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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, 1997 COMMISSION FILE NO. 0-17295
THE KUSHNER-LOCKE COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4079057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11601 Wilshire Blvd., 21st Floor, Los Angeles, California 90025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(310) 445-1111
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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, Class C
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. [ ]
The aggregate market value based on the closing price of the
Registrant's Common Stock held by nonaffiliates of the Registrant was
approximately $22,260,000 as of December 23, 1997.
There were 9,132,815 shares of outstanding Common Stock of the
Registrant as of December 23, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 1998
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, 1997)
are incorporated by reference in Part III Items 10, 11, 12 and 13 of this Form
10-K.
Total number of pages 60. Exhibit Index begins on page 58.
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PART I
1. BUSINESS
GENERAL
The Kushner-Locke Company (the "Company") is a leading independent
entertainment company which principally develops, produces, and distributes
original feature films and television programming. The Company's television
programming has included television series, mini-series, movies-for-television,
animation, reality and game show programming for the major networks, cable
television, first-run syndication and international markets. The Company's
feature films are developed and produced for the theatrical, made-for-video and
pay cable motion picture markets. The Company established its feature film
production operations in 1993. In 1994, the Company established an international
theatrical film subsidiary to expand into foreign theatrical distribution. In
1995, the Company formed KLC/New City ("KLC/New City"), a joint venture 82.5%
owned by the Company, to acquire films for distribution through emerging new
delivery systems, including pay cable, pay-per-view, basic cable,
video-on-demand and satellite systems.
The Company's feature film activities can be grouped into three areas:
production and distribution of a limited number of higher-budget films intended
for wide-screen domestic theatrical release, production and distribution of
low-to-moderate budget films released direct-to-video or on pay cable
television, and distribution licensing of acquired film rights. In certain
cases, the Company's low-to-moderate budget films may have a limited theatrical
release or a pay cable premiere before being released in home video. For fiscal
1997, the Company did not release a higher budget film, but earned revenues of
more than $1,800,000 from the continued international exploitation of The
Adventures of Pinocchio, which was originally released in fiscal 1996. The
Company's feature slate for fiscal 1997 generated $19,800,000 of revenues
principally from the international exploitation of Basil starring Christian
Slater, Claire Forlani and Jared Leto, and Double Tap starring Heather Locklear
and Stephen Rea, delivery of a film produced for Twentieth Century Fox Film
Corporation, equity in the earnings of a joint venture which produced two
sequels to the animated feature Brave Little Toaster, and seven children's
fantasy adventure films. In various stages of production for the Company's
currently anticipated fiscal 1998 distribution slate are Beowulf starring
Christopher Lambert, Denial starring Jason Alexander and directed by Adam
Rifkin, Minion starring Dolph Lundgren, Possums starring Mac Davis, Noose
directed by Ted Demme, Susan's Plan written and directed by John Landis, Bone
Daddy starring Rutger Hauer, Girl starring Dominique Swain, One Man's Hero
starring Tom Berenger, Taxman starring Joe Pantoliano, Legion starring Parker
Stevenson, Swing starring Lisa Stansfield, and three family films.
The Company's distribution activities consist primarily of foreign
distribution of product produced, overseen or acquired by the Company and,
through KLC/New City, domestic distribution of over 100 low-budget feature films
to the pay-per-view, pay cable, basic cable and other ancillary markets. In
fiscal 1997, the Company generated $11,700,000 of revenues from licenses of its
existing library and from domestic distribution of films acquired through
KLC/New City.
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. The Company's recent
movies-of-the-week which have aired include Princess in Love for CBS, starring
Julie Cox, Every Woman's Dream for CBS starring Jeff Fahey, A Husband, A Wife
and a Lover for CBS starring Judith Light, Echo for ABC starring Jack Wagner,
Jack Reed for NBC, starring Brian Dennehy and Unlikely Angel for CBS, starring
Dolly Parton. For fiscal 1997, the Company's television slate generated
$22,800,000 of revenue principally from network and international licensing of
Jack Reed, Unlikely Angel, and the television series Gun, and Hammer. Gun
episodes starred Jennifer Tilly, Randy Quaid, Darryl Hannah, Rosanna Arquette
and Peter Horton. The series was co-executive produced by Robert Altman
(director of M*A*S*H, The Player and Pret-a-Porter) who directed the first
episode. The Company is currently producing the one hour ABC prime time network
series Cracker starring Robert Pastorelli (through a joint venture with Granada
under a 22 episode order), 26 one hour episodes of the syndicated television
series Hammer starring Stacy Keach, a half-hour HBO series which the Company is
distributing to international and other domestic markets, and 26 half-hour
episodes of Mowgli: The New Adventures of The Jungle Book, including 13 episodes
for the Fox Kids Network and all 26 episodes for foreign distribution. As of
September 30, 1997, the Company had 13 movies-for-television and various
television series in different stages of development for potential production.
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TV First, which is a partnership 50% owned by the Company, purchases
media time for Christian music infomercials produced by the Company. TV First
markets compact discs and audio and video cassettes. Fiscal 1997 sales by the
joint venture exceeded $6,600,000.
The Company recently entered into an agreement in principle with a major
studio whereby the Company has the right to distribute in international
territories up to nine moderate to high-budget motion pictures over a three year
period. The Company has the right to select the motion pictures, if any, to be
distributed among titles made available by the major studio. In the event the
Company selects one or more films under the arrangement, management currently
expects to finance its acquisition of the distribution rights via credit
facilities not presently in place. There can be no assurance that definitive
agreements for this distribution arrangement will be agreed to, that financing
will be obtained, or that such activities will ultimately be profitable if
undertaken.
The Company's operating revenues were $56,935,000 for the fiscal year
ended September 30, 1997, a decrease of 29% from the $80,157,000 recognized for
the fiscal year ended September 30, 1996. This decrease reflects in part the
Company's increased use of joint venture arrangements for its production and
distribution of certain feature films and television programming. In certain
cases the Company recognizes in its financial statements its equity in earnings
of unconsolidated entities operating results rather than gross distribution
revenues. For example, for fiscal 1997, the Company would have recognized an
additional $8,500,000 for Cracker produced by Cracker Company LLC were this
joint venture's revenues consolidated. The Company also did not release a high
budget picture in 1997 similar to The Adventures of Pinocchio in 1996. If
revenues generated by The Adventures of Pinocchio were excluded from both fiscal
1996 and 1997 periods, current year reported revenues would have increased 2%.
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 such activities, including the longer lead times to complete new
product and obtain cash receipts from exploitation of such product in the
international marketplace.
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.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this annual report are "forward-looking statements" as
defined in the Private Securities Litigation Reform Act of 1995 which involve
certain risks and uncertainties which could cause actual results to differ
materially from those discussed herein. Such risks and uncertainties include,
but are not limited to, liquidity and financing requirements, variability of
quarterly results and prior losses, increased interest expense, dependence on a
limited number of projects, certain accounting policies including amortization
of film costs, dependence on key personnel, production deficits, the risk
involved in the television and theatrical film industries, competition,
government regulation, labor relations, and the volatility of public markets.
See the relevant discussions elsewhere herein, and in the Company's registration
statement on Form S-3 (Registration No. 333-40391), as filed on November 17,
1997 and the Company's periodic reports and other documents filed with the
Securities and Exchange Commission for further discussions of these and other
risks and uncertainties pertaining to the Company and its business.
MOTION PICTURE INDUSTRY OVERVIEW
The business of the motion picture industry may be broadly divided into
two major segments: production, involving the development, financing and making
of motion pictures, and distribution, involving the promotion and exploitation
of completed motion pictures in a variety of media.
Historically, the largest companies, the so-called "Majors" and
"mini-Majors," have dominated the motion picture industry by both producing and
distributing a majority of the motion pictures which generate significant box
office receipts. Over the past decade, however, "Independents" or smaller film
production and distribution companies, such as the Company,
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have played an increasing role in the production and distribution of motion
pictures to fill the increasing worldwide demand for filmed entertainment
product.
The Majors (and mini-Majors) include Universal Pictures, Warner Bros.
Pictures, Metro-Goldwyn-Mayer Inc., Twentieth Century Fox Film Corporation,
Paramount Pictures Corporation, Sony Pictures Entertainment (including Columbia
Pictures, TriStar Pictures and Triumph Releasing) and The Walt Disney Company
(Buena Vista Pictures, Touchstone Pictures and Hollywood Pictures). Generally,
the Majors own their own production studios (including lots, sound stages and
post-production facilities), have nationwide or worldwide distribution
organizations, release pictures with direct production costs generally ranging
from $25 million to $75 million, and provide a continual source of pictures to
film exhibitors. In addition, some of the Majors have divisions which are
promoted as "independent" distributors of motion pictures. These "independent"
divisions of Majors include Miramax Films (a division of The Walt Disney
Company), Sony Classics (a division of Sony Pictures), The Samuel Goldwyn
Company (a division of Metro-Goldwyn-Mayer), October Films (a division of
Universal), New Line (a division of Time Warner) and its Fine Line distribution
label, and Republic Pictures (a division of Viacom).
In addition to the Majors, the Independents engaged primarily in the
distribution of motion pictures produced by companies other than the Majors
include, among others, Trimark Holdings and Live Entertainment. The Independents
typically do not own production studios or employ as large a development or
production staff as the Majors.
MOTION PICTURE PRODUCTION AND FINANCING
The production of a motion picture usually involves four steps:
development, pre-production, production and post-production. The development
stage includes developing a concept internally, or obtaining an original
screenplay or a screenplay based on a pre-existing literary work, or acquiring
and rewriting a screenplay. Creative personnel may be contacted to determine
availability and for planning the timing of the project, or in some cases
actually hired. In pre-production, a budget is prepared, the remaining creative
personnel, including a director, actors and various technical personnel are
hired, shooting schedules and locations are planned and other steps necessary to
prepare for principal photography are completed. Production is the principal
photography of the project and generally continues for a period of not more than
three months. In post-production, the film is edited and synchronized with music
and dialogue and, in certain cases, special effects are added. The final edited
synchronized product, the negative, is used to manufacture release prints
suitable for public exhibition.
The production of a motion picture requires the financing of the direct
and indirect overhead costs of production. Direct production costs include film
studio rental, cinematography, post-production costs and the compensation of
creative and other production personnel. Distribution costs (including costs of
advertising and release prints) are not included in direct production costs.
The Majors generally have sufficient cash flow from their motion picture
and related activities, or in some cases, from unrelated businesses (e.g., theme
parks, publishing, electronics, and merchandising) to pay or otherwise provide
for their production costs. Overhead costs are, in substantial part, the
salaries and related costs of the production staff and physical facilities which
the Majors maintain on a full-time basis. The Majors often enter into contracts
with writers, producers and other creative personnel for multiple projects or
for fixed periods of time.
Independents generally avoid incurring substantial overhead costs by
hiring creative and other production personnel and retaining the other elements
required for pre-production principal photography and post-production activities
only on a project-by-project basis. Unlike the Majors, Independents also
typically finance their production activities from various sources, including
bank loans, "pre-sales," equity offerings and joint ventures. Independents
generally attempt to complete their financing of a motion picture production
prior to commencement of principal photography, at which point substantial
production costs begin to be incurred and to require payment.
"Pre-sales" are often used by Independents to finance all or a portion
of the direct production costs of a motion picture. Pre-sales consist of fees or
advances paid or guaranteed to the producer by third parties in return for the
right to exhibit the completed motion picture in theaters or to distribute it in
home video, television, international or other ancillary
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markets. Independents with distribution capabilities may retain the right to
distribute the completed motion picture either domestically or in one or more
international markets. Other independents may separately license theatrical,
home video, television, international and other distribution rights among
several licensees. Payment commitments in a pre-sale are typically subject to
delivery and to the approval of a number of prenegotiated factors, including
script, production budget, cast and director.
Both Majors and Independents often acquire motion pictures for
distribution through an arrangement known as a "negative pickup" under which the
Major or Independent agrees to acquire from another production company some or
all rights to a film upon its completion. The Independent often finances
production of the motion picture pursuant to financing arrangements with banks
or other lenders wherein the lender obtains a security interest in the film and
in the Independent's rights under its distribution arrangement. When the Major
or Independent "picks up" the completed motion picture, it may assume some or
all of the production financing indebtedness incurred by the production company
in connection with the film. In addition, the Independent is often paid a
production fee and is granted a participation in the profits from distribution
of the motion picture.
Both Majors and Independents often grant third-party participations in
connection with the distribution and production of a motion picture.
Participations are contractual rights of actors, directors, screenwriters,
producers, owners of rights and other creative and financial contributors
entitling them to share in revenues or profits (as defined in the respective
agreements) from a particular motion picture. Except for the most sought-after
talent, participations are generally payable only after all distribution and
marketing fees and costs, direct production costs (including overhead) and
financing costs are recouped by the producer in full.
MOTION PICTURE DISTRIBUTION
Distribution of a motion picture involves the domestic and international
licensing of the picture for (i) theatrical exhibition, (ii) home video, (iii)
presentation on television, including pay-per-view, video-on-demand, satellites,
pay cable, network, basic cable and syndication, (iv) non-theatrical exhibition,
which includes airlines, hotels, armed forces facilities and schools and (v)
marketing of the other rights in the picture, which may include books, CD-ROMs,
merchandising and soundtrack recordings.
Theatrical Distribution and Exhibition. Motion pictures are often exhibited
first in theaters open to the public where an admission fee is charged.
Theatrical distribution involves the manufacture of release prints; licensing of
motion pictures to theatrical exhibitors; and promotion of the motion picture
through advertising and promotional campaigns. The size and success of the
promotional and advertising campaign may materially affect the revenues realized
from its theatrical release, generally referred to as "box office gross." Box
office gross represents the total amounts paid by patrons at motion picture
theaters for a particular film, as determined from reports furnished by
exhibitors. The ability to exhibit films during summer and holiday periods,
which are generally considered peak exhibition seasons, may affect the
theatrical success of a film. Competition among distributors to obtain
exhibition dates in theaters during these seasons is significant. In addition,
the costs incurred in connection with the distribution of a motion picture can
vary significantly depending on the number of screens on which the motion
picture is to be exhibited and the ability to exhibit motion pictures during
peak exhibition seasons. Similarly, the ability to exhibit motion pictures in
the most popular theaters in each area can affect theatrical revenues.
Exhibition arrangements with theater operators for the first run of a film
generally provide for the exhibitor to pay the greater of 90% of ticket sales in
excess of fixed amounts relating to the theater's costs of operation and
overhead, or a minimum percentage of ticket sales which varies from 40% to 70%
for the first week of an engagement at a particular theater, decreasing each
subsequent week to 25% to 30% for the final weeks of the engagement. The length
of an engagement depends principally on the audience response to the film.
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Films with theatrical releases (which generally may continue for up to
six months) typically are made available for release in other media as follows:
<TABLE>
<CAPTION>
MONTHS AFTER
THEATRICAL APPROXIMATE RELEASE
MARKET RELEASE PERIOD
- ------ ------------ -------------------
<S> <C> <C>
Domestic home video.............................................. 4 - 6 months 6 months
Domestic pay-per-view............................................ 6 - 9 months 3 months
Domestic pay cable............................................... 10 - 18 months 12 - 21 months
Domestic network or basic cable.................................. 30 - 36 months 18 - 36 months
Domestic syndication............................................. 30 - 36 months 3 - 15 years
International theatrical......................................... _ 4 - 6 months
International home video......................................... 6 - 12 months 6 months
International television......................................... 18 - 24 months 18 months - 10 years
</TABLE>
Home Video. The home video distribution business involves the promotion and sale
of videocassettes and videodiscs to video retailers (including video specialty
stores, convenience stores, record stores and other outlets), which then rent or
sell the videocassettes and videodiscs to consumers for private viewing. The
home video marketplace now generates total revenues greater than the domestic
theatrical exhibition market.
Major feature films are usually scheduled for release in the home video
market four to six months after theatrical release to capitalize on the recent
theatrical advertising and publicity for the film. Promotion of new home video
releases is generally undertaken during the nine to twelve weeks before the home
video release date. Videocassettes of feature films are generally sold to
domestic wholesalers on a unit basis. Unit-based sales typically involve the
sales of individual videocassettes to wholesalers or distributors at
approximately $50 to $60 per unit and generally are rented by consumers for fees
ranging from $1 to $5 per day (with all rental fees retained by the retailer).
Wholesalers who meet certain sales and performance objectives may earn rebates,
return credits and cooperative advertising allowances. Selected titles including
certain made-for-video programs, are priced significantly lower to encourage
direct purchase by consumers. The market for direct sale to consumers is
referred to as the "priced-for-sale" or "sell-through" market.
Technological developments, including videoserver and compression
technologies which regional telephone companies and others are developing, and
expanding markets for DVD and laser discs, could make competing delivery systems
economically viable and could significantly impact the home video market
generally and, as a consequence, the Company's home video revenues.
Pay-per-view. Pay-per-view television allows cable television subscribers to
purchase individual programs, primarily recently released theatrical motion
pictures, sporting events and music concerts, on a "per use" basis. The fee a
subscriber is charged is typically split among the program distributor, the pay-
per-view operator and the cable operator.
Pay Cable. The domestic pay cable industry (as it pertains to motion pictures)
currently consists primarily of HBO/Cinemax, Showtime/The Movie Channel,
Encore/Starz and a number of regional pay services. Pay cable services are sold
to cable system operators for a monthly license fee based on the number of
subscribers receiving the service. These pay programming services are in turn
offered by cable system operators to subscribers for a monthly subscription fee.
The pay television networks generally acquire their film programming by
purchasing the distribution rights from motion picture distributors.
Non-Theatrical Markets. In addition to the distribution media described above,
a number of sources of revenue exist for motion picture distribution through the
exploitation of other rights, including the right to distribute films to
airlines, schools, libraries, hotels, armed forces facilities and hospitals.
International Markets. The worldwide demand for motion pictures has expanded
significantly as evidenced by the development of new international markets and
media. This growth is primarily driven by the overseas privatization of
television stations, introduction of direct broadcast satellite services, growth
of home video and increased cable penetration.
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In September 1994 the Company established foreign theatrical distribution
operations for its own and third party product.
MOTION PICTURE ACQUISITION
In addition to its own production activities, the Company continually
seeks to acquire rights to films and other programming from Independent film
producers, distribution companies and others in order to maximize the number of
films it can distribute in the emerging new delivery systems. To be successful,
the Company must locate and track the development and production of numerous
independent feature films.
Types of Motion Pictures Acquired. The Company generally seeks to produce or
acquire motion pictures across a broad range of genres, including drama,
thriller, comedy, science fiction, family, action and fantasy/adventure, which
will individually appeal to a targeted audience. The Company has been very
selective in acquiring higher budget (over $10 million) films because of the
interest that the Majors have shown in acquiring such films, and the associated
competition and higher production advances, minimum guarantees and other costs.
The Company acquires projects when it believes it can limit its financial risk
on such projects through, for example, significant presales, and when it
believes that a project has significant marketability. In most cases, the
Company attempts to acquire rights to motion pictures with a recognizable
marquis "name" personality with public recognition, thereby enhancing promotion
of the motion pictures in the home video or international markets. The Company
believes that this approach increases the likelihood of producing a product
capable of generating positive cash flow, ancillary rights income and the
possibility of a theatrical release.
Methods of Acquisition. The Company typically acquires films on either a "pick-
up" basis or a "pre-buy" basis. The "pick-up" basis refers to those films in
which the Company acquires distribution rights following completion of most or
all of the production and post-production process. These films are generally
acquired after management of the Company has viewed the film to evaluate its
commercial viability.
The "pre-buy" basis refers to films in which the Company acquires
distribution rights prior to completion of a substantial portion of production
and post-production. Management's willingness to acquire films on a pre-buy
basis is based upon factors generally including the track record and reputation
of the picture's producer, the quality and commercial value of the screenplay,
the "package" elements of the picture, including the director and principal cast
members, the budget of the picture and the genre of the picture. Before making
an offer to acquire rights in a film on a pre-buy basis, the Company may work
with the producer to modify certain of these elements. Once the modifications
are considered acceptable, the Company's obligation to accept delivery and make
payment is conditioned upon receipt of a finished film conforming to the script
reviewed by the Company and other specifications considered important by the
Company.
Sources of Distribution Rights. Typically, projects are submitted directly to
the Company for consideration. To promote the submission of projects, the
Company relies primarily on its reputation as an Independent having significant
access to the international markets. The Company also relies upon the personal
contacts of its senior officers which have been generated through their prior
business and personal dealings with Majors, other Independents, legal and
accounting firms, business management firms, talent agencies, production lenders
and personal managers who are actively involved in the production community.
Acquisition Process. If the Company locates a motion picture project which it
believes satisfies its criteria, the Company may pay an advance or a guaranteed
minimum payment conditioned upon delivery of a completed film ("minimum
guarantee") against a share or participation in the revenue actually received by
the Company from the exploitation of a film in each licensed media. The minimum
guarantee is generally paid prior to the film's release. Typically, the Company
will recoup the minimum guarantee and certain other amounts from the
distribution revenues realized by the Company prior to paying any additional
revenue participation to the production company. In fiscal 1997, the Company
acquired international distribution rights to "Double Tap" on this basis. In
fiscal 1998, the Company anticipates acquiring "Bone Daddy" and certain family
and other low-budget films on this basis.
Film Library. The Company's distribution rights, which may include either
worldwide, foreign, or domestic rights, generally range from an initial
licensing cycle of seven to 21 years to perpetuity.
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COMPANY FEATURE FILM PRODUCTION
The Company's feature film division was established in 1993 to develop
and produce low and medium budget films. The Company's low to medium budget
films to date have had production budgets ranging from less than $1 million to
$10 million, although the Company from time to time may release films having
higher budgets. The Company's low-budget films are primarily targeted for direct
distribution to the television market and its medium-budget films may be
targeted for theatrical release. The Company generally retains distribution
rights for licensing to third parties internationally. The Company's films
generally are distributed by third parties domestically. In unique
circumstances, the Company undertakes limited domestic distribution or
co-distribution activities.
The Company's feature film strategy generally is to develop and produce
feature films when the production budgets for the films are expected to be
substantially covered through a combination of pre-sales, output arrangements,
equity arrangements and production loans with "gap" financing. To further limit
the Company's financing risk or to obtain production loans, the Company often
purchases completion bonds to guarantee the completion of production.
The following films were released or delivered by the Company or its
joint ventures in fiscal 1997.
<TABLE>
<CAPTION>
Principal
Picture Initial Media Delivery/Release Date Film Type Talent
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Brave Little Home Video June-97 Animated N/A
Toaster Goes to Mars
The Brave Little Home Video June-97 Animated N/A
Toaster Goes to
School
The Incredible Genie Home Video Jan-97 Fantasy/Adventure N/A
Dragon World: The Home Video Feb-97 Fantasy/Adventure N/A
Legend Continues
Johnny Mysto: Boy Home Video Dec-96 Fantasy/Adventure N/A
Wizard
The Midas Touch Home Video Dec-96 Fantasy/Adventure N/A
Little Ghost Home Video Dec-96 Fantasy/Adventure N/A
Waiting For The Man Home Video Dec-96 Drama Darren McGavin; Rae
Dawn Chong
Basil Theatrical September-97 Drama Christian Slater
Double Tap HBO Premiere July - 97 Drama Heather Locklear,
Stephen Rea
</TABLE>
The following films were released or delivered or are currently
scheduled for release or delivery by the Company in fiscal 1998:
<TABLE>
<CAPTION>
Expected
Picture Initial Media
----------------------------------------
<S> <C>
Beowulf Theatrical
Denial Theatrical
Minion Theatrical
Possums Theatrical
Susan's Plan Theatrical
Bone Daddy HBO Premiere
Girl Theatrical
One Man's Hero MGM Theatrical
Taxman Pay Cable or
Video
Legion Pay Cable or
Video
Swing, Theatrical
Jungle Book: The Pay Cable and
Search for the Video
Elephant Eye Diamond
Five family pictures Video/Cable
Noose Theatrical
</TABLE>
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There is no assurance that any motion picture which has not yet been
released will be released, that a change in the scheduled release dates of any
such films will not occur or, if such motion picture is released, it will be
successful. The Company has various additional potential feature films under
development. There is no assurance that any project under development will be
produced.
International Distribution
The Company hired Pascal Borno in fiscal 1997 to head its international
distribution activities as President of Kushner-Locke International. Mr. Borno
also owns Conquistador Entertainment, which he previously headed on a full-time
basis and which arranged the financing and distribution licensing of theatrical
motion pictures. As part of the Company's agreement with Mr. Borno,
Conquistador's pictures are now being distributed by the Company and the Company
has hired former Conquistador employees as additional sales and marketing
personnel. During the term of Mr. Borno's employment with the Company,
Conquistador is not active outside the purview of the Company's arrangements
with Mr. Borno and does not maintain any separate staffing.
TELEVISION INDUSTRY OVERVIEW
The domestic television market remains the largest in the world,
consisting of the principal broadcast networks and their affiliates, independent
television stations and cable television networks. Expanding international
television broadcast, cable and satellite delivery systems offer further
opportunities for the exploitation of television programming.
Domestic Market. The domestic market for television programming primarily is
composed of four submarkets: the broadcast television networks (ABC, CBS, NBC
and Fox and emerging networks UPN and WBN), pay cable services (such as
HBO/Cinemax, Encore/Starz and Showtime/The Movie Channel), basic cable services
(such as USA Network, the Arts & Entertainment Network, Lifetime, The Family
Channel, The Disney Channel, and Turner Broadcasting Network) and syndicators of
first-run programming (such as MCA, King World Productions and Multimedia,
Inc.).
The domestic broadcast television market currently is dominated by the
four major networks, each of which has approximately 200 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 domestic
television markets. There are also a significant number of independent
commercial television stations in the United States. These stations offer an
alternative to network distribution through syndication. The network schedule
provides affiliates with only a portion of their daily program schedule, and the
balance of the time is filled with programs acquired through television
syndication companies or produced locally by the station.
Cable services generally are classified as being in one of four
categories: telephone delivery, superstations (e.g., Turner Broadcasting
System), pay cable services (e.g., HBO/Cinemax) 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.
Television Programming. Each of the three major television networks currently
broadcasts approximately 22 hours of prime-time programming and approximately 30
hours of daytime programming each week. Prime-time programming generally
consists of half-hour series (often situation comedies), reality shows,
hour-length series, movies-for-television (films of two hours or less) and
mini-series (dramatic epics of three hours or more). The increased channel
capacity and large base of cable subscribers that have developed during the
1980s and 1990s have made possible the development of a number of pay cable and
basic cable networks which have become important purchasers of both original and
rerun television programming, including movies-for-television, mini-series and
series. Suppliers of television programming include the production division or
affiliated companies of the major networks, major film studios (Majors), station
owners and independent producers (Independents) such as the Company.
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International Markets. The number of international outlets for television
programming has been increasing with the worldwide proliferation of broadcast,
cable and satellite delivery systems. Over the last ten years, European
governments have privatized television systems in several countries, including
Germany, Italy, France and Spain. The Company believes privatized systems are
more likely to broadcast American programming than government-owned networks. In
addition, both the number of pay and satellite television systems in Europe and
the number of subscribers to these systems have increased. Pay television and
satellite distribution systems also are developing in other geographic areas,
including many Asian countries. In international markets, suppliers of
programming may be subject to local content and quota requirements which
prohibit or limit the amount of American programming in particular markets. See
"Business-Government Regulations."
COMPANY TELEVISION STRATEGY
The Company was founded in 1983 to develop and produce, 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 1991, the
Company established an international distribution licensing 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
the Company's ability to recover the cost of new programs and to retain the fees
and profit potential previously realized by third parties.
The Company seeks to increase 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. To increase the likelihood of developing programs that will
be licensed by the networks, the Company has expanded its roster of network
approved writers, producers and actors and literary materials and rights
acquisition budgets. As of September 30, 1997, the Company had 16
movies-for-television and various television series in active stages of
development for potential production, many of which are being funded at least in
part by the networks or other third parties.
To position itself for the perceived growth in this market, the Company
is actively acquiring various forms of domestic cable, video-on-demand and
satellite rights from third party producers for license periods ranging from
fifteen years to perpetuity through its KLC/New City joint venture. The
customary release cycle includes a period of approximately six months of
pay-per-view followed by 18 to 24 months of pay cable, finally 24 to 48 months
of basic cable, and free television thereafter.
The Company utilizes licensing and co-production arrangements to fund
the costs of production, and generally retains additional licensing rights
including, in the case of series, rerun syndication rights which offer future
upside profit potential. The Company generally does not commence principal
photography of its television programming without first obtaining license or
other revenue commitments or production financing which equal all or a
substantial portion of the budgeted production costs. By obtaining license fees
and other pre-committed revenues through the efforts of its international
television distribution division to cover a substantial portion or all of its
budgeted production costs, the Company believes that it reduces many of the
financial risks associated with an individual production.
TELEVISION PROGRAM FINANCING
Development Costs. The Company generally finances project development costs
without third-party involvement until the script commitment stage. Because of
the likelihood that the significant costs in producing scripts and pilots will
not be recovered, the Company 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 licenses 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 which
represents a portion of the program's budgeted production cost. The 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,
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enabling the Company to recoup all, or a portion, of the production deficit. In
addition, the Company will typically license additional domestic releases in
other media to cover the remainder, if any, of the production deficit. A
production order sets forth the principal terms for a license of the Company's
product to a network and specifies the license fee to be paid and the conditions
to be met for payment. Production orders typically are contingent on the
producer's obtaining certain approvals from the network, including the script,
principal cast and director, prior to commencement of principal photography. The
Company usually receives its license fee in installments, with one-third due on
or prior to commencement of principal photography, one-third due upon completion
of principal photography and one-third due 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 secured
borrowings, even if the original license fees equal or exceed budgeted
production costs.
For first-run syndication programs, license agreements with the
first-run syndicator generally provide the Company a fixed license fee and a
percentage of revenues from distribution after the syndicator recoups the fixed
license fee and its distribution fees and costs.
An alternate first-run syndication revenue source is called "barter"
sales. A television station, in lieu of or in combination with paying 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. The Company has licensed its
television series Hammer and Could It Be a Miracle on this basis.
The Company seeks to cover most or all of its production costs with
license fees and other pre-committed revenues, however it may finance some of
the production costs on its own and may rely on subsequent licensing in
international or other ancillary markets to recoup the remaining production
costs. Additional profits from a television program initially shown on a network
or cable service are realized 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.
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 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).
TELEVISION PRODUCTION ACTIVITIES
As a producer, the Company first develops literary properties internally
or acquires them from third parties. The Company may refine the concept of an
acquired property. It 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 is
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, director,
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
undertaken,
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followed by post-production, in which the film is edited, synchronized with
music and dialogue and, in certain cases, 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 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. 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 subsequently 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 for
fiscal 1997 and certain programming scheduled for fiscal 1998, the type of
program and the network or other medium where such programming initially
exhibited or will exhibit:
<TABLE>
<CAPTION>
Fiscal 1998
First Fiscal 1997 Expected
Title Type of Program Exhibition Deliveries Deliveries
----- --------------- ---------------------------------------------
<S> <C> <C> <C> <C>
Jack Reed V: Death Movie-of-the-week NBC Yes --
and Vengeance
Gun (6 episodes) One-hour Series ABC Yes --
Unlikely Angel Movie-of-the-week CBS Yes --
Could It Be A Miracle One hour Series Syndication Yes --
(24 episodes)
Mowgli: The New 1/2 hour Series Fox Kids 6 7*
Adventures of The Worldwide
Jungle Book (26
episodes)
Erotic Confessions 13 1/2 hour Series HBO 6 7
Episodes
Cracker (22 episodes) One hour Series ABC 5 17
Hammer (26 episodes) One hour Series Syndicaction 7 19
</TABLE>
* Also 13 additional episodes for international distribution.
There is no assurance that any television program which has not yet
aired will be aired, that a change in the scheduled airing date of such
programming will not occur or, if such television program is aired, that it will
be successful.
TELEVISION PROJECTS IN DEVELOPMENT
The Company requires adequate access to program concepts, ideas and
scripts. 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. The Company occasionally enters into agreements
with producers and writers to develop or acquire new programming. While the
Company may finance the early development of such 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.
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The following table sets forth potential television movies and
television series in various stages of development and the potential network or
other medium to which each may be delivered, if known:
<TABLE>
<CAPTION>
Working Title Type of Program
-----------------------------------------------------------
<S> <C>
Silicone Valley One Hour Series (ABC)
Prodigal Son Movie-of-the-week
Beat Cop Movie-of-the-week (Fox)
If I Can't Have You Movie-of-the-week (ABC)
Jack London Movie-of-the-week (CBS)
Aliens Ate My Homework Movie-of-the-week (Showtime)
Jack Reed VI Movie-of-the-week (NBC)
The Life She Left Behind Movie-of-the-week (CBS)
Seven The Hard Way Movie-of-the-week (CBS)
Undercover Girls One Hour Series (Fox)
N.Y. Arts & Entertainment One Hour Series (Fox)
Coleoptra Movie-of-the-week (HBO)
Death Cloud Movie-of-the-week (Fox)
Unlikely Angel II Movie-of-the-week (CBS)
Silke One Hour Series (CBS)
Air America Syndication
</TABLE>
While the Company has many 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). 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 described above, will lead to production
commitments or that any programs that are ultimately produced will be
successful.
TELEVISION DISTRIBUTION ACTIVITIES
Domestic Distribution. The Company's original programming generally is initially
licensed to a network or cable broadcaster for a period expiring on the earlier
of two broadcasts or a 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 are generally
obtained from subsequent licensing in the domestic market in other media,
including syndication, cable and home video.
International Distribution. In 1991, the Company commenced the distribution of
its own television programming and, to a lesser extent, acquired television
programs for distribution in international markets. Previously the Company had
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 available, the home video market,
pay television and cable services. The Company's international television
distribution operation has increased the Company's ability to recover the costs
of new programs and to retain the fees and profit potential previously realized
by outside distributors through the control of the distribution of its own
television programming, including the ability to package such product for
distribution in different media. The Company also believes its international
television distribution operation enables it to increase its distribution of
programs produced by others. In December 1994, the Company expanded its
activities in international distribution by establishing an international
distribution subsidiary. In June 1995, the Company hired Marvinia Anderson from
World International Network as President of its television distribution
activities, and she continues in this role. In April 1997 the Company hired
Pascal Borno as President of the entire distribution operation. Mr. Borno also
owns Conquistador Entertainment, which he previously headed on a full-time
basis, and, prior to Conquistador, handled international sales and distribution
for Dino de Laurentiis and for ITC Entertainment. The Company's combined film
and television distribution division gives the Company increased control over
the marketing of its product line, greater bargaining strength, and improved
cost efficiencies.
The Company's strategy has been to reduce its business risks in
international markets by securing business relationships with strong local
distributors and broadcasters. The Company has entered into output arrangements
in certain
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foreign territories with broadcasters and distributors who have agreed to
license distribution rights in such markets for all of the Company's product
produced during the specified term of the agreement (generally between three and
five years) at designated prices for various types of film or television
product.
LIBRARY
Since its inception in 1983, the Company has produced or acquired more
than 1,000 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 feature films,
movies-for-television, television series, game shows and talk shows produced or
acquired by the Company since its inception. The following table sets forth, as
of September 30, 1997, certain completed feature films and television
programming in which the Company has ownership rights, distribution rights or
the right to share in future profit participation:
Feature Film
<TABLE>
<CAPTION>
Title First Exhibition
- -----------------------------------------------------------------------
<S> <C>
Animalympics NBC
The Brave Little Toaster Disney Channel
Andre Theatrical
Babysitters Home Video
Cafe Society Pay Cable
Closer, The Theatrical
Forbidden Passion Home Video
Deadly Exposure Home Video
Dragon World: The Legend Continues Home Video
Dream Master Home Video
Eggs From 70 Million B.C. Home Video
Flesh Suitcase Pay Cable
Freeway Pay Cable
The Incredible Genie Home Video
The Grave Pay Cable
The Human Pets Home Video
Indecent Behavior Home Video
Johnny Mysto: Boy Wizard Home Video
Journey to the Magic Cavern Home Video
The Midas Touch Home Video
Lady-in-Waiting Home Video
Last Gasp Home Video
Last Battle for the Universe Home Video
The Last Time I Committed Suicide Theatrical
Little Ghost Home Video
Lost World of the Giants Home Video
Medium Rare Home Video
Mesmer Home Video
Naked Souls Home Video
Oblivion HBO
The Adventures of Pinocchio Theatrical
Planet of the Dino-Knights Home Video
Red Hot Home Video
Red Ribbon Blues Cable/Home Video
Sensation HBO
Serpent's Lair Pay Cable
Shrunken Heads Home Video
Test Tube Teens Home Video
Trapped in Toyworld Home Video
Wes Craven Presents: Mindripper Home Video
The Whole Wide World Theatrical
Alien Abduction Cable/Home Video
</TABLE>
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<PAGE> 15
<TABLE>
<S> <C>
Angel of Passion Cable/Home Video
Banished Behind Bars Cable/Home Video
Bare Exposure Cable/Home Video
Bikini Drive In Cable/Home Video
Blonde Heaven Cable/Home Video
Caged Hearts Cable/Home Video
Call Girl Cable/Home Video
Cave Girl Island Cable/Home Video
Cellblock Sisters Cable/Home Video
Centerfold Cable/Home Video
Donor, The Cable/Home Video
Electra Cable/Home Video
Elke's Erotic Nights Cable/Home Video
Forbidden Games Cable/Home Video
Hard Bounty Cable/Home Video
Illicit Dreams II Cable/Home Video
Improper Conduct Cable/Home Video
Innocence Betrayed Cable/Home Video
International Beach Cable/Home Video
Irresistible Impulse Cable/Home Video
Jacko Cable/Home Video
Jungle Law Cable/Home Video
Lap Dancer Cable/Home Video
Love Me Twice Cable/Home Video
Lover's Concerto Cable/Home Video
Lurid Tales Cable/Home Video
Masseuse, The Cable/Home Video
Miami Models Cable/Home Video
Midnight Confessions Cable/Home Video
Midnight Tease II Cable/Home Video
Midnight Temptations Cable/Home Video
Petticoat Planet Cable/Home Video
Pleasure in Paradise Cable/Home Video
Powder Burn Cable/Home Video
Prelude to Love Cable/Home Video
Private Obsession Cable/Home Video
Professional Affair Cable/Home Video
Raven's Kiss Cable/Home Video
Second Sight Cable/Home Video
Seduction of Innocence Cable/Home Video
Sensuous Summer Cable/Home Video
Shadow Dancer Cable/Home Video
Siren's Kiss Cable/Home Video
Softbodies, The Movie Cable/Home Video
Spirit of the Night Cable/Home Video
Stolen Heart Cable/Home Video
Target of Seduction Cable/Home Video
Totally Exposed Cable/Home Video
Tropical Tease Cable/Home Video
Under Lock and Key Cable/Home Video
Under The Gun Cable/Home Video
Uninhibited Cable/Home Video
Virtual Desire Cable/Home Video
Wager of Love Cable/Home Video
</TABLE>
Television Movies and Mini-Series
<TABLE>
<CAPTION>
Title First Exhibition
- -----------------------------------------------------------------------
<S> <C>
Aladdin International
Glory Years (4 hours) HBO
Family Pictures ABC
JFK: Reckless Youth (3 hours) ABC
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
Carolina Skeletons NBC
Confessions: Two Faces of Evil NBC
Father and Son: Dangerous Relations NBC
Fire in the Dark CBS
Getting Gotti: The Diane Giacalone Story CBS
Good Cops, Bad Cops NBC
Jack Reed III: A Search For Justice NBC
Jack Reed IV: A Killer Amongst Us NBC
Jack Reed V: Death and Vengeance NBC
Dangerous Intentions CBS
Lady Killer CBS
Murder C.O.D. NBC
Kiss Shot CBS
Liberace: Behind the Music CBS
Overruled NBC
Sins of the Mother CBS
Sweet Bird of Youth NBC
Then There Were Giants NBC
To Save the Children CBS
Your Mother Wears Combat Boots NBC
Candles in the Dark Family Channel
City Boy PBS
Every Woman's Dream CBS
A Husband, A Wife and A Lover CBS
Innocent Victims NBC
Princess in Love CBS
Echo ABC
Unlikely Angel CBS
</TABLE>
Television Series/Game Show
<TABLE>
<CAPTION>
Produced or
Title In Production First Exhibition
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Sweating Bullets 66 CBS
Pigasso's Place 13 Syndication
Teen Wolf 21 CBS
Mapletown 39 Syndication
Cinematractions 26 Syndication
1st and Ten 80 HBO
Harts of the West 15 CBS
Trial Watch 118 NBC
The Barbara De Angelis Show 70 CBS
Heroes: Made in the USA 38 Syndication
Profiles-Unauthorized Biographies 4 A&E
Relatively Speaking 90 Syndication
Erotic Confessions 39 HBO
Could It Be a Miracle 24 Syndication
Gun 6 ABC
Cracker 22 ABC
Hammer 26 Syndication
Mowgli: The New Adventures of The Jungle Book 26 Fox Kids Worldwide
</TABLE>
A significant portion of the Company's library is under license in many
of the major domestic and international markets. Following the expiration of the
licenses, rights generally revert to the Company for relicensing.
JOINT VENTURES AND ANCILLARY ACTIVITIES
The Company has expanded into areas which exploit the characters and
story ideas in its feature films and television
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<PAGE> 17
programs through joint ventures and partnerships. The Company is actively
marketing the music used in its productions through an arrangement with Cherry
Lane Music, Inc., a music publisher. Using its expertise as a television
producer, the Company produced two infomercials for its partnership TVFirst. TV
First markets recorded Christian music sung by contemporary Christian artists.
From October 1, 1995 through September 30, 1997 music revenues have exceeded
$9,600,000.
Responding to the increased demand for product by the pay-per-view,
telephone delivery, pay cable and basic cable services, the Company formed
called KLC/New City Tele-Ventures to acquire product from third parties for
distribution in the cable, pay service and satellite markets, as well as other
emerging markets. The joint venture has acquired over 100 films for this
purpose. The Company owns 82.5% of this entity.
The Company holds 50% ownership interests in BLT Ventures, which
produced the two sequels to the animated feature Brave Little Toaster, and
Cracker Company LLC, which is producing the network televison series Cracker.
In November 1997 the Company obtained an option to acquire majority
ownership and controlling interest in 800-U.S. Search, ("Search") in exchange
for certain guaranties. The Company is assisting Search with its infomercial
marketing efforts. Search engages in public records searches to locate
individuals with whom the consumer has lost contact for a low fixed fee.
International Co-Productions. An international co-production is a joint venture
or partnership between entities in two or more countries which in certain cases
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 pre-production costs in certain foreign 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. Receipts from its distribution of the project recoup production
funding, production fees, talent participations, distribution fees and expenses.
Excess receipts, if any, are distributed to the various parties in accordance
with their agreed-upon profit participation. The Adventures of Pinocchio is an
example of a co-production with German, French and English participation.
Producer-for-Hire. In addition to developing and producing its own programs, the
Company may be hired as a producer-for-hire for 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, the Company receives a set
fee and agrees to deliver the completed program for that fee. The Company's
profit is the excess of its fee over its production costs. If production costs
exceed the package fee, the Company bears the deficit. Under the second type,
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.
GOVERNMENT REGULATIONS
The Federal Communications Commission ("FCC") repealed its financial
interest and syndication rules effective in September 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,
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 since the effective date of the repeal of the FCC's
financial interest and syndication rules, and this may place additional
competitive pressures on program suppliers, such as the Company.
Under the Telecommunications Act of 1996 (the "1996 Act"), manufacturers
of television set equipment are required to equip all new television receivers
with a so-called "V-Chip" which would allow for parental blocking of violent,
sexually-explicit or indecent programming based on a rating for any given
program that would be broadcast along with the program. The FCC is directed by
the 1996 Act to develop a ratings system based upon the recommendations of an
advisory committee selected by the FCC unless the television industry
establishes its own voluntary ratings system by February 1997. The television
networks did establish and have implemented such a system. Other provisions of
the 1996 Act revise the broadcast multiple ownership rules, allow local exchange
telephone companies to offer multichannel video programming
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<PAGE> 18
service, subject to certain regulatory requirements, and allow for cable
companies to offer local exchange telephone service, subject to certain
regulatory requirements.
The impact on the Company of the changes brought about by the 1996 Act,
including the new ratings guidelines and by accompanying changes in FCC rules
cannot be predicted at the present time. However, it is possible that recent
alliances of certain program producers and television station group owners,
coupled with the recent FCC rule revisions allowing a single television station
licensee to own television stations reaching up to 35% of the nation's
television households, may place additional competitive pressures on program
suppliers, such as the Company, to the extent they are unaligned with the major
networks or any television station group owners.
In international markets, the Company's programming is occasionally
subject to local content and quota requirements, and/or other limitations, 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 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
The Company is party to certain 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.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 19, 1997 the shareholders of the Company voted in the annual
meeting to (A) re-elect directors, (B) re-appoint KPMG Peat Marwick LLP as
independent accountants, (C) effect a 1-for-6 reverse stock split and (D) to
amend the Company's Amended Articles of Incorporation to decrease the number of
authorized shares of Common Stock of the Company from the previous amount of
150,000,000 shares to 50,000,000 shares. Finally, the shareholders voted not to
amend the Company's Amended Articles of Incorporation to provide for 3,000,000
authorized shares of Preferred Stock of the Company. A majority of total shares
voting was needed to approve proposals A and B, whereas a majority of shares
outstanding was needed to approve proposals C and D, and the amendment to
authorized Preferred Stock. The results of the voting, on an unadjusted
(pre-reverse split) basis were as follows:
<TABLE>
<CAPTION>
A) Election of directors:
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Peter Locke 41,122,705 250,087 942,570
Donald Kushner 41,130,605 249,387 935,370
David Braun 41,169,612 236,880 908,870
S. James Coppersmith 41,169,347 235,145 910,870
Stuart Hersch 41,170,412 233,080 911,870
B) Approval of the appointment of KPMG Peat Marwick LLP as
independent accountants for the fiscal year ended September 30,
1997:
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
41,552,897 539,188 223,277
C) Approval of the Reverse Stock Split
FOR AGAINST ABSTAIN
40,045,361 2,090,323 179,678
D) Approval of the Common Stock Amendment:
FOR AGAINST ABSTAIN
39,646,677 2,336,900 331,785
E) Approval of the Preferred Stock Amendment:
FOR AGAINST ABSTAIN
7,773,357 3,890,988 500,182
</TABLE>
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, as retroactively adjusted for a one-for-six
reverse stock split effective September 5, 1997.
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
FISCAL 1996
First Quarter (ended December 31, 1995) . $ 4.50 $ 2.82
Second Quarter (ended March 31, 1996) ... 6.36 3.48
Third Quarter (ended June 30, 1996) ..... 9.00 5.46
Fourth Quarter (ended September 30, 1996) 8.64 3.36
FISCAL 1997
First Quarter (ended December 31, 1996) . 4.32 2.28
Second Quarter (ended March 31, 1997 .... 3.36 1.86
Third Quarter (ended June 30, 1997 ...... 3.00 1.32
Fourth Quarter (ended September 30, 1997 3.90 1.68
FISCAL 1998
First Quarter (through December 23, 1997) 5.25 2.44
</TABLE>
On December 23, 1997, the last sale price for the Common Stock as
reported on the NNM was $2.81 for the Common Stock. At December 23, 1997, there
were approximately 745 record holders of the Common Stock. In September 1997 the
Company effected a 1-for-6 reverse stock split. All stock prices presented
herein give retroactive effect to the reverse split.
RECENT SALES OF UNREGISTERED SECURITIES; USES OF PROCEEDS FROM
REGISTERED SECURITIES.
In October 1997, the Company issued to Lawrence Mortorff, a former
employee of the Company, 66,667 shares of Common Stock in exchange for the 5% of
the outstanding common stock of KL Features, Inc. not owned by the Company. The
Common Stock was sold without registration under an exception from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
See Notes 6 and 8 of Notes to Consolidated Financial Statements for
descriptions of warrants issued to Allen & Company, Incorporated and a financial
consultant, and options granted to Messrs. Kushner, Locke and certain other
persons under the Company's stock option plan in the fourth quarter of fiscal
1997. Such securities were issued without registration pursuant to the
exception noted above.
19
<PAGE> 20
REVERSE STOCK SPLIT
On August 19, 1997, the Company's shareholders approved a one-for-six
reverse stock split (the "Reverse Stock Split") of its outstanding common stock,
no per value (the "Common Stock"). The Reverse Stock Split became effective on
September 5, 1997 to shareholders of record at the close of business on
September 4, 1997. As part of the Reverse Stock Split, the exercise price and
the number of shares of Common Stock issuable upon exercise of the Company's
Common Stock purchase warrants were also adjusted. In addition, the shareholders
also approved an amendment to the Company's Restated Articles of Incorporation
which reduced the number of authorized shares of Common Stock from 150,000,000
to 50,000,000 shares.
DIVIDENDS
The Company has never paid any cash dividends and has no present
intention to declare or to pay cash dividends. The payment of dividends also is
restricted by covenants in the Company's credit agreement and the indentures and
fiscal agency agreements under which the Company's Convertible Subordinated
Debentures were issued. It is the present policy of the Company to retain any
earnings to finance the growth and development of the Company's business.
6. SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data for
the Company and should be read in conjunction with the certain 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, 1997 and 1996, 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, 1997 appears
elsewhere in this Annual Report.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues ........................... $ 56,935 $ 80,157 $ 20,407 $ 50,736 $ 42,487
Costs relating to operating revenues ......... (52,084) (70,648) (17,404) (54,952) (41,497)
Selling, general and administrative expenses . (5,333) (3,595) (3,838) (3,208) (2,797)
-------- -------- -------- -------- --------
Earnings/(loss) from operations .............. (482) 5,914 (835) (7,424) (1,807)
Interest income .............................. 163 198 300 197 78
Interest expense ............................. (4,027) (4,027) (3,409) (2,209) (1,173)
Interest expense related to bridge note
financing .................................. -- (943) -- -- --
-------- -------- -------- -------- --------
Earnings/(loss) before income taxes and
cumulative effect of a change in accounting
principle and extraordinary item ........... (4,346) 1,142 (3,944) (9,436) (2,902)
Income taxes ................................. (23) (47) (31) 2,277 1,076
-------- -------- -------- -------- --------
Earnings/(loss) before cumulative effect of a
change in accounting principle and
extraordinary item ......................... (4,369) 1,095 (3,975) (7,159) (1,826)
Cumulative effect of a change in accounting
for income taxes ........................... -- -- -- 394 --
-------- -------- -------- -------- --------
(4,369) 1,095 (3,975) (6,765) (1,826)
Extraordinary item: costs associated with
repayment of credit facility ............... -- (365) -- -- --
-------- -------- -------- -------- --------
Net earnings/(loss) .......................... $ (4,369) $ 730 $ (3,975) $ (6,765) $ (1,826)
======== ======== ======== ======== ========
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C> <C>
Earnings/(loss) per common and common
equivalent share (2):
Before cumulative effect of a change in
accounting and extraordinary items $ (.49) $ .16 $ (.75) $ (1.46) $ (.39)
Cumulative effect of a change in
accounting for income taxes ....... -- -- -- .08 --
Extraordinary item .................... -- (.05) -- -- --
-------- -------- -------- -------- --------
Net earnings/(loss) ................... $ (.49) $ .11 $ (.75) $ (1.38) $ (.39)
======== ======== ======== ======== ========
Weighted average of common and common
equivalent shares outstanding(2) ........... 8,959 6,668 5,286 4,896 4,729
======== ======== ======== ======== ========
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
SEPTEMBER 30,
(IN THOUSANDS)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents(1) ........... $ 16,791 $ 11,636 $ 4,301 $ 15,681 $ 6,542
Accounts receivable, net ............... 27,696 22,885 7,864 6,177 5,360
Film and television property costs, net
amortization ......................... 68,507 58,463 73,716 30,688 43,031
Total assets ........................... 124,368 100,152 88,952 54,254 56,131
Notes payable .......................... 62,647 41,481 28,398 9,600 8,007
Convertible subordinated debentures, net 11,631 12,039 17,745 22,056 4,296
Total liabilities ...................... 93,232 65,902 69,745 35,713 32,252
Stockholders' equity ................... 31,136 34,250 19,207 18,541 23,879
======== ======== ======== ======== ========
</TABLE>
- -----------
(1) $1,609 of cash and cash equivalents are restricted deposits that are
collateral for a sale/leaseback transaction and for certain production
loans for 1997 ($419 for 1996 and $1,162 for 1995) and $105 ($4,126 for
1996 and none for 1995) is cash collected by the Company and reserved for
use by Chase Manhattan Bank to pay down outstanding borrowings under the
Company's credit facility.
(2) In September 1997 the Company effected a 1-for-6 reverse stock split.
Amounts for all periods presented herein give retroactive effect to the
reverse split.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's revenues are derived primarily from the production or the
acquisition of distribution rights of films licensed for release domestically by
studios, pay cable, basic cable and videocassette companies; and from the
development, production and distribution of television programming for the major
domestic television networks, basic and pay cable television and first-run
syndicators; as well as from the licensing of rights to films and television
programs in international markets. The Company generally finances all or a
substantial portion of the budgeted production costs of its programming through
advances obtained from distributors and borrowings secured by domestic and
international licenses. The Company typically retains rights in its programming
to be exploited in future periods or in additional markets or media. In 1993,
the Company established a feature film operation which produces 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.
21
<PAGE> 22
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). Revenues from distributor
production advances or license fees received prior to delivery or completion of
a program are deferred. Production advances and deferred license fees are
generally recognized as revenue on the date the film or program is delivered or
available for delivery. Activities conducted through joint ventures, wherein the
Company reports its equity in earnings as revenues, can significantly affect
comparability of revenues. See "Results of Operations - Comparison of Fiscal
Year Ended September 30, 1997 and 1996" below.
The Company generally capitalizes the costs it has incurred to produce a
film or television program. These costs include direct production expenditures,
certain exploitation costs, production overhead, and interest relating to
financing the project. 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 or
program in future markets. These costs, as well as third party participations
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 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, 1997 and 1996" and "Results of Operations-Comparison of Fiscal Years Ended
September 30, 1996 and 1995."
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. Thus, a change in the amount of entertainment product available for
delivery from period to period has materially affected a given period's revenues
and results of operations and year-to-year results may not be comparable. The
continuing shift of the Company's product mix during the fiscal year may further
affect the Company's quarter-to-quarter or year-to- year results of operations
as new products may be amortized differently as determined by length of product
life cycle and the number of related revenue sources. Film costs, net of
accumulated amortization, increased to $68,507,000 at September 30, 1997 from
$58,463,000 at September 30, 1996. Film costs in process or development at
September 30, 1997 decreased to $10,497,000 from $16,527,000 at September 30,
1996. See "Results of Operations Comparison of Fiscal Years Ended September 30,
1997 and 1996" below.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996
The Company's operating revenues for the fiscal year ended September 30, 1997
were $56,935,000, a decrease of $23,222,000 (29%), from $80,157,000 for the
prior fiscal year. The decrease was due primarily to 1997 deliveries of joint
venture projects whose gross revenues are not consolidated in the accompanying
financial statements, and no repetition of the 1996 delivery of the
higher-budget feature The Adventures of Pinocchio. If revenues generated by The
Adventures of Pinocchio were excluded from both fiscal 1996 and 1997 periods,
current year revenues would have increased 2%. The Company's production and
deliveries during fiscal 1997 shifted somewhat toward increased episodic
television programming with related start-up costs.
For fiscal 1997, the Company did not release a higher budget film, but
earned revenues of more than $1,800,000 (3% of total revenues) for the continued
international exploitation of The Adventures of Pinocchio, which was originally
released in fiscal 1996. The Company's feature slate for fiscal 1997 generated
over $19,800,000 (35%) of revenues principally from the international
exploitation of Basil starring Christian Slater, Claire Forlani and Jared Leto,
and Double Tap starring Heather Locklear and Stephen Rea, delivery of a film
produced for Twentieth Century Fox Film Corporation, equity in the earnings of
the joint venture which produced two sequels to the animated feature Brave
Little Toaster, and seven children's fantasy adventure films. In addition, the
Company's television slate generated $22,800,000 (40%) of revenues during fiscal
1997 principally from the Company's six one hour prime time episodes of a
mid-season replacement series for ABC entitled Gun which aired in the spring of
1997, equity in the earnings of the joint venture which produced five episodes
of the ABC prime time network series
22
<PAGE> 23
Cracker starring Robert Pastorelli, under a 22 episode order, seven episodes of
the syndicated television series Hammer starring Stacy Keach, a half-hour series
presently airing on HBO which the Company will also be distributing to
international and other domestic markets, and 6 episodes of Mowgli: The New
Adventures of the Jungle Book, out of a total of 13 half-hour episodes for the
Fox Kids Network and 26 episodes for an international distributor. In addition,
the Company recognized $4,400,000 (8%) of revenues from distribution to domestic
cable and pay-per-view media for films acquired through KLC/New City. The
Company also recognized $7,300,000 (13%) of revenues from continuing licenses of
completed product from the Company's library to foreign distributors, domestic
cable channel operators and international sub-distributors. Operating revenues
include $2,189,000 relating to the Company's equity in earnings from the
following joint ventures: Cracker Company LLC, formed to produce and distribute
the Cracker series, TV First and the joint venture producing and distributing
the Brave Little Toaster sequels. Gross revenues for the three joint ventures
were $24,681,000 for fiscal 1997.
The Company recognized approximately $44,100,000 (55%) of operating
revenues for fiscal 1996, primarily attributable to the delivery and/or
availability of 16 feature films, including $26,300,000 (33%)from the initial
release of the feature film The Adventures of Pinocchio and $9,000,000 (11%)
from the films Serpent's Lair, The Grave, Freeway, The Whole Wide World, and The
Last Time I Committed Suicide. In addition, the Company recognized $22,800,000
(28%) of revenues during fiscal 1996 from the delivery and/or availability of 4
network movies, Princess in Love, Every Woman's Dream, A Husband, A Wife and a
Lover and Echo, the network mini-series Innocent Victims and the network pilot
for the Company's mid-season series Gun. Twelve other film and video projects
generated $8,800,000 (11%) of revenues during fiscal 1996. In addition, the
Company recognized approximately $4,100,000 (5%) of revenues from distribution
to domestic cable for films acquired through KLC/New City. The Company also
recognized additional revenues from continuing licenses of completed product
from the Company's library to foreign distributors, domestic cable channel
operators and international sub-distributors and from the national rollout of an
infomercial marketing contemporary Christian music on compact discs.
In various stages of production for the Company's fiscal 1998
distribution slate are Beowulf starring Christopher Lambert, Denial starring
Jason Alexander and directed by Adam Rifkin, Minion starring Dolph Lundgren,
Possums starring Mac Davis, Noose directed by Ted Demme, Susan's Plan written
and directed by John Landis, Bone Daddy starring Rutger Hauer, Girl starring
Dominique Swain, One Man's Hero starring Tom Berenger, Taxman starring Joe
Pantoliano, Legion starring Parker Stevenson, and Swing starring Lisa
Stansfield. The Company is also continuing its production of the television
series Hammer, and Mowgli: The New Adventures of The Jungle Book, and a joint
venture is continuing the production of the television series Cracker as
described above. In addition, the Company continues to acquire domestic cable
rights for films for distribution through KLC/New City and the international
distribution rights to films for distribution through Kushner Locke
International, Inc.
Costs relating to operating revenues were $52,084,000 during fiscal 1997
as compared to $70,648,000 during fiscal 1996. As a percentage of operating
revenues, costs relating to operating revenues were 91% for fiscal 1997 compared
to 88% for fiscal 1996. In comparison to the third quarter's percentage of
operating revenues, wherein margins were relatively high due to the delivery of
two animated video sequels to Brave Little Toaster, in the fourth quarter the
Company's joint venture with Granada Television delivered five episodes of
Cracker, a recently introduced ABC television network series and the Company
delivered the first seven episodes of Hammer. As is usually the case with
newly-introduced episodic television series, the joint venture realized a
relatively low operating margin on Cracker, and the Company realized relatively
low operating margins on Hammer and certain additional new product. Also during
the fourth quarter of fiscal 1997, the Company reduced prior estimates of future
revenues of certain film and television productions. Principal among the
productions so adjusted was Gun, which was not picked up by the ABC television
network for its Fall 1997 or Spring 1998 broadcast seasons. These factors
combined to decrease the carrying value of film and television inventory by
$1,325,000 in the fourth quarter. Absent unforeseen developments, management
expects margins to increase somewhat in 1998.
Selling, general and administrative expenses increased to $5,333,000 in
fiscal 1997 compared to $3,595,000 in fiscal 1996. This 48% increase results
principally from over $1,300,000 of additions to the allowance for doubtful
receivables ($800,000 greater than additions provided in 1996) in order to
reflect net expected international collections, and increased salary and
benefits expenses.
23
<PAGE> 24
Interest expense for the year ended September 30, 1997 was $4,027,000 as
compared to $4,970,000 for the year ended September 30, 1996. The 19% decrease
in 1997 was primarily due to the absence of the $943,000 charge to interest
expense in 1996 related to the issuance of shares of common stock as part of the
refinancing by the Company and lower effective interest rates on the line of
credit in 1997, which was offset in part by increased 1997 credit facility
borrowings. The Company capitalized $306,000 less interest to film and
television property costs in fiscal 1997. Total indebtedness for borrowed money
increased 39% to $74,278,000 at September 30, 1997 from $53,520,000 at September
30, 1996 due to increased production borrowings to finance a larger production
slate. The weighted average interest rate under the line of credit was 9.25%
during fiscal 1997 compared to 9.98% during fiscal 1996, while the Series A,
Series B, 8% and 9% Convertible Subordinated Debentures bear interest fixed at
10%, 13.75%, 8% and 9%, respectively. Management expects the level of borrowings
and related interests costs to increase in fiscal 1998.
The Company's effective income tax rate was (1%) for the year ended
September 30, 1997 compared to an effective income tax rate of approximately 4%
for the year ended September 30, 1996. The Company recognized minimum state
income tax expense incurred despite its net loss and loss carryforwards. At
September 30, 1997, the Company had net operating loss carryforwards of
$39,308,000 for federal tax purposes compared to $33,030,000 at September 30,
1996. Such carryforwards expire in fiscal 2012.
The Company reported a net loss of $(4,369,000), or $(.49) per share,
for the fiscal year ended September 30, 1997, and net earnings of $730,000, or
$.11 per share, for the fiscal year ended September 30, 1996. The per share
amounts have been adjusted for the effects of a 1-for-6 reverse stock split
effected in September 1997. The loss in 1997 resulted primarily from the
Company's fourth quarter reduction of prior estimates of future revenues of
certain film and television product, and fourth quarter increased allowance for
doubtful receivables which aggregated $2,600,000, and also from start-up costs
in connection with the Company's new distribution personnel and products
activities, an increased allowance for doubtful receivables and lower margins on
production released in the current year.
The Company continues to use the intrinsic value-based method under
Accounting Principles Board Opinion No. 25, as allowed under SFAS 123, to
account for all of its employee stock-based compensation plans. Therefore, in
consolidated financial statements for fiscal 1997, the Company has made the
required pro forma disclosures in a footnote to the financial statements. SFAS
No. 123 is not expected to have a material effect on the Company's results of
operations or financial position.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995
The Company's operating revenues for the fiscal year ended September 30,
1996 were $80,157,000, an increase of $59,750,000 (292%) from $20,407,000 from
the prior fiscal year. The increase was due primarily to the delivery and/or
availability of a substantially increased slate of films and television
programs. The Company shifted its product mix during fiscal 1996 towards an
increased number of feature films.
The Company recognized $44,100,000 (55%) of revenues during fiscal 1996
from the delivery and/or availability of 16 feature films, including $26,300,000
from the initial release of the feature film The Adventures of Pinocchio (with
certain anticipated revenues to be recognized in fiscal 1997) and $9,000,000
from the films Serpent's Lair starring Jeff Fahey, The Grave starring Gabrielle
Anwar, Eric Roberts and Craig Sheffer, Freeway executive produced by Oliver
Stone and starring Reese Witherspoon, Keifer Sutherland and Brooke Shields, The
Whole Wide World starring Vincent D'Onofrio and Renee Zellweger and being
distributed in the U.S. by Sony Classics, and The Last Time I Committed Suicide
starring Keanu Reeves. In addition, the Company recognized $22,800,000 (28%) of
revenues during fiscal 1996 from the delivery and/or availability of 4 network
movies, the network mini-series Innocent Victims and the network pilot for the
Company's mid-season series Gun, including, $13,700,000 for the Company's four
television network movies including Princess in Love, starring Julie Cox in the
book version of Princess Diana's affair, for CBS, Every Woman's Dream starring
Jeff Fahey for CBS, A Husband, A Wife and a Lover starring Judith Light, for CBS
and Echo starring Jack Wagner, for ABC. Twelve other film and video projects
generated $8,800,000 (11%) of revenues during fiscal 1996. In addition, the
Company recognized $4,100,000 (5%) of revenues from distribution to domestic
cable for films acquired through KLC/New City. The Company also recognized
additional revenues from continuing licenses of completed product from the
Company's library to foreign distributors, domestic cable channel operators and
international sub-distributors and from the national rollout of an infomercial
marketing
24
<PAGE> 25
contemporary Christian music on compact discs.
Operating revenues for fiscal 1995 were primarily attributable to the
delivery and/or availability to Warner Vision of the three low budget feature
films Lady in Waiting, The Last Gasp and Wes Craven Presents: Mindripper and
$9,500,000 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.
Costs relating to operating revenues were $70,648,000 during fiscal 1996
as compared to $17,404,000 during fiscal 1995. As a percentage of operating
revenues, costs relating to operating revenues were 88% for fiscal 1996 compared
to 85% for fiscal 1995. During the fourth quarter of fiscal 1996, the Company
revised its estimates of the future revenues of certain film and television
product resulting in a net decrease of the carrying value of film and television
inventory of $500,000. Without such reduction, costs relating to operating
revenues would have been $70,148,000 for fiscal 1996. During the fourth quarter
of 1995, the Company revised its estimates of future revenues for certain older
television programs which resulted in reductions of the carrying value of such
programs and an expense of $888,000 recorded during the fourth quarter of fiscal
1995. Without such reduction, costs related to operating revenues would have
been $16,500,000 (81%) of revenues for fiscal 1995.
Selling, general and administrative expenses decreased to $3,595,000 in
fiscal 1996 compared to $3,838,000 in fiscal 1995. This decrease resulted from
the capitalization of certain production overhead items to theatrical,
television and cable product partially offset by an overall increase in staffing
and personnel costs.
Interest expense for the year ended September 30, 1996 was $4,970,000 as
compared to $3,409,000 for the year ended September 30, 1995. The increase was
primarily due to a $943,000 charge to interest expense related to the issuance
of shares of common stock as part of the refinancing of Bridge Notes issued by
the Company, plus a $365,000 charge relating to the repayment of the Company's
previous $15,000,000 credit facility for fees including a non-cash charge of
$65,000 related to the issuance of warrants to the former lender and the
increased interest costs associated with the higher amount of borrowings under
the new credit facility. The previous credit facility was replaced by an
increased $40,000,000 credit facility led by The Chase Manhattan Bank, which was
subsequently increased to $60,000,000. Total indebtedness for borrowed money
increased to $53,520,000 at September 30, 1996 from $46,143,000 at September 30,
1995 due to increased production borrowings to finance a larger
off-balance-sheet production slate, including The Adventures of Pinnochio and
Magic Adventures. The weighted average interest rate under the line of credit
was 9.98% during fiscal 1996 compared to 10% during fiscal 1995, 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 effective income tax rate was 4% for the year ended
September 30, 1996 compared to an effective income tax rate of 1% for the year
ended September 30, 1995. At September 30, 1996, the Company had net operating
loss carryforwards of $33,030,000 for federal tax purposes compared to
$24,631,000 at September 30, 1995. Such carryforwards expire in fiscal 2011.
The Company reported net earnings of $730,000, or $.02 per share, for
the fiscal year ended September 30, 1996, and a net loss of $(3,975,000), or
$(.13) per share, for the fiscal year ended September 30, 1995. The loss in
fiscal 1995 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 impacted 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.
LIQUIDITY AND CAPITAL RESOURCES
25
<PAGE> 26
Cash and cash equivalents increased 44% to $16,791,000 (including
$1,609,000 of restricted cash being used as collateral for a film sale/leaseback
transaction and for certain production loans, and $105,000 of reserved cash to
be applied against the Company's outstanding borrowings under its credit
facility) at September 30, 1997 from $11,636,000 (including $419,000 of
restricted cash and $4,126,000 of reserved cash) at September 30, 1996 primarily
from an increase in cash flow attributable to non-recurring costs in fiscal 1996
incurred in connection with the issuance of common stock and from an increase in
notes payable.
The Company's production and distribution operations are capital
intensive. The Company has funded its working capital requirements through
receipt of third party domestic and international licensing payments as well as
other operating revenues, and proceeds from debt and equity financing, and has
relied upon its line of credit and transactional production loans to provide
bridge production financing prior to receipt of license fees. The Company funds
production and acquisition costs out of its working capital, including the line
of credit, and through certain pre-sale of rights in international markets. In
addition, the expansion of the Company's international distribution business and
the establishment of its 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 (primarily resulting from the Company's significant expansion of
production) of $7,893,000 during the twelve months ended September 30, 1997,
which was more than offset by net cash of $19,848,000 provided by financing
activities from production loans, and greater usage of the Company's
revolving line of credit. As a result primarily of an excess of cash
collections plus borrowings over production and operating expense payments,
net unrestricted cash increased by $7,986,000 to $15,077,000 $ on September 30,
1997. 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. Credit Facility
In June, 1996, the Company closed a $40,000,000 syndicated revolving
credit agreement with a group of banks led by The Chase Manhattan Bank N.A.
("Chase"). In September 1997 that agreement was amended to increase the maximum
amount of revolving credit to $60,000,000. The agreement provides for borrowing
by the Company of up to $60,000,000 based on specified percentages of domestic
and international accounts and contracts receivable and a specified amount based
upon the Company's appraised library value for unsold or unlicensed rights In
addition, the Company may from time to time allocate a production tranche in its
line of credit for the Company's productions. Such tranche will allow the
Company to borrow production funding after accounting for specified percentages
of pre-sales, licensing fees and similar revenues from third parties and a
required Company equity participation. All loans made pursuant to such agreement
are secured by substantially all of the Company's otherwise unencumbered assets
and bear interest, at the Company's option, either (i) at LIBOR (6% as of
December 19, 1997) plus 3% (for that portion of the borrowing base supported by
accounts or contracts receivable) or 4% (for that portion of the borrowing base
[supported by [unamortized] library film costs or for loans made under the
production tranche) or (ii) at the Alternate Base Rate (which is the greater of
(a) Chase's Prime Rate (8.75% as of December 19, 1997), (b) Chase's Base CD Rate
(5.81% as of December 24, 1997) plus 1% or (c) the Federal Funds Effective Rate
(5.46% as of December 19, 1997) plus 1/2%) plus 2% (for that portion of the
borrowing base supported by accounts or contracts receivable) or 3% (for that
potion of the borrowing base supported by unamortized library film costs or
loans made under the production tranche). The Company is required to pay a
commitment fee of .5% per annum of the unused portion of the credit line. As of
December 24, 1997, the Company had drawn down $53,080,000 under the credit
facility out of a total net borrowing base availability of $57,829,000 and Chase
also held $179,000 of reserved cash collected from distributors but not yet
applied against existing loans. Also on that date, the Company held over
$1,600,000 of unrestricted cash and over $1,500,000 of restricted cash.
The credit agreement contains various restrictive covenants to which the
Company must adhere. These covenants, among other things, include limitations on
additional indebtedness, liens, investments, disposition of assets, guarantees,
deficit financing, capital expenditures, affiliate transactions and the use of
proceeds and prohibit payment of cash dividends and prepayment of subordinated
debt. In addition, the credit agreement requires the Company to maintain a
minimum liquidity level, limits overhead expense and requires the Company to
meet certain ratios. The credit agreement also contains a provision permitting
the bank to declare an event of default if either of Messrs. Locke or Kushner
fails to be the Chief Executive Officer of the Company or if any person or group
acquires ownership or control of capital stock of the Company having voting
power greater than the voting power at the time controlled by Messrs. Kushner
and Locke combined (other than any institutional investor able to report its
holdings on Schedule 13G which holds no more than 15% of such voting
26
<PAGE> 27
power). On December 23,1997 the credit agreement was further amended to change
the interest coverage covenant effective on September 30, 1997.
Securities Offerings
As of September 30, 1997, $5,000,000 principal amount of 8% Convertible
Subordinated Debentures and $4,100,000 principal amount of 9% Convertible
Subordinated Debentures were outstanding. Through December 19, 1997, an
additional $250,000 principal amount of the 8% Debentures were converted into
42,735 shares of Common Stock and no additional shares of 9% Debentures were
converted. As of September 30, 1997, approximately $77,000 principal amount of
Series A Debentures (convertible into common stock at an adjusted rate of
approximately $7.61 per share) and $3,242,000 of Series B Debentures
(convertible into common stock at an adjusted rate of approximately $9.27 per
share) were outstanding. The Company has the right to redeem the Series A
Debentures at redemption prices at par after September 30, 1997 and to redeem
the Series B Debentures at redemption prices at par after October 1, 1997.
All conversion rates are as adjusted for the Company's one-for-six reverse
stock split effective September 5, 1997.
In September 1994, the Company filed a registration statement covering
an aggregate of 21,388,064 shares (now equivalent to 3,564,678 shares giving
effect to the 1-for-6 reverse stock split) 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.
In May 1996, the Company issued $1,500,000 of short-term bridge notes in
a private placement which were repaid in July 1996 in connection with the
secondary public offering referred to below.
In July 1996, the Company closed a secondary public offering of an
aggregate of 4,750,000 units (a "Unit"), each Unit consisting of two shares of
Common Stock (now equivalent to 1,583,334 shares in the aggregate giving effect
to the 1-for-6 reverse stock split) and one five year Class C Redeemable Common
Stock Purchase Warrant to purchase Common Stock at an adjusted exercise price of
$6.8625 per share. The Company received net proceeds in the amount of
$9,203,125. In connection with such offering, the Company issued warrants to
purchase up to an aggregate of 475,000 Units (prior to the reverse split )at an
adjusted rate of $18.00 per Unit to the underwriter thereof and a consultant.
Production/Distribution Loans
The Company's other short term borrowings, totaling $5,844,000 as of
September 30, 1997, consisted of production loans from Banque Paribas (Los
Angeles Agency) ("Paribas") and Imperial Bank to consolidated production
entities. The Kushner-Locke Company provided limited corporate guarantees for a
portion of the Paribas loan which is callable in the event that the production
company does not repay the loans by the respective maturity date. The Imperial
Bank production loans is recourse only to the production entity. Deposits on the
purchase price paid by the distributing licensees are held as restricted cash
collateral by the Lenders. To the extent the collateral value securing the loans
exceeds the amount outstanding, the Company may determine in the future to
assume such obligations in full under its Chase facility and take title to such
assets.
The table below shows certain production loans as of September 30, 1997.
<TABLE>
<CAPTION>
KUSHNER-LOCKE
AMOUNT WEIGHTED CORPORATE
FILM LENDER LOAN AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY
---- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basil Paribas $ 6,300,000 $3,564,000 10% $1,000,000 3-30-98
Magic Adventures Imperial 5,150,000 2,280,000 9.92% -- 11-15-97*
----------- ---------- ----------
$11,450,000 $5,844,000 $1,000,000
=========== ========== ==========
</TABLE>
* Fully repaid at maturity.
27
<PAGE> 28
In April 1996, a $5,150,000 production loan was obtained from Imperial
Bank to cover a portion of the production budgets of the Magic Adventures home
video series. The loan bore interest at Prime plus 1.5%. The loan was secured
by the rights, title and assets related to the film series which are being
delivered to domestic and international sub-distributors. The loan was fully
repaid in November 1997.
In February 1997, a $6,300,000 production loan was obtained from Paribas
to cover a portion of the production budget of Basil. The loan bears interest at
Prime (8.75% as of December 19, 1997) plus 1.5% payable monthly plus certain
loan fee amounts. The loan is secured by the rights, title and assets related to
the film which is being delivered to sub-distributors. In May 1997 a third party
invested $2,000,000 in the film project in exchange for certain rights and
profit participations.
As of September 30, 1996 the Company's consolidated entities had
productions loans outstanding for Innocent Victims production loan and The
Adventures of Pinocchio. In March 1997 the Innocent Victims loan was repaid. In
September 1997 the The Adventures of Pinocchio loan was repaid.
In November 1997, an $8,200,000 production loan was obtained from
Comerica Bank - California by an unconsolidated company 25%-owned by the Company
to cover a portion of the production budget of Beowulf. The loan bears interest
at U.S. Prime (8.75% as of December 19, 1997) plus 1% or at LIBOR (6% as of
December 19, 1997) plus 2%. The Company provided a corporate guaranty in the
amount of $1,250,000 in connection with this loan. The loan matures on August
31, 1998. The loan is secured by the rights, title and assets related to the
film.
The Company recently entered into an agreement in principle with a major
studio whereby the Company has the right to distribute in international
territories up to nine moderate to high-budget motion pictures over a three year
period. The Company has the right to select the motion pictures, if any, to be
distributed among titles made available by the major studio. In the event the
Company selects one or more films under the arrangement, management currently
expects to finance its acquisition of the distribution rights via credit
facilities not presently in place. There can be no assurance that definitive
agreements for this distribution arrangement will be agreed to, that financing
will be obtained, or that such activities will ultimately be profitable if
undertaken.
Management expects to finance future production and distribution
arrangements through a combination of production loans and credit facility
borrowings. No assurance can be given that such financing will be available when
and if needed. Management believes the Company will comply with the restrictive
covenants of the Chase agreement and accordingly the credit facility will be
available through June 2000, the maturity date.
SUMMARY
Management believes that existing resources and cash generated from
operating activities, together with amounts available under the syndicated
revolving credit agreement with Chase will be sufficient to meet the Company's
working capital requirements for at least the next twelve months. The Company
from time to time will seek additional financing through the issuance of new
debt or equity securities, additional bank financings, or other means
available to the Company to increase its working capital. In addition to
expanding production and its distribution business, whether internally or by
acquisition, the Company also considers acquisition possibilities from time to
time, including film libraries and companies ancillary to the Company's
business, subject to the availability of financing as necessary.
The Company's business and operations have not been materially affected
by inflation.
The Company utilizes third party provider computer programs to process
certain information in order to maintain efficient business operations. No
Company-created programming is utilized. Management is aware of the Year 2000
programming issue and is evaluating the adequacy of the third party providers'
proposed or implemented solutions. At present, no assurance can be given that
those solutions will resolve the issue, and therefore no assurance can be given
that the Company will avoid significant deteriorations of operating efficiency
or programming costs.
28
<PAGE> 29
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS
No, 128, "Earnings Per Share." SFAS No. 128 specifies new standards designed to
improve the earnings per share (EPS) information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic, EPS, for which common stock equivalents are not considered, (b)
eliminating the modified treasury stock method and the three percent materiality
provision and (c) revising the contingent share provision and the supplemental
EPS data requirements. SFAS No. 128 also makes a number of changes to existing
disclosure statements issued for periods ending after December 15, 1997,
including interim periods The Company's basic earnings per share as calculated
under SFAS 128 are $(0.49), $0.11 and $(0.75) for the years ended September 30,
1997, 1996 and 1995, respectively.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. SFAS No. 130 is effective for financial statements issued for
periods beginning after December 15, 1997. Management believes that the impact
of SFAS No. 130 will not be material to the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standard for the reporting of operating segment information
in annual financial statements and in interim financial reports issued to
shareholders. SFAS No. 131 is effective for financial statements issued for
periods beginning after December 15, 1997. Management believes that the impact
of SFAS No. 131 will not be material to the Company's financial statements.
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.
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE 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, 1997) in
the Company's definitive Proxy Statement in connection with its 1998 Annual
Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, or in an amendment to this Annual Report of Form 10-K.
11. EXECUTIVE COMPENSATION
The information called for in Item 11 of Part II I shall be filed not
later than 120 days after the Company's fiscal year end (September 30, 1997) in
the Company's definitive Proxy Statement in connection with its 1998 Annual
Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, or in an amendment to this Annual Report on Form 10-K.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for in Item 12 of Part III shall be filed not
later than 120 days after the Company's fiscal year
29
<PAGE> 30
end (September 30, 1997) in the Company's definitive Proxy Statement in
connection with its 1998 Annual Meeting of Stockholders pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended, or in an amendment to
this Annual Report on Form 10-K.
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for in Item 13 of Part III shall be filed not
later than 120 days after the Company's fiscal year end (September 30, 1997) in
the Company's definitive Proxy Statement in connection with its 1998 Annual
Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange
Act of 1934, as amended, or in an amendment to this Annual Report on Form 10-K.
30
<PAGE> 31
14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) (1) Financial Statements:
Independent Auditors' Report............................................................................
Consolidated Balance Sheets at September 30, 1997 and 1996..............................................
Consolidated Statements of Operations for the years ended September 30, 1997, 1996, and 1995............
Consolidated Statements of Cash Flows for the years ended September 30, 1997, 1996, and 1995............
Consolidated Statements of Stockholder Equity for the years ended September 30, 1997, 1996, and 1995....
Notes to Consolidated Financial Statements..............................................................
(2) Financial Statement Schedule
Schedule II for the years ended September 30, 1997, 1996, and 1995......................................
All other schedules are inapplicable and, therefore, have been omitted.
(3) Exhibits................................................................................................
Exhibits filed as part of this report are listed in the Exhibit Index, which follows the Signatures.....
(b) Report on Form 8-K:
Current Report of the Company on Form 8-K, as filed on September 2, 1997
</TABLE>
31
<PAGE> 32
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 as of September 30, 1997 and 1996, 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, 1997.
In connection with our audits of the consolidated financial statements, we have
also audited the accompanying financial statement schedule. These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and the 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1997, 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.
KPMG PEAT MARWICK LLP
Los Angeles, California
December 26, 1997
32
<PAGE> 33
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............................................................. $ 15,077,000 $ 7,091,000
Reserved cash ......................................................................... 105,000 4,126,000
Restricted cash ....................................................................... 1,609,000 419,000
Accounts receivable, net of allowance for doubtful accounts of $891,000 in 1997 and
$693,000 in 1996 .................................................................... 27,696,000 22,885,000
Due from affiliates ................................................................... 588,000 1,238,000
Note receivable from related party .................................................... 423,000 540,000
Film and television property costs, net of accumulated amortization ................... 68,507,000 58,463,000
Investments in unconsolidated entities, at equity ..................................... 5,326,000 1,514,000
Other assets .......................................................................... 5,037,000 3,876,000
------------- -------------
$ 124,368,000 $ 100,152,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities .............................................. $ 2,935,000 $ 3,277,000
Notes payable ......................................................................... 62,647,000 41,481,000
Deferred film license fees ............................................................ 3,362,000 3,460,000
Contractual obligations, principally participants' share payable and talent residuals . 6,155,000 3,512,000
Production advances ................................................................... 6,502,000 2,133,000
Convertible subordinated debentures, net of deferred issuance costs ................... 11,631,000 12,039,000
------------- -------------
Total liabilities ........................................................... 93,232,000 65,902,000
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares at September 30, 1997 and
80,000,000 at September 30, 1996: issued and outstanding 9,090,080 shares at
September 30, 1997 and 8,777,541 shares at September 30, 1996 as adjusted ........ 38,905,000 37,650,000
Accumulated deficit ................................................................. (7,769,000) (3,400,000)
------------- -------------
Net stockholders' equity .................................................... 31,136,000 34,250,000
------------- -------------
$ 124,368,000 $ 100,152,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 34
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues ............................................ $ 56,935,000 $ 80,157,000 $ 20,407,000
Costs related to operating revenues ........................... (52,084,000) (70,648,000) (17,404,000)
Selling, general and administrative expenses .................. (5,333,000) (3,595,000) (3,838,000)
------------ ------------ ------------
Earnings/(loss) from operations .......................... (482,000) 5,914,000 (835,000)
Interest income ............................................... 163,000 198,000 300,000
Interest expense .............................................. (4,027,000) (4,027,000) (3,409,000)
Interest expense related to Bridge Note financing ............. -- (943,000) --
------------ ------------ ------------
Earnings/(loss) before income taxes and extraordinary item (4,346,000) 1,142,000 (3,944,000)
Income tax (expense) .......................................... (23,000) (47,000) (31,000)
------------ ------------ ------------
Earnings/(loss) before extraordinary item ................ (4,369,000) 1,095,000 (3,975,000)
Extraordinary item: costs associated with repayment
of credit facility ......................................... -- (365,000) --
------------ ------------ ------------
Net earnings/(loss) ...................................... $ (4,369,000) $ 730,000 $ (3,975,000)
============ ============ ============
Earnings/(loss) per common and common equivalent share:
Before extraordinary item .................................. $ (.49) $ .16 $ (.75)
Extraordinary item ......................................... -- (.05) --
------------ ------------ ------------
Net earnings/(loss) ...................................... $ (.49) $ .11 $ (.75)
============ ============ ============
Weighted average common and common equivalent shares
outstanding ................................................ 8,959,000 6,668,000 5,286,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 35
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings/(loss) ........................................................... $ (4,369,000) $ 730,000 $ (3,975,000)
Adjustments to reconcile net earnings/(loss) to net cash used by
operating activities:
Amortization of film costs ................................................ 50,835,000 70,068,000 16,977,000
Depreciation and amortization ............................................. 192,000 190,000 239,000
Amortization of capitalized issuance costs ................................ 969,000 299,000 414,000
Interest on bridge loan ................................................... -- 750,000 --
Changes in assets and liabilities:
Restricted cash ........................................................... (1,190,000) 743,000 (1,162,000)
Reserved cash ............................................................. 4,021,000 (4,126,000) --
Accounts receivable, net .................................................. (4,811,000) (15,021,000) (1,687,000)
Other receivables ......................................................... 767,000 (717,000) (766,000)
Film costs ................................................................ (60,879,000) (54,815,000) (60,005,000)
Accounts payable and accrued liabilities .................................. (342,000) 32,000 860,000
Deferred film license fees ................................................ (98,000) 707,000 2,389,000
Contractual obligations ................................................... 2,643,000 2,517,000 (221,000)
Production advances ....................................................... 4,369,000 (14,476,000) 16,527,000
------------ ------------ ------------
Net cash used by operating activities ................................ (7,893,000) (13,119,000) (30,410,000)
------------ ------------ ------------
Cash flows from investing activities: .......................................... --
Investments in unconsolidated entities ......................................... (3,812,000) (1,495,000)
Increase in property and equipment, net ....................................... (157,000) (140,000) (317,000)
------------ ------------ ------------
Net cash used by investing activities ................................ (3,969,000) (1,635,000) (317,000)
------------ ------------ ------------
Cash flows from financing activities:
Increase in notes payable ..................................................... 54,716,000 34,081,000 21,398,000
Repayment of notes payable .................................................... (33,550,000) (20,998,000) (2,600,000)
Net proceeds from issuance of common stock .................................... -- 7,202,000 --
Net proceeds from exercise of stock options ................................... -- 412,000 --
Repayment of debentures/exercise of conversion options ........................ -- (56,000) (25,000)
Other ......................................................................... (1,318,000) (1,935,000) (588,000)
------------ ------------ ------------
Net cash provided by financing activities ............................ 19,848,000 18,706,000 18,185,000
------------ ------------ ------------
Net increase (decrease) in cash ...................................... 7,986,000 3,952,000 (12,542,000)
Cash and cash equivalents at beginning of year ................................. 7,091,000 3,139,000 15,681,000
------------ ------------ ------------
Cash and cash equivalents at end of year ....................................... $ 15,077,000 $ 7,091,000 $ 3,139,000
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ................................................................. $ 4,487,000 $ 3,557,000 $ 2,952,000
Income taxes ............................................................. $ 23,000 $ 47,000 $ 27,200
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 36
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
(1) In fiscal 1995, $5,260,000 of convertible subordinated debentures were
converted into 899,583 adjusted shares of common stock.
(2) In fiscal 1996, $6,500,000 of convertible subordinated debentures were
converted into 1,182,248 adjusted shares of common stock including 105,289
adjusted shares of common stock, valued at $750,000, relating to interest on the
bridge loan. See accompanying notes to consolidated financial statements.
(3) In fiscal 1997, $667,000 of convertible subordinated debentures were
converted into 84,562 adjusted shares of common stock.
36
<PAGE> 37
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NUMBER OF (ACCUMULATED
SHARES COMMON STOCK DEFICIT) NET
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at September 30, 1994 ............ 5,011,517 $ 18,696,000 $ (155,000) $ 18,541,000
Conversion of subordinated debentures ......... 899,583 4,641,000 -- 4,641,000
Net loss ...................................... -- -- (3,975,000) (3,975,000)
------------ ------------ ------------ ------------
Balance at September 30, 1995 ............ 5,911,100 23,337,000 (4,130,000) 19,207,000
Issuance of common stock ...................... 1,583,333 7,202,000 -- 7,202,000
Stock options exercised ....................... 75,000 412,000 -- 412,000
Stock purchase warrants exercised ............. 25,860 -- -- --
Issuance of bridge loan stock ................. 105,289 750,000 -- 750,000
Conversion of subordinated debentures ......... 1,076,959 5,949,000 -- 5,949,000
Net earnings .................................. -- -- 730,000 730,000
------------ ------------ ------------ ------------
Balance of September 30, 1996 ........... 8,777,541 37,650,000 (3,400,000) 34,250,000
Issuance of common stock ...................... 227,500 598,000 -- 598,000
Conversion of subordinated debentures ......... 84,562 613,000 -- 613,000
Other ......................................... 477 44,000 -- 44,000
Net loss ...................................... -- -- (4,369,000) (4,369,000)
============ ============ ============ ============
Balance at September 30, 1997 ............ 9,090,080 $ 38,905,000 $ (7,769,000) $ 31,136,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 38
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") develops, produces and
distributes feature films, direct-to-video films, television series,
movies-for-television, mini-series and animated programming. In the last three
years, 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.
Generally, theatrical films are first distributed in the theatrical and
home video markets. Subsequently, theatrical films are made available for
world-wide television network exhibition or pay television, television
syndication and cable television. Generally, television films are first licensed
for network exhibition and foreign syndication or home video, and subsequently
for domestic syndication or cable television. Certain films are produced and/or
distributed directly for initial exhibition by local television stations,
advertiser-supported cable television, pay television and/or home video. The
revenue cycle generally extends 7 to 10 years on film and television products.
Basis of Presentation
The consolidated financial statements include the accounts of The
Kushner-Locke Company, its wholly-owned subsidiaries and certain less than
wholly-owned entities which the Company controls. All material intercompany
balances and transactions have been eliminated. Entities in which the Company
holds a 20% to 50% interest and exercises significant influence are accounted
for under the equity method.
Certain reclassifications have been made to conform prior year balances
with the current presentation.
Revenue Recognition
Revenues from feature film and television program distribution
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 licensee and certain
other conditions of sale have been met pursuant to criteria specified by SFAS
No. 53, Financial Reporting By Producers and Distributors of Motion Picture
Films. Revenues from barter transactions, whereby the program is exchanged for
television advertising time which is sold to product sponsors, are recognized
when the television program has aired and all conditions precedent have been
satisfied.
Producer fees received from production of films and television programs
for outside parties where the Company has no continuing ownership interest in
the project are recognized on a percentage-of-completion basis as determined by
applying the cost-to-cost method. The cost of such films and television series
is expensed as incurred.
Accounting for Film and Television Property Costs
The Company capitalizes costs incurred to produce a film or television
project, 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 expected revenue or profit
participations 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
38
<PAGE> 39
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 and television property costs are stated at the lower of
unamortized cost or estimated net realizable value. Losses which may arise
because unamortized costs of individual films or television series exceed
anticipated revenues are charged to operations through additional amortization.
The Company capitalized interest of $1,429,000, $1,735,000 and $631,000
to film and television property costs for the years ended September 30, 1997,
1996, and 1995, respectively.
Participants' Share Payable and Talent Residuals
The Company charges profit participation and talent residual costs 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 such amounts 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.
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.
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 and Reserved Cash
At September 30, 1997, the Company had $1,609,000 in restricted cash
related to a deposit held at a British bank pursuant to a film sale/leaseback
transaction, and to advances made by the Company to film producers for the
acquisition of distribution rights or films not yet completed ($419,000 at
September 30, 1996). The latter cash advances are held in escrow accounts as
collateral by financial institutions providing production loans to those
producers. In addition, the Company has $105,000 in cash collected by the
Company and reserved for use by Chase Manhattan Bank to be applied against the
Company's outstanding borrowings under the terms of the Company's credit
facility ($4,126,000 at September 30, 1996.).
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, 1997 were not significant.
Income Taxes
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
39
<PAGE> 40
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. 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.
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Significant estimates are primarily related to ultimate revenues and
ultimate costs relating to the Company's film and television properties and the
collectibility of accounts receivable. Actual results may differ from estimated
amounts.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is effective
for fiscal years beginning after December 15, 1995, and requires that the
Company either recognize in its consolidated financial statements costs related
to its employee stock-based compensation plans, such as stock option and stock
purchase plans, or make pro forma disclosures of such costs in a footnote to the
consolidated financial statements.
Fair Value of Financial Instruments
The fair value of the Company's cash and cash equivalents, accounts
receivable, due from affiliates, accounts payable and accrued liabilities,
contractual obligations and participants' share payable for talent residuals
approximate their recorded value due to the relatively short maturities of these
instruments. The fair value of due from affiliates and note receivable from a
related party have not been estimated due to the related party nature of such
amounts. The fair value of notes payable and convertible subordinated debentures
approximates the recorded value due to the stated interest rate on such
instruments and the indeterminate nature of the value of the convertibility
feature of such debt instrument.
Reverse Stock Split
In September 1997 the Company effected a 1-for-6 reverse split of the
issued and outstanding shares of common stock which had been approved by the
stockholders. All references to shares outstanding give effect to this reverse
stock split as if it had occurred at the beginning of the earliest period
presented.
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 inclusion of the additional shares assuming the conversion of the Company's
convertible subordinated debentures or assuming the exercise of warrants or
stock options would have been anti-dilutive for all periods.
(2) Film and Television Property Costs
Film and television property costs consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
In process or development ......................................... $10,497,000 $16,527,000
Released, principally feature films and television productions, net
of accumulated amortization ..................................... 58,010,000 41,936,000
----------- -----------
Total ............................................................. $68,507,000 $58,463,000
=========== ===========
</TABLE>
40
<PAGE> 41
Based upon the Company's present estimates of anticipated future
revenues at September 30, 1997, approximately 70% of the film costs related to
released films and television series will be amortized during the three-year
period ending September 30, 2000.
(3) Investments in Unconsolidated Entities, at Equity
Information regarding investments and advances, net as of September
30, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
OWNERSHIP NET EQUITY
INVESTEE % INVESTMENT
-------- -------------------------------
<S> <C> <C>
1997:
BLT Ventures 50% $1,925,000
Cracker Company, LLC 50% 2,533,000
TV First 50% 868,000
----------
$5,326,000
==========
1996:
BLT Ventures 50% $ 19,000
TV First 50% 1,495,000
----------
$1,514,000
==========
</TABLE>
Equity in earnings (losses) of unconsolidated entities and other investments for
the years ended September 30, 1997 and 1996 which are included in operating
revenues were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
BLT Ventures $ 1,896,000 $ 243,000
Cracker Company, LLC 313,000 --
TV First (20,000) (17,000)
----------- -----------
$ 2,189,000 $ 226,000
=========== ===========
</TABLE>
The following representation is a condensed combined unaudited summary of
financial information of the Company's investments. Certain of the Company's
other equity investments are not considered significant and are therefore not
included:
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS
SEPTEMBER 30
-------------------------------------
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
Film and television programming costs net $12,510,000 $ 3,316,000
Cash 1,242,000 631,000
Other assets 3,304,000 1,198,000
----------- -----------
Total assets $17,056,000 $ 5,145,000
=========== ===========
Accounts payable $ 1,481,000 $ 1,037,000
Notes payable 208,000 --
Production advances 10,896,000 2,882,000
Ownership equity 4,471,000 1,226,000
----------- -----------
Total Liabilities and ownership equity $17,056,000 $ 5,145,000
=========== ===========
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
COMBINED OPERATING STATEMENTS
YEAR ENDED SEPTEMBER 30
-------------------------------
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Operating income $ 24,681,000 $ 3,393,000
Costs relating to operating revenues (20,278,000) (2,896,000)
Interest income 4,000 5,000
Interest expenses (29,000) (49,000)
------------ ------------
Net earnings $ 4,378,000 $ 453,000
============ ============
</TABLE>
No dividends were received from unconsolidated entities during fiscal
1997 or 1996.
(4) Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Note payable to bank, under the revolving credit facility secured by
substantially all Company assets, interest at varying rates as discussed
below, outstanding principal balance due June 2000...................... $56,803,000 $29,037,000
Notes payable to banks and/or financial institutions consisting of two
production loans secured by certain film rights held by
producers, priced at different rates for each loan ..................... 5,844,000 12,444,000
----------- -----------
Total .................................................................... $62,647,000 $41,481,000
=========== ===========
</TABLE>
In June, 1996 the Company obtained a $40,000,000 syndicated borrowing
base revolving credit facility. In conjunction with this new facility, the
Company repaid amounts outstanding under its previously existing $15,000,000
credit facility. Unamortized issuance costs of $365,000 relating to this
previous credit facility were expensed as an extraordinary item in 1996. In
September 1997 the facility was increased to $60,000,000.
The revolving credit facility is available through June 2000 and bears
interest at the Company's option, either (i) at LIBOR (6% as of December 19,
1997) plus 3% (for that portion of the borrowing base supported by accounts or
contracts receivable) or LIBOR (6% as of December 19, 1997) plus 4% (for that
portion of the borrowing base supported by unamortized library film costs or for
loans made under the production tranche) or (ii) at the Alternate Base Rate
(which is the greater of (a) the agent bank's Prime Rate (8.75% as of December
19, 1997), (b) the agent bank's Base CD Rate (5.81% as of December 24, 1997)
plus 1% or (c) the Federal Funds Effective Rate (5.46%) as of December 19, 1997)
plus 1/2% plus 2% (for that portion of the borrowing base supported by accounts
or contracts receivable) or 3% (for that portion of the borrowing base supported
by unamortized library film costs or for loans made under the production
tranche). The credit agreement contains restrictive covenants to which the
Company must adhere. These covenants, among other things, include limitations on
additional indebtedness, liens, investments, disposition of assets, guarantees,
deficit financing, capital expenditures, affiliate transactions and the use of
proceeds, and prohibit payment of cash dividends and prepayment of most
subordinated debt. In addition, the Company must maintain a minimum liquidity
level, limit overhead expense and to meet certain financial ratios. The bank
could declare an event of default if either of Messrs. Locke or Kushner failed
to be the Chief Executive Officer of the Company or if any person or group
acquired ownership or control of capital stock of the Company having voting
power greater than the voting power at the time controlled by Messrs. Kushner
and Locke combined (other than any institutional investor able to report its
holdings on Schedule 13G which holds no more than 15% of such voting power). On
December 18, 1997 the Company received a waiver of covenants pertaining to the
specified ratio of debt
42
<PAGE> 43
to equity and the specified earnings coverage of interest costs which had not
been met at September 30, 1997. On December 23,1997 the credit agreement was
further amended to change the interest coverage covenant effective as of
September 30, 1997, and the Company was in compliance with the amended covenant.
The Company's other short term borrowings, totaling $5,844,000 as of
September 30, 1997, consist of production loans from Banque Paribas (Los Angeles
Agency) ("Paribas") and Imperial Bank ("Imperial") to consolidated production
entities. The Paribas loan bears interest at Reference Rate (8.75% as of
December 19, 1997) plus 1.5%. The Imperial loan, which was fully repaid by
November 1997, bore interest at Prime plus 1.5%. The Kushner-Locke Company
provided limited corporate guarantees for a portion of the Paribas loan which is
callable in the event that the production company does not repay the loan made
by the respective maturity date. Deposits on the purchase price paid by the
distributing licensees are held as restricted cash collateral by the Lenders.
During fiscal 1997 the $12,500,000 Newmarket loan and the $1,200,000 Paribas
loan which were outstanding as of September 30, 1996 were fully repaid.
The table below shows production loans as of September 30, 1997.
<TABLE>
<CAPTION>
ORIGINAL LOAN AMOUNTS WEIGHTED
FILM LENDER AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
10%
Basil .................. Paribas $ 6,300,000 $3,564,000 $1,000,000 5-30-98
Magic Adventures........ Imperial 5,150,000 2,280,000 9.97% -- 11-15-97*
------------ ---------- -----------
Total ............ $ 11,450,000 $5,844,000 $1,000,000
============ ========== ===========
</TABLE>
- -----------------
* Fully repaid at maturity
In April 1996, a $5,150,000 production loan was obtained from Imperial
Bank to cover a portion of the production budgets of the Magic Adventures home
video series. The loan bore interest at Prime plus 1.5% . The loan was secured
by the rights, title and assets related to the film series which are being
delivered to domestic and international sub-distributors. The loan was fully
repaid in November 1997.
In February 1997, a $6,300,000 production loan was obtained from
Paribas to cover a portion of the production budget of Basil. The loan bears
interest at Prime (8.75% as of December 19, 1997) plus 1.5% payable monthly plus
certain loan fee amounts. The loan is secured by the rights, title and assets
related to the film which is being delivered to sub-distributors. In May 1997 a
third party invested $2,000,000 in the film project in exchange for certain
rights and profit participations.
In November 1997, a $8,200,000 loan was obtained from Comerica Bank -
California by an unconsolidated company 25%-owned by the Company to cover a
portion of the production budget of Beowulf. The Company provided its corporate
guaranty in the amount of $1,250,000 in connection with this loan. The loan
matures on August 31,1998. The loan bears interest. at Prime (8.75% as of
December 19, 1997) plus 1% or at LIBOR (6% as of December 19, 1997) plus 2 %,
payable monthly plus certain loan fee amounts. The loan is secured by the
rights, title and assets related to the film.
43
<PAGE> 44
(5) Convertible Subordinated Debentures
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Series A Convertible Subordinated Debentures due December 2000, bearing interest at 10%
per annum payable June 15 and December 15, net ....................................... 71,000 $ 68,000
Series B Convertible Subordinated Debentures due December 2000, bearing interest at
13 3/4% per annum payable monthly, net of unamortized issuance costs ................. 3,029,000 2,976,000
8% Convertible Subordinated Debentures due December 2000, bearing interest at 8% per
annum payable February 1 and August 1, net ........................................... 4,710,000 4,821,000
9% Convertible Subordinated Debentures due July 2002, bearing interest at 9% per annum
payable January 1 and July 1, net .................................................... 3,821,000 4,174,000
----------- -----------
Total .................................................................................. $11,631,000 $12,039,000
=========== ===========
</TABLE>
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 84 shares of common stock of the Company
at $12.00 per share, as adjusted for the reverse stock split. Each warrant has
been valued at $1.50 (350,000 warrants with a total value of $525,000) and is
included in common stock.
As of September 30, 1997, the Company had outstanding $77,000 principal
amount of Series A Debentures. The debentures are recorded net of unamortized
underwriting discounts, expenses associated with the offering and warrants
totaling $6,000 which are amortized using the interest method to interest
expense over the term of the debentures. Approximately $3,000 of capitalized
issuance costs have been amortized to interest expense for the year ended
September 30, 1997.
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 approximate adjusted rate of 132 shares for
each $1,000 principal amount of debentures, subject to further adjustment under
certain circumstances.
The Company may redeem the debentures at 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, 1997 the Company had outstanding $3,242,000
principal amount of Series B Debentures due 2000. The debentures bear interest
at 13.75% per annum. The Series B Debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$212,000, which are amortized using the interest
44
<PAGE> 45
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, 1997.
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 an
adjusted rate of $9.2664 per share. The Series B Debentures rank pari passu
(i.e., equally) in right of payment with the Company's other debentures. For the
year ended September 30, 1997 $56,000 principal amount of Series B Debentures
were repurchased upon the death of bondholders pursuant to the "Flower Bond"
provision of the Series B Debentures.
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 through March 1999 for $9,613,700
principal amount and through April 1999 for $30,000 principal amount.
As of September 30, 1997, the Company had outstanding $5,000,000
principal amount of 8% Debentures. The debentures are recorded net of
unamortized underwriting discounts and expenses associated with the offering
totaling $290,000 which are amortized using the interest method to interest
expense over the term of the debentures. Approximately $106,000 of capitalized
issuance costs had been amortized as interest expense for the year ended
September 30, 1997. Approximately $217,000 principal amount of the 8% Debentures
had been converted into 37,094 shares of common stock of the Company in fiscal
year 1997.
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 an adjusted rate
of $5.85 per share; and (iii) the Company has the right to redeem the 8%
Debentures at redemption prices commencing at 102.7% of par in February 1998 and
declining to par commencing in February 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 warrants are exerciseable July, 1999.
As of September 30, 1997, the Company had outstanding $4,100,000
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 $279,000, which are amortized
using the interest method to interest expense over the term of the debentures.
Approximately $97,000 of capitalized issuance costs had been amortized as
interest expense for the year ended September 30, 1997. Approximately $450,000
principal amount of the 9% Debentures had been converted into 47,468 shares of
common stock of the Company in fiscal year 1997.
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 an adjusted rate
of $9.48 per share; and (iii) the Company has the right to redeem the 9%
Debentures at redemption prices commencing at 103% of par in July 1998 and
declining to par commencing in July 2000. The 9% Debentures rank pari passu in
right of payment with the Company's other debentures.
45
<PAGE> 46
(5) Income Taxes
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Current:
Federal .................... $ -- $ -- $ --
State ...................... 23,000 47,000 31,000
------------------------------
23,000 47,000 31,000
Deferred:
Federal .................... -- -- --
State ...................... -- -- --
------------------------------
Total income tax expense $23,000 $47,000 $31,000
==============================
</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,
-------------------------
1997 1996 1995
-------------------------
<S> <C> <C> <C>
Statutory Federal income tax rate ............ (34)% 34% (34)%
Change in valuation allowance ................ 34 (34) 34
State income taxes, net of Federal tax benefit (1) 4 (1)
-------------------------
(1)% 4% (1)%
=========================
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities at September 30, 1997 and September 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1996
------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ................. $ 14,056,000 $ 11,492,000
Tax and general business tax credit carryforwards 857,000 751,000
Allowance for doubtful accounts and other reserves 691,000 250,000
Deferred film license fees ....................... 1,182,000 1,295,000
Other reserves ................................... 484,000 409,000
Depreciation ..................................... 30,000 100,000
------------------------------
Total gross deferred assets .................. 17,300,000 14,297,000
Valuation allowance .......................... (5,198,000) (2,908,000)
------------------------------
Net deferred tax assets ...................... $ 12,102,000 $ 11,389,000
==============================
Deferred tax liabilities:
Film amortization ................................ $ 11,825,000 $ 11,389,000
Partnerships ..................................... 153,000
State taxes ...................................... 124,000 -
------------------------------
Total deferred tax liabilities ............... $ 12,102,000 $ 11,389,000
==============================
</TABLE>
46
<PAGE> 47
At September 30, 1997, the Company had total net operating loss
carryforwards of approximately $39,309,000,000 for federal income tax purposes.
Such carryforwards expire in fiscal 2012. For state tax purposes, the Company
had net operating loss carryforwards of $7,436,000 which expire in fiscal 1999
through 2002. The Company's international tax credits, amounting to
approximately $493,000, expire in fiscal 1997 through 2001. The Company's
general business credit carryforwards, amounting to approximately $197,000,
expire through 2003. Finally, the Company's alternative minimum tax credit
carryforwards, amounting to approximately $173,000, have no expiration date.
(6) Stockholder's Equity
Authorized Stock
In November 1996 the stockholders of the Company approved an increase
in the number of authorized shares of Common Stock of the Company from
80,000,000 shares to 150,000,000 shares. In August 1997 the stockholders of the
Company approved a reduction in the number of authorized shares of Common Stock
from 150,000,000 to 50,000,000 in conjunction with a 1-for-6 reverse stock
split.
Warrants
In 1991, in connection with the Series A Convertible Subordinated
Debenture offering, 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 84
shares of common stock of the Company as adjusted at $12.00 per share as
adjusted. The warrants, sold as part of the unit, were exerciseable through
March, 1997 as extended. The Company issued 350,000 warrants as adjusted valued
at $525,000 to purchase common stock at $12.00 per share, subject to adjustment
in certain circumstances. No warrants were exercised.
In 1992, in connection with its public offering of common stock, the
Company issued warrants to the underwriters of the offering to purchase 116,667
shares of common stock as adjusted. The warrants were exerciseable through
November 1997 at an adjusted price of $7.50 per share. No warrants were
exercised.
In 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, subject to
adjustment in certain circumstances. The warrants are exerciseable March, 1999
for $1,613,700 principal amount and April, 1999 for $30,000 principal amount. In
connection with the 9% Convertible Subordinated Debenture offering, the Company
issued warrants to the underwriters to purchase up to 10% of the aggregate
principal amount of debentures sold ($505,000) at an exercise price equal to
120% of the principal amount of the debentures, subject to adjustments in
certain circumstances. The warrants are exercisable through July, 1999. Through
September 30, 1997, no warrants had been exercised.
In 1996, in connection with its public offering of 4,750,000 units
consisting of two (pre-reverse split) shares of common stock and one warrant to
purchase one share of common stock (a "Unit") for an adjusted price of $11.625
per unit, the Company issued 791,667 warrants to purchase common stock, as
adjusted, and warrants to the underwriter to purchase up to 71,167 units at an
exercise price of $19.18125 per Unit, as adjusted, subject to adjustment in
certain circumstances. In addition, the Company issued warrants to a consultant
to purchase up to 47,500 Units at $19.18125 per Unit, subject to adjustment in
certain circumstances. The warrants underlying the Units are exercisable at an
adjusted exercise price of $6.8625 per share subject to adjustments in certain
circumstances through June 2001. Through September 30, 1997, no warrants had
been exercised.
In June 1997 the Company issued warrants to a financial consultant to
purchase up to 50,000 shares of common stock of the Company at $1.6875 per share
which are exercisable from December 27, 1997 through June 2002. These warrants
replaced several earlier warrants grants to the consultant, which are no longer
exercisable.
In September 1997, in connection with a consulting agreement, the
Company issued warrants to Allen & Company,
47
<PAGE> 48
Incorporated to purchase up to 500,000 shares of common stock of the Company at
$2.0625 per share. Of the total, warrants for 166,667 shares are immediately
exercisable, an additional 166,667 become exercisable in September 1998, and the
remaining 166,666 become exerciseable in September 1999, the latter two events
subject to Allen & Company, Incorporated still being engaged as consultants by
the Company. The warrants expire in September 2004. Also in September 1997 the
Company issued warrants to a financial consultant to purchase up to 50,000
shares of common stock at $2.0625 per share. The terms of that warrant are the
same as that pertaining to Allen & Company Incorporated. The fair value of such
warrants will be amortized over the term of the consulting agreement.
Options
In 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 250,000 to 750,000, as adjusted. In November 1996
the stockholders voted to make certain amendments to the Plan, including
increasing the number of shares of Common Stock reserved for issuance from
750,000 shares to 1,250,000 shares, as adjusted, as well as certain changes in
accordance with new rules enacted under Section 16 of the Securities Exchange
Act of 1934, as amended. 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, 1997,
1,078,692 stock options had been granted and were outstanding under the Plan.
The schedule below includes stock options that the Company has granted
as of September 30, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICES
-----------------------
<S> <C> <C>
Balance at September 30, 1994 ............... 698,268
Granted Fiscal 1995 .............................. 102,500 $4.50-
Options Expired/Canceled ......................... (12,083) $8.28
Options Exercised ................................ ---------
Balance at September 30, 1995 ............... 788,685
Granted Fiscal 1996 .............................. 16,667 $4.50
Options Expired/Canceled ......................... (30,833) $4.86
Options Exercised ................................ (75,000) $5.49
---------
Balance at September 30, 1996 ............... 699,519
Granted Fiscal 1997 .............................. 450,006 $1.98
Options Expired/Canceled ......................... (70,833) $2.58
---------
Balance at September 30, 1997 ............... 1,078,692
=========
Exercisable at September 30, 1997 ................ 528,141 $6.16
Exercisable at September 30, 1996 ................ 397,016 $7.04
Exercisable at September 30, ..................... 378,849 $5.24
=========
</TABLE>
At September 30, 1997, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $1.86 - $15,78 and 6.4
years, respectively. At September 30, 1997, 171,308 shares remained available
for future grant.
48
<PAGE> 49
The Company applies APB opinion No. 25 and related Interpretations in
accounting for its plan, and accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's plan been determined
consistent with FASB Statement No. 123, the Company's net earnings (loss) and
earnings loss per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1997 1996
---------------------------------
<S> <C> <C>
Net earnings (loss) As Reported $ (4,369,000) $ 730,000
---------------------------------
Pro forma $ (4,448,000) 730,000
=================================
Earnings (loss)
per share As Reported $ (.49) $ .11
=================================
Pro forma $ (.50) $ .11
=================================
</TABLE>
The pro forma disclosure of compensation cost under this pronouncement was based
on the Black-Scholes single-option pricing model with the following weighted
average assumption for 1997 and 1996: volatility of 58%, risk-free interest rate
of 6.27%, and an expected option life of 10 years.
Pro forma net earnings (loss) reflects only options granted in fiscal 1997 and
1996. Therefore, the full impact of calculating compensation cost for stock
options under FASB Statement No. 123 is not reflected in the pro forma net
earnings (loss) amounts presented above because compensation cost is reflected
over the options' vesting period and compensation cost for options granted prior
to October 1, 1995 is not considered.
(8) Commitments and Contingencies
Officer Compensation
Messrs. Kushner and Locke
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
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. Under the revised
employment agreements, Messrs. Kushner and Locke each have a base salary of and
$425,000 through fiscal 1998, subject to potential increase upon review by the
Company's Board of Directors after fiscal 1995. As approved by the Board of
Directors in February 1996 and May 1996, Messrs. Kushner and Locke amended their
employment agreements to waive their pre-tax earnings performance bonus in the
event the Company's annual net income in fiscal 1996 was less than $1,250,000,
but were to receive 6% of pre-tax earnings of the Company for fiscal 1996 in
excess of $1,250,000 and up to $3,166,666; and were to receive 4% of pre-tax
earnings of the Company for fiscal 1996 in excess of $3,166,666, but in no event
were either one of them to be entitled to receive greater than $250,000 of
performance bonus. No bonus was accrued or paid in fiscal 1995, 1996 or 1997.
In order to induce Messrs. Kushner and Locke to amend their employment
agreements, the Company granted to each in March 1994 options to purchase
150,000 shares of Common Stock as adjusted at an exercise price per share equal
to $5.04 (the adjusted 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").
In October, 1997, Messrs. Kushner and Locke each agreed to an amendment
to his respective employment agreement with the Company to extend the term of
the agreement to October, 2002. Under the revised employment agreements, Messrs.
Kushner and Locke each have a base salary of $425,000 in fiscal 1997, and
$25,000 annual increases up
49
<PAGE> 50
to a maximum of $525,000 annual base compensation. In the event the Company
achieves earnings before income taxes in excess of $2,000,000, each of Messrs.
Kushner and Locke are entitled to certain profit bonuses at graduated rates
ranging from 5% of annual earnings before income taxes up to $4,000,000 to
7.5% of annual earnings before income taxes in excess of $8,000,000.
In order to induce Messrs. Kushner and Locke to enter into the amended
employment agreements, the Company granted to each, as of August 1, 1997 ,
options to purchase 83,333 (post reverse split) shares of Common Stock at an
exercise price per share equal to $1.875 (the last reported sale price of the
Common Stock on the date prior to the award date, as adjusted). The options vest
over a five year period, with 20% vesting respectively on each of the next five
annual anniversary dates following the date of the grant (subject to possible
acceleration following a "change-in-control" as defined in the Company's 1988
Stock Incentive Plan). The Company also granted to each of Messrs. Kushner and
Locke options to purchase an additional 83,333 (post reverse split) shares of
Common Stock at an exercise price per share equal to $1.875, vesting at the rate
of 20% per year, but exercisable only upon the achievement of certain annual
income targets to be set by the board of directors or the Company's Common Stock
reaching certain public trading prices ranging from $2.00 to $6.00 per share.
The Company also provides each of Messrs. Kushner and Locke with certain
fringe benefits, including $3,500,000 of term life insurance with a split dollar
ownership structure and disability insurance. The Company also agreed to assign
any key-man life insurance policy to the employee after termination of the
employment agreement. The agreements permit Messrs. Kushner and Locke to collect
outside compensation 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 his employment
agreement, except that the Company may continue to use such name for a period of
one year after such notice, or for such longer period of time as is reasonably
necessary to cause the Company not to default under any indebtedness for
borrowed money or other material agreement.
Mr. Lilliston. In September 1996, the Company entered into an employment
agreement with Bruce St. J. Lilliston pursuant to which the Company hired Mr.
Lilliston as the President and Chief Operating Officer of the Company effective
October 1996 for a three year term. As part of the agreement, Mr. Lilliston is
paid a base salary of $400,000 per year. In addition, he was advanced as a loan
the sum of $100,000 on September 3, 1996 and $200,000 in October 1996 to assist
Mr. Lilliston in the transition from his private practice to his duties as Chief
Operating Officer of the Company. The loans accrue simple interest at the rate
of 8% per annum and are to be repaid over a five year period at certain
specified dates ending October 2001. Mr. Lilliston has the right to receive
bonuses equal to the amount of the payments, and interest, due for such loan
repayment if Mr. Lilliston is still employed by the Company (including the
renewal of his employment agreement if applicable) on certain applicable dates
(the "Employment Bonus").
Beginning October 1997, if Mr. Lilliston is still employed by the
Company (including the renewal of his employment agreement if applicable), he
shall be entitled to receive a bonus of $100,000 the first time the "Average
Closing Price" (the average closing price of the common stock over a thirty
calendar day period) is $6.00 or more greater than the "First Day Price" (the
average closing price of the common stock over the thirty calendar day period
immediately prior to October 1996). Thereafter, if Mr. Lilliston is still
employed by the Company (including the renewal of his employment agreement if
applicable), he shall be entitled to receive an additional $100,000 bonus the
first time the Average Closing Price exceeds the First Day Price by $12.00 or
more, and each six dollar increment through and including $60.00 (each such
bonus, a "Stock Bonus"). The aggregate of such bonuses shall not exceed
$1,000,000. The foregoing Stock Bonuses shall be reduced by an amount equal to
the Employment Bonus up to $150,000 plus interest paid thereon from September
1996. The foregoing stock prices have been adjusted from the amounts specified
in Mr. Lilliston's employment agreement to reflect the Company's 1-for-6 reverse
stock split which became effective in September 1997.
If the Company realizes pre-tax operating profits or earnings per share
for any fiscal year of employment greater than 100% of the largest pre-tax
operating profit or earnings per share amount for any of the preceding years of
Mr. Lilliston's employment under his employment agreement or in any of the five
fiscal years immediately preceding the commencement of such agreement, and if
Mr. Lilliston is still employed by the Company at the end of the applicable
fiscal
50
<PAGE> 51
year, then Mr. Lilliston shall be entitled to receive a bonus of $50,000.
As part of the agreement, the Company granted Mr. Lilliston options to
purchase up to 41,668 shares of Common Stock as adjusted, with 20,834 of such
options being granted and vested immediately, 8,334 and 12,500 of such options
to be granted and vested one and two years, respectively, after the commencement
of the term (the "Term") of the employment agreement (in each case, subject to
Mr. Lilliston reaching certain performance criteria to be established by the
Board of Directors or a committee thereof). If Mr. Lilliston's employment is
extended for a second term pursuant to such agreement (the "Second Term"), the
Company has agreed to grant Mr. Lilliston options to purchase up to an
additional 83,334 shares of Common Stock as adjusted, 41,667, 16,667, and 25,000
of such options to be granted upon commencement and one and two years,
respectively, after the commencement of the Second Term with one-half of each
such grant to vest immediately upon grant and the remainder thereof to vest upon
Mr. Lilliston reaching certain performance criteria to be established by the
Board of Directors or a committee thereof. If Mr. Lilliston's employment is
extended beyond a Second Term, the Company has agreed to grant Mr. Lilliston
options to purchase up to an additional 41, 667 shares of Common Stock as
adjusted, with such options granted in full upon such employment extension with
one-half of such grant to vest immediately upon grant and the remainder thereof
to vest upon Mr. Lilliston reaching certain performance criteria to be
established by the Board of Directors or a committee thereof. In the event the
performance goals are not met, such options vest at a fixed date in the future,
contingent solely on future employment. The exercise price for such options
shall be equal to the closing price of the Common Stock on the applicable date
of grant. Finally, as part of Mr. Lilliston's agreement, he is allowed to
maintain not more than two independent outside legal consultancy client
relationships, subject to approval by the Chief Executive Officers, with
earnings from such consultancies limited to $150,000 per year.
Director Compensation
Directors are compensated at $25,000 per year. During fiscal 1997
Messrs. David Braun and S. James Coppersmith received stock options totalling
16,667 adjusted shares each at an adjusted exercise price of $1.875.
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.
Lease
The Company is obligated under a noncancelable operating lease expiring
in March 2000 for office space on the 20th and 21st floors at its principal
executive offices in Los Angeles, California at September 30, 1997 as follows:
<TABLE>
<S> <C>
Fiscal 1998 ...................................... $ 527,000
Fiscal 1999 ...................................... 527,000
Fiscal 2000 ...................................... 264,000
----------
Total minimum future lease rental payments ............ $1,318,000
==========
</TABLE>
Rental expense for the years ended September 30, 1997, 1996 and 1995
was approximately $541,000, $540,000 and $530,000, respectively.
Contingencies
The Company is involved in certain legal proceedings and claims arising
out of the normal conduct of its business. Management of the Company believes
that the ultimate resolution of these matters will not have a material adverse
effect upon the Company's results of operations or financial position.
51
<PAGE> 52
In its normal course of business, the Company makes contractual down
payments to acquire film distribution rights. This initial advance for rights
ranges from 10% to 30% of the total purchase price. The balance of the payment
is generally due upon the complete delivery by third party producers of
acceptable film 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, 1997 the Company had made contractual agreements
for an aggregate of $4,479,000 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 estimated to be payable over the next [eighteen] months.
(9) Related Party Transactions
In December 1994, the Company loaned August Entertainment, Inc.
("August") $650,000 against distribution rights to third party product. August
is majority owned by Gregory Cascante, former President of the Company's
international film distribution division. The loan bears interest at the lesser
of (a) Prime (8.75% at December 23, 1997) plus 2% or (b) 10%. The distribution
agreement is secured by all assets of August, including a pledge of all sales
commissions due to August from the producers of 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 Entertainment Group PLC, and its
subsidiaries which produced the film have guaranteed payment of such commissions
to the extent they would be payable had there been no production loan on that
film. Repayment of principal and interest is by collection of commissions
assigned as collateral. As of September 30, 1997 the Company had been repaid
$384,000 toward interest and principal and approximately $423,000 principal
amount remains outstanding. The loan matures in December 1997, but August and
the Company have reached an agreement, subject to completion of documentation,
to a one year extension to December 23, 1998 with August agreeing to make
principal reduction payments totaling $205,000 on a scheduled basis prior to
maturity. Mr. Cascante left the Company in April 1997 and his employment
agreement was then settled. The Company's loan arrangement with August was not
affected, and August has remained current on all interest and principal payment
obligations since Mr. Cascante left the Company.
In fiscal 1995 the Company became a general partner in TVFirst, which
creates and markets infomercials. The Company's investment in TVFirst on the
equity basis amounted to $868,000 as of September 30, 1997, which is included in
other assets. One of TVFirst's current projects is a Christian music
infomercial. TVFirst purchased air time for such infomercial but neither TVFirst
nor either of its partners (including the Company) had the available resources
to fund such purchases. Messrs. Locke and Kushner loaned TV First $355,000
during 1996 to enable TVFirst to purchase such air time. Such loans bore
interest at prime (8.25% during the loan period) plus 1% and were repaid within
fiscal year 1996. In addition, each lender received an additional amount equal
to 10% of the principal amount loaned by such lender when the loans were repaid.
Furthermore, each lender will receive a profit participation in the profits, if
any, related to this Christian music infomercial, up to an amount equal to 5% of
its principal amount, which amount will be payable on the first anniversary of
such repayment. While the infomercial has generated revenues in excess of its
programming and media costs to date, there is no assurance that future revenues
will continue to exceed costs. The foregoing transaction was approved by a
majority of the independent directors of the Company's Board of Directors.
The Company has acquired from New City Releasing ("New City"), on a
retroactive basis, one half of New City's interest in the KLC/New City
Tele-Ventures joint venture (representing a 17.5% ownership interest in the
joint venture as to which the Company previously held a 65% ownership interest)
for 227,500 shares of Common Stock as adjusted.
During fiscal 1989, the Company entered into a consulting agreement
with Mr. Stuart Hersch to engage his services through September 1994 as an
executive consultant. Pursuant to the consulting agreement the Company granted
Mr. Hersch stock options to purchase 142,365 shares of common stock as adjusted
at $9.33 per share, the adjusted fair market value on the date the Company
committed to make the grant. During fiscal 1990, the consulting agreement was
amended, reducing the options granted to 71,183 shares as adjusted. As of
September 30, 1997, all of those options had vested.
In consideration of the elimination of certain demand registration
rights, the Company indemnified Mr. Hersch in the event Mr. Hersch sold 85,000
shares of the Company's common stock as adjusted to third parties at an adjusted
price less than $10.50 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.
52
<PAGE> 53
Mr. Hersch became a consultant to the Company effective April 1996 for
which he is paid $90,000 per year. Mr. Hersch is assisting the Company in
analyzing potential strategic acquisitions and is providing the Company
consulting services in connection with the Company's involvement in
infomercials. This agreement is on a month-to-month basis as needed by the
Company.
Mr. Hersch sold 8,333 shares of the Company's common stock in December,
1997 at $3.625 per share.
(10) Major Customers and Export Sales
Revenues to major customers which exceeded 10% of net operating
revenues represented 20% 24% and 45% of operating revenues for the years ended
September 30, 1997, 1996 and 1995, respectively, and consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Television Network CBS ..................... $ 3,029,000 $ 8,288,000 $ 6,045,000
Television Network ABC ..................... 4,925,000 10,550,000 _
Television Network NBC ..................... 3,107,000 _ 3,105,000
----------- ----------- -----------
$11,061,000 $18,838,000 $ 9,150,000
=========== =========== ===========
</TABLE>
Accounts receivable from these major customers totaled $ 0, $108,700
and $356,000 at September 30, 1997, 1996 and 1995, respectively.
Domestic and international accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1996
------------------------------
<S> <C> <C>
Accounts Receivable:
Domestic ............................................... $ 8,072,000 $ 3,266,000
International .......................................... 20,515,000 20,312,000
28,587,000 23,578,000
Less: Allowance for Doubtful Accounts ................... (891,000) (693,000)
------------------------------
$ 27,696,000 $ 22,885,000
==============================
</TABLE>
Export sales by geographic areas were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Europe ................... $12,100,000 $22,513,000 $ 3,500,000
Canada ................... 2,671,000 451,000 327,000
Other .................... 20,229,000 13,069,000 2,408,000
-------------------------------------------
$35,000,000 $36,033,000 $ 6,235,000
===========================================
</TABLE>
Other sales were principally to customers in Asia, South America and
Australia.
53
<PAGE> 54
(11) Fourth Quarter Adjustments
During the fourth quarter of 1995, 1996 and 1997, the Company revised
its estimates of future revenues for certain product no longer being produced by
the Company. In 1995 and 1996 the impact was immaterial. In addition during the
fourth quarter of 1997, the Company increased its provision for bad debts. The
adjustments to revise estimates of future revenues and increase the allowance
for doubtful accounts recorded in the fourth quarter of 1997 amounted to
approximately $2,600,000.
54
<PAGE> 55
THE KUSHNER-LOCKE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
ADDITIONS
---------
BALANCE AT CHARGED TO
---------- ----------
BEGINNING OF COSTS AND DEDUCTIONS DUE BALANCE AT END
------------ --------- -------------- --------------
PERIOD EXPENSES TO WRITE-OFFS OF PERIOD
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended 9/30/97 ................ $ 693,000 $1,310,000 (1,112,000) 891,000
========================================================
Year Ended 9/30/96 ................ 400,000 499,000 (206,000) 693,000
========================================================
Year Ended 9/30/95 ................ 650,000 450,000 (700,000) 400,000
========================================================
</TABLE>
55
<PAGE> 56
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.
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: December 26, 1997
/s/ DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board, Co-Chief Executive
Officer and Secretary
Dated: December 26, 1997
/s/ ROBERT SWAN
Robert Swan
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and the capacities and on the dated indicated.
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: December 26, 1997
/s/ PETER LOCKE
Peter Locke
Co-Chairman of the Board and Co-Chief
Executive Officer
Dated: December 26, 1997
/s/ DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board, Co-Chief Executive
Officer and Secretary
Dated: December 26, 1997
/s/ ROBERT SWAN
Robert Swan
Chief Financial Officer
Dated: December 26, 1997
/s/ ADELINA VILLAFLOR
Adelina Villaflor
Controller
Dated: December , 1997
Stuart Hersch
Director
Dated: December 26, 1997
/s/ DAVID BRAUN
David Braun
56
<PAGE> 57
Director
Dated: December 26, 1997
/s/ S. JAMES COPPERSMITH
S. James Coppersmith
Director
57
<PAGE> 58
INDEX TO EXHIBITS
3 Articles of Incorporation (A)
4.1 Indenture between the Company and National City Bank of Minneapolis,
as Trustee, dated as of December 1, 1990 pertaining to 10% Convertible
Subordinated Debentures Due 2000, Series A (E)
4.2 First Supplemental Indenture between the Company and National City
Bank of Minneapolis, as Trustee, dated as of March 15, 1991 pertaining
to 10% Convertible Subordinated Debentures Due 2000, Series A (F)
4.3 Indenture between the Company and National City Bank of Minneapolis,
as Trustee, dated as of December 1, 1990 pertaining to 13 3/4%
Convertible Subordinated Debentures Due 2000, Series B (E)
4.4 Warrant agreement between the Company and City National Bank, as
Warrant Agent, dated as of March 19, 1991 pertaining to Common Stock
Purchase Warrants (F)
4.5 Warrant agreement dated September 5, 1997 between the Company and
Allen & Company Incorporated.(U)
4.6 Warrant agreement dated September 5, 1997 between the Company and I.
Friedman Equities, Inc. (U)
4.7 Warrant Agreement dated June 27, 1997 between the Company and I.
Friedman Equities, Inc.(U)
4.8 Stock Purchase Agreement dated as of June 25, 1997 between the Company
and Lawrence Mortorff. (U)
4.9 Stock Option Award Agreement dated March 1, 1994 between the Company
and Lawrence Mortorff. (U)
10.1 Amended and Restated Employment Agreement dated October 1, 1997
between the Company and Donald Kushner.
10.2 Amended and Restated Employment Agreement dated October 1, 1997
between the Company and Peter Locke.
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)
10.12 Lease Agreement, dated as of November 1989, between the Company and
11601 Wilshire Associates (G)
10.12.1 Amended Lease Agreement (G)
10.16 Warrant Agreement between the Company and Chatfield Dean & Co., Inc.
dated as of November 13, 1992 (J) 10.19 Fiscal Agency Agreement dated
March 10, 1994 between and among the Company, Bank America National
Trust Company and Bank of America National Trust and Savings
Association (K)
10.19.1 Side letter between the Company and BankAmerica Trust Company to the
Fiscal Agency Agreement dated March 10, 1994 between and among the
Company, BankAmerica Trust Company and Bank of America National Trust
and Savings Association (K)
10.20 Warrant Agreement dated March 10, 1994 between the Company and RAS
Securities Corp. (K)
10.21 Warrant Agreement dated March 10, 1994 between the Company and I.
Friedman Equities, Inc. (K)
10.22 Fiscal Agency Agreement dated July 25, 1994 between and among the
Company, Bank America National Trust Company and Bank of America
National Trust and Savings Association (L)
10.24 Employment Agreement dated September 1, 1994 between the Company and
Gregory Cascante (M)
10.25 Employment Agreement dated September 1, 1994 between the Company and
Eleanor Powell (M)
10.27 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)
58
<PAGE> 59
10.28 Letter Agreement, dated March 23, 1995, by and between Woodenhead
Productions, Ltd. and Newmarket Capital Group, L.P. (N)
10.30* Letter Agreement dated February 6, 1995 by and between Savoy Pictures,
Inc. and KL Features, Inc. (N)* 10.32 Guaranty, dated July 7, 1995, by
and between The Kushner-Locke Company and Newmarket Capital Group,
L.P. for loan and interest of Allied Pinocchio Productions, LTD. (The
Legend of Pinocchio) (O)
10.41 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 (Q)
10.44 Amendment to the 1988 Stock Incentive Plan dated May 17, 1994 (Q)
10.46 First Amendment to Credit Documents dated December 22, 1995 between
Allied Pinocchio Productions, Limited, Newmarket Capital Group L.P.,
Bank of American National Trust and Savings Associations, The
Kushner-Locke Company and Kushner-Locke International, Inc. (The
Legend of Pinocchio) (Q)
10.50 Cross Collateralization Agreement dated as of July 7, 1995 between The
Kushner-Locke Company, Allied Pinocchio Productions Ltd., Dayton Way
Pictures, Inc., Dayton Way Pictures II, Inc., Dayton Way Pictures IV,
Inc. and Newmarket Capital Group, L.P. (Q)
10.51 First Amendment to Cross Collateralization Agreement dated January 10,
1996 between The Kushner-Locke Company, Allied Pinocchio Productions
Ltd., Dayton Way Pictures, Inc., Dayton Way Pictures II, Inc., Dayton
Way Pictures IV, Inc. and Newmarket Capital Group, L.P. (Q)
10.56 Letter Agreement, dated as of April 12, 1996, by and among The
Kushner-Locke Company, Chemical Bank and Chase Securities Inc. (T)
10.57 Credit, Security, Guaranty and Pledge Agreement, dated as of June 19,
1996, among The Kushner-Locke Company, the Guarantors named therein,
The Chase Manhattan Bank, N.A., (formerly Chemical Bank) as Agent, and
The Chase Manhattan Bank, N.A., (formerly Chemical Bank) as Fronting
Bank (T)
10.58 Employment Agreement dated September 14, 1996 between The
Kushner-Locke Company and Bruce St. J Lilliston (V)
10.59 Loan and Security Agreement dated March 1, 1996 between The
Kushner-Locke Company and its subsidiaries and Banque Paribas,
Los Angeles Agency (V)
10.60 Loan and Security Agreement, dated as of April 19, 1996, by and
between The Kushner-Locke Company, I. O. International Ltd., and
Imperial Bank. (V)
10.61 Waiver of Section 6.17 Overhead Expenses of the Credit, Security,
Guaranty and Pledge Agreement, dated as of June 19, 1996, among The
Kushner-Locke Company, the Guarantors referred to therein, the Lenders
referred to therein, and The Chase Manhattan Bank, N.A., (formerly
known as Chemical Bank), as Agent. (V)
10.62 Amendment No. 5 dated as of December 22, 1997 to the Credit,
Security, Guarantee and Pledge Agreements dated as of June 19, 1996,
among The Kushner Locke Company, The Guarantors and The Chase
Manhattan Bank.
23.1 Consent of KPMG Peat Marwick LLP
- ----------------------
* Confidential Treatment Granted.
(A) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-18, as amended, effective December 5, 1988 (Commission File
No. 33-25101-LA).
(B) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1989.
(C) Incorporated by reference from the Exhibit to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1990.
(D) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-37192), as initially filed on October 5, 1990
or as amended on November 30, 1990.
(E) Incorporated by reference from the Exhibits to the Company's Registration
Statements on Form S-1, as amended, effective November 30, 1990 (File No.
33-37192), and effective December 20, 1990 (File No. 33-37193).
59
<PAGE> 60
(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-K 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.
(P) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1995.
(Q) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended December 31, 1995.
(R) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1996.
(S) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1996.
(T) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-2, as amended, effective August 15, 1996 (Commission File
No. 333-05089).
(U) Incorporated by reference from the Exhibits to the Company's Registration
Statement on form S-3 as filed November 17, 1997 (Commission File No.
333-40391).
(V) Incorporated by reference from the Exhibits to the Company's Report on
Form 10-K for the fiscal year ended September 30, 1996.
60
<PAGE> 1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement")
executed as of October 1, 1997, by and between THE KUSHNER-LOCKE COMPANY, a
California corporation ("Employer" or the "Company"), and DONALD KUSHNER
("Employee") amends and restates effective as of October 1, 1997 the Employment
Agreement dated as of October 1, 1988, as amended to date, between the parties.
The parties hereto agree as follows:
1. Employment of Employee and Duties. Employer hereby hires Employee
and Employee hereby accepts employment upon the terms and conditions described
herein. Employee shall be Co-Chairman of the Board and Co-Chief Executive
Officer of Employer. Employee's duties shall include responsibility for and
supervision of all of Employer's activities and projects with respect to
television and motion picture production and distribution and such other
activities and duties as Employer may reasonably require from time to time.
Employee shall be the most senior executive of Employer along with Peter Locke
(so long as he shall be so employed), and Employee shall report solely to the
Board of Directors of Employer (the "Board"). During the Term, Employee shall be
elected as a director of Employer and each subsidiary thereof, and, if there is
an Executive Committee, then as a member thereof. Employee agrees to use his
best efforts to promote and further the reputation and good name of Employer and
Employee shall promptly and faithfully comply with all instructions, directions,
requests, rules and regulations made or issued by the Board of Directors from
time to time.
2. Exclusivity.
(a) Employee shall use his full business time and efforts in the
discharge of his duties hereunder and shall faithfully and industriously and to
the best of his ability, experience, and talent, perform all of the duties that
may be required of and from him pursuant to the express and implicit terms
hereof, to the reasonable satisfaction of Employer. Such duties shall be
rendered at such place or places as Employer shall in good faith require within
the County of Los Angeles, State of California, or, on any occasional basis, at
such other places as the interests, needs, business, and opportunities of
Employer shall require or deem advisable.
(b) Employee's business services shall be exclusive to Employer;
provided, however, that Employee may render incidental services (such as serving
as a member of a board of directors) and devote such time as is reasonably
necessary to manage his personal business affairs that do not interfere with the
discharge of his duties hereunder. During the term of this Agreement, Employee
shall not be engaged, employed, concerned or have any financial interest,
directly or indirectly, in any corporation, partnership, firm or entity that is
in competition with Employer; provided, however, that notwithstanding the
foregoing, Employee shall not be prohibited from owning, directly or indirectly,
up to five percent (5%) of the outstanding securities of any publicly traded
company that is in competition with Employer, provided that
<PAGE> 2
such five percent (5%) interest does not provide a direct or indirect
controlling interest in such company.
(c) Employee may devote such time and activity as he may reasonably
require to enable him to administer, monitor and collect such revenues,
reimbursements, fees or other sums to which he may be entitled, and to provide
incidental and limited services outside of his employment hereunder and retain
any compensation or other income related thereto with respect to completed
productions not owned by the Company and owned by Employee as of the date hereof
as set forth below, so long as such activities and services do not materially
interfere with Employee's performance of his obligations hereunder. Employee now
owns certain rights in the property "Animalympics." The Company may, but shall
not be obligated to, purchase an option for such rights from Employee. Employee
may retain any payments made by the Company to him for such rights and as a
result of future exploitation.
3. Term of Agreement. This Agreement shall commence on October 1, 1997
and shall continue, unless terminated as provided in Section 10 hereof, for five
(5) years from the date hereof (the "Term"). Each year of the Term, commencing
as of October 1, is referred to herein as an "Employment Year."
4. Compensation. During the term of this Agreement, Employer shall pay
to Employee, in full payment for Employee's services hereunder, the following
compensation:
(a) Base Salary. Employee shall receive a salary (the "Base Salary")
of Four Hundred Twenty-Five Thousand Dollars ($425,000) per annum. Commencing
with the second Employment Year, and for each subsequent Employment Year, the
amount of the Base Salary shall be increased by Twenty-Five Thousand Dollars
($25,000) over the then Base Salary payable to Employee, but such Base Salary
shall not exceed Five Hundred Twenty-Five Thousand Dollars ($525,000) per annum
for any Employment Year.
(b) Profit Bonus.
Employee shall be paid a bonus (the "Profit Bonus"), if any, for
each Employment Year (or portion thereof) commencing with the first Employment
Year, in an amount equal to a percentage as set forth below of the "Earnings
Before Income Taxes" calculated prior to Employee's and Peter Locke's profit
bonus ("EBIT"), as reflected on Employer's annual consolidated financial
statements, as certified by the independent public accountants retained by
Employer at such time (the "Accountants") and as filed with the Securities and
Exchange Commission (the "SEC") on the Employer's Form 10-K with respect to such
Employment Year. Such percentage utilized for the determination of Profit Bonus,
if any, for each Employment Year shall be calculated as follows:
2
<PAGE> 3
<TABLE>
<CAPTION>
Through EBIT Profit Bonus
EBIT Above: Up To and Including: Percentage
----------- -------------------- ----------
<S> <C> <C>
0 $2 million 0%
$2 million $4 million 5%
$4 million $6 million 5.5%
$6 million $8 million 6%
$8 million Not applicable 7.5%
</TABLE>
For EBIT above Two Million Dollars ($2,000,000) and up to and including
Four Million Dollars ($4,000,000), the five percent (5%) Profit Bonus percentage
shall be applied to the first dollars of EBIT up to and including Four Million
Dollars ($4,000,000). However, for EBIT above Four Million Dollars ($4,000,000),
the applicable higher Profit Bonus percentage(s) shall only be applied to the
amount of EBIT within the range corresponding to such higher Profit Bonus
percentage(s). By way of example only, assuming EBIT for any applicable fiscal
year is Five Million Dollars ($5,000,000), the Profit Bonus for such fiscal year
would be Two Hundred Fifty-Five Thousand Dollars ($255,000) based on the
following calculation: (($4,000,000 x .05) + ($1,000,000 x .055)).
The Employment Year and the fiscal year of the Company are currently the
same. If at any time the fiscal year is changed then appropriate adjustments
must be made to the provisions involved in calculating Profit Bonus.
Notwithstanding the foregoing provisions, in no event shall the Profit Bonus
with respect to any full fiscal year exceed two (2) times the Base Salary for
such fiscal year (such maximum amount being pro-rated for any partial year).
(c) The Profit Bonus shall be payable within ten (10) days following
the delivery of the opinion of the Accountants on the year-end financial
statements of the Company (for such fiscal year). Employer shall use its good
faith reasonable efforts to cause the Accountants, within ninety (90) days of
the close of such fiscal year, to certify such statements and issue its opinion.
(d) Options. Employer hereby confirms that Employer unconditionally
committed to issue as of August 1, 1997 options to purchase 500,000 shares on a
pre-split basis of Employer's common stock, no par value (the "Common Stock") at
an exercise price equal to the closing price of the Common Stock on such date
(subject to appropriate adjustment based on the reverse stock split) and vesting
on a time vesting basis (the "Time Vesting Options") and options to purchase an
additional 500,000 shares on a pre-split basis of the Common Stock at the same
exercise price vesting on a time vesting basis but exercisable only upon
Employer's achievement of certain annual operating income targets or Employer's
Common Stock reaching certain public trading prices (the "Performance Options").
The aforesaid options have been granted under Employer's 1988 Stock Incentive
Plan, as amended (the "Plan") as evidenced (on a post-split basis) by the option
agreements set forth in Exhibit A and Exhibit B hereto.
3
<PAGE> 4
5. Benefits. During the Term of this Agreement, Employer shall provide
the following fringe benefits to Employee.
(a) Employee and his eligible dependents shall be included in any
group hospital, surgical, medical and dental benefit plans of the Company or, at
Employee's option, the Company shall reimburse Employee for the out-of-pocket
cost of his premiums if he has his own policy and is not covered under the
Company's applicable group hospital, surgical, medical and dental benefit plans,
up to a maximum amount equal to the savings the Company realizes as a result of
not insuring Employee.
(b) The Company agrees to provide a life insurance policy (the
"Policy") on the life of Employee in the face amount of Three Million Five
Hundred Thousand Dollars ($3,500,000) with a split dollar ownership structure.
The Company and Employee shall share the premiums on such policy and the
incidents of ownership in accordance with a Split Dollar Agreement to be entered
into between the Company and Employee contemporaneously herewith. If Employee is
terminated by the Company (other than pursuant to Section 10(a)) or by Employee
for cause pursuant to Section 10(b), the Company shall promptly pay to the
insurance company to whom premiums are payable with respect to the Policy an
amount equal to the present value of any and all unpaid Company premiums on such
Policy for the ten (10) year period commencing February 12, 1997, less any
premiums which have already been paid. The Company will cause The Kushner-Locke
Company Shareholders' Cross-Purchase Agreement, dated October 1, 1988, as
amended, and the Trust Agreement, dated October 1, 1988, as amended, entered
into thereunder to be terminated.
(c) Within 10 days following the termination of Employee for any
reason (other than death), at Employee's request, the Company shall assign any
key-man life insurance policies insuring the life of Employee and in favor of
the Company to Employee, whereupon Employee shall assume all related premium
payment and other obligations, and the Company shall not be responsible for
further premium payments on any such policy or policies; provided, however,
that, in the event Employee terminates his employment, or if, at the time of any
termination Employee is critically or terminally ill, the Company shall have the
option of retaining such life insurance policy or policies and continuing to pay
all premiums as they come due for up to one year after such termination, after
which time such policy or policies shall be assigned to Employee. Any benefits
paid for an event occurring within such one year period shall be paid to and
remain the property of the Company. Notwithstanding the foregoing, however, the
Company shall have no obligation to assign any such key-man life insurance
policy or take any action relating thereto if such action would cause, upon
notice or with lapse of time, or both, the Company to be in default of any
material agreement, including, without limitation, any credit agreements or
guarantees.
(d) During the Term hereof, the Company, subject to Employee's
insurability at a reasonable cost, agrees to pay to Employee as additional
compensation to Executive an amount equal to the premiums on a portable,
individual disability income insurance policy providing benefits of $15,000 per
month (or the maximum available at standard rates, if less)
4
<PAGE> 5
during the period of any disability. The Company shall have no interest in or
claim to the policy or the proceeds thereof.
(e) Employer shall provide Employee with a monthly automobile
allowance at a rate not to exceed Twenty-One Thousand Six Hundred Dollars
($21,600) per Employment Year.
(f) Employer shall reimburse Employee for the cost of the monthly
base operating fee and for business related calls made or received by Employee
from his car phone. Reimbursement of such expenses shall be made only against
receipts and a signed itemized list of such expenditures. The car phone will
remain the sole property of Employee.
(g) In accordance with their terms, Employee shall be entitled to
participate in any plans or agreements, if any, that Employer may maintain with
respect to retirement benefits applicable to Employer's executive officers.
(h) The Company will pay for or reimburse Employee for all
first-class travel and all other out-of-pocket business or entertainment
expenses reasonably incurred by him in connection with the performance of his
duties hereunder. Employee will attend conventions, symposia, film and
television festivals and other business meetings selected by him and reasonably
related to the business of the Company, and will be required to be on location
for production of Employee's programs, and the reasonable expenses of such
attendance by Employee and, if he is required to be out of Los Angeles for more
than one week, the reasonable expenses of his spouse, up to but not in excess of
$10,000 in the aggregate in any Employment Year, will be paid for or reimbursed
by the Company. Employee acknowledges that the Company may be obligated to
withhold from his Base Salary and/or deliver Form 1099 regarding the
compensation elements inherent in any of the fringe benefits paid hereunder.
(i) The Company will pay for or reimburse Employee for the
initiation fee (not to exceed $1,000) and the monthly dues (not to exceed
$175.00 per month) for membership in an athletic or country club, which
membership, in the sole opinion of Employee will assist Employee in the
development of relationships valuable to Employee's position in the
entertainment community.
(j) In addition to the benefits provided above, Employer shall
provide Employee with a non-accountable expense allowance equal to Twenty-Five
Thousand Dollars ($25,000) per year (before deduction of all required
withholding taxes), payable quarterly in advance on the 1st day of each quarter
commencing October 1, 1997.
6. Vacation. Employee shall be entitled to take four (4) weeks (20
business days) of paid vacation which shall accrue monthly during each twelve
(12) months of Employee's employment hereunder, and which vacation shall be
taken on dates to be selected by mutual agreement of the Company and Employee.
Paid vacation days will not accrue at any time Employee has accrued 30 days or
more of unused vacation time.
5
<PAGE> 6
7. Credit. Subject to obligations of the Company to third parties
Employee shall be accorded credit as an executive producer or producer at
Employee's election on all Covered Programs (as defined below), the production
of which commenced at any time Employee was employed by the Company. Such credit
shall be in the main titles and shall be equal in size, type and style of the
credits accorded other producers or executive producers on the respective
Covered Programs. The foregoing credit shall be accorded in all paid ads issued
by or under the direct control of Company. Except as expressly provided herein,
Company shall, in its sole discretion, determine the manner, form, size, style,
nature and placement of any credit given to Employee. No casual or inadvertent
failure to comply with the foregoing credit provisions will constitute a breach
of this Agreement. Company shall use its reasonable efforts to cure
prospectively any breach of these credit provisions following receipt of notice
of same from Employee.
"Covered Program" means any production: (i) the teleplay or screenplay of which
was written in whole or part at any time Employee was employed by the Company,
(ii) the underlying property or rights to which were acquired at any time
Employee was employed by the Company, (iii) with respect to which a production
order was received at any time Employee was employed by the Company; and (iv)
principal photography of which took place in whole or part at any time Employee
was employed by the Company, and/or which was delivered to the initial licensee
at any time Employee was employed by the Company.
8. Rights and Materials. Company and Employee acknowledge and confirm
that the relationship between them is exclusively that of an employer and
employee, and that Company's obligations to Employee are exclusively contractual
in nature. Company shall own, in perpetuity, throughout the universe, all right,
title and interest in and to the results and proceeds of Employee's services
hereunder and all material produced thereby and/or furnished by Employee, of any
kind and nature whatsoever, it being understood and agreed that Company hereby
acquires the maximum rights permitted to be obtained by employers and purchasers
of literary material and other proprietary rights and information. Any such
materials and/or ideas submitted to Company hereunder shall automatically become
the property of Company and Employee hereby transfers and agrees to transfer and
assign to Company all of said rights and materials (including, without
limitation, all copyrights and similar protections, renewals and extensions of
copyright, and any and all causes of action that may have heretofore accrued to
Employee's favor for infringement of copyright), it being understood that
Employee, for purposes hereof, is acting entirely as Company's
employee-for-hire. Employee, shall, at Company's request, execute and deliver to
Company or procure the execution and delivery to Company of such documents or
other instruments which Company may from time to time deem necessary or
desirable to evidence, maintain and protect its rights hereunder and to carry
out the intent and purposes of this Agreement and to convey to Company all
rights in and to the material supplied to Company by Employee hereunder.
Employee shall not, except as provided in writing to the contrary by a separate
agreement signed by the parties, render at his own initiative or be required to
render any writing services which may be covered by the Writers Guild of America
Basic Agreement then in effect during the course of Employee's employment
hereunder. It is
6
<PAGE> 7
acknowledged that Employee will be acting solely as a producer in a supervisory
capacity and not as a "writer" as defined in said Basic Agreement.
9. Name and Likeness. Employee grants to the Company the right to use,
and permit others to use, Employee's name, likeness, voice, biography,
photograph and picture, in connection with Employee's services, the Covered
Programs, and the advertising or exploitation of the same, for promotional,
commercial advertising, publicity or other commercial exploitation purposes in
connection with any product, commodity or service produced, manufactured,
licensed or distributed by Company or any station, network or other licensee of
any Covered Programs or any rights hereunder or the sponsor or advertising
agency of the foregoing, provided that such use is not in the nature of a direct
endorsement of any such product, commodity or service without Employee's
consent. Employee shall be consulted with respect to the likeness, biography,
photographs and pictures to be used in connection with the foregoing. However,
Employee shall have the right to cause the Company to change the name of the
Company to remove Employee's name, provided such right is executed within one
year after the expiration or termination of the Term and the Company may use the
name for one year after notice of Employee's exercise of such right (or such
longer period of time as reasonably necessary to cause the Company not to
default under any indebtedness for borrowed money or other material agreement).
Notwithstanding the change of the name of the Company, the Company may continue
in perpetuity to use Employee's name as part of the Company name on all Company
product released with his name thereon prior to the termination of the right to
use the name.
10. Termination.
(a) Termination by Company "For Cause". The Company may terminate
this Agreement for cause, or upon the disability of Employee. For purposes of
this Agreement, the term "cause," when used in connection with the termination
by the Company under this Section 10(a), shall be limited to: (i) the willful
engaging by Employee in gross misconduct which is materially injurious to the
Company; (ii) conviction of Employee of a felony (A) involving any financial
impropriety, or (B) which would materially interfere with Employee's ability to
perform his services required under this Agreement or otherwise be materially
injurious to the Company in the good faith judgment of the Board of Directors;
or (iii) the failure of Employee to perform in a material respect his
obligations under this Agreement without proper cause. For purposes of this
Section 10(a) no act, or failure to act, on Employee's part shall be considered
"willful" unless done, or admitted to be done, by Employee in bad faith and
without reasonable belief that such action or omission was in the best interest
of the Company. For purposes of this Agreement, "disability" is defined as the
incapacity, illness or mental or physical disability which incapacitates or
prevents Employee from rendering his services to the Company for a period of 180
days consecutive days or 180 days in the aggregate during any twelve (12) month
period during the Term. The Company may terminate this agreement upon the death
of Employee.
(b) Termination by Employee "For Cause". Employee shall have the
right to terminate this Agreement for cause. For purposes of this Agreement, the
term "cause" when used in connection with the termination by Employee under this
Section 10(b), shall be limited
7
<PAGE> 8
to: (i) the failure of the Company to perform in a material respect its
obligations under this Agreement without proper cause; (ii) the wrongful
termination by the Company of this Agreement; (iii) the failure to elect
Employee as a member of the Board of Directors or Executive Committee of the
Company and each subsidiary to which Employee has, from time to time, requested
that he be elected, or to elect Employee as the senior executive officer (other
than Peter Locke who may have equal seniority) of the Company and each
subsidiary to which Employee has, from time to time, requested he be elected,
with duties and responsibilities commensurate with such position, provided,
however, that Employee is ready, willing and able to serve in such capacities;
(iv) the material reduction in the aggregate benefits provided to Employee
pursuant to this Agreement; (v) the relocation of the Company's principal office
or the principal place where Employee is to perform his duties by more than
twenty-five (25) miles except as otherwise permitted or required pursuant to
this Agreement; (vi) upon notice by Employee within 180 days following a Change
of Control of the Company; or (vii) the failure of the Company to maintain
directors and officers insurance covering Employee to the extent reasonably
available.
(c) Except for a termination pursuant to Section 10(b)(vi), any
termination of this Agreement by the Company pursuant to Section 10(a) (if for
cause) or by Employee pursuant to Section 10(b) above shall be effective only if
(i) the terminating party exercises such right of termination by written notice
delivered to the non-terminating party within sixty (60) days of the terminating
party having actual knowledge of the event giving rise to the right of
termination, which notice shall specify in reasonable detail the events giving
rise to, and the reasons for, such termination; and (ii) except as to the cause
defined in Section 10(a)(ii) or Section 10(b)(vi), the non-terminating party
shall have failed to correct or reverse the event giving rise to such right of
termination within thirty (30) days of the giving of such notice. Such
termination shall be effective upon the expiration of the period referred to in
item 10(c)(i) or (ii) above, as the case may be.
(d) If this Agreement is terminated by the Company pursuant to
Section 10(a), the Company shall pay to Employee the accrued amount of the
compensation, benefits, reimbursement and other sums payable pursuant to this
Agreement, prorated through the date of termination (other than proper expense
reimbursements which will be paid in full). Except for the amounts payable by
the Company pursuant to the preceding sentence, all obligations of the Company
with respect to compensation and benefits under this Agreement shall cease upon
any such termination.
(e) If this Agreement is terminated for any reason: (i) Employee
shall have no further obligation under this Agreement (except with respect to
those provisions of this Agreement which, by their terms, require performance by
the parties subsequent to termination of this Agreement). If this Agreement is
terminated by Employee pursuant to Section 10(b) or by Employer (other than
pursuant to Section 10(a) or as a result of Employee's death or disability),
Employee shall be entitled immediately to all compensation and benefits provided
for in this Agreement for the remainder of the Term which shall be discounted at
the rate of 10% per annum but not be reduced by any amounts earned or received
by Employee from any third party
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<PAGE> 9
at any time. If this Agreement is terminated by Employee pursuant to Section
10(b) or wrongfully by the Company, all unvested options theretofore granted to
Employee shall immediately vest. Without limiting the generality of the
foregoing, in the case of any termination of this Agreement by Employee pursuant
to Section 10(b) there shall be no requirement on the part of Employee to
mitigate damages and no amounts received by him from others may be used to
mitigate damages.
(f) Nothing contained in this Agreement shall limit the other rights
and remedies, at law or in equity, of the Company or Employee in the event of a
breach by any party of any of its or his obligations pursuant to this Agreement,
and the parties acknowledge that the non-breaching party may proceed, at its
option, pursuant to this Section 10, or by an action at law or in equity arising
from such breach, or any combination of the foregoing.
11. Trade Secrets of Employer; Non-Solicitation.
(a) During the term of this Agreement, Employee will have access to
and become acquainted with various trade secrets of Employer, including, without
limitation, scripts, stories, treatments, ideas, photographs, films, videotapes,
drawings, devices, secret inventions, processes, compilations of information,
records, and specifications, that are owned by Employer and that are regularly
used in the operation of the business of Employer ("Trade Secrets"). Employee
shall not discuss any Trade Secrets, directly or indirectly, or use them in any
way, either during the term of this Agreement, or at any time thereafter, except
as required in the course of his employment by Employer. All scripts, stories,
treatments, ideas, files, photographs, film, videotape, drawings, records,
documents, and specifications and similar items relating to the business of
Employer, whether prepared by Employee or otherwise, coming into his possession
shall remain the exclusive property of Employer, and shall not be removed for
purposes other than work related from the premises where the work of Employer is
being carried on without prior written consent of Employer. Nothing contained in
this Section 11 shall prevent Employee from competing with Employer subsequent
to the termination of this Agreement; provided, however, that Employee shall not
utilize subsequent to the termination of this Agreement Trade Secrets of
Employer obtained by Employee during the term of this Agreement.
(b) During the period ending two (2) years following the termination
of this Agreement, Employee shall not solicit or induce any of the Company's or
its subsidiaries' employees to terminate their employment with the Company or
any of its subsidiaries or hire or cause any of the then current employees of
the Company or any of its subsidiaries to be hired by any other company in which
Employee is an officer, director, consultant, employee or investor.
12. Services Unique. Employee acknowledges that his services hereunder
are special, unique, unusual and extraordinary in character, the loss of which
cannot be reasonably or adequately compensated in damages in an action at law,
and by reason thereof, Employee agrees that Employer shall be entitled to
injunctive or other equitable relief to prevent or curtail any
9
<PAGE> 10
breach of this Agreement by Employee. In the event of any breach by Employer of
this Agreement, Employee shall be limited to Employee's remedy at law for
damages, if any.
13. Notices.
All notices, requests, demands and other communications pertaining
to the subject matter hereof shall be in writing and shall be deemed to be duly
rendered upon personal delivery or telefax or, if mailed, seven (7) days after
deposit in the United States mail, postage prepaid, registered or certified with
return receipt requested and addressed as follows, or as either party may
hereafter designate to the other in writing:
IF TO EMPLOYER: The Kushner-Locke Company
11601 Wilshire Boulevard
Twenty-First Floor
Los Angeles, California 90025
Attn: Chief Financial Officer
IF TO EMPLOYEE: Donald Kushner
11601 Wilshire Boulevard
Twenty-First Floor
Los Angeles, California 90025
If to either, then cc: Barry L. Dastin, Esq.
Kaye, Scholer, Fierman,
Hays & Handler LLP 1999 Avenue
of the Stars Suite 1600 Los
Angeles, CA 90067
14. Attorneys' Fees, Expenses.
In the event of any dispute or litigation arising out of or relating
to the meaning, interpretation or breach of or compliance or non-compliance with
the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees and costs, to be paid by the losing party. Each party
shall bear its own expenses in connection with the execution and delivery of
this Agreement except that Employer shall reimburse Employee for his actual
out-of-pocket legal expenses in connection therewith up to but not exceeding
$10,000.
15. Jurisdiction, Severability and Integration.
This Agreement has been executed in and shall be governed by and
construed in accordance with the laws of the State of California without giving
effect to any conflict of law provisions thereof. If any provisions of this
Agreement shall be invalid or unenforceable for any reason and to any extent,
the remainder of this Agreement shall not be affected thereby, but
10
<PAGE> 11
rather shall be enforced to the greatest extent permitted by law. This Agreement
contains the entire understanding between the parties hereto and supersedes any
prior understandings and agreements, either oral or written, between and among
the parties hereto relating to the subject matter of this Agreement which are
not fully expressed herein.
16. Binding Agreement.
This Agreement shall be binding upon the parties hereto, their
successors and assigns, and legal representatives, but may not be assigned or
delegated without the prior written consent of the other party(ies). This
Agreement, together with all outstanding option agreements between Employer and
Employee, supersedes and replaces all prior employment agreements, as amended,
or similar understandings, between the parties hereto, each of which agreements
are hereby terminated, but does not supersede any outstanding option agreements.
17. Counterparts.
This Agreement may be executed in several counterparts, and all so
executed shall constitute one agreement, binding on all of the parties hereto,
notwithstanding that all the parties are not signatory to the original or the
same counterparts.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement on the date first above written.
"Employer" THE KUSHNER-LOCKE COMPANY,
a California corporation
By:__________________________________
Title:_______________________________
"Employee" _____________________________________
DONALD KUSHNER
11
<PAGE> 12
EXHIBIT A
STOCK OPTION AWARD AGREEMENT (TIME VESTING)
THIS AWARD AGREEMENT is dated as of the 1st day of October, 1997, by and
between THE KUSHNER-LOCKE COMPANY, a California corporation (the "Corporation")
and DONALD KUSHNER ("Participant").
W I T N E S S E T H
WHEREAS, pursuant to the Corporation's 1988 Stock Incentive Plan (the
"Plan"), the Corporation's Stock Option Committee , acting through the
non-employee director members thereof (the "Committee"), committed to grant to
the Participant, effective as of August 1, 1997 (for purposes of such grant, the
"Award Date"), a non-qualified stock option (the "Option") to purchase all or
any part of 83,333 shares of Common Stock (on a post reverse stock split basis),
without par value, of the Corporation (the "Common Stock") upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and covenants
made herein and the mutual benefits to be derived herefrom, the parties hereto
agree as follows:
1. Grant of Option. The Corporation has granted to the Participant as a
matter of separate inducement and agreement in connection with the Participant's
employment with, or other services to, the Corporation, but not in lieu of any
salary or other compensation for such services, the right and option to
purchase, in accordance with the Plan and on the terms and conditions
hereinafter and therein set forth, all or any part of an aggregate of 83,333
shares of Common Stock at the exercise price of $1.875 per share (the "Price"),
exercisable from time to time, subject to the provisions of this Award Agreement
prior to the close of business on August 1, 2007, unless earlier terminated
pursuant to the provisions of the Plan upon termination of Participant's
relationship with the Corporation, which provisions are incorporated herein by
this reference (the "Expiration Date").
2. Exercisability of Option. Except as otherwise provided in this Award
Agreement, the Option shall vest from time to time, as follows:
16,667 shares shall vest on August 1, 1998
16,666 shares shall vest on August 1, 1999
16,667 shares shall vest on August 1, 2000
16,667 shares shall vest on August 1, 2001
16,666 shares shall vest on August 1, 2002
provided, however, that the Option may not be exercised as to less than 100
shares at any one time unless the number of shares purchased is the total number
at the time available for purchase
<PAGE> 13
under the Option. The Option may be exercised only as to whole shares;
fractional share interests shall be disregarded except that they may be
accumulated.
3. Method of Exercise and Payment.
(a) Exercise of Option. Each exercise of the Option shall be by
means of written notice of exercise duly delivered to the Corporation,
specifying the number of whole shares with respect to which the Option is then
being exercised, together with any written statements required pursuant hereto
or under the Plan and payment of the Price in full in cash or by check payable
to the order of the Corporation. The Participant may, in lieu of payment of a
portion or all of the Price in cash or by check, also deliver in payment of a
portion or all of the Price, certificates evidencing Common Stock valued at the
aggregate amount of such portion or all of the Price, each share of Common Stock
shall be valued at the Fair Market Value on the date of exercise of the Option.
At the option of the Committee, the Participant may, in lieu of payment of a
portion or all of the Price in cash, by check or in certificates evidencing
Common Stock, pay for all or a portion of the Price by means of a promissory
note to the Corporation, on such terms and conditions, including as to security,
as the Committee may determine.
4. Continuance of Employment. Nothing contained in this Award Agreement
or in the Plan shall confer upon the Participant any right to continue in the
employ of, or to continue rendering services to, the Corporation or constitute
any contract or agreement of engagement or employment. The Participant
acknowledges that the Corporation has the right to terminate the Participant's
employment or services at will except as may be otherwise provided by separate
agreement. Nothing contained in this Award Agreement or in the Plan shall
interfere in any way with the right of the Corporation to (i) terminate the
employment or services of the Participant at any time for any reason whatsoever,
with or without cause, or (ii) reduce the Participant's compensation.
5. Non-Assignability of Option. Interest in the Option shall not be
subject to sale, transfer, pledge, assignment, encumbrance, change or alienation
other than by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code, regardless of any
community property or other interest therein of the Participant's spouse or such
spouse's successor in interest. In the event that the spouse of the Participant
shall have acquired a community property interest in the Option, the
Participant, or his permitted transferees, may exercise it on behalf of the
spouse of the Participant or such spouse's successor in interest.
6. Adjustments Upon Specified Changes. Upon the occurrence of certain
events relating to the Corporation's stock as set forth in the Plan, including
stock splits, combinations, extraordinary cash dividends or mergers in which the
Corporation is not the Surviving Corporation, adjustments will be made in the
number and kind of shares that may be issuable under, or in the consideration
payable with respect to, the Option as such adjustments are set forth in the
Plan.
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<PAGE> 14
7. Acceleration. Upon the occurrence of certain Events, including a
Change of Control or in the event Participant's Employment Agreement, dated as
of October 1, 1988, as amended, is terminated by Participant under Section 10(b)
thereof, or is wrongfully terminated by the Corporation, the Option shall become
immediately vested and exercisable to the full extent theretofore not either
vested or exercisable unless prior to the Event the Board determines otherwise.
Notwithstanding the forgoing, however, any acceleration of this Option shall
comply with all applicable regulatory requirements and the Plan.
8. Application of Securities Laws.
(a) No shares of Common Stock may be purchased pursuant to the
Option unless and until any then applicable requirements of the Commission, and
any other regulatory agencies, including any state securities agencies having
jurisdiction over the Corporation or such issuance, and any exchanges upon which
the Common Stock may be listed, shall have been fully satisfied. The Participant
represents, agrees and certifies that:
(1) The Participant understands that the Option and the shares
issuable upon exercise of the Option have not been registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities or blue
sky law in reliance on available exemptions and that the Corporation is relying
upon the Participant's representations and warranties herein in availing itself
of said exemptions.
(2) The Participant has had a full opportunity to ask questions
of and receive answers from the Chief Financial Officer and the President of the
Company concerning the terms and conditions of this investment. The Participant
has received and reviewed carefully a copy of the Plan.
(3) The Participant (a) can bear the economic risk of losing the
Participant's entire investment; and (a) has adequate means of providing for the
Participant's current needs and possible personal contingencies.
(4) The Option hereby granted to the Participant is being
acquired solely for the Participant's own account for investment purposes, and
is not being purchased with a view to or for the purposes of the resale,
transfer or other distribution thereof; and the Participant has no present plans
to enter into any contract, undertaking, agreement or arrangement for such
resale, transfer or distribution and the Participant further agrees that the
Option and Common Stock acquired pursuant to the exercising of the Option will
not be resold, transferred or otherwise distributed without (a) first having
presented to the Corporation a written opinion of legal counsel in form and
substance satisfactory to the Corporation's counsel indicating the proposed
transfer will not be in violation of any of the provisions of the Act and
applicable state securities laws and the rules and regulations promulgated
thereunder or (b) a registration statement covering the resale of such Common
Stock being effective. The Participant recognizes that a legend reading
substantially as follows shall be placed on all certificates representing the
Common Stock as well as on the Option issued pursuant hereto and a stop order
shall be placed
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<PAGE> 15
in the stock register of the Corporation against a transfer of same in
accordance with the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES OR BLUE SKY
LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR AN EXEMPTION FROM REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES
OR BLUE SKY LAWS.
(5) The Participant either has a preexisting personal or
business relationship with the Corporation or any of its officers, directors or
controlling persons, or by reason of the Participant's business or financial
experience or the business or financial experience of its professional advisors
who are unaffiliated with and who are not compensated by the Corporation or any
affiliated or selling agent, directly or indirectly, can be reasonably assumed
to have the capacity to protect his own interests in connection with acquisition
of the Option and exercise thereof.
The foregoing representations and warranties are true and accurate as of
the Award Date and of the date of delivery of Common Stock acquired pursuant to
the Option and shall survive such date and such delivery. If, in any respect,
such representations and warranties shall not be true and accurate as of any of
the foregoing dates, the Participant shall give written notice of such fact to
the Corporation specifying which representations and warranties are not true and
accurate and the reasons therefor.
(b) The Committee may impose such conditions on the Option or on its
exercise or acceleration or on the payment of any withholding obligation
(including, without limitation, restricting the time of exercise to specified
periods) as may be required to satisfy applicable regulatory requirements,
including, without limitation, Rule 16b-3 (or any successor rule) promulgated by
the Commission pursuant to the Exchange Act.
9. Notices. Any notice to be given to the Corporation under the terms of
the Award Agreement or pursuant to the Plan shall be in writing and addressed to
the Secretary of the Corporation at its principal office and any notice to be
given to the Participant shall be sent to the Participant at the address given
beneath the Participant's signature hereto, or at such other address as either
party may hereafter designate in writing to the other party. Any such notice
shall be deemed to have been duly given on the date of delivery, if delivered by
hand, or 3 days after deposit into U.S. mails of a notice sent by registered or
certified mail (postage and registry or certification fee prepaid) or the date
after being timely delivered to a recognized messenger service or overnight
courier for next day delivery (delivery charges prepaid).
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<PAGE> 16
10. Effect of Award Agreement. The Award Agreement shall be assumed by,
be binding upon and inure to the benefit of any successor or successors of the
Corporation to the extent provided in the Plan and to any permitted successor,
assign and transferee of the Participant.
11. Tax Withholding. The provisions of the Plan are hereby incorporated
and shall govern any withholding that the Corporation is required to make with
respect to an exercise of the Option as well as the Corporation's right to
condition a transfer of Common Stock upon compliance with the applicable
withholding requirements of federal, state and local authorities. No Common
Stock acquired pursuant to an exercise of the Option may be transferred to the
Participant or any permitted successor, assign or transferee unless and until
the Corporation has withheld, or has received payment from the Participant or
such permitted successor, assign or transferee of, all amounts the Corporation
is so required to withhold.
12. Terms of the Plan Govern. Except with respect to terms specifically
set forth in this Award Agreement, the Award and this Award Agreement are
subject to, and the Corporation and the Participant agree to be bound by, all of
the terms and conditions of the Plan. Capitalized terms not otherwise defined
herein shall have the respective meanings assigned to them in the Plan. The
rights of the Participant are subject to limitations, adjustments,
modifications, suspension and termination in certain circumstances and upon the
occurrence of certain conditions as set forth in the Plan.
13. Laws Applicable to Construction. The interpretation, performance and
enforcement of the Award and this Award Agreement shall be governed by the laws
of the State of California without giving effect to any conflict of law
provisions.
5
<PAGE> 17
IN WITNESS WHEREOF, the Corporation has caused this Award Agreement to
be executed on its behalf by a duly authorized officer and the Participant has
hereunto set his hand as of the date and year first above written.
THE KUSHNER-LOCKE COMPANY
By:___________________________
Bruce Lilliston
President
PARTICIPANT
______________________________
Donald Kushner
______________________________
(Address)
______________________________
(City, State, Zip Code)
______________________________
(Social Security Number)
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<PAGE> 18
EXHIBIT B
STOCK OPTION AWARD AGREEMENT (PERFORMANCE)
THIS AWARD AGREEMENT is dated as of the 1st day of October, 1997, by and
between THE KUSHNER-LOCKE COMPANY, a California corporation (the "Corporation")
and DONALD KUSHNER ("Participant").
W I T N E S S E T H
WHEREAS, pursuant to the Corporation's 1988 Stock Incentive Plan (the
"Plan"), the Corporation's Stock Option Committee, acting through the
non-employee director members thereof (the "Committee"), committed to grant to
the Participant, effective as of August 1, 1997 (for purposes of such grant, the
"Award Date"), a non-qualified stock option (the "Option") to purchase all or
any part of 83,333 shares of Common Stock (on a post reverse stock split basis),
without par value, of the Corporation (the "Common Stock") upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and covenants
made herein and the mutual benefits to be derived herefrom, the parties hereto
agree as follows:
1. Grant of Option. The Corporation has granted to the Participant as a
matter of separate inducement and agreement in connection with the Participant's
employment with, or other services to, the Corporation, but not in lieu of any
salary or other compensation for such services, the right and option to
purchase, in accordance with the Plan and on the terms and conditions
hereinafter and therein set forth, all or any part of an aggregate of 83,333
shares of Common Stock at the exercise price of $1.875 per share (the "Price"),
exercisable from time to time subject to the provisions of this Award Agreement
prior to the close of business on August 1, 2007, unless earlier terminated
pursuant to the provisions of the Plan upon termination of Participant's
relationship with the Corporation, which provisions are incorporated herein by
this reference (the "Expiration Date").
1. Exercisability of Option. Except as otherwise provided in this Award
Agreement, the Option shall vest from time to time, as follows:
16,667 shares shall vest on August 1, 1998
16,666 shares shall vest on August 1, 1999
16,667 shares shall vest on August 1, 2000
16,667 shares shall vest on August 1, 2001
16,666 shares shall vest on August 1, 2002
provided, however, that no vested options may be exercised except in the
following circumstances: 1/3 of all vested options may be exercised commencing
the earlier of (x) the day
<PAGE> 19
following the date the average closing price of the Common Stock for the
previous twenty (20) consecutive trading days, as quoted on the Nasdaq National
Market or other principal national stock exchange or market on which the Common
Stock is then listed (the "Market Price"), is equal to or greater than $3.00 or
(y) the day after the Corporation announces its fiscal year earnings if, in such
fiscal year, the Corporation earns, exclusive of extraordinary gains or losses,
at least 85% of its projected earnings before taxes pursuant to the
Corporation's business plan previously approved by the Board of Directors; an
additional 1/3 of all vested options may be exercised commencing the earlier of
(x) the day following the date the average closing price of the Common Stock for
the previous twenty (20) consecutive trading days as so quoted is equal to or
greater than $4.50 or (y) the day after the Corporation announces its fiscal
year earnings if, in any two fiscal years during the term hereof, the
Corporation earns, exclusive of extraordinary gains or losses, at least 85% of
its projected earnings before taxes pursuant to the Corporation's business plan
previously approved by the Board of Directors; and the remaining 1/3 of all
vested options may be exercised commencing the earlier of (x) the day following
the date the average closing price of the Common Stock for the previous twenty
(20) consecutive trading days as so quoted is equal to or greater than $6.00 or
(y) the day after the Corporation announces its fiscal year earnings if, in any
three fiscal years during the term hereof, the Corporation earns, exclusive of
extraordinary gains or losses, at least 85% of its projected earnings before
taxes pursuant to the Corporation's business plan previously approved by the
Board of Directors.
In addition, the Option may not be exercised as to less than 100 shares
at any one time unless the number of shares purchased is the total number at the
time available for purchase under an installment of the Option. The Option may
be exercised only as to whole shares; fractional share interests shall be
disregarded except that they may be accumulated.
3. Method of Exercise and Payment.
(a) Exercise of Option. Each exercise of the Option shall be by
means of written notice of exercise duly delivered to the Corporation,
specifying the number of whole shares with respect to which the Option is then
being exercised, together with any written statements required pursuant hereto
or under the Plan and payment of the Price in full in cash or by check payable
to the order of the Corporation. The Participant may, in lieu of payment of a
portion or all of the Price in cash or by check, also deliver in payment of a
portion or all of the Price, certificates evidencing Common Stock valued at the
aggregate amount of such portion or all of the Price, each share of Common Stock
shall be valued at the Fair Market Value on the date of exercise of the Option.
At the option of the Committee, the Participant may, in lieu of payment of a
portion or all of the Price in cash, by check or in certificates evidencing
Common Stock, pay for all or a portion of the Price by means of a promissory
note to the Corporation, on such terms and conditions, including as to security,
as the Committee may determine.
4. Continuance of Employment. Nothing contained in this Award Agreement
or in the Plan shall confer upon the Participant any right to continue in the
employ of, or to continue rendering services to, the Corporation or constitute
any contract or agreement of engagement or
2
<PAGE> 20
employment. The Participant acknowledges that the Corporation has the right to
terminate the Participant's employment or services at will except as may be
otherwise provided by separate agreement. Nothing contained in this Award
Agreement or in the Plan shall interfere in any way with the right of the
Corporation to (i) terminate the employment or services of the Participant at
any time for any reason whatsoever, with or without cause, or (ii) reduce the
Participant's compensation.
5. Non-Assignability of Option. Interest in the Option shall not be
subject to sale, transfer, pledge, assignment, encumbrance, change or alienation
other than by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code, regardless of any
community property or other interest therein of the Participant's spouse or such
spouse's successor in interest. In the event that the spouse of the Participant
shall have acquired a community property interest in the Option, the
Participant, or his permitted transferees, may exercise it on behalf of the
spouse of the Participant or such spouse's successor in interest.
6. Adjustments Upon Specified Changes. Upon the occurrence of certain
events relating to the Corporation's stock as set forth in the Plan, including
stock splits, combinations, extraordinary cash dividends or mergers in which the
Corporation is not the Surviving Corporation, adjustments will be made in the
number and kind of shares that may be issuable under, or in the consideration
payable with respect to, the Option as such adjustments are set forth in the
Plan.
7. Acceleration. Upon the occurrence of certain Events, including a
Change of Control or in the event Participant's Employment Agreement, dated as
of October 1, 1988, as amended, is terminated by Participant under Section 10(b)
thereof, or is wrongfully terminated by the Corporation, the Option shall become
immediately vested and exercisable to the full extent theretofore not either
vested or exercisable unless prior to the Event the Board determines otherwise.
Notwithstanding the forgoing, however, any acceleration of this Option shall
comply with all applicable regulatory requirements and the Plan.
8. Application of Securities Laws.
(a) No shares of Common Stock may be purchased pursuant to the Option
unless and until any then applicable requirements of the Commission, and any
other regulatory agencies, including any state securities agencies having
jurisdiction over the Corporation or such issuance, and any exchanges upon which
the Common Stock may be listed, shall have been fully satisfied. The Participant
represents, agrees and certifies that:
(1) The Participant understands that the Option and the shares
issuable upon exercise of the Option have not been registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities or blue
sky law in reliance on available exemptions and that the Corporation is relying
upon the Participant's representations and warranties herein in availing itself
of said exemptions.
3
<PAGE> 21
(2) The Participant has had a full opportunity to ask questions of and
receive answers from the Chief Financial Officer and the President of the
Corporation concerning the terms and conditions of this investment. The
Participant has received and reviewed carefully a copy of the Plan.
(3) The Participant (A) can bear the economic risk of losing the
Participant's entire investment; and (a) has adequate means of providing for the
Participant's current needs and possible personal contingencies.
(4) The Option hereby granted to the Participant is being acquired
solely for the Participant's own account for investment purposes, and is not
being purchased with a view to or for the purposes of the resale, transfer or
other distribution thereof; and the Participant has no present plans to enter
into any contract, undertaking, agreement or arrangement for such resale,
transfer or distribution and the Participant further agrees that the Option and
Common Stock acquired pursuant to the exercising of the Option will not be
resold, transferred or otherwise distributed without (a) first having presented
to the Corporation a written opinion of legal counsel in form and substance
satisfactory to the Corporation's counsel indicating the proposed transfer will
not be in violation of any of the provisions of the Act and applicable state
securities laws and the rules and regulations promulgated thereunder or (b) a
registration statement covering the resale of such Common Stock being effective.
The Participant recognizes that a legend reading substantially as follows shall
be placed on all certificates representing the Common Stock as well as on the
Option issued pursuant hereto and a stop order shall be placed in the stock
register of the Corporation against a transfer of same in accordance with the
following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES OR BLUE SKY
LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR AN EXEMPTION FROM REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES
OR BLUE SKY LAWS.
(5) The Participant either has a preexisting personal or business
relationship with the Corporation or any of its officers, directors or
controlling persons, or by reason of the Participant's business or financial
experience or the business or financial experience of its professional advisors
who are unaffiliated with and who are not compensated by the Corporation or any
affiliated or selling agent, directly or indirectly, can be reasonably assumed
to have the capacity to protect his own interests in connection with acquisition
of the Option and exercise thereof.
4
<PAGE> 22
The foregoing representations and warranties are true and accurate as of
the Award Date and of the date of delivery of Common Stock acquired pursuant to
the Option and shall survive such date and such delivery. If, in any respect,
such representations and warranties shall not be true and accurate as of any of
the foregoing dates, the Participant shall give written notice of such fact to
the Corporation specifying which representations and warranties are not true and
accurate and the reasons therefor.
(b) The Committee may impose such conditions on the Option or on its
exercise or acceleration or on the payment of any withholding obligation
(including, without limitation, restricting the time of exercise to specified
periods) as may be required to satisfy applicable regulatory requirements,
including, without limitation, Rule 16b-3 (or any successor rule) promulgated by
the Commission pursuant to the Exchange Act.
9. Notices. Any notice to be given to the Corporation under the terms of
the Award Agreement or pursuant to the Plan shall be in writing and addressed to
the Secretary of the Corporation at its principal office and any notice to be
given to the Participant shall be sent to the Participant at the address given
beneath the Participant's signature hereto, or at such other address as either
party may hereafter designate in writing to the other party. Any such notice
shall be deemed to have been duly given on the date of delivery, if delivered by
hand, or 3 days after deposit into U.S. mails of a notice sent by registered or
certified mail (postage and registry or certification fee prepaid) or the date
after being timely delivered to a recognized messenger service or overnight
courier for next day delivery (delivery charges prepaid).
10. Effect of Award Agreement. The Award Agreement shall be assumed by,
be binding upon and inure to the benefit of any successor or successors of the
Corporation to the extent provided in the Plan and to any permitted successor,
assign and transferee of the Participant.
11. Tax Withholding. The provisions of the Plan are hereby incorporated
and shall govern any withholding that the Corporation is required to make with
respect to an exercise of the Option as well as the Corporation's right to
condition a transfer of Common Stock upon compliance with the applicable
withholding requirements of federal, state and local authorities. No Common
Stock acquired pursuant to an exercise of the Option may be transferred to the
Participant or any permitted successor, assign or transferee unless and until
the Corporation has withheld, or has received payment from the Participant or
such permitted successor, assign or transferee of, all amounts the Corporation
is so required to withhold.
12. Terms of the Plan Govern. Except with respect to terms specifically
set forth in this Award Agreement, the Award and this Award Agreement are
subject to, and the Corporation and the Participant agree to be bound by, all of
the terms and conditions of the Plan. Capitalized terms not otherwise defined
herein shall have the respective meanings assigned to them in the Plan. The
rights of the Participant are subject to limitations, adjustments,
modifications, suspension and termination in certain circumstances and upon the
occurrence of certain conditions as set forth in the Plan.
5
<PAGE> 23
13. Laws Applicable to Construction. The interpretation, performance and
enforcement of the Award and this Award Agreement shall be governed by the laws
of the State of California without giving effect to any conflict of law
provisions.
IN WITNESS WHEREOF, the Corporation has caused this Award Agreement to
be executed on its behalf by a duly authorized officer and the Participant has
hereunto set his hand as of the date and year first above written.
THE KUSHNER-LOCKE COMPANY
By:____________________________
Bruce Lilliston
President
PARTICIPANT
______________________________
Donald Kushner
______________________________
(Address)
______________________________
(City, State, Zip Code)
______________________________
(Social Security Number)
6
<PAGE> 1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement")
executed as of October 1, 1997, by and between THE KUSHNER-LOCKE COMPANY, a
California corporation ("Employer" or the "Company"), and PETER LOCKE
("Employee") amends and restates effective as of October 1, 1997 the Employment
Agreement dated as of October 1, 1988, as amended to date, between the parties.
The parties hereto agree as follows:
1. Employment of Employee and Duties. Employer hereby hires Employee and
Employee hereby accepts employment upon the terms and conditions described
herein. Employee shall be Co-Chairman of the Board and Co-Chief Executive
Officer of Employer. Employee's duties shall include responsibility for and
supervision of all of Employer's activities and projects with respect to
television and motion picture production and distribution and such other
activities and duties as Employer may reasonably require from time to time.
Employee shall be the most senior executive of Employer along with Donald
Kushner (so long as he shall be so employed), and Employee shall report solely
to the Board of Directors of Employer (the "Board"). During the Term, Employee
shall be elected as a director of Employer and each subsidiary thereof, and, if
there is an Executive Committee, then as a member thereof. Employee agrees to
use his best efforts to promote and further the reputation and good name of
Employer and Employee shall promptly and faithfully comply with all
instructions, directions, requests, rules and regulations made or issued by the
Board of Directors from time to time.
2. Exclusivity.
(a) Employee shall use his full business time and efforts in the
discharge of his duties hereunder and shall faithfully and industriously and to
the best of his ability, experience, and talent, perform all of the duties that
may be required of and from him pursuant to the express and implicit terms
hereof, to the reasonable satisfaction of Employer. Such duties shall be
rendered at such place or places as Employer shall in good faith require within
the County of Los Angeles, State of California, or, on any occasional basis, at
such other places as the interests, needs, business, and opportunities of
Employer shall require or deem advisable.
(b) Employee's business services shall be exclusive to Employer;
provided, however, that Employee may render incidental services (such as serving
as a member of a board of directors) and devote such time as is reasonably
necessary to manage his personal business affairs that do not interfere with the
discharge of his duties hereunder. During the term of this Agreement, Employee
shall not be engaged, employed, concerned or have any financial interest,
directly or indirectly, in any corporation, partnership, firm or entity that is
in competition with Employer; provided, however, that notwithstanding the
foregoing, Employee shall not be prohibited from owning, directly or indirectly,
up to five percent (5%) of the outstanding securities of any publicly traded
company that is in competition with Employer, provided that
<PAGE> 2
such five percent (5%) interest does not provide a direct or indirect
controlling interest in such company.
(c) Employee may devote such time and activity as he may reasonably
require to enable him to administer, monitor and collect such revenues,
reimbursements, fees or other sums to which he may be entitled, and to provide
incidental and limited services outside of his employment hereunder and retain
any compensation or other income related thereto with respect to completed
productions not owned by the Company and owned by Employee as of the date hereof
as set forth below, so long as such activities and services do not materially
interfere with Employee's performance of his obligations hereunder. Employee now
owns certain rights in the property "The Hills Have Eyes III." The Company may,
but shall not be obligated to, purchase an option for such rights from Employee.
Employee may retain any payments made by the Company to him for such rights and
as a result of future exploitation.
3. Term of Agreement. This Agreement shall commence on October 1, 1997
and shall continue, unless terminated as provided in Section 10 hereof, for five
(5) years from the date hereof (the "Term"). Each year of the Term, commencing
as of October 1, is referred to herein as an "Employment Year."
4. Compensation. During the term of this Agreement, Employer shall pay
to Employee, in full payment for Employee's services hereunder, the following
compensation:
(a) Base Salary. Employee shall receive a salary (the "Base Salary")
of Four Hundred Twenty-Five Thousand Dollars ($425,000) per annum. Commencing
with the second Employment Year, and for each subsequent Employment Year, the
amount of the Base Salary shall be increased by Twenty-Five Thousand Dollars
($25,000) over the then Base Salary payable to Employee, but such Base Salary
shall not exceed Five Hundred Twenty-Five Thousand Dollars ($525,000) per annum
for any Employment Year.
(b) Profit Bonus.
Employee shall be paid a bonus (the "Profit Bonus"), if any, for
each Employment Year (or portion thereof) commencing with the first Employment
Year, in an amount equal to a percentage as set forth below of the "Earnings
Before Income Taxes" calculated prior to Employee's and Donald Kushner's profit
bonus ("EBIT"), as reflected on Employer's annual consolidated financial
statements, as certified by the independent public accountants retained by
Employer at such time (the "Accountants") and as filed with the Securities and
Exchange Commission (the "SEC") on the Employer's Form 10-K with respect to such
Employment Year. Such percentage utilized for the determination of Profit Bonus,
if any, for each Employment Year shall be calculated as follows:
2
<PAGE> 3
<TABLE>
<CAPTION>
Through EBIT Profit Bonus
EBIT Above: Up To and Including: Percentage
----------- -------------------- ----------
<S> <C> <C>
0 $2 million 0%
$2 million $4 million 5%
$4 million $6 million 5.5%
$6 million $8 million 6%
$8 million Not applicable 7.5%
</TABLE>
For EBIT above Two Million Dollars ($2,000,000) and up to and including
Four Million Dollars ($4,000,000), the five percent (5%) Profit Bonus percentage
shall be applied to the first dollars of EBIT up to and including Four Million
Dollars ($4,000,000). However, for EBIT above Four Million Dollars ($4,000,000),
the applicable higher Profit Bonus percentage(s) shall only be applied to the
amount of EBIT within the range corresponding to such higher Profit Bonus
percentage(s). By way of example only, assuming EBIT for any applicable fiscal
year is Five Million Dollars ($5,000,000), the Profit Bonus for such fiscal year
would be Two Hundred Fifty-Five Thousand Dollars ($255,000) based on the
following calculation: (($4,000,000 x .05) + ($1,000,000 x .055)).
The Employment Year and the fiscal year of the Company are currently the
same. If at any time the fiscal year is changed then appropriate adjustments
must be made to the provisions involved in calculating Profit Bonus.
Notwithstanding the foregoing provisions, in no event shall the Profit Bonus
with respect to any full fiscal year exceed two (2) times the Base Salary for
such fiscal year (such maximum amount being pro-rated for any partial year).
(c) The Profit Bonus shall be payable within ten (10) days following
the delivery of the opinion of the Accountants on the year-end financial
statements of the Company (for such fiscal year). Employer shall use its good
faith reasonable efforts to cause the Accountants, within ninety (90) days of
the close of such fiscal year, to certify such statements and issue its opinion.
(d) Options. Employer hereby confirms that Employer unconditionally
committed to issue as of August 1, 1997 options to purchase 500,000 shares on a
pre-split basis of Employer's common stock, no par value (the "Common Stock") at
an exercise price equal to the closing price of the Common Stock on such date
(subject to appropriate adjustment based on the reverse stock split) and vesting
on a time vesting basis (the "Time Vesting Options") and options to purchase an
additional 500,000 shares on a pre-split basis of the Common Stock at the same
exercise price vesting on a time vesting basis but exercisable only upon
Employer's achievement of certain annual operating income targets or Employer's
Common Stock reaching certain public trading prices (the "Performance Options").
The aforesaid options have been granted under Employer's 1988 Stock Incentive
Plan, as amended (the "Plan") as evidenced (on a post-split basis) by the option
agreements set forth in Exhibit A and Exhibit B hereto.
3
<PAGE> 4
5. Benefits. During the Term of this Agreement, Employer shall provide
the following fringe benefits to Employee.
(a) Employee and his eligible dependents shall be included in any
group hospital, surgical, medical and dental benefit plans of the Company or, at
Employee's option, the Company shall reimburse Employee for the out-of-pocket
cost of his premiums if he has his own policy and is not covered under the
Company's applicable group hospital, surgical, medical and dental benefit plans,
up to a maximum amount equal to the savings the Company realizes as a result of
not insuring Employee.
(b) The Company agrees to provide a life insurance policy (the
"Policy") on the life of Employee in the face amount of Three Million Five
Hundred Thousand Dollars ($3,500,000) with a split dollar ownership structure.
The Company and Employee shall share the premiums on such policy and the
incidents of ownership in accordance with a Split Dollar Agreement to be entered
into between the Company and Employee contemporaneously herewith. If Employee is
terminated by the Company (other than pursuant to Section 10(a)) or by Employee
for cause pursuant to Section 10(b), the Company shall promptly pay to the
insurance company to whom premiums are payable with respect to the Policy an
amount equal to the present value of any and all unpaid Company premiums on such
Policy for the ten (10) year period commencing February 12, 1997, less any
premiums which have already been paid. The Company will cause The Kushner-Locke
Company Shareholders' Cross-Purchase Agreement, dated October 1, 1988, as
amended, and the Trust Agreement, dated October 1, 1988, as amended, entered
into thereunder to be terminated.
(c) Within 10 days following the termination of Employee for any
reason (other than death), at Employee's request, the Company shall assign any
key-man life insurance policies insuring the life of Employee and in favor of
the Company to Employee, whereupon Employee shall assume all related premium
payment and other obligations, and the Company shall not be responsible for
further premium payments on any such policy or policies; provided, however,
that, in the event Employee terminates his employment, or if, at the time of any
termination Employee is critically or terminally ill, the Company shall have the
option of retaining such life insurance policy or policies and continuing to pay
all premiums as they come due for up to one year after such termination, after
which time such policy or policies shall be assigned to Employee. Any benefits
paid for an event occurring within such one year period shall be paid to and
remain the property of the Company. Notwithstanding the foregoing, however, the
Company shall have no obligation to assign any such key-man life insurance
policy or take any action relating thereto if such action would cause, upon
notice or with lapse of time, or both, the Company to be in default of any
material agreement, including, without limitation, any credit agreements or
guarantees.
(d) During the Term hereof, the Company, subject to Employee's
insurability at a reasonable cost, agrees to pay to Employee as additional
compensation to Executive an amount equal to the premiums on a portable,
individual disability income insurance policy providing benefits of $15,000 per
month (or the maximum available at standard rates, if less)
4
<PAGE> 5
during the period of any disability. The Company shall have no interest in or
claim to the policy or the proceeds thereof.
(e) Employer shall provide Employee with a monthly automobile
allowance at a rate not to exceed Twenty-One Thousand Six Hundred Dollars
($21,600) per Employment Year.
(f) Employer shall reimburse Employee for the cost of the monthly
base operating fee and for business related calls made or received by Employee
from his car phone. Reimbursement of such expenses shall be made only against
receipts and a signed itemized list of such expenditures. The car phone will
remain the sole property of Employee.
(g) In accordance with their terms, Employee shall be entitled to
participate in any plans or agreements, if any, that Employer may maintain with
respect to retirement benefits applicable to Employer's executive officers.
(h) The Company will pay for or reimburse Employee for all
first-class travel and all other out-of-pocket business or entertainment
expenses reasonably incurred by him in connection with the performance of his
duties hereunder. Employee will attend conventions, symposia, film and
television festivals and other business meetings selected by him and reasonably
related to the business of the Company, and will be required to be on location
for production of Employee's programs, and the reasonable expenses of such
attendance by Employee and, if he is required to be out of Los Angeles for more
than one week, the reasonable expenses of his spouse, up to but not in excess of
$10,000 in the aggregate in any Employment Year, will be paid for or reimbursed
by the Company. Employee acknowledges that the Company may be obligated to
withhold from his Base Salary and/or deliver Form 1099 regarding the
compensation elements inherent in any of the fringe benefits paid hereunder.
(i) The Company will pay for or reimburse Employee for the
initiation fee (not to exceed $1,000) and the monthly dues (not to exceed
$175.00 per month) for membership in an athletic or country club, which
membership, in the sole opinion of Employee will assist Employee in the
development of relationships valuable to Employee's position in the
entertainment community.
(j) In addition to the benefits provided above, Employer shall
provide Employee with a non-accountable expense allowance equal to Twenty-Five
Thousand Dollars ($25,000) per year (before deduction of all required
withholding taxes), payable quarterly in advance on the 1st day of each quarter
commencing October 1, 1997.
6. Vacation. Employee shall be entitled to take four (4) weeks (20
business days) of paid vacation which shall accrue monthly during each twelve
(12) months of Employee's employment hereunder, and which vacation shall be
taken on dates to be selected by mutual agreement of the Company and Employee.
Paid vacation days will not accrue at any time Employee has accrued 30 days or
more of unused vacation time.
5
<PAGE> 6
7. Credit. Subject to obligations of the Company to third parties
Employee shall be accorded credit as an executive producer or producer at
Employee's election on all Covered Programs (as defined below), the production
of which commenced at any time Employee was employed by the Company. Such credit
shall be in the main titles and shall be equal in size, type and style of the
credits accorded other producers or executive producers on the respective
Covered Programs. The foregoing credit shall be accorded in all paid ads issued
by or under the direct control of Company. Except as expressly provided herein,
Company shall, in its sole discretion, determine the manner, form, size, style,
nature and placement of any credit given to Employee. No casual or inadvertent
failure to comply with the foregoing credit provisions will constitute a breach
of this Agreement. Company shall use its reasonable efforts to cure
prospectively any breach of these credit provisions following receipt of notice
of same from Employee.
"Covered Program" means any production: (i) the teleplay or screenplay of which
was written in whole or part at any time Employee was employed by the Company,
(ii) the underlying property or rights to which were acquired at any time
Employee was employed by the Company, (iii) with respect to which a production
order was received at any time Employee was employed by the Company; and (iv)
principal photography of which took place in whole or part at any time Employee
was employed by the Company, and/or which was delivered to the initial licensee
at any time Employee was employed by the Company.
8. Rights and Materials. Company and Employee acknowledge and confirm
that the relationship between them is exclusively that of an employer and
employee, and that Company's obligations to Employee are exclusively contractual
in nature. Company shall own, in perpetuity, throughout the universe, all right,
title and interest in and to the results and proceeds of Employee's services
hereunder and all material produced thereby and/or furnished by Employee, of any
kind and nature whatsoever, it being understood and agreed that Company hereby
acquires the maximum rights permitted to be obtained by employers and purchasers
of literary material and other proprietary rights and information. Any such
materials and/or ideas submitted to Company hereunder shall automatically become
the property of Company and Employee hereby transfers and agrees to transfer and
assign to Company all of said rights and materials (including, without
limitation, all copyrights and similar protections, renewals and extensions of
copyright, and any and all causes of action that may have heretofore accrued to
Employee's favor for infringement of copyright), it being understood that
Employee, for purposes hereof, is acting entirely as Company's
employee-for-hire. Employee, shall, at Company's request, execute and deliver to
Company or procure the execution and delivery to Company of such documents or
other instruments which Company may from time to time deem necessary or
desirable to evidence, maintain and protect its rights hereunder and to carry
out the intent and purposes of this Agreement and to convey to Company all
rights in and to the material supplied to Company by Employee hereunder.
Employee shall not, except as provided in writing to the contrary by a separate
agreement signed by the parties, render at his own initiative or be required to
render any writing services which may be covered by the Writers Guild of America
Basic Agreement then in effect during the course of Employee's employment
hereunder. It is
6
<PAGE> 7
acknowledged that Employee will be acting solely as a producer in a supervisory
capacity and not as a "writer" as defined in said Basic Agreement.
9. Name and Likeness. Employee grants to the Company the right to use,
and permit others to use, Employee's name, likeness, voice, biography,
photograph and picture, in connection with Employee's services, the Covered
Programs, and the advertising or exploitation of the same, for promotional,
commercial advertising, publicity or other commercial exploitation purposes in
connection with any product, commodity or service produced, manufactured,
licensed or distributed by Company or any station, network or other licensee of
any Covered Programs or any rights hereunder or the sponsor or advertising
agency of the foregoing, provided that such use is not in the nature of a direct
endorsement of any such product, commodity or service without Employee's
consent. Employee shall be consulted with respect to the likeness, biography,
photographs and pictures to be used in connection with the foregoing. However,
Employee shall have the right to cause the Company to change the name of the
Company to remove Employee's name, provided such right is executed within one
year after the expiration or termination of the Term and the Company may use the
name for one year after notice of Employee's exercise of such right (or such
longer period of time as reasonably necessary to cause the Company not to
default under any indebtedness for borrowed money or other material agreement).
Notwithstanding the change of the name of the Company, the Company may continue
in perpetuity to use Employee's name as part of the Company name on all Company
product released with his name thereon prior to the termination of the right to
use the name.
10. Termination.
(a) Termination by Company "For Cause". The Company may terminate
this Agreement for cause, or upon the disability of Employee. For purposes of
this Agreement, the term "cause," when used in connection with the termination
by the Company under this Section 10(a), shall be limited to: (i) the willful
engaging by Employee in gross misconduct which is materially injurious to the
Company; (ii) conviction of Employee of a felony (A) involving any financial
impropriety, or (B) which would materially interfere with Employee's ability to
perform his services required under this Agreement or otherwise be materially
injurious to the Company in the good faith judgment of the Board of Directors;
or (iii) the failure of Employee to perform in a material respect his
obligations under this Agreement without proper cause. For purposes of this
Section 10(a) no act, or failure to act, on Employee's part shall be considered
"willful" unless done, or admitted to be done, by Employee in bad faith and
without reasonable belief that such action or omission was in the best interest
of the Company. For purposes of this Agreement, "disability" is defined as the
incapacity, illness or mental or physical disability which incapacitates or
prevents Employee from rendering his services to the Company for a period of 180
days consecutive days or 180 days in the aggregate during any twelve (12) month
period during the Term. The Company may terminate this agreement upon the death
of Employee.
(b) Termination by Employee "For Cause". Employee shall have the
right to terminate this Agreement for cause. For purposes of this Agreement, the
term "cause" when used in connection with the termination by Employee under this
Section 10(b), shall be limited
7
<PAGE> 8
to: (i) the failure of the Company to perform in a material respect its
obligations under this Agreement without proper cause; (ii) the wrongful
termination by the Company of this Agreement; (iii) the failure to elect
Employee as a member of the Board of Directors or Executive Committee of the
Company and each subsidiary to which Employee has, from time to time, requested
that he be elected, or to elect Employee as the senior executive officer (other
than Donald Kushner who may have equal seniority) of the Company and each
subsidiary to which Employee has, from time to time, requested he be elected,
with duties and responsibilities commensurate with such position, provided,
however, that Employee is ready, willing and able to serve in such capacities;
(iv) the material reduction in the aggregate benefits provided to Employee
pursuant to this Agreement; (v) the relocation of the Company's principal office
or the principal place where Employee is to perform his duties by more than
twenty-five (25) miles except as otherwise permitted or required pursuant to
this Agreement; (vi) upon notice by Employee within 180 days following a Change
of Control of the Company; or (vii) the failure of the Company to maintain
directors and officers insurance covering Employee to the extent reasonably
available.
(c) Except for a termination pursuant to Section 10(b)(vi), any
termination of this Agreement by the Company pursuant to Section 10(a) (if for
cause) or by Employee pursuant to Section 10(b) above shall be effective only if
(i) the terminating party exercises such right of termination by written notice
delivered to the non-terminating party within sixty (60) days of the terminating
party having actual knowledge of the event giving rise to the right of
termination, which notice shall specify in reasonable detail the events giving
rise to, and the reasons for, such termination; and (ii) except as to the cause
defined in Section 10(a)(ii) or Section 10(b)(vi), the non-terminating party
shall have failed to correct or reverse the event giving rise to such right of
termination within thirty (30) days of the giving of such notice. Such
termination shall be effective upon the expiration of the period referred to in
item 10(c)(i) or (ii) above, as the case may be.
(d) If this Agreement is terminated by the Company pursuant to
Section 10(a), the Company shall pay to Employee the accrued amount of the
compensation, benefits, reimbursement and other sums payable pursuant to this
Agreement, prorated through the date of termination (other than proper expense
reimbursements which will be paid in full). Except for the amounts payable by
the Company pursuant to the preceding sentence, all obligations of the Company
with respect to compensation and benefits under this Agreement shall cease upon
any such termination.
(e) If this Agreement is terminated for any reason: (i) Employee
shall have no further obligation under this Agreement (except with respect to
those provisions of this Agreement which, by their terms, require performance by
the parties subsequent to termination of this Agreement). If this Agreement is
terminated by Employee pursuant to Section 10(b) or by Employer (other than
pursuant to Section 10(a) or as a result of Employee's death or disability),
Employee shall be entitled immediately to all compensation and benefits provided
for in this Agreement for the remainder of the Term which shall be discounted at
the rate of 10% per annum but not be reduced by any amounts earned or received
by Employee from any third party
8
<PAGE> 9
at any time. If this Agreement is terminated by Employee pursuant to Section
10(b) or wrongfully by the Company, all unvested options theretofore granted to
Employee shall immediately vest. Without limiting the generality of the
foregoing, in the case of any termination of this Agreement by Employee pursuant
to Section 10(b) there shall be no requirement on the part of Employee to
mitigate damages and no amounts received by him from others may be used to
mitigate damages.
(f) Nothing contained in this Agreement shall limit the other rights
and remedies, at law or in equity, of the Company or Employee in the event of a
breach by any party of any of its or his obligations pursuant to this Agreement,
and the parties acknowledge that the non-breaching party may proceed, at its
option, pursuant to this Section 10, or by an action at law or in equity arising
from such breach, or any combination of the foregoing.
11. Trade Secrets of Employer; Non-Solicitation.
(a) During the term of this Agreement, Employee will have access to
and become acquainted with various trade secrets of Employer, including, without
limitation, scripts, stories, treatments, ideas, photographs, films, videotapes,
drawings, devices, secret inventions, processes, compilations of information,
records, and specifications, that are owned by Employer and that are regularly
used in the operation of the business of Employer ("Trade Secrets"). Employee
shall not discuss any Trade Secrets, directly or indirectly, or use them in any
way, either during the term of this Agreement, or at any time thereafter, except
as required in the course of his employment by Employer. All scripts, stories,
treatments, ideas, files, photographs, film, videotape, drawings, records,
documents, and specifications and similar items relating to the business of
Employer, whether prepared by Employee or otherwise, coming into his possession
shall remain the exclusive property of Employer, and shall not be removed for
purposes other than work related from the premises where the work of Employer is
being carried on without prior written consent of Employer. Nothing contained in
this Section 11 shall prevent Employee from competing with Employer subsequent
to the termination of this Agreement; provided, however, that Employee shall not
utilize subsequent to the termination of this Agreement Trade Secrets of
Employer obtained by Employee during the term of this Agreement.
(b) During the period ending two (2) years following the termination
of this Agreement, Employee shall not solicit or induce any of the Company's or
its subsidiaries' employees to terminate their employment with the Company or
any of its subsidiaries or hire or cause any of the then current employees of
the Company or any of its subsidiaries to be hired by any other company in which
Employee is an officer, director, consultant, employee or investor.
12. Services Unique. Employee acknowledges that his services hereunder
are special, unique, unusual and extraordinary in character, the loss of which
cannot be reasonably or adequately compensated in damages in an action at law,
and by reason thereof, Employee agrees that Employer shall be entitled to
injunctive or other equitable relief to prevent or curtail any
9
<PAGE> 10
breach of this Agreement by Employee. In the event of any breach by Employer of
this Agreement, Employee shall be limited to Employee's remedy at law for
damages, if any.
13. Notices.
All notices, requests, demands and other communications pertaining
to the subject matter hereof shall be in writing and shall be deemed to be duly
rendered upon personal delivery or telefax or, if mailed, seven (7) days after
deposit in the United States mail, postage prepaid, registered or certified with
return receipt requested and addressed as follows, or as either party may
hereafter designate to the other in writing:
IF TO EMPLOYER: The Kushner-Locke Company
11601 Wilshire Boulevard
Twenty-First Floor
Los Angeles, California 90025
Attn: Chief Financial Officer
IF TO EMPLOYEE: Peter Locke
11601 Wilshire Boulevard
Twenty-First Floor
Los Angeles, California 90025
If to either, then cc: Barry L. Dastin, Esq.
Kaye, Scholer, Fierman,
Hays & Handler LLP
1999 Avenue of the Stars
Suite 1600
Los Angeles, CA 90067
14. Attorneys' Fees, Expenses.
In the event of any dispute or litigation arising out of or relating
to the meaning, interpretation or breach of or compliance or non-compliance with
the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees and costs, to be paid by the losing party. Each party
shall bear its own expenses in connection with the execution and delivery of
this Agreement except that Employer shall reimburse Employee for his actual
out-of-pocket legal expenses in connection therewith up to but not exceeding
$10,000.
15. Jurisdiction, Severability and Integration.
This Agreement has been executed in and shall be governed by and
construed in accordance with the laws of the State of California without giving
effect to any conflict of law provisions thereof. If any provisions of this
Agreement shall be invalid or unenforceable for any reason and to any extent,
the remainder of this Agreement shall not be affected thereby, but
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<PAGE> 11
rather shall be enforced to the greatest extent permitted by law. This Agreement
contains the entire understanding between the parties hereto and supersedes any
prior understandings and agreements, either oral or written, between and among
the parties hereto relating to the subject matter of this Agreement which are
not fully expressed herein.
16. Binding Agreement.
This Agreement shall be binding upon the parties hereto, their
successors and assigns, and legal representatives, but may not be assigned or
delegated without the prior written consent of the other party(ies). This
Agreement, together with all outstanding option agreements between Employer and
Employee, supersedes and replaces all prior employment agreements, as amended,
or similar understandings, between the parties hereto, each of which agreements
are hereby terminated, but does not supersede any outstanding option agreements.
17. Counterparts.
This Agreement may be executed in several counterparts, and all so
executed shall constitute one agreement, binding on all of the parties hereto,
notwithstanding that all the parties are not signatory to the original or the
same counterparts.
IN WITNESS WHEREOF, the parties hereto have executed this
Employment Agreement on the date first above written.
"Employer" THE KUSHNER-LOCKE COMPANY,
a California corporation
By:_________________________________
Title:______________________________
"Employee" _____________________________________
PETER LOCKE
11
<PAGE> 12
EXHIBIT A
STOCK OPTION AWARD AGREEMENT (TIME VESTING)
THIS AWARD AGREEMENT is dated as of the 1st day of October, 1997, by and
between THE KUSHNER-LOCKE COMPANY, a California corporation (the "Corporation")
and PETER LOCKE ("Participant").
W I T N E S S E T H
WHEREAS, pursuant to the Corporation's 1988 Stock Incentive Plan (the
"Plan"), the Corporation's Stock Option Committee, acting through the
non-employee director members thereof (the "Committee"), committed to grant to
the Participant, effective as of August 1, 1997 (for purposes of such grant, the
"Award Date"), a non-qualified stock option (the "Option") to purchase all or
any part of 83,333 shares of Common Stock (on a post reverse stock split basis),
without par value, of the Corporation (the "Common Stock") upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and covenants
made herein and the mutual benefits to be derived herefrom, the parties hereto
agree as follows:
1. Grant of Option. The Corporation has granted to the Participant as a
matter of separate inducement and agreement in connection with the Participant's
employment with, or other services to, the Corporation, but not in lieu of any
salary or other compensation for such services, the right and option to
purchase, in accordance with the Plan and on the terms and conditions
hereinafter and therein set forth, all or any part of an aggregate of 83,333
shares of Common Stock at the exercise price of $1.875 per share (the "Price"),
exercisable from time to time, subject to the provisions of this Award Agreement
prior to the close of business on August 1, 2007, unless earlier terminated
pursuant to the provisions of the Plan upon termination of Participant's
relationship with the Corporation, which provisions are incorporated herein by
this reference (the "Expiration Date").
2. Exercisability of Option. Except as otherwise provided in this Award
Agreement, the Option shall vest from time to time, as follows:
16,667 shares shall vest on August 1, 1998
16,666 shares shall vest on August 1, 1999
16,667 shares shall vest on August 1, 2000
16,667 shares shall vest on August 1, 2001
16,666 shares shall vest on August 1, 2002
provided, however, that the Option may not be exercised as to less than 100
shares at any one time unless the number of shares purchased is the total number
at the time available for purchase
<PAGE> 13
under the Option. The Option may be exercised only as to whole shares;
fractional share interests shall be disregarded except that they may be
accumulated.
3. Method of Exercise and Payment.
(a) Exercise of Option. Each exercise of the Option shall be by
means of written notice of exercise duly delivered to the Corporation,
specifying the number of whole shares with respect to which the Option is then
being exercised, together with any written statements required pursuant hereto
or under the Plan and payment of the Price in full in cash or by check payable
to the order of the Corporation. The Participant may, in lieu of payment of a
portion or all of the Price in cash or by check, also deliver in payment of a
portion or all of the Price, certificates evidencing Common Stock valued at the
aggregate amount of such portion or all of the Price, each share of Common Stock
shall be valued at the Fair Market Value on the date of exercise of the Option.
At the option of the Committee, the Participant may, in lieu of payment of a
portion or all of the Price in cash, by check or in certificates evidencing
Common Stock, pay for all or a portion of the Price by means of a promissory
note to the Corporation, on such terms and conditions, including as to security,
as the Committee may determine.
4. Continuance of Employment. Nothing contained in this Award Agreement
or in the Plan shall confer upon the Participant any right to continue in the
employ of, or to continue rendering services to, the Corporation or constitute
any contract or agreement of engagement or employment. The Participant
acknowledges that the Corporation has the right to terminate the Participant's
employment or services at will except as may be otherwise provided by separate
agreement. Nothing contained in this Award Agreement or in the Plan shall
interfere in any way with the right of the Corporation to (i) terminate the
employment or services of the Participant at any time for any reason whatsoever,
with or without cause, or (ii) reduce the Participant's compensation.
5. Non-Assignability of Option. Interest in the Option shall not be
subject to sale, transfer, pledge, assignment, encumbrance, change or alienation
other than by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code, regardless of any
community property or other interest therein of the Participant's spouse or such
spouse's successor in interest. In the event that the spouse of the Participant
shall have acquired a community property interest in the Option, the
Participant, or his permitted transferees, may exercise it on behalf of the
spouse of the Participant or such spouse's successor in interest.
6. Adjustments Upon Specified Changes. Upon the occurrence of certain
events relating to the Corporation's stock as set forth in the Plan, including
stock splits, combinations, extraordinary cash dividends or mergers in which the
Corporation is not the Surviving Corporation, adjustments will be made in the
number and kind of shares that may be issuable under, or in the consideration
payable with respect to, the Option as such adjustments are set forth in the
Plan.
2
<PAGE> 14
7. Acceleration. Upon the occurrence of certain Events, including a
Change of Control or in the event Participant's Employment Agreement, dated as
of October 1, 1988, as amended, is terminated by Participant under Section 10(b)
thereof, or is wrongfully terminated by the Corporation, the Option shall become
immediately vested and exercisable to the full extent theretofore not either
vested or exercisable unless prior to the Event the Board determines otherwise.
Notwithstanding the forgoing, however, any acceleration of this Option shall
comply with all applicable regulatory requirements and the Plan.
8. Application of Securities Laws.
(a) No shares of Common Stock may be purchased pursuant to the Option
unless and until any then applicable requirements of the Commission, and any
other regulatory agencies, including any state securities agencies having
jurisdiction over the Corporation or such issuance, and any exchanges upon which
the Common Stock may be listed, shall have been fully satisfied. The Participant
represents, agrees and certifies that:
(1) The Participant understands that the Option and the shares
issuable upon exercise of the Option have not been registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities or blue
sky law in reliance on available exemptions and that the Corporation is relying
upon the Participant's representations and warranties herein in availing itself
of said exemptions.
(2) The Participant has had a full opportunity to ask questions of
and receive answers from the Chief Financial Officer and the President of the
Company concerning the terms and conditions of this investment. The Participant
has received and reviewed carefully a copy of the Plan.
(3) The Participant (a) can bear the economic risk of losing the
Participant's entire investment; and (a) has adequate means of providing for the
Participant's current needs and possible personal contingencies.
(4) The Option hereby granted to the Participant is being acquired
solely for the Participant's own account for investment purposes, and is not
being purchased with a view to or for the purposes of the resale, transfer or
other distribution thereof; and the Participant has no present plans to enter
into any contract, undertaking, agreement or arrangement for such resale,
transfer or distribution and the Participant further agrees that the Option and
Common Stock acquired pursuant to the exercising of the Option will not be
resold, transferred or otherwise distributed without (a) first having presented
to the Corporation a written opinion of legal counsel in form and substance
satisfactory to the Corporation's counsel indicating the proposed transfer will
not be in violation of any of the provisions of the Act and applicable state
securities laws and the rules and regulations promulgated thereunder or (b) a
registration statement covering the resale of such Common Stock being effective.
The Participant recognizes that a legend reading substantially as follows shall
be placed on all certificates representing the Common Stock as well as on the
Option issued pursuant hereto and a stop order shall be placed
3
<PAGE> 15
in the stock register of the Corporation against a transfer of same in
accordance with the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES OR BLUE SKY
LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR AN EXEMPTION FROM REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES
OR BLUE SKY LAWS.
(5) The Participant either has a preexisting personal or business
relationship with the Corporation or any of its officers, directors or
controlling persons, or by reason of the Participant's business or financial
experience or the business or financial experience of its professional advisors
who are unaffiliated with and who are not compensated by the Corporation or any
affiliated or selling agent, directly or indirectly, can be reasonably assumed
to have the capacity to protect his own interests in connection with acquisition
of the Option and exercise thereof.
The foregoing representations and warranties are true and accurate as of
the Award Date and of the date of delivery of Common Stock acquired pursuant to
the Option and shall survive such date and such delivery. If, in any respect,
such representations and warranties shall not be true and accurate as of any of
the foregoing dates, the Participant shall give written notice of such fact to
the Corporation specifying which representations and warranties are not true and
accurate and the reasons therefor.
(b) The Committee may impose such conditions on the Option or on its
exercise or acceleration or on the payment of any withholding obligation
(including, without limitation, restricting the time of exercise to specified
periods) as may be required to satisfy applicable regulatory requirements,
including, without limitation, Rule 16b-3 (or any successor rule) promulgated by
the Commission pursuant to the Exchange Act.
9. Notices. Any notice to be given to the Corporation under the terms of
the Award Agreement or pursuant to the Plan shall be in writing and addressed to
the Secretary of the Corporation at its principal office and any notice to be
given to the Participant shall be sent to the Participant at the address given
beneath the Participant's signature hereto, or at such other address as either
party may hereafter designate in writing to the other party. Any such notice
shall be deemed to have been duly given on the date of delivery, if delivered by
hand, or 3 days after deposit into U.S. mails of a notice sent by registered or
certified mail (postage and registry or certification fee prepaid) or the date
after being timely delivered to a recognized messenger service or overnight
courier for next day delivery (delivery charges prepaid).
4
<PAGE> 16
10. Effect of Award Agreement. The Award Agreement shall be assumed by,
be binding upon and inure to the benefit of any successor or successors of the
Corporation to the extent provided in the Plan and to any permitted successor,
assign and transferee of the Participant.
11. Tax Withholding. The provisions of the Plan are hereby incorporated
and shall govern any withholding that the Corporation is required to make with
respect to an exercise of the Option as well as the Corporation's right to
condition a transfer of Common Stock upon compliance with the applicable
withholding requirements of federal, state and local authorities. No Common
Stock acquired pursuant to an exercise of the Option may be transferred to the
Participant or any permitted successor, assign or transferee unless and until
the Corporation has withheld, or has received payment from the Participant or
such permitted successor, assign or transferee of, all amounts the Corporation
is so required to withhold.
12. Terms of the Plan Govern. Except with respect to terms specifically
set forth in this Award Agreement, the Award and this Award Agreement are
subject to, and the Corporation and the Participant agree to be bound by, all of
the terms and conditions of the Plan. Capitalized terms not otherwise defined
herein shall have the respective meanings assigned to them in the Plan. The
rights of the Participant are subject to limitations, adjustments,
modifications, suspension and termination in certain circumstances and upon the
occurrence of certain conditions as set forth in the Plan.
13. Laws Applicable to Construction. The interpretation, performance and
enforcement of the Award and this Award Agreement shall be governed by the laws
of the State of California without giving effect to any conflict of law
provisions.
5
<PAGE> 17
IN WITNESS WHEREOF, the Corporation has caused this Award Agreement to
be executed on its behalf by a duly authorized officer and the Participant has
hereunto set his hand as of the date and year first above written.
THE KUSHNER-LOCKE COMPANY
By:_____________________________
Bruce Lilliston
President
PARTICIPANT
________________________________
Peter Locke
________________________________
(Address)
________________________________
(City, State, Zip Code)
________________________________
(Social Security Number)
6
<PAGE> 18
EXHIBIT B
STOCK OPTION AWARD AGREEMENT (PERFORMANCE)
THIS AWARD AGREEMENT is dated as of the 1st day of October, 1997, by and
between THE KUSHNER-LOCKE COMPANY, a California corporation (the "Corporation")
and PETER LOCKE ("Participant").
W I T N E S S E T H
WHEREAS, pursuant to the Corporation's 1988 Stock Incentive Plan (the
"Plan"), the Corporation's Stock Option Committee, acting through the
non-employee director members thereof (the "Committee"), committed to grant to
the Participant, effective as of August 1, 1997 (for purposes of such grant, the
"Award Date"), a non-qualified stock option (the "Option") to purchase all or
any part of 83,333 shares of Common Stock (on a post reverse stock split basis),
without par value, of the Corporation (the "Common Stock") upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual promises and covenants
made herein and the mutual benefits to be derived herefrom, the parties hereto
agree as follows:
1. Grant of Option. The Corporation has granted to the Participant as a
matter of separate inducement and agreement in connection with the Participant's
employment with, or other services to, the Corporation, but not in lieu of any
salary or other compensation for such services, the right and option to
purchase, in accordance with the Plan and on the terms and conditions
hereinafter and therein set forth, all or any part of an aggregate of 83,333
shares of Common Stock at the exercise price of $1.875 per share (the "Price"),
exercisable from time to time subject to the provisions of this Award Agreement
prior to the close of business on August 1, 2007, unless earlier terminated
pursuant to the provisions of the Plan upon termination of Participant's
relationship with the Corporation, which provisions are incorporated herein by
this reference (the "Expiration Date").
2. Exercisability of Option. Except as otherwise provided in this Award
Agreement, the Option shall vest from time to time, as follows:
16,667 shares shall vest on August 1, 1998
16,666 shares shall vest on August 1, 1999
16,667 shares shall vest on August 1, 2000
16,667 shares shall vest on August 1, 2001
16,666 shares shall vest on August 1, 2002
provided, however, that no vested options may be exercised except in the
following circumstances: 1/3 of all vested options may be exercised commencing
the earlier of (x) the day
<PAGE> 19
following the date the average closing price of the Common Stock for the
previous twenty (20) consecutive trading days, as quoted on the Nasdaq National
Market or other principal national stock exchange or market on which the Common
Stock is then listed (the "Market Price"), is equal to or greater than $3.00 or
(y) the day after the Corporation announces its fiscal year earnings if, in such
fiscal year, the Corporation earns, exclusive of extraordinary gains or losses,
at least 85% of its projected earnings before taxes pursuant to the
Corporation's business plan previously approved by the Board of Directors; an
additional 1/3 of all vested options may be exercised commencing the earlier of
(x) the day following the date the average closing price of the Common Stock for
the previous twenty (20) consecutive trading days as so quoted is equal to or
greater than $4.50 or (y) the day after the Corporation announces its fiscal
year earnings if, in any two fiscal years during the term hereof, the
Corporation earns, exclusive of extraordinary gains or losses, at least 85% of
its projected earnings before taxes pursuant to the Corporation's business plan
previously approved by the Board of Directors; and the remaining 1/3 of all
vested options may be exercised commencing the earlier of (x) the day following
the date the average closing price of the Common Stock for the previous twenty
(20) consecutive trading days as so quoted is equal to or greater than $6.00 or
(y) the day after the Corporation announces its fiscal year earnings if, in any
three fiscal years during the term hereof, the Corporation earns, exclusive of
extraordinary gains or losses, at least 85% of its projected earnings before
taxes pursuant to the Corporation's business plan previously approved by the
Board of Directors.
In addition, the Option may not be exercised as to less than 100 shares
at any one time unless the number of shares purchased is the total number at the
time available for purchase under an installment of the Option. The Option may
be exercised only as to whole shares; fractional share interests shall be
disregarded except that they may be accumulated.
3. Method of Exercise and Payment.
(a) Exercise of Option. Each exercise of the Option shall be by
means of written notice of exercise duly delivered to the Corporation,
specifying the number of whole shares with respect to which the Option is then
being exercised, together with any written statements required pursuant hereto
or under the Plan and payment of the Price in full in cash or by check payable
to the order of the Corporation. The Participant may, in lieu of payment of a
portion or all of the Price in cash or by check, also deliver in payment of a
portion or all of the Price, certificates evidencing Common Stock valued at the
aggregate amount of such portion or all of the Price, each share of Common Stock
shall be valued at the Fair Market Value on the date of exercise of the Option.
At the option of the Committee, the Participant may, in lieu of payment of a
portion or all of the Price in cash, by check or in certificates evidencing
Common Stock, pay for all or a portion of the Price by means of a promissory
note to the Corporation, on such terms and conditions, including as to security,
as the Committee may determine.
4. Continuance of Employment. Nothing contained in this Award Agreement
or in the Plan shall confer upon the Participant any right to continue in the
employ of, or to continue rendering services to, the Corporation or constitute
any contract or agreement of engagement or
2
<PAGE> 20
employment. The Participant acknowledges that the Corporation has the right to
terminate the Participant's employment or services at will except as may be
otherwise provided by separate agreement. Nothing contained in this Award
Agreement or in the Plan shall interfere in any way with the right of the
Corporation to (i) terminate the employment or services of the Participant at
any time for any reason whatsoever, with or without cause, or (ii) reduce the
Participant's compensation.
5. Non-Assignability of Option. Interest in the Option shall not be
subject to sale, transfer, pledge, assignment, encumbrance, change or alienation
other than by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code, regardless of any
community property or other interest therein of the Participant's spouse or such
spouse's successor in interest. In the event that the spouse of the Participant
shall have acquired a community property interest in the Option, the
Participant, or his permitted transferees, may exercise it on behalf of the
spouse of the Participant or such spouse's successor in interest.
6. Adjustments Upon Specified Changes. Upon the occurrence of certain
events relating to the Corporation's stock as set forth in the Plan, including
stock splits, combinations, extraordinary cash dividends or mergers in which the
Corporation is not the Surviving Corporation, adjustments will be made in the
number and kind of shares that may be issuable under, or in the consideration
payable with respect to, the Option as such adjustments are set forth in the
Plan.
7. Acceleration. Upon the occurrence of certain Events, including a
Change of Control or in the event Participant's Employment Agreement, dated as
of October 1, 1988, as amended, is terminated by Participant under Section 10(b)
thereof, or is wrongfully terminated by the Corporation, the Option shall become
immediately vested and exercisable to the full extent theretofore not either
vested or exercisable unless prior to the Event the Board determines otherwise.
Notwithstanding the forgoing, however, any acceleration of this Option shall
comply with all applicable regulatory requirements and the Plan.
8. Application of Securities Laws.
(a) No shares of Common Stock may be purchased pursuant to the Option
unless and until any then applicable requirements of the Commission, and any
other regulatory agencies, including any state securities agencies having
jurisdiction over the Corporation or such issuance, and any exchanges upon which
the Common Stock may be listed, shall have been fully satisfied. The Participant
represents, agrees and certifies that:
(1) The Participant understands that the Option and the shares
issuable upon exercise of the Option have not been registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities or blue
sky law in reliance on available exemptions and that the Corporation is relying
upon the Participant's representations and warranties herein in availing itself
of said exemptions.
3
<PAGE> 21
(2) The Participant has had a full opportunity to ask questions of
and receive answers from the Chief Financial Officer and the President of the
Corporation concerning the terms and conditions of this investment. The
Participant has received and reviewed carefully a copy of the Plan.
(3) The Participant (a) can bear the economic risk of losing the
Participant's entire investment; and (a) has adequate means of providing for the
Participant's current needs and possible personal contingencies.
(4) The Option hereby granted to the Participant is being acquired
solely for the Participant's own account for investment purposes, and is not
being purchased with a view to or for the purposes of the resale, transfer or
other distribution thereof; and the Participant has no present plans to enter
into any contract, undertaking, agreement or arrangement for such resale,
transfer or distribution and the Participant further agrees that the Option and
Common Stock acquired pursuant to the exercising of the Option will not be
resold, transferred or otherwise distributed without (a) first having presented
to the Corporation a written opinion of legal counsel in form and substance
satisfactory to the Corporation's counsel indicating the proposed transfer will
not be in violation of any of the provisions of the Act and applicable state
securities laws and the rules and regulations promulgated thereunder or (b) a
registration statement covering the resale of such Common Stock being effective.
The Participant recognizes that a legend reading substantially as follows shall
be placed on all certificates representing the Common Stock as well as on the
Option issued pursuant hereto and a stop order shall be placed in the stock
register of the Corporation against a transfer of same in accordance with the
following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES OR BLUE SKY
LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR AN EXEMPTION FROM REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES
OR BLUE SKY LAWS.
(5) The Participant either has a preexisting personal or business
relationship with the Corporation or any of its officers, directors or
controlling persons, or by reason of the Participant's business or financial
experience or the business or financial experience of its professional advisors
who are unaffiliated with and who are not compensated by the Corporation or any
affiliated or selling agent, directly or indirectly, can be reasonably assumed
to have the capacity to protect his own interests in connection with acquisition
of the Option and exercise thereof.
4
<PAGE> 22
The foregoing representations and warranties are true and accurate as of
the Award Date and of the date of delivery of Common Stock acquired pursuant to
the Option and shall survive such date and such delivery. If, in any respect,
such representations and warranties shall not be true and accurate as of any of
the foregoing dates, the Participant shall give written notice of such fact to
the Corporation specifying which representations and warranties are not true and
accurate and the reasons therefor.
(b) The Committee may impose such conditions on the Option or on its
exercise or acceleration or on the payment of any withholding obligation
(including, without limitation, restricting the time of exercise to specified
periods) as may be required to satisfy applicable regulatory requirements,
including, without limitation, Rule 16b-3 (or any successor rule) promulgated by
the Commission pursuant to the Exchange Act.
9. Notices. Any notice to be given to the Corporation under the terms of
the Award Agreement or pursuant to the Plan shall be in writing and addressed to
the Secretary of the Corporation at its principal office and any notice to be
given to the Participant shall be sent to the Participant at the address given
beneath the Participant's signature hereto, or at such other address as either
party may hereafter designate in writing to the other party. Any such notice
shall be deemed to have been duly given on the date of delivery, if delivered by
hand, or 3 days after deposit into U.S. mails of a notice sent by registered or
certified mail (postage and registry or certification fee prepaid) or the date
after being timely delivered to a recognized messenger service or overnight
courier for next day delivery (delivery charges prepaid).
10. Effect of Award Agreement. The Award Agreement shall be assumed by,
be binding upon and inure to the benefit of any successor or successors of the
Corporation to the extent provided in the Plan and to any permitted successor,
assign and transferee of the Participant.
11. Tax Withholding. The provisions of the Plan are hereby incorporated
and shall govern any withholding that the Corporation is required to make with
respect to an exercise of the Option as well as the Corporation's right to
condition a transfer of Common Stock upon compliance with the applicable
withholding requirements of federal, state and local authorities. No Common
Stock acquired pursuant to an exercise of the Option may be transferred to the
Participant or any permitted successor, assign or transferee unless and until
the Corporation has withheld, or has received payment from the Participant or
such permitted successor, assign or transferee of, all amounts the Corporation
is so required to withhold.
12. Terms of the Plan Govern. Except with respect to terms specifically
set forth in this Award Agreement, the Award and this Award Agreement are
subject to, and the Corporation and the Participant agree to be bound by, all of
the terms and conditions of the Plan. Capitalized terms not otherwise defined
herein shall have the respective meanings assigned to them in the Plan. The
rights of the Participant are subject to limitations, adjustments,
modifications, suspension and termination in certain circumstances and upon the
occurrence of certain conditions as set forth in the Plan.
5
<PAGE> 23
13. Laws Applicable to Construction. The interpretation, performance and
enforcement of the Award and this Award Agreement shall be governed by the laws
of the State of California without giving effect to any conflict of law
provisions.
IN WITNESS WHEREOF, the Corporation has caused this Award Agreement to
be executed on its behalf by a duly authorized officer and the Participant has
hereunto set his hand as of the date and year first above written.
THE KUSHNER-LOCKE COMPANY
By:____________________________
Bruce Lilliston
President
PARTICIPANT
________________________________
Peter Locke
________________________________
(Address)
________________________________
(City, State, Zip Code)
________________________________
(Social Security Number)
6
<PAGE> 1
AMENDMENT NO. 5 dated as of December 22, 1997 to the Credit,
Security, Guaranty and Pledge Agreement dated as of June 19,
1996, as amended, among THE KUSHNER-LOCKE COMPANY (the
"Borrower"), the Guarantors named therein, the Lenders referred
to therein and THE CHASE MANHATTAN BANK (formerly known as
Chemical Bank), as Agent and as Fronting Bank for the Lenders
(the "Agent") (as heretofore amended, the "Credit Agreement").
INTRODUCTORY STATEMENT
The Lenders have made available to the Borrower a revolving credit
facility pursuant to the terms of the Credit Agreement.
The Borrower has requested certain modifications to the Credit
Agreement.
The Borrower, the Guarantor, the Lenders and the Agent have agreed to
make revisions to the Credit Agreement, all on the terms and subject to the
conditions hereinafter set forth.
Therefore, the parties hereto hereby agree as follows:
Section 1. Defined Terms. Capitalized terms used herein and not
otherwise defined herein shall have the meaning given them in the Credit
Agreement.
Section 2. Amendments to the Credit Agreement. Subject to the
satisfaction of the conditions precedent set forth in Section 3 hereof, the
Credit Agreement is hereby amended as of September 30, 1997 (the "Effective
Date") as follows:
(A) The definition of "Consolidated Interest Expense" appearing in
Article 1 of the Credit Agreement is hereby amended in its entirety to read
as follows:
"Consolidated Interest Expense" shall mean for any period for which such
amount is being determined, total interest expense paid or payable in cash
(including that properly attributable to Capital Leases in accordance with GAAP
and all capitalized interest but excluding in any event all amortization of
debt discount and debt issuance costs) of the Borrower and its Consolidated
-1-
<PAGE> 2
Subsidiaries on a consolidated basis including, without limitation, all
commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing and net cash costs
(or net profits) under Interest Rate Protection Agreements, net of
interest received in cash."
(B) Section 6.19 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following new Section 6.19:
"SECTION 6.19 EBIT to Interest Expense Ratio. For any rolling four
quarter period, permit the ratio of (i) the sum of EBIT and film amortization
minus 50% of investments in film inventory made during such period, to (ii)
Consolidated Interest Expense, to be less than 2.25.1."
Section 3. Conditions to Effectiveness. The effectiveness of this
Amendment is subject to the satisfaction in full of each of the conditions
precedent set forth in this Section 3:
(A) the Agent shall have received counterparts of this Amendment which,
when taken together, bear the signatures of the Borrower, each Guarantor, the
Agent and such of the Lenders as are required by the Credit Agreement; and
(B) all legal matters incident to this Amendment shall be satisfactory
to Morgan, Lewis & Bockius LLP, counsel for the Agent.
Section 4. Waiver. Each of the Lenders, by its execution hereof, hereby
waives the Credit Parties' non-compliance with Section 6.18 regarding the ratio
of Total Unsubordinated Liabilities to Consolidated Capital Base, solely
through the period ending September 30, 1997.
Section 5. Representations and Warranties. Each Credit Party represents
and warrants that:
(A) after giving effect to this Amendment, the representations and
warranties contained in the Credit Agreement are true and correct in all
material respects on and as of the date hereof as if such representations and
warranties had been made on and as of the date hereof (except to the extent
that any such representations and warranties specifically relate to an earlier
date); and
(B) after giving effect to this Amendment, no Event of Default or
Default will have occurred and be continuing on and as of the date hereof.
Section 5. Further Assurances. At any time and from time to time, upon
the Agent's request and at the sole expense of the Credit Parties, each Credit
Party will promptly and duly execute and deliver any and all further
instruments and documents and take such further action as the Agent reasonably
deems necessary to effect the purposes of this Amendment.
-2-
<PAGE> 3
Section 7. Fundamental Documents. This Amendment is designated a
Fundamental Document by the Agent.
Section 8. Full Force and Effect. Except as expressly amended hereby, the
Credit Agreement and the other Fundamental Documents shall continue in full
force and effect in accordance with the provisions thereof on the date hereof.
As used in the Credit Agreement, the terms "Agreement", "this Agreement",
"herein", "hereafter", "hereto", "hereof", and words of similar import, shall,
unless the context otherwise requires, mean the Credit Agreement as amended by
this Amendment.
Section 9. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 10. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute but one instrument.
Section 11. Expenses. The Borrower agrees to pay all out-of-pocket
expenses incurred by the Agent in connection with the preparation, execution
and delivery of this Amendment, including, but not limited to, the reasonable
fees and disbursements of counsel for the Agent.
Section 12. Headings. The headings of this Amendment are for the purposes
of reference only and shall not affect the construction of or be taken into
consideration in interpreting this Amendment.
IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be
duly executed as of the date first written above.
BORROWER:
THE KUSHNER-LOCKE COMPANY
By: /s/ ROBERT SWAN
-----------------------------------
Name: Robert Swan
Title: Chief Financial Officer
-3-
<PAGE> 4
GUARANTORS:
KL PRODUCTIONS, INC.
KL INTERNATIONAL, INC.
ACME PRODUCTIONS, INC.
KUSHNER-LOCKE PRODUCTIONS, INC.
THE RELATIVES COMPANY
POST AND PRODUCTION SERVICES, INC.
L-K ENTERTAINMENT, INC.
INTERNATIONAL COURTROOM NEWS SERVICE
FAMILY PICTURES, INC.
TROPICAL HEAT, INC.
KL SYNDICATION, INC.
ANDRE PRODUCTIONS, INC.
TKLC NO. 2, INC.
TWILIGHT ENTERTAINMENT, INC.
KLC FILMS, INC.
KL FEATURES, INC.
KLF GUILD CO.
KLF DEVELOPMENT CO.
KLTV GUILD CO.
KLTV DEVELOPMENT CO.
KUSHNER-LOCKE INTERNATIONAL, INC.
KL INTERACTIVE MEDIA, INC.
By /s/ ROBERT SWAN
-------------------------------
Name: Robert Swan
Title: Chief Financial Officer
KLC/NEW CITY
By its General Partner
THE KUSHNER-LOCKE COMPANY
By /s/ ROBERT SWAN
-------------------------------
Name: Robert Swan
Title: Chief Financial Officer
-4-
<PAGE> 5
DAYTON WAY PICTURES, INC.
DAYTON WAY PICTURES II, INC.
DAYTON WAY PICTURES III, INC.
DAYTON WAY PICTURES IV, INC.
FW COLD CO., INC.
BY /s/ ROBERT SWAN
------------------------------
Name: Robert Swan
Title: Chief Financial Officer
LENDERS:
Executed in
New York, New York THE CHASE MANHATTAN BANK (formerly
On December 29, 1997 known as Chemical Bank), as Agent
BY /s/ ANN B. KERNS
------------------------------
Name: Ann B. Kerns
Title: Vice President
DE NATIONALE INVESTERINGSBANK N.V.
BY /s/ ERIC H. SNATERSE
------------------------------
Name: Eric H. Snaterse
Title:
BY /s/ J.L.J.M REISEN
------------------------------
Name: J.L.J.M Reisen
Title:
COMERICA BANK -- CALIFORNIA
BY /s/ D. JEFFREY ANDRICK
------------------------------
Name: D. Jeffrey Andrick
Title: V.P.
-5-
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
The Kushner-Locke Company:
We consent to incorporation by reference in the registration statements (Nos.
333-10239 and 33-82942) on Form S-3 and (Nos. 33-45248 and 33-86768) on Form S-8
of The Kushner-Locke Company of our report dated December 26, 1997, relating to
the consolidated balance sheets of The Kushner-Locke Company and subsidiaries as
of September 30, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended September 30, 1997, and the related schedule, which
report appears in the September 30, 1997 annual report on Form 10-K of The
Kushner-Locke Company.
KPMG Peat Marwick LLP
Los Angeles, California
December 26, 1997
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 16,791
<SECURITIES> 0
<RECEIVABLES> 28,587
<ALLOWANCES> 891
<INVENTORY> 68,507
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 124,368
<CURRENT-LIABILITIES> 2,935
<BONDS> 11,631
0
0
<COMMON> 38,905
<OTHER-SE> (7,769)
<TOTAL-LIABILITY-AND-EQUITY> 124,368
<SALES> 0
<TOTAL-REVENUES> 56,935
<CGS> 52,084
<TOTAL-COSTS> 52,084
<OTHER-EXPENSES> 5,333
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,027
<INCOME-PRETAX> (4,346)
<INCOME-TAX> 23
<INCOME-CONTINUING> (4,369)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,369)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
</TABLE>
