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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMMISSION FILE NO. 0-17295
THE KUSHNER-LOCKE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-4079057
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
</TABLE>
11601 WILSHIRE BLVD., 21ST FLOOR, LOS ANGELES, CALIFORNIA 90025
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 445-1111
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
10% Convertible Subordinated Debentures, Series A due 2000
13 3/4% Convertible Subordinated Debentures, Series B due 2000
Common Stock Purchase Warrants
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value based on the closing price of the Registrant's
Common Stock held by nonaffiliates of the Registrant was approximately
$21,194,000 as of December 29, 1995.
There were 35,679,607 shares of outstanding Common Stock of the Registrant
as of December 29, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1996 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A not later than
120 days after the end of the Registrant's fiscal year (September 30, 1995) are
incorporated by reference in Part III Items 10, 11, 12 and 13 of this Form 10-K.
Total number of pages 50 Exhibit Index begins on page F-22
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PART I
1. BUSINESS
GENERAL
The Kushner-Locke Company (the "Company") is a leading independent
entertainment company principally engaged in the development, production and
distribution of theatrical feature films, direct-to-video films and television
programming. In April 1993, the Company established a feature film division to
develop and produce feature films, primarily low- and medium-budget films for
direct release to home video and cable television services. In August 1994, the
Company's new feature film division produced ANDRE, a family picture budgeted at
approximately $9,500,000, which was released theatrically and on home video in
the U.S. through Paramount Pictures and distributed internationally through
Turner Pictures. In September 1994, the Company established an international
theatrical distribution operation for its own and acquired feature films. The
Company has also recently entered into various joint ventures or partnerships
with third parties to exploit ancillary markets in the areas of interactive
computer games and CD-ROM formatted product, infomercials, music publishing and
distribution of product to domestic cable services. As of December 22, 1995, the
Company had four movies-for-television, one mini-series, four low-budget films
and one higher-budget theatrical film in various stages of production.
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 (often consisting of a series of
related features or specialty films) and films 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.
During fiscal 1995, the Company had one film on wide-screen domestic release
initially released at the end of fiscal 1994 (ANDRE) and eleven films released
direct-to-video, including two fantasy adventure films under the banner of JOSH
KIRBY: TIME WARRIOR distributed by Paramount Pictures. For 1996, in the
higher-budget film category, the Company's feature film THE LEGEND OF PINOCCHIO,
starring Martin Landau and Jonathan Taylor Thomas, budgeted at approximately
$28.5 million, is scheduled to be released theatrically in the U.S. in the
summer of 1996 by New Line Pictures (a division of Turner Entertainment), with
the Company retaining foreign distribution rights. The Company's lower budget
feature slate for 1996 includes more than 20 films, including five children's
fantasy adventure films under the Moonbeam label for Paramount Pictures, two
animated feature film sequels to the Company's 1988 video release THE BRAVE
LITTLE TOASTER for a division of The Walt Disney Company, SERPENT'S LAIR
starring Jeff Fahey for WarnerVision, 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 and WHOLE WIDE
WORLD starring Vincent D'Onofrio. The Company's distribution activities will
consist primarily of foreign distribution of product produced, overseen or
acquired by the Company and, through a joint venture, domestic distribution of
45 low-budget feature films to the pay-per-view, pay cable, basic cable and
other ancillary markets.
Since its inception in 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. For the 1995-1996 television
season, the Company delivered television programming including three
movies-of-the-week, with two such movies-of-the-week for CBS titled LADY KILLER
starring Judith Light and Jack Warner and DANGEROUS INTENTIONS starring Donna
Mills and Corbin Bernsen, and one movie-of-the-week for NBC titled JACK REED: A
KILLER AMONGST US starring Brian Dennehy, as well as a four-hour mini-series for
ABC titled INNOCENT VICTIMS starring Hal Holbrook and Rick Schroder. The Company
also has an additional 10 movies-for-television and various television series in
various stages of development for potential production. The Company's
programming for the 1994-1995 television season included two movies-of-the-week
for CBS titled GETTING GOTTI starring Lorraine Bracco and Anthony Denison and TO
SAVE THE CHILDREN starring Richard Thomas and Robert Urich, a movie-of-the-week
for NBC titled JACK REED: A SEARCH FOR JUSTICE, starring Brian Dennehy, a
half-hour children's educational series titled PIGASSO'S PLACE and a
presentation pilot for Fox titled BAD DATE DIARIES.
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The Company's operating revenues were $20,407,000 for the year ended
September 30, 1995 and $50,736,000 for the year ended September 30, 1994, a
decrease of 60%, reflecting in part the Company's significant investment in
feature film projects to be completed or released after the fiscal year end. In
its production activities, the Company generally seeks to finance all or a
substantial portion of its costs through domestic and international pre-sales,
output arrangements or joint venture or distribution agreements with third
parties, while retaining the benefit of ownership rights or profit
participations in each film or television program. However, as the Company has
shifted a significant portion of its product mix from its traditional base of
network-television programming, the Company has become subject to the increased
risks 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.
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.
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 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 System) 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 three categories:
superstations (e.g., Turner Broadcasting System), pay cable services (e.g., HBO)
and basic cable networks (advertiser-supported, e.g., The Family 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.
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."
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
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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.
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 December 22, 1995, 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 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 joint venture KLC/New City. The customary order for
release is a period of approximately six months of pay-per-view followed by 18
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 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.
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
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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 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
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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. The Company's principal co-production activities in the last fiscal
year have been in connection with the production of the television movies
DANGEROUS INTENTIONS, LADY KILLER and JACK REED IV. The production of these
episodes was funded from the license fees from the networks, tax benefits in
Canada, presales to certain international broadcasters which have an output
arrangement with the Company and from other sales of distribution rights.
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")
pursuant to which WIS has 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 ratings for the prior season.
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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 is
in pre-production or scheduled to air after December 22, 1995, the type of
program, the number of episodes produced or to be ordered, and the medium where
such programming would be initially exhibited:
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TITLE TYPE OF PROGRAM FIRST EXHIBITION
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INNOCENT VICTIMS Mini-Series ABC
JACK REED: V Movie-of-the-week NBC
EVERY WOMAN'S DREAM Movie-of-the-week CBS
NO EASY ANSWERS Movie-of-the-week CBS
PRINCESS DI Movie-of-the-week CBS
</TABLE>
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. Since 1991, the Company has expanded its development and
production capabilities by hiring three producers and four writers with
substantial experience in producing movies-of-the-week and episodic series for
the major networks and feature films for the studios. 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 December 22, 1995, potential
television movies in various stages of development identified below:
<TABLE>
<CAPTION>
WORKING TITLE NETWORK FORM OF PROGRAM
- ---------------------------------------- --------------------- ---------------------
<S> <C> <C>
DON'T COUNT ME OUT CBS Movie-of-the-week
IN HER SISTER'S NAME CBS Movie-of-the-week
FAMILY IN FEAR NBC Movie-of-the-week
SECRET LIFE OF ANNIE D. LIFETIME Movie-of-the-week
IS THERE NO PLACE ON EARTH FOR ME? USA Network Movie-of-the-week
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>
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The following table sets forth potential television series that are also in
various stages of development by the Company as of December 22, 1995:
<TABLE>
<CAPTION>
PROJECT NETWORK STATUS
- ---------------------------------------- ------- -------------------------------------
<S> <C> <C>
THE GUN ABC Script commitment
WADE RIVERS CBS Script commitment
ROAD DOCS ABC Script commitment
PURGATORY ABC First draft of script
BLACK BAG JOBS NBC Script commitment
GARGOYLES ABC First draft of script
INFINITY PLUS UPN First draft of script
WAITERS AND ARTISTS FOX First draft of script
</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.
COMPANY 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. The Company
also believes the establishment of its international television distribution
operation will enable it to increase its activity as a distributor of programs
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 control over all of its product line and removes the need for costly
sales agents or middlemen.
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.
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 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.
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The Company's feature film strategy 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.
In fiscal 1995, the Company's new feature film division delivered eleven
films for the home video market. For WarnerVision it delivered the horror movie
WES CRAVEN PRESENTS: MINDRIPPER, the supernatural thriller LAST GASP and the
detective story LADY-IN-WAITING. The Company also delivered to Paramount
Pictures two out of six fantasy adventure films 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 (the TIME WARRIOR series). In
addition, the Company acquired six more adult thriller films that it sold to
other home video distributors including SPIRIT OF THE NIGHT, LURID TALES OF THE
CASTLE QUEEN, PETTICOAT PLANET, ALIEN ABDUCTION, DREAM MASTER and CYBERELLA.
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). The Company will be distributing the live
action feature THE LEGEND OF PINOCCHIO, the $28,500,000 production which is
scheduled for domestic release by New Line Pictures in the summer of 1996, and
four other feature films entitled FREEWAY, THE GRAVE, WHOLE WIDE WORLD, and
SERPENT'S LAIR. The Company's low budget feature slate for 1996 includes more
than 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.
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 December 22, 1995, certain programming in which the Company has ownership
rights, distribution rights or the right to share in future profit
participations:
<TABLE>
<CAPTION>
NUMBER
TITLE TYPE OF PROGRAM PRODUCED/ORDERED FIRST EXHIBITION
- ------------------------------ ---------------------------------------------------- ---------------- ----------------
<S> <C> <C> <C>
ANIMALYMPICS Animated feature film 1 NBC
THE BRAVE LITTLE TOASTER Animated feature film 1 Disney Channel
MAPLETOWN Animated series 39 Syndication
PIGASSO'S PLACE Animated/live-action series 13 Syndication
Saturday morning
animated series
TEEN WOLF 21 CBS
GLORY YEARS Cable mini-series 6 HBO
1ST AND TEN Cable series 80 HBO
ANDRE Feature film 1 Theatrical
ALIEN ABDUCTION Feature film 1 Home Video
CYBERELLA Feature film 1 Home Video
DEADLY EXPOSURE Feature film 1 Home Video
DREAM MASTER Feature film 1 Home Video
EGGS FROM 70 MILLION B.C. Feature film 1 Home Video
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NUMBER
TITLE TYPE OF PROGRAM PRODUCED/ORDERED FIRST EXHIBITION
- -------------------------------------------------- -------------------------------- ---------------- ----------------
<S> <C> <C> <C>
THE HUMAN PETS Feature film 1 Home Video
JOURNEY TO THE MAGIC CAVERN Feature film 1 Home Video
LADY-IN-WAITING Feature film 1 Home Video
THE LAST GASP Feature film 1 Home Video
LOST WORLD OF THE GIANTS Feature film 1 Home Video
OBLIVION Feature film 1 Home Video
PLANET OF THE DINO KNIGHTS Feature film 1 Home Video
SENSATION Feature film 1 HBO
TRAPPED IN TOYWORLD Feature film 1 Home Video
WES CRAVEN PRESENTS: MINDRIPPER Feature film 1 Home Video
ANGEL OF PASSION Feature film 1 Cable/Home Video
BANISHED BEHIND BARS Feature film 1 Cable/Home Video
BARE EXPOSURE Feature film 1 Cable/Home Video
BIKINI DRIVE IN Feature film 1 Cable/Home Video
BLONDE HEAVEN Feature film 1 Cable/Home Video
CAGED HEARTS Feature film 1 Cable/Home Video
CALL GIRL Feature film 1 Cable/Home Video
CAVE GIRL ISLAND Feature film 1 Cable/Home Video
DONOR, THE Feature film 1 Cable/Home Video
ELKE'S EROTIC DREAM Feature film 1 Cable/Home Video
FORBIDDEN GAMES Feature film 1 Cable/Home Video
HARD BOUNTY Feature film 1 Cable/Home Video
ILLICIT DREAMS II Feature film 1 Cable/Home Video
IMPROPER CONDUCT Feature film 1 Cable/Home Video
INNOCENCE BETRAYED Feature film 1 Cable/Home Video
INTERNATIONAL BEACH Feature film 1 Cable/Home Video
IRRESISTIBLE IMPULSE Feature film 1 Cable/Home Video
JACKO Feature film 1 Cable/Home Video
JUNGLE LAW Feature film 1 Cable/Home Video
LAP DANCER Feature film 1 Cable/Home Video
LOVE ME TWICE Feature film 1 Cable/Home Video
LOVER'S CONCERTO Feature film 1 Cable/Home Video
LURID TALES Feature film 1 Cable/Home Video
MASSEUSE, THE Feature film 1 Cable/Home Video
MIAMI MODELS Feature film 1 Cable/Home Video
MIDNIGHT CONFESSIONS Feature film 1 Cable/Home Video
MIDNIGHT TEASE II Feature film 1 Cable/Home Video
MIDNIGHT TEMPTATIONS Feature film 1 Cable/Home Video
PETTICOAT PLANET Feature film 1 Cable/Home Video
PLEASURE IN PARADISE Feature film 1 Cable/Home Video
POWDER BURN Feature film 1 Cable/Home Video
PRELUDE TO LOVE Feature film 1 Cable/Home Video
PRIVATE OBSESSION Feature film 1 Cable/Home Video
SECOND SIGHT Feature film 1 Cable/Home Video
SEDUCTION OF INNOCENCE Feature film 1 Cable/Home Video
SENSUOUS SUMMER Feature film 1 Cable/Home Video
SIREN'S KISS Feature film 1 Cable/Home Video
SOFTBODIES, THE MOVIE Feature film 1 Cable/Home Video
SPIRIT OF THE NIGHT Feature film 1 Cable/Home Video
TARGET OF SEDUCTION Feature film 1 Cable/Home Video
TOTALLY EXPOSED Feature film 1 Cable/Home Video
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
NUMBER
TITLE TYPE OF PROGRAM PRODUCED/ORDERED FIRST EXHIBITION
- -------------------------------------------------- -------------------------------- ---------------- ----------------
<S> <C> <C> <C>
UNDER LOCK AND KEY Feature film 1 Cable/Home Video
UNINHIBITED Feature film 1 Cable/Home Video
VIRTUAL DESIRE Feature film 1 Cable/Home Video
WAGER OF LOVE Feature film 1 Cable/Home Video
RELATIVELY SPEAKING Game show 90 Syndication
CINEMATTRACTIONS Magazine series 26 Syndication
ALADDIN Musical special 1 International
FAMILY PICTURES Network mini-series 1 ABC
JFK: RECKLESS YOUTH Network mini-series 1 ABC
WORLD WAR II: WHEN LIONS ROARED Network mini-series 1 NBC
CAROLINA SKELETONS Network movie-of-the-week 1 NBC
CONFESSIONS: TWO FACES OF EVIL Network movie-of-the-week 1 NBC
FATHER AND SON: DANGEROUS RELATIONS Network movie-of-the-week 1 NBC
FIRE IN THE DARK Network movie-of-the-week 1 CBS
GETTING GOTTI: THE DIANE GIACALONE STORY Network movie-of-the-week 1 CBS
GOOD COPS, BAD COPS Network movie-of-the-week 1 NBC
JACK REED: A KILLER AMONGST US Network movie-of-the-week 1 NBC
KISS SHOT Network movie-of-the-week 1 CBS
LIBERACE: BEHIND THE MUSIC Network movie-of-the-week 1 CBS
OVERRULED Network movie-of-the-week 1 NBC
SINS OF THE MOTHER Network movie-of-the-week 1 CBS
SWEET BIRD OF YOUTH Network movie-of-the-week 1 NBC
TO SAVE THE CHILDREN Network movie-of-the-week 1 CBS
YOUR MOTHER WEARS COMBAT BOOTS Network movie-of-the-week 1 NBC
HARTS OF THE WEST Network series 15 CBS
SWEATING BULLETS Network series 66 CBS
TRIAL WATCH Network series 117 NBC
THE BARBARA DE ANGELIS SHOW Network talk show 70 CBS
HEROES: MADE IN THE USA Reality series 38 Syndication
BIOGRAPHIES Hour series 4 A&E
CANDLES IN THE DARK Television movie 1 Family Channel
CITY BOY Television movie 1 PBS
</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. Following
the expiration of the licenses, rights generally revert to the Company where the
Company is the copyright owner.
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 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. Concepts
used in films are being developed into CD-ROM computer games under an agreement
with IBM. IBM will also be publishing a CD-ROM developed by the Company with
Dove Films and Total Media as a reference work on the subject of wine. Using its
expertise as a television producer, the Company has two infomercials in
production through a partnership known as TVFirst. One infomercial has begun
testing and is on the subject of personal relationships. The other is a work in
process on the subject of Christian music. Responding to the increased demand
for product by the pay-per-view, pay cable and basic
11
<PAGE>
cable services, the Company formed a joint venture called KLC/New City to
acquire product from third parties for distribution in the cable market. The
joint venture has acquired over 45 films for this purpose as of December 22,
1995.
GOVERNMENT REGULATIONS
In a decision released September 6, 1995, 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 predicted at the present time, although there has
been an increase in in-house productions of programming for the networks' own
use.
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.
2. PROPERTIES
The Company leases approximately 23,000 square feet of office space on the
20th and 21st floors at 11601 Wilshire Boulevard, Los Angeles, California under
a lease agreement through March 31, 2000. The annual rent under the lease is
approximately $527,500. The Company's film service subsidiary, Kushner Locke
International (U.K.) Limited, leases approximately 560 square feet of office
space at 83 Marylebone High Street in London, United Kingdom under a lease
agreement through June 24, 2000. The annual rent under such a lease is
approximately $12,850 (L8,400).
The Company rents studio facilities as needed for production, except that
certain post-production off-line editing is performed at the Company's executive
offices.
3. LEGAL PROCEEDINGS
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 position,
results of operations or liquidity.
The Company is party to certain other legal proceedings and claims arising
out of the normal course of business. The Company believes that the ultimate
resolution of all of these matters will not have a material adverse effect upon
the Company's financial position, results of operations or liquidity.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year covered by this report.
12
<PAGE>
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the Nasdaq National Market ("NNM")
under the symbol "KLOC." Additionally, the stock is listed on the Pacific Stock
Exchange under the symbol "KLO." The following table sets forth the range of
high and low sale price for the Common Stock, as reported on the NNM, for the
periods indicated.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1994
First Quarter (ended December 31, 1993).................................... 1.38 0.84
Second Quarter (ended March 31, 1994)...................................... 1.09 0.75
Third Quarter (ended June 30, 1994)........................................ 1.53 0.72
Fourth Quarter (ended September 30, 1994).................................. 1.91 0.88
FISCAL 1995
First Quarter (ended December 31, 1994).................................... 1.03 0.69
Second Quarter (ended March 31, 1995)...................................... 0.97 0.69
Third Quarter (ended June 30, 1995)........................................ 0.88 0.69
Fourth Quarter (ended September 30, 1995).................................. 0.81 0.50
FISCAL 1996
First Quarter (ended December 29, 1995).................................... 0.75 0.47
</TABLE>
On December 29, 1995, the last sale price for the Common Stock as reported
on the NNM was $.59 for the Common Stock. At December 29, 1995, there were
approximately 728 record holders of the Common Stock.
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 or agreements
under which the Company's 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.
13
<PAGE>
6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data for the
Company and should be read in conjunction with the more detailed consolidated
financial statements included elsewhere in this Annual Report. The selected
consolidated financial data for the fiscal years are derived from the
consolidated financial statements audited by KPMG Peat Marwick LLP, independent
certified public accountants, whose report with respect to the consolidated
balance sheets of 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 appears
elsewhere in this Annual Report.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating revenues........................... $ 20,407 $ 50,736 $ 42,487 $ 24,052 $ 28,006
Costs relating to operating revenues......... 17.404 54,952 41,497 20,082 22,621
Selling, general and administrative
expenses.................................... 3,838 3,208 2,797 2,441 2,233
--------- --------- --------- --------- ---------
Earnings (loss) from operations.............. (835) (7,424) (1,807) 1,529 3,152
Interest income.............................. 300 197 78 54 180
Interest expense............................. (3,409) (2,209) (1,173) (1,217) (1,000)
Other income................................. -- -- -- -- 8
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes and
cumulative effect of a change in accounting
principle................................... (3,944) (9,436) (2,902) 366 2,340
Income tax expense (benefit)................. 31 (2,277) (1,076) 122 895
--------- --------- --------- --------- ---------
Earnings (loss) before cumulative effect of a
change in accounting principle.............. (3,975) (7,159) (1,826) 244 1,445
Cumulative effect of a change in accounting
for income taxes............................ -- (394) -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss).......................... $ (3,975) $ (6,765) $ (1,826) $ 244 $ 1,445
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings (loss) per common and common
equivalent share:
Earnings (loss) before cumulative effect of a
change in accounting for income taxes....... $ (.13) $ (.24) $ (.06) $ .01 $ .08
Cumulative effect of a change in accounting
for income taxes............................ -- .01 -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss).......................... $ (.13) $ (.23) $ (.06) $ .01 $ .08
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common and common
equivalent shares outstanding............... 31,713 29,373 28,372 20,958 17,846
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 4,301 (1) $ 15,681 $ 6,542 $ 2,491 $ 2,867
Accounts receivable, net..................... 7,864 6,177 5,360 2,936 2,970
Film costs, net of accumulated
amortization................................ 73,716 30,688 43,031 42,680 33,807
Total assets................................. 88,952 54,254 56,131 49,847 41,364
Notes payable................................ 28,398 9,600 8,007 5,582 3,349
Convertible subordinated debentures, net..... 17,745 22,056 4,296 4,942 4,985
Total Liabilities............................ 69,745 35,713 32,252 31,674 23,568
Stockholders' equity......................... 19,207 18,541 23,879 18,173 17,796
</TABLE>
- ------------------------
*(1) $1,162 of cash and cash equivalents are restricted deposits that are
collateral for certain production loans.
14
<PAGE>
7. 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 and distribute 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 (See Note 1 of Notes to
Consolidated Financial Statements). 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 in which such write-down is taken could result. See "Results of
Operations -- Comparison of Fiscal Years Ended September 30, 1995 and 1994."
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 net earnings may occur from period to
period. Accordingly, year-to-year comparisons of quarterly results may not be
meaningful and quarterly operating results during the course of a fiscal year
may not be indicative of the results that may be expected for the entire fiscal
year. During fiscal 1995 the Company invested over $60 million into film and
television programs, of which the majority were not available for delivery or
distribution prior to the fiscal year end. As a result of this and other
factors, the Company has reported a net loss during each quarter of and for the
fiscal year ended September 30, 1995 and film costs, net of accumulated
amortization, increased to $73,716,000 at September 30, 1995 from $30,688,000 at
September 30, 1994. Film costs in process or development at September 30, 1995
increased to $42,115,000 from $5,177,000 at the prior period ending September
30, 1994. See "Results of Operations -- Comparison of Fiscal Years Ended
September 30, 1995 and 1994" below.
Historically a small number of television programs or feature films have
accounted for a significant portion of the Company's revenues in any given
fiscal period. Thus, a change in the amount of entertainment product available
for delivery from period to period have materially affected a given period's
revenues and results of operations and year-to-year results may not be
comparable. The continuing diversification of the
15
<PAGE>
Company's product mix during this 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 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.
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
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 from 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.
In various stages of production for the Company's fiscal 1996 slate as of
December 15, 1995 are (a) the major theatrical feature film THE LEGEND OF
PINOCCHIO starring Martin Landau and Jonathan Taylor Thomas, (b) the feature
film SERPENT'S LAIR starring Jeff Fahey for WarnerVision, (c) the feature film
THE GRAVE starring Gabrielle Anwar, Eric Roberts and Craig Sheffer, (d) the
feature film FREEWAY executive produced by Oliver Stone and starring Kiefer
Sutherland, Reese Witherspoon and Brooke Shields, (e) the feature film WHOLE
WIDE WORLD starring Vincent D'Onofrio, (f) two animated feature films for Buena
Vista Home Video, a division of The Walt Disney Company, that are sequels to the
successful direct-to-video title THE BRAVE LITTLE TOASTER (g) a four-hour
mini-series for the ABC television network entitled INNOCENT VICTIMS starring
Hal Holbrook and Rick Schroder, (h) a television movie called NO EASY ANSWERS
starring Judith Light, and (i) one infomercial on the subject of Christian music
through the Company's partnership called TVFirst. In addition, the Company has
acquired domestic cable rights for a package of over 45 films, the majority of
which are scheduled to be delivered during fiscal 1996, for distribution through
a joint venture called KLC/ New City; and has acquired the international
distribution rights to an additional 14 films for distribution through Kushner
Locke International, Inc.
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 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%, reflecting a change in the product mix to projects
with higher profit margins. During the fourth quarter of fiscal 1994, the
Company revised its estimate of future revenue programming no longer being
produced by the Company resulting in a write down expense of approximately
16
<PAGE>
$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 is funding 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 versus having only the Series A and B
debt outstanding for part of the 1994 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
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
large amount of development and production of work in process scheduled to be
delivered after the 1995 fiscal year and 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: 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 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 during fiscal 1993.
17
<PAGE>
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 for 1ST AND
TEN and SWEATING BULLETS. These revised estimates and, to a lesser extent,
revised estimates on other programming no longer being produced by the Company
resulted 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 resulted from developments surrounding O. J.
Simpson, one of the stars of the series 1ST AND TEN. Without such reductions,
costs relating to operating revenues would have been $47,152,000, or
approximately 93%, for fiscal 1994.
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 from Statement of Financial Accounting Standards (SFAS) No.
96 to SFAS No. 109 "Accounting for Income Taxes" of ($7,159,000), or ($.24) per
share, and net loss of ($6,765,000), or ($.23) per share, for the year ended
September 30, 1994 and ($1,826,000), or ($.06) per share, for the year ended
September 30, 1993. The losses in fiscal 1994 and 1993 resulted primarily from
the above described reductions in the carrying value of certain programs no
longer being produced by the Company and the increased interest expense and
amortization of capitalized issuance costs incurred as a result of the 8% and 9%
Convertible Subordinated Debenture offerings.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $4,301,000 (including $1,162,000 of
restricted cash being used as collateral for certain production loans) at
September 30, 1995 from $15,681,000 at September 30, 1994 primarily from
utilization of working capital in the development, production, acquisition and
distribution of feature films and, to a lesser extent, television programs; and
expansion of the Company's business lines into related ancillary markets for its
product. At September 30, 1995, the Company had net negative liquid assets of
approximately ($18,493,000) consisting of cash and cash equivalents, accounts
receivable, amounts due from affiliates, and notes receivable from distributor
less accounts payable and accrued liabilities, short-term production loans and
the $14,804,000 current portion of the Company's existing line of credit which
matures on January 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,
18
<PAGE>
including the line of credit, and through certain pre-sale of rights in
international markets. In addition, the recent expansion of the Company's
international distribution business and the establishment of a new feature film
division 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 from the Company's significant expansion of production) of
$30,420,000 during the twelve months ended September 30, 1995, which was
partially offset by net cash of $18,713,000 provided by financing activities
from production loans and greater usage of the Company's revolving line of
credit. As a result primarily of the foregoing factors, net unrestricted cash
decreased by $12,542,000 to $3,139,000 on September 30, 1995. As the Company
expands production and distribution activities and increases its debt service
burdens, it will continue to experience net negative cash flows from operating
activities, pending receipt of licensing revenues, other revenues and sales from
its library.
The Company's current line of credit with Imperial Bank provides for
borrowings up to $15,000,000 based on specified percentages of eligible domestic
and international receivables and net film costs balances through January 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 (8.5% as of December 22, 1995)
plus 1.25%. At September 30, 1995, the outstanding loan balance was $14,804,000
under the line of credit and there was $196,000 additional availability. As of
December 22, 1995, the outstanding loan balance was $15,000,000 with no
additional availability.
The credit agreement with Imperial Bank contains various financial and other
covenants to which the Company must adhere. These covenants, among other things,
require the maintenance of minimum net income and various financial ratios which
are reported to the bank on a quarterly basis and include limitations on
additional indebtedness, liens, investments, disposition of assets, guarantees,
deficit financing, affiliate transactions, the use of proceeds and prohibit
payment of dividends and repayment of subordinated debt. The outstanding credit
agreement also contains a provision permitting the bank to declare an event of
default if the services of Messrs. Locke or Kushner are not available to the
Company unless a replacement acceptable to the bank is named. On August 11,
1995, the Company was advised by Imperial Bank that the bank's prior waiver of
the tangible net worth covenant of the credit agreement extended only through
June 30, 1995 (the original maturity date of the line of credit), not the
revised September 30, 1995 maturity date. The Company subsequently applied for a
waiver of such covenant through September 30, 1995, and was advised by the bank
on August 14, 1995 that such waiver had been granted.
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. 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,
19
<PAGE>
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.
From December 1990 through April 1991, the Company sold an aggregate of
$5,700,000 principal amount of Series A Debentures and an aggregate of
$6,000,000 principal amount of Series B Debentures. In connection with the
issuance of certain of the Series A Debentures, the Company issued warrants to
purchase an aggregate of 2,100,000 shares of Common Stock at an exercise price
of $2.00 per share. In December 1995, the Company elected to extend the
expiration date of such warrants from March 20, 1996 to March 20, 1997. As of
September 30, 1995, approximately $97,000 principal amount of Series A
Debentures and $3,326,000 of Series B Debentures were outstanding. The Series A
Debentures are convertible into shares of Common Stock at the rate of
approximately $1.27 per share and the Series B Debentures into shares of Common
Stock at the rate of approximately $1.54 per share. The reduction in Series A
and Series B Debentures has resulted primarily from conversions to Common Stock.
The Company currently has the right to redeem the Series A Debentures at
redemption prices at 103% of par after September 30, 1995 and declining to par
after September 30, 1997. The indentures under which the Company's outstanding
debentures described above were issued contain various covenants to which the
Company must adhere. These covenants, among other things, also impose certain
limitations on additional indebtedness and dividend payments by the Company.
In November 1992, the Company completed an offering of 8,050,000 shares of
its common stock for which the Company received net proceeds of approximately
$6,640,000.
During March and April 1994, the Company sold $16,437,000 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 the 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 the rate of $1.58 per share, subject to customary
anti-dilutive provisions and provisions in the event of certain payment
defaults. The Company has the right to redeem the 9% Debentures at redemption
prices commencing at 103% of par on or after July 1, 1998 and declining to par
on or after July 1, 2000. The Debentures are subordinated in right of payment to
all Senior Indebtedness (as defined) of the Company and rank pari passu with the
Company's Series A, Series B and 8% Debentures. The fiscal agency agreement,
under which the Company's 9% Debentures were issued, contains various covenants
to which the Company must adhere.
20
<PAGE>
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, primarily as a result of the
conversion of the 8% and 9% Debentures, the number of outstanding shares of
common stock has increased from 30,069,101 to 35,679,607 as of December 29,
1995.
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 loan bears interest at an annual rate of Prime
(8.5% as of December 22, 1995) plus 3% payable monthly. The loan is secured
solely by the rights, title and assets related to the film series. The loan
matures in February 1996 but will be partially prepaid in advance of the
maturity date. At December 22, 1995, the outstanding loan balance was $1,486,706
under the TIME WARRIOR production loan.
In December 1994, the Company advanced August Entertainment, Inc. ("August")
$650,000. August is majority owned by Gregory Cascante, who joined the Company
as head of its new international film distribution division. The agreement is
secured by all assets of August, including a pledge of all sales commissions due
to August from the producers thereof on the films SLEEP WITH ME, LAWNMOWER MAN
II and NOSTRADAMUS. 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 (8.5% at December 22, 1995) plus
2% or (b) 10%. Repayment of principal and interest is by collection of
commissions assigned as collateral. As of December 22, 1995 the Company had been
repaid approximately $170,000 toward interest and principal. The loan matures in
December 1996.
The 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 a live-action feature-length theatrical motion
picture currently titled THE LEGEND 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 50% of the budget to the production entity up to
$25,000,000 (which budget has been subsequently increased to approximately
$28,450,000 of which the majority of such increase has been financed by Savoy in
exchange for certain profit participations). In order to fund the Company's up
to $12,850,000 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 has 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. As of December 22, 1995 $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 $13,000,000 of foreign pre-sales, was
guaranteed by The Kushner-Locke Company.
There is no assurance that THE LEGEND OF PINOCCHIO, which represents the
Company's biggest budget theatrical motion picture to date, will be completed,
or if completed, 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 Pictures) and
international sub-distributors. New Line Pictures has agreed to accept the
technical specifications ordered by Savoy as its delivery requirements. The
Company's ability to complete this project is materially dependent upon both
funding by Savoy (against domestic distribution rights it licensed) and by
Newmarket (against the Company's foreign pre-sales and remaining foreign
rights).
In May and June 1995 the Company, in its role as world wide distributor,
agreed to guaranty a proportion of two production loans to film producers, which
are consolidated entities, from Newmarket which finance the budgets for the
feature films SERPENT'S LAIR and THE GRAVE. The loans of $1,005,000 and
21
<PAGE>
$2,100,000 each bear interest at an annual rate of either (a) Prime (8.5% as of
December 22, 1995) plus 1% or (b) LIBOR + 3% payable monthly or on the maturity
date of the related LIBOR contract. The loans are secured solely by the rights,
title and assets of the production companies related to those films. The loans
mature in February 1996 and March 1996, respectively. 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 these
milestones and amended its Loan and Security Agreements accordingly. At December
22, 1995, the outstanding balance on The Kushner-Locke Company's corporate
guaranty of principal for SERPENT'S LAIR was reduced to $300,000 and for THE
GRAVE was reduced to $250,000. See Note 3 of Notes to Consolidated Financial
Statements.
In August 1995 the Company, in its role as world wide distributor, agreed to
guaranty a proportion of two other production loans to film producers, which are
consolidated entities, provided by Newmarket and Banque Paribas, Los Angeles
Agency ("Paribas") which finance the majority of the budgets for the films WHOLE
WIDE WORLD and FREEWAY. The $1,550,000 loan from Newmarket for WHOLE WIDE WORLD
bears interest at either (a) Prime (8.5% as of December 22, 1995) plus 1% or (b)
LIBOR + 3% until the maturity date of March 31, 1996. The Kushner-Locke
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 and
December 1995, Newmarket granted waivers to the Borrower for not reaching these
milestones and amended its Loan and Security Agreement accordingly. As of
December 22, 1995 The Kushner-Locke 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 Paribas loan for $1,983,333 for FREEWAY
bears interest at either (a) Reference Rate (8.5% as of December 22, 1995) plus
1/2% or (b) LIBOR + 2% until the maturity date of July 5, 1996. In this case,
there are no milestone dates for aggregate contracts receivable and The
Kushner-Locke 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 collectable at the maturity date by Paribas from The
Kushner-Locke Company. See Note 3 of Notes to Consolidated Financial Statements.
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 business and operations have not been materially affected by
inflation.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Item 8 are set
forth in the pages indicated in Item 14.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
22
<PAGE>
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information called for in Item 10 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (September 30, 1995) in the
Company's definitive Proxy Statement in connection with its 1996 Annual Meeting
of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of
1934 or in an amendment to this Annual Report of Form 10-K.
11. EXECUTIVE COMPENSATION
The information called for in Item 11 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (September 30, 1995) in the
Company's definitive Proxy Statement in connection with its 1996 Annual Meeting
of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of
1934 or in an amendment to this Annual Report of Form 10-K.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for in Item 11 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (September 30, 1995) in the
Company's definitive Proxy Statement in connection with its 1996 Annual Meeting
of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of
1934 or in an amendment to this Annual Report of Form 10-K.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for in Item 11 of Part III shall be filed not later
than 120 days after the Company's fiscal year end (September 30, 1995) in the
Company's definitive Proxy Statement in connection with its 1996 Annual Meeting
of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of
1934 or in an amendment to this Annual Report of Form 10-K.
PART IV
14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
(a) (1) Financial Statements:
Independent Auditors' Report........................................................... F-1
Consolidated Balance Sheets at September 30, 1995 and 1994............................. F-2
Consolidated Statements of Operations for the years ended September 30, 1995, 1994 &
1993.................................................................................. F-3
Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1994 and
1993.................................................................................. F-4
Consolidated Statements of Stockholder's Equity for the years ended September 30, 1995,
1994 and 1993......................................................................... F-6
(2) Financial Statement Schedule
Schedule II............................................................................ F-21
All other schedules are inapplicable and, therefore, have been omitted.
(3) Exhibits............................................................................... F-22
Exhibits filed as a part of this report are listed in the Exhibit Index, which follows
the Signatures
(b) Reports on Form 8-K:
None.
</TABLE>
23
<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. In connection with our audits of the consolidated financial
statements, we have also audited the accompanying financial statement schedule.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
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-1
<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-2
<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-3
<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-4
<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-5
<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-6
<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-7
<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
F-8
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the years ended September 30, 1995, 1994 and 1993, respectively. The inclusion
of the additional shares assuming the conversion of the Company's convertible
subordinated debentures would have been anti-dilutive for all periods.
(2) FILM COSTS
Film costs consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
In process or development............................................. $ 42,115,000 $ 5,177,000
Released, principally television productions, net of accumulated
amortization......................................................... 31,601,000 25,511,000
------------- -------------
$ 73,716,000 $ 30,688,000
------------- -------------
------------- -------------
</TABLE>
Based upon the Company's present estimates of anticipated future revenues at
September 30, 1995, approximately 76% of the film costs related to released
films and television series will be amortized during the three-year period
ending September 30, 1998.
(3) NOTES PAYABLE AND LIQUIDITY
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
Note payable to bank, secured by substantially all Company assets,
interest at prime (8.75% at September 30, 1995) plus 1.25%,
outstanding principal balance due January 1996....................... $ 14,804,000 $ 9,600,000
Notes payable, secured by certain film rights held by producers
payable through September 1996....................................... 13,594,000 --
------------- -------------
$ 28,398,000 $ 9,600,000
------------- -------------
------------- -------------
</TABLE>
The Imperial credit agreement, as amended and restated in August 1993, had
an original maturity date of June 2, 1995. The original maturity date was
extended in March 1995 to September 30, 1995, then subsequently extended in
September 1995 to December 29, 1995 and further extended in December 1995 to
January 31, 1996. During the beginning of this period, the Company initially
held discussions with Imperial Bank seeking a longer-term extension and increase
of the facility to $25,000,000 through a syndication to include additional
financial institutions. In September 1995, 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. Imperial Bank's commitment
is subject to completion and effectiveness of an amendment to the existing
credit agreement satisfactory to the
F-9
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NOTES PAYABLE AND LIQUIDITY (CONTINUED)
bank by January 31, 1996, which amendment will eliminate existing financial
covenants as of September 30, 1995 and substitute revised net worth, liquidity
and minimum quarterly net income requirements. Imperial Bank has advised the
Company that based on its knowledge of the Company the bank believes it is
highly probable such documentation will be executed shortly.
Following completion and effectiveness of the amendment, the Company intends
to commence discussions with Imperial Bank concerning arranging or participating
in a multi-year increased syndicated credit facility to amend or replace the
existing facility by May 31, 1996 in which it is expected that Imperial Bank
would continue to participate in a decreased amount. If such facility is not in
place by such time, as required by Imperial Bank's commitment letter, the
existing line of credit will be reduced in size from $15,000,000 to $12,500,000
during the period from May 31, 1996 to October 31, 1996, and further reduced to
$10,000,000 prior to December 31, 1996 to the extent of excess available cash
flow.
The line is secured by substantially all of the Company's assets and bears
interest at an annual rate of Prime (8.5% at December 22, 1995) plus 1.25%. The
Company is required to pay a commitment fee of .5% per annum of the unused
portion of the credit line. As of September 30, 1995, the Company had drawn down
$14,804,000 under this facility out of a total eligible collateral at such date
of $16,233,000 but which was capped at the credit limit of $15,000,000.
The outstanding credit agreement described above contains various covenants
to which the Company must adhere. These covenants, among other things, require
the maintenance of minimum net worth and various financial ratios which are
reported to the bank on a quarterly basis and include limitations on additional
indebtedness, liens, investments, disposition of assets, guarantees, deficit
financing, affiliate transactions and the use of proceeds and prohibit payment
of dividends and prepayment of subordinated debt. The outstanding credit
agreement also contains a provision permitting the bank to declare an event of
default if the services of either of Messrs. Kushner or Locke are not available
to the Company unless a replacement acceptable to the bank is named. The Company
is in compliance with the non-financial terms and conditions of the outstanding
credit agreement and the bank has agreed to waive the violation, if any, of any
existing financial covenants for the period ending September 30, 1995 upon
completion of documentation.
While the Company believes that it will obtain a multi-year increased
syndicated credit facility by May 31, 1996, the Company has not received any
commitment for such facility. If the Company is unable to obtain such increased
credit facility, the Company will seek alternative financing. However, there is
no guarantee that alternative financing will be available on acceptable terms.
If such increased credit facility and/or alternative financing is not available,
Management believes that existing resources and cash generated from operating
activities, after a reduction of the level of Company's investment in film
costs, will be adequate to comply with the terms of the anticipated extension of
the credit facility through December 1996. To the extent that existing resources
and a reduction in the level of Company's investment in film costs are not
adequate, Management has the ability and intent to reduce operating expenses.
Further, while the Company has in any event received the bank's commitment to
extend the existing facility through December 31, 1996 (subject to reduction
commencing May 31, 1996), such commitment is subject to completion and
effectiveness of the amendment by January 31, 1996. In the event that the
company does not receive an extension of its existing credit facility or is
unable to comply with the terms of the anticipated extension, the Company would
seek to restructure its obligations under the facility. This would have a
significant effect on the Company's operations.
The Company's other short term borrowings totaling $13,594,000 as of
September 30, 1995, consist of production loans from Newmarket Capital Group
L.P. ("Newmarket"), Banque Paribas (Los Angeles Agency) ("Paribas") and Imperial
Bank ("Imperial") to consolidated production entities. Newmarket's
F-10
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NOTES PAYABLE AND LIQUIDITY (CONTINUED)
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 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-11
<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 $1.5444 per
share.
F-12
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
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-13
<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>
YEAR 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>
YEAR 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>
YEAR 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-14
<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
-----------
Net operating loss carryforward............................. $ --
Valuation allowance......................................... --
Amortization of film costs.................................. (2,875,000 )
Foreign tax credit.......................................... --
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
Credit utilization to reduce deferred liability............. --
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
F-15
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) WARRANTS (CONTINUED)
principal amount of debentures sold ($505,000) at an exercise price equal to
120% of the principal amount of the debentures. The warrants are exercisable
during the four year period commencing July 25, 1995. As of September 30, 1995,
no warrants had been exercised.
(7) OPTIONS
In fiscal 1989, the Board of Directors approved a stock incentive plan (the
"Plan") that covers directors, third party consultants and advisors, independent
contractors, officers and other employees of the Company. In May 1994, the
stockholders of the Company voted to increase the authorized number of shares
available under the Plan from 1,500,000 to 4,500,000. The Plan allows for the
issuance of options to purchase shares of the Company's common stock at an
option price at least equal to the fair value of the stock on the date of grant.
As of September 30, 1995, 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-16
<PAGE>
(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 $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
F-17
<PAGE>
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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
F-18
<PAGE>
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
$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.
(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>
YEAR 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.
F-19
<PAGE>
(10) MAJOR CUSTOMERS AND EXPORT SALES (CONTINUED)
Domestic and international accounts receivable consisted of the following:
<TABLE>
<CAPTION>
YEAR 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>
YEAR 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-20
<PAGE>
THE KUSHNER-LOCKE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
ALLOWANCE BALANCE ADDITIONS BALANCE
FOR AT CHARGED TO DEDUCTIONS AT END
DOUBTFUL BEGINNING COSTS AND DUE TO OF
ACCOUNTS OF PERIOD EXPENSES WRITE-OFFS PERIOD
- --------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1995 $ 650,000 $450,000 $700,000 $400,000
1994 $ 450,000 $200,000 -- $650,000
1993 $ 350,000 $185,000 $ 85,000 $450,000
</TABLE>
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: January 12, 1996 /s/DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: January 12, 1996 /s/LENORE NELSON
Lenore Nelson
Chief Financial Officer,
Executive Vice President
and Assistant Secretary
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: January 12, 1996 /s/PETER LOCKE
Peter Locke
Co-Chairman of the Board,
Co-Chief Executive Officer
and President
Dated: January 12, 1996 /s/DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Dated: January 12, 1996 /s/LENORE NELSON
Lenore Nelson
Chief Financial Officer,
Executive Vice President
and Assistant Secretary
Dated: January 4, 1996 /s/STUART HERSCH
Stuart Hersch
Director
Dated: December 29, 1995 /s/MILT OKUN
Milt Okun
Director
Dated: January 12, 1996 /s/S. JAMES COPPERSMITH
S. James Coppersmith
Director
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<C> <S> <C>
3 Article 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)
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)
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)
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
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)
10.23 Employment Agreement dated April 25, 1994 between the Company and Lenore
Nelson (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)
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)
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
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)
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)
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)
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)
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 receivable milestone (WHOLE WIDE WORLD)
10.40 Modification and Extension of Restated Credit Agreement, dated September 29,
1995, by and between Imperial Bank and The Kushner-Locke Company
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
10.42 Modification and Extension of Restated Credit Agreement dated December 22,
1995 by and between Imperial Bank and The Kushner-Locke Company
10.43 Letter regarding extension of Restated Credit Agreement dated January 12,
1996 by and between Imperial Bank and The Kushner-Locke Company
23.1 Consent of KPMG Peat Marwick LLP
</TABLE>
- ------------------------
* Confidential Treatment Granted.
<PAGE>
(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 year 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.
<PAGE>
(EXHIBIT 10.35)
GUARANTY
GUARANTY, dated as of July 31, 1995, made by The Kushner-Locke Company (the
"Guarantor"). Except as otherwise defined herein, terms used herein and defined
in the Loan Agreement (as hereinafter defined) shall be used as so defined.
W I T N E S S E T H :
WHEREAS, Newmarket Capital Group, L.P. ("Lender") and Dayton Way Pictures
IV, Inc. (the "Borrower") have entered into that certain Loan Agreement and
Promissory Note dated as of July 31, 1995 relating to that certain motion
picture currently entitled "THE WHOLE WIDE WORLD" (the "Picture") and as a
condition to advancing funds thereunder, Lender has requested that Guarantor
provide this Guaranty;
WHEREAS, Guarantor will obtain benefits as a result of Borrower and Lender
entering into the Loan Agreement, and, accordingly, desires to execute and
deliver this Guaranty in order to satisfy the conditions described in the
preceding paragraph;
NOW, THEREFORE, in consideration of the foregoing and other benefits
accruing to the Guarantor, the receipt and sufficiency of which are hereby
acknowledged, the Guarantor hereby makes the following representations and
warranties to Lender and hereby covenants and agrees with Lender as follows:
1. The Guarantor irrevocably and unconditionally guarantees the full and
prompt payment when due at maturity (whether by acceleration or otherwise) of
the principal of and interest on the Note and of all other obligations and
liabilities (including, without limitation, indemnities, fees and interest
thereon) of the Borrower now existing or hereafter incurred under, arising out
of or in connection with the Note and the due performance and compliance with
the terms of the Note (all such principal, interest, obligations and
liabilities, collectively, the "Guaranteed Obligations"); provided, however,
that the Guarantor shall in no event be liable hereunder for any amount in
excess of Five Hundred Thousand Dollars ($500,000) which amount shall be subject
to reduction pursuant to Paragraph 5(b) of that certain Interparty Agreement
dated as of July 31, 1995 among Guarantor, Lender, Borrower, and Film Finances,
Inc.
2. The Guarantor hereby waives (a) notice of acceptance of this Guaranty
and notice of any liability to which it may apply; (b) presentment, demand of
payment, protest, notice of dishonor or nonpayment of any such liability, suit
or taking of other action by Borrower or Lender against, and any other notice
to, any party liable thereon (including the Guarantor or any other guarantor);
(c) any defense arising by reason of (i) any disability or other defense of
Borrower, or (ii) the cessation from any cause
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<PAGE>
whatsoever of the liability of Borrower other than indefeasible payment in full
in cash of the Guaranteed Obligations; (d) any and all suretyship defenses under
applicable law; (e) any and all benefits of Guarantor under California Civil
Code Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850 and 2899 and
California Code of Civil Procedure Sections 580a and 580d; (f) the benefit of
any statute of limitations affecting its liability hereunder or the enforcement
hereof, to the extent permitted by law.
3. Lender may at any time and from time to time without the consent of,
or notice to the Guarantor, without incurring responsibility to the Guarantor,
without impairing or releasing the obligations of the Guarantor hereunder, upon
or without any terms or conditions and in whole or in part:
(a) change the manner, place or terms of payment of, and/or change or
extend the time of payment of, renew or alter, any of the Guaranteed
Obligations or any liability incurred directly or indirectly in respect
thereof, and the guaranty herein made shall apply to the Guaranteed
Obligations as so changed, extended, renewed or altered;
(b) sell, exchange, release, surrender, realize upon or otherwise
deal with in any manner and in any order any property by whomsoever at any
time pledged or mortgaged to secure, or howsoever securing, the Guaranteed
Obligations or any liabilities (including any of those hereunder) incurred
directly or indirectly in respect thereof or hereof, and/or any offset
thereagainst;
(c) exercise or refrain from exercising any rights against Borrower
or others or otherwise act or refrain from acting;
(d) settle or compromise any of the Guaranteed Obligations or any
liability (including any of those hereunder) incurred directly or
indirectly in respect thereof or hereof, and may subordinate the payment of
all or any part thereof to the payment of any liability (whether due or
not) of Borrower to creditors of Borrower other than Producer, Lender and
the Guarantor;
(e) apply any sums by whomsoever paid or howsoever realized to any
liability or liabilities of Borrower to Producer and/or Lender regardless
of what liabilities or liabilities of Borrower remain unpaid; PROVIDED,
however, that any and all sums paid by the Guarantor pursuant to this
Guaranty shall be applied towards the Guaranteed Obligations;
(f) consent to or waive any breach of, or any act, omission or
default under, the Note, or otherwise amend, modify or supplement the Note
or any of such other instruments or agreements; and/or
(g) act or fail to act in any manner referred to in this Guaranty
which may deprive the Guarantor of any right to subrogation which it may
have against
2
<PAGE>
Borrower to recover full indemnity for any payments made pursuant to this
Guaranty.
4. The obligations of the Guarantor under this Guaranty are absolute and
unconditional and shall remain in full force and effect without regard to, and
shall not be released, suspended, discharged, terminated or otherwise affected
by, any circumstance or occurrence whatsoever, including, without limitation:
(a) any action or inaction by the Lender as contemplated in Section 3
of this Guaranty;
(b) any invalidity, irregularity or unenforceability of all or part
of the Guaranteed Obligations or of any security therefor;
(c) the Lender's election, in any proceeding instituted under Chapter
11 of Title 11 of the United States Code (11 U.S.C. SECTION 101 et seq.)
(the "Bankruptcy Code"), of the application of Section 1111(b) (2) of the
Bankruptcy Code;
(d) any borrowing or grant of a security interest by the Borrower, as
debtor-in-possession, or extension of credit, under Section 364 of the
Bankruptcy Code;
(e) the disallowance under Section 502 of the Bankruptcy Code of all
or any portion of the Lender's claim(s) for repayment of the Guaranteed
Obligations;
(f) any use of cash collateral under Section 363 of the Bankruptcy
Code;
(g) any agreement or stipulation as to the provision of adequate
protection in any bankruptcy proceeding;
(h) the avoidance of any lien in favor of the Agent for any reason;
(i) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, liquidation or dissolution proceeding commenced by or
against the Guarantor, including, without limitation, any discharge of, or
bar or stay against collecting, all or any of the Guaranteed Obligations
(or any interest thereon) in or as a result of any such proceeding;
(j) failure by the Lender to file or enforce a claim against the
Borrower or its estate in any bankruptcy or insolvency case or proceeding;
(k) any other circumstance which might otherwise constitute a legal
or equitable discharge or defense of a guarantor.
3
<PAGE>
This Guaranty is a primary obligation of the Guarantor.
5. If and to the extent that the Guarantor makes any payment to the
Lender or to any other person or entity pursuant to or in respect of this
Guaranty, any claim which the Guarantor may have against the Borrower by reason
thereof shall be subject and subordinate to the prior payment in full of the
Guaranteed Obligations.
6. In order to induce the Lender to enter into the Loan Agreement, the
Guarantor makes the following representations, warranties and agreements:
(a) The Guarantor (i) is a corporation duly organized, validly
existing and in good standing under the laws of the State of California,
(ii) has the power and authority to own its property and assets and to
transact business in which it is engaged and (iii) is duly qualified and in
good standing in each jurisdiction where the ownership, leasing or
operation of property or the conduct of its business requires such
qualification.
(b) The Guarantor has the power to execute, deliver and perform the
terms and provisions of this Guaranty and has taken all necessary action to
authorize the execution, delivery and performance of this Guaranty. The
Guarantor has duly executed and delivered this Guaranty, and this Guaranty
constitutes a legal, valid and binding obligation of Guarantor enforceable
in accordance with its terms.
(c) Neither the execution, delivery or performance by the Guarantor
of this Guaranty, nor its compliance with the terms and provisions hereof,
(i) will contravene any provision of any law, statute, rule or regulation
or any order, writ, injunction or decree of any court or governmental
instrumentality, or (ii) will conflict or be inconsistent with or result in
any breach of any of the terms, covenants, conditions or provisions of, or
constitute a default under any agreement, contract or instrument to which
the Guarantor is a party or by which it or any of its property or assets
are bound or to which it may be subject.
(d) No order, consent, approval, license, authorization or validation
of, or filing, recording or registration with (except as have been obtained
or made prior to the execution and delivery hereof) or exemption by, any
governmental or public body or authority, or any subdivision thereof, is
required to authorize, or is required in connection with, (i) the
execution, delivery and performance of this Guaranty or (ii) the legality,
validity, binding effect or enforceability of this Guaranty.
(e) Guarantor will obtain benefits as a result of Borrower entering
into the Loan Agreement and Guarantor has reviewed and is familiar with the
Loan Agreement and is familiar with the financial and business affairs of
Borrower.
4
<PAGE>
(f) All factual information (taken as a whole) heretofore or
contemporaneously furnished by or on behalf of the Guarantor in writing to
the Lender (including without limitation all information contained herein)
for purposes of or in connection with this Guaranty or any transaction
contemplated herein is, and all other such factual information (taken as a
whole) hereafter furnished by or on behalf of the Guarantor in writing to
the Lender will be, true and accurate in all material respects on the date
as of which such information is dated or certified and not incomplete by
omitting to state any fast [fact] necessary to make such information (taken
as a whole) not misleading at such time in light of the circumstances under
which such information was provided.
(g) The Guarantor has filed all tax returns it is required to file
and has paid all income taxes he is required to pay which have become due
pursuant to such tax returns and all other taxes and assessments he must
pay which have become due, other than those not yet delinquent and except
for those contested in good faith and for which adequate reserves have been
established. The Guarantor has paid, or has provided adequate reserves (in
the good faith judgment of the Guarantor) for the payment of, all federal
and state income taxes applicable for all prior fiscal years and for the
current fiscal year to the date hereof.
(h) The Guarantor is in compliance with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property, except such noncompliances as
would not, in the aggregate, have a material adverse effect on the
business, operations, property, assets, condition (financial or otherwise)
or prospects of the Guarantor taken as a whole.
7. This Guaranty is a continuing one and all liabilities to which it
applies or may apply under the terms hereof shall be conclusively presumed to
have been created in reliance hereon. No failure or delay on the part of the
Lender in exercising any right, power or privilege hereunder and no course of
dealing between the Guarantor, the Lender or any holder of the Note shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights,
powers and remedies herein expressly provided are cumulative and not exclusive
of any rights, powers or remedies which the Lender or any holder of the Note
would otherwise have. No notice to or demand on the Guarantor in any case shall
entitle the Guarantor to any other further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Lender or any holder
of the Note to any other or further action in any circumstances without notice
or demand.
8. This Guaranty shall be binding upon the Guarantor and its successors
and assigns and shall inure to the benefit of Lender and its successors and
assigns. Neither this Guaranty nor any provision hereof may be changed, waived,
discharged or
5
<PAGE>
terminated unless such change, waiver, discharge or termination is in
writing signed by the Guarantor and Lender.
9. All notices and other communications hereunder shall be in writing to
the party to be so notified at its address specified opposite its signature
below.
10. This Guaranty shall remain in full force and effect until the
Guaranteed Obligations have been paid in full. Notwithstanding any termination
or discharge of this Guaranty, if a claim is ever made upon Lender for repayment
or recovery of any amount or amounts received in payment or on account of any of
the Guaranteed Obligations and Lender repays all or part of said amount by
reason of (a) any judgment, decree or order of any court or administrative body
having jurisdiction over Lender or any of its property or (b) any settlement or
compromise of any such claim effected by Lender with any such claimant
(including Borrower), then and in such event the Guarantor agrees that any such
judgment, decree, order, settlement or compromise shall be binding upon it,
notwithstanding any revocation hereof, and the Guarantor shall be and remain
liable to the aforesaid payees hereunder for the amount so repaid or recovered
to the same extent as if such amount had never originally been received by
Lender.
11. This Guaranty shall be construed in accordance with and governed by
the law of the State of California without reference to the principles of
conflicts of law thereof. Guarantor hereby agrees that any legal action or
proceeding with respect hereto may be brought in the courts of the State of
California or in the federal courts for the United States for the Central
District of California, as the moving party may elect. By execution below, the
Guarantor irrevocably submits to such jurisdiction and irrevocably waives any
objection to the venue or any claim of inconvenient forum which it may now or
hereafter have in connection with any action or proceeding arising out of or
relating hereto brought in the courts of such jurisdiction.
12. This Guaranty may be executed by the parties hereto in counterparts,
and each such counterpart, when so executed, shall be deemed an original and all
such counterparts shall constitute but one and the same agreement.
13. The illegality or unenforceability of any provision of this Guaranty
or any instrument or agreement required hereunder shall not in any way affect or
impair the legality or enforceability of the remaining provisions of this
Guaranty or any instrument or agreement required hereunder.
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed
and delivered as of the date first above written.
THE KUSHNER-LOCKE COMPANY ADDRESS
11601 Wilshire Boulevard
By: [Signature of Donald Kushner] 21st Floor
---------------------------------- Los Angeles, California 90025
Its:
-----------------------------------
6
<PAGE>
(EXHIBIT 10.36)
GUARANTY
THIS GUARANTY ("Guaranty") is entered into as of the _____ day of
July, 1995, by The Kushner-Locke Company ("Guarantor") in favor of Banque
Paribas, Los Angeles Agency ("Bank"), with reference to the following:
A. Dayton Way Pictures III, Inc. ("Borrower") and Bank have entered
into a Loan and Security Agreement, dated as of July __, 1995 (said Loan and
Security Agreement, as it may hereafter be modified, amended, extended and
restated from time to time, being referred to herein as the "Loan Agreement"),
pursuant to which Bank has agreed to advance certain funds to Borrower in the
aggregate principal amount of One Million Nine Hundred Eighty-Three Thousand
Three Hundred Thirty-Three Dollars (US$1,983,333.00) (the "Loan") to be used in
payment of certain costs of production of the motion picture entitled "Freeway".
B. Pursuant to an agreement between Borrower and Guarantor,
Guarantor assigned the rights to the Picture and agreed to finance certain costs
of production of the Picture.
C. It is a condition precedent to the making of the Loan by Bank
under the Loan Agreement that Guarantor execute and deliver this Guaranty to
Bank.
D. Capitalized terms used herein without definition shall have the
meanings ascribed them in the Loan Agreement.
NOW, THEREFORE, based upon the foregoing and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Guarantor unconditionally agrees to guarantee the Guarantied Obligations (as
hereinafter defined) in accordance with the following terms and conditions:
Until all of the Obligations in favor of Bank arising under or with
respect to the Loan Agreement are repaid in full and the Commitment Period has
terminated, Guarantor hereby unconditionally and irrevocably guaranties the due
and punctual payment of all obligations in favor of Bank arising under or with
respect to the Loan Agreement up to an amount equal to fifty percent (50%) of
the Indebtedness of Borrower to Bank under the Loan Agreement (the "Guarantied
Obligations"), upon [the date which is six (6) months after delivery of the
Picture to Kushner-Locke International, Inc.], and agrees to pay, in addition to
the Guarantied Obligations, any and all costs and expenses (including fees and
disbursements of outside counsel) incurred by Bank in enforcing any rights under
this Guaranty. In furtherance of the foregoing and not in limitation of any
1
<PAGE>
other right which Bank may have at law or in equity against Guarantor by virtue
hereof, upon the failure of Borrower to pay any of the Guarantied Obligations
when and as the same become due, as aforesaid, Guarantor will, within ten (10)
days after written demand therefor, pay, or cause to be paid, in cash, to Bank,
an amount equal to all Guarantied Obligations then owed to Bank, subject to any
defenses thereto which Borrower may have (if any) under the Loan Agreement.
Guarantor further agrees that this Guaranty constitutes a guaranty of
payment when due and not of collection and waives any right to require that any
resort be had by Bank to any of the security held for payment of any of the
Guarantied Obligations or to any balance of any deposit account or credit on the
books of Bank in favor of Borrower or any other Person.
Guarantor agrees that the Guarantied Obligations may be rescinded,
waived, extended, renewed or altered, in whole or in part, without notice or
further assent from it, and that Guarantor will remain bound by this Guaranty
notwithstanding any such rescission, waiver, extension, renewal or alteration of
any Guarantied Obligation.
Guarantor waives presentment, demand and protest of any Guarantied
Obligation and also waives notice of protest for nonpayment. Without limiting
the generality of the foregoing and to the fullest extent permitted by law,
Guarantor hereby waives and relinquishes any and all rights, defenses and
benefits arising under California Commercial Code Section 3605, California Civil
Code Sections 2809, 2810, 2819, 2839, 2845, 2850, 2899 and 3433, and all other
rights, defenses and benefits limiting the liability of or exonerating
guarantors or sureties offered by law as well as the benefits of Sections 580a-
580d and 726 of the California Code of Civil Procedure. The obligations of
Guarantor under this Guaranty shall not be affected by:
(a) the failure of Bank to assert any claim or demand or to enforce
any right or remedy against Borrower under the provisions of the Loan Agreement,
any other Loan Document or any instrument executed pursuant thereto or any
other agreement or otherwise; or
(b) any extension or renewal of any provision of any thereof; or
(c) any rescission, waiver, amendment or modification of any of the
terms or provisions of the Loan Agreement, any other Loan Document, or any
instrument or agreement executed pursuant thereto; or
(d) Bank taking and holding security or collateral for the payment of
this Guaranty, any other guaranties of the Guarantied Obligations or any other
liabilities of Borrower or the Guarantied Obligations, and Bank exchanging,
enforcing, waiving and releasing any such security or collateral; or
2
<PAGE>
(e) the failure to perfect any security interest in, or the release
of, any of the security held by Bank for any of the Guarantied Obligations; or
(f) the failure of Bank to exercise any right or remedy against any
other guarantor of any of the Guarantied Obligations; or
(g) Bank applying such security or collateral and directing the order
or manner of sale thereof as in its discretion it may determine; or
(h) Bank settling, releasing, compromising, collecting or otherwise
liquidating the Guarantied Obligations and any security or collateral therefor
in any manner, as Bank may determine.
The obligations of Guarantor under this Guaranty shall not be subject
to any reduction, limitation, defense (other than such defenses (if any) as
Borrower may have under the Loan Agreement), setoff, recoupment, impairment or
termination for any reason, including, without limitation, any claim of waiver,
release, surrender, alteration or compromise of any of the Guarantied
Obligations, and shall not be subject to any defense or setoff, counterclaim,
recoupment or termination whatsoever by reason of the invalidity, illegality or
unenforceability of any of the Guarantied Obligations or any discharge of
Borrower from any of the Guarantied Obligations in a bankruptcy or similar
proceeding or otherwise. Without limiting the generality of the foregoing, the
obligations of Guarantor under this Guaranty shall not be discharged or impaired
or otherwise affected by any default, failure or delay, or by any other act or
thing or omission or delay to do any other act or thing that may or might in any
manner or to any extent vary the risk of Guarantor or which would otherwise
operate as a discharge of Guarantor as a matter of law or equity.
Guarantor assumes the risk of keeping informed concerning the
financial condition of Borrower and all other circumstances bearing upon the
risk of nonpayment of the Guarantied Obligations and further agrees that this
Guaranty shall continue to be effective or be reinstated, as the case may be, if
at any time payment, or any part thereof, of principal of or interest on any
Guarantied Obligation is rescinded or must otherwise be restored by Bank upon
the bankruptcy or reorganization of Borrower, or any other Person or otherwise.
Guarantor hereby irrevocably waives with respect to Borrower, its
successors and assigns and any other person, including other guarantors, who may
have similar rights against Borrower, any and all rights of subrogation,
reimbursement, exoneration, contribution or setoff, any and all rights to
participate in any claim or remedy of Bank against Borrower or any collateral,
and any and all other rights that could accrue to a surety against a principal,
to a guarantor against a maker or obligor, to an accommodation party against the
party accommodated or to a holder or transferee against a maker, and which
Guarantor may have or hereafter acquire against Borrower or any such other
person by contract, at law or in equity in connection with or as a result of
3
<PAGE>
Guarantor's execution, delivery and/or performance of this Guaranty or any other
Loan Document. Guarantor shall not at any time hereafter have or assert any
such claims or rights against Borrower, its successors and assigns or any such
other persons either directly or as an attempted setoff to any action commenced
against Guarantor by Borrower, Bank or any other person. Guarantor hereby
acknowledges and agrees that this waiver is intended to be for the benefit of
Borrower, as a third party beneficiary, as well as for the benefit of Bank.
Therefore, the waiver set forth herein shall remain at all times hereafter in
full force and effect, and may be enforced by Borrower in its own name and
right, notwithstanding that all indebtedness and obligations of Borrower to Bank
arising under the Loan Documents have been repaid in full.
Guarantor acknowledges that all of the waivers and consents set forth
herein are freely granted, after consultation with competent counsel, since it
is Guarantor's purpose and intent that all of Guarantor's obligations hereunder
be absolute, independent and unconditional under any and all circumstances.
Guarantor represents and warrants that:
(i) Guarantor is a corporation duly organized and existing in good
standing under the laws of the State of California, respectively, and in
each other jurisdiction in which each transacts business, has all requisite
corporate power to own and operate its property and to carry on its
business as now conducted and as proposed to be conducted. Guarantor has
all necessary corporate or legal power and authority to enter into this
Guaranty and to perform its obligations and undertakings hereunder.
(ii) There is no action, suit, investigation or proceeding pending or,
to the best knowledge of Guarantor after due inquiry, threatened against or
affecting Guarantor, any of its subsidiaries, or any properties or rights
of any of such corporations or entity, before any court, arbitrator or
administrative or governmental body, which might reasonably be expected to
result, individually or in the aggregate, in any material adverse change in
the business, condition or operations of Guarantor or any of its
subsidiaries taken as a whole, or seeks to restrain, enjoin, prevent the
consummation of or otherwise questions the validity or legality of this
Guaranty or any action taken or to be taken pursuant hereto and, to the
best knowledge or Guarantor, there is no valid basis for any such action,
proceeding or investigation.
(iii) Neither the execution nor delivery of this Guaranty, nor the
fulfillment and compliance with the terms and conditions hereof, will (A)
conflict with, or result in a breach or violation of, or constitute a
default under, any of the terms, conditions or provisions of (x) the
articles of incorporation, bylaws (if any) or any other organizational
documents of Guarantor or any of its subsidiaries, or (y) any term of any
material agreement, instrument, order, writ, judgment or decree to which
Guarantor or any of its subsidiaries is a party or by which its
4
<PAGE>
properties or assets are bound, or (z) any present statute, rule or
regulation binding on Guarantor or any of its subsidiaries, or (B) result
in the creation of any lien upon any of the properties or assets of
Guarantor or any of its subsidiaries under any agreement referred to in
clause (y) above.
No delay or omission by Bank to exercise any right under this Guaranty
shall impair any such right, nor shall it be construed to be a waiver thereof.
No amendment, modification, termination or waiver of any provision of this
Guaranty, or consent to any departure by Guarantor therefrom, shall in any event
be effective without the written concurrence of Bank. No waiver of any single
breach or default under this Guaranty shall be deemed a waiver of any other
breach or default.
In addition to all rights of setoff given to Bank by law against any
property of Borrower or of Guarantor, Bank and each subsequent holder of the
promissory note delivered to Bank pursuant to the Loan Agreement shall have a
right of setoff against all property of Guarantor now or hereafter in the
physical possession of or on deposit with Bank or such subsequent holder,
whether held in a general or special account, on deposit for safekeeping,
evidenced by a certificate of deposit or otherwise (but not trust accounts).
Each such right of setoff may be enforced or exercised without demand upon or
notice to Guarantor, shall continue in full force unless specifically waived by
Bank or such subsequent holder in writing and shall not be deemed waived by any
conduct of Bank or such subsequent holder, by any failure of Bank or such
subsequent holder to exercise any such right of setoff or by any neglect or
delay in so doing. Pending any such setoff or application Bank or such
subsequent holder may hold all such property and deposits as collateral and
return as unpaid any and all checks drawn against such deposits which are
presented for payment.
To the extent that any underlying Guarantied Obligation is not bearing
interest, payments not made when due hereunder by Guarantor to Bank on account
of such Guarantied Obligation shall bear interest from the due date hereunder
until paid to Bank at the Default Rate specified in the Loan Agreement.
Guarantor shall also, upon demand, indemnify Bank against and pay to Bank (1)
any and all outside attorneys' fees, costs and other expenses that Bank actually
expends or incurs in collecting or compromising the Guarantied Obligations or in
enforcing this Guaranty against Guarantor, whether or not suit is filed,
including, without limitation, all costs, attorneys' fees and expenses actually
expended or incurred by Bank in connection with, or in defense of, any
insolvency, bankruptcy, reorganization, arrangement or other similar proceeding
involving Guarantor, Borrower or any other person that in any way affects the
exercise by Bank of its rights and remedies hereunder and (2) any and all
amounts which Bank at any time returns to Borrower or to Borrower's trustee in
bankruptcy, whether voluntarily or involuntarily and whether or not suit is
filed, in response to any claim that Bank had theretofore received preferential
payments or transfers in fraud of creditors within the meaning of any
bankruptcy, insolvency or other similar law, now or hereafter existing. As used
herein attorneys' fees "actually expended or incurred" means the full and actual
cost of any legal services actually performed in connection with the matter for
5
<PAGE>
which such fees are sought, calculated on the basis of the usual fees charged by
the attorneys performing such services, and shall not be limited to "reasonable
attorneys' fees" as that term may be defined in statutory or decisional
authority.
Subject to any duty of Bank imposed by contract or by law and subject
to he direction of a court of competent jurisdiction, upon payment in full of
the Guarantied Obligations Guarantor shall be entitled to the release of all
security interests in any and all collateral given to Bank by Guarantor to
secure this Guaranty and to the return of any and all such collateral which is
in the possession of Bank; PROVIDED, however, that Bank shall not be obligated
to return such collateral to Guarantor, to deliver the same to the holder of any
subordinate lien or to release any of Bank's security interests therein until it
is satisfied, in its sole and absolute discretion, that all amounts which it has
received in respect of the Guarantied Obligations are no longer subject to being
recaptured under any applicable bankruptcy, insolvency or similar laws. The
return of collateral, however effected, shall be without recourse to Bank, and
Bank shall be entitled to receive appropriate documentation to such effect. The
return of such collateral shall be effected without representation or warranty
and shall not entitle Guarantor to any right to any endorsement.
This Guaranty shall be binding upon Guarantor and its successors and
assigns and shall inure to the benefit of the successors and assigns of Bank
and, in the event of any transfer or assignment of rights by Bank, the rights
and privileges herein conferred upon Bank shall automatically extend to and be
vested in such transferee or assignee, all subject to the terms and conditions
hereof.
This Guaranty, and any instrument or agreement required hereunder,
shall be governed by, and construed and enforced in accordance with, the laws of
the State of California. Guarantor hereby agrees that any legal action or
proceeding arising under or with respect to this Guaranty or any other
agreement, document or other instrument executed in connection herewith or
pursuant hereto, or any action or proceeding to execute or otherwise enforce any
judgment obtained against Guarantor or any of its properties may be brought in
the courts of the State of California or in the Federal Courts of the United
States for the Central District of California, provided always that suit also
may be brought in the courts of any country or place where Guarantor or any of
its assets may be found, and, by execution and delivery of this Guaranty,
Guarantor hereby irrevocably waives any objection which Guarantor may now or
hereafter have to the venue of any such suit, action or proceeding brought in
the courts of the State of California or in the Federal Courts of the United
States for the Central District of California, and hereby further irrevocably
waives any claim that any such suit, action or proceeding brought in any such
court has been brought in an inconvenient forum. Service of all writs, processes
and summonses in any action, suit or proceeding instituted by Bank in any of the
courts of the State of California or of the United States of America may be made
upon Guarantor by any means permitted by law, and to the extent permitted by
law, by the mailing of copies of the same to Guarantor, enclosed in registered
or certified mail cover, at the address designated for Guarantor below its
signature hereto.
6
<PAGE>
Guarantor consents to service of process in accordance with California law and
hereby appoints Bruce Lilliston, Esq. as agent for service of process.
This Guaranty may be executed in any number of counterparts, each of
which shall be deemed to be an original for all purposes; but such counterparts
shall be deemed to constitute but one and the same instrument.
IN WITNESS WHEREOF, the undersigned Guarantor has caused this Guaranty
to be duly executed as of the day and year first written above.
THE KUSHNER-LOCKE COMPANY, INC.
By: [Signature of Donald Kushner]
--------------------------------------
Its:
--------------------------------------
NOTICE ADDRESS:
11061 Wilshire Blvd, 21st Floor
Los Angeles, California 90025
Attention: Mr. Donald Kushner
Telecopy: (310) 445-1191
7
<PAGE>
(EXHIBIT 10.37)
SECOND AMENDMENT TO
LOAN AGREEMENT
This Second Amendment to Loan Agreement ("Amendment") is made as of
September 29, 1995 by and between Newmarket Capital Group, L.P. (the "Lender")
and Dayton Way Pictures II, Inc. (the "Borrower").
R E C I T A L S
WHEREAS, Borrower and Lender entered into that certain Loan Agreement dated
as of May 24, 1995 as amended by that certain First Amendment dated as of June
14, 1995, (collectively, the "Loan Agreement") relating to that certain motion
picture presently entitled "THE NESTING"; and
WHEREAS, Borrower and Lender now wish to amend the Loan Agreement;
NOW, THEREFORE, for good and valuable consideration, receipt and
sufficiency of which is hereby acknowledged, Borrower and Lender hereby agree as
follows:
1. DEFINITIONS. All capitalized terms not otherwise defined herein are
used herein as defined in the Loan Agreement.
2. WAIVER. By its execution hereof Lender hereby waives any Event of
Default which has occurred and is continuing as of the date hereof under Section
8.11 (a) of the Loan Agreement as a result of Debtor's failure to deliver to
Lender on or before June 30, 1995 sufficient Distribution Agreements together
with Distributor's Acceptances related thereto with an Acceptable Pre-Sale Value
of at least $400,000.
This waiver shall be effective only for the specific Event of Default(s)
specified above, and in no event shall this waiver be deemed to be a waiver of
(a) enforcement of the Lender's rights with respect to any other Event(s) of
Default now existing or hereafter arising or (b) Debtor's compliance with any
other covenants or provisions of the Credit Documents.
Nothing contained herein nor any communications between the Lender and the
Debtor shall be a waiver of any rights or remedies the Lender has or may have
against the Debtor, except as specifically provided herein. The Lender hereby
reserves and preserves all of its rights and remedies against the Debtor under
the Loan Agreement, the other Credit Documents, and applicable law.
3. AMENDMENT. The parties hereto agree that the Loan Agreement is hereby
amended as follows:
<PAGE>
SECTION 8.11. Section 8.11 of the Loan Agreement is hereby amended by
deleting the reference to "June 30, 1995" in the second line thereof and
replacing it with a reference to "November 30, 1995".
4. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants that all of the representations and warranties set forth in the Loan
Agreement are true and correct and that no Event of Default under the Loan
Agreement has occurred or is continuing as of the date hereof except as
specifically waived herein.
5. EFFECTIVE DATE. This Amendment shall become effective upon delivery
to the Lender of a fully executed copy of this Amendment. Except as
specifically set forth herein, the parties hereto agree and confirm that the
Loan Agreement and the other documents related thereto remain in full force and
effect as executed except that each reference in the Credit Documents to the
Loan Agreement shall be deemed to refer to the Loan Agreement as amended hereby.
6. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of California. No amendment hereto shall
be effective unless in writing and executed by the parties hereto.
7. COUNTERPARTS. This Amendment may be executed in counterparts all of
which when taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Amendment is duly executed by an authorized
signatory of each of the parties hereto as of the date first above written.
DAYTON WAY PICTURES II, INC.
By: [Signature Of Alan Abrams]
--------------------------------------
Name: ALAN ABRAMS
Title: President
NEWMARKET CAPITAL GROUP, L.P.
By: BFB, LLC
Its: Managing General Partner
By: [Signature of William Tyrer]
-------------------------------------
Name: William A. Tyrer
Title: President
<PAGE>
(EXHIBIT 10.38)
FIRST AMENDMENT TO
LOAN AGREEMENT
This First Amendment to Loan Agreement ("Amendment") is made as of
September 29, 1995 by and between Newmarket Capital Group, L.P. (the "Lender")
and Dayton Way Pictures, Inc. (the "Borrower").
R E C I T A L S
WHEREAS, Borrower and Lender entered into that certain Loan Agreement dated
as of June 12, 1995, (the "Loan Agreement") relating to that certain motion
picture presently entitled "THE GRAVE"; and
WHEREAS, Borrower and Lender now wish to amend the Loan Agreement;
NOW, THEREFORE, for good and valuable consideration, receipt and
sufficiency of which is hereby acknowledged, Borrower and Lender hereby agree as
follows:
1. DEFINITIONS. All capitalized terms not otherwise defined herein are
used herein as defined in the Loan Agreement.
2. WAIVER. By its execution hereof Lender hereby waives any Event of
Default which has occurred and is continuing as of the date hereof under Section
8.11 (a) of the Loan Agreement as a result of Debtor's failure to deliver to
Lender on or before June 30, 1995 sufficient Distribution Agreements together
with Distributor's Acceptances related thereto with an Acceptable Pre-Sale Value
of at least $700,000.
This waiver shall be effective only for the specific Event of Default(s)
specified above, and in no event shall this waiver be deemed to be a waiver of
(a) enforcement of the Lender's rights with respect to any other Event(s) of
Default now existing or hereafter arising or (b) Debtor's compliance with any
other covenants or provisions of the Credit Documents.
Nothing contained herein nor any communications between the Lender and the
Debtor shall be a waiver of any rights or remedies the Lender has or may have
against the Debtor, except as specifically provided herein. The Lender hereby
reserves and preserves all of its rights and remedies against the Debtor under
the Loan Agreement, the other Credit Documents, and applicable law.
3. AMENDMENT. The parties hereto agree that the Loan Agreement is hereby
amended as follows:
SECTION 8.11. Section 8.11 of the Loan Agreement is hereby amended by
deleting the reference to "June 30, 1995" in the second line thereof and
replacing it with a reference to "November 30, 1995".
<PAGE>
4. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants that all of the representations and warranties set forth in the Loan
Agreement are true and correct and that no Event of Default under the Loan
Agreement has occurred or is continuing as of the date hereof except as
specifically waived herein.
5. EFFECTIVE DATE. This Amendment shall become effective upon delivery
to the Lender of a fully executed copy of this Amendment. Except as
specifically set forth herein, the parties hereto agree and confirm that the
Loan Agreement and the other documents related thereto remain in full force and
effect as executed except that each reference in the Credit Documents to the
Loan Agreement shall be deemed to refer to the Loan Agreement as amended hereby.
6. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of California. No amendment hereto shall
be effective unless in writing and executed by the parties hereto.
7. COUNTERPARTS. This Amendment may be executed in counterparts all of
which when taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Amendment is duly executed by an authorized
signatory of each of the parties hereto as of the date first above written.
DAYTON WAY PICTURES, INC.
By: [Signature of Alan Abrams]
---------------------------------------
Name: ALAN ABRAMS
Title: President
NEWMARKET CAPITAL GROUP, L.P.
By: BFB, LLC
Its: Managing General Partner
By: [Signature of William Tyrer]
-------------------------------------
Name: William A. Tyrer
Title: President
<PAGE>
(EXHIBIT 10.39)
FIRST AMENDMENT TO
LOAN AGREEMENT
This First Amendment to Loan Agreement ("Amendment") is made as of
September 29, 1995 by and between Newmarket Capital Group, L.P. (the "Lender")
and Dayton Way Pictures IV, Inc. (the "Borrower").
R E C I T A L S
WHEREAS, Borrower and Lender entered into that certain Loan Agreement dated
as of July 31, 1995, (the "Loan Agreement") relating to that certain motion
picture presently entitled "THE WHOLE WIDE WORLD"; and
WHEREAS, Borrower and Lender now wish to amend the Loan Agreement;
NOW, THEREFORE, for good and valuable consideration, receipt and
sufficiency of which is hereby acknowledged, Borrower and Lender hereby agree as
follows:
1. DEFINITIONS. All capitalized terms not otherwise defined herein are
used herein as defined in the Loan Agreement.
2. WAIVER. By its execution hereof Lender hereby waives any Event of
Default which has occurred and is continuing as of the date hereof under Section
8.11 (a) of the Loan Agreement as a result of Debtor's failure to deliver to
Lender on or before September 15, 1995 sufficient Distribution Agreements
together with Distributor's Acceptances related thereto with an Acceptable Pre-
Sale Value of at least $675,000 excluding any sale of the United States.
This waiver shall be effective only for the specific Event of Default(s)
specified above, and in no event shall this waiver be deemed to be a waiver of
(a) enforcement of the Lender's rights with respect to any other Event(s) of
Default now existing or hereafter arising or (b) Debtor's compliance with any
other covenants or provisions of the Credit Documents.
Nothing contained herein nor any communications between the Lender and the
Debtor shall be a waiver of any rights or remedies the Lender has or may have
against the Debtor, except as specifically provided herein. The Lender hereby
reserves and preserves all of its rights and remedies against the Debtor under
the Loan Agreement, the other Credit Documents, and applicable law.
3. AMENDMENT. The parties hereto agree that the Loan Agreement is hereby
amended as follows:
<PAGE>
SECTION 8.11. Section 8.11 of the Loan Agreement is hereby amended by
deleting the reference to "June 30, 1995" in the second line thereof and
replacing it with a reference to "November 30, 1995".
4. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants that all of the representations and warranties set forth in the Loan
Agreement are true and correct and that no Event of Default under the Loan
Agreement has occurred or is continuing as of the date hereof except as
specifically waived herein.
5. EFFECTIVE DATE. This Amendment shall become effective upon delivery
to the Lender of a fully executed copy of this Amendment. Except as
specifically set forth herein, the parties hereto agree and confirm that the
Loan Agreement and the other documents related thereto remain in full force and
effect as executed except that each reference in the Credit Documents to the
Loan Agreement shall be deemed to refer to the Loan Agreement as amended hereby.
6. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of California. No amendment hereto shall
be effective unless in writing and executed by the parties hereto.
7. COUNTERPARTS. This Amendment may be executed in counterparts all of
which when taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Amendment is duly executed by an authorized
signatory of each of the parties hereto as of the date first above written.
DAYTON WAY PICTURES IV, INC.
By: [Signature of Alan Abrams]
---------------------------------
Name: ALAN ABRAMS
Title: President
NEWMARKET CAPITAL GROUP, L.P.
By: BFB, LLC
Its: Managing General Partner
By: [Signature of William Tyrer]
------------------------------------
Name: William A. Tyrer
Title: President
<PAGE>
(EXHIBIT 10.40)
[Imperial Bank Letterhead]
September 29, 1995
Mr. Donald Kushner
The Kushner Locke Company
11601 Wilshire Boulevard
Los Angeles, CA 90025
Re: Third Amended and Restated Credit Agreement among Kushner-Locke Company and
Imperial Bank, 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 as
heretofore amended (the "Credit Agreement")
-------------------------------------------
Dear Mr. Kushner:
All capitalized terms used herein and not otherwise defined herein shall
have the meanings given them in the Credit Agreement.
You have requested that the Maturity Date of the Credit Agreement be
extended until December 29, 1995.
Imperial Bank, in its capacity as Agent for the Lenders under the Credit
Agreement and as a Lender, hereby consents to such an extension, thereby
amending the Credit Agreement so that the definition of Maturity Date appearing
therein is deleted in its entirety and replaced with the following:
"Maturity Date shall mean December 29, 1995."
Except to the extent expressly set forth herein, this letter agreement does
not constitute a modification or amendment of any other provision of the Credit
Agreement. Except as expressly amended herein, all terms of the Credit
Agreement remain in full force and effect. In addition, the modification
contained herein is without prejudice to the Lender's or Agent's rights to
enforce all other terms and conditions of the Credit Agreement and shall not be
construed as entitling the Borrower to any future modification or amendment with
respect to the same or other matters.
<PAGE>
If you agree to this extension, please execute the enclosed copy of this
letter. Please return the executed copy along with the $37,500 fee for the 90-
day extension (pro rata 1% loan fee) no later than 4 p.m. today to become
effective.
Very truly yours,
IMPERIAL BANK
individually and as Agent
By: [Signature of Janice Zeitinger]
----------------------------------------
Janice Zeitinger
Vice President
AGREED TO BY:
THE KUSHNER LOCKE COMPANY
By: [Signature of Donald Kushner]
---------------------------------------
Name:
Title:
<PAGE>
(EXHIBIT 10.41)
[NEW LINE CINEMA LETTERHEAD]
VIA FAX
310/445-1191
December 5, 1995
Richard Marks
Kushner Locke
RE: SAVOY/TERM SHEET AGREEMENT
Dear Richard:
Ben Zinkin asked me to provide you with a summary of the applicable terms of the
New Line/Savoy deal as relates to Kushner Locke and "Pinocchio". These are as
follows:
1. PRODUCTION/POST-PRODUCTION. In connection with production and post-
production of "Pinocchio", New Line and Savoy share all of Savoy's creative,
business, administrative and other controls, with New Line having the right to
break any deadlock. New Line has the right to take any reasonable actions it
deems necessary on Savoy's behalf if Savoy fails to cooperate as reasonably
required by New Line after reasonable notice thereof. New Line has the right to
exercise all of Savoy's cutting rights with respect to "Pinocchio", including
final cutting rights.
2. EXERCISE OF DISTRIBUTION RIGHTS. New Line has been granted all of Savoy's
distribution rights in "Pinocchio" (including ancillary rights). With respect
to those worldwide ancillary rights which Kushner Locke and Savoy have agreed to
"coordinate" with Savoy having the last word, New Line has succeeded to these
rights. New Line has acknowledged that a number of licenses are already in
place, and New Line has agreed not to exploit its rights in contravention of
these licenses. I understand that David Imhoff, our head of merchandising, has
been in touch with your merchandising department.
3. REMAKES/SEQUELS. New Line has been granted Savoy's rights in
remakes/sequels to "Pinocchio".
<PAGE>
4. SUMS PAYABLE TO SAVOY. To the extent that Kushner Locke is to repay Savoy
for any advances made by Savoy to or on Kushner Locke's behalf, such sums, prior
to delivery to New Line, should be paid to Savoy. After delivery to New Line,
they should be paid to New Line.
Please feel free to call me with any questions. My phone number is 310/967-
6793.
Kind regards,
[Signature of Avy]
Avy Eschenasy
Vice President
Business and Legal Affairs
AE:jm
SAVOY/Mark1205.02L
cc: David Imhoff
Lewis Korman (by fax)
Alan Sokol (by fax)
Sonya Thompsen
Ben Zinkin
<PAGE>
(EXHIBIT 10.42)
[IMPERIAL BANK LETTERHEAD]
December 22, 1995
Mr. Donald Kushner
The Kushner Locke Company
11601 Wilshire Boulevard
Los Angeles, CA 90025
Re: Third Amended and Restated Credit Agreement among
Kushner-Locke Company and Imperial Bank, 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, as heretofore amended (the "Credit Agreement")
----------------------------------------------------
Dear Mr. Kushner:
All capitalized terms used herein and not otherwise defined herein shall
have the meanings given them in the Credit Agreement.
You have requested that the Maturity Date of the Credit Agreement be
extended until January 31, 1996.
Imperial Bank, in its capacity as Agent for the Lenders under the Credit
Agreement and as a Lender, hereby consents to such an extension, thereby
amending the Credit Agreement so that the definition of Maturity Date
appearing therein is deleted in its entirety and replaced with the following:
"'Maturity Date' shall mean January 31, 1996."
Except to the extent expressly set forth herein, this letter agreement
does not constitute a modification or amendment of any other provision of
the Credit Agreement. Except as expressly amended herein, all terms of the
Credit Agreement remain in full force and effect. In addition, the
modification contained herein is without prejudice to the Lender's or Agent's
rights to enforce all other terms and conditions of the Credit Agreement and
shall not be construed as entitling the Borrower to any future modification
or amendment with respect to the same or other matters.
<PAGE>
If you agree to this extension, please execute the enclosed copy of this
letter. Please return the executed copy along with the $12,500 fee for the
30-day extension (pro rate 1% loan fee) no later than 4 p.m. today to become
effective.
Very truly yours,
IMPERIAL BANK
Individually and as Agent
By: [SIGNATURE OF JANICE ZEITINGER]
------------------------------------
Janice Zeitinger
Vice President
By: [SIGNATURE OF JEFF COLVIN]
------------------------------------
Jeff Colvin
Vice President
AGREED TO BY:
THE KUSHNER LOCKE COMPANY
By: [SIGNATURE OF DONALD KUSHNER]
------------------------------------
Name:
Title:
<PAGE>
Exhibit 10.43
[IMPERIAL BANK LETTERHEAD]
January 12, 1996
Mr. Donald Kushner
The Kushner-Locke Company
11601 Wilshire Blvd, 21st floor
Los Angeles, CA 90025
RE: EXISTING CREDIT FACILITY FOR THE KUSHNER-LOCKE COMPANY ("THE BORROWER"
OR "THE COMPANY")
Dear Donald:
Imperial Bank ("Bank") has approved an extension of the Company's existing
credit facility with Imperial Bank from its current maturity to December 31,
1996. The current facility is extended to the Company pursuant to the Third
Amended and Restated Credit Agreement (the "Credit Agreement") among Kushner
Locke Company and Imperial Bank (the "Bank"), dated as of February 9, 1990
and as amended and restated as of December 14, 1990, May 1, 1992, and August
31, 1993 as heretofore amended.
The existing secured revolving credit facility to the Company will be amended
as set forth in the "Summary of Terms & Conditions of Revolving Credit
Facility" to this commitment letter and incorporated herein by this reference.
Whether or not such amendment in form and substance acceptable to the Bank is
agreed to and executed. Borrower shall be liable for and shall pay to Bank,
immediately upon demand, all costs and expenses, including reasonable
attorneys' fees, expended or incurred by Bank in connection with the
negotiation and/or preparation of this letter, such amendment and any other
documents required hereunder or thereunder.
The commitment to extend the maturity date as set forth herein (the
"Commitment") is personal to the Borrower and may not be transferred or
assigned without the prior written consent of the Bank. This letter or any
portions hereof, may not be disclosed or exhibited to any person or entity
without the prior written consent of Bank.
1
<PAGE>
Bank reserves the right to terminate Commitment at any time prior to receipt
by Bank of a copy of this letter executed below by Borrower along with the
payment required hereunder.
Your acknowledgment of this letter shall constitute acceptance of the terms
and conditions contained herein. Unless accepted or terminated, this
Commitment shall expire on January 12, 1996 at 5:00 p.m. If the amendment
required by Bank, in its sole discretion as necessary to carry out the
effects and purposes hereof, is not completed and effective for any reason by
January 31, 1996 then this Commitment shall expire on said date.
By acceptance of this letter you acknowledge that it is issued at a time when
Bank has not undertaken an updated business, credit and legal analysis of the
Company. As a result of further investigation and analysis by us and our
counsel, information which Bank is not aware of may be revealed and/or
certain other impediments to closing may come to Bank's attention. While our
mutual efforts will be directed towards the closing of this transaction, Bank
may require that the transaction be restructured or otherwise modified. As
the lender, Bank is the sole judge of what is an impediment and whether the
impediment is so serious as to preclude closing.
Except as modified and extended in the attached "Summary of Terms &
Conditions of Revolving Credit Facility", the Credit Agreement remains in
full force and effect.
If you agree to these modifications, please execute the enclosed copy of this
letter. Please return the executed copy to the Bank no later than 5 p.m.
January 12, 1996 for the Commitment to become effective, along with a check
for $150,000 for payment of 50% of the loan fee, and a check for $863,386 for
payment of 50% of the amount due on the TIME WARRIOR loan to Kushner/IO
International.
Sincerely,
Imperial Bank
[Signature of Morgan Rector] [Signature of Janice Zeitinger]
Morgan Rector Janice Zeitinger
Senior Vice President Vice President
& Manager
Acknowledged and accepted January 12, 1996
The Kushner-Locke Company
By: [Signature of Donald Kushner]
-----------------------------
Title: Co Chairman
--------------------------
cc: Ken Libkin
2
<PAGE>
SUMMARY OF TERMS AND CONDITIONS
OF REVOLVING CREDIT FACILITY FOR
THE KUSHNER-LOCKE COMPANY
BORROWERS: The Kushner-Locke Company and subsidiaries ("KLC"or "the
Company").
FACILITY: Secured revolving credit facility.
COMMITMENT: $15 million, to be reduced $417,000 per month beginning
5/31/96 so that the aggregate commitment will be reduced
to $12.5 million by 10/31/96. Further reductions to $10 million
will be made prior to 12/31/96 to the extent of excess
available cashflow (such amounts to be negotiated).
FINAL MATURITY: 12/31/96
LOAN FEE: 2% of the amount of the commitment amount of the Facility,
of which 50% is payable upon the execution of the Commitment
Letter and the balance at the soonest of 2/12/96 or upon
execution of the documentation.
WARRANTS: Borrower will provide Imperial Bank with warrants to
purchase 500,000 shares with Bank's standard provisions
at a negotiated strike price no less than fair market value,
exercisable within the next five years.
BORROWING BASE: Total outstandings under the Facility will be limited to the
amount eligible under a monthly Borrowing Base (to be detailed
separately) computed in accordance with the following:
TIER 1: 85% of on and off balance sheet eligible account receivables
for completed and delivered product which are due within 12
months plus 90% of those receivables which are backed by a
letter of credit.
Cap of $15 million.
TIER 2: 70% of on and off balance sheet eligible account receivables
for completed and delivered product which are due in more than
12 months but less than 24 months plus 90% of those receivables
backed by a letter of credit.
Cap of $4 million.
3
<PAGE>
TIER 3: 85% of on and off balance sheet receivables for incomplete,
bonded product plus 50% on those receivables for incomplete,
unbonded TV product.
Cap of $6 million or 40% of total base.
TIER 4: 10% of net book value of library for completed and released
product, less eliminations of collateral included in Tiers 1,
2, and 3, as well as any third party obligations.
Cap of $2.5 million.
CONDITIONS 1) Company will repay 50% of all amounts outstanding under
PRECEDENT the Kushner/IO International loan for the TIME WARRIOR series
TO COMMITMENT (50% of the aggregate of loan outstandings, plus $195,000 in
OF EXTENSION: backend profit participation, plus $25,000 for the release of
Bank's participation in the future revenue streams) upon
execution of the Commitment Letter, with the balance due at
the 2/29/96 maturity of the TIME WARRIOR loan.
2) Company will pay 50% of the Loan Fee.
FINANCIAL Existing financial covenants will be eliminated as of 9/30/95.
CONVENANTS: The financial covenants below will be measured quarterly
beginning 12/31/95, with the exception of liquidity which
will be measured monthly and submitted with the Borrowing Base
certificate. The liquidity covenant will allow a cure period to
be negotiated.
CONSOLIDATED CAPITAL BASE: KLC will maintain a minimum
consolidated capital base (net worth plus subordinated debt)
as outlined below. To the extent any item of product with a
budget size $1.5 million or greater has not been released or
aired within 12 months of completion, its book value will be
deducted from net worth for the purpose of this calculation.
To the extent subordinated debt increases due to accreted
interest, such accreted interest will be deducted for the
purpose of this calculation. Capitalized issuance costs will
also be deducted from subordinated debt for the purpose of this
calculation.
12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
-------- ------- ------- ------- --------
36,000,000 37,000,000 39,650,000 40,900,000 43,400,000
LIQUIDITY: KLC will maintain a minimum of cash and cash
equivalents plus excess borrowing availability under the
Facility of $2,000,000.
4
<PAGE>
MINIMUM NET INCOME: KLC will achieve a minimum net income as
outlined below for the periods ending on the dates indicated:
12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
-------- ------- ------- ------- --------
1,000,000 750,000 2,650,000 1,250,000 2,400,000
SINGLE OBLIGOR Amounts due from a single obligor which represent amounts in
LIMIT: excess of 15% of the total borrowing base will continue to be
eliminated from the borrowing base. The existing exceptions to
this limit will remain, in addition to eligible obligations
from Taurusfilm of Beta Taurus in Germany, which will be capped
at $3 million.
EVENTS OF The existing events of default will remain in addition to
DEFAULT: the following: Borrower shall fail to deliver to Bank by the
later of 60 days after the execution of the Commitment Letter,
or 3/31/96; i) satisfactory chain of title searches and
copyright mortgage searches on such titles as may be requested
by the Bank in its sole discretion, ii) executed documents
satisfactory to Bank in connection with the warrants to be
granted to the Bank, and iii) such other documents or
information which the Bank deems reasonably necessary to
complete its due diligence analysis as referred to in the
Commitment Letter.
5
<PAGE>
[IMPERIAL BANK LETTERHEAD]
January 12, 1996
Mr. Donald Kushner
The Kushner-Locke Company
11601 Wilshire Blvd, 21st floor
Los Angeles, CA 90025
This letter will summarize our discussions regarding The Kushner-Locke
Company ("the Company") and its current line of credit:
We have agreed to extend the existing line of credit to 12/31/96 with waivers
of any current covenant violations, if any. Such extension and waivers are
subject to executing final documentation, which documentation will include
amendments and other financial changes. However, based on our knowledge of
the Company we believe it is highly probable such documentation will be
executed shortly.
We have amended the line of credit so that by 4/30/96 we begin the even
reduction of the total commitment from $15,000,000 to $12,500,000 by
10/31/96, with further reductions to $10,000,000 prior to 12/31/96 to the
extent of available cash flow (such amounts to be negotiated). Terms and
conditions are set forth in the commitment letter provided to you.
Sincerely,
Imperial Bank
[Signature of Morgan Rector] [Signature of Janice Zeitinger]
Morgan Rector Janice Zeitinger
Senior Vice President Vice President
& Manager
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
The Kushner-Locke Company:
We consent to incorporation by reference in the registration statement (No.
33-45248) on Form S-8 of The Kushner-Locke Company, the registration
statement (No. 33-86768) on Form S-8 of The Kushner-Locke Company and the
registration statement (No. 33-82942) on Form S-3 of The Kushner-Locke
Company of our report dated December 28, 1995, relating to the consolidated
balance sheets of The Kushner-Locke Company and subsidiaries 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, and the related schedule, which report
appears in the September 30, 1995, annual report on Form 10-K of The
Kushner-Locke Company.
KPMG PEAT MARWICK LLP
Los Angeles, California
January 12, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<CASH> 4,301
<SECURITIES> 0
<RECEIVABLES> 8,264
<ALLOWANCES> 400
<INVENTORY> 73,716<F3>
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,940
<DEPRECIATION> 1,425
<TOTAL-ASSETS> 88,952
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 28,398
0
0
<COMMON> 23,337
<OTHER-SE> (4,130)
<TOTAL-LIABILITY-AND-EQUITY> 88,952
<SALES> 0
<TOTAL-REVENUES> 20,407
<CGS> 0
<TOTAL-COSTS> 17,404
<OTHER-EXPENSES> 3,838
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,409
<INCOME-PRETAX> (3,944)
<INCOME-TAX> 31
<INCOME-CONTINUING> (3,975)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,975)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
<FN>
<F1>The Company does not issue a Classified Balance Sheet.
<F2>The Company does not issue a Classified Balance Sheet.
<F3>Included as Inventory were Completed Film Costs, Productions in Progress and
Development Costs.
</FN>
</TABLE>
