10KSB 1 e10ksb.txt FORM 10-KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended April 30, 2000 Commission File No. 0-14234 KINGS ROAD ENTERTAINMENT, INC. (Name of small business issuer in its charter) Delaware 95-3587522 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.)
3489 West Cahuenga Blvd., Suite D Hollywood, California 90068 (Address of principal executive office) Issuer's telephone number: (323) 512-5045 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.01 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year: $661,251 As of August 15, 2000, the aggregate market value of the voting stock held by non-affiliates (based on the closing sales price as reported by NASDAQ) was approximately $663,487 (assuming all officers and directors are deemed affiliates for this purpose). As of August 15, 2000 the registrant had 3,541,140 shares of its common stock outstanding. Documents Incorporated by Reference: None Transitional Small Business Disclosure Format: YES [ ] NO [X] 2 PART I. ITEM 1. DESCRIPTION OF BUSINESS GENERAL Kings Road Entertainment, Inc. ("Company" or "Registrant"), incorporated in Delaware in 1980, has been engaged primarily in the development, financing and production of motion pictures for subsequent distribution in theaters, to pay, network and syndicated television, on home video, and in other ancillary media in the United States (the domestic market) and all other countries and territories of the world (the international market). The Company began active operations in January 1983 and released its first motion picture in 1984, All of Me, starring Steve Martin. Seventeen additional pictures have since been theatrically released in the domestic market and six pictures have been released directly to the domestic home video or pay television market. RECENT EVENTS Subsequent to the fiscal year ended April 30, 1995, the Company has not produced any new films and has derived revenues almost exclusively from the exploitation of films produced prior to April 30, 1995. Following the death on October 4, 1996 of Mr. Stephen Friedman, the Company's founder and then Chairman of the Board of Directors and Chief Executive Officer, the Company explored various business options. On November 6, 1998, pursuant to a Stock Acquisition Agreement, FAB Capital Corporation ("FAB"), MBO Music Verlag GmbH ("MBO"), West Union Leasing Ltd. ("West") and RAS Securities Corp. (collectively, the "Acquirors") purchased 962,360 shares of the Company's common stock (approximately 50.3% of the Company's then outstanding common stock) from the Estate of Stephen Friedman ("Estate") and Christopher Trunkey, the Chief Financial Officer of the Company, for a purchase price of $2.35 per share or $2,261,546 in the aggregate. In addition, Music Action Ltd. ("MAC") agreed that it would, as soon as practicable but in any event within 120 days after November 6, 1998, make or cause to be made an offer to each of the Company's shareholders other than the Acquirors, the Estate and Mr. Trunkey, for the purchase of up to ninety percent (90%) of such shareholder's shares at a price of $2.35 per share ("Purchase Offer"). MAC agreed that, in the event the Purchase Offer was not made within ninety days after November 6, 1998, it would deposit $1,800,000 into escrow to be applied toward the Purchase Offer. FAB agreed to make the $1,800,000 deposit into escrow in the event MAC did not do so. On February 3, 1999, the Stock Acquisition Agreement was amended to eliminate the Purchase Offer due to the fact that the Company's closing share price exceeded the $2.35 Purchase Offer price for the previous ten (10) trading days. On November 9, 1998, the Company acquired 2,393,235 shares of Immediate Entertainment Group, Inc. ("Immediate"), approximately 19% of Immediate's then outstanding common stock, for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares of the Company's common stock and a note ("Immediate Note") payable to the sellers of the stock for $210,803. During the fiscal year ended April 30, 2000, this note, plus its accrued interest, was converted into the Company's common stock pursuant to an agreement between the Company and the sellers of the Immediate shares dated as of March 12, 1999. Immediate is a diversified entertainment holding company that provides services relating to music production, audio recording, CD manufacturing, film soundtrack and script development and operates a mail order music club. The Company, after carefully evaluating the carrying value of its investment in Immediate, decided to completely write down its investment in Immediate. This decision was based upon Immediate's continued operating losses, changes in management, a "going 2 3 concern" opinion rendered by Immediates's auditors and a material decrease in the price of Immediate's common stock. The Company is presently evaluating various alternatives with respect to recovering its investment in Immediate. On May 20, 2000, the Company announced that it would acquire Animal Town, Inc. ("Animal Town"), a privately-held direct mail order catalogue company that markets children's toys, games, crafts and books specializing in cooperative play and development, animal protection and environmental awareness. The Company has agreed to acquire all of the outstanding common stock of Animal Town in exchange for approximately $51,000 in cash and the issuance of up to 97,026 restricted shares of the Company's commons stock, the exact number of shares to be determined based upon a debt-for-equity exchange offer to be made to existing Animal Town creditors. The Company also agreed, on an interim basis in advance of the closing of the acquisition, to provide a secured credit facility in order for Animal Town to immediately commence production of a Fall 2000 catalog. The Company believes that there are numerous opportunities in the children's educational and entertainment markets and intends to develop a focused strategy that, in the future, will capitalize on these opportunities. DEVELOPMENT The Company allocates a significant portion of the time and energy of its staff to search for potentially viable motion picture material and the development of screenplays. At any given time, the Company is developing between approximately five and fifteen motion picture scripts or ideas for possible future production. During fiscal years 2000 and 1999, the Company spent approximately $54,000 and $176,000, respectively, on development activities. The Company expects to increase its expenditures on development activities, including the purchase of books and screenplays, and anticipates that it will spend between $50,000 and $150,000 each year in the future on such activities. Although many of the projects that the Company develops are subsequently abandoned, the Company believes that these expenditures are necessary if the Company is to obtain projects that will attract third party financing and subsequently achieve commercial success. FINANCING The Company's strategy has been to fully finance its pictures by obtaining advances and guarantees from the licensing of distribution rights in its pictures and other investments from third parties. Once fully financed, the Company would primarily earn fees for its development and production services plus contingent compensation based on the success of a film. If necessary, the Company may finance a portion of the cost of a film using internally generated capital or debt financing. PRODUCTION Once fully financed, the Company attempts to produce its pictures at the lowest possible cost consistent with the quality that it seeks to achieve. The Company avoids the substantial overhead of major studios by maintaining only a small permanent staff and by renting production facilities and engaging production staff only as required. The Company has generally produced pictures that have a cost of production between $1,000,000 and $10,000,000 and which it believes cannot significantly exceed their budgeted cost. Although the Company's past production experience allows it certain control over production costs, production costs of motion pictures as an industry trend have substantially escalated in recent years. 3 4 As of April 30, 2000, the Company has produced (or co-produced) twenty-five pictures, eighteen of which were theatrically released in the domestic market and seven of which were released directly to video or pay television in the domestic market, as follows:
TITLE PRINCIPAL CAST RELEASE DATE ----- -------------- ------------ All of Me Steve Martin, Lily Tomlin September 1984 Creator Peter O'Toole, Mariel Hemingway September 1985 Enemy Mine Dennis Quaid, Louis Gossett, Jr. December 1985 The Best of Times Robin Williams, Kurt Russell January 1986 Touch & Go Michael Keaton, Maria Conchita Alonso August 1986 Morgan Stewart's Coming Home Jon Cryer, Lynn Redgrave February 1987 The Big Easy Dennis Quaid, Ellen Barkin August 1987 In the Mood Patrick Dempsey, Beverly D'Angelo September 1987 Rent-A-Cop Burt Reynolds, Liza Minelli January 1988 The Night Before Keanu Reeves, Lori Louglin March 1988 My Best Friend is a Vampire Robert Sean Leonard, Cheryl Pollack May 1988 Jacknife Robert DeNiro, Ed Harris March 1989 Time Flies When You're Alive Paul Linke July 1989 Kickboxer Jean Claude Van Damme August 1989 Homer & Eddie Whoopi Goldberg, James Belushi December 1989 Blood of Heroes Rutger Hauer, Joan Chen February 1990 Kickboxer II Sasha Mitchell, Peter Boyle June 1991 Kickboxer III Sasha Mitchell June 1992 Paydirt Jeff Daniels, Catherine O'Hara August 1992 Knights Kris Kristofferson, Kathy Long November 1993 Brainsmasher Andrew Dice Clay, Teri Hatcher November 1993 Kickboxer IV Sasha Mitchell July 1994 The Stranger Kathy Long March 1995 The Redemption Mark Dacascos August 1995 The Haunted Heart Diane Ladd, Olympia Dukakis January 1996
DISTRIBUTION Theatrical - The Company, when practical, has licensed its pictures to distributors for theatrical distribution in the domestic market. These distributors undertake all activities related to the distribution of the Company's motion pictures, including booking the picture into theaters, shipping prints and collecting film rentals. In certain cases distributors have advanced the costs of advertising and publicizing the motion pictures and the manufacture of prints, however, in most cases the Company has been required to fund or arrange funding for these costs itself. The Company's most recent pictures, however, were not theatrically released and were initially released on either home video or pay television. Home Video - Distribution into the home video market has occurred by licensing the home video rights for the Company's pictures to video distributors including HBO Video, 4 5 Paramount Pictures, Live Home Video and Trimark Pictures. These video distributors in turn sell videocassettes to video retailers that rent or sell videocassettes to consumers. During the year ended April 30, 1999, the Company licensed the home video and DVD rights for the United States and Canada to nineteen (19) of its pictures to Trimark Pictures. All but one of the pictures has been previously released. Pay and Free Television - Distribution on pay television has occurred by licensing the pay television rights of its movies to cable television companies such as HBO/Cinemax, Showtime/The Movie Channel and various pay-per-view distributors. After licensing to pay television, the Company's films are then made available to television stations and basic cable outlets. The Company has licensed the free television rights to its films to companies such as ITC Entertainment and Worldvision Enterprises who in turn sell packages of films to television stations and basic cable services. Other Rights - Network television, non-theatrical, music publishing, soundtrack album, novelization, and other miscellaneous rights in the Company's pictures have been, whenever possible, licensed by the Company to third parties. The revenue to be derived from the exercise of these other rights is generally not as significant as revenue from other sources. International Markets - The Company previously generated substantial revenues from the licensing of its pictures outside of the United States. However, in 1996 the Company sold the international distribution rights to most of its films to another company. For those pictures where international distribution rights are still owned by the Company, it licenses these pictures to local distributors on a territory-by-territory basis. Each license may cover one or more pictures, and may include all rights or only certain rights. Sales, collections and delivery of product are handled by outside foreign sales organizations. Such organizations generally receive a commission based on a percentage of cash receipts. The Company believes that, based on its current and anticipated future level of film production, it is more efficient and cost effective to use outside foreign sales organizations rather than to maintain its own staff. EMPLOYEES As of April 30, 2000, the Company employed three full-time employees. The Company is subject to the terms of certain industry-wide collective bargaining agreements with the Writers Guild of America, the Directors Guild of America, and the Screen Actors Guild, among others, relating to its completed films and projects in development. The Company considers its employee relations to be satisfactory at present, although the renewal of these union contracts does not depend on the Company's activities or decisions alone. Any strike, work stoppage or other labor disturbance may have a materially adverse effect on the production of motion pictures. COMPETITION The motion picture industry is highly competitive. The Company faces intense competition from motion picture studios and numerous independent production companies, many of which have significantly greater financial resources than the Company. All of these companies compete for motion picture projects and talent and are producing motion pictures that compete for exhibition time at theaters, on television, and on home video with pictures produced by the Company. The Company expects the children's educational and entertainment markets to be highly competitive as well, with numerous well known and well financed companies providing a broad array of children's products and merchandise. 5 6 REGULATION Distribution rights to motion pictures are granted legal protection under the copyright laws of the United States and most foreign countries, which provide substantial civil and criminal sanctions for unauthorized duplication and exhibition of motion pictures. Motion pictures, musical works, sound recording, artwork, still photography and motion picture properties are each separate works subject to copyright under most copyright laws, including the United States Copyright Act of 1976, as amended. The Company plans to take all appropriate and reasonable measures to obtain agreements from licensees to secure, protect and maintain copyright protection for all motion pictures under the laws of all applicable jurisdictions. The Classification and Rating Administration of the Motion Picture Association of America, an industry trade association, assigns ratings for age-group suitability for motion pictures. The Company submits its pictures for such ratings. Management's current policy is to produce or participate in the production of motion pictures that qualify for a rating no more restrictive than "R". ITEM 2. PROPERTIES The Company's principal executive offices are located at 3489 West Cahuenga Blvd., Suite D, Hollywood, California 90068 and consist of approximately 500 square feet leased on a month-to-month basis. In management's opinion, the space currently occupied will be adequate for future needs. The Company does not own or intend to acquire production facilities and would rent any such facilities as needed on a film-by-film basis. The Company has not experienced any difficulty to date in obtaining such facilities. ITEM 3. LEGAL PROCEEDINGS In the ordinary course of business, the Company has or may become involved in disputes or litigation which in the aggregate are not believed by management to be material to its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders during the fiscal year covered by this report. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the OTC Bulletin Board under the symbol: "KREN". The following table sets forth the high and low sales prices of the Company's common stock during the years ended April 30, 1999 and 2000:
FISCAL YEAR 1999 HIGH LOW ---------------- ---- --- First Quarter 1 9/16 1 3/16 Second Quarter 1 7/16 1 1/16 Third Quarter 3 5/16 1 5/16 Fourth Quarter 4 1/8 2 5/8
6 7
FISCAL YEAR 2000 HIGH LOW ---------------- ---- --- First Quarter 3 13/16 1 1/2 Second Quarter 1 5/8 1/2 Third Quarter 7/8 3/8 Fourth Quarter 7/16 3/8
As of August 15, 2000, the Company had approximately 217 stockholders of record. In October 1999, the Company's common stock was de-listed from the NASDAQ SmallCap Market because the Company failed to meet certain minimum listing maintenance criteria set by NASDAQ. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS Subsequent to the fiscal year ended April 30, 1995, the Company has not produced any new films and has derived revenues almost exclusively from the exploitation of films produced prior to April 30, 1995. Following the death on October 4, 1996 of Mr. Stephen Friedman, the Company's founder and then Chairman of the Board of Directors and Chief Executive Officer, the Company explored various business options. On November 6, 1998, pursuant to a Stock Acquisition Agreement, FAB, MBO, West and RAS purchased 962,360 shares of the Company's common stock (approximately 50.3% of the Company's then outstanding common stock) from the Estate and Christopher Trunkey, the Chief Financial Officer of the Company, for a purchase price of $2.35 per share or $2,261,546 in the aggregate. In addition, MAC agreed that it would, as soon as practicable but in any event within 120 days after November 6, 1998, make or cause to be made an offer to each of the Company's shareholders other than the Acquirors, the Estate and Mr. Trunkey, for the purchase of up to ninety percent (90%) of such shareholder's shares at a price of $2.35 per share. MAC agreed that, in the event the Purchase Offer was not made within ninety days after November 6, 1998, it would deposit $1,800,000 into escrow to be applied toward the Purchase Offer. FAB agreed to make the $1,800,000 deposit into escrow in the event MAC did not do so. On February 3, 1999, the Stock Acquisition Agreement was amended to eliminate the Purchase Offer due to the fact that the Company's closing share price exceeded the $2.35 Purchase Offer price for the previous ten (10) trading days. On November 9, 1998, the Company acquired 2,393,235 shares of Immediate, approximately 19% of Immediate's outstanding common stock, for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares of the Company's common stock and a note payable to the sellers of the stock for $210,803. During the fiscal year ended April 30, 2000, this note, plus its accrued interest, was converted into the Company's common stock pursuant to an agreement between the Company and the sellers of the Immediate shares dated as of March 12, 1999. Immediate is a diversified entertainment holding company that provides services relating to music production, audio recording, CD manufacturing, film soundtrack and script development and operates a mail order music club. The Company, after carefully evaluating the carrying value of its investment in Immediate, decided to completely write down its investment in Immediate. This decision was based upon Immediate's continued operating losses, changes in management, a "going concern" opinion rendered by Immediate's auditors and a material decrease in the price of Immediate's common stock. The Company is presently evaluating various alternatives with respect to recovering its investment in Immediate. 7 8 On May 20, 2000, the Company announced that it would acquire Animal Town, Inc. ("Animal Town"), a privately-held direct mail order catalogue company that markets children's toys, games, crafts and books specializing in cooperative play and development, animal protection and environmental awareness. The Company has agreed to acquire all of the outstanding common stock of Animal Town in exchange for approximately $51,000 in cash and the issuance of up to 97,026 restricted shares of the Company's commons stock, the exact number of shares to be determined based upon a debt-for-equity exchange offer to be made to existing Animal Town creditors. The Company also agreed, on an interim basis in advance of the closing of the acquisition, to provide a secured credit facility in order for Animal Town to immediately commence production of a Fall 2000 catalog. The Company believes that there are numerous opportunities in the children's educational and entertainment markets and intends to develop a focused strategy that, in the future, will capitalize on these opportunities. OVERVIEW In recent years the Company's business has been to produce films with budgets between $1,000,000 and $3,000,000 that are released directly to the home video or pay television markets both domestically and abroad. During the fiscal year ended April 30, 2000, the Company did not produce any films. The Company's most recent picture, The Redemption, was completed in early 1995 and premiered on the Home Box Office pay television service in August 1995. Subject to its overall strategic direction, the Company may continue to produce these types of films but will generally seek to produce films with budgets between $3,000,000 and $10,000,000. The Company expects to increase its expenditures on development activities, including the purchase of books and screenplays, in order to obtain the types of projects that will attract third party financing and subsequently achieve commercial success. (SEE "ITEM 1. - DESCRIPTION OF BUSINESS"). The Company's revenues have been derived almost exclusively from the exploitation of the feature films it produces and are typically spread over a number of years. The Company attempts to generate revenues from theatrical distributors as soon as possible following completion of a picture. However, lower budget films, of which the Company has produced most recently, often do not have a theatrical release. Revenues from home video are initially recognized when a film becomes available for release on videocassette, typically six months after the initial theatrical release or, when no theatrical release occurs, upon delivery of the film to the distributor. Revenues from pay and free television of a film are similarly recognized when a film becomes available for exploitation in those media, typically six to twenty-four months after the initial release. Some distribution contracts, however, may license more than one medium, a "multiple rights license". In this case, the full license fee is recognized when the film is exploited in the first available medium. Revenues from international markets generally follow the same pattern as revenues from the domestic market and may include multiple rights licenses as well. However, the Company sold the international distribution rights to most of its films to another company in 1996 and international revenues have substantially decreased due to this sale. As a result of these factors, the Company's revenues vary significantly each year depending on the number and success of release of films that become available in the various media during that fiscal year. Although the Company has not produced any films since 1995, the Company believes its present development activities, which may include the sale of certain projects to non-affiliated companies, may achieve commercial success. 8 9 As revenues have been recognized for each film, the Company has amortized the costs incurred in producing that film. The Company has amortized film costs under the income forecast method as described in Financial Accounting Standards Board Statement No. 53, which provides that film costs are amortized for a motion picture in the ratio of revenue earned in the current period to the Company's estimate of total revenues to be realized. The Company's management has periodically reviewed its estimates on a film-by-film basis and, when unamortized costs exceed net realizable value for a film, that film's unamortized costs have been written down to net realizable value. Costs relating to projects that have been abandoned or sold before being produced have been charged to overhead and capitalized to film costs in the year that event occurs. RESULTS OF OPERATIONS For the year ended April 30, 2000, feature film revenues were approximately $660,000 as compared to approximately $765,000 for the year ended April 30, 1999. The decrease in feature film revenues of approximately 14% results primarily from the fact that the Company has not produced any new films since the fiscal year ended April 30, 1995. Until such time as the Company either produces new films or develops and implements another different overall strategic plan, the Company expects that its feature film revenues will continue to decline. Interest income decreased to approximately $1,000 for the year ended April 30, 2000 from approximately $72,000 reflecting the substantial decrease in excess cash held during the year versus the same period last year. Film cost amortization decreased to approximately $80,000, approximately 12% of feature film revenues, for the year ended April 30, 2000 from approximately $304,000, approximately 40% of feature film revenues, for the year ended April 30, 1999. This decrease results primarily from the fact that a significant portion of the costs associated with the Company's films has previously been amortized. Selling expenses decreased by approximately 84% to approximately $19,000 during the fiscal year ended April 30, 2000 versus approximately $118,000 during the previous fiscal year. This decrease results primarily from decreased costs associated with the Company's license of home video and DVD rights for the United States and Canada to nineteen (19) of its films to Trimark Pictures and decreased provisions for bad debt reserves. General and administrative costs decreased by approximately 13% to approximately $674,000 during the year ended April 30, 2000 versus approximately $771,000 during the same period last year. Interest expense decreased to approximately $86,000 during the year ended April 30, 2000 from approximately $433,000 during the year ended April 30, 1999. This decrease results primarily from an interest charge during the year ended April 30, 1999 of approximately $427,000 related to a beneficial conversion feature contained in a $1,000,000 convertible note issued by the Company on April 26, 1999. During the year ended April 30, 2000, the Company had no equity in the losses of affiliates versus approximately $476,000 for the year ended April 30, 1999. The equity in losses of affiliates during the year ended April 30, 1999 represented the Company's share of losses incurred by Immediate. During the years ended April 30, 2000 and 1999, the Company recorded valuation allowances of approximately $1,979,000 and $3,284,000, respectively, reflecting the Company's uncertainty regarding the recoverability of its investment in Immediate. As of April 30, 2000, the Company had recorded equity in losses of affiliates and/or valuation allowances for the full amount of its investment in Immediate. Immediate has experienced substantial recurring operating losses and has a significant working capital deficit. During the year ended April 30, 2000, the Company also recorded a valuation allowance for the full amount of its investment in Merchant Ivory Distribution LLC. (SEE NOTE C - INVESTMENTS). During the 9 10 period ended April 30, 2000, the Company recorded a gain on the sale of its investment in Star TV. The gain results from the forgiveness by Star of a loan in the principal amount of $250,000 plus accrued interest of $10,538 that occurred as part of a transaction whereby the Company sold its investment in Star back to Star. (SEE NOTE C - INVESTMENTS AND NOTE E - NOTES PAYABLE). During the year ended April 30, 2000, the Company incurred a net loss of approximately $2,172,000 versus a net loss of approximately $4,537,000 during the year ended April 30, 1999. The loss for the year ended April 30, 2000 results primarily from the valuation allowances recorded by the Company to reflect the recoverability of certain investments, primarily Immediate. The decrease in the Company's net loss of approximately $2,365,000 as compared to the year ended April 30, 1999 results primarily from (i) the decrease in equity in losses of affiliates and valuation allowances of approximately $1,530,000, (ii) the interest charge of approximately $427,000 recorded during the year ended April 30, 1999 associated with the issuance of a convertible note and (iii) the decrease in film cost amortization and selling expenses of approximately $323,000. During the years ended April 30, 2000 and 1999, the Company had no significant provision for income taxes. LIQUIDITY AND CAPITAL RESOURCES The production of motion pictures requires substantial capital. In producing a motion picture, the Company may expend substantial sums for both the production and distribution of a picture, before that film generates any revenues. In many instances the Company obtains advances or guarantees from its distributors but these advances and guarantees generally defray only a portion of a film's cost. The Company's principal source of working capital during the year ended April 30, 2000 was motion picture licensing income. Except for the financing of film production costs, management believes that its existing cash resources will be sufficient to fund its ongoing operations. During the year ended April 30, 2000, the Company's operating activities generated approximately $919,000 of cash that was primarily used to repay a convertible note in the principal amount of $1,000,000. During the year ended April 30, 1999, the Company used approximately $2,603,000 of cash on hand plus approximately $1,211,000 of cash provided by financing activities to fund approximately $1,230,000 of operating activities and approximately $2,584,000 of investing activities. As of April 30, 2000, the Company had cash and cash equivalents of approximately $85,000 as compared to cash, cash equivalents and restricted cash of approximately $1,056,000 as of April 30, 1999. FUTURE COMMITMENTS On May 20, 2000, the Company announced that it would acquire all of the outstanding common stock of privately-held Animal Town for a combination of $51,000 in cash and the issuance of up to 97,026 shares of the Company's common stock. Further, the Company agreed, on an interim basis in advance of the closing of the acquisition, to provide a secured credit facility in order for Animal Town to immediately commence production of a new catalogue. The Company believes that is has sufficient working capital to undertake this new business activity. The Company does not have any other material future commitments. 10 11 FORWARD-LOOKING STATEMENTS The foregoing discussion, as well as the other sections of this Annual Report on Form 10-KSB, contains forward-looking statements that reflect the Company's current views with respect to future events and financial results. Forward-looking statements usually include the verbs "anticipates," believes," "estimates," "expects," "intends," "plans," "projects," "understands" and other verbs suggesting uncertainty. The Company reminds shareholders that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors which could cause the actual results to differ materially from the forward-looking statements. Potential factors that could affect forward-looking statements include, among other things, the Company's ability to identify, produce and complete film projects which are successful in the market, to arrange financing, distribution and promotion for these projects on favorable terms in various markets and to attract and retain qualified personnel. ITEM 7. FINANCIAL STATEMENTS The Financial Statements of Kings Road Entertainment, Inc. are listed on the Index to Financial Statements set forth on page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III. ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information with respect to the directors and executive officers of the Company. Directors are elected at the annual meeting of stockholders to serve for staggered terms of three years each and until their successors are elected and qualified. Officers serve at the request of the Board of Directors of the Company. There are no family relationships between any of the directors or executive officers.
EXPIRATION NAME AGE POSITION OF TERM ---- --- -------- ---------- Michael L. Berresheim 47 Chairman and Chief Executive 2001 Officer David W. Dube 44 Director, President and Chief 2000 Operating Officer James P. Leaderer 46 Director 2000
EXECUTIVE OFFICERS AND DIRECTORS MICHAEL L. BERRESHEIM has been a director of the Company since November 1999 and began serving as the Company's Chairman and Chief Executive Officer in April 2000. Mr. Berresheim was the Chairman and Chief Executive Officer of publicly traded Immediate Entertainment Group, Inc. from November 1997 to March 2000. From November 1993 to November 1997 Mr. Berresheim was Chairman of Media and Music Services Holding Corp., a music publishing company. Prior to November 1993, Mr. Berresheim was self-employed, during 11 12 which time he was associated with Filmtrax, an independent film music publisher in Europe and founded King Biscuit Flower Hour Records, a U.S. based music label. DAVID W. DUBE has been a director of the Company since April 1999 and became the Company's President and Chief Operating Officer in April 2000. From June 1999 until April 2000, Mr. Dube was the Company's Chairman and Chief Executive Officer. From September 1997 to October 1999, Mr. Dube was Senior Vice President of FAB Capital Corporation, a merchant banking and securities firm. Mr. Dube was President and Chief Executive Officer of Optimax Industries, Inc., a publicly traded company with interests in the horticultural, decorative giftware and truck parts accessories industries from July 1996 to September 1997. From February 1991 to June 1996, Mr. Dube was the principal of Dube & Company, a financial consulting firm. Mr. Dube currently serves as a director of SafeScience, Inc., CareerEngine Network, Inc., New World Wine Group, Ltd. and several other privately held companies. Mr. Dube received undergraduate and graduate degrees from Suffolk University and an additional graduate degree from Bentley College. Mr. Dube is certified public accountant in the State of New Hampshire, holds various general and principal securities licenses and is an adjunct instructor of accounting for the Center for Professional Education, Inc. JAMES P. LEADERER has been a director of the Company since November 1999. Mr. Leaderer currently serves as the President and Chief Executive Officer of Directrade, Inc., a day trading firm. From November 1997 to January 1999, Mr. Leaderer was Vice President of Investment Banking and was a director of FAB Securities of America, Inc. From June 1991 to November 1997, Mr. Leaderer was the President and Chief Executive Officer of Woodside Assurance, Inc., a private investment entity. Mr. Leaderer graduated from Syracuse University with a degree in Industrial Engineering. Mr. Leaderer holds various general and principal securities licenses. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company believes that Mr. Berresheim is currently delinquent in filing a Form 4 since joining the Company's board of directors. Other than the foregoing, the Company does not know of any person or beneficial owner that did not timely file the reports required by Section 16(a) of the Securities Exchange Act. ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the compensation for each of the last three fiscal years of the Company's Chief Executive Officers and up to four of the other most highly compensated individuals serving as executive officers at April 30, 2000 whose total salary and bonus exceeded $100,000 for the fiscal year ("Named Officers"). No other Named Officer of the Company received salary and bonus in excess of $100,000 in any of the last three fiscal years. 12 13
LONG TERM ANNUAL COMPENSATION COMPENSATION --------------------- STOCK OPTIONS ALL OTHER NAME AND POSITION YEAR SALARY($) BONUS($) (SHARES) COMPENSATION ----------------- ---- --------- -------- ------------- ------------ Michael L. Berresheim(1) Chairman and Chief 2000 $ 10,000 $ 0 0 $ 0 Executive Officer David W. Dube(2) President and Chief 2000 100,000 0 175,000 0 Operating Officer Phillip G. Cook(3) Former Chairman and 2000 0 0 0 0 Chief Executive Officer 1999 0 0 0 0 Kenneth I. Aguado(4) Former Chairman and 1999 71,085 75,334 66,667 1,154(5) Chief Executive Officer 1998 115,269 10,000 27,708 64,314(6)
--------------- (1) Mr. Berresheim became the Company's Chief Executive Officer in April 2000. (2) Mr. Dube was the Company's Chief Executive Officer from June 1999 until his resignation from that position in April 2000. (3) Mr. Cook was the Company's Chief Executive Officer from November 1998 until his resignation in June 1999. (4) Mr. Aguado was the Company's Chief Executive Officer from October 1996 until his resignation in November 1999. (5) Represents contributions made by the Company on behalf of Mr. Aguado pursuant to the Company's SIMPLE IRA plan. (6) Includes $58,808 representing the difference between the exercise price and the market price on the date of exercise of stock options exercised by Mr. Aguado and $5,506 representing contributions made by the Company on behalf of Mr. Aguado pursuant to the Company's SIMPLE IRA plan. OPTION GRANTS The following table sets forth the individual grants of stock options made during the fiscal year ended April 30, 2000 to the Named Officers:
% OF TOTAL OPTIONS GRANTED TO OPTIONS EMPLOYEES EXERCISE EXPIRATION NAME GRANTED IN FISCAL YEAR PRICE DATE ---- ------- -------------- -------- ---------- David W. Dube 175,000 100% $0.94 09/12/2004
OPTION EXERCISES AND YEAR-END VALUES Shown below is information with respect to ownership by the Named Officers of options and option values as of April 30, 2000. No options were exercised during the year ended April 30, 2000. 13 14
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT APRIL 30, 2000 AT APRIL 30, 2000(1) ------------------------------ ------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- David W. Dube 25,000 150,000 $0 $0
---------- (1) Based upon the difference between the closing stock price on April 30, 2000 and the option exercise price. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL STOCKHOLDERS The following table sets forth certain information, as of July 31, 2000, concerning ownership of shares of Common Stock by each person who is known by the Company to own beneficially more than 5% of the issued and outstanding Common Stock of the Company:
NUMBER OF PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS ------------------------------------ --------- ---------- Michael Berresheim 1,560,997(1)(2) 44.1% Gerauer Street 58A Moerfelden Walldorf, Germany 64546 MBO Music Verlag GmbH 988,493 27.9% Gerauer Street 58A Moerfelden Walldorf, Germany 64546 West Union Leasing 572,504(2) 16.2% 10 Greycoat Place 1 Premier House London SW1 United Kingdom Wavecount, Inc. 300,000(3) 8.5% 42 Broadway, Suite 1101 New York, New York 10004 Randy Strausberg 300,000(3) 8.5% 42 Broadway, Suite 1101 New York, New York 10004
---------- (1) Includes 988,493 shares owned by MBO Music Verlag GmbH of which Mr. Berresheim is the Managing Director and sole shareholder and 572,504 shares of West Union Leasing Limited ("West Union"), a trust whose beneficiary is Mrs. Johanna Ammons, the mother of Mr. Berresheim. (2) The Company has been advised of a claim of ownership by West Union to 150,000 shares owned by Robert H. Jaffe & Associates, P.A. as trustee for Lancaster Consultants, Inc. and Robert H. Jaffe & Associates, P.A. In the event that West Union is determined to be the owner of such shares, the ownership of West Union would increase to 722,504 shares, 20.4% of the Company's outstanding common stock. Mr. Berresheim's beneficial ownership would likewise increase to 1,710,997 shares, 48.3% of the Company's outstanding common stock. (3) Mr. Strausberg is the President and a significant shareholder of Wavecount, Inc., the registered holder of 300,000 shares of the Company's common stock. 14 15 SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of July 31, 2000, certain information concerning ownership of shares of Common Stock by each director of the Company and by all executive officers and directors of the Company as a group:
NAME AND ADDRESS OF DIRECTORS OR NUMBER OF PERCENT OF NUMBER OF PERSONS IN GROUP SHARES CLASS -------------------------------- --------- ---------- Michael L. Berresheim 1,560,997(1) 42.7% Gerauer Street 58A Moerfelden Walldorf, Germany 64546 David W. Dube 137,500(2) 3.8% 12 East 33rd Street, 12th Floor New York, New York 10016 James P. Leaderer 25,000(3) Less than 1.0% 135 East 54th Street, 14th Floor New York, New York 10022 All Executive Officers and Directors as a Group (3 persons) 1,723,497 47.2%
---------- (1) Includes 988,493 shares owned by MBO Music Verlag GmbH of which Mr. Berresheim is the Managing Director and sole shareholder and 572,504 shares of West Union Leasing Limited ("West Union"), a trust whose beneficiary is Mrs. Johanna Ammons, the mother of Mr. Berresheim. (2) Includes options to purchase up to 87,500 shares that are currently exercisable. Does not include options to purchase up to 87,500 shares that are not currently exercisable. (3) Includes options to purchase up to 25,000 shares that are currently exercisable. Does not include options to purchase up to 25,000 shares that are not currently exercisable. Except as otherwise disclosed herein, the Company does not know of any arrangements, including any pledge of the Company's securities, the operation of which at a subsequent date may result in a change of control of the Company. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS During the fiscal year ended April 30, 2000, the Company has advanced to Immediate Entertainment Group, Inc. ("Immediate") or made payments to third parties on Immediate's behalf the aggregate sum of $93,000. An aggregate of approximately $240,000 is currently due to the Company from Immediate. In order to repay these advances, the Company has reached an agreement with Immediate whereby Immediate will transfer to the Company ownership to certain film projects currently being developed by Immediate. The basis for determining the value of these projects will be the historical costs paid by Immediate for development of the projects that will then reduce, on a dollar-for-dollar basis, amounts due from Immediate. The Company has recorded a write down of approximately $185,000 to reflect the difference between the historical costs for the projects the Company expects to receive and the amount due to the Company from Immediate. Mr. Berresheim, the Company's Chairman and Chief Executive Officer, was an officer of Immediate and continues to be a significant shareholder of Immediate. 15 16 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-B) 3.1 Restated Certificate of Incorporation of Registrant.(1) 3.2 Bylaws of Registrant.(2) 10.1 1998 Stock Option Plan.(1) 21 Subsidiaries of Registrant.(3) 27 Financial Data Schedule.(5) ---------- (1) Incorporated by reference to Form 10-KSB for the fiscal year ended April 30, 1998. (2) Incorporated by reference to Form 10-K for the fiscal year ended April 30, 1988. (3) Incorporated by reference to Form 10-KSB for the fiscal year ended April 30, 1999. (4) Filed electronically with Securities and Exchange Commission, omitted in copies distributed to shareholders or other persons. (b) FORMS 8-K None (c) SEE (a) ABOVE 16 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: August 18, 2000 KINGS ROAD ENTERTAINMENT, INC. By: /s/Michael Berresheim ------------------------------------- Michael Berresheim, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/Michael Berresheim Chairman of the Board of August 18, 2000 ------------------------- MICHAEL BERRESHEIM Directors and Chief Executive Officer (Principal Executive Officer) /s/David Dube Director, President and Chief August 18, 2000 ------------------------- DAVID DUBE Operating Officer (Principal Financial and Accounting Officer) /s/James Leaderer Director August 18, 2000 ------------------------- JAMES LEADERER
17 18 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 2000 Report of Independent Auditors F-2 Consolidated Balance Sheet as of April 30, 2000 F-3 Consolidated Statements of Operations for the Years Ended April 30, 2000 and 1999 F-4 Consolidated Statements of Shareholders' Equity for the Years Ended April 30, 2000 and 1999 F-5 Consolidated Statements of Cash Flows for the Years Ended April 30, 2000 and 1999 F-6 Notes to Consolidated Financial Statements F-7
F-1 19 HJ & ASSOCIATES, LLC INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Kings Road Entertainment, Inc. Los Angeles, California We have audited the accompanying consolidated balance sheet of Kings Road Entertainment, Inc. and Subsidiaries (the "Company") as of April 30, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended April 30, 2000 and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kings Road Entertainment, Inc. as of April 30, 2000 and the results of their operations and their cash flows for the years ended April 30, 2000 and 1999, in conformity with generally accepted accounting principles. /s/HJ & Associates, LLC ----------------------------- HJ & Associates, LLC, Salt Lake City, Utah August 14, 2000 F-2 20 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
AS OF APRIL 30, 2000 -------------- ASSETS Cash and Cash Equivalents $ 85,159 Accounts Receivable, net of allowance of $32,630 99,958 Due from Related Party 55,660 Film Costs, net of amortization of $168,440,044 131,636 Prepaid Expenses 12,477 Fixed Assets 10,338 Other Assets 1,990 ------------ TOTAL ASSETS $ 397,218 ============ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Accounts Payable $ 189,068 Accrued Expenses 3,160 Deferred Revenue 1,900 ------------ TOTAL LIABILITIES 194,128 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common Stock, $.01 par value, 12,000,000 shares authorized, 3,541,140 shares issued and outstanding 35,411 Additional Paid-In Capital 24,872,798 Deficit (24,705,119) ------------ TOTAL SHAREHOLDERS' EQUITY 203,090 ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 397,218 ============
The accompanying notes are an integral part of this balance sheet. F-3 21 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED APRIL 30 2000 1999 ----------- ----------- REVENUES Feature Films $ 659,941 $ 765,116 Interest Income 1,310 72,183 ----------- ----------- 661,251 837,299 COSTS AND EXPENSES Film Cost Amortization 79,554 304,243 Selling Expenses 19,073 117,996 General & Administrative Expenses 674,252 770,899 Interest Expense 85,545 433,276 ----------- ----------- 858,424 1,626,414 ----------- ----------- OPERATING LOSS (197,173) (789,115) Equity in Losses of Affiliates 0 475,695 Adjustment in Valuation of Investments 2,229,475 3,283,973 Gain on Sale of Investment in Star TV (260,538) 0 ----------- ----------- LOSS BEFORE INCOME TAXES (2,166,110) (4,548,783) Provision for Income Taxes 5,527 (11,924) ----------- ----------- NET LOSS $(2,171,637) $(4,536,859) =========== =========== Net Loss Per Share - Basic $ (0.62) $ (1.71) =========== =========== Weighted Average Number of Common Shares - Basic 3,484,810 2,650,532 =========== =========== Net Loss Per Share - Diluted $ (0.62) $ (1.71) =========== =========== Weighted Average Number of Common Shares and Common Share Equivalents - Diluted 3,484,810 2,650,532 =========== ===========
The accompanying notes are an integral part of these statements. F-4 22 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Common Additional Retained Total Stock Stock Paid-In Earnings/ Shareholders' Shares Amount Capital (Deficit) Equity ------------ ------------ ------------ ------------ ------------ Balance at April 30, 1998 1,911,748 $ 19,118 $ 21,117,200 $(17,996,623) $ 3,139,695 Issuance of Stock for Investment in Immediate 1,477,567 14,775 3,029,016 -- 3,043,791 Issuance of Convertible Note -- -- 427,185 -- 427,185 Net Loss -- -- -- (4,536,859) (4,536,859) ------------ ------------ ------------ ------------ ------------ Balance at April 30, 1999 3,389,315 33,893 24,573,401 (22,533,482) 2,073,812 Issuance of Stock in Regulation S Offering 91,418 914 158,045 -- 158,959 Issuance of Stock to Repay Note 60,407 604 141,352 -- 141,956 Net Loss -- -- -- (2,171,637) (2,171,637) ------------ ------------ ------------ ------------ ------------ Balance at April 30, 2000 3,541,140 $ 35,411 $ 24,872,798 $(24,705,119) $ 203,090 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements. F-5 23 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(2,171,637) $(4,536,859) Adjustments to Reconcile Net Loss to Net Cash Provided By/(Used In) Operating Activities: Depreciation and Amortization 84,100 221,093 Equity in Losses of Affiliates 0 475,695 Adjustment in Valuation of Investments 2,229,475 3,283,973 Gain on Sale of Investments (260,538) 0 Additional Reserve for Bad Debts 0 37,630 Non-cash Interest Expense 0 427,185 Benefit from Conversion of Note Payable to Related Party into Common Stock (68,847) 0 Changes in Assets and Liabilities: Decrease/(Increase) in Restricted Cash 1,000,000 (1,000,000) Decrease in Accounts Receivable 232,385 3,491 Decrease/(Increase) in Amount Due from Related Party (93,210) (147,000) Decrease in Prepaid Expenses 3,757 31,607 Decrease/(Increase) in Other Assets 139,189 (138,679) (Decrease)/Increase in Accounts Payable (81,908) 37,809 (Decrease)/Increase in Accrued Expenses (88,492) 76,652 Decrease in Deferred Revenue (5,375) (2,325) ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY/(USED IN) OPERATING ACTIVITIES 918,899 (1,229,728) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Investments (1,250,000) (2,510,803) Purchase of Fixed Assets (5,116) (2,988) Gross Additions to Film Costs (53,704) (70,201) Sale of Investments 1,260,538 0 ----------- ----------- NET CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES (48,282) (2,583,992) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Stock 158,959 0 (Repayment)/Issuance of Convertible Note (1,000,000) 1,000,000 Borrowing from Related Parties 0 210,803 ----------- ----------- NET CASH AND CASH EQUIVALENTS (USED IN)/PROVIDED BY FINANCING ACTIVITIES (841,041) 1,210,803 ----------- ----------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 29,576 (2,602,917) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 55,583 2,658,500 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 85,159 $ 55,583 =========== =========== Cash paid for: Interest 66,034 0 Taxes 4,727 7,362
The accompanying notes are an integral part of these statements. F-6 24 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES Principals of Consolidation - The consolidated financial statements include the accounts of Kings Road Entertainment, Inc. and its subsidiaries, Ticker, Inc. ("Ticker") and Orwell Properties, Inc. ("Orwell"), after elimination of all intercompany items and transactions. Ticker is a California corporation that was inactive at April 30, 2000. Orwell is a corporation formed under the laws of the Territory of the British Virgin Islands that was also inactive at April 30, 2000. Accounting Method - The Company's consolidated financial statements are prepared using the accrual method of accounting. The Company has elected an April 30 year-end. Recognition of Revenues - The Company recognizes revenues in accordance with the provisions of Financial Accounting Standards Board ("FASB") Statement No. 53. Revenues from theatrical exhibition are recognized on the dates of exhibition. Revenues from international, home video, television and pay television license agreements are recognized when the license period begins and the film is available for exhibition or exploitation pursuant to the terms of the applicable license agreement. Once complete, a typical film will generally be made available for licensing as follows:
Months After Approximate Marketplace Initial Release Release Period ----------- --------------- -------------- Domestic theatrical 6 months All international markets 1-10 years Domestic home video 6 months 6-12 months Domestic cable/pay television 12-18 months 18 months Domestic syndicated/free television 24-48 months 1-6 years
During the year ended April 30, 2000, the Company earned revenue from four significant customers of approximately $445,000 (67%) of revenues. During the year ended April 30, 1999, the Company earned revenue from three significant customers of approximately $516,000 (62%) of revenues. Revenues from foreign sources were approximately $20,000 and $82,000 in 2000 and 1999, respectively. Film Costs - Film costs, including any related interest and overhead, are capitalized as incurred. Profit participations and residuals, if any, are accrued in the proportion that revenue for a period bears to the estimated future revenues. The individual film forecast method set forth in FASB Statement No. 53 is used to amortize these costs based on the ratio of revenue earned in the current period to the Company's estimate of total revenues to be realized. Management periodically reviews its estimates on a film-by-film basis and, when unamortized costs exceed net realizable value for a film, that film's unamortized costs are written down to net realizable value. Costs related to projects which are abandoned or sold before being produced are charged to overhead in the year that event occurs. F-7 25 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Depreciation and Amortization - Depreciation of fixed assets is computed by the straight-line method over the estimated useful lives of the assets ranging from three to five years. Leasehold improvements are amortized over the useful life of the improvements or the term of the applicable lease, whichever is less. Concentration of Credit Risk - The Company licenses various rights in its films to distributors throughout the world. Generally, payment is received in full or in part prior to the Company's delivery of the film to the applicable distributor. As of April 30, 2000, approximately 9% of the Company's accounts receivable were from foreign distributors. Cash Concentration - The Company maintains its cash balances at financial institutions that are federally insured, however, at times such balances may exceed federally insured limits. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of - On April 1, 1997, the Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell. Adoption of this statement did not have a material impact on the Company's financial position or results of operations. Year 2000 Compliance - The Company did not experience any problems with its computer systems relating to year 2000 processing issues. New Accounting Pronouncements - The Company has adopted SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. Adoption of these pronouncements did not have a material impact on the Company's financial position or results of operations as there were no items of comprehensive income and there were no reportable segments. The Company operated in one business segment at April 30, 2000, consisting of the production and distribution of feature length motion pictures, however, recent events may require segment reporting in future periods. F-8 26 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recent Accounting Pronouncements Effective Subsequent to 2000 - In October 1998, FASB released an exposure draft of its Proposed Statement of Position - Accounting by Producers and Distributors of Films ("Proposed SOP"). This Proposed SOP would replace FASB No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films. The Company does not anticipate that the adoption of this statement, as currently drafted, will have a material impact on the Company's financial position or results of operations. Basic and Fully Diluted Loss Per Share - During the Company's fiscal year ended 1998, the Company implemented SFAS No. 128, Earnings Per Share. SFAS No. 128 provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity that were outstanding for the period, similar to fully diluted earnings per share. Reclassification - Certain amounts for the year ended April 30, 1999 have been reclassified to conform with the presentation of the April 30, 2000 amounts. The reclassifications have no effect on reported net income. NOTE B - FILM COSTS Film costs consist of:
As Of April 30, 2000 -------------- Released Films, less amortization $ 0 Films in Production 0 Projects in Development 131,636 -------- $131,636 ========
No interest or overhead was capitalized to film costs during the fiscal years ended April 30, 2000 and 1999, as no new motion pictures were produced during those periods. NOTE C - INVESTMENTS In September 1993, the Company entered into an agreement ("Agreement") with another corporation ("Limited Partner") wherein a limited partnership ("Partnership") was formed for the purpose of producing and distributing one theatrical motion picture ("Picture") at a cost of approximately $3,000,000. The Company is the general partner and owns 50% of the Partnership. Revenue generated by the Picture, after deduction of distribution expenses, is disbursed equally to the Company and the Limited Partner. For financial reporting purposes, the Company's contributions to the Picture, and certain capitalized overhead and interest expenses, are included in film costs. Revenue from the Partnership is recognized when received and the Company's contributions to the Picture are amortized according to the individual film forecast method described in Note A. During the fiscal year ended April 30, 2000, the Company received approximately $102,000 from the Partnership. F-9 27 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C - INVESTMENTS (CONTINUED) On November 9, 1998, the Company acquired 2,393,235 shares of Immediate Entertainment Group, Inc. ("Immediate"), approximately 19% of Immediate's outstanding common stock, for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares of the Company's common stock and a note payable to the sellers of the stock for $210,803. During the fiscal year ended April 30, 2000, this note, plus its accrued interest, was converted into the Company's common stock pursuant to an agreement between the Company and the sellers of the Immediate shares dated as of March 12, 1999. The Company has evaluated the recoverability of its investment in Immediate and recorded a valuation allowance of $1,794,926 during the year ended April 30, 2000, reducing the carrying value of this investment to $0. An aggregate of approximately $240,000 is currently due to the Company from Immediate. In order to repay these advances, the Company has reached an agreement with Immediate whereby Immediate will transfer to the Company ownership to certain film projects currently being developed by Immediate. The basis for determining the value of these projects will be the historical costs paid by Immediate for development of the projects that will then reduce, on a dollar-for-dollar basis, amounts due from Immediate. The Company has recorded a write down of approximately $185,000 to reflect the difference between the historical costs for the projects the Company expects to receive and the amount due to the Company from Immediate. On May 12, 1999, the Company purchased approximately 19% of the outstanding common stock of Star TV AG ("Star") through the Company's wholly owned subsidiary, Orwell Properties, Inc. On February 15, 2000, the Company sold its investment in Star back to Star for (i) cash proceeds of $1,000,000 and (ii) extinguishment of the Star Loan and related accrued interest. The cash proceeds were used to repay the Convertible Note. SEE NOTE E - NOTES PAYABLE. On April 27, 1999, the Company entered into an agreement ("Joint Venture Agreement") with Merchant Ivory Productions ("MIP"). Pursuant to the Joint Venture Agreement, the Company was required to contribute to Merchant Ivory Distribution, LLC ("MIFD"), on or before May 5, 1999, $250,000 and options to purchase up to 250,000 shares of the Company's common stock at an exercise price equal to the average price of the Company's stock for the five day period prior to the execution of the Joint Venture Agreement. The Company was also required to provide a revolving line of credit of up to $500,000 to MIFD to fund print and advertising expenses incurred by MIFD. On May 18, 1999, the Company contributed $250,000 to MIFD. As of April 30, 2000, the Company has abandoned its interest in MIFD and recorded a valuation allowance of $250,000 during the year ended April 30, 2000 to write-off its investment in MIFD. NOTE D - FIXED ASSETS Fixed assets consist of:
As Of April 30, 2000 -------------- Office Equipment $11,788 Furniture & Fixtures 4,640 Accumulated Depreciation (6,090) ------- $10,338 =======
F-10 28 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E - NOTES PAYABLE On November 9, 1998, the Company acquired 2,393,235 shares of Immediate, approximately 19% of Immediate's outstanding common stock, from FAB Capital Corporation ("FAB"), MBO Music Verlag GmbH ("MBO") and West Union Leasing Ltd. ("West"), collectively, the "Sellers," for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares of the Company's common stock and a note payable to the sellers of the stock for $210,803 bearing interest at 5% per annum due upon demand but in no event earlier that April 30, 2000 ("Note"). Pursuant to such transaction, FAB, MBO and West were due $93,175, $82,424, and $35,204, respectively, under the Note. The Note, at the option of the Company, was convertible into shares of the Company's common stock at the rate of $2.35 per share pursuant to an agreement between the Company and the Sellers dated March 12, 1999. During the fiscal year ended April 30, 2000, the Company converted the Note plus applicable accrued interest, after the deduction of certain advances made by the Company to the Sellers or to third parties affiliated with the Sellers. On April 26, 1999, the Company issued a convertible note ("Convertible Note") to Tresor Worldwide Limited ("Tresor") in the principal amount of $1,000,000. On February 15, 2000, the Convertible Note was repaid in full using the cash proceeds from the sale of the Company's investment in Star. SEE NOTE C - INVESTMENTS. On May 17, 1999, the Company entered into a Loan Agreement with Star TV whereby the Company borrowed $250,000 from Star ("Star Loan") bearing interest at 6% per annum. On February 15, 2000, the Star Loan was extinguished as part of the Company's sale of its investment in Star back to Star. SEE NOTE C - INVESTMENTS. NOTE F - COMMITMENTS AND CONTINGENCIES On May 20, 2000, the Company announced that it would acquire all of the outstanding common stock of privately-held Animal Town, Inc. for a combination of $51,000 in cash and the issuance of up to 97,026 shares of the Company's common stock. Further, the Company agreed, on an interim basis in advance of the closing of the acquisition, to provide a secured credit facility in order for Animal Town to immediately commence production of a new catalog. The Company leases approximately 500 square feet of office space and various film element and general storage space on a month-to-month basis. Rent expense for the Company's office and storage space was $36,262 and $50,822 in 2000 and 1999, respectively. NOTE G - STOCK OPTIONS AND WARRANTS The Company's 1998 Stock Option Plan ("1998 Plan") provides for the grant of options to purchase up to 400,000 shares of the Company's common stock. At April 30, 2000, options to purchase up to 225,000 shares of the Company's common stock were outstanding under the 1998 Plan at an exercise price of $0.94 per share. Of such outstanding options, 50,000 were fully vested and exercisable as of April 30, 2000. F-11 29 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G - STOCK OPTIONS AND WARRANTS (CONTINUED) The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its employee stock options since the alternative fair value accounting provided for under FASB No. 123, Accounting for Stock-Based Compensation, requires the use of valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. NOTE H - INCOME TAXES A reconciliation of the provision for income taxes to the expected income tax expense at the statutory federal tax rate of 34% is as follows:
2000 1999 ---- ---- Computed Expected Tax at Statutory Rate $(702,430) $(1,546,586) Benefit of Prior Years Amended Tax Returns 0 (19,286) State and Local Taxes 5,394 6,256 Foreign Taxes 133 1,106 Valuation Allowance 702,430 1,546,586 --------- ----------- $ 5,527 $ (11,924) ========= ===========
For federal income tax purposes, the Company has available investment tax credits of approximately $2,166,000 after being reduced by 35% as a result of the Tax Reform Act of 1986 (expiring between 2000 and 2002) and net operating loss carryforwards of approximately $15,525,000 (expiring between 2001 and 2014) to potentially offset future income tax liabilities. Deferred tax assets result from temporary differences between financial and tax accounting in the recognition of revenue and expenses. Temporary differences and carryforwards which give rise to deferred tax assets are as follows:
As Of April 30, 2000 -------------- Valuation Allowances 2,436,000 Net Operating Loss Carryforwards 6,210,000 Investment Tax Credit Carryforwards 2,166,000 Foreign Tax Credit Carryforwards 400,000 ---------- 11,212,000 Valuation Allowance (11,212,000) ---------- $0 ----------
A valuation allowance of $11,212,000 has been recorded to offset the net deferred tax assets due to the uncertainty of realizing the benefits of the tax assets in the future. In addition, as a result of the change in control of the Company resulting from a November 6, 1998 Acquisition Agreement, Internal Revenue Code section 382 significantly limits the Company's ability to utilize its net operating loss carryforwards. As a result of this limitation, the Company expects that its investment tax credit and foreign tax credit carryforwards as well as a significant amount of its net operating loss carryforwards incurred prior to the change in control will expire prior to utilization by the Company. F-12 30 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE I - LITIGATION AND CONTINGENCIES In the ordinary course of business, the Company has or may become involved in disputes or litigation which in the aggregate are not believed by management to be material to its financial position or results of operations. NOTE J - RELATED PARTY TRANSACTIONS During the fiscal year ended April 30, 2000, the Company has advanced to Immediate Entertainment Group, Inc. ("Immediate") or made payments to third parties on Immediate's behalf the aggregate sum of $93,000. An aggregate of approximately $240,000 is currently due to the Company from Immediate. In order to repay these advances, the Company has reached an agreement with Immediate whereby Immediate will transfer to the Company ownership to certain film projects currently being developed by Immediate. The basis for determining the value of these projects will be the historical costs paid by Immediate for development of the projects that will then reduce, on a dollar-for-dollar basis, amounts due from Immediate. The Company has recorded a write down of approximately $185,000 to reflect the difference between the historical costs for the projects the Company expects to receive and the amount due to the Company from Immediate. Mr. Berresheim, the Company's Chairman and Chief Executive Officer, was an officer of Immediate and continues to be a significant shareholder of Immediate. SEE NOTE C - INVESTMENTS. F-13