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, 1997 Commission File No. 0-17295
THE KUSHNER-LOCKE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
California 95-4079057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
11601 Wilshire Blvd., 21st Floor, Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
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, Class C
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 54,252,810 shares of outstanding Common Stock of the Registrant
as of May 14, 1997.
Total number of pages . Exhibit Index begins on page 20.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Form 10-Q for the Quarter ended March 31, 1997
INDEX
Part I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Earnings
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
</TABLE>
Part II. OTHER INFORMATION
Items 1 through 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: 10.65
10.66
(b) Reports on Form 8-K: None
<PAGE>
PART I
Item 1.
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Assets
<TABLE>
<Captions>
March 31, September 30,
1997 1996
-------------- ------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,159,000 $ 7,091,000
Reserved cash 207,000 4,126,000
Restricted cash 107,000 419,000
Accounts receivable, net of allowance
for doubtful accounts 23,196,000 22,885,000
Due from affiliates 894,000 1,238,000
Notes receivable from related party 440,000 540,000
Film and television property costs, net
of accumulated amortization 66,989,000 58,463,000
Property and equipment, at cost, net of
accumulated depreciation and amortization 427,000 465,000
Other assets 4,370,000 4,925,000
----------- ------------
$97,789,000 $100,152,000
=========== ============
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 4,998,000 $ 3,277,000
Notes payable 33,736,000 41,481,000
Deferred film license fees 4,994,000 3,460,000
Contractual obligations, principally
participants' share payable and talent
residuals 2,709,000 3,512,000
Production advances 4,468,000 2,133,000
Convertible subordinated debentures, net
of deferred issuance costs 11,944,000 12,039,000
----------- -----------
Total liabilities 62,849,000 65,902,000
Stockholders' equity:
Common stock, no par value. Authorized
150,000,000 shares, issued and
outstanding 54,252,810 shares at March
31, 1997 and 52,665,248 shares at
September 30, 1996 38,152,000 37,650,000
Accumulated deficit (3,212,000) (3,400,000)
----------- -----------
Total stockholders' equity 34,940,000 34,250,000
------------ -------------
$ 97,789,000 $ 100,152,000
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues $11,707,000 $13,230,000 $28,254,000 $29,337,000
Costs related to
operating revenues (9,679,000) (11,052,000) (23,699,000) (24,365,000)
Selling, general and
administrative expenses (1,121,000) (1,072,000) (2,293,000) (1,968,000)
---------- ---------- ---------- ----------
Earnings from operations 907,000 1,106,000 2,262,000 3,004,000
Interest income 11,000 6,000 39,000 60,000
Interest expense (879,000) (975,000) (2,096,000) (1,904,000)
---------- ---------- ---------- ----------
Earnings before income
taxes 39,000 137,000 205,000 1,160,000
Income taxes (11,000) (9,000) (17,000) (20,000)
---------- ---------- ---------- ----------
Net earnings $ 28,000 $ 128,000 $ 188,000 $ 1,140,000
========== ========== ========== ==========
Earnings per common and
common equivalent share $ .001 $ .004 $ .004 $ .03
========== ========== ========== ==========
Weighted average number of
common and common
equivalent shares
outstanding 52,903,000 36,337,000 52,870,000 35,961,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 188,000 $ 1,140,000
Adjustments to reconcile net earnings to
net cash used by operating activities:
Amortization of film costs 23,542,000 24,195,000
Depreciation and amortization 93,000 110,000
Amortization of other assets 187,000 340,000
Other 388,000 ---
Changes in assets and liabilities:
Reserved and restricted cash 312,000 (1,258,000)
Accounts receivable, net (311,000) (10,620,000)
Due from affiliates 444,000 95,000
Increase in film and television
property costs (32,299,000) (25,501,000)
Accounts payable and accrued
liabilities 1,721,000 1,305,000
Deferred film license fees 1,534,000 2,288,000
Contractual obligations (803,000) 3,426,000
Production advances 2,335,000 1,664,000
----------- -----------
Net cash used by operating activities (2,669,000) (2,816,000)
----------- -----------
Cash flows from investing activities:
Increase in property and equipment (55,000) (38,000)
Decrease (increase) in other assets 618,000 (293,000)
Net cash provided (used) by investing ---------- ---------
activities 563,000 (331,000)
---------- ---------
Cash flows from financing activities:
Borrowings under notes payable 12,246,000 3,292,000
Repayment of notes payable (16,072,000) ---
Other --- (224,000)
---------- ---------
Net cash provided (used) by financing
activities (3,826,000) 3,068,000
---------- ---------
Net decrease in cash and cash equivalents (5,932,000) (79,000)
Cash and cash equivalents at beginning of
period 7,091,000 3,139,000
---------- ----------
Cash and cash equivalents at end of period $ 1,159,000 $ 3,060,000
========== ==========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
(1) During the six months ended March 31, 1997, $217,000 of convertible
subordinated debentures before unamortized issuance costs of $17,000 were
converted into 222,562 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.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
Six Months ended March 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Number of Common Accumulated
shares Stock deficit Total
--------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Balance at September
30, 1996 52,665,248 $37,650,000 $(3,400,000) $ 34,250,000
Conversions of convertible
debentures 222,562 189,000 --- 189,000
Issuance of shares for
increased investment
in KL / New City
Televentures 1,365,000 313,000 --- 313,000
Net earnings --- --- 188,000 188,000
---------- ----------- ------------ -----------
Balance at March 31, 1997 54,252,810 $38,152,000 $(3,212,000) $34,940,000
========== =========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<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. In the last two years, the Company expanded its operations into
related business lines in ancillary markets for its product such as
merchandising, home video, cable and interactive/multimedia applications for
characters and story ideas developed by the Company.
Generally, theatrical films are first distributed in the theatrical and home
video markets. Subsequently, theatrical films are made available for
world-wide television network exhibition or pay television, television
syndication and cable television. Generally, television films are first
licensed for network exhibition and foreign syndication or home
video, and subsequently for domestic syndication or cable television.
Certain films are produced and/or distributed directly for initial
exhibition by local television stations, advertiser-supported cable
television, pay television and/or home video. The revenue cycle generally
extends 7 to 10 years on film and television product.
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 which the Company controls. 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.
These unaudited condensed consolidated financial statements should be read
in conjunction with the Company's annual consolidated financial statements
and notes thereto which are included in the Company's September 30,
1996 annual report on Form 10-K, as amended.
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, 1997, the results of its operations for the six month
periods ended March 31, 1997 and 1996, and its cash flows for the six month
periods ended March 31, 1997 and 1996. Interim results are not
necessarily indicative of results to be expected for a full fiscal year.
Restricted and Reserved Cash
As of March 31, 1997, the Company held $107,000 in restricted cash related
to advances made by the Company to film producers for the acquisition of
distribution rights. These cash advances were being held in escrow accounts as
collateral by financial institutions providing production loans to those
producers. In addition, as of March 31, 1997, the Company held $207,000 in
cash collected by the Company and reserved for use by Chase Manhattan Bank to
be applied against the Company's outstanding borrowings under the Company's
credit facility.
Income Taxes
Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Under the asset and liability method of SFAS No. 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 No. 109, the effect on
deferred tax
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(1) Summary of Significant Accounting Policies (continued)
assets and liabilities of a change in tax rates is recognized in operating
results in the period encompassing the enactment date.
Earnings Per Share
Earnings 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
inclusion of the additional shares, assuming the conversion of the Company's
convertible subordinated debentures, would have been anti-dilutive for the
three month and six month periods ended March 31, 1997 and March 31, 1996.
(2) Film and Television Property Costs
Film and television property costs consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
In process or development $15,887,000 $16,527,000
Released, principally feature films
and television productions, net of
accumulated amortization 51,102,000 41,936,000
---------- ----------
$66,989,000 $58,463,000
========== ==========
</TABLE>
(3) Notes Payable
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
Note payable to bank, under the revolving
credit facility secured by substantially
all Company assets, interest at varying
rates, outstanding principal balance due
June 25, 1999 $24,701,000 $29,037,000
Notes payable to banks and/or financial
institutions consisting of three production
loans secured by certain film rights held
by producers, at varying interest rates for
each loan 9,035,000 12,444,000
---------- ----------
$33,736,000 $41,481,000
========== ==========
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(4) Convertible Subordinated Debentures
Convertible subordinated debentures are comprised of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
Series A Convertible Subordinated Debentures
due December 15, 2000, bearing interest at
10%, net of unamortized issuance costs and
warrants of $7,000 and $9,000, respectively $ 70,000 $ 68,000
Series B Convertible Subordinated Debentures
due December 15, 2000, bearing interest at
13-3/4%, net of unamortized issuance costs
of $250,000 and $284,000, respectively 3,004,000 2,976,000
8% Convertible Subordinated Debentures due
December 15, 2000, net of unamortized
issuance costs of $337,000 and $396,000,
respectively 4,663,000 4,821,000
9% Convertible Subordinated Debentures due
July 1, 2002, net of unamortized issuance
costs of $343,000 and $376,000, respectively 4,207,000 4,174,000
---------- ----------
$11,944,000 $12,039,000
========== ==========
</TABLE>
Series A Debentures
As of March 31, 1997 the Company had outstanding $77,000 principal amount of
Series A Debentures. The debentures are recorded net of unamortized
underwriting discounts, expenses associated with the offering and warrants
totaling $7,000. Approximately $2,000 of issuance costs were amortized to
interest expense for the six months ended March 31, 1997.
Series B Debentures
As of March 31, 1997 the Company had outstanding $3,254,000 principal amount
of Series B Debentures due 2000. The Series B Debentures are recorded net of
unamortized underwriting discounts and expenses associated with the offering
totaling $250,000. Approximately $34,000 of issuance costs were amortized as
interest expense for the six months ended March 31, 1997.
8% Debentures
As of March 31, 1997, the Company had outstanding $5,000,000 principal
amount of 8% Debentures. The debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$337,000. Approximately $59,000 of issuance costs were amortized as interest
expense for the six months ended March 31, 1997.
<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, 1997, the Company had outstanding $4,550,000 principal
amount of 9% Debentures. The debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$343,000. Approximately $33,000 of issuance costs were amortized as interest
expense for the six months ended March 31, 1997.
(5) Income Taxes
Income taxes for the six month periods ended March 31, 1997 and 1996 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 most taxable income for the fiscal year
will be offset by a deferred tax asset which will result in an effective
federal tax rate of approximately 5%.
(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, as amended, for the fiscal year ended
September 30, 1996 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 results of
operations or financial condition.
In January 1997 the Company sold its ownership of The Adventures of
Pinocchio to an unrelated British corporation ("Lessor") and concurrently
leased the film back pursuant to a 12 year lease with option to repurchase the
film at the end of the lease period. The Company's entitlement to its
distribution rights and revenues was unchanged by these transactions. A
substantial portion of the sale proceeds was placed on deposit with a British
bank to fund the lease payments. An additional portion of the sale proceeds
was also placed on deposit with a British bank to be used as security for an
indemnification as to the lease payments to be made by the Company.
Depending on the level of the British corporate tax rate over various time
periods, the Company could be liable for additional payments or entitled to
a return of the security deposit. This sale-leaseback transaction may be
unwound by the Lessor in certain circumstances. In such event the Company
could be liable for certain unwind costs which could be substantial. Based
upon a legal opinion received from a reputable British legal counsel, the
Company believes it is unlikely that the transaction will be unwound.
In its normal course of business as an entertainment distributor, the
Company makes contractual down payments for the acquisition of distribution
rights upon signature of documentation. 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 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, 1997 the Company had made contractual agreements
for an aggregate of approximately $7,400,000 in payments due should those
third party producers complete delivery to the Company. These amounts are
estimated to be payable over the next eighteen months.
<PAGE>
PART I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's revenues are currently derived primarily from the production
or the acquisition of distribution rights of films released in the U.S. by
studios, pay cable, basic cable, and videocassette companies; and from the
development, production and distribution of television programming for the
major U.S. television networks, basic and pay cable television and first-run
syndication; as well as from the licensing of all rights to the films and
television programs in international territories. While the Company
generally finances all or a substantial portion of the budgeted production
costs of its programming through domestic and international licensing and
other arrangements, the Company typically retains rights in its programming
which may be exploited in future periods or in additional territories. In
April 1993, the Company established a feature film operation to produce 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 or license fees 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.
Such costs include the actual direct costs of production, certain
exploitation costs, production overhead and interest expense 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 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 net earnings may occur
from period to period. Thus, a change in the amount of entertainment product
available for delivery from period to period has materially affected a given
period's revenues and results of operations and year-to-year results may
not be comparable. The continuing shift of the Company's product mix during
this 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.
The information contained herein should be read in conjunction with the more
comprehensive material included in the Company's September 30, 1996 annual
report on Form 10-K, as amended, which describes in greater detail the
Company's historical and current activities and performance.
Forward Looking Statements
Except for the historical information contained herein, certain of the
matters discussed in this report are "forward-looking statements" as defined
in Section 21E of the Securities Exchange Act of 1934, as amended, which
involve certain risks and uncertainties which could cause actual results to
differ materially from those discussed herein. Such risks and uncertainties
include, but are not limited to, liquidity and financing requirements,
variability of quarterly results and prior losses, increased interest
expense, dependence on a limited number of projects, certain accounting
policies including amortization of film costs, dependence on key personnel,
production deficits, the risk involved in the television and theatrical film
industries, competition, government regulation, labor relations, absence of
cash dividends, and the volatility of public markets. See the relevant
discussions elsewhere herein, and in the Company's registration statement on
Form S-2 (Registration No. 333-05089), as declared effective on
July 24, 1996, and the Company's periodic reports and other documents filed
with the Securities and Exchange Commission for further discussions of these
and other risks and uncertainties applicable to the Company and its business.
Results of Operations
Comparison of Three Months Ended March 31, 1997 and 1996
The Company's operating revenues for the second quarter ended March 31, 1997
were $11,707,000, a decrease of $1,523,000, or 12%, from $13,230,000 from the
prior fiscal year's second quarter ended March 31, 1996. This decrease was
due primarily to the timing of delivery and/or availability of films and
television programs.
The Company recognized $1,895,000, or 16%, of revenues during the second
quarter of fiscal 1997 from the delivery and/or availability of 4 feature
films. In addition, the Company recognized $3,956,000, or 34%, of revenues
during the second quarter of fiscal 1997, including revenues from the
delivery and/or availability of two episodes of the ABC network series Gun
and the one-hour first-run syndication series Could It Be A Miracle.
Revenues of $3,004,000, or 26%, came from deliveries in the Company's family
division of direct-to-video product. In addition, the Company recognized
$1,039,000, or 9%, of revenues this quarter from distribution to domestic
cable for films acquired through its majority-owned subsidiary KLC/New City.
Remaining revenues came from continuing licenses of completed product from
the Company's library to domestic cable channel operators and international
sub-distributors.
Operating revenues for the second quarter of fiscal 1996 included $3,773,000
from the delivery and/or availability of feature films including Freeway,
executive produced by Oliver Stone and starring Kiefer Sutherland, Reese
Witherspoon and Brooke Shields, Serpent's Lair starring Jeff Fahey, and 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 Company's library.
In various stages of production for the Company's 1997 slate are (a) the
feature film Basil starring Christian Slater, Claire Forlani and Jerad Ledo,
(b) two animated feature films for Buena Vista Home Video, a division of the
Walt Disney Company, entitled Brave Little Toaster Goes to Mars and Brave
Little Toaster Goes to School, that are sequels to the successful
direct-to-video title The Brave Little Toaster, and (c) five additional
titles of the direct-to-video Magic Adventures series. The Company also
produced six one-hour prime time episodes of a mid-season replacement series
for ABC entitled Gun, including episodes starring Jennifer Tilly, Randy
Quaid, Darryl Hannah and Rosanna Arquette. ABC aired the first Gun episode
on April 12, 1997. In addition, the Company is producing a pilot for ABC for
the fall 1997 season entitled Cracker. Other television programs in
production for fiscal 1997 include Erotic Confessions, a half-hour series
presently airing on HBO for which the Company will be handling foreign
distribution, and additional episodes of Could It Be A Miracle, a one-hour
series in first-run syndication, hosted by Robert Culp. In addition, the
Company is in production on Mowgli's Jungle Book, 13 half-hour episodes for
the Fox Network. Furthermore, the Company continues to acquire domestic
cable rights for films for distribution through KLC/New City and the
international distribution rights to films for distribution through Kushner
Locke International, Inc. Included in the latter are the foreign
distribution rights to the theatrical motion picture currently entitled
Double Tap starring Heather Locklear and Stephen Rea, and executive produced
by Joel Silver and Richard Donner, which is currently expected to be
delivered in calendar 1997.
Costs relating to operating revenues were $9,677,000 during the second
quarter of fiscal 1997 as compared to $11,052,000 during the second quarter
of fiscal 1996. As a percentage of operating revenues, costs relating to
operating revenues were 83% for the second quarter of fiscal 1997 compared to
approximately 84% for the second quarter of fiscal 1996. The decreased
percentage in the most recent period reflects a weighting of the product mix
which includes titles that are projected to be somewhat more profitable than
titles included in the comparable fiscal year 1996 quarter.
Selling, general and administrative expenses increased to $1,121,000 in the
second quarter of fiscal 1997 from $1,072,000 in the second quarter of fiscal
1996. The 5% increase in such expenses is principally due to increased
personnel costs.
Interest expense for the second quarter ended March 31, 1997 was $879,000 as
compared to $975,000 for the second quarter ended March 31, 1996. The
decrease was attributable to lower average interest rates incurred,
production-related interest capitalized in the current quarter, and slightly
reduced overall levels of borrowing in the current quarter. Total
indebtedness for borrowed money decreased to $46,527,000 at March 31, 1997
from $49,375,000 at March 31, 1996.
The Company's effective income tax rate was 28% for the second quarter ended
March 31, 1997 compared to an effective income tax rate of 1% for the
quarter ended March 31, 1996. Income tax expense in second quarter of fiscal
1997 consisted of estimated state income and federal alternative minimum taxes.
The Company reported net earnings of $28,000 or $.001 per share, for the
second quarter ended March 31, 1997 as compared to net earnings of $128,000,
or $.003 per share, for the second quarter ended March 31, 1996. Weighted
number of common shares for the compared second quarters were 52,903,000 in
1997 and 36,337,000 in 1996.
Comparison of Six Months Ended March 31, 1997 and 1996
The Company's operating revenues for the six months ended March 31, 1997
were $28,254,000, a decrease of $1,083,000, or 4%, from $29,337,000 from the
prior fiscal year's six month period. This decrease was due primarily to
the timing of delivery and/or availability of films and television programs.
The Company recognized $6,862,000, or 24%, of revenues during the six months
ended March 31, 1997 from the delivery and/or availability of 14 feature
films. In addition, the Company recognized $ 11,861,000, or 42%, of
revenues during the six months ended March 31, 1997, including revenues from
the delivery and/or availability of the ABC network series Gun and the
one-hour first-run syndication series Could It Be A Miracle. Revenues of
$4,208,000, or 15%, came from the Company's family division of
direct-to-video product. In addition, the Company recognized $2,249,000, or
8%, of revenues from distribution to domestic cable for films acquired
through its majority-owned subsidiary KLC/New City. Remaining revenues came
from continuing licenses of completed product from the Company's library to
domestic cable channel operators and international sub-distributors.
Operating revenues for the six months ended March 31, 1996 included
$9,930,000 from the delivery and/or availability of feature films including
Freeway executive produced by Oliver Stone and starring Kiefer Sutherland,
Reese Witherspoon and Brooke Shields, Serpent's Lair starring Jeff Fahey,
and The Grave starring Gabrielle Anwar, Eric Roberts and Craig Sheffer. The
Company also recognized $2,875,000 of revenues during the six months ended
March 31, 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 the
balance from continuing licenses of completed product from the Company's
library to domestic cable channel operators and delivery and/or availability
of various product from the Company's library.
Costs relating to operating revenues were $23,697,000 during the six months
ended March 31, 1997 as compared to $24,365,000 during the six months ended
March 31, 1996. As a percentage of operating revenues, costs relating to
operating revenues were 84% for the six months ended March 31, 1997 compared
to approximately 83% for the six months ended March 31, 1996. The increased
percentage in the most recent period reflect a weighting of the product mix
which includes titles that are projected to be somewhat more profitable than
titles included in the comparable earlier period.
Selling, general and administrative expenses increased to $2,293,000 during
the six months ended March 31, 1997 from $1,968,000 during the six months
ended March 31, 1996. The 17% increase in such expenses is principally due to
increased personnel costs in the first quarter of the fiscal year.
Interest expense during the six months ended March 31, 1997 was $2,096,000 as
compared to $1,904,000 for the six months ended March 31, 1996. The increase
was principally attributable to the amortization of issuance costs pertaining
to the new line of credit, partially offset by reduced borrowings and lower
average interest rates. Total indebtedness for borrowed money decreased to
$46,527,000 at March 31, 1997 from $49,375,000 at March 31, 1996.
The Company's estimated effective income tax rate was 8% for the six months
ended March 31, 1997 compared to an estimated effective income tax rate of 2%
for the six months ended March 31, 1996. Income tax expense for the six
months ended March 31, 1997 consisted of estimated state income and federal
alternative minimum taxes.
The Company reported net earnings of $188,000 or $.004 per share, for the six
months ended March 31, 1997 as compared to net earnings of $1,140,000, or $.03
per share, for the six months ended March 31, 1996. Weighted number of common
shares for the compared six month periods were 52,870,000 in 1997 and
35,961,000 in 1996.
Liquidity and Capital Resources
At March 31, 1997 the Company had $6,048,000 of unused and available funds
under its revolving credit facility. Cash at March 31, 1997 decreased
$10,038,000 to $1,598,000 (including $107,000 of restricted cash being used as
collateral for certain production loans and $207,000 of reserved cash to be
applied against the Company's outstanding borrowings under its credit
facility) from $11,636,000 (including $419,000 of restricted cash being used
as collateral for certain production loans and $4,126,000 of reserved cash to
be applied against the Company's outstanding borrowings under its credit
facility) at September 30, 1996. The decrease was primarily due to investing
funds in new projects without drawing down equivalent amounts of unused and
available funds under the revolving credit facility.
The Company's production and distribution operations are capital intensive.
The Company has funded its working capital requirements through receipt of
third party domestic license payments and international licensing, as well as
other operating revenues, and proceeds from debt and equity financing, and has
relied upon its line of credit and transactional production loans to provide
bridge production financing prior to receipt of license fees. The Company
funds production and acquisition costs out of its working capital, including
the line of credit, and through certain pre-sale of rights in international
markets. In addition, the expansion of the Company's international
distribution business and the establishment of 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 from operating activities of
$2,669,000 during the six months ended March 31, 1997, resulting primarily
from new investments of $32,299,000 in film and television properties, which
exceeded the amortization of such costs on completed productand new production
advances obtained by $6,422,000. Net cash inflows from investing activities
primarily resulted from liquidations of other assets. The Company also used
net cash of $3,826,000 to repay portions of certain outstanding loans. As a
result primarily of the foregoing factors, net unrestricted cash decreased
during the six month period by $5,932,000 to $1,159,000 on March 31, 1997. As
the Company expands production and distribution activities and increases its
debt service burdens, it may experience net negative cash flows from operating
activities, pending receipt of licensing and other revenues.
Credit Facility
In June 1996, the Company obtained $40,000,000 of revolving credit from a
syndicated group of banks led by The Chase Manhattan Bank N.A. ("Chase"). The
Company may borrow up to $40,000,000 under the facility based on specified
percentages of domestic and international accounts and contracts receivable
and a specified percentage of the Company's book value of unamortized library
film costs, as adjusted. In addition, the Company may allocate a production
tranche out of its line of credit for the Company's productions. Such tranche
allows the Company to borrow, subject to specified conditions and
restrictions, a portion of the production costs not covered by then-existing
distribution licenses All loans made pursuant to such agreement are secured
by substantially all of the Company's otherwise unencumbered assets and bear
interest, at the Company's option, either (i) at LIBOR (5.75% as of May 8,
1997) plus 3% (for that portion of the borrowing base collateralized by
accounts or contracts receivable) or 4% (for that portion of the borrowing
base collateralized by unamortized library film costs or for loans made under
the production tranche) or (ii) at the Alternate Base Rate, which is the
greater of (a) Chase's Prime Rate (8.50% as of May 14, 1997), (b) Chase's Base
30-Day CD Rate (5.60% as of May 14, 1997) plus 1% or (c) the Federal Funds
Effective Rate (5.50% as of May 14, 1997) plus 2% (for that portion of the
borrowing base collateralized by accounts or contracts receivable) or 3% (for
that portion of the borrowing base collateralized by unamortized library film
costs or loans made under the production tranche). The Company is required to
pay a commitment fee of 0.5% of the unused portion of the credit line. As of
March 31, 1997, the Company had drawn down $24,701,000 under the credit
facility out of a total net borrowing base availability of $30,749,000.
The credit agreement contains various 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 and the use of
proceeds and prohibit payment of cash dividends and prepayment of subordinated
debt. In addition, the credit agreement requires the Company to maintain a
minimum liquidity level, limits overhead costs 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 and 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). Effective March 31, 1997, the Company and the
members of the revolving credit facility syndicate amended a restrictive
covenant included in the the agreement pertaining to interest costs.
Securities Offerings
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 subordinate 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 the Debentures sold at an exercise price
equal to 120% of the principal amount of the Debentures. The 9% Debentures
are convertible into shares of common stock at a rate of $1.58 per share,
subject to customary anti-dilutive provisions and provisions in the event of
certain payment defaults. The Company has the right to redeem the 9%
Debentures at redemption prices commencing at 103% of par on or after July 1,
1998 and declining to par on or after July 1, 2000. The Debentures are
subordinated in right of payment to all Senior Indebtedness (as
defined) of the Company and rank pari passu with the Company's Series A,
Series B and 8% Debentures. The fiscal agency agreement, under which the
Company's 9% Debentures were issued, contains various covenants to which the
Company must adhere. As of March 31, 1997, approximately $5,000,000 principal
amount of 8% Debentures and $4,550,000 principal amount of 9% Debentures were
outstanding. As of March 31, 1997, approximately $77,000 principal amount of
Series A Debentures (convertible into common stock at a rate of approximately
$1.27 per share) and $3,254,000 of Series B Debentures (convertible into
common stock at a rate of approximately $1.54 per share) were outstanding.
The Company has the right to redeem the Series A Debentures at redemption
prices at 101% of par beginning October 1, 1996 and at par beginning October
1, 1997 and to redeem the Series B Debentures at redemption prices at 101% of
par beginning October 1, 1996 and at par beginning October 1, 1997. 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, 1996), as a
result of the conversion of the 8% Debentures, the number of outstanding
shares of common stock has increased from 52,665,248 to 52,887,810 as of March
31, 1997.
In May 1996, the Company issued $1,500,000 of short-term bridge notes in a
private placement which were repaid in July 1996 in connection with the
secondary public offering referred to below.
In July 1996, the Company completed a secondary public offering of 4,750,000
units, each unit consisting of two shares of Common Stock and one five year
Class C Redeemable Common Stock Purchase Warrant to purchase Common Stock at
an exercise price of $1.14375 per share.
Production/Distribution Loans
The Company's other short term borrowings, totaling $9,035,000 as of March
31, 1997, consisted of production loans from Newmarket Capital Group L.P.
("Newmarket"), Banque Paribas (Los Angeles Agency) ("Paribas") and Imperial
Bank to consolidated production entities. The Kushner-Locke Company provided
limited corporate guarantees for a portion of the Newmarket and Paribas loans
which are callable in the event that the production companies do not repay the
loans by the respective maturity date. The balance of the production loans
are recourse only to the production entities. Deposits on the purchase price
paid by the distributing licensees are held as restricted cash collateral by
the Lenders. To the extent the collateral value securing the loans exceeds
the amount outstanding, the Company may determine in the future to assume such
obligations in full under its Chase facility and take title to such assets.
The table below shows production loans as of March 31, 1997:
<TABLE>
<CAPTION>
Original Amounts Corporate
Film Lender Loan Amount Outstanding Interest Guaranty Maturity
- ----------- -------- ---------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
The Adventures
of Pinocchio Newmarket $12,500,000 $552,000 7.75% $552,000 (1) 12-31-97
Basil Paribas $6,200,000 4,819,000 8.25% 1,000,000 11-30-97
Magic Adventure Imperial $5,100,000 3,664,000 9.75% --- 11-15-97
---------- --------- ---------
$23,800,000 $9,035,000 $1,552,000
========== ========= =========
</TABLE>
(1) As of May 14, 1997, the amount outstanding had been reduced to $464,000.
The remaining balance owed by the production entity is collateralized by
license obligations in excess of the loan balance.
In order to fund the Company's approximately $12,580,000 share of the
budgeted negative costs of the motion picture titled The Adventures of
Pinocchio, in July 1995 the Company assisted the film production company's
consolidated entity in obtaining loan documentation for $12,500,000 from
Newmarket and the Bank of America. The loan bears interest at LIBOR (5.75% as
of May 8, 1997) plus 2% plus certain fees. In January 1997 the loan was
amended to reflect Newmarket's favorable acceptance of a British
sale-leaseback transaction in connection with the film. In return, Newmarket
secured a second-position interest in the bank account holding the remaining
net proceeds of the sale-leaseback. Additional provisions of the amendment
extended the maturity date to December 31, 1997 and revised the related loan
repayment schedule. Newmarket also has a profit participation in the film.
In April 1996, a production loan was obtained from Imperial Bank in the
aggregate available amount of $5,100,000 to cover a portion of the production
budgets of the Magic Adventures home video series. The loan bears interest
at prime (8.50% as of May 14, 1997) plus 1.50% payable monthly, plus certain
fees. The loan is secured by the rights, title and all assets related to the
film series. The loan matures in November 1997.
In February 1997, a new production loan was obtained from Paribas by a
consolidated entity in the amount of $6,300,000 to cover the production of the
feature film Basil. In connection with obtaining this loan, the Company
entered into an accomodation security agreement as sales agent for the picture
and provided a guarantee in the amount of $1,000,000. The loan bears interest
at the Company's option at LIBOR (5.75% as of May 8, 1997) plus 2.50% or
prime (8.50% as of May 14, 1997) plus 1/2%, plus certain fees. The loan is
secured by all of the Company's interests in the production. The loan matures
in November 1997. In accordance with the requirements of the Chase loan
facility, the Company obtained the consent of Chase to enter into this
production loan agreement with Paribas.
In May 1996, the Company and Decade entered into an agreement to produce four
theatrical action motion pictures. The motion pictures will be produced,
subject to approval by the Company of certain creative aspects of such
movies, by Decade and executive produced by Joel Silver and Richard Donner.
Under the agreement, the Company has agreed to guarantee payment up to
$3,200,000 per picture payable upon the delivery of the "mandatory delivery
items" (as defined in such agreement) for each picture in in exchange for
foreign distribution rights. The agreement may be extended, at Decade's
option, to include a fifth picture. The initial film under the agreement is
Double Tap starring Heather Locklear and Stephen Rea, which is currently
expected to be delivered in calendar 1997. The Company's guarantee for Double
Tap is $2,450,000.
In December 1994, the Company loaned August Entertainment, Inc. ("August")
$650,000 in exchange for distribution rights to certain third party feature
films. August is majority owned by Gregory Cascante, who served as
President of the Company's international film distribution division from
September 1994 until April 1,1997. The loan bears interest at the lesser of
(a) prime (8.50% at May 14, 1997) plus 2% or (b) 10%. The distribution
agreement is secured by all assets of August, including a pledge of all sales
commissions due to August from the producers of the films Sleep With Me,
Lawnmower Man II and Nostradamus. While the right of August to receive such
commissions on the film Lawnmower Man II is subordinate to the interests of
the film's production lenders, The Allied Entertainment Group PLC, and its
subsidiaries which produced the film have guaranteed payment of such
commissions to a certain extent. Repayment of principal and interest is by
collection of commissions assigned as collateral. The loan matured in
December 1996. In February 1997, the Company agreed to extend the maturity
date until December 1997. August thereupon paid $100,000 as a partial
repayment. August has agreed to make additional $25,000 principal plus
interest payments quarterly. The first quarterly payment has been received by
the Company. As of March 31, 1997 the Company had been paid $317,000 of
interest and principal and $440,000 principal amount remained outstanding.
The Company is currently negotiating a possible extension of the repayment
terms of the loan with August.
Summary
Management believes that existing resources and cash generated from operating
activities, together with amounts expected to be available under the
syndicated revolving credit agreement with Chase will be sufficient to meet
the Company's working capital requirements for at least the next twelve
months. However, the Company from time to time may seek additional financing
through the issuance of additional debt or equity securities, additional bank
financings, or other means available to the Company to increase its working
capital. In addition to expanding production and its distribution business,
whether internally or by acquisition, the Company may also consider
acquisition possibilities from time to time, including film libraries and
companies ancillary to the Company's business, subject to the availability of
financing as necessary.
The Company's business and operations have not been materially affected by
inflation.
<PAGE>
PART II
OTHER INFORMATION
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.
<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.
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: May 14, 1997 /S/ DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: May 14, 1997 /S/ ROBERT SWAN
Robert Swan
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
Exhibits:
10.65 Waiver regarding the production financing of the motion picture
"Basil" of the Credit, Security, Guaranty and Pledge Agreement,
dated as of June 19, 1996, among the Kushner-Locke Company, the
Guarantors referred to therein, the Lenders referred to therein,
and The Chase Manhattan Bank, N.A., (formerly known as Chemical
Bank), as Agent.
10.66 Amendment No. 2 dated as of March 31, 1997 to the Credit,
Security, Guaranty and Pledge Agreement dated as of June 19, 1996,
as amended as of November 25, 1996, among The Kushner-Locke
Company, 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
<PAGE>
EXHIBIT 10.65
as of February 21, 1997
The Kushner-Locke Company
11601 Wilshire Boulevard, 21st Floor
Los Angeles, California 90025
Dear Sirs:
Reference is hereby made to that certain Credit, Security, Guaranty and
Pledge Agreement, dated as of June 19, 1996 (as the same has been, and may be,
amended, supplemented or otherwise modified, renewed or replaced from time to
time, the "Credit Agreement"), among The Kushner-Locke Company (the
"Borrower"), the Guarantors referred to therein, the Lenders referred to
therein, and The Chase Manhattan Bank (formerly known as Chemical Bank), as
Agent. Capitalized terms used herein and not otherwise defined are used
herein as defined in the Credit Agreement.
You have advised the Agent that (i) you are in the process of consummating a
transaction (the "Loan") in connection with the financing of the theatrical
motion picture tentatively entitled "Basil" (the "Picture") which is being
produced by a Special Purpose Producer named Dayton Way Pictures VI, Inc. (the
"Producer"), (ii) Kushner-Locke International ("KLI") will be the sales agent
for the Picture, (iii) the Borrower will provide a $1,000,000 guaranty as
contemplated by Section 6.1 (g) of the Credit Agreement. In connection
therewith, you have requested that the Lenders authorize and direct the Agent
to enter into an agreement (the "Subordinated Agreement") with the production
lender, Banque Paribas, Los Angeles Agency ("Paribas") in connection with the
Loan (i) consenting to the execution and delivery by the Producer, the
Borrower and/or KLI of the loan, guaranty and security documents relating to
the Loan and to the grant by the Producer, the Borrower and/or KLI of a
security interest to Paribas, in all of their right, title and interest, if
any, in and to the Picture and (ii) whereby the interest of the Lenders in and
to the Picture, including without limitation, any proceeds derived with
respect to the exploitation of the Picture, shall be subordinate to the
interests of Paribas until all the obligations of the Producer, the Borrower
and KLI in connection with the Loan have been indefeasibly performed and paid
in full. You have also requested that the Lenders waive any non-compliance by
the Borrower and KLI with Credit Agreement solely with respect to the
production financing for the Picture.
Each of the undersigned hereby agrees to such consent and waiver and
authorizes and direct the Agent to enter into the Subordination Agreement (in
such form as the Agent may deem appropriate).
By execution hereof, the Borrower hereby represents and warrants that as of
the date hereof, there exists no Default or Event of Default.
This waiver may be executed in counterparts, each of which shall constitute
an original, but all of which when taken together, shall constitute one and
the same instrument.
This waiver shall become effective when the Agent shall have received
executed counterparts of this waiver which, when taken together, bear the
signatures of all of the Lenders and all the Credit Parties.
This waiver shall not be construed as extending to any other matter, similar
or dissimilar, or entitling the Credit Parties to any future waivers regarding
similar matters or otherwise.
Except to the extent expressly set forth above, this letter does not
constitute a waiver or modification of any provision of the Credit Agreement
or a waiver of any Default or Event of Default, whether or not known to the
Agent or the Lenders. Except as expressly modified herein, all terms of the
Credit Agreement remain in full force and effect.
THIS WAIVER SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
Very truly yours,
THE CHASE MANHATTAN BANK
(formerly known as Chemical Bank),
individually and as Agent
/S/ ANN B. KERNS
By:
Name: ANN B. KERNS
Title: VICE PRESIDENT
DE NATIONALE INVESTERINGSBANK N.V.
/S/ ERIC H. SNATERSE
By:
Name: ERIC H. SNATERSE
Title: GENERAL MANAGER
/S/ LARS VAN 'D HOENDERDAAL
By:
Name: LARS VAN 'D HOENDERDAAL
Title: SENIOR ACCOUNT MANAGER
COMERICA BANK -- CALIFORNIA
/S/ D. JEFFREY ANDRICK
By:
Name: D. JEFFREY ANDRICK
Title: VICE PRESIDENT
AGREED TO BY:
THE KUSHNER-LOCKE COMPANY
KL PRODUCTIONS, INC.
KL INTERNATIONAL, INC.
ACME PRODUCTIONS, INC.
KUSHNER-LOCKE PRODUCTIONS, INC.
THE RELATIVES COMPANY
POST AND PRODUCTION SERVICES, INC.
K-L ENTERTAINMENT, INC.
INTERNATIONAL COURTROOM NEW 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.
/S/ DONALD KUSHNER
By
Name: Donald Kushner
Title:
KLC/NEW CITY
By its General Partner
THE KUSHNER-LOCKE COMPANY
/S/ DONALD KUSHNER
By
Name: Donald Kushner
Title:
DAYTON WAY PICTURES, INC.
DAYTON WAY PICTURES II, INC.
DAYTON WAY PICTURES III, INC.
DAYTON WAY PICTURES IV, INC.
FW COLD CO., INC.
/S/ ALAN ABRAMS
By
Name: Alan Abrams
Title: President
<PAGE>
EXHIBIT 10.66
AMENDMENT NO. 2 dated as of March 31, 1997 to the Credit,
Security, Guaranty and Pledge Agreement dated as of June 19,
1996, as amended as of November 25, 1996, 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, 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 as of the Effective Date (as hereinafter defined)
as follows:
(A) Section 6.19 of the Credit Agreement is hereby amended in its entirety
to read as follows:
"Section 6.19. EBIT to Interest Expense Ratio.
Permit the ratio of EBIT to Consolidated Interest Expense at the end of any
rolling fourth quarter period ending on or during any period set forth below,
to exceed the ratio set forth below across from such period:
Period Ratio
Closing Date through 9/30/97 1.2:1
10/1/97 and thereafter 1.75:1"
Section 3. Conditions to Effectiveness. The effectiveness of this Amendment
is subject to the satisfaction in full of each of the conditions precedent set
forth in this Section 3 (the first date on which all such conditions have been
satisfied being herein called 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;
(B) all legal matters incident to this Amendment shall be satisfactory to
Morgan, Lewis & Bockius LLP, counsel for the Agent.
Section 4. 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
(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 5. 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 6. Fundamental Documents. This Amendment is designated a
Fundamental Document by the Agent.
Section 7. Full Force and Effect. Except as expressly amended hereby, the
Credit Agreement and the other Fundamental Documents shall contain 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 8. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
Section 9. 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 10. 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 11. 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
/S/ BRUCE ST.J LILLISTON
By:
Name: Bruce St.J Lilliston
Title:
<PAGE>
GUARANTORS:
KL PRODUCTIONS, INC.
KL INTERNATIONAL, INC.
ACME PRODUCTIONS, INC.
KUSHNER-LOCKE PRODUCTIONS, INC.
THE RELATIVES COMPANY
POST AND PRODUCTION SERVICES, INC.
K-L ENTERTAINMENT, INC.
INTERNATIONAL COURTROOM NEW
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.
/S/ BRUCE ST.J LILLISTON
By
Name: Bruce St.J Lilliston
Title:
KLC/NEW CITY
By its General Partner
THE KUSHNER-LOCKE COMPANY
/S/ BRUCE ST.J LILLISTON
By
Name: Bruce St.j Lilliston
Title:
DAYTON WAY PICTURES, INC.
DAYTON WAY PICTURES II, INC.
DAYTON WAY PICTURES III, INC.
DAYTON WAY PICTURES IV, INC.
FW COLD CO., INC.
/S/ ALAN ABRAMS
By
Name: Alan Abrams
Title: President
LENDERS:
Executed in THE CHASE MANHATTAN BANK
New York, New York (formerly known as Chemical Bank),
on May , 1997 individually and as Agent
/S/ MARY E. BACON
By:
Name: Mary E. Bacon
Title: Vice President
DE NATIONALE INVESTERINGSBANK N.V.
/S/ E. H. SNATERS
By:
Name: E. H. Snaterse
Title: Vice President
/S/ J. L. J. M. VAN REISEN
By:
Name: J. L. J. M. Van Reisen
Title: Vice President
COMERICA BANK -- CALIFORNIA
/S/ D. JEFFREY ANDRICK
By:
Name: D. Jeffrey Andrick
Title: Vice President
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<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 1473
<SECURITIES> 0
<RECEIVABLES> 23196
<ALLOWANCES> 0
<INVENTORY> 66989
<CURRENT-ASSETS> 0
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<TOTAL-ASSETS> 97789
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0
0
<COMMON> 38152
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<TOTAL-LIABILITY-AND-EQUITY> 97789
<SALES> 28254
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<CGS> 23699
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