-----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, ALooeCWDAvVnzP3XuwvIiljJvLSK0vh1luGnHJIbAD2HhkI5elNnKtJX18U7z2ZW 7behpBIXbMeehsZVfZ8SAg== 0000842009-98-000013.txt : 19980817 0000842009-98-000013.hdr.sgml : 19980817 ACCESSION NUMBER: 0000842009-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD 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: 98691330 BUSINESS ADDRESS: STREET 1: 11601 WILSHIRE BLVD 21ST FLR CITY: LOS ANGELES STATE: CA ZIP: 95202 BUSINESS PHONE: 3104451111 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 June 30, 1998 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 10% Convertible Subordinated Debentures, Series A due 2000 13-3/4% Convertible Subordinated Debentures, Series B due 2000 Common Stock Purchase Warrants, Class C Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No There were 9,208,029 shares of outstanding Common Stock of the Registrant as of August 13, 1998. Total number of pages: 28. Exhibit Index begins on page 21. THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES Form 10-Q for the Quarter ended June 30, 1998 INDEX Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Stockholders' Equity Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II. OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: None (b) Reports on Form 8-K: None Items 2, 3 and 5. Not Applicable. PART I Item 1. THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES Condensed Consolidated Balance Sheets
Assets June 30, September 30, 1998 1997 ____________ ___________ (unaudited) Cash and cash equivalents $ 377,000 $15,077,000 Reserved cash 81,000 105,000 Restricted cash 1,965,000 1,609,000 Accounts receivable, net of allowance for doubtful accounts 46,586,000 27,696,000 Due from affiliates 998,000 1,011,000 Film and television property costs, net of accumulated amortization 58,758,000 68,507,000 Investments in unconsolidated subsidiaries, at equity 5,662,000 5,326,000 Other assets 6,369,000 5,037,000 ----------- ----------- $120,796,000 $124,368,000 =========== =========== Liabilities and Stockholders' Equity Accounts payable and accrued liabilities $4,352,000 $2,935,000 Notes payable 68,285,000 62,647,000 Deferred film license fees 4,074,000 3,362,000 Contractual obligations, principally participants' share payable and talent residuals 3,238,000 6,155,000 Production advances 662,000 6,502,000 Convertible subordinated debentures, net of deferred issuance costs 11,472,000 11,631,000 ---------- ---------- Total liabilities 92,083,000 93,232,000 ---------- ---------- Stockholders' equity: Common stock, no par value. Authorized 50,000,000 shares, issued and outstanding 9,208,029 shares at June 30, 1998 and 9,090,080 shares at September 30, 1997 39,226,000 38,905,000 Accumulated deficit (10,513,000) (7,769,000) ---------- ---------- Net stockholders' equity 28,713,000 31,136,000 ----------- ----------- $120,796,000 $124,368,000 =========== ===========
See accompanying notes to condensed consolidated financial statements. THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Operations (unaudited)
Three Months Ended Nine Months Ended June 30, June 30, ----------------- ----------------- 1998 1997 1998 1997 ------ ------ ------ ------ Operating revenues $15,323,000 $13,413,000 $59,769,000 $41,667,000 Costs related to operating revenues (11,799,000) (10,375,000) (50,649,000) (34,074,000) Selling, general and administrative expenses (4,216,000) (1,082,000) (7,584,000) (3,375,000) ---------- ---------- ---------- ---------- Earnings (loss) from operations (692,000) 1,956,000 1,536,000 4,218,000 Interest income 27,000 11,000 64,000 50,000 Interest expense (1,572,000) (1,059,000) (4,326,000) (3,155,000) ---------- ---------- ---------- ---------- Earnings (loss) before income taxes (2,237,000) 908,000 (2,726,000) 1,113,000 Provision for income taxes (6,000) (6,000) (18,000) (23,000) ---------- ---------- ---------- ---------- Net earnings (loss) $(2,243,000) $902,000 $(2,744,000) $1,090,000 ========== ========== ========== ========== Earnings (loss) available for common stockholders $(2,243,000) $902,000 $(2,744,000) $1,090,000 ========== ========== ========== ========== Earnings (loss) per share: basic and diluted ($0.24) $0.10 ($0.30) $0.12 ===== ===== ===== ===== Average number of shares of common stock outstanding 9,204,000 9,061,000 9,170,000 8,894,000 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended June 30, ------------------ 1998 1997 ------ ------ Cash flows from operating activities: Net earnings (loss) $(2,744,000) $1,090,000 Adjustments to reconcile net earnings to net cash used by operating activities: Amortization of film costs 29,885,000 33,567,000 Depreciation and amortization 195,000 141,000 Amortization of debt issuance costs 760,000 737,000 Changes in assets and liabilities: Reserved and restricted cash (332,000) (1,442,000) Accounts receivable, net (18,890,000) (8,327,000) Due from affiliates 13,000 273,000 Increase in film and television property costs (20,136,000) (41,499,000) Accounts payable and accrued liabilities 1,417,000 (879,000) Deferred film license fees 712,000 3,996,000 Contractual obligations (2,917,000) (1,018,000) Production advances (5,840,000) 4,258,000 ---------- ---------- Net cash used by operating activities (17,877,000) (9,103,000) ---------- ---------- Cash flows from investing activities: (Increase) decrease in investments in unconsolidated entities (336,000) 126,000 (Increase) decrease in other assets (668,000) 706,000 ---------- ---------- Net cash provided (used) by investing activities (1,004,000) 832,000 ---------- ---------- Cash flows from financing activities: Borrowings under notes payable 33,095,000 27,296,000 Repayment of notes payable (27,457,000) (19,582,000) Other (1,457,000) 15,000 ---------- ---------- Net cash provided by financing activities 4,181,000 7,729,000 ---------- ---------- Net decrease in cash and cash equivalents (14,700,000) (542,000) Cash and cash equivalents at beginning of period 15,077,000 7,091,000 ---------- ---------- Cash and cash equivalents at end of period $377,000 $6,549,000 ========== ==========
Supplemental disclosure of non-cash investing and financing activities: (1)During the nine months ended June 30, 1998, $300,000 of convertible subordinated debentures were converted into 51,282 shares of common stock and the Company acquired control of 800-U.S. Search for no cash consideration. (2)During the nine months ended June 30, 1997, $667,000 of convertible subordinated debentures were converted into 84,562 shares of common stock. See accompanying notes to condensed consolidated financial statements. THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders' Equity Nine Months ended June 30, 1998 (unaudited)
Number of Common Accumulated shares Stock deficit Total -------- ------- --------- ------- Balance at September 30, 1997 9,090,080 $38,905,000 $(7,769,000) $31,136,000 Conversions of convertible debentures 51,282 284,000 -- 284,000 Other 66,667 37,000 -- 37,000 Net loss -- -- (2,744,000) (2,744,000) --------- ---------- ---------- ---------- Balance at June 30, 1998 9,208,029 $39,226,000 $(10,513,000) $28,713,000 ========= ========== ========== ==========
See accompanying notes to condensed consolidated financial statements. THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (1) Summary of Significant Accounting Policies The Company The Kushner-Locke Company (the "Company") is principally engaged in the development, production, acquisition and distribution of feature films, direct-to-video films, television series, movies-for-television, mini-series and animated programming. In addition, the Company markets its search and Christian music products via the Internet, direct marketing and telemarketing. Generally, theatrical films are first distributed in the theatrical and home video markets. Subsequently, theatrical films are made available for worldwide television network exhibition or pay television, television syndication and cable television. Generally, television films are first licensed for network exhibition and foreign syndication or home video, and subsequently for domestic syndication or cable television. Certain films are produced and/or distributed directly for initial exhibition by local television stations, advertiser-supported cable television, pay television and/or home video. The revenue cycle generally extends 7 to 10 years on film and television product. Basis of Presentation The accompanying condensed consolidated financial statements include consolidated accounts of The Kushner-Locke Company, its subsidiaries and certain entities which the Company controls, including 800-U.S. Search. Entities in which the Company holds a 20% to 50% interest and exercises significant influence are accounted for under the equity method. All material intercompany balances and transactions have been eliminated. These unaudited condensed 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. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's annual consolidated financial statements and notes thereto which are included in the Company's September 30, 1997 annual report on Form 10-K, as amended. 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, 1998, the results of its operations for the three and nine month periods ended March 31, 1998 and 1997, and its cash flows for the nine month periods ended June 30, 1998 and 1997. Interim results are not necessarily indicative of results to be expected for a full fiscal year. Restricted and Reserved Cash As of June 30, 1998, the Company held $1,965,000 in restricted cash principally related to deposits held at a British bank pursuant to film sale/leaseback transactions. Certain other cash advances were being held in escrow accounts as collateral by financial institutions providing production loans to those producers. In addition, as of June 30, 1998, the Company held $81,000 in cash collected by the Company and reserved for use by Chase Manhattan Bank to be applied against the Company's outstanding borrowings under the Company's credit facility. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (1) Summary of Significant Accounting Policies (continued) and liabilities of a change in tax rates is recognized in operating results in the period encompassing the enactment date. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Significant estimates are primarily related to ultimate revenues and ultimate costs relating to the Company's film and television properties and the collectibility of accounts receivable. Actual results may differ from estimated amounts. Reverse Stock Split In September 1997 the Company effected a 1-for-6 reverse split of the issued and outstanding shares of common stock as approved by the stockholders. All references to shares outstanding give effect to this reverse stock split as if it had occurred at the beginning of the earliest period presented. Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements.
Three Months Ended Nine Months Ended June 30, June 30, ---------- ---------- 1998 1997 1998 1997 ------ ------ ------ ------ Numerator for basic earnings per share - income available to common stockholders $(2,243,000) $902,000 $(2,744,000) $1,090,000 Effect of dilutive securities: interest on convertible debt -- -- -- -- Numerator for diluted --------- -------- ---------- --------- earnings per share - income available to common stockholders - assumed conversions $(2,243,000) $902,000 $(2,744,000) $1,090,000 ========== ======= ========== ========= Denominator for basic earnings per share - weighted average shares 9,204,000 9,061,000 9,170,000 8,864,000 Effect of dilutive securities: Employee stock options and warrants -- -- -- -- Convertible debentures -- -- -- -- --------- --------- --------- --------- Dilutive potential common shares -- -- -- -- --------- --------- --------- --------- Denominator for diluted earnings per share - adjusted weighted average shares - assumed conversions 9,204,000 9,061,000 9,170,000 8,864,000 ========= ========= ========= ========= Basic earnings (loss) per share $(0.24) $0.10 $(0.30) $0.12 ===== ==== ===== ==== Diluted earnings (loss) per share $(0.24) $0.10 $(0.30) $0.12 ===== ==== ===== ====
THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) A total of 1,105 000 and 712,000 options and 1,651,000 and 1,584,000 warrants to acquire common stock were not included in the calculation of diluted earnings per share for the three and nine month periods ended June 30, 1998 and 1997, respectively, as their exercise prices were greater than the average market price for the respective periods. Shares issuable upon conversion of the Company's convertible subordinated debentures have not been included in the calculation of diluted earnings per share for the three and nine months ended June 30, 1998 or 1997 as the impact of including such securities would be antidilutive. (2) Film and Television Property Costs Film and television property costs consist of the following:
June 30, September 30, 1998 1997 ------ ------ (unaudited) In process or development $14,980,000 $10,497,000 Released, net of accumulated amortization 43,778,000 58,010,000 ---------- ---------- $58,758,000 $68,507,000 ========== ==========
(3) Notes Payable Notes payable are comprised of the following:
June 30, September 30, 1998 1997 ------ ------ (unaudited) Note payable to bank, under the revolving credit facility secured by substantially all Company assets, interest at varying rates, outstanding principal balance due June 25, 2000 $59,048,000 $56,803,000 Notes payable to banks consisting of production loans secured by certain film rights held by the producers, and commercial loans secured primarily by receivables of a subsidiary, at varying interest rates for each loan 9,237,000 5,844,000 ---------- ---------- $68,285,000 $62,647,000 ========== ==========
THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (4) Convertible Subordinated Debentures Convertible subordinated debentures are comprised of the following:
June 30, September 30, 1998 1997 ------ ------ (unaudited) Series A Convertible Subordinated Debentures due December 15, 2000, bearing interest at 10%, net of unamortized issuance costs and warrants of $5,000 and $6,000, respectively $72,000 $71,000 Series B Convertible Subordinated Debentures due December 15, 2000, bearing interest at 133/4%, net of unamortized issuance costs of $161,000 and $212,000, respectively 3,045,000 3,029,000 8% Convertible Subordinated Debentures due December 15, 2000, net of unamortized issuance costs of $209,000 and $290,000, respectively 4,491,000 4,710,000 9% Convertible Subordinated Debentures due July 1, 2002, net of unamortized issuance costs of $236,000 and $279,000, respectively 3,864,000 3,821,000 ---------- ---------- $11,472,000 $11,631,000 ========== ==========
Series A Debentures As of June 30, 1998 the Company had outstanding $77,000 principal amount of Series A Debentures. The debentures are recorded net of unamortized underwriting discounts and expenses associated with the offering. For the nine months ended June 30, 1998, $1,000 of issuance costs were amortized to interest expense. Series B Debentures As of June 30, 1998 the Company had outstanding $3,206,000 principal amount of Series B Debentures due 2000. The Series B Debentures are recorded net of unamortized underwriting discounts and expenses associated with the offering. For the nine months ended June 30, 1998, $51,000 of issuance costs were amortized as interest expense. During the nine months ended June 30, 1998, $36,000 of Series B debentures were redeemed. 8% Debentures As of June 30, 1998, the Company had outstanding $4,700,000 principal amount of 8% Debentures. The debentures are recorded net of unamortized underwriting discounts and expenses associated with the offering. For the nine months ended June 30, 1998, $64,000 of issuance costs were amortized as interest expense. During the nine months ended June 30, 1998, $300,000 of 8% debentures were converted into 51,282 shares of common stock. 9% Debentures As of June 30, 1998, the Company had outstanding $4,100,000 principal amount of 9% Debentures. The debentures are recorded net of unamortized underwriting discounts and expenses associated with the offering. For the nine months ended June 30, 1998, $44,000 of issuance costs were amortized as interest expense. THE KUSHNER-LOCKE COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Continued) (5) Income Taxes Income taxes for the nine month periods ended June 30, 1998 and 1997 were computed using the effective income tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. Management believes that most taxable income for the fiscal year will be offset by a deferred tax asset, which will result in an effective federal tax rate of approximately 1%. As of September 30, 1997 the Company had a $37,244,000 federal income tax net operating loss carryforward. (6) Contingencies The Company is involved in certain legal proceedings and claims arising out of the normal conduct of its business. Reference is made to the Company's annual report on Form 10-K, as amended, for the fiscal year ended September 30, 1997 for a description of certain legal proceedings. Management of the Company believes that the ultimate resolution of these matters will not have a material adverse effect upon the Company's results of operations or financial condition. In its normal course of business as an entertainment distributor, the Company makes contractual down payments for the acquisition of distribution rights upon signature of documentation. 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 film or video materials and proof of rights held and insurance policies that may be required for the Company to begin exploitation of the product. As of June 30, 1998 the Company had agreed to pay approximately $6,172,000 should those third party producers complete delivery to the Company. These amounts are estimated to be payable over the next eighteen months. PART I Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company's revenues are currently derived primarily from the production or the acquisition of distribution rights of films released in the U.S. by studios, pay cable, basic cable, and videocassette companies; and from the development, production and distribution of television programming for the major U.S. television networks, basic and pay cable television and first-run syndication; as well as from the licensing of all rights to the films and television programs in international territories. While the Company generally finances all or a substantial portion of the budgeted production costs of its programming through domestic and international licensing and other arrangements, the Company typically retains rights in its programming which may be exploited in future periods or in additional territories. In 1993, the Company established a feature film operation to produce and distribute low and medium budget films for theatrical and/or home video or cable release. The Company also 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 fiscal 1998 the Company obtained 80% ownership and control of 800-U.S. Search, a company that provides people search and other customized individual reference services over the Internet and through direct marketing. The Company's revenues and results of operations are significantly affected by accounting policies required for the industry and management's estimates of the ultimate realizable value of its films and programs. Production advances or license fees received prior to delivery or completion of a program are treated as deferred revenues and are recorded as either production advances or deferred license fees. Production advances are generally recognized as revenue on the date the program is delivered or available for delivery. Deferred license fees are recognized as revenue on the date of availability and/or delivery of the item of product. The Company generally capitalizes all costs incurred to produce film and television product. Such costs include the actual direct costs of production, certain exploitation costs, production overhead and interest expense relating to financing the project. Capitalized exploitation or distribution costs include those costs that clearly benefit future periods such as prints and prerelease and early release advertising that is expected to benefit the film or television product in future markets. These costs, as well as participation and talent residuals, are amortized each period on an individual film or television product basis in the ratio that the current period's gross revenues from all sources for the program bear to management's estimate of anticipated total gross revenues for such film or program from all sources. In the event management reduces its estimates of the future gross revenues associated with a particular item of product, which had been expected to yield greater future proceeds, a significant write-down and a corresponding decrease in the Company's earnings for the quarter and fiscal year end in which such write-down is taken could result. Gross profits for any period are a function in part of the number of programs delivered in that period and the recognition of costs in that period. Because initial licensing revenues and related costs generally are recognized either when the program has been delivered or is available for delivery, significant fluctuations in revenues and net earnings may occur from period to period. Thus, a change in the amount of entertainment product available for delivery from period to period 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 product mix during this fiscal year may further affect the Company's quarter-to-quarter or year-to-year results of operations as new products may be amortized differently as determined by length of product life cycle and the number of related revenue sources. The Company has recognized all assets, including intangible assets, liabilities and adjusted results of operations of 800-U.S. Search in its consolidated financial statements since obtaining control of 800-U.S. Search earlier this fiscal year. No minority interest in 800-U.S. Search's earnings will be recognized in the Company's consolidated financial statements until the Company recognizes 800-U.S. Search accumulated net earnings for the period since acquisition and the Company has recouped the minority shareholder's portion of 800-U.S Search net losses previously consolidated. The information contained herein should be read in conjunction with the more comprehensive material included in the Company's September 30, 1997 annual report on Form 10-K, as amended, which describes in greater detail the Company's historical and current activities and performance. Forward Looking Statements Except for the historical information contained herein, certain of the matters discussed in this 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, the risk involved in the television, theatrical film and public record search industries, acquiring or developing ancillary businesses, competition, government regulation, labor relations, absence of cash dividends, and the volatility of public markets. See the relevant discussions elsewhere herein, and in the Company's registration statement on Form S-3 (Registration No. 333-40391), as filed with the Securities and Exchange Commission on January 8, 1998, and the Company's periodic reports and other documents filed with the Securities and Exchange Commission for further discussions of these and other risks and uncertainties applicable to the Company and its business. Results of Operations Comparison of Three Months Ended June 30, 1998 and 1997 The Company's operating revenues for the third quarter ended June 30, 1998 were $15,332,000, an increase of $1,910,000 (14%) as compared to $13,413,000 in the prior fiscal year's third quarter ended June 30, 1997. This increase was due primarily to the timing of delivery and/or availability of films and to the inclusion in 1998 of the revenues of certain films previously marketed by Conquistador Entertainment, an independent film distributor controlled by the Company's senior marketing executive, and revenues of newly-acquired 800-U.S. Search. The Company recognized $8,800,000 (57%) of revenues during the third quarter of fiscal 1998 from the delivery and/or availability of four feature films, including Girl starring Dominique Swain, One Man's Hero starring Tom Berenger, and Taxman starring Joe Pantoliano. Revenues of $700,000 (5%) came from deliveries in the Company's family division of direct-to-video product. In addition, the Company recognized $2,000,000 (13%) of revenues this quarter from continuing licenses of product from the Company's library to domestic cable channel operators through its majority-owned subsidiary KLC/New City, and through international sub-distributors. Of the remaining 25% of revenues, approximately $2,700,000 (17%) came from the Company's recently acquired subsidiary, 800-U.S. Search, which experienced a 78% increase in revenues from those recognized in the previous quarter. Operating revenues for the third quarter of fiscal 1997 included $8,200,000 (61%) from the delivery of four episodes of the ABC network series Gun, the delivery of the pilot episode of Cracker to ABC, and deliveries of additional episodes of the one-hour first-run syndication series Could It Be A Miracle. Revenues of $2,100,000 (15%) came from deliveries in the Company's family division of direct-to-video product, principally including net profits from one of the Company's joint ventures which delivered two animated feature films to Buena Vista Home Video, a division of the Walt Disney Company, entitled Brave Little Toaster Goes to Mars and Brave Little Toaster Goes to School. In addition, the Company recognized $1,100,000 (8%) of revenues that quarter from distribution to domestic cable for films acquired through its majority-owned subsidiary KLC/New City. Remaining revenues came from continued exploitation of feature films released earlier that fiscal year and from continued licensing of completed product from the Company's library to domestic cable channel operators and international sub-distributors. In various stages of production for the Company's fiscal 1998 distribution slate are Beowulf starring Christopher Lambert, Susan's Plan written and directed by John Landis and starring Natassja Kinski, Billy Zane, Michael Biehn, Rob Schneider, Lara Flynn Boyle and Dan Aykroyd, Black and White starring Gina Gershon, Swing starring Lisa Stansfield and Hugo Speer and Killer App produced by Robert Altman. In addition, the Company continues to acquire international distribution rights to films for distribution through Kushner Locke International, Inc. Costs relating to operating revenues for the third quarter of fiscal 1998 were $11,799,000, a $1,424,000 (14%) increase as compared to $10,375,000 during the third quarter of fiscal 1997. As a percentage of operating revenues, costs relating to operating revenues were 77% for the third quarter of fiscal 1998 unchanged from the third quarter of fiscal 1997. The percentage reflects a weighting of the product mix which principally includes film titles produced by others which were previously marketed by Conquistador Entertainment that are projected to be less profitable than titles included in the comparable fiscal year 1997 quarter, and lower costs in relation to revenues recognized by 800-U.S. Search. Selling, general and administrative expenses for the third quarter of fiscal 1998 were $4,216,000, a $3,134,000 (290%) increase from $1,082,000 in the third quarter of fiscal 1997. The increase in such expenses is principally due to a $675,000 addition to the Company's allowance for doubtful receivables in the current quarter in comparison to last year's quarter, and to the inclusion in the current year of $2,276,000 of advertising and other expenses of 800-U.S. Search, which was acquired in the current fiscal year. Such 800-U.S. Search expenses may increase in the future. Interest expense for the third quarter ended March 31, 1998 was $1,572,000, a $513,000 (48%) increase as compared to $1,059,000 for the third quarter ended March 31, 1997. The increase was attributable to increased average levels of borrowing in the current quarter. Total indebtedness for borrowed money increased 41% to $79,757,000 at June 30, 1998 from $56,752,000 at June 30, 1997. The Company's effective income tax rate was less than (1%) for the third quarter ended June 30, 1998 compared to an effective income tax rate of 1% for the quarter ended June 30, 1997. Income tax expense in third quarter of fiscal 1998 consisted of estimated state income and federal alternative minimum taxes. As of September 30, 1997 the Company had a $37,244,000 federal income tax net operating loss carryforward. The Company reported a net loss of ($2,243,000) ($0.24 per share) for the third quarter ended June 30, 1998 as compared to net earnings of $902,000 ($0.10 per share) for the third quarter ended June 30, 1997. Weighted number of common shares for the compared third quarters were 9,204,000 in 1998 and 9,061,000 in 1997. Included in the quarter ended June 30, 1998 was a $720,000 net loss at 800-U.S. Search, which resulted from increases in its advertising and salary expenses. Comparison of Nine Months Ended June 30, 1998 and 1997 The Company's operating revenues for the nine months ended June 30, 1998 were $59,769,000, an increase of $18,102,000 (43%) from $41,667,000 from the prior fiscal year's nine month period. This increase was due primarily to the timing of delivery and/or availability of films and television programs and to the inclusion in 1998 of the revenues of certain films previously marketed by Conquistador and the revenues of newly acquired 800-U.S. Search. The Company recognized $22,450,000 (38%) of revenues during the nine months ended June 30, 1998 from the delivery and/or availability of 16 feature films, including Girl starring Dominique Swain, One Man's Hero starring Tom Berenger, Taxman starring Joe Pantoliano, Swing starring Lisa Stansfield and Hugo Speer, Minion starring Dolph Lundgren, Noose directed by Ted Demme, Possums starring Mac Davis, Legion starring Parker Stevenson, and Denial starring Jason Alexander and directed by Adam Rifkin. In addition, the Company recognized $17,600,000(29%)of revenues during the nine months ended June 30, 1998, including revenues from the delivery and/or availability of the remaining episodes of the first-run syndication series Hammer and Mowgli: The New Adventures of The Jungle Boy, and the net earnings from the delivery by a joint venture of the remaining episodes of the ABC network series Cracker. Revenues of $4,400,000 (7%) came from deliveries in the Company's family division of direct-to-video product. In addition, the Company recognized $5,800,000 (10%) of revenues from continuing licenses of product from the Company's library to domestic cable channel operators through its majority-owned subsidiary KLC/New City, and through international sub-distributors. Remaining revenues of approximately $9,600,000 (16%) came principally from the sales of contemporary Christian music on behalf of a joint venture and search services provided by the recently acquired 800-U.S. Search business. Operating revenues for the nine months ended June 30, 1997 included $7,700,000 (19%) from the delivery and/or availability of four feature films. In addition, the Company recognized $20,100,000 (48%) of television revenues during the nine months ended June 30, 1997, including revenues from the delivery and/or availability of the pilot of the ABC network series Cracker, four hours of the ABC network series Gun, movies of the week entitled Jack Reed V: Death and Vengeance to the NBC network and Unlikely Angel to the CBS network, and the one-hour first-run syndication series Could It Be A Miracle. Revenues of $6,300,000 (15%) came from the Company's family division of direct-to-video product, principally from two animated feature films for Buena Vista Home Video, a division of the Walt Disney Company, entitled Brave Little Toaster Goes to Mars and Brave Little Toaster Goes to School. In addition, the Company recognized $3,400,000 (8%) of revenues from distribution to domestic cable for films acquired through its majority-owned subsidiary KLC/New City. Remaining revenues came from continued licensing of completed product from the Company's library to domestic cable channel operators and international sub-distributors. Costs relating to operating revenues for the nine months ended June 30, 1998 were $50,649,000, a $16,575,000 (49%) increase as compared to $34,074,000 during the nine months ended June 30, 1997. As a percentage of operating revenues, costs relating to operating revenues were 85% for the nine months ended June 30, 1998 compared to 82% for the nine months ended June 30, 1997. The increased percentage in the most recent period principally reflects a weighting of the product mix, which includes film titles produced by others which were previously marketed by Conquistador Entertainment that are projected to be less profitable than titles included in the comparable earlier period. Selling, general and administrative expenses for the nine months ended June 30, 1998 were $7,584,000, a $4,209,000 (125%) increase as compared to $3,375,000 during the nine months ended June 30, 1997. The increase in such expenses is principally due to inclusion of $3,371,000 of advertising and other expenses of 800 U.S. Search, which was acquired in the current year. Interest expense for the nine months ended June 30, 1998 was $4,326,000, a $1,171,000 (37%) increase as compared to $3,155,000 for the nine months ended June 30, 1997. The increase was principally attributable to the increased average levels of borrowing in the current quarter, partially offset by increased production-related interest capitalized in the current period. Total indebtedness for borrowed money increased 41% to $79,757,000 at June 30, 1998 from $56,752,000 at June 30, 1997. The Company's estimated effective income tax rate was (1%) for the nine months ended June 30, 1998 compared to an estimated effective income tax rate of 2% for the nine months ended June 30, 1997. Income tax expense for the nine months ended June 30, 1998 consisted of estimated state income and federal alternative minimum taxes. As of September 30, 1997 the Company had a $37,244,000 federal income tax net operating loss carryforward. The Company reported a net loss of ($2,744,000) ($0.30 per share) for the nine months ended June 30, 1998 as compared to net earnings of $1,090,000 ($0.12 per share) for the nine months ended June 30, 1997. Weighted number of common shares for the compared nine-month periods were 9,170,000 in 1998 and 8,894,000 in 1997. Liquidity and Capital Resources The Company's production and distribution operations are capital intensive. The Company has funded its working capital requirements through receipt of third party domestic license payments and international licensing, as well as other operating revenues, and proceeds from debt and equity financings, and has relied upon its line of credit and transactional production loans to provide bridge production financing prior to receipt of license fees. The Company funds production and acquisition costs out of its working capital, including the line of credit, and through certain pre-sales of rights in international markets. In addition, the expansion of the Company's international distribution business, the establishment of its feature film division and its Internet and direct marketing subsidiary 800-U.S. Search have significantly increased the Company's working capital requirements and use of related production loans. The amount available under the credit facility as of August 13, 1998 was $2,249,000. At June 30, 1998, cash and cash equivalents decreased to $2,423,000 (including $1,965,000 of restricted cash being used principally as collateralfor film sale/leaseback transactions and $81,000 of reserved cash to be applied against the Company's outstanding borrowings under its credit facility) from $16,791,000 (including $1,609,000 of restricted cash being used principally as collateral for a film sale/leaseback transaction and for certain production loans and $105,000 of reserved cash to be applied against the Company's outstanding borrowings under its credit facility) at September 30, 1997. Unrestricted and unreserved cash and cash equivalents decreased $14,700,000 since September 30, 1997. The Company experienced net cash flows used by operating activities of ($17,877,000) for the nine months ended June 30, 1998, resulting primarily from a $18,890,000 (68%) increase in accounts receivable which was principally due to the previously noted $18,102,000 (43%) increase in revenues for the nine months ended June 30, 1998 (15% for the three months then ended). In comparison to June 30, 1997, at June 30, 1998 the receivables turnover rate declined somewhat from 6.7 months' revenues to 7 months' revenues. A task force has been established to review and accelerate receivables collections. In addition, cash flows provided by financing activities were $4,181,000 for the period principally as a result of new production borrowings in excess of repayments of notes payable. Net unrestricted cash decreased during the nine-month period by $14,700,000 to $377,000 on June 30, 1998. The Company also has amounts available under its line of credit. See "Credit Facility" below. As the Company expands production and distribution activities and increases its debt service burdens, it may 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 line of credit from a group of banks led by The Chase Manhattan Bank N.A. ("Chase"). In September 1997 that agreement was amended to increase the maximum amount of revolving credit to $60,000,000 and to extend its maturity to June 2000. Such agreement provides for borrowing by the Company of up to $60,000,000 based on specified percentages of domestic and international accounts and contracts receivable and a specified percentage of an appraised value of the Company's library. In addition, the Company may from time to time allocate a production tranche in its line of credit for the Company's productions. Such tranche will allow the Company to borrow up to 50% of the production deficit after accounting for specified percentages of pre-sales, licensing fees and similar revenues from third parties and a required Company equity participation. All loans made pursuant to such agreement are secured by substantially all of the Company's otherwise unencumbered assets and bear interest, at the Company's option, either (i) at LIBOR (5.66% as of August 13, 1998) plus 3% (for that portion of the borrowing base supported by accounts or contracts receivable or the appraised library value) or 4% (for loans made under the production tranche) or (ii) at the Alternate Base Rate, which is the greater of (a) Chase's Prime Rate (8.50% as of August 13, 1998), (b) Chase's Base 30-Day CD Rate (5.56% as of August 13, 1998) plus 1% or (c) the Federal Funds Effective Rate (5.58% as of August 13, 1998)plus 2% (for that portion of the borrowing base supported by accounts or contracts receivable or the appraised library value) or 3% (for loans made under the production tranche). The Company is required to pay a commitment fee of 0.5% per annum of the unused portion of the credit line. The amount outstanding under the credit facility as of June 30, 1998 was $59,048,000 out of a borrowing base availability of $60,000,000, and as of August 13, 1998 it was $57,640,000 out of a borrowing base availability of $59,889,000. The Company is discussing with Chase an increase in the line of credit to more than $100,000,000. Should the Company not increase its line of credit, it will continue to seek individual film and television project financing. The credit agreement contains various restrictive covenants to which the Company must adhere. These covenants, among other things, include limitations on additional indebtedness, liens, investments, disposition of assets, guarantees, deficit financing, capital expenditures, affiliate transactions and the use of proceeds and prohibit payment of cash dividends and prepayment of subordinated debt. In addition, the credit agreement requires the Company to maintain a minimum liquidity level, limits overhead expense and requires the Company to meet certain ratios. The credit agreement also contains a provision permitting the bank to declare an event of default if either of Messrs. Locke or Kushner fails to be the Chief Executive Officer of the Company or if any person or group acquires ownership or control of capital stock of the Company having voting power greater than the voting power at the time controlled by Messrs. Kushner and Locke combined (other than any institutional investor able to report its holdings on Schedule 13G which holds no more than 15% of such voting power). Production/Distribution Loans The Company's other consolidated short term borrowings, totaling $9,237,000 as of June 30, 1998, consisted of $2,683,000 under a production loan further described below from Banque Paribas (Los Angeles Agency) ("Paribas") to a consolidated production entity, $4,220,000 of loans from Comerica Bank - - California, $2,086,000 under a production loan from a Canadian financial institution, and $248,000 due to a current minority shareholder of 800-U.S. Search and to a former shareholder of 800-U.S. Search. The Kushner-Locke Company has provided a $1,500,000 corporate guarantee for a portion of the Paribas loan which is callable in the event that the production company does not repay the loans by the extended maturity date. Deposits on the purchase price paid by the distributing licensees are held as restricted cash collateral by the lender. To the extent the collateral value securing the loan exceeds the amount outstanding, the Company may determine in the future to assume such obligations in full under its Chase facility and take title to such assets. In September 1996, TVFirst, an unconsolidated company 50%-owned by the Company, obtained a $500,000 secured line of credit from Comerica Bank - California. Advances under the line bear interest at Prime (8.50% at August 13, 1998) plus 2.50% payable monthly. The Company provided a corporate guaranty in the amount of $500,000 in connection with this loan. On June 30, 1998, advances totaling $140,000 were outstanding under this credit line. In February 1997, a $6,300,000 production loan was obtained from Paribas to cover a portion of the production budget of Basil. The loan bears interest at Prime (8.50% as of August 13, 1998) plus 1.5% payable monthly plus certain loan fee amounts. The maturity date for the loan has been extended to December 15, 1998. The loan is secured by the rights, title and assets related to the film, which is being delivered to sub-distributors. In May 1997 a third party invested $2,000,000 in the film project in exchange for certain rights and profit participations. At June 30, 1998, $2,683,000 was outstanding under this loan. In November 1997, an $8,200,000 production loan was obtained from Comerica Bank - California by an unconsolidated company 25%-owned by the Company to cover a portion of the production budget of Beowulf. The loan bears interest at the Prime Rate (8.50% as of August 13, 1998) plus 1% or at LIBOR (5.% as of August 13, 1998) plus 2%. The loan is secured by the rights, title and assets related to the film. The Company provided a corporate guaranty in the amount of $500,000 in connection with this loan. The bank has agreed to extend the loan maturity date from August 31, 1998 to January 31, 1999 as a consequence of production delays in the completion and delivery of the picture. On June 30, 1998, advances totaling $7,648,000 were outstanding pursuant to this loan. In March 1998, 800-U.S. Search obtained a secured line of credit from Comerica Bank - California. Advances under the line bear interest at the Prime Rate (8.50% August 13, 1998) plus 2.50% payable monthly. On June 30, 1998, advances totaling $295,000 were outstanding under this credit line. As of August 7, 1998 the bank and the Company agreed that the loan would be capped at the $344,000 amount outstanding as of that date. Through June 30, 1998 the Company had loaned 800-U.S. Search $680,000. In May 1998, a Canadian dollar 5,100,000 production loan was obtained from a Canadian financial institution, by a consolidated subsidiary to cover a portion of the production budgets of six direct-to-video feature films. The loan bears interest at the Canadian Prime Rate (6.50% as of August 13, 1998) plus 2%. The loan is secured by the rights, title and assets related to the films. As the films' distributor, the Company agreed to deliver a minimum of $3,300,000 of exploitation agreements to the financial institution in connection with this loan. On June 30, 1998, advances totaling $2,086,000 were outstanding under this loan. The loan matures in April 1999. In April 1998, a $4,625,000 production loan was obtained by a consolidated subsidiary from Comerica Bank - California to cover the production budget of Susan's Plan. The loan bears interest at the Prime Rate (8.50% as of August 13, 1998) plus 1% or at LIBOR (5.% as of August 13, 1998) plus 2% . The loan is secured 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. On June 30, 1998, advances totaling $3,925,000 were outstanding under this loan. The loan matures in March 1999. Securities Offerings As of June 30, 1998, $4,700,000 principal amount of 8% Convertible Subordinated Debentures (convertible into common stock at an adjusted rate of $5.85 per share) and $4,100,000 principal amount of 9% Convertible Subordinated Debentures (convertible into common stock at an adjusted rate of $9.48 per share) were outstanding. During fiscal 1998, $300,000 principal amount of the 8% Debentures were converted into 51,282 shares of Common Stock. As of June 30, 1998, $77,000 principal amount of Series A Debentures (convertible into common stock at an adjusted rate of approximately $7.61 per share) and $3,206,000 of Series B Debentures (convertible into common stock at an adjusted rate of approximately $9.27 per share) were outstanding. Other The Company recently entered into an agreement in principle with a major studio whereby the Company has the right to distribute in international territories up to nine moderate to high-budget motion pictures over a three-year period. The Company has the right to select the motion pictures, if any, to be distributed among titles made available by the major studio. In the event the company selects one or more films under the arrangement, management currently expects to finance its acquisition of the distribution rights via credit facilities not presently in place. There can be no assurance that definitive agreements for this distribution arrangement will be agreed to, that financing will be obtained, or that such activities will ultimately be profitable if undertaken. Summary Management believes that existing resources and cash generated from operating activities, together with amounts expected to be available under the syndicated revolving credit agreement with Chase and from production loans will be sufficient to meet the Company's working capital requirements for at least the next twelve months, except as indicated above pertaining to potential financing requirements relating to the agreement in principle with a major studio. The Company from time to time will seek additional financing through the issuance of new debt or sale of new equity securities, additional bank financings, or other means available to the Company to increase its working capital. In addition to expanding production and its distribution business, whether internally or by acquisition, the Company also considers acquisition possibilities from time to time, including film libraries and companies ancillary to the Company's business, subject to the availability of financing as necessary. The Company's business and operations have not been materially affected by inflation. Year 2000 ("Y2K") Issues The Company utilizes third party provider computer programs to process certain information in order to maintain efficient business operations. No Company-created programming is utilized. Management is aware of the Year 2000 programming and hardware issue and has been evaluating the adequacy of the third party providers' proposed or implemented solutions over the past year. At present, no assurance can be given that those solutions will resolve the issue, and therefore no assurance can be given that the Company will avoid significant deterioration of operating efficiency or programming costs. PART II OTHER INFORMATION Item 1. Legal Proceedings In January 1998, the Company settled certain disputes with WarnerVision which were the subject matter of a complaint filed against WarnerVision in June 1997, and WarnerVision settled certain disputes with the Company which were the subject matter of a complaint filed against the Company in October 1997. The settlement clarified the Company's and WarnerVision's rights regarding the exploitation of certain films, and WarnerVision reduced the Company's contractual payment obligation to WarnerVision, which had been accrued but not paid due to the disputes. Pursuant to the settlement, the Company paid $543,000 to WarnerVision in May 1998. Item 4. Submission of Matters to a Vote of Security Holders On June 18, 1998 the shareholders of the Company voted in the annual meeting to elect five directors, and re-appoint KPMG Peat Marwick LLP as independent accountants. The results of the voting were as follows:
Election of directors: FOR AGAINST ABSTAIN Peter Locke 7,284,348 286,452 25,897 Donald Kushner 7,284,783 286,460 25,454 Irwin Friedman 7,266,017 270,616 60,064 Stuart Hersch 7,265,044 273,069 58,584 John Lannan 7,280,100 255,813 60,784
Approval of the appointment of KPMG Peat Marwick LLP as independent accountants for the fiscal year ended September 30, 1998:
FOR AGAINST ABTAIN 7,499,467 43,072 50,124
The company is unaware of any withheld votes or broker on-votes. Item 5. Other Information The following table presents the previous five fiscal years ended September 30, 1997 reconciliation of earnings per share calculations restated in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share. (SFAS 128)
For the Year Ended September 30, ---------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Basic earnings per share ($0.49) $0.11 ($0.75) ($1.38) ($0.39) ===== ===== ===== ===== ===== Diluted earnings per share ($0.49) $0.11 ($0.75) ($1.38) ($0.39) ===== ===== ===== ===== =====
The following table presents the reconciliation of earnings per share calculations restated in accordance with SFAS 128 for each of the years in the three-year period ended September 30, 1997.
For the Year Ended September 30, --------------------------------- 1997 1996 1995 ------ ------ ------ Numerator: Net income (loss) ($4,369,000) $730,000 ($3,975,000) Assumed debenture conversions -- -- -- Numerator for basic and diluted ---------- -------- ---------- earnings per share - income available to common stockholders ($4,369,000) $730,000 ($3,975,000) ========== ======== ========== Denominator: Denominator for basic earnings per share - weighted average shares 8,959,000 6,668,000 5,286,000 Effect of dilutive securities: --------- --------- --------- Employee stock options and warrants -- -- -- Convertible debentures -- -- -- --------- --------- --------- Dilutive potential common shares -- -- -- --------- --------- --------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 8,959,000 6,668,000 5,286,000 ========= ========= =========
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: August 14, 1998 /S/ DONALD KUSHNER Donald Kushner Co-Chairman of the Board, Co-Chief Executive Officer and Secretary Dated: August 14, 1998 /S/ ROBERT SWAN Robert Swan Senior Vice President and Chief Financial Officer
INDEX TO EXHIBITS 10.63 Amendment No. 6 dated as of May 13, 1998 to the Credit, Security, Guaranty and Pledge Agreement dated as of June 19, 1996, as amended, among The Kushner-Locke Company (the "Borrower"), the Guarantors named therein, the Lenders referred to therein and The Chase Manhattan Bank (formerly known as Chemical Bank), as Agent and as Fronting Bank for the Lenders (the "Agent") (as heretofore amended, the "Credit Agreement"). AMENDMENT NO. 6 dated as of May 13, 1998 to the Credit, Security, Guaranty and Pledge Agreement dated as of June 19, 1996, as amended, among THE KUSHNER LOCKE COMPANY (the "Borrower"), the Guarantors named therein, the Lenders referred to therein and THE CHASE MANHATTAN BANK (formerly known as Chemical Bank), as Agent and as Fronting Bank for the Lenders (the "Agent") (as heretofore amended, the "Credit Agreement").
INTRODUCTORY STATEMENT The Lenders have made available to the Borrower a revolving credit facility pursuant to the terms of the Credit Agreement. The Borrower has requested certain modifications to the Credit Agreement. The Borrower, the Guarantors, the Lenders and the Agent have agreed to make revisions to the Credit Agreement, all on the terms and subject to the conditions hereinafter set forth. Therefore, the parties hereto hereby agree as follows: Section 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning given them in the Credit Agreement. Section 2. Amendments to the Credit Agreement. Subject to the satisfaction of the conditions precedent set forth in Section 3 hereof, the Credit Agreement is hereby amended effective as of January 31, 1998 (the "Effective Date") as follows: (A) Article 1 of the Credit Agreement is hereby amended by adding the following definition in the appropriate alphabetical sequence: "US-SEARCH" shall mean 800-U.S. SEARCH, a California corporation, the shareholders of which are the Borrower (80%) and Nick Matzorkis (20%). (B) The definition of "Consolidated Interest Expense" appearing in Article 1 of the Credit Agreement is hereby amended by adding the parenthetical "(other than US- SEARCH)" after the term "Consolidated Subsidiaries". (C) The definition of "Consolidated Net Income" appearing in Article 1 of the Credit Agreement is hereby amended by adding the parenthetical "(other than US- SEARCH, except to the extent of the amount of any dividends or other distributions actually paid by US-SEARCH to a Credit Party during such period)" immediately after the term "Consolidated Subsidiaries" but immediately before the words "during such period" appearing in the second and third lines therein. (D) The definition of "Stockholders' Equity" appearing in Article 1 of the Credit Agreement is hereby amended by adding the parenthetical "(other than US- SEARCH)" after the word "Subsidiaries" appearing therein. (E) Section 6.1 (Limitations on Indebtedness) of the Credit Agreement is hereby amended by adding the following clause (k) at the end thereof: "(k) Indebtedness incurred by US-SEARCH for its working capital purposes, in an amount not to exceed $1,000,000 at any one time outstanding" (F) Section 6.2 (Limitations on Liens) of the Credit Agreement is hereby amended by adding the following clause (n) at the end thereof: "(n) Liens granted by US-SEARCH to secure Indebtedness permitted by Section 6.1(k) hereof, which Liens are non-recourse to any Credit Party." (G) Section 6.3 (Limitations on Guarantees) of the Credit Agreement is hereby amended by (i) deleting the amount "$1,000,000" appearing in clause (iv) thereof and replacing it with "$500,000" and (ii) adding the following clauses (v) and (vi) at the end thereof: ", (v) the Guarantee by the Borrower for the Indebtedness of US-SEARCH in an amount not to exceed $1,000,000, and (vi) Guarantees by the Borrower or a Guarantor of the obligations of another Guarantor." (H) Section 6.14 (Consolidated Capital Base) of the Credit Agreement is hereby amended by deleting the words "the net earnings of the Borrower and its Subsidiaries" appearing in the second line therein, and inserting in lieu thereof the words "Consolidated Net Income". Section 3. Conditions to Effectiveness. The effectiveness of this Amendment is subject to the satisfaction in full of each of the conditions precedent set forth in this Section 3: (A) the Agent shall have received counterparts of this Amendment which, when taken together, bear the signatures of the Borrower, each Guarantor, the Agent and such of the Lenders as are required by the Credit Agreement; (B) US-SEARCH shall have become a Credit Party under the Credit Agreement and executed and delivered such instruments as may be appropriate in the reasonable judgment of the Agent to provide the Agent (for the benefit of the Lenders) a perfected Lien in the assets of US-SEARCH, including without limitations, an Instrument of Assumption and Joinder, UCC-1 financing statements, supplements to the Trademark Security Agreement and/or Copyright Security Agreement, and stock certificate(s) evidencing the Borrower's interest in US-SEARCH accompanied by undated stock powers executed in blank; (C) the Borrower shall have obtained the written consent of all shareholders of US-SEARCH regarding the assumption by US-SEARCH of the obligations and liabilities of a Guarantor under the Credit Agreement and the other Fundamental Documents and the pledge to the Agent by the Borrower of its ownership interest in US-SEARCH; and (D) all legal matters incident to this Amendment shall be satisfactory to Morgan, Lewis & Bockius LLP, counsel for the Agent. Section 4. Consent. Each of the Lenders, by its execution hereof, hereby consents, to the extent required pursuant to the Credit Agreement, to the Agent entering into a Subordination Agreement, in form and substance satisfactory to the Agent, whereby the Liens of the Agent and the Lenders under the Credit Agreement and other Fundamental Documents in the assets of US-SEARCH are subordinated to the Liens granted by US-SEARCH to secure Indebtedness permitted by Section 6.1(k) of the Credit Agreement. Section 5. Representations and Warranties. Each Credit Party represents and warrants that: (A) after giving effect to this Amendment, the representations and warranties contained in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if such representations and warranties had been made on and as of the date hereof (except to the extent that any such representations and warranties specifically relate to an earlier date); and (B) after giving effect to this Amendment, no Event of Default or Default will have occurred and be continuing on and as of the date hereof. Section 6. Further Assurances. At any time and from time to time, upon the Agent's request and at the sole expense of the Credit Parties, each Credit Party will promptly and duly execute and deliver any and all further instruments and documents and take such further action as the Agent reasonably deems necessary to effect the purposes of this Amendment. Section 7. Fundamental Documents. This Amendment is designated a Fundamental Document by the Agent. Section 8. Full Force and Effect. Except as expressly amended hereby, the Credit Agreement and the other Fundamental Documents shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Credit Agreement, the terms "Agreement", "this Agreement", "herein", "hereafter", "hereto", "hereof", and words of similar import, shall, unless the context otherwise requires, mean the Credit Agreement as amended by this Amendment. Section 9. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 10. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. Section 11. Expenses. The Borrower agrees to pay all out-of-pocket expenses incurred by the Agent in connection with the preparation, execution and delivery of this Amendment, including, but not limited to, the reasonable fees and disbursements of counsel for the Agent. Section 12. Headings. The headings of this Amendment are for the purposes of reference only and shall not affect the construction of or be taken into consideration in interpreting this Amendment IN WITNESS WHEREOF, the parties hereby have caused this Amendment to be duly executed as of the date first written above. BORROWER: THE KUSHNER-LOCKE COMPANY By: Name: Title: GUARANTORS: KL PRODUCTIONS, INC. KL INTERNATIONAL, INC. ACME PRODUCTIONS, INC. KUSHNER-LOCKE PRODUCTIONS, INC. THE RELATIVES COMPANY POST AND PRODUCTION SERVICES,INC. L-K ENTERTAINMENT, INC. INTERNATIONAL COURTROOM NEWS SERVICE FAMILY PICTURES, INC. TROPICAL HEAT, INC. KL SYNDICATION, INC. ANDRE PRODUCTIONS, INC. TKLC NO. 2, INC. TWILIGHT ENTERTAINMENT, INC. KLC FILMS, INC. KL FEATURES, INC. KLF GUILD CO. KLF DEVELOPMENT CO. KLTV GUILD CO. KLTV DEVELOPMENT CO. KUSHNER-LOCKE INTERNATIONAL, INC. KL INTERACTIVE MEDIA, INC. By Name: Title: KLC/NEW CITY By its General Partner THE KUSHNER-LOCKE COMPANY By Name: Title: DAYTON WAY PICTURES, INC. DAYTON WAY PICTURES II, INC. DAYTON WAY PICTURES III, INC. DAYTON WAY PICTURES IV, INC. FW COLD CO., INC. By Name: Title: 800-U.S. SEARCH By Name: Title: LENDERS: Executed in THE CHASE MANHATTAN BANK (formerly New York, New York known as Chemical Bank), as Agent On _____________, 1998 By Name: Title: DE NATIONALEINVESTERINGSBANK N.V. By Name: Title: By Name: Title: COMERICA BANK -- CALIFORNIA By Name: Title:
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5 1000 9-MOS SEP-30-1998 JUN-30-1998 2,423 0 48,207 1,621 58,758 0 0 0 120,796 0 11,472 0 0 39,226 (10,513) 28,713 0 59,769 50,649 50,649 7,584 0 4,326 (2,726) 18 (2,744) 0 0 0 (2,744) (.30) (.30) Included as Inventory are: completed film and television property costs, productions in process and development costs. The Company does not present a classified balance sheet. The Company does not present a classified balance sheet.
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