SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended June 30, 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
13-3/4% Convertible Subordinated Debentures, Series B due 2000
Common Stock Purchase Warrants, Class C
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
There were 9,208,029 shares of outstanding Common Stock of the Registrant as
of August 13, 1998.
Total number of pages: 28. Exhibit Index begins on page 21.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Form 10-Q for the Quarter ended June 30, 1998
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Condensed Consolidated Statements of Stockholders' Equity
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None
(b) Reports on Form 8-K: None
Items 2, 3 and 5. Not Applicable.
<PAGE>
PART I
Item 1.
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets
June 30, September 30,
1998 1997
____________ ___________
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 377,000 $15,077,000
Reserved cash 81,000 105,000
Restricted cash 1,965,000 1,609,000
Accounts receivable, net of allowance
for doubtful accounts 46,586,000 27,696,000
Due from affiliates 998,000 1,011,000
Film and television property costs, net
of accumulated amortization 58,758,000 68,507,000
Investments in unconsolidated subsidiaries,
at equity 5,662,000 5,326,000
Other assets 6,369,000 5,037,000
----------- -----------
$120,796,000 $124,368,000
=========== ===========
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $4,352,000 $2,935,000
Notes payable 68,285,000 62,647,000
Deferred film license fees 4,074,000 3,362,000
Contractual obligations, principally
participants' share payable and talent
residuals 3,238,000 6,155,000
Production advances 662,000 6,502,000
Convertible subordinated debentures, net
of deferred issuance costs 11,472,000 11,631,000
---------- ----------
Total liabilities 92,083,000 93,232,000
---------- ----------
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares, issued and outstanding
9,208,029 shares at June 30, 1998 and
9,090,080 shares at September 30, 1997 39,226,000 38,905,000
Accumulated deficit (10,513,000) (7,769,000)
---------- ----------
Net stockholders' equity 28,713,000 31,136,000
----------- -----------
$120,796,000 $124,368,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
----------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating revenues $15,323,000 $13,413,000 $59,769,000 $41,667,000
Costs related to operating
revenues (11,799,000) (10,375,000) (50,649,000) (34,074,000)
Selling, general and
administrative expenses (4,216,000) (1,082,000) (7,584,000) (3,375,000)
---------- ---------- ---------- ----------
Earnings (loss) from
operations (692,000) 1,956,000 1,536,000 4,218,000
Interest income 27,000 11,000 64,000 50,000
Interest expense (1,572,000) (1,059,000) (4,326,000) (3,155,000)
---------- ---------- ---------- ----------
Earnings (loss) before
income taxes (2,237,000) 908,000 (2,726,000) 1,113,000
Provision for income taxes (6,000) (6,000) (18,000) (23,000)
---------- ---------- ---------- ----------
Net earnings (loss) $(2,243,000) $902,000 $(2,744,000) $1,090,000
========== ========== ========== ==========
Earnings (loss) available
for common stockholders $(2,243,000) $902,000 $(2,744,000) $1,090,000
========== ========== ========== ==========
Earnings (loss) per share:
basic and diluted ($0.24) $0.10 ($0.30) $0.12
===== ===== ===== =====
Average number of shares
of common stock
outstanding 9,204,000 9,061,000 9,170,000 8,894,000
========= ========= ========= =========
</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>
Nine Months Ended
June 30,
------------------
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(2,744,000) $1,090,000
Adjustments to reconcile net earnings to
net cash used by operating activities:
Amortization of film costs 29,885,000 33,567,000
Depreciation and amortization 195,000 141,000
Amortization of debt issuance costs 760,000 737,000
Changes in assets and liabilities:
Reserved and restricted cash (332,000) (1,442,000)
Accounts receivable, net (18,890,000) (8,327,000)
Due from affiliates 13,000 273,000
Increase in film and television property
costs (20,136,000) (41,499,000)
Accounts payable and accrued liabilities 1,417,000 (879,000)
Deferred film license fees 712,000 3,996,000
Contractual obligations (2,917,000) (1,018,000)
Production advances (5,840,000) 4,258,000
---------- ----------
Net cash used by operating activities (17,877,000) (9,103,000)
---------- ----------
Cash flows from investing activities:
(Increase) decrease in investments in
unconsolidated entities (336,000) 126,000
(Increase) decrease in other assets (668,000) 706,000
---------- ----------
Net cash provided (used) by investing activities (1,004,000) 832,000
---------- ----------
Cash flows from financing activities:
Borrowings under notes payable 33,095,000 27,296,000
Repayment of notes payable (27,457,000) (19,582,000)
Other (1,457,000) 15,000
---------- ----------
Net cash provided by financing activities 4,181,000 7,729,000
---------- ----------
Net decrease in cash and cash equivalents (14,700,000) (542,000)
Cash and cash equivalents at beginning of period 15,077,000 7,091,000
---------- ----------
Cash and cash equivalents at end of period $377,000 $6,549,000
========== ==========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
(1)During the nine months ended June 30, 1998, $300,000 of convertible
subordinated debentures were converted into 51,282 shares of common
stock and the Company acquired control of 800-U.S. Search for no cash
consideration.
(2)During the nine months ended June 30, 1997, $667,000 of convertible
subordinated debentures were converted into 84,562 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
Nine Months ended June 30, 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 51,282 284,000 -- 284,000
Other 66,667 37,000 -- 37,000
Net loss -- -- (2,744,000) (2,744,000)
--------- ---------- ---------- ----------
Balance at June 30, 1998 9,208,029 $39,226,000 $(10,513,000) $28,713,000
========= ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(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, direct
marketing 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
consolidated accounts of The Kushner-Locke Company, its subsidiaries and
certain entities which the Company controls, including 800-U.S. Search.
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 June 30, 1998, the results of its operations for the three and nine month
periods ended March 31, 1998 and 1997, and its cash flows for the nine month
periods ended June 30, 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 June 30, 1998, the Company held $1,965,000 in restricted cash
principally related to deposits held at a British bank pursuant to film
sale/leaseback transactions. Certain other cash advances were being held in
escrow accounts as collateral by financial institutions providing production
loans to those producers. In addition, as of June 30, 1998, the Company held
$81,000 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 assets
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(1) Summary of Significant Accounting Policies (continued)
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 Nine Months Ended
June 30, June 30,
---------- ----------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Numerator for basic earnings
per share - income available
to common stockholders $(2,243,000) $902,000 $(2,744,000) $1,090,000
Effect of dilutive
securities: interest on
convertible debt -- -- -- --
Numerator for diluted --------- -------- ---------- ---------
earnings per share - income
available to common
stockholders - assumed
conversions $(2,243,000) $902,000 $(2,744,000) $1,090,000
========== ======= ========== =========
Denominator for basic earnings
per share - weighted
average shares 9,204,000 9,061,000 9,170,000 8,864,000
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 9,204,000 9,061,000 9,170,000 8,864,000
========= ========= ========= =========
Basic earnings (loss) per
share $(0.24) $0.10 $(0.30) $0.12
===== ==== ===== ====
Diluted earnings (loss) per
share $(0.24) $0.10 $(0.30) $0.12
===== ==== ===== ====
</TABLE>
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
A total of 1,105 000 and 712,000 options and 1,651,000 and 1,584,000 warrants
to acquire common stock were not included in the calculation of diluted
earnings per share for the three and nine month periods ended June 30, 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 nine months
ended June 30, 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>
June 30, September 30,
1998 1997
------ ------
(unaudited)
<S> <C> <C>
In process or development $14,980,000 $10,497,000
Released, net of accumulated amortization 43,778,000 58,010,000
---------- ----------
$58,758,000 $68,507,000
========== ==========
</TABLE>
(3) Notes Payable
Notes payable are comprised of the following:
<TABLE>
<CAPTION>
June 30, 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, 2000 $59,048,000 $56,803,000
Notes payable to banks consisting of production
loans secured by certain film rights held by the
producers, and commercial loans secured primarily
by receivables of a subsidiary, at varying
interest rates for each loan 9,237,000 5,844,000
---------- ----------
$68,285,000 $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>
June 30, 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 133/4%, net
of unamortized issuance costs of $161,000 and
$212,000, respectively 3,045,000 3,029,000
8% Convertible Subordinated Debentures due December
15, 2000, net of unamortized issuance costs of
$209,000 and $290,000, respectively 4,491,000 4,710,000
9% Convertible Subordinated Debentures due July 1,
2002, net of unamortized issuance costs of $236,000
and $279,000, respectively 3,864,000 3,821,000
---------- ----------
$11,472,000 $11,631,000
========== ==========
</TABLE>
Series A Debentures
As of June 30, 1998 the Company had outstanding $77,000 principal amount of
Series A Debentures. The debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering. For the
nine months ended June 30, 1998, $1,000 of issuance costs were amortized to
interest expense.
Series B Debentures
As of June 30, 1998 the Company had outstanding $3,206,000 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.
For the nine months ended June 30, 1998, $51,000 of issuance costs were
amortized as interest expense. During the nine months ended June 30, 1998,
$36,000 of Series B debentures were redeemed.
8% Debentures
As of June 30, 1998, the Company had outstanding $4,700,000 principal amount
of 8% Debentures. The debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering. For the
nine months ended June 30, 1998, $64,000 of issuance costs were amortized as
interest expense. During the nine months ended June 30, 1998, $300,000 of 8%
debentures were converted into 51,282 shares of common stock.
9% Debentures
As of June 30, 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. For the
nine months ended June 30, 1998, $44,000 of issuance costs were amortized as
interest expense.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(5) Income Taxes
Income taxes for the nine month periods ended June 30, 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 1%. As of September 30, 1997 the Company
had a $37,244,000 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 June 30, 1998 the Company had agreed to pay approximately
$6,172,000 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 80% ownership and control of 800-U.S. Search, a company
that provides people search and other customized individual reference
services over the Internet and through direct marketing.
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 film and
television product. 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 prints and prerelease and early release advertising that is expected
to benefit the film or television product in future markets. These costs, as
well as participation and talent residuals, are amortized each period on an
individual film or television product 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 Company has recognized all assets, including intangible assets,
liabilities and adjusted results of operations of 800-U.S. Search in its
consolidated financial statements since obtaining control of 800-U.S. Search
earlier this fiscal year. No minority interest in 800-U.S. Search's earnings
will be recognized in the Company's consolidated financial statements until
the Company recognizes 800-U.S. Search accumulated net earnings for the period
since acquisition and the Company has recouped the minority shareholder's
portion of 800-U.S Search net losses previously consolidated.
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 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,
theatrical film and public record search industries, acquiring or developing
ancillary 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 June 30, 1998 and 1997
The Company's operating revenues for the third quarter ended June 30, 1998
were $15,332,000, an increase of $1,910,000 (14%) as compared to $13,413,000
in the prior fiscal year's third quarter ended June 30, 1997. This increase
was due primarily to the timing of delivery and/or availability of films and
to the inclusion in 1998 of the revenues of certain films previously marketed
by Conquistador Entertainment, an independent film distributor controlled by
the Company's senior marketing executive, and revenues of newly-acquired
800-U.S. Search.
The Company recognized $8,800,000 (57%) of revenues during the third quarter
of fiscal 1998 from the delivery and/or availability of four feature films,
including Girl starring Dominique Swain, One Man's Hero starring Tom
Berenger, and Taxman starring Joe Pantoliano. Revenues of $700,000 (5%) came
from deliveries in the Company's family division of direct-to-video product.
In addition, the Company recognized $2,000,000 (13%) 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 25% of revenues,
approximately $2,700,000 (17%) came from the Company's recently acquired
subsidiary, 800-U.S. Search, which experienced a 78% increase in revenues
from those recognized in the previous quarter.
Operating revenues for the third quarter of fiscal 1997 included $8,200,000
(61%) from the delivery of four episodes of the ABC network series Gun, the
delivery of the pilot episode of Cracker to ABC, and deliveries of additional
episodes of the one-hour first-run syndication series Could It Be A Miracle.
Revenues of $2,100,000 (15%) came from deliveries in the Company's family
division of direct-to-video product, principally including net profits from
one of the Company's joint ventures which delivered two animated feature
films to Buena Vista Home Video, a division of the Walt Disney Company,
entitled Brave Little Toaster Goes to Mars and Brave Little Toaster Goes to
School. In addition, the Company recognized $1,100,000 (8%) of revenues that
quarter from distribution to domestic cable for films acquired through its
majority-owned subsidiary KLC/New City. Remaining revenues came from
continued exploitation of feature films released earlier that fiscal year and
from continued licensing 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, Black and
White starring Gina Gershon, Swing starring Lisa Stansfield and Hugo Speer
and Killer App produced by Robert Altman. In addition, the Company continues
to acquire international distribution rights to films for distribution
through Kushner Locke International, Inc.
Costs relating to operating revenues for the third quarter of fiscal 1998
were $11,799,000, a $1,424,000 (14%) increase as compared to $10,375,000
during the third quarter of fiscal 1997. As a percentage of operating
revenues, costs relating to operating revenues were 77% for the third quarter
of fiscal 1998 unchanged from the third quarter of fiscal 1997. The
percentage reflects a weighting of the product mix which principally includes
film titles produced by others which were previously marketed by Conquistador
Entertainment that are projected to be less profitable than titles included
in the comparable fiscal year 1997 quarter, and lower costs in relation to
revenues recognized by 800-U.S. Search.
Selling, general and administrative expenses for the third quarter of fiscal
1998 were $4,216,000, a $3,134,000 (290%) increase from $1,082,000 in the
third quarter of fiscal 1997. The increase in such expenses is principally
due to a $675,000 addition to the Company's allowance for doubtful receivables
in the current quarter in comparison to last year's quarter, and to the
inclusion in the current year of $2,276,000 of advertising and other expenses
of 800-U.S. Search, which was acquired in the current fiscal year. Such
800-U.S. Search expenses may increase in the future.
Interest expense for the third quarter ended March 31, 1998 was $1,572,000, a
$513,000 (48%) increase as compared to $1,059,000 for the third quarter ended
March 31, 1997. The increase was attributable to increased average levels of
borrowing in the current quarter. Total indebtedness for borrowed money
increased 41% to $79,757,000 at June 30, 1998 from $56,752,000 at
June 30, 1997.
The Company's effective income tax rate was less than (1%) for the third
quarter ended June 30, 1998 compared to an effective income tax rate of 1%
for the quarter ended June 30, 1997. Income tax expense in third quarter of
fiscal 1998 consisted of estimated state income and federal alternative
minimum taxes. As of September 30, 1997 the Company had a $37,244,000
federal income tax net operating loss carryforward.
The Company reported a net loss of ($2,243,000) ($0.24 per share) for the
third quarter ended June 30, 1998 as compared to net earnings of $902,000
($0.10 per share) for the third quarter ended June 30, 1997. Weighted number
of common shares for the compared third quarters were 9,204,000 in 1998 and
9,061,000 in 1997. Included in the quarter ended June 30, 1998 was a $720,000
net loss at 800-U.S. Search, which resulted from increases in its advertising
and salary expenses.
Comparison of Nine Months Ended June 30, 1998 and 1997
The Company's operating revenues for the nine months ended June 30, 1998 were
$59,769,000, an increase of $18,102,000 (43%) from $41,667,000 from the prior
fiscal year's nine 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 $22,450,000 (38%) of revenues during the nine months
ended June 30, 1998 from the delivery and/or availability of 16 feature
films, including Girl starring Dominique Swain, One Man's Hero starring
Tom Berenger, Taxman starring Joe Pantoliano, Swing starring Lisa Stansfield
and Hugo Speer, 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(29%)of revenues during the nine months ended
June 30, 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 $4,400,000 (7%) came from deliveries in the Company's family
division of direct-to-video product. In addition, the Company recognized
$5,800,000 (10%) of revenues 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. Remaining revenues of approximately $9,600,000 (16%) came
principally from the sales of contemporary Christian music on behalf of a
joint venture and search services provided by the recently acquired 800-U.S.
Search business.
Operating revenues for the nine months ended June 30, 1997 included
$7,700,000 (19%) from the delivery and/or availability of four feature films.
In addition, the Company recognized $20,100,000 (48%) of television revenues
during the nine months ended June 30, 1997, including revenues from the
delivery and/or availability of the pilot of the ABC network series Cracker,
four hours of the ABC network series Gun, movies of the week entitled Jack
Reed V: Death and Vengeance to the NBC network and Unlikely Angel to the CBS
network, and the one-hour first-run syndication series Could It Be A Miracle.
Revenues of $6,300,000 (15%) came from the Company's family division of
direct-to-video product, principally from 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. In
addition, the Company recognized $3,400,000 (8%) of revenues from distribution
to domestic cable for films acquired through its majority-owned subsidiary
KLC/New City. Remaining revenues came from continued licensing of completed
product from the Company's library to domestic cable channel operators and
international sub-distributors.
Costs relating to operating revenues for the nine months ended June 30, 1998
were $50,649,000, a $16,575,000 (49%) increase as compared to $34,074,000
during the nine months ended June 30, 1997. As a percentage of operating
revenues, costs relating to operating revenues were 85% for the nine months
ended June 30, 1998 compared to 82% for the nine months ended June 30, 1997.
The increased percentage in the most recent period principally reflects a
weighting of the product mix, which includes film titles produced by others
which were previously marketed by Conquistador Entertainment that are
projected to be less profitable than titles included in the comparable
earlier period.
Selling, general and administrative expenses for the nine months ended June
30, 1998 were $7,584,000, a $4,209,000 (125%) increase as compared to
$3,375,000 during the nine months ended June 30, 1997. The increase in such
expenses is principally due to inclusion of $3,371,000 of advertising and
other expenses of 800 U.S. Search, which was acquired in the current year.
Interest expense for the nine months ended June 30, 1998 was $4,326,000, a
$1,171,000 (37%) increase as compared to $3,155,000 for the nine months ended
June 30, 1997. The increase was principally attributable to the increased
average levels of borrowing in the current quarter, partially offset by
increased production-related interest capitalized in the current period.
Total indebtedness for borrowed money increased 41% to $79,757,000 at June 30,
1998 from $56,752,000 at June 30, 1997.
The Company's estimated effective income tax rate was (1%) for the nine
months ended June 30, 1998 compared to an estimated effective income tax rate
of 2% for the nine months ended June 30, 1997. Income tax expense for the
nine months ended June 30, 1998 consisted of estimated state income and
federal alternative minimum taxes. As of September 30, 1997 the Company had
a $37,244,000 federal income tax net operating loss carryforward.
The Company reported a net loss of ($2,744,000) ($0.30 per share) for the
nine months ended June 30, 1998 as compared to net earnings of $1,090,000
($0.12 per share) for the nine months ended June 30, 1997. Weighted number
of common shares for the compared nine-month periods were 9,170,000 in 1998
and 8,894,000 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, the establishment of its feature film
division and its Internet and direct marketing subsidiary 800-U.S. Search
have significantly increased the Company's working capital requirements and
use of related production loans. The amount available under the credit
facility as of August 13, 1998 was $2,249,000.
At June 30, 1998, cash and cash equivalents decreased to $2,423,000 (including
$1,965,000 of restricted cash being used principally as collateralfor film
sale/leaseback transactions and $81,000 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
$14,700,000 since September 30, 1997.
The Company experienced net cash flows used by operating activities of
($17,877,000) for the nine months ended June 30, 1998, resulting primarily
from a $18,890,000 (68%) increase in accounts receivable which was
principally due to the previously noted $18,102,000 (43%) increase in revenues
for the nine months ended June 30, 1998 (15% for the three months then ended).
In comparison to June 30, 1997, at June 30, 1998 the receivables turnover
rate declined somewhat from 6.7 months' revenues to 7 months' revenues. A
task force has been established to review and accelerate receivables
collections. In addition, cash flows provided by financing activities were
$4,181,000 for the period principally as a result of new production borrowings
in excess of repayments of notes payable. Net unrestricted cash decreased
during the nine-month period by $14,700,000 to $377,000 on June 30, 1998. The
Company also has amounts available under its line of credit. 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 an appraised value of the
Company's library. 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 (5.66% as of August 13,
1998) plus 3% (for that portion of the borrowing base supported by accounts or
contracts receivable or the appraised library value) or 4% (for loans made
under the production tranche) or (ii) at the Alternate Base Rate, which is the
greater of (a) Chase's Prime Rate (8.50% as of August 13, 1998), (b) Chase's
Base 30-Day CD Rate (5.56% as of August 13, 1998) plus 1% or (c) the Federal
Funds Effective Rate (5.58% as of August 13, 1998)plus 2% (for that portion of
the borrowing base supported by accounts or contracts receivable or the
appraised library value) or 3% (for 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 June 30, 1998 was $59,048,000 out of a borrowing base
availability of $60,000,000, and as of August 13, 1998 it was $57,640,000 out
of a borrowing base availability of $59,889,000. The Company is discussing
with Chase an increase in the line of credit to more than $100,000,000.
Should the Company not increase its line of credit, it will continue to seek
individual film and television project financing.
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 $9,237,000
as of June 30, 1998, consisted of $2,683,000 under a production loan further
described below from Banque Paribas (Los Angeles Agency) ("Paribas") to a
consolidated production entity, $4,220,000 of loans from Comerica Bank
- - California, $2,086,000 under a production loan from a Canadian financial
institution, and $248,000 due to a current minority shareholder of 800-U.S.
Search and to a former shareholder of 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
August 13, 1998) plus 2.50% payable monthly. The Company provided a
corporate guaranty in the amount of $500,000 in connection with this loan.
On June 30, 1998, advances totaling $140,000 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 August 13, 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. At June 30, 1998, $2,683,000 was
outstanding under this loan.
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 August 13, 1998) plus 1% or at LIBOR (5.% as
of August 13, 1998) plus 2%. The loan is secured by the rights, title and
assets related to the film. The Company provided a corporate guaranty in the
amount of $500,000 in connection with this loan. The bank has agreed to
extend the loan maturity date from August 31, 1998 to January 31, 1999 as a
consequence of production delays in the completion and delivery of the
picture. On June 30, 1998, advances totaling $7,648,000 were outstanding
pursuant to this loan.
In March 1998, 800-U.S. Search obtained a secured line of credit from Comerica
Bank - California. Advances under the line bear interest at the Prime Rate
(8.50% August 13, 1998) plus 2.50% payable monthly. On June 30, 1998,
advances totaling $295,000 were outstanding under this credit line. As of
August 7, 1998 the bank and the Company agreed that the loan would be capped
at the $344,000 amount outstanding as of that date. Through June 30, 1998 the
Company had loaned 800-U.S. Search $680,000.
In May 1998, a Canadian dollar 5,100,000 production loan was obtained from a
Canadian financial institution, by a consolidated subsidiary to cover a
portion of the production budgets of six direct-to-video feature films. The
loan bears interest at the Canadian Prime Rate (6.50% as of August 13, 1998)
plus 2%. The loan is secured by the rights, title and assets related to the
films. As the films' distributor, the Company agreed to deliver a minimum of
$3,300,000 of exploitation agreements to the financial institution in
connection with this loan. On June 30, 1998, advances totaling $2,086,000
were outstanding under this loan. The loan matures in April 1999.
In April 1998, a $4,625,000 production loan was obtained by a consolidated
subsidiary from Comerica Bank - California to cover the production budget of
Susan's Plan. The loan bears interest at the Prime Rate (8.50% as of August
13, 1998) plus 1% or at LIBOR (5.% as of August 13, 1998) plus 2% . The loan
is secured by the rights, title and assets related to the film. The Company
provided a corporate guaranty in the amount of $600,000 in connection with
this loan. On June 30, 1998, advances totaling $3,925,000 were outstanding
under this loan. The loan matures in March 1999.
Securities Offerings
As of June 30, 1998, $4,700,000 principal amount of 8% Convertible
Subordinated Debentures (convertible into common stock at an adjusted rate of
$5.85 per share) and $4,100,000 principal amount of 9% Convertible
Subordinated Debentures (convertible into common stock at an adjusted rate of
$9.48 per share) were outstanding. During fiscal 1998, $300,000 principal
amount of the 8% Debentures were converted into 51,282 shares of Common Stock.
As of June 30, 1998, $77,000 principal amount of Series A Debentures
(convertible into common stock at an adjusted rate of approximately $7.61 per
share) and $3,206,000 of Series B Debentures (convertible into common stock at
an adjusted rate of approximately $9.27 per share) were outstanding.
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.
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 and from production loans
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 sale of new 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.
Year 2000 ("Y2K") Issues
The Company utilizes third party provider computer programs to process
certain information in order to maintain efficient business operations. No
Company-created programming is utilized. Management is aware of the Year 2000
programming and hardware issue and has been evaluating the adequacy of the
third party providers' proposed or implemented solutions over the past year.
At present, no assurance can be given that those solutions will resolve the
issue, and therefore no assurance can be given that the Company will avoid
significant deterioration of operating efficiency or programming costs.
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
$543,000 to WarnerVision in May 1998.
Item 4. Submission of Matters to a Vote of Security Holders
On June 18, 1998 the shareholders of the Company voted in the annual meeting
to elect five directors, and re-appoint KPMG Peat Marwick LLP as independent
accountants. The results of the voting were as follows:
<TABLE>
<CAPTION>
Election of directors:
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Peter Locke 7,284,348 286,452 25,897
Donald Kushner 7,284,783 286,460 25,454
Irwin Friedman 7,266,017 270,616 60,064
Stuart Hersch 7,265,044 273,069 58,584
John Lannan 7,280,100 255,813 60,784
</TABLE>
Approval of the appointment of KPMG Peat Marwick LLP as independent
accountants for the fiscal year ended September 30, 1998:
<TABLE>
<CAPTION>
FOR AGAINST ABTAIN
<S> <C> <C> <C>
7,499,467 43,072 50,124
</TABLE>
The company is unaware of any withheld votes or broker on-votes.
<PAGE>
Item 5. Other Information
The following table presents the previous five fiscal years ended September
30, 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 income (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: August 14, 1998 /S/ DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: August 14, 1998 /S/ ROBERT SWAN
Robert Swan
Senior Vice President and
Chief Financial Officer
</TABLE>
<PAGE>
INDEX TO EXHIBITS
10.63 Amendment No. 6 dated as of May 13, 1998 to the Credit, Security,
Guaranty and Pledge Agreement dated as of June 19, 1996, as
amended, among The Kushner-Locke Company (the "Borrower"), the
Guarantors named therein, the Lenders referred to therein and
The Chase Manhattan Bank (formerly known as Chemical Bank), as
Agent and as Fronting Bank for the Lenders (the "Agent") (as
heretofore amended, the "Credit Agreement").
<PAGE>
<TABLE>
<S> <C>
AMENDMENT NO. 6 dated as of May 13, 1998 to the Credit,
Security, Guaranty and Pledge Agreement dated as of
June 19, 1996, as amended, among THE KUSHNER LOCKE
COMPANY (the "Borrower"), the Guarantors named therein,
the Lenders referred to therein and THE CHASE MANHATTAN
BANK (formerly known as Chemical Bank), as Agent and as
Fronting Bank for the Lenders (the "Agent")
(as heretofore amended, the "Credit Agreement").
</TABLE>
INTRODUCTORY STATEMENT
The Lenders have made available to the Borrower a revolving credit
facility pursuant to the terms of the Credit Agreement.
The Borrower has requested certain modifications to the Credit Agreement.
The Borrower, the Guarantors, the Lenders and the Agent have agreed to
make revisions to the Credit Agreement, all on the terms and subject to the
conditions hereinafter set forth.
Therefore, the parties hereto hereby agree as follows:
Section 1. Defined Terms. Capitalized terms used herein and not
otherwise defined herein shall have the meaning given them in the Credit
Agreement.
Section 2. Amendments to the Credit Agreement. Subject to the
satisfaction of the conditions precedent set forth in Section 3 hereof, the
Credit Agreement is hereby amended effective as of January 31, 1998 (the
"Effective Date") as follows:
(A) Article 1 of the Credit Agreement is hereby amended by adding the
following definition in the appropriate alphabetical sequence:
"US-SEARCH" shall mean 800-U.S. SEARCH, a California corporation, the
shareholders of which are the Borrower (80%) and Nick Matzorkis (20%).
(B) The definition of "Consolidated Interest Expense" appearing in
Article 1 of the Credit Agreement is hereby amended by adding the parenthetical
"(other than US- SEARCH)" after the term "Consolidated Subsidiaries".
<PAGE>
(C) The definition of "Consolidated Net Income" appearing in Article 1
of the Credit Agreement is hereby amended by adding the parenthetical
"(other than US- SEARCH, except to the extent of the amount of any
dividends or other distributions actually paid by US-SEARCH to a
Credit Party during such period)" immediately after the term
"Consolidated Subsidiaries" but immediately before the words "during
such period" appearing in the second and third lines therein.
(D) The definition of "Stockholders' Equity" appearing in Article 1 of the
Credit Agreement is hereby amended by adding the parenthetical "(other
than US- SEARCH)" after the word "Subsidiaries" appearing therein.
(E) Section 6.1 (Limitations on Indebtedness) of the Credit Agreement is
hereby amended by adding the following clause (k) at the end thereof:
"(k) Indebtedness incurred by US-SEARCH for its working capital
purposes, in an amount not to exceed $1,000,000 at any one time
outstanding"
(F) Section 6.2 (Limitations on Liens) of the Credit Agreement is hereby
amended by adding the following clause (n) at the end thereof:
"(n) Liens granted by US-SEARCH to secure Indebtedness permitted by
Section 6.1(k) hereof, which Liens are non-recourse to any Credit Party."
(G) Section 6.3 (Limitations on Guarantees) of the Credit Agreement is
hereby amended by (i) deleting the amount "$1,000,000" appearing in
clause (iv) thereof and replacing it with "$500,000" and (ii) adding
the following clauses (v) and (vi) at the end thereof:
", (v) the Guarantee by the Borrower for the Indebtedness of US-SEARCH
in an amount not to exceed $1,000,000, and (vi) Guarantees by the
Borrower or a Guarantor of the obligations of another Guarantor."
(H) Section 6.14 (Consolidated Capital Base) of the Credit Agreement is
hereby amended by deleting the words "the net earnings of the Borrower
and its Subsidiaries" appearing in the second line therein, and
inserting in lieu thereof the words "Consolidated Net Income".
Section 3. Conditions to Effectiveness. The effectiveness of this
Amendment is subject to the satisfaction in full of each of the conditions
precedent set forth in this Section 3:
(A) the Agent shall have received counterparts of this Amendment which, when
taken together, bear the signatures of the Borrower, each Guarantor, the Agent
and such of the Lenders as are required by the Credit Agreement;
<PAGE>
(B) US-SEARCH shall have become a Credit Party under the Credit Agreement
and executed and delivered such instruments as may be appropriate in the
reasonable judgment of the Agent to provide the Agent (for the benefit of the
Lenders) a perfected Lien in the assets of US-SEARCH, including without
limitations, an Instrument of Assumption and Joinder, UCC-1 financing
statements, supplements to the Trademark Security Agreement and/or Copyright
Security Agreement, and stock certificate(s) evidencing the Borrower's interest
in US-SEARCH accompanied by undated stock powers executed in blank;
(C) the Borrower shall have obtained the written consent of all shareholders
of US-SEARCH regarding the assumption by US-SEARCH of the obligations and
liabilities of a Guarantor under the Credit Agreement and the other
Fundamental Documents and the pledge to the Agent by the Borrower of its
ownership interest in US-SEARCH; and
(D) all legal matters incident to this Amendment shall be satisfactory to
Morgan, Lewis & Bockius LLP, counsel for the Agent.
Section 4. Consent. Each of the Lenders, by its execution hereof,
hereby consents, to the extent required pursuant to the Credit Agreement, to
the Agent entering into a Subordination Agreement, in form and substance
satisfactory to the Agent, whereby the Liens of the Agent and the Lenders
under the Credit Agreement and other Fundamental Documents in the assets of
US-SEARCH are subordinated to the Liens granted by US-SEARCH to secure
Indebtedness permitted by Section 6.1(k) of the Credit Agreement.
Section 5. Representations and Warranties. Each Credit Party
represents and warrants that:
(A) after giving effect to this Amendment, the representations and
warranties contained in the Credit Agreement are true and correct in all
material respects on and as of the date hereof as if such representations and
warranties had been made on and as of the date hereof (except to the extent
that any such representations and warranties specifically relate to an earlier
date); and
(B) after giving effect to this Amendment, no Event of Default or
Default will have occurred and be continuing on and as of the date hereof.
Section 6. Further Assurances. At any time and from time to time,
upon the Agent's request and at the sole expense of the Credit Parties, each
Credit Party will promptly and duly execute and deliver any and all further
instruments and documents and take such further action as the Agent reasonably
deems necessary to effect the purposes of this Amendment.
Section 7. Fundamental Documents. This Amendment is designated a
Fundamental Document by the Agent.
<PAGE>
Section 8. Full Force and Effect. Except as expressly amended
hereby, the Credit Agreement and the other Fundamental Documents shall continue
in full force and effect in accordance with the provisions thereof on the date
hereof. As used in the Credit Agreement, the terms "Agreement", "this
Agreement", "herein", "hereafter", "hereto", "hereof",
and words of similar import, shall, unless the context otherwise requires,
mean the Credit Agreement as amended by this Amendment.
Section 9. APPLICABLE LAW. THIS AMENDMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK.
Section 10. Counterparts. This Amendment may be executed in two or
more counterparts, each of which shall constitute an original, but all of which
when taken together
shall constitute but one instrument.
Section 11. Expenses. The Borrower agrees to pay all out-of-pocket
expenses incurred by the Agent in connection with the preparation, execution
and delivery of this Amendment, including, but not limited to, the reasonable
fees and disbursements of counsel for the Agent.
Section 12. Headings. The headings of this Amendment are for the
purposes of reference only and shall not affect the construction of or be taken
into consideration in interpreting this Amendment
IN WITNESS WHEREOF, the parties hereby have caused this Amendment to
be duly executed as of the date first written above.
<TABLE>
<S> <C>
BORROWER:
THE KUSHNER-LOCKE COMPANY
By:
Name:
Title:
<PAGE>
GUARANTORS:
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
Name:
Title:
KLC/NEW CITY
By its General Partner
THE KUSHNER-LOCKE COMPANY
By
Name:
Title:
<PAGE>
DAYTON WAY PICTURES, INC.
DAYTON WAY PICTURES II, INC.
DAYTON WAY PICTURES III, INC.
DAYTON WAY PICTURES IV, INC.
FW COLD CO., INC.
By
Name:
Title:
800-U.S. SEARCH
By
Name:
Title:
LENDERS:
Executed in THE CHASE MANHATTAN BANK (formerly
New York, New York known as Chemical Bank), as Agent
On _____________, 1998
By
Name:
Title:
DE NATIONALEINVESTERINGSBANK N.V.
By
Name:
Title:
By
Name:
Title:
<PAGE>
COMERICA BANK -- CALIFORNIA
By
Name:
Title:
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,423
<SECURITIES> 0
<RECEIVABLES> 48,207
<ALLOWANCES> 1,621
<INVENTORY> 58,758<F1>
<CURRENT-ASSETS> 0<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 120,796
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 11,472
0
0
<COMMON> 39,226
<OTHER-SE> (10,513)
<TOTAL-LIABILITY-AND-EQUITY> 28,713
<SALES> 0
<TOTAL-REVENUES> 59,769
<CGS> 50,649
<TOTAL-COSTS> 50,649
<OTHER-EXPENSES> 7,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,326
<INCOME-PRETAX> (2,726)
<INCOME-TAX> 18
<INCOME-CONTINUING> (2,744)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,744)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
<FN>
<F1>Included as Inventory are: completed film and television property costs,
productions in process and development costs.
<F2>The Company does not present a classified balance sheet.
<F3>The Company does not present a classified balance sheet.
</FN>
</TABLE>
