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 June 30, 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 54,537,620 shares of outstanding Common Stock of the Registrant as
of August 14, 1997.
<TABLE>
<S> <C>
Total number of pages: 25. Exhibit Index begins on page 20.
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Form 10-Q for the Quarter ended June 30, 1997
INDEX
Part I. FINANCIAL INFORMATION
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
Item 3. Not applicable.
Part II. OTHER INFORMATION
Items 1 through 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: 10.67
________________
(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>
June 30, September 30,
1997 1996
------------- -----------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $6,549,000 $7,091,000
Reserved cash 105,000 4,126,000
Restricted cash 1,861,000 419,000
Accounts receivable, net of
allowance for doubtful accounts 31,212,000 22,885,000
Due from affiliates 1,065,000 1,238,000
Notes receivable from related party 440,000 540,000
Film and television property costs,
net of accumulated amortization 66,864,000 58,463,000
Other assets 3,845,000 5,390,000
------------ -------------
$111,941,000 $ 100,152,000
============ =============
</TABLE>
Liabilities and Stockholders' Equity
<TABLE>
<S> <C> <C>
Accounts payable and accrued
liabilities $ 2,398,000 $ 3,277,000
Notes payable 45,174,000 41,481,000
Deferred film license fees 7,456,000 3,460,000
Contractual obligations, principally
participants' share payable and
talent residuals 2,494,000 3,512,000
Production advances 6,391,000 2,133,000
Convertible subordinated debentures,
net of deferred issuance costs 11,578,000 12,039,000
----------- -----------
Total liabilities 75,491,000 65,902,000
----------- -----------
Stockholders' equity:
Common stock, no par value.
Authorized 150,000,000 shares,
issued and outstanding 54,537,620
shares at June 30, 1997 and
52,665,248 shares at September
30, 1996 38,760,000 37,650,000
Accumulated deficit (2,310,000) (3,400,000)
------------ ------------
Total stockholders' equity 36,450,000 34,250,000
------------ ------------
$110,956,000 $100,152,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Operating revenues $13,413,000 $28,983,000 $41,667,000 $58 320,000
Costs related to
operating revenues (10,375,000) (26,294,000) (34,074,000) (50,659,000)
Selling, general and
administrative expenses (1,082,000) (900,000) (3,375,000) (2,868,000)
----------- ---------- ---------- ----------
Earnings from
operations 1,956,000 1,789,000 4,218,000 4,793,000
Interest income 11,000 83,000 50,000 143,000
Interest expense (1,059,000) (1,330,000) (3,155,000) (3,184,000)
----------- ---------- ---------- ----------
Earnings before income
taxes and
extraordinary item 908,000 542,000 1,113,000 1,752,000
Income taxes (6,000) (16,000) (23,000) (36,000)
----------- ---------- ---------- ---------
Earnings before
extraordinary item 902,000 526,000 1,090,000 1,716,000
Extraordinary item:
Costs associated with
repayment of credit
facility --- (250,000) --- (300,000)
---------- --------- ---------- ----------
Net earnings $902,000 $276,000 $1,090,000 $1,416,000
========== ========= ========== ==========
Earnings per common and
common equivalent
share:
Before extraordinary
item $ 0.02 $ 0.01 $ 0.02 $ 0.05
Extraordinary item --- (---) --- (0.01)
------- ------- ------- -------
Net earnings $ 0.02 $ 0.01 $ 0.02 $ 0.04
======= ======= ======= =======
Weighted average number
of common and common
equivalent shares
outstanding 54,363,000 39,190,000 53,363,000 37,034,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $1,090,000 $ 1,416,000
Adjustments to reconcile net earnings
to net cash used by operating
activities:
Amortization of film costs 33,567,000 50,496,000
Depreciation and amortization 141,000 101,000
Amortization of other assets 737,000 365,000
Changes in assets and liabilities:
Reserved and restricted cash (1,442,000) (1,794,000)
Accounts receivable, net (8,327,000) (12,865,000)
Due from affiliates 273,000 341,000
Increase in film and television
property costs (41,499,000) (41,759,000)
Accounts payable and accrued liabilities (879,000) 2,041,000
Deferred film license fees 3,996,000 3,192,000
Contractual obligations (1,018,000) 3,580,000
Production advances 4,258,000 (14,342,000)
---------- ----------
Net cash used by operating activities (9,103,000) (9,228,000)
---------- ----------
Cash flows from investing activities:
Decrease in other assets 832,000 166,000
---------- ----------
Net cash provided by investing activities 832,000 166,000
---------- ----------
Cash flows from financing activities:
Borrowings under notes payable 27,296,000 21,747,000
Repayment of notes payable (19,582,000) (15,000,000)
Issuance of debentures --- 1,307,000
Exercise of debenture conversion options --- (55,000)
Exercise of stock options --- 412,000
Other 15,000 ---
--------- ---------
Net cash provided by financing activities 7,729,000 8,411,000
--------- ---------
Net decrease in cash and cash equivalents (542,000) (651,000)
Cash and cash equivalents at beginning of period 7,091,000 3,139,000
--------- ---------
Cash and cash equivalents at end of period $6,549,000 $2,488,000
========= =========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
(1) During the nine months ended June 30, 1997, $667,000 of convertible
subordinated debentures before unamortized issuance costs of $64,000 were
converted into 507,372 shares of common stock.
(2) During the nine months ended June 30, 1996, $3,586,000 of convertible
subordinated debentures before unamortized capitalized issuance costs of
$315,000 were converted into 3,662,411 shares of Common Stock.
(3) During the nine months ended June 30, 1996, 631,733 shares of Common
Stock, valued at $750,000, were issued related to interest on the bridge notes.
(4) During the three months ended June 30, 1996, $1,960,000 of bank fees were
financed by the bank.
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
Nine Months ended June 30, 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 507,372 613,000 --- 613,000
Issuance of shares for
increased investment in
KL / New City 1,365,000 469,000 --- 469,000
Other --- 28,000 --- 28,000
Net earnings --- --- 1,090,000 1,090,000
---------- ---------- ---------- ----------
Balance at June 30, 1997 54,537,620 $38,760,000 $(2,310,000) $36,450,000
========== ========== ========== ==========
</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. 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 series 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 June 30, 1997, the results of its operations for the six month periods
ended June 30, 1997 and 1996, and its cash flows for the six month periods
ended June 30, 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 June 30, 1997, the Company held $1,861,000 in restricted cash related
to advances made by the Company which are held in escrow accounts as
collateral by financial institutions providing production loans to affiliated
film producers for the acquisition of distribution rights, and a deposit with
a British bank pursuant to a feature film sale/leaseback transaction. In
addition, as of June 30, 1997, the Company held $105,000 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
7
<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 nine month periods ended June 30, 1997 and June 30, 1996.
(2) Film and Television Property Costs
Film and television property costs consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
---------- -----------
(unaudited)
<S> <C> <C>
In process or development $14,071,000 $16,527,000
Released, principally feature films and
television productions, net of
accumulated amortization 52,793,000 41,936,000
---------- ----------
$66,864,000 $58,463,000
</TABLE> ========== ==========
(3) Notes Payable
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
June 30, 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 $38,964,000 $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 6,210,000 12,444,000
---------- ----------
$45,174,000 $41,481,000
========== ==========
</TABLE>
8
<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>
June 30, 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 $233,000 and $284,000, respectively 3,014,000 2,976,000
8% Convertible Subordinated Debentures due
December 15, 2000, net of unamortized
issuance costs of $316,000 and $396,000,
respectively 4,684,000 4,821,000
9% Convertible Subordinated Debentures due
July 1, 2002, net of unamortized issuance
costs of $290,000 and $376,000,
respectively 3,810,000 4,174,000
---------- ----------
$11,578,000 $12,039,000
========== ==========
</TABLE>
Series A Debentures
As of June 30, 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 nine months ended June 30, 1997.
Series B Debentures
As of June 30, 1997 the Company had outstanding $3,247,000 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 $233,000. Approximately $51,000 of issuance costs were amortized as
interest expense for the nine months ended June 30, 1997.
8% Debentures
As of June 30, 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 $316,000.
Approximately $64,000 of issuance costs were amortized as interest expense for
the six months ended June 30, 1997. During the nine months ended June 30,
1997, $217,000 principal amount of 8% debentures were converted into common
stock.
9
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(4) Convertible Subordinated Debentures (Continued)
9% Debentures
As of June 30,1997, the Company had outstanding $4,100,000 principal amount
of 9% Debentures. The debentures are recorded net of unamortized underwriting
discounts and expenses associated with the offering totaling $290,000.
Approximately $48,000 of issuance costs were amortized as interest expense for
the six months ended June 30, 1997. During the nine months ended June 30,
1997, $450,000 principal amount of 9% debentures were converted into common
stock.
(5) Income Taxes
Income taxes for the nine month periods ended June 30, 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 2%.
(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
this security deposit, which is included in restricted cash. 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 advice received from a reputable
British legal counsel, management of the Company believes it is unlikely that
the transaction will be unwound, although there can be no assurance that this
contingency will not occur.
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 June 30, 1997 the Company had made contractual agreements for
an aggregate of approximately $10,005,000 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.
10
<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
11
<PAGE>
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 and adjustments 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 June 30, 1997 and 1996
Operating revenues for the quarter ended June 30, 1997 were $13,413,000, a
decrease of $15,570,000 (54%) from the prior fiscal year's third quarter.
Principally affecting the comparability of operating revenues is the timing of
delivery of significant films and television programs, and in particular the
recognition of the major theatrical release of The Adventures of Pinocchio in
1996, with no comparable major film release in the current period.
The Company recognized $8,208,000 (61%) of revenues during the third quarter
of fiscal 1997 from the delivery of four episodes of the ABC network series
Gun, including episodes starring Jennifer Tilly, Randy Quaid and Darryl
Hannah, the delivery of the pilot episode of Cracker to ABC under a network
series order announced in May 1997, and deliveries of additional episodes of
the one-hour first-run syndication series Could It Be A Miracle. ABC aired
the Gun episodes in April and May 1997. Revenues of $2,052,000 (15%) came
from deliveries in the Company's family division of direct-to-video product,
principally including net profits from one of the Company's joint ventures
which delivered two animated feature films to 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. Those titles are sequels to the
successful direct-to-video title The Brave Little Toaster. In addition, the
Company recognized $1,115,000 (8%) of revenues this quarter from distribution
to domestic cable for films acquired through its majority-owned subsidiary
KLC/New City. Remaining revenues came from continued exploitation of feature
films released earlier this fiscal year and from continuing licenses of
completed product from the Company's library to domestic cable channel
operators and international sub-distributors.
Operating revenues for the third quarter of fiscal 1996 included $15,793,000
(54%) from the delivery of the major theatrical film The Adventures of
Pinocchio starring Martin Landau and Jonathan Taylor Thomas, two CBS network
movies entitled Princess in Love and Every Woman's Dream, and a pilot for ABC
entitled The Gun. Additionally, $3,122,000 (11%) was recognized 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. A Christian music
infomercial produced by the Company's TVFirst partnership began its national
rollout during the third fiscal quarter of 1996.
In various stages of production for the Company's 1997 and 1998 slates are
(a) the ABC prime time network series Cracker, being produced by a joint
venture under a 13 episode order, (b) the feature film Basil starring
Christian Slater, Claire Forlani and Jared Leto, due to be released in the
fourth quarter of 1997, (c) the feature film Beowolf starring Christopher
Lambert, and (d) five additional titles of the direct-to-video Magic
Adventures series. Other television programs in production for 1997 include a
half-hour series presently airing on HBO which the Company will also be
distributing to international and other domestic markets. In addition, the
Company continues in production on Mowgli's Jungle Book, including 13
half-hour episodes for the Fox Network and 26 episodes for an international
distributor. 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. The Company has acquired international distribution
rights to two feature films which are starting production, One Man's Hero,
starring Tom Berenger, and Minion, starring Dolph Lundgren. The Company is
commencing foreign distribution of the film Double Tap starring Heather
Locklear and Stephen Rea, and executive produced by Joel Silver and Richard
Donner, which was delivered to the Company in July 1997.
Costs relating to operating revenues were $10,375,000 during the third
quarter of fiscal 1997 as compared to $26,294,000 during the third quarter of
fiscal 1996. As a percentage of operating revenues, costs relating to
operating revenues were 77% for the third quarter of fiscal 1997 compared to
approximately 91% for the third quarter of fiscal
12
<PAGE>
1996. The decreased
percentage in 1997 principally reflects the Company's recognition in operating
revenues of its proportionate share of the net profits from the 1997 joint
venture release of the two Brave Little Toaster sequels, with no corresponding
cost of revenue to be recognized.
Selling, general and administrative expenses increased to $1,082,000 in the
third quarter of fiscal 1997 from $900,000 in the third quarter of fiscal
1996. The 20% increase in such expenses is principally due to increased
personnel costs.
Interest expense for the third quarter ended June 30, 1997 was $1,059,000 as
compared to $1,330,000 for the third quarter ended June 30, 1996. The
decrease was attributable to lower average interest rates incurred. Total
indebtedness for borrowed money increased to $56,752,000 at June 30,1997 from
$53,186,000 at June 30, 1996.
The Company's effective income tax rate was 1% for the third quarter ended
June 30,1997 compared to an effective income tax rate of 3% for the quarter
ended June 30, 1996. Income tax expense in third quarter of fiscal 1997
consisted of estimated state income and federal alternative minimum taxes.
The Company reported net earnings of $902,000 ($0.02 per share) for the third
quarter ended June 30, 1997, an increase of $626,000 or 227% as compared to
net earnings of $276,000 ($0.01 per share) for the third quarter ended June
30, 1996. The 1996 amounts are reported after recognizing an extraordinary
$250,000 charge to earnings for costs associated with the credit facility
which was repaid in June 1996. The weighted average number of common shares
for the compared third quarters were 54,363,000 in 1997 and 39,190,000 in
1996.
Comparison of Nine Months Ended June 30, 1997 and 1996
Operating revenues for the nine months ended June 30, 1997 were $41,667,000,
a decrease of $16,653,000 (29%) from the prior fiscal year's nine month
period. Affecting the comparability of operating revenues is the timing of
delivery of significant films and television programs, and in particular the
recognition of the major theatrical release of The Adventures of Pinocchio in
1996, with no comparable major film release in the current period.
The Company recognized $7,719,000 (19%) of revenues during the nine months
ended June 30, 1997 from the delivery and/or availability of four feature
films. In addition, the Company recognized $20,069,000 (48%) of revenues
during the nine months ended June 30, 1997, including revenues from the
delivery and/or availability of the pilot of the ABC network series Cracker,
which is airing this Fall on the ABC network under a 13 episode order, four
hours of the ABC network series Gun, movies of the week entitled Jack Reed V:
Death and Vengeance to the NBC network and Unlikely Angel to the CBS network,
and the one-hour first-run syndication series Could It Be A Miracle. Revenues
of $6,260,000 (15%) came from the Company's family division of direct-to-video
product. 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. In addition, the Company
recognized $3,364,000 (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 nine months ended June 30, 1996 included
$23,484,000 (40%) from the delivery of feature films including the delivery of
the major theratrical film The Adventures of Pinocchio starring Martin Landau
and Jonathan Taylor Thomas, 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 recognized revenues of $19,230,000 (33%) from
delivery of three CBS network movies entitled Princess in Love, Every Woman's
Dream, and A Husband, A Wife and A Lover, the ABC network mini-series Innocent
Victims, and a pilot for ABC entitled The Gun. The balance of revenues were
derived from family films released direct-to-video, continuing licenses of
completed product from the Company's library to domestic cable channel
operators and delivery and availability of various product from the Company's
library.
Costs relating to operating revenues were $34,074,000 during the nine months
ended June 30,1997 as compared to $50,659,000 during the nine months ended
June 30, 1996. As a percentage of operating revenues, costs relating to
operating revenues were 82% for the nine months ended June 30,1997 compared to
approximately 87% for the nine months ended June 30, 1996. The decreased
percentage in 1997 principally reflects the Company's recognition in operating
revenues of its proportionate share of the net profits from the 1997 joint
venture release of the two Brave Little Toaster sequels, with no corresponding
cost of revenue to be recognized.
13
<PAGE>
Selling, general and administrative expenses increased to $3,375,000 during
the nine months ended June 30, 1997 from $2,868,000 during the nine months
ended June 30, 1996. The 18% increase in such expenses is principally due to
increased personnel costs in the current fiscal year.
Interest expense during the nine months ended June 30, 1997 was $3,155,000 as
compared to $3,184,000 for the nine months ended June 30, 1996. The minor
decrease was principally attributable to lower average interest rates
partially offset by the amortization of issuance costs pertaining to the new
line of credit and to somewhat increased borrowings. Total indebtedness for
borrowed money increased to $56,752,000 at June 30,1997 from $53,186,000 at
June 30, 1996.
The Company's estimated effective income tax rate was 2% for the nine months
ended June 30,1997, equal to the estimated effective income tax rate of 2% for
the nine months ended June 30, 1996. Income tax expense for each nine month
period consisted of estimated state income and federal alternative minimum
taxes.
The Company reported net earnings of $1,090,000 ($0.02 per share) for the
nine months ended June 30, 1997 as compared to net earnings of $1,416,000
($0.04 per share) for the nine months ended June 30, 1996. Weighted number
of common shares for the compared nine month periods were 53,363,000 in 1997
and 37,034,000 in 1996.
Liquidity and Capital Resources
Cash at June 30, 1997 decreased $3,121,000 to $8,515,000 (including
$1,861,000 of restricted cash being used as collateral for certain production
loans and held pursuant to a sale/leaseback transaction, and $105,000 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. At June 30,
1997 the Company had $858,000 of unused and available funds under its
revolving credit facility. As of August 13, 1997 the Company had borrowed
$37,746,000, held $901,000 of reserved cash on hand to retire borrowings, and
had an additional $2,001,000 of unused and available funds under its 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
$9,103,000 during the nine months ended June 30, 1997, resulting primarily
from new investments of $41,499,000 in film and television properties, which
exceeded the amortization of such costs on completed product and new
production advances obtained by $3,674,000. Net cash inflows from financing
activities primarily resulted from net new borrowings under the revolving
credit facility. As a result primarily of the foregoing factors, net
unrestricted cash decreased during the nine month period by $542,000 to
$6,549,000 on June 30, 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
14
<PAGE>
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 (5.67% as of August 13,
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 August 13, 1997), (b) Chase's
Base 30-Day CD Rate (5.60% as of August 13, 1997) plus 1% or (c) the Federal
Funds Effective Rate (5.50% as of August 13, 1997) plus 1/2% 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 June 30, 1997, the Company had drawn down
$38,964,000 under the credit facility out of a total net borrowing base
availability of $39,822,000. As of August 13, 1997 the Company had borrowed
$37,746,000, held more than $1,600,000 of unrestricted cash and $901,000 of
reserved cash on hand to retire borrowings, and had an additional $2,001,000
of available credit.
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).
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 Comapny
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
The fiscal agency agreement, under which the Company's 9% Debentures were
issued, contains various covenants to which the Company must adhere. As of
June 30, 1997, $5,000,000 principal amount of 8% Debentures and $4,100,000
principal amount of 9% Debentures were outstanding. As of June 30, 1997,
approximately $77,000 principal amount of Series A Debentures (convertible
into common stock at a rate of approximately $1.27 per share) and $3,247,000
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.
15
<PAGE>
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 conversion of certain 8% and 9% Debentures, the number of
outstanding shares of common stock has increased by 507,372 shares.
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 $1.9375 per share.
In March 1997 the Company issued 1,365,000 shares of Common Stock to New City
Releasing in exchange for an additional 17.5% interest in its KLC/New City
joint venture with New City Releasing.
Production/Distribution Loans
The Company's other short term borrowings, totaling $6,210,000 as of June 30,
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 June 30, 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 $375,000 7.625% $375,000 12-31-97
Basil Paribas 6,300,000 3,344,000 8.125% 1,000,000 11-30-97
Magic
Adventures Imperial 5,100,000 2,491,000 10.00% --- 11-15-97
---------- --------- ---------
$23,900,000 $6,210,000 $1,375,000
========== ========= =========
</TABLE>
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 its film production consolidated
entity in obtaining loan documentation for $12,500,000 from Newmarket and the
Bank of America. The loan bears interest at LIBOR (5.625% as of August 11,
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 August 11, 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 Bank Paribas by a
consolidated entity in the amount of $6,300,000 to cover the Company's
production of the feature film Basil. In connection with obtaining this loan,
the
16
<PAGE>
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 (5.625% as of August 11,
1997) plus 2.50% or prime (8.50% as of August 11, 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 Bank Paribas. In May
1997 the Company sold an interest in the film and certain distribution rights
to a third party in exchange for $2,000,000, the majority of which was used to
repay borrowings at Bank Paribas.
In May 1996, the Company and Decade Entertainment 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 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 was delivered in
July 1997. The Company paid its $2,550,000 minimum guarantee for Double Tap
at that time.
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 loan 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 two
quarterly payments have been received by the Company. As of June 30, 1997 the
Company had been paid $317,000 of interest and principal and $440,000
principal amount remained outstanding.
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.
17
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C> <C>
(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.
</TABLE>
18
<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: August 14, 1997 /S/ DONALD KUSHNER
------------------------
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: August 14, 1997 /S/ ROBERT SWAN
----------------------
Robert Swan
Chief Financial Officer
</TABLE>
19
<PAGE>
INDEX TO EXHIBITS
Exhibits:
<TABLE>
<S> <C>
10.67 Agreement as of May 1, 1997 between The Kushner-Locke Company and
Robert Swan.
</TABLE>
20
<PAGE>
EXHIBIT 10.67
AGREEMENT
This agreement is entered into as of April 30, 1997 between The Kushner-Locke
Company ("Company") and Robert Swan ("Executive"), based on the following
facts:
A. Executive is presently employed as Controller of the Company.
B. Company is desirous of promoting Executive to the position of Chief
Financial Officer of the Company.
C. Executive accepts, in accordance with the terms of this agreement, such
employment and responsibilities.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Title and Responsibilities.
A. Subject to the terms hereof, Company hereby hires Executive and Executive
hereby accepts such employment as Chief Financial Officer of the Company.
Executive's responsibilities shall include all usual and customary services
required in Executive's job, including without limitation the following:
(i) Supervising the financial and accounting staff and the Company's
outside accountants in the rendition of their services;
(ii) Supervising the implementation and utilization of appropriate
financial controls and reporting systems;
(iii) Supervising in coordination with the Officers (as defined below) and
the Company's counsel and outside accountants, as appropriate, the preparation
and filing of the Company's financial public reporting documents and filings
as required by law;
(iv) Supervising the administration of collections of the Company's
receivables and otherwise seeking to maximize the Company's cash flow
opportunities;
(v) Supervising the structuring, administration of and compliance with the
Company's banking relationships and agreements;
(vi) Designing and maintaining appropriate financial models for the
projection of the Company's anticipated future activity;
(vii) Supervising the Company's financial controls and reporting
arrangements in respect of its continuing joint venture and partnership
activities;
(viii) In coordination with the Officers, making such presentations and
engaging in such consultations with the Company's banks and other financiers
as may from time to time be required;
(ix) Subject to Executive's professional and legal responsibilities,
following the directions of the Chief Executive Officers (currently Donald
Kushner and Peter Locke) and the Chief Operating Officer (currently Bruce
Lilliston) or any successors of any such individuals (collectively the
"Officers"); and
21
<PAGE>
(x) Reviewing overhead and formulating strategies for the cost-effective
development within the Company, and in relation to KL, of available human
financial, and physical resources.
B. Executive shall report solely to the Officers. All corporate accounting
and financial control and analysis personnel within Company shall report
directly to Executive. Executive shall devote his full-time services,
individual loyalty and best professional efforts to his duties and
responsibilities hereunder, and shall not render any other professional
services for remuneration or otherwise to any third party during the Term
hereof without the Company's express prior written consent.
2. Term. The term (the "Term") of Executive's engagement hereunder shall
commence on May 1, 1997, and continue through and including April 30, 2000.
The Term shall be subject to early termination on the first or second
anniversary of commencement of the Term, exercisable by Officers upon written
notice delivered to Executive not less than ninety (90) days prior to the
applicable early termination date. In the event of such early termination,
the Term shall thereupon be deemed to have ended.
3. Base Salary. Executive shall be paid salary ("Salary"), payable in
arrears on Company's usual paydays (no less frequently than monthly), as
follows:
(i) From May 1, 1997 through April 30, 1998, the sum of One Hundred Sixty
Thousand Dollars ($160,000) per annum;
(ii) For the next twelve (12) months, the sum of One Hundred Seventy Five
Thousand Dollars ($175,000); and
(iii) For the next twelve (12) months, the sum of Two Hundred Thousand
Dollars ($200,000).
The Salary shall be deemed to constitute full and complete payment for all of
Executive's services hereunder, with no additional compensation to be paid in
respect of any overtime work or work on weekends, holidays, nights, or other
times, nor for any work hereunder required by Company to be rendered at any
distant locations away from Company's offices.
4. Bonus Compensation. Executive shall be entitled to participate in all
Company-wide or senior management bonus arrangements. In addition, Executive
shall be entitled to additional bonus compensation (collectively the "Bonus
Compensation") for each year of the Term in an amount equal to ten percent
(10%) of the applicable annualized Salary in effect on September 30 (the
"Bonus Date"), of each year of the Term. The Bonus Compensation shall be
payable if and only if the Company's audited reported earnings for the fiscal
year ending on the respective Bonus Date exceed the earnings of the preceding
fiscal year and all preceding fiscal years ending during the Term. The Bonus
Compensation, if payable in respect of a particular fiscal year of the
Company, shall be payable within 120 days following the applicable Bonus Date.
5. Stock Options. Subject to and in accordance with the terms and conditions
set forth herein, the Company shall grant to Executive the stock options
specified hereinbelow. The vesting of all such options is subject to the
vesting provisions set forth below. Executive shall receive stock options to
purchase the Company's Common Stock (the "Stock") as set forth hereinbelow and
in an option agreement in customary form which includes such terms, provided
that (i) the exercise price per share for all such options shall be equal to
the Stock's closing price on the date that such options are granted hereunder
(collectively the "Grant Date"); (ii) Executive shall be employed by Company
on the respective vesting dates for the options as indicated hereinbelow; and
(iii) such vested options must be exercised by Executive no later than three
months following the termination of his employment with Company, or by
Executive or his guardian or executor no later than one year following such
termination in the event of Executive's incapacity or death, or the same shall
expire, provided that all non-exercised options shall be automatically and
imediately voided and no longer exercisable as a consequence of any
termination for default. Subject to the foregoing, the stock options to be
provided to Executive are: One Hundred Fifty Thousand (150,000) shares granted
upon the date of this agreement, one-third of which shall be vested
22
<PAGE>
and exercisable then
or thereafter, one-third of which shall be vested on the first day of the
second year of the Term and exercisable then or thereafter, and one-third of
which shall be vested on the first day of the third year of the Term and
exercisable then or thereafter, provided that all such options shall vest
immediately upon the cessation of employment by the Company of both current
Chief Executive Officers in such capacities. The stock options shall contain
automatic adjustment provisions in respect of any stock splits, reverse
splits, or dilution, and will expire on the earlier of ten (10) years or
Company-wide plan termination.
6. Insurance. Executive and his family shall be covered by Company's group
insurance policies in accordance with Company policy.
7. Benefits. Executive shall be entitled to all benefits provided to senior
management in accordance with Company's ploicy.
8. Vacation. Executive shall be entitled to no less than three weeks annual
paid vacation. Any unused vacation be rolled over to the first and only to
the first year thereafter, unless vacation has not been taken at the request
of the Officers. Executive shall not take more than three weeks continuoud
vacation at any time unless such time is approved in advance by the Officers.
All dates of Executive's vacations shall be subject to the approval of the
Officers, not to be unreasonably withheld.
9. Automobile Allowance. Compnay shall remimburse Executive on a monthly
basis for automobile expenses in the amount of Five Hundred Dollars ($500) per
month.
10. Expenses. Executive shall be reimbursed on a monthly basis, in
accordance with Company's policy, for reasonable travel, entertainment, and
other expenses incurred by Executive in direct furtherance of the Company's
business, subject to approval of the Officers. Executive shall travel
business call for all flights on the Company's business and shall be entitled
to single room accommodations in first class hotels.
11. Office Arrangements. Executive shall be furnished with private executive
office space. Executive shall be provided with a full time senior executive
assistant. Executive's office shall be furnished with a desktop computer
connected to KL's network, and with usual and customary office equipment and
supplies.
12. Additional Title. Provided that Executive is then employed by Company
and not in default of his obligations hereunder, upon the first day of the
second year of the Term, Executive shall be accorded the additional title of
Senior Vice President of the Company.
13. Warranties and Indemnification. Company and Executive each represent and
warrant to the other that they each respectively have the full right and
authority to enter into this agreement, to be bound by the terms hereof, and
fulfill their respective representations and obligations hereunder. Without
limiting the generaility of the foregoing, the Company represents and warrants
to Executive that this agreement shall be binding and enforceable upon
signature of the parties hereinbelow, and that any and all necessary corporate
authorizations and ratifications required for the entering of this agreement
have been obtained. Company and Executive each indemnify and agree to hold
harmless one another and (in the case of Company as the indemnified party)
Company's officers, directors, employers shareholders, and all affiliated
entities, from and against any loss, claim, or other damages (including
reasonable attorney's fees) resulting from any breach of the respective
indeminifying party's obligations, representations, warranties, or
understanings pursuant to this agreement.
14. Availability of Remedies. The parties acknowledge and confirm that
Executive's services hereunder are of a unique and distinctive character and
value to the Company, and are not readily subject to quantification in
monetary terms. Accordingly, in the event of any breach by Executive of his
obligations hereunder, Company shall be entitled to seek injunctive relief in
addition to monetary damages. The parties further acknowledge and confirm
that any breach of this agreement by Company is adequately measured by
monetary damages, that Executive shall be limited to his remedies at law for
monetary damages in the event of any breach by Company of its obligations
hereunder, and that in no event shall Executive have any right to rescind this
agreement nor to seek injunctive relief against Company.
23
<PAGE>
15. Suspension and Early Termination. Company shall have the right to
suspend this agreement and Executive's services hereunder in the event of (i)
any event of force majeure which materially interferes with Company's usual
business activity and results in the suspension of the Officers services, (ii)
Executive's medically verified incapacity lasting longer than fourteen
consecutive days, or (iii) Executive's default under paragraph 1 or 13 hereof.
Such suspension may extend, in Company's discretion, for the duration of such
event and a reasonable time thereafter consistent, in the event of a force
majeure suspension, with the suspensions of the Officers. The commencement
and completion of any such suspension shall be communicated by written notice
from the Company to Executive.
Company shall have the right to terminate this agreement by written notice in
the event of any incapacity suspensions lasting longer than fourteen (14)
consectuive days or twenty-one (21) days in the aggregate, any force majeure
suspension lasting longer than fifty (50) days, or any default by Executive of
his obligations hereunder, provided that Executive shall be accorded a
one-time only cure opportunity for default (if curable at all) and, in such
event, must cure such default within forty-eight (48) hours following
Company's notice thereof. Executive shall have the right to terminate this
agreement in the event of any force majeure suspension lasting longer than
twenty-five (25) consecutive days, provided that Executive shall first, at any
time when Executive is so suspended and has been continuously suspended for
more than twenty-five (25) consecutive preceding days, give Company notice of
Executive's intention to terminate, and Executive may then terminate this
agreement if Company thereafter fails to end such suspension and reinstate
Executive's sertvices hereunder within seven (7) days following such notice.
No salary shall accrue during any suspension or following any early
termination hereunder. Pursuant to paragraph 5 hereinabove, in the event of
any termination by Company as a consequence of Executive's default, all
non-exercised stock options hereunder shall be deemed automatically voided.
16. Intellectual Property; Corporate Opportunities. Any and all concepts,
ideas, themes, titles, characters, or intellectual property protectible under
applicable law (including without limitation copyright, trademark, and patent
law) which may be created by Executive (i) during the Term or (ii) at any
prior time and are presented to Company during the Term, shall be deemed a
work for hire for Company and shall be owned by Company. Comnpany shall have
the unencumbered right to add to, subtract from, or otherwise alter such
material in any way and to exploit such material by any means in any media
throught the universe in perpetuity. Any and all corporate or personal
business opportunities in the field of entertainment and media which
Executive becomes aware during the Term shall promptly be referred to the
Officers and, as between Company and Executive, shall be wholly and
exclusively by, and proprietary to, the Company. Executive shall not be
entitled to any additional payment or other consideration in respect of
Company's rights and exploitation of any such right or opportunities pursuant
to this paragraph.
17. No Obligation to Use Services. Company shall have the right at any time to
terminate this agreement and Executive's services hereunder without cause. In
this event, Company's sole obligation shall be to pay Executive's Salary and
then-existing benefits for the remainder of the Term as herein provided and to
pay any Bonus Compensation determined in respect of Bonus Dates occuring prior
to such termination.
18. Notices. All notices hereunder shall be in writing and shall be hand
delivered or mailed by deposit in the U.S. Mail, postage prepaid, first class
certified return receipt requested. All notices shall be deemed delivered
upon the date of hand delivery or on the third business day following mailing
as aforesaid. All notices to the Company shall be addressed and delivered to
the Company at 11601 Wilshire Blvd., 21st Floor, Los Angeles, CA 90025,
directed to the Company's General Counsel, with a copy addressed and delived
to Doniger and Fetter, 606 S. Olive Street, Suite 530, Los Angeles, CA 90014,
Attn: Tom Doniger. All notices to Executive shall be addressed and delivered
to Executive at his residence address as maintained in the Company records.
19. Confidentiality. Subject solely to Company's public reporting and
disclosure requirements, compliance with any judicial order or other legal
mandate, and either party's confidential disclosure to their respective
professional advisors, the terms and conditions of this Agreement shall remain
confidential and shall not be publicized by either party. Executive further
agrees not to disclose any of Company's trade secrets or other proprietary
or confidential information to any third party, including any successor
employeror business colleague
24
<PAGE>
or investor, except as may be specifically authorized in
advance in writing by the Company or as may be required by judicial order or
legal mandate (in which event Executive shall promptly notify Company of such
order or mandate specifically in advance of the required disclosure date to
enable Company to challenge such order or mandate through appropriate legal
action). Executive further agrees not to use or exploit for his own account
any such trade secrets or other proprietary or confidential information at any
time during Executive's employment hereunder or at any time thereafter.
20. Announcement. Company and Executive shall fully consult with one another
regarding the timing and text of Company's announcement of Executives
engagement hereunder. In the event of any disagreement, Company's decisions
in such matter shall be final. Executive shall not separately issue any
publicity announcing this engagement nor disclose such engagement to any third
parties under Company's announcement.
21. Other Terms and Conditions. All other terms and conditions of
Executive's employment shall be in accordance with Company's and KL's standard
policies. In this regard, Executive acknowledges receipt of KL's employee
manual, which is binding on employees of the Company. In the event of any
conflict or inconsistency between the terms thereof and his agreement, the
terms of his agreement control and prevail to the extent necessary to resolve
such conflict or inconsistency.
22. Choice of Law; Arbitration. Company and Executive hereby agree that any
cause of action, claim, controversy, demand or dispute (including, but not
limited to, any discrimination claim or Title VII claim) based upon or arising
from Executive's employment, or any agreement or services with respect thereto
(including this agreement), shall be resolved exclusively by binding
arbitration before a single retired judge selected by mutual consent, not to
be unreasonably withheld, in accordance with the Commercial Rules of the
American Arbitration Association conducted in Los Angeles, California,
although not pursuant to the jurisdiction of the American Arbitration
Association. The parties waive any right to stay such arbitration under the
state or federal law or to litigate such claims, including any right to try
such claims before a court or jury. Any award made by the arbitrator may be
entered as a judgement by any court having jurisdiction thereof.
23. Entire Agreement. This document reflects the enitre agreement of the
parties with respect to Executive's employment by Company, and thereby
supersedes any and all prior agreements, correspondence, communications,
representations, inducements, and negotiations in connection therewith. This
agreement may only be modified by a subsequent written instrument signed by
both parties.
EXECUTED at Los Angeles, California as of the 30th day of April, 1997.
<TABLE>
<S> <C>
THE KUSHNER-LOCKE COMPANY
/S/ DONALD KUSHNER
By: Donald Kushner
-----------------------------
Its: Co-Chairman of the Board, Co-Chief Executive
Officer and Secretary
/S/ ROBERT SWAN
- ---------------------
Robert Swan
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-1-1996
<PERIOD-END> JUN-30-1997
<CASH> 8,515
<SECURITIES> 0
<RECEIVABLES> 32,717
<ALLOWANCES> 0
<INVENTORY> 70,709
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 111,941
<CURRENT-LIABILITIES> 63,913
<BONDS> 11,578
0
0
<COMMON> 38,760
<OTHER-SE> (2,310)
<TOTAL-LIABILITY-AND-EQUITY> 111,941
<SALES> 41,667
<TOTAL-REVENUES> 41,667
<CGS> 34,074
<TOTAL-COSTS> 34,074
<OTHER-EXPENSES> 3,375
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,105
<INCOME-PRETAX> 1,113
<INCOME-TAX> 23
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,090
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
