-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, At2DwzHlewV72U7Bc+AdwLYg6nJ6EY6fHUf/v1MTlJ+NyrdfGY3GbYu7MCBb9+3v d7XkETjzXBkf2DBgO7UKsg== 0000950148-98-001777.txt : 19980803 0000950148-98-001777.hdr.sgml : 19980803 ACCESSION NUMBER: 0000950148-98-001777 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980730 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINGS ROAD ENTERTAINMENT INC CENTRAL INDEX KEY: 0000773588 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 953587522 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-14234 FILM NUMBER: 98673612 BUSINESS ADDRESS: STREET 1: 1901 AVE OF THE STARS STE 1545 CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3105520057 MAIL ADDRESS: STREET 1: 1901 AVE OF THE STARS STREET 2: SUITE 1545 CITY: LOS ANGELES STATE: CA ZIP: 90067 10KSB 1 FORM 10KSB 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, 1998 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.) 1901 Avenue of the Stars, Suite 1545 Los Angeles, California 90067 (Address of principal executive office) Issuer's telephone number: (310) 552-0057 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: $1.7 million. As of July 20, 1998, the aggregate market value of the voting stock held by non-affiliates (based on the closing sales price as reported by NASDAQ) was approximately $1,528,000 (assuming all officers and directors are deemed affiliates for this purpose). As of July 20, 1998 the registrant had 1,911,748 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 During the fiscal year ended April 30, 1998, the Company did not produce any new films and derived revenues almost exclusively from the exploitation of films produced in prior fiscal years. Following the death on October 4, 1996 of Mr. Stephen Friedman, then Chairman of the Board of Directors and Chief Executive Officer of the Company, the Company has explored various business options including, among other things, the liquidation of the Company, the sale of the Company as a going concern to an outside party, the sale of substantially all of the assets of the Company to an outside party and the issuance of shares of common stock to an outside party which would provide a new source of financing for the Company. The implementation of any of such options could result in a material alteration in the Company's business strategy, and the following discussion of the Company's business in prior years under the captions "Development," "Financing," "Production" and "Distribution" should be read in conjunction with the discussion of the Company's strategic plans. (SEE "ITEM 6. - - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS"). 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 has been developing between approximately five and fifteen motion picture scripts or ideas for possible future production. During fiscal years 1998 and 1997, the Company spent approximately $96,000 and $132,000, respectively, on development activities. Subject to its overall strategic direction, the Company expects to increase its expenditures on development activities, including the purchase of books and screenplays, and anticipates that it will spend between $100,000 and $250,000 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 2 3 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 generally produces 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. As of April 30, 1998, 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 August 1986 Alonso 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 May 1988 Pollack 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
3 4 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, 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. 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 it own staff. EMPLOYEES As of April 30, 1998, the Company employed three full-time employees in its Los Angeles office. During the production of a motion picture, the Company would engage between thirty and one-hundred twenty-five additional employees for that production. The compensation of these additional employees, including in some cases the right to participate in the net or gross revenues of a particular picture, is included in the capitalized cost of the related picture. The Company is subject to the terms of various industry-wide collective bargaining agreements with the Writers Guild of America, the Directors Guild of America, and the Screen Actors Guild, among others. 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. 4 5 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. 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 motion pictures that qualify for a rating no more restrictive than "R". ITEM 2. PROPERTIES The Company's principal executive offices are located at 1901 Avenue of the Stars, Suite 1545, Los Angeles, California 90067 and consist of approximately 1,500 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 On March 3, 1997, Jasmine Films, Inc. ("Jasmine") initiated arbitration with the American Arbitration Association of its claim that the Company, among other things, breached the terms of a limited partnership agreement between the Company and Jasmine (the "Jasmine Litigation"). In a ruling dated December 24, 1997, an arbitrator dismissed with prejudice all of Jasmine's claims against the Company. On March 19, 1997, Strother Film Partners II and Strother Investment Co. (collectively, "Strother") filed a lawsuit against the Company and the Estate of Stephen Friedman in Los Angeles Superior Court alleging, among other things, that the Company breached the terms of a March 1990 settlement agreement between Strother and the Company (the "Strother Litigation"). On April 8, 1998, the Company entered into a settlement agreement with Strother whereby Strother released all of its claims against the Company and the Estate of Stephen Friedman in exchange for the sum of $52,500. 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. 5 6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on April 16, 1998. Martin Davidson and Kenneth Aguado were each elected to the board of directors for terms expiring in 2000 and 2001, respectively. Three proposals submitted for shareholder approval along with the results of voting on each are as follows: 1. The approval of the issuance of shares of common stock to the Morgan Kent Group, Inc., to provide such entity with approximately 53% of the outstanding shares of common stock of the Company immediately upon such stock issuance. This proposal was approved by a vote of 4,139,918 for and 28,065 against with 15,014 abstentions and 1,212,119 broker non-votes. The transaction was later abandoned. 2. The approval of an amendment to the Company's restated certificate of incorporation to effect a reverse split of the Company's common stock on the basis of one share for each three shares then issued and outstanding. This proposal was approved by a vote of 5,341,918 for and 47,633 against with 5,565 abstentions. 3. Ratification of the accounting firm of Stonefield Josephson, Inc. to serve as the Company's independent auditors for fiscal year 1998. This proposal was approved by a vote of 5,362,875 for and 27,390 against with 4,851 abstentions. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the Nasdaq SmallCap Market tier of the Nasdaq Stock Market under the symbol: "KREN". The following table sets forth the high and low sales prices of the Company's common stock as reported by Nasdaq through April 30, 1998 (all per share information in this report reflects a reverse 1-for-3 stock split effected by the Company on April 17, 1998):
FISCAL YEAR 1997 HIGH LOW ---------------- ---- --- First Quarter 2 1/4 1 7/8 Second Quarter 2 5/32 1 1/2 Third Quarter 1 31/32 1 5/16 Fourth Quarter 3 9/32 1 5/16
FISCAL YEAR 1998 HIGH LOW ---------------- ---- --- First Quarter 3 21/32 1 1/8 Second Quarter 1 7/8 1 1/8 Third Quarter 2 1/16 1 1/2 Fourth Quarter 2 7/16 1 5/16
As of July 20, 1998, the Company had approximately 248 stockholders of record. In addition, the Company believes it has over 650 beneficial owners holding shares in street name. On June 9, 1997, based upon the Company's recognition that its business plan did not require its then existing cash balance, the Company made a cash distribution on June 27, 1997 of $3,956,695, or $2.10 per share of common stock, to shareholders of record on June 20, 1997. Future distributions, if any, will depend on the Company's final strategic plans. (SEE 6 7 "ITEM 6. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS"). ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS During the fiscal year ended April 30, 1998, the Company did not produce any new films and derived revenues almost exclusively from the exploitation of films produced in prior fiscal years. Following the death on October 4, 1996 of Mr. Stephen Friedman, then Chairman of the Board of Directors and Chief Executive Officer of the Company, the Company has explored various business options, including, among other things, the liquidation of the Company, the sale of the Company as a going concern to an outside party, the sale of substantially all of the assets of the Company to an outside party and the issuance of shares of common stock to an outside party which would provide a new source of financing for the Company. From January through May 1997, the Company had discussions with over twenty outside parties which expressed varying degrees of interest in acquiring all or part of the Company or in supplying additional capital in return for an equity interest in the Company. On June 9, 1997, based upon the Company's recognition that its business plan did not require its then existing cash balance, the Company made a cash distribution on June 27, 1997 of $3,956,695, or $2.10 per share of common stock, to shareholders of record on June 20, 1997. On December 11, 1997, the Company entered into an agreement with the Morgan Kent Group, Inc. ("Morgan Kent") wherein the Company was to issue common stock to Morgan Kent sufficient to give Morgan Kent 53% of the outstanding common stock upon such issuance in exchange for $2,967,738. Prior to the stock issuance, the Company was to make a cash distribution to shareholders of approximately $1.26 per share. The agreement between the Company and Morgan Kent was terminated on June 3, 1998. On June 30, 1998, the Company announced that it was again seeking acquisition and merger proposals for the Company. All of the plans and strategies of the Company are subject to the outcome of any such proposals. 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, 1998, 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. Subject to its overall strategic direction, the Company expects to increase its expenditures on development activities, including the purchase of books and screenplays, 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 7 8 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 has sold the international distribution rights to most of its films to another company (the "Foreign Sale") and expects a substantial decrease in international revenues 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. 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, 1998 feature film revenues were approximately $1,538,000 as compared to approximately $2,357,000 for the year ended April 30, 1997. The substantial decrease in feature film revenues of approximately 35% 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 overall strategic plan, the Company expects that its feature film revenues will continue to decline. Interest income decreased to approximately $160,000 for the year ended April 30, 1998 from approximately $329,000 reflecting the decrease in marketable securities held during the year versus the same period last year. Costs related to revenue as a percentage of feature film revenues decreased to approximately 38% for the year ended April 30, 1998 from approximately 50% for the year ended April 30, 1997. This decrease results from the fact that a significant portion of the costs associated with the Company's films have previously been amortized such as All of Me, Kickboxer, The Big Easy, Kickboxer II and Knights which generated significant revenue during the fiscal year with little or no amortization of costs associated with those revenues. Selling expenses decreased by approximately 55% to approximately $58,000 during the year fiscal ended April 30, 1998 versus approximately $128,000 during the previous fiscal year reflecting the overall decrease in the Company's feature film revenues. General and administrative costs increased to approximately $1,012,000 during the year ended April 30, 1998 versus approximately $799,000 during the same period last year. Reductions in salaries and general office expenditures were offset by increases in public company expenditures and a substantial increase of approximately $314,000 in legal 8 9 expenditures resulting from the Jasmine Litigation, the Strother Litigation and the Morgan Kent transaction. (SEE "ITEM 3. - LEGAL PROCEEDINGS" AND "RECENT DEVELOPMENTS"). Net income decreased to approximately $39,000 for the year ended April 30, 1998 versus approximately $589,000 for the year ended April 30, 1997 reflecting lower feature film revenues and interest income plus substantially higher legal expenditures. During the years ended April 30, 1998 and April 30, 1997, the Company had no significant provision for income taxes due to the utilization of tax loss carryforwards. 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, 1998 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. The Company's net cash provided by operating activities decreased to approximately $373,000 as compared to approximately $1,740,000 during the year ended April 30, 1997. The Company used its operating cash flow plus cash flow generated by the sale of marketable securities to make a cash distribution to its shareholders of approximately $3,957,000 on June 27, 1997. As of April 30, 1998, the Company had cash, cash equivalents and marketable securities of approximately $2,659,000 as compared to approximately $6,215,000 as of April 30, 1997. FUTURE COMMITMENTS The Company has no material commitments for capital expenditures. The Company will evaluate the adequacy of and need for capital resources once a final strategic plan has been developed. (SEE "RECENT DEVELOPMENTS"). 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 those projects on favorable terms in various markets, and to attract and retain qualified personnel. In addition, the Company is currently seeking merger and acquisition proposals for the Company and its plans, strategies and future results are subject to the outcome of any such proposals. 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. 9 10 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 pleasure of the Board of Directors (the "Board") of the Company. The Board has an audit committee consisting of Mr. Davidson and Mrs. Aguado. Except as indicated below, there are no other family relationships between any of the directors or executive officers.
EXPIRATION NAME AGE POSITION OF TERM ---- --- -------- ---------- Kenneth Aguado 40 Chairman and Chief Executive Officer 2001 Christopher Trunkey 32 Senior Vice President, Chief ------ Financial and Administrative Officer and Secretary Martin Davidson 58 Director 2000 Susan Aguado 65 Director 1999
EXECUTIVE OFFICERS AND DIRECTORS KENNETH AGUADO has been a director of the Company since February 1989. Mr. Aguado became Chief Executive Officer in October 1996 following the death of Stephen Friedman. In July 1994, Mr. Aguado rejoined the Company as Vice President of Creative Affairs, a position he held from 1981 until 1990. Between 1990 and 1994, Mr. Aguado headed production for Miller-Boyett Motion Pictures at Warner Brothers and was Vice-President of Production for Badham/Cohen Group at Universal Pictures. Mr. Aguado attended Tulane University, where he graduated with a degree in Psychology. Mr. Aguado is the son of Susan Aguado. CHRISTOPHER TRUNKEY, Senior Vice President, Chief Financial and Administrative Officer and Secretary joined the Company in May 1994. Between September 1997 and May 1998, Mr. Trunkey served as a consultant to the Company while also serving as Senior Vice President of Overseas Filmgroup. Before joining the Company, Mr. Trunkey was Controller for Ulysse Entertainment from October 1993 to May 1994. Prior to Ulysse Entertainment, Mr. Trunkey was Director of Financial Planning at Reeves Entertainment from May 1990 through September 1993 and Staff Accountant for Telautograph Corporation from August 1988 through May 1990. Mr. Trunkey is a graduate of Drake University with a degree in Finance. MARTIN DAVIDSON has been a director of the Company since February 1989. He has been a producer, writer, and director of feature films since 1972. He produced the film "A Fan's Notes," wrote, produced and directed "The Lords of Flatbush," wrote and directed "Almost 10 11 Summer" and "Eddie and the Cruisers," and directed "Hero at Large," "Long Gone," "Heart of Dixie," and "Hard Promises". Mr. Davidson was the head of the motion picture division of Ashley Famous Agency from 1960 to 1964. He attended Syracuse University from 1957 to 1958 and the American Academy of Dramatic Arts from 1959 to 1961. SUSAN AGUADO has been a director of the Company since October 1996. Since March 1992, Mrs. Aguado has been retired. Between March 1989 and March 1992, Mrs. Aguado was Creative Director for Hometown Films and from January 1983 to March 1989, Mrs. Aguado was Vice President of East Coast Development for the Company. Mrs. Aguado is graduate of New York University. Mrs. Aguado is the mother of Kenneth Aguado. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 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, 1998 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 $100,000 in any of the last three fiscal years.
LONG TERM COMPENSATION ANNUAL COMPENSATION ------------- ------------------------ STOCK OPTIONS ALL OTHER NAME AND POSITION YEAR SALARY ($) BONUS ($) (SHARES) COMPENSATION ----------------- ---- ---------- ---------- ------------- ------------ Kenneth Aguado (1) Chairman and Chief 1998 $115,269 $10,000 27,708 (2) $64,314 (3) Executive Officer 1997 89,577 3,596 0 (2) 619 (4) Stephen Friedman (1) Chairman and Chief 1997 115,385 0 0 0 Executive Officer 1996 237,500 0 0 0
- --------------- (1) Mr. Aguado became the Company's Chief Executive Officer on October 7, 1996 following the death of Mr. Friedman on October 4, 1996. (2) The exercise price of options to purchase 27,708 shares granted to Mr. Aguado on October 14, 1996 was adjusted from $1.68 per share to $.00 as a result of the cash distribution to shareholders of $2.10 per share on June 27, 1997. (3) 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. (4) Represents contributions made by the Company on behalf of Mr. Aguado pursuant to the Company's SIMPLE IRA plan. 11 12 OPTION GRANTS, EXERCISES AND YEAR-END VALUES Shown below is information with respect to the exercise by the Named Officers of options during the fiscal year ended April 30, 1998.
SHARES ACQUIRED VALUE NAME ON EXERCISE REALIZED (1) ---- ----------- ------------ Stephen Friedman (2) 161,833 $273,094 Kenneth Aguado 33,333 58,808
- --------------- (1) Based upon the difference between the exercise price and the market price on the date of exercise. (2) The stock options granted to Mr. Friedman were exercised by the Estate of Stephen Friedman. No options were granted during the fiscal year ended April 30, 1998 and no options were outstanding as of April 30, 1998. An option to purchase up to 66,667 shares of common stock at an exercise price of $1 7/32 was granted to Mr. Aguado on July 15, 1998. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL STOCKHOLDERS The following table sets forth certain information, as of July 20, 1998, 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 ------------------------------------ --------- ---------- Estate of Stephen Friedman (1) 1,060,956 (2) 55.5% c/o William Immerman, Executor 1999 Avenue of the Stars, Suite 1250 Los Angeles, CA 90067
- --------------- (1) Susan Aguado, Joan Aguado Shapiro and Kenneth Aguado are 50%, 25% and 25% beneficiaries, respectively, of the Friedman Estate's shares except as noted in footnote (2). (2) Includes 33,333 shares owned by the Stephen J. Friedman Films, Inc. Employee Pension Plan of which Mr. Immerman is the trustee and Susan Aguado is the sole beneficiary. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of July 20, 1998, 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 -------------------------------- --------- ---------- Susan Aguado 547,145 (1) 28.6% 235 Cleveland Drive Croton, NY 10520
12 13
NAME AND ADDRESS OF DIRECTORS OR NUMBER OF PERCENT OF NUMBER OF PERSONS IN GROUP SHARES CLASS -------------------------------- --------- ---------- Kenneth Aguado 291,905 (2) 15.3% 4309 Wilkinson Avenue Studio City, CA 91604 Martin Davidson 0 00.0% 1505 Viewsite Terrace Los Angeles, CA 90069 All Executive Officers and Directors as a Group (4 persons) 848,516 44.4%
- --------------- (1) Includes 513,812 shares representing 50% of the 1,027,623 shares owned by the Friedman Estate of which Mrs. Aguado is a 50% beneficiary and 33,333 shares owned by the Stephen J. Friedman Films, Inc. Employee Pension Plan of which Mrs. Aguado is the sole beneficiary. See "Principal Stockholders". (2) Includes 256,906 shares representing 25% of the 1,027,623 shares owned by the Friedman Estate of which Mr. Aguado is a 25% beneficiary. See "Principal Stockholders". The Friedman Estate is currently the controlling shareholder of the Company. The distribution of its common stock to its beneficiaries, which is expected shortly, will increase the record common stock ownership of Susan Aguado, Joan Aguado Shapiro, and Kenneth Aguado by 547,145, 256,906 and 256,906 shares, respectively, although these shares are already included as beneficially owned in the table above. (SEE "PRINCIPAL STOCKHOLDERS"). 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 In May 1997, the Company entered into an Assignment and Mutual Release Agreement with S.J.F. Productions Ltd. ("SJF Ltd.") and Stephen J. Friedman Films, Inc. ("SJF Inc.") (SJF Ltd. And SJF Inc. collectively, "SJF") with respect to SJF's rights to a motion picture entitled "Lovin' Molly" ("Film"). SJF Inc. is the general partner of SJF Ltd. The Friedman Estate is the sole shareholder of SJF Inc. and is a limited partner of SJF Ltd. The film was encumbered by the claim of Leucadia National Corp. ("LNC") to be paid at least $600,000 by SJF solely from the Film's revenues pursuant to a loan agreement between SJF and LNC's predecessor-in-interest ("Agreement"), and by SJF's claim of copyright ownership in the film. The Company acquired LNC's rights to the Film, including LNC's rights under the Agreement, in exchange for $75,000 and subsequently acquired SJF's rights to the Film in exchange for releasing SJF of its obligations under the Agreement. 13 14 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) 10.2 Grant of Nonqualified Stock Option to Kenneth Aguado. (1) 27 Financial Data Schedule. (1) --------------- (1) Filed electronically with Securities and Exchange Commission, omitted in copies distributed to shareholders or other persons. (2) Incorporated by reference to Form 10-K for the fiscal year ended April 30, 1988. (b) FORMS 8-K On December 24, 1997, the Company filed a Form 8-K reporting under Item 1 thereof a change in control resulting from the execution of a Stock Purchase Agreement with the Morgan Kent Group, Inc. that was subsequently terminated on June 3, 1998. (c) SEE (a) ABOVE 14 15 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: July 20, 1998 KINGS ROAD ENTERTAINMENT, INC. By: /s/Christopher M. Trunkey ------------------------------- Christopher M. Trunkey, Chief Financial 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/Kenneth Aguado Chairman of the Board of July 20, 1998 - ------------------------------- Directors and Chief Executive KENNETH AGUADO Officer (Principal Executive Officer) /s/Martin Davidson Director July 20, 1998 - ------------------------------- MARTIN DAVIDSON /s/Susan Aguado Director July 20, 1998 - ------------------------------- SUSAN AGUADO /s/Christopher M. Trunkey Vice President, Chief Financial July 20, 1998 - ------------------------------- and Administrative Officer and CHRISTOPHER M. TRUNKEY Secretary (Principal Financial and Accounting Officer)
15 16 KINGS ROAD ENTERTAINMENT, INC. FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1998 Report of Independent Auditors F-2 Balance Sheet as of April 30, 1998 F-3 Statements of Income for the Years Ended April 30, 1998 and 1997 F-4 Statements of Shareholders' Equity for the Years Ended April 30, 1998 and 1997 F-5 Statements of Cash Flows for the Years Ended April 30, 1998 and 1997 F-6 Notes to Financial Statements F-7
F-1 17 STONEFIELD JOSEPHSON, INC. INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Kings Road Entertainment, Inc. Los Angeles, California: We have audited the accompanying balance sheet of Kings Road Entertainment, Inc. (the "Company") as of April 30, 1998, and the related statements of income, shareholders' equity and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 audit provides a reasonable basis for opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kings Road Entertainment, Inc. as of April 30, 1998, and the results of their operations and their cash flows for the two years then ended, in conformity with generally accepted accounting principles. /s/Stonefield Josephson, Inc. - ------------------------------- STONEFIELD JOSEPHSON, INC., CERTIFIED PUBLIC ACCOUNTANTS Santa Monica, California July 15, 1998 F-2 18 KINGS ROAD ENTERTAINMENT, INC. BALANCE SHEET
AS OF APRIL 30, 1998 -------------- ASSETS Cash and Cash Equivalents $ 2,658,500 Accounts Receivable, net of allowance of $10,000 373,463 Film Costs, net of amortization of $168,244,816 300,673 Prepaid Expenses 47,841 Fixed Assets 14,485 Other Assets 2,500 ------------ TOTAL ASSETS $ 3,397,462 ============ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Accounts Payable $ 233,167 Accrued Expenses 15,000 Deferred Revenue 9,600 ------------ TOTAL LIABILITIES 257,767 COMMITMENTS AND CONTINGENCIES 0 SHAREHOLDERS' EQUITY Common Stock, $.01 par value, 12,000,000 shares authorized, 1,911,748 shares issued and outstanding 51,040 Additional Paid-In Capital 21,085,278 Deficit (17,996,623) ------------ TOTAL SHAREHOLDERS' EQUITY 3,139,695 ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,397,462 ============
The accompanying notes are an integral part of this balance sheet. F-3 19 KINGS ROAD ENTERTAINMENT, INC. STATEMENTS OF INCOME
FOR THE YEAR ENDED APRIL 30 -------------------------------- 1998 1997 ----------- ----------- REVENUES Feature Films $ 1,538,292 $ 2,356,940 Interest Income 159,802 328,705 Other Income 0 2,079 ----------- ----------- 1,698,094 2,687,724 COSTS AND EXPENSES Costs Related to Revenue 584,333 1,171,843 Selling Expenses 57,645 128,118 General & Administrative Expenses 1,011,895 799,087 ----------- ----------- 1,653,873 2,099,048 ----------- ----------- INCOME BEFORE INCOME TAXES 44,221 588,676 Provision for Income Taxes 5,404 (291) ----------- ----------- NET INCOME $ 38,817 $ 588,967 =========== =========== Net Income Per Share - Basic $ 0.02 $ 0.35 =========== =========== Weighted Average Number of Common Shares - Basic 1,873,954 1,706,581 =========== =========== Net Income Per Share - Diluted $ 0.02 $ 0.32 =========== =========== Weighted Average Number of Common Shares and Common Share Equivalents - Diluted 1,873,954 1,820,078 =========== ===========
The accompanying notes are an integral part of these statements. F-4 20 KINGS ROAD ENTERTAINMENT, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
Common Common Additional Retained Total Stock Stock Paid-In Earnings/ Shareholders' Shares Amount Capital (Deficit) Equity ------------ ------------ ------------ ------------ ------------ Balance, April 30, 1996 1,706,581 $ 45,716 $ 24,902,177 ($18,624,407) $ 6,323,486 Net Income -- -- -- 588,967 588,967 ------------ ------------ ------------ ------------ ------------ Balance, April 30, 1997 1,706,581 45,716 24,902,177 (18,035,440) 6,912,453 Exercise of Stock Options 205,167 5,324 139,797 -- 145,121 Distribution to Shareholders -- -- (3,956,696) -- (3,956,696) Net Income -- -- -- 38,817 38,817 ------------ ------------ ------------ ------------ ------------ Balance, April 30, 1998 1,911,748 $ 51,040 $ 21,085,278 ($17,996,623) $ 3,139,695 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements. F-5 21 KINGS ROAD ENTERTAINMENT, INC. STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30 --------------------------------- 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 38,817 $ 588,967 Adjustments to reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 592,751 1,178,032 Change in Assets and Liabilities: (Increase)/Decrease in Accounts Receivable (59,614) 294,270 Increase in Prepaid Expenses (34,546) (9,584) Decrease in Other Assets 0 3,000 (Decrease)/Increase in Accounts Payable (82,554) 13,544 Decrease in Accrued Expenses 0 (76,582) Decrease in Income Taxes Payable (3,482) (44,459) Decrease in Deferred Revenue (78,200) (207,214) ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY OPERATING ACTIVITIES 373,172 1,739,974 CASH FLOWS FROM INVESTING ACTIVITIES: Sale/(Purchase) of Marketable Securities 5,967,031 (1,519,648) Disposal/(Purchase) of Fixed Assets 484 (17,880) Gross Additions to Film Cost (118,816) (359,781) ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY/(USED IN) INVESTING ACTIVITIES 5,848,699 (1,897,309) CASH FLOWS FROM FINANCING ACTIVITIES: Exercise of Stock Options 145,121 0 Distribution to Shareholders (3,956,696) 0 ----------- ----------- NET CASH AND CASH EQUIVALENTS USED IN FINANCING ACTIVITIES (3,811,575) 0 ----------- ----------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 2,410,296 (157,335) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 248,204 405,539 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,658,500 $ 248,204 =========== =========== Cash paid for: Interest 0 0 Taxes 5,404 70,158
The accompanying notes are an integral part of these statements. F-6 22 KINGS ROAD ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES 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 1998, the Company earned revenue from three significant customers of approximately $740,000 (44%) of revenues. During 1997, the Company earned revenue from two significant customers of approximately $1,008,000 (37%) of revenues, of which approximately $158,000 is included in accounts receivable as of April 30,1998. Revenues from foreign sources were approximately $956,000 and $1,471,000 in 1998 and 1997, respectively. Film Costs - Film costs, including 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 and capitalized to film costs in the year that event occurs. 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. F-7 23 KINGS ROAD ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 terms of the applicable lease, whichever is less. Earnings Per Share - The Company has adopted Statement of Financial Accounting Standard No. 128, Earnings Per Share ("SFAS No. 128"), which became effective for financial statements issued for periods ending after December 15, 1997. In accordance with SFAS No. 128, prior year earnings per share amounts have been restated. SFAS No. 128 was issued to simplify the standards for calculating earnings per share ("EPS") previously in Accounting Principles Board No. 15, Earnings Per Share. SFAS No. 128 replaces the presentation of primary EPS with basic EPS. The new rules also require dual presentation of basic and diluted EPS on the face of the statement of income. Common Stock - In April 1998, the Company effected a 1-for-3 reverse stock split for shareholders of record on April 17, 1998. All share and per share data in the financial statements reflect the reverse stock split for all periods presented. 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, 1998, approximately 49% 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 the Company's balances may exceed federally insured limits. NOTE B - FILM COSTS Film costs consist of:
As Of April 30, 1998 -------------- Released Films, less amortization $ 210,017 Films in Production 0 Films in Development 90,656 --------- $ 300,673 =========
Based on the Company's estimates of revenue as of April 30, 1998, 100% of unamortized film costs applicable to released films will be amortized during the three years ended April 30, 2001. No interest or overhead was capitalized to film costs during the fiscal years ended April 30, 1998 and 1997, as no new motion pictures were produced. F-8 24 KINGS ROAD ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE C - FIXED ASSETS Fixed assets consist of:
As Of April 30, 1998 -------------- Office Equipment $201,588 Furniture & Fixtures 31,480 Accumulated Depreciation (218,583) -------- $ 14,485 ========
NOTE D - COMMITMENTS AND CONTINGENCIES The Company leases approximately 1,500 square feet of office space on a month-to-month basis. Rent expense was $28,838 and $30,579 in 1998 and 1997, respectively. The Company operates in one business segment, consisting primarily of production and distribution of feature length motion pictures. NOTE E - STOCK OPTIONS AND WARRANTS As of April 30, 1998, the Company did not have any outstanding stock options. 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 because 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. Proforma information regarding net income and earnings per share under the fair value method for the year ended April 30, 1997 has not been presented as the amounts are immaterial. NOTE F - 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:
1998 1997 --------- --------- Computed Expected Tax at Statutory Rate $ 15,035 $ 154,228 State and Local Taxes 4,220 8,276 Foreign Taxes 1,184 6,173 Valuation Allowance (15,035) (168,968) --------- --------- $ 5,404 ($ 291) ========= =========
F-9 25 KINGS ROAD ENTERTAINMENT, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE F - INCOME TAXES (CONTINUED) 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 $16,626,000 (expiring between 2001 and 2007) 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 April 30, 1998 -------------- Deferred Revenue $ 4,000 Film Cost Amortization 18,000 Net Operating Loss Carryforwards 6,650,000 Investment Tax Credit Carryforwards 2,166,000 Foreign Tax Credit Carryforwards 400,000 ----------- 9,238,000 Valuation Allowance (9,238,000) ----------- $ 0 ===========
A valuation allowance of $9,238,000 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. NOTE G - 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 impact on the Company's financial position or results of operations. NOTE H - INVESTMENT IN LIMITED PARTNERSHIP 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. F-10 EX-3.1 2 EXHIBIT 3.1 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION KINGS ROAD ENTERTAINMENT, INC. (Pursuant to Section 245 of the Delaware General Corporation Law) KINGS ROAD ENTERTAINMENT, INC., a corporation originally incorporated on February 8, 1980, under the name of Kings Road Productions, Inc., under the General Corporation Law of Delaware, hereby amends and restates its Certificate of Incorporation so that the same shall read in its entirety as follows: FIRST: The name of the corporation is KINGS ROAD ENTERTAINMENT, INC. SECOND: The address, including street, number, city and county of the registered office of the corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, 19801; and the name of the registered agent of the corporation in the State of Delaware at such address is The Corporation Trust Company. THIRD: The nature of the business or purposes to be conducted or promoted is: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of all classes of stock which the corporation shall have authority to issue is 12,000,000 shares, consisting of 12,000,000 shares of Common Stock, $.01 par value. FIFTH: Bylaws for the Corporation may be adopted, amended or repealed, at any time and from time to time, by the stockholders or the board of Directors. SIXTH: A. The Board of Directors shall be divided into three classes as nearly equal in number as reasonably possible, designated Class 1, Class 2 and Class 3. The initial terms of office shall expire as follows: Class 1 directors, at the annual meeting of stockholders in 1988; Class 2 directors, at the annual meeting of stockholders in 1989; Class 3 directors, at the annual meeting of stockholders in 1990. Thereafter, at each annual meeting of stockholders, successors to the class of directors whose terms of office expire in that year shall be elected to hold office for a term of three (3) years. Each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. B. No director of the corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such a director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) pursuant to Section 174 of the General Corporation Law of the State of Delaware; or (iv) for any transaction from which such director derived an improper personal benefit. No amendment to or repeal of this Section B shall apply to or have any effect on the liability 1 2 or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. This restated Certificate of Incorporation has been duly adopted by the Corporation's Board of Directors in accordance with the provisions of Sections 245 and 242 of the General Corporation Law of the State of Delaware, the Restated Certificate of Incorporation and the Bylaws of this Corporation. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provision of this Corporation's Certificate of Incorporation as heretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. The undersigned declare under penalty of perjury under the laws of the State of Delaware that the statements contained in the foregoing Certificate are true and correct of their own knowledge. Executed at Los Angeles, California on July 16, 1998. KINGS ROAD ENTERTAINMENT, INC. A Delaware Corporation By: /s/Kenneth I. Aguado ------------------------------- KENNETH I. AGUADO, President ATTEST: /s/Christopher M. Trunkey - ------------------------------- CHRISTOPHER TRUNKEY, Secretary 2 EX-10.1 3 EXHIBIT 10.1 1 EXHIBIT 10.1 KINGS ROAD ENTERTAINMENT, INC. 1998 STOCK OPTION PLAN This 1998 Stock Option Plan is hereby adopted by the Company (capitalized terms not otherwise defined are defined in the final section of this Plan). 1. PURPOSES OF THE PLAN. The purposes of this Plan are: - to attract and retain the best available personnel, - to provide additional incentive to Employees, Directors and - Consultants, and to promote the success of the Company's business. 2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 10, options covering no more than Four Hundred Thousand (400,000) Shares of Common Stock may be granted under the Plan . The Shares may be authorized, but unissued, or reacquired Common Stock. Any unpurchased Shares subject to an Option which terminates or is surrendered pursuant to an Option Exchange Program shall become available for future Option grants unless the Plan has terminated. However, any Shares which the Company re-acquires after issuance pursuant to the exercise of an Option will not be available for future grant under the Plan. 3. TYPE OF OPTIONS; ELIGIBILITY. Options granted under the Plan may be either Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Nonstatutory Options may be granted to Directors, Employees and Consultants; Incentive Stock Options may be granted only to Employees unless otherwise permitted under the Code. At the time of grant, the Administrator shall designate whether Option is an Incentive Stock Option or a Nonstatutory Stock Option. However, despite any such designation, any Options which cause the aggregate Fair Market Value of Shares under incentive stock options granted by the Company, or any Parent or Subsidiary to a single Optionee (under all plans of the Company and of any Parent or Subsidiary) to exceed $100,000 will be deemed Nonstatutory Stock Options. For purposes of this Section 3, the Fair Market Value of the Shares shall be determined as of the time of grant. Optionees may be granted more than one Option. 4. OPTION EXERCISE PRICE AND CONSIDERATION. When any Option is granted, the Administrator shall determine: 4.1. NUMBER OF SHARES. The number of Shares subject to the Option, except that no Officer shall be granted Options to purchase more than 100,000 Shares in any fiscal year of the Company unless permitted by the requirements for "performance-based compensation" within the meaning of Section 162(m). 4.2. EXERCISE PRICE. The per share exercise price for the Optioned Shares, which may be more or less than the Fair Market Value, except no Incentive Stock may be granted with an exercise price per share less than 100% (110% in the case of an Option granted to a Significant Owner) of Fair Market Value. 4.3. WAITING PERIOD AND EXERCISE DATES. The period within which the Option may be exercised and any conditions which must be satisfied before the Option may be exercised. No Option may have an exercise period which extends more than ten years (five years in the case of any Incentive Stock Option granted to a Significant Owner) from the date of grant. 1 2 4.4. OTHER TERMS AND CONDITIONS. Other terms and conditions including, but are not limited to, performance criteria, any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or the Shares. The Shares received on exercise of any Option may be made subject to a shareholder's agreement or other restriction or option. 5. EXERCISE OF OPTION. 5.1. PROCEDURE FOR EXERCISE. An Option shall be deemed exercised when the Company receives all of the following (which may be waived by the Administrator as permitted by Applicable Laws): (i) written notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, (ii) full payment for the Shares with respect to which the Option is exercised, and (iii) payment of any required withholding taxes. 5.2. NO FRACTIONAL SHARES. An Option may not be exercised for a fraction of a Share. 5.3. FORM OF CONSIDERATION. The Administrator shall determine the acceptable form of consideration and method of payment for exercise of an Option. (In the case of an Incentive Stock Option, the Administrator must determine the acceptable form of consideration at the time of grant.) To the extent permitted by the Administrator, consideration may consist of: - cash; - a promissory note made by the Optionee in favor of the Company; - other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; - any combination of the foregoing methods of payment; or -such other consideration to the extent permitted by Applicable Laws. 5.4. EFFECT ON OPTION. Exercise of an Option in any manner shall decrease the number of Shares thereafter available by the number of Shares as to which the Option is exercised, both for purposes of the Plan and for sale under the Option. 6. ISSUANCE OF SHARES. 6.1. NAME FOR REGISTRATION. Shares issued upon exercise of an Option shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. 6.2. LEGAL COMPLIANCE. The Company is not obligated to issue any Shares pursuant to the exercise of an Option unless counsel for the Company is satisfied that the exercise of such Option and the issuance and delivery of such Shares complies with all relevant provisions of Applicable Law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. The inability of the Company to obtain authority from any regulatory body deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such Shares. 2 3 6.3. INVESTMENT REPRESENTATIONS. As a condition to the exercise of an Option, the Company may require that the person exercising such Option represent and warrant that the Shares are being purchased only for investment and without any present intention to sell, transfer or distribute such Shares. 6.4. RIGHTS AS STOCKHOLDER. Until the stock certificate evidencing Shares is actually issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), the Optionee will have no right to vote or receive dividends or any other rights as a shareholder with respect to the Optioned Stock, despite any exercise of the Option. Subject to this Section 6, the Company shall issue (or cause to be issued) such stock certificate promptly after an Option is exercised. Except as provided in Section 10, no adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is actually issued. 7. WITHHOLDING TAXES. Upon (i) the disposition by an Optionee of Shares acquired pursuant to the exercise of an Incentive Stock Option within two years of the granting of such Incentive Stock Option or within one year after exercise of such Incentive Stock Option, or (ii) the exercise of a Nonstatutory Stock Option, the Company shall have the right to require the Optionee to pay the Company the amount of any taxes which the Company may be required to withhold with respect to such Shares. 8. NON-TRANSFERABILITY OF OPTIONS. 8.1. NO TRANSFER. No Option may be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution or may be exercised, during the lifetime of the Optionee, by anyone except the Optionee, except that the Administrator may, if it wishes to do so, allow the spouse of the Optionee to hold and/or exercise the Option pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA. 8.2. DESIGNATION OF BENEFICIARY. An Optionee may file a written designation of a beneficiary who is to receive any Options that remain unexercised in the event of the Optionee's death. If an Optionee is married and the designated beneficiary is not his or her spouse, spousal consent shall be required for such designation to be effective. The Optionee may change such designation of beneficiary at any time by written notice, subject to the above spousal consent conditions. 8.3. EFFECT OF NO DESIGNATION. If an Optionee dies and there is no living beneficiary validly designated under the Plan, the Option may be exercised on behalf of the Optionee to the extent permitted hereunder (i) by the executor or administrator of the estate of the Optionee, or (ii) if the Company does not know that an executor or administrator has been appointed, by the spouse or to any one or more dependents or relatives of the participant as determined by the Company, or (iii) if no spouse, dependent or relative is known to the Company, then by such other person as the Company may designate. 9. ACCELERATED TERMINATION OF OPTION TERM. 9.1. TERMINATION FOR CAUSE. Notwithstanding anything to the contrary contained in the Plan, no Optionee may exercise any Option (whether otherwise vested or not) at any time following a Termination Event with respect to such Optionee. 3 4 9.2. TERMINATION WITHOUT CAUSE. If an Optionee's Continuous Relationship terminates (other than as a result of a Termination Event), his or her Option may be exercised only to the extent that the Optionee was entitled to exercise it on the date of termination, and only within such period of time as is determined by the Administrator, and in no event later than the expiration of the term of such Option as set forth in the Option Agreement. In the case of an Incentive Stock Option, the Administrator shall determine such period of time (in no event to exceed ninety (90) days from the date of termination, except where the termination occurs as a result of death or disability, where the maximum period shall be twelve months) at the time that the Option is granted. 10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR ASSET SALE. 10.1. CHANGES IN CAPITALIZATION. Subject to any required action by the shareholders of the Company, if the outstanding shares of Common Stock are increased, decreased, changed into or exchanged for a different number or kind of shares of securities of the Company through reorganization, recapitalization, reclassification, stock combination, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares as to which Options may be granted under this Plan. A corresponding adjustment changing the number or kind of shares allocated to unexercised Options which have been granted prior to any such change, shall likewise be made. Any such adjustment in the outstanding Options shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Options but with a corresponding adjustment in the price for each share or other unit of any security covered by the Option. Such adjustment shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive. 10.2. DISSOLUTION OR LIQUIDATION. Any Option to the extent not previously exercised will terminate immediately prior to the consummation of any dissolution or liquidation of the Company. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. 10.3. MERGER OR ASSET SALE. In the event of a merger of the Company with or into another corporation, or the sale of substantially all of the assets of the Company, the Administrator, upon 30 days prior written notice to the Optionees, may, in its discretion, do one or more of the following: (i) shorten the period during which Options are exercisable (provided they remain exercisable for at least 30 days after the date the notice is given); (ii) accelerate any vesting schedule to which an Option is subject; (iii) arrange to have the surviving or successor entity grant replacement options with appropriate adjustments in the number and kind of securities and option prices; or (iv) cancel any Option upon payment to the Optionee of cash equal to the excess of the Fair Market Value of the number of Shares as to which the Option is then exercisable (at the effective time of the merger, reorganization, sale of other event including to the extent the exercise has been accelerated as contemplated in clause (ii) above) over the aggregate exercise price with respect to such Shares. The Administrator may also provide for one or more of the foregoing alternatives in any particular Option Agreement. 11. SHAREHOLDER APPROVAL. This Plan is subject to approval by the shareholders of the Company in compliance with Applicable Law within twelve (12) months after the date the Plan is adopted by the Board. Options may be granted but not exercised prior to shareholder approval 4 5 of the Plan. If stockholder approval is not obtained within the applicable period, any Options granted shall terminate retroactively as of the date they were granted. 12. ADMINISTRATION OF THE PLAN. 12.1. PROCEDURE. 12.1.1. ADMINISTRATOR. The Plan shall be administered by (A) the Board or (B) a committee designated by the Board which is constituted to satisfy Applicable Laws. To the extent it is involved in such matters, any Committee must comply with any applicable requirements (i) of Rule 16b-3 for exempt acquisitions with respect to Option grants to Officers or Directors and (ii) for the Options to qualify as "performance-based compensation" under Section 162(m) with respect to Option grants "covered employees" within the meaning of Section 162(m). If permitted by the applicable rules, the Administrator may be different bodies with respect to Directors, Officers who are not Directors, and Employees who are neither Directors nor Officers. 12.1.2. REGULATION OF COMMITTEE. Once appointed, any Committee shall serve in its designated capacity until otherwise directed by the Board. The Board may increase the size of the Committee and appoint additional members, remove members (with or without cause) and substitute new members, fill vacancies (however caused), and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Applicable Laws, and to the extent relevant, the rules for qualification as "performance-based compensation" under Section 162(m) and/or exempt acquisitions under Rule 16b-3. 12.2. POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and, in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion to take any action provided in this Plan, including without limitation: - to determine the Optionee, exercise price, number of shares of Common Stock to be covered by, and terms and conditions of each Option granted hereunder; - to approve forms of Option Agreement; - to modify or amend any Option (subject to Section 13), including reducing the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted; - to authorize any person to execute any instrument required to effect the grant of an Option on behalf of the Company; - to institute an Option Exchange Program; - to construe and interpret the terms of the Plan; - to prescribe, amend and rescind rules and regulations relating to the Plan; and - to make all other determinations deemed necessary or advisable for administering the Plan. 12.3. EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options. 13. AMENDMENT AND TERMINATION OF THE PLAN. 5 6 13.1. AMENDMENT AND TERMINATION. This Plan shall become effective upon its adoption by the Board and continue in effect for a term of ten (10) years, except that the Board may at any time amend, alter or suspend or terminate the Plan. 13.2. SHAREHOLDER APPROVAL. The Company shall be required to obtain shareholder approval of any Plan amendment only to the extent necessary and desirable to comply with Rule 16b-3, with Section 422 or 162(m) of the Code or with any Applicable Laws, including the requirements of any exchange or quotation system on which the Common Stock is listed or quoted. Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by Applicable Law. If the Company purports to grant Options covering more than the number of Shares which may be issued under the Plan without additional shareholder approval, such Option shall be void (and the Optionee will have no right against the Company) with respect to such excess Optioned Stock, unless shareholder approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with this Section 13.2. 13.3. EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration, suspension or termination of the Plan shall impair the rights of an Optionee, unless mutually agreed otherwise between the Optionee and the Administrator. Any such agreement must be in writing and signed by the Optionee and the Company. 14. RIGHTS OF PARTICIPANTS AND BENEFICIARIES. The Company shall pay all amounts payable hereunder only to the Optionee or beneficiaries entitled thereto pursuant to the Plan. The Company shall not be liable for the debts, contracts or engagements of any Optionee or his or her beneficiaries, and rights to Shares or cash payments under the Plan may not be taken in execution by attachment or garnishment, or by any other legal or equitable proceeding, while in the hands of the Company. 15. RESERVATION OF SHARES. During the term of this Plan, the Company will reserve a sufficient number of Shares to satisfy the requirements of the Plan. 16. NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any Option shall confer upon an Optionee any right with respect to continuing the Optionee's employment or consulting relationship with the Company, nor shall they interfere in any way with the Optionee's right or the Company's right to terminate such employment or consulting relationship at any time, with or without cause. 17. GOVERNING LAW. The Plan shall be governed by, and construed in accordance with the laws of the State of Delaware (without giving effect to conflicts of law principles). 18. DEFINITIONS. As used herein, the following definitions shall apply: "ADMINISTRATOR" means the Board or any Committee administering the Plan in accordance with Section 12. "APPLICABLE LAWS" means the legal requirements relating to the administration of stock option plans under state corporate and securities laws and the Code. "BOARD" means the Board of Directors of the Company. 6 7 "CODE" means the Internal Revenue Code of 1986 and related regulations, as amended. "COMMITTEE" means any Committee appointed by the Board in accordance with Section 12. "COMMON STOCK" means the Common Stock, $.01 par value, of the Company. "COMPANY" means Kings Road Entertainment, Inc. "CONSULTANT" means any person, including an advisor, engaged by the Company, a Parent or Subsidiary to render services and who is compensated for such services. "CONTINUOUS RELATIONSHIP" means that the employment or consulting relationship or directorship is not interrupted or terminated by the Company, any Parent or Subsidiary. Continuous Relationship shall not be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; provided, however, that for purposes of Incentive Stock Options, any such leave may not exceed ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract (including certain Company polices) or statute; or (ii) transfers between locations of the Company or between the Company, its Parent, its Subsidiaries or its successor. In the case of a consultant, the manner of determining the duration of the "Continuous Relationship" may be set out in the Option Agreement, which will then control. "DIRECTOR" means a member of the Board. "DISABILITY" means total and permanent disability as defined in Section 22(e)(3) of the Code. "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation, the National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales are reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market thereof) or is regularly quoted by recognized securities dealers 7 8 but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in the Wall Street journal or such other source as the Administrator deems reliable; In the absence of any established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. "OPTION" means a stock option granted pursuant to the Plan. "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Every Option Agreement is subject to the terms and conditions of the Plan. "OPTION EXCHANGE PROGRAM" means a plan under which outstanding options are surrendered in exchange for options with a lower exercise price. "OPTIONED STOCK" means the Common Stock subject to an Option. "OPTIONEE" means an Employee, Director or Consultant who holds an outstanding Option. "PARENT" means a "parent corporation" of the Company, whether now or hereafter existing, as defined in Section 424(e) of the Code. "PLAN" means this 1998 Stock Option Plan. "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. "SECTION 162(m)" means Section 162(m) of the Code. "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 10 of the Plan. "SIGNIFICANT OWNER" means an Employee who, at the time an Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary. "SUBSIDIARY" means a "subsidiary corporation" of the Company, whether now or hereafter existing, as defined in Section 424(f) of the Code. 8 9 "TERMINATION EVENT" means the determination of the Company that either of the following has occurred: (i) any use or disclosure by an Optionee of confidential information or trade secrets of the Company or any Parent or Subsidiary in violation of any confidentiality, non-competition or nondisclosure agreement by which the Optionee is bound, or (ii) the termination of Optionee's Continuous Relationship for cause as defined pursuant to applicable law, as a result of a breach of Optionee's employment or consulting agreement, theft, fraud or embezzlement, or any disclosure or use of confidential information or trade secrets described in part (i) of this paragraph. 9 EX-10.2 4 EXHIBIT 10.2 1 EXHIBIT 10.2 GRANT OF NONQUALIFIED STOCK OPTION ---------------------------------- (EMPLOYEE) To: Kenneth I. Aguado ("OPTIONEE") From: Kings Road Entertainment, Inc. As you probably know, Kings Road Entertainment, Inc. (our "COMPANY") has adopted a 1998 Stock Option Plan (the "PLAN") under which the Company can grant options to purchase shares of Company's Common Stock (the "COMMON STOCK"). We are pleased to inform you that our Board of Directors (the "BOARD") has decided to grant you an option under the Plan (your "OPTION"). Your Option will be governed by the Plan, the attached Standard Terms and Conditions (the "TERMS") and the following specific provisions (which are subject to adjustment under the Plan and the Terms): The "DATE OF GRANT" for your Option for vesting purposes is: July 15, 1998. The "EXPIRATION DATE" of your Option is: June 3, 2003. The "NUMBER OF SHARES" covered by your Option is: 66,667. The "EXERCISE PRICE" per share for your Option is: $1 7/32 VESTING. Your Option cannot be exercised before June 3, 1999. At any time on or after June 3, 1999, but before June 3, 2000, the maximum number of shares you may purchase or have purchased under this Option is fifty percent (50%) of the Number of Shares; on or after June 3, 2000, you may purchase or have purchased all of the Number of Shares. Of course, you can never exercise the Option for more than the Number of Shares or after the Expiration Date (in each case as adjusted under the Terms and the Plan). 1 2 Please review the Plan and the Terms carefully, as they control your rights under your Option. Then sign and return (and if you are married, have your spouse sign) one copy of this letter. We appreciate your continuing efforts on behalf of the Company. Very truly yours, Kings Road Entertainment, Inc. /s/Christopher M. Trunkey ------------------------------- By: Christopher Trunkey Its: Chief Financial Officer I hereby accept this Option and have reviewed the Plan and the Terms. /s/Kenneth I. Aguado ------------------------------- "Optionee" I agree to be bound by all of the terms and conditions of the Option, including those set forth in the Plan and the Terms. Optionee's Spouse /s/Kylene Aguado ------------------------------- Name: Kylene Aguado THE OPTION AND ANY SHARES ISSUABLE UNDER IT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. NO REGULATORY AGENCY HAS PASSED ON THE FAIRNESS OF THE ISSUANCE OF THESE SECURITIES. 2 3 STANDARD TERMS AND CONDITIONS These Standard Terms and Conditions are attached to a letter (the "OPTION LETTER") from Kings Road Entertainment, Inc. granting an Option to you, and are intended to govern that Option. All capitalized terms not specifically defined in these Standard Terms and Conditions have the meanings set forth in the Option Letter or in the Company's 1998 Stock Option Plan. 1. OPTION. You may exercise the Option to buy all or any part of any Number of Shares of Common Stock which are then exercisable at the Exercise Price per share until the Expiration Date. This Option is not intended to qualify as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended (the "CODE"). 2. MANNER OF EXERCISE. This Option may be exercised only (i) during your lifetime, by you; (ii) to the extent permitted by the Committee, by your spouse if your spouse obtained the Option pursuant to a qualified domestic relations order as defined by the Code or Title I of ERISA, or the rules thereunder ("QUALIFIED DOMESTIC RELATIONS ORDER"); and (iii) after your death, by your transferees by will or the laws of descent or distribution. To exercise this Option, you must provide the Company with (a) a written notice of exercise, specifying the number of shares to be purchased and (b) the full purchase price of the shares to be purchased solely (i) in cash or by check payable to the order of the Company or (ii) by delivery of shares of Common Stock of the Company previously purchased on the open market or acquired more than six months previously through exercise of a stock option, and in your possession, valued at fair market value. This Option may not be exercised for a fraction of a share and no partial exercise of this Option may be for less than (a) one hundred (100) shares or (b) the total number of shares then eligible for exercise, if less than one hundred (100) shares. 3. FAIR MARKET VALUE OF COMMON STOCK. The fair market value of a share of Common Stock shall be determined for purposes of this Option by reference to the closing price on the principal stock exchange on which such shares are then listed or, if the shares are not then listed on a stock exchange, by reference to the closing price (if approved for quotation on the NASDAQ National Market) or the mean between the bid and asked price (if other over-the-counter issue) of a share as supplied by the National Association of Securities Dealers, Inc. through NASDAQ (or its successor in function), in each case as reported by The Wall Street Journal, for the business day immediately preceding the date on which the option is exercised (or, if for any reason no such price is available, in such other manner as the Committee may deem appropriate to reflect the then fair market value thereof). 4. TERMINATION OF SERVICE; DEATH OR PERMANENT DISABILITY. The Expiration Date is the earlier of (i) the date set out in the Option Letter or (ii) the expiration of a period following the time you cease (whether voluntarily or involuntarily) to be an employee of the Company or its subsidiaries, which period will be (a) three (3) months if you ceased to be an employee for any reason other than your death or 1 4 "permanent disability" (within the meaning of Section 22(e)(3) of the Code), or (b) twelve (12) months if you die or becomes "permanently disabled" while you are an employee of the Company or one of its subsidiaries. Any options not exercisable on the date that you cease to be an employee (whether voluntarily or involuntarily) will be of no further force or effect. After the Expiration Date, the Option will expire and be void and of no further force or effect. 5. SHARES TO BE ISSUED IN COMPLIANCE WITH APPLICABLE LAWS AND EXCHANGE RULES. By accepting the Option, you represent and agree, for yourself and any person entitled to exercise this Option, that none of the shares purchased on exercise of the Option will be acquired with a view to any sale, transfer or distribution in violation of the Securities Act of 1933, as amended (the "SECURITIES ACT"), and the rules and regulations promulgated thereunder, any applicable state "blue sky" laws or any applicable foreign laws. If required by the Committee at the time the Option is exercised, the person entitled to exercise the Option shall furnish evidence satisfactory to the Company to such effect (including a written representation and an indemnification of the Company in the event of any violation of any applicable laws). The Company does not have to issue any shares on the exercise of this Option if there has not been full compliance with all applicable requirements of the Securities Act (whether by registration or satisfaction of exemption conditions), all applicable listing requirements of any national securities exchange on which shares of the same class are then listed and any other requirements of law or of any regulatory bodies having jurisdiction over such issuance. 6. WITHHOLDING OF TAXES. Upon the exercise of this Option, the Company may require the person entitled to exercise it to pay the Company the amount of any taxes which the Company is required to withhold with respect to the exercise. 7. NO ASSIGNMENT OR TRANSFER. This Option and all other rights and privileges granted hereby[, and any securities issued on exercise (the "STOCK")] shall not be transferred, either voluntarily or by operation of law except (i) by will or the laws of descent and distribution or (ii) pursuant to a Qualified Domestic Relations Order to the extent permitted by the Committee. If there is any other attempt to transfer this Option or any other right or privilege granted hereby, this Option and all rights and privileges granted hereby shall immediately become null and void and be of no further force or effect. 8. ADJUSTMENT FOR REORGANIZATIONS, STOCK SPLITS, ETC. If the outstanding shares of Common Stock of the Company (or any other class of shares or securities which shall have become issuable upon the exercise of this Option pursuant to this sentence) are increased or decreased or changed into or exchanged for a different number or kind of shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made in the Number of Shares, without change in the aggregate purchase price applicable to the unexercised portion of this Option, but with a corresponding adjustment in the price for each share or other unit of any security covered by this Option. 2 5 Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all the property or more than fifty percent (50%) of the then outstanding stock of the Company to another corporation, this Option shall terminate; provided, however, that notwithstanding the foregoing, the Committee shall provide in writing in connection with such transaction for the appropriate satisfaction of this Option by one or more of the following alternatives (separately or in combinations): (i) for the Option to become immediately exercisable notwithstanding the vesting provisions; (ii) for the assumption by the successor corporation of this Option or the substitution by such corporation therefor of a new option covering the stock of the successor corporation or its subsidiaries with appropriate adjustments as to the number and kind of shares and prices; (iii) for the continuance of the Plan by such successor corporation in which event the Plan and this Option shall continue in the manner and under the terms so provided; or (iv) for the payment in cash or stock in lieu of and in complete satisfaction of this Option. Adjustments under this Section 8 will be made by the Committee and its determination as to what adjustments to make will be final, binding and conclusive. No fractional shares of stock shall be issued under this Option on any such adjustment. 9. PARTICIPATION IN OTHER COMPANY PLANS. The grant of this Option will not affect any right you might otherwise have to participate in and receive benefits under the then current provisions of any pension, insurance, or profit sharing program of the Company or of any subsidiary of the Company. 10. NOT AN EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Option is to be construed as an agreement, express or implied, by the Company or any of its subsidiaries to employ you or contract for your services, nor will it restrict the Company's or such subsidiary's right to discharge you or cease contracting for your services or to modify, extend or otherwise affect in any manner whatsoever, the terms of any employment agreement or contract for services which may exist between you and the Company or any of its subsidiaries. 11. NO RIGHTS AS A STOCKHOLDER UNTIL ISSUANCE OF STOCK CERTIFICATE. Neither you nor any other person legally entitled to exercise this Option will be entitled to any of the rights or privileges of a stockholder of the Company with respect to any shares issuable upon any exercise of this Option unless and until a certificate or certificates representing the shares shall have been actually issued and delivered. 12. AGREEMENT SUBJECT TO STOCK OPTION PLAN. This Option is subject to, and the Company and you agree to be bound by, all of the terms and conditions of the Plan, as it may be amended from time to time in accordance with its terms. No amendment to the Plan will adversely affect your rights under this Option in a material manner without your prior written consent. 3 6 13. GOVERNING LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the internal substantive laws of the State of Delaware, without regard to the conflict of laws provisions of that or any other State. The Option can only be amended in a writing executed by a duly authorized Executive Officer of the Company. 4 EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB FOR THE YEAR ENDED APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS APR-30-1998 APR-30-1998 2,658,500 0 383,463 (10,000) 300,673 3,332,636 233,068 (218,583) 3,397,462 248,167 0 0 0 21,136,318 (17,996,623) 3,397,462 1,538,292 1,698,094 584,333 1,653,873 0 0 0 44,221 5,404 38,817 0 0 0 38,817 0.02 0.02
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