-----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, Auxoq02hKpFEe1wvqTd7DGgJYTyv9E++2Qa87XD/8SBwZL4Ehyv+hxKtdCnFL0FM JBlKhBqsRuzWoaWp8Yvb4w== 0000950148-99-002135.txt : 20000211 0000950148-99-002135.hdr.sgml : 20000211 ACCESSION NUMBER: 0000950148-99-002135 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990929 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: 99719600 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 10-KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended April 30, 1999 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 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: $837,000. As of September 15, 1999, the aggregate market value of the voting stock held by non-affiliates (based on the closing sales price as reported by NASDAQ) was approximately $1,451,000 (assuming all officers and directors are deemed affiliates for this purpose). As of September 15, 1999 the registrant had 3,482,019 shares of its common stock outstanding. Documents Incorporated by Reference: None Transitional Small Business Disclosure Format: YES [ ] NO [X] 2 PART I. ITEM 1. DESCRIPTION OF BUSINESS GENERAL Kings Road Entertainment, Inc. ("Company" or "Registrant"), incorporated in Delaware in 1980, has been engaged primarily in the development, financing and production of motion pictures for subsequent distribution in theaters, to pay, network and syndicated television, on home video, and in other ancillary media in the United States (the domestic market) and all other countries and territories of the world (the international market). The Company began active operations in January 1983 and released its first motion picture in 1984, All of Me, starring Steve Martin. Seventeen additional pictures have since been theatrically released in the domestic market and six pictures have been released directly to the domestic home video or pay television market. RECENT EVENTS Subsequent to the fiscal year ended April 30, 1995, the Company has not produced any new films and has derived revenues almost exclusively from the exploitation of films produced prior to April 30, 1995. Following the death on October 4, 1996 of Mr. Stephen Friedman, the Company's founder and then Chairman of the Board of Directors and Chief Executive Officer, the Company explored various business options, 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 that would provide a new source of financing for the Company. 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 November 6, 1998, pursuant to a Stock Acquisition Agreement, FAB Capital Corporation ("FAB"), MBO Music Verlag GmbH ("MBO"), West Union Leasing Ltd. ("West") and RAS Securities Corp. (collectively, the "Acquirors") purchased 962,360 shares of the Company's common stock (approximately 50.3% of the Company's then outstanding common stock) from the Estate of Stephen Friedman ("Estate") and Christopher Trunkey, the Chief Financial Officer of the Company, for a purchase price of $2.35 per share or $2,261,546 in the aggregate. In addition, Music Action Ltd. ("MAC") agreed that it would, as soon as practicable but in any event within 120 days after November 6, 1998, make or cause to be made an offer to each of the Company's shareholders other than the Acquirors, the Estate and Mr. Trunkey, for the purchase of up to ninety percent (90%) of such shareholder's shares at a price of $2.35 per share ("Purchase Offer"). MAC agreed that, in the event the Purchase Offer was not made within ninety days after November 6, 1998, it would deposit $1,800,000 into escrow to be applied toward the Purchase Offer. FAB agreed to make the $1,800,000 deposit into escrow in the event MAC did not do so. On February 3, 1999, the Stock Acquisition Agreement was amended to eliminate the Purchase Offer due to the fact that the Company's closing share price exceeded the $2.35 Purchase Offer price for the previous ten (10) trading days. On November 9, 1998, the Company acquired 2,393,235 shares of Immediate Entertainment Group, Inc. ("Immediate"), approximately 19% of Immediate's outstanding common stock, for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares of the Company's common stock and a note ("Immediate Note") payable to the sellers of the stock for $210,803. Immediate is a diversified entertainment holding company that provides services 2 3 relating to music production, audio recording, CD manufacturing, film soundtrack and script development and operates a mail order music club. 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 1999 and 1998, the Company spent approximately $176,000 and $96,000, 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 necessary, the Company may finance a portion of the cost of a film using internally generated capital or debt financing. PRODUCTION Once fully financed, the Company attempts to produce its pictures at the lowest possible cost consistent with the quality that it seeks to achieve. The Company avoids the substantial overhead of major studios by maintaining only a small permanent staff and by renting production facilities and engaging production staff only as required. The Company has generally produced pictures that have a cost of production between $1,000,000 and $10,000,000 and which it believes cannot significantly exceed their budgeted cost. Although the Company's past production experience allows it certain control over production costs, production costs of motion pictures as an industry trend have substantially escalated in recent years. As of April 30, 1999, the Company has produced (or co-produced) twenty-five pictures, eighteen of which were theatrically released in the domestic market and seven of which were released directly to video or pay television in the domestic market, as follows:
TITLE PRINCIPAL CAST RELEASE DATE - ----- -------------- ------------ All of Me Steve Martin, Lily Tomlin September 1984 Creator Peter O'Toole, Mariel Hemingway September 1985 Enemy Mine Dennis Quaid, Louis Gossett, Jr. December 1985 The Best of Times Robin Williams, Kurt Russell January 1986 Touch & Go Michael Keaton, Maria Conchita Alonso August 1986 Morgan Stewart's Coming Home Jon Cryer, Lynn Redgrave February 1987 The Big Easy Dennis Quaid, Ellen Barkin August 1987
3 4 In the Mood Patrick Dempsey, Beverly D'Angelo September 1987 Rent-A-Cop Burt Reynolds, Liza Minelli January 1988 The Night Before Keanu Reeves, Lori Louglin March 1988 My Best Friend is a Vampire Robert Sean Leonard, Cheryl Pollack May 1988 Jacknife Robert DeNiro, Ed Harris March 1989 Time Flies When You're Alive Paul Linke July 1989 Kickboxer Jean Claude Van Damme August 1989 Homer & Eddie Whoopi Goldberg, James Belushi December 1989 Blood of Heroes Rutger Hauer, Joan Chen February 1990 Kickboxer II Sasha Mitchell, Peter Boyle June 1991 Kickboxer III Sasha Mitchell June 1992 Paydirt Jeff Daniels, Catherine O'Hara August 1992 Knights Kris Kristofferson, Kathy Long November 1993 Brainsmasher Andrew Dice Clay, Teri Hatcher November 1993 Kickboxer IV Sasha Mitchell July 1994 The Stranger Kathy Long March 1995 The Redemption Mark Dacascos August 1995 The Haunted Heart Diane Ladd, Olympia Dukakis January 1996
DISTRIBUTION Theatrical - The Company, when practical, has licensed its pictures to distributors for theatrical distribution in the domestic market. These distributors undertake all activities related to the distribution of the Company's motion pictures, including booking the picture into theaters, shipping prints and collecting film rentals. In certain cases distributors have advanced the costs of advertising and publicizing the motion pictures and the manufacture of prints, however, in most cases the Company has been required to fund or arrange funding for these costs itself. The Company's most recent pictures, however, were not theatrically released and were initially released on either home video or pay television. Home Video - Distribution into the home video market has occurred by licensing the home video rights for the Company's pictures to video distributors including HBO Video, Paramount Pictures, Live Home Video and Trimark Pictures. These video distributors in turn sell videocassettes to video retailers that rent or sell videocassettes to consumers. During the year ended April 30, 1999, the Company licensed the home video and DVD rights for the United States and Canada to nineteen (19) of its pictures to Trimark Pictures. All but one of the pictures has been previously released. Pay and Free Television - Distribution on pay television has occurred by licensing the pay television rights of its movies to cable television companies such as HBO/Cinemax, Showtime/The Movie Channel and various pay-per-view distributors. After licensing to pay television, the Company's films are then made available to television stations and basic cable outlets. The Company has licensed the free television rights to its films to companies such as ITC Entertainment and Worldvision Enterprises who in turn sell packages of films to television stations and basic cable services. 4 5 Other Rights - Network television, non-theatrical, music publishing, soundtrack album, novelization and other miscellaneous rights in the Company's pictures have been, whenever possible, licensed by the Company to third parties. The revenue to be derived from the exercise of these other rights is generally not as significant as revenue from other sources. International Markets - The Company previously generated substantial revenues from the licensing of its pictures outside of the United States. However, in 1996 the Company sold the international distribution rights to most of its films to another company. For those pictures where international distribution rights are still owned by the Company, it licenses these pictures to local distributors on a territory-by-territory basis. Each license may cover one or more pictures, and may include all rights or only certain rights. Sales, collections and delivery of product are handled by outside foreign sales organizations. Such organizations generally receive a commission based on a percentage of cash receipts. The Company believes that, based on its current and anticipated future level of film production, it is more efficient and cost effective to use outside foreign sales organizations rather than to maintain its own staff. EMPLOYEES As of April 30, 1999, the Company employed two 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 or has been 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. 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 5 6 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 In the ordinary course of business, the Company has or may become involved in disputes or litigation which in the aggregate are not believed by management to be material to its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders during the fiscal year covered by this report. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock trades on the Nasdaq SmallCap Market tier of the Nasdaq Stock Market ("Nasdaq") 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, 1999 (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 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
FISCAL YEAR 1999 HIGH LOW ---------------- ---- --- First Quarter 1 9/16 1 3/16 Second Quarter 1 7/16 1 1/16 Third Quarter 3 5/16 1 5/16 Fourth Quarter 4 1/8 2 5/8
As of September 15, 1999, the Company had approximately 220 stockholders of record. In addition, the Company believes it has over 600 beneficial owners holding shares in street name. On January 11, 1999, Nasdaq advised the Company that the acquisition by FAB, MBO, West and RAS of 962,360 shares of the Company's stock resulted in a change in control of the Company. Further, Nasdaq has advised the Company that its purchase of 2,393,235 shares of 6 7 common stock of Immediate resulted in a change in the Company's business which would require the Company to meet all initial listing requirements for the Nasdaq SmallCap Market. The Company responded to Nasdaq that it believed there would be no change in the Company's business unless it merged with Immediate. Although the Company had announced plans to merge with Immediate in connection with its purchase of Immediate stock, such plans were abandoned by the mutual consent of the parties. On August 17, 1999, Nasdaq notified the Company that it had failed to timely file its Form 10-KSB for the fiscal year ended April 30, 1999 and that the Company's securities were subject to delisting from the Nasdaq SmallCap Market pending a hearing scheduled for September 30, 1999. The Company is required to demonstrate to Nasdaq that it has met and will meet all filing requirements under the Securities Exchange Act of 1934 and that it has the ability to sustain long-term compliance with all other Nasdaq maintenance criteria. Among the Nasdaq SmallCap maintenance criteria are a $1.00 minimum bid price for the Company's common stock and a $1,000,000 minimum market value of shares owned by non-affiliates of the Company. As of September 15, 1999, the closing price for the Company's common stock was $.94. The Company has approximately 1.2 million shares outstanding that are owned by non-affiliates of the Company. There can be no assurance that the Company will be able to maintain its listing on the Nasdaq SmallCap Market. Further, in the event the Company's securities are delisted, the Company will be in default of the Convertible Note described in Note G of the Company's Consolidated Financial Statements. Subsequent to April 30, 1999, the Company sold approximately 92,700 shares of new common stock under a Regulation S offering to offshore investors. Gross proceeds were approximately $214,000, or approximately $2.30 per share. Net proceeds, after commissions and offering expenses, were approximately $161,000. The proceeds from the offering were used for general corporate purposes. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS Subsequent to the fiscal year ended April 30, 1995, the Company has not produced any new films and has derived revenues almost exclusively from the exploitation of films produced prior to April 30, 1995. Following the death on October 4, 1996 of Mr. Stephen Friedman, the Company's founder and then Chairman of the Board of Directors and Chief Executive Officer, the Company explored various business options, 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 that would provide a new source of financing for the Company. 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 November 6, 1998, pursuant to a Stock Acquisition Agreement, FAB, MBO, West and RAS purchased 962,360 shares of the Company's common stock (approximately 50.3% of the Company's then outstanding common stock) from the Estate and Christopher Trunkey, the Chief Financial Officer of the Company, for a purchase price of $2.35 per share or $2,261,546 in the aggregate. In addition, MAC agreed that it would, as soon as practicable but in any event within 120 days after November 6, 1998, make or cause to be made an offer to each of the 7 8 Company's shareholders other than the Acquirors, the Estate and Mr. Trunkey, for the purchase of up to ninety percent (90%) of such shareholder's shares at a price of $2.35 per share. MAC agreed that, in the event the Purchase Offer was not made within ninety days after November 6, 1998, it would deposit $1,800,000 into escrow to be applied toward the Purchase Offer. FAB agreed to make the $1,800,000 deposit into escrow in the event MAC did not do so. On February 3, 1999, the Stock Acquisition Agreement was amended to eliminate the Purchase Offer due to the fact that the Company's closing share price exceeded the $2.35 Purchase Offer price for the previous ten (10) trading days. On November 9, 1998, the Company acquired 2,393,235 shares of Immediate, approximately 19% of Immediate's outstanding common stock, for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares of the Company's common stock and a note payable to the sellers of the stock for $210,803. Immediate is a diversified entertainment holding company that provides services relating to music production, audio recording, CD manufacturing, film soundtrack and script development and operates a mail order music club. 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, 1999, 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 completion of a picture. However, lower budget films, of which the Company has produced most recently, often do not have a theatrical release. Revenues from home video are initially recognized when a film becomes available for release on videocassette, typically six months after the initial theatrical release or, when no theatrical release occurs, upon delivery of the film to the distributor. Revenues from pay and free television of a film are similarly recognized when a film becomes available for exploitation in those media, typically six to twenty-four months after the initial release. Some distribution contracts, however, may license more than one medium, a "multiple rights license". In this case, the full license fee is recognized when the film is exploited in the first available medium. Revenues from international markets generally follow the same pattern as revenues from the domestic market and may include multiple rights licenses as well. However, the Company sold the international distribution rights to most of its films to another company in 1996 and international revenues have substantially decreased due to this sale. As a result of these factors, the Company's revenues vary significantly each year depending on the number and success of release of films that become available in the various media during that fiscal year. 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 8 9 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, 1999 feature film revenues were approximately $765,000 as compared to approximately $1,538,000 for the year ended April 30, 1998. The substantial decrease in feature film revenues of approximately 50% 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 $72,000 for the year ended April 30, 1999 from approximately $160,000 reflecting the decrease in marketable securities held during the year versus the same period last year. Film cost amortization as a percentage of feature film revenues increased slightly to approximately 40% for the year ended April 30, 1999 from approximately 38% for the year ended April 30, 1998. Film cost amortization during the year ended April 30, 1999 included approximately $140,000 of costs associated with various development projects that were abandoned by the Company versus approximately $90,000 for the year ended April 30, 1998. Selling expenses increased by approximately 105% to approximately $118,000 during the year fiscal ended April 30, 1999 versus approximately $58,000 during the previous fiscal year. This increase results primarily from an increased provision for bad debt reserves and costs associated with the Company's license of home video and DVD rights for the United States and Canada to nineteen (19) of its films to Trimark Pictures. General and administrative costs decreased to approximately $771,000 during the year ended April 30, 1999 versus approximately $1,012,000 during the same period last year. A substantial reduction in legal expenditures of approximately $319,000 due to the resolution in December 1997 and April 1998 of certain litigation involving the Company was partially offset by increases in salaries and bonus expenditures. In connection with the Stock Acquisition Agreement, all of the then outstanding options under the Company's 1998 Stock Option Plan were canceled. For such cancellation, the option holders received approximately $114,000 that was recorded as an expense that approximated the aggregate difference between the exercise price under the options and the fair market value of the Company's common stock at the time of cancellation. Interest expense was approximately $433,000 primarily resulting from an interest charge of approximately $427,000 related to a beneficial conversion feature contained in a $1,000,000 convertible note issued by the Company on April 26, 1999. No interest expense was incurred during the year ended April 30, 1998. Equity in the losses of affiliates was approximately $476,000 during the year ended April 30, 1999 reflecting the Company's share of the losses incurred by Immediate. The Company also recorded a valuation allowance of approximately $3,284,000 to reflect the Company's evaluation of the recoverability of its investment in Immediate. Immediate has experienced recurring operating losses and has a working capital deficit. Immediate's management is presently pursuing plans to increase sales, reduce administrative costs, improve cash flow and obtain additional financing. Immediate's ability to achieve its operating goals and to obtain additional financing is uncertain. During the year ended April 30, 1998, the Company had no affiliates. 9 10 During the year ended April 30, 1999, the Company incurred a net loss of approximately $4,537,000 versus net income of approximately $39,000 during the year ended April 30, 1998. The loss results primarily from (i) the valuation allowance recorded by the Company to reflect the recoverability of its investment in Immediate, (ii) the Company's share of losses incurred by Immediate, (iii) a substantial decrease in feature film revenues due to the fact that the Company has not produced any new films since the fiscal year ended April 30, 1995 and (iv) the increase in interest expense associated with the issuance of a convertible note. During the years ended April 30, 1999 and April 30, 1998, the Company had no significant provision for income taxes. LIQUIDITY AND CAPITAL RESOURCES The production of motion pictures requires substantial capital. In producing a motion picture, the Company may expend substantial sums for both the production and distribution of a picture, before that film generates any revenues. In many instances the Company obtains advances or guarantees from its distributors but these advances and guarantees generally defray only a portion of a film's cost. The Company's principal source of working capital during the year ended April 30, 1999 was motion picture licensing income and the issuance on April 26, 1999 of a $1,000,000 convertible note ("Convertible Note"). Except for the financing of film production costs and the repayment of the Convertible Note, management believes that its existing cash resources will be sufficient to fund its ongoing operations. During the year ended April 30, 1999, the Company used approximately $2,603,000 of cash on hand plus approximately $1,211,000 of cash provided by financing activities to fund approximately $1,230,000 of operating activities and approximately $2,584,000 of investing activities. The financing activities consisted primarily of the issuance of the Convertible Note. The investing activities consisted primarily of the Company's investment in Immediate. (SEE RECENT DEVELOPMENTS). During the year ended April 30, 1998, the Company used operating cash flow of approximately $373,000 plus cash flow generated by the sale of marketable securities of approximately $5,967,000 to make a cash distribution to its shareholders of approximately $3,957,000 on June 27, 1997. As of April 30, 1999, the Company had cash, cash equivalents and restricted cash of approximately $1,056,000 as compared to approximately $2,659,000 as of April 30, 1998. The Convertible Note is due April 25, 2000 bearing interest at 8% per annum payable quarterly and is convertible into the Company's common stock at the lower of (i) $2.06 per share or (ii) 70% of the average closing bid price for the five (5) trading days immediately preceding the date of conversion but in no event less than $1.00 ("Conversion Price"). The Conversion Price is subject to reduction of 3% per month beginning on the six month anniversary of the Convertible Note in the event any portion of the securities issuable upon conversion have not been registered under the Securities Act of 1933, as amended. The Company has entered into a Registration Rights Agreement with the note holder wherein the Company, as soon as practicable, has agreed to register the securities issuable upon conversion of the Convertible Note. FUTURE COMMITMENTS On May 12, 1999, the Company used the proceeds from the Convertible Note to purchase approximately 19% of the outstanding common stock of Star TV AG ("Star") through the Company's wholly owned subsidiary, Orwell Properties, Inc. ("Orwell"). At April 30, 1999, these proceeds were reflected as restricted cash on the Company's balance sheet. Pursuant to a Pledge and Security Agreement between the Convertible Note holder and Orwell, the Convertible Note is secured by Orwell's investment in Star. In addition, Orwell has agreed to guarantee the obligations of the Company under the Convertible Note. 10 11 If the term of the Convertible Note is not extended on or before April 20, 2000 or is not converted, the Company will need to secure financing to repay the Convertible Note. There can be no assurance that such financing can be secured by the Company. On April 27, 1999, the Company entered into a letter agreement ("Joint Venture Agreement") with Merchant Ivory Productions ("MIP") pursuant to which the Company was required to contribute to Merchant Ivory Distribution, LLC ("MIFD") on or before May 5, 1999 $250,000 plus options to purchase up to 250,000 shares of the Company's common stock. The Company is also required to provide a revolving line of credit of up to $500,000 to MIFD to fund print and advertising expenses incurred by MIFD. MIFD is a joint venture between the Company and MIP, 25% owned by the Company and 75% owned by MIP formed to acquire and subsequently distribute motion pictures in significant markets including the United States. On May 18, 1999, the Company made a contribution of $250,000 to MIFD. MIP has subsequently advised the Company that it believes the Company has materially breached the Joint Venture Agreement by failing to provide the stock options and the line of credit to MIFD. On the other hand, the Company believes that MIP has materially breached its obligations to the Company under the Joint Venture Agreement. MIP and the Company are currently discussing the matter. On May 17, 1999, the Company entered into a Loan Agreement ("Star Loan Agreement") with Star whereby the Company borrowed $250,000 from Star ("Star Loan") bearing interest at 6% per annum. The Star Loan was originally due July 19, 1999. By agreement dated July 22, 1999, the due date was extended until August 19, 1999. As of September 15, 1999, the Star Loan has not been repaid and the Company is currently in default of the Star Loan Agreement. A further extension of the due date of the Star Loan is currently being discussed with Star. The Company does not have any other material future commitments. FORWARD-LOOKING STATEMENTS The foregoing discussion, as well as the other sections of this Annual Report on Form 10-KSB, contains forward-looking statements that reflect the Company's current views with respect to future events and financial results. Forward-looking statements usually include the verbs "anticipates," "believes," "estimates," "expects," "intends," "plans," "projects," "understands" and other verbs suggesting uncertainty. The Company reminds shareholders that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors which could cause the actual results to differ materially from the forward-looking statements. Potential factors that could affect forward-looking statements include, among other things, the Company's ability to identify, produce and complete film projects which are successful in the market, to arrange financing, distribution and promotion for these projects on favorable terms in various markets and to attract and retain qualified personnel. ITEM 7. FINANCIAL STATEMENTS The Financial Statements of Kings Road Entertainment, Inc. are listed on the Index to Financial Statements set forth on page F-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On April 16, 1999, the Company selected the firm of Richard A. Eisner & Company, LLP as the Company's independent auditors for the fiscal year ended April 30, 1999. Stonefield 11 12 Josephson had served as the Company's independent auditors for the fiscal years ended April 30, 1998, 1997 and 1996. The Company believes there were no disagreements with Stonefield Josephson as to any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure in connection with the audits of the Company's financial statements for the fiscal years ended April 30, 1998, 1997 and 1996. On September 10, 1999, the Company selected the firm of Jones, Jensen & Company, LLC as the Company's independent auditors for the fiscal year ended April 30, 1999. The firm of Richard A. Eisner & Company, LLP has served as the Company's independent auditors since April 16, 1999 but had not completed any audit of the Company's financial statements for any fiscal year or interim period. The Company believes there were no disagreements with Richard A. Eisner & Company, LLP as to any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure during the period in which they were retained. 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 of the Company. There are no family relationships between any of the directors or executive officers.
EXPIRATION NAME AGE POSITION OF TERM ---- --- -------- ---------- David Dube 43 Chairman 1999 Christopher Trunkey 33 Senior Vice President, Chief ---- Financial and Administrative Officer James Leaderer 45 Director 2000
EXECUTIVE OFFICERS AND DIRECTORS DAVID DUBE has been a director of the Company since April 1999 and Chairman of the Company's board of directors since June 1999. Mr. Dube is presently Chairman and Chief Executive Officer of Stonewall Holdings, Inc., a privately held corporate finance and investment banking firm. Mr. Dube was Senior Vice President of Investment Banking with FAB Securities of America, Inc. from March 1998 until June 1999 and was, from September 1997 to February 1998 a project finance consultant to the firm. Mr. Dube was President and Chief Executive Officer of Optimax Industries, Inc. from July 1996 to September 1997. From February 1991 to June 1996, Mr. Dube had been the principal of Dube & Company, a financial consulting firm. Mr. Dube currently serves on the boards of directors of Helmstar Group, Inc. and SafeScience, Inc. Mr. Dube graduated from Suffolk University where he also received a Master's degree in Taxation and graduated from Bentley College with an additional Master's degree in Accountancy. Mr. Dube is a certified public accountant and holds various general and principal securities licenses. 12 13 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. JAMES LEADERER has been a director of the Company since November 1998. Mr. Leaderer currently serves as the President and Chief Executive Officer of Directrade, Inc., a stock day trading firm. From November 1997 to January 1999, Mr. Leaderer was Vice President of Investment Banking and was a director of FAB Securities of America, Inc. From June 1991 to November 1997, Mr. Leaderer was the President and Chief Executive Officer of Woodside Assurance, Inc., a private investment entity. Mr. Leaderer graduated from Syracuse University with a degree in Industrial Engineering. Mr. Leaderer also holds various general securities licenses. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE FAB Capital Corp. (and Phillip Cook as an indirect beneficial owner) filed a Form 4 approximately 2 days late in connection with its transfer of restricted common stock in January 1999. Other than the foregoing, the Company does not know of any person or beneficial owner that did not timely file the reports required by Section 16(a) of the Securities Exchange Act. ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth the compensation for each of the last three fiscal years of the Company's Chief Executive Officers and up to four of the other most highly compensated individuals serving as executive officers at April 30, 1999 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 $100,000 in any of the last three fiscal years. 13 14
LONG TERM ANNUAL COMPENSATION COMPENSATION ---------------------- STOCK OPTIONS ALL OTHER NAME AND POSITION YEAR SALARY ($) BONUS ($) (SHARES) COMPENSATION ----------------- ---- ---------- --------- -------- ------------ Phillip Cook (1) Chairman and Chief 1999 $0 $0 0 $0 Executive Officer Kenneth Aguado (2) 1999 71,085 75,334 66,667 1,154(3) Chairman and Chief 1998 115,269 10,000 27,708 64,314(4) Executive Officer 1997 89,577 3,596 0 619(3) Christopher Trunkey (5) Senior Vice President, 1999 107,885 41,055 34,000 4,171(3) Chief Financial and Administrative Officer
- --------------- (1) Mr. Cook was the Company's Chief Executive Officer from November 6, 1998 until his resignation on June 24, 1999. (2) Mr. Aguado was the Company's Chief Executive Officer from October 7, 1996 until his resignation on November 6, 1999. (3) Represents contributions made by the Company on behalf of the respective employee pursuant to the Company's SIMPLE IRA plan. (4) 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. (5) Mr. Trunkey was not a Named Officer during 1998 or 1997 as his salary and bonus during the respective fiscal years did not exceed $100,000. OPTION GRANTS, EXERCISES AND YEAR-END VALUES The following table sets forth the individual grants of stock options made during the fiscal year ended April 30, 1999 to the Named Officers:
% OF TOTAL OPTIONS GRANTED TO OPTIONS EMPLOYEES EXERCISE EXPIRATION NAME GRANTED IN FISCAL YEAR PRICE DATE ---- ---------- -------------- -------- ---------- Kenneth Aguado 66,667(1) 66% $1.22 06/03/2003 Christopher Trunkey 34,000(1) 34% $1.22 06/03/2003
- --------------- (1) On November 6, 1998, in connection with a Stock Acquisition Agreement, the options granted to Mr. Aguado and Mr. Trunkey were canceled. For such cancellation, Mr. Aguado and Mr. Trunkey received, in the aggregate, the sum of $113,754 representing the difference between $2.35, the per share purchase price under the Acquisition Agreement, and the exercise price of $1.22. No options were exercised during the fiscal year ended April 30, 1999 and no options were outstanding as of April 30, 1999. EMPLOYMENT AGREEMENTS The Company has a consulting agreement dated as of July 1, 1999 with David W. Dube, the Company's Chairman of the Board of Directors. The agreement provides for a monthly 14 15 consulting fee of $10,000 per month beginning on July 1, 1999 through April 30, 2000. Pursuant to the terms of the consulting agreement, on September 14, 1999, Mr. Dube was granted options to purchase up to 125,000 shares of the Company's common stock at an exercise price of $.9375, with 50% of the options granted vesting on July 1, 2000 and the balance of the options vesting on July 1, 2001. The Company entered into an employment agreement dated as of April 17, 1998 with Christopher Trunkey, the Company's Senior Vice President, Chief Financial and Administrative Officer. The agreement provides for Mr. Trunkey's employment with the Company beginning May 11, 1998 through and including May 5, 2000 ("Term"). Pursuant to the terms of the agreement, Mr. Trunkey is to receive a salary of $110,000 during the first year of the Term and $120,000 for the second year of the Term. Mr. Trunkey was also granted options to purchase up to 34,000 shares of the Company's common stock at an exercise price of $1.22. On July 16, 1998, Mr. Trunkey's employment agreement was amended to provide an advance to Mr. Trunkey of $20,000 against Mr. Trunkey's annual salary to be repaid in equal installments over the then remaining term of the employment agreement ("Salary Advance"). On November 6, 1998, in connection with a Stock Acquisition Agreement, the options granted to Mr. Trunkey were canceled. For such cancellation, Mr. Trunkey received, the sum of $38,420 representing the difference between $2.35, the per share purchase price under the Acquisition Agreement, and the exercise price of $1.22. On September 14, 1999, each of the directors, Mr. Dube and James Leaderer were each granted options to purchase up to 50,000 shares of the Company's common stock at an exercise price of $.9375. Of Mr. Leaderer's options, 50% vest on November 7, 1999, to coincide with the one-year anniversary of Mr. Leaderer's appointment to the board of directors with the balance vesting on November 7, 2000. Of Mr. Dube's options, 50% vest on April 1, 2000, coinciding with the one-year anniversary of Mr. Dube's appointment to the board of directors with the balance vesting on April 1, 2001. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL STOCKHOLDERS The following table sets forth certain information, as of August 1, 1999, 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 based on the Company's records and information provided by the owners: 15 16
NUMBER OF PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS - ------------------------------------ ------------------ ---------- Michael Berresheim 1,201,247(1)(2)(3) 34.7% Gerauer Street 58A Moerfelden - Walldorf Germany 64546 MBO Music Verlag GmbH 950,829 27.3% Gerauer Street 58A Moerfelden - Walldorf Germany 64546 Tresor Worldwide Limited 1,000,000(4) 22.3% Havilland Hall Guernsey, Channel Islands GYS 8TP FAB Capital Corporation 732,680(2) 21.0% 50 Broadway New York, New York 10004 West Union Leasing Limited 256,418(3) 7.4% C/o Christoph Martin, Trustee 10 Greycoat Place 1 Premier House London SW1 United Kingdom
- --------------- (1) Includes 950,829 shares owned by MBO Music Verlag GmbH of which Mr. Berresheim is the Managing Director and sole shareholder and 256,418 shares owned by West Union Leasing Limited ("West Union"), a trust whose beneficiary is Mrs. Johanna Ammons, the mother of Mr. Berresheim. Mr. Berresheim disclaims beneficial ownership of the shares held by West Union. (2) The Company has been advised of a claim of ownership by Mr. Berresheim or his affiliates to the 732,680 shares owned of record by FAB Capital Corporation. In the event Mr. Berresheim is determined to be the owner of such shares, the ownership of Mr. Berresheim would increase to 1,939,927 shares, 55.7% of the Company's outstanding common stock. (3) The Company has been advised of a claim of ownership by West Union to 150,000 shares owned by Robert H. Jaffe & Associates, P.A. as Trustee for Lancaster Consultants, Inc. and Robert H. Jaffe & Associates, P.A. In the event that West Union is determined to be the owner of such shares, the ownership of West Union would increase to 406,418 shares, 11.7% of the Company's outstanding common stock. Mr. Berresheim's beneficial ownership would likewise increase to 1,351,247 shares, 38.8% of the Company's outstanding common stock. (4) Represents 1,000,000 shares of the Company's common stock issuable to Tresor Worldwide Limited as of September 15, 1999 under the terms of a Convertible Note dated as of April 26, 1999. As of September 15, 1999, a principal balance of $1,000,000 was due to Tresor convertible into shares of the Company's common stock at the lower of (i) $2.06 or (ii) seventy (70%) percent of the average closing bid price for the five (5) trading days immediately preceding the date of conversion (on September 15, 1999 such average price would be $.98) but in no event less than $1.00. (5) Hayward Lake Funding Services, Inc. ("Hayward") is the owner of record of 165,000 shares, 4.7% of the Company's outstanding common stock. The sole shareholder of Hayward is Mr. Fred Schulman. Mr. Schulman's sister, Mrs. Faye Peltz, is the owner of record of 135,000 shares, 3.9% of the Company's outstanding common stock. Hayward and Mrs. Peltz disclaim beneficial ownership of the shares held by the other. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth, as of September 15, 1999, 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: 16 17
NAME AND ADDRESS OF DIRECTORS OR NUMBER OF PERCENT OF NUMBER OF PERSONS IN GROUP SHARES CLASS - -------------------------------- --------- ------------- David Dube 50,000(1) 1.5% 50 Broadway, 14th Floor New York, New York 10004 Christopher Trunkey 0 0.0% 1901 Avenue of the Stars, Suite 1545 Los Angeles, California 90067 James Leaderer 25,000(2) Less than 1.0% 50 Broadway, 14th Floor New York, New York 10004 All Executive Officers and Directors as a Group (3 persons) 75,000 2.2%
- --------------- (1) Does not include options to purchase up to 175,000 shares that are not presently exercisable. (2) Represents options to purchase shares that become exercisable on November 7, 1999. Does not include options to purchase up to an additional 25,000 shares that are not presently exercisable. Except as otherwise disclosed herein, the Company does not know of any arrangements, including any pledge of the Company's securities, the operation of which at a subsequent date may result in a change of control of the Company. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS On November 6, 1998, pursuant to a Stock Acquisition Agreement, FAB, MBO, West and RAS purchased 421,949, 373,350, 159,461 and 100 shares, respectively, of the Company's common stock from the Estate, and FAB simultaneously purchased 7,500 shares from Christopher Trunkey, the Chief Financial Officer of the Company, for a purchase price of $2.35 per share or $2,261,546 in the aggregate. Such shares in the aggregate represented approximately 50.3% of the Company's then outstanding common stock. Phillip Cook, Chairman, Chief Executive Officer and 25% shareholder of FAB became Chairman and Chief Executive Officer of the Company until his resignation on June 24, 1999. MAC agreed that it would, as soon as practicable but in any event within 120 days after November 6, 1998, make or cause to be made an offer to each of the Company's shareholders other than the Acquirors, the Estate and Mr. Trunkey, for the purchase of up to ninety percent (90%) of such shareholder's shares at a price of $2.35 per share. MAC agreed that, in the event the Purchase Offer was not made within ninety days after November 6, 1998, it would deposit $1,800,000 into escrow to be applied toward the Purchase Offer. FAB agreed to make the $1,800,000 deposit into escrow in the event MAC did not do so. On February 3, 1999, the Stock Acquisition Agreement was amended to eliminate the Purchase Offer due to the fact that the Company's closing share price exceeded the $2.35 Purchase Offer price for the previous ten (10) trading days. On November 9, 1998, the Company acquired approximately 19% of the outstanding common stock of Immediate from FAB, MBO and West for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares of the Company's stock and the Immediate Note payable to the sellers for $210,803 bearing interest at 5% per annum due upon demand but in no event earlier than April 30, 2000. Pursuant to such transaction FAB, MBO and West, respectively, received $1,016,679, $898,875 and $384,446 in cash, 653,131, 577,479 and 246,957 shares of the 17 18 Company's common stock and are due $93,175, $82,424 and $35,204 under the Note. During the year ended April 30, 1999, interest expense of $4,996 was accrued on the Note. FAB, MBO and West owned 429,449, 373,350 and 159,461 shares, respectively, of the Company's common stock at the time of this transaction. In connection with the Convertible Note, the Company agreed to pay FAB Securities of America, Inc. ("FAB Securities"), a wholly-owned subsidiary of FAB, a commission of 5% of the Convertible Note gross proceeds, $50,000. In addition, FAB Securities is entitled to warrants to purchase the Company's common stock equal to 5% of any portion of the Convertible Note converted by Tresor into the Company's common stock at an exercise price equal to the closing price of the Company's common stock on the date of issuance of such warrants. As of April 30, 1999, $11,400 was due and payable to FAB Securities under this agreement. During the fiscal year ended April 30, 1999, the Company has advanced to Immediate or made payments to third parties on Immediate's behalf the aggregate sum of $147,000. Immediate has agreed to repay such advances to the Company together with interest at the rate of 6% per annum. As of September 15, 1999, the Company has advanced an additional approximately $267,000 to Immediate and Immediate has repaid approximately $26,000 to the Company. 18 19 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 Employment Agreement effective as of May 11, 1998 between Christopher Trunkey and the Registrant.(3) 10.3 Stock Acquisition Agreement dated November 6, 1998 between the Estate of Stephen Friedman, RAS Securities Corp., FAB Capital Corp., Christopher Trunkey and the Registrant.(4) 10.4 Stock Purchase Agreement dated November 9, 1998 between West Union Leasing Ltd., FAB Capital Corp., MBO Music Verlag GmbH, Immediate Entertainment Group, Inc. and the Registrant.(4) 10.5 Convertible Note dated April 26, 1999 issued by Registrant to Tresor Worldwide Ltd.(5) 10.6 Registration Rights Agreement dated as of April 26, 1999 between Tresor Worldwide Ltd. and the Registrant.(5) 10.7 Pledge and Security Agreement dated April 26, 1999 between Tresor Worldwide Ltd. and Orwell Properties, Inc., a wholly owned subsidiary of the Registrant.(5) 10.8 Letter Agreement dated April 27, 1999 between Merchant Ivory Productions and the Registrant.(5) 21 Subsidiaries of Registrant.(5) 27 Financial Data Schedule.(5)
- --------------- (1) Incorporated by reference to Form 10-KSB for the fiscal year ended April 30, 1998. (2) Incorporated by reference to Form 10-K for the fiscal year ended April 30, 1988. (3) Incorporated by reference to Form 10-QSB for the quarterly period ended July 31, 1998. (4) Incorporated by reference to Schedule 13D dated November 13, 1998 filed by FAB Capital Corp., RAS Securities Corp., MBO Music Verlag GmbH, West Union Leasing Ltd., Christoph Martin and Michael Berresheim. (5) Filed electronically with Securities and Exchange Commission, omitted in copies distributed to shareholders or other persons. (B) FORMS 8-K On April 21, 1999 the Company filed a Form 8-K reporting under Item 4 thereof a change in the Company's independent auditors for the fiscal year ended April 30, 1999. On September 15, 1999, the Company filed a Form 8-K reporting under Item 4 thereof a change in the Company's independent auditors for the fiscal year ended April 30, 1999. The Company also reported under Item 5 thereof that (i) the Company had not filed its Annual Report on Form 10-KSB and that the Nasdaq Stock Market has notified the Company that its common stock was subject to delisting pending a hearing scheduled for September 30, 1999 and (ii) Phillip Cook resigned as the Company's President and Chairman on June 24, 1999 and that David Dube, who has been a member of the board of directors since April 1, 1999, became the Company's new Chairman. 19 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 27, 1999 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/David W. Dube Chairman of the Board of September 27, 1999 - ------------------------- Directors and Chief Executive DAVID DUBE Officer (Principal Executive Officer) /s/James P. Leaderer Director September 27, 1999 - ------------------------- JAMES LEADERER /s/Christopher M. Trunkey Senior Vice President, Chief September 27, 1999 - ------------------------- Financial and Administrative CHRISTOPHER M. TRUNKEY Officer (Principal Financial and Accounting Officer)
20 21 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1999 Reports of Independent Auditors F-2 Consolidated Balance Sheet as of April 30, 1999 F-4 Consolidated Statements of Income for the Years Ended April 30, 1999 and 1998 F-5 Consolidated Statements of Stockholders' Equity for the Years Ended April 30, 1999 and 1998 F-6 Consolidated Statements of Cash Flows for the Years Ended April 30, 1999 and 1998 F-7 Notes to Consolidated Financial Statements F-8
F-1 22 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 statement of operation of Kings Road Entertainment, Inc. (the "Company") for the year ended April 30, 1998, and the related statements of shareholders' equity and cash flows. 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 results of the operations of Kings Road Entertainment, Inc. for the year ended April 30, 1998, and their cash flows, 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 23 JONES, JENSEN & COMPANY INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Kings Road Entertainment, Inc. Los Angeles, California: We have audited the accompanying consolidated balance sheet of Kings Road Entertainment, Inc. (the "Company") as of April 30, 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our 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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kings Road Entertainment, Inc. as of April 30, 1999, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Jones, Jensen & Company - --------------------------- Jones, Jensen & Company Salt Lake City, Utah September 24, 1999 F-3 24 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
AS OF APRIL 30, 1999 --------------- ASSETS Cash and Cash Equivalents $ 55,583 Restricted Cash 1,000,000 Accounts Receivable, net of allowance of $32,630 332,342 Film Costs, net of amortization of $168,409,527 157,486 Investment in Immediate Entertainment Group 1,941,926 Prepaid Expenses 16,234 Fixed Assets 9,768 Other Assets 141,179 ------------ TOTAL ASSETS $ 3,654,518 ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts Payable $ 270,976 Note Payable to Related Parties 210,803 Convertible Note Payable 1,000,000 Accrued Expenses 91,652 Deferred Revenue 7,275 ------------ TOTAL LIABILITIES 1,580,706 COMMITMENTS AND CONTINGENCIES 0 STOCKHOLDERS' EQUITY Common Stock, $.01 par value, 12,000,000 shares authorized, 3,389,315 shares issued and outstanding 33,893 Additional Paid-In Capital 24,573,401 Deficit (22,533,482) ------------ TOTAL STOCKHOLDERS' EQUITY 2,073,812 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,654,518 ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 25 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED APRIL 30 --------------------------- 1999 1998 ---------- ---------- REVENUES Feature Films $ 765,116 $1,538,292 Interest Income 72,183 159,802 ---------- ---------- 837,299 1,698,094 COSTS AND EXPENSES Film Cost Amortization 304,243 584,333 Selling Expenses 117,996 57,645 General & Administrative Expenses 770,899 1,011,895 Interest Expense 433,276 0 ---------- ---------- 1,626,414 1,653,873 ---------- ---------- OPERATING (LOSS)/INCOME (789,115) 44,221 OTHER EXPENSES Equity in Losses of Affiliates 475,695 0 Adjustment in Valuation of Investment in Immediate 3,283,973 0 ---------- ---------- 3,759,668 0 (LOSS)/INCOME BEFORE INCOME TAXES (4,548,783) 44,221 Provision for Income Taxes (11,924) 5,404 ---------- ---------- NET (LOSS)/INCOME $(4,536,859) $ 38,817 ========== ========== Net (Loss)/Income Per Share -- Basic $( 1.71) $ 0.02 ========== ========== Weighted Average Number of Common Shares -- Basic 2,650,532 1,873,954 ========== ========== Net (Loss)/Income Per Share -- Diluted $( 1.71) $ 0.02 ========== ========== Weighted Average Number of Common Shares and Common Share Equivalents -- Diluted 2,650,532 1,873,954 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-5 26 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common Additional Retained Total Stock Stock Paid-In Earnings/ Stockholders' Shares Amount Capital (Deficit) Equity --------- ------- ----------- ------------ ------------- Balance at April 30, 1997 1,706,581 $17,066 $24,930,827 $(18,035,440) $ 6,912,453 Exercise of Stock Options 205,167 2,052 143,069 -- 145,121 Distribution to Shareholders -- -- (3,956,696) -- (3,956,696) Net Income -- -- -- 38,817 38,817 --------- ------- ----------- ------------ ----------- Balance at April 30, 1998 1,911,748 19,118 21,117,200 (17,996,623) 3,139,695 Issuance of Stock for Investment in Immediate 1,477,567 14,775 3,029,016 -- 3,043,791 Issuance of Convertible Note -- -- 427,185 -- 427,185 Net Loss -- -- -- (4,536,859) (4,536,859) --------- ------- ----------- ------------ ----------- Balance at April 30, 1999 3,389,315 $33,893 $24,573,401 $(22,533,482) $ 2,073,812 ========= ======= =========== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 27 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED APRIL 30 ----------------------------- 1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss)/Income $(4,536,859) $ 38,817 Adjustments to reconcile Net (Loss)/Income to Net Cash (Used In)/Provided by Operating Activities: Depreciation and Amortization 221,093 592,751 Equity in Losses of Affiliates 475,695 0 Adjustment in Valuation of Investment in Immediate 3,283,973 Additional Reserve for Bad Debts 37,630 0 Non-cash Interest Expense 427,185 0 Change in Assets and Liabilities: Increase in Restricted Cash (1,000,000) 0 Decrease/(Increase) in Accounts Receivable 3,491 (59,614) Increase in Amount Due from Related Party (147,000) 0 Decrease/(Increase) in Prepaid Expenses 31,607 (34,546) Increase in Other Assets (138,679) 0 Increase/(Decrease) in Accounts Payable 37,809 (82,554) Increase in Accrued Expenses 76,652 0 Decrease in Income Taxes Payable 0 (3,482) Decrease in Deferred Revenue (2,325) (78,200) ----------- ----------- NET CASH AND CASH EQUIVALENTS (USED IN)/PROVIDED BY OPERATING ACTIVITIES (1,229,728) 373,172 CASH FLOWS FROM INVESTING ACTIVITIES: (Purchase)/Disposal of Fixed Assets (2,988) 484 Gross Additions to Film Costs (70,201) (118,816) Investment in Immediate Entertainment Group (2,510,803) 0 Sale of Marketable Securities 0 5,967,031 ----------- ----------- NET CASH AND CASH EQUIVALENTS (USED IN)/PROVIDED BY INVESTING ACTIVITIES (2,583,992) 5,848,699 CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing from Related Parties 210,803 0 Issuance of Convertible Note 1,000,000 0 Exercise of Stock Options 0 145,121 Distribution to Shareholders 0 (3,956,696) ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY/(USED IN) FINANCING ACTIVITIES 1,210,803 (3,811,575) ----------- ----------- NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (2,602,917) 2,410,296 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,658,500 248,204 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 55,583 $ 2,658,500 =========== =========== Cash paid for: Interest 0 0 Taxes 7,362 5,404
The accompanying notes are an integral part of these consolidated financial statements. F-7 28 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of Kings Road Entertainment, Inc. and its subsidiaries, Ticker, Inc. ("Ticker") and Orwell Properties, Inc. ("Orwell"), after elimination of all intercompany items and transactions. Collectively, they are referred to as the "Company." Ticker is a California corporation that was inactive at April 30, 1999. Orwell is a corporation formed under the laws of the Territory of the British Virgin Islands to make an investment in Star TV AG ("Star"). SEE NOTE O - - TRANSACTIONS SUBSEQUENT TO APRIL 30, 1999. Accounting Method - The Company's consolidated financial statements are prepared using the accrual method of accounting. The Company has elected an April 30 year-end. Recognition of Revenues - The Company recognizes revenues in accordance with the provisions of Financial Accounting Standards Board ("FASB") Statement No. 53. Revenues from theatrical exhibition are recognized on the dates of exhibition. Revenues from international, home video, television and pay television license agreements are recognized when the license period begins and the film is available for exhibition or exploitation pursuant to the terms of the applicable license agreement. Once complete, a typical film will generally be made available for licensing as follows:
Months After Approximate Marketplace Initial Release Release Period ----------- --------------- -------------- Domestic theatrical 6 months All international markets 1-10 years Domestic home video 6 months 6-12 months Domestic cable/pay television 12-18 months 18 months Domestic syndicated/free television 24-48 months 1-6 years
For the year ended April 30, 1999, the Company earned revenue from three significant customers of approximately $516,000 (68%) of feature film revenues. For the year ended April 30, 1998, the Company earned revenue from three significant customers of approximately $740,000 (48%) of feature film revenues. Revenues from foreign sources were approximately $82,000 and $956,000 for the years ended April 30, 1999 and 1998, respectively. Film Costs - Film costs, including any related interest and overhead, are capitalized as incurred. Profit participations and residuals, if any, are accrued in the proportion that revenue for a period bears to the estimated future revenues. The individual film forecast method set forth in FASB Statement No. 53 is used to amortize these costs based on the ratio of revenue earned in the current period to the Company's estimate of total revenues to be realized. Management periodically reviews its estimates on a film-by-film basis and, when unamortized costs exceed net realizable value for a film, that film's unamortized costs are written down to net realizable value. Costs related to projects which are abandoned or sold before being produced are charged to overhead and capitalized to film costs in the year that event occurs. F-8 29 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Depreciation and Amortization - Depreciation of fixed assets is computed by the straight-line method over the estimated useful lives of the assets ranging from three to five years. Leasehold improvements are amortized over the useful life of the improvements or the term of the applicable lease, whichever is less. Concentration of Credit Risk - The Company licenses various rights in its films to distributors throughout the world. Generally, payment is received in full or in part prior to the Company's delivery of the film to the applicable distributor. As of April 30, 1999, approximately 6% of the Company's accounts receivable were from foreign distributors. Cash Concentration - The Company maintains its cash balances at financial institutions that are federally insured, however, at times such balances may exceed federally insured limits. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of - On April 1, 1997, the Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell. Adoption of this statement did not have a material impact on the Company's financial position or results of operations. Year 2000 Compliance - As has been widely reported, many computer systems process dates based on two digits for the year of a transaction and may be unable to correctly process dates in the year 2000 and beyond. The Company believes that all of its computer systems are year 2000 compliant. Although the Company does not expect year 2000 compliance to have a material adverse effect on its internal operations, it is possible that year 2000 compliance problems could have a significant adverse effect on the Company's suppliers and their ability to service the Company and to accurately process payments received. F-9 30 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Pronouncements - The Company has adopted SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. Adoption of these pronouncements did not have a material impact on the Company's financial position or results of operations as there were no items of comprehensive income and there were no reportable segments. The Company operates in one business segment, consisting primarily of production and distribution of feature length motion pictures. Recent Accounting Pronouncements Effective Subsequent to 1999 - In April 1998, Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5") was issued. SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. The SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The Company does not anticipate that the adoption of this statement will have a material impact on the Company's financial position or results of operations. In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities became effective for fiscal years beginning after June 15, 1999. The Company does not anticipate that the adoption of this statement will have a material impact on the Company's financial position or results of operations. In October 1998, FASB released an exposure draft of its Proposed Statement of Position - Accounting by Producers and Distributors of Films ("Proposed SOP"). This Proposed SOP would replace FASB No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films and, if adopted, would become effective for fiscal years beginning after December 15, 1999. The Company does not anticipate that the adoption of this statement, as currently drafted, will have a material impact on the Company's financial position or results of operations. Basic and Fully Diluted Income/(Loss) Per Share - During the Company's fiscal year ended 1998, the Company implemented SFAS No. 128, Earnings Per Share. SFAS No. 128 provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholder by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity that were outstanding for the period, similar to fully diluted earnings per share. Reclassification - Certain amounts for the year ended April 30, 1998 have been reclassified to conform with the presentation of the April 30, 1999 amounts. The reclassifications have no effect on net income for the year ended April 30, 1999. NOTE B - RESTRICTED CASH On April 30, 1999 the Company had restricted cash of $1,000,000 on deposit with Eckstein Treuhand GmbH ("Eckstein"), a Swiss limited liability company, pursuant to an April 17, 1999 Trust Agreement ("Trust Agreement") between Orwell, a wholly owned subsidiary of the Company, and Eckstein. Pursuant to the Trust Agreement, on May 12, 1999, Eckstein purchased 140,000 shares of Star on behalf of Orwell with the restricted cash. SEE NOTE O - TRANSACTIONS SUBSEQUENT TO APRIL 30, 1999. F-10 31 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C - FILM COSTS Film costs consist of:
As Of April 30, 1999 -------------- Released Films, less amortization $ 30,517 Films in Production 0 Films in Development 126,969 -------- $157,486 ========
Based on the Company's estimates of future revenue as of April 30, 1999, 100% of unamortized film costs applicable to released films will be amortized during the three years ended April 30, 2002. No interest or overhead was capitalized to film costs during the fiscal years ended April 30, 1999 and 1998, as no new motion pictures were produced. NOTE D - INVESTMENT IN IMMEDIATE ENTERTAINMENT GROUP On November 9, 1998, the Company acquired 2,393,235 shares of Immediate Entertainment Group, Inc. ("Immediate"), approximately 19% of Immediate's outstanding common stock, for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares of the Company's common stock and a note payable to the sellers of the stock for $210,803. The Company's investment in Immediate has been accounted for using the equity method. Immediate is a diversified entertainment holding company that provides services relating to music production, audio recording, CD manufacturing, film soundtrack and script development and operates a mail order music club. The Company has evaluated the recoverability of its investment in Immediate and recorded a valuation allowance of $3,283,973. The Company's investment in Immediate also includes $147,000 of amounts advanced to Immediate or payments made to third parties on Immediate's behalf. NOTE E - FIXED ASSETS Fixed assets consist of:
As Of April 30, 1999 -------------- Office Equipment $ 199,919 Furniture & Fixtures 31,479 Accumulated Depreciation (221,630) --------- $ 9,768 =========
NOTE F - OTHER ASSETS Other assets consist of:
As Of April 30, 1999 -------------- Deposits $ 2,500 Miscellaneous Receivables 33,809 Capitalized Financing Costs 104,870 -------- $141,179 ========
F-11 32 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G - NOTES PAYABLE On November 9, 1998, the Company acquired 2,393,235 shares of Immediate, approximately 19% of Immediate's outstanding common stock, from FAB Capital Corporation ("FAB"), MBO Music Verlag GmbH ("MBO") and West Union Leasing Ltd. ("West") for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares of the Company's common stock and a note payable to the sellers of the stock for $210,803 bearing interest at 5% per annum due upon demand but in no event earlier that April 30, 2000 ("Note"). Pursuant to such transaction, FAB, MBO and West are due $93,175, $82,424, and $35,204, respectively, under the Note. Interest expense of $4,996 was incurred on the Note during the fiscal year ended April 30, 1999, none of which has been paid. On April 26, 1999, the Company issued a convertible note ("Convertible Note") to Tresor Worldwide Limited ("Tresor") in the principal amount of $1,000,000. The Convertible Note has a term of one year and bears interest at the rate of 8% per annum, payable quarterly on July 1, 1999, October 1, 1999 and January 1, 2000. Tresor has the right to convert, in whole or in part, any outstanding and unpaid principal and interest into fully paid and non-assessable shares of the Company's common stock at the lower of (i) $2.06 per share or (ii) 70% of the average closing bid price for the five (5) trading days immediately preceding the date of conversion but in no event less than $1.00 ("Conversion Price"). The Conversion Price is subject to reduction of 3% per month beginning on the six month anniversary of the Convertible Note in the event any portion of the securities issuable upon conversion have not been registered under the Securities Act of 1933, as amended. The Company has entered into a Registration Rights Agreement with the note holder wherein the Company, as soon as practicable, has agreed to register the securities issuable upon conversion of the Convertible Note. The accrued interest balance at April 30, 1999 was $1,096. As the Convertible Note has a beneficial conversion feature, the Company has recorded interest expense of $427,185 associated with this conversion feature and included a corresponding amount in Additional Paid-In Capital. On May 12, 1999, the Company used the proceeds from the Convertible Note to purchase approximately 19% of the outstanding common stock of Star through the Company's wholly owned subsidiary, Orwell. Pursuant to a Pledge and Security Agreement between Tresor and Orwell, the Convertible Note is secured by Orwell's investment in Star. In addition, Orwell has agreed to guarantee the obligations of the Company under the Convertible Note. SEE NOTE O - TRANSACTIONS SUBSEQUENT TO APRIL 30, 1999. NOTE H - COMMITMENTS AND CONTINGENCIES The Company leases approximately 1,500 square feet of office space on a month-to-month basis. Rent expense was $28,793 and $28,838 for the years ended April 30, 1999 and 1998, respectively. F-12 33 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE I - STOCK OPTIONS AND WARRANTS The Company's 1998 Stock Option Plan ("1998 Plan") provides for the grant of options to purchase up to 400,000 shares of the Company's common stock. At April 30, 1999, no options were outstanding under the 1998 Plan. On November 6, 1998, in connection with a November 6, 1998 Stock Acquisition Agreement ("Acquisition Agreement"), all of the then outstanding options under the 1998 Plan were canceled. For such cancellation, the option holders received, in the aggregate, the sum of $113,754, representing the difference between $2.35, the per share purchase price under the Acquisition Agreement, and the exercise price of $1.22 times 100,667, the number of then outstanding 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. NOTE J - 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:
1999 1998 ----------- -------- Computed Expected Tax at Statutory Rate $(1,546,586) $ 15,035 Benefit of Prior Years Amended Tax Returns (19,286) 0 State and Local Taxes 6,256 4,220 Foreign Taxes 1,106 1,184 Valuation Allowance 1,546,586 (15,035) ----------- -------- $( 11,924) $ 5,404 =========== ========
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 $19,496,000 (expiring between 2001 and 2016) to potentially offset future income tax liabilities. Deferred tax assets result from temporary differences between financial and tax accounting in the recognition of revenue and expenses. Temporary differences and carryforwards which give rise to deferred tax assets are as follows: F-13 34 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE J - INCOME TAXES (CONTINUED)
As Of April 30, 1999 -------------- Deferred Revenue $3,000 Film Cost Amortization 8,000 Net Operating Loss Carryforwards 7,799,000 Investment Tax Credit Carryforwards 2,166,000 Foreign Tax Credit Carryforwards 400,000 -------------- 10,376,000 Valuation Allowance (10,376,000) -------------- $0 ==============
A valuation allowance of $10,376,000 has been recorded to offset the net deferred tax assets due to the uncertainty of realizing the benefits of the tax assets in the future. In addition, as a result of the change in control of the Company resulting from a November 6, 1998 Acquisition Agreement, Internal Revenue Code section 382 significantly limits the Company's ability to utilize its net operating loss carryforwards. As a result of this limitation, the Company expects that its investment tax credit and foreign tax credit carryforwards as well as a significant amount of its net operating loss carryforwards will expire prior to utilization by the Company. NOTE K - LITIGATION AND CONTINGENCIES On April 27, 1999, the Company entered into a letter agreement ("Joint Venture Agreement") with Merchant Ivory Productions ("MIP") pursuant to which the Company was required to contribute to Merchant Ivory Distribution, LLC ("MIFD") on or before May 5, 1999 $250,000 plus options to purchase up to 250,000 shares of the Company's common stock. The Company is also required to provide a revolving line of credit of up to $500,000 to MIFD to fund print and advertising expenses incurred by MIFD. MIFD is a joint venture between the Company and MIP, 25% owned by the Company and 75% owned by MIP formed to acquire and subsequently distribute motion pictures in significant markets including the United States. On May 18, 1999, the Company made a contribution of $250,000 to MIFD. MIP has subsequently advised the Company that it believes the Company has materially breached the Joint Venture Agreement by failing to provide the stock options and the line of credit to MIFD. On the other hand, the Company believes that MIP has materially breached its obligations to the Company under the Joint Venture Agreement. MIP and the Company are currently discussing the matter. 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. F-14 35 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE L - 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. During the fiscal year ended April 30, 1999, the Company received approximately $164,000 from the Partnership. NOTE M - INVESTMENT IN JOINT VENTURE On April 27, 1999, the Company entered into a letter agreement ("Joint Venture Agreement") with Merchant Ivory Productions ("MIP") pursuant to which the Company was required to contribute to Merchant Ivory Distribution, LLC ("MIFD") on or before May 5, 1999 $250,000 plus options to purchase up to 250,000 shares of the Company's common stock. The Company is also required to provide a revolving line of credit of up to $500,000 to MIFD to fund print and advertising expenses incurred by MIFD. MIFD is a joint venture between the Company and MIP, 25% owned by the Company and 75% owned by MIP formed to acquire and distribute motion pictures in significant markets including the United States. As of April 30, 1999, the Company had not made any contributions to MIFD under the Joint Venture Agreement. SEE NOTE K - LITIGATION AND CONTINGENCIES AND NOTE O - TRANSACTIONS SUBSEQUENT TO APRIL 30, 1999. NOTE N - RELATED PARTY TRANSACTIONS On November 6, 1998, pursuant to a Stock Acquisition Agreement, FAB, MBO, West and RAS Securities Corp. (collectively, the "Acquirors") purchased 421,949, 373,350, 159,461 and 100 shares, respectively, of the Company's common stock from the Estate of Stephen Friedman ("Estate"), and FAB simultaneously purchased 7,500 shares from Christopher Trunkey, the Chief Financial Officer of the Company, for a purchase price of $2.35 per share or $2,261,546 in the aggregate. Such shares in the aggregate represented approximately 50.3% of the Company's then outstanding common stock. Phillip Cook, Chairman, Chief Executive Officer and 25% shareholder of FAB Capital became Chairman and Chief Executive Officer of the Company until his resignation on June 24, 1999. Music Action Ltd. ("MAC") agreed that it would, as soon as practicable but in any event within 120 days after November 6, 1998, make or cause to be made an offer to each of the Company's shareholders other than the Acquirors, the Estate and Mr. Trunkey, for the purchase of up to ninety percent (90%) of such shareholder's shares at a price of $2.35 per share ("Purchase Offer"). MAC agreed that, in the event the Purchase Offer was not made within ninety days after November 6, 1998, it would deposit $1,800,000 into escrow to be applied toward the Purchase Offer. FAB agreed to make the $1,800,000 deposit into escrow in the event MAC did not do so. On February 3, 1999, the Stock Acquisition Agreement was amended to eliminate the Purchase Offer due to the fact that the Company's closing share price exceeded the $2.35 Purchase Offer price for the previous ten (10) trading days. F-15 36 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE N - RELATED PARTY TRANSACTIONS (CONTINUED) On November 9, 1998, the Company acquired 19% of the outstanding common stock of Immediate from FAB, MBO and West for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares of the Company's stock and a note payable to the sellers for $210,803 bearing interest at 5% per annum due upon demand but in no event earlier than April 30, 2000. Pursuant to such transaction FAB, MBO and West, respectively, received $1,016,679, $898,875 and $384,446 in cash, 653,131, 577,479 and 246,957 shares of the Company's common stock and are due $93,175, $82,424 and $35,204 under the Note. During the year ended April 30, 1999, interest expense of $4,996 was accrued on the Note. FAB, MBO and West owned 429,449, 373,350 and 159,461 shares, respectively, of the Company's common stock at the time of this transaction. In connection with the Convertible Note, the Company agreed to pay FAB Securities of America, Inc. ("FAB Securities"), a wholly-owned subsidiary of FAB, a commission of 5% of the Convertible Note gross proceeds, $50,000. In addition, FAB Securities is entitled to warrants to purchase the Company's common stock equal to 5% of any portion of the Convertible Note converted by Tresor into the Company's common stock at an exercise price equal to the closing price of the Company's common stock on the date of issuance of such warrants. As of April 30, 1999, $11,400 was due and payable to FAB Securities under this agreement. During the fiscal year ended April 30, 1999, the Company has advanced to Immediate or made payments to third parties on Immediate's behalf the aggregate sum of $147,000. Immediate has agreed to repay such advances together with interest at the rate of 6% per anum. NOTE O - TRANSACTIONS SUBSEQUENT TO APRIL 30, 1999 On May 12, 1999, the Company used the $1,000,000 in proceeds from the issuance of the Convertible Note to purchase approximately 19% of the outstanding common stock of Star through its wholly owned subsidiary, Orwell. On May 17, 1999, the Company entered into a Loan Agreement ("Star Loan Agreement") with Star whereby the Company borrowed $250,000 from Star ("Star Loan") bearing interest at 6% per annum. The Star Loan was originally due July 19, 1999. By agreement dated July 22, 1999, the due date was extended until August 19, 1999. As of September 15, 1999, the Star Loan has not been repaid and the Company is currently in default of the Star Loan Agreement. A further extension of the due date of the Star Loan is currently being discussed with Star. On May 18, 1999, the Company made a contribution of $250,000 to MIFD. As of September 15, 1999, the Company has not provided any portion of the line credit required under the Joint Venture Agreement. SEE NOTE K LITIGATION AND CONTINGENCIES AND NOTE M - INVESTMENT IN JOINT VENTURE. F-16 EX-10.5 2 EXHIBIT 10.5 1 Exhibit 10.5 CONVERTIBLE NOTE THIS NOTE AND THE COMMON STOCK INTO WHICH IT IS CONVERTIBLE (COLLECTIVELY, THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR UNDER THE LAWS OF ANY STATE OR OTHER JURISDICTION. THE SECURITIES MAY NOT BE OFFERED OR SOLD UNLESS THEY ARE REGISTERED UNDER THE ACT AND UNDER THE LAWS OF THE STATES WHERE EACH SALE IS MADE, OR AN EXEMPTION FROM REGISTRATION REQUIREMENTS IS AVAILABLE IN THE OPINION OF COUNSEL SATISFACTORY TO KINGS ROAD ENTERTAINMENT, INC. FOR VALUE RECEIVED, KINGS ROAD ENTERTAINMENT, INC., a Delaware corporation (hereinafter called "Borrower"), hereby promises to pay to TRESOR WORLDWIDE LIMITED, a corporation of the British Virgin Islands (the "Holder"), with an address at Havilland Hall, Guernsey, Channel Islands, GY6 8TP and telecopy number of 011 44 171 823 5129, the sum of ONE MILLION U.S. DOLLARS ($1,000,000.00), together with interest as provided below, on the first anniversary of the date of this Note (the "Maturity Date"). This Note and any other convertible notes which are issued in exchange for all or any portion of this Note are referred to herein as the "Notes." The following terms shall apply to this Note: ARTICLE I GENERAL I.1 Payment Grace Period. The Borrower shall have a ten (10) day grace period to pay any amounts due under this Note. I.2 Interest Rate. Interest shall accrue at 8% per annum, payable quarterly, on July 1, 1999, October 1, 1999, January 1, 2000 and the Maturity Date, and until this Note is paid in full. In the event that this Note is not paid in full on the Maturity Date or any extended maturity date or upon acceleration of this Note, interest shall accrue at the maximum interest rate permitted by applicable law. I.3 Prepayment. The Borrower may, upon giving thirty (30) days' notice to the Holder, prepay this Note prior to the Maturity Date, in whole or in part, at any time without penalty; provided, however, that Borrower shall not have such right of prepayment in the event the Holder, within ten (10) days after receiving such notice of prepayment, gives written notice to the Borrower that the Holder objects to such proposed prepayment of this Note. I.4 Option to Extend Maturity Date of this Note. 2 (a) By written notice to the Borrower prior to the Maturity Date or any extended Maturity Date, the Holder from time to time may extend, for a period or periods not to exceed one (1) year in the aggregate, the date on which the principal and interest on this Note are due provided that such notice sets forth clearly the new maturity date and whether or not the Holder may further extend the new maturity date by prior notice to the Borrower. I.5 Convertible Note Purchase Agreement. This Note is issued by the Borrower to the Holder pursuant to a Convertible Note Purchase Agreement made between them dated as of the date hereof. ARTICLE II CONVERSION AND REGISTRATION RIGHTS The Holder shall have the right to convert the principal amount due under this Note and the interest accrued and unpaid thereon, into shares of the Common Stock of the Borrower, as set forth below. II.1 Conversion into Borrower's Common Stock. (a) The Holder shall have the right from time to time, at any time on or prior to the date the Note is paid in full, to convert in whole or in part any outstanding and unpaid principal portion of this Note of not less than $25,000 (or any lesser amount representing the full remaining outstanding and unpaid portion of the Note), together with the interest accrued and unpaid thereon, into fully paid and nonassessable shares (the "Conversion Shares") of Common Stock, $0.01 par value per share, of the Borrower as such stock exists on the date of issuance of this Note (the "Common Stock") or any shares of capital stock of the Borrower and/or other securities into which such Common Stock shall hereafter be changed or reclassified at the conversion price (the "Conversion Price"), determined as provided herein. Upon the surrender of this Note, accompanied by the Holder's written request for conversion, Borrower shall issue and deliver to the Holder that number of shares of Common Stock and/or other securities for the portion of the Note converted and a new Note in the form hereof for the balance of the principal amount hereof, if any. The number of shares of Common Stock and/or other securities to be issued upon each conversion of this Note shall be determined by dividing the dollar amount of that portion of the Note to be converted by the Conversion Price and shall be delivered to the Holder not later than three (3) business days after Holder has delivered its request for conversion. (b) Subject to adjustment as provided in Section 2.1(e) hereof, the Conversion Price shall be the lower of (i) $2.06 or (ii) seventy (70%) percent of the average closing bid price of the Common Stock as quoted on The Nasdaq SmallCap Market ("SmallCap Market") or the so-called "pink sheets" or the OTC "Electronic Bulletin Board," as the case may be, for the five (5) trading days immediately preceding the date of conversion of all or part of the Note; provided, however, that the Conversion Price shall in no event be less than $1.00 (One Dollar) except through the operation of adjustments as provided in Section 2.1(e) or the Penalty, described in Section 2.1(c), and, in addition, unless shareholders of the Borrower have approved the terms of the Note, the Borrower, upon conversion of the Note, shall not be obligated to issue more shares than it could issue under NASD Rule 4310(c)(25)(H)(i)d without having to obtain shareholder 2 3 approval and the unconvertible balance of the Note, if any, shall remain a debt of the Borrower. Unless the shareholders of the Borrower have approved the terms of the Note within one hundred thirty-five (135) days of the date of the Note, the holder of the Note may declare the Note immediately due and payable. (c) The Borrower and the Holder have entered into a Registration Rights Agreement dated as of the date hereof (the "Registration Rights Agreement"). Capitalized terms used and not defined in this Note have the respective meaning assigned to them in the Registration Rights Agreement. (i) Unless a Registration Statement registering all of the Registrable Securities has become effective under the Securities Act by the six-month anniversary (the "Six-Month Anniversary") of the date of this Note, or (ii) if such Registration Statement has become effective but thereafter ceases to be effective as to all Registrable Securities at any time prior to the expiration of the Registration Period, as long as any portion of the Registrable Securities remains as a Restricted Security, the applicable Conversion Price at the time of conversion will be reduced by three (3%) percent on a cumulative basis (the "Penalty") at the beginning of each thirty (30) day period following (i) the Six-Month Anniversary or (ii) the date on which such Registration Statement ceases to be effective, as the case may be, up to a maximum of an eighteen (18%) percent reduction in the Conversion Price. If, however, after the first anniversary of the date of this Note, the Registrable Securities may not be sold because of the Company's failure to be current in its reporting obligations, or because of volume limitations under Rule 144(e)(2), then the three (3%) percent Penalty will continue with respect to the reduction of the Conversion Price on a cumulative basis at the beginning of each thirty (30) day period following the first anniversary of the date of this Note until such portion of the Registrable Securities ceases to be a Restricted Security and the Conversion Price may be reduced by more than eighteen (18%) percent. (d) [Intentionally left blank.] (e) The Conversion Price and number and kind of shares of other securities to be issued upon conversion shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows: A. Merger, Sale of Assets, etc. If the Borrower at any time shall consolidate with or merge into or sell or convey all or substantially all its assets to any other corporation, this Note shall thereafter evidence the right to purchase such number and kind of shares or other securities and property as would have been issuable or distributable on account of such consolidation, merger, sale or conveyance, upon or with respect to the securities subject to the conversion or purchase right immediately prior to such consolidation, merger, sale or conveyance. The foregoing provision shall similarly apply to successive transactions of a similar nature by any such successor or purchaser. Without limiting the generality of the foregoing, the anti-dilution provisions of this Section 2.1(e) shall apply to such securities of such successor or purchaser after any such consolidation, merger, sale or conveyance. B. Reclassification, etc. If the Borrower at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, this Note shall thereafter evidence the right to purchase such 3 4 number and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change. C. Stock Splits, Combinations and Dividends. If the shares of Common Stock are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, the Conversion Price shall be proportionately reduced in the case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event. D. Adjustment for Sale of Additional Shares. (1) If the Borrower shall issue any additional shares of Common Stock of any class at a price per share less than the last sale price of the Common Stock on the SmallCap Market in effect immediately prior to the sale of such shares, and the Borrower is paid exclusively in cash for such shares, then in each such case the Conversion Price shall be reduced to an amount determined by multiplying in the Conversion Price by a fraction: (i) the numerator of which shall be (x) the number of shares of Common Stock of all classes outstanding (excluding treasury shares) immediately prior to the issuance of such additional shares of Common Stock plus (y) the number of shares of Common Stock which the consideration received by the Borrower for the total number of such additional shares of Common Stock so issued would purchase at the Conversion Price (prior to adjustment), and (ii) the denominator of which shall be (x) the number of shares of Common Stock of all classes outstanding (excluding treasury shares) immediately prior to the issuance of such additional shares of Common Stock plus (y) the number of such additional shares of Common Stock so issued. (2) Notwithstanding anything herein to the contrary, no adjustment to the Conversion Price will be made pursuant to the preceding paragraph D.(1) in connection with the Borrower's proposed transactions with Immediate Entertainment Group, Inc. or Star TV Ag or in connection with the purchase by the Borrower of the assets of DCC Compact Classics, Inc. or the IEGP Subsequent Acquisitions, defined and described in the Convertible Note Purchase Agreement between the Borrower and the Holder. II.2 Method of Conversion. This Note may be converted by the Holder in whole or in part by the surrender of this Note at the office of the Borrower set forth below. Upon partial exercise hereof, a new Note containing the same date and provisions of this Note shall be issued by the Borrower to the Holder for the principal balance of this Note which shall not have been converted. 4 5 ARTICLE III EVENTS OF DEFAULT If any of the following events shall occur (herein individually referred to as an "Event of Default"): (i) Default in payment of the principal amount of this Note when due; (ii) Default in the payment when due of any interest accruing on this Note if such default is not cured by the Borrower within ten (10) days after the Holder has given Borrower written notice of such default; provided, that after Holder has given notice under this clause (ii) on two separate occasions, no notice shall be required of a default in interest payments to constitute any further Event of Default hereunder; (iii) Failure of the Borrower to deliver the Conversion Shares and/or other securities to the Holder within three (3) business days as provided in Section 2.1(a). (iv) A material default by Borrower of any obligation, or breach by the Borrower of any representation, warranty, covenant or agreement, set forth in any other document signed by Borrower in connection with the issuance of this Note, which is not cured or cannot be cured by the Borrower within ten (10) days after the Holder has given the Borrower written notice of such default; (v) Failure by the Borrower to maintain its SmallCap Market Listing for shares of its stock. (vi) Any default of Borrower under any indebtedness or other obligations which aggregate at least $100,000 if such default is not cured by Borrower before the earlier of (1) ten (10) days after the Holder has given Borrower written notice of such default or (2) the obligee of such indebtedness or other obligation has made demand or notified Borrower of any acceleration and, in either case, any cure period has lapsed; (vii) The rendering of one or more judgments or orders against Borrower for the payment of money exceeding any applicable insurance coverage by more than $25,000 in the aggregate, and either (1) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order or (2) there shall be any period of thirty consecutive days during which a stay or enforcement of any such judgement or order, by reason of a pending appeal or otherwise, shall not be in effect; (viii) The institution by Borrower of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the federal Bankruptcy Code, or any other applicable federal or state law, or the consent by Borrower to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official for all or any substantial part of its property, or the taking of any action by the Borrower in furtherance of any such action; or 5 6 (ix) If, within sixty (60) days after the commencement of an action against Borrower seeking any bankruptcy, insolvency, reorganization, liquidation or similar relief under any present or future statute, law or regulation, such action shall not have been resolved in favor of Borrower or all orders or proceedings thereunder affecting the property of Borrower stayed, or if the stay of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official for all or any substantial part of the Borrower's property shall not have been vacated; Then, with the exception of any Event of Default specified in clauses (viii) or (ix) above, the Holder of this Note may, by notice to Borrower, declare the principal of this Note, all interest thereon and any other amounts payable hereunder to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower, whereupon the principal amount of this Note, all such interest and all such other amounts shall become and be immediately due and payable, and the Holder may exercise any and all of its other rights under applicable law hereunder. Upon the occurrence of an Event of Default specified in clauses (viii) or (ix) above, the principal amount of this Note, all interest thereon and all other amounts payable hereunder shall thereupon and concurrently therewith become due and payable, all without any action by the Holder of this Note, and without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower, anything in this Note to the contrary notwithstanding. The Borrower covenants and agrees that, so long as any portion of this Note is outstanding, it will hold in reserve solely for the issuance of the Conversion Shares one share of Common Stock for each one dollar of principal amount of this Note outstanding. ARTICLE IV REPRESENTATIONS Borrower represents and warrants to the Holder that: (i) this Note is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms; (ii) the execution and delivery by the Borrower of this Note and the performance by the Borrower of the transactions contemplated hereby do not and will not conflict with, or result in a breach of, or constitute a default under, any agreement to which the Borrower is a party or to which the Borrower may be bound; and (iii) the authorized capital stock of the Borrower consists of 12,000,000 shares of Common Stock, of which 3,389,315 are issued and outstanding and that no options or warrants or other securities convertible into shares of Common Stock are outstanding. ARTICLE V MISCELLANEOUS V.1 Failure or Indulgency Not Waiver. No failure or delay on the part of Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, 6 7 nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. V.2 Notices. All notices or other communications given or made hereunder shall be in writing and shall be deemed delivered the day telecopied (with copy mailed by overnight courier) to the party to receive the same at its address set forth below or to such other address as either party shall hereafter give to the other by notice duly made under this Section 5.2: (i) if to the Borrower, to Phillip Cook, c/o FAB Securities of America, Inc., 50 Broadway 14th Floor, New York, New York 10004, telecopy: 212-785-3232, with a copy to Joseph L. Cannella, Fischbein- Badillo- Wagner- Harding, 909 Third Avenue, New York, NY 10022, telecopy number: (212) 644-3603; and (ii) if to the Holder, to the name, address and telecopy number (if one is provided) set forth on the first page hereof, with a copy to Lawrence Blatte, Esq., Rosen & Reade, LLP, 757 Third Avenue, New York, NY 10017, telecopy number: (212) 755-5600. V.3 Amendment Provision. The term "Note" and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented. V.4 Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns. V.5 Governing Law. This Note has been executed in and shall be governed by the laws of the State of New York. V.6 Guaranty of this Note by Orwell Properties, Inc. This Note and any additional Notes are guaranteed by the Borrower's wholly-owned subsidiary, Orwell Properties, Inc., a corporation of the British Virgin Islands. The form of the Guaranty is attached to the Convertible Note Purchase Agreement as Exhibit M. V.7 Expenses and Attorneys' Fees. Borrower shall be fully responsible for and shall pay costs and expenses incurred by Holder in enforcing Holder's rights under this Note, including, but not limited to, attorney's fees, court costs and disbursements. V.8 Submission to Jurisdiction; Service of Process. Borrower irrevocably agrees to submit to personal jurisdiction of the Courts of England, situated in London, England, in any action or proceeding arising under this Note. Borrower further irrevocably agrees that suit, action or other legal proceedings may be brought in such courts of England and waives any objection which Borrower may have to the laying of venue of any such suit, action or proceeding in such courts. Borrower further agrees and consents that any such service of process upon Borrower in any manner as is provided in Section 5.2 for the giving of Notices shall be taken and held to be valid personal service upon Borrower for the courts of England and that any such service of process shall be of the same force and validity as if service were made upon Borrower according to the laws governing the validity and requirements of such service in England, and Borrower waives all claim of error by reason of such service. 7 8 IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer on this 26th day of April, 1999. KINGS ROAD ENTERTAINMENT, INC. By: /s/Phillip Geoffrey Cook -------------------------------------- Title:Chairman 8 EX-10.6 3 EXHIBIT 10.6 1 Exhibit 10.6 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of this 26th day of April, 1999 (the "Agreement"), by and between Kings Road Entertainment, Inc., a Delaware Corporation, with principal executive offices located at 1901 Avenue of the Stars, Los Angeles, CA 90067 (the "Company") and Tresor World Wide, Havilland Hall, Guernsey, Channel Islands, GY6 8TP (the "Holder"). W I T N E S S E T H: WHEREAS, upon the terms and subject to the conditions of the Convertible Note Purchase Agreement dated as of the date hereof between the Company and the Holder (the "Convertible Note Purchase Agreement"), the Company has agreed to issue and sell to the Holder a One Million U.S. Dollar ($1,000,000.00) Convertible Note which, upon the terms and subject to the conditions thereof, is convertible into shares of the common stock, $.01 par value, of the Company (the "Common Stock"); and WHEREAS, to induce the Holder to execute and deliver the Convertible Note Purchase Agreement, the Company has agreed to provide with respect to the Common Stock issued or issuable, upon conversion of the Convertible Note certain registration rights with respect to the Securities Act. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. DEFINITIONS (a) As used in this Agreement, the following terms shall have the meanings: (i) "CONVERTIBLE NOTE" means the One Million U.S. Dollar ($1,000,000.00) Convertible Note issued by the Company to the Holder or any Convertible Note subsequently issued by the Company (or its Successors or assigns) representing all or any portion of the Convertible Note. (ii) "COMMISSION" means the Securities and Exchange Commission. (iii) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (iv) "HOLDER" means any Person who at the time in question is the owner or beneficial owner of all or any portion of the Convertible Note. (v) "PERSON" means any individual, partnership, corporation, limited liability company, joint stock company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. (vi) "PROSPECTUS" means the prospectus (including, without limitation, any preliminary prospectus and any final prospectus filed pursuant to Rule 424 (b) under the Securities Act, including any prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance on Rule 430A under the 2 Securities Act) included in the Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement and by all other amendments and supplements to such prospectus, including all material incorporated by reference in such prospectus and all documents filed after the date of such prospectus by the Company under the Exchange Act and incorporated by reference therein. (vii) "REGISTRABLE SECURITIES" means the Common Stock and other securities issued or issuable upon conversion of all or any portion of a Convertible Note; provided, however, a share of Common Stock shall cease to be a Registrable Security for purposes of this Agreement when it no longer is a Restricted Security. (viii) "REGISTRATION STATEMENT" means a registration statement of the Company filed on an appropriate form under the Securities Act providing for the registration of, and the sale on a continuous or delayed basis by the holders of, all of the Registrable Securities pursuant to Rule 415 under the Securities Act, including the Prospectus contained therein and forming a part thereof, any amendments to such registration statement and supplements to such Prospectus, and all exhibits and other material incorporated by reference in such registration statement and Prospectus. (ix) "RESTRICTED SECURITY" means any share of Common Stock or other security issued or issuable upon conversion of all or any portion of a Convertible Note except any such share that (i) has been registered pursuant to an effective registration statement under the Securities Act and sold in a manner contemplated by the Prospectus included in the Registration Statement, (ii) has been transferred in compliance with the resale provisions of Rule 144 under the Securities Act (or any successor provision thereto) or is transferable by the holder thereof pursuant to paragraph (k) of Rule 144 under the Securities Act (or any successor provision thereto), or (iii) otherwise has been transferred and a new share of Common Stock not subject to transfer restrictions under the Securities Act has been delivered by or on behalf of the Company. (x) "SECURITIES ACT" means the Securities Act of 1933 , as amended, and the rules and regulations of the Commission thereunder, or any similar successor statute. (b) All capitalized terms used and not defined herein have the respective meaning assigned to them in the Convertible Note Purchase Agreement. 2. REGISTRATION (a) FILING AND EFFECTIVENESS OF REGISTRATION STATEMENT. The Company shall promptly prepare and file with the Commission a Registration Statement on Form S-3 (or if the Company is not then eligible to register for resale the Registrable Securities on Form S-3 such registration shall be on another appropriate Form in accordance herewith) relating to the offer and sale of all of the Registrable Securities and shall use its reasonable best efforts to cause the Commission to declare such Registration Statement effective under the Securities Act as promptly as practicable, but not later than the six-month anniversary of the date of the Convertible Note, and shall use its reasonable best efforts to keep such Registration Statement continuously effective under the Securities Act until the date which is thirteen (13) months after the date that such Registration Statement is declared effective by the Commission (subject to the suspension periods described in Section 3(a) hereof) or such shorter period that will terminate when all the 2 3 Registrable Securities covered by the Registration Statement have been sold pursuant thereto in accordance with the plan of distribution provided in the Prospectus, transferred pursuant to Rule 144 under the Securities Act or otherwise transferred in a manner that results in the delivery of new securities not subject to transfer restrictions under the Securities Act (the "Registration Period"). (b) PIGGYBACK REGISTRATION RIGHTS. (i) In the event, the Company determines to proceed with the preparation and filing of a Registration Statement under the Securities Act in connection with the proposed offer and sale for cash of any of its securities by it or any of its other security holders (other than a registration statement pursuant to Section 2(a) or on Form S-4, S-8 or other limited purpose form), the Company shall give written notice of its determination to all record holders of a Convertible Note or of Registrable Securities. Upon the written request of a record holder of a Convertible Note or any of the Registrable Securities, given within twenty (20) days after receipt of any such notice from the Company, and provided the Company receives from such record holder all other information the Company reasonably requests, the Company shall, subject to the remainder of this Section 2(b), cause such holder's Registrable Securities to be included in such Registration Statement. Nothing herein shall prevent the Company from, at any time, abandoning or delaying any registration contemplated by this Section 2(b). (ii) If any registration pursuant to this Section 2(b) is underwritten in whole or in part, the Company may also require that the included Registrable Securities be so included in the underwriting on the same terms and conditions as the other securities being sold through such underwriter(s) and that each holder thereof enter into an appropriate underwriting agreement. If, in good faith judgment of the managing underwriter of such public offering, the inclusion of such Registrable Securities and any other securities having similar piggyback registration rights for which registration at the same time as such Registrable Securities has been requested (such Registrable Securities and other securities being collectively, the "Piggyback Securities") would interfere with the successful marketing, or require a reduction in the number, of the securities offered by the Company, the number of the Piggyback Securities otherwise to be included in such underwritten public offering may be reduced pro rata (as the Company, in its sole discretion, deems equitable) among the holders thereof or excluded in their entirety if so required by the underwriter(s). To the extent only a portion of the Piggyback Securities is included in the underwritten public offering, the excluded Registrable Securities shall be withheld from the market by the holders thereof for a period, not to exceed 180 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. (iii) The Company shall pay the expenses described in Section 5 for each Registration Statement filed pursuant to this Section 2(b) which becomes effective. 3. OBLIGATIONS OF THE COMPANY. If and when the Company is required by the provisions of this Agreement to use its reasonable best efforts to effect the registration of the Registrable Securities, the Company shall: (a) Prepare and file with the Commission such amendments (including post-effective amendments) to the Registration Statement and supplements to the Prospectus as may be necessary to keep the Registration Statement effective and in compliance with the provisions of the Securities Act applicable thereto so as to permit the Prospectus forming part thereof to be current and useable by the Holders for resales of the Registrable Securities during 3 4 the Registration Period. Notwithstanding the foregoing provisions of this section 3 (a) , the Company may, during the Registration Period, suspend the sale by the Holders of their Registrable Securities pursuant to the Registration Statement for a reasonable period not to exceed ninety (90) days upon (1) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, in which case suspension shall be limited to sales in such jurisdiction, (2) the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or (3) the good faith determination of the Board of Directors of the Company that because of valid business reasons, including pending mergers or other business combination transactions, the planned acquisition or divestiture of assets, pending material corporate developments and similar events which the Company has a bona fide business purpose for preserving as confidential, it is in the best interests of the Company to suspend such use, and prior to or contemporaneously with suspending such use, the Company provides the Holders with written notice of such suspension, which notice need not specify the nature of the event giving rise to such suspension. At the end of any such suspension period, the Company shall provide the Holders with written notice of the termination of such suspension. Each Holder agrees that it will not sell Registrable Securities pursuant to the Registration Statement during any suspension period and the Company agrees to cause each such suspension period to end as soon as reasonably practicable. (b) Furnish to each Holder whose Registrable Securities are included in the Registration Statement and its legal counsel identified to the Company such number of copies of the Prospectus (including any preliminary Prospectus), and all amendments and supplements thereto as such Holder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Holder. (c) Use its reasonable best efforts to register or qualify the Registrable Securities covered by the Registration Statement under such securities or "blue sky" laws of such jurisdictions as Holders who hold a majority-in-interest of the Registrable Securities being offered reasonably request in order to facilitate the disposition of the Registrable Securities by the Holders; provided, however, that the Company shall not be required in connection therewith or asa condition thereto to (1) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3 (c), (2) subject itself to general taxation in any such jurisdiction or (3) file a general consent to service of process in any such jurisdiction. (d) Use its reasonable best efforts to cause all the Registrable Securities covered by the Registration Statement to be listed on the principal national securities exchange, and included in an inter-dealer quotation system of a registered national securities association, on or in which securities of the same class or series issued by the Company are then listed or included. (e) Maintain a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement. 4 5 (f) Take all reasonable actions as the Holders may reasonably request necessary to expedite or facilitate the disposition by the Holders of their Registrable Securities. (g) (i) Make reasonably available for inspection by the Holders participating in any disposition pursuant to the Registration Statement, and any attorney or accountant retained by such Holders, all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and (ii) cause the Company's officers, directors and employees to supply all information reasonably requested by such Holders or any such attorney or accountant in connection with the Registration Statement, in each case, as is customary for similar due diligence examinations; provided, however, that all records, information and documents that are designated in writing by the Company, in good faith, as confidential, proprietary or containing any material non-public information shall be kept confidential by such Holders and any such attorney or accountant (pursuant to an appropriate confidentiality agreement in the case of any such holder) , unless such disclosure is made pursuant to judicial process in a court proceeding (after first giving the Company an opportunity promptly to seek a protective order or otherwise limit the scope of the information sought to be disclosed) or is required by law, or such records, information or documents become available to the public generally or through a third party not in violation of an accompanying obligation of confidentiality; and provided further that, if the foregoing inspection and information gathering would otherwise disrupt the Company's conduct of its business, such inspection and information gathering shall, to the maximum extent possible, be coordinated on behalf of the Holders and the other parties entitled thereto by one firm of counsel designed by and on behalf of the majority in interest of Holders and other parties. (h) Promptly notify the Holders (i) when a Prospectus or any Prospectus supplement or post-effective amendment has been filed and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission or any state securities authority for amendments and supplements to a Registration Statement and Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement or the initiation or threatening of any proceedings for that purpose, (iv) of the issuance by any state securities commission or other regulatory authority of any order suspending the qualification or exemption from qualification of any of the Registrable Securities under state securities or "blue sky" laws or the initiation of any proceedings for that purpose, (v) if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company contained in any securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in all material respects, and (vi) of the happening of any event which makes any statement made in a Registration Statement or related Prospectus untrue or which requires the making of any changes in such Registration Statement or Prospectus so that they will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. As promptly as possible following expiration of any suspension period, the Company shall prepare and file with the Commission and furnish a supplement or amendment to such Prospectus so that, as thereafter deliverable to the purchasers of such Registrable Securities, such Prospectus will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 5 6 (i) Make generally available to the Holders an earnings statement satisfying the provisions of Section 11(a) of the Securities Act no later than 45 days after the end of the 12-month period beginning with the first day of the Company's first fiscal quarter commencing after the effective date of a Registration Statement, which earnings statement shall cover said 12-month period, and which requirement will be deemed to be satisfied if the Company timely files complete and accurate information on forms 10-Q, 10-K or 10 QSB, 10 KSB, as the case may be, and 8-K under the Exchange Act and otherwise complies with Rule 158 under the Securities Act. (j) Promptly use its reasonable best efforts to prevent the issuance of or, if issued, obtain the withdrawal of any order suspending the effectiveness of a Registration Statement, and if one is issued use commercially reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment. (k) Permit counsel for the Holders to review the Registration Statement and all amendments and supplements thereto for a reasonable period of time prior to their filing with the Commission, and shall not file any document in a form to which such counsel reasonably objects. (l) Cooperate with the Holders in a reasonable manner to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be sold pursuant to the registration statement and enable such certificates to be in such denominations or amounts, as the case may be, and registered in such names as the Holders may reasonably request. 4. OBLIGATIONS OF THE HOLDERS. In connection with the registration of the Registrable Securities, the Holders shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of such (a) Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request in order to assure compliance with the Securities Act and the Exchange Act. At least twenty (20) business days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Holder of the information the Company requires from each such Holder (the "Requested Information") if such Holder elects to have any of its Registrable Securities included in the Registration Statement. If at least three (3) business days prior to the anticipated filing date the Company has not received the Requested Information from a Holder (a "NonResponsive Holder"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Holder and have no further obligations to the Non-Responsive Holder. (b) Each Holder by its acceptance of the Registrable Securities agrees to cooperate with the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Holder has notified the Company in writing of its election to exclude all of its Registrable Securities from the Registration Statement. 6 7 (c) Each Holder agrees that, to the extent limited thereby, it will not effect sales of the Registrable Securities during any suspension period as described in section 3(a) hereof until such Holder receives notice from the Company that the suspension period has ended and, if so directed by the Company, such Holder shall deliver to the Company or destroy (and deliver to the Company a certificate of destruction) all copies in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of notice of such suspension. (d) The failure of any Holder to comply with the provisions of this Section 4 shall not relieve the Company of its obligations to the other Holders under this Agreement with respect to the registration of such other Holders' Registrable Securities in accordance with the terms hereof, except where the failure of any Holder to so comply will materially interfere with the ability of the Company to timely perform its obligations hereunder to the other Holders. 5. EXPENSES OF REGISTRATION. All expenses, other than underwriting discounts and commissions, if any, incurred in connection with registrations, filings or qualifications pursuant to Section 2 shall be borne by the Company; provided, that the Holders shall bear their own attorney's fees and expenses and all underwriting discounts and commissions applicable to their Registrable Securities. 6. INDEMNIFICATION AND CONTRIBUTION. (a) Indemnification by the Company. If the Registrable Securities are registered under the Securities Act pursuant to Section 2 hereof, the Company shall indemnify and hold harmless each Holder who sold Registrable Securities pursuant to such registration its officers, directors, partners and trustees, and each person who controls a Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (each, a "Holder Indemnitee") from and against any losses, claims, damages or liabilities to which such Holder Indemnitee may become subject under the Securities Act, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or any amendment thereto or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, not misleading or arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in a Prospectus (as the same may have been amended or supplemented) or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company hereby agrees to reimburse such Holder Indemnitee for all reasonable legal and other expenses incurred by them in connection with investigating or defending any such action or claim as and when such expenses are incurred; provided, however, that the Company shall not be liable to any such Holder Indemnitee in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement made in, or an omission or alleged omission from, such Registration Statement or Prospectus in reliance upon and in conformity with written information furnished to the Company by such Holder Indemnitee expressly for use therein or (ii) the use by the Indemnified Holder of an outdated or defective Prospectus after the Company has provided to such Holder Indemnitee an updated Prospectus correcting the untrue statement or alleged untrue statement or omission or alleged omission giving rise to such loss, claim, damage or liability. 7 8 (b) Indemnification by the Holders. If any Registrable Securities are registered under the Securities Act pursuant to Section 2 hereof each Holder agrees to (i) indemnify and hold harmless the Company, its directors (including any person who, with his or her consent, is named in the Registration Statement as a director nominee of the Company), its officers who sign any Registration Statement and each person, if any, who controls the Company within meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, against any losses, claims, damages or liabilities to which the Company or such other persons may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such Registration Statement or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any Prospectus or an omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading in each case to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such holder expressly for use therein, and (ii) reimburse the Company for any legal or other expenses incurred by the Company in connection with investigating or defending any such action or claim as such expenses are incurred; provided, however, that a Holder shall be liable to the Company under this Section 6(b) only to the extent of, in the aggregate, the lesser of (i) the amount of any such loss, claim, damage or liability or (ii) the net proceeds actually received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Notice of Claims, etc. Promptly after receipt by a party seeking indemnification pursuant to this Section 6 (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party against whom indemnification pursuant to this Section 6 is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is materially prejudiced and forfeits substantive rights and defenses by reason of such failure. In connection with any Claim as to which both the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (x) the Indemnifying Party shall have agreed to pay such fees, costs and expenses, (y) representation of the Indemnified Party by the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (z) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim; provided, however, in no event shall the Indemnifying Party be required to pay the fees and expenses of more than one separate firm for all Indemnified Parties. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (x), (y) or (z) above, the fees, costs and expenses of such legal counsel 8 9 shall be borne exclusively by the Indemnified Party. The Indemnifying Party shall not, without the prior written consent of the Indemnifying Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnifying Party from all liabilities with respect to such Claim or judgment. (d) Contribution. If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Person under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein because such indemnification is held by a court of competent jurisdiction to be unenforceable, then each Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and the Indemnified Party in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations, subject, however, to the limitations on the liability of the Holders contained in subsection (b) above. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such Indemnifying Party or by such Indemnified Party, and the parties, relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6 (d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6 (d) . The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 7. RULE 144. With a view to making available the benefits of certain rules and regulations of the Commission that may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information regarding the Company available as those terms are understood and defined in Rule 144 under the Securities Act; (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; and (c) So long as the Holder owns a Convertible Note or any Registrable Securities, furnish to the Holder forthwith upon written request a written statement by the Company as to its compliance with the reporting requirements of Rule 144, and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as the Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 9 10 8. ASSIGNMENT. The rights to have the Company register Registrable Securities pursuant to this Agreement may be assigned by the Holders to any permitted transferee of all or any portion of the Registrable Securities (or all or any portion of any Convertible Note) provided, that: (a) the Holder agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment, the securities so transferred or assigned to the transferee or assignee constitute Restricted Securities, and (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein. 9. AMENDMENT AND WAIVER. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) , only with the written consent of the Company and Holders who hold a majority-ininterest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Holder and the Company; provided, however, that no amendment or waiver shall be effective as to any Holder whose rights hereunder may be adversely affected thereby without such Holder's express written consent. 10. MISCELLANEOUS. (a) A person or entity shall be deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Except as may be otherwise provided herein, any notice or other communication or delivery required or permitted hereunder shall be in writing and shall be delivered personally or sent by certified mail, postage prepaid, or by a nationally recognized overnight courier service, and shall be deemed given when so delivered personally or by overnight courier service, or, if mailed, three (3) days after the date of deposit in the United States mails, as follows: (1) if to the Company, to: KINGS ROAD ENTERTAINMENT, INC. 1901 Avenue of the Stars Los Angeles, CA 90067 Attn: __________________ With a copy to: FISCHBEIN - BADILLO - WAGNER - HARDING 909 Third Avenue 10 11 New York, NY 10022 Attn: Joseph L. Canella, Esq. (2) if to any Holder, at the most current address as such Holder shall have provided in writing to the Company in accordance with the provisions of this Section 10, which address shall initially be the address set forth next to such Holder's name on the initial page of this Agreement. With a copy to : ROSEN & READE, LLP 757 Third Avenue New York, NY 10017 Attn: Lawrence A. Blatte, Esq. (c) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York. (d) The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provision, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (e) This Agreement, the Convertible Note Purchase Agreement and the Convertible Note constitute the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement, the Convertible Note Purchase Agreement and the Convertible Note supersede all prior agreements and undertakings among the parties hereto with respect to the subject matter hereof. (f) Subject to the requirements of Section 8 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (g) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (h) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (i) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. 11 12 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first above written KINGS ROAD ENTERTAINMENT, INC. By: /s/Phillip Geoffrey Cook -------------------------------------- Name: Phillip Geoffrey Cook Title: Chairman TRESOR WORLD WIDE By: /s/Allan Hamilton Burnside -------------------------------------- Name: Allan Hamilton Burnside Title: Director 12 EX-10.7 4 EXHIBIT 10.7 1 Exhibit 10.7 PLEDGE AND SECURITY AGREEMENT AGREEMENT dated April 26th, 1999, between ORWELL PROPERTIES, INC., with offices at 1901 Avenue of the Stars, Los Angeles, CA 90067 ("Pledgor") and Tresor WorldWide Limited, with an address at Havilland Hall, Guernsey, Channel Island, GY6 8TP ("Pledgee"). Kings Road Entertainment, Inc. ("Kings Road"), the parent company of Pledgor, has delivered to Pledgee Kings Road's 8% Convertible Note in the principal amount of $1,000,000.00 (the "Promissory Note"). As security for the due and punctual payment of all amounts due to Pledgee as Payee under the Promissory Note, Pledgor is pledging to Pledgee 140,000 shares of capital stock of Star TV Ag, a Swiss corporation, which are owned by Pledgor, in accordance with this Agreement. Such shares of Star TV Ag common stock are hereinafter referred to as the "Pledged Shares." NOW, THEREFORE, the parties hereto agree as follows: 1. Pledge; Obligations Secured. As collateral security for the due and punctual payment of the Promissory Note and the due and punctual performance by Pledgor of all of its obligations under this Agreement (all such payments and obligations being collectively, the "Obligations"), Pledgor does hereby pledge, hypothecate, sign, transfer, set over and deliver unto Pledgee, and grant to Pledgee a security interest in, the following: (a) The Pledged Shares and the certificates representing the Pledged Shares, and all cash, securities and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; and (b) All securities hereafter delivered to Pledgee in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such securities and all interest, cash, securities and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof. (Such Pledged Shares, certificates, interest, cash, securities and other property are herein collectively called the "Pledged Collateral"). 2. Delivery of Pledged Collateral. Concurrently with the execution and delivery of this Agreement, Pledgor is delivering to the Pledgee pursuant to this Agreement, all certificates representing the Pledged Shares, accompanied by stock powers endorsed in blank with signatures guaranteed. All other Pledged Collateral, whether in substitution for or in addition to the Pledged Shares, shall be delivered to the Pledgee forthwith after Pledgor receives or becomes entitled to receive the same. 3. Representations and Warranties. Pledgor represents and warrants (which representations and warranties shall be true at all times until the Pledged Collateral is released to Pledgor or otherwise disposed of in accordance with this Agreement): (a) The Pledgor is the sole legal and beneficial owner of the Pledged Shares free and clear of any lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement. 2 (b) The pledge of the Pledged Shares pursuant to this Agreement creates a valid and perfected first priority security interest in the Pledged Shares, securing the payment and performance of the Obligations. (c) All corporate action required to authorize the execution, delivery and performance by Pledgor of this Agreement has been duly taken. (d) This Agreement is a legal, valid and binding agreement of Pledgor enforceable in accordance with its terms. (e) No authorization, approval, or other action by, and no notice to or from and with, any governmental authority or regulatory body is required either (i) for the execution, delivery or performance of this Agreement by Pledgor or (ii) for the exercise by Pledgee of the voting or other rights provided for in this Agreement or the remedies in respect of the Pledged Shares pursuant to this Agreement (except as may be required in connection with such exercise of remedies by laws affecting the offering and sale of securities, generally). 4. Further Assurances. Pledgor agrees that, at any time and from time to time, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Pledgee may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Pledgee to exercise and enforce its rights and remedies hereunder with respect to any of the Pledged Collateral. 5. Voting; Dividends; Etc. (a) So long as no Event of Default (as defined below) shall have occurred: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the rights of Pledgee under this Agreement. (ii) Pledgor shall be entitled to receive and retain any and all dividends paid in respect of the Pledged Collateral, provided, however, that any and all A. dividends paid or payable in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in a permitted exchange for, any Pledged Collateral; B. dividends and other distributions paid or payable in cash in respect of any of the Pledged Collateral in connection with a permitted partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus; and C. cash paid, payable or otherwise distributed in respect of a permitted redemption of, or in exchange for, any of the Pledged Collateral; shall be forthwith delivered to the Pledgee to hold as Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Pledgee, be segregated from the other property or funds of Pledgor, and be forthwith delivered to the Pledgee as Pledged Collateral in the same form as so received (with any necessary endorsement). 2 3 (b) Upon the occurrence of an Event of Default, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 5(a)(i), and to receive the dividend payments which it would otherwise be authorized to receive and retain pursuant to Section 5(a)(ii), shall cease and all such rights shall immediately become vested in Pledgee who shall then have the sole right to exercise such voting and other consensual rights and to receive and hold as Pledged Collateral such dividends. 6. Other Covenants. Pledgor, by its signature below, agrees that it will not (a) sell or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, or (b) create or permit to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement. 7. Pledgee Appointed Attorney-in-Fact. Pledgor hereby appoints Pledgee as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Pledgee's discretion, to take any action and to execute any instrument which Pledgee may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same. 8. Reasonable Care. The Pledgee shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if the Pledged Collateral is accorded treatment substantially equal to that which it accords its own property. 9. Events of Default. "Events of Default," as used herein, shall have the meaning assigned to such term in the Promissory Note. 10. Remedies upon Default. If any Event of Default shall have occurred: (a) Pledgee shall give written notice to the Pledgor of its intention to exercise its rights under this Agreement and describing the Event of Default. (b) Thereafter, unless enjoined by service of an order issued by an English court situated in London, England, after the expiration of five days after the Pledgor received the notice from the Pledgee pursuant to Section 10(a), Pledgee may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to Pledgee, all the rights and remedies of a secured party under the laws of England and Wales. Pledgor agrees that, to the extent notice of sale shall be required by law, at least twenty days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. 11. Amendments, etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure by Pledgor or Pledgee from any requirement hereof, shall in any event be effective unless the same shall be in writing and signed by the party to be charged, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 12. Notices. All notices, affidavits or other communications given or made hereunder shall be in writing and shall be delivered by hand (which shall include an overnight courier service), against written receipt, sent by facsimile transmission, receipt confirmed, or mailed by registered or 3 4 certified mail, return receipt requested, postage prepaid, to the party at its address set forth above. Notices shall be deemed given on the date of receipt or, if mailed, two business days after mailing, except notices of change of address, which shall be deemed given when received. 13. Continuing Security Interest. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the earlier of (i) payment and performance in full of the Obligations, or (ii) the return to Pledgor of all of the Pledged Collateral and all instruments of transfer or assignment with respect thereto, (b) be binding upon Pledgor and its successors and assigns, and (c) inure, together with the rights and remedies of Pledgee hereunder, to the benefit of Pledgee and Pledgee's heirs, personal representatives, successors, and assigns. 14. Governing Law; Terms. This Agreement shall be governed by and construed in accordance with the laws of England and Wales without regard to principles of conflict of laws. 15. Submission to Jurisdiction. Pledgor hereby irrevocably agrees to submit to personal jurisdiction of the courts of England situated in London, England in any action or proceeding arising under this Agreement or otherwise relating to the Obligations and consents to the service of process of such court in the same manner as is provided in Section 12 for the giving of Notices. 16. Expenses; Return of Remaining Pledged Shares. (a) Pledgor shall be fully responsible for and shall pay costs and expenses incurred by Pledgee in enforcing Pledgee's rights under this Agreement or otherwise with respect to the Obligations, including, but not limited to, attorneys' fees, court costs and disbursements and costs relating to the disposition of the Pledged Collateral in accordance with Section 10 hereof. (b) Upon satisfaction of the Obligations, Pledgor shall be entitled to the prompt return of all of the Pledged Collateral, to or at the direction of Pledgor, which have not been used or applied toward the satisfaction of the Obligations. 4 5 IN WITNESS WHEREOF, Pledgor has caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. PLEDGOR: ORWELL PROPERTIES, INC. By: /s/Phillip Geoffrey Cook -------------------------------------- Title: Chairman PLEDGEE: TRESOR WORLDWIDE LIMITED By: /s/Allan Hamilton Burnside -------------------------------------- Title: Director 5 EX-10.8 5 EXHIBIT 10.8 1 Exhibit 10.8 Kings Road Entertainment 1901 Avenue of the Stars Los Angeles California 90067 Phone: (310) 552-0057 Fax: (310) 277-4468 April 27, 1999 Via facsimile (212) 459-9201 Mr. Ismail Merchant Merchant Ivory Productions 250 West 57th Street, Suite 1913A New York, NY 10107 Dear Mr. Merchant: This letter will confirm that Merchant Ivory Productions ("MIP") and Kings Road Entertainment, Inc. ("KREN") will create a company to be called Merchant Ivory Film Distribution, LLC ("MIFD"), for the purpose of worldwide distribution of various visual entertainment material (films). The outline of the transaction for the Joint Venture ("Venture") follows: 1) Investment: MIP will contribute $250,000 for a consideration in total of 75% of the Joint Venture. KREN will contribute Two Hundred Fifty Thousand Dollars ($250,000) and Two Hundred Fifty Thousand (250,000) KREN stock options, exercisable at the average price of the five day period prior to the date of execution of this Joint Venture Agreement, plus $0.125 (provided that, in no event shall the exercise price exceed $3.50), into the Venture, for a consideration in total of 25% of the Venture. 2) Ownership: The ownership of the new entity will be 25% KREN and 75% MIP. 3) Overhead and Related Costs: The Venture will contribute fifty (50%) of the New York City Office rent and related telephone and office expenditures as well as a Ten Thousand Dollar ($10,000) budget per festival, for each major film festival (i.e. Cannes, Venice, Berlin, etc.) that MIFD personnel attend. 4) Board of Directors: The directors of the newly formed company shall be provided as follows: three (3) directors appointed by MIP and two (2) directors appointed by KREN. 5) Auditors: Richard A. Eisner & Co. of New York, NY. 6) Bank: Bank of New York 2 Page 2 - Agreement April 27, 1999 7) MIFD shall have the opportunity to acquire distribution rights to MIP films (library and new projects) as such rights are available (to be determined in MIP's sole discretion) in good faith, upon terms to be negotiated at arms length; provided, however, nothing in this agreement shall obligate MIP to distribute its film library or future productions through MIFD. 8) To further this Venture, MIP will use its reasonable best efforts to search out completed film projects of accomplished filmmakers that may be readily licensed for distribution in all media in significant markets (in North America whenever reasonably available) to help build a successful library for the Venture. Neither MIP nor KREN may on its own, "carve out" any rights separately from any films licensed from third parties intended for the Venture. Both MIP and KREN will extend, to MIFD, the opportunity to acquire the distribution rights to MIP and KREN films to the extent same are reasonably available, in good faith through agreements negotiated at arms length. 9) KREN will provide a revolving line of credit of up to Five Hundred Thousand Dollars ($500,000) toward the print and advertising expenses incurred in the distribution of MIFD films. KREN will charge MIFD an interest rate (which shall be exclusive of fees and charges) not to exceed the rate charged to KREN by its financial institution on all money drawn from the line of credit. Eighty percent (80%) of the net revenue of each MIFD film will be used to payback such line of credit. 10) The parties intend to enter into a more formal agreement incorporating the above terms as well as other standard terms for agreements of this nature. Unless or until such more formal agreement is entered into, this agreement will be deemed a binding agreement and funding shall occur not later than May 5, 1999. 11) This agreement shall be construed in accordance with the laws in the State of New York applicable to agreements, which are executed and fully performed within said state. 12) KREN agrees to indemnify MIP, its employees assignees and licensees from and against any and all damages, losses, or expenses incurred or suffered by MIP as a result of any representaions, warranties, or agreements made by MIP by or on behalf of KREN. 13) MIP agrees to indemnify KREN, its employees, assignees and licenseses from and against any and all damages, losses, or expenses incurred or suffered by KREN as a result of any representations, warranties, or agreements made to KREN by or on behalf of MIP. For: Kings Road Entertainment, Inc. For: Merchant Ivory Productions By: /s/ Phillip Geoffrey Cook By: /s/ Ismail Merchant -------------------------------- -------------------------------- Phillip G. Cook Ismail Merchant Chairman 2 EX-21 6 EXHIBIT 21 1 Exhibit 21 SUBSIDIARIES OF REGISTRANT Ticker, Inc. Orwell Properties, Inc. EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10-KSB FOR THE FISCAL YEAR ENDED APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS APR-30-1999 APR-30-1999 55,583 0 364,972 (32,630) 157,486 1,545,411 231,398 (221,630) 3,654,518 1,481,779 0 0 0 24,607,294 (22,533,482) 3,654,518 765,116 837,299 304,243 1,193,138 3,759,668 0 433,276 (4,548,783) (11,924) (4,536,859) 0 0 0 (4,536,859) (1.71) (1.71)
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