<PAGE> 1
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 DECEMBER 31, 1996 COMMISSION FILE NO. 0-17295
THE KUSHNER-LOCKE COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4079057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11601 WILSHIRE BLVD., 21ST FLOOR, LOS ANGELES, 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 A
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 52,887,810 shares of outstanding Common Stock of the Registrant
as of February 7, 1997.
<PAGE> 2
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Condensed Consolidated Statement of Stockholders' Equity
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. OTHER INFORMATION
Items 1 through 3. Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: 10.62
10.63
10.64
(b) Reports on Form 8-K: None
2
<PAGE> 3
PART I
ITEM 1.
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------- -------------
<S> <C> <C>
Cash and cash equivalents .......................................... $ 5,952,000 $ 7,091,000
Reserved cash ...................................................... 180,000 4,126,000
Restricted cash .................................................... 255,000 419,000
Accounts receivable, net of allowance for doubtful accounts ........ 20,351,000 22,885,000
Due from affiliates ................................................ 1,519,000 1,238,000
Notes receivable from related party ................................ 540,000 540,000
Film and television property costs, net of accumulated amortization 59,270,000 58,463,000
Property and equipment, at cost, net of accumulated depreciation and
amortization .................................................... 442,000 465,000
Other assets ....................................................... 4,258,000 4,925,000
------------- -------------
$ 92,767,000 $ 100,152,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities ........................... $ 1,740,000 $ 3,277,000
Notes payable ...................................................... 35,796,000 41,481,000
Deferred film license fees ......................................... 3,799,000 3,460,000
Contractual obligations, principally participants' share payable and
talent residuals ................................................ 3,451,000 3,512,000
Production advances ................................................ 1,336,000 2,133,000
Convertible subordinated debentures, net of deferred issuance costs 11,890,000 12,039,000
------------- -------------
Total liabilities ............................................... $ 58,012,000 $ 65,902,000
------------- -------------
Stockholders' equity:
Common stock, no par value. Authorized 150,000,000 shares,
issued and outstanding 52,887,810 shares at December 31, 1996
and 52,665,248 shares at September 30, 1996 .................. 37,995,000 37,650,000
Accumulated deficit ............................................. (3,240,000) (3,400,000)
------------- -------------
Total stockholders' equity ...................................... $ 34,755,000 $ 34,250,000
------------- -------------
$ 92,767,000 $ 100,152,000
============= =============
</TABLE>
See accompanying Notes to condensed consolidated financial statements.
3
<PAGE> 4
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Operating revenues .................................... $ 16,547,000 $ 16,107,000
Costs related to operating revenues ................... (14,020,000) (13,313,000)
Selling, general and administrative
expenses ............................................ (1,172,000) (896,000)
------------ ------------
Earnings from operations ......................... 1,355,000 1,898,000
Interest income ....................................... 28,000 54,000
Interest expense ...................................... (1,217,000) (929,000)
------------ ------------
Earnings before income taxes ..................... 166,000 1,023,000
Provision for income taxes ............................ (6,000) (11,000)
------------ ------------
Net earnings ..................................... $ 160,000 $ 1,012,000
============ ============
Net earnings per common and common equivalent share ... $ 0.003 $ 0.03
============ ============
Weighted average number of common and common
equivalent shares outstanding .................... 52,838,000 35,589,000
============ ============
</TABLE>
See accompanying Notes to condensed consolidated financial statements.
4
<PAGE> 5
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ....................................................... $ 160,000 $ 1,012,000
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Amortization of film costs .................................... 13,935,000 13,310,000
Depreciation and amortization ................................. 28,000 52,000
Amortization of other assets .................................. 191,000 107,000
Reserved and restricted cash .................................. 4,110,000 (797,000)
Accounts receivable, net ...................................... 2,534,000 (4,887,000)
Due from affiliates ........................................... (281,000) 83,000
Increase in film and television property costs ................ (14,742,000) (12,010,000)
Accounts payable and accrued liabilities ...................... (1,537,000) 1,040,000
Deferred film license fees .................................... 339,000 237,000
Contractual obligations ....................................... (61,000) (239,000)
Production advances ........................................... (797,000) (1,647,000)
------------ ------------
Net cash provided (used) by operating activities ................... 3,879,000 (3,739,000)
------------ ------------
Cash flows from investing activities:
Increase in property and equipment ................................. (6,000) (31,000)
Decrease (increase) in other assets ................................ 476,000 (33,000)
------------ ------------
Net cash provided (used) by investing activities ................... 470,000 (64,000)
------------ ------------
Cash flows from financing activities:
Borrowings under notes payable ..................................... 627,000 5,009,000
Repayment of notes payable ......................................... (6,461,000) (2,600,000)
Other .............................................................. 346,000 (40,000)
------------ ------------
Net cash provided (used) by financing activities .................. (5,488,000) 2,369,000
------------ ------------
Net decrease in cash .............................................. (1,139,000) (1,434,000)
Cash and cash equivalents at beginning of period ..................... 7,091,000 3,139,000
------------ ------------
Cash and cash equivalents at end of period ........................... $ 5,952,000 $ 1,705,000
============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
(1) During the quarter ended December 31, 1996, $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 quarter ended December 31, 1995, $210,000 of convertible
subordinated debentures before unamortized issuance costs of $20,000 were
converted into 213,008 shares of common stock.
See accompanying Notes to condensed consolidated financial statements.
5
<PAGE> 6
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1996
(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 debentures and other... 222,562 345,000 -- 345,000
Net earnings ......................... -- -- 160,000 160,000
---------- ----------- ----------- -----------
Balance at December 31, 1996 ............ 52,887,810 $37,995,000 $(3,240,000) $34,755,000
========== =========== =========== ===========
</TABLE>
See accompanying Notes to condensed consolidated financial statements.
6
<PAGE> 7
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. The
unaudited condensed consolidated financial statements should be read in
conjunction with the Company's annual consolidated financial statements and
notes thereto.
The unaudited condensed consolidated financial statements reflect, in the
opinion of management, all adjustments, all of which are of a normal recurring
nature, necessary to present fairly the financial position of the Company as of
December 31, 1996, the results of its operations for the three month periods
ended December 31, 1996 and 1995, and its cash flows for the three month periods
ended December 31, 1996 and 1995. Interim results are not necessarily indicative
of results to be expected for a full fiscal year.
Restricted and Reserved Cash
As of December 31, 1996, the Company had $255,000 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 December 31, 1996 the Company had $180,000 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> 8
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 weighted average number of common and common equivalent shares outstanding
for the calculation of primary earnings per share was 52,838,000 and 35,589,000
for the quarters ended December 31, 1996 and 1995, respectively. The inclusion
of the additional shares, assuming the conversion of the Company's convertible
subordinated debentures, would have been anti-dilutive for the first quarters
ended December 31, 1996 and December 31, 1995.
(2) FILM AND TELEVISION PROPERTY COSTS
Film and television property costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
----------- -----------
<S> <C> <C>
In process or development ........................ $11,467,000 $16,527,000
Released, principally feature films and television
productions, net of accumulated amortization .... 47,803,000 41,936,000
----------- -----------
$59,270,000 $58,463,000
=========== ===========
</TABLE>
(3) NOTES PAYABLE
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
----------- -----------
<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 ............................. $27,307,000 $29,037,000
Notes payable to banks and/or financial institutions
consisting of three production loans secured by certain
film rights held by producers, priced at different
rates for each loan ................................... $ 8,489,000 $12,444,000
----------- -----------
$35,796,000 $41,481,000
=========== ===========
</TABLE>
8
<PAGE> 9
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
----------- -----------
<S> <C> <C>
Series A Convertible Subordinated Debentures due December 15,
2000, bearing interest at 10% per annum payable June 15 and
December 15, net of unamortized capitalized issuance costs and
warrants of $8,000 and $9,000, respectively ................... $ 69,000 $ 68,000
Series B Convertible Subordinated Debentures due December 15,
2000, bearing interest at 133/4% per annum payable monthly, net
of unamortized capitalized issuance costs of $267,000 and
$284,000, respectively ........................................ $ 2,987,000 $ 2,976,000
Convertible Subordinated Debentures due December 15, 2000,
bearing interest at 8% per annum payable February 1 and August
1, net of unamortized capitalized issuance costs of $357,000
and $396,000, respectively .................................... $ 4,643,000 $ 4,821,000
Convertible Subordinated Debentures due July 1, 2002, bearing
interest at 9% per annum payable January 1 and July 1, net of
unamortized capitalized issuance costs of $359,000 and
$376,000, respectively ........................................ 4,191,000 4,174,000
----------- -----------
$11,890,000 $12,039,000
=========== ===========
</TABLE>
Series A Debentures
As of December 31, 1996 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 $8,000 which are amortized using the interest method to interest
expense over the term of the debentures. Approximately $500 of issuance costs
were amortized to interest expense for the three months ended December 31, 1996.
Series B Debentures
As of December 31, 1996 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 $267,000, which are amortized using the interest method to interest
expense over the term of the debentures. Approximately $17,000 of issuance costs
were amortized as interest expense for the three months ended December 31, 1996.
8% Debentures
As of December 31, 1996, 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
$357,000 which are amortized using the interest method to interest expense over
the term of the debentures. Approximately $22,000 of issuance costs were
amortized as interest expense for the three months ended December 31, 1996.
9
<PAGE> 10
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
9% Debentures
As of December 31, 1996, 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
$359,000, which are amortized using the interest method to interest expense over
the term of the debentures. Approximately $17,000 of issuance costs were
amortized as interest expense for the three months ended December 31, 1996.
(5) INCOME TAXES
Income taxes for the three month periods ended December 31, 1996 and 1995
were computed using the effective income tax rate estimated to be applicable for
the full fiscal year, which is subject to ongoing review and evaluation by
management. Management believes that all taxable income for the fiscal year will
be offset by a deferred tax asset which will keep the effective federal tax rate
at approximately 0%.
(6) CONTINGENCIES
The Company is involved in certain legal proceedings and claims arising out
of the normal conduct of its business. Reference is made to the Company's annual
report on Form 10-K for the fiscal year ended September 30, 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 its normal course of business as a entertainment distributor, the
Company makes contractual down payments for the acquisition of distribution
rights upon signature of documentation. This initial advance for rights ranges
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 December
31, 1996 the Company had made contractual agreements for an aggregate of
approximately $7,600,000 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> 11
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.
11
<PAGE> 12
RESULTS OF OPERATIONS
Comparison of Three Months Ended December 31, 1996 and 1995
The Company's operating revenues for the first quarter ended December 31,
1996 were $16,547,000, an increase of $440,000, or 3%, from $16,107,000 from the
prior fiscal year's first quarter ended December 31, 1995. This increase was due
primarily to the timing of delivery and/or availability of films and television
programs.
The Company recognized approximately $5,000,000, or approximately 30%, of
revenues during the first quarter of fiscal 1997 from the delivery and/or
availability of 10 feature films, including approximately $3,800,000 from an
untitled film delivered to 20th Century Fox. In addition, the Company recognized
approximately $7,900,000, or approximately 48%, of revenues during the first
quarter of fiscal 1997, from the delivery and/or availability of 7 network
movies, the network mini-series "Innocent Victims" and the one-hour first run
syndication series "Could It Be A Miracle", including approximately $6,600,000
from two network television movies of the week: "Jack Reed V: Death and
Vengeance" starring Brian Dennehy for NBC and "Unlikely Angel" starring Dolly
Parton for CBS. In addition, the Company recognized approximately $1,200,000, or
approximately 7%, of revenues this quarter from distribution to domestic cable
for films acquired through its majority-owned subsidiary KLC/New City. The
majority of remaining revenues for the period came from the Company's family
division of direct-to-video product 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 first quarter of fiscal 1996 were primarily
attributable to the delivery and/or availability of the ABC network mini-series
"Innocent Victims" starring Hal Holbrook and Rick Schroder (approximately
$6,157,000), and to the delivery and/or availability of four feature films: (a)
"Serpent's; Lair" starring Jeff Fahey for WarnerVision, (b) "The Grave" starring
Gabrielle Anwar, Eric Roberts and Craig Sheffer, and (c) two of the six "Josh
Kirby: Time Warrior" films for Paramount entitled "The Human Pets" and "Planet
of the Dino Knights", which together made up approximately $3,071,000 of
revenues for the period.
In various stages of production for the Company's fiscal 1997 slate are (a)
the feature film "Basil" starring Christian Slater, (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 is also producing six one-hour prime time
episodes of a mid-season replacement series for ABC entitled "The Gun",
including episodes starring Jennifer Tilly, Randy Quaid, Darryl Hannah and
Rosanna Arquette. ABC is scheduled to air the first episode on April 5, 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 "Could It Be A
Miracle", a one-hour series in first-run syndication, hosted by Robert Culp, for
which the Company is now completing the first 24 episodes. In addition, the
Company is producing "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 $14,020,000 during the first
quarter of fiscal 1997 as compared to $13,313,000 during the first quarter of
fiscal 1996. As a percentage of operating revenues, costs relating to operating
revenues were approximately 85% for the first quarter of fiscal 1997 compared to
approximately 83% for the first quarter of fiscal 1996. The increased costs in
the most recent period reflect a weighting of the product mix which includes
titles that are amortized more rapidly than titles included in the comparable
fiscal year 1996 quarter.
Selling, general and administrative expenses increased to $1,172,000 in the
first quarter of fiscal 1997 from $896,000 in the first quarter of fiscal 1996.
The increase in such expenses is principally due to the Company's increased
personnel costs and the Company's increased funding of overhead and development
costs associated with joint ventures or partnerships.
12
<PAGE> 13
Interest expense for the first quarter ended December 31, 1996 was
$1,217,000 as compared to $929,000 for the first quarter ended December 31,
1995. The increase was attributable to the amortization of issuance costs
pertaining to the new line of credit, and the changes in the composition of
debt instruments which currently bear higher average interest rates. Total
indebtedness for borrowed money decreased to $47,686,000 at December 31, 1996
from $48,429,000 at December 31, 1995.
The Company's estimated effective income tax rate was approximately 4% for
the first quarter ended December 31, 1996 compared to an estimated effective
income tax rate of approximately 1% for the quarter ended December 31, 1995. The
$6,000 tax expense in first quarter of fiscal 1997 consisted of state taxes
related to the number of active subsidiary companies.
The Company reported net earnings of $160,000 or $0.003 per share, for the
first quarter ended December 31, 1996 as compared to net earnings of $1,012,000,
or $.03 per share, for the first quarter ended December 31, 1995. Weighted
number of common shares for the compared first quarters were 52,838,100 in
fiscal year 1997 and 35,589,000 in fiscal year 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $6,387,000 (including $255,000 of
restricted cash being used as collateral for certain production loans and
$180,000 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. Unrestricted and
unreserved cash and cash equivalents decreased $1,139,000 since September 30,
1996, primarily due to disbursements which reduced accounts payable and accrued
expenses. Reserved cash decreased $3,946,000 since September 30, 1996 as the
Company repaid certain line of credit borrowings. Restricted cash decreased
$164,000 since September 30, 1996 as a result of the completion of feature film
and television projects which had previously restricted cash balances.
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 positive cash flows from operating activities
of $3,879,000 during the three months ended December 31, 1996, resulting
primarily from the availability of $4,110,000 of previously reserved and
restricted cash and the net collection of $2,534,000 of accounts receivable,
which were partially offset by disbursements which reduced accounts payable and
accrued expenses by $1,537,000 and a $797,000 reduction in the level of
production advances held by the Company. The operating cash inflows were
offset by net cash of $5,488,000 used to repay certain outstanding loans. As
a result primarily of the foregoing factors, net unrestricted cash decreased
during the three month period by $1,139,000 to $5,952,000 on December 31, 1996.
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 revenues, other revenues
and sales from its library.
Credit Facility
On June 25, 1996, the Company closed a $40,000,000 syndicated revolving
credit agreement with a group of banks led by The Chase Manhattan Bank N.A.
("Chase"). Such agreement provides for borrowing by the Company of up to
$40,000,000 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 from time to time allocate a production tranche in its line of
credit for the Company's productions. Such tranche will allow the Company to
borrow up to 50% of the production deficit after accounting for specified
percentages of pre-sales, licensing fees and similar revenues from third parties
and a required Company equity participation. All loans made pursuant to such
agreement are secured by substantially all of the Company's otherwise
unencumbered assets and bear interest, at the Company's option, either (i) at
LIBOR (5.44% as of February 7, 1997) plus 3% (for that portion of the
borrowing base supported by accounts or contracts receivable) or 4% (for that
portion of the borrowing base supported by unamortized library film costs or for
loans made under the production tranche) or (ii) at the Alternate Base Rate,
which is the greater of (a) Chase's
13
<PAGE> 14
Prime Rate (8.25% as of February 7, 1997), (b) Chase's Base 30 Day CD Rate
(5.35% as of February 7, 1997) plus 1% or (c) the Federal Funds Effective Rate
(5.08% as of February 7, 1996) plus 1/2%) plus 2% (for that portion of the
borrowing base supported by accounts or contracts receivable) or 3% (for that
portion of the borrowing base supported by unamortized library film costs or
loans made under the production tranche). The Company is required to pay a
commitment fee of .5% per annum of the unused portion of the credit line. As of
December 31, 1996, the Company had drawn down $27,307,000 under the credit
facility out of a total net borrowing base availability of $29,600,000. The
amount outstanding under the credit facility as of February 7, 1997 had
decreased to $26,308,000.
The credit agreement contains various restrictive covenants to which the
Company must adhere. These covenants, among other things, include limitations on
additional indebtedness, liens, investments, disposition of assets, guarantees,
deficit financing, capital expenditures, affiliate transactions and the use of
proceeds and prohibit payment of cash dividends and prepayment of subordinated
debt. In addition, the credit agreement requires the Company to maintain a
minimum liquidity level, limits overhead expense and requires the Company to
meet certain ratios. The credit agreement also contains a provision permitting
the bank to declare an event of default if either of Messrs. Locke or Kushner
fails to be the Chief Executive Officer of the Company or if any person or group
acquires ownership or control of capital stock of the Company having voting
power greater than the voting power at the time controlled by Messrs. Kushner
and Locke combined (other than any institutional investor able to report its
holdings on Schedule 13G which holds no more than 15% of such voting power). On
February 13, 1997, the Company received a waiver of the minimum ratio of
earnings before interest and taxes to consolidated interest expense for the
rolling four quarter period ended December 31, 1996.
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 December 31, 1996,
approximately $5,000,000 principal amount of 8% Debentures and $4,550,000
principal amount of 9% Debentures were outstanding. As of December 31, 1996,
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
14
<PAGE> 15
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 December 31, 1996.
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 closed a secondary public offering of an
aggregate of 4,750,000 units (a "Unit"), each unit consisting of two shares of
Common Stock and one five year Class C Redeemable Common Stock Purchase Warrants
to purchase Common Stock at an exercise price $1.14375 per share.
Production/Distribution Loans
The Company's other short term borrowings, totaling $8,489,000 as of
December 31, 1996, 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 December 31, 1996:
<TABLE>
<CAPTION>
KUSHNER-LOCKE
FILM AMOUNTS WEIGHTED CORPORATE
- ---- LENDER LOAN AMOUNT OUTSTANDING INTEREST GUARANTY MATURITY
------ ----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
The Adventures of ... Newmarket $12,500,000 $3,491,000 10.56% $1,750,000(1) 12-31-97
Pinocchio
Innocent Victims .... Paribas $ 1,200,000 $ 533,000 7.94% $ 300,000(2) 3-31-97
Magic Adventures .... Imperial $ 5,100,000 $4,465,000 9.75% $ 0 11-15-97
----------- ---------- ----------
$18,800,000 $8,489,000 $2,050,000
=========== ========== ==========
</TABLE>
(1) As of February 10, 1997, the amount outstanding had been reduced to
approximately $1,468,000. The remaining balance owed by the production entity is
collateralized by license obligations in excess of the loan balance.
(2) As of February 10, 1997, the amount outstanding was approximately $538,000.
The remaining balance (and the amount subject to such corporate guarantee) is
fully collateralized by distribution license obligations which exceed the
loan balance.
The Company entered into a long form agreement dated as of February 6, 1995
with Savoy Pictures, Inc. ("Savoy") relating to the development, production,
financing and distribution of a live-action feature-length theatrical motion
picture titled "The Adventures of Pinocchio". The film opened domestically on
July 26, 1996 in a wide theatrical release by New Line Pictures (a subsidiary of
Time Warner Inc.) which has acquired the domestic distribution rights and 50% of
certain ancillary rights from Savoy. The film is being distributed in foreign
territories by the Company. Pursuant to the February 6, 1995 letter agreement,
the Company licensed those domestic and ancillary rights to Savoy in exchange
for Savoy funding 50% of the budget to the production entity up to $25,000,000
(which budget was subsequently increased to approximately $29,450,000, the
majority of which has been financed by Savoy in exchange for certain profit
participations). In order to fund the Company's
15
<PAGE> 16
approximately $12,850,000 share of the budgeted negative costs, the Company has
assisted the film's production company, a consolidated entity, in obtaining loan
documentation from Newmarket and the Bank of America in the amount of 50% of the
film's original budget up to $12,500,000, a portion of which is reserved to pay
the lender's financing fees and costs. The loan bears interest at LIBOR (5.44%
as of February 7, 1997) plus 2% and fees were determined on a sliding scale
related to the amount of acceptable contracts receivable at the time of initial
funding. In January 1997, the loan was amended to reflect Newmarket's favorable
acceptance of a United Kingdom sale-leaseback transaction in respect of "The
Adventures of Pinocchio" in return for which Newmarket secured a second-position
interest with respect to 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 with a related revision in the principal
repayment schedule. Newmarket also has the right to certain profit participation
in connection with the film. There is no assurance that "The Adventures of
Pinocchio", which represents the Company's biggest budget theatrical motion
picture to date, will be ultimately successful to an extent sufficient to repay
the loan in full.
In March 1996, a new production loan was obtained from Paribas in the
aggregate amount of $1,200,000 to cover the Company's acquisition price of
distribution rights in the mini-series entitled "Innocent Victims". The loan
bears interest at the Company's option at LIBOR (5.44% as of February 7, 1997)
plus 2.50% and Bank of America's published reference rate (8.25% as of
February 7, 1997) plus 1/2% and certain loan fees. The loan is secured by the
Company's right, title and interest in and related to the mini-series. The loan
matured on December 31, 1996, but in accordance with the terms of the agreement
was automatically extended to March 31, 1997.
In April 1996, a new 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 (8.25% as of February 7, 1997) plus 1 1/2% payable monthly plus certain
loan fee amounts. The loan was secured by the rights, title and assets related
to the film series which are in various stages of production and will ultimately
be delivered to domestic and international sub-distributors. The loan matures in
November 1997.
In December 1994, the Company loaned August Entertainment, Inc. ("August")
$650,000 against distribution rights to third party product. August is majority
owned by Gregory Cascante, who subsequently joined the Company as President of
its new international film distribution division. The loan bears interest at the
lesser of (a) Prime (8.25% at February 7, 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 with respect to the film "Lawnmower Man II" is subordinate to
the interests of the production lenders, The Allied Entertainment Group PLC, and
its subsidiaries which produced the film have guaranteed payment of such
commissions to the extent they would be payable had there been no production
loan on the film. Repayment of principal and interest is by collection of
commissions assigned as collateral. As of December 31, 1996 the Company had been
repaid $217,000 toward interest and principal and approximately $540,000
principal amount remains outstanding. The loan matured in December 1996.
Effective February 12, 1997, the Company entered into an agreement with August
to extend the maturity date until December 31, 1997 and, in connection
therewith, August Entertainment paid to the Company an additional $100,000 as
partial repayment. August has also agreed to pay an additional $25,000
principal plus interest quarterly, with the loan balance to be paid in full by
December 31, 1997.
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 consideration of receipt of foreign
distribution rights. The agreement is for a minimum of four feature-length
motion pictures and may be extended, at Decade's option, to include a fifth
picture. The initial film under the agreement is "Double Tap" starring Heather
Locklear and Stephen Rea, which is currently expected to be delivered in
calendar 1997.
16
<PAGE> 17
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> 18
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 21, 1996 the shareholders of the Company voted in
a special meeting to amend the Company's Amended Articles of
Incorporation to increase the number of authorized shares of Common
Stock of the Company from the present amount of 80,000,000 shares to
150,000,000 shares. In addition, the shareholders voted to make certain
amendments to the Company's 1988 Stock Incentive Plan, including
increasing the number of shares of Common Stock reserved for issuance
by 3,000,000 shares from 4,500,000 shares to 7,500,000 shares, as well
as certain changes in accordance with new rules enacted under Section
16 of the Securities Exchange Act of 1934, as amended. Finally, the
shareholders voted not to amend the Company's Amended Articles of
Incorporation to provide for 1,000,000 authorized shares of Preferred
Stock of the Company. A majority of total shares outstanding was needed
to approve proposals A and B, whereas a majority of shares voting
was needed to approve proposal C. The results of the voting were as
follows:
a) Approval of the Common Stock Amendment
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
40,146,932 9,038,921 1,030,501
---------- --------- ---------
</TABLE>
b) Disapproval of the Preferred Stock Amendment
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
17,019,136 9,251,592 1,074,823
---------- --------- ---------
</TABLE>
c) Approval of the Amendment to the Company's 1988 Stock
Incentive Plan
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
18,755,342 8,901,555 1,089,500
---------- --------- ---------
</TABLE>
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.
18
<PAGE> 19
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: February 13, 1997 /s/ Peter Locke
--------------------------
Peter Locke
Co-Chairman of the Board,
Co-Chief Executive Officer
Dated: February 13, 1997 /s/ Donald Kushner
--------------------------
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: February 13, 1997 /s/ James L. Schwab
--------------------------
James L. Schwab
Chief Financial Officer
19
<PAGE> 20
INDEX TO EXHIBITS
EXHIBITS:
10.62 Amendment to Master Agreement dated January 22, 1997 between Newmarket
Capital Group, L.P., The Kushner-Locke Company, and Allied Pinocchio
Productions Ltd.
10.63 Waiver of Section 6.19 EBIT to Interest Expenses Ratio 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.
10.64 Extension of Maturity Date under the Loan and Security Agreement, dated
as of March 1, 1996 between Kushner Locke International, Inc. and
Family Pictures, Inc. and Banque Paribas, Los Angeles Agency.
20
<PAGE> 1
EXHIBIT 10.62
MASTER AGREEMENT
This Master Agreement ("Agreement") is entered into by and among
Newmarket Capital Group, L.P. ("Newmarket"), The Kushner-Locke Company ("KLC"),
and Allied Pinocchio Productions Ltd. ("Allied").
1. Definitions. All capitalized terms used herein shall have the
meanings set forth in the introductory paragraph hereof or as set forth below:
a. "Account" has the meaning set forth in Paragraph 3(c).
b. "BofA" means Bank of America.
c. "Metropolitan LC" means the letter of credit issued on
behalf of Metropolitan Filmexport Group.
d. "Overdue Rate" has the meaning set forth in the Pinocchio
Loan Agreement.
e. "Pinocchio" means the theatrical motion picture titled "The
Legend of Pinocchio."
f. "Pinocchio Loan" means Newmarket's and BofA's loan to
Allied to fund production of "Pinocchio."
g. "Pinocchio Loan Agreement" means the Loan Agreement with
respect to the Pinocchio Loan and all ancillary security agreements and other
documentation relating to the Pinocchio Loan.
2. Amendment to Pinocchio Loan Agreement. Subject to Newmarket's and
BofA's fulfillment of their obligations pursuant to Paragraph 3(a) hereof, the
Pinocchio Loan Agreement is hereby amended as follows:
a. The parties agree that the total outstanding balance of the
loan (including all interest, bank fees, legal fees, and costs) was
$3,490,563.95 as of December 31, 1996.
<PAGE> 2
Newmarket hereby confirms that said balance excludes any legal fees and costs
(for both inside or outside counsel) incurred by Newmarket or BofA in respect of
services rendered between August 1 and December 31, 1996, and that all legal
fees in respect of earlier time periods have been posted, and that no legal fees
or costs will subsequently be posted in respect of this five-month period.
b. Commencing on January 1, 1997, the loan shall bear interest
at the non-Overdue Rate. However, Newmarket hereby waives and releases the first
$33,600 of interest which would otherwise accrue in 1997.
c. All interest on the loan shall be paid directly by KLC
monthly within 30 days following Newmarket's invoice therefor, without any
reduction for any payments on the loan from other sources until principal is
fully repaid (i.e., such other payments shall first be applied to principal and
then to interest).
d. The maturity date of the loan is extended to December 31,
1997. The repayment schedule for principal shall be $1,750,000 by February 15,
1997, $875,000 by July 31, 1997, and the remaining balance on December 31, 1997,
with mandatory pre-payments from any and all distributor payments that are
received earlier.
e. Newmarket will release its security interest, copyright
mortgage, assignment of proceeds, and all other benefits in respect to any
particular receivables requested and designated from time to time by KLC and/or
Allied in favor of KLC or KLC's designee in consideration for a paydown of the
Pinocchio Loan with respect to such receivable in an amount equal to the
discounted present value of the receivable (discounted at the non-Overdue Rate).
In this connection, Newmarket shall enter into such reasonable and customary
inter-party documentation and release of applicable bank payment assignments as
may be requested by KLC and will agree to pay over to KLC or its designee any
proceeds which may thereafter inadvertently be received by Newmarket in respect
of the released receivable. Newmarket confirms that it will not retain any
security interest, payment assignment, or collection account to secure its
profit
-2-
<PAGE> 3
participation on Pinocchio with respect to such released receivable.
f. KLC hereby irrevocably and unconditionally guarantees the
timely and full payment to Newmarket of (a) all principal payments on the loan
(excluding $1,750,000 due to be paid by Metropolitan Filmexport on January 31,
1997 and secured by the Metropolitan LC, whether or not all or any portion of
such obligation is actually paid), (b) any reasonable and customary legal fees
in respect of the loan for legal services rendered after January 1, 1997, and
(c) any usual and customary collection costs, such as wire transfer fees or
other remittance charges. Subject to the foregoing limitations on amounts
guaranteed hereunder, all of the provisions of Paragraphs 2 through 13 of the
original Guaranty (i.e., excluding any amendments thereto) dated as of July 7,
1995 made by KLC with respect to the Pinocchio Loan are hereby incorporated by
reference in full, provided that the term "Lenders" herein shall be deemed to
refer solely to Newmarket, and BofA shall not be deemed a beneficiary of the
guarantee herein provided. Subject to the foregoing, the parties acknowledge and
confirm the cancellation of the original Guaranty and KLC's release from any and
all liability thereunder.
g. Except as expressly set forth herein, the Pinocchio Loan
Agreement shall remain in full force and effect, provided that the parties
acknowledge that there are no existing defaults thereunder, that no further bank
fees shall be charged or payable thereunder provided that there are no
subsequent defaults under the Pinocchio Loan Agreement as amended by this
Agreement, that BofA has no rights or security thereunder in relation to Allied
and KLC (other than as provided in Paragraph 4 hereof), and that Allied and KLC
have no further obligation thereunder to close or achieve further sales
thresholds at any time.
3. UK Sale-Leaseback. The following provisions shall apply with respect
to the proposed UK sale-leaseback of Pinocchio:
a. Newmarket covenants to KLC and Allied that Newmarket and
BofA shall cooperate with KLC in concluding a sale-leaseback of Pinocchio by
timely executing all usual and customary documentation required in connection
therewith and
-3-
<PAGE> 4
causing the delivery of such reasonable and customary legal opinions as may be
required in connection thereunder from counsel to Newmarket and BofA.
b. KLC shall be entitled to receive up to the first $150,000
in net cash released and payable to KLC upon closing of the sale-leaseback (net
of all payments, costs, fees, and expenses incurred by KLC or Allied in respect
of the transaction), subject to Newmarket's right to verify that all payments
and fees from the gross amount are paid to bona fide third parties.
c. Newmarket shall be entitled to a second-position security
interest (behind Co-Op Bank) with respect to the bank account holding the
remaining net proceeds of the sale-leaseback (the "Account"). Such security
interest is granted solely for the purpose of securing repayment of the
Pinocchio Loan by Allied as provided in the Pinocchio Loan Agreement as herein
amended. Such security interest shall be subject to the terms and conditions of
the Pinocchio Loan Agreement, as herein amended, applicable to Newmarket's
security as provided thereunder.
d. KLC hereby represents and warrants as follows:
i) From the date of the Pinocchio Loan Agreement
through and including the date of closing of the sale-leaseback transaction,
there have been no (a) grants or licenses by Allied except as have been fully
disclosed to Newmarket or (b) any intervening liens or judgments against Allied.
ii) No voluntary or involuntary bankruptcy petition
will be filed against Allied or the new lessee until at least 90 days after the
Pinocchio Loan is paid in full.
iii) Newmarket shall not suffer any economic loss
(other than its own legal fees) by reason of cooperating with the
sale-leaseback.
4. Newmarket is Lender. Newmarket hereby represents and warrants that
it has bought out the interest of BofA in the Pinocchio Loan and has assigned
the Pinocchio Loan Agreement to BofA as security for a loan from BofA to
Newmarket. Newmarket represents and warrants that it has the right to enter into
this
-4-
<PAGE> 5
agreement and to amend and modify the Pinocchio Loan Agreement with all such
agreements, amendments, and modifications fully binding on BofA, and Newmarket
indemnifies KLC and Allied from any loss, claim, or liability resulting from any
contrary action by BofA.
5. Mutual General Release. Subject to Newmarket's and BofA's
fulfillment of their obligations pursuant to Paragraph 3(a) hereunder, KLC and
Allied, on the one hand, and Newmarket, on the other, hereby fully release,
discharge, and waive any and all claims they may have against the other
attributable to any claim, defaults, acts, or inactions that have occurred, or
are alleged to have occurred, prior to the effective date hereof. This release
shall extend to all claims and causes of action of every kind and nature whether
in law or in equity, whether known or unknown, foreseen or unforeseen. This
release is intended to be a general release, and both parties waive the
provisions of California Civil Code section 1542 (which states that a general
release does not extend to unknown claims). For the avoidance of doubt, this
release does not apply to the obligations of the parties hereunder and under the
Pinocchio Loan Agreement as amended by this Agreement.
6. Condition Precedent. A condition precedent to the effectiveness of
this Agreement is the closing of the UK sale-leaseback.
7. Guarantee of Participation. KLC hereby unconditionally and
irrevocably guarantees the full and prompt payment when and as due of
Newmarket's share of revenues attributable to exploitation of Pinocchio pursuant
to the letter agreement among Newmarket, KLC, Allied, and Kushner-Lock
International, Inc. Notwithstanding the foregoing, and for the avoidance of
doubt, Newmarket acknowledges and confirms that it has no security in Pinocchio
or proceeds thereof in respect of its revenue participation, and that it waives
any claim or entitlement to a collection account in connection therewith. For
the further avoidance of doubt, Newmarket acknowledges and confirms its approval
of all third party revenue participations summarized on Exhibit "A" granted by
Allied or KLC or their predecessors in interest in respect of rights acquired,
services rendered and financing provided in connection with Pinocchio as
permissible
-5-
<PAGE> 6
deductions in the computation of Newmarket's revenue participation hereunder.
8. Governing Law and Jurisdiction. This Agreement shall be governed by
the internal laws of the State of California (i.e., without regard to its
conflict of law principles). Each party hereto hereby agrees that any dispute
relating to this Agreement may be brought in the state or federal courts in Los
Angeles, California, and each party irrevocably waives any objection to such
venue or any claim of inconvenient forum with respect to such jurisdiction.
9. Amendment. This Agreement may only be amended by a written
instrument executed by all of the parties hereto.
10. Execution in Counterparts. This Agreement may be executed in
counterparts and transmitted by facsimile copy, each of which shall be deemed to
constitute an original.
IN WITNESS WHEREOF, this Agreement has been executed by and among the
parties hereto effective as of ___________, 1997.
THE KUSHNER-LOCKE COMPANY
By: /s/ Bruce Lilliston
------------------------------
Title: President
ALLIED PINOCCHIO PRODUCTIONS LTD.
By: /s/ Bruce Lilliston
------------------------------
Title: Authorized Signatory
NEWMARKET CAPITAL GROUP, L.P.
By: BFB, LLC, Managing
General Partner
By: /s/ W. Tyre
-------------------------
Title: COO
-6-
<PAGE> 1
EXHIBIT 10.63
as of February 13, 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.
In accordance with the Borrower's request, each of the undersigned
Lenders hereby waives the Credit Parties' non-compliance with Section 6.19 of
the Credit Agreement solely with respect to the rolling four quarter period
ending December 31, 1996.
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 the Required Lenders and all the Credit Parties.
<PAGE> 2
This waiver shall not be construed as extending to any other matters,
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.
By: /s/ MARY E. BACON
------------------------------------
Name: Mary E. Bacon
Title: Vice President
DE NATIONALE INVESTERINGSBANK N.V.
By:
------------------------------------
Name:
Title:
By:
------------------------------------
Name:
Title:
COMERICA BANK -- CALIFORNIA
By: /s/ D. JEFFREY ANDRICK
------------------------------------
Name: D. Jeffrey Andrick
Title: Vice President
-2-
<PAGE> 3
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.
L-K ENTERTAINMENT, INC.
INTERNATIONAL COURTROOM NEWS SERVICE
FAMILY PICTURES, INC.
TROPICAL HEAT, INC.
KL SYNDICATION, INC.
ANDRE PRODUCTIONS, INC.
TKLC NO. 2, INC.
TWILIGHT ENTERTAINMENT, INC.
KLC FILMS, INC.
KL FEATURES, INC.
KLF GUILD CO.
KLF DEVELOPMENT CO.
KLTV GUILD CO.
KLTV DEVELOPMENT CO.
KUSHNER-LOCKE INTERNATIONAL, INC.
KL INTERACTIVE MEDIA, INC.
By: /s/ DONALD KUSHNER
--------------------------------
Name: Donald Kushner
Title: Co-Chairman
KLC/NEW CITY
By its General Partner
THE KUSHNER-LOCKE COMPANY
By: /s/ DONALD KUSHNER
--------------------------------
Name: Donald Kushner
Title: Authorized Signatory
-3-
<PAGE> 4
DAYTON WAY PICTURES, INC.
DAYTON WAY PICTURES II, INC.
DAYTON WAY PICTURES III, INC.
DAYTON WAY PICTURES IV, INC.
FW COLD CO., INC.
By:/s/ ALAN ABRAMS
---------------------------------
Name: Alan Abrams
Title: President
-4-
<PAGE> 1
EXHIBIT 10.64
[KUSHNER-LOCKE COMPANY LETTERHEAD]
Bruce S.J. Lilliston Phone: (310) 645-1111
President and Fax: (310) 914-0672
Chief Operating Officer
February 13, 1997
VIA FAX
- -------
Banque Paribas Los Angeles Agency
2029 Century Park East
Los Angeles, CA 90067
Attention: Douglas Hansen
Re: INNOCENT VICTIMS
Gentlemen:
Reference is hereby made to the Loan and Security Agreement, dated as of
March 1, 1996 between Kushner Locke International, Inc. and Family Pictures,
Inc., on the one hand, and Banque Paribas, Los Angeles Agency, on the other
hand.
We hereby notify you that various events of force majeure have occurred.
Please confirm that the Maturity Date under the Loan Agreement has been extended
for a period of 90 days to March 31, 1997.
Very truly yours,
KUSHNER LOCKE INTERNATIONAL, INC.
By: /s/ Bruce Lilliston
-----------------------
Its: Authorized Signatory
-----------------------
AGREED TO AND ACCEPTED:
BANQUE PARIBAS LOS ANGELES AGENCY
By: /s/ DOUGLAS C. HANSEN
---------------------
Douglas C. Hansen
Its: Vice President
---------------------
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<FISCAL-YEAR-END> SEP-30-1996
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