<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1996 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, 90025
CALIFORNIA (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 445-1111
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
10% Convertible Subordinated Debentures, Series A due 2000
13 3/4% Convertible Subordinated Debentures, Series B due 2000
Common Stock Purchase Warrants
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 ___
There were 39,555,190 shares of outstanding Common Stock of the Registrant
as of May 10, 1996
------------------------
Total number of pages 21 Exhibit Index begins on page 21
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<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1995
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Condensed Consolidated Statements of Stockholders' Equity
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. OTHER INFORMATION
Items 1 through 4. Not Applicable
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: 10.52
10.53
10.54
10.55
(b) Reports on Form 8-K: None
2
<PAGE>
PART I
ITEM 1.
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
---------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash............................................................................ $ 3,060,000 $ 3,139,000
Restricted Cash................................................................. 2,420,000 1,162,000
Accounts receivable, net allowance for doubtful accounts........................ 18,484,000 7,864,000
Due from Affiliates............................................................. 233,000 309,000
Notes Receivable from August Entertainment Inc.................................. 657,000 676,000
Film costs, net of accumulated amortization..................................... 75,022,000 73,716,000
Property and equipment, at cost, net of accumulated depreciation and
amortization................................................................... 444,000 515,000
Other assets.................................................................... 1,864,000 1,571,000
---------------- --------------
$ 102,184,000 $ 88,952,000
---------------- --------------
---------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities........................................ $ 4,550,000 $ 3,245,000
Income taxes payable............................................................ -- --
Notes payables.................................................................. 31,690,000 28,398,000
Deferred film license fees...................................................... 5,041,000 2,753,000
Contractual obligations, principally participants' share payable and talent
residuals...................................................................... 4,421,000 995,000
Production advances............................................................. 18,273,000 16,609,000
Convertible Subordinated Debentures net of amortized issuance costs............. 16,110,000 17,745,000
---------------- --------------
80,085,000 69,745,000
---------------- --------------
Stockholders' Equity:
Common stock, no par value. Authorized 80,000,000 shares: issued and
outstanding 37,437,553 shares at March 31, 1996 and 35,466,599 shares at
September 30, 1995........................................................... 25,089,000 23,337,000
Accumulated Deficit........................................................... (2,990,000) (4,130,000)
---------------- --------------
22,099,000 19,207,000
---------------- --------------
$ 102,184,000 $ 88,952,000
---------------- --------------
---------------- --------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating revenues................................ $ 13,230,000 $ 6,176,000 $ 29,337,000 $ 11,614,000
Costs related to operating revenues............... 11,052,000 4,871,000 24,365,000 9,168,000
Selling, general and administrative expenses...... 1,072,000 984,000 1,968,000 1,977,000
-------------- -------------- -------------- --------------
Earnings from operations........................ 1,106,000 321,000 3,004,000 469,000
Interest Income................................... 6,000 70,000 60,000 136,000
Interest Expense.................................. (975,000) (833,000) (1,904,000) (1,592,000)
-------------- -------------- -------------- --------------
137,000 (442,000) 1,160,000 (987,000)
Provision for Income Taxes........................ 9,000 16,000 20,000 16,000
-------------- -------------- -------------- --------------
Net Earnings/(Loss)............................. $ 128,000 $ (458,000) $ 1,140,000 $ (1,003,000)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Gain/(Loss) per common and common equivalent
share:
Net Earnings/(Loss)............................. $ .003 $ (0.01) $ 0.03 $ (0.03)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average number of common and common
equivalent shares outstanding.................... 36,337,000 31,973,000 35,961,000 31,159,000
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
--------------------------------
1995
1996 ---------------
---------------
(UNAUDITED)
<S> <C> <C>
Cash Flow from operating activities:
Net Earnings/(Loss).......................................................... $ 1,140,000 $ (1,003,000)
Adjustments to reconcile net earnings to net cash used by operating
activities:
Increase in restricted cash................................................ (1,258,000) --
Amortization of film costs................................................. 24,195,000 9,088,000
Depreciation and amortization.............................................. 110,000 120,000
Amortization of capitalized issuance costs and warrants.................... 340,000 210,000
Accounts receivable, net................................................... (10,620,000) (1,042,000)
Other receivables.......................................................... 95,000 (712,000)
Increase in film costs..................................................... (25,501,000) (18,805,000)
Accounts payable and accrued liabilities................................... 1,305,000 (100,000)
Deferred film license fees................................................. 2,288,000 453,000
Contractual obligations.................................................... 3,426,000 94,000
Production advances........................................................ 1,664,000 (82,000)
--------------- ---------------
Net cash provided (used) by Operating Activities......................... (2,816,000) (11,779,000)
Cash flows from investing activites:
Increase in property and equipment, net...................................... (38,000) (204,000)
Decrease (increase) in other assets.......................................... (293,000) (3,000)
--------------- ---------------
Net cash (used) by investing activities.................................. (331,000) (207,000)
Cash flows from financing activities:
Increase in notes payable.................................................... 3,292,000 7,770,000
Repayment of notes payable................................................... -- (2,600,000)
Repayment of debentures...................................................... -- (60,000)
Other........................................................................ (224,000) --
--------------- ---------------
Net cash provided by financing activities................................ 3,068,000 5,110,000
Net increase in cash......................................................... (79,000) (6,876,000)
Cash at beginning of period.................................................. 3,139,000 15,681,000
--------------- ---------------
Cash at end of period........................................................ $ 3,060,000 $ 8,805,000
--------------- ---------------
--------------- ---------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
-- 1 During the six months ended March 31, 1995, $650,000 of convertible
subordinated debentures before unamortized capitalized issuance costs
of $69,000 were converted into 666,666 shares of Common Stock.
-- 2 During the six months ended March 31, 1996, $1,714,000 of convertible
subordinated debentures before unamortized capitalized issuance costs
of $152,000 were converted into 1,757,947 shares of Common Stock.
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-----------------------------------------------------------------
NUMBER OF CAPITAL ACCUMULATED
SHARES STOCK DEFICIT TOTAL
------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995................ 35,466,598 $ 23,337,000 $ (4,130,000) $ 19,207,000
------------- -------------- ------------------ --------------
Conversions of convertible debentures........ 213,008 190,000 190,000
Net earnings................................. -- -- 1,012,000 1,012,000
------------- -------------- ------------------ --------------
Balance at December 31, 1995............... 35,679,606 $ 23,527,000 $ (3,118,000) $ 20,409,000
Conversions of convertible debentures........ 1,757,947 1,562,000 1,562,000
Net earnings................................. -- -- 128,000 128,000
------------- -------------- ------------------ --------------
Balance at March 31, 1996.................. 37,437,553 $ 25,089,000 $ (2,990,000) $ 22,099,000
------------- -------------- ------------------ --------------
------------- -------------- ------------------ --------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
The Kushner-Locke Company (the "Company") is principally engaged in the
development, production and distribution of feature films, direct-to-video
films, television series, movies-for-television, mini-series and animated
programming.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of The Kushner-Locke Company, its subsidiaries and certain less than
wholly-owned entities where the Company has control. All material intercompany
balances and transactions have been eliminated.
These unaudited consolidated financial statements and notes thereto have
been condensed and, therefore, do not contain certain information included in
the Company's annual consolidated financial statements and notes thereto. The
unaudited condensed consolidated financial statements should be read in
conjunction with the Company's annual consolidated financial statements and
notes thereto.
The unaudited condensed consolidated financial statements reflect, in the
opinion of management, all adjustments, all of which are of a normal recurring
nature, necessary to present fairly the financial position of the Company as of
March 31, 1996, the results of its operations for the three and six month
periods ended March 31, 1996 and 1995, and its cash flows for the six month
period ended March 31, 1996 and 1995. Interim results are not necessarily
indicative of results to be expected for a full fiscal year.
Certain reclassifications have been made to conform prior year balances with
the current presentation.
RESTRICTED CASH
As of March 31, 1996, the Company had $2,420,000 in restricted cash related
to advances received by the Company from film producers for the acquisition of
distribution rights. These cash advances were being held in escrow accounts as
collateral by financial institutions providing production loans to those
producers.
INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This
statement supersedes SFAS No. 96, "Accounting for Income Taxes." Under the asset
and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statements carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operating results in the period encompassing the
enactment date.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common and common equivalent share is based upon the
weighted average number of shares of common stock outstanding plus common
equivalent shares consisting of dilutive outstanding warrants and stock options.
The weighted average number of common and common equivalent shares outstanding
for the calculation of primary earnings per share was 36,337,000 and 31,973,000
for the quarters ended March 31, 1996 and 1995, respectively, 35,961,000 and
31,159,000 for the six months ending March 31, 1996 and 1995, respectively. The
inclusion of the additional
7
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shares, assuming the conversion of the Company's convertible subordinated
debentures, would have been anti-dilutive for the three and the six month
periods ended March 31, 1996 and March 31, 1995, respectively.
(2) FILM COSTS
Film costs consist of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
-------------- --------------
<S> <C> <C>
In process or development.............................................. $ 36,467,000 $ 42,115,000
Released, principally television productions net of accumulated
amortization.......................................................... 38,555,000 31,601,000
-------------- --------------
$ 75,022,000 $ 73,716,000
-------------- --------------
-------------- --------------
</TABLE>
(3) NOTES PAYABLE
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
-------------- --------------
<S> <C> <C>
Note payable to bank, revolving credit facility secured by
substantially all Company assets, interest at prime (8.25% at May 10,
1996) plus 1.25%, outstanding principal balance due December 31,
1996.................................................................. $ 15,000,000 $ 14,804,000
Notes payable to banks and/or financial institutions consisting of six
production loans secured by certain film rights held by producers,
priced at different rates for each loan; approximately $3,903,000 due
before July 1996, $1,801,000 due before August 1996 and $10,986,000
due before October 1996............................................... 16,690,000 13,594,000
-------------- --------------
$ 31,690,000 $ 28,398,000
-------------- --------------
-------------- --------------
</TABLE>
8
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
-------------- --------------
<S> <C> <C>
Series A Convertible Subordinated Debentures due December 15, 2000, bearing
interest at 10% per annum payable June 15 and December 15, net of unamortized
capitalized issuance costs and warrants of $11,000 and $13,000, respectively.... $ 76,000 $ 84,000
-------------- --------------
Series B Convertible Subordinated Debentures due December 15, 2000, bearing
interest at 13 3/4% per annum payable monthly, net of unamortized capitalized
issuance costs of $320,000 and $354,000, respectively........................... 2,955,000 2,972,000
-------------- --------------
Convertible Subordinated Debentures due December 15, 2000, bearing interest at 8%
per annum payable February 1 and August 1, net of unamortized capitalized
issuance costs of $791,000 and $1,058,000, respectively......................... 8,482,000 10,129,000
-------------- --------------
Convertible Subordinated Debentures due July 1, 2002, bearing interest at 9% per
annum payable January 1 and July 1, net of unamortized capitalized issuance
costs of $453,000 and $490,000, respectively.................................... 4,597,000 4,560,000
-------------- --------------
$ 16,110,000 $ 17,745,000
-------------- --------------
-------------- --------------
</TABLE>
SERIES A DEBENTURES
As of March 31, 1996, the Company had outstanding $87,000 principal amount
of Series A Debentures. The Debentures are recorded net of unamortized
underwriting discounts, expenses associated with the offering and warrants
totaling $11,000 which are amortized using the interest method to interest
expense over the term of the Debentures. Approximately $2,000 of capitalized
issuance costs have been amortized to interest expense for the six months ended
March 31, 1996.
SERIES B DEBENTURES
As of March 31, 1996, the Company had outstanding $3,275,000 principal
amount of Series B Debentures due 2000. The Debentures are recorded net of
unamortized underwriting discounts and expenses associated with the offering
totaling $320,000, which are amortized using the interest method to interest
expense over the term of the Debentures. Approximately $17,000 of capitalized
issuance costs had been amortized as interest expense for the six months ended
March 31, 1996.
8% DEBENTURES
As of March 31, 1996, the Company had outstanding $9,273,000 principal
amount of 8% Debentures. The Debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$791,000 which are amortized using the interest method to interest expense over
the term of the debentures. Approximately $46,000 of capitalized issuance costs
had been amortized as interest expense for the six months ended March 31, 1996.
9
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
9% DEBENTURES
As of March 31, 1996, the Company had outstanding $5,050,000 principal
amount of 9% Debentures. The Debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$453,000, which are amortized using the interest method to interest expense over
the term of the Debentures. Approximately $18,000 of capitalized issuance costs
had been amortized as interest expense for the six months ended March 31, 1996.
(5) INCOME TAXES
Income taxes for the six month periods ended March 31, 1996 and 1995 were
computed using the effective income tax rate estimated to be applicable for the
full fiscal year, which is subject to ongoing review and evaluation by
management. Management believes that all taxable income for the fiscal year will
be offset by a deferred tax asset which will keep the effective federal tax rate
at approximately 0%.
(6) CONTINGENCIES
The Company is involved in certain legal proceedings and claims arising out
of the normal conduct of its business. Reference is made to the Company's annual
report on Form 10-K for the fiscal year ended September 30, 1995 for a
description of certain legal proceedings. Management of the Company believes
that the ultimate resolution of these matters will not have a material adverse
effect upon the Company's financial condition.
In its normal course of business as a entertainment distributor, the Company
makes contractual down payments for the acquisition of distribution rights upon
signature of documentation. This initial advance for rights ranges for 10% to
30% of the total purchase price. The balance of the payment is generally due
upon the complete delivery by third party producers of acceptable film or video
materials and proof of rights held and insurance policies that may be required
for the Company to begin exploitation of the product. As of March 31, 1996 the
Company had made contractual agreements for an aggregate of approximately
$1,238,000 in payments due should those third party producers complete delivery
to the Company. If such third parties use the Company's distribution agreement
as collateral for a production loan, then the Company may be obligated to make
such payments to financial institutions or others instead of such third party
producers. These obligations have originated from the acquisition personnel in
the Company's cable joint venture known as KLC/New City Tele-Ventures. These
amounts are payable over the next twelve months.
10
<PAGE>
PART I
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues are currently derived primarily from the production
or the acquisition of distribution rights of films released in the U.S. by
studios, pay cable, basic cable, and videocassette companies; and from the
development, production and distribution of television programming for the major
U.S. television networks, basic and pay cable television and first-run
syndication; as well as from the licensing of all rights to the films and
television programs in international territories. While the Company generally
finances all or a substantial portion of the budgeted production costs of its
programming through domestic and international licensing and other arrangements,
the Company typically retains rights in its programming which may be exploited
in future periods or in additional territories. In April 1993, the Company
established a feature film operation to produce and distribute low and medium
budget films for theatrical and/or home video or cable release. The Company also
produces a limited number of higher-budget theatrical films to the extent the
Company is able to obtain an acceptable domestic studio to release the film
theatrically in the U.S.
The Company's revenues and results of operations are significantly affected
by accounting policies required for the industry and management's estimates of
the ultimate realizable value of its films and programs. Production advances
received prior to delivery or completion of a program are treated as deferred
revenues and are recorded as either production advances or deferred license
fees. Production advances are generally recognized as revenue on the date the
program is delivered or available for delivery. Deferred license fees are
recognized as revenue on the date of availability and/or delivery of the item of
product.
The Company generally capitalizes all costs incurred to produce a film,
including the interest expense funded under production loans. Such costs also
include the actual direct costs of production, certain exploitation costs and
production overhead. Capitalized exploitation or distribution costs include
those costs that clearly benefit future periods such as film prints and
prerelease and early release advertising that is expected to benefit the film in
future markets. These costs, as well as participation and talent residuals, are
amortized each period on an individual film or television program basis in the
ratio that the current period's gross revenues from all sources for the program
bear to management's estimate of anticipated total gross revenues for such film
or program from all sources. In the event management reduces its estimates of
the future gross revenues associated with a particular item of product, which
had been expected to yield greater future proceeds, a significant write-down and
a corresponding decrease in the Company's earnings for the quarter and fiscal
year end in which such write-down is taken could result.
Gross profits for any period are a function in part of the number of
programs delivered in that period and the recognition of costs in that period.
Because initial licensing revenues and related costs generally are recognized
either when the program has been delivered or is available for delivery,
significant fluctuations in revenues and results of operations may occur from
period to period. Thus, a change in the amount of entertainment product
available for delivery from period to period have materially affected a given
period's revenues and results of operations and year-to-year results may not be
comparable. The continuing shift of the Company's product mix during this fiscal
year may further affect the Company's quarter to quarter or year to year results
of operations as particular products may be amortized differently as determined
by length of product life cycle and the number of related revenue sources.
11
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND 1995
The Company's operating revenues for the second quarter ended March 31, 1996
were $13,230,000, an increase of $7,054,000, or 142%, from $6,176,000 from the
prior fiscal year's second quarter ended March 31, 1995. This increase was due
primarily to the timing of delivery and/or availability of films and television
programs. The Company has shifted its current product mix towards a greater
percentage of feature films due to opportunities available to the Company.
The Company recognized approximately $3,773,000 from the delivery and/or
availability of (a) the feature film FREEWAY executive produced by Oliver Stone
and starring Kiefer Sutherland, Reese Witherspoon and Brooke Shields (b) NAKED
SOULS starring Pamela Anderson and Dean Stockwell and David Warner (c) SERPENT'S
LAIR starring Jeff Fahey, (d) THE GRAVE starring Gabrielle Anwar, Eric Roberts
and Craig Sheffer. The Company also recognized $2,875,000 of revenues during the
second quarter of fiscal 1996 from the delivery and/or availability of the CBS
network movie "A HUSBAND, A WIFE AND A LOVER" starring Jay Thomas and Judith
Light and $1,054,000 from continuing licenses of completed product from the
Company's library to domestic cable channel operators, and the balance from
delivery and/or availability of various product from the Companies library.
Operating revenues for the second quarter of fiscal 1995 were primarily
attributable to the delivery and/or availability of a movie for CBS entitled
"Lady Killer," starring Judith Light and Jack Wagner, and three direct-to-Video
titles: "Last Gasp" starring Robert Patrick for Warnervision and "Planet of the
Dino Knights" and "The Human Pets," two fantasy adventure stories for Paramount
Pictures Corporation, which were the first in a series of six films to be known
under the name "Josh Kirby: Time Warrior." Continuing sales of licenses for
completed product from the Company's library of titles to international
distributors accounted for the majority of remaining revenues for the period.
In various stages of production for the Companys slate of projects currently
scheduled for distribution during the balance of the fiscal year are (a) the
major theatrical feature film THE ADVENTURES OF PINOCCHIO starring Martin Landau
and Jonathan Taylor Thomas, (b) two animated feature films for Buena Vista Home
Video, a division of The Walt Disney Company, that are sequels to the successful
direct-to-video title THE BRAVE LITTLE TOASTER, (c) the feature film WAITING FOR
THE MAN starring Jeff Fahey and Rae Dawn Chong, (d) the feature film THE LAST
TIME I COMMITTED SUICIDE starring Keanu Reaves, (e) three television movies, two
for CBS called PRINCESS IN LOVE and EVERY WOMAN'S DREAM, starring Kim Cattrall
and Jeff Fahey and, one for ABC entitled ECHO starring Jack Wagner, (f) a pilot
for ABC called THE GUN starring Peter Horton and Rosanna Arquette, and (g) an
infomercial on the subject of Christian music through the Company's partnership
called TVFirst. Currently in pre-production and scheduled for principal
photography starting in the remainder of this fiscal year are a television movie
for NBC JACK REED V starring Brian Denehy, and five direct-to-video feature
films for Paramount Home Video entitled KID MIDAS, JOHNNY MYSTO: BOY WIZARD,
LITTLE GHOST, GULLIVER: LOST IN LILLIPUT, AND GENIE. In addition, the Company
has acquired domestic cable rights for a package of over 10 films in addition to
the 50 titles previously acquired, the majority of which are scheduled to be
released during fiscal 1996, for distribution through a joint venture of the
Company called KLC/New City Tele-Ventures. During the second quarter of 1996,
approximately $13,451,000 was expended for new projects. Film costs in process
or development at March 31, 1996 increased to $36,467,000 from $7,547,000 at
March 31, 1995.
Costs relating to operating revenues were $11,052,000 during the second
quarter of fiscal 1996 as compared to $4,871,000 during the second quarter of
fiscal 1995. As a percentage of operating revenues, costs relating to operating
revenues were approximately 84% for the second quarter of fiscal 1996 compared
to approximately 79% for the second quarter of fiscal 1995. The increased costs
in the most recent period reflect a weighting of the product mix toward titles
which, in general, are amortized more rapidly than titles determined to have a
longer product life cycle and a greater number of related revenue sources.
12
<PAGE>
Selling, general and administrative expenses increased to $1,072,000 in the
second quarter of fiscal 1996 from $984,000 in the second quarter of fiscal
1995. The increase resulted from higher level of operating activity including
increased staffing and personnel, primarily in the feature film and
international distribution divisions, and the Company's funding of overhead and
development costs associated with joint ventures or partnerships related to
interactive/multimedia applications, cable distribution and infomercial
production.
Overhead for the second quarter of fiscal 1996 did not include the 8%
aggregate pre-tax profit performance bonus (in the maximum amount of $200,000
each per year) accruing to Messrs. Locke and Kushner under their employment
agreements as amended in March 1994. Subject to approval by the Board of
Directors, Messrs. Locke and Kushner have agreed to waive their pre-tax profit
performance bonus in the event the Company's annual net income in fiscal 1996 is
less than $1,250,000 and will receive such bonuses through an increased pre-tax
profit percentage if the Company's net income for fiscal 1996 exceeds
$1,250,000; but in no event shall they be entitled to receive a higher
performance bonus than they would have received under the original employment
agreements.
Interest expense for the second quarter ended March 31, 1996 was $975,000 as
compared to $833,000 for the second quarter ended March 31, 1995. The increase
was due to higher average borrowings under the Company's line of credit
primarily associated with increased production and acquisition financing of
non-network movies. Total notes payable increased to $31,690,000 at March 31,
1996 from $28,398,000 at September 30, 1995.
The Company's estimated effective income tax rate was approximately 7% for
the second quarter ended March 31, 1996 compared to an estimated effective
income tax expense of approximately 0% for the year ended September 30, 1995.
The $9,000 additional tax expense for the three month period in second quarter
of fiscal 1996 consisted of minimum state taxes related to the number of active
subsidiary companies.
The Company reported net earnings of $128,000, or $.003 per share, for the
second quarter ended March 31, 1996 as compared to a net loss of $(458,000), or
$(.01) per share, for the second quarter ended March 31, 1995. Weighted number
of common shares for the compared second quarters were 36,337,000 in 1996 and
31,973,000 in 1995. The earnings in second quarter of fiscal 1996 resulted
primarily from the Company completing a portion of its film and television
projects in process and recognition of revenues on existing contracts receivable
("presales") made to third parties licensing the rights to distribute those
projects in certain media and territories. The losses in the second quarter of
fiscal 1995 resulted primarily from the delivery and or availability of fewer
titles and certain expenses related to the expansion of the Company's feature
film and international distribution divisions.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $5,480,000 (including $2,420,000 of
restricted cash being used as collateral for certain production loans) at March
31, 1996 from $4,301,000 (including $1,162,000 of restricted cash) at September
30, 1995 primarily from additional collections from foreign presales. At March
31, 1996, the Company had net negative liquid assets of approximately
$(11,386,000) consisting of cash and cash equivalents, accounts receivable and
amounts due from affiliates less accounts payable and accrued liabilities,
short-term production loans and the $15,000,000 current portion of the Company's
existing line of credit which is due to mature on December 31, 1996.
The Company's production and distribution operations are capital intensive.
The Company has funded its working capital requirements through receipt of third
party domestic license payments and international licensing, as well as other
operating revenues, and proceeds from debt and equity financing, and has relied
upon its line of credit and transactional production loans to provide bridge
production financing prior to receipt of license fees. The Company funds
production and acquisition costs out of its working capital, including the line
of credit, and through certain pre-sale of rights in
13
<PAGE>
international markets. In addition, the expansion of the Company's international
distribution business and the establishment of a feature film division have
significantly increased the Company's working capital requirements and use of
related production loans.
The Company experienced net negative cash flows from operating activities
(resulting principally from the Company's significant expansion of production)
of $(2,816,000) during the six months ended March 31, 1996, which was partially
offset by net cash of $3,068,000 provided by financing activities from
production loans and slightly greater usage of the Company's revolving line of
credit up to the maximum amount of credit available. As a result primarily of
the foregoing factors, net unrestricted cash decreased during the six month
period by $79,000 to $3,060,000 on March 31, 1996. To the extent that the
Company expands production and distribution activities and increases its debt
service burdens, it will continue to experience net negative cash flows from
operating activities, pending receipt of licensing revenues, other revenues and
sales from its library.
CREDIT FACILITY
The Company's current line of credit with Imperial Bank provides for
borrowings up to $15,000,000 based on specified percentages of eligible domestic
and international accounts and contracts receivable and net film costs balances
through December 31, 1996. The line of credit is secured by substantially all of
the Company's assets and bears interest at an annual rate of prime (8.25% as of
May 10, 1996) plus 1.25%. The Company is required to pay a commitment fee of .5%
per annum of the unused portion of the credit line. As of March 31, 1996, the
Company had drawn down $15,000,000 under this facility and had no further
availability.
The Imperial credit agreement, as amended and restated in August 1993, had
an original maturity date of June 2, 1995. The original maturity date was
extended in March 1995 to September 30, 1995, then subsequently extended in
September 1995 to December 29, 1995 and further extended in December 1995 to
January 31, 1996. On January 12, 1996, Imperial Bank provided to the Company its
commitment to extend the existing credit line through December 31, 1996 and the
Company paid a loan fee to the bank in connection with such commitment and
agreed to issue warrants to purchase 500,000 shares of common stock to the bank
at an exercise price of $.084 per share. The related amendment to the existing
credit agreement became effective on January 31, 1996 upon payment of the
balance of the loan fee. The third amendment to the Amended and Restated Credit
Agreement eliminated certain existing financial covenants as of September 30,
1995 and substituted revised quarterly net worth and net income requirements and
set a minimum liquidity level.
The outstanding credit agreement contains various covenants in addition to
those mentioned above to which the Company must adhere. These covenants, among
other things, include limitations on additional indebtedness, liens,
investments, disposition of assets, guarantees, deficit financing, affiliate
transactions and the use of proceeds and prohibit payment of dividends and
prepayment of subordinated debt. The Company has obtained all necessary waivers
related to the Credit Agreement through the second quarter of fiscal 1996. The
outstanding credit agreement also contains a provision permitting the bank to
declare an event of default if the services of either of Messrs. Locke or
Kushner are not available to the Company unless a replacement acceptable to the
bank is named.
The Company thereafter commenced discussions with various commercial banks
concerning arranging or participating in a multi-year increased syndicated
credit facility to seek to amend or replace the existing facility by May 31,
1996. (See description of the Chemical Bank facility below.) If such facility is
not in place by such time, as required by the Amended and Restated Credit
Agreement, the existing Imperial Bank line of credit will be reduced in size
from $15,000,000 to $12,500,000 during the period from May 31, 1996 to October
31, 1996 and will mature December 31, 1996.
CHEMICAL BANK
On April 14, 1996, the Company received a commitment letter from Chemical
Bank and Chase Securities Inc. (collectively, "Chase") for a $40 million
syndicated line of credit. Such line of credit will provide for borrowings by
the Company based on specified percentages of domestic and international
14
<PAGE>
accounts and contracts receivable and a specified percentage of the Company's
book value of unamortized library film costs (as adjusted). In addition, the
commitment letter contemplates that the Company will from time to time utilize a
production tranche in its line of credit for the Company's film and television
productions. Such tranche would allow the Company to borrow up to 50% of the
production deficit after accounting for specified percentages of pre-sales,
licensing fees and similar revenues from third parties and a required Company
equity participation. The Company anticipates closing the new credit facility
with Chase prior to May 31, 1996, but there is no assurance that such facility
will be completed prior to such time. Either of the parties may determine, for
various reason, including changes in market conditions, changes in the results
or operations of the Company, changes in general economic conditions or changes
in the prospects of the Company, not to proceed with the new credit line.
Accordingly, there is no assurance that the Company will be able to finalize
such arrangement and enter into a credit agreement with Chase and, if a credit
agreement with Chase is entered into by the Company, when such agreement will be
finalized and what terms such credit agreement will contain.
SECURITIES OFFERINGS
From December 1990 through April 1991, the Company sold an aggregate of
$5,700,000 principal amount of Series A Debentures and an aggregate of
$6,000,000 principal amount of Series B Debentures. In connection with the
issuance of certain of the Series A Debentures, the Company issued warrants to
purchase an aggregate of 2,100,000 shares of Common Stock at an exercise price
of $2.00 per share. In November 1995, the Company elected to extend the
expiration date of such warrants from March 20, 1996 to March 20, 1997. As of
March 31, 1996, approximately $87,000 principal amount of Series A Debentures
and $3,275,000 of Series B Debentures were outstanding. The Series A Debentures
are convertible into shares of Common Stock at a rate of approximately $1.27 per
share and the Series B Debentures into shares of Common Stock at a rate of
approximately $1.54 per share. The reduction in Series A and Series B Debentures
has resulted primarily from conversions to Common Stock. The Company currently
has the right to redeem the Series A Debentures at redemption prices at 103% of
par after September 30, 1995 and declining to par after September 30, 1997. The
indentures under which the Company's outstanding debentures described above were
issued contain various covenants to which the Company must adhere. These
covenants, among other things, also impose certain limitations on additional
indebtedness and dividend payments by the Company.
In November 1992, the Company completed an offering of 8,050,000 shares of
its common stock for which the Company received net proceeds of approximately
$6,640,000.
During March and April 1994, the Company sold $16,437,000 principal amount
of 8% Convertible Subordinated Debentures due 2000. In connection with the
issuance of the 8% Debentures, the Company issued warrants to purchase up to 10%
of the aggregate principal amount of Debentures sold at an exercise price equal
to 120% of the principal amount of the Debentures. The 8% Debentures are
convertible into shares of common stock at a rate of $.975 per share, subject to
customary anti-dilutive provisions and provisions in the event of certain
payment defaults. The Company will have the right to redeem the 8% Debentures at
redemption prices commencing at 102.7% of par on or after February 1, 1998 and
declining to par on or after February 1, 2000. The Debentures are subordinated
in right of payment to all Senior Indebtedness (as defined) of the Company and
rank pari passu with the Company's Series A and Series B Debentures. The fiscal
agency agreement, under which the Company's 8% Debentures were issued, contains
various covenants to which the Company must adhere.
During July 1994, the Company sold $5,050,000 principal amount of 9%
Convertible Subordinated Debentures due 2002. In connection with the issuance of
the 9% Debentures, the Company issued warrants to purchase up to 9% of the
aggregate principal amount of Debentures sold at an exercise price equal to 120%
of the principal amount of the Debentures. The 9% Debentures are convertible
into shares of common stock at a rate of $1.58 per share, subject to customary
anti-dilutive provisions and provisions in the event of certain payment
defaults. The Company has the right to redeem the 9% Debentures at redemption
prices commencing at 103% of par on or after July 1, 1998
15
<PAGE>
and declining to par on or after July 1, 2000. The Debentures are subordinated
in right of payment to all Senior Indebtedness (as defined) of the Company and
rank pari passu with the Company's Series A, Series B and 8% Debentures. The
fiscal agency agreement, under which the Company's 9% Debentures were issued,
contains various covenants to which the Company must adhere.
In September 1994, the Company filed a registration statement covering an
aggregate of 21,388,064 shares of common stock comprising the shares of common
stock issuable upon conversion of the 8% Convertible Subordinated Debentures and
the 9% Convertible Subordinated Debentures and certain warrants issued to
underwriters. Since the end of the fiscal year (September 30, 1995), primarily
as a result of the conversion of the 8% and 9% Debentures, the number of
outstanding shares of common stock has increased from 35,466,598 to 37,437,553
as of March 31, 1996.
In May 1996, the Company issued $1,500,000 of short-term notes in a private
placement. See "Part II -- Other Information."
PRODUCTION/DISTRIBUTION LOANS
The Company's other short term borrowings, totaling $16,689,455 as of March
31, 1996, consist of production loans from Newmarket Capital Group L.P.
("Newmarket"), Banque Paribas (Los Angeles Agency) ("Paribas") and Imperial Bank
("Imperial") to consolidated production entities. The Kushner-Locke Company
provides limited corporate guarantees for a portion of the Newmarket and Paribas
loans which are callable in the event that the production companies' loan
amounts (including a reserve for fees, interest and financing costs) are not
adequately collateralized with acceptable contracts receivable from third party
domestic and/or foreign sub-distributors by certain dates or by the maturity
date of the loan. Deposits on the purchase price paid by these sub-distributors
are held as restricted cash collateral by the Lenders. Amounts outstanding
(other than the amounts covered by the limited corporate guarantees) are
recourse only to the film assets held by the production companies.
The table below shows production loans as of March 31, 1996. Corporate
guarantees have been reduced as of March 31, 1996 due to the Company reaching
certain sales milestones as allowed under the Newmarket loans. Three of the
production loans were scheduled to mature before April 1996. The Company
requested, and Newmarket agreed, to extend the maturity dates by approximately
90 days on the production loans for SERPENT'S LAIR, THE GRAVE and WHOLE WIDE
WORLD for customary delays in the process of delivering and collecting cash from
foreign territories.
<TABLE>
<CAPTION>
KUSHNER LOCKE
LOAN AMOUNT WEIGHTED CORPORATE
FILM LENDER AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY
- ----------------------------- -------------- -------------- -------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
The Legend of Pinocchio Newmarket $ 12,500,000 $ 10,976,701 8.75% $ 2,175,000 9/30/96
Serpents Lair Newmarket 1,005,000 654,530 9.25% 345,000 6/30/96
The Grave Newmarket 2,100,000 1,603,228 10.25% 300,000 6/30/96
Whole Wide World Newmarket 1,550,000 1,109,195 8.00% 500,000 6/30/96
Freeway Paribas 1,983,333 1,800,802 7.00% 961,667 7/5/96
Time Warriors Imperial 1,950,000 545,000 9.60% 545,000* 5/1/96
-------------- -------------- -------------
$ 21,088,333 $ 16,689,456 $ 4,826,667
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
- ------------------------
*The TIME WARRIORS loan was paid off as of May 15, 1996.
In October 1994, The Kushner-Locke Company obtained a production loan in the
amount of $1,950,000 from Imperial Bank to cover a portion of the budget of the
JOSH KIRBY: TIME WARRIORS series. The Imperial loan bears interest at Prime
(8.25% as of May 10, 1996) plus 3% payable monthly plus loan fees of $97,500
plus a net profit participation. The loan is secured solely by the rights, title
and assets related to the film series which has been completely and is in the
process of being delivered
16
<PAGE>
to domestic and international sub-distributors. Collection of cash from sales
has been reducing the loan balance. At March 31, 1996, the outstanding loan
balance was $545,00 under the TIME WARRIOR production loan. The loan matures on
May 1, 1996 but was paid off as of May 15, 1996.
The Company entered into a long form agreement dated as of February 6, 1995
with Savoy Pictures, Inc. ("Savoy") relating to the development, production,
financing and distribution of a live-action feature-length theatrical motion
picture currently titled THE ADVENTURES OF PINOCCHIO. The film commenced
principal photography in July 1995. The film will be distributed in foreign
territories by the Company. The film will be distributed domestically by New
Line Pictures (a subsidiary of Turner Entertainment Co.) which has acquired the
domestic and 50% of certain ancillary rights from Savoy. Pursuant to the
February 6, 1995 letter agreement, the Company licensed those domestic and
ancillary rights to Savoy in exchange for Savoy funding 50% of the budget to the
production entity up to $25,000,000 (which budget has been subsequently
increased to approximately $28,450,000 of which the majority of such increase
has been financed by Savoy in exchange for certain profit participations). In
order to fund the Company's up to $12,850,000 share of the budgeted negative
costs, the Company has assisted the film's production company, a consolidated
entity, in obtaining loan documentation from Newmarket Capital Group L.P.
("Newmarket") which agreed to provide for financing in the amount of 50% of the
film's original budget up to $12,500,000, a portion of which is reserved to pay
the lender's financing fees and costs. The loan bears interest at LIBOR plus 2%
and fees were determined on a sliding scale related to the amount of acceptable
contracts receivable at the time of initial funding. As of March 31, 1996
$2,175,000 of the obligations of the production company to Newmarket under the
loan facility, other than the portion of the loan covered by more than
$13,000,000 of foreign presales, was guaranteed by The Kushner-Locke Company.
There is no assurance that THE ADVENTURES OF PINOCCHIO, which represents the
Company's biggest budget theatrical motion picture to date, will be successful.
The Company has obtained completion bond insurance to guaranty that the film
will be completed and delivered to the technical specifications of Savoy (as
assigned to New Line Pictures) and international sub-distributors. New Line
Pictures has agreed to accept the technical specifications ordered by Savoy as
its delivery requirements. The Company's ability to complete this project is
materially dependent upon both funding by Savoy (against domestic distribution
rights it licensed) and by Newmarket (against the Company's foreign pre-sales
and remaining foreign rights).
In May and June 1995 the Company, in its role as world wide distributor,
agreed to guaranty a portion of two production loans to film producers, which
are consolidated entities, from Newmarket with respect to the feature films
SERPENT'S LAIR and THE GRAVE. The loans of $1,005,000 and $2,100,000 each bear
interest at an annual rate of Prime (8.25% as of May 10, 1996) plus 1% on the
first $500,000 advanced under the loan, then pricing options are at either (a)
Prime plus 1% or (b) LIBOR plus 3% on the remaining loan balance through
February 1, 1996 when the loans have a pricing increase to Prime + 3% through
the maturity date of such loans, plus loan fees of $60,000 per loan, plus a net
profit participation. The loans are secured solely by the rights, title and
assets of the production companies related to those films. The loans mature on
June 30, 1996. The Kushner-Locke Company's corporate guaranty is reducible by
substitution of contracts receivable from sub-distributors licensing rights to
these films in certain media and territories. Milestone dates for aggregate
acceptable contracts receivable were set by Newmarket within the loan
documentation. In September and December 1995, Newmarket granted waivers to the
borrower for not reaching these milestones and amended its Loan and Security
Agreements accordingly. At March 31, 1996, the outstanding balance on The
Kushner-Locke Company's corporate guaranty of principal and interest for
SERPENT'S LAIR was reduced to $345,000 and for THE GRAVE was reduced to $300,000
as a result of reaching certain acceptable sales levels.
In August 1995 the Company, in its role as world wide distributor, agreed to
guaranty a portion of two other production loans to film producers, which are
consolidated entities, provided by Newmarket and Paribas, with respect to the
films WHOLE WIDE WORLD and FREEWAY. The $1,550,000 loan from Newmarket for WHOLE
WIDE WORLD bears interest at rate of Prime (8.25% as of May 10, 1996) plus 1%
17
<PAGE>
on the first $500,000 advanced under the loan, then pricing options are at
either (a) Prime plus 1% or (b) LIBOR plus 3% on the remaining loan balance
through February 1, 1996 when the loan has a pricing increase to Prime + 3%
through the maturity date of June 30, 1996, plus loan fees of $60,000, plus a
net profit participation. The Kushner-Locke Company's corporate guaranty is
reducible by the substitution of acceptable contracts receivable. Milestone
dates for aggregate acceptable contracts receivable were set by Newmarket within
the loan documentation. In September 1995 and March 31 1996, Newmarket granted
waivers to the Borrower for not reaching these milestones and amended its Loan
and Security Agreement accordingly. As of March 31, 1996, The Kushner-Locke
Company's outstanding corporate guaranty of principal for WHOLE WIDE WORLD was
$500,000 and Newmarket required that the loan be repaid by $500,000 of
principal. The Paribas loan for $1,800,802 for FREEWAY bears interest at either
(a) Reference Rate (8.25% as of May 10, 1996) plus 1/2% or (b) LIBOR + 2% until
the maturity date of July 5, 1996. In this case, there are no milestone dates
for aggregate contracts receivable and The Kushner-Locke Company's corporate
guaranty of $961,667 is not reducible during the life of the loan. The amount of
the difference between the cash collected and $961,667 is collectable at the
maturity date by Paribas from The Kushner-Locke Company.
RELATED PARTY TRANSACTIONS
In December 1994, the Company advanced August Entertainment, Inc. ("August")
$650,000 against distribution rights to third party product. August is majority
owned by Gregory Cascante, who joined the Company as head of its new
international film distribution division. The agreement is secured by all assets
of August, including a pledge of all sales commissions due to August from the
producers thereof on the films SLEEP WITH ME, LAWNMOWER MAN II and NOSTRADAMUS.
While the right of August to receive such commissions with respect to the film
LAWNMOWER MAN II is subordinate to the interests of the production lenders, The
Allied Entertainments Group PLC, and its subsidiaries which produced the film,
has guaranteed payment of such commissions to the extent they would be payable
had there been no production loan on that film. The loan bears interest at the
lesser of (a) Prime (8.25% at May 10, 1996) plus 2% or (b) 10%. Repayment of
principal and interest is by collection of commissions assigned as collateral.
As of March 31, 1996 the Company had been repaid approximately $170,000 toward
interest and principal. The loan matures in December 1996.
Stuart Hersch, in addition to his compensation paid as a Member of the Board
of Directors of the Company, became a consultant to the Company effective April
1, 1996 for which he is paid $7,500 per month.
In fiscal 1995 the Company entered into a partnership named TVFirst which
creates and markets informercials. One of TVFirst's current projects is a
Christian music informercial. TVFirst has decided to purchase air time for such
informercial on an accelerated basis but neither TVFirst nor either of its
partners have the available resources to fund such accelerated purchases.
Messrs. Locke and Kushner have loaned to the Company $30,000 as of March 31,
1996 which then made a capital contribution to TVFirst to enable TVFirst to
purchase such air time; subsequent loans have totaled $325,000 through May 10,
1996. Such loans, subject to final documentation, will bear interest at the
prime rate (8.25% as of May 10) plus 1% and are anticipated to be repaid within
six months, or possibly earlier. In addition, each lender would also receive a
royalty equal to 10% of the principal amount loaned by such lender, which amount
will be payable on the repayment date. Furthermore, each lender would receive a
profit participation in the profits, if any, related to the Christian music
informercial, up to an amount equal to 5% of its principal amount, which amount
will be payable on the first anniversary of such repayment. There is no
assurance that the informercial will have any revenues associated with it.
SUMMARY
While the Company believes that it will obtain a multi-year increased
syndicated credit facility from Chemical Bank by May 31, 1996 or shortly
thereafter there is no assurance that the Company will obtain such credit
accommodation. If the Company is unable to obtain such credit facility, the
Company will seek alternative financing. However, there is no guarantee that
alternative financing
18
<PAGE>
will be available on acceptable terms. If such credit facility and/or
alternative financing is not available, Management believes that existing
resources and cash generated from operating activities, after a reduction of the
level of Company's investment in film costs, will be adequate to comply with the
terms of the extension of the Imperial credit facility through December 1996. To
the extent that existing resources and a reduction in the level of Company's
investment in film costs are not adequate, Management intends to reduce
operating expenses. In the event that the Company is unable to comply with the
terms of such extension or obtain an additional extension or alternative
financing after the current maturity date of December 31, 1996, the Company
would seek to restructure its obligations under the facility. This would have a
significant effect on the Company's operations.
The Company's business and operations have not been materially affected by
inflation.
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On May 10, 1996, the Company completed an offering and sale of $1,500,000 of
its 5% Convertible Subordinated Notes (the "Notes") pursuant to a private
placement. As part of such transaction, the purchaser of the Notes will have the
right to receive shares (the "Bonus Shares") of common stock, no par value, of
the Company (the "Common Stock") equal in value to 50% of the principal amount
of the Notes so purchased. The number of Bonus Shares receivable by each
Noteholder shall be adjusted on the effective date (the "Effective Date") of a
contemplated secondary public offering of the Company (the "Secondary Public
Offering") based upon the Common Stock component of the security sold in such
Secondary Public Offering. The Notes have not been registered under the
Securities Act of 1933, as amended (the "Act"), and may not be offered or sold
in the United States absent registration or an applicable exception from
registration requirements. The Notes will not be registered under the Act but
the Company has agreed to register the Bonus Shares as part of the Secondary
Public Offering.
Interest in the Notes will accrue at a rate of 5% per annum and will be
payable quarterly in arrears commencing on July 31, 1996. The Notes will mature
(the "Maturity Date") on the sooner to occur of (i) November 3, 1996 or (ii) the
effective date; provided, however, that the November 3, 1996 date set forth
above shall be extended to May 3, 1997 if the Secondary Public Offering is
delayed beyond November 3, 1996 if such delay is not solely the fault of the
Company.
The Company has the right, upon the satisfaction of certain conditions, to
convert the Notes into shares of Common Stock (the "Conversion Shares") at a
conversion price per share equal to 66 2/3% of the closing high bid price of the
Common Stock on the NASDAQ National Market (the "NNM") on the Effective Date
(the "Conversion Price"); provided however, that the Conversion Price shall be
reduced to 50% of the Closing high bid price on the NNM on the Effective Date if
the Effective Date is after March 3, 1997 and the delay is due to no fault of
the underwriter of the Secondary Public Offering. In addition, if the Notes are
not repaid or repayment thereof provided for on or before the Maturity Date, the
holders of the Notes shall have the right after the Maturity Date to convert the
Notes into Conversion Shares at the Conversion Price (an "Optional Conversion").
Any conversion of the Notes would be in lieu of the repayment of the principal
of the Notes and the issuance and delivery of the Bonus Shares. After an
Optional Conversion, the holders of the Conversion Shares shall have, in the
aggregate, one demand registration right with respect to the Conversion Shares.
The Bonus Shares and the Conversion Shares shall not be transferable until
the end of the six month period beginning on the Effective Date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: Exhibits filed as part of this report are listed on the
"Index to Exhibits" which follows the signature pages hereto.
(b) Reports on Form 8-K: None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: May 15, 1996
---------------------------------------------
Peter Locke
CO-CHAIRMAN OF THE BOARD,
CO-CHIEF EXECUTIVE OFFICER AND PRESIDENT
Dated: May 15, 1996
---------------------------------------------
Donald Kushner
CO-CHAIRMAN OF THE BOARD,
CO-CHIEF EXECUTIVE OFFICER AND SECRETARY
Dated: May 15, 1996
---------------------------------------------
James L. Schwab
CHIEF FINANCIAL OFFICER,
VICE PRESIDENT OF FINANCE
</TABLE>
20
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
- ----------
<C> <S>
10.52 Waiver of Sections 6.1 LIMITATION ON INDEBTEDNESS, 6.6 LIMITATION
ON PREPAYMENT OF SUBORDINATED DEBT and 6.16 LIMITATION ON
ISSUANCE OF CAPITAL STOCK of the Third Amended and Restated
Credit Agreement (the "Credit Agreement") among Kushner-Locke
Company and Imperial Bank, dated as of February 9, 1990 and as
amended and restated as of December 14, 1990, May 1, 1992, and
August 31, 1993, and as further amended as of December 31, 1995.
10.53 Waiver of Sections 5.9 MINIMUM NET INCOME of the Third Amended and
Restated Credit Agreement (the "Credit Agreement") among
Kushner-Locke Company and Imperial Bank, dated as of February 9,
1990 and as amended and restated as of December 14, 1990, May 1,
1992, and August 31, 1993, and as further amended as of December
31, 1995.
10.54 Fourth Amendment to Employment Agreement between The Kushner-Locke
Company and Peter Locke dated February 13, 1996.
10.55 Fourth Amendment to Employment Agreement between The Kushner-Locke
Company and Donald Kushner dated February 13, 1996.
</TABLE>
21
<PAGE>
IMPERIAL BANK [LETTERHEAD]
May 2, 1996
Mr. Donald Kushner
The Kushner Locke Company
11601 Wilshire Blvd. 21st floor
Los Angeles, CA 90025
RE: Waiver of Sections 6.1 LIMITATION ON INDEBTEDNESS, 6.6 LIMITATION ON
PREPAYMENT OF SUBORDINATED DEBT AND 6.16 LIMITATION ON ISSUANCE OF CAPITAL
STOCK of the Third Amended and Restated Credit Agreement (the "Credit
Agreement") among Kushner-Locke Company and Imperial Bank, dated as of
February 9, 1990 and as amended and restated as of December 14, 1990, May 1,
1992, August 31, 1993, and December 31, 1995.
Dear Mr. Kushner:
You have requested that imperial Bank as Agent waive the provision referenced
above. The Bank has given its consent and is willing to do so and hereby
grants the waiver of Sections 6.1, 6.6 and 6.16 with respect only to the two
transactions to be consummated with the New York based underwriter Lew
Lieberbaum & Co., Inc., specifically the $750M to $1.5MM bridge loan and the
$10MM equity offering.
The forgoing waiver of the sections indicated above is without prejudice to
the Bank's rights to enforce all other terms and conditions of the Third
Amended and Restated Credit Agreement and these waivers will not be effective
beyond the transactions defined or in any other manner obligate the Bank
concerning the Revolving Facility.
Except as modified by this waiver, the Credit Agreement remains in full force
and effect and this waiver is without prejudice to the Bank's right to
enforce all covenants except as waived for the current period.
Please execute the enclosed copy of this letter. Kindly return the executed
copy along with a check for the $5,000 waiver fee no later than 12 p.m.
May 3, 1996 for the waiver to become effective.
<PAGE>
Sincerely yours,
/s/ Janice Zeiringer
Janice Zeiringer
Vice President
Acknowledged and agreed 5/2/95, 1996
KUSHNER LOCKE COMPANY
By: /s/ (illegible)
----------------------
cc: Ken Libkin, Morgan Rector, Phil Ellis
<PAGE>
IMPERIAL BANK [LETTERHEAD]
May 14, 1996
Mr. Donald Kushner
The Kushner-Locke Company
11601 Wilshire Blvd., 21st Floor
Los Angeles, CA 90025
RE: Waiver of Section 5.9 MINIMUM NET INCOME of the Third Amended and
Restated Credit Agreement (the "Credit Agreement") among the
Kushner-Locke Company (and the additional Individual Borrowers referred
to therein) as Borrower, The Lenders named therein and Imperial Bank as
Agent for the Lenders, dated as of February 9, 1990 and as amended and
restated as of December 14, 1990, May 1, 1992, August 31, 1993, and
December 31, 1995.
Dear Mr. Kushner:
You have requested that Imperial Bank, as Agent under the Credit Agreement,
waive the provision referenced above (the "defaulted covenant"). Subject to
receipt of a check in the amount of $7,500 no later than 4 p.m. on May 15,
1996, along with a copy of this letter executed by you on behalf of the
Borrower, Imperial Bank waives compliance with the above referenced provision
with respect to the financial results of The Kushner-Locke Company for the
period ending March 31, 1996.
This waiver applies only to the defaulted covenant. This waiver does not
apply to any other default that may now exist or may occur after the date of
this waiver with respect to the defaulted covenant or any other term,
condition or covenant of the Credit Agreement. All other terms of the Credit
Agreement remain unchanged.
Sincerely yours,
/s/ Janice Zeitinger
Janice Zeitinger
Vice President
Acknowledged and agreed _____________________, 1996.
THE KUSHNER-LOCKE COMPANY
By: /s/ (illegible)
---------------------------------
cc: Jim Schwab, Ken Libkin, Phil Ellis
<PAGE>
KUSHNER-LOCKE [LETTERHEAD]
February 13, 1996
Mr. Peter Locke
The Kushner-Locke Company
11601 Wilshire Boulevard
21st Floor
Los Angeles, CA 90025
Re: Fourth Amendment to Employment Agreement between The Kushner-Locke
Company and Peter Locke
Dear Mr. Locke:
Reference is made to that certain Employment Agreement, executed as of
October 1, 1988, as amended August 18, 1992, as further amended November 12,
1992, and as further amended January 20, 1994 and that certain addendum
thereto dated as of July 1, 1994 (the "Agreement"), by and between The
Kushner-Locke Company ("Employer") and Peter Locke ("Employee") in connection
with the Employee's responsibility for and supervision of all of Employer's
activities with respect to television and motion picture production and such
other activities and duties as Employer may reasonably require from time to
time. All capitalized terms contained herein not otherwise defined shall have
the meanings ascribed to them in the Agreement.
This letter shall amend the Agreement as follows:
1. Paragraph 4.2 is hereby amended by adding the following new sentence to
the end of said paragraph:
Employee shall receive no Profit Bonus in Fiscal 1996 until EBIT
exceeds one million dollars ($1,000,000). If EBIT exceeds one million
dollars ($1,000,000) in Fiscal 1996, Employee shall receive a Profit
Bonus equal to six percent (6%) of EBIT in excess of one million
dollars ($1,000,000) up to and including EBIT of three million dollars
($3,000,000) and a Profit Bonus equal to four percent (4%) of EBIT in
excess of three million dollars ($3,000,000); provided that the
aggregate Profit Bonus for Fiscal 1996 shall not exceed two hundred
fifty thousand dollars ($250,000).
The effectiveness of this Fourth Amendment to the Agreement is contingent
upon the approval hereof by the Board of Directors of Employer.
<PAGE>
Except as expressly stated herein, nothing contained in this Fourth Amendment
to the Agreement shall be deemed or construed to waive, amend or modify the
terms and conditions of the Agreement which terms and conditions, as amended,
are hereby ratified and confirmed as of the date first written above.
Very truly yours,
Richard Marks
Agreed and Accepted:
The Kushner-Locke Company
By: _________________________________
Name:
Title:
_________________________________
Peter Locke
<PAGE>
KUSHNER-LOCKE [LETTERHEAD]
February 13, 1996
Mr. Donald Kushner
The Kushner-Locke Company
11601 Wilshire Boulevard
21st Floor
Los Angeles, CA 90025
Re: Fourth Amendment to Employment Agreement between The Kushner-Locke
Company and Donald Kushner
Dear Mr. Locke:
Reference is made to that certain Employment Agreement, executed as of
October 1, 1988, as amended August 18, 1992, as further amended November 12,
1992, and as further amended January 20, 1994 and that certain addendum
thereto dated as of July 1, 1994 (the "Agreement"), by and between The
Kushner-Locke Company ("Employer") and Donald Kushner ("Employee") in
connection with the Employee's responsibility for and supervision of all of
Employer's activities with respect to television and motion picture
production and such other activities and duties as Employer may reasonably
require from time to time. All capitalized terms contained herein not
otherwise defined shall have the meanings ascribed to them in the Agreement.
This letter shall amend the Agreement as follows:
1. Paragraph 4.2 is hereby amended by adding the following new sentence to
the end of said paragraph:
Employee shall receive no Profit Bonus in Fiscal 1996 until EBIT
exceeds one million dollars ($1,000,000). If EBIT exceeds one million
dollars ($1,000,000) in Fiscal 1996, Employee shall receive a Profit
Bonus equal to six percent (6%) of EBIT in excess of one million
dollars ($1,000,000) up to and including EBIT of three million dollars
($3,000,000) and a Profit Bonus equal to four percent (4%) of EBIT in
excess of three million dollars ($3,000,000); provided that the
aggregate Profit Bonus for Fiscal 1996 shall not exceed two hundred
fifty thousand dollars ($250,000).
The effectiveness of this Fourth Amendment to the Agreement is contingent
upon the approval hereof by the Board of Directors of Employer.
<PAGE>
Except as expressly stated herein, nothing contained in this Fourth Amendment
to the Agreement shall be deemed or construed to waive, amend or modify the
terms and conditions of the Agreement which terms and conditions, as amended,
are hereby ratified and confirmed as of the date first written above.
Very truly yours,
Richard Marks
Agreed and Accepted:
The Kushner-Locke Company
By: _________________________________
Name:
Title:
_________________________________
Donald Kushner
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 5,480
<SECURITIES> 0
<RECEIVABLES> 18,484
<ALLOWANCES> 400
<INVENTORY> 75,022<F3>
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,980
<DEPRECIATION> 1,536
<TOTAL-ASSETS> 102,184
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 47,800
0
0
<COMMON> 25,089
<OTHER-SE> (2,990)
<TOTAL-LIABILITY-AND-EQUITY> 102,184
<SALES> 0
<TOTAL-REVENUES> 29,337
<CGS> 0
<TOTAL-COSTS> 24,365
<OTHER-EXPENSES> 1,968
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,904
<INCOME-PRETAX> 1,160
<INCOME-TAX> 20
<INCOME-CONTINUING> 1,140
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,140
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
<FN>
<F1>THE COMPANY DOES NOT ISSUE A CLASSIFIED BALANCE SHEET.
<F2>THE COMPANY DOES NOT ISSUE A CLASSIFIED BALANCE SHEET.
<F3>INCLUDED AS INVENTORY ARE: COMPLETED FILM COSTS, PRODUCTIONS IN PROGRESS
AND DEVELOPMENT.
</FN>
</TABLE>
