Kushner-Locke wishes on a wooden star.
After three consecutive losing years will two Syracuse University roommates' Pinocchio film make their dreams come true?
Like its new film about Pinocchio, the wooden puppet who became a boy, Kushner-Locke[a] (Nasdaq: KLOC-15/16) appears on the
brink of becoming a real company.
For three consecutive years the Los Angeles-based film maker tossed around in a sea of red ink, finishing fiscal 1995, which ended last
September 30, with revenue of $20.4 million and a net loss of $3.9 million or $0.13 per share. But for fiscal 1996, revenues could soar
as high as $85 million, net income over $4 million and earnings per share perhaps $0.10 depending on how many of its remaining
convertible debentures turn into stock. Some analysts believe Kushner-Locke shares, which were only $0.50 when the film maker
presented at Equities' Winter Corporate Conference last December, could reach $3 or $4 by summer as speculators bet on the success of
the $30 million "The Legend of Pinocchio," to be released in August.
After all, in 1993 just when Kushner-Locke released the $9 million family film "Andre," the stock jumped up from $0.75 to over $2
only to descend when speculators realized it was a perfectly good minnow but no Monstro the Whale. The company believes "Pinocchio"
will be the crown jewel in its vault of 30 releases scheduled for 1996.
The company has recently attracted the backing of savvy venture capitalist Louis Marx Jr. who participated in its 1995 $21 million
convertible debenture offering. If it performs as well as expected, now it has a prestigious backer. If it fails, well, as Louie always says,
"Others may know when to buy as well as I do, but I know when to sell."
Like many businesses, Kushner-Locke Co. began with a lunch. The lunch took place in 1982 after the two Syracuse roommates, Donald
Kushner and Peter Locke crossed paths at neighboring production studios in California.
Besides having a law degree--useful for understanding the intricacies of raising capital by going public and financing movies--Kushner
was working at Disney on a science-fiction feature titled "Tron." Locke was shooting a four-hour NBC miniseries called "Star Maker."
The two enterprising producers put their heads together and realized that they could do what the studios did.
Now 14 years later, Kushner-Locke Co. is an independent film production company that develops and distributes feature films and
television product for network and cable television and theatrical and video release. The company has produced more than 900 hours of
television programming and controls the rights to a $49 million, 400-hour film library.
During that initial meeting, Kushner asked Locke to look at a reel from "Tron." After the viewing, Locke had an idea. "We can sell
something like this to TV," Locke recalls. The then unofficial partnership repackaged "Tron" as "Automan" and sold it to ABC. Months
later, Kushner and Locke produced one of the Disney Channel's first series, "Contraption, " which ran for four years and 40 episodes.
Then came "Divorce Court, " 860 episodes of unhappily married couples fighting it out in court. The HBO series 1st and Ten, 88
episodes and Sweating Bullets, 66 episodes, were also highly regarded. Its most visible current TV production is the Jack Reed series of
movies for NBC starring Brian Dennehy.
Hundreds of film projects later, Kushner-Locke endures as a small independent film maker headquartered in Los Angeles. The
company was taken public in December 1988 by now defunct SEC target Stuart James and another low-priced house, J. W. Gant. The
initial public offering was for one million units, each unit consisting of five shares of common stock for $5 or $1 a share. For 11
consecutive years, this Los Angeles-based TV and film producers had been profitable (but not too profitable), earning just a penny a
share in 1992.
However, recent years have earned unkind reviews from securities analysts. Three consecutive losing years make 1996 a cliffhanger.
Peter Locke, who spoke at EQUITIES' conference, says he's confident the audience will see a happy ending.
"Our revenues took a dip of over $30 million in fiscal 1995 because of over $36 million of work-in-progress for undelivered products."
Projects include "The Legend of Pinocchio" and three films which have qualified for competition in Robert Redford's Sundance Film
Festival.
Among the Sundance films are: "The Grave" starring Gabrielle Anwar, Eric Roberts and Craig Sheffer; "The Whole Wide World"
starring Vincent D'Onofrio and Rene Zellweger; and "Freeway" with Oliver Stone as executive producer and starring Kiefer Sutherland,
Reese Witherspoon and Brooke Shields. "'Freeway' is a rough picture," Locke says. It's about a teenage runaway who gets picked up
hitchhiking by a serial killer called the "I-5 killer." "Whole Wide World" is a gentler movie, a Texas love story set in the 1930s.
"This will be by far our best year ever," Locke says. Kushner-Locke' s revenues could reach $85 million and net income could reach
$4.5 million or over $0.10 a share, depending on how much of its remaining convertible debt is turned into common shares. The
conversion price is $0.97, and as the stock breaks above 1 1/4 and holds, it all should go, thus converting the expensive debt to equity.
Why the new optimism? Kushner-Locke has a $50 million production backlog. The company also added 75 new titles to its film library
in the last 18 months and boosted its television production backlog to $16 million. And with the addition of a foreign theatrical
distribution branch, headed by Gregory Cascante of August Entertainment, Kushner-Locke has already rang up $13 million in advance
foreign sales for "The Legend of Pinocchio."
So far, the $30 million film looks like a winner, Locke says. Martin Landau, who won an Academy Award in 1994 for his performance
in "Ed Wood," plays Geppeto. Steve Barron, director of "Teenage Mutant Ninja Turtles," directs the "The Legend of Pinocchio."
Jonathan Taylor Thomas, from ABC's hit series "Home Improvement," has the title role.
Don't look for Muppet-like puppets to play Pinocchio when Thomas is off-screen. Viewers are treated to a realistic animatronic puppet.
That job falls to Jim Henson's Creature Shop in London. Computerized images of the cricket will make cartoon life seem almost
human-like. Advances in computer-animation technology, already seen in Walt Disney' s "Toy Story," make this possible. "The movie
could not have been made five years ago," explains Kushner.
The press appears anxious to see the results. The film has garnered some high-profile publicity. Both The New York Trines and The Los
Angeles Times wrote lengthy feature stories on "The Legend of Pinocchio. " "This is a classic story that everybody knows. We're
confident audiences will love our version of the tale," Locke says.
Kushner-Locke also has a big partner in this venture. IBM put down a wager of over $1 million on Pinocchio with its plans to make a
CD- ROM game based on the film. "We think it's pretty good to stand next to IBM, especially for a company our size," Locke says. IBM
paid Kushner- Locke a $300,000 advance for the project.
New Line Cinema plans a wide release for "The Legend of Pinocchio" in August. After distribution fees and New Lines Cinemas
recoups its investment, "we get 100% of the foreign sales and half the domestic sales," Locke says.
Its plan for capturing foreign sales shows Kushner-Locke has learned from its past. A good case study is the motion picture "Andre."
In 1993 the company produced. the film, which stars Keith Carradine and child actress Tina Majorino and tells the story of a New
England seal. It grossed $30 million from box office and home video sales. The picture cost $9 million to make. "Its budget was less than
half the average studio budget," Kushner says.
Unfortunately, the company lacked the means to sell "Andre" to overseas markets. Turner Pictures Worldwide bought the foreign rights,
and Kushner-Locke received some much needed cash in exchange. "If we had distributed foreign rights, we could have netted an
additional $5 million," says Philip Mittleman, Kushner-Locke's dynamic 25-year-old vice president of feature films. "Most of it would
have flowed right to the bottom line."
Should Pinocchio prove to be little more than a break-even film, the company can pin some of its hopes on the productions showing at
Sundance, as well as "Red Ribbon Blues" with Paul Mercurio and RuPaul. Two sequels to Disney's "Brave Little Toaster" are also in
production for video release, and "Andre II," the seal sequel, is in development.
Kushner-Locke is having its biggest primetime television series pilot season with a record eight one-hour series currently in
development for ABC, CBS, NBC, FOX and UPN. The eight hours of network primetime series pilots--which the company believes
rival the productivity of many major studios--includes a mix of drama, action-adventure and the supernatural. The eight series hours
include:
"Purgatory," an hour dramatic series for ABC, is about a female big- city reporter who must prove herself by running a small town
daily before she can get the top editorial post of her dreams.
"Gargoyles" is an hour suspense series for ABC about a beautiful architect who is hunted by gargoyles. Additional characters include a
helpful, elderly caretaker and a gargoyle who falls in love with his intended victim and risks his life to protect her. "Gargoyles" is
written by Dan O'Bannon of feature films "Alien" and "Total Recall."
"Gun" is an hour dramatic anthology for ABC in which a gun weekly falls into the hands of a different set of characters, prompting
strange circumstances and ironic outcomes. A variety of guest stars, writers and directors will contribute to this series. The teleplay is by
James Sadwith who received an Emmy Award for his direction of CBS' "Sinatra" mini-series.
"Road Does" is an hour contemporary dramatic adventure series for ABC about two seemingly opposite thirty-something doctors who
pursue a life of excitement and adventure by taking their practice on the road. Lawrence Dworet, from the film"Outbreak," and David
Assail wrote the script.
"Wade Rivers" is an hour adventure series for CBS written by James Sadwith. It follows the exploits of a young scientist who comes face
to face with exotic cultures while traveling unexplored and dangerous places around the world.
"New York Dancers" is an hour dramatic series for FOX about an aspiring dancer and her circle of artistic friends struggling to find
success in New York City. The teleplay is by Kathryn Pratt whose credits include "Sisters."
"Black Bag Jobs" is an hour action adventure series for NBC about five young mercenaries, each with a special skill. They are called
upon to handle unusual cases which call for non-traditional sleuthing. Peter Iliff, who prepared the screenplay for "Patriot Games,"
wrote the show.
"Infinity Plus" is an hour suspense drama for UPN about a special unit of the FBI investigating a modem vampire society. One of the
unit's agents must find the vampire who bit him or risk becoming a vampire himself. Roderick Taylor of "Star Chamber" and Bruce A.
Taylor are the authors.
How can a company with so limited a cash hoard and no earnings since 1992 have such a busy production schedule? Off-balance sheet
financing is Kushner-Locke's answer to cash flow needs. New Market Capital Group, Imperial Bank and Banque Paribas provide
financing based on a production' s projected sales. For example, costly "Pinocchio" was completely funded with off-balance financing. In
addition, Imperial Bank in Los Angeles granted Kushner-Locke a $15 million line of on-balance credit. The company is negotiating a
$30 million line of credit with another bank.
"We look for titles which are pre-sold worldwide. Once we can secure sales contracts for the film, banks can supply the money for its
production, " Locke says. The loan is gradually paid down with the delivery of the finished picture to its customers. The company has
met its foreign sales projections consistently. "The bank trusts our projections," Locke says. "We can keep costs low and, thereby, limit
the downside risk to our lenders."
With films made for $4 million and under, one can be wrong many times, Locke explains, so long as the films break even. One home
run is all it takes to put a company over the top. For example, "Pulp Fiction, " "Reservoir Dogs," "The Crying Game" and "Sex, Lies
and Videotapes" are four films made for less than $10 million that delivered more than $50 million in worldwide revenues. Of course
Pinocchio has a bigger budget, but it also could have a much bigger payoff.
"We make art films and action films," Locke explains. "Art films can surprise people with their success, and action films translate well
overseas. Crashing cars are easy to figure out."
This will be the year, Locke believes, when the company finally achieves its long awaited breakthrough--a profitable year--and
shareholders get to enjoy their just desserts. If so, institutional investors should give management their validation. Then the co-founding
fraternity brothers will be on their way to the big time. For years now they have stated they want to become a quality company with
stock worth over $10 per share, doing over $100 million in production and operating distribution arms both domestically and abroad
that are doing another $100 million. This would set the stage for the company's next act: building a major entertainment company.
ADDRESS: 11601 Wilshire Boulevard, Los Angeles, CA 90025. Phone: (213) 445-1111.
SHARE DATA: Recent price, 15/16; 1988-1996 Range, 3 7/16-1/2; Shares Outstanding 32 million; Estimated 1996 EPS, $0.15
BALANCE SHEET DATA: Total Assets, $54.3 million; Total Liabilities, $54.3 million; Shareholders' Equity, $18.5 million; Book
Value Per Share, $0.54
PHOTO (BLACK & WHITE): No Strings Attached: This animatronic puppet from Jim Henson's Creature Shop brings Kushmer-Locke's
newest star to life.
PHOTO (BLACK & WHITE): Seal of Approval: With "Andre" Kushner-Locke learned that it could make money with small-budget
films and realized the value of distributing its own films abroad.
~~~~~~~~
By Robert J. Flaherty and Matthew Lubanko
Inset Article
RISKS
Some companies are always turning around. Only profitability in 1996, followed by consistency will bring the company respect and
convince institutional analysts it is a real company. That will bring a higher stock price, conversion of debt into stock and the ability to
raise money on better terms and for larger amounts. To avoid shareholder dilution and gambling on a higher stock price in the future,
Kushner- Locke has turned down offers to raise $20 million or more in new growth capital. If Pinocchio and the other new projects
turn out to be limited successes, management may be sorry it didn't take the new capital when it could get it.
This company is hungry for cash. Even with a new avenue for credit, $15 million is skimpy for a budget because production costs are
only half the battle; marketing films also cost money. The film industry is risky. Many films released to theaters or video don't make a
profit. Many others never make it past the early production phases. And the film industry relies on accounting methods that are suspect
to say the least. For example "Forest Gump," a film that grossed more than $200 million, "lost money" for its producers. In addition,
there is a limited market for company shares trading below $1.
Another risk is film companies sell on dreams and investors usually expect too much from them. Often projects are only singles, not
home runs. For example, Kushner-Locke's excellent TV series for CBS, "Harts of West," which management hoped would run for
years and create valuable syndication rights, didn't last a whole season. Several other seemingly well conceived past projects didn't make
it over the fence either. In the Hollywood hills the future is truly unpredictable. Movie companies always give their shareholders
surprises, not all of them pleasant.
Inset Article
UNTITLED.
The Boys From Syracuse: Providence, RI-born Donald Kushner, 50, earned his B.A from Syracuse and received his law degree from
Boston University. His college roommate and fraternity brother, Brooklyn, NY-born Peter Locke, 52, graduated from Syracuse
University with a B.A. in English and attended graduate film school at San Francisco State. He started out doing everything he could
from carrying cameras and doing rewrites in low budget films in New York City until he gained enough experience to become a
Hollywood television producer. Hollywood and film making beckoned to Kushner, too. The co-chairmen and CEOs of the company
collectively own 7 million shares and draw salaries of over $300,000 plus annual incentive payments. In other industries where a
company is losing money such salaries would seem high. But, hey, hooray for Hollywood.
PHOTO (BLACK & WHITE): Donald Kushner and Peter Locke |
