<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
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. / /
------------------------------
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)........... 631,734
Total................................. $13,515,000 $4,661
</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 $750,000 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 631,734 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 JUNE 3, 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 May
31, 1996, the closing high bid price of the Common Stock as reported on the NNM
was $1.25 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 , 1996.
LEW LIEBERBAUM & CO., INC.
The Date of this Prospectus is , 1996
<PAGE>
[PHOTOS TO COME]
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
$40,000 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 for a period
commencing and continuing
until , 2001. See "Description of
Securities." (1)
Securities Being Registered for
the Account of Selling Security
Holders.......................... 631,734 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. The Selling Security
Holders' Shares are not being underwritten
by the Underwriter.
Common Stock outstanding prior to
the offering..................... 39,896,575 shares (2)
Common Stock to be outstanding
after the offering............... shares (1)(2)
Estimated net proceeds............ $8,185,000 (1)(3)
Use of proceeds................... To repay the 5% Convertible Subordinated
Notes and for general corporate purposes.
See "Use of Proceeds."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
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 May 29, 1996, and
does not include approximately 13,538,827 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,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues.......... $ 28,006 $ 24,052 $ 42,487 $ 50,736 $ 20,407 $ 11,614 $ 29,337
Earnings (Loss) from
Operations................. 3,152 1,529 (1,807) (7,424) (835) 469 3,004
Net Earnings (Loss)......... $ 1,445 $ 244 $ (1,826) $ (6,765) $ (3,975) $ (1,003) $ 1,140
Net Earnings (Loss) Per
Common and Common
Equivalent Shares
Outstanding................ $ 0.08 $ 0.01 $ (0.06) $ (0.23) $ (0.13) $ (0.03) $ 0.03
Weighted Average Shares
Outstanding................ 17,846 20,958 28,372 29,373 31,713 31,159 35,961
</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 price per share of Common
Stock on the Effective Date. 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 $4.4 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." The Company has entered into a commitment letter
with Chemical Bank and Chase Securities Inc. ("Chase") for a $40 million
syndicated line of credit. See "The Company -- Certain Forward Looking
Statements -- Credit Facility." If the Company is unable to consummate the new
line of credit or if such sources of funds prove to be insufficient or
unavailable for any reason, the Company would 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
any increased credit line such as the proposed Chase facility 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
Company's credit agreement 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 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 commitment
letter with Chase for the proposed new syndicated line of credit contemplates
that the new facility will also include as an event 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 event of default will not occur
or that if it occurs, that the bank 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
10
<PAGE>
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 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.
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, as
the Company has shifted a significant portion of its product mix from its
traditional base of network-television programming to feature films, 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 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
11
<PAGE>
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 27,483,730 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 14,739,099 shares are issuable at or
below $1.27 per share, 6,019,632 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 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.
12
<PAGE>
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 , 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, subject to approval by the Company of certain
creative aspects of such movies, 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
14
<PAGE>
to the JACK REED movies starring Brian Dennehy. The Company has produced a
one-hour prime time pilot for ABC as a potential mid-season replacement series
entitled 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.
CERTAIN FORWARD LOOKING STATEMENTS
CREDIT FACILITY. The Company's current line of credit with Imperial Bank
provides for borrowings up to $15,000,000 based on specified percentages of
eligible domestic and international accounts and contracts receivable and net
film costs balances expiring December 31, 1996, subject to scheduled principal
reductions commencing May 31, 1996. The May 31, 1996 scheduled principal
reduction of $417,000 was extended to June 28, 1996; see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources -- Credit Facility." The line of credit is
secured by substantially all of the Company's assets, bears interest at an
annual rate of prime plus 1.25% (8.25% as of May 24, 1996) and matures on
December 31, 1996. As of May 31, 1996, the Company had drawn down $15,000,000
under this facility and had no further availability.
On April 14, 1996, the Company received a commitment letter from Chase for a
$40 million syndicated line of credit. Such line of credit will provide 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 commitment letter contemplates that the Company will from time to
time allocate a production tranche in its line of credit for the Company's
productions. Such tranche would 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. The Company anticipates closing the new credit facility
with Chase in June 1996.
In addition, Chase has agreed to fund one of the Company's productions prior
to the funding of the proposed credit facility. It is contemplated that any such
funding may be repaid through borrowings under the new credit facility once it
is implemented.
Pursuant to the commitment letter, Chase has the right to determine, for
various reasons, including changes in market conditions, changes in the results
of operations of the Company, changes in general economic conditions or changes
in the prospects of the Company, not to proceed with the new credit line. The
line of credit is also subject to Chase syndicating to other banks participation
in amounts satisfactory to Chase. Accordingly, there is no assurance that the
Company will be able to finalize the credit arrangement with Chase and, if a
credit agreement with Chase is entered into by the Company, when such agreement
will be finalized and what terms such credit agreement will contain.
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
15
<PAGE>
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
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 the production lender for the
film. 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 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
16
<PAGE>
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 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 May 24, 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.
17
<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 with the remainder of such net proceeds
to be added to working capital. 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 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.
18
<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 (through May 31, 1996).............................. 1.50 0.91 0.53 0.28
</TABLE>
On May 31, 1996, the closing high bid price for the Common Stock as reported
on the NNM was $1.25 and the closing high bid price for the Class A Warrants was
$0.44. At May 24, 1996, there were approximately 762 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.
19
<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)........ 22,099 22,099 30,091
--------- ------------- -----------
$ 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) Bank line of credit matures on December 31, 1996, subject to certain
possible required principal repayments commencing May 31, 1996, which
scheduled principal reduction was extended to June 28, 1996. The Company is
in discussions to refinance this obligation as a long-term obligation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Credit Facility" and "--
Chemical Bank."
(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,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues............. $ 28,006 $ 24,052 $ 42,487 $ 50,736 $ 20,407 $ 11,614 $ 29,337
Earnings (Loss) from
Operations.................... 3,152 1,529 (1,807) (7,424) (835) 469 3,004
Net Earnings (Loss)............ $ 1,445 $ 244 $ (1,826) $ (6,765) $ (3,975) $ (1,003) $ 1,140
Net Earnings (Loss) Per Common
and Common Equivalent Shares
Outstanding................... $ 0.08 $ 0.01 $ (0.06) $ (0.23) $ (0.13) $ (0.03) $ 0.03
Weighted Average Shares
Outstanding................... 17,846 20,958 28,372 29,373 31,713 31,159 35,961
</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 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 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.
22
<PAGE>
The Company recognized approximately $10,534,000 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 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 from 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 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.
23
<PAGE>
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. After adjusting for this write down, the overall
costs related to revenues was 81% during 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.
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
24
<PAGE>
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 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
25
<PAGE>
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.
(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.
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
26
<PAGE>
affiliates less accounts payable and accrued liabilities, short-term production
loans and the $15,000,000 outstanding under the Company's existing line of
credit which is due to mature on December 31, 1996.
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.
CREDIT FACILITY
The Company's current line of credit with Imperial Bank provides for
borrowings up to $15,000,000 based on specified percentages of eligible domestic
and international accounts and contracts receivable and net film costs balances
through December 31, 1996. The line of credit is secured by substantially all of
the Company's assets and bears interest at an annual rate of prime (8.25% as of
May 24, 1996) 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 March 31, 1996, the
Company had drawn down $15,000,000 under this facility and had no further
availability.
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, in connection with a proposed $30 million bank refinancing which
subsequently was not consummated, to December 29, 1995 and further extended in
December 1995 to January 31, 1996. 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 of $0.84 per share. The related
amendment to the existing credit agreement became effective on January 31, 1996
upon payment of the balance of the loan fee. The third amendment to the Amended
and Restated Credit Agreement eliminated certain existing financial covenants as
of December 30, 1995 and substituted revised quarterly net worth and net income
requirements and set a minimum liquidity level.
The outstanding credit agreement contains various covenants, in addition to
those mentioned above, to which the Company must adhere. These covenants, among
other things, 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 Company has obtained all necessary waivers
related to the Credit Agreement through the second quarter of fiscal 1996. The
outstanding credit agreement also contains a provision permitting the bank to
declare an event of default if the services of either of Messrs. Locke or
Kushner are not available to the Company unless a replacement acceptable to the
bank is named.
27
<PAGE>
In the second quarter of fiscal 1996, the Company commenced discussions with
various commercial banks concerning arranging or participating in a multi-year
increased syndicated credit facility to seek to amend or replace the existing
facility by May 31, 1996. See description of the Chemical Bank facility below.
If such facility is not in place by such time, as required by the Amended and
Restated Credit Agreement, the existing Imperial Bank 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 will mature December 31, 1996. On May 31, 1996,
Imperial Bank agreed to extend the $417,000 principal repayment due on May 31,
1996 to June 28, 1996 to provide an additional period of time for the Company to
refinance the credit facility.
CHEMICAL BANK
On April 14, 1996, the Company received a commitment letter from Chemical
Bank and Chase Securities, Inc. (collectively, "Chase") for a $40 million
syndicated line of credit. Such line of credit will provide for borrowings by
the Company based on specified percentages of domestic and international
accounts and contacts receivable and a specified percentage of the Company's
book value of unamortized library film costs (as adjusted). In addition, the
commitment letter contemplates that the Company will from time to time allocate
a production tranche in its line of credit for the Company's film and television
productions. Such tranche would 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. The Company anticipates closing the new credit facility
with Chase in early June 1996, but there is no assurance that such facility will
be completed prior to such time. Pursuant to the commitment letter, Chase has
the right to determine, for various reasons, including changes in market
conditions, changes in the results or operations of the Company, changes in
general economic conditions or changes in the prospects of the Company, not to
proceed with the new credit line. The line of credit is also subject to Chase
syndicating to other banks participation of a satisfactory portion of the new
facility. There is no assurance that the Company will be able to finalize the
credit arrangement with Chase and, if a credit agreement with Chase is entered
into by the Company, when such agreement will be finalized and what terms such
credit agreement will contain.
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 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-
28
<PAGE>
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 May 24, 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 39,896,575 as of May 29, 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. 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 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
29
<PAGE>
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 6-30-96
THE GRAVE Newmarket $ 2,100,000 $ 1,603,228 10.25% $ 300,000 6-30-96
WHOLE WIDE WORLD Newmarket $ 1,550,000 $ 1,109,195 8.00% $ 500,000 6-30-96
FREEWAY Paribas $ 1,983,333 $ 1,800,802 7.00% $ 961,667 7-05-96
-------------- -------------- -------------
$ 21,088,333 $ 16,689,455 $ 4,826,667
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
- ------------------------
* The JOSH KIRBY: TIME WARRIOR loan was repaid in full on May 15, 1996.
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 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
30
<PAGE>
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 May 24, 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. The loans are secured solely by the rights, title and
assets of the production companies related to those films. The loans mature 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 May 24, 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. 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
May 24, 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 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
31
<PAGE>
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 May 24 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 (8.25% as of May 24, 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 proposed Chemical Bank credit
facility will be sufficient to meet the Company's working capital requirements
for at least the next twelve months. While the Company believes that it will
consummate the Chemical Bank facility in June 1996, there is no assurance that
the Company will obtain such credit accommodation. If the Company is unable to
obtain such credit facility, the Company will seek alternative financing.
However, there is no guarantee that alternative financing will be available on
acceptable terms. If such credit facility and/or alternative financing is not
available, Management believes that existing resources and cash generated from
operating activities, together with the net proceeds of this Offering, after a
reduction of the level of the Company's investment in film costs, will be
adequate to comply with the terms of the extension of the Imperial credit
facility through December 1996. To the extent that existing resources and a
reduction in the level of the Company's investment in film costs are not
adequate, Management intends to reduce operating expenses. In the event that the
Company is unable to comply with the terms of such extension or obtain an
additional extension or alternative financing after the current maturity date of
December 31, 1996, 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 business and operations have not been materially affected by
inflation.
32
<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
33
<PAGE>
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
34
<PAGE>
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 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.
35
<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
36
<PAGE>
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. The Company's decision process in acquiring a finished
or an unfinished film focuses on productions which seem most likely to fit the
Company's requirements. When the Company acquires the distribution rights to a
motion picture, 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.
37
<PAGE>
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>
38
<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
39
<PAGE>
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
40
<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. 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
41
<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")
42
<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>
43
<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
44
<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 May 29, 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>
45
<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>
46
<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 leading music publisher.
In addition, the Company has entered into an agreement with Deca Records, a
division of Polygram, to distribute the soundtrack of THE ADVENTURES OF
PINOCCHIO, which is expected to include 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 May 28, 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
47
<PAGE>
Company 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 May 29, 1996, the Company had 39,896,575 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. Holders of Common Stock
will be entitled to receive such
48
<PAGE>
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 commencing on and expiring on , 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 .
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 27,483,730 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 14,739,099
shares are issuable at or below $1.27 per share, 6,019,632 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.
49
<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, $40,000 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.
50
<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 631,734
shares of Common Stock for a period of six (6) months following the Effective
Date without the prior written approval 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 2% 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, 631,734 shares of Common Stock, representing
the estimated number of Bonus Shares, 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 (6) months after the Effective Date without the consent of the
Underwriter.
51
<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.
52
<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 and 1995 (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
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:
Increase in property and equipment, net..................... (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.
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. 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. 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.
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.
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.
F-8
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.
F-9
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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, 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,
F-10
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NOTES PAYABLE AND LIQUIDITY (CONTINUED)
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, 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
F-11
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NOTES PAYABLE AND LIQUIDITY (CONTINUED)
(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>
(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>
F-12
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
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 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
F-13
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
$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 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.
F-14
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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>
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>
F-15
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES (CONTINUED)
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 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
F-16
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) WARRANTS (CONTINUED)
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, 3,880,000 stock options had been granted and were
outstanding under the Plan.
In fiscal 1994, the Company granted 3,182,500 unvested options to purchase
shares of common stock to certain employees entering into employment contracts
under the Plan.
In fiscal 1995, the Company granted 415,000 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:
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........................................................ 2,962,500 20,000 3,182,500 $.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.............................................. 3,517,500 672,096 4,389,596
--------- -------- ---------
--------- -------- ---------
Granted Fiscal 1995........................................................ 415,000 0 440,000 $.75 - $0.78
Options Expired/Canceled................................................... (72,500) -- 32,500 $.75 - $2.63
Options Exercised.......................................................... -- -- --
--------- -------- ---------
Balance at September 30, 1995.............................................. 3,860,000 672,096 4,797,096
--------- -------- ---------
--------- -------- ---------
Exercisable at September 30, 1995.......................................... 1,590,000 672,096 2,273,096
--------- -------- ---------
--------- -------- ---------
</TABLE>
F-17
<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-18
<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.
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 are covered under medical, dental and vision care plans; and after
one year of employment, may participate in a 401(k) retirement plan with an
option for a 125 Flexible Savings plan which are administered by Mutual of
Omaha.
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 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 condition.
F-19
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 results of operations or financial position.
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-20
<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-21
<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-22
<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-23
<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:
Increase in property and equipment, net...................................... (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-24
<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-25
<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-26
<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-27
<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-28
<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 condition.
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-29
<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.................................................................. 33
Description of Securities................................................. 48
Underwriting.............................................................. 50
Concurrent Offering....................................................... 51
Legal Matters............................................................. 52
Experts................................................................... 52
Index to Consolidated Financial Statements................................ F-1
</TABLE>
[LOGO]
THE KUSHNER-LOCKE COMPANY
UNITS
---------------------
PROSPECTUS
---------------------
[LOGO]
, 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 JUNE 3, 1996
PROSPECTUS
THE KUSHNER-LOCKE COMPANY
631,734 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 631,734 shares of the Company's common
stock, no par value, (the "Common Stock"). Such shares are not being
underwritten in an underwritten offering and the Company will not receive any
proceeds from the sale of such shares. See "Selling Security Holders." The
shares of Common Stock held by the Selling Security Holders may be sold by the
Selling Security Holders or their respective transferees commencing on the date
of this Prospectus. Sales of the shares of Common Stock held by the Selling
Security Holders 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 631,734 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 transferees 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. 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 six (6) months following the Effective Date without the
prior written approval of the Underwriter.
<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 42,135 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-
CLFS Equities 42,135 42,135 -0-
Michael M. Arnouse 10,256 10,256 -0-
Eric Jackson 10,256 10,256 -0-
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-
</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>
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-
</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.
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.................................................................. 33
Description of Securities................................................. 48
Selling Security Holders.................................................. 51
Plan of Distribution...................................................... 52
Experts................................................................... 52
Index to Consolidated Financial Statements................................ F-1
</TABLE>
THE KUSHNER-LOCKE COMPANY
631,734 SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 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................................................. $ 4,661
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.................................................... 27,339
-----------
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.
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.
** To be provided by amendment.
(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.
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 registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on June 3, 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
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 June 3, 1996
Peter Locke Executive Officer and President
/s/ DONALD KUSHNER
------------------------------------------- Co-Chairman of the Board, Co-Chief June 3, 1996
Donald Kushner Executive Officer and Secretary
/s/ JAMES L. SCHWAB
------------------------------------------- Chief Financial Officer, Vice President June 3, 1996
James L. Schwab of Finance
/s/ RENE ROUSSELET
------------------------------------------- Controller June 3, 1996
Rene Rousselet
/s/ S. JAMES COPPERSMITH
------------------------------------------- Director June 3, 1996
S. James Coppersmith
------------------------------------------- Director
Stuart Hersch
/s/ MILTON OKUN
------------------------------------------- Director June 3, 1996
Milton Okun
</TABLE>
II-8
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
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.
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.
** To be provided by amendment.
(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.
<PAGE>
[CHASE LETTERHEAD]
Chase Securities Inc.
Entertainment Industries Group
1800 Century Park East, Suite 400
Los Angeles, CA 90067
Tel 310-788-5600
Fax 310-788-5628
as of April 12, 1996
The Kushner-Locke Company
11601 Wilshire Boulevard
21st Floor
Los Angeles, CA 90025
Attention: Donald Kushner
Dear Sirs:
You have advised us that The Kushner-Locke Company (the "Company")
requires a revolving credit facility in the amount of $40 million (the
"Facility") the proceeds of which shall be used to (i) refinance existing
bank debt of the Company, (ii) finance the Company's production, acquisition,
distribution and exploitation of television product, feature films and video
product and rights therein, and (iii) fund general working capital needs of
the Company.
We are pleased to advise you of the commitment of Chemical Bank (the
"Bank") to act as agent for the Facility, to act as the issuing bank for
letters of credit issued under the Facility and to provide $15 million of the
Facility, subject to there being obtained from lenders (other than the Bank)
commitments satisfactory to the Bank for the remaining $25 million of the
Facility and further subject to the terms and conditions set forth or
referred to herein and in the Summary of Terms and Conditions attached hereto
as Exhibit A (the "Term Sheet").
We are also pleased to advise you that Chase Securities Inc. ("CSI";
together with the Bank being collectively referred to herein as "Chase") has
agreed to manage and structure the Facility and to arrange for the
syndication of the Facility and in such capacity to work with you to organize
a syndicate of lenders (together with the Bank being referred to as the
"Lenders") to provide the portion of the Facility which is not committed by
the Bank. As we have discussed with you however, there can be no assurance
that such syndication efforts will be successful.
You agree to actively assist Chase in achieving a syndication which is
satisfactory to Chase. This will be accomplished by a variety of means,
including (i) direct contact during the syndication between you, your
officers and representatives and the proposed syndicate lenders, (ii) if
deemed necessary by Chase, the active participation of the Company in the
preparation of a syndication book satisfactory to Chase and (iii) if deemed
necessary by Chase, participation in
<PAGE>
one or more bank meetings. To assist Chase in the syndication efforts, you
agree promptly to provide, and to cause your advisors to provide, Chase and
the Lenders upon request with all reasonable information deemed necessary by
Chase to successfully complete the syndication, including but not limited to
all information, projections and valuations prepared by you, your advisors,
or on your behalf relating to the Company, and the transactions described
herein.
It is understood and agreed that the Bank will act as sole and exclusive
agent for the Facility and that no additional agents or co-agents will be
appointed unless agreed to by Chase and the Company. You also agree that to
the extent any syndication prior to execution of definitive loan
documentation results in commitments in excess of the full amount of the
Facility, then Chase may reduce its commitment accordingly. It is understood
and agreed that Chase will manage all aspects of the syndication, including
decisions as to when Chase shall approach the Lenders, when Chase shall
accept their commitments, and further including any naming rights, Lender
selection and the final allocations of the commitments among the Lenders. It
is understood that no proposed syndicate lender in the Facility will receive
compensation from the Company outside of the terms contained herein in order
to obtain its commitment to participate in this financing.
As consideration for Chase's commitment hereunder and agreement to
manage, structure and syndicate the Facility and Chase's work in connection
with the syndication, you agree to pay to the Bank and CSI the fees and other
consideration specified in that certain letter agreement dated the date
hereof between the Bank and CSI on the one hand, and you on the other hand,
concerning fees relating to the transaction contemplated hereby (the "Fee
Letter"). Such fees and other consideration shall be payable as set forth in
the Fee Letter and shall be paid in immediately available funds. Once paid,
such fees and other consideration shall not be refundable under any
circumstances.
Chase's commitment hereunder is subject to the negotiation, execution
and delivery of definitive documentation with respect to the Facility in form
and substance satisfactory to it and the other Lenders. Chase's commitment
hereunder is also subject to (x) there not having occurred and be continuing
(and there being no likelihood, in the good faith judgment of Chase, of the
occurrence of) a material disruption or a material adverse change in the
financial or capital markets and (y) a material adverse change not occurring
in the business, assets, property, condition, financial or otherwise, or
prospects of the Company. The terms and conditions of Chase's commitment
hereunder and of the Facility are not limited to the terms and conditions set
forth herein and in the Term Sheet (such additional terms and conditions
shall be in the nature of elaboration in documentation and consistent with
transactions of this type). Those matters which are not covered by or made
clear under the provisions hereof and of the Term Sheet are subject to the
approval and agreement of Chase (it being understood that any terms and
conditions reflecting such matters shall not be inconsistent with the terms
and conditions set forth herein and in the Term Sheet).
Chase has reviewed certain information about the Company which you have
furnished to us. You agree promptly to provide Chase upon request with
additional information deemed
2
<PAGE>
necessary by Chase, including but not limited to information prepared by you,
your advisors, or on your or their behalf. If Chase's continuing review of
materials about the Company discloses information, or Chase otherwise
discovers information not previously disclosed to it, or any information
previously disclosed to Chase proves to be inaccurate, any of which Chase
believes has a materially adverse impact on the financial condition,
operations, assets and prospects of the Company or presents material tax or
litigation exposure to the Company, Chase may, in its sole discretion,
suggest alternative financing amounts or structures that ensure adequate
protection for the Bank and the syndicate Lenders or withdraw its commitment
hereunder.
You hereby represent and covenant that, to the best of your knowledge,
(a) all written information and data (excluding financial projections)
concerning the Company (the "Information"), which has been or is hereafter
made available to Chase by you or on your behalf will be complete and correct
in all material respects and will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained therein not misleading in light of the circumstances
under which such statements are made and (b) all financial projections
concerning the Company (the "Projections"), which are made available to Chase
by you or on your behalf will, unless otherwise disclosed, be prepared in
good faith based upon assumptions believed by management to be reasonable.
If, subsequent to making any Information or Projections available to us, you
become aware of any facts which would cause the foregoing representation to
no longer be true, you will promptly so notify us. In extending its
commitment relating to the Facility and arranging, structuring and working
with you to syndicate the Facility, Chase will be using and relying on the
Information and Projections without independent verification thereof.
By executing this letter agreement, you agree (i) to indemnify and hold
harmless each of Chase and the other Lenders and their respective officers,
directors, employees, agents and controlling persons from and against any and
all losses, claims, damages and liabilities to which any such person may
become subject arising out of or in connection with this letter agreement,
the Facility or the loans, the letters of credit or other extensions of
credit under the Facility, the use of any proceeds of the loans, or any
related transaction or any claim, litigation, investigation or proceeding
relating to any of the foregoing or the security given for the loans and the
obligations under the letter of credit issued under the Facility or otherwise
concerning the Company, whether or not any of such indemnified parties is a
party thereto, and to reimburse each of such indemnified parties upon demand
for any legal or other expenses incurred in connection with investigating or
defending any of the foregoing; PROVIDED that the foregoing indemnification
will not, as to any indemnified party, apply to losses, claims, damages,
liabilities or related expenses to the extent arising from the willful
misconduct or gross negligence of such indemnified party; and (ii) to
reimburse Chase from time to time upon demand for all reasonable
out-of-pocket expenses (including expenses of Chase's due diligence
investigation, syndication expenses and fees and disbursements of counsel)
incurred in connection with the Facility and the preparation of this letter
agreement, the Term Sheet, the definitive documentation for the Facility and
the security arrangements in connection therewith. The provisions contained
in this paragraph shall remain in full force and effect whether or not
definitive financing documentation
3
<PAGE>
shall be executed and delivered and notwithstanding the termination of this
letter agreement or the commitment hereunder.
The foregoing agreement shall be in addition to any rights that Chase or
any other indemnified party may have at common law or otherwise, including,
but not limited to, any right to contribution.
If for any reason the foregoing indemnification is unavailable to any
party or insufficient to hold it harmless as and to the extent contemplated
by the preceding paragraphs, then you shall contribute to the amount paid or
payable by the indemnified party as a result of such loss, claim, damage,
liability or expense in such proportion as is appropriate to reflect the
relative benefits received by you, on the one hand, and Chase, the other
indemnified parties and any other applicable indemnified party, as the case
may be, on the other hand, and also the relative fault of you and Chase, the
other indemnified parties and any other applicable indemnified party, as the
case may be, as well as any other relevant equitable considerations.
You agree that this letter agreement is for your confidential use only
and will not be disclosed by you to any person other than your attorneys,
accountants, tax consultants and other advisors and as required by law or as
compelled by legal process (and then only after giving Chase prior notice)
and on a confidential basis, except that, following your acceptance and
return hereof and of the Fee Letter, you may make public disclosure of the
existence and amount of the Bank's commitment and Chase's undertakings
hereunder and may file a copy of this commitment letter in any public record
in which it is required by law to be filed and may make such other public
disclosures of the terms and conditions hereof as you are required by law.
This commitment letter shall not be assignable by you without the prior
written consent of Chase, and may not be amended or any provision hereof
waived or modified except by an instrument in writing signed by you and Chase.
In the event that the definitive documentation relating to the
Facilities has not been executed on or before May 31, 1996, then this letter
agreement and the commitment contained herein shall terminate, unless Chase
shall, in its sole discretion, agree to an extension; provided that nothing
herein shall limit any of your rights with respect to a breach by Chase of
the commitment contained herein. Notwithstanding the foregoing, the
reimbursement and indemnification provisions hereof shall survive any
termination hereof.
THIS LETTER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
Please indicate your acceptance of the terms hereof by signing in the
appropriate space below and returning to Chase the enclosed duplicate
original of this letter agreement, together with an accepted copy of the Fee
Letter by 5 PM New York City time on April 15, 1996, at which time the Bank's
commitment and Chase's other agreements hereunder will expire in the event
Chase has not received all of the foregoing.
4
<PAGE>
Chase is pleased to have been given the opportunity to assist you in
connection with the transactions contemplated herein.
Very truly yours,
CHEMICAL BANK
By /s/ John J. Huber
-----------------------------
Name:
Title:
CHASE SECURITIES INC.
By /s/ Christa L. Thomas
-----------------------------
Name: Christa L. Thomas
Title: Vice President
Accepted and agreed to
as of the date first written above:
THE KUSHNER-LOCKE COMPANY
By /s/ Donald D. Kushner
-----------------------------
Name:
Title:
5
<PAGE>
SUMMARY OF TERMS AND CONDITIONS
OF PROPOSED REVOLVING CREDIT FACILITY FOR
THE KUSHNER-LOCKE COMPANY
This Term Sheet sets forth the terms of the Revolving Credit Facility
for The Kushner-Locke Company described in the commitment letter, dated as of
April 12, 1996 (the "Commitment Letter"), to which this summary is attached.
Capitalized terms used herein and not otherwise defined herein or in the
Commitment Letter shall have the respective meanings given to such terms in
Schedule 2 attached hereto.
BORROWER: The Kushner-Locke Company (the "Borrower" or "KLC").
FACILITY: $40,000,000 three year secured revolving credit facility
(the "Facility"), a portion of which may from time to time
at the option of the Borrower be designated as the "Special
Production Tranche" as described below.
AGENT: Chemical Bank ("Chemical" or the "Agent").
LENDERS: The Agent and other financial institutions to be selected by
Chemical and acceptable to the Borrower (collectively the
"Lenders"). Initially Chemical will commit to provide
$15,000,000 of the Facility. Chemical and its affiliate,
Chase Securities Inc. will work with the Borrower to
organize a syndicate of Lenders to provide the remainder of
the Facility.
USE OF PROCEEDS: (i) Refinance the current credit facility with Imperial
Bank; (ii) working capital; (iii) production of television
product, feature films and video product; (iv) acquisition
of rights to television product, feature films and video
product; and (v) distribution of television product, feature
films and video product.
LETTERS OF CREDIT: The Facility may also be used by the Borrower to issue
letters of credit. Such Letters of Credit will be issued by
Chemical (in such capacity the "Issuing Bank") with each
Lender taking a pro rata risk participation.
AVAILABILITY
PERIOD: Loans may be borrowed, repaid and reborrowed until three
years after the date of execution of definitive credit
documentation.
FINAL MATURITY: Three years after the date of execution of definitive credit
documentation.
1
<PAGE>
GUARANTORS: All direct and indirect subsidiaries of the Borrower (it
being understood that 50/50 joint ventures will not be
considered subsidiaries for this purpose).
SECURITY: Pledge of all stock of all Guarantors held directly or
indirectly by the Borrower.
Perfected first security interest (subject to certain
existing liens and certain other permitted encumbrances) in
all assets of the Borrower and the Guarantors, including but
not limited to partnership and joint venture interests, all
accounts, inventory and equipment.
Assignment for security of all copyrights including but not
limited to all picture assets and pictures.
Assignment of (or a right of equivalent access under) all
laboratory access letters or documents allowing permanent
access to the physical elements of motion picture, video and
television product.
Direct assignment to the Agent for the benefit of the
Lenders of all proceeds payable to a Borrower other than (i)
de MINIMIS amounts and (ii) proceeds of particular items of
product which are assigned to third-party lenders pursuant
to permitted production financing arrangements as
contemplated below). The Borrower will create a system of
lockboxes and collection accounts with the Agent and/or
other Lenders so that all collections are paid directly to
the Agent and applied periodically to pay down outstanding
loans.
COMMITMENT FEE: 1/2 of 1% per annum on the unused portion of the Facility,
payable quarterly in arrears. The Commitment Fee shall
begin to accrue at closing.
INTEREST RATES: 1) Adjusted LIBO Rate plus 3% or Alternate Base Rate plus 2%
on that portion of the outstanding loans which are covered
by Borrowing Base Tier 1; and, 2) Adjusted LIBO Rate plus 4%
or Alternate Base Rate plus 3% on that portion, if any, of
the outstanding loans supported by Borrowing Base Tier 2;
and, 3) Adjusted LIBO Rate plus 4% or Alternate Base Rate
plus 3% on that portion, if any, of the outstanding loans
made under the "Special Production Tranche" described below.
The Borrower may select interest periods of 1, 2 or 3 months
(and 6 months if available and consented to by all Lenders)
for Adjusted
2
<PAGE>
LIBO Rate loans. No more than 8 LIBO Rate
loans shall be outstanding at any one time.
In each case, calculation of interest shall be on the basis
of actual days elapsed in a year of 360 days (except that
Alternate Base Rate Loans based on the Prime Rate shall be
calculated based on a year of 365/366 days). Interest on
Alternate Base Rate borrowings shall be paid quarterly in
arrears. Interest on Adjusted LIBO Rate borrowings shall be
payable at the end of each Interest Period, and every three
months for Interest Periods in excess of three months
duration.
Alternate Base Rate is the highest of the Agent's Prime
Rate, the Base CD Rate plus 1%, and the Federal Funds
Effective Rate Plus 1/2 of 1%.
Adjusted LIBO Rate will include statutory reserves at all
times.
FACILITY FEE: At closing a one-time fee shall be paid to each of the
Lenders (including Chemical) in consideration of its
commitment to participate in the Facility in an amount equal
to 2% of its final allocated commitment.
LETTER OF
CREDIT FEES: The Agent shall receive for the benefit of the Lenders a fee
computed at a rate per annum equal to the applicable margin
for Adjusted LIBO Rate loans (calculated in the same manner
as interest) of the face amount of each letter of credit
issued and in addition the Issuing Bank shall receive a fee
of 1/8 of 1% per annum of the face amount for each letter of
credit issued.
The Issuing Bank shall also receive its customary drawing,
issuance and other charges from time to time in effect.
COST AND YIELD
PROTECTION: The usual, including, without limitation, in respect of
prepayments, changes in capital adequacy and capital
requirements or their interpretation, illegality, reserves
without proration or offset and other similar provisions
typically found in credit facilities of this type.
BORROWING BASE : The total of loans and letters of credit outstanding under
the Facility plus the Completion Reserve must at all times
be less than
3
<PAGE>
or equal to the amount of the Borrowing Base
computed in accordance with Schedule 1 hereto.
BORROWING BASE
CERTIFICATE: Borrowing Base Certificate (the "Certificate"), in form
satisfactory to the Agent, will be presented on the 25th day
of each month showing the calculation of the Borrowing Base
as of the end of the preceding month. The amount of
outstanding borrowings allowed at any one time under the
Facility will be reset upon the presentation of each
Certificate. Failure to present the Certificate within ten
(10) business days of the due date will result in an Event
of Default if there are any outstanding borrowings and no
loans need be made if the Borrower is in default of this
provision. At the time of each borrowing (which shall be no
more frequent than once per week), the Chairman,
Vice-Chairman, President, Vice President-Finance, Controller
or Chief Operating Officer of the Borrower will certify to
the best of his or her knowledge that the amount of the
Borrowing Base remains sufficient to comply with the
Borrowing Base formula set forth above.
MANDATORY
PREPAYMENT: If at any time the sum of the aggregate amount of loans and
letters of credit then outstanding plus the Completion
Reserve exceeds the lesser of (i) the Borrowing Base and
(ii) the Commitment, then the Borrower shall immediately
repay loans to the extent necessary to eliminate such
excess.
VOLUNTARY
PREPAYMENT: All or any portion of the outstanding loans may be prepaid
at any time in whole or in part at the Borrower's option,
subject to payment of breakage costs for Adjusted LIBO Rate
Loans.
KEY MAN LIFE
INSURANCE: Key Man life insurance policies in the amount of $5,000,000
each on Donald Kushner and Peter Locke shall be assigned to
the Agent as collateral.
SPECIAL
PRODUCTION
TRANCHE: The Borrower may fund up to six (6) theatrical motion
picture projects (with a "project" consisting of one or more
motion pictures which are financed and sold as a package)
per year having a maximum Production Exposure of no more
than $20,000,000 per project (but of which no more than two
(2) projects per year may
4
<PAGE>
have a Production Exposure of more than $7,500,000),
using loans under a Special Production Tranche within the
Facility. Only Pictures funded under the Special
Production Tranche may have an Unsold Territory Credit
included in the Borrowing Base. If the Borrower wishes
to fund a Picture using loans under the Special
Production Tranche then in addition to complying with all
other applicable provisions of the Credit Agreement, the
Borrower shall (i) deliver a sources and uses statement
demonstrating to the satisfaction of the Agent that at
least 45% of the budget of such Picture will be covered
by a minimum guaranty under an acceptable domestic
distribution arrangement and no more than 17% of the
budget is to be funded from loans which are supported by
the Unsold Territory Credit for such Picture, and (ii) 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 Picture, also deliver 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). Upon
satisfaction of the foregoing conditions, a portion of
the Commitment equal to the Strike Price for such Picture
(reduced by amounts already expended or to be cash flowed
by an acceptable third party) will be segregated and
designated as the Special Production Tranche for such
Picture. Such allocated portion of the Special
Production Tranche will thereafter be available solely to
fund production of such Picture and will not be available
for any other purpose until the Picture has been
Completed and all costs of production paid or provided
for. All loans under a Special Production Tranche shall
be dispersed directly into the production account for
such Picture.
DOCUMENTATION: The usual for facilities and transactions of this type and
which shall be acceptable to the Agent and its counsel.
REPRESENTATIONS
AND WARRANTIES: Usual for facilities and transactions of this type and
others, including but not limited to corporate existence,
good standing, authorization, financial statements, title to
assets, ownership of stock, no material adverse change,
litigation, no violation of agreements or instruments,
compliance with law, taxes, accuracy of information.
5
<PAGE>
CONDITIONS
PRECEDENT: Usual for facilities and transactions of this type, those
specified below and others to be specified by the Agent,
including but not limited to borrowing certificates, legal
opinions, receipt of valid security interests as
contemplated hereby, accuracy of representations and
warranties, absence of defaults, evidence of authority,
government approvals, compliance with laws, absence of
material adverse change in business, assets, property,
conditions, financial or otherwise, or prospects (except
general economic conditions) of the Borrower and payment of
fees.
The commitment of Chemical is subject to the Borrower
obtaining commitments for at least $25,000,000 from the
Lenders (other than Chemical).
The Agent shall have received and be satisfied with the
terms and provisions of (i) the Borrower's standard forms of
distribution agreement and all significant existing
distribution agreements which are not on such standard form,
and (ii) all joint venture or partnership agreements to
which the Borrower or any subsidiary is a party.
The Agent shall have received duly executed laboratory
access letters or laboratory pledgeholder agreements,
whichever is appropriate, covering all pictures and picture
property.
The existing credit agreement with Imperial Bank as Agent
shall have been terminated and all related security
interests released (or, at the Agent's option, assigned to
the Agent as an amendment and restatement of the existing
facility).
The Agent shall have received and be satisfied with the
terms of any production loan agreement with a Subsidiary of
the Borrower which is not to be paid off at closing, and
each such production lender shall have entered into such
intercreditor agreement as the Agent may require.
The Agent shall have received and be satisfied with the
latest available respective audited and unaudited balance
sheets and the related statements of earnings, cash flow and
stockholders' equity of the Borrower and subsidiaries. The
Agent shall have also received updated income, cash flow and
borrowing base projections covering at least 2 years which
indicate, to the
6
<PAGE>
satisfaction of the Agent, that the Borrowing Base
availability will meet the Borrower's working capital needs.
Delivery of a schedule of all titles owned by the Borrower
along with the copyright registration number to the Agent.
Delivery of a schedule of all physical materials and their
locations to the Agent.
Verification that no litigation, inquiry, injunction or
restraining order shall be pending, entered or threatened
which could reasonably be expected to have a material
adverse effect on (i) the business, assets, operations,
condition, or prospects of the Borrower and its
Subsidiaries, taken as a whole; (ii) the ability of the
Borrower and Subsidiaries to perform their obligations under
the credit agreement; or (iii) the rights and remedies of
the Lenders.
All filings and other actions required to perfect the
security interest of the Lenders shall have occurred.
The Lenders shall have received the favorable results of a
recent lien search.
The Lenders shall have received satisfactory legal opinions.
The Borrower and Subsidiaries shall be in pro-forma
compliance with all covenants as evidence by a pro-forma
compliance report, dated at closing or on the date on which
the most recent data was available.
The satisfactory completion of due diligence relating to
management, corporate structure, business agreements,
business plan, contingent liabilities, and cash management,
and any other matters deemed appropriate by the Agent.
Delivery of all Borrowing Base documents required in
Schedule 1 Borrowing Base.
Delivery of all organic documents of the Borrower and
Guarantors.
Certificates of insurance listing Agent as loss payee.
Executed copies of the credit agreement.
7
<PAGE>
Delivery of all key agreements including but not limited to
all debt instruments, guarantees and employment agreements.
Neither Donald Kushner nor Peter Locke shall have reduced
their stock ownership since the most recent Proxy Statement.
AFFIRMATIVE
COVENANTS: Usual for facilities and transactions of this type, those
specified below and others to be specified by the Agent,
including but not limited to maintenance of corporate
existence and rights, performance of obligations, notices of
defaults, litigation and material adverse changes,
compliance with laws, inspection of books and properties,
compliance with ERISA, financial statements, further
assurances and payments of taxes and indebtedness.
Maintain insurance (errors and omission, cast, etc.) within
or greater than industry standards.
Maintain security filings, copyright filings, laboratory
access letters and other documentation necessary to perfect
the Agent's position with respect to the collateral.
Furnish to the Lenders within 60 days after the close of
each of the first three fiscal quarterly periods of each
fiscal year, quarterly consolidated financial statements for
the Borrower and its subsidiaries, together with a
compliance certificate (including supporting schedules) of
the Chairman, Vice-Chairman, President, Vice
President-Finance, Controller or Chief Operating Officer of
the Borrower.
Furnish to the Lenders within 95 days after fiscal year end,
annual consolidated financial statements for the Borrower
and its subsidiaries, audited by KPMG Peat Marwick LLP or
another independent public accountant acceptable to the
Lenders, along with an auditor's report regarding such
financial statements, the scope of the audit, the presence
or absence of an Event of Default and compliance with
certain financial covenants. The Borrower shall also
deliver a compliance certificate of its Chairman,
Vice-Chairman, President, Vice President-Finance, Controller
or Chief Operating Officer.
Deliver 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
8
<PAGE>
ensuing four quarters on a quarterly basis, in the same
format previously provided, demonstrating that sufficient
cash will be available from operations, borrowings under
the Facility and amounts committed to be funded by
third-parties approved by the Agent as and when needed to
fund all reasonably anticipated cash requirements.
Deliver within 120 days after the end of each fiscal year
updated income projections in the same format previously
provided.
Deliver to the Lenders copies of all filings and other
reports filed by the Borrower with the Securities and
Exchange Commission and all such other information as may be
requested from time to time.
Permit the Agent or its designee to spot audit the
Borrower's internal records. The Borrower will give the
Agent notice of, and access to results of, all audits
conducted by the Borrower of third party licensees,
partnerships and joint ventures. The Borrower will also
exercise their audit rights of any third party licensee,
partnership or joint venture upon the reasonable request of
the Agent; provided, however, that if the Borrower shall
object to such audit, the audit shall not be undertaken and
the receivables in the Borrowing Base associated with
respect to such picture from such third party licensee,
partnership or joint venture shall be eliminated from the
Borrowing Base.
NEGATIVE
COVENANTS: Usual for facilities and transactions of this type and
others to be specified by the Agent, including but not
limited to limitations on sale and leaseback, selling
receivables, transactions with affiliates, ERISA violations
and further covenants that the Borrower and the Guarantors
will not:
Create, incur, assume or suffer to exist any indebtedness of
the Borrower, the Guarantors, or any partnership or joint
venture in which the Borrower or a Guarantor is a general
partner, EXCEPT (i) indebtedness under the Facility, (ii)
trade payables incurred in the ordinary course of business
and payable within 90 days (or such longer terms as may be
customary in the industry), (iii) liabilities relating to
profit participations, deferments and guild residuals in
connection with the production of Pictures, (iv)
indebtedness subordinated to the loans on terms and
conditions acceptable to the Required Lenders, including the
outstanding Convertible
9
<PAGE>
Subordinated Debentures of the Borrower, (v) unsecured
liabilities for acquisitions of rights or product in the
ordinary course of business, which are not otherwise
prohibited hereunder, (vi) purchase money indebtedness
not to exceed $500,000 at any one time outstanding, (vi)
certain existing indebtedness acceptable to the Lenders
and (vii) indebtedness in respect of single picture
production financing incurred by special purpose
production affiliates which is non-recourse to any
Borrower or other Guarantor except to the extent of a
negative pick-up arrangement or short-fall guarantee
meeting criteria to be set forth in the final loan
documentation in an amount not exceeding $7,500,000 at
any one time outstanding. The final documentation will
also make clear that if a third-party distributor
"cash-flows" a Picture by making NON-REFUNDABLE advances
to a Borrower, no indebtedness is created and therefore
such arrangements would not violate this covenant.
Create, incur or assume combined lease expense (but
specifically excluding amounts included in the Budgeted
Negative Cost of a Picture) for any twelve consecutive
months in excess of $1,000,000.
Make or incur on a combined basis any obligation to make
capital expenditures (but specifically excluding amounts
included in the Budgeted Negative Cost of a Picture) for any
twelve consecutive months in excess of $500,000.
Enter into any transaction with any of its Affiliates that
is not fair to the Borrower or such Corporate Guarantor or
that is on terms less favorable than if such transaction
were at arms' length.
Create, incur, assume or cause to exist any lien upon any
asset or revenue stream, EXCEPT (i) liens pursuant to
written security agreements required by collective
bargaining agreements with guilds on terms satisfactory to
the Agent, (ii) liens to secure distribution, exhibition
and/or exploitation rights of licensees pursuant to license
agreements on terms satisfactory to the Agent, (iii)
deposits under worker's compensation, unemployment insurance
and Social Security laws or to secure statutory obligations
or bonds incurred in the ordinary course of business, (iv)
liens pursuant to the Facility, (v) specified existing
liens, (vi) liens in favor of laboratories, post production
houses, etc. to secure trade payables in the ordinary course
of business, (vii) customary liens in favor of completion
guarantors in connection with
10
<PAGE>
completion bonds and (viii) other customary exceptions to
be agreed.
Provide any guarantee, either directly or indirectly, EXCEPT
negative pickup agreements and minimum guarantees to acquire
product in the ordinary course of business to the extent
otherwise permitted hereunder.
Pay, declare or become obligated to pay dividends or
distributions; redeem, purchase or otherwise acquire or make
any other payment in respect of any subordinated debt,
stock, option, warrant or other equity interest; provided
however that the Borrower may pay interest and certain
mandatory prepayments to be specified on subordinated debt
if no Default would be continuing after giving effect to
each payment.
Permit development costs (which neither have been sold,
written off nor allocated to a picture for which active
preproduction has commenced) to exceed $3,000,000 in the
aggregate or $500,000 for any individual project.
Create, make or incur any investment, loan or advance EXCEPT
(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; or (ii) in the case of an advance
against the purchase of rights approved by the Agent made to
a special purpose production company in which the Lenders
have a first priority security interest in all assets of the
production company and the advances shall be limited to the
amount covered by a completion bond, in form and substance
satisfactory to the Agent, in which the Agent is the
beneficiary; (iii) purchase of (x) U.S. Government
obligations maturing within one year, (y) time deposits,
certificates of deposit, acceptances or prime commercial
paper or repurchase obligations of the above from a bank
having a short term deposit rating of A-2 or P-2 or higher
or, and (z) commercial paper with a rating of A-1, A-2, P-1
or P-2 maturing within 12 months, (iv) inter-company
advances among the Borrower and its Subsidiaries (provided
that advances to less-than-wholly-owned Subsidiaries shall
be subject to such limitations as may be negotiated in final
documentation), (v) scheduled investments as of the Closing
Date, (vi) nominal payments to reacquire "Captive"
production companies after project loans are repaid and
pictures have been delivered, and (vii)
11
<PAGE>
loans and advances to officers and employees of the
Borrower of not more than $250,000 in the aggregate at
any one time outstanding.
Wind up, liquidate or dissolve its affairs or consolidate
with or merge into any entity, 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).
The Borrower and the Guarantors will not engage in any
business activities other than production and exploitation
of theatrical motion pictures, television programs,
infomercials and videos and rights therein (e.g. music
publishing, 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".
Permit Consolidated Capital Base at the end of any quarter
to be less than the sum of $33,000,000 plus 100% of net new
equity invested and 50% of net earnings, if any, for each
fiscal year ending after September 30, 1995 and prior to the
date as of which compliance is being determined.
Incur initial Print and Advertising Expenditures through the
theatrical opening for any picture in excess of $500,000 for
any picture.
Permit aggregate allocated and unallocated overhead expenses
to exceed $8,500,000 in fiscal 1996, $9,000,000 in fiscal
1997, $9,500,000 in fiscal 1998 and $10,000,000 in fiscal
1999.
Permit the ratio of Total Unsubordinated Liabilities
(including negative-pickup and similar obligations) to
Consolidated Capital Base to be greater than 2 to 1 at any
time.
Permit the ratio of EBIT to total interest expense
(including interest on Subordinated Debt) to be less than 2
to 1 for any rolling four quarter period, commencing with
the four quarter period ending June 30, 1996.
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
12
<PAGE>
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 Facility 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.
No modification or termination of key employment agreements,
subordinated debt indentures, or other key agreements
without prior approval of the Required Lenders.
ADDITIONAL
COVENANTS
REGARDING PRODUCT: With respect to each Picture for which any Borrower is the
producer or has a financial interest which is subject to a
completion risk, other than (i) any television series with a
pattern budget of $750,000 per episode or less, (i) 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 a picture produced
by the Borrower or a Guarantor or for which the Borrower or
a Guarantor has a financial interest which is subject to
completion risk (i.e. payment by the Borrower is not
conditioned upon delivery) 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 subparagraph (b), clauses
(vi) and (vii) shall not be applicable), (i) the budget for
such picture, (ii) a list of all agreements executed in
connection with such picture which provide for deferments or
participations along with copies of such agreements as the
Lenders may reasonably request, (iii) certificates or
binders of insurance for such picture, (iv) chain of title
documents for the underlying literary properties for such
picture, (v) copyright assignments and laboratory
pledgeholder agreements for such picture, (vi) a schedule of
sources and uses demonstrating in detail the sources and
uses of all cash necessary to complete and deliver the
picture, and (vii) a completion guaranty with respect to
such picture from an approved completion guarantor in
Agent's customary form or otherwise in form and substance
satisfactory to the Agent naming the Agent for the benefit
of the Lenders as a beneficiary thereof to
13
<PAGE>
the extent of the Borrower's financial interest in such
picture. International Film Guarantors L.P./Firemans
Fund, Cinema Completions International, Inc./Continental
Casualty Company and The Motion Picture Bond Co. are
pre-approved as completion guarantors. Film Finances
Inc. is also pre-approved but only for Pictures with a
Budget of $7,500,000 or less.
The Borrower will not begin production on any product unless
there are Eligible Receivables associated with such product
in an amount equal to at least 40% of the production budget,
unless the budget of the product is less than $1,000,000.
Borrower will not permit the ratio of (i) Eligible
Receivables plus non-refundable collections on acquired
product to (ii) the purchase price of the acquired product
to fall below 50% for all product acquired in the preceding
12 months, computed on an aggregate rolling four quarters
basis.
Produce any Picture with a Production Exposure in excess of
$7,500,000 (except for Pictures funded under the Special
Production Tranche) without Agent approval, or enter into
any agreement obligating the Borrower to pay a minimum
guarantee of more than $3,500,000 for any Picture produced
by a third party without Agent approval.
Borrower will not acquire rights in product which is not in
its first cycle with the exception of permitted library
acquisitions not to exceed $500,000 per year.
Production and acquisition deficits (net of pre-sale
guarantees payable within 1 year after delivery) will not
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 miniseries.
EVENTS OF DEFAULT: Usual for transactions and facilities of this type and
others to be specified by the Agent, including but not
limited to nonpayment of principal or interest when due,
violation of covenants, falsity of representations and
warranties in any material respect, cross-default,
cross-acceleration, bankruptcy, material judgments,
14
<PAGE>
ERISA, actual or asserted (by a Guarantor or any
subsidiary) invalidity of security documents and security
interests, Change of Control and Change in Management.
For purposes hereof (i) "Change in Control" shall mean
either (x) any Person or group 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 (y) 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, and (ii) "Change in
Management" shall mean that someone other than Donald
Kushner or Peter Locke shall be the Chief Executive
Officer of the Borrower.
ASSIGNMENTS AND
PARTICIPATIONS: Lenders will be permitted without the consent of the
Borrower to participate and assign all or a part of their
interest under the Facility to Eligible Assignees.
Voting rights of participants will be limited to changes in
amount, collateral provisions relating to release of all or
substantially all of the collateral, rate, fees and maturity
date. Participants will receive cost and yield protection
(limited to the cost and yield protection available to the
Lenders). Any assignment will be by novation and will be
subject to the approval of the Agent. Assignees will assume
all the rights and obligations of the assignor Lender. Each
assignment will be subject to the payment of a service fee
by the assigning Lender to the Agent.
EXPENSES AND
INDEMNIFICATION: All reasonable costs and expenses of the Agent (including
the reasonable fees and disbursements of the Agent's counsel
and accountants) associated with (i) the preparation,
amendment, servicing and waiver of the loan agreement and
the other loan documents, (ii) any litigation or other
proceedings relating to the collateral, the loan agreement
or the other loan documents or the
15
<PAGE>
Borrower's affairs, (iii) the enforcement of any rights
of the Lenders or any participant against the Borrower or
any other person obligated to the Lenders pursuant
hereto, or (iv) any attempt to audit, inspect, protect or
sell the collateral, are to be paid by the Borrower.
Borrower will indemnify each of the Agent and each Lender
and hold it harmless from and against all costs, expenses
(including reasonable fees and disbursements of counsel) and
liabilities relating to or arising in connection with any
enforcement of the loan agreement and any investigative,
administrative or judicial proceeding (regardless of whether
the Agent or such Lender is a party thereto) arising out of
the proposed transactions, including the financing
contemplated hereby or any transactions connected therewith,
provided that the Agent or a Lender will not be indemnified
for losses resulting solely from its gross negligence or
willful misconduct.
MISCELLANEOUS: New York law to govern.
Waiver of trial by jury.
All completion guarantors shall be approved by the Agent.
Consent to jurisdiction of state and federal courts located
in New York City.
16
<PAGE>
Schedule 1
BORROWING BASE
BORROWING BASE CALCULATION
The Borrowing Base shall be equal to the sum, without double-counting, of:
TIER 1:
a. 90% of Eligible L/C Receivables; PLUS
b. 90% of Eligible Receivables from Major Domestic Account Debtors;
PLUS
c. 85% of Eligible Receivables from Major Foreign Account Debtors;
PLUS
d. 85% of Eligible Receivables from Acceptable Domestic Account
Debtors; PLUS
e. 80% of Eligible Receivables from Country List A Acceptable
Foreign Account Debtors; PLUS
f. 50% of Eligible Receivables from Country List B Acceptable
Foreign Account Debtors; PLUS
g. a percentage of Pay-Per-View Estimates to be negotiated in final
documentation;
Tier 1 Restrictions: The amount of the Borrowing Base credit
attributable to Eligible Receivables from each Approved Account Debtor
shall not exceed the Allowable Amount which, unless specified
differently on Schedule 4, shall be $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.
PLUS
TIER 2:
15% of Eligible Library Amount;
Tier 2 Restrictions: The amount of the Borrowing Base credit
attributable to Tier 2 shall be limited to $7,500,000.
PLUS
TIER 3:
a. 100% of Eligible Receivables from Disney, Fox, Viacom/Paramount,
Sony, Turner, Universal or Warner Bros. which cover at least 50%
of the budget of a Picture being funded under the Special
Production Tranche; plus
b. 50% of the Unsold Territory Credit for each Picture being funded
under the Special Production Tranche.
1
<PAGE>
Tier 3 Restrictions: Tier 3 is a special tier which will only be
available to support loans made under the Special Production Tranche.
MINUS
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 Tiers 1, 2 and 3
above, including without limitation remaining acquisition payments,
set offs, profit participations, deferments, residuals, commissions
and royalties.
The Borrowing Base credit attributable to any single obligor shall never
exceed 25% of the total Borrowing Base. Items which the Borrower is
permitted to include in Tier 3 but which are not needed to support loans
under the Special Production Tranche may instead be included by the Borrower
in Tier 1 or Tier 2 to the extent otherwise satisfying all applicable
criteria.
The Major Domestic Account Debtors, Major Foreign Account Debtors,
Acceptable Domestic Account Debtors, and Acceptable Foreign Account Debtors
shall initially be as specified on schedules annexed to the Credit Agreement;
provided, however, that (i) the Agent may from time to time by written notice
to the Borrower (which notice shall be prospective, i.e. to the extent that
giving effect to such notice would otherwise result in a mandatory prepayment
by the Borrower, such notice shall not be given effect for purposes of such
mandatory prepayment, but shall nevertheless be effective for all other
purposes under this Agreement immediately upon the Borrower's receipt of such
notice), delete any Person from such schedules 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, acting in good faith, may at its discretion
deem appropriate or (ii) the Required Lenders may by giving written notice to
the Borrower, add an Approved Account Debtor 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.
BORROWING
BASE
CONDITIONS
PRECEDENT: The following items must be delivered to the Agent, in form
and substance acceptable to the Agent, in order for any
receivable to be considered eligible to be included in the
Borrowing Base:
a. Copy of the executed distribution agreement for all
Eligible Accounts Receivable in excess of $100,000 or
which are requested by the Agent
b. Summary checklist demonstrating the eligibility of the
receivable, showing a summary of the terms and
conditions, and the calculation for any possible
deductions (residuals, participations, etc.)
for all Eligible Accounts
2
<PAGE>
Receivable in excess of $100,000 or which are
requested by the Agent
c. To the extent not already delivered, and to the extent
requested by the Agent, copyright registration for the
distribution rights, chain of title documents,
acceptable insurance, and security filings
Additionally, for uncompleted product the Borrower must be
in compliance with the covenants listed above under
"Additional Covenants Regarding Product".
3
<PAGE>
Schedule 2
CERTAIN DEFINITIONS
"ACCEPTABLE L/C" shall mean an irrevocable letter of credit in form
and on terms acceptable to the Agent, payable in Dollars in New York City and
issued or confirmed by any Bank or any domestic commercial bank (or domestic
branch of a foreign commercial bank) of recognized standing having capital
and surplus in excess of $250,000,000 or by any other bank which the Agent
may in its discretion determine to be of acceptable credit quality.
"AFFILIATE" shall mean any Person, which, directly or indirectly,
is in control of, 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.
"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.
"ALLOWABLE AMOUNT" shall mean, with respect to any Person or
Affiliated Group, such amount as may be specified on Schedule 4 hereto as the
maximum aggregate exposure for an Approved 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 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 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.
"APPROVED ACCOUNT DEBTORS" shall mean in aggregate Major Domestic
Account Debtors, Major Foreign Account Debtors, Acceptable Domestic Account
Debtors, and Acceptable Foreign Account Debtors.
"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.
"BUDGETED NEGATIVE COST" shall mean, with respect to any Picture, the
amount of the cash budget (stated in Dollars) for such Picture including all
costs customarily included in connection with the acquisition of all underlying
literary and musical rights with respect to such Picture and in connection with
the preparation, production and completion of such Picture including costs of
materials, equipment, physical properties, personnel and services utilized in
4
<PAGE>
connection with such Picture, both "above-the-line" and "below-the-line", any
completion bond fee, and all other items customarily included in negative
costs, but excluding production fees and overhead charges payable to a
Borrower or Guarantor, finance charges and interest expense.
"CLOSING DATE" shall mean the date on which all conditions
precedent to the making of the initial loans have been satisfied or waived.
"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.
"COMPLETED" and "COMPLETION" shall mean with respect to any
Picture, that (A) either (i) sufficient elements have been delivered by a
Borrower to, and accepted by, a Person (other than a Borrower or an Affiliate
thereof) to permit such Person to exhibit the Picture theatrically in the
United States or (ii) a 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 Picture 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 Picture shall revert to being uncompleted
until the Agent receives such verification, and (B) if such Picture 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 (other than the payment of money not yet due) the occurrence of which
might result in the Borrower losing any of its rights in such Picture.
"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 the entire acquisition price or minimum
advance for any Picture acquired from a third party) 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 such product.
"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;
5
<PAGE>
(iv) off-balance sheet receivables on Completed product which are included in
Tier 1, 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 by a rate of
interest equal to the interest rate in effect on the notes on the date of the
computation) of (a) all net amounts which pursuant to a binding agreement are
contractually obligated to be paid to the Borrower or a Guarantor 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 Borrower or Guarantor in writing (and such
report has been forwarded to the Agent) will be paid to such Borrower or
Guarantor following receipt by the distributor of sums contractually
obligated to be paid to the distributor from their parties) minus (b) the sum
of (i) the following items (based on the Borrower's then best estimates):
third party profit 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 the Borrower or Guarantor 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 the Borrower or any
Guarantor or adjustment pursuant to approved distribution agreements, but
Eligible Receivables shall not include amounts which:
a. in the aggregate due from a single Approved Account Debtor are in
excess of the Allowable Amount with respect to such Approved Account
Debtor;
b. 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 a Borrower's direct control);
c. to the extent such receivables are more than 90 days past due;
d. are theatrical receivables which are due from any obligor in
connection with the theatrical exhibition, distribution or
exploitation of a Picture that is still outstanding six months after
its creation;
e. are in excess of $3,000,000 in the aggregate if they are to be
paid in a currency other than United States Dollars unless hedged in a
manner satisfactory to the Agent;
f. have been included in a Borrower's estimated bad debts;
6
<PAGE>
g. any receivable amount (other than the amounts that are being
disputed or contested in good faith) from any obligor which has 10% or
more of the total receivable amount from such obligor 120 or more days
past due;
h. for which there is 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;
i. are attributable to a Picture in which the Borrower cannot
warrant sufficient title to the underlying rights to justify such
receivable;
j. the Agent (for the benefit of the Lenders) does not have a first
perfected security interest under the Uniform Commercial Code;
k. 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 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);
l. relate to Pictures as to which the Agent has not received a fully
executed laboratory access letter or a pledgeholder agreement for each
laboratory holding physical elements sufficient to fully exploit the
rights held by the Borrower in such Picture;
m. will be subject to repayment to the extent not earned by
performance;
n. are attributable to Pictures which have not been Completed which
with respect to any particular Picture exceeds the amount covered by
the related completion guarantee, if a guarantee was required (except
that if a letter of credit is issued pursuant to the Facility in order
to support the Borrower's minimum payment obligation to acquire
distribution rights in a Picture, amounts attributable to such rights
may be treated as Eligible Receivables (even though the Picture has
not yet been Completed) but only if (A) proof of Completion of the
Picture 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 any Picture does not exceed the amount of such letter
of credit for such Picture, and (C) such amounts otherwise meet all of
the applicable criteria for inclusion as Eligible Receivables); or
o. will not become due and payable until 6 months or more after the
scheduled final maturity of the Facility.
7
<PAGE>
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 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.
"ESTIMATED VALUE" shall mean with respect to any Picture 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 Picture:
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 foregoing percentages will be reduced proportionately with respect to all
remaining Unsold Major Foreign Territories for any Picture for which actual
sales in the listed territories total less than the aggregate estimate for
such sold territories based on the foregoing percentages.
"PAY-PER-VIEW ESTIMATES" shall mean an amount determined pursuant
to a formula to be negotiated in final documentation.
"PERSON" shall mean any natural person, corporation, partnership,
trust, joint venture, association, company, estate, unincorporated
organization or government or any agency or political subdivision thereof.
"PICTURE" 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
8
<PAGE>
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 Borrower (i) is the initial copyright
owner or (ii) acquires an equity interest or distribution rights. The term
"Picture" shall include, without limitation, the scenario, screenplay or
script upon which such Picture 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 Debtors, and all rights
therein and thereto, of every kind and character.
"PRINT AND ADVERTISING EXPENDITURES" shall mean the actual
out-of-pocket print and advertising expenditures associated with a Picture
which the Borrower has undertaken to pay or have paid.
"PRODUCTION EXPOSURE" for a Picture shall mean the Budgeted
Negative Cost of such Picture (net of amounts being cash-flowed by a third
party unrelated to the Borrower pursuant to contractual arrangements
acceptable to the Agent).
"SENIOR BANK DEBT" shall mean all of the Obligations of the
Borrower under the Facility.
"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.
"UNSOLD MAJOR FOREIGN TERRITORY" shall mean with respect to any
Picture, each of the territories listed in the definition of "Estimated
Value" as to which no binding Distribution Agreement has been entered into
for such Picture by the Borrower .
"UNSOLD TERRITORY CREDIT" shall mean with respect to any 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.
9
<PAGE>
Schedule 3
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
Netherlands Turkey
New Zealand Thailand
Norway
Portugal
Spain
Sweden
Switzerland
Taiwan
United Kingdom
10
<PAGE>
Schedule 4
Allowable Amounts
- -----------------
a. Major Domestic Account Debtors: No Limit
b. Major Foreign Account Debtors: $2,500,000, except $3,500,000 for Antena 3
and $5,000,000 for Beta Taurus
Exclusions: None
c. Acceptable Domestic Account Debtors: $500,000, except $1,000,000 for New
City Releasing
Exclusions: None
d. Acceptable Foreign Account Debtors (Country List A): $500,000
Exclusions: None
e. Acceptable Foreign Account Debtors (Country List B): $500,000
Exclusions: None
11
<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
May 29, 1996
