............................................131
SECTION 13.9. Extension of Payment Date.............................132
SECTION 13.10. Amendments, etc.......................................132
SECTION 13.11. Severability..........................................132
SECTION 13.12. SERVICE OF PROCESS....................................133
SECTION 13.13. Headings..............................................133
SECTION 13.14. Execution in Counterparts.............................134
SECTION 13.15. Subordination of Intercompany Advances................134
SECTION 13.16. Confidentiality.......................................134
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<PAGE>
Credit, Security, Guaranty and Pledge Agreement
Schedules and Exhibits
Schedules
1 Schedule of Commitments
2 Approved Account Debtors/Allowable Amounts
3 Approved Countries
4 Guarantors
3.7(a) Credit Parties/Pledged Securities
3.7(b) Beneficial Interests
3.8(a) Items of Product; Copyrights
3.8(b) Trademarks
3.9 Fictitious Names
3.11 Principal Executive Office/Location of Collateral
3.12 Litigation
3.17 Existing Indebtedness/Material Agreements
3.21 Environmental Liabilities
3.22 Outstanding Rights re Pledged Securities
5.22 Bank Accounts
6.2 Existing Liens
6.3 Guarantees
6.4 Scheduled Investments
Exhibits
A Form of Note
B-1 Opinion of Kaye, Scholer, Fierman, Hayes & Handler, LLP counsel to
the Credit Parties
B-2 Opinion of Internal Counsel to the Credit Parties
C Form of Borrowing Base Certificate
D Form of Pledgeholder Agreement
E-1 Form of Copyright Security Agreement
E-2 Form of Copyright Security Agreement Supplement
F Form of Trademark Security Agreement
G Form of Laboratory Access Letter
H Form of Contribution Agreement
I Form of Notice of Assignment and Irrevocable Instructions
J Form of Borrowing Certificate
K Form of Assignment and Acceptance
L Form of Instrument of Assumption and Joinder
- v -
<PAGE>
EXHIBIT 23.1
The Board of Directors
The Kushner Locke Company:
We consent to the use of our reports included herein, the use of our reports
incorporated herein by reference from the September 30, 1995 Annual Report on
Form 10-K and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG Peat Marwick LLP
Los Angeles, California
July 10, 1996
