10QSB 1 v70754e10qsb.txt FORM 10QSB 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 January 31, 2001 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.) 12 East 33rd Street, 12th Floor New York, NY 10016 (Address of principal executive office) Issuer's telephone number: (212) 252-9519 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 March 20, 2001, the registrant had 3,487,390 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 JAN. 31, 2001 ------------- ASSETS Cash and Cash Equivalents $ 47,216 Inventories 215,890 Accounts Receivable 306,496 Due from Related Party 55,660 Film Costs, net of amortization of $168,463,829 57,957 Theatrical Production Costs 37,385 Prepaid Catalog Costs 197,348 Other Prepaid Expenses and Deposits 43,430 Fixed Assets 3,824 ------------ TOTAL ASSETS $ 965,206 ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts Payable $ 458,728 Note Payable 19,000 Accrued Expenses 9,987 Deferred Revenue 9,930 ------------ TOTAL LIABILITIES 497,645 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common Stock, $.01 par value, 12,000,000 shares authorized, 3,487,390 shares issued and outstanding 34,874 Additional Paid-In Capital 24,747,023 Deficit (24,314,336) ------------ TOTAL STOCKHOLDERS' EQUITY 467,561 ============ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 965,206 ============
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)
THREE MONTHS NINE MONTHS ENDED JAN. 31, ENDED JAN. 31, ----------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- REVENUES Feature Films $ 296,248 $ 234,898 $ 1,267,514 $ 525,338 Merchandise Catalog Sales 394,010 0 486,760 0 Theatrical Admissions 274,292 0 285,586 0 ----------- ----------- ----------- ----------- 964,550 234,898 2,039,860 525,338 COSTS AND EXPENSES Costs Related to Revenue 368,219 41,249 791,799 76,215 Selling Expenses 0 8,858 0 14,065 General & Administrative Expenses 585,913 157,307 988,788 634,149 Interest 438 26,571 1,004 79,001 ----------- ----------- ----------- ----------- 954,570 233,985 1,781,591 803,430 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) 9,980 913 258,269 (278,092) OTHER INCOME (EXPENSES) Equity in Losses of Affiliates 0 (299,155) 0 (1,495,772) Adjustment in Valuation of Other Investments 0 0 0 (250,000) Interest Income 135 168 7,802 581 Gain From Cancellation of Indebtedness 0 0 126,313 0 ----------- ----------- ----------- ----------- 135 (298,987) 134,115 (1,745,191) INCOME (LOSS) BEFORE INCOME TAXES 10,115 (298,074) 392,384 (2,023,283) Provision for Income Taxes 0 2,620 1,600 2,866 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 10,115 $ (300,694) $ 390,784 $(2,026,149) =========== =========== =========== =========== Net Income (Loss) Per Share - Basic $ 0.00 $ (0.09) $ 0.11 $ (0.58) =========== =========== =========== =========== Weighted Average Number of Common Shares - Basic 3,487,390 3,482,019 3,487,390 3,479,457 =========== =========== =========== =========== Net Income (Loss) Per Share - Diluted $ 0.00 $ (0.09) $ 0.11 $ (0.58) =========== =========== =========== =========== Weighted Average Number of Common Shares and Common Share Equivalents - Diluted 3,487,390 3,482,019 3,487,390 3,479,457 =========== =========== =========== ===========
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 NINE MONTHS ENDED JANUARY 31, ----------------------------- 2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ 390,784 $(2,026,149) Adjustments to reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: Depreciation and Amortization 281,528 79,547 Equity in Losses of Affiliates 0 1,495,772 Gain from Cancellation of Indebtedness (126,313) 0 Adj. in Valuation of Other Investments 0 250,000 Changes in Assets and Liabilities: Decrease in Restricted Cash 0 1,000,000 Increase (Decrease) in Accounts Receivable (206,537) 185,422 Increase in Inventory (215,890) 0 Increase in Amount Due from Related Party 0 (93,210) Increase in Prepaid Expenses (184,871) (2,642) Increase (Decrease) in Other Assets (41,440) 114,573 Increase (Decrease) in Accounts Payable 71,810 (64,991) Increase (Decrease) in Accrued Expenses 6,827 (58,193) Increase (Decrease) in Deferred Revenue 8,030 (5,375) ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY (USED IN) OPERATING ACTIVITIES (16,072) 874,754 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Other Investments (10,000) (1,250,000) Gross Additions to Film Cost 0 (51,261) Gross Additions to Theater Production Costs (37,385) 0 Disposal (Purchase) of Fixed Assets 6,514 (3,312) ----------- ----------- NET CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES (40,871) (1,304,573) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Stock 0 161,908 Issuance of Note Payable 39,000 250,000 Repayment of Note Payable (20,000) 0 ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES 19,000 411,908 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (37,943) (17,911) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 85,159 55,583 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 47,216 $ 37,672 =========== ===========
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 present fairly the Company's financial position at January 31, 2001 and the results of operations and cash flows for the nine month periods ended January 31, 2001 and 2000 have been included. The results of operations for the three month period ended January 31, 2001 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 motion picture projects actively in development at January 31, 2001. 5 6 NOTE C - 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:
Nine Months Ended Nine Months Ended Jan. 31, 2001 Jan. 31, 2000 ----------------- ----------------- Computed Expected Tax (Benefit) at Statutory Rate $ 132,867 $(688,891) State and Local Taxes 1,600 2,732 Foreign Taxes 0 134 Valuation Allowance (132,867) 688,891 --------- --------- $ 1,600 $ 2,866 ========= =========
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 2001 and 2002) and net operating loss carryforwards of approximately $19,496,000 (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: As Of January 31, 2001 ---------------- Investment 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 film revenues almost exclusively from the exploitation of films produced in prior years. The Company continues to fund and develop motion picture 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 developed 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 of Immediate for $210,803 that was subsequently cancelled, by a revised agreement between the parties, in exchange for the cancellation of other obligations due from entities that were either affiliated or related to Immediate. 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, a material decrease in the trading price of Immediate's common stock and the subsequent filing of certain insolvency proceedings in Germany by a subsidiary of Immediate. 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 August 31, 2000, the Company completed the acquisition of the common stock of 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 acquired 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 that commenced on September 29, 2000, made to existing Animal Town creditors. The Company had 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. This credit facility to Animal Town was consummated, which allowed for the production, printing and subsequent distribution of over 500,000 catalogs, and was collateralized by all of Animal Town's inventory, trademarks and proprietary customer list. The Company believes that there are numerous opportunities in the children's education 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". The play opened November 9, 2000 and received a substantial number of favorable press reviews. 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 any future generated revenues. The Company announced on March 13, 2001 that the play conducted its final show after 17 previews and 124 performances. Further productions are in the initial planning stages for San Francisco, Miami, London and Sydney. 7 8 RESULTS OF OPERATIONS THE THREE MONTHS ENDED JANUARY 31, 2001 VS. THE THREE MONTHS ENDED JANUARY 31, 2000 For the quarter ended January 31, 2001, total revenues were $964,550 as compared to $234,898 for the quarter ended January 31, 2000. The increase of $729,652 principally related to holiday merchandise catalog sales resulting from the Company's acquisition of the common stock of Animal Town, Inc. on August 31, 2000 and ticket admissions revenues from its theatrical play production of "End of the World Party", for which there were no comparable revenues during the quarter ended January 31, 2000, and increased royalties on the Company's feature film library. Costs related to revenues were $368,219 for the quarter ended January 31, 2001 as compared to $41,249 during the quarter ended January 31, 2000. This increase of $326,970 principally related to merchandise catalog product costs and amortization costs relating to certain feature films. General and administrative costs increased to $585,913 for the quarter ended January 31, 2001 compared to $157,307 for the quarter ended January 31, 2000, an increase of $428,606. The increase resulted principally from additional full-time personnel employed during the quarter ended January 31, 2001 to handle the Company's increased business activities and contracted personnel and occupancy costs associated with the Company's theatrical play production. Interest expense during the quarter ended January 31, 2001 was $438 compared to $26,571 during the quarter ended January 31, 2000, a decrease of $26,133, resulting from the Company's repayment of substantially all of its outstanding notes payable. During the quarter ended January 31, 2001, the Company had no equity in the losses of affiliates. During the quarter ended January 31, 2000, equity in losses of affiliates was $299,155 reflecting the Company's share of losses incurred by Immediate. The Company had interest income of $135 for the quarter ended January 31, 2001 compared to interest income of $168 during the quarter ended January 31, 2000. The Company had net income of $10,115 for the quarter ended January 31, 2001 compared to a net loss of $300,694 for the quarter ended January 31, 2000. The increase in net income resulted primarily from (i) increased revenues during the quarter ended January 31, 2001, as discussed above, and (ii) higher profit margins on certain of the Company's business activities. During the quarters ended January 31, 2001 and 2000, the Company had no significant provision for income taxes. THE NINE MONTHS ENDED JANUARY 31, 2001 VS. THE NINE MONTHS ENDED JANUARY 31, 2000 For the nine months ended January 31, 2001, total revenues were $2,039,860 as compared to $525,338 for the nine months ended January 31, 2000. The increase of $1,514,522 principally related to (i) the sale of the Company's rights to "Ticker", a motion picture project that had been developed by the Company, (ii) increased distribution revenues from feature films in the Company's film library, (iii) holiday merchandise catalog sales resulting from the Company's acquisition of Animal Town, Inc. on August 31, 2000 and (iv) ticket admissions revenues from its theatrical play production of "End of the World Party". Costs related to revenue were $791,799 for the nine months ended January 31, 2001 as compared to $76,215 during the nine months ended January 31, 2000. This increase of $715,584 principally related to holiday merchandise catalog product costs and amortization costs relating to certain feature films. General and administrative costs increased to $988,788 for the nine months ended January 31, 2001 from $634,149 for the nine months ended January 31, 2000, an increase of $354,639. The increase resulted principally from additional full-time personnel employed during the nine months ended January 31, 2001 to handle the Company's increased business activities and contracted personnel and occupancy costs associated with the Company's theatrical play production. Interest expense during the nine months ended January 31, 2001 was $1,004 compared to $79,001 during the nine months ended January 31, 2000, a decrease of $77,997, resulting from the Company's repayment of substantially all its outstanding notes payable. During the nine months ended January 31, 2001, the Company had no equity in the losses of affiliates or adjustments in the valuation of its investments. During the nine months ended January 31, 2000, equity in losses of affiliates was $1,495,772 reflecting the Company's share of losses incurred by 8 9 Immediate. During the same period, the Company recorded a decrease adjustment in the valuation of an investment in a joint venture of $250,000. The Company had interest income of $7,802 for the nine months ended January 31, 2001 compared to interest income of $581 during the nine months ended January 31, 2000. The Company recorded a gain from the cancellation of certain indebtedness relating to the Immediate transaction during the nine months ended January 31, 2001. The indebtedness was originally satisfied by an agreement, executed prior to April 30, 2000, to convert the indebtedness to common stock of the Company. During the nine months ended January 31, 2001, the Company reached a new agreement with the debtholders, who were either affiliates of or related to Immediate, to relinquish and cancel their debt due to certain cash advances that were made by the Company to Immediate, which were subsequently determined to be uncollectible. The Company reached this subsequent agreement prior to the issuance of the common stock specified in the original agreement. During the nine months ended January 31, 2000, the Company had no comparable transactions. The Company had net income of $390,784 for the nine months ended January 31, 2001 compared to a net loss of $2,026,149 for the nine months ended January 31, 2000. The increase in net income resulted primarily from (i) increased revenues during the nine months ended January 31, 2001, as discussed above, (ii) higher profit margins on certain of the Company's business activities, resulting in operating income for the nine months ended January 31, 2001, compared to an operating loss for the comparable prior year period, (iii) the equity in losses of affiliates and adjustments made in the valuation of certain investments recorded during the nine months ended January 31, 2000 for which there were no comparable losses during the nine months ended January 31, 2001 and (iv) a gain from the cancellation of certain indebtedness relating to the Immediate transaction during the nine months ended January 31, 2001, for which there was no comparable gain during the nine months ended January 31, 2000. During the nine months ended January 31, 2001 and 2000, the Company had no significant provision for income taxes. LIQUIDITY AND CAPITAL RESOURCES The Company's principal source of working capital during the three and nine month periods ended January 31, 2001 was motion picture licensing income, merchandise product sales from its catalog operation and ticket admission revenues from its theatrical play production. The Company continues to invest in the development of motion picture projects, the production of which requires substantial capital. In the event that the Company decides to invest in the production of one or more of its developed projects, the Company will need to examine and evaluate the additional capital requirements to undertake such activities. The Company presently does not have sufficient capital to pursue such activities. With the exception of financing of new film production costs, the Company believes it has sufficient working capital to maintain all of its business activities. For the nine months ended January 31, 2001, the Company's net cash flow used in operating activities was $16,072 compared to net cash flow provided by operating activities of $874,754 for the comparable nine month prior year period. The resulting decrease was principally attributable to restricted cash received by the Company, pursuant to a secured financing arrangement with a third party during the nine months ended January 31, 2000 and utilized in connection with the purchase of certain investments. This transaction also principally accounted for the reduction of net cash used in investing activities from $1,304,573 during the nine months ended January 31, 2000 to $40,871 during the nine months ended January 31, 2001. At January 31, 2001, the Company had cash and cash equivalents of $47,216 compared to $37,672 at January 31, 2000. FUTURE COMMITMENTS On August 31, 2000, the Company completed the acquisition of the common stock of 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 acquired 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- 9 10 equity exchange offer that commenced on September 29, 2000, made to existing Animal Town creditors. The exchange offer was made pursuant to a private placement offering memorandum with an acceptance deadline of no later than January 26, 2001. The Company believes that approximately eighty percent (80%) of the dollar amount of all Animal Town, Inc. creditor claims subject to the exchange offer were properly tendered prior to the expiration of the offering period. The Company does not have, nor is it aware of, 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. 10 11 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 impact 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) ----------- (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. (b) FORMS 8-K None. 11 12 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: March 20, 2001 KINGS ROAD ENTERTAINMENT, INC. By: /s/David W. Dube ------------------------ David W. Dube, President Chief Operating Officer 12