<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000 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 14,271,908 shares of outstanding Common Stock of the Registrant
as of August 11, 2000.
Total number of pages: 22.
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THE KUSHNER-LOCKE COMPANY
Form 10-Q for the Quarter ended June 30, 2000
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
Items 1 through 5. Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
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PART I
Item 1. FINANCIAL INFORMATION
THE KUSHNER-LOCKE COMPANY
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Assets (unaudited)
Cash and cash equivalents $ 9,427,000 $ 31,612,000
Reserved cash 52,000 734,000
Restricted cash 4,279,000 4,088,000
Accounts receivable, net of allowance for doubtful accounts 40,266,000 30,030,000
Due from related parties 3,413,000 2,611,000
Film and television program costs, net of accumulated amortization 81,332,000 91,499,000
Investments in unconsolidated entities, at equity 10,266,000 12,045,000
Other assets 17,793,000 12,496,000
------------- -------------
Total assets $ 166,828,000 $ 185,115,000
============= =============
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 16,612,000 $ 11,104,000
Due to related party 85,000 233,000
Notes payable 87,080,000 82,925,000
Deferred revenue 5,878,000 3,628,000
Contractual obligations 7,993,000 11,039,000
Production advances 1,415,000 1,592,000
Convertible subordinated debentures, net of deferred issuance costs 2,151,000 2,269,000
------------- -------------
Total liabilities 121,214,000 112,790,000
------------- -------------
Minority interest 2,492,000 11,580,000
Stockholders' equity:
Common stock, no par value. Authorized 50,000,000 shares;
issued and outstanding 13,846,908 shares at June 30, 2000 71,497,000 70,379,000
and 13,810,767 shares at September 30, 1999
Accumulated deficit (28,374,000) (9,634,000)
------------- -------------
Net stockholders' equity 43,122,000 60,745,000
------------- -------------
Total liabilities and stockholders' equity $ 166,828,000 $ 185,115,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
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THE KUSHNER-LOCKE COMPANY
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Operating revenues:
Film and television program licensing $ 7,798,000 $ 6,028,000 $ 28,934,000 $ 24,582,000
Search and individual reference services 5,918,000 3,983,000 19,466,000 9,623,000
------------ ------------ ------------ ------------
Total operating revenues 13,716,000 10,011,000 48,400,000 34,205,000
------------ ------------ ------------ ------------
Costs related to operating revenues:
Film and television program licensing (7,220,000) (9,516,000) (25,454,000) (25,261,000)
Search and individual reference services (3,080,000) (1,497,000) (8,899,000) (3,857,000)
------------ ------------ ------------ ------------
Total costs related to
operating revenues (10,300,000) (11,013,000) (34,353,000) (29,118,000)
------------ ------------ ------------ ------------
Gross profit (loss) 3,416,000 (1,002,000) 14,047,000 5,087,000
Selling, general and administrative expenses (12,884,000) (8,917,000) (36,941,000) (20,270,000)
Provision for doubtful accounts and notes (147,000) (1,798,000) (1,086,000) (2,999,000)
------------ ------------ ------------ ------------
Loss from operations (9,615,000) (11,717,000) (23,980,000) (18,182,000)
Equity in net earnings of
unconsolidated entities 15,000 -- 86,000 --
Gain on sale of interest in subsidiary -- 13,148,000 -- 13,148,000
Gain on issuance of stock by subsidiary -- 21,152,000 -- 21,152,000
Dividend income 103,000 -- 303,000 --
Interest income 189,000 1,000 807,000 104,000
Interest expense (2,253,000) (2,061,000) (6,227,000) (6,167,000)
------------ ------------ ------------ ------------
Earnings (loss) before minority interest
and income taxes (11,561,000) 20,523,000 (29,011,000) 10,055,000
Minority interest in subsidiary net losses 4,411,000 -- 10,319,000 --
------------ ------------ ------------ ------------
Earnings (loss) before income taxes (7,150,000) 20,523,000 (18,692,000) 10,055,000
Income tax expense (7,000) (658,000) (48,000) (740,000)
------------ ------------ ------------ ------------
Net earnings (loss) $ (7,157,000) $ 19,865,000 $(18,740,000) $ 9,315,000
============ ============ ============ ============
Basic net earnings (loss) per share $ (0.52) $ 1.53 $ (1.35) $ 0.84
============ ============ ============ ============
Diluted net earnings (loss) per share $ (0.52) $ 1.41 $ (1.35) $ 0.79
============ ============ ============ ============
Weighted average common shares outstanding 13,846,000 12,948,000 13,836,000 11,062,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
4
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THE KUSHNER-LOCKE COMPANY
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(18,740,000) $ 9,315,000
Adjustments to reconcile net earnings (loss) to
net cash used by operating activities:
Amortization of film costs 24,749,000 25,832,000
Gain on issuance of stock by subsidiary -- (21,152,000)
Gain on sale of interest in subsidiary -- (13,148,000)
Amortization of other assets 395,000 787,000
Minority interest in subsidiary net losses (10,319,000) --
Dividend income (303,000) --
Equity in net earnings of unconsolidated entities (86,000) --
Depreciation and amortization 171,000 283,000
Provision for doubtful accounts and notes 1,066,000 2,807,000
Compensatory option and warrant grants 326,000 --
Other 4,000 35,000
Changes in assets and liabilities:
Reserved and restricted cash 491,000 (154,000)
Accounts receivable, net (11,202,000) 6,902,000
Due from affiliates (1,050,000) (1,199,000)
Increase in film and television program costs (17,082,000) (45,213,000)
Other assets 3,720,000 (6,281,000)
Accounts payable and accrued liabilities 5,508,000 4,283,000
Income taxes -- 659,000
Deferred film license fees 2,250,000 (32,000)
Contractual obligations (3,046,000) (93,000)
Production advances (177,000) (480,000)
------------ ------------
Net cash used by operating activities (23,325,000) (36,849,000)
------------ ------------
Cash flows from investing activities:
Decrease in investments in unconsolidated entities 1,865,000 844,000
Increase in other assets (2,895,000) (260,000)
------------ ------------
Net cash provided (used) by investing activities (1,030,000) 584,000
------------ ------------
Cash flows from financing activities:
Borrowings under notes payable 17,286,000 34,443,000
Repayment of notes payable (15,131,000) (21,483,000)
Public offering of subsidiary stock -- 48,818,000
Private placement of common stock -- 5,456,000
Exercise of stock options and warrants 15,000 9,398,000
Other -- 5,304,000
------------ ------------
Net cash provided by financing activities 2,170,000 81,936,000
------------ ------------
Net increase (decrease) in cash (22,185,000) 45,671,000
Cash and cash equivalents at beginning of period 31,612,000 1,255,000
------------ ------------
Cash and cash equivalents at end of period $ 9,427,000 $ 46,926,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
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THE KUSHNER-LOCKE COMPANY
Condensed Consolidated Statement of Stockholders' Equity
Nine Months Ended June 30, 2000
(unaudited)
<TABLE>
<CAPTION>
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
Stock options exercised 8,000 15,000 -- 15,000
Conversion of subordinated debentures 25,641 146,000 -- 146,000
Compensatory option and warrant grants 2,500 326,000 -- 326,000
Issuance of stock by subsidiary -- 630,000 -- 630,000
Net earnings -- -- (18,740,000) (18,740,000)
------------ ------------ ------------ ------------
Balance at June 30, 2000 13,846,908 $ 71,497,000 $(28,374,000) $ 43,122,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated
financial statements.
6
<PAGE> 7
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 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
June 30, 2000, the results of its operations for the three and nine month
periods ended June 30, 2000 and 1999, and its cash flows for the nine month
periods ended June 30, 2000 and 1999. Interim results are not necessarily
indicative of results to be expected for a full fiscal year.
Restricted and Reserved Cash
At June 30, 2000, out of $13,758,000 of total cash the Company had $4,279,000 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 June 30, 2000, the Company had $52,000 in cash
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>
<CAPTION>
June 30, September 30,
2000 1999
----------- -----------
<S> <C> <C>
In process or development $ 7,182,000 $20,472,000
Released, net of accumulated amortization 74,150,000 71,027,000
----------- -----------
$81,332,000 $91,499,000
=========== ===========
</TABLE>
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(4) Credit Agreement and Financing Arrangements
Credit arrangements and borrowings consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
----------- ------------
<S> <C> <C>
Note payable to bank under a
revolving credit facility
collateralized by substantially
all Company assets, interest at
LIBOR (6.62% at
August 11, 2000) plus 3%, outstanding principal balance due August 2000 $68,000,000 $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
(6.62% at August 11, 2000) plus
2% to Prime (9.50% at August 11,
2000) plus 2.5%, and maturities
at varying
dates through March 2001 15,550,000 16,272,000
Term note payable to bank collateralized by certain partnership
interests, bearing interest at 7% per annum, payable quarterly, due 2,000,000 --
February 2005
Series B Convertible Subordinated Debentures due December 2000,
bearing interest at 13.75% per annum payable monthly, net 1,556,000 1,535,000
Private placement notes, due October 2000, bearing interest at 10% per
annum, with Company option to extend to May 2001 1,500,000 --
Convertible Subordinated Debentures due December 2000, bearing
interest at 8% per annum, payable February 1 and August 1, net 595,000 734,000
Trade notes payable and debt of US SEARCH.com 30,000 198,000
----------- -----------
Total credit agreements and financing arrangements $89,231,000 $85,194,000
=========== ===========
Total notes payable $87,080,000 $82,925,000
=========== ===========
Total convertible subordinated debentures, net of deferred issuance $ 2,151,000 $ 2,269,000
=========== ===========
costs
</TABLE>
The Company has a $75,000,000 revolving credit facility. In April 2000 the
Company was granted an extension of the facility's June 2000 maturity to August
25, 2000, and the syndicated group approved the issuance of up to $2,500,000 in
principal amount of the Company's notes as described below, in exchange for a
renewal of the Company's former pledge of the 7,608,080 shares of common stock
of US SEARCH.com not pledged as security for such notes. As of August 11, 2000 a
maximum of $68,000,000 could be borrowed based upon available collateral, and
$68,000,000 was then outstanding.
The Company is in advanced negotiations of formal documentation issued by The
Chase Manhattan Bank N.A. ("Chase") regarding extension of the secured revolving
facility from August 25, 2000 until September 30, 2001.
In February 2000 the Company obtained a $2,000,000 loan from Far East National
Bank. Interest is payable quarterly commencing March 2000. Proceeds were used to
obtain limited partnership units in World Wide Multimedia LLP, which
collateralize the loan. The Company has obtained additional limited partnership
units in World Wide Multimedia LLP in exchange for certain film rights.
In April 2000, certain individuals, including Messrs. Kushner and Locke,
purchased notes from the Company in the aggregate principal amount of $1,500,000
in a private placement pursuant to Regulation D of the Securities Exchange Act
of 1934. An additional $1,000,000 in notes may be sold to these or other persons
under terms of the private placement. The notes will become due six months from
the closing unless extended another six months at the Company's option. The
notes are collateralized by a pledge of 2,000,000 shares of the Company's US
SEARCH.com shareholdings. The notes bear interest at the rate of 10%
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per annum payable at maturity. At the scheduled six month maturity the holders
will be entitled to receive, at their election, either a cash payment equal to
15% of the principal amount of the notes purchased or a warrant for a number of
shares of common stock equal to their loan principal amount divided by $10. The
warrant would be exerciseable at 110% of the Company's common stock market value
at the loan closing date for a three-year term from the date of issuance. In
addition, if the Company extends the notes' maturity an additional six months,
at the extended maturity date the holders will be entitled to receive, at their
election, either a cash payment equal to 15% of the principal amount of the
notes purchased or an additional warrant for a number of shares of common stock
equal to their loan principal amount divided by $10. That warrant would also be
exerciseable at 110% of the Company's common stock market value at the loan
closing date for a three-year term from the date of issuance. The warrants will
not be transferable. Unissued shares of common stock underlying the warrants
will be reserved by the Company for possible future issuance, and will be
registered as soon as practicable at the Company's expense. At the request of
other investors, Messrs. Kushner and Locke have agreed to participate as members
of the investor group, but have agreed to receive only the cash payments in
addition to the 10% interest.
Credit arrangements and borrowings are due as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending September 30, Amount
------------------------------------------ --------------
<S> <C>
2000 $81,251,000
2001 5,980,000
2005 2,000,000
--------------
Total $89,231,000
==============
</TABLE>
(5) Commitments and Contingencies
The Company is party to certain legal proceedings and claims arising out of the
normal course of its business. 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 June 30, 2000 the Company had agreed to pay
approximately $110,000 should those third party producers complete delivery to
the Company. These amounts are estimated to be payable over the next twelve
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 June 30, 2000, the
minimum noncancelable payments required under these agreements are
approximately:
<TABLE>
<CAPTION>
Fiscal year ending September 30, Amount
------------------------------------------ ----------------
<S> <C>
2000 $4,880,000
2001 9,502,000
2002 5,950,000
2003 4,200,000
2004 4,200,000
Thereafter 1,050,000
--------------
Total $29,782,000
==============
</TABLE>
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(6) Earnings (Loss) Per Share
Basic net earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net earnings
(loss) per share is computed using the weighted average number of common shares
and common equivalent shares outstanding during the period.
Approximately 1,328,000 options and 585,000 warrants to acquire common stock
were not included in the calculation of diluted earnings per share for the three
or nine month periods ended June 30, 2000, as the impact of including such
securities would be antidilutive. Approximately 425,000 shares of restricted
stock were not included in the calculation of diluted loss per share for the
three or nine month periods ended June 30, 2000, as the impact of including such
securities would be antidilutive. Approximately 167,000 shares representing the
potential conversion of debentures were not included in the calculation of
diluted loss per share for the nine month period ended June 30, 1999, as the
impact of including such securities would be antidilutive. Shares issuable upon
conversion of the Company's convertible subordinated debentures were not
included in the calculation of diluted earnings per share for the three or nine
month periods ended June 30, 2000 as the impact of including such securities
would be antidilutive.
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(7) Segment Information
Summarized financial information regarding the Company's business segments is
shown in the table below (in thousands).
<TABLE>
<CAPTION>
Film and
Television Search Other (a) Consolidated
---------- ---------- --------- ------------
<S> <C> <C> <C> <C>
For the three months ended June 30, 2000:
Revenues $ 7,798 $ 5,918 -- $ 13,716
Gross profit 578 2,838 -- 3,416
EBIT (b) (548) (9,128) 4,487 (5,189)
Earnings (loss) before income taxes (2,588) (8,973) 4,411 (7,150)
For the three months ended June 30, 1999:
Revenues 6,028 3,983 -- 10,011
Gross profit (loss) (3,488) 2,486 -- (1,002)
EBIT (b) 24,322 (7,275) 5,536 22,583
Earnings (loss) before income taxes 22,306 (7,456) 5,673 20,523
For the nine months ended June 30, 2000:
Revenues 28,934 19,466 -- 48,400
Gross profit 3,480 10,567 -- 14,047
EBIT (b) (1,248) (22,968) 10,641 (13,575)
Earnings (loss) before income taxes (6,738) (22,273) 10,319 (18,692)
For the nine months ended June 30, 1999:
Revenues 24,582 9,623 -- 34,205
Gross profit (loss) (679) 5,766 -- 5,087
EBIT (b) 18,896 (10,554) 7,776 16,118
Earnings (loss) before income taxes 12,936 (10,947) 8,066 10,055
Total assets at:
June 30, 2000 150,623 16,205 -- 166,828
June 30 1999 148,432 36,683 -- 185,115
</TABLE>
------------
(a) Amounts represent minority interests in subsidiary net losses.
(b) EBIT represents earnings before interest, dividends and income taxes.
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(8) Supplemental Cash Flow Information
During the nine month period ended June 30, 2000, $150,000 of convertible
subordinated debentures were converted into 25,641 shares of common stock.
Additionally, the Company contributed film and television license rights valued
at $2,500,000 in exchange for partnership interests, which are included in other
assets.
(9) Subsequent Event
On August 3, 2000, US Search.com, the Company's majority owned subsidiary, filed
a Current Report on Form 8-K with the Securities and Exchange Commission
announcing the proposal for sale to accredited investors in a private placement
shares of that company's Series A Convertible Preferred Stock ("Series A
Preferred") and warrants to purchase additional shares of Series A Preferred
("the Warrants"). A minimum of $10,000,000 and a maximum of $27,500,000 may be
raised in the private placement, subject to the exercise of the Warrants, US
Search.com meeting certain financial performance objectives and certain other
requirements. As a result of this transaction, US Search.com could issue up to
13,750,000 shares of its Common Stock upon conversion of the Series A Preferred,
which would represent 42.1% of that company's outstanding Common Stock on a
fully diluted basis (giving effect to the issuance of the Series A Preferred and
the currently exercisable outstanding stock options.) Additionally, as part of
the proposed transaction, the Kushner-Locke Company will sell 3,500,000 of its
shares of US Search.com. Such transaction, if undertaken, would reduce the
Company's ownership interest below 50%, resulting in the deconsolidation of US
Search.com's operating results from those of the Company.
(10) Recent Accounting Pronouncement
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants recently issued Statement of Position ("SOP")
00-02 Accounting by Producers or Distributors of Films. The SOP establishes new
accounting standards for producers and distributors of films, including changes
in revenue recognition and accounting for advertising, development and overhead
costs. The SOP is effective for fiscal years beginning after December 15, 2000.
The Company is in the process of evaluating the overall impact of the SOP on
its consolidated Financial Statements.
12
<PAGE> 13
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
$81,332,000 at June 30, 2000 from $91,499,000 at September 30, 1999. Film and
television program costs in process or development at June 30, 2000 decreased to
$7,182,000 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.
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<PAGE> 14
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), 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. During the quarter
ended March 31, 2000 US SEARCH.com issued shares to an executive in connection
with his exercise of stock options. This resulted in an increase in US
SEARCH.com's equity but diluted the Company's ownership position to 53.6%.
Subsequent option exercises have further diluted the Company's ownership
position to 52.6% as of June 30,2000. Since such acquisition, the Company has
consolidated $43,091,000 of revenues and $27,236,000 of net losses attributable
to US SEARCH.com. US SEARCH.com has significantly higher gross profit margins
than the film and television program segment. US SEARCH.com's strategy is to
enhance its brand awareness and market position through increased advertising
and distribution and marketing alliances.
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.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants recently issued Statement of Position ("SOP")
00-02 Accounting by Producers or Distributors of Films. The SOP establishes new
accounting standards for producers and distributors of films, including changes
in revenue recognition and accounting for advertising, development and overhead
costs. The SOP is effective for fiscal years beginning after December 15, 2000.
The Company is in the process of evaluating the overall impact of the SOP on
its consolidated Financial Statements.
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 the 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 JUNE 30, 2000 AND 1999
The Company's operating revenues for its third quarter ended June 30, 2000 were
$13,716,000, an increase of $3,705,000 or 37% from $10,011,000 from the prior
fiscal year's third quarter ended June 30, 1999. The
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increase is principally the result of a $1,935,000 or 49% increase in US
SEARCH.com revenues from $3,983,000 in the third quarter of 1999 to $5,918,000
in the third quarter of 2000. Film and television revenues increased $1,770,000
or 29% from the prior fiscal year's third quarter and decreased $(1,646,000), or
(17%) from the quarter ended March 31, 2000 due to the timing of delivery or
availability of film and television productions.
The Company recognized $5,443,000 of revenues (40% of total revenues) during the
third quarter of fiscal 2000 from the licensing of certain broadcast rights for
certain programs to United Releasing International, Ltd. A total of $5,918,000
or 43% of third quarter fiscal 2000 revenues were generated by US SEARCH.com. In
addition, $2,335,000 or 17% of fiscal 2000 revenues came from continuing
licenses of completed product from the Company's library direct to video, to
domestic cable channel operators and international sub-distributors. The balance
of fiscal 2000 revenues were generated from various sources, including materials
sold to licensees. Gran Canal Latino generated nominal revenues.
In various stages of production for the Company's fiscal 2000 distribution slate
are Vlad The Impaler directed by Joe Chappelle, and Harvard Man starring Sarah
Michelle Gellar and written and directed by James Toback. 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 $10,302,000 during the third quarter
of fiscal 2000 as compared to $11,013,000 during the third quarter of fiscal
1999. As a percentage of operating revenues, costs relating to operating
revenues were 75% for the third quarter of fiscal 2000 compared to 110% for the
third quarter of fiscal 1999. The $(711,000) or (6%) overall decrease resulted
from a $(2,294,000) or (24%) decrease in film and television program costs,
principally consisting of amortization, offset in part by a $1,583,000 or 106%
increase in costs incurred by US SEARCH.com.
The Company's film and television licensing gross profits increased $4,064,000
for the June 30, 2000 quarter compared to the June 30, 1999 quarter primarily as
a result of increased profitability from the Company's television and film
licensing activities. US SEARCH.com's gross profits increased $352,000 or 7%
from the June 30, 1999 quarter to the June 30, 2000 quarter due primarily to a
49% revenue increase in the comparable periods. US SEARCH.com's gross profit
margin decreased from 62% in the June 30, 1999 quarter to 48% in the June 30,
2000 quarter due primarily to the introduction of a broad array of products in
late 1999, some of which were at lower prices and profit margins, and due to
higher labor costs in anticipation of increased transaction levels.
Selling, general and administrative expenses increased $3,967,000 or 44% to
$12,884,000 in the third quarter of fiscal 2000 from $8,917,000 in the third
quarter of fiscal 1999. The increase in such expenses is principally due to a
$5,521,000, or 90% increase in US SEARCH.com advertising and administrative
expenses, offset in part by a $(1,554,000), or (56%) decrease in film and
television selling, general and administrative expenses. US SEARCH.com is
contractually committed to spend at least $2,880,000 in the September 2000
quarter for advertising.
The provision for doubtful accounts and notes decreased by $(1,651,000) or (92%)
for the quarter ended June 30, 2000 compared to the quarter ended June 30, 1999
due to a $(1,584,000) or (109%) decrease in such provisions for the film and
television segment. The provision was higher in the previous fiscal year as the
Company reduced its estimates for several projects in that period. The provision
also includes a $(67,000) or (19%) decrease for US SEARCH.com.
The Company has recorded minimal income tax expense for the three months ended
June 30, 2000, and has Federal net operating loss carryforwards which exceed
expected taxable income for fiscal 2000.
Interest expense for the third quarter ended June 30, 2000 was $2,253,000, a
$192,000 or 9% increase as compared to $2,061,000 for the third quarter ended
June 30, 1999. The increase was due to increased average borrowings under the
Company's line of credit and by increases in the variable rates charged on
borrowings. The increased average borrowings under separate production loans did
not have a material effect upon interest expense because interest is capitalized
to film and television program costs during production. Changes in variable
interest rates during 2000 are expected to increase expense in subsequent
quarters if debt remains near current levels. The Company may also incur
additional debt, which would result in increased interest expense.
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Total indebtedness for borrowed money increased 1% to $89,231,000 at June 30,
2000 from $88,463,000 at June 30, 1999.
The Company reported a net loss of $(7,157,000) or $(0.52) per basic and diluted
share, for the third quarter ended June 30, 2000. This compares with net
earnings of $19,865,000, or $1.53 per basic share and $1.41 per diluted share,
for the third quarter ended June 30, 1999, in which the Company recognized gains
of $34,300,000 as a result of reducing its ownership position through the
Initial Public Offering of US Search.com. Basic average common shares
outstanding for the compared third quarters were 13,846,000 in fiscal 2000 and
12,948,000 in fiscal 1999.
COMPARISON OF NINE MONTHS ENDED JUNE 30, 2000 AND 1999
The Company's operating revenues for the nine month period ended June 30, 2000
were $48,400,000, an increase of $14,195,000 or 41% from $34,205,000 during the
nine month period ended June 30, 1999. The increase resulted from a $9,843,000
or 102% increase in US SEARCH.com revenues from $9,623,000 to $19,466,000. Film
and television revenues increased $4,352,000 or 18% from the prior fiscal year's
period.
The Company recognized $15,752,000 of revenues (33% of total revenues) during
the nine month period ended June 30, 2000 primarily from the licensing of
broadcast rights of certain programs to United Releasing International, Ltd. as
well as the delivery and/or availability of two films, Picking Up The Pieces
starring Woody Allen and Sharon Stone, and The St. Francisville Experiment. In
addition, $2,884,000 or 6% of fiscal 2000 revenues came from the delivery and/or
availability of the made-for-television film They Nest starring Dean Stockwell,
John Savage and Thomas Calabro. A total of $19,466,000 or 40% of fiscal 2000
revenues were generated by US SEARCH.com. In addition, $9,645,000 or 20% 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 1% of fiscal 2000 revenues were generated from
various sources, including the licensing of existing television programming and
materials sold to licensees. Gran Canal Latino generated nominal revenues.
Costs relating to operating revenues were $34,355,000 during the nine month
period ended June 30, 2000, a $5,237,000 or 18% increase as compared to
$29,118,000 during the nine month period ended June 30, 1999. As a percentage of
operating revenues, costs relating to operating revenues were 71% for the fiscal
2000 compared to 85% for fiscal 1999. The increase resulted primarily from a
$5,042,000 or 131% increase in costs incurred by US SEARCH.com, in addition to a
$195,000 or 1% increase in film and television program amortization.
The Company's film and television licensing gross profits increased $4,151,000
primarily as a result of increased profitability from the Company's television
and film licensing activities. US SEARCH.com operations resulted in a $4,801,000
or 83% increase in gross profits. US SEARCH.com's gross profit margin decreased
from 60% during the nine months ended June 30, 1999 to 54% during the nine
months ended June 30, 2000, due primarily to the introduction of a broad array
of products in late 1999, some of which were at lower prices and profit margins,
and due to higher labor costs in anticipation of increased transaction levels.
Selling, general and administrative expenses increased $16,671,000 or 82% to
$36,941,000 during the nine months ended June 30, 2000 from $20,270,000 during
the nine months ended June 30, 1999. The increase in such expenses is
principally due to a $17,844,000 or 121% increase in US SEARCH.com advertising
and administrative expenses, offset in part by a $(1,173,000) decrease in film
and television segment selling, general and administrative expenses.
The provision for doubtful accounts and notes decreased by $(1,813,000) or
(60%) during the nine months ended June 30, 2000 due to a $(1,861,000) or (92%)
decrease in such provisions for the film and television segment, partially
offset by a $58,000 or 7% increase for US SEARCH.com.
Interest expense for the nine months ended June 30, 2000 was $6,227,000, a
$60,000 or 1% increase as compared to $6,167,000 for the nine months ended June
30, 1999. The increase was due to increased average borrowings under the
Company's line of credit, and by increases in the variable rates charged on
borrowings, offset in part by a decrease in subordinated debenture borrowings in
fiscal 2000. The increased average borrowings under separate production loans
did not have a material effect upon interest expense because interest is
capitalized to film and television program costs during production. Changes in
variable interest rates during
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2000 are expected to increase expense in subsequent quarters if debt remains
near current levels. The Company may also incur additional debt, which would
result in increased interest expense. Total indebtedness for borrowed money
increased 1% to $89,231,000 at June 30, 2000 from $88,463,000 at June 30, 1999.
The Company has recorded minimal income tax expense for the nine months ended
June 30, 2000, and has Federal net operating loss carryforwards which exceed
expected taxable income for fiscal 2000.
The Company reported a net loss of $(18,740,000) or $(1.35) per basic and
diluted share, for the nine months ended June 30, 2000. This compares with net
earnings of $9,315,000, or $0.84 per basic share and $0.79 per diluted share for
the nine months ended June 30, 1999, in which the company recognized gains of
$34,300,000 as a result of reducing its ownership position through the Initial
Public Offering of US Search.com. Basic average common shares outstanding for
the compared nine month periods were 13,836,000 in fiscal 2000 and 11,062,000 in
fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 2000 decreased to $13,758,000 (including
$4,279,000 of restricted cash being used principally as collateral for a film
sale/leaseback transaction and as a deposit by US SEARCH.com, and $52,000 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
$(22,185,000) 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 has financed that subsidiary's capital needs since that date. 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 the 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 Company
was operating at the ceiling of the credit facility as of August 11, 2000.
For the nine months ended June 30, 2000 the Company experienced consolidated net
negative cash flows of $(23,325,000) from operating activities, primarily
resulting from the Company's operating expenditures exceeding operating
receipts, including $(14,126,000) pertaining to its subsidiary US SEARCH.com.
Consolidated accounts receivable and amounts due from related parties increased
$10,236,000 from September 30, 1999 to June 30, 2000. Net consolidated
unrestricted cash decreased by ($22,185,000) to $9,427,000 on June 30, 2000. As
the Company continues 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. If US SEARCH.com continues to increase marketing and
administrative expenditures, it will continue to experience net negative cash
flows from operating activities.
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, however participating banks have limited their
credit to $68,000,000. The
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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. Loans made pursuant to such agreement are secured
by substantially all of the Company's otherwise unencumbered assets except for a
portion of the Company's US SEARCH.com shareholdings, and bear interest, at the
Company's option, either (i) at LIBOR (6.62% as of August 11, 2000) 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 (9.50% as of August 11, 2000), (b) Chase's Base 30-Day CD Rate (6.50%
as of August 11, 2000) plus 1% or (c) the Federal Funds Effective Rate (6.48% as
of August 11, 2000) plus 1/2%). The Company pays an annual commitment fee of
0.5% of the unused portion of the credit line. As of June 30 and August 11, 2000
the credit facility had a borrowing base availability of $68,000,000, of which
the total was then outstanding.
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). Management believes the Company
will comply with the restrictive covenants of the Chase agreement and
accordingly the credit facility will be available through August 2000, the
current maturity date.
In April 2000 the Company was granted an extension of the facility's June 2000
maturity to August 25, 2000 and the syndicated group approved the issuance of up
to $2,500,000 in principal amount of the Company's notes as described below in
exchange for a renewal of the Company's former pledge of 7,608,080 shares of
common stock of US SEARCH.com not pledged as a security for such notes. The
Company is currently in advanced negotiations of formal documentation issued by
Chase regarding extension of the secured revolving facility from August 25, 2000
until September 30, 2001. While no formal agreement has been reached, the
Company believes such agreement will be completed, allowing the line of credit
to be extended beyond its current maturity date. See Summary below.
OTHER DEBT
The Company's other borrowings, totaling $21,231,000 as of June 30, 2000,
consisted principally of production loans from Comerica Bank - California
("Comerica") and Far East National Bank ("Far East") to consolidated production
entities, convertible subordinated debentures, a five-year term loan, and loans
to the Company's 53.6%-owned subsidiary, US SEARCH.com. The Kushner-Locke
Company provided corporate guarantees for a total of $3,750,000 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 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 (9.50% as of August 11, 2000) plus 1% or at LIBOR
(6.62% as of August 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 matured on June
30, 2000. The Company is currently in discussions to extend the maturity date of
loan. Should Comerica elect not to extend the maturity date of the loan, the
entire guaranty will be immediately due and payable.
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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 (9.50% as of August 11, 2000) plus 1% or at LIBOR (6.62% as of
August 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 October 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 (9.50% as of August 11, 2000) plus 1.5%.
The loan is collateralized by the rights, title and assets related to the film.
The loan matured on April 30, 2000. The Company provided no corporate guaranty
in connection with this loan. As extended, the loan matures on August 31, 2000.
In October 1998, a $2,500,000 production loan was obtained by an unconsolidated
subsidiary from Far East National Bank to cover the production budget of Freeway
II: Confessions of a Trickbaby. The loan bears interest at Prime (9.50% as of
August 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 September 30, 2000.
In April 1999, a $12,000,000 production loan was obtained by a consolidated
subsidiary from Comerica to cover the production budget of Picking Up The
Pieces. The loan bears interest at Prime (9.50% as of August 11,2000) plus 1% or
at LIBOR (6.62% as of August 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 $700,000 in connection with this loan. As
extended, the loan matures on November 15, 2000.
In June 1999, a $1,626,000 production loan was obtained by a consolidated
subsidiary from Far East National Bank to cover the production budget of The
Last Producer. The loan bears interest at Prime (9.50% as of August 11, 2000)
plus 1%. The loan is collateralized by the rights, title and assets related to
the film. The Company provided no corporate guaranty in connection with this
loan. The loan matured on June 30, 2000. The Company is currently in discussions
to extend the maturity date of the loan.
In November 1999, a $1,500,000 production loan was obtained by a consolidated
subsidiary from Far East National Bank to cover the production budget of They
Nest. The loan bears interest at Prime (9.50% as of August 11, 2000) plus 1.5%.
The loan is collateralized by the rights, title and assets related to the film.
The Company provided no corporate guaranty in connection with this loan. The
loan matures on November 30, 2000.
In February 2000 the Company obtained a $2,000,000 loan from Far East National
Bank. Interest at 7% per year is payable quarterly commencing March 2000. The
loan matures in February 2005. Proceeds were used to obtain limited partnership
units in World Wide Multimedia LLP ("WWMM") which collateralize the loan. The
Company has obtained additional limited partnership units in WWMM in exchange
for certain film rights.
In March 2000, a $1,700,000 production loan was obtained by a consolidated
subsidiary from Far East National Bank to cover the production budget of Vlad
The Impaler. The loan bears interest at Prime (9.50% as of August 11, 2000) plus
1%. The loan is collateralized by the rights, title and assets related to the
film. The Company provided a corporate guaranty in the amount of $1,250,000 in
connection with this loan. The loan matures on March 31, 2001.
PROCEEDS FROM SECURITIES OFFERINGS
As of June 30, 2000, $1,571,500 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.
In April 2000, certain individuals, including Messrs. Kushner and Locke,
purchased notes from the Company in the aggregate principal amount of $1,500,000
in a private placement pursuant to Regulation D of the Securities Exchange Act
of 1934. An additional $1,000,000 in notes may be sold to these or other persons
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under the terms of the private placement. The notes will become due six months
from the closing unless extended another six months at the Company's option. The
notes are collateralized by a pledge of 2,000,000 shares of the Company's US
SEARCH.com shareholdings. The notes bear interest at the rate of 10% per annum
payable at maturity. At the scheduled six month maturity the holders will be
entitled to receive, at their election, either a cash payment equal to 15% of
the principal amount of the notes purchased or a warrant for a number of shares
of common stock equal to their loan principal amount divided by $10. The warrant
would be exerciseable at 110% of the Company's common stock market value at the
loan closing date for a three-year term from the date of issuance. In addition,
if the Company extends the notes' maturity an additional six months, at the
extended maturity date the holders will be entitled to receive, at their
election, either a cash payment equal to 15% of the principal amount of the
notes purchased or an additional warrant for a number of shares of common stock
equal to their loan principal amount divided by $10. That warrant would also be
exerciseable at 110% of the Company's common stock market value at the loan
closing date for a three-year term from the date of issuance. The warrants will
not be transferable. Unissued shares of common stock underlying the warrants
will be reserved by the Company for possible future issuance, and will be
registered as soon as practicable at the Company's expense. At the request of
other investors, Messrs. Kushner and Locke have agreed to participate as members
of the investor group, but have agreed to receive only the cash payments in
addition to the 10% interest.
CAPITAL EXPENDITURE COMMITMENTS
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 June 30, 2000 the Company had agreed to pay
approximately $110,000 should those third party producers complete delivery to
the Company. These amounts are estimated to be payable over the next twelve
months.
US SEARCH.com has several cancelable and noncancelable agreements with various
suppliers, Internet companies and broadcasters and cable companies for
advertising. At June 30, 2000, the minimum noncancelable payments required under
these agreements are approximately $4,880,000, $9,502,000, $5,950,000,
$4,200,000, $4,200,000 and $1,050,000 for 2000, 2001, 2002, 2003, 2004 and
thereafter, respectively. The Company expects US SEARCH.com to decrease its
Internet and television advertising of US SEARCH.com's services in its quest for
profitability, however it expects US SEARCH.com's net losses to continue. 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 faces short term liquidity issues. Management believes that if the
Company is able to extend the maturity of or refinance its existing revolving
credit facility and other borrowings coming due in calendar year 2000, existing
resources and cash generated from operating activities, together with amounts
that would be generated from the possible sale of certain non-core assets, will
be sufficient to meet the Company's working capital requirements for at least
the next twelve months. In April 2000 the Company obtained an extension of the
maturity of the Chase facility to August 25, 2000. The Company is currently in
advanced negotiations of formal documentation issued by Chase to extend the
secured revolving facility beyond its current maturity date. While no formal
agreement has been signed regarding any extension beyond August 25, 2000, the
Company believes such agreement will be completed. There can be no assurance,
however, that any extension beyond the current August 25, 2000 maturity date
will be obtained or, if obtained, will continue the credit facility on its
present or other commercially acceptable terms.
If not extended, all amounts outstanding under the revolving credit facility at
August 25, 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. In addition to refinancing or extending the maturity of existing
debt, the Company also is considering other sources of financing to meet its
working capital and other cash
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requirements, including separate equity or debt financing for US SEARCH.com and
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. 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, its operations and its financial condition and liquidity.
The Company also from time to time evaluates strategic alternatives for
enhancing liquidity in its core and non-core businesses. To pursue strategic
alternatives, the Company engaged Prudential Securities. In addition the Company
continued 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, sales to, 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. The Company is currently in discussions
to obtain outside financing for US SEARCH.com. As part of its financing
discussions, the Company is considering selling a part of its 9,608,080 shares
of US SEARCH.com. 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.
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.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits: None
b) Reports on Form 8-K: None
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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.
THE KUSHNER-LOCKE COMPANY
--------------------------
(Registrant)
Dated: August 14, 2000 /s/ PETER LOCKE
--------------------------
Peter Locke
Co-Chairman of the Board,
Co-Chief Executive Officer
Dated: August 14, 2000 /s/ DONALD KUSHNER
--------------------------
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: August 14, 2000 /s/ BRUCE ST.J LILLISTON
--------------------------
Bruce St.J Lilliston
President and Chief
Operating Officer
Dated: August 14, 2000 /s/ BRETT ROBINSON
--------------------------
Brett Robinson
Chief Financial Officer
22
