-----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, M95id5IoepKEfnLkq99mHseCSR9YsLJwp5SmBrIi+0tz4ucN713IdXL4rWv/HQP/ KDRPR5MYwK5VqZzDYJT/cw== 0000950148-00-002516.txt : 20001225 0000950148-00-002516.hdr.sgml : 20001225 ACCESSION NUMBER: 0000950148-00-002516 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KUSHNER LOCKE CO CENTRAL INDEX KEY: 0000842009 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954079057 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10661 FILM NUMBER: 794008 BUSINESS ADDRESS: STREET 1: 11601 WILSHIRE BLVD 21ST FLR CITY: LOS ANGELES STATE: CA ZIP: 95202 BUSINESS PHONE: 3104812018 MAIL ADDRESS: STREET 1: 11601 WILSHIRE BLVD STREET 2: 21ST FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90025 10-K 1 v68115e10-k.txt FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMMISSION FILE NO. 0-17295
THE KUSHNER-LOCKE COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-4079057 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
11601 WILSHIRE BLVD., 21ST FLOOR, LOS ANGELES, CALIFORNIA 90025 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (310) 481-2000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NOT APPLICABLE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, WITHOUT PAR VALUE 13 3/4% CONVERTIBLE SUBORDINATED DEBENTURES, SERIES B DUE 2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value based on the closing price of the Registrant's Common Stock held by nonaffiliates of the Registrant was approximately $1,302,000 as of December 18, 2000. There were 13,846,908 shares of outstanding Common Stock of the Registrant as of December 18, 2000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for its 2001 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A not later than 120 days after the end of the Registrant's fiscal year (September 30, 2000) are incorporated by reference in Part III Items 10, 11, 12 and 13 of this Form 10-K. Total number of pages 61. Exhibit Index begins on page 58. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL The Kushner-Locke Company (the "Company") is a leading independent entertainment company which principally develops, produces, and distributes original feature films and television programming. The Company's feature films are developed and produced for the theatrical, made-for-video and pay cable motion picture markets. The Company's television programming has included television series, mini-series, movies-for-television, animation, reality and game show programming for the major networks, cable television, first-run syndication and international markets. The Company established its feature film production operations in 1993. In 1994, the Company established an international theatrical film subsidiary to expand into foreign theatrical distribution. In 1995, in response to the increased demand for product by the pay-per-view, telephone delivery, pay cable and basic cable services, the Company formed an entity called KLC/New City Tele-Ventures to acquire product from third parties for distribution in the cable, pay service and satellite markets, as well as other emerging markets. The joint venture has acquired over 100 films for this purpose. The Company owns 82.5% of this entity. In late 1997, the Company acquired an 80% interest in US SEARCH.com, a leading provider of fee-based people search and other customized individual reference services. In June 1999 US SEARCH.com completed an initial pubic offering in which the Company sold a portion of its shareholdings. As of September 30, 2000, the Company owned 52.6% of US SEARCH.com. In October 2000 the Company completed a transaction wherein Pequot Capital Management acquired 3,500,000 shares of US SEARCH.com from the Company. The sale was made in conjunction with a financing transaction where Pequot Private Equity Group, the venture capital arm of Pequot Capital Management, completed a private financing with US SEARCH.com for up to $27.5 million. As a result of the transaction, the Company's ownership position in US SEARCH.com has been reduced below 50%, and therefore the Company will not be consolidating US SEARCH.com's future operating results. In the future, the Company will recognize its corresponding share of equity in US SEARCH.com's earnings and losses, to the extent the Company has basis remaining in its investment. As of September 30, 2000, the consolidation of losses in US SEARCH.com had reduced the Company's basis to zero. In February 1998 the Company established KL/Phoenix, an 80% owned venture, which distributes film and television product in Latin America. In November 1998, the Company launched Gran Canal Latino ("GCL"), a satellite channel through a newly-formed 80%-owned subsidiary. GCL broadcasts 24 hours a day, with a selection of Spanish language films mostly from Spain. GCL's satellite transmission reaches the United States and all of Latin America including Mexico. Under a distribution arrangement with Enrique Cerezo, the Company is broadcasting selections from 1,500 Spanish language movie titles. In April 1999 the Company obtained warrants and a minority ownership interest in The Harvey Entertainment Company in exchange for 468,886 shares of common stock of the Company. In June 1999 the Company obtained a 20% ownership interest in Digital Renaissance, a German digital special effects facility. In February 2000, the Company obtained a 30% partnership interest in World Wide Multimedia, LLP in exchange for $2,000,000 and the contribution of certain film rights. In conjunction with the transaction, the Company obtained a $2,000,000 loan from Far East National Bank, due in February 2005, with interest payable quarterly. In October 1999 the Company sold its 50% partnership interest in TV First to its partner. TV First purchases media time for Christian music infomercials and commenced retail marketing of compact discs and audio and video cassettes in fiscal 1999. The Company's feature films for fiscal 2000 generated $11,220,000 of revenues. Picking up the Pieces, starring Woody Allen, Sharon Stone and David Schwimmer, and The St. Francisville Experiment were delivered by the Company in Fiscal 2000. In addition, the Company has recently completed post production activities on Harvard Man, starring Sarah Michelle Gellar and has completed principal photography on Wolfgirl. 1 3 Since its inception in 1983, the Company has produced or distributed over 1,000 hours of original television programming, including various television series, movies-for-television and mini-series. For fiscal 2000, the Company's television slate generated $7,963,000 of revenue, principally from network and international licensing of two feature length television movies: They Nest, starring Dean Stockwell, John Savage and Thomas Calabro, and Dark Prince: The True Story of Dracula, starring Rudolf Martin and Jane March. The Company is currently in post production on the HBO series, Thrills. Overall, the Company's operating revenues were $59,640,000 for the fiscal year ended September 30, 2000, an increase of 20% from the $49,890,000 recognized for the fiscal year ended September 30, 1999. This increase is primarily due to increased revenues from US SEARCH.com. FORWARD LOOKING STATEMENTS Except for the historical information contained herein, certain of the matters discussed in this annual report are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 which involve certain risks and uncertainties which could cause actual results to differ materially from those discussed herein. Words such as "anticipate," "estimate," "expects," "projects," "intends," "plans," "believes" and words of similar substance used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, new product development and the Company's outlook regarding capital resources, performance and growth are forward-looking statements. These forward-looking statements are just predictions and involve risks and uncertainties such that actual results may differ materially from these statements. Such risks and uncertainties include, but are not limited to, liquidity and financing requirements, variability of quarterly results and prior losses, increased interest expense, dependence on a limited number of projects, certain accounting policies including amortization of film costs, dependence on key personnel, production deficits, television and theatrical film industries, competition, government regulation, labor relations, shares available for future sale, and the volatility of public markets. See the relevant discussions elsewhere herein, and in the Company's periodic reports and other documents filed with the Securities and Exchange Commission for further discussions of these and other risks and uncertainties pertaining to the Company and its business. The Company is under no obligation, and expressly disclaims any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements. US SEARCH.COM, INC. General. US SEARCH.com, Inc. ("US SEARCH.com"), a 52.6% owned subsidiary of the Company as of September 30, 2000, is a leading provider of fee-based people search and other customized individual reference services. US SEARCH.com uses a wide variety of public records and other publicly available information on individuals. In October, 2000 the Company completed a transaction wherein Pequot Capital Management acquired 3,500,000 shares of US SEARCH.com from the Company in conjunction with a financing transaction of US SEARCH.com. As a result of these transactions, the Company's ownership position in US SEARCH.com has been reduced below 50%, and therefore the Company will not be consolidating US SEARCH.com's future operating results. MOTION PICTURE INDUSTRY OVERVIEW The business of the motion picture industry may be broadly divided into two major segments: production, involving the development, financing and making of motion pictures; and distribution, involving the promotion and exploitation of completed motion pictures in a variety of media. Historically, the largest companies, the so-called "Majors" and "mini-Majors," have dominated the motion picture industry by both producing and distributing a majority of the motion pictures which generate significant theatrical box office receipts. Over the past 15 years, however, "Independents" or smaller film production and distribution companies, such as the Company, have played an increasing role in the production and distribution of motion pictures to fill the increasing worldwide demand for filmed entertainment product. 2 4 The Majors (and mini-Majors) include Universal Pictures (a division of Vivendi Universal), Warner Bros. Pictures (a division of Time Warner), Metro-Goldwyn-Mayer Inc., Twentieth Century Fox Film Corporation (a division of News Corporation), Paramount Pictures Corporation (a division of Viacom), Sony Pictures Entertainment (including Columbia Pictures, TriStar Pictures and Triumph Releasing; altogether divisions of Sony) and The Walt Disney Company (Buena Vista Pictures, Touchstone Pictures and Hollywood Pictures). Generally, the Majors own their own production studios (including lots, sound stages and post-production facilities), have nationwide or worldwide distribution organizations, release pictures with direct production costs generally ranging from $25,000,000 to $75,000,000, and provide a continual source of pictures to film exhibitors. In addition, some of the Majors have divisions which are promoted as "independent" distributors of motion pictures. These "independent" divisions of Majors include Miramax Films (a division of The Walt Disney Company), Sony Classics (a division of Sony Pictures), Fox Searchlight (a division of News Corporation), and New Line (a division of Time Warner) and its Fine Line distribution label. Most of these divisions were formerly Independents. In addition to the Majors, the Independents engaged primarily in the distribution of motion pictures produced by companies other than the Majors include, among others, Lions Gate and Artisan Entertainment. The Independents typically do not own production studios or employ as large a development or production staff as the Majors. MOTION PICTURE PRODUCTION AND FINANCING The production of a motion picture requires the financing of the direct costs and indirect overhead costs of production. Direct production costs include film studio rental, cinematography, post-production costs and the compensation of creative and other production personnel. Distribution costs (including costs of advertising and release prints) are not included in direct production costs. Majors generally have sufficient cash flow from their motion picture and related activities, or in some cases, from unrelated businesses (e.g., theme parks, publishing, electronics, and merchandising) to pay or otherwise provide for their production costs. Overhead costs are, in substantial part, the salaries and related costs of the production staff and physical facilities which Majors maintain on a full-time basis. Majors often enter into contracts with writers, producers and other creative personnel for multiple projects or for fixed periods of time. Independents generally avoid incurring substantial overhead costs by hiring creative and other production personnel, but retaining the other elements required for pre-production, principal photography and post-production activities only on a project-by-project basis. Independents also typically finance their production activities from various sources, including bank loans, "pre-sales," equity offerings and joint ventures. Independents generally attempt to complete their financing of a motion picture production prior to commencement of principal photography, at which point substantial production costs begin to be incurred and require payment. "Pre-sales" are often used by Independents to finance all or a portion of the direct production costs of a motion picture. Pre-sales consist of fees or advances paid or guaranteed to the producer by third parties in return for the right to exhibit the completed motion picture in theaters or to distribute it in home video, television, international or other ancillary markets. Payment commitments in a pre-sale are typically subject to delivery and to the approval of a number of prenegotiated factors, including script, production budget, cast and director. Both Majors and Independents often acquire motion pictures for distribution through an arrangement known as a "negative pickup" under which the Major or Independent agrees to acquire from another production company some or all rights to a film upon its completion. The Independent often finances production of the motion picture pursuant to financing arrangements with banks or other lenders wherein the lender obtains a security interest in the film and in the Independent's rights under its distribution arrangement. When the Major or Independent "picks up" the completed motion picture, it may assume some or all of the production financing indebtedness incurred by the production company in connection with the film. In 3 5 addition, the production company is often paid a production fee and is granted a participation in the profits from distribution of the motion picture. Both Majors and Independents often grant third-party participations in connection with the distribution and production of a motion picture. Participations are contractual rights of actors, directors, screenwriters, producers, owners of rights and other creative and financial contributors entitling them to share in revenues or profits (as defined in the respective agreements) from a particular motion picture. Except for the most sought-after talent, participations are generally payable only after all distribution and marketing fees and costs, direct production costs (including overhead) and financing costs are recouped by the producer in full. MOTION PICTURE DISTRIBUTION Distribution of a motion picture involves the domestic and international licensing of the picture for (i) theatrical exhibition, (ii) home video, (iii) presentation on television, including pay-per-view, video-on-demand, satellites, pay cable, network, basic cable and syndication, (iv) non-theatrical exhibition, which includes airlines, hotels, armed forces facilities and schools and (v) marketing of the other rights in the picture, which may include books, CD-ROMs, merchandising and soundtrack recordings. Theatrical Distribution and Exhibition. Motion pictures are often exhibited first in theaters open to the public where an admission fee is charged. Theatrical distribution involves the manufacture of release prints, licensing of motion pictures to theatrical exhibitors, and promotion of the motion picture through advertising and promotional campaigns. The size and success of the promotional and advertising campaign may materially affect the revenues realized from its theatrical release, generally referred to as "box office gross." Box office gross represents the total amounts paid by patrons at motion picture theaters for a particular film, as determined from reports furnished by exhibitors. The ability to exhibit films during summer and holiday periods, which are generally considered peak exhibition seasons, may affect the theatrical success of a film. Competition among distributors to obtain exhibition dates in theaters during these seasons is significant. In addition, the costs incurred in connection with the distribution of a motion picture can vary significantly depending on the number of screens on which the motion picture is to be exhibited and the ability to exhibit motion pictures during peak exhibition seasons. Similarly, the ability to exhibit motion pictures in the most popular theaters in each area can affect theatrical revenues. Exhibition arrangements with theater operators for the first run of a film generally provide for the exhibitor to pay the greater of 90% of ticket sales in excess of fixed amounts relating to the theater's costs of operation and overhead, or a minimum percentage of ticket sales which varies from 40% to 70% for the first week of an engagement at a particular theater, decreasing each subsequent week to 25% to 30% for the final weeks of the engagement. The length of an engagement depends principally on the audience response to the film. Films with theatrical releases (which generally may continue for several months domestically) typically are made available for release in other media as follows:
MONTHS AFTER APPROXIMATE MARKET THEATRICAL RELEASE RELEASE PERIOD ------ ------------------ -------------------- Domestic home video............................ 4 - 6 months perpetuity 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 perpetuity International television....................... 18 - 24 months 18 months - 10 years
Home Video. The home video distribution business involves the promotion and sale of videocassettes, DVDs and videodiscs to video retailers (including video specialty stores, convenience stores, record stores and other outlets), which then rent or sell the videocassettes and videodiscs to consumers for private viewing. The 4 6 domestic home video marketplace now generates total revenues greater than the domestic theatrical exhibition market. Videocassettes of feature films are generally sold to domestic wholesalers on a unit basis. Unit-based sales typically involve the sales of individual videocassettes to wholesalers or distributors at $20.00 to $60.00 per unit and generally are rented by consumers for fees ranging from $1.00 to $5.00 per day (with all rental fees retained by the retailer). Wholesalers who meet certain sales and performance objectives may earn rebates, return credits and cooperative advertising allowances. Selected titles including certain made-for-video programs, are priced significantly lower to encourage direct purchase by consumers. The market for direct sale to consumers is referred to as the "priced-for-sale" or "sell-through" market. Technological developments, including videoserver and compression technologies which regional telephone companies and others are developing, and expanding markets for DVD and laser discs, are making competing delivery systems economically viable and could significantly impact the home video market generally and, as a consequence, the Company's home video revenues. Pay-Per-View. Pay-per-view television allows cable and satellite television subscribers to purchase individual programs, primarily recently released theatrical motion pictures, sporting events and music concerts, on a "per use" basis. The fee a subscriber is charged is typically split among the program distributor, the pay-per-view operator and the cable operator. Pay Cable. The domestic pay cable industry (as it pertains to motion pictures) currently consists primarily of HBO/Cinemax, Showtime/The Movie Channel, Encore/Starz and a number of regional pay services. Pay cable services are sold to cable system operators for a monthly license fee based on the number of subscribers receiving the service. These pay programming services are in turn offered by cable system operators to subscribers for a monthly subscription fee. The pay television networks generally acquire their film programming by licensing the distribution rights from motion picture distributors. Non-Theatrical Markets. In addition to the distribution media described above, a number of sources of revenue exist for motion picture distribution through the exploitation of other rights, including the right to distribute films to airlines, schools, libraries, hotels, armed forces facilities and hospitals. International Markets. The worldwide demand for motion pictures has expanded significantly as evidenced by the development of new international markets and media. This growth is primarily driven by the overseas privatization of television stations, introduction of direct broadcast satellite services, growth of home video and increased cable penetration. COMPANY MOTION PICTURE ACQUISITIONS In addition to its own production activities, the Company continually seeks to acquire rights to films and other programming from Independent film producers, distribution companies and others in order to increase the number of films it can distribute in the emerging new delivery systems. To be successful, the Company must locate and track the development and production of numerous independent feature films. Types of Motion Pictures Acquired. The Company generally seeks to produce or acquire motion pictures across a broad range of genres, including drama, thriller, comedy, science fiction, family, action and fantasy/adventure, which will individually appeal to a targeted audience. The Company has been very selective in acquiring higher budget (over $10,000,000) films because of the interest that the Majors have shown in acquiring such films, and the associated competition and higher production advances, minimum guarantees and other costs. The Company acquires projects when it believes it can limit its financial risk on such projects through, for example, significant presales, and when it believes that a project has significant marketability. In most cases, the Company attempts to acquire rights to motion pictures with a recognizable marquis "name" personality with public recognition, thereby enhancing promotion of the motion pictures in the home video or international markets. The Company believes that this approach increases the likelihood of producing a product capable of generating positive cash flow, ancillary rights income and the possibility of a theatrical release. 5 7 Methods of Acquisition. The Company typically acquires films on either a "pick-up" basis or a "pre-buy" basis. The "pick-up" basis refers to those films in which the Company acquires distribution rights following completion of most or all of the production and post-production process. These films are generally acquired after management of the Company has viewed the film to evaluate its commercial viability. The "pre-buy" basis refers to films in which the Company acquires distribution rights prior to completion of a substantial portion of production and post-production. Management's willingness to acquire films on a pre-buy basis is based upon factors generally including the track record and reputation of the picture's producer, the quality and commercial value of the screenplay, the "package" elements of the picture, including the director and principal cast members, the budget of the picture and the genre of the picture. Before making an offer to acquire rights in a film on a pre-buy basis, the Company may work with the producer to modify certain of these elements. Once the modifications are considered acceptable, the Company's obligation to accept delivery and make payment is conditioned upon receipt of a finished film conforming to the script reviewed by the Company and other specifications considered important by the Company. Acquisition Process. If the Company locates a motion picture project which it believes satisfies its criteria, the Company may pay an advance or a guaranteed minimum payment conditioned upon delivery of a completed film ("minimum guarantee") against a share or participation in the revenue actually received by the Company from the exploitation of a film in each licensed media. The minimum guarantee is generally paid prior to the film's release. Typically, the Company will have the right to recoup the minimum guarantee and certain other amounts from the distribution revenues realized by the Company prior to paying any additional revenue participation to the production company. Film Library. The Company's distribution rights for acquired films and television programs, which may include worldwide, foreign, or domestic rights, generally range from an initial licensing cycle of seven to 21 years to perpetuity. COMPANY FEATURE FILM PRODUCTION The Company's feature film division was established in 1993 to develop and produce low and medium budget films. The Company's low to medium budget films to date have had production budgets ranging from less than $1 million to $10 million, although the Company from time to time may release films having higher budgets. The Company's low-budget films are primarily targeted for direct distribution to the television market and its medium-budget films may be targeted for theatrical release. The Company generally retains distribution rights for licensing to third parties internationally. The Company's films generally are distributed by third parties domestically or are limited to international distribution. In unique circumstances, the Company undertakes limited domestic distribution or co-distribution activities. The Company's feature film strategy generally is to develop and produce feature films when the production budgets for the films are expected to be substantially covered through a combination of pre-sales, output arrangements, equity arrangements and production loans with "gap" financing. To further limit the Company's financing risk or to obtain production loans, the Company often purchases completion bonds to guarantee the completion of production. The following films were released or delivered by the Company or its joint ventures in fiscal 2000:
DELIVERY/ PICTURE INITIAL MEDIA RELEASE DATE PRINCIPAL TALENT ------- ------------- ------------ ---------------- Picking up the Pieces.................... Theatrical May 2000 Woody Allen, Sharon Stone But I'm a Cheerleader.................... Theatrical July 2000 Natasha Lyonne, Clea DuVall The St. Francisville Experiment.......... Theatrical July 2000 --
6 8 The following films are currently scheduled for release or delivery by the Company in fiscal 2001:
EXPECTED PICTURE INITIAL MEDIA ------- ------------- Harvard Man.............................................. Theatrical Wolfgirl................................................. Theatrical The Lions are Loose...................................... Theatrical
There is no assurance that any motion picture which has not yet been released will be released, that a change in the scheduled release dates of any such films will not occur or, if such motion picture is released, it will be successful. The Company has various additional potential feature films under development. There is no assurance that any project under development will be produced. International Distribution In September 1994 the Company established foreign distribution operations for its own and third party product. The Company has hired Rob Aft to handle the Company's international distribution activities as President of International Distribution. Arturo Feliu handles Latin American distribution activities as President of KL/Phoenix. See Note 10 of Notes to Consolidated Financial Statements for information on international revenues. TELEVISION INDUSTRY OVERVIEW The United States television market remains the largest in the world, consisting of the principal broadcast networks and their affiliates, independent television stations and cable television networks. Expanding international television broadcast, cable and satellite delivery systems offer further opportunities for the exploitation of television programming. Domestic Market. The domestic market for television programming primarily is composed of four submarkets: the broadcast television networks (ABC, CBS, NBC and Fox and emerging networks UPN and WBN), pay cable services (such as HBO/Cinemax, Encore/Starz and Showtime/The Movie Channel), basic cable services (such as USA Network, the Arts & Entertainment Network, Lifetime, The Family Channel, The Disney Channel, and Turner Broadcasting Network) and syndicators of first-run programming (such as Universal, King World Productions and Multimedia, Inc.). The domestic broadcast television market currently is dominated by the four major networks, each of which has approximately 200 affiliated stations. Three of the four major networks are owned by or affiliated with major motion picture companies. The affiliates broadcast network-supplied programming and national commercials in return for payments by the major networks. This relationship results in the networks being able to reach virtually all of the significant domestic television markets. There are also a significant number of independent commercial television stations in the United States. These stations offer an alternative to network distribution through syndication. The network schedule provides affiliates with only a portion of their daily program schedule, and the balance of the time is filled with programs acquired through television syndication companies or produced locally by the station. Cable services generally are classified as being in one of four categories: telephone delivery, superstations, pay cable services (e.g., HBO/Cinemax) and basic cable networks (advertiser-supported, e.g., The Family Channel). The most successful cable networks reach more than 60% of the U.S. television households. Digital compression technology, combined with fiber optics or small-sized satellite dishes may permit cable companies, telephone companies or direct broadcast satellite systems to expand the domestic television market up to 500 or more channels. Television Programming. Each of the four major television networks currently broadcasts approximately 22 hours of prime-time programming and approximately 30 hours of daytime programming each week. The increased channel capacity and large base of cable subscribers that have developed during the 1980s and 1990s have made possible the development of a number of pay cable and basic cable networks which have become important purchasers of both original and rerun television programming, including movies-for-television, mini- 7 9 series and series. Suppliers of television programming include the production division or affiliated companies of the major networks, major film studios (Majors), station owners and independent producers (Independents) such as the Company. International Markets. The number of international outlets for television programming has been increasing with the worldwide proliferation of broadcast, cable and satellite delivery systems. Over the last ten years, European governments have privatized television systems in several countries, including Germany, Italy, France and Spain. The Company believes privatized systems are more likely to broadcast American programming than government-owned networks. In addition, both the number of pay and satellite television systems in Europe and the number of subscribers to these systems have increased. Pay television and satellite distribution systems also are developing in other geographic areas, including many Asian countries. In international markets, suppliers of programming may be subject to local content and quota requirements which prohibit or limit the amount of American programming in particular markets. See "Business -- Government Regulations." COMPANY TELEVISION STRATEGY The Company was founded in 1983 to develop and produce, on a cost-effective basis, quality television programming with broad appeal. The Company's television business has evolved from the production of programs owned by third parties and typically airing on local television stations in the first-run syndication market, such as the long-running daytime series Divorce Court, to the development, production and ownership of series, movies-for-television and mini-series for major domestic and international television networks and the expanding pay and basic cable markets. In 1991, the Company established an international distribution licensing operation for its own and acquired television programming. The Company believes that through the control of the distribution of its own programming this operation has increased the Company's ability to recover the cost of new programs and to retain the fees and profit potential previously realized by third parties. Due to the major networks' ability to produce programming as well as distribute it, the Company has decreased the amount of programming it provides to the major U.S. networks. To position itself for the perceived growth in the overall television market, the Company is actively acquiring various forms of domestic cable, video-on-demand and satellite rights from third party producers for license periods ranging from fifteen years to perpetuity through its KLC/New City joint venture. The customary release cycle includes a period of approximately six months of pay-per-view followed by 18 to 24 months of pay cable (HBO, Showtime or USA Network, for example), followed by 24 to 48 months of basic cable (Romance Channel, Discovery Channel or A&E, for example), and free television thereafter. The Company utilizes licensing and co-production arrangements to fund the costs of production, and generally retains additional licensing rights including, in the case of series, rerun syndication rights which offer future upside profit potential. The Company generally does not commence principal photography of its television programming without first obtaining license or other revenue commitments or production financing which equal all or a substantial portion of the budgeted production costs. By obtaining license fees and other pre-committed revenues through the efforts of its international television distribution division to cover a substantial portion or all of its budgeted production costs, the Company believes that it reduces many of the financial risks associated with an individual production. TELEVISION PROGRAM FINANCING Development Costs. The Company generally finances project development costs without third-party involvement until the script commitment stage. Because of the likelihood that the significant costs in producing scripts and pilots will not be recovered, the Company attempts to limit its financial investment by obtaining financial commitments from networks or other third parties to cover all or a substantial portion of these costs. See "Business -- Television Projects in Development." Program Licensing. Generally, the Company licenses to United States media the right to broadcast a program for a period ending the earlier of the second broadcast of the program or four years from delivery in exchange for a license fee which represents a portion of the program's budgeted production cost. A production 8 10 order sets forth the principal terms for a license of the Company's product to a network and specifies the license fee to be paid and the conditions to be met for payment. Production orders typically are contingent on the producer's obtaining certain approvals from the network, including the script, principal cast and director, prior to commencement of principal photography. The Company generally retains all other rights to the program and will usually license certain rights to international broadcasters, enabling the Company to recoup all, or a portion, of the production costs. In addition, the Company will typically license additional domestic releases in other media to cover the remainder, if any, of the production costs. The Company usually receives its license fee in installments, with one-third due on or prior to commencement of principal photography, one-third due upon completion of principal photography and one-third due upon delivery of the completed program. International distribution typically involves licensing the rights to exhibit programming in international territories to broadcasters within those territories for a fixed license fee usually payable after the program has been delivered. Due to timing differences between the Company's receipt of license fees and its payment of production costs, the Company generally is required to fund at least a portion of its production costs from working capital or secured borrowings, even if the original license fees equal or exceed budgeted production costs. For first-run syndication programs, license agreements with the first-run syndicator generally provide the Company a fixed license fee and a percentage of revenues from distribution after the syndicator recoups the fixed license fee and its distribution fees and costs. An alternate first-run syndication revenue source is called "barter" sales. A television station, in lieu of or in combination with paying licensing fees, may grant to the Company's distributor the right to sell advertising spots during the exhibition of the Company's television program. For a program to be barterable, exhibition of the program on stations reaching at least 70% of the U.S. television households and in most of the top ten major metropolitan areas typically is required. The amount of the fee paid by the advertiser is conditioned upon the program achieving certain agreed upon ratings. If the specified rating is not achieved, the distributor is required to "make good" by giving the advertiser additional advertising time or cash payment, and the Company's share of barter revenues decreases. The Company has licensed its television series Hammer and Could It Be a Miracle on this basis. The Company seeks to cover all of its production costs with license fees and other pre-committed revenues, however it may finance some of the production costs on its own and may rely on subsequent licensing in international or other ancillary markets to recoup the remaining production costs. Additional profits from a television program initially shown on a network or cable service are realized from subsequent reruns of the program on local television stations, international delivery systems and cable services after exhibition on a major network or cable service. In any event, any production is subject to the risk of cost overruns, and there is no assurance that the Company will be able to recover any investment it undertakes in a deficit-financed project. International Co-Productions. The Company has entered into international co-production arrangements in the past. An international co-production is a joint venture or partnership between entities in two or more countries which in certain cases take advantage of alternative sources of financing for its productions, utilize international tax benefits, pass foreign quota restrictions and benefit from lower pre-production costs in certain foreign countries. In a typical co-production arrangement, the Company transfers all or part of its copyright ownership in the project to third parties (the co-production entities), which generally provide a portion of the production financing and other services. Typically, the co-production partners grant distribution rights to the Company. Receipts from its distribution of the project recoup production funding, production fees, talent participations, distribution fees and expenses. Excess receipts, if any, are distributed to the various parties in accordance with their agreed-upon profit participation. The Adventures of Pinocchio is an example of a co-production with German, French and English participation, and Swing was a co-production with English participation. Producer-for-Hire. In addition to developing and producing its own programs, the Company on occasion is engaged as a producer-for-hire for a creative concept or literary property owned by another person. During the late 1980s, as a producer for hire, the Company produced 860 episodes of Divorce Court, 65 episodes of the 9 11 Night Games game show, the animated feature film Pound Puppies: The Legend of Big Paw and the Family Dog episode of Steven Spielberg's Amazing Stories. This programming is not included in the Company's library. There are at least two types of producer-for-hire arrangements. Under the first type, the Company receives a set fee and agrees to deliver the completed program for that fee. The Company's profit is the excess of its fee over its production costs. If production costs exceed the package fee, the Company bears the deficit. Under the second type, the Company furnishes personnel as a producer, receives a fixed fee per episode and the production costs of the program are reimbursed directly by the distributor. Rerun Syndication. Domestic rerun syndication typically involves the exhibition of programming on local television stations and cable services after exhibition on a major network. Since production costs for network series may exceed network license fees and other pre-committed revenues, some television production companies depend on successful syndication of their programming for profitable operations. Generally, to be successful in rerun syndication, a television series must have at least 66 episodes (the equivalent of three full television seasons). TELEVISION PRODUCTION ACTIVITIES As a producer, the Company first develops literary properties internally or acquires them from third parties. The Company may refine the concept of an acquired property. It then attempts to interest one of the networks or another buyer in the project. If the buyer is interested in a concept presented to it, the buyer will usually order a script from the Company. Once the script is delivered, the buyer may order production of a single pilot episode or a limited number of episodes in the case of a series, or the entire production in the case of a movie-for-television or mini-series. Once production is ordered, the Company and the buyer negotiate a financing arrangement. The Company then undertakes pre-production activities in which a budget is prepared, the screenplay is polished or rewritten, director, actors, a line producer and technical personnel are engaged, filming is scheduled, locations are arranged and other steps are taken to prepare the project for principal photography. By this point, the Company generally has negotiated license fees and obtained other commitments to cover a substantial portion of the budgeted production costs. Principal photography is then undertaken, followed by post-production, in which the film is edited, synchronized with music and dialogue and, in certain cases, special effects are added. In the case of a series, if episodes are ordered and the ratings are sufficiently strong, additional episodes may be ordered for the entire season and then for additional seasons. The Company hires writers, directors, cast and crew members on a project-by-project basis. The terms of employment and compensation are negotiated in light of an individual's previous experience, the prevailing market conditions and, where applicable, collective bargaining agreements. The Company also obtains locations, sets and post-production personnel and facilities on an as-needed basis. The Company believes that production and post-production personnel and facilities are in ample supply at competitive rates. The production of animated programming is a labor-intensive process that commences with artistic sketches of the various characters and the story line. Storyboards, models, songs and voice elements are then sent to various production companies, typically in Asia, where drawings of the animation frames are prepared. The frames are painted and then subsequently photographed to create film. The film is then usually sent back to the United States, where final editing of footage and mixing of sound effects, dialogue and music is completed, although on occasion final editing and mixing may be completed in Asia. The following table summarizes the Company's television programming for fiscal 2000, the type of program and the network or other medium where such programming initially exhibited or will exhibit:
TITLE TYPE OF PROGRAM FIRST EXHIBITION ----- --------------- ---------------- They Nest....................................... Cable Premiere Cable Dark Prince: The True Story of Dracula.......... Cable Premiere Cable
10 12 There is no assurance that any television program which has not yet aired will be aired, that a change in the scheduled airing date of such programming will not occur or, if such television program is aired, that it will be successful. TELEVISION PROJECTS IN DEVELOPMENT To develop successful television projects, the Company requires adequate access to program concepts, ideas and scripts. Such access is dependent upon numerous factors, including the reputation and credibility of the Company in the creative community, the relationships the Company has in the entertainment industry and the Company's financial and other resources. The Company occasionally enters into agreements with producers and writers to develop or acquire new programming. While the Company may finance the early development of such projects, the Company typically does not proceed with the preparation of a script or the production of a pilot, which involves a more significant financial commitment, unless a network or other buyer has agreed to fund all or a substantial portion of the costs associated therewith. The following table sets forth potential television programming in various stages of development and the potential network or other medium to which each may be delivered, if known:
WORKING TITLE TYPE OF PROGRAM ------------- ----------------- Thrills.......................................... Cable Series (HBO)
While the Company has many projects in development, as is typical in the industry, only a relatively small number of such projects are ultimately produced (with the likelihood of production being more remote in the case of television series). It is rare for any projects in development to have production commitments until late in the development process. There is no assurance that the Company's efforts in developing or acquiring potential new programs, including any of the projects described above, will lead to production commitments or that any programs that are ultimately produced will be successful. TELEVISION DISTRIBUTION ACTIVITIES United States Distribution. The Company's original and acquired programming generally is initially licensed to a network or cable broadcaster for a period expiring on the earlier of two broadcasts or a period of up to four years from delivery. Following the expiration of the license, the rights typically revert to the Company's library and become available for additional licensing. Further revenues are generally obtained from subsequent licensing in the domestic market in other media, including syndication, cable and home video. International Distribution. In 1991, the Company commenced the distribution of its own television programming and, to a lesser extent, acquired television programs for distribution in international markets. Programming is distributed primarily to local international broadcasters and, where available, the home video market, pay television and cable services. In December 1994, the Company expanded its activities in international distribution by establishing an international distribution subsidiary. The Company's combined film and television distribution division gives the Company increased control over the marketing of its product line, greater bargaining strength, and improved cost efficiencies. The Company's strategy has been to reduce its business risks in international markets by securing business relationships with strong local distributors and broadcasters. The Company has entered into output arrangements in certain foreign territories with broadcasters and distributors who have agreed to license distribution rights in such markets for all of the Company's product produced during the specified term of the agreement (generally between three and five years) at designated prices for various types of film or television product. LIBRARY Since its inception in 1983, the Company has produced or acquired more than 1,000 hours of television programming. The Company's current library includes a variety of feature films, movies-for-television, television series, game shows and talk shows produced or acquired by the Company since its inception. A 11 13 significant portion of the Company's library is under license in many of the major domestic and international markets. Following the expiration of the licenses, rights generally revert to the Company for relicensing. JOINT VENTURES AND ANCILLARY ACTIVITIES The Company currently holds 50% ownership interests in BLT Ventures, which produced the two sequels to the animated feature Brave Little Toaster, Cracker Company LLC, which produced the network television series Cracker, Denial Venture, which produced the feature Denial, Swing Ventures, which produced the feature Swing, Trick Productions which produced the feature Freeway II: Confessions of A Trickbaby, and a 25% interest in Grendel Productions LLC, which produced the feature Beowulf. As of September 30, 2000, the Company held a 52.6% ownership interest in US SEARCH.com, a 22.5% interest in Digital Renaissance, a 30% partnership interest in World Wide Multimedia, an 82.5% ownership interest in KLC/New City, and an 80% ownership interest in Gran Canal Latino, each as previously described. COMPETITION In the film and television program business, the Company competes against many vertically integrated production and distribution businesses that have substantially greater resources than the Company, and smaller independent companies of a similar size to the Company. See "Motion Picture Industry Overview" above and "Government Regulations" below. Due to the artistic quality of the product produced, consumer acceptance of individual productions rather than distributor brand name tend to generate revenues. BUSINESS CONCENTRATION AND DEPENDENCE The Company conducts its film and television business world-wide, with no concentrations in one or a few geographic areas, or to one or a few individual customers the loss of whom would materially adversely affect Company results. GOVERNMENT REGULATIONS The United States Federal Communications Commission ("FCC") repealed its financial interest and syndication rules in September 1995. Those FCC rules, which had been adopted in 1970 to limit television network control over television programming and thereby foster the development of diverse programming sources, restricted the ability of U.S. television networks ABC, CBS and NBC to own and syndicate television programming. As a result of the repeal of the FCC's financial interest and syndication rules, there has been an increase in internal television network production of programming for their own use. This has placed additional competitive pressures on program suppliers, such as the Company. Under the Telecommunications Act of 1996 (the "1996 Act"), manufacturers of television set equipment are required to equip all new television receivers with a so-called "V-Chip" which allows for parental blocking of violent, sexually-explicit or indecent programming based on a rating for any given program that is broadcast along with the program. The FCC was directed by the 1996 Act to develop a ratings system based upon the recommendations of an advisory committee selected by the FCC unless the television industry established its own voluntary ratings system by February 1997. The majority of the television networks did establish and have implemented such a system. Other provisions of the 1996 Act revise the broadcast multiple ownership rules, allow local exchange telephone companies to offer multichannel video programming service, subject to certain regulatory requirements, and allow for cable companies to offer local exchange telephone service, subject to certain regulatory requirements. The full impact on the Company of the changes brought about by the 1996 Act, including the new content ratings guidelines and accompanying changes in FCC rules cannot be predicted at the present time. However, it is possible that recent alliances of certain program producers and television station group owners may place additional competitive pressures on program suppliers, such as the Company, to the extent they are unaligned with the major networks or any television station group owners. These alliances have been further 12 14 encouraged by FCC rule revisions which permit greater consolidation of ownership of television stations on the national level by allowing a single television station licensee to own television stations reaching up to 35% of the nation's television households and which permit a single owner to own two television stations in a single market, with certain limitations. The FCC has also adopted rules that require certain programs to be broadcast with closed captioning for the hearing impaired and the Company may have to make additional closed-captioning expenditures to ensure the value of its library for television licensing. Further, the FCC recently adopted video description rules to make television more accessible to persons with visual disabilities. Specifically, the FCC requires certain broadcasters and most multi-channel video programming distributors to insert into a TV program narrated descriptions of settings and actions that are not otherwise reflected in the dialogue. These new rules may result in the Company being required to further enhance its library with video description for future television licensing. Recently enacted legislation requires direct broadcast satellite operators to carry certain local broadcast channels. Such legislation may limit the number of pay-per-view and other niche channels available for the Company's programming on direct broadcast satellite operators' systems. In addition, direct broadcast satellite operators are required to set aside four percent of their systems' total channel capacity exclusively for programming of an educational or informational nature. This requirement may also limit the availability of channels available for the Company's programming on direct broadcast satellite systems. The FCC already requires cable operators to carry certain local analog stations, and is considering whether to compel cable systems to carry all the digital signals that a local station broadcasts. Since local stations will be able to broadcast multiple signals, this may result in decreased availability of open cable channels for pay-per-view and other niche channels. If this occurs, the Company may face increased competition for a limited supply of pay-per-view and other niche channels for distribution. In international markets, the Company's programming is occasionally subject to domestic content and quota requirements, and/or other limitations, which prohibit or limit the amount of programming produced outside of the local market. Although the Company believes these requirements have not affected the Company's licensing of its programs in international markets to date, such restrictions, or new or different restrictions, could have an adverse impact on the Company's operations. In connection with certain services provided or intended to be provided by US SEARCH.com, particularly individual background checks used for certain purposes, US SEARCH.com may be considered a "consumer reporting agency" as such term is used in the Fair Credit Reporting Act, as amended ("FCRA"), and, therefore, may be required to comply with the various consumer credit disclosure requirements of the FCRA. While US SEARCH.com intends to comply with the FCRA as a "consumer reporting agency" in connection with providing individual background checks for employment purposes, the procedures which are implemented by the Company may be deemed to be insufficient. In addition, US SEARCH.com's limited procedures to date to avoid being regulated as a consumer reporting agency by attempting to restrict its individual background check service to permissible purposes (which do not permit use for employment purposes), may not be sufficient. Willful or negligent noncompliance with the FCRA, including with respect to US SEARCH.com's prior operations, could result in civil liability to the subjects of reports. Also, the Americans with Disabilities Act of 1990 ("ADA") contains pre-employment inquiry and confidentiality restrictions designed to prevent discrimination against individuals with disabilities in the hiring process. The use by US SEARCH.com's customers of certain information sold to them is also regulated, both in respect to the type of information and the timing of its use by the ADA. Similarly, there are a number of states which have laws similar to the FCRA, and some states which have laws more restrictive than the ADA. Further, many state laws limit the type of information which can be made available to the public. In addition, certain state laws may require US SEARCH.com to be licensed in order to conduct its background check business within those states. Customers in such states can access US SEARCH.com's Web site, which may subject US SEARCH.com to the laws of such states. There is no assurance that US SEARCH.com will not be subject to the laws of states in which US SEARCH.com has no contacts other than through residents of such state ordering services through US SEARCH.com's Web site and US SEARCH.com mailing, faxing or 13 15 e-mailing reports to the resident within such state. In the event US SEARCH.com is determined to have violated any of the federal or state laws referred to herein, or other laws and regulations applicable to US SEARCH.com's business, such as consumer protection laws, US SEARCH.com could be subject to substantial civil and/or criminal liability which could have a material adverse effect on the Company's business, financial condition, results of operations and prospects. US SEARCH.com is subject to laws and regulations applicable to businesses generally, and laws or regulations specifically applicable to electronic commerce. Due to concerns arising in connection with the increasing popularity and use of the Internet, a number of new or changed laws, governmental policies and/or regulations may be adopted, or cases may be decided, with respect to the Internet or commercial online services covering issues such as property ownership, user privacy, libel, pricing, acceptable content, copyrights, trademarks and/or other intellectual property rights, taxation, access charges and other fees, and quality of products and services. These actions, as well as any increased costs resulting from such actions, could have a material adverse effect on US SEARCH.com's business, financial condition, results of operations, and prospects. US SEARCH.com could also face potential liability from individuals, government agencies, or businesses under current laws and regulations for defamation, invasion of privacy negligence, copyright, patent or trademark infringement, and other claims based on the nature and content of the materials that appear on US SEARCH.com's website on in its search reports delivered to customers. In addition, breaches of security on the systems of US SEARCH.com or its contractors could also expose US SEARCH.com to liability. Imposition of liability, particularly liability that is not covered by insurance, could have a material adverse effect on US SEARCH.com's business, financial condition, results of operation and prospects. EMPLOYEES The Company had approximately 55 full-time and 2 part-time employees as of December 15, 2000. The Company's executive offices are located at 11601 Wilshire Boulevard, Suite 2100, Los Angeles, California 90025, and its telephone number is (310) 481-2000. The Company has employment contracts with certain key executives due to its reliance upon them for critical functions. The Company relies upon the personal contacts of its senior officers which have been generated through their prior business and personal dealings with Majors, other Independents, legal and accounting firms, business management firms, talent agencies, production lenders and personal managers who are actively involved in the production community. No employees of the Company are represented by unions, although staff temporarily employed for specific film and television program productions are often so represented. Management believes that employee relations are wholly satisfactory. ITEM 2. PROPERTIES The Company leases approximately 19,000 square feet of office space on the 21st floor at 11601 Wilshire Boulevard, Los Angeles, California under a lease agreement which runs through June 2005. The minimum annual rent under the lease currently is $674,000 with a scheduled increase in fiscal 2003. The Company rents studio facilities as needed for production, except that certain post-production off-line editing is performed at the Company's executive offices. ITEM 3. LEGAL PROCEEDINGS The Company is party to certain legal proceedings and claims arising out of the normal course of business. The Company believes that the ultimate resolution of all of these matters will not have a material adverse effect upon the Company's financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the NASDAQ National Market ("NNM") under the symbol "KLOC." Additionally, the stock is listed on the Pacific Stock Exchange under the symbol "KLO." The following table sets forth the range of high and low sale prices for the Common Stock, as reported on the NNM, for the periods indicated:
COMMON STOCK HIGH LOW ------------ ------ ----- FISCAL 1999 First Quarter (ended December 31, 1998)..................... $ 8.38 $1.63 Second Quarter (ended March 31, 1999)....................... $16.00 $7.00 Third Quarter (ended June 30, 1999)......................... $21.63 $4.88 Fourth Quarter (ended September 30, 1999)................... $ 8.75 $3.03 FISCAL 2000 First Quarter (ended December 31, 1999)..................... $ 6.94 $3.56 Second Quarter (ended March 31, 2000)....................... $ 7.19 $3.06 Third Quarter (ended June 30, 2000)......................... $ 4.06 $1.59 Fourth Quarter (ended September 30, 2000)................... $ 2.81 $1.00 FISCAL 2001 First Quarter (through December 18, 2000)................... $ 1.13 $0.09
On December 18, 2000, the last sale price for the Common Stock as reported on the NNM was $0.09. On November 30, 2000, there were approximately 567 record holders. Recent Sales of Unregistered Securities; Uses of Proceeds None. Dividends The Company has never paid any cash dividends and has no present intention to declare or to pay cash dividends. The payment of dividends also is restricted by covenants in the Company's credit agreement and the indentures and fiscal agency agreements under which the Company's Convertible Subordinated Debentures were issued. It is the present policy of the Company to retain any earnings to finance the growth and development of the Company's business. 15 17 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes selected consolidated financial data for the Company and should be read in conjunction with the detailed consolidated financial statements included elsewhere in this Annual Report. The selected consolidated financial data for the fiscal years are derived from the consolidated financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose report with respect to the consolidated balance sheets of the Company as of September 30, 2000 and 1999 and the related consolidated statements of operations, cash flows and stockholders' equity for the years ended September 30, 2000, 1999 and 1998. On October 20, 1998, the Company changed its independent public accountants.
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------- 2000(1) 1999(1) 1998(1) 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA: Operating revenues.................. $ 59,640 $ 49,890 $ 76,130 $ 54,746 $ 80,157 Costs relating to operating revenues.......................... (47,623) (39,666) (61,627) (52,084) (70,648) Selling, general and administrative expenses.......................... (50,175) (31,186) (12,028) (4,023) (3,096) Provision for doubtful accounts..... (6,068) (2,959) (2,118) (1,310) (499) -------- -------- -------- -------- -------- Earnings (loss) from operations..... (44,226) (23,921) 357 (2,671) 5,914 Equity in earnings (losses) of unconsolidated entities........... (222) (520) (330) 2,189 -- Loss on impairment of assets........ (3,893) -- -- -- -- Gain (loss) on sale of interest in subsidiary........................ (91) 13,148 -- -- -- Gain on issuance of stock by subsidiary........................ -- 21,018 -- -- -- Interest and dividend income........ 1,367 687 79 163 198 Interest expense.................... (8,411) (7,782) (6,261) (4,027) (4,027) Interest expense related to bridge note financing.................... -- -- -- -- (943) -------- -------- -------- -------- -------- Earnings (loss) before minority interest, income taxes and extraordinary item................ (55,476) 2,630 (6,155) (4,346) 1,142 Minority interest in subsidiary net losses............................ 16,222 2,567 -- -- -- -------- -------- -------- -------- -------- Earnings (loss) before income taxes and extraordinary item............ (39,254) 5,197 (6,155) (4,346) 1,142 Income taxes........................ -- (726) (181) (23) (47) -------- -------- -------- -------- -------- Earnings (loss) before extraordinary item.............................. (39,254) 4,471 (6,336) (4,369) 1,095 Extraordinary item: costs associated with repayment of credit facility.......................... -- -- -- -- (365) -------- -------- -------- -------- -------- Net earnings (loss)................. (39,254) $ 4,471 $ (6,336) $ (4,369) $ 730 ======== ======== ======== ======== ======== Basic earnings (loss) per share(2): Before extraordinary item......... $ (2.84) $ .38 $ (.69) $ (.49) $ .16 Extraordinary item................ -- -- -- -- (.05) -------- -------- -------- -------- -------- Net earnings (loss)............... $ (2.84) $ .38 $ (.69) $ (.49) $ .11 ======== ======== ======== ======== ======== Diluted earnings (loss) per share(2): Before extraordinary item......... $ (2.84) $ .36 $ (.69) $ (.49) $ .16 Extraordinary item................ -- -- -- -- (.05) -------- -------- -------- -------- -------- Net earnings (loss)............... $ (2.84) $ .36 $ (.69) $ (.49) $ .11 ======== ======== ======== ======== ======== Weighted average common shares outstanding(2).................... 13,839 11,755 9,181 8,959 6,668 ======== ======== ======== ======== ========
16 18
SEPTEMBER 30, -------------------------------------------------------- 2000(1) 1999(1) 1998(1) 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS) CONDENSED CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents(3)........ $ 14,024 $ 36,434 $ 3,309 $ 16,791 $ 11,636 Accounts receivable, net............ 26,519 30,030 40,418 27,696 22,885 Film and television program costs, net............................... 80,988 91,499 73,773 68,507 58,463 Investments in unconsolidated subsidiaries...................... 14,983 12,045 10,798 5,326 1,495 Total assets........................ 151,200 185,115 137,105 124,368 100,152 Notes payable and other indebtedness...................... 90,055 85,194 84,677 74,278 53,520 Total liabilities................... 120,255 112,790 111,639 93,232 65,902 Stockholders' equity................ 23,035 60,745 25,466 31,136 34,250
- --------------- (1) In November 1997 the Company acquired a controlling interest in US SEARCH.com. In June 1999 US SEARCH.com completed an initial public offering in which the Company sold a portion of its shareholdings as well. Because US SEARCH.com has incurred net losses since acquisition and the Company funded 100% of such losses through its initial public offering, the Company recognized 100% of those incurred net losses in its consolidated financial statements through June 1999. Subsequent to the public offering, the Company has recognized in its consolidated balance sheet a minority interest in the net equity of US SEARCH.com, and has recognized in its consolidated statements of operations a minority interest in the net losses of US SEARCH.com proportionate to the minority ownership. Subsequent to September 30, 2000, the Company reduced its ownership in US SEARCH.com below 50% and as such will not consolidate earnings in future periods. In April 1999 the Company acquired a minority interest in The Harvey Entertainment Company. (2) In September 1997 the Company effected a 1-for-6 reverse stock split. Amounts for all periods presented herein give retroactive effect to the reverse split. (3) $1,958 of cash and cash equivalents are restricted deposits that are collateral for a sale/leaseback transaction and for certain production loans for 2000 ($2,088 for 1999, $1,988 for 1998, $1,609 for 1997 and $419 for 1996), $2,200 of cash and cash equivalents are restricted deposits of subsidiary US SEARCH.com ($2,000 for 1999), and $77 is cash collected by the Company and reserved for use by Chase Manhattan Bank to pay down outstanding borrowings under the Company's credit facility ($734 for 1999, $66 for 1998, $105 for 1997, $4,126 for 1996). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's revenues are derived primarily from the production or the acquisition of distribution rights in films licensed for release domestically; from the production and distribution of television programming for the major domestic television networks, basic and pay cable television and first-run syndicators; and from the licensing of rights to films and television programs in international markets. Major domestic television networks are reducing the volume of independently produced television programming. The Company generally finances all or a substantial portion of the budgeted production costs of films and television programming it produces through advances obtained from distributors and borrowings secured by domestic and international licenses. The Company typically retains rights to be exploited in future periods or in additional markets or media. The Company produces a limited number of higher-budget theatrical films to the extent the Company is able to obtain an acceptable domestic studio to release the film theatrically in the U.S. In November 1997, the Company acquired control of US SEARCH.com, Inc., a leading provider of fee-based people search and other customized individual reference services. In February 1998 the Company established KL/Phoenix, an 80% owned venture, which distributes film and television product in Latin America. In November 1998 the Company established Gran Canal Latino, an 80% owned venture which broadcasts Spanish and Portuguese language programming in the Americas. 17 19 The Company's revenues and results of operations are significantly affected by accounting policies required for the industries in which it operates (see Note 1 of Notes to Consolidated Financial Statements). Among the more significant policies are the following: Film and Television Programs. The Company generally capitalizes the costs it has incurred to produce a film or television program. These costs include direct production expenditures, certain exploitation costs, production overhead, and interest relating to financing the project. Capitalized exploitation or distribution costs include those costs that clearly benefit future periods such as film prints and prerelease and early release advertising that is expected to benefit the film or program in future markets. These costs, as well as third party participations and talent residuals, are amortized each period on an individual film or television program basis in the ratio that the current period's gross revenues for the program bear to management's estimate of anticipated total remaining gross revenues for such film or program from all sources. When management reduces its estimates of the future gross revenues for a particular product, a significant write-down and a corresponding decrease in the Company's earnings could result. See "Results of Operations" below. Film and television program costs, net of accumulated amortization, decreased to $80,988,000 at September 30, 2000 from $91,499,000 at September 30, 1999. Film and television program costs in process or development at September 30, 2000 decreased to $7,311,000 from $20,472,000 at September 30, 1999. See "Results of Operations -- Comparison of Fiscal Years Ended September 30, 2000 and 1999" below. Gross profits for any period are a function, in part, of the number of programs delivered in that period and the recognition of costs in that period. Because initial licensing revenues and related costs generally are recognized either when the program has been delivered or is available for delivery, significant fluctuations in revenues and net earnings may occur from period to period. Thus, a change in the amount of entertainment product available for delivery from period to period may materially affect a given period's revenues and results of operations and year-to-year results may not be comparable. The continuing shift of the Company's film and television program mix during a fiscal year may further affect the Company's quarter-to-quarter or year-to-year results of operations as new products may be amortized differently as determined by length of product life cycle and the number of related revenue sources. Distributor production advances or license fees received prior to delivery or completion of a program are deferred. License fees are generally recognized as revenue on the date the film or program is delivered or available for delivery. Activities conducted through joint ventures, wherein the Company reports its equity in earnings (losses) as revenues, can significantly affect comparability of net earnings. See "Results of Operations" below. US SEARCH.com. In November 1997, the Company acquired an 80% interest of US SEARCH.com, a leading provider of fee-based people search and other customized individual reference services. In June 1999 the Company sold shares of US SEARCH.com and US SEARCH.com completed an initial public offering which resulted in the Company's ownership position declining to 55.2%. Subsequent option exercises by executives of US SEARCH.com have diluted the Company's ownership percentage to 52.6% as of September 30, 2000. Since its acquisition, US SEARCH.com's financial position and results of operations have been consolidated in the Company's financial statements. The consolidation of Search has resulted in a substantial change in the presentation of the Company's results of operations due to the inclusion of this new business segment. Since such acquisition, the Company has consolidated $48,295,000 of revenues and $30,087,000 of net losses attributable to US SEARCH.com. In October, 2000 the Company completed a transaction wherein Pequot Capital Management acquired 3,500,000 shares of US SEARCH.com from the Company. The sale was made in conjunction with a financing transaction where Pequot Private Equity Group, the venture capital arm of Pequot Capital Management, completed a private financing with US SEARCH.com for up to $27.5 million. As a result of the transaction, the Company's ownership position in US SEARCH.com has been reduced below 50%, and therefore the Company will not be consolidating US SEARCH.com's future operating results. The Company anticipates recording a gain of approximately $4,800,000 in the first quarter of fiscal year 2001 associated with the sale of these shares. In the future, the Company will recognize its corresponding share of equity in US SEARCH.com's earnings and losses, to the extent the Company has basis remaining in its investment. As of September 30, 2000, the consolidation of 18 20 losses in US SEARCH.com had reduced the Company's basis to zero. See Note 10 of Notes to Consolidated Financial Statements. Gran Canal Latino. In November 1998, the Company launched Gran Canal Latino ("GCL"), its first satellite channel. GCL broadcasts 24 hours a day, with a selection of films mostly from Spain. GCL's satellite transmission reaches the United States and all of Latin America including Mexico. Through November 30, 2000, GCL's cable distributors had addressable homes of approximately 1.5 million subscribers, including 250,000 in the United States. Under a distribution agreement with Enrique Cerezo, the Company is broadcasting selections from approximately 1,500 Spanish language movie titles. RESULTS OF OPERATIONS Comparison of Fiscal Years Ended September 30, 2000 and 1999 The following tables provide the dollar and percentage changes in operating results by segment and in total for fiscal 2000 versus fiscal 1999:
$000 % ------------------------------- --------------------------- FILM FILM AND TV SEARCH CONSOL. AND TV SEARCH CONSOL. ------- -------- -------- ------ ------ ------- Operating revenues........................ $ 818 $ 8,932 $ 9,750 2% 57% 20% Costs relating to operating revenues...... $(3,072) $ (4,885) $ (7,957) (9)% (76)% (20)% Gross profit.............................. $(2,254) $ 4,047 $ 1,793 (246)% 43% 18% Selling, general and administrative expenses................................ $ (558) $(18,431) $(18,989) (10)% (73)% (61)% Bad debt expense.......................... $(2,953) $ (157) $ (3,110) (168)% (13)% (105)% Loss from operations...................... $(5,764) $(14,541) $(20,305) (87)% (84)% (85)%
The Company's operating revenues for fiscal 2000 increased $9,750,000 (20%) from fiscal 1999. The increase resulted from a $8,932,000 or 57% increase in revenues from US SEARCH.com versus 1999 attributable to an increase in the number of Internet-based transactions which occurred as a result of increased web site visitor traffic. The growth in web site traffic was primarily driven by increased advertising on a greater number of Internet search engines and popular web sites. Additionally, film and television licensing revenues increased $818,000, or 2%, due primarily to increased film revenues. See Note 10 to the consolidated financial statements for revenue information by territory and for significant customers. The Company recognized $24,679,000 (41%) of revenues during fiscal 2000 from US SEARCH.com. The Company recognized $11,220,000 (19%) of revenues during fiscal 2000 from the delivery and/or availability of three feature films. The Company recognized $15,778,000 (27%) of revenues in fiscal 2000 from continuing licenses of product from the Company's library to domestic cable channel operators through its majority-owned subsidiary KLC/New City, and through international sub-distributors including KL/Phoenix. Revenues of $7,963,000 (13%) came from television feature or pilot productions. In various stages of production for the Company's fiscal 2001 distribution slate are Harvard Man starring Sarah Michelle Gellar, the feature films Wolfgirl and The Lions are Loose and the HBO series Thrills. Costs relating to operating revenues during fiscal 2000 increased $7,957,000 (20%) as compared to fiscal 1999. As a percentage of operating revenues, costs relating to operating revenues were 80% for fiscal 2000 in comparison to 80% for fiscal 1999. Film and television costs increased 9%, due to an increase in production activity in addition to costs taken from the reduction of expected future revenues from certain film titles. US SEARCH.com costs increased 76%, in large part due to costs associated with increased revenues. Additionally, data acquisition and fulfillment costs increased as a percentage of revenue from the introduction of lower priced products, combined with the use of a higher quality data provider for certain products. Additionally, increased hourly labor costs and higher refund rates contributed to increased costs related to revenues. Gross profit during fiscal 2000 increased $1,793,000 (18%) from fiscal 1999. As a percentage of operating revenues, gross profit was 20% for fiscal 2000, compared to the 20% rate for fiscal 1999. Film and television gross profit amounts decreased by ($2,254,000), principally due to additional amortization resulting from the 19 21 reduction of expected future revenues from certain film titles. US SEARCH.com gross profit amounts increased 43%, resulting from the increase in revenues, reduced in part by the higher cost of providing services to consumers. Selling, general and administrative expenses increased $18,989,000 or 61% for fiscal 2000 from fiscal 1999. The increase in such expenses is principally due to a $13,700,000 (84%) increase in advertising and marketing expenses for US SEARCH.com. As a percentage of US SEARCH.com's net revenues, selling, general and administrative expenses increased to approximately 183% for fiscal 2000, from approximately 114% for fiscal 1999. This increase is primarily attributable to an increase in the level of Internet-based advertising, increased television promotional fee advertisements, a non-cash charge of $2.2 million for warrants issued in connection with the restructuring of an online advertising agreement, severance costs and an increase in rent expense. Also included in US SEARCH.com's 1999 selling, general and administrative expenses is $1,834,000 of US SEARCH.com non-cash director and officer stock option costs in connection with options granted in fiscal 1999. Also included in fiscal 1999 expenses are $1,549,000 of bonuses to the Co-Chairmen and Co-Chief Executive Officers, the President and Chief Operating Officer, and the Chief Financial Officer. No such bonuses were included in fiscal 2000 expenses. Bad debt expense increased $3,110,000 or 105% during fiscal 2000 principally due to a $2,953,000 increase in the provision for doubtful film and television license receivables based upon estimated collections, in addition to a $157,000 increase in provisions for doubtful accounts for US SEARCH.com. The US SEARCH.com increase is primarily due to increases in the accruals for potential chargebacks regarding uncollectible consumer checks, credit card charges and 900 number telephone sales. During fiscal 1999 the Company recognized a $21,018,000 pre-tax gain on the issuance of stock by its subsidiary, US SEARCH.com. This resulted from the subsidiary's initial public offering on June 25, 1999, in which new shareholders invested an amount per share substantially in excess of the Company's per-share investment in the subsidiary, resulting in a substantial increase in the subsidiary's net worth. The gain represents the increase in the Company's revised proportionate share of the subsidiary's net equity. During the quarter ended September 30, 2000, the Company recorded an impairment provision of $3,893,000 relating to an investment in equity securities. During fiscal 1999 the Company recognized a $13,148,000 pre-tax gain on sale to the public of 1,500,000 shares of its holdings in its subsidiary US SEARCH.com in conjunction with the initial public offering by the subsidiary. No comparable transaction occurred in fiscal 2000. Interest and dividend income increased $680,000 (99%) during fiscal 2000 due to earnings on invested proceeds from the US SEARCH.com initial public offering and dividends received from the investment in The Harvey Entertainment Company during fiscal 1999. Interest expense during fiscal 2000 increased $629,000. The 8% increase was principally attributable to the increased average levels of borrowing in fiscal 2000 and an increase in the average interest rate. Total indebtedness for borrowed money increased 6% to $90,054,000 at September 30, 2000 from $85,194,000 at September 30, 1999. Loss before income taxes of ($39,254,000) were reported for fiscal 2000, versus earnings before income taxes of $5,197,000 for fiscal 1999. The Company's effective income tax rate was 0% for fiscal 2000 compared to an effective income tax rate of 13% for fiscal 1999. Income tax expense for fiscal 2000 consisted of alternative minimum taxes and state income taxes. Through September 30, 2000 the Company and US SEARCH.com had combined estimated Federal and state net operating loss carryforwards totaling $75,020,000 and $22,374,000, respectively. The Federal net operating loss carryforwards begin to expire in fiscal 2008. The state net operating loss carryforwards begin to expire in fiscal 2004. Due to the sale of US SEARCH.com common stock in connection with the subsidiary's initial public offering in June 1999, effective July 1999 US SEARCH.com taxable income or loss will not be consolidated in the Company's income tax returns. As a result, in future periods taxable income or loss could vary significantly from financial statement earnings or losses before income taxes. 20 22 The Company reported net losses of ($2.84) per basic and diluted share, for fiscal 2000, compared to earnings of $4,471,000, or $0.38 per basic share and $0.36 per diluted share, for fiscal 1999. Weighted number of common shares for the compared year were 13,839,000 (basic and diluted) in fiscal 2000 and 11,755,000 (basic) and 12,696,000 (diluted) in fiscal 1999. Comparison of Fiscal Years Ended September 30, 1999 and 1998 The following tables provide the dollar and percentage changes in operating results by segment and in total for fiscal 1999 versus fiscal 1998:
$000 % -------------------------------- --------------------------- FILM FILM AND TV SEARCH CONSOL. AND TV SEARCH CONSOL. -------- -------- -------- ------ ------ ------- Operating revenues....................... $(34,118) $ 7,878 $(26,240) (50)% 100% (34)% Costs relating to operating Revenues..... $(24,812) $ 2,851 $(21,961) (43)% 79% (36)% Gross profit............................. $ (9,306) $ 5,027 $ (4,279) (91)% 118% (30)% Selling, general and administrative expenses............................... $ 4,168 $ 14,990 $ 19,158 91% 202% 159% Provision for doubtful accounts.......... $ 390 $ 451 $ 841 28% 61% 40% Earnings (loss) from operations.......... $(13,864) $(10,414) $(24,278) NM 268% NM
- --------------- NM -- not meaningful The Company's operating revenues for fiscal 1999 decreased ($26,240,000) (34%) from fiscal 1998. The decrease resulted from a ($34,118,000) or (50%) decline in film and television licensing revenues due primarily to a decline in the delivery and/or availability of films and television programs. Television program revenues declined $18,000,000 as episodic deliveries to networks concluded in fiscal 1998. Also seven larger feature films were delivered during fiscal 1999 in comparison to 25 moderate-sized feature films delivered or available in fiscal 1998. Partially offsetting this decrease was a $7,878,000 or 100% increase in revenues from US SEARCH.com versus 1998. This increase was attributable to increased marketing and advertising expenditures. See Note 10 to the consolidated financial statements for revenue information by territory and for significant customers. The Company recognized $15,747,000 (32%) of revenues during the fiscal 1999 from US SEARCH.com. The Company recognized $14,081,000 (28%) of revenues during the fiscal 1999 from the delivery and/or availability of seven feature films, including Ringmaster, starring Jerry Springer which was released in the United States by Artisan Entertainment, and One Man's Hero starring Tom Berenger, which was released in the United States by MGM. The Company recognized $11,548,000 (23%) of revenues in fiscal 1999 from continuing licenses of product from the Company's library to domestic cable channel operators through its majority-owned subsidiary KLC/New City, and through international sub-distributors including KL/Phoenix. Revenues of $6,878,000 (14%) came from television feature or pilot productions. Revenues of $1,135,000 (2%) came from producer fees on third party productions. Revenues of $1,306,000 (3%) came from deliveries in the Company's family division of direct-to-video product. Costs relating to operating revenues during fiscal 1999 decreased ($21,961,000) (36%) as compared to fiscal 1998. As a percentage of operating revenues, costs relating to operating revenues were 80% for fiscal 1999 in comparison to the 81% rate for fiscal 1998. Film and television costs declined 43%. This decline was less than the revenue decline principally due to additional amortization expense resulting from the reduction of estimated future revenues on several released titles in fiscal 1999. US SEARCH.com costs increased 79%, which was less than the revenue increase as Internet-sourced revenues were less costly to provide to consumers. Gross profit during fiscal 1999 decreased ($4,279,000) (30%) from fiscal 1998. As a percentage of operating revenues, gross profit was 20% for fiscal 1999, slightly more than the 19% rate for fiscal 1998. Film and television gross profit amounts declined 91%, principally due to reduced operating revenues and management reducing its estimates of likely future revenues on several released titles in fiscal 1999. 21 23 US SEARCH.com gross profit amounts increased 118%, as Internet-sourced revenues were less costly to provide to consumers. Selling, general and administrative expenses increased $19,158,000 or 159% for fiscal 1999 from fiscal 1998. The increase in such expenses is principally due to a $10,392,000 (200%) increase in US SEARCH.com advertising expenses and a $3,392,000 (122%) increase in US SEARCH.com administrative expenses. As a percentage of US SEARCH.com's net revenues, advertising and marketing expenses increased to approximately 99% for fiscal 1999, from approximately 67% for fiscal 1998. This increase is primarily attributable to an increase in the level of Internet-based advertising. As a percentage of net revenues, general and administrative expenses increased to approximately 64% for fiscal 1999, from approximately 16% for fiscal 1998. This increase in general and administrative expenses in absolute dollars is primarily attributable to the cost associated with the hiring of additional management and administrative personnel in 1999. Also included in US SEARCH.com's 1999 selling, general and administrative expenses is $1,834,000 of US SEARCH.com non-cash director and officer stock option costs in connection with options granted in fiscal 1999. No options were granted in fiscal 1998. Also included in fiscal 1999 expenses are $1,499,000 of bonuses to the Co-Chairmen and Co-Chief Executive Officers, the President and Chief Operating Officer, and the Chief Financial Officer. No such bonuses were included in fiscal 1998 expenses. The provisions for doubtful accounts increased $841,000 or 40% during fiscal 1999 principally due to a $390,000 increase in such provisions for film and television license receivables based upon estimated collections, and a $451,000 increase in such provisions for US SEARCH.com. The US SEARCH.com increase is primarily due to increases in the accruals for potential chargebacks regarding uncollectible consumer checks, credit card charges and 900 number telephone sales. During fiscal 1999 the Company recognized a $21,018,000 pre-tax gain on the issuance of stock by its subsidiary, US SEARCH.com. This resulted from the subsidiary's initial public offering on June 25, 1999, in which new shareholders invested an amount per share substantially in excess of the Company's per-share investment in the subsidiary, resulting in a substantial increase in the subsidiary's net worth. The gain represents the increase in the Company's revised proportionate share of the subsidiary's net equity. No comparable transaction occurred in fiscal 1998. During fiscal 1999 the Company recognized a $13,148,000 pre-tax gain on sale to the public of 1,500,000 shares of its holdings in its subsidiary US SEARCH.com in conjunction with the initial public offering by the subsidiary. No comparable transaction occurred in fiscal 1998. Interest and dividend income increased $608,000 (770%) during fiscal 1999 due to earnings on invested proceeds from the US SEARCH.com initial public offering and dividends received from the investment in The Harvey Entertainment Company during fiscal 1999. Interest expense during fiscal 1999 increased $1,521,000. The 24% increase was principally attributable to the increased average levels of borrowing in fiscal 1999 and an increase in the average interest rate. Total indebtedness for borrowed money increased 1% to $85,194,000 at September 30, 1999 from $84,677,000 at September 30, 1998. Earnings before income taxes of $5,197,000 were reported for fiscal 1999, versus a loss before income taxes of ($6,155,000) for fiscal 1998. The Company's effective income tax rate was 13% for fiscal 1999 compared to an effective income tax rate of 3% for fiscal 1998. Income tax expense for fiscal 1999 consisted of alternative minimum taxes and state income taxes. Through September 30, 1999 the Company and US SEARCH.com had combined estimated Federal and state net operating loss carryforwards totaling $35,368,000 and $9,198,000, respectively. The Federal net operating loss carryforwards begin to expire in fiscal 2008. The state net operating loss carryforwards begin to expire in fiscal 2004. Due to the sale of US SEARCH.com common stock in connection with the subsidiary's initial public offering in June 1999, effective July 1999 US SEARCH.com taxable income or loss will not be consolidated in the Company's income tax returns. As a result, in future periods taxable income or loss could vary significantly from financial statement earnings or losses before income taxes. 22 24 The Company reported net earnings of $4,471,000, or $0.38 per basic share and $0.36 per diluted share, for fiscal 1999 as compared to a net loss of ($6,336,000), or losses of ($0.69) per basic and diluted share, for fiscal 1998. Weighted number of common shares for the compared year were 11,755,000 (basic) and 12,696,000 (diluted) in fiscal 1999 and 9,181,000 (basic and diluted) in fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES On December 8, 2000, the Company filed a borrowing base certificate with The Chase Manhattan Bank N.A. ("Chase") as agent for the lenders in the bankgroup (the "lenders") under the Credit, Security, Guaranty and Pledge Agreement. This certificate reported that the Company is materially over its borrowing limits which would be an event of default under the Credit Agreement for which the Agent may terminate the Agreement and/or declare all amounts due and payable thereunder immediately due and payable, and the Company does not believe its present cash position would enable it to repay the amounts due. Consequently, the Company was prohibited from making any payments to any subordinated creditors under either its 13 3/4% Convertible Subordinated Debentures or its 8% Convertible Subordinated Debentures, both of which matured on December 15, 2000. Even if the Company would not be in default under the Credit Agreement, the Company's present cash position would not enable it to make the required payments on the principal amounts due upon maturity of these debentures. Failure to make these payments when due constituted a default of the Company's obligations under these debentures. The Company is exploring its options with respect to the debentures. There can be no assurance that the Company will reach an accommodation with the debenture holders. Additionally, the Company believes the defaults on the senior credit line and debentures may materially impact the Company's ability to extend the maturity dates of its production loans, and may limit the Company's ability to obtain further production loans. Management does not expect that existing resources and cash expected to be generated from operating activities will be sufficient to fund the combined requirements of the Company's planned production, acquisition and distribution activities and mandatory interest and debt repayments in the next twelve months. The Company is in active negotiations with the lenders to reschedule interest and principal repayments on its existing credit facility and is exploring strategic alternatives, including possible asset sales and additional licensing activities with third parties to enhance liquidity. There can be no assurance that such negotiations will be successful or that asset sales or other transactions will generate sufficient funds to enable the Company to meet its obligations as they become due. In the event negotiations with the lenders are not successful, the Company will not be able to meet operating requirements. Cash and cash equivalents decreased 62% to $14,024,000 (including $1,958,000 of restricted cash being used as collateral for film sale/leaseback transactions, and $2,200,000 of restricted deposits of subsidiary US SEARCH.com, and $77,000 of reserved cash to be applied against the Company's outstanding borrowings under its credit facility) at September 30, 2000 from $36,434,000 (including $4,088,000 of restricted cash and $734,000 of reserved cash) at September 30, 1999 primarily resulting from proceeds obtained from the initial public offering of US SEARCH.com. The Company's film and television program operations are capital intensive. The Company has funded its working capital requirements through receipt of third party domestic and international licensing payments as well as other operating revenues, and proceeds from debt and equity financings, and has relied upon its line of credit and transactional production loans to provide bridge production financing prior to receipt of license fees. The Company funds production and acquisition costs out of its working capital, including the line of credit, and through certain pre-sale of rights in international markets. In addition, the expansion of the Company's international distribution business and the establishment of its feature film division have significantly increased the Company's working capital requirements and use of related production loans. The Company experienced net negative cash flows of ($29,333,000) from operating activities primarily resulting from the Company's operating expenditures exceeding operating receipts at the Company and its subsidiary US SEARCH.com. Additionally, the Company had net negative cash flows of ($7,471,000) from investing activities, primarily from additions of property, plant and equipment by US SEARCH.com and the investment in World 23 25 Wide Multimedia, LLP. These negative cash flows were offset in part by net cash of $14,981,000 provided primarily by financing activities from production loans and greater usage of the Company's revolving line of credit. Net unrestricted cash decreased by $21,823,000 to $9,789,000 on September 30, 2000. Credit Facility In June 1996, the Company obtained a $40,000,000 syndicated revolving credit facility with a group of banks, including Comerica Bank -- California ("Comerica") and Far East National Bank ("Far East"), led by The Chase Manhattan Bank. A September 1997 amendment increased the maximum amount of revolving credit to $60,000,000, and a December 1998 amendment increased the maximum amount of revolving credit to $75,000,000, as discussed more fully below. The agreement, as amended, provides for borrowing by the Company on specified percentages of receivables and a specified amount of the Company's appraised library value for unsold or unlicensed rights and is secured by substantially all of the Company's assets. In August 2000, the Company negotiated the extension of the credit facility through the period ending September 30, 2001. This amendment eliminates a production tranche which was granted under a previous amendment and calls for scheduled paydowns of the credit facility. The Company pays an annual commitment fee of .5% of the unused portion of the credit line. As described earlier, on December 8, the Company filed a borrowing base certificate with The Chase Manhattan Bank as agent under the Credit, Security, Guaranty and Pledge Agreement. This certificate reported that the Company is materially over its borrowing limits, which would be an event of default under the Credit Agreement. As of December 16, 2000, the Company had drawn down $67,205,000 under the credit facility out of a total net borrowing base availability of $63,794,000. The credit agreement contains restrictive covenants to which the Company must adhere. These covenants include limitations on additional indebtedness, liens, investments, disposition of assets, guarantees, deficit financing, capital expenditures, affiliate transactions, the use of proceeds, and prohibit payment of cash dividends and prepayment of subordinated debt. In addition, the credit agreement requires the Company to maintain a minimum liquidity level, limits overhead expense and requires the Company to meet certain ratios. The credit agreement also contains a provision permitting the bank to declare an event of default if either of Messrs. Locke or Kushner fails to be the Chief Executive Officer of the Company or if any person or group acquires ownership or control of capital stock of the Company having voting power greater than the voting power at the time controlled by Messrs. Kushner and Locke combined (other than any institutional investor able to report its holdings on Schedule 13G which holds no more than 15% of such voting power). For fiscal 1999, the group waived the Company's noncompliance with the annual overhead covenant. In December 1998 the banks increased the maximum amount of the Company's collateralized line of credit from $60,000,000 to $75,000,000. Existing participants in the syndicate approved the increase and are committed to lend up to $68,000,000. Additional availability is subject to adding new banks to the syndicate. As of December 18, 2000, the credit line remained overdrawn. Proceeds from Sales of Securities In December 1998 the Company obtained net proceeds of $5,673,000 ($6,000,000 of gross proceeds) through a private placement of 1,200,000 newly-issued shares of common stock. In February 1999 the Company filed a registration statement for such shares. On April 26, 1999 the Company issued 468,883 shares of restricted common stock to The Harvey Entertainment Company ("Harvey") in exchange for 55,000 shares of Series A Preferred Stock of Harvey and 388,215 warrants exerciseable into common stock of Harvey, all pursuant to a stock purchase agreement involving a new Harvey investor group which includes the Company. The Harvey Series A Preferred Stock are convertible into 814,814 shares of Harvey common stock commencing October 26, 1999 and require payment of quarterly dividends in cash or in additional shares of Harvey Series A Preferred Stock at a 7% annual rate. The Company holds certain demand and piggyback registration rights relating to its Harvey securities. On a fully-diluted basis, assuming all securities exerciseable or convertible into Harvey common stock are so exercised or converted, the Company would own 12% of the voting shares of Harvey. In June 1999 the Company filed a registration statement for the shares of its restricted common stock issued to Harvey. 24 26 Effective May 14, 1999 the Company called for redemption of all of its Class C Redeemable Common Stock Purchase Warrants (the "Class C Warrants") and its outstanding 10% Convertible Subordinated Debentures, Series A due 2000. In advance of the redemption, a total of 794,215 Class C Warrants were exercised for 794,215 shares of Common Stock and the Company received proceeds of $5,419,000. In advance of the redemption, the Company issued 6,435 new shares of common stock for the conversion of $49,000 aggregate principal amount of the Series A Debentures. The Company redeemed $28,000 aggregate principal amount of the Series A Debentures. On June 25, 1999, the Company's subsidiary US SEARCH.com consummated an initial public offering of newly-issued common stock. The subsidiary sold 4,500,000 newly-issued shares and obtained $36,109,000 of net proceeds. Also on June 25, 1999 the Company sold 1,500,000 shares out of its holdings of US SEARCH.com common stock and obtained $12,555,000 of net proceeds. The Company recognized a $13,148,000 pre-tax gain on the sale of the 1,500,000 shares and a $21,018,000 gain on the increased value of its proportion of the net equity of the subsidiary. In October, 2000 the Company completed a transaction wherein Pequot Capital Management acquired 3,500,000 shares of US SEARCH.com from the Company. The sale was made in conjunction with a financing transaction where Pequot Private Equity Group, the venture capital arm of Pequot Capital Management, completed a private financing with US SEARCH.com for up to $27.5 million. As a result of the transaction, the Company's ownership position in US SEARCH.com has been reduced below 50%, and therefore the Company will not be consolidating US SEARCH.com's future operating results. In the future, the Company will recognize its corresponding share of equity in US SEARCH.com's earnings and losses, to the extent the Company has basis remaining in its investment. As of September 30, 2000, the consolidation of losses in US SEARCH.com had reduced the Company's basis to zero. Production Loans The Company's production loans, totaling $15,599,000 as of September 30, 2000, consisted of production loans by Comerica and Far East to consolidated production entities. The Company provided limited corporate guarantees for portions of the production loans which are callable in the event that the respective borrower does not repay the loans by the respective maturity date. In general these loans are non-recourse to the Company except to the extent of the guaranties. However, the Company occasionally advances funds to the lenders in advance of receipts from customers. Deposits paid by the distributing licensees prior to the delivery of the financed pictures are held as restricted cash collateral by the Lenders. The table below shows production loans as of September 30, 2000:
KUSHNER- ORIGINAL LOCKE LOAN AMOUNT WEIGHTED CORPORATE PRESENT FILM OR COMPANY LENDER AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY --------------- -------- ----------- ----------- ------------ ---------- ---------- Susan's Plan.................. Comerica $ 4,625,000 $ 1,354,000 Prime + 1% $ -- 5/31/2001 Ringmaster.................... Comerica 4,200,000 714,000 Prime + 1% 400,000 10/15/2000 Mambo Cafe.................... Far East 1,400,000 223,000 Prime + 1.5% -- 7/31/2001 Picking Up The Pieces......... Comerica 12,000,000 6,955,000 Prime + 1% 700,000 11/15/2000 The Last Producer............. Far East 1,626,000 402,000 Prime + 1% -- 4/30/2001 They Nest..................... Far East 1,500,000 449,000 Prime + 1.5% -- 4/30/2001 Dark Prince................... Far East 1,700,000 1,195,000 Prime + 1% -- 3/31/2001 Harvard Man................... Far East 5,967,000 4,266,000 Prime + 1.5% 400,000 12/15/2001 Conquistador.................. Comerica --(1) 21,000 -- -- TV First...................... Comerica -- 20,000 -- -- ----------- ----------- ---------- $33,018,000 $15,599,000 $1,500,000 =========== =========== ==========
- --------------- (1) Assumed from former employee. In April 1998, a $4,625,000 production loan was obtained by a consolidated subsidiary from Comerica to cover the production budget of Susan's Plan. The loan bears interest at Prime (9.50% as of December 15, 25 27 2000) plus 1% or at LIBOR (6.60% as of December 15, 2000) plus 2%. The loan is collateralized by the rights, title and assets related to the film. The Company provided a corporate guaranty in the amount of $600,000 in connection with this loan. As extended, the loan matures on May 31, 2001. In August 1998, a $2,900,000 production loan was obtained by a consolidated subsidiary from Comerica to cover the production budget of Ringmaster. In November 1998, the loan amount was increased to $4,200,000. The loan bears interest at Prime (9.50% as of December 15, 2000) plus 1% or at LIBOR (6.60% as of December 15, 2000) plus 2%. The loan is collateralized by the rights, title and assets related to the film. The Company provided a corporate guaranty in the original amount of $800,000 in connection with this loan, which is reducible based on sales and other loan conditions. As extended, the loan matured on October 15, 2000. The Company has not repaid the balance of the production loan and is in discussions with the bank regarding the Company's obligations under the loan agreement. There can be no assurance that the loan will be extended, or if it is extended, that such extension will be on favorable terms. In October 1998, a $1,400,000 production loan was obtained by a consolidated subsidiary from Far East to cover the production budget of Mambo Cafe. The loan bears interest at Prime (9.50% as of December 15, 2000) plus 1.5%. The loan is collateralized by the rights, title and assets related to the film. As extended, the loan matures on July 31, 2001. In October 1998, a $2,500,000 production loan was obtained by an unconsolidated subsidiary from Far East National Bank to cover the production budget of Freeway II: Confessions of a Trickbaby. The loan bears interest at Prime (9.50% as of December 15, 2000) plus 1.5%. The loan is collateralized by the rights, title and assets related to the film. The Company provided a corporate guaranty in the amount of $400,000 in connection with this loan. The loan has been purchased by Worldwide Multimedia, which has extended the maturity date to March 31, 2001. In April 1999, a $12,000,000 production loan was obtained by a consolidated subsidiary from Comerica to cover the production budget of Picking Up The Pieces. The loan bears interest at Prime (9.50% as of December 15, 2000) plus 1% or at LIBOR (6.60% as of December 15, 2000) plus 2%. The loan is collateralized by the rights, title and assets related to the film. The Company provided a corporate guaranty in the amount of $700,000 in connection with this loan. As extended, the loan matured on November 15, 2000. The Company has not repaid the balance of the production loan and is in discussions with the bank regarding the Company's obligations under the loan agreement. There can be no assurance that the loan will be extended, or if it is extended, that such extension will be on favorable terms. In June 1999, a $1,626,000 production loan was obtained by a consolidated subsidiary from Far East National Bank to cover the production budget of The Last Producer. The loan bears interest at Prime (9.50% as of December 15, 2000) plus 1%. The loan is collateralized by the rights, title and assets related to the film. The Company provided no corporate guaranty in connection with this loan. As extended, the loan matures on April 30, 2001. In November 1999, a $1,500,000 production loan was obtained by a consolidated subsidiary from Far East National Bank to cover the production budget of They Nest. The loan bears interest at Prime (9.50% as of December 15, 2000) plus 1.5%. The loan is collateralized by the rights, title and assets related to the film. The Company provided no corporate guaranty in connection with this loan. As extended the loan matures on April 30, 2001. In February 2000 the Company obtained a $2,000,000 loan from Far East National Bank. Interest at 7% per year is payable quarterly commencing March 2000. The loan matures in February 2005. Proceeds were used to obtain limited partnership units in World Wide Multimedia LLP ("WWMM") which collateralize the loan. The Company has obtained additional limited partnership units in WWMM in exchange for certain film rights. In March 2000, a $1,700,000 production loan was obtained by a consolidated subsidiary from Far East National Bank to cover the production budget of Dark Prince: The True Story of Dracula. The loan bears interest at Prime (9.50% as of December 15, 2000) plus 1%. The loan is collateralized by the rights, title and assets related to the film. The Company provided a corporate guaranty in the original amount of $1,250,000 in 26 28 connection with this loan. The corporate guarantee was reduced to zero by subsequent licensing of the film. The loan matures on March 31, 2001. In July 2000, a $5,967,000 production loan was obtained by a consolidated subsidiary from Far East National Bank to cover the production budget of Harvard Man. The loan bears interest at Prime (9.50% as of December 15, 2000) plus 1.5%. The loan is collateralized by the rights, title and assets related to the film. The Company provided a corporate guaranty in the amount of $400,000 in connection with this loan. The loan matures on December 15, 2001. Capital Expenditure Commitments In its normal course of business as an entertainment distributor, the Company makes contractual down payments to acquire film and television distribution rights. This initial advance for rights ranges from 10% to 30% of the total purchase price. The balance of the payment is generally due upon the complete delivery by third party producers of acceptable materials, proof of rights held and insurance policies that may be required for the Company to begin exploitation of the product. As of September 30, 2000 the Company was not liable for any amounts under such contracts. SUMMARY Management does not expect that existing resources and cash expected to be generated from operating activities will be sufficient to fund the combined requirements of the Company's planned production, acquisition and distribution activities and mandatory interest and debt repayments in the next twelve months. The Company is in active negotiations with The Chase Manhattan Bank to reschedule interest and principal repayments on its existing credit facility and is exploring strategic alternatives, including possible asset sales and additional licensing activities with third parties to enhance liquidity. There can be no assurance that such negotiations will be successful or that any transactions will generate sufficient funds to enable the Company to meet its obligations as they become due. On December 8, 2000, the Company filed a borrowing base certificate with The Chase Manhattan Bank as agent under the Credit, Security, Guaranty and Pledge Agreement which reported that the Company is materially over its borrowing limits which would be an event of default under the Credit Agreement for which the Agent may terminate the Agreement and/or declare all amounts due and payable thereunder immediately due and payable, and the Company does not believe its present cash position would enable it to repay the amounts due. Additionally, the Company has not made any payments to any subordinated creditors under either its 13 3/4% Convertible Subordinated Debentures or its 8% Convertible Subordinated Debentures, both of which became due December 15, 2000. Failure to make these payments when due constituted a default of the Company's obligations under these debentures. In the event Chase restricts the Company's use of capital, the Company will not be able to meet operating requirements. The Company from time to time evaluates strategic alternatives for enhancing liquidity in its core and non-core businesses. Strategic alternatives include but are not limited to, the pursuit of opportunities to enhance the exploitation of the Company's library properties, its distribution system, and its satellite channel. This approach may include consolidations with, acquisition of or strategic partnering with companies in our core businesses or in businesses complementary to our core businesses. In addition to expanding production and its distribution business, whether internally or by acquisition, the Company also considers acquisition possibilities from time to time, including film libraries and companies which may or may not be ancillary to the Company's existing business, subject to the availability of financing as necessary. There can be no assurances that any of these transactions will occur. Many of these alternatives might require a change in the capital structure or equity or debt financing. There is no assurance that financing sources will be available or, if available, will be available on commercially acceptable terms. International operations are a significant portion of total operations. Therefore the Company is exposed to risks of currency translation losses, cash collection and repatriation risks and risks of adverse political, regulatory and economic changes. The Company's business and operations have not been materially affected by inflation. 27 29 Management believes that the Company's film and television sales volumes are not subject to significant fluctuations based upon seasonality, however search services have generally declined during holiday periods. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by Item 8 are set forth in the pages indicated in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On October 20, 1998, the Company changed its independent accountants. This change (and the response of the Company's former independent public accountants) is described in the Company's Current Report on Form 8-K filed on October 27, 1998, which is incorporated by reference herein. 28 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information called for in Item 10 of Part III shall be filed not later than 120 days after the Company's fiscal year end (September 30, 2000) in the Company's definitive Proxy Statement in connection with its 2000 Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, or in an amendment to this Annual Report of Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information called for in Item 11 of Part III shall be filed not later than 120 days after the Company's fiscal year end (September 30, 2000) in the Company's definitive Proxy Statement in connection with its 2001 Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, or in an amendment to this Annual Report of Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for in Item 12 of Part III shall be filed not later than 120 days after the Company's fiscal year end (September 30, 2000) in the Company's definitive Proxy Statement in connection with its 2000 Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, or in an amendment to this Annual Report of Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for in Item 13 of Part III shall be filed not later than 120 days after the Company's fiscal year end (September 30, 2000) in the Company's definitive Proxy Statement in connection with its 2000 Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, or in an amendment to this Annual Report of Form 10-K. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
PAGE ---- (a)(1) Financial Statements: Report of Independent Accountants........................... 30 Consolidated Balance Sheets at September 30, 2000 and 1999.................................................. 31 Consolidated Statements of Operations for the years ended September 30, 2000, 1999 and 1998..................... 32 Consolidated Statements of Stockholders' Equity for the years ended September 30, 2000, 1999, and 1998........ 33 Consolidated Statements of Cash Flows for the years ended September 30, 2000, 1999, and 1998.................... 34 Notes to Consolidated Financial Statements.................. 35 (2) Financial Statement Schedule: Schedule II for the years ended September 30, 2000, 1999, and 1998.............................................. 56 All other schedules are inapplicable and, therefore, have been omitted. (3) Exhibits Exhibits filed as part of this report are listed in the Exhibit Index, which follows the Signatures........... 58 (b) Report on Form 8-K: None
29 31 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders of The Kushner-Locke Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of The Kushner-Locke Company (the "Company") and its subsidiaries at September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein for the years ended September 30, 2000, 1999 and 1998 when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Century City, California December 15, 2000 30 32 THE KUSHNER-LOCKE COMPANY CONSOLIDATED BALANCE SHEETS ASSETS
SEPTEMBER 30, ---------------------------- 2000 1999 ------------ ------------ Assets: Cash and cash equivalents................................. $ 9,789,000 $ 31,612,000 Reserved cash............................................. 77,000 734,000 Restricted cash........................................... 4,158,000 4,088,000 Accounts receivable, net of allowance for doubtful accounts of $4,446,000 in 2000 and $3,248,000 in 1999................................................... 26,519,000 30,030,000 Due from affiliates....................................... 3,291,000 2,611,000 Film and television program costs, net of accumulated amortization........................................... 80,988,000 91,499,000 Investments in unconsolidated entities, at equity......... 14,983,000 12,045,000 Other assets.............................................. 11,395,000 12,496,000 ------------ ------------ Total assets...................................... $151,200,000 $185,115,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable and accrued liabilities.................. $ 18,121,000 $ 11,104,000 Due to related party...................................... 87,000 233,000 Notes payable............................................. 87,891,000 82,925,000 Deferred revenue.......................................... 3,361,000 3,628,000 Contractual obligations................................... 7,196,000 11,039,000 Production advances....................................... 1,435,000 1,592,000 Convertible subordinated debentures, net of deferred issuance costs......................................... 2,164,000 2,269,000 ------------ ------------ Total liabilities................................. 120,255,000 112,790,000 Minority interest........................................... 7,910,000 11,580,000 Commitments and contingencies (Note 8) Stockholders' equity: Common stock, no par value. Authorized 50,000,000 shares: issued 14,271,908 and outstanding 13,846,908 shares at September 30, 2000 and 13,810,767 shares at September 30, 1999............................................... 71,923,000 70,379,000 Accumulated deficit....................................... (48,888,000) (9,634,000) ------------ ------------ Net stockholders' equity.......................... 23,035,000 60,745,000 ------------ ------------ Total liabilities and stockholders' equity........ $151,200,000 $185,115,000 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 31 33 THE KUSHNER-LOCKE COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Operating revenues: Film and television program licensing.......... $ 34,961,000 $ 34,143,000 $ 68,261,000 Search and individual reference services....... 24,679,000 15,747,000 7,869,000 ------------ ------------ ------------ Total operating revenues............... 59,640,000 49,890,000 76,130,000 ------------ ------------ ------------ Costs related to operating revenues: Film and television program licensing.......... (36,298,000) (33,226,000) (58,038,000) Search and individual reference services....... (11,325,000) (6,440,000) (3,589,000) ------------ ------------ ------------ Total costs related to operating revenues............................. (47,623,000) (39,666,000) (61,627,000) ------------ ------------ ------------ Gross profit........................... 12,017,000 10,224,000 14,503,000 Selling, general and administrative expenses..... (50,175,000) (31,186,000) (12,028,000) Provision for doubtful accounts.................. (6,068,000) (2,959,000) (2,118,000) ------------ ------------ ------------ (Losses) earnings from operations...... (44,226,000) (23,921,000) 357,000 Equity in net (losses) of unconsolidated entities....................................... (222,000) (520,000) (330,000) Dividend income.................................. 407,000 167,000 -- Interest income.................................. 960,000 520,000 79,000 Interest expense................................. (8,411,000) (7,782,000) (6,261,000) (Loss) on impairment of assets................... (3,893,000) -- -- Gain (loss) on sale of interest in subsidiary.... (91,000) 13,148,000 -- Gain on issuance of stock by subsidiary.......... -- 21,018,000 -- ------------ ------------ ------------ Earnings (loss) before minority interest and income taxes............ (55,476,000) 2,630,000 (6,155,000) Minority interest in subsidiary net losses....... 16,222,000 2,567,000 -- ------------ ------------ ------------ Earnings (loss) before income taxes.... (39,254,000) 5,197,000 (6,155,000) Income tax expense............................... -- (726,000) (181,000) ------------ ------------ ------------ Net earnings (loss).................... $(39,254,000) $ 4,471,000 $ (6,336,000) ============ ============ ============ Basic earnings (loss) per share.................. $ (2.84) $ .38 $ (.69) ============ ============ ============ Diluted earnings (loss) per share................ $ (2.84) $ .36 $ (.69) ============ ============ ============ Weighted average common shares outstanding....... 13,839,000 11,755,000 9,181,000 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 32 34 THE KUSHNER-LOCKE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK NET ------------------------- ACCUMULATED STOCKHOLDERS' SHARES AMOUNT DEFICIT EQUITY ---------- ----------- ------------ ------------- Balance at September 30, 1997... 9,090,080 $38,905,000 $ (7,769,000) $ 31,136,000 Stock options exercised.............. 9,000 34,000 -- 34,000 Conversion of subordinated debentures......................... 51,282 284,000 -- 284,000 Issuance of stock grants............. 66,667 16,000 -- 16,000 Compensatory warrant grants.......... -- 332,000 -- 332,000 Net loss............................. -- -- (6,336,000) (6,336,000) ---------- ----------- ------------ ------------ Balance at September 30, 1998... 9,217,029 39,571,000 (14,105,000) 25,466,000 Private placement.................... 1,200,000 5,456,000 -- 5,456,000 Investment in The Harvey Entertainment Company.............. 468,883 5,820,000 -- 5,820,000 Exercises of warrants................ 1,219,361 8,122,000 -- 8,122,000 Stock options exercised.............. 317,309 857,000 -- 857,000 Issuance of stock grants............. 100,000 488,000 -- 488,000 Conversion of subordinated debentures......................... 1,288,185 9,336,000 -- 9,336,000 Compensatory option and warrant grants............................. -- 729,000 -- 729,000 Net earnings......................... -- -- 4,471,000 4,471,000 ---------- ----------- ------------ ------------ Balance at September 30, 1999... 13,810,767 70,379,000 (9,634,000) 60,745,000 Stock options exercised.............. 8,000 15,000 -- 15,000 Issuance of stock by subsidiary...... -- 630,000 -- 630,000 Conversion of subordinated debentures......................... 25,641 146,000 -- 146,000 Compensatory option and warrant grants............................. 2,500 753,000 -- 753,000 Net loss............................. -- -- (39,254,000) (39,254,000) ---------- ----------- ------------ ------------ Balance at September 30, 2000... 13,846,908 $71,923,000 $(48,888,000) $ 23,035,000 ========== =========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 33 35 THE KUSHNER-LOCKE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Cash flows from operating activities: Net earnings (loss)...................................... $(39,254,000) $ 4,471,000 $ (6,336,000) Adjustments to reconcile net earnings (loss) to net cash used by operating activities: Minority interest in subsidiary net losses............. (16,222,000) (2,567,000) -- Gain on issuance of stock by subsidiary................ -- (21,018,000) -- Gain on sale of interest in subsidiary................. -- (13,148,000) -- Dividend income........................................ (407,000) (167,000) -- Equity in net losses (earnings) of unconsolidated entities............................................. 222,000 520,000 330,000 Depreciation and amortization.......................... 469,000 435,000 530,000 Provisions and allowances.............................. 6,068,000 2,959,000 2,118,000 Loss on impairment of asset............................ 3,893,000 -- -- Amortization of capitalized issuance costs............. 46,000 123,000 213,000 Issuance of stock grants............................... -- 488,000 16,000 Compensatory options and warrants...................... 753,000 729,000 332,000 Amortization of film costs............................. 35,103,000 32,354,000 53,916,000 Changes in assets and liabilities: Reserved cash.......................................... 657,000 (668,000) (379,000) Restricted cash........................................ (70,000) (2,100,000) 39,000 Accounts receivable.................................... (2,361,000) 7,413,000 (14,755,000) Due from related party................................. (876,000) 84,000 (1,708,000) Film and television program cost additions............. (22,092,000) (51,890,000) (59,182,000) Other assets........................................... 2,134,000 2,704,000 (130,000) Accounts payable and accrued liabilities............... 7,017,000 5,303,000 1,608,000 Due to related party................................... (146,000) 502,000 -- Deferred revenue....................................... (267,000) (483,000) 749,000 Contractual obligations................................ (3,843,000) (2,812,000) 6,901,000 Production advances.................................... (157,000) (1,377,000) (3,533,000) ------------ ------------ ------------ Net cash used by operating activities............. (29,333,000) (38,145,000) (19,271,000) ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sale of interest in subsidiary, net........ -- 12,555,000 -- Investments in unconsolidated entities................... (3,160,000) (1,767,000) (3,993,000) Purchases of property and equipment...................... (4,311,000) (610,000) (786,000) ------------ ------------ ------------ Net cash provided (used) by investing activities...................................... (7,471,000) 10,178,000 (4,779,000) ------------ ------------ ------------ Cash flows from financing activities: Borrowings under notes payable........................... 26,185,000 43,626,000 42,094,000 Repayment of notes payable............................... (21,219,000) (35,802,000) (31,864,000) Proceeds from subsidiary's issuance of common stock...... 10,000,000 36,109,000 -- Proceeds from issuance of common stock................... -- 5,456,000 -- Proceeds from exercise of warrants and stock options..... 15,000 8,979,000 34,000 Repayment of debentures.................................. -- (44,000) (36,000) ------------ ------------ ------------ Net cash provided by financing activities......... 14,981,000 58,324,000 10,228,000 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents....... (21,823,000) 30,357,000 (13,822,000) Cash and cash equivalents at beginning of year............. 31,612,000 1,255,000 15,077,000 ------------ ------------ ------------ Cash and cash equivalents at end of year................... $ 9,789,000 $ 31,612,000 $ 1,255,000 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 34 36 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company The Kushner-Locke Company (the "Company") is a leading independent entertainment company which principally develops, produces, and distributes original feature films and television programming. Feature films are developed and produced principally for the theatrical, video and pay cable motion picture markets. Television programming includes television series, mini-series, movies for television, animation, reality and game show programming. The Company established feature film production operations in 1993. In 1994, an international theatrical film subsidiary was established to expand into foreign theatrical distribution. In 1995, the Company formed KLC/New City Tele-Ventures ("KLC/New City") to acquire films for distribution through other delivery systems, including pay cable, pay-per-view, basic cable, video-on-demand and satellite systems. In 1997, the Company acquired control of US SEARCH.com Inc. ("US SEARCH.com"), a leading provider of fee-based public record search and other customized individual reference services. Subsequent to fiscal 2000, the Company sold a portion of its investment in US SEARCH.com and reduced its ownership interest below 50%. In November 1998 the Company launched a 24 hour Spanish language movie channel called Gran Canal Latino. Fiscal Year The Company's fiscal year ends on September 30. US SEARCH.com has a December 31 fiscal year end, however its financial position and results are consolidated herein from October 1 through September 30 of each year. All references to years herein refer to the Company's fiscal year end. Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. Entities in which the Company holds a 20% to 50% interest are not consolidated, but are accounted for under the equity method. Entities in which the Company holds less than a 20% interest are accounted for under the cost method and included in other assets. All significant intercompany balances and transactions have been eliminated. In 1995, the Company formed the 82.5%-owned subsidiary KLC/New City. Since establishment, the Company has consolidated 100% of the net losses of that subsidiary. In November 1997, the Company acquired 80% of US SEARCH.com and commenced consolidation of its accounts. US SEARCH.com has incurred net losses since acquisition and the Company funded 100% of such losses through its initial public offering (Note 2). The Company recognized 100% of the net losses through June 30, 1999. Subsequent to the public offering, the Company has recognized a minority interest in the net losses and equity of US SEARCH.com proportionate to the minority ownership percentage, which has been between 44.8% and 47.4%. In future periods, the Company will not be consolidating net earnings or losses of US SEARCH.com as it's ownership percentage has been reduced below 50% following the sale of 3,500,000 shares of US SEARCH.com in October 2000. In November 1997, the Company established KL/Phoenix, an 80%-owned joint venture for Latin American distribution of film and television programs. In November 1998, the Company established Gran Canal Latino, an 80%-owned joint venture for satellite broadcasting of Spanish and Portuguese language film and television programs. Since establishment, the Company has consolidated 100% of these ventures' net losses. 35 37 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Reclassifications Certain reclassifications have been made to conform prior year balances with the current presentation. Revenue Recognition Revenues from feature film and television program distribution licensing agreements are recognized on the date the completed film or program is delivered or becomes available for delivery, is available for exploitation in the relevant media window purchased by that customer or licensee and certain other conditions of sale have been met pursuant to criteria specified by SFAS No. 53, Financial Reporting By Producers and Distributors of Motion Picture Films. Revenues from barter transactions, whereby the program is exchanged for television advertising time which is sold to product sponsors, are recognized when the television program has aired and all conditions precedent have been satisfied. The revenue cycle generally extends 7 to 10 years on film and television products. US SEARCH.com generates revenues by performing various information search services for customers. Revenue is recognized when the results of the search services are delivered to clients. The terms of each sale do not provide for client refunds after search services have been delivered, however, in certain instances, where the clients indicate that the initial search is unsuccessful, US SEARCH.com may perform, at no charge to the client, up to three identical searches during the one year period following their first search. The costs related to such additional searches are recorded in the period of the initial sale and are based upon the estimated number of additional searches. In addition, where clients request to broaden the scope of their fully automated searches, US SEARCH.com may apply up to a portion of the cost of the client's fully automated searches towards the cost of the broader and more extensive searches. The estimated credits are recorded in the period of the initial sale and are based upon the amount estimated to be redeemed by clients. To date, the costs of additional searches and estimated credits to be provided in future periods have not been material. Advertising Costs US SEARCH.com's advertising production costs are expensed the first time the advertisement is run. Media costs are expensed in the month the advertising appears. Advertising expense related to US SEARCH.com for fiscal 2000 and 1999 was $29,619,000 and $15,592,000, respectively. Concentration of Risk Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents are deposited throughout the world with high credit quality financial institutions. The Company's customers are located throughout the world. For certain revenue streams, the Company does not require guarantee of payment and establishes an allowance for doubtful accounts based upon historical trends and other information. To date, such losses have been within management's expectations. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Restricted and Reserved Cash At September 30, 2000 and 1999, the Company had $1,958,000 and $2,088,000, respectively, in restricted cash related to deposits held at a British bank pursuant to film sale/leaseback transactions, and $2,200,000 which are restricted deposits of US SEARCH.com pledged as collateral on an outstanding letter of credit 36 38 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) related to a recent lease of a facility ($2,000,000 at September 30, 1999). In addition, the Company has $77,000 in cash collected and reserved for use by Chase Manhattan Bank to be applied against the Company's outstanding borrowings under the terms of the Company's credit facility ($734,000 at September 30, 1999). Allowances for Doubtful Accounts The Company provides for doubtful accounts based on historical collection experience and periodically adjusts the allowance based on the aging of accounts receivable and other conditions. Receivables are written off against the allowance in the period they are deemed uncollectible. Accounting for Film and Television Program Costs The Company capitalizes direct costs incurred to produce a film or television project. The costs include interest expense funded under production loans, certain exploitation costs and production overhead. Capitalized exploitation or distribution costs include prints and advertising that is expected to benefit the film in future markets. These costs, including management's estimates of anticipated total costs, are amortized each period on an individual film or television program basis in the ratio that the current period's gross revenues from all sources for the program bear to management's estimate of anticipated total gross revenues for such film or program from all sources. Revenue estimates are reviewed quarterly and adjusted where appropriate. Film and television program costs are stated at the lower of unamortized cost or estimated net realizable value. Losses are charged to operations through additional amortization. Investments in Equity Securities -- Cost Method In April 1999, the Company issued 468,883 shares of common stock with a value of $5,820,000 to The Harvey Entertainment Company ("Harvey") in exchange for convertible preferred stock and detachable warrants. The investment is not subject to Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as the Harvey preferred stock is not publicly traded. The preferred stock is convertible into publicly traded common shares of Harvey and earns mandatory dividends payable in cash or additional shares of Harvey preferred stock. The Company recognized dividend earnings, in the form of additional Harvey preferred shares, totaling $406,000 for the year ended September 30, 2000 and $167,000 for the year ended September 30, 1999. The detachable warrants are convertible into Harvey common stock and were fully exercisable at issuance. At September 30, 2000, the Company has warrants exercisable into 388,235 shares of Harvey common stock. The warrants begin to expire in 2005. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets. Leasehold improvements and equipment under capital leases are amortized over the shorter of the estimated useful life or the life of the lease. Depreciation and amortization periods by asset category are as follows: Equipment........................... 3 - 10 years Furniture and fixtures.............. 5 - 7 years Leasehold improvements.............. Shorter of useful life or lease term Equipment under capital lease....... Shorter of useful life or lease term
37 39 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Maintenance and repairs are charged to expense as incurred while renewals and improvements are capitalized. Upon the sale or retirement of property and equipment, the accounts are relieved of the cost and the related accumulated depreciation, with any resulting gain or loss included in the Statement of Operations. Long-Lived Assets The carrying value of long-lived assets, consisting primarily of investments and property and equipment, is periodically reviewed by management. The Company records impairment losses on long-lived assets when events or circumstances indicate that such assets might be impaired. Measurement of any impairment would include a comparison of estimated future cash flows anticipated to be generated during the remaining life of the long-lived asset to the net carrying value of the long-lived asset. During the quarter ended September 30, 2000 the Company recorded an impairment provision of $3,893,000 relating to an investment in equity securities. Participants' Share Payable and Talent Residuals The Company charges profit participation and talent residual costs to expense in the same manner as amortization of film and television program costs. Payments for profit participations are made in accordance with the participants' contractual agreements. Payments for talent residuals are remitted to the respective guilds in accordance with the provisions of their union agreements. Production Advances The Company receives license fees for projects in the production phase. Production advances are generally nonrefundable and are recognized as earned revenue when the film or television program is available for delivery. International Currency Transactions The majority of the Company's foreign sales transactions are payable in U.S. dollars. Accordingly, international currency transaction gains and losses included in the consolidated statements of operations for the three years ended September 30, 2000 were not significant. Income Taxes The Company utilizes the liability method of accounting for income taxes. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the period in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the 38 40 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) reported amounts of revenues and expenses during the reporting period. Actual results may differ from estimated amounts. Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost, if any, is recognized over the respective vesting period based upon the difference on the grant date between the fair value of the Company's common stock and the grant price. Pro forma disclosures reflect stock option grants subsequent to fiscal 1996. Fair Value of Financial Instruments The recorded value of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, contractual obligations and participants' share payable for talent residuals approximate their fair value due to the relatively short maturities of these instruments. The fair value of notes payable approximates the recorded value due to the stated interest rate on such instruments. Management estimates that the fair value of the convertible subordinated debentures is less than the recorded value due to the Company's current liquidity position and the subordinated position that these instruments take to the Company's principal credit facility. Reverse Stock Split In September 1997 the Company effected a 1-for-6 reverse split of the issued and outstanding shares of common stock. All references to shares outstanding give effect to this reverse stock split as if it had occurred at the beginning of the earliest period presented. Net Earnings (Loss) Per Share Basic net earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period. Diluted net earnings (loss) per share is computed using the weighted average number of common shares and common equivalent shares outstanding during the period. Common equivalent shares related to options and warrants are excluded from the computation when their effect is antidilutive. Comprehensive Income In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." This statement established standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, and requires restatement of earlier periods presented. SFAS No. 130 defines comprehensive income as net income plus all other changes in equity from nonowner sources. The Company had no other comprehensive income items and accordingly net income equals comprehensive income. Segment Reporting The company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" for the year ended September 30, 1999. Comparative fiscal 1998 disclosures have been included. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for 39 41 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products or services, geographic areas, and major customers. The Company's management reporting structure provides for two reportable segments. Recent Accounting Pronouncement The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants recently issued Statement of Position ("SOP") 00-02, "Accounting by Producers or Distributors of Films". The SOP establishes new accounting standards for producers and distributors of films, including changes in revenue recognition and accounting for advertising and development costs. Additionally, in June 2000, the FASB issued SFAS No. 139, which rescinds SFAS No. 53 on financial reporting by motion picture film producers and distributors and requires public companies to follow the requirements of SOP 00-02. The SOP is effective for fiscal years beginning after December 15, 2000. The Company plans to early-adopt the SOP in its fiscal year beginning October 1, 2000. As a result of adopting the SOP the Company expects to record a one-time, pre-tax non-cash charge of approximately $2,000,000. (2) LIQUIDITY AND MANAGEMENT PLANS Management does not expect that existing resources and cash expected to be generated from operating activities will be sufficient to fund the combined requirements of the Company's planned production, acquisition and distribution activities and mandatory interest and debt repayments in the next twelve months. The Company is in active negotiations with The Chase Manhattan Bank to reschedule interest and principal repayments on its existing credit facility and is exploring strategic alternatives, including possible asset sales and additional licensing activities with third parties to enhance liquidity. There can be no assurance that such negotiations will be successful or that asset sales or other transactions will generate sufficient funds to enable the Company to meet its obligations as they become due. In the event Chase restricts the Company's use of capital, the Company will not be able to meet operating requirements. (3) SUBSIDIARY PUBLIC OFFERING On June 25, 1999 US SEARCH.com consummated its initial public offering ("offering") and issued 4,500,000 new shares of its common stock to the public. US SEARCH.com obtained $36,109,000 in net proceeds related to the offering. US SEARCH.com is traded on the NASDAQ National Market under the symbol "SRCH." Concurrent with the offering, the Company exercised warrants to purchase 1,360,173 additional shares of US SEARCH.com common stock for $2,752,000. The Company has no remaining warrants to purchase additional common stock of US SEARCH.com. In conjunction with the offering, the Company sold 1,500,000 of its shares in US SEARCH.com to the public in exchange for net proceeds of $12,555,000. The Company recognized a $13,148,000 pre-tax gain on the sale of the 1,500,000 shares. Subsequent to the offering, the Company retained a 55.2% interest in the subsidiary, which was reduced to 52.6% as of the year ended September 30, 2000. Subsequent to fiscal 2000, the Company sold a portion of its investment in US SEARCH.com and reduced its ownership interest below 50%. During fiscal 1999, the Company recognized a $21,018,000 pre-tax gain based on its revised proportionate share in the subsidiary's increased net equity. 40 42 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) FILM AND TELEVISION PROGRAM COSTS Film and television program costs consist of the following:
SEPTEMBER 30, SEPTEMBER 30, 2000 1999 ------------- ------------- In process or development......................... $ 7,311,000 $20,472,000 Released, net of accumulated amortization......... 73,677,000 71,027,000 ----------- ----------- Total................................... $80,988,000 $91,499,000 =========== ===========
Based upon present estimates of anticipated future revenues at September 30, 2000, approximately 70% of the costs related to released films and television programs will be amortized during the three-year period ending September 30, 2003. The Company capitalized interest of $600,000, $372,000 and $982,000 to film and television program costs for the years ended September 30, 2000, 1999, and 1998, respectively. During the same respective periods, $7,738,000, $8,154,000 and $7,243,000 of total interest costs were incurred. (5) INVESTMENTS IN UNCONSOLIDATED ENTITIES, AT EQUITY Significant investments in unconsolidated entities are accounted for under the equity method ("equity affiliates"). These entities are principally engaged in the production and distribution of films and television programs. The Company's share of earnings of these equity affiliates is included in income as earned. Investments in equity affiliates at September 30 consist of the following:
OWNERSHIP PERCENTAGE 2000 1999 -------------------- ----------- ----------- BLT Ventures.......................... 50% $ 856,000 $ 808,000 Cracker Company LLC................... 50% 3,951,000 5,829,000 TV First.............................. 0% -- 357,000 Grendel Productions LLC............... 25% 2,578,000 2,161,000 Swing Ventures........................ 50% 1,313,000 1,188,000 Trick Productions..................... 50% 1,068,000 1,047,000 Denial Venture........................ 50% 508,000 303,000 World Wide Multimedia................. 30% 4,361,000 -- Others................................ 20% 348,000 352,000 ----------- ----------- $14,983,000 $12,045,000 =========== ===========
41 43 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The summarized unaudited information below at September 30 represents an aggregation of the Company's equity affiliates: FINANCIAL INFORMATION (UNAUDITED)
2000 1999 ----------- ----------- BALANCE SHEET DATA Assets.................................................... $32,747,000 $22,710,000 Liabilities............................................... 1,397,000 4,133,000 Net assets................................................ 31,350,000 18,577,000 Company's equity in net assets............................ $14,983,000 $12,045,000
2000 1999 1998 --------- ----------- ----------- EARNINGS DATA Operating revenues........................... $ 797,000 $ 4,229,000 $31,871,000 Gross profit (loss).......................... 434,000 (293,000) 963,000 Net earnings (losses)........................ (762,000) (1,168,000) 972,000 Company's equity in net (losses)............. $(222,000) $ (520,000) $ (330,000)
No dividends were received from equity affiliates for the years ended September 30, 2000, 1999, or 1998. (6) CREDIT AGREEMENT AND FINANCING ARRANGEMENTS Credit arrangements and borrowings consist of the following:
SEPTEMBER 30, SEPTEMBER 30, 2000 1999 ------------- ------------- Note payable to bank, under a revolving credit facility collateralized by substantially all Company assets, interest at Libor (6.62% at September 30, 2000) plus 3%, outstanding principal balance due September 2001.......... $68,000,000 $66,455,000 Notes payable to banks and/or financial institutions consisting of production loans principally collateralized by film rights, interest at rates from Libor (6.62% at September 30, 2000) plus 2% to Prime (9.50% at September 30, 2000) plus 2.5%, and maturities at varying dates through December 2001..................................... 15,599,000 16,272,000 Term note payable to bank, collateralized by certain partnership interests, bearing interest at 7% per annum, payable quarterly, due February 2005...................... 2,000,000 -- Private placement notes, collateralized by 2,000,000 shares of the Company's US SEARCH.com shareholdings, bearing interest at 10% per annum, maturing October 2000.......... 1,500,000 -- Series B Convertible Subordinated Debentures due December 2000, bearing interest at 13 3/4% per annum payable monthly, net.............................................. 1,565,000 1,535,000 8% Convertible Subordinated Debentures due December 2000, interest payable February 1 and August 1, net............. 599,000 734,000 Trade notes payable and debt of US SEARCH.com............. 792,000 198,000 ----------- ----------- Total credit agreements and financing arrangements................................... $90,055,000 $85,194,000 =========== =========== Total notes payable............................... $87,891,000 $82,925,000 =========== =========== Total convertible subordinated debentures, net of deferred issuance costs........................ $ 2,164,000 $ 2,269,000 =========== ===========
42 44 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At September 30, 2000 the Company had a $75,000,000 revolving credit facility with a syndicated group of banks. Chase Manhattan Bank is the agent bank. As extended, the credit facility expires September 30, 2001. On December 8, 2000, the Company filed a borrowing base certificate with The Chase Manhattan Bank under its Credit, Security, Guaranty and Pledge Agreement. This certificate reported that the Company is materially over its borrowing limits which would be an event of default under the Credit Agreement for which the Agent may terminate the Agreement and/or declare all amounts due and payable thereunder immediately due and payable, and the Company does not believe its present cash position would enable it to repay the amounts due. Additionally, the credit agreement contains restrictive covenants which include, but are not limited to, limitations on additional indebtedness, liens, investments, disposition of assets, guarantees, deficit financing, capital expenditures, affiliate transactions and the use of proceeds, and prohibit the payment of cash dividends and prepayment of most subordinated debt. In addition, the Company must maintain a minimum liquidity level, limit overhead expense and meet certain financial ratios. The bank could declare an event of default if either of Messrs. Locke or Kushner failed to be the Chief Executive Officer of the Company or if any person or group acquired ownership or control of capital stock of the Company having voting power greater than the voting power at the time controlled by Messrs. Kushner and Locke combined (other than any institutional investor able to report its holdings on Schedule 13G which holds no more than 15% of such voting power). The Company received a waiver of default due to non-compliance with an overhead covenant for fiscal 1999. At September 30, 2000, the Company had outstanding $15,599,000 of production loans to consolidated entities from Comerica Bank -- California ("Comerica") and Far East National Bank in addition to $20,000 in loans assumed from a previously consolidated entity. The unused portion of credit available under these production loans at September 30, 2000 was $1,707,000. The Company provided $1,500,000 in corporate guarantees for loans to consolidated entities and $400,000 for one loan to an equity affiliate. The guarantees are callable in the event the respective borrower does not repay the loan made by the respective maturity date. Deposits paid by distributing licensees prior to the delivery of the financed pictures are held as restricted cash collateral by the lenders. Additionally, the Company believes the default to the senior credit line and debentures may materially impact the Company's ability to extend the maturity dates of its production loans, and may limit the Company's ability to obtain further production loans. During the year ended September 30, 1999, $1,616,000 of the Series B Debentures principal were converted into 174,382 newly-issued shares of common stock of the Company at a rate of $9.2664 per share. No such conversions were made in the year ended September 30, 2000. Unamortized discounts were $7,000 at September 30, 2000. Approximately $32,000 and $49,000 of these costs were amortized under the straight-line method as interest expense for the years ended September 30, 2000 and 1999, respectively. As of September 30, 2000, $1,572,000 principal amount of the debentures were outstanding. The principal balance became due and payable on December 15, 2000. The Company has not repaid the debentures, and is exploring its options for the debentures. During the year ended September 30, 2000, $150,000 of the 8% Debentures principal were converted into 25,641 new-issued shares of common stock at a rate of $5.85 per share. During the year ended September 30, 1999, $3,948,000 of the 8% Debentures principal were converted into 674,873 new-issued shares of common stock. Unamortized discounts were $3,000 at September 30, 2000. Approximately $14,000 and $43,000 of these costs were amortized under the straight-line method as interest expense for the years ended September 30, 2000 and 1999, respectively. As of September 30, 2000, $602,000 principal amount of the debentures were outstanding. The principal balance became due and payable on December 15, 2000. The Company has not repaid the debentures, and is exploring its options for the debentures. The debentures are subordinated to all existing and future senior indebtedness. The term senior indebtedness includes principal and interest on all indebtedness of the Company to banks, insurance 43 45 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) companies and similar institutional lenders, and to the public for securities registered under the Securities Act of 1933. Senior indebtedness does not include other debentures, indebtedness to affiliates and indebtedness expressly subordinated to or on parity with the debentures. In February 2000 the Company obtained a $2,000,000 loan from Far East National Bank. Interest is payable quarterly commencing March 2000. Proceeds were used to obtain limited partnership units in World Wide Multimedia LLP, which collateralize the loan. The Company has obtained additional limited partnership units in World Wide Multimedia LLP in exchange for certain film rights. In April 2000, certain individuals, including Messrs. Kushner and Locke, purchased notes from the Company in the aggregate principal amount of $1,500,000 in a private placement pursuant to Regulation D of the Securities Exchange Act of 1934. The notes bore interest at the rate of 10% per annum payable at maturity. At the scheduled six month maturity the holders were entitled to receive, at their election, either a cash payment equal to 15% of the principal amount of the notes purchased or a warrant for a number of shares of common stock equal to their loan principal amount divided by $10. The warrant would be exercisable at 110% of the Company's common stock market value at the loan closing date for a three-year term from the date of issuance. The notes became due in October 2000 and were repaid at that time. The notes were collateralized by a pledge of 2,000,000 shares of the Company's US SEARCH.com shareholdings. Credit arrangements and borrowings are due as follows:
AMOUNT ----------- Fiscal Year Ending September 30, 2001.................................................. $83,597,000 2002.................................................. 4,458,000 2003.................................................. -- 2004.................................................. -- 2005.................................................. 2,000,000 ----------- Total......................................... $90,055,000 ===========
(7) INCOME TAXES Income tax expense (benefit) consisted of the following:
YEAR ENDED SEPTEMBER 30, ------------------------------- 2000 1999 1998 ------- -------- -------- CURRENT: Federal............................................. $ -- $186,000 $154,000 State............................................... -- 540,000 27,000 ------- -------- -------- -- 726,000 181,000 DEFERRED: Federal............................................. -- -- -- State............................................... -- -- -- ------- -------- -------- Total income tax expense.................. $ -- $726,000 $181,000 ======= ======== ========
44 46 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A reconciliation of the statutory Federal income tax rate to the effective rate is presented below:
YEAR ENDED SEPTEMBER 30, -------------------- 2000 1999 1998 ---- ---- ---- Statutory Federal income tax rate........................... (34)% 34% (34)% Alternative minimum taxes and permanent differences......... 0 3 2 Change in valuation allowance............................... 36 (30) 34 State income taxes, net of Federal tax benefit.............. (2) 6 1 --- --- --- 0% 13% 3% === === ===
Significant components of deferred tax assets and liabilities, using enacted tax rates, are as follows:
AT SEPTEMBER 30, --------------------------- 2000 1999 ------------ ----------- DEFERRED TAX ASSETS: Net operating loss carryforwards and credits............. $ 17,404,000 $13,589,000 Allowance for doubtful accounts and other reserves....... 2,007,000 1,169,000 Deferred film license fees............................... 1,247,000 1,306,000 Other temporary differences.............................. 1,792,000 1,953,000 Partnerships............................................. 564,000 -- Depreciation............................................. -- 85,000 State taxes.............................................. -- 212,000 ------------ ----------- Total gross deferred assets.................... 23,014,000 18,314,000 Valuation allowance............................ (22,904,000) (5,432,000) ------------ ----------- Net deferred tax assets........................ $ 110,000 $12,882,000 ============ =========== DEFERRED TAX LIABILITIES: Film amortization........................................ $ -- $ 5,150,000 Partnerships............................................. -- 94,000 Depreciation............................................. 13,000 -- Deferred gain on sale of subsidiary stock................ -- 7,638,000 State taxes.............................................. 97,000 -- ------------ ----------- Total deferred tax liabilities................. $ 110,000 $12,882,000 ============ ===========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Due to the uncertainty surrounding the realizability of the net deferred tax assets, a full valuation allowance has been established as management believes that it is more likely than not, based upon available evidence, that the deferred tax assets will not be realized. Due to the sale of US SEARCH.com common stock in connection with the subsidiary's initial public offering in June 1999, effective July 1999, US SEARCH.com will no longer join the Company in filing of a consolidated income tax return. The Internal Revenue Code of 1986, as amended, includes provisions which may limit the net operating loss carryforwards available for use in any given year if certain events occur, including significant changes in ownership. Due to the Company's initial public offering and other issuances of common stock and common stock equivalents, utilization of the Company's net operating loss carryforwards to 45 47 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) offset future income may be limited. Accordingly, as of September 30, 2000, the Company and US SEARCH.com had net operating loss and tax credit carry-forwards as follows:
AMOUNT ------------------------------ EXPIRATION DATE KUSHNER-LOCKE US SEARCH.COM BEGINNING ------------- ------------- --------------- NOLs for Federal tax purposes.......... $47,480,000 $27,540,000 Fiscal 2007 NOLs for state tax purposes............ 8,604,000 13,770,000 Fiscal 2003 International tax credits.............. 493,000 -- Fiscal 2001 General business credits............... 191,000 -- Fiscal 2002 Alternative minimum tax credits........ 311,000 -- N/A
(8) WARRANTS AND STOCK OPTIONS Warrants A summary of exercisable warrants at September 30, 2000 is as follows:
WARRANT HOLDER AMOUNT EXERCISE PRICE EXPIRATION DATE -------------- ------- -------------- --------------- Allen & Company warrants.................... 500,000 $2.0625 September 2004 Friedman warrants........................... 50,000 $2.0625 September 2004 Friedman consulting warrants................ 35,000 $1.6875 June 2002 ------- 585,000 =======
In 1994, in connection with the 8% Convertible Subordinated Debentures offering, the Company issued warrants to the underwriter to purchase up to $1,643,700 of the aggregate principal amount of the debentures at an exercise price equal to 120% of the principal amount of the debentures, subject to adjustment in certain circumstances. The warrants were fully exercised in fiscal 1999 for $1,775,000 and the Company issued new shares of common stock. In 1994, in connection with the 9% Convertible Subordinated Debenture offering, the Company issued warrants to the underwriters to purchase up to $505,000 of the aggregate principal amount of the debentures sold at an exercise price equal to 120% of the principal amount of the debentures, subject to adjustments in certain circumstances. The warrants were exercisable through July 1999, when they expired unexercised. In 1996 the Company had a public offering of 4,750,000 units (the "unit offering"). Each unit consisted of two pre-reverse split shares of common stock and one Class C Redeemable Common Stock Purchase Warrant to purchase one share of common stock, at an exercise price of $6.8625 per share, as adjusted. In connection with the unit offering, the Company issued warrants to the underwriter to purchase 71,167 units at an adjusted exercise price of $19.1825 each (the "Underwriter Warrants"). In addition, the Company issued warrants to a consultant to purchase 47,500 units at the same exercise price (the "Consultant Warrants"). In April 1999, the Company called all Class C Warrants for redemption in May 1999. Included in the redemption were the Class C Warrants issued as a part of the Underwriter Warrants and Consultant Warrants. The Company issued 794,215 shares of common stock and received proceeds of $5,419,000 from the exercise of the Class C Warrants. A total of 14,410 warrants were redeemed at a total cost of $1,441. In June 1997 the Company issued warrants to I. Friedman Equities, Inc. (the "Friedman consulting warrants") to purchase up to 50,000 shares of common stock. In September 1997, the Company issued additional warrants to I. Friedman Equities, Inc. of 50,000 (the "Friedman warrants"). In August 1999, 15,000 Friedman consulting warrants were exercised. In September 1997, in connection with a consulting agreement, the Company issued warrants to Allen & Company, Incorporated (the "Allen & Company Warrants") to purchase 500,000 share of common stock. 46 48 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The value assigned to the warrants of $1,339,000 is recorded as consulting expense over the term of the agreement with a portion allocated to the private placement financing consummated in fiscal 1999. For the years ended September 30, 2000, 1999 and 1998, the Company recognized consulting expense of $230,000, $579,000 and $332,000, respectively. At September 30,1999, the warrants were fully vested. Options In 1989, the Board of Directors approved a stock incentive plan (the "Plan") that covers directors, third party consultants and advisors, independent contractors, officers and other employees of the Company. In April 1999 the stockholders approved an increase in the number of shares of Common Stock reserved for issuance from 1,250,000 shares to 1,820,000 shares. In March 2000 the stockholders approved an additional increase in the number of shares of Common Stock reserved for issuance from 1,820,000 to 2,500,000. The Plan allows for the issuance of options to purchase shares of the Company's common stock at an exercise price at least equal to the fair value of the stock on the date of grant. Options generally vest over a three year term subject to continued employment or the completion of services rendered, and have a maximum term of ten years. The Company granted options during the years ended September 30, 2000 and 1999 that resulted in compensation of $6,000 and $150,000, respectively. There were no option grants that resulted in compensation expense for the year ended September 30, 1998. At September 30, 2000, 304,361 shares remained available for future grant. The following table summarizes stock option activity for the period from September 30, 1997 to September 30, 2000:
WEIGHTED AVERAGE SHARES PRICE PER SHARE EXERCISE PRICES --------- --------------- ---------------- Balance at September 30, 1997.......... 1,095,359 $1.50 - $11.64 $4.65 Granted Fiscal 1998.................. 121,668 $1.50 - $ 4.00 $2.65 Options Expired/Canceled............. (112,501) $2.63 - $ 6.36 $3.98 Options Exercised.................... (9,000) $3.75 $3.75 --------- Balance at September 30, 1998.......... 1,095,526 $1.50 - $11.64 $2.93 Granted Fiscal 1999.................. 502,243 $2.97 - $10.25 $4.63 Options Exercised.................... (317,309) $1.50 - $ 6.36 $2.74 --------- Balance at September 30, 1999.......... 1,280,460 $1.50 - $11.64 $4.42 Granted Fiscal 2000.................. 536,667(1) $0.00 - $ 6.56 $0.93 Options Expired/Canceled............. (159,519) $1.88 - $11.64 $7.33 Options Exercised.................... (435,500)(1) $0.00 - $ 1.88 $0.03 --------- Balance at September 30, 2000.......... 1,222,108 $1.50 - $10.25 $4.07 =========
- --------------- (1) Includes 425,000 shares of restricted stock granted out of the Common Stock reserved for issuance under the Company's Plan. Additional information with respect to the outstanding options as of September 30, 2000 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------- -------------------- WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE - --------------- --------- ---------------- -------- --------- -------- $1.50 - $ 3.00 400,443 7.07 years $1.92 323,777 $1.93 $3.01 - $ 6.00 714,166 6.63 years $4.76 668,333 $4.78 $6.01 - $11.64 107,499 8.45 years $7.49 92,499 $8.31 --------- --------- 1,222,108 1,084,609 ========= =========
47 49 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Options exercisable at September 30, 1999 and 1998 were 1,060,185 and 671,087, respectively. The weighted average exercise price of these exercisable options at September 30, 1999 and 1998 were $4.83 and $4.79, respectively. The pro forma effects of applying SFAS No. 123 are as follows:
YEAR ENDED SEPTEMBER 30, ----------------------------------------- 2000 1999 1998 ------------ ---------- ----------- Net earnings (loss) As reported............................... $(39,254,000) $4,471,000 $(6,336,000) ============ ========== =========== Pro forma................................. $(40,442,000) $3,689,000 $(6,662,000) ============ ========== =========== Earnings (loss) per share As reported............................... $ (2.84) $ .38 $ (.69) ============ ========== =========== Pro forma................................. $ (2.92) $ .31 $ (.73) ============ ========== ===========
The pro forma disclosure of applying SFAS No. 123 is estimated on the option's date of grant using assumptions of the expected term to exercise, volatility, risk-free rate, and the expected dividend yield. A summary of these assumptions is as follows:
DIVIDEND EXPECTED TERM VOLATILITY RISK-FREE RATE YIELD ------------- ------------ -------------- -------- Fiscal 2000.................... 10 years 80.08% 6.46% - 6.97% 0% Fiscal 1999.................... 10 years 71.6 - 76.2% 5.11% - 7.09% 0% Fiscal 1998.................... 10 years 71.6% 5.67% - 5.89% 0%
(9) COMMITMENTS AND CONTINGENCIES Compensation Messrs. Kushner and Locke entered into employment agreements that expire in March 2004. Those agreements provide for base compensation to each individual of $500,000, $525,000, $550,000 and $575,000 in the fiscal years ended September 30, 2001, 2002, 2003 and 2004, respectively. The Company also provides Messrs. Kushner and Locke with certain fringe benefits, including $3,500,000 of term life insurance with a split dollar ownership structure and disability insurance for each person. The Company has agreements with five other employees and officers of the Company, excluding US SEARCH.com, which provide for annual base salaries each ranging from $117,500 to $250,000, eligibility for options, performance bonuses, and severance payments. Employee Benefit Plans The Company participates in various multiemployer defined benefit and defined contribution pension plans under union and industry agreements. These plans include substantially all temporary film production employees covered under various collective bargaining agreements. The Company incurred $254,000, $425,000, and $345,000 of multi-employer plan costs in fiscal 2000, 1999, and 1998, respectively. Such costs are capitalized as a component of film and television programming costs. The Company funds the costs of such plans as incurred. Leases The Company and its subsidiaries lease certain facilities and equipment. The leases generally provide for the lessee to pay taxes, maintenance, insurance and certain other operating costs of the leased property. 48 50 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At September 30, 2000, the future minimum payments under leases that have initial or remaining noncancelable lease terms in excess of one year are as follows:
CAPITAL OPERATING YEAR ENDING SEPTEMBER 30, LEASES LEASES ------------------------- -------- ---------- 2001............................................... $198,000 $ 674,000 2002............................................... 61,000 674,000 2003............................................... 37,000 708,000 2004............................................... -- 720,000 2005............................................... -- 540,000 Thereafter......................................... -- -- -------- ---------- Total minimum future lease rental payments........... $296,000 $3,316,000 ========== Less: amounts representing interest.................. (21,000) -------- Capitalized lease obligations, included within Contractual obligations in the consolidated balance sheet at September 30, 2000........................ $275,000 ========
Rental expense for all operating leases for the years ended September 30, 2000, 1999 and 1998 was approximately $1,340,000, $678,000 and $657,000, respectively. Film and Television Program Production The Company has certain films and television projects in development (Note 3). The Company routinely makes contractual down payments to acquire film distribution rights. This initial advance for rights ranges from 10% to 30% of the total purchase price. The balance of the payment is generally due upon the complete delivery by third party producers of acceptable film and video materials and other proof of rights held and insurance policies that may be required for the Company to begin exploitation of the product. Litigation The Company is involved in certain legal proceedings and claims arising out of the normal course of business. Management believes the resolution of these matters will not have a material adverse effect upon the Company's results of operations, financial position or cash flows. (10) RELATED PARTY TRANSACTIONS In fiscal 1998 Messrs. Kushner and Locke each earned annual base compensation of $425,000. In fiscal 1999 Messrs. Kushner and Locke each earned base compensation at an annual rate of $450,000 through March 1999 and $475,000 thereafter. In fiscal 2000 Messrs. Kushner and Locke each earned base compensation at an annual rate of $475,000. In March 1999, the Company granted to each of Messrs. Kushner and Locke 50,000 shares of restricted common stock and accelerated the vesting of 33,333 then unvested stock options. In September 1999, the Company granted to each of Messrs. Kushner and Locke bonuses of $500,000 and options to purchase 100,000 shares of common stock. In April 2000, the Company granted to each of Messrs. Kushner and Locke 200,000 shares of restricted common stock, with the restrictions lapsing in equal portions over a three-year period. These shares are considered issued but not outstanding at September 30, 2000 due to the aforementioned restrictions. 49 51 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a summary of stock and option compensation to each of Messrs. Kushner and Locke for the three-year period ended September 30, 2000:
OPTIONS/SHARES VESTED, NET OF EXERCISE GRANT DATE ISSUED EXERCISE PRICE AT SEPTEMBER 30, 2000 VESTING REQUIRED ---------- -------------- -------------- ----------------------- ---------------- February 1999................ 50,000 N/A N/A (1) September 1999............... 100,000 $4.6875 100,000 (2) April 2000................... 200,000 N/A N/A (3)
- --------------- (1) Restrictions removed in June 1999. (2) Immediately vested upon grant. (3) Vest over a three year period from April 2001 to April 2003. Outside directors each receive annual compensation between $15,000 and $25,000 in cash. The following is a summary of option compensation to outside directors for the three year period ended September 30, 2000.
VESTED, NET OF OPTIONS EXERCISE EXERCISES AT VESTING HOLDER GRANT DATE ISSUED PRICE SEPTEMBER 30, 2000 REQUIRED ------ -------------- ------- -------- ------------------ -------- Irwin Friedman.............. June 1998 16,667 $2.8438 11,111 (1) Irwin Friedman.............. February 1999 13,333 $7.19 13,333 (2) Irwin Friedman.............. September 1999 13,333 $4.8125 13,333 (2) Stuart Hersch............... August 1997 16,667 $1.875 16,667 (1) Stuart Hersch............... February 1999 13,333 $7.19 13,333 (2) Stuart Hersch............... September 1999 13,333 $4.8125 13,333 (2) Stuart Hersch............... September 1999 40,000 $4.8125 40,000 (2) John Lannan................. June 1998 16,667 $2.8438 11,111 (1) John Lannan................. February 1999 13,333 $7.19 13,333 (2) John Lannan................. September 1999 13,333 $4.8125 13,333 (2)
- --------------- (1) Vests one-third at grant date and one-third over next two anniversaries of the grant date. (2) Immediately vested upon grant. The Company loaned the President and Chief Operating Officer a total of $300,000 in September and October 1996. The loan bears interest at 8% per year and is due through October 2001. Pursuant to his employment contract, during fiscal 1998 and fiscal 1999 $50,000 and $100,000 principal amounts of the loan, respectively, plus interest on such amounts, were forgiven and recorded as additional compensation expense. In addition, the Company loaned the executive $100,000 in January, 2000, with interest due quarterly at a rate of 8%. At September 30, 2000, $100,000 remained outstanding. During 1989, the Company entered into a consulting agreement with Stuart Hersch, a director of the Company. The agreement is on a month-to-month basis. For the years ended September 30, 1998, 1999 and 2000 the Company recognized $90,000, $71,000 and $59,200 respectively, in consulting expense under this agreement. Since 1991 Irwin Friedman, a director of the Company, has rendered financial consulting services to the Company through the firm I. Friedman Equities, Inc. During 1997 in connection with rendering certain services, that firm was granted warrants exercisable for 100,000 shares of common stock (Note 7). For the years ended September 30, 1998, 1999 and 2000 the Company recognized $24,000, $48,000 and $101,000, respectively, in consulting expense under various agreements with that firm. During the year ended September 30, 1999, I. Friedman Equities, Inc. was also paid $62,000 pursuant to a 1996 agreement in 50 52 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) connection with the redemption of Class C Common Stock Warrants, and that amount was charged to stockholders' equity. In December 1994, the Company loaned August Entertainment, Inc. ("August") $650,000 against distribution rights to third party product. August is majority owned by Gregory Cascante, former President of the Company's international film distribution division. The loan bore interest at the lesser of (a) Prime plus 2% or (b) 10%. In January 1999 the loan was assigned to a subsidiary, and was used to reduce pre-existing obligations to August. From May 1997 to October 1997, Peter Locke (co-chairman of US SEARCH.com and the Company) personally loaned to US SEARCH.com amounts aggregating approximately $397,000 (gross of any repayments which occurred during such period). The loans with interest at 10% per annum were repaid in full. In addition, US SEARCH.com paid approximately $40,000 in consulting fees and interest to Mr. Locke for services rendered through December 31, 1997. (11) SEGMENT INFORMATION Prior to fiscal 1998, the Company operated in one business segment, film and television programs. Early in fiscal 1998 the Company obtained controlling interest in US SEARCH.com. The Company subsequently operated in two segments: film and television program production and distribution, and search services related to US SEARCH.com. Each segment is a strategic business unit that offers different products and services. They are managed separately because each requires different investment, technology and marketing strategies. Management evaluates business segment performance based on operating revenues, operating earnings and asset growth. The film and television program business segment exploits distribution rights in its film and television program libraries, films and television programs produced by the Company or co-produced with equity affiliates, and film and television programs produced by third parties. Products are licensed in both the United States and virtually all international markets. The search services business segment consists solely of the Company's interest in US SEARCH.com, which provides people search and customized individual reference services. Services are provided almost exclusively to United States customers. 51 53 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Summarized financial information regarding the Company's business segments is shown in the table below.
FILM AND SEARCH TELEVISION SERVICES CONSOLIDATED ------------ ------------ ------------ FISCAL 2000: Operating revenues............................... $ 34,961,000 $ 24,679,000 $ 59,640,000 Gross profit (loss).............................. (1,337,000) 13,354,000 12,017,000 (Loss) before income taxes....................... (24,459,000) (14,795,000) (39,254,000) Total assets..................................... 133,095,000 18,105,000 151,200,000 FISCAL 1999: Operating revenues............................... 34,143,000 15,747,000 49,890,000 Gross profit..................................... 917,000 9,307,000 10,224,000 Earnings (loss) before income taxes.............. 16,539,000 (11,342,000) 5,197,000 Total assets..................................... 154,627,000 30,488,000 185,115,000 FISCAL 1998: Operating revenues............................... 68,261,000 7,869,000 76,130,000 Gross profit..................................... 10,223,000 4,280,000 14,503,000 (Loss) before income taxes....................... 1,419,000 (4,736,000) 6,155,000 Total assets..................................... 134,319,000 2,786,000 137,105,000
Geographic Data The revenues of equity affiliates are generated worldwide and their operations are principally located in the United States. The table below presents sources of operating revenue by country or territory for the Company and consolidated subsidiaries. Equity affiliates are not included.
YEAR ENDED SEPTEMBER 30, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- United States............................... $41,533,000 $33,862,000 $40,251,000 Germany..................................... 5,427,000 4,420,000 12,954,000 France...................................... 2,105,000 281,000 2,302,000 Great Britain............................... 745,000 1,712,000 1,596,000 Latin America............................... 2,299,000 5,625,000 3,574,000 Australia................................... 48,000 719,000 2,181,000 Japan....................................... 795,000 637,000 3,077,000 Spain....................................... 1,314,000 -- 3,289,000 Italy....................................... 1,500,000 383,000 3,463,000 Other foreign countries or territories...... 3,874,000 2,251,000 3,443,000 ----------- ----------- ----------- Total revenues.................... $59,640,000 $49,890,000 $76,130,000 =========== =========== ===========
52 54 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table presents film and television program costs and total assets based upon their geographic location:
UNITED LATIN GREAT STATES AMERICA BRITAIN TOTAL ------------ ---------- ---------- ------------ September 30, 2000: Film and television program costs... $ 80,407,000 $ 581,000 $ -- $ 80,988,000 Total assets........................ 146,177,000 3,065,000 1,958,000 151,200,000 September 30, 1999: Film and television program costs... 89,163,000 2,508,000 -- 91,499,000 Total assets........................ 179,864,000 3,163,000 2,088,000 185,115,000 September 30, 1998: Film and television program costs... 73,773,000 -- -- 73,773,000 Total assets........................ 132,756,000 2,361,000 1,988,000 137,105,000
Customer Concentration For the year ended September 30, 2000, sales to two United States and one international film and television program customer represented 28% of the Company's consolidated operating revenues. At September 30, 2000, accounts receivable from two customers represented 40% of the Company's consolidated accounts receivable. For the year ended September 30, 1999, sales to one United States film and television program customer represented 18% of the Company's consolidated operating revenues. At September 30, 1999, accounts receivable from two customers represented 31% of the Company's consolidated accounts receivable. For the year ended September 30, 1998, sales to two international film and television program customers represented 26% of the Company's consolidated operating revenues. At September 30, 1998, accounts receivable from two customers represented 41% of the Company's consolidated accounts receivable. 53 55 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) EARNINGS (LOSS) PER SHARE The table below reconciles net earnings (loss) and average shares of common stock outstanding to those amounts used to calculate basic and diluted earnings (loss) per share.
YEAR ENDED SEPTEMBER 30, ------------------------------------------ 2000 1999 1998 ------------ ----------- ----------- NUMERATOR: Numerator for basic earnings per share -- earnings (loss) available to common stockholders.......... $(39,254,000) $ 4,471,000 $(6,336,000) Effect of dilutive securities: interest on convertible debt................................. -- 60,000 -- ------------ ----------- ----------- Numerator for diluted earnings per share --earnings (loss) available to common stockholders after assumed conversions.............................. $(39,254,000) $ 4,531,000 $(6,336,000) ------------ ----------- ----------- DENOMINATOR: Denominator for basic earnings per share -- weighted average shares................. 13,839,000 11,755,000 9,181,000 ------------ ----------- ----------- Effect of dilutive securities: Employee stock options........................... -- 378,000 -- Warrants......................................... -- 434,000 -- Convertible debentures........................... -- 129,000 -- ------------ ----------- ----------- Dilutive potential common shares................. -- 941,000 -- ------------ ----------- ----------- Denominator for diluted earnings per share -- adjusted weighted average shares and assumed conversions.............................. 13,839,000 12,696,000 9,181,000 ============ =========== =========== Basic earnings (loss) per share.................... $ (2.84) $ .38 $ (.69) ============ =========== =========== Diluted earnings (loss) per share.................. $ (2.84) $ .36 $ (.69) ============ =========== ===========
All options, warrants, and convertible debentures were antidilutive for the year ended September 30, 2000. A total of 367,000 shares of common stock representing the potential exercise of options, warrants and the potential conversion of debentures were not included in the calculation of diluted earnings per share for fiscal 1999, as the impact of including such securities would be antidilutive. All options, warrants, and convertible debentures were antidilutive for the year ended September 30, 1998. (13) FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 2000, the Company revised its estimates of future revenues for certain library product. In addition during the fourth quarter of 2000, the Company increased its provision for bad debts. The adjustments to revise estimates of future revenues and increase the allowance for doubtful accounts recorded in the fourth quarter of 2000 amounted to approximately $8,425,000. Additionally, in the fourth quarter, as a result in the decline in market value of Harvey Entertainment, Inc., the Company recorded a $3,893,000 impairment write down of its equity investment. (14) SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED SEPTEMBER 30, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- CASH PAID FOR: Interest..................................... $6,845,000 $7,436,000 $6,427,000 Taxes........................................ $ 79,000 $ 30,000 $ 40,000
54 56 THE KUSHNER-LOCKE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Fiscal 1998: - The Company acquired an 80% interest in 800-US Search in exchange for certain guaranties of indebtedness. In conjunction with the acquisition, liabilities assumed were: Fair value of assets acquired............................ $ 461,000 Cash paid for the capital stock.......................... -- Liabilities assumed...................................... $2,557,000
- $300,000 of convertible subordinated debentures were converted into 51,282 adjusted shares of common. Fiscal 1999: - The Company assigned a note receivable from August of $192,000 to a subsidiary to reduce pre-existing subsidiary obligations to August (Note 9). - $100,000 of a note receivable from an officer of the Company was forgiven (Note 9). - $296,000 in related party notes of US Search.com were forgiven (Note 9). - The Company issued common stock with a value of $5,820,000 in exchange for convertible preferred stock and detachable warrants in Harvey (Note 1). - $9,713,000 of convertible subordinated debentures were converted into 1,288,185 adjusted shares of common stock. - A formerly-consolidated film production subsidiary was deconsolidated as the Company no longer exercised control. The non-cash reduction in assets and liabilities were: Accounts receivable...................................... $ 16,000 Film and television program costs........................ $1,810,000 Other assets............................................. $ 40,000 Accounts payable and accrueds............................ $ 38,000 Notes payable............................................ $1,950,000
Fiscal 2000: - $146,000 of convertible subordinated debentures were converted into 25,641 adjusted shares of common stock. - $150,000 of a note receivable from an officer of the Company was recorded as compensation expense. - The Company purchased partnership units in World Wide Multimedia, LLP by contributing film titles valued at $2,500,000 and paying $2,000,000 in cash proceeds from a loan from Far East National Bank. 55 57 SCHEDULE II THE KUSHNER-LOCKE COMPANY VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS CHARGED DEDUCTIONS BEGINNING OF TO COSTS AND DUE TO BALANCE AT PERIOD EXPENSES WRITE-OFFS END OF PERIOD ------------ ----------------- ---------- ------------- Allowances for Doubtful Accounts: Year Ended 9/30/00................. $3,248,000 6,068,000 4,870,000 $4,446,000 ========== ========= ========== ========== Year Ended 9/30/99................. $2,509,000 2,959,000 (2,220,000) $3,248,000 ========== ========= ========== ========== Year Ended 9/30/98................. $ 925,000 2,118,000 (534,000) $2,509,000 ========== ========= ========== ==========
56 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE KUSHNER-LOCKE COMPANY (Registrant) Dated: December 18, 2000 /s/ DONALD KUSHNER -------------------------------------- Donald Kushner Co-Chairman of the Board, Co-Chief Executive Officer and Secretary Dated: December 18, 2000 /s/ BRETT ROBINSON -------------------------------------- Brett Robinson Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the dated indicated. THE KUSHNER-LOCKE COMPANY (Registrant) Dated: December 18, 2000 /s/ PETER LOCKE -------------------------------------- Peter Locke Co-Chairman of the Board and Co-Chief Executive Officer Dated: December 18, 2000 /s/ DONALD KUSHNER -------------------------------------- Donald Kushner Co-Chairman of the Board, Co-Chief Executive Officer and Secretary Dated: December 18, 2000 /s/ BRETT ROBINSON -------------------------------------- Brett Robinson Senior Vice President and Chief Financial Officer Dated: December 18, 2000 /s/ IRWIN FRIEDMAN -------------------------------------- Irwin Friedman Director Dated: December 18, 2000 /s/ STUART HERSCH -------------------------------------- Stuart Hersch Director Dated: December 18, 2000 /s/ JOHN LANNAN -------------------------------------- John Lannan Director 57 59 INDEX TO EXHIBITS 3 Articles of Incorporation(A) 4.1 Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of December 1, 1990 pertaining to 10% Convertible Subordinated Debentures Due 2000, Series A(E) 4.2 First Supplemental Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of March 15, 1991 pertaining to 10% Convertible Subordinated Debentures Due 2000, Series A(F) 4.3 Indenture between the Company and National City Bank of Minneapolis, as Trustee, dated as of December 1, 1990 pertaining to 13 3/4% Convertible Subordinated Debentures Due 2000, Series B(E) 4.4 Warrant agreement between the Company and City National Bank, as Warrant Agent, dated as of March 19, 1991 pertaining to Common Stock Purchase Warrants(F) 4.5 Warrant agreement dated September 5, 1997 between the Company and Allen & Company Incorporated.(U) 4.6 Warrant agreement dated September 5, 1997 between the Company and I. Friedman Equities, Inc.(U) 4.7 Warrant Agreement dated June 27, 1997 between the Company and I. Friedman Equities, Inc.(U) 10.1 Amended and Restated Employment Agreement dated October 1, 1997 between the Company and Donald Kushner.(W) 10.1.1 First Amendment to Amended and Restated Employment Agreement dated March 2, 1999 between the Company and Donald Kushner.(Y) 10.2 Amended and Restated Employment Agreement dated October 1, 1997 between the Company and Peter Locke.(W) 10.2.1 First Amendment to Amended and Restated Employment Agreement dated March 2, 1999 between the Company and Peter Locke.(Y) 10.3 1988 Stock Incentive Plan of the Company(A) 10.4 Form of Indemnification Agreement(A) 10.5 Kushner-Locke Shareholders' Cross-Purchase Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited(A) 10.5.1 Amendment dated as of May 14, 1992 to the Kushner-Locke Shareholders' Cross-Purchase Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited(I) 10.6 Kushner-Locke Trust Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited(A) 10.6.1 Amendment dated May 14, 1992 to the Kushner-Locke Trust Agreement dated as of October 1, 1988 between and among Donald Kushner, Rebecca Hight, Peter Locke, Karen Locke, Peter Locke Productions, Inc. and Twelfth Street Limited(I) 10.12 Lease Agreement, dated as of November 1989, between the Company and 11601 Wilshire Associates(G) 10.12.1 Amended Lease Agreement(G) 10.12.2 Lease Agreement by and between Arden Realty Limited Partnership and The Kushner-Locke Company as of August 13, 1999.(G)
58 60 10.16 Warrant Agreement between the Company and Chatfield Dean & Co., Inc. dated as of November 13, 1992(J) 10.19 Fiscal Agency Agreement dated March 10, 1994 between and among the Company, Bank America National Trust Company and Bank of America National Trust and Savings Association(K) 10.19.1 Side letter between the Company and BankAmerica Trust Company to the Fiscal Agency Agreement dated March 10, 1994 between and among the Company, BankAmerica Trust Company and Bank of America National Trust and Savings Association(K) 10.20 Warrant Agreement dated March 10, 1994 between the Company and RAS Securities Corp.(K) 10.21 Warrant Agreement dated March 10, 1994 between the Company and I. Friedman Equities, Inc.(K) 10.22 Fiscal Agency Agreement dated July 25, 1994 between and among the Company, Bank America National Trust Company and Bank of America National Trust and Savings Association(L) 10.27 Loan and Security Agreement dated December 1, 1994 between the Company and August Entertainment, Inc., and Guarantees between the Company, August Entertainment, Inc. and the Allied Entertainments Group PLC and certain of its subsidiaries(M) 10.44 Amendment to the 1988 Stock Incentive Plan dated May 17, 1994(Q) 10.56 Letter Agreement, dated as of April 12, 1996, by and among The Kushner-Locke Company, Chemical Bank and Chase Securities Inc.(T) 10.57 Credit, Security, Guaranty and Pledge Agreement, dated as of June 19, 1996, among The Kushner-Locke Company, the Guarantors named therein, the lenders named therein and The Chase Manhattan Bank, N.A., (formerly Chemical Bank) as Agent, and as Fronting Bank for the lenders (the "Credit Agreement")(T) 10.58 Employment Agreement dated September 14, 1996 between The Kushner-Locke Company and Bruce St. J Lilliston(V) 10.59 Loan and Security Agreement dated March 1, 1996 between The Kushner-Locke Company and its subsidiaries and Banque Paribas, Los Angeles Agency(V) 10.61 Waiver of Section 6.17 Overhead Expenses of the Credit Agreement, dated as of .(V) 10.62 Amendment No. 5 dated as of December 22, 1997 to the Credit Agreement.(W) 10.63 Amendment No. 6 dated as of May 13, 1998 to the Credit Agreement.(X) 10.64 Amendment No. 7 dated as of December, 1998 to the Credit Agreement.(Y) 10.65 Waiver of Section 6.17 Overhead Expenses of the Credit Agreement, dated as of December 9, 1999.(Y) 10.66 Amendment No. 8 dated as of May 14, 1999 to the Credit Agreement.(Z) 10.67 Amendment No. 9 dated as of April 18, 2000 to the Credit Agreement.(Z) 10.68 Amendment No. 10 dated as of August 23, 2000 to the Credit Agreement.(Z) 23.1 Consent of PricewaterhouseCoopers LLP 27 Financial Data Schedule
- --------------- (A) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-18, as amended, effective December 5, 1988 (Commission File No. 33-25101-LA). (B) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1989. (C) Incorporated by reference from the Exhibit to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1990. (D) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-1 (File No. 33-37192), as initially filed on October 5, 1990 or as amended on November 30, 1990. 59 61 (E) Incorporated by reference from the Exhibits to the Company's Registration Statements on Form S-1, as amended, effective November 30, 1990 (File No. 33-37192), and effective December 20, 1990 (File No. 33-37193). (F) Incorporated by reference to the Company's Registration Statement on Form S-1, as amended, effective March 20, 1991. (G) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1991. (H) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1991. (I) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1992. (J) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-2, as amended, effective November 12, 1992 (Commission File No. 33-51544). (K) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal quarter ended March 31, 1994. (L) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1994. (M) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1994. (N) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1995. (O) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1995. (P) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1995. (Q) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended December 31, 1995. (R) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended March 31, 1996. (S) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1996. (T) Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-2, as amended, effective August 15, 1996 (Commission File No. 333-05089). (U) Incorporated by reference from the Exhibits to the Company's Registration Statement on form S-3 as filed November 17, 1997 (Commission File No. 333-40391). (V) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1996. (W) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1997. (X) Incorporated by reference from the Exhibits to the Company's Report on Form 10-Q for the fiscal quarter ended June 30, 1998. (Y) Incorporated by reference from the Exhibits to the Company's Report on Form 10-K for the fiscal year ended September 30, 1999. (Z) Filed herewith. 60 EX-10.66 2 v68115ex10-66.txt EXHIBIT 10.66 1 EXHIBIT 10.66 AMENDMENT NO. 8 dated as of May 14, 1999 to the Credit, Security, Guaranty and Pledge Agreement dated as of June 19, 1996, as amended, among THE KUSHNER-LOCKE COMPANY (the "Borrower"), the Guarantors named therein, the Lenders referred to therein and THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), as Agent and as Fronting Bank for the Lenders (the "Agent") (as heretofore amended, the "Credit Agreement"). INTRODUCTORY STATEMENT The Lenders have made available to the Borrower a revolving credit facility pursuant to the terms of the Credit Agreement. The Borrower has informed the Agent and the Lenders that 800-U.S. SEARCH, a Subsidiary of the Borrower and Guarantor under the Credit Agreement ("US-SEARCH"), proposes to engage in an initial public offering (the "Proposed Offering") of its capital stock. In connection with the Proposed Offering, the Borrower has requested that the Agent and the Lenders (i) release US-SEARCH from its obligations (including, without limitation, the obligations of US-SEARCH as a Guarantor) under the Credit Agreement, (ii) release their Lien in the assets of US-SEARCH and the capital stock of US-SEARCH currently held by the Borrower and (iii) make certain other modifications to the Credit Agreement. The Borrower, the Guarantors, the Lenders and the Agent have agreed to make revisions to the Credit Agreement, all on the terms and subject to the conditions hereinafter set forth. Therefore, the parties hereto hereby agree as follows: Section 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning given them in the Credit Agreement. Section 2. Amendments to the Credit Agreement. Subject to the satisfaction of the conditions precedent set forth in Section 3 hereof, the Credit Agreement is hereby amended effective as of the Effective Date (as hereinafter defined) as follows: -1- 2 (A) Section 2.6 of the Credit Agreement is hereby amended by adding the following clause (d) at the end thereof: "(d) The Commitments shall be permanently reduced by an amount equal to 50% of Net Cash Proceeds of any sale, transfer or other disposition of shares of capital stock of US-SEARCH held by a Credit Party, which sale, transfer or other disposition occurs subsequent to the completion of the Proposed Offering (as defined in Amendment No. 8 to the Credit Agreement); provided, that the Commitments shall not be reduced by more than $15 million in the aggregate in connection with this Section 2.6(d). Such reduction(s) in the Commitments shall occur simultaneously with the receipt by any Credit Party of such Net Cash Proceeds. For purposes of this Section 2.6(d), "Net Cash Proceeds" shall mean cash payments received by any Credit Party from the sale, transfer or other disposition of shares of capital stock of US-SEARCH (whether directly or upon a later sale, transfer, collection or other disposition of non-cash proceeds), in each case net of all legal expenses, commissions and other fees and expenses incurred, and any taxes payable and reasonably estimated income taxes, as a consequence of such sale, transfer or other disposition, but only to the extent reserved for, whether or not such reserve is required by GAAP." (B) The opening paragraph of Article 6 of the Credit Agreement is hereby amended by adding the parenthetical "(other than US-SEARCH)" after the word "Subsidiaries" appearing therein. (C) Section 6.4 of the Credit Agreement is hereby amended by deleting the text set forth in clauses (x), (xi) and (xii) in their entirety and inserting in lieu thereof the following: "(x) up to an aggregate principal amount of $5,500,000 loaned to US-SEARCH, on or prior to the Proposed Offering (as defined in Amendment No. 8 to the Credit Agreement), pursuant to convertible notes issued by US-SEARCH to the Borrower, (xi) up to an aggregate amount of $2,750,005 to be paid by the Borrower to US-SEARCH pursuant to the exercise of outstanding warrants, on or prior to the Proposed Offering, to purchase common stock of US-SEARCH; and (xii) other investments in or loans to US-SEARCH by the Borrower in an amount not to exceed $1,000,000, provided, that such investments or loans shall only be permitted hereunder until the expiration of the 5 day-period following the consummation of the Proposed Offering. (D) Section 6.7 of the Credit Agreement is hereby amended by adding the words", or sell, transfer or otherwise dispose of shares of capital stock of US-SEARCH held by a Credit Party for consideration other than cash other than in connection with a -2- 3 transaction or series of transactions to which US-SEARCH or US-SEARCH and the stockholders of US-SEARCH are parties and which involves (x) any consolidation or merger of US-SEARCH with or into any other entity or person, or any other corporate reorganization, or (y) any sale, lease or other disposition of all or substantially all of the assets of US-SEARCH" immediately after the parenthetical "(other than permitted transactions between the Borrower and its Subsidiaries)" appearing therein. (E) Article 7 of the Credit Agreement is hereby amended by adding the following clause (o) immediately after the end of clause (n) appearing therein: "(o) US-SEARCH shall have failed to repay all amounts owed by US-SEARCH to the Borrower as of the date of the consummation of the Proposed Offering (as defined in Amendment No. 8 to the Credit Agreement) (including, without limitation, all deferred management fees payable to the Borrower by US-SEARCH and all loans made by the Borrower to US-SEARCH but excluding any convertible securities such as convertible notes which will convert or shall be exercisable for shares of capital stock of US-SEARCH) within 5 days following the consummation of the Proposed Offering (as described in Amendment No. 8 to the Credit Agreement);" Section 3. Conditions to Effectiveness. This Amendment is effective as of the first date on which all of the following conditions precedent have been satisfied in full (the "Effective Date"): (A) the Agent shall have received counterparts of this Amendment which, when taken together, bear the signatures of the Borrower, each Guarantor, the Agent and such of the Lenders as are required by the Credit Agreement; and (B) the Agent shall have received evidence reasonably satisfactory to the Agent and its counsel, that the Registration Statement relating to the Proposed Offering (i) shall have been declared effective by the Securities and Exchange Commission and (ii) shall provide that a portion of the proceeds received by US-SEARCH in connection with the Proposed Offering shall be used to repay all amounts owed by US-SEARCH to the Borrower (including, without limitation, all deferred management fees payable to the Borrower by US-SEARCH and all loans made by the Borrower to US-SEARCH but excluding any convertible securities such as convertible notes which will convert or shall be exercisable for shares of capital stock of US-SEARCH). Section 4. Release. Each of the Lenders and the Agent (on behalf of itself and the Lenders), by its execution hereof, hereby releases as of the Effective Date (i) US-SEARCH from its obligations (including without limitation the obligations of US-SEARCH as a -3- 4 Guarantor) under the Credit Agreement, (ii) its Lien in the assets of US-SEARCH, and (iii) its Lien in the shares of capital stock of US-SEARCH held by the Borrower. Section 5. Representations and Warranties. Each Credit Party represents and warrants that: (A) notwithstanding the terms of this Amendment, any outstanding shares of capital stock of US-SEARCH held or acquired by a Credit Party (other than US-SEARCH) subsequent to the completion of the Proposed Offering shall remain subject to the limitation on Liens set forth in Section 6.2 of the Credit Agreement; (B) after giving effect to this Amendment, the representations and warranties contained in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof (except to the extent that any such representations and warranties specifically relate to an earlier date); and (C) after giving effect to this Amendment, no Event of Default or Default will have occurred and be continuing on and as of the date hereof. Section 6. Further Assurances. At any time and from time to time, upon the Agent's request and at the sole expense of the Credit Parties, each Credit Party will promptly and duly execute and deliver any and all further instruments and documents and take such further action as the Agent reasonably deems necessary to effect the purposes of this Amendment. Promptly after the Effective Date, but in no event later than five (5) Business Days, the Agent agrees to execute, on behalf of itself and the Lenders, any UCC financing statements, including releases and termination statements, or other documentation as US-SEARCH of the Borrower may reasonably deem necessary to effect the purposes of the Amendment. No later than two (2) Business Days after the Effective Date, the Agent agrees to return to US-SEARCH or the Borrower, as the case may be, any definitive instruments representing the shares of capital stock or other securities of US-SEARCH and stock powers issued in connection therewith. Section 7. Fundamental Documents. This Amendment is designated a Fundamental Document by the Agent. Section 8. Full Force and Effect. Except as expressly amended hereby, the Credit Agreement and the other Fundamental Documents shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Credit Agreement, the terms "Agreement", "this Agreement", "herein", "hereafter", "hereto", "hereof", and words of similar import, shall, unless the context otherwise requires, mean the Credit Agreement as amended by this Amendment. -4- 5 Section 9. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 10. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. Section 11. Expenses. The Borrower agrees to pay all out-of-pocket expenses incurred by the Agent in connection with the preparation, execution and delivery of this Amendment, including, but not limited to, the reasonable fees and disbursements of counsel for the Agent. Section 12. Headings. The headings of this Amendment are for the purposes of reference only and shall not affect the construction of or be taken into consideration in interpreting this Amendment. IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first written above. BORROWER: THE KUSHNER-LOCKE COMPANY By /s/ DONALD KUSHNER -------------------------------- Name: Donald Kushner Title: Co-Chairman & Co-CEO -5- 6 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. DAYTON WAY PICTURES, INC. DAYTON WAY PICTURES II, INC. DAYTON WAY PICTURES III, INC. DAYTON WAY PICTURES IV, INC. FW COLD CO., INC. By /s/ DONALD KUSHNER -------------------------------- Name: Donald Kushner Title: Co-Chairman & Co-CEO -6- 7 KLC/NEW CITY By its General Partner THE KUSHNER-LOCKE COMPANY By /s/ DONALD KUSHNER -------------------------------- Name: Donald Kushner Title: Co-Chairman & Co-CEO 800-U.S. SEARCH By /s/ DONALD KUSHNER -------------------------------- Name: Donald Kushner Title: LENDERS: THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), as Agent By: -------------------------------- Name: Title: DE NATIONALE INVESTERINGSBANK N.V. By: -------------------------------- Name: Title: By: -------------------------------- Name: Title: -7- EX-10.67 3 v68115ex10-67.txt EXHIBIT 10.67 1 EXHIBIT 10.67 AMENDMENT NO. 9 dated as of April 18, 2000, to the Credit Security, Guaranty and Pledge Agreement dated as of June 19, 1996, as amended, among THE KUSHNER-LOCKE COMPANY (the "Borrower"), the Guarantors named therein, the Lenders referred to therein and THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), as Agent and as Fronting Bank for the Lenders (the "Agent") (as heretofore amended, the "Credit Agreement"). INTRODUCTORY STATEMENT The Lenders have made available to the Borrower a revolving credit facility pursuant to the terms of the Credit Agreement. The Borrower has informed the Agent and the Lenders that it proposes to enter into a Note Purchase and Pledge Agreement among the Borrower, the purchasers named therein (the "Note Purchasers") and U.S. Trust Company, National Association, as collateral agent, pursuant to which the Borrower will issue up to $2,500,000 of its Notes (the "US Search Notes") to the Purchasers (the "Proposed Facility"). The Notes will be secured by a first-priority lien in the Borrower's interest in 2.0 million shares of common stock of 800-U.S. Search ("US Search"). The Borrower has requested that the Agent and the Lenders make certain modifications to the Credit Agreement to permit the Proposed Facility. In addition, the Borrower has requested that the Agent and the Lenders extend the Commitment Termination Date and Maturity Date under the Credit Agreement by an additional two months. The Borrower, the Guarantors, the Lenders and the Agent have agreed to make revisions to the Credit Agreement, all on the terms and subject to the conditions hereinafter set forth. Therefore, the parties hereto hereby agree as follows: Section 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning given them in the Credit Agreement. Section 2. Amendments to the Credit Agreement. Subject to the satisfaction of the conditions precedent set forth in Section 3 hereof, the Credit Agreement is hereby amended effective as of the Effective Date (as hereinafter defined) as follows: (A) The definitions of "Commitment Termination Date" and "Maturity Date" set forth in Article 1 of the Credit Agreement are each hereby amended by deleting the date "June 25, 2000" referenced therein and inserting in lieu thereof the date "August 25, 2000." 2 (B) Section 6.1 of the Credit Agreement is hereby amended by adding the following clause (l) at the end thereof: "(l) Indebtedness of the Borrower of up to $2,500,000 at any one time outstanding, represented by the promissory notes (the "US Search Notes") issued by the Borrower pursuant to that certain Note Purchase and Pledge Agreement, among the Borrower, the purchasers of the notes referred to therein (the "Note Purchasers") and U.S. Trust Company, National Association, as collateral agent, substantially in the form previously delivered to the Agent." (C) Section 6.2 of the Credit Agreement is hereby amended by adding the following clause (o) at the end thereof: "(o) Liens granted by the Borrower in favor of the Note Purchasers in 2.0 million shares of common stock of 800-U.S. Search held by the Borrower to secure the Indebtedness permitted by Section 6.1(l) hereof." Section 3. Conditions to Effectiveness. This Amendment is effective as of the first date on which all of the following conditions precedent have been satisfied in full (the "Effective Date"): (A) the Agent shall have received counterparts of this Amendment which, when taken together, bear the signatures of the Borrower, each Guarantor, the Agent and such of the Lenders as are required by the Credit Agreement; and (B) all legal matters incident to this Amendment shall be satisfactory to Morgan, Lewis & Brockius LLP, counsel for the Agent. Section 4. Pledge. As security for the Obligations, the Borrower hereby pledges, hypothecates, assigns, transfers, sets over and delivers unto the Agent for the benefit of the Lenders, a security interest in the issued and outstanding capital stock of 800-U.S. Search (the "US Search Stock"), directly or indirectly owned or controlled by the Borrower (other than the capital stock of 800-U.S. Search pledged by the Borrower to the Note Purchasers to secure repayment of the US Search Notes). As of the date hereof, the US Search Stock pledged to the Agent (for the benefit of the Lenders) shall consist of the shares listed on Schedule 1 hereto. The Borrower acknowledges and agrees that the US Search Stock shall constitute "Pledged Securities" (as defined in the Credit Agreement) and shall be subject to the terms and conditions set forth in the Credit Agreement. Section 5. Representations and Warranties. Each Credit Party represents and warrants that: (A) after giving effect to this Amendment, the representations and warranties contained in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof (except to the extent that any such representations and warranties specifically relate to an earlier date); and 2 3 (B) after giving effect to this Amendment, no Event of Default or Default will have occurred and be continuing on and as of the date hereof. Section 6. Further Assurances. At any time and from time to time, upon the Agent's request and at the sole expense of the Credit Parties, each Credit Party will promptly and duly execute and deliver any and all further instruments and documents and take such further action as the Agent reasonably deems necessary to effect the purposes of this Amendment. Section 7. Fundamental Documents. This Amendment is designated a Fundamental Document by the Agent. Section 8. Full Force and Effect. Except as expressly amended hereby, the Credit Agreement and the other Fundamental Documents shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Credit Agreement, the terms "Agreement", "this Agreement", "herein", "hereafter", "hereto", "hereof", and words of similar import, shall, unless the context otherwise requires, mean the Credit Agreement as amended by this Amendment. Section 9. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 10. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. Section 11. Expenses. The Borrower agrees to pay all out-of-pocket expenses incurred by the Agent in connection with the preparation, execution and delivery of this Amendment, including, but not limited to, the reasonable fees and disbursements of counsel for the Agent. Section 12. Headings. The headings of this Amendment are for the purposes of reference only and shall not affect the construction of or be taken into consideration in interpreting this Amendment. 3 4 IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first written above. BORROWER: THE KUSHNER-LOCKE COMPANY By: /s/ BRUCE LILLISTON ------------------------------ Name: Bruce Lilliston Title: President GUARANTORS: KL PRODUCTIONS, INC. POST AND PRODUCTION SERVICES, INC. TWILIGHT ENTERTAINMENT, INC. KLF GUILD CO. KLTV DEVELOPMENT CO. KUSHNER-LOCKE INTERNATIONAL, INC. KL INTERACTIVE MEDIA, INC. DAYTON WAY PICTURES III, INC. By: /s/ BRUCE LILLISTON ------------------------------ Name: Bruce Lilliston Title: Authorized Signatory KLC/NEW CITY By its General Partner THE KUSHNER-LOCKE COMPANY By: /s/ BRUCE LILLISTON ------------------------------ Name: Bruce Lilliston Title: President LENDERS: Executed in THE CHASE MANHATTAN BANK (formerly New York, New York known as Chemical Bank), as Agent By: ------------------------------ Name: Title: 4 5 DE NATIONALE INVESTERINGSBANK N.V. By: ------------------------------ Name: Title: By: ------------------------------ Name: Title: COMERICA BANK - CALIFORNIA By: ------------------------------ Name: Title: FAR EAST NATIONAL BANK By: ------------------------------ Name: Title: 5 EX-10.68 4 v68115ex10-68.txt EXHIBIT 10.68 1 EXHIBIT 10.68 AMENDMENT NO. 10, dated as of August 23, 2000, to the Credit, Security, Guaranty and Pledge Agreement dated as of June 19, 1996, as amended, among THE KUSHNER-LOCKE COMPANY (the "Borrower"), the Guarantors named therein, the Lenders referred to therein and THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), as agent and as Fronting Bank for the Lenders (the "Agent") (as heretofore amended, the "Credit Agreement"). INTRODUCTORY STATEMENT The Lenders have made available to the Borrower a revolving credit facility pursuant to the terms of the Credit Agreement. The Borrower has requested that the Agent and the Lenders, among other things, extend the Commitment Termination Date and Maturity Date under the Credit Agreement until September 30, 2001. The Borrower, the Guarantors, the Lenders and the Agent have agreed to make revisions to the Credit Agreement, all on the terms and subject to the conditions hereinafter set forth. Therefore, the parties hereto hereby agree as follows: Section 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning given them in the Credit Agreement. Section 2. Amendments to the Credit Agreement. Subject to the satisfaction of the conditions precedent set forth in Section 3 hereof, the Credit Agreement is hereby amended effective as of the Effective Date (as hereinafter defined) as follows: (a) The definitions of "Commitment Termination Date" and "Maturity Date" set forth in Article 1 of the Credit Agreement are each hereby amended by deleting the date "August 25, 2000" referenced therein and inserting in lieu thereof the date "September 30, 2001". (b) Clause (iii) of the definition of "Borrowing Base" set forth in Article 1 of the Credit Agreement is hereby amended in its entirety to read as follows: "(iii) Tier 3 Borrowing Base, provided that effective as of the Amendment No. 10 Effective Date and continuing thereafter, the amount of the Tier 3 Borrowing Base shall be automatically reduced to zero; minus" 2 (g) The definition of "Tier 2 Borrowing Base" set forth in Article 1 of the Credit Agreement is hereby amended in its entirety to read as follows: "Tier 2 Borrowing Base" shall mean, at any date of determination, an amount equal to (x) forty percent (40%) of the Eligible Library Amount minus (y) the amount of the Net Proceeds (as defined in Section 2.6(d)) received by the Credit Parties in connection with the Pequot Transaction; provided that the amount of the Borrowing Base credit attributable to the Tier 2 Borrowing Base shall never exceed 50% of the Total Commitments; provided, further, that the amount of the Borrowing Base credit attributable to the Tier 2 Borrowing Base shall not exceed the amounts set forth below, effective as of the dates indicated below:
----------------------------------------------------------------------- Effective Date Maximum Tier 2 Borrowing Base credit ----------------------------------------------------------------------- As Of October 1, 2000 $31,000,000 ----------------------------------------------------------------------- As of January 1, 2001 $30,000,000 ----------------------------------------------------------------------- As of April 1, 2001 $28,000,000 ----------------------------------------------------------------------- As of July 1, 2001 $16,000,000 -----------------------------------------------------------------------
(d) The definition of "Tier 3 Borrowing Base" set forth in Article 1 of the Credit Agreement is hereby amended by adding the following proviso immediately after clause (vii) appearing therein: "; provided, however, that effective as of the Amendment No. 10 Effective Date, the Tier 3 Borrowing Base shall be automatically reduced to zero." (e) the following definitions are hereby added to Article 1 of the Credit Agreement in their correct alphabetical sequence: "Amendment No. 10 Effective Date" shall mean the Effective Date, as such term is defined in Amendment No. 10 to the Credit Agreement." "Pequot Transaction" shall mean the sale of 3,500,000 shares of US-SEARCH to Pequot Private Equity Fund III, L.P., Pequot Offshore Private Equity Fund III, L.P. and/or their affiliates. (f) Section 2.6(d) of the Credit Agreement is hereby amended in its entirety to read as follows: "(d) The Commitments shall be permanently reduced by an amount equal to 100% of Net Cash Proceeds of any sale, transfer or other disposition outside the ordinary course of business of any item of Collateral, or any sale, transfer or other disposition of any Investment held by a Credit Party, including without limitation any sale, transfer or other disposition of shares of (x) common stock of US-SEARCH, (y) preferred stock of Harvey Entertainment, Inc. and (z) equity interests in Gran Canal Latino; provided, that with respect to the Pequot 2 3 Transaction, the Borrower may use the Net Proceeds thereof to pay the Agent and the Lenders the amendment fee payable pursuant to Amendment No. 10 to the Credit Agreement and any accrued and unpaid interest under the Credit Agreement. For purposes of this Section 2.6(d), "Net Cash Proceeds" shall mean cash or other forms of payment received by any Credit Party from the sale, transfer or other disposition of any Investment (whether directly or upon a later sale, transfer or collection or other disposition of non-cash proceeds), in each case net of (i) all legal expenses, commissions and other fees and expenses incurred, (ii) any taxes payable and reasonably estimated income taxes, as a consequence of such sale, transfer or other disposition, but only to the extent reserved for, whether or not such reserve is required by GAAP, (iii) amounts required to repay in full any third party financier(s) of the item of Collateral or Investment subject to such sale, transfer or other disposition; provided that with respect to the Pequot Transaction, the aggregate amount that may be deducted for repayment of third party financing shall not exceed $1,800,000; and (iv) amounts used by the Borrower to pay to the Lenders any accrued and unpaid interest under the Credit Agreement, or to reimburse the Borrower for interest paid during the period from August 14, 2000 through August 25, 2000; provided, that the aggregate amount that may be used to pay accrued and unpaid interest and to reimburse the Borrower for any interest paid during such period shall not exceed $1,000,000 per sale, transfer or disposition." (g) Section 2.6 of the Credit Agreement is hereby further amended by adding the following clause (e) at the end thereof: "(e) The Commitments shall be automatically reduced (i) on March 31, 2001, by an amount such that the Commitments, after giving effect to such reduction, shall not exceed $63,000,000, and (ii) on July 31, 2001, by an amount such that the Commitments, after giving effect to such reduction, shall not exceed $58,000,000." (h) Section 6.1(g) of the Credit Agreement is hereby amended in its entirety to read as follows: "(g) Indebtedness incurred by a Special Purpose Producer which is non-recourse to any Credit Party except to the extent of existing negative pick-up and shortfall guarantee obligations set forth on Schedule 6.1(g) attached hereto;" (i) Section 6.2(h) of the Credit Agreement is hereby amended in its entirety to read as follows: "(h) Liens granted by a Special Purpose Producer which are non-recourse to any Credit Party;" (j) Section 6.3 (Limitations on Guarantees) of the Credit Agreement is hereby amended in its entirety to read as follows: 3 4 "Section 6.3. Limitation on Guarantees. Provide any Guaranty, either directly or indirectly, except: (i) guarantees to the Agent and the Lenders in accordance with Article 9 hereof; (ii) for existing Guarantees listed on Schedule 6.3 hereto; (iii) the Guarantee by the Borrower for the Indebtedness of TV First, a partnership between the Borrower and David Sams Industries, Inc., in an amount not to exceed $500,000; and (iv) Guarantees by the Borrower or a Guarantor of the obligations of another Guarantor (other than US-SEARCH)." (k) Section 6.4 (Limitations on Invesments) of the Credit Agreement is hereby amended in its entirety to read as follows: "Section 6.4. Limitation on Investments. Make or permit to exist any Investment other than (i) in the case of an advance against the purchase of rights made to a Special Purpose Producer in which the Agent (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; (ii) purchase of Cash Equivalents; (iii) inter-company advances among the Borrower and the Guarantors and equity investments by the Borrower or a Guarantor in another Guarantor; (iv) scheduled investments as of the Closing Date set forth on Schedule 6.4; (v) nominal payments to reacquire Special Purpose Producers after project loans are repaid and the Designated Picture has been delivered in an amount not to exceed $1,000 per reacquisition; (vi) loans and advances to officers and employees of the Borrower of not more than $250,000 in the aggregate at any one time outstanding; (vii) equity investments in Special Purpose Producers and joint ventures not exceeding $3,500,000; provided that with respect to Gran Canal Latino, (A) until December 31, 2000, the Credit Parties may make investments of up to $50,000 in the aggregate per month, and (B) after December 31, 2000, the Credit Parties shall not make any additional investments in such joint venture; and (viii) the guarantee by the Borrower for the Indebtedness of TV First, a partnership between the Borrower and David Sams Industries, Inc., as contemplated by Section 6.3(iii) hereof." Notwithstanding the foregoing, as of the Amendment No. 10 Effective Date, the Credit Parties shall not be permitted to make any additional Investments in US- 4 5 SEARCH or Gran Canal Latino other than investments in Gran Canal Latino in an amount not to exceed $50,000 per month until December 31, 2000." (l) Section 6.11 (Capital Expenditures) of the Credit Agreement is hereby amended by deleting the reference to "$500,000" appearing therein and inserting in lieu thereof the amount, "$100,000". (m) Section 6.15 (Initial Print and Advertising Expenditures) of the Credit Agreement is hereby amended in its entirety to read as follows: "6.15. Initial Print and Advertising Expenditures. Make or incur any Print and Advertising Expenditures with respect to any item of Product (other than Print and Advertising Expenditures to support video releases of items of Product)." (n) Section 6.16 (Development Costs) of the Credit Agreement is hereby amended by deleting the reference to "$3,000,000" appearing therein and inserting in lieu thereof the amount, "$1,500,000". (o) Section 6.17 (Overhead Expense) of the Credit Agreement is hereby amended in its entirety to read as follows: "6.17 Overhead Expense. Permit aggregate allocated and unallocated overhead expenses (excluding expenses attributable to US-SEARCH) to exceed $10,500,000 in fiscal year 2000, and $7,125,000 for the nine-month period ending June 30, 2001." (p) Section 6.23(c) is hereby amended in its entirety to read as follows: "(c) Produce any item of Product with a Production Exposure in excess of $5,000,000 without the Agent's approval, or enter into any agreement obligating any Credit Party to pay a minimum guarantee for any item of Product produced by a third party without the Agent's approval (other than permitted rights acquisitions not to exceed $500,000 per item of Product); provided, that the Credit Parties may produce an item of Product with a Production Exposure in excess of $5,000,000 if, prior to the applicable Credit Party assuming any completion risk in respect of such item of Product, the Credit Parties shall have obtained binding agreements from distributors with respect to such item of Product in an aggregate amount which (x) is equal to or exceeds the applicable Credit Party's Production Exposure for such item of Product and (y) is sufficient to fully collateralize any third party financing obtained by the applicable Credit Party for such item of Product." (q) Section 6.23(d) is hereby amended in its entirety to read as follows: "Produce or otherwise acquire rights in any Product produced for television release (other than single television movies, movies-of-the-week or HBO television series structured on substantially the same financial terms as the series entitled "Thrills")." 5 6 (r) Section 6.23(e) is hereby amended in its entirety to read as follows: "(e) Permit production and acquisition deficits (net of pre-sale guarantees and completed pre-sales payable within 1 year after delivery) for any single television movie, move-of-the-week or item of Product being produced by a Credit Party to exceed $500,000 at any time." (s) The Credit Agreement is hereby amended by adding the attached Schedule 6.1(g) (Existing Negative Pick-Up and Shortfall Guarantee Obligations) as a schedule thereto. Section 3. Conditions to Effectiveness. This Amendment is effective as of the first date on which all of the following conditions precedent have been satisfied in full (the "Effective Date"). (a) the Agent shall have received counterparts of this Amendment which, when taken together, bear the signatures of the Borrower, each Guarantor, the Agent and such of the Lenders as are required by the Credit Agreement; and (b) all legal matters incident to this Amendment shall be satisfactory to Morgan, Lewis & Bockius LLP, counsel for the Agent. Section 4. Fees. In consideration for the Lenders and the Agent entering into this Amendment, on the Effective Date the Borrower agrees to pay the Agent for the account of each of the Lenders to be paid to the Lenders in accordance with their respective Percentages, an aggregate fee equal to 1/2 of 1% of the Total Commitment in effect as of the Effective Date (i.e. $340,000). Section 5. Waiver of 1999 Library Valuation. Each of the Lenders, by its execution hereof, hereby waives the Borrower's non-compliance with its obligation to obtain an annual redetermination of the "Eligible Library Amount" in accordance with definition of "Eligible Library Amount" with respect to the 1999 calendar year; provided, however, that the Borrower shall have obtained and delivered a redetermination of the Eligible Library Amount by an independent consultant (acceptable to the Agent) using methodology consistent with the initial valuation on or before December 31, 2000. Section 6. Financial Advisor. The Borrower covenants and agrees with the Agent and the Lenders that it shall have retained a financial advisor (acceptable to the Agent) to explore strategic options and opportunities available to the Borrower and its subsidiaries no later than September 15, 2000, it being understood that the Borrower's failure to retain such financial advisor by September 15, 2000 shall constitute an Event of Default under the Credit Agreement. Section 7. Representations and Warranties. Each Credit Party represents and warrants that: (a) after giving effect to this Amendment, the representations and warranties contained in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if such representations and warranties had been made 6 7 on and as of the date hereof (except to the extent that any such representations and warranties specifically relate to an earlier date); and (b) after giving effect to this Amendment, no Event of Default or Default will have occurred and be continuing on and as of the date hereof. Section 8. Further Assurances. At any time and from time to time, upon the Agent's request and at the sole expense of the Credit Parties, each Credit Party will promptly and duly execute and deliver any and all further instruments and documents and take such further action as the Agent reasonably deems necessary to effect the purposes of this Amendment. Section 9. Fundamental Documents. This Amendment is designated a Fundamental Document by the Agent. Section 10. Full Force and Effect. Except as expressly amended hereby, the Credit Agreement and the other Fundamental Documents shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Credit Agreement, the terms "Agreement", "this Agreement", "herein", "hereafter", "hereto", "hereof", and words of similar import, shall, unless the context otherwise requires, mean the Credit Agreement as amended by this Amendment. Section 11. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 12. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. Section 13. Expenses. The Borrower agrees to pay all out-of-pocket expenses incurred by the Agent in connection with the preparation, execution and delivery of this Amendment, including, but not limited to, the reasonable fees and disbursements of counsel for the Agent. Section 14. Headings. The headings of this Amendment are for the purposes of reference only and shall not affect the construction of or be taken into consideration in interpreting this Amendment. 7 8 IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first written above. BORROWER: THE KUSHNER-LOCKE COMPANY By: -------------------------------- Name: Title: GUARANTORS: KL PRODUCTIONS, INC. POST AND PRODUCTION SERVICES, INC. TWILIGHT ENTERTAINMENT, INC. KLF GUILD CO. KLTV DEVELOPMENT CO. KUSHNER-LOCKE INTERNATIONAL, INC. KL INTERACTIVE MEDIA, INC. DAYTON WAY PICTURES III, INC. By: -------------------------------- Name: Title: KLC/NEW CITY By its General Partner THE KUSHNER-LOCKE COMPANY By: -------------------------------- Name: Title: LENDERS: Executed in THE CHASE MANHATTAN BANK (formerly New York, New York known as Chemical Bank), as Agent By: -------------------------------- Name: Title: 8 9 NIB CAPITAL BANK N.V. (formerly known as De Nationale Investeringsbank N.V.) By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: COMERICA BANK - CALIFORNIA By: --------------------------------- Name: Title: FAR EAST NATIONAL BANK By: --------------------------------- Name: Title: 9 10 Schedule 6.1(g) Existing Negative Pick-Up and Shortfall Guarantee Obligations - ------------------------------------------------------------------------------- Item of Product Amount of Negative Pick-Up or Shortfall Guarantee - ------------------------------------------------------------------------------- Bone Daddy $1,500,000 - ------------------------------------------------------------------------------- Confessions of a Trickbaby $ 400,000 - ------------------------------------------------------------------------------- Picking up the Pieces $ 700,000 - ------------------------------------------------------------------------------- Ringmaster $ 400,000 - ------------------------------------------------------------------------------- Harvard Man $ 400,000 - ------------------------------------------------------------------------------- Total $3,400,000 - ------------------------------------------------------------------------------- 10 EX-23.1 5 v68115ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 The Board of Directors The Kushner-Locke Company: We consent to incorporation by reference in the registration statements (Nos. 333-72785, 333-80521, 333-40391, 333-10239 and 33-82942) on Form S-3 and (Nos. 333-79729, 333-63297, 33-45248 and 33-86768) on Form S-8 of our report dated December 15, 2000 related to the consolidated balance sheets of The Kushner-Locke Company and its subsidiaries at September 30, 2000 and 1999 and the related consolidated statements of operations and of cash flows and financial statement schedule for each of the years in the three-year period ended September 30, 2000, which report is included in the Annual Report on Form 10-K. PricewaterhouseCoopers LLP Century City, California December 21, 2000 EX-27 6 v68115ex27.txt FINACIAL DATA SCHEDULE
5 12-MOS SEP-30-2000 SEP-30-2000 14,024 0 29,810 4,446 0 0 6,801 1,750 151,200 0 0 0 0 71,923 (48,888) 151,200 59,640 59,640 47,623 47,623 50,175 6,068 8,411 (39,254) 0 (39,254) 0 0 0 (39,254) (2.84) (2.84)
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