-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TL+zXGNvms8nP6dI4rYKQECk65uOGMpFHRUgy9N8FpliOXwvjk7oAAAaDjwHtuHO YlJRCzaJgXhqtYj5v5pmDw== 0000842009-00-000002.txt : 20000203 0000842009-00-000002.hdr.sgml : 20000203 ACCESSION NUMBER: 0000842009-00-000002 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KUSHNER LOCKE CO CENTRAL INDEX KEY: 0000842009 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954079057 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-10661 FILM NUMBER: 516587 BUSINESS ADDRESS: STREET 1: 11601 WILSHIRE BLVD 21ST FLR CITY: LOS ANGELES STATE: CA ZIP: 95202 BUSINESS PHONE: 3104812000 MAIL ADDRESS: STREET 1: 11601 WILSHIRE BLVD STREET 2: 21ST FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90025 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________ FORM 10-K/A _________________________ Amendment to 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) Registrant's telephone number, including area code (310) 481-2000 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 1 No0 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or 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. 0 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. Total number of pages: 84. Exhibit index begins on page 80. The undersigned registrant (the "Registrant") hereby amends its Annual Report on Form-K for the fiscal year ended September 30, 1999 (the "Report") as follows: 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 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 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, 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. 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 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 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:
Market Months After Theatrical Release Approximate Release Period - -------------------------------------------------------------------------------- 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
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 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. 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:
Picture Initial Media Delivery/Release Date Principal Talent - -------------------------------------------------------------------------------- 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
The following films are currently scheduled for release or delivery by the Company in fiscal 2000:
Picture Expected 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. 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 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 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 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:
Title Type of program First Exhibition ------------------------------------------------------------------------ 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
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) Coast Guard One Hour Drama (ABC)
While the Company has many projects in development, as is typical in the industry, only a relatively small number of such projects are ultimately produced (with the likelihood of production being more remote in the case of television series). It is rare for any projects in development to have production commitments until late in the development process. There is no assurance that the Company's efforts in developing or acquiring potential new programs, including any of the projects described above, will lead to production commitments or that any programs that are ultimately produced will be successful. Television Distribution Activities 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:
Title First Exhibition --------------------------------------------------------------------- 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 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 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 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 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 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
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 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
Title Episodes Produced First Exhibition --------------------------------------------------------------------------- 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
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. 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. 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 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. 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 2000. 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:
Common Stock High Low ------------ -------------------- 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
On December 14, 1999, the last sale price for the Common Stock as reported on the NNM was $3.97. On November 30, 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. Condensed Consolidated Statement of Operations Data:
Year Ended September 30, --------------------------------------------- (in thousands, except per share data) 1999(1) 1998(1) 1997 1996 1995 ------- ------- ------- ------- ------- 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 -- -- -- (.05) -- ------- ------- ------- ------- ------- Net earnings (loss) $.36 ($.69) ($.49) $.11 ($.75) ======= ======= ======= ======= ======= Weighted average common shares outstanding (2) 11,755 9,181 8,959 6,668 5,286 ======= ======= ======= ======= =======
Condensed Consolidated Balance Sheet Data:
September 30, ----------------------------------------------- (In thousands) 1999(1) 1998(1) 1997 1996 1995 ------- ------- ------- ------- -------- 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 ======= ======= ======= ======= =======
(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 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 $16,078,000 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:
$000 % ----------------------------- ------------------------ Film Film and TV Search Consol. and TV Search Consol. --------- -------- -------- ------ ------ ------- 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)% 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
___________________________________ 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 Calabro, 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 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 $1,499,000 of bonuses to the Co-Chairmen and Co-Chief Executive Officers, the President and Chief Operating Officer, and the Chief Financial Officer. A $50,000 bonus to the President and Chief Operating Officer was included in fiscal 1998 expenses. 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:
$000 % --------------------------- ----------------------- Film Film and TV Search Consol. and TV Search Consol. ------- ------- -------- ------ ------ ------- 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%
_______________________ 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 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. 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 $23,000,000 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. 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 $23,000,000 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. 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 $36,109,000 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 $21,018,000 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:
Kushner- Original Locke Film or Loan Amount Weighted Corporate Present Company Lender Amount Outstanding Interest Guaranty Maturity - -------------------------------------------------------------------------------- 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% -- 4/30/2000 Picking Up +1.5% The Pieces Comerica 12,000,000 10,544,000 Prime+1% 700,000 3/31/2000 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 =========== =========== ==========
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. 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 data suppliers,Internet companies and advertisers. At September 30, 1999, the minimum noncancelable payments required under these agreements are approximately $15,940,000, $8,600,000, $5,950,000, $4,200,000, $4,200,000 and $1,050,000 for 2000, 2001, 2002, 2003, 2004 and thereafter, 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 lossess 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 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. 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 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 Executive Officers and Directors Directors of the Company are elected annually by the shareholders to serve for a term of one year or until their successors are duly elected and qualified. Officers are elected by the Board of Directors and serve at the Board's pleasure. Set forth below is certain information concerning each person who was an executive officer or director of the Company as of September 30, 1999.
Director Name Age Since Position - -------------------------------------------------------------------------------- Peter Locke 56 1983 Co-Chairman and Co-Chief Executive Officer; Director Donald Kushner 54 1983 Co-Chairman, Co-Chief Executive Officer and Secretary; Director Irwin Friedman* 65 1998 Director Stuart Hersch* 48 1989 Director John Lannan* 53 1998 Director Bruce St. J. Lilliston 47 -- Chief Operating Officer and President Robert Swan 52 -- Senior Vice President and Chief Financial Officer
______________________ * Member of Audit Committee and Compensation Committee Background of Executive Officers and Directors The business experience, principal occupations and employment of each of the directors and executive officers of the Company, for at least the past five years, are as follows: Peter Locke co-founded the Company with Donald Kushner in 1983 and currently serves as Co-Chairman and Co-Chief Executive Officer of the Company. Mr. Locke has served as executive producer on substantially all of the Company's productions since its inception. Prior to 1983, Mr. Locke produced several prime-time television programs, including two years of the Stockard Channing Show and the NBC television mini- series The Star Maker, starring Rock Hudson. Mr. Locke also produced two made-for-television movies telecast on CBS and the films The Hills Have Eyes Parts I and II. Mr. Locke is Co-Chairman of the board of directors of US SEARCH.com. Donald Kushner co-founded the Company with Peter Locke in 1983 and currently serves as Co-Chairman, Co-Chief Executive Officer and Secretary. Mr. Kushner has served as executive producer on substantially all of the Company's productions since its inception. Mr. Kushner was the producer of Tron, a 1982 Walt Disney theatrical film starring Jeff Bridges, which was nominated for two Academy Awards. Mr. Kushner is Co-Chairman of the board of directors of US SEARCH.com. Irwin Friedman has served as a director of the Company since 1998. Mr. Friedman is President of I. Friedman Equities, Inc., a corporate financial services firm, which he founded more than twenty years ago. Since 1991 Mr. Friedman has rendered financial consulting services to the Company through I. Friedman Equities, Inc. Mr. Friedman was responsible for introducing the Company to various investment banking firms, and has advised and assisted the Company with various corporate financing and other transactions. Mr. Friedman is a director of Recoton Corporation, a consumer electronics company. Stuart Hersch has served as a director of the Company since 1989. Since 1996, Mr. Hersch has been a consultant to several entertainment companies. In 1996, Mr. Hersch became a consultant to the Company. Mr. Hersch assists the Company in analyzing potential strategic acquisitions and provides the Company consulting services in connection with the Company's infomercial operations. From 1990 to 1996, Mr. Hersch was President of the WarnerVision Entertainment division of Atlantic Records, a subsidiary of Time-Warner, Inc. From 1988 to 1989, Mr. Hersch was Chairman of Hersch Diener & Company, an independent consulting firm. From 1983 to 1987, Mr. Hersch was the Chief Operating and Chief Financial Officer of King World Productions, Inc. John Lannan has served as a director of the Company since 1998. Mr. Lannan is the President of Brentwood Partners, Inc., a mortgage banking company. From 1995 to 1998 Mr. Lannan was Vice President of Westco Real Estate Finance Corp., a mortgage banking company. Previously he was Vice-Chairman of Hollingsworth & Lord, a mortgage banking company. Mr. Lannan is a director of Centennial Bank and of Orange County Bancorp, treasurer of the Lannan Foundation, a not-for-profit organization, and is a member of the California Bar. Bruce St.J Lilliston became President and Chief Operating Officer of the Company in October 1996. Prior to joining the Company, Mr. Lilliston practiced entertainment law for 19 years. He represented the Company in various transactions for the two years preceding his appointment as Company President and Chief Operating Officer. Mr. Lilliston served as an arbitrator for the American Film Marketing Association, and also served a special master for the Los Angeles Superior Court. He graduated from the University of Chicago Law School in 1977, where he was an associate editor of the University of Chicago Law Review. He received his bachelor of arts degree with honors from Brown University in 1974. Mr. Lilliston was a partner in the law firm of Paul, Hastings, Janofsky & Walker from 1989 to 1991, where he was managing partner of that firm's entertainment finance and transactions practice. Robert Swan joined the Company as Controller in October 1996. In May 1997 Mr. Swan was appointed Chief Financial Officer and in May 1998 became Senior Vice President and Chief Financial Officer. Prior to assuming the Chief Financial Officer role for the Company, Mr. Swan had been Chief Financial Officer of AVI Entertainment Group, Inc., a music publishing and distribution company since 1994. Mr. Swan is a Certified Public Accountant and holds an MBA in finance and accounting from the University of California at Los Angeles. Directors who are also executive officers of the Company do not receive any additional compensation for serving as members of the Board of Directors or any committee thereof. Peter Locke and Donald Kushner receive no compensation for serving as a member of the Board of Directors. Irwin Friedman and Stuart Hersch receive $25,000 annually each, and John Lannan receives $15,000 annually, for serving on the Board of Directors and any committees thereof. Each of Messrs. Friedman and Lannan were granted options to purchase 16,667 shares at an exercise price of $2.84 in June 1998, and Mr. Hersch was granted options to purchase 16,667 shares at an exercise price of $1.875 in August 1997. In 1990 Mr. Hersch was granted options to acquire 71,185 adjusted shares of common stock at an adjusted price of $9.33 per share. Each of Messrs. Friedman, Hersch and Lannan were granted options to purchase 13,333 shares at an exercise price of $7.19 in February 1999 and options to purchase 13,333 shares each at an exercise price of $4.8125 in September 1999. In September 1999 Mr. Hersch was granted options to purchase 40,000 shares at an exercise price of $4.8125 per share. During the 1999 fiscal year, there were six meetings of the Board of Directors, five meetings of the Compensation Committee and two meetings of the Audit Committee of the Board of Directors. Each director attended all of the meetings of the Board of Directors, the Compensation Committee and the Audit Committee held during the period for which he was a director or for which he had served as a committee member. Other Significant Employees The business experience, principal occupations and employment for at least the past five years of certain other significant employees who have made or are expected to make significant contributions to the business of the Company are as follows: Rob Aft, age 35, was appointed President of International Distribution of the Company in December 1999. From November 1994 to November 1999, Mr. Aft was Senior Vice President for Worldwide Distribution at Behaviour Worldwide. From August 1991 to November 1994, Mr. Aft was Vice President International Sales for Trimark Holdings. Mr. Aft is a member of the board of directors of the American Film Marketing Association. Richard Marks, age 51, was appointed Executive Vice President and General Counsel of the Company in April 1997. Prior to that, he served as the Company's Senior Vice President in charge of Legal and Business Affairs since joining the Company in October 1993. From 1991 to October 1993, Mr. Marks served as Senior Vice President in charge of Business and Legal Affairs for Media Home Entertainment, an independent film producer and video distributor. From 1983 to 1991 Mr. Marks held similar legal and business affairs positions with Walt Disney Pictures, Paramount Pictures and Weintraub Entertainment Group. Adam Moos, age 39, joined the Company in October 1999 as Executive Vice President-Production. From 1994 to October 1999. Mr. Moos was Vice President-Production at Film Finances, Inc., a production guarantor. Phillip Mittleman, age 29, joined the Company in 1993 as Director of Development, Feature Films. In March 1994 Mr. Mittleman was appointed Vice President, Feature Films. In 1995 Mr. Mittleman was appointed Executive Vice President, Feature Films. Prior to 1993 Mr. Mittleman served as production coordinator, script coordinator and writer's assistant on various Company projects. Steven Rosen, age 39, joined the Company in June 1994 as Production Controller. In June 1995 Mr. Rosen was appointed Director - Production Finance. In June 1997 Mr. Rosen was appointed Vice President - Production Finance. In January 1999 Mr. Rosen was appointed Executive Vice President, Operations and Finance. Prior to June 1994 Mr. Rosen served as Controller of The Finnigan Pinchuk Company. C. Nicholas Keating, Jr., age 57, has served as President, Chief Executive Officer and a director of US SEARCH.com since March 1999. Mr. Keating has served as an independent business advisor since 1993 to a number of companies principally in the networking, software, semiconductor and imaging industries. From 1987 to 1993, Mr. Keating was Vice President of Network Equipment Technologies, Inc., a wide-area networking company. Mr. Keating currently serves on the Board of Directors of MCMS, Inc., a leading advanced electronics manufacturer serving original equipment manufacturers, E-Net Corporation, an enterprise software supplier to the financial services industry, and LIC Energy, a European simulation systems company serving the oil and gas transmission market. Mr. Keating holds a B.A. and a M.A. from American University and is a former Fulbright Scholar. Nicholas Matzorkis, age 37, is the Chief Strategist of US SEARCH.com. Mr. Matzorkis co-founded US SEARCH.com in 1994 and served as its President and a director from inception to September 1998. From 1992 to 1994, Mr. Matzorkis was founder and President of U.S. Bell Long Distance, an aggregator and reseller of telecommunications services. In addition, from 1992 through 1997 Mr. Matzorkis consulted with companies in the entertainment industry on Web site development, and promoted a variety of music and entertainment ventures. William G. Langley, age 50, has served as Chief Financial Officer of US SEARCH.com since March 1999. From September 1992 to March 1999, Mr. Langley served as Chief Financial Officer of FEI Company, a company that designs, manufactures and markets particle beam products, and was promoted in October 1994 to its Chief Financial Officer, Chief Operating Officer, President and director. Mr. Langley was Vice President of Acquisitions/Finance for Ticonderoga Partners from 1990 to 1992 as well as Vice President of Capital Preservation and Restructuring for Shearson Lehman Hutton from 1988 to 1990. From 1984 to 1988, Mr. Langley served as the Vice President-Asset Finance at Kidder, Peabody & Company. He is a member of the Oregon state bar and a certified public accountant. Mr. Langley holds an LL.M. from New York University School of Law, a J.D. from Northwestern School of Law of Lewis & Clark College and a B.A. from Albertson College of Idaho. Robert J. Richards, age 46, has served as Vice President, Operations of US SEARCH.com since April 1999. From November 1996 to 1999, Mr. Richards served as Vice President, Operations at E-Net Corporation, overseeing certain aspects of research and development, technical support, technical writing and MIS activities. From October 1995 to September 1996, Mr. Richards served as Vice President, Operations at GEMM Corporation and directed all operations activities including sales, marketing, administration research and development. Mr. Richards joined QuickResponse Services, Inc. in February 1988 serving in various roles, and became its Vice President, Research and Development in July 1994. From June 1983 to February 1988, Mr. Richards served as Director, Systems Technology and then as Vice President, Operation at the Pacific Stock Exchange. Mr. Richards holds a B.A. in Business and Economics from Moravian College. Robert Anderson, age 42, has served as Marketing Vice President of US SEARCH.com since October 1999. From November 1997 to October 1999, Mr. Anderson was an independent marketing consultant who served as Strategy Director for USWeb/CKS, head of marketing for Apple Computer, and head of sales and marketing for Seiko Epson Corporation. From 1995 to 1997 Mr. Anderson co-founded and operated Silver Hammer, an Emmy Award- winning broadcast design firm. Mr. Anderson holds an MBA degree from Columbia University and a B.S. in computer science from the University of Southern California. Karol Pollock, age 47, has served as Vice President and General Counsel for US SEARCH.com since October 1999. From September 1996 to October 1999 Ms. Pollock was Regional Counsel with NASD Regulation, Inc. From March 1993 to July 1996 Ms. Pollock was General Counsel and Assistant Director of the New Mexico Securities Division. From September 1990 to September 1992 Ms. Pollock was a senior staff attorney with the Securities and Exchange Commission. Ms. Pollock holds a J.D. degree from Loyola University School of Law in Los Angeles and a B.A. in political science from the University of Illinois. Meg Shea-Chiles, age 45, has served as Vice President, Business Development of US SEARCH.com since May 1999. From 1998 to 1999, Ms. Meg Shea-Chiles served as Executive of Global Alliances at IBM, where she also served as Director of Reengineering and Information Technology from 1996 to 1998, and Program Director of Business Development from May 1995 to 1996. From December 1994 to May 1995, Ms. Shea-Chiles served as Vice President, Product Design for NBS Imaging Systems, Inc., a systems integrator and producer of identification and verification cards. From March 1989 to December 1994, Ms. Shea-Chiles served in various roles at Network Equipment Technologies, Inc., a manufacturer of enterprise network equipment, and became its Senior Director of Strategic Partnership Programs in 1991. Ms. Shea-Chiles holds a B.S., magna cum laude, in Psychology and in Biology from Boston College and a M.S. in Chemistry from Southern Methodist University. Alan Mazursky, age 41, has served as Vice President, Finance of US SEARCH.com since March 1999. From January 1998 to March 1999 Mr. Mazursky was a consultant to the Company and acted as Chief Financial Officer of US SEARCH.com from July 1998 through March 1999. From 1996 to 1998 Mr. Mazursky was an independent financial consultant. From 1988 to 1996 Mr. Mazursky was Chief Financial Officer of Hard Rock Cafe America, the owner, operator and franchisor of Hard Rock Cafe restaurants in the western United States and certain international territories. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires executive officers and directors, and persons who beneficially own more than 10% of any class of the Company's equity securities to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission ("SEC"). Executive officers, directors and beneficial owners of more than 10% of any class of the Company's equity securities are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company during or with respect to fiscal 1999, and certain written representations from executive officers and directors, the Company believes that each such person has complied with all Section 16(a) filing requirements applicable to such executive officers, directors and greater than 10% beneficial owners, except that Bruce Lilliston inadvertently failed to file one report on a timely basis, covering one transaction reflecting a grant of options to acquire common stock Item 11. Executive Compensation Cash Compensation The following table sets forth the cash compensation paid or accrued by the Company during the fiscal year ended September 30, 1999 to the Chief Executive Officer and each executive officer of the Company whose salary and bonus exceeded $100,000 (the "Named Executive Officers").
Long-Term Annual Compensation Awards Compensation(1) ---------------------- ---------------- Securities All Other Name and Restricted Underlying Compensation Principal Fiscal Salary Bonus Stock Options/ (1)(4) Position Year ($) ($) Awards($) SARs(#) ($) - ----------------------------------------------------------------------------- Peter Locke(2)(3) 1999 457,596 679,904 243,750(5) 100,000/0 4,216 Co-Chairman, Co- 1998 425,000 -- -- -- 30,856 Chief Executive 1997 425,000 -- -- 166,666/0 36,293 Officer Donald Kushner(3) 1999 457,596 679,904 243,750(5) 100,000/0 4,216 Co-Chairman, Co- 1998 425,000 -- -- -- 27,989 Chief Executive 1997 425,000 -- -- 166,666/0 33,878 Officer and Secretary Bruce Lilliston 1999 400,000 118,811 -- 12,500/0 -- President and 1998 400,000 74,132 -- 8,333/0 -- Chief Operating 1997 400,000 -- -- 20,834/0 -- Officer Robert Swan 1999 186,153 20,000 -- -- -- Senior Vice 1998 172,558 -- -- -- -- President and 1997 124,154 -- -- 25,000/0 -- Chief Financial Officer
______________________ (1) In accordance with the rules of the Commission, the compensation described in this table does not include medical, group life insurance or other benefits received by the named executive officers that are available generally to all of our salaried employees and perquisites and other personal benefits received by the named executive officers that do not exceed the lesser of $50,000 or 10% of the officer's salary and bonus disclosed in this table. Does not include perquisites including automobile allowances and $25,000 annual non-accountable expense allowances in the case of Messrs. Locke, Kushner and Lilliston. (2) Does not include payments by the Company's subsidiary, US SEARCH.com, prior to January 30, 1998, when the Company acquired such subsidiary. (3) Does not include options to purchase shares of the common stock of US SEARCH.com which were approved by the Company and Search, but subsequently were terminated prior to full documentation pursuant to a waiver of any rights to receive such options executed by Messrs. Kushner and Locke. (4) Consists of term life insurance premiums paid by the Company on behalf of the Named Executive Officers in respect of a $3,500,000 policy and disability insurance premiums paid by the Company on behalf of the Named Executive Officers. (5) Consists of 50,000 shares for which the restrictions lapsed in June 1999. Employment Agreements Messrs. Kushner and Locke. In March 1994, the Company amended employment agreements with each of Messrs. Kushner and Locke to extend the term of the agreement to September 1998 and reduce the maximum annual performance bonus that each may receive to 4% of pre-tax earnings up to a maximum of $270,000 in fiscal 1997 and $290,000 in fiscal 1998. Under the revised agreements, Messrs. Kushner and Locke each received a base salary of $425,000 in fiscal 1997 and fiscal 1998. In addition, the Company granted to each, in March 1994, options to purchase 150,000 adjusted shares of common stock at an adjusted exercise price per share of $5.04. The options are fully vested. In October 1997, the Company extended the term of Messrs. Kushner and Locke's agreements to October 2002. Messrs. Kushner and Locke each continued to receive annual base compensation of $425,000 in fiscal 1997 and fiscal 1998, and receive $25,000 annual increases beginning in fiscal 1999 under the amended agreement up to a maximum of $525,000. If Company achieves earnings before income taxes prior to the profit bonuses in excess of $2,000,000, each of Messrs. Kushner and Locke are entitled to profit bonuses at graduated rates ranging from 5% of such annual earnings before income taxes up to $4,000,000, with increasing percentages up to 7.5% of annual earnings before income taxes in excess of $8,000,000. The total profit bonus is not to exceed two times annual base compensation. In August 1997, the Company granted to each of Messrs. Kushner and Locke options to purchase 83,333 adjusted shares of Common Stock at an exercise price per share of $1.875 . These options (time vesting options) vest over a five year period, with 20% vesting respectively on each of the five annual anniversary dates following the date of the grant (subject to acceleration in the event of termination of optionee's employment agreement by such optionee for "cause" (as defined therein) or wrongfully by the Company or upon certain "Events" (as defined under the agreement), including termination following a "change-in-control" as defined in the agreement). The Company also granted to each of Messrs. Kushner and Locke options to purchase an additional 83,333 (post reverse split) shares of Common Stock at an exercise price per share equal to $1.875, vesting at the rate of 20% per year, but exercisable only upon (i) the achievement of at least 85% of certain annual earnings before income tax targets to be set by the board of directors or (ii) the Company's Common Stock reaching certain public trading prices ranging from $3.00 to $6.00 per share. Such performance options are also subject to accelerated vesting and exercisability under the circumstances described above for the time- vesting option tranche. As of September 30, 1999 50,000 time vesting options and 83,333 performance options had vested for each of Messrs. Kushner and Locke. In March 1999 the Company further amended the employment contracts of Messrs. Kushner and Locke to extend the term of the agreements to March 2004. Under the revised employment agreements, each of Messrs. Kushner and Locke were granted a $25,000 increase in annual base compensation for each year of employment, and will be entitled to an annual base compensation of $550,000 in fiscal 2003 and $575,000 in fiscal 2004. Messrs. Kushner and Locke were also granted 50,000 shares of restricted Common Stock, and one-half of each of their remaining unvested stock options were determined to be immediately vested. In June 1999 the restrictions on the shares of common stock lapsed and unrestricted shares were issued to each of them. In September 1999 the Board of Directors granted to each of Messrs. Kushner and Locke special bonuses of $500,000 and fully vested options to acquire 100,000 shares of common stock at $4.6875 per share. The awards were granted based upon the executives' overall performance. 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. If the employment agreement is terminated by the employee for "cause" or wrongfully by the Company, the Company is required to pay the present value of all unpaid premiums on the split dollar policy for the ten (10) year period ending February 2007. The Company also agreed to assign any key-man life insurance policy to the employee after certain terminations of the employment agreement. The agreements permit Messrs. Kushner and Locke to collect outside compensation and to provide limited services outside of their employment with the Company and to receive compensation therefor, so long as such activities do not materially interfere with the performance of their duties under the agreements. Each of Messrs. Kushner and Locke also may require the Company to change its name to remove his name within one year after the expiration or termination of his employment agreement, except that the Company may continue to use such name for a period of one year after such notice, or for such longer period of time as is reasonably necessary to cause the Company not to default under any indebtedness for borrowed money or other material agreement. In the event Messrs. Kushner's or Locke's employment agreement is terminated following a change of control, as such term is defined therein, such executive would be entitled to a lump sum payment equal to all compensation and benefits provided for in the agreement for the remainder of the term, discounted at the rate of 10% per annum. Mr. Lilliston. In September 1996, the Company entered into an employment agreement with Bruce St. J. Lilliston pursuant to which the Company employed Mr. Lilliston as the President and Chief Operating Officer of the Company effective October 1996 for a three year term. As part of the agreement, Mr. Lilliston is paid a base salary of $400,000 per year. In addition, the Company loaned him $100,000 in September 1996 and $200,000 in October 1996. The loans were made to assist Mr. Lilliston in the transition from his private law practice to his duties as Chief Operating Officer of the Company. The loans accrue simple interest at the rate of 8% per annum and will be repaid over a five year period at certain specified dates ending in October 2001. Mr. Lilliston receives bonuses equal to the amount of the payments, including interest, due for such loan if Mr. Lilliston is still employed by the Company (including the renewal of his employment agreement if applicable) on certain dates (the "Employment Bonus"). Through September 30, 1999 Mr. Lilliston had received $150,000 of such Employment Bonuses. Beginning in October 1997, so long as Mr. Lilliston remains employed by the Company (including the renewal of his employment agreement if applicable), he is entitled to a bonus of $100,000 the first time the adjusted "Average Closing Price" (the average closing price of the common stock over a thirty calendar day period) is $6.00 or more greater than the "First Day Price" (the average closing price of the Common Stock, as adjusted, over the thirty calendar day period immediately prior to October 1, 1996). Thereafter, if Mr. Lilliston is still employed by the Company (including the renewal of his employment agreement if applicable), he will be entitled to receive an additional $100,000 bonus the first time the Average Closing Price exceeds the First Day Price by $12.00 or more, as adjusted, and each whole six- dollar amount through and including $60.00, as adjusted, (each such bonus, a "Stock Bonus"). The aggregate of such bonuses is not to exceed $1,000,000. The Stock Bonuses are reduced by an amount equal to the Employment Bonus up to $150,000 plus interest payable thereon from September 1996. Through September 30, 1999 Mr. Lilliston had received a $100,000 Stock Bonus, subject to the aforementioned initial offset which reduced said bonus to zero. If the Company realizes pre-tax operating profits or earnings per share for any fiscal year during Mr. Lilliston's employment greater than 100% of the Company's largest pre-tax operating profit or earnings per share amount for any of the preceding years of Mr. Lilliston's employment under his employment agreement or in any of the five fiscal years immediately preceding the commencement of such agreement, and if Mr. Lilliston is still employed by the Company at the end of the applicable fiscal year, then Mr. Lilliston is entitled to receive a bonus of $50,000 for each such event. No bonus was earned or paid for fiscal 1998. For fiscal 1999 Mr. Lilliston earned both an operating profit and earnings per share bonus, both of which were subject to the offset mentioned above, resulting in a net bonus payable of $18,811. As part of the agreement, the Company granted Mr. Lilliston options to purchase up to 41,667 adjusted shares of Common Stock, with 20,834 of such options having been granted and vested in November 1996. Options to purchase an additional 8,333 shares of common stock and 12,500 shares of common stock were granted and vested in October 1997 and October 1998, respectively, as Mr. Lilliston reached the performance criteria established by the Board of Directors or a committee thereof. Discussions for an extension of Mr. Lilliston's employment have commenced. If Mr. Lilliston's employment is extended for a second term pursuant to the terms of the original agreement (the "Second Term"), the Company is to grant Mr. Lilliston options to purchase up to an additional 83,334 shares of Common Stock, 41,667, 16,667, and 25,000 of such options to be granted upon commencement and one, and two years, respectively, after the commencement of the Second Term with one-half of each such grant to vest immediately upon grant and the remainder thereof to vest upon Mr. Lilliston reaching certain performance criteria to be established by the Board of Directors or a committee thereof. If Mr. Lilliston's employment is extended beyond a Second Term, the Company is to grant Mr. Lilliston options to purchase up to an additional 41,667 shares of Common Stock , with such options granted in full upon such employment extension with one-half of such grant to vest immediately upon grant and the remainder thereof to vest upon Mr. Lilliston reaching certain performance criteria to be established by the Board of Directors or a committee thereof. In the event the performance goals are not met, such options vest at a fixed date in the future, contingent solely on future employment. The exercise price for such options will be equal to the closing price of the Common Stock on the applicable date of grant. Finally, as part of Mr. Lilliston's agreement, he is allowed to maintain not more than two independent outside legal consultancy client relationships, subject to approval by the Co-Chief Executive Officers, with earnings from such consultancies limited to $150,000 per year. Effective September 30, 1999 Mr. Lilliston's employment was extended for three months under the existing terms of employment. In January 2000 Mr. Lilliston's employment was continued on an at-will basis under the same terms, and he received a $100,000 loan bearing interest at 8%. Mr. Swan. In May 1997 the Company entered into an employment agreement with Robert Swan pursuant to which the Company employed Mr. Swan as the Chief Financial Officer of the Company for a three year term. Mr. Swan was paid a base annual salary of $160,000 for the first year, $175,000 for the second year and $200,000 for the current year. Mr. Swan is to receive a bonus equal to 10% of his base annual salary if net earnings for a fiscal year are greater than that of the immediately preceding fiscal year. The Company granted Mr. Swan options to purchase up to 25,000 shares of Common Stock, all of which have vested. In fiscal 1999 Mr. Swan earned a $20,000 bonus. Option/SAR Grants in Last Fiscal Year The following table sets forth information concerning stock options that the Company granted to the named executive officers. The Company has never issued stock appreciation rights.
Potential Individual Grants realizeable value ------------------------------------------- value at assumed Percentage of annual rates Number of total options of stock price securities granted to Exercise appreciation for underlying employees or base Expira- option term(5) Options in fiscal price tion --------------- Name granted(#)(1) year(2) ($/Sh)(3) Date(4) 5%($) 10%($) - -------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) Peter Locke(6) 100,000 19.91% $4.6875 9/21/09 $298,787 $787,939 Donald Kushner(6) 100,000 19.91% $4.687 9/21/09 $298,787 $787,939 Bruce Lilliston(6) 12,500 2.49% $2.96 10/1/08 $23,656 $62,384 Robert Swan -- --% -- -- -- --
__________________ (1) Represents options the Company granted under its 1988 Stock Incentive Plan. (2) Based on an aggregate 502,243 shares of Common Stock subject to options granted to employees during the last fiscal year. (3) The Company granted options at an exercise price equal to the closing price of the Common Stock on the NNM on the last trading day before the grant. (4) The term of each option grant is generally ten years from the date of grant. The options may terminate before their expiration dates if the option holder's status as an employee is terminated or upon the option holder's death or disability. (5) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the rules of the Commission and do not represent either historical appreciation or the Company's estimate or projection of its future Common Stock prices. (6) Options immediately vested upon grant. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values The following table sets forth information concerning options that the named executive officers exercised during the last fiscal year and the number of shares subject to both exerciseable and unexerciseable stock options as of September 30, 1999. The table also reports values for "in-the-money" options that represent the positive spread between the exercise prices of outstanding options and the fair market value of the Common Stock as of September 30, 1999. The Company has never issued stock appreciation rights.
Number of Securities Value of Underlying Unexercised Unexercised In-The-Money Options/SARs Options/SARs Shares at FY-End (#) at FY-End ($) Acquired on Value Exercisable/ Exercisable/ Name Exercise(#) Realized($) Unexercisable Unexercisable(1) - ----------------------------------------------------------------------------- Peter Locke -0- N/A 383,333/33,333 $447,916/$104,166 Donald Kushner -0- N/A 383,333/33,333 $447,916/$104,166 Bruce Lilliston 41,667 $345,964 0/0 $0/$0 Robert Swan 15,000 $74,695 10,000/0 $31,250/$0
________________ (1) Calculated by determining the difference between the exercise price and the sale price of the Common Stock on the NNM on September 30, 1999. 1988 Stock Incentive Plan The 1988 Stock Incentive Plan (the "Plan") authorizes the granting of varying forms of stock incentive awards ("Awards") to qualified officers, employees, directors, key employees and third parties providing valuable services to the Company, e.g., independent contractors, consultants and advisors to the Company. In April 1999, the shareholders of the Company voted to increase the adjusted authorized number of shares available under the Plan from 1,250,000 to 1,820,000. The Plan may be administered by a committee appointed by the Board and consisting of two or more members, each of whom must be Non-Employee Directors. A Non-Employee Director is defined as a director who is not employed by the Company or its subsidiaries, does not receive compensation from the Company or its subsidiaries other than as a director, except for compensation in an amount less than $60,000, and is generally disinterested. The Plan is currently administered by the entire board of directors, who determine the number of shares to be covered by an Award, the term and exercise price, if any, of the Award and other terms and provisions of Awards. The Plan is designed to help the Company attract and retain qualified persons for positions of substantial responsibility and to provide certain key employees and consultants with an additional incentive to contribute to the success of the Company. As of September 30, 1999, options to purchase 1,200,461 shares of the Company's Common Stock were outstanding under the Plan. Through that date options to purchase 538,031 shares had been exercised, options to purchase 411,281 shares had expired or been canceled and options to purchase 81,508 shares remained available for grant under the Plan. Awards can be Stock Options ("Options"), Stock Appreciation Rights ("SARs"), Performance Share Awards ("PSAs") and Restricted Stock Awards ("RSAs"). The number and kind of shares available under the Plan are subject to adjustment in certain events. Shares relating to Options or SARs which are not exercised, shares relating to RSAs which do not vest and shares relating to PSAs which are not issued will again be available for issuance under the Plan. An Option may be an incentive stock option ("ISO") within the meaning of the internal Revenue Code or a nonqualified option. The exercise price for Options is to be determined by the Committee, but in the case of an ISO is not to be less than fair market value on the date the Option is granted (110% of fair market value in the case of an ISO granted to any person who owns more than 10% of the Common Stock). The purchase price is payable in any combination of cash, shares of Common Stock already owned by the participant for at least six months or, if authorized by the Committee, a promissory note secured by the Common Stock issuable upon exercise. In addition, the award agreement may provide for "cashless" exercise and payment. Subject to early termination or acceleration provisions, an Option is exercisable, in whole or in part, from the date specified in the related award agreement until the expiration date determined by the Committee (not to exceed 10 years from the date of grant). The options granted under the Plan become exercisable on such dates as the Board determines in the terms of each individual option. Options are subject to termination in the event of a disposition of all or substantially all of the assets or capital stock of the Company by means of a sale, merger, consolidation, reorganization, liquidation or otherwise; unless the Committee arranges for a continuation of the Plan or for the optionee to receive payment or new options covering shares of the corporation purchasing or acquiring the assets or stock of the Company, in substitution of the options granted under the Plan. The Committee in any event may, on such terms and conditions as it deems appropriate, accelerate the exercisability of options granted under the Plan. An ISO to a holder of more than 10% of the total combined voting power of all classes of stock of the Company must expire no later than five years from the date of grant. A nonqualified stock option must expire no later than ten years from the date of the grant. The options granted under the Plan are not transferable other than by will or the laws of descent and distribution. Unexercised options generally lapse 3 months after termination of employment other than by reason of retirement, disability or death (except in the case of ISOs) in which case it terminates one year thereafter. An SAR is the right to receive payment based on the appreciation in the fair market value of Common Stock from the date of grant to the date of exercise. In its discretion, the Committee may grant an SAR concurrently with the grant of an Option. An SAR is only exercisable at such time, and to the extent, that the related Option is exercisable. Upon exercise of an SAR, the holder receives for each share with respect to which the SAR is exercised an amount equal to the difference between the exercise price under the related Option and the fair market value of a share of Common Stock on the date of exercise of the SAR. The Committee in its discretion may pay the amount in cash, shares of Common Stock, or a combination thereof. An RSA is an award of a fixed number of shares of Common Stock subject to restrictions. The Committee specifies the prices, if any, the recipient must pay for such shares. Shares included in an RSA may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered until they have vested. The recipient is entitled to dividend and voting rights pertaining to such RSA shares even though they have not vested, so long as such shares have not been forfeited. A PSA is an award of a fixed number of shares of Common Stock, the issuance of which is contingent upon the attainment of such performance objectives, and the payment of such consideration, if any, as is specified by the Committee. The Plan also provides for certain tax-offset bonuses and tax withholding using shares of Common Stock instead of cash. When a participant is no longer employed by the Company for any reason, shares subject to the participant's RSAs which have not become vested by that date or shares subject to the participant's PSAs which have not been issued are forfeited in accordance with the terms of the related Award agreements. Options which have become exercisable by the date of termination of employment or of service on the Committee must be exercised within certain specified periods of time from the date of termination, dependent upon on the reason for termination. Options which have not yet become exercisable on the date the participant terminates employment or service for a reason other than retirement, death or total disability terminate on that date. All employees, officers and directors of, and consultants to, the Company are eligible to participate in the Plan. The Committee determines which persons shall be granted options, the extent of such grants and, consistent with the Plan, the terms and conditions thereof. As of December 17, 1999, approximately 50 employees of the Company, and three directors of the Company who are not also employees of the Company, are eligible to receive option grants under the Plan. The Plan provides for anti-dilution adjustments in the event of a reorganization, merger, combination, recapitalization, reclassification, stock dividend, stock split or reverse stock split; however, no such adjustment need be made if it is determined that the adjustment may result in the receipt of federally taxable income to optionees or the holders of Common Stock or other classes of the Company's securities. Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company as a result of which the Company is not the surviving entity, the Plan will terminate, and any outstanding awards will terminate and be forfeited unless assumed by the successor corporation. The Board of Directors may, at any time, terminate, amend or suspend the Plan. In addition, the Committee may, with certain exceptions, amend any provision of the Plan. The Plan currently provides that the Board may amend the Plan at any time without obtaining shareholder approval to the fullest extent permitted by applicable law or regulation. In the event the Board determines that shareholder approval is required by applicable law or regulation, then such amendments would be effective once approved by the Board and the holders of a majority of the shares of Common Stock. Compensation Committee Interlocks and Insider Participation The Compensation Committee participated in deliberations and decisions regarding executive compensation. However, the full Board of Directors of the Company participated in deliberations and decisions regarding grants of new options to certain directors and certain employees in connection with new employment agreements and amendments and extensions of employment agreements with the Company. Other than Messrs. Kushner and Locke, no member of the Board of Directors was, during the fiscal year or formerly, an officer or employee of the Company or any of its subsidiaries, however Mr. Hersch is paid $4,916 per month ($7,500 per month through March 1999) and Mr. Friedman is paid $24,000 per quarter (commencing in April 1999) pursuant to consulting contracts. During fiscal year 1999, Mr. Locke served as Co-Chairman of the Board, and Co- Chief Executive Officer of the Company, and Mr. Kushner served as Co- Chairman of the Board, Co-Chief Executive Officer, and Secretary of the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management. BENEFICIAL OWNERSHIP OF CERTAIN STOCKHOLDERS The following table sets forth certain information as of January 17, 2000 concerning the beneficial ownership of Common Stock, by (i) each person who is known to the Company to be a beneficial owner of more than 5% of the outstanding Common Stock; (ii) each of the current Directors of the Company; (iii) each of the Named Executive Officers; and (iv) all current Directors and Executive Officers of the Company as a group. The address and telephone number for those directors and executive officers not otherwise noted is 11601 Wilshire Boulevard, 21st Floor, Los Angeles, California 90025, (310) 481-2000.
Common Stock Percent of Beneficial Owner Beneficially Owned Class (8) Peter Locke 931,012 (1) 6.54% Donald Kushner 881,157 (1)(2) 6,19% Irwin Friedman 132,222 (3) * Stuart Hersch 154,518 (4) 1.10 John Lannan 51,110 (5) * Bruce St. J. Lilliston 41,667 (4) * Robert Swan 15,000 (6) * Gruber & McBaine Capital Management, LLC 2,016,150 (7) 14.56% Jon D. Gruber 2,286,550 (7) 16.52% J. Patterson McBaine 2,326,300 (7) 16.80% Thomas O. Lloyd-Butler 2,016,150 (7) 14.56% All directors and executive officers as a group (seven individuals) 2,206,686 14.74% (1)(2)(3)(4)(5)(6)
_____________ * Less than 1% (1) Includes 350,000 shares subject to options which are currently exercisable or exercisable within 60 days of the date hereof, and excludes 66,666 options which are not currently exercisable or exercisable within 60 days of the date hereof. (2) Includes 33,333 shares owned by a corporation controlled by Mr. Kushner. (3) Includes 117,222 shares subject to options and warrants currently exerciseable, and excludes 5,555 shares subject to options and warrants which are not currently exercisable or exercisable within 60 days. (4) Represents shares subject to options currently exercisable. (5) Includes 37,778 shares subject to options currently exercisable, and excludes 5,555 shares subject to options which are not currently exercisable or exercisable within 60 days. (6) Includes 10,000 shares subject to options currently exercisable. (7) The information reported herein was provided orally by Gruber & McBaine Capital Management, LLC as of January 17, 2000, superceding information set forth in Form 13D dated December 10, 1999 filed jointly by Gruber & McBaine Capital Management, LLC, Jon D. Gruber, J. Patterson McBaine and Thomas O. Lloyd-Butler. All such persons reported shared voting and dispositive powers for 2,016,150 shares. Mr. Gruber reported sole voting and dispositive powers for 247,400 additional shares. Mr. McBaine reported sole voting and dispositive powers for 310,150 additional shares. The address of Gruber & McBaine Capital Management, LLC is 50 Osgood Place, Penthouse, San Francisco, CA 94133 (8) As a percentage of the 13,844,408 shares outstanding on January 17, 2000 plus certain shares issuable upon conversion of convertible securities or subject to options held by such person or persons. Item 13. Certain Relationships and Related Transactions Stuart Hersch, a Director of the Company, was previously President of WarnerVision. During fiscal 1998 the Company paid to WarnerVision $1,543,000, a previously accrued payment obligation, and settled certain disputes with WarnerVision. In September 1996, the Company entered into an employment agreement with Bruce St. J. Lilliston pursuant to which the Company agreed to hire Mr. Lilliston as the President and Chief Operating Officer of the Company effective October 1996. As part of such agreement, Mr. Lilliston is allowed to maintain not more than two independent outside legal consultancy client relationships, subject to approval by the Chief Executive Officers. Mr. Lilliston had provided various legal services to certain of Kushner-Locke International's distributing licensees as well as August Entertainment. See Item II, Executive Compensation - Employment Agreement - Mr. Lilliston for a further description of Mr. Lilliston's employment arrangement with the Company. In April 1999 Mr. Lilliston exercised all options granted to him by the Company and obtained 41,667 shares of common stock for $128,000. Since April 1996, Stuart Hersch has consulted with the Company pursuant to a month-to-month consulting agreement which provides for a monthly fee of $4,916 (since April 1999; $7,500 per month previously) to be paid to Mr. Hersch. Mr. Hersch assists the Company in analyzing potential strategic acquisitions and provides the Company consulting services in connection with the Company's infomercial operations. From April 1999 to December 1999 the Company paid I. Friedman Equities, Inc. $72,000 pursuant to a consulting agreement effective from April 1999 through June 2000. In July 1999 as a result of the Company's redemption of its Class C Warrants, I. Friedman Equities was paid a fee of $62,000 pursuant to a 1996 agreement. The Company understands that I. Friedman Equities is controlled by Irwin Friedman, a Company director. From May 1997 to October 1997, Mr. Locke personally advanced US SEARCH.com $397,000, bearing interest at 10% per annum, payable upon demand. These advances were subsequently 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 1997. In February 1999 the Board granted to each of Messrs. Kushner and Locke 50,000 restricted shares of common stock. In June 1999 the Board removed such restrictions and the Company issued unrestricted shares to each individual. Messrs. Friedman, Hersch, and Lannan were each granted options to purchase 13,333 shares of Company common stock at an exercise price of $7.19 per share in February 1999. In September 1999 Messrs. Friedman, Hersch, and Lannan were each granted options to purchase 13,333 shares of Company common stock at exercise prices of $4.8125 per share. Also in September 1999 Mr. Hersch was granted options for 40,000 shares of common stock at an exercise price of $4.8125 per share. Also in September 1999 the Board of Directors approved the granting to each of Messrs. Kushner and Locke special bonuses of $500,000 and options for 100,000 shares of common stock at exercise prices of $4.6875 per share. 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
Page (a) (1) Financial Statements: Report of Independent Accountants 53 Independent Auditors' Report 54 Consolidated Balance Sheets at September 30, 1999 and 1998 55 Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997 56 Consolidated Statements of Stockholders' Equity for the years ended September 30, 1999, 1998, and 1997 57 Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998, and 1997 58 Notes to Consolidated Financial Statements 59 (2) Financial Statement Schedule: Schedule II for the years ended September 30, 1999, 1998, and 1997 78 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 80 (b) Report on Form 8-K: None
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 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 THE KUSHNER-LOCKE COMPANY CONSOLIDATED BALANCE SHEETS
September 30, ---------------------------- 1999 1998 ------------ ------------ 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 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. THE KUSHNER-LOCKE COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- 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 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. THE KUSHNER-LOCKE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock ---------------------- Net Accumulated Stockholders' Shares Amount Deficit Equity ---------- ----------- ---------- ----------- 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 ========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. THE KUSHNER-LOCKE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30, ------------------------------------- 1999 1998 1997 ----------- ---------- ----------- 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 in subsidiary net losses (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 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 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. THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Company's outstanding borrowings under the terms of the Company's credit facility ($66,000 at September 30, 1998). 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. THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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." THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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:
September 30, September 30, 1999 1998 ----------- ----------- 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 =========== ===========
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:
Ownership Percentage 1999 1998 -------------------- ----------- ----------- 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 =========== ===========
The summarized unaudited information below at September 30 represents an aggregation of the Company's equity affiliates: THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Financial Information (unaudited)
Balance Sheet Data 1999 1998 ----------- ----------- 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
Earnings Data 1999 1998 1997 ---------- ----------- ----------- 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
No dividends were received from equity affiliates for the years ended September 30, 1999, 1998, or 1997. (5) Credit Agreement and Financing Arrangements Credit arrangements and borrowings consist of the following:
September 30, September 30, 1999 1998 ------------ ----------- 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 =========== ===========
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 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. 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:
Fiscal Year Ending September 30, Amount - ---------------------------------------------------------------------------- 2000 $82,875,000 2001 2,319,000 ---------------- Total $85,194,000 ================
THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (6) Income Taxes Income tax expense (benefit) consisted of the following:
Year Ended September 30, -------------------------------- 1999 1998 1997 --------- --------- ---------- 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 ========= ========= ==========
A reconciliation of the statutory Federal income tax rate to the effective rate is presented below:
Year Ended September 30, -------------------------------- 1999 1998 1997 --------- --------- ---------- 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% ========= ========= ==========
Significant components of deferred tax assets and liabilities, using enacted tax rates, are as follows:
At September 30, -------------------------- 1999 1998 ------------- ------------ 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 ============= ============
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. THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 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 carry-forwards as follows:
Amount Expiration ----------------------------- Date Kushner-Locke US SEARCH.com Beginning -------------- ------------- ---------- 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
(7) Warrants and Stock Options Warrants A summary of exercisable warrants at September 30, 1999 is as follows:
Warrant Holder Amount Exercise Price Expiration Date - ------------------------------------- --------------- ------------------ 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 =========
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. THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 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 years 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:
Weighted Average Exercise Shares Price per Share Prices ----------------------------------------- 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 ===========
THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Additional information with respect to the outstanding options as of September 30, 1999 is as follows:
Options Outstanding Options Exercisable ---------------------------------- --------------------- Weighted Average Remaining Average Average Range of Number of Contractual Exercise Number of Exercise Exercise Prices: Shares Life Price Shares Price - --------------- ---------- ------------ --------- ---------- --------- $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 ========== ==========
Options exercisable at September 30, 1998 and 1997 were 671,087 and 528,141, respectively. The weighted average exercise price of these exerciseable options at September 30, 1998 and 1997 were $4.79 and $6.16, respectively. The pro forma effects of applying SFAS No. 123 are as follows:
Year Ended September 30, ------------------------------------- 1999 1998 1997 ---------- ----------- ------------ 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) ========== =========== ===========
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:
Dividend Expected Term Volatility Risk-free Rate Yield -------------- ----------- --------------- -------- 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%
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 KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. 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:
Capital Operating Year Ending September 30, Leases Leases - --------------------------------------------------------------------- 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 ========
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:
Year ending September 30, Amount ---------------------------------------------- 2000 $15,940,000 2001 $8,600,000 2002 $5,950,000 2003 $4,200,000 2004 $4,200,000 Thereafter $1,050,000
THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. 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:
Options/ Vested, net of Shares Exercise exercise at Vesting Grant Date Issued Price September 30, 1999 Required - --------------- ---------- --------- ------------------ ----------- 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)
__________________ (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. THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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.
Vested, net of exercises Options Exercise at September Vesting Holder Grant Date Issued Price 30, 1999 Required - --------------- ------------ -------- -------- ------------ -------- 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)
__________________ (1) Vests one-third at grant date and one-third over next two anniversaries of the grant date. (2) Immediately vested upon grant. 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. THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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. (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. THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Summarized financial information regarding the Company's business segments is shown in the table below.
Film and Search television services Consolidated ----------- ----------- ------------ 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
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.
Year ended September 30, ----------------------------------- 1999 1998 1997 ----------- ----------- ----------- 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 =========== =========== ===========
THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table presents film and television program costs and total assets based upon their geographic location:
United Latin Great States America Britain Total ----------- ----------- ---------- ------------ 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
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. (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.
Year Ended September 30, ----------------------------------- 1999 1998 1997 ---------- ----------- ----------- 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) ========== =========== ===========
THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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
Year ended September 30, ---------------------------------- Cash paid for: 1999 1998 1997 ---------- ---------- ---------- Interest $7,436,000 $6,427,000 $4,487,000 Taxes $30,000 $40,000 $23,000
Fiscal 1997: - -- $667,000 of convertible subordinated debentures were converted into 84,562 adjusted shares of common stock. Fiscal 1998: - -- The Company acquired an 80% interest in US SEARCH.com 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
- -- $300,000 of convertible subordinated debentures were converted into 51,282 adjusted shares of common. Fiscal 1999: - -- The Company assigned a note receivable from August of $192,000 to a subsidiary to reduce pre-existing subsidiary obligations to August (Note 9). - -- $100,000 of a note receivable from an officer of the Company was forgiven (Note 9). - -- $296,000 in related party notes of US Search.com were forgiven (Note 9). - -- 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). - -- $9,713,000 of convertible subordinated debentures were converted into 1,288,185 adjusted shares of common stock. - -- 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
THE KUSHNER-LOCKE COMPANY VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
Additions Balance at Charged to Deductions Balance at Beginning of Costs and Due to End of Period Expenses Write-offs Period ------------------------------------------------ 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 ========== ========= ========== ==========
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: January 27, 2000 /s/ DONALD KUSHNER Donald Kushner Co-Chairman of the Board, Co-Chief Executive Officer and Secretary Dated: January 27, 2000 /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: January 27, 2000 /s/ PETER LOCKE Peter Locke Co-Chairman of the Board and Co-Chief Executive Officer Dated: January 27, 2000 /s/ DONALD KUSHNER Donald Kushner Co-Chairman of the Board, Co-Chief Executive Officer and Secretary Dated: January 27, 2000 /s/ ROBERT SWAN Robert Swan Senior Vice President and Chief Financial Officer Dated: January 27, 2000 /s/ ADELINA VILLAFLOR Adelina Villaflor Controller (Chief Accounting Officer) Dated: January 27, 2000 /s/ IRWIN FRIEDMAN Irwin Friedman Director Dated: January , 2000 Stuart Hersch Director Dated: January 27, 2000 /s/ JOHN LANNAN John Lannan Director
INDEX TO EXHIBITS 3 Articles of Incorporation (A) 4.1 Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of December 1, 1990 pertaining to 10% Convertible Subordinated Debentures Due 2000, Series A (E) 4.2 First Supplemental Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of March 15, 1991 pertaining to 10% Convertible Subordinated Debentures Due 2000, Series A (F) 4.3 Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of December 1, 1990 pertaining to 13-3/4% Convertible Subordinated Debentures Due 2000, Series B (E) 4.4 Warrant agreement between the Company and City National Bank, as Warrant Agent, dated as of March 19, 1991 pertaining to Common Stock Purchase Warrants (F) 4.5 Warrant agreement dated September 5, 1997 between the Company and Allen & Company Incorporated. (U) 4.6 Warrant agreement dated September 5, 1997 between the Company and I. Friedman Equities, Inc. (U) 4.7 Warrant Agreement dated June 27, 1997 between the Company and I. Friedman Equities, Inc. (U) 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. (Y) 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. (Y) 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. (Y) 10.16 Warrant Agreement between the Company and Chatfield Dean & Co., Inc. dated as of November 13, 1992 (J) 10.19 Fiscal Agency Agreement dated March 10, 1994 between and among the Company, Bank America National Trust Company and Bank of America National Trust and Savings Association (K) 10.19.1 Side letter between the Company and BankAmerica Trust Company to the Fiscal Agency Agreement dated March 10, 1994 between and among the Company, BankAmerica Trust Company and Bank of America National Trust and Savings Association (K) 10.20 Warrant Agreement dated March 10, 1994 between the Company and RAS Securities Corp. (K) 10.21 Warrant Agreement dated March 10, 1994 between the Company and I. Friedman Equities, Inc. (K) 10.22 Fiscal Agency Agreement dated July 25, 1994 between and among the Company, Bank America National Trust Company and Bank of America National Trust and Savings Association (L)
10.27 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. (Y) 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of KPMG LLP 27 Financial Data Schedule (Y)
___________ (A) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-18, as amended, effective December 5, 1988 (Commission File No. 33-25101-LA). (B) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1989. (C) Incorporated by reference from the Exhibit to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1990. (D) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-1 (File No. 33-37192), as initially filed on October 5, 1990 or as amended on November 30, 1990. (E) Incorporated by reference from the Exhibits to the Company's Registration Statements on Form S-1, as amended, effective November 30, 1990 (File No. 33-37192), and effective December 20, 1990 (File No. 33- 37193). (F) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended, effective March 20, 1991. (G) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1991. (H) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1991. (I) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1992. (J) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-2, as amended, effective November 12, 1992 (Commission File No. 33-51544). (K) Incorporated by reference from the Exhibits to the Company's Report on Form 10-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. 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/A. PriceWaterhouseCoopers LLP Century City, California January 27, 2000 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/A of The Kushner-Locke Company. KPMG LLP Los Angeles, California January 26, 2000 -----END PRIVACY-ENHANCED MESSAGE-----