-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q24S5Qw7mmF7z37QZV+4zFhzYcwufBIMvQLDnzB8QHaXbDqgAmj18Vnj+TQ/UkPz +FQqRb29rAlDqgNxLv86Qg== 0000842009-00-000004.txt : 20000215 0000842009-00-000004.hdr.sgml : 20000215 ACCESSION NUMBER: 0000842009-00-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KUSHNER LOCKE CO CENTRAL INDEX KEY: 0000842009 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 954079057 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10661 FILM NUMBER: 543175 BUSINESS ADDRESS: STREET 1: 11601 WILSHIRE BLVD 21ST FLR CITY: LOS ANGELES STATE: CA ZIP: 95202 BUSINESS PHONE: 3104812000 MAIL ADDRESS: STREET 1: 11601 WILSHIRE BLVD STREET 2: 21ST FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90025 10-Q 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 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. THE KUSHNER-LOCKE COMPANY Form 10-Q for the Quarter ended December 31, 1999 INDEX Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Stockholders' Equity Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Not Applicable.
Part II. OTHER INFORMATION Item 1 through 5. Not Applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: None. (b) Reports on Form 8-K: None.
PART I Item 1. THE KUSHNER-LOCKE COMPANY Condensed Consolidated Balance Sheets 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 ============ ============
See accompanying notes to condensed consolidated financial statements. THE KUSHNER-LOCKE COMPANY Condensed Consolidated Statements of Operations (unaudited) Three Months Ended December 31, ------------------------- 1999 1998 ------------ ----------- 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 ========== ==========
See accompanying notes to condensed consolidated financial statements. THE KUSHNER-LOCKE COMPANY Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended December 31, ------------------------ 1999 1998 ----------- ----------- 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 =========== ===========
See accompanying notes to condensed consolidated financial statements. THE KUSHNER-LOCKE COMPANY Condensed Consolidated Statement of Stockholders' Equity Three Months ended December 31, 1999 (unaudited) Common Stock ---------------------- Number of Common Accumulated shares Stock Deficit Net ---------- ----------- ------------ ----------- 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 ========== =========== ============ ===========
See accompanying notes to condensed consolidated financial statements. 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: 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 =========== ===========
(4) Credit Agreement and Financing Arrangements Credit arrangements and borrowings consist of the following: 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 =========== ===========
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: Fiscal Year Ending September 30, Amount - -------------------------------- ----------- 2000 $83,973,000 2001 2,131,000 ----------- Total $86,104,000 ===========
(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: 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
(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. Three Months Ended December 31, -------------------------- 1999 1998 ----------- ------------ 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) ====== ======
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). 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
(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. 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. 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: 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
INDEX TO EXHIBITS EX-27 Financial Data Schedule EX-27 2
5 1000 A:\FDS1Q00 3-MOS SEP-30-1999 DEC-31-1999 1 26570 0 39788 2812 0 0 4060 1402 176149 0 0 0 0 70657 (15109) 55548 31 17788 18 12877 11384 418 1815 (5455) 20 (5475) 0 0 0 (5475) (.40) (.40) Included in total assets is $87,982 representing net film and television program assets. The Company presents its financial position in an unclassified consolidated balance sheet.
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