-----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, A2ygEjVIW0eQTJVoVHWjM9BB0LVSSU9tZZ167mV9a8SEQiuG5uyYS6wR3t+KynZZ T058qcw66ZYpqqHUXzpdIw== 0000950150-96-000136.txt : 19960318 0000950150-96-000136.hdr.sgml : 19960318 ACCESSION NUMBER: 0000950150-96-000136 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960131 FILED AS OF DATE: 19960315 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINGS ROAD ENTERTAINMENT INC CENTRAL INDEX KEY: 0000773588 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 953587522 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-14234 FILM NUMBER: 96535016 BUSINESS ADDRESS: STREET 1: 1901 AVE OF THE STARS STE 605 CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3105520057 MAIL ADDRESS: STREET 1: 1901 AVE OF THE STARS STREET 2: SUITE 605 CITY: LOS ANGELES STATE: CA ZIP: 90034 10QSB 1 FORM 10-QSB DATED JANUARY 31, 1996 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended January 31, 1996 Commission File No. 0-1423 KINGS ROAD ENTERTAINMENT, INC. (Exact name of Registrant as specified in its charter) Delaware 95-3587522 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.)
1901 Avenue of the Stars, Suite 605 Los Angeles, California 90067 (Address of principal executive office) Registrant's telephone number, including area code: (310) 552-0057 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ____ On March 11, 1996 the Registrant had 5,120,047 shares of its common stock, $.01 par value, issued and outstanding. 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET - (UNAUDITED)
As of Jan. 31, 1996 ------------- ASSETS Cash and Cash Equivalents $ 557,348 Marketable Securities, at cost - Note B 500,118 Accounts Receivable, net of allowance of $15,000 661,438 Film Costs, net of amortization of $165,729,300 - Note C 2,625,197 Prepaid Expenses 9,280 Fixed Assets, net of depreciation of $209,654 12,708 Other Assets 5,500 ----------- TOTAL ASSETS $ 4,371,589 =========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Accounts Payable $ 408,070 Accrued Expenses 18,000 Income Taxes Payable 4,000 Deferred Revenue 393,712 ----------- TOTAL LIABILITIES 823,782 COMMITMENTS AND CONTINGENCIES Note E SHAREHOLDERS' EQUITY Common stock, $.01 par value, 12,000,000 shares authorized; 5,120,047 shares issued and outstanding - Note F 45,716 Additional Paid-in Capital 24,902,177 Deficit (21,400,086) ----------- TOTAL SHAREHOLDERS' EQUITY 3,547,807 ----------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 4,371,589 ===========
The accompanying notes are an integral part of this statement. 2 3 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED JANUARY 31, ENDED JANUARY 31, 1996 1995 1996 1995 ---------- ----------- ---------- ---------- REVENUES: Feature Films $ 850,588 $1,427,056 $2,907,856 $2,771,541 Interest Income 7,623 13 15,056 291 Other Income 7,635 0 10,952 1,510 --------- ---------- ---------- ---------- 865,846 1,427,069 2,933,864 2,773,342 COSTS AND EXPENSES: Costs Related to Revenue 826,328 1,220,662 2,453,541 2,053,226 Selling Expenses 92,977 83,423 402,598 326,166 General & Admin. Exp. 290,027 179,672 813,928 499,690 Interest - Note C 1,762 0 14,154 0 --------- ---------- ---------- ---------- 1,211,094 1,483,757 3,684,221 2,879,082 INCOME/(LOSS) BEFORE INCOME TAXES (345,248) (56,688) (750,357) (105,740) Provision for Income Taxes - Note G 8,047 1,422 53,591 51,772 --------- ---------- ---------- ---------- NET INCOME/(LOSS) ($353,295) ($58,110) ($803,948) ($157,512) ========= ========== ========== ========== Net Earnings Per Share - Note A ($0.07) ($0.01) ($0.16) ($0.03) ========= ========== ========== ========== Weighted Average Number of Common Shares 5,120,047 5,120,047 5,120,047 5,120,047 ========= ========== ========== ==========
The accompanying notes are an integral part of these statements. 3 4 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - (UNAUDITED)
Common Common Additional Total Stock Stock Paid-In Shareholders' Shares Amount Capital Deficit Equity --------- ------- ----------- ------------ ------------- Balance, April 30, 1994 5,080,047 $45,316 $24,886,327 ($20,201,393) $4,730,250 Net Loss -- -- -- (394,745) (394,745) Exercise of Stock Options 40,000 400 15,850 ----- 16,250 --------- ------- ----------- ------------ ---------- -- -- -- -- - Balance, April 30, 1995 5,120,047 45,716 24,902,177 (20,596,138) $4,351,755 Net Loss -- -- -- (803,948) (803,948) --------- ------- ----------- ------------ ---------- -- -- -- -- -- Balance, Jan. 31, 1996 5,120,047 $45,716 $24,902,177 ($21,400,086) $3,547,807 ========= ======= =========== ============ ==========
The accompanying notes are an integral part of these statements. 4 5 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
FOR THE NINE MONTHS ENDED JANUARY 31, 1996 1995 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss ($803,948) ($157,512) Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities: Depreciation and Amortization 2,456,106 2,061,547 Changes in Assets and Liabilities: Decrease in Accounts Receivable 351,971 48,155 Increase in Prepaid Expenses and Other Assets (727) (2) Decrease in Restricted Cash 0 10,430 (Decrease)/Increase in Payables and Accrued Exp. (353,794) 142,830 Increase in Deferred Revenue 179,000 234,815 ---------- ----------- NET CASH AND CASH EQUIVALENTS PROVIDED BY OPERATING ACTIVITIES 1,828,608 2,340,263 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Marketable Securities (500,118) 0 Purchase of Fixed Assets (9,460) (1,839) Gross Additions to Film Cost (472,470) (3,394,054) ---------- ----------- NET CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES (982,048) (3,395,893) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Debt 0 2,742,181 Repayment of Debt 0 (2,158,774) Borrowing from Related Party 0 283,000 Repayments to Related Party (443,132) 0 Proceeds from Exercise of Stock Options 0 16,250 ---------- ----------- NET CASH AND CASH EQUIVALENTS (USED IN)/PROVIDED BY FINANCING ACTIVITIES (443,132) 882,657 ---------- ----------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 403,428 (172,973) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 153,920 177,364 ---------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $557,348 $4,391 ========== ===========
The accompanying notes are an integral part of these statements. 5 6 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PREPARATION 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 consolidated financial statements and related footnotes for the year ended April 30, 1995, 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 January 31, 1996 and the results of operations and cash flows for the three and nine month periods ended January 31, 1996 and 1995 have been included. The results of operations for the three and nine month periods ended January 31, 1996 are not necessarily indicative of the results to be expected for the full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended April 30, 1995. Net Income or Loss per share amounts have been calculated using the weighted average number of common shares outstanding. Stock options have been excluded as common stock equivalents because of their antidilutive or non-material effect. NOTE B - MARKETABLE SECURITIES On October 27, 1995, the Company purchased US Treasury Bills in the face amount of $308,000 maturing on April 25, 1996 at a discount rate of 5.09%. On November 7, 1995 the Company purchased Federal Home Loan Bank notes with a par value of $200,000 maturing on November 7, 2000 but callable May 7, 1996 paying interest at 6.75%. As of January 31, 1996, the market values of these securities were approximately $304,172 and $201,250, respectively. The Company intends to hold these securities until maturity. NOTE C - FILM COSTS
As of Film Costs Consist of: Jan. 31, 1996 -------------- Released Films, less amortization $2,437,225 Films in Production 0 Films in Development 187,972 ---------- Total Film Costs $2,625,197 ==========
6 7 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE C - FILM COSTS (CONTINUED) In accordance with Financial Accounting Standards No. 34, interest costs are capitalized to feature film productions until the date of completion. No interest expense was capitalized to Film Costs during the three or nine month periods ended January 31, 1996. Approximately $41,000 and $88,000 of interest expense was capitalized to Film Costs for the three and nine month periods ended January 31, 1995, respectively. NOTE D - RELATED PARTY TRANSACTIONS In December 1992, the Company borrowed $175,000 from Stephen Friedman, an officer of the Company, at an interest rate of 6% per annum. During the quarter ending January 31, 1996, the Company repaid this obligation in full. Interest expense to Mr. Friedman during the nine month period ending January 31, 1996 was approximately $7,000. NOTE E - LITIGATION AND CONTINGENCIES In December 1994, the Company filed a lawsuit in Los Angeles Superior Court against The Movie Group, Inc. ("TMG") alleging causes of action for breach of contract, conversion and breach of fiduciary duty, among other things, and seeking an accounting, declaratory relief and monetary damages, among other things, arising from a sales agency agreement ("Agreement") with TMG in connection with one of the Company's films. Under the Agreement, the Company is entitled to receive certain monies derived from exploitation of the film after the deduction of certain fees and expenses. The Company believes TMG has substantially underpaid the monies which the Company is entitled to receive. While management believes it may prevail on some or all of the causes of action, the likelihood of any monetary recovery is uncertain and the Company may be required to share any recovery with certain third parties. TMG has filed a cross-complaint against the Company and a third party alleging, among other things, inducing breach of contract, recision based on fraud and intentional interference with existing business relationships. Management believes it has substantial defenses to all of the allegations in the cross-complaint. On October 20, 1995, as amended on November 9, 1995, SK Films Ltd., Inc. (the "Limited Partner") filed a lawsuit in Los Angeles Superior Court (the "Court") against Mother Productions Limited Partnership, a limited partnership of which the Company is general partner and the Limited Partner is the sole limited partner. The lawsuit alleges breaches of the partnership agreement, fraud, and misrepresentation, among other things, and seeks recision, appointment of a receiver and declaratory relief, among other things, in addition to monetary damages of not less than $2,254,157 plus interest. Although not named as a defendant, the Company, as general partner, is responsible for conducting business on behalf of the partnership and could liable for any damages, if any, awarded to the Limited Partner. On January 19, 1996, the Court ordered the dispute be submitted to arbitration and stayed any further proceedings until the completion of arbitration. (SEE "ITEM 2 - FUTURE COMMITMENTS"). 7 8 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE E - LITIGATION AND CONTINGENCIES (CONTINUED) In the ordinary course of business, the Company has or may become involved in disputes or litigation. On the basis of information available to it, management believes such contingencies will not have a materially adverse impact on the Company's financial position or results of operations. NOTE F - STOCK OPTIONS AND WARRANTS The Company's 1987 Non-qualified Stock Option Plan ("1987 Plan") provides for the grant of options to purchase up to 850,000 shares. At January 31, 1996, options to purchase up to 302,375 shares were outstanding under the 1987 Plan at exercise prices ranging from $.25 to $.56 per share. Of the outstanding options under the 1987 Plan, 235,500 are held by the Chief Executive Officer, 16,875 by a director and officer, and 50,000 by another officer of the Company. Options to purchase an additional 250,000 shares have also been granted to the Chief Executive Officer outside the 1987 Plan at an exercise price of $.25 per share. Of the outstanding options, 502,375 expire in August 1997 and 50,000 expire in November 1999. NOTE G - INCOME TAXES A reconciliation of the provision for income taxes to the expected income tax expense at the statutory tax rate of 34% is as follows:
Quarter Ending Jan. 31, 1996 -------------- Computed Expected Tax at Statutory Rate ($120,000) State and Local Income Taxes 307 Foreign Taxes 7,740 Valuation Allowance 120,000 --------- $8,047 =========
For federal income tax purposes, the Company has available investment tax credits of approximately $2,166,000, after being reduced 35% by the Tax Reform Act of 1986 (expiring between 2000 and 2002) and net operating loss carryforwards of approximately $16,274,000 (expiring between 2001 and 2007) to offset future income tax liabilities. Deferred tax assets and liabilities 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 and liabilities are as follows: 8 9 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE F - INCOME TAXES (CONTINUED)
As of Assets/(Liabilities) Jan. 31, 1996 ------------------------ ------------- Deferred Revenue $86,000 Film Cost Amortization (158,000) Net Operating Loss Carryforwards 6,488,000 Investment Tax Credit Carryforwards 2,166,000 Foreign Tax Credit Carryforwards 400,000 ----------- 8,982,000 Valuation Allowance (8,982,000) ----------- $0 ===========
A valuation allowance of $8,982,000 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. 9 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS For the three months ended January 31, 1996, the Company reported a net loss of approximately $353,000 on revenues of approximately $866,000 compared to a net loss of approximately $58,000 on revenues of approximately $1,427,000 for the same period last year. For the nine month periods ending January 31, 1996 and 1995, the Company reported net losses of approximately $804,000 and $158,000, respectively. The increased loss for the nine month period ending January 31, 1996 versus the same period last year results primarily from the write-down to net realizable value, in accordance with generally accepted accounting principles, of the Company's investment in a film produced during a prior fiscal year. The decrease in revenues during the quarter ended January 31, 1996 of approximately 40% versus the same quarter last year, is due primarily to generally lower prices for the Company's lower budget action/martial arts genre films. Future revenues of the Company will be dependent upon the success of its films and on the Company's ability to continue to generate working capital for the development and production of new motion picture projects. The Company is not currently in production on any new film projects. (SEE "LIQUIDITY AND CAPITAL RESOURCES"). Costs relating to revenue were approximately $826,000 during the three months ended January 31, 1996 versus approximately $1,221,000 during the three months ended January 31, 1995. These costs relate to amortization of production costs of films for which revenue was recognized during the period. Selling expenses increased to approximately $93,000 during the quarter versus approximately $83,000 for the same period last year. General and administrative expenses increased to approximately $290,000 during the quarter from approximately $180,000 during the same period last year. This increase results primarily from legal expenses in connection with the various lawsuits referred to in NOTE E TO THE CONSOLIDATED FINANCIAL STATEMENTS. LIQUIDITY AND CAPITAL RESOURCES The production of motion pictures requires substantial capital. In producing a motion picture, the Company must expend substantial sums for both production and distribution of a picture, all before any revenues are generated by the film. In certain instances the Company obtains advances and guarantees from its distributors, but these advances and guarantees defray only a small portion of a film's cost. The Company's principal source of working capital during the quarter ending January 31, 1996 has been motion picture licensing income. During the fiscal year ended April 30, 1995, significant working capital was also provided under a revolving credit facility ("Credit Facility") with Credit Lyonnais Bank Nederland N.V. ("CLBN"); borrowings were limited to a percentage of qualifying contracts receivable of the Company and were secured by first position liens on all amounts to be received under the Company's film license agreements and the copyrights to all of the Company's films. The Credit Facility expired March 1, 1995. 10 11 For the nine months ended January 31, 1996, the Company's net cash flow provided by operating activities was approximately $1,829,000 compared to approximately $2,340,000 during the same period last year. Net cash flows of approximately $982,000 were used in investing activities primarily through the purchase of marketable securities and gross additions to film costs. Net cash flows of approximately $443,000 were used in financing activities reflecting the repayment to Stephen Friedman, Chief Executive Officer, of certain loans made in prior fiscal years. Cash and cash equivalents increased from approximately $4,000 as of January 31, 1995 to approximately $557,000 as of January 31, 1996. The principal asset on the Company's balance sheet is unamortized film costs. The Company's unamortized film costs at January 31, 1996 and 1995 were approximately $2,625,000 and $5,800,000, respectively. Not reflected on the balance sheet, in accordance with generally accepted accounting standards, is the full value of the Company's film library. In October 1995, the Company entered into a Purchase and Sale Agreement ("Agreement") with World Icon Distribution Enterprises C.V. ("Icon") whereby the Company agreed to sell substantially all right, title and interest in and to certain motion pictures owned or distributed by the company, throughout the world excluding the United States and Canada, for the sum of $6,500,000 subject to reduction pursuant to the terms of the agreement. Subsequent to this transaction, the Company will retain ownership of the domestic and Canadian rights to its films along with the foreign rights to certain films not subject to the Agreement. The Company substantially completed this transaction on February 5, 1996. (SEE THE COMPANY'S FILING ON FORM 8-K DATED OCTOBER 26, 1995). FUTURE COMMITMENTS The Company's anticipated major financial commitments relate to the development, production and release of its motion pictures. In recent years, the Company has been concentrating on lower budget films and expects to continue producing these types of films, but will pursue projects with higher budgets if management feels sufficient resources are available and risk is limited. The financial resources necessary for the production and release of films are generally dependent on adequate borrowing availability. The Credit Facility with CLBN expired March 1, 1995 and allowed the Company to borrow a percentage of qualifying contracts receivable. There are a number of banks in the entertainment industry that support this type of lending and the Company is actively pursuing a new facility with these banks. Although management believes it will be able to obtain financing for the production of new films, the Company's financial position and results of operations will be constrained by the availability of adequate financing. The Company owns 50% of a limited partnership created for the sole purpose of producing and distributing a film entitled "The Haunted Heart". The Company, which acts as the general partner, guaranteed repayment of 50% of a loan made to the partnership by the sole limited partner in the approximate amount of $1,500,000. In management's opinion, this potential future commitment will not have a materially adverse impact on the Company's financial position or results of operations. 11 12 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS On October 20, 1995, as amended on November 9, 1995, SK Films Ltd., Inc. (the "Limited Partner") filed a lawsuit in Los Angeles Superior Court (the "Court") against Mother Productions Limited Partnership, a limited partnership of which the Company is general partner and the Limited Partner is the sole limited partner. The lawsuit alleges breaches of the partnership agreement, fraud, and misrepresentation, among other things, and seeks recision, appointment of a receiver and declaratory relief, among other things, in addition to monetary damages of not less than $2,254,157 plus interest. Although not named as a defendant, the Company, as general partner, is responsible for conducting business on behalf of the partnership and could liable for any damages, if any, awarded to the Limited Partner. On January 19, 1996, the Court ordered the dispute be submitted to arbitration and stayed any further proceedings until the completion of arbitration. In the ordinary course of business, the Company has or may become involved in disputes or litigation. On the basis of information available to it, management believes such contingencies will not have a materially adverse impact on the Company's financial position or results of operations. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS None. (B) FORMS 8-K On March 1, 1996, the Company filed a Form 8-K reporting under Item 4 thereof a change in the Company's independent auditors for the fiscal year ending April 30, 1996. 12 13 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. KINGS ROAD ENTERTAINMENT, INC. Dated: March 11, 1996 /s/ Stephen J. Friedman ----------------------------------------- Stephen J. Friedman Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) Dated: March 11, 1996 /s/ Christopher M. Trunkey ---------------------------------------- Christopher M. Trunkey Vice President, Chief Financial and Administrative Officer and Secretary (Principal Financial and Accounting Officer) 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-QSB FOR THE QUARTERLY PERIOD ENDING JANUARY 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS APR-30-1996 JAN-31-1996 557,348 500,118 676,438 (15,000) 2,625,197 4,344,101 222,362 (209,654) 4,371,589 430,070 0 24,947,893 0 0 (21,400,086) 4,371,589 850,588 865,846 826,328 1,209,332 0 0 1,762 (345,248) 8,047 (353,295) 0 0 0 (353,295) (0.07) (0.07)
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