KUSHNER LOCKE CO, 10-Q, 1995-08-14

KUSHNER LOCKE CO
10-Q, 1995-08-14
MOTION PICTURE & VIDEO TAPE PRODUCTION

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

-------------------------

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

-------------------------

FOR QUARTER ENDED JUNE 30, 1995 COMMISSION FILE NUMBER 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 No.)

11601 Wilshire Blvd., 21st Floor, Los Angeles, CA 90025
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (310) 445-1111

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
13 3/4% Convertible Subordinated Debentures, Series B
Common Stock Purchase Warrants

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
---- ----

Number of shares of registrant's common stock outstanding as of August 9, 1995:
32,081,984

<PAGE>

THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995

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
-----------------

Items 1 through 3. Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits: 10.1
10.2
10.3

(b) Reports on Form 8-K: None

2
<PAGE>

PART I

ITEM 1.
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS
------
JUNE 30, SEPTEMBER 30,
1995 1994
(UNAUDITED) (AUDITED)
----------- ------------
<S> <C> <C>
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,277,000 $ 15,681,000
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650,000
Accounts receivable, net of allowance for
doubtful accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,693,000 6,177,000
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,040,000 295,000
Film costs, net of accumulated amortization. . . . . . . . . . . . . . . . . . . . . 49,015,000 30,688,000
Property and equipment, at cost, net of
accumulated depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 493,000 437,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 939,000 976,000
----------- -----------

$63,107,000 $54,254,000
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>

Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . $3,005,000 $2,385,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ---- 10,000
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,642,000 9,600,000
Deferred film license fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,278,000 364,000
Contractual obligations, principally
participants'share payable and talent residuals. . . . . . . . . . . . . . . . . . 707,000 1,216,000
Production advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,191,000 82,000
Convertible subordinated debentures due 2000 and 2002, net of amortized
issuance costs 20,625,000 22,056,000
---------- ----------

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,448,000 35,713,000
---------- ----------

Stockholders' equity:

Common stock, no par value. Authorized
80,000,000 shares: issued and outstanding
32,081,984 shares at June 30, 1995 and
30,069,101 shares at September 30, 1994. . . . . . . . . . . . . . . . . . . . . . 20,381,000 18,696,000

Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,722,000) (155,000)
---------- ----------

Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . 17,659,000 18,541,000
---------- ----------
$ 63,107,000 $ 54,254,000
------------- -------------
------------- -------------
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.

<PAGE>

THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
1995 1994 1995 1994
-------------- -------------- -------------- ---------------
<S>
<C> <C> <C> <C>
Operating revenues . . . . . . . . . . . . . . . . $ 1,904,000 $ 7,107,000 $ 13,518,000 $ 36,072,000
Costs related to operating revenues. . . . . . . . 1,567,000 7,440,000 10,735,000 33,448,000
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . 957,000 796,000 2,934,000 2,239,000
-------------- -------------- -------------- ---------------
Earnings (loss) from operations . . . . . . . (620,000) (1,129,000) (151,000) 385,000

Interest income. . . . . . . . . . . . . . . . . . 49,000 115,000 185,000 132,000
Interest expense . . . . . . . . . . . . . . . . . (966,000) (729,000) (2,558,000) (1,511,000)
-------------- -------------- -------------- ---------------

Loss before income taxes and
cumulative effect of a change in
accounting principle . . . . . . . . . . . . . . (1,537,000) (1,743,000) (2,524,000) (994,000)

Provision for income taxes . . . . . . . . . . . . 26,000 (661,000) 43,000 (377,000)
-------------- -------------- -------------- ---------------
Loss before cumulative effect of a
change in accounting for income taxes. . . . . (1,563,000) (1,082,000) (2,567,000) (617,000)

Cumulative effect of a change in
accounting for income taxes. . . . . . . . . . . ----- ----- ---- 394,000
-------------- -------------- -------------- ---------------
Net loss. . . . . . . . . . . . . . . . . . . $ (1,563,000) $ (1,082,000) $ (2,567,000) $ (223,000)
-------------- -------------- -------------- ---------------

Earnings (loss) per common and common
equivalent share:

Loss before cumulative effect of a
change in accounting principle . . . . . . . . . $(.05) $(.04) $(.08) $(.02)

Cumulative effect of a change in accounting
for income taxes . . . . . . . . . . . . . . . . $.--- $.--- $.--- $.01
-------- ------- ------- -------

Net loss . . . . . . . . . . . . . . . . . . . . . $(.05) $(.04) $(.08) $(.01)
-------- ------- ------- -------
Weighted average number of common and
common equivalent shares outstanding . . . . . . 31,589,000 28,975,000 31,432,000 28,977,000
--------------- --------------- -------------- -------------
--------------- --------------- -------------- -------------
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.

4
<PAGE>

THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

NINE MONTHS ENDED
JUNE 30,
----------------------------------
1995 1994
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,567,000) $ (223,000)
Adjustments to reconcile net loss to net cash
used by operating activities:
Cumulative effect of a change in accounting principle. . . . . . . . . . . . . ---- (394,000)
Increase in restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . (650,000) ----
Amortization of film costs . . . . . . . . . . . . . . . . . . . . . . . . . . 11,049,000 32,774,000
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . 185,000 200,000
Amortization of capitalized issuance costs and warrants. . . . . . . . . . . . 314,000 117,000
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ---- (377,000)
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (516,000) (2,242,000)
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (745,000) (628,000)
Increase in film costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,376,000) (34,744,000)
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . 610,000 (3,278,000)
Deferred film license fees . . . . . . . . . . . . . . . . . . . . . . . . . . 914,000 294,000
Contractual obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . (509,000) (308,000)
Production advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,109,000 458,000
--------------- --------------
Net cash used by
operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,182,000) (8,351,000)

Cash flows from investing activities:
Increase in property and equipment, net. . . . . . . . . . . . . . . . . . . . . . (241,000) (19,000)
Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,000 (218,000)
--------------- --------------
Net cash used by investing activities. . . . . . . . . . . . . . . . . . . . (204,000) (237,000)

Cash flows from financing activities:
Increase in notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,642,000 20,500,000
Repayment of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,600,000) (20,271,000)
Net proceeds from issuance of debentures . . . . . . . . . . . . . . . . . . . . . ---- 14,436,000
Repayment of debentures and other. . . . . . . . . . . . . . . . . . . . . . . . . (60,000) (37,000)
--------------- --------------

Net cash and restricted cash provided by financing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,982,000 14,628,000

Net increase in cash and restricted cash . . . . . . . . . . . . . . . . . . . . . . (11,404,000) 6,040,000

Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . 15,681,000 6,542,000
--------------- --------------
Cash, cash equivalents and restricted cash at end of period. . . . . . . . . . . . . $ 4,277,000 $ 12,582,000
--------------- --------------
--------------- --------------
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.

<PAGE>

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)

Supplemental disclosure of non-cash financing activity:

During the nine months ended June 30, 1995, $1,960,400 of convertible
subordinated debentures before unamortized capitalized issuance costs of
$216,600 were converted into 2,012,883 shares of common stock.

See accompanying Notes to Condensed Consolidated Financial Statements.

<PAGE>

THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

COMMON STOCK
--------------------------
NUMBER OF ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1994 (audited). . . . . . . . 30,069,101 $ 18,696,000 $ (155,000) $ 18,541,000
Conversion of convertible debentures . . . . . . . . . 2,012,883 1,685,000 1,685,000

Net (loss) . . . . . . . . . . . . . . . . . . . . . . (2,567,000) (2,567,000)
------------- -------------- -------------- -------------
Balance at June 30, 1995 (unaudited). . . . . . . . . 32,081,984 $ 20,381,000 $ (2,722,000) $ 17,659,000
------------- -------------- -------------- -------------
------------- -------------- -------------- -------------
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.

<PAGE>

THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

The Kushner-Locke Company (the "Company") is principally engaged in the
development, production and distribution of feature films, direct-to-video
films, television series, pilots, movies-for-television, mini-series and
animated programming. Last year, the Company expanded its operations into
related business lines in ancillary markets for its product such as
merchandising, home video and interactive/multimedia applications for characters
and story ideas developed by the Company. Recently, the Company entered into
various joint ventures and partnerships with established companies having
expertise in their respective fields including music exploitation; infomercials;
cable distribution; CD-ROM formatted product; and development of interactive
game product.

BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements presented
include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.

These unaudited consolidated financial statements and notes thereto have
been condensed and, therefore, do not contain certain information included in
the Company's annual consolidated financial statements and notes thereto. The
unaudited condensed consolidated financial statements should be read in
conjunction with the Company's annual consolidated financial statements and
notes thereto.

The unaudited condensed consolidated financial statements reflect, in the
opinion of management, all adjustments, all of which are of a normal recurring
nature, necessary to present fairly the financial position of the Company as of
June 30, 1995, the results of its operations for the three and nine month
periods ended June 30, 1995 and 1994, and its cash flows for the nine month
periods ended June 30, 1995 and 1994. Interim results are not necessarily
indicative of results to be expected for a full fiscal year.

Certain reclassifications have been made to conform prior year balances
with the current presentation.

RESTRICTED CASH

During the quarter ended June 30, 1995, the Company had $650,000 in
restricted cash related to advances made to film producers for the acquisition
of distribution rights which were being held as collateral by financial
institutions providing production loans to such producers.

INCOME TAXES

Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Incomes Taxes." This
statement supersedes SFAS 96, "Accounting for Income Taxes." Under the asset
and liability method of SFAS 109, 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.
Under SFAS 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.

8
<PAGE>

1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company elected to reflect the cumulative effect of adopting this
pronouncement as a change in accounting principle at the beginning of fiscal
1994 with a credit to earnings of $394,000. Prior year financial statements
were not restated.

EARNINGS (LOSS) PER SHARE

Earnings (loss) per common and common equivalent share is based upon the
weighted average number of shares of common stock outstanding plus common
equivalent shares consisting of all outstanding warrants and dilutive stock
options. The weighted average number of common and common equivalent shares
outstanding for the calculation of primary earnings per share was 31,589,000 and
28,975,000 for the quarters ended June 30, 1995 and 1994, respectively, and
31,432,000 and 28,977,000 for the nine months ending June 30, 1995 and 1994,
respectively. The inclusion of the additional shares assuming the conversion of
the Company's Convertible Subordinated Debentures would have been anti-dilutive
for all periods.

(2) FILM COSTS

Film costs consist of the following:

JUNE 30, SEPTEMBER 30,
1995 1994
--------------------- --------------------
<S> <C> <C>
In process or development. . . . . . . . . . . . . . . $ 11,164,000 $ 5,177,000
Released, net of accumulated amortization. . . . . . . 37,851,000 25,511,000
--------------------- --------------------

$ 49,015,000 $ 30,688,000
--------------------- --------------------
--------------------- --------------------
</TABLE>

(3) NOTES PAYABLE

Notes payable are comprised of the following:

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1995 1994
---------------- -------------
<S> <C> <C>
Note payable to bank, secured by substantially all
Company assets, interest at prime (8.75% at
June 30, 1995) plus 1.25%, payable
monthly, outstanding principal balance due
September 30, 1995 . . . . . . . . . . . . . . . $ 14,918,000 $ 9,600,000

Note payable to bank, secured by certain film rights,
interest at prime (8.75% at June 30, 1995)
plus 3%, payable monthly, outstanding
principal balance due February 28, 1996 . . . . . 1,724,000 ----
---------------- -------------
$ 16,642,000 $ 9,600,000
---------------- -------------
---------------- -------------
</TABLE>

9
<PAGE>

(4) CONVERTIBLE SUBORDINATED DEBENTURES

JUNE 30, SEPTEMBER 30,
1995 1994
------------- --------------
<S> <C> <C>
Series A Convertible Subordinated
Debentures due December 15, 2000
bearing interest at 10% per annum
payable June 15 and December 15,
net of unamortized capitalized issuance
costs and warrants of $14,000 and
$17,000, respectively . . . . . . . . . . . . . $ 83,000 $ 80,000

Series B Convertible Subordinated
Debentures due December 15, 2000
bearing interest at 13-3/4% per annum
payable monthly, net of unamortized
capitalized issuance costs of $371,000
and $423,000, respectively. . . . . . . . . . . 2,980,000 2,938,000

Convertible Subordinated Debentures
due December 15, 2000, bearing interest
at 8% per annum payable February 1 and
August 1, net of unamortized capitalized
issuance costs of $1,467,000 and
$1,887,000, respectively. . . . . . . . . . . . 13,020,000 14,550,000

Convertible Subordinated Debentures
due July 1, 2002, bearing interest at 9%
per annum payable January 1 and July 1,
net of unamortized capitalized issuance
costs of $507,000 and $562,000, respectively. . 4,542,000 4,488,000
------------- --------------
$ 20,625,000 $ 22,056,000
------------- --------------
------------- --------------
</TABLE>

SERIES A DEBENTURES

As of June 30, 1995, the Company had outstanding $97,000 principal amount
of Series A Debentures. The Debentures are recorded net of underwriting
discounts, expenses associated with the offering and warrants totaling $14,000
which will be amortized using the interest method to interest expense over the
term of the Debentures. Approximately $3,000 of capitalized issuance costs have
been amortized to interest expense for the nine months ended June 30, 1995.

SERIES B DEBENTURES

As of June 30, 1995, the Company had outstanding $3,350,000 principal
amount of Series B Debentures. The Debentures are recorded net of underwriting
discounts and expenses associated with the offering totaling $371,000, which
will be amortized using the interest method to interest expense over the term
of the Debentures. Approximately $52,000 of capitalized issuance costs had
been amortized as interest expense for the nine months ended June 30, 1995.

10
<PAGE>

(4) CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)

8% DEBENTURES

As of June 30, 1995, the Company had outstanding $14,487,000 principal
amount of 8% Debentures. The Debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$1,467,000, which are amortized using the interest method to interest expense
over the term of the Debentures. Approximately $205,000 of capitalized issuance
costs had been amortized as interest expense for the nine months ended June 30,
1995.

9% DEBENTURES

As of June 30, 1995, the Company had outstanding $5,050,000 principal
amount of 9% Debentures. The Debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$507,000, which are amortized using the interest method to interest expense over
the term of the Debentures. Approximately $54,000 of capitalized issuance costs
had been amortized as interest expense for the nine months ended June 30, 1995.

(5) INCOME TAXES

Income taxes for the three and nine month periods ended June 30, 1995 and
1994 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.

(6) CONTINGENCIES

The Company is involved in certain legal proceedings and claims arising out
of the normal conduct of its business. Management of the Company believes that
the ultimate resolution of these matters will not have a material adverse effect
upon the Company's financial position or results of operation.

The Company is in negotiation or has entered into distribution agreements
with third parties for television and film product which would or will obligate
the Company to pay a minimum guaranteed advance against revenues upon delivery
of the applicable product to the Company. If such third parties use the
Company's distribution agreement as collateral for a production loan, then the
Company may be obligated to make such payments to financial institutions or
others.

<PAGE>

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 from third party
producers of films to be released in the U.S. by studios, pay cable,
videocassette companies, basic cable channels and first-run syndication; and
from the development, production and distribution of television programming
for the major U.S. television networks; as well as from licensing of all
rights to the films and programs in international territories. While the
Company generally finances all or a substantial portion of the budgeted
production costs of its programming and films through domestic and foreign
licensing and other arrangements, the Company typically retains rights in its
programming and films which may be exploited in future periods or in
additional territories. The Company's feature film division generally
produces low and medium budget films for theatrical and/or home video or
cable release, but may produce one or more major theatrical films if the
Company is able to obtain an acceptable domestic studio to release the film
theatrically in the U.S.

The Company's revenues and earnings are significantly affected by
accounting policies required for the industry and management's estimates of the
ultimate realizable value of its programs. Production advances received prior
to delivery or completion of a program are treated as deferred revenues and are
generally recognized as revenue on the date the program is delivered or
available for delivery. Cash received from licenses in advance of availability
of the program is recorded as deferred film license fees. Deferred film license
fees are recognized as revenue on the date of availability and/or delivery of
the program.

Production costs for a film or television program (including allocated
overhead) are capitalized as film costs, net of accumulated amortization, and
are amortized each period 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 program from all sources. In the
event management reduces its estimates of the future gross revenues
associated with a particular program, which had previously 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 in which
such write-down is taken could result. The Company is monitoring the future
sales performance of certain television programs in its library to determine
if a write-down may be necessary with respect to such programs. Such
write-down, if necessary, could have a material adverse impact on the
Company's results of operation for the fourth quarter and the fiscal year
ending September 30, 1995.

Gross profits from any period are a function in part of the number of
programs and films 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 or film has been delivered or is available
for delivery, significant fluctuations in revenues and net earnings may occur
from period to period. Accordingly, year-to-year comparisons of quarterly
results may not be meaningful and quarterly operating results during the course
of a fiscal year may not be indicative of the results that may be expected for
the entire fiscal year.

A small number of television programs historically have accounted for a
significant portion of the Company's revenues in any given fiscal period. Thus,
a change in the amount of entertainment product delivered or available from
period to period may materially affect a given period's results of operations
and year-to-year results may not be comparable.

<PAGE>

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED JUNE 30, 1995 AND 1994

The Company's operating revenues for the quarter ended June 30, 1995 were
$1,904,000, a decrease of $5,203,000 (approximately 73%) from $7,107,000 for the
quarter ended June 30, 1994. This decrease was due primarily to the timing of
delivery and the availability of film and television programming.

The Company recognized approximately $1,377,000 revenues during the third
quarter of fiscal 1995 from the delivery and/or availability in foreign
territories of a movie for CBS entitled "DANGEROUS INTENTIONS" starring Donna
Mills and Corbin Bernsen and four direct-to-video titles: "WES CRAVEN PRESENTS
THE MINDRIPPER" starring Lance Henriksen for WarnerVision and "GIRL TALK
CONFIDENTIAL," "DREAM MASTER" and "CYBERELLA," three adult thrillers.
Continuing sales of licenses for completed product from the Company's library of
titles to international distributors accounted for the majority of remaining
revenues for the period.

In the same period for the previous year, the Company was delivering the
CBS television movie "GETTING GOTTI," the NBC mini-series "WORLD WAR II: THEN
THERE WERE GIANTS" and a pilot for a episodic series to the FOX television
network called "ERROL MORRIS' BACK PAGE" from which it recognized $3,398,000 in
combined revenues. It also delivered the feature film "SENSATION" which
premiered on the Home Box Office cable channel and then was released in
videocassettes by Columbia Tristar Home Video. The episodic television series
"HARTS OF THE WEST" starring Lloyd and Beau Bridges, while not renewed by CBS,
continued to earn revenues from international distribution.

In production as of August 1, 1995 are (a) the feature film, "THE LEGEND
OF PINOCCHIO" starring Martin Landau and Jonathan Taylor Thomas, (b) the
feature film "THE NESTING" starring Jeff Fahey for WarnerVision, (c) the
feature film "THE GRAVE" aka "THE SECRET" starring Gabrielle Anwar, Eric
Roberts and Craig Sheffer, (d) the feature film "FREEWAY" executive produced
by Oliver Stone and starring Reese Witherspoon, Kiefer Sutherland and Brooke
Shields, (e) the feature film "WHOLE WIDE WORLD" starring Vincent D'Onofrio,
(f) a four-hour mini-series for the ABC television network entitled "INNOCENT
VICTIMS" starring Hal Holbrook and Rick Schroder, (g) two animated feature
films for Buena Vista Home Video, a division of The Walt Disney Company, that
are sequels to the successful direct-to-video title "BRAVE LITTLE TOASTER,"
(h) two adult thrillers made primarily for cable release and (i) two
infomercials through the Company's joint venture called TVFirst of which one
is in the area of personal motivation and one is related to a popular style
of music. In addition, the Company has acquired domestic cable rights for a
package of films, a portion of which are scheduled to be delivered during
fiscal 1995, for distribution through a joint venture called KLC/New City.

Costs relating to operating revenues decreased to $1,567,000 in the third
quarter of fiscal 1995 as compared to $7,440,000 in the third quarter of fiscal
1994. As a percentage of operating revenues, costs relating to operating
revenues were approximately 82% for the three months ended June 30, 1995 as
compared to approximately 105% for the comparable period ended June 30, 1994.
The decreased costs relate to the release and/or delivery of fewer titles, and a
change in the product mix to projects with higher profit margins.

Selling, general and administrative expenses for the quarter ended June 30,
1995 increased to $957,000 as compared to $796,000 for the comparable quarter
ended June 30, 1994. The Company is funding overhead and development costs
associated with its entry into new business segments of interactive/multimedia,
cable and infomercials, which are conducted through joint ventures or
partnerships. The Company has also incurred increased overhead costs associated
with the establishment of a theatrical film international sales subsidiary.

<PAGE>

Interest expense for the quarter ended June 30, 1995 was $966,000 as
compared to $729,000 for the comparable quarter ended June 30, 1994. The
increase was primarily due to incurring interest costs for the full period on
the Company's four issues of Convertible Subordinated Debentures versus having
only the Series A and B debt outstanding for the entire comparable three
month period in 1994. Interest costs were also affected by an increased
usage of the revolving line of credit for increased production and
acquisition financing of non-network movies and additional transactional
production loans secured by specific projects.

The Company's estimated effective income tax rate was approximately 2% and
38% for the three month periods ending June 30, 1995 and 1994, respectively.

The Company reported net losses of $(1,563,000), $(0.05) per share, in
the third quarter of fiscal 1995 compared to net loss of ($1,082,000),
$(0.04) per share, in the third quarter of fiscal 1994. The increase in net
losses in the current period primarily reflects the absence of television
programs delivered and released by the U.S. broadcast networks in the current
period as compared to the prior year period, as augmented by higher interest
expense and increased overhead associated with the Company's expansion into
non-television related marketing and distribution channels.

COMPARISON OF NINE MONTHS ENDED JUNE 30, 1995 AND 1994

The Company's operating revenues for the nine months ended June 30, 1995
were $13,518,000 as compared to $36,072,000 for the comparable period ended June
30, 1994. This $22,544,000 (approximately 63%) decrease was due primarily to
the Company having two episodic series in production for television networks
last year during the nine month period ending June 30, 1994 and no episodic
series in the nine month period ending June 30, 1995.

During the nine months ended June 30, 1995, the Company recognized
approximately $10,090,000 from the delivery to both domestic and
international customers of the three CBS television movies "DANGEROUS
INTENTIONS," "LADY KILLER" starring Judith Light and Jack Warner, and "JACK
REED: A SEARCH FOR JUSTICE" starring Brian Dennehy; the two feature films
"WES CRAVEN PRESENTS: THE MIND RIPPER" and "LAST GASP" starring Robert
Patrick to WarnerVision; international sales of the films "GIRL TALK
CONFIDENTIAL," "DREAM MASTER" and "CYBERELLA" and the fantasy adventure films
under the banner of "JOSH KIRBY: TIME WARRIOR" - "PLANET OF THE DINO KNIGHTS"
and "THE HUMAN PETS."

During the nine months ended June 30, 1994, the Company recognized
approximately $31,624,000 of revenues from the delivery and/or availability of
certain episodes of the CBS series "HARTS OF THE WEST" and "SWEATING BULLETS;"
the CBS television movies "TO SAVE THE CHILDREN" and "GETTING GOTTI;" the ABC
mini-series "JFK: RECKLESS YOUTH;" the feature film "SENSATIONS" and continuing
sales on completed titles in the Company's library of product.

Costs relating to operating revenues were $10,735,000 during the nine
months ended June 30, 1995 as compared to $33,448,000 during the nine months
ended June 30, 1994. As a percentage of operating revenues, costs relating to
operating revenues were approximately 79% for the nine months ended June 30,
1995 compared to approximately 93% for the comparable period ended June 30,
1994. The decreased percentage during the nine months ended June 30, 1995
resulted primarily from the lower rate of amortization of costs associated with
having seven non-television movies in the current period changing the product
mix versus one non-television movie in the comparable period ending June 30,
1994. Theatrical product generally has a longer life cycle and more channels
of distribution in which it can be marketed versus typical television
programs.

Selling, general and administrative expenses for the nine months ended June
30, 1995 increased to $2,934,000 as compared to $2,239,000 for the comparable
nine months ended June 30, 1994 due to increased overhead associated with the
Company's diversification and expansion of distribution activities.

Interest expense for the nine months ended June 30, 1995 was $2,558,000 as
compared to $1,511,000 for the nine months ended June 30, 1994. The increase
was primarily due to the effect of carrying the full interest costs associated
with the issuance of $22,510,000 of the 8% and 9% Convertible Subordinated
Debentures in March and July of 1994 and increased usage of the bank credit
facility to fund production of non-network television programming, as well as
transactional production loans for direct-to-video and cable movies.

The Company's estimated effective income tax rate was approximately 2% and
38% for the nine month periods ending June 30, 1995 and 1994, respectively.

<PAGE>

Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," under
which 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 bases.
Under SFAS 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized as income in the period that includes the enactment
date. As a result of adopting this pronouncement, the Company recognized a one-
time gain of $394,000 during the nine months ended June 30, 1994.

The Company reported losses of $(2,567,000), $(0.08) per share, in the
nine months ended June 30, 1995 compared to net losses of $(223,000), $(0.01)
per share, in the nine months ended June 30, 1994. The increase in net
losses in the current nine month period primarily reflected a combined effect
of an absence of network television episodic shows produced and delivered in
the current period versus the previous comparable period, and the increases
in staff associated with increased distribution activities in the current
period and higher interest expense in the current period resulting from the
issuance of the 8% and 9% Convertible Subordinated Debentures.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents decreased to $4,277,000 at June 30, 1995 from
$15,681,000 at September 30, 1994 as a result of investment of the proceeds of
the 8% and 9% Convertible Subordinated Debentures into the development,
production and acquisition of television programs and feature films, and
expansion of the Company's business lines into related ancillary markets for
its product. At June 30, 1995, the Company had negative net liquid assets of
approximately $(6,987,000) consisting of cash, cash equivalents, accounts
receivable and other receivables, less accounts payable, accrued liabilities
and the current portion of notes payable, including the Company's credit
facility which expires in September 1995.

The Company's production and distribution operations are capital intensive.
The Company has funded its working capital requirements through receipt of
installment license payments from U.S. television networks and cable services
and international licenses, as well as other operating revenues, and proceeds
from debt and equity financing, 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 recent expansion of
the Company's international distribution business and the establishment of a new
feature film division are expected to significantly increase the Company's
working capital requirements and use of transactional production loans.

The Company experienced net negative cash flows from operating
activities (resulting from the Company's significant expansion in new film
product) of $18,182,000 during the nine months ended June 30, 1995, which was
partially offset by net cash of $6,982,000 provided by financing activities.
As a result primarily of the foregoing factors, net cash decreased by
$11,404,000 to $4,277,000 on June 30, 1995. 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.

The Company's current line of credit with Imperial Bank provides for
borrowings up to $15,000,000 based on specified percentages of eligible domestic
and international receivables and net film costs balances through September 30,
1995. The line of credit is secured by substantially all of the Company's
assets and bears interest at an annual rate of prime (8.75% as of August 1,
1995) plus 1.25%. At June 30, 1995, the outstanding loan balance was
$14,918,000, which included $106,500 of accrued interest. As of August 1, 1995,
the Company had drawn down $14,837,475 under the line of credit and had $162,525
additional availability. During March 1995, the Company received a written
commitment from Imperial Bank to extend the $15,000,000 revolving credit
facility until September 30, 1995 to accommodate discussions for a long term
renewal and potential increase of the facility.

The credit agreement with Imperial Bank contains various financial and
other covenants to which the Company must adhere. These covenants, among
other things, require the maintenance of minimum net income and various
financial ratios which are reported to the bank on a quarterly basis and
include limitations on additional indebtedness, liens, investments,
disposition of assets, guarantees, deficit financing, affiliate transactions,
the use of proceeds and prohibit payment of dividends and repayment of
subordinated debt. The outstanding credit agreement also contains a provision
permitting the bank to declare an event of default if the services of Messrs.
Locke or Kushner are not available to the Company unless a replacement
acceptable to the bank is named. During the period ended August 14, 1995 the
Company had obtained prior approvals and waivers from Imperial Bank to allow
the Company to provide credit enhancements for financial institutions
providing productions loans to third party film producers whose completed
product will be distributed by the Company including "THE LEGEND OF
PINOCCHIO," "THE NESTING," "THE GRAVE" aka "THE SECRET," "WHOLE WIDE WORLD"
and "FREEWAY."

On August 11, 1995, the Company was advised by Imperial Bank that the
bank's prior waiver of the tangible net worth covenant in the credit
agreement extended only through June 30, 1995 (the original maturity date of
the line of credit), not the revised September 30, 1995 maturity date. The
Company subsequently applied for a waiver of such covenant through September
30, 1995, and was advised by the bank on August 14, 1995 that such waiver had
been granted.

The Company is currently in discussions with Imperial Bank concerning
the extension and increase of the Company's existing line of credit, which
expires on September 30, 1995. Based upon its expanded production slate and
anticipated credit requirements, which otherwise would be subject to
off-balance sheet or single project financings, the Company has requested
that its existing $15,000,000 line of credit be increased to at least
$25,000,000, through a syndicated loan facility. The bank has advised the
Company that it is preparing a term sheet for such facility and that an
extension of the existing facility may be necessary during the syndication
process. The Company is also seeking alternate financing arrangements.
While the Company believes that it will obtain a line of credit in a maximum
amount of at least the current line of credit, the Company has not received
any formal commitment for such line of credit, and there is no assurance that
the Company's existing line of credit will be extended, increased or replaced
on satisfactory terms. If the Company's line of credit is extended past
September 30, 1995 (but not increased), the Company would be required to seek
additional off-balance sheet and project financing to fund its current
production obligations. In the event that the line of credit is not extended
and suitable alternative financing is not obtained, the Company would be
required to use its working capital, to the extent available, or other assets
towards repayment of the then outstanding balances under the line of credit
or to otherwise seek to restructure its obligations.

<PAGE>

As part of the Company's discussions with regard to the extension and
increase of its line of credit, the Company has entered into related
discussions with certain holders of its 9% Convertible Subordinated
Debentures about a possible conversion of this debt to common stock. The
conversion of the 9% Debentures would result in an increase to the Company's
net worth by up to approximately $5,050,000 less unamortized issuance costs
of approximately $507,000 and a decrease in annual interest expense of up to
approximately $455,000. There is no assurance that any or all of the 9%
Debentures will be converted to common stock or at what terms such conversion
would occur, if at all.

From December 1990 through April 1991, the Company sold an aggregate of
$5,700,000 principal amount of Series A Debentures due 2000 and an aggregate of
$6,000,000 principal amount of Series B Debentures due 2000. In connection with
the issuance of certain of the Series A Debentures, the Company issued warrants
to purchase an aggregate of 2,100,000 shares of common stock at an exercise
price of $2.00 per share. As of June 30, 1995, approximately $83,000 principal
amount of Series A Debentures and $2,980,000 of Series B Debentures were
outstanding. The Series A Debentures are convertible into shares of common
stock at the rate of approximately $1.27 per share and the Series B Debentures
into shares of common stock at the rate of approximately $1.54 per share. The
decrease in Series A and Series B Debentures has resulted primarily from
conversions to common stock. The Company has the right to redeem the Series A
and Series B Debentures at redemption prices at 103% of par after September 30,
1993 and declining to par after September 30, 1997. The indentures under which
the Company's Series A and Series B Debentures were issued contain various
covenants to which the Company must adhere. These covenants, among other
things, also impose certain limitations on additional indebtedness and dividend
payments by the Company.

In November 1992, the Company completed an offering of 8,050,000 shares of
its common stock for which the Company received net proceeds of approximately
$6,640,000.

During March and April 1994, the Company sold $16,137,000 principal amount
of 8% Convertible Subordinated Debentures due 2000. In connection with the
issuance of the 8% Debentures, the Company issued warrants to purchase up to 10%
of the aggregate principal amount of such Debentures sold at an exercise price
equal to 120% of the principal amount of such Debentures. During April, 1994,
an additional $300,000 principal amount of 8% Debentures were sold. The 8%
Debentures are convertible into shares of common stock at the rate of $.975 per
share, subject to customary anti-dilutive provisions and provisions in the event
of certain payment defaults. The Company has the right to redeem the 8%
Debentures at redemption prices commencing at 102.7% of par on or after February
1, 1998 and declining to par on or after February 1, 2000. The Debentures are
subordinated in right of payment to all Senior Indebtedness (as defined) of the
Company and rank pari passu with the Company's Series A, Series B Debentures and
9% Debentures. The fiscal agency agreement, under which the Company's 8%
Debentures were issued, contains various covenants to which the Company must
adhere.

During July 1994, the Company sold $5,050,000 principal amount of 9%
Convertible Subordinated Debentures due 2002. In connection with the issuance
of the 9% Debentures, the Company issued warrants to purchase up to 9% of the
aggregate principal amount of such Debentures sold at an exercise price equal to
120% of the principal amount of such Debentures. The 9% Debentures are
convertible into shares of common stock at the rate of $1.58 per share, subject
to customary anti-dilutive provisions and provisions in the event of certain
payment defaults. The Company has the right to redeem the 9% Debentures at
redemption prices commencing at 103% of par on or after July 1, 1998 and
declining to par on or after July 1, 2000. The Debentures are subordinated in
right of payment to all Senior Indebtedness (as defined) of the Company and rank
pari passu with the Company's Series A, Series B and 8% Debentures. The fiscal
agency agreement, under which the Company's 9% Debentures were issued, contains
various covenants to which the Company must adhere.

In September 1994, the Company filed a registration statement covering an
aggregate of 21,388,064 shares of common stock comprising the shares of common
stock issuable upon conversion of the 8% Convertible Subordinated Debentures and
the 9% Convertible Subordinated Debentures and certain warrants related thereto.

In October 1994, the Company obtained a production loan in the amount of
$1,950,000 from Imperial Bank to cover a portion of the production budget of the
"JOSH KIRBY: TIME WARRIOR" series. The loan bears interest at an annual rate of
Prime (8.75% as of August 1, 1995) plus 3% payable monthly. The loan is secured
solely by the rights, title and assets of the production company related to the
film series. The loan matures in February 1996. At August 1, 1995, the
outstanding loan balance was $1,724,000 under the "TIME WARRIORS" production
loan.

In December 1994, the Company advanced August Entertainment, Inc.
("August") $650,000. August is majority owned by Gregory Cascante. Mr.
Cascante joined the Company in September 1994 as head of its new international
film distribution division in addition to his responsibilities at August. The
agreement is secured by all of the assets of August, including a pledge of all
sales commissions due to August from the producers thereof on the films "SLEEP
WITH ME," "NOSTRADAMUS" and "LAWNMOWER MAN II." While the right of August to
receive such commissions with respect to the films "NOSTRADAMUS" and "LAWNMOWER
MAN II" is subordinate to the interests of the production lenders on such films,
The Allied Entertainment Group PLC, and its subsidiaries which produced the
films, has guaranteed payment of such commissions to the extent they would be
payable had there been no production loans on

<PAGE>

those two films. The loan bears interest at the lesser of (a) Prime (8.75% at
August 1, 1995) plus 2% or (b) 10%. Repayment of principal and interest on such
advance is secured by collection of commissions and a general pledge of all
other assets as collateral. The loan matures in December 1996.

The Company has entered into a long form agreement dated as of February 6,
1995 with Savoy Pictures, Inc. ("Savoy") relating to the development,
production, financing and distribution of a live-action feature-length
theatrical motion picture currently titled "THE LEGEND OF PINOCCHIO." The film
commenced principal photography in July 1995. The film will be distributed
domestically by Savoy and in foreign territories by the Company. Pursuant
to the letter agreement, the Company and Savoy have agreed to co-finance the
picture on a 50/50 basis up to a budget of $25,000,000 (which budget has been
subsequently increased by an additional $1,350,000 to be financed by Savoy).
In order to fund the Company's up to $12,500,000 share of the budgeted
negative costs, the Company has assisted the film's production company in
obtaining loan documentation from Newmarket Capital Group L.P. ("Newmarket")
which has agreed to provide, subject to various conditions precedent, for
financing in the amount of 50% of the film's budget up to $12,500,000, a
portion of which shall be reserved to pay the lender's financing fees and
costs. As of August 1, 1995 $4,015,000 of the obligations of the production
company to Newmarket under the loan facility, other than the portion of the
loan covered by certain foreign pre-sales, was guaranteed by the Company.

There is no assurance that "THE LEGEND OF PINOCCHIO," which represents
the Company's biggest budget theatrical motion picture to date, will be
completed, or if completed, will be successful. The Company has obtained
completion bond insurance to guaranty that the film will be completed and
delivered to the technical specifications of Savoy and international
sub-distributors. The Company's ability to complete this project is
materially dependent upon among other things, funding by Savoy (against
domestic distribution rights) and by Newmarket (against the Company's foreign
pre-sales and remaining foreign rights).

In May and June 1995 the Company, in its role as world wide distributor,
agreed to guaranty a proportion of two production loans to third parties from
Newmarket which finance the budgets for the feature films "THE NESTING" and
"THE GRAVE" aka "THE SECRET." The loans of $1,005,000 and $2,100,000 each
bear interest at an annual rate of either Prime (8.75% as of August 1, 1995)
plus 1% or LIBOR + 3% payable monthly or on the maturity date of the LIBOR
contract. The loans are secured solely by the rights, title and assets of
the production companies related to those films. The loans mature in
February 1996 and March 1996, respectively, at which time the Company
acquires clear ownership of the completed films. The Company's corporate
guaranty is reducible by substitution of contracts receivable from
sub-distributors purchasing rights to these films in certain media and
territories. At August 1, 1995, the outstanding balance on the corporate
guaranty for "THE NESTING" was $345,000 and for "THE GRAVE" aka "THE SECRET"
was $740,000.

In August 1995 the Company, in its role as world wide distributor,
agreed to guaranty a proportion of two other production loans to third party
film producers provided by Newmarket and Banque Paribas, Los Angeles Agency
("Paribas") which finance the majority of the budgets for the films "WHOLE
WIDE WORLD" and "FREEWAY". The $1,550,000 loan from Newmarket for "WHOLE
WIDE WORLD" bears interest at either Prime (8.75% as of August 1, 1995) plus
1% or LIBOR + 3% until the maturity date of March 31, 1996. The Company's
corporate guaranty is reducible by the substitution of acceptable contracts
receivable. As of August 10, 1995 the outstanding guaranty for "WHOLE WIDE
WORLD" was $500,000. The Paribas loan for $1,983,333 for "FREEWAY" bears
interest at Reference Rate (8.75% as of August 1, 1995) plus 1/2% or LIBOR +
2% until the maturity date of September 15, 1996. In this case, the
Company's corporate guaranty is not reducible during the life of the loan,
and the amount of the difference between the cash collected and $961,667 is
collectable at the maturity date.

Management believes that the Company's existing working capital together
with anticipated cash from operations, borrowings under its line of credit
(subject to and as proposed by the Company to be extended and increased) and
transactional production loans, together with and subject to obtaining
pre-sales and/or production financing for its production and distribution
activities as necessary, will provide adequate sources of funding to satisfy
anticipated working capital requirements for at least the next twelve months.
However, as described above, there is no assurance that the Company will
obtain an extension or increase of its line of credit or alternate financing.
Additionally, the Company may also consider 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.

<PAGE>

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

The Company adopted FASB 109 "Accounting for Income Taxes" relating to,
among other things, deferred income tax liabilities in the first quarter of
fiscal 1994. The Company elected to reflect the cumulative effect of adopting
this pronouncement as a change in accounting principle at the beginning of
fiscal 1994 with a credit to earnings of $394,000.

The Company provides no post-employment benefits. Accordingly, Statement
of Financial Accounting Standards Nos. 106, "Post Employment Benefits Other than
Pensions," will have no impact on the Company.

<PAGE>

PART II.
OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 17, 1995, the annual meeting of the stockholders of the Company was
held. Stockholders present in person or by proxy representing 30,251,323
shares voted as follows:

(i) elect as directors each of
<S> <C> <C> <C>
Peter Locke: 30,003,928 For 33,580 Against 144,065 Abstain
Donald Kushner: 30,003,928 For 33,580 Against 144,065 Abstain
S. James Coppersmith: 29,994,928 For 37,880 Against 148,765 Abstain
Stuart Hersch: 30,008,729 For 28,580 Against 144,265 Abstain
Milton Okun: 30,009,828 For 24,980 Against 146,765 Abstain
Joe Pagano: 29,993,028 For 39,780 Against 148,765 Abstain

(ii) appoint KPMG Peat Marwick L.L.P. as the Company's independent
accountants

30,010,283 For 114,780 Against 22,310 Abstain
</TABLE>

ITEM 5. OTHER INFORMATION

The Company received a letter dated July 18, 1995 pursuant to which
Joseph Pagano resigned from the Board of Directors. Mr. Pagano advised the
Company that he was resigning to avoid a conflict, or potential conflict of
interest, with his other investment activities.

ITEM 6. EXHIBITS AND REPORTS ON 8-K

(a) Exhibits: Exhibits filed as part of this report are listed in
the Exhibit Index, which follows the signature pages hereto.

(b) Reports on Form 8-K: None

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

THE KUSHNER-LOCKE COMPANY
-------------------------
(Registrant)

Dated: August 14, 1995 /s/Peter Locke
---------------- -------------------------------
Peter Locke
Co-Chairman of the Board,
Co-Chief Executive Officer and
President

Dated: August 14, 1995 /s/Donald Kushner
--------------- -------------------------------
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer and
Secretary

Dated: August 14, 1995 /s/Lenore Nelson
--------------- ----------------
Lenore Nelson
Chief Financial Officer,
Executive Vice President and
Assistant Secretary

<PAGE>

PART II
EXHIBIT INDEX

ITEM 6 (A). EXHIBIT INDEX

10.1 Guarantees, dated July 7, 1995, by and between The Kushner-Locke
Company and Newmarket Capital Group, L.P. for loan and interest of
Allied Pinocchio Productions, LTD. ("THE LEGEND OF PINOCCHIO" )

10.2 Guarantees, dated May 24, 1995, by and between The Kushner-Locke
Company and Newmarket Capital Group, L.P for loan and interest of
Dayton Way Pictures II, Inc. ("THE NESTING" ).

10.3 Guarantees, dated June 12, 1995 by and between The Kushner-Locke
Company and Newmarket Capital Group L.P. for loan and interest of
Dayton Way Pictures, Inc. ("THE GRAVE" aka "THE SECRET" ).

<PAGE>

EXHIBIT 10.1
------------

GUARANTY

GUARANTY, dated as of July 7, 1995, made by The Kushner-Locke Company (the
"Guarantor"). Except as otherwise defined herein, terms used herein and
defined in the Loan Agreement (as hereinafter defined) shall be used as so
defined.

W I T N E S S E T H :
- - - - - - - - - -

WHEREAS, Newmarket Capital Group, L.P. and Bank of America National Trust
and Savings Association (collectively, the "Lenders") and Allied Pinocchio
Productions Limited (the "Borrower") have entered into that certain Loan
Agreement and those certain Promissory Notes ("Notes") dated as of July 7,
1995 relating to that certain motion picture currently entitled "THE LEGEND
OF PINOCCHIO" (the "Picture") and as a condition to advancing funds
thereunder, Lenders have requested that Guarantor provide this Guaranty;

WHEREAS, Guarantor will obtain benefits as a result of Borrower and
Lenders entering into the Loan Agreement, and, accordingly, desires to
execute and deliver this Guaranty in order to satisfy the conditions
described in the preceding paragraph;

NOW, THEREFORE, in consideration of the foregoing and other benefits
accruing to the Guarantor, the receipt and sufficiency of which are hereby
acknowledged, the Guarantor hereby makes the following representations and
warranties to Lenders and hereby covenants and agrees with Lenders as follows:

1. The Guarantor irrevocably and unconditionally guarantees the full and
prompt payment when due at maturity (whether by acceleration or otherwise) of
the principal of and interest on the Notes and of all other obligations and
liabilities (including, without limitation, indemnities, fees and interest
thereon) of the Borrower now existing or hereafter incurred under, arising
out of or in connection with the Notes and the due performance and compliance
with the terms of the Notes (all such principal, interest, obligations and
liabilities, collectively, the "Guaranteed Obligations"); provided, however,
that the Guarantor shall in no event be liable hereunder for any amount in
excess of Two Million Eight Hundred Thousand Dollars ($2,800,000.00) and
Guarantor acknowledges that its liability hereunder is in addition to its
liability under that certain Overage Guaranty of even date herewith from
Guarantor in favor of Lenders.

<PAGE>

defense of Borrower, or (ii) the cessation from any cause whatsoever of the
liability of Borrower other than indefeasible payment in full in cash of the
Guaranteed Obligations; (d) any and all suretyship defenses under applicable
law; (e) any and all benefits of Guarantor under California Civil Code
Sections 2809, 2810, 2819, 2845, 2847, 2848, 2849, 2850 and 2899 and
California Code of Civil Procedure Sections 580a and 580d; (f) the benefit of
any statute of limitations affecting its liability hereunder or the
enforcement hereof, to the extent permitted by law.

3. Lenders may at any time and from time to time without the consent of,
or notice to the Guarantor, without incurring responsibility to the
Guarantor, without impairing or releasing the obligations of the Guarantor
hereunder, upon or without any terms or conditions and in whole or in part:

(a) change the manner, place or terms of payment of, and/or
change or extend the time of payment of, renew or alter, any of
the Guaranteed Obligations or any liability incurred directly or
indirectly in respect thereof, and the guaranty herein made shall
apply to the Guaranteed Obligations as so changed, extended,
renewed or altered;

(b) sell, exchange, release, surrender, realize upon or
otherwise deal with in any manner and in any order any property
by whomsoever at any time pledged or mortgaged to secure, or
howsoever securing, the Guaranteed Obligations or any liabilities
(including any of those hereunder) incurred directly or
indirectly in respect thereof or hereof, and/or any offset
thereagainst;

(d) settle or compromise any of the Guaranteed Obligations
or any liability (including any of those hereunder) incurred
directly or indirectly in respect thereof or hereof, and may
subordinate the payment of all or any part thereof to the payment
of any liability (whether due or not) of Borrower to creditors of
Borrower other than Lenders and the Guarantor;

(e) apply any sums by whomsoever paid or howsoever realized
to any liability or liabilities of Borrower to Lenders regardless
of what liabilities or liabilities of Borrower remain unpaid;
PROVIDED, however, that any and all sums paid by the Guarantor
pursuant to this Guaranty shall be applied towards the Guaranteed
Obligations;

(f) consent to or waive any breach of, or any act, omission
or default under, the Notes, or otherwise amend, modify or
supplement the Notes or any of such other instruments or
agreements; and/or

<PAGE>

(g) act or fail to act in any manner referred to in this
Guaranty which may deprive the Guarantor of any right to
subrogation which it may have against Borrower to recover full
indemnity for any payments made pursuant to this Guaranty.

4. The obligations of the Guarantor under this Guaranty are absolute and
unconditional and shall remain in full force and effect without regard to,
and shall not be released, suspended, discharged, terminated or otherwise
affected by, any circumstance or occurrence whatsoever, including, without
limitation:

(a) any action or inaction by the Lenders as contemplated
in Section 3 of this Guaranty;

(b) any invalidity, irregularity or unenforceability of all
or part of the Guaranteed Obligations or of any security
therefor;

(c) the Lenders' election, in any proceeding instituted
under Chapter 11 of Title 11 of the United States Code (11 U.S.C.
Section 101 et seq.) (the "Bankruptcy Code"), of the application of
Section 1111(b)(2) of the Bankruptcy Code;

(d) any borrowing or grant of a security interest by the
Borrower, as debtor-in-possession, or extension of credit, under
Section 364 of the Bankruptcy Code;

(e) the disallowance under Section 502 of the Bankruptcy
Code of all or any portion of the Lenders' claim(s) for repayment
of the Guaranteed Obligations;

(f) any use of cash collateral under Section 363 of the
Bankruptcy Code;

(g) any agreement or stipulation as to the provision of
adequate protection in any bankruptcy proceeding;

(h) the avoidance of any lien in favor of the Agent for any
reason;

(i) any bankruptcy, insolvency, reorganization,
arrangement, readjustment of debt, liquidation or dissolution
proceeding commenced by or against the Guarantor, including,
without limitation, any discharge of, or bar or stay against
collecting, all or any of the Guaranteed Obligations (or any
interest thereon) in or as a result of any such proceeding;

(j) failure by the Lenders to file or enforce a claim
against the Borrower or its estate in any bankruptcy or
insolvency case or proceeding;

(k) any other circumstance which might otherwise constitute
a legal or equitable discharge or defense of a guarantor.

<PAGE>

This Guaranty is a primary obligation of the Guarantor.

5. If and to the extent that the Guarantor makes any payment to the
Lenders or to any other person or entity pursuant to or in respect of this
Guaranty, any claim which the Guarantor may have against the Borrower by
reason thereof shall be subject and subordinate to the prior payment in full
of the Guaranteed Obligations.

6. In order to induce the Lenders to enter into the Loan Agreement, the
Guarantor makes the following representations, warranties and agreements:

(a) The Guarantor (i) is a corporation duly organized,
validly existing and in good standing under the laws of
California, (ii) has the power and authority to own its property
and assets and to transact business in which it is engaged and
(iii) is duly qualified and in good standing in each jurisdiction
where the ownership, leasing or operation of property or the
conduct of its business requires such qualification.

(b) The Guarantor has the power to execute, deliver and
perform the terms and provisions of this Guaranty and has taken
all necessary action to authorize the execution, delivery and
performance of this Guaranty. The Guarantor has duly executed
and delivered this Guaranty, and this Guaranty constitutes a
legal, valid and binding obligation of Guarantor enforceable in
accordance with its terms.

(c) Neither the execution, delivery or performance by the
Guarantor of this Guaranty, nor its compliance with the terms and
provisions hereof, (i) will contravene any provision of any law,
statute, rule or regulation or any order, writ, injunction or
decree of any court or governmental instrumentality, or (ii) will
conflict or be inconsistent with or result in any breach of any
of the terms, covenants, conditions or provisions of, or
constitute a default under any agreement, contract or instrument
to which the Guarantor is a party or by which it or any of its
property or assets are bound or to which it may be subject.

(d) No order, consent, approval, license, authorization or
validation of, or filing, recording or registration with (except
as have been obtained or made prior to the execution and delivery
hereof) or exemption by, any governmental or public body or
authority, or any subdivision thereof, is required to authorize,
or is required in connection with, (i) the execution, delivery
and performance of this Guaranty or (ii) the legality, validity,
binding effect or enforceability of this Guaranty.

(e) Guarantor will obtain benefits as a result of Borrower
entering into the Loan Agreement and Guarantor has

<PAGE>

reviewed and is familiar with the Loan Agreement and is
familiar with the financial and business affairs of Borrower.

(f) All factual information (taken as a whole) heretofore
or contemporaneously furnished by or on behalf of the Guarantor
in writing to the Lenders (including without limitation all
information contained herein) for purposes of or in connection
with this Guaranty or any transaction contemplated herein is, and
all other such factual information (taken as a whole) hereafter
furnished by or on behalf of the Guarantor in writing to the
Lenders will be, true and accurate in all material respects on
the date as of which such information is dated or certified and
not incomplete by omitting to state any fast necessary to make
such information (taken as a whole) not misleading at such time
in light of the circumstances under which such information was
provided.

(g) The Guarantor has filed all tax returns it is required
to file and has paid all income taxes he is required to pay which
have become due pursuant to such tax returns and all other taxes
and assessments he must pay which have become due, other than
those not yet delinquent and except for those contested in good
faith and for which adequate reserves have been established. The
Guarantor has paid, or has provided adequate reserves (in the
good faith judgment of the Guarantor) for the payment of, all
federal and state income taxes applicable for all prior fiscal
years and for the current fiscal year to the date hereof.

(h) The Guarantor is in compliance with all applicable
statutes, regulations and orders of, and all applicable
restrictions imposed by, all governmental bodies, domestic or
foreign, in respect of the conduct of its business and the
ownership of its property, except such noncompliances as would
not, in the aggregate, have a material adverse effect on the
business, operations, property, assets, condition (financial or
otherwise) or prospects of the Guarantor taken as a whole.

7. This Guaranty is a continuing one and all liabilities to which it
applies or may apply under the terms hereof shall be conclusively presumed to
have been created in reliance hereon. No failure or delay on the part of the
Lenders in exercising any right, power or privilege hereunder and no course
of dealing between the Guarantor, the Lenders or any holder of the Notes
shall operate as a waiver thereof; nor shall any single or partial exercise
of any right, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights, powers and remedies herein expressly provided are cumulative and not
exclusive of any rights, powers or remedies which the Lenders or any holder
of the Note would otherwise have. No notice to or demand on the Guarantor in
any case shall entitle the Guarantor to any other further notice or demand in
similar or other circumstances or constitute a waiver of

<PAGE>

the rights of the Lenders or any holder of the Note to any other or further
action in any circumstances without notice or demand.

8. This Guaranty shall be binding upon the Guarantor and its successors
and assigns and shall inure to the benefit of Lenders and its successors and
assigns. Neither this Guaranty nor any provision hereof may be changed,
waived, discharged or terminated unless such change, waiver, discharge or
termination is in writing signed by the Guarantor and Lenders.

9. All notices and other communications hereunder shall be in writing to
the party to be so notified at its address specified opposite its signature
below.

10. This Guaranty shall remain in full force and effect until the
Guaranteed Obligations have been paid in full. Notwithstanding any
termination or discharge of this Guaranty, if a claim is ever made upon
Lenders for repayment or recovery of any amount or amounts received in
payment or on account of any of the Guaranteed Obligations and Lenders repay
all or part of said amount by reason of (a) any judgment, decree or order of
any court or administrative body having jurisdiction over Lenders or any of
its property or (b) any settlement or compromise of any such claim effected
by Lenders with any such claimant (including Borrower), then and in such
event the Guarantor agrees that any such judgment, decree, order, settlement
or compromise shall be binding upon it, notwithstanding any revocation
hereof, and the Guarantor shall be and remain liable to the aforesaid payees
hereunder for the amount so repaid or recovered to the same extent as if such
amount had never originally been received by Lenders.

11. This Guaranty shall be construed in accordance with and governed by
the law of the State of California without reference to the principles of
conflicts of law thereof. Guarantor hereby agrees that any legal action or
proceeding with respect hereto may be brought in the courts of the State of
California or in the federal courts for the United States for the Central
District of California, as the moving party may elect. By execution below,
the Guarantor irrevocably submits to such jurisdiction and irrevocably waives
any objection to the venue or any claim of inconvenient forum which it may
now or hereafter have in connection with any action or proceeding arising out
of or relating hereto brought in the courts of such jurisdiction.

12. This Guaranty may be executed by the parties hereto in counterparts,
and each such counterpart, when so executed, shall be deemed an original and
all such counterparts shall constitute but one and the same agreement.

13. The illegality or unenforceability of any provision of this Guaranty
or any instrument or agreement required hereunder shall not in any way affect
or impair the legality or enforceability of the remaining provisions of this
Guaranty or any instrument or agreement required hereunder.

<PAGE>

IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed
and delivered as of the date first above written.

THE KUSHNER-LOCKE COMPANY ADDRESS

By: /s/ LENORE NELSON 11601 Wilshire Boulevard
---------------------- 21st Floor
Its: EVP/CFO/SA Los Angeles, California 90025
----------------------

<PAGE>

OVERAGE GUARANTY

W I T N E S S E T H :
- - - - - - - - - -

1. The Guarantor irrevocably and unconditionally guarantees the full and
prompt payment when due at maturity (whether by acceleration or otherwise) of
any interest which has accrued under the Loan Agreement in excess of the
Interest and Fee Reserve and any loss resulting from converting currency
under the Loan Agreement at any rate less favorable than as set forth in the
Approved Budget (collectively, the "Guaranteed Obligations"); provided,
however, that the Guarantor shall in no event be liable hereunder for any
amount in excess of Four Hundred Fifty Thousand Dollars ($450,000) and
Guarantor acknowledges that its liability hereunder is in addition to its
liability under the KL Guaranty.

<PAGE>

benefits of Guarantor under California Civil Code Sections 2809, 2810, 2819,
2845, 2847, 2848, 2849, 2850 and 2899 and California Code of Civil Procedure
Sections 580a and 580d; (f) the benefit of any statute of limitations
affecting its liability hereunder or the enforcement hereof, to the extent
permitted by law.

(f) consent to or waive any breach of, or any act, omission
or default under, the Notes, or otherwise amend, modify or
supplement the Notes or any of such other instruments or
agreements; and/or

(g) act or fail to act in any manner referred to in this
Guaranty which may deprive the Guarantor of any right to

<PAGE>

subrogation which it may have against Borrower to recover full
indemnity for any payments made pursuant to this Guaranty.