10QSB 1 v65688e10qsb.txt FORM 10-QSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended July 31, 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 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 [ ] ---- ----- As of September 12, 2000 the Registrant had 3,541,140 shares of its common stock outstanding. Transitional Small Business Disclosure Format: YES [ ] NO [X] --- ----- 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF JULY 31, 2000 ------------- ASSETS Cash and Cash Equivalents $ 158,443 Marketable Securities 300,440 Accounts Receivable, net of allowance of $32,630 98,747 Due from Related Party 55,660 Notes Receivable 31,500 Film Costs, net of amortization of $168,463,829 45,086 Investment in Theatrical Production 4,500 Prepaid Expenses 10,227 Fixed Assets 5,373 Other Assets 1,990 ------------ TOTAL ASSETS $ 711,966 ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts Payable $ 216,969 Accrued Expenses 3,160 Deferred Revenue 9,930 ------------ TOTAL LIABILITIES 230,059 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' 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 (24,426,302) ------------ TOTAL STOCKHOLDERS' EQUITY 481,907 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 711,966 ============
The accompanying notes are an integral part of these consolidated financial statements. 2 3 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JULY 31, 2000 1999 ------------ ------------ REVENUES Feature Films $ 692,565 $ 91,865 Interest Income 5,778 413 ----------- ----------- 698,343 92,278 COSTS AND EXPENSES Costs Related to Revenues 225,693 0 Selling Expenses 35,585 1,451 General & Administrative Expenses 156,648 276,467 Interest 0 25,859 ----------- ----------- 417,926 303,777 ----------- ----------- OPERATING INCOME (LOSS) 280,417 (211,499) OTHER EXPENSES Equity in Losses of Affiliates 0 237,849 Adjustment in Valuation of Other Investments 0 100,000 ----------- ----------- 0 337,849 INCOME (LOSS) BEFORE INCOME TAXES 280,417 (549,348) Provision for Income Taxes 1,600 110 ----------- ----------- NET INCOME (LOSS) $ 278,817 ($ 549,458) =========== =========== Net Income (Loss) Per Share - Basic and Diluted $ 0.08 ($ 0.16) =========== =========== Weighted Average Number of Common Shares - Basic and Diluted 3,541,140 3,474,334 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JULY 31, 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 278,817 $ (549,458) Adjustments to reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation and Amortization 227,020 1,534 Equity in Losses of Affiliates 0 237,849 Adj. in Valuation of Other Investments 0 100,000 Changes in Assets and Liabilities: Decrease in Restricted Cash 0 1,000,000 Decrease in Accounts Receivable 1,210 123,997 Increase in Amount Due from Related Party 0 (93,210) Increase in Notes Receivable (31,500) 0 Decrease in Prepaid Expenses 2,250 2,983 Decrease in Other Assets 0 60,609 Increase in Accounts Payable 27,902 53,198 Decrease in Accrued Expenses 0 (64,714) Increase in Deferred Revenue 8,030 0 ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY OPERATING ACTIVITIES 513,729 872,788 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Marketable Securities (300,440) 0 Gross Additions to Film Costs (139,143) (41,597) Increase in Other Investments (4,500) (1,250,000) Disposal of Fixed Assets 3,638 0 ----------- ----------- NET CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES (440,445) (1,291,597) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Common Stock 0 161,083 Issuance of Note Payable 0 250,000 ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES 0 411,083 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 73,284 (7,726) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 85,159 55,583 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 158,443 $ 47,857 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 5 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements. Accordingly, they do not include all of the information and disclosures required for annual financial statements. These financial statements should be read in conjunction with the financial statements and related footnotes for the year ended April 30, 2000 included in the Kings Road Entertainment, Inc. ("Company" or "Registrant") annual report on Form 10-KSB for that period. In the opinion of the Company's management, all adjustments (consisting of normal recurring accruals) necessary to fairly present the Company's financial position at July 31, 2000 and the results of operations and cash flows for the three months ended July 31, 2000 and 1999, respectively, have been included. The results of operations for the three month period ended July 31, 2000 are not necessarily indicative of the results to be expected for the full fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended April 30, 2000. 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 periods. Actual results could differ from those estimates. NOTE B - FILM COSTS Film costs consist of film projects actively in development at July 31, 2000. NOTE C - MARKETABLE SECURITIES In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, the Company determines the classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. Marketable securities have been classified as available for sale and are stated at market value. It is currently the Company's policy to purchase only US Government securities with maturities of less than one year. NOTE D - LITIGATION AND CONTINGENCIES In the ordinary course of business, the Company has or may become involved in disputes or litigation. On the basis of information available to it, management believes such contingencies will not have a materially adverse effect on the Company's financial position or results of operations. 5 6 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E - 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:
Three Months Three Months Ended Ended July 31, 2000 July 31, 1999 -------------- ------------- Computed Expected Tax at Statutory Rate $ 95,342 $(237,779) State and Local Taxes 1,600 110 Valuation Allowance (95,342) 237,779 --------- --------- $ 1,600 $ 110 ========= =========
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 2016) to 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:
At July 31, 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 a change in control of the Company that occurred in November 1998, 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, will expire prior to utilization by the Company. 6 7 ITEM 2 - 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 its revenues almost exclusively from the exploitation of films produced in prior years. The Company continues to fund and develop film projects, with the intention of either producing the film, establishing a partnership or joint venture with another film production company or an outright sale of the project. 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 common stock for $210,803 that was subsequently converted into additional shares of the Company's common stock. 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 remainder of the carrying value of its investment in Immediate, decided to effect a complete writedown during the year ended April 30, 2000. 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 trading price of Immediate's common stock. The Company is currently evaluating various alternatives with respect to recovering its investment in Immediate, however, there can be no assurance that the Company will be able to recover any portion of this investment. 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 a combination of approximately $51,000 in cash and the issuance of up to 97,026 shares of the Company's common 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. Advances under this credit facility to Animal Town at July 31, 2000 were approximately $32,000 and are collateralized by Animal Town's inventory, trademarks and proprietary customer list. 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. On August 31, 2000, the Company announced that it entered into an agreement as Executive Producer for an Off-Broadway production of the play "End of the World Party". In addition to certain film rights, performance venues and other production rights that were negotiated with the producer/director team, including future theatrical projects, the Company will assist in the creation and sale of merchandise associated with the theatrical play and will share in the revenues generated. 7 8 RESULTS OF OPERATIONS For the quarter ended July 31, 2000, feature film revenues were approximately $693,000 as compared to approximately $92,000 for the quarter ended July 31, 1999. The substantial increase in feature film revenues results primarily from (i) the sale of the Company's rights to "Ticker", a feature film project that had been developed by the Company, for approximately $243,000 and (ii) increased foreign distribution revenues from feature films in the Company's film library. Interest income increased to approximately $6,000 for the quarter ended July 31, 2000 from approximately $400 during the same quarter last year, reflecting an increase in cash and marketable securities held during the quarter ended July 31, 2000. Costs related to revenues were approximately $226,000 for the quarter ended July 31, 2000 versus no similar costs during the quarter ended July 31, 1999. This increase results primarily from the amortization of costs related to "Ticker". Selling expenses increased to approximately $36,000 during the quarter ended July 31, 2000 versus approximately $1,000 during the same quarter last year. This increase results primarily from commissions payable to the Company's sales agent handling foreign distribution of the Company's film library. General and administrative costs decreased by 43% to approximately $157,000 during the quarter ended July 31, 2000 versus approximately $276,000 during the same period last year. This change results primarily from decreased accounting fees and financing costs associated with a convertible promissory note that was repaid and the expense adjustment during the quarter ended July 31, 1999 reflecting certain amounts previously advanced to third parties. During the quarter ended July 31, 2000, the Company had no interest expense. Interest expense during the quarter ended July 31, 1999 was approximately $26,000, reflecting the interest incurred by the Company on its then outstanding notes payable. During the quarter ended July 31, 2000, the Company had no equity in the losses of affiliates or adjustments in the valuation of its investments. During the quarter ended July 31, 1999, equity in losses of affiliates was approximately $238,000 reflecting the Company's share of losses incurred by Immediate. During the same period, the Company recorded a decrease adjustment in the valuation of its investment in a joint venture of $100,000. During the quarter ended July 31, 2000, the Company had net income of approximately $279,000 versus a net loss of approximately $549,000 for the quarter ended July 31, 1999. This increase in net income results primarily from (i) the substantial increase in revenues during the quarter ended July 31, 2000 discussed above, (ii) the decrease in general and administrative expenses during the quarter ended July 31, 2000 as compared to the quarter ended July 31, 1999 discussed above, and (iii) the equity in losses of affiliates and adjustments made in the valuation of certain investments recorded during the quarter ended July 31, 1999, for which there were no comparable losses or adjustments during the quarter ended July 31, 2000. During the quarters ended July 31, 2000 and 1999, the Company had no significant provisions 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 motion picture before that film generates any revenues. In many instances, the Company obtains advances or guarantees from its distributors but these advances and guarantees 8 9 generally defray only a portion of a film's total cost. The Company's principal source of working capital during the quarter ended July 31, 2000 was motion picture licensing income. Except for the financing of new film production costs, management believes that its existing cash resources will be sufficient to fund its ongoing operations. For the quarter ended July 31, 2000, the Company's net cash flow provided by operating activities was approximately $514,000, a decrease of approximately $359,000, as compared to approximately $873,000 of net cash flow provided by operating activities during the quarter ended July 31, 1999. During the quarter ended July 31, 2000, the Company used its cash flow from operations to purchase approximately $300,000 of marketable securities plus expended gross additions to film costs of approximately $139,000. At July 31, 2000, the Company had cash, cash equivalents and marketable securities of approximately $459,000 as compared to approximately $48,000 as of July 31, 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, Inc. ("Animal Town") for a combination of approximately $51,000 in cash and the issuance of up to 97,026 shares of the Company's common 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. 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 Fall 2000 catalog. On August 31, 2000, the Company announced that it entered into an agreement as Executive Producer for an Off-Broadway production of the play "End of the World Party". In addition to certain film rights, performance venues and other production rights that were negotiated with the producer/director team, including future theatrical projects, the Company will assist in the creation and sale of merchandise associated with the theatrical play and will share in the revenues generated. The Company believes that it has sufficient working capital to undertake these new business activities. The Company does not have any other material future commitments. FORWARD-LOOKING STATEMENTS The foregoing discussion, as well as the other sections of this Quarterly Report on Form 10-QSB, 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 that are successful in the marketplace, to arrange financing, distribution and promotion for these projects on favorable terms in various markets and to attract and retain qualified personnel. 9 10 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS In the ordinary course of business, the Company has or may become involved in disputes or litigation. On the basis of information available to it, management believes such contingencies will not have a materially adverse effect on the Company's financial position or results of operations. ITEM 6 - 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) 27 Financial Data Schedule. (3) --------------- (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) Filed electronically with Securities and Exchange Commission, omitted in copies distributed to shareholders or other persons. (B) FORMS 8-K None. 10 11 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: September 12, 2000 KINGS ROAD ENTERTAINMENT, INC. By: /s/David W. Dube ------------------------------- David W. Dube, President and Chief Operating Officer 11