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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, 1999 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) 481-2000
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
13 3/4% Convertible Subordinated Debentures, Series B due 2000
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 $48,550,000 as
of December 16, 1999.
There were 13,818,767 shares of outstanding Common Stock of the Registrant as of
December 16, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2000 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, 1999) are
incorporated by reference in Part III Items 10, 11, 12 and 13 of this Form 10-K.
Total number of pages 144. Exhibit Index begins on page 72.
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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 feature films are developed and
produced for the theatrical, made-for-video and pay cable motion picture
markets. 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 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, in response to the increased
demand for product by the pay-per-view, telephone delivery, pay cable and basic
cable services, the Company formed an entity 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.
In late 1997, the Company acquired an 80% interest in US SEARCH.com, a leading
provider of fee-based people search and other customized individual reference
services. In June 1999 US SEARCH.com completed an initial pubic offering in
which the Company sold a portion of its shareholdings. Currently, the Company
owns 55.2% of US SEARCH.com.
In February 1998 the Company established KL/Phoenix, an 80% owned venture, which
distributes film and television product in Latin America. In November 1998, the
Company launched Gran Canal Latino ("GCL"), a satellite channel through a
newly-formed 80%-owned subsidiary. GCL broadcasts 24 hours a day, with a
selection of Spanish language films mostly from Spain. GCL's satellite
transmission reaches the United States and all of Latin America including
Mexico. Under a distribution arrangement with Enrique Cerezo, the Company is
broadcasting selections from 1,500 Spanish language movie titles. In June 1999
the Company obtained a 20% ownership interest in Digital Renaissance, a German
digital special effects facility. In April 1999 the Company obtained warrants
and a minority ownership interest in The Harvey Entertainment Company in
exchange for 468,886 shares of common stock of the Company.
The Company's feature films for fiscal 1999 generated $14,081,000 of revenues.
One Man's Hero starring Tom Berenger and distributed domestically by MGM,
Ringmaster starring Jerry Springer, which Artisan Entertainment released
domestically in November 1998, and But I'm A Cheerleader, which is to be
released theatrically by New Line Cinema, were delivered by the Company in
fiscal 1999. In addition, the Company has recently completed principal
photography on Picking Up The Pieces starring Woody Allen, Sharon Stone and
David Schwimmer, The St. Francisville Experiment and They Nest, starring Dean
Stockwell, John Savage and Thomas Calabro, and is preparing for principal
photography on Vlad the Impaler.
Since its inception in 1983, the Company has produced or distributed over 1,000
hours of original television programming, including various television series,
movies-for-television and mini-series. For fiscal 1999, the Company's television
slate generated $6,878,000 of revenue, principally from network and
international licensing of three feature length television movies, The Last
Producer directed by Burt Reynolds and starring Burt Reynolds, Lauren Holly and
Benjamin Bratt, Mambo Cafe starring Thalia and Danny Aiello, Freeway II:
Confessions of a Trick Baby starring Natasha Leone, Vincent Gallo, a pilot for a
television series and a co-produced 13-episode series, Would You Believe It for
the Discovery Channel.
TV First, a partnership 50% owned by the Company, purchases media time for
Christian music infomercials and commenced retail marketing of compact discs and
audio and video cassettes in fiscal 1999. Fiscal 1999 sales by the joint venture
exceeded $1,300,000. In October 1999 the Company sold its partnership interest
to its partner.
The Company's operating revenues were $49,890,000 for the fiscal year ended
September 30, 1999, a decrease of 34% from the $76,130,000 recognized for the
fiscal year ended September 30, 1998. This decrease reflects reduced television
series production, partially offset by increased revenues from US SEARCH.com and
increased availabilities of feature
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films.
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 Internet, television and theatrical film industries, competition, government
regulation, labor relations, limited operating history and continued operating
losses of US SEARCH.com, reliance of US SEARCH.com on strategic relationships in
Internet market, uncertain acceptance and maintenance of the 1-800-US SEARCH
brand, risks associated with offering new services, risks associated with growth
and expansion, liability for online content, rapidly changing technology,
standards and consumer demands, online commerce security risks, including credit
card fraud, system disruptions and capacity constraints for US SEARCH.com, risks
associated with domain names, year 2000 compliance, shares available for future
sale, 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. 333-80521), as filed on June 11, 1999 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.
U.S. SEARCH.COM, INC.
GENERAL. US SEARCH.com, Inc. ("US SEARCH.com"), a 55.2% owned subsidiary of the
Company as of September 30, 1999, is a leading provider of fee-based people
search and other customized individual reference services. US SEARCH.com uses a
wide variety of public records and other publicly available information on
individuals. In June 1999 US SEARCH.com completed an initial pubic offering in
which the Company sold a portion of its shareholdings as well.
US SEARCH.com's services are marketed through its US SEARCH.COM and
1800USSEARCH.COM Internet world wide web ("Web") sites and through its direct
response 1-800USSEARCH telephone number. US SEARCH.com operates a 24 hour, seven
days a week sales and service center, where its employees research, aggregate
and cross-check data from a wide variety of sources. Research results are placed
in a pre-formatted template and then delivered to US SEARCH.com's customers via
e-mail, fax or U.S. mail.
US SEARCH.com's quarterly revenues have grown from $1,804,000 in the quarter
ended March 31, 1998 to $6,163,000 in the quarter ended September 30, 1999.
Unique visitors to the websites have increased from 4,600,000 in the quarter
ended March 31, 1999 to 11,200,000 in the quarter ended September 30, 1999.
US SEARCH Services
US SEARCH.com provides individual, corporate and professional clients with
quick, easy and inexpensive access to a broad range of public record information
about individuals. A client can request a search from anywhere, at any time
through US SEARCH.com's Web site, 1800USSEARCH.com, or by calling its toll free
telephone number, 1-800 U.S. SEARCH. The search is performed quickly by
electronically accessing multiple, geographically-dispersed public record
databases, aggregating the requested information, and then delivering the search
results in a user-friendly format, often within seconds or minutes. US
SEARCH.com is often able to fulfill a client's search requests based on minimal
client input information, such as a first and last name or a date of birth.
US SEARCH.com provides clients with a single, comprehensive access point to a
broad range of public record information about individuals. The fees for US
SEARCH.com's services range from $10.00 to $500.00 per transaction based on the
nature and amount of information gathered and whether or not the search is
assisted by a search specialist. In November 1999 US SEARCH.com expanded its
service offerings to include pre-employment background screening and other
services
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for corporate and professional clients and government agencies.
Instant Searches. US SEARCH.com offers Internet-based "Instant Searches," which
include general individual locator, first name only, national death records,
real estate records, civil court records, civil judgments and bankruptcy
searches. Instant Searches are performed automatically and results are delivered
via the Web site, often in a matter of seconds or minutes. US SEARCH.com applies
up to a portion of the cost of the individual locator "Instant Searches"
purchased online by the client towards the cost of the more comprehensive
search.
Individual Locator. This service is targeted at individual, corporate and
professional clients interested in locating missing individuals such as
long-lost friends, family, former employees, or business contacts. Corporate and
professional organizations may also wish to locate a large number of members in
connection with class reunions, corporate gatherings or fundraising efforts.
Individual Public Record Reports. Individual or corporate clients can order a
public record search to verify information about a person and determine whether
there is any material information about a person's history that has not been
disclosed. Using this service, a client will receive information about a
person's previous addresses, lawsuits, judgments, UCC filings, property
ownership and corporate affiliations.
Anti-Fraud Identification Verification. This service allows clients to search
for evidence of anyone using their social security number or assuming their
identity for fraudulent purposes. One of the major causes of credit card fraud
is the unlawful use of a person's social security number to gain credit. US
SEARCH.com's service allows for early detection of this activity, avoiding time
consuming and costly resolution.
Nationwide Court Records Search. This service allows clients to search court
records across all 50 states to determine if an individual has filed any
lawsuits, had lawsuits filed against them, obtained a civil judgment, had a
civil judgment filed against them, had property or tax liens against them, had
any foreclosures, or had any unlawful detainers filed against them. US
SEARCH.com also recently introduced Criminal Records Searches on a county-by
county basis in all 50 states.
For the nine months ended September 30, 1999, US SEARCH.com's individual locator
and "Instant Searches" services accounted for over 85% of its revenues.
Services Under Development During Fiscal 1999
Additional "Instant Searches." US SEARCH.com intends to begin offering several
additional Internet-based "Instant Searches" on its Web site. For example, US
SEARCH.com recently began offering "Instant" lawsuit searches, legal judgment
searches, real property searches, and intends to introduce instant UCC filings
searches and unclaimed property searches. As with its current "Instant
Searches," clients would be able to directly access these services online and
receive results in a completely automated fashion via its Web site, often in as
little as seconds or minutes.
Pre-Employment Background Screening. In November 1999, US SEARCH.com began
offering pre-employment background screening services to corporate and
professional clients. This service allows corporate and professional clients to
conduct automated public record information searches in connection with hiring
and other employment decisions. US SEARCH.com expects to design customized
templates with appropriate fields on separate Web pages with secure access for
its corporate and professional clients.
Using US SEARCH Services
Using US SEARCH.com's services is quick, easy and inexpensive. Clients can
access US SEARCH.com's services through its user-friendly Web site,
1800USSEARCH.com, as well as its toll free telephone number, 1-800 U.S. SEARCH.
Services are available 24 hours a day, seven days a week.
1800USSEARCH.Com Web Site. Clients can access US SEARCH.com's Web site directly
or can click through via its advertising on the people search services of one of
the following Internet search engines and popular Web sites: AOL.com,
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msn.com, Excite.com, InfoSpace.com, Lycos.com, Snap.com, Infoseek.com,
WhoWhere.com, Tripod.com and Angelfire.com. From US SEARCH.com's Web site, a
client can choose from one of its completely automated "Instant Searches" or
from several different types of assisted searches. Once a search is selected, a
client will be prompted to fill in specific information, such as the full name,
birth date, social security number or last known address of the individual about
whom the information is requested.
In the case of Internet-based "Instant Searches," the search request is
processed online, and the results are delivered in often as little as a few
seconds or minutes. In the case of partially-automated searches, the request is
forwarded to one of US SEARCH.com's search specialists for fulfillment. US
SEARCH.com's computer system then assembles the results into a pre-formatted
template. After review, the completed report is delivered to the client by
email, facsimile or mail.
US SEARCH Telephone Services. Through its toll free telephone number, 1-800 U.S.
SEARCH, US SEARCH.com provides additional search services for more complex and
in- depth search requests. US SEARCH.com's operations and support center has
trained search specialists and customer service agents available 24 hours a day,
seven days a week. If a client's online search via US SEARCH.com's Web site is
unsuccessful or he desires additional information, the client can then call in
to request additional, more comprehensive search services which may include
using a search specialist to assist in completing the search request.
Public Record Information Database Sources. US SEARCH.com has direct and
indirect electronic access to a broad range of public record databases and other
information sources such as CSRA/Ameridex, Metromail and DBT Online. US
SEARCH.com maintains open accounts with its data providers and pays fixed fees
per inquiry.
US SEARCH.com continually evaluates its information database sources both to
ensure that it has access to the most timely, cost-effective, accurate and
comprehensive data, and to expand the number of automated searches offered to
its clients. If US SEARCH.com determines that a particular information database
source is inadequate or it otherwise becomes unavailable, US SEARCH.com believes
it can switch to an alternative data source with some increase in cost and
without significant delay. From time to time US SEARCH.com expects to evaluate
potential acquisitions or investments in in-house proprietary information
databases to complement its access to third party data providers.
Marketing and Brand Awareness
US SEARCH.com markets its services through a combination of Internet and
television advertising featuring its US SEARCH brand. US SEARCH.com intends to
strengthen its US SEARCH brand through extensive advertising, emphasis on its
1800USSEARCH.com Web site and promotion of additional public record information
and search services under the US SEARCH brand. US SEARCH.com also intends to
combine an increasing level of key Internet advertising with strategically
placed television advertising to attract a great number of users to its Web
site.
Internet Advertising. US SEARCH.com believes that marketing agreements with
Internet search engines and popular Web sites have increased its brand
recognition and attracted clients. US SEARCH.com generates visitors to its Web
site from its various forms of Internet advertising, such as banners, buttons,
text links and key words within search engines, and online white pages. US
SEARCH.com maintains marketing agreements with leading Internet search engines
and popular Web sites, including InfoSpace.com, The Lycos Network, Go
Network/Infoseek, Snap.com and Yahoo!. These marketing agreements have placed
its advertising on major Web sites such as InfoSpace.com, AOL.com, msn.com,
Lycos.com, Snap.com, WhoWhere.com, Tripod.com, Angelfire.com, Go
Network/Infoseek.com, Excite.com and Yahoo.com. US SEARCH.com intends to develop
relationships with other companies, based on traffic patterns, customer
profiles, and related services in order to increase its advertising presence on
the Internet.
Television Advertising. US SEARCH.com uses television advertising to promote its
services. The principal form of television advertising used includes 10-second
promotional fee spots on national television programs that prominently feature
its toll free telephone number, 1-800 U.S. SEARCH, and Web site address,
1800USSEARCH.com. US SEARCH.com believes that its television advertising has
enabled it to increase the reach of its US SEARCH brand and services.
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US SEARCH.com is currently the network closed captioning sponsor for CNBC and
regularly appears on other cable networks including MSNBC, CNN, CNN Headline
News and Fox News. US SEARCH.com is also a fee spot sponsor of the two highest
rated syndicated television programs, Jeopardy and Wheel of Fortune. US
SEARCH.com advertises weekly on Leeza, The Ricki Lake Show, Hollywood Squares,
Judge Judy, The Dating Game, Newlywed Game and Judge Joe Brown. US SEARCH.com
intends to expand its fee spot advertising as opportunities arise. US SEARCH.com
intends to reach a wider audience and to attract more clients through the use of
longer length commercials (15, 30 and 60 seconds) and longer format commercials
which provide marketing flexibility not available with the 10-second fee spots.
Marketing to Corporate and Professional Clients. US SEARCH.com is establishing a
corporate sales force and a team of research specialists to promote and increase
the marketing of its services to prospective professional and corporate clients
and to address the specific needs of each corporate and professional client. US
SEARCH.com also has begun to offer corporate accounts with volume discounts to
promote and market its services. For example, beginning in November 1999, US
SEARCH.com began offering pre-employment background screening services to
corporate and professional clients, allowing these clients to conduct automated
public record information searches in connection with hiring and other
employment decisions. In addition, US SEARCH.com expects to design customized
Web pages with specific search criteria tailored to the needs of each corporate
and professional client.
US SEARCH.com's executive offices are currently located at 9107 Wilshire Blvd.,
Suite 700, Beverly Hills, California 90210, and its telephone number is (310)
553-7000. US SEARCH.com had 198 full time employees and 45 part time employees
as of December 10, 1999.
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 theatrical box office
receipts. Over the past 15 years, however, "Independents" or smaller film
production and distribution companies, such as the Company, 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 (a division of Seagram),
Warner Bros. Pictures (a division of Time Warner), Metro-Goldwyn-Mayer Inc.,
Twentieth Century Fox Film Corporation (a division of News Corporation),
Paramount Pictures Corporation (a division of Viacom) , Sony Pictures
Entertainment (including Columbia Pictures, TriStar Pictures and Triumph
Releasing; altogether divisions of Sony) 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 $25,000,000 to $75,000,000, 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), Fox Searchlight (a
division of News Corporation), and New Line (a division of Time Warner) and its
Fine Line distribution label.
Most of these divisions were formerly Independents.
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 Artisan 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
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The production of a motion picture requires the financing of the direct costs
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.
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 Majors
maintain on a full-time basis. 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, but retaining the other elements
required for pre-production, principal photography and post-production
activities only on a project-by-project basis. Independents also typically
finance their production activities from various sources, including bank loans,
"pre-sales," equity offerings and joint ventures. Independents generally attempt
to complete their financing of a motion picture production prior to commencement
of principal photography, at which point substantial production costs begin to
be incurred and require payment.
"Pre-sales" are often used by 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 markets. 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 production company 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
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success of the promotional and advertising campaign may materially affect the
revenues realized from its theatrical release, generally referred to as "box
office gross." Box office gross represents the total amounts paid by patrons at
motion picture theaters for a particular film, as determined from reports
furnished by exhibitors. The ability to exhibit films during summer and holiday
periods, which are generally considered peak exhibition seasons, may affect the
theatrical success of a film. Competition among distributors to obtain
exhibition dates in theaters during these seasons is significant. In addition,
the costs incurred in connection with the distribution of a motion picture can
vary significantly depending on the number of screens on which the motion
picture is to be exhibited and the ability to exhibit motion pictures during
peak exhibition seasons. Similarly, the ability to exhibit motion pictures in
the most popular theaters in each area can affect theatrical revenues.
Exhibition arrangements with theater operators for the first run of a film
generally provide for the exhibitor to pay the greater of 90% of ticket sales in
excess of fixed amounts relating to the theater's costs of operation and
overhead, or a minimum percentage of ticket sales which varies from 40% to 70%
for the first week of an engagement at a particular theater, decreasing each
subsequent week to 25% to 30% for the final weeks of the engagement. The length
of an engagement depends principally on the audience response to the film.
Films with theatrical releases (which generally may continue for several months
domestically) typically are made available for release in other media as
follows:
<TABLE>
<CAPTION>
Market Months After Theatrical Release Approximate 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, DVDs 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.
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 $20.00 to $50.00 per unit and
generally are rented by consumers for fees ranging from $1.00 to $5.00 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 and satellite 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
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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. .
COMPANY MOTION PICTURE ACQUISITIONS
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 increase 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 $10,000,000) 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.
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 have the right to 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.
Film Library. The Company's distribution rights for acquired films and
television programs, which may include worldwide, foreign, or domestic rights,
generally range from an initial licensing cycle of seven to 21 years to
perpetuity.
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<PAGE> 10
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 or are limited to
international distribution. 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 1999:
<TABLE>
<CAPTION>
Picture Initial Media Delivery/Release Date Principal Talent
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ringmaster Theatrical November 1998 Jerry Springer
One Man's Hero Theatrical June 1999 Tom Berenger
But I'm A Cheerleader Theatrical June 1999 Natasha Lyonne, Clea
DuVall
</TABLE>
The following films are currently scheduled for release or delivery by the
Company in fiscal 2000:
Expected
Picture Initial Media
- --------------------------------------------------------------------------
Picking Up The Pieces Theatrical
The St. Francisville Experiment Theatrical
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
In September 1994 the Company established foreign distribution operations for
its own and third party product. The Company recently hired Rob Aft to handle
the Company's international distribution activities as President of
International Distribution. Arturo Feliu handles Latin American distribution
activities as President of KL/Phoenix. See Note 10 of Notes to Consolidated
Financial Statements for information on international revenues.
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<PAGE> 11
TELEVISION INDUSTRY OVERVIEW
The United States 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 Universal, 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. Two of
the four major networks are owned by major motion picture companies. 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, 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 four major television networks currently
broadcasts approximately 22 hours of prime-time programming and approximately 30
hours of daytime programming each week. 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.
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
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<PAGE> 12
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.
Due to the major networks' ability to produce programming as well as distribute
it, the Company has decreased the amount of programming it provides to the major
U.S. networks. To position itself for the perceived growth in the overall
television 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 (HBO, Showtime or USA Network, for example), followed by 24 to 48 months
of basic cable (Romance Channel, Discovery Channel or A&E, for example), 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 United States media 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. 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 generally retains all other rights to the program and will usually
license certain rights to international broadcasters, enabling the Company to
recoup all, or a portion, of the production costs. In addition, the Company will
typically license additional domestic releases in other media to cover the
remainder, if any, of the production costs. 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
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<PAGE> 13
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 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.
International Co-Productions. The Company has entered into international
co-production arrangements in the past. 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, and Swing was a co-production with English participation.
Producer-for-Hire. In addition to developing and producing its own programs, the
Company on occasion is engaged as a producer-for-hire for a creative concept or
literary property owned by another person. During the late 1980s, as a producer
for hire, the Company produced 860 episodes of Divorce Court, 65 episodes of the
Night Games game show, the animated feature film Pound Puppies: The Legend of
Big Paw and the Family Dog episode of Steven Spielberg's Amazing Stories. This
programming is not included in the Company's library. 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.
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
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<PAGE> 14
undertaken, 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
1999, the type of program and the network or other medium where such programming
initially exhibited or will exhibit:
<TABLE>
<CAPTION>
Title Type of program First
Exhibition
- --------------------------------------------------------------------------------------
<S> <C> <C>
Killer App Pilot of a one hour Series Fox
Criminal Minds Pilot of a one hour Series CBS
Mambo Cafe Television movie Cable
Freeway II: Confessions of a Trickbaby Television movie Cable
The Last Producer Television movie Cable
</TABLE>
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
To develop successful television projects, 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.
The following table sets forth potential television programming in various
stages of development and the potential network or other medium to which each
may be delivered, if known:
Working Title Type of Program
- ------------------------------------------------------------------------
They Nest Cable Premiere
Vlad the Impaler Cable Premiere
Aliens Ate My Homework Movie-of-the-week (Showtime)
The Life She Left Behind Movie-of-the-week (CBS)
Coast Guard One Hour Drama (ABC)
Murder of Tut Movie-of-the-Week (Fox)
Death Cloud Movie-of-the-week (TBS)
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
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<PAGE> 15
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
United States Distribution. The Company's original and acquired 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. Programming is distributed
primarily to local international broadcasters and, where available, the home
video market, pay television and cable services. In December 1994, the Company
expanded its activities in international distribution by establishing an
international distribution subsidiary. 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
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. 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 December 15, 1999, 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:
<TABLE>
<CAPTION>
Title First Exhibition
- ---------------------------------------------------------------------------------------------------------
<S> <C>
ABOUT SARAH TELEVISION
ADVENTURE EXPRESS HOME VIDEO
ALIEN ABDUCTION: INTIMATE SECRETS HOME VIDEO
ALIEN ARSENAL HOME VIDEO
ALIENS IN THE WILD WILD WEST HOME VIDEO
ANDRE THEATRICAL
ANDROMINA: THE FANTASY PLANET HOME VIDEO
ANGEL EYES HOME VIDEO
ANGEL IN TRAINING HOME VIDEO
ANGEL OF PASSION HOME VIDEO
ANGRY DOGS TELEVISION
ANIMALYMPICS THEATRICAL
BABYSITTERS HOME VIDEO
BACKLASH: OBLIVION 2 HOME VIDEO
BARE EXPOSURE HOME VIDEO
BASIL THEATRICAL
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
BEACH BABES FROM BEYOND HOME VIDEO
BEOWULF THEATRICAL
BIKINI DRIVE-IN HOME VIDEO
BIKINI HOE DOWN HOME VIDEO
BIKINI SUMMER 3: SOUTH BEACH HEAT HOME VIDEO
BIKINI TRAFFIC SCHOOL HOME VIDEO
BILLY LONE BEAR TELEVISION
BIMBO MOVIE BASH HOME VIDEO
BLACK AND WHITE PAY CABLE
BLONDE HEAVEN HOME VIDEO
BLOOD DOLLS HOME VIDEO
BLUE ICE PAY CABLE
BODY STROKES HOME VIDEO
BONE DADDY PAY CABLE
BRAVE LITTLE TOASTER HOME VIDEO
BRAVE LITTLE TOASTER GOES TO MARS HOME VIDEO
BRAVE LITTLE TOASTER TO THE RESCUE HOME VIDEO
BUT I'M A CHEERLEADER THEATRICAL
CAB TO CANADA TELEVISION
CAFE SOCIETY PAY CABLE
CAGED HEARTS HOME VIDEO
CALL GIRL HOME VIDEO
CARNAL FATE HOME VIDEO
CAVE GIRL ISLAND HOME VIDEO
CELL BLOCK SISTERS HOME VIDEO
CENTERFOLD HOME VIDEO
CHRISTMAS WISH TELEVISION
CLOCKMAKER, THE HOME VIDEO
CLOSER, THE THEATRICAL
COMING UNGLUED TELEVISION
CONFESSIONS OF A LAPDANCER HOME VIDEO
CREEPS, THE HOME VIDEO
CRISS CROSS HOME VIDEO
CURSE OF THE PUPPETMASTER HOME VIDEO
DEAD HATE THE LIVING HOME VIDEO
DENIAL PAY CABLE
DESIRES OF INNOCENCE HOME VIDEO
DIARY OF LUST HOME VIDEO
DIFFERENT STROKES HOME VIDEO
DISH DOGS TELEVISION
DONOR, THE HOME VIDEO
DOUBLE EXPOSURE HOME VIDEO
DOUBLE TAP PAY CABLE
DRAGONBALL Z THEATRICAL
DRAGON WORLD: THE LEGEND CONTINUES HOME VIDEO
DREAM MASTER: THE EROTIC INVADER HOME VIDEO
DREAM WITH THE FISHES THEATRICAL
DUNGEON OF DESIRE HOME VIDEO
EGGS FROM 70 MILLION BC HOME VIDEO
ELECTRA HOME VIDEO
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
ELKE'S EROTIC NIGHTS HOME VIDEO
EROTIC BOUNDARIES HOME VIDEO
EROTIC HOUSE OF WAX HOME VIDEO
ESCORT, THE HOME VIDEO
ESCORT 2, THE HOME VIDEO
ESCORT 3, THE HOME VIDEO
EXCALIBUR KID, THE HOME VIDEO
EXOTIC TIME MACHINE HOME VIDEO
FATAL COMBAT HOME VIDEO
FEMALIEN HOME VIDEO
FEMALIEN 2 HOME VIDEO
FLESH SUITCASE PAY CABLE
FORBIDDEN GAMES HOME VIDEO
FORBIDDEN GAMES II HOME VIDEO
FORBIDDEN PASSIONS HOME VIDEO
FOREVER LOVE TELEVISION
FREEWAY PAY CABLE
FREEWAY II: CONFESSIONS OF A TRICKBABY HOME VIDEO
FUGITIVE RAGE HOME VIDEO
GALAXY GIRLS HOME VIDEO
GIRL PAY CABLE
GIRLS OF SURRENDER CINEMA HOME VIDEO
GRAVE, THE PAY CABLE
HARBINGER TELEVISION
HARD BOUNTY HOME VIDEO
HEAD OF THE FAMILY HOME VIDEO
HEATWAVE HOME VIDEO
HIDDEN BEAUTIES HOME VIDEO
HIDEOUS HOME VIDEO
HOLLYWOOD MADAM (aka LADY IN WAITING) PAY CABLE
HOTEL EXOTICA HOME VIDEO
HOTTEST BID, THE HOME VIDEO
HUMAN PETS HOME VIDEO
HUSBAND, WIFE, AND LOVER PAY CABLE
IF I DIE BEFORE I WAKE PAY CABLE
ILLICIT DREAMS HOME VIDEO
ILLICIT DREAMS II HOME VIDEO
ILLUSIONS OF SIN HOME VIDEO
IMPROPER CONDUCT HOME VIDEO
INCREDIBLE GENIE, THE HOME VIDEO
INDECENT BEHAVIOR 3 HOME VIDEO
INDECENT BEHAVIOR 4 HOME VIDEO
INNER ACTION HOME VIDEO
INNOCENCE BETRAYED HOME VIDEO
INSATIABLE WIVES HOME VIDEO
INVISIBLE HOME VIDEO
IRRESISTIBLE IMPULSE HOME VIDEO
JACK-O HOME VIDEO
JOHNNY MYSTO: BOY WIZARD HOME VIDEO
JOURNEY TO THE MAGIC CAVERN HOME VIDEO
</TABLE>
17
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<TABLE>
<S> <C>
JUNGLE BOOK, THE: SEARCH FOR THE LOST TREASURE HOME VIDEO
KILLER EYE, THE HOME VIDEO
KISS AND TELL TELEVISION
KISSING A DREAM HOME VIDEO
KRAA! THE SEA MONSTER HOME VIDEO
LA CUCARACHA TELEVISION
LADY IN BLUE HOME VIDEO
LAP DANCER HOME VIDEO
LAST BATTLE FOR THE UNIVERSE HOME VIDEO
LAST PRODUCER, THE CABLE
LAST TIME I COMMITTED SUICIDE, THE THEATRICAL
L.I.P. SERVICE HOME VIDEO
LITTLE GHOST HOME VIDEO
LITTLE MISS MAGIC HOME VIDEO
LONG WEEKEND TELEVISION
LOVE ME TWICE HOME VIDEO
LOVE ME TWICE 2 HOME VIDEO
LOVER'S LEAP HOME VIDEO
LURED INNOCENCE TELEVISION
LURID TALES OF THE CASTLE QUEEN HOME VIDEO
LURKING FEAR HOME VIDEO
MAMBO CAFE THEATRICAL
MANDROID HOME VIDEO
MASSEUSE HOME VIDEO
MASSEUSE 3 HOME VIDEO
MAXIMUM REVENGE HOME VIDEO
MIAMI MODELS HOME VIDEO
MICROSCOPIC BOY, THE HOME VIDEO
MIDAS TOUCH, THE HOME VIDEO
MIDNIGHT CONFESSIONS HOME VIDEO
MIDNIGHT TEASE II HOME VIDEO
MIDNIGHT TEMPTATIONS HOME VIDEO
MIDNIGHT TEMPTATIONS II HOME VIDEO
MILO TELEVISION
MINDRIPPER, THE PAY CABLE
MISTRESS CLUB HOME VIDEO
MISTRESS OF SEDUCTION HOME VIDEO
MURDERCYCLE HOME VIDEO
MY SANTA, MY DAD HOME VIDEO
MYSTERIOUS MUSEUM HOME VIDEO
MYSTERY MONSTERS HOME VIDEO
NAKED SOULS HOME VIDEO
NEMESIS-CRY OF ANGELS HOME VIDEO
NIGHTMARE STREET TELEVISION
NOOSE THEATRICAL
O LITA 2000 HOME VIDEO
OBLIVION HOME VIDEO
ONE HELL OF A GUY TELEVISION
ONE MAN'S HERO THEATRICAL
PASSION'S DESIRE HOME VIDEO
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
PASSION OBSESSION HOME VIDEO
PERFECT GETAWAY TELEVISION
PETTICOAT PLANET HOME VIDEO
PHANTOM LOVE HOME VIDEO
PHANTOM TOWN HOME VIDEO
PHOENIX THEATRICAL
PICKING UP THE PIECES THEATRICAL
PINOCCHIO, THE ADVENTURES OF THEATRICAL
PLANET OF THE DINO-KNIGHTS HOME VIDEO
PLANET PATROL HOME VIDEO
PLEASURE IN PARADISE HOME VIDEO
PLEASURECRAFT HOME VIDEO
POSSUMS HOME VIDEO
POWDER BURN HOME VIDEO
PRELUDE TO LOVE HOME VIDEO
PRIVATE LESSONS II HOME VIDEO
PRIVATE OBSESSION HOME VIDEO
PROFESSIONAL AFFAIR HOME VIDEO
RAPID ASSAULT HOME VIDEO
REBECCA'S SECRET HOME VIDEO
RED RIBBON BLUES PAY CABLE
RETRO-PUPPETMASTER HOME VIDEO
RINGMASTER THEATRICAL
SAVIOR THEATRICAL
SCORING HOME VIDEO
SECRET KINGDOM, THE HOME VIDEO
SEDUCTION OF INNOCENCE HOME VIDEO
SENSATIONS HOME VIDEO
SENSUOUS SUMMER, A HOME VIDEO
SERPENT'S LAIR PAY CABLE
SEXUAL IMPULSE HOME VIDEO
SEXUAL ROULETTE HOME VIDEO
SHADOWDANCER HOME VIDEO
SHANDRA: THE JUNGLE GIRL HOME VIDEO
SHAPESHIFTER HOME VIDEO
SHOOTER, THE PAY CABLE
SHRIEK HOME VIDEO
SHRUNKEN CITY, THE HOME VIDEO
SHRUNKEN HEADS HOME VIDEO
SINFUL INTRIGUE HOME VIDEO
SKYJACKED TELEVISION
SMOOTH TALKER TELEVISION
SPIRIT OF THE NIGHT HOME VIDEO
ST. FRANCISVILLE EXPERIMENT, THE THEATRICAL
STOLEN HEARTS HOME VIDEO
STORM SWEPT HOME VIDEO
STORMY NIGHTS HOME VIDEO
STREET LAW HOME VIDEO
STRIPSHOW HOME VIDEO
SUBSPECIES: THE AWAKENING HOME VIDEO
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
SUSAN'S PLAN PAY CABLE
SWING THEATRICAL
TALISMAN HOME VIDEO
TARGET OF SEDUCTION HOME VIDEO
TAXMAN THEATRICAL
TEEN KNIGHT HOME VIDEO
TEEN SORCERY HOME VIDEO
TEEN TASK FORCE HOME VIDEO
TEENAGE SPACE VAMPIRES HOME VIDEO
TEST TUBE TEENS FROM THE YEAR 2000 HOME VIDEO
THE BRAVE TELEVISION
THE KIDNAPPING TELEVISION
THE LAST LIE TELEVISION
THE POET TELEVISION
THE STAIRCASE TELEVISION
TIMEGATE: TALES OF THE SADDLE TRAMPS HOME VIDEO
TOTALLY EXPOSED HOME VIDEO
TRAINSPOTTING THEATRICAL
TRAPPED ON TOY WORLD HOME VIDEO
TROPICAL TEASE HOME VIDEO
ULTIMATE TABOO HOME VIDEO
UNDER LOCK AND KEY HOME VIDEO
UNDER THE GUN HOME VIDEO
UNINHIBITED HOME VIDEO
UNWED FATHER TELEVISION
VAMPIRE JOURNALS HOME VIDEO
VERONICA 2030 HOME VIDEO
VERY BAD THINGS THEATRICAL
VICE GIRLS HOME VIDEO
VIRGINS OF SHERWOOD FOREST HOME VIDEO
VIRTUAL DESIRE HOME VIDEO
VIRTUAL ENCOUNTERS HOME VIDEO
VIRTUAL ENCOUNTERS II HOME VIDEO
VOYEUR, THE HOME VIDEO
WAGER OF LOVE HOME VIDEO
WAITING FOR SUNSET PAY CABLE
WAITING FOR THE MAN PAY CABLE
WHOLE WIDE WORLD THEATRICAL
WITCHOUSE HOME VIDEO
X-RAY KID, THE HOME VIDEO
YOUNGER & YOUNGER THEATRICAL
ZARKORR! THE INVADER HOME VIDEO
ZORRITA: PASSION'S AVENGER HOME VIDEO
</TABLE>
Television Movies and Mini-Series
Title First Exhibition
- --------------------------------------------------------------------------------
A Husband, A Wife and A Lover CBS
Aladdin International
Candles in the Dark Family Channel
Carolina Skeletons NBC
Child in the Night CBS
City Boy CBS
20
<PAGE> 21
Confessions: Two Faces of Evil NBC
Dangerous Intentions CBS
Echo ABC
Every Woman's Dream CBS
Family Pictures (4 hours) ABC
Father and Son: Dangerous Relations NBC
Fire in the Dark CBS
Getting Gotti: The Diane Giacalone Story CBS
Glory Years (6 hours) HBO
Good Cops, Bad Cops NBC
Innocent Victims (4 hours) NBC
Jack Reed: A Search For Justice NBC
Jack Reed: A Killer Amongst Us NBC
Jack Reed: Death and Vengeance NBC
JFK: Reckless Youth (4 hours) ABC
Kiss Shot CBS
Lady Killer CBS
Liberace: Behind the Music CBS
Murder C.O.D NBC
Overruled NBC
Princess in Love CBS
Sins of the Mother CBS
Sweet Bird of Youth NBC
Then There Were Giants (4 hours) NBC
To Save the Children CBS
Unlikely Angel CBS
Your Mother Wears Combat Boots NBC
Television Series/Game Shows
<TABLE>
<CAPTION>
Episodes
Title Produced First Exhibition
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
1st and Ten 80 HBO
Could It Be a Miracle 24 Syndication
Cracker 16 ABC
Erotic Confessions 39 HBO
Gun 6 ABC
Harts of the West 15 CBS
Heroes: Made in the USA 38 Syndication
Mapletown 39 Syndication
Mike Hammer 26 Syndication
Mowgli: The New Adventures of The Jungle Book 26 Fox Kids Worldwide
Pigasso's Place 13 Syndication
Profiles-Unauthorized Biographies 4 A&E
Relatively Speaking 90 Syndication
Sweating Bullets 66 CBS
Teen Wolf 21 CBS
The Barbara De Angelis Show 70 CBS
Trial Watch 118 NBC
Would You Believe It? 13 Discovery Channel
</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 programs through joint ventures and
partnerships. The Company markets 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 50%
owned partnership TVFirst. TVFirst markets recorded Christian music sung by
contemporary Christian artists. From October 1995 through September 1999 music
revenues have exceeded $12,900,000.
21
<PAGE> 22
The Company sold its interest in TVFirst in October 1999.
The Company currently holds 50% ownership interests in BLT Ventures, which
produced the two sequels to the animated feature Brave Little Toaster, Cracker
Company LLC, which produced the network television series Cracker, Swing
Ventures, which produced the feature Swing, Trick Productions which produced the
feature Freeway II: Confessions of A Trickbaby, and a 25% interest in Grendel
Productions LLC, which produced the feature Beowulf.
The Company currently holds a 55.2% ownership interest in US SEARCH.com, an
82.5% ownership interest in KLC/New City, and an 80% ownership interest in Gran
Canal Latino, each as previously described.
COMPETITION
In the film and television program business, the Company competes against many
vertically integrated production and distribution businesses that have
substantially greater resources than the Company, and smaller independent
companies of a similar size to the Company. See "Motion Picture Industry
Overview" above and "Government Regulations" below. Due to the artistic quality
of the product produced, consumer acceptance of individual productions rather
than distributor brand name tend to generate revenues.
The individual reference service industry is highly competitive and highly
fragmented. Currently, US SEARCH.com's primary competitors in the area of
individual locator searches include major telephone companies and other third
parties who publish free printed or electronic directories, private
investigation firms and a variety of other companies. Their primary competitors
for individual profile report search services include these companies, as well
as LEXIS-NEXIS, a division of Reed Elsevier Inc., The Dun & Bradstreet
Corporation, Reuters Limited, Avert, Inc., Choice Point, KnowX.com, a division
of DBT Online, inc., the primary data supplier to US SEARCH.com, The
Kroll-O'Gara Company, Pinkerton and the Proudfoot Reports Division of ASI
Solutions, Inc. Many of these companies have greater financial and marketing
resources than US SEARCH.com does and may have significant competitive
advantages through other lines of business and existing business relationships.
US SEARCH.com also competes with online services and other Web site operators,
as well as traditional media such as television, radio and print for a share of
advertisers' total advertising space or programs. US SEARCH.com does not
presently consider major Internet search directories or Web sites as
competitors. In fact, US SEARCH.com views them as lead generators through their
search directories and other services, and presently benefits from strategic
advertising arrangements with several of the major Internet portals and Web
sites. However, there is no guarantee that these Web sites, many of which have
financial and other resources greater than those of US SEARCH.com will not
acquire businesses that compete with or introduce new products and services in
direct competition with US SEARCH.com. More generally, competitors or potential
competitors of US SEARCH.com may develop services that are superior, are less
expensive or achieve greater market acceptance.
BUSINESS CONCENTRATION AND DEPENDENCE
The Company conducts its film and television business world-wide, with no
concentrations in one or a few geographic areas, or to one or a few individual
customers the loss of whom would materially adversely affect Company results.
GOVERNMENT REGULATIONS
The United States Federal Communications Commission ("FCC") repealed its
financial interest and syndication rules in September 1995. Those FCC rules,
which had been adopted in 1970 to limit television network control over
television programming and thereby foster the development of diverse programming
sources, restricted the ability of U.S. television networks ABC, CBS and NBC to
own and syndicate television programming. As a result of the repeal of the FCC's
financial interest and syndication rules, there has been an increase in internal
television network production of programming for their own use. This has placed
additional competitive pressures on program suppliers, such as the Company.
22
<PAGE> 23
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 allows for parental blocking of violent,
sexually-explicit or indecent programming based on a rating for any given
program that is broadcast along with the program. The FCC was 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
established its own voluntary ratings system by February 1997. The majority of
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
service, subject to certain regulatory requirements, and allow for cable
companies to offer local exchange telephone service, subject to certain
regulatory requirements.
The full impact on the Company of the changes brought about by the 1996 Act,
including the new content ratings guidelines and 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 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. These alliances have been further encouraged by
recent FCC rule revisions which permit greater consolidation of ownership of
television stations on the national level by allowing a single television
station licensee to own television stations reaching up to 35% of the nation's
television households and which permit a single owner to own two television
stations in a single market.
The FCC has also adopted rules that require certain programs to be broadcast
with closed captioning for the hearing impaired and the Company may have to make
additional closed-captioning expenditures to ensure the value of its library for
television licensing. Further, the FCC is considering a proposal to require that
programs be accompanied by a video description of settings and actions not
otherwise in the dialogue for the visually impaired which may result in the
Company being required to further enhance its library for future television
licensing.
Recently enacted legislation requires direct broadcast satellite operators to
carry certain local broadcast channels. Such legislation may limit the number of
pay-per-view and other niche channels available for the Company's programming.
The FCC is considering whether to compel cable systems to carry all the digital
signals that a local station broadcasts. Since local stations will be able to
broadcast multiple signals, this may result in decreased availability of open
cable channels for pay-per-view and other niche channels. If this occurs, the
Company may face increased competition for a limited supply of pay-per-view and
other niche channels for distribution.
In international markets, the Company's programming is occasionally subject to
domestic 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 connection with certain services provided or intended to be provided by US
SEARCH.com, particularly individual background checks used for certain purposes,
US SEARCH.com may be considered a "consumer reporting agency" as such term is
used in the Fair Credit Reporting Act, as amended ("FCRA"), and, therefore, may
be required to comply with the various consumer credit disclosure requirements
of the FCRA. While US SEARCH.com intends to comply with the FCRA as a "consumer
reporting agency" in connection with providing individual background checks for
employment purposes, the procedures which are implemented by the Company may be
deemed to be insufficient. In addition, US SEARCH.com's limited procedures to
date to avoid being regulated as a consumer reporting agency by attempting to
restrict its individual background check service to permissible purposes (which
do not permit use for employment purposes), may not be sufficient. Willful or
negligent noncompliance with the FCRA, including with respect to US SEARCH.com's
prior operations, could result in civil liability to the subjects of reports.
Also, the Americans with Disabilities Act of 1990 ("ADA") contains
pre-employment inquiry and confidentiality restrictions designed to prevent
discrimination against individuals with disabilities in the hiring process. The
use by US SEARCH.com's customers of certain information sold to them is also
regulated, both in respect to the type of information and the timing of its use
by the ADA. Similarly, there are a number of states which have laws similar to
the FCRA, and some states which have laws
23
<PAGE> 24
more restrictive than the ADA. Further, many state laws limit the type of
information which can be made available to the public. In addition, certain
state laws may require US SEARCH.com to be licensed in order to conduct its
background check business within those states. Customers in such states can
access US SEARCH.com's Web site, which may subject US SEARCH.com to the laws of
such states. There is no assurance that US SEARCH.com will not be subject to the
laws of states in which US SEARCH.com has no contacts other than through
residents of such state ordering services through US SEARCH.com's Web site and
US SEARCH.com mailing, faxing or e-mailing reports to the resident within such
state. In the event US SEARCH.com is determined to have violated any of the
federal or state laws referred to herein, US SEARCH.com could be subject to
substantial civil and/or criminal liability which could have a material adverse
effect on the Company's business, financial condition, results of operations and
prospects.
EMPLOYEES
The Company and its subsidiaries had approximately 265 full-time and 45
part-time employees as of December 10, 1999. The Company's executive offices are
located at 11601 Wilshire Boulevard, Suite 2100, Los Angeles, California 90025,
and its telephone number is (310) 481-2000.
The Company has employment contracts with certain key executives due to its
reliance upon them for critical functions. The Company 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. No
employees of the Company are represented by unions, although staff temporarily
employed for specific film and television program productions are often so
represented. Management believes that employee relations are wholly
satisfactory.
24
<PAGE> 25
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 recently extended through June 2005. The minimum annual rent
under the lease currently is $528,000 but will increase in fiscal 2000 and
beyond. The Company's subsidiary, US SEARCH.com, leases approximately 8,000
square feet of office space in Beverly Hills, California under a lease agreement
through February 2001. The minimum annual rent under the lease is $188,000. US
SEARCH.com recently entered into a five year lease for approximately 52,500
square feet of office space in Marina Del Rey, California commencing in December
1999. The minimum annual rent under that lease will be $1,006,000.
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, results of operations or liquidity.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 prices for the Common Stock, as reported on the NNM, for the
periods indicated:
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
------------ ----------------------
<S> <C> <C>
FISCAL 1998
First Quarter (ended December 31, 1997).................................................. $5.25 $2.44
Second Quarter (ended March 31, 1998).................................................... $3.19 $1.75
Third Quarter (ended June 30, 1998)...................................................... $3.78 $1.75
Fourth Quarter (ended September 30, 1998)................................................ $5.13 $2.44
FISCAL 1999
First Quarter (ended December 31, 1998) $8.38 $1.63
Second Quarter (ended March 31, 1999) $16.00 $7.00
Third Quarter (ended June 30, 1999) $21.63 $4.88
Fourth Quarter (ended September 30, 1999) $8.75 $3.03
FISCAL 2000
First Quarter (through December 14, 1999)................................................ $5.63 $3.56
</TABLE>
On December 14, 1999, the last sale price for the Common Stock as reported on
the NNM was $3.97. On November 30,
25
<PAGE> 26
1999, there were approximately 596 record holders
RECENT SALES OF UNREGISTERED SECURITIES; USES OF PROCEEDS
None.
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 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 PricewaterhouseCoopers LLP,
independent public accountants, whose report with respect to the consolidated
balance sheets of the Company as of September 30, 1999 and 1998, and the related
consolidated statements of operations, cash flows and stockholders' equity for
the years ended September 30, 1999 and 1998, and by KPMG LLP, independent public
accountants, whose report with respect to the consolidated statements of
operations, cash flows and stockholders' equity of the Company for the year
ended September 30, 1997 each appears elsewhere in this Annual Report. On
October 20, 1998, the Company changed its independent public accountants.
26
<PAGE> 27
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------
(in thousands, except per share data)
1999 (1) 1998 (1) 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues ..................................... $ 49,890 $ 76,130 $ 54,746 $ 80,157 $ 20,407
Costs relating to operating revenues ................... (39,666) (61,627) (52,084) (70,648) (17,404)
Selling, general and administrative expenses ........... (31,186) (12,028) (4,023) (3,096) (3,388)
Provision for doubtful accounts ........................ (2,959) (2,118) (1,310) (499) (450)
-------- -------- -------- -------- --------
Earnings (loss) from operations ........................ (23,921) 357 (2,671) 5,914 (835)
Equity in earnings (losses) of unconsolidated entities
(520) (330) 2,189 -- --
Gain on sale of interest in subsidiary ................. 13,148 -- -- -- --
Gain on issuance of stock by subsidiary ................ 21,018 -- -- -- --
Interest and dividend income ........................... 687 79 163 198 300
Interest expense ....................................... (7,782) (6,261) (4,027) (4,027) (3,409)
Interest expense related to bridge note financing ...... -- -- -- (943) --
-------- -------- -------- -------- --------
Earnings (loss) before minority interest, income
taxes and extraordinary item ......................... 2,630 (6,155) (4,346) 1,142 (3,944)
Minority interest in subsidiary net losses ............. 2,567 -- -- -- --
-------- -------- -------- -------- --------
Earnings (loss) before income taxes and extraordinary
item ................................................. 5,197 (6,155) (4,346) 1,142 (3,944)
Income taxes ........................................... (726) (181) (23) (47) (31)
-------- -------- -------- -------- --------
Earnings (loss) before extraordinary item .............. 4,471 (6,336) (4,369) 1,095 (3,975)
Extraordinary item: costs associated with repayment
of credit facility ................................... -- -- -- (365) --
-------- -------- -------- -------- --------
Net earnings (loss) .................................... $ 4,471 ($ 6,336) $ (4,369) $ 730 $ (3,975)
======== ======== ======== ======== ========
Basic earnings (loss) per share (2):
Before extraordinary item ........................ $ .38 $ (.69) $ (.49) $ .16 $ (.75)
Extraordinary item .............................. -- -- -- (.05) --
-------- -------- -------- --------
Net earnings (loss) ............................. $ .38 $ (.69) $ (.49) $ .11 $ (.75)
======== ======== ======== ======== ========
Diluted earnings (loss) per share (2):
Before extraordinary item ........................ $ .36 $ (.69) $ (.49) $ .16 $ (.75)
Extraordinary item
Net
-- -- -- (.05) --
-------- -------- -------- -------- --------
$ .36 $ (.69) $ (.49) $ .11 $ (.75)
======== ======== ======== ======== ========
Weighted average common shares outstanding (2) 11,755 9,181 8,959 6,668 5,286
======== ======== ======== ======== ========
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------
(In thousands)
1999 (1) 1998 (1) 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents (3) ........... $ 36,434 $ 3,309 $ 16,791 $ 11,636 $ 4,301
Accounts receivable, net ................. 30,030 40,418 27,696 22,885 7,864
Film and television program costs, net ... 91,499 73,773 68,507 58,463 73,716
Investments in unconsolidated subsidiaries 12,045 10,798 5,326 1,495 --
Total assets ............................. 185,115 137,105 124,368 100,152 88,952
Notes payable and other indebtedness ..... 85,194 84,677 74,278 53,520 46,143
Total liabilities ........................ 112,790 111,639 93,232 65,902 69,745
Stockholders' equity ..................... 60,745 25,466 31,136 34,250 19,207
======== ======== ======== ======== ========
</TABLE>
27
<PAGE> 28
- -----------
(1) In November 1997 the Company acquired a controlling interest in US
SEARCH.com. In June 1999 US SEARCH.com completed an initial public offering
in which the Company sold a portion of its shareholdings as well. Because US
SEARCH.com has incurred net losses since acquisition and the Company funded
100% of such losses through its initial public offering, the Company
recognized 100% of those incurred net losses in its consolidated financial
statements through June 1999. Subsequent to the public offering, the Company
has recognized in its consolidated balance sheet a minority interest in the
net equity of US SEARCH.com, and has recognized in its consolidated
statements of operations a minority interest in the net losses of US
SEARCH.com proportionate to the minority ownership. In April 1999 the
Company acquired a minority interest in The Harvey Entertainment Company.
(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.
(3) $2,088 of cash and cash equivalents are restricted deposits that are
collateral for a sale/leaseback transaction and for certain production loans
for 1999 ($1,988 for 1998, $1,609 for 1997, $419 for 1996 and $1,162 for
1995), $2,000 of cash and cash equivalents for 1999 are restricted deposits
of subsidiary US SEARCH.com, and $734 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 ($66 for 1998, $105 for 1997, $4,126 for
1996 and none for 1995).
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 in films licensed for release domestically;
from the production and distribution of television programming for the major
domestic television networks, basic and pay cable television and first-run
syndicators; and from the licensing of rights to films and television programs
in international markets. Major domestic television networks are reducing the
volume of independently produced television programming. The Company generally
finances all or a substantial portion of the budgeted production costs of films
and television programming it produces through advances obtained from
distributors and borrowings secured by domestic and international licenses. The
Company typically retains rights to be exploited in future periods or in
additional markets or media. 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. In
November 1997, the Company acquired control of US SEARCH.com, Inc., a leading
provider of fee-based people search and other customized individual reference
services. In February 1998 the Company established KL/Phoenix, an 80% owned
venture, which distributes film and television product in Latin America. In
November 1998 the Company established Gran Canal Latino, an 80% owned venture
which broadcasts Spanish and Portuguese language programming in the Americas.
The Company's revenues and results of operations are significantly affected by
accounting policies required for the industries in which it operates (see Note 1
of Notes to Consolidated Financial Statements). Among the more significant
policies are the following:
Film and Television Programs. 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 for the program bear to management's estimate of
anticipated total remaining gross revenues for such film or program from all
sources. When management reduces its estimates of the future gross revenues for
a particular product, a significant write-down and a corresponding decrease in
the Company's earnings could result. See "Results of Operations" Below. Film and
television program costs, net of accumulated amortization, increased to
$91,499,000 at September 30, 1999 from $73,773,000 at September 30, 1998. Film
and television program costs in process or development at September 30, 1999
increased to $20,472,000 from $10,570,000 at September 30, 1998. See "Results of
Operations - Comparison of Fiscal Years Ended
28
<PAGE> 29
September 30, 1999 and 1998" below.
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 may materially affect 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 film and television program mix during a 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.
Distributor production advances or license fees received prior to delivery or
completion of a program are 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 (losses) as revenues, can significantly affect comparability
of net earnings. See "Results of Operations" below.
US Search.com. In November 1997, the Company acquired an 80% interest of US
SEARCH.com, a leading provider of fee-based people search and other customized
individual reference services. In June 1999 the Company sold shares of US
SEARCH.com and US SEARCH.com completed an initial public offering which resulted
in the Company's ownership position declining to 55.2%. Since its acquisition,
US SEARCH.com's financial position and results of operations have been
consolidated in the Company's financial statements. The consolidation of Search
has resulted in a substantial change in the presentation of the Company's
results of operations due to the inclusion of this new business segment. Since
such acquisition, the Company has consolidated $23,616,000 of revenues and
$15,291,000 of net losses attributable to US SEARCH.com. US SEARCH.com has
significantly higher gross profit margins than the film and television program
segment. Management's strategy is to enhance US SEARCH.com's brand awareness and
market position through increased advertising and distribution and marketing
alliances. As an expected result of increases in revenues trailing such
increases in expenditures, the Company believes that US SEARCH.com will continue
to adversely affect the Company's consolidated results of operations for the
foreseeable future. See Note 10 of Notes to Consolidated Financial Statements.
Gran Canal Latino. In November 1998, the Company launched Gran Canal Latino
("GCL"), its first satellite channel. GCL broadcasts 24 hours a day, with a
selection of films mostly from Spain. GCL's satellite transmission reaches the
United States and all of Latin America including Mexico. Through November 30,
1999, GCL's cable distributors had a base of 1,300,000 subscribers including its
multiple system operators. Under a distribution agreement with Enrique Cerezo,
the Company is broadcasting selections from approximately 1,500 Spanish language
movie titles.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND 1998
The following tables provide the dollar and percentage changes in operating
results by segment and in total for fiscal 1999 versus fiscal 1998:
<TABLE>
<CAPTION>
$000 %
---------------------------------------------- -------------------------------------
Film Film
and TV Search Consol. and TV Search Consol.
------------- ------------ ------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $(34,118) $7,878 $(26,240) (50)% 100% (34)%
Costs relating to operating revenues $(24,812) $2,851 $(21,961) (43)% 79% (36)%
Gross profit $(9,306) $5,027 $(4,279) (91)% 118% (30)%
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Selling, general and administrative
expenses $4,168 $14,990 $19,158 91% 202% 159%
Provision for doubtful accounts $390 $451 $841 28% 61% 40%
Earnings (loss) from operations $(13,864) $(10,414) $(24,278) NM 268% NM
</TABLE>
- -----------------------
NM - not meaningful
The Company's operating revenues for fiscal 1999 decreased ($26,240,000) (34%)
from fiscal 1998. The decrease resulted from a $(34,118,000) or (50%) decline in
film and television licensing revenues due primarily to a decline in the
delivery and/or availability of films and television programs. Television
program revenues declined $18,000,000 as episodic deliveries to networks
concluded in fiscal 1998. Also seven larger feature films were delivered during
fiscal 1999 in comparison to 25 moderate-sized feature films delivered or
available in fiscal 1998. Partially offsetting this decrease was a $7,878,000 or
100% increase in revenues from US SEARCH.com versus 1998. This increase was
attributable to increased marketing and advertising expenditures. See Note 10 to
the consolidated financial statements for revenue information by territory and
for significant customers.
The Company recognized $15,747,000 (32%) of revenues during the fiscal 1999 from
US SEARCH.com. The Company recognized $14,081,000 (28%) of revenues during the
fiscal 1999 from the delivery and/or availability of seven feature films,
including Ringmaster, starring Jerry Springer which was released in the United
States by Artisan Entertainment, and One Man's Hero starring Tom Berenger, which
was released in the United States by MGM. The Company recognized $11,548,000
(23%) of revenues in fiscal 1999 from continuing licenses of product from the
Company's library to domestic cable channel operators through its majority-owned
subsidiary KLC/New City, and through international sub-distributors including
KL/Phoenix. Revenues of $6,878,000 (14%) came from television feature or pilot
productions. Revenues of $1,135,000 (2%) came from producer fees on third party
productions. Revenues of $1,306,000 (3%) came from deliveries in the Company's
family division of direct-to-video product.
In various stages of production for the Company's fiscal 2000 distribution slate
are Picking Up The Pieces starring Woody Allen, The St. Francisville Experiment,
They Nest starring Dean Stockwell, John Savage and Thomas Collabro, and Vlad the
Impaler.
Costs relating to operating revenues during fiscal 1999 decreased $21,961,000
(36%) as compared to fiscal 1998. As a percentage of operating revenues, costs
relating to operating revenues were 80% for fiscal 1999 in comparison to the 81%
rate for fiscal 1998. Film and television costs declined 43%, which was less
than the revenue decline principally because management reduced its estimates of
likely future revenues on several released titles in fiscal 1999. US SEARCH.com
costs increased 79%, which was less than the revenue increase as
Internet-sourced revenues were less costly to provide to consumers.
Gross profit during fiscal 1999 decreased ($4,279,000) (30%) from fiscal 1998.
As a percentage of operating revenues, gross profit was 20% for fiscal 1999,
slightly more than the 19% rate for fiscal 1998. Film and television gross
profit amounts declined 91%, principally due to reduced operating revenues and
management reducing its estimates of likely future revenues on several released
titles in fiscal 1999. US SEARCH.com gross profit amounts increased 118%, as
Internet-sourced revenues were less costly to provide to consumers.
Selling, general and administrative expenses increased $19,158,000 or 159% for
fiscal 1999 from fiscal 1998. The increase in such expenses is principally due
to a $10,392,000 (200%) increase in US SEARCH.com advertising expenses and a
$3,392,000 (122%) increase in US SEARCH.com administrative expenses. As a
percentage of US SEARCH.com's net revenues, advertising and marketing expenses
increased to approximately 99% for fiscal 1999, from approximately 67% for
fiscal 1998. This increase is primarily attributable to an increase in the level
of Internet-based advertising. As a percentage of net revenues, general and
administrative expenses increased to approximately 64% for fiscal 1999, from
approximately 16% for fiscal 1998. This increase in general and administrative
expenses in absolute dollars is primarily attributable to the cost associated
with the hiring of additional management and administrative personnel in 1999.
Also included in US SEARCH.com's 1999 selling, general and administrative
expenses is $1,834,000 of US SEARCH.com
30
<PAGE> 31
non-cash director and officer stock option costs in connection with options
granted in fiscal 1999. No options were granted in fiscal 1998. Also included in
fiscal 1999 expenses are $1,511,000 of bonuses to the Co-Chairmen and Co-Chief
Executive Officers, the President and Chief Operating Officer, and the Chief
Financial Officer. No such bonuses were included in fiscal 1998 expenses.
31
<PAGE> 32
The provisions for doubtful accounts increased $841,000 or 40% during
fiscal 1999 principally due to a $390,000 increase in such provisions for film
and television license receivables based upon estimated collections, and a
$451,000 increase in such provisions for US SEARCH.com. The US SEARCH.com
increase is primarily due to increases in the accruals for potential chargebacks
regarding uncollectible consumer checks, credit card charges and 900 number
telephone sales.
During fiscal 1999 the Company recognized a $21,018,000 pre-tax gain on the
issuance of stock by its subsidiary, US SEARCH.com. This resulted from the
subsidiary's initial public offering on June 25, 1999, in which new shareholders
invested an amount per share substantially in excess of the Company's per-share
investment in the subsidiary, resulting in a substantial increase in the
subsidiary's net worth. The gain represents the increase in the Company's
revised proportionate share of the subsidiary's net equity. No comparable
transaction occurred in fiscal 1998.
During fiscal 1999 the Company recognized a $13,148,000 pre-tax gain on sale to
the public of 1,500,000 shares of its holdings in its subsidiary US SEARCH.com
in conjunction with the initial public offering by the subsidiary. No comparable
transaction occurred in fiscal 1998.
Interest and dividend income increased $608,000 (770%) during fiscal 1999 due to
earnings on invested proceeds from the US SEARCH.com initial public offering and
dividends received from the investment in The Harvey Entertainment Company
during fiscal 1999.
Interest expense during fiscal 1999 increased $1,521,000. The 24% increase was
principally attributable to the increased average levels of borrowing in fiscal
1999 and an increase in the average interest rate. Total indebtedness for
borrowed money increased 1% to $85,194,000 at September 30, 1999 from
$84,677,000 at September 30, 1998.
Earnings before income taxes of $5,197,000 were reported for fiscal 1999, versus
a loss before income taxes of ($6,155,000) for fiscal 1998.
The Company's effective income tax rate was 13% for fiscal 1999 compared to an
effective income tax rate of 3% for fiscal 1998. Income tax expense for fiscal
1999 consisted of alternative minimum taxes and state income taxes. Through
September 30, 1999 the Company and US SEARCH.com had combined estimated Federal
and state net operating loss carryforwards totaling $35,368,000 and $9,198,000,
respectively. The Federal net operating loss carryforwards begin to expire in
fiscal 2008. The state net operating loss carryforwards begin to expire in
fiscal 2004. Due to the sale of US SEARCH.com common stock in connection with
the subsidiary's initial public offering in June 1999, effective July 1999 US
SEARCH.com taxable income or loss will not be consolidated in the Company's
income tax returns. As a result, in future periods taxable income or loss could
vary significantly from financial statement earnings or losses before income
taxes.
The Company reported net earnings of $4,471,000, or $0.38 per basic share and
$0.36 per diluted share, for fiscal 1999 as compared to a net loss of
($6,336,000), or losses of ($0.69) per basic and diluted share, for fiscal 1998.
Weighted number of common shares for the compared year were 11,755,000 (basic)
and 12,696,000 (diluted) in fiscal 1999 and 9,181,000 (basic and diluted) in
fiscal 1998.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1997
The following tables provide the dollar and percentage changes in operating
results by segment and in total for fiscal 1998 versus fiscal 1997:
32
<PAGE> 33
<TABLE>
<CAPTION>
$000 %
------------------------------------------ --------------------------------------
Film Film
and TV Search Consol. and TV Search Consol.
----------- ----------- ------------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $13,515 $7,869 $21,384 25% NM 39%
Costs relating to operating revenues $5,954 $3,589 $9,543 11% NM 18%
Gross profit $7,561 $4,280 $11,841 284% NM 445%
Selling, general and administrative expenses
$574 $7,431 $8,005 14% NM 199%
Provision for doubtful accounts $73 $735 $808 6% NM 62%
Earnings (loss) from operations $6,914 $(3,886) $3,028 259% NM 113%
</TABLE>
- -----------------------
NM - not meaningful
The Company's operating revenues for fiscal 1998 increased $21,384,000 (39%).
This increase was due primarily to the timing of delivery and/or availability of
films and television programs, to the increase during fiscal 1998 in revenues
related to certain films previously marketed by Conquistador and to the
inclusion in fiscal 1998 of the revenues of newly acquired US SEARCH.com.
The Company recognized $26,200,000 (34%) of revenues during the fiscal year
ended September 30, 1998 from the delivery and/or availability of 25 feature
films, including Susan's Plan written and directed by John Landis and starring
Natassja Kinski, Billy Zane, Michael Biehn, Rob Schneider, Lara Flynn Boyle and
Dan Aykroyd, Black and White starring Gina Gershon, Girl starring Dominique
Swain, Taxman starring Joe Pantoliano, Minion starring Dolph Lundgren, Noose
directed by Ted Demme, and Legion starring Parker Stevenson. Also included were
the Company's equity in net earnings of joint ventures which delivered Beowulf
starring Christopher Lambert, Swing starring Lisa Stansfield and Hugo Speer, and
Denial starring Jason Alexander and directed by Adam Rifkin. In addition, the
Company recognized $18,500,000 (24%) of revenues from its television slate
during fiscal 1998, including revenues from the delivery and/or availability of
the remaining episodes of the first-run syndication series Hammer and Mowgli:
The New Adventures of The Jungle Boy, and the net earnings from the delivery by
a joint venture of the remaining episodes of the ABC network series Cracker.
Revenues of $4,300,000 (6%) came from deliveries of nine films in the Company's
family division of direct-to-video product. In addition, the Company recognized
$12,900,000 (17%) of revenues from continuing licenses of product from the
Company's library to domestic cable channel operators through its majority-owned
subsidiary KLC/New City, and through international sub-distributors. Revenues of
$7,869,000 (10%) were recognized from delivery of people search services by the
recently acquired US SEARCH.com business. Remaining revenues of approximately
$6,000,000 (8%) came from the sales of contemporary Christian music on behalf of
a joint venture and from other sources.
Costs relating to operating revenues for fiscal 1998 increased $9,543,000 (18%).
As a percentage of operating revenues, costs relating to operating revenues were
81% for fiscal 1998 compared to 95% for fiscal 1997. The decreased percentage in
fiscal 1998 principally reflects a change in the product mix. This principally
includes the effects in fiscal 1998 of consolidating $3,589,000 of Search costs
which were substantially less than the related consolidation of $7,869,000 of
Search revenues. The increase in gross profit margins was partially offset by
the inclusion in fiscal 1998 of $15,265,000 of amortization expense pertaining
to film titles produced by others which were previously marketed by Conquistador
Entertainment that are expected to be less profitable than Company titles
included in fiscal 1997 costs where the Company assumed greater risks.
Selling, general and administrative expenses for fiscal 1998 increased
$8,005,000 (199%). The increase in such expenses is due to inclusion of
$7,431,000 of advertising and administrative expenses of US SEARCH.com
(primarily $4,747,000 of advertising expenses), which was acquired in fiscal
1998. In addition, the Company's new Latin American operations, which commenced
operations in the fiscal 1998 second quarter, incurred $962,000 of
administrative expenses during fiscal
33
<PAGE> 34
1998 and none in fiscal 1997.
A $808,000 (62%) increase in the provision for doubtful accounts in fiscal 1998
resulted principally from a deterioration in net expected international
collections.
Interest expense for fiscal 1998 increased $2,234,000 (55%). The increase was
principally attributable to the increased average levels of borrowing in fiscal
1998, which was not offset by increased production-related interest capitalized.
Total indebtedness for borrowed money increased 13% to $84,296,000 at September
30, 1998 from $74,278,000 at September 30, 1997.
The Company's effective income tax rate was 3% for fiscal year 1998 compared to
an effective income tax rate of 1% for fiscal 1997. Income tax expense for
fiscal 1998 consisted of minimum state income and federal alternative minimum
taxes.
The Company reported a net loss of ($6,336,000) ($0.69 per basic and diluted
share) for fiscal 1998 as compared to a net loss of ($4,369,000) ($0.49 per
basic and diluted share) for the fiscal year ended September 30, 1997. Weighted
number of common shares for the compared fiscal years were 9,181,000 in 1998 and
8,959,000 in 1997. The fiscal 1998 net loss resulted primarily from
consolidating US SEARCH.com operations into the Company's financial statements
resulting in a net loss of ($3,284,000). In addition, the Company's film and
television business experienced a change in product mix in fiscal 1998,
including the release of low profit margin titles formerly distributed by
Conquistador which generated $15,689,000 of revenues but only $424,000 of gross
profit.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased 1001% to $36,434,000 (including $2,088,000
of restricted cash being used as collateral for film sale/leaseback
transactions, and $2,000,000 of restricted deposits of subsidiary US SEARCH.com,
and $734,000 of reserved cash to be applied against the Company's outstanding
borrowings under its credit facility) at September 30, 1999 from $3,309,000
(including $1,988,000 of restricted cash and $66,000 of reserved cash) at
September 30, 1998 primarily resulting from proceeds obtained from the initial
public offering of US SEARCH.com.
The Company's film and television program operations, and operations of US
SEARCH.com are capital intensive. The June 1999 initial public offering of US
SEARCH.com financed that subsidiary's capital needs. While the Company is not
contractually obligated to finance US SEARCH.com, from time to time the Company
may consider doing so out of its capital resources. 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 financings, 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, the establishment of its feature
film division and its Internet and direct marketing subsidiary US SEARCH.com
have significantly increased the Company's working capital requirements and use
of related production loans. The amount available under the credit facility as
of December 17, 1999 was $3,906,000.
The Company experienced net negative cash flows of ($38,145,000) from operating
activities primarily resulting from the Company's operating expenditures
exceeding operating receipts at the Company and its subsidiary US SEARCH.com.
This was offset by net cash of $58,324,000 provided by financing activities from
production loans, greater usage of the Company's revolving line of credit, and
receipt of proceeds from the US SEARCH.com initial public offering. Net
unrestricted cash increased by $30,357,000 to $31,612,000 on September 30, 1999.
On December 16, 1999 the Company and its subsidiaries held more than $25,000,000
in net unrestricted cash. 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.
34
<PAGE> 35
CREDIT FACILITY
In June 1996, the Company obtained a $40,000,000 syndicated revolving credit
facility with a group of banks led by The Chase Manhattan Bank N.A. ("Chase"). A
September 1997 amendment increased the maximum amount of revolving credit to
$60,000,000, and a December 1998 amendment increased the maximum amount of
revolving credit to $75,000,000, as discussed more fully below. The agreement
provides for borrowing by the Company on specified percentages of receivables
and a specified amount of 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 a required
Company equity participation. 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 (6.46% as of December
17,1999) plus 3% or (ii) at the Alternate Base Rate (which is the greater of (a)
Chase's Prime Rate (8.5% as of December 17, 1999), (b) Chase's Base CD Rate
(6.44% as of December 17, 1999) plus 1% or (c) the Federal Funds Effective Rate
(5.54% as of December 17, 1999) plus 1/2%) plus 2%. The Company pays an annual
commitment fee of .5% of the unused portion of the credit line. As of December
16, 1999, the Company had drawn down $64,094,000 under the credit facility out
of a total net borrowing base availability of $68,000,000. Also on that date,
the Company held over $25,000,000 of unrestricted cash and over $4,000,000 of
restricted cash.
The credit agreement contains restrictive covenants to which the Company must
adhere. These covenants include limitations on additional indebtedness, liens,
investments, disposition of assets, guarantees, deficit financing, capital
expenditures, affiliate transactions, 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 power. For fiscal 1999 the group has
waived the Company's noncompliance with the annual overhead covenant.
In December 1998 the banks increased the maximum amount of the Company's
collateralized line of credit from $60,000,000 to $75,000,000. Existing
participants in the syndicate approved the increase and are committed to lend up
to $68,000,000. Additional availability is subject to adding new banks to the
syndicate. As of December 16, 1999, the principal amount outstanding under this
credit line was $64,094,000 and $3,906,000 remained available for borrowing.
The credit facility expires in June 2000. The Company is currently in
discussions with Chase regarding extending the secured revolving facility beyond
its current maturity date. While the discussions are presently in an early stage
and no agreement has been reached, Chase has expressed a willingness to extend
the maturity date beyond fiscal 2000. See Summary below.
PROCEEDS FROM SECURITIES OFFERINGS
In September 1994, the Company filed a registration statement for 21,388,064
shares of common stock (now 3,564,678 shares giving effect to the fiscal 1997
1-for-6 reverse stock split) 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 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
$9,203,000. 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.
35
<PAGE> 36
In December 1998 the Company obtained net proceeds of $5,673,000 ($6,000,000 of
gross proceeds) through a private placement of 1,200,000 newly-issued shares of
common stock. In February 1999 the Company filed a registration statement for
such shares.
On April 26, 1999 the Company issued 468,883 shares of restricted common stock
to The Harvey Entertainment Company ("Harvey") in exchange for 55,000 shares of
Series A Preferred Stock of Harvey and 388,215 warrants exerciseable into common
stock of Harvey, all pursuant to a stock purchase agreement involving a new
Harvey investor group which includes the Company. The Harvey Series A Preferred
Stock are convertible into 814,814 shares of Harvey common stock commencing
October 26, 1999 and require payment of quarterly dividends in cash or in
additional shares of Harvey Series A Preferred Stock at a 7% annual rate. The
Company holds certain demand and piggyback registration rights relating to its
Harvey securities. On a fully-diluted basis, assuming all securities
exerciseable or convertible into Harvey common stock are so exercised or
converted, the Company would own 12% of the voting shares of Harvey. In June
1999 the Company filed a registration statement for the shares of its restricted
common stock issued to Harvey.
Effective May 14, 1999 the Company called for redemption of all of its Class C
Redeemable Common Stock Purchase Warrants (the "Class C Warrants") and its
outstanding 10% Convertible Subordinated Debentures, Series A due 2000. In
advance of the redemption, a total of 794,215 Class C Warrants were exercised
for 794,215 shares of Common Stock and the Company received proceeds of
$5,419,000. In advance of the redemption, the Company issued 6,435 new shares of
common stock for the conversion of $49,000 aggregate principal amount of the
Series A Debentures. The Company redeemed $28,000 aggregate principal amount of
the Series A Debentures.
On June 25, 1999, the Company's subsidiary US SEARCH.com consummated an initial
public offering of newly-issued common stock. The subsidiary sold 4,500,000
newly-issued shares and obtained $36,263,000 of net proceeds. Also on June 25,
1999 the Company sold 1,500,000 shares out of its holdings of US SEARCH.com
common stock and obtained $12,555,000 of net proceeds. The Company retains a
55.2% interest in the subsidiary and continues to consolidate the subsidiary in
the accompanying financial statements. The Company recognized a $13,148,000
pre-tax gain on the sale of the 1,500,000 shares and a $21,018152,000 gain on
the increased value of its proportion of the net equity of the subsidiary.
PRODUCTION LOANS
The Company's production loans, totaling $16,272,000 as of September 30, 1999,
consisted of production loans by Comerica Bank - California ("Comerica") and Far
East National Bank ("Far East") to consolidated production entities, and loans
to the Company's 55.2%-owned subsidiary, US SEARCH.com. The Company provided
limited corporate guarantees for portions of the production loans which are
callable in the event that the respective borrower does not repay the loans by
the respective maturity date. In general these loans are non-recourse to the
Company except to the extent of the guaranties. However, the Company
occasionally advances funds to the lenders in advance of receipts from
customers. Deposits paid by the distributing licensees prior to the delivery of
the financed pictures are held as restricted cash collateral by the Lenders
The table below shows production loans as of September 30, 1999:
36
<PAGE> 37
<TABLE>
<CAPTION>
KUSHNER-
LOCKE
ORIGINAL AMOUNT WEIGHTED CORPORATE PRESENT
FILM OR COMPANY LENDER LOAN AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Susan's Plan Comerica $ 4,625,000 $ 2,529,000 Prime + 1% $ 600,000 6/30/2000
Ringmaster Comerica 4,200,000 1,099,000 Prime + 1% 800,000 12/31/1999
Mambo Cafe Far East 1,400,000 743,000 Prime + 1.5% -- 4/30/2000
Picking Up The Comerica 12,000,000 10,544,000 Prime + 1% 700,000 3/31/2000
Pieces
The Last Producer Far East 1,626,000 1,285,000 Prime + 1% 6/30/2000
Conquistador Comerica (1) 72,000 --
------------------- ---------------- -----------------
$23,851,000 $16,272,000 $2,100,000
=================== ================ =================
</TABLE>
- -------------
(1) assumed from former employee.
In February 1997, a $6,300,000 production loan was obtained by a consolidated
subsidiary from Banque Paribas (Los Angeles Agency) to cover a portion of the
production budget of Basil. In June 1999 the $229,000 remaining balance of the
loan was repaid.
In November 1997, an $8,200,000 production loan was obtained from Comerica by an
unconsolidated company 25%-owned by the Company to cover a portion of the
production budget of Beowulf. The loan bears interest at Prime (8.5 % as of
December 17, 1999) plus 1% or at LIBOR (6.46% as of December 17, 1999) plus 2%.
The Company has provided a corporate guaranty in the reduced amount of $500,000
in connection with this loan. The loan is collateralized by the rights, title
and assets related to the film. As extended, the loan matures on December 31,
1999.
In April 1998, a $4,625,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Susan's Plan. The
loan bears interest at Prime (8.5 % as of December 17, 1999) plus 1% or at LIBOR
(6.46% as of December 17, 1999) plus 2%. The loan is collateralized by the
rights, title and assets related to the film. The Company provided a corporate
guaranty in the amount of $600,000 in connection with this loan. As extended,
the loan matures on June 30, 2000.
In April 1998, a $1,850,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Black and White. In
July 1999 the $379,000 remaining balance of the loan was repaid.
In August 1998, a $2,900,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Ringmaster. In
November 1998, the loan amount was increased to $4,200,000. The loan bears
interest at Prime (8.5 % as of December 17, 1999) plus 1% or at LIBOR (6.46% as
of December 17 , 1999) plus 2%. The loan is collateralized by the rights, title
and assets related to the film. The Company provided a corporate guaranty in the
amount of $800,000 in connection with this loan. As extended, the loan matures
on December 31, 1999.
In October 1998, a $1,400,000 production loan was obtained by a consolidated
subsidiary from Far East to cover the production budget of Mambo Cafe. The loan
bears interest at Prime (8.5 % as of December 17, 1999) plus 1.5%. The loan is
collateralized by the rights, title and assets related to the film. As extended,
the loan matures on April 30, 2000.
In October 1998, a $2,500,000 production loan was obtained by an unconsolidated
company from Far East to cover the production budget of Freeway II:
Confessions of a Trickbaby. The loan bears interest at Prime (8.5 % as of
December 17, 1999) plus 1.5%. The loan is collateralized by the rights, title
and assets related to the film. The Company provided a corporate guaranty in the
amount of $400,000 in connection with this loan. As extended, the loan matures
on April 30, 2000.
In April 1999 a $12,000,000 loan was obtained by a consolidated subsidiary from
Comerica to cover the production budget of Picking Up The Pieces. The loan bears
interest at Prime (8.5 % at December 17, 1999) plus 1% or at LIBOR (6.46% at
December 17, 1999) plus 2%. The loan is collateralized by the rights, title and
assets related to the film. The Company provided a corporate guaranty in the
amount of $700,000 in connection with this loan. The loan matures on March 31,
2000.
37
<PAGE> 38
\
In June 1999, a $1,626,000 production loan was obtained by a consolidated
subsidiary from Far East to cover a portion of the production budget of The Last
Producer. The loan bears interest at Prime (8.5 % as of December 17, 1999) plus
1%. The loan is collateralized by the rights, title and assets related to the
film. The loan matures on June 30, 2000.
In February 1998, US SEARCH.com obtained a collateralized line of credit from
Comerica. Advances under the line bore interest at Prime plus 2.50% payable
monthly. In August 1998 the bank and the Company agreed that the loan would be
capped at the $345,000 amount outstanding as of that date. In December 1998
Comerica extended the loan's maturity date from November 1998 to March 1999. In
March 1999, US SEARCH.com repaid the loan.
In May 1998, a Canadian dollar 5,100,000 production loan was obtained from a
Canadian financial institution, by a formerly consolidated subsidiary to cover a
portion of the production budgets of six direct-to-video feature films. The loan
bears interest at the Canadian Prime Rate plus 2%. The loan is collateralized by
the rights, title and assets related to the films. The Company agreed to pay
$550,000 to the former subsidiary borrower upon delivery of each of the films
for the acquisition of distribution rights. The Company deconsolidated the
subsidiary in March 1999. The Company made all $550,000 payments to the former
subsidiary borrower.
CAPITAL EXPENDITURE COMMITMENTS
Management expects to finance future production, broadcast 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 current maturity date. The Company is currently
in negotiations to extend the secured revolving facility beyond June 2000. Chase
has expressed a willingness to extend the facility, however no agreement has
been executed.
US SEARCH.com has several cancelable and noncancelable agreements with various
Internet companies. At September 30, 1999, the minimum noncancelable payments
required under these agreements are approximately $2,555,000, $3,300,000,
$4,200,000 and $4,200,000 for 2000, 2001, 2002 and 2003, respectively. The
Company expects US SEARCH.com to increase its Internet and television
advertising of US SEARCH.com's services. As a result, US SEARCH.com's net losses
may continue to increase. Such losses would adversely impact the Company's
consolidated results of operations, however the Company is not obligated to fund
any US SEARCH.com operating cash flow deficiencies.
SUMMARY
The Company from time to time evaluates strategic alternatives for enhancing
liquidity in its core and non-core businesses. To pursue strategic alternatives,
the Company has engaged Prudential Securities. In addition the Company will
continue its advisory agreement with Allen & Company Incorporated. Strategic
alternatives include but are not limited to, the pursuit of opportunities to
enhance the exploitation of the Company's library properties, its distribution
system, and its satellite channel. This approach may include consolidations
with, acquisition of or strategic partnering with companies in our core
businesses or in businesses complementary to our core businesses. 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 which may or may not be ancillary
to the Company's existing business, subject to the availability of financing as
necessary. There can be no assurances that any of these transactions will occur.
Many of these
38
<PAGE> 39
alternatives might require a change in the capital structure or equity or debt
financing. There is no assurance that financing sources will be available or, if
available, will be available on commercially acceptable terms.
Management believes that existing resources and cash generated from operating
activities, together with amounts anticipated to be 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 is currently in negotiations to extend the secured revolving facility
beyond its current maturity date, however no agreement has been executed. Chase
has expressed a willingness to extend the facility, however there can be no
assurance that an extension of the maturity date will be obtained or, if
obtained, will continue the credit facility on its present terms. If not
extended, all amounts outstanding under the credit facility at June 30, 2000
will become due and payable on that date. The Company would then be required to
obtain additional capital from other sources to satisfy such obligations. The
inability to obtain such resources on commercially acceptable terms would have a
material adverse effect on the Company's cash flow, the scope of strategic
alternatives available to the Company and its operations. The Company may seek
other sources of financing to meet its working capital requirements, including a
separate equity financing for US SEARCH.com or other possible sources of
financing. The Company from time to time seeks 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. The Company may
not obtain additional financing on terms satisfactory to the Company or at all.
International operations are a significant portion of total operations.
Therefore the Company is exposed to risks of currency translation losses, cash
collection and repatriation risks and risks of adverse political, regulatory and
economic changes.
The Company's business and operations have not been materially affected by
inflation.
Management believes that the Company's film and television sales volumes are not
subject to significant fluctuations based upon seasonality, however search
services have generally declined during holiday periods.
YEAR 2000 ("Y2K") ISSUES
The "Year 2000 Issue" is typically the result of certain firmware limitations
and of limitations of certain software written using two digits rather than four
to define the applicable year. If software and firmware with date-sensitive
functions are not Year 2000 compliant, they may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, interruptions in customer service operations, a temporary inability to
process transactions, conduct searches, or engage in similar normal business
activities.
Corporate operations and film and television segment. The Company has upgraded
or replaced virtually all firmware in part to mitigate Year 2000 exposure. The
Company utilizes off-the-shelf and custom software developed internally and by
third parties. The Company believes that its off-the-shelf software is Year 2000
compliant. However, there is no assurance that the Company will not be required
to modify or replace significant portions of its software so that its systems
will function properly with respect to dates in the year 2000 and thereafter.
The Company has completed a Year 2000 evaluation including Information
Technology ("IT") systems, non-IT systems, and critical third-party entities
with which the Company transacts business. If required modifications to existing
software and firmware or conversions to new software or firmware are not made,
or are not completed timely, or if there is a malfunction in software or
firmware used on computer systems utilized by those upon whom the Company
depends for provision of its services, there is no assurance that potential
systems interruptions or the cost necessary to update such software or firmware
or any outages or delays in services will not have a material adverse effect on
the Company's business, financial condition, results of operations and
prospects. Further, the failure of the Company to successfully resolve such
issues could result in a shut-down of some or a substantial portion of the
corporate or film and television operations, which could have a material adverse
effect on the business, financial condition, results of operations and prospects
of the Company.
39
<PAGE> 40
US SEARCH.com. The Year 2000 Issue could result in a system failure or
miscalculations causing significant disruption of operations, including, among
other things, interruptions in Internet traffic, accessibility of the Web site,
delivery of service, transaction processing or searching and other features of
US SEARCH.com services. It is possible that this disruption will continue for an
extended period of time. US SEARCH.com depends on information contained
primarily in electronic format in databases and computer systems maintained by
third parties, including governmental agencies. The disruption of third-party
systems or its systems interacting with these third-party systems could prevent
US SEARCH.com from receiving orders or delivering search results in a timely
manner. In addition, US SEARCH.com relies on the integration of many systems in
aggregating search data from multiple sources. The failure of any of those
systems as a result of Year 2000 compliance issues could prevent it from
delivering products and services. Failure of its systems or third-party systems
providing information used in our services could materially adversely affect US
SEARCH.com's business and results of operations. Management has received
information confirming the Year 2000 compliance from present data suppliers.
Management has also confirmed Year 2000 compliance with key third party vendors.
US SEARCH.com has conducted an evaluation of internal systems. The objective was
to ensure uninterrupted transition into the Year 2000. The scope of the Year
2000 objective included: (1) information technology ("IT") such as software and
hardware, (2) non-IT systems such as components contained in various safety
systems, facilities and utilities, and (3) readiness of key third parties,
including suppliers and customers. US SEARCH.com has obtained written
confirmation of the Year 2000 status of its third party software. US SEARCH.com
has utilized internal resources to test internally developed software for Year
2000 compliance. USEARCH.com has modified or replaced certain portions of its
software so that its systems will function properly with respect to dates in the
year 2000 and thereafter. If there is a malfunction in its systems, potential
systems interruptions or delays in services may have a material adverse effect
on US SEARCH.com's business, financial condition and results of operations.
Further, if management fails to successfully resolve these issues, some or all
of US SEARCH.com's operations may shut-down, which would have a material adverse
effect on its business, financial condition and results of operations.
US SEARCH.com has a process in place to assess the Year 2000 readiness of its
business critical vendors and customers, and has worked with these vendors and
customers on Year 2000 compliance issues. Disruptions with respect to computer
systems of vendors or customers, whose systems are outside US SEARCH.com's
control, could impair its ability to provide support to customers, and could
have a material adverse effect on its financial condition and results of
operations.
Overall. Management has developed contingency plans to be implemented as part of
its efforts to identify and correct Year 2000 problems with internal and
Web-based systems. Within the plans, management addresses various problems,
including disruptions to Web-servers, significant interruption of data flow
between the Company and third party data providers, and failures associated with
internal systems. The contingency plans emphasize the identification and
accessibility of additional data sources for US SEARCH.com services. There is no
assurance that the contingency plans will adequately address all Year 2000
issues.
US SEARCH.com has incorporated the utilization of (1) additional data sources,
(2) manual procedures for order processing and delivery of search results (3)
standby equipment and accelerated availability of replacement parts, and (4)
increased staffing levels for resolution of information technology issues and to
manually process orders. Failure to implement any of these plans, if and when
necessary, may have a material adverse effect on US SEARCH.com's business and
results of operations.
Finally, the Company is also vulnerable to external forces that might generally
affect industry and commerce, such as utility or transportation company or
Internet Year 2000 compliance failures and related service interruptions. Any
significant interruption of general access to the Internet, or the customary
function and operations of, the Internet could have a material adverse effect on
the Company's business, financial condition, results of operations and
prospects. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent the Company may be
affected by it.
The Company currently believes that this issue will not pose significant
operational problems for its corporate or film and television operations,
however delays in the modification or conversion of its or US SEARCH.com's
systems, or those of vendors and suppliers of services to the Company and US
SEARCH.com, or the failure to fully identify all Year 2000
40
<PAGE> 41
dependencies in the systems could have a material adverse effect on the
Company's business, financial condition, results of operations and prospects.
The Company cannot quantify the impact of the Year 2000 Issue; however, failure
of critical internal IT systems, non-IT systems, third-party vendors and
financial institutions may limit or prevent the Company from performing services
for its customers, and could have a material adverse effect on the Company's
business, financial condition, results of operations and prospects. We estimate
that the total cost of implementing and maintaining our Year 2000 compliance
program will not exceed $200,000 and most of these costs have been incurred
to date. This estimate includes implementation of redundant hardware,
software and communications systems.
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
On October 20, 1998, the Company changed its independent public accountants.
This change (and the response of the Company's former independent public
accountants) is described in the Company's Current Report on Form 8-K filed on
October 27, 1998, which is incorporated by reference herein. This Annual Report
contains an independent auditor's report issued by the Company's former
independent public accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information called for in Item 10 of Part III shall be filed not later than
120 days after the Company's fiscal year end (September 30, 1999) in the
Company's definitive Proxy Statement in connection with its 1999 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.
ITEM 11. EXECUTIVE COMPENSATION
The information called for in Item 11 of Part III shall be filed not later than
120 days after the Company's fiscal year end (September 30, 1999) in the
Company's definitive Proxy Statement in connection with its 1999 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.
ITEM 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 end (September 30, 1999) in the
Company's definitive Proxy Statement in connection with its 1999 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.
ITEM 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, 1999) in the
Company's definitive Proxy Statement in connection with its 1999 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.
41
<PAGE> 42
14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
<S> <C>
(a) Financial Statements:
(1)
Report of Independent Accountants....................................................................... 43
Independent Auditors' Report............................................................................ 44
Consolidated Balance Sheets at September 30, 1999 and 1998.............................................. 45
Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997............. 46
Consolidated Statements of Stockholders' Equity for the years ended September 30, 1999, 1998, and 1997.. 47
Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998, and 1997............ 48
Notes to Consolidated Financial Statements.............................................................. 49
(2) Financial Statement Schedule
Schedule II for the years ended September 30, 1999, 1998, and 1997...................................... 69
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..... 72
(b) Report on Form 8-K: None
</TABLE>
42
<PAGE> 43
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of The Kushner-Locke Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of The
Kushner-Locke Company (the "Company") and its subsidiaries at September 30, 1999
and 1998, and the results of their operations and their cash flows for each of
the two years in the period ended September 30, 1999, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein for
the years ended September 30, 1999 and 1998 when read in conjunction with the
related consolidated financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audits 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Century City, California
December 21, 1999
43
<PAGE> 44
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Kushner-Locke Company:
We have audited the accompanying consolidated statements of operations, cash
flows and stockholders' equity of The Kushner-Locke Company and subsidiaries for
the year ended September 30, 1997. In connection with our audit of the
consolidated financial statements, we have also audited the accompanying
financial statement schedule for the year ended September 30, 1997. 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 audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
The Kushner-Locke Company and subsidiaries for the year ended September 30,
1997, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule for the year ended September
30, 1997, 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 LLP
Los Angeles, California
December 26, 1997
44
<PAGE> 45
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Assets:
Cash and cash equivalents............................................................... $ 31,612,000 $ 1,255,000
Reserved cash........................................................................... 734,000 66,000
Restricted cash......................................................................... 4,088,000 1,988,000
Accounts receivable, net of allowance for doubtful accounts of $3,248,000 in 1999
and $2,509,000 in 1998.............................................................. 30,030,000 40,418,000
Due from related party.................................................................. 2,611,000 2,719,000
Film and television program costs, net of accumulated amortization...................... 91,499,000 73,773,000
Investments in unconsolidated entities, at equity....................................... 12,045,000 10,798,000
Other assets............................................................................ 12,496,000 6,088,000
------------ ------------
Total assets......................................................................... $185,115,000 $137,105,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities................................................ $ 11,104,000 $ 6,031,000
Due to related party.................................................................... 233,000 --
Notes payable........................................................................... 82,925,000 73,151,000
Deferred revenue........................................................................ 3,628,000 4,111,000
Contractual obligations................................................................. 11,039,000 13,851,000
Production advances..................................................................... 1,592,000 2,969,000
Convertible subordinated debentures, net of deferred issuance costs..................... 2,269,000 11,526,000
------------ ------------
Total liabilities.................................................................... 112,790,000 111,639,000
Minority interest 11,580,000 --
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares: issued and
outstanding 13,810,767 shares at September 30, 1999 and 9,217,029 shares at
September 30, 1998................................................................... 70,379,000 39,571,000
Accumulated deficit.................................................................... (9,634,000) (14,105,000)
------------ ------------
Net stockholders' equity.......................................................... 60,745,000 25,466,000
------------ ------------
Total liabilities and stockholders' equity....................................... $185,115,000 $137,105,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
45
<PAGE> 46
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Operating revenues:
Film and television program licensing.......................... $34,143,000 $68,261,000 $54,746,000
Search and individual reference services....................... 15,747,000 7,869,000 --
----------- ----------- -----------
Total operating revenues................................... 49,890,000 76,130,000 54,746,000
----------- ----------- -----------
Costs related to operating revenues:
Film and television program licensing.......................... (33,226,000) (58,038,000) (52,084,000)
Search and individual reference services....................... (6,440,000) (3,589,000) --
----------- ----------- -----------
Total costs related to operating revenues................. (39,666,000) (61,627,000) (52,084,000)
----------- ----------- -----------
Gross profit............................................... 10,224,000 14,503,000 2,662,000
Selling, general and administrative expenses........................ (31,186,000) (12,028,000) (4,023,000)
Provision for doubtful accounts..................................... (2,959,000) (2,118,000) (1,310,000)
----------- ----------- -----------
(Losses) earnings from operations.......................... (23,921,000) 357,000 (2,671,000)
Equity in net (losses) earnings of unconsolidated entities......... (520,000) (330,000) 2,189,000
Dividend income................................................. 167,000 -- --
Interest income..................................................... 520,000 79,000 163,000
Interest expense.................................................... (7,782,000) (6,261,000) (4,027,000)
Gain on sale of interest in subsidiary.............................. 13,148,000 -- --
Gain on issuance of stock by subsidiary............................. 21,018,000 -- --
----------- ----------- -----------
Earnings (loss) before minority interest and income taxes.. 2,630,000 (6,155,000) (4,346,000)
Minority interest in subsidiary net losses.......................... 2,567,000 -- --
----------- ----------- -----------
Earnings (loss) before income taxes........................ 5,197,000 (6,155,000) (4,346,000)
Income tax expense.................................................. (726,000) (181,000) (23,000)
----------- ----------- -----------
Net earnings (loss)....................................... $ 4,471,000 $(6,336,000) $(4,369,000)
=========== =========== ===========
Basic earnings (loss) per share................................. $.38 $(.69) $(.49)
=========== =========== ===========
Diluted earnings (loss) per share............................... $.36 $(.69) $(.49)
=========== =========== ===========
Weighted average common shares outstanding.......................... 11,755,000 9,181,000 8,959,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
46
<PAGE> 47
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Net
------------------------------- Accumulated Stockholders'
Shares Amount Deficit Equity
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at 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
Stock options exercised..................... 9,000 34,000 -- 34,000
Conversion of subordinated debentures....... 51,282 284,000 -- 284,000
Issuance of stock grants.................... 66,667 16,000 -- 16,000
Compensatory warrant grants................. -- 332,000 -- 332,000
Net loss.................................... -- -- (6,336,000) (6,336,000)
---------- ----------- ----------- -----------
Balance at September 30, 1998......... 9,217,029 39,571,000 (14,105,000) 25,466,000
Private placement........................... 1,200,000 5,456,000 -- 5,456,000
Investment in The Harvey Entertainment
Company.............................. 468,883 5,820,000 -- 5,820,000
Exercises of warrants....................... 1,219,361 8,122,000 -- 8,122,000
Stock options exercised..................... 317,309 857,000 -- 857,000
Issuance of stock grants.................... 100,000 488,000 -- 488,000
Conversion of subordinated debentures....... 1,288,185 9,336,000 -- 9,336,000
Compensatory option and warrant grants...... -- 729,000 -- 729,000
Net earnings................................ -- -- 4,471,000 4,471,000
---------- ----------- ----------- -----------
Balance at September 30, 1999......... 13,810,767 $70,379,000 $(9,634,000) $60,745,000
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
47
<PAGE> 48
THE KUSHNER-LOCKE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------
1999 1998 1997
------------------ ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................................. $ 4,471,000 $(6,336,000) $(4,369,000)
Adjustments to reconcile net earnings (loss) to net cash
Used by operating activities:
Minority interest................................................ (2,567,000) -- --
Gain on issuance of stock by subsidiary.......................... (21,018,000) -- --
Gain on sale of interest in subsidiary........................... (13,148,000) -- --
Dividend income.................................................. (167,000) -- --
Equity in net losses (earnings) of unconsolidated entities....... 520,000 330,000 (2,189,000)
Depreciation and amortization.................................... 435,000 530,000 192,000
Provisions and allowances........................................ 2,959,000 2,118,000 1,310,000
Amortization of capitalized issuance costs....................... 123,000 213,000 969,000
Issuance of stock grants......................................... 488,000 16,000 --
Compensatory options and warrants................................ 729,000 332,000 --
Amortization of film costs....................................... 32,354,000 53,916,000 50,835,000
Changes in assets and liabilities:
Reserved cash.................................................... (668,000) (379,000) (1,190,000)
Restricted cash.................................................. (2,100,000) 39,000 4,021,000
Accounts receivable.............................................. 7,413,000 (14,755,000) (6,121,000)
Due from related party........................................... 84,000 (1,708,000) 767,000
Film and television program costs................................ (51,890,000) (59,182,000) (60,879,000)
Other assets..................................................... 2,704,000 (130,000) --
Accounts payable and accrued liabilities......................... 5,303,000 1,608,000 (342,000)
Due to related party............................................. 502,000 -- --
Deferred revenue (483,000) 749,000 (98,000)
Contractual obligations.......................................... (2,812,000) 6,901,000 2,643,000
Production advances.............................................. (1,377,000) (3,533,000) 4,369,000
------------------ ----------------- ----------------
Net cash used by operating activities (38,145,000) (19,271,000) (10,082,000)
------------------ ----------------- ----------------
Cash flows from investing activities:
Proceeds from sale of interest in subsidiary, net................ 12,555,000 -- --
Investments in unconsolidated entities............................ (1,767,000) (3,993,000) (3,432,000)
Purchases of property, plant and equipment........................ (610,000) (786,000) (157,000)
------------------ ----------------- ----------------
Net cash provided (used) by investing activities 10,178,000 (4,779,000) (3,589,000)
------------------ ----------------- ----------------
Cash flows from financing activities:
Borrowings under notes payable.................................... 43,626,000 42,094,000 54,716,000
Repayment of notes payable........................................ (35,802,000) (31,864,000) (33,550,000)
Proceeds from subsidiary's issuance of common stock............... 36,109,000 -- --
Proceeds from issuance of common stock............................ 5,456,000 -- --
Proceeds from exercise of warrants and stock options.............. 8,979,000 34,000 --
Repayment of debentures........................................... (44,000) (36,000) --
Other............................................................. -- -- 491,000
------------------ ----------------- ----------------
Net cash provided by financing activities 58,324,000 10,228,000 21,657,000
------------------ ----------------- ----------------
Net increase (decrease) in cash and cash equivalents................. 30,357,000 (13,822,000) 7,986,000
Cash and cash equivalents at beginning of year....................... 1,255,000 15,077,000 7,091,000
------------------ ----------------- ----------------
Cash and cash equivalents at end of year............................. $31,612,000 $ 1,255,000 $15,077,000
================== ================= ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
48
<PAGE> 49
THE KUSHNER-LOCKE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The Company
The Kushner-Locke Company (the "Company") is a leading independent entertainment
company which principally develops, produces, and distributes original feature
films and television programming. Feature films are developed and produced
principally for the theatrical, video and pay cable motion picture markets.
Television programming includes television series, mini-series, movies for
television, animation, reality and game show programming.
The Company established feature film production operations in 1993. In 1994, an
international theatrical film subsidiary was established to expand into foreign
theatrical distribution. In 1995, the Company formed KLC/New City Tele-Ventures
("KLC/New City") to acquire films for distribution through other delivery
systems, including pay cable, pay-per-view, basic cable, video-on-demand and
satellite systems. In 1997, the Company acquired control of US SEARCH.com Inc.
("US SEARCH.com"), a leading provider of fee-based public record search and
other customized individual reference services. In November 1998 the Company
launched a 24 hour Spanish language movie channel called Gran Canal Latino.
Fiscal Year
The Company's fiscal year ends on September 30. US SEARCH.com has a December 31
fiscal year end, however its financial position and results are consolidated
herein from October 1 through September 30 of each year. All references to years
herein refer to the Company's fiscal year end.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. Entities in which the Company holds
a 20% to 50% interest are not consolidated, but are accounted for under the
equity method. Entities in which the Company holds less than a 20% interest are
accounted for under the cost method and included in other assets.
All significant intercompany balances and transactions have been eliminated.
In 1995, the Company formed the 82.5%-owned subsidiary KLC/New City. Since
establishment, the Company has consolidated 100% of the net losses of that
subsidiary.
In November 1997, the Company acquired 80% of US SEARCH.com and commenced
consolidation of its accounts. US SEARCH.com has incurred net losses since
acquisition and the Company funded 100% of such losses through its initial
public offering (Note 2). The Company recognized 100% of the net losses through
June 30, 1999. Subsequent to the public offering, the Company has recognized a
minority interest in the net losses and equity of US SEARCH.com proportionate to
the 44.8% minority ownership percentage.
In November 1997, the Company established KL/Phoenix, an 80%-owned joint venture
for Latin American distribution of film and television programs. In November
1998, the Company established Gran Canal Latino, an 80%-owned joint venture for
satellite broadcasting of Spanish and Portuguese language film and television
programs. Since establishment, the Company has consolidated 100% of these
ventures' net losses.
Reclassifications
Certain reclassifications have been made to conform prior year balances with the
current presentation.
49
<PAGE> 50
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. The revenue
cycle generally extends 7 to 10 years on film and television products.
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.
US SEARCH.com generates revenues by performing various information search
services for customers. Revenue is recognized when the results of the search
services are delivered to clients. The terms of each sale do not provide for
client refunds after search services have been delivered, however, in certain
instances, where the clients indicate that the initial search is unsuccessful,
US SEARCH.com may perform, at no charge to the client, up to three identical
searches during the one year period following their first search. The costs
related to such additional searches are recorded in the period of the initial
sale and are based upon the estimated number of additional searches. In
addition, where clients request to broaden the scope of their fully automated
searches, US SEARCH.com may apply up to a portion of the cost of the client's
fully automated searches towards the cost of the broader and more extensive
searches. The estimated credits are recorded in the period of the initial sale
and are based upon the amount estimated to be redeemed by clients. To date, the
costs of additional searches and estimated credits to be provided in future
periods have not been material.
Advertising Costs
US SEARCH.com's advertising production costs are expensed the first time the
advertisement is run. Media costs are expensed in the month the advertising
appears. Advertising expense related to US SEARCH.com for fiscal 1999 and 1998
was $15,592,000 and $5,200,000, respectively.
Concentration of Risk
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and trade accounts receivable.
Cash and cash equivalents are deposited throughout the world with high credit
quality financial institutions.
The Company's customers are located throughout the world. For certain revenue
streams, the Company does not require guarantee of payment and establishes an
allowance for doubtful accounts based upon historical trends and other
information. To date, such losses have been within management's expectations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Restricted and Reserved Cash
At September 30, 1999 and 1998, the Company had $ 2,088,000 and $1,988,000,
respectively, in restricted cash related to deposits held at a British bank
pursuant to film sale/leaseback transactions, and $2,000,000 which are
restricted deposits of US SEARCH.com pledged as collateral on an outstanding
letter of credit related to a recent lease of a facility. In addition, the
Company has $734,000 in cash collected 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 ($66,000 at September 30, 1998).
50
<PAGE> 51
Allowances 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.
Accounting for Film and Television Program Costs
The Company capitalizes direct costs incurred to produce a film or television
project. The costs include interest expense funded under production loans,
certain exploitation costs and production overhead. Capitalized exploitation or
distribution costs include prints and advertising that is expected to benefit
the film in future markets. These costs, including management's estimates of
anticipated total costs, are amortized each period on an individual film or
television program basis in the ratio that the current period's gross revenues
from all sources for the program bear to management's estimate of anticipated
total gross revenues for such film or program from all sources. Revenue
estimates are reviewed quarterly and adjusted where appropriate.
Film and television program costs are stated at the lower of unamortized cost or
estimated net realizable value. Losses are charged to operations through
additional amortization.
Investments in Equity Securities - Cost Method
In April 1999, the Company issued 468,883 shares of common stock with a value of
$5,820,000 to The Harvey Entertainment Company ("Harvey") in exchange for
convertible preferred stock and detachable warrants. The investment is not
subject to Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as the
Harvey preferred stock is not publicly traded.
The preferred stock is convertible into publicly traded common shares of Harvey
and earns mandatory dividends payable in cash or additional shares of Harvey
preferred stock. As of September 30, 1999 the Company earned approximately
$167,000 of dividends in the form of additional Harvey preferred shares.
The detachable warrants are convertible into Harvey common stock and were fully
exercisable at issuance. At September 30, 1999, the Company has warrants
exercisable into 388,235 shares of Harvey common stock. The warrants begin to
expire in 2005.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the estimated
useful lives of the assets. Leasehold improvements and equipment under capital
leases are amortized over the shorter of the estimated useful life or the life
of the lease. Depreciation and amortization periods by asset category are as
follows:
Equipment................................3 - 10 years
Furniture and fixtures...................5 - 7 years
Leasehold improvements...................Shorter of useful life or lease term
Equipment under capital lease............Shorter of useful life or lease term
Maintenance and repairs are charged to expense as incurred while renewals and
improvements are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated
depreciation, with any resulting gain or loss included in the Statement of
Operations.
51
<PAGE> 52
Long-Lived Assets
The carrying value of long-lived assets, consisting primarily of investments and
property and equipment, is periodically reviewed by management. The Company
records impairment losses on long-lived assets when events or circumstances
indicate that such assets might be impaired. Measurement of any impairment would
include a comparison of estimated future cash flows anticipated to be generated
during the remaining life of the long-lived asset to the net carrying value of
the long-lived asset.
Participants' Share Payable and Talent Residuals
The Company charges profit participation and talent residual costs to expense in
the same manner as amortization of film and television program costs. 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.
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, 1999 were not significant.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from estimated amounts.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with Accounting Principles Board ("APB") No. 25, "Accounting for
Stock Issued to Employees," and complies with the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation cost, if any, is recognized over the respective vesting period
based upon the difference on the grant date between the fair value of the
Company's common stock and the grant price. Pro forma disclosures reflect stock
option grants subsequent to fiscal 1996.
52
<PAGE> 53
Fair Value of Financial Instruments
The recorded value of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities, contractual obligations
and participants' share payable for talent residuals approximate their fair
value due to the relatively short maturities of these instruments. 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
instruments.
Reverse Stock Split
In September 1997 the Company effected a 1-for-6 reverse split of the issued and
outstanding shares of common stock. 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.
Net Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net earnings
(loss) per share is computed using the weighted average number of common shares
and common equivalent shares outstanding during the period. Common equivalent
shares related to options and warrants are excluded from the computation when
their effect is antidilutive.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income." This statement established standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Comprehensive income generally
represents all changes in shareholders' equity during the period except those
resulting from investments by, or distributions to, shareholders. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997, and requires
restatement of earlier periods presented. SFAS No. 130 defines comprehensive
income as net income plus all other changes in equity from nonowner sources. The
Company had no other comprehensive income items and accordingly net income
equals comprehensive income.
Segment Reporting
The company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" for the
year ended September 30, 1999. Comparative fiscal 1998 and 1997 disclosures have
been included. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products or services, geographic areas,
and major customers. The Company's management reporting structure provides for
two reportable segments.
(2) Subsidiary Public Offering
On June 25, 1999 US SEARCH.com consummated its initial public offering
("offering") and issued 4,500,000 new shares of its common stock to the public.
US SEARCH.com obtained $36,109,000 in net proceeds related to the offering. US
SEARCH.com is traded on the NASDAQ National Market under the symbol "SRCH."
53
<PAGE> 54
Concurrent with the offering, the Company exercised warrants to purchase
1,360,173 additional shares of US SEARCH.com common stock for $2,752,000. The
Company has no remaining warrants to purchase additional common stock of US
SEARCH.com.
In conjunction with the offering, the Company sold 1,500,000 of its shares in US
SEARCH.com to the public in exchange for net proceeds of $12,555,000. The
Company recognized a $13,148,000 pre-tax gain on the sale of the
1,500,000 shares.
Subsequent to the offering, the Company retains a 55.2% interest in the
subsidiary. The Company recognized a $21,018,000 pre-tax gain based on its
revised proportionate share in the subsidiary's increased net equity.
(3) Film and Television Program Costs
Film and television program costs consist of the following:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------------ ------------------
<S> <C> <C>
In process or development......................................... $20,472,000 $10,570,000
Released, net of accumulated amortization......................... 71,027,000 63,203,000
------------------ ------------------
Total............................................................. $91,499,000 $73,773,000
================== ==================
</TABLE>
Based upon present estimates of anticipated future revenues at September 30,
1999, approximately 70% of the costs related to released films and television
programs will be amortized during the three-year period ending September 30,
2002.
The Company capitalized interest of $372,000, $982,000 and $1,429,000 to film
and television program costs for the years ended September 30, 1999, 1998, and
1997, respectively. During the same respective periods, $8,154,000, $7,243,000
and $5,456,000 of total interest costs were incurred.
(4) Investments in Unconsolidated Entities, at Equity
Significant investments in unconsolidated entities are accounted for under the
equity method ("equity affiliates"). These entities are principally engaged in
the production and distribution of films and television programs. The Company's
share of earnings of these equity affiliates is included in income as earned.
Investments in equity affiliates at September 30 consist of the following:
<TABLE>
<CAPTION>
Ownership
Percentage 1999 1998
-------------------------------------- -----------------
<S> <C> <C> <C>
BLT Ventures..................................... 50% $ 808,000 $ 827,000
Cracker Company LLC.............................. 50% 5,829,000 5,648,000
TV First......................................... 50% 357,000 520,000
Grendel Productions LLC.......................... 25% 2,161,000 2,093,000
Swing Ventures................................... 50% 1,188,000 1,230,000
Trick Productions................................ 50% 1,047,000 --
Others........................................... 20%-50% 655,000 480,000
================= =================
$12,045,000 $10,798,000
================= =================
</TABLE>
54
<PAGE> 55
The summarized unaudited information below at September 30 represents an
aggregation of the Company's equity affiliates:
Financial Information (unaudited)
<TABLE>
<CAPTION>
Balance Sheet Data 1999 1998
------------------ -------------------
<S> <C> <C>
Assets.......................................................... $22,710,000 $30,375,000
Liabilities..................................................... 4,133,000 9,238,000
Net assets...................................................... 18,577,000 21,137,000
Company's equity in net assets................................. $12,045,000 $10,798,000
</TABLE>
<TABLE>
<CAPTION>
Earnings Data 1999 1998 1997
----------------- ------------------- -----------------
<S> <C> <C> <C>
Operating revenues.............................................. $4,229,000 $31,871,000 $24,681,000
Gross profit.................................................... (293,000) 963,000 4,403,000
Net (losses) earnings........................................... $(1,168,000) $972,000 $4,378,000
Company's equity in net (losses) earnings....................... $(520,000) $(330,000) $2,189,000
</TABLE>
No dividends were received from equity affiliates for the years ended September
30, 1999, 1998, or 1997.
55
<PAGE> 56
(5) Credit Agreement and Financing Arrangements
Credit arrangements and borrowings consist of the following:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998
------------------ -----------------
<S> <C> <C>
Note payable to bank, under a revolving
credit facility collateralized by
substantially all Company assets, interest
at Libor (5.38% at September 30, 1999)
plus 3%, outstanding principal balance due June 2000............................ $66,455,000 $58,980,000
Notes payable to banks and/or financial
institutions consisting of production
loans principally collateralized by film
rights, interest at rates from Libor
(5.38% at September 30, 1999) plus 2% to
Prime (8.25% at September 30, 1999) plus
2.5%, and maturities at varying dates through June 2000.......................... 16,272,000 13,432,000
Series A Convertible Subordinated Debentures due December 2000,
bearing interest at 10% per annum payable June 15 and December 15, net........... -- 73,000
Series B Convertible Subordinated Debentures due December 2000,
bearing interest at 13-3/4% per annum payable monthly, net....................... 1,535,000 3,061,000
8% Convertible Subordinated Debentures due December 2000,
interest payable February 1 and August 1, net.................................... 734,000 4,513,000
9% Convertible Subordinated Debentures due July 2002, interest
payable January 1 and July 1, net................................................ -- 3,879,000
Trade notes payable and debt of US SEARCH.com 198,000 739,000
=================== ================
Total credit agreements and financing arrangements $85,194,000 $84,677,000
=================== ================
Total notes payable......................................................... $82,925,000 $73,151,000
=================== ================
Total convertible subordinated debentures, net of deferred issuance costs... $2,269,000 $11,526,000
=================== ================
</TABLE>
At September 30, 1999 the Company had a $75,000,000 revolving credit facility
with a syndicated group of banks. Chase Manhattan Bank is the agent bank. Unused
borrowings on this facility were $1,148,000 at September 30, 1999. The credit
facility expires in June 2000. The Company is currently in negotiations to
extend the revolving facility beyond its current maturity date, however no
agreement has been executed. The credit agreement contains restrictive covenants
which include, but are not limited to, limitations on additional indebtedness,
liens, investments, disposition of assets, guarantees, deficit financing,
capital expenditures, affiliate transactions and the use of proceeds, and
prohibit the 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). The Company received a waiver of
default due to non-compliance with an overhead covenant for fiscal 1999.
At September 30, 1999, the Company had outstanding $16,272,000 of production
loans to consolidated entities from Comerica Bank - California ("Comerica") and
Far East National Bank. The unused portion of credit available under these
production loans at September 30, 1999 was $671,000. The Company provided
$2,100,000 in corporate guarantees for loans to consolidated entities and
$400,000 for one loan to an equity affiliate. The guarantees are callable in the
event the respective borrower does not repay the loan made by the respective
maturity date. Deposits paid by distributing licensees prior to the delivery of
the financed pictures are held as restricted cash collateral by the lenders.
56
<PAGE> 57
In April 1999 the Company called the Series A Debentures for redemption. In May
1999, $49,000 of principal was converted into 6,435 newly-issued shares of
common stock at a rate of $7.61 per share, and the remaining $28,000 was
redeemed. Approximately $2,000 of capitalized issuance costs were amortized
under the straight-line method as interest expense during each of the years
ended September 30, 1999 and 1998.
During the year ended September 30, 1999, $1,616,000 of the Series B Debentures
principal were converted into 174,382 newly-issued shares of common stock of the
Company at a rate of $9.2664 per share. Unamortized discounts were $38,000 at
September 30, 1999. Approximately $49,000 and $68,000 of these costs were
amortized under the straight-line method as interest expense for the years ended
September 30, 1999 and 1998, respectively.
During the year ended September 30, 1999, $3,948,000 of the 8% Debentures
principal were converted into 674,873 new-issued shares of common stock at a
rate of $5.85 per share. Unamortized discounts were $18,000 at September 30,
1999. Approximately $43,000 and $86,000 of these costs were amortized under the
straight-line method as interest expense for the years ended September 30, 1999
and 1998, respectively. The Company has the right to redeem the debentures at a
redemption price of 100% of par commencing in February 2000.
During the year ended September 30, 1999, all of the 9% Debentures were
converted into 432,495 newly-issued shares of common stock at a rate of $9.48
per share. Approximately $29,000 and $59,000 of capitalized issuance costs were
amortized under the straight-line method as interest expense for the years ended
September 30, 1999 and 1998, respectively.
The debentures are subordinated to all existing and future senior indebtedness.
The term senior indebtedness includes principal and interest on all indebtedness
of the Company to banks, insurance companies and similar institutional lenders,
and to the public for securities registered under the Securities Act of 1933.
Senior indebtedness does not include other debentures, indebtedness to
affiliates and indebtedness expressly subordinated to or on parity with the
debentures.
Credit arrangements and borrowings are due as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending September 30, Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
2000 $82,875,000
2001 2,319,000
----------------
Total $85,194,000
================
</TABLE>
(6) Income Taxes
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------
1999 1998 1997
----------------- --------------- --------------
<S> <C> <C> <C>
Current:
Federal................................................................... $186,000 $154,000 $ --
State..................................................................... 540,000 27,000 23,000
----------------- --------------- --------------
726,000 181,000 23,000
Deferred:
Federal................................................................... -- -- --
State..................................................................... -- -- --
----------------- --------------- --------------
Total income tax expense .............................................. $726,000 $181,000 $23,000
================= =============== ==============
</TABLE>
57
<PAGE> 58
A reconciliation of the statutory Federal income tax rate to the effective rate
is presented below:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1999 1998 1997
---------------- -------------- ---------------
<S> <C> <C> <C>
Statutory Federal income tax rate......................................... 34% (34)% (34)%
Alternative minimum taxes and permanent differences....................... 3 2 --
Change in valuation allowance............................................. (30) 34 34
State income taxes, net of Federal tax benefit............................ 6 1 1
---------------- --------------- --------------
13% 3 % 1 %
================= ============== ==============
</TABLE>
Significant components of deferred tax assets and liabilities, using enacted tax
rates, are as follows:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------
1999 1998
--------------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards and credits............................... $13,589,000 $13,299,000
Allowance for doubtful accounts and other reserves......................... 1,169,000 695,000
Deferred film license fees................................................. 1,306,000 1,571,000
Other temporary differences ............................................... 1,953,000 265,000
Depreciation............................................................... 85,000 53,000
State taxes................................................................ 212,000 --
--------------------- -----------------
Total gross deferred assets............................................. 18,314,000 15,883,000
Valuation allowance..................................................... (5,432,000) (7,694,000)
--------------------- -----------------
Net deferred tax assets................................................. $12,882,000 $ 8,189,000
===================== =================
Deferred tax liabilities:
Film amortization.......................................................... $ 5,150,000 $ 7,239,000
Partnerships............................................................... 94,000 721,000
Deferred gain on sale of subsidiary stock.................................. 7,638,000 --
State taxes................................................................ -- 229,000
--------------------- -----------------
Total deferred tax liabilities.......................................... $12,882,000 $ 8,189,000
===================== =================
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. Due to the uncertainty surrounding the realizability of
the net deferred tax assets, a full valuation allowance has been established as
management believes that it is more likely than not, based upon available
evidence, that the deferred tax assets will not be realized.
Due to the sale of US SEARCH.com common stock in connection with the
subsidiary's initial public offering in June 1999, effective July, 1999, US
SEARCH.com will no longer join the Company in the filing of a consolidated
income tax return. Accordingly, as of September 30, 1999, the Company and US
SEARCH.com had net operating loss and tax credit carryforwards as follows:
<TABLE>
<CAPTION>
Amount
-------------------------------------------- Expiration Date
Kushner-Locke US SEARCH.com Beginning
-------------------- ------------------- ---------------------
<S> <C> <C> <C>
NOLs for Federal tax purposes $20,580,000 $14,788,000 Fiscal 2008
NOLs for state tax purposes -- 9,198,000 Fiscal 2004
International tax credits 122,000 -- Fiscal 2000
General business credits 197,000 -- Fiscal 2003
Alternative minimum tax credits 437,000 -- N/A
</TABLE>
58
<PAGE> 59
(7) Warrants and Stock Options
Warrants
A summary of exercisable warrants at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Warrant Holder Amount Exercise Price Expiration Date
- --------------------------------------------------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
Allen &Company warrants 500,000 $2.0625 September 2004
Friedman warrants 50,000 $2.0625 September 2004
Friedman consulting warrants 35,000 $1.6875 June 2002
================
585,000
================
</TABLE>
In 1994, in connection with the 8% Convertible Subordinated Debentures offering,
the Company issued warrants to the underwriter to purchase up to $1,643,700 of
the aggregate principal amount of the debentures at an exercise price equal to
120% of the principal amount of the debentures, subject to adjustment in certain
circumstances. The warrants were fully exercised in fiscal 1999 for $1,775,000
and the Company issued new shares of common stock.
In 1994, in connection with the 9% Convertible Subordinated Debenture offering,
the Company issued warrants to the underwriters to purchase up to $505,000 of
the aggregate principal amount of the debentures sold at an exercise price equal
to 120% of the principal amount of the debentures, subject to adjustments in
certain circumstances. The warrants were exercisable through July 1999, when
they expired unexercised.
In 1996 the Company had a public offering of 4,750,000 units (the "unit
offering"). Each unit consisted of two pre-reverse split shares of common stock
and one Class C Redeemable Common Stock Purchase Warrant to purchase one share
of common stock, at an exercise price of $6.8625 per share, as adjusted. In
connection with the unit offering, the Company issued warrants to the
underwriter to purchase 71,167 units at an adjusted exercise price of $19.1825
each (the "Underwriter Warrants"). In addition, the Company issued warrants to a
consultant to purchase 47,500 units at the same exercise price (the "Consultant
Warrants").
In April 1999, the Company called all Class C Warrants for redemption in May
1999. Included in the redemption were the Class C Warrants issued as a part of
the Underwriter Warrants and Consultant Warrants. The Company issued 794,215
shares of common stock and received proceeds of $5,419,000 from the exercise of
the Class C Warrants. A total of 14,410 warrants were redeemed at a total cost
of $1,441.
In June 1997 the Company issued warrants to I. Friedman Equities, Inc. (the
"Friedman consulting warrants") to purchase up to 50,000 shares of common stock.
In September 1997, the Company issued additional warrants to I. Friedman
Equities, Inc. of 50,000 (the "Friedman warrants"). In August 1999, 15,000
Friedman consulting warrants were exercised.
In September 1997, in connection with a consulting agreement, the Company issued
warrants to Allen & Company, Incorporated (the "Allen & Company Warrants") to
purchase 500,000 share of common stock. The value assigned to the warrants of
$1,339,000 is recorded as consulting expense over the term of the agreement with
a portion allocated to the private placement financing consummated in fiscal
1999. For the years ended September 30, 1999 and 1998, the Company recognized
consulting expense of $579,000 and $332,000, respectively. The Company will
recognize the remaining $230,000 of consulting expense during the year ended
September 30, 2000. At September 30,1999, the warrants were fully vested.
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 April 1999 the
stockholders approved an increase in the number of shares of Common Stock
reserved for issuance from 1,250,000 shares to 1,820,000
59
<PAGE> 60
shares. The Plan allows for the issuance of options to purchase shares of the
Company's common stock at an exercise price at least equal to the fair value of
the stock on the date of grant. Options generally vest over a three year term
subject to continued employment or the completion of services rendered, and have
a maximum term of ten years. The Company granted options during the year ended
September 30, 1999 which resulted in compensation of $150,000. There were no
option grants which resulted in compensation expense for the years ended
September 30, 1998 or 1997. At September 30, 1999, 1,509 shares remained
available for future grant.
The following table summarizes stock option activity for the period from
September 30, 1996 to September 30, 1999:
<TABLE>
<CAPTION>
Weighted
Price per Average
Shares Share Exercise Prices
---------------------------------------------------------
<S> <C> <C> <C>
Balance at September 30, 1996...................................... 699,519 $1.50 - $11.64 $5.95
Granted Fiscal 1997................................................ 466,673 $1.88 - $ 2.81 $1.97
Options Expired/Canceled........................................... (70,833) $4.50 - $15.18 $7.84
--------------------
Balance at September 30, 1997...................................... 1,095,359 $1.50 - $11.64 $4.65
Granted Fiscal 1998................................................ 121,668 $1.50 - $4.00 $2.65
Options Expired/Canceled........................................... (112,501) $2.63 - $6.36 $3.98
Options Exercised.................................................. (9,000) $3.75 $3.75
--------------------
Balance at September 30, 1998...................................... 1,095,526 $1.50 - $11.64 $2.93
Granted Fiscal 1999................................................ 502,243 $2.97 - $10.25 $4.63
Options Exercised.................................................. (317,309) $1.50 - $6.36 $2.74
====================
Balance at September 30, 1999...................................... 1,280,460 $1.50 - $11.64 $4.42
====================
</TABLE>
Additional information with respect to the outstanding options as of September
30, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- -------------------------------
Weighted Average Average Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Prices: Shares Contractual Life Price Shares Price
- ---------------------------- ------------------ ----------------------- -------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
$1.50- $3.00 465,110 7.55 years $1.95 277,335 $1.94
$3.01 - $6.00 613,332 6.86 years $4.84 610,832 $4.84
$6.01 - $11.64 202,018 4.71 years $8.88 172,018 $9.17
================== ================
1,280,460 1,060,185
================== ================
</TABLE>
Options exercisable at September 30, 1998 and 1997 were 671,087 and 528,141,
respectively. The weighted average exercise price of these exercisable options
at September 30, 1998 and 1997 were $4.79 and $6.16, respectively.
60
<PAGE> 61
The pro forma effects of applying SFAS No. 123 are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------
1999 1998 1997
----------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net earnings (loss) As reported $ 4,471,000 $ (6,336,000) $ (4,369,000)
============= ============= =============
Pro forma $ 3,689,000 $ (6,662,000) $ (4,577,000)
============= ============= =============
Earnings (loss) per share As reported $ .38 $ (.69) $ (.49)
============= ============= =============
Pro forma $ .31 $ (.73) $ (.51)
============= ============= =============
</TABLE>
The pro forma disclosure of applying SFAS No. 123 is estimated on the option's
date of grant using assumptions of the expected term to exercise, volatility,
risk-free rate, and the expected dividend yield. A summary of these assumptions
is as follows:
<TABLE>
<CAPTION>
Dividend
Expected Term Volatility Risk-free Rate Yield
------------------- ------------------ ---------------------- -----------
<S> <C> <C> <C> <C>
Fiscal 1999 10 years 71.6%-76.2% 5.11%-7.09% 0%
Fiscal 1998 10 years 71.6% 5.67%-5.89% 0%
Fiscal 1997 10 years 71.6% 6.22%-6.99% 0%
</TABLE>
US SEARCH.com Stock Incentive Plan
US SEARCH.com has a stock incentive plan administered by the US SEARCH.com
Compensation Committee. US SEARCH.com has authorized for issuance 2,600,650
options under this plan. At September 30, 1999, 189,820 options issued under
this plan are potentially dilutive to the Company's current ownership percentage
of 55.2%.
(8) Commitments and Contingencies
Compensation
Messrs. Kushner and Locke entered into employment agreements which expire in
March 2004. Those agreements provide for base compensation to each individual of
$475,000, $500,000, $525,000, $550,000 and $575,000 in the fiscal years ended
September 30, 2000, 2001, 2002, 2003 and 2004, respectively. The Company also
provides 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 for each person
The Company has agreements with twelve other employees and officers of the
Company, including consolidated subsidiaries, which provide for annual base
salaries each ranging from $150,000 to $400,000, eligibility for options,
performance bonuses, and severance payments.
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 temporary film production employees covered under
various collective bargaining agreements. The Company incurred $425,000,
$345,000, and $378,000 of multiemployer plan costs in fiscal 1999, 1998, and
1997, respectively. Such costs are capitalized as a component of film and
television programming costs. The Company funds the costs of such plans as
incurred.
61
<PAGE> 62
Leases
The Company and its subsidiaries lease certain facilities and equipment. The
leases generally provide for the lessee to pay taxes, maintenance, insurance and
certain other operating costs of the leased property.
At September 30, 1999, the future minimum payments under leases that have
initial or remaining noncancelable lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Year Ending September 30, Leases Leases
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
2000................................................................................ $228,000 $1,615,000
2001................................................................................ 193,000 1,884,000
2002................................................................................ 35,000 1,770,000
2003................................................................................ 9,000 1,804,000
2004................................................................................ -- 1,848,000
Thereafter........................................................................... -- 729,000
----------- --------------
Total minimum future lease rental payments 465,000 $9,650,000
==============
Less: amounts representing interest (22,000)
-----------
Capitalized lease obligations, included within Contractual obligations in the
consolidated balance sheet at September 30, 1999..................................... $443,000
==========
</TABLE>
Rental expense for all operating leases for the years ended September 30, 1999,
1998 and 1997 was approximately $678,000, $657,000 and $541,000, respectively.
Commitments of US Search.com
US SEARCH.com has several cancelable and noncancelable agreements with data
suppliers and various Internet companies. The Company also has cancelable and
noncancelable broadcast and cable advertising commitments. At September 30,
1999, the minimum noncancelable payments required under these agreements are
approximately :
<TABLE>
<CAPTION>
Year ending September 30, Amount
------------------------- -----------
<S> <C>
2000.......................................... $15,940,000
2001.......................................... $ 8,600,000
2002.......................................... $ 5,950,000
2003.......................................... $ 4,200,000
2004.......................................... $ 4,200,000
Thereafter.................................... $ 1,050,000
</TABLE>
Film and Television Program Production
The Company has certain films and television projects in development (Note 3).
The Company routinely 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.
62
<PAGE> 63
Litigation
The Company is involved in certain legal proceedings and claims arising out of
the normal course of business. Management believes the resolution of these
matters will not have a material adverse effect upon the Company's results of
operations, financial position or cash flows.
(9) Related Party Transactions
In fiscal 1997 and 1998 Messrs. Kushner and Locke each earned annual base
compensation of $425,000. In fiscal 1999 Messrs. Kushner and Locke each earned
base compensation at an annual rate of $450,000 through March 1999 and $475,000
thereafter. In August 1997, the Company granted to each of Messrs. Kushner and
Locke options to purchase 166,666 shares of common stock. In March 1999, the
Company granted to each of Messrs. Kushner and Locke 50,000 shares of restricted
common stock and accelerated the vesting of 33,333 then unvested stock options.
In September 1999, the Company granted to each of Messrs. Kushner and Locke
bonuses of $500,000 and options to purchase 100,000 shares of common stock.
The following is a summary of stock and option compensation to each of Messrs.
Kushner and Locke for the three year period ended September 30, 1999:
<TABLE>
<CAPTION>
Options/Shares Vested, net of exercise
Grant Date Issued Exercise Price at September 30, 1999 Vesting Required
- ------------------------ --------------- ------------------- ----------------------- ----------------
<S> <C> <C> <C> <C>
August 1997 83,333 $1.875 50,000 (1)
August 1997 83,333 $1.875 83,333 (2)
February 1999 50,000 N/A N/A (3)
September 1999 100,000 $4.6875 100,000 (4)
</TABLE>
- ------------------
(1) Originally vested over five years commencing each anniversary of the grant
date. Vesting of options for 33,333 shares was accelerated in March 1999.
The difference in intrinsic value of these options between the grant date
and the date of accelerated vesting is $277,000.
(2) Achievement of profit targets set by the Board of Directors or the price of
the Company's common stock reaching trading prices between $3.00 and $6.00
per share; portions accelerated in March 1999.
(3) Restrictions removed in June 1999.
(4) Immediately vested upon grant.
Outside directors each receive annual compensation between $15,000 and $25,000
in cash. The following is a summary of option compensation to outside directors
for the three year period ended September 30, 1999
<TABLE>
<CAPTION>
Vested, net of
Options Exercise exercises, at Vesting
Holder Grant Date Issued Price September 30, 1999 Required
- ----------------------- ------------------ ------------- ------------ ------------------- ----------
<S> <C> <C> <C> <C> <C>
Irwin Friedman June 1998 16,667 $2.8438 5,556 (1)
Irwin Friedman February 1999 13,333 $7.19 13,333 (2)
Irwin Friedman September 1999 13,333 $4.8125 13,333 (2)
Stuart Hersch August 1997 16,667 $1.875 16,667 (1)
Stuart Hersch February 1999 13,333 $7.19 13,333 (2)
Stuart Hersch September 1999 13,333 $4.8125 13,333 (2)
Stuart Hersch September 1999 40,000 $4.8125 40,000 (2)
John Lannan June 1998 16,667 $2.8438 11,111 (1)
John Lannan February 1999 13,333 $7.19 13,333 (2)
John Lannan September 1999 13,333 $4.8125 13,333 (2)
</TABLE>
- ------------------
(1) Vests one-third at grant date and one-third over next two anniversaries of
the grant date.
(2) Immediately vested upon grant.
63
<PAGE> 64
The Company loaned the President and Chief Operating Officer a total of $300,000
in September and October 1996. The loan bears interest at 8% per year and is due
through October 2001. Pursuant to his employment contract, during fiscal 1998
and fiscal 1999 $50,000 and $100,000 principal amounts of the loan,
respectively, plus interest on such amounts, were forgiven and recorded as
additional compensation expense. The unpaid principal balance at September 30,
1999 was $150,000.
During 1989, the Company entered into a consulting agreement with Stuart Hersch,
a director of the Company. The agreement is on a month-to-month basis. For the
years ended September 30, 1997, 1998 and 1999 the Company recognized $90,000,
$90,000 and $71,000 respectively, in consulting expense under this agreement.
Mr. Hersch sold 8,333 shares of the Company's common stock in December 1997 at
$3.625 per share.
Since 1991 Irwin Friedman, a director of the Company, has rendered financial
consulting services to the Company through the firm I. Friedman Equities, Inc.
During 1997 in connection with rendering certain services, that firm was granted
warrants exercisable for 100,000 shares of common stock (Note 7). For the years
ended September 30, 1997, 1998 and 1999 the Company recognized $72,000, $24,000
and $48,000, respectively, in consulting expense under various agreements with
that firm. During the year ended September 30, 1999, I. Friedman Equities, Inc.
was also paid $62,000 pursuant to a 1996 agreement in connection with the
redemption of Class C Common Stock Warrants, and that amount was charged to
stockholders' equity.
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 bore interest at the lesser of (a) Prime plus 2%
or (b) 10%. In January 1999 the loan was assigned to a subsidiary, and was
used to reduce pre-existing obligations to August.
From May 1997 to October 1997, Peter Locke (co-chairman of US SEARCH.com and the
Company) personally loaned to US SEARCH.com amounts aggregating approximately
$397,000 (gross of any repayments which occurred during such period). The loans
with interest at 10% per annum were repaid in full. In addition, US SEARCH.com
paid approximately $40,000 in consulting fees and interest to Mr. Locke for
services rendered through December 31, 1997.
US SEARCH.com loaned approximately $41,000 in 1995, $176,000 in 1996 and $32,000
in 1997, to an existing stockholder and co-founder of US SEARCH.com (the
"Stockholder"). US SEARCH.com received repayments of approximately $5,000 in
1995 and $3,000 in 1996 from Stockholder. In June 1997, the Stockholder
personally assumed US SEARCH.com's obligations under a $296,000 promissory note
payable to a former stockholder of US SEARCH.com (the "Related Loan"). In
consideration of the Stockholder's assumption of US SEARCH.com's obligations
under the Stockholder Loan, the prior outstanding amounts loaned to this
Stockholder were repaid in full and an amount payable to Stockholder was
established to the extent the assumption of the Related Loan exceeded loans made
to the Stockholder. In September 1998, in connection with US SEARCH.com's
amended and restated employment agreement with the Stockholder, US SEARCH.com
agreed to assume the Stockholder's obligations on the Related Loan. The
assumption resulted in a $296,000 compensation charge recorded in general and
administrative expenses in the year ended September 30, 1999.
An affiliate of a former stockholder/executive officer of US SEARCH.com lent
this subsidiary $50,000 in December 1996 and $50,000 in May 1997, bearing
interest at 20% per annum and payable in six monthly installments of $10,000
each (including interest). US SEARCH.com subsequently defaulted in its
obligations under these notes. In January 1998, the notes were restructured
providing for the payment of $120,000, including all past and future interest,
in 36 equal monthly installments of approximately $3,333 each, beginning in
January 1998, and guaranteed by the Company. As of September 30, 1999, US
SEARCH.com owed $70,000 under this note.
64
<PAGE> 65
(10) Segment Information
Prior to fiscal 1998, the Company operated in one business segment, film and
television programs. Early in fiscal 1998 the Company obtained controlling
interest in US SEARCH.com. The Company subsequently operated in two segments:
film and television program production and distribution, and search services
related to US SEARCH.com. Each segment is a strategic business unit that offers
different products and services. They are managed separately because each
requires different investment, technology and marketing strategies. Management
evaluates business segment performance based on operating revenues, operating
earnings and asset growth.
The film and television program business segment exploits distribution rights in
its film and television program libraries, films and television programs
produced by the Company or co-produced with equity affiliates, and film and
television programs produced by third parties. Products are licensed in both the
United States and virtually all international markets.
The search services business segment consists solely of the Company's interest
in US SEARCH.com., which provides people search and customized individual
reference services. Services are provided almost exclusively to United States
customers.
Summarized financial information regarding the Company's business segments is
shown in the table below.
<TABLE>
<CAPTION>
Film and
television Search services Consolidated
------------ --------------- ------------
<S> <C> <C> <C>
Fiscal 1999:
Operating revenues $ 34,143,000 $ 15,747,000 $ 49,890,000
Gross profit 917,000 9,307,000 9,704,000
Earnings (loss) before income taxes 16,539,000 (11,342,000) 5,197,000
Total assets 154,627,000 30,488,000 185,115,000
Fiscal 1998:
Operating revenues 68,261,000 7,869,000 76,130,000
Gross profit 10,223,000 4,280,000 14,503,000
(Loss) before income taxes (1,419,000) (4,736,000) (6,155,000)
Total assets 134,319,000 2,786,000 137,105,000
Fiscal 1997:
Operating revenues 54,746,000 -- 54,746,000
Gross profit 2,662,000 -- 2,662,000
(Loss) before income taxes (4,346,000) -- (4,346,000)
Total assets 124,368,000 -- 124,368,000
</TABLE>
65
<PAGE> 66
Geographic Data
The revenues of equity affiliates are generated worldwide and their operations
are principally located in the United States. The table below presents sources
of operating revenue by country or territory for the Company and consolidated
subsidiaries. Equity affiliates are not included.
<TABLE>
<CAPTION>
Year ended September 30.
-----------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States $33,862,000 $40,251,000 $24,489,000
Germany 4,420,000 12,954,000 5,873,000
France 281,000 2,302,000 1,036,000
Great Britain 1,712,000 1,596,000 1,310,000
Latin America 5,625,000 3,574,000 766,000
Australia 719,000 2,181,000 2,985,000
Japan 637,000 3,077,000 1,985,000
Spain -- 3,289,000 6,347,000
Italy 383,000 3,463,000 1,545,000
Other foreign countries or territories 2,251,000 3,443,000 8,410,000
----------- ----------- -----------
Total revenues $49,890,000 $76,130,000 $54,746,000
=========== =========== ===========
</TABLE>
The following table presents film and television program costs and total assets
based upon their geographic location:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
United Latin Great
States America Britain Total
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
September 30, 1999:
Film and television program costs $89,163,000 $2,508,000 $ -- $ 91,499,000
Total assets 179,864,000 3,163,000 2,088,000 185,115,000
September 30, 1998:
Film and television program costs 73,773,000 -- -- 73,773,000
Total assets 132,756,000 2,361,000 1,988,000 137,105,000
September 30, 1997:
Film and television program costs 68,507,000 -- -- 68,507,000
Total assets 122,759,000 -- 1,609,000 124,368,000
</TABLE>
Customer Concentration
For the year ended September 30, 1999, sales to one United States film and
television program customer represented 18% of the Company's consolidated
operating revenues. At September 30, 1999, accounts receivable from two
customers represented 31% of the Company's consolidated accounts receivable. For
the year ended September 30, 1998, sales to two international film and
television program customers represented 26% of the Company's consolidated
operating revenues. At September 30, 1998, accounts receivable from two
customers represented 41% of the Company's consolidated accounts receivable.
There were no customer concentrations for the year ended September 30, 1997.
66
<PAGE> 67
(11) Earnings (Loss) Per Share
The table below reconciles net earnings (loss) and average shares of common
stock outstanding to those amounts used to calculate basic and diluted earnings
(loss) per share.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings per share - earnings (loss)
available to common stockholders $ 4,471,000 $(6,336,000) $(4,369,000)
Effect of dilutive securities: interest on convertible debt 60,000 -- --
----------- ----------- -----------
Numerator for diluted earnings per share - earnings (loss)
available to common stockholders after assumed conversions $4,531,,000 $(6,336,000) $(4,369,000)
=========== =========== ===========
Denominator:
Denominator for basic earnings per share - weighted average
shares 11,755,000 9,181,000 8,959,000
----------- ----------- -----------
Effect of dilutive securities:
Employee stock options 378,000 -- --
Warrants 434,000 -- --
Convertible debentures 129,000 -- --
----------- ----------- -----------
Dilutive potential common shares 941,000 -- --
=========== =========== ===========
Denominator for diluted earnings per share - adjusted weighted
average shares and assumed conversions 12,696,000 9,181,000 8,959,000
=========== =========== ===========
Basic earnings (loss) per share $ .38 $ (.69) $ (49)
=========== =========== ===========
Diluted earnings (loss) per share $ .36 $ (.69) $ (.49)
=========== =========== ===========
</TABLE>
A total of 367,000 shares of common stock representing the potential exercise of
options, warrants and the potential conversion of debentures were not included
in the calculation of diluted earnings per share for fiscal 1999, as the impact
of including such securities would be antidilutive. All options, warrants, and
convertible debentures were antidilutive for the years ended September 30, 1998
and 1997.
(12) Fourth Quarter Adjustments
During the fourth quarter of 1997, the Company revised its estimates of future
revenues for certain product no longer being produced by the Company. 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.
(13) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------------------------
Cash paid for: 1999 1998 1997
--------------- ------------- -------------
<S> <C> <C> <C>
Interest $7,436,000 $6,427,000 $4,487,000
Taxes $30,000 $40,000 $23,000
</TABLE>
Fiscal 1997:
o $667,000 of convertible subordinated debentures were converted into 84,562
adjusted shares of common stock.
67
<PAGE> 68
Fiscal 1998:
o The Company acquired an 80% interest in 800-US Search in exchange for
certain guaranties of indebtedness. In conjunction with the acquisition,
liabilities assumed were:
Fair value of assets acquired $461,000
Cash paid for the capital stock --
Liabilities assumed $2,557,000
o $300,000 of convertible subordinated debentures were converted into 51,282
adjusted shares of common.
Fiscal 1999:
o The Company assigned a note receivable from August of $192,000 to a
subsidiary to reduce pre-existing subsidiary obligations to August (Note 9)
o $100,000 of a note receivable from an officer of the Company was forgiven
(Note 9).
o $296,000 in related party notes of US Search.com were forgiven (Note 9).
o The Company issued common stock with a value of $5,820,000 in exchange for
convertible preferred stock and detachable warrants in Harvey (Note 1).
o $9,713,000 of convertible subordinated debentures were converted into
1,288,185 adjusted shares of common stock.
o A formerly-consolidated film production subsidiary was deconsolidated as
the Company no longer exercised control. The non-cash reduction in assets
and liabilities were:
Accounts receivable $ 16,000
Film and television program costs $ 1,810,000
Other assets $ 40,000
Accounts payable and accrueds $ 38,000
Notes payable $ 1,950,000
68
<PAGE> 69
THE KUSHNER-LOCKE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
Balance at Additions Charged
Beginning of to Costs and Deductions Due Balance at End
Period Expenses to Write-offs of Period
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowances for Doubtful Accounts:
Year Ended 9/30/99 $2,509,000 2,959,000 (2,220,000) $3,248,000
==============================================================
Year Ended 9/30/98 $ 925,000 2,118,000 (534,000) $2,509,000
==============================================================
Year Ended 9/30/97 $ 693,000 1,310,000 (1,078,000) $ 925,000
==============================================================
</TABLE>
69
<PAGE> 70
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 27, 1999
/s/ DONALD KUSHNER
----------------------------------
Donald Kushner
Co-Chairman of the Board, Co-Chief
Executive Officer and Secretary
Dated: December 27, 1999
/s/ ROBERT SWAN
----------------------------------
Robert Swan
Senior Vice President and 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 27, 1999
/s/ PETER LOCKE
----------------------------------
Peter Locke
Co-Chairman of the Board and
Co-Chief Executive Officer
Dated: December 27, 1999
/s/ DONALD KUSHNER
----------------------------------
Donald Kushner
Co-Chairman of the Board, Co-Chief
Executive Officer and
Secretary
Dated: December 27, 1999
/s/ ROBERT SWAN
----------------------------------
Robert Swan
Senior Vice President and Chief
Financial Officer
Dated: December 27, 1999
/s/ ADELINA VILLAFLOR
----------------------------------
Adelina Villaflor
Controller (Chief Accounting
Officer)
Dated: December 27, 1999
/s/ IRWIN FRIEDMAN
----------------------------------
Irwin Friedman
Director
70
<PAGE> 71
Dated: December , 1999
----------------------------------
Stuart Hersch
Director
Dated: December 27, 1999
/s/ JOHN LANNAN
----------------------------------
John Lannan
Director
71
<PAGE> 72
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 133*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)
10.1 Amended and Restated Employment Agreement dated October 1, 1997
between the Company and Donald Kushner. (W)
10.1.1 First Amendment to Amended and Restated Employment Agreement
dated March 2, 1999 between the Company and Donald Kushner.
10.2 Amended and Restated Employment Agreement dated October 1, 1997
between the Company and Peter Locke. (W)
10.2.1 First Amendment to Amended and Restated Employment Agreement
dated March 2, 1999 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)
10.12.2 Lease Agreement by and between Arden Realty Limited Partnership
and the Kushner-Locke Company as of August 13, 1999
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)
72
<PAGE> 73
10.27 Loan and Security Agreement dated December 1, 1994 between the
Company and August Entertainment, Inc., and Guarantees between
the Company, August Entertainment, Inc. and the Allied
Entertainments Group PLC and certain of its subsidiaries (M)
10.44 Amendment to the 1988 Stock Incentive Plan dated May 17,
1994 (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 lenders named therein and The Chase Manhattan Bank,
N.A., (formerly Chemical Bank) as Agent, and as Fronting Bank for
the lenders (the "Credit Agreement") (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)
10.61 Waiver of Section 6.17 Overhead Expenses of the Credit
Agreement, dated as of . (V)
10.62 Amendment No. 5 dated as of December 22, 1997 to the Credit
Agreement. (W)
10.63 Amendment No. 6 dated as of May 13, 1998 to the Credit
Agreement. (X)
10.64 Amendment No. 7 dated as of December , 1998 to the Credit
Agreement. (Y)
10.65 Waiver of Section 6.17 Overhead Expenses of the Credit Agreement,
dated as of December 9, 1999.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG LLP
27. Financial Data Schedule
- -----------
(A) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-18, as amended, effective December 5, 1988 (Commission
File No. 33-25101-LA).
(B) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1989.
(C) Incorporated by reference from the Exhibit to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1990.
(D) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-37192), as initially filed on October 5,
1990 or as amended on November 30, 1990.
(E) Incorporated by reference from the Exhibits to the Company's Registration
Statements on Form S-1, as amended, effective November 30, 1990 (File No.
33-37192), and effective December 20, 1990 (File No. 33-37193).
(F) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, effective March 20, 1991.
(G) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended March 31, 1991.
(H) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1991.
(I) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1992.
(J) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-2, as amended, effective November 12, 1992 (Commission
File No. 33-51544).
73
<PAGE> 74
(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.
(W) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1997.
(X) Incorporated by reference from the Exhibits to the Company's Report on Form
10-Q for the fiscal quarter ended June 30, 1998.
(Y) Incorporated by reference from the Exhibits to the Company's Report on Form
10-K for the fiscal year ended September 30, 1999.
74
<PAGE> 1
EXHIBIT 10.1.1
FIRST AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This First Amendment to Amended and Restated Employment Agreement (the
"First Amendment") is entered into by and between Donald Kushner, as "Employee,"
and The Kushner-Locke Company, a California corporation, as "Employer" or
"Company," as of March 2, 1999, based upon the following facts:
RECITALS
A. Employee and Company executed an Amended and Restated Employment Agreement as
of October 1, 1997, setting forth the terms and conditions of Employee's
employment by Company.
B. On March 2, 1999, a special meeting of the Board of Directors of Company was
held at which the Board of Directors took the following action: (1) granted to
Employee 50,000 shares of restricted common stock of The Kushner-Locke Company
with the terms and conditions of such restrictions to be determined by the Board
at a later date; (2) accelerated the vesting of one-half of all previously
issued but currently unvested stock options granted to Employee; (3) amended the
Amended and Restated Employment Agreement of Employee dated October 1, 1997 to
immediately increase Employee's Salary by $25,000 on an annual basis, effective
as of March 2, 1999; (4) extended the term of Employee's Amended and Restated
Employment Agreement to expire on March 2, 2004; (5) established Employee's
annualized Base Salary for the employment year ending September 30, 2003 at
$550,000 and established the annualized Base Salary for the partial employment
year ending March 2, 2004 at $575,000; and (6) ratified and confirmed the
Amended and Restated Employment Agreement except as so amended. A true and
correct copy of the Minutes of Directors' Meeting of The Kushner-Locke Company
of March 2, 1999 is attached as Exhibit A to this First Amendment to Amended and
Restated Employment Agreement.
C. Company and Employee now wish to amend Employee's Amended and Restated
Employment Agreement to reflect the action taken by Company's Board of Directors
on March 2, 1999.
NOW, THEREFORE, in consideration of the parties' mutual promises contained
herein and in the Amended and Restated Employment Agreement, which consideration
is acknowledged to be adequate and sufficient, the parties hereto hereby agree
as follows:
AGREEMENT
1. The above Recitals are hereby incorporated in this First Amendment by
reference.
2. Employee's Amended and Restated Employment Agreement is hereby amended in
conformance with the March 2, 1999 Minutes of Directors' Meeting of The
Kushner-Locke Company, and as stated in Recital B above.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as of March 2, 1999.
"Employer": THE KUSHNER-LOCKE COMPANY,
a California corporation
By: /s/ BRUCE ST.J LILLISTON
-----------------------------------
Title: Chief Operating Officer and
President
"Employee": /s/ DONALD KUSHNER
-----------------------------------
<PAGE> 1
EXHIBIT 10.2.1
FIRST AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This First Amendment to Amended and Restated Employment Agreement (the
"First Amendment") is entered into by and between Peter Locke, as "Employee,"
and The Kushner-Locke Company, a California corporation, as "Employer" or
"Company," as of March 2, 1999, based upon the following facts:
RECITALS
A. Employee and Company executed an Amended and Restated Employment Agreement as
of October 1, 1997, setting forth the terms and conditions of Employee's
employment by Company.
B. On March 2, 1999, a special meeting of the Board of Directors of Company was
held at which the Board of Directors took the following action: (1) granted to
Employee 50,000 shares of restricted common stock of The Kushner-Locke Company
with the terms and conditions of such restrictions to be determined by the Board
at a later date; (2) accelerated the vesting of one-half of all previously
issued but currently unvested stock options granted to Employee; (3) amended the
Amended and Restated Employment Agreement of Employee dated October 1, 1997 to
immediately increase Employee's Salary by $25,000 on an annual basis, effective
as of March 2, 1999; (4) extended the term of Employee's Amended and Restated
Employment Agreement to expire on March 2, 2004; (5) established Employee's
annualized Base Salary for the employment year ending September 30, 2003 at
$550,000 and established the annualized Base Salary for the partial employment
year ending March 2, 2004 at $575,000; and (6) ratified and confirmed the
Amended and Restated Employment Agreement except as so amended. A true and
correct copy of the Minutes of Directors' Meeting of The Kushner-Locke Company
of March 2, 1999 is attached as Exhibit A to this First Amendment to Amended and
Restated Employment Agreement.
C. Company and Employee now wish to amend Employee's Amended and Restated
Employment Agreement to reflect the action taken by Company's Board of Directors
on March 2, 1999.
NOW, THEREFORE, in consideration of the parties' mutual promises contained
herein and in the Amended and Restated Employment Agreement, which consideration
is acknowledged to be adequate and sufficient, the parties hereto hereby agree
as follows:
AGREEMENT
1. The above Recitals are hereby incorporated in this First Amendment by
reference.
2. Employee's Amended and Restated Employment Agreement is hereby amended in
conformance with the March 2, 1999 Minutes of Directors' Meeting of The
Kushner-Locke Company, and as stated in Recital B above.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
as of March 2, 1999.
"Employer": THE KUSHNER-LOCKE COMPANY,
a California corporation
By: /s/ BRUCE ST.J LILLISTON
------------------------------------
Title: Chief Operating Officer and
President
/s/ PETER LOCKE
"Employee": ------------------------------------
<PAGE> 1
EXHIBIT 10.65
As of December 9, 1999
The Kushner-Locke Company
11601 Wilshire Boulevard, 21st floor
Los Angeles, California 90025
Dear Sirs:
Reference is hereby made to that certain Credit, Security, Guaranty and Pledge
Agreement, dated as of June 19, 1996 (as the same has been, and may be, amended,
supplemented or otherwise modified, renewed or replaced from time to time, the
"Credit Agreement"), among The Kushner-Locke Company (the "Borrower"), the
Guarantors referred to therein, the Lenders referred to therein, and The Chase
Manhattan Bank (formerly known as Chemical Bank), as Agent. Capitalized terms
used herein and not otherwise defined are used herein as defined in the Credit
Agreement.
You have requested that the Required Lenders waive compliance with Section 6.17
(Overhead Expenses) of the Credit Agreement solely with respect to the
requirement for fiscal year 1999.
Each of the undersigned hereby waives the Credit Parties' non-compliance with
Section 6.17 of the Credit Agreement solely with respect to the requirement for
fiscal year 1999.
By its execution hereof, the Credit Parties hereby represents and warrants that
as of the date hereof, there exists no Default or Event of Default.
This waiver may be executed in counterparts, each of which shall constitute an
original, but all of which when taken together, shall constitute one and the
same instrument.
This waiver shall become effective when the Agent shall have received
executed counterparts of this waiver which, when taken together, bear the
signatures of the Required Lenders and all the Credit Parties.
This waiver shall not be construed as extending to any other matter, similar or
dissimilar, or entitling the Credit Parties to any future waivers regarding
similar matters or otherwise.
Except to the extent expressly set forth above, this letter does not constitute
a waiver or modification of any provision of the Credit Agreement or a waiver of
any Default or Event of Default, whether or not known to the Agent or the
Lenders. Except as expressly modified herein, all terms of the Credit Agreement
remain in full force and effect.
THIS WAIVER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK.
Very truly yours,
THE CHASE MANHATTAN BANK, individually
and as Agent
<PAGE> 2
By: /s/ CONSTANCE M. COLEMAN
--------------------------------------
Name: Constance M. Coleman
Title: Vice President
DE NATIONALE INVESTERINGSBANK N.V.
By: /s/ ERIC SNATERSE
--------------------------------------
Name: Eric Snaterse
Title: Senior Vice President
By: /s/ H. Rynberg
--------------------------------------
Name: H. Rynberg
Title: Vice President
COMERICA BANK -- CALIFORNIA
By: /s/ D. JEFFREY ANDRICK
-------------------------------------
Name: D. Jeffrey Andrick
Title: First Vice President
FAR EAST NATIONAL BANK
By: /s/ CHARLES H. AVIS
------------------------------------
Name: Charles H. Avis
Title: Regional Vice President
AGREED TO BY:
THE KUSHNER-LOCKE COMPANY
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.
<PAGE> 3
KLF GUILD CO.
KLF DEVELOPMENT CO.
KLTV GUILD CO.
KLTV DEVELOPMENT CO.
KUSHNER-LOCKE INTERNATIONAL, INC.
KL INTERACTIVE MEDIA, INC.
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/ BRUCE LILLISTON
------------------------------------
Name: Bruce Lilliston
Title: President and Chief Operating Officer
KLC/NEW CITY
By its General Partner
THE KUSHNER-LOCKE COMPANY
By /s/ BRUCE LILLISTON
------------------------------------
Name: Bruce Lilliston
Title: President and Chief Operating Officer
<PAGE> 4
Exhibit 10.12.2
STANDARD OFFICE LEASE
BY AND BETWEEN
ARDEN REALTY LIMITED PARTNERSHIP,
Maryland limited partnership
AS LANDLORD,
AND
THE KUSHNER-LOCKE COMPANY,
a California corporation,
AS TENANT
SUITES 2030 and 2100
WORLD SAVINGS CENTER
TABLE OF CONTENTS
PAGES
ARTICLE 1 BASIC LEASE PROVISIONS 1
ARTICLE 2 TERM/PREMISES 2
ARTICLE 3 RENTAL 2
(a) Basic Rental 2
(b) Increase in Direct Costs 2
(c) Definitions 2
d) Determination of Payment 5
ARTICLE 4 SECURITY DEPOSIT 7
ARTICLE 5 HOLDING OVER 7
ARTICLE 6 PERSONAL PROPERTY TAXES 7
ARTICLE 7 USE 8
ARTICLE 8 CONDITION OF PREMISES 8
ARTICLE 9 REPAIRS AND ALTERATIONS 9
ARTICLE 10 LIENS 10
ARTICLE 11 PROJECT SERVICES 10
ARTICLE 12 RIGHTS OF LANDLORD 12
ARTICLE 13 INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY 12
(a) Indemnity 12
(b) Exemption of Landlord from Liability 13
ARTICLE 14 INSURANCE 13
(a) Tenant's Insurance 13
(b) Form of Policies 13
<PAGE> 5
(c) Landlord's Insurance 14
(d) Waiver of Subrogation 14
(e) Compliance with Law 14
ARTICLE 15 ASSIGNMENT AND SUBLETTING 15
ARTICLE 16 DAMAGE OR DESTRUCTION 17
ARTICLE 17 SUBORDINATION 19
ARTICLE 18 EMINENT DOMAIN 19
ARTICLE 19 DEFAULT 20
(a) Tenant's Default 20
(b) Landlord's Default 20
ARTICLE 20 REMEDIES 20
ARTICLE 21 TRANSFER OF LANDLORD'S INTEREST 21
ARTICLE 22 BROKER 22
ARTICLE 23 PARKING 22
ARTICLE 24 WAIVER 23
ARTICLE 25 ESTOPPEL CERTIFICATE 23
ARTICLE 26 LIABILITY OF LANDLORD 23
ARTICLE 27 INABILITY TO PERFORM 24
ARTICLE 28 HAZARDOUS WASTE 24
ARTICLE 29 SURRENDER OF PREMISES; REMOVAL OF PROPERTY 25
ARTICLE 30 MISCELLANEOUS 25
(a) Severability; Entire Agreement 25
(b) Attorneys' Fees; Waiver of Jury Trial 26
(c) Time of Essence 26
(d) Headings; Joint and Several 26
(e) Reserved Area 26
(f) No Option 26
(g) Use of Project Name; Improvements 26
(h) Rules and Regulations 26
(i) Quiet Possession 27
(j) Rent 27
(k) Successors and Assigns 27
(l) Notices 27
(m) Intentionally Omitted 27
(n) Right of Landlord to Perform 27
(o) Access, Changes in Project, Facilities, Name 27
(p) Signing Authority 28
(q) Intentionally Omitted 28
(r) Substitute Premises 28
(s) Survival of Obligations 28
(t) Reasonable Consent 28
(u) Governing Law 28
(v) Exhibits and Addendum 29
ARTICLE 31 OPTION TO EXTEND 29
(a) Option Right 29
(b) Option Rent 29
(c) Exercise of Option 29
(d) Determination of Market Rent 30
ARTICLE 32 RIGHT OF FIRST OFFER 31
ARTICLE 33 SIGNAGE 32
ARTICLE 34 STORAGE SPACE 32
(a) Monthly Storage Rent. 33
(b) Indemnification. 33
(c) Use of Storage Space 33
(d) Incorporation of Lease Provisions. 33
Exhibit "A" Premises
Exhibit "B" Rules and Regulations
<PAGE> 6
Exhibit "C" Notice of Lease Term Dates and Tenant's Proportionate
Share
Exhibit "D" Tenant Work Letter
INDEX OF DEFINED TERMS
DEFINED TERMS PAGE
Abatement Event 11
Abatement Notice 11
ADA 4
Additional Rent 2
Affiliate 16
Affiliated Assignee 16
Alterations 9
Annual Storage Rent 33
Approved Working Drawings Exhibit D
Architect Exhibit D
Base Year 1
Base, Shell and Core Exhibit D
Basic Rental 1
Brokers 1
Claims 12
Code Exhibit D
Commencement Date 1
Construction Drawings Exhibit D
Contemplated Effective Date 17
Contemplated Term 17
Contemplated Transfer Space 17
Contractor Exhibit D
Control 16
Co-Producers 17
Cosmetic Alterations 9
Damage Repair Estimate 17
Direct Costs 2
Economic Terms 31
Eligibility Period 12
Engineers Exhibit D
Estimate 5
Estimate Statement 5
Estimated Excess 6
Event of Default 20
Excess 5
Exercise Notice 29
Expiration Date 1
Final Retention Exhibit D
Final Space Plan Exhibit D
Final Working Drawings Exhibit D
First Offer Notice 31
First Offer Space 31
Force Majeure 24
Hazardous Material 24
Improvement Allowance Exhibit D
Improvement Allowance Items Exhibit D
Intention to Transfer Notice 17
Interest Notice 30
Landlord 1
Landlord Coordination Fee Exhibit D
<PAGE> 7
Laws 25
Lease 1
Lease Year 2
Market Rent 29
Miscellaneous Items Exhibit D
Objectionable Name 32
Operating Costs 3
Option 29
Option Rent 29
Option Rent Notice 30
Option Term 29
Original Tenant 29
Outside Agreement Date 30
Parking Passes 2
Permits Exhibit D
Permitted Use 1
Premises 1
Project 1
Real Property 3
Reassessment 3
Representative 23
Review Period 6
RSF 32
Second Chance Notice 31
Security Deposit 1
Six Month Period 17
Specifications Exhibit D
Square Footage 1
Standard Improvement Package Exhibit D
Statement 6
Storage Space 32
Superior Leases 31
Superior Rights 31
Tax Costs 3
Tax Increase 3
Tenant 1
Tenant's Acceptance 30
Tenant Improvements 8
Tenant's Agents Exhibit D
Tenant's Proportionate Share 1
Tenant's Signage 32
Term 1
Transfer 15
Transfer Premium 16
Transferee 16
STANDARD OFFICE LEASE
This Standard Office Lease ("Lease") is made and entered into as of the
13th day of August, 1999, by and between ARDEN REALTY LIMITED PARTNERSHIP, a
Maryland limited partnership ("Landlord"), and THE KUSHNER-LOCKE COMPANY, a
California corporation ("Tenant").
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the
premises described as Suites 2030 and 2100, as designated on the plans attached
hereto and incorporated herein as Exhibit "A"
<PAGE> 8
("Premises"), of the project ("Project" ") now known as World Savings Center
whose address is 11601 Wilshire Boulevard, Los Angeles, California 90025 for the
Term and upon the terms and conditions hereinafter set forth, and Landlord and
Tenant hereby agree as follows:
ARTICLE 1
BASIC LEASE PROVISIONS
A. Term: Suite 2100: Five (5) years and three (3) months.
Suite 2030: Twenty-one (21) months, subject to
extension pursuant to Article 31 below.
Commencement Date: April 1, 2000.
Expiration Date: Suite 2100: June 30, 2005.
Suite 2030: December 31, 2001.
B. Square Footage: 23,132 rentable (21,695 usable) square feet, of
which 3,774 rentable (3,306 usable) square feet
comprise Suite 2030 and the remainder of which
comprises Suite 2100.
C. Basic Rental:
Annual Monthly Monthly Basic Rental
Lease Month Basic Rental Basic Rental Per Rentable Square Foot
1-3 $527,409.60 $43,950.80 $1.90
4-33 $804,993.60* $67,082.80* $2.90
34-63 $860,510.40* $71,709.20* $3.10
Subject to decrease in the event Tenant elects not to exercise its option(s) to
extend the Term as to Suite 2030.
D. Base Year: 2000
E. Tenant's Proportionate: 4.93%, based on a total Project rentable
square footage of 469,115.
F. Security Deposit: $43,950.80 in accordance with Article 4
of the Lease.
G. Permitted: General office use
H. Brokers: Travers Realty.
I. Parking Passes: Tenant shall have the use of fifty-six
(56) unreserved parking passes and
fourteen (14) reserved parking passes
<PAGE> 9
for use in the Project's parking
facility, at the rate provided in
Article 23 hereof (which shall be
decreased on a pro rata basis in the
event Tenant does not exercise its
Suite 2030 Option(s) pursuant to Article
31 below).
ARTICLE 2
TERM/PREMISES
The Term of this Lease shall commence on the Commencement Date as set forth
in Article 1.A. of the Basic Lease Provisions and shall end on the Expiration
Date set forth in Article 1.A. of the Basic Lease Provisions. For purposes of
this Lease, the term "Lease Year" shall mean each consecutive twelve (12) month
period during the Lease Term, with the first Lease Year commencing on the
Commencement Date. Landlord and Tenant hereby stipulate that the Premises
contains the number of square feet specified in Article 1.B. of the Basic Lease
Provisions. Landlord may deliver to Tenant a Commencement Letter in a form
substantially similar to that attached hereto as Exhibit "C", which Tenant shall
execute and return to Landlord within five (5) days of receipt thereof. Failure
of Tenant to timely execute and deliver the Commencement Letter shall constitute
acknowledgment by Tenant that the statements included in such notice in good
faith are true and correct, without exception.
ARTICLE 3
RENTAL
(a) Basic Rental. Tenant agrees to pay to Landlord during the Term hereof,
at Landlord's office or to such other person or at such other place as directed
from time to time by written notice to Tenant from Landlord, the initial monthly
and annual sums as set forth in Article 1.C of the Basic Lease Provisions,
payable in advance on the first day of each calendar month, without demand,
setoff or deduction, except as expressly provided in this Lease.
(b) Increase in Direct Costs" Increase in Direct Costs. The term "Base
Year" means the calendar year set forth in Article 1.D. of the Basic Lease
Provisions. If, in any calendar year during the Term of this Lease, the "Direct
Costs" (as hereinafter defined) paid or incurred by Landlord shall be higher
than the Direct Costs for the Base Year, Tenant shall pay an additional sum for
such and each subsequent calendar year equal to the product of the amount set
forth in Article 1.E. of the Basic Lease Provisions multiplied by such increased
amount of "Direct Costs." In the event either the Premises and/or the Project is
expanded, then Tenant's Proportionate Share shall be appropriately adjusted, and
as to the calendar year in which such change occurs, Tenant's Proportionate
Share for such year shall be determined on the basis of the number of days
during that particular calendar year that such Tenant's Proportionate Share was
in effect. In the event this Lease shall terminate on any date other than the
last day of a calendar year, the additional sum payable hereunder by Tenant
during the calendar year in which this Lease terminates shall be prorated on the
basis of the relationship which the number of days which have elapsed
<PAGE> 10
from the commencement of said calendar year to and including said date on which
this Lease terminates bears to three hundred sixty-five (365). Any and all
amounts due and payable by Tenant pursuant to Article 3(b),(c) and (d) hereof
shall be deemed "Additional Rent" and Landlord shall be entitled to exercise the
same rights and remedies upon default in these payments as Landlord is entitled
to exercise with respect to defaults in monthly Basic Rental payments.
(c) Definitions" As used herein the term "Direct Costs" shall mean the sum of
the following:
(i) "Tax Costs", which shall mean any and all real estate taxes and other
similar charges on real property or improvements, assessments, water and sewer
charges, and all other charges assessed, reassessed or levied upon the Project
and appurtenances thereto and the parking or other facilities thereof, or the
real property thereunder (collectively the "Real Property") or attributable
thereto or on the rents, issues, profits or income received or derived therefrom
which are assessed, reassessed or levied by the United States, the State of
California or any local government authority or agency or any political
subdivision thereof, and shall include Landlord's reasonable legal fees, costs
and disbursements incurred in connection with proceedings for reduction of Tax
Costs or any part thereof; provided, however, if at any time after the date of
this Lease the methods of taxation now prevailing shall be altered so that in
lieu of or as a supplement to or a substitute for the whole or any part of any
Tax Costs, there shall be assessed, reassessed or levied (a) a tax, assessment,
reassessment, levy, imposition or charge wholly or partially on the rents, or
(b) a tax, assessment, reassessment, levy (including but not limited to any
municipal, state or federal levy), imposition or charge measured by or based in
whole or in part upon the Real Property and imposed upon Landlord, or (c) a
license fee measured by the rent payable under this Lease, then all such taxes,
assessments, reassessments or levies or the part thereof so measured or based,
shall be deemed to be included in the term "Direct Costs." In no event shall Tax
Costs included in Direct Costs for any year subsequent to the Base Year be less
than the amount of Tax Costs included in Direct Costs for the Base Year. In
addition, when calculating Tax Costs for the Base Year, special assessments
shall only be deemed included in Tax Costs for the Base Year to the extent that
such special assessments are included in Tax Costs for the applicable subsequent
calendar year during the Term. Notwithstanding anything to the contrary
contained in this Section 3(c)(i), there shall be excluded from Tax Costs (i)
all excess profits taxes, franchise taxes, gift taxes, capital stock taxes,
inheritance and succession taxes, estate taxes, federal and state income taxes,
and other taxes to the extent applicable to Landlord's general or net income (as
opposed to rents or receipts attributable to operations at the Project), (ii)
any items included as Operating Costs, (iii) any items paid by Tenant under
Article 6 of this Lease, and (iv) any assessments on other leasehold
improvements in the Project to the extent such assessment is attributable to a
level of improvement for which Tenant would be directly responsible pursuant to
Article 6 of this Lease. Notwithstanding anything to the contrary contained in
this Lease, in the event that, at any time during the first two (2) Lease Years,
any sale, refinancing, or change in ownership of the Real Property is
consummated, and as a result thereof, and to the extent that in connection
therewith, the Real Property is reassessed (the
<PAGE> 11
"Reassessment") for real estate tax purposes by the appropriate governmental
authority pursuant to the terms of Proposition 13, then the following provisions
shall apply to such Reassessment of the Real Property.
For purposes of this Section 3(c)(i), the term "Tax Increase " shall mean
that portion of the Tax Costs, as calculated immediately following the
Reassessment, which is attributable solely to the Reassessment. Accordingly, the
term Tax Increase shall not include any portion of the Tax Costs, as calculated
immediately following the Reassessment, which (1) is attributable to the initial
assessment of the value of the Real Property, the Base, Shell and Core of the
Project or the tenant improvements located in the Project, (2) is attributable
to assessments which were pending immediately prior to the Reassessment which
assessments were conducted during, and included in, such Reassessment, or which
assessments were otherwise rendered unnecessary following the Reassessment, or
(3) is attributable to the annual inflationary increase of real estate taxes
permitted to be assessed annually under Proposition 13. During the first two (2)
years of the initial Lease Term, any Tax Increase shall be excluded from Tax
Costs. After the first two (2) years of the initial Lease Term, any Tax Increase
shall be included in Tax Costs.
(ii) "Operating Costs ", which shall mean all costs and expenses incurred
by Landlord in connection with the maintenance, operation, ownership and repair
of the Project, the equipment, the intrabuilding network cable, adjacent walks,
malls and landscaped and common areas and the parking structure, areas and
facilities of the Project, including, but not limited to, salaries, wages,
medical, surgical and general welfare benefits and pension payments, payroll
taxes, fringe benefits, employment taxes, workers' compensation, uniforms and
dry cleaning thereof for all persons who perform duties connected with the
operation, maintenance and repair of the Project, its equipment, the
intrabuilding network cable and the adjacent walks and landscaped areas,
including janitorial, gardening, security, parking, operating engineer,
elevator, painting, plumbing, electrical, carpentry, heating, ventilation, air
conditioning, window washing, hired services, a reasonable allowance for
depreciation of the cost of acquiring or the rental expense of personal property
used in the maintenance, operation and repair of the Project, accountant's fees
incurred in the preparation of rent adjustment statements, legal fees, real
estate tax consulting fees, personal property taxes on property used in the
maintenance and operation of the Project, fees, costs, expenses or dues payable
pursuant to the terms of any covenants, conditions or restrictions or owners'
association pertaining to the Project, capital expenditures incurred which are
reasonably anticipated to effect economies of operation of the Project in an
amount in excess of the expenditure and capital expenditures required by
government regulations, laws, or ordinances not in effect as of the Commencement
Date; the cost of all charges for electricity, gas, water and other utilities
furnished to the Project, including any taxes thereon; the cost of all charges
for fire and extended coverage, liability and all other insurance for the
Project carried by Landlord; the cost of all building and cleaning supplies and
materials; the cost of all charges for cleaning, maintenance and service
contracts and other services with independent contractors and administration
fees; a commercially reasonable property management fee (which fee may be
imputed if
<PAGE> 12
Landlord has internalized management or otherwise acts as its own property
manager) and license, permit and inspection fees relating to the Project. In the
event, during any calendar year, the Project is less than ninety-five percent
(95%) occupied at all times, Operating Costs shall be adjusted to reflect the
Operating Costs of the Project as though ninety-five percent (95%) were occupied
at all times, and the increase or decrease in the sums owed hereunder shall be
based upon such Operating Costs as so adjusted. Notwithstanding anything to the
contrary set forth in this Article 3, when calculating Operating Costs for the
Base Year, Operating Costs shall exclude (a) market-wide labor-rate increases
due to extraordinary circumstances including, but not limited to, boycotts and
strikes, (b) utility rate increases due to extraordinary circumstances
including, but not limited to, conservation surcharges, boycotts, embargoes or
other shortages, and (c) amortization of any capital items including, but not
limited to, capital improvements, capital repairs and capital replacements
(including such amortized costs where the actual improvement, repair or
replacement was made in prior years).
Notwithstanding anything above to the contrary, Operating Costs shall not
include (1) the cost of providing any service directly to and paid directly by
any tenant (outside of such tenant's Direct Cost payments); (2) the cost of any
items for which Landlord is reimbursed by insurance proceeds, condemnation
awards, a tenant of the Project, or otherwise to the extent so reimbursed; (3)
any real estate brokerage commissions or other costs incurred in procuring
tenants, or any fee in lieu of commission; (4) depreciation, amortization of
principal and interest on mortgages or ground lease payments (if any); (5) costs
of items considered capital repairs, replacements, improvements and equipment
under generally accepted accounting principles consistently applied except as
expressly included in Operating Costs pursuant to the definition above; (6)
costs incurred by Landlord due to the violation by Landlord or any tenant of the
terms and conditions of any lease of space in the Project or any law, code,
regulation, ordinance or the like; (7) Landlord's general corporate overhead and
general and administrative expenses; (8) any compensation paid to clerks,
attendants or other persons in commercial concessions operated by Landlord
(other than in the parking facility for the Project); (9) costs incurred in
connection with upgrading the Project to comply with disability, life, seismic,
fire and safety codes, ordinances, statutes, or other laws in effect prior to
the Commencement Date, including, without limitation, the Americans with
Disabilities Act ("ADA"), including penalties or damages incurred due to such
non-compliance; (10) bad debt expenses and interest, principal, points and fees
on debts (except in connection with the financing of items which may be included
in Operating Costs) or amortization on any ground lease, mortgage or mortgages
or any other debt instrument encumbering the Project (including the land on
which the Project is situated); (11) marketing costs, including leasing
commissions, attorneys' fees in connection with the negotiation and preparation
of letters, deal memos, letters of intent, leases, subleases and/or assignments,
space planning costs, and other costs and expenses incurred in connection with
lease, sublease and/or assignment negotiations and transactions with present or
prospective tenants or other occupants of the Project, including attorneys' fees
and other costs and expenditures incurred in connection with disputes with
present or prospective tenants or other occupants of the Project; (12) real
estate brokers' leasing commissions; (13) costs,
<PAGE> 13
including permit, license and inspection costs, incurred with respect to the
installation of other tenants' or occupants' improvements made for tenants or
other occupants in the Project or incurred in renovating or otherwise improving,
decorating, painting or redecorating vacant space for tenants or other occupants
in the Project; (14) any costs expressly excluded from Operating Costs elsewhere
in this Lease; (15) costs of any items (including, but not limited to, costs
incurred by Landlord for the repair of damage to the Project) to the extent
Landlord receives reimbursement from insurance proceeds or from a third party
(except that any deductible amount under any insurance policy shall be included
within Operating Costs); (16) rentals and other related expenses for leasing an
HVAC system, elevators, or other items (except when needed in connection with
normal repairs and maintenance of the Project) which if purchased, rather than
rented, would constitute a capital improvement not included in Operating Costs
pursuant to this Lease; (17) depreciation, amortization and interest payments,
except as specifically included in Operating Costs pursuant to the terms of this
Lease and except on materials, tools, supplies and vendor-type equipment
purchased by Landlord to enable Landlord to supply services Landlord might
otherwise contract for with a third party, where such depreciation, amortization
and interest payments would otherwise have been included in the charge for such
third party's services, all as determined in accordance with generally accepted
accounting principles, consistently applied, and when depreciation or
amortization is permitted or required, the item shall be amortized over its
reasonably anticipated useful life; (18) costs incurred by Landlord for
alterations (including structural additions), repairs, equipment and tools which
are of a capital nature and/or which are considered capital improvements or
replacements under generally accepted accounting principles, consistently
applied, except as specifically included in Operating Costs pursuant to the
terms of this Lease; (19) expenses in connection with services or other benefits
which are not offered to Tenant or for which Tenant is charged for directly but
which are provided to another tenant or occupant of the Project, without charge;
(20) electric power costs or other utility costs for which any tenant directly
contracts with the local public service company (but Landlord shall have the
right to "gross up" as if such space was vacant); (21) costs incurred in
connection with the operation of retail stores selling merchandise and
restaurants in the Project to the extent such costs are in excess of the costs
Landlord reasonably estimates would have been incurred had such space been used
for general office use; (22) costs (including in connection therewith all
attorneys' fees and costs of settlement, judgments and/or payments in lieu
thereof) arising from claims, disputes or potential disputes in connection with
potential or actual claims litigation or arbitrations pertaining to Landlord
and/or the Project, other than such claims or disputes respecting any services
or equipment used in the operation of the Building by Landlord; (23) costs
associated with the operation of the business of the partnership which
constitutes Landlord as the same are distinguished from the costs of operation
of the Project; (24) costs incurred in connection with the original construction
of the Project; (25) costs of correcting defects in or inadequacy of the initial
design or construction of the Project; (26) costs incurred to (i) comply with
laws relating to the removal of any "Hazardous Material," as that term is
defined in Article 28 of this Lease, and (ii) remove, remedy, contain, or treat
any Hazardous Material; and (27) any cost incurred in order to correct problems
in the Project resulting from the so called
<PAGE> 14
"year 2000" computer issue. If Landlord does not carry earthquake insurance for
the Project during any part of the Base Year but subsequently obtains earthquake
insurance for the Project during the Lease Term, then from and after the date
upon which Landlord obtains such earthquake insurance and continuing throughout
the period during which Landlord maintains such insurance, Operating Costs for
the Base Year shall be deemed to be increased by the amount of the premium
Landlord reasonably estimates it would have incurred had Landlord maintained
such insurance for the same period of time during the Base Year as such
insurance was maintained by Landlord during such subsequent calendar year.
(d) Determination of Payment
(i) If for any calendar year ending or commencing within the Term,
Tenant's Proportionate Share of Direct Costs for such calendar year exceeds
Tenant's Proportionate Share of Direct Costs for the Base Year, then Tenant
shall pay to Landlord, in the manner set forth in Sections 3(d)(ii) and (iii),
below, and as additional rent, an amount equal to the excess (the "Excess").
(ii) Landlord shall give Tenant a yearly expense estimate statement (the
"Estimate Statement") which shall set forth Landlord's reasonable estimate (the
"Estimate") of what the total amount of Direct Costs for the then-current
calendar year shall be and the estimated Excess (the "Estimated Excess ") as
calculated by comparing Tenant's Proportionate Share of Direct Costs for such
calendar year, which shall be based upon the Estimate, to Tenant's Proportionate
Share of Direct Costs for the Base Year. The failure of Landlord to timely
furnish the Estimate Statement for any calendar year shall not preclude Landlord
from enforcing its rights to collect any Estimated Excess under this Article 3.
If pursuant to the Estimate Statement an Estimated Excess is calculated for the
then-current calendar year, Tenant shall pay, with its next installment of
Monthly Basic Rental due, a fraction of the Estimated Excess for the
then-current calendar year (reduced by any amounts paid pursuant to the last
sentence of this Section 3(d)(ii)). Such fraction shall have as its numerator
the number of months which have elapsed in such current calendar year to the
month of such payment, both months inclusive, and shall have twelve (12) as its
denominator. Until a new Estimate Statement is furnished, Tenant shall
pay monthly, with the Monthly Basic Rental installments, an amount equal to
one-twelfth (1/12) of the total Estimated Excess set forth in
the previous Estimate Statement delivered by Landlord to Tenant.
(iii) In addition, Landlord shall endeavor to give to Tenant on or before
the first day of April following the end of each calendar year, a statement (the
"Statement") which shall state the Direct Costs incurred or accrued for such
preceding calendar year, and which shall indicate the amount, if any, of the
Excess. Upon receipt of the Statement for each calendar year during the Term, if
amounts paid by Tenant as Estimated Excess are less than the actual Excess as
specified on the Statement, Tenant shall pay, with its next installment of
Monthly Basic Rental due, the full amount of the Excess for such calendar year,
less the amounts, if any, paid during such calendar year as Estimated Excess.
If, however, the Statement indicates that amounts paid by Tenant as Estimated
Excess are greater than the actual Excess as specified on the Statement, such
overpayment shall be credited
<PAGE> 15
against Tenant's next installments of Estimated Excess. The failure of Landlord
to timely furnish the Statement for any calendar year shall not prejudice
Landlord from enforcing its rights under this Article 3. Even though the Term
has expired and Tenant has vacated the Premises, when the final determination is
made of Tenant's Proportionate Share of the Direct Costs for the calendar year
in which this Lease terminates, if an Excess is present, Tenant shall promptly
pay to Landlord an amount as calculated pursuant to the provisions of this
Article 3(d). The provisions of this Section 3(d)(iii) shall survive the
expiration or earlier termination of the Term.
(iv) Within one hundred eighty (180) days after receipt of a Statement by
Tenant ("Review Period"), if Tenant disputes the amount set forth in the
Statement, Tenant's employees or an independent certified public accountant
designated by Tenant, may, after reasonable notice to Landlord and at reasonable
times, inspect Landlord's records at Landlord's offices, provided that Tenant is
not then in default after expiration of all applicable cure periods and provided
further that Tenant and such accountant or representative shall, and each of
them shall use their commercially reasonable efforts to cause their respective
agents and employees to, maintain all information contained in Landlord's
records in strict confidence. Notwithstanding the foregoing, Tenant shall only
have the right to review Landlord's records one (1) time during any twelve (12)
month period. Tenant's failure to dispute the amounts set forth in any Statement
within the Review Period shall be deemed to be Tenant's approval of such
Statement and Tenant, thereafter, waives the right or ability to dispute the
amounts set forth in such Statement. If after such inspection, but within thirty
(30) days after the Review Period, Tenant notifies Landlord in writing that
Tenant still disputes such amounts, a certification as to the proper amount
shall be made in accordance with Landlord's standard accounting practices, at
Tenant's expense, by an independent certified public accountant selected by
Landlord and who is a member of a nationally or regionally recognized accounting
firm. Landlord shall cooperate in good faith with Tenant and the accountant to
show Tenant and the accountant the information upon which the certification is
to be based. However, if such certification by the accountant proves that the
Direct Costs set forth in the Statement were overstated by more than five
percent (5%), then the cost of the accountant and the cost of such certification
shall be paid for by Landlord. Promptly following the parties receipt of such
certification, the parties shall make such appropriate payments or
reimbursements, as the case may be, to each other, as are determined to be owing
pursuant to such certification.
ARTICLE 4
SECURITY DEPOSIT
Tenant has previously deposited with Landlord the sum set forth in Article
1.F. of the Basic Lease Provisions in connection with its previous lease of the
Premises. Landlord shall continue to hold said Security Deposit in accordance
with the terms of this Article 4 and as security for the full and faithful
performance of every provision of this Lease to be performed by Tenant. If
Tenant breaches any provision of this Lease, including but not limited to the
payment of rent, Landlord may use such part of this security deposit required
for the payment of any rent or any other sums in default, or to compensate
<PAGE> 16
Landlord for any other loss or damage which Landlord may suffer by reason of
Tenant's default. If any portion of said deposit is so used or applied, Tenant
shall, within fifteen (15) days after written demand therefor, deposit cash with
Landlord in an amount sufficient to restore the security deposit to its original
amount. Tenant agrees that Landlord shall not be required to keep the security
deposit in trust, segregate it or keep it separate from Landlord's general funds
but Landlord may commingle the security deposit with its general funds and
Tenant shall not be entitled to interest on such deposit. At the expiration of
the Lease Term, and provided there exists no default by Tenant hereunder, the
security deposit or any balance thereof shall be returned to Tenant (or, at
Landlord's option, to Tenant's assignee), provided that subsequent to the
expiration of this Lease, Landlord may retain from said security deposit any and
all amounts permitted by law or this Article 4. Tenant hereby waives the
provisions of Section 1950.7 of the California Civil Code and all other
provisions of law, now or hereafter in effect, to the extent the same are
inconsistent with Landlord's right to claim those sums specified in this Article
4 above and/or those sums reasonably necessary to compensate Landlord for any
other loss or damage, foreseeable or unforeseeable, caused by the acts or
omissions of Tenant or any officer, employee, agent, contractor or invitee of
Tenant.
ARTICLE 5
HOLDING OVER
Should Tenant, without Landlord's written consent, hold over after
termination of this Lease, Tenant shall become a tenant from month to month,
only upon each and all of the terms herein provided as may be applicable to a
month to month tenancy and any such holding over shall not constitute an
extension of this Lease. During such holding over, Tenant shall pay in advance,
monthly, rent at one hundred fifty percent (150%) of the rate in effect for the
last month of the Term of this Lease, in addition to, and not in lieu of, all
other payments required to be made by Tenant hereunder including but not limited
to Tenant's Proportionate Share of any increase in Direct Costs. Nothing
contained in this Article 5 shall be construed as consent by Landlord to any
holding over of the Premises by Tenant, and Landlord expressly reserves the
right to require Tenant to surrender possession of the Premises to Landlord as
provided in this Lease upon the expiration or earlier termination of the Term.
If Landlord notifies Tenant in writing at least thirty (30) days prior to the
Lease Expiration Date that Landlord has signed proposal from a succeeding tenant
to lease the Premises, and if Tenant fails to surrender the Premises upon the
expiration or termination of this Lease, Tenant agrees to indemnify, defend and
hold Landlord harmless from all costs, loss, expense or liability, including
without limitation, claims made by any succeeding tenant and real estate brokers
claims and attorney's fees.
ARTICLE 6
PERSONAL PROPERTY TAXES
Tenant shall pay, prior to delinquency, all taxes assessed against or
levied upon trade fixtures, furnishings, equipment and all other personal
property of Tenant located in the Premises. In the event any or all of Tenant's
trade fixtures, furnishings, equipment and other personal property shall be
assessed and taxed with property of
<PAGE> 17
Landlord, or if the cost or value of any leasehold improvements in the Premises
exceeds the cost or value of a Project-standard buildout as determined by
Landlord and, as a result, real property taxes for the Project are increased,
Tenant shall pay to Landlord its share of such taxes within thirty (30) days
after delivery to Tenant by Landlord of a statement in writing setting forth the
amount of such taxes applicable to Tenant's property or above-standard
improvements and Tenant's receipt of substantiating documentation. Tenant shall
assume and pay to Landlord at the time of paying Basic Rental any excise, sales,
use, rent, occupancy, garage, parking, gross receipts or other taxes (other than
net income taxes) which may be imposed on or on account of letting of the
Premises or the payment of Basic Rental or any other sums due or payable
hereunder, and which Landlord may be required to pay or collect under any law
now in effect or hereafter enacted. Tenant shall pay directly to the party or
entity entitled thereto all business license fees, gross receipts taxes and
similar taxes and impositions which may from time to time be assessed against or
levied upon Tenant, as and when the same become due and before delinquency.
Notwithstanding anything to the contrary contained herein, any sums payable by
Tenant under this Article 6 shall not be included in the computation of "Tax
Costs."
ARTICLE 7
USE
Tenant shall use and occupy the Premises only for the use set forth in
Article 1.G. of the Basic Lease Provisions and shall not use or occupy the
Premises or permit the same to be used or occupied for any other purpose without
the prior written consent of Landlord, which consent may be given or withheld in
Landlord's sole and absolute discretion, and Tenant agrees that it will use the
Premises in such a manner so as not to unreasonably interfere with or infringe
the rights of other tenants in the Project. Tenant shall, at its sole cost and
expense, promptly comply with all laws, statutes, ordinances and governmental
regulations or requirements now in force or which may hereafter be in force
relating to or affecting (i) the condition, use or occupancy of the Premises or
the Project excluding structural changes to the Project not related to Tenant's
particular use of the Premises, and (ii) improvements installed or constructed
in the Premises by or for the benefit of Tenant. Tenant shall not do or permit
to be done anything which would invalidate or increase the cost of any fire and
extended coverage insurance policy covering the Project and/or the property
located therein and Tenant shall comply with all rules, orders, regulations and
requirements of any organization which sets out standards, requirements or
recommendations commonly referred to by major fire insurance underwriters.
Tenant shall within thirty (30) days after demand reimburse Landlord for any
additional premium charges for any such insurance policy assessed or increased,
to the extent such assessment or increase is attributable to Tenant's failure to
comply with the provisions of this Article after Tenant's receipt of
substantiating documentation. Landlord represents that Landlord has taken or
shall take the necessary steps to comply with what Landlord reasonably believes
are the requirements of ADA in effect as of the date of this Lease as it
pertains to the common areas within the Project. Operating Costs shall not
include any cost incurred by Landlord in connection with upgrading the Project
to comply with the requirements of the ADA that are in effect as of the date of
this
<PAGE> 18
Lease, including penalties or damages incurred due to such noncompliance.
ARTICLE 8
CONDITION OF PREMISES
The Premises shall be renovated as provided in, and subject to, the Tenant
Work Letter attached hereto as Exhibit "D" and made a part hereof. The existing
leasehold improvements in the Premises as of the date of this Lease, together
with the Improvements (as defined in the Tenant Work Letter) may be collectively
referred to herein as the "Tenant Improvements" The taking of possession of the
Premises by Tenant shall conclusively establish that the Premises and the
Project were at such time in satisfactory condition, subject to latent defects.
Tenant hereby waives Sections 1941 and 1942 of the Civil Code of California or
any successor provision of law. So long as none of the following increases
Tenant's obligations or decreases Tenant's rights hereunder (unless the action
is required by law), Landlord reserves the right from time to time, but subject
to payment by and/or reimbursement from Tenant as otherwise provided herein: (i)
to install, use, maintain, repair, replace and relocate for service to the
Premises and/or other parts of the Project pipes, ducts, conduits, wires,
appurtenant fixtures, and mechanical systems, wherever located in the Premises
or the Project, (ii) to alter, close or relocate any facility in the Premises or
the Common Areas or otherwise conduct any of the above activities for the
purpose of complying with a general plan for fire/life safety for the Project or
otherwise and (iii) to comply with any federal, state or local law, rule or
order with respect thereto or the regulation thereof not currently in effect.
Landlord shall attempt to perform any such work with the least inconvenience to
Tenant as possible, and provided Landlord uses commercially reasonable efforts
to do so, in no event shall Tenant be permitted to withhold or reduce Basic
Rental or other charges due hereunder as a result of same or otherwise make
claim against Landlord for interruption or interference with Tenant's business
and/or operations except as provided in Section 11(g) below.
ARTICLE 9
REPAIRS AND ALTERATIONS
Landlord shall maintain the structural portions of the Project including
the foundation, floor/ceiling slabs, roof, curtain wall, exterior glass,
columns, beams, shafts, stairs, stairwells, elevator cabs and common areas and
shall also maintain and repair the basic mechanical, electrical, lifesafety,
plumbing, sprinkler systems and heating, ventilating and air-conditioning
systems. Except as expressly provided as Landlord's obligation in this Article
9, Tenant shall keep the Premises in good condition and repair. All damage or
injury to the Premises or the Project resulting from the act or negligence of
Tenant, its employees, agents or visitors, guests, invitees or licensees or by
the use of the Premises shall be promptly repaired by Tenant, at its sole cost
and expense (to the extent not covered by Landlord's insurance), to the
satisfaction of Landlord; provided, however, that for damage to the Project as a
result of casualty or for any repairs that may impact the mechanical,
electrical, plumbing, heating, ventilation or air-conditioning systems of the
Project, Landlord shall have the right (but not the obligation) to select the
contractor and
<PAGE> 19
oversee all such repairs. Landlord may make any repairs which are not promptly
made by Tenant after Tenant's receipt of written notice and the reasonable
opportunity of Tenant to make said repair within fifteen (15) business days from
receipt of said written notice, and charge Tenant for the cost thereof, which
cost shall be paid by Tenant within five (5) days from invoice from Landlord.
Tenant shall be responsible for the design and function of all non-standard
improvements of the Premises, whether or not installed by Landlord at Tenant's
request. Tenant waives all rights to make repairs at the expense of Landlord, or
to deduct the cost thereof from the rent. Tenant shall make no alterations,
changes or additions in or to the Premises (collectively, "Alterations ")
without Landlord's prior written consent, and then only by contractors or
mechanics approved by Landlord in writing and upon the approval by Landlord in
writing of fully detailed and dimensioned plans and specifications pertaining to
the Alterations in question, to be prepared and submitted by Tenant at its sole
cost and expense. Tenant shall at its sole cost and expense obtain all necessary
approvals and permits pertaining to any Alterations. If Landlord, in approving
any Alterations, specifies a commencement date therefor, Tenant shall not
commence any work with respect to such Alterations prior to such date.
Notwithstanding anything to the contrary contained herein, Tenant may make
strictly cosmetic changes to the finish work in the Premises (the "Cosmetic
Alterations") without Landlord's consent, provided that such alterations do not
(i) require any structural or other substantial modifications to the Premises,
(ii) require any changes to, nor adversely affect, the systems and equipment of
the Project, and (iii) affect the exterior appearance of the Project. Tenant
shall give Landlord at least fifteen (15) days prior notice of such Cosmetic
Alterations, which notice shall be accompanied by reasonably adequate evidence
that such changes meet the criteria contained in this Article 9. Tenant hereby
indemnifies, defends and agrees to hold Landlord free and harmless from all
liens and claims of lien, and all other liability, claims and demands arising
out of any work done or material supplied to the Premises by or at the request
of Tenant in connection with any Alterations. If permitted Alterations are made,
they shall be made at Tenant's sole cost and expense and shall be and become the
property of Landlord, except that Landlord may, by written notice to Tenant
given at the time of Landlord's consent thereto (or if no consent is required,
then within fifteen (15) days after written request by Tenant for such
determination by Landlord), require Tenant at Tenant's expense to remove all
partitions, counters, railings and other Alterations installed by Tenant, and to
repair any damages to the Premises caused by such removal. Any and all costs
attributable to or related to the applicable building codes of the city in which
the Project is located (or any other authority having jurisdiction over the
Project) arising from Tenants plans, specifications, improvements, alterations
or otherwise shall be paid by Tenant at its sole cost and expense. With regard
to repairs, Alterations or any other work arising from or related to this
Article 9 other than Cosmetic Alterations, Landlord shall be entitled to receive
an administrative/supervision fee (which fee shall vary depending upon whether
or not Tenant orders the work directly from Landlord but shall not exceed five
percent (5%)) sufficient to compensate Landlord for all overhead, general
conditions, fees and other costs and expenses arising from Landlord's
involvement with such work. The construction of initial improvements to the
Premises shall be governed by the terms of the Tenant Work Letter and not the
terms of this Article 9.
<PAGE> 20
ARTICLE 10
LIENS
Tenant shall keep the Premises and the Project free from any mechanics'
liens, vendors liens or any other liens arising out of any work performed,
materials furnished or obligations incurred by Tenant, and agrees to defend,
indemnify and hold harmless Landlord from and against any such lien or claim or
action thereon, together with costs of suit and reasonable attorneys' fees
incurred by Landlord in connection with any such claim or action. Before
commencing any work of alteration, addition or improvement to the Premises,
Tenant shall give Landlord at least ten (10) business days' written notice of
the proposed commencement of such work (to afford Landlord an opportunity to
post appropriate notices of non-responsibility). In the event that there shall
be recorded against the Premises or the Project or the property of which the
Premises is a part any claim or lien arising out of any such work performed,
materials furnished or obligations incurred by Tenant and such claim or lien
shall not be removed or discharged within ten (10) days of filing, Landlord
shall have the right but not the obligation to pay and discharge said lien
without regard to whether such lien shall be lawful or correct or to require
that Tenant deposit with Landlord in cash, lawful money of the United States,
one hundred fifty percent (150%) of the amount of such claim, which sum may be
retained by Landlord until such claim shall have been removed of record or until
judgment shall have been rendered on such claim and such judgment shall have
become final, at which time Landlord shall have the right to apply such deposit
in discharge of the judgment on said claim and any costs, including attorneys'
fees incurred by Landlord, and shall remit the balance thereof to Tenant.
ARTICLE 11
PROJECT SERVICES
(a) Landlord agrees to maintain, operate and repair the Building in a
first-class manner. Landlord agrees to furnish to the Premises, at a cost to be
included in Operating Costs, from 8:00 a.m. to 6:00 p.m. Mondays through Fridays
and 9:00 a.m. to 2:00 p.m. on Saturdays, excepting local and national holidays,
air conditioning and heat all in such reasonable quantities as in the judgment
of Landlord is reasonably necessary for the comfortable occupancy of the
Premises. In addition, Landlord shall provide electric current for normal
lighting and normal office machines, elevator service and water on the same
floor as the Premises for lavatory and drinking purposes in such reasonable
quantities as in the judgment of Landlord is reasonably necessary for general
office use. Janitorial and maintenance services shall be furnished five (5) days
per week, excepting local and national holidays. Tenant shall comply with all
rules and regulations which Landlord may reasonably establish for the proper
functioning and protection of the common area air conditioning, heating,
elevator, electrical intrabuilding network cable and plumbing systems. Except as
provided in Section 11(g) below, Landlord shall not be liable for, and there
shall be no rent abatement as a result of, any stoppage, reduction or
interruption of any such services caused by governmental rules, regulations or
ordinances, riot, strike, labor disputes, breakdowns, accidents, necessary
repairs or other cause. Except as specifically provided in this Article 11,
Tenant agrees to pay for all
<PAGE> 21
utilities and other services utilized by Tenant and additional building services
furnished to Tenant not uniformly furnished to all tenants of the Project at the
rate generally charged by Landlord to tenants of the Project.
(b) Tenant will not, without the prior written consent of Landlord, use any
apparatus or device in the Premises which will in any way increase the amount of
electricity or water usually furnished or supplied for use of the Premises as
general office space; nor connect any apparatus, machine or device with water
pipes or electric current (except through existing electrical outlets in the
Premises), for the purpose of using electric current or water.
(c) If Tenant shall require electric current in excess of that which
Landlord is obligated to furnish under Article 11(a) above, Tenant shall first
obtain the written consent of Landlord, which Landlord may refuse in its sole
and absolute discretion, to the use thereof and Landlord may cause an electric
current meter or submeter to be installed in the Premises to measure the amount
of such excess electric current consumed by Tenant in the Premises. The cost of
any such meter and of installation, maintenance and repair thereof shall be paid
for by Tenant and Tenant agrees to pay to Landlord, promptly upon demand
therefor by Landlord, for all such excess electric current consumed by any such
use as shown by said meter at the rates charged for such service by the city in
which the Project is located or the local public utility, as the case may be,
furnishing the same, plus any additional expense incurred by Landlord in keeping
account of the electric current so consumed.
(d) If any lights, machines or equipment (including but not limited to
computers) are used by Tenant in the Premises which materially affect the
temperature otherwise maintained by the air conditioning system, or generate
substantially more heat in the Premises than would be generated by the building
standard lights and usual office equipment, Landlord shall have the right to
install any machinery and equipment which Landlord reasonably deems necessary to
restore temperature balance, including but not limited to modifications to the
standard air conditioning equipment, and the cost thereof, including the cost of
installation and any additional cost of operation and maintenance occasioned
thereby, shall be paid by Tenant to Landlord upon demand by Landlord. Landlord
shall not be liable under any circumstances for loss of or injury to property,
however occurring, through or in connection with or incidental to failure to
furnish any of the foregoing.
(e) If Tenant requires heating, ventilation and/or air conditioning during
times other than the times provided in Article 11(a) above, Tenant shall give
Landlord such advance notice as Landlord shall reasonably require and shall pay
Landlord's standard charge for such after-hours use, which standard charge as of
the date of this Lease is $3.29 per hour per sector (with approximately
twenty-five (25) sectors per floor in the Project), provided that any increase
in the charge per hour per sector shall be based upon Landlord's reasonable
estimate of increases in its actual cost of providing such service.
(f) Landlord may impose a reasonable charge for any utilities or services
(other than electric current and heating, ventilation and/or
<PAGE> 22
air conditioning which shall be governed by Articles 11(c) and (e) above)
utilized by Tenant in excess of the amount or type that Landlord reasonably
determines is typical for general office use.
(g) An "Abatement Event" shall be defined as an event that prevents Tenant
from using the Premises or any portion thereof, as a result of any failure to
provide services or access to the Premises, where (i) Tenant does not actually
use the Premises or such portion thereof, and (ii) such event is not caused by
the negligence or willful misconduct of Tenant, its agents, employees or
contractors. Tenant shall give Landlord notice ("Abatement Notice") of any such
Abatement Event, and if such Abatement Event continues beyond the "Eligibility
Period" (as that term is defined below), then the Basic Rental and Tenant's
Proportionate Share of Direct Costs and Tenant's obligation to pay for parking
shall be abated entirely or reduced, as the case may be, after expiration of the
Eligibility Period for such time that Tenant continues to be so prevented from
using, and does not use, the Premises or a portion thereof, in the proportion
that the rentable area of the portion of the Premises that Tenant is prevented
from using, and does not use, bears to the total rentable area of the Premises;
provided, however, in the event that Tenant is prevented from using, and does
not use, a portion of the Premises for a period of time in excess of the
Eligibility Period and the remaining portion of the Premises is not sufficient
to allow Tenant to effectively conduct its business therein, and if Tenant does
not conduct its business from such remaining portion, then for such time after
expiration of the Eligibility Period during which Tenant is so prevented from
effectively conducting its business therein, the Basic Rental and Tenant's
Proportionate Share of Direct Costs and Tenant's obligation to pay for parking
for the entire Premises shall be abated entirely for such time as Tenant
continues to be so prevented from using, and does not use, the Premises. If,
however, Tenant reoccupies any portion of the Premises during such period, the
Basic Rental and Tenant's Proportionate Share of Direct Costs allocable to such
reoccupied portion, based on the proportion that the rentable area of such
reoccupied portion of the Premises bears to the total rentable area of the
Premises, shall be payable by Tenant from the date Tenant reoccupies such
portion of the Premises. The term "Eligibility Period" shall mean a period of
five (5) consecutive business days after Landlord's receipt of any Abatement
Notice(s). Such right to abate Basic Rental and Tenant's Proportionate Share of
Direct Costs shall be Tenant's sole and exclusive remedy at law or in equity for
an Abatement Event.
ARTICLE 12
RIGHTS OF LANDLORD
Landlord and its agents shall have the right to enter the Premises at all
reasonable times (upon reasonable prior notice to Tenant except in the case of
emergency or regularly scheduled service (e.g., janitorial service)) for the
purpose of cleaning the Premises, examining or inspecting the same, serving or
posting and keeping posted thereon notices as provided by law, or which Landlord
deems necessary for the protection of Landlord or the Property, showing the same
to prospective tenants (but as to prospective tenants only during the last nine
(9) months of the Term or Option Term, as applicable), lenders or purchasers of
the Project, in the case of an emergency, and for making
<PAGE> 23
such alterations, repairs, improvements or additions to the Premises or to the
Project as Landlord may deem necessary or desirable. Landlord shall provide
Tenant with an opportunity to have a representative of Tenant accompany Landlord
in connection with any such entry (except in the case of an emergency). If
Tenant shall not be personally present to open and permit an entry into the
Premises at any time when such an entry by Landlord is necessary or permitted
hereunder, Landlord may enter by means of a master key or may enter forcibly,
only in the case of an emergency, without liability to Tenant and without
affecting this Lease.
ARTICLE 13
INDEMNITY; EXEMPTION OF LANDLORD FROM LIABILITY
(a) Indemnity. Tenant shall indemnify, defend and hold Landlord harmless
from any and all claims arising from Tenant's use of the Premises or the Project
including Tenant's Signage rights set forth in Article 33 or from the conduct of
its business or from any activity, work or thing which may be permitted or
suffered by Tenant in or about the Premises or the Project and shall further
indemnify, defend and hold Landlord harmless from and against any and all claims
arising from any negligence of Tenant or any of its agents, contractors,
employees or invitees, patrons, customers or members in or about the Project and
from any and all costs, attorneys' fees, expenses and liabilities incurred in
the defense of any claim or any action or proceeding brought thereon, including
negotiations in connection therewith. However, notwithstanding the foregoing,
Tenant shall not be required to indemnify and/or hold Landlord harmless from any
loss, cost, liability, damage or expense, including, but not limited to,
penalties, fines, attorneys' fees or costs (collectively, "Claims"), to any
person, property or entity to the extent resulting from the negligence or
willful misconduct of Landlord or its agents, contractors, or employees (except
for damage to the Improvements and Tenant's personal property, fixtures,
furniture and equipment in the Premises in which case Tenant shall be
responsible to the extent Tenant is required to obtain the requisite insurance
coverage pursuant to this Lease). Landlord hereby indemnifies Tenant and holds
Tenant harmless from any Claims to the extent resulting from the negligence or
willful misconduct of Landlord or its agents, contractors or employees;
provided, however, that because Landlord maintains insurance on the Project and
Tenant compensates Landlord for such insurance as part of Tenant's Proportionate
Share of Direct Costs and because of the existence of waivers of subrogation set
forth in Article 14 of this Lease, Landlord hereby indemnifies and holds Tenant
harmless from any Claims to any property outside of the Premises to the extent
such Claim is covered by such insurance, even if resulting from the negligence
or willful misconduct of Tenant or those of its agents, contractors, or
employees. Similarly, since Tenant must carry insurance pursuant to Article 14
to cover its personal property within the Premises and the Improvements, Tenant
hereby indemnifies and holds Landlord harmless from any Claim to any property
within the Premises, to the extent such Claim is covered by such insurance, even
if resulting from the negligence or willful misconduct of Landlord or those of
its agents, contractors, or employees. Tenant hereby assumes all risk of damage
to property or injury to persons in or about the Premises from any cause, and
Tenant hereby waives all claims in respect thereof against Landlord, excepting
and to the extent the damage is caused by the negligence or willful
<PAGE> 24
misconduct of Landlord, its agents, employees or contractors (in which case
Landlord shall be responsible for such damage to the extent not covered by
insurance required to be carried by Tenant under this Lease or actually carried
by Tenant).
(b) Exemption of Landlord from Liability. Landlord shall not be liable for
injury to Tenant's business, or loss of income therefrom, or, except in
connection with damage or injury resulting from the negligence or willful
misconduct of Landlord, or its authorized agents, employees or contractors (in
which case Landlord shall be responsible for such damage to the extent not
covered by insurance required to be carried by Tenant under this Lease or
actually carried by Tenant) for damage that may be sustained by the person,
goods, wares, merchandise or property of Tenant, its employees, invitees,
customers, agents, or contractors, or any other person in, on or about the
Premises directly or indirectly caused by or resulting from fire, steam,
electricity, gas, water, or rain which may leak or flow from or into any part of
the Premises, or from the breakage, leakage, obstruction or other defects of the
pipes, sprinklers, wires, appliances, plumbing, air conditioning, light
fixtures, or mechanical or electrical systems or from intrabuilding network
cable, whether such damage or injury results from conditions arising upon the
Premises or upon other portions of the Project or from other sources or places
and regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Tenant. Landlord shall not be liable to
Tenant for any damages arising from any act or neglect of any other tenant of
the building.
Landlord shall not be liable for losses due to theft, vandalism, or like
causes.
ARTICLE 14
INSURANCE
(a) Tenant's Insurance. Tenant, shall at all times during the Term of this
Lease, and at its own cost and expense, procure and continue in force the
following insurance coverage: (i) Commercial General Liability Insurance with a
combined single limit for bodily injury and property damages of not less than
One Million Dollars ($1,000,000) per occurrence and Three Million Dollars
($3,000,000) in the annual aggregate, including products liability coverage if
applicable, covering the insuring provisions of this Lease and the performance
of Tenant of the indemnity and exemption of Landlord from liability agreements
set forth in Article 13 hereof; (ii) a policy of standard fire, extended
coverage and special extended coverage insurance (all risks), including a
vandalism and malicious mischief endorsement, sprinkler leakage coverage and
earthquake sprinkler leakage where sprinklers are provided in an amount equal to
the full replacement value new without deduction for depreciation of all (A)
Tenant Improvements, Alterations, fixtures and other improvements in the
Premises and (B) trade fixtures, furniture, equipment and other personal
property installed by or at the expense of Tenant; (iii) Worker's Compensation
coverage as required by law; and (iv) business interruption, loss of income and
extra expense insurance. Tenant shall carry and maintain during the entire Lease
Term (including any option periods, if applicable), at Tenant's sole cost and
expense, increased amounts of the insurance required to be carried by Tenant
pursuant to
<PAGE> 25
this Article 14 and such other reasonable types of insurance coverage and in
such reasonable amounts covering the Premises and Tenant's operations therein,
as may be reasonably required by Landlord, so long as such increased amounts
and/or other types of insurance coverage are then generally required by
comparable landlords of comparable first-class, institutional quality office
buildings in the vicinity of the Project.
(b) Form of Policies. The aforementioned minimum limits of policies and
Tenant's procurement and maintenance thereof shall in no event limit the
liability of Tenant hereunder. The Commercial General Liability Insurance policy
shall name Landlord, Landlord's property manager, Landlord's lender(s) and such
other persons or firms as Landlord specifies from time to time, as additional
insureds with an appropriate endorsement to the policy(s). All such insurance
policies carried by Tenant shall be with companies having a rating of not less
than A-VIII in Best's Insurance Guide. Tenant shall furnish to Landlord, from
the insurance companies, or cause the insurance companies to furnish,
certificates of coverage. No such policy shall be cancelable or subject to
reduction of coverage or cancellation except after thirty (30) days prior
written notice to Landlord by the insurer. All such policies shall be endorsed
to agree that Tenant's policy is primary as to Claims arising within the
Premises and that any insurance carried by Landlord is excess and not
contributing with any Tenant insurance requirement hereunder. Tenant shall, at
least twenty (20) days prior to the expiration of such policies, furnish
Landlord with renewals or binders. Tenant agrees that if Tenant does not take
out and maintain such insurance or furnish Landlord with renewals or binders,
Landlord may (but shall not be required to), upon prior notice to Tenant and the
expiration of a five (5) day cure period, procure said insurance on Tenant's
behalf and charge Tenant the cost thereof, which amount shall be payable by
Tenant upon demand with interest (at the rate set forth in Section 20(e) below)
from the date such sums are extended. Tenant shall have the right to provide
such insurance coverage pursuant to blanket policies obtained by Tenant,
provided such blanket policies expressly afford coverage to the Premises and to
Tenant as required by this Lease.
(c) Landlord's Insurance. Landlord shall, as a cost to be included in
Operating Costs, procure and maintain at all times during the Term of this
Lease, a policy or policies of insurance covering loss or damage to the Project
in the amount of the full replacement costs without deduction for depreciation
thereof (exclusive of Tenant's trade fixtures, inventory, personal property and
equipment), providing protection against all perils included within the
classification of fire and extended coverage, vandalism coverage and malicious
mischief, sprinkler leakage, water damage, and special extended coverage on
building. Additionally, Landlord may (but shall not be required to) carry: (i)
Bodily Injury and Property Damage Liability Insurance and/or Excess Liability
Coverage Insurance; and (ii) Earthquake and/or Flood Damage Insurance; and (iii)
Rental Income Insurance at its election or if required by its lender from time
to time during the Term hereof, in such amounts and with such limits as Landlord
or its lender may deem appropriate. The costs of such insurance shall be
included in Operating Costs. However, notwithstanding the foregoing, Landlord
shall either carry, or shall be deemed to have elected to self-insure, the
Bodily Injury and Property Damage Liability Insurance coverage
<PAGE> 26
described in subsection (i) of the immediately preceding sentence, and if
Landlord elects to self-insure any or all of such coverage, Tenant shall be
deemed to be in the same position it would have been in had Landlord actually
purchased such insurance from a third party carrier.
(d) Waiver of Subrogation. Landlord and Tenant each agree to have their
respective insurers issuing the insurance described in Sections 14(a)(ii),
14(a)(iv) and the first sentence of Section 14(c) waive any rights of
subrogation that such companies may have against the other party. Tenant hereby
waives any right that Tenant may have against Landlord and Landlord hereby
waives any right that Landlord may have against Tenant as a result of any loss
or damage to the extent such loss or damage is insurable under such policies.
(e) Compliance with Law. Tenant agrees that it will not, at any time,
during the Term of this Lease, carry any stock of goods or do anything in or
about the Premises that will in any way tend to increase the insurance rates
upon the Project. Tenant agrees to pay Landlord within thirty (30) days after
demand the amount of any increase in premiums for insurance against loss by fire
that may be charged during the Term of this Lease on the amount of insurance to
be carried by Landlord on the Project resulting from the foregoing, or from
Tenant doing any act in or about said Premises that does so increase the
insurance rates, whether or not Landlord shall have consented to such act on the
part of Tenant, so long as Tenant receives substantiating documentation. If
Tenant installs upon the Premises any electrical equipment which constitutes an
overload of electrical lines of the Premises, Tenant shall at its own cost and
expense in accordance with all other Lease provisions, and subject to the
provisions of Article 9, 10 and 11, hereof, make whatever changes are necessary
to comply with requirements of the insurance underwriters and any governmental
authority having jurisdiction thereover, but nothing herein contained shall be
deemed to constitute Landlord's consent to such overloading. Tenant shall, at
its own expense, comply with all requirements of the insurance authority having
jurisdiction over the Project necessary for the maintenance of reasonable fire
and extended coverage insurance for the Premises, including without limitation
thereto, the installation of fire extinguishers or an automatic dry chemical
extinguishing system.
ARTICLE 15
ASSIGNMENT AND SUBLETTING
Tenant shall have no power to, either voluntarily, involuntarily, by
operation of law or otherwise, sell, assign, transfer or hypothecate this Lease,
or sublet the Premises or any part thereof, or permit the Premises or any part
thereof to be used or occupied by anyone other than Tenant or Tenant's employees
without the prior written consent of Landlord which shall not be unreasonably
withheld. Landlord shall grant or deny consent to a proposed Transfer by written
notice to Tenant within ten (10) business days after Landlord's receipt of an
executed duplicate original of the Transfer document together with a completed
lease application by the Transferee and financial information reasonably
requested by Landlord. Landlord's failure to withhold its consent by written
notice to Tenant within said ten (10) business day period shall be deemed to
constitute Landlord's consent to such Transfer. Tenant may transfer its interest
pursuant to this Lease only upon the following express conditions, which
conditions are agreed by
<PAGE> 27
Landlord and Tenant to be reasonable:
(a) That the proposed transferee shall be subject to the prior written
consent of Landlord, which consent will not be unreasonably withheld but,
without limiting the generality of the foregoing, it shall be reasonable for
Landlord to deny such consent if:
(i) The use to be made of the Premises by the proposed transferee is (a)
not generally consistent with the character and nature of all other tenancies in
the Project, or (b) a use which conflicts with any so-called "exclusive" then in
favor of, or for any use which is the same as that stated in any percentage rent
lease to, another tenant of the Project or any other buildings which are in the
same complex as the Project, or (c) a use which would be prohibited by any other
portion of this Lease (including but not limited to any Rules and Regulations
then in effect);
(ii) The financial responsibility of the proposed transferee is not
reasonably satisfactory to Landlord;
(iii) The proposed transferee is either a governmental agency or
instrumentality thereof; or
(iv) Either the proposed transferee or any person or entity which
directly or indirectly controls, is controlled by or is under common control
with the proposed transferee is negotiating with Landlord to lease space in the
Project.
(b) Whether or not Landlord consents to any such transfer, Tenant shall pay
to Landlord Landlord's then standard processing fee and reasonable attorneys'
fees incurred in connection with the proposed transfer up to the aggregate sum
of $1,000.00;
(c) That the proposed transferee shall execute an agreement pursuant to
which it shall agree to perform faithfully and be bound by all of the terms,
covenants, conditions, provisions and agreements of this Lease applicable to
that portion of the Premises so transferred; and
(d) That an executed duplicate original of said assignment and assumption
agreement or other transfer on a form reasonably approved by Landlord, shall be
delivered to Landlord within five (5) days after the execution thereof, and that
such transfer shall not be binding upon Landlord until the delivery thereof to
Landlord and the execution and delivery of Landlord's consent thereto. It shall
be a condition to Landlord's consent to any subleasing, assignment or other
transfer of part or all of Tenant's interest in the Premises (hereinafter
referred to as a "Transfer") that (i) upon Landlord's consent to any Transfer,
Tenant shall pay and continue to pay fifty percent (50%) of any "Transfer
Premium" (defined below), received by Tenant from the transferee; (ii) any
sublessee of part or all of Tenant's interest in the Premises shall agree that
in the event Landlord gives such sublessee notice that Tenant is in default
under this Lease, such sublessee shall thereafter make all sublease or other
payments directly to Landlord, which will be received by Landlord without any
liability whether to honor the sublease or otherwise (except to credit such
payments against sums due under this Lease), and any sublessee shall
<PAGE> 28
agree to attorn to Landlord or its successors and assigns at their request
should this Lease be terminated for any reason, except that in no event shall
Landlord or its successors or assigns be obligated to accept such attornment;
(iii) any such Transfer and consent shall be effected on forms supplied by
Landlord and/or its legal counsel; (iv) Landlord may require that Tenant not
then be in default hereunder in any respect; and (v) Tenant or the proposed
subtenant or assignee (collectively, "Transferee") shall agree to pay Landlord,
upon demand, as additional rent, a sum equal to the additional costs, if any,
incurred by Landlord for maintenance and repair as a result of any change in the
nature of occupancy caused by such subletting or assignment. "Transfer Premium"
shall mean all rent, additional rent or other consideration payable by a
Transferee in connection with a Transfer in excess of the rent and Additional
Rent payable by Tenant under this Lease during the term of the Transfer and if
such Transfer is less than all of the Premises, the Transfer Premium shall be
calculated on a rentable square foot basis. In any event, the Transfer Premium
shall be calculated after deducting the reasonable expenses incurred by Tenant
for (1) any changes, alterations and improvements to the Premises paid for by
Tenant in connection with the Transfer, (2) any other out-off-pocket monetary
concessionsprovided by Tenant to the Transferee, (3) any brokerage commissions
paid for by Tenant in connection with the Transfer, (4) advertising costs
incurred in connection with the Transfer, (5) attorneys' fees incurred in
connection with the Transfer, (6) lease takeover costs incurred in connection
with the Transfer, and (7) the unamortized cost of alterations and improvements
made or paid for by Tenant and applicable to the space which is the subject of
the Transfer (amortized on a straight-line basis from date of installation until
the Expiration Date). "Transfer Premium" shall also include, but not be limited
to, key money, bonus money or other cash consideration paid by a transferee to
Tenant in connection with such Transfer, and any payment in excess of fair
market value for services rendered by Tenant to the Transferee and any payment
in excess of fair market value for assets, fixtures, inventory, equipment, or
furniture transferred by Tenant to the Transferee in connection with such
Transfer. Any sale, assignment, hypothecation, transfer or subletting of this
Lease which is not in compliance with the provisions of this Article 15 shall be
voidable at the option of Landlord. In no event shall the consent by Landlord to
an assignment or subletting be construed as relieving Tenant, any assignee, or
sublessee from obtaining the express written consent of Landlord to any further
assignment or subletting, or as releasing Tenant from any liability or
obligation hereunder whether or not then accrued and Tenant shall continue to be
fully liable therefor. No collection or acceptance of rent by Landlord from any
person other than Tenant shall be deemed a waiver of any provision of this
Article 15 or the acceptance of any assignee or subtenant hereunder, or a
release of Tenant (or of any successor of Tenant or any subtenant).
Notwithstanding anything to the contrary in this Lease, if Tenant or any
proposed Transferee claims that Landlord has unreasonably withheld or delayed
its consent under this Article 15 or otherwise has breached or acted
unreasonably under this Article 15, their sole remedies shall be a declaratory
judgment, an injunction for the relief sought and/or monetary damages, and
Tenant hereby waives any right at law or equity to terminate this Lease.
The term "Affiliate" shall mean (i) any entity that is controlled
<PAGE> 29
by, controls or is under common control with, Tenant or (ii) any entity that
merges with, is acquired by, or acquires Tenant through the purchase of stock or
assets and where the net worth of the surviving entity as of the date such
transaction is completed is not less than the net worth of Tenant as of the date
of this Lease, calculated under generally accepted accounting principles.
Notwithstanding anything to the contrary contained in this Article 15, an
assignment or subletting of all or a portion of the Premises to an Affiliate,
shall not be deemed a Transfer under this Article 15, provided that Tenant
notifies Landlord of any such assignment or sublease and promptly supplies
Landlord with any documents or information requested by Landlord regarding such
assignment or sublease or such affiliate, and further provided that such
assignment or sublease is not a subterfuge by Tenant to avoid its obligations
under this Lease. An assignee of Tenant's entire interest in this Lease pursuant
to the immediately preceding sentence may be referred to herein as an
"Affiliated Assignee" "Control" ," as used in this Article 15, shall mean the
ownership, directly or indirectly, of greater than fifty percent (50%) of the
voting securities of, or possession of the right to vote, in the ordinary
direction of its affairs, of greater than fifty percent (50%) of the voting
interest in, an entity. In addition, notwithstanding anything to the contrary
contained in this Article 15, Landlord and Tenant acknowledge that, from time to
time, without the Premises being separately demised, certain offices within the
Premises may be utilized on a temporary basis by entities or persons
("Co-Producers") with whom Tenant is then working on entertainment-related
projects in the ordinary course of its business as an entertainment production
company. Upon written request of Landlord, Tenant shall from time to time
identify to Landlord in writing the Co-Producers so utilizing the Premises. Such
occupancy by the Co-Producers shall not be deemed an assignment or subletting,
and shall not require Tenant's compliance with the provisions of this Article
15, so long as Tenant is not being compensated for use of such space beyond
reimbursement of Tenant's costs of such space. The amount of all space occupied
at any one time by Co-Producers shall not exceed in the aggregate 8,000 usable
square feet. Co-Producers shall not have any of the rights of Tenant under this
Lease and Landlord shall not be obligated to deal directly with any such
Co-Producer. No signage shall be posted outside the Premises or elsewhere in the
Project naming any of such Co-Producers as occupants of the Premises or the
Project, except as permitted in accordance with Article 33 below. The provisions
of this paragraph shall be solely for the benefit of The Kushner-Locke Company
and shall not apply to its assignees or subtenants, if any.
Notwithstanding anything to the contrary contained in this Article 15, if
Tenant contemplates a Transfer to other than an Affiliate or Co- Producer, then
Tenant shall give Landlord notice (the "Intention to Transfer Notice") of such
contemplated Transfer (whether or not the contemplated Transferee or the terms
of such contemplated Transfer have been determined). The Intention to Transfer
Notice shall specify the portion of and number of rentable square feet of the
Premises which Tenant intends to Transfer (the "Contemplated Transfer Space"),
the contemplated date of commencement of the contemplated Transfer (the
"Contemplated Effective Date") and the contemplated length of the term of such
contemplated Transfer ("Contemplated Term"). Thereafter, Landlord shall have the
option, by giving written notice to Tenant within ten (10) business days after
Landlord's receipt of the Intention
<PAGE> 30
to Transfer Notice, to recapture the Contemplated Transfer Space effective as of
the Contemplated Effective Date for the Contemplated Term. In the event that
such option is exercised by Landlord, this Lease shall be terminated (or where
appropriate, suspended if the last day of the Contemplated Term is not the last
day of the Term, and at the end of such suspension period the Premises or the
applicable portion thereof, shall be returned to Tenant in the same condition as
when received, reasonable wear and tear excepted) with respect to the
Contemplated Transfer Space effective as of the Contemplated Effective Date
until the last day of the Contemplated Term. In the event of a recapture by
Landlord with respect to less than the entire Premises, the Monthly Basic Rental
reserved herein shall be prorated on the basis of the number of rentable square
feet retained by Tenant in proportion to the number of rentable square feet
contained in the entire Premises, and this Lease as so amended shall continue
thereafter in full force and effect, and upon request of either party, the
parties shall execute written confirmation of the same. If Landlord declines, or
fails to elect in a timely manner to recapture as to the Contemplated Transfer
Space under this Article 15 within such ten (10) business day period, then,
provided Landlord has consented to the proposed Transfer, Tenant shall be
entitled to proceed to transfer the Contemplated Transfer Space to a proposed
Transferee and Landlord shall not have any right to recapture such Contemplated
Transfer Space with respect to any Transfer thereof consummated within a period
of six (6) months (the "Six Month Period") commencing on the expiration of such
ten (10) business day period; provided, however, that any such Transfer shall be
subject to other terms of this Article 15. If such a Transfer is not so
consummated within the Six Month Period (or if a Transfer is so consummated,
then upon the expiration of the term of any Transfer of such Contemplated
Transfer Space consummated within such Six Month Period), Tenant shall again be
required to submit a new Intention to Transfer Notice to Landlord with respect
to any contemplated Transfer, as provided above in this Article 15.
ARTICLE 16
DAMAGE OR DESTRUCTION
Within sixty (60) days after the date Landlord learns of the necessity for
repairs as a result of damage, Landlord shall notify Tenant ("Damage Repair
Estimate") of Landlord's estimated assessment of the period of time in which the
repairs will be completed. If the Project is damaged by fire or other insured
casualty and the insurance proceeds have been made available therefor by the
holder or holders of any mortgages or deeds of trust covering the Premises or
the Project, the damage shall be repaired by Landlord to the extent such
insurance proceeds are available therefor and provided the Damage Repair
Estimate indicates that repairs can be completed within one hundred eighty (180)
days after the necessity for repairs as a result of such damage becomes known to
Landlord without the payment of overtime or other premiums, and until such
repairs are completed rent shall be abated in proportion to the part of the
Premises which is unusable by Tenant in the conduct of its business (but there
shall be no abatement of rent by reason of any portion of the Premises being
unusable for a period equal to one (1) day or less). However, if the damage is
due to the fault or neglect of Tenant, its employees, agents, contractors,
guests, invitees and the like, there shall be no abatement of rent, unless and
to the extent Landlord receives rental income insurance proceeds or would have
<PAGE> 31
received such insurance had Landlord carried standard rental income insurance.
Upon the occurrence of any damage to the Premises, Tenant shall assign to
Landlord (or to any party designated by Landlord) all insurance proceeds payable
to Tenant under Section 14(a)(ii)(A) above; provided, however, that if the cost
of repair of improvements within the Premises by Landlord exceeds the amount of
insurance proceeds received by Landlord from Tenant's insurance carrier, as so
assigned by Tenant, plus proceeds received from Landlord's insurance carrier
allocable to such leasehold improvements, such excess costs shall be paid by
Tenant to Landlord prior to Landlord's repair of such damage. If, however, the
Damage Repair Estimate indicates that repairs cannot be completed within one
hundred eighty (180) days after the necessity for repairs as a result of such
damage becomes known to Landlord without the payment of overtime or other
premiums, Landlord may, at its option, either (i) make them in a reasonable time
and in such event this Lease shall continue in effect and the rent shall be
abated, if at all, in the manner provided in this Article 16, or (ii) elect not
to effect such repairs and instead terminate this Lease, by notifying Tenant in
writing of such termination within sixty (60) days after Landlord learns of the
necessity for repairs as a result of damage, such notice to include a
termination date giving Tenant sixty (60) days to vacate the Premises. In
addition, Landlord may elect to terminate this Lease if the Project shall be
materially damaged by fire or other casualty or cause, whether or not the
Premises are affected, and the damage is not fully covered, except for
deductible amounts, by Landlord's insurance policies. However, if Landlord does
not elect to terminate this Lease pursuant to Landlord's termination right as
provided above, and the Damage Repair Estimate indicates that repairs cannot be
completed within one hundred eighty (180) days after being commenced, Tenant may
elect, not later than thirty (30) days after Tenant's receipt of the Damage
Repair Estimate, to terminate this Lease by written notice to Landlord effective
as of the date specified in Tenant's notice. Finally, if the Premises or the
Project is damaged to any substantial extent during the last twelve (12) months
of the Term, then notwithstanding anything contained in this Article 16 to the
contrary, Landlord shall have the option to terminate this Lease by giving
written notice to Tenant of the exercise of such option within sixty (60) days
after Landlord learns of the necessity for repairs as the result of such damage.
In the event that the Premises or the Project is destroyed or damaged to any
substantial extent during the last twelve (12) months of the Lease Term and if
such damage shall take longer than sixty (60) days to repair and if such damage
is not the result of the negligence or willful misconduct of Tenant or Tenant's
employees, licensees, invitees or agents, then notwithstanding anything in this
Article 16 to the contrary, Tenant shall have the option to terminate this Lease
by written notice to Landlord of the exercise of such option within sixty (60)
days after Tenant learns of the necessity for repairs as the result of such
damage. A total destruction of the Project shall automatically terminate this
Lease. Except as provided in this Article 16, there shall be no abatement of
rent and no liability of Landlord by reason of any injury to or interference
with Tenant's business or property arising from such damage or destruction or
the making of any repairs, alterations or improvements in or to any portion of
the Project or the Premises or in or to fixtures, appurtenances and equipment
therein. Tenant understands that Landlord will not carry insurance of any kind
on Tenant's furniture, furnishings, trade fixtures or equipment, and that
Landlord shall not
<PAGE> 32
be obligated to repair any damage thereto or replace the same. Except for
proceeds relating to Tenant's furniture, furnishings, trade fixtures and
equipment, Tenant acknowledges that Tenant shall have no right to any proceeds
of insurance relating to property damage. With respect to any damage which
Landlord is obligated to repair or elects to repair, Tenant, as a material
inducement to Landlord entering into this Lease, irrevocably waives and releases
its rights under the provisions of Sections 1932 and 1933 of the California
Civil Code.
ARTICLE 17
SUBORDINATION
This Lease is subject and subordinate to all ground or underlying leases,
mortgages and deeds of trust which affect the property or the Project, including
all renewals, modifications, consolidations, replacements and extensions
thereof; provided, however, if the lessor under any such lease or the holder or
holders of any such mortgage or deed of trust shall advise Landlord that they
desire or require this Lease to be prior and superior thereto, upon written
request of Landlord to Tenant, Tenant agrees to promptly execute, acknowledge
and deliver any and all documents or instruments which Landlord or such lessor,
holder or holders deem necessary or desirable for purposes thereof. Landlord
shall have the right to cause this Lease to be and become and remain subject and
subordinate to any and all ground or underlying leases, mortgages or deeds of
trust which may hereafter be executed covering the Premises, the Project or the
property or any renewals, modifications, consolidations, replacements or
extensions thereof, for the full amount of all advances made or to be made
thereunder and without regard to the time or character of such advances,
together with interest thereon and subject to all the terms and provisions
thereof; provided, however, that a condition precedent to such subordination
shall be that Landlord obtains from the lender or other party in question a
commercially reasonable non-disturbance agreement in favor of Tenant. Tenant
agrees, within twenty (20) days after Landlord's written request therefor, to
execute, acknowledge and deliver upon request any and all documents or
instruments requested by Landlord or necessary or proper to assure the
subordination of this Lease to any such mortgages, deed of trust, or leasehold
estates. Tenant agrees that in the event any proceedings are brought for the
foreclosure of any mortgage or deed of trust or any deed in lieu thereof, to
attorn to the purchaser or any successors thereto upon any such foreclosure sale
or deed in lieu thereof as so requested to do so by such purchaser and to
recognize such purchaser as the lessor under this Lease; Tenant shall, within
fifteen (15) days after request execute such further instruments or assurances
as such purchaser may reasonably deem necessary to evidence or confirm such
attornment. Tenant agrees to provide copies of any notices of Landlord's default
under this Lease to any mortgagee or deed of trust beneficiary whose address has
been provided to Tenant and Tenant shall provide such mortgagee or deed of trust
beneficiary a commercially reasonable time after receipt of such notice within
which to cure any such default. Tenant waives the provisions of any current or
future statute, rule or law which may give or purport to give Tenant any right
or election to terminate or otherwise adversely affect this Lease and the
obligations of the Tenant hereunder in the event of any foreclosure proceeding
or sale.
<PAGE> 33
ARTICLE 18
EMINENT DOMAIN
If the whole of the Premises or the Project or so much thereof as to render
the balance unusable by Tenant shall be taken under power of eminent domain, or
is sold, transferred or conveyed in lieu thereof, this Lease shall automatically
terminate as of the date of such condemnation, or as of the date possession is
taken by the condemning authority, at Landlord's option. No award for any
partial or entire taking shall be apportioned, and Tenant hereby assigns to
Landlord any award which may be made in such taking or condemnation, together
with any and all rights of Tenant now or hereafter arising in or to the same or
any part thereof; provided, however, that nothing contained herein shall be
deemed to give Landlord any interest in or to require Tenant to assign to
Landlord any award made to Tenant for the taking of personal property and trade
fixtures belonging to Tenant and removable by Tenant at the expiration of the
Term hereof as provided hereunder or for the interruption of, or damage to,
Tenant's business. In the event of a partial taking described in this Article
18, or a sale, transfer or conveyance in lieu thereof, which does not result in
a termination of this Lease, the rent shall be apportioned according to the
ratio that the part of the Premises remaining useable by Tenant bears to the
total area of the Premises. Tenant hereby waives any and all rights it might
otherwise have pursuant to Section 1265.130 of the California Code of Civil
Procedure.
ARTICLE 19
DEFAULT
(a) Tenant's Default. Each of the following acts or omissions of Tenant or
of any guarantor of Tenant's performance hereunder, or occurrences, shall
constitute an "Event of Default":
(i) Failure or refusal to pay Basic Rental, Additional Rent or any other
amount to be paid by Tenant to Landlord hereunder within five (5) business days
after notice that the same is due or payable hereunder; said five (5) day period
shall be in addition to, and not in lieu of, the notice requirements of Section
1161 of the California Code of Civil Procedure or any similar or successor law;
(ii) Except as set forth in items (i) above and (iii) below, failure to
perform or observe any other covenant or condition of this Lease to be performed
or observed within thirty (30) days following written notice to Tenant of such
failure; however, if the nature of such default is such that the same cannot be
reasonably cured within a thirty (30) day period, Tenant shall not be deemed to
be in default if Tenant diligently commences such cure within such period and
thereafter diligently proceeds to rectify and cure said default. Such thirty
(30) day notice shall be in addition to, and not in lieu of, any required under
Section 1161 of the California Code of Civil Procedure or any similar or
successor law; or
(iii) Tenant's failure to observe or perform according to the provisions
of Articles 17 or 25 within five (5) business days after notice from Landlord.
(b) Landlord's Default. Notwithstanding anything to the contrary
<PAGE> 34
set forth in this Lease, Landlord shall be in default in the performance of any
obligation required to be performed by Landlord pursuant to this Lease if
Landlord fails to perform such obligation within thirty (30) days after the
receipt of notice from Tenant specifying in detail Landlord's failure to
perform; provided, however, if the nature of Landlord's obligation is such that
more than thirty (30) days are required for its performance, then Landlord shall
not be in default under this Lease if it shall commence such performance within
such thirty (30) day period and thereafter diligently pursue the same to
completion. Upon any such default by Landlord under this Lease, Tenant may,
except as otherwise specifically provided in this Lease to the contrary,
exercise any of its rights provided at law or in equity.
ARTICLE 20
REMEDIES
(a) Upon the occurrence of an Event of Default under this Lease as provided
in Article 19 hereof, Landlord may exercise all of its remedies as may be
permitted by law, including but not limited to the remedy provided by Section
1951.4 of the California Civil Code, and including without limitation,
terminating this Lease, reentering the Premises and removing all persons and
property therefrom, which property may be stored by Landlord at a warehouse or
elsewhere at the risk, expense and for the account of Tenant. If Landlord elects
to terminate this Lease, Landlord shall be entitled to recover from Tenant the
aggregate of all amounts permitted by law, including but not limited to (i) the
worth at the time of award of the amount of any unpaid rent which had been
earned at the time of such termination; plus (ii) the worth at the time of award
of the amount by which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; plus (iii) the worth at the
time of award of the amount by which the unpaid rent for the balance of the
Lease Term after the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; plus (iv) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom; and (v) at
Landlord's election, such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law. The term
"rent" as used in this Article 20(a) shall be deemed to be and to mean all sums
of every nature required to be paid by Tenant pursuant to the terms of this
Lease, whether to Landlord or to others. As used in items (i) and (ii), above,
the "worth at the time of award" shall be computed by allowing interest at the
rate set forth in item (e), below, but in no case greater than the maxximum
amount of such interestpermitted by law. As used in item (iii), above, the
"worth at the time of award" shall be computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of award
plus one percent (1%).
(b) Nothing in this Article 20 shall be deemed to affect Landlord's right
to indemnification for liability or liabilities arising prior to the termination
of this Lease for personal injuries or property damage under the indemnification
clause or clauses contained
<PAGE> 35
in this Lease.
(c) Notwithstanding anything to the contrary set forth herein, Landlord's
re-entry to perform acts of maintenance or preservation of or in connection with
efforts to relet the Premises or any portion thereof, or the appointment of a
receiver upon Landlord's initiative to protect Landlord's interest under this
Lease shall not terminate Tenant's right to possession of the Premises or any
portion thereof and, until Landlord does elect to terminate this Lease, this
Lease shall continue in full force and effect and Landlord may enforce all of
Landlord's rights and remedies hereunder including, without limitation, the
remedy described in California Civil Code Section 1951.4 (lessor may continue
lease in effect after lessee's breach and abandonment and recover rent as it
becomes due, if lessee has the right to sublet or assign, subject only to
reasonable limitations). Accordingly, if Landlord does not elect to terminate
this Lease on account of any default by Tenant, Landlord may, from time to time,
without terminating this Lease, enforce all of its rights and remedies under
this Lease, including the right to recover all rent as it becomes due.
(d) All rights, powers and remedies of Landlord hereunder and under any
other agreement now or hereafter in force between Landlord and Tenant shall be
cumulative and not alternative and shall be in addition to all rights, powers
and remedies given to Landlord by law, and the exercise of one or more rights or
remedies shall not impair Landlord's right to exercise any other right or
remedy.
(e) Any amount due from Tenant to Landlord hereunder which is not paid
within five (5) days after notice to Tenant the same is due shall bear interest
at the lower of twelve percent (12%) per annum or the maximum lawful rate of
interest from the due date until paid, unless otherwise specifically provided
herein, but the payment of such interest shall not excuse or cure any default by
Tenant under this Lease. In addition to such interest: (i) if Basic Rental is
not paid within ten (10) days after notice to Tenant the same is due, a late
charge equal to five percent (5%) of the amount overdue shall be assessed and
shall accrue for each calendar month or part thereof until such rental,
including the late charge, is paid in full, which late charge Tenant hereby
agrees is a reasonable estimate of the damages Landlord shall suffer as a result
of Tenant's late payment and (ii) an additional charge of $25 shall be assessed
for any check given to Landlord by or on behalf of Tenant which is not honored
by the drawee thereof; which damages include Landlord's additional
administrative and other costs associated with such late payment and unsatisfied
checks and the parties agree that it would be impracticable or extremely
difficult to fix Landlord's actual damage in such event. Such charges for
interest and late payments and unsatisfied checks are separate and cumulative
and are in addition to and shall not diminish or represent a substitute for any
or all of Landlord's rights or remedies under any other provision of this Lease.
ARTICLE 21
TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer or termination of Landlord's interest in the
Premises or the Project by sale, assignment, transfer, foreclosure, deed-in-lieu
of foreclosure or otherwise whether voluntary
<PAGE> 36
or involuntary (and the assumption in writing by the transferee of all of
Landlord's obligations hereunder), Landlord shall be automatically relieved of
any and all obligations and liabilities on the part of Landlord from and after
the date of such transfer or termination, including furthermore without
limitation, the obligation of Landlord under Article 4 and California Civil Code
1950.7 above to return the security deposit, provided said security deposit is
transferred to said transferee. Tenant agrees to attorn to the transferee upon
any such transfer and to recognize such transferee as the lessor under this
Lease and Tenant shall, within five (5) days after request, execute such further
instruments or assurances as such transferee may reasonably deem necessary to
evidence or confirm such attornment.
ARTICLE 22
BROKER
In connection with this Lease, Landlord and Tenant warrant and represents
that they have had dealings only with firm(s) set forth in Article 1.H. of the
Basic Lease Provisions and that they know of no other person or entity who is or
might be entitled to a commission, finder's fee or other like payment in
connection herewith and do hereby indemnify and agree to hold the other, their
agents, members, partners, representatives, officers, affiliates, shareholders,
employees, successors and assigns harmless from and against any and all loss,
liability and expenses that the other party may incur should such warranty and
representation prove incorrect, inaccurate or false.
ARTICLE 23
PARKING
Tenant shall have the right, but not the obligation, to rent from Landlord,
commencing on the Commencement Date, the number of parking passes set forth in
Section 1(I) of the Basic Lease Provisions, which parking passes shall pertain
to the Project parking facility. Tenant's reserved parking shall be at locations
within such structure currently utilized by Tenant's under Tenant's existing
lease at the Project, and any additional reserved parking shall be at locations
reasonably designated by Landlord. Tenant shall have the right to vary the
number of parking passes rented by Tenant (up to the maximum set forth in
Section 1(I) of the Basic Lease Provisions); provided, however, if at any time
Tenant elects to rent less than all of the parking passes to which Tenant is
entitled, Tenant shall only have the right to subsequently rent such parking
passes if, at the time Tenant desires to rent such passes, Landlord reasonably
determines that such additional parking passes are available in the Project.
Tenant shall pay to Landlord for automobile parking passes the prevailing rate
charged from time to time at the location of such parking passes, which rates
are currently, as of the date of this Lease, One Hundred Four and 50/100 Dollars
($104.50) per month per unreserved parking pass and One Hundred Sixty-Five
Dollars ($165.00) per month per reserved parking pass and which rates shall
remain in effect throughout calendar year 1999. For each calendar year
thereafter, the maximum parking rates shall be one hundred five percent (105%)
of the maximum rate in effect as of the immediately preceding calendar year
(whether or not such maximum rate is actually charged). In addition to the rates
described above, Tenant shall be responsible for the full amount of any taxes
imposed by any governmental authority in connection with the renting of such
parking
<PAGE> 37
passes by Tenant or the use of the parking facility by Tenant. Tenant's
continued right to use the parking passes is conditioned upon Tenant abiding by
all rules and regulations which are prescribed from time to time for the orderly
operation and use of the parking facility where the parking passes are located,
including any sticker or other identification system established by Landlord,
Tenant's cooperation in seeing that Tenant's employees and visitors also comply
with such rules and regulations, and Tenant not being in default under this
Lease beyond any applicable cure period. Landlord specifically reserves the
right to change the size, configuration, design, layout and all other aspects of
the Project parking facility at any time and Tenant acknowledges and agrees that
Landlord may, without incurring any liability to Tenant and without any
abatement of rent under this Lease, from time to time, to temporarily close-off
or restrict access to the Project parking facility for purposes of permitting or
facilitating any such construction, alteration or improvements. Landlord may
delegate its responsibilities hereunder to a parking operator or a lessee of the
parking facility in which case such parking operator or lessee shall have all
the rights of control attributed hereby to the Landlord. The parking passes
rented by Tenant pursuant to this Article 23 are provided to Tenant solely for
use by Tenant's own personnel and such passes may not be transferred, assigned,
subleased or otherwise alienated by Tenant without Landlord's prior approval.
Tenant may validate visitor parking by such method or methods as the Landlord
may establish, at the validation rate from time to time generally applicable to
visitor parking.
ARTICLE 24
WAIVER
No waiver by Landlord or Tenant of any provision of this Lease shall be
deemed to be a waiver of any other provision hereof or of any subsequent breach
of the same or any other provision. No provision of this Lease may be waived by
Landlord or Tenant, except by an instrument in writing executed by Landlord and
Tenant. Landlord's consent to or approval of any act by Tenant requiring
Landlord's consent or approval shall not be deemed to render unnecessary the
obtaining of Landlord's consent to or approval of any subsequent act of Tenant,
whether or not similar to the act so consented to or approved. No act or thing
done by Landlord or Landlord's agents during the Term of this Lease shall be
deemed an acceptance of a surrender of the Premises, and no agreement to accept
such surrender shall be valid unless in writing and signed by Landlord. Any
payment by Tenant or receipt by Landlord of an amount less than the total amount
then due hereunder shall be deemed to be in partial payment only thereof and not
a waiver of the balance due or an accord and satisfaction, notwithstanding any
statement or endorsement to the contrary on any check or any other instrument
delivered concurrently therewith or in reference thereto. Accordingly, Landlord
may accept any such amount and negotiate any such check without prejudice to
Landlord's right to recover all balances due and owing and to pursue its other
rights against Tenant under this Lease, regardless of whether Landlord makes any
notation on such instrument of payment or otherwise notifies Tenant that such
acceptance or negotiation is without prejudice to Landlord's rights.
ARTICLE 25
ESTOPPEL CERTIFICATE
<PAGE> 38
Tenant shall, at any time and from time to time, upon not less than twenty
(20) days' prior written notice from Landlord, execute, acknowledge and deliver
to Landlord a statement in writing certifying the following information, (but
not limited to the following information in the event further information is
requested by Landlord): (i) that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease, as modified, is in full force and effect); (ii) the dates to
which the rental and other charges are paid in advance, if any; (iii) the amount
of Tenant's security deposit, if any; and (iv) acknowledging that there are not,
to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder,
and no events or conditions then in existence which, with the passage of time or
notice or both, would constitute a default on the part of Landlord hereunder, or
specifying such defaults, events or conditions, if any are claimed. It is
expressly understood and agreed that any such statement may be relied upon by
any prospective purchaser or encumbrancer of all or any portion of the Real
Property. Tenant's failure to deliver such statement within such time shall
constitute an admission by Tenant that all statements contained therein are true
and correct.
ARTICLE 26
LIABILITY OF LANDLORD
Notwithstanding anything in this Lease to the contrary, any remedy of
Tenant for the collection of a judgment (or other judicial process) requiring
the payment of money by Landlord in the event of any default by Landlord
hereunder or any claim, cause of action or obligation, contractual, statutory or
otherwise by Tenant against Landlord concerning, arising out of or relating to
any matter relating to this Lease and all of the covenants and conditions or any
obligations, contractual, statutory, or otherwise set forth herein, shall be
limited solely and exclusively to an amount which is equal to the lesser of (i)
the interest of Landlord in and to the Project, and (ii) the interest Landlord
would have in the Project if the Project were encumbered by third party debt in
an amount equal to eighty percent (80%) of the then current value of the
Project. No other property or assets of Landlord, or any member, officer,
director, shareholder, partner, trustee, agent, servant or employee of Landlord
(the "Representative") shall be subject to levy, execution or other enforcement
procedure for the satisfaction of Tenant's remedies under or with respect to
this Lease, Landlord's obligations to Tenant, whether contractual, statutory or
otherwise, the relationship of Landlord and Tenant hereunder, or Tenant's use or
occupancy of the Premises. Tenant further understands that any liability, duty
or obligation of Landlord to Tenant, shall automatically cease and terminate as
of the date that Landlord or any of Landlord's Representatives no longer have
any right, title or interest in or to the Project.
ARTICLE 27
INABILITY TO PERFORM
This Lease and the obligations of both parties hereunder shall not be
affected or impaired because such party is unable to fulfill any of its
obligations hereunder or is delayed in doing so, if such inability
<PAGE> 39
or delay is caused by reason of any prevention, delay, stoppage due to strikes,
lockouts, acts of God, or any other cause previously, or at such time, beyond
the reasonable control or anticipation of such party (collectively, a "Force
Majeure") and both parties' obligations under this Lease shall be forgiven and
suspended by any such Force Majeure; provided, however, that this Article 27 is
not intended to, and shall not, extend the time period for the payment of any
monetary amounts due (including, without limitation, rent payments from Tenant)
from either party to the other under this Lease nor relieve either party from
their monetary obligations to the other under this Lease.
ARTICLE 28
HAZARDOUS WASTE
(a) Tenant shall not cause or permit any Hazardous Material (as defined in
Article 28(c) below) to be brought, kept or used in or about the Project by
Tenant, its agents, employees, contractors, or invitees.
(b) It shall not be unreasonable for Landlord to withhold its consent to
any proposed Transfer if (i) the proposed transferee's anticipated use of the
Premises involves the generation, storage, use, treatment, or disposal of
Hazardous Material; (ii) the proposed Transferee has been required by any prior
landlord, lender, or governmental authority to take remedial action in
connection with Hazardous Material contaminating a property if the contamination
resulted from such Transferee's actions or use of the property in question; or
(iii) the proposed Transferee is subject to an enforcement order issued by any
governmental authority in connection with the use, disposal, or storage of a
Hazardous Material.
(c) As used herein, the term "Hazardous Material" means any hazardous or
toxic substance, material, or waste which is or becomes regulated by any local
governmental authority, the State of California or the United States Government.
The term "Hazardous Material" includes, without limitation, any material or
substance which is (i) defined as "Hazardous Waste," "Extremely Hazardous
Waste," or "Restricted Hazardous Waste" under Sections 25115, 25117 or 25122.7,
or listed pursuant to Section 25140, of the California Health and Safety Code,
Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined as a
"Hazardous Substance" under Section 25316 of the California Health and Safety
Code, Division 20, Chapter 6.8 (Carpenter- Presley-Tanner Hazardous Substance
Account Act), (iii) defined as a "Hazardous Material," "Hazardous Substance," or
"Hazardous Waste" under Section 25501 of the California Health and Safety Code,
Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and
Inventory), (iv) defined as a "Hazardous Substance" under Section 25281 of the
California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage
of Hazardous Substances), (v) petroleum, (vi) asbestos, (vii) listed under
Article 9 or defined as Hazardous or extremely hazardous pursuant to Article 11
of Title 22 of the California Administrative Code, Division 4, Chapter 20,
(viii) designated as a "Hazardous Substance" pursuant to Section 311 of the
Federal Water Pollution Control Act (33 U.S.C. ss. 1317), (ix) defined as a
"Hazardous Waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C. ss. 6901 et seq. (42 U.S.C. ss. 6903), or (x)
defined as a "Hazardous Substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and
<PAGE> 40
Liability Act, 42 U.S.C. ss. 9601 et seq. (42 U.S.C. ss. 9601).
(d) As used herein, the term "Laws" mean any applicable federal, state or
local laws, ordinances, or regulations relating to any Hazardous Material
affecting the Project, including, without limitation, the laws, ordinances, and
regulations referred to in Article 28(c) above.
ARTICLE 29
SURRENDER OF PREMISES; REMOVAL OF PROPERTY
(a) The voluntary or other surrender of this Lease by Tenant to Landlord,
or a mutual termination hereof, shall not work a merger, and shall at the option
of Landlord, operate as an assignment to it of any or all subleases or
subtenancies affecting the Premises.
(b) Upon the expiration of the Term of this Lease, or upon any earlier
termination of this Lease, Tenant shall quit and surrender possession of the
Premises to Landlord in as good order and condition as the same are now and
hereafter may be improved by Landlord or Tenant, reasonable wear and tear,
damage by casualty resulting in termination of this Lease and repairs which are
Landlord's obligation excepted, and shall, without expense to Landlord, remove
or cause to be removed from the Premises all debris and rubbish, all furniture,
equipment, business and trade fixtures, free-standing cabinet work, moveable
partitioning, telephone and data cabling and other articles of personal property
owned by Tenant or installed or placed by Tenant at its own expense in the
Premises, and all similar articles of any other persons claiming under Tenant
unless Landlord exercises its option to have any subleases or subtenancies
assigned to it, and Tenant shall repair all damage to the Premises resulting
from the installation and removal of such items to be removed.
(c) Whenever Landlord shall reenter the Premises as provided in Article 12
hereof, or as otherwise provided in this Lease, any property of Tenant not
removed by Tenant upon the expiration of the Term of this Lease (or within two
(2) business days after a termination by reason of Tenant's default), as
provided in this Lease, shall be considered abandoned and Landlord may remove
any or all of such items and dispose of the same in accordance with applicable
law or store the same in a public warehouse or elsewhere for the account and at
the expense and risk of Tenant, and if Tenant shall fail to pay the cost of
storing any such property after it has been stored for a period of ninety (90)
days or more, Landlord may sell any or all of such property at public or private
sale, in such manner and at such times and places as Landlord, in its sole
discretion, may deem proper, without notice or to demand upon Tenant, for the
payment of all or any part of such charges or the removal of any such property,
and shall apply the proceeds of such sale as follows: first, to the cost and
expense of such sale, including reasonable attorneys' fees for services
rendered; second, to the payment of the cost of or charges for storing any such
property; third, to the payment of any other sums of money which may then or
thereafter be due to Landlord from Tenant under any of the terms hereof; and
fourth, the balance, if any, to Tenant.
(d) All fixtures, equipment, leasehold improvements, Alterations and/or
appurtenances attached to or built into the Premises prior to or
<PAGE> 41
during the Term, whether by Landlord or Tenant and whether at the expense of
Landlord or Tenant, or of both, shall be and remain part of the Premises and
shall not be removed by Tenant at the end of the Term unless otherwise expressly
provided for in this Lease or unless such removal is required by Landlord. Such
fixtures, equipment, leasehold improvements, Alterations, additions,
improvements and/or appurtenances shall include but not be limited to: all floor
coverings, drapes, paneling, built-in cabinetry, molding, doors, vaults
(including vault doors), plumbing systems, security systems, electrical systems,
lighting systems, silencing equipment, communication systems, all fixtures and
outlets for the systems mentioned above and for all telephone, radio, telegraph
and television purposes, and any special flooring or ceiling installations.
ARTICLE 30
MISCELLANEOUS
(a) Severability; Entire Agreement. Any provision of this Lease which shall
prove to be invalid, void, or illegal shall in no way affect, impair or
invalidate any other provision hereof and such other provisions shall remain in
full force and effect. This Lease and the Exhibits and any Addendum attached
hereto constitute the entire agreement between the parties hereto with respect
to the subject matter hereof, and no prior agreement or understanding pertaining
to any such matter shall be effective for any purpose. No provision of this
Lease may be amended or supplemented except by an agreement in writing signed by
the parties hereto or their successor in interest.
(b) Attorneys' Fees; Waiver of Jury Trial.
(i) In any action to enforce the terms of this Lease, including any suit
by Landlord for the recovery of rent or possession of the Premises, the losing
party shall pay the successful party a reasonable sum for attorneys' fees in
such suit and such attorneys' fees shall be deemed to have accrued prior to the
commencement of such action and shall be paid whether or not such action is
prosecuted to judgment.
(ii) EACH PARTY HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION
SEEKING SPECIFIC PERFORMANCE OF ANY PROVISION OF THIS LEASE, FOR DAMAGES FOR ANY
BREACH UNDER THIS LEASE, OR OTHERWISE FOR ENFORCEMENT OF ANY RIGHT OR REMEDY
HEREUNDER.
(c) Time of Essence. Time is of the essence with respect to the performance
of every provision of this Lease.
(d) Headings; Joint and Several. The article headings contained in this
Lease are for convenience only and do not in any way limit or amplify any term
or provision hereof. The terms "Landlord" and "Tenant" as used herein shall
include the plural as well as the singular, the neuter shall include the
masculine and feminine genders and the obligations herein imposed upon Tenant
shall be joint and several as to each of the persons, firms or corporations of
which Tenant may be composed.
(e) Reserved Area. Tenant hereby acknowledges and agrees that the exterior
walls of the Premises and the area between the finished ceiling of the Premises
and the slab of the floor of the project
<PAGE> 42
thereabove have not been demised hereby and the use thereof together with the
right to install, maintain, use, repair and replace pipes, ducts, conduits and
wires leading through, under or above the Premises in locations which will not
materially interfere with Tenant's use of the Premises and serving other parts
of the Project are hereby excepted and reserved unto Landlord.
(f) NO OPTION. THE SUBMISSION OF THIS LEASE BY LANDLORD, ITS AGENT OR
REPRESENTATIVE FOR EXAMINATION OR EXECUTION BY TENANT DOES NOT CONSTITUTE AN
OPTION OR OFFER TO LEASE THE PREMISES UPON THE TERMS AND CONDITIONS CONTAINED
HEREIN OR A RESERVATION OF THE PREMISES IN FAVOR OF TENANT, IT BEING INTENDED
HEREBY THAT THIS LEASE SHALL ONLY BECOME EFFECTIVE UPON THE EXECUTION HEREOF BY
LANDLORD AND DELIVERY OF A FULLY EXECUTED LEASE TO TENANT.
(g) Use of Project Name; Improvements. Tenant shall not be allowed to use
the name, picture or representation of the Project, or words to that effect, in
connection with any business carried on in the Premises or otherwise (except as
Tenant's address) without the prior written consent of Landlord. In the event
that Landlord undertakes any additional improvements on the Real Property
including but not limited to new construction or renovation or additions to the
existing improvements, provided that Landlord uses commercially reasonable
efforts not to interfere with Tenant's business operations or access to the
Premises, Landlord shall not be liable to Tenant for any noise, dust, vibration
or interference with access to the Premises or disruption in Tenant's business
caused thereby, except as provided in Section 11(g) above.
(h) Rules and Regulations. Tenant shall observe faithfully and comply
strictly with the Rules and Regulations attached to this Lease as Exhibit "B"
and made a part hereof, and such other Rules and Regulations as Landlord may
from time to time reasonably adopt for the safety, care and cleanliness of the
Project, the facilities thereof, or the preservation of good order therein.
Landlord shall not be liable to Tenant for violation of any such Rules and
Regulations, or for the breach of any covenant or condition in any lease by any
other tenant in the Project. A waiver by Landlord of any Rule or Regulation for
any other tenant shall not constitute nor be deemed a waiver of the Rule or
Regulation for this Tenant. Landlord agrees not to discriminate among tenants of
the Project in its enforcement of the Rules and Regulations and not to apply
such Rules and Regulations in an unreasonable manner.
(i) Quiet Possession. Upon Tenant's paying the Basic Rent, Additional Rent
and other sums provided hereunder and observing and performing all of the
covenants, conditions and provisions on Tenant's part to be observed and
performed hereunder, Tenant shall have quiet possession of the Premises for the
entire Term hereof, subject to all of the provisions of this Lease.
(j) Rent. All payments required to be made hereunder to Landlord shall be
deemed to be rent, whether or not described as such.
(k) Successors and Assigns. Subject to the provisions of Article 15 hereof,
all of the covenants, conditions and provisions of this Lease shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
heirs, personal representatives,
<PAGE> 43
successors and assigns.
(l) Notices. Any notice required or permitted to be given hereunder shall
be in writing and may be given by personal service evidenced by a signed receipt
or sent by registered or certified mail, return receipt requested, or via
overnight courier, and shall be effective upon proof of delivery, addressed to
Tenant at the Premises or to Landlord at the management office for the Project,
with a copy to Landlord, c/o Arden Realty, Inc., 11601 Wilshire Boulevard,
Fourth Floor, Los Angeles, California 90025, Attn: Legal Department. Either
party may by notice to the other specify a different address for notice purposes
except that, upon Tenant's taking possession of the Premises, the Premises shall
constitute Tenant's address for notice purposes. A copy of all notices to be
given to Landlord hereunder shall be concurrently transmitted by Tenant to such
party hereafter designated by notice from Landlord to Tenant. Any notices sent
by Landlord regarding or relating to eviction procedures, including without
limitation three day notices, may be sent by regular mail.
(m) Intentionally Omitted.
(n) Right of Landlord to Perform. All covenants and agreements to be
performed by Tenant under any of the terms of this Lease shall be performed by
Tenant at Tenant's sole cost and expense and without any abatement of rent. If
Tenant shall fail to pay any sum of money, other than rent, required to be paid
by it hereunder or shall fail to perform any other act on its part to be
performed hereunder, and such failure shall continue beyond any applicable cure
period set forth in this Lease, Landlord may, but shall not be obligated to,
after reasonable notice to Tenant, without waiving or releasing Tenant from any
obligations of Tenant, make any such payment or perform any such other act on
Tenant's part to be made or performed as is in this Lease provided. All sums so
paid by Landlord and all reasonable incidental costs, together with interest
thereon at the rate of ten percent (10%) per annum from the date of such payment
by Landlord, shall be payable to Landlord within thirty (30) days after demand
and Tenant covenants to pay any such sums, and Landlord shall have (in addition
to any other right or remedy of Landlord) the same rights and remedies in the
event of the nonpayment thereof by Tenant as in the case of default by Tenant in
the payment of the rent.
(o) Access, Changes in Project, Facilities, Name.
(i) Every part of the Project except the inside surfaces of all walls,
windows and doors bounding the Premises (including exterior building walls, core
corridor walls and doors and any core corridor entrance), and any space in or
adjacent to the Premises used for shafts, stacks, pipes, conduits, fan rooms,
ducts, electric or other utilities, sinks or other building facilities, and the
use thereof, as well as access thereto through the Premises for the purposes of
operation, maintenance, decoration and repair, are reserved to Landlord.
(ii) Tenant shall permit Landlord to install, use and maintain pipes,
ducts and conduits within the walls, columns and ceilings of the Premises.
<PAGE> 44
(iii) Landlord reserves the right, without incurring any liability to
Tenant therefor, to make such changes in or to the Project and the fixtures and
equipment thereof, as well as in or to the street entrances, halls, passages,
elevators, stairways and other improvements thereof, as it may deem necessary or
desirable.
(iv) Landlord may adopt any name for the Project and Landlord reserves
the right to change the name or address of the Project at any time, so long as
Landlord pays for Tenant's reprinting costs for announcements, stationery and
business cards where the new name or address is initiated by Landlord and is not
imposed involuntarily upon Landlord by any governmental agency or other third
party.
Landlord agrees that, except where required by law, Landlord's exercise of
its rights under this Section 30(o) shall be conditioned upon Landlord not
unreasonably interfering with Tenant's access to or use of the Premises and the
parking facilities of the Project.
(p) Signing Authority. Concurrently with Tenant's execution of this Lease,
Tenant shall provide to Landlord reasonably satisfactory evidence that the
individuals executing this Lease on behalf of Tenant are authorized to bind
Tenant and to enter into this Lease.
(q) Intentionally Omitted.
(r) Substitute Premises. Landlord shall have the right at any time during
the Term hereof, upon giving Tenant not less than sixty (60) days prior notice,
to provide and furnish Tenant with comparable space elsewhere in the Project of
approximately the same size as Suite 2030 and remove and place Tenant in such
space, with Landlord to pay all verified and previously approved costs and
expenses incurred as a result of such movement to such new space. Such new space
shall have comparable identity with similar views to that of Suite 2030, shall
be located on the twentieth (20th) floor of the Project or higher, shall be of
at least substantially the same size as Suite 2030 and shall have a perimeter
configuration substantially usable for the purposes for which Suite 2030 was
then being used by Tenant. If Landlord moves Suite 2030 to such new space, this
Lease and each and all of its terms, covenants and conditions shall remain in
full force and effect and shall be deemed applicable to such new space and such
new space shall thereafter be deemed to be a portion of the "Premises" as though
Landlord and Tenant had entered into an express written amendment of this Lease
with respect thereto.
(s) Survival of Obligations. Any obligations of Tenant occurring prior to
the expiration or earlier termination of this Lease shall survive such
expiration or earlier termination.
(t) Reasonable Consent. Except for matters for which there is a standard of
consent or approval specifically set forth in this Lease (other than a
reasonableness standard), and except for matters which could affect (i) the
systems and equipment of the Project; (ii) structural aspects of the Project or
(iii) the exterior appearance of the Project, in which case Landlord shall have
the right to act in its sole and absolute discretion (but at all times in good
faith), any time the consent or approval of Landlord or Tenant is required under
this Lease, such consent or approval shall not be unreasonably withheld,
<PAGE> 45
conditioned or delayed.
(u) Governing Law. This Lease shall be governed by and construed in
accordance with the laws of the State of California. No conflicts of law rules
of any state or country (including, without limitation, California conflicts of
law rules) shall be applied to result in the application of any substantive or
procedural laws of any state or country other than California. All
controversies, claims, actions or causes of action arising between the parties
hereto and/or their respective successors and assigns, shall be brought, heard
and adjudicated by the courts of the State of California, with venue in the
County of Los Angeles. Each of the parties hereto hereby consents to personal
jurisdiction by the courts of the State of California in connection with any
such controversy, claim, action or cause of action, and each of the parties
hereto consents to service of process by any means authorized by California law
and consent to the enforcement of any judgment so obtained in the courts of the
State of California on the same terms and conditions as if such controversy,
claim, action or cause of action had been originally heard and adjudicated to a
final judgment in such courts. Each of the parties hereto further acknowledges
that the laws and courts of California were freely and voluntarily chosen to
govern this Lease and to adjudicate any claims or disputes hereunder.
(v) Exhibits and Addendum. The Exhibits and Addendum, if applicable,
attached hereto are incorporated herein by this reference as if fully set forth
herein.
ARTICLE 31
OPTIONS TO EXTEND
(a) Option Right. Landlord hereby grants Tenant the following options: (i)
two (2) consecutive options to extend Tenant's lease of Suite 2030 for a period
of twenty-one (21) months each ("Suite 2030 Option"); provided that the second
Suite 2030 Option shall be exercisable only in the event Tenant has exercised
the first Suite 2030 Option, and (ii) one (1) option ("Option") to extend the
Lease Term for the entire Premises for a period of five (5) years ("Option
Term"), both of which options shall be exercisable only by written notice
delivered by Tenant to Landlord set forth below. The rights contained in this
Article 31 shall be personal to the Tenant named in this Lease (the "Original
Tenant") and any Affiliated Assignee.
(b) Option Rent.
(i) In the event Tenant exercises its Suite 2030 Options, the Term of
Tenant's lease of Suite 2030 shall be extended on all the same terms and
conditions set forth in this Lease and the rent payable during the two (2) Suite
2030 Options shall be the same rate per rentable square foot as Tenant is paying
for Suite 2100. In no event shall Tenant be entitled to exercise the second
(2nd) Suite 2030 Option unless Tenant has exercised the first Suite 2030 Option.
Tenant shall not be entitled to any additional Tenant Improvement Allowance
during the Suite 2030 Option periods.
(ii) In the event Tenant exercises the Option as to the entire Premises,
the rent payable by Tenant during the Option Term ("Option
<PAGE> 46
Rent") shall be equal to the "Market Rent" (defined below). "Market Rent" shall
mean the applicable Monthly Basic Rental, including all escalations, Direct
Costs, additional rent and other charges at which tenants, as of the time of
Landlord's "Option Rent Notice" (as defined below), are entering into leases for
non-sublease, non-encumbered, space comparable in size, location and quality to
the Premises in renewal transactions for a term comparable to the Option Term
which comparable space is located in office buildings comparable to the Project
on Wilshire Boulevard in the Brentwood area of Los Angeles, California, taking
into consideration the value of the existing improvements in the Premises to
Tenant, as compared to the value of the existing improvements in such comparable
space, with such value to be based upon the age, quality and layout of the
improvements and the extent to which the same could be utilized by Tenant with
consideration given to the fact that the improvements existing in the Premises
are specifically suitable to Tenant.
(c) Exercise of Options.
(i) The Suite 2030 Options shall be exercised by Tenant only in the
following manner: (i) Tenant shall not be in default beyond any applicable cure
periods on the delivery date of the Exercise Notice; and (ii) Tenant shall
deliver written notice ("Exercise Notice") to Landlord not less than six (6)
months prior to the expiration of the then current Lease Term as to Suite 2030,
stating that Tenant is exercising the Option. Tenant's failure to deliver the
Exercise Notice on or before the date specified above shall be deemed to
constitute Tenant's election not to exercise the Suite 2030 Option. If Tenant
timely and properly exercises its Suite 2030 Option(s), the Lease Term shall be
extended as to Suite 2030 for an additional twenty-one (21) months upon all of
the terms and conditions set forth in this Lease.
(ii) The Option shall be exercised by Tenant only in the following
manner: (A) Tenant shall not be in default beyond any applicable cure periods on
the delivery date of the Interest Notice and Tenant's Acceptance; (B) Tenant
shall deliver written notice ("Interest Notice") to Landlord not more than
twelve (12) months nor less than nine (9) months prior to the expiration of the
Lease Term, stating that Tenant is interested in exercising the Option, (C)
within fifteen (15) business days of Landlord's receipt of Tenant's written
notice, Landlord shall deliver notice ("Option Rent Notice") to Tenant setting
forth the Option Rent; and (D) if Tenant desires to exercise such Option, Tenant
shall provide Landlord written notice within fifteen (15) business days after
receipt of the Option Rent Notice ("Tenant's Acceptance") and upon, and
concurrent with such exercise, Tenant may, at its option, object to the Option
Rent contained in the Option Rent Notice. Tenant's failure to deliver the
Interest Notice or Tenant's Acceptance on or before the dates specified above
shall be deemed to constitute Tenant's election not to exercise the Option. If
Tenant timely and properly exercises its Option, the Lease Term shall be
extended for the Option Term upon all of the terms and conditions set forth in
this Lease, except that the rent for the Option Term shall be as indicated in
the Option Rent Notice unless Tenant, concurrently with Tenant's Acceptance,
objects to the Option Rent contained in the Option Rent Notice, in which case
the parties shall follow the procedure and the Option Rent shall be determined,
as set forth in Section 31(d) below.
<PAGE> 47
(d) Determination of Market Rent. If Tenant timely and appropriately
objects to the Market Rent in Tenant's Acceptance, Landlord and Tenant shall
attempt to agree upon the Market Rent using their best good-faith efforts. If
Landlord and Tenant fail to reach agreement within twenty-one (21) days
following Tenant's Acceptance ("Outside Agreement Date"), then each party shall
make a separate determination of the Market Rent which shall be submitted to
each other and to arbitration in accordance with the following items (i) through
(vii):
(i) Landlord and Tenant shall each appoint, within ten (10) days of the
Outside Agreement Date, one arbitrator who shall by profession be a current real
estate broker or appraiser of commercial high-rise properties in the immediate
vicinity of the Project, and who has been active in such field over the last
five (5) years. The determination of the arbitrators shall be limited solely to
the issue of whether Landlord's or Tenant's submitted Market Rent is the closest
to the actual Market Rent as determined by the arbitrators, taking into account
the requirements of item (b), above.
(ii) The two arbitrators so appointed shall within five (5) business days
of the date of the appointment of the last appointed arbitrator agree upon and
appoint a third arbitrator who shall be qualified under the same criteria set
forth hereinabove for qualification of the initial two arbitrators.
(iii) The three arbitrators shall within fifteen (15) days of the
appointment of the third arbitrator reach a decision as to whether the parties
shall use Landlord's or Tenant's submitted Market Rent, and shall notify
Landlord and Tenant thereof.
(iv) The decision of the majority of the three arbitrators shall be
binding upon Landlord and Tenant.
(v) If either Landlord or Tenant fails to appoint an arbitrator within
ten (10) days after the applicable Outside Agreement Date, the arbitrator
appointed by one of them shall reach a decision, notify Landlord and Tenant
thereof, and such arbitrator's decision shall be binding upon Landlord and
Tenant.
(vi) If the two arbitrators fail to agree upon and appoint a third
arbitrator, or both parties fail to appoint an arbitrator, then the appointment
of the third arbitrator or any arbitrator shall be dismissed and the matter to
be decided shall be forthwith submitted to arbitration under the provisions of
the American Arbitration Association, but subject to the instruction set forth
in this item (d).
(vii) The cost of arbitration shall be paid by Landlord and Tenant
equally.
ARTICLE 32
RIGHT OF FIRST OFFER
Landlord hereby grants to Tenant a right of first offer with respect to all
space on the twentieth (20th) floor of the Building other than the Premises
("First Offer Space"). Notwithstanding the
<PAGE> 48
foregoing, such first offer right of Tenant shall commence only following the
expiration or earlier termination of (A) any existing lease pertaining to the
First Offer Space, and (B) as to any First Offer Space which is vacant as of the
date of this Lease, the first lease pertaining to any portion of such First
Offer Space entered into by Landlord after the date of this Lease (collectively,
the "Superior Leases"), including any renewal or extension of such existing or
future lease, whether or not such renewal or extension is pursuant to an express
written provision in such lease, and regardless of whether any such renewal or
extension is consummated pursuant to a lease amendment or a new lease (the
rights described above to be known collectively as "Superior Rights"). Tenant's
right of first offer shall be on the terms and conditions set forth in this
Section 32.
(a) Procedure for Offer. Landlord shall notify Tenant (the "First Offer
Notice") from time to time when Landlord determines that Landlord shall commence
the marketing of any First Offer Space because such space shall become available
for lease to third parties, where no holder of a Superior Right desires to lease
such space. The First Offer Notice shall describe the space so offered to Tenant
and shall set forth Landlord's proposed economic terms and conditions applicable
to Tenant's lease of such space (collectively, the "Economic Terms").
Notwithstanding the foregoing, Landlord's obligation to deliver the First Offer
Notice shall not apply during the last nine (9) months of the initial Lease Term
unless Tenant has delivered an Interest Notice to Landlord pursuant to Section
31(c) above nor shall Landlord be obligated to deliver the First Offer Notice
during the last eight (8) months of the initial Lease Term unless Tenant has
timely delivered Tenant's Acceptance to Landlord pursuant to Section 31(c)
above.
(b) Procedure for Acceptance. If Tenant wishes to exercise Tenant's right
of first offer with respect to the space described in the First Offer Notice,
then within five (5) business days after delivery of the First Offer Notice to
Tenant, Tenant shall deliver notice to Landlord of Tenant's intention to
exercise its right of first offer with respect to the entire space described in
the First Offer Notice. If concurrently with Tenant's exercise of the first
offer right, Tenant notifies Landlord that it does not accept the Economic Terms
set forth in the First Offer Notice, Landlord and Tenant shall, for a period of
fifteen (15) days after Tenant's exercise, negotiate in good faith to reach
agreement as to such Economic Terms. If Tenant does not so notify Landlord that
it does not accept the Economic Terms set forth in the First Offer Notice
concurrently with Tenant's exercise of the first offer right, the Economic Terms
shall be as set forth in the First Offer Notice. In addition, if Tenant does not
exercise its right of first offer within the five (5) business day period, or,
if Tenant exercises its first offer right but timely objects to Landlord's
determination of the Economic Terms and if Landlord and Tenant are unable to
reach agreement on such Economic Terms within said fifteen (15) day period, then
Landlord shall be free to lease the space described in the First Offer Notice to
anyone to whom Landlord desires on any terms Landlord desires ; provided,
however, that if Landlord intends to enter into a lease upon Economic Terms
which are more favorable to a third (3rd) party tenant than those Economic Terms
proposed by Landlord in the First Offer Notice, Landlord shall first deliver
written notice to Tenant ("Second Chance Notice") providing Tenant with the
opportunity to lease the First Offer Space on such more
<PAGE> 49
favorable Economic Terms. Tenant's failure to elect to lease the First Offer
Space upon such more favorable Economic Terms by written notice to Landlord
within three (3) business days after Tenant's receipt of such Second Chance
Notice from Landlord shall be deemed to constitute Tenant's election not to
lease such space upon such more favorable Economic Terms, in which case Landlord
shall be entitled to lease such space to any third (3rd) party on terms no more
favorable to the third (3rd) party than those set forth in the Second Chance
Notice. If Landlord does lease such First Offer Space to a third (3rd) party
tenant pursuant to the terms and conditions of this Section 32(b) above, Tenant
shall have no further right to lease such First Offer Space and Tenant's right
of first offer shall terminate as to the First Offer Space described in the
First Offer Notice. Notwithstanding anything to the contrary contained herein,
Tenant must elect to exercise its right of first offer, if at all, with respect
to all of the space offered by Landlord to Tenant at any particular time, and
Tenant may not elect to lease only a portion thereof.
(c) Lease of First Offer Space. If Tenant timely exercises Tenant's right
to lease the First Offer Space as set forth herein, Landlord and Tenant shall
execute an amendment adding such First Offer Space to this Lease upon the same
non-economic terms and conditions as applicable to the initial Premises, and the
economic terms and conditions as provided in this Article 32. Tenant shall
commence payment of rent for the First Offer Space and the Lease Term of the
First Offer Space shall commence upon the date of delivery of such space to
Tenant. The Lease Term for the First Offer Space shall expire co-terminously
with Tenant's lease of the initial Premises.
(d) No Defaults. The rights contained in this Article 32 shall be personal
to the Original Tenant and any Affiliated Assignee and may only be exercised by
the Original Tenant or an Affiliated Assignee (and not any other assignee,
sublessee or other transferee) if the Original Tenant or such Affiliated
Assignee occupies the entire Premises as of the date of the First Offer Notice.
Tenant shall not have the right to lease First Offer Space as provided in this
Article 32 if, as of the date of the First Offer Notice, or, at Landlord's
option, as of the scheduled date of delivery of such First Offer Space to
Tenant, Tenant is in default under this Lease after expiration of applicable
cure periods.
ARTICLE 33
SIGNAGE
Tenant shall be entitled to retain the number of directory listings
utilized by Tenant as of the date of this Lease under its existing lease at the
Project. Further, Tenant shall have the right to maintain up to five (5) lines
in the lobby directory on the Twentieth (20th) floor of the Project, which
directory may list up to four (4) Co-Producers, subject to Landlord's approval
as indicated below and provided that the Co-Producers do not have an
Objectionable Name, as defined below. In addition, Tenant shall have the right
to maintain signage identifying Tenant in the lobby of the Project (in its
current location utilized pursuant to Tenant's existing lease in the Project)
("Tenant's Signage"), which signage (including size, design, materials and
content) shall conform to the signage specifications of the Project. In
connection with any assignment of Tenant's interest under
<PAGE> 50
this Lease, which assignment is permitted by Landlord pursuant to the provisions
of Article 15 hereof (including without limitation any Affiliated Assignee),
Tenant's Signage may be assigned to the assignee with Landlord's prior consent,
which consent shall not be unreasonably withheld by Landlord so long as the name
of the assignee is not an "Objectionable Name," as that term is defined below.
Should the name of the Original Tenant change, Tenant shall be entitled to
modify, at Tenant's sole cost and expense, Tenant's Signage to reflect Tenant's
new name, but only if Tenant's new name is not an "Objectionable Name." The term
"Objectionable Name" shall mean any name that relates (i) to an entity that is
of a character or reputation, or is associated with a political orientation or
faction that is materially inconsistent with the quality of the Project, or
which would otherwise reasonably offend a landlord of a building comparable to
the Project, taking into consideration the level and visibility of Tenant's
Signage, or (ii) conflicts with any covenants in other leases of space in the
Project.
ARTICLE 34
STORAGE SPACE
Commencing as of the Commencement Date, and continuing on a month-to-month
basis terminable by either party upon at least thirty (30) days prior written
notice to the other, Tenant shall lease from Landlord and Landlord shall lease
to Tenant certain storage area located on the P-1 floor of the Project("Storage
Space") which Storage Space consists of approximately 362 rentable square feet
("RSF"), at the location currently leased by Tenant pursuant to its existing
lease at the Project. Tenant hereby agrees to accept the Storage Space in its
"as-is" condition and Tenant hereby acknowledges that Landlord shall not be
obligated to provide or pay for any improvement work or services related to the
improvement of the Storage Space. Tenant also acknowledges that Landlord has
made no representation or warranty regarding the condition of the Storage Space.
(a) Monthly Storage Rent. The monthly rental rate for the Storage Space
("Monthly Storage Rent") shall be One and 50/100 Dollar ($1.50) per RSF per
month of the Storage Space per month ($543.00 per month) throughout the term of
Tenant's lease of the Storage Space. Such Monthly Storage Rent shall be payable
on the first day of each month in advance during the Lease Term at the same time
and in the same manner as monthly Basic Rental for the Premises. In the event
the Monthly Storage Rent is not paid when due, Landlord shall have the same
rights as provided in Article 20 of this Lease for unpaid rent. Tenant's
Proportionate Share shall not be increased as a result of Tenant's leasing the
Storage Space.
(b) Indemnification. Except to the extent any loss, costs, damage, expense
or liability exceeds the coverage of the liability insurance and property
insurance coverage required hereunder to be carried by Tenant and is caused by
(i) any default by Landlord in the observance or performance of any of the
terms, covenants or conditions to be observed or performed by Landlord under
this Lease, or (ii) the negligence or willful misconduct of Landlord or any of
its agents, employees, contractors, or licensees, Tenant hereby absolves
Landlord from any and all loss, cost, damage, expense and liability, whether
foreseeable or not, from any cause whatsoever, that Tenant may suffer to its
personal property located anywhere in the Storage Space or that
<PAGE> 51
it or its agents, employees, principals, invitees, or licensees may suffer as a
direct or indirect consequence of Tenant's lease of or use of the Storage Space
or access areas to the Storage Space. In addition, Tenant hereby agrees to
indemnify, defend, protect and hold Landlord harmless from and against any loss,
cost, damage, liability, expense, claim, action or cause of action of any third
party, whether foreseeable or not, resulting as a direct or indirect consequence
of Tenant's lease or use of the Storage Space or access areas to the Storage
Space.
(c) Use of Storage Space. Tenant agrees not to store any flammable or
highly combustible materials in the Storage Space. Tenant also agrees not to
store excess or highly concentrated waste in the Storage Space; it shall be
Tenant's responsibility to obtain from Landlord the tolerable limits thereof.
Tenant agrees to use the Storage Space solely for storage purposes and not as
office space. Tenant agrees that Landlord and its agents may enter and inspect
the Storage Space and any goods stored therein at any time during regular
business hours upon giving twenty-four (24) hours prior notice to Tenant. Tenant
shall, at its sole cost and expense, deliver to Landlord a key for any locks
installed by Tenant for Landlord's emergency entrance purposes.
(d) Incorporation of Lease Provisions. The provisions of this Lease with
regard to the Premises, to the extent applicable and not inconsistent with the
provisions of this Article 34, shall be deemed to apply to the Storage Space as
though the Storage Space is part of the Premises, and as though the Monthly
Storage Rent is part of the monthly Basic Rental.
IN WITNESS WHEREOF, the parties have executed this Lease, consisting of the
foregoing provisions and Articles, including all exhibits and other attachments
referenced therein, as of the date first above written.
"LANDLORD" ARDEN REALTY LIMITED PARTNERSHIP,
a Maryland limited partnership
By: ARDEN REALTY, INC.,
----------------------------
a Maryland corporation
Its: Sole General Partner
By: /s/ VICTOR J. COLEMAN
----------------------------
VICTOR J. COLEMAN
Its: President and COO
By: /s/ ANDREW J. SOBEL
----------------------------
ANDREW J. SOBEL
Its: Exec. V.P. and
Assistant Secretary
"TENANT" THE KUSHNER-LOCKE COMPANY,
a California corporation
<PAGE> 52
By: /s/ DONALD KUSHNER
----------------------------
Print Name:
Title:
By: /s/ ROBERT SWAN
----------------------------
Print Name: ROBERT SWAN
Title: SR. V.P. & CFO
EXHIBIT "A"
PREMISES
[ Floor plans: omitted.]
EXHIBIT "B"
RULES AND REGULATIONS
1. No sign, advertisement or notice shall be displayed, printed or affixed
on or to the Premises or to the outside or inside of the Project or so as to be
visible from outside the Premises or Project without Landlord's prior written
consent. Landlord shall have the right to remove any non-approved sign,
advertisement or notice, without notice to and at the expense of Tenant, and
Landlord shall not be liable in damages for such removal. All approved signs or
lettering on doors and walls shall be printed, painted, affixed or inscribed at
the expense of Tenant by Landlord or by a person selected by Landlord and in a
manner and style acceptable to Landlord.
2. Tenant shall not obtain for use on the Premises ice, waxing, cleaning,
interior glass polishing, rubbish removal, towel or other similar services, or
accept barbering or bootblackening, or coffee cart services, milk, soft drinks
or other like services on the Premises, except from persons reasonably
authorized by Landlord and at the hours and under regulations reasonably fixed
by Landlord. Except for a reasonable number of soft drink and snack vending
machines for use by Tenant's employees, no vending machines or machines of any
description shall be installed, maintained or operated upon the Premises without
Landlord's prior written consent.
3. The sidewalks, halls, passages, exits, entrances, elevators and
stairways shall not be obstructed by Tenant or used for any purpose other than
for ingress and egress from Tenant's Premises. Under no circumstances is trash
to be stored in the corridors. Notice must be given to Landlord for any large
deliveries. Furniture, freight and other large or heavy articles, and all other
deliveries may be brought into the Project only at times and in the manner
designated by Landlord, and always at Tenant's sole responsibility and risk.
Landlord may impose reasonable charges for use of freight elevators after or
before normal business hours. All damage done to the Project by moving or
maintaining such furniture, freight or articles shall be repaired by Landlord at
Tenant's expense. Tenant shall not take or permit to be taken in or out of
entrances or passenger elevators of the Project, any item normally taken, or
which Landlord otherwise reasonably requires to be taken, in or out through
service doors or on freight elevators. Tenant shall move all supplies, furniture
and equipment as soon as received directly to the Premises, and shall move
<PAGE> 53
all waste that is at any time being taken from the Premises directly to the
areas designated for disposal.
4. Toilet rooms, toilets, urinals, wash bowls and other apparatus shall not
be used for any purpose other than for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein.
5. Tenant shall not overload the floor of the Premises or , except for
customary wall-hangings, mark, drive nails, screw or drill into the partitions,
ceilings or floor or in any way deface the Premises. Tenant shall not place
typed, handwritten or computer generated signs in the corridors or any other
common areas. Should there be a need for signage additional to the Project
standard tenant placard, a written request shall be made to Landlord to obtain
approval prior to any installation. All costs for said signage shall be Tenant's
responsibility.
6. In no event shall Tenant place a load upon any floor of the Premises or
portion of any such flooring exceeding the floor load per square foot of area
for which such floor is designed to carry and which is allowed by law, or any
machinery or equipment which shall cause excessive vibration to the Premises or
noticeable vibration to any other part of the Project. Prior to bringing any
heavy safes, vaults, large computers or similarly heavy equipment into the
Project, Tenant shall inform Landlord in writing of the dimensions and weights
thereof and shall obtain Landlord's consent thereto. Such consent shall not
constitute a representation or warranty by Landlord that the safe, vault or
other equipment complies, with regard to distribution of weight and/or
vibration, with the provisions of this Rule 6 nor relieve Tenant from
responsibility for the consequences of such noncompliance, and any such safe,
vault or other equipment which Landlord determines to constitute a danger of
damage to the Project or a nuisance to other tenants, either alone or in
combination with other heavy and/or vibrating objects and equipment, shall be
promptly removed by Tenant, at Tenant's cost, upon Landlord's written notice of
such determination and demand for removal thereof.
7. Except for normal office supplies used in accordance with Law and in
commercially reasonable amounts, Tenant shall not use or keep in the Premises or
Project any kerosene, gasoline or inflammable, explosive or combustible fluid or
material, or use any method of heating or air-conditioning other than that
supplied by Landlord.
8. Tenant shall not lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as approved by Landlord.
9. Tenant shall not install or use any blinds, shades, awnings or screens
in connection with any window or door of the Premises and shall not use any
drape or window covering facing any exterior glass surface other than the
standard drapes, blinds or other window covering established by Landlord.
10. Tenant shall cooperate with Landlord in obtaining maximum effectiveness
of the cooling system by closing window coverings when the sun's rays fall
directly on windows of the Premises. Tenant shall
<PAGE> 54
not obstruct, alter, or in any way impair the efficient operation of Landlord's
heating, ventilating and air-conditioning system. Tenant shall not tamper with
or change the setting of any thermostats or control valves.
11. The Premises shall not be used for manufacturing or for the storage of
merchandise except as such storage may be incidental to the permitted use of the
Premises. Tenant shall not, without Landlord's prior written consent, occupy or
permit any portion of the Premises to be occupied or used for the manufacture or
sale of liquor or tobacco in any form, or a barber or manicure shop, or as an
employment bureau. The Premises hall not be used for lodging or sleeping or for
any improper, objectionable or immoral purpose. No auction shall be conducted on
the Premises.
12. Tenant shall not make, or permit to be made, any unseemly or disturbing
noises, or disturb or unreasonably interfere with occupants of Project or
neighboring buildings or premises or those having business with it by the use of
any musical instrument, radio, phonographs or unusual noise, or in any other
way.
13. No bicycles, vehicles or animals of any kind shall be brought into or
kept in or about the Premises, and no cooking shall be done or permitted by any
tenant in the Premises, except that the preparation of coffee, tea, hot
chocolate and similar items for tenants, their employees and visitors shall be
permitted. No tenant shall cause or permit any unusual or objectionable odors to
be produced in or permeate from or throughout the Premises. The foregoing
notwithstanding, Tenant shall have the right to use a microwave and to heat
microwavable items typically heated in an office. No hot plates or similar open
element cooking apparatus shall be permitted in the Premises.
14. The sashes, sash doors, skylights, windows and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Project shall not be covered or obstructed by any tenant, nor shall any bottles,
parcels or other articles be placed on the window sills.
15. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any tenant, nor shall any changes be made in existing
locks or the mechanisms thereof unless Landlord is first notified thereof, gives
written approval, and is furnished a key therefor. Each tenant must, upon the
termination of his tenancy, give to Landlord all keys and key cards of stores,
offices, or toilets or toilet rooms, either furnished to, or otherwise procured
by, such tenant, and in the event of the loss of any keys so furnished, such
tenant shall pay Landlord the cost of replacing the same or of changing the lock
or locks opened by such lost key if Landlord shall deem it necessary to make
such change. If more than two keys for one lock are desired, Landlord will
provide them upon payment therefor by Tenant. Tenant shall not key or re-key any
locks. All locks shall be keyed by Landlord's locksmith only.
16. Landlord shall have the right to prohibit any advertising by any tenant
which, in Landlord's opinion, tends to impair the reputation of the Project or
its desirability as an office building and upon written notice from Landlord any
tenant shall refrain from and
<PAGE> 55
discontinue such advertising.
17. Landlord reserves the right to control access to the Project by all
persons after reasonable hours of generally recognized business days and at all
hours on Sundays and legal holidays. Each tenant shall be responsible for all
persons for whom it requests after hours access and shall be liable to Landlord
for all acts of such persons. Landlord shall have the right from time to time to
establish reasonable rules pertaining to freight elevator usage, including the
allocation and reservation of such usage for tenants' initial move-in to their
premises, and final departure therefrom.
18. Any person employed by any tenant to do janitorial work shall, while in
the Project and outside of the Premises, be subject to and under the control and
direction of the Office of the Project or its designated representative such as
security personnel (but not as an agent or servant of Landlord, and the Tenant
shall be responsible for all acts of such persons).
19. All doors opening on to public corridors shall be kept closed, except
when being used for ingress and egress. Tenant shall cooperate and comply with
any reasonable safety or security programs, including fire drills and air raid
drills, and the appointment of "fire wardens" developed by Landlord for the
Project, or required by law. Before leaving the Premises unattended, Tenant
shall close and securely lock all doors or other means of entry to the Premises
and shut off all lights and water faucets in the Premises.
20. The requirements of tenants will be attended to only upon application
to the Office of the Project.
21. Canvassing, soliciting and peddling in the Project are prohibited and
each tenant shall cooperate to prevent the same.
22. All office equipment of any electrical or mechanical nature shall be
placed by tenants in the Premises in settings approved by Landlord, to absorb or
prevent any vibration, noise or annoyance.
23. No air-conditioning unit or other similar apparatus shall be installed
or used by any tenant without the prior written consent of Landlord. Tenant
shall pay the cost of all electricity used for air-conditioning in the Premises
if such electrical consumption exceeds normal office requirements, regardless of
whether additional apparatus is installed pursuant to the preceding sentence.
24. There shall not be used in any space, or in the public halls of the
Project, either by any tenant or others, any hand trucks except those
equippedwith rubber tires and side guards.
25. All electrical ceiling fixtures hung in offices or spaces along the
perimeter of the Project must be fluorescent and/or of a quality, type, design
and bulb color approved by Landlord. Tenant shall not permit the consumption in
the Premises of more than 3 watts per net usable square foot in the Premises in
reespect of office lighting norshall Tenant permit the consumption in the
Premises of more than 2 watts per net usable square foot of space in the
Premises in respect of the power outlets therein, at any one time. In the event
<PAGE> 56
that such limits are exceeded, Landlord shall have the right to require Tenant
to remove lighting fixtures and equipment and/or to charge Tenant for the cost
of the additional electricity consumed.
26. Parking.
(a) Garage hours shall be 7:00 a.m. to 7:00 p.m., Monday through
Friday, and closed on weekends, state and federal holidays excepted, as such
hours may be revised from time to time by Landlord.
(b) Automobiles must be parked entirely within the stall lines on the
floor.
(c) All directional signs and arrows must be observed.
(d) The speed limit shall be 5 miles per hour.
(e) Parking is prohibited in areas not striped for parking.
(f) Parking cards or any other device or form of identification
supplied by Landlord (or its operator) shall remain the property of Landlord (or
its operator). Such parking identification device must be displayed as requested
and may not be mutilated in any manner. The serial number of the parking
identification device may not be obliterated. Devices are not transferable or
assignable and any device in the possession of an unauthorized holder will be
void. There will be a replacement charge to the Tenant or person designated by
Tenant of $25.00 for loss of any parking card. There shall be a security deposit
of $25.00 due at issuance for each card key issued to Tenant.
(g) The monthly rate for parking is payable in advance and must be
paid by the third business day of each month. Failure to do so will
automatically cancel parking privileges and a charge at the prevailing daily
rate will be due. No deductions or allowances from the monthly rate will be made
for days parker does not use the parking facilities.
(h) Tenant may validate visitor parking by such method or methods as
the Landlord may approve, at the validation rate from time to time generally
applicable to visitor parking.
(i) Landlord (and its operator) may refuse to permit any person who
violates the within rules to park in the garage, and any violation of the rules
shall subject the automobile to removal from the garage at the parker's expense.
In either of said events, Landlord (or its operator) shall refund a prorata
portion of the current monthly parking rate and the sticker or any other form of
identification supplied by Landlord (or its operator) will be returned to
Landlord (or its operator).
(j) Garage managers or attendants are not authorized to make or allow
any exceptions to these Rules and Regulations.
(k) All responsibility for any loss or damage to automobiles or any
personal property therein is assumed by the parker.
(l) Loss or theft of parking identification devices from automobiles
must be reported to the garage manager immediately, and a lost or stolen report
must be filed by the parker at that time.
(m) The Parking facilities are for the sole purpose of parking one
automobile per space. Washing, waxing, cleaning or servicing of any vehicles by
the parker or his agents is prohibited.
(n) Landlord (and its operator) reserves the right to refuse the
issuance of monthly stickers or other parking identification devices to any
Tenant and/or its employees who refuse to comply with the above Rules and
Regulations and all City, State or Federal ordinances, laws or agreements.
<PAGE> 57
(o) Tenant agrees to acquaint all employees with these Rules and
Regulations.
(p) No vehicle shall be stored in the garage for a period of more than
one (1) week.
27. The Project is a non-smoking Project. Smoking or carrying lighted
cigars or cigarettes in the Premises or the Project, including the elevators in
the Project, is prohibited.
EXHIBIT "C"
NOTICE OF LEASE TERM DATES
AND TENANT'S PROPORTIONATE SHARE
TO: DATE:
RE: Lease dated ________________, 1999, between
("Landlord"), and
("Tenant"), concerning
Suite ________, located at __________________________________________.
Ladies and Gentlemen:
In accordance with the Lease, Landlord wishes to advise and/or confirm the
following:
1. That the Premises have been accepted herewith by the Tenant as being
substantially complete in accordance with the Lease and that there is no
deficiency in construction.
2. That the Tenant has taken possession of the Premises and acknowledges
that under the provisions of the Lease the Term of said
Lease shall commence as of ____________ for a term of ________________________
ending on ________________________.
3. That in accordance with the Lease, Basic Rental commenced to accrue on
________________________.
4. If the Commencement Date of the Lease is other than the first day of
the month, the first billing will contain a prorata adjustment. Each billing
thereafter shall be for the full amount of the monthly installment as provided
for in said Lease.
5. Rent is due and payable in advance on the first day of each and every
month during the Term of said Lease. Your rent checks should
be made payable to ________________________ at ________________________________.
6. The exact number of rentable square feet within the Premises is
__________ square feet.
7. Tenant's Proportionate Share, as adjusted based upon the exact number
of rentable square feet within the Premises is _______%.
AGREED AND ACCEPTED:
<PAGE> 58
TENANT:
,
a
By:
Its:
EXHIBIT "D"
TENANT WORK LETTER
This Tenant Work Letter shall set forth the terms and conditions relating
to the renovation of the tenant improvements in the Premises. This Tenant Work
Letter is essentially organized chronologically and addresses the issues of the
construction of the Premises, in sequence, as such issues will arise.
SECTION 1
LANDLORD'S INITIAL CONSTRUCTION IN THE PREMISES
Landlord has constructed, at its sole cost and expense, the base, shell and
core (i) of the Premises, and (ii) of the floor of the Building on which the
Premises is located (collectively, the "Base, Shell and Core"). Tenant has
inspected and hereby approves the condition of the Premises and the Base, Shell
and Core, and agrees that the Premises and the Base, Shell and Core shall be
delivered to Tenant in their current "as-is" condition. The renovation to the
improvements in the Premises shall be designed and constructed pursuant to this
Tenant Work Letter.
SECTION 2
IMPROVEMENTS
2.1 Improvement Allowance. Tenant shall be entitled to a one-time
improvement allowance (the "Improvement Allowance") in the amount of $295,671.00
(based on $15.00 per usable square foot of Suite 2100 and $6.00 per usable
square foot of Suite 2030) for the costs relating to the initial design and
construction of Tenant's improvements which are permanently affixed to the
Premises (the "Improvements"). In no event shall Landlord be obligated to make
disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Improvement Allowance. Tenant may elect, by written notice to
Landlord, to receive up to $6.00 per usable square foot (i.e., $130,170.00) of
the Premises of the Improvement Allowance as a cash payment from Landlord, which
shall be due and payable within thirty (30) days after the date of Tenant's
execution and delivery of this Lease. In no event shall Tenant be entitled to
any credit to the extent any portion of the Improvement Allowance is not used by
Tenant for such cash payment or otherwise on or before June 30, 2001.
2.2 Disbursement of the Improvement Allowance. Except as otherwise set
forth in this Tenant Work Letter, the Improvement Allowance shall be disbursed
by Landlord (each of which disbursements shall be made pursuant to Landlord's
disbursement process provided below) for costs related to the construction of
the Improvements and for the following items and costs (collectively, the
"Improvement Allowance Items"): (i) payment of the fees of the "Architect" and
the
<PAGE> 59
"Engineers," as those terms are defined in Section 3.1 of this Tenant Work
Letter, and payment of the fees incurred by, and the cost of documents and
materials supplied by, Landlord and Landlord's consultants in connection with
the preparation and review of the "Construction Drawings," as that term is
defined in Section 3.1 of this Tenant Work Letter, and designer/consultant fees;
(ii) the cost of permits and construction supervision fees; (iii) the cost of
any changes in the Base, Shell and Core required by the Construction Drawings;
(iv) the cost of any changes to the Construction Drawings or Improvements
required by applicable building codes (the "Code"); (v) the "Landlord
Coordination Fee," as that term is defined in Section 4.3 of this Tenant Work
Letter; and (vi) installation of telecommunications equipment, wiring and
cabling and furniture, fixtures and equipment (collectively, "Miscellaneous
Items"). However, in no event shall more than $2.00 per usable square foot of
the Improvement Allowance be used for the items described in (i) and (ii) above
nor shall more than $3.00 per usable square foot of the Improvement Allowance be
used for the Miscellaneous Items; any additional amount incurred shall be deemed
to constitute an Over-Allowance Amount. During the construction of the
Improvements, Landlord shall make monthly disbursements of the Improvement
Allowance for Improvement Allowance Items for the benefit of Tenant and shall
authorize the release of monies for the benefit of Tenant as follows.
2.2.1 Monthly Disbursements. On or before the first day of each
calendar month, during the construction of the Improvements Tenant shall deliver
to Landlord: (i) a request for payment of the "Contractor," as that term is
defined in Section 4.1 of this Tenant Work Letter, approved by Tenant, in a form
to be provided by Landlord, showing the schedule, by trade, of percentage of
completion of the Improvements in the Premises, detailing the portion of the
work completed and the portion not completed; (ii) invoices from all of
"Tenant's Agents," as that term is defined in Section 4.2 of this Tenant Work
Letter, for labor rendered and materials delivered to the Premises; (iii)
executed mechanic's lien releases from all of Tenant's Agents which shall comply
with the appropriate provisions, as reasonably determined by Landlord, of
California Civil Code Section 3262(d); and (iv) all other information reasonably
requested by Landlord. Tenant's request for payment shall be deemed Tenant's
acceptance and approval of the work furnished and/or the materials supplied as
set forth in Tenant's payment request. Thereafter, Landlord shall deliver a
check to Tenant in payment of the lesser of: (A) the amounts so requested by
Tenant, as set forth in this Section 2.2.1, above, less a ten percent (10%)
retention (the aggregate amount of such retentions to be known as the "Final
Retention"), and (B) the balance of any remaining available portion of the
Improvement Allowance (not including the Final Retention), provided that
Landlord does not dispute any request for payment based on non-compliance of any
work with the "Approved Working Drawings," as that term is defined in Section
3.4 below, or due to any substandard work, or for any other reason. Landlord's
payment of such amounts shall not be deemed Landlord's approval or acceptance of
the work furnished or materials supplied as set forth in Tenant's payment
request.
2.2.2. Final Retention. Subject to the provisions of this Tenant Work
Letter, a check for the Final Retention payable to Tenant shall be delivered by
Landlord to Tenant following the completion of
<PAGE> 60
construction of the Premises, provided that (i) Tenant delivers to Landlord
properly executed mechanics lien releases in compliance with both California
Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section
3262(d)(4), (ii) Landlord has determined that no substandard work exists which
adversely affects the mechanical, electrical, plumbing, heating, ventilating and
air conditioning, life- safety or other systems of the Building, the curtain
wall of the Building, the structure or exterior appearance of the Building, or
any other tenant's use of such other tenant's leased premises in the Building
and (iii) Architectdelivers to Landlord a certificate, in a form reasonably
acceptable to Landlord, certifying that the construction of the Improvements in
the Premises has been substantially completed.
2.2.3 Other Terms. Landlord shall only be obligated to make
disbursements from the Improvement Allowance to the extent costs are incurred by
Tenant for Improvement Allowance Items. All Improvement Allowance Items for
which the Improvement Allowance has been made available shall be deemed
Landlord's property.
2.3 Standard Tenant Improvement Package. Landlord has established
specifications (the "Specifications") for the Building- standard components to
be used in the construction of the Improvements in the Premises (collectively,
the "Standard Improvement Package"), which Specifications are available upon
request. The quality of Improvements shall be equal to or of greater quality
than the quality of the Specifications, provided that Landlord may, at
Landlord's option, require the Improvements to comply with certain
Specifications.
SECTION 3
CONSTRUCTION DRAWINGS
3.1 Selection of Architect/Construction Drawings. If based upon the scope
of the Improvements, Landlord reasonably determines that plans and
specifications are necessary, Tenant shall retain an architect/space planner
reasonably approved by Landlord (the "Architect") to prepare the "Construction
Drawings," as that term is defined in this Section 3.1. If necessary, Tenant
shall also retain the engineering consultants designated by Landlord (the
"Engineers") to prepare all plans and engineering working drawings relating to
the structural, mechanical, electrical, plumbing, HVAC and lifesafety work of
the Improvements; provided, however, that Landlord shall ensure that the charges
of such engineering consultants designated by Landlord are commercially
competitive. The plans and drawings to be prepared by Architect and the
Engineers hereunder shall be known collectively as the "Construction Drawings"
All Construction Drawings shall comply with the drawing format and
specifications as reasonably determined by Landlord, and shall be subject to
Landlord's reasonable approval. Tenant and Architect shall verify, in the field,
the dimensions and conditions as shown on the relevant portions of the base
building plans, and Tenant and Architect shall be solely responsible for the
same, and Landlord shall have no responsibility in connection therewith.
Landlord's review of the Construction Drawings as set forth in this Section 3,
shall be for its sole purpose and shall not imply Landlord's review of the same,
or obligate Landlord to review the same, for quality, design, Code compliance or
other like matters.
<PAGE> 61
Accordingly, notwithstanding that any Construction Drawings are reviewed by
Landlord or its space planner, architect, engineers and consultants, and
notwithstanding any advice or assistance which may be rendered to Tenant by
Landlord or Landlord's space planner, architect, engineers, and consultants,
Landlord shall have no liability whatsoever in connection therewith and shall
not be responsible for any omissions or errors contained in the Construction
Drawings.
3.2 Final Space Plan. Tenant and the Architect shall prepare the final
space plan for Improvements in the Premises (collectively, the "Final Space Plan
"), which Final Space Plan shall include a layout and designation of all
offices, rooms and other partitioning, their intended use, and equipment to be
contained therein, and shall deliver the Final Space Plan to Landlord for
Landlord's approval.
3.3 Final Working Drawings. Architect and the Engineers shall complete the
architectural and engineering drawings for the Premises, and the final
architectural working drawings in a form which is complete to allow
subcontractors to bid on the work and to obtain all applicable permits
(collectively, the "Final Working Drawings") and shall submit the same to
Landlord for Landlord's approval.
3.4 Permits. The Final Working Drawings shall be approved by Landlord (the
"Approved Working Drawings") prior to the commencement of the construction of
the Improvements. Tenant shall cause the Architect to immediately submit the
Approved Working Drawings to the appropriate municipal authorities for all
applicable building permits necessary to allow "Contractor," as that term is
defined in Section 4.1, below, to commence and fully complete the construction
of the Improvements (the "Permits"). No changes, modifications or alterations in
the Approved Working Drawings may be made without the prior written consent of
Landlord, which consent shall not be unreasonably withheld.
SECTION 4
CONSTRUCTION OF THE IMPROVEMENTS
4.1 Contractor. A general contractor shall be retained by the Tenant to
construct the Improvements. Such general contractor ("Contractor") shall be
selected by the Tenant and approved by Landlord.
4.2 Tenant's Agents. All subcontractors, laborers, materialmen, and
suppliers used by the Tenant (such subcontractors, laborers, materialmen, and
suppliers, and the Contractor to be known collectively as "Tenant's Agents")
must be approved in writing by Landlord, which approval shall not be
unreasonably withheld or delayed. If Landlord does not approve any of the
Tenant's proposed subcontractors, laborers, materialmen or suppliers, the Tenant
shall submit other proposed subcontractors, laborers, materialmen or suppliers
for Landlord's written approval. Notwithstanding the foregoing, the Tenant shall
be required to utilize subcontractors designated by Landlord for any mechanical,
electrical, plumbing, life-safety, sprinkler, structural and air-balancing work;
provided, however, that Landlord shall ensure that the rates charged by such
designated subcontractors are commercially competitive.
<PAGE> 62
4.3 Construction of Improvements by Contractor. The Tenant shall
independently retain, in accordance with Section 4.1 above, Contractor to
construct the Improvements in accordance with the Approved Working Drawings. The
Tenant shall pay a logistical coordination fee (the "Landlord Coordination Fee")
to Landlord in an amount equal to five percent (5%) of the total amount of the
construction contract and general conditions between the Tenant and the
Contractor, excluding any flooring, painting and wallcovering.
4.4 Indemnification & Insurance.
4.4.1 Indemnity. Tenant's indemnity of Landlord as set forth in Article
13 of the Lease shall also apply with respect to any and all costs, losses,
damages, injuries and liabilities related in any way to any act or omission of
Tenant or Tenant's Agents.
4.4.2 Requirements of Tenant's Agents. Each of Tenant's Agents shall
guarantee to Tenant and for the benefit of Landlord that the portion of the
Improvements for which it is responsible shall be free from any defects in
workmanship and materials for a period of not less than one (1) year from the
date of completion thereof. All such warranties or guarantees as to materials or
workmanship of or with respect to the Improvements shall be contained in the
contract or subcontract and shall be written such that such guarantees or
warranties shall inure to the benefit of both Landlord and Tenant, as their
respective interests may appear, and can be directly enforced by either. Tenant
covenants to give to Landlord any assignment or other assurances which may be
necessary to effect such right of direct enforcement.
4.4.3 Insurance Requirements.
4.4.3.1 General Coverages. All of Tenant's Agents shall carry
worker's compensation insurance covering all of their respective employees, and
shall also carry public liability insurance, including property damage, all with
limits, in form and with companies as are required to be carried by Tenant as
set forth in Article 14 of the Lease.
4.4.3.2 Special Coverages. Tenant shall carry "Builder's All Risk"
insurance in an amount approved by Landlord covering the construction of the
Improvements, and such other insurance as Landlord may require. Such insurance
shall be in amounts and shall include such extended coverage endorsements as may
be reasonably required by Landlord.
4.4.3.3 General Terms. Certificates for all insurance carried
pursuant to this Section 4.4.3.3 shall be delivered to Landlord before the
commencement of construction of the Improvements and before the Contractor's
equipment is moved onto the site. In the event that the Improvements are damaged
by any cause during the course of the construction thereof, Tenant shall
immediately repair the same at Tenant's sole cost and expense.
SECTION 5
MISCELLANEOUS
<PAGE> 63
5.1 Tenant's Representative. The Tenant has designated Richard Marks as its
sole representative with respect to the matters set forth in this Tenant Work
Letter, who, until further notice to Landlord, shall have full authority and
responsibility to act on behalf of the Tenant as required in this Tenant Work
Letter.
5.2 Landlord's Representative. Prior to commencement of construction of
Improvements, Landlord shall designate a representative with respect to the
matters set forth in this Tenant Work Letter, who, until further notice to the
Tenant, shall have full authority and responsibility to act on behalf of the
Landlord as required in this Tenant Work Letter.
5.3 Time of the Essence in This Tenant Work Letter. Unless otherwise
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. Tenant acknowledges that the work to be performed by Tenant
pursuant to this Tenant Work Letter may be performed during the Lease Term, that
Tenant shall be entitled to (but shall not be obligated to) conduct business
throughout the course of such renovations and that Tenant shall not be entitled
to any abatement of rent, nor shall Tenant be deemed to be constructively
evicted from the Premises, as a result of the construction of such renovations.
5.4 Miscellaneous Charges. Landlord agrees that the Contractor shall not be
charged for utilities, freight elevator usage during normal business hours, or
parking during the construction of these renovations.
<PAGE> 1
Exhibit 23.1
The Board of Directors
The Kushner-Locke Company:
We consent to incorporation by reference in the registration statements (Nos.
333-72785, 333-80521, 333-40391, 333-10239 and 33-82942) on Form S-3 and (Nos.
333-79729, 333-63297, 33-45248 and 33-86768) on Form S-8 of our report dated
December 21, 1999, on our audits of the consolidated financial statements and
financial statement schedule of The Kushner-Locke Company as of and for each
of the years in the two-year period ended September 30, 1999, which report
is included in the Annual Report on Form 10-K.
PriceWaterhouseCoopers LLP
Century City, California
December 28, 1999
84
<PAGE> 1
Exhibit 23.2
The Board of Directors
The Kushner-Locke Company:
We consent to incorporation by reference in the registration statements (Nos.
333-72785, 333-80521, 333-40391, 333-10239 and 33-82942) on Form S-3 and (Nos.
333-79729, 333-63297, 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
statements of operations, stockholders' equity and cash flows of The
Kushner-Locke Company for the year ended September 30, 1997, and the related
schedule for the year ended September 30,1997, which report appears in the
September 30, 1999 annual report on Form 10-K of The Kushner-Locke Company.
KPMG LLP
Los Angeles, California
December 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 36,434
<SECURITIES> 0
<RECEIVABLES> 35,889
<ALLOWANCES> 3,248
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 0<F2>
<PP&E> 2,490
<DEPRECIATION> 1,281
<TOTAL-ASSETS> 185,115
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 0
0
0
<COMMON> 70,379
<OTHER-SE> (9,634)
<TOTAL-LIABILITY-AND-EQUITY> 185,115
<SALES> 711
<TOTAL-REVENUES> 49,890
<CGS> 723
<TOTAL-COSTS> 39,666
<OTHER-EXPENSES> 31,186
<LOSS-PROVISION> 2,959
<INTEREST-EXPENSE> 7,782
<INCOME-PRETAX> 5,197
<INCOME-TAX> 726
<INCOME-CONTINUING> 4,471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,471
<EPS-BASIC> .38
<EPS-DILUTED> .36
<FN>
<F1>Included in total assets is $91,499 representing net film and television
program assets.
<F2>The Company presents its financial position in an unclassified consolidated
balance sheet.
</FN>
</TABLE>
