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, 1999 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 12,797,389 shares of outstanding Common Stock of the Registrant as
of May 14, 1999.
Total number of pages: . Exhibit Index begins on page .
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Form 10-Q for the Quarter ended March 31, 1999
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
Item 3. Not Applicable.
Part II. OTHER INFORMATION
Item 1. Not Applicable.
Item 2. Recent Sales of Unregistered Securities, Uses of Proceeds From
Registered Securities.
Item 3 through 5. Not Applicable.
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:
Current Report on Form 8-K, filed on April 13, 1999.
Current Report on Form 8-K, filed on May 3, 1999.
<PAGE>
PART I
Item 1.
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
(unaudited)
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 560,000 $ 1,255,000
Reserved cash 103,000 66,000
Restricted cash 1,995,000 1,988,000
Accounts receivable, net of allowance for
doubtful accounts 39,085,000 40,418,000
Due from affiliates 3,430,000 2,488,000
Note receivable from related party -- 231,000
Film and television property costs, net of
accumulated amortization 74,419,000 73,773,000
Investments in unconsolidated entities, at equity 10,639,000 10,798,000
Other assets 5,388,000 6,088,000
------------ ------------
$135,619,000 $137,105,000
============ ============
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 8,184,000 $ 6,031,000
Notes payable 73,208,000 73,151,000
Deferred film license fees 2,896,000 4,111,000
Contractual obligations 13,284,000 13,851,000
Production advances 2,484,000 2,969,000
Convertible subordinated debentures, net of
deferred issuance costs 7,671,000 11,526,000
------------ ------------
Total liabilities 107,727,000 111,639,000
------------ ------------
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued and outstanding
11,625,606 shares at March 31, 1999 and
9,217,029 shares at September 30, 1998 51,671,000 39,571,000
Additional paid-in capital 876,000 --
Accumulated deficit (24,655,000) (14,105,000)
------------ ------------
Net stockholders' equity 27,892,000 25,466,000
------------ ------------
$135,619,000 $137,105,000
============ ============
</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 Six Months Ended
March 31, March 31,
----------------------- ------------------------
1999 1998 1999 1998
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues:
Film and television
programming $6,811,000 $22,772,000 $18,554,000 $42,342,000
Search and individual
reference services 3,397,000 1,514,000 5,640,000 2,104,000
---------- ---------- ---------- ----------
Total operating
revenues 10,208,000 24,286,000 24,194,000 44,446,000
---------- ---------- ---------- ----------
Costs related to
operating revenues:
Film and television
programming (4,966,000) (20,722,000) (15,745,000) (37,800,000)
Search and individual
reference services (1,476,000) (841,000) (2,360,000) (1,050,000)
---------- ---------- ---------- ----------
Total costs related to
operating revenues (6,442,000) (21,563,000) (18,105,000) (38,850,000)
---------- ---------- ---------- ----------
Gross profit 3,766,000 2,723,000 6,089,000 5,596,000
Selling, general and
administrative
expenses (5,684,000) (1,865,000) (11,353,000) (3,018,000)
Provision for doubtful
accounts and notes (411,000) (175,000) (1,201,000) (350,000)
---------- --------- --------- ----------
Earnings (loss) from
operations (2,329,000) 683,000 (6,465,000) 2,228,000
Interest income 39,000 4,000 103,000 37,000
Interest expense (2,253,000) (1,360,000) (4,106,000) (2,754,000)
---------- --------- --------- ----------
Loss before income
taxes (4,543,000) (673,000) (10,468,000) (489,000)
Income tax expense (32,000) (6,000) (82,000) (12,000)
---------- --------- ---------- ---------
Net loss ($4,575,000) ($679,000) ($10,550,000) ($501,000)
========== ========= ========== =========
Loss available for
common
stockholders ($4,575,000) ($679,000) ($10,550,000) ($501,000)
========== ========= ========== =========
Loss per share:
basic and diluted ($0.42) ($0.07) ($1.04) ($0.05)
===== ===== ===== =====
Average number of
shares of common
stock outstanding 10,932,000 9,192,000 10,149,000 9,129,000
========== ========= ========== =========
</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,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,550,000) $(501,000)
Adjustments to reconcile net loss
to net cash used by operating activities:
Amortization of film costs 16,568,000 19,921,000
Depreciation and amortization 189,000 121,000
Amortization of other assets 301,000 498,000
Provision for doubtful accounts and notes 965,000 350,000
Other 909,000 --
Reserved and restricted cash (44,000) 156,000
Accounts receivable 448,000 (15,418,000)
Due from affiliates (766,000) (99,000)
Increase in film and television property costs (17,214,000) (7,479,000)
Other assets 441,000 (1,048,000)
Accounts payable and accrued liabilities 2,151,000 633,000
Deferred film license fees (1,215,000) 188,000
Contractual obligations (567,000) (359,000)
Production advances (485,000) (4,705,000)
----------- -----------
Net cash used by operating activities (8,869,000) (7,742,000)
----------- -----------
Cash flows from investing activities:
Decrease (increase) in investments in
unconsolidated entities 134,000 (485,000)
Increase in other assets (96,000) (670,000)
----------- -----------
Net cash provided (used) by investing activities 38,000 (1,155,000)
----------- -----------
Cash flows from financing activities:
Borrowings under notes payable 17,134,000 23,352,000
Repayment of notes payable (17,077,000) (23,179,000)
Private placement of common stock 5,456,000 --
Exercise of warrants and stock options 2,671,000
Other (48,000) 37,000
----------- -----------
Net cash provided by financing activities 8,136,000 210,000
----------- -----------
Net decrease in cash (695,000) (8,687,000)
Cash and cash equivalents at beginning of period 1,255,000 15,077,000
----------- -----------
Cash and cash equivalents at end of period $560,000 $6,390,000
=========== ===========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
(1) During the six months ended March 31, 1999, $4,090,000 of convertible
subordinated debentures were converted into 653,055 shares of common
stock.
(2) During the six months ended March 31, 1998, $250,000 of convertible
subordinated debentures were converted into 42,735 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, 1999
(unaudited)
<TABLE>
<CAPTION>
Additional
Number of Common Paid-in Accumulated
Shares Stock Capital Deficit Net
--------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at
September 30, 1998 9,217,029 $39,571,000 $-- $(14,105,000) $25,466,000
Private placement
of common stock 1,200,000 5,456,000 -- -- 5,456,000
Exercise of
warrants and
stock options 555,522 2,671,000 -- -- 2,671,000
Conversion of
subordinated
debentures 653,055 3,942,000 -- -- 3,942,000
Consulting warrant
cost -- 33,000 -- -- 33,000
Options
granted by
subsidiary -- -- 876,000 -- 876,000
Net loss -- -- -- (10,550,000) (10,550,000)
---------- ---------- ------- ---------- ----------
Balance at
March 31, 1999 11,625,606 $51,671,000 $876,000 $(24,655,000) $27,892,000
========== ========== ======= ========== ==========
</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 is a leading independent entertainment company which
principally develops, produces, and distributes original feature films and
television programming. Our feature films are developed and produced for the
theatrical, made-for-video and pay cable motion picture markets. Our
television programming has included television series, mini-series,
movies-for-television, animation, reality and game show programming for the
major networks, cable television, first-run syndication and international
markets.
We established our feature film production operations in 1993. In 1994, we
established an international theatrical film subsidiary to expand into foreign
theatrical distribution. In 1995, we formed KLC/New City Tele-Ventures
("KLC/New City"), a joint venture 82.5% owned by us, to acquire films for
distribution through emerging new delivery systems, including pay cable,
pay-per-view, basic cable, video-on-demand and satellite systems. In late
1997, we acquired control of 800-U.S. Search, a leading provider of fee-based
public record search and other customized individual reference services. In
February 1998 we established KL/Phoenix, an 80% owned entity, which
distributes feature films, television and video product throughout Latin
America. In November 1998 KL/Phoenix launched a 24 hour Spanish language movie
channel called Gran Canal Latino.
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 wholly-owned subsidiaries, and
certain less than wholly-owned 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.
During November 1997, the Company obtained control of 800-US Search and
established a new 80%-owned joint venture for Latin American distribution and
satellite television broadcasting. Those entities' accounts are consolidated
in the accompanying financial statements from the date of acquisition or
establishment. The acquisition of 800-US Search was accounted for as a
purchase and, after revaluing acquired assets and liabilities, the Company
recorded a $2,097,000 intangible asset representing the excess of cost over
net assets acquired. That intangible asset is being amortized straight-line
over an estimated 5 year life. Because 800-U.S. Search and Kushner-Locke's
new Latin American distribution and satellite television broadcasting
subsidiaries have incurred net losses since inception or acquisition and the
Company has funded 100% of such losses, the Company has recognized 100% of
those incurred net losses in its consolidated financial statements and no
minority interest receivables or credits to operating results were
recognized.
These unaudited consolidated financial statements and notes thereto have been
condensed and, therefore, do not contain certain information included in the
Company's annual consolidated financial statements and notes thereto. The
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the Company's annual consolidated financial
statements and notes thereto.
The unaudited condensed consolidated financial statements reflect, in the
opinion of management, all adjustments, all of which are of a normal recurring
nature, necessary to present fairly the financial position of the Company as
of March 31, 1999, and the results of its operations and its cash flows for
the three and six month periods ended March 31, 1999 and 1998. Interim
results are not necessarily indicative of results to be expected for a full
fiscal year.
Restricted and Reserved Cash
At March 31, 1999, out of $2,658,000 of total cash the Company had
$1,995,000 in restricted cash principally related to deposits held at a
British bank pursuant to film sale/leaseback transactions. In addition, at
March 31, 1999, the Company had $103,000 in cash collected by the Company
and reserved for use principally 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 and liabilities of a change in tax rates is recognized in
operating results in the period encompassing the enactment date of such change.
The accompanying financial statements include no deferred tax assets or
liabilities due to the existence of net operating loss carryforwards.
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.
(2) Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income." This statement established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income generally represents all changes in
shareholders' equity during the period except those resulting from investments
by, or distributions to, shareholders. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997, and requires restatement of earlier
periods presented. SFAS No. 130 defines comprehensive income as net income
plus all other changes in equity from nonowner sources. The Company has
adopted the provisions of SFAS No. 130 as of October 1, 1998. For all periods
presented there were no changes in equity from nonowner sources. Accordingly,
for all periods presented, comprehensive income or loss is equal to net
earnings or loss, and the accumulated other comprehensive loss is zero.
(3) Film and Television Property Costs
Film and television property costs consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------- -----------
<S> <C> <C>
In process or development $6,888,000 $10,570,000
Released, principally feature films and television
productions, net of accumulated amortization 67,531,000 63,203,000
----------- -----------
$74,419,000 $73,773,000
=========== ===========
</TABLE>
(4) Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------- -----------
<S> <C> <C>
Note payable to bank, under the revolving credit
facility collateralized by substantially all
Company assets, interest at varying rates,
outstanding principal balance due June 2000 $64,135,000 $58,980,000
Notes payable to banks and financial institutions
principally consisting of production loans
collateralized by film rights 9,073,000 14,171,000
---------- ----------
$73,208,000 $73,151,000
========== ==========
</TABLE>
In June 1996 the Company obtained a $40,000,000 syndicated borrowing base
revolving credit facility. In September 1997 the facility was increased to
$60,000,000 and the maturity was extended to June 2000. In December 1998 the
facility was increased to a maximum of $75,000,000, subject to the addition of
new banks to the syndicated group and to the availability of sufficient
collateral. As of May 14, 1999 a maximum of $68,000,000 could be
borrowed based upon available collateral, and $66,985,000 was then
outstanding.
(5) Convertible Subordinated Debentures
Convertible Subordinated Debentures consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------ ------------
<S> <C> <C>
Series A Convertible Subordinated Debentures due
December 2000, bearing interest at 10% payable
June 15 and December 15, net $73,000 $73,000
Series B Convertible Subordinated Debentures due
December 2000, bearing interest at 13.75% payable
monthly, net 2,679,000 3,061,000
8% Convertible Subordinated Debentures due
December 2000, interest payable February 1 and
August 1 1,296,000 4,513,000
9% Convertible Subordinated Debentures due July
2002, interest payable January 1 and July 1, net 3,623,000 3,879,000
----------- -----------
$7,671,000 $11,526,000
=========== ===========
</TABLE>
Series A Debentures
As of March 31, 1999 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 $4,000 at March 31, 1999 which are amortized using the interest method
to interest expense over the term of the debentures. Less than $1,000 of
issuance costs were amortized to interest expense for the six months ended
March 31, 1999.
On April 13, 1999 the Company called the Series A Debentures for redemption on
or before May 14,1999. Holders of $49,000 are converting their debentures into
6,435 newly-issued shares of common stock, and the remaining $28,000 is
expected to be redeemed.
Series B Debentures
As of March 31, 1999 the Company had outstanding $2,776,000 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 $97,000 at March 31, 1999, which are amortized using the
interest method to interest expense over the term of the debentures.
Approximately $47,000 of issuance costs were amortized as interest expense for
the six months ended March 31, 1999.
8% Debentures
As of March 31, 1999, the Company had outstanding $1,330,000 principal
amount of 8% Debentures. The debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$34,000 at March 31, 1999, which are amortized using the interest method to
interest expense over the term of the debentures. Approximately $153,000 of
issuance costs were amortized as interest expense for the six months ended
March 31, 1999.
9% Debentures
As of March 31, 1999, the Company had outstanding $3,800,000 principal
amount of 9% Debentures. The debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$177,000 at March 31, 1999, which are amortized using the interest method to
interest expense over the term of the debentures. Approximately $43,000 of
issuance costs were amortized as interest expense for the six months ended
March 31, 1999.
(6) Income Taxes
Income taxes for the three and six month periods ended March 31, 1999 and 1998
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 currently believes that taxable income, if any, for the
fiscal year except for federal alternative minimum taxes and minimum state
income taxes will be offset by utilization of existing net operating losses.
(7) Contingencies
The Company is party to certain legal proceedings and claims arising out of
the normal course 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, 1998
for a description of certain legal proceedings. Management of the Company
believes that the ultimate resolution of all of these matters will not have a
material adverse effect upon the Company's results of operations, liquidity or
financial condition.
In its normal course of business as an entertainment distributor, the Company
makes contractual down payments to acquire film and television distribution
rights. 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 materials, proof of
rights held and insurance policies that may be required for the Company to
begin exploitation of the product. As of March 31, 1999 the Company had
agreed to pay approximately $5,090,000 should those third party producers
complete delivery to the Company. These amounts are estimated to be payable
over the next eighteen months.
(8) Earnings (Loss) Per Share
The table below reconciles net earnings (loss) and average shares of common
stock outstanding to those amounts used to calculate basic and diluted
earnings (loss) per share.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------ --------------------
1999 1998 1999 1998
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic
earnings per share -
loss available to
common stockholders $(4,575,000) $(679,000) $(10,550,000) $(501,000)
Effect of dilutive
securities: interest on
convertible debt -- -- -- --
Numerator for diluted
earnings per share - loss
available to common
stockholders after ----------- --------- ----------- --------
assumed conversions $(4,575,000) $(679,000) $(10,550,000) $(501,000)
=========== ========= =========== ========
Denominator:
Denominator for basic
earnings per share -
weighted average
shares 10,932,000 9,192,000 10,149,000 9,129,000
Effect of dilutive
securities:
Employee stock options -- -- -- --
Convertible debentures -- -- -- --
---------- ---------- ---------- ---------
Dilutive potential
common shares -- -- -- --
Denominator for diluted
earnings per
share - adjusted
weighted average
shares and ---------- ---------- ---------- ---------
assumed conversions 10,932,000 9,192,000 10,149,000 9,129,000
========== ========== ========== =========
Basic loss per share $(0.42) $(0.07) $(1.04) $(0.05)
====== ====== ====== ======
Diluted loss per share $(0.42) $(0.07) $(1.04) $(0.05)
====== ====== ====== ======
</TABLE>
Approximately 982,000 options and 1,446,000 warrants to acquire common stock
were not included in the calculation of diluted loss per share for the three
or six month periods ended March 31, 1999, respectively, as the impact of
including such securities would be antidilutive. Shares issuable upon
conversion of the Company's convertible subordinated debentures were not
included in the calculation of diluted earnings per share for the three or six
months ended March 31, 1999 or 1998 as the impact of including such securities
would be antidilutive.
(9) Subsequent Events
On April 12,1999 the Company's subsidiary 800-U.S. Search filed a registration
statement with the Securities and Exchange Commission proposing to issue shares
of its common stock to the public. The Company anticipates selling certain of
its shares in 800-U.S. Search to the public in conjunction with the proposed
offering.
On April 13, 1999 the Company announced the redemption effective May 14, 1999
of its Class C Redeemable Common Stock Purchase Warrants (the "Class C
Warrants") and its outstanding 10% Convertible Subordinated Debentures, Series
A due 2000, each effective as of May 14, 1999, subject to certain broker
protection periods. Through May 14, 1999 787,347 Class C Warrants were
exercised for 787,347 shares of Common Stock and the Company was due to
receive proceeds of $5,403,000. Through May 14, 1999 the Company was to issue
6,435 new shares of common stock in connection with the conversion of $49,000
aggregate principal amount of the Series A Debentures. Through May 14, 1999
the
Company expected to redeem approximately 5,000 of the Class C Warrants and
$28,000 aggregate principal amount of the Series A Debentures.
On April 26, 1999 the Company issued 468,883 shares of restricted common stock
to The Harvey Entertainment Company ("Harvey") in exchange for 55,000 shares
of Series A Preferred Stock of Harvey and 388,215 warrants exerciseable into
common stock of Harvey, all pursuant to a stock purchase agreement involving a
new Harvey investor group which includes the Company. The Harvey Series A
Preferred Stock are convertible into 814,814 shares of Harvey common stock
commencing October 26, 1999 and bear 7% annual dividends. On a fully-diluted
basis, assuming all securities exerciseable or convertible into Harvey common
stock are so exercised or converted, the Company would own 12% of the voting
shares of Harvey. The Company has agreed to file a registration statement
registering the shares of its restricted common stock issued to Harvey by not
later than June 25, 1999.
<PAGE>
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 rights to the films and
television programs in international territories. The Company generally
finances all or a substantial portion of the budgeted production costs of its
programming through advances obtained from licensees and borrowings secured by
domestic and international licenses. The Company typically retains rights in
its programming which may be exploited in future periods or in additional
markets or media. In 1993 the Company established a feature film operation
which produces low and medium budget films for theatrical and/or home video or
cable release. The Company also has produced 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
1994, the Company established an international theatrical film subsidiary to
expand into foreign theatrical distribution. In 1995, the Company formed
KLC/New City Tele-Ventures ("KLC/New City"), a joint venture 82.5% owned by
the Company, to acquire films for distribution through emerging new delivery
systems, including pay cable, pay-per-view, basic cable, video-on-demand and
satellite systems. In late 1997, the Company acquired control of 800-U.S.
Search, a leading provider of fee-based people search and other customized
individual reference services. In February 1998 the Company established
KL/Phoenix, an 80% owned entity, which distributes film and television
product in Latin America.
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
deferred. Production advances and deferred license fees are recognized as
revenue on the date of product availability and/or delivery. Activities
conducted by joint ventures, wherein the Company reports its equity in the
ventures' earnings as revenues, also can significantly affect the
comparability of revenues.
The Company generally capitalizes all costs incurred to produce a film or
television program. 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 film or 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 film or program, 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 films
and 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 film or 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 can 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.
800-U.S. Search. In November 1997, the Company acquired 80% control of
800-U.S. Search, a leading provider of fee-based people search and other
customized individual reference services. Since its acquisition, Search's
financial position and results of operations have been consolidated in the
Company's financial statements. The consolidation of Search has resulted in a
substantial change in the presentation of the Company's results of operations
due to the inclusion of this new line of business. Since such acquisition,
the Company has consolidated $13,495,000 of revenues and over ($8,060,000) of
net losses attributable to Search. Management's strategy is to build Search's
long-term value through continued investment in enhancing Search's brand
awareness and market position through increased advertising and distribution
and marketing alliances. As a result, the Company believes that Search will
continue to adversely affect the Company results of operations for the
foreseeable future.
Gran Canal Latino. In November 1998, the Company launched Gran Canal Latino
("GCL"), its first satellite channel. GCL broadcasts 24 hours a day, with a
selection of films mostly from Spain. GCL's satellite transmission reaches
the United States and all of Latin America including Mexico. Through April
30, 1999, GCL's cable distributors had a base of 700,000 subscribers. To date
GCL has generated no revenues as it continues to approach the end of initial
free subscription periods following commencement of broadcasts in November
1998. The Company is planning to launch a second channel by the end of 1999.
Under a distribution agreement with Enrique Cerezo, the Company is
broadcasting selections from approximately 1,500 Spanish language movie
titles. Until subscriber receipts exceed operating costs, the Company's new
satellite operations will adversely affect the Company's results of
operations. Such adverse effect is presently expected to continue throughout
fiscal 1999.
Forward Looking Statements
Except for the historical information contained herein, certain of the matters
discussed in this quarterly 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, risks involved in the Internet, television and
theatrical film industries, competition, government regulation, labor
relations, limited operating history and continued operating losses of Search
and GCL, reliance of Search on strategic relationships in Internet market,
uncertain acceptance and maintenance of the 1-800-U.S.Search brand, risks
associated with offering new services, risks associated with growth and
expansion, liability for online content, rapidly changing technology,
standards and consumer demands, online commerce security risks, including
credit card fraud, system disruptions and capacity constraints for Search,
risks associated with domain names, year 2000 compliance, shares available for
future sale, 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. 333-72785), as filed with
the Securities and Exchange Commission on March 2, 1999, 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, 1999 and 1998
The Company's operating revenues for its second quarter ended March 31, 1999
were $10,208,000, a decrease of $(14,078,000) or (58%) from $24,286,000 from
the prior fiscal year's second quarter ended March 31, 1998. The decrease
resulted from a $(15,961,000) or (70%) decline in film and television program
revenues due primarily to the timing of delivery and/or availability of films
and television programs. Included in film and television operating revenues for
the second quarter ended March 31, 1999 are $89,000 of equity in the net
earnings of seven joint ventures whose gross revenues are not consolidated in
the accompanying financial statements. This represents a $15,000 (14%)
decrease from the $104,000 of equity in net earnings of unconsolidated joint
ventures recognized in the quarter ended March 31, 1998. Partially offsetting
this decrease was a $1,883,000 or 124% increase in quarterly revenues from
Search versus the year-earlier quarter.
Revenues for the second quarter included $3,397,000 (33% of total revenues)
from 800 U.S. Search. The Company recognized $2,539,000 (26%) of revenues
during the second quarter of fiscal 1999 primarily from the delivery and/or
availability of three feature films. In addition, $2,541,000 (25%) of
quarterly revenues came from continuing licenses of completed product from the
Company's library to domestic cable channel operators and international
sub-distributors, including $1,587,000 from our KL/Phoenix subsidiary in Latin
America. The Company also recognized $1,160,000 (11%) from producer fees on
third party productions. The balance of the Company's quarterly revenues came
from a diversified mix of product, including licensing of television
programming, and distribution of Christian music on behalf of TV First, a
Company joint venture. Gran Canal Latino generated no revenues as it continues
to approach the end of initial free subscription periods following
commencement of broadcasts in November 1998.
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, $1,514,000 came from the
then newly-acquired 800 U.S. Search business, whose revenues increased 157%
from those recognized in the previous quarter.
Currently in principal photography for the Company's fiscal 1999 distribution
slate is Picking Up The Pieces, starring Woody Allen, Sharon Stone, Kiefer
Sutherland, David Schwimmer, Elliott Gould, Cheech Marin and Lou Diamond
Phillips, and directed by Alfonso Arau. The Company also expects to commence
principal photography within the next four months on The Last Producer,
starring and directed by Burt Reynolds, and also starring Charles Durning,
Ann-Margaret, Joe Mantenga, Robert Costanzo, Sean Austin, Greg Germann and
Robert Goulet. In addition, the Company continues to acquire international
distribution rights to films for distribution through Kushner Locke
International, Inc. and KL/Phoenix.
Costs relating to operating revenues were $6,442,000 during the second quarter
of fiscal 1999, a decrease of $15,121,000 (70%) as compared to $21,563,000
during the second quarter of fiscal 1998. As a percentage of operating
revenues, costs relating to operating revenues were 63% for the second quarter
of fiscal 1999 compared to 89% for the second quarter of fiscal 1998. The
(70%) decrease resulted from a $(15,757,000) or (76%) decrease in film and
television costs due to reduced deliveries/availabilities. Despite the
reduced costs, the Company's film and television gross profits declined
$202,000 (10%) as the fiscal 1999 release of two feature films are expected to
be only nominally profitable. Partially offsetting the film and television
licensing margin decrease was a $1,248,000 (185%) increase in gross profits
realized from Search operations. Search's gross profit margin increased from
44% in the March 31, 1998 quarter to 57% in the March 31, 1999 quarter due
primarily to increased Internet sales which involve less direct labor costs.
Selling, general and administrative expenses increased $3,819,000 or 205% to
$5,684,000 in the second quarter of fiscal 1999 from $1,865,000 in the second
quarter of fiscal 1998. The increase in such expenses is principally due to an
approximate $1,930,000 or 281% increase in Search advertising expenses and an
approximate $673,000 or 128% increase in Search administrative expenses.
Included in Search's administrative expenses is $876,000 of Search director and
officer stock option costs, which are not expected to recur. In addition, the
Company's new Latin American operations, which commenced operations in the
fiscal 1998 second quarter, incurred $389,000 of administrative expenses during
the fiscal 1999 second quarter and none in the earlier year.
The provisions for doubtful accounts and notes increased $236,000 or 135%
during the second quarter of fiscal 1999 principally due to a $236,000 increase
in such provisions for Search. The Search increase is due to increased
accruals for potential chargebacks regarding uncollectible consumer checks,
credit card charges and 900 number telephone sales.
Interest expense for the second quarter ended March 31, 1999 was $2,253,000,
an $893,000 or 66% increase as compared to $1,360,000 for the second quarter
ended March 31, 1998. The increase was due to higher average borrowings
under the Company's line of credit and decreased interest costs capitalized to
productions. Total indebtedness for borrowed money increased 9% to $80,879,000
at March 31, 1999 from $74,313,000 at March 31, 1998.
The Company's estimated effective income tax expense was (1%) for the second
fiscal quarter ended March 31, 1999 compared to an estimated effective income
tax rate of (1%) for the fiscal quarter ended March 31, 1998. Tax expense in
each of the quarters pertained to estimated federal alternative minimum taxes
and state income taxes. Through September 30, 1998 the Company had Federal and
state net operating loss carryforwards totaling $35,000,000 and $6,400,000,
respectively, which exceed presently expected taxable income for fiscal 1999.
The Federal net operating loss carryforwards expire from fiscal 2009 through
fiscal 2013. The California net operating loss carryforwards expire from
fiscal 2006 through fiscal 2013.
The Company reported a net loss of $(4,575,000) or $(0.42) per basic and
diluted share, for the second quarter ended March 31, 1999 as compared to a
net loss of ($679,000), or ($.07) per basic and diluted share, for the second
quarter ended March 31, 1998. The principal factors resulting in the reported
net loss were the decline in total revenues for the film and television
segment, the increased investment in Search operations which have yielded
significant continuing operating losses, the inclusion of new Latin American
operations which are yielding start-up net losses, increases in provisions for
doubtful accounts and increases in interest expense. Weighted number of
common shares for the compared second quarters were 10,932,000 in fiscal 1999
and 9,192,000 in fiscal 1998.
Comparison of Six Months Ended March 31, 1999 and 1998
The Company's operating revenues for the six months ended March 31, 1999 were
$24,194,000, a decrease of ($20,252,000) (46%) from $44,446,000 from the prior
fiscal year's six month period. The decrease resulted from a $(23,788,000) or
(56%) decline in film and television licensing revenues 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. Partially offsetting this decrease was a $3,536,000 or 168%
increase in six month revenues from Search versus the year-earlier period.
The Company recognized $10,046,000 (42%) of revenues during the six months
ended March 31, 1999 from the delivery and/or availability of five feature
films, including Ringmaster, starring Jerry Springer which was released in the
United States by Artisan Entertainment and One Man's Hero starring Tom
Berenger, which is licensed for United States release to MGM. The Company
recognized $5,775,000 (24%) of revenues in the fiscal 1999 period 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 including KL/Phoenix. In addition, the
Company recognized $5,640,000 (23%) of revenues during the six months ended
March 31, 1999 from Search. Revenues of $1,280,000 (5%) came from deliveries
in the Company's family division of direct-to-video product. Remaining
revenues came from the sales of contemporary Christian music on behalf of a
joint venture and a variety of other sources.
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 during the six month period 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 Search.
Costs relating to operating revenues were $18,105,000 during the six months
ended March 31, 1999, a decrease of $20,745,000 (53%) as compared to
$38,850,000 during the six months ended March 31, 1998. As a percentage of
operating revenues, costs relating to operating revenues were 75% for the six
months ended March 31, 1999 compared to 87% for the six months ended March 31,
1998. The decreased percentage in the most recent period principally reflects
a weighting of the product mix, which does not include in 1999 episodic
television titles that are projected to be less profitable than titles
included in the current period.
Selling, general and administrative expenses increased to $11,353,000 during
the six months ended March 31, 1999 from $3,018,000 during the six months
ended March 31, 1998. The $8,335,000 (277%) increase in such expenses is
principally due to the increase in advertising and other expenses of Search.
Included in Search's administrative expenses is $876,000 of Search director
and officer stock option costs, which are not expected to recur.
The provisions for doubtful accounts and notes increased $851,000 or 243%
during the first six months of fiscal 1999 versus 1998 principally due to a
$842,000 increase in such provisions for Search. The Search increase is
primarily due to increases in the accruals for potential chargebacks regarding
uncollectible consumer checks, credit card charges and 900 number telephone
sales. The remaining Search increase represents forgiveness of a $299,000
related party note receivable from a founding employee and shareholder of
Search in connection with an agreement to enter into both a three year
employment contract and a shareholder agreement, among other items.
Interest expense during the six months ended March 31, 1999 was $4,106,000 as
compared to $2,754,000 for the six months ended March 31, 1998. The 49%
increase was principally attributable to the increased overall levels of
borrowing in the current period and decreased production-related interest
capitalized in the current period. Total indebtedness for borrowed money
increased 11% to $82,709,000 at March 31, 1999 from $74,313,000 at March 31,
1998.
The Company's estimated effective income tax rate was (1%) for the six months
ended March 31, 1999 compared to an estimated effective income tax rate of
(2%) for the six months ended March 31, 1998. Income tax expense for the six
months ended March 31, 1999 consisted of estimated state income and federal
alternative minimum taxes. Through September 30, 1998 the Company had Federal
and state net operating loss carryforwards totaling $35,000,000 and
$6,400,000,respectively, which exceed presently expected taxable income for
fiscal 1999. The Federal net operating loss carryforwards expire from fiscal
2009 through fiscal 2013. The California net operating loss carryforwards
expire from fiscal 2006 through fiscal 2013.
The Company reported a net loss of ($10,550,000), or ($1.04) per basic and
diluted share, for the six months ended March 31, 1999 as compared to a net
loss of ($501,000), or ($0.05) per basic and diluted share, for the six months
ended March 31, 1998. Weighted number of common shares for the compared
six-month periods were 10,149,000 in fiscal 1999 and 9,129,000 in fiscal 1998.
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 or other
operating revenues. The Company funds production and acquisition costs out of
its working capital, including its line of credit, and through certain
pre-sales of rights in international markets. In addition, the expansion of
the Company's Search business and international distribution business and the
commencement of satellite broadcasting in Latin America have significantly
increased the Company's working capital requirements and demand for capital.
Cash and cash equivalents at March 31, 1999 decreased to $2,658,000
(including $1,995,000 of restricted cash being used principally as collateral
for film sale/leaseback transactions and $103,000 of reserved cash to be
applied against the Company's outstanding borrowings under its credit
facility) from $3,309,000 (including $1,988,000 of restricted cash being used
principally as collateral for a film sale/leaseback transaction and $66,000 of
reserved cash to be applied against the Company's outstanding borrowings under
its credit facility) at September 30, 1998. Unrestricted and unreserved cash
and cash equivalents decreased ($695,000) since September 30, 1998.
The Company experienced net negative cash flows from operating activities of
($8,869,000) during the six months ended March 31, 1999, resulting
primarily from the net loss reported for the six months. The Company
capitalized $17,214,000 in new film and television property costs, which is
$646,000 greater than the $16,568,000 of film and television property
amortization included in results of operations. In addition to borrowings,
those newly capitalized film and television property costs were principally
funded by increased accounts payable. The Company received net proceeds of
$5,673,000 in December 1998 ($6,000,000 of gross proceeds) through a private
placement of 1,200,000 newly-issued shares of common stock and incurred costs
of $217,000 in connection with the private placement. The Company has
advanced most of those private placement net proceeds to Search to fund its
operations. In addition, the Company obtained $2,671,000 from the
exercise of warrants and stock options, and obtained net cash inflows from
borrowing activities of $57,000 during the period as a result of new
borrowings in excess of repayments. As a result primarily of the foregoing
factors, net unrestricted cash decreased during the six month period by
$695,000 to $560,000 on March 31, 1999 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, funds increased operations at Search and in Latin America and
increases its debt service burdens, it expects to experience net negative cash
flows from operating activities, pending receipt of licensing revenues, Search
revenues, broadcast 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. In
December 1998 the facility was increased to a maximum of $75,000,000. 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 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% as of May 13, 1999) 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 (7.75% as of May 13,
1999), (b) Chase's Base 30-Day CD Rate (4.7% as of May 13, 1999) plus 1%
or (c) the Federal Funds Effective Rate (7.2% as of May 13, 1999) 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, 1999 was $64,135,000 out of a borrowing base
availability of $67,590,000, and as of May 14, 1999 $66,985,000 was
outstanding out of a borrowing base availability of $68,000,000.
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). For the quarter ended March 31, 1999, as a result of
reported net losses, the Company was not in compliance with two covenants in
its credit agreement pertaining to the maintenance of a certain capital base
and to a certain interest coverage by earnings. The group of banks have
waived such non-compliance.
Other Loans
The Company's other borrowings, totaling $9,073,000 as of March 31, 1999,
consisted of production loans from Banque Paribas (Los Angeles Agency)
("Paribas") and Comerica Bank - California ("Comerica") to consolidated
production entities. The Kushner-Locke Company provided limited corporate
guarantees for portions of the production loans which are callable in the event
that the respective borrower does not repay the loans by the respective
maturity date. Deposits paid by the distributing licensees prior to the
delivery of the financed pictures are held as restricted cash collateral by
the Lenders.
In February 1997, a $6,300,000 production loan was obtained by a consolidated
subsidiary from Paribas to cover a portion of the production budget of Basil.
The loan bears interest at Prime (7.75% as of May 13, 1999) plus 0.5% or at
LIBOR (5% as of May 13, 1999) plus 2.5% payable monthly plus certain loan fee
amounts. The loan is collateralized by the rights, title and assets related to
the film. In May 1997 a third party invested $2,000,000 in the film project in
exchange for certain rights and profit participations. In December 1998
Paribas extended the maturity of the production loan guaranteed by the Company
to June 1999.
In November 1997, an $8,200,000 production loan was obtained from Comerica by
an unconsolidated company 25%-owned by the Company to cover a portion of the
production budget of Beowulf. The loan bears interest at Prime (7.75% as of
May 13, 1999) plus 1% or at LIBOR (5% as of May 13, 1999) plus
2%. The Company provided a corporate guaranty in the amount of $1,250,000 in
connection with this loan. As extended, the loan matures on June 30, 1999.
The loan is collateralized by the rights, title and assets related to the
film. Uncollected Beowulf license receivables exceed the remaining balance of
the loan.
In February 1998, Search obtained a collateralized line of credit
from Comerica. Advances under the line bear interest at Prime (7.75% as of
May 13, 1999) plus 2.50% payable monthly. In August 1998 the bank and
the Company agreed that the loan would be capped at the $345,000 amount
outstanding as of that date. In March 1999, Search repaid the loan. Through
March 31, 1999 the Company had also loaned Search $5,662,000 and the
Company continues to provide funding to Search.
In April 1998, a $4,625,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Susan's Plan. The
loan bears interest at Prime (7.75% as of May 13, 1999) plus 1% or at
LIBOR (5% as of May 13, 1999) plus 2%. The loan is collateralized
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.
As extended, the loan matures on June 30, 1999.
In April 1998, a $1,850,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Black & White.
The loan bears interest at Prime (7.75% as of May 13, 1999) plus 2% or at
LIBOR (5% as of May 13, 1999) plus 2.25%. The loan is collateralized by the
rights, title and assets related to the film. As extended, the loan matures
on June 30, 1999.
In August 1998, a $2,900,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Ringmaster. The
loan bears interest at Prime (7.75% as of May 13, 1999) plus 1% or at
LIBOR (5% as of May 13, 1999) plus 2%. The loan is collateralized
by the rights, title and assets related to the film. The Company provided a
corporate guaranty in the amount of $800,000 in connection with this loan.
As extended, the loan matures on June 30, 1999.
In October 1998, a $1,400,000 production loan was obtained by a consolidated
subsidiary from Far East National Bank to cover the production budget of Mambo
Cafe. The loan bears interest at Prime (7.75% as of May 13, 1999) plus
1.5%. The loan is collateralized by the rights, title and assets related to
the film. The loan matures on October 30, 1999.
In October 1998, a $2,500,000 production loan was obtained by a consolidated
subsidiary from Far East National Bank to cover the production budget of
Freeway II: Confessions of a Trickbaby. The loan bears interest at Prime
(7.75% as of May 13, 1999) plus 1.5%. The loan is collateralized by the
rights, title and assets related to the film. The Company provided a
corporate guaranty in the amount of $400,000 in connection with this loan.
The loan matures on October 30, 1999.
Securities Offerings
The Company obtained net proceeds of $5,673,000 in December 1998 ($6,000,000
of gross proceeds) through a private placement of 1,200,000 newly-issued
shares of common stock.
As of March 31, 1999, $1,330,000 principal amount of 8% Convertible
Subordinated Debentures and $3,800,000 principal amount of 9% Convertible
Subordinated Debentures were outstanding. As of March 31, 1999, $77,000
principal amount of Series A Debentures and $2,776,000 of Series B Debentures
were outstanding. During the six months ended March 31, 1999, $420,000
principal amount of the Series B Debentures, $3,370,000 principal amount of the
8% Debentures and $300,000 principal amount of the 9% Debentures were converted
into 653,055 shares of Common Stock.
On April 12, 1999, the Company's subsidiary Search filed a registration
statement for an initial public offering of newly-issued common stock. The
Company may sell a portion of its Search common stock in such offering.
On April 13, 1999 the Company announced the redemption effective May 14, 1999
of its Class C Warrants and its outstanding 10% Convertible Subordinated
Debentures, Series A due 2000, each effective as of May 14, 1999, subject to
certain broker protection periods. Through May 14, 1999 787,347 Class C
Warrants were exercised for 787,347 shares of Common Stock and the Company was
due to receive proceeds of $5,403,000. Through May 14, 1999 the Company was to
issue 6,435 new shares of common stock in connection with the conversion of
$49,000 aggregate principal amount of the Series A Debentures. Through May 14,
1999 the Company expected to redeem approximately 5,000 of the Class C Warrants
and $28,000 aggregate principal amount of the Series A Debentures.
On April 26, 1999 the Company issued 468,883 shares of restricted common stock
to The Harvey Entertainment Company ("Harvey") in exchange for 55,000 shares of
Series A Preferred Stock of Harvey and 388,215 warrants exerciseable into
common stock of Harvey, all pursuant to a stock purchase agreement involving a
new Harvey investor group which includes the Company. The Harvey Series A
Preferred Stock are convertible into 814,814 shares of Harvey common stock
commencing October 26, 1999 and bear 7% annual dividends. On a fully-diluted
basis, assuming all securities exerciseable or convertible into Harvey common
stock are so exercised or converted, the Company would own 12% of the voting
shares of Harvey. The Company has agreed to file a registration statement
registering the shares of its restricted common stock issued to Harvey by not
later than June 25, 1999.
Other
The Company has entered into an agreement in principle with Universal Studios,
Inc. 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 Universal Studios,
Inc. In the event the Company and Universal Studios, Inc. agree upon 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 financing and
investment activities, including 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. The Company (including its subsidiaries) from
time to time may be required to seek additional financing through the issuance
of new debt or equity securities, additional bank financings, or other means
available to the Company. The Company's ability to continue to finance
investments in Search's advertising expenditures and operating losses is
limited at current advertising expenditure levels. Such continued
expenditures and recoupment of the Company's investments are dependent on
Search's ability to obtain independent financing, whether through its proposed
initial public offering or otherwise. No assurance can be given that such
financing will be available or, if available, will be at costs comparable to
current financings or on terms acceptable to the Company. In addition to
expanding production and its distribution business and its investment
activities, whether internally or by acquisition, the Company also considers
acquisition and investment 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 Issues
The "Year 2000 Issue" is typically the result of certain firmware limitations
and of limitations of certain software written using two digits rather than
four to define the applicable year. If software and firmware with
date-sensitive functions are not Year 2000 compliant, they may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, interruptions in customer service operations,
a temporary inability to process transactions, conduct searches, or engage in
similar normal business activities.
The Company has upgraded or replaced virtually all firmware in part to mitigate
Year 2000 exposure. The Company utilizes off-the-shelf and custom software
developed internally and by third parties. The Company believes that its off-
the-shelf software is Year 2000 compliant. However, there is no assurance that
the Company will not be required to modify or replace significant portions of
its software so that its systems will function properly with respect to dates
in the year 2000 and thereafter. The Company is engaged in a two-phase process
to evaluate its internal status with respect to the Year 2000 issue. The
Company is completing a Year 2000 evaluation ("Phase One") including
Information Technology ("IT") systems, non-IT systems, and critical
third-party entities with which the Company transacts business. If required
modifications to existing software and firmware or conversions to new software
or firmware are not made, or are not completed timely, or if there is a
malfunction in software or firmware used on computer systems utilized by those
upon whom the Company depends for provision of its services, there is no
assurance that potential systems interruptions or the cost necessary to update
such software or firmware or any outages or delays in services will not have
a material adverse effect on the Company's business, financial condition,
results of operations and prospects. Further, the failure of the Company to
successfully resolve such issues could result in a shut-down of some or a
substantial portion of the Company's operations (including those of Search),
which could have a material adverse effect on the business, financial
condition, results of operations and prospects of the Company.
Search depends on information contained primarily in electronic format in
Internet databases and computer systems maintained by third parties. The
disruption of such third-party systems and the supply of information provided
through such systems could have a material adverse effect on Search's, and
therefore the Company's, business, financial condition, results of operations
and prospects. In addition, Search relies on the integration of various
systems in aggregating the content from multiple sources. The failure of any
of those systems as a result of Year 2000 compliance issues could prevent
Search from delivering its products and services, which could have a material
adverse effect on Search's, and therefore the Company's, business, financial
condition, results of operations and prospects. Search does not currently
have any information concerning the Year 2000 compliance status of its
customers and their Internet service providers. In the event that
substantial numbers of Internet users do not successfully and timely achieve
Year 2000 compliance, Search's, and therefore the Company's, business,
financial condition, results of operations and prospects could be adversely
affected.
The Company is developing a comprehensive contingency plan to address
situations that may result if the Company is unable to achieve Year 2000
readiness of its critical operations, and in particular those related to
Search. There is no assurance that the Company's contingency plan will
adequately address all Year 2000 issues. The failure of the Company to
implement, if necessary, an appropriate contingency plan could have a material
impact on the Company's business, financial condition, results of operations
and prospects.
Finally, the Company is also vulnerable to external forces that might generally
affect industry and commerce, such as utility or transportation company or
Internet Year 2000 compliance failures and related service interruptions. Any
significant interruption of general access to the Internet, or the customary
function and operations of, the Internet could have a material adverse effect
on the Company's business, financial condition, results of operations and
prospects. Some commentators have predicted significant litigation regarding
Year 2000 compliance issues. Because of the unprecedented nature of such
litigation, it is uncertain whether or to what extent the Company may be
affected by it.
The Company currently believes that this issue will not pose significant
operational problems, however delays in the modification or conversion of
its or Search's systems, or those of vendors and suppliers of services to the
Company and Search, or the failure to fully identify all Year 2000
dependencies in the systems could have a material adverse effect on the
Company's business, financial condition, results of operations and prospects.
Until the completion of phase one, the Company cannot quantify the impact of
the Year 2000 issue; however, failure of critical internal IT systems, non-IT
systems, third-party vendors and financial institutions may limit or prevent
the Company from performing services for its customers, and could have a
material adverse effect on the Company's business, financial condition,
results of operations and prospects. Through March 31, 1999 the Company
incurred no material year 2000 remediation costs, and presently anticipates
incurring no material remediation costs in the future.
<PAGE>
PART II
OTHER INFORMATION
Item 2. Recent Sales of Unregistered Securities; Uses of Proceeds
In December 1998, the Company issued to certain accredited investors 1,200,000
shares of Common Stock in a private placement with Allen & Company,
Incorporated as placement agent. The net proceeds to the Company of the
private placement were $5,673,000 after deducting a 5% placement agency fee
($6,000,000 of gross proceeds) and certain reimbursable expenses of Allen &
Company. The Common Stock issued in the private placement was issued pursuant
to exemptions from registration requirements under Section 4(2) of the
Securities Act of 1933, as amended (the "Act") and Regulation D promulgated
thereunder, and accordingly the Common Stock was not registered under the Act
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. In February 1999 the
Company filed a registration statement covering the Common Stock issued in the
private placement. In March 1999 such registration statement was declared
effective by the Securities and Exchange Commission. The Company has used the
net proceeds for working capital and general corporate purposes, primarily by
providing additional funding to Search for its operations.
On April 26, 1999 the Company issued 468,883 shares of restricted common stock
to The Harvey Entertainment Company ("Harvey") in exchange for 55,000 shares of
Series A Preferred Stock of Harvey and 388,215 warrants exerciseable into
common stock of Harvey, all pursuant to a stock purchase agreement involving a
new Harvey investor group which includes the Company. The Harvey Series A
Preferred Stock are convertible into 814,814 shares of Harvey common stock
commencing October 26, 1999 and bear 7% annual dividends. On a fully-diluted
basis, assuming all securities exerciseable or convertible into Harvey common
stock are so exercised or converted, the Company would own 12% of the voting
shares of Harvey. The Company has agreed to file a registration statement
registering the shares of its restricted common stock issued to Harvey by not
later than June 25, 1999
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:
Current Report on Form 8-K, filed on April 13, 1999.
Current Report on Form 8-K, filed on May 3, 1999.
<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, 1999 /s/ PETER LOCKE
-------------------------
Peter Locke
Co-Chairman of the Board,
Co-Chief Executive Officer
Dated: May 14, 1999 /s/ DONALD KUSHNER
-------------------------
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: May 14, 1999 /s/ ROBERT SWAN
-------------------------
Robert Swan
Senior Vice President and Chief Financial Officer
</TABLE>
<PAGE>
INDEX TO EXHIBITS
10.65 Waiver letter agreement by and between The Kushner-Locke Company, The
Chase Manhattan Bank, De Nationale Investeringsbank N.V., Comerica
Bank - California, and Far East National Bank, dated as of May 14, 1999.
<PAGE>
EXHIBIT 10.65
as of May 14, 1999
The Kushner-Locke Company
11601 Wilshire Boulevard, 21st floor
Los Angeles, California 90025
Dear Sirs:
Reference is hereby made to that certain Credit, Security, Guaranty and
Pledge Agreement, dated as of June 19, 1996 (as the same had been, and may be,
amended, supplemented or otherwise modified, renewed or replaced from time to
time, the "Credit Agreement"), among The Kushner-Locke Company (the
"Borrower"), the Guarantors referred to therein, the Lenders referred to
therein, and The Chase Manhattan Bank (formerly known as Chemical Bank), as
Agent. Capitalized terms used herein and not otherwise defined are used herein
as defined in the Credit Agreement.
The Borrower has requested that the Required Lenders waive the Credit
Parties' non-compliance with (i) Section 6.14 of the Credit Agreement solely
with respect to consolidated Capital Base for the fiscal
quarter ended March 31, 1999, required by such Section 6.14 and (ii) section
6.19 of the Credit Agreement solely with respect to the ratio of EBIT to
Consolidated Interest Expense for the rolling quarter period
ended March 31, 1999, required by such Section 6.19.
Each of the undersigned hereby waives the Credit Parties' non-compliance
with Sections 6.14 and 6.19 of the Credit Agreement, solely to the extent set
forth in the immediately preceding paragraph.
By its execution hereof, the Borrower hereby represents and warrants that
as of the date hereof, there exists no Default or Event of Default.
In consideration for the Required Lenders and the Agent waiving the Credit
Parties' compliance with Sections 6.14 and 6.19 of the Credit Agreement, the
Borrower agrees to pay the Agent for the account of each of the Lenders who
executes a counterpart of this Waiver Letter on or prior to May 17, 1999, a fee
equal to 0.5% of such Lender's Commitment.
This waiver may be executed in counterparts, each of which shall
constitute an original, but all of which when taken together, shall
constitute one and the same instrument.
This waiver shall become effective when the Agent shall have received
executed counterparts of this waiver which, when taken together, bear the
signatures of the Required Lenders and all the Credit Parties.
This waiver shall not be construed as extending to any other matter,
similar or dissimilar, or entitling the Credit Parties to any future waivers
regarding similar matters or otherwise.
Except to the extent expressly set forth above, this letter does not
constitute a waiver or modification of any provision of the Credit Agreement or
a waiver of any Default or Event of Default, whether or not known to the Agent
or the Lenders. Except as expressly modified herein, all terms of the Credit
Agreement remain in full force and effect.
THIS WAIVER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK.
Very Truly Yours,
THE CHASE MANHATTAN BANK (formerly
known as Chemical Bank), individually and as Agent
By: /s/ WILLIAM E. ROTTINO
______________________________
Name: William E. Rottino
Title: Vice President
DE NATIONALE INVESTERINGSBANK N.V.
By:
______________________________
Name:
Title:
By:
______________________________
Name:
Title:
COMERICA BANK - CALIFORNIA
By: /s/ D. JEFFREY ANDRICK
_______________________________
Name: D. J. Andrick
Title: V.P.
FAR EAST NATIONAL BANK
By: /s/ CHARLES AVIS
_______________________________
Name: Charles Avis
Title: Regional V.P.
AGREED TO BY:
THE KUSHNER-LOCKE COMPANY
KL PRODUCTIONS, INC.
KL INTERNATIONAL, INC.
ACME PRODUCTIONS, INC.
KUSHNER-LOCKE PRODUCTIONS, INC.
THE RELATIVES COMPANY
POST AND PRODUCTION SERVICES, INC.
L-K ENTERTAINMENT, INC.
INTERNATIONAL COURTROOM NEWS SERVICE
FAMILY PICTURES, INC.
TROPICAL HEAT, INC.
KL SYNDICATION, INC.
ANDRE PRODUCTIONS, INC.
TKLC NO. 2, INC.
TWILIGHT ENTERTAINMENT, INC.
KLC FILMS, INC.
KL FEATURES, INC.
KLF GUILD CO.
KLF DEVELOPMENT CO.
KLTV GUILD CO.
KLTV DEVELOPMENT CO.
KUSHNER-LOCKE INTERNATIONAL, INC.
KL INTERACTIVE MEDIA, INC.
DAYTON WAY PICTURES, INC.
DAYTON WAY PICTURES, II, INC.
DAYTON WAY PICTURES III, INC.
DAYTON WAY PICTURES IV, INC.
FW COLD., INC.
By /s/ DONALD KUSHNER
_________________________
Name:
Title:
KLC/NEW CITY
By its General Partner
THE KUSHNER-LOCKE COMPANY
By /s/ DONALD KUSHNER
____________________________
Name:
Title:
800-U.S. SEARCH
By /s/ DONALD KUSHNER
____________________________
Name:
Title:
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1999
<CASH> 2658
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<RECEIVABLES> 41355
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0
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<TOTAL-LIABILITY-AND-EQUITY> 135619
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<FN>
<F1>FILM AND TELEVISION PROPERTY ASSETS TOTALLING $, ARE NOT CLASSIFIED
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<F2>UNCLASSIFIED BALANCE SHEET.
<F3>UNCLASSIFIED BALANCE SHEET.
</FN>
</TABLE>
