-----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, HlI0uH+ce7ktIwXbRPqA9zLh79s2n6hUu6o8+ZF4BWV6Pxp/NkyeM3L6fpo6aQFD rT32NEBlvBMxb7Hh4dalvA== 0000950148-99-002722.txt : 19991221 0000950148-99-002722.hdr.sgml : 19991221 ACCESSION NUMBER: 0000950148-99-002722 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 19991220 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-14234 FILM NUMBER: 99777494 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 10QSB 1 FORM 10QSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended October 31, 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.) 3489 West Cahuenga Blvd., Suite D Hollywood, California 90068 (Address of principal executive office) Issuer's telephone number: (323) 512-5045 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of December 15, 1999 the registrant had 3,482,019 shares of its common stock outstanding. Transitional Small Business Disclosure Format: YES [ ] NO [X] 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF OCT. 31, 1999 ------------ ASSETS Cash and Cash Equivalents $ 8,736 Accounts Receivable, net of allowance of $32,630 164,694 Film Costs, net of amortization of $168,424,493 172,675 Investment in Immediate Entertainment Group 838,518 Other Investments 1,000,000 Prepaid Expenses 13,251 Fixed Assets 6,199 Other Assets 53,405 ------------ TOTAL ASSETS $ 2,257,478 ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Accounts Payable $ 251,411 Accrued Expenses 32,224 Note Payable to Related Parties 210,803 Convertible Note Payable 1,000,000 Note Payable 250,000 Deferred Revenue 2,775 ------------ TOTAL LIABILITIES 1,747,213 COMMITMENTS AND CONTINGENCIES 0 STOCKHOLDERS' EQUITY Common Stock, $.01 par value, 12,000,000 shares authorized, 3,481,310 shares issued and outstanding 34,820 Additional Paid-In Capital 24,734,382 Deficit (24,258,937) ------------ TOTAL STOCKHOLDERS' EQUITY 510,265 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,257,478 ============
The accompanying notes are an integral part of these consolidated financial statements. 2 3 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS SIX MONTHS ENDED OCT. 31, ENDED OCT. 31, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- REVENUES Feature Films $ 198,575 $ 72,247 $ 290,440 $ 222,164 Interest Income 0 34,452 413 66,699 ----------- ----------- ----------- ----------- 198,575 106,699 290,853 288,863 COSTS AND EXPENSES Costs Related to Revenue 34,966 1,500 34,966 8,857 Selling Expenses 3,756 21,008 5,207 29,473 General & Administrative Expenses 200,375 167,324 476,842 312,587 Interest 26,571 0 52,430 0 ----------- ----------- ----------- ----------- 265,668 189,832 569,445 350,917 ----------- ----------- ----------- ----------- OPERATING LOSS (67,093) (83,133) (278,592) (62,054) OTHER EXPENSES Equity in Losses of Affiliates 958,768 0 1,196,617 0 Adjustment in Valuation of Other Investments 150,000 0 250,000 0 ----------- ----------- ----------- ----------- 1,108,768 0 1,446,617 0 LOSS BEFORE INCOME TAXES (1,175,861) (83,133) (1,725,209) (62,054) Provision for Income Taxes 136 174 246 (18,940) ----------- ----------- ----------- ----------- NET LOSS ($1,175,997) ($ 83,307) ($1,725,455) ($ 43,114) =========== =========== =========== =========== Net Loss Per Share - Basic ($ 0.34) ($ 0.04) ($ 0.50) ($ 0.02) =========== =========== =========== =========== Weighted Average Number of Common Shares - Basic 3,482,019 1,911,748 3,478,177 1,911,748 =========== =========== =========== =========== Net Loss Per Share - Diluted ($ 0.34) ($ 0.04) ($ 0.50) ($ 0.02) =========== =========== =========== =========== Weighted Average Number of Common Shares and Common Share Equivalents - Diluted 3,482,019 1,911,748 3,478,177 1,911,748 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common Common Additional Retained Total Stock Stock Paid-In Earnings/ Stockholders' Shares Amount Capital (Deficit) Equity ------------ ------------ ------------ ------------ ------------ Balance, 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, April 30, 1999 3,389,315 33,893 24,573,401 (22,533,482) 2,073,812 Issuance of Stock for Cash 92,704 927 160,981 -- 161,908 Net Loss -- -- -- (1,725,455) (1,725,455) ------------ ------------ ------------ ------------ ------------ Balance, October 31, 1999 3,482,019 $ 34,820 $ 24,734,382 ($24,258,937) $ 510,265 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 5 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED OCTOBER 31, 1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss ($1,725,455) ($ 43,114) Adjustments to reconcile Net Loss to Net Cash Provided by/(Used in) Operating Activities: Depreciation and Amortization 37,223 12,974 Equity in Losses of Affiliates 1,196,617 0 Adj. in Valuation of Other Investments 250,000 0 Change in Assets and Liabilities: Decrease in Restricted Cash 1,000,000 0 Decrease/(Increase) in Accounts Receivable 167,648 (23,496) Increase in Amount Due from Related Party (93,210) 0 Decrease/(Increase) in Prepaid Expenses 2,983 (9,558) Decrease in Other Assets 87,774 0 Decrease in Accounts Payable (19,565) (105,958) Decrease in Accrued Expenses (59,428) (6,840) Decrease in Deferred Revenue (4,500) (1,200) ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY/ (USED IN) OPERATING ACTIVITIES 840,087 (177,192) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Other Investments (1,250,000) 0 Gross Additions to Film Cost (50,154) (20,580) Disposal/(Purchase) of Fixed Assets 1,312 (4,560) ----------- ----------- NET CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES (1,298,842) (25,140) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Stock 161,908 0 Issuance of Note Payable 250,000 0 ----------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING ACTIVITIES 411,908 0 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (46,847) (202,332) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 55,583 2,658,500 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,736 $ 2,456,168 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements. Accordingly, they do not include all of the information and disclosures required for annual financial statements. These financial statements should be read in conjunction with the financial statements and related footnotes for the year ended April 30, 1999 included in the Kings Road Entertainment, Inc. ("Company" or "Registrant") annual report on Form 10-KSB for that period. In the opinion of the Company's management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as of October 31, 1999 and the results of operations and cash flows for the three and six month periods ended October 31, 1999 and 1998 have been included. The results of operations for the three and six month periods ended October 31, 1999 are not necessarily indicative of the results to be expected for the full fiscal year. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended April 30, 1999. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 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. Certain amounts for the three and six month periods ended October 31, 1998 have been reclassified to conform to the presentation of the October 31, 1999 amounts. The reclassifications have no effect on the net loss for the quarter ended October 31, 1999. 6 7 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE B - FILM COSTS Film costs consist of: As Of Oct. 31, 1999 ------------- Released Films, less amortization $15,551 Films in Development 157,124 -------- $172,675 ======== NOTE C - 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. The Company's investment in Immediate also includes $240,210 of amounts advanced to Immediate or payments made to third parties on Immediate's behalf. 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 approximately $959,000 during the quarter ended October 31, 1999. 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. NOTE D - OTHER INVESTMENTS On May 12, 1999, the Company acquired 140 shares of Star TV AG ("Star"), approximately 19% of Star's outstanding common stock for $1,000,000 in cash. The Company's investment in Star has been accounted for using the cost method. Star is a developing cable television network based in Switzerland. NOTE E - 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. The accrued and unpaid interest balance at October 31, 1999 was $10,310. 7 8 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E - NOTES PAYABLE (CONTINUED) 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 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 if 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 Tresor wherein the Company, as soon as practicable, has agreed to register the securities issuable upon conversion. The accrued and unpaid interest balance at October 31, 1999 was $6,795. The Company is currently in default of the Convertible Note. Upon written notice to the Company, Tresor, the Convertible Note holder, may immediately demand repayment of all amounts due under the Convertible Note. At the present time, the Company does not have the resources to repay amounts due under the Convertible Note if such a demand is made. 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. By further agreement, the due date was extended until December 22, 1999. The accrued and unpaid interest balance at October 31, 1999 was $6,788. NOTE F - LITIGATION AND CONTINGENCIES In the ordinary course of business, the Company has or may become involved in disputes or litigation. On the basis of information available to it, the Company believes such contingencies will not have a materially adverse impact on the Company's financial position or results of operations. NOTE G - 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:
Six Months Ended Six Months Ended Oct. 31, 1999 Oct. 31, 1998 ------------- ------------- Computed Expected Tax at Statutory Rate ($260,590) ($ 21,098) State and Local Taxes 112 0 Benefit of Prior Years Amended Returns 0 (19,286) Foreign Taxes 134 346 Valuation Allowance 260,590 21,098 --------- --------- $ 246 ($ 18,940) ========= =========
8 9 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G - INCOME TAXES (CONTINUED) The Company filed amended federal and state tax returns for the fiscal years ended April 30, 1997 and 1996 that resulted in a reduction in income tax expense of $19,286 recorded during the quarter ended July 31, 1998. 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 offset future income tax liabilities. Deferred tax assets result from temporary differences between financial and tax accounting in the recognition of revenue and expenses. Temporary differences and carryforwards which give rise to deferred tax assets are as follows:
As Of Oct. 31, 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 a change in control of the Company that occurred in November 1998, Internal Revenue Code section 382 significantly limits the Company's ability to utilize its net operating loss carryforwards. As a result of this limitation, the Company expects that its investment tax credit and foreign tax credit carryforwards as well as a significant amount of its net operating loss carryforwards will expire prior to utilization by the Company. 9 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS Subsequent to the fiscal year ended April 30, 1995, the Company has not produced any new films and has derived 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 Securities, Inc. 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. 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 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. On May 12, 1999, the Company acquired 140 shares of Star TV AG ("Star"), approximately 19% of Star's outstanding common stock for $1,000,000 in cash. Star is a developing cable television network based in Switzerland. RESULTS OF OPERATIONS THE THREE MONTHS ENDED OCTOBER 31, 1999 VS. THE THREE MONTHS ENDED OCTOBER 31, 1998 For the quarter ended October 31, 1999 feature film revenues were approximately $199,000 as compared to approximately $72,000 for the quarter ended October 31, 1998. The increase in feature film revenues of approximately $127,000 results primarily from revenue generated by the initial release of "All of Me", "The Best of Times" and "The Big Easy" to the DVD market pursuant to an agreement between Trimark Pictures and the Company. The Company 10 11 had no interest income for the quarter ended October 31, 1999 versus approximately $34,000 during the same quarter last year, reflecting the substantial decrease in cash and marketable securities held during the quarter ended October 31, 1999 versus the same period last year. Costs related to revenue for the quarter ended October 31, 1999 increased to approximately $35,000 versus approximately $2,000 for the quarter ended October 31, 1998. This increase results primarily from a reserve for abandoned development projects of approximately $20,000 recorded by the Company during the quarter ended October 31,1999. Selling expenses decreased to approximately $4,000 during the quarter ended October 31, 1999 versus approximately $21,000 during the same quarter last year. This decrease results primarily from decreased distribution expenses related to the Company's agreement with Trimark Pictures to release seventeen (17) of the Company's films to the DVD and home videocassette markets. General and administrative costs increased by approximately 20% to approximately $200,000 during the quarter ended October 31, 1999 versus approximately $167,000 during the same period last year. This increase results primarily from increased professional fees and financing costs partially offset by decreases in employee salary expenses. Interest expense during the quarter ended October 31, 1999 was approximately $27,000 reflecting the interest incurred by the Company on its outstanding notes payable. During the quarter ended October 31, 1998, the Company had no interest expense. Equity in losses of affiliates was approximately $959,000 during the quarter ended October 31, 1999 resulting from a valuation allowance recorded by the Company 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 quarter ended October 31, 1999, the Company incurred a net loss of approximately $1,176,000 versus a net loss of approximately $83,000 for the quarter ended October 31, 1998. This increased loss results primarily from (i) a valuation allowance of approximately $150,000 recorded to reflect the Company's uncertainty in fully recovering a certain investment, and (ii) a valuation allowance of approximately $959,000 recorded to reflect the Company's uncertainty in fully recovering its investment in Immediate. During the quarters ended October 31, 1999 and 1998, the Company had no significant provision for income taxes. THE SIX MONTHS ENDED OCTOBER 31, 1999 VS. THE SIX MONTHS ENDED OCTOBER 31, 1998 For the six months ended October 31, 1999 feature film revenues were approximately $290,000 as compared to approximately $222,000 for the six months ended October 31, 1998. This increase in feature film revenues of approximately $68,000 results primarily from revenue generated by the initial release of "All of Me", "The Best of Times" and "The Big Easy" to the DVD market pursuant to an agreement between Trimark Pictures and the Company. During the six months ended October 31, 1999, interest income was approximately $1,000 versus approximately $67,000 during the same quarter last year, reflecting the substantial decrease in cash and marketable securities held during the six months ended October 31, 1999 versus the same period last year. Costs related to revenue for the six months ended October 31, 1999 increased to approximately $35,000 versus approximately $9,000 for the six months ended October 31, 1998. This increase results primarily from a reserve for abandoned development projects of 11 12 approximately $20,000 recorded by the Company during the six months ended October 31, 1999. Selling expenses decreased to approximately $5,000 during the six months ended October 31, 1999 versus approximately $29,000 during the same period last year. This decrease results primarily from decreased distribution expenses related to the Company's agreement with Trimark Pictures to release seventeen (17) of the Company's films to the DVD and home videocassette markets. General and administrative costs increased by approximately 53% to approximately $477,000 during the six months ended October 31, 1999 versus approximately $313,000 during the same period last year. This increase results primarily from increases in professional fees (accounting and consultants), investor relations costs, financing costs associated with the Convertible Note and the write-off of certain amounts advanced to third parties partially offset by a decrease in employee salary expenses. Interest expense during the six months ended October 31, 1999 was approximately $52,000 reflecting the interest incurred by the Company on its outstanding notes payable. During the six months ended October 31, 1998, the Company had no interest expense. Equity in losses of affiliates was approximately $1,197,000 during the six months ended October 31, 1999 resulting primarily from a valuation allowance of approximately $959,000 recorded by the Company 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 six months ended October 31, 1999, the Company incurred a net loss of approximately $1,725,000 versus a net loss of approximately $43,000 for the six months ended October 31, 1998. This loss results primarily from (i) a valuation allowance of approximately $250,000 recorded to reflect the Company's uncertainty in fully recovering a certain investment, (ii) a valuation allowance of approximately $959,000 recorded to reflect the Company's uncertainty in fully recovering its investment in Immediate (iii) the Company's share of losses incurred by Immediate, and (iv) increased general and administrative and interest expenses. During the six month periods ended October 31, 1999 and 1998, the Company had no significant provision for income taxes. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of working capital during the three and six month periods ended October 31, 1999 were motion picture licensing income, the proceeds from the Star Loan and the proceeds from a Regulation S offering to offshore investors. 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. For the six months ended October 31, 1999, the Company's net cash flow provided by its operating activities was approximately $840,000, an increase of approximately $1,017,000 as compared to approximately $177,000 of net cash flow used in operating activities during the quarter ended October 31, 1998. During the six months ended October 31, 1999, the Company used its cash flow from operations plus approximately $412,000 of cash flow provided by financing activities to make investments of $1,250,000. SEE NOTE D - INVESTMENT IN STAR TV. As of October 31, 1999, the Company had cash and cash equivalents of approximately $9,000 as compared to approximately $2,456,000 at October 31, 1998. 12 13 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"). 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. The Company is currently in default of the Convertible Note. Upon written notice to the Company, Tresor, the Convertible Note holder, may immediately demand repayment of all amounts due under the Convertible Note. At the present time, the Company does not have the resources to repay amounts due under the Convertible Note if such a demand is made. If the Company's default is not cured or waived or if the Convertible Note 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. SEE NOTE E - NOTES PAYABLE. On May 17, 1999, the Company entered into the Star Loan Agreement whereby the Company borrowed $250,000 from Star 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. By further agreement, the due date was extended until December 22, 1999. The Company does not have any other material future commitments. FORWARD-LOOKING STATEMENTS The foregoing discussion, as well as the other sections of this Quarterly Report on Form 10-QSB, contains forward-looking statements that reflect the Company's current views with respect to future events and financial results. Forward-looking statements usually include the verbs "anticipates," "believes," "estimates," "expects," "intends," "plans," "projects," "understands" and other verbs suggesting uncertainty. The Company reminds shareholders that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors which could cause the actual results to differ materially from the forward-looking statements. Potential factors that could affect forward-looking statements include, among other things, the Company's ability to identify, produce and complete film projects that are successful in the marketplace, to arrange financing, distribution and promotion for these projects on favorable terms in various markets and to attract and retain qualified personnel. In addition, the Company is currently seeking merger and acquisition proposals for the Company and its plans, strategies and future results are subject to the outcome of any such proposals. 13 14 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS In the ordinary course of business, the Company has or may become involved in disputes or litigation. On the basis of information available to it, management believes such contingencies will not have a materially adverse impact on the Company's financial position or results of operations. ITEM 5 - OTHER INFORMATION In October 1999, the Company's common stock was de-listed from the NASDAQ SmallCap Market because the Company failed to meet certain minimum listing maintenance criteria. The Company's common stock subsequently began trading on the OTC Bulletin Board. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-B) 3.1 Restated Certificate of Incorporation of Registrant. (1) 3.2 Bylaws of Registrant. (2) 27 Financial Data Schedule. (3) --------------- (1) Incorporated by reference to Form 10-KSB for the fiscal year ended April 30, 1998. (2) Incorporated by reference to Form 10-K for the fiscal year ended April 30, 1988. (3) Filed electronically with Securities and Exchange Commission, omitted in copies distributed to shareholders or other persons. (b) FORMS 8-K On September 15, 1999, the Company filed a Form 8-K reporting under Item 4 thereof a change in the Company's independent auditors and under Item 5 thereof the possible de-listing of the Company's common stock from the NASDAQ SmallCap Market. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 15, 1999 KINGS ROAD ENTERTAINMENT, INC. By: /s/Christopher M. Trunkey ----------------------------- Christopher M. Trunkey, Chief Financial Officer 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS APR-30-2000 OCT-31-1999 8,736 0 197,324 (32,630) 172,675 346,105 10,132 (3,933) 2,257,478 1,744,438 0 0 0 24,769,202 (24,258,937) 2,257,478 198,575 198,575 34,966 239,097 1,108,768 0 26,571 (1,175,861) 136 (1,175,997) 0 0 0 (1,175,997) (.34) (.34)
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