SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended December 31, 1997 Commission File No. 0-17295
THE KUSHNER-LOCKE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
California 95-4079057
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
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 9,132,815 shares of outstanding Common Stock of the Registrant as
of February 13, 1998.
Total number of pages: 35. Exhibit Index begins on page 21.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Form 10-Q for the Quarter ended December 31, 1997
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Condensed Consolidated Statements of Stockholders' Equity
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Not Applicable.
Part II. OTHER INFORMATION
Items 1 through 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:
(b) Reports on Form 8-K: None
<PAGE>
PART I
Item 1.
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
(unaudited)
Assets ------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 781,000 $ 15,077,000
Reserved cash 107,000 105,000
Restricted cash 1,518,000 1,609,000
Accounts receivable, net of allowance for
doubtful accounts 30,774,000 23,909,000
Due from affiliates 882,000 588,000
Note receivable from related party 423,000 423,000
Film and television property costs, net
of accumulated amortization 69,250,000 68,507,000
Investments in unconsolidated entities,
at equity 5,627,000 5,326,000
Other assets 5,475,000 5,037,000
------------ ------------
$114,837,000 $120,581,000
============ ============
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 2,884,000 $ 2,935,000
Notes payable 55,981,000 62,647,000
Deferred film license fees 3,681,000 3,362,000
Contractual obligations, principally
participants'share payable and talent
residuals 6,858,000 6,155,000
Production advances 2,397,000 2,715,000
Convertible subordinated debentures, net of
deferred issuance costs 11,449,000 11,631,000
----------- -----------
Total liabilities 83,250,000 90,517,000
----------- -----------
Stockholders' equity:
Common stock, no par value. Authorized
50,000,000 shares:issued and
outstanding 9,132,815 shares at
December 31, 1997 and 9,090,080
shares at September 30, 1997 39,178,000 38,905,000
Accumulated deficit (7,591,000) (7,769,000)
----------- -----------
Net stockholders' equity 31,587,000 31,136,000
----------- -----------
$114,837,000 $120,581,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1997 1996
<S> <C> <C>
Operating revenues $20,160,000 $16,547,000
Costs related to operating revenues (17,287,000) (14,020,000)
Selling, general and administrative expenses (1,328,000) (1,172,000)
---------- ----------
Earnings from operations 1,545,000 1,355,000
Interest income 33,000 28,000
Interest expense (1,394,000) (1,217,000)
---------- ----------
Earnings before income taxes 184,000 166,000
Income tax expense (6,000) (6,000)
--------- ---------
Net earnings $ 178,000 $ 160,000
========= =========
Basic net earnings per share $0.02 $0.02
===== =====
Diluted net earnings per share $0.02 $0.02
===== =====
Number of shares used in computing basic
net earnings per share 9,114,000 8,806,000
========= =========
Number of shares used in computing diluted
net earnings per share 10,259,000 8,806,000
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 178,000 $ 160,000
Adjustments to reconcile net earnings to
net cash (used) by operating activities:
Amortization of film costs 14,935,000 13,935,000
Depreciation and amortization 56,000 28,000
Amortization of other assets 255,000 191,000
Reserved and restricted cash 89,000 4,110,000
Accounts receivable, net (6,865,000) 2,534,000
Due from affiliates (294,000) (281,000)
Increase in film and television
property costs (15,678,000) (14,742,000)
Accounts payable and accrued liabilities (51,000) (1,537,000)
Deferred film license fees 319,000 339,000
Contractual obligations 703,000 (61,000)
Production advances (318,000) (797,000)
Net cash provided (used) by operating ---------- ----------
activities (6,671,000) 3,879,000
---------- ----------
Cash flows from investing activities:
Increase in investments in unconsolidated
entiies (301,000) 476,000
Decrease (increase) in other assets (219,000) (6,000)
Net cash provided (used) by investing ---------- ----------
activities (520,000) 470,000
---------- ----------
Cash flows from financing activities:
Borrowings under notes payable 11,433,000 627,000
Repayment of notes payable (18,099,000) (6,461,000)
Other (439,000) 346,000
Net cash provided (used) by financing ---------- ----------
activities (7,105,000) (5,488,000)
---------- ----------
Net decrease in cash (14,296,000) (1,139,000)
Cash and cash equivalents at beginning of
period 15,077,000 7,091,000
---------- ----------
Cash and cash equivalents at end of period $ 781,000 $ 5,952,000
========== ==========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
(1) During the quarter ended December 31, 1997, $236,000 of convertible
subordinated debentures were converted into 42,735 shares of common stock.
(2) During the quarter ended December 31, 1996, $217,000 of convertible
subordinated debentures were converted into 37,094 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
Three Months ended December 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Number of Common Accumulated
shares Stock Deficit Net
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 9,090,080 $38,905,000 $(7,769,000) $31,136,000
Conversion of subordinated
debentures 42,735 236,000 --- 236,000
Other --- 37,000 --- 37,000
Net earnings --- --- 178,000 178,000
--------- ---------- --------- ----------
Balance at December 31, 1997 9,132,815 $39,178,000 $(7,591,000) $31,587,000
========= ========== ========= ==========
</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") develops, produces and distributes
feature films, direct-to-video films, television series,
movies-for-television, mini-series and animated programming. In the last
three years, the Company expanded its operations into related business lines
in ancillary markets for its product such as merchandising, home video, cable
and interactive/multimedia applications for characters and story ideas
developed by the Company.
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 the
accounts of The Kushner-Locke Company, its wholly-owned subsidiaries, and
certain less than wholly-owned entities which the Company controls. Entities
in which the Company holds a 20% to a 50% interest and exercises significant
influence are accounted for under the equity method. All material
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 December 31, 1997, and the results of its operations and its
cash flows for the three month periods ended December 31, 1997 and 1996.
Interim results are not necessarily indicative of results to be expected for
a full fiscal year.
Restricted and Reserved Cash
At December 31, 1997, the Company had $1,518,000 in restricted cash
principally related to a deposit held at a British bank pursuant to a film
sale/leaseback transaction. In addition, at December 31, 1997, the Company
had $107,000 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
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(1) Summary of Significant Accounting Policies (continued)
assets 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.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Numerator:
Numerator for basic earnings per share income
available to common stockholders $178,000 $160,000
Effect of dilutive securities:
Interest on convertible debt -- --
-------- --------
Numerator for diluted earnings per share-income
available to common stockholders after assumed
conversions $178,000 $160,000
======== ========
Denominator
Denominator for basic earnings per share -
weighted average shares 9,114,000 8,806,000
--------- ---------
Effect of dilutive securities:
Employee stock options 1,145,000 --
Convertible debentures -- --
---------- ---------
Dilutive potential common shares 1,145,000 --
---------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 10,259,000 8,806,000
========== =========
Basic earnings per share $0.02 $0.02
===== =====
Diluted earnings per share $0.02 $0.02
===== =====
</TABLE>
Approximately 412,000 and 418,000 options and 1,393,000 and 1,459,000
warrants to acquire common stock were not included in the calculation of
diluted earnings per share for the three months ended December 31, 1997 and
1996, 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 months ended
December 31, 1997 or 1996 as the impact of including such securities would be
antidilutive.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(2) Film and Television Property Costs
Film and television property costs consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
---------- ----------
<S> <C> <C>
In process or development $7,564,000 $10,497,000
Released, principally feature films and
television productions, net of accumulated
amortization 61,686,000 58,010,000
---------- ----------
$75,036,000 $68,507,000
========== ==========
</TABLE>
(3) Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
----------- ------------
<S> <C> <C>
Note payable to bank, under the revolving credit
facility secured by substantially all Company
assets, interest at varying rates, outstanding
principal balance due June 2000 $53,080,000 $56,803,000
Notes payable to banks for production loans secured
by certain film rights held by producers, interest
at different rates for each loan 2,869,000 5,844,000
Other 32,000 --
---------- ----------
$55,981,000 $62,647,000
========== ==========
</TABLE>
In June 1996 the Company obtained a $40,000,000 syndicated borrowing base
revolving credit facility. In September 1997 the facility was increased to
$60,000,000 and the maturity was extended to June 2000.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(4) Convertible Subordinated Debentures
Convertible subordinated debentures consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
----------- -----------
<S> <C> <C>
Series A Convertible Subordinated Debentures due
December 2000, bearing interest at 10% payable
June 15 and December 15, net $ 71,000 $ 71,000
Series B Convertible Subordinated Debentures due
December 2000, bearing interest at 13.75% payable
monthly, net 3,046,000 3,029,000
8% Convertible Subordinated Debentures due December
2000, interest payable February 1 and August 1, net 4,496,000 4,710,000
9% Convertible Subordinated Debentures due July
2002, interest payable January 1 and July 1, net 3,836,000 3,821,000
---------- ----------
$11,449,000 $11,631,000
========== ==========
</TABLE>
Series A Debentures
As of December 31, 1997 the Company had outstanding $77,000 principal amount
of Series A Debentures. The debentures are recorded net of unamortized
underwriting discounts, expenses associated with the offering and warrants
totaling $6,000 which are amortized using the interest method to interest
expense over the term of the debentures. Approximately $500 of issuance
costs were amortized to interest expense for the three months ended
December 31, 1997.
Series B Debentures
As of December 31, 1997 the Company had outstanding $3,242,000 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 totaling $196,000, which are amortized using the interest method
to interest expense over the term of the debentures. Approximately $17,000
of issuance costs were amortized as interest expense for the three months
ended December 31, 1997.
8% Debentures
As of December 31, 1997, the Company had outstanding $4,750,000 principal
amount of 8% Debentures. The debentures are recorded net of unamortized
underwriting discounts and expenses associated with the offering totaling
$254,000 which are amortized using the interest method to interest expense
over the term of the debentures. Approximately $22,000 of issuance costs
were amortized as interest expense for the three months ended December 31,
1997.
9% Debentures
As of December 31, 1997, 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 totaling
$264,000, which are amortized using the interest method to interest expense
over the term of the debentures.
<PAGE>
THE KUSHNER-LOCKE COMPANY
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(4) Convertible Subordianted ebentures (Continued)
Approximately $15,000 of issuance costs were amortized as interest expense
for the three months ended December 31, 1997.
(5) Income Taxes
Income taxes for the three month periods ended December 31, 1997 and 1996
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 all taxable income for the fiscal
year except for minimum state income taxes will be offset by utilization of
existing net operating losses which aggregated $39,309,0000 for Federal income
tax purposes and $7,436,000 for state income tax purposes at September 30,
1997. The Federal operating loss carryforwards expire through 2012, and the
state operating loss carryforwards expire through 2002.
(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 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 to acquire film and television
distribution rights. This initial advance for rights ranges from 10% to 30%
of the total purchase price. The balance of the payment is generally due
upon the complete delivery by third party producers of acceptable materials,
proof of rights held and insurance policies that may be required for the
Company to begin exploitation of the product. As of December 31, 1997 the
Company had agreed to pay approximately $2,667,000 should those third party
producers complete delivery to the Company. These amounts are estimated to
be payable over the next eighteen months. In addition, the Company has
guaranteed certain payments to production lenders. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" below.
<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 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 rights to the films and
television programs in international territories. The Company generally
finances all or a substantial portion of the budgeted production costs of its
programming through advances obtained from licensees and borrowings secured
by domestic and international licenses. The Company typically retains rights
in its programming which may be exploited in future periods or in additional
markets or media. In April 1993, the Company established a feature film
operation which produces low and medium budget films for theatrical and/or
home video or cable release. The Company also has produced 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.
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 deferred. Production advances and deferred license fees are
recognized as revenue on the date of product availability and/or delivery.
Activities conducted by unconsolidated joint ventures, wherein the Company
reports its equity in the ventures' earnings as revenues, also can
significantly affect the comparability of revenues.
The Company generally capitalizes all costs incurred to produce a film or
television program. 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 film prints and prerelease and early release advertising that is
expected to benefit the film in future markets. These costs, as well as
participation and talent residuals, are amortized each period on an
individual film or television program basis in the ratio that the current
period's gross revenues 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 has materially affected 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 the 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.
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 adjustmens of film costs, dependence
on key personnel, production deficits, the risk involved in the television
and theatrical film industries, competition, government regulation, labor
relations,
<PAGE>
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 December 31, 1997 and 1996
The Company's operating revenues for the first quarter ended December 31,
1997 were $20,160,000, an increase of $3,613,000, or 22%, from $16,547,000
from the prior fiscal year's first quarter ended December 31, 1996. This
increase was due primarily to the timing of delivery and/or availability of
films and television programs. Included in operating revenues are net earnings
aggregating $278,000 from five joint ventures whose gross revenues are not
consolidated in the accompanying financial statements.
The Company recognized $4,300,000 (21%) of revenues during the first
quarter of fiscal 1998 from the delivery and/or availability of four feature
films, consisting of 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 $8,800,000 (44%)
of revenues during the first quarter of fiscal 1998 from the delivery and/or
availability of additional episodes of the television series Hammer, and
Mowgli: The New Adventures of The Jungle Book, and the net earnings from the
delivery by a joint venture of additional episodes of the television series
Cracker, starring Robert Pastorelli. Twelve percent of the Company's revenues
came from its distribution of Christian music on behalf of TV First, a Company
joint venture. Nine percent of revenues for the period came from the
Company's family division of direct-to-video product and six percent from
continuing licenses of completed product from the Company's library to
domestic cable channel operators and international sub-distributors. The
remaining eight percent of revenues came from distribution to domestic cable
for films acquired through its majority-owned subsidiary KLC/New City, sales
of search services by the Company's newly-acquired subsidiary, 800-U.S.
Search, materials sold to licensees and other minor sources.
The Company recognized $5,000,000 (30%) of revenues during the first quarter
of fiscal 1997 from the delivery and/or availability of 10 feature films,
including $3,800,000 from a film delivered to 20th Century Fox. In addition,
the Company recognized $7,900,000 (48%) of revenues during the first quarter
of fiscal 1997 from the delivery and/or availability of 7 network movies, the
network mini-series Innocent Victims and the one-hour first-run syndication
series Could It Be A Miracle, including $6,600,000 from two network
television movies-of-the- week: Jack Reed V: Death and Vengeance starring
Brian Dennehy for NBC and Unlikely Angel starring Dolly Parton for CBS. In
addition, the Company recognized $1,200,000 (7%) of revenues during that
quarter from distribution to domestic cable of films acquired through its
majority-owned subsidiary KLC/New City. The majority of remaining revenues
for the period came from the Company's family division of direct-to-video
product and from continuing licenses 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,
Minion starring Dolph Lundgren, Bone Daddy starring Rutger Hauer, Girl
starring Dominique Swain, One Man's Hero starring Tom Berenger, Taxman
starring Joe Pantoliano, and Swing starring Lisa Stansfield. In addition,
the Company continues to acquire international distribution rights
to films for distribution through Kushner Locke International, Inc. Twelve
episodes each of Hammer and Mowgli: The New Adventures of The Jungle Book and
four episodes of Cracker remain to be delivered after December 31, 1997. In
February 1998 the joint venture producing Cracker was advised by ABC that six
episodes previously ordered were cancelled, leaving 16 as the total ABC order.
Costs relating to operating revenues were $17,287,000 during the first
quarter of fiscal 1998 as compared to $14,020,000 during the first quarter of
fiscal 1997. As a percentage of operating revenues, costs relating to
operating revenues were 86% for the first quarter of fiscal 1998 compared to
85% for the first quarter of fiscal 1997. The Company's deliveries during
the first quarter of fiscal 1998 shifted somewhat toward episodic television
programming with related start-up costs which increased costs relating to
operating revenues.
<PAGE>
Selling, general and administrative expenses increased to $1,328,000 in the
first quarter of fiscal 1998 from $1,172,000 in the first quarter of fiscal
1997. The increase in such expenses is principally due to the inclusion of
such expenses for 800-U.S. Search, a company in which the Company acquired a
controlling interest in November 1997.
Interest expense for the first quarter ended December 31, 1997 was $1,394,000
as compared to $1,217,000 for the first quarter ended December 31, 1996. The
increase was due to higher average borrowings under the Company's line of
credit primarily associated with increased production. Total indebtedness for
borrowed money increased to $68,612,000 at December 31, 1997 from $35,796,000
at December 31, 1996.
The Company's estimated effective income tax expense was 3% for the first
quarter ended December 31, 1997 compared to an estimated effective income tax
rate of 4% for the quarter ended December 31, 1996. The tax expense in the
first quarter of fiscal 1998 pertained to minimum state income taxes. The
Company has Federal and state net operating loss carryforwards which exceed
expected taxable income for fiscal 1998.
The Company reported net earnings of $178,000 or $0.02 per share, for the
first quarter ended December 31, 1997 as compared to net earnings of $160,000,
or $.02 per share, for the first quarter ended December 31, 1996. Weighted
number of common shares for the compared first quarters were 9,130,000 in
fiscal 1998 and 8,806,000 in fiscal 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 and the establishment of its feature film
division have significantly increased the Company's working capital
requirements and use of related production loans.
Cash and cash equivalents decreased to $2,406,000 (including $1,518,000 of
restricted cash being used principally as collateral for a film sale/leaseback
transaction and $107,000 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 $14,296,000 since September 30, 1997.
The Company experienced net negative cash flows from operating activities of
$6,671,000 during the three months ended December 31, 1997, resulting
primarily from a 29% increase in accounts receivable due to slow holiday
season collections. In addition, the Company experienced net negative cash
flows from financing activities of $7,105,000 during the period as a result of
repayment of notes payable in excess of new borrowings. As a result
primarily of the foregoing factors, net unrestricted cash decreased during the
three month period by $14,296,000 to $ 781,000 on December 31, 1997 before
taking into consideration amounts available under the Company's line of credit
as of such dates. 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 the Company's book value of
unamortized library film costs (as adjusted). 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
<PAGE>
substantially all of the Company's otherwise
unencumbered assets and bear interest, at the Company's option, either (i) at
LIBOR (5.625% as of February 13, 1998) plus 3% (for that portion of the
borrowing base supported by accounts or contracts receivable) or 4% (for that
portion of the borrowing base supported by unamortized library film costs or
for loans made under the production tranche) or (ii) at the Alternate Base
Rate, which is the greater of (a) Chase's Prime Rate (8.50% as of February 13,
1998), (b) Chase's Base 30-Day CD Rate (5.625% as of February 13, 1998) plus
1% or (c) the Federal Funds Effective Rate (5.625% as of February 13, 1998)
plus 2% (for that portion of the borrowing base supported by accounts or
contracts receivable) or 3% (for that portion of the borrowing base supported
by unamortized library film costs or loans made under the production tranche).
The Company is required to pay a commitment fee of .5% per annum of the unused
portion of the credit line. The amount outstanding under the credit facility
as of December 31, 1997 was $53,080,000 out of a borrowing base availability
of $57,879,000, and as of February 17, 1998 the amount outstanding was
$55,540,000 out of a borrowing base availability of $59,349,000.
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 $2,901,000
as of December 31, 1997, consisted of $2,869,000 under a production loan
further described below from Banque Paribas (Los Angeles Agency) ("Paribas")
to a consolidated production entity and a $32,000 loan from Union Bank
previously obtained by the Company's recently-acquired subsidiary, 800-U.S.
Search. The Kushner-Locke Company provided a $1,000,000 corporate guarantees
for a portion of the Paribas loan which is callable in the event that the
production company does not repay the loans by the 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 April 1996, a $5,150,000 production loan was obtained from Imperial Bank
to cover a portion of the production budgets of the Magic Adventures home
video series. The loan bore interest at Prime plus 1.5%. The loan was fully
repaid in November 1997.
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 February
13, 1998) plus 2.50% payable monthly. In September 1997 the line was
increased to $1,000,000. On December 31, 1997, advances totalling $448,000
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 February 13, 1998) plus 1.5% payable monthly plus certain
loan fee amounts. 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.
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 U.S. Prime (8.50% as of February 13, 1998) plus 1% or at LIBOR (5.625% as
of February 13, 1998) plus 2%. The Company provided a corporate guaranty in
the amount of $1,250,000 in connection with this loan. The loan matures on
August 31, 1998. The loan is secured by the rights, title and assets related
to the film. On December 31, 1997, advances totalling $6,674,000 were
outstanding pursuant to this loan.
<PAGE>
Securities Offerings
As of December 31, 1997, $4,750,000 principal amount of 8% Convertible
Subordinated Debentures and $4,100,000 principal amount of 9% Convertible
Subordinated Debentures were outstanding. In December 1997, $250,000
principal amount of the 8% Debentures were converted into 42,735 shares of
Common Stock. As of December 31, 1997, approximately $77,000 principal amount
of Series A Debentures (convertible into common stock at an adjusted rate of
approximately $7.61 per share) and $3,242,000 of Series B Debentures
(convertible into common stock at an adjusted rate of approximately $9.27 per
share) were outstanding.
In July 1996, the Company closed a secondary public offering of an aggregate
of 4,750,000 units (a "Unit"), each Unit consisting of two shares of Common
Stock (now equivalent to 1,583,334 shares in the aggregate giving effect to
the 1-for-6 reverse stock split) and one five year Class C Redeemable Common
Stock Purchase Warrant (now equivalent to 791,666 warrants) to purchase Common
Stock at an adjusted exercise price of $6.8625 per share. The Company
received net proceeds in the amount of $9,203,125. In connection with such
offering, the Company issued warrants to purchase up to an aggregate of 79,166
Units (adjusted for the reverse split) at an adjusted rate of $18.00 per Unit
to the underwriter thereof and a consultant.
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.
In December 1994, the Company loaned August Entertainment, Inc. ("August")
$650,000 against distribution rights to third party product. August is
majority owned by Gregory Cascante, who subsequently joined the Company as
President of its international film distribution division. The loan bears
interest at the lesser of (a) Prime (8.50% at February 13, 1998) plus 2% or
(b) 10%. The distribution agreement is secured by all assets of August,
including a pledge of all sales commissions due to August from the producers
of the films Sleep With Me, Lawnmower Man II and Nostradamus. While the right
of August to receive such commissions with respect to the film Lawnmower Man
II is subordinate to the interests of the production lenders, The Allied
Entertainment Group PLC, and its subsidiaries which produced the film have
guaranteed payment of such commissions to the extent they would be payable had
there been no production loan on the film. Repayment of principal and interest
is by collection of commissions assigned as collateral. As of December 31,
1997 the Company had been repaid $384,000 toward interest and principal and
approximately $423,000 principal amount remains outstanding. The loan matured
in December 1997, but August and the Company have reached an agreement,
subject to completion of documentation, to a one year extension to December
1998 with August agreeing to make principal reduction payments totaling
$205,000 on a scheduled basis prior to maturity. Mr. Cascante left the
Company in April 1997 and his employment agreement was then settled.
<PAGE>
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 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 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.
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
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).
<TABLE>
<CAPTION>
For the Year Ended September 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
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)
===== ===== ===== ===== =====
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
For the Year Ended September 30,
1997 1996 1995
<S> <C> <C> <C>
Numerator:
Net earnings (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
Effective 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
========= ========= =========
</TABLE>
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.
<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.
<TABLE>
<S> <C>
THE KUSHNER-LOCKE COMPANY
(Registrant)
Dated: February 17, 1998 /s/ Peter Locke
Peter Locke
Co-Chairman of the Board,
Co-Chief Executive Officer
Dated: February 17, 1998 /s/ Donald Kushner
Donald Kushner
Co-Chairman of the Board,
Co-Chief Executive Officer
and Secretary
Dated: February 17, 1998 /s/ Bruce St.J Lilliston
Bruce St.J Lilliston
President and Chief Operating Officer
Dated: February 17, 1998 /s/ Robert Swan
Robert Swan
Chief Financial Officer
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<S> <C>
3.1 Articles of Incorporation
</TABLE>
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
UNIT #15 DRILLING CORPORATION
ONE: The name of this corporation is:
Unit #15 Drilling Corporation
TWO: The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business, or the practice of a profession permitted to be incorporated
by the California Corporations Code.
THREE: The name and address in the State of California of the corporation's
initial agent for service of process is:
James R. Eller, Jr.
c/o Finley, Kumble, Wagner, Heine
Underberg, Manley, Myerson & Casey
707 Wilshire Boulevard, 45th Floor
Los Angeles, California 90017
FOUR: This corporation is authorized to issue only one class of shares of
stock; the total number of shares which this corporation is authorized to
issue is ten million (10,000,000).
Dated: July 2, 1986
___________________________________
Yvonne La Rose, Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
YVONNE LA ROSE certifies that:
1. She is the sole incorporator of UNIT #15 DRILLING CORPORATION, a
California corporation.
2. She hereby adopts the following amendment of the articles of incorporation
of this corporation:
Article ONE is amended to read as follows:
"The name of this corporation is Atlantic/K-L, Inc."
3. No directors were named in the original articles of incorporation and none
have been elected.
4. No shares have been issued.
I further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of my own knowledge.
Dated: December 15, 1986
___________________________________
YVONNE LA ROSE, Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
YVONNE LA ROSE certifies that:
1. She is the sole incorporator of GEOTHERMAL POWER CORP., a California
corporation.
2. She hereby adopts the following amendment of the articles of incorporation
of this corporation:
Article ONE is amended to read as follows:
"The name of this corporation is UNIT #15 DRILLING CORPORATION."
3. No directors were named in the original articles of incorporation and none
have been elected.
4. No shares have been issued.
I further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of my own knowledge.
Dated: August 20, 1986
__________________________________
YVONNE LA ROSE, Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
YVONNE LA ROSE certifies that:
1. She is the sole incorporator of UNIT #15 DRILLING CORPORATION, a
California corporation.
2. She hereby adopts the following amendment of the articles of incorporation
of this corporation:
Article ONE is amended to read as follows:
"The name of this corporation is GEOTHERMAL POWER CORP."
3. No directors were named in the original articles of incorporation and none
have been elected.
4. No shares have been issued.
I further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of my own knowledge.
Dated as of July 7, 1986
___________________________________
YVONNE LA ROSE, Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ATLANTIC/K-L, INC.
The undersigned hereby certify that:
1. I am the Co-President and Secretary of ATLANTIC/K-L, INC., a California
corporation.
2. Article One of the Articles of Incorporation of this Corporation is
amended to read as follows:
1. The name of this Corporation is ATLANTIC/KUSHNER-LOCKE, INC.
3. The foregoing amendment of the Articles of Incorporation has been duly
approved of by the Board of Directors.
4. The foregoing amendment of Articles of Incorporation has been duly
approved of by the required vote of the shareholders in accordance with
Section 902 of the Corporations Code. The total number of outstanding shares
of this Corporation is 200,000. The number of shares voting in favor of the
amendment equaled or exceeded the required vote. The percentage vote required
was more than fifty percent (50%).
I further declare under penalty of perjury under the laws of the State of
California that the matters set forth in the foregoing Certificate are true
and correct of my own knowledge.
Dated: March 31, 1987
___________________________________
DONALD S. KUSHNER
Co-President and Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ATLANTIC/KUSHNER-LOCKE, INC.
The undersigned hereby certify that:
1. We are the president and secretary, respectively, of
ATLANTIC/KUSHNER-LOCKE, INC., a California corporation.
2. Article ONE of the Articles of Incorporation of this Corporation is
hereby amended to read in its entirety as follows:
ONE: The name of this Corporation is THE KUSHNER-LOCKE COMPANY.
3. Articles FIVE and SIX of the Articles of Incorporation of this
Corporation are added to read in their entirety as follows:
FIVE: The liability of directors of this Corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law.
SIX: This Corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the Corporations Code) for breach of duty
to this Corporation and its stockholders through bylaw provisions or
through agreements with the agents, or otherwise; in excess of the
indemnification otherwise permitted by Section 317 of the Corporations
Code, subject to the limits on such excess indemnification set forth in
Section 204 of the Corporations Code.
4. The foregoing amendments of the Articles of Incorporation have been
duly approved of by the board of directors.
5. The foregoing amendments of Articles of Incorporation have been duly
approved of by the required vote of the shareholders in accordance with
Section 902 of the Corporation Code. The total number of outstanding shares
of this Corporation is One Hundred Thousand (100,000). The number of shares
voting in favor of the amendment equaled or exceeded the required vote. The
percentage vote required was more than fifty percent (50%).
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in the foregoing Certificate are true
and correct of our own knowledge.
Dated: July 28, 1988.
___________________________________
PETER LOCKE, President
___________________________________
DONALD KUSHNER, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
THE KUSHNER-LOCKE COMPANY
The undersigned hereby certify that:
1. We are the president and secretary, respectively, of THE KUSHNER-LOCKE
COMPANY, a California corporation.
2. Article FOUR of the Articles of Incorporation of this Corporation is
hereby amended to read in its entirety as follows:
FOUR: This Corporation is authorized to issue only one class of shares
of stock; the total number of shares which this Corporation is
authorized to issue is Fifty million (50,000,000).
Upon the amendment of this Article FOUR to read as hereinabove set
forth, each outstanding share of Common Stock is divided into 100
shares of Common Stock.
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the board of directors.
4. The foregoing amendment of Articles of Incorporation has been duly
approved by the required vote of the shareholders in accordance with Section
902 of the Corporation Code. The total number of outstanding shares of this
Corporation is One Hundred Thousand (100,000). The number of shares voting in
favor of the amendment equaled or exceeded the required vote. The percentage
vote required was more than fifty percent (50%).
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in the foregoing Certificate are true
and correct of our own knowledge.
Dated: October 31, 1988
___________________________________
PETER LOCKE, President
___________________________________
DONALD KUSHNER, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
THE KUSHNER-LOCKE COMPANY
The undersigned certify that:
1. We are the President and the Secretary, respectively, of THE KUSHNER-LOCKE
COMPANY, a California corporation.
2. Article FOUR of the Articles of Incorporation of this Corporation is hereby
amended to delete and replace to read in its entirety as follows:
FOUR: This Corporation is authorized to issue only one class of shares of
stock; the total number of shares which this Corporation is authorized to
issue is Eighty million (80,000,000).
3. The foregoing amendment of the Articles of Incorporation has been duly
approved by the board of directors.
4. The foregoing amendment of Articles of Incorporation has been duly approved
by the required vote of the shareholders in accordance with Section 902 of the
Corporations Code. The total number of outstanding shares of this Corporation
is 28,975,049. The number of shares voting in favor of the amendment equaled
or exceeded the vote required. The percentage vote required was more than
fifty percent 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in the foregoing Certificate are true
and correct of our own knowledge.
Dated: May 17, 1994
Peter Locke, Chief Executive Officer
Donald Kushner, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
THE KUSHNER-LOCKE COMPANY
The undersigned certify that:
5. They are the President and the Secretary, respectively, of The
Kushner-Locke Company, a California corporation (the "Corporation").
6. Article FOUR of the Corporation's Articles of Incorporation is amended in
its entirety to read as follows:
This Corporation is authorized to issue only one class of shares of
stock; the total number of shares which this Corporation is authorized
to issue is One Hundred Fifty Million (150,000,000).
7. The amendment herein set forth has been duly approved by the Board of
Directors of the Corporation.
8. The amendment herein set forth has been duly approved by the required vote
of the shareholders in accordance with Section 902 of the California
Corporations Code. The total number of outstanding shares of common stock of
the Corporation (the "Common Stock") entitled to vote with respect to the
foregoing amendment is 52,840,247. The number of shares voting in favor of
the amendment equaled or exceeded the vote required. The percentage vote
required was more than 50% of the outstanding shares of Common Stock.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated as of November 22, 1996
Peter Locke, President
Donald Kushner, Secretary
<PAGE>
CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
THE KUSHNER-LOCKE COMPANY
In accordance with Section 109 of the California Code, the undersigned
certify that:
1. They are the President and the Secretary, respectively, of The
Kushner-Locke Company, a California corporation (the "Corporation");
2. The name if the Corporation is The Kushner-Locke Company;
3. The Certificate of Amendment of Articles of Incorporation of The
Kushner-Locke Company that was filed with the California Secretary of State's
office on December 20, 1996 contained a defect in execution and is hereby
being corrected in accordance with Section 109 of the California Corporations
Code;
4. This Certificate of Correction does not alter the wording of any resolution
or written consent which was adopted by the board of directors or the
shareholders;
5. In accordance with Section 907 (a) of the California Corporations Code, the
signature line for the President of the Corporation included in The
Certificate of Amendment of Articles of Incorporation of The Kushner-Locke
Company is corrected in its entirety to read as follows:
________________________________
Bruce Lilliston, President
6. The filing of this Certificate of Correction of Articles of Incorporation
of The Kushner-Locke Company shall not alter the effective time of the
instrument being corrected, which shall remain as its original effective time,
and such filing shall not affect any right or liability accrued or incurred
before such filing expect that any right or liability accrued or incurred by
reason of the error of defect being corrected shall be extinguished by such
filing if the person having that right has not detrimentally relied on the
original document.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated as of January 7, 1997
______________________________
Bruce Lilliston, President
Donald Kushner, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
THE RESTATED ARTICLES OF INCORPORATION
OF
THE KUSHNER-LOCKE COMPANY
A California Corporation
The undersigned certify that:
1. They are the President and the Secretary, respectively, of The
Kushner-Locke Company, a California corporation.
2. ARTICLE FOUR of the Restated Articles of Incorporation is amended to read
as follows:
" The aggregate number of shares of capital stock that the Corporation is
authorized to issue is Fifty Million (50,000,000) shares, such shares to
be designated Common Stock. Upon amendment to this Article to read as
herein set forth, each six (6) shares of outstanding Common Stock is
converted into or reconstituted as one (1) share of Common Stock."
3. The foregoing Amendment of the Restated Articles of Incorporation has been
duly approved by of the board of directors.
4. The foregoing Amendment of the Restated Articles of Incorporation has been
duly approved by the required vote of shareholders in accordance with Section
902 of the California Corporations Code. The total number of outstanding
shares of the corporation is 54,537,620. The number of shares voting in
favor of the amendment equaled or exceeded the vote required. The percentage
vote required was more than 50%. We further declare under penalty of perjury
under the laws of the State of California that the matters set forth in this
certificate are true and correct of our own knowledge.
Date: September 4, 1997
______________________________
Bruce St. J. Lilliston
President
________________________________
Donald Kushner
Secretary
