-----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, RfcMDYMg4NoAK9zBARFt95Z2o8pAYeM+k0JixLGzkeBoffZlTwwqFw6dOjF0NSWu F5JDwpjmOSVNlhK65H4iAA== 0000912057-96-014277.txt : 19960712 0000912057-96-014277.hdr.sgml : 19960712 ACCESSION NUMBER: 0000912057-96-014277 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960711 SROS: NASD 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: S-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-05089 FILM NUMBER: 96593268 BUSINESS ADDRESS: STREET 1: 11601 WILSHIRE BLVD 21ST FLR CITY: LOS ANGELES STATE: CA ZIP: 95202 BUSINESS PHONE: 3104451111 MAIL ADDRESS: STREET 1: 11601 WILSHIRE BLVD STREET 2: 21ST FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90025 S-2/A 1 S-2A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 11, 1996 REGISTRATION NO. 333-5089 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ THE KUSHNER-LOCKE COMPANY (Exact name of registrant as specified in its charter) CALIFORNIA 95-4079057 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
11601 WILSHIRE BLVD., 21ST FLOOR LOS ANGELES, CALIFORNIA 90025 (310) 445-1111 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) DONALD KUSHNER CO-CHIEF EXECUTIVE OFFICER AND SECRETARY THE KUSHNER-LOCKE COMPANY 11601 WILSHIRE BLVD., 21ST FLOOR LOS ANGELES, CALIFORNIA 90025 (310) 445-1111 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ WITH COPIES TO: Barry L. Dastin, Esq. Felice F. Mischel, Esq. Russ A. Cashdan, Esq. Gregory Sichenzia, Esq. Kaye, Scholer, Fierman, Hays & Handler, LLP Schneck, Weltman, Hashmall & Mischel LLP 1999 Avenue of the Stars, Suite 1600 1285 Avenue of the Americas Los Angeles, CA 90067 New York, New York 10019
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If the Registrant elects to deliver its latest annual report to security-holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - ---------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - ---------------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CALCULATION OF REGISTRATION FEE
AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF BE OFFERING PRICE AGGREGATE REGISTRATION TITLE OF SECURITIES TO BE REGISTERED REGISTERED (1) PER UNIT (1) OFFERING PRICE (1) FEE (1) Units(2)................................ 4,370,000 Common Stock, no par value(2)........... 13,110,000 Class C Redeemable Common Stock Purchase Warrants(2)............................ 4,370,000 Underwriter's Warrant(3)................ 1 Common Stock, no par value(3)........... 1,311,000 Class C Redeemable Common Stock Purchase Warrants(3)............................ 4,370,000 Consultant's Warrant(4)................. 1 Common Stock, no par value(4)........... 131,100 Class C Redeemable Common Stock Purchase Warrants(4)............................ 43,700 Common Stock, no par value(5)........... 1,331,734 Total................................. $14,390,000 $4,963
(1) Pursuant to Rule 457(o) promulgated under the Securities Act of 1933, the registration fee is calculated on the basis of the maximum aggregate offering price of all the securities listed in the "Calculation of Registration Fee" table. The number of shares, warrants and units are included as estimates solely for purposes of calculating the registration fee. (2) An aggregate of $11,500,000 of Units (the "Units"), each Unit consisting of two shares of common stock, no par value (the "Common Stock"), and one Class C Redeemable Common Stock Purchase Warrant, will be offered to the public, including an aggregate of $1,500,000 of Units which may be purchased to cover over-allotments, if any. (3) An aggregate of $1,150,000 of Units issuable upon exercise of the Underwriter's Warrant plus such additional number of shares, if any, as may be issuable pursuant to the anti-dilution provisions thereof. (4) An aggregate of $115,000 of Units issuable upon exercise of the Consultant's Warrant plus such additional number of shares, if any, as may be issuable pursuant to the anti-dilution provisions thereof. (5) An aggregate of $1,625,000 of Common Stock which may be sold from time to time by certain Selling Security Holders. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. EXPLANATORY NOTE This registration statement contains two prospectuses. The first prospectus forming a part of this registration statement is to be used in connection with an $11.5 million underwritten public offering of up to units (the "Units"), each Unit consisting of two shares of common stock, no par value (the "Common Stock"), of The Kushner-Locke Company (the "Company") and one Class C Redeemable Common Stock Purchase Warrant (the "Warrants" or "Class C Warrants"), including Units subject to the Underwriter's Over-allotment Option, plus Units subject to warrants sold to the Underwriter and a consultant of the Company. Such prospectus immediately follows the Cross Reference Sheet. The second prospectus forming a part of this registration statement is to be used in connection with the sale by certain non-affiliated shareholders of the Company of up to 1,331,734 shares of Common Stock. Such second prospectus will consist of (i) the second cover page immediately following the first prospectus, (ii) pages 3 through 49 of the first prospectus (other than the sections entitled "Underwriting," "Concurrent Offering" and "Legal Matters") and pages F-1 through F-30 of the first prospectus, (iii) pages SS-1 through SS-3 (which will appear after "Description of Securities" in place of the sections entitled "Underwriting," "Concurrent Offering" and "Legal Matters") and (iv) the back cover page, which immediately follows the back inside cover page of the first prospectus. THE KUSHNER-LOCKE COMPANY CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-2
FORM S-2 REGISTRATION STATEMENT ITEM AND HEADING HEADING IN PROSPECTUS - ----------------------------------------- ----------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus................ Facing Page; Cross Reference Sheet; Outside Front Cover Page; Available Information 2. Inside Front and Outside Back Cover Pages of Prospectus............... Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................... Prospectus Summary; The Company; Risk Factors; Selected Consolidated Financial Data 4. Use of Proceeds.................... Prospectus Summary; Use of Proceeds 5. Determination of Offering Price.... Underwriting 6. Dilution........................... Not Applicable 7. Selling Security Holders........... Concurrent Offering; Selling Security Holders 8. Plan of Distribution............... Outside Front Cover Page; Underwriting; Plan of Distribution 9. Description of Securities to be Registered........................ Prospectus Summary; Capitalization; Description of Securities 10. Interests of Named Experts and Counsel........................... Not Applicable 11. Information with Respect to the Registrant........................ Outside and Inside Front Cover Pages; Prospectus Summary; The Company; Risk Factors; Use of Proceeds; Market For Common Stock and Class A Warrants and Dividends; Capitalization; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Description of Securities; Experts; Consolidated Financial Statements 12. Incorporation of Certain Information by Reference.......... Incorporation of Certain Documents by Reference 13. Disclosure of Commission Position on Indemnification of Securities Act Liabilities . Underwriting
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 11, 1996 PROSPECTUS THE KUSHNER-LOCKE COMPANY LOGO THE KUSHNER-LOCKE COMPANY UNITS $ PER UNIT EACH UNIT CONSISTING OF TWO SHARES OF COMMON STOCK AND ONE CLASS C REDEEMABLE COMMON STOCK PURCHASE WARRANT Each unit offered hereby consists of two shares of common stock, no par value (the "Common Stock"), of The Kushner-Locke Company, a California corporation (the "Company"), and one Class C Redeemable Common Stock Purchase Warrant (the "Warrant" or the "Class C Warrant") of the Company (the "Units"). The shares of Common Stock and Warrants offered hereby are expected to trade separately and not as Units beginning on the effective date of the registration statement of which this Prospectus is a part (the "Effective Date"). See "Underwriting." Each Warrant expires on , 2001, five years after the Effective Date, and entitles the holder, to purchase one share of Common Stock for 120% of the price of the Common Stock component of the Unit on the Effective Date as agreed to by the Company and the Underwriter. The exercise price of the Warrants is subject to adjustment in certain events pursuant to the anti-dilution provisions thereof. The Warrants are redeemable at a price of $.10 per Warrant commencing one year after the Effective Date (or sooner with the consent of the Underwriter) and prior to their expiration; provided that (i) not less than 30 days prior written notice of the date of redemption is given to the Warrant holders; (ii) the closing high bid price (the "Closing Price"), for the 10 consecutive trading days ending on the third business day prior to the date on which the Company gives notice has been at least 150% of the then exercise price of the Warrants, subject to adjustment for certain events; and (iii) Warrant holders shall have exercise rights until the close of the business day preceding the date fixed for redemption. See "Description of Securities -- Class C Warrants." The Common Stock is traded on the Nasdaq National Market ("NNM") under the symbol "KLOC" and on the Pacific Stock Exchange under the symbol "KLO." On July 9, 1996, the closing high bid price of the Common Stock as reported on the NNM was $1.31 per share. Prior to this offering (the "Offering"), there has been no public market for the Class C Warrants, and there can be no assurance that a public market will develop or be sustained after the completion of the Offering. The offering price of the Units and the exercise price of the Warrants were established by negotiations between the Company and the Underwriter. See "Underwriting." The Company intends to amend its NNM listing in connection with the Common Stock and to apply for quotation of the Warrants on the NNM. THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK FACTORS" ON PAGE 9. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING DISCOUNTS PROCEEDS TO THE PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)(3) Per Unit......................... $ $ $ Total............................ $10,000,000 $1,000,000 $9,000,000
(FOOTNOTES ON PG. 3) The Units are offered on a "firm commitment" basis by the Underwriter when, as and if issued to the Underwriter, subject to prior sale and certain other conditions and legal matters. The Underwriter reserves the right to withdraw, cancel or modify the Offering and to reject any order in whole or in part. It is expected that delivery of the certificates will be made against payment at the offices of Lew Lieberbaum & Co., Inc., 600 Old Country Road, Suite 518, Garden City, New York 11530 on or about July , 1996. LEW LIEBERBAUM & CO., INC. The Date of this Prospectus is July , 1996 [NARRATIVE DESCRIPTION OF PHOTOS] [PHOTO OF COMPANY'S ANNUAL REPORT COVER PAGE] [PHOTOS OF CERTAIN OF THE ACTORS AND ACTRESSES FROM SOME OF THE COMPANY'S PRODUCTS, INCLUDING THE NAMES OF SUCH ACTORS AND ACTRESSES AND THE NAMES OF THE APPLICABLE PRODUCTS] 2 - ------------------------ (1) Does not include additional compensation to the Underwriter consisting of (i) a non-accountable expense allowance equal to 3% of the Price to the Public of the Units, or $300,000 ($345,000 if the Underwriter's Over-allotment Option (as defined below) is exercised in full), of which $56,000 has been paid to date; (ii) a warrant to be sold to the Underwriter for nominal consideration to purchase one Unit for each 10 Units actually sold in the Offering (the "Underwriter's Warrant"), at a price of $ per Unit, subject to the anti-dilution provisions thereof, exercisable during the four years commencing one year after the Effective Date; and (iii) a two-year consulting agreement providing for fees totaling $144,000, of which $72,000 is payable on the closing of the Offering and the balance of $72,000 is payable monthly at the rate of $6,000 commencing on the closing of the Offering. In addition, the Company has agreed to pay a commission to the Underwriter upon the exercise of the Warrants equal to 4% of the exercise price per Warrant under certain circumstances and to indemnify the Underwriter against certain liabilities, including those arising under the Securities Act of 1933 (the "Securities Act"). See "Underwriting." (2) After deducting Underwriting discounts and commissions, but before payment of the Underwriter's non-accountable expense allowance in the amount of $300,000 ($345,000 if the Over-allotment Option is exercised in full) and other expenses of the Offering (estimated at $515,000) payable by the Company. See "Underwriting." (3) The Company has granted to the Underwriter an option, exercisable within 45 days after the Effective Date, to purchase up to additional Units, upon the same terms and conditions set forth above, solely to cover over-allotments, if any (the "Over-allotment Option"). If the Over-allotment Option is exercised in full, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to the Company will be $11,500,000, $1,150,000 and $10,350,000, respectively. See "Underwriting." ------------------------ IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 3 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at 7 World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company's Common Stock is listed on the NNM. Such materials can also be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. Additional information regarding the Company and the Units offered hereby is contained in the Registration Statement on Form S-2 (of which this Prospectus is a part) and the exhibits thereto filed with the Commission under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus does not contain all the information set forth in the Registration Statement, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information pertaining to the Company and the Units offered hereby, reference is made to the Registration Statement, and to the exhibits and schedules thereto and the financial statements filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance such statements are qualified in their entirety by reference to the copy of such contract or other document filed as an exhibit to the Registration Statement. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Company incorporates by reference the following documents heretofore filed with the Commission pursuant to the Exchange Act: 1. Annual Report of the Company on Form 10-K for the fiscal year ended September 30, 1995; 2. Amendment to Annual Report of the Company on Form 10-K/A for the fiscal year ended September 30, 1995; 3. Quarterly Report of the Company on Form 10-Q for the fiscal quarter ended December 31, 1995; 4. Quarterly Report of the Company on Form 10-Q for the fiscal quarter ended March 31, 1996; and 5. Proxy Statement of the Company, dated April 18, 1996. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute part of this Prospectus. Copies of all documents incorporated by reference herein (other than exhibits to such documents unless such exhibits are specifically incorporated by reference herein) will be provided without charge to each person, including any beneficial owner, who receives a copy of this Prospectus on the request of such person made to The Kushner-Locke Company, 11601 Wilshire Blvd., 21st Floor, Los Angeles, California 90025, tel: (310) 445-1111, Attention: Donald Kushner. 4 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE "COMPANY" ARE TO THE COMPANY AND ITS SUBSIDIARIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN CERTAIN FORWARD LOOKING STATEMENTS, INCLUDING BUT NOT LIMITED TO THOSE UNDER "CERTAIN FORWARD LOOKING STATEMENTS," INCLUDED ELSEWHERE HEREIN. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THE OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. THE COMPANY GENERAL The Kushner-Locke Company (the "Company") is a leading independent entertainment company principally engaged in the development, production and distribution of original feature films and television programming. The Company's feature films are developed and produced for the made-for-video, pay cable and theatrical motion picture markets. The Company's television programming has included television series, mini-series, movies-for-television, animation and reality and game show programming for the major networks, cable television, first-run syndication and international markets. The Company established its feature film production operations in April 1993. In September 1994, the Company employed certain new, experienced international theatrical film sales personnel to expand the Company into foreign theatrical distribution. In 1995, the Company formed KLC/New City Tele-Ventures ("KLC/New City") to acquire films for distribution through emerging new delivery systems, including pay cable, pay-per-view, basic cable, video-on-demand and satellite. The Company's feature film activities can be grouped into three areas: higher-budget films intended for wide-screen domestic theatrical release (historically, no more than one project per year), low-to-moderate budget films released direct-to-video or on pay cable television and films and film rights acquired for distribution only. In certain cases, the Company's low-to-moderate budget films may have a limited theatrical release or a pay cable premiere before being released in home video. For fiscal 1996, in the higher-budget film category, the Company's feature film THE ADVENTURES OF PINOCCHIO, starring Martin Landau, Jonathan Taylor Thomas and a puppet from Jim Henson's Creature Shop and budgeted at approximately $29 million, is scheduled to be released theatrically on July 26, 1996 in the U.S. by New Line Pictures (a division of Turner Entertainment Co., "New Line"). The Company's lower-budget feature slate for 1996 includes approximately 20 films, including SERPENT'S LAIR starring Jeff Fahey, THE GRAVE starring Gabrielle Anwar, Eric Roberts and Craig Sheffer, FREEWAY executive produced by Oliver Stone and starring Reese Witherspoon, Kiefer Sutherland and Brooke Shields, WHOLE WIDE WORLD starring Vincent D'Onofrio and Renee Zewelleger and being distributed in the U.S. by Sony Classics, THE LAST TIME I COMMITTED SUICIDE starring Keanu Reeves, five children's fantasy adventure films for Paramount Pictures under Paramount Pictures' Moonbeam label and two animated feature film sequels to the Company's 1988 video release THE BRAVE LITTLE TOASTER for a division of The Walt Disney Company. The Company's distribution activities consist primarily of foreign distribution of product produced, overseen or acquired by the Company and, through KLC/ New City, domestic distribution of 60 low-budget feature films to the pay-per-view, pay cable, basic cable and other ancillary markets. On May 6, 1996, the Company and Decade Entertainment ("Decade") entered into an agreement to produce four theatrical action motion pictures. The motion pictures will be produced, subject to approval by the Company of certain creative aspects of such movies, by Decade and executive produced by Joel Silver (producer of EXECUTIVE DECISION and the LETHAL WEAPON and two DIE HARD action pictures) and Richard Donner (director/producer of THE OMEN and SUPERMAN). Under the agreement, the Company has agreed to guarantee payment of $3,200,000 per picture payable upon the delivery of the "mandatory delivery items" (as defined in such agreement) for each picture in consideration of 5 receipt of foreign distribution rights. The agreement may be extended, at Decade's option, to include a fifth picture. The initial two films under the agreement are WHITE ROSE and MADE MEN, neither of which yet has a scheduled release date. Since its inception 1983, the Company has produced or distributed over 1,000 hours of original television programming, including various television series, movies-for-television and mini-series. The Company's movies-of-the-week currently in production or which have aired recently include PRINCESS IN LOVE, starring Julie Cox in the book version of Princess Diana's affair, for CBS, EVERY WOMAN'S DREAM starring Jeff Fahey for CBS, A HUSBAND, A WIFE AND A LOVER starring Judith Light for CBS and ECHO starring Jack Wagner for ABC. In addition, in pre-production for NBC is the fifth sequel (and the third produced by the Company) to the JACK REED movies starring Brian Dennehy. The Company has produced a one-hour prime time pilot as a potential mid-season replacement series for ABC entitled THE GUN written and directed by Emmy award winner Jim Sadwith starring Rosanna Arquette and Peter Horton. The pilot was co-executive produced by Robert Altman (director of M*A*S*H., THE PLAYER and PRET-A-PORTER). As of March 31, 1996, the Company had 10 movies-for-television and various television series in different stages of development for potential production. The Company's executive offices are located at 11601 Wilshire Boulevard, Suite 2100, Los Angeles, California 90025, and its telephone number is (310) 445-1111. THE OFFERING Securities offered by the Units, each consisting of two shares of Company.......................... Common Stock (the "Shares") and one Class C redeemable Common Stock purchase warrant entitling the holder to purchase one share of Common Stock at a price of 120% of the price of the Common Stock component of the Unit on the Effective Date as agreed to by the Company and the Underwriter (the "Warrant" or the "Class C Warrant"). The Warrants are exercisable until July , 2001. See "Description of Securities." (1) Securities Being Registered for the Account of Selling Security Holders.......................... 1,331,734 shares of Common Stock ("Selling Security Holders' Shares") are being registered pursuant to a separate prospectus included in the registration statement of which this Prospectus is a part and may be sold by certain non-affiliated security holders (the "Selling Security Holders"). The Company will not receive any proceeds from the sale of the Selling Security Holders' Shares but will receive proceeds upon the exercise, if at all, of all or a portion of warrants to purchase 700,000 shares of Common Stock included in the Selling Security Holders' Shares. The Selling Security Holders' Shares are not being underwritten by the Underwriter. Common Stock outstanding prior to the offering..................... 40,218,618 shares (2) Common Stock to be outstanding after the offering............... shares (1)(2) Estimated net proceeds............ $8,185,000 (1)(3)
6 Use of proceeds................... To repay the 5% Convertible Subordinated Notes and for general corporate purposes. See "Use of Proceeds." Risk Factors...................... An investment in the Units offered hereby involves a high degree of risk. See "Risk Factors." Trading symbols: Common Stock...................... KLOC (NNM); KLO (Pacific) Class C Warrants (Proposed NNM Symbol)............ KLOCZ (4)
- ------------------------ (1) Does not include the sale of up to Units which are subject to the Over-allotment Option. See "Underwriting." (2) The number of outstanding shares of Common Stock is as of July 8, 1996, and does not include approximately 13,195,094 shares of Common Stock reserved for issuance in respect of possible conversion of the Company's outstanding Convertible Subordinated Debentures, 4,122,096 shares of Common Stock reserved for issuance in respect of outstanding options and 5,522,808 shares of Common Stock reserved for issuance in respect of outstanding warrants. Also does not include shares issuable upon exercise of the Warrants, or Common Stock or Warrants issuable upon exercise of warrants sold to the Underwriter and a consultant to the Company. If the Over-allotment Option is exercised in full, and all outstanding options, warrants and convertible securities are thereafter exercised or converted into Common Stock, the Company would have approximately shares outstanding, assuming approximately 631,734 Bonus Shares were issued in connection with the repayment of the Company's 5% Convertible Subordinated Notes. See "Risk Factors -- Limited Number of Shares of Common Stock Available After Offering." (3) After deducting expenses of the offering estimated at $815,000. (4) The Company's Class A Warrants are currently trading on the NNM under the symbol "KLOCW." 7 SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA (in thousands except per share amounts) CONSOLIDATED STATEMENT OF OPERATIONS DATA:
SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, MARCH 31, ----------------------------------------------------- -------------------- 1995 1994 1993 1992 1991 1996 1995 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) Operating Revenues.......... $ 20,407 $ 50,736 $ 42,487 $ 24,052 $ 28,006 $ 29,337 $ 11,614 Earnings (Loss) from Operations................. (835) (7,424) (1,807) 1,529 3,152 3,004 469 Net Earnings (Loss)......... $ (3,975) $ (6,765) $ (1,826) $ 244 $ 1,445 $ 1,140 $ (1,003) Net Earnings (Loss) Per Common and Common Equivalent Shares Outstanding................ $ (0.13) $ (0.23) $ (0.06) $ 0.01 $ 0.08 $ 0.03 $ (0.03) Weighted Average Shares Outstanding................ 31,713 29,373 28,372 20,958 17,846 35,961 31,159
CONSOLIDATED BALANCE SHEET DATA:
AT MARCH 31, 1996 ------------------------------------------ ACTUAL PRO FORMA (1) AS ADJUSTED(2) ----------- ------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Cash and cash equivalents...................................... $ 3,060 $ 4,367 $ 11,052 Restricted Cash................................................ 2,420 2,420 2,420 Accounts Receivable, Net....................................... 18,484 18,484 18,484 Film Costs, Net of Accumulated Amortization.................... 75,022 75,022 75,022 Total Assets................................................... 102,184 103,491 110,176 Bank Line of Credit............................................ 15,000 15,000 15,000 Notes Payable.................................................. 16,690 16,690 16,690 Convertible Subordinated Debentures, Net....................... 16,110 17,417 16,110 Total Liabilities.............................................. 80,085 81,392 80,085 Stockholders' Equity........................................... $ 22,099 $ 22,099 $ 30,091 ----------- ------------- -------------- ----------- ------------- --------------
- ------------------------ (1) On May 10, 1996 the Company completed an offering and sale of $1,500,000 of its 5% Convertible Subordinated Notes (the "Bridge Notes") pursuant to a private placement. As part of the transaction, purchasers of the Bridge Notes have the right to receive payment in full of the Bridge Notes upon the closing of this Offering together with issuance of shares of Common Stock (the "Bonus Shares") equal in value to 50% of the principal amount of the Bridge Notes as determined based on the closing high bid price per share of Common Stock on the NNM on the Effective Date. The issuance of the Bonus Shares will result in approximately a $750,000 charge to interest expense. This interest expense will be amortized over the estimated term of the Bridge Notes beginning in May 1996 and, in any event, will be fully amortized at the date of issuance of the Bonus Shares. The Company incurred $193,000 of issuance costs in connection with such transaction. See "Use of Proceeds." (2) Gives effect to the sale by the Company of $10 million of Units, net of discounts, commissions and expenses of the Company in connection with the Offering, and the repayment by the Company of the Bridge Notes. 8 RISK FACTORS Prospective investors should consider carefully the following factors, as well as all of the other information set forth in this Prospectus, in evaluating an investment in the Units. 1. LIQUIDITY AND FINANCING REQUIREMENTS. The Company's business is capital intensive. The Company has experienced substantial negative cash flows from operating activities over the past three fiscal years which have been offset by equity and debt financings. As the Company expands its production and distribution activities, it may continue to experience negative cash flows from operating activities. In such circumstances, the Company may be required to fund at least a portion of production and distribution costs, pending receipt of anticipated future licensing revenues, from working capital, including its line of credit, or from additional debt or equity financings from outside sources. The Company will have a limited number of shares of Common Stock available after the completion of this Offering which may restrict or preclude additional equity financings. See "-- Limited Number of Shares of Common Stock Available After Offering." The Company has outstanding approximately $4.8 million of corporate guarantees on certain productions which project loans come due during the next four months. Any required payments on such guarantees may negatively impact the Company's liquidity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Production/Distribution Loans." On June 25, 1996, the Company closed a $40 million syndicated revolving credit agreement with a group of banks led by Chemical Bank ("Chemical"). See "The Company -- Recent Developments." If the funds available to the Company under such new credit agreement based upon the borrowing base formula set forth therein or from other sources prove to be insufficient or unavailable for any reason, the Company may be required to seek other sources of financing to meet its working capital requirements during the next 12 months. There is no assurance that the Company will be able to obtain such financing or that such financing, if available, will be on terms satisfactory to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources - -- Summary." 2. VARIABILITY OF QUARTERLY RESULTS; PRIOR LOSSES. The Company's operating revenues, cash flow and net earnings historically have fluctuated significantly from quarter to quarter, depending in large part on the delivery or availability dates of its programs and product and the amount of production costs incurred and amortized in the period. Therefore, year-to-year comparisons of quarterly results may not be meaningful and quarterly results during the course of a fiscal year may not be indicative of results that may be expected for the entire fiscal year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results of Operations." In addition, primarily as a result of significant net losses in fiscal 1993, 1994 and 1995, the Company had an accumulated deficit of $3.0 million at March 31, 1996. 3. INCREASED INTEREST EXPENSE. Increased borrowing by the Company under its new syndicated revolving credit agreement with Chemical will most likely increase interest expense and adversely affect the results of operations of the Company unless the Company is able to profitably use such increased borrowings. 4. DEPENDENCE ON A LIMITED NUMBER OF PROJECTS. The Company is dependent on a limited number of television programs, films and other projects that change from period to period for a substantial percentage of its revenues. The change in projects from period to period is due principally to the opportunities available to the Company and to audience response to its programs and films, which are unpredictable and subject to change. For the six months ended March 31, 1996, 7 projects accounted for 60% of the total revenue for such fiscal quarter. For the fiscal year ended September 30, 1995, 6 other projects accounted for approximately 66% of the total revenue for such fiscal year. The loss of a major project, unless replaced by new projects, or the failure or less-than-expected performance of a major project (such as the Company's upcoming major feature film release, THE ADVENTURES OF PINOCCHIO) could have a material adverse effect on the Company's results of operations and financial condition as well as the market price of the Company's securities. There is no assurance that the 9 Company will continue to generate the same level of new projects or that any particular project released by the Company will be successful. See "The Company - -- Certain Forward Looking Statements -- The Adventures of Pinocchio." 5. CERTAIN ACCOUNTING POLICIES; AMORTIZATION OF FILM COSTS. The Company generally recognizes revenues when a program or film is either delivered or available for delivery. Capitalized production costs are amortized each period in the ratio that the current period's gross revenues bear to management's estimate of anticipated total gross revenues from the program or film during its useful life. Accordingly, in the event management reduces its estimate of the future revenues of a program or film, a significant write-down and a corresponding decrease in the Company's earnings in the quarter and fiscal year in which such write-down is taken could result. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results of Operations." 6. LIMITED NUMBER OF SHARES OF COMMON STOCK AVAILABLE AFTER OFFERING. Upon completion of this Offering, assuming full exercise of the Underwriter's Over-allotment Option, there will be 77,632,406 shares of Common Stock issued and outstanding or reserved for issuance (assuming 3,800,000 Units are sold in this Offering and the Over-allotment Option is exercised in full) out of a total of 80,000,000 shares of Common Stock authorized under the Company's Articles of Incorporation. Accordingly, the Company will be substantially restricted in its ability to issue additional shares of Common Stock, including issuances to raise capital or acquire assets using Common Stock as the means of payment. The Company can only increase its authorized capital stock by amending its Articles of Incorporation. While the Company intends to increase its authorized but unissued capital stock at its next meeting of shareholders, such an amendment requires the approval of the shareholders and, even if approved, any delay in approval could cause the Company to be unable to raise additional equity required for its operations or to miss an available opportunity to raise additional capital or to acquire assets or otherwise. In addition, there can be no assurance that the shareholders of the Company will vote to increase the authorized capital of the Company. 7. DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts and abilities of Donald Kushner and Peter Locke, the Company's founders and principal executive officers, and certain other members of senior management. The Company has entered into employment agreements with each of Messrs. Kushner and Locke, which agreements expire in September 1998. The Company is currently in negotiations with Messrs. Kushner and Locke to extend their employment agreements through September 2000. There is no assurance that such extension will be agreed to or as to the terms such extensions will be made, although it is likely that such executive officers will require increased compensation. The Company has obtained and is the beneficiary of term life insurance policies on each of the lives of Messrs. Kushner and Locke in the amount of $5,000,000. The loss of the services of either Messrs. Kushner or Locke, or of other key personnel, could have a material adverse effect on the business of the Company if suitable replacements could not be found quickly. The new syndicated revolving credit agreement with Chemical also includes as events of default the failure of either Messrs. Kushner or Locke to be the Chief Executive Officer of the Company or if any person or group acquires ownership or control of capital stock of the Company having voting power greater than the voting power at the time controlled by Messrs. Kushner and Locke combined (other than any institutional investor able to report its holdings on Schedule 13G which holds no more than 15% of such voting power). There is no assurance that such events of default will not occur or that if it occurs, that the banks will waive such default. 8. PRODUCTION DEFICITS. The revenues from pre-sales, output arrangements and the initial licensing of television programming or film, particularly in the case of license fees for network series, may be less than the associated production costs. The ability of the Company to cover the production costs of particular programming or films is dependent upon the availability, timing and the amount of such revenues obtained from third parties, including revenues from foreign or ancillary markets where available. In any event, the Company generally is required to fund at least a portion of production costs, pending receipt of such revenues, out of its lines of credit or its working capital, which will include the net proceeds of this Offering. Although the Company's strategy generally is not 10 to commence principal photography without first obtaining commitments which cover all or substantially all of the budgeted production costs, from time to time the Company may commence principal photography without having obtained such commitments. In the past, the Company has commenced principal photography on a limited number of projects prior to first obtaining commitments which cover substantially all of the budgeted production costs but was able subsequently to obtain commitments to cover substantially all of such costs. Each such project was one which the Company believed would be successful and for which the Company determined it was necessary to begin principal photography on an expedited basis. There is no assurance that the Company will be able to cover project costs in the future if it was to undertake projects prior to obtaining adequate pre-sales. 9. TELEVISION AND FEATURE FILM INDUSTRIES. The production and distribution of television programs and feature films involves a substantial degree of risk. The success of an individual television program or feature film depends upon subjective factors, such as the personal tastes of the public and critics and alternative forms of entertainment, and does not necessarily bear a direct correlation to the costs of production and distribution. Therefore, there is a risk that some or all of the Company's projects will not be successful, resulting in costs not being recouped and losses being incurred. In addition, typically for television projects, the networks pay license fees equal to approximately 80-90% of the production budget as the project is being produced. The remainder of the production budget is usually covered by foreign sales which are typically paid when the project is made available or delivered to such entities. However, with feature film production, approximately 40-50% of the production budget is covered by domestic sales which are typically paid in thirds upon the project being available for release in different media (see "Business -- Motion Picture Distribution"). The remainder of the production budget is usually financed by foreign sales which are typically paid when the project is made available or delivered to such entities. Accordingly, as the Company has shifted a significant portion of its product mix from its traditional base of network-television programming to feature films (for the first six months of fiscal 1996 approximately 48% of revenues were from feature film activities versus approximately 34% of revenues for fiscal 1995 and 21% of revenues for fiscal 1994), the Company has become subject to the increased risk of feature film activities, including the longer lead times for completion of new product and receipt of related cash flow from exploitation of such product. 10. COMPETITION. Competition in the television and motion picture industries is intense. The Company competes with the major motion picture studios, numerous independent producers of television programming and feature films and the major U.S. networks for the services of actors, other creative and technical personnel and creative material and, in the case of network television programming, for a limited number of time slots for episodic series, movies-of-the-week and mini-series. Many of the Company's principal competitors have greater financial, distribution, technical and creative resources than the Company. 11. GOVERNMENT REGULATION. The Federal Communications Commission ("FCC") repealed its financial interest and syndication rules, effective as of September 21, 1995. Those FCC rules, which were adopted in 1970 to limit television network control over television programming and thereby foster the development of diverse programming sources, had restricted the ability of the three established, major U.S. television networks (I.E., ABC, CBS and NBC), to own and syndicate television programming. The ultimate impact of the repeal of the FCC's financial interest and syndication rules on the Company's operations cannot be predicated at the present time, although there has been an increase in in-house productions of programming for the networks' own use and potentially a decrease of programming from independent suppliers such as the Company. Under the Telecommunications Act of 1996 enacted in February 1996 (the "1996 Act"), manufacturers of television set equipment will be required to equip all new television receivers with a so-called "V-Chip" which would allow for parental blocking of violent, sexually-explicit or indecent programming based on a rating for any given program that would be broadcast along with the program. Unless the television industry establishes a voluntary ratings system by February 1998, the FCC is directed 11 by the 1996 Act to develop a ratings system based upon the recommendations of an advisory committee selected by the FCC. A coalition of various segments of the entertainment industry has announced plans to devise a voluntary industry ratings code for rating video programming with respect to violent, sexual or indecent content. The industry coalition has announced its intent to have these new guidelines in place before February 1997. Other provisions of the 1996 Act revise the multiple broadcast ownership rules, allow local exchange telephone companies to offer multichannel video programming service, subject to certain regulatory requirements, and allow for cable companies to offer local exchange telephone service. The impact on the Company of the changes brought about by the 1996 Act and by accompanying changes in FCC rules cannot be predicted at the present time, although it is expected that there will be an increase in the demand for video programming product as a result of the likelihood that these regulatory changes will facilitate the advent of additional exhibition sources for such programming. However, it is possible that recent alliances of certain program producers and television station group owners, coupled with the recent FCC rule revisions allowing a single television station licensee to own television stations reaching up to 35% of the nation's television households, may place additional competitive pressures on program suppliers, such as the Company, to the extent they are unaligned with the major networks or any television station group owners. 12. LABOR RELATIONS. The Company and certain of its subsidiaries are parties to several collective bargaining agreements. The Company's union contracts are industry-wide and its labor relations are not entirely dependent on its activities or decisions alone. Future revenues and earnings could be adversely affected by a labor dispute or strike. 13. BROAD DISCRETION AS TO USE OF PROCEEDS. The Company's management will have complete discretion in determining the use of most of the net proceeds of this Offering as the majority of the net proceeds will be added to working capital. See "Use of Proceeds." 14. ABSENCE OF CASH DIVIDENDS. The Company has never paid any cash dividends on the Common Stock and has no present intention to declare or pay cash dividends. 15. NO ASSURANCE OF PUBLIC MARKET. The Common Stock is currently listed on the NNM. The Class A Warrants are currently listed on the NNM under the symbol "KLOCW." The Company expects the Class C Warrants to be listed on the NNM upon consummation of this Offering. There can be no assurance that such listing will be obtained, will be maintained, that an adequate trading market for the Class C Warrants will develop after this Offering or, if any such market develops, that it will be maintained. There can be no assurance that, in subsequent trading, the Company's securities will not trade at a level below the price being offered hereby. 16. SHARES AVAILABLE FOR FUTURE SALE. Substantially all of the shares of Common Stock to be outstanding after this Offering, and, subject to issuance, the 26,639,998 shares of Common Stock issuable upon exercise of outstanding options or warrants (excluding the warrants being sold to the Underwriter and a consultant to the Company) or issuable upon conversion of outstanding convertible securities will be freely tradeable in the public markets, in certain cases pursuant to a registration statement or available exemption from registration. Of such shares issuable upon exercise or conversion of outstanding securities, approximately 14,423,523 shares are issuable at or below $1.27 per share, 5,991,466 additional shares are issuable at or below $1.58 per share and 2,300,000 additional shares are issuable at or below $2.00 per share. Approximately 7,657,875 shares held by affiliates will be subject to a six month lock-up in favor of the Underwriter. See "Underwriting." The availability of shares for public sale, or the perception of such availability, may have a depressive effect on the market price of the Common Stock. 17. CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE CLASS C WARRANTS. Purchasers of the Class C Warrants will be able to exercise the Class C Warrants only if a current prospectus relating to the securities underlying the Class C Warrants is then in effect and only if such securities are qualified for sale or exempt from qualification under the applicable securities laws of the 12 states in which the various holders of Class C Warrants reside. Although the Units will not knowingly be sold to purchasers in jurisdictions in which they are not registered or otherwise qualified for sale, purchasers may buy Common Stock or Class C Warrants in the aftermarket or may move to jurisdictions in which the shares of Common Stock issuable upon exercise of the Class C Warrants are not so registered or qualified during the period that the Class C Warrants are exercisable. The Company will be unable to issue the Common Stock to those persons desiring to exercise their Class C Warrants if a current prospectus covering the securities issuable upon the exercise of the Class C Warrants is not kept effective or if such securities are not qualified or exempt from qualification in the states in which the holders of the Class C Warrants reside. In addition, the Class C Warrants may not be called for redemption unless a current prospectus relating to the underlying securities is then in effect. Although the Company will use its best efforts to maintain a current prospectus covering the securities underlying the Class C Warrants, there can be no assurance that the Company will be able to do so. 18. RELATIONSHIP OF UNDERWRITER TO TRADING. The Underwriter may act in a brokerage capacity with respect to the purchase or sale of Common Stock or Class C Warrants in the over-the-counter market where each will trade. Under Rule 10b-6 promulgated under the Exchange Act, except as described below the Underwriter and any soliciting broker-dealer will be prohibited from engaging in any market-making activities or soliciting brokerage activities with regard to the Company's securities during a period beginning nine business days prior to the commencement of any such solicitation and ending on the later of the termination of such solicitation activity or the termination (by waiver or otherwise) of any right that the Underwriter and soliciting broker-dealers may have to receive a fee for soliciting the exercise of the Class C Warrants. As a result, the Underwriter and soliciting broker-dealers may be unable to continue to make a market for the Company's securities during certain periods while the Class C Warrants are exercisable except for passive market making allowed in accordance with Rule 10b-6A promulgated by the Commission under the Exchange Act. Such a limitation, while in effect, could impair the liquidity and market price of the Company's securities. See "Underwriting." 19. POSSIBLE REDEMPTION OF CLASS C WARRANTS. The Class C Warrants are redeemable by the Company, at a redemption price of $.10 per Class C Warrant, upon at least 30 days' prior written notice, commencing on July , 1997 (one year after the Effective Date) (or sooner with the consent of the Underwriter), if the average of the closing high bid prices of the Common Stock as reported on the NNM (or the last sale prices if listed on a national securities exchange) exceeds 150% of the then exercise price of the Class C Warrants (initially $ ) for 10 consecutive trading days ending on the third day prior to the date on which notice of redemption is given, and provided that a current prospectus relating to the underlying securities is then in effect. If the Class C Warrants are redeemed, Class C Warrant holders will lose their right to exercise the Class C Warrants except during such 30 day redemption period. Redemption of the Class C Warrants could force the holders to exercise the Class C Warrants at a time when it may be disadvantageous for the holders to do so or to sell the Class C Warrants at the then market value of the Class C Warrants at the time of redemption. See "Description of Securities -- Class C Warrants." 13 THE COMPANY GENERAL The Kushner-Locke Company (the "Company") is a leading independent entertainment company principally engaged in the development, production and distribution of original feature films and television programming. The Company's feature films are developed and produced for the made-for-video, pay cable and theatrical motion picture markets. The Company's television programming has included television series, mini-series, movies-for-television, animation and reality and game show programming for the major networks, pay cable television, first-run syndication and international markets. The Company established its feature film production operations in April 1993. In September 1994, the Company employed certain new, experienced international theatrical film sales personnel to expand the Company into foreign theatrical distribution. In 1995, the Company formed KLC/New City Tele-Ventures ("KLC/New City") to acquire films for distribution through emerging new delivery systems, including pay cable, pay-per-view, basic cable, video-on-demand and satellite. The Company's feature film activities can be grouped into three areas: higher-budget films intended for wide-screen domestic theatrical release (historically, no more than one project per year), low-to-moderate budget films released direct-to-video or on cable television and films and film rights acquired for distribution only. In certain cases, the Company's low-to-moderate budget films may have a limited theatrical release or a cable premiere before being released in home video. For fiscal 1996, in the higher-budget film category, the Company's feature film THE ADVENTURES OF PINOCCHIO, starring Martin Landau, Jonathan Taylor Thomas and a puppet from Jim Henson's Creature Shop and budgeted at approximately $29 million, is scheduled to be released theatrically on July 26, 1996 in the U.S. in July 1996 by New Line Pictures (a division of Turner Entertainment, "New Line"). The Company's lower-budget feature slate for 1996 includes approximately 20 films, including SERPENT'S LAIR starring Jeff Fahey, THE GRAVE starring Gabrielle Anwar, Eric Roberts and Craig Sheffer, FREEWAY executive produced by Oliver Stone and starring Reese Witherspoon, Kiefer Sutherland and Brooke Shields, WHOLE WIDE WORLD starring Vincent D'Onofrio and Renee Zewelleger and being distributed in the U.S. by Sony Classics, THE LAST TIME I COMMITTED SUICIDE starring Keanu Reeves, five children's fantasy adventure films for Paramount Pictures under Paramount Pictures' Moonbeam label and two animated feature film sequels to the Company's 1988 video release THE BRAVE LITTLE TOASTER for a division of The Walt Disney Company. The Company's distribution activities consist primarily of foreign distribution of product produced, overseen or acquired by the Company and, through the KLC/ New City joint venture, domestic distribution of 60 low-budget feature films to the pay-per-view, pay cable, basic cable and other ancillary markets. On May 6, 1996, the Company and Decade Entertainment ("Decade") entered into an agreement to produce four theatrical action motion pictures. The motion pictures will be produced, subject to approval by the Company of certain creative aspects of such movies, by Decade and executive produced by Joel Silver (producer of EXECUTIVE DECISION and the LETHAL WEAPON and two DIE HARD action pictures) and Richard Donner (director/producer of THE OMEN and SUPERMAN). Under the agreement, the Company has agreed to guarantee payment of $3,200,000 per picture payable upon the delivery of the "mandatory delivery items" (as defined in such agreement) for each picture in consideration of receipt of foreign distribution rights. The agreement may be extended, at Decade's option, to include a fifth picture. The initial two films under the agreement are WHITE ROSE and MADE MEN, neither of which yet has a scheduled release date. Since its inception 1983, the Company has produced or distributed over 1,000 hours of original television programming, including various television series, movies-for-television and mini-series. The Company's movies-of-the-week currently in production or which have aired recently include PRINCESS IN LOVE starring Julie Cox in the book version of Princess Diana's affair for CBS, EVERY WOMAN'S DREAM starring Jeff Fahey for CBS, A HUSBAND, A WIFE AND A LOVER starring Judith Light for CBS and ECHO starring Jack Wagner for ABC. In addition, in pre-production for NBC is the fifth sequel to the JACK REED movies starring Brian Dennehy. The Company has produced a one-hour prime time 14 pilot for ABC as a potential mid-season replacement series entitled THE GUN written and directed by Emmy award winner Jim Sadwith starring Rosanna Arquette and Peter Horton. The pilot was co-executive produced by Robert Altman (director of M*A*S*H., THE PLAYER and PRET-A-PORTER). As of March 31, 1996, the Company had 10 movies-for-television and various television series in different stages of development for potential production. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Credit Facility." RECENT DEVELOPMENTS On June 25, 1996, the Company closed a $40 million syndicated revolving credit agreement with a group of banks led by Chemical. Such agreement provides for borrowings by the Company based on specified percentages of domestic and international accounts and contracts receivable and a specified percentage of the Company's book value of unamortized library film costs (as adjusted). In addition, the Company will 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 up to 50% of the production deficit after accounting for specified percentages of pre-sales, licensing fees and similar revenues from third parties and a required Company equity participation. All loans made pursuant to such agreement are secured by substantially all of the Company's assets and bears interest, at the Company's option, either (i) at LIBOR (5.19% as of July 9, 1996) plus 3% (for that portion of the borrowing base supported by accounts or contracts receivable) or 4% (for that portion of the borrowing base supported by unamortized library film costs or for loans made under the production tranche) or (ii) at the Alternate Base Rate (which is the greater of (a) Chemical's Prime Rate (8.25% as of July 9, 1996), (b) Chemical's Base CD Rate (5.40% as of July 9, 1996) plus 1% or (c) the Federal Funds Effective Rate (5.14% as of July 9, 1996) plus 1/2%) plus 2% (for that portion of the borrowing base supported by accounts or contracts receivable) or 3% (for that portion of the borrowing base supported by unamortized library film costs or for loans made under the production tranche). CERTAIN FORWARD LOOKING STATEMENTS THE ADVENTURES OF PINOCCHIO. The Company's largest theatrical feature film project to date is currently titled THE ADVENTURES OF PINOCCHIO. The film has a current budgeted cost of approximately $29 million. Such film is scheduled to be released domestically on July 26, 1996 in a wide theatrical release. The film stars Academy Award winner Martin Landau as "Geppetto," Jonathan Taylor Thomas, from the hit T.V. series "Home Improvement," as Pinocchio and a puppet from Jim Henson's Creature Shop. While it is possible that THE ADVENTURES OF PINOCCHIO may be a success, it is also possible that such film will not be widely accepted by the viewing public and thus will not be economically successful for the Company. It is also possible that the success of the film will be adversely impacted by other, more popular summer feature film releases or by competition from the Summer Olympics which will be held from July 19 to August 4, 1996. The film is being distributed domestically through New Line Pictures (a division of Turner Entertainment Co., "New Line"). The Company's only prior wide release theatrical feature film, ANDRE, achieved $17 million in domestic box office receipts (I.E., the total of theatrical ticket sales, which revenue is allocated among various parties). While the Company has entered into licenses and pre-sales which substantially cover its portion of the budgeted cost of THE ADVENTURES OF PINOCCHIO, the film will have to achieve domestic and foreign box office levels substantially in excess of the levels achieved by ANDRE for the Company to realize significant additional profitability on the film. See "Risk Factors -- Dependence on a Limited Number of Projects." In addition, while the popular and better known Walt Disney animated version of the Carlo Collodi story was successful, it is possible that the Company's live action version may not be. The film is still in the post-production process and is currently in front of preview and test audiences. It is anticipated that the film's target audience will include children who will be off from school during the summer periods. It is possible that a delay, if any, which precludes the release during the summer months or limits the time during the summer during which the film is available for viewing could have a negative effect on the success of the film. In 15 addition, while the Company anticipates that sufficient funds for prints and advertising will be devoted to the project commensurate with the funds usually spent with the level of the screens to which the film is scheduled to be released, if such amounts were not spent by New Line or were not spent in ways that effectively promote and support the picture, the success of the film could be negatively affected. As part of its arrangement with New Line, the Company has retained primarily the international distribution rights for the film and certain overages on the picture. As part of its effort to fund its portion of the film's budget, the Company has pre-sold most of the foreign markets and thus limited its potential upside in the project above that which it otherwise would have had. The agreements the Company has entered into for such pre-sales typically allow the Company to participate in the revenues of the film only after the foreign distributor has recouped its fees and costs. In addition, the Company will participate in the domestic gross proceeds of the film in excess of certain minimum amounts, which may not be exceeded. Further, the Company may participate in certain other ancillary revenue streams related to the film. If the film does not reach certain sales levels (domestically, internationally or in the ancillary markets, including merchandising), including sales which would allow for the recoupment of costs related to the realization of such revenues, additional revenues to the Company would be limited or non-existent. In the event the film is successful, the Company will be required to share its net profits with certain third parties, including Newmarket Capital Group L.P. ("Newmarket"), the production lender for the film. The Company gave Newmarket a net profit participation in the film in connection with an amendment to the production loan agreement in which amendment Newmarket agreed to accept certain presales of the film made by the Company. The Company has also entered into an oral settlement agreement with a third party pursuant to which the Company has paid $10,000 to such third party and given such third party ten percent of the Company's net profit participation in connection with the film. The foregoing are some of the potential issues which could impact the success of THE ADVENTURES OF PINOCCHIO, and thus the Company. In addition, there are many other events which could adversely affect this or any film which are not specifically set forth herein. Any potential investor must be aware that the production and distribution of feature films is a risky, unpredictable venture. The actual results may differ materially based upon these or other factors. See "Risk Factors -- Television and Feature Film Industries." KLC/NEW CITY TELE-VENTURES; NEW CITY RELEASING. In 1995, the Company formed KLC/ New City Tele-Ventures ("KLC/New City") with New City Releasing, Inc. ("New City") to acquire films for distribution through the emerging new delivery systems. The Company has begun preliminary discussions with New City in connection with the possible acquisition by the Company of the 35% of the KLC/New City joint venture it does not currently own and/or the possible acquisition by the Company of all or a portion of New City itself. New City owns the right to distribute certain third party programs and films through its distribution channels. While such discussions are preliminary in nature and the amount and type of consideration has not been agreed upon, the Company believes that any such transaction would involve an option to acquire KLC/New City or New City and/or a combination of cash and a stock for stock exchange (which may require approval by the Company's shareholders) and a possible employment agreement for New City's principals. Any such stock for stock exchange may result in additional dilution of the Common Stock and additional shares which may be available for public sale and could impact the trading value of the Common Stock. The parties may determine, for various reasons, including differences in valuation of the business, differences over control and operational issues and differences over artistic issues to not proceed with any such transaction. Accordingly, there is no assurance that any transaction will be consummated with New City and, if consummated, upon what terms such transaction would be consummated. TVFIRST. In fiscal 1995 the Company entered into a partnership with David Sams Industries, Inc. named TVFirst ("TVFirst") which creates and markets infomercials. One of TVFirst's current projects is a Christian music infomercial, in which a recording of Christian music sung by leading gospel artists is marketed. TVFirst has purchased air time for such infomercial but neither TVFirst 16 nor either of its partners (including the Company) had the excess available resources to fund such purchases. Messrs. Locke and Kushner have loaned to TVFirst $30,000 as of March 31, 1996 to enable TVFirst to purchase such air time; subsequent loans by Messrs. Locke and Kushner have totaled an additional $325,000 through May 10, 1996. Such loans, subject to final documentation, will be guaranteed by the Company, will bear interest at a rate of prime (8.25% as of July 8, 1996) plus 1% and are anticipated to be repaid within six months, or possibly earlier based upon the cash flow of TVFirst. In addition, each lender will also receive an additional amount equal to 10% of the principal amount loaned by such lender, which amount will be payable on the repayment date. Furthermore, each lender will receive a profit participation in the profits, if any, related to the Christian music infomercial, up to an amount equal to 5% of its principal amount, which amount will be payable on the first anniversary of such repayment. There is no assurance that the infomercial will generate revenues in excess of its programming and media costs. The foregoing transaction was approved by a majority of the independent directors of the Company's Board of Directors. 17 USE OF PROCEEDS The net proceeds to the Company from the sale of the Units, after deducting underwriting commissions and expenses of the Offering payable by the Company, are estimated to be approximately $8,185,000, assuming no exercise of the Over-allotment Option. The Company will use $1,500,000 of the net proceeds of the Offering to repay the Bridge Notes, anticipates using (depending upon market conditions, market responses and similar factors) approximately $1 million to $2 million for additional investments in TVFirst in order to acquire additional air time for the infomercial airing under the name KEEP THE FAITH (see "Business -- Joint Ventures to Exploit Ancillary Markets") and anticipates using (depending upon available products, market conditions and similar factors) approximately $1 million to $2 million for additional investments in KLC/New City to acquire additional products (see "Business -- Joint Ventures to Exploit Ancillary Markets") with the remainder of such net proceeds to be added to working capital including for the development and production of additional feature film and television products. Any additional proceeds from the exercise of the Warrants or from the exercise of the Over-allotment Option will be added to working capital. All amounts added to working capital will be available for general corporate purposes. On May 10, 1996, in order to increase its working capital, the Company completed an offering and sale of $1,500,000 of the Bridge Notes pursuant to a private placement. As part of such transaction, the purchasers of the Bridge Notes have the right to receive repayment in full of the Bridge Notes and issuance of Bonus Shares equal in value to 50% of the principal amount of the Notes so purchased based upon the closing high bid price of the Common Stock on the NNM on the Effective Date. The proceeds from such transaction were used for working capital purposes. The Bonus Shares are among the securities being registered pursuant to the registration statement of which this prospectus is a part. See "The Offering." The Bridge Notes bear interest at a rate of 5% per annum and will mature upon the Effective Date of this Offering. The issuance of the Bonus Shares will result in approximately a $750,000 charge to interest expense. This interest expense will be amortized over the estimated term of the Bridge Notes beginning in May 1996 and, in any event, will be fully amortized at the date of issuance of the Bonus Shares. The Company expects to continue to use a significant amount of its working capital to finance its development, production and distribution activities, including those of its feature film division, and to fund its obligations pending collection of license fees. The amount of working capital required for production activities will vary depending on, among other things, actual production costs, the timing of payments from, among others, proceeds from output arrangements, the networks and other third parties and the availability of additional licensing revenue. Additionally, the Company has expanded its distribution activities and may use a portion of the net proceeds to finance distribution activities in international or other markets. Further, the Company expects to use a portion of its working capital to fund the purchase of additional air time by TVFirst. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company from time to time considers the acquisition of assets or businesses complimentary to its current operations and may use a portion of the net proceeds for such purposes. However, the Company does not have pending any agreements for the acquisition of any business nor has it allocated any portion of the net proceeds of this Offering for any specific acquisitions. Pending the application of the net proceeds of this Offering for the purposes described above, the Company intends to invest the funds in short-term interest-bearing instruments. The Company will not receive any of the proceeds from the sales of the Selling Security Holders' Shares. 18 MARKET FOR COMMON STOCK AND CLASS A WARRANTS AND DIVIDENDS MARKET INFORMATION The Company's Common Stock is quoted on the NNM under the symbol "KLOC." Additionally, the stock is listed on the Pacific Stock Exchange under the symbol "KLO." The Class A Warrants are quoted on the NNM under the symbol "KLOCW." The following table sets forth the range of high and low closing prices for the Common Stock and the Class A Warrants, as reported on the NNM, for the periods indicated.
CLASS A COMMON STOCK WARRANTS -------------------- -------------------- HIGH LOW HIGH LOW --------- --------- --------- --------- FISCAL 1994 First Quarter (ended December 31, 1993)........................... $ 1.38 $ 0.84 $ 0.28 $ 0.19 Second Quarter (ended March 31, 1994)............................. 1.09 0.75 0.28 0.19 Third quarter (ended June 30, 1994)............................... 1.53 0.72 0.53 0.41 Fourth Quarter (ended September 30, 1994)......................... 1.91 0.88 0.28 0.22 FISCAL 1995 First Quarter (ended December 31, 1994)........................... $ 1.03 $ 0.69 $ 0.31 $ 0.19 Second Quarter (ended March 31, 1995)............................. 0.97 0.69 0.22 0.16 Third quarter (ended June 30, 1995)............................... 0.88 0.69 0.13 0.09 Fourth Quarter (ended September 30, 1995)......................... 0.81 0.50 0.19 0.13 FISCAL 1996 First Quarter (ended December 31, 1995)........................... $ 0.75 $ 0.47 $ 0.16 $ 0.09 Second Quarter (ended March 31, 1996)............................. 1.03 0.63 0.50 0.28 Third Quarter (ended June 30, 1996)............................... 1.50 0.91 0.53 0.28 Fourth Quarter (through July 10, 1996)............................ 1.44 1.22 .44 .34
On July 9, 1996, the closing high bid price for the Common Stock as reported on the NNM was $1.31 and the closing high bid price for the Class A Warrants was $0.38. At July 8, 1996, there were approximately 780 record holders of the Common Stock and 14 record holders of the Class A Warrants. DIVIDENDS The Company has never paid any cash dividends and has no present intention to declare or to pay cash dividends. The payment of dividends also is restricted by covenants in the Company's credit agreement and the indentures and fiscal agency agreements under which the Company's Convertible Subordinated Debentures were issued. It is the present policy of the Company to retain any earnings to finance the growth and development of the Company's business. 19 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996, on a pro forma basis to reflect the Bridge Notes and as adjusted to give effect to the sale by the Company of the Units being offered hereby and the application of the net proceeds therefrom (assuming no exercise of the Underwriter's Over-allotment Option).
AS OF MARCH 31, 1996 ------------------------------------- ACTUAL PRO FORMA(1) AS ADJUSTED --------- ------------- ----------- (DOLLARS IN THOUSANDS) Short-term obligations (net of unamortized issuance costs): 5% Convertible Subordinated Notes (1)................................... $ 0 $ 1,307 $ 0 Notes payable (2)....................................................... 16,690 16,690 16,690 --------- ------------- ----------- --------- ------------- ----------- Long-term obligations, including current portion (net of unamortized issuance costs): Bank line of credit (3)................................................. 15,000 15,000 15,000 Series A, Convertible Subordinated Debentures due 2000, net (4)......... 76 76 76 Series B, Convertible Subordinated Debentures due 2000, net (4)......... 2,955 2,955 2,955 8% Convertible Subordinated Debentures due 2000, net (4)................ 8,482 8,482 8,482 9% Convertible Subordinated Debentures due 2002, net (4)................ 4,598 4,598 4,598 Stockholders' equity: Common Stock, no par value; 80,000,000 shares authorized, 37,437,553 shares outstanding at March 31, 1996, 38,069,287 shares outstanding on a pro forma basis and shares outstanding as adjusted (4)........ 25,089 25,089 33,274 Accumulated Deficit..................................................... (2,990) (2,990) (3,183) --------- ------------- ----------- $ 69,900 $ 71,207 $ 77,892 --------- ------------- ----------- --------- ------------- -----------
- ------------------------ (1) On May 10, 1996 the Company completed an offering and sale of $1,500,000 of its Bridge Notes pursuant to a private placement. The Company incurred $193,000 of issuance costs in connection with such transaction. As part of the transaction, purchasers of the Bridge Notes have the right to receive payment in full of the Bridge Notes on the closing of this Offering together with the issuance of the Bonus Shares. See "Use of Proceeds." (2) Represents short-term production obligations of entities presented on a consolidated basis with the Company. Of such obligations, $4,826,667 was guaranteed by The Kushner-Locke Company as of March 31, 1996 and the balance is recourse to the related film assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Production/Distribution Loans." (3) On June 25, 1996, the Company closed a $40 million syndicated revolving credit agreement with a group of banks led by Chemical to replace its previous $15 million revolving credit facility. See "The Company -- Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Credit Facility." (4) As of March 31, 1996, an aggregate of 14,916,113 additional shares of Common Stock were issuable upon conversion of the Company's outstanding Convertible Subordinated Debentures, an aggregate of 5,472,808 additional shares of Common Stock were issuable upon the exercise of the Company's outstanding warrants and an aggregate of 4,647,096 additional shares of Common Stock were issuable upon the exercise of the Company's outstanding options. 20 SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following selected financial data are derived from the consolidated financial statements of The Kushner-Locke Company. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included or incorporated by reference herein. CONSOLIDATED STATEMENT OF OPERATIONS DATA:
SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, MARCH 31, ----------------------------------------------------- -------------------- 1995 1994 1993 1992 1991 1996 1995 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) Operating Revenues............. $ 20,407 $ 50,736 $ 42,487 $ 24,052 $ 28,006 $ 29,337 $ 11,614 Earnings (Loss) from Operations.................... (835) (7,424) (1,807) 1,529 3,152 3,004 469 Net Earnings (Loss)............ $ (3,975) $ (6,765) $ (1,826) $ 244 $ 1,445 $ 1,140 $ (1,003) Net Earnings (Loss) Per Common and Common Equivalent Shares Outstanding................... $ (0.13) $ (0.23) $ (0.06) $ 0.01 $ 0.08 $ 0.03 $ (0.03) Weighted Average Shares Outstanding................... 31,713 29,373 28,372 20,958 17,846 35,961 31,159
CONSOLIDATED BALANCE SHEET DATA:
YEARS ENDED SEPTEMBER 30, AT MARCH 31, 1996 ----------------------------------------------------- ------------------------------------------ 1995 1994 1993 1992 1991 ACTUAL PRO FORMA(1) AS ADJUSTED(2) --------- --------- --------- --------- --------- ----------- ------------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Cash and cash equivalents........ $ 3,139 $ 15,681 $ 6,542 $ 2,491 $ 2,867 $ 3,060 $ 4,367 $ 11,052 Restricted Cash..... 1,162 -- -- -- -- 2,420 2,420 2,420 Accounts Receivable, Net................ 7,864 6,177 5,360 2,936 2,970 18,484 18,484 18,484 Film Costs, Net of Accumulated Amortization....... 73,716 30,688 43,031 42,680 33,807 75,022 75,022 75,022 Total Assets........ $ 88,952 $ 54,254 $ 56,131 $ 49,847 $ 41,364 $ 102,184 $ 103,491 $ 110,176 Bank Line of Credit............. $ 15,000 $ 15,000 $ 7,907 $ -- $ -- $ 15,000 $ 15,000 $ 15,000 Notes Payable....... 28,398 9,600 8,007 5,582 3,349 16,690 16,690 16,690 Convertible Subordinated Debentures, Net.... 17,745 22,056 4,296 4,942 4,985 16,110 17,417 16,110 Total Liabilities... $ 69,745 $ 35,713 $ 32,252 $ 31,674 $ 23,568 80,085 81,392 80,085 Stockholders' Equity............. $ 19,207 $ 18,541 $ 23,879 $ 18,173 $ 17,796 $ 22,099 $ 22,099 $ 30,091 --------- --------- --------- --------- --------- ----------- ------------- -------------- --------- --------- --------- --------- --------- ----------- ------------- --------------
- ------------------------ (1) On May 10, 1996 the Company completed an offering and sale of $1,500,000 of its Bridge Notes pursuant to a private placement. As part of the transaction, purchasers of the Notes have the right to receive payment in full of the Bridge Notes upon the closing of this Offering together with the issuance of the Bonus Shares. The issuance of Bonus Shares will result in approximately a $750,000 charge to interest expense. This interest expense will be amortized over the estimated term of the Bridge Notes beginning in May 1996 and, in any event, will be fully amortized at the date of issuance of the Bonus Shares. The Company incurred $193,000 of issuance costs in connection with such transaction. See "Use of Proceeds." (2) Gives effect to the sale by the Company of $10 million of Units, net of discounts, commissions and expenses of the Company in connection with the Offering, and the repayment by the Company of the Bridge Notes. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's revenues are currently derived primarily from the production or the acquisition of distribution rights of films released in the U.S. by studios, pay cable, basic cable, and videocassette companies; and from the development, production and distribution of television programming for the major U.S. television networks, basic and pay cable television and first-run syndication; as well as from the licensing of all rights to the films and television programs in international territories. While the Company generally finances all or a substantial portion of the budgeted production costs of its programming through domestic and international licensing and other arrangements, the Company typically retains rights in its programming which may be exploited in future periods or in additional territories. In April 1993, the Company established a feature film operation to produce low and medium budget films for theatrical and/or home video or cable release. The Company produces a limited number of higher-budget theatrical films to the extent the Company is able to obtain an acceptable domestic studio to release the film theatrically in the U.S. The Company's revenues and results of operations are significantly affected by accounting policies required for the industry and management's estimates of the ultimate realizable value of its films and programs. Production advances received prior to delivery or completion of a program are treated as deferred revenues and are recorded as either production advances or deferred license fees. Production advances are generally recognized as revenue on the date the program is delivered or available for delivery. Deferred license fees are recognized as revenue on the date of availability and/or delivery of the item of product. The Company generally capitalizes all costs incurred to produce a film, including the interest expense funded under production loans. Such costs also include the actual direct costs of production, certain exploitation costs and production overhead. Capitalized exploitation or distribution costs include those costs that clearly benefit future periods such as film prints and prerelease and early release advertising that is expected to benefit the film in future markets. These costs, as well as participation and talent residuals, are amortized each period on an individual film or television program basis in the ratio that the current period's gross revenues from all sources for the program bear to management's estimate of anticipated total gross revenues for such film or program from all sources. In the event management reduces its estimates of the future gross revenues associated with a particular item of product, which had been expected to yield greater future proceeds, a significant write-down and a corresponding decrease in the Company's earnings for the quarter and fiscal year-end could result. Gross profits for any period are a function in part of the number of programs delivered in that period and the recognition of costs in that period. Because initial licensing revenues and related costs generally are recognized either when the program has been delivered or is available for delivery, significant fluctuations in revenues and results of operations may occur from period to period. Thus, a change in the amount of entertainment product available for delivery from period to period has materially affected a given period's revenues and results of operations and year-to-year results may not be comparable. The continuing shift of the Company's product mix during the fiscal year may further affect the Company's quarter to quarter or year to year results of operations as new products may be amortized differently as determined by length of product life cycle and the number of related revenue sources. RESULTS OF OPERATIONS COMPARISON OF SIX MONTHS ENDED MARCH 31, 1996 AND 1995 The Company's operating revenues for the six months ended March 31, 1996 were $29,337,000, an increase of $17,723,000, or 153%, from $11,614,000 from the comparable six month period ended March 31, 1995. This increase was due primarily to the timing of delivery and/or availability of films and television programs. The Company has shifted its current product mix towards a greater percentage of feature films due to opportunities available to the Company. 22 The Company recognized approximately $10,534,000, or approximately 36% of revenues during the first half of fiscal 1996 from the delivery and/or availability of (a) the ABC network mini-series INNOCENT VICTIMS starring Hal Holbrook and Rick Schroeder, and (b) the CBS network movie A HUSBAND, A WIFE AND A LOVER starring Judith Light and Jay Thomas; and $7,101,000, or approximately 24% of revenues from the delivery and/or availability of five feature films: (a) FREEWAY, executive produced by Oliver Stone and starring Kiefer Sutherland, Reese Witherspoon and Brooke Shields, (b) NAKED SOULS starring Pamela Anderson, Dean Stockwell and David Warner, (c) SERPENT'S LAIR, starring Jeff Fahey, (d) THE GRAVE starring Gabrielle Anwar, Eric Roberts and Craig Sheffer, and (e) the six JOSH KIRBY: TIME WARRIOR films for Paramount. The majority of remaining revenues for the period came from a license to a German distributor of rights to distribute portions of the Company's library in Germany, from continuing licenses of completed product from the Company's library to domestic cable channel operators and international sub-distributors, and from delivery and/or availability of various product from the Company's library. Operating revenues for the first half of fiscal 1995 were primarily attributable to the delivery and/ or availability of the theatrical feature film WES CRAVEN PRESENTS: MINDRIPPER, the two television movies for CBS entitled DANGEROUS INTENTIONS and LADY KILLER, and three direct-to-video titles. Costs relating to operating revenues were $24,365,000 during the first six months of fiscal 1996 as compared to $9,168,000 during the comparable period of fiscal 1995. The increase resulted from significantly greater revenues in connection with increased production and distribution levels. This higher level of operating activity resulted in the Company's increased staffing and personnel, primarily in the feature film and international distribution divisions, and the Company's funding of overhead and development costs associated with joint ventures or partnerships related to interactive/multi- media applications, cable distribution and infomercial production. Interest expense for the first six months ended March 31, 1996 was $1,904,000 as compared to $1,592,000 for the comparable period ended March 31, 1995. The increase was due to higher average borrowings under the Company's line of credit primarily associated with increased production and acquisition financing of non-network movies. Total notes payable increased to $31,690,000 at March 31, 1996 from $14,770,000 at March 31, 1995. In the event the Company enters into the $40 million line of credit with Chase and borrows amounts thereunder in excess of the current outstanding balance under the Imperial Bank facility, interest expense will most likely increase. The Company's estimated effective income tax rate was approximately 1.75% for the first six months ended March 31, 1996 compared to an estimated income tax expense of approximately 0% for the first six months ended March 31, 1995. The $20,000 tax expense in first half of fiscal 1996 consisted of minimum state taxes related to certain active subsidiary companies. The Company reported earnings of $1,140,000, or $.03 per share, for the first six months ended March 31, 1996 as compared to a net loss of $(1,003,000), or $(.03) per share, for the comparable six month period ended March 31, 1995. Weighted number of common shares outstanding for the comparable periods were 35,961,000 in 1996 and 31,159,000 in a 1995. The earnings in the first half of fiscal 1996 resulted primarily from the Company completing a portion of its film and television projects in process and recognition of revenues on existing contracts receivable ("pre-sales") made to third parties licensing the rights to distribute those projects in certain media and territories. The loss in the first half of fiscal 1995 resulted primarily from the delivery and/or availability for delivery of fewer titles and ongoing fixed expenses related to the Company's feature film, television and international distribution divisions. COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1994 The Company's operating revenues for the fiscal year ended September 30, 1995 were $20,407,000, a decrease of $30,329,000, or 60%, from $50,736,000 from the prior fiscal year. This 23 decrease was due primarily to the timing of delivery and/or availability of films and television programs. The Company has shifted its current product mix towards a greater percentage of feature films due to opportunities available to the Company. Feature films generally have a longer lead time than television programs from the time of financial commitment to the recognition of related revenues. The Company recognized approximately $4,028,000 of revenues during fiscal 1995 from the delivery and/or availability of the three low budget feature films LADY IN WAITING, THE LAST GASP and WES CRAVEN PRESENTS: MINDRIPPER to WarnerVision and approximately $9,501,000 for the three television network movies DANGEROUS INTENTIONS for CBS, LADY KILLER for CBS and JACK REED IV: A KILLER AMONGST US for NBC. The majority of remaining revenues for the period came from the release of six adult thriller direct-to-video films; from two of the six fantasy adventure feature films for Paramount Pictures under the banner JOSH KIRBY: TIME WARRIOR; and from continuing sales of licenses for completed product from the Company's library of titles to international distributors. Operating revenues for fiscal 1994 were primarily attributable to the delivery and/or availability of the major theatrical feature film Andre of approximately $9,992,000, the three network television movies TO SAVE THE CHILDREN for CBS, GETTING GOTTI for CBS, and JACK REED III: A SEARCH FOR JUSTICE for NBC of approximately $9,333,000, and the network mini-series JFK: RECKLESS YOUTH for ABC of approximately $9,273,000. The Company also recognized approximately $14,511,000 of revenues from the delivery and/or commencement of distribution of fifteen episodes of the television series HARTS OF THE WEST for CBS. Costs relating to operating revenues were $17,404,000 during fiscal 1995 as compared to $54,952,000 during fiscal 1994. As a percentage of operating revenues, costs relating to operating revenues were approximately 85% for fiscal 1995 compared to approximately 108% for fiscal 1994. During the fourth quarter of fiscal 1995, the Company revised its estimate of future revenue for certain older television programs which resulted in reductions of the carrying value of such programs and an expense of approximately $888,000 recorded during the fourth quarter of fiscal 1995. Without such reductions, costs relating to operating revenues would have been approximately $18,292,000, or approximately 90% of revenues for fiscal 1995. During the fourth quarter of fiscal 1994, the Company revised its estimate of future revenue from programming no longer being produced by the Company resulting in a write down expense of approximately $7,800,000 for fiscal 1994. The major component of such reductions consisted of the episodic series 1ST AND TEN starring O.J. Simpson. Without such reductions, costs relating to operating revenues would have been $47,152,000, or approximately 93% of revenues, for fiscal 1994. Selling, general and administrative expenses increased to $3,838,000 in fiscal 1995 from $3,280,000 in fiscal 1994. Expenses associated with increased staffing and personnel, primarily in the feature film and international distribution divisions, were the major factors contributing to the increase. In addition, the Company funded overhead and development costs associated with its entry into new business segments including interactive/multimedia, cable distribution and infomercial production, which are conducted through joint ventures or partnerships. Interest expense for the year ended September 30, 1995 was $3,409,000 as compared to $2,209,000 for the year ended September 30, 1994. The increase was due to incurring interest costs for the full period on the Company's four issues of Convertible Subordinated Debentures during the 1995 fiscal year; an increase in amortization of capitalized issuance costs related to the Convertible Subordinated Debentures and higher average borrowings under the Company's line of credit associated with increased production and acquisition financing of non-network movies. Total indebtedness for borrowed money increased to $46,143,000 at September 30, 1995 from $31,656,000 at September 30, 1994. The weighted average interest rate under the line of credit was 10% during fiscal 1995 compared to 7.81% in fiscal 1994, while the Convertible Subordinated Debentures Series A, Series B, 8% and 9% bear interest fixed at 10%, 13 3/4%, 8% and 9%, respectively. 24 The Company's estimated effective income tax benefit was 0% for the year ended September 30, 1995 compared to an estimated effective income tax benefit of approximately 24% for the year ended September 30, 1994. The tax benefit in fiscal 1994 was due to partial recognition of the benefit of deferred taxes during the fiscal year ended September 30, 1994. The Company reported a net loss of ($3,975,000), or ($.13) per share, for the fiscal year ended September 30, 1995 and net loss of ($6,765,000), or ($.23) per share, for the year ended September 30, 1994 when the Company reported a loss before cumulative effect of a change in accounting principle from Statement of Financial Accounting Standards (SFAS) No. 96 to SFAS No. 109 "Accounting for Income Taxes" of ($7,159,000), or ($.24) per share. The losses in fiscal 1995 and 1994 resulted primarily from the above described non-cash reductions in the carrying value of certain programs no longer being produced by the Company and the increased interest expense and amortization of capitalized issuance costs. The losses in fiscal 1995 were augmented by certain expenses associated with the expansion of the Company's feature film and international distribution divisions. COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1994 AND 1993 The Company's operating revenues for the fiscal year ended September 30, 1994 were $50,736,000, an increase of $8,249,000, or 19%, from $42,487,000 from the prior fiscal year. This increase was due primarily to the delivery and/or availability of the feature film ANDRE, 15 episodes of the network prime-time series HARTS OF THE WEST, the network television movies TO SAVE THE CHILDREN, GETTING GOTTI, and JACK REED III: A SEARCH FOR JUSTICE and the network mini-series JFK: RECKLESS YOUTH, as well as international distribution revenues from HARTS OF THE WEST and JFK: RECKLESS YOUTH. Operating revenues during fiscal 1993 were primarily attributable to the delivery and/or availability for additional markets of the late-night network series Sweating Bullets, the network mini-series Family Pictures, the made-for-cable series 1ST AND TEN and a pay-cable series for which the Company acted as a producer-for-hire. During fiscal 1994 the Company recognized revenues from the delivery and/or availability of the feature film ANDRE of approximately $9,992,000; from the mini-series JFK: RECKLESS YOUTH of approximately $9,273,000; and recognized approximately $14,511,000 of revenues from the delivery and/or commencement of distribution of HARTS OF THE WEST during fiscal 1994 as compared to approximately $3,061,000 for HARTS OF THE WEST during fiscal 1993. Costs relating to operating revenues were $54,952,000 during fiscal 1994 as compared to $41,497,000 during fiscal 1993. As a percentage of operating revenues, costs relating to operating revenues were approximately 108% for fiscal 1994 compared to approximately 98% for fiscal 1993. During the fourth quarter of 1994, the Company revised its estimate of future revenue from certain programming no longer being produced by the Company resulting in reductions of the carrying value of such programs and expense of approximately $7,800,000 during the fourth quarter of fiscal 1994. The major component of such reductions consisted of the episodic series 1ST AND TEN starring O.J. Simpson. Without such reductions, costs relating to operating revenues would have been $47,152,000, or approximately 93%, for fiscal 1994. During the fourth quarter of fiscal 1993, the Company revised its ultimate revenue estimates in certain programming resulting in increased amortization of approximately $4.3 million. Selling, general and administrative expenses increased to $3,208,000 in fiscal 1994 from $2,797,000 in fiscal 1993. Expenses associated with increased staffing and personnel, primarily in the feature film division, were the major factors contributing to the increase. Interest expense for the year ended September 30, 1994 was $2,209,000 as compared to $1,173,000 for the year ended September 30, 1993. Total indebtedness, which consists of amounts due under the Company's line of credit and Convertible Subordinated Debentures, increased to $31,656,000 at September 30, 1994 from $12,203,000 at September 30, 1993. The reason for the increase was the additional interest and amortization of capitalized issuance costs related to the issuance of the 8% and 9% Convertible Subordinated Debentures during fiscal 1994 and higher average borrowings under the Company's line 25 of credit. The weighted average interest rate under the line of credit was 7.81% during fiscal 1994 compared to 7.25% in fiscal 1993, while the Convertible Subordinated Debentures Series A, Series B, 8% and 9% bear interest fixed at 10%, 13 3/4%, 8% and 9%, respectively. The Company's estimated effective income benefit was 24% for the year ended September 30, 1994 compared to an estimated effective income tax benefit of approximately 37% for the year ended September 30, 1993. The decrease was due to recognition of the benefit of deferred tax assets during the fiscal year ended September 30, 1994. The Company reported a loss before cumulative effect of a change in accounting principle of ($7,159,000), or ($.24) per share, and net loss of ($6,765,000), or ($.23) per share, for the year ended September 30, 1994 and ($1,826,000), or ($.06) per share, for the year ended September 30, 1993. The losses in fiscal 1994 and 1993 resulted primarily from the above described reductions in the carrying value of certain programs no longer being produced by the Company and the increased interest expense and amortization of capitalized issuance costs incurred as a result of the 8% and 9% Convertible Subordinated Debenture offerings. QUARTERLY RESULTS OF OPERATION A large percentage of a film or television program's revenues is recognized when the film or television program is delivered. As a result, significant fluctuations in the Company's total revenues and net income can occur from period to period depending on the delivery or availability dates of films and television programs. Pursuant to the Company's accounting policy, as required under generally accepted accounting principles, capitalized film and television program costs are reviewed on a quarterly basis and any portion of such costs that subsequently appear not to be fully recoverable from future revenues are charged to expense during the period in which the loss becomes evident. As a result, some quarters or years will have fluctuating levels of expenses due to such losses. The following table sets forth selected data by quarter included in the Company's Consolidated Statements of Operations (unaudited). This information has not been audited or reviewed by KPMG Peat Marwick LLP.
QUARTER ENDED IN QUARTERS ENDED IN 1995 1996 --------------------------------------------------- ------------ SEPTEMBER 30 MARCH 31 DECEMBER 31 (1) JUNE 30 MARCH 31 ------------ ------------ ------------ --------- --------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Operating Revenues........ $ 13,230 $ 16,107 $ 6,889 $ 1,904 $ 6,176 Costs Related to Operating Revenues................. 11,052 13,313 6,669 1,567 4,871 Selling, General and Administrative Expenses.. 1,072 896 904 957 984 ------------ ------------ ------------ --------- --------- Earnings (Loss) from Operations............... 1,106 1,898 (684) (620) 321 Interest Expense.......... (969) (875) (736) (917) (763) Income Taxes (Benefit) (2)...................... 9 11 (11) 26 16 ------------ ------------ ------------ --------- --------- Net Earnings (Loss)....... $ 128 $ 1,012 $ (1,409) $ (1,563) $ (458) ------------ ------------ ------------ --------- --------- ------------ ------------ ------------ --------- --------- Net Earnings (Loss) Per Common Share............. $ 0.003 $ 0.03 $ (0.13) $ (0.05) $ (0.01) ------------ ------------ ------------ --------- --------- ------------ ------------ ------------ --------- --------- QUARTERS ENDED IN 1994 QUARTERS ENDED IN 1993 --------------------------------------------------- --------------------------------------- SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 (1) JUNE 30 MARCH 31 DECEMBER 31 (1) JUNE 30 ------------ ------------ --------- --------- ------------ ------------ --------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Operating Revenues........ $ 5,438 $ 14,664 $ 7,107 $ 12,953 $ 16,012 $ 12,871 $ 5,533 Costs Related to Operating Revenues................. 4,297 21,504 7,440 11,369 14,639 16,238 4,438 Selling, General and Administrative Expenses.. 993 969 796 742 701 631 707 ------------ ------------ --------- --------- ------------ ------------ --------- Earnings (Loss) from Operations............... 148 (7,809) (1,129) 842 672 (3,998) 388 Interest Expense.......... (693) (633) (614) (448) (317) (250) (245) Income Taxes (Benefit) (2)...................... -- (1,900) (661) 149 (259) (1,614) 57 ------------ ------------ --------- --------- ------------ ------------ --------- Net Earnings (Loss)....... $ (545) $ (6,542) $ (1,082) $ 245 $ 614 $ (2,634) $ 86 ------------ ------------ --------- --------- ------------ ------------ --------- ------------ ------------ --------- --------- ------------ ------------ --------- Net Earnings (Loss) Per Common Share............. $ (0.02) $ (0.23) $ (0.04) $ 0.01 $ 0.02 $ (0.06) $ 0.003 ------------ ------------ --------- --------- ------------ ------------ --------- ------------ ------------ --------- --------- ------------ ------------ ---------
- ---------------------------------- (1) During the fourth quarter of fiscal 1995, the Company revised its estimate of future revenues for ALADDIN, THE BARBARA DE ANGELIS SHOW, TRAIL WATCH, SWEET BIRD OF YOUTH, and PIGASSO'S PLACE. During the fourth quarter of fiscal 1994, the Company revised its estimate of future revenue for 1ST AND TEN and SWEATING BULLETS and other programming no longer being produced by the Company. These revised estimates resulted in a reduction in the carrying value of such programs and amortization expense of approximately $7,800,000. The major component of such reduction consisted of the episodic series 1ST AND TEN starring O.J. Simpson. During the fourth quarter of fiscal 1993, upon commencement of the domestic syndication of 1ST AND TEN, the Company revised certain ultimate revenue estimates based on the initial results of syndication. The revised ultimate revenue estimates on 1ST AND TEN and other film and television programs resulted in increased amortization of film costs of approximately $4.3 million in the fourth quarter of fiscal 1993. 26 (2) In the quarter ended December 31, 1993, the provision for Income Taxes included a benefit of $394,000 related to the cumulative effect of a change in accounting principle. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS IMPAIRMENT OR DISPOSITION OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121 will be effective for fiscal years beginning after December 15, 1995. The Company believes that adoption of SFAS No. 121 will not have a material impact on the Company's financial statements. STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 will be effective for fiscal years beginning after December 15, 1995, and will require that the Company either recognize in its financial statements costs related to its employee stock-based compensation plans, such as stock option and stock purchase plans, or make pro forma disclosures in a footnote to the financial statements. The Company expects to continue to use the intrinsic value-based method of Accounting Principles Board Opinion No. 25, as allowed under SFAS 123, to account for all of its employee stock-based compensation plans. Therefore, in its financial statements for fiscal 1996, the Company will make the required pro forma disclosures in a footnote to the financial statements. SFAS No. 123 is not expected to have a material effect on the Company's results of operations or financial position. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased to $5,480,000 (including $2,420,000 of restricted cash being used as collateral for certain production loans) at March 31, 1996 from $4,301,000, including $1,162,000 of restricted cash at September 30, 1995 primarily from additional collections from foreign pre-sales. At March 31, 1996, the Company had net negative liquid assets of approximately ($11,386,000) consisting of cash and cash equivalents, accounts receivable and amounts due from affiliates less accounts payable and accrued liabilities, short-term production loans and the $15,000,000 outstanding under the Company's prior line of credit with Imperial Bank which was replaced by the new credit facility with Chemical. The Company's production and distribution operations are capital intensive. The Company has funded its working capital requirements through receipt of third-party domestic license payments and international licensing, as well as other operating revenues, and proceeds from debt and equity financing, and has relied upon its line of credit and transactional production loans to provide bridge production financing prior to receipt of license fees. The Company funds production and acquisition costs out of its working capital, including the line of credit, and through certain pre-sale of rights in international markets. In addition, the expansion of the Company's international distribution business and the establishment of a feature film division have significantly increased the Company's working capital requirements and use of related production loans. The Company experienced net negative cash flows from operating activities (resulting principally from the Company's expansion of production) of $(2,816,000) during the six months ended March 31, 1996, which was offset by net cash of $3,068,000 provided by financing activities from production loans and slightly greater usage of the Company's revolving line of credit up to the maximum amount of credit available. As a result primarily of the foregoing factors, net unrestricted cash decreased during the six month period by $79,000 to $3,060,000 on March 31, 1996. Net cash used by operating activities was $(30,420,000) during fiscal 1995 as the Company substantially increased its investment in new film product. To the extent that the Company expands production and distribution activities and increases its debt service burdens, it will continue to experience net negative cash flows from operating activities, pending receipt of licensing revenues, other revenues and sales from its library. 27 CREDIT FACILITY On June 25, 1996, the Company closed a $40 million syndicated revolving credit agreement with a group of banks led by Chemical. Such agreement provides for borrowings by the Company based on specified percentages of domestic and international accounts and contracts receivable and a specified percentage of the Company's book value of unamortized library film costs (as adjusted). In addition, the Company will 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 up to 50% of the production deficit after accounting for specified percentages of pre-sales, licensing fees and similar revenues from third parties and a required Company equity participation. All loans made pursuant to such agreement are secured by substantially all of the Company's assets and bears interest, at the Company's option, either (i) at LIBOR (5.19 % as of July 9, 1996) plus 3% (for that portion of the borrowing base supported by accounts or contracts receivable) or 4% (for that portion of the borrowing base supported by unamortized library film costs or for loans made under the production tranche) or (ii) at the Alternate Base Rate (which is the greater of (a) Chemical's Prime Rate (8.25% as of July 9, 1996), (b) Chemical's Base CD Rate (5.40% as of July 9, 1996) plus 1% or (c) the Federal Funds Effective Rate (5.14% as of July 9, 1996) plus 1/2%) plus 2% (for that portion of the borrowing base supported by accounts or contracts receivable) or 3% (for that portion of the borrowing base supported by unamortized library film costs or for loans made under the production tranche). The Company is required to pay a commitment fee of .5% per annum of the unused portion of the credit line. This new credit facility with Chemical replaces a $15 million line of credit the Company had with Imperial Bank. As of March 31, 1996, the Company had drawn down $15,000,000 under the Imperial credit facility and had no further availability. As of June 25, 1996, the Company had drawn down $18,584,890 under the Chemical credit facility out of a total borrowing base availability of $18,705,857. The Company plans to refinance four non-recourse project loans under the Chemical credit facility prior to July 31, 1996, which will increase the amount outstanding under the credit facility by approximately $3.2 million and which is anticipated will also increase the Company's overall unused borrowing base availability. See "-- Production/Distribution Loans." The outstanding credit agreement contains various covenants to which the Company must adhere. These covenants, among other things, include limitations on additional indebtedness, liens, investments, disposition of assets, guarantees, deficit financing, capital expenditures, affiliate transactions and the use of proceeds and prohibit payment of cash dividends and prepayment of subordinated debt. In addition, the credit agreement requires the Company to maintain a minimum liquidity level, limits overhead expenses 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). SECURITIES OFFERINGS In November 1992, the Company completed an offering of 8,050,000 shares of its Common Stock for which the Company received net proceeds of approximately $6,640,000. In connection with such offering, the Company issued warrants to purchase up to 700,000 shares to the underwriter thereof at $1.25 per share. During March and April 1994, the Company sold $16,437,000 principal amount of 8% Convertible Subordinated Debentures due 2000. In connection with the issuance of the 8% Debentures, the Company issued warrants to purchase up to 10% of the aggregate principal amount of Debentures sold at an exercise price equal to 120% of the principal amount of the Debentures. The 8% Debentures are convertible into shares of Common Stock at a rate of $.975 per share, subject to customary anti-dilutive provisions and provisions in the event of certain payment defaults. The Company will have the right to redeem the 8% Debentures at redemption prices commencing at 102.7% of par on or after 28 February 1, 1998 and declining to par on or after February 1, 2000. The Debentures are subordinated in right of payment to all Senior Indebtedness (as defined) of the Company and rank PARI PASSU with the Company's Series A and Series B Debentures. The fiscal agency agreement, under which the Company's 8% Debentures were issued, contains various covenants to which the Company must adhere. During July 1994, the Company sold $5,050,000 principal amount of 9% Convertible Subordinated Debentures due 2002. In connection with the issuance of the 9% Debentures, the Company issued warrants to purchase up to 9% of the aggregate principal amount of Debentures sold at an exercise price equal to 120% of the principal amount of the Debentures. The 9% Debentures are convertible into shares of Common Stock at a rate of $1.58 per share, subject to customary anti-dilutive provisions and provisions in the event of certain payment defaults. The Company has the right to redeem the 9% Debentures at redemption prices commencing at 103% of par on or after July 1, 1998 and declining to par on or after July 1, 2000. The Debentures are subordinated in right of payment to all Senior Indebtedness (as defined) of the Company and rank PARI PASSU with the Company's Series A, Series B and 8% Debentures. The fiscal agency agreement, under which the Company's 9% Debentures were issued, contains various covenants to which the Company must adhere. As of March 31, 1996, approximately $9,273,000 principal amount of the 8% Debentures and $5,050,000 principal amount of 9% Debentures were outstanding. Through July 8, 1996, an additional $1,212,000 aggregate principal amount of the 8% Debentures were converted into an aggregate of 1,243,077 shares of Common Stock and $[50,000] aggregate principal amount of the 9% Debentures were converted into an aggregate of [31,646] shares of Common Stock. In September 1994, the Company filed a registration statement covering an aggregate of 21,388,064 shares of Common Stock comprising the shares of Common Stock issuable upon conversion of the 8% Convertible Subordinated Debentures and the 9% Convertible Subordinated Debentures and certain warrants issued to underwriters. Since the end of the fiscal year (September 30, 1995) , primarily as a result of the conversion of the 8% and 9% Debentures, the number of outstanding shares of Common Stock has increased from 35,466,598 to 37,437,553 as of March 31, 1996 and 40,218,618 as of July 8, 1996. In May 1996, the Company issued $1,500,000 of short-term Bridge Notes in a private placement, which will be repaid at the closing of this Offering along with the issuance of the Bonus Shares. See "Use of Proceeds." Upon completion of this Offering, assuming full exercise of the Underwriter's Over-allotment Option, there will be shares of Common Stock issued and outstanding or reserved for issuance out of a total of 80,000,000 shares of Common Stock authorized under the Company's Articles of Incorporation. Accordingly, the Company will be substantially restricted in its ability to issue additional shares of Common Stock, including issuances to raise capital or acquire assets using Common Stock as the means of payment. The Company can only increase its authorized capital stock by amending its Articles of Incorporation. While the Company intends to increase its authorized but unissued capital stock at its next meeting of shareholders, such an amendment requires the approval of the shareholders and, even if approved, any delay in approval could cause the Company to be unable to raise additional equity required for its operations or to miss an available opportunity to raise additional capital or to acquire assets or otherwise. In addition, there can be no assurance that the shareholders of the Company will vote to increase the authorized capital of the Company. PRODUCTION/DISTRIBUTION LOANS The Company's other short term borrowings, totaling $16,689,455 as of March 31, 1996, consist of production loans from Newmarket Capital Group L.P. ("Newmarket"), Banque Paribas (Los Angeles Agency) ("Paribas") and Imperial Bank ("Imperial") to consolidated production entities controlled by the Company, which loans are recourse to the related film assets. The Kushner-Locke Company provides limited corporate guarantees for a portion of the Newmarket and Paribas loans which are callable in the event that the production companies' loan amounts (including a reserve for 29 fees, interest and financing costs) are not adequately collateralized with acceptable contracts receivable from third-party domestic and/or foreign sub-distributors by certain dates or by the maturity date of the loan. Deposits on the purchase price paid by these sub-distributors are held as restricted cash collateral by the Lenders. The table below shows production loans as of March 31, 1996. Corporate guarantees have been reduced as of March 31, 1996 due to the Company reaching certain sales milestones as allowed under the Newmarket loans. Three of the production loans were scheduled to mature before April 1996. The Company requested, and Newmarket agreed, to extend the maturity dates by approximately 90 days on the production loans for SERPENT'S LAIR, THE GRAVE and WHOLE WIDE WORLD for customary delays in the process of delivering and collecting cash from foreign territories.
KUSHNER- LOCKE AMOUNTS WEIGHTED CORPORATE FILM LENDER LOAN AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY - --------------------------- -------------- -------------- -------------- --------- ------------- --------- JOSH KIRBY: TIME WARRIOR Imperial $ 1,950,000 $ 545,000 9.60% $ 545,000* 5-01-96 THE ADVENTURES OF PINOCCHIO Newmarket $ 12,500,000 $ 10,976,701 8.75% $ 2,175,000 9-30-96 SERPENT'S LAIR Newmarket $ 1,005,000 $ 654,530 9.25% $ 345,000 7-19-96 THE GRAVE Newmarket $ 2,100,000 $ 1,603,228 10.25% $ 300,000 7-19-96 WHOLE WIDE WORLD Newmarket $ 1,550,000 $ 1,109,195 8.00% $ 500,000 7-19-96 FREEWAY Paribas $ 1,983,333 $ 1,800,802 7.00% $ 961,667 7-31-96 -------------- -------------- ------------- $ 21,088,333 $ 16,689,455 $ 4,826,667** -------------- -------------- ------------- -------------- -------------- -------------
- ------------------------ * The JOSH KIRBY: TIME WARRIOR loan was repaid in full on May 15, 1996. ** As of June 30, 1996, the Company believes that The Kushner-Locke Company corporate guarantees aggregated approximately $3.2 million and that the guarantees in connection with SERPENT'S LAIR, THE GRAVE and WHOLE WIDE WORLD have been substantially reduced to zero. In October 1994, the Company obtained a production loan in the amount of $1,950,000 from Imperial Bank to cover a portion of the budget of the JOSH KIRBY: TIME WARRIORS series. The Imperial loan accrued interest at Prime (8.25% as of May 15, 1996) plus 3% payable monthly plus loan fees of $97,500 plus a net profit participation. The loan was secured solely by the rights, title and assets related to the film series which has been completed and is in the process of being delivered to domestic and international sub-distributors. Collection of cash from sales had been reducing the loan balance. The loan matured on May 1, 1996 and was repaid in full on May 15, 1996 within its grace period. The Kushner-Locke Company entered into a long form agreement dated as of February 6, 1995 with Savoy Pictures, Inc. ("Savoy") relating to the development, production, financing and distribution of the live-action feature-length theatrical motion picture THE ADVENTURES OF PINOCCHIO. The film commenced principal photography in July 1995. The film will be distributed in foreign territories by the Company. The film will be distributed domestically by New Line Pictures (a subsidiary of Turner Entertainment Co.) which has acquired the domestic and 50% of certain ancillary rights from Savoy. Pursuant to the February 6, 1995 letter agreement, the Company licensed those domestic and ancillary rights to Savoy in exchange for Savoy funding approximately 50% of the budget to the production entity up to $25 million (which budget has been subsequently increased to approximately $29 million, the majority of which has been financed by Savoy in exchange for certain profit participations). In order to fund the Company's approximately $13 million share of the budgeted negative costs, the Company has assisted the film's production company, a consolidated entity, in obtaining loan documentation from Newmarket Capital Group L.P. ("Newmarket") which agreed to provide for financing in the amount of 50% of the film's original budget up to $12,500,000, a portion of which is reserved to pay the lender's financing fees and costs. The loan bears interest at LIBOR plus 2% and fees were determined on a sliding scale related to the amount of acceptable contracts receivable at the time of 30 initial funding. As of March 31, 1996 $2,175,000 of the obligations of the production company to Newmarket under the loan facility, other than the portion of the loan covered by more than $13 million of foreign pre-sales, was guaranteed by the Company. Newmarket also has the right to certain profit participations in connection with the film. There is no assurance that THE ADVENTURES OF PINOCCHIO, which represents the Company's biggest budget theatrical motion picture to date, will be successful. The Company has obtained completion bond insurance to guaranty that the film will be completed and delivered to the technical specifications of Savoy (as assigned to New Line) and international sub-distributors. New Line has agreed to accept the technical specifications ordered by Savoy as its delivery requirements. The Company's ability to complete this project is materially dependent upon both funding by Savoy (against domestic distribution rights it licensed) and by Newmarket (against the Company's foreign pre-sales and remaining foreign rights). See "Certain Forward Looking Statements." In May and June 1995 the Company, in its role as worldwide distributor, agreed to guaranty a proportion of two production loans to film producers, which are consolidated entities, from Newmarket with respect to the feature films SERPENT'S LAIR and THE GRAVE. The loans of $1,005,000 and $2,100,000 each bear interest at an annual rate of Prime (8.25% as of July 8, 1996) plus 1% on the first $500,000 advanced under the loan, then pricing options are at either (a) Prime plus 1% or (b) LIBOR plus 3% on the remaining loan balance through February 1, 1996 when the loans have a pricing increase to Prime + 3% through the maturity date of such loans, plus loan fees of $60,000 per loan, plus a net profit participation of 10% of the Company's net profit participation. The loans are secured solely by the rights, title and assets of the production companies related to those films. The loans matured on June 30, 1996. The Kushner-Locke Company's corporate guaranty is reducible by substitution of contracts receivable from sub-distributors, licensing rights to these films in certain media and territories. Milestone dates for aggregate acceptable contracts receivable were set by Newmarket within the loan documentation. In September and December 1995, Newmarket granted waivers to the borrower for not reaching certain milestones and amended its Loan and Security Agreements accordingly. At March 31, 1996, the outstanding balance on the Company's corporate guaranty of principal and interest for SERPENT'S LAIR was reduced to $345,000 and for THE GRAVE was reduced to $300,000 as a result of reaching certain acceptable sales levels. In August 1995 the Company, in its role as worldwide distributor, agreed to guaranty a portion of two other production loans to film producers, which are consolidated entities, provided by Newmarket and Paribas, with respect to the films WHOLE WIDE WORLD and FREEWAY. The $1,550,000 loan from Newmarket for WHOLE WIDE WORLD bears interest at a rate of Prime (8.25% as of July 8, 1996) plus 1% on the first $500,000 advanced under the loan, then pricing options are at either (a) Prime plus 1% or (b) LIBOR plus 3% on the remaining loan balance through February 1, 1996 when the loan has a pricing increase to Prime +3% through the maturity date of June 30, 1996, plus loan fees of $60,000, plus a net profit participation of 10% of the Company's net profit participation. The Company's corporate guaranty is reducible by the substitution of acceptable contracts receivable. Milestone dates for aggregate acceptable contracts receivable were set by Newmarket within the loan documentation. In September 1995 and March 1996, Newmarket granted waivers to the borrower for not reaching these milestones and amended its Loan and Security Agreement accordingly. As of March 31, 1996 the Company's outstanding corporate guaranty of principal for WHOLE WIDE WORLD was $500,000, and Newmarket required that the loan be repaid by $500,000 of principal. The Paribus loan for $1,983,333 for FREEWAY bears interest at either (a) Reference Rate (8.25% as of July 8, 1996) plus 1/2% or (b) LIBOR + 2% until the maturity date of July 5, 1996. For this loan, there are no milestone dates for aggregate contracts receivable and the Company's corporate guaranty of $961,667 is not reducible during the life of the loan. The amount of the difference between the cash collected and $961,667 is collectible at the maturity date by Paribus from the Company. On July 3, 1996, the borrowers under such loans sent letters to the lenders requesting a pay off amount for each of the Newmarket and Paribus loans (other than in connection with THE ADVENTURES OF PINOCCHIO). On July 3, 1996, such borrowers received letters from Newmarket and Paribus, as 31 applicable, setting forth the applicable pay off amounts. The Kushner-Locke Company anticipates that such loans will be repaid through the Company's line of credit with Chemical after the transfer of the applicable films to the Company and the inclusion of the receivables related to such films in its borrowing base. The Company anticipates completing the necessary documentation in mid to late July. The borrowers have not sought waivers in connection with these loans and, thus, such loans are past due and are in default. To date the lenders have not attempted to collect on such loans or the guarantees of The Kushner-Locke Company related thereto. If the loans are not repaid, The Kushner-Locke Company may be liable on its applicable guarantees. If The Kushner-Locke Company is unable to meet its obligations under such guarantees, such would lead to a default under its Convertible Subordinated Debentures and its credit facility with Chemical and the possible acceleration of such indebtedness. If such acceleration occurred and was not cured, the Company would be forced to immediately repay all of such indebtedness, including possibly through the sale of some or all of its assets. On May 6, 1996, the Company and Decade entered into an agreement to produce four theatrical action motion pictures. The motion pictures will be produced, subject to approval by the Company of certain creative aspects of such movies, by Decade and executive produced by Joel Silver and Richard Donner. Under the agreement, the Company has agreed to guarantee payment of $3,200,000 per picture payable upon the delivery of the "mandatory delivery items" for each picture in consideration of receipt of foreign distribution rights. The agreement is for a minimum of four feature-length motion pictures and may be extended, at Decade's option, to include a fifth picture. The initial two films under the agreement are WHITE ROSE and MADE MEN, neither of which yet has a scheduled release date. RELATED PARTY TRANSACTIONS. In December 1994, the Company advanced August Entertainment, Inc. ("August") $650,000 against distribution rights to third-party product. August is majority owned by Gregory Cascante, who joined the Company as head of its new international film distribution division. The agreement is secured by all assets of August, including a pledge of all sales commissions due to August from the producers thereof on the films SLEEP WITH ME, LAWNMOWER MAN II and NOSTRADAMUS and certain restricted cash in escrow. While the right of August to receive such commissions with respect to the film LAWNMOWER MAN II is subordinate to the interests of the production lenders, The Allied Entertainments Group PLC, and its subsidiaries which produced the film, has guaranteed payment of such commissions to the extent they would be payable had there been no production loan on that film. The loan bears interest at the lesser of (a) Prime (8.25% at July 8, 1996) plus 2% or (b) 10%. Repayment of principal and interest is by collection of commissions assigned as collateral. As of March 31, 1996 the Company had been repaid approximately $170,000 toward interest and principal and $528,000 principal amount remains outstanding. The loan matures in December 1996. Stuart Hersch, in addition to compensation paid to him as a member of the Board of Directors of the Company, became a consultant to the Company effective April 1, 1996 for which he is paid $7,500 per month. Mr. Hersch is assisting the Company in analyzing potential strategic acquisitions and is providing the Company consulting services in connection with the Company's involvement in infomercials. This agreement is on a month-to-month basis as needed by the Company. See Note 9 to "Notes to Consolidated Financial Statements to the Audited Financial Statements." Effective on April 29, 1996, the Company hired James L. Schwab as its new Chief Financial Officer replacing its previous Chief Financial Officer after the term of her employment agreement expired. In fiscal 1995 the Company entered into a partnership named TVFirst which creates and markets infomercials. One of TVFirst's current projects is a Christian music infomercial, in which a recording of Christian music sung by leading gospel artists is marketed. TVFirst has purchased air time for such infomercial but neither TVFirst nor either of its partners (including the Company) had the excess available resources to fund such purchases. Messrs. Locke and Kushner have loaned to TVFirst $30,000 as of March 31, 1996 to enable TVFirst to purchase such air time; subsequent loans by Messrs. Locke and Kushner have totaled an additional $325,000 through May 10, 1996. Such loans, subject to final documentation, will be guaranteed by the Company, will bear interest at the prime rate 32 (8.25% as of July 8, 1996) plus 1% and are anticipated to be repaid within six months, or possibly earlier based upon the cash flow of TVFirst. In addition, each lender will also receive an additional amount equal to 10% of the principal amount loaned by such lender, which amount will be payable on the repayment date. Furthermore, each lender will receive a profit participation in the profits, if any, related to the Christian music infomercial, up to an amount equal to 5% of its principal amount, which amount will be payable on the first anniversary of such repayment. There is no assurance that the infomercial will generate revenues in excess of its programming and media costs. The foregoing transaction was approved by a majority of the independent directors of the Company's Board of Directors. SUMMARY Management believes that existing resources and cash generated from operating activities, together with the net proceeds of this Offering and amounts expected to be available under the new syndicated revolving credit agreement with Chemical will be sufficient to meet the Company's working capital requirements for at least the next twelve months. The Company's business and operations have not been materially affected by inflation. 33 BUSINESS THE U.S. MOTION PICTURE INDUSTRY OVERVIEW The business of the motion picture industry may be broadly divided into two major segments: production, involving the development, financing and making of motion pictures, and distribution, involving the promotion and exploitation of completed motion pictures in a variety of media. Historically, the largest companies, or the so-called "Majors" and "mini-Majors," have dominated the motion picture industry by both producing and distributing in the United States a majority of those theatrical motion pictures which generate significant box office receipts. Over the past decade, however, "Independents" or smaller film production and distribution companies, such as the Company, have played an increasingly significant role in the production and distribution of motion pictures to fill the increasing worldwide demand for filmed entertainment product. The Majors (and mini-Majors) include MCA Universal Pictures, Warner Bros. Pictures, Metro-Goldwyn-Mayer Inc., New Line Pictures (a division of Turner Entertainment Co.), Twentieth Century Fox Film Corporation, Paramount Pictures Corporation, Sony Pictures Entertainment (including Columbia Pictures, TriStar Pictures and Triumph Releasing) and The Walt Disney Company (Buena Vista Pictures, Touchstone Pictures and Hollywood Pictures). Generally, the Majors own their own production studios (including lots, sound stages and post-production facilities), have a nationwide or worldwide distribution organization, release pictures with direct production costs generally ranging from $25 million to $60 million, and provide a continual source of pictures to film exhibitors. In addition, some of the Majors have divisions which are promoted as "Independent" distributors of motion pictures. These "Independent" divisions of Majors include Miramax Films (a division of The Walt Disney Company) and Sony Classics (a division of Sony Pictures). In addition to the Majors, the Independents engaged primarily in the distribution of motion pictures produced by companies other than the Majors include, among others, Trimark Holdings (through Trimark Pictures and Vidmark Entertainment), Live Entertainment, October Films, Republic Pictures (a division of Viacom), The Samuel Goldwyn Company and Fine Line Pictures (a division of New Line Pictures). The Independents typically do not own production studios or employ as large a development or production staff as the Majors. MOTION PICTURE PRODUCTION AND FINANCING The production of a motion picture usually involves four steps: development, pre-production, production and post-production. The development stage includes obtaining an original screenplay or a screenplay based on a pre-existing literary work, or a screenplay may be acquired and rewritten. Creative personnel may be contacted to determine availability and for planning the timing of the project, or in some cases actually hired. In pre-production, a budget is prepared, the remaining creative personnel, including a director, actors and various technical personnel are hired, shooting schedules and locations are also planned and other steps necessary to prepare the motion picture for principal photography are completed. Production is the principal photography of the project and generally continues for a period of not more than three months. In post-production, the film is edited and synchronized with music and dialogue and, in certain cases, special effects are added. The final edited synchronized product, the negative, is used to manufacture release prints suitable for public exhibition. The production of a motion picture requires the financing of the direct costs of production. Direct production costs include film studio rental, cinematography, post-production costs and the compensation of creative and other production personnel. Distribution costs (including costs of advertising and release prints) are not included in direct production costs. The Majors generally have sufficient cash flow from their motion picture and related activities, or, in some cases, from unrelated businesses (E.G., theme parks, publishing, electronics, merchandising) to pay or otherwise provide for their production costs, and the studios themselves generally absorb the considerable overhead costs involved in a production. Overhead costs are, in substantial part, the 34 salaries and related costs of the production staff and physical facilities which the Majors maintain on a full-time basis. The Majors often enter into contracts with writers, producers and other creative personnel for multiple projects or for fixed periods of time. Independent production companies generally avoid incurring substantial overhead costs by hiring creative and other production personnel and retaining the other elements required for pre-production, principal photography and post-production activities on a project-by-project basis. Unlike the Major studios, the Independents also typically finance their production activities from various sources including bank loans, "pre-sales," equity offerings and joint ventures. Independents generally attempt to complete their financing of a motion picture production prior to commencement of principal photography, at which point substantial production costs begin to be incurred and require payment. "Pre-sales" are often used by Independent film companies to finance all or a portion of the direct production costs of a motion picture. Pre-sales consist of fees or advances paid or guaranteed to the producer by third parties in return for the right to exhibit the completed motion picture in theaters or to distribute it in home video, television, international or other ancillary markets. Producers with distribution capabilities may retain the right to distribute the completed motion picture either domestically or in one or more international markets. Other producers may separately license theatrical, home video, television, international and all other distribution rights among several licensees. Commitments in a pre-sale are typically subject to delivery and to the approval of a number of prenegotiated factors, including script, production budget, cast and director. Both Major studios and Independent film companies often acquire motion pictures for distribution through a customary industry arrangement known as a "negative pickup" under which the studio or Independent film company agrees to acquire from an Independent production company some or all rights to a film upon completion of production. The Independent production company normally finances production of the motion picture pursuant to financing arrangements with banks or other lenders in which the lender is granted a security interest in the film and the Independent production company's rights under its arrangement with the studio or Independent. When the studio or Independent "picks up" the completed motion picture, it may assume some or all of the production financing indebtedness incurred by the production company in connection with the film. In addition, the Independent production company is paid a production fee and generally is granted a participation in the net profits from distribution of the motion picture. Both Major studios and Independent film companies generally incur various third-party participations in connection with the distribution and production of a motion picture. These participations are contractual rights of actors, directors, screenwriters, producers, owners of rights and other creative and financial contributors entitling them to share in revenues or net profits (as defined in the respective agreements) from a particular motion picture. Except for the most sought-after talent, participations are generally payable only after all distribution and marketing fees and costs, direct production costs (including overhead) and financing costs are paid in full. MOTION PICTURE DISTRIBUTION Distribution of a motion picture involves the domestic and international licensing of the picture for (i) theatrical exhibition, (ii) home video, (iii) presentation on television, including pay-per-view, video-on-demand, satellites, pay cable, network, basic cable and syndication, (iv) non-theatrical exhibition, which includes airlines, hotels, armed forces facilities and schools and (v) marketing of the other rights in the picture, which may include books, CD-ROM, merchandising and soundtrack recordings. THEATRICAL DISTRIBUTION AND EXHIBITION. Theatrical distribution of motion pictures is the exhibition of a film in a theater open to the public where an admission fee is charged. Theatrical distribution involves the manufacture of release prints; licensing of motion pictures to theatrical exhibitors; and promotion of the motion picture through advertising and promotional campaigns. The size and 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 35 amounts paid by patrons at motion picture theaters for a particular film, as determined from reports furnished by exhibitors. The ability to exhibit films during summer and holiday periods, which are generally considered peak exhibition seasons, may affect the theatrical success of a film. Competition among distributors to obtain exhibition dates in theaters during these seasons is significant. In addition, the costs incurred in connection with the distribution of a motion picture can vary significantly, depending on the number of screens on which the motion picture is to be exhibited and the ability to exhibit motion pictures during peak exhibition seasons. Similarly, the ability to exhibit motion pictures in the most popular theaters in each area can affect theatrical revenues. Exhibition arrangements with theater operators for the first run of a film generally provide for the exhibitor to pay the greater of 90% of ticket sales in excess of fixed amounts relating to the theater's costs of operation and overhead, or a minimum percentage of ticket sales which varies from 40% to 70% for the first week of an engagement at a particular theater, decreasing each subsequent week to 25% to 30% for the final weeks of the engagement. The length of an engagement depends principally on the audience response to the film. Films with theatrical releases (which generally may continue for up to six months) typically are made available for release in other media as follows:
MONTHS AFTER APPROXIMATE MARKET INITIAL RELEASE RELEASE PERIOD - -------------------------------------------------- ---------------- ---------------- Domestic home video............................... 4-6 months -- Domestic pay-per-view............................. 6-9 months 3 months Domestic pay cable................................ 10-18 months 12-21 months Domestic network or basic cable................... 30-36 months 18-36 months Domestic syndication.............................. 30-36 months 3-15 years International theatrical.......................... -- 4-6 months International home video.......................... 6-12 months -- International television.......................... 18-24 months 18-30 months
HOME VIDEO. The home video distribution business involves the promotion and sale of videocassettes and videodiscs to local, regional and national video retailers (including video speciality stores, convenience stores, record stores and other outlets), which then rent or sell the videocassettes and videodiscs to consumers for private viewing. In the last decade, home video has been one of the fastest growing motion picture distribution media. In terms of total distribution revenues generated, the domestic home video market is currently larger than the domestic theatrical exhibition market. Major feature films are usually scheduled for release in the home video market within four to six months after theatrical release to capitalize on the theatrical advertising and publicity for the film. Promotion of new releases is generally undertaken during the nine to twelve weeks before the home video release date. Videocassettes of feature films are generally sold to domestic wholesalers either on a unit basis or pay-per-transaction basis. Unit based sales typically involve the sales of individual videocassettes to wholesalers or distributors at approximately $50 to $60 per unit and generally are rented by consumers for fees ranging from $1 to $5 per day (with all rental fees retained by the retailer). Sales involve the sale of a videocassette at a nominal price ($5-$10) with rental fees divided between the video retailer and the video distributor. Wholesalers who meet certain sales and performance objectives may earn rebates, return credits and cooperative advertising allowances. Selected titles, including certain made-for-video programs, are priced significantly lower to encourage direct purchase by consumers. The market for direct sale to consumers is referred to as the "priced-for-sale" or "sell-through" market. Technological developments including videoserver and compression technologies, which regional telephone companies and others are developing could make competing delivery systems economically viable and could significantly impact the Company's home video revenues. 36 PAY-PER-VIEW. Pay-per-view television allows cable television subscribers to purchase individual programs, primarily recently released theatrical motion pictures, sporting events and music concerts, on a "per use" basis. The fee a subscriber is charged is typically split among the program distributor, the pay-per-view operator and the cable operator. PAY CABLE. The domestic pay cable industry (as it pertains to motion pictures) currently consists primarily of HBO/Cinemax, Showtime/The Movie Channel, Encore/Starz and a number of regional pay services. Pay cable services are sold to cable system operators for a monthly license fee based on the number of subscribers receiving the service. These pay programming services are in turn offered by cable system operators to subscribers for a monthly subscription fee. The pay television networks generally acquire their film programming by purchasing the distribution rights from motion picture distributors. INTERNATIONAL MARKETS. The worldwide demand for motion pictures has expanded significantly as evidenced by the development of new international markets and media. This growth is primarily driven by the overseas privatization of television stations, introduction of direct broadcast satellite services, growth of home video and increased cable penetration. Accordingly, in September 1994 the Company established its own foreign theatrical distribution operations for its own and third party product. NON-THEATRICAL MARKETS. In addition to the distribution media described above, a number of sources of revenue exist for motion picture distribution through the exploitation of other rights, including the right to distribute films to airlines, schools, libraries and hospitals. MOTION PICTURE ACQUISITION In addition to its own production activities, the Company is actively engaged in the acquisition of rights to films and other programming from Independent film producers, distribution companies and others for use in the emerging new delivery systems. The Company is continually seeking to identify and negotiate the acquisition of motion picture distribution rights in order to maximize the number of films it can distribute. To be successful, the Company must locate and track the development and production of numerous independent feature films. TYPES OF MOTION PICTURES ACQUIRED. The Company generally seeks to produce or acquire motion pictures across a broad range of genres -- dramas, thriller, comedy, science fiction, family, action, and fantasy/adventure, etc. -- which will appeal to a targeted audience. Historically, the Company has not attempted to acquire higher production budget (over $3.5 million) films because of the interest that the Majors have shown in acquiring such films, and the associated competition and higher production advances, minimum guarantees and other costs. In most cases, the Company attempts to acquire rights to motion pictures with a recognizable marquis "name" with public recognition, thereby enhancing promotion of the motion pictures in the home video or international markets. The Company believes that this approach enhances the marketability of a film and increases the likelihood of generating a product capable of producing cash flow, ancillary rights income and the possibility of a theatrical release. METHOD OF ACQUISITIONS. The Company has typically acquired films on a "pick-up" basis or "pre-buy" basis. Films acquired on a "pick-up" basis are those films to which the Company has acquired distribution rights following completion of most or all of the production and editing process. These films are generally acquired after management of the Company has viewed the film to evaluate its commercial viability. Films acquired on a "pre-buy" basis are films to which the Company acquires distribution rights prior to the completion of a substantial portion of production and editing. The Company's willingness to acquire films on a pre-buy basis will be based upon factors which generally include the track record and reputation of the picture's producer, the quality and commercial value of the screenplay, the "package" elements of the picture, including the director and principal cast members, the budget of the picture and the genre of the picture. Before making an acquisition offer on a film to be acquired on 37 a pre-buy basis, the Company may work with the producer to modify certain of these elements. If the matters considered are acceptable, the Company's obligation to accept delivery and make payment will be conditioned upon receipt of a finished film conforming to the script reviewed by the Company and other specifications considered important by the Company. SOURCES OF DISTRIBUTION RIGHTS. Typically, projects which may be suitable for the Company are submitted directly to the Company for consideration. In order to promote the submission of projects, the Company relies primarily on its reputation as an Independent having significant access to the international markets. The Company also relies upon the personal contacts of its senior officers, which contacts have been generated through their prior business and personal dealings with Independent production companies, Majors, other Independents, entertainment, legal and accounting firms, business management firms, talent agencies, production lenders and personal managers who are actively involved in the production community. ACQUISITION PROCESS. If the Company locates a motion picture which it believes satisfies the criteria set forth above in "-- Types of Motion Pictures Acquired" above for which it desires to acquire the distribution rights, the Company may pay the production company granting those rights an advance or a guaranteed minimum payment conditioned upon delivery of a completed film (either, a "minimum guarantee") against a share or participation in the revenue actually received by the Company from the exploitation of a film in each licensed media. The minimum guarantee is generally paid prior to the film's release. Typically, the Company will recoup the minimum guarantee and certain other amounts from the production company's participation prior to paying the production company additional amounts. FILM LIBRARY. The Company's distribution rights generally range from seven to 21 years from the date of acquisition, or continue in perpetuity, and primarily extend to home video and free, basic cable and pay cable television and international territories. MULTI-PICTURE DISTRIBUTION. On May 6, 1996, the Company and Decade entered into an agreement to produce four theatrical action motion pictures. The motion pictures will be produced, subject to approval by the Company of certain creative aspects of such movies, by Decade and executive produced by Joel Silver and Richard Donner. Under the agreement, the Company has agreed to guarantee payment of $3,200,000 per picture (out of the estimated $6 million to $7 million budget) payable upon the delivery of the "mandatory delivery items" for each picture in consideration of receipt of foreign distribution rights. The agreement is for a minimum of four feature-length motion pictures and may be extended, at Decade's option, to include a fifth picture. The initial two films under the agreement are WHITE ROSE and MADE MEN, neither of which yet has a scheduled release date. COMPANY FEATURE FILM PRODUCTION The Company's feature film division was established in April 1993 to develop and produce low and medium budget films. The Company's low to medium budget films to date have had production budgets ranging from approximately $1 million to $3.5 million although the Company from time to time may release a higher budget film or moderate budget film having higher budgets. The Company anticipates that its low-budget films primarily will be targeted for direct distribution to home video and cable television markets and that its medium-budget films may be targeted for theatrical release. The Company generally retains distribution rights outside of the U.S. with respect to such films. The Company's films primarily will be distributed by third parties in the U.S. market, but, in certain circumstances, the Company may undertake limited U.S. distribution or co-distribution activities for films it produces or acquires. The Company's feature film strategy generally is to develop and produce feature films when the production budgets for the films are expected to be substantially covered through a combination of pre-sales, output arrangements, equity arrangements and production loans with "gap" financing. To further limit the Company's financing risk or to obtain production loans, the Company expects to purchase completion bonds when necessary to guaranty the completion of production. 38 In fiscal 1995, the Company's feature film division delivered eleven films for the home video market. The horror movie Wes Craven Presents: MINDRIPPER, which premiered on HBO, the supernatural thriller LAST GASP and the detective story LADY-IN-WAITING were all distributed by WarnerVision Home Video. The Company also delivered to Paramount Pictures the six fantasy adventure films (the TIME WARRIOR series) entitled THE HUMAN PETS, PLANET OF THE DINO-KNIGHTS, TRAPPED IN TOYWORLD, JOURNEY TO THE MAGIC CAVERN, EGGS FROM 70 MILLION B.C. and LOST WORLD OF THE GIANTS. In addition, the Company acquired six adult thriller films for distribution purposes. For 1996, the Company is currently producing, in a co-venture with Keswick Films, Inc., THE BRAVE LITTLE TOASTER GOES TO MARS and THE BRAVE LITTLE TOASTER GOES TO SCHOOL, two sequels to its successful animated film THE BRAVE LITTLE TOASTER (for Buena Vista Home Video) and five children's fantasy adventure films for Paramount Pictures under its Moonbeam label entitled GENIE, GULLIVER LOST IN LILLIPUT, JOHNNIE MYSTO: BOY WIZARD, KID MIDAS and LITTLE GHOST. The Company will be distributing internationally the live action feature THE ADVENTURES OF PINOCCHIO, the approximately $29 million production which is scheduled for domestic release by New Line Pictures on July 26, 1996, and four other feature films entitled FREEWAY, THE GRAVE, WHOLE WIDE WORLD, and SERPENT'S LAIR. Another upcoming film is THE LAST TIME I COMMITTED SUICIDE starring Keanu Reeves. The Company's low budget feature slate for 1996 includes approximately 20 films, including the projects described above. There is no assurance that any project in development will lead to production commitments or that any feature films which are produced or distributed will be commercially successful. FILM SCHEDULE The following films were released or delivered by the Company in fiscal 1995.
DELIVERY/RELEASE PICTURE INITIAL MEDIA DATE FILM TYPE PRINCIPAL TALENT - -------------------------------- --------------- ---------------- ---------------------- -------------------- PLANET OF THE DINO-KNIGHTS Home Video Sep-95 Fantasy/Adventure Corbin Allred THE HUMAN PETS Home Video Sep-95 Fantasy/Adventure Corbin Allred TRAPPED IN TOYWORLD Home Video Sep-95 Fantasy/Adventure Corbin Allred EGGS FROM 70 MILLION B.C. Home Video Sep-95 Fantasy/Adventure Corbin Allred JOURNEY TO THE MAGIC CAVERN Home Video Sep-95 Fantasy/Adventure Corbin Allred LOST WORLD OF THE GIANTS Home Video Sep-95 Fantasy/Adventure Corbin Allred LAST GASP Pay Cable May-95 Horror Robert Patrick WES CRAVEN PRESENTS: MINDRIPPER Pay Cable May-95 Horror Lance Henriksen
The following films were released or delivered on are scheduled for release or delivery by the Company in fiscal 1996. Unless otherwise indicated, each of the films released or to be released theatrically, other than THE ADVENTURES OF PINOCCHIO, are expected to have a limited theatrical release.
ESTIMATED/ACTUAL ACTUAL/ANTICIPATED DELIVERY/RELEASE PICTURE INITIAL MEDIA DATE FILM TYPE PRINCIPAL TALENT - --------------------------- ----------------- --------------- ---------------------- ----------------------- THE BRAVE LITTLE TOASTER Home Video Sep-96 Animated N/A GOES TO MARS THE BRAVE LITTLE TOASTER Home Video Sep-96 Animated N/A GOES TO SCHOOL GENIE Home Video Dec-96 Fantasy/Adventure N/A GULLIVER LOST IN LILLIPUT Home Video Dec-96 Fantasy/Adventure N/A INDECENT BEHAVIOR 3 Home Video Feb-96 Thriller Shannon Tweed JOHNNIE MYSTO: BOY WIZARD Home Video Sep-96 Fantasy/Adventure N/A KID MIDAS Home Video Sep-96 Fantasy/Adventure N/A LITTLE GHOST Home Video Nov-96 Fantasy/Adventure N/A
39
ESTIMATED/ACTUAL ACTUAL/ANTICIPATED DELIVERY/RELEASE PICTURE INITIAL MEDIA DATE FILM TYPE PRINCIPAL TALENT - --------------------------- ----------------- --------------- ---------------------- ----------------------- NAKED SOULS Home Video Mar-96 Drama Pamela Anderson; Dean Stockwell; David Warner CAFE SOCIETY Pay Cable Feb-96 Drama Laura Flynn Boyle; Peter Gallager FREEWAY Pay Cable Feb-96 Drama Kiefer Sutherland; Reese Witherspoon; Brooke Shields THE GRAVE Pay Cable Feb-96 Thriller Craig Sheffer; Gabrielle Anwar; Eric Roberts SERPENT'S LAIR Pay Cable Feb-96 Thriller Jeff Fahey; Lisa B THE LAST TIME I COMMITTED Theatrical Sep-96 Drama Keanu Reeves SUICIDE THE ADVENTURES OF PINOCCHIO Theatrical Jul-96 Fantasy/Adventure Martin Landau; Jonathan Taylor Thomas RED RIBBON BLUES Theatrical Feb-96 Drama Debbie Mazar WHOLE WIDE WORLD Theatrical Mar-96 Drama Vincent D'Onofrio; Rene Zewelleger WAITING FOR SUNSET Theatrical Aug-96 Drama Robert Mitchum; Cliff Robertson WAITING FOR THE MAN Theatrical Jun-96 Action Jeff Fahey; Rae Dawn Chong
There is no assurance that any motion picture which has not yet been released will be released, or that a change in the scheduled release dates of any such films will not occur. TELEVISION INDUSTRY OVERVIEW The United States television market is the largest in the world, consisting of the principal broadcast networks and their affiliates, independent television stations and cable television networks. Expanding international television broadcast, cable and satellite delivery systems offer further opportunities for the exploitation of television programming. DOMESTIC MARKET. The U.S. market for television programming primarily is composed of four submarkets: the broadcast television networks (ABC, CBS, NBC and Fox and emerging networks consisting of UPN and WBN), pay cable services (such as HBO, The Disney Channel and Showtime/ The Movie Channel, Inc.), basic cable services (such as USA Network, the Arts & Entertainment Network, Lifetime, The Family Channel and Turner Broadcasting Network) and syndicators of first-run programming (such as MCA, King World Productions and Multimedia, Inc.). The U.S. television market currently is dominated by the three major networks, each of which has approximately 200 affiliated stations and the Fox network, which has approximately 125 affiliated stations. The affiliates broadcast network-supplied programming and national commercials in return for payments by the major networks. This relationship results in the networks being able to reach virtually all of the significant television markets in the U.S. There are also a significant number of independent commercial television stations in the U.S. These stations offer an alternative to network distribution through syndication. The network schedule provides affiliates with only a portion of their daily program schedule, and the balance of the time is filled with programs acquired through television syndication companies or produced locally by the station. Cable services generally are classified as being in one of four categories: telephone delivery (e.g., Disney TeleVentures arrangement with four phone companies to deliver programming over telephone lines), superstations (e.g., Turner Broadcasting Network), pay cable services (e.g., HBO) and basic cable networks (advertiser-supported, e.g., The Family 40 Channel). The most successful cable networks reach more than 60% of the U.S. television households. Recently developed digital compression technology combined with fiber optics or small-sized satellite dishes may permit cable companies, telephone companies or direct broadcast satellite systems to expand the domestic television market up to 500 or more channels. TELEVISION PROGRAMMING. Each of the three major television networks currently broadcasts approximately 22 hours of prime-time programming and approximately 30 hours of daytime programming each week. Prime-time programming generally consists of half-hour series (often situation comedies), reality shows, hour-length series, movies-for-television (films of two hours or less) and mini-series (dramatic epics of three hours or more). The increased channel capacity and large base of cable subscribers that have developed during the 1980s and 1990s have made possible the development of a number of pay cable and basic cable networks which have become important purchasers of both original and rerun television programming, including movies-for-television, mini-series and series. Suppliers of television programming include the production divisions or affiliated companies of the major networks, major film studios, station owners and independent producers, such as the Company. INTERNATIONAL MARKETS. The number of outlets for television programming outside the U.S. has been increasing with the worldwide proliferation of broadcast, cable and satellite delivery systems. Over the last ten years, European governments have privatized television systems in several countries, including Germany, Italy, France and Spain. The Company believes privatized systems are more likely to broadcast American programming than government-owned networks. In addition, both the number of pay and satellite television systems in Europe and the number of subscribers to these systems have increased. Pay television and satellite distribution systems also are developing in other geographic areas, including many Asian countries. In international markets, suppliers of programming may be subject to local content and quota requirements which prohibit or limit the amount of American programming in particular markets. See "Business -- Government Regulations." COMPANY TELEVISION STRATEGY The Company was founded in 1983 to engage in the business of developing and producing, on a cost-effective basis, quality television programming with broad appeal. The Company's television business has evolved from the production of programs owned by third parties and typically airing on local television stations in the first-run syndication market, such as the long-running daytime series DIVORCE COURT, to the development, production and ownership of series, movies-for-television and mini-series for major domestic and international television networks and the expanding pay and basic cable markets. In August 1991, the Company implemented a key element of its business strategy by establishing an international distribution operation for its own and acquired television programming. The Company believes that through the control of the distribution of its own programming this operation has increased its ability to cover the cost of new programs and to retain the fees and profit potential previously realized by third parties. The Company's television strategy is principally focused on increasing the amount of programming it provides to the major U.S. networks, primarily one-hour series, movies-of-the week and mini-series, in part because the Company believes network exhibition enhances a television program's potential value (both in international markets and potential rerun syndication). In order to increase the likelihood of developing programs that will be licensed by the networks, the Company has made significant investments in expanding its roster of network approved writers, producers and actors and acquiring literary materials and rights. As of March 31, 1996, the Company had 10 movies-for-television and various television series in different stages of development for potential production which were being funded at least in part by the networks or other third parties. The Company believes that the worldwide proliferation of television delivery systems has expanded the potential purchasers of television programming beyond the major U.S. networks and other traditional purchasers of television programming. As part of its strategy, the Company actively seeks 41 to supply programming to these non-traditional purchasers. The Company has sold original programming developed for pay cable (The Disney Channel and HBO) and for basic cable (The Family Channel and the Arts & Entertainment Network). To position itself for the perceived growth in this market, the Company is actively acquiring various forms of U.S. cable, video-on-demand and satellite rights from third party producers for time periods ranging from seven years to perpetuity through its KLC/New City joint venture. The customary order for release is a period of approximately six months of pay-per-view followed by 18-24 months of pay cable and 24 to 48 months of basic cable, which completes a cycle. In connection with its programming activities, the Company utilizes licensing and co-production arrangements to fund the costs of production, and generally retains additional licensing rights and, in the case of series, rerun syndication rights which offer future upside profit potential. The Company generally does not commence principal photography of its television programming without first obtaining license or other revenue commitments or production financing which equal all or a substantial portion of the budgeted production costs. By obtaining license fees and other pre-committed revenues through the efforts of its international television distribution division to cover a substantial portion or all of its budgeted production costs, the Company believes that it reduces many of the financial risks associated with an individual production. TELEVISION PROGRAM FINANCING DEVELOPMENT COSTS. The Company generally finances project development costs without third-party participation until the script commitment stage. Because of the substantial likelihood that the significant costs in producing scripts and pilots will not be recovered, the Company generally attempts to limit its financial investment by obtaining financial commitments from networks or other third parties to cover all or a substantial portion of these costs. See "Business -- Television Projects in Development." PROGRAM LICENSING. Generally, the Company will license to a network the right to broadcast a program for a period ending the earlier of the second broadcast of the program or four years from delivery in exchange for a license fee equal to 70% to 90% of the program's budgeted production cost (any remaining amount is referred to as the "production deficit"). The Company generally retains all other rights to the program and will usually license certain rights to international broadcasters, enabling the Company to recoup all, or a portion, of the production deficit. In addition, the Company will typically license additional domestic releases in other media to cover the remainder, if any, of the production deficit. A production order sets forth the principal terms for a license of the Company's product to a network and specifies the license fee to be paid and the conditions to be met for payment. Production orders typically are contingent on the producer's obtaining certain approvals from the network, such as script, principal cast and director, prior to commencement of principal photography. The Company usually receives its license fee in installments, e.g., one-third on or prior to commencement of principal photography, one-third upon completion of principal photography and one-third upon delivery of the completed program. International distribution typically involves licensing the rights to exhibit programming in international territories to broadcasters within those territories for a fixed license fee usually payable after the program has been completed. Due to timing differences between the Company's receipt of license fees and its payment of production costs, the Company generally is required to fund at least a portion of its production costs from working capital or financing of the contracts receivable, even if the original license fees equal or exceed budgeted production costs. In the case of first-run syndication programs, the license agreements with the first-run syndicator generally provide that the Company is entitled to a fixed license fee and a percentage of revenues from distribution after the syndicator recoups the fixed license fee it pays the Company and deducts its distribution fees and costs. The Company's operating revenues from first-run syndication have not been material in the past three fiscal years. An alternate first-run syndication revenue source is called "barter" sales. A television station, in lieu of, or in combination with, licensing fees may grant to the Company's distributor the right to sell 42 advertising spots during the exhibition of the Company's television program. For a program to be barterable, exhibition of the program on stations reaching at least 70% of the U.S. television households and in most of the top ten major metropolitan areas typically is required. The amount of the fee paid by the advertiser is conditioned upon the program achieving certain agreed upon ratings. If the specified rating is not achieved, the distributor is required to "make good" by giving the advertiser additional advertising time or cash payment, and the Company's share of barter revenues decreases. Bartering arrangements were used for PIGASSO'S PLACE during the September 1994 season and were used in the domestic rerun distribution of the first 26 episodes of SWEATING BULLETS and of certain episodes of 1ST AND TEN. See "Rerun Syndication." While the Company seeks to cover most or all of its production costs with license fees and other pre-committed revenues, it may finance some of the production costs on its own and rely on subsequent licensing in international or other ancillary markets to recoup the remaining production costs. In many cases, additional profit potential from a television program initially shown on a network or cable service is sought from subsequent reruns of the program on local television stations, international delivery systems and cable services after exhibition on a major network or cable service. In any event, any production is subject to the risk of cost overruns, and there is no assurance that the Company will be able to recover any investment it undertakes in a deficit-financed project. INTERNATIONAL CO-PRODUCTIONS. An international co-production is a joint venture or partnership between entities in two or more countries which in certain cases may take advantage of tax or nationality benefits in one or more of the countries. In a typical co-production arrangement, the Company transfers all or part of its copyright ownership in the project to third parties (the co- production entities), which generally provide a portion of the production financing and other services. Typically, the co-production partners grant distribution rights to the Company. The revenues received by the Company from its distribution of the project are allocated to the various parties for recoupment of production funding, production fees, talent participations, distribution fees and expenses. Any remaining receipts are distributed to the various parties in accordance with their agreed-upon profit participation. The Company has utilized co-productions with international producers in certain cases in order to take advantage of alternative sources of financing for its productions, to utilize international tax benefits, to pass foreign quota restrictions and to benefit from lower production costs in certain foreign countries. PRODUCER-FOR-HIRE. In addition to developing and producing programs that it owns, the Company may be hired as a producer-for-hire in connection with a creative concept or literary property owned by another person. There are at least two types of producer-for-hire arrangements. Under the first type of arrangement, the Company receives a set package fee and agrees to deliver the completed program for that fee. The Company's profit is the excess of the package fee over its production costs. If production costs exceed the package fee, the Company bears the deficit. Under the second type of producer-for-hire arrangement, the Company furnishes personnel as a producer, receives a fixed fee per episode and the production costs of the program are reimbursed directly by the distributor. The Company's production of 860 episodes of DIVORCE COURT from 1984 to 1988 was on a producer-for-hire basis. The Company's current strategy generally is rather to obtain ownership and control of distribution of its television programming. RERUN SYNDICATION. Domestic rerun syndication typically involves the exhibition of programming on local television stations and cable services after exhibition on a major network. Since production costs for network series may exceed network license fees and other pre-committed revenues, some television production companies may depend on successful syndication of their programming for profitable operations. Generally, to be successful in rerun syndication, a television series must have at least 66 episodes (the equivalent of three full television seasons). In the past, the Company has licensed rerun syndication distribution rights to 1ST AND TEN to HBO in consideration of certain advances. HBO entered into an agreement with Western International Syndication ("WIS") 43 pursuant to which WIS acquired certain exclusive rights (including rerun syndication) to distribute 1ST AND TEN for a ten-year period. The Company also licensed rerun syndication of the first 26 episodes of SWEATING BULLETS for a one-year period to Multimedia, Inc. TELEVISION PRODUCTION ACTIVITIES As a producer of television programming, the Company first develops or acquires literary properties either internally or from third parties. The Company may undertake expenditures to refine the concept of an acquired property and then attempts to interest one of the networks or another buyer in the project. If the buyer is interested in a concept presented to it, the buyer will usually order a script from the Company. Once the script has been delivered, the buyer may order production of a single pilot episode or a limited number of episodes, in the case of a series, or the entire production, in the case of a movie-for-television or mini-series. Once production is ordered, the Company and the buyer negotiate a financing arrangement. The Company then undertakes pre-production activities in which a budget is prepared, the screenplay is polished or rewritten, creative personnel (including director and actors), a line producer and technical personnel are engaged, filming is scheduled, locations are arranged and other steps are taken to prepare the project for principal photography. By this point, the Company generally has negotiated license fees and obtained other commitments to cover a substantial portion of the budgeted production costs. Principal photography is then completed, followed by post-production, in which the film is edited, synchronized with music and dialogue and any special effects are added. In the case of a series, if episodes are ordered and the ratings are sufficiently strong, additional episodes may be ordered for the entire season and then for additional seasons. The production of episodes for subsequent seasons is usually dependent upon the audience ratings for the prior season. In undertaking production of its programming, the Company hires writers, directors, cast and crew members on a project-by-project basis. The terms of employment and compensation are negotiated in light of an individual's previous experience, the prevailing market conditions and, where applicable, collective bargaining agreements. The Company also obtains locations, sets and post- production personnel and facilities on an as-needed basis by paying prevailing rates. The Company believes that production and post-production personnel and facilities are in ample supply at competitive rates. The production of animated programming is a labor intensive process that commences with artistic sketches of the various characters and the story line. Storyboards, models, songs and voice elements are then sent to various production companies, typically in Asia, where drawings of the animation frames are prepared. The frames are painted and then sequentially photographed to create film. The film is then usually sent back to the United States, where final editing of footage and mixing of sound effects, dialogue and music is completed, although on occasion final editing and mixing may be completed in Asia. The following table summarizes the Company's television programming which has aired, is in pre-production, or is scheduled to air after January 1, 1996, the type of program and the network where such programming would be initially exhibited:
FIRST TITLE TYPE OF PROGRAM EXHIBITION - ----------------------------------------- --------------------- -------------- JACK REED IV: A KILLER AMONGST US Movie-of-the-week NBC JACK REED V Movie-of-the-week NBC PRINCESS IN LOVE Movie-of-the-week CBS THE GUN One-hour Pilot ABC ECHO Movie-of-the-week ABC EVERY WOMAN'S DREAM Movie-of-the-week CBS A HUSBAND, A WIFE AND A LOVER Movie-of-the-week CBS INNOCENT VICTIMS Mini-series ABC
44 TELEVISION PROJECTS IN DEVELOPMENT The Company's results of operations largely depend on its having adequate access to program concepts, ideas and scripts that are capable of being acquired, produced and successfully marketed. Such access is dependent upon numerous factors, including the reputation and credibility of the Company in the creative community, the relationships the Company has in the entertainment industry and the Company's financial and other resources. In order to provide a supply of ideas and projects, the Company from time to time enters into agreements with producers and writers for the purpose of developing or acquiring new programming. While the Company may finance the early development of its projects, the Company typically does not proceed with the preparation of a script or the production of a pilot, which involves a more significant financial commitment, unless a network or other buyer has agreed to fund all or a substantial portion of the costs associated therewith. The following table sets forth, as of March 31, 1996, potential television movies in various stages of development identified below:
WORKING TITLE NETWORK TYPE OF PROGRAM - ------------------------------ --------- --------------------- HAPPY TRAILS CBS MOVIE-OF-THE-WEEK IN HER SISTER'S NAME CBS MOVIE-OF-THE-WEEK FAMILY IN FEAR NBC MOVIE-OF-THE-WEEK FAST TRACK ABC MOVIE-OF-THE-WEEK DOWN THE ROAD HBO ORIGINAL MOVIE JACK REED VI NBC MOVIE-OF-THE-WEEK COME HERE CBS MOVIE-OF-THE-WEEK CHILDREN NBC MOVIE-OF-THE-WEEK THE LIFE SHE LEFT BEHIND ABC MOVIE-OF-THE-WEEK UNLAWFUL SEDUCTION ABC MOVIE-OF-THE-WEEK
Although the Company has numerous projects in development, as is typical in the industry, only a relatively small number of such projects are ultimately produced (with the likelihood of production being more remote in the case of television series), and it is rare for any projects in development to have production commitments until late in the development process. There is no assurance that the Company's efforts in developing or acquiring potential new programs, including any of the projects in development described above, will lead to production commitments or that any programs that are ultimately produced will be successful. TELEVISION DISTRIBUTION ACTIVITIES DOMESTIC DISTRIBUTION. The Company's original programming generally has been initially licensed to a network or cable broadcaster for a period expiring on the earlier of two network broadcasts or a license period of up to four years from delivery. Following the expiration of the license, the rights typically revert to the Company's library and become available for additional licensing. Further revenues may be sought from subsequent licensing in the domestic market in other media, including syndication, cable and home video. INTERNATIONAL DISTRIBUTION. In August 1991, the Company added experienced personnel and commenced the distribution of its own television programming and, to a lesser extent, acquired television programs in international markets. Prior to such time the Company generally utilized third parties to arrange for the distribution of its television programming in international markets. Programming is distributed primarily to local international broadcasters and, where appropriate, for the home video market, pay television and cable services. The establishment of the Company's international television distribution operation has increased its ability to cover the costs of new programs and to retain the fees and profit potential previously realized by outside distributors through the control of the distribution of its own television programming, including the ability to package such product for distribution in different media. The Company also believes the establishment of its international television distribution operation will enable it to increase its activity as a distributor of programs 45 produced by others. In December 1994, the Company expanded its activities in international distribution by hiring personnel from August Entertainment, Inc., who are experienced in feature film sales. This combined division now gives the Company more control over the marketing of its product line and allows the Company to be more responsive to its customers on a more cost efficient basis. In June 1995, the Company hired Marvina Anderson from World International Network to enhance T.V. sales. The Company's strategy has been to remove more of its business risks in international territories by locking in its business relationships with strong sub-distributors. The Company has recently entered into output arrangements in certain foreign territories with broadcasters and distributors who have agreed to license distribution rights in such territories for the Company's product for the next three to five years at a fixed price for specified types of film or television product. LIBRARY Since its inception in 1983, the Company has produced for itself and others or acquired more than 1000 hours of television programming. In addition, as a producer for hire, the Company produced 860 episodes of DIVORCE COURT, 65 episodes of the NIGHT GAMES game show, 34 episodes of the children's game show THE KRYPTON FACTOR, the animated feature film POUND PUPPIES: THE LEGEND OF BIG PAW, and the FAMILY DOG episode of Steven Spielberg's AMAZING STORIES. The Company's current library includes a variety of movies-for-television, television series, game shows and talk shows, as well as feature films, produced or acquired by the Company since its inception. The following table sets forth, as of July 10, 1996, certain programming in which the Company has ownership rights, distribution rights or the right to share in future profit participation: FEATURE FILM
TITLE NUMBER PRODUCED FIRST EXHIBITION - --------------------------------------------- ---------------- ---------------------- ANIMALYMPICS 1 NBC THE BRAVE LITTLE TOASTER 1 Disney Channel ANDRE 1 Theatrical ALIEN ABDUCTION 1 Home Video CYBERELLA 1 Home Video DEADLY EXPOSURE 1 Home Video DREAM MASTER 1 Home Video EGGS FROM 70 MILLION B.C. 1 Home Video THE HUMAN PETS 1 Home Video JOURNEY TO THE MAGIC CAVERN 1 Home Video LADY-IN-WAITING 1 Home Video LAST GASP 1 Home Video LAST BATTLE FOR THE UNIVERSE 1 Home Video OBLIVION 1 Home Video PLANET OF THE DINO-KNIGHTS 1 Home Video LOST WORLD OF THE GIANTS 1 Home Video SENSATION 1 HBO TRAPPED IN TOYWORLD 1 Home Video WES CRAVEN PRESENTS: MINDRIPPER 1 Home Video ANGEL OF PASSION 1 Cable/Home Video BANISHED BEHIND BARS 1 Cable/Home Video BARE EXPOSURE 1 Cable/Home Video BIKINI DRIVE IN 1 Cable/Home Video BLONDE HEAVEN 1 Cable/Home Video CAGED HEARTS 1 Cable/Home Video CALL GIRL 1 Cable/Home Video CAVE GIRL ISLAND 1 Cable/Home Video DONOR, THE 1 Cable/Home Video
46
TITLE NUMBER PRODUCED FIRST EXHIBITION - --------------------------------------------- ---------------- ---------------------- ELKE'S EROTIC DREAM 1 Cable/Home Video FORBIDDEN GAMES 1 Cable/Home Video HARD BOUNTY 1 Cable/Home Video ILLICIT DREAMS II 1 Cable/Home Video IMPROPER CONDUCT 1 Cable/Home Video INNOCENCE BETRAYED 1 Cable/Home Video INTERNATIONAL BEACH 1 Cable/Home Video IRRESISTIBLE IMPULSE 1 Cable/Home Video JACKO 1 Cable/Home Video JUNGLE LAW 1 Cable/Home Video LAP DANCER 1 Cable/Home Video LOVE ME TWICE 1 Cable/Home Video LOVER'S CONCERTO 1 Cable/Home Video LURID TALES 1 Cable/Home Video MASSEUSE, THE 1 Cable/Home Video MIAMI MODELS 1 Cable/Home Video MIDNIGHT CONFESSIONS 1 Cable/Home Video MIDNIGHT TEASE II 1 Cable/Home Video MIDNIGHT TEMPTATIONS 1 Cable/Home Video PETTICOAT PLANET 1 Cable/Home Video PLEASURE IN PARADISE 1 Cable/Home Video POWDER BURN 1 Cable/Home Video PRELUDE TO LOVE 1 Cable/Home Video PRIVATE OBSESSION 1 Cable/Home Video SECOND SIGHT 1 Cable/Home Video SEDUCTION OF INNOCENCE 1 Cable/Home Video SENSUOUS SUMMER 1 Cable/Home Video SIREN'S KISS 1 Cable/Home Video SOFTBODIES, THE MOVIE 1 Cable/Home Video SPIRIT OF THE NIGHT 1 Cable/Home Video TARGET OF SEDUCTION 1 Cable/Home Video TOTALLY EXPOSED 1 Cable/Home Video UNDER LOCK AND KEY 1 Cable/Home Video UNINHIBITED 1 Cable/Home Video VIRTUAL DESIRE 1 Cable/Home Video WAGER OF LOVE 1 Cable/Home Video
TELEVISION MOVIES AND MINI-SERIES
TITLE NUMBER PRODUCED FIRST EXHIBITION - --------------------------------------------- ---------------- ---------------------- ALADDIN 1 International GLORY YEARS 6 HBO FAMILY PICTURES 1 ABC JFK: RECKLESS YOUTH 1 ABC WORLD WAR II: WHEN LIONS ROARED 1 NBC CAROLINA SKELETONS 1 NBC CONFESSIONS: TWO FACES OF EVIL 1 NBC FATHER AND SON: DANGEROUS RELATIONS 1 NBC FIRE IN THE DARK 1 CBS GETTING GOTTI: THE DIANE GIACALONE STORY 1 CBS GOOD COPS, BAD COPS 1 NBC JACK REED III: A SEARCH FOR JUSTICE 1 NBC
47
TITLE NUMBER PRODUCED FIRST EXHIBITION - --------------------------------------------- ---------------- ---------------------- JACK REED IV: A KILLER AMONGST US 1 NBC DANGEROUS INTENTIONS 1 CBS LADY KILLER 1 CBS MURDER C.O.D. 1 NBC KISS SHOT 1 CBS LIBERACE: BEHIND THE MUSIC 1 CBS OVERRULED 1 NBC SINS OF THE MOTHER 1 CBS SWEET BIRD OF YOUTH 1 NBC TO SAVE THE CHILDREN 1 CBS YOUR MOTHER WEARS COMBAT BOOTS 1 NBC CANDLES IN THE DARK 1 Family Channel CITY BOY 1 PBS A HUSBAND, A WIFE AND A LOVER 1 CBS INNOCENT VICTIMS 1 NBC
TELEVISION SERIES/GAME SHOW
TITLE NUMBER PRODUCED FIRST EXHIBITION - ------------------------------------- ------------------------- ---------------------- SWEATING BULLETS 66 CBS PIGASSO'S PLACE 13 Syndication TEEN WOLF 21 CBS MAPLETOWN 39 Syndication CINEMATTRACTIONS 26 Syndication 1ST AND TEN 80 HBO HARTS OF THE WEST 15 CBS TRIAL WATCH 117 NBC THE BARBARA DE ANGELIS SHOW 70 CBS HEROES: MADE IN THE USA 38 Syndication BIOGRAPHIES 4 A&E RELATIVELY SPEAKING 90 Syndication
At any given time, a significant portion of the Company's library will be under license in many of the major domestic and international markets. For example, in fiscal 1996 the Company licensed portions of its libraries in Germany and Spain. Following the expiration of the licenses, rights generally revert to the Company where the Company is the copyright owner for resale in the second cycle. JOINT VENTURES TO EXPLOIT ANCILLARY MARKETS The Company has expanded its business through joint ventures and partnerships into areas which exploit the characters and story ideas in its feature films and television programs. These activities provide additional sources of revenues in certain cases without significant additional associated expenses. The Company is actively marketing the music used in its productions through an arrangement with Cherry Lane Music, Inc., a music publisher. In addition, the Company has entered into an agreement with Decca Records, a division of Polygram, to distribute the soundtrack of THE ADVENTURES OF PINOCCHIO, which includes two original recordings by Stevie Wonder. Concepts used in films are being developed into CD-ROM computer games under an agreement with IBM. Using its expertise as a television producer, the Company has two infomercials in production through a partnership known as TVFirst. One infomercial is a Christian music infomercial in which a recording of Christian music sung by leading gospel artists is marketed. Such infomercial has begun airing under the name KEEP THE FAITH. The Company believes that the results have been favorable through July 10, 1996 and plans to increase acquisition of air time for such infomercial. The other infomercial is a work-in-process on the subject of personal relationships. Responding to the increased demand for product by the pay-per-view, telephone delivery, pay cable and basic cable services, the Company 48 formed a joint venture called KLC/New City Tele-Ventures to acquire product from third parties for distribution in the cable, pay service and satellite markets, as well as other emerging markets. The joint venture has acquired over 60 films for this purpose as of May 1, 1996. GOVERNMENT REGULATIONS In a decision released September 6, 1995, the FCC repealed its financial interest and syndication rules effective as of September 21, 1995. Those FCC rules, which were adopted in 1970 to limit television network control over television programming and thereby foster the development of diverse programming sources, had restricted the ability of the three established, major U.S. television networks (i.e., ABC, CBS and NBC), to own and syndicate television programming. The ultimate impact of the repeal of the FCC's financial interest and syndication rules on the Company's operations cannot be predicted at the present time, although there has been an increase in in-house productions of programming for the networks' own use. Under the 1996 Act, manufacturers of television set equipment will be required to equip all new television receivers with a so-called "V-Chip" which would allow for parental blocking of violent, sexually-explicit or indecent programming based on a rating for any given program that would be broadcast along with the program. Unless the television industry establishes a voluntary ratings system by February 1998, the FCC is directed by the 1996 Act to develop a ratings system based upon the recommendations of an advisory committee selected by the FCC. A coalition of various segments of the entertainment industry has announced plans to devise a voluntary industry ratings code for rating video programming with respect to violent, sexual or indecent content. The industry coalition has announced its intent to have these new guidelines in place before February 1997. Other provisions of the 1996 Act revise the multiple broadcast ownership rules, allow local exchange telephone companies to offer multichannel video programming service, subject to certain regulatory requirements, and allow for cable companies to offer local exchange telephone service. The impact on the Company of the changes brought about by the 1996 Act and by accompanying changes in FCC rules cannot be predicted at the present time, although it is expected that there will be an increase in the demand for video programming product as a result of the likelihood that these regulatory changes will facilitate the advent of additional exhibition sources for such programming. However, it is possible that recent alliances of certain program producers and television station group owners, coupled with the recent FCC rule revisions allowing a single television station licensee to own television stations reaching up to 35% of the nation's television households, may place additional competitive pressures on program suppliers, such as the Company, to the extent they are unaligned with the major networks or any television station group owners. In international markets, the Company's programming may be subject to local content and quota requirements which prohibit or limit the amount of programming produced outside of the local market. Although the Company believes these requirements have not affected the Company's licensing of its programs in international markets to date, such restrictions, or new or different restrictions, could have an adverse impact on the Company's operations in the future should opportunities to obtain foreign content not be available. DESCRIPTION OF SECURITIES COMMON STOCK The authorized capital stock of the Company consists of 80,000,000 shares of Common Stock. At July 8, 1996, the Company had 40,218,618 shares of Common Stock issued and outstanding. Each share of Common Stock entitles the holder thereof to vote on all matters submitted to the shareholders; in electing directors, however, each shareholder is entitled to cumulate votes for any candidate if, prior to the voting, such candidate's name has been placed in nomination and any shareholder has given notice of an intention to cumulate votes. The Common Stock is not subject to redemption or to liability for further calls or assessment. Holders of Common Stock will be entitled to 49 receive such dividends as may be declared by the Board of Directors of the Company out of funds legally available therefor and to share pro rata in any distribution to shareholders. The shareholders have no conversion, preemptive or other subscription rights. CLASS C WARRANTS Each Class C Warrant shall entitle the holder thereof to purchase one share of Common Stock until July , 2001. The exercise price of the Class C Warrants shall be 120% of the price of the Common Stock component of the Unit on the Effective Date as agreed to by the Company and the Underwriter. The Company may redeem the Class C Warrants at a redemption price of $.10 per Class C Warrant commencing one year after the date hereof (or earlier at the sole discretion of the Underwriter) if notice of not less than 30 days is given and the closing high bid price of the Common Stock as reported on the NNM if traded thereon, the closing high bid price if listed on a national securities exchange (or other reporting system that provides last sales prices), or if not traded thereon but traded on the Nasdaq SmallCap Market, over the counter or on the bulletin board, the average of the ask and bid price, has been at least 150% of the then exercise price of the Class C Warrants on all ten of the trading days prior to the third day prior to the day on which such notice is given. The exercise price and number of Class C Warrants shall be subject to adjustment upon the occurrence of certain events, including a merger, acquisition, recapitalization or split-up of shares of the Company or the issuance by the Company of a stock dividend. Holders of Class C Warrants will not, as such, have any of the rights of shareholders of the Company. The Warrant Agent for the Class C Warrants will be Corporate Stock Transfer. CLASS A WARRANTS Each Class A Warrant entitles the holder thereof to purchase one share of Common Stock at any time prior to March 20, 1996 for $2.00. Prior to the expiration date of the Class A Warrants, the Company extended the expiration date thereof to March 20, 1997. No fractional shares will be issued upon the exercise of the Class A Warrants. The number and kind of securities or other property for which the Class A Warrants are exercisable are subject to adjustments in certain events, such as mergers, reorganizations or stock splits. At any time, upon thirty days' written notice, the Company may redeem all, but not less than all, unexercised Class A Warrants for $0.25 per Class A Warrant. All Class A Warrants not exercised or redeemed will expire on March 20, 1997. Holders of Class A Warrants will not, as such, have any of the rights of shareholders of the Company. TRANSFER AGENT AND REGISTRAR; WARRANT AGENT FOR CLASS A WARRANTS The Transfer Agent and Registrar for the Common Stock is Corporate Stock Transfer, Denver, Colorado. The Warrant Agent for the Class A Warrants is National City Bank of Minneapolis. SHARES ELIGIBLE FOR FUTURE SALE Substantially all of the shares of Common Stock to be outstanding after this Offering, and, subject to issuance, the 26,639,998 shares of Common Stock issuable upon exercise of outstanding options or warrants (excluding the warrants being sold to the Underwriter and a consultant to the Company) or issuable upon conversion of outstanding convertible securities will be freely tradeable in the public markets, in certain cases pursuant to a registration statement or available exemption from registration. Of such shares issuable upon exercise or conversion of outstanding securities, approximately 14,423,532 shares are issuable at or below $1.27 per share, 5,991,466 additional shares are issuable at or below $1.58 per share and 2,300,000 additional shares are issuable at or below $2.00 per share. Approximately 7,657,875 shares held by affiliates will be subject to a six month lock-up in favor of the Underwriter. The availability of shares for public sale, or the perception of such availability, may have a depressive effect on the market price of the Common Stock. 50 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, which is filed as an exhibit to the registration statement of which this Prospectus is a part, the Underwriter has agreed to purchase from the Company Units, each Unit consisting of two shares of Common Stock and one Warrant at the price to the public less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the Underwriter will be obligated to purchase all of the Units offered hereby on a "firm commitment" basis, if any are purchased. The Company has been advised by the Underwriter that it proposes to offer the Units to the public initially at the public offering price set forth on the cover page of this Prospectus. The Underwriter may allow a concession not exceeding $. per Unit to selected dealers who are members of the NASD, and to certain foreign dealers, and such dealers may reallot to NASD members and to certain foreign dealers a concession not exceeding $. per Unit. The Underwriting Agreement provides that the Company will pay a non-accountable expense allowance of 3% of the gross proceeds of the offering to the Underwriter, $56,000 of which has been paid as of the date of this Prospectus. The Company has also granted to the Underwriter an option to purchase up to additional Units during the 45 day period commencing with the Effective Date, solely to cover over-allotments, if any, in the sale of the Units offered hereby. The Underwriting Agreement provides that the Underwriter has the right, for a period of two years from the Effective Date, to nominate an individual to serve on the Company's Board of Directors. The Underwriter has advised the Company that it intends to designate a director to be named in the future to act as its nominee to the Company's Board of Directors upon the closing of the Offering. If the Underwriter does not designate a nominee to the Company's Board of Directors, the Underwriter shall have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the Board of Directors. Such designee will be entitled to the same notices and communications sent by the Company to its directors and to attend directors' meetings, but will not be entitled to vote thereat. Upon the exercise of the Class C Warrants more that one year after the date of this Prospectus, and to the extent not inconsistent with the guidelines of the NASD and the rules and regulations of the Commission, the Company has agreed to pay to the Underwriter a solicitation fee equal to 4% of the exercise price for the Class C Warrants exercised during the period commencing one year after the Effective Date and ending on the fifth anniversary thereof. However, no compensation will be paid to the Underwriter in connection with the exercise of the Class C Warrants if (a) the market price of the underlying shares of Common Stock is lower than the exercise price, (b) the Class C Warrants are held in a discretionary account, (c) the Class C Warrants are exercised in an unsolicited transaction, or (d) the disclosure of such compensation arrangements has not been made in the documents provided to the customers both as part of the original Offering and at the time of exercise. In addition, unless granted an exemption by the Commission from Rule 10b-6 under the Exchange Act, the Underwriter will be prohibited from engaging in any market making activities or solicited brokerage activities with regard to the Company's securities until the later of the termination of such solicitation activity or the termination by waiver or otherwise of any right the Underwriter may have to receive a fee for the exercise of the Class C Warrants following such solicitations. In addition, the Company has agreed to pay to I. Friedman Equities, Inc., a consultant to the Company since 1990, a fee equal to 1% of the gross proceeds from the exercise of the Class C Warrants. The Underwriting Agreement provides for reciprocal indemnification between the Company and the Underwriter against certain liabilities in connection with the registration statement of which this Prospectus is a part, including liabilities under the Securities Act. To the extent that this section may purport to provide exculpation from possible liabilities arising under the federal securities laws, it is the opinion of the Commission that such indemnification is contrary to public policy and unenforceable. 51 In connection with the Offering, the Company has agreed to sell to the Underwriter, for nominal consideration, the Underwriter's Warrants to purchase one Unit for each 10 Units sold in the Offering. The Underwriter's Warrants are exercisable at $ per Unit, subject to the anti-dilution provisions thereof, for a period of four years commencing one year from the Effective Date. The Underwriter's Warrants grants to the holders thereof certain "piggyback" and demand registration rights for a period of five years from the Effective Date with respect to the registration under the Securities Act of the securities issuable upon exercise of the Underwriter's Warrants. All of the officers and directors of the Company and shareholders holding five percent or more of the outstanding shares of the Common Stock of the Company, exclusive of institutional holders, have agreed not to sell publicly any of their shares of Common Stock for a period of six (6) months following the Effective Date without the prior written approval of the Underwriter. In addition, the Selling Security Holders have agreed not to sell their 1,331,734 shares of Common Stock for a period of up to six (6) months following the Effective Date without the prior written consent of the Underwriter. The Company has agreed that it will not publicly sell or offer any of its securities except (i) with respect to Common Stock issued upon exercise of outstanding options and warrants, options issued under the Company's stock option plan, the Warrants or the Underwriter's Warrants, or upon conversion of the Company's Convertible Subordinated Debentures and Notes or (ii) pursuant to a merger, acquisition or other business combination, for six (6) months following the Effective Date, without the prior written approval of the Underwriter. The Company has engaged the Underwriter or its representative as its financial consultant for a period of 24 months to commence on the Effective Date, in consideration for which the Underwriter shall receive a consulting fee of $144,000, $72,000 of which shall be paid on the completion of the Offering and the balance ($72,000) shall be paid at the rate of $6,000 per month commencing upon completion of the Offering. The Company also has agreed to pay all expenses in connection with qualifying the Units offered hereby for sale under the laws of such states as the Underwriter may reasonably designate, including fees and expenses of counsel retained for such purposes. The Company also has agreed to reimburse certain due diligence costs of the Underwriter. Further, the Company has agreed to pay a fee to I. Friedman Equities, Inc. for financial consultation services equal to 1% of the gross proceeds of the offering. In addition, the Company will sell to I. Friedman Equities, Inc., for nominal consideration, a warrant to purchase Units equal to 1% of the Units sold in the Offering at an exercise price equal to $ , subject to anti-dilution adjustments. The offering price of the Units offered hereby and the terms of the Warrants were determined by negotiation between the Company and the Underwriter. Factors considered in determining such prices and terms include the current market price of the Common Stock, the prevailing market conditions, the history of and the prospects of the industry in which the Company competes, an assessment of the Company's management, the prospects of the Company, its capital structure and such other factors as were deemed relevant. CONCURRENT OFFERING Concurrently with the Offering, 1,331,734 shares of Common Stock, representing the estimated number of Bonus Shares and shares of Common Stock issuable upon exercise of a warrant issued to an underwriter as part of the Company's November 1992 offering, are being registered under the Securities Act for resale as part of the registration statement of which this Prospectus is a part. The holders of such securities have agreed not to sell such securities for a period of up to (6) months after the Effective Date without the prior written consent of the Underwriter subject, in the case of shares of Common Stock issuable upon exercise of certain warrants, to earlier release under certain circumstances. 52 LEGAL MATTERS The validity of the Units offered hereby will be passed upon for the Company by Kaye, Scholer, Fierman, Hays & Handler, LLP, 1999 Avenue of the Stars, Suite 1600, Los Angeles, California. Certain legal matters will be passed upon for the Underwriter by Schneck, Weltman, Hashmall & Mischel LLP, 1285 Avenue of the Americas, New York, New York. EXPERTS The consolidated financial statements of The Kushner-Locke Company at September 30, 1995 and 1994, and for each of the three years in the period ended September 30, 1995, appearing in this Prospectus and Registration Statement have been audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein or incorporated by reference herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 53 THE KUSHNER LOCKE COMPANY AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditor's Report.............................................. F-2 Annual Financial Statements: Consolidated Balance Sheets as of September 30, 1995 and 1994........... F-3 Consolidated Statements of Operations for each of the Three Years Ended September 30, 1995..................................................... F-4 Consolidated Statements of Cash Flows for each of the Three Years Ended September 30, 1995..................................................... F-5 Consolidated Statements of Stockholders' Equity for Each of the Three Years Ended September 30, 1995......................................... F-7 Notes to Consolidated Financial Statements.............................. F-8 Interim Financial Statements: Condensed Consolidated Balance Sheets as of March 31, 1996 (unaudited) and September 30, 1995................................................. F-22 Condensed Consolidated Statements of Operations for the Six Months Ended March 31, 1996 and 1995 (unaudited).................................... F-23 Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 1996 and 1995 (unaudited).................................... F-24 Condensed Consolidated Statements of Stockholder Equity for the Six Months Ended March 31, 1996 (unaudited)................................ F-25 Notes to Condensed Consolidated Financial Statements.................... F-26
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors The Kushner-Locke Company: We have audited the accompanying consolidated balance sheets of The Kushner-Locke Company and subsidiaries (the "Company") as of September 30, 1995 and 1994, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the years in the three-year period ended September 30, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Kushner-Locke Company and subsidiaries as of September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 5 to consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standard Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in 1994. KPMG PEAT MARWICK LLP Los Angeles, California January 12, 1996 F-2 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
SEPTEMBER 30, SEPTEMBER 30, 1995 1994 -------------- -------------- Cash and cash equivalents........................................................ $ 3,139,000 $ 15,681,000 Restricted cash.................................................................. 1,162,000 -- Accounts receivable, net of allowance for doubtful accounts of $400,000 in 1995 and $650,000 in 1994............................................................ 7,864,000 6,177,000 Due from affiliates.............................................................. 309,000 187,000 Notes receivable from August Entertainment, Inc.................................. 676,000 32,000 Film costs, net of accumulated amortization...................................... 73,716,000 30,688,000 Property and equipment, at cost, net of accumulated depreciation and amortization of $1,425,000 in 1995 and $1,187,000 in 1994.................................... 515,000 437,000 Other assets..................................................................... 1,571,000 1,052,000 -------------- -------------- $ 88,952,000 $ 54,254,000 -------------- -------------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued liabilities......................................... $ 3,245,000 $ 2,385,000 Income taxes payable............................................................. -- 10,000 Notes payable.................................................................... 28,398,000 9,600,000 Deferred film license fees....................................................... 2,753,000 364,000 Contractual obligations, principally participants' share payable and talent residuals....................................................................... 995,000 1,216,000 Production advances.............................................................. 16,609,000 82,000 Convertible subordinated debentures, net of deferred issuance costs.............. 17,745,000 22,056,000 -------------- -------------- Total liabilities........................................................ $ 69,745,000 $ 35,713,000 -------------- -------------- Stockholders' equity: Common stock, no par value. Authorized 80,000,000 shares at September 30, 1995 and at September 30, 1994: issued and outstanding 35,466,599 shares at September 30, 1995 and 30,069,101 shares at September 30, 1994.................................................. 23,337,000 18,696,000 Accumulated deficit............................................................ (4,130,000) (155,000) -------------- -------------- Total stockholders' equity............................................... $ 19,207,000 $ 18,541,000 -------------- -------------- $ 88,952,000 $ 54,254,000 -------------- -------------- -------------- --------------
See accompanying notes to consolidated financial statements. F-3 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1995 1994 1993 -------------- -------------- -------------- Operating revenues............................................... $ 20,407,000 $ 50,736,000 $ 42,487,000 Costs related to operating revenues.............................. 17,404,000 54,952,000 41,497,000 Selling, general and administrative expenses..................... 3,838,000 3,208,000 2,797,000 -------------- -------------- -------------- Loss from operations............................................. (835,000) (7,424,000) (1,807,000) Interest income.................................................. 300,000 197,000 78,000 Interest expense................................................. (3,409,000) (2,209,000) (1,173,000) -------------- -------------- -------------- Loss before income taxes and cumulative effect of a change in accounting principle............................................ (3,944,000) (9,436,000) (2,902,000) Income tax expense (benefit)..................................... 31,000 (2,277,000) (1,076,000) -------------- -------------- -------------- Loss before cumulative effect of a change in accounting principle....................................................... (3,975,000) (7,159,000) (1,826,000) Cumulative effect of a change in accounting for income taxes..... -- (394,000) -- -------------- -------------- -------------- Net loss......................................................... $ (3,975,000) $ (6,765,000) $ (1,826,000) -------------- -------------- -------------- -------------- -------------- -------------- Loss per common and common equivalent share: Loss before cumulative effect of a change in accounting for income taxes.................................................. $ (.13) $ (.24) $ (.06) Cumulative effect of a change in accounting for income taxes... -- $ .01 -- -------------- -------------- -------------- Net loss....................................................... $ (.13) $ (.23) $ (.06) -------------- -------------- -------------- -------------- -------------- -------------- Weighted average number of common and common equivalent shares outstanding..................................................... 31,713,000 29,373,000 28,372,000 -------------- -------------- -------------- -------------- -------------- --------------
See accompanying notes to consolidated financial statements. F-4 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
1995 1994 1993 --------------- --------------- --------------- Cash flows from operating activities: Net loss.................................................... $ (3,975,000) (6,765,000) (1,826,000) Adjustments to reconcile net earnings (loss) to net cash used by operating activities: Cumulative effect of a change in accounting principle..... -- (394,000) -- Increase in restricted cash................................. (1,162,000) -- -- Amortization of film costs................................ 16,977,000 54,281,000 27,730,000 Depreciation and amortization............................. 239,000 250,000 180,000 Amortization of capitalized issuance costs and warrants... 414,000 222,000 100,000 Deferred income taxes..................................... -- (2,321,000) (926,000) Accounts receivable, net.................................. (1,687,000) (817,000) (2,424,000) Income taxes receivable................................... -- 25,000 (9,000) Due from affiliates....................................... (766,000) (209,000) 11,000 Notes receivable from distributor......................... -- -- 1,000 Film costs................................................ (60,005,000) (41,938,000) (28,081,000) Accounts payable and accrued liabilities.................. 860,000 (3,323,000) 3,005,000 Income taxes payable...................................... (10,000) 10,000 -- Deferred film license fees................................ 2,389,000 (266,000) (6,336,000) Contractual obligations................................... (221,000) (1,134,000) 93,000 Production advances....................................... 16,527,000 (8,464,000) 2,963,000 --------------- --------------- --------------- Net cash used by operating activities................... (30,420,000) (10,843,000) (5,519,000) --------------- --------------- --------------- Cash flows from investing activities: Purchase of property and equipment.......................... (317,000) (134,000) (178,000) Decrease (increase) in other assets......................... (518,000) (442,000) 537,000 --------------- --------------- --------------- Net cash provided (used) by investing activities........ (835,000) (576,000) 359,000 --------------- --------------- --------------- Cash flows from financing activities: Increase in notes payable................................... 21,398,000 31,600,000 22,500,000 Repayment of notes payable.................................. (2,600,000) (30,007,000) (20,075,000) Net proceeds from issuance of common stock.................. -- -- 6,640,000 Net proceeds from exercise of options....................... -- 105,000 185,000 Net proceeds from issuance of debentures and warrants....... -- 18,911,000 -- Repayment of debentures..................................... (25,000) (37,000) (39,000) Other....................................................... (60,000) (14,000) -- --------------- --------------- --------------- Net cash provided by financing activities................. 18,713,000 20,558,000 9,211,000 --------------- --------------- --------------- Net increase (decrease) in cash........................... (12,542,000) 9,139,000 4,051,000 Cash and cash equivalents at beginning of year................ 15,681,000 6,542,000 2,491,000 --------------- --------------- --------------- --------------- --------------- --------------- Cash and cash equivalents at end of year...................... $ 3,139,000 $ 15,681,000 $ 6,542,000 --------------- --------------- --------------- --------------- --------------- --------------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest.................................................... $ 2,952,000 $ 1,888,000 $ 1,260,000 --------------- --------------- --------------- --------------- --------------- --------------- Income taxes................................................ $ 27,200 $ 8,800 $ 8,800 --------------- --------------- --------------- --------------- --------------- ---------------
F-5 SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: (1) In fiscal 1993, $844,000 of convertible subordinated debentures before unamortized capitalized issuance costs of $137,000 were converted into 547,979 shares of common stock. (2) In fiscal 1994, $1,537,000 of convertible subordinated debentures before unamortized capitalized issuance costs of $201,000 were converted into 989,052 shares of common stock. (3) In fiscal 1995, $5,260,000 of convertible subordinated debentures before unamortized capitalized issuance costs of $559,000 were converted into 5,397,498 shares of common stock. See accompanying notes to consolidated financial statements. F-6 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
STOCKHOLDERS' EQUITY --------------------------------------------------- RETAINED EARNINGS NUMBER OF COMMON (ACCUMULATED SHARES STOCK DEFICIT) TOTAL ---------- ----------- ------------ ----------- Balance at September 30, 1992..................... 20,804,570 $ 9,737,000 $ 8,436,000 $18,173,000 Issuance of common stock.......................... 8,050,000 6,640,000 -- 6,640,000 Stock options exercised........................... 110,000 110,000 -- 110,000 Warrants exercised................................ 62,500 75,000 -- 75,000 Conversions of convertible debentures............. 547,979 707,000 -- 707,000 Net loss.......................................... -- -- (1,826,000) (1,826,000) ---------- ----------- ------------ ----------- Balance at September 30, 1993..................... 29,575,049 $17,269,000 $ 6,610,000 $23,879,000 Retirement of common stock........................ (600,000) -- -- -- Stock options exercised........................... 105,000 105,000 -- 105,000 Costs related to registration statement........... -- (14,000) -- (14,000) Conversions of convertible debentures............. 989,052 1,336,000 -- 1,336,000 Net loss.......................................... -- -- (6,765,000) (6,765,000) ---------- ----------- ------------ ----------- Balance at September 30, 1994..................... 30,069,101 $18,696,000 $ (155,000) $18,541,000 Conversions of convertible debentures............. 5,397,498 4,641,000 -- 4,641,000 Net loss.......................................... -- -- (3,975,000) (3,975,000) ---------- ----------- ------------ ----------- Balance at September 30, 1995..................... 35,466,599 $23,337,000 $ (4,130,000) $19,207,000 ---------- ----------- ------------ ----------- ---------- ----------- ------------ -----------
See accompanying notes to consolidated financial statements. F-7 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY The Kushner-Locke Company (the "Company") is principally engaged in the development, production and distribution of feature films, direct-to-video films, television series, movies-for-television, mini-series and animated programming. Last year, the Company expanded its operations into related business lines in ancillary markets for its product such as merchandising, home video, cable and interactive/multimedia applications for characters and story ideas developed by the Company through various arrangements with established companies having expertise in these respective fields. Generally, theatrical films are first distributed in the theatrical and home video markets. Subsequently, theatrical films are made available for world-wide television network exhibition or pay television, television syndication and cable television. Generally, television films are first licensed for network exhibition and foreign syndication or home video, and subsequently for domestic syndication or cable television. Certain films are produced and/or distributed directly for initial exhibition by local television stations, advertiser-supported cable television, pay television and/or home video. The revenue cycle extends 7 to 10 years on film and television product. BASIS OF PRESENTATION The consolidated financial statements include the accounts of The Kushner-Locke Company, its subsidiaries and certain less than wholly-owned entities where the Company has control. All material intercompany balances and transactions have been eliminated. Certain reclassifications have been made to conform prior year balances with the current presentation. REVENUE RECOGNITION Revenues from feature film distribution agreements and/or from television licensing agreements are recognized on the date the completed film or program is delivered or becomes available for delivery, is available for exploitation in the relevant media window purchased by that customer or by that licensee and certain other conditions of sale have been met pursuant to criteria specified by SFAS No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films. Revenues from barter transactions, whereby the program is exchanged for television advertising time which is sold to product sponsors, are recognized when the television program has aired and all conditions precedent have been satisfied. Producer fees received from production of films and television programs for outside parties where the Company has no continuing ownership interest in the project are recognized on a percentage-of-completion basis as determined by applying the cost-to-cost method. The cost of such films and television series is expensed as incurred. ACCOUNTING FOR FILM COSTS The Company generally capitalizes all costs incurred to produce a film, including the interest expense funded under the production loans. Such costs also include the actual direct costs of production, certain exploitation costs and production overhead. Capitalized exploitation or distribution costs include those costs that clearly benefit future periods such as film prints and prerelease and early release advertising that is expected to benefit the film in future markets. These costs, as well as participation and talent residuals, are amortized each period on an individual film or television program basis in the ratio that the current period's gross revenues from all sources for the program bear to management's estimate of anticipated total gross revenues for such film or program from all sources. Revenue estimates are reviewed quarterly and adjusted where appropriate and the impact of such adjustments could be material. F-8 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Film costs are stated at the lower of unamortized cost or estimated net realizable value. Losses which may arise because unamortized costs of individual films or television series exceed anticipated revenues are charged to operations through additional amortization. The Company capitalized interest of $631,174, $450,910 and $89,090 related to film cost inventories for the years ended September 30, 1995, 1994 and 1993, respectively. PARTICIPANTS' SHARE PAYABLE AND TALENT RESIDUALS The Company charges profit participations and talent residuals to expense in the same manner as amortization of production costs, based on the ratio of current period gross revenues to management's estimate of total ultimate gross revenues, if it is anticipated they will be payable. Payments for profit participations are made in accordance with the participants' contractual agreements. Payments for talent residuals are remitted to the respective guilds in accordance with the provisions of their union agreements or earlier, if assessed. PRODUCTION ADVANCES The Company receives license fees for projects in the production phase. Production advances are generally nonrefundable and are recognized as earned revenue when the film or television program is available for delivery. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company provides for doubtful accounts based on historical collection experience and periodically adjusts the allowance based on the aging of accounts receivable and other conditions. Receivables are written off against the allowance in the period they are deemed uncollectible. PROPERTY AND EQUIPMENT Property and equipment, at cost, is depreciated using the straight-line method over the estimated useful lives of the assets (ranging from five to eight years). CASH AND CASH EQUIVALENTS The Company considers certificates of deposit and other highly liquid investments with original maturities of three months or less to be cash equivalents. RESTRICTED CASH During the fiscal year ended September 30, 1995, the Company had $1,162,000 in restricted cash related to advances made by the Company to film producers for the acquisition of distribution rights. These cash advances were being held in escrow accounts as collateral by financial institutions providing production loans to those producers. INTERNATIONAL CURRENCY TRANSACTIONS The majority of the Company's foreign sales transactions are payable in U.S. dollars. Accordingly, international currency transaction gains and losses included in the consolidated statements of operations for the three years ended September 30, 1995 were not significant. INCOME TAXES Effective October 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This statement supersedes SFAS No. 96, "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable F-9 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in operating results in the period encompassing the enactment date. The Company elected to reflect the cumulative effect of adopting this pronouncement as a change in accounting principle at the beginning of fiscal 1994 with a credit to results of operations of $394,000. Prior year consolidated financial statements were not restated. EARNINGS (LOSS) PER SHARE Earnings (loss) per common and common equivalent share is based upon the weighted average number of shares of common stock outstanding plus common equivalent shares consisting of dilutive outstanding warrants and stock options. The weighted average number of common and common equivalent shares outstanding for the calculation of primary earnings per share was 31,713,000, 29,373,000 and 28,372,000 for the years ended September 30, 1995, 1994 and 1993, respectively. The inclusion of the additional shares assuming the conversion of the Company's convertible subordinated debentures would have been anti-dilutive for all periods. (2) FILM COSTS Film costs consist of the following:
SEPTEMBER 30, SEPTEMBER 30, 1995 1994 ------------- ------------- In process or development............................................. $ 42,115,000 $ 5,177,000 Released, principally television productions, net of accumulated amortization......................................................... 31,601,000 25,511,000 ------------- ------------- $ 73,716,000 $ 30,688,000 ------------- ------------- ------------- -------------
Based upon the Company's present estimates of anticipated future revenues at September 30, 1995, approximately 76% of the film costs related to released films and television series will be amortized during the three-year period ending September 30, 1998. (3) NOTES PAYABLE AND LIQUIDITY Notes payable are comprised of the following:
SEPTEMBER 30, SEPTEMBER 30, 1995 1994 ------------- ------------- Note payable to bank, secured by substantially all Company assets, interest at prime (8.75% at September 30, 1995) plus 1.25%, outstanding principal balance due January 1996....................... $ 14,804,000 $ 9,600,000 Notes payable, secured by certain film rights held by producers payable through September 1996....................................... 13,594,000 -- ------------- ------------- $ 28,398,000 $ 9,600,000 ------------- ------------- ------------- -------------
The Imperial credit agreement, as amended and restated in August 1993, had an original maturity date of June 2, 1995. The original maturity date was extended in March 1995 to September 30, 1995, then subsequently extended in September 1995 to December 29, 1995 and further extended in December 1995 to January 31, 1996. During the beginning of this period, the Company initially held discussions with Imperial Bank seeking a longer-term extension and increase of the facility to $25,000,000 through a syndication to include additional financial institutions. In September 1995, F-10 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) NOTES PAYABLE AND LIQUIDITY (CONTINUED) however, the Company obtained a commitment letter from the U.S. division of a major international financial institution to provide a new syndicated credit facility to refinance the Company's existing line and provide credit availability up to $30,000,000 (or the available borrowing base, if less). Completion of the new facility was subject to negotiation and execution of mutually satisfactory definitive credit documentation, among other conditions. In January 1996, the Company decided to seek a longer-term extension of its existing $15,000,000 credit line from Imperial Bank, in lieu of proceeding further at such time with negotiations concerning documentation and completion of a new facility. On January 12, 1996, Imperial Bank provided to the Company its commitment to extend the existing credit line through December 31, 1996 and the Company paid a loan fee to the bank in connection with such commitment and agreed to issue warrants to purchase 500,000 shares of common stock to the bank at an exercise price no less than fair market value at the time of the grant thereof. Imperial Bank's commitment is subject to completion and effectiveness of an amendment to the existing credit agreement satisfactory to the bank by January 31, 1996, which amendment will eliminate existing financial covenants as of September 30, 1995 and substitute revised net worth, liquidity and minimum quarterly net income requirements. Imperial Bank has advised the Company that based on its knowledge of the Company the bank believes it is highly probable such documentation will be executed shortly. Following completion and effectiveness of the amendment, the Company intends to commence discussions with Imperial Bank concerning arranging or participating in a multi-year increased syndicated credit facility to amend or replace the existing facility by May 31, 1996 in which it is expected that Imperial Bank would continue to participate in a decreased amount. If such facility is not in place by such time, as required by Imperial Bank's commitment letter, the existing line of credit will be reduced in size from $15,000,000 to $12,500,000 during the period from May 31, 1996 to October 31, 1996, and further reduced to $10,000,000 prior to December 31, 1996 to the extent of excess available cash flow. The line is secured by substantially all of the Company's assets and bears interest at an annual rate of Prime (8.5% at December 22, 1995) plus 1.25%. The Company is required to pay a commitment fee of .5% per annum of the unused portion of the credit line. As of September 30, 1995, the Company had drawn down $14,804,000 under this facility out of a total eligible collateral at such date of $16,233,000 but which was capped at the credit limit of $15,000,000. The outstanding credit agreement described above contains various covenants to which the Company must adhere. These covenants, among other things, require the maintenance of minimum net worth and various financial ratios which are reported to the bank on a quarterly basis and include limitations on additional indebtedness, liens, investments, disposition of assets, guarantees, deficit financing, affiliate transactions and the use of proceeds and prohibit payment of dividends and prepayment of subordinated debt. The outstanding credit agreement also contains a provision permitting the bank to declare an event of default if the services of either of Messrs. Kushner or Locke are not available to the Company unless a replacement acceptable to the bank is named. The Company is in compliance with the non-financial terms and conditions of the outstanding credit agreement and the bank has agreed to waive the violation, if any, of any existing financial covenants for the period ending September 30, 1995 upon completion of documentation. While the Company believes that it will obtain a multi-year increased syndicated credit facility by May 31, 1996, the Company has not received any commitment for such facility. If the Company is unable to obtain such increased credit facility, the Company will seek alternative financing. However, F-11 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) NOTES PAYABLE AND LIQUIDITY (CONTINUED) there is no guarantee that alternative financing will be available on acceptable terms. If such increased credit facility and/or alternative financing is not available, Management believes that existing resources and cash generated from operating activities, after a reduction of the level of Company's investment in film costs, will be adequate to comply with the terms of the anticipated extension of the credit facility through December 1996. To the extent that existing resources and a reduction in the level of Company's investment in film costs are not adequate, Management has the ability and intent to reduce operating expenses. Further, while the Company has in any event received the bank's commitment to extend the existing facility through December 31, 1996 (subject to reduction commencing May 31, 1996), such commitment is subject to completion and effectiveness of the amendment by January 31, 1996. In the event that the company does not receive an extension of its existing credit facility or is unable to comply with the terms of the anticipated extension, the Company would seek to restructure its obligations under the facility. This would have a significant effect on the Company's operations. The Company's other short term borrowings totaling $13,594,000 as of September 30, 1995, consist of production loans from Newmarket Capital Group L.P. ("Newmarket"), Banque Paribas (Los Angeles Agency) ("Paribas") and Imperial Bank ("Imperial") to consolidated production entities. Newmarket's loans require an interest rate of Prime (8.5% as of December 22, 1995) plus 1% on the first $500,000 advanced under the loan, then pricing options are at either (a) Prime plus 1% or (b) LIBOR plus 3% on the remaining loan balance plus loan fees of $60,000 plus a net profit participation. The Paribas loan bears interest at either (a) Reference Rate (8.5% as of December 22, 1995) plus 1/2% or (b) LIBOR plus 2% plus loan fees of $120,000. The Imperial loan bears interest at Prime (8.5% as of December 22, 1995) plus 3% plus loan fees of $97,500 plus a net profit participation. The Kushner-Locke Company provides limited corporate guarantees for a portion of the Newmarket and Paribas loans which are callable in the event that the production companies' loan amounts (including a reserve for fees, interest and financing costs) are not adequately collateralized with acceptable contracts receivable from third party domestic and/or foreign sub-distributors by certain dates or by the maturity date of the loan. Deposits on the purchase price paid by these sub-distributors are held as restricted cash collateral by the Lenders. The table below shows production loans as of September 30, 1995. Any events of default have been waived and all loans are in compliance with Lender's covenants:
AMOUNTS WEIGHTED FILM LENDER LOAN AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY - -------------------------------------------------- --------- ----------- ------------ -------- ---------- -------- THE LEGEND OF PINOCCHIO........................... Newmarket $12,500,000 $ 7,596,000 8.75% $3,250,000 9-30-96 SERPENT'S LAIR.................................... Newmarket $ 1,005,000 $ 751,000 9.25% $ 345,000 2-28-96 THE GRAVE......................................... Newmarket $ 2,100,000 $ 1,343,000 10.25% $ 740,000 3-14-96 WHOLE WIDE WORLD.................................. Newmarket $ 1,550,000 $ 955,000 8.00% $ 500,000 3-31-96 FREEWAY........................................... Paribas $ 1,983,333 $ 1,225,000 7.00% $ 961,667 7-5-96 TIME WARRIORS..................................... Imperial $ 1,950,000 $ 1,724,000 9.60% $1,724,000 2-28-96 ----------- ------------ ---------- $21,088,333 $ 13,594,000 $7,520,667 ----------- ------------ ---------- ----------- ------------ ----------
F-12 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) CONVERTIBLE SUBORDINATED DEBENTURES
SEPTEMBER 30, SEPTEMBER 30, 1995 1994 -------------- -------------- Series A Convertible Subordinated Debentures due December 15, 2000, bearing interest at 10% per annum payable June 15 and December 15, net of unamortized capitalized issuance costs and warrants of $13,000 and $17,000, respectively.... $ 84,000 $ 80,000 Series B Convertible Subordinated Debentures due December 15, 2000, bearing interest at 13 3/4% per annum payable monthly, net of unamortized capitalized issuance costs of $354,000 and $423,000, respectively........................... 2,972,000 2,938,000 Convertible Subordinated Debentures due December 15, 2000, bearing interest at 8% per annum payable February 1 and August 1, net of unamortized capitalized issuance costs of $1,058,000 and $1,887,000, respectively....................... 10,129,000 14,550,000 Convertible Subordinated Debentures due July 1, 2002, bearing interest at 9% per annum payable January 1 and July 1, net of unamortized capitalized issuance costs of $490,000 and $561,000, respectively.................................... 4,560,000 4,488,000 -------------- -------------- $ 17,745,000 $ 22,056,000 -------------- -------------- -------------- --------------
None of the Convertible Subordinated Debentures mature during the next five fiscal years. SERIES A DEBENTURES During fiscal 1991, the Company sold $1,500,000 principal amount of Series A Convertible Subordinated Debentures due 2000 and 4,200 units which represented an additional $4,200,000 principal amount of Series A Debentures. Each unit included warrants to purchase 500 shares of common stock of the Company at $2.00 per share. Each warrant has been valued for reporting purposes at $.25 (2.1 million warrants with a total value of $525,000) and is included in common stock. As of September 30, 1995, the Company had outstanding $97,000 principal amount of Series A Debentures. The debentures are recorded net of unamortized underwriting discounts, expenses associated with the offering and warrants totaling $13,000 which are amortized using the interest method to interest expense over the term of the debentures. Approximately $4,000 of capitalized issuance costs have been amortized to interest expense for the year ended September 30, 1995. The Series A Debentures bear interest at 10% per annum, payable on June 15 and December 15 in each year. The Series A Debentures are convertible into common stock of the Company at the rate of 788 shares for each $1,000 principal amount of debentures, subject to adjustment under certain circumstances. As of September 30, 1995, approximately $5,603,000 principal amount of Series A Debentures and unamortized capitalized issuance costs and warrants of $1,744,000 had been converted into 4,865,754 shares of common stock of the Company. The debentures are redeemable at the option of the Company in whole or in part at 110% of the face amount of the debentures provided that the closing bid price (or, if applicable, closing price) of the common stock has equaled or exceeded 150% of the conversion price for the 20 consecutive trading days ending five trading days prior to the date of notice of redemption. The Company may also redeem the debentures at redemption prices commencing at 105% of par and declining to par after September 30, 1997. The debentures are subordinated to all existing and future "senior indebtedness." The term "senior indebtedness" is defined to mean the principal of (and premium, if any) and interest on F-13 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED) any and all indebtedness of the Company that is (i) incurred in connection with the borrowing of money from banks, insurance companies and similar institutional lenders, (ii) issued as a result of a public offering of debt securities pursuant to registration under the Securities Act of 1933, or (iii) incurred in connection with the borrowing of money with an original principal amount of at least $100,000 secured at least in advanced by companies engaged in the ordinary course of their business in the entertainment industry. Senior indebtedness does not include (i) the Series B Debentures, (ii) indebtedness to affiliates and (iii) indebtedness expressly subordinated to or on parity with the Series A Debentures, whether outstanding on the date of execution of the indenture or thereafter created, incurred, assumed or guaranteed. SERIES B DEBENTURES During fiscal 1991, the Company sold $6,000,000 principal amount of Series B Convertible Subordinated Debentures due 2000. As of September 30, 1995 the Company had outstanding $3,326,000 principal amount of Series B Debentures due 2000. The debentures bear interest at 13 3/4% per annum. The Series B Debentures are recorded net of unamortized underwriting discounts and expenses associated with the offering totaling $354,000, which are amortized using the interest method to interest expense over the term of the debentures. Approximately $69,000 of capitalized issuance costs had been amortized as interest expense for the year ended September 30, 1995. The terms of the Series B Debentures are generally similar to those of the Series A Debentures other than with respect to the interest rates, except that (i) interest is payable monthly on the Series B Debentures and (ii) the Series B Debentures are convertible into common stock of the Company at $1.5444 per share. The Series B Debentures rank pari passu (i.e., equally) in right of payment with the Company's other debentures. Approximately $10,000 principal amount of the Series B Debentures and unamortized costs of $1,000 had been converted to 6,732 shares of common stock of the Company in fiscal year 1995. As of September 30, 1995, approximately $2,508,000 principal amount of Series B Debentures and unamortized capitalized issuance costs of $361,000 had been converted into 1,618,357 shares of common stock of the Company. An additional $166,000 principal amount of Series B Debentures were repurchased upon the death of bondholders. 8% DEBENTURES During fiscal 1994, the Company sold $16,437,000 principal amount of 8% Convertible Subordinated Debentures due 2000. In connection with the issuance, the Company issued warrants to purchase up to 10% of the aggregate principal amount of debentures sold at an exercise price equal to 120% of the principal amount of the debentures which are exercisable during the four year period commencing March 10, 1995 for $9,613,700 principal amount and April 12, 1995 for $30,000 principal amount. As of September 30, 1995, the Company had outstanding $11,187,000 principal amount of 8% Debentures. The debentures are recorded net of unamortized underwriting discounts and expenses associated with the offering totaling $1,058,000 which are amortized using the interest method to interest expense over the term of the debentures. Approximately $270,000 of capitalized issuance costs had been amortized as interest expense for the year ended September 30, 1995. Approximately $5,250,000 principal amount of the 8% Debentures and unamortized capitalized issuance costs of $559,000 had been converted into 5,390,766 shares of common stock of the Company in fiscal year 1995. The terms of the 8% Debentures are generally similar to those of the Series A Debentures, other than with respect to the interest rates, except that (i) interest is payable on February 1 and August 1 in each year; (ii) the 8% Debentures are convertible into common stock of the Company at $.975 per F-14 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED) share; and (iii) the Company has the right to redeem the 8% Debentures at redemption prices commencing at 102.7% of par on or after February 1, 1998 and declining to par on or after February 1, 2000. The 8% Debentures rank pari passu in right of payment with the Company's other debentures. 9% DEBENTURES During fiscal 1994, the Company sold $5,050,000 principal amount of 9% Convertible Subordinated Debentures due 2002. In connection with the issuance, the Company issued warrants to purchase up to 9% of the aggregate principal amount of debentures sold at an exercise price equal to 120% of the principal amount of debentures which are exercisable during the four year period commencing July 25, 1995. As of September 30, 1995, the Company had outstanding $5,050,000 principal amount of 9% Debentures. The debentures bear interest at 9% per annum. The debentures are recorded net of unamortized underwriting discounts and expenses associated with the offering totaling $490,000, which are amortized using the interest method to interest expense over the term of the debentures. Approximately $72,000 of capitalized issuance costs had been amortized as interest expense for the year ended September 30, 1995 The terms of the 9% Debentures are generally similar to those of the Series A Debentures, other than with respect to the interest rates, except that: (i) interest is payable on January 1 and July 1 in each year; (ii) the 9% Debentures are convertible into common stock of the Company at $1.58 per share; and (iii) the Company has the right to redeem the 9% Debentures at redemption prices commencing at 103% of par on or after July 1, 1998 and declining to par on or after July 1, 2000. The 9% Debentures rank pari passu in right of payment with the Company's other debentures. (5) INCOME TAXES As discussed in Note 1 of "Notes to Consolidated Financial Statements," the Company adopted SFAS No. 109 as of October 1, 1993. Income tax expense (benefit) consisted of the following:
YEARS ENDED SEPTEMBER 30, --------------------------------- 1995 1994 1993 ------- ----------- ----------- Current: Federal................................................... $ -- $ -- $ (150,000) State..................................................... 31,000 44,000 -- ------- ----------- ----------- $31,000 $ 44,000 $ (150,000) ------- ----------- ----------- Deferred: Federal................................................... $ -- $(2,036,000) $ (926,000) State..................................................... -- (285,000) -- ------- ----------- ----------- -- (2,321,000) (926,000) ------- ----------- ----------- Total income tax expense (benefit)...................... $31,000 $(2,277,000) $(1,076,000) ------- ----------- ----------- ------- ----------- -----------
F-15 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) INCOME TAXES (CONTINUED) A reconciliation of the statutory Federal income tax rate to the Company's effective rate is presented below:
YEARS ENDED SEPTEMBER 30, ------------------ 1995 1994 1993 ---- ---- ---- Statutory Federal income tax rate.......................................... (34)% (34)% (34)% Change in valuation allowance.............................................. 34% 13 -- Other...................................................................... -- (3) (3) ---- ---- ---- -- (24)% (37)% ---- ---- ---- ---- ---- ----
Significant components of the Company's deferred tax assets and liabilities, at September 30, 1995 and September 30, 1994 are as follows:
YEARS ENDED SEPTEMBER 30, -------------------------- 1995 1994 ----------- ------------- Deferred tax assets: Net operating loss carryforwards.............................................. $ 8,652,000 $ 2,598,000 Tax and general business tax credit carryforwards............................. 559,000 556,000 Allowance for doubtful accounts and other reserves............................ 145,000 289,000 Deferred film license fees.................................................... 995,000 134,000 Deferred rent................................................................. 65,000 81,000 ----------- ------------- Total gross deferred assets................................................. 10,416,000 3,658,000 Valuation allowance......................................................... (3,679,000) (1,216,000) ----------- ------------- Net deferred tax assets..................................................... $ 6,737,000 $ 2,442,000 ----------- ------------- ----------- ------------- Deferred tax liabilities: Film amortization............................................................. $ 6,701,000 $ 2,417,000 Depreciation.................................................................. 36,000 25,000 ----------- ------------- Total deferred tax liabilities.............................................. $ 6,737,000 $ 2,442,000 ----------- ------------- ----------- -------------
Deferred income taxes result from timing differences in the recognition of revenue and expense for tax and financial reporting purposes. The sources of these differences and the related tax effects are as follows:
YEAR ENDED SEPTEMBER 30, --------------- 1993 --------------- Amortization of film costs.................................. $ (2,875,000) Deferred film license fees.................................. 1,142,000 Allowance for doubtful accounts............................. 34,000 Deferred rent............................................... 31,000 Participant's share and talent residuals.................... 757,000 Other, net.................................................. (15,000) --------------- $ (926,000) --------------- ---------------
At September 30, 1995, the Company had net operating loss carryforwards of approximately $24,631,000 for federal tax purposes. Such carryforwards expire in fiscal 2010. For state tax purposes, the Company had net operating loss carryforwards of $4,527,000 which expire in fiscal 1998 through F-16 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) INCOME TAXES (CONTINUED) 2000. The Company's international tax credits, amounting to approximately $386,000, expire in fiscal 1997 through 2000. The Company's general business credit carryforwards, amounting to approximately $190,700, expire in fiscal 2002 and 2003. Finally, the Company's alternative minimum tax credit carryforwards, amounting to approximately $173,000, have no expiration date. (6) WARRANTS In fiscal 1991, in connection with the Series A Convertible Subordinated Debenture offering, the Company issued warrants to the underwriter to purchase up to $150,000 principal amount of Series A Debentures for $1,200 for each $1,000 principal amount of Series A Debentures purchased. The warrants are exercisable through December 20, 1995. The Company issued warrants to the underwriter to purchase up to 400 units of Series A Debentures at $1,200 per unit. Each unit consists of $1,000 principal amount of Series A Debentures and warrants to purchase 500 shares of common stock of the Company at $2.00 per share. The underlying warrants are exercisable through March 20, 1996 and the Company has agreed to extend the exercise period through March 20, 1997. The Company issued 2,100,000 warrants valued at $525,000 to purchase common stock at $2.00 per share. The warrants are exercisable through March 20, 1997 (as agreed to be extended). As of September 30, 1995, no warrants had been exercised. In fiscal 1992, in connection with its public offering of common stock, the Company issued warrants to the underwriters of the offering to purchase 700,000 shares of common stock. The warrants are exercisable during the four-year period commencing on November 13, 1993 at a price of $1.25 per share. In fiscal 1994, in connection with the 8% Convertible Subordinated Debentures offering, the Company issued warrants to the underwriter to purchase up to 10% of the aggregate principal amount of debentures sold ($1,643,700) at an exercise price equal to 120% of the principal amount of the debentures. The warrants are exercisable during the four year period commencing March 10, 1995 for $1,613,700 principal amount and April 12, 1995 for $30,000 principal amount. In connection with the 9% Convertible Subordinated Debenture offering, the Company issued warrants to the underwriters to purchase up to 10% of the aggregate principal amount of debentures sold ($505,000) at an exercise price equal to 120% of the principal amount of the debentures. The warrants are exercisable during the four year period commencing July 25, 1995. As of September 30, 1995, no warrants had been exercised. (7) OPTIONS In fiscal 1989, the Board of Directors approved a stock incentive plan (the "Plan") that covers directors, third party consultants and advisors, independent contractors, officers and other employees of the Company. In May 1994, the stockholders of the Company voted to increase the authorized number of shares available under the Plan from 1,500,000 to 4,500,000. The Plan allows for the issuance of options to purchase shares of the Company's common stock at an option price at least equal to the fair value of the stock on the date of grant. As of September 30, 1995, 4,299,500 stock options had been granted and were outstanding under the Plan. In fiscal 1994, the Company granted 3,369,500 unvested options to purchase shares of common stock to certain employees entering into employment contracts under the Plan. In fiscal 1995, the Company granted 507,500 unvested options to purchase shares of common stock to certain employees revising their employment contracts under the Plan. The schedule below includes stock options that the Company has granted as of September 30, 1995: F-17 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) OPTIONS (CONTINUED) STOCK OPTIONS OUTSTANDING AS OF SEPTEMBER 30, 1995
NUMBER OF OPTIONS ------------------------------- OUTSIDE PRICE PLAN THE PLAN TOTAL EXERCISE - --------------------------------------------------------------------------- --------- -------- --------- ------------- Balance at September 30, 1992.............................................. 853,500 652,096 1,505,596 Granted Fiscal 1993........................................................ 43,500 -- 43,500 $1.00 Options Expired/Canceled................................................... (43,500) -- (43,500) $1.00 Options Exercised.......................................................... (110,000) -- (110,000) $1.00 --------- -------- --------- Balance at September 30, 1993.............................................. 743,500 652,096 1,395,596 --------- -------- --------- --------- -------- --------- Granted Fiscal 1994........................................................ 3,369,500 20,000 3,389,500 $.75 - $1.16 Options Expired/Canceled................................................... (83,500) -- (83,500) $1.00 - $1.94 Options Exercised.......................................................... (105,000) -- (105,000) $1.00 --------- -------- --------- Balance at September 30, 1994.............................................. 3,924,500 672,096 4,596,596 --------- -------- --------- --------- -------- --------- Granted Fiscal 1995........................................................ 507,500 -- 507,500 $.75 - $0.78 Options Expired/Canceled................................................... (132,500) -- (132,500) $.75 - $2.63 Options Exercised.......................................................... -- -- -- --------- -------- --------- Balance at September 30, 1995.............................................. 4,299,500 672,096 4,971,596 --------- -------- --------- --------- -------- --------- Exercisable at September 30, 1995.......................................... 1,590,000 672,096 2,273,096 --------- -------- --------- --------- -------- ---------
F-18 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) COMMITMENTS AND CONTINGENCIES OFFICER COMPENSATION In March 1994, Messrs. Kushner and Locke each amended his respective employment agreement with the Company to (i) extend the term of the agreement to five years from the effective date thereof (March 1999) and (ii) reduce the maximum annual performance bonus that each may receive to 4% of pre-tax earnings for the applicable period up to a maximum of $200,000 in fiscal 1994, $220,000 in fiscal 1995, $250,000 in fiscal 1996, $270,000 in fiscal 1997 and $290,000 in fiscal 1998. In fiscal 1992, Messrs. Kushner and Locke elected to forego certain executive production and incentive bonuses. Under the revised employment agreements, Messrs. Kushner and Locke each have a base salary of $400,000 in fiscal 1994 and $425,000 in fiscal 1995 through fiscal 1998, subject to potential increase upon review by the Company's Board of Directors after fiscal 1995. Messrs. Kushner and Locke also are each entitled to 5% of the gross profit (as defined) earned by the Company on a sale or other disposition of substantially all rights of the Company to 1ST AND TEN (other than pay cable and distribution rights heretofore granted to a pay cable network). In order to induce Messrs. Kushner and Locke to amend their employment agreements in March 1994, the Company granted to each as of March 10, 1994 options to purchase 900,000 shares of Common Stock at an exercise price per share equal to $0.84 (the last reported sale price of the Common Stock on the date of the initial closing of the 8% Debentures). The options vest over a five year period, with 20% vesting at each anniversary of the date of grant (subject to possible acceleration following a "change-in-control"). The Company also provides Messrs. Kushner and Locke with certain fringe benefits, including payment of an amount equal to the premiums in respect of $3,500,000 of term life insurance with beneficiaries to be designated by each person and disability insurance for each person. After the employment agreements expire or are terminated, Messrs. Kushner and Locke will be entitled to certain payments should they continue to provide executive producer or consulting services to the Company. The agreements permit Messrs. Kushner and Locke to collect outside compensation to which they may be entitled and to provide incidental and limited services outside of their employment with the Company and to receive compensation therefor, so long as such activities do not materially interfere with the performance of their duties under the agreements. Each of Messrs. Kushner and Locke also may require the Company to change its name to remove his name within one year after the expiration or termination of the term of his employment, except for product released prior to such termination, and except that the Company may continue to use such name for a period of one year after such notice. In fiscal 1992, in connection with the Company's public offering of common stock, Messrs. Kushner and Locke deposited 600,000 shares of the Company's common stock with an escrow agent. Under the agreement with the Company, as revised, if a designated earnings before income taxes and extraordinary items requirement was not met for the year ending September 30, 1993, Messrs. Kushner and Locke would make capital contributions by releasing the shares of common stock to the Company. Effective October 1, 1993, these shares were contributed back to the Company for no consideration and retired. In April 1994, Ms. Nelson entered into a two-year employment contract with an option for a third year with the Company providing for a base salary of $175,000 per year, subject to annual increases of 7 1/2% commencing in the second year of the agreement. Ms. Nelson received a signing bonus equal to $25,000 and is entitled to an incentive bonus equal to 1/2% of the Company's pre-tax earnings, which incentive bonus cannot exceed 50% of Ms. Nelson's base salary. The Company has also granted Ms. Nelson options to acquire an aggregate of 225,000 shares of Common Stock at an exercise price of F-19 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) COMMITMENTS AND CONTINGENCIES (CONTINUED) $0.75 per share (the last reported sale price of the Common Stock on the date of the grant); such options vest in installments of 75,000 shares over the three year term of Ms. Nelson's employment agreement. DIRECTOR COMPENSATION During fiscal 1989, the Company entered into a consulting agreement with Mr. Stuart Hersch to engage his services until September 30, 1994 as an executive consultant. Pursuant to the consulting agreement the Company granted Mr. Hersch stock options to purchase 854,192 shares of common stock at $1.555 per share, the fair market value on the date the Company committed to make the grant. During fiscal 1990, the consulting agreement was amended, reducing the options granted to 427,096 shares. As of September 30, 1995, 427,096 options had vested. In consideration of the elimination of certain demand registration rights, the Company indemnified Mr. Hersch in the event Mr. Hersch sold 510,000 shares of the Company's common stock to third parties at a price less than $1.75 per share. The Company paid Mr. Hersch a total of $275,000 during the three-year period ended September 30, 1994 related to such indemnification. Mr. Hersch was paid $100,000 as a consulting fee under the amended consulting agreement during each year in the three year period ended September 30, 1993. EMPLOYEE BENEFIT PLANS The Company participates in various multiemployer defined benefit and defined contribution pension plans under union and industry agreements. These plans include substantially all participating film production employees covered under various collective bargaining agreements. The Company funds the costs of such plans as incurred. Corporate employees not related to actual film production may participate in a 401(k) retirement plan after one year of employment, with an option for a 125 Flexible Savings plan which are each administered by Mutual of Omaha. Costs related to the Employee Benefit Plans are immaterial for the years presented. LEASE The Company is obligated under a noncancelable operating lease for office space on the 20th and 21st floors at its principal executive offices and for office space at 83 Maryleborne High Street in London at September 30, 1995 as follows: Fiscal 1996 (20th and 21st floors).................. $ 568,000 Fiscal 1997......................................... 561,000 Fiscal 1998......................................... 540,000 Fiscal 1999......................................... 540,000 Thereafter.......................................... 273,000 ---------- Total minimum future lease rental payments.................. $2,482,000 ---------- ----------
Rental expense for the years ended September 30, 1995, 1994 and 1993 was approximately $505,000, $401,000 and $493,000, respectively. CONTINGENCIES On December 26, 1995, Guano Holdings Ltd. ("Guano") filed a complaint against the Company, two of the Company's subsidiaries, an employee of the Company, Savoy Pictures, Inc., and Allied Pinocchio Productions, Ltd. claiming that Guano was entitled to be a partner in the film project entitled THE LEGEND OF PINOCCHIO and that it is seeking approximately $5,000,000 as damages. While this proceeding is in the preliminary stages and there can be no assurance that the Company will be F-20 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) COMMITMENTS AND CONTINGENCIES (CONTINUED) successful on the merits of this lawsuit, the Company believes it has good and meritorious defenses to the claims and that this action will not have a material adverse effect on the Company's financial position or results of operations. The Company is involved in certain other legal proceedings and claims arising out of the normal conduct of its business. Management of the Company believes that the ultimate resolution of these matters will not have a material adverse effect upon the Company's financial position or results of operations. In its normal course of business as a entertainment distributor, the Company makes contractual down payments for the acquisition of distribution rights upon signature of documentation. This initial advance for rights ranges for 10% to 30% of the total purchase price. The balance of the payment is generally due upon the complete delivery by unrelated third party producers of acceptable film and video materials and other proof of rights held and insurance policies that may be required for the Company to begin exploitation of the product. As of September 30, 1995 the Company had made contractual agreements for an aggregate of $1,300,000 in payments due should those third party producers complete delivery to the Company. About one half of these obligations have originated in the Company's cable joint venture known as KLC/New City. These amounts are payable over the next eighteen months. (9) RELATED PARTY TRANSACTIONS In fiscal 1993, the Company entered into a domestic home video distribution agreement with the A*Vision Entertainment division of Atlantic Records, a subsidiary of Time-Warner, Inc. for the feature film DEADLY EXPOSURE. Stuart Hersch, a Director of the Company, has been president of A*Vision since August 1990. The distribution agreement provides for payment by A*Vision to the Company of $250,000 in exchange for domestic home video rights, subject to certain back-end participation rights of the Company, and payments by the Company to A*Vision of 30% of the Company's net revenues derived from Canadian home video and broadcast television exploitation of DEADLY EXPOSURE. The Company has paid approximately $28,000 to A*Vision pursuant to such agreement. In fiscal 1994, the Company entered into additional motion picture distribution arrangements with A*Vision, which subsequently changed its name to WarnerVision. WarnerVision and the Company share production costs and expenses and any resulting net revenues after recoupment of investments. Under this arrangement the Company entered into domestic home video distribution agreements with WarnerVision for the feature films LADY-IN-WAITING and LAST GASP which provided for the payment by WarnerVision to the Company of $510,000 and $530,000, in exchange for participation rights with the Company in the revenues derived from the exploitation of those two films. In fiscal 1994, the Company also agreed for WarnerVision to license domestic home video distribution rights to WES CRAVEN PRESENTS THE MINDRIPPER substituting a lower gross revenue participation for the other net revenue participation. In fiscal 1995, the Company entered into a $696,000 net revenue arrangement with WarnerVision similar to DOUBLE EXPOSURE, LADY-IN-WAITING and LAST GASP for a fourth feature film entitled SERPENT'S LAIR. Through September 30, 1995, the Company had received approximately $1,986,000 towards these four films pursuant to these net revenue financing and distribution arrangements. The Company believes that the terms of the foregoing transactions are no less favorable to the Company than those that could have been obtained in transactions with unaffiliated third parties. F-21 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) MAJOR CUSTOMERS AND EXPORT SALES Revenues to major customers which exceeded 10% of net operating revenues represented 45%, 51% and 48% of net operating revenues for the years ended September 30, 1995, 1994 and 1993, respectively, and consisted of the following:
YEARS ENDED SEPTEMBER 30 ------------------------------------ 1995 1994 1993 ---------- ----------- ----------- Television Network CBS............................ $6,045,000 $18,320,000 $ 8,110,000 Television Network ABC............................ -- 7,440,000 5,850,000 Television Network NBC............................ 3,105,000 -- -- Pay/Cable Television Network...................... -- -- 6,575,000 ---------- ----------- ----------- $9,150,000 $25,760,000 $20,535,000 ---------- ----------- ----------- ---------- ----------- -----------
Accounts receivable from these major customers totaled $356,000, $235,000 and $168,000 at September 30, 1995, 1994 and 1993, respectively. Domestic and international accounts receivable consisted of the following:
YEARS ENDED SEPTEMBER 30 ----------------------- 1995 1994 ---------- ----------- Accounts Receivable: Domestic........................................ $3,560,000 $ 2,465,000 International................................... 4,704,000 4,362,000 ---------- ----------- 8,264,000 6,827,000 Less: Allowance for Doubtful Accounts............. (400,000) (650,000) ---------- ----------- $7,864,000 $ 6,177,000 ---------- ----------- ---------- -----------
Export sales by geographic areas were as follows:
YEARS ENDED SEPTEMBER 30 ------------------------------------ 1995 1994 1993 ---------- ----------- ----------- Europe............................................ $3,500,000 $ 6,643,000 $ 5,355,000 Canada............................................ 327,000 1,121,000 393,000 Other............................................. 2,408,000 2,486,000 1,456,000 ---------- ----------- ----------- $6,235,000 $10,250,000 $ 7,204,000 ---------- ----------- ----------- ---------- ----------- -----------
Other sales were principally to customers in Asia, South America and Australia. (11) FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1995, the Company revised its estimate of future revenues for ALADDIN, THE BARBARA DE ANGELIS SHOW, TRAIL WATCH, SWEET BIRD OF YOUTH, and PIGASSO'S PLACE. These revised estimates and, to a lesser extent, revised estimates on other programming no longer being produced by the Company were not material to the Statements of Operations. During the fourth quarter of 1994, the Company revised its estimate of future revenue for 1ST AND TEN and SWEATING BULLETS and other programming no longer being produced by the Company. These revised estimates resulted in a reduction in the carrying value of such programs and amortization expense of approximately $7,800,000. The major component of this reduction resulted from developments surrounding O.J. Simpson, who starred in the 1ST AND TEN series which was cancelled from Rerun Syndication. F-22 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
MARCH 31, SEPTEMBER 30, 1996 1995 ---------------- -------------- (UNAUDITED) Cash............................................................................ $ 3,060,000 $ 3,139,000 Restricted Cash................................................................. 2,420,000 1,162,000 Accounts receivable, net allowance for doubtful accounts........................ 18,484,000 7,864,000 Due from Affiliates............................................................. 233,000 309,000 Notes Receivable from August Entertainment, Inc................................. 657,000 676,000 Film costs, net of accumulated amortization..................................... 75,022,000 73,716,000 Property and equipment, at cost, net of accumulated depreciation and amortization................................................................... 444,000 515,000 Other assets.................................................................... 1,864,000 1,571,000 ---------------- -------------- $ 102,184,000 $ 88,952,000 ---------------- -------------- ---------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued liabilities........................................ $ 4,550,000 $ 3,245,000 Income taxes payable............................................................ -- -- Notes payables.................................................................. 31,690,000 28,398,000 Deferred film license fees...................................................... 5,041,000 2,753,000 Contractual obligations, principally participants' share payable and talent residuals...................................................................... 4,421,000 995,000 Production advances............................................................. 18,273,000 16,609,000 Convertible Subordinated Debentures net of amortized issuance costs............. 16,110,000 17,745,000 ---------------- -------------- $ 80,085,000 $ 69,745,000 ---------------- -------------- Stockholders' Equity: Common stock, no par value. Authorized 80,000,000 shares: issued and outstanding 37,437,553 shares at March 31, 1996 and 35,466,599 shares at September 30, 1995........................................................... 25,089,000 23,337,000 Accumulated Deficit........................................................... (2,990,000) (4,130,000) ---------------- -------------- 22,099,000 19,207,000 ---------------- -------------- $ 102,184,000 $ 88,952,000 ---------------- -------------- ---------------- --------------
See accompanying Notes to Condensed Consolidated Financial Statements. F-23 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED MARCH 31, ------------------------------ 1996 1995 -------------- -------------- Operating revenues................................................................ $ 29,337,000 $ 11,614,000 Costs related to operating revenues............................................... 24,365,000 9,168,000 Selling, general and administrative expenses...................................... 1,968,000 1,977,000 -------------- -------------- Earnings from operations........................................................ 3,004,000 469,000 Interest Income................................................................... 60,000 136,000 Interest Expense.................................................................. (1,904,000) (1,592,000) -------------- -------------- 1,160,000 (987,000) Provision for Income Taxes........................................................ 20,000 16,000 -------------- -------------- Net Earnings/(Loss)............................................................. $ 1,140,000 $ (1,003,000) -------------- -------------- -------------- -------------- Net Earnings/(Loss) per common and common equivalent share: Net Earnings/(Loss)............................................................. $ 0.03 $ (0.03) -------------- -------------- -------------- -------------- Weighted average number of common and common equivalent shares outstanding........ 35,961,000 31,159,000 -------------- -------------- -------------- --------------
See accompanying Notes to Condensed Consolidated Financial Statements. F-24 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, -------------------------------- 1996 1995 --------------- --------------- (UNAUDITED) Cash Flow from operating activities: Net Earnings/(Loss).......................................................... $ 1,140,000 $ (1,003,000) Adjustments to reconcile net earnings to net cash used by operating activities: Increase in restricted cash................................................ (1,258,000) -- Amortization of film costs................................................. 24,195,000 9,088,000 Depreciation and amortization.............................................. 110,000 120,000 Amortization of capitalized issuance costs and warrants.................... 340,000 210,000 Accounts receivable, net................................................... (10,620,000) (1,042,000) Other receivables.......................................................... 95,000 (712,000) Increase in film costs..................................................... (25,501,000) (18,805,000) Accounts payable and accrued liabilities................................... 1,305,000 (100,000) Deferred film license fees................................................. 2,288,000 453,000 Contractual obligations.................................................... 3,426,000 94,000 Production advances........................................................ 1,664,000 (82,000) --------------- --------------- Net cash provided (used) by operating activities......................... (2,816,000) (11,779,000) Cash flows from investing activites: Purchase of property and equipment........................................... (38,000) (204,000) Decrease (increase) in other assets.......................................... (293,000) (3,000) --------------- --------------- Net cash (used) by investing activities.................................. (331,000) (207,000) Cash flows from financing activities: Increase in notes payable.................................................... 3,292,000 7,770,000 Repayment of notes payable................................................... -- (2,600,000) Repayment of debentures...................................................... -- (60,000) Other........................................................................ (224,000) -- --------------- --------------- Net cash provided by financing activities................................ 3,068,000 5,110,000 Net increase in cash......................................................... (79,000) (6,876,000) Cash at beginning of period.................................................. 3,139,000 15,681,000 --------------- --------------- Cash at end of period........................................................ $ 3,060,000 $ 8,805,000 --------------- --------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: -- 1 During the six months ended March 31, 1995, $650,000 of convertible subordinated debentures before unamortized capitalized issuance costs of $69,000 were converted into 666,666 shares of Common Stock. -- 2 During the six months ended March 31, 1996, $1,714,000 of convertible subordinated debentures before unamortized capitalized issuance costs of $152,000 were converted into 1,757,947 shares of Common Stock. See accompanying Notes to Condensed Consolidated Financial Statements. F-25 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
STOCKHOLDERS' EQUITY ----------------------------------------------------------------- NUMBER OF CAPITAL ACCUMULATED SHARES STOCK DEFICIT TOTAL ------------- -------------- ------------------ -------------- Balance at September 30, 1995................ 35,466,598 $ 23,337,000 $ (4,130,000) $ 19,207,000 ------------- -------------- ------------------ -------------- Conversions of convertible debentures........ 1,970,955 1,752,000 1,752,000 Net earnings................................. -- -- 1,140,000 1,140,000 ------------- -------------- ------------------ -------------- Balance at March 31, 1996.................. 37,437,553 $ 25,089,000 $ (2,990,000) $ 22,099,000 ------------- -------------- ------------------ -------------- ------------- -------------- ------------------ --------------
See accompanying Notes to Condensed Consolidated Financial Statements. F-26 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY The Kushner-Locke Company (the "Company") is principally engaged in the development, production and distribution of feature films, direct-to-video films, television series, movies-for-television, mini-series and animated programming. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of The Kushner-Locke Company, its subsidiaries and certain less than wholly-owned entities where the Company has control. All material intercompany balances and transactions have been eliminated. These unaudited consolidated financial statements and notes thereto have been condensed and, therefore, do not contain certain information included in the Company's annual consolidated financial statements and notes thereto. The unaudited condensed consolidated financial statements should be read in conjunction with the Company's annual consolidated financial statements and notes thereto. The unaudited condensed consolidated financial statements reflect, in the opinion of management, all adjustments, all of which are of a normal recurring nature, necessary to present fairly the financial position of the Company as of March 31, 1996, the results of its operations for the three and six month periods ended March 31, 1996 and 1995, and its cash flows for the six month period ended March 31, 1996 and 1995. Interim results are not necessarily indicative of results to be expected for a full fiscal year. Certain reclassifications have been made to conform prior year balances with the current presentation. RESTRICTED CASH As of March 31, 1996, the Company had $2,420,000 in restricted cash related to advances received by the Company from film producers for the acquisition of distribution rights. These cash advances were being held in escrow accounts as collateral by financial institutions providing production loans to those producers. INCOME TAXES Effective October 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This statement supersedes SFAS No. 96, "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in operating results in the period encompassing the enactment date. EARNINGS (LOSS) PER SHARE Earnings (loss) per common and common equivalent share is based upon the weighted average number of shares of common stock outstanding plus common equivalent shares consisting of dilutive outstanding warrants and stock options. The weighted average number of common and common equivalent shares outstanding for the calculation of primary earnings per share was 36,337,000 and 31,973,000 for the quarters ended March 31, 1996 and 1995, respectively, and 35,961,000 and 31,159,000 for the six months ending March 31, 1996 and 1995, respectively. The inclusion of the F-27 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) additional shares, assuming the conversion of the Company's convertible subordinated debentures, would have been anti-dilutive for the three and the six month periods ended March 31, 1996 and March 31, 1995, respectively. (2) FILM COSTS Film costs consist of the following:
MARCH 31, SEPTEMBER 30, 1996 1995 -------------- -------------- In process or development.............................................. $ 36,467,000 $ 42,115,000 Released, principally television productions net of accumulated amortization.......................................................... 38,555,000 31,601,000 -------------- -------------- $ 75,022,000 $ 73,716,000 -------------- -------------- -------------- --------------
(3) NOTES PAYABLE Notes payable are comprised of the following:
MARCH 31, SEPTEMBER 30, 1996 1995 -------------- -------------- Note payable to bank, revolving credit facility secured by substantially all Company assets, interest at prime (8.25% at May 10, 1996) plus 1.25%, outstanding principal balance due December 31, 1996.................................................................. $ 15,000,000 $ 14,804,000 Notes payable to banks and/or financial institutions consisting of six production loans secured by certain film rights held by producers, priced at different rates for each loan; approximately $3,903,000 due before July 1996, $1,801,000 due before August 1996 and $10,986,000 due before October 1996............................................... 16,690,000 13,594,000 -------------- -------------- $ 31,690,000 $ 28,398,000 -------------- -------------- -------------- --------------
F-28 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) CONVERTIBLE SUBORDINATED DEBENTURES
MARCH 31, SEPTEMBER 30, 1996 1995 -------------- -------------- Series A Convertible Subordinated Debentures due December 15, 2000, bearing interest at 10% per annum payable June 15 and December 15, net of unamortized capitalized issuance costs and warrants of $11,000 and $13,000, respectively.... $ 76,000 $ 84,000 -------------- -------------- Series B Convertible Subordinated Debentures due December 15, 2000, bearing interest at 13 3/4% per annum payable monthly, net of unamortized capitalized issuance costs of $320,000 and $354,000, respectively........................... 2,955,000 2,972,000 -------------- -------------- Convertible Subordinated Debentures due December 15, 2000, bearing interest at 8% per annum payable February 1 and August 1, net of unamortized capitalized issuance costs of $791,000 and $1,058,000, respectively......................... 8,482,000 10,129,000 -------------- -------------- Convertible Subordinated Debentures due July 1, 2002, bearing interest at 9% per annum payable January 1 and July 1, net of unamortized capitalized issuance costs of $453,000 and $490,000, respectively.................................... 4,597,000 4,560,000 -------------- -------------- $ 16,110,000 $ 17,745,000 -------------- -------------- -------------- --------------
SERIES A DEBENTURES As of March 31, 1996, the Company had outstanding $87,000 principal amount of Series A Debentures. The Debentures are recorded net of unamortized underwriting discounts, expenses associated with the offering and warrants totaling $11,000 which are amortized using the interest method to interest expense over the term of the Debentures. Approximately $2,000 of capitalized issuance costs have been amortized to interest expense for the six months ended March 31, 1996. SERIES B DEBENTURES As of March 31, 1996, the Company had outstanding $3,275,000 principal amount of Series B Debentures due 2000. The Debentures are recorded net of unamortized underwriting discounts and expenses associated with the offering totaling $320,000, which are amortized using the interest method to interest expense over the term of the Debentures. Approximately $17,000 of capitalized issuance costs had been amortized as interest expense for the six months ended March 31, 1996. 8% DEBENTURES As of March 31, 1996, the Company had outstanding $9,273,000 principal amount of 8% Debentures. The Debentures are recorded net of unamortized underwriting discounts and expenses associated with the offering totaling $791,000 which are amortized using the interest method to interest expense over the term of the debentures. Approximately $46,000 of capitalized issuance costs had been amortized as interest expense for the six months ended March 31, 1996. F-29 THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED) 9% DEBENTURES As of March 31, 1996, the Company had outstanding $5,050,000 principal amount of 9% Debentures. The Debentures are recorded net of unamortized underwriting discounts and expenses associated with the offering totaling $453,000, which are amortized using the interest method to interest expense over the term of the Debentures. Approximately $18,000 of capitalized issuance costs had been amortized as interest expense for the six months ended March 31, 1996. (5) INCOME TAXES Income taxes for the six month periods ended March 31, 1996 and 1995 were computed using the effective income tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. Management believes that all taxable income for the fiscal year will be offset by a deferred tax asset which will keep the effective federal tax rate at approximately 0%. (6) CONTINGENCIES The Company is involved in certain legal proceedings and claims arising out of the normal conduct of its business. Reference is made to the Company's annual report on Form 10-K for the fiscal year ended September 30, 1995 for a description of certain legal proceedings. Management of the Company believes that the ultimate resolution of these matters will not have a material adverse effect upon the Company's financial position or results of operations. In its normal course of business as a entertainment distributor, the Company makes contractual down payments for the acquisition of distribution rights upon signature of documentation. This initial advance for rights ranges for 10% to 30% of the total purchase price. The balance of the payment is generally due upon the complete delivery by third party producers of acceptable film or video materials and proof of rights held and insurance policies that may be required for the Company to begin exploitation of the product. As of March 31, 1996 the Company had made contractual agreements for an aggregate of approximately $1,238,000 in payments due should those third party producers complete delivery to the Company. If such third parties use the Company's distribution agreement as collateral for a production loan, then the Company may be obligated to make such payments to financial institutions or others instead of such third party producers. These obligations have originated from the acquisition personnel in the Company's cable joint venture known as KLC/New City Tele-Ventures. These amounts are payable over the next twelve months. F-30 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY PERSON IN ANY JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 4 Incorporation of Certain Documents By Reference........................... 4 Prospectus Summary........................................................ 5 Risk Factors.............................................................. 9 The Company............................................................... 14 Use of Proceeds........................................................... 18 Market For Common Stock and Class A Warrants and Dividends................ 19 Capitalization............................................................ 20 Selected Consolidated Financial Data...................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 22 Business.................................................................. 34 Description of Securities................................................. 49 Underwriting.............................................................. 51 Concurrent Offering....................................................... 52 Legal Matters............................................................. 53 Experts................................................................... 53 Index to Consolidated Financial Statements................................ F-1
[LOGO] THE KUSHNER-LOCKE COMPANY UNITS --------------------- PROSPECTUS --------------------- [LOGO] JULY , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 11, 1996 PROSPECTUS THE KUSHNER-LOCKE COMPANY 1,331,734 SHARES COMMON STOCK ------------------ This Prospectus relates to the registration by The Kushner-Locke Company (the "Company"), at its expense, for the account of certain security holders (the "Selling Security Holders") of 1,331,734 shares of the Company's common stock, no par value, (the "Common Stock"), of which (i) 631,734 shares are currently held by certain Selling Security Holders and (ii) 700,000 shares are issuable by the Company upon the exercise, if at all, of certain warrants (the "Selling Security Holder Warrants"). Such shares are not being underwritten in an underwritten offering and the Company will not receive any proceeds from the sale of such shares. The Company will receive proceeds upon the exercise, if at all, of all or a portion of the Selling Security Holder Warrants. See "Selling Security Holders." The shares of Common Stock held by the Selling Security Holders or issuable upon exercise, if at all, of the Selling Security Holder Warrants may be sold by the Selling Security Holders or their respective permitted transferees (assuming, in the case of the shares of Common Stock underlying the Selling Security Holder Warrants, that such warrants have been exercised) commencing on the date of this Prospectus. Sales of the shares of Common Stock held by the Selling Security Holders or issuable upon exercise, if at all, of the Selling Security Holder Warrants may depress the price of the Common Stock. See "Prospectus Summary -- The Offering," "Selling Security Holders" and "Plan of Distribution." Concurrently with the commencement of this Offering, the Company is offering units (the "Units"), each Unit consisting of two shares of Common Stock and one Class C redeemable Common Stock purchase warrant (the "Warrants"), each exercisable to purchase one share of Common Stock at an exercise price of 120% of the price of the Common Stock on the effective date of the registration statement of which this Prospectus is a part (the "Effective Date") as agreed to by the Company and the Underwriter. The Common Stock is traded on the NASDAQ National Market ("NNM") under the symbol "KLOC" and on the Pacific Stock Exchange under the symbol "KLO." THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. PURCHASERS SHOULD CAREFULLY CONSIDER THE MATTERS DESCRIBED UNDER "RISK FACTORS" ON PAGE 9. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ The sale of the shares of Common Stock held by the Selling Security Holders may be effected from time to time in transactions (which may include block transactions by or for the account of the Selling Security Holders) in the over-the counter market, on the NNM or in negotiated transactions, trough the writing of options on such shares, through a combination of such methods of sale or otherwise. Sales may be made at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. If any Selling Security Holder sells his, her or its shares of Common Stock, or options thereon, pursuant to this Prospectus at a fixed price or at a negotiated price which is, in either case, other than the prevailing market price or in a block transaction to a purchaser who resells, or if any Selling Security Holder pays compensation to a broker-dealer that is other than the usual and customary discounts, concessions or commissions, or if there are any arrangements either individually or in the aggregate that would constitute a distribution of the shares of Common Stock held by the Selling Security Holders, a post-effective amendment to the Registration Statement of which this Prospectus is a part would need to be filed and declared effective by the Securities and Exchange Commission before such Selling Security Holder could make such sale, pay such compensation or make such a distribution. The Company is under no obligation to file a post-effective amendment to the Registration Statement of which this Prospectus is a part under such circumstances. ------------------------ The date of this Prospectus is , 1996 SELLING SECURITY HOLDERS An aggregate of 1,331,734 shares of Common Stock are being registered in this Offering for the accounts of the Selling Security Holders. The shares of Common Stock owned by the Selling Security Holders may be sold by the Selling Security Holders or their respective permitted transferees (assuming, in the case of the shares of Common Stock underlying the Selling Security Holder Warrants, that such warrants have been exercised) commencing on the date of this Prospectus. Sales of such shares of Common Stock by the Selling Security Holders or their respective transferees may depress the price of the Common Stock. The following table sets forth certain information with respect to persons for whom the Company is registering such shares of Common Stock for resale to the public. The Company will not receive any of the proceeds from the sale of such shares of Common Stock. The Company will receive proceeds upon the exercise, if at all, of all or a portion of the Selling Security Holder Warrants. None of the Selling Security Holders except Phillip Mittleman, who is an employee of the Company, has had any position, office or material relationship with the Company or its affiliates since the Company's inception. The shares of Common Stock owned by the Selling Security Holders are not being underwritten by the Underwriter in connection with this Offering. Selling Security Holders may sell their shares through the Underwriter. The Selling Security Holders have agreed not to sell the Selling Security Holders' Shares for a period of up to six (6) months following the Effective Date without the prior written consent of the Underwriter subject, in the case of Common Stock issued upon exercise of certain of the Selling Security Holder Warrants, to earlier release under certain circumstances.
AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES OWNED NAME OF SELLING SECURITY HOLDER (1) OWNED BEFORE OFFERING BEING REGISTERED AFTER OFFERING (2) - ----------------------------------------------- --------------------- ---------------- --------------------------- Stanley & Marilyn Fishman 10,811 10,811 -0- Gary Fuchs 5,405 5,405 -0- Jerry W. Gunn 15,939 15,939 -0- Moshe & Dan Levy 32,432 32,432 -0- Alan D. Lips 10,811 10,811 -0- Norman Laufer 10,811 10,811 -0- Mitchell Kersch 10,811 10,811 -0- Greg Supinsky 10,811 10,811 -0- Nat Compton 5,405 5,405 -0- Timothy E. Abbott 5,405 5,405 -0- Rick Borchert 5,405 5,405 -0- Albert & Sandra Kula 10,811 10,811 -0- Richard David 10,811 10,811 -0- Phillip Mittleman 86,486(3) 86,486 -0- Dean Morehouse 21,622 21,622 -0- K&K Realty 10,811 10,811 -0- James Finstad 5,405 5,405 -0- Marcus Finkel 21,622 21,622 -0- John Kyle Jr. 10,811 10,811 -0- James Lustig 42,135 42,135 -0- Michael M. Arnouse 10,256 10,256 -0- Eric Jackson 10,256 10,256 -0-
SS-1
AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES OWNED NAME OF SELLING SECURITY HOLDER (1) OWNED BEFORE OFFERING BEING REGISTERED AFTER OFFERING (2) - ----------------------------------------------- --------------------- ---------------- --------------------------- Trans Euro Investments Ltd. 10,256 10,256 -0- James D. Tate 10,256 10,256 -0- Ronald P. Cohen 5,128 5,128 -0- Yuet Yee Lam 5,128 5,128 -0- Conrad Von Bibra FBO Edith Von Bibra 20,513 20,513 -0- The Earnest Group 10,256 10,256 -0- Camila Bellick 10,256 10,256 -0- Stratton & Judy Sclavos 10,257 10,257 -0- Richard Brooks 10,256 10,256 -0- Arthur Luxenberg 20,513 20,513 -0- Catfish, Ltd. 20,513 20,513 -0- Jay & Bernice Salomon 10,256 10,256 -0- Lawrence Michels 10,256 10,256 -0- Neil T. Anderson 10,256 10,256 -0- Perry Weitz 10,256 10,256 -0- Herbert Cyrlin 20,513 20,513 -0- Strathearn & Company 10,256 10,256 -0- Robert & Lois Worton 10,256 10,256 -0- Bruce & Linda Pollekoff 10,256 10,256 -0- Thomas A. Peacock 20,513 20,513 -0- John Divivier & Lisa Bottom 10,256 10,256 -0- Michael Anthony DellaVecchia 10,256 10,256 -0- Sanford D. Greenberg 357,000(4) 357,000 -0- Robert L. Lemon 81,200(4) 81,200 -0- Richard H. Kamerling 40,600(4) 40,600 -0- Harvey S. Morrow 40,600(4) 40,600 -0- Kenneth S. Bernstein 70,000(4) 70,000 -0- Kenneth L. Greenberg 70,000(4) 70,000 -0- Richard Frueh 40,600(4) 40,600 -0-
- ------------------------ (1) Information set forth in the table regarding the Selling Security Holders' securities is provided to the best knowledge of the Company based on information furnished to the Company by the respective Selling Security Holders and/or available to the Company through its stock ledgers. (2) Assumes that each Selling Security Holder sells all of the shares of Common Stock held by such Selling Security Holder. (3) Phillip Mittleman also has options to acquire 200,000 shares of Common Stock and is an employee of the Company. (4) Represents shares of Common Stock issuable upon exercise of Selling Security Holder Warrants. SS-2 PLAN OF DISTRIBUTION The sale of the shares of Common Stock held by the Selling Security Holders may be effected from time to time in transactions (which may include block transactions by or for the account of the Selling Security Holders) in the over-the-counter market, on the NNM or in negotiated transactions, through the writing of options on such shares, through a combination of such methods of sale, or otherwise. Sales may be made at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. If any Selling Security Holder sells his, her or its shares of Common Stock, or options thereon, pursuant to this Prospectus at a fixed price or at a negotiated price which is, in either case, other than the prevailing market price or in a block transaction to a purchaser who resells, or if any Selling Security Holder pays compensation to a broker-dealer that is other than the usual and customary discounts, concessions or commissions, or if there are any arrangements either individually or in the aggregate that would constitute a distribution of the shares of Common Stock held by the Selling Security Holders, a post-effective amendment to the Registration Statement of which this Prospectus is a part would need to be filed and declared effective by the Securities and Exchange Commission before such Selling Security Holder could make such sale, pay such compensation or make such a distribution. The Company is under no obligation to file a post-effective amendment to the Registration Statement of which this Prospectus is a part under such circumstances. The Selling Security Holders may effect transactions in their shares of Common Stock by selling their securities directly to purchasers, through broker-dealers acting as agents for the Selling Security Holders or to broker-dealers who may purchase the Selling Security Holders' securities as principals and thereafter sell such securities from time to time in the over-the-counter market, on the NNM, in negotiated transactions, or otherwise. Such broker-dealers, if any, may receive compensation in the form of discounts, concessions or commissions from the Selling Security Holders and/or the purchasers for whom such broker-dealers may act as agents or to whom they may sell as principals or both. The Selling Security Holders and broker-dealers, if any, acting in connection with such sales might be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act and any commission received by them and any profit on the resale of such securities might be deemed to be underwriting discounts and commissions under the Securities Act. SS-3 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY, BY ANY PERSON IN ANY JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. ------------------------ TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 4 Incorporation of Certain Documents By Reference........................... 4 Prospectus Summary........................................................ 5 Risk Factors.............................................................. 9 The Company............................................................... 14 Use of Proceeds........................................................... 18 Market For Common Stock and Class A Warrants and Dividends................ 19 Capitalization............................................................ 20 Selected Consolidated Financial Data...................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 22 Business.................................................................. 34 Description of Securities................................................. 49 Selling Security Holders.................................................. 51 Plan of Distribution...................................................... 52 Experts................................................................... 53 Index to Consolidated Financial Statements................................ F-1
[LOGO] THE KUSHNER-LOCKE COMPANY 1,331,734 SHARES COMMON STOCK --------------------- PROSPECTUS --------------------- JULY , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth costs and expenses, other than underwriting discounts and commissions (and consultant fees of $100,000), payable in connection with the sale and distribution of the securities being registered. All amounts are estimated except the Securities and Exchange Commission registration fee.
ITEM - ----------------------------------------------------------------- Registration Fee................................................. $ 4,963 NASD Filing Fee.................................................. 35,000 Blue Sky fees and expenses....................................... 45,000 Legal fees and expenses.......................................... 175,000 Printing Expenses................................................ 50,000 Accounting fees and expenses..................................... 75,000 Transfer Agent and Registrar Fees................................ 3,000 Miscellaneous.................................................... 27,037 ----------- Total........................................................ $ 415,000 ----------- -----------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Pursuant to provisions of the California General Corporation Law ("CGCL"), the Articles of Incorporation of the registrant (the "Company"), as amended, include a provision which eliminates the personal liability of its directors to the Company and its shareholders for monetary damage to the fullest extent permissible under California law. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing his or her duties, of a risk of a serious injury to the Company or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (vi) under Section 310 of the CGCL (concerning contracts or transactions between the Company and a director or (vii) under Section 316 of the CGCL (concerning directors' liability for improper dividends, loans and guarantees). The provision does not eliminate or limit the liability of an officer for any act or omission as an officer, notwithstanding that the officer is also a director or that his actions, if negligent or improper, have been ratified by the Board of Directors. Further, the provision has no effect on claims arising under federal or state securities or blue sky laws and does not affect the availability of injunctions and other equitable remedies available to the Company's shareholders for any violation of a director's fiduciary duty to the Company or its shareholders. The Company's Articles of Incorporation also authorize the Company to indemnify is agents (as defined in Section 317 of the CGCL) for breach of duty to the corporation and its shareholders through bylaw provisions, agreements or both, in excess of the indemnification otherwise permitted by Section 317 of the CGCL, subject to the limits on such excess indemnification set forth in Section 204 of the CGCL. The general effect of Section 317 of the CGCL and Article V of the Company's bylaws, as amended, is to provide for indemnification of its agents to the fullest extent permissible under California law. Reference is also made to the indemnification provisions of the underwriting agreement which provides for indemnification by the Underwriter of the Company and its officers and directors for certain liabilities arising under the Securities Act or otherwise. II-1 The Company maintains insurance coverage for each director and officer of the Company for claims against such directors and officers for any alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act in their respective capacities as directors and officers of the Company, or any matter claimed against them solely by reason of their status as directors or officers of the Company, subject to certain exceptions. ITEM 16. EXHIBITS 1.1 Form of Underwriting Agreement 3. Articles of Incorporation (A) 4.1 Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of December 1, 1990 pertaining to 10% Convertible Subordinated Debentures Due 2000, Series A(E) 4.2 First Supplemental Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of March 15, 1991 pertaining to 10% Convertible Subordinated Debentures Due 2000, Series A(F) 4.3 Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of December 1, 1990 pertaining to 13 3/4% Convertible Subordinated Debentures Due 2000, Series B(E) 4.4 Warrant agreement between the Company and City National Bank, as Warrant Agent, dated as of March 19, 1991 pertaining to Common Stock Purchase Warrants (F) 4.5 Form of Class C Redeemable Common Stock Purchase Warrant 4.6 Form of Underwriter's Warrant 5. Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP 10.1 Employment Agreement dated October 1, 1988 between the Company and Donald Kushner (A) 10.1.1 Amendment dated August 18, 1992 to the Employment Agreement dated October 1, 1988 between the Company and Donald Kushner (J) 10.1.2 Amendment dated January 20, 1994 to the Employment Agreement dated October 1, 1988 between the Company and Donald Kushner (K) 10.1.3 Addendum dated July 1, 1994 to the Employment Agreement dated October 1, 1988 between the Company and Donald Kushner (M) 10.2 Employment Agreement dated October 1, 1988 between the Company and Peter Locke (A) 10.2.1 Amendment dated August 18, 1992 to the Employment Agreement dated October 1, 1988 between the Company and Peter Locke (J) 10.2.2 Amendment dated January 20, 1994 to the Employment Agreement dated October 1, 1988 between the Company and Peter Locke (K) 10.2.3 Addendum dated July 1, 1994 to the Employment Agreement dated October 1, 1988 between the Company and Peter Locke (M) 10.3 1988 Stock Incentive Plan of the Company (A) 10.4 Form of Indemnification Agreement (A) 10.5 Kushner-Locke Shareholders' Cross-Purchase Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited (A)
II-2 10.5.1 Amendment dated as of May 14, 1992 to the Kushner-Locke Shareholders' Cross-Purchase Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited (I) 10.6 Kushner-Locke Trust Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited (A) 10.6.1 Amendment dated May 14, 1992 to the Kushner-Locke Trust Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited (I) 10.11.2 Third Amended and Restated Credit Agreement between the Company and Imperial Bank, dated as of February 9, 1990, as amended and restated on December 14, 1990, May 1, 1992 and August 31, 1993 (K) 10.11.3 Imperial Bank Waiver (K) 10.11.4 Amendment No. 1 dated March 10, 1994 between the Company and Imperial Bank to the Third Amended and Restated Credit Agreement dated February 9, 1990, as amended and restated on December 14, 1990, May 1, 1992 and August 31, 1993 (K) 10.12 Lease Agreement, dated as of November 1989, between the Company and 11601 Wilshire Associates (G) 10.12.1 Amended Lease Agreement (G) 10.14 Warrant Agreement between the Company and Paulson Investment Company, Inc. dated as of December 20, 1990 (C) 10.15 Warrant Agreement between the Company and Paulson Investment Company, Inc. dated as of March 20, 1991 (F) 10.16 Warrant Agreement between the Company and Chatfield Dean & Co., Inc. dated as of November 13, 1992 (J) 10.17 Employment Agreement dated October 1, 1993 between the Company and Lawrence Mortorff (K) 10.19 Fiscal Agency Agreement dated March 10, 1994 between and among the Company, Bank America National Trust Company and Bank of America National Trust and Savings Association (K) 10.19.1 Side letter between the Company and BankAmerica Trust Company to the Fiscal Agency Agreement dated March 10, 1994 between and among the Company, BankAmerica Trust Company and Bank of America National Trust and Savings Association (K) 10.20 Warrant Agreement dated March 10, 1994 between the Company and RAS Securities Corp. (K) 10.21 Warrant Agreement dated March 10, 1994 between the Company and I. Friedman Equities, Inc. (K) 10.22 Fiscal Agency Agreement dated July 25, 1994 between and among the Company, Bank America National Trust Company and Bank of America National Trust and Savings Association (L) 10.24 Employment Agreement dated September 1, 1994 between the Company and Gregory Cascante (M)
II-3 10.25 Employment Agreement dated September 1, 1994 between the Company and Eleanor Powell (M) 10.26 Imperial Bank Commitment Letter regarding Waiver and Amendment of Sections 5.9 and 5.11 of the Third Amended and Restated Credit Agreement (M) 10.27 Loan and Security Agreement dated December 1, 1994 between the Company and August Entertainment, Inc., and Guarantees between the Company, August Entertainment, Inc. and the Allied Entertainments Group PLC and certain of its subsidiaries (M) 10.28 Letter Agreement, dated March 23, 1995, by and between Woodenhead Productions, Ltd. and Newmarket Capital Group, L.P. (N) 10.29 Modification and Extension of Restated Credit Agreement, dated March 24, 1995, by and between Imperial Bank and The Kushner-Locke Company (N) 10.30* Letter Agreement dated February 6, 1995 by and between Savoy Pictures, Inc. and KL Features, Inc. (N)* 10.31 Letter Agreement dated May 12, 1995 by and between Imperial Bank and The Kushner-Locke Company (N) 10.32 Guaranty, dated July 7, 1995, by and between The Kushner-Locke Company and Newmarket Capital Group, L.P. for loan and interest of Allied Pinocchio Productions, LTD. (THE LEGEND OF PINOCCHIO) (O) 10.33 Guaranty, dated May 24, 1995, by and between The Kushner-Locke Company and Newmarket Capital Group, L.P. for loan and interest of Dayton Way Pictures II, Inc. (SERPENT'S LAIR) (O) 10.34 Guaranty, dated June 12, 1995 by and between The Kushner-Locke Company and Newmarket Capital Group, L.P. for loan and interest of Dayton Way Pictures, Inc. (THE GRAVE) (O) 10.35 Guaranty, dated July 31, 1995, by and between The Kushner-Locke Company and Newmarket Capital Group, L.P. for loan and interest of Dayton Way Pictures IV, Inc. (WHOLE WIDE WORLD) (P) 10.36 Guaranty, dated July 1995 by and between The Kushner-Locke Company and Banque Paribas (Los Angeles Agency) for loan and interest of Dayton Way Pictures III, Inc. (FREEWAY) (P) 10.37 Second Amendment to Loan and Security Agreement dated September 29, 1995 between Dayton Way Pictures, II, Inc. and Newmarket Capital Group L.P. waiving contracts receivable milestone (SERPENT'S LAIR) (P) 10.38 First Amendment to Loan and Security Agreement dated September 29, 1995 between Dayton Way Pictures, Inc. and Newmarket Capital Group L.P. waiving contracts receivable milestone (THE GRAVE) (P) 10.39 First Amendment to Loan and Security Agreement dated September 29, 1995 between Dayton Way Pictures IV, Inc. and Newmarket Capital Group L.P. waiving contracts milestone (WHOLE WIDE WORLD) (P) 10.40 Modification and Extension of Restated Credit Agreement, dated September 29, 1995, by and between Imperial Bank and The Kushner-Locke Company (P) 10.41 Letter Agreement dated December 5, 1995 from New Line Cinema to The Kushner Locke Company summarizing New Line/Savoy deal regarding THE LEGEND OF PINOCCHIO (P)
II-4 10.42 Modification and Extension of Restated Credit Agreement dated December 22, 1995 by and between Imperial Bank and The Kushner-Locke Company (P) 10.43 Letter regarding extension of Restated Credit Agreement dated January 12, 1996 by and between Imperial Bank and The Kushner-Locke Company (P) 10.44 Amendment to the 1988 Stock Incentive Plan dated May 17, 1994 (Q) 10.45 Amendment No. 3 dated December 31, 1995 between The Kushner-Locke Company and Imperial Bank for the Third Amended and Restated Credit Agreement dated as of February 9, 1990, as amended and restated as of December 14, 1990, as of May 1, 1992 and as of August 31, 1993 (Q) 10.46 First Amendment to Credit Documents dated December 22, 1995 between Allied Pinocchio Productions, Limited, Newmarket Capital Group L.P., Bank of America National Trust and Savings Association, The Kushner-Locke Company and Kushner-Locke International, Inc. (THE LEGEND OF PINOCCHIO) (Q) 10.47 Third Amendment to Credit Documents dated December 22, 1995 between Dayton Way Pictures II, Inc., Newmarket Capital Group L.P. and Kushner-Locke International, Inc., a division of The Kushner-Locke Company (SERPENTS LAIR) (Q) 10.48 Second Amendment to Credit Documents dated December 22, 1995 between Dayton Way Pictures, Inc., Newmarket Capital Group L.P. and Kushner-Locke International, Inc., a division of The Kushner-Locke Company. (THE GRAVE) (Q) 10.49 Second Amendment to Credit Documents dated December 22, 1995 between Dayton Way Pictures IV, Inc. and Newmarket Capital Group L.P. (WHOLE WIDE WORLD) (Q) 10.50 Cross Collateralization Agreement dated as of July 7, 1995 between The Kushner-Locke Company, Allied Pinocchio Productions Ltd., Dayton Way Pictures, Inc., Dayton Way Pictures II, Inc., Dayton Way Pictures IV, Inc. and Newmarket Capital Group, L.P. (Q) 10.51 First Amendment to Cross Collateralization Agreement dated January 10, 1996 between The Kushner-Locke Company, Allied Pinocchio Productions Ltd., Dayton Way Pictures, Inc., Dayton Way Pictures II, Inc., Dayton Way Pictures IV, Inc. and Newmarket Capital Group, L.P. (Q) 10.52 Waiver of Sections 6.1 LIMITATION ON INDEBTEDNESS, 6.6 LIMITATION ON PREPAYMENT OF SUBORDINATED DEBT and 6.16 LIMITATION ON ISSUANCE OF CAPITAL STOCK of the Third Amended and Restated Credit Agreement (the "Credit Agreement") among Kushner-Locke Company and Imperial Bank, dated as of February 9, 1990 and as amended and restated as of December 14, 1990, May 1, 1992, August 31, 1993, and December 31, 1995. (R) 10.53 Waiver of Sections 5.9 MINIMUM NET INCOME of the Third Amended and Restated Credit Agreement (the "Credit Agreement") among Kushner-Locke Company and Imperial Bank, dated as of February 9, 1990 and as amended and restated as of December 14, 1990, May 1, 1992, August 31, 1993, and December 31, 1995. (R) 10.54 Fourth Amendment to Employment Agreement between The Kushner-Locke Company and Peter Locke dated February 13, 1996. (R) 10.55 Fourth Amendment to Employment Agreement between The Kushner-Locke Company and Donald Kushner dated February 13, 1996. (R)
II-5 10.56 Letter Agreement, dated as of April 12, 1996, by and among The Kushner-Locke Company, Chemical Bank and Chase Securities Inc. (S) 10.57 Credit, Security, Guaranty and Pledge Agreement, dated as of June 19, 1996, among The Kushner-Locke Company, The Guarantors named therein, Chemical Bank, as Agent, and Chemical Bank, as Fronting Bank. 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in item 5)
- ------------------------ * Confidential treatment granted. (A) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-18, as amended, effective December 5, 1988 (Commission File No. 33-25101-LA). (B) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1989. (C) Incorporated by reference from the Exhibit to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1990. (D) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-1 (File No. 33-37192), as initially filed on October 5, 1990 or as amended on November 30, 1990. (E) Incorporated by reference from the Exhibits to the Company's Registration Statements on Form S-1, as amended, effective November 30, 1990 (File No. 33-37192), and effective December 20, 1990 (File No. 33-37193). (F) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended, effective March 20, 1991. (G) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1991. (H) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1991. (I) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1992. (J) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-2, as amended, effective November 12, 1992 (Commission File No. 33-51544). (K) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1994. (L) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1994. (M) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal quarter ended September 30, 1994. (N) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1995. (O) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1995. (P) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended September 30, 1995. (Q) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended December 31, 1995. (R) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1996. (S) Incorporated by reference from the Company's Registration Statement on Form S-2 (File No. 333-5089), as initially filed on June 3, 1996. II-6 ITEM 17. UNDERTAKINGS The Company hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in this registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under Securities Act, may be permitted to directors, officers, and controlling persons of the Company pursuant to the provision described in Item 15 or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer, or controlling person of the Company in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Amendment No. 2 to Form S-2 registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on July 11, 1996. THE KUSHNER-LOCKE COMPANY, By: /s/ DONALD KUSHNER ----------------------------------- Donald Kushner CO-CHAIRMAN OF THE BOARD Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to Form S-2 Registration Statement has been signed by the following persons in the capacities and on the date indicated: SIGNATURE TITLE DATE - ------------------------------------------------------ -------------------------------------- ----------------- /s/ PETER LOCKE ------------------------------------------- Co-Chairman of the Board, Co-Chief July 11, 1996 Peter Locke Executive Officer and President /s/ DONALD KUSHNER ------------------------------------------- Co-Chairman of the Board, Co-Chief July 11, 1996 Donald Kushner Executive Officer and Secretary /s/ JAMES L. SCHWAB ------------------------------------------- Chief Financial Officer July 11, 1996 James L. Schwab /s/ RENE ROUSSELET ------------------------------------------- Vice President of Finance and July 11, 1996 Rene Rousselet Controller (Chief Accounting Officer) /s/ S. JAMES COPPERSMITH ------------------------------------------- Director July 11, 1996 S. James Coppersmith /s/ STUART HERSCH ------------------------------------------- Director July 11, 1996 Stuart Hersch /s/ MILTON OKUN ------------------------------------------- Director July 11, 1996 Milton Okun
II-8 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS TO AMENDMENT NO. 2 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 THE KUSHNER-LOCKE COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - --------- ----------------------------------------------------------------- 1.1 Form of Underwriting Agreement 3. Articles of Incorporation (A) 4.1 Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of December 1, 1990 pertaining to 10% Convertible Subordinated Debentures Due 2000, Series A(E) 4.2 First Supplemental Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of March 15, 1991 pertaining to 10% Convertible Subordinated Debentures Due 2000, Series A(F) 4.3 Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of December 1, 1990 pertaining to 13 3/4% Convertible Subordinated Debentures Due 2000, Series B(E) 4.4 Warrant agreement between the Company and City National Bank, as Warrant Agent, dated as of March 19, 1991 pertaining to Common Stock Purchase Warrants (F) 4.5 Form of Class C Redeemable Common Stock Purchase Warrant 4.6 Form of Underwriter's Warrant 5. Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP 10.1 Employment Agreement dated October 1, 1988 between the Company and Donald Kushner (A) 10.1.1 Amendment dated August 18, 1992 to the Employment Agreement dated October 1, 1988 between the Company and Donald Kushner (J) 10.1.2 Amendment dated January 20, 1994 to the Employment Agreement dated October 1, 1988 between the Company and Donald Kushner (K) 10.1.3 Addendum dated July 1, 1994 to the Employment Agreement dated October 1, 1988 between the Company and Donald Kushner (M) 10.2 Employment Agreement dated October 1, 1988 between the Company and Peter Locke (A) 10.2.1 Amendment dated August 18, 1992 to the Employment Agreement dated October 1, 1988 between the Company and Peter Locke (J) 10.2.2 Amendment dated January 20, 1994 to the Employment Agreement dated October 1, 1988 between the Company and Peter Locke (K) 10.2.3 Addendum dated July 1, 1994 to the Employment Agreement dated October 1, 1988 between the Company and Peter Locke (M) 10.3 1988 Stock Incentive Plan of the Company (A) 10.4 Form of Indemnification Agreement (A) 10.5 Kushner-Locke Shareholders' Cross-Purchase Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited (A) 10.5.1 Amendment dated as of May 14, 1992 to the Kushner-Locke Shareholders' Cross-Purchase Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited (I) 10.6 Kushner-Locke Trust Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited (A)
EXHIBIT NO. DESCRIPTION - --------- ----------------------------------------------------------------- 10.6.1 Amendment dated May 14, 1992 to the Kushner-Locke Trust Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited (I) 10.11.2 Third Amended and Restated Credit Agreement between the Company and Imperial Bank, dated as of February 9, 1990, as amended and restated on December 14, 1990, May 1, 1992 and August 31, 1993 (K) 10.11.3 Imperial Bank Waiver (K) 10.11.4 Amendment No. 1 dated March 10, 1994 between the Company and Imperial Bank to the Third Amended and Restated Credit Agreement dated February 9, 1990, as amended and restated on December 14, 1990, May 1, 1992 and August 31, 1993 (K) 10.12 Lease Agreement, dated as of November 1989, between the Company and 11601 Wilshire Associates (G) 10.12.1 Amended Lease Agreement (G) 10.14 Warrant Agreement between the Company and Paulson Investment Company, Inc. dated as of December 20, 1990 (C) 10.15 Warrant Agreement between the Company and Paulson Investment Company, Inc. dated as of March 20, 1991 (F) 10.16 Warrant Agreement between the Company and Chatfield Dean & Co., Inc. dated as of November 13, 1992 (J) 10.17 Employment Agreement dated October 1, 1993 between the Company and Lawrence Mortorff (K) 10.19 Fiscal Agency Agreement dated March 10, 1994 between and among the Company, Bank America National Trust Company and Bank of America National Trust and Savings Association (K) 10.19.1 Side letter between the Company and BankAmerica Trust Company to the Fiscal Agency Agreement dated March 10, 1994 between and among the Company, BankAmerica Trust Company and Bank of America National Trust and Savings Association (K) 10.20 Warrant Agreement dated March 10, 1994 between the Company and RAS Securities Corp. (K) 10.21 Warrant Agreement dated March 10, 1994 between the Company and I. Friedman Equities, Inc. (K) 10.22 Fiscal Agency Agreement dated July 25, 1994 between and among the Company, Bank America National Trust Company and Bank of America National Trust and Savings Association (L) 10.24 Employment Agreement dated September 1, 1994 between the Company and Gregory Cascante (M) 10.25 Employment Agreement dated September 1, 1994 between the Company and Eleanor Powell (M) 10.26 Imperial Bank Commitment Letter regarding Waiver and Amendment of Sections 5.9 and 5.11 of the Third Amended and Restated Credit Agreement (M) 10.27 Loan and Security Agreement dated December 1, 1994 between the Company and August Entertainment, Inc., and Guarantees between the Company, August Entertainment, Inc. and the Allied Entertainments Group PLC and certain of its subsidiaries (M) 10.28 Letter Agreement, dated March 23, 1995, by and between Woodenhead Productions, Ltd. and Newmarket Capital Group, L.P. (N)
EXHIBIT NO. DESCRIPTION - --------- ----------------------------------------------------------------- 10.29 Modification and Extension of Restated Credit Agreement, dated March 24, 1995, by and between Imperial Bank and The Kushner-Locke Company (N) 10.30* Letter Agreement dated February 6, 1995 by and between Savoy Pictures, Inc. and KL Features, Inc. (N)* 10.31 Letter Agreement dated May 12, 1995 by and between Imperial Bank and The Kushner-Locke Company (N) 10.32 Guaranty, dated July 7, 1995, by and between The Kushner-Locke Company and Newmarket Capital Group, L.P. for loan and interest of Allied Pinocchio Productions, LTD. (THE LEGEND OF PINOCCHIO) (O) 10.33 Guaranty, dated May 24, 1995, by and between The Kushner-Locke Company and Newmarket Capital Group, L.P. for loan and interest of Dayton Way Pictures II, Inc. (SERPENT'S LAIR) (O) 10.34 Guaranty, dated June 12, 1995 by and between The Kushner-Locke Company and Newmarket Capital Group, L.P. for loan and interest of Dayton Way Pictures, Inc. (THE GRAVE) (O) 10.35 Guaranty, dated July 31, 1995, by and between The Kushner-Locke Company and Newmarket Capital Group, L.P. for loan and interest of Dayton Way Pictures IV, Inc. (WHOLE WIDE WORLD) (P) 10.36 Guaranty, dated July 1995 by and between The Kushner-Locke Company and Banque Paribas (Los Angeles Agency) for loan and interest of Dayton Way Pictures III, Inc. (FREEWAY) (P) 10.37 Second Amendment to Loan and Security Agreement dated September 29, 1995 between Dayton Way Pictures, II, Inc. and Newmarket Capital Group L.P. waiving contracts receivable milestone (SERPENT'S LAIR) (P) 10.38 First Amendment to Loan and Security Agreement dated September 29, 1995 between Dayton Way Pictures, Inc. and Newmarket Capital Group L.P. waiving contracts receivable milestone (THE GRAVE) (P) 10.39 First Amendment to Loan and Security Agreement dated September 29, 1995 between Dayton Way Pictures IV, Inc. and Newmarket Capital Group L.P. waiving contracts milestone (WHOLE WIDE WORLD) (P) 10.40 Modification and Extension of Restated Credit Agreement, dated September 29, 1995, by and between Imperial Bank and The Kushner-Locke Company (P) 10.41 Letter Agreement dated December 5, 1995 from New Line Cinema to The Kushner Locke Company summarizing New Line/Savoy deal regarding THE LEGEND OF PINOCCHIO (P) 10.42 Modification and Extension of Restated Credit Agreement dated December 22, 1995 by and between Imperial Bank and The Kushner-Locke Company (P) 10.43 Letter regarding extension of Restated Credit Agreement dated January 12, 1996 by and between Imperial Bank and The Kushner-Locke Company (P) 10.44 Amendment to the 1988 Stock Incentive Plan dated May 17, 1994 (Q) 10.45 Amendment No. 3 dated December 31, 1995 between The Kushner-Locke Company and Imperial Bank for the Third Amended and Restated Credit Agreement dated as of February 9, 1990, as amended and restated as of December 14, 1990, as of May 1, 1992 and as of August 31, 1993 (Q) 10.46 First Amendment to Credit Documents dated December 22, 1995 between Allied Pinocchio Productions, Limited, Newmarket Capital Group L.P., Bank of America National Trust and Savings Association, The Kushner-Locke Company and Kushner-Locke International, Inc. (THE LEGEND OF PINOCCHIO) (Q)
EXHIBIT NO. DESCRIPTION - --------- ----------------------------------------------------------------- 10.47 Third Amendment to Credit Documents dated December 22, 1995 between Dayton Way Pictures II, Inc., Newmarket Capital Group L.P. and Kushner-Locke International, Inc., a division of The Kushner-Locke Company (SERPENTS LAIR)(Q) 10.48 Second Amendment to Credit Documents dated December 22, 1995 between Dayton Way Pictures, Inc., Newmarket Capital Group L.P. and Kushner-Locke International, Inc., a division of The Kushner-Locke Company. (THE GRAVE) (Q) 10.49 Second Amendment to Credit Documents dated December 22, 1995 between Dayton Way Pictures IV, Inc. and Newmarket Capital Group L.P. (WHOLE WIDE WORLD) (Q) 10.50 Cross Collateralization Agreement dated as of July 7, 1995 between The Kushner-Locke Company, Allied Pinocchio Productions Ltd., Dayton Way Pictures, Inc., Dayton Way Pictures II, Inc., Dayton Way Pictures IV, Inc. and Newmarket Capital Group, L.P. (Q) 10.51 First Amendment to Cross Collateralization Agreement dated January 10, 1996 between The Kushner-Locke Company, Allied Pinocchio Productions Ltd., Dayton Way Pictures, Inc., Dayton Way Pictures II, Inc., Dayton Way Pictures IV, Inc. and Newmarket Capital Group, L.P. (Q) 10.52 Waiver of Sections 6.1 LIMITATION ON INDEBTEDNESS, 6.6 LIMITATION ON PREPAYMENT OF SUBORDINATED DEBT and 6.16 LIMITATION ON ISSUANCE OF CAPITAL STOCK of the Third Amended and Restated Credit Agreement (the "Credit Agreement") among Kushner-Locke Company and Imperial Bank, dated as of February 9, 1990 and as amended and restated as of December 14, 1990, May 1, 1992, August 31, 1993, and December 31, 1995. (R) 10.53 Waiver of Sections 5.9 MINIMUM NET INCOME of the Third Amended and Restated Credit Agreement (the "Credit Agreement") among Kushner-Locke Company and Imperial Bank, dated as of February 9, 1990 and as amended and restated as of December 14, 1990, May 1, 1992, August 31, 1993, and December 31, 1995. (R) 10.54 Fourth Amendment to Employment Agreement between The Kushner-Locke Company and Peter Locke dated February 13, 1996. (R) 10.55 Fourth Amendment to Employment Agreement between The Kushner-Locke Company and Donald Kushner dated February 13, 1996. (R) 10.56 Letter Agreement, dated as of April 12, 1996, by and among The Kushner-Locke Company, Chemical Bank and Chase Securities Inc. (S) 10.57 Credit, Security, Guaranty and Pledge Agreement, dated as of June 19, 1996, among The Kushner-Locke Company, the Guarantors named therein, Chemical Bank, as Agent, and Chemical Bank, as Fronting Bank 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Kaye, Scholer, Fierman, Hays & Handler, LLP (included in item 5)
- ------------------------ * Confidential treatment granted. (A) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-18, as amended, effective December 5, 1988 (Commission File No. 33-25101-LA). (B) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1989. (C) Incorporated by reference from the Exhibit to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1990. (D) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-1 (File No. 33-37192), as initially filed on October 5, 1990 or as amended on November 30, 1990. (E) Incorporated by reference from the Exhibits to the Company's Registration Statements on Form S-1, as amended, effective November 30, 1990 (File No. 33-37192), and effective December 20, 1990 (File No. 33-37193). (F) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended, effective March 20, 1991. (G) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1991. (H) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1991. (I) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1992. (J) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-2, as amended, effective November 12, 1992 (Commission File No. 33-51544). (K) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1994. (L) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1994. (M) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal quarter ended September 30, 1994. (N) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1995. (O) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1995. (P) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended September 30, 1995. (Q) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended December 31, 1995. (R) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1996. (S) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-2 (File No. 333-5089), as initially filed on June 3, 1996. EX-1.1 2 EX 1.1 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 Proof of July 8, 1996 [FORM OF UNDERWRITING AGREEMENT] THE KUSHNER-LOCKE COMPANY _______ Units consisting in the aggregate of Two Shares of Common Stock and One Class C Redeemable Common Stock Purchase Warrants UNDERWRITING AGREEMENT , 1996 Lew Lieberbaum & Co., Inc. 600 Old Country Road Garden City, New York 11530 Dear Sirs: The Kushner-Locke Company, a California corporation (the "Company"), hereby confirms its agreement with Lew Lieberbaum & Co., Inc. ("you" or the "Underwriter"), as follows: i. DESCRIPTION OF THE SECURITIES. The Company proposes to issue and sell to the Underwriter _______ units ("Units") consisting of two shares (the "Shares") of common stock, no par value per share ("Common Stock"), and one Class C redeemable common stock purchase warrants ("Warrants") of the Company (the Units and the Shares, together with such Warrants, being sometimes referred to as the "Securities"). The Company proposes to grant to the Underwriter an option for forty-five days from the Effective Date (as defined below) to purchase an amount of Units equal to 15% of Units initially offered to the public _______ (the "Additional Securities") solely for the purpose of covering over-allotments, if any. The offering of Securities and Additional Securities contemplated hereby may sometimes be referred to as the "Offering." (a) THE WARRANTS. Pursuant to and subject to certain conditions set forth in the agreement (the "Warrant Agreement") between the Company, the Underwriter and Corporate Stock Transfer, each Warrant will be exercisable during the period commencing on the effective date of the Registration Statement, as defined in Paragraph 2(a) hereof (the "Effective Date"), and expiring five years thereafter, subject to prior redemption by the Company (as described below), at an initial exercise price (subject to adjustment as set forth in the Warrant Agreement) equal to $____ per share (120% above the closing high bid price of the Common Stock on the Nasdaq National Market (the "NNM") on the Effective Date). The shares of Common Stock issuable upon the exercise of Warrants are hereinafter referred to as "Warrant Shares." As more fully provided in the Warrant Agreement, the Warrants will be redeemable by the Company at a price of $.10 per Warrant, commencing one year after the Effective Date (or earlier with the consent of the Underwriter not to be unreasonably withheld) and prior to their expiration upon not less than 30 days' prior written notice to the holders of the Warrants, provided the closing high bid price of the Common Stock as reported on the NNM if traded thereon, or if not traded thereon, the closing sale price if listed on a national securities exchange (or other reporting system that provides last sales prices), or if not traded thereon but traded on either the Nasdaq SmallCap Market or over-the- counter on the bulletin board, the average of the closing ask and bid price, has been at least 150% of the then current Warrant exercise price (initially $___ per share, 120% of the closing high bid price on NNM on the Effective Date), for a period of 10 trading days ending on the third day prior to the date on which the Company gives notice of redemption, subject to the right of the holder to exercise his purchase rights thereunder until redemption. (b) UNDERWRITER'S SECURITIES. The Company will sell, subject to the Underwriter's purchase of the Units pursuant to the terms and conditions herein, to the Underwriter, for an aggregate of $10.00, warrants to purchase up to one Unit for each ten Units sold in the Offering excluding the Additional Securities (a maximum of ______ Units) $________, 120% of the public offering price (the "Underwriter's Warrants"). The Underwriter's Warrants, Units and shares of Common Stock and Warrants underlying the Units and shares of Common Stock issuable upon exercise of the Warrants underlying the Units are hereinafter referred to collectively as the "Underwriter's Securities." The Underwriter's Warrants shall be non-exercisable and non-transferable (other than to officers and directors of the Underwriter and to members of the selling group and their officers or partners) for a period of 12 months following the Effective Date. Thereafter, the Underwriter's Warrants shall be exercisable and transferable for a period of four years (provided such transfer is in accordance with the Securities Act of 1933 (the "Act") and any other applicable federal and state securities laws). If the Underwriter's Warrants are not exercised during their term, they shall, by their terms, automatically expire. The Underwriter's Securities shall be registered for sale to the public and shall be included in the Registration Statement filed in connection with the Offering. 2 ii. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Underwriter that: (a) The Company has filed with the Securities and Exchange Commission (the "Commission"), a registration statement, and one or more amendments thereto, on Form S-2 (File No. 333-5089), including in each such registration statement and each such amendment any related preliminary prospectus, as such may be amended ("Preliminary Prospectus"), for the registration of the Securities under the Act. The Company will, if required by applicable law, file a further amendment to said registration statement in the form to be delivered to you and will not, before the registration statement becomes effective, file any other amendment thereto to which you shall have reasonably objected in writing after having been furnished with a copy thereof unless the Company or its outside counsel determines that such amendment is required to be filed by applicable law. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time such registration statement becomes effective (including the prospectus, financial statements, exhibits and all other documents, as amended, filed as a part thereof), is hereinafter called the "Registration Statement," and the prospectus, in the form filed with the Commission, as such may be amended, pursuant to Rule 424(b) of the General Rules and Regulations of the Commission under the Act (the "Regulations") or, if no such filing is made, the definitive prospectus used in the Offering, as such may be amended, is hereinafter called the "Prospectus." The Company has delivered to you copies of each Preliminary Prospectus as filed with the Commission. (b) The Commission has not issued any orders preventing or suspending the use of any Preliminary Prospectus, and, as of the date filed with the Commission, each Preliminary Prospectus conformed in all material respects with the requirements of the Act and did not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Company by or on your behalf, or by or on behalf of any Selling Shareholder named in the Preliminary Prospectus, for use in such Preliminary Prospectus and; provided, further, however, that this representation and warranty does not apply to statements or omissions that have been cured in a subsequent preliminary prospectus or in the Prospectus. 3 (c) When the Registration Statement becomes effective under the Act and at all times subsequent thereto to and including the Closing Date (hereinafter defined) and the Option Closing Date (hereinafter defined) and for such longer periods as a Prospectus is required to be delivered in connection with the sale of the Securities by the Underwriter, the Registration Statement and Prospectus, and any amendment thereof or supplement thereto, will contain all material statements which are required to be stated therein in accordance with the Act and the Regulations, and will in all material respects conform to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Company by or on your behalf, or by or on behalf of any Selling Shareholder named in the Registration Statement or Prospectus, for use in the Registration Statement or Prospectus, or in any amendment thereof or supplement thereto. It is understood that the statements set forth in the Registration Statement or Prospectus with respect to (i) the amounts of the selling concession and reallowance; (ii) the identity of counsel to the Underwriter under the heading "Legal Matters"; (iii) the statements set forth under the heading "Underwriting," including the information concerning the National Association of Securities Dealers, Inc. ("NASD") affiliation of the Underwriter; and (iv) the stabilization legend in the Prospectus constitute the only information supplied by you for use in the Registration Statement or Prospectus. (d) The Company is, and at the Closing Date and the Option Closing Date will be, a corporation duly incorporated, validly existing and in good standing under the laws of the State of California. The Company's subsidiaries are, and at the Closing Date and the Option Closing Date will be, duly incorporated under the laws of the states of such incorporation. The Company is duly qualified and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any of its properties or the conduct of its business requires such qualification, except those jurisdictions in which the failure to so qualify would not have a material adverse effect on the business or operations of the Company and its subsidiaries taken as a whole ("Material Adverse Effect") and except as described in or contemplated by the Registration Statement. The Company has all requisite corporate powers and authority, and all necessary authorizations, approvals, orders, licenses, certificates and permits of and from all applicable governmental regulatory officials and bodies to own or lease its properties and conduct its business as described in or 4 contemplated by the Registration Statement except where the failure to have any such powers, authority, certificates or permits would not have a Material Adverse Effect and except as described in or contemplated by the Registration Statement. The Company is doing business and has been doing business during the period described in the Registration Statement in material compliance with all such material authorizations, approvals, orders, licenses, certificates and permits and all material federal, state and local laws, rules and regulations concerning the business in which the Company is engaged, except where the failure to comply with any such authorizations, approvals, orders, licenses, certificates or permits or any such laws, rules or regulations would not have a Material Adverse Effect and except as described in or contemplated by the Registration Statement. The disclosures in the Registration Statement concerning the effects of federal, state and local regulation on the Company's business as currently conducted and as currently contemplated are correct in all material respects and do not omit to state a material fact required to be stated therein in light of the circumstances under which such disclosures were made. The Company has all requisite corporate power and authority to enter into this Agreement and carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained or will have been obtained prior to the Closing Date. (e) This Agreement has been duly and validly authorized and executed by the Company. The Securities (including the Units, the Shares and the Warrants), the Warrant Shares underlying such Warrants, and the Underwriter's Securities have been duly authorized (and, in the case of the Shares and the Warrant Shares, have been duly reserved for issuance) and, when issued and paid for in accordance with this Agreement (and, in the case of such Warrant Shares, upon exercise of such Warrants and payment to the Company of the exercise price therefor pursuant to the terms of the Warrant Agreement), the Shares and such Warrant Shares will be validly issued, fully paid and non- assessable; the Securities, Additional Securities, Warrant Shares (other than Underwriter's Securities), and Underwriter's Securities are not and will not be subject to the preemptive rights of any shareholder of the Company and conform and at all times up to and including their issuance will conform in all material respects to all statements with regard thereto contained in the Registration Statement and Prospectus; and all corporate action required to be taken for the authorization, issuance and sale of the Securities, the Additional Securities, Warrant Shares (other than Underwriter's Securities) and Underwriter's Securities has been taken, and this Agreement constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, to issue and sell, upon exercise in accordance with the terms thereof, the number and kind of securities called for thereby. 5 (f) The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof will not result in a breach or violation of any material terms or provisions of, or constitute a default under, the Certificate of Incorporation or by-laws, in each case as amended, of the Company or of any material evidence of indebtedness, lease, contract or other material agreement or instrument to which the Company is a party or by which the Company or any of its properties is bound, or under any applicable law, rule, regulation, judgment, order or decree of any applicable governmental body, professional advisory body, administrative agency or court, domestic or foreign, having jurisdiction over the Company or its properties, in each case except for any breach, violation or default that would not have a Material Adverse Effect and except as described in or contemplated by the Registration Statement, or result in the creation or imposition of any material lien, charge or encumbrance upon any of the material properties or assets of the Company; and no consent, approval, authorization or order of any court or governmental or other regulatory agency or body is required for the consummation by the Company of the transactions on its part herein contemplated, except such as may be required under the Act or under state securities or blue sky laws or under the rules and regulations of the NASD, and except where the breach, violation or failure to obtain such consent, approval, authorization or order would not have a Material Adverse Effect and except as described in or contemplated by the Registration Statement. (g) Subsequent to the date hereof, and prior to the Closing Date and the Option Closing Date, except for any securities issuable upon exercise of any outstanding options and warrants, options pursuant to the Company's stock option plan, upon conversion of any of the Company's convertible securities and as part of a merger, acquisition or other business combinations and except as otherwise described in or contemplated by the Registration Statement, the Company will not issue or acquire any of its equity securities. (h) The consolidated financial statements and related notes thereto included in the Registration Statement and the Prospectus fairly present in all material respects the consolidated financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply; and such financial statements and related notes thereto have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved (except as may be otherwise noted therein). (i) Except as described in or contemplated by the Registration Statement, the Company is not, and at the Closing Date and at the Option Closing Date the Company will not be, in violation or breach of, or default in, the due performance and 6 observance of any material term, covenant or condition of any material indenture, mortgage, deed of trust, note, loan or credit agreement, or any other material agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the property or assets of the Company is subject, which violations, breaches, default or defaults, singularly or in the aggregate, would have a Material Adverse Effect. The Company does not have and at the Closing Date or Option Closing Date the Company will not have taken any action in violation of the provisions of the Certificate of Incorporation or by-laws, in each case as amended, of the Company, or any applicable statute, order, rule or regulation of any court or regulatory authority or governmental body having jurisdiction over or application to the Company or its business or properties, except for any violations that, singularly or in the aggregate, would not have a Material Adverse Effect and except as described in or contemplated by the Registration Statement. (j) The Company has, and at the Closing Date and at the Option Closing Date will have, good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, encumbrances, claims, security interests, restrictions and defects of any material nature whatsoever, except for liens incurred in the ordinary course of business (including, but not limited to, the credit facility with Chase, loans or guarantees for the Company's products or productions and liens by professional guilds) or as are described in or contemplated by the Registration Statement and liens for taxes not yet due and payable or such as in the aggregate will not have a Material Adverse Effect. All of the material leases and subleases under which the Company is the lessor or sublessor of properties or assets or under which the Company holds properties or assets as lessee as described in the Prospectus are, and will on the Closing Date and the Option Closing Date be, in full force and effect, and except as described in or contemplated by the Registration Statement, the Company is not and will not be in material default in respect of any of the terms or provisions of any of such leases or subleases (except for defaults which would not have a Material Adverse Effect), and no claim has been asserted by anyone adverse to rights of the Company or the Subsidiaries as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of the Company to continue possession of the leased or subleased premises or assets under any such lease or sublease, except as described in or contemplated by the Registration Statement or such as in the aggregate would not have a Material Adverse Effect, and the Company (including through wholly owned subsidiaries) owns or leases all such material properties as are necessary to its operations as now conducted and, except as otherwise stated in or contemplated by the Registration 7 Statement, as proposed to be conducted as set forth in the Prospectus (except where the failure to own or lease such properties would not have a Material Adverse Effect). (k) The authorized, issued and outstanding capital stock of the Company as of the date referenced in the Prospectus is, and the authorized, issued and outstanding capital stock of the Company on the Closing Date will be, as set forth in the Prospectus under "Capitalization" (in each case based on the assumptions set forth therein and except that issuance and sale of the Additional Securities, the issuance of the Warrant Shares, the issuance of the Underwriter's Securities and the issuance of any shares of Common Stock issuable upon the exercise of any options or warrants to purchase shares of Common Stock (including the Company's stock option plan) or upon the conversion of any convertible securities of the Company will not be reflected therein); the shares of issued and outstanding capital stock of the Company set forth thereunder have been (or as of the Closing Date will be) duly authorized and validly issued and are (or as of the Closing Date will be) fully paid and non-assessable; except for options granted pursuant to the Company's stock option plans, the Company's publicly traded warrants, the Warrants, the Underwriter's Securities, the Additional Securities, the Company's convertible securities, the warrants and options described in or contemplated by the registration statement of the Company on Form S-3 and as described in or contemplated by the Registration Statement, no options, warrants or other rights to purchase, agreements or other obligations to issue, or agreements or other rights to convert any obligation into, any shares of capital stock of the Company have been granted or entered into by the Company; and the Common Stock, the Warrants and all such options and warrants conform in all material respects, to all statements relating thereto contained in the Registration Statement and Prospectus. (l) Except as described in or contemplated by the Registration Statement, the Company does not own or control any capital stock or securities of, or have any proprietary interest in, or otherwise participates in any other corporation, partnership, joint venture, firm, association or business organization (other than those disclosed in Exhibit [ ] attached hereto); PROVIDED, HOWEVER, that this provision shall not be applicable to the investment, if any, of the net proceeds from the sale of the Securities sold by the Company or other funds thereof in interest-bearing savings accounts, certificates of deposit, money market accounts, United States government obligations or other similar short-term obligations or investments. (m) To the best of the Company's knowledge, KPMG Peat Marwick LLP, who have reported on the financial statements of the Company, are independent accountants with respect to the Company as required by the Act and the Regulations. 8 (n) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company has not (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) entered into any transaction other than in the ordinary course of business; or (iii) declared or paid any dividend or made any other distribution on or in respect of its capital stock; PROVIDED, HOWEVER, that this provision shall not be applicable to any transaction between or among the Company and its subsidiaries or any other corporation, partnership, joint venture, firm, association or business organization set forth on Exhibit [ ] attached hereto. (o) There is no litigation or governmental proceeding pending or to the knowledge of the Company threatened against, or involving the properties or business of the Company which would reasonably be expected to be decided against the Company and which decision would have a Material Adverse Effect, except as described in or contemplated by the Registration Statement. Further, except as described in or contemplated by the Registration Statement, there are no pending actions, suits or proceedings related to environmental matters or related to discrimination on the basis of age, sex, religion or race, nor is the Company charged with or, to its knowledge, under investigation with respect to any violation of any applicable statutes or regulations of any regulatory authority having jurisdiction over its business or operations, which violations would reasonably be expected to be decided against the Company and which decision would have a Material Adverse Effect, and no labor disturbances by the employees of the Company exist or, to the knowledge of the Company, have been threatened. (p) The Company has, and at the Closing Date and at the Option Closing Date will have, filed all necessary federal, state and foreign income and franchise tax returns or has requested extensions thereof (except in any case where the failure so to file would not have a Material Adverse Effect), and has paid all taxes which it believes in good faith were required to be paid by it except for any such taxes that currently, or on the Closing Date or Option Closing Date, as the case may be, are being contested in good faith or as described in or contemplated by the Registration Statement. (q) The Company has not at any time (i) made any contribution to any candidate for political office, or failed to disclose fully any such contribution, in violation of law, or (ii) made any illegal payment to any state, federal, foreign governmental or professional regulatory agency, officer or official or other person charged with similar public, quasi-public or professional regulatory duties, other than payments or contributions required or allowed by applicable law. 9 (r) Except as described in or contemplated by the Registration Statement, neither the Company nor any officer, director, employee or agent of the Company has made any payment or transfer of any funds or assets of the Company or conferred any personal benefit by use of the Company's assets or received any funds, assets or personal benefit in violation of any law, rule or regulation, which is required to be stated in the Registration Statement or necessary to make the statements therein not misleading. (s) On the Closing Date and on the Option Closing Date, all transfer or other taxes, if any (other than income tax), which are required to be paid, and are due and payable, in connection with the sale and transfer of the Securities by the Company to the Underwriter will have been fully paid or provided for by the Company as the case may be, and all laws imposing such taxes will have been fully complied with in all material respects. (t) There are no contracts or other documents of the Company which are of a character required to be described in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement which have not been so described or filed. (u) The Company maintains a system of internal accounting controls that it believes is sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specified authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; and (3) access to assets is permitted only in accordance with management's general or specific authorizations. (v) Except as described in or contemplated by the Registration Statement or for securities contemplated to be registered on a Form S-3 of the Company, no holder of any securities of the Company has the right (which has not been effectively waived or terminated) to require registration of any securities because of the filing or effectiveness of the Registration Statement. (w) The Company has not taken and at the Closing Date will not have taken, directly or indirectly, any illegal action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the illegal stabilization or manipulation of the price of the Common Stock or the Warrants to facilitate the sale or resale of such securities. (x) To the Company's knowledge, there are no claims for services in the nature of a finder's origination fee 10 with respect to the sale of the Securities hereunder, except as described in or contemplated by the Registration Statement. (y) No right of first refusal exists with respect to any sale of the Securities by the Company except as may relate to the Underwriter. (z) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by this Agreement to be delivered to the Underwriter was, when made, or as of the Closing Date or as of the Option Closing Date will be materially inaccurate, untrue or incorrect. iii. COVENANTS OF THE COMPANY. The Company covenants and agrees with the Underwriter that: (a) It will deliver to the Underwriter, without charge, two conformed copies of each Registration Statement and of each amendment or supplement thereto, including all financial statements and exhibits. (b) The Company has delivered to the Underwriter, and each of the Selected Dealers (as hereinafter defined) without charge, as many copies as have been reasonably requested of each Preliminary Prospectus heretofore filed with the Commission in accordance with and pursuant to the Commission's Rule 430 under the Act and will deliver to the Underwriter, without charge, on the Effective Date, and thereafter from time to time during such reasonable period as you may reasonably request if, in the reasonable written opinion of counsel for the Underwriter, the Prospectus is required by law to be delivered in connection with sales by the Underwriter or a Selected Dealer, as many copies of the Prospectus (and, in the event of any amendment of or supplement to the Prospectus, of such amended or supplemented Prospectus) as the Underwriter may reasonably request for the purposes contemplated by the Act. The Company will take all reasonable and necessary actions to furnish to the Underwriter, when and as requested by the Underwriter, all necessary documents, exhibits, information, applications, instruments and papers as may be reasonably required in order to permit or facilitate the sale of the Securities. (c) The Company has authorized the Underwriter to use, and make available for use by prospective dealers, the Preliminary Prospectus, and authorizes the Underwriter, all dealers selected by you in connection with the distribution of the Securities (the "Selected Dealers") to be purchased by the Underwriter and all Selected Dealers to whom any of such Securities may be sold by the Underwriter or by any Selected Dealer, to use the Prospectus, as from time to time amended or 11 supplemented, in connection with the sale of the Securities in accordance with the applicable provisions of the Act, the applicable Regulations and applicable state law, until completion of the distribution of the Securities and for such longer period as you may reasonably request if the Prospectus is required under the Act, the applicable Regulations or applicable state law to be delivered in connection with sales of the Securities by the Underwriter or the Selected Dealers. (d) The Company will use its best efforts to cause the Registration Statement to become effective and will notify the Underwriter as promptly as practicable, and confirm the notice in writing, upon the Company becoming aware thereof: (i) when the Registration Statement or any post- effective amendment thereto becomes effective; (ii) the receipt of any comments from the Commission regarding the Registration Statement or the receipt of any stop order or the initiation, or to the best of the Company's knowledge, the threatening, of any proceedings for that purpose; and (iii) the suspension of the qualification of the Securities and the Underwriter's Warrants, or underlying securities, for offering or sale in any jurisdiction or of the initiating, or to the best of the Company's knowledge the threatening, of any proceeding for that purpose. If the Commission shall enter a stop order at any time, the Company will make every reasonable effort to obtain the lifting of such order as promptly as practicable. (e) During the time when a prospectus relating to the Securities is required to be delivered under the Act, the Company will use its best efforts to comply with all requirements imposed upon it by the Act and the Securities Exchange Act of 1934 (the "Exchange Act"), as now and hereafter amended and by the Regulations, as from time to time in force, as necessary to permit the continuance of sales and offers of the Securities in accordance with the provisions hereof and the Prospectus and the Company shall use its best efforts to keep the Registration Statement effective so long as a Prospectus is required to be delivered in connection with the sale of the Securities or Additional Securities by the Underwriter or by the Selected Dealers effecting transactions therein in connection with the initial public offering thereof. If at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the reasonable opinion of counsel for the Company or counsel for the Underwriter, the Prospectus as then amended or supplemented (or the prospectus contained in a new registration statement filed by the Company pursuant to Paragraph 3(q)), includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if, in the reasonable opinion of either such counsel, it is necessary at any time to amend the Prospectus (or the prospectus contained in such 12 new registration statement) to comply with the Act, the Company will notify you promptly and prepare and file with the Commission an appropriate amendment or supplement in accordance with Section 10 of the Act and will furnish to you copies thereof. (f) The Company will endeavor in good faith, in cooperation with you, at or prior to the time the Registration Statement becomes effective, to qualify the Securities for offering and sale under the securities laws or blue sky laws of such jurisdictions as you may reasonably designate; PROVIDED, HOWEVER, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction or to make any changes in its capital structure or articles of incorporation or in any other material aspects of its business or to enter into any material agreement with any Blue Sky or state securities commissioner. In each jurisdiction where such qualification shall be effected, the Company will, unless you agree that such action is not at the time necessary or advisable, use it best efforts to file and make such statements or reports at such times as are or may reasonably be required by the laws of such jurisdiction to continue such qualification until none of the Warrants are outstanding. (g) The Company will make generally available (within the meaning of Section 11(a) of the Act and the Regulations) to its security holders, as soon as practicable, but in no event later than the first day of the eighteenth full calendar month following the Effective Date, an earnings statement of the Company, which will be in reasonable detail but which need not be audited, covering a period of at least twelve months beginning after the Effective Date, which earnings statements shall satisfy the requirements of Section 11(a) of the Act and the Regulations as then in effect. The Company may discharge this obligation in accordance with Rule 158 of the Regulations. (h) During the period of two years commencing on the Effective Date (unless the Company shall no longer have a class of equity securities registered under Section 12(b) or 12(g) of the Exchange Act), the Company will furnish to its shareholders an annual report (including financial statements audited by its independent public accountants), in accordance with Rule 14a-3 under the Exchange Act, and, at its expense, furnish to the Underwriter (i) within 105 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its consolidated subsidiaries and a separate balance sheet of each majority owned subsidiary of the Company the accounts of which are not included in such consolidated balance sheet as of the end of such fiscal year, and consolidated statements of operations, stockholder's equity and cash flows of the Company and its consolidated subsidiaries and separate statements of operations, stockholder's equity and cash flows of 13 each of the majority owned subsidiaries of the Company the accounts of which are not included in such consolidated statements, for the fiscal year then ended all in reasonable detail and all certified by independent accountants (within the meaning of the Act and the Regulations), (ii) within 50 days after the end of each of the first three fiscal quarters of each fiscal year, similar balance sheets for the Company as of the end of such fiscal quarter for the Company and similar statements of operations, stockholder's equity and cash flows for the Company for the fiscal quarter then ended, all in reasonable detail, and subject to year end adjustment, all certified by the Company's principal financial officer or the Company's principal accounting officer as having been prepared in accordance with generally accepted accounting principles applied on a consistent basis, (iii) as soon as available, each report furnished to or filed with the Commission or any securities exchange and each report and financial statement furnished to the Company's shareholders generally, [and (iv) as soon as available, such other material as the Underwriter may from time to time reasonably request regarding the financial condition and operations of the Company; PROVIDED, HOWEVER, that the Underwriter shall use such other material only in connection with its activities as Underwriter hereunder and shall otherwise keep such other material confidential.] (i) For a period of eighteen months from the Closing Date, the Company, at its expense, shall cause its regularly engaged independent certified public accountants to review (but not audit), the Company's financial statements for each of the first three quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-Q quarterly report and the mailing, if any, of quarterly financial information to stockholders. (j) Prior to the Closing Date or the Option Closing Date (if any), the Company will not, directly or indirectly, without your prior written consent, which shall not be unreasonably withheld or delayed, issue any press release or other public announcement or hold any press conference with respect to the Company or its activities with respect to the Offering (other than trade releases issued in the ordinary course of the Company's business consistent with past practices with respect to the Company's operations). (k) The Company will deliver to you prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and will not file any such amendment or supplement to which you shall reasonably object after being furnished such copy unless counsel to the Company shall determine that such filing is required under the Act or the Regulations. 14 (l) During the period of 120 days commencing on the date hereof, the Company will not at any time take, directly or indirectly, any illegal action designed to, or which will constitute or which might reasonably be expected to cause or result in illegal stabilization or manipulation of the price of the Securities to facilitate the sale or resale of any of the Securities. (m) The Company will apply the net proceeds from the Offering received by it substantially in the manner set forth under "Use of Proceeds" in the Prospectus. (n) The Company will use its best efforts to cause counsel for the Company, the Company's accountants, and the officers and directors of the Company to, respectively, furnish the opinions, the letters and the certificates referred to in subsections of Paragraph 9 hereof, and, if the Company shall file any amendment to the Registration Statement relating to the offering of the Securities or any amendment or supplement to the Prospectus relating to the offering of the Securities subsequent to the Effective Date, the Company will use its best efforts to cause such counsel, such accountants, and such officers and directors, respectively, to, at the time of such filing or at such subsequent time as you shall reasonably specify, so long as Securities being registered by such amendment or supplement are being underwritten by the Underwriter, furnish to you such opinions, letters and certificates, each dated the date of its delivery, of the same nature as the opinions, the letters and the certificates referred to in said Paragraph 9, as you may reasonably request, or, if any such opinion or letter or certificate cannot be furnished by reason of the fact that such counsel or such accountants or any such officer or director believes that the same would be inaccurate, the Company will use its best efforts to have such counsel or such accountants or such officer or director furnish an accurate opinion or letter or certificate with respect to the same subject matter. (o) The Company will comply in all material respects with all of the provisions of any undertakings contained in the Registration Statement. (p) The Company will reserve and keep available for issuance that maximum number of its authorized but unissued shares of Common Stock which are issuable upon exercise of the Warrants and issuable upon exercise of the Underwriter's Warrants (including the underlying securities) outstanding from time to time. (q) During the period a Prospectus is required to be delivered under the Act, the Company will timely prepare and file at its sole cost and expense one or more post-effective amendments to the Registration Statement or a new registration statement as required by law as will permit Warrant holders to be 15 furnished with a current prospectus in the event and at such time as the Warrants are exercised, and the Company will use its best efforts and due diligence to have the same be declared effective (with the intent that the same be declared effective as soon as the Warrants become exercisable) and to keep the same effective so long as the Warrants are outstanding. The Company will deliver a draft of each such post-effective amendment or new registration statement to the Underwriter at least ten days prior to the filing of such post- effective amendment or registration statement. (r) So long as any of the Warrants remain outstanding, the Company will timely deliver and supply to its Warrant agent, as reasonably requested thereby, sufficient copies of the Company's current Prospectus, as will enable such Warrant agent to deliver a copy of such Prospectus to any Warrant or other holder where such Prospectus delivery is by law required to be made. (s) So long as any of the Warrants remain outstanding, the Company shall continue to employ the services of a firm of independent certified public accountants reasonably acceptable to the Underwriter in connection with the preparation of the financial statements to be included in any registration statement to be filed by the Company hereunder, or any amendment or supplement thereto. During the same period, the Company shall employ the services of a law firm(s) reasonably acceptable to the Underwriter in connection with all legal work of the Company, including the preparation of a registration statement to be filed by the Company hereunder, or any amendment or supplement thereto. The Company's current accounting firm, KPMG Peat Marwick LLP, and current law firm, Kaye, Scholer, Fierman, Hays & Handler, LLP, are hereby acknowledged as being acceptable to the Underwriter. (t) So long as any of the Warrants remain outstanding, the Company shall continue to appoint a Warrant agent for the Warrants, who shall be reasonably acceptable to the Underwriter. The Underwriter hereby acknowledges that Corporate Stock Transfer is acceptable as warrant agent. (u) The Company agrees that it will, upon the Effective Date, for a period of two years from the Effective Date, use its best efforts to cause a designee of the Underwriter to be elected as a board member (the "Member") of its Board of Directors where such Member shall attend meetings of the Board, receive all notices and other correspondence and communications sent by the Company to members of its Board of Directors and receive compensation equal to the entitlement of other non-officer Directors. In addition, such Member shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings including, but not limited to (if reasonably required in connection with any meeting held outside the New York City metropolitan area), food, lodging and 16 transportation. The Company further agrees that, during said two year period, it shall schedule no less than [four (4)] meetings of its Board of Directors in each such year and such meetings shall be held quarterly each year and advance notice of such meetings identical to the notice given to directors shall be given to the Advisor. The Company will not increase or authorize an increase in the compensation of the executive officers without the express approval of the Compensation Committee or the entire Board of Directors for a period of two years from the Effective Date. The Compensation Committee shall be comprised of members of the Board of Directors, including two delegates of the Company and, to the extent the Underwriter designates a member of the Board, one from the Underwriter. Further, during such two year period, the Company shall give notice to the Underwriter with respect to any proposed acquisitions, mergers, reorganizations or other similar transactions which the Underwriter agrees to keep confidential. Alternatively to the Underwriter's right to designate a Member, the Underwriter shall have the right during such two-year period, in its sole discretion, to designate one person as an advisor ("Advisor") to the Board of Directors who shall have the right to observe each meeting of the Board of Directors and shall be entitled to receive the same compensation, expense reimbursements and other benefits as set forth above for the Member. Any designee or representative of the Underwriter who has not been elected or appointed to the Board of Directors, but who shall be attending a meeting thereof, shall be required to execute a confidentiality agreement satisfactory to the Company. The Company agrees, to the extent permitted by law, to indemnify and hold the Underwriter and such Advisor or Member harmless against any and all claims, actions, damages, costs and expenses, and judgments arising solely out of the attendance and participation of your designee at any such meeting of the Board of Directors. The Company will use its best efforts to obtain and maintain a liability insurance policy affording coverage for the acts of its officers and directors, which policy shall not exceed $50,000 per year in premiums, and agrees, to include the Underwriter's designee Member or Advisor as an insured under such policy. (v) Upon the Closing Date, the Company shall have entered into an agreement with the Underwriter in form reasonably satisfactory to the Underwriter (the "Consulting Agreement"), pursuant to which the Underwriter will be retained as a financial consultant for a twenty-four month period commencing as of the Closing Date, and will be paid a fee of $6,000 a month for such term, $72,000 shall be paid upon the Closing Date. The balance will be paid out monthly in equal installments over the subsequent 12 months commencing one month after the closing of the public offering. 17 (w) The Company will use its best efforts to cause the Common Stock and Warrants to be quoted on the NNM, not later than the Closing Date. Thereafter, (unless the Company is acquired) the Company will use its best efforts to maintain such listing or cause such securities to be listed on a national securities exchange or in a comparable inter-dealer quotation system for at least five years from the date of this Agreement (or until such earlier date on which no Warrants remain outstanding). (x) The Company will apply for listing in Standard and Poors Corporation Reports or Moodys OTC Guide and shall use its best efforts to have the Company included in such publications for at least five years from the Closing Date (unless the Common Stock is listed on the New York Stock Exchange or the American Stock Exchange or unless the Company shall no longer have a class of equity securities registered under Section 12(b) or 12(g) of the Exchange Act). (y) The Company will use its best efforts to obtain from each person who is currently an officer or director of the Company or a 5% or greater stockholder of the Company, or family members of the forgoing, exclusive of institutional holders, a written agreement, in form and substance reasonably satisfactory to you and your counsel, to the effect that such person shall not offer, sell or contract to sell, or otherwise dispose of in a public sale or public offering, directly or indirectly, without your prior written consent, which shall not be unreasonably withheld (or pursuant to such other agreement with respect to the sale of capital stock as may be required by state "Blue Sky" laws in order to qualify the Offering in any such State), any shares of the Common Stock owned by such person or any securities convertible into, or exchangeable for, or warrants to purchase or acquire, shares of Common Stock, for a period of six months from the Effective Date, except as otherwise described in or contemplated by the Registration Statement or as may be required by applicable state blue sky-laws. For a period of six months from the Effective Date, the Company shall not issue any shares of Common Stock or preferred stock or any warrants, options or other rights to purchase Common Stock or preferred stock without the consent of the Underwriter, which shall not be unreasonably withheld, except for (i) the Securities and the Additional Securities, (ii) the Underwriter's Securities, (iii) Warrant Shares, (iv) securities issuable upon the exercise of other options or warrants outstanding as of the Closing Date, (v) options to purchase shares of Common Stock pursuant to the Company's stock option plan and shares of Common Stock issuable upon the exercise of such options, (vi) shares of Common Stock issuable upon the conversion of any convertible securities of the Company and (vii) a merger, acquisition or other business combination. In addition, the Company shall not file a new registration statement on form S-8 (or a comparable form) for the registration of shares of Common Stock underlying stock options 18 for a period of six (6) months from the Effective Date, without the underwriters prior knowledge and at least 30 days notice. (z) The Company agrees that it will employ the services of a financial public relations firm reasonably acceptable to the Underwriter for a period of at least twelve months following the Effective Date. The Underwriter hereby acknowledges that Rick Roland Perry is acceptable. iv. SALE, PURCHASE AND DELIVERY OF SECURITIES; CLOSING DATE; PUBLIC OFFERING. (a) On the basis of the warranties, representations and agreements herein contained, and subject to the satisfaction or waiver of all the terms and conditions of this Agreement, the Company agrees to issue and sell to the Underwriter, and the Underwriter agrees to purchase from the Company, the Securities at a price of $______ per Unit, less, in the case of each such Unit, an underwriting discount of ten percent (10%) of the price for such Security. The Underwriter may allow a concession not exceeding $. per share of Common Stock and $. per Warrant to Selected Dealers who are members of the NASD, and to certain foreign dealers, and such dealers may reallow to NASD members and to certain foreign dealers a concession not exceeding $. per share of Common Stock and $ per Warrant. (b) Delivery of the Securities and payment therefor shall be made at 10:00 A.M., New York time on the Closing Date, as hereinafter defined, at the offices of the Underwriter at __________ or such other location as may be agreed upon by you and the Company. Delivery of certificates for the Common Stock and Warrants (in definitive form and registered in such names and in such denominations as you shall request by written notice to the Company delivered at least four business days' prior to the Closing Date), shall be made to you for the account of the Underwriter against payment of the purchase price therefor by certified or bank check or wire transfer payable in New York Clearing House funds to the order of the Company. The Company will make such certificates available for inspection at least one business day prior to the Closing Date at such place as you shall designate. (c) The "Closing Date" shall be , 1996, or such other date not later than the fourth business day following the effective date of the Registration Statement as you and the Company shall determine. (d) The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Securities by the Company to the Underwriter shall be borne by the Company. The Company will pay and hold the Underwriter, and any subsequent holder of the Securities, harmless from any and 19 all liabilities with respect to or resulting from any failure or delay in paying federal and state stamp taxes, if any, which are payable in connection with the original issuance or sale to the Underwriter of the Securities or any portions thereof. (e) As soon, on or after the Effective Date, as the Underwriter deems advisable, the Underwriter shall make a public offering of the Securities (other than to residents of or in any jurisdiction in which qualification of the Securities is required and has not become effective) at the initial public offering prices and upon the other terms set forth in the Prospectus. The Underwriter may from time to time increase or decrease the public offering prices of the Securities after the distribution thereof has been completed to such extent as the Underwriter, in its sole discretion, deems advisable. v. SALE, PURCHASE AND DELIVERY OF ADDITIONAL SECURITIES; OPTION CLOSING DATE. (a) Upon the basis of the representations, warranties and agreements herein contained, and subject to the satisfaction or waiver of all the terms and conditions of this Agreement, the Company agrees to sell to the Underwriter, and the Underwriter shall have the option (the "Option") to purchase from the Company, the Additional Securities at the same price per Unit as set forth in Paragraph 4(a) above. Additional Securities may be purchased solely for the purpose of covering over-allotments made in connection with the distribution and sale of the Units as contemplated by the Prospectus. (b) The Option to purchase all or part of the Additional Securities covered thereby is exercisable by you at any time and from time to time before the expiration of a period of 45 calendar days from the date of the Effective Date (the "Option Period") by written notice received by the Company setting forth the number of Additional Securities for which the Option is being exercised, the name or names in which the certificates for such Additional Securities are to be registered and the denominations of such certificates. Upon each exercise of the Option, the Company shall sell to the Underwriter the aggregate number of Additional Securities specified in the notice exercising such Option. (c) Delivery of the Additional Securities with respect to which Options shall have been exercised and payment therefor shall be made at 10:00 A.M., New York time on the Option Closing Date, as hereinafter defined, at the offices of the Underwriter at _________ or at such other locations as may be agreed upon by you and the Company. Delivery of certificates for Additional Securities shall be made to you for the account of the Underwriter against payment of the purchase price therefor by certified or bank check or wire transfer in New York Clearing House Funds to the order of the Company. The Company will make 20 certificates for Additional Securities to be purchased at the Option Closing Date available for inspection at least one business day prior to such Option Closing Date at such place as you shall designate. (d) The "Option Closing Date" shall be the date not later than four business days after the end of the Option Period as you shall determine and advise the Company by at least three full business days' notice, unless some other time is agreed upon between you and the Company. (e) The obligations of the Underwriter to purchase and pay for Additional Securities at such Option Closing Date shall be subject to compliance or waiver as of such date with all the conditions specified in Paragraph 9 herein and the delivery to you, or waiver of such requirement of opinions, certificates and letters, each dated such Option Closing Date, substantially similar in scope to those specified in Paragraph 9 herein. (f) The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Additional Securities by the Company to the Underwriter shall be borne by the Company. The Company will pay and hold the Underwriter, and any subsequent holder of Additional Securities, harmless from any and all liabilities with respect to or resulting from any failure or delay in paying federal and state stamp taxes, if any, which are payable in connection with the original issuance or sale to the Underwriter of the Additional Securities or any portion thereof. vi. WARRANT SOLICITATION FEE. Subject to the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD"), the Company agrees to pay the Underwriter a fee of four percent (4%) of the aggregate exercise price of the Warrants if: (i) the market price of the Common Stock is greater than the exercise price of the Warrants on the date of exercise; (ii) the exercise of the Warrants is solicited by a member of the NASD; (iii) the Warrants are not held in a discretionary account; (iv) the disclosure of compensation arrangements was made both at the time of the Offering and at the time of the exercise of the Warrant; and (v) the solicitation of the Warrant is not in violation of Rule 10b-6 promulgated under the Exchange Act. The Company agrees not to solicit the exercise of any Warrants other than through the Underwriter and will not authorize any other dealer to engage in such solicitation without the prior written consent of the Underwriter which will not be unreasonably withheld. The Warrant solicitation fee will not be paid in a non-solicited transaction. Any request for exercise will be presumed to be unsolicited unless the customer states in writing that the transaction was solicited and designates in writing the broker/dealer to receive 21 compensation for the exercise. The Company will not have any obligation to pay any fee for the solicitation of Warrants other than to the Underwriter or I. Friedman Equities, Inc. The Company will not pay any fee pursuant to this Paragraph 6 for any exercise of Warrants during the twelve-month period beginning on the Effective Date. vii. REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITER. The Underwriter represents and warrants to the Company that: (a) The Underwriter is a member in good standing of the NASD, and has complied with all NASD requirements concerning net capital and compensation to be received in connection with the Offering. (b) To the Underwriter's knowledge, there are no claims for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder, which the Company is, or may become, obligated to pay other than financial consulting fees payable to I. Friedman Equities, Inc. viii. PAYMENT OF EXPENSES. (a) The Company will pay and bear all of its costs, fees and expenses incident to and in connection with: (i) the original issuance, sale and delivery of the Units and Additional Securities, including all expenses and fees incident to the preparation, printing and filing (including the mailing and distribution of preliminary and final prospectuses) of the Registration Statement (including all exhibits thereto), each Preliminary Prospectus, the Prospectus, and amendments and post-effective amendments thereof and supplements thereto, and this Agreement and related documents, Preliminary and Final Blue Sky Memoranda, including the cost of preparing and copying all copies thereof in quantities deemed reasonably necessary by the Underwriter; (ii) advertising costs and expenses, including, but not limited to, the costs and expenses in connection with the "road show," (to be held at the Garden City Hotel and the Hotel Intercontinental in New York City), memorabilia and "tombstones," in The Wall Street Journal, The Los Angeles Times and the Long Island Business News; (iii) the printing, engraving, issuance and delivery of the Shares, Warrants, Warrant Shares, Additional Securities, Underwriter's Warrants and the securities underlying the Underwriter's Warrant, including any transfer or other taxes payable thereon in connection with the original issuance thereof (excluding such transfer or other taxes as may be payable in connection with the original issuance of the securities underlying the Underwriter's Warrants or in connection with the issuance of Common Stock upon the exercise of Warrants); (iv) the qualification of the Common Stock and Warrants under the state 22 securities or "Blue Sky" laws selected by the Underwriter and the Company, and disbursements and reasonable fees of counsel for the Underwriter in connection therewith up to a maximum of $20,000 plus the filing fees for such states; (v) fees and disbursements of counsel and accountants for the Company; (vi) all reasonable traveling and lodging expenses incurred by us and/or our counsel in connection with reasonable visits to, and examination of, the Company's premises not to exceed $3,000; (vii) other expenses and disbursements incurred on behalf of the Company including transaction bibles and lucite cube mementos in such reasonable quantities as the Underwriter may request; (viii) the filing fees payable to the Commission and the NASD; and (ix) any listing of the Common Stock and Warrants on a securities exchange or on NASDAQ. (b) In addition to the expenses to be paid and borne by the Company referred to in Paragraph 8(a) above, the Company shall reimburse you at closing for expenses incurred by you in connection with the Offering (for which you need not make any accounting), in the amount of 3% of the price to the public of the Securities and Additional Securities sold in the Offering. This 3% non-accountable expense allowance shall cover the fees of your legal counsel, but shall not include any expenses for which the Company is responsible under Paragraph 8(a) above, including the reasonable fees and disbursements of your legal counsel with respect to Blue Sky matters in accordance with Paragraph 8(a) above. The Underwriter hereby acknowledges the receipt prior to the date hereof of $56,000 of the amounts due pursuant to this Paragraph 8(b). ix. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligations of the Underwriter to consummate the transactions contemplated by this Agreement shall be subject to the continuing accuracy in all material respects of the representations and warranties of the Company contained herein (except those representations and warranties that speak as of a specific date) and the accuracy in all material respects of the written statements of the Company and its officers and directors made pursuant to the provisions hereof, as of the date hereof and as of the Closing Date (except those representations and warranties that speak as of a specific date), and to the performance by the Company, or the waiver thereof by the Underwriter, in all material respects of its covenants and agreements hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 p.m., New York time, on the date following the date of this Agreement, or such later date and time as shall be consented to in writing by you and, on or prior to the Closing Date, no stop order suspending the effectiveness of the Registration Statement and no proceedings for that purpose shall have been instituted or to your knowledge or the knowledge 23 of the Company, shall be pending or contemplated by the Commission and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriter and after the date hereof no amendment or supplement shall have been filed to the Registration Statement or Prospectus without your prior consent, which shall not have been unreasonably withheld or delayed. (b) The Underwriter shall not have advised the Company that the Registration Statement or the Prospectus or any amendment thereof or supplement thereto contains an untrue statement of a fact which, in the Underwriter's reasonable opinion, is material, or omits to state a fact which, in the Underwriter's reasonable opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) Between the time of the execution and delivery of this Agreement and the Closing Date, there shall be no litigation instituted against the Company or any of its officers or directors, and between such dates there shall be no proceeding instituted or, to the Company's knowledge, threatened against the Company or any of its officers or directors, before or by any federal, state or county commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding an unfavorable ruling, decision or finding is reasonably possible and would have a Material Adverse Effect. (d) The representations and warranties of the Company contained herein and in each certificate and document contemplated under this Agreement to be delivered to you shall be true and correct in all material respects at the Closing Date as if made at the Closing Date (except those representations and warranties that speak as of a specific date, and all covenants and agreements contained herein to be performed on the part of the Company, and all conditions contained herein to be fulfilled or complied with by the Company, at or prior to the Closing Date shall be performed, fulfilled or complied with in all material respects or waived by the Underwriter. (e) At the Closing Date, you shall have received the opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP, counsel to the Company and/or other inside or outside counsel of the Company, dated as of such Closing Date, addressed to the Underwriter and in form and substance satisfactory to counsel to the Underwriter, substantially to the effect set forth in Exhibit A attached hereto. (f) On or prior to the Closing Date, counsel for the Underwriter shall have been furnished such documents, 24 certificates and opinions as they may reasonably require for the purpose of enabling them to review the matters referred to in subparagraph (e) of this Paragraph 9, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. (g) Prior to the Closing Date: (i) There shall have been no material adverse change in the condition or prospects or the business activities, financial or otherwise, of the Company and its subsidiaries taken as a whole from the latest dates as of which such condition is set forth in the Registration Statement, except for any such change described in or contemplated by the Registration Statement; (ii) There shall have been no material transaction, outside the ordinary course of business, entered into by the Company from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus which is material to the Company, which is (x) required to be disclosed in the Prospectus or Registration Statement and is not so disclosed, and (y) likely to have a Material Adverse Effect; (iii) The Company shall not be in default under any material provision of any instrument relating to any outstanding indebtedness, except as described in or contemplated by the Registration Statement and except such as will not have a Material Adverse Effect; (iv) No material amount of the assets of the Company shall have been pledged, mortgaged or otherwise encumbered, except as described in or contemplated by the Registration Statement and except for liens incurred in the ordinary course of business (including, but not limited to, the credit facility with Chase, loans or guarantees for the Company's products or productions and liens by professional guilds); (v) Between the time of the execution and delivery of this Agreement and the Closing Date, no action, suit or proceeding, at law or in equity, shall have been pending or, to the Company's knowledge, threatened against the Company or affecting any of its properties or businesses before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding is reasonably likely and would have a Material Adverse Effect, except as described in or contemplated by the Registration Statement; (vi) No stop order shall have been issued under the Act and no proceedings therefor shall have been 25 initiated or, to the Company's knowledge, threatened by the Commission; and (vii) Each of the representations and warranties of the Company contained in this Agreement and in each certificate and document contemplated under this Agreement to be delivered to you was, when originally made and is at the time such certificate is dated (except for those representations and warranties that speak as of a specific date), true and correct in all material respects. (h) At the Closing Date, you shall have received a certificate of the Company signed by a Chief Executive Officer of the Company and the principal financial officer of the Company, dated as of the Closing Date, to the effect that the conditions set forth in subparagraph (g) above have been satisfied in all material respects and that, as of the Closing Date, the representations and warranties of the Company set forth in Paragraph 2 herein are true and correct, as if made on and as of the Closing Date (except for those representations and warranties that speak as of a specific date), in all material respects. Any certificate signed by any officer of the Company and delivered to you or to counsel for the Underwriter shall be deemed a representation and warranty by the Company to the Underwriter as to the statements made therein. (i) At the time this Agreement is executed, and at the Closing Date, you shall have received a letter, addressed to the Underwriter and in form and substance reasonably satisfactory in all material respects to you and counsel for the Underwriter, from KPMG Peat Marwick LLP dated as of the date of this Agreement and as of the Closing Date, substantially in the form of EXHIBIT B hereto. (j) All proceedings taken in connection with the authorization, issuance or sale of the Securities, Warrant Shares, Additional Securities and the Underwriter's Securities as herein contemplated shall be reasonably satisfactory in form and substance to you and to counsel to the Underwriter, and the Underwriter shall have received from such counsel an opinion, dated as the Closing Date with respect to such of these proceedings as you may reasonably require. (k) The obligation of the Underwriter to purchase Additional Securities hereunder is subject to the accuracy of the representations and warranties of the Company contained herein on and as of the Option Closing Date in all material respects and to the satisfaction or waiver on or prior to the Option Closing Date of the conditions set forth herein in all material respects. (l) On the Closing Date there shall have been duly tendered to you for your account the appropriate number of shares of Common Stock and Warrants constituting the Securities. 26 x. INDEMNIFICATION AND CONTRIBUTION. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless the Underwriter, each of its agents and counsel and each person, if any, who controls the Underwriter ("controlling person") within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, liabilities, claims, damages, actions and expenses or liability, joint or several, whatsoever (including but not limited to any and all expense whatsoever reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever), joint or several, to which it or such controlling persons may become subject under the Act, the Exchange Act or under any other statute or at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any Preliminary Prospectus or the Prospectus (as from time to time amended and supplemented); in any post-effective amendment or amendments or any new registration statement and prospectus in which is included the Warrant Shares of the Company issued or issuable upon exercise of the Warrants, or Warrant Shares issued or issuable upon exercise of the Underwriter's Warrants; or in any application or other document or written communication (in this Paragraph 10 collectively called "application") executed by the Company or based upon written information furnished by the Company expressly to be included in an application filed in any jurisdiction in order to qualify the Securities, Warrant Shares, Additional Securities, Underwriter's Warrants and Underwriter's Securities under the securities laws thereof or filed with the Commission or any securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading (in light of the circumstances under which they were made), unless such statement or omission was made in reliance upon or in conformity with written information furnished to the Company with respect to the Underwriter by or on behalf of the Underwriter, or with respect to any of the selling security holders set forth in the Registration Statement by or on behalf of any of such selling security holders, expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment or supplement thereof, or in any application, as the case may be. Notwithstanding the foregoing, the Company shall have no liability under this Paragraph 10(a) if any such untrue statement or omission made in a Preliminary Prospectus, is corrected in the Prospectus or any amendment or supplement thereto and the Underwriter failed to deliver to the person or persons alleging the liability upon which indemnification is being sought, at or prior to the written confirmation of such sale, a copy of the Prospectus or such amendment or supplement. This indemnity will be in addition to any liability which the Company may otherwise have. 27 (b) The Underwriter agrees to indemnify and hold harmless the Company and each of the officers and directors of the Company who have signed the Registration Statement, each of its agents and counsel, and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Underwriter in Paragraph 10(a), but only with respect to any untrue statement or alleged untrue statement of any material fact contained in or any omission or alleged omission to state a material fact required to be stated in any Preliminary Prospectus, the Registration Statement or Prospectus (as from time to time amended and supplemented) or any post- effective amendment or amendments or supplement thereof or necessary to make the statements therein not misleading or in any new registration statement and prospectus in which is included the Securities, the Additional Securities, the Underwriters' Securities, the Warrant Shares of the Company issued or issuable upon exercise of the Warrants, or the Warrant Shares issued or issuable upon exercise of the Underwriter's Warrants or in any application made in reliance upon, and in conformity with, written information furnished to the Company by you expressly for use in the preparation of such Preliminary Prospectus, the Registration Statement, the Prospectus or applications with respect to the Underwriter or directly relating to the transactions effected or to be effected by the Underwriter in connection with the Offering. This indemnity agreement will be in addition to any liability which the Underwriter may otherwise have. (c) If any action is brought against any indemnified party (the party seeking such indemnifications hereinafter called the "Indemnitee") in respect of which indemnity may be sought against another party pursuant to the foregoing (the "Indemnitor"), the Indemnitor shall assume the defense of the action, including the employment and fees of counsel (reasonably satisfactory to the Indemnitee) and payment of expenses. Any Indemnitee shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Indemnitee unless the employment of such counsel shall have been authorized in writing by the Indemnitor in connection with the defense of such action. If the Indemnitor shall have employed counsel to have charge of the defense or shall previously have assumed the defense of any such action or claim, the Indemnitor shall not thereafter be liable to any Indemnitee in investigating, preparing or defending any such action or claim. Each Indemnitee shall promptly notify the Indemnitor of the commencement of any litigation or proceedings or any other action against the Indemnitee in respect of which indemnification is to be sought. (d) In order to provide for just and equitable contribution under the Act in any case in which: (i) an Indemnitee makes a claim for indemnification pursuant 28 to Paragraph 10 hereof, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the time to appeal has expired or the last right of appeal has been denied) that such indemnification may not be enforced in such case notwithstanding the fact that this Paragraph 10 provides for indemnification of such case; or (ii) contribution under the Act may be required on the part of an Indemnitor in circumstances for which indemnification is provided under this Paragraph 10, then, and in each such case, the Company and the Underwriter shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after any contribution from others) in such proportion so that the Underwriter is responsible for the portion represented by dividing the total compensation received by the Underwriter herein or in connection with the Offering by the total purchase price of all Securities sold in the underwritten public offering and the Company is responsible for the remaining portion; provided, that in any such case, no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The foregoing contribution agreement shall in no way affect the contribution liabilities of any persons having liability under Section 11 of the Act other than the Company and the Underwriter. If the full amount of the contribution specified in this paragraph is not permitted by law, then the Indemnitee and each person who controls the Indemnitee shall be entitled to contribution from the Indemnitor to the full extent permitted by law. No contribution shall be requested with regard to the settlement of any matter from any party who did not consent in writing to such settlement. (e) Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is made against another party (the "contributing party"), notify, in accordance with Paragraph 13 hereof, the contributing party of the commencement thereof, but the omission so to notify the contributing party will not relieve it from any liability it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies, in accordance with Paragraph 13 hereof, a contributing party of the commencement thereof within the aforesaid fifteen (15) days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding effected by such party seeking contribution without the written consent of such contributing party. The 29 indemnification provisions contained in this Paragraph 11 are in addition to any other rights or remedies which either party hereto may have with respect to the other or hereunder. xi. REPRESENTATIONS, WARRANTIES, AGREEMENTS TO SURVIVE DELIVERY. The respective indemnity and contribution agreements by the Underwriter and the Company contained in Paragraph 10 hereof, and the covenants, representations and warranties of the Company and the Underwriter set forth in this Agreement required by its terms to be performed after the Closing Date, shall remain operative and in full force and effect regardless of (i) any investigation made by the Underwriter or on its behalf or by or on behalf of any person who controls the Underwriter, or by the Company or any controlling person of the Company or any director or any officer of the Company, (ii) acceptance of any of the Securities and payment therefor, or (iii) with respect to Paragraph 10 hereof, any termination of this Agreement, and shall survive the delivery of the Securities; and any successor of the Underwriter or the Company, or of any person who controls you or the Company or any other indemnified party, as the case may be, shall be entitled to the benefit of such respective indemnity and contribution agreements. The respective indemnity and contribution agreements by the Underwriter and the Company contained in Paragraph 10 above shall be in addition to any liability which the Underwriter and the Company may otherwise have. xii. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF. (a) This Agreement shall become effective at 10:00 A.M., New York time, on the first full business day following the day on which you and the Company receive notification that the Registration Statement became effective. (b) This Agreement may be terminated by the Underwriter or the Company by notifying the other party hereto at any time on or before the Closing Date, if any domestic or international event or act or occurrence has materially disrupted, or in such party's reasonable opinion will in the immediate future materially disrupt, securities markets in the United States; or if trading in securities generally on the New York Stock Exchange, the American Stock Exchange, or in the over-the-counter market in the United States shall have been suspended, or minimum or maximum prices for trading in securities generally shall have been fixed, or maximum ranges for prices for securities shall have been required, on the over-the-counter market by the NASD or NASDAQ or by order of the Commission or any other governmental authority having jurisdiction; or if the Company shall have sustained a loss material to the Company and its subsidiaries taken as a whole by fire, flood, accident, 30 hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in such party's reasonable opinion, make it inadvisable to proceed with the offering, sale and delivery of the Securities; or if there shall have been a material adverse change in the conditions of the United States securities market in general, as in such party's reasonable judgment would make it inadvisable to proceed with the offering, sale and delivery of the Securities. (c) If any party elects to terminate this Agreement as provided in this Paragraph 12, the other party shall be notified promptly by such terminating party by telephone or facsimile, confirmed by letter. (d) Anything in this Agreement to the contrary notwithstanding, if this Agreement shall terminate or shall not be carried out within the time specified herein solely by reason of any failure on the part of the Company to perform any undertaking, or to satisfy any condition of this Agreement by it to be performed or satisfied, the sole liability of the Company to the Underwriter, in addition to the obligations assumed by the Company pursuant to Paragraph 8 herein, will be to reimburse the Underwriter on an accountable basis for the following: (i) reasonable Blue Sky counsel fees and expenses to the extent set forth in Paragraph 8(a)(iv); (ii) Blue Sky filing fees to that same extent; and (iii) such other reasonable out-of-pocket expenses actually incurred by the Underwriter (including the reasonable fees and disbursements of their counsel), to the extent set forth in Paragraph 8(a), in connection with this Agreement and the proposed offering of the Securities, but in no event to exceed the sum of $100,000 less such amounts as shall have already been paid pursuant to Section 8(b) or otherwise. The Company shall not in any event be liable to the Underwriter for the loss of anticipated profits from the transactions covered or contemplated by this Agreement or the Registration Statement. Anything in this Agreement to the contrary notwithstanding, if this Agreement shall be terminated by you because you have exercised your rights pursuant to Paragraph 12(b) above, the Company shall not be under any liability to you except, on an accountable basis, for the portion of the non-accountable expense allowance referred to in Paragraph 8(b) for which expenses have actually been paid or incurred by you, and any balance will be returned by you to the Company. xiii. NOTICES. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and, if sent to the Underwriter, shall be mailed, delivered or telegraphed and confirmed to the Underwriter at Lew Lieberbaum & Co., Inc., 600 Old Country Road, Garden City, New York 11530, Attention: Leonard 31 Neuhaus, with a copy thereof to Felice F. Mischel, Esq., Schneck Weltman Hashmall & Mischel LLP, 1285 Avenue of the Americas, New York, New York 10019, and, if sent to the Company, shall be mailed, delivered or telegraphed and confirmed to the Company at 11601 Wilshire Boulevard, 21st Floor, Los Angeles California 90025, Attention: Donald Kushner, Co-Chairman of the Board, with a copy thereof to Barry L. Dastin, Esq., Kaye, Scholer, Fierman, Hays & Handler, LLP, 1999 Avenue of the Stars, Suite 1600, Los Angeles California 90067. xiv. PARTIES. This Agreement shall inure solely to the benefit of and shall be binding upon, the Underwriter, the Company and the controlling persons, directors and officers referred to in Paragraph 10 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. No purchaser of any of the Securities or Additional Securities from the Underwriter shall be deemed a successor or assign by reason merely of such purchase. xv. CONSTRUCTION. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to the rules governing conflict of laws, and shall supersede any agreement or understanding, oral or in writing, express or implied, between the Company and you relating to the sale of any of the Securities. xvi. JURISDICTION AND VENUE. The Company agrees that the courts of the State of New York shall have jurisdiction over any litigation arising from this Agreement, and venue shall be proper in the Supreme Court of New York, County of Nassau or in the United States District Court for the Eastern District of New York. xvii. COUNTERPARTS. This agreement may be executed in counterparts. If the foregoing correctly sets forth the understanding between you and the Company, please so indicate in the space 32 provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, THE KUSHNER-LOCKE COMPANY By: ------------------------------ Donald Kushner, Co-Chairman of the Board Accepted as of the date first above written: LEW LIEBERBAUM & CO., INC. By: ------------------------------ 33 EX-4.5 3 EX 4.5 FORM OF CLASS C REDEEMABLE WARRANT EXHIBIT 4.5 Proof of July 8, 1996 [FORM OF PUBLIC WARRANT] THE KUSHNER-LOCKE COMPANY A CALIFORNIA CORPORATION LEW LIEBERBAUM & CO., INC. AND CORPORATE STOCK TRANSFER TABLE OF CONTENTS SECTION PAGE ------- ---- 1. APPOINTMENT OF WARRANT AGENT . . . . . . . . . . . . . . . . . 1 2. FORM OF WARRANT . . . . . . . . . . . . . . . . . . . . . . . 2 3. COUNTERSIGNATURE AND REGISTRATION . . . . . . . . . . . . . . 2 4. TRANSFERS AND EXCHANGES . . . . . . . . . . . . . . . . . . . 3 5. EXERCISE OF WARRANTS; PAYMENT OF WARRANT SOLICITATION FEE . . 3 6. PAYMENT OF TAXES . . . . . . . . . . . . . . . . . . . . . . . 6 7. MUTILATED OR MISSING WARRANTS . . . . . . . . . . . . . . . . 6 8. RESERVATION OF COMMON STOCK . . . . . . . . . . . . . . . . . 7 9. ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . 7 10. FRACTIONAL INTERESTS . . . . . . . . . . . . . . . . . . . . . 10 11. NOTICES TO WARRANTHOLDERS . . . . . . . . . . . . . . . . . . 10 12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS . . . . . . . 11 13. REDEMPTION OF WARRANTS . . . . . . . . . . . . . . . . . . . . 11 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT . . 12 15. DUTIES OF WARRANT AGENT . . . . . . . . . . . . . . . . . . . 12 16. CHANGE OF WARRANT AGENT . . . . . . . . . . . . . . . . . . . 14 17. IDENTITY OF TRANSFER AGENT . . . . . . . . . . . . . . . . . . 14 18. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 19. SUPPLEMENTS AND AMENDMENTS . . . . . . . . . . . . . . . . . . 16 20. NEW YORK CONTRACT. . . . . . . . . . . . . . . . . . . . . . . 16 21. BENEFITS OF THIS AGREEMENT . . . . . . . . . . . . . . . . . . 16 22. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . 16 23. WARRANTHOLDER NOT DEEMED A SHAREHOLDER . . . . . . . . . . . . 16 24. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . 17 i WARRANT AGENT AGREEMENT, dated as of , 1996, among THE KUSHNER-LOCKE COMPANY, INC., a California corporation (the "Company"), LEW LIEBERBAUM & CO., INC. ("Lieberbaum"), and CORPORATE STOCK TRANSFER, as warrant agent (hereinafter called the "Warrant Agent"). WHEREAS, the Company proposes to issue and sell through a secondary public offering (the "SPO") underwritten by Lieberbaum (the "Underwriter"), an aggregate of up to _______ units ("Units") each consisting of two shares of common stock, no par value per share of the Company (the "Common Stock"), and one Class C Redeemable Common Stock Purchase Warrants (the "Warrants") and, pursuant to the Underwriter's overallotment option (the "Underwriter's Overallotment Option"), up to an additional ________ Units; WHEREAS, each Warrant will entitle the holder to purchase one share of Common Stock; WHEREAS, in connection with the SPO the Company proposes to sell to the Underwriter warrants (the "Underwriter's Option") to purchase up to _______ Units in accordance with that certain Underwriter's Warrant Agreement, dated _______, 1996, by and between the Company and the Underwriter (the "Underwriter's Warrant Agreement"); WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and exercise of the Warrants; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants (the "Warrant Certificates") and the respective rights and obligations thereunder of the Company, the Underwriter, the holders of the Warrant Certificates and the Warrant Agent, the parties hereto agree as follows: Section 1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the Warrant Agent to act as Warrant Agent for the Company in accordance with the instructions hereinafter set forth in this Agreement, and the Warrant Agent hereby accepts such appointment. Upon the execution and delivery of this Agreement by all of the parties hereto and the payment of the aggregate Unit purchase price in accordance with the Underwriting Agreement, dated ______, 1996, by and between the Company and the Underwriter (the "Underwriting Agreement"), Warrant Certificates representing _______ Warrants to purchase up to an aggregate of ________ shares of Common Stock (subject to modification and adjustment as provided in Section 9 hereof) shall be executed by the Company and delivered to the Warrant Agent. Upon the exercise of the Underwriter's Overallotment Option and the payment for the Units to be issued upon the exercise of the Underwriter's Overallotment Option each in accordance with the Underwriting Agreement, Warrant Certificates representing up to [ ] Warrants to purchase up to an aggregate of [ ] shares of Common Stock (subject to modification and adjustment as provided in Section 9 hereof) shall be executed by the Company and delivered to the Warrant Agent. Upon exercise of the Underwriter's Option and the payment of the aggregate exercise price each in accordance with the Underwriter's Warrant Agreement, Warrant Certificates representing up to [ ] Warrants to purchase up to an aggregate of [ ] shares of Common Stock (subject to modification and adjustment as provided in Section 9 hereof) shall be executed by the Company and delivered to the Warrant Agent. Section 2. FORM OF WARRANT CERTIFICATE. The text of the Warrant Certificate and the form of election to purchase Common Stock and the form of assignment each to be printed on the reverse thereof shall be substantially as set forth in EXHIBIT A attached hereto (the provisions of which are hereby incorporated herein). The Warrant Certificates may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage. Each Warrant shall initially entitle the registered holder thereof to purchase one share of Common Stock at a purchase price of [ ] dollars ($[ ]) (the "Warrant Price"), at any time during the period (the "Exercise Period") commencing on , 1996 (the date of the Company's prospectus (the "Prospectus") pursuant to which the Warrants are being sold in the SPO) and expiring (the "Expiration Date") at 5:00 p.m. New York time, on , 2001 (five years after the date of the Prospectus). The Warrant Price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events, all as hereinafter provided. The Warrants shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman or Co-Chairman of the Board, President or Vice President of the Company, and attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. The Warrant Certificates shall be dated as of the date of issuance by the Warrant Agent either upon initial issuance or upon transfer or exchange. In the event the aforesaid expiration date of the Warrants falls on a day that is not a business day, then the Warrants shall expire at 5:00 p.m. New York time on the next succeeding business day. For purposes hereof, the term "business day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in New York City, New York, are authorized or obligated by law to be closed. Section 3. COUNTERSIGNATURE AND REGISTRATION. The Warrant Agent shall maintain books for the transfer and registration of the Warrants. Upon the initial issuance of the Warrants, the Warrant Agent shall issue and register the Warrants in the 2 names of the respective holders thereof. The Warrant Certificates shall be countersigned manually or by facsimile by the Warrant Agent (or by any successor to the Warrant Agent then acting as warrant agent under this Agreement in accordance with Section 16 hereof) and shall not be valid for any purpose unless so countersigned. The Warrants may, however, be so countersigned by the Warrant Agent (or by its successor as Warrant Agent) and be delivered by the Warrant Agent, notwithstanding that the persons whose manual or facsimile signatures appear thereon as proper officers of the Company shall have ceased to be such officers at the time of such countersignature or delivery. Section 4. TRANSFERS AND EXCHANGES. The Warrant Agent shall, from time to time, register the transfer of any outstanding Warrants upon the books to be maintained by the Warrant Agent for that purpose, upon surrender of the Warrant Certificate evidencing such Warrants, with the form of assignment duly completed and executed (with such signature guaranteed as set forth in the Warrant Certificate) and such supporting documentation as the Warrant Agent or Company may reasonably require, to the Warrant Agent at any time on or prior to the Expiration Date and upon the payment to the Warrant Agent for the account of the Company of an amount equal to any applicable transfer tax (as defined below). Thereupon a new Warrant Certificate shall be issued to the transferee and the surrendered Warrant Certificate shall be canceled by the Warrant Agent. Warrant Certificates so canceled shall be delivered by the Warrant Agent to the Company from time to time upon request. Any Warrant Certificate or Certificates may be exchanged at the option of the holder thereof, when surrendered at the office of the Warrant Agent, for another Warrant Certificate or Warrant Certificates of different denominations of like tenor and representing in the aggregate the same number of Warrants. No Warrant Certificates shall be issued except for (i) Warrant Certificates initially issued hereunder in accordance with Section 1 hereof, (ii) Warrant Certificates issued upon any transfer or exchange of Warrant Certificates, (iii) Warrant Certificates issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7 hereof, and (iv) at the option of the Board of Directors of the Company, Warrant Certificates in such form as may be approved by its Board of Directors, to reflect any adjustment or change in the exercise price or the number of shares of Common Stock purchasable upon exercise of the Warrants made pursuant to Section 9 hereof. Section 5. EXERCISE OF WARRANTS; PAYMENT OF WARRANT SOLICITATION FEE. Subject to the provisions of this Agreement, each registered holder of Warrants shall have the right, at any time during the Exercise Period, to exercise such Warrants and purchase the number of fully paid and non-assessable shares of Common Stock specified in such Warrant Certificate upon presentation and surrender of such Warrant Certificate to the Company at the corporate office of the Warrant Agent, with the exercise form on the reverse thereof duly completed and executed (with such signature guaranteed as set forth in the Warrant Certificate), and upon payment to the Company of the Warrant Price, 3 determined in accordance with the provisions of Sections 2, 9 and 10 of this Agreement, for that number of shares of Common Stock in respect of which such Warrants are then exercised and the payment of any applicable transfer tax or similar charges imposed upon sale, assignment or other transfer (as used herein, "transfer tax") of Common Stock. Payment of such Warrant Price and transfer taxes shall be made in cash or by certified or bank check payable to the Company. Subject to Section 6 hereof, upon such surrender of Warrant Certificates and the receipt by the Warrant Agent for the benefit of the Company of the Warrant Price and transfer taxes, the Warrant Agent on behalf of the Company shall cause to be issued and delivered with all reasonable dispatch to or upon the written order of the registered holder of such Warrants and in such name or names as such registered holder may designate, a Warrant Certificate or Warrant Certificates for the number of full shares of Common Stock so purchased upon the exercise of such Warrants. Such Warrant Certificate or Warrant Certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such shares of Common Stock immediately prior to the close of business on the date of the surrender of such Warrant Certificate and the receipt by the Warrant Agent for the benefit of the Company of the Warrant Price and transfer taxes as aforesaid. The rights of purchase represented by the Warrants shall be exercisable during the Exercise Period, at the election of the registered holders thereof, either as an entirety or from time to time for a portion of the shares specified therein and, in the event that any Warrant is exercised in respect of less than all of the shares of Common Stock specified therein at any time prior to the Expiration Date, a new Warrant Certificate or Certificates will be issued to the registered holder for the remaining number of unexercised Warrants specified in the Warrant Certificate so surrendered, and the Warrant Agent is hereby irrevocably authorized to countersign and to deliver the required new Warrant Certificate or Certificates pursuant to the provisions of this Section and of Section 3 of this Agreement and the Company, whenever requested by the Warrant Agent, will supply the Warrant Agent with Warrant Certificates duly executed on behalf of the Company for such purpose. Upon the exercise of any one or more Warrants, the Warrant Agent shall promptly notify the Company in writing of such fact and of the number of securities delivered upon such exercise and, subject to the provisions below, shall cause all payments of an amount, in cash or by check made payable to the order of the Company, equal to the aggregate Warrant Price for such Warrants, less any amounts payable to the Underwriter as an Exercise Fee (as defined below) as provided below in this Section 5, to be deposited promptly in the Company's bank account. The Company and Warrant Agent shall determine, in their sole and absolute discretion, whether a Warrant Certificate has been properly completed for exercise by the registered holder thereof. Anything in the foregoing to the contrary notwithstanding, no Warrant will be exercisable and the Company shall not be obligated to deliver any securities pursuant to the 4 exercise of any Warrant unless at the time of exercise the Company has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 (the "Act") covering the securities issuable upon exercise of such Warrant and such registration statement shall have been declared and shall remain effective and shall be current, and such shares have been registered or qualified or deemed to be exempt under the securities laws of the state or other jurisdiction of residence of the holder of such Warrant and the exercise of such Warrant in any state or other jurisdiction shall not otherwise be unlawful. During the Exercise Period, the Company shall use its reasonable best efforts to have a current registration statement on file with the Securities and Exchange Commission covering the issuance of Common Stock underlying the Warrants so as to permit the Company to deliver to each person exercising a Warrant a prospectus meeting the requirements of Section 10(a)(3) of the Act and otherwise complying therewith, and will deliver such prospectus to each such person requesting such prospectus. During the Exercise Period, the Company shall also use its reasonable best efforts to effect appropriate qualifications of the Common Stock underlying the Warrants under the laws and regulations of the states and other jurisdictions in which the Common Stock and Warrants are sold by the Underwriter in the SPO in order to comply with applicable laws in connection with the exercise of the Warrants. (a) If at the time of exercise of any Warrant (i) the market price of the Common Stock is equal to or greater than the then exercise price of the Warrant, (ii) the exercise of the Warrant is solicited by the Underwriter (provided, however, that the exercise of a Warrant shall be presumed to be unsolicited by the Underwriter unless the Holder of the applicable Warrant states in writing that the exercise was solicited by the Underwriter) and at such time of solicitation and at the time of the exercise of such Warrant the Underwriter is a member of the National Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant is not held in a discretionary account, (iv) disclosure of the compensation arrangement is made in documents provided to the holders of the Warrants as part of the original offering of the Warrants and at the time of exercise, and (v) the solicitation of the exercise of the Warrant is not in violation of Rule 10b-6 (as such rule or any successor rule may be in effect as of such time of exercise) promulgated under the Securities Exchange Act of 1934, then the Underwriter shall be entitled to receive from the Company, with such amount payable solely by the Warrant Agent from the payments received by it as part of the Warrant Price, following exercise of each of the Warrants so exercised a fee of four percent (4%) of the aggregate exercise price of the Warrants so exercised (the "Exercise Fee"); provided, however, that no Exercise Fee shall be payable in connection with any exercise of a Warrant prior to the date which is one year and a day after the date hereof or after the fifth anniversary of the date hereof. The procedures for payment of the Exercise Fee are set forth in Section 5(b) below. (b) (1) Within five (5) days after the last day of each month commencing with , 1997, the Warrant Agent 5 will notify the Underwriter of each Warrant Certificate which has been properly completed and executed for exercise by holders of Warrants during the immediately preceding month. The Warrant Agent will provide the Underwriter with such information, in connection with the exercise of each such Warrant, as the Underwriter shall reasonably request. (2) The Company hereby authorizes and instructs the Warrant Agent to deliver to the Underwriter the Exercise Fee, if payable, in respect of each due and proper exercise of Warrants, promptly after receipt by the Warrant Agent from the Holder of such Warrants of the applicable Warrant Price, in the amount of such Exercise Fee. In the event that an Exercise Fee is paid to the Underwriter with respect to a Warrant which the Company or the Warrant Agent determines is not duly and properly completed and executed for exercise or in respect of which the Underwriter is not entitled to an Exercise Fee, the Underwriter will, promptly after notification thereof by the Company or the Warrant Agent, return such Exercise Fee to the Warrant Agent which shall forthwith return such fee to the Company. The Underwriter and the Company may at any time during business hours examine the records of the Warrant Agent, including its ledger of original Warrant Certificates returned to the Warrant Agent upon exercise of Warrants. Notwithstanding any provision to the contrary, the provisions of paragraph 5(a) and 5(b) may not be modified, amended or deleted without the prior written consent of the Underwriter. Section 6. PAYMENT OF TAXES. The Company will pay any documentary stamp taxes attributable to the initial issuance of Common Stock issuable upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any transfer tax involved in the issuance or delivery of any Warrant Certificates or certificates of shares of Common Stock in a name other than that of the registered holders of the Warrants in respect of which such Warrants were originally issued, and in such case neither the Company nor the Warrant Agent shall be required to issue or deliver any certificate for shares of Common Stock or any Warrant Certificate until the person requesting the same has paid to the Company the amount of such transfer tax or has established to the Company's satisfaction that such transfer tax has been paid. Section 7. MUTILATED OR MISSING WARRANT CERTIFICATES. In case any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue and the Warrant Agent shall countersign and deliver in exchange and substitution for and upon cancellation of a mutilated Warrant Certificate, or in lieu of and in substitution for a Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, but only upon receipt of evidence satisfactory to the Company and the Warrant Agent of such loss, theft or destruction and, in case of a lost, stolen or destroyed Warrant, indemnity of the Company and the Warrant Agent satisfactory to each of them. Applicants for such substitute Warrant Certificates shall also comply with such other 6 reasonable regulations and pay such reasonable charges as the Company or the Warrant Agent may prescribe. Section 8. RESERVATION OF COMMON STOCK. There have been reserved, and the Company shall at all times keep reserved, out of its authorized shares of Common Stock, that number of shares of Common Stock sufficient to provide for the exercise of the rights of purchase represented by the Warrants, and the transfer agent for the shares of Common Stock and every subsequent transfer agent for any shares of Common Stock issuable upon the exercise of any of the aforesaid rights of purchase are irrevocably authorized and directed at all times to reserve such number of authorized shares of Common Stock as shall be required for such purpose. The Company agrees that all shares of Common Stock issued upon exercise of the Warrants shall be, at the time of delivery of the certificates for such shares against payment of the Warrant Price therefor, validly issued, fully paid and nonassessable. The Company will keep a copy of this Agreement on file with the transfer agent for the shares of Common Stock (which may be the Warrant Agent) and with every subsequent transfer agent during the Exercise Period for any shares of Common Stock issuable upon the exercise of the rights of purchase represented by the Warrants. The Warrant Agent is irrevocably authorized to obtain from time to time from such transfer agent such stock certificates required to issue shares of Common Stock upon due and proper exercise of Warrant Certificates. The Company will supply such transfer agent with duly executed stock certificates for that purpose. All Warrant Certificates surrendered upon the due and proper exercise of the rights thereby evidenced shall be canceled by the Warrant Agent and shall thereafter be delivered to the Company, and such canceled Warrants shall constitute sufficient evidence of the number of shares of Common Stock which have been issued upon the exercise of such Warrants. Promptly after the date of expiration of the Warrants, the Warrant Agent shall certify to the Company the total aggregate amount of Warrants then outstanding, and thereafter no shares of Common Stock shall be subject to reservation in respect of such Warrants which shall have expired. Section 9. ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF SECURITIES (a) SUBDIVISION AND COMBINATION. In case the Company shall at any time after the date of the closing of the sale of securities pursuant to the SPO (the "Closing Date") subdivide or combine the outstanding shares of Common Stock, the Warrant Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. (b) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the Warrant Price pursuant to the provisions of this Section 9, the number of shares of Common Stock issuable upon the exercise of the Warrants shall be adjusted to the nearest full whole number by multiplying a number equal to the Warrant Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of the Warrants immediately 7 prior to such adjustment and dividing the product so obtained by the adjusted Warrant Price. (c) RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case of any reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in the case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of the property of the Company as an entirety, the Holder shall thereafter have the right, upon the exercise of its Warrants, to purchase the kind and number of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance as if the Holder were the owner of the shares of Common Stock underlying the Warrants immediately prior to any such events at a price equal to the product of (x) the number of shares issuable upon exercise of the Warrants and (y) the Warrant Price in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance as if such Holder had exercised the Warrant. (d) NO ADJUSTMENT OF WARRANT PRICE IN CERTAIN CASES. Notwithstanding anything herein to the contrary, no adjustment of the Warrant Price shall be made: (i) Upon the issuance or sale of the Underwriter's Option, the shares of Common Stock or Warrants issuable upon the exercise of the Underwriter's Option or the shares of Common Stock issuable upon exercise of the Warrants underlying the Underwriter's Option; or (ii) Upon the issuance or sale of (A) the shares of Common Stock or Warrants issued by the Company in the SPO (including pursuant to the Underwriter's Overallotment Option) or other shares of Common Stock or warrants issued by the Company upon consummation of the SPO, (B) the shares of Common Stock (or other securities) issuable upon exercise of Warrants; or (iii) Upon (A) the issuance of options pursuant to the Company's employee stock option plan in effect on the date hereof or as hereafter amended in accordance with the terms thereof or any other employee or executive stock option plan approved by shareholders of the Company or the issuance or sale by the Company of any shares of Common Stock pursuant to the exercise of any such options, or (B) the issuance or sale by the Company of any shares of Common Stock pursuant to the exercise of any options or warrants issued and outstanding on the date of closing of the sale of Common Stock and Warrants pursuant to the SPO or (C) the issuance or sale by the Company of any shares of Common Stock upon the conversion 8 of any convertible securities of the Company or (D) as part of a merger, consolidation or other comparable acquisition or business combination; or (iv) If the amount of said adjustment shall be less than two cents (2CENTS) per share of Common Stock. (e) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO OUTSTANDING SECURITIES. In the event that the Company shall at any time after the Closing Date and prior to the exercise and expiration of all Warrants declare a dividend (other than a dividend consisting solely of shares of Common Stock or a cash dividend or distribution payable out of current or retained earnings) or otherwise distribute to the holders of Common Stock any monies, assets, property, rights, evidences of indebtedness, securities (other than such a cash dividend or distribution or dividend consisting solely of shares of Common Stock), whether issued by the Company or by another person or entity, or any other thing of value, the Holders of the unexercised Warrants shall thereafter be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise thereof, to receive, upon the exercise of such Warrants, the same monies, property, assets, rights, evidences of indebtedness, securities or any other thing of value that they would have been entitled to receive at the time of such dividend or distribution as if the Holders were the owners of the shares of Common Stock underlying such Warrants. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Section 9(e). (f) SUBSCRIPTION RIGHTS FOR SHARES OF COMMON STOCK OR OTHER SECURITIES. In case the Company shall at any time after the date hereof and prior to the exercise of all the Warrants issue any rights to subscribe for shares of Common Stock or any other securities of the Company to all the holders of Common Stock, the Holders of the unexercised Warrants shall be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise of the Warrants, to receive such rights at the time such rights are distributed to the other shareholders of the Company but only to the extent of the number of shares of Common Stock, if any, for which the Warrants remain exercisable. (g) NOTICE IN EVENT OF DISSOLUTION. In case of the dissolution, liquidation or winding-up of the Company, all rights under the Warrants shall terminate on a date fixed by the Company, such date to be no earlier than ten (10) days prior to the effectiveness of such dissolution, liquidation or winding-up and not later than five (5) days prior to such effectiveness. Notice of such termination of purchase rights shall be given to the last registered holder of the Warrants, as the same shall appear on the books of the Company maintained by the Warrant Agent, by registered mail at least thirty (30) days prior to such termination date. (h) COMPUTATIONS. The Company may retain a firm of independent public accountants (who may be any such firm regularly employed by the Company) to make any computation required under this Section 9, and any certificate setting forth such computation 9 signed by such firm shall be conclusive evidence of the correctness of any computation made under this Section 9. In addition, the Chief Financial Officer of the Company may make any computation required by this Section 9 and any certificate setting forth such computation signed by the Chief Financial Officer of the Company shall be conclusive evidence of the correctness of any computation made under this Section 9. Section 10. FRACTIONAL INTERESTS. (a) The Warrants may only be exercised to purchase full shares of Common Stock and the Company shall not be required to issue fractional shares of Common Stock on the exercise of Warrants or Warrant Certificates evidencing a fraction of a Warrant upon exercise of less than all of the Warrants of a Holder. However, if a Warrantholder exercises all Warrants then owned of record by him and such exercise would result in the issuance of a fractional share, the Company will pay to such Warrantholder, in lieu of the issuance of any fractional share otherwise issuable, an amount of cash based on the Market Price on the last trading day prior to the exercise date; (b) By accepting a Warrant Certificate, the Holder thereof expressly waives any right to receive a Warrant Certificate evidencing any fractions of a Warrant or to receive any fractional shares of securities upon exercise of a Warrant. Section 11. NOTICES TO WARRANTHOLDERS. (a) Upon any adjustment of the Warrant Price and the number of shares of Common Stock issuable upon exercise of a Warrant, then and in each such case, the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Warrant Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of a Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. The Company shall also mail such notice to the holders of the Warrants at their respective addresses appearing in the Warrant register. Failure to give or mail such notice, or any defect therein, shall not affect the validity of the adjustments. (b) In case at any time after the Closing Date: (i) the Company shall pay dividends payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of Common Stock; or (ii) the Company shall offer for subscription pro rata to all of the holders of Common Stock any additional shares of stock of any class or other rights; or (iii) there shall be any capital reorganization or reclassification (other than a reclassification involving merely the subdivision or combination of outstanding capital stock of the Company) of the capital stock of the Company, or consolidation or merger of the Company with, or sale of substantially all of its assets to another corporation where the approval of the Company's shareholders is required; or (iv) there shall be a voluntary dissolution, liquidation or winding-up of the Company; then in any one or more of such cases, the Company shall give written notice to the Warrant 10 Agent and the holders of the Warrants in the manner set forth in Section 11(a) of the date on which (A) a record shall be taken for such dividend, distribution or subscription rights, or (B) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange, if at all, their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, as the case may be. Such notice shall be given at least ten (10) days prior to the action in question and not less than ten (10) days prior to the record date in respect thereof. Failure to give such notice, or any defect therein, shall not affect the legality or validity of any of the matters set forth in this Section 11(b). (c) The Company shall cause copies of all financial statements and reports, proxy statements and other documents that are sent to its shareholders to be sent by first-class mail, postage prepaid, on the date of mailing to such stockholders, to each registered holder of Warrants at his address appearing in the Warrant register as of the record date for the determination of the shareholders entitled to such documents. Section 12. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS. (a) The Warrant Agent shall promptly forward to the Company all monies received by the Warrant Agent for the purchase of shares of Common Stock through the exercise of such Warrants. (b) The Warrant Agent shall keep copies of this Agreement available for inspection by holders of Warrants during normal business hours. Section 13. REDEMPTION OF WARRANTS. The Warrants are redeemable by the Company commencing 12 months after the date of the Prospectus, or earlier with the consent of the Underwriter, in whole or in part, on not less than thirty (30) days' prior written notice at a redemption price of $.10 per Warrant, provided the closing high bid quotation of the Common Stock as reported on the Nasdaq National Market, if traded thereon, or if not traded thereon, the closing sale price if listed on a national securities exchange (or other reporting system that provides last sales prices), or if not traded thereon but traded on the Nasdaq SmallCap Market, over-the-counter or on the bulletin board, the average of the ask and bid price has been at least 150% of the then Exercise Price of the Warrants, for a period of 10 consecutive trading days ending on the third day prior to the date on which the Company gives such notice of redemption. Any redemption in part shall be made pro rata to all Warrant holders. The redemption notice shall be mailed to the holders of the Warrants at their respective addresses appearing in the Warrant register. Any such notice mailed in the manner provided herein shall be conclusively presumed to have been duly given in accordance with this Agreement whether or not the registered holder of Warrants receives such notice. No 11 failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a registered holder of a Warrant (i) to whom notice was not mailed or (ii) whose notice was defective. An affidavit of the Warrant Agent or the Secretary or Assistant Secretary of the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. Holders of the Warrants will have exercise rights until the close of business on the day immediately preceding the date fixed for redemption. Section 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT. Any corporation or company which may succeed to the corporate trust business of the Warrant Agent by any merger or consolidation or otherwise shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Warrant Agent under the provisions of Section 16 of this Agreement. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, any of the Warrants shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent, and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in the Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignature under its prior name and deliver Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall have the full force provided in the Warrant Certificates and in the Agreement. Section 15. DUTIES OF WARRANT AGENT. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Warrant Certificates, by their acceptance thereof, shall be bound: (a) The statements of fact and recitals contained herein and in the Warrant Certificates shall be taken as statements of the Company, and the Warrant Agent assumes no responsibility for the correctness of any of the same except its countersignature on the Warrant Certificate and such statements or recitals as describe the Warrant Agent or action taken or to be taken by it. The Warrant Agent assumes no responsibility with respect to the 12 distribution of the Warrant Certificates except as herein expressly provided. (b) The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants in this Agreement or in the Warrant Certificates to be complied with by the Company. (c) The Warrant Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant Certificate in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel. (d) The Warrant Agent shall incur no liability or responsibility to the Company or to any holder of any Warrant Certificate for any action taken in reliance on any notice, resolution, waiver, consent, order, certificate or other instrument reasonably believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (e) The Company agrees to pay to the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the execution of this Agreement, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges incurred by the Warrant Agent in the execution of this Agreement and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and reasonable counsel fees, for anything done or omitted by the Warrant Agent in the execution of this Agreement except as a result of the Warrant Agent's negligence, willful misconduct or bad faith. (f) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expenses unless the Company or one or more registered holders of Warrant Certificates shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the registered holders of the Warrants, as their respective rights and interests may appear. (g) The Warrant Agent and any stockholder, director, officer, partner or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to or otherwise act as fully and freely as though it were not the Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. 13 (h) The Warrant Agent shall act hereunder solely as agent and its duties shall be determined solely by the provisions hereof. (i) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees, and the Warrant Agent shall not be answerable or accountable for any such attorneys, agents or employees or for any loss to the Company resulting from such neglect or misconduct, provided reasonable care had been exercised in the selection and continued employment thereof. (j) Any request, direction, election, order or demand of the Company shall be sufficiently evidenced by an instrument signed in the name of the Company by its Chairman or Co-Chairman of the Board, President or a Vice President or its Secretary or an Assistant Secretary or its Chief Financial Officer or its Controller (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Warrant Agent by a copy thereof certified by the Secretary or an Assistant Secretary of the Company. Section 16. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and be discharged from its duties under this Agreement by giving to the Company notice in writing, and to the holders of the Warrant Certificates notice by mailing such notice to the holders at their respective addresses appearing on the Warrant register, of such resignation, specifying a date when such resignation shall take effect. The Company may remove the Warrant Agent by like notice to the Warrant Agent from the Company and the like mailing of notice to the holders of the Warrant Certificates. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of action, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent, then the Company agrees to perform the duties of the Warrant Agent hereunder until a successor Warrant Agent is appointed. After appointment and agreeing to be bound by the provisions of this Agreement as in effect at such time, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibility as if it had been originally named as Warrant Agent without further act or deed and the former Warrant Agent shall deliver and transfer to the successor Warrant Agent as soon as possible all cancelled Warrants, records and property at the time held by it hereunder, and execute and deliver any further assurance or conveyance necessary for the purpose. Failure to file or mail any notice provided for in this Section, however, or any defect therein, shall not affect the validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. Section 17. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment of any transfer agent (other than Corporate Stock 14 Transfer) for the shares of Common Stock or of any subsequent transfer agent for the shares of Common Stock or other shares of the Common Stock issuable upon the exercise of the rights of purchase represented by the Warrants, the Company will file with the Warrant Agent a statement setting forth the name and address of such transfer agent. Section 18. NOTICES. Any notice pursuant to this Agreement to be given by the Warrant Agent, or by the registered holder of any Warrant to the Company, shall be sufficiently given if sent by first-class mail, postage prepaid, addressed (until another is filed in writing by the Company with the Warrant Agent) as follows: The Kushner-Locke Company 11601 Wilshire Blvd., 21st Floor Los Angeles, California 90025 Attention: Donald Kushner, Secretary and a copy thereof to: Kaye, Scholer, Fierman, Hays & Handler, LLP 1999 Avenue of the Stars, Suite 1600 Los Angeles, California 90067 Attention: Barry L. Dastin, Esq. Any notice pursuant to this Agreement to be given by the Company or by the registered holder of any Warrant to the Warrant Agent shall be sufficiently given if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: Corporate Stock Transfer [ ] [ ] Attention: [ ] Any notice pursuant to this Agreement to be given by the Warrant Agent or by the Company to the Underwriter shall be sufficiently given if sent by first- class mail, postage prepaid, addressed (until another address if filed in writing with the Warrant Agent) as follows: Lew Lieberbaum & Co., Inc. 600 Old Country Road Garden City, New York 11530 Attention: Mr. Leonard Neuhaus and a copy thereof to: 15 Schneck Weltman Hashmall & Mischel LLP 1285 Avenue of the Americas New York, New York 10019 Attention: Felice F. Mischel, Esq. Section 19. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant Agent may from time to time, without the consent or concurrence of the registered holders of the Warrants, supplement or amend this Agreement in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to add any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrant Certificates and which shall not materially adversely affect the interest of the holders of Warrants; and in addition the Company and the Warrant Agent may modify, supplement or alter this Agreement (other than as otherwise prescribed in this Agreement) with the consent in writing of the registered holders of the Warrants representing not less than a majority of the Warrants then outstanding. Section 20. NEW YORK CONTRACT. This Agreement and each Warrant issued hereunder shall be deemed to be a contract made under the laws of the State of New York and shall be construed in accordance with the laws of New York without regard to the conflicts of law principles thereof. Section 21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement or in the Warrant Certificates shall be construed to give to any person or corporation other than the Company, the Warrant Agent, and each of their respective successors and assigns, and the registered holders of the Warrants any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent and the registered holders of the Warrants. Section 22. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 23. WARRANTHOLDER NOT DEEMED A SHAREHOLDER. No Warrantholder, as such, shall be entitled to vote, receive dividends or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable upon the exercise of the Warrants represented thereby for any purpose whatever, nor shall anything contained herein or in any Warrant Certificate be construed to confer upon any Warrantholder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, 16 consolidation, merger, conveyance or otherwise), or to receive notice of meetings or other actions affecting shareholders (except as provided in Section 11 hereof), or to receive dividends or subscription rights, or otherwise, until such Warrant shall have been exercised in accordance with the provisions hereof and the receipt of the Warrant Price and any other amounts payable upon such exercise by the Warrant Agent (including, without limitation, any applicable transfer taxes). Section 24. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed an original and such counterparts shall together constitute but one and the same instruments. 17 IN WITNESS WHEREOF, the parties have entered into this Agreement on the date first above written. THE KUSHNER-LOCKE COMPANY By: ---------------------------------- Name: Title: CORPORATE STOCK TRANSFER By: --------------------------------- Name: Title: LEW LIEBERBAUM & CO., INC. By: --------------------------------- Name: Title: 18 [FORM OF CLASS C REDEEMABLE COMMON STOCK PURCHASE WARRANT] No. W VOID AFTER 5:00 P.M.,, NEW YORK, ------------ ON , 2001 ----------- WARRANTS ----- CLASS C REDEEMABLE COMMON STOCK PURCHASE WARRANT CERTIFICATE TO PURCHASE ONE SHARE OF COMMON STOCK THE KUSHNER-LOCKE COMPANY CUSIP [ ] THIS CERTIFIES THAT, FOR VALUE RECEIVED or registered assigns (the "Registered Holder") is the owner of the number of Class C Redeemable Common Stock Purchase Warrants (the "Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable share of Common Stock, no par value (the "Common Stock"), of The Kushner-Locke Company, a California corporation (the "Company"), at any time from ___________, 1996 [the date of the Prospectus] (the "Initial Warrant Exercise Date"), and prior to the Expiration Date (as hereinafter defined), upon the presentation and surrender of this Warrant Certificate with the Exercise Form on the reverse hereof duly executed, at the corporate office of Corporate Stock Transfer [ ], as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $[ ], subject to adjustment (the "Exercise Price"), in lawful money of the United States of America in cash or by certified or bank check made payable to the Company plus any applicable transfer tax or similar charge. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement, dated as of ____, 1996 [date of the Prospectus] (the "Warrant Agreement"), among the Company, Lew Lieberbaum & Co., Inc. and the Warrant Agent. In the event of certain contingencies provided for in the Warrant Agreement, the Exercise Price and the number of shares of Common 19 Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional share of Common Stock or Warrant Certificates evidencing fractional Warrants will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor for, in the aggregate, the remaining number of unexercised Warrants evidenced hereby, which the Warrant Agent shall countersign. The term "Expiration Date" shall mean 5:00 p.m. (New York time) on ________, 2001 [the date which is the fifth anniversary of the Initial Warrant Exercise Date]; provided, that if such date is not a business day, it shall mean 5:00 p.m., New York City time, on the next following business day. For purposes hereof, the term "business day' shall mean any day other than a Saturday, Sunday or a day on which banking institutions in New York City, New York, are authorized or obligated by law to be closed. The Company shall not be obligated to deliver any securities pursuant to the exercise of the Warrants represented hereby unless at the time of exercise the Company has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 (the "Act") covering the securities issuable upon exercise of the Warrants represented hereby and such registration statement has been declared and shall remain effective and shall be current, and such securities have been registered or qualified or deemed to be exempt under the securities laws of the state or other jurisdiction of residence of the Registered Holder and the exercise of the Warrants represented hereby in any state or other jurisdiction shall not otherwise be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon the presentment and payment of any tax or other charge imposed in connection therewith or incident thereto, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. The Registered Holder, as such, shall not be, or be deemed to be, the holder of Common Stock or any other security of the Company 20 which may at any time be issuable upon the exercise of the Warrant evidenced hereby for any purpose whatsoever, nor shall anything contained herein or in the Warrant Agreement be construed to confer upon the Registered Holder hereof, as such, any of the rights of a shareholder or security holder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as specifically provided in the Warrant Agreement. Subject to the provisions of the Warrant Agreement, this Warrant may be redeemed, in whole or in part, at the option of the Company, at a redemption price of $.10 per Warrant, at any time commencing ________, 1997 [one year after the date of the Prospectus] (or earlier at the sole discretion of the Underwriter), provided that the closing high bid quotation of the Common Stock as reported on the Nasdaq National Market, if traded thereon, or if not traded thereon, the closing sale price if listed on a national exchange (or other reporting system that provides last sales prices), or if not traded thereon but traded on the Nasdaq SmallCap Market, over the counter or on the bulletin board, the average of the ask and bid price, shall have for a period of 10 consecutive trading days ending on the third day prior to the date on which the Company gives the Notice of Redemption, as defined below, equaled or exceeded 150% of the then Exercise Price. A notice of redemption (the "Notice of Redemption") shall be given by the Company not later than the thirtieth day before the date fixed for such redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no right with respect to this Warrant except to receive the $.10 per Warrant upon surrender of this Certificate. Under certain circumstances described in the Warrant Agreement, Lew Lieberbaum & Co., Inc. shall be entitled to receive as a solicitation fee an aggregate of four percent (4%) of the Exercise Price of the Warrants represented hereby which are exercised. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary, except as provided in the Warrant Agreement. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflicts of law principles thereof. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. 21 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. Dated , ------------- --------- SEAL THE KUSHNER-LOCKE COMPANY By: --------------------------- Chairman, Co-Chairman President or Vice President By: -------------------------- Secretary or Assistant Secretary COUNTERSIGNED: CORPORATE STOCK TRANSFER, as Warrant Agent By: -------------------------------------- Authorized Officer 22 EXERCISE FORM To Be Executed by the Registered Holder in Order to Exercise Warrant The undersigned Registered Holder hereby irrevocably elects to exercise ________ Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ------------------------- ------------------------- ------------------------ (please print or type name and address) and be delivered to ------------------------ ------------------------ ------------------------- (please print or type name and address) and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. IMPORTANT: PLEASE COMPLETE THE FOLLOWING: 1. The exercise of this Warrant was solicited by Lew Lieberbaum & Co., Inc. / / 2. The exercise of this Warrant was solicited by 3. If the exercise of this Warrant was not solicited, please check the following box. / / Dated: X ----------------------- ----------------------------- Signature of Registered Holder 23 ----------------------------------- ----------------------------------- ----------------------------------- Address --------------------------------- Social Security or Taxpayer Identification Number ----------------------------------- Signature Guaranteed THE SIGNATURE TO THE ASSIGNMENT OR THE EXERCISE FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION ON OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM. 24 ASSIGNMENT To be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, , hereby sells, assigns and transfers unto ---------------------- PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ----------------- ----------------- ----------------- (please print or type name and address) _______________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints as its/his/her attorney-in-fact to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: X ------------------ --------------------------------- Signature of Registered Holder X -------------------------------- Signature Guaranteed THE SIGNATURE TO THE ASSIGNMENT OR THE EXERCISE FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION ON OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM. 25 EX-4.6 4 EX 4.6 FORM OF UNDERWRITERS WARRANT EXHIBIT 4.6 Proof of July 8, 1996 [FORM OF UNDERWRITER'S WARRANT] NO SALE OR TRANSFER OF THIS WARRANT OR THE SECURITIES UNDERLYING THIS WARRANT MAY BE MADE UNTIL THE EFFECTIVENESS OF A REGISTRATION STATEMENT OR OF A POST-EFFECTIVE AMENDMENT THERETO UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), COVERING THIS WARRANT OR THE SECURITIES UNDERLYING THIS WARRANT, OR UNTIL THE COMPANY IS IN RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT. TRANSFER OF THIS WARRANT IS RESTRICTED UNDER PARAGRAPH 2 BELOW. UNDERWRITER'S WARRANT TO PURCHASE COMMON STOCK AND/OR REDEEMABLE WARRANTS THE KUSHNER-LOCKE COMPANY (A CALIFORNIA CORPORATION) Dated: , 1996 THIS CERTIFIES THAT, for value received, Lew Lieberbaum & Co., Inc. (the "Underwriter") or its permitted registered assigns (the "Holder") is the owner of options (the "Underwriter's Option") to purchase from The Kushner-Locke Company, a California corporation (the "Company"), during the period and at the prices hereinafter specified, up to _____ Units (a "Unit") each consisting of two shares of the Company's common stock, no par value per share (the "Common Stock"), and two Class C redeemable common stock purchase warrants (the "Warrants" and, collectively with the Common Stock, the "Securities"). This Underwriter's Option is issued pursuant to an Underwriting Agreement dated , 1996, between the Company and the Underwriter in connection with a public offering through the Underwriter (the "Public Offering") of Units and, pursuant to the Underwriter's overallotment option, an additional Units. The Warrants (including those issuable pursuant to the exercise of the Underwriter's Option) will be issued pursuant to and subject to the terms and conditions set forth in an agreement by and among the Company, the Underwriter and Corporate Stock Transfer (the "Warrant Agreement"). 1. EXERCISE OF THE UNDERWRITER'S OPTION. (a) The rights represented by this Underwriter's Option shall be exercisable at the prices and during the period specified below, upon the terms and subject to the conditions as set forth herein: (i) During the period from , 1996 to , 1997, inclusive, the Holder shall have no right to purchase any Units hereunder. (ii) Between , 1997 and , 2001, inclusive, the Holder shall have the option to purchase Units hereunder at a price of $ per Unit, the purchase price of the Units being % of the public offering prices for the Units set forth in the Prospectus forming a part of the registration statement on Form S-2 (File No. 333-5089) of the Company, as amended (the "Registration Statement"). (iii) After , 2001, the Holder shall have no right to purchase any Units hereunder and this Underwriter's Option shall expire effective at 5:00 p.m., New York time on such date. (b) The rights represented by this Underwriter's Option may be exercised at any time within the period above specified, in whole or in part, by (i) the surrender of this Underwriter's Option (with the purchase form at the end hereof properly executed) at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company); (ii) payment to the Company of the exercise price then in effect for the number of shares of Units specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any; and (iii) delivery to the Company of a duly executed agreement signed by the person(s) designated in the purchase form to the effect that such person(s) agree(s) to be bound by the provisions of Paragraph 5 and subparagraphs (b), (c) and (d) of Paragraph 6 hereof. This Underwriter's Option shall be deemed to have been exercised, in whole or in part to the extent specified, immediately prior to the close of business on the date this Underwriter's Option is surrendered and payment is made in accordance with the foregoing provisions of this Paragraph 1, and the person or persons in whose name or names the certificates for the Securities shall be issuable upon such exercise shall be deemed the holder or holders of record of such Common Stock and Warrants at that time and date. The Common Stock and Warrants so purchased shall be delivered to the Holder within a reasonable time, not exceeding ten (10) business days, after the Company receives the items required to be delivered by this Paragraph 1 to evidence the Underwriter's exercise of the rights represented by this Underwriter's Option. 2. RESTRICTIONS ON TRANSFER. This Underwriter's Option shall not be transferred, sold, assigned or hypothecated for a period of one year commencing , 1996, and thereafter it may be transferred only to successors of the Holder, and may be assigned in whole or in part to any person who is an officer of the Underwriter or an officer or 2 partner of any other member of the selling group. Any such assignment shall be effected by the Holder by (i) completing and executing the transfer form at the end hereof and (ii) surrendering this Underwriter's Option with such duly completed and executed transfer form for cancellation, accompanied by funds sufficient to pay any transfer tax or similar charges imposed upon transfer, sale or assignment (as used hereinafter "transfer tax") at the office or agency of the Company referred to in Paragraph 1 hereof, accompanied by a certificate (signed by a duly authorized representative of the Holder), stating that each transferee is a permitted transferee under this Paragraph 2; whereupon the Company shall issue, in the name or names specified by the Holder (including the Holder), a new Underwriter's Option or Underwriter's Options of like tenor and representing in the aggregate rights to purchase the same number of Units as are then purchasable hereunder. The Holder acknowledges that this Underwriter's Option may not be offered or sold except pursuant to an effective registration statement under the Act or an opinion of counsel satisfactory to the Company that an exemption from registration under the Act is available. 3. COVENANTS OF THE COMPANY (a) The Company covenants and agrees that all Common Stock issuable upon the exercise of this Underwriter's Option will, upon issuance thereof and payment therefor in accordance with the terms hereof, and all Common Stock issuable upon exercise of the Warrants underlying this Underwriter's Option, will upon the issuance thereof and payment therefor in accordance with the terms of the Warrant Agreement, be duly and validly issued, fully paid and nonassessable and no personal liability will attach to the holder thereof by reason of being such a holder, other than as set forth herein. (b) The Company covenants and agrees that during the period within which this Underwriter's Option may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of this Underwriter's Option and the Warrants included therein. (c) The Company covenants and agrees that for so long as the Units shall be outstanding (unless the Securities shall no longer be registered under Paragraph 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended) the Company shall use its reasonable best efforts to cause the Company's Common Stock and the Warrants to be listed on the NASDAQ National Market or listed on a national securities exchange. 4. NO RIGHTS OF SHAREHOLDER. This Underwriter's Option shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company, either at law or in equity, and the rights of the Holder are limited to those expressed in this Underwriter's Option and are not 3 enforceable against the Company except to the extent set forth herein. 5. REGISTRATION RIGHTS. (a) During the period of four years from , 1997, the Company shall advise the Holder, whether the Holder holds this Underwriter's Option or has exercised this Underwriter's Option and holds Common Stock and Warrants, or Common Stock underlying the Warrants (the "Warrant Shares"), by written notice at least 20 days prior to the filing of any post-effective amendment to the Registration Statement or of any new registration statement or post-effective amendment thereto under the Act, covering any Securities of the Company, for its own account or for the account of others, and upon the request of the Holder made during such four-year period, include in any such post-effective amendment or registration statement such information as may be required to permit a public offering of any of the Common Stock or Warrants issuable hereunder, and/or the Warrant Shares (the "Registerable Securities"); provided, that this Paragraph 5(a) shall not apply to any registration statement filed pursuant to Paragraph 5(b) hereof or to registrations of securities in connection with an employee benefit plan or a merger, consolidation or other comparable acquisition or business combination; and provided, further, that, notwithstanding the foregoing, the Holder shall have no right to include any Registrable Securities in any new registration statement or post-effective amendment thereto unless as of the effective date thereof the Registration Statement (as it may hereafter be amended or supplemented) or any new registration statement under which the Registrable Securities are registered shall have ceased to be effective or the prospectus contained in such Registration Statement shall have ceased to be current. The Company shall supply the Holders a reasonable number of prospectuses in order to facilitate the public sale or other disposition of the Registerable Securities, use its reasonable best efforts to register and qualify any of the Registerable Securities for sale in such states in which the Common Stock and Warrants are offered and sold in the Public Offering as such Holder reasonably designates and do any and all other acts and things which may be necessary to enable such Holder to consummate the public sale of the Registerable Securities, provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any jurisdiction or make any change in its capital structure or articles of incorporation or in any other aspect of its business or to enter into material agreements with any blue sky or state securities commission, and furnish indemnification in the manner provided in Paragraph 6 hereof. The Holder shall furnish information reasonably requested by the Company to be used in connection with such post-effective amendments or registration statements, including its intentions with respect thereto, and shall furnish indemnification as set forth in Paragraph 6. The Company shall continue to advise the Holders of the Registerable 4 Securities of its intention to file a registration statement or amendment pursuant to this Paragraph 5(a) until the earliest of (i) , 2001; or (ii) such time as all of the Registerable Securities have been registered and sold under the Act; or (iii) all of the Registrable Securities have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent public distribution of them shall not require registration or qualification of them under the Act, or (iv) in the opinion of legal counsel for the Company, the Registrable Securities may be offered and sold by the holders thereof without being registered under the Act and such Units, upon receipt by the purchasers thereof pursuant to such sale, will not constitute "restricted securities" as such term is defined in Rule 144 under the Act. (b) If any fifty-one (51%) percent holder (as defined below) shall give written notice to the Company at any time during the four (4) year period beginning one (1) year from , 1996 to the effect that such holder desires to register under the Act any Registerable Securities, under such circumstances that a public distribution (within the meaning of the Act) of any such Registerable Securities will be involved (and the Registration Statement or any new registration statement under which such Registerable Securities are registered shall have ceased to be effective or the Prospectus contained therein shall have ceased to be current), then the Company will, as promptly as practicable after receipt of such notice, at the Company's option, file a post- effective amendment to the current Registration Statement or a new registration statement pursuant to the Act to the end that the Registerable Securities may be publicly sold under the Act as promptly as practicable thereafter and the Company will use its reasonable best efforts to cause such registration to become and remain effective as provided herein (including the taking of such steps as are reasonably necessary to obtain the removal of any stop order); provided, that all Holders of Registrable Securities to be so registered shall furnish the Company with appropriate information in connection therewith as the Company may reasonably request; and provided, further, that the Company shall not be required to file such a post-effective amendment or registration statement pursuant to this Paragraph 5(b) on more than one occasion in connection with any of the Registrable Securities; and provided, further, that, the registration rights of the 51% holder under this Paragraph 5(b) shall be subject to the "piggyback" registration rights of other holders of Securities of the Company to include such Securities in any registration statement or post- effective amendment filed pursuant to this Paragraph 5(b); and provided, further, that, the Company shall not be required to prepare and file any registration statement or post-effective amendment in connection with any or all of the Registrable Securities within 9 months of the filing or effectiveness of any other registration statement. The Company will maintain such registration statement or post-effective amendment current under the Act for a period of 5 at least nine months from the effective date thereof. The Company shall supply the Holders of Registrable Securities included in the applicable Registration Statement or post-effective amendment a reasonable number of prospectuses in order to facilitate the public sale of the Registerable Securities, use its reasonable best efforts to register and qualify any of the Registerable Securities for sale in such states in which the Common Stock and Warrants are offered and sold in the Public Offering as such holder reasonably designates and furnish indemnification in the manner provided in Paragraph 6 hereof, provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any jurisdiction or make any change in its capital structure or articles of incorporation or in any other aspect of its business or to enter into material agreements with any blue sky or state securities commission. (c) The Holder may, in accordance with Paragraphs 5(a) or (b), at his, her or its option, and subject to the limitations set forth in Paragraph 1(a) hereof, request the registration of any of the Registerable Securities prior to the exercise of this Underwriter's Option. The Holder may thereafter exercise this Underwriter's Option at any time or from time to time, subject to any other restrictions and limitations set forth herein, subsequent to the effectiveness under the Act of the registration statement in which the Common Stock underlying the Underwriter's Options and Warrants were included. (d) The term "51% holder," as used in this Paragraph 5, shall include any owner or combination of owners of Underwriter's Options or Registrable Securities, if and to the extent of the exercise of the Underwriter's Options, if the aggregate number of shares of Common Stock and Warrant Shares included in and underlying the Underwriter's Options and Registerable Securities held of record by it or them, would constitute a majority of the aggregate of such shares of Common Stock and Warrant Shares underlying the Underwriter's Option and Registrable Securities as of the date of the initial issuance of the Underwriter's Option. (e) The following provisions of this Paragraph 5 shall also be applicable: (i) Within fourteen (14) days after receiving any notice from a 51% holder pursuant to Paragraph 5(b), the Company shall give notice to the other Holders of Underwriter's Options or Registerable Securities, advising that the Company is proceeding with such post-effective amendment or registration and offering to include therein the Registerable Securities of such other Holders, provided that they shall furnish the Company with all information in connection therewith as shall be necessary or appropriate and as the Company shall reasonably request in writing. Following the effective date of such post- effective amendment or registration, the Company shall, upon the request of any Holder of Registerable Securities included in such post-effective amendment or registration, forthwith supply such reasonable number of 6 prospectuses meeting the requirements of the Act, as shall be reasonably requested by such Holder. The Company shall use its reasonable best efforts to qualify the Registerable Securities for sale in such states in which the Common Stock and Warrants are offered and sold in the Public Offering as the 51% holder shall reasonably designate at such times as the registration statement is effective under the Act, provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any jurisdiction or make any change in its capital structure or articles incorporation or in any other aspect of its business or to enter into material agreements with any blue sky or state securities commission. (ii) The Company shall bear the entire cost and expense of any registration of Securities initiated by it under Paragraph 5(a) hereof notwithstanding that the Registerable Securities subject to this Underwriter's Option may be included in any such registration. The Company shall also comply with the one request for registration made by the 51% holder pursuant to Paragraph 5(b) hereof at the Company's own expense and without charge to any holder of the Registerable Securities. Notwithstanding the foregoing, any Holder whose Registerable Securities are included in any such registration statement or post-effective amendment pursuant to this Paragraph 5 shall, however, bear the fees of any counsel or other advisors retained by him, her or it, any transfer taxes and underwriting discounts or commissions applicable to the Registerable Securities sold by him, her or it pursuant thereto and, in the case of a registration pursuant to Paragraph 5(a) hereof, any additional registration or "blue sky" or state securities fees attributable to the registration or qualification of such Holder's Registerable Securities. (iii) If the underwriter or managing underwriter in any underwritten offering made pursuant to Paragraph 5(a) hereof shall advise the Company that it declines to include a portion or all of the Registerable Securities requested by the Holders to be included in the registration statement, then distribution of all or a specified portion of the Registerable Securities shall be excluded from such registration statement (in case of an exclusion as to a portion of such Registerable Securities, such portion to be allocated among such Holders in proportion to the respective numbers of Registerable Securities requested to be registered by each such Holder). In such event the Company shall give the Holder prompt notice of the number of Registerable Securities excluded. Further, in such event the Company shall, if requested in writing by a 51% holder, commencing six (6) months after the completion of such underwritten offering, file and use its reasonable best efforts to have declared effective, at its sole expense (subject to the last sentence of Paragraph 5(a)(ii)), a registration statement relating to such excluded Registrable Securities. (iv) Notwithstanding anything to the contrary contained herein, the Company shall have the right at any time after it shall 7 have given written notice pursuant to Paragraph 5(a) or 5(b) (irrespective of whether a written request for inclusion of any Registerable Securities shall have been made) to elect not to file or to delay any such proposed registration statement or post-effective amendment thereto, or to withdraw the same after the filing but prior to the effective date thereof. In addition, the Company may delay the filing of any registration statement or post-effective amendment requested pursuant to Paragraph 5(b) hereof by not more than 180 days if the Company, prior to the time it would otherwise have been required to file such registration statement or post-effective amendment thereto, determines in good faith that the filing of the registration statement would require the disclosure of non-public material information that, in its judgment, would be detrimental to the Company if so disclosed or would otherwise adversely affect a financing, acquisition, disposition, merger or other material transaction. (v) If a registration pursuant to Paragraph 5(a) hereof involves an underwritten offering, the Company shall have the right to select the investment banker or investment bankers and manager or managers that will serve as underwriter with respect to the underwritten offering. No Holder of Registerable Securities may participate in any underwritten offering under this Agreement unless such Holder completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwritten offering, in each case, in the form and upon terms reasonably acceptable to the Company and the underwriters of such underwritten offering. The requested registration pursuant to Paragraph 5(b) hereof shall not involve an underwritten offering unless the Company shall first give its written approval of each underwriter that participates in such offering, such approval not to be unreasonably withheld. 6. INDEMNIFICATION. (a) Whenever pursuant to Paragraph 5, a registration statement relating to any Registerable Securities is filed under the Act, amended or supplemented, the Company will indemnify and hold harmless each Holder of the Registerable Securities covered by such registration statement, amendment or supplement (such holder hereinafter referred to as the "Distributing Holder"), each person, if any, who controls (within the meaning of the Act) the Distributing Holder, and each officer, employee, partner or agent of the Distributing Holder, if the Distributing Holder is a broker or dealer, and each underwriter (within the meaning of the Act) of such Securities and each person, if any, who controls (within the meaning of the Act) any such underwriter and each officer, employee, agent or partner of such underwriter against any losses, claims, damages or liabilities, joint or several, to which the Distributing Holder, any such underwriter or any such other person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or 8 alleged untrue statement of any material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or supplement thereto, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading; and will reimburse the Distributing Holder and each such underwriter or such other person for any expenses reasonably incurred by the Distributing Holder, or underwriter or such other person, in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case (i) to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by or on behalf of such Distributing Holder, any other Distributing Holder or any such underwriter for use in the preparation thereof, or (ii) such losses, claims, damages or liabilities arise out of or are based upon any actual or alleged untrue statement or omission made in or from any registration statement or preliminary prospectus, but corrected in any subsequent preliminary prospectus, registration statement or the final prospectus, as amended or supplemented. (b) Whenever pursuant to Paragraph 5 a registration statement relating to the Registerable Securities is filed under the Act, or is amended or supplemented, the Distributing Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed said registration statement or such amendments or supplements thereto, and each person, if any, who controls the Company (within the meaning of the Act) against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by or on behalf of such Distributing Holder for use in the preparation thereof; and will reimburse the Company 9 or any such director, officer or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this Paragraph 6 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, give the indemnifying party notice of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Paragraph 6. (d) In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, that, if the Company is an indemnifying party it shall have the right to assume and control the defense thereof, and after notice from the indemnifying party to such indemnified party of its election to so assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 7. ADJUSTMENTS OF WARRANT PRICE AND NUMBER OF SHARES OF COMMON STOCK. (a) COMPUTATION OF ADJUSTED PRICE. Except as hereinafter provided, in case the Company shall, at any time after the date of closing of the sale of Units pursuant to the secondary public offering ("SPO") being underwritten by the Underwriter (the "Closing Date"), issue or sell any shares of Common Stock (other than the issuances or sales referred to in Paragraph 7(f) hereof), including shares held in the Company's treasury and shares of Common Stock issued upon the exercise of any options, rights or warrants to subscribe for shares of Common Stock (other than the issuances or sales of Common Stock pursuant to rights to subscribe for such Common Stock distributed pursuant to Paragraph 7(j) hereof) and shares of Common Stock issued upon the direct or indirect conversion or exchange of securities for shares of Common Stock, for an aggregate consideration per share less than both the "Market Price" (as defined in Paragraph 7(a)(vi) hereof) per share of Common Stock on the trading day immediately preceding such issuance or sale and the Warrant Price in effect immediately prior to such issuance or sale, or without consideration, then forthwith upon such issuance or sale, the Warrant Price in respect of the Common Stock issuable upon exercise of the Underwriter's Option (but not the exercise price of the Warrants underlying the Underwriter's Option, which shall be adjusted only in accordance with the Warrant Agreement) shall (until another such issuance or 10 sale) be reduced to the price (calculated to the nearest full cent) determined by multiplying the Warrant Price in effect immediately prior to such issuance or sale by a fraction, the numerator of which shall be the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied by the Warrant Price immediately prior to such issuance or sale plus (2) the aggregate consideration received by the Company upon such issuance or sale and upon the sale of any applicable option, right or warrant, and the denominator of which shall be the product of (x) the total number of shares of Common Stock outstanding immediately after such issuance or sale, multiplied by (y) the Warrant Price immediately prior to such issuance or sale; provided, however, that in no event shall the Warrant Price be adjusted pursuant to this computation to an amount in excess of the Warrant Price in effect immediately prior to such computation, except in the case of a combination of outstanding shares of Common Stock, as provided by Paragraph 7(c) hereof, or in the case of a reclassification, consolidation, merger or other change of outstanding shares of Common Stock, as provided by Paragraph 7(e) hereof. This Paragraph 7(a) shall not be applicable to any sale or issuance covered by any other paragraph or sub-paragraph of this Paragraph 7. For the purposes of this Paragraph 7, the term "Warrant Price" shall mean the exercise price per share of Common Stock issuable upon exercise of the Underwriter's Option (initially $ per share), as adjusted from time to time pursuant to the provisions of this Paragraph 7. For the purposes of any computation to be made in accordance with this Paragraph 7(a), the following provisions shall be applicable: (i) In case of the issuance or sale of shares of Common Stock for a consideration part or all of which shall be cash, the amount of the cash consideration therefor shall be deemed to be the amount of cash received by the Company for such shares (or, if shares of Common Stock are offered by the Company for subscription, the subscription price, or, if such share of Common Stock shall be sold to underwriters or dealers for public offering without a subscription offering, the public offering price) before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith. (ii) In case of the issuance or sale (otherwise than as a dividend or other distribution on any stock of the Company) of shares of Common Stock for a consideration part or all of which shall be other than cash, the amount of the consideration therefor other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Company. (iii) Shares of Common Stock issuable by way of dividend or other distribution on any stock of the Company 11 shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration. (iv) The reclassification of Securities of the Company other than shares of Common Stock into Securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined as provided in subparagraph (ii) of this Paragraph 7(a). (v) The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable upon the exercise of options, rights, warrants and upon the conversion or exchange of convertible or exchangeable securities. (vi) As used herein, the phrase "Market Price" at any date shall be deemed to be the last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the last three trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or as reported in the NASDAQ National Market, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on the NASDAQ National Market, the average of the closing bid and ask quotations as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting such information, or if the Common Stock is not quoted on NASDAQ, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it for the day immediately preceding such issuance or sale, the day of such issuance or sale and the day immediately after such issuance or sale. If the Common Stock is listed or admitted to trading on a national securities exchange and also quoted on the NASDAQ National Market, the Market Price shall be determined as hereinabove provided by reference to the prices reported in the NASDAQ National Market; provided that if the Common Stock is listed or admitted to trading on the New York Stock Exchange, the Market Price shall be determined as hereinabove provided by reference to the prices reported by such exchange. (b) OPTIONS, RIGHTS, WARRANTS AND CONVERTIBLE AND EXCHANGEABLE SECURITIES. Except in the case of the Company issuing rights to subscribe for shares of Common Stock distributed pursuant to Paragraph 7(j) hereof, if the Company shall at any time after the Closing Date issue options, rights or warrants to subscribe for shares of Common Stock, or issue any Securities 12 convertible into or exchangeable for shares of Common Stock, in each case other than the issuances or sales referred to in Paragraph 7(f) hereof, (i) for a consideration per share less than the lesser of (a) the Warrant Price in effect immediately prior to the issuance of such options, rights or warrants, or such convertible or exchangeable securities, and (b) the Market Price on the trading day immediately preceding such issuance, or (ii) without consideration, the Warrant Price in effect immediately prior to the issuance of such options, rights or warrants, or such convertible or exchangeable securities, as the case may be, shall be reduced to a price determined by making a computation in accordance with the provisions of Paragraph 7(a) hereof, provided that: (i) The aggregate maximum number of shares of Common Stock, as the case may be, issuable under all the outstanding options, rights or warrants shall be deemed to be issued and outstanding at the time such outstanding options, rights or warrants were issued, and for a consideration equal to the minimum purchase price per share provided for in the options, rights or warrants at the time of issuance, plus the consideration (determined in the same manner as consideration received on the issue or sale of shares in accordance with the terms of Paragraph 7(a) hereof), if any, received by the Company for the options, rights or warrants, and if no minimum price is provided in the options, rights or warrants, then the consideration shall be equal to zero; provided, however, that upon the expiration or other termination of the options, rights or warrants, if any thereof shall not have been exercised, the number of shares of Common Stock deemed to be issued and outstanding pursuant to this subparagraph (b) (and for the purposes of subparagraph (v) of Paragraph 7(a) hereof) shall be reduced by such number of shares as to which such options, warrants and/or rights shall have expired or terminated unexercised, and such number of shares shall no longer be deemed to be issued and outstanding, and the Warrant Price then in effect shall forthwith be readjusted and thereafter be the price which it would have been had adjustment been made on the basis of the issuance only of shares actually issued upon the exercise of those options, rights or warrants as to which the exercise rights shall not have expired or terminated unexercised. (ii) The aggregate maximum number of shares of Common Stock issuable upon conversion or exchange of any convertible or exchangeable securities shall be deemed to be issued and outstanding at the time of issuance of such Securities, and for a consideration equal to the consideration (determined in the same manner as consideration received on the issue or sale of shares of Common Stock in accordance with the terms of Paragraph 7(a) hereof) received by the Company for such Securities, plus the minimum consideration, if any, receivable by the Company upon the conversion or exchange thereof; provided, however, that upon the expiration or other termination of the right to convert or exchange 13 such convertible or exchangeable securities (whether by reason of redemption or otherwise), the number of shares deemed to be issued and outstanding pursuant to this subparagraph (ii) (and for the purpose of subparagraph (v) of Paragraph 7(a) hereof) shall be reduced by such number of shares as to which the conversion or exchange rights shall have expired or terminated unexercised, and such number of shares shall no longer be deemed to be issued and outstanding, and the Warrant Price then in effect shall forthwith be readjusted and thereafter be the price which it would have been had adjustment been made on the basis of the issuance only of the shares actually issued upon the conversion or exchange of those convertible or exchangeable securities as to which the conversion or exchange rights shall not have expired or terminated unexercised. No adjustment will be made pursuant to this subparagraph (ii) upon the issuance by the Company of any convertible or exchangeable securities pursuant to the exercise of any option, right or warrant exercisable therefor, to the extent that adjustments in respect of such options, rights or warrants were previously made or will be made pursuant to the provisions of subparagraph (i) of this subparagraph 7(b). (iii) If any change shall occur in the price per share provided for in any of the options, rights or warrants referred to in subparagraph (i) of this Paragraph 7(b), or in the price per share at which the Securities referred to in subparagraph (ii) of this Paragraph 7(b) are convertible or exchangeable, or if any such option, rights or warrants are exercised at a price greater than the minimum purchase price provided for in such options, rights or warrants, or any such Securities are converted or exercised for more than the minimum consideration receivable by the Company upon such conversion or exchange, the options, rights or warrants or conversion or exchange rights, as the case may be, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued pursuant to the exercise or conversion or exchange thereof, and the Company shall be deemed to have issued upon such date new options, rights or warrants or convertible or exchangeable securities at the new price in respect of the number of shares issuable upon the exercise of such options, rights or warrants or the conversion or exchange of such convertible or exchangeable securities; PROVIDED, HOWEVER, that no adjustment shall be made pursuant to this subparagraph (iii) with respect to any change in the price per share provided for in any of the options, rights or warrants referred to in subparagraph (i) of this Paragraph 7(b), or in the price per share at which the Securities referred to in subparagraph (ii) of this Paragraph 7(b) are convertible or exchangeable, which change results from the application of the anti-dilution provisions thereof in connection with an event for which, subject to subparagraph (iv) of Paragraph 7(f), an adjustment to the Warrant Price and the number of Securities issuable upon exercise of the Warrants will be required to be made pursuant to this Paragraph 7. 14 (c) SUBDIVISION AND COMBINATION. In case the Company shall at any time after the Closing Date subdivide or combine the outstanding shares of Common Stock, the Warrant Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. (d) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the Warrant Price pursuant to the provisions of this Paragraph 7, the number of shares of Common Stock (but not the number of Warrants, which are subject to adjustment as set forth in the Warrant Agreement) issuable upon the exercise of the Underwriter's Option shall be adjusted to the nearest full whole number by multiplying a number equal to the Warrant Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of the Underwriter's Option immediately prior to such adjustment and dividing the product so obtained by the adjusted Warrant Price. (e) RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case of any reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in the case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of the property of the Company as an entirety, the Holder shall thereafter have the right, upon exercise of the Underwriter's Option, to purchase the kind and number of shares of stock and other Securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance as if the Holder were the owner of the shares of Common Stock underlying the Underwriter's Option immediately prior to any such events (but not the shares of Common Stock issuable upon exercise of any Warrants underlying the Underwriter's Option) at a price equal to the product of (x) the number of shares issuable upon exercise of the Underwriter's Option (but not the shares of Common Stock issuable upon exercise of any Warrants underlying the Underwriter's Option) and (y) the Warrant Price in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance as if such Holder had exercised the Underwriter's Option. (f) NO ADJUSTMENT OF WARRANT PRICE IN CERTAIN CASES. Notwithstanding anything herein to the contrary, no adjustment of the Warrant Price shall be made: 15 (i) Upon the issuance or sale of the Underwriter's Option, the shares of Common Stock or Warrants issuable upon the exercise of the Underwriter's Option or the shares of Common Stock issuable upon exercise of the Warrants underlying the Underwriter's Option; or (ii) Upon the issuance or sale of (A) the shares of Common Stock or Warrants issued by the Company in the Public Offering (including pursuant to the Underwriter's overallotment option) or other shares of Common Stock or warrants issued by the Company upon consummation of the SPO, (B) the shares of Common Stock (or other Securities) issuable upon exercise of Warrants; or (iii) Upon (A) the issuance of options pursuant to the Company's employee stock option plan in effect on the date hereof or as hereafter amended in accordance with the terms thereof or any other employee or executive stock option plan approved by shareholders of the Company or the issuance or sale by the Company of any shares of Common Stock pursuant to the exercise of any such options, or (B) the issuance or sale by the Company of any shares of Common Stock pursuant to the exercise of any options or warrants issued and outstanding on the date of closing of the sale of Common Stock and Warrants pursuant to the Public Offering or (C) the issuance or sale by the Company of any shares of Common Stock upon the conversion of any convertible securities of the Company or (D) as part of a merger, consolidation or other corporate acquisition or business combination; or (iv) Upon the issuance or sale of any Securities of the Company in an underwritten transaction or in any transaction where the price of the securities to be issued or sold in such transaction is determined by an investment banker or placement agent; or (v) If the amount of said adjustment shall be less than two cents (2 CENTS) per share of Common Stock. (g) ADJUSTMENT OF WARRANTS UNDERLYING UNDERWRITER'S OPTION. With respect to the Warrants underlying the Underwriter's Option, the exercise price of such Warrants and the number of shares of Common Stock purchasable pursuant to such Warrants shall be automatically adjusted in accordance with the applicable provisions of the Warrant Agreement, upon the occurrence, at any time after the date hereof, of any of the events described in the Warrant Agreement requiring such adjustment, with the same force and effect as if such Warrants had been issued as of this date, 16 whether or not such Warrants shall have been exercised (or exercisable) at the time of the occurrence of such event and whether or not such Warrants shall be issued and outstanding at the time of the occurrence of such event. Thereafter, such Warrants shall be exercisable at such adjusted Warrant's exercise price for such adjusted number of shares of Common Stock or other [UNITS], properties or rights. (h) REDEMPTION OF UNDERWRITER'S OPTION. Notwithstanding anything to the contrary contained in this Agreement or elsewhere, the Underwriters Option cannot be redeemed by the Company under any circumstances. (i) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO OUTSTANDING SECURITIES. In the event that the Company shall at any time after the Closing Date and prior to the exercise and expiration of the Underwriter's Option declare a dividend (other than a dividend consisting solely of shares of Common Stock or a cash dividend or distribution payable out of current or retained earnings) or otherwise distribute to the holders of Common Stock any monies, assets, property, rights, evidences of indebtedness, Securities(other than such a cash dividend or distribution or dividend consisting solely of shares of Common Stock), whether issued by the Company or by another person or entity, or any other thing of value, the Holders of the unexercised Underwriter's Option shall thereafter be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise thereof, to receive, upon the exercise of such Underwriter's Option, the same monies, property, assets, rights, evidences of indebtedness, Securities or any other thing of value that they would have been entitled to receive at the time of such dividend or distribution as if the Holders were the owners of the shares of Common Stock underlying the Underwriter's Option (but not the shares of Common Stock issuable upon exercise of any Warrants underlying the Underwriter's Option). At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Paragraph 7(i). (j) SUBSCRIPTION RIGHTS FOR SHARES OF COMMON STOCK OR OTHER SECURITIES. In case the Company shall at any time after the date hereof and prior to the exercise of the Underwriter's Option in full issue any rights to subscribe for shares of Common Stock or any other Securities of the Company to all the holders of Common Stock of the Company, the Holders of the unexercised Underwriter's Option shall be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise of the Underwriter's Option, to receive such rights at the time such rights are distributed to the other shareholders of the Company but only to the extent of the number of shares of Common Stock, if any, for which the Underwriter's Option remains exercisable. 17 (k) NOTICE IN EVENT OF DISSOLUTION. In case of the dissolution, liquidation or winding-up of the Company, all rights under the Underwriter's Option shall terminate on a date fixed by the Company, such date to be no earlier than ten (10) days prior to the effectiveness of such dissolution, liquidation or winding-up and not later than five (5) days prior to such effectiveness. Notice of such termination of purchase rights shall be given to the last registered Holder of the Underwriter's Option, as the same shall appear on the books and records of the Company, by registered mail at least thirty (30) days prior to such termination date. (l) COMPUTATIONS. The Company may retain a firm of independent public accountants (who may be any such firm regularly employed by the Company) to make any computation required under this Paragraph 7, and any certificate setting forth such computation signed by such firm shall be conclusive evidence of the correctness of any computation made under this Paragraph 7. In addition, the Chief Financial Officer of the Company may make any computations required by this Paragraph 7 and any certificate setting forth such computation signed by the Chief Financial Officer of the Company shall be conclusive evidence of the correctness of any computation made under this Paragraph 7. 8. FRACTIONAL SHARES. (a) The Company shall not be required to issue fractional shares of Common Stock or fractional Warrants on the exercise of this Underwriter's Option, provided, however, that if the Holder exercises the Underwriter's Option in full, any fractional shares of Common Stock shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock. (b) The Holder of this Underwriter's Option, by acceptance hereof, expressly waives his right to receive any fractional share of Common Stock or fractional Warrant upon exercise of this Underwriter's Option. 9. REDEMPTION OF WARRANTS UNDERLYING THE UNDERWRITER'S OPTION The Warrants underlying the Underwriter's Option are redeemable by the Company upon the terms and conditions set forth in the Warrant Agreement. 10. MISCELLANEOUS. (a) This Underwriter's Option shall be governed by and in accordance with the laws of the State of New York without regard to the conflicts of law principles thereof. (b) All notices, requests, consents and other communications hereunder shall be made in writing and shall be deemed to have been duly made when delivered, or mailed by 18 registered or certified mail, return receipt requested: (i) if to a Holder, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, 11601 Wilshire Boulevard, 21st Floor, Los Angeles, California 90025. (c) The Company and the Underwriter may from time to time supplement or amend this Underwriter's Option without the approval of any other Holders in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to add any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriter may deem necessary or desirable and which the Company and the Underwriter deem not to materially adversely affect the interest of the Holders. (d) All the covenants and provisions of this Underwriter's Option by or for the benefit of the Company and the Holders shall bind and inure to the benefit of their respective successors and assigns hereunder. (e) Nothing in this Underwriter's Option shall be construed to give to any person or corporation other than the Company and the Underwriter and any other registered Holder or Holders, any legal or equitable right, and this Underwriter's Option shall be for the sole and exclusive benefit of the Company and the Underwriter and any other Holder or Holders. (f) This Underwriter's Option may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Underwriter's Warrant to be signed by its duly authorized officer and this Underwriter's Option to be dated , 1996. THE KUSHNER-LOCKE COMPANY By: Donald Kushner, Co-Chief Executive Officer Agreed, acknowledged and accepted this ____ day of ___________, 1996. LEW LIEBERBAUM & CO., INC. By:_________________________ [Name, title] 19 PURCHASE FORM (To be signed only upon exercise of the Underwriter's Option) The undersigned, the Holder of the foregoing Underwriter's Option, hereby irrevocably elects to exercise the purchase rights represented by such Underwriter's Option for, and to purchase thereunder,____ Units consisting of two shares of Common Stock and one Warrant of The Kushner-Locke Company and herewith makes payment of $________ therefor, and requests that the certificates for Common Stock and Warrants be issued in the name(s) of, and delivered to ________________________________ whose address(es) is (are) _____________________________________________ and whose social security or taxpayer identification number is . Dated: __________________ _________________________ (Name of Holder) _________________________* (Signature of Holder) _________________________ (Address) * Signature must conform in all respects to name of registered Holder. 20 TRANSFER FORM (To be signed only upon transfer of the Underwriter's Option) For value received, the undersigned hereby sells, assigns, and transfers unto _____________________ the right to purchase ______ Units consisting of two shares of Common Stock and one Warrant of The Kushner-Locke Company represented by the foregoing Underwriter's Option to the extent of __________ Units, and appoints ________________, attorney to transfer such rights on the books of The Kushner-Locke Company with full power of substitution in the premises. Dated: __________________ _________________________ (Name of Holder) _________________________* (Signature of Holder) _________________________ (Address) In the presence of: _________________________ _________________________ * Signature must conform in all respects to name of registered Holder. EX-5 5 EX 5 OPINION OF KAYE, SCHOLER, ET AL. EXHIBIT 5 [Kaye, Scholer, Fierman, Hays & Handler, LLP Letterhead] July __, 1996 Board of Directors The Kushner-Locke Company 11601 Wilshire Blvd., 21st Floor Los Angeles, California 90025 Re: Registration Statement on Form S-2 ---------------------------------- Gentlemen: In connection with the Registration Statement on Form S-2 (as amended, the "Registration Statement") filed by The Kushner-Locke Company, a California corporation (the "Company"), with the Securities and Exchange Commission (the "Commission") for the purpose of registering under the Securities Act of 1933, as amended (the "Act"), units ("Units") consisting of two shares of the Company's common stock, no par value (the "Common Stock"), and one of the Company's Class C Redeemable Common Stock Purchase Warrants (the "Warrants"), we have examined such corporate records, certificates and other documents, upon which we have relied, and reviewed such questions of law as we have deemed necessary or appropriate for the purposes of this opinion. On the basis of such examination and review, we advise you that the Common Stock issuable as part of the Units, upon the issuance, delivery and payment therefore in the manner contemplated by the Registration Statement, and the Common Stock issuable upon the exercise of the Warrants, upon the issuance, delivery and payment therefore in the manner contemplated by the Registration Statement, will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement, and to all references to our firm included in such Registration Statement. In giving such opinion and consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder. Very truly yours, EX-10.57 6 EX 10.57 CREDIT, SECURITY, GUARANTY AND PLEDGE AGR COMPOSITE COPY _________________________________________________________________ _________________________________________________________________ CREDIT, SECURITY, GUARANTY AND PLEDGE AGREEMENT DATED AS OF JUNE 19, 1996 AMONG THE KUSHNER-LOCKE COMPANY as Borrower, THE GUARANTORS NAMED HEREIN AND THE LENDERS NAMED HEREIN WITH CHEMICAL BANK, AS AGENT AND CHEMICAL BANK, AS FRONTING BANK _________________________________________________________________ _________________________________________________________________ CREDIT, SECURITY, GUARANTY AND PLEDGE AGREEMENT, dated as of June 19, 1996 (as amended, supplemented or otherwise modified, renewed or replaced from time to time, the "Credit Agreement"), among THE KUSHNER-LOCKE COMPANY, a California corporation ("Borrower"), the Guarantors named herein, the Lenders referred to herein, CHEMICAL BANK, a New York banking corporation, as Agent (the "Agent") for the Lenders and CHEMICAL BANK as Fronting Bank (the "Fronting Bank"). INTRODUCTORY STATEMENT All terms not otherwise defined above or in this Introductory Statement are as defined in Article 1 hereof, or as defined elsewhere herein. The Borrower has requested that the Lenders make available a $40,000,000 three-year secured revolving credit facility, which will be used to (i) refinance outstanding obligations as of the Closing Date under the Imperial Credit Agreement; (ii) finance the production, acquisition and distribution of television product (including, without limitation, infomercials), feature films and video product and rights therein; and (iii) fund general working capital requirements. To provide assurance for the repayment of the Loans and other Obligations of the Borrower hereunder, the Borrower and the Guarantors will provide or will cause to be provided to the Agent for the benefit of the Lenders, the following (each as more fully described herein): (i) a security interest in the Collateral pursuant to Article 8 hereof; (ii) a guaranty of the Obligations pursuant to Article 9 hereof; and (iii) a pledge of the Pledged Securities pursuant to the Article 10 hereof. Subject to the terms and conditions set forth herein, the Agent is willing to act as agent for the Lenders and each Lender is willing to make Loans to the Borrower and participate in the Letters of Credit in amounts not in excess of its Commitment hereunder, all as set forth on the Schedule of Commitments. Accordingly, the parties hereto hereby agree as follows: 1. DEFINITIONS For the purposes hereof unless the context otherwise requires, all Section references herein shall be deemed to correspond with Sections herein, the following terms shall have the meanings indicated, all accounting terms not otherwise defined herein shall have the respective meanings accorded to them under GAAP and all terms defined in the UCC and not otherwise defined herein shall have the respective meanings accorded to them therein. Unless the context otherwise requires, any of the following terms may be used in the singular or the plural, depending on the reference: "ACCEPTABLE DOMESTIC ACCOUNT DEBTOR" shall mean any Person listed as such on Schedule 2 hereto (as modified from time to time in accordance with Section 2.16). "ACCEPTABLE FOREIGN ACCOUNT DEBTOR" shall mean any Person listed as such on Schedule 2 hereto (as modified from time to time in accordance with Section 2.16). "ACCEPTABLE L/C" shall mean an irrevocable letter of credit which (i) is in form and on terms acceptable to the Agent, (ii) is payable in Dollars at an office of the issuing or confirming bank in New York City (or another city acceptable to the Agent in its sole discretion), (iii) is payable to a Collection Account for the item of Product to which the letter of credit relates, (iv) is issued or confirmed by (a) any Lender; (b) any commercial bank that has (or which is the principal operating subsidiary of a holding company which has) as of the time such letter of credit is issued, public debt outstanding with a rating of at least "A" (or the equivalent of an "A") from one of the nationally recognized debt rating agencies; or (c) by any other bank which the Required Lenders may in their sole discretion determine to be of acceptable credit quality and (v) has an expiration date no earlier than two (2) months after the "Outside Delivery Date" for an item of Product (as set forth in the Completion Guarantee for such item of Product) to which the letter of credit relates. "AFFILIATE" shall mean any Person which, directly or indirectly, is controlled by or is under common control with another Person. For purposes of this definition, a Person shall be deemed to be "controlled by" another Person if such latter Person possesses, directly or indirectly, power either to direct or cause the direction of the management and policies of such controlled Person whether by contract or otherwise. - 2 - "AFFILIATED GROUP" shall mean a group of Persons, each of which is an Affiliate (other than by reason of having common directors or officers) of some other Person in the group. "AGENT" shall mean Chemical Bank, in its capacity as agent for the Lenders hereunder or such successor Agent as may be appointed pursuant to Section 12.12 of this Credit Agreement. "ALLOWABLE AMOUNT" shall mean, with respect to any Person or Affiliated Group, such amount as may be specified on Schedule 2 hereto as the maximum aggregate exposure for such Approved Account Debtor which, unless specified differently on Schedule 2, shall be unlimited for each Major Domestic Account Debtor, $2,500,000 for each Major Foreign Account Debtor and $500,000 for each Acceptable Foreign Account Debtor and for each Acceptable Domestic Account Debtor; PROVIDED, HOWEVER, that (i) the Agent may from time to time by written notice to the Borrower (which notice shall be prospective only, i.e. to the extent that reducing such Allowable Amount for any Approved Account Debtor would otherwise result in a mandatory prepayment by the Borrower under Section 2.9, such reduction shall not be given effect for purposes of such mandatory prepayment, but such reduction shall nevertheless be effective for all other purposes under this Credit Agreement immediately upon the Borrower's receipt of such notice) decrease such amount as the Agent, acting in good faith, may in its discretion deem appropriate or (ii) the Required Lenders may, by written notice to the Borrower, increase such amount as they may in their discretion deem appropriate. "ALTERNATE BASE RATE" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect for such day plus 1/2 of 1%. For purposes hereof, "PRIME RATE" shall mean the rate of interest per annum publicly announced from time to time by the Agent as its prime rate in effect at its principal office in New York City. "BASE CD RATE" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate. "THREE-MONTH SECONDARY CD RATE" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board of Governors of the Federal Reserve System of the United States through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under current practices of the Board of Governors of the Federal Reserve System of the United States, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on - 3 - such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. "STATUTORY RESERVES" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board of Governors of the Federal Reserve System of the United States and any other banking authority to which the Agent is subject for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "ALTERNATE BASE RATE LOAN" shall mean a Loan based on the Alternate Base Rate in accordance with the provisions of Article 2 hereof. "APPLICABLE LAW" shall mean all provisions of statutes, rules, regulations and orders of the United States or foreign governmental bodies or regulatory agencies applicable to the Person in question, and all orders and decrees of all courts and arbitrators in proceedings or actions in which the Person in question is a party. "APPLICABLE MARGIN" shall mean (i) with respect to that portion of outstanding Loans (other than Loans under a Special Production Tranche) which are supported by Tier 1 Borrowing Base, in the case of Alternate Base Rate Loans 2% per annum, or in the case of Eurodollar Loans, 3% per annum; (ii) - 4 - with respect to that portion of outstanding Loans which are supported by Tier 2 Borrowing Base, in the case of Alternate Base Rate Loans 3% per annum, or in the case of Eurodollar Loans 4% per annum; and (iii) with respect to that portion, if any, of outstanding Loans which were made under a Special Production Tranche, in the case of Alternate Base Rate Loans, 3% per annum, or in the case of Eurodollar Loans 4% per annum. "APPROVED ACCOUNT DEBTORS" shall mean in the aggregate the Major Domestic Account Debtors, Major Foreign Account Debtors, Acceptable Domestic Account Debtors, and Acceptable Foreign Account Debtors initially identified as such on Schedule 2 hereto. "APPROVED COMPLETION GUARANTOR" shall mean a financially sound and reputable completion guarantor approved by the Required Lenders. The Required Lenders hereby pre-approve as a completion guarantor (i) The Motion Picture Bond Co. (to the extent a completion guarantee is accompanied by a London Guarantee Insurance Company "cut-through"), (ii) Fireman's Fund Insurance Company, acting through its agent, International Film Guarantors L.P. (the general partner of which is International Film Guarantors, Inc.), (iii) Cinema Completions International Inc./Continental Casualty Company and (iv) Film Finances, Inc. (but only for items of Product with a budget of $7,500,000 or less and only to the extent the completion guarantee is accompanied by a Lloyd's of London "cut-through"); PROVIDED, HOWEVER, that any such pre-approval may be revoked by the Agent if deemed appropriate in its sole discretion or if so instructed by the Required Lenders, at any time upon 30 days prior written notice to the Borrower; but FURTHER, PROVIDED, that such pre-approval may not be revoked with regard to an item of Product if a Completion Guarantee has already been issued for such item of Product. "APPROVED COUNTRY" shall refer to countries, as determined from time to time in the sole and absolute discretion of the Agent, acting in good faith which have an acceptable risk profile as measured by political and economic stability; and, which are segregated by country risk as set forth in Schedule 3 hereto. "ASSESSMENT RATE" shall mean, for any day, the net annual assessment rate (rounded upwards, if necessary, to the next higher 1/100 of 1%) as most recently estimated by the Agent for determining the then current annual assessment payable by the Agent to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or such successor) of time deposits made in Dollars at the Agent's domestic offices. "ASSIGNMENT AND ACCEPTANCE" shall mean an agreement in the form of Exhibit K hereto, executed by the assignor, assignee and other parties as contemplated thereby. - 5 - "AUTHORIZED OFFICER" shall mean, with respect to the Borrower, the Chairman, Vice-Chairman, President, Vice President-Finance, Controller or Chief Operating Officer. "BANKRUPTCY CODE" shall mean the Bankruptcy Reform Act of 1978, as heretofore and hereafter amended, as codified at 11 U.S.C. Section 101 ET SEQ. "BORROWING" shall mean a group of Loans of a single interest rate type and as to which a single Interest Period is in effect on a single day. "BORROWING BASE" shall mean, at any date for which the amount thereof is to be determined, an amount equal to: (i) Tier 1 Borrowing Base; PLUS (ii) Tier 2 Borrowing Base; PLUS (iii) Tier 3 Borrowing Base; MINUS (iv) to the extent not already deducted in computing the foregoing, all amounts payable to third parties from or with regard to the amounts otherwise included in the Borrowing Base pursuant to (i), (ii) and (iii) above, including without limitation remaining related acquisition payments, set offs, profit participations, deferments, residuals, commissions and royalties; MINUS (v) the aggregate amount of all accrued but unpaid residuals owed to any trade guild, to the extent that the obligation of any Credit Party to pay such residuals is secured by a security interest in any Eligible Receivable included in the Borrowing Base, which security interest is not subordinated to the security interests of the Lenders; PROVIDED, HOWEVER, that the Borrowing Base credit attributable to any single obligor shall never exceed 25% of the total Borrowing Base. "BORROWING BASE CERTIFICATE" shall be as defined in Section 5.1(e). "BORROWING CERTIFICATE" shall mean a borrowing certificate, substantially in the form of Exhibit J hereto, to be delivered by the Borrower to the Agent in connection with each Borrowing. "BUDGETED NEGATIVE COST" shall mean, with respect to any item of Product, the amount of the cash budget (stated in Dollars) for such item of Product including all costs customarily - 6 - included in connection with the acquisition of all underlying literary and musical rights with respect to such item of Product and in connection with the preparation, production and Completion of such item of Product including costs of materials, equipment, physical properties, personnel and services utilized in connection with such item of Product, both "above-the-line" and "below-the-line", any Completion Guarantee fee, and all other items customarily included in negative costs, but excluding production fees and overhead charges payable to a Credit Party, finance charges and interest expense. "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or other day on which banks are required or permitted to close in the State of New York, State of California or in Amsterdam, The Netherlands; PROVIDED, HOWEVER, that when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in Dollar deposits on the London Interbank Market. "CAPITAL EXPENDITURES" shall mean, with respect to any Person for any period, the sum of (i) the aggregate of all expenditures (whether paid in cash or accrued as a liability) by such Person during that period which, in accordance with GAAP, are or should be included in "additions to property, plant or equipment or similar items included in cash flows" (including Capital Leases) and (ii) to the extent not covered by clause (i) hereof, the aggregate of all expenditures properly capitalized in accordance with GAAP by such Person to acquire, by purchase or otherwise, the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, in part or in whole, of any other Person (other than the portion of such expenditures allocable in accordance with GAAP to net current assets). "CAPITAL LEASE" shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in accordance with GAAP, is or should be accounted for as a capital lease on the balance sheet of that Person. "CASH COLLATERAL ACCOUNTS" shall be as defined in Section 11.1 hereof. "CASH EQUIVALENTS" shall mean (i) marketable securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (ii) time deposits, certificates of deposit, acceptances or prime commercial paper or repurchase obligations for underlying securities of the types described in clause (i) entered into with any Lender or any commercial bank having a short-term deposit rating of at least A-2 or the equivalent thereof by Standard & - 7 - Poor's Corporation or at least P-2 or the equivalent thereof by Moody's Investors Service, Inc. or (iii) commercial paper with a rating of A-1 or A-2 or the equivalent thereof by Standard & Poor's Corporation or P-1 or P-2 or the equivalent thereof by Moody's Investors Service, Inc. and in each case maturing within twelve months after the date of acquisition. "CHANGE IN CONTROL" shall mean either (i) any Person or group (such term being used as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) acquiring ownership or control of capital stock of the Borrower having voting power greater than the voting power at the time controlled by Donald Kushner and Peter Locke combined (other than an institutional investor eligible to report its holdings on Schedule 13G which holds no more than 15% of such voting power) or (ii) at any time individuals who at the date hereof constituted the Board of Directors of the Borrower (together with any Directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Borrower, as the case may be, was approved by a vote of the majority of the Directors still in office who were either Directors at the date hereof or whose election or nomination for election was previously so approved) ceasing for any reason to constitute a majority of the Board of Directors of the Borrower then in office. "CHANGE IN MANAGEMENT" shall mean that any Person other than Donald Kushner or Peter Locke shall be the Chief Executive Officer of the Borrower. "CHEMICAL CLEARING ACCOUNT" shall mean the account of the Agent (for the benefit of the Lenders) maintained at the office of the Agent at 270 Park Avenue, New York, New York 10017-2070, designated as the "Kushner-Locke Agent Bank Clearing Account", Account No. 323-220568. "CLOSING DATE" shall mean the earliest date on which all conditions precedent to the making of the initial Loans as set forth in Section 4.1 have been satisfied or waived. "CODE" shall mean the Internal Revenue Code of 1986 and the rules and regulations issued thereunder, as heretofore amended, as codified at 26 U.S.C. Section 1 ET SEQ or any successor provision thereto. "COLLATERAL" shall mean with respect to each Credit Party, all of such Credit Party's right, title and interest in personal property, tangible and intangible, wherever located or situated and whether now owned or hereafter acquired or created, including but not limited to goods, accounts, intercompany obligations, partnership and joint venture interests contract rights, documents, chattel paper, general intangibles, goodwill, - 8 - equipment, inventory, copyrights, trademarks, tradenames, insurance proceeds, cash and bank accounts and any proceeds thereon, products thereof or income therefrom, further including but not limited to all of such Credit Party's right, title and interest in and to each and every item of Product the scenario, screenplay or script upon which an item of Product is based, all of the properties thereof, tangible and intangible, and all domestic and foreign copyrights and all other rights therein and thereto, of every kind and character, whether now in existence or hereafter to be made or produced, and whether or not in possession of such Credit Party, including with respect to each and every item of Product and without limiting the foregoing language, each and all of the following particular rights and properties (to the extent they are owned or hereafter created or acquired by such Credit Party): (i) all scenarios, screenplays and/or scripts at every stage thereof; (ii) all common law and/or statutory copyright and other rights in all literary and other properties (hereinafter called "said literary properties") which form the basis of each item of Product and/or which are and/or will be incorporated into each item of Product, all component parts of each item of Product consisting of said literary properties, all motion picture rights in and to the story, all treatments of said story and said literary properties, together with all preliminary and final screenplays used and to be used in connection with the item of Product, and all other literary material upon which the item of Product is based or from which it is adapted; (iii) all rights in and to all music and musical compositions used and to be used in each item of Product, including, each without limitation, all rights to record, rerecord, produce, reproduce or synchronize all of said music and musical compositions in and in connection with motion pictures; (iv) all tangible personal property relating to each item of Product, including, without limitation, all exposed film, developed film, positives, negatives, prints, positive prints, answer prints, special effects, preparing materials (including interpositives, duplicate negatives, internegatives, color reversals, intermediates, lavenders, fine grain master prints and matrices, and all other forms of pre-print elements), sound tracks, cutouts, trims and any and all other physical properties of every kind and nature relating to such item of Product, whether in completed form or in some state of completion, and all masters, duplicates, drafts, versions, variations and copies of each thereof, in all formats whether on film, videotape, disk or otherwise - 9 - and all music sheets and promotional materials relating to such item of Product (collectively, the "PHYSICAL MATERIALS"); (v) all collateral, allied, subsidiary and merchandising rights appurtenant or related to each item of Product including, without limitation, the following rights: all rights to produce remakes or sequels or prequels to each item of Product based upon each item of Product, said literary properties or the theme of each item of Product and/or the text or any part of said literary properties; all rights throughout the world to broadcast, transmit and/or reproduce by means of television (including commercially sponsored, sustaining and subscription or "pay" television) or by any process analogous thereto, now known or hereafter devised, each item of Product or any remake or sequel or prequel to the item of Product; all rights to produce primarily for television or similar use a motion picture or series of motion pictures, by use of film or any other recording device or medium now known or hereafter devised, based upon each item of Product, said literary properties or any part thereof, including, without limitation, based upon any script, scenario or the like used in each item of Product; all merchandising rights including, without limitation, all rights to use, exploit and license others to use and exploit any and all commercial tieups of any kind arising out of or connected with said literary properties, each item of Product, the title or titles of each item of Product, the characters of each item of Product or said literary properties and/or the names or characteristics of said characters and including further, without limitation, any and all commercial exploitation in connection with or related to each item of Product, any remake or sequel thereof and/or said literary properties; (vi) all statutory copyrights, domestic and foreign, obtained or to be obtained on item of Product, together with any and all copyrights obtained or to be obtained in connection with each item of Product or any underlying or component elements of each item of Product, including, in each case without limitation, all copyrights on the property described in subparagraphs (i) through (v) inclusive, of this paragraph, together with the right to copyright (and all rights to renew or extend such copyrights) and the right to sue in the name of any of the Credit Parties for past, present and future infringements of copyright; (vii) all insurance policies and completion bonds connected with each item of Product and all proceeds which may be derived therefrom; - 10 - (viii) all rights to distribute, sell, rent, license the exhibition of and otherwise exploit and turn to account each item of Product, the Physical Materials and motion picture rights in and to said story, other literary material upon which each item of Product is based or from which it is adapted, and said music and musical compositions used or to be used in each item of Product; (ix) any and all sums, proceeds, money, products, profits or increases, including money profits or increases (as those terms are used in the UCC or otherwise) or other property obtained or to be obtained from the distribution, exhibition, sale or other uses or dispositions of each item of Product or any part of each item of Product, including, without limitation, all proceeds, profits, products and increases, whether in money or otherwise, from the sale, rental or licensing of each item of Product and/or any of the elements of each item of Product including from collateral, allied, subsidiary and merchandising rights; (x) the dramatic, nondramatic, stage, television, radio and publishing rights, title and interest in and to each item of Product, and the right to obtain copyrights and renewals of copyrights therein; (xi) the name or title of each item of Product and all rights of such Credit Party to the use thereof, including, without limitation, rights protected pursuant to trademark, service mark, unfair competition and/or the rules and principles of law and of any other applicable statutory, common law, or other applicable statutes, common law, or other rule or principle of law; (xii) any and all contract rights and/or chattel paper which may arise in connection with each item of Product; (xiii) all accounts and/or other rights to payment which such Credit Party presently owns or which may arise in favor of such Credit Party in the future, including, without limitation, any refund under a completion guaranty, all accounts and/or rights to payment due from exhibitors in connection with the distribution of each item of Product, and from exploitation of any and all of the collateral, allied, subsidiary, merchandising and other rights in connection with each item of Product; (xiv) any and all "general intangibles" (as that term is defined in the UCC) not elsewhere included in this definition, including, without limitation, any and all general intangibles consisting of any right to payment which may arise in the distribution or exploitation of any of the - 11 - rights set out herein, and any and all general intangible rights in favor of such Credit Party for services or other performances by any third parties, including actors, writers, directors, individual producers and/or any and all other performing or nonperforming artists in any way connected with each item of Product, any and all general intangible rights in favor of such Credit Party relating to licenses of sound or other equipment, licenses for any photograph or photographic process, and all general intangibles related to the distribution or exploitation of each item of Product including general intangibles related to or which grow out of the exhibition of each item of Product and the exploitation of any and all other rights in each item of Product set out in this definition; (xv) any and all goods including inventory (as that term is defined in the UCC) which may arise in connection with the creation, production or delivery of each item of Product and which goods pursuant to any production or distribution agreement or otherwise are owned by such Credit Party; (xvi) all and each of the rights, regardless of denomination, which arise in connection with the creation, production, completion of production, delivery, distribution, or other exploitation of each item of Product, including, without limitation, any and all rights in favor of such Credit Party, the ownership or control of which are or may become necessary or desirable, in the opinion of the Agent, in order to complete production of each item of Product in the event that the Agent exercises any rights it may have to take over and complete production of each item of Product; (xvii) any and all documents issued by any pledgeholder or bailee with respect to the item of Product or any Physical Materials (whether or not in completed form) with respect thereto; (xviii) any and all production accounts or other bank accounts established by such Credit Party with respect to such item of Product; (xix) any and all rights of such Credit Party under contracts relating to the production or acquisition of such item of Product; and (xx) any and all rights of such Credit Party under Distribution Agreements relating to each item of Product. "COLLECTION ACCOUNTS" shall mean the accounts referred to in Section 8.3. - 12 - "COLLECTION BANK" shall mean Chemical Bank or such other bank acceptable to the Agent. "COMMITMENT" shall mean the commitment of each Lender to make Loans to the Borrower and participate in Letters of Credit from the Initial Date applicable to such Lender through the Commitment Termination Date up to an aggregate amount, at any one time, not in excess of the amount set forth (i) opposite its name in the Schedule of Commitments appearing in Schedule 1 hereto, or (ii) in any applicable Assignment and Acceptance(s) to which it may be a party, as the case may be, as such amount may be reduced from time to time in accordance with the terms of this Credit Agreement. "COMMITMENT FEE" shall have the meaning given such term in Section 2.5 hereof. "COMMITMENT TERMINATION DATE" shall mean the earlier to occur of (i) June 25, 1999 or (ii) such earlier date on which the Commitments shall terminate in accordance with Section 2.6 or Article 7 hereof. "COMPLETED" or "COMPLETION" shall mean with respect to any item of Product, that (a) either (i) sufficient elements have been delivered by the Borrower to, and accepted by, a Person (other than a Borrower or an Affiliate thereof) to permit such Person to exhibit the item of Product theatrically in the United States or (ii) the Borrower has certified to the Agent that an independent laboratory has in its possession a complete final 35 mm composite positive print or video master of the item of Product as finally cut, main and end titled, edited, scored and assembled with sound track printed thereon in perfect synchronization with the photographic action and fit and ready for theatrical exhibition and distribution, provided that if such certification shall not be verified to the Agent by such independent laboratory within 20 Business Days thereafter, such item of Product shall revert to being uncompleted until the Agent receives such verification, and (b) if such item of Product was acquired from a third party, the entire acquisition price or minimum advance shall have been paid to the extent then due and there is no condition or event (including, without limitation, the payment of money not yet due) the occurrence of which might result in the Borrower losing any of its rights in such item of Product. "COMPLETION GUARANTEE" shall mean a completion guarantee, in the Agent's customary form or otherwise in form and substance satisfactory to the Agent, issued by an Approved Completion Guarantor which names the Agent for the benefit of Lenders as a beneficiary thereof to the extent of the Borrower's financial interest in an item of Product. - 13 - "COMPLETION RESERVE" shall mean the portion of the Borrowing Base that has been reserved for Completion of uncompleted product (including without limitation, the payment of any portion of the acquisition price or minimum advance for any item of Product acquired from a third party the nonpayment of which would permit such third party to terminate the Borrower's rights in such item of Product, but excluding all Designated Pictures) for which receivables have been included in the Borrowing Base. The Completion Reserve shall be calculated by subtracting the aggregate amounts applied to the strike prices of self-produced product and acquisition prices and/or minimum guarantees for acquired product from the aggregate strike prices, acquisition prices, and minimum guarantees for all such items of Product. "CONCENTRATION ACCOUNT" shall mean the account referred to in Section 8.3. "CONSOLIDATED" shall mean financial information of the Borrower and its Subsidiaries consolidated in accordance with GAAP. "CONSOLIDATED CAPITAL BASE" shall mean the sum of (i) Stockholders' Equity and (ii) Subordinated Debt MINUS (x) the aggregate book value of all items of Product with a negative cost of more than $1,500,000 which remain unreleased more than 12 months after Completion. "CONSOLIDATED INTEREST EXPENSE" shall mean for any period for which such amount is being determined, total interest expense paid or payable in cash (including that properly attributable to Capital Leases in accordance with GAAP but excluding in any event all capitalized interest and amortization of debt discount and debt issuance costs) of the Borrower and its Consolidated Subsidiaries on a consolidated basis including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net cash costs (or net profits) under Interest Rate Protection Agreements, net of interest received in cash. "CONSOLIDATED NET INCOME" shall mean, for any period for which such amount is being determined, the net income (or loss) of the Borrower and its Consolidated Subsidiaries during such period, determined on a Consolidated basis for such period taken as a single accounting period in accordance with GAAP, PROVIDED that there shall be excluded (i) income (or loss) of any Person (other than a Consolidated Subsidiary) in which the Borrower or any of its Consolidated Subsidiaries has an equity investment or comparable interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or any of its Consolidated Subsidiaries by such Person - 14 - during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Consolidated Subsidiary of the Borrower or is merged into or Consolidated with the Borrower or any of its Consolidated Subsidiaries or the Person's assets are acquired by the Borrower or any of its Consolidated Subsidiaries and (iii) the income of any Consolidated Subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Consolidated Subsidiary of its income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Consolidated Subsidiary. "CONSOLIDATED SUBSIDIARIES" shall mean all Subsidiaries of a Person which are required to be Consolidated with such Person for financial reporting purposes in accordance with GAAP. "CONTRIBUTION AGREEMENT" shall mean a Contribution Agreement executed by the Guarantors substantially in the form of Exhibit H hereto, as the same may be amended, supplemented or otherwise modified from time to time. "CONTROLLED GROUP" shall mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with any Credit Party, are treated as a single employer under Section 414(b), (c), (m) or (o) of the Code. "CONVERTIBLE SUBORDINATED DEBENTURES" shall mean (i) the Convertible Subordinated Debentures due 2000, Series A and Series B, (ii) the 8% Convertible Subordinated Debentures due 2000 and (iii) the 9% Convertible Subordinated Debentures due 2002, issued by the Borrower prior to the date hereof. "COPYRIGHT SECURITY AGREEMENT" shall mean the Copyright Security Agreement, substantially in the form of Exhibit E-1 hereto as the same may be amended or supplemented from time to time by delivery of a Copyright Security Agreement Supplement or otherwise. "COPYRIGHT SECURITY AGREEMENT SUPPLEMENT" shall mean a Supplement to the Copyright Security Agreement substantially in the form of Exhibit E-2 hereto. "CREDIT PARTY" shall mean the Borrower or any of the Guarantors. "CURRENCY AGREEMENT" shall mean any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement designed to protect the Borrower against fluctuations in currency values. - 15 - "DEFAULT" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "DESIGNATED PICTURE" shall mean a theatrical motion picture Project (including motion pictures intended for foreign theatrical release but domestically released on cable television or direct-to-video) designated as such by the Borrower in a written notice delivered to the Agent and meeting all of the following criteria: (A) the Borrower shall have delivered a sources and uses statement demonstrating to the satisfaction of the Agent that at least 45% of the Budgeted Negative Cost of such Project will be covered by a minimum guaranty under acceptable domestic distribution arrangement(s) and no more than 17% of the budget is to be funded from loans which are supported by the Unsold Territory Credit for such Project, and (B) if such sources and uses statement shows that any portion of the budget for such Picture is to be funded from loans which are supported by the Unsold Territory Credit for such Project, the Borrower shall also have delivered to the Agent satisfactory evidence that (a) foreign presales have been concluded covering at least 19% of the budget and (b) the Borrower has concluded presales for at least two (2) of the territories listed in the definition of Estimated Value (at least one (1) of which shall be either France, Germany, Italy, Japan or the United Kingdom); PROVIDED that the Borrower may designate no more than six (6) Projects per year as Designated Pictures. For purposes of this definition, "PROJECT" shall mean one or more theatrical motion pictures which are financed and sold as a package, PROVIDED that the total maximum Production Exposure of each Project is not more than $20,000,000 and; PROVIDED, FURTHER, that no more than two (2) Projects per year may have a Production Exposure of more than $7,500,000. "DISTRIBUTION AGREEMENTS" shall mean (i) any and all agreements entered into by a Credit Party pursuant to which such Credit Party has sold, leased, licensed or assigned distribution rights or other exploitation rights to any item of Product to an un-Affiliated Person and (ii) any agreement hereafter entered into by a Credit Party pursuant to which such Credit Party sells, leases, licenses or assigns distribution rights to an item of Product to an un-Affiliated Person. "DOLLARS" and "$" shall mean lawful money of the United States of America. "EBIT" shall mean, for any period, for the Borrower and its Subsidiaries on a Consolidated basis, the sum for such period of (i) Consolidated Net Income, (ii) interest expense and (iii) provision for income taxes during such period, all as determined for such period in conformity with GAAP. - 16 - "ELIGIBLE ASSIGNEE" shall mean (i) a commercial bank organized under the laws of the United States, or any State thereof, and having total assets in excess of $1,000,000,000; (ii) a savings and loan association or savings bank organized under the laws of the United States, or any State thereof, and having a net worth of at least $100,000,000, calculated in accordance with GAAP; (iii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development ("OECD"), or a political subdivision of any such country, and having total assets in excess of $1,000,000,000, provided that such bank is acting through a branch, subsidiary or agency located in the country in which it is organized or another country which is also a member of the OECD; or (iv) the central bank of any country which is a member of the OECD. "ELIGIBLE L/C RECEIVABLE" shall have the same definition as an Eligible Receivable with the additional provision that an Acceptable L/C be delivered to the Agent for the full amount of the receivable but need not be with an Approved Account Debtor. "ELIGIBLE LIBRARY AMOUNT" shall be equal to the Borrower's share (net of participations) of the sum of (i) the book value of film costs as measured on a GAAP basis, minus; (ii) the book value of film costs for Product which is encumbered by liens other than those of this facility and certain other permitted liens arising in the ordinary course of production, minus; (iii) the book value of film costs for Product which is not Completed, minus; (iv) off-balance sheet receivables on Completed Product which are included in Tier 1 Borrowing Base, minus (v) production advances and deferred income to the extent not already deducted. "ELIGIBLE RECEIVABLES" shall mean, at any date at which the amount thereof is to be determined, an amount equal to the sum of the present values (discounted, in the case of amounts which are not due and payable within 12 months following the date of determination, on a quarterly basis at a rate of interest equal to the greater of (x) the Alternate Base Rate in effect on the date of the computation or (y) 10% per annum) of (a) all net amounts which pursuant to a binding agreement are contractually required to be paid to any Credit Party either unconditionally or subject only to normal delivery requirements, and which are reasonably expected by the Borrower to be payable and collected from Approved Account Debtors (including, without limitation, amounts which a distributor has reported to a Credit Party in writing (and such report has been forwarded to the Agent) will be paid to such Credit Party following receipt by the distributor of sums contractually required to be paid to the distributor from third parties) minus (b) the sum of (i) the following items (based on the Borrower's then best estimates): third party profit - 17 - participations, residuals, collection/ distribution expenses, commissions, home video costs, foreign withholding, remittance and similar taxes chargeable in respect of such accounts receivable, and any other projected expenses of such Credit Party arising in connection with such amounts and (ii) the outstanding amount of unrecouped advances made by a distributor to the extent subject to repayment by or adjustment pursuant to approved Distribution Agreements, but Eligible Receivables shall not include amounts which: (i) in the case of any single Approved Account Debtor, exceed the Allowable Amount with respect to such Approved Account Debtor; (ii) in the reasonable discretion of the Agent, are subject to material conditions precedent to payment (including a material performance obligation or a material executory aspect on the part of the Borrower or any other party or obligations contingent upon future events not within the Borrower's direct control); (iii) are attributable to receivables that are more than 90 days past due; (iv) are theatrical receivables due from any obligor in connection with the theatrical exhibition, distribution or exploitation of an item of Product that is still outstanding six months after its creation; (v) are in excess of $3,000,000 in the aggregate if they are to be paid in a currency other than Dollars unless hedged in a manner satisfactory to the Agent; (vi) have been included in the Borrower's estimated bad debts; (vii) are receivable from any obligor with respect to whom 10% or more of the total receivable amount from such obligor 120 or more days past due (other than the amounts that are being disputed or contested in good faith); (viii) are subject to a bona fide request for a material credit, adjustment, compromise, offset, counterclaim or dispute; PROVIDED, HOWEVER, that only the amount in question shall be excluded from such receivable; - 18 - (ix) are attributable to an item of Product in which the Borrower cannot warrant sufficient title to the underlying rights to justify such receivable; (x) are not subject to a first perfected security interest under the UCC (subject only to guild liens contemplated by clause (v) of the definition of Borrowing Base) in favor of the Agent (for the benefit of the Lenders); (xi) are determined by the Agent in its sole discretion, acting in good faith, upon written notice from the Agent to the Borrower and effective 10 days subsequent to the Borrower's receipt of such notice, to be unacceptable (it being understood that certain unacceptable receivables may be made acceptable and may be included in the Borrowing Base if secured by an Acceptable L/C); (xii) relate to items of Product as to which the Agent has not received a fully executed Laboratory Access Letter or Pledgeholder agreement for each laboratory holding physical elements sufficient to fully exploit the rights held by the Borrower in such item of Product; (xiii) will be subject to repayment to the extent not earned by performance; (xiv) are attributable to items of Product which have not been Completed (except that (1) if a Letter of Credit is issued in order to support the Borrower's minimum payment obligation to acquire distribution rights in such item of Product, amounts attributable to such rights may be treated as Eligible Receivables (even though the item of Product has not yet been Completed), PROVIDED THAT (A) proof of Completion of such item of Product must be presented in order to draw under the Letter of Credit, (B) the portion of the Borrowing Base attributable to such Eligible Receivables for such item of Product does not exceed the amount of such Letter of Credit for such item of Product, and (C) such amounts otherwise meet all of the applicable criteria for inclusion as Eligible Receivables, (2) if a Completion Guarantee has been issued for such item of Product and the Borrower otherwise is in compliance with Section 5.25, amounts attributable to such item of Product may be treated as Eligible Receivables (even though the item of Product has not yet been - 19 - Completed), PROVIDED THAT (A) the portion of the Borrowing Base attributable to such Eligible Receivables for such item of Product does not exceed the amounts attributable to such Completion Guarantee for such item of Product and (B) such amounts otherwise meet all of the applicable criteria for inclusion as Eligible Receivables, (3) with respect to an item of Product being produced by a third party where a Credit Party is not subject to a completion risk (i.e. payment by such Credit Party is conditioned on delivery), amount attributable to such item of Product may be treated as Eligible Receivables (even though the item of Product has not yet been Completed), PROVIDED THAT (A) the portion of the Borrowing Base attributable to such Eligible Receivables for such item of Product does not exceed the portion of the Completion Reserve attributable to such item of Product and (B) such amounts otherwise meet all of the applicable criteria for inclusion as Eligible Receivables, and (4) if a Completion Guarantee is not required for an item of Product being produced by a Credit Party, amounts attributable to such item of Product may be treated as Eligible Receivables (even though the item of Product has not yet been Completed) provided that such amounts otherwise meet all of the applicable criteria for inclusion as Eligible Receivables). Without limiting the foregoing, Eligible Receivables shall include amounts which are attributable to items of Product acquired from a third party pursuant to a Distribution Agreement if the entire acquisition price or minimum advance shall have been paid to the extent then due and there is no condition or event (including, without limitation, the payment of money not yet due) the occurrence of which might result in any Credit Party losing its rights in such item of Product, PROVIDED that all the conditions set forth in the definition of "Completed" have been satisfied and such items of Product are not otherwise excluded by clauses (i) through (xiii) and clause (xv) of this definition; or (xv) will not become due and payable until six months or more after the scheduled final maturity of the Credit Agreement. In the event the Agent notifies the Borrower that the Agent has determined that a Person or Affiliated Group is to be deleted as an Approved Account Debtor, no additional Eligible Receivable from such Person or Affiliated Group may be included - 20 - in the Borrowing Base subsequent to such notice unless the Agent thereafter determines that such Person or Affiliated Group is an Approved Account Debtor. In the event the Agent notifies the Borrower that the Agent has determined that the Allowable Amount with respect to an Approved Account Debtor is to be decreased, no additional Eligible Receivable from such Approved Account Debtor may be included in the Borrowing Base if such inclusion would result in the aggregate amount of Eligible Receivables from such Approved Account Debtor exceeding the Allowable Amount after giving effect to such reduction unless the Agent thereafter determines that the Allowable Amount may be increased. No item shall constitute an Eligible Receivable unless the Borrower shall have delivered to the Agent (A) executed copies of the Distribution Agreements for eligible accounts receivable in excess of $100,000 or which are requested by the Agent, (B) a summary checklist demonstrating the eligibility of the receivable, showing a summary of the terms and conditions, and the calculation for any possible deductions including but not limited to residuals and participations, for all eligible accounts receivable in excess of $1,000,000 or which are requested by the Agent and (C) to the extent not already delivered and requested by the Agent, copyright registration for the distribution rights, chain-of-title documents, acceptable insurance and security filings with respect to eligible accounts receivable. "ENVIRONMENTAL LAWS" shall mean any and all federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees or requirements of any Governmental Authority regulating, relating to or imposing liability or standards of conduct concerning any Hazardous Material or environmental protection or health and safety, as now or may at any time hereafter be in effect, including without limitation, the Clean Water Act also known as the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C. Section 1251 ET SEQ., the Clean Air Act ("CAA"), 42 U.S.C. Sections 7401 ET SEQ., the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA"), 7 U.S.C. Sections 136 ET SEQ., the Surface Mining Control and Reclamation Act ("SMCRA"), 30 U.S.C. Sections 1201 ET SEQ., the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 ET SEQ., the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), Public Law 99-499, 100 Stat. 1613, the Emergency Planning and Community Right to Know Act ("ECPCRKA"), 42 U.S.C. Section 11001 ET SEQ., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 ET SEQ., the Occupational Safety and Health Act as amended ("OSHA"), 29 Section 655 and Section 657, together, in each case, with any amendment thereto, and the regulations adopted pursuant thereto. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as heretofore and hereafter amended, as - 21 - codified at 29 U.S.C. Section 1001 ET SEQ. and the regulations promulgated thereunder. "ESTIMATED VALUE" shall mean with respect to any item of Product and any Unsold Major Foreign Territory, the estimated value attributable to such Major Foreign Territory, which value shall be calculated by multiplying the percentage set forth below for such Major Foreign Territory times the final budget for such item of Product: Major Foreign Estimated Value Territory (Percentage of the Final Budget) --------- -------------------------------- Australia 4% Benelux 3% France 8% Germany 10% Italy 8% Japan 10% Korea 5% Scandinavia 3% Spain 4% United Kingdom 9% The Agent (at its discretion) may reduce foregoing percentages proportionately with respect to all remaining Unsold Major Foreign Territories for any item of Product for which actual sales in the listed territories total less than the aggregate estimate for such sold territories based on the foregoing percentages. "EURODOLLAR LOAN" shall mean a Loan based on the LIBO Rate in accordance with the provisions of Article 2 hereof. "EVENT OF DEFAULT" shall have the meaning given such term in Article 7 hereof. "FEE LETTER" shall mean that certain letter agreement dated as of April 12, 1996 between the Borrower and the Agent relating to the payment of certain fees by the Borrower. "FRONTING BANK" shall mean as defined in the initial paragraph hereof. "FUNDAMENTAL DOCUMENTS" shall mean this Credit Agreement, the Notes, the Pledgeholder Agreements, the Laboratory Access Letters, the Copyright Security Agreement, the Copyright Security Agreement Supplements, the Trademark Security Agreement, the Instruments of Assumption and Joinder, the Notices of Assignment and Irrevocable Instruction, UCC financing statements and any other ancillary documentation which is required to be or - 22 - is otherwise executed by any of the Credit Parties and delivered to the Agent in connection with this Credit Agreement or any other Fundamental Document. "GAAP" shall mean generally accepted accounting principles consistently applied (except for accounting changes in response to FASB releases, or other authoritative pronouncements). "GOVERNMENTAL AUTHORITY" shall mean any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, or any court, in each case whether of the United States or a foreign jurisdiction. "GUARANTORS" shall mean all direct and indirect Subsidiaries of the Borrower now existing or hereafter acquired or created, but excluding 50/50 joint ventures. "GUARANTY" shall mean, as to any Person, any direct or indirect obligation of such Person guaranteeing or intended to guaranty any Indebtedness, Capital Lease, dividend or other monetary obligation ("primary obligation") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (a) for the purchase or payment of any such primary obligation or (b) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, or (iii) to purchase property, securities or services, in each case, primarily for the purpose of assuring the owner of any such primary obligation; PROVIDED, HOWEVER, that the term Guaranty shall not include endorsements for collection or collections for deposit, in either case in the ordinary course of business. The amount of any Guaranty shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder). "HAZARDOUS MATERIALS" shall mean any flammable materials, explosives, radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic substances, or similar materials defined in any Environmental Law. "IMPERIAL CREDIT AGREEMENT" shall mean the Third Amended and Restated Credit Agreement dated as of February 9, 1990, as amended and restated as of December 14, 1990, as of May 1, 1992 and as of August 31, 1993 among the Borrower, the additional individual borrowers referred to therein, the lenders - 23 - named therein and Imperial Bank, as agent, as the same has been amended through the date hereof. "INDEBTEDNESS" shall mean (without double counting), at any time and with respect to any Person, (i) indebtedness of such Person for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase price of property or services purchased (other than amounts constituting trade payables (payable within 90 days or such longer terms as may be customary in the industry) arising in the ordinary course of business); (ii) obligations of such Person in respect of letters of credit, acceptance facilities, or drafts or similar instruments issued or accepted by banks and other financial institutions for the account of such Person; (iii) obligations of such Person under Capital Leases; (iv) deferred payment obligations of such Person resulting from the adjudication or settlement of any claim or litigation and (v) Indebtedness of others of the type described in clauses (i), (ii), (iii) and (iv) hereof which such Person has (a) directly or indirectly assumed or guaranteed in connection with a Guaranty or (b) secured by a Lien on the assets of such Person, whether or not such Person has assumed such indebtedness. Indebtedness shall not include non-refundable advances made by a third-party distributor to "cash-flow" the production of an item of Product. "INITIAL DATE" shall mean (i) in the case of the Agent, the date hereof, (ii) in the case of each Lender which is an original party to this Credit Agreement, the date hereof and (iii) in the case of any other Lender, the effective date of the Assignment and Acceptance pursuant to which it became a Lender. "INSTRUMENTS OF ASSUMPTION AND JOINDER" shall mean the Instruments of Assumption and Joinder substantially in the form of Exhibit L pursuant to which Subsidiaries of the Borrower become parties to this Credit Agreement as contemplated by Section 6.24. "INTEREST PAYMENT DATE" shall mean (i) as to any Eurodollar Loan having an Interest Period of one, two, three months, the last day of such Interest Period, (ii) as to any Eurodollar Loan having an Interest Period of six months, the last day of such Interest Period and, in addition, the date during such Interest Period that would be the last day of an Interest Period commencing on the same day as the first day of such Interest Period but having a duration of three months and (iii) with respect to Alternate Base Rate Loans, the last Business Day of each March, June, September and December (commencing the last Business Day of June 1996). "INTEREST PERIOD" shall mean as to any Eurodollar Loan, the period commencing on the date of such Loan or the last day of the preceding Interest Period and ending on the numerically - 24 - corresponding day (or if there is no corresponding day, the last day) in the calendar month that is one, two, three or six months thereafter as the Borrower may elect; PROVIDED, HOWEVER, that (i) if any Interest Period would end on a day which shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless such next succeeding Business Day would fall in the next calendar month, in which case, such Interest Period shall end on the next preceding Business Day, (ii) no Interest Period may be selected which would end later than the Maturity Date and (iii) no Interest Period of six months may be selected unless consented to by all of the Lenders in their sole discretion. "INTEREST RATE PROTECTION AGREEMENTS" shall mean any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect any Credit Party against fluctuations in interest rates. "INVESTMENT" shall mean any stock, evidence of indebtedness or other securities of any Person, any loan, advance, contribution of capital, extension of credit or commitment therefor, including without limitation the guarantee of loans made to others (except for current trade and customer accounts receivable for services rendered in the ordinary course of business and payable in accordance with customary trading terms in the ordinary course of business), and any purchase of (i) any securities of another Person or (ii) any business or undertaking of any Person or any commitment or option to make any such purchase. "KEYMAN LIFE INSURANCE" shall mean the Kushner Life Insurance and the Locke Life Insurance. "KEYMAN LIFE INSURANCE ASSIGNMENT" shall mean the Assignment to the Agent of the Keyman Life Insurance as Collateral, in form and substance satisfactory to the Agent. "KLC/NEW CITY" shall mean KLC/New City, a California general partnership, the general partners of which are the Borrower and New City Releasing. "KUSHNER LIFE INSURANCE" shall mean the keyman life insurance policy on the life of Donald Kushner issued by Chubb Sovereign Life Insurance in a face amount of not less than $5,000,000, which policy is in form and substance satisfactory to the Agent, and any supplemental or replacement policies relating thereto. "L/C EXPOSURE" shall mean, at any time, the amount expressed in Dollars of the aggregate face amount of all drafts which may then or thereafter be presented by beneficiaries under - 25 - all Letters of Credit then outstanding plus (without duplication) the face amount of all drafts which have been presented under all Letters of Credit but have not yet been paid or have been paid but not reimbursed. "LABORATORY" shall mean any laboratory reasonably acceptable to the Agent, which is located in the United States, Canada or the United Kingdom and is a party to a Pledgeholder Agreement. "LABORATORY ACCESS LETTER" shall mean a letter agreement among (i) a Laboratory holding any elements of any Product to which a Credit Party has the right of access, (ii) such Credit Party and (iii) the Agent, substantially in the form of Exhibit G hereto or a form otherwise acceptable to the Agent. "LENDER" and "LENDERS" shall mean the financial institutions whose names appear at the foot hereof and any assignee of a Lender pursuant to Section 13.3(b). "LENDING OFFICE" shall mean, with respect to any of the Lenders, the branch or branches (or affiliate or affiliates) from which any such Lender's Eurodollar Loans or Alternate Base Rate Loans, as the case may be, are made or maintained and for the account of which all payments of principal of, and interest on, such Lender's Eurodollar Loans or Alternate Base Rate Loans are made, as notified to the Agent from time to time. "LETTER OF CREDIT" shall mean a letter of credit issued by the Fronting Bank pursuant to Section 2.15. "LIBO RATE" shall mean, with respect to the Interest Period for a Eurodollar Loan, an interest rate per annum equal to the quotient (rounded upwards to the next 1/100 of 1%) of (A) the average of the rates at which Dollar deposits approximately equal in principal amount to the Agent's portion of such Eurodollar Loan and for a maturity equal to the applicable Interest Period are offered to the Lending Office of the Agent in immediately available funds in the London Interbank Market for Eurodollars at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period divided by (B) one minus the applicable statutory reserve requirements of the Agent, expressed as a decimal (including without duplication or limitation, basic, supplemental, marginal and emergency reserves), from time to time in effect under Regulation D or similar regulations of the Board of Governors of the Federal Reserve System. It is agreed that for purposes of this definition, Eurodollar Loans made hereunder shall be deemed to constitute Eurocurrency Liabilities as defined in Regulation D and to be subject to the reserve requirements of Regulation D. - 26 - "LICENSING AGREEMENTS" shall mean agreements between a Credit Party and other Persons (who are not Affiliates of a Credit Party) pursuant to which such Credit Party grants licenses to such other Persons to distribute, broadcast or exhibit an item of Product. "LIEN" shall mean any mortgage, copyright mortgage, pledge, security interest, encumbrance, lien or charge of any kind whatsoever (including any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction or the agreement to grant a security interest at a future date). "LOANS" shall mean the Loans made hereunder in accordance with the provisions of Article 2, whether made as a Eurodollar Loan or an Alternate Base Rate Loan, as permitted hereby. "LOCKE LIFE INSURANCE" shall mean the keyman life insurance policy on the life of Peter Locke issued by Chubb Sovereign Life Insurance in a face amount not less than $5,000,000 as specified in, which policy is in form and substance satisfactory to the Agent, and any supplemental or replacement policies relating thereto. "MAJOR DOMESTIC ACCOUNT DEBTOR" shall mean any Person listed as such on Schedule 2 hereto (as modified from time to time in accordance with Section 2.16). "MAJOR FOREIGN ACCOUNT DEBTOR" shall mean any Person listed as such on Schedule 2 hereto (as modified from time to time in accordance with Section 2.16). "MARGIN STOCK" shall be as defined in Regulation U of the Board of Governors of the Federal Reserve System. "MATURITY DATE" shall mean June 25, 1999 or such earlier date, if any, on which the Loans shall become due and payable in accordance with the provisions of Article 7 hereto. "MULTIEMPLOYER PLAN" shall mean a plan described in Section 4001(a)(3) of ERISA. "NOTICE OF ASSIGNMENT AND IRREVOCABLE INSTRUCTIONS" shall mean the Notice of Assignment and Irrevocable Instructions substantially in the form of Exhibit I or in such other form as shall be acceptable to the Agent, including without limitation the inclusion of such notice and instructions in a Distribution Agreement. - 27 - "OBLIGATIONS" shall mean the obligation of the Borrower to make due and punctual payment of principal of and interest on the Loans, the Commitment Fee, reimbursement obligations in respect of Letters of Credit and all other monetary obligations of the Borrower to the Agent, the Fronting Bank or any Lender under this Credit Agreement, the Notes or any other Fundamental Document or the Fee Letter and all amounts payable by the Borrower to any Lender under any Interest Rate Protection Agreement or Currency Agreement, provided that the Agent shall have received written notice at least 10 days prior to execution of each such Interest Rate Protection Agreement or Currency Agreement. "PAY-PER-VIEW ESTIMATES" shall mean with respect to the Borrower or any Guarantor, the amount of all receivables which are estimated to be due to the Borrower or such Guarantor from Approved Account Debtors in connection with feature films which have aired on pay-per-view networks representing at least 10,000,000 addressable homes. The net amount of such estimated receivables for each such feature film which may be included as Pay-Per-View Estimates shall be the lesser of (i) the previous year's average pay-per-view amount paid per title to the Borrower and the Guarantors for each feature film (which average for the balance of 1996 shall be $75,000 per title) or (ii) the average pay-per-view amount paid per title to the Borrower and the Guarantors for the last six (6) feature films which have been available for pay-per-view exhibition for at least six (6) months, reduced in each case by the amount of any advance or other payment which may theretofore have been paid, or committed to be paid, to the Borrower or any Guarantor with respect to the pay-per-view exhibition of such feature film; PROVIDED HOWEVER, that the amount of the Pay-Per-Estimates for all such feature films shall never exceed $3,000,000 in the aggregate. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor thereto. "PERCENTAGE" shall mean, with respect to any Lender, its ratable share expressed as a percentage equal to the ratio obtained by dividing the applicable Commitment of such Lender by the applicable aggregate Commitments of the Lenders. "PERMITTED ENCUMBRANCES" shall mean Liens permitted under Section 6.2 hereof. "PERSON" shall mean any natural person, corporation, division of a corporation, partnership, trust, joint venture, association, company, estate, unincorporated organization or government or any agency or political subdivision thereof. "PHYSICAL MATERIALS" shall be as defined in the definition of "Collateral" hereof. - 28 - "PLAN" shall mean an employee benefit plan within the meaning of Section 3(2) of ERISA, other that a Multiemployer Plan, maintained by the Borrower or any member of the Controlled Group, or to which the Borrower or any member of the Controlled Group contributes or is required to contribute or any other plan covered by Title IV of ERISA that cover any employees of the Borrower or any member of the Controlled Group. "PLEDGED SECURITIES" shall mean all of the issued and outstanding capital stock directly or indirectly owned or controlled by the Borrower, as listed on Schedule 3.7(a). "PLEDGEHOLDER AGREEMENT" shall mean a Laboratory Pledgeholder Agreement among a Credit Party, the Agent, a third party completion guarantor (if there is one), and one or more Laboratories, substantially in the form of Exhibit D hereto, or in such other form as shall be acceptable to the Agent. "PLEDGORS" shall mean those Credit Parties identified as such on Schedule 3.7. "PREPAYMENT DATE" shall be as defined in Section 2.12(j). "PRINT AND ADVERTISING EXPENDITURES" shall mean the actual out-of-pocket print and advertising expenditures associated with an item of Product which the Borrower has undertaken to pay or has paid. "PRODUCT" shall mean any motion picture, film or video tape produced for theatrical, non-theatrical or television release or for release in any other medium, in each case whether recorded on film, videotape, cassette, cartridge, disc or on or by any other means, method, process or device whether now known or hereafter developed, with respect to which a Credit Party (i) is the initial copyright owner or (ii) acquires an equity interest or distribution rights. The term "item of Product" shall include, without limitation, the scenario, screenplay or script upon which such Product is based, all of the properties thereof, tangible and intangible, and whether now in existence or hereafter to be made or produced, whether or not in possession of the Credit Parties, and all rights therein and thereto, of every kind and character. "PRODUCTION ACCOUNT(s)" shall mean individually or collectively, as the context so requires, each demand deposit account(s) established by a Credit Party or Special Purpose Producer at a commercial bank located in the United States or otherwise acceptable to the Agent, for the sole purpose of paying the production costs of a particular item of Product or Designated Picture, as the case may be, and as to which the Approved Completion Guarantor for such item of Product or Designated Picture, as the case may be, has agreed in writing - 29 - that amounts deposited in such account shall be deemed available for production of such item of Product or Designated Picture, as the case may be, for purposes of the Completion Guarantee for such item of Product or Designated Picture, as the case may be. "PRODUCTION EXPOSURE" shall mean the Budgeted Negative Cost of an item of Product (net of amounts being cash-flowed by a third party unrelated to the Borrower pursuant to contractual arrangements acceptable to the Agent). "PRO RATA SHARE" shall mean, with respect to any Obligation or other amount, each Lender's pro rata share of such Obligation or other amount determined in accordance with such Lender's Percentage. "QUIET ENJOYMENT" shall be as defined in Section 8.13 hereof. "REPORTABLE EVENT" shall mean any reportable event as defined in Section 4043(c) of ERISA, other than a reportable event as to which provision for 30-day notice to the PBGC would be waived under applicable regulations had the regulations in effect on the Closing Date been in effect on the date of occurrence of such reportable event. "REQUIRED LENDERS" shall mean the Lenders holding in excess of 60% of the aggregate unpaid principal amount of Loans and L/C Exposure then outstanding or if no Loans and no Letters of Credit are then outstanding, the Lenders holding in excess of 60% of the Total Commitments. "RESTRICTED PAYMENT" shall mean (i) any distribution, dividend or other direct or indirect payment on account of shares of any class of stock of, partnership interest in, or any other equity interest of, a Credit Party, other than a dividend, distribution or other payment payable solely in additional shares of common stock, (ii) any redemption or other acquisition, re-acquisition or retirement by a Credit Party of any class of its own stock or other equity interest of a Credit Party or an Affiliate, now or hereafter outstanding, (iii) any payment made to retire, or obtain the surrender of any outstanding warrants, puts or options or other rights to purchase or acquire shares of any class of stock of, or any equity interest of a Credit Party, now or hereafter outstanding and (iv) any payment by a Credit Party of principal of, premium, if any, or interest on, or any redemption, purchase, retirement, defeasance, sinking fund or similar payment with respect to, any Subordinated Debt now or hereafter outstanding. "SCHEDULE OF COMMITMENTS" shall mean the schedule of the commitments of the Lenders set forth in Schedule 1 hereto. - 30 - "SPECIAL PRODUCTION TRANCHE" shall mean, with respect to each Designated Picture, a portion of the Total Commitments in an amount equal to the "strike price" or "production price" as set forth in the Completion Guarantee for such Designated Picture, reduced by sums already expended or to be cash flowed by an acceptable third party, which amount will be segregated and designated as the "Special Production Tranche" for such Designated Picture. "SPECIAL PURPOSE PRODUCER" shall mean a special purpose corporation formed solely for the purpose of producing a particular motion picture and controlled by the Borrower. "STOCKHOLDERS' EQUITY" shall mean the Consolidated capital, surplus and retained earnings of the Borrower and its Subsidiaries, subject to intercompany eliminations and reduced by the outstanding amount of any note received by the Borrower in payment for capital stock, all as determined in accordance with GAAP. "SUBORDINATED DEBT" shall mean all other Indebtedness of any of the Credit Parties subordinated to the Obligations pursuant to written agreements, containing interest rates, payment terms, maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and substance satisfactory to the Required Lenders. "SUBSIDIARY" shall mean with respect to any Person, any corporation, association, joint venture, partnership or other business entity (whether now existing or hereafter organized) of which at least a majority of the Voting Stock or other ownership interests having ordinary voting power for the election of directors (or the equivalent) is, at the time as of which any determination is being made, owned or controlled by such Person or one or more subsidiaries of such Person or by such Person and one or more subsidiaries of such Person. "TIER 1 BORROWING BASE" shall mean, at any date of determination, an amount equal to the aggregate (without double counting) of the following: (i) Ninety percent (90%) of Borrower's Eligible L/C Receivables; PLUS (ii) Ninety percent (90%) of Borrower's Eligible Receivables from Major Domestic Account Debtors; PLUS (iii) Eighty-five percent (85%) of Borrower's Eligible Receivables from Major Foreign Account Debtors; PLUS (iv) Eighty-five percent (85%) of Borrower's Eligible Receivables from Acceptable Domestic Account Debtors; PLUS - 31 - (v) Eighty percent (80%) of Eligible Receivables from Acceptable Foreign Account Debtors from the Approved Countries listed in Part A of Schedule 3 hereto; PLUS (vi) Fifty percent (50%) of Eligible Receivables from Acceptable Foreign Account Debtors from the Approved Countries listed in Part B of Schedule 3 hereto; PLUS (vii) Seventy-five percent (75%) of Pay-Per-View Estimates. "TIER 2 BORROWING BASE" shall mean, at any date of determination, an amount equal to fifteen percent (15%) of Eligible Library Amount, PROVIDED such amount shall not exceed $7,500,000. "TIER 3 BORROWING BASE" shall mean, at any date of determination, an amount equal to the aggregate of the following: (i) One hundred percent (100%) of Eligible Receivables from Disney, Fox, Viacom/Paramount, Sony, Turner, Universal or Warner Bros. which cover at least fifty percent (50%) of the budget of a Designated Picture being funded under a Special Production Tranche; PLUS (ii) Fifty percent (50%) of the Unsold Territory Credit for each Designated Picture being funded under a Special Production Tranche. "TOTAL COMMITMENTS" shall mean the aggregate amount of the Commitments then in effect of all of the Lenders as such amount may be reduced from time to time in accordance with the terms of this Credit Agreement. "TOTAL UNSUBORDINATED LIABILITIES" shall mean, for the Borrower and its Subsidiaries on a Consolidated basis, on the date such amount is being determined, the sum of (i) all items which in accordance with GAAP should be shown as liabilities on a balance sheet of the Borrower and its Subsidiaries on a Consolidated basis (excluding Subordinated Debt) and (ii) obligations of the Borrower and its Subsidiaries, on a Consolidated basis, under a negative pickup and similar obligations, whether or not such obligations would be classified as liabilities under GAAP. "TRADEMARK SECURITY AGREEMENT" shall mean a Trademark Security Agreement executed by the Credit Parties substantially in the form of Exhibit F hereto, as the same may be amended, supplemented or otherwise modified from time to time. - 32 - "UCC" shall mean the Uniform Commercial Code as in effect in the State of New York on the date of execution of this Credit Agreement. "UNSOLD MAJOR FOREIGN TERRITORY" shall mean with respect to any item of Product, each of the territories listed in the definition of "Estimated Value" as to which no binding Distribution Agreement has been entered into for such item of Product by the Borrower. "UNSOLD TERRITORY CREDIT" shall mean with respect to any Designated Picture being funded under the Special Production Tranche, the aggregate determined on a territory-by-territory basis for each Unsold Major Foreign Territory, of the lesser of (a) the Borrower's good faith estimate of the minimum guarantee to be obtained with respect to such Unsold Major Foreign Territory and (b) the Estimated Value of such Unsold Major Foreign Territory. "VOTING STOCK" shall mean the capital stock of an entity having ordinary voting power under ordinary circumstances to vote in the election of directors of such entity. 2. THE LOANS SECTION 2.1. LOANS. (a) Each Lender, severally and not jointly, agrees, upon the terms and subject to the conditions hereof, to make Loans to the Borrower, on any Business Day and from time to time from the Closing Date to but excluding the Commitment Termination Date, each in an aggregate principal amount which when added to the aggregate principal amount of all Loans then outstanding to the Borrower from such Lender, PLUS such Lender's Pro Rata Share of the then current L/C Exposure does not exceed such Lender's Commitment. Subject to Section 2.2, the Loans shall be made at such times as the Borrower shall request. (b) Subject to the terms and conditions of this Credit Agreement, the Borrower may borrow, repay and re-borrow amounts constituting the Commitments. (c) No Loan shall be made which would result in the sum of the aggregate amount of all outstanding Loans, PLUS the then current L/C Exposure, PLUS the unused portion of the Special Production Tranche for each Designated Picture, PLUS the Completion Reserve exceeding the lesser of (x) the then current amount of the Borrowing Base and (y) the Total Commitments then in effect. - 33 - (d) Tier 3 Borrowing Base may only be used to support Special Production Tranches and Loans thereunder, i.e. no Loan shall be made which would result in the sum of the aggregate amount of all outstanding Loans (other than Loans drawn under a Special Production Tranche for a Designated Picture) PLUS the then current L/C Exposure, PLUS the Completion Reserve exceeding the then current amount of the Borrowing Base (excluding the Tier 3 Borrowing Base). SECTION 2.2. MAKING OF LOANS. (a) Each Loan shall be an Alternate Base Rate Loan or a Eurodollar Loan as the Borrower may request subject to and in accordance with this Section 2.2. The Borrower shall give the Agent at least four Business Days' prior written, facsimile or telephonic (promptly confirmed in writing) notice of each Borrowing which is to consist of Eurodollar Loans, and at least two Business Days' prior written, facsimile or telephonic (promptly confirmed in writing) notice of each Borrowing which is to consist of Alternate Base Rate Loans. Each such notice in order to be effective must be received by the Agent not later than 3:00 p.m., New York City time on the day required and shall specify the date (which shall be a Business Day) on which such Loan is to be made, the aggregate principal amount of the requested Loan, and, if applicable, the portion of the Loan being made under a Special Production Tranche. Each such notice shall be irrevocable and shall specify whether the Borrowing then being requested is to consist of Alternate Base Rate Loans or Eurodollar Loans and in the case of Eurodollar Loans, the Interest Period or Interest Periods with respect thereto. If no election of an Interest Period is specified in such notice in the case of a Borrowing consisting of Eurodollar Loans, such notice shall be deemed to be a request for an Interest Period of one month. If no election is made as to the type of Loan, such notice shall be deemed a request for a Borrowing consisting of Alternate Base Rate Loans. No Borrowing shall consist of Eurodollar Loans if after giving effect thereto an aggregate of more than eight separate Eurodollar Loans would be outstanding hereunder with respect to each Lender (determined in accordance with Section 2.8(c) hereof). (b) The Agent shall promptly notify each Lender of its proportionate share of each Borrowing under this Section 2.2, the date of such Borrowing, the type of Loans being requested and the Interest Period or Interest Periods applicable thereto. On the borrowing date specified in such notice, each Lender shall make its share of the Borrowing available at the offices of Chemical Bank, Agent Bank Services Department, 140 East 45th St., 29th Floor, New York, NY 10017, Attention: Gloria Javier for credit to the Chemical Clearing Account no later than 1:00 p.m. New York City time in Federal or other immediately available funds. Upon receipt of the funds to be made available by the Lenders to fund - 34 - any Borrowing hereunder, the Agent shall disburse such funds by depositing the requested amounts into an account maintained with the Agent by the Borrower PROVIDED, HOWEVER, that (i) proceeds of the initial Loans which are used to repay loans outstanding under the Imperial Credit Agreement shall be applied by the Agent directly for such purpose, and (ii) if the Borrowing Certificate for any particular Borrowing indicates that it is to be used to fund the production of a Designated Picture, then the Agent shall deposit the proceeds of such Loan directly into the Production Account for such Designated Picture. (c) Each Lender may at its option fulfill its obligation to make Eurodollar Loans by causing a foreign branch or affiliate to fund such Eurodollar Loans, provided that any exercise of such option shall not affect the obligation of the Borrower to repay Loans in accordance with the terms hereof. Subject to the other provisions of this Section 2.2, Loans of more than one interest rate type may be outstanding at the same time. (d) Each Loan requested hereunder on any date shall be made by each Lender in accordance with its respective Percentage. (e) The amount of any Borrowing of new funds shall be in an aggregate principal amount of $500,000 (or such lesser amount as shall equal the available but unused portion of the Commitments) or such greater amount which is an integral multiple of $100,000; PROVIDED, HOWEVER that the amount of any Borrowing of new funds which shall be a Eurodollar Loan shall be in an aggregate principal amount of $1,500,000 or such greater amount which is an integral multiple of $100,000. (f) Notwithstanding the provisions of clause (a) above and/or the absence of a request from the Borrower that the Lenders make a Loan, the Required Lenders may direct the Lenders to make Loans and apply the proceeds thereof as follows: (i) if the Approved Completion Guarantor for any item of Product being produced by the Borrower or for which receivables are included in the Borrowing Base shall take over production of such item of Product pursuant to the Completion Guarantee with respect to such item of Product, to make Loans with respect to the production of such item of Product and pay the proceeds thereof directly to the completion guarantor to be used to finance the production and delivery of such item of Product pursuant to the terms of the Completion Guarantee; and (ii) if an Event of Default shall have occurred and be continuing, to make Loans with respect to any item - 35 - of Product being produced by the Borrower or for which receivables are included in the Borrowing Base and pay the proceeds thereof directly to Persons providing services in connection with the production, delivery and distribution of such Product so as to ensure Completion of such item of Product and/or the collection of Eligible Receivables. SECTION 2.3. NOTES. (a) The Loans made by each Lender hereunder shall be evidenced by a single promissory note substantially in the form of Exhibit A hereto (each a "NOTE" and collectively the "NOTES") in the face amount of each such Lender's Commitment, payable to the order of each such Lender, duly executed by the Borrower and dated the Closing Date. (b) Each of the Notes shall bear interest on the outstanding principal balance thereof as set forth in Section 2.4 hereof. Each Lender and the Agent on its behalf is hereby authorized by the Borrower, but not obligated, to enter the amount of each Loan and the amount of each payment or prepayment of principal or interest thereon in the appropriate spaces on the reverse of or on an attachment to the Notes; PROVIDED, HOWEVER, that the failure of any Lender or the Agent to set forth such Loans, principal payments or other information shall not in any manner affect the obligations of the Borrower to repay such Loans. SECTION 2.4. INTEREST ON NOTES. (a) In the case of a Eurodollar Loan, interest shall be payable at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the LIBO Rate plus the Applicable Margin. Interest shall be payable on each Eurodollar Loan on each applicable Interest Payment Date, at maturity and on the date of a conversion of such Eurodollar Loan to an Alternate Base Rate Loan. The Agent shall determine the applicable LIBO Rate for each Interest Period as soon as practicable on the date when such determination is to be made in respect of such Interest Period and shall notify the Borrower and the Lenders of the applicable interest rate so determined. Such determination shall be conclusive absent manifest error. (b) In the case of an Alternate Base Rate Loan, interest shall be payable at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365/366 days, as the case may be, during such times as the Alternate Base Rate is based upon the Prime Rate, and over a year of 360 days at all other times) equal to the Alternate Base Rate plus the Applicable - 36 - Margin. Interest shall be payable on each Alternate Base Rate Loan on each applicable Interest Payment Date, at maturity and on the date of a conversion of such Alternate Base Rate Loan to a Eurodollar Loan. (c) Anything in this Credit Agreement or the Notes to the contrary notwithstanding, the interest rate on the Loans shall in no event be in excess of the maximum permitted by Applicable Law. SECTION 2.5. COMMITMENT FEES AND OTHER FEES. (a) The Borrower agrees to pay to the Agent for the account of each Lender on the last Business Day of each March, June, September and December in each year (commencing on the last Business Day of June 1996) prior to the Commitment Termination Date and on the Commitment Termination Date, an aggregate fee (the "COMMITMENT FEES") of 1/2 of 1% per annum, computed on the basis of the actual number of days elapsed over a year of 360 days, on the average daily amount by which such Lender's Commitment, as such Commitment may be reduced in accordance with the provisions of this Credit Agreement, exceeds the sum of the principal balance such Lender's outstanding Loans plus its Percentage of L/C Exposure during the preceding period or quarter. (b) Such Commitment Fees shall commence to accrue from the Closing Date. (c) In addition, the Borrower agrees to pay to each of the Lenders (including the Agent) on the Closing Date a one-time fee in an amount equal to 2% of its Commitment in consideration of such Lender's commitment to participate in the Credit Agreement. (d) In addition, the Borrower agrees to pay to the Agent on the Closing Date any and all fees that are then due and payable pursuant to the Fee Letter. SECTION 2.6. OPTIONAL AND MANDATORY TERMINATION OR REDUCTION OF COMMITMENTS. (a) Upon at least three Business Days' prior written, facsimile or telephonic notice (provided that such telephonic notice is immediately followed by written confirmation) to the Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments. In the case of a partial reduction, each such reduction of the Commitments shall be in a minimum aggregate principal amount of $500,000 or an integral multiple thereof; PROVIDED, HOWEVER, that the Commitments may not be reduced by more than the amount of the then unused Commitments and may not - 37 - be reduced to an amount less than the aggregate principal amount of the Loans outstanding, PLUS the then current L/C Exposure, PLUS the Special Production Tranche of each Designated Picture PLUS the Completion Reserve. Any partial reduction of the Commitments shall be made among the Lenders in accordance with their respective Percentages. (b) Simultaneously with each such termination or reduction of the Commitments, the Borrower shall pay to the Agent for the benefit of each Lender all accrued and unpaid Commitment Fees on the amount of the Commitments so terminated or reduced through the date of such termination or reduction. (c) Any reduction of the Total Commitments pursuant to this Section 2.6 shall be pro rata in accordance with each Lender's Percentage and applied to reduce the Commitment of each Lender. SECTION 2.7. DEFAULT INTEREST; ALTERNATE RATE OF INTEREST. (a) If the Borrower shall default in the payment of the principal of, or interest on any Loan becoming due hereunder, whether at stated maturity, by acceleration or otherwise, or the payment of any other amount becoming due hereunder after written notification from the Agent to the Borrower of such amount, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on all Loans and overdue amounts outstanding up to the date of actual payment of such defaulted amount (after as well as before judgment) (i) for the remainder of the then current Interest Period for each Eurodollar Loan, at 2% in excess of the rate then in effect for Eurodollar Loans and (ii) for all periods subsequent to the then current Interest Period for each Eurodollar Loan, for all Alternate Base Rate Loans and for all other overdue amounts hereunder, at 2% in excess of the rate then in effect for Alternate Base Rate Loans. (b) In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Loan, (i) the Agent shall have received notice from any Lender of such Lender's determination (which determination, absent manifest error, shall be conclusive) that Dollar deposits in the amount of the principal amount of such Eurodollar Loan are not generally available in the London Interbank Market or that the rate at which such Dollar deposits are being offered will not adequately and fairly reflect the cost to such Lender of making or maintaining the principal amount of such Eurodollar Loan during such Interest Period or (ii) the Agent shall have determined that reasonable means do not exist for ascertaining the applicable LIBO Rate, the Agent shall, as soon as practicable thereafter, give written or facsimile notice of such determination to the Borrower and the Lenders, and any - 38 - request by the Borrower for a Eurodollar Loan (or conversion to or continuation as a Eurodollar Loan pursuant to Section 2.8 hereof), made after receipt of such notice, shall be deemed a request for an Alternate Base Rate Loan; PROVIDED, HOWEVER, that in the circumstances described in clause (i) above such deemed request shall only apply to the affected Lender's portion thereof. After such notice shall have been given and until the circumstances giving rise to such notice no longer exist, each request (or portion thereof, as the case may be) for a Eurodollar Loan, to the extent such request relates to such affected Lender's portion shall be deemed to be a request for an Alternate Base Rate Loan. SECTION 2.8. CONTINUATION AND CONVERSION OF LOANS. The Borrower shall have the right, at any time, (i) to convert any Eurodollar Loan or portion thereof to an Alternate Base Rate Loan or to continue such Eurodollar Loan or a portion thereof for a successive Interest Period, or (ii) to convert any Alternate Base Rate Loan or a portion thereof to a Eurodollar Loan, subject to the following: (a) the Borrower shall give the Agent prior notice of each continuation or conversion hereunder of at least four Business Days for continuation as or conversion to a Eurodollar Loan; such notice shall be irrevocable and to be effective, must be received by the Agent on the day required not later than 1:00 p.m., New York City time; (b) no Event of Default or Default shall have occurred and be continuing at the time of any conversion to a Eurodollar Loan or continuation of any such Eurodollar Loan into a subsequent Interest Period; (c) no Alternate Base Rate Loan may be converted to a Eurodollar Loan and no Eurodollar Loan may be continued as a Eurodollar Loan if, after such conversion, and after giving effect to any concurrent prepayment of Loans, an aggregate of more than eight separate Eurodollar Loans would be outstanding hereunder with respect to each Lender (for purposes of determining the number of such Loans outstanding, Loans with different Interest Periods shall be counted as different Loans even if made on the same date); (d) if fewer than all Loans at the time outstanding shall be continued or converted, such continuation or conversion shall be made pro rata among the Lenders in accordance with the respective Percentage of the principal amount of such Loans held by the Lenders immediately prior to such continuation or conversion; - 39 - (e) the aggregate principal amount of Loans continued as or converted to Eurodollar Loans as part of the same Borrowing, shall be $1,500,000 or such greater amount which is an integral multiple of $100,000; (f) accrued interest on the Eurodollar Loans (or portion thereof) being continued or converted shall be paid by the Borrower at the time of continuation or conversion; (g) the Interest Period with respect to a new Eurodollar Loan effected by a continuation or conversion shall commence on the date of such continuation or conversion; (h) if a Eurodollar Loan is converted to another type of Loan other than on the last day of the Interest Period with respect thereto, the amounts required by Section 2.9(b) shall be paid upon such conversion; and (i) each request for a continuation as or conversion to a Eurodollar Loan which fails to state an applicable Interest Period shall be deemed to be a request for an Interest Period of one month. In the event that the Borrower shall not give notice to continue or convert any Eurodollar Loan as provided above, such Loan (unless repaid) shall automatically be converted to an Alternate Base Rate Loan at the expiration of the then current Interest Period. The Agent shall, after it receives notice from the Borrower, promptly give the Lenders notice of any continuation or conversion. SECTION 2.9. PREPAYMENT OF LOANS; REIMBURSEMENT OF LENDERS. (a) Subject to the terms of paragraph (b) of this Section 2.9, the Borrower shall have the right at its option at any time and from time to time to prepay (i) any Alternate Base Rate Loan, in whole or in part, upon at least two Business Days' prior written, telephonic (promptly confirmed in writing) or facsimile notice to the Agent, in the principal amount of $500,000 or such greater amount which is an integral multiple of $100,000 or the remaining balance of such Loan if less than $500,000 and (ii) any Eurodollar Loan, in whole or in part, upon at least four Business Days' prior written, telephonic (promptly confirmed in writing) or facsimile notice, in the principal amount of $1,500,000 or such greater amount which is an integral multiple of $100,000. Each notice of prepayment shall specify the prepayment date, each Loan to be prepaid and the principal amount thereof, shall be irrevocable and shall commit the Borrower to prepay such Loan in the amount and on the date stated therein. Such notice shall also specify the expected principal amount of Loans to be outstanding after giving effect to such - 40 - prepayment. All prepayments under this Section 2.9(a) shall be accompanied by accrued but unpaid interest on the principal amount being prepaid to the date of (but not including) prepayment. (b) The Borrower shall reimburse each Lender on demand for any loss incurred or to be incurred by any such Lender in the reemployment of the funds released (i) by any prepayment (for any reason) of any Eurodollar Loan if such Loan is repaid other than on the last day of the Interest Period for such Loan or (ii) in the event that after the Borrower delivers a notice of borrowing under Section 2.2(a) or Section 2.8(a) in respect of Eurodollar Loans, such Loan is not made on the first day of the Interest Period specified in such notice of borrowing for any reason other than (A) a suspension or limitation under Section 2.7(b) of the right of the Borrower to select a Eurodollar Loan or (B) a breach by the Lenders of their obligation to fund such borrowing when they are otherwise required to do so hereunder or (C) it shall be unlawful for any Lender to make or maintain Eurodollar Loans pursuant to Section 2.11. Such loss shall be the amount as reasonably determined by such Lender as the excess, if any, of (I) the amount of interest which would have accrued to such Lender on the amount so paid or not borrowed, continued or converted at a rate of interest equal to the interest rate applicable to such Loan pursuant to Section 2.4 hereof, for the period from the date of such payment or failure to borrow, continue or convert to the last day (x) in the case of a payment other than on the last day of the Interest Period for such Loan, of the then current Interest Period for such Loan or (y) in the case of such failure to borrow, continue or convert, of the Interest Period for such Loan which would have commenced on the date of such failure to borrow, continue or convert, over (II) the amount realized or to be realized by such Lender in reemploying the funds not advanced or the funds received in prepayment or realized from the Loan not so continued or converted during the period referred to above. Each Lender shall deliver to the Borrower from time to time one or more certificates setting forth the amount of such loss (and in reasonable detail the manner of computation thereof) as determined by such Lender, which certificates shall be conclusive absent manifest error. The Borrower shall pay such Lender the amounts shown on such certificate within ten days of the Borrower's receipt of such certificate. (c) In the event the Borrower fails to prepay any Loan on the date specified in any prepayment notice delivered pursuant to Section 2.9(a), the Borrower shall pay to the Agent for the account of the applicable Lender any amounts required to compensate such Lender for any actual loss incurred by such Lender as a result of such failure to prepay, including, without limitation, any loss, cost or expenses incurred by reason of the - 41 - acquisition of deposits or other funds by such Lender to fulfill deposit obligations incurred in anticipation of such prepayment. Each Lender shall deliver to the Borrower and the Agent from time to time one or more certificates setting forth the amount of such loss (and in reasonable detail the manner of computation thereof) as determined by such Lender, which certificates shall be conclusive absent manifest error. The Borrower shall pay such Lender the amounts shown on such certificate within ten days of the Borrower's receipt of such certificate. (d) Simultaneously with the delivery to the Agent of each Borrowing Base Certificate and subject to the provisions of Section 2.15(i), the Borrower shall prepay the Loans to the extent, if any, that either (x) the sum of the Loans outstanding, PLUS the L/C Exposure, PLUS the unused portion of the Special Production Tranche for each Designated Picture, PLUS the Completion Reserve exceeds the lesser of (i) the Borrowing Base as set forth on such Borrowing Base Certificate and (ii) the Total Commitments or (y) the sum of the aggregate amount of al outstanding Loans (other than the Loans drawn under a Special Production Tranche), PLUS the L/C Exposure, PLUS the Completion Reserve exceeds the Borrowing Base (excluding the Tier 3 Borrowing Base) as set forth on such Borrowing Base Certificate. (e) Simultaneously with each termination and/or mandatory or optional reduction of the Total Commitments pursuant to Section 2.6, the Borrower shall pay to the Agent for the benefit of the Lenders the excess of the aggregate outstanding principal amount of the Loans over the reduced Total Commitments, all accrued and unpaid interest thereon and the Commitment Fees on the amount of the Total Commitments so terminated or reduced through the date thereof. (f) Subject to the provisions of Section 2.9(g), on the last Business Day of each week (or more frequently if determined by the Agent in its sole discretion) in which the balance of cash receipts which have been transferred into the Concentration Account is in excess of $250,000, the outstanding principal amount of the Loans shall be prepaid in an amount equal to the sum of items on deposit in each such Concentration Account which equals $250,000 or such greater amount which is an integral multiple of $50,000. (g) If on any day on which the Loans would otherwise be required to be prepaid but for the operation of this Section 2.9(g) (each a "PREPAYMENT DATE"), the amount of such required prepayment exceeds the then outstanding aggregate principal amount of the Loans which consist of Alternate Base Rate Loans, and no Default or Event of Default is then continuing, then on such Prepayment Date the Agent at the request of the Borrower, shall transfer funds, if any, from a Concentration Account referenced in Section 2.9(f) above into the appropriate Cash - 42 - Collateral Account identified by the Borrower in an amount equal to such excess. If the Borrower makes such deposit (i) only the outstanding Alternate Base Rate Loans shall be required to be prepaid on such Prepayment Date, and (ii) on the last day of each Interest Period in effect after such Prepayment Date, the Agent is irrevocably authorized and directed to apply funds from the appropriate Cash Collateral Account (and liquidate investments held in such Cash Collateral Account as necessary) to prepay Eurodollar Loans for which the Interest Period is then ending until the aggregate of such prepayments equals the prepayment which would have been required on such Prepayment Date but for the operation of this Section 2.9(g). (h) Unless otherwise designated in writing by the Borrower, all prepayments shall be applied to the applicable principal payment set forth in this Section 2.9, first to that amount of such applicable principal payment then maintained as Alternate Base Rate Loans by the Borrower, and then, subject to the provisions of Section 2.9(g), to that amount of such applicable principal payment maintained as Eurodollar Loans by the Borrower in order of the scheduled expiry of Interest Periods with respect thereto. (i) All prepayments shall be accompanied by accrued but unpaid interest on the principal amount being prepaid to the date of prepayment. SECTION 2.10. CHANGE IN CIRCUMSTANCES. (a) In the event that after the Initial Date any change in Applicable Law or in the official interpretation or administration thereof (including, without limitation, any request, guideline or policy not having the force of law) by any authority charged with the administration or interpretation thereof or, with respect to clause (ii), (iii) or (iv) below any change in conditions, shall occur which shall: (i) subject any Lender to, or increase the net amount of, any tax, levy, impost, duty, charge, fee, deduction or withholding with respect to any Eurodollar Loan (other than withholding tax imposed by the United States of America or any political subdivision or taxing authority thereof or any other tax, levy, impost, duty, charge, fee, deduction or withholding (A) that is measured with respect to the overall net income of such Lender or of a Lending Office of such Lender, and that is imposed by the United States of America, or by the jurisdiction in which such Lender or Lending Office is incorporated, in which such Lending Office is located, managed or controlled or in which such Lender has its principal office (or any political subdivision or taxing authority thereof or therein), or (B) that is - 43 - imposed solely by reason of any Lender failing to make a declaration of, or otherwise to establish, non-residence, or to make any other claim for exemption, or otherwise to comply with any certification, identification, information, documentation or reporting requirements prescribed under the laws of the relevant jurisdiction, in those cases where a Lender may properly make such declaration or claim or so establish non-residence or otherwise comply); or (ii) change the basis of taxation of any payment to any Lender of principal or any interest on any Eurodollar Loan or other fees and amounts payable to any Lender hereunder, or any combination of the foregoing; other than withholding tax imposed by the United States of America or any political subdivision or taxing authority thereof or any other tax, levy, impost, duty, charge, fee, deduction or withholding that is measured with respect to the overall net income of such Lender or of a Lending Office of such Lender, and that is imposed by the United States of America, or by the jurisdiction in which such Lender or Lending Office is incorporated, in which such Lending Office is located, managed or controlled or in which such Lender has its principal office (or any political subdivision or taxing authority thereof or therein); or (iii) impose, modify or deem applicable any reserve, deposit or similar requirement against any assets held by, deposits with or for the account of or loans or commitments by an office of such Lender with respect to any Eurodollar Loan; or (iv) impose upon such Lender or the London Interbank Market any other condition with respect to the Eurodollar Loans or this Credit Agreement; and the result of any of the foregoing shall be to increase the actual cost to such Lender of making or maintaining any Eurodollar Loan hereunder or to reduce the amount of any payment (whether of principal, interest or otherwise) received or receivable by such Lender in connection with any Eurodollar Loan hereunder, or to require such Lender to make any payment in connection with any Eurodollar Loan hereunder, in each case by or in an amount which such Lender in its sole judgment shall deem material, then and in each case the Borrower shall pay to the Agent for the account of such Lender, as provided in paragraph (c) below, such amounts as shall be necessary to compensate such Lender for such cost, reduction or payment. - 44 - (b) If at any time and from time to time after the Initial Date any Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or adoption after the Initial Date of any law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any Lending Office of such Lender) or any Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Credit Agreement or the Loans made or Letters of Credit issued or participated in by such Lender pursuant hereto to a level below that which such Lender or such Lender's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered with respect to Loans made by such Lender hereunder. (c) Each Lender shall deliver to the Borrower and the Agent from time to time, one or more certificates setting forth the amounts due to such Lender under paragraphs (a) and (b) above, the changes as a result of which such amounts are due, the manner of computing such amounts and the manner of computing the amounts allocable to Loans hereunder pursuant to paragraphs (a) and (b) above. Each such certificate shall be conclusive in the absence of manifest error. The Borrower shall pay to the Agent for the account of each such Lender the amounts shown as due on any such certificate within ten Business Days after its receipt of the same. No failure on the part of any Lender to demand compensation under paragraph (a) or (b) above on any one occasion shall constitute a waiver of its rights to demand compensation on any other occasion. The protection of this Section 2.10(c) shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of any law, regulation or other condition which shall give rise to any demand by such Lender for compensation thereunder. (d) Each Lender agrees that, as promptly as practicable, after it becomes aware of the occurrence of an event - 45 - or the existence of a condition that (i) would cause it to incur any increased cost hereunder or render it unable to perform its agreements hereunder for the reasons specifically set forth in Section 2.7(b) or this Section 2.10 or Section 2.13 or Section 2.15(g) or (ii) would require the Borrower to pay an increased amount under Section 2.7(b) or this Section 2.10 or Section 2.13 or Section 2.15(g), it will use reasonable efforts to notify the Borrower of such event or condition and, to the extent not inconsistent with such Lender's internal policies, will use its reasonable efforts to make, fund or maintain the affected Loans of such Lender, or, if applicable, to participate in Letters of Credit as required under Section 2.15, through another Lending Office of such Lender if as a result thereof the additional monies which would otherwise be required to be paid or the reduction of amounts receivable by such Lender thereunder in respect of such Loans would be materially reduced, or such inability to perform would cease to exist, or the increased costs which would otherwise be required to be paid in respect of such Loans pursuant to Section 2.7(b) or this Section 2.10 or Section 2.13 or Section 2.15(g) would be materially reduced or the taxes or other amounts otherwise payable under Section 2.7(b) or this Section 2.10 or Section 2.13 or Section 2.15(g) would be materially reduced, and if, as determined by such Lender, in its discretion, the making, funding or maintaining of such Loans through such other Lending Office would not otherwise materially adversely affect such Loans or such Lender. (e) In the event any Lender shall have delivered to the Borrower a notice that (i) amounts are due to such Lender pursuant to this Section 2.10, Section 2.13 or Section 2.15, (ii) any one or more Lenders have determined pursuant to Section 2.11 that it may not make or maintain Eurodollar Loans at such time or (iii) any of the events designated in paragraph (d) hereof have occurred, the Borrower may (but subject in any such case to the payments required by Section 2.9(b) and (c) and Section 2.13(e)), provided that there shall exist no Default or Event of Default, upon at least five Business Days' prior written or telecopier notice to such Lender and the Agent, but not more than 30 days after receipt of notice from such Lender, identify to the Agent an Eligible Assignee reasonably acceptable to the Agent which will purchase the Commitment of such Lender, the amount of outstanding Loans and any participations in Letters of Credit from such Lender providing such notice and such Lender shall thereupon assign its Commitment, any Loans owing to such Lender and any participations in Letters of Credit and the Note held by such Lender to such replacement Eligible Assignee pursuant to Section 13.3 (it being understood that any such replacement shall not release such replaced Lenders from any liabilities to the Borrower for any breach by such Lender of any of its obligations hereunder nor shall any such replacement impair in any manner any rights or remedies the Borrower may have against such Lender for any such breach). Such notice shall specify an effective date - 46 - for such assignment and at the time thereof, the Borrower shall pay all accrued interest, Commitment Fees and all other amounts (including without limitation all amounts payable under this Section 2.10) owing hereunder to such Lender as at such effective date for such assignment. SECTION 2.11. CHANGE IN LEGALITY. (a) Notwithstanding anything to the contrary contained elsewhere in this Credit Agreement, if any change after the date hereof in Applicable Law, guideline or order, or in the interpretation thereof by any Governmental Authority charged with the administration thereof, shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to a Eurodollar Loan, then, by written notice to the Borrower and the Agent, such Lender may (i) declare that Eurodollar Loans will not thereafter be made by such Lender hereunder and/or (ii) require that, subject to Section 2.9(b), all outstanding Eurodollar Loans made by it be converted to Alternate Base Rate Loans, whereupon all of such Eurodollar Loans shall automatically be converted to Alternate Base Rate Loans, as of the effective date of such notice as provided in paragraph (b) below. Such Lender's pro rata portion of any subsequent Eurodollar Loan shall, instead, be an Alternate Base Rate Loan unless such declaration is subsequently withdrawn. (b) A notice to the Borrower by any Lender pursuant to paragraph (a) above shall be effective for purposes of clause (ii) thereof, if lawful, on the last day of the current Interest Period for each outstanding Eurodollar Loan; and in all other cases, on the date of receipt of such notice by the Borrower. SECTION 2.12. MANNER OF PAYMENTS. All payments of principal and interest by the Borrower in respect of any Loans to it shall be pro rata among the Lenders holding such Loans in accordance with the then outstanding principal amounts of such Loans held by them and all Borrowings of any Loans by the Borrower hereunder shall be made pro rata among the Lenders in accordance with their Commitments. All payments by the Borrower hereunder and under the Notes shall be made in Dollars in Federal or other immediately available funds at the office of Chemical Bank, Agent Bank Services Department, 140 East 45th St., 29th Floor, New York, NY 10017, Attention: Gloria Javier for credit to the Chemical Clearing Account no later than 1:00 p.m., New York City time, on the date on which such payment shall be due. Interest in respect of any Loan hereunder shall accrue from and including the date of such Loan to but excluding the date on which such Loan is paid or converted to a Loan of a different type. - 47 - SECTION 2.13. UNITED STATES WITHHOLDING. (a) Prior to the date of the initial Loans hereunder, and prior to the effective date set forth in the Assignment and Acceptance with respect to any Lender becoming a Lender after the date hereof, and from time to time thereafter if requested by the Borrower or the Agent or required because, as a result of a change in law or a change in circumstances or otherwise, a previously delivered form or statement becomes incomplete or incorrect in any material respect, each Lender organized under the laws of a jurisdiction outside the United States shall provide, if applicable, the Agent and the Borrower with complete, accurate and duly executed forms or other statements prescribed by the Internal Revenue Service of the United States certifying such Lender's exemption from, or entitlement to a reduced rate of, United States withholding taxes (including backup withholding taxes) with respect to all payments to be made to such Lender hereunder and under the Notes. (b) The Borrower and the Agent shall be entitled to deduct and withhold any and all present or future taxes or withholdings, and all liabilities with respect thereto, from payments hereunder or under the Notes, if and to the extent that the Borrower or the Agent in good faith determines that such deduction or withholding is required by the law of the United States, including, without limitation, any applicable treaty of the United States. In the event that the Borrower or the Agent shall so determine that deduction or withholding of taxes is required, it shall advise the affected Lender as to the basis of such determination prior to actually deducting and withholding such taxes. In the event the Borrower or the Agent shall so deduct or withhold taxes from amounts payable hereunder, it (i) shall pay to or deposit with the appropriate taxing authority in a timely manner the full amount of taxes it has deducted or withheld; (ii) shall provide evidence of payment of such taxes to, or the deposit thereof with, the appropriate taxing authority and a statement setting forth the amount of taxes deducted or withheld, the applicable rate, and any other information or documentation reasonably requested by the Lenders from whom the taxes were deducted or withheld; and (iii) shall forward to such Lenders any official tax receipts or other documentation with respect to the payment or deposit of the deducted or withheld taxes as may be issued from time to time by the appropriate taxing authority. Unless the Borrower and the Agent have received forms or other documents satisfactory to them indicating that payments hereunder or under the Notes are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Borrower or the Agent may withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States. - 48 - (c) Each Lender agrees (i) that as between it and the Borrower or the Agent, such Lender shall be the Person to deduct and withhold taxes, and to the extent required by law it shall deduct and withhold taxes, on amounts that such Lender may remit to any other Person(s) by reason of any undisclosed transfer or assignment of an interest in this Credit Agreement to such other Person(s) pursuant to Section 13.3(g) and (ii) to indemnify the Borrower and the Agent and any officers, directors, agents, or employees of the Borrower or the Agent against and to hold them harmless from any tax, interest, additions to tax, penalties, reasonable counsel and accountants' fees, disbursements or payments arising from the assertion by any appropriate taxing authority of any claim against them relating to a failure to withhold taxes as required by law with respect to amounts described in clause (i) of this paragraph (c) or arising from the reliance by the Borrower or the Agent on any form or other document furnished by such Lender and purporting to establish a basis for not withholding, or for withholding at a reduced rate, taxes with respect to payments hereunder. (d) Each assignee of a Lender's interest in this Credit Agreement in conformity with Section 13.3 shall be bound by this Section 2.13, so that such assignee will have all of the obligations and provide all of the forms and statements and all indemnities, representations and warranties required to be given under this Section 2.13. (e) Notwithstanding the foregoing, in the event that any additional withholding taxes shall become payable solely as a result of any change in any statute, treaty, ruling, determination or regulation occurring after the Initial Date in respect of any sum payable hereunder or under any other Fundamental Document to any Lender or the Agent (i) the sum payable by the Borrower shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.13) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such withholding deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with Applicable Law. (f) In the event that a Lender receives a refund of or credit for taxes withheld or paid pursuant to clause (e) of this Section 2.13, which credit or refund is identifiable by such Lender as being a result of taxes withheld in connection with sums payable hereunder or under any other Fundamental Document, such Lender shall promptly notify the Agent and the Borrower and shall remit to the Borrower the amount of such refund or credit allocable to payments made hereunder or under the other Fundamental Documents. - 49 - (g) Each Lender agrees that, as promptly as practicable after it becomes aware of the occurrence of an event that would cause the Borrower to pay any amount pursuant to clause (e) of this Section 2.13, it will use reasonable efforts to notify the Borrower of such event and, to the extent not inconsistent with such Lender's internal policies, will use its reasonable efforts to make, fund or maintain the affected Loans of such Lender through another Lending Office of such Lender if as a result thereof the additional monies which would otherwise be required to be paid by reason of Section 2.13(e) in respect of such Loans would be materially reduced, and if, as determined by such Lender, in its discretion, the making, funding or maintaining of such Loans through such other Lending Office would not otherwise materially adversely affect such Loans or such Lender. SECTION 2.14. INTEREST ADJUSTMENTS. If the provisions of this Credit Agreement or any Note would at any time require payment by the Borrower to a Lender of any amount of interest in excess of the maximum amount then permitted by the law applicable to any Loan, the interest payments to that Lender shall be reduced to the extent necessary so that such Lender shall not receive interest in excess of such maximum amount. If, as a result of the foregoing, a Lender shall receive interest payments hereunder or under a Note in an amount less than the amount otherwise provided hereunder, such deficit (hereinafter called the "INTEREST DEFICIT") will, to the fullest extent permitted by Applicable Law, cumulate and will be carried forward (without interest) until the termination of this Credit Agreement. Interest otherwise payable to a Lender hereunder and under a Note for any subsequent period shall be increased by the maximum amount of the Interest Deficit that may be so added without causing such Lender to receive interest in excess of the maximum amount then permitted by the law applicable to the Loans. The amount of any Interest Deficit relating to a particular Loan and Note shall be treated as a prepayment penalty and shall, to the fullest extent permitted by Applicable Law, be paid in full at the time of any optional prepayment by the Borrower to the Lenders of all the Loans at that time outstanding pursuant to Section 2.9(a) hereof. The amount of any Interest Deficit relating to a particular Loan and Note at the time of any complete payment of the Loans at that time outstanding (other than an optional prepayment thereof pursuant to Section 2.9(a) hereof) shall be cancelled and not paid. SECTION 2.15. LETTERS OF CREDIT. (a) (i) Subject to the terms and conditions hereof and of Applicable Law, the Fronting Bank agrees to issue Letters of Credit payable in Dollars from time to time after the Closing - 50 - Date and prior to the Commitment Termination Date upon the request of the Borrower, PROVIDED, HOWEVER, that (A) the Borrower shall not request that any Letter of Credit be issued if, after giving effect thereto, the sum of the then current L/C Exposure, PLUS the aggregate Loans then outstanding, PLUS the Special Production Tranche for each Designated Picture, PLUS the Completion Reserve would exceed the lesser of the then current amount of the Borrowing Base or the Total Commitments and (B) in no event shall the Fronting Bank issue any Letter of Credit having an expiration date after the Commitment Termination Date. (ii) Immediately upon the issuance of each Letter of Credit, each Lender shall be deemed to, and hereby agrees to, have irrevocably purchased from the Fronting Bank a participation in such Letter of Credit in accordance with such Lender's Percentage. (iii) Each Letter of Credit may, at the option of the Fronting Bank, provide that the Fronting Bank may (but shall not be required to) pay all or any part of the maximum amount which may at any time be available for drawing thereunder to the beneficiary thereof upon the occurrence and continuation of an Event of Default and the acceleration of the maturity of the Loans, provided that, if payment is not then due to the beneficiary, the Fronting Bank shall deposit the funds in question in a segregated account with the Fronting Bank to secure payment to the beneficiary and any funds so deposited shall be paid to the beneficiary of the Letter of Credit if conditions to such payment are satisfied or returned to the Fronting Bank for distribution to the Lenders (or, if all Obligations shall have been paid in full in cash, to the Borrower) if no payment to the beneficiary has been made and the final date available for drawings under the Letter of Credit has passed. Each payment or deposit of funds by the Fronting Bank as provided in this paragraph shall be treated for all purposes of this Credit Agreement as a drawing duly honored by the Fronting Bank under the related Letter of Credit. (b) Whenever the Borrower desires the issuance of a Letter of Credit, it shall deliver to the Fronting Bank a written notice no later than 1:00 p.m., New York City time, at least five Business Days prior to the proposed date of issuance. Such notice shall specify (i) the proposed date of issuance (which shall be a Business Day), (ii) the face amount of the Letter of Credit, (iii) the expiration date of the Letter of Credit and (iv) the name and address of the beneficiary. Such notice shall be accompanied by a brief description of the underlying transaction and upon request of the Fronting Bank, the Borrower shall provide additional details regarding the underlying transaction. Concurrently with the giving of written notice of a request for the issuance of a Letter of Credit, the Borrower shall specify a precise description of the documents and the - 51 - verbatim text of any certificate to be presented by the beneficiary of such Letter of Credit which, if presented by such beneficiary prior to the expiration date of the Letter of Credit, would require the Fronting Bank to make payment under the Letter of Credit; PROVIDED, HOWEVER, that the Fronting Bank, in its reasonable discretion, may require customary changes in any such documents and certificates. Promptly after receipt of such notice, the Agent shall notify each Lender of the issuance and the amount of each such Lender's respective participation therein. (c) The payment of drafts under any Letter of Credit shall be made in accordance with the terms of such Letter of Credit and the Uniform Customs and Practice for documentary Credits of the International Chamber of Commerce, as adopted or amended from time to time. The Fronting Bank shall be entitled to honor any drafts and accept any documents presented to it by the beneficiary of such Letter of Credit in accordance with the terms of such Letter of Credit and believed by the Fronting Bank in good faith to be genuine. The Fronting Bank shall not have any duty to inquire as to the accuracy or authenticity of any draft or other drawing documents which may be presented to it, but shall be responsible only to determine in accordance with customary commercial practices that the documents which are required to be presented before payment or acceptance of a draft under any Letter of Credit have been delivered and that they comply on their face with the requirements of that Letter of Credit. (d) If the Fronting Bank shall make payment on any draft presented under a Letter of Credit (regardless of whether a Default or Event of Default or acceleration has occurred), the Fronting Bank shall give notice of such payment to the Lenders and each Lender hereby authorizes and requests the Fronting Bank to advance for its account pursuant to the terms hereof its share of such payment based upon its participation in the Letter of Credit and agrees promptly to reimburse the Fronting Bank in immediately available funds for the Dollar equivalent of the amount so advanced on its behalf. If such reimbursement is not made by any Lender in immediately available funds on the same day on which the Fronting Bank shall have made payment on any such draft, such Lender shall pay interest thereof to the Fronting Bank at a rate per annum equal to the Fronting Bank's cost of obtaining overnight funds in the New York Federal Funds Market. In the case of any draft presented under a Letter of Credit which is required to be paid at any time on or before the Commitment Termination Date, such payment of the unreimbursed draft shall constitute an Alternate Base Rate Loan hereunder and interest shall accrue from the date the Fronting Bank makes payment of a draft under the Letter of Credit. - 52 - (e) If any draft is presented under a Letter of Credit, payment of which is required to be made after the Commitment Termination Date (it being understood that no Letter of Credit shall be issued which would expire after June 25, 1999), then the Borrower will, upon demand by the Fronting Bank, pay to the Fronting Bank, in immediately available funds, the full amount of such draft. If such payment is not made by the Borrower and the Fronting Bank shall make payment on any draft presented under a Letter of Credit, the Fronting Bank shall give notice of such payment to the Lenders and each Lender hereby authorizes and requests the Fronting Bank to advance for its account pursuant to the terms thereof its share of such payment based upon its participation in the Letter of Credit and agrees promptly to reimburse the Fronting Bank in immediately available funds for the Dollar equivalent of the amount so advanced on its behalf. If such reimbursement is not made by any Lender in immediately available funds on the same day on which the Fronting Bank shall have made payment on any such draft, such Lender shall pay interest thereon to the Fronting Bank at a rate per annum equal to the Fronting Bank's cost of obtaining overnight funds in the New York Federal Funds Market. Such payment shall constitute an Alternate Base Rate Loan hereunder and interest shall accrue from the date the Fronting Bank makes payment of a draft under the Letter of Credit at the rate specified in Section 2.7. (f) (i) The Borrower agrees to pay the following amount to the Fronting Bank with respect to Letters of Credit issued by it hereunder: (A) with respect to the issuance, amendment, transfer or any other transaction related to each Letter of Credit and each drawing made thereunder, documentary and processing charges in accordance with the Fronting Bank's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or drawing, as the case may be; and (B) a fronting fee for the period from and including the Closing Date to but excluding the Commitment Termination Date, computed at a rate equal to 1/8 of 1% per annum of the face amount of each Letter of Credit issued, such fee to be due and payable in arrears on and through the last day of each fiscal quarter of the Borrower, prior to the Commitment Termination Date, on the Commitment Termination Date and on the expiration of the last outstanding Letter of Credit. (ii) The Borrower agrees to pay to the Agent for distribution to each Lender in respect of their L/C Exposure, such Lender's Pro Rata Share of a commission calculated at a rate per annum equal to the Applicable Margin for Eurodollar Loans - 53 - (calculated in the same manner as interest) of the face amount of each Letter of Credit issued. Such commission shall be payable in arrears on and through the last day of each fiscal quarter prior to the Commitment Termination Date and on the later of the Commitment Termination Date and the expiration of the last outstanding Letter of Credit. (iii) Promptly upon receipt by the Fronting Bank of any amount described in clause (ii) of this Section 2.15(f), or any amount described in Section 2.15(e) previously reimbursed to the Fronting Bank by the Lenders, the Fronting Bank shall distribute to each Lender its Pro Rata Share of such amount. Amounts payable under clauses (i)(A) and (i)(B) of this Section 2.15(f) shall be paid directly to the Fronting Bank and shall be for its exclusive use. (g) If by reason of (i) any change in Applicable Law after the Initial Date, or in the interpretation or administration thereof (including, without limitation, any request, guideline or policy not having the force of law) by any Governmental Authority charged with the administration or interpretation thereof, or (ii) compliance by the Fronting Bank or any Lender with any direction, request or requirement (whether or not having the force of law) issued after the Initial Date by any Governmental Authority or monetary authority (including any change whether or not proposed or published prior to the Initial Date), including, without limitation, any modifications to Regulation D occurring after the Initial Date: (A) the Fronting Bank or any Lender shall be subject to any tax, levy, duty, fee, charge, deduction or withholding with respect to any Letter of Credit (other than withholding tax imposed by the United States of America or any other tax, levy, impost, duty, charge, fee, deduction or withholding (I) that is measured with respect to the overall net income of the Fronting Bank or such Lender or of a Lending Office of the Fronting Bank or such Lender, and that is imposed by the United States of America, or by the jurisdiction in which the Fronting Bank or such Lender is incorporated, or in which such Lending Office is located, managed or controlled or in which the Fronting Bank or such Lender has its principal office (or any political subdivision or taxing authority thereof or therein) or (II) that is imposed solely by reason of the Fronting Bank or such Lender failing to make a declaration of, or otherwise to establish, non-residence or to make any other claim for exemption, or otherwise to comply with any certification, identification, information, documentation or reporting requirements prescribed under the laws of the relevant jurisdiction, in those cases where the Fronting Bank or - 54 - such Lender may properly make such declaration or claim or so establish non-residence or otherwise comply); (B) the basis of taxation of any fee or amount payable hereunder with respect to any Letter of Credit shall be changed (except as limited in clause (A) above); (C) any reserve, deposit or similar requirement is or shall be applicable, imposed or modified in respect of any Letter of Credit issued by the Fronting Bank or participations therein purchased by any Lender; or (D) there shall be imposed on the Fronting Bank or any Lender any other condition regarding this Section 2.15, any Letter of Credit or any participation therein; and the result of the foregoing is to increase the actual cost to the Fronting Bank or any Lender of issuing, making or maintaining any Letter of Credit or of purchasing or maintaining any participation therein, or to reduce the amount receivable in respect thereof by the Fronting Bank or any Lender, in each case by or in an amount which the Fronting Bank or any Lender shall reasonably deem material, then and in any such case the Fronting Bank or such Lender may, at any time, notify the Borrower, and the Borrower shall pay on demand such amounts as the Fronting Bank or such Lender may specify to be necessary to compensate the Fronting Bank or such Lender for such additional cost or reduced receipt. Section 2.10(b), (c), (d) and Section 2.11 shall in all instances apply to the Fronting Bank and any Lender with respect to Letters of Credit issued hereunder. The determination by the Fronting Bank or any Lender, as the case may be, of any amount due pursuant to this Section 2.15 as set forth in a certificate setting forth the calculation thereof in reasonable detail shall, in the absence of manifest error, be final, conclusive and binding on all of the parties hereto. (h) If at any time when an Event of Default shall have occurred and be continuing, any Letters of Credit shall remain outstanding, then the Required Lenders or the Fronting Bank may, at their option, require the Borrower to deliver to the Fronting Bank Cash Equivalents in an amount equal to the full amount of the L/C Exposure or to furnish other security acceptable to the Fronting Bank. Any amounts so delivered pursuant to the preceding sentence shall be applied to reimburse the Fronting Bank for the amount of any drawings honored under Letters of Credit; PROVIDED, HOWEVER, that if prior to the Commitment Termination Date, no Event of Default is then continuing, the Fronting Bank shall return all of such collateral relating to such deposit to the Borrower if requested by it. - 55 - (i) If at any time that any Letter of Credit is outstanding, the L/C Exposure, PLUS Loans outstanding, PLUS the Special Production Tranche for each Designated Picture, PLUS the Completion Reserve exceeds the Borrowing Base, then the Required Lenders or the Fronting Bank may, at their option, require (x) a prepayment of the Loans in accordance with Section 2.9(d) or (y) the Borrower to deliver Cash Equivalents to the Fronting Bank in an amount sufficient to eliminate such excess or to furnish other security for such excess acceptable to the Fronting Bank. Any amounts so delivered pursuant to the preceding sentence shall be applied to reimburse the Fronting Bank for the amount of any drawings honored under Letters of Credit; PROVIDED, HOWEVER, that if subsequent to any such deposit such excess is reduced to an amount less than the amount of such deposited amounts and no Default or Event of Default is then continuing, the Borrower shall be entitled to receive such excess collateral if requested by it. (j) Notwithstanding the termination of the Commitments and the payment of the Loans, the obligations of the Borrower under this Section 2.15 shall remain in full force and effect until the Fronting Bank and the Lenders shall have been irrevocably released from their obligations with regard to any and all Letters of Credit. (k) This Section 2.15 shall not be amended without the written consent of the Fronting Bank and the Agent. SECTION 2.16. PROVISIONS RELATING TO THE BORROWING BASE. (a) The Agent may (and at the direction of the Required Lenders shall) from time to time by written notice to the Borrower (which notice shall be prospective only, i.e., to the extent that giving effect to such notice would otherwise result in a mandatory prepayment by the Borrower under Section 2.9, such notice shall not be given effect for purposes of such mandatory prepayment but shall nevertheless be effective for all other purposes under this Credit Agreement immediately upon the Borrower's receipt of such notice) delete any Person from the initial Schedule of Approved Account Debtors or move a Person to a category of Approved Account Debtor having a lower advance rate, in each case as the Agent or the Required Lenders, acting in good faith, may in its or their discretion deem appropriate or (ii) the Required Lenders may add, by written notice to the Borrower, a Person to the list of Approved Account Debtors or move an Approved Account Debtor to a category having a higher advance rate in each case as they may in their discretion deem appropriate. (b) In the event the Agent notifies the Borrower that a Person or Affiliated Group is to be deleted as an Approved - 56 - Account Debtor in accordance with Section 2.16(a), no additional Eligible Receivables from such Person or Affiliated Group may be included in the Borrowing Base subsequent to such notice unless the Agent thereafter notifies the Borrower that such Person or Affiliated Group is reinstated as an Approved Account Debtor in accordance with Section 2.16(a). In the event the Agent notifies the Borrower that the Allowable Amount with respect to an Approved Account Debtor is to be reduced in accordance with Section 2.16(a), no additional Eligible Receivables from such Approved Account Debtor may be included in the Borrowing Base subsequent to such notice if such inclusion would result in the aggregate amount of Eligible Receivables from such Approved Account Debtor being in excess of the Allowable Amount after giving effect to such reduction unless the Agent thereafter notifies the Borrower that the Allowable Amount may be increased in accordance with Section 2.16(a). Notwithstanding the foregoing, (i) if a Person or Affiliated Group is deleted as an Approved Account Debtor or the Agent notifies the Borrower that the Allowable Amount with respect to an Approved Account Debtor is to be reduced more than 30 days after the Closing Date, even if such Person or Affiliated Group is deleted as an Approved Account Debtor or the Allowable Amount set forth in Schedule 2 hereto with respect to an Approved Account Debtor has been reduced, an item that was included as an Eligible Receivable on the most recent Borrowing Base Certificate received by the Agent prior to any such deletion or reduction, may continue to be included as an Eligible Receivable in any subsequent Borrowing Base Certificate and (ii) if, within 30 days after the Closing Date, a Person or Affiliated Group is deleted as an Approved Account Debtor or the Agent notifies the Borrower that the Allowable Amount with respect to an Approved Account Debtor is to be reduced, all Eligible Receivables from such deleted Person or Affiliated Group and the amount of Eligible Receivables from such Approved Account Debtor in excess of the Allowable Amount after giving effect to such reduction shall be immediately excluded from the Borrowing Base. (c) With respect to such items of Product as described in Section 5.25, no Eligible Receivables may be included in the Borrowing Base unless the Borrower is in compliance with Section 5.25. (d) Such portion of the Borrowing Base qualifying under Tier 3 Borrowing Base may only be used to support Loans made under a Special Production Tranche. (e) The Borrowing Base credit attributable to any single obligor may not exceed 25% of the total Borrowing Base. - 57 - 3. REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES In order to induce the Lenders to enter into this Credit Agreement and to make the Loans and purchase participations in the Letters of Credit provided for herein, the Credit Parties, jointly and severally, make the following representations and warranties to, and agreements with, the Lenders, all of which shall survive the execution and delivery of this Credit Agreement, the issuance of the Notes, the making of the Loans and the issuance of the Letters of Credit: SECTION 3.1. CORPORATE EXISTENCE AND POWER. Each of the Credit Parties (other than KLC/New City) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is in good standing as a foreign corporation in all jurisdictions where the nature of its properties or business so requires and where the failure to be in good standing as a foreign corporation would render an Eligible Receivable unenforceable or would give rise to a material liability of any Credit Party. KLC/New City is a duly organized and existing general partnership under the laws of the State of California. Each of the Credit Parties has the corporate power or partnership power, as the case may be, and authority to own its respective properties and carry on its respective businesses as now being conducted, to execute, deliver and perform, as applicable, its obligations under this Credit Agreement, the Notes and the other Fundamental Documents and other documents contemplated hereby to which it is or will be a party as provided herein and to grant to the Agent, for the benefit of the Lenders, a security interest in the Collateral as contemplated by Article 8 hereof and in the Pledged Securities as contemplated by Article 10 hereof and guaranty the Obligations as contemplated by Article 9 hereof. SECTION 3.2. CORPORATE AUTHORITY AND NO VIOLATION. (a) The execution, delivery and performance of this Credit Agreement and the other Fundamental Documents to which it is a party, by each Credit Party and, in the case of the Borrower, the borrowings hereunder and the execution and delivery of the Notes and, in the case of each Credit Party, the grant to the Agent for the benefit of the Lenders of the security interest in the Collateral and the Pledged Securities as contemplated herein and in the other Fundamental Documents and, in the case of each Credit Party, the guaranty of the Obligations as contemplated in Article 9 hereof (i) have been duly authorized by all necessary corporate action or partnership action, as the case may be, on the part of each such Credit Party, (ii) will not constitute a violation by any Credit Party of any provision of Applicable Law in any material respect, any order of any court or other agency of the United States or any state thereof applicable - 58 - to any of the Credit Parties or any of their respective properties or assets, (iii) will not violate any provision of the Certificate of Incorporation or By-Laws or joint venture agreement, as the case may be, of any of the Credit Parties, or any material provision of any Distribution Agreement, Licensing Agreement, indenture, agreement, bond, note or other similar instrument to which any of the Credit Parties is a party or by which any of the Credit Parties or their respective properties or assets are bound, (iv) will not be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under or create any right to terminate any such Distribution Agreement, Licensing Agreement, indenture, agreement, bond, note or other instrument, and (v) will not result in the creation or imposition of any Lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of any of the Credit Parties other than pursuant to this Credit Agreement or the other Fundamental Documents to which it is a party. (b) Except as set forth on Schedule 3.2, there are no restrictions on the transfer of any of the Pledged Securities other than as a result of this Credit Agreement or applicable securities laws and the regulations promulgated thereunder. SECTION 3.3. GOVERNMENTAL APPROVAL. All authorizations, approvals, registrations or filings with any governmental or public regulatory body or authority of the United States or any state thereof (other than UCC financing statements, the Copyright Security Agreement, and the Trademark Security Agreement which have been delivered to the Agent prior to the making of the initial Loan hereunder, in form suitable for recording or filing with the appropriate filing office) required for the execution, delivery and performance by any Credit Party of this Credit Agreement and the other Fundamental Documents to which it is a party, and the execution and delivery by the Borrower of the Notes, have been duly obtained or made, or duly applied for and are in full force and effect, and if any such further authorizations, approvals, registrations or filings should hereafter become necessary, the Credit Parties will use their best efforts to obtain or make all such authorizations, approvals, registrations or filings. SECTION 3.4. BINDING AGREEMENTS. This Credit Agreement and the other Fundamental Documents when executed will constitute the legal, valid and binding obligations of the respective Credit Parties, enforceable in accordance with their respective terms, subject, as to the enforcement of remedies, to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general principles of equity. - 59 - SECTION 3.5. FINANCIAL STATEMENTS. (i) The audited Consolidated balance sheets of the Borrower at September 30, 1995, (ii) the unaudited Consolidated balance sheet of the Borrower at December 31, 1995, and (iii) the unaudited Consolidated balance sheet of the Borrower at March 31, 1996, together with the related statements of cash flows and Stockholders' Equity and the related notes and supplemental information for the audited statements, in the forms which have previously been provided to the Lenders, have been prepared in accordance with GAAP, except as otherwise indicated in the notes to such financial statements. All of such financial statements fairly present the Consolidated financial condition or the results of operations of the Borrower and its Consolidated Subsidiaries, at the dates or for the periods indicated, subject in the case of unaudited statements to changes resulting from normal year-end and audit adjustments, and (in the case of balance sheets) reflect (including the notes thereto) all known liabilities, contingent or otherwise, as of such dates required in accordance with GAAP to be shown or reserved against, or disclosed in the notes to the financial statements. SECTION 3.6. NO MATERIAL ADVERSE CHANGE. (a) There has been no material adverse change with respect to the business, operations, performance, assets, properties or condition (financial or otherwise) of the Credit Parties taken as a whole from March 31, 1996, except for changes due to seasonality that are consistent with the corresponding periods in prior years. (b) No Credit Party has entered or is entering into the arrangements contemplated hereby and by the other Fundamental Documents, or intends to make any transfer or incur any obligations hereunder or thereunder, with actual intent to hinder, delay or defraud either present or future creditors. On and as of the Closing Date, on a pro forma basis after giving effect to all Indebtedness (including the Loans) (i) each Credit Party expects the cash available to such Credit Party, after taking into account all other anticipated uses of the cash of such Credit Party (including the payments on or in respect of debt referred to in clause (iii) of this Section 3.6(b)), will be sufficient to satisfy all final judgments for money damages which have been docketed against such Credit Party or which may be rendered against such Credit Party in any action in which such Credit Party is a defendant (taking into account the reasonably anticipated maximum amount of any such judgment and the earliest time at which such judgment might be entered); (ii) the sum of the present fair saleable value of the assets of each Credit Party will exceed the probable liability of such Credit Party on its debts (including its Guaranties); (iii) no Credit Party will have incurred or intends to, or believes that it will, incur - 60 - debts beyond its ability to pay such debts as such debts mature (taking into account the timing and amounts of cash to be received by such Credit Party from any source, and of amounts to be payable on or in respect of debts of such Credit Party and the amounts referred to in clause (ii)); and (iv) each Credit Party believes it will have sufficient capital with which to conduct its present and proposed business and the property of such Credit Party does not constitute unreasonably small capital with which to conduct its present or proposed business. For purposes of this Section 3.6, "debt" means any liability on a claim, and "claim" means (y) right to payment whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed (other than those being disputed in good faith), undisputed, legal, equitable, secured or unsecured, or (z) right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. SECTION 3.7. OWNERSHIP OF PLEDGED SECURITIES, ETC. (a) Annexed hereto as Schedule 3.7(a) is a correct and complete list as of the date hereof, of each Credit Party (other than KLC/New City) showing, as to each, its name, the jurisdiction of incorporation, its authorized capitalization, the number of shares of its capital stock outstanding and the ownership of the capital stock of each such Credit Party; and (b) Except as noted on Schedule 3.7(b), no Credit Party owns any Voting Stock or beneficial interest, directly or indirectly, in any entity other than in the Subsidiaries of the Borrower. SECTION 3.8. COPYRIGHTS, TRADEMARKS AND OTHER RIGHTS. (a) On the date hereof, the items of Product listed on Schedule 3.8(a) comprise all of the Product in which any Credit Party has any right, title or interest in or to (either directly or through a joint venture or partnership), and the character of the interests held by the Credit Party are set forth across from the description of such item of Product. As to each item listed on Schedule 3.8(a) hereto the Credit Party holding such interests has duly recorded its interests in the United States Copyright Office and has delivered copies of all such recordation to the Agent. To the best of each Credit Party's knowledge, all items of Product and all component parts thereof do not and will not violate or infringe upon any copyright, right of privacy, trademark, patent, trade name, performing right or any literary, dramatic, musical, artistic, personal, private, several, care, contract or copyright right or any other right of any Person or contain any libelous or slanderous material other than to an - 61 - extent which is either not material or for which coverage is provided in existing insurance policies. To the best of each Credit Party's knowledge, there is no claim, suit, action or proceeding pending or threatened against any Credit Party that involves a claim of infringement of any copyright with respect to any item of Product listed on Schedule 3.8(a) and no Credit Party has knowledge of any existing infringement by any other Person of any copyright held by any Credit Party with respect to any item of Product listed on Schedule 3.8(a). (b) Schedule 3.8(b) hereto (i) lists all the trademarks registered by any Credit Party on the date hereof and identifies the Credit Party which registered each such trademark and (ii) specifies as to each, the jurisdictions in which such trademark has been issued or registered (or, if applicable, in which an application for such issuance or registration has been filed), including the respective registration or application numbers and applicable dates of registration or application and (iii) specifies as to each, as applicable, material licenses, sublicenses and other material agreements as of the date hereof (other than any agreements which relate to the exploitation of a item of Product), to which any Credit Party is a party and pursuant to which any Credit Party is authorized to use such trademark. Each trademark set forth on Schedule 3.8(b) shall be included on Schedule A to the Trademark Security Agreement delivered to the Agent pursuant to Section 4.01. SECTION 3.9. FICTITIOUS NAMES. Except as disclosed on Schedule 3.9, none of the Credit Parties are doing business or intend to do business other than under its full corporate name, including, without limitation, under any trade name or other doing business name. SECTION 3.10. TITLE TO PROPERTIES. As of the Closing Date, the Credit Parties have good title to each of the properties and assets reflected on the latest balance sheets referred to in Section 3.5 (other than such properties or assets disposed of in the ordinary course of business since the date of such balance sheets) and all such properties and assets are free and clear of Liens, except Permitted Encumbrances. SECTION 3.11. PLACES OF BUSINESS. The chief executive office of each Credit Party is, on the Closing Date, as set forth on Schedule 3.11 hereto, which offices in the United States are the places where each Credit Party is "located" for the purpose of the UCC and the Uniform Commercial Code in effect in any State in which any Credit Party is so located. All of the places where each Credit Party keeps - 62 - the records concerning the Collateral on the date hereof or regularly keeps any goods included in the Collateral on the date hereof are also listed on Schedule 3.11 hereto. SECTION 3.12. LITIGATION. Except as set forth on Schedule 3.12 hereto, there are no actions, suits or other proceedings at law or in equity by or before any arbitrator or arbitration panel, or any Governmental Authority (including, but not limited to, matters relating to environmental liability) or any investigation by any Governmental Authority of the affairs of or threatened litigation action or other proceedings against or affecting any Credit Party or of any of their respective properties or rights which would have a significant likelihood of materially and adversely affecting (i) the ability of any Credit Party to perform its obligations under the Fundamental Documents to which it is a party, (ii) the ability of any Credit Party to carry on its business, (iii) the security interests granted to the Agent for the benefit of the Lenders under the Fundamental Documents, (iv) the financial condition or business of the Credit Parties taken as a whole or, (v) the Collateral. No Credit Party is in default with respect to any order, writ, injunction, decree, rule or regulation of any Governmental Authority binding upon such Person, which default would have a material adverse effect upon the financial condition or the business of the Credit Parties taken as a whole. SECTION 3.13. FEDERAL RESERVE REGULATIONS. No Credit Party is engaged principally or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No part of the proceeds of the Loans will be used, directly or indirectly, whether immediately, incidentally or ultimately (i) to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock, or (ii) for any other purpose, in each case, violative of or inconsistent with any of the provisions of any regulation of the Board of Governors of the Federal Reserve System, including, without limitation, Regulations G, T, U and X thereto. SECTION 3.14. INVESTMENT COMPANY ACT. No Credit Party is, or will during the term of this Credit Agreement be, (i) an "investment company", within the meaning of the Investment Company Act of 1940, as amended or (ii) subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or any foreign, federal or local statute or any other Applicable Law of the United States of America, any other jurisdiction, in each case limiting its ability to incur indebtedness for money borrowed as contemplated hereby or by any other Fundamental Document. - 63 - SECTION 3.15. TAXES. Each Credit Party has filed or caused to be filed all federal, state, local and foreign tax returns which are required to be filed with any Governmental Authority after giving effect to applicable extensions, and has paid or have caused to be paid all taxes as shown on said returns or on any assessment received by them in writing, to the extent that such taxes have become due, except as permitted by Section 5.15 hereof. No Credit Party knows of any material additional assessments or any basis therefor. The Credit Parties reasonably believe that the charges, accrual and reserves on its books in respect of taxes or other governmental charges are adequate. SECTION 3.16. COMPLIANCE WITH ERISA. Each Credit Party is in compliance in all material respects with the provisions of ERISA and the Code applicable to Plans, and the regulations and published interpretations thereunder, if any, which are applicable to it. As of the date hereof, no Credit Party has, with respect to any Plan established or maintained by it, engaged in a prohibited transaction which would subject it to a material tax or penalty on prohibited transactions imposed by ERISA or Section 4975 of the Code. No material liability to the PBGC has been or is expected to be incurred with respect to the Plans (other than for premiums not yet due) and there has been no Reportable Event and no other event or condition that presents a material risk of termination of a Plan by the PBGC. No Credit Party has engaged in a transaction which would result in the incurrence by such Credit Party of any liability under Section 4069 of ERISA. No Credit Party has taken any action and no event has occurred with respect to any Multiemployer Plan which would subject any Credit Party to material liability under either Section 4201 or 4204 of ERISA. SECTION 3.17. AGREEMENTS. (a) No Credit Party is in default in the performance, observance or fulfillment of any of the material obligations, covenants or conditions contained in any agreement or instrument (including the Distribution Agreements and the Licensing Agreements) to which it is a party which would reasonably be expected to result in any material adverse change in the business, properties, assets, operations, or condition (financial or otherwise) of the Credit Parties taken as a whole. (b) Schedule 3.17 is a true and complete listing (in form satisfactory to the Agent) as of the date on which this Credit Agreement is executed by the Borrower of (i) all credit agreements, indentures, and other agreements related to any Indebtedness for borrowed money of the Credit Parties, (ii) all - 64 - joint venture agreements to which the Credit Parties are a party (iii) all material Distribution Agreements and the Licensing Agreements to which the Credit Parties are party and (iv) all other contracts and agreements which are material to any Credit Party, including but not limited to, guarantees and employment agreements. The Credit Parties have delivered or made available to the Agent a true and complete copy of each agreement listed on Schedule 3.17, including all exhibits and schedules. For purposes of this Section 3.17, a Distribution Agreement or other contract or agreement shall be deemed "material" if the Credit Parties reasonably expect that prior to the Commitment Termination Date any Credit Party would, pursuant to the terms thereof, (A) recognize net revenues after the payment of third party shares in excess of $500,000 or (B) incur liabilities or obligations (not covered by corresponding revenues) in excess of $500,000. SECTION 3.18. SECURITY INTEREST; OTHER SECURITY. (a) This Credit Agreement and the other Fundamental Documents, when executed and delivered and, upon the making of the initial Loan hereunder, will create and grant to the Agent for the benefit of the Lenders (upon (i) the filing of the appropriate UCC-1 financing statements, (ii) the filing of the Copyright Security Agreements with the U.S. Copyright Office, (iii) the filing of the Trademark Security Agreement with the U.S. Patent and Trademark Office and (iv) delivery of the Pledged Securities to the Agent) valid and first priority perfected security interests in the Collateral and the Pledged Securities subject only to Permitted Encumbrances and except as priority may be limited by bankruptcy, insolvency, or other laws affecting the enforcement of creditors' rights generally. (b) The Keyman Life Insurance is in full force and effect and the Credit Parties know of no defense or offset to the full and timely payment thereon which could be asserted by the insurer issuing such policy if a bona fide claim were to be made. (c) The Keyman Life Insurance Assignment constitutes a valid and effective transfer to the Agent for the benefit of the Lenders for security purposes of all right, title and interest of any of the Credit Parties in and to the Keyman Life Insurance. SECTION 3.19. DISCLOSURE. Neither this Credit Agreement nor any other Fundamental Document nor any agreement, document, certificate or statement furnished to the Agent for the benefit of the Lenders by any Credit Party in connection with the transactions contemplated hereby, at the time it was furnished or delivered contained any untrue statement of a material fact regarding the Credit Parties or, when taken together with such other agreements, documents, - 65 - certificates and statements omitted to state a material fact necessary under the circumstances under which it was made in order to make the statements contained herein or therein not misleading. There is no fact known to any Credit Party not constituting general industry conditions or not disclosed in such agreements, documents, certificates and statements which materially and adversely affects, or could reasonably be expected in the future to materially and adversely affect, the business, assets or condition, financial or otherwise of the Credit Parties taken as a whole. SECTION 3.20. DISTRIBUTION RIGHTS. Each Credit Party has sufficient right, title and interest in each item of Product to enable it (i) to enter into and perform all of the Distribution Agreements to which it is a party and other agreements generating Eligible Receivables and accounts receivable reflected on the most recent balance sheet delivered to the Lenders pursuant hereto, and (ii) to charge, earn, realize and retain all fees and profits to which such Credit Party is entitled thereunder, and is not in breach of any of its obligations under such agreements, nor does any Credit Party have any knowledge of any breach or anticipated breach by any other parties thereto, which breach in either case either individually or when aggregated with all other such breaches would have a material adverse effect on the Credit Parties taken as a whole. SECTION 3.21. ENVIRONMENTAL LIABILITIES. (a) Except as set forth on Schedule 3.21 hereto, no Credit Party has used, stored, treated, transported, manufactured, refined, handled, produced or disposed of any Hazardous Materials on, under, at or from any of their properties or assets owned or leased by a Credit Party, in any manner which at the time of the action in question violated any Environmental Law governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials and to the best of the Credit Parties' knowledge, no prior owner of such property or asset or any tenant, subtenant, prior tenant or prior subtenant thereof has used Hazardous Materials on or affecting such property or asset, or otherwise, in any manner which at the time of the action in question violated any Environmental Law governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials. (b) To the best of each Credit Party's knowledge (i) no Credit Party has any obligations or liabilities, known or unknown, matured or not matured, absolute or contingent, assessed or unassessed, which would reasonably be expected to have a materially adverse effect on the business or condition (financial - 66 - or otherwise) of the Credit Parties taken as a whole and (ii) no claims have been made against any of the Credit Parties during the past five years and no presently outstanding citations or notices have been issued against any of the Credit Parties, which could reasonably be expected to have a materially adverse effect on the business or condition (financial or otherwise) of the Credit Parties taken as a whole which in either case have been or are imposed by reason of or based upon any provision of any Environmental Law, including, without limitation, any such obligations or liabilities relating to or arising out of or attributable, in whole or in part, to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of any Hazardous Materials by any Credit Party, or any of their employees, agents, representatives or predecessors in interest in connection with or in any way arising from or relating to any of the Credit Parties or any of their respective owned or leased properties, or relating to or arising from or attributable, in whole or in part, to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of any such substance, by any other Person at or on or under any of the real properties owned or used by any of the Credit Parties or any other location where such could have a materially adverse effect on the business or condition (financial or otherwise) of the Credit Parties taken as a whole. SECTION 3.22. PLEDGED SECURITIES. All of the Pledged Securities are duly authorized, validly issued and fully paid, and are owned and held by the Pledgors, free and clear of any liens, encumbrances, or security interests whatsoever other than those created pursuant to this Credit Agreement or Permitted Encumbrances and there are no restrictions on the transfer of the Pledged Securities other than as a result of this Credit Agreement or applicable securities laws. Except as set forth on Schedule 3.22, there are no outstanding rights, warrants, options, or agreements to purchase or otherwise acquire any shares of the stock or securities or obligations of any kind convertible into any shares of capital stock, of any shares, of the issuers of the Pledged Securities. The Pledged Securities are owned by the Persons specified on Schedule 3.7(a). SECTION 3.23. COMPLIANCE WITH LAWS. No Credit Party is in violation of any Applicable Law except for such violations in the aggregate which would not have a material adverse effect on the business condition (financial or otherwise) of the Credit Parties taken as a whole. The borrowings hereunder, the intended use of the proceeds of the Loans as described in the preamble hereto and as contemplated by - 67 - Section 5.23 and any other transactions contemplated hereby will not violate any Applicable Law. 4. CONDITIONS OF LENDING SECTION 4.1. CONDITIONS PRECEDENT TO INITIAL LOANS OR LETTER OF Credit. The obligation of each Lender to make its initial Loan or issue and participate in the initial Letter of Credit is subject to the following conditions precedent: (a) CORPORATE DOCUMENTS. At the time of the making of the initial Loan, the Agent shall have received, with copies for each of the Lenders: (i) a copy of each Credit Party's certificate of incorporation or joint venture agreement, certified as of a recent date by the Secretary of State of such Credit Party's jurisdiction of incorporation or organization, as the case may be; (ii) a certificate of such Secretary of State, dated as of a recent date as to the good standing of and payment of taxes by each Credit Party or General Partner of such Credit Party, as the case may be, which lists the charter documents on file in the office of such Secretary of State; (iii) a certificate dated as of a recent date as to the good standing of each Credit Party issued by the Secretary of State of each jurisdiction in which each Credit Party is qualified as a foreign corporation; and (iv) a certificate of the Secretary of each Credit Party or in the case of KLC/New City, a certificate of one of its General Partners, dated the date of the initial Loans and certifying (A) that attached thereto is a true and complete copy of the by-laws of such Credit Party or General Partner of such Credit Party, as the case may be, as in effect on the date of such certification, (B) that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of such Credit Party or General Partner of such Credit Party, as the case may be, authorizing (to the extent applicable) the Borrowings hereunder, the execution, delivery and performance in accordance with their respective terms of this Credit Agreement, the Notes (if any) to be executed by it, and any other documents required or contemplated hereunder or thereunder and that such resolutions have not been amended, rescinded or supplemented and are currently in - 68 - effect, (C) that the certificate of incorporation of such Credit Party or General Partner of such Credit Party, as the case may be, has not been amended since the date of the last amendment thereto indicated on the certificate of the Secretary of State furnished pursuant to clause (i) above except to the extent specified in such Secretary's certificate and (D) as to the incumbency and specimen signature of each officer of such Credit Party or General Partner of such Credit Party, as the case may be, executing (as applicable) this Credit Agreement, the Notes or any other document delivered by it in connection herewith or therewith (such certificate to contain a certification by another officer of such Credit Party or General Partner of such Credit Party, as the case may be, as to the incumbency and signature of the officer signing the certificate referred to in this clause (iv)); and (v) such additional supporting documents as the Agent or its counsel or any Lender may reasonably request. (b) NOTES. On or before the date of the making of the initial appropriate Loans, the Agent shall have received the Notes executed by the Borrower. (c) OPINIONS OF COUNSEL. The Agent shall have received the written opinions dated the date hereof and addressed to the Agent and the Lenders substantially in the form attached hereto as Exhibit B, in form and substance satisfactory to Morgan, Lewis & Bockius LLP, of Kaye, Scholer, Fierman, Hayes & Handler, LLP. and internal legal counsel to the Credit Parties. (d) PROJECTED FINANCIAL INFORMATION. The Credit Parties shall have delivered to the Agent forecasted financial statements consisting of balance sheets, cash flow statements, income statements and borrowing base projections together with appropriate supporting details and a statement of the underlying assumptions. Such projected statements shall cover a period commencing on the Closing Date and ending at fiscal year end 1997 and shall have been prepared on a basis consistent with the Borrower's past practices. All of the foregoing shall have been prepared in good faith and shall represent the, good faith opinion of the senior management of the Borrower of the most probable course of its business as of the date of delivery of such projections to the Agent. (e) NO MATERIAL ADVERSE CHANGE. No material adverse change shall have occurred with respect to the business, operations, performance, assets, properties, condition (financial or otherwise) or prospects of the Credit Parties taken as a whole - 69 - from March 31, 1996 except for changes due to seasonality that are consistent with the corresponding periods in prior years. (f) INSURANCE. The Borrower shall have furnished the Agent with (i) a summary of all existing insurance coverage, (ii) evidence acceptable to the Agent that the insurance policies required by Section 5.6 have been obtained and are in full force and effect and (iii) Certificates of Insurance with respect to all existing insurance coverage which certificates shall name Chemical Bank, as Agent, as the certificate holder and shall evidence the Borrowers' compliance with Section 5.6(f) with respect to all insurance coverage existing as of the Closing Date. (g) BORROWING BASE CERTIFICATE. The Agent shall have received an initial Borrowing Base Certificate substantially in the form of Exhibit C hereto. (h) SECURITY AND OTHER DOCUMENTATION. On or prior to the Closing Date, the Agent shall have received fully executed copies of (i) a Pledgeholder Agreement for each item of Product, for which a Credit Party has control over any physical elements thereof as listed on Schedule 3.8(a) hereto; (ii) a Copyright Security Agreement for each item of Product in which a Credit Party has a copyrightable interest (as listed on Schedule 3.8(a) hereto) executed by such Credit Party; (iii) a Trademark Security Agreement for each trademark in which a Credit Party has any interest (as listed on Schedule 3.8(b) hereto) executed by such Credit Party; (iv) a Laboratory Access Letter addressed to each Laboratory where a Credit Party has access rights to any physical elements of Product or; (v) appropriate UCC-1 financing statements relating to the Collateral; and (vi) the Pledged Securities with appropriate undated stock powers executed in blank. (i) SECURITY INTERESTS IN COPYRIGHTS AND OTHER COLLATERAL. On or prior to the Closing Date, the Agent shall have received evidence satisfactory to it that each Credit Party has sufficient right, title and interest in and to the Collateral and other assets which it purports to own (including appropriate licenses under copyright), as set forth in its financial statements and in the other documents presented to the Lenders to enable each such Credit Party to perform the Distribution Agreements and Licensing Agreements to which each such Credit Party is a party and as to each Credit Party to grant to the Agent for the benefit of the Lenders the security interests contemplated by the Fundamental Documents, and that all financing statements, copyright filings and other filings under Applicable Law necessary to provide the Agent for the benefit of the Lenders with a first priority perfected security interest in the Pledged Securities, Keyman Life Insurance and Collateral (subject, as to - 70 - the Collateral, to Permitted Encumbrances) have been filed or delivered to the Agent in satisfactory form for filing. (j) PAYMENT OF FEES. All fees and expenses then due and payable by any Credit Party in connection with the transactions contemplated hereby or by the Fee Letter shall have been paid including, but not limited to, fees and expenses due and payable by the Borrower to the Agent and the Lenders. (k) CERTIFICATE FROM THE BORROWER. The Agent shall have received a certificate, signed by an Authorized Officer on behalf of the Borrower, confirming that the Borrower has determined that the projected availability of the Loans as determined by the Borrowing Base, together with funds from internally generated sources and other available sources that are acceptable to the Agent, is sufficient to finance the Borrower in a manner compatible with the forecasted financial statements previously delivered to the Lenders. (l) LITIGATION. No litigation, inquiry, injunction or restraining order shall be pending, entered or threatened which in the Agent's good faith judgment could reasonably be expected to materially and adversely affect (i) the assets, operations, business or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower and its Subsidiaries to perform their respective Obligations hereunder or (iii) the rights and remedies of the Lenders. (m) EXISTING INDEBTEDNESS. Simultaneously with the making of the initial Loans, all Indebtedness of the Borrower under the Imperial Credit Agreement shall have been paid in full, the commitments of the banks thereunder shall have been terminated and all security interests, liens and other encumbrances granted thereunder shall have been released (or, at the Agent's option, assigned to the Agent as an amendment and restatement of the existing facility). (n) UCC SEARCHES. The Agent shall have received UCC searches satisfactory to it indicating that no other filings (other than in connection with Permitted Encumbrances) with regard to the Collateral are of record in any jurisdiction in which it shall be necessary or desirable for the Agent to make a UCC filing in order to provide the Agent with a perfected security interest in the Collateral. (o) FINANCIAL STATEMENTS. The Agent and the Lenders shall have received and be satisfied with the true and complete copies of all of the financial statements referred to in Section 3.5. - 71 - (p) ERISA. The Agent shall have received copies of all Plans of the Credit Parties that are in existence on the Closing Date, and descriptions of those that are committed to on the Closing Date. (q) DELIVERY OF AGREEMENTS. The Agent shall have received and be satisfied with the terms and provisions of (i) the Borrower's standard form of Distribution Agreement and all significant existing Distribution Agreements which are not on such standard form, (ii) all joint venture or partnership agreements to which the Borrower or a Subsidiary is a party and (iii) all other agreements listed on Schedule 3.17 to the extent requested by the Agent. (r) CONTRIBUTION AGREEMENT. The Agent shall have received a fully executed Contribution Agreement duly executed by all parties thereto. (s) KEYMAN LIFE INSURANCE ASSIGNMENT. The Keyman Life Insurance and the Keyman Life Insurance Assignment shall have been delivered to the Agent. (t) PRO-FORMA COMPLIANCE. The Agent shall have received a pro-forma compliance report dated the Closing Date or on the date on which the most recent data was available confirming that the Borrower and its Subsidiaries are in pro-forma compliance with all covenants set forth in Article 5 and Article 6 hereof and in the other Fundamental Documents. (u) STOCK OWNERSHIP. Neither Donald Kushner nor Peter Locke shall have reduced his stock ownership in the Borrower since the most recent proxy statement. (v) NOTICES OF ASSIGNMENT AND IRREVOCABLE INSTRUCTIONS. The Agent shall have received, with respect to each Eligible Receivable included in the initial Borrowing Base Certificate, fully executed copies of the Notice of Assignment and Irrevocable Instructions, subject to the provisions of Section 5.18(d). (w) REQUIRED CONSENTS AND APPROVALS. The Agent shall be satisfied that all required consents and approvals have been obtained with respect to the transactions contemplated hereby from all Governmental Authorities with jurisdiction over the business and activities of any Credit Party as of the date hereof, and from any other entity whose consent or approval the Agent in its reasonable discretion deems necessary to consummate the transactions contemplated hereby. (x) COMPLIANCE WITH LAWS. The Agent shall be satisfied that the transactions contemplated hereby will not violate any provision of Applicable Law, or any order of any - 72 - court or other agency of the United States, any state thereof, Canada or the United Kingdom applicable to any of the Credit Parties (as of the date hereof) or any of their respective properties or assets. (y) PRODUCTION LOAN AGREEMENTS. The Agent shall have received and be satisfied with the terms of any production loan agreement to which a Subsidiary of the Borrower is party which is not to be paid off on the Closing Date, and shall have received from each such production lender an intercreditor agreement in form and substance acceptable to the Agent. (z) APPROVAL OF COUNSEL TO THE AGENT. All legal matters incident to this Credit Agreement and the transactions contemplated hereby shall be reasonably satisfactory to Morgan, Lewis & Bockius LLP, counsel to the Agent. (aa) OTHER DOCUMENTS. The Agent shall have received such other documentation as the Agent may reasonably request. SECTION 4.2. CONDITIONS PRECEDENT TO EACH LOAN AND LETTER OF CREDIT. The obligation of the Lenders to make each Loan and to issue and participate in each Letter of Credit (including the initial Loans and Letter of Credit) is subject to the following conditions precedent: (a) NOTICE. The Agent shall have received a notice with respect to such Borrowing or the Fronting Bank shall have received a notice with respect to such Letter of Credit as required by Article 2 hereof. (b) BORROWING CERTIFICATE. The Agent shall have received a Borrowing Certificate with respect to such Borrowing, duly executed by an Authorized Officer of the Borrower. (c) REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in Article 3 hereof and in the other Fundamental Documents shall be true and correct in all material respects on and as of the date of each Borrowing and issuance of a Letter of Credit hereunder (except to the extent that such representations and warranties expressly relate to an earlier date and except to the extent that such changes have occurred without breach or default under any of the terms or conditions hereof including without limitation Articles 5 and 6 hereof) with the same effect as if made on and as of such date. (d) NO EVENT OF DEFAULT. On the date of each Borrowing or the issuance of each Letter of Credit hereunder, each Credit Party shall be in compliance with all of the terms - 73 - and provisions set forth herein to be observed or performed and no Event of Default or Default shall have occurred and be continuing. (e) ADDITIONAL DOCUMENTS. The Lenders shall have received from the Borrower on the date of each Borrowing and issuance of a Letter of Credit such documents and information as they may reasonably request relating to the satisfaction of the conditions in this Section 4.2. Each request for a Borrowing or for issuance of a Letter of Credit shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing or issuance of such Letter of Credit as to the matters specified in paragraphs (c) and (d) of this Section. 5. AFFIRMATIVE COVENANTS From the date hereof and for so long as the Commitments shall be in effect or any amount remains outstanding under the Notes or any Letter of Credit shall remain outstanding or any Obligations remain unpaid or unsatisfied, each Credit Party agrees that, unless the Required Lenders shall otherwise consent in writing, each of them will: SECTION 5.1. FINANCIAL STATEMENTS AND REPORTS. Furnish or cause to be furnished to the Agent in sufficient numbers for distribution to the Lenders: (a) Within 95 days after the end of each fiscal year of the Borrower commencing with fiscal year 1996 (i) the audited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at the end of, and the related statements of income, Stockholders' Equity and cash flow for, such year, and the corresponding figures as at the end of, and for, the preceding fiscal year, accompanied by an opinion of KPMG Peat Marwick LLP or such other independent public accountants of recognized standing as shall be retained by the Borrower and be reasonably satisfactory to the Lenders, which report and opinion shall be prepared in accordance with generally accepted auditing standards relating to reporting and which report and opinion shall contain no material exceptions or qualifications except for qualifications relating to accounting changes (with which such independent public accountants concur) in response to FASB releases or other authoritative pronouncements and (ii) the unaudited consolidating balance sheet of the Borrower and its Consolidated Subsidiaries as at the end of, and the related unaudited consolidating statements of income and cash flow for, such fiscal year certified by the chief financial officer of the Borrower, on behalf of the Borrower; - 74 - (b) Within 60 days after the end of each of the first three fiscal quarters of each of its fiscal years the unaudited consolidated and consolidating balance sheets of the Borrower and its Consolidated Subsidiaries as at the end of, and the related unaudited consolidated and consolidating statements of income and cash flow for, such quarter, and the corresponding figures as at the end of, and for, the corresponding period in the preceding fiscal year, together with a certificate signed by an Authorized Officer of the Borrower, on behalf of the Borrower, to the effect that such financial statements, while not examined by independent public accountants, reflect, in the opinion of the Borrower, all adjustments necessary to present fairly the financial position of the Borrower and its Consolidated Subsidiaries as at the end of the fiscal quarter and the results of its operations for the quarter then ended in conformity with GAAP; (c) Simultaneously with the delivery of the statements referred to in paragraphs (a) and (b) of this Section 5.1, a certificate of an Authorized Officer of the Borrower, on behalf of the Borrower, in form and substance satisfactory to the Agent (i) stating whether or not such Authorized Officer has knowledge of any condition or event which would constitute an Event of Default or Default has occurred and, if so, specifying each such condition or event and the nature thereof, (ii) demonstrating in reasonable detail compliance with the provisions of Sections 6.11, 6.14 through 6.20 and 6.23 hereof, (iii) specifying the actual pay-per-view amount paid to the Borrower or any Guarantor during such fiscal period for each feature film (together with appropriate supporting detail) and (iv) certifying that all filings required under Section 5.9 hereof have been made and listing each such filing that has been made since the date of the last certificate delivered in accordance with this Section 5.1(c); (d) Furnish to the Lenders, together with each set of audited financial statements required by paragraph (a) above, a report from the independent public accountants rendering the report thereon (i) stating that such Person has made such examination or investigation as is necessary to enable it to express an informed opinion as to the matters referred to in clauses (ii) and (iii) of this Section 5.1(d), it being understood that no special audit procedures are required hereby, (ii) stating whether, in connection with their audit examination, any condition or event, at any time during or at the end of the accounting period covered by such financial statements, which constitutes an Event of Default has come to their attention, and if such a condition or event has come to their attention, specifying the nature and period, if known, of existence thereof and (iii) stating that the matters set forth in the compliance certificate delivered therewith pursuant to clause (ii) of paragraph (c) above for the applicable fiscal year are stated in accordance with the terms of this Credit Agreement; - 75 - (e) On or prior to the twenty-fifth day of each month, a certificate ("BORROWING BASE CERTIFICATE") in the form of Exhibit C hereto, setting forth the amount of each component included in the Borrowing Base as of the last Business Day of the preceding month, attached to which shall be detailed information including the calculation of each such component (the Borrower, at its option, may furnish additional Borrowing Base Certificates setting forth such information as of such other dates as it may deem appropriate); (f) Promptly upon their becoming available, copies of (i) all management projections, studies or evaluations prepared by consultants for or presented to any Credit Party's Board of Directors and (ii) all audits, studies, reports or evaluations prepared for or submitted to any of the Credit Parties by any outside professional firm or service, including, without limitation, the comment letter submitted by the Credit Parties' accountants to management in connection with their annual audit; (g) Within 30 days after filing with the Internal Revenue Service, copies of the actual corporate income tax return(s) of the Borrower and its Consolidated Subsidiaries; (h) Promptly upon their becoming available, copies of (i) all registration statements, proxy statements, and all reports which the Borrower or any other Credit Party shall file with any securities exchange or with the Securities and Exchange Commission or any successor agency and (ii) all reports, financial statements, press releases and other information which the Borrower or any other Credit Party shall release, send or make available to its common stockholders generally; (i) Notice of (i) any substantive action taken by any Credit Party in connection with the proposed issuance of any additional debt or equity securities and (ii) the date on which such Credit Party expects to receive the net cash proceeds from the issuance of such additional debt or equity securities; (j) Within 120 days after the end of each fiscal year of the Borrower (commencing with fiscal year 1996), forecasted financial statements consisting of balance sheets of the Borrower and its Subsidiaries, cash flow statements and income statements together with appropriate supporting details and a statement of underlying assumptions comparable to the projections delivered to the Lenders pursuant to Section 4.1(d) hereof which cover the succeeding two fiscal years, and which shall have been prepared in accordance with GAAP; (k) Deliver to the Agent within 60 days of the end of each fiscal quarter (95 days in the case of fiscal year end) updated cash flow projections for the ensuing four quarters in the format previously delivered to the Lenders demonstrating that - 76 - sufficient cash will be available from operations, borrowings under this Credit Agreement and amounts committed to be funded by third parties approved by the Agent as and when needed to fund all reasonably anticipated cash requirements; and (l) From time to time such additional information regarding the financial condition or business of the Credit Parties or otherwise regarding the Collateral, as any Lender may reasonably request for the purpose of assuring itself as to compliance by the Credit Parties with the terms hereof. SECTION 5.2. CORPORATE EXISTENCE. Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its corporate existence, rights, material licenses, material permits and material franchises, and comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, any Governmental Authority, except as otherwise permitted under Section 6.7 and except that any Subsidiary of the Borrower may be liquidated or dissolved if in the reasonable judgment of the Board of Directors of the Borrower such Subsidiary is no longer necessary for the proper conduct of the business of the Borrower. SECTION 5.3. MAINTENANCE OF PROPERTIES. Keep its tangible properties which are material to its business in good repair, working order and condition (ordinary wear and tear excepted) and, from time to time (i) make all necessary and proper repairs, renewals, replacements, additions and improvements thereto and (ii) comply at all times with the provisions of all material leases and other material agreements to which it is a party so as to prevent any loss or forfeiture thereof or thereunder unless compliance therewith is being currently contested in good faith by appropriate proceedings; PROVIDED, HOWEVER, that nothing in this Section 5.3 shall prevent any Credit Party from discontinuing the use, operation or maintenance of such properties or disposing of them if such discontinuance or disposal is, in the judgment of its Board of Directors, desirable in the conduct of the business. SECTION 5.4. NOTICE OF MATERIAL EVENTS. (a) Promptly upon any executive officer of any Credit Party obtaining knowledge of (i) any Default or Event of Default, or becoming aware that any Lender has given notice or taken any other action with respect to a claimed Event of Default, (ii) any material adverse change in the condition or operations of the Borrower and its Subsidiaries taken as a whole, financial or otherwise, (other than changes due to seasonality that are consistent with the corresponding periods in prior years), (iii) - 77 - any action or event which might materially and adversely affect the performance of the Credit Parties' obligations under this Credit Agreement, the repayment of the Notes, or the security interests granted to the Agent for the benefit of the Lenders under this Credit Agreement or any other Fundamental Document, (iv) the opening of any office of any Credit Party or the change of the executive office or the principal place of business of any Credit Party or of the location of any Credit Party's books and records with respect to the Collateral, (v) any change in the name of any Credit Party, (vi) any other event which may materially and adversely impact upon the amount or collectibility of accounts receivable of the Credit Parties or otherwise materially decrease the value of the Collateral or (vii) any Person giving any notice to any Credit Party or taking any other action to enforce remedies with respect to a claimed default or event or condition of the type referred to in paragraph (d) of Article 7, such Credit Party shall promptly give written notice thereof to the Agent specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken and the nature of such claimed Event of Default or condition and what action such Credit Party has taken, is taking and proposes to take with respect thereto. (b) Promptly upon any executive officer of any Credit Party obtaining knowledge of (i) the institution of, or threat of, any action, suit, proceeding, investigation or arbitration by any Governmental Authority or other Person against or affecting any Credit Party or any of its assets, or (ii) any material development in any such action, suit, proceeding, investigation or arbitration (whether or not previously disclosed to the Lenders), which, in the case of (i) or (ii) might have a significant likelihood of, materially, and adversely affecting the Borrower and its Subsidiaries taken as a whole, such Credit Party shall promptly give notice thereof to the Agent and provide such other information as may be available to it to enable the Lenders to evaluate such matters; and, in addition to the requirements set forth in clauses (i) and (ii) of this subsection (b), such Credit Party upon request shall promptly give notice of the status of any action, suit, proceeding, investigation or arbitration covered by a report delivered to the Lenders pursuant to clause (i) and (ii) above to the Lenders and provide such other information as may be reasonably available to it to enable the Lenders to evaluate such matters. For the purposes of this Section 5.4, the submittal or filing by a Credit Party of a notice or report or an application for the issuance, modification or renewal of any permit or the acknowledgment by a Governmental Authority of receipt of such notice, report or application shall not constitute an "action", "suit", "proceeding", "investigation" or "arbitration". SECTION 5.5. MATERIAL ADVERSE EFFECT. - 78 - Promptly report to the Agent and the Lenders, after any executive officer of a Credit Party obtains knowledge of same, any event or series of events which would have any change or effect that (i) has a materially adverse effect on the business, assets, properties, operations or financial condition of the Credit Parties taken as a whole, (ii) materially impairs the ability of a Credit Party to perform its respective obligations under the Fundamental Documents to which it is a party or (iii) materially impairs the validity or enforceability of, or materially impairs the rights, remedies or benefits available to the Lenders under, the Fundamental Documents. SECTION 5.6. INSURANCE. (a) Keep its assets which are of an insurable character insured (to the extent and for the time periods consistent with normal industry practices) by financially sound and reputable insurers against loss or damage by fire, explosion, theft or other hazards which are included under extended coverage in amounts not less than the insurable value of the property insured or such lesser amounts, and with such self-insured retention or deductible levels, as are consistent with normal industry practices. (b) Maintain with financially sound and reputable insurers, insurance against other hazards and risks and liability to Persons and property to the extent and in the manner customary for companies in similar businesses. (c) Maintain, or cause to be maintained, in effect during the period from the commencement of principal photography of each item of Product produced by any Credit Party, through the third anniversary of the date on which such item of Product is Completed and/or as otherwise required by applicable contracts, a so-called "Errors and Omissions" policy with respect to all items of Product for which principal photography has commenced, and cause such Errors and Omissions policy to provide coverage to the extent and in such manner as is customary for items of Product of like type but, at minimum, to the extent and in such manner as is required under all applicable contracts relating thereto. (d) Maintain, or cause to be maintained, in effect during the period from the commencement of principal photography of each item of Product produced by any Credit Party, or from the date of acquisition of each item of Product acquired by any Credit Party (i) until such time as the Agent shall have been provided with satisfactory evidence of the existence of one negative or master tape in one location and an interpositive or internegative or duplicate master tape in another location of the final version of the Completed Product, insurance on the negatives and sound tracks or master tapes of such item of Product in an amount not less than the cost of re-shooting the - 79 - principal photography of the item of Product, and (ii) until principal photography of such item of Product has been concluded, a cast insurance policy with respect to such item of Product, which provides coverage to the extent and in such manner as is customary for a like type of Product, but at minimum, to the extent required under all applicable contracts relating thereto. (e) Maintain, or cause to be maintained, in effect distributor's "Errors and Omissions" insurance to the extent and in amounts customary for companies in similar businesses. (f) Cause all such above-described insurance (excluding worker's compensation insurance) to (i) provide for the benefit of the Lenders that 30 days' prior written notice of suspension, cancellation, termination, modification, non-renewal or lapse or material change of coverage shall be given to the Agent; (ii) name the Agent for the benefit of the Lenders as the loss payee (except for "Errors and Omissions" insurance and other third party liability insurance), PROVIDED, HOWEVER, that production insurance recoveries received prior to Completion or abandonment of an item of Product may be utilized to finance the production of such item of Product and property insurance proceeds may be used to repair damage in respect of which such proceeds were received; and (iii) to the extent that neither the Agent nor the Lenders shall be liable for premiums or calls, name the Agent for the benefit of the Lenders as an additional insured including, without limitation, under any "Errors and Omissions" policy. (g) Upon the request of the Agent, the Borrower will render to the Agent a statement in such detail as the Agent may request as to all such insurance coverage. (h) So long as Donald Kushner is employed by the Borrower, maintain or cause to be maintained the Kushner Life Insurance. (i) So long as Peter Locke is employed by the Borrower maintain or cause to be maintained the Locke Life Insurance: SECTION 5.7. PRODUCTION. Use its reasonably best efforts to cause any item of Product being produced by any Credit Party to be produced in all material respects in accordance with the standards set forth in, and within the time period established in, all agreements with respect to such item of Product to which such Credit Party is a party, subject to the terms and conditions of such agreements. - 80 - SECTION 5.8. MUSIC. When an item of Product has been scored, if requested by the Agent, deliver to the Agent, (a) written evidence of the music synchronization rights obtained from the composer or the licensor of the music and (b) copies of all music cue sheets with respect to such item of Product. SECTION 5.9. COPYRIGHT. (a) Within 90 days after the initial release or broadcast of each item of Product, to the extent any Credit Party is or becomes the copyright proprietor thereof or to the extent such interest is obtained by any Credit Party, or any Credit Party otherwise acquires a copyrightable interest, take any and all actions necessary to register the copyright for such item in the name of such Credit Party (subject to a Lien in favor of the Agent for the benefit of the Lenders pursuant to the Copyright Security Agreement) in conformity with the laws of the United States and such other jurisdictions as the Agent may reasonably specify, and immediately deliver to the Agent (i) written evidence of the registration of any and all such copyrights for inclusion in the Collateral under this Credit Agreement and (ii) a Copyright Security Agreement Supplement relating to such item executed by such Credit Party. (b) Obtain instruments of transfer or other documents evidencing the interest of any Credit Party with respect to the copyright relating to items of Product in which such Credit Party is not entitled to be the initial copyright proprietor, and promptly record such instruments of transfer on the United States Copyright Register and such other jurisdictions as the Agent may specify. SECTION 5.10. BOOKS AND RECORDS. (a) Maintain or cause to be maintained at all times true and complete books and records of its financial operations and provide the Agent and its representatives access to such books and records and to any of its properties or assets upon reasonable notice and during regular business hours in order that the Agent may make such audits and examinations and make abstracts from such books, accounts, records and other papers pertaining to the Collateral (including, but not limited to, Eligible Receivables included in the Borrowing Base) and upon notification to the Borrower may discuss the affairs, finances and accounts with, and be advised as to the same by, officers and independent accountants, all as the Agent may deem appropriate for the purpose of verifying the accuracy of the Borrowing Base Certificate and the various other reports delivered by any Credit Party to the Agent and/or the Lenders pursuant to this Credit - 81 - Agreement or for otherwise ascertaining compliance with this Credit Agreement or any other Fundamental Document. (b) If, prior to an Event of Default, the Agent wishes to confirm with account debtors and other payors the amounts and terms of any or all Eligible Receivables included in the Borrowing Base, the Agent will so notify the Borrower. Within 10 days after receipt of such notice from the Agent, the Borrower may, upon written notice to the Agent, elect to have such confirmation made through the Credit Parties' auditors in conjunction with its next annual audit. If the Borrower fails to timely make such election, the Agent may proceed to make such confirmations directly with account debtors and other payors. Each of the Credit Parties hereby agrees that, upon the occurrence and during the continuance of an Event of Default, the Agent shall be entitled to confirm directly with account debtors the amounts and terms of all accounts receivable. The Agent hereby agrees to provide the applicable Credit Party with copies of any written request sent by the Agent to such account debtors. SECTION 5.11. THIRD PARTY AUDIT RIGHTS. Promptly notify the Agent of, and allow the Agent access to the results of, all audits conducted by the Borrower of any third party licensee, partnership and joint venture under any agreement with respect to any item of Product included in the Collateral. The Borrower will exercise its audit rights with respect to any third party licensees, partnerships and joint ventures under any agreement with respect to an item of Product included in the Collateral upon the reasonable request of the Agent, PROVIDED, HOWEVER, that if the Borrower shall object to performing such audit, the audit shall not be undertaken and the receivables in the Borrowing Base from such third party licensee, partnership or joint venture in connection with the item of Product shall be eliminated from the Borrowing Base. After an Event of Default has occurred and is continuing, the Agent shall have the right to exercise through any Credit Party such Credit Party's right to audit any obligor under an agreement with respect to any item of Product included in the Collateral. SECTION 5.12. OBSERVANCE OF AGREEMENTS. Duly observe and perform all material terms and conditions of all material agreements with respect to the exploitation of items of Product and diligently protect and enforce the rights of the Credit Parties under all such agreements in a manner consistent with prudent business judgment and subject to the terms and conditions of such agreements. - 82 - SECTION 5.13. FILM PROPERTIES AND RIGHTS; CREDIT PARTIES TO ACT AS PLEDGEHOLDER. Act as pledgeholder for the Agent for the benefit of the Lenders with the same effect as if the Agent for the benefit of the Lenders were a pledgee in possession of all property relating to items of Product which are now or hereafter in the (actual or constructive) possession of any Credit Party, subject to such access as shall be necessary to distribute such items of Product. SECTION 5.14. LABORATORIES; NO REMOVAL. (a) To the extent any Credit Party has control over or rights to receive any of the physical elements of any item of Product, deliver or cause to be delivered to a Laboratory or Laboratories located within the United States all negative and preprint material, master tapes and all sound track materials with respect to each such item of Product and deliver to the Agent a fully executed Pledgeholder Agreement with respect to such materials. To the extent that any Credit Party has only rights of access to preprint material or master tapes then the Credit Parties will deliver to the Agent a fully executed Laboratory Access Letter covering such materials. Prior to requesting any such laboratory to deliver such negative or other preprint or sound track material or master tapes to another laboratory, any such Credit Party shall provide the Agent with a Pledgeholder Agreement or Laboratory Access Letter, as appropriate, executed by such other Laboratory and all other parties to such Pledgeholder Agreement (other than the Agent). Each Credit Party hereby agrees not to remove or cause the removal of the original negative and film or sound materials with respect to any item of Product owned by such Credit Party or in which such Credit Party has an interest (i) to a location outside the United States, other than in Canada or the United Kingdom or (ii) to any state where UCC-1 financing statements (or in the case of jurisdictions outside the United States, documents similar in purpose and effect) have not been filed against such Credit Party holding any rights to such item of Product. (b) During production of any item of Product produced by any Credit Party, such Credit Party shall promptly deliver the daily rushes for such item of Product to the appropriate Laboratory. (c) With respect to items of Product completed after the Closing Date, as soon as practicable after completion, deliver to the Agent and the Laboratories which are signatories to Pledgeholder Agreements a revised schedule of Product on deposit with such Laboratories. - 83 - SECTION 5.15. TAXES AND CHARGES; INDEBTEDNESS IN ORDINARY COURSE OF BUSINESS. Duly pay and discharge, or cause to be paid and discharged, before the same shall become in arrears (after giving effect to applicable extensions), all taxes, assessments, levies and other governmental charges, imposed upon any Credit Party or its properties, sales and activities, or any part thereof, or upon the income or profits therefrom, as well as all claims for labor, materials, or supplies which if unpaid might by law become a Lien upon any property of any Credit Party; PROVIDED, HOWEVER, that any such tax, assessment, charge, levy or claim need not be paid if the validity or amount thereof shall currently be contested in good faith by appropriate proceedings and if such Credit Party shall have set aside on its books reserves (the presentation of which is segregated to the extent required by GAAP) adequate with respect thereto if reserves shall be deemed necessary; and PROVIDED, FURTHER, that such Credit Party will pay all such taxes, assessments, levies or other governmental charges forthwith upon the commencement of proceedings to foreclose any Lien which may have attached as security therefor. The Credit Parties will promptly pay when due, or in conformance with customary trade terms, all other indebtedness incident to its operations in a manner consistent with such Credit Party's past business practices. SECTION 5.16. LIENS. Defend the Collateral against any and all Liens howsoever arising, other than Permitted Encumbrances. SECTION 5.17. CASH RECEIPTS. In the event any Credit Party receives (i) payment from any account debtor or obligor, which payment should have been remitted to a Collection Account or (ii) the proceeds of any sale of an item of Product, whether in the form of cash or otherwise, such Credit Party shall immediately remit such payment or proceeds to the Agent for deposit in the appropriate Collection Account for application in accordance with Section 2.9(f). SECTION 5.18. FURTHER ASSURANCES; SECURITY INTERESTS. (a) Upon the request of the Agent, duly execute and deliver, or cause to be duly executed and delivered, at the cost and expense of the Credit Parties, such further instruments as may be appropriate in the reasonable judgment of the Agent to carry out the provisions and purposes of this Credit Agreement and the other Fundamental Documents. (b) Upon the request of the Agent, promptly execute and deliver or cause to be executed and delivered, at the cost - 84 - and expense of the Credit Parties, such further instruments as may be appropriate in the reasonable judgment of the Agent, to provide the Agent (for the benefit of the Lenders) a perfected Lien in the Collateral and any and all documents (including, without limitation, the execution, amendment or supplementation of any financing statement and continuation statement or other statement) for filing under the provisions of the UCC and the rules and regulations thereunder, or any other statute, rule or regulation of any applicable foreign, federal, state or local jurisdiction, and perform or cause to be performed such other ministerial acts which are necessary or advisable, from time to time, in order to grant and maintain in favor of the Agent (for the benefit of the Lenders) the security interest in the Collateral contemplated hereunder and under the other Fundamental Documents, subject only to Permitted Encumbrances. (c) Promptly undertake to deliver or cause to be delivered to the Lenders from time to time such other documentation, consents, authorizations and approvals in form and substance satisfactory to the Agent, as the Agent shall deem reasonably necessary or advisable to perfect or maintain the Liens of the Agent for the benefit of the Lenders. (d) With respect to each Distribution Agreement, as promptly as practicable execute and use reasonable commercial efforts to cause each party thereto to duly execute and deliver to the Agent an original Notice of Assignment and Irrevocable Instructions; provided that notices (rather than executed counterparts) shall be sufficient except in the case of material Distribution Agreements reasonably required by the Agent. SECTION 5.19. RECEIVABLES AUDIT. In connection with the annual audit by KPMG Peat Marwick LLP (or any successor auditor) if so requested by the Agent arrange for account debtors to confirm accounts receivables (both on and off balance sheet) directly to the Agent. SECTION 5.20. ERISA COMPLIANCE AND REPORTS. Furnish to the Agent (a) as soon as possible, and in any event within 30 days after any Credit Party knows that (i) any Reportable Event with respect to any Plan has occurred, a statement of an executive officer of the Credit Party, setting forth on behalf of such Credit Party details as to such Reportable Event and the action which it proposes to take with respect thereto, together with a copy of the notice, if any, required to be filed by the applicable Credit Party of such Reportable Event given to the PBGC or (ii) an accumulated funding deficiency has been incurred or an application has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard or an extension of any amortization - 85 - period under Section 412 of the Code with respect to a Plan, a Plan or Multiemployer Plan has been or is proposed to be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA, proceedings have been instituted to terminate a Plan, a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Multiemployer Plan, or the Borrower or such Credit Party will incur any liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan or Multiemployer Plan under Sections 4062, 4063, 4201 or 4204 of ERISA, if the occurrence of any of the foregoing events would result in a liability which is materially adverse to the financial condition of the Borrower and its Subsidiaries taken as a whole or would materially and adversely affect the ability of the Borrower to perform its obligations under this Credit Agreement or the Notes, a statement of an executive officer of the Borrower, setting forth details as to such event and the action the applicable Credit Party proposes to take with respect thereto, (b) promptly upon reasonable request of the Agent, copies of each annual and other report with respect to each Plan and (c) promptly after receipt thereof, a copy of any notice any Credit Party may receive from the PBGC relating to the PBGC's intention to terminate any Plan or to appoint a trustee to administer any Plan. SECTION 5.21. ENVIRONMENTAL LAWS. (a) Promptly notify the Agent upon any Credit Party becoming aware of any violation or potential violation or non-compliance with, or liability or potential liability under any Environmental Laws which, when taken together with all other pending violations would reasonably be expected to be materially adverse to the Borrower and its Subsidiaries or any Credit Party, and promptly furnish to the Agent all notices of any nature which any Credit Party may receive from any Governmental Authority or other Person with respect to any violation, or potential violation or non-compliance with, or liability or potential liability under any Environmental Laws which, in any case or when taken together with all such other notices, could reasonably be expected to have a materially adverse effect on the Borrower and its Subsidiaries and the Credit Parties taken as a whole. (b) Comply with and use reasonable efforts to ensure compliance by all tenants and subtenants with all Environmental Laws, and obtain and comply in all material respects with and maintain and use best efforts to ensure that all tenants and subtenants obtain and comply in all material respects with and maintain any and all licenses, approvals, registrations or permits required by Environmental Laws, except where failure to do so would not have a materially adverse effect on the Borrower or any Credit Party. - 86 - (c) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under all Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities, except where failure to do so would not have a materially adverse effect on the Borrower or any Credit Party. Any order or directive whose lawfulness is being contested in good faith by appropriate proceedings shall be considered a lawful order or directive when such proceedings, including any judicial review of such proceedings, have been finally concluded by the issuance of a final non-appealable order; provided, however, that the appropriate Credit Party shall have set aside on its books reserves (the presentation of which is segregated to the extent required by GAAP) adequate with respect thereto if reserves shall be deemed necessary. (d) Defend, indemnify and hold harmless the Agent and the Lenders, and their respective employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature, known or unknown, contingent or otherwise, arising out of, or in any way related to the violation of or non-compliance by any Credit Party with any Environmental Laws, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, reasonable attorney and consultant fees, investigation and laboratory fees, court costs and litigation expenses, but excluding therefrom all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses arising out of or resulting from (i) the gross negligence or willful misconduct of any indemnified party or (ii) any acts or omissions of any indemnified party occurring after any indemnified party is in possession of, or controls the operation of, any property or asset. SECTION 5.22. BANK ACCOUNTS. Provide the Agent with notice of the opening of any bank accounts by any Credit Party other than those listed on Schedule 5.22 hereof and execute such forms of notice to the banks holding such accounts as reasonably requested by the Agent. SECTION 5.23. USE OF PROCEEDS. Use the proceeds of the Loans solely to (i) refinance the outstanding loans to the Borrower under the Imperial Credit Agreements, (ii) finance the Borrower's production (both directly and through certain of the Guarantors), acquisition, distribution and exploitation of feature length motion pictures, television products (including, without limitation, infomercials) and video products and rights therein, and (iii) for general working capital purposes. - 87 - SECTION 5.24. SECURITY AGREEMENTS WITH THE GUILDS. Furnish to the Agent duly executed copies of (i) each security agreement relating to an item of Product entered into by a Credit Party with any guild and (ii) a subordination agreement (in form and substance satisfactory to the Agent) from the applicable guild with respect to the security interest and other rights granted to it pursuant to each such security agreement delivered to the Agent pursuant to clause (i) above. SECTION 5.25. UNCOMPLETED PRODUCTS. With respect to items of Product for which any Credit Party is the producer or has a financial interest which is subject to a completion risk (i.e. payment by a Credit Party is not conditioned upon delivery), including Designated Pictures, other than (i) any television series with a pattern budget of $950,000 per episode or less (other than the television pilot or series "Gun"), (ii) any single made-for-television movie of two hours or less having a budget of $3,500,000 or less, and (iii) any television mini-series with a budget of $7,500,000 or less, deliver to the Agent, not later than (A) five (5) days prior to the commencement of principal photography of such item of Product and (B) five (5) days prior to payment of the acquisition cost for a negative pick-up, each of the following to the extent applicable (it being understood that for purposes of clause B clauses (vi) and (vii) below shall not be applicable), (i) the budget for such item of Product, (ii) a schedule identifying all agreements executed by a Credit Party in connection with such item of Product which provide for deferments of compensation or a gross or net profit participation, (iii) copies of such of the foregoing agreements as the Lenders may reasonably request, (iv) certificates or binders of insurance with respect to such item of Product (and policies of insurance if requested by the Agent), including all forms of insurance coverage required by Section 5.6 hereof, (v) copies of all instruments of transfer or other instruments (in recordable form) ("Chain of Title" documents) necessary to establish, to the reasonable satisfaction of the Agent, in the appropriate Credit Party ownership of sufficient copyright rights in the literary properties upon which such item of Product is to be based to enable such Credit Party to produce and/or distribute such item of Product and to grant the Agent the security interests therein which are contemplated by this Credit Agreement which documents shall evidence to the Agent's satisfaction the Credit Party's rights in, and with respect to, such item of Product, (vi) an executed Copyright Security Agreement Supplement with respect to such item of Product, (vii) executed Pledgeholder Agreements with respect to such item of Product, (viii) a schedule of sources and uses demonstrating in detail that all cash necessary to complete and deliver such item of Product will be available as and when needed from sources acceptable to the Agent, and (ix) a Completion - 88 - Guarantee with respect to such item of Product in form and substance satisfactory to the Agent naming the Agent, for the benefit of the Lenders, as a beneficiary thereof. 6. NEGATIVE COVENANTS From the date hereof and for so long as the Commitments shall be in effect or any amount remains outstanding under the Notes or any Letter of Credit shall remain outstanding or any Obligations remain unpaid or unsatisfied, each Credit Party agrees that, unless the Required Lenders shall otherwise consent in writing, it will not and will not allow any of its Subsidiaries to: SECTION 6.1. LIMITATIONS ON INDEBTEDNESS. Incur, create, assume or suffer to exist any Indebtedness or permit any partnership or joint venture in which any Credit Party is a general partner to incur create, assume or suffer to exist any Indebtedness other than: (a) the Indebtedness represented by the Notes and the other Obligations; (b) Indebtedness in respect of secured purchase money financing and/or Capital Leases to the extent permitted by Section 6.2(b); (c) unsecured liabilities for acquisitions of rights or product incurred in the ordinary course of business and not otherwise prohibited hereunder; (d) liabilities relating to net or gross profit participations, deferments and guild residuals with respect to items of Product; (e) Subordinated Debt, including the Convertible Subordinated Debentures; (f) existing Indebtedness listed on Schedule 3.17 hereto but no increases, extensions or renewals thereof unless otherwise noted on Schedule 3.17; (g) Indebtedness incurred by a Special Purpose Producer which is non-recourse to any Credit Party except to the extent of a negative pick-up arrangement or short-fall guarantee; PROVIDED that the aggregate amount of such recourse obligations together with the aggregate amount of unrecouped advances (and the Borrower's unfunded obligation to make further such advances) of the type contemplated by Section 6.4(ii) does not exceed $7,500,000 at any one time outstanding; - 89 - (h) in the case of the Guarantors, the guarantees of the Obligations pursuant to Article 9 hereof; and (i) Investments permitted under Section 6.4 hereof. SECTION 6.2. LIMITATIONS ON LIENS. Incur, create, assume or suffer to exist any Lien on its revenue stream, property or assets, whether now owned or hereafter acquired, except: (a) Liens pursuant to written security agreements (in form and substance acceptable to the Agent) in favor of guilds required pursuant to terms of collective bargaining agreements; (b) Liens (including in the form of Capital Leases) granted to the Person financing the acquisition of property, plant or equipment if (i) limited to the particular assets acquired; (ii) the debt secured by the Lien does not exceed the amount financed for the acquisition cost of a particular asset for which the Lien is granted; (iii) such transaction does not otherwise violate this Credit Agreement and (iv) the aggregate amount of all Indebtedness secured by Liens permitted under this paragraph does not exceed $500,000 at any one time outstanding; (c) Liens to secure distribution, exhibition and/or exploitation rights of licensees pursuant to License Agreements on terms satisfactory to the Agent; (d) deposits under worker's compensation, unemployment insurance, old-age pensions and other Social Security laws or to secure statutory obligations or surety or appeal bonds or performance or other similar bonds incurred in the ordinary course of business (other than Completion Guarantees); (e) Liens for taxes, assessments or other governmental charges or levies due and payable, the validity or amount of which is currently being contested in good faith by appropriate proceedings pursuant to the terms of Section 5.15 hereof; (f) Liens incurred in the ordinary course of business with regard to services rendered by Laboratories and production houses, record warehouses and suppliers of materials and equipment which secure trade payables; - 90 - (g) Liens arising out of attachments, judgments or awards as to which an appeal or other appropriate proceedings for contest or review are promptly commenced (and as to which foreclosure and other enforcement proceedings shall not have been commenced (unless fully bonded or otherwise effectively stayed)); (h) Liens granted by a Special Purpose Producer which are non-recourse to any Credit Party except to the extent of a negative pick-up arrangement or short-fall guarantee permitted under Section 6.1(g) hereof; (i) the Liens of the Agent and the Lenders under this Credit Agreement, the other Fundamental Documents and other documents contemplated hereby; (j) existing Liens set forth on Schedule 6.2 hereto; (k) customary liens in favor of Approved Completion Guarantors in connection with Completion Guarantees; (l) possessory Liens (other than those of Laboratories and production houses) which (i) occur in the ordinary course of business, (ii) secure normal trade debt which is not yet due and payable and (iii) do not secure Indebtedness for borrowed money; and (m) Liens arising by virtue of any statutory or common law provision relating to banker's liens, rights of setoff or similar rights with respect to deposit accounts of the Credit Parties. SECTION 6.3. LIMITATION ON GUARANTEES. Provide any Guaranty, either directly or indirectly, except (i) negative pickup agreements and minimum guarantees to acquire product in the ordinary course of business to the extent otherwise permitted hereunder, (ii) for guarantees to the Agent and the Lenders in accordance with Article 9 hereof and (iii) for existing Guarantees listed on Schedule 6.3 hereto. SECTION 6.4. LIMITATIONS ON INVESTMENTS. Make or permit to exist any Investment other than (i) in the case of product acquisitions, in which case the Borrower may make advances toward the purchase prior to the delivery of the product provided that the aggregate amount of such advances (net of related presales) for all product may not exceed $3,500,000; (ii) in the case of an advance against the purchase of rights made to a Special Purpose Producer in which the Agent - 91 - (for the benefit of the Lenders) has a security interest (subject only to the security interest of the lender to the Special Purpose Producer in accordance with Section 6.1(g) in all assets of the Special Purpose Producer and the advances shall be limited to the amount covered by a Completion Guarantee, in form and substance satisfactory to the Agent, in which the Agent is the beneficiary; PROVIDED that the aggregate amount of such unrecouped advances (and the Borrower's unfunded obligation to make further such advances) together with recourse obligations of the type contemplated by Section 6.1(g) does not exceed $7,500,000 at any one time outstanding; (iii) purchase of Cash Equivalents; (iv) inter-company advances among the Borrower and the Guarantors and equity investments by the Borrower or a Guarantor in another Guarantor; (v) scheduled investments as of the Closing Date set forth on Schedule 6.4; (vi) nominal payments to reacquire Special Purpose Producers after project loans are repaid and the Designated Picture has been delivered; (vii) loans and advances to officers and employees of the Borrower of not more than $250,000 in the aggregate at any one time outstanding; and (viii) equity investments after the date hereof in Special Purpose Producers and joint ventures not exceeding $3,500,000 in the aggregate. SECTION 6.5. RESTRICTED PAYMENTS. Declare, make or incur any liability to make any Restricted Payments other than interest and certain mandatory prepayments specified on Subordinated Debt, but only if no Default would be continuing after giving effect to each payment. SECTION 6.6. LIMITATIONS ON LEASES. Create, incur or assume combined lease expense (but specifically excluding amounts included in the Budgeted Negative Cost of an item of Product) for any twelve calendar months in excess of $1,000,000. SECTION 6.7. CONSOLIDATION, MERGER, SALE OR PURCHASE OF ASSETS, ETC. Whether in one transaction or a series of transactions, wind up, liquidate or dissolve its affairs, or enter into any transaction of merger or consolidation, or sell or otherwise dispose of all or substantially all of its property, stock or assets (other than permitted transactions between the Borrower and its Subsidiaries), or agree to do or suffer any of the foregoing, except that any Subsidiary of the Borrower may merge with and into another Subsidiary of the Borrower or with and into the Borrower. - 92 - SECTION 6.8. RECEIVABLES. Sell, discount or otherwise dispose of notes, accounts receivable or other obligations owing to any Credit Party except for the purpose of collection in the ordinary course of business. SECTION 6.9. SALE AND LEASEBACK. Enter into any arrangement with any Person or Persons, whereby in contemporaneous transactions any Credit Party sells essentially all of its right, title and interest in an item of Product and acquires or licenses the right to distribute or exploit such item of Product in media and markets accounting for substantially all the value of such item of Product other than in connection with "The Adventures of Pinocchio" provided that such arrangement does not impair the collateral position of the Lenders and is evidenced by documentation acceptable to the Agent in its sole discretion. SECTION 6.10. PLACES OF BUSINESS; CHANGE OF NAME. Change the location of its chief executive office or principal place of business or any of the locations where it keeps any material portion of the Collateral or its books and records with respect to the Collateral or change its name without (i) giving the Agent 15 days prior written notice of such change and (ii) filing any additional Uniform Commercial Code financing statements, and such other documents requested by the Agent or which are otherwise necessary or desirable to maintain perfection of the security interest of the Agent for the benefit of the Lenders in the Collateral. SECTION 6.11. LIMITATIONS ON CAPITAL EXPENDITURES. Make or incur on a Consolidated basis any obligation to make Capital Expenditures (other than amounts included in the Budgeted Negative Cost of an item of Product) for any twelve consecutive months in excess of $500,000. SECTION 6.12. TRANSACTIONS WITH AFFILIATES. Effect any transaction with an Affiliate on a basis less favorable to such Credit Party than would have been the case if such transaction had been effected at arms-length (other than compensation paid to Peter Locke and Donald Kushner pursuant to their respective employment agreements with the Borrower and normal compensation to other members of the Borrower's Board of Directors). SECTION 6.13. PROHIBITION OF AMENDMENTS OR WAIVERS. - 93 - Amend, alter, modify, or waive, or consent to any amendment, alteration, modification or waiver of (x) any Subordinated Debt indenture in any manner whatsoever or (y) any key employment agreement, or other material agreement to which any Credit Party is a party, or the terms thereof in any manner which would change, alter or waive any material term thereof and which might (i) materially and adversely affect the - 94 - collectibility of accounts receivable that form part of the Borrowing Base, (ii) materially and adversely affect the financial condition of any Credit Party, (iii) materially and adversely affect the rights of the Lenders under this Credit Agreement, the other Fundamental Documents and any other agreements contemplated hereby, (iv) materially decrease the value of the Collateral, or (v) decrease the amount of the Borrowing Base to less than the then outstanding principal amount of the Loans. SECTION 6.14. CONSOLIDATED CAPITAL BASE. Permit Consolidated Capital Base at the end of any fiscal quarter to be less than the sum of $33,000,000 PLUS 50% of the net earnings of the Borrower and its Subsidiaries for each fiscal year ending after March 31, 1996 through the last day of the fiscal quarter immediately preceding the date of determination PLUS 100% of the net proceeds of any equity issued by the Borrower or Indebtedness (other than Subordinated Debt) converted into equity (net of related amortization of costs) after the date hereof. SECTION 6.15. INITIAL PRINT AND ADVERTISING EXPENDITURES. Permit initial Print and Advertising Expenditures through the theatrical opening of any item of Product to exceed $500,000. SECTION 6.16. DEVELOPMENT COSTS. Permit development costs (which have neither been sold, written off nor allocated to an item of Product for which active preproduction has commenced) to exceed $3,000,000 in the aggregate or $500,000 for any item of Product. SECTION 6.17. OVERHEAD EXPENSE. Permit aggregate allocated and unallocated overhead expenses to exceed $8,750,000 in fiscal year 1996, $9,000,000 in fiscal year 1997, $9,500,000 in fiscal year 1998 and $10,000,000 in fiscal year 1999. SECTION 6.18. TOTAL UNSUBORDINATED LIABILITIES TO CONSOLIDATED CAPITAL BASE RATIO. Permit the ratio of Total Unsubordinated Liabilities to Consolidated Capital Base to be greater than 2 to 1 at any time. SECTION 6.19. EBIT TO INTEREST EXPENSE RATIO. Permit the ratio of EBIT to Consolidated Interest Expense to be less than 1.5 to 1 for the rolling three quarter - 95 - period ending June 30, 1996 and the rolling four quarter period ending September 30, 1996 or 2 to 1 for any rolling four quarter period thereafter. SECTION 6.20. PROJECTED LIQUIDITY. Permit "Projected Liquidity" to be less than $2,000,000 for any 12 month period beginning on the first day of each fiscal quarter, but projected on a month-by-month basis. "PROJECTED LIQUIDITY" means for any period, the amount by which (x) the sum of unrestricted cash on hand and unused availability under the Credit Agreement at the beginning of each month during such period plus cash receipts reasonably expected to be received during each month of such period exceeds (y) projected cash disbursements for each month during such period, including without limitation, cash expenditures to complete or acquire product and net loan repayments, but excluding projected cash disbursements the payments of which restricted cash is available. SECTION 6.21. NO CHANGE IN BUSINESS. Engage in any business activities other than (i) activities relating to production and exploitation of theatrical motion pictures, television programs, infomercials and videos and the rights therein (e.g., music publishing, CD Roms, soundtrack album, merchandising, publishing, live-action or animated television spin-offs and other exploitation of ancillary rights); PROVIDED that the Borrower shall not engage in the domestic distribution of theatrical motion pictures directly to exhibitors, except for the limited release of certain specialty films or "HBO Premieres". SECTION 6.22. ERISA COMPLIANCE. Engage in a "prohibited transaction", as defined in Section 406 of ERISA or Section 4975 of the Code, with respect to any Plan or Multiemployer Plan or knowingly consent to any other "party in interest" or any "disqualified person", as such terms are defined in Section 3(14) or ERISA and Section 4975(e)(2) of the Code, respectively, engaging in any "prohibited transaction", with respect to any Plan or Multiemployer Plan maintained or contributed to by any Credit Party; or permit any Plan maintained by any Credit Party to incur any "accumulated funding deficiency", as defined in Section 302 of ERISA or Section 412 of the Code, unless such incurrence shall have been waived in advance by the Internal Revenue Service; or terminate any Plan in a manner which could result in the imposition of a Lien on any property of any Credit Party pursuant to Section 4068 of ERISA; or breach or knowingly permit any employee or officer or any trustee or administrator of any Plan maintained by any Credit Party to breach any fiduciary responsibility imposed under Title I of ERISA with respect to any Plan; engage in any transaction which would result in the incurrence of a liability - 96 - under Section 4069 of ERISA; or fail to make contributions to a Plan or Multiemployer Plan which results in the imposition of a Lien on any property of any Credit Party pursuant to Section 302(f) of ERISA or Section 412(n) of the Code, if the occurrence of any of the foregoing events (alone or in the aggregate) would result in a liability which is materially adverse to the financial condition of the Credit Parties taken as a whole or would materially and adversely affect the ability of the Borrower to perform its obligations under this Credit Agreement or the Notes. SECTION 6.23. ADDITIONAL LIMITATIONS ON PRODUCTION AND ACQUISITION OF PRODUCT. (a) Begin production on any item of Product unless there are Eligible Receivables associated with such item of Product in an amount equal to at least 40% of the production budget, unless the budget of the item of Product is less than $1,000,000. (b) Permit the ratio of (i) Eligible Receivables plus non-refundable collections on an acquired item of Product to (ii) the purchase price of the acquired item of Product to fall below 50% for all items of Product acquired in the preceding 12 months, computed on an aggregate rolling four quarters basis. (c) Produce any item of Product with a Production Exposure in excess of $7,500,000 (except for Designated Pictures funded under a Special Production Tranche) without the Agent's approval, or enter into any agreement obligating the Borrower to pay a minimum guarantee of more than $3,500,000 for any item of Product produced by a third party without the Agent's approval. (d) Acquire rights in an item of Product which is not in its first cycle of exploitation with the exception of permitted library acquisitions not to exceed $500,000 per year. (e) Permit production and acquisition deficits (net of pre-sale guarantees and completed pre-sales payable within 1 year after delivery) to exceed: $6,000,000 in the aggregate at any time (i) for all television series in production or acquired, which shall not exceed $150,000 for any single episode of any television series or $300,000 for a pilot for a television series; and (ii) for all single television movies or mini-series in production or acquired, which shall not exceed $600,000 for any single such item of product of two hours or less and $1,200,000 for any longer movie or mini-series. SECTION 6.24. SUBSIDIARIES. Acquire or create any new direct or indirect Subsidiary provided however that the Borrower may incorporate additional Subsidiaries if (i) each such Subsidiary executes an Instrument - 97 - of Assumption and Joinder satisfactory to the Agent whereby such Subsidiary becomes a Credit Party hereunder and the capital stock of such Subsidiary becomes part of the Pledged Securities hereunder or (ii) the Borrower takes such other action in connection with the stock of such Subsidiary as is deemed appropriate by the Agent to protect the Lenders' security interest therein. SECTION 6.25. BANK ACCOUNTS. After the date hereof, open or maintain any bank account other than (a) at the office of the Agent as contemplated by Section 8.3 hereof, (b) those accounts listed on Schedule 5.22, (c) ordinary operating accounts opened at the office of Metrobank or Comerica Bank or (d) a production account for a specific item of Product which is in production, as to which the Agent shall have received notice and as to which the Agent shall have been granted a perfected first priority security interest in such account (subject to liens permitted under Section 6.2(m)). SECTION 6.26. HAZARDOUS MATERIALS. Except as set forth on Schedule 3.21, cause or permit any of its properties or assets to be used to generate, manufacture, refine, transport, treat, store, handle, dispose, transfer, produce or process Hazardous Materials, except in compliance in all material respects with all applicable Environmental Laws, nor release, discharge, dispose or of permit or suffer any release or disposal as a result of any intentional act or omission on its part of Hazardous Materials onto any such property or asset in material violation of any Environmental Law. SECTION 6.27. USE OF PROCEEDS OF LOANS AND REQUESTS FOR LETTERS OF CREDIT. Use the proceeds of Loans or request any Letter of Credit hereunder other than for the purposes set forth in, and as required by, Section 5.23 hereof. SECTION 6.28. SPECIAL PRODUCTION TRANCHE. Use the proceeds of Loans made under a Special Production Tranche for purposes other than to fund production of the relevant Designated Picture unless such Designated Picture has been completed and all costs of production have been paid or provided for. SECTION 6.29. INTEREST RATE PROTECTION AGREEMENTS, ETC. Enter into any Interest Rate Protection Agreement or Currency Agreement for other than bona fide hedging purposes. - 98 - 7. EVENTS OF DEFAULT In the case of the happening and during the continuance of any of the following events (herein called "EVENTS OF DEFAULT"): (a) any representation or warranty made by any Credit Party in this Credit Agreement or any other Fundamental Document or in connection with this Credit Agreement or with the execution and delivery of the Notes or the Borrowings hereunder, or any statement or representation made in any report, financial statement, certificate or other document furnished by or on behalf of any Credit Party to the Agent or any Lender under or in connection with this Credit Agreement or any Fundamental Document and not corrected prior to the Closing Date, shall prove to have been false or misleading in any material respect when made or delivered; (b) default shall be made in the payment of any principal of or interest on the Notes or of any fees or other amounts payable by the Borrower hereunder, when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise and in the case of payments of any amounts other than principal, such default shall continue unremedied for five (5) days after receipt by the Borrower of an invoice therefor; (c) default shall be made by any Credit Party in the due observance or performance of any covenant, condition or agreement contained in Section 5.4 or Article 6 of this Credit Agreement; (d) default shall be made with respect to any payment of any Indebtedness of any Credit Party in excess of $500,000 when due or the performance of any other obligation incurred in connection with any such Indebtedness, if the effect of such default is to accelerate the maturity of such Indebtedness or to permit the holder thereof to cause such Indebtedness to become due prior to its stated maturity and such default shall not be remedied, cured, waived or consented to within the period of grace with respect thereto, or any other circumstance which arises (other than the mere passage of time) by reason of which the Borrower is required to redeem or repurchase or offer to holders of the Convertible Subordinated Debentures, the opportunity to have redeemed or repurchased, any such indebtedness; (e) any Credit Party shall generally not pay its debts as they become due or shall admit in writing its inability to pay its debts, or shall make a general assignment for the benefit of creditors; or any Credit Party shall commence any case, proceeding or other action seeking to have an order for relief entered on its behalf as debtor or to adjudicate it a bankrupt or - 99 - insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property or shall file an answer or other pleading in any such case, proceeding or other action admitting the material allegations of any petition, complaint or similar pleading filed against it or consenting to the relief sought therein; or any Credit Party shall take any action to authorize any of the foregoing; (f) any involuntary case, proceeding or other action against any Credit Party shall be commenced seeking to have an order for relief entered against it as debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of any order for relief against it or (ii) shall remain undismissed for a period of sixty (60) days; (g) final judgment(s) for the payment of money in excess of $250,000 shall be rendered against any Credit Party which within thirty (30) days from the entry of such judgment shall not have been discharged or stayed pending appeal or which shall not have been discharged or bonded in full within thirty (30) days from the entry of a final order of affirmance on appeal; (h) failure to deliver a Borrowing Base Certificate to the Agent within 10 Business Days of the date such Certificate was due pursuant to Section 5.1(e) hereof, PROVIDED, HOWEVER, that any failure to deliver a Borrowing Base Certificate shall not give rise to an Event of Default under this clause (i) in the event there are no outstanding Loans; (i) a Change in Control shall occur; (j) a Change in Management shall occur; (k) as long as Donald Kushner is an employee of the Borrower, the Kushner Life Insurance shall be cancelled or terminated and such insurance shall remain cancelled or terminated for thirty (30) days provided, that the Locke Life Insurance is not cancelled or terminated during such 30 day period; as long as Peter Locke is an employee of the Borrower, the Locke Life Insurance shall be cancelled or terminated and such insurance shall remain cancelled or terminated for thirty - 100 - (30) days provided, that the Kushner Life Insurance is not cancelled or terminated during such 30 day period; (l) default shall be made by any Credit Party in the due observance or performance of any other covenant, condition or agreement to be observed or performed pursuant to the terms of this Credit Agreement, or any other Fundamental Document and such default shall continue unremedied for thirty (30) consecutive days after any Credit Party obtains knowledge of such occurrence; (m) a Reportable Event relating to a failure to meet minimum funding standards or an inability to pay benefits when due shall have occurred with respect to any Plan under the control of any Credit Party shall not have been remedied within thirty (30) days after the occurrence of such Reportable Event; or a trustee shall be appointed by a United States District Court to administer such Plan, or the PBGC shall institute proceedings to terminate such Plan and the Agent shall have notified the Borrower that the Required Lenders have made a determination that on the basis of such Reportable Event, appointment of trustee or commencement of proceedings, there are reasonable grounds to believe that such occurrence would have a material adverse effect to the financial condition of the Credit Parties taken as a whole or would materially and adversely affect the ability of the Borrower to perform its obligations under this Credit Agreement or the Notes; or (n) this Credit Agreement, the Copyright Security Agreement, any Copyright Security Agreement Supplement and the Trademark Security Agreement (each a "SECURITY DOCUMENT") shall, for any reason, not be or shall cease to be in full force and effect except as provided herein or therein and such event would not enable the Lenders to obtain the material benefits of the Security Documents or shall be declared null and void or any of the Security Documents shall not give or shall cease to give the Agent the Liens, rights, powers and privileges purported to be created thereby in favor of the Agent for the benefit of the Lenders, superior to and prior to the rights of all third Persons (except to the extent expressly permitted herein or therein) and subject to no other Liens (except to the extent expressly permitted herein or therein) other than by actions of the Agent or any Lender or by the failure of the Agent to take such actions to continue the perfection of such Liens, or the validity or enforceability of the Liens granted, to be granted, or purported to be granted, by any of the Security Documents shall be contested by any Credit Party or any of its Affiliates, PROVIDED that no such defect in the Security Documents shall give rise to an Event of Default under this paragraph (o) unless such defect or such failure shall affect Collateral that is or should be subject to a Lien in favor of the Agent having an aggregate value in excess of $500,000; then, in every such event and at any time thereafter during the continuance of such event, the Agent may, or if directed by the - 101 - Required Lenders shall, take either or both of the following actions, at the same or different times: terminate forthwith the Commitments and/or declare the principal of and the interest on the Loans and the Notes and all other amounts payable hereunder or thereunder to be forthwith due and payable, whereupon the same shall become and be forthwith due and payable, without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived, anything in this Credit Agreement or in the Notes to the contrary notwithstanding. If an Event of Default specified in paragraphs (e) or (f) above shall have occurred, the Commitments shall automatically terminate and the Loans and the Notes shall automatically become due and payable, both as to interest and principal, without presentment, demand, protest, or other notice of any kind, all of which are hereby expressly waived, anything in this Credit Agreement or the Notes to the contrary notwithstanding. Such remedies shall be in addition to any other remedy available to the Lenders pursuant to Applicable Law or otherwise. 8. GRANT OF SECURITY INTEREST; REMEDIES SECTION 8.1. SECURITY INTERESTS. The Borrower, as security for the due and punctual payment of the Obligations and the Guarantors, as security for their obligations under Article 9 hereof, hereby mortgage, pledge, assign, transfer, set over, convey and deliver to the Agent (for the benefit of the Lenders) and grant to the Agent (for the benefit of the Lenders) a security interest in the Collateral. SECTION 8.2. USE OF COLLATERAL. So long as no Event of Default shall have occurred and be continuing, and subject to the various provisions of this Credit Agreement and the other Fundamental Documents, a Credit Party may use the Collateral in any lawful manner permitted hereunder. SECTION 8.3. COLLECTION ACCOUNTS. (a) The Borrower will establish a lockbox arrangement and related collection bank accounts (each, a "COLLECTION ACCOUNT") and will direct all Persons who become licensees, buyers or account debtors under receivables with respect to any item included in the Collateral (other than DE MINIMIS amounts and amounts in respect of items of Product which are assigned to third-party lenders permitted under Section 6.1(g)) to make payments under or in connection with the license agreements, sales agreements or receivables directly to the appropriate lockbox or Collection Account. Upon agreement between the Agent and the Borrower, a Collection Account may also serve as the Cash - 102 - Collateral Account, PROVIDED that such Collection Account is in the name of the Agent (for the benefit of the Lenders) and is under the sole dominion and control of the Agent. To the extent practicable, the Credit Parties, will amend existing agreements to direct all Persons who are licensees, buyers or account debtors under receivables with respect to any item included in the Collateral, to make payments under or in connection with the license agreements, sales agreements or receivables directly to the appropriate lockbox or Collection Account. Arrangements will be made in a manner satisfactory to the Agent to periodically transfer all amounts in the Collection Accounts to a single concentration account maintained by the Agent (the "Concentration Account"). (b) The Credit Parties will execute such documentation as may be reasonably required by the Agent in order to provide for the deposit into the Collection Accounts of all items received in the lockbox and to otherwise effectuate the provisions of this Section 8.3. (c) In the event a Credit Party receives payment from any Person or proceeds under an Acceptable L/C, which payment should have been remitted directly to a Collection Account, such Credit Party shall promptly remit such payment or proceeds to a Collection Account to be applied in accordance with the terms of this Credit Agreement. (d) All such lockboxes and Collection Accounts shall be maintained with the Agent or with such other financial institutions as may be approved by the Agent, subject to the right of the Agent to at any time withdraw such approval and transfer any such lockboxes and/or Collection Account(s) to the Agent or another approved financial institution. SECTION 8.4. CREDIT PARTIES TO HOLD IN TRUST. Upon the occurrence and during the continuance of an Event of Default, the Credit Parties will, upon receipt by them of any revenue, income, profits or other sums in which a security interest is granted by this Article 8, payable pursuant to any agreement or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the sum in trust for the Lenders, and forthwith, without any notice or demand whatsoever (all notices, demands, or other actions on the part of the Lenders being expressly waived), endorse, transfer and deliver any such sums or instruments or both, to the Agent to be applied to the repayment of the Obligations in accordance with the provisions of Section 8.7 hereof. - 103 - SECTION 8.5. COLLECTIONS, ETC. Upon the occurrence and during the continuance of an Event of Default, the Agent may, in its sole discretion, in its name or in the name of any Credit Party or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Collateral, but shall be under no obligation so to do, or the Agent may extend the time of payment, arrange for payment in installments, or otherwise modify the terms of, or release, any of the Collateral, without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, any Credit Party. The Agent will not be required to take any steps to preserve any rights against prior parties to the Collateral. If any Credit Party fails to make any payment or take any action required hereunder, the Agent may make such payments and take all such actions as the Agent reasonably deems necessary to protect the Lenders' security interests in the Collateral and/or the value thereof, and the Agent is hereby authorized (without limiting the general nature of the authority herein above conferred) to pay, purchase, contest or compromise any Liens that in the judgment of the Agent appear to be equal to, prior to or superior to the security interests of the Lenders in the Collateral and any Liens not expressly permitted by this Credit Agreement. SECTION 8.6. POSSESSION, SALE OF COLLATERAL, ETC. Upon the occurrence and during the continuance of an Event of Default, the Agent may enter upon the premises of any Credit Party or wherever the Collateral may be, and take possession of the Collateral, and may demand and receive such possession from any Person who has possession thereof, and the Agent may take such measures as it may deem necessary or proper for the care or protection thereof, including the right to remove all or any portion of the Collateral, and with or without taking such possession may sell or cause to be sold, whenever the Agent shall decide, in one or more sales or parcels, at such prices as the Agent may deem best, and for cash or on credit or for future delivery, without assumption of any credit risk, all or any portion of the Collateral, at any broker's board or at public or private sale, without demand of performance or notice of intention to sell or of time or place of sale (except 15 days' written notice to the Credit Parties of the time and place of any such public sale or sales and such other notices as may be required by Applicable Law and cannot be waived), and the Agent or any other Person may be the purchaser of all or any portion of the Collateral so sold and thereafter hold the same absolutely, free (to the fullest extent permitted by Applicable Law) from any claim or right of whatever kind, including any equity of redemption, of any Credit Party, any such demand, notice, claim, right or equity being hereby expressly waived and released. At - 104 - any sale or sales made pursuant to this Article 8, the Agent may bid for or purchase, free (to the fullest extent permitted by Applicable Law) from any claim or right of whatever kind, including any equity of redemption, of any Credit Party, any such demand, notice, claim, right or equity being hereby expressly waived and released, any part of or all of the Collateral offered for sale, and may make any payment on account thereof by using any claim for moneys then due and payable to the Agent and the Lenders by any Credit Party hereunder as a credit against the purchase price. The Agent shall in any such sale make no representations or warranties with respect to the Collateral or any part thereof, and neither the Agent nor any Lender shall be chargeable with any of the obligations or liabilities of any Credit Party. Each Credit Party hereby agrees (i) that it will indemnify and hold the Agent and the Lenders harmless from and against any and all claims with respect to the Collateral asserted before the taking of actual possession or control of the relevant Collateral by the Agent pursuant to this Article 8, or arising out of any act of, or omission to act on the part of, any party (other than the Agent or Lenders) prior to such taking of actual possession or control by the Agent (whether asserted before or after such taking of possession or control), or arising out of any act on the part of any Credit Party, or its agents before or after the commencement of such actual possession or control by the Agent; and (ii) neither the Agent nor any Lender shall have liability or obligation to any Credit Party arising out of any such claim except for acts of willful misconduct or gross negligence or not taken in good faith. Subject only to the lawful rights of third parties, any Laboratory which has possession of any of the Collateral is hereby constituted and appointed by the Credit Parties as pledgeholder for the Agent and, upon the occurrence of an Event of Default, each such pledgeholder is hereby authorized (to the fullest extent permitted by Applicable Law) to sell all or any portion of the Collateral upon the order and direction of the Agent, and each Credit Party hereby waives any and all claims, for damages or otherwise, for any action taken by such pledgeholder in accordance with the terms of the UCC not otherwise waived hereunder. In any action hereunder, the Agent shall be entitled if permitted by Applicable Law to the appointment of a receiver without notice, to take possession of all or any portion of the Collateral and to exercise such powers as the court shall confer upon the receiver. Notwithstanding the foregoing, upon the occurrence of an Event of Default, and during the continuation of such Event of Default, the Agent shall be entitled to apply, without prior notice to the Credit Parties, any cash or cash items constituting Collateral in the possession of the Agent to payment of the Obligations. - 105 - SECTION 8.7. APPLICATION OF PROCEEDS ON DEFAULT. During the continuance of an Event of Default, the balances in the Chemical Clearing Account, Collection Account(s), Cash Collateral Account(s), or in any account of any Credit Party with any Lender, all other income on the Collateral, and all proceeds from any sale of the Collateral pursuant hereto shall be applied first toward payment of the reasonable out-of-pocket costs and expenses paid or incurred by the Agent in enforcing this Credit Agreement, in realizing on or protecting any Collateral and in enforcing or collecting any Obligations or any Guaranty thereof, including, without limitation, court costs and the reasonable attorney's fees and expenses incurred by the Agent, and then to the payment in full of the Obligations in such order as determined by the Required Lenders, PROVIDED, HOWEVER, that, the Agent may in its discretion apply funds comprising the Collateral to pay the cost (i) of completing any item of Product owned in whole or in part by any Credit Party in any stage of production and (ii) of making delivery to the distributors of such item of Product. Any amounts remaining after such indefeasible payment in full shall be remitted to the appropriate Credit Party or as a court of competent jurisdiction may otherwise direct. SECTION 8.8. POWER OF ATTORNEY. Upon the occurrence of an Event of Default which is not waived in writing by the Required Lenders, (a) each Credit Party does hereby irrevocably make, constitute and appoint the Agent or any of its officers or designees its true and lawful attorney-in-fact with full power in the name of the Agent or such other Person to receive, open and dispose of all mail addressed to any Credit Party, and to endorse any notes, checks, drafts, money orders or other evidences of payment relating to the Collateral that may come into the possession of the Agent with full power and right to cause the mail of such Persons to be transferred to the Agent's own offices or otherwise, and to do any and all other acts necessary or proper to carry out the intent of this Credit Agreement and the grant of the security interests hereunder and under the Fundamental Documents, and each Credit Party hereby ratifies and confirms all that the Agent or its substitutes shall properly do by virtue hereof; (b) each Credit Party does hereby further irrevocably make, constitute and appoint the Agent or any of its officers or designees its true and lawful attorney-in-fact in the name of the Agent or any Credit Party (i) to enforce all of each Credit Party's rights under and pursuant to all agreements with respect to the Collateral, all for the sole benefit of the Agent for the benefit of the Lenders and to enter into such other agreements as may be necessary or appropriate in the judgment of the Agent to complete the production, distribution or exploitation of any item of Product which is included in the Collateral, (ii) to enter into and perform such agreements as may be necessary in order to carry - 106 - out the terms, covenants and conditions of the Fundamental Documents that are required to be observed or performed by any Credit Party, (iii) to execute such other and further mortgages, pledges and assignments of the Collateral, and related instruments or agreements, as the Agent may reasonably require for the purpose of perfecting, protecting, maintaining or enforcing the security interests granted to the Agent on behalf of the Lenders hereunder, and (iv) to do any and all other things necessary or proper to carry out the intention of this Credit Agreement and the grant of the security interests hereunder and under the other Fundamental Documents. The Credit Parties hereby ratify and confirm in advance all that the Agent as such attorney-in-fact or its substitutes shall properly do by virtue of this power of attorney. In the event the Agent exercises the power of attorney granted herein, the Agent shall, concurrently with such exercise, provide written notice to the Borrower and the Lenders in accordance with Section 13.1. SECTION 8.9. FINANCING STATEMENTS, DIRECT PAYMENTS. Each Credit Party hereby authorizes the Agent to file UCC financing statements and any amendments thereto or continuations thereof, any Copyright Security Agreement, any Copyright Security Agreement Supplement, any Trademark Security Agreement and any other appropriate security documents or instruments and to give any notices necessary or desirable to perfect the Lien of the Agent on behalf of the Lenders on the Collateral, in all cases without the signatures of any Credit Party or to execute such items as attorney-in-fact for any Credit Party. Each Credit Party further authorizes the Agent upon the occurrence of an Event of Default, and during the continuation of such Event of Default, to notify any account debtors that all sums payable to any Credit Party relating to the Collateral shall be paid directly to the Agent. SECTION 8.10. FURTHER ASSURANCES. Upon the reasonable request of the Agent, each Credit Party hereby agrees to duly and promptly execute and deliver, or cause to be duly executed and delivered, at the cost and expense of the Credit Parties, such further instruments as may be necessary or proper, in the judgment of the Agent, to carry out the provisions and purposes of this Article 8, necessary, in the judgment of the Agent, to perfect and preserve the Liens of the Agent for the benefit of the Lenders hereunder and under the Fundamental Documents, and in the Collateral or any portion thereof. SECTION 8.11. TERMINATION. The security interests granted under this Article 8 shall terminate when all the Obligations have been indefeasibly fully paid and performed and the Commitments shall have - 107 - terminated and all Letters of Credit shall have expired or been terminated or cancelled. Upon request by the Credit Parties (and at the sole expense of the Credit Parties) after such termination, the Agent will take all reasonable action and do all things reasonably necessary, including executing UCC terminations, Pledgeholder Agreement terminations, termination letters to account debtors and copyright reassignments, to release the security interest granted to it hereunder. SECTION 8.12. REMEDIES NOT EXCLUSIVE. The remedies conferred upon or reserved to the Agent in this Article 8 are intended to be in addition to, and not in limitation of, any other remedy or remedies available to the Agent. Without limiting the generality of the foregoing, the Agent and the Lenders shall have all rights and remedies of a secured creditor under Article 9 of the UCC. SECTION 8.13. QUIET ENJOYMENT. The Lenders acknowledge that their security interest hereunder is subject to the rights of Quiet Enjoyment of parties to Distribution Agreements, Licensing Agreements and other similar agreements, whether existing on the date hereof or hereafter executed. For the purpose hereof, "QUIET ENJOYMENT" shall mean in connection with the rights of licensees under Licensing Agreements and distributors under Distribution Agreements, the Lenders' agreement that their rights under this Credit Agreement and the Fundamental Documents and in the Collateral are subject to the rights of such parties to distribute, exhibit and/or to exploit the item of Product licensed to them, and to receive prints or tapes or have access to preprint material or master tapes in connection therewith and that even if the Lenders shall become the owner of the Collateral in case of an Event of Default, the Lenders' ownership rights shall be subject to the rights of said parties under such agreements, PROVIDED, HOWEVER, that such licensee or such distributor shall not be in default under the relevant License or Distribution Agreement and, PROVIDED, FURTHER that the Lenders shall not be responsible for any liability or obligation of any Credit Party under any License Agreement. - 108 - SECTION 8.14. CONTINUATION AND REINSTATEMENT. Each Credit Party further agrees that the security interest granted hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment or any part thereof, of principal or interest on any Obligation is rescinded or must otherwise be restored by the Agent or the Lenders upon the bankruptcy or reorganization of any Credit Party or otherwise. 9. GUARANTY SECTION 9.1. GUARANTY. (a) Each Guarantor unconditionally and irrevocably guarantees to the Agent and the Lenders the due and punctual payment by, and performance of, the Obligations (including interest accruing on and after the filing of any petition in bankruptcy or of reorganization of the obligor whether or not post filing interest is allowed in such proceeding). Each Guarantor further agrees that the Obligations may be extended or renewed, in whole or in part, without notice or further assent from it (except as may be otherwise required herein), and it will remain bound upon this guaranty notwithstanding any extension or renewal of any Obligation. (b) Each Guarantor waives presentation to, demand for payment from and protest to, as the case may be, the Borrower or any other Guarantor of any of the Obligations, and also waives notice of protest for nonpayment. The obligations of each Guarantor hereunder shall not be affected by (i) the failure of the Agent or the Lenders to assert any claim or demand or to enforce any right or remedy against the Borrower or any Guarantor or any other guarantor under the provisions of this Credit Agreement or any other agreement or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) the failure of the Agent or the Lenders to obtain the consent of the Guarantor with respect to any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of this Credit Agreement, the Notes or of any other agreement; (iv) the release, exchange, waiver or foreclosure of any security held by the Agent for the Obligations or any of them; (v) the failure of the Agent or the Lenders to exercise any right or remedy against any other guarantor of the Obligations; or (vi) the release or substitution of any Guarantor or guarantor. Without limiting the generality of the foregoing or any other provision hereof, to the extent permitted by applicable law, each Guarantor hereby expressly waives any and all benefits which might otherwise be available to it under California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2849, 2850, 2899 and 3433. - 109 - (c) Each Guarantor further agrees that this Guaranty constitutes a guaranty of performance and of payment when due and not just of collection, and waives any right to require that any resort be had by the Agent or the Lenders to any security held for payment of the Obligations or to any balance of any deposit, account or credit on the books of the Agent or the Lenders in favor of the Borrower, any other Guarantor or to any other Person. (d) Each Guarantor hereby expressly assumes all responsibilities to remain informed of the financial condition of the Borrower, the Guarantors and any other guarantors and any circumstances affecting the ability of the Borrower to perform under this Credit Agreement. (e) Each Guarantor's guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Obligations, the Notes or any other instrument evidencing any Obligations, or by the existence, validity, enforceability, perfection, or extent of any collateral therefor or by any other circumstance relating to the Obligations which might otherwise constitute a defense to this Guaranty. The Agent and the Lenders make no representation or warranty with respect to any such circumstances and have no duty or responsibility whatsoever to each Guarantor in respect to the management and maintenance of the Obligations or any collateral security for the Obligations. SECTION 9.2. NO IMPAIRMENT OF GUARANTY, ETC. The obligations of each Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (except payment of the Obligations), including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations. Without limiting the generality of the foregoing, the obligations of each Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Agent or the Lenders to assert any claim or demand or to enforce any remedy under this Credit Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of such Guarantor or would otherwise operate as a discharge of such Guarantor as a matter of law, unless and until the Obligations are paid in full the Commitments have terminated and each outstanding Letter of Credit has expired or otherwise been terminated. - 110 - SECTION 9.3. CONTINUATION AND REINSTATEMENT, ETC. (a) Each Guarantor further agrees that its guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by the Agent or the Lenders upon the bankruptcy or reorganization of the Borrower or a Guarantor, or otherwise. In furtherance of the provisions of this Article 9, and not in limitation of any other right which the Agent or the Lenders may have at law or in equity against the Borrower or a Guarantor by virtue hereof, upon failure of the Borrower to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice or otherwise, each Guarantor hereby promises to and will, upon receipt of written demand by the Agent on behalf of the Lenders, forthwith pay or cause to be paid to the Agent for the benefit of the Lenders in cash an amount equal to the unpaid amount of all the Obligations with interest thereon at a rate of interest equal to the rate specified in Section 2.7(a) hereof, and thereupon the Agent shall assign such Obligation, together with all security interests, if any, then held by the Agent in respect of such Obligation, to the Guarantors making such payment; such assignment to be subordinate and junior to the rights of the Agent on behalf of the Lenders with regard to amounts payable by the Borrower in connection with the remaining unpaid Obligations and to be pro tanto to the extent to which the Obligation in question was discharged by the Guarantor or Guarantors making such payments. (b) All rights of the Guarantors against the Borrower, arising as a result of the payment by any Guarantor of any sums to the Agent for the benefit of the Lenders or directly to the Lenders hereunder by way of right of subrogation or otherwise shall in all respects be subordinated and junior in right of payment to the prior final and indefeasible payment in full of all the Obligations. If any amount shall be paid to such Guarantor for the account of the Borrower, such amount shall be held in trust for the benefit of the Agent and shall forthwith be paid to the Agent on behalf of the Lenders to be credited and applied to the Obligations, whether matured or unmatured. SECTION 9.4. LIMITATION ON GUARANTEED AMOUNT ETC. Notwithstanding any other provision of this Article 9, the amount guaranteed by the Guarantor hereunder shall be limited to the extent, if any, required so that its obligations under this Article 9 shall not be subject to avoidance under Section 548 of the Bankruptcy Code or to being set aside or annulled under any applicable state law relating to fraud on creditors. In determining the limitations, if any, on the amount of any Guarantor's obligations hereunder pursuant to the preceding sentence, it is the intention of the parties thereto that any rights of subrogation or contribution which such Guarantor may - 111 - have under this Article 9 (or as a result of the operation of Article 8 with regard to assets of other Credit Parties) or any other agreement or under Applicable Law shall be taken into account. 10. PLEDGE SECTION 10.1. PLEDGE. As security for the Obligations, each Pledgor hereby pledges, hypothecates, assigns, transfers, sets over and delivers unto the Agent for the benefit of the Lenders, a security interest in all Pledged Securities now owned or hereafter acquired by it. On the Closing Date, the Pledgors shall deliver to the Agent the definitive instruments representing all Pledged Securities, accompanied by executed undated stock powers, duly endorsed or executed in blank by the appropriate Pledgor, and such other instruments or documents as the Agent on behalf of the Lenders or its counsel shall reasonably request. SECTION 10.2. COVENANT. Each Pledgor covenants that as stockholder of each of its respective Subsidiaries it will not take any action to allow any additional shares of common stock, preferred stock or other equity securities of any of its respective Subsidiaries or any securities convertible or exchangeable into common or preferred stock of such Subsidiaries to be issued, or grant any options or warrants, unless such securities are pledged to the Agent (for the benefit of the Lenders) as security for the Obligations. SECTION 10.3. REGISTRATION IN NOMINEE NAME; DENOMINATIONS. Upon the occurrence and during the continuation of an Event of Default, the Agent shall have the right (in its sole and absolute discretion) to hold the certificates representing any Pledged Securities (a) in its own name or in the name of its nominee or (b) in the name of the appropriate Pledgor, endorsed or assigned in blank or in favor of the Agent. The Agent shall have the right to exchange the certificates representing Pledged Securities for certificates of smaller or larger denominations for any purpose consistent with this Credit Agreement. SECTION 10.4. VOTING RIGHTS; DIVIDENDS; ETC. (a) The appropriate Pledgor shall be entitled to exercise any and all voting and/or consensual rights and powers accruing to owners of the Pledged Securities or any part thereof for any purpose not inconsistent with the terms hereof, at all times, except as expressly provided in (c) below. - 112 - (b) Any dividends or distributions of any kind whatsoever (other, so long as an Event of Default is not continuing, than cash) received by a Pledgor, whether resulting from a subdivision, combination, or reclassification of the outstanding capital stock of the issuer or received in exchange for Pledged Securities or any part thereof or as a result of any merger, consolidation, acquisition, or other exchange of assets to which the issuer may be a party, or otherwise, shall be and become part of the Pledged Securities pledged hereunder and shall immediately be delivered to the Agent to be held subject to the terms hereof. (c) Upon the occurrence and during the continuance of an Event of Default and notice from the Agent of the transfer of such rights to the Agent, all rights of the Pledgors to exercise the voting and/or consensual rights and powers which it is entitled to exercise pursuant to this Section shall cease, and all such rights shall thereupon become vested in the Agent, which shall have the sole and exclusive right and authority to exercise such voting and/or consensual rights until such time as such Event of Default has been cured. All dividends and distributions which are received contrary to the provisions of this subsection (c) shall be received in trust for the benefit of the Agent and the Lenders and shall be delivered. (d) If the Agent shall receive any cash pursuant to Section 10.4(c) which but for the occurrence of an Event of Default the relevant Pledgor would be entitled to retain for its own account under Section 10.4(b), then after and so long as all Events of Default have been cured and only if the Obligations have not been accelerated, the Agent shall pay over to such Pledgor any such cash retained by it during the continuance of such Event of Default which has not been applied to the Obligations pursuant to the terms hereof. SECTION 10.5. REMEDIES UPON DEFAULT. If an Event of Default shall have occurred and be continuing, the Agent on behalf of the Lenders may sell the Pledged Securities, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery as the Agent shall deem appropriate subject to the terms hereof or as otherwise provided in the UCC. The Agent shall be authorized at any such sale (if it deems it advisable to do so) to restrict to the full extent permitted by Applicable Law the prospective bidders or purchasers to Persons who will represent and agree that they are purchasing the Pledged Securities for their own account for investment and not with a view to the distribution or sale thereof, and upon consummation of any such sale the Agent shall have the right to assign, transfer, and deliver to the purchaser or purchasers thereof the Pledged Securities so sold. Each such purchaser at any such sale shall hold the property sold absolutely, free from - 113 - any claim or right on the part of the Pledgors. The Agent shall give ten (10) days' written notice of its intention to make any such public or private sale, or sale at any broker's board or on any such securities exchange, or of any other disposition of the Pledged Securities. Such notice, in the case of public sale, shall state the time and place for such sale and, in the case of sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Pledged Securities, or portion thereof, will first be offered for sale at such board or exchange. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Agent may fix and shall state in the notice of such sale. At any such sale, the Pledged Securities, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as the Agent may (in its sole and absolute discretion) determine. The Agent shall not be obligated to make any sale of the Pledged Securities if it shall determine not to do so, regardless of the fact that notice of sale of the Pledged Securities may have been given. The Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case the sale of all or any part of the Pledged Securities is made on credit or for future delivery, the Pledged Securities so sold shall be retained by the Agent until the sale price is paid by the purchaser or purchasers thereof, but the Agent shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Pledged Securities so sold and, in case of any such failure, such Pledged Securities may be sold again upon like notice. At any sale or sales made pursuant to this Section 10.5, the Agent (on behalf of the Lenders) may bid for or purchase, free from any claim or right of whatever kind, including any equity of redemption, of the Pledgors, any such demand, notice, claim, right or equity being hereby expressly waived and released, any or all of the Pledged Securities offered for sale, and may make any payment on the account thereof by using any claim for moneys then due and payable to the Agent or any consenting Lender by any Credit Party as a credit against the purchase price; and the Agent, upon compliance with the terms of sale, may hold, retain and dispose of the Pledged Securities without further accountability therefor to the Pledgors or any third party (other than the Lenders). The Agent shall in any such sale make no representations or warranties with respect to the Pledged Securities or any part thereof, and shall not be chargeable with any of the obligations or liabilities of the Pledgors with respect thereto. Each Pledgor hereby agrees (i) it will indemnify and hold the Agent and the Lenders harmless from and against any and all claims with respect to the Pledged Securities asserted before the taking of actual possession or control of the Pledged Securities by the Agent pursuant to this Credit Agreement or arising out of any act - 114 - of, or omission to act on the part of, any party prior to such taking of actual possession or control by the Agent (whether asserted before or after such taking of possession or control), or arising out of any act on the part of any Pledgor, their agents or Affiliates before or after the commencement of such actual possession or control by the Agent and (ii) the Agent and the Lenders shall have no liability or obligation arising out of any such claim. As an alternative to exercising the power of sale herein conferred upon it, the Agent may proceed by a suit or suits at law or in equity to foreclose upon the Collateral and Pledged Securities under this Credit Agreement and to sell the Pledged Securities, or any portion thereof, pursuant to a judgment or decree of a court or courts having competent jurisdiction. SECTION 10.6. APPLICATION OF PROCEEDS OF SALE AND CASH. The proceeds of sale of the Pledged Securities sold pursuant to Section 10.5 hereof shall be applied by the Agent on behalf of the Lenders as follows: (i) to the payment of all reasonable out-of-pocket costs and expenses paid or incurred by the Agent in connection with such sale, including, without limitation, all court costs and the reasonable fees and expenses of counsel for the Agent in connection therewith, and the payment of all reasonable out-of-pocket costs and expenses paid or incurred by the Agent in enforcing this Credit Agreement, in realizing or protecting any Collateral and in enforcing or collecting any Obligations or any Guaranty thereof, including, without limitation, court costs and the reasonable attorney's fees and expenses incurred by the Agent in connection therewith; and (ii) to the payment in full of the Obligations in such order as determined by the Required Lenders; PROVIDED, HOWEVER, that the Agent may in its discretion apply funds comprising the Collateral to pay the cost (i) of completing any item of Product owned in whole or in part by any Credit Party in any stage of production and (ii) of making delivery to the distributors of such item of Product. Any amounts remaining after such indefeasible payment in full shall be remitted to the appropriate Pledgor, or as a court of competent jurisdiction may otherwise direct. SECTION 10.7. SECURITIES ACT, ETC. In view of the position of each Pledgor in relation to the Pledged Securities pledged by it, or because of other present or future circumstances, a question may arise under the - 115 - Securities Act of 1933, as amended, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being hereinafter called the "Federal Securities Laws"), with respect to any disposition of the Pledged Securities permitted hereunder, each Pledgor understands that compliance with the Federal Securities Laws may very strictly limit the course of conduct of the Agent if the Agent were to attempt to dispose of all or any part of the Pledged Securities, and may also limit the extent to which or the manner in which any subsequent transferee of any Pledged Securities may dispose of the same. Similarly, there may be other legal restrictions or limitations affecting the Agent in any attempt to dispose of all or any part of the Pledged Securities under applicable Blue Sky or other state securities laws, or similar laws analogous in purpose or effect. Under Applicable Law, in the absence of an agreement to the contrary, the Agent may perhaps be held to have certain general duties and obligations to the Pledgors to make some effort towards obtaining a fair price even though the Obligations may be discharged or reduced by the proceeds of a sale at a lesser price. Each Pledgor waives to the fullest extent permitted by Applicable Law any such general duty or obligation to it, and the Pledgors and/or the Credit Parties will not attempt to hold the Agent responsible for selling all or any part of the Pledged Securities at an inadequate price, even if the Agent shall accept the first offer received or does not approach more than one possible purchaser. Without limiting the generality of the foregoing, the provisions of this Section 10.7 would apply if, for example, the Agent were to place all or any part of the Pledged Securities for private placement by an investment banking firm, or if such investment banking firm purchased all or any part of the Pledged Securities for its own account, or if the Agent placed all or any part of the Pledged Securities privately with a purchaser or purchasers. SECTION 10.8. CONTINUATION AND REINSTATEMENT. Each Pledgor further agrees that its pledge hereunder shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Obligation is rescinded or must otherwise be restored by Agent or the Lenders upon the bankruptcy or reorganization of any Pledgor or otherwise. SECTION 10.9. TERMINATION. The pledge referenced herein shall terminate when all of the Obligations shall have been indefeasibly fully paid and the Commitments shall have terminated, and all Letters of Credit shall have expired or been terminated or cancelled, at which time the Agent shall assign and deliver to the appropriate Pledgor, or to such Person or Persons as such Pledgor shall designate, against receipt, such of the Pledged Securities (if any) as shall - 116 - not have been sold or otherwise applied by the Agent pursuant to the terms hereof and shall still be held by it hereunder, together with appropriate instruments of reassignment and release. Any such reassignment shall be free and clear of all Liens, arising by, under or through any Lender but shall otherwise be without recourse upon or warranty by the Agent and at the expense of the Pledgors. 11. CASH COLLATERAL ACCOUNT SECTION 11.1. CASH COLLATERAL ACCOUNTS. On or prior to the Closing Date, there shall be established with the Agent a collateral account in the name of the Agent (the "CASH COLLATERAL ACCOUNT"), into which the appropriate Credit Parties shall from time to time deposit Dollars pursuant to the express provisions of this Credit Agreement requiring or permitting such deposits. Except to the extent otherwise provided in this Article 11, the Cash Collateral Account shall be under the sole dominion and control of the Agent. SECTION 11.2. INVESTMENT OF FUNDS. (a) The Agent is hereby authorized and directed to invest and reinvest the funds from time to time deposited in the Cash Collateral Account on the instructions of the Borrower (provided that such notice may be given verbally to be confirmed promptly in writing) or, if the Borrower shall fail to give such instruction upon delivery of any such funds, in the sole discretion of the Agent, PROVIDED that in no event may the Borrower give instructions to the Agent to, or may the Agent in its discretion, invest or reinvest funds in the Cash Collateral Account in other than Cash Equivalents described in clause (i) of the definition of Cash Equivalents, or described in clauses (ii) and (iii) of the definition of Cash Equivalents to the extent issued by Chemical Bank. (b) Any net income or gain on the investment of funds from time to time held in the Cash Collateral Account, shall be promptly reinvested by the Agent as a part of the Cash Collateral Account and any net loss on any such investment shall be charged against the Cash Collateral Account. (c) Neither the Agent nor the Lenders shall be a trustee for the Credit Parties, or shall have any obligations or responsibilities, or shall be liable for anything done or not done, in connection with the Cash Collateral Account, except as expressly provided herein and except that the Agent shall have the obligations of a secured party under the UCC. The Agent and the Lenders shall not have any obligation or responsibilities and shall not be liable in any way for any investment decision made - 117 - pursuant to this Section 11.2 or for any decrease in the value of the investments held in the Cash Collateral Account. SECTION 11.3. GRANT OF SECURITY INTEREST. For value received and to induce the Lenders to make Loans from time to time to the Borrower as provided for in this Credit Agreement, as security for the payment of all of the Obligations, the Credit Parties hereby assign to the Agent (for the benefit of the Lenders), and grant to the Agent (for the benefit of the Lenders), a first and prior Lien upon all the Credit Parties' rights in and to the Cash Collateral Account, all cash, documents, instruments and securities from time to time held therein, and all rights pertaining to investments of funds in the Cash Collateral Account and all products and proceeds of any of the foregoing. All cash, documents, instruments and securities from time to time on deposit in the Cash Collateral Account, and all rights pertaining to investments of funds in the Cash Collateral Accounts shall immediately and without any need for any further action on the part of any of the Credit Parties, any Lender or the Agent, become subject to the Lien set forth in this Section 11.3, be deemed Collateral for all purposes hereof and be subject to the provisions of this Credit Agreement. SECTION 11.4. REMEDIES. At any time during the continuation of an Event of Default, the Agent may sell any documents, instruments and securities held in the Cash Collateral Account and may immediately apply the proceeds thereof and any other cash held in the Cash Collateral Account to the satisfaction of the Obligations in such order as the Agent may determine, but subject to the rights of the Lenders. Any amounts remaining after such application shall be paid or delivered to the Borrower or as a court of competent jurisdiction may direct. 12. THE AGENT AND THE FRONTING BANK SECTION 12.1. ADMINISTRATION BY AGENT. (a) The general administration of the Fundamental Documents and any other documents contemplated by this Credit Agreement shall be by the Agent or its designees. Except as otherwise expressly provided herein each of the Lenders hereby irrevocably authorizes the Agent, at its discretion, to take or refrain from taking such actions as agent on its behalf and to exercise or refrain from exercising such powers under the Fundamental Documents, the Notes and any other documents contemplated by this Credit Agreement as are expressly delegated by the terms hereof or thereof, as appropriate, together with all powers reasonably incidental thereto. The Agent shall have no - 118 - duties or responsibilities except as set forth in the Fundamental Documents. (b) The Lenders hereby authorize the Agent (in its sole discretion): (i) in connection with the sale or other disposition of any asset included in the Collateral or all of the capital stock of any Guarantor, to the extent undertaken in accordance with the terms of this Credit Agreement, to release a Lien granted to it (for the benefit of the Lenders) on such asset and/or release such Guarantor from its obligations hereunder; (ii) to determine that the cost to the Borrower or another Credit Party is disproportionate to the benefit to be realized by the Lenders by perfecting a Lien in a given asset or group of assets included in the Collateral (other than any item which is to be included in the Borrowing Base) and that the Borrower or other Credit Party should not be required to perfect such Lien in favor of the Agent (for the benefit of the Lenders); (iii) to appoint subagents or Lenders to be the holder of record of a Lien to be granted to the Agent (for the benefit of the Lenders) or to hold on behalf of the Agent such collateral or instruments relating thereto; (iv) to grant the right of Quiet Enjoyment to licensees pursuant to the terms of Section 8.13; (v) in connection with an item of Product being produced by a Credit Party, the principal photography of which is being done outside the United States in a location other than Canada or the United Kingdom, to approve arrangements with such Credit Party as shall be satisfactory to the Agent with respect to the temporary storage of the original negative film, the original sound track materials or other physical materials of such Picture in a production laboratory located outside the United States, other than in Canada or the United Kingdom; (vi) enter into guild subordination agreements with the guilds with respect to the security interests in favor of the guilds required pursuant to the terms of the collective bargaining agreements; (vii) to enter into subordination agreements (in such form as the Agent may deem appropriate) in connection with transactions permitted under Section - 119 - 6.1(g) whereby the claims of the Lenders against the Special Purpose Producer which is the borrower in such transaction and/or Liens in favor of the Agent (for the benefit of the Lenders) in their respective assets may be subordinated to the claims and/or Liens of third party lenders; and (viii) to enter into subordination agreements in connection with existing Liens set forth on Schedule 6.2 hereof in substantially the same form as previously executed by Imperial Bank, as agent, under the Imperial Credit Agreement. SECTION 12.2. ADVANCES AND PAYMENTS. (a) On the date requested by the Borrower for the funding of each Loan, the Agent shall be authorized (but not obligated) to advance, for the account of each of the Lenders, the amount of the Loan to be made by it in accordance with its Percentage hereunder. Each of the Lenders hereby authorizes and requests the Agent to advance for its account, pursuant to the terms hereof, the amount of the Loan to be made by it, and each of the Lenders agrees forthwith to reimburse the Agent in immediately available funds for the amount so advanced on its behalf by the Agent. If any such reimbursement is not made in immediately available funds on the same day on which the Agent shall have made any such amount available on behalf of any Lender, such Lender shall pay interest to the Agent at a rate per annum equal to the Agent's cost of obtaining overnight funds in the New York Federal Funds Market for the first day following the time when the Lender fails to make the required reimbursement, and thereafter at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin for Alternate Base Rate Loans. If and to the extent that any such reimbursement shall not have been made to the Agent, the Borrower agrees to repay to the Agent forthwith on demand a corresponding amount with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent at the Alternate Base Rate plus the Applicable Margin for Alternate Base Rate Loans. (b) Any amounts received by the Agent in connection with this Credit Agreement or the Notes the application of which is not otherwise provided for, shall be applied, in accordance with each of the Lenders' Percentages, first, to pay accrued but unpaid Commitment Fees, second, to pay accrued but unpaid interest on the Notes, third, the principal balance outstanding on the Notes and amounts outstanding under Currency Agreements and Interest Rate Protection Agreements and fourth, to pay other amounts payable to the Agent. All amounts to be paid to any of the Lenders by the Agent shall be credited to the Lenders, after collection by the Agent, in immediately available funds either by wire transfer or deposit in such Lender's correspondent account - 120 - with the Agent, or as such Lender and the Agent shall from time to time agree. SECTION 12.3. SHARING OF SETOFFS AND CASH COLLATERAL. Each of the Lenders agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against any Credit Party, including, but not limited to, a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim and received by such Lender under any applicable bankruptcy, insolvency or other similar law, or otherwise, obtain payment in respect of its Loans as a result of which the unpaid portion of its Loans and L/C Exposure is proportionately less than the unpaid portion of any of the other Lenders (a) it shall promptly purchase at par (and shall be deemed to have thereupon purchased) from such other Lenders a participation in the Loans or Letters of Credit of such other Lenders, so that the aggregate unpaid principal amount of each of the Lenders' Loans and its participation in Loans and Letters of Credit of the other Lenders shall be in the same proportion to the aggregate unpaid principal amount of all Loans then outstanding and L/C Exposure as the principal amount of its Loans and L/C Exposure prior to the obtaining of such payment was to the principal amount of all Loans outstanding and L/C Exposure prior to the obtaining of such payment and (b) such other adjustments shall be made from time to time as shall be equitable to ensure that the Lenders share such payment pro rata. If all or any portion of such excess payment is thereafter recovered from the Lender which originally received such excess payment, such purchase (or portion thereof) shall be cancelled and the purchase price restored to the extent of such recovery. The Credit Parties expressly consent to the foregoing arrangements and agree that any Lender or Lenders holding (or deemed to be holding) a participation in a Note or Letters of Credit may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower to such Lender or Lenders as fully as if such Lender or Lenders held a Note and was the original obligee thereon or was the issuer of the Letter of Credit, in the amount of such participation. SECTION 12.4. NOTICE TO THE LENDERS. Upon receipt by the Agent from any of the Credit Parties of any communication calling for an action on the part of the Lenders, or upon notice to the Agent of any Event of Default, the Agent will in turn immediately inform the other Lenders in writing (which shall include facsimile communications) of the nature of such communication or of the Event of Default, as the case may be. - 121 - SECTION 12.5. LIABILITY OF AGENT. (a) The Agent or the Fronting Bank, when acting on behalf of the Lenders, may execute any of its duties under this Credit Agreement or the other Fundamental Documents by or through its officers, agents, or employees and neither the Agent, the Fronting Bank nor their respective officers, agents or employees shall be liable to the Lenders or any of them for any action taken or omitted to be taken in good faith, nor be responsible to the Lenders or to any of them for the consequences of any oversight or error of judgment, or for any loss, unless the same shall happen through its gross negligence or willful misconduct. The Agent, the Fronting Bank and their respective directors, officers, agents, and employees shall in no event be liable to the Lenders or to any of them for any action taken or omitted to be taken by it pursuant to instructions received by it from the Lenders or in reliance upon the advice of counsel selected by it with reasonable care. Without limiting the foregoing, neither the Agent, the Fronting Bank nor any of their respective directors, officers, employees, or agents shall be responsible to any of the Lenders for the due execution, validity, genuineness, effectiveness, sufficiency, or enforceability of, or for any statement, warranty, or representation in, or for the perfection of any security interest contemplated by, this Credit Agreement or any related agreement, document or order, or shall be required to ascertain or to make any inquiry concerning the performance or observance by the Borrower or any Credit Party of the terms, conditions, covenants, or agreements of this Credit Agreement or any related agreement or document. (b) Neither the Agent, as agent for the Lenders hereunder, nor any of its directors, officers, employees, or agents shall have any responsibility to the Borrower or any other Credit Party on account of the failure or delay in performance or breach by any of the Lenders of any of their respective obligations under this Credit Agreement or the Notes or any related agreement or document or in connection herewith or therewith. (c) The Agent, as agent for the Lenders hereunder, shall be entitled to rely on any communication, instrument, or document reasonably believed by it to be genuine or correct and to have been signed or sent by a Person or Persons believed by it to be the proper Person or Persons, and it shall be entitled to rely on advice of legal counsel, independent public accountants, and other professional advisers and experts selected by it. SECTION 12.6. REIMBURSEMENT AND INDEMNIFICATION. Each of the Lenders agrees (i) to reimburse the Agent in accordance with such Lender's Percentage, for any expenses and fees incurred for the benefit of the Lenders under the Fundamental Documents, including, without limitation, counsel - 122 - fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, and any other expense incurred in connection with the operations or enforcement thereof not reimbursed by the Borrower, (ii) to indemnify and hold harmless the Agent and any of its directors, officers, employees, or agents, on demand, in accordance with each Lender's Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it or any of them in any way relating to or arising out of the Fundamental Documents or any action taken or omitted by it or any of them under the Fundamental Documents to the extent not reimbursed by the Borrower or any other Credit Party (except such as shall result from their gross negligence or willful misconduct) and (iii) to indemnify and hold harmless the Fronting Bank and any of its directors, officers, employees, or agents, on demand, in the amount of its Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it or any of them in any way relating to or arising out of the issuance of any Letters of Credit or the failure to issue Letters of Credit if such failure or issuance was at the direction of Required Lenders (except as shall result from the gross negligence or willful misconduct of the Person to be reimbursed, indemnified or held harmless, as applicable). To the extent indemnification payments made by the Lenders pursuant to this Section 12.6 are subsequently recovered by the Agent from a Credit Party, the Agent will promptly refund such previously paid indemnity payments to the Lenders. SECTION 12.7. RIGHTS OF AGENT. It is understood and agreed that the Agent shall have the same rights and powers as a Lender hereunder (including the right to give such instructions) as the other Lenders and may exercise such rights and powers, as well as its rights and powers under other agreements and instruments to which it is or may be party, and engage in other transactions with any Credit Party, as though it were not the Agent of the Lenders or the Fronting Bank under this Credit Agreement. SECTION 12.8. INDEPENDENT INVESTIGATION BY LENDERS. Each of the Lenders acknowledges that it has decided to enter into this Credit Agreement and to make the Loans and participate in the Letters of Credit hereunder based on its own analysis of the transactions contemplated hereby and of the creditworthiness of the Credit Parties and agrees that the Agent and the Fronting Bank shall bear no responsibility therefor. - 123 - SECTION 12.9. EXECUTION BY AGENT OF SECURITY DOCUMENTATION ON BEHALF OF THE LENDERS. The Agent hereby agrees to expressly indicate in all the security documentation (including the UCC-1 Financing Statements, Copyright Security Agreement, Trademark Security Agreement, Pledgeholder Agreements and any payment instructions) that it obtains or executes that it is doing such on behalf of the Lenders. SECTION 12.10. AGREEMENT OF REQUIRED LENDERS. Upon any occasion requiring or permitting an approval, consent, waiver, election or other action on the part of the Required Lenders, action shall be taken by the Agent for and on behalf or for the benefit of all Lenders upon the direction of the Required Lenders and any such action shall be binding on all Lenders. No amendment, modification, consent or waiver shall be effective except in accordance with the provisions of Section 13.10 hereof. SECTION 12.11. NOTICE OF TRANSFER. The Agent may deem and treat any Lender which is a party to this Credit Agreement as the owner of such Lender's respective portions of the Loans and participations in Letters of Credit for all purposes, unless and until a written notice of the assignment or transfer thereof executed by any such Lender shall have been received by the Agent and become effective in accordance with Section 13.3 hereof. SECTION 12.12. SUCCESSOR AGENT. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, but such resignation shall not become effective until acceptance by a successor Agent of its appointment pursuant hereto. Upon any such resignation, the retiring Agent shall promptly appoint a successor Agent from among the Lenders which is experienced and sophisticated in entertainment industry lending, provided that such replacement is reasonably acceptable (as evidenced in writing) to the Borrower and the Required Lenders. If no successor Agent shall have been so appointed by the retiring Agent and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation, the Borrower may appoint a successor Agent (which successor may be replaced by the Required Lenders; provided that such replacement is experienced and is sophisticated in entertainment industry lending and reasonably acceptable to the Borrower), which shall be either a Lender or a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $250,000,000 and which is experienced and sophisticated in entertainment - 124 - industry lending. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Credit Agreement, the other Fundamental Documents and any other credit documentation. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article 12 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Credit Agreement. 13. MISCELLANEOUS SECTION 13.1. NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered or mailed (or in the case of facsimile communication, if by telegram, delivered to the telegraph company and, if by telex, graphic scanning or other telegraphic or facsimile communications equipment of the sending party hereto, delivered by such equipment) addressed, if to the Agent or Chemical Bank, to it at 270 Park Avenue, New York, New York 10017, Attn: John J. Huber III, facsimile no.: (212) 270-2625, with a copy to Chase Securities, Inc., 1800 Century Park East, Suite 400, Los Angeles, California 90067, Attn: David Shaheen or if to any Credit Party at 11601 Wilshire Boulevard, 21st floor, Los Angeles, California, 90025, Attn: Donald Kushner, facsimile no.: (310) 445-1142 or if to a Lender, to it at its address set forth on the signature page, or such other address as such party may from time to time designate by giving written notice to the other parties hereunder. Any failure of the Agent or a Lender giving notice pursuant to this Section 13.1, to provide a courtesy copy to a party as provided herein, shall not affect the validity of such notice. All notices and other communications given to any party hereto in accordance with the provisions of this Credit Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid, return receipt requested, if by mail, or when delivered to the telegraph company, charges prepaid, if by telegram, or upon receipt by such party, if by any telegraphic or facsimile communications equipment, in each case addressed to such party as provided in this Section 13.1 or in accordance with the latest unrevoked written direction from such party. SECTION 13.2. SURVIVAL OF AGREEMENT, REPRESENTATIONS AND WARRANTIES, ETC. All warranties, representations and covenants made by any of the Credit Parties herein or in any certificate or other instrument delivered by it or on its behalf in connection with - 125 - this Credit Agreement shall be considered to have been relied upon by the Agent and the Lenders and, except for any terminations, amendments, modifications or waivers thereof in accordance with the terms hereof, shall survive the making of the Loans and issuance of the Letters of Credit herein contemplated and the execution and delivery to the Agent of the Notes regardless of any investigation made by the Agent or the Lenders or on their behalf and shall continue in full force and effect so long as any amount due or to become due hereunder is outstanding and unpaid and so long as the Letter of Credit remains outstanding and so long as the Commitments have not been terminated. All statements in any such certificate or other instrument shall constitute representations and warranties by the Credit Parties hereunder. SECTION 13.3. SUCCESSORS AND ASSIGNS; SYNDICATIONS; LOAN SALES; Participations. (a) Whenever in this Credit Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party (PROVIDED, HOWEVER, that neither the Borrower nor any other Credit Party may assign its rights hereunder without the prior written consent of all the Lenders), and all covenants, promises and agreements by or on behalf of any of the Credit Parties which are contained in this Credit Agreement shall inure to the benefit of the successors and assigns of the Lenders. (b) Each of the Lenders may (but only with the prior written consent of the Agent, which consent shall not be unreasonably withheld) assign to an Eligible Assignee all or a portion of its interests, rights and obligations under this Credit Agreement (including, without limitation, all or a portion of its Commitment and the same portion of all Loans at the time owing to it and the Notes held by it and its obligations and rights with regard to any Letter of Credit); PROVIDED, HOWEVER, that (i) each assignment shall be of a constant, and not a varying, percentage of the assigning Lender's rights and obligations under this Credit Agreement, (ii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance, together with any Note or Notes subject to such assignment and a processing and recordation fee of $2,000 to be paid to the Agent by the assigning Lender and (iii) an assignment involving a participation in any Letter of Credit shall require the consent of the Fronting Bank, as the case may be, which shall not be unreasonably withheld. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be not earlier than five Business Days after the date of acceptance and recording by the Agent, (x) the assignee thereunder shall be a party hereto and, to the extent - 126 - provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Credit Agreement except that notwithstanding such assignment any rights and remedies available to the Borrower for any breaches by such assigning Lender of its obligations hereunder while a Lender shall be preserved after such assignment and such Lender shall not be relieved of any liability to the Borrower due to any such breach (and, in the case of an Assignment and Acceptance covering all or the remaining portion of the assigning Lender's rights and obligations under this Credit Agreement, such assigning Lender shall cease to be a party hereto). (c) Notwithstanding the other provisions of this Section 13.3, each Lender may at any time make an assignment of its interests, rights and obligations under this Credit Agreement to (i) any Affiliate of such Lender or (ii) any other Lender hereunder, provided that after giving effect to such assignment, the assignee's Percentage shall not exceed 50%. (d) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, the assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Fundamental Documents or any other instrument or document furnished pursuant hereto or thereto; (ii) such assignor Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Credit Parties or the performance or observance by the Credit Parties of any of their obligations under the Fundamental Documents; (iii) such assignee confirms that it has received a copy of this Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Sections 5.1(a) and 5.1(b) (or if none of such financial statements shall have then been delivered, then copies of the financial statements referred to in Section 3.5 hereof) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the assigning Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Credit Agreement; (v) such assignee appoints and authorizes the Agent to take such action as the Agent on its behalf and to exercise such powers under this Credit Agreement as are delegated to the Agent - 127 - by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will be bound by the provisions of this Credit Agreement and will perform in accordance with their terms all of the obligations which by the terms of this Credit Agreement are required to be performed by it as a Lender. (e) The Agent shall maintain at its address at which notices are to be given to it pursuant to Section 13.1 a copy of each Assignment and Acceptance and a register for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Credit Parties, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of the Fundamental Documents. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (f) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee together with any Notes subject to such assignment, and the processing and recordation fees the Agent shall, if such Assignment and Acceptance has been completed and is in the form of Exhibit K hereto, (i) accept such Assignment and Acceptance, (ii) record - 128 - the information contained therein in the Register and (iii) give prompt written notice thereof to the Borrower. Within five (5) Business Days after receipt of the notice, the Borrower, at its own expense, shall execute and deliver to the Lender, in exchange for the surrendered Notes, new Notes to the order of such assignee in an amount equal to the Commitments assumed by it pursuant to such Assignment and Acceptance and new Notes to the order of the assigning Lender in an amount equal to the Commitments retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such retained Commitment, shall be dated the date of the surrendered Notes and shall otherwise be in substantially the form of Exhibit A hereto. In addition the Credit Parties will promptly, at their own expense, execute such amendments to the Fundamental Documents to which it is a party and such additional documents, and take such other actions as the Agent or the assignee Lender may reasonably request in order to give such assignee Lender the full benefit of the Liens contemplated by the Fundamental Documents. (g) Each of the Lenders may without the consent of the Credit Parties sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Credit Agreement (including, without limitation, all or a portion of its Commitment and the Loans owing to it and the Note or Notes held by it); PROVIDED, HOWEVER, that (i) any such Lender's obligations under this Credit Agreement shall remain unchanged, (ii) such participant shall not be granted any voting rights under this Credit Agreement, except with respect to proposed changes to interest rates, amount of Commitments, final maturity of Loans, releases of all or substantially all the Collateral and fees (as applicable to such participant), (iii) any such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the participating banks or other entities shall be entitled to the cost protection provisions contained in Sections 2.9, 2.10 and 2.13(e) hereof but a participant shall not be entitled to receive pursuant to such provisions an amount larger than its share of the amount to which the Lender granting such participation would have been entitled and (v) the Credit Parties, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Credit Agreement. (h) The Lenders may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 13.3, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Credit Parties furnished to the Agent by or on behalf of the Credit Parties; provided that prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall agree, by executing a confidentiality letter in form and substance equivalent to the confidentiality letter executed by - 129 - the Lenders in connection with information received by such Lenders relating to this transaction to preserve the confidentiality of any confidential information relating to the Borrower received from such Lender. (i) Any assignment pursuant to paragraph (a) or (b) of this Section 13.3 shall constitute an amendment of the Schedule of Commitments as of the effective date of such assignment. (j) The Borrower consents that any Lender may at any time and from time to time pledge or otherwise grant a security interest in any Loan or in any of the Notes evidencing such Loans (or any part thereof) to any Federal Reserve Bank. SECTION 13.4. EXPENSES; DOCUMENTARY TAXES. Whether or not the transactions hereby contemplated shall be consummated, the Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Agent or Chase Securities Inc. in connection with performance of due diligence by the Agent in connection with the transactions hereby contemplated and the syndication, preparation, execution, delivery, waiver or modification and administration of this Credit Agreement and any other documentation contemplated hereby, the Notes and the making of the Loans, including but not limited to any internally allocated audit costs, the reasonable fees and disbursements of Morgan, Lewis & Bockius LLP, counsel for the Agent, and any other counsel that the Agent shall retain, fees and expenses of technical or other consultants engaged by the Agent to the extent previously approved by the Borrower. Such payments shall be made on the date of execution of this Credit Agreement and thereafter on demand. In addition, the Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Lenders in the enforcement or protection of the rights of the Lenders in connection with this Credit Agreement or the Notes, and with respect to any action which may be instituted by any Person other than the Credit Parties against any Lender in respect of the foregoing, or as a result of any transaction, action or non-action arising from the foregoing, including but not limited to the reasonable fees and disbursements of any counsel for the Lenders. Such payments shall be made on demand after the date of execution of this Credit Agreement. The Borrower agrees that it shall indemnify the Agent and the Lenders from and hold them harmless against any documentary taxes, assessments or charges made by any Governmental Authority by reason of the execution and delivery of this Credit Agreement, the Notes or the issuance of Letters of Credit. The obligations of the Borrower under this Section 13.4 shall survive the termination of this Credit Agreement and/or the payment of the Loans and/or the expiration of the Letters of Credit. SECTION 13.5. INDEMNIFICATION OF LENDERS. - 130 - The Borrower agrees (a) to indemnify and hold harmless the Lenders (to the full extent permitted by law) from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever nature, and (b) to pay to the Agent an amount equal to the amount of all costs and expenses, including reasonable legal fees and disbursements, and with regard to both (a) and (b) growing out of or resulting from any litigation or other proceedings relating to the Collateral, this Credit Agreement, the Copyright Security Agreements the Trademark Security Agreement and the Pledgeholder Agreements, the making of the Loans, any attempt to audit, inspect, protect or sell the Collateral, or the administration and enforcement or exercise of any right or remedy granted to the Lenders hereunder or thereunder but excluding therefrom all costs arising out of or resulting from (i) the gross negligence or willful misconduct of the Lender or the Agent claiming indemnification hereunder, (ii) litigation between the Borrower and the Agent or the Lenders in connection with the Fundamental Documents or in any way relating to the transactions contemplated hereby if, after final non-appealable judgment, the Agent or the Lenders are not the prevailing party or parties in such litigation and (iii) litigation among the Lenders or between the Agent and the Lenders in connection with the Fundamental Documents or in any way relating to the transactions contemplated hereby. The foregoing indemnity agreement includes any reasonable costs incurred by the Lenders in connection with any action or proceeding which may be instituted in respect of the foregoing by the Agent, or by any other Person either against the Lenders or in connection with which any officer or employee of the Lenders is called as a witness or deponent, including, but not limited to, the reasonable fees and disbursements of Morgan, Lewis & Bockius LLP, counsel to the Agent, and any out-of-pocket costs incurred by the Lenders in appearing as a witness or in otherwise complying with legal process served upon them. In no event shall the Lenders be liable to the Borrower for any matter or thing in connection with this Credit Agreement other than to make Loans and account for moneys actually received by them in accordance with the terms hereof. Whenever the provisions of this Credit Agreement or any other Fundamental Document provide that, if any Credit Party shall fail to do any act or thing which it has covenanted to do hereunder or any representation or warranty of any of the Credit Parties shall be breached, the Agent may (but shall not be obligated to) do the same or cause it to be done or remedy any such breach and the Agent does the same or causes it to be done, there shall be added to the Obligations hereunder the cost or expense incurred by the Agent in so doing, and any and all amounts expended by the Agent in taking any such action shall be repayable to it upon its demand therefor and shall bear interest at 4% in excess of the Alternate Base Rate from time to time in effect from the date advanced to the date of repayment. - 131 - All indemnities contained in this Section 13.5 shall survive the expiration or earlier termination of this Credit Agreement and shall inure to the benefit of any Person who was a Lender notwithstanding such Person's assignment of all its Loans and Commitments. SECTION 13.6. CHOICE OF LAW. THIS CREDIT AGREEMENT AND THE NOTES SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK WHICH ARE APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE AND, IN THE CASE OF PROVISIONS RELATING TO INTEREST RATES, ANY APPLICABLE LAW OF THE UNITED STATES OF AMERICA. EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH LETTER OF CREDIT, OR IF NO SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM CUSTOMS") AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM CUSTOMS, THE LAWS OF THE STATE OF NEW YORK. SECTION 13.7. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH CREDIT PARTY HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF OR ANY FUNDAMENTAL DOCUMENT, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING OR WHETHER IN CONTRACT OR TORT OR OTHERWISE. EACH CREDIT PARTY ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY THE LENDERS THAT THE PROVISIONS OF THIS SECTION CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE LENDERS HAVE RELIED, ARE RELYING AND WILL RELY IN ENTERING INTO THIS CREDIT AGREEMENT AND ANY OTHER FUNDAMENTAL DOCUMENT. THE AGENT OR ANY LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 13.7 WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE BORROWER TO THE WAIVER OF ITS RIGHTS TO TRIAL BY JURY. SECTION 13.8. NO WAIVER. No failure on the part of the Agent or any Lender or the Fronting Bank to exercise, and no delay in exercising, any right, power or remedy hereunder, under the Notes or any other Fundamental Document or with regards to Letters of Credit shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. - 132 - SECTION 13.9. EXTENSION OF PAYMENT DATE. Should any payment of principal of or interest on the Notes or any other amount due hereunder become due and payable on a day other than a Business Day, the due date of such payment thereof shall be extended to the next succeeding Business Day and, in the case of principal, interest shall be payable thereon at the rate herein specified during such extension. SECTION 13.10. AMENDMENTS, ETC. No modification, amendment or waiver of any provision of this Credit Agreement, and no consent to any departure by the Credit Parties herefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given; PROVIDED, HOWEVER, that no such modification, waiver, consent or amendment shall, without the written consent of all of the Lenders, (i) change the Commitment of any Lender, (ii) amend or modify any provision of this Credit Agreement which provides for the unanimous consent or approval of the Lenders, (iii) release any Collateral or any of the Pledged Securities (except as contemplated herein) or release any Guarantor from its obligations hereunder, (iv) alter the fixed scheduled maturity or principal amount of any Loan, or the rate of interest payable thereon, or the rate at which the Commitment Fees accrue or the fixed scheduled maturity or amount of any other payment required to be made under this Credit Agreement, (v) subordinate the Obligations hereunder to other Indebtedness or subordinate the security interests of the Lenders in the Collateral except as permitted by Section 11.1, (vi) amend the definition of "Required Lenders," (vii) amend the definition of "Borrowing Base" or any of the defined terms used therein, (viii) amend the definition of "Applicable Margin", (ix) amend the definition of "Collateral," (x) amend or modify Sections 2.1(c), 2.15(a)(i), 2.9(d) or 2.15(i) or (xi) amend this Section 13.10. No such amendment or modification may adversely affect the rights and obligations of the Agent hereunder without its prior written consent or the rights and obligations of the Fronting Bank without its prior written consent. No notice to or demand on any of the Credit Parties shall entitle such Credit Party to any other or further notice or demand in the same, similar or other circumstances. Each holder of a Note shall be bound by any amendment, modification, waiver or consent authorized as provided herein, whether or not a Note shall have been marked to indicate such amendment, modification, waiver or consent and any consent by any holder of a Note shall bind any Person subsequently acquiring a Note, whether or not a Note is so marked. SECTION 13.11. SEVERABILITY. Any provision of this Credit Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or - 133 - unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 13.12. SERVICE OF PROCESS. EACH CREDIT PARTY (EACH A "SUBMITTING PARTY") HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE STATE COURTS OF THE STATE OF NEW YORK AND TO THE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR BASED UPON THIS CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF BROUGHT BY THE AGENT OR A LENDER. THE SUBMITTING PARTY TO THE EXTENT PERMITTED BY APPLICABLE LAW (A) HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE, OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH COURTS, ANY CLAIM THAT IT IS NOT SUBJECT PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR THAT THIS CREDIT AGREEMENT OR THE SUBJECT MATTER HEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT, AND (B) HEREBY WAIVES THE RIGHT TO ASSERT IN ANY SUCH ACTION, SUIT OR PROCEEDING ANY OFFSETS OR COUNTERCLAIMS EXCEPT COUNTERCLAIMS THAT ARE COMPULSORY OR OTHERWISE ARISE FROM THE SAME SUBJECT MATTER. THE SUBMITTING PARTY HEREBY CONSENTS TO SERVICE OF PROCESS BY MAIL AT ITS ADDRESS TO WHICH NOTICES ARE TO BE GIVEN PURSUANT TO SECTION 13.1 HEREOF. THE SUBMITTING PARTY AGREES THAT ITS SUBMISSION TO JURISDICTION AND CONSENT TO SERVICE OF PROCESS BY MAIL IS MADE FOR THE EXPRESS BENEFIT OF THE AGENT, THE FRONTING BANK AND THE LENDERS. FINAL JUDGMENT AGAINST THE SUBMITTING PARTY IN ANY SUCH ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE, AND MAY BE ENFORCED IN ANY OTHER JURISDICTION (A) BY SUIT, ACTION OR PROCEEDING ON THE JUDGMENT, A CERTIFIED OR TRUE COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND THE AMOUNT OF INDEBTEDNESS OR LIABILITY OF THE SUBMITTING PARTY THEREIN DESCRIBED OR (B) IN ANY OTHER MANNER PROVIDED BY OR PURSUANT TO THE LAWS OF SUCH OTHER JURISDICTION, PROVIDED, HOWEVER, THAT THE AGENT, THE FRONTING BANK OR A LENDER MAY AT ITS OPTION BRING SUIT, OR INSTITUTE OTHER JUDICIAL PROCEEDINGS AGAINST THE SUBMITTING PARTY OR ANY OF ITS ASSETS IN ANY STATE OR FEDERAL COURT OF THE UNITED STATES OR OF ANY COUNTRY OR PLACE WHERE THE SUBMITTING PARTY OR SUCH ASSETS MAY BE FOUND. SECTION 13.13. HEADINGS. Section headings used herein and the Table of Contents are for convenience only and are not to affect the construction of or be taken into consideration in interpreting this Credit Agreement. - 134 - SECTION 13.14. EXECUTION IN COUNTERPARTS. This Credit Agreement may be executed in any number of counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same instrument. SECTION 13.15. SUBORDINATION OF INTERCOMPANY ADVANCES. (a) Each Credit Party hereby agrees that any Indebtedness or other intercompany receivables or advances of any other Credit Party, directly or indirectly, in favor of such Credit Party of whatever nature at any time outstanding shall be completely subordinate in right of payment to the prior payment in full of the Obligations, and that no payment on any such Indebtedness shall be made (i) except intercompany receivables and advances permitted pursuant to the terms hereof may be repaid in the ordinary course of business so long as no Default or Event of Default, shall have occurred and be continuing and (ii) except as specifically consented to by all the Lenders in writing, until the prior payment in full all Obligations and termination of the Commitments. (b) In the event that any payment on any such indebtedness shall be received by such Credit Party other than as permitted by Section 13.15(a) before payment in full of all Obligations and termination of the Commitments, such Credit Party shall receive such payments and hold the same in trust for, and shall immediately pay over to, the Agent on behalf of the Lenders all such sums to the extent necessary so that the Lenders shall have been paid all Obligations owed or which may become owing. SECTION 13.16. CONFIDENTIALITY. Each of the Lenders understands that the information furnished to it pursuant to this Credit Agreement will be received by it prior to the time that such information shall have been made public, and each of the Lenders hereby agrees that it will keep, and will direct its officers and employees to keep, all the information provided to it pursuant to this Credit Agreement confidential prior to its becoming public (through publication other than as a result of action by one of the Lenders in violation of this Section 13.16) subject, however, to (i) disclosure to officers, directors, employees, representatives, agents, auditors, consultants, advisors, lawyers and affiliates of such Lender, in the ordinary course of business who have been made aware of the confidential nature of the information; (ii) disclosure to such officers, directors, employees, agents and representatives of a prospective assignee or participant as need to know such information in connection with the evaluation of a possible participation in the Loans hereunder (who agrees in writing to be bound by this provision - 135 - will be informed of the confidential nature of the material); (iii) the obligations of the Lenders or a participant under Applicable Law, or pursuant to subpoenas or other legal process, to make information available to governmental agencies and examiners or to others and the right of the Lenders to use such information in proceedings to enforce their rights and remedies hereunder or under any other Fundamental Document or in any proceeding against the Lenders in connection with this Agreement or under any other Fundamental Document or the transactions contemplated hereunder; (iv) disclosure to the extent such information (A) becomes publicly available other than as a result of a breach of this Credit Agreement or (B) becomes available to a Lender or a participant on a non-confidential basis, not in breach of any agreement or other obligation to the Borrower, from a source other than the Borrower; (v) disclosure to the extent the Borrower shall have consented to such disclosure in writing; or (vi) each Lender's or participant's right to make information available (A) to any corporation controlled by such Lender or participant or under common control with such Lender or participant in connection with the sale of a participation by such Lender or participant to such other corporation provided such transferee agrees in writing to be bound by this provision or (B) in accordance with Section 13.3(h) herein. IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed as of the day and the year first written. BORROWER: THE KUSHNER-LOCKE COMPANY By_______________________________ Name: Title: - 136 - GUARANTORS: KL PRODUCTIONS, INC. KL INTERNATIONAL, INC. ACME PRODUCTIONS, INC. KUSHNER-LOCKE PRODUCTIONS, INC. THE RELATIVES COMPANY POST AND PRODUCTION SERVICES, INC. L-K ENTERTAINMENT, INC. INTERNATIONAL COURTROOM NEWS SERVICE FAMILY PICTURES, INC. TROPICAL HEAT, INC. KL SYNDICATION, INC. ANDRE PRODUCTIONS, INC. TKLC NO.2, INC. TWILIGHT ENTERTAINMENT, INC. KLC FILMS, INC. KL FEATURES, INC. KLF GUILD CO. KLF DEVELOPMENT CO. KLTV GUILD CO. KLTV DEVELOPMENT CO. KUSHNER-LOCKE INTERNATIONAL, INC. KL INTERACTIVE MEDIA, INC. By______________________________ Name: Donald Kushner Title: Authorized Signatory for each of the foregoing KLC/NEW CITY By its General Partner THE KUSHNER-LOCKE COMPANY By______________________________ Name: Title: LENDERS: CHEMICAL BANK, individually and as Agent By_______________________________ Name: Title: Address: 270 Park Avenue New York, NY 10017 Attn: John J. Huber III DE NATIONALE INVESTERINGSBANK, N.V. By________________________________ Name: Title: By________________________________ Name: Title: Address: 4 Carnegieplein 2501 BH The Hague The Netherlands The KG251 Attn: Lars van't Hoenderdaal METROBANK By________________________________ Name: Title Address: 10900 Wilshire Boulevard Los Angeles, CA 90024 Attn: D. Jeffrey Andrick SCHEDULE OF 1 SCHEDULE OF COMMITMENTS Revolving --------- Lender Credit Loan Total ------ ----------- ----- Chemical Bank $15,000,000 $15,000,000 De Nationale $15,000,000 $15,000,000 Investeringsbank, N.V. Metrobank $10,000,000 $10,000,000 Schedule 2 APPROVED ACCOUNT DEBTORS [LIST PROVIDED BY THE BORROWER] Schedule 3 APPROVED COUNTRIES Country List A Country List B - -------------- -------------- Austria Brazil Australia Brunei Belgium Chile Canada Greece Denmark Iceland Finland Indonesia France Israel Germany Liechtenstein Hong Kong Malaysia Ireland Mexico Italy Singapore Japan South Africa Luxembourg South Korea Monaco Turkey Netherlands Thailand New Zealand Norway Portugal Spain Sweden Switzerland Taiwan United Kingdom Schedule 4 GUARANTORS ---------- KL PRODUCTIONS, INC. KL INTERNATIONAL, INC. ACME PRODUCTIONS, INC. KUSHNER-LOCKE PRODUCTIONS, INC. THE RELATIVES COMPANY POST AND PRODUCTION SERVICES, INC. L-K ENTERTAINMENT, INC. INTERNATIONAL COURTROOM NEWS SERVICE FAMILY PICTURES, INC. TROPICAL HEAT, INC. KL SYNDICATION, INC. ANDRE PRODUCTIONS, INC. TKLC NO.2, INC. TWILIGHT ENTERTAINMENT, INC. KLC FILMS, INC. KL FEATURES, INC. KLF GUILD CO. KLF DEVELOPMENT CO. KLTV GUILD CO. KLTV DEVELOPMENT CO. KUSHNER-LOCKE INTERNATIONAL, INC. KL INTERACTIVE MEDIA, INC. KLC/NEW CITY, a California general partnership TABLE OF CONTENTS Page ---- 1. DEFINITIONS............................................................ 2 2. THE LOANS.............................................................. 33 SECTION 2.1. Loans.................................................. 33 SECTION 2.2. Making of Loans........................................ 34 SECTION 2.3. Notes.................................................. 36 SECTION 2.4. Interest on Notes...................................... 36 SECTION 2.5. Commitment Fees and Other Fees......................... 37 SECTION 2.6. Optional and Mandatory Termination or Reduction of Commitments.................................................... 37 SECTION 2.7. Default Interest; Alternate Rate of Interest........... 38 SECTION 2.8. Continuation and Conversion of Loans................... 39 SECTION 2.9. Prepayment of Loans; Reimbursement of Lenders.......... 40 SECTION 2.10. Change in Circumstances............................... 43 SECTION 2.11. Change in Legality.................................... 47 SECTION 2.12. Manner of Payments.................................... 47 SECTION 2.13. United States Withholding............................. 48 SECTION 2.14. Interest Adjustments.................................. 50 SECTION 2.15. Letters of Credit..................................... 50 SECTION 2.16. Provisions Relating to the Borrowing Base............. 56 3. REPRESENTATIONS AND WARRANTIES OF CREDIT PARTIES....................... 58 SECTION 3.1. Corporate Existence and Power.......................... 58 SECTION 3.2. Corporate Authority and No Violation................... 58 SECTION 3.3. Governmental Approval.................................. 59 SECTION 3.4. Binding Agreements..................................... 59 SECTION 3.5. Financial Statements................................... 60 SECTION 3.6. No Material Adverse Change............................. 60 SECTION 3.7. Ownership of Pledged Securities, etc................... 61 SECTION 3.8. Copyrights, Trademarks and Other Rights................ 61 SECTION 3.9. Fictitious Names....................................... 62 SECTION 3.10. Title to Properties.................................... 62 SECTION 3.11. Places of Business..................................... 62 SECTION 3.12. Litigation............................................. 63 SECTION 3.13. Federal Reserve Regulations............................ 63 SECTION 3.14. Investment Company Act................................. 63 SECTION 3.15. Taxes.................................................. 64 SECTION 3.16. Compliance with ERISA.................................. 64 SECTION 3.17. Agreements............................................. 64 SECTION 3.18. Security Interest; Other Security...................... 65 SECTION 3.19. Disclosure............................................. 65 SECTION 3.20. Distribution Rights.................................... 66 SECTION 3.21. Environmental Liabilities.............................. 66 SECTION 3.22. Pledged Securities..................................... 67 SECTION 3.23. Compliance with Laws................................... 67 4. CONDITIONS OF LENDING.................................................. 68 - i - SECTION 4.1. Conditions Precedent to Initial Loans or Letter of Credit............................................. 68 SECTION 4.2. Conditions Precedent to Each Loan and Letter of Credit................................................ 73 5. AFFIRMATIVE COVENANTS.................................................. 74 SECTION 5.1. Financial Statements and Reports....................... 74 SECTION 5.2. Corporate Existence.................................... 77 SECTION 5.3. Maintenance of Properties.............................. 77 SECTION 5.4. Notice of Material Events.............................. 77 SECTION 5.5. Material Adverse Effect................................ 78 SECTION 5.6. Insurance.............................................. 79 SECTION 5.7. Production............................................. 80 SECTION 5.8. Music.................................................. 80 SECTION 5.9. Copyright.............................................. 81 SECTION 5.10. Books and Records...................................... 81 SECTION 5.11. Third Party Audit Rights............................... 82 SECTION 5.12. Observance of Agreements............................... 82 SECTION 5.13. Film Properties and Rights; Credit Parties to Act as Pledgeholder................................................... 82 SECTION 5.14. Laboratories; No Removal.............................. 83 SECTION 5.15. Taxes and Charges; Indebtedness in Ordinary Course of Business....................................................... 83 SECTION 5.16. Liens................................................. 84 SECTION 5.17. Cash Receipts......................................... 84 SECTION 5.18. Further Assurances; Security Interests................ 84 SECTION 5.19. Receivables Audit..................................... 85 SECTION 5.20. ERISA Compliance and Reports.......................... 85 SECTION 5.21. Environmental Laws.................................... 86 SECTION 5.22. Bank Accounts......................................... 87 SECTION 5.23. Use of Proceeds....................................... 87 SECTION 5.24. Security Agreements with the Guilds................... 87 SECTION 5.25. Uncompleted Products.................................. 88 6. NEGATIVE COVENANTS..................................................... 89 SECTION 6.1. Limitations on Indebtedness............................ 89 SECTION 6.2. Limitations on Liens................................... 90 SECTION 6.3. Limitation on Guarantees............................... 91 SECTION 6.4. Limitations on Investments............................. 91 SECTION 6.5. Restricted Payments.................................... 92 SECTION 6.6. Limitations on Leases.................................. 92 SECTION 6.7. Consolidation, Merger, Sale or Purchase of Assets, etc. 92 SECTION 6.8. Receivables............................................ 92 SECTION 6.9. Sale and Leaseback..................................... 93 SECTION 6.10. Places of Business; Change of Name..................... 93 SECTION 6.11. Limitations on Capital Expenditures.................... 93 SECTION 6.12. Transactions with Affiliates. ........................ 93 SECTION 6.13. Prohibition of Amendments or Waivers................... 93 SECTION 6.14. Consolidated Capital Base.............................. 94 SECTION 6.15. Initial Print and Advertising Expenditures............. 94 - ii - SECTION 6.16. Development Costs...................................... 94 SECTION 6.17. Overhead Expense....................................... 94 SECTION 6.18. Total Unsubordinated Liabilities to Consolidated Capital Base Ratio................................. 94 SECTION 6.19. EBIT to Interest Expense Ratio........................ 94 SECTION 6.20. Projected Liquidity................................... 95 SECTION 6.21. No Change in Business................................. 95 SECTION 6.22. ERISA Compliance...................................... 95 SECTION 6.23. Additional Limitations on Production and Acquisition of Product......................................... 96 SECTION 6.24. Subsidiaries.......................................... 97 SECTION 6.25. Bank Accounts......................................... 97 SECTION 6.26. Hazardous Materials................................... 97 SECTION 6.27. Use of Proceeds of Loans and Requests for Letters of Credit......................................................... 97 SECTION 6.28. Special Production Tranche............................ 97 SECTION 6.29. Interest Rate Protection Agreements, etc.............. 98 7. EVENTS OF DEFAULT...................................................... 98 8. GRANT OF SECURITY INTEREST; REMEDIES...................................101 SECTION 8.1. Security Interests.....................................101 SECTION 8.2. Use of Collateral......................................101 SECTION 8.3. Collection Accounts....................................102 SECTION 8.4. Credit Parties to Hold in Trust........................102 SECTION 8.5. Collections, etc.......................................103 SECTION 8.6. Possession, Sale of Collateral, etc....................103 SECTION 8.7. Application of Proceeds on Default.....................105 SECTION 8.8. Power of Attorney......................................105 SECTION 8.9. Financing Statements, Direct Payments..................106 SECTION 8.10. Further Assurances.....................................106 SECTION 8.11. Termination............................................107 SECTION 8.12. Remedies Not Exclusive.................................107 SECTION 8.13. Quiet Enjoyment........................................107 SECTION 8.14. Continuation and Reinstatement.........................108 9. GUARANTY...............................................................108 SECTION 9.1. Guaranty...............................................108 SECTION 9.2. No Impairment of Guaranty, etc.........................109 SECTION 9.3. Continuation and Reinstatement, etc....................110 SECTION 9.4. Limitation on Guaranteed Amount etc....................110 10. PLEDGE................................................................111 SECTION 10.1. Pledge................................................111 SECTION 10.2. Covenant..............................................111 SECTION 10.3. Registration in Nominee Name; Denominations...........111 SECTION 10.4. Voting Rights; Dividends; etc.........................111 SECTION 10.5. Remedies Upon Default.................................112 SECTION 10.6. Application of Proceeds of Sale and Cash..............114 - iii - SECTION 10.7. Securities Act, etc...................................115 SECTION 10.8. Continuation and Reinstatement........................115 SECTION 10.9. Termination...........................................116 11. CASH COLLATERAL ACCOUNT...............................................116 SECTION 11.1. Cash Collateral Accounts..............................116 SECTION 11.2. Investment of Funds...................................116 SECTION 11.3. Grant of Security Interest............................117 SECTION 11.4. Remedies..............................................117 12. THE AGENT.............................................................118 SECTION 12.1. Administration by Agent...............................118 SECTION 12.2. Advances and Payments.................................119 SECTION 12.3. Sharing of Setoffs and Cash Collateral................120 SECTION 12.4. Notice to the Lenders.................................121 SECTION 12.5. Liability of Agent....................................121 SECTION 12.6. Reimbursement and Indemnification.....................122 SECTION 12.7. Rights of Agent.......................................122 SECTION 12.8. Independent Investigation by Lenders..................123 SECTION 12.9. Execution by Agent of Security Documentation on behalf of the Lenders.......................................123 SECTION 12.10. Agreement of Required Lenders........................123 SECTION 12.11. Notice of Transfer...................................123 SECTION 12.12. Successor Agent......................................123 13. MISCELLANEOUS.........................................................124 SECTION 13.1. Notices...............................................124 SECTION 13.2. Survival of Agreement, Representations and Warranties, etc................................................125 SECTION 13.3. Successors and Assigns; Syndications; Loan Sales; Participations.................................................125 SECTION 13.4. Expenses; Documentary Taxes...........................129 SECTION 13.5. Indemnification of Lenders............................129 SECTION 13.6. CHOICE OF LAW.........................................131 SECTION 13.7. WAIVER OF JURY TRIAL..................................131 SECTION 13.8. No Waiver.............................................131 SECTION 13.9. Extension of Payment Date.............................132 SECTION 13.10. Amendments, etc.......................................132 SECTION 13.11. Severability..........................................132 SECTION 13.12. SERVICE OF PROCESS....................................133 SECTION 13.13. Headings..............................................133 SECTION 13.14. Execution in Counterparts.............................134 SECTION 13.15. Subordination of Intercompany Advances................134 SECTION 13.16. Confidentiality.......................................134 - iv - Credit, Security, Guaranty and Pledge Agreement Schedules and Exhibits Schedules 1 Schedule of Commitments 2 Approved Account Debtors/Allowable Amounts 3 Approved Countries 4 Guarantors 3.7(a) Credit Parties/Pledged Securities 3.7(b) Beneficial Interests 3.8(a) Items of Product; Copyrights 3.8(b) Trademarks 3.9 Fictitious Names 3.11 Principal Executive Office/Location of Collateral 3.12 Litigation 3.17 Existing Indebtedness/Material Agreements 3.21 Environmental Liabilities 3.22 Outstanding Rights re Pledged Securities 5.22 Bank Accounts 6.2 Existing Liens 6.3 Guarantees 6.4 Scheduled Investments Exhibits A Form of Note B-1 Opinion of Kaye, Scholer, Fierman, Hayes & Handler, LLP counsel to the Credit Parties B-2 Opinion of Internal Counsel to the Credit Parties C Form of Borrowing Base Certificate D Form of Pledgeholder Agreement E-1 Form of Copyright Security Agreement E-2 Form of Copyright Security Agreement Supplement F Form of Trademark Security Agreement G Form of Laboratory Access Letter H Form of Contribution Agreement I Form of Notice of Assignment and Irrevocable Instructions J Form of Borrowing Certificate K Form of Assignment and Acceptance L Form of Instrument of Assumption and Joinder - v - EX-23.1 7 EX 23.1 CONSENT OF KPFM PEAT MARWICK LLP EXHIBIT 23.1 The Board of Directors The Kushner Locke Company: We consent to the use of our reports included herein, the use of our reports incorporated herein by reference from the September 30, 1995 Annual Report on Form 10-K and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Los Angeles, California July 10, 1996 -----END PRIVACY-ENHANCED MESSAGE-----