SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended March 31, 1998 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) 481-2000
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
133/4% 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 9,199,482 shares of outstanding Common Stock of the Registrant as
of May 14, 1998.
Total number of pages 20. Exhibit Index begins on page 20.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Form 10-Q for the Quarter ended March 31, 1998
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
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Items 2 through 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None
(b) Reports on Form 8-K: None
<PAGE>
PART I
Item 1.
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
---------- ---------
(unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 6,390,000 $ 15,077,000
Reserved cash 20,000 105,000
Restricted cash 1,538,000 1,609,000
Accounts receivable, net of allowance
for doubtful accounts 42,764,000 27,696,000
Due from affiliates 1,110,000 1,011,000
Film and television property costs,
net of accumulated amortization 56,065,000 68,507,000
Investments in unconsolidated
subsidiaries, at equity 5,811,000 5,326,000
Other assets 6,234,000 5,037,000
----------- -----------
$119,932,000 $124,368,000
=========== ===========
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 3,568,000 $ 2,935,000
Notes payable 62,820,000 62,647,000
Deferred film license fees 3,550,000 3,362,000
Contractual obligations, principally
participants' share payable and talent
residuals 5,796,000 6,155,000
Production advances 1,797,000 6,502,000
Convertible subordinated debentures, net
of deferred issuance costs 11,493,000 11,631,000
----------- -----------
Total liabilities 89,024,000 93,232,000
----------- -----------
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares, issued and
outstanding 9,199,482 shares at March
31, 1998 and 9,090,080 shares at
September 30, 1997 39,178,000 38,905,000
Accumulated deficit (8,270,000) (7,769,000)
----------- -----------
Net stockholders' equity 30,908,000 31,136,000
----------- -----------
$119,932,000 $124,368,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- ------------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues $24,286,000 $11,707,000 $44,446,000 $28,254,000
Costs related to
operating revenues (21,563,000) (9,679,000) (38,850,000) (23,699,000)
Selling, general and
administrative
expenses (2,040,000) (1,121,000) (3,368,000) (2,293,000)
--------- --------- --------- ---------
Earnings from
operations 683,000 907,000 2,228,000 2,262,000
Interest income 4,000 11,000 37,000 39,000
Interest expense (1,360,000) (879,000) (2,754,000) (2,096,000)
--------- --------- --------- ---------
Earnings (loss)
before income
taxes (673,000) 39,000 (489,000) 205,000
Provision for
income taxes (6,000) (11,000) (12,000) (17,000)
--------- --------- --------- ---------
Net earnings (loss) $(679,000) $ 28,000 $(501,000) $ 188,000
========= ========= ========= =========
Earnings (loss)
available for
common
stockholders $(679,000) $ 28,000 $(501,000) $ 188,000
========= ========= ========= =========
Earnings (loss) per
share: basic and
diluted ($0.07) $0.00 ($0.05) $0.02
====== ===== ====== =====
Average number of
shares of common
stock outstanding 9,192,000 8,817,000 9,129,000 8,812,000
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (501,000) $ 188,000
Adjustments to reconcile net earnings to
net cash used by operating activities:
Amortization of film costs 19,921,000 23,542,000
Depreciation and amortization 121,000 93,000
Amortization of other assets 498,000 187,000
Changes in assets and liabilities:
Reserved and restricted cash 156,000 312,000
Accounts receivable, net (15,068,000) (311,000)
Due from affiliates (99,000) 444,000
Increase in film and television
property costs (7,479,000) (32,299,000)
Accounts payable and accrued liabilities 633,000 1,721,000
Deferred film license fees 188,000 1,534,000
Contractual obligations (359,000) (803,000)
Production advances (4,705,000) 2,335,000
---------- ----------
Net cash used by operating activities (6,694,000) (3,057,000)
---------- ----------
Cash flows from investing activities:
(Increase) decrease in investments in
unconsolidated entities (485,000) 618,000
(Increase) decrease in other assets (1,718,000) 333,000
---------- ----------
Net cash provided (used) by investing
activities (2,203,000) 951,000
---------- ----------
Cash flows from financing activities:
Borrowings under notes payable 23,352,000 12,246,000
Repayment of notes payable (23,179,000) (16,072,000)
Other 37,000 --
---------- ----------
Net cash provided (used) by financing
activities 210,000 (3,826,000)
---------- ----------
Net decrease in cash and cash equivalents (8,687,000) (5,932,000)
Cash and cash equivalents at beginning of period 15,077,000 7,091,000
---------- ----------
Cash and cash equivalents at end of period $ 6,390,000 $ 1,159,000
========== ==========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
(1) During the six months ended March 31, 1998, $250,000 of convertible
subordinated debentures were converted into 42,735 shares of common stock.
(2) During the six months ended March 31, 1997, $217,000 of convertible
subordinated debentures were converted into 222,562 shares of common
stock.
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
Six Months ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Number of Common Accumulated
Shares Stock deficit Total
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 9,090,080 $38,905,000 $(7,769,000) $31,136,000
Conversions of convertible
debentures 42,735 236,000 -- 236,000
Other 66,667 37,000 -- 37,000
Net loss -- -- (501,000) (501,000)
--------- ---------- --------- ----------
Balance at March 31, 1998 9,199,482 $39,178,000 $(8,270,000) $30,908,000
========= ========== ========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
The Company
The Kushner-Locke Company (the "Company") is principally engaged in the
development, production, acquisition and distribution of feature films,
direct-to-video films, television series, movies-for-television, mini-series
and animated programming. In addition, the Company markets its search and
Christian music products via the internet and telemarketing.
Generally, theatrical films are first distributed in the theatrical and home
video markets. Subsequently, theatrical films are made available for
worldwide 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 entities
which the Company controls. Entities in which the Company holds a 20% to 50%
interest and exercises significant influence are accounted for under the
equity method. All material intercompany balances and transactions have been
eliminated.
These unaudited condensed 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,
1997 annual report on Form 10-K, as amended.
The unaudited condensed consolidated financial statements reflect, in the
opinion of management, all adjustments, all of which are of a normal recurring
nature, necessary to present fairly the financial position of the Company as
of March 31, 1998, the results of its operations for the six month periods
ended March 31, 1998 and 1997, and its cash flows for the six month periods
ended March 31, 1998 and 1997. Interim results are not necessarily indicative
of results to be expected for a full fiscal year.
Restricted and Reserved Cash
As of March 31, 1998, the Company held $1,538,000 in restricted cash
principally related to a deposit held at a British bank pursuant to a film
sale/leaseback transaction. These cash advances were being held in escrow
accounts as collateral by financial institutions providing production loans to
those producers. In addition, as of March 31, 1998, the Company held $20,000
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
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. The effect on
deferred tax
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(1) Summary of Significant Accounting Policies (continued)
assets and liabilities of a change in tax rates is recognized in operating
results in the period encompassing the enactment date.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Significant estimates are primarily related to ultimate revenues
and ultimate costs relating to the Company's film and television properties
and the collectibility of accounts receivable. Actual results may differ
from estimated amounts.
Reverse Stock Split
In September 1997 the Company effected a 1-for-6 reverse split of the issued
and outstanding shares of common stock as approved by the stockholders. All
references to shares outstanding give effect to this reverse stock split as
if it had occurred at the beginning of the earliest period presented.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Numerator for basic earnings per
share - income available to common
stockholders $(679,000) $ 28,000 $(501,000) $188,000
Effect of dilutive securities:
interest on convertible debt -- -- -- --
------- ------- ------- -------
Numerator for diluted earnings per
share - income available to common
stockholders - assumed conversions $(679,000) $ 28,000 $(501,000) $188,000
======= ======= ======= =======
Denominator for basic earnings per
share - weighted average shares 9,192,000 8,817,000 9,129,000 8,812,000
Effect of dilutive securities:
Employee stock options and
warrants -- -- -- --
Convertible debentures -- -- -- --
---------- -------- --------- ---------
Dilutive potential common shares -- -- -- --
---------- -------- --------- ---------
Denominator for diluted earnings per
share - adjusted weighted average
shares - assumed conversions 9,192,000 8,817,000 9,129,000 8,812,000
========= ========= ========= =========
Basic earnings (loss) per share $(0.07) $0.00 $(0.05) $0.02
========= ========= ========= =========
Diluted earnings (loss) per share $(0.07) $0.00 $(0.05) $0.02
========= ========= ========= =========
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
A total of 1,016,000 and 708,000 options and 1,651,000 and 512,000 warrants
to acquire common stock were not included in the calculation of diluted
earnings per share for the three and six month periods ended March 31, 1998
and 1997, respectively, as their exercise prices were greater than the average
market price for the respective periods. Shares issuable upon conversion of
the Company's convertible subordinated debentures have not been included in
the calculation of diluted earnings per share for the three and six months
ended March 31, 1998 or 1997 as the impact of including such securities would
be antidilutive.
(2) Film and Television Property Costs
Film and television property costs consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
In process or development $8,151,000 $10,497,000
Released, principally feature films and
television productions, net of
accumulated amortization 47,914,000 58,010,000
---------- ----------
$56,065,000 $68,507,000
========== ==========
</TABLE>
(3) Notes Payable
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
----------- ------------
(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 $59,664,000 $56,803,000
Notes payable to banks consisting of a
production loan secured by certain film rights
held by the producer, and commercial loans
secured primarily by receivables of a
subsidiary, at varying interest rates for each
loan 3,156,000 5,844,000
---------- ----------
$62,820,000 $62,647,000
========== ==========
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(4) Convertible Subordinated Debentures
Convertible subordinated debentures are comprised of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
------------ ------------
(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 $5,000 and $6,000, respectively $ 72,000 $ 71,000
Series B Convertible Subordinated Debentures
due December 15, 2000, bearing interest at
13-3/4%, net of unamortized issuance costs of
$179,000 and $212,000, respectively 3,054,000 3,029,000
8% Convertible Subordinated Debentures due
December 15, 2000, net of unamortized issuance
costs of $233,000 and $290,000, respectively 4,517,000 4,710,000
9% Convertible Subordinated Debentures due
July 1, 2002, net of unamortized issuance costs
of $250,000 and $279,000, respectively 3,850,000 3,821,000
---------- ----------
$11,493,000 $11,631,000
========== ==========
</TABLE>
Series A Debentures
As of March 31, 1998 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 $5,000. Approximately $1,000 of issuance costs were amortized to
interest expense for the six months ended March 31, 1998.
Series B Debentures
As of March 31, 1998 the Company had outstanding $3,233,000 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 $179,000. Approximately $33,000 of issuance costs were amortized as
interest expense for the six months ended March 31, 1998.
8% Debentures
As of March 31, 1998, the Company had outstanding $4,750,000 principal amount
of 8% Debentures. The debentures are recorded net of unamortized underwriting
discounts and expenses associated with the offering totaling $233,000.
Approximately $57,000 of issuance costs were amortized as interest expense for
the six months ended March 31, 1998.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(4) Convertible Subordinated Debentures (Continued)
9% Debentures
As of March 31, 1998, 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 $250,000.
Approximately $29,000 of issuance costs were amortized as interest expense for
the six months ended March 31, 1998.
(5) Income Taxes
Income taxes for the six month periods ended March 31, 1998 and 1997 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%. As of September 30, 1997 the Company
had a $39,309,000 federal income tax net operating loss carryforward.
(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, 1997 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 an entertainment distributor, the
Company makes contractual down payments for the acquisition of distribution
rights upon signature of documentation. This initial advance for rights
ranges from 10% to 30% of the total purchase price. The balance of the
payment is generally due upon the complete delivery by third party producers
of acceptable film or video materials and proof of rights held and insurance
policies that may be required for the Company to begin exploitation of the
product. As of March 31, 1998 the Company had agreed to pay approximately
$2,713,000 should those third party producers complete delivery to the
Company. These amounts are estimated to be payable over the next eighteen
months.
<PAGE>
PART I
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's revenues are currently derived primarily from the production or
the acquisition of distribution rights of films released in the U.S. by
studios, pay cable, basic cable, and videocassette companies; and from the
development, production and distribution of television programming for the
major U.S. television networks, basic and pay cable television and first-run
syndication; as well as from the licensing of all rights to the films and
television programs in international territories. While the Company generally
finances all or a substantial portion of the budgeted production costs of its
programming through domestic and international licensing and other
arrangements, the Company typically retains rights in its programming which
may be exploited in future periods or in additional territories. In 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. In fiscal 1998 the Company obtained
control of 800-U.S. Search. That company provides public records searches for
retail consumers.
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 may materially affect a given period's revenues and
results of operations and year-to-year results may not be comparable. The
continuing shift of the Company's 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, 1997 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
<PAGE>
certain risks and uncertainties which could cause actual results to
differ materially from those discussed herein. Such risks and uncertainties
include, but are not limited to, liquidity and financing requirements,
variability of quarterly results and prior losses, increased interest expense,
dependence on a limited number of projects, certain accounting policies
including amortization and adjustments of the film costs, dependence on key
personnel, production deficits, the risk involved in the television and
theatrical film industries, acquiring or developing ancilliary businesses,
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-3 (Registration No. 333-40391), as filed with the Securities and
Exchange Commission on January 8, 1998, and the Company's periodic reports and
other documents filed with the Securities and Exchange Commission for further
discussions of these and other risks and uncertainties applicable to the
Company and its business.
Results of Operations
Comparison of Three Months Ended March 31, 1998 and 1997
The Company's operating revenues for the second quarter ended March 31, 1998
were $24,286,000, an increase of $12,579,000, (107%) from $11,707,000 from the
prior fiscal year's second quarter ended March 31, 1997. This increase was due
primarily to the timing of delivery and/or availability of films and
television programs and to the inclusion in 1998 of the revenues of certain
films previously marketed by Conquistador Entertainment, an independent film
distributor, and revenues of newly-acquired 800-U.S. Search.
The Company recognized $9,600,000 (40%) of revenues during the second quarter
of fiscal 1998 from the delivery and/or availability of eight feature films,
including Minion starring Dolph Lundgren. In addition, the Company recognized
$8,800,000 (36%) of revenues during the second quarter of fiscal 1998 from the
delivery and/or availability of the remaining episodes of the first-run
syndication series Hammer and Mowgli: The New Adventures of The Jungle Boy,
and the net earnings from the delivery by a joint venture of the remaining
episodes of the ABC network series Cracker. The television network's
cancellation of the Cracker series is not expected to adversely affect the
Company in the future, as the series' profit margin was small. Revenues of
$1,600,000 (7%) came from deliveries in the Company's family division of
direct-to-video product. In addition, the Company recognized $2,000,000 (8%)
of revenues this quarter from continuing licenses of product from the
Company's library to domestic cable channel operators through its
majority-owned subsidiary KLC/New City, and through international
sub-distributors. Of the remaining 9% of revenues, the majority came from the
newly-acquired 800-U.S. Search business, whose revenues increased 157% from
those recognized in the previous quarter. Since being acquired, 800-U.S.
Search has incurred a minor net loss.
Operating revenues for the second quarter of fiscal 1997 included $1,895,000
(16%) of revenues during the second quarter of fiscal 1997 from the delivery
and/or availability of 4 feature films. In addition, the Company recognized
$3,956,000 (34%) of revenues during the second quarter of fiscal 1997,
including revenues from the delivery and/or availability of two episodes of
the ABC network series Gun and the one-hour first-run syndication series Could
It Be A Miracle. Revenues of $3,004,000 (26%) came from deliveries in the
Company's family division of direct-to-video product. In addition, the
Company recognized $1,039,000 (9%) of revenues this quarter from distribution
to domestic cable for films acquired through its majority-owned subsidiary
KLC/New City. Remaining revenues came from continuing licenses of completed
product from the Company's library to domestic cable channel operators and
international sub-distributors.
In various stages of production for the Company's fiscal 1998 distribution
slate are Beowulf starring Christopher Lambert, Susan's Plan written and
directed by John Landis and starring Natassja Kinski, Billy Zane, Michael
Biehn, Rob Schneider, Lara Flynn Boyle and Dan Aykroyd, Girl starring
Dominique Swain, One Man's Hero starring Tom Berenger, Taxman starring Joe
Pantoliano, and Swing starring Lisa Stansfield and Hugo Speer. In addition,
the Company continues to acquire international distribution rights to films
for distribution through Kushner Locke International, Inc.
Costs relating to operating revenues were $21,563,000 during the second
quarter of fiscal 1998 as compared to $9,679,000 during the second quarter of
fiscal 1997. As a percentage of operating revenues, costs relating to
operating revenues were 89% for the second quarter of fiscal 1998 compared to
83% for the second quarter of fiscal 1997. The increased percentage in the
most recent quarter principally reflects a weighting of the product mix which
includes episodic television titles that are projected to be less profitable
than titles included in the comparable fiscal year 1997 quarter.
<PAGE>
Selling, general and administrative expenses increased to $2,040,000 in the
second quarter of fiscal 1998 from $1,121,000 in the second quarter of fiscal
1997. The 81% increase in such expenses is principally due to inclusion in
the current year of advertising and other expenses of 800-U.S. Search, which
was acquired in the current fiscal year. Such 800-U.S. Search expenses are
expected to increase in the future, and revenues are also expected to
increase.
Interest expense for the second quarter ended March 31, 1998 was $1,360,000
as compared to $879,000 for the second quarter ended March 31, 1997. The 54%
increase was attributable to increased overall levels of borrowing in the
current quarter, partially offset by lower average interest rates incurred and
increased production-related interest capitalized in the current quarter.
Total indebtedness for borrowed money increased 63% to $74,313,000 at March
31, 1998 from $45,680,000 at March 31, 1997.
The Company's effective income tax rate was (1%) for the second quarter
ended March 31, 1998 compared to an effective income tax rate of 28% for the
quarter ended March 31, 1997. Income tax expense in second quarter of fiscal
1998 consisted of estimated state income and federal alternative minimum
taxes. As of September 30, 1997 the Company had a $39,309,000 federal income
tax net operating loss carryforward.
The Company reported a net loss of ($679,000) ($0.07 per share) for the
second quarter ended March 31, 1998 as compared to net earnings of $28,000
($0.00 per share) for the second quarter ended March 31, 1997. Weighted
number of common shares for the compared second quarters were 9,192,000 in
1998 and 8,817,000 in 1997.
Comparison of Six Months Ended March 31, 1998 and 1997
The Company's operating revenues for the six months ended March 31, 1998 were
$44,446,000, an increase of $16,192,000 (57%) from $28,254,000 from the prior
fiscal year's six month period. This increase was due primarily to the timing
of delivery and/or availability of films and television programs and to the
inclusion in 1998 of the revenues of certain films previously marketed by
Conquistador and the revenues of newly-acquired 800-U.S. Search.
The Company recognized $13,900,000 (31%) of revenues during the six months
ended March 31, 1998 from the delivery and/or availability of 12 feature
films, including Minion starring Dolph Lundgren, , Noose directed by Ted
Demme, Possums starring Mac Davis, Legion starring Parker Stevenson, and
Denial starring Jason Alexander and directed by Adam Rifkin. In addition, the
Company recognized $17,600,000 (40%) of revenues during the six months ended
March 31, 1998, including revenues from the delivery and/or availability of
the remaining episodes of the first-run syndication series Hammer and Mowgli:
The New Adventures of The Jungle Boy, and the net earnings from the delivery
by a joint venture of the remaining episodes of the ABC network series
Cracker. Revenues of $3,300,000 (8%) came from deliveries in the Company's
family division of direct-to-video product. In addition, the Company
recognized $3,800,000 (8%) of revenues this quarter from continuing licenses
of product from the Company's library to domestic cable channel operators
through its majority-owned subsidiary KLC/New City, and through international
sub-distributors. The majority of remaining revenues (13%) came from the sales
of contemporary Christian music on behalf of a joint venture and search
services by the newly-acquired 800-U.S. Search business.
Operating revenues for the six months ended March 31, 1997 included
$6,862,000 (24%) of revenues from the delivery and/or availability of 14
feature films. In addition, the Company recognized $ 11,861,000 (42%) of
revenues during the six months ended March 31, 1997, including revenues from
the delivery and/or availability of the ABC network series Gun and the
one-hour first-run syndication series Could It Be A Miracle. Revenues of
$4,208,000 (15%) came from the Company's family division of direct-to-video
product. In addition, the Company recognized $2,249,000 (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.
Costs relating to operating revenues were $38,850,000 during the six months
ended March 31, 1998 as compared to $23,699,000 during the six months ended
March 31, 1997. As a percentage of operating revenues, costs relating to
operating revenues were 87% for the six months ended March 31, 1998 compared
to approximately 84% for the six months ended March 31, 1997. The increased
percentage in the most recent period principally reflects a weighting of
the product mix, which includes episodic television titles that are projected
to be less profitable than titles included in the comparable earlier period.
<PAGE>
Selling, general and administrative expenses increased to $3,368,000 during
the six months ended March 31, 1998 from $2,293,000 during the six months
ended March 31, 1997. The 47% increase in such expenses is principally due to
inclusion of advertising and other expenses of 800 U.S. Search which was
acquired in the current year.
Interest expense during the six months ended March 31, 1998 was $2,754,000 as
compared to $2,096,000 for the six months ended March 31, 1997. The 31%
increase was principally attributable to the increased overall levels of
borrowing in the current quarter, partially offset by lower average interest
rates incurred and increased production-related interest capitalized in the
current period. Total indebtedness for borrowed money increased 63% to
$74,313,000 at March 31, 1998 from $45,680,000 at March 31, 1997.
The Company's estimated effective income tax rate was (2%) for the six months
ended March 31, 1998 compared to an estimated effective income tax rate of 8%
for the six months ended March 31, 1997. Income tax expense for the six
months ended March 31, 1998 consisted of estimated state income and federal
alternative minimum taxes. As of September 30, 1997 the Company had a
$39,309,000 federal income tax net operating loss carryforward.
The Company reported a net loss of ($501,000) ($0.05 per share) for the six
months ended March 31, 1998 as compared to net earnings of $188,000 ($0.02 per
share) for the six months ended March 31, 1997. Weighted number of common
shares for the compared six-month periods 9,129,000 in 1998 and 8,812,000 in
1997.
Liquidity and Capital Resources
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 financings, and
has relied upon its line of credit and transactional production loans to
provide bridge production financing prior to receipt of license fees. The
Company funds production and acquisition costs out of its working capital,
including the line of credit, and through certain pre-sales 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.
At March 31, 1998, cash and cash equivalents decreased to $7,948,000
(including $1,538,000 of restricted cash being used principally as collateral
for a film sale/leaseback transaction and $20,000 of reserved cash to be
applied against the Company's outstanding borrowings under its credit
facility) from $16,791,000 (including $1,609,000 of restricted cash being
used principally as collateral for a film sale/leaseback transaction and for
certain production loans and $105,000 of reserved cash to be applied against
the Company's outstanding borrowings under its credit facility) at September
30, 1997. Unrestricted and unreserved cash and cash equivalents decreased
$8,687,000 since September 30, 1997.
The Company experienced net negative cash flows from operating activities of
($6,694,000) during the six months ended March 31, 1998, resulting primarily
from a $15,068,000 (54%) increase in accounts receivable which was due to the
previously noted 57% increase in revenues for the six months ended March 31,
1998 (107% for the three months then ended). The Company advanced $680,000
to 800-U.S. Search and invested $485,000 in its unconsolidated joint ventures
during the six months ended March 31, 1998. In addition, the Company
experienced net positive cash flows from financing activities of $210,000
during the period as a result of new borrowings slightly in excess of
repayments of notes payable. As a result primarily of the foregoing factors,
net unrestricted cash decreased during the six month period by $8,687,000 to
$6,390,000 on March 31, 1998 before taking into consideration amounts
available under the Company's line of credit as of such dates. See "Credit
Facility" below. 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
In June 1996, the Company obtained a $40,000,000 syndicated revolving line of
credit from a group of banks led by The Chase Manhattan Bank N.A. ("Chase").
In September 1997 that agreement was amended to increase the maximum amount of
revolving credit to $60,000,000 and to extend its maturity to June 2000. Such
agreement provides for borrowing by the Company of up to $60,000,000 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
<PAGE>
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 (5.625% as of May 14, 1998) 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 Prime Rate (8.50% as of May 14, 1998), (b)
Chase's Base 30-Day CD Rate (5.56% as of May 14, 1998) plus 1% or (c) the
Federal Funds Effective Rate (5.625% as of May 14, 1998) 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 0.5% per annum of the unused portion of
the credit line. The amount outstanding under the credit facility as of March
31, 1998 was $59,664,000 out of a borrowing base availability of $59,665,000,
and as of May 14, 1998 it was $56,814,000 out of a borrowing base availability
of $59,056,000.
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).
Production/Distribution Loans
The Company's other consolidated short term borrowings, totaling $3,156,000
as of March 31, 1998, consisted of $2,715,000 under a production loan further
described below from Banque Paribas (Los Angeles Agency) ("Paribas") to a
consolidated production entity and $441,000 of loans from Comerica Bank -
California and Union Bank to the Company's recently-acquired subsidiary,
800-U.S. Search. The Kushner-Locke Company has provided a $1,500,000
corporate guarantee for a portion of the Paribas loan which is callable in the
event that the production company does not repay the loans by the extended
maturity date. Deposits on the purchase price paid by the distributing
licensees are held as restricted cash collateral by the lender. To the extent
the collateral value securing the loan 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.
In September 1996, TVFirst, an unconsolidated company 50%-owned by the
Company, obtained a $500,000 secured line of credit from Comerica Bank -
California. Advances under the line bear interest at Prime (8.50% at May 14,
1998) plus 2.50% payable monthly. On March 31, 1998, advances totaling
$262,000 were outstanding under this credit line.
In February 1997, a $6,300,000 production loan was obtained from Paribas to
cover a portion of the production budget of Basil. The loan bears interest at
Prime (8.50% as of May 14, 1998) plus 1.5% payable monthly plus certain loan
fee amounts. The maturity date for the loan has been extended to December 15,
1998. The loan is secured by the rights, title and assets related to the
film, which is being delivered to sub-distributors. In May 1997 a third party
invested $2,000,000 in the film project in exchange for certain rights and
profit participations.
In November 1997, an $8,200,000 production loan was obtained from Comerica
Bank - California by an unconsolidated company 25%-owned by the Company to
cover a portion of the production budget of Beowulf. The loan bears interest
at the Prime Rate (8.50% as of May 14, 1998) plus 1% or at LIBOR (5.625% as of
May 14, 1998) plus 2%. The Company provided a corporate guaranty in the amount
of $1,250,000 in connection with this loan. The loan matures on August 31,
1998. The loan is secured by the rights, title and assets related to the
film. On March 31, 1998, advances totaling $7,306,000 were outstanding
pursuant to this loan.
<PAGE>
Securities Offerings
As of March 31, 1998, $4,750,000 principal amount of 8% Convertible
Subordinated Debentures and $4,100,000 principal amount of 9% Convertible
Subordinated Debentures were outstanding. In December 1997, $250,000
principal amount of the 8% Debentures were converted into 42,735 shares of
Common Stock. As of March 31, 1998, approximately $77,000 principal amount of
Series A Debentures (convertible into common stock at an adjusted rate of
approximately $7.61 per share) and $3,242,000 of Series B Debentures
(convertible into common stock at an adjusted rate of approximately $9.27 per
share) were outstanding.
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 (now equivalent to 1,583,334 shares in the aggregate giving effect to
the 1-for-6 reverse stock split) and one five year Class C Redeemable Common
Stock Purchase Warrant to purchase Common Stock at an adjusted exercise price
of $6.8625 per share. The Company received net proceeds in the amount of
$9,203,125. In connection with such offering, the Company issued warrants to
purchase up to an aggregate of 475,000 Units (prior to the reverse split) at
an adjusted rate of $18.00 per Unit to the underwriter thereof and a
consultant.
Other
The Company recently entered into an agreement in principle with a major
studio whereby the Company has the right to distribute in international
territories up to nine moderate to high-budget motion pictures over a
three-year period. The Company has the right to select the motion pictures,
if any, to be distributed among titles made available by the major studio. In
the event the company selects one or more films under the arrangement,
management currently expects to finance its acquisition of the distribution
rights via credit facilities not presently in place. There can be no
assurance that definitive agreements for this distribution arrangement will be
agreed to, that financing will be obtained, or that such activities will
ultimately be profitable if undertaken
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 international film distribution division. The loan bears
interest at the lesser of (a) Prime (8.50% at May 14, 1998) 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 March
31, 1998 the Company had been repaid $484,000 toward interest and principal
and approximately $333,000 principal amount remains outstanding. The loan
matured in December 1997, but August and the Company have agreed to a one
year extension to December 1998 with August agreeing to make principal
reduction payments totaling $205,000 on a scheduled basis prior to maturity.
Mr. Cascante left the Company in April 1997 and his employment agreement was
then settled.
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, except as indicated above pertaining to potential financing
requirements relating to the agreement in principle with a major studio. The
Company from time to time will seek additional financing through the issuance
of new 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 also considers 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In January 1998, the Company settled certain disputes with WarnerVision which
were the subject matter of a complaint filed against WarnerVision in June
1997, and WarnerVision settled certain disputes with the Company which were
the subject matter of a complaint filed against the Company in October 1997.
The settlement clarified the Company's and WarnerVision's rights regarding the
exploitation of certain films, and WarnerVision reduced the Company's
contractual payment obligation to WarnerVision, which had been accrued but not
paid due to the disputes. Pursuant to the settlement, the Company paid
$1,003,000 to WarnerVision in February 1998.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The following table presents the previous five fiscal years ended March 31,
1997 reconciliation of earnings per share calculations restated in accordance
with Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS 128).
<TABLE>
<CAPTION>
For the Year Ended September 30,
----------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Basic earnings per share ($0.49) $0.11 ($0.75) ($1.38) ($0.39)
====== ====== ====== ====== ======
Diluted earnings per share ($0.49) $0.11 ($0.75) ($1.38) ($0.39)
====== ====== ====== ====== ======
</TABLE>
The following table presents the reconciliation of earnings per share
calculations restated in accordance with SFAS 128 for each of the years in the
three year period ended September 30, 1997.
<TABLE>
<CAPTION>
For the Year Ended September 30,
------------------------------------
1997 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Numerator:
Net earnings (loss) ($4,369,000) $730,000 ($3,975,000)
Assumed debenture conversions -- -- --
Numerator for basic and diluted
earnings per share - income
available to common ---------- --------- ----------
stockholders ($4,369,000) $730,000 ($3,975,000)
========== ========= ==========
Denominator:
Denominator for basic earnings
per share - weighted
average shares 8,959,000 6,668,000 5,286,000
Effect of dilutive securities:
Employee stock options and
warrants -- -- --
Convertible debentures -- -- --
---------- --------- ----------
Dilutive potential common shares -- -- --
---------- --------- ----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 8,959,000 6,668,000 5,286,000
========== ========= ==========
</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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: May 14, 1998 /S/ DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: May 14, 1998 /S/ ROBERT SWAN
Robert Swan
Senior Vice President and
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
None.
</TABLE>
