SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended December 31, 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 10,691,128 shares of outstanding Common Stock of the Registrant as
of February 12, 1999.
Total number of pages: 21. Exhibit Index begins on page 21.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Form 10-Q for the Quarter ended December 31, 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
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: None.
(b) Reports on Form 8-K: Current Report on Form 8-K, filed on
October 27, 1998.
<PAGE>
PART I
Item 1.
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
(unaudited)
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 7,754,000 $ 1,255,000
Reserved cash 228,000 66,000
Restricted cash 2,023,000 1,988,000
Accounts receivable, net of allowance for
doubtful accounts 39,141,000 40,418,000
Due from affiliates 2,246,000 2,488,000
Note receivable from related party -- 231,000
Film and television property costs, net of
accumulated amortization 79,691,000 73,773,000
Investments in unconsolidated entities, at equity 10,836,000 10,798,000
Other assets 5,686,000 6,088,000
------------ ------------
$147,605,000 $137,105,000
============ ============
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 8,455,000 $ 6,031,000
Notes payable 79,714,000 73,151,000
Deferred film license fees 3,300,000 4,111,000
Contractual obligations 16,660,000 13,851,000
Production advances 2,476,000 2,969,000
Convertible subordinated debentures, net of
deferred issuance costs 11,474,000 11,526,000
------------ ------------
Total liabilities 122,079,000 111,639,000
------------ ------------
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares; issued and outstanding
10,579,292 shares at December 31, 1998
and 9,217,029 shares at September 30, 1998 45,606,000 39,571,000
Accumulated deficit (20,080,000) (14,105,000)
------------ ------------
Net stockholders' equity 25,526,000 25,466,000
------------ ------------
$147,605,000 $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 December 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Operating revenues:
Film and television program licensing $11,743,000 $19,571,000
Search and individual reference services 2,243,000 589,000
----------- -----------
Total operating revenues 13,986,000 20,160,000
----------- -----------
Costs related to operating revenues:
Film and television program licensing (10,779,000) (17,077,000)
Search and individual reference services (884,000) (210,000)
----------- -----------
Total costs related to operating revenues (11,663,000) (17,287,000)
----------- -----------
Gross profit 2,323,000 2,873,000
Selling, general and administrative expenses (5,669,000) (1,135,000)
Provision for doubtful accounts and notes (790,000) (193,000)
----------- -----------
Earnings (loss) from operations (4,136,000) 1,545,000
Interest income 64,000 33,000
Interest expense (1,853,000) (1,394,000)
----------- -----------
Earnings (loss) before income taxes (5,925,000) 184,000
Income tax expense (50,000) (6,000)
----------- -----------
Net earnings (loss) $(5,975,000) $178,000
=========== ===========
Basic net earnings (loss) per share $(0.64) $0.02
====== =====
Diluted net earnings (loss) per share $(0.64) $0.02
====== =====
Number of shares used in computing basic
net earnings (loss) per share 9,387,000 9,114,000
========= ==========
Number of shares used in computing diluted
net earnings (loss) per share 9,387,000 10,259,000
========= ==========
</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>
Three Months Ended December 31,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(5,975,000) $ 178,000
Adjustments to reconcile net earnings (loss)
to net cash (used) by operating activities:
Amortization of film costs 8,974,000 14,935,000
Depreciation and amortization 103,000 56,000
Amortization of other assets 173,000 255,000
Provision for doubtful accounts and notes 790,000 193,000
Reserved and restricted cash (197,000) 89,000
Accounts receivable, net 567,000 (6,865,000)
Due from affiliates 418,000 (294,000)
Increase in film and television property costs (14,892,000) (15,678,000)
Other assets 292,000 (669,000)
Accounts payable and accrued liabilities 2,422,000 (51,000)
Deferred film license fees (811,000) 319,000
Contractual obligations 2,809,000 703,000
Production advances (493,000) (318,000)
----------- -----------
Net cash provided (used) by operating activities (5,820,000) (7,147,000)
----------- -----------
Cash flows from investing activities:
Increase in investments in unconsolidated entities (63,000) (301,000)
Decrease (increase) in other assets (34,000) (219,000)
----------- -----------
Net cash provided (used) by investing activities (97,000) (520,000)
----------- -----------
Cash flows from financing activities:
Borrowings under notes payable 10,793,000 11,433,000
Repayment of notes payable (4,230,000) (18,099,000)
Private placement of common stock 5,456,000 --
Other 397,000 37,000
----------- -----------
Net cash provided (used) by financing activities 12,416,000 (6,629,000)
----------- -----------
Net increase (decrease) in cash 6,499,000 (14,296,000)
Cash and cash equivalents at beginning of period 1,255,000 15,077,000
----------- -----------
Cash and cash equivalents at end of period $ 7,754,000 $ 781,000
=========== ===========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
(1) During the quarter ended December 31, 1998, $100,000 of convertible
subordinated debentures were converted into 17,095 shares of common
stock.
(2) During the quarter ended December 31, 1997, $236,000 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
Three Months ended December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Number of Common Accumulated
shares Stock Deficit Net
----------- ----------- ------------ -----------
<S> <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 stock options 145,168 453,000 -- 453,000
Conversion of subordinated
debentures 17,095 96,000 -- 96,000
Consulting warrant cost -- 30,000 -- 30,000
Net loss -- -- (5,975,000) (5,975,000)
---------- ----------- ------------ -----------
Balance at December 31, 1998 10,579,292 $45,606,000 $(20,080,000) $25,526,000
========== =========== ============ ===========
</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 and to launch 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 liabilities or charges against 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 should be read in
conjunction with the Company's annual consolidated financial statements and
notes thereto.
The unaudited condensed consolidated financial statements reflect, in the
opinion of management, all adjustments, all of which are of a normal recurring
nature, necessary to present fairly the financial position of the Company as
of December 31, 1998, and the results of its operations and its cash flows for
the three month periods ended December 31, 1998 and 1997. Interim results are
not necessarily indicative of results to be expected for a full fiscal year.
Restricted and Reserved Cash
At December 31, 1998, out of $10,005,000 of total cash the Company had
$2,023,000 in restricted cash principally related to deposits held at a
British bank pursuant to film sale/leaseback transactions. In addition, at
December 31, 1998, the Company had $228,000 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.
Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the reporting of operating segment
information in annual financial statements and in interim financial reports
issued to shareholders. SFAS No. 131 is effective for annual financial
statements issued for periods beginning after December 15, 1997. Management
is assessing the impact of SFAS No. 131 and cannot presently give assurance
that the implementation will not be material to the Company's financial
statements. Once implemented, interim information such as that contained in
the accompanying financial statements may be retroactively restated in next
year's comparative interim reports.
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>
December 31, September 30,
1998 1998
----------- -----------
<S> <C> <C>
In process or development $9,586,000 $10,570,000
Released, principally feature films and television
productions, net of accumulated amortization 70,105,000 63,203,000
----------- -----------
$79,691,000 $73,773,000
=========== ===========
</TABLE>
(4) Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 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 $62,610,000 $58,980,000
Notes payable to banks and financial institutions
principally consisting of production loans
collateralized by film rights 17,104,000 14,171,000
----------- -----------
$79,714,000 $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 February 12, 1999 a maximum of $68,000,000 could be
borrowed based upon available collateral, and $60,160,000 was then
outstanding.
(5) Convertible Subordinated Debentures
Convertible Subordinated Debentures consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 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 3,069,000 3,061,000
8% Convertible Subordinated Debentures due
December 2000, interest payable February 1 and
August 1 4,437,000 4,513,000
9% Convertible Subordinated Debentures due July
2002, interest payable January 1 and July 1, net 3,894,000 3,879,000
----------- -----------
$11,474,000 $11,526,000
=========== ===========
</TABLE>
Series A Debentures
As of December 31, 1998 the Company had outstanding $77,000 principal amount
of Series A Debentures. The debentures are recorded net of unamortized
underwriting discounts, expenses associated with the offering and warrants
totaling $4,000 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 three months ended December 31,
1998.
Series B Debentures
As of December 31, 1998 the Company had outstanding $3,196,000 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 $128,000, which are amortized using the interest method to
interest expense over the term of the debentures. Approximately $16,000 of
issuance costs were amortized as interest expense for the three months ended
December 31, 1998.
8% Debentures
As of December 31, 1998, the Company had outstanding $4,600,000 principal
amount of 8% Debentures. The debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$163,000 which are amortized using the interest method to interest expense
over the term of the debentures. Approximately $21,000 of issuance costs were
amortized as interest expense for the three months ended December 31, 1998.
9% Debentures
As of December 31, 1998, the Company had outstanding $4,100,000 principal
amount of 9% Debentures. The debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$206,000, which are amortized using the interest method to interest expense
over the term of the debentures. Approximately $15,000 of issuance costs were
amortized as interest expense for the three months ended December 31, 1998.
(6) Income Taxes
Income taxes for the three month periods ended December 31, 1998 and 1997 were
computed using the effective income tax rate estimated to be applicable for
the full fiscal year, which is subject to ongoing review and evaluation by
management. Management believes that all taxable income for the fiscal year
except for 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 December 31, 1998 the Company had
agreed to pay approximately $6,619,000 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
December 31,
------------------
1998 1997
----------- ----------
<S> <C> <C>
Numerator:
Numerator for basic earnings per share - income
(loss) available to common stockholders $(5,975,000) $178,000
Effect of dilutive securities: interest on
convertible debt -- --
Numerator for diluted earnings per share-income
(loss) available to common stockholders after ----------- ---------
assumed conversions $(5,975,000) $178,000
=========== =========
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares 9,387,000 9,114,000
Effect of dilutive securities:
Employee stiock options -- 1,145,000
Convertible debentures -- --
----------- ----------
Dilutive potential common shares -- 1,145,000
Denominator for diluted earnings (loss) per
share - adjusted weighted average shares and ----------- ----------
assumed conversions 9,387,000 10,259,000
=========== ==========
Basic earnings (loss) per share $(0.64) $0.02
====== ======
Diluted earnings (loss) per share $(0.64) $0.02
====== ======
</TABLE>
Approximately 978,000 options and 1,834,000 warrants to acquire common stock
were not included in the calculation of diluted loss per share for the three
months ended December 31, 1998, respectively, as the impact of including such
securities would be antidilutive. Approximately 412,000 options and 1,393,000
warrants to acquire common stock were not included in the calculation of
diluted earnings per share for the three months ended December 31, 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 were not included in the
calculation of diluted earnings per share for the three months ended December
31, 1998 or 1997 as the impact of including such securities would be
antidilutive.
<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 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 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-US 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 $10,100,000 of revenues and over $5,800,000 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 January
31, 1999, GCL's cable distributors had a base of 700,000 subscribers. A
portion of those subscribers are to begin paying in February 1999. 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. The
Company expects that its new satellite operations will adversely affect the
Company's results of operations during the start-up phase of such satellite
operations continuing into 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-USSearch 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. 333-40391), 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 December 31, 1998 and 1997
The Company's operating revenues for the first quarter ended December 31, 1998
were $13,986,000, a decrease of $(6,174,000) or (31%) from $20,160,000 from
the prior fiscal year's first quarter ended December 31, 1997. The decrease
resulted from a $(7,828,000) or (40%) decline in film and television licensing
revenues due primarily to the timing of delivery and/or availability of films
and television programs. Partially offsetting this decrease was a $1,654,000
or 281% increase in revenues from Search. Included in film and television
operating revenues for the first quarter ended December 31, 1998 are $174,000
of equity in the net earnings of five joint ventures whose gross revenues are
not consolidated in the accompanying financial statements. This represents a
$218,000 (56%) decrease from the $392,000 of equity in earnings of
unconsolidated joint ventures recognized in the quarter ended December 31,
1997.
The Company recognized $7,508,000 (54%) of revenues during the first quarter
of fiscal 1999 primarily from the delivery and/or availability of two feature
films, 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. In addition, $3,234,000
(23%) of fiscal 1999 revenues came from continuing licenses of completed
product from the Company's library to domestic cable channel operators and
international sub-distributors. An additional $2,243,000 (16%) of fiscal 1999
revenues were generated by Search. Two percent of fiscal 1999 revenues
came from distribution of Christian music on behalf of TV First, a Company
joint venture. Three percent of fiscal 1999 revenues came from the Company's
family division of direct-to-video product. Of the remaining revenues, 1%
represented the licensing of exiting television programming and 2% represented
revenues from materials sold to licensees and other minor sources. Gran Canal
Latino generated no revenues as it offered an initial three month free
subscription period upon commencement of its broadcasts in November 1998.
The Company recognized $4,300,000 (21%) of revenues during the first quarter
of fiscal 1998 from the delivery and/or availability of four feature films,
including 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 $8,800,000 (44%) of revenues
during the first quarter of fiscal 1998 from the delivery and/or availability
of additional episodes of the television series Hammer, and Mowgli: The New
Adventures of The Jungle Book, and the net earnings from the delivery by a
joint venture of additional episodes of the television series Cracker,
starring Robert Pastorelli. Twelve percent of the Company's revenues came from
its distribution of Christian music on behalf of TV First, a Company joint
venture. Nine percent of revenues for the period came from the Company's
family division of direct-to-video product and six percent from continuing
licenses of completed product from the Company's library to domestic cable
channel operators and international sub-distributors. The remaining eight
percent of revenues came from distribution to domestic cable for films
acquired through its majority-owned subsidiary KLC/New City, sales of search
services by the newly-acquired subsidiary, 800-U.S. Search, materials sold to
licensees and other minor sources.
In various stages of production for the Company's fiscal 1999 distribution
slate are Mambo Cafe starring Thalia and Danny Aiello; and Confessions of a
Trick Baby: Freeway II starring Natasha Leone and Vincent Gallo. The Company
is also producing two pilots for television networks, Killer App, a one-hour
pilot for the Fox network written by Garry Trudeau and directed by Robert
Altman and Criminal Confessions, a one-hour pilot for CBS. The is no
assurance that either of these pilots will be picked up for series by the
networks, as only a small percentage of pilots are eventually picked up for
series. In addition, the Company continues to acquire international
distribution rights to films for distribution through Kushner Locke
International, Inc.
Costs relating to operating revenues were $11,663,000 during the first quarter
of fiscal 1999 as compared to $17,287,000 during the first quarter of fiscal
1998. As a percentage of operating revenues, costs relating to operating
revenues were 83% for the first quarter of fiscal 1999 compared to 86% for the
first quarter of fiscal 1998. The $(5,624,000) or (33%) decrease resulted
from a $(6,298,000) or (37%) decrease in film and television licensing costs.
Despite the reduced costs, the Company's film and television licensing gross
profits declined $1,530,000 (61%) 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 $980,000 (259%) increase
in gross profits realized from Search operations. Search's gross profit
margin decreased from 64% in the December 31, 1997 quarter to 61% in the
December 31, 1998 quarter due primarily to recently introduced lower-priced
search services intended to stimulate sales.
Selling, general and administrative expenses increased $4,534,000 or 400% to
$5,669,000 in the first quarter of fiscal 1999 from $1,135,000 in the first
quarter of fiscal 1998. The increase in such expenses is principally due to a
$2,109,000 or 1834% increase in Search advertising expenses and a $1,469,000
increase in Search administrative expenses. Search is contractually committed
to spend at least $1,480,000 in the March 1999 quarter, $1,339,000 in the June
1999 quarter and $750,000 in the September quarter for advertising. In
addition, the Company's new Latin American operations, which did not exist in
the fiscal 1998 first quarter, incurred $973,000 of administrative expenses
during the fiscal 1999 first quarter.
The provisions for doubtful accounts and notes increased $597,000 or 309%
during fiscal 1999 principally due to a $521,000 increase in such provisions
for Search. The Search increase is primarily due to the foregiveness of a
$299,000 related party note receivable from a founding employee and
shareholder of Search in exchange for an agreement to enter into both a three
year employment contract and a shareholder agreement. The remaining Search
increase includes accruals for potential chargebacks regarding uncollectible
consumer checks, credit card charges and 900 number telephone sales.
Interest expense for the first quarter ended December 31, 1998 was $1,853,000,
a $459,000 or 33% increase as compared to $1,394,000 for the first quarter
ended December 31, 1997. The increase was due to higher average borrowings
under the Company's line of credit and an increased volume of separate
production loans. Declines in variable interest rates during the 1999 fiscal
quarter and increases in interest costs capitalized to productions did not
materially affect the change in interest expense. Total indebtedness for
borrowed money increased 31% to $89,764,000 at December 31, 1998 from
$68,612,000 at December 31, 1997.
The Company's estimated effective income tax expense was (1%) for the first
quarter ended December 31, 1998 compared to an estimated effective income tax
rate of 3% for the quarter ended December 31, 1997. Tax expense in first
quarter of fiscal 1999 pertained to estimated federal alternative minimum
taxes and state income taxes. The Company has Federal and state net operating
loss carryforwards which exceed expected taxable income for fiscal 1999.
The Company reported a net loss of $(5,975,000) or $(0.64) per share, for the
first quarter ended December 31, 1998 as compared to net earnings of $178,000,
or $.02 per share, for the first quarter ended December 31, 1997. The
principal factors resulting in the reported net loss were the decline in both
total revenues and profit margin for the film and television licensing
segment, the increased investment in Search operations which have yielded
significant operating losses, the inclusion of new Latin American operations
which are yielding net losses, increases in provisions for doubtful accounts
and increases in interest expense. Weighted number of common shares for the
compared first quarters were 9,387,000 in fiscal 1999 and 9,114,000 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. 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 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 December 31, 1998 increased to $10,005,000
(including $2,023,000 of restricted cash being used principally as collateral
for a film sale/leaseback transaction and $228,000 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 increased $6,499,000 since September 30, 1998.
The Company experienced net negative cash flows from operating activities of
$(5,820,000) during the three months ended December 31, 1998, resulting
primarily from the net loss reported for the quarter. The Company capitalized
$14,892,000 in new film and television property costs, which is $5,918,000
greater than the $8,974,000 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 contractual obligations and accounts payable. The Company received
$5,673,000 in December 1998 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 intends to advance all or
most of those net proceeds to Search to fund its operations. In addition, the
Company experienced net positive cash flows from borrowing activities of
$6,563,000 during the period as a result of new borrowings of notes payable in
excess of repayments. As a result primarily of the foregoing factors, net
unrestricted cash increased during the three month period by $6,499,000 to
$7,754,000 on December 31, 1998 before taking into consideration amounts
available under the Company's line of credit as of such dates. See "Credit
Facility" below. As the Company expands production and distribution
activities, funds increased operations at Search and in Latin America and
increases its debt service burdens, it may 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 (4.9375% as of February 12, 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 February 12,
1999), (b) Chase's Base 30-Day CD Rate (4.89% as of February 12, 1999) plus 1%
or (c) the Federal Funds Effective Rate (4.9375% as of February 12, 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 December 31, 1998 was $62,610,000 out of a borrowing base
availability of $63,000,000, and as of February 12, 1999 $60,160,000 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).
Other Loans
The Company's other borrowings, totaling $17,104,000 as of December 31, 1998,
consisted of production loans from Banque Paribas (Los Angeles Agency)
("Paribas"), Equicap Financial Corporation ("Equicap") and Comerica Bank -
California ("Comerica") to consolidated production entities, and loans to the
Company's 80%-owned subsidiary, 800-US Search. 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 from Paribas to
cover a portion of the production budget of Basil. The loan bears interest at
Prime (7.75% as of February 12, 1999) plus 0.5% or at LIBOR (4.9375% as of
February 12, 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
which is being delivered to sub-distributors. In May 1997 a third party
invested $2,000,000 in the film project in exchange for certain rights and
profit participations. In 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
February 12, 1999) plus 1% or at LIBOR (4.9375 % as of February 12, 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 April 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, 800-U.S. Search obtained a collateralized line of credit
from Comerica. Advances under the line bear interest at Prime (7.75% as of
February 12, 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 November 1998, Search did not repay the loan
then due. In December 1998 Comerica extended the loan's maturity date to
March 1999. Through December 31, 1998 the Company had also loaned 800-U.S.
Search $2,640,000 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 February 12, 1999) plus 1% or at
LIBOR (4.9375% as of February 12, 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.
The loan matures on March 31, 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 February 12, 1999) plus 2% or at
LIBOR (4.9375% as of February 12, 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 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 (6.75% as of February 12, 1999)
plus 2%. The loan is collateralized by the rights, title and assets related to
the films. The Company agreed to pay $550,000 to the subsidiary borrower upon
delivery of each of the films for the acquisition of distribution rights. The
loan matures on April 1, 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 February 12, 1999) plus 1% or at
LIBOR (4.9375% as of February 12, 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.
The loan matures on April 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 February 12, 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 February 12, 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 December 31, 1998, $4,600,000 principal amount of 8% Convertible
Subordinated Debentures and $4,100,000 principal amount of 9% Convertible
Subordinated Debentures were outstanding. In December 1998, $100,000
principal amount of the 8% Debentures were converted into 17,045 shares of
Common Stock. As of December 31, 1998, $77,000 principal amount of Series A
Debentures (convertible into common stock at an adjusted rate of approximately
$7.61 per share) and $3,196,000 of Series B Debentures (convertible into
common stock at an adjusted rate of approximately $9.27 per share) were
outstanding.
In July 1996, the Company closed a secondary public offering of an aggregate
of 4,750,000 units (a "Unit"), each Unit consisting of two shares of Common
Stock (now equivalent to 1,583,334 shares in the aggregate giving effect to
the 1-for-6 reverse stock split) and one five year Class C Redeemable Common
Stock Purchase Warrant to purchase Common Stock at an adjusted exercise price
of $6.8625 per share. The Company received net proceeds in the amount of
$9,203,125. In connection with such offering, the Company issued warrants to
purchase up to an aggregate of 475,000 Units (prior to the reverse split) at
an adjusted rate of $19.18 per Unit to the underwriter thereof and a
consultant.
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 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 to increase its working capital. No assurance can be given that such
financing will be available or, if available, will be at costs comparable to
current financings. 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 "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 utilizes off-the-shelf and custom software developed internally
and by third parties. The Company believes that most of 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 currently conducting 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
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 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 has not yet fully developed 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. Contingency plans are expected to be developed in detail and expanded
during 1999. There is no assurance that the Company will be able to develop
a contingency plan that will adequately address all Year 2000 issues. The
failure of the Company to develop and 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, 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.
Although the Company currently believes that this issue will not pose
significant operational problems, 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, and
results of operations. Through December 31, 1998 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
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. The Company has agreed to file a registration
statement covering the Common Stock within 60 days of the closing of the
private placement. The Company expects to use the net proceeds for working
capital and general corporate purposes, primarily providing additional funding
to Search for its operations.
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 October
27, 1998.
<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: February 16, 1999 /s/ PETER LOCKE
-------------------------
Peter Locke
Co-Chairman of the Board,
Co-Chief Executive Officer
Dated: February 16, 1999 /s/ DONALD KUSHNER
-------------------------
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: February 16, 1999 /s/ ROBERT SWAN
-------------------------
Robert Swan
Senior Vice President and Chief Financial Officer
</TABLE>
<PAGE>
INDEX TO EXHIBITS
None.
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<PERIOD-END> DEC-31-1998
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<ALLOWANCES> 2487
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0
0
<COMMON> 45606
<OTHER-SE> (20080)
<TOTAL-LIABILITY-AND-EQUITY> 147605
<SALES> 260
<TOTAL-REVENUES> 13986
<CGS> 247
<TOTAL-COSTS> 11663
<OTHER-EXPENSES> 5669
<LOSS-PROVISION> 790
<INTEREST-EXPENSE> 1853
<INCOME-PRETAX> (5925)
<INCOME-TAX> 50
<INCOME-CONTINUING> (5975)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5975)
<EPS-PRIMARY> (.64)
<EPS-DILUTED> (.64)
<FN>
<F1>FILM AND TELEVISION PROPERTY ASSETS TOTALLING $79,691 ARE NOT CLASSIFIED
AS INVENTORY.
<F2>UNCLASSIFIED BALANCE SHEET.
<F3>UNCLASSIFIED BALANCE SHEET.
</FN>
</TABLE>
