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, 1999 Commission File No. 0-17295
THE KUSHNER-LOCKE COMPANY
(Exact name of registrant as specified in its charter)
California 95-4079057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11601 Wilshire Blvd., 21st Floor, Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 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
13-3/4% Convertible Subordinated Debentures, Series B due 2000
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 13,844,408 shares of outstanding Common Stock of the Registrant
as of February 11, 2000.
Total number of pages: 21. Exhibit Index begins on page 20.
<PAGE>
THE KUSHNER-LOCKE COMPANY
Form 10-Q for the Quarter ended December 31, 1999
INDEX
Part I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
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.
</TABLE>
Part II. OTHER INFORMATION
<TABLE>
<S> <C>
Item 1 through 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
</TABLE>
<PAGE>
PART I
Item 1.
THE KUSHNER-LOCKE COMPANY
Condensed Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
December 31, September 30,
1999 1999
------------ ------------
Assets (unaudited)
Cash and cash equivalents $22,327,000 $31,612,000
Reserved cash 166,000 734,000
Restricted cash 4,077,000 4,088,000
Accounts receivable, net of allowance for
doubtful accounts 33,201,000 30,030,000
Due from related parties 3,775,000 2,611,000
Film and television program costs, net of
accumulated amortization 87,982,000 91,499,000
Investments in unconsolidated entities, at equity 9,885,000 12,045,000
Other assets 14,736,000 12,496,000
------------ ------------
Total assets $176,149,000 $185,115,000
============ ============
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $10,655,000 $11,104,000
Due to related party 19,000 233,000
Notes payable 83,973,000 82,925,000
Deferred revenue 5,303,000 3,628,000
Contractual obligations 8,079,000 11,039,000
Production advances 1,716,000 1,592,000
Convertible subordinated debentures, net of
deferred issuance costs 2,131,000 2,269,000
------------ ------------
Total liabilities 111,876,000 112,790,000
Minority interest 8,725,000 11,580,000
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares: issued and outstanding
13,844,408 shares at December 31, 1999 and
13,810,767 shares at September 30, 1999 70,657,000 70,379,000
Accumulated deficit (15,109,000) (9,634,000)
------------ ------------
Net stockholders' equity 55,548,000 60,745,000
------------ ------------
Total liabilities and shareholders' equity $176,149,000 $185,115,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTIONS>
Three Months Ended
December 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Operating revenues:
Film and television program licensing $11,685,000 $11,625,000
Search and individual reference services 6,103,000 2,243,000
------------ -----------
Total operating revenues 17,788,000 13,868,000
------------ -----------
Costs related to operating revenues:
Film and television program licensing (10,231,000) (10,779,000)
Search and individual reference services (2,646,000) (884,000)
------------ -----------
Total costs related to operating revenues (12,877,000) (11,663,000)
------------ -----------
Gross profit 4,911,000 2,205,000
Selling, general and administrative expenses (11,384,000) (5,669,000)
Provision for doubtful accounts and notes (418,000) (790,000)
------------ -----------
Loss from operations (6,891,000) (4,254,000)
Equity in net earnings of unconsolidated entities 18,000 118,000
Dividend income 99,000 --
Interest income 370,000 64,000
Interest expense (1,815,000) (1,853,000)
------------ -----------
Loss before minority interest and income taxes (8,219,000) (5,925,000)
Minority interest in subsidiary net losses 2,764,000 --
------------ -----------
Loss before income taxes (5,455,000) (5,925,000)
Income tax expense (20,000) (50,000)
------------ -----------
Net loss $(5,475,000) $(5,975,000)
============ ===========
Basic net loss per share $(0.40) $(0.64)
====== ======
Diluted net loss per share $(0.40) $(0.64)
====== ======
Weighted average common shares outstanding 13,818,000 9,387,000
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTIONS>
Three Months Ended
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,475,000) $(5,975,000)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Minority interest in subsidiary net losses (2,764,000) --
Dividend income (99,000) --
Equity in net (earnings) of unconsolidated
entities (18,000) (118,000)
Depreciation and amortization 368,000 276,000
Provision for doubtful accounts and notes 418,000 790,000
Compensatory option and warrants 117,000 --
Amortization of film and television program costs 9,768,000 8,974,000
Changes in assets and liabilities:
Reserved and restricted cash 579,000 (197,000)
Accounts receivable, net (3,489,000) 567,000
Due from related parties (1,264,000) 418,000
Film and television program costs (6,251,000) (14,892,000)
Other assets (1,022,000) 410,000
Accounts payable and accrued liabilities (449,000) 2,422,000
Due to related party (214,000) --
Deferred revenue 1,675,000 (811,000)
Contractual obligations (2,960,000) 2,809,000
Production advances 124,000 (493,000)
----------- -----------
Net cash used in operating activities (10,956,000) (5,820,000)
----------- -----------
Cash flows from investing activities:
Investments in unconsolidated entities 2,178,000 (63,000)
Purchases of property, plant and equipment (1,570,000) (34,000)
----------- -----------
Net cash provided by (used in) investing activities 608,000 (97,000)
----------- -----------
Cash flows from financing activities:
Borrowings under notes payable 9,372,000 10,793,000
Repayment of notes payable (8,324,000) (4,230,000)
Proceeds from issuance of common stock -- 5,456,000
Other 15,000 397,000
----------- -----------
Net cash provided by financing activities 1,063,000 12,416,000
----------- -----------
Net (decrease) increase in cash (9,285,000) 6,499,000
Cash and cash equivalents at beginning of period 31,612,000 1,255,000
----------- -----------
Cash and cash equivalents at end of period $22,327,000 $ 7,754,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
Condensed Consolidated Statement of Stockholders' Equity
Three Months ended December 31, 1999
(unaudited)
<TABLE>
<CAPTIONS>
Common Stock
----------------------
Number of Common Accumulated
shares Stock Deficit Net
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at September 30, 1999 13,810,767 $70,379,000 $(9,634,000) $60,745,000
Exercise of stock options 8,000 15,000 -- 15,000
Conversion of subordinated
debentures 25,641 146,000 -- 146,000
Compensatory option and
warrant grants -- 117,000 -- 117,000
Net loss -- -- (5,475,000) (5,475,000)
---------- ----------- ------------ -----------
Balance at December 31, 1999 13,844,408 $70,657,000 $(15,109,000) $55,548,000
========== =========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Organization and Business
The Kushner-Locke Company is a leading independent entertainment company
established in 1983, 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.
(2) Basis of Presentation
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, 1999, and the results of its operations and its cash flows for
the three month periods ended December 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 December 31, 1999, out of $26,570,000 of total cash the Company had
$4,077,000 in restricted cash principally related to deposits held at a
British bank pursuant to film sale/leaseback transactions and a security
deposit on rental space for a subsidiary. In addition, at December 31, 1999,
the Company had $166,000 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.
(3) Film and Television Program Costs
Film and television program costs consist of the following:
<TABLE>
<S> <C> <C>
December 31, September 30,
1999 1999
----------- -----------
In process or development $8,702,000 $20,472,000
Released, net of accumulated amortization 79,280,000 71,027,000
----------- -----------
$87,982,000 $91,499,000
=========== ===========
</TABLE>
(4) Credit Agreement and Financing Arrangements
Credit arrangements and borrowings consist of the following:
<TABLE>
<S> <C> <C>
December 31, September 30,
1999 1999
----------- -----------
Note payable to bank, under a revolving credit
facility collateralized by substantially all
Company assets, interest at Libor (5.38% at
September 30, 1999) plus 3%, outstanding
principal balance due June 2000 $67,378,000 $66,455,000
Notes payable to banks and/or financial
institutions consisting of production loans
principally collateralized by film rights,
interest at rates from Libor (5.38% at
September 30, 1999) plus 2% to Prime (8.25% at
September 30, 1999) plus 2.5%, and maturities at
varying dates through June 2000 16,497,000 16,272,000
Series B Convertible Subordinated Debentures due
December 2000, bearing interest at 13-3/4% per
annum payable monthly, net 1,543,000 1,535,000
8% Convertible Subordinated Debentures due
December 2000, interest payable February 1 and
August 1, net 588,000 734,000
Trade notes payable and debt of US SEARCH.com 98,000 198,000
----------- -----------
Total credit agreements and financing arrangements $86,104,000 $85,194,000
=========== ===========
Total notes payable $83,973,000 $82,925,000
=========== ===========
Total convertible subordinated debentures, net of
deferred issuance costs $2,131,000 $2,269,000
=========== ===========
</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 11, 2000 a maximum of $68,000,000 could be
borrowed based upon available collateral, and $66,228,000 was then outstanding.
The credit facility expires in June 2000. The Company is currently in
discussions with the agent bank for the syndicate regarding extending the
secured revolving facility beyond its current maturity date. While the
discussions are presently in an early stage and no agreement has been reached,
the agent bank has expressed a willingness to extend the maturity date beyond
fiscal 2000.
Credit arrangements and borrowings are due as follows:
<TABLE>
<S> <C>
Fiscal Year Ending September 30, Amount
- -------------------------------- -----------
2000 $83,973,000
2001 2,131,000
-----------
Total $86,104,000
===========
</TABLE>
(5) Commitments and Contingencies
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, 1999 the Company had agreed
to pay approximately $2,612,000 should those third party producers complete
delivery to the Company. These amounts are estimated to be payable over the
next eighteen months.
US SEARCH.com has several cancelable and noncancelable agreements with data
suppliers and various Internet companies. The Company also has cancelable and
noncancelable broadcast and cable advertising commitments. At December 31,
1999, the minimum noncancelable payments required under these agreements are
approximately:
<TABLE>
<S> <C>
Year ending September 30, Amount
- ------------------------- -----------
2000 (balance of fiscal year) $12,361,000
2001 $7,520,000
2002 $5,200,000
2003 $4,200,000
2004 $4,200,000
</TABLE>
(6) Earnings (Loss) Per Share
The table below reconciles net loss and average shares of common stock
outstanding to those amounts used to calculate basic and diluted loss per
share.
<TABLE>
<CAPTIONS>
Three Months Ended
December 31,
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
Numerator:
Numerator for basic earnings per share - loss
available to common stockholders $(5,475,000) $(5,975,000)
Effect of dilutive securities: interest on
convertible debt -- --
Numerator for diluted earnings per share-loss
available to common stockholders after ----------- -----------
assumed conversions $(5,475,000) $(5,975,000)
=========== ===========
Denominator:
Denominator for basic loss per share -
weighted average shares 13,818,000 9,387,000
----------- -----------
Effect of dilutive securities:
Employee stock options -- --
Warrants -- --
Convertible debentures -- --
----------- -----------
Dilutive potential common shares -- --
----------- -----------
Denominator for diluted loss per share -
adjusted weighted average shares and
assumed conversions 13,818,000 9,387,000
=========== ===========
Basic loss per share $(0.40) $(0.64)
====== ======
Diluted loss per share $(0.40) $(0.64)
====== ======
</TABLE>
Approximately 1,218,000 options and 585,000 warrants to acquire common stock
were not included in the calculation of diluted earnings per share for the
three months ended December 31, 1999, respectively, as the impact of including
such securities would be antidilutive. 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. 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, 1999 or 1998 as the
impact of including such securities would be antidilutive.
(7) Segment Information
Summarized financial information regarding the Company's business segments is
shown in the table below (in thousands).
<TABLE>
<S> <C> <C> <C>
Film and
Television Search Consolidated
---------- ------ ------------
For the three months ended
December 31, 1999:
Operating revenues $11,685 $6,103 $17,788
Gross profit 1,454 3,457 4,911
Earnings (loss) before income taxes 905 (6,360) (5,455)
For the three months ended
December 31, 1998:
Operating revenues 11,625 2,243 13,868
Gross profit 846 1,359 2,205
Earnings (loss) before income taxes (2,820) (3,105) (5,925)
Total assets at:
December 31, 1999 150,500 25,649 176,149
September 30, 1999 154,627 30,488 185,115
</TABLE>
(8) Supplemental Cash Flow Information
During the quarter ended December 31, 1999, $150,000 of convertible
subordinated debentures were converted into 25,641 shares of common stock.
During the quarter ended December 31, 1998, $100,000 of convertible
subordinated debentures were converted into 17,095 shares of common stock.
Also $100,000 of a note receivable from an officer of the Company was
forgiven.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's revenues are derived primarily from the production or the
acquisition of distribution rights in films licensed for release domestically;
from the production and distribution of television programming for the major
domestic television networks, basic and pay cable television and first-run
syndicators; and from the licensing of rights to films and television programs
in international markets. Major domestic television networks are reducing the
volume of independently produced television programming. The Company
generally finances all or a substantial portion of the budgeted production
costs of films and television programming it produces through advances
obtained from distributors and borrowings secured by domestic and
international licenses. The Company typically retains rights to be exploited
in future periods or in additional markets or media. The Company produces a
limited number of higher-budget theatrical films to the extent the Company is
able to obtain an acceptable domestic studio to release the film theatrically
in the U.S. In November 1997, the Company acquired control of US SEARCH.com,
Inc., 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 venture, which distributes film and television
product in Latin America. In November 1998 the Company established Gran Canal
Latino, an 80% owned venture which broadcasts Spanish and Portuguese language
programming in the Americas.
The Company's revenues and results of operations are significantly affected by
accounting policies required for the industries in which it operates (see
Note 1 of Notes to Consolidated Financial Statements). Among the more
significant policies are the following:
Film and Television Programs. The Company generally capitalizes the costs it
has incurred to produce a film or television program. These costs include
direct production expenditures, certain exploitation costs, production
overhead, and interest 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 or program in future
markets. These costs, as well as third party participations 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 for the
program bear to management's estimate of anticipated total remaining gross
revenues for such film or program from all sources. When management reduces
its estimates of the future gross revenues for a particular product, a
significant write-down and a corresponding decrease in the Company's earnings
could result. See "Results of Operations" below. Film and television program
costs, net of accumulated amortization, decreased to $87,982,000 at December
31, 1999 from $91,499,000 at September 30, 1999. Film and television program
costs in process or development at December 31, 1999 decreased to $8,702,000
from $20,472,000 at September 30, 1999. See "Results of Operations" below.
Gross profits for any period are a function, in part, of the number of
programs delivered in that period and the recognition of costs in that
period. Because initial licensing revenues and related costs generally are
recognized either when the program has been delivered or is available for
delivery, significant fluctuations in revenues and net earnings may occur from
period to period. Thus, a change in the amount of entertainment product
available for delivery from period to period may materially affect a given
period's revenues and results of operations and year-to-year results may not
be comparable. The continuing shift of the Company's film and television
program mix during a 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.
Distributor production advances or license fees received prior to delivery or
completion of a program are deferred. License fees are generally recognized
as revenue on the date the film or program is delivered or available for
delivery. Activities conducted through joint ventures, wherein the Company
reports its equity in earnings (losses) as revenues, can significantly affect
comparability of net earnings. See "Results of Operations" below.
US Search.com. In November 1997, the Company acquired an 80% interest of US
SEARCH.com, a leading provider of fee-based people search and other customized
individual reference services. In June 1999 the Company sold shares of US
SEARCH.com and US SEARCH.com completed an initial public offering, which
resulted in the Company's ownership position declining to 55.2% while raising
$54,000,000 of gross proceeds, $13,500,000 of which benefited the Company.
Since its acquisition, US SEARCH.com'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 business segment. Since such acquisition, the Company has
consolidated $29,719,000 of revenues and $19,589,000 of net losses
attributable to US SEARCH.com. US SEARCH.com has significantly higher gross
profit margins than the film and television program segment. Management's
strategy is to enhance US SEARCH.com's brand awareness and market position
through increased advertising and distribution and marketing alliances and
expansion of its productline to include more services directed to business
users. As an expected result of increases in revenues trailing such
increases in expenditures, the Company believes that US SEARCH.com will
continue to adversely affect the Company's consolidated results of operations
for the foreseeable future. See Note 10 of Notes to Consolidated Financial
Statements in the Company's Form 10-K as of September 30, 1999.
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. Under a
distribution agreement with Enrique Cerezo, the Company is broadcasting
selections from approximately 1,500 Spanish language movie titles.
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 US
SEARCH.com and GCL, reliance of US SEARCH.com 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
US SEARCH.com, 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. 333-80521), as filed with the Securities and Exchange
Commission on June 11, 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 December 31, 1999 and 1998
The Company's operating revenues for the first quarter ended December 31, 1999
were $17,788,000, an increase of $3,920,000 or 28% from $13,868,000 from the
prior fiscal year's first quarter ended December 31, 1998. The increase
resulted from a $3,860,000 or 172% increase in US SEARCH.com revenues from
$2,243,000 to $6,103,000. Film and television revenues increased $60,000 or
1% from the prior fiscal year's first quarter period and increased 22% over
the quarter ended September 30, 1999.
The Company recognized $8,404,000 of revenues (47% of total revenues) during
the first quarter of fiscal 2000 primarily from the delivery and/or
availability of one feature film, Picking Up The Pieces, starring Woody Allen
and Sharon Stone. A total of $6,103,000 (34%) of first quarter fiscal 2000
revenues were generated by US SEARCH.com. In addition, $2,213,000 (12%) of
fiscal 2000 revenues came from continuing licenses of completed product from
the Company's library to domestic cable channel operators and international
sub-distributors. The remaining 7% of total revenues were generated from
various sources, including the licensing of existing television programming
and materials sold to licensees. Gran Canal Latino generated nominal
revenues.
In various stages of production for the Company's fiscal 2000 distribution
slate are The St. Francisville Experiment, They Nest starring Dean Stockwell,
John Savage and Thomas Calabro; and Vlad The Impaler. 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 $12,877,000 during the first
quarter of fiscal 2000 as compared to $11,663,000 during the first quarter of
fiscal 1999. As a percentage of operating revenues, costs relating to
operating revenues were 72% for the first quarter of fiscal 2000 compared to
84% for the first quarter of fiscal 1999. The $1,214,000 or 10% increase
resulted from a $1,762,000 or 199% increase in costs incurred by US
SEARCH.com, partially offset by a $(548,000) or (5%) decrease in film and
television program costs.
The Company's film and television licensing gross profits increased $608,000
(72%) as the fiscal 2000 release of a feature film is expected to be more
profitable than the fiscal 1999 releases. US SEARCH.com operations resulted in
a $2,098,000 or 154% increase in gross profits. US SEARCH.com's gross profit
percentage decreased from 61% in the December 31, 1998 quarter to 57% in the
December 31, 1999 quarter due primarily to the introduction of a broad array
of products in 1999, some of which were at lower prices and profit margins,
and due to higher labor costs in anticipation of higher transaction levels.
Selling, general and administrative expenses increased $5,715,000 or 101 % to
$11,384,000 in the first quarter of fiscal 2000 from $5,669,000 in the first
quarter of fiscal 1999. The increase in such expenses is principally due to
a $5,452,000 or 125% increase in US SEARCH.com advertising and administrative
expenses. US SEARCH.com is contractually committed to spend at least
$4,558,000 in the March 2000 quarter, $3,842,000 in the June 2000 quarter and
$3,711,000 in the September 2000 quarter for advertising.
The provisions for doubtful accounts and notes decreased $(372,000) or (47%)
during fiscal 2000 due to a $(407,000) or (80%) decrease in such provisions
for the film and television segment, partially offset by a $35,000 (12%)
increase for US SEARCH.com consistent with increased credit basis revenues.
Interest expense for the first quarter ended December 31, 1999 was $1,815,000,
a $(38,000) or (2%) decrease as compared to $1,853,000 for the first quarter
ended December 31, 1998. The decrease was due to lower average borrowings due
to the fiscal 1999 subordinated debenture conversions and an increase in the
capitalization of interest costs in fiscal 2000, partially offset by increased
borrowings under the Company's line of credit and an increased volume of
separate production loans. Changes in variable interest rates during the 2000
fiscal quarter did not materially affect the change in interest expense.
Total indebtedness for borrowed money decreased (6%) to $86,104,000 at
December 31, 1999 from $91,188,000 at December 31, 1998.
The Company's estimated effective income tax expense was less than 1% for the
first quarter ended December 31, 1999 compared to an estimated effective
income tax rate of 1% for the quarter ended December 31, 1998. Tax expense
in first quarter of fiscal 2000 pertained to estimated federal alternative
minimum taxes and state income taxes. The Company has Federal net operating
loss carryforwards which exceed expected taxable income for fiscal 2000.
The Company reported a net loss of $(5,475,000) or $(0.40) per share, for the
first quarter ended December 31, 1999 as compared a net loss of $(5,975,000),
or $(.64) per share, for the first quarter ended December 31, 1998. Basic and
diluted average common shares outstanding for the compared first quarters were
13,818,000 in fiscal 2000 and 9,387,000 in fiscal 1999.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 1999 decreased to $26,570,000
(including $4,077,000 of restricted cash being used principally as collateral
for a film sale/leaseback transaction and as a deposit by US SEARCH.com, and
$166,000 of reserved cash to be applied against the Company's outstanding
borrowings under its credit facility) from $36,434,000 (including $4,088,000
of restricted cash being used as collateral for film sale/leaseback
transactions and as a deposit by US SEARCH.com, and $734,000 of reserved cash
to be applied against the Company's outstanding borrowings under its credit
facility) at September 30, 1999. Unrestricted and unreserved cash and cash
equivalents decreased $(9,285,000) since September 30, 1999.
The Company's film and television program operations, and operations of US
SEARCH.com are capital intensive. The June 1999 initial public offering of
US SEARCH.com financed that subsidiary's capital needs. While the Company is
not contractually obligated to finance US SEARCH.com, from time to time the
Company may consider doing so out of its capital resources. The Company has
funded its working capital requirements through receipt of third party
domestic and international licensing payments 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-sale of rights in international
markets and use of related production loans. In addition, the expansion of
the Company's international distribution business, the establishment of its
feature film division and its Internet and direct marketing subsidiary US
SEARCH.com have significantly increased the Company's working capital
requirements. The amount available under the credit facility as of February
11, 2000 was $1,772,000.
The Company experienced net negative cash flows of ($10,956,000) from
operating activities primarily resulting from the Company's operating
expenditures exceeding operating receipts at the Company and its subsidiary US
SEARCH.com. Net unrestricted cash decreased by ($9,285,000) to $22,327,000
on December 31, 1999. As the Company expands production and distribution
activities and increases its debt service burdens, it will continue to
experience net negative cash flows from operating activities, pending receipt
of licensing revenues, other revenues and sales from its library.
Credit Facility
In June 1996, the Company obtained a $40,000,000 syndicated revolving credit
facility with a group of banks led by The Chase Manhattan Bank N.A. ("Chase").
A September 1997 amendment increased the maximum amount of revolving credit to
$60,000,000, and a December 1998 amendment increased the maximum amount of
revolving credit to $75,000,000, as discussed more fully below. The agreement
provides for borrowing by the Company on specified percentages of receivables
and a specified amount of the Company's appraised library value for unsold or
unlicensed rights. 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 production funding after a required
Company equity participation. 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 (5.89% 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 2% plus the
greater of (a) Chase's Prime Rate (8.75% as of February 11, 2000), (b) Chase's
Base 30-Day CD Rate (5.83% as of February 11, 2000) plus 1% or (c) the Federal
Funds Effective Rate (5.79% as of February 11, 2000) plus 1/2%). The Company
pays an annual commitment fee of .5% of the unused portion of the credit line.
The amount outstanding under the credit facility as of December 31, 1999 was
$67,378,000 out of a borrowing base availability of $68,000,000, and as of
February 11, 2000 $66,228,000 was outstanding out of a borrowing base
availability of $68,000,000.
The credit agreement contains restrictive covenants to which the Company must
adhere. These covenants include limitations on additional indebtedness, liens,
investments, disposition of assets, guarantees, deficit financing, capital
expenditures, affiliate transactions, 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).
In December 1998 the banks increased the maximum amount of the Company's
collateralized line of credit from $60,000,000 to $75,000,000. Existing
participants in the syndicate approved the increase and are committed to lend
up to $68,000,000. Additional availability is subject to adding new banks to
the syndicate. As of February 11, 2000, the principal amount outstanding
under this credit line was $66,228,000 and $1,772,000 remained available for
borrowing.
The credit facility expires in June 2000. The Company is currently in
discussions with Chase regarding extending the secured revolving facility
beyond its current maturity date. While the discussions are presently
in an early stage and no agreement has been reached, Chase has expressed a
willingness to extend the maturity date beyond fiscal 2000. See "Summary"
below.
Other Loans
The Company's other borrowings, totaling $16,595,000 as of December 31, 1999,
consisted principally of production loans from Comerica Bank - California
("Comerica") and Far East National Bank ("Far East") to consolidated
production entities, and loans to the Company's 55.2%-owned subsidiary, US
SEARCH.com. 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 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 bore interest at Prime (8.75% as of
February 11, 2000) plus 1% or at LIBOR (5.89% as of February 11, 2000) plus
2%. The Company provided a corporate guaranty in the amount of $1,250,000 in
connection with this loan. The loan matured on December 31, 1999 and has been
repaid.
In April 1998, a $4,625,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Susanss Plan. The
loan bears interest at Prime (8.75% as of February 11, 2000) plus 1% or at
LIBOR (5.89% as of February 11, 2000) 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 June 30, 2000.
In August 1998, a $2,900,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Ringmaster. In
November 1998, the loan amount was increased to $4,200,000. The loan bears
interest at Prime (8.75% as of February 11, 2000) plus 1% or at LIBOR (5.89%
as of February 11, 2000) 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 15, 2000.
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 (8.75% as of February 11, 2000) plus
1.5%. The loan is collateralized by the rights, title and assets related to
the film. As extended, the loan matures on April 30, 2000.
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
(8.75% as of February 11, 2000) 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. As
extended, the loan matures on April 30, 2000.
Proceeds from Securities Offerings
As of December 31, 1999, $1,574,000 principal amount of Series B Convertible
Subordinated Debentures (convertible into common stock at an adjusted rate
of approximately $9.27 per share) and $602,000 principal amount of 8%
Convertible Subordinated Debentures (convertible into common stock at an
adjusted rate of $5.85 per share) were outstanding. In December 1999,
$150,000 principal amount of the 8% Debentures were converted into 25,641
shares of Common Stock.
Capital Expenditure Commitments
Management expects to finance future production, broadcast and distribution
arrangements through a combination of production loans and credit facility
borrowings. No assurance can be given that such financing will be
available when and if needed. Management believes the Company will comply
with the restrictive covenants of the Chase agreement and accordingly the
credit facility will be available through June 2000, the current maturity
date. The Company is currently in negotiations to extend the secured
revolving facility beyond June 2000. Chase has expressed a willingness to
extend the facility, however no agreement has been executed.
US SEARCH.com has several cancelable and noncancelable agreements with
various suppliers, Internet companies and broadcasters and cable companies
for advertising. At December 31, 1999, the minimum noncancelable
payments required under these agreements are approximately $12,121,000,
$7,520,000, $5,200,000, $4,200,000 and $4,200,000 for 2000, 2001, 2002, 2003
and 2004, respectively. The Company expects US SEARCH.com to increase its
Internet and television advertising of US SEARCH.com's services. As a result,
US SEARCH.com's net losses may continue to increase. Such losses would
adversely impact the Company's consolidated results of operations, however
the Company is not obligated to fund any US SEARCH.com operating cash flow
deficiencies.
Summary
The Company from time to time evaluates strategic alternatives for
enhancing liquidity in its core and non-core businesses. To pursue
strategic alternatives, the Company has engaged Prudential Securities.
In addition the Company will continue its advisory agreement with Allen &
Company Incorporated. Strategic alternatives include but are not limited
to, the pursuit of opportunities to enhance the exploitation of the
Company's library properties, its distribution system, and its satellite
channel. This approach may include consolidations with, acquisition of or
strategic partnering with companies in our core businesses or in
businesses complementary to our core businesses. 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 which may or may not
be ancillary to the Company's existing business, subject to the
availability of financing as necessary. There can be no assurances that
any of these transactions will occur. Many of these alternatives might
require a change in the capital structure or equity or debt financing.
There is no assurance that financing sources will be available or, if
available, will be available on commercially acceptable terms.
Management believes that existing resources and cash generated from
operating activities, together with amounts anticipated 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 is currently in negotiations
to extend the secured revolving facility beyond its current maturity
date, however no agreement has been executed. Chase has expressed a
willingness to extend the facility, however there can be no assurance
that an extension of the maturity date will be obtained or, if obtained,
will continue the credit facility on its present terms. If not extended,
all amounts outstanding under the credit facility at June 30, 2000 will
become due and payable on that date. The Company would then be required
to obtain additional capital from other sources to satisfy such
obligations. The inability to obtain such resources on commercially
acceptable terms would have a material adverse effect on the Company's
cash flow, the scope of strategic alternatives available to the Company
and its operations. The Company may seek other sources of financing to
meet its working capital requirements, including separate equity or debt
financing for US SEARCH.com or other possible sources of financing. The
Company from time to time seeks 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. The Company may
not obtain additional financing on terms satisfactory to the Company or at
all.
International operations are a significant portion of total operations.
Therefore the Company is exposed to risks of currency translation losses,
cash collection and repatriation risks and risks of adverse political,
regulatory and economic changes.
Management believes that the Company's film and television sales volumes
are not subject to significant fluctuations based upon seasonality, however
search services have generally declined during holiday periods.
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.
Corporate operations and film and television segment. 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 has completed a Year 2000 evaluation 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 corporate or film and television operations, which could have a
material adverse effect on the business, financial condition, results of
operations and prospects of the Company.
US SEARCH.com. The Year 2000 Issue could result in a system failure or
miscalculations causing significant disruption of operations, including,
among other things, interruptions in Internet traffic, accessibility of
the Web site, delivery of service, transaction processing or searching and
other features of US SEARCH.com services. It is possible that this
disruption will continue for an extended period of time. US SEARCH.com
depends on information contained primarily in electronic format in
databases and computer systems maintained by third parties, including
governmental agencies. The disruption of third-party systems or its
systems interacting with these third-party systems could prevent US
SEARCH.com from receiving orders or delivering search results in a
timely manner. In addition, US SEARCH.com relies on the integration of
many systems in aggregating search data from multiple sources. The
failure of any of those systems as a result of Year 2000 compliance issues
could prevent it from delivering products and services. Failure of its
systems or third-party systems providing information used in our services
could materially adversely affect US SEARCH.com's business and results of
operations. Management has received information confirming the Year 2000
compliance from present data suppliers. Management has also confirmed
Year 2000 compliance with key third party vendors.
US SEARCH.com has conducted an evaluation of internal systems. The
objective was to ensure uninterrupted transition into the Year 2000.
The scope of the Year 2000 objective included: (1) information technology
("IT") such as software and hardware, (2) non-IT systems such as
components contained in various safety systems, facilities and utilities,
and (3) readiness of key third parties, including suppliers and customers.
US SEARCH.com has obtained written confirmation of the Year 2000 status
of its third party software. US SEARCH.com has utilized internal resources
to test internally developed software for Year 2000 compliance. US
SEARCH.com has modified or replaced certain portions of its software so
that its systems will function properly with respect to dates in the year
2000 and thereafter. If there is a malfunction in its systems, potential
systems interruptions or delays in services may have a material adverse
effect on US SEARCH.com's business, financial condition and results of
operations. Further, if management fails to successfully resolve these
issues, some or all of US SEARCH.com's operations may shut-down, which
would have a material adverse effect on its business, financial condition
and results of operations.
US SEARCH.com has a process in place to assess the Year 2000 readiness of
its business critical vendors and customers, and has worked with these
vendors and customers on Year 2000 compliance issues. Disruptions with
respect to computer systems of vendors or customers, whose systems are
outside US SEARCH.com's control, could impair its ability to provide
support to customers, and could have a material adverse effect on its
financial condition and results of operations.
Overall. Management has developed contingency plans to be implemented as
part of its efforts to identify and correct Year 2000 problems with
internal and Web-based systems. Within the plans, management addresses
various problems, including disruptions to Web-servers, significant
interruption of data flow between the Company and third party data
providers, and failures associated with internal systems. The
contingency plans emphasize the identification and accessibility of
additional data sources for US SEARCH.com services. There is no
assurance that the contingency plans will adequately address all Year
2000 issues.
US SEARCH.com has incorporated the utilization of (1) additional data
sources, (2) manual procedures for order processing and delivery of
search results (3) standby equipment and accelerated availability of
replacement parts, and (4) increased staffing levels for resolution of
information technology issues and to manually process orders. Failure to
implement any of these plans, if and when necessary, may have a material
adverse effect on US SEARCH.com's business and results of operations.
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 for its corporate or film and television operations,
however delays in the modification or conversion of its or US
SEARCH.com's systems, or those of vendors and suppliers of services to
the Company and US SEARCH.com, 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.
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. The Company estimates that the total cost
of implementing and maintaining its Year 2000 compliance program will not
exceed $200,000 and most of these costs have been incurred to date. This
estimate includes implementation of redundant hardware, software and
communications systems.
As of February 11, 2000 neither the Company nor US SEARCH.com have
experienced any significant disruptions of operations attributable to
Y2K issues.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibits filed as part of this report are listed on the
"Index to Exhibits" which follows the signature pages
hereto.
(b) Reports on Form 8-K: None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: February 14, 2000 /s/ PETER LOCKE
Peter Locke
Co-Chairman of the Board,
Co-Chief Executive Officer
Dated: February 14, 2000 /s/ DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: February 14, 2000 /s/ BRUCE ST.J LILLISTON
Bruce St.J Lilliston
President and Chief Operating
Officer
Dated: February 14, 2000 /s/ ROBERT SWAN
Robert Swan
Senior Vice President and Chief
Financial Officer
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EX-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> A:\FDS1Q00
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 26570
<SECURITIES> 0
<RECEIVABLES> 39788
<ALLOWANCES> 2812
<INVENTORY> 0<F1>
<CURRENT-ASSETS> 0<F2>
<PP&E> 4060
<DEPRECIATION> 1402
<TOTAL-ASSETS> 176149
<CURRENT-LIABILITIES> 0<F2>
<BONDS> 0
0
0
<COMMON> 70657
<OTHER-SE> (15109)
<TOTAL-LIABILITY-AND-EQUITY> 55548
<SALES> 31
<TOTAL-REVENUES> 17788
<CGS> 18
<TOTAL-COSTS> 12877
<OTHER-EXPENSES> 11384
<LOSS-PROVISION> 418
<INTEREST-EXPENSE> 1815
<INCOME-PRETAX> (5455)
<INCOME-TAX> 20
<INCOME-CONTINUING> (5475)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5475)
<EPS-BASIC> (.40)
<EPS-DILUTED> (.40)
<FN>
<F1>Included in total assets is $87,982 representing net film and television
program assets.
<F2>The Company presents its financial position in an unclassified
consolidated balance sheet.
</FN>
</TABLE>
