10QSB/A 1 kren10qajuly2001.txt KINGS ROAD AMENDED FORM 10-QSB JULY 31, 2001 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB/A-1 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended July 31, 2001 Commission File No. 0-14234 KINGS ROAD ENTERTAINMENT, INC. (Name of small business issuer in its charter) Delaware 95-3587522 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 5743 NW 66th Ave., Parkland, FL 33067-1330 (Address of principal executive office) Issuer's telephone number: (212) 709-8111 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [__] As of October 18, 2001, the Registrant had 3,664,390 shares of its common stock outstanding. Transitional Small Business Disclosure Format: YES [__] NO [X] 1 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF JULY 31, 2001 ---------------------- (Restated) CURRENT ASSETS Cash $ 13,629 Inventory 22,709 Accounts Receivable 247,493 Prepaid Expenses 44,229 ------------------- Total Current Assets 328,060 ------------------- FIXED ASSETS, NET 2,205 ------------------- OTHER ASSETS Film Development Costs, net 143,693 Other Assets 148 Advance to shareholder 28,000 ------------------- Total Other Assets 171,841 ------------------- TOTAL ASSETS $ 502,106 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note Payable $ 19,000 Accounts Payable 207,727 Accrued Expenses 168,975 Deferred Revenue 17,241 Related Party Payable 47,374 ------------------- Total Current Liabilities 460,317 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common Stock, $.01 par value, 12,000,000 shares authorized, 3,664,390 shares issued and outstanding 36,644 Additional Paid-In Capital 24,906,655 Deficit (24,901,510) ------------------- TOTAL STOCKHOLDERS' EQUITY 41,789 ------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 502,106 =========== The accompanying notes are an integral part of these consolidated financial statements.
2 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED JULY 31, 2001 2000 --------------- ----------------- (Restated) REVENUES Feature Films $ 162,962 $ 692,565 ---------------- ----------------- 162,962 692,565 COSTS AND EXPENSES Costs Related to Revenue - 225,693 Selling Expenses 5,534 35,585 General & Administrative Expenses 316,105 156,648 ---------------------------------- 322,639 417,926 ---------------------------------- OPERATING (LOSS) INCOME (158,677) 274,639 OTHER INCOME (EXPENSE) Interest Income 38 5,778 Interest Expense (339) - Other Income 2,483 - ---------------- ----------------- 2,182 5,778 -------------------------------- (LOSS) INCOME BEFORE DISCONTINUED OPERATIONS (156,495) 280,417 LOSS FROM DISCONTINUED OPERATIONS (48,031) - ---------------------------------- (LOSS) INCOME BEFORE INCOME TAXES (204,526) 280,417 Provision for Income Taxes - 1,600 ---------------------------------- NET (LOSS) INCOME $ (204,526) $ 278,817 ========== ========== Net (Loss) Income Per Share - Basic $ (0.06) $ 0.08 and Diluted ========== ========== Weighted Average Number of Common shares - Basic and Diluted 3,664,390 3,541,140 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
3 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JULY 31, 2001 2000 ------------------- ------------------- (Restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net (Loss) Income $ (204,526) $ 278,817 Adjustments to reconcile Net (Loss) Income to Net Cash Provided by (Used in) Operating Activities: Depreciation and Amortization 358 227,020 Impairment of Goodwill 67,965 - Changes in Assets and Liabilities: (Increase) Decrease in Accounts Receivable (27,217) 1,210 Decrease in Inventory 11,362 - (Increase) in Note Receivable - (31,500) Decrease in Prepaid Expenses 55,444 2,250 Increase in Accounts Payable (53,444) 27,902 Increase in Accrued Expenses 111,502 - Increase in Deferred Revenue 14,941 8,030 ------------------- ------------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (23,615) 513,729 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Marketable Securities - (300,440) Gross Additions to Film Development Costs (17,376) (139,143) Purchase of Other Investments - (4,500) Disposal of Fixed Assets - 3,638 ------------------- ------------------- NET CASH USED IN INVESTING ACTIVITIES (17,376) (440,445) CASH FLOWS FROM FINANCING ACTIVITIES: NET CASH PROVIDED BY FINANCING ACTIVITIES - - ------------------- ------------------- NET (DECREASE) INCREASE IN CASH (40,991) 73,284 CASH AT BEGINNING OF PERIOD 54,620 85,159 ------------------- ------------------- CASH AT END OF PERIOD $ 13,629 $ 158,443 =========== =========== The accompanying notes are an integral part of these consolidated financial statements.
4 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, 2001 included in the Kings Road Entertainment, Inc. ("Company" or "Registrant") annual report on Form 10-KSB for that period. In the opinion of the Company's management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position at July 31, 2001 and the results of operations and cash flows for the three month periods ended July 31, 2001 and 2000, respectively, have been included. The results of operations for the three month period ended July 31, 2001 are not necessarily indicative of the results to be expected for the full fiscal year ended April 30, 2002. 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, 2001. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain amounts for the three month period ended July 31, 2000 have been reclassified to conform to the presentation of the July 31, 2001 amounts. The reclassifications have no effect on reported net income (loss). NOTE B - FILM DEVELOPMENT COSTS Film development costs consist of film script projects actively in development at July 31, 2001. No interest or overhead was capitalized to film development costs during the three month periods ended July 31, 2001 and 2000, as no new motion pictures were produced during those periods. NOTE C - NOTES PAYABLE On August 31, 2000, the Company issued a note to the seller of the common stock of Animal Town, Inc. in the principal amount of $39,000, bearing interest at 7% per annum with an initial maturity date of November 30, 2000. The Company repaid $20,000 of principal during the year ended April 30, 2001, leaving an outstanding principal balance of $19,000 at April 30, 2001. The parties, by agreement, have extended the maturity date of the outstanding balance of the note to November 30, 2001. 5 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE D - INCOME TAXES A reconciliation of the provision for income taxes to the expected income tax expense at the statutory federal tax rate of 34% is as follows:
Three Months Three Months Ended Ended July 31, 2001 July 31, 2000 ------------- ------------- Computed Expected Tax (Benefit) at $ (77,296) $ 95,342 Statutory Rate - 1,600 State and Local Taxes Valuation Allowance 77,296 (95,342) ------------ ------------- $ - $ 1,600 ============ =============
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 through 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:
At July 31, 2001 --------------- Valuation Allowances $ 2,436,000 Net Operating Loss Carryforwards 6,210,000 Investment Tax Credit Carryforwards 2,166,000 Foreign Tax Credit Carryforwards 400,000 ---------------- 11,212,000 Valuation Allowance (11,212,000) ----------------- $ - ================
A valuation allowance of $11,212,000 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. 6 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE E - DISCONTINUED OPERATIONS In August 2001, the Company elected to cease all operations pertaining to its Animal Town subsidiary. Subsequent to its purchase by the Company, Animal Town's operations proved to be unprofitable and the Company was unable to determine a reasonable scenario under which Animal Town could become a profitable entity. Therefore, as of October 31, 2000, Animal Town's operations have been classified as discontinued and have been segregated from the Company's viable operations. At the date of discontinuance, Animal Town had assets totaling $12,770 and liabilities of $57,329. The following is a summary of the loss from discontinued operations resulting from the elimination of the operations of Animal Town. The financial statements have been retroactively stated to reflect this event. No tax benefit has been attributed to the discontinued operations. No amounts have been reflected during the three months ended July 31, 2000 since Animal Town was not acquired until August 2000.
THREE MONTHS ENDED JULY 31, 2001 2000 ----------- ---------- REVENUES Catalog Sales $ 36,943 $ - Theatrical Admissions - - ----------- ---------- 36,943 - COSTS AND EXPENSES Costs Related to Revenue 29,852 - General & Administrative Expenses 55,122 - ----------- ---------- 84,972 - ----------- ---------- NET LOSS FROM DISCONTINUED OPERATIONS $ (48,031) $ - =========== ==========
NOTE F - LITIGATION AND CONSEQUENCES In the ordinary course of business, the Company has or may become involved in disputes or litigation. On the basis of information available to it, management believes such contingencies will not have a materially adverse effect on the Company's financial position or results of operations. 7 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G - CORRECTION OF ERROR Subsequent to the original issuance of the July 31, 2001 consolidated financial statements, the Company determined that revenue was not properly recognized along with associated costs primarily related to residual obligations. The Company also incorrectly accounted for the consolidation of a subsidiary. Correction of these errors had the following effect on the previously reported Assets, Liabilities and Net Loss as of and for the three months ended July 31, 2001 and has an equal understatement of the retained deficit as of July 31, 2001.
Originally As Reported Restated Difference ------------------ ------------------ ----------------- Cash $ 13,486 $ 13,629 $ 143 (2) Accounts receivable 67,346 247,493 180,147 (1) Prepaid expenses 6,698 44,229 37,531 (2) Other assets - 148 148 (2) Advance to shareholder - 28,000 28,000 (2) Goodwill 52,090 - 52,090 (3) Accounts payable 256,631 207,727 (50,229) (1) 1,325 (2) Accrued expenses 65,502 168,975 102,373 (1) 1,100 (2) Related party payable - 47,374 47,374 (2) Accumulated deficit 24,993,446 24,902,510 (100,739) (1) 9,803 (2) Net loss (157,019) (204,526) (17,093) (1) 12,510 (2) 52,090 (3) Loss per share $ (0.04) $ (0.06) $ (0.02) (4)
(1) Relates to the proper recognition of revenue and related receivables along with costs associated with related residual obligations for the year ended April 30, 2001 and the three months ended July 31, 2001. (2) Relates to the proper consolidation of the Company's subsidiary, Kings Road Productions (Europe) GmbH. (3) Relates to the proper impairment of goodwill for discontinued operations. (4) Loss per share increased by $0.02 per share. 8 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 its film revenues almost exclusively from the exploitation of films produced in prior years. The Company continues to fund and develop motion picture film scripts, with the intention of either producing the film, establishing a partnership or joint venture with another film production company or an outright sale of the developed script. On August 31, 2000, the Company completed the acquisition of the common stock of Animal Town, Inc. ("Animal Town"), a privately-held direct mail order catalogue company that markets children's toys, games, crafts and books specializing in cooperative play and development, animal protection and environmental awareness. The Company acquired all of the outstanding common stock of Animal Town in exchange for approximately $12,000 in cash, a note payable in the amount of $39,000 to the seller of the common stock and the issuance of 77,000 shares of the Company's common stock, the exact number of shares determined based upon a debt-for-equity exchange offer made to existing Animal Town creditors that commenced on September 29, 2000 and was concluded on January 29, 2001. The Company also agreed, on an interim basis in advance of the closing of the acquisition, to provide a secured credit facility in order for Animal Town to immediately commence production of a Fall 2000 catalog. The credit facility to Animal Town was consummated, which allowed for the production, printing and subsequent distribution of over 600,000 catalogs, and was collateralized by all of Animal Town's inventory, trademarks and proprietary customer list. The Company is presently evaluating the Animal Town operation, which may include a substantial reduction, total cessation or sale of the operation. The Company expects revenues from merchandise sales to substantially decline. Results of Operations For the quarters ended July 31, 2001 and 2000, feature film revenues were approximately $163,000 and $693,000, respectively, a decrease of approximately $530,000. The substantial decrease in feature film revenues was attributable to (1) the sale of the Company's rights to "Ticker", a feature film project that had been developed by the Company, for approximately $243,000, during the quarter ended July 31, 2000 and for which there were no comparable sales during the quarter ended July 31, 2001 and (2) decreased domestic and foreign distribution revenues from feature films in the Company's film library. Revenues derived from merchandising sales of the Animal Town children's catalog were approximately $37,000 and $0 for the quarters ended July 31, 2001 and 2000, respectively, the increase totally attributable to the Company's acquisition of Animal Town on August 31, 2000 and for which there were no comparable revenues during the quarter ended July 31, 2000. The Company is presently evaluating the Animal Town catalog operation, which may include a substantial reduction, total cessation or sale of the operation. The Company expects revenues from merchandise sales to substantially decline. Interest income decreased to $38 for the quarter ended July 31, 2001 compared to approximately $5,800 for the quarter ended July 31, 2000, reflecting a decrease in cash and marketable securities held during the quarter ended July 31, 2001. 9 Costs related to sales were approximately $-0- and $226,000 for the quarters ended July 31, 2001 and 2000, respectively. The comparable decrease resulted primarily from the amortization of costs related to "Ticker". Selling costs were approximately $6,000 and $36,000 for the quarters ended July 31, 2001 and 2000, respectively. The comparable decrease resulted primarily from a reduction in commissions payable to the Company's sales agents handling domestic and foreign distribution of the Company's film library. General and administrative costs were approximately $316,000 and $157,000 for the quarters ended July 31, 2001 and 2000, respectively. The comparable increase resulted primarily from initial operating costs and expenses associated with the Animal Town catalog, which the Company acquired on August 31, 2000 and for which there were no comparable costs and expenses during the quarter ended July 31, 2000. The Company expects to reduce its general and administrative costs as it evaluates an alternative plan of operation for the Animal Town catalog. Interest expense was approximately $300 for the quarter ended July 31, 2001 and was attributable to a note payable issued by the Company on August 31, 2000 in connection with the acquisition of Animal Town. During the quarter ended July 31, 2000, the Company had no interest expense. The Company had a net loss of approximately $205,000 for the quarter ended July 31, 2001 compared to net income of $279,000 for the quarter ended July 31, 2000. The substantial decrease in net income resulted primarily from (i) significantly decreased revenues during the quarter ended July 31, 2001, as discussed in detail above, and (ii) an increase in general and administrative costs attributable to initial operating costs and expenses associated with the Animal Town catalog. During the quarters ended July 31, 2001 and 2000, the Company had no significant provisions for income taxes. Liquidity and Capital Resources The Company's principal source of working capital during the three month period ended July 31, 2001 was motion picture licensing income and merchandise product sales from its catalog operation. The Company continues to invest in the development of motion picture film projects, the production of which requires substantial capital. In the event that the Company decides to invest in the production of one or more of its developed film projects, the Company will need to examine and evaluate the additional capital requirements to undertake such activities. The Company presently does not have sufficient capital to pursue such activities. Except for the financing of new film production costs, the Company believes it has sufficient working capital to maintain its ongoing operations. For the quarter ended July 31, 2001, the Company's net cash flow used in operating activities was approximately $24,000 compared to net cash flow provided by operating activities of approximately $514,000 for the quarter ended July 31, 2000. The resulting decrease was principally attributable to the substantial decrease in reported net income and principally accounted for the significant reduction in net cash used in investing activities from approximately $440,000 during the quarter ended July 31, 2000 to approximately $17,000 during the quarter ended July 31, 2001. At July 31, 2001 and 2000, the Company had cash of approximately $14,000 and $158,000, respectively. 10 Future Commitments The Company does not have, nor is it aware of, 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. Item 3 - Controls and Procedures In order to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis, the Company has formalized its disclosure controls and procedures. The Company's principal executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Exchange Act Rules 13a-14(c) and 15d-14(c), as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were effective in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. Since the Evaluation Date, there have not been any significant changes in the internal controls of the Company, or in other factors that could significantly affect these controls subsequent to the Evaluation Date. PART II - OTHER INFORMATION Item 1 - Legal Proceedings Kelrom Agency, Inc. v. Kings Road Entertainment Inc., et al. ------------------------------------------------------------ On April 30, 2001, Kelrom Agency, Inc. filed suit against the Company and KRTR, Inc. with the Civil Court of the City of New York. Case no. (or Index) 013294 CVN 2001, seeking payment of $5,968 related to theater advertising for the play "End of the World Party." This suit was subsequently settled for the amount of $ 2,500, released and discharged on November 13, 2002. On February 15, 2003, subsequent to the period covered by this report, a Stipulation of Discontinuance was filed. The Company is not aware of pending claims or assessments, other than as described above, which may have a material adverse impact on the Company's financial position or results of operations. 11 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) 10.1 1998 Stock Option Plan (1) 21 Subsidiaries of Registrant (3) 99.1** Section 302 certification by the Chief Executive Officer 99.2** Section 302 certification by the Chief Financial Officer 99.3** Section 906 certification --------------- (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-KSB for the fiscal year ended April 30, 2001. ** Filed Herewith (b) Forms 8-K None. 12 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. Date: August 14, 2003 /S/ Geraldine Blecker ------------------------------- By: Geraldine Blecker Its: Chief Executive Officer Date: August 13, 2004 /S/ H. Martin DeFrank ------------------------------- By: H. Martin DeFrank Its: Chief Financial Officer 13