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, 2001 | Commission File No. 0-14234 |
KINGS ROAD ENTERTAINMENT, INC.
(Name of small business issuer in its charter)
Delaware (State or other jurisdiction of incorporation) |
95-3587522 (I.R.S. Employer Identification No.) |
12 East 33rd Street, 12th Floor
New York, NY 10016
(Address of principal executive office)
Issuers 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 October 22, 2001, the Registrant had 3,664,390 shares of its common stock outstanding.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS OF | ||||||
JULY 31, 2001 | ||||||
ASSETS |
||||||
Cash and Cash Equivalents |
$ | 13,486 | ||||
Inventories |
22,709 | |||||
Accounts Receivable |
67,346 | |||||
Film Development Costs, Net |
143,693 | |||||
Prepaid Expenses and Deposits |
6,698 | |||||
Fixed Assets, Net |
2,205 | |||||
Goodwill |
52,090 | |||||
TOTAL ASSETS |
$ | 308,227 | ||||
LIABILITIES AND STOCKHOLDERS DEFICIT |
||||||
LIABILITIES |
||||||
Accounts Payable |
256,631 | |||||
Accrued Expenses |
65,502 | |||||
Note Payable |
19,000 | |||||
Deferred Revenue |
17,241 | |||||
TOTAL LIABILITIES |
358,374 | |||||
COMMITMENTS AND CONTINGENCIES |
||||||
STOCKHOLDERS DEFICIT |
||||||
Common Stock, $.01 par value, 12,000,000 shares
authorized, 3,664,390 shares issued and outstanding |
36,644 | |||||
Additional Paid-In Capital |
24,906,655 | |||||
Deficit |
(24,993,446 | ) | ||||
TOTAL STOCKHOLDERS DEFICIT |
(50,147 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT |
$ | 308,227 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS | |||||||||
ENDED JULY 31, | |||||||||
2001 | 2000 | ||||||||
REVENUES |
|||||||||
Feature Films |
$ | 150,201 | $ | 692,565 | |||||
Merchandise Catalog Sales |
36,943 | 0 | |||||||
187,144 | 692,565 | ||||||||
COSTS AND EXPENSES |
|||||||||
Costs Related to Revenue |
29,852 | 225,693 | |||||||
Selling Expenses |
5,534 | 35,585 | |||||||
General & Administrative Expenses |
292,601 | 156,648 | |||||||
327,987 | 417,926 | ||||||||
OPERATING (LOSS) INCOME |
(140,843 | ) | 274,639 | ||||||
OTHER INCOME (EXPENSE) |
|||||||||
Interest Income |
38 | 5,778 | |||||||
Interest Expense |
(339 | ) | 0 | ||||||
Impairment of Goodwill |
(15,875 | ) | 0 | ||||||
(16,176 | ) | 5,778 | |||||||
(LOSS) INCOME BEFORE INCOME TAXES |
(157,019 | ) | 280,417 | ||||||
Provision for Income Taxes |
0 | 1,600 | |||||||
NET (LOSS) INCOME |
$ | (157,019 | ) | $ | 278,817 | ||||
Net (Loss) Income Per Share Basic
and Diluted |
$ | (0.04 | ) | $ | 0.08 | ||||
Weighted Average Number of Common
Shares Basic and Diluted |
3,664,390 | 3,541,140 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
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KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS | ||||||||||
ENDED JULY 31, | ||||||||||
2001 | 2000 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||
Net (Loss) Income |
$ | (157,019 | ) | $ | 278,817 | |||||
Adjustments to reconcile Net (Loss) Income to Net Cash
Provided by (Used in) Operating Activities: |
||||||||||
Depreciation and Amortization |
358 | 227,020 | ||||||||
Impairment of Goodwill |
15,875 | 0 | ||||||||
Changes in Assets and Liabilities: |
||||||||||
(Increase) Decrease in Accounts Receivable |
(14,456 | ) | 1,210 | |||||||
Decrease in Inventory |
11,362 | 0 | ||||||||
(Increase) in Note Receivable |
0 | (31,500 | ) | |||||||
Decrease in Prepaid Expenses |
42,933 | 2,250 | ||||||||
Increase in Accounts Payable |
53,262 | 27,902 | ||||||||
Increase in Accrued Expenses |
9,129 | 0 | ||||||||
Increase in Deferred Revenue |
14,941 | 8,030 | ||||||||
NET CASH AND CASH EQUIVALENTS (USED IN)
PROVIDED BY OPERATING ACTIVITIES |
(23,615 | ) | 513,729 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||
Purchases of Marketable Securities |
0 | (300,440 | ) | |||||||
Gross Additions to Film Development Costs |
(17,376 | ) | (139,143 | ) | ||||||
Purchase of Other Investments |
0 | (4,500 | ) | |||||||
Disposal of Fixed Assets |
0 | 3,638 | ||||||||
NET CASH AND CASH EQUIVALENTS USED IN
INVESTING ACTIVITIES |
(17,376 | ) | (440,445 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||
NET CASH AND CASH EQUIVALENTS PROVIDED
BY FINANCING ACTIVITIES |
0 | 0 | ||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(40,991 | ) | 73,284 | |||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
54,477 | 85,159 | ||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 13,486 | $ | 158,443 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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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 audited financial statements and related footnotes for the year ended April 30, 2001 included in the Kings Road Entertainment, Inc. (Company or Registrant) annual report on Form 10-KSB for that period.
In the opinion of the Companys management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Companys financial position at July 31, 2001 and the results of its operations and cash flows for the three month periods ended July 31, 2001 and 2000, respectively, have been included.
The results of operations for the three month period ended July 31, 2001 are not necessarily indicative of the results to be expected for the full fiscal year. For further information, refer to the audited financial statements and footnotes thereto included in the Companys annual report on Form 10-KSB for the year ended April 30, 2001.
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. Certain amounts for the three month period ended July 31, 2000 have been reclassified to conform to the presentation of the July 31, 2001 amounts. The reclassifications have no effect on reported net income (loss).
NOTE B FILM DEVELOPMENT COSTS
Film development costs consist of film script projects actively in development at July 31, 2001.
NOTE C NOTES PAYABLE
In connection with the acquisition of Animal Town, Inc. (Animal Town) on August 31, 2000, the Company issued a note payable to the seller of the common stock of Animal Town in the principal amount of $39,000, bearing interest at 7% per annum with an initial maturity date of November 30, 2000. The outstanding balance of the note payable at July 31, 2001 was $20,131, consisting of $19,000 of principal and $1,131 of accrued interest. The parties, by agreement, have extended the maturity date of the outstanding balance of the note to November 30, 2001.
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KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D 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, 2001 | July 31, 2000 | |||||||
Computed Expected Tax (Benefit) at
Statutory Rate |
$ | (53,387 | ) | $ | 95,342 | |||
State and Local Taxes |
0 | 1,600 | ||||||
Valuation Allowance |
53,387 | (95,342 | ) | |||||
$ | 0 | $ | 1,600 | |||||
NOTE E SEGMENT INFORMATION
The Companys two reportable segments are distinct business areas that are managed separately and offer different products. The Companys operating segments consist of (1) entertainment products and (2) a childrens mail order catalog operation. The entertainment products include the development, production and distribution of feature length motion pictures. The childrens mail order catalog operation consists solely of the distribution of the Animal Town catalog.
The following table presents segment information for the three months ended July 31, 2001 and 2000:
2001 | 2000 | ||||||||
Revenues: |
|||||||||
Entertainment Products |
$ | 150,201 | $ | 692,565 | |||||
Mail Order Catalog |
36,943 | 0 | |||||||
Total Revenues |
$ | 187,144 | $ | 692,565 | |||||
Net (Loss) Income: |
|||||||||
Entertainment Products |
$ | (72,073 | ) | $ | 278,817 | ||||
Mail Order Catalog |
(84,946 | ) | 0 | ||||||
Total Net (Loss) Income |
$ | (157,019 | ) | $ | 278,817 | ||||
NOTE F LITIGATION AND CONSEQUENCES
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 Companys financial position or results of operations.
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Item 2 | Managements 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 film scripts, 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 script.
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 childrens 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 approximately $12,000 in cash, a note payable in the amount of $39,000 to the seller of the common stock and the issuance of 77,000 shares of the Companys common stock, the exact number of shares determined based upon a debt-for-equity exchange offer made to existing Animal Town creditors that commenced on September 29, 2000 and was concluded on January 29, 2001. 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 credit facility to Animal Town was consummated, which allowed for the production, printing and subsequent distribution of over 600,000 catalogs, and was collateralized by all of Animal Towns inventory, trademarks and proprietary customer list. The Company is presently evaluating the Animal Town operation, which may include a substantial reduction, total cessation or sale of the operation. The Company expects revenues from merchandise sales to substantially decline.
Results of Operations
For the quarters ended July 31, 2001 and 2000, feature film revenues were approximately $150,000 and $693,000, respectively, a decrease of approximately $543,000. The substantial decrease in feature film revenues was attributable to (1) the sale of the Companys rights to Ticker, a feature film project that had been developed by the Company, for approximately $243,000, during the quarter ended July 31, 2000 for which there were no comparable sales during the quarter ended July 31, 2001 and (2) decreased domestic and foreign distribution revenues from feature films in the Companys film library. Revenues derived from merchandising sales of the Animal Town childrens catalog were approximately $37,000 and $0 for the quarters ended July 31, 2001 and 2000, respectively, the increase totally attributable to the Companys acquisition of Animal Town on August 31, 2000 and for which there were no comparable revenues during the quarter ended July 31, 2000. The Company is presently evaluating the Animal Town catalog operation, which may include a substantial reduction, total cessation or sale of the operation. The Company expects revenues from merchandise sales to substantially decline. Interest income decreased to $38 for the quarter ended July 31, 2001 compared to approximately $5,800 for the quarter ended July 31, 2000, reflecting a decrease in cash and marketable securities held during the quarter ended July 31, 2001.
Costs related to sales were approximately $30,000 and $226,000 for the quarters ended July 31, 2001 and 2000, respectively. The comparable decrease resulted primarily from the amortization of costs related to Ticker. Selling costs were approximately $6,000 and $36,000
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for the quarters ended July 31, 2001 and 2000, respectively. The comparable decrease resulted primarily from a reduction in commissions payable to the Companys sales agents handling domestic and foreign distribution of the Companys film library.
General and administrative costs were approximately $293,000 and $157,000 for the quarters ended July 31, 2001 and 2000, respectively. The comparable increase resulted primarily from initial operating costs and expenses associated with the Animal Town catalog, which the Company acquired on August 31, 2000 and for which there were no comparable costs and expenses during the quarter ended July 31, 2000. The Company expects to reduce its general and administrative costs as it evaluates an alternative plan of operation for the Animal Town catalog. Interest expense was approximately $400 for the quarter ended July 31, 2001 and was attributable to a note payable issued by the Company on August 31, 2000 in connection with the acquisition of Animal Town. During the quarter ended July 31, 2000, the Company had no interest expense. The Company recorded an impairment charge of approximately $16,000 during the quarter ended July 31, 2001 for the writedown of goodwill associated with the Animal Town acquisition. There was no comparable impairment charge during the quarter ended July 31, 2000.
The Company had a net loss of approximately $157,000 for the quarter ended July 31, 2001 compared to net income of $279,000 for the quarter ended July 31, 2000. The substantial decrease in net income resulted primarily from (i) significantly decreased revenues during the quarter ended July 31, 2001, as discussed in detail above, and (ii) an increase in general and administrative costs attributable to initial operating costs and expenses associated with the Animal Town catalog. During the quarters ended July 31, 2001 and 2000, the Company had no significant provisions for income taxes.
Liquidity and Capital Resources
The Companys principal source of working capital during the three month period ended July 31, 2001 was motion picture licensing income and merchandise product sales from its catalog operation. The Company continues to invest in the development of motion picture film 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 film 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. Except for the financing of new film production costs, the Company believes it has sufficient working capital to maintain its ongoing operations.
For the quarter ended July 31, 2001, the Companys net cash flow used in operating activities was approximately $24,000 compared to net cash flow provided by operating activities of approximately $514,000 for the quarter ended July 31, 2000. The resulting decrease was principally attributable to the substantial decrease in reported net income and principally accounted for the significant reduction in net cash used in investing activities from approximately $441,000 during the quarter ended July 31, 2000 to approximately $17,000 during the quarter ended July 31, 2001. At July 31, 2001 and 2000, the Company had cash and cash equivalents of approximately $13,000 and $158,000, respectively.
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Future Commitments
The Company does not have, nor is it aware of, any 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 Companys 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 Companys 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.
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 Companys 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.
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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: October 22, 2001 | KINGS ROAD ENTERTAINMENT, INC. | |||||
By: | /s/ Michael L. Berresheim | |||||
Michael L. Beresheim, Chairman | ||||||
and Chief Executive Officer |
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