10QSB 1 form10qsb.txt FORM 10-QSB 07/31/03 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 July 31, 2003 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.) 447-B N. Doheny Drive, Beverly Hills, CA 90210 (Address of principal executive office) Issuer's telephone number: (310) 278-9975 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 July 13, 2004 the registrant had 3,857,765 shares of its common stock outstanding. Transitional Small Business Disclosure Format: YES NO X ----- ----- KINGS ROAD ENTERTAINMENT, INC. Report on Form 10-QSB For the Quarter Ended July 31, 2003
INDEX Page Part I. Financial Information Item 1. Financial Statements (unaudited).................................................. 3 Consolidated Balance Sheets ...................................................... 3 Consolidated Statements of Operations ............................................ 4 Consolidated Statements of Cash Flows............................................. 5 Notes to the Consolidated Financial Statements ................................... 6 Item 2. Management's Discussion and Analysis or Plan of Operation ........................ 7 Item 3. Controls and Procedures .......................................................... 8 Part II. Other Information Item 1. Legal Proceedings ................................................................ 9 Item 2. Changes in Securities ............................................................ 12 Item 3. Defaults Upon Senior Securities .................................................. 12 Item 4. Submission of Matters to a Vote of Security Holders .............................. 12 Item 5. Other Information ................................................................ 12 Item 6. Exhibits and Reports on Form 8-K ...................................................... 12
PART I - FINANCIAL INFORMATION Item 1 - Financial Statements KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS ------ July 31, April 30, 2003 2003 ------------- ------------- (Unaudited) CURRENT ASSETS Cash $ 106,447 $ 50,679 Accounts receivable 315,982 350,345 ------------- ------------- Total Current Assets 442,429 401,024 ------------- ------------- FIXED ASSETS, NET - - ------------- ------------- OTHER ASSETS Film development costs, net 58,645 47,345 ------------- ------------- Total Other Assets 58,645 47,345 ------------- ------------- TOTAL ASSETS $ 481,074 $ 448,369 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Accounts payable $ 102,893 $ 99,855 Accrued expenses 195,163 189,002 Deferred revenue 81,667 86,667 Liabilities from discontinued operations 4,000 4,000 ------------- ------------- Total Current Liabilities 383,723 379,524 ------------- ------------- TOTAL LIABILITIES 383,723 379,524 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.01 par value, 12,000,000 shares authorized, 3,864,390 shares issued and outstanding 38,644 38,644 Additional paid-in capital 24,932,655 24,932,655 Accumulated deficit (24,873,948) (24,902,454) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 97,351 68,845 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 481,074 $ 448,369 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 3 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)
For the Three Months Ended July 31, -------------------------- 2002 2003 ----------- ----------- REVENUES Feature films $ 135,934 $ 108,891 ----------- ----------- Total Revenues 135,934 108,891 ----------- ----------- COSTS AND EXPENSES General and administrative expenses 106,264 132,036 ----------- ----------- Total Costs and Expenses 106,264 132,036 ----------- ----------- OPERATING (LOSS) INCOME 29,670 (23,145) ----------- ----------- OTHER INCOME (EXPENSE) Interest income 152 - Gain on sale of assets - 100,000 Other income (Expense) (1,316) (40) ----------- ----------- Total Other Income (Expense) (1,164) 99,960 ----------- ----------- INCOME BEFORE INCOME TAXES 28,506 76,815 PROVISION FOR INCOME TAXES - - ----------- ----------- NET INCOME $ 28,506 $ 76,815 =========== =========== BASIC INCOME PER SHARE $ 0.01 $ 0.02 =========== =========== FULLY DILUTED INCOME PER SHARE $ 0.01 $ 0.02 =========== =========== Weighted Average Number of Common Shares - Basic and Diluted 3,816,564 3,816,564 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended July 31, -------------------------- 2002 2003 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 28,506 $ 76,815 Adjustments to reconcile Net Income to Net Cash Provided by (Used in) Operating Activities: Depreciation and amortization - 171 Gain on sale of assets - (100,000) Common stock issued for services - 28,000 Changes in Assets and Liabilities: (Increase) decrease in accounts receivable 34,363 (108,996) Increase (decrease) in accounts payable 3,038 (17,520) Increase in accrued expenses 6,161 37,216 Increase in deferred revenue (5,000) (35,200) ----------- ----------- NET CASH PROVIDED USED IN OPERATING ACTIVITIES 67,068 (119,514) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Gross additions to film development costs (11,300) - Proceeds from sale of assets - 100,000 ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (11,300) 100,000 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES - - ----------- ----------- NET (DECREASE) INCREASE IN CASH 55,768 (19,514) CASH AT BEGINNING OF PERIOD 50,679 27,925 ----------- ----------- CASH AT END OF PERIOD $ 106,447 $ 8,411 =========== =========== SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES: CASH PAID FOR: Interest $ - $ - Income taxes $ - $ - SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Common stock issued for services $ - $ 28,000
The accompanying notes are an integral part of these consolidated financial statements. 5 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements July 31, 2003 and April 30, 2003 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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, 2003 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, 2003 and the results of operations and cash flows for the three month periods ended July 31, 2003 and 2002, respectively, have been included. The results of operations for the three month period ended July 31, 2003 are not necessarily indicative of the results to be expected for the full fiscal year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. NOTE 2 - SIGNIFICANT AND SUBSEQUENT EVENTS On April 17, 2003, the Company received a formal request by a Shareholders Action Committee for the Board to investigate a series of Related Party Transactions, which occurred during the period of November 1998 through April 2001. The Company received an additional letter dated November 10, 2003 from the Chairman of the Shareholders Action Committee inquiring as to the status of the investigation. The Board has appointed independent counsel to investigate these transactions and report to the Board, the Shareholders Action Commttee and the Shareholders. On July 31, 2003, Rigel USA, Inc. filed a complaint in the Superior Court of California, County of Los Angeles, California against Kings Road Entertainment and others, including a former officer and director. The complaint alleges breach of contract regarding the option agreement between Rigel Entertainment, Inc. and the Company regarding "The Kickboxer" series of television movies. The complaint sought compensation in an unspecified amount. On or about June 3, 2004, the Company entered into a Settlement Agreement with Rigel providing for the settlement of the matter and other possible claims of the parties. Pursuant to the terms of the Settlement Agreement, Rigel and the Company have each agreed to release the other from any and all claims arising out of the lawsuit. Additionally, as part of the settlement the Company and Rigel executed an Option and License Agreement, whereby in considration of $10,000 paid by Rigel to the Company, the Company granted Rigel two exclusive options to use the word "Kickboxer" in the title of up to two live-action feature length motion pctures. The first option period shall commence on August 1, 2004 and end on October 31, 2006, and shall be exercised by commencement of prinipal photography and the payment of $90,000 to the Company. The option for the second motion picture shall commence on November 1, 2005 and end on July 31, 2006, and shall be exercised by the commencement of principal photography and the payment of $75,000 to the Company. If either or both motion pictures are produced, the Company shall also be entitled to 10% of the net proceeds. In April 2004, the Company became aware that between April 2003 and December 2003, certain funds intended for the Company and others related to screenplay royalties totaling $103,517 had been diverted by a former officer and director of the Company and an associate, both of whom have denied that the funds were taken without the Company's knowledge. The Company has requested immediate return of the funds and has been notified that the funds will be returned during July 2004. The individuals have also denied malfeasance and in addition to returning the funds, have expressed the intention to undertake other actions to resolve the situation. Respective legal counsel representing the Company and the individuals are negotiating a full resolution to this matter. Repayment of the funds and resolution to related matters has not yet been reached. The consolidiated financial statements have been restated to reflect the additional revenue, receivable and payable associated with this matter for the periods presented. 6 Item 2 - Management's Discussion and Analysis of Financial Position and Results of Operations. Cautionary Forward - Looking Statement -------------------------------------- The following discussion should be read in conjunction with the Company's financial statements and related notes. Certain matters discussed herein may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties include, but are not limited to, the following: - the volatile and competitive nature of the film industry, - the uncertainties surrounding the rapidly evolving markets in which the Company competes, - the uncertainties surrounding technological change of the industry, - the Company's dependence on its intellectual property rights, - the success of marketing efforts by third parties, - the changing demands of customers and - the arrangements with present and future customers and third parties. Should one or more of these risks or uncertainties materialize or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated. 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. Results of Operations For the quarter ended July 31, 2003, feature film revenues were $135,934 as compared to $108,891 for the quarter ended July 31, 2002, The increase of $27,043 results primarily from increased royalties on the Company's feature film library. During the three months ended July 31, 2003, the Company recorded a write-down in development costs of $11,300 that the Company does not expect to recover. General and administrative costs decreased to $106,265 for the quarter ended July 31, 2003 as compared to $132,036 during the quarter ended July 31, 2002. This decrease of $25,771 resulted primarily from reduced administrative, legal and accounting costs. The Company had reduced its office expenses and accounting staff to reduce these costs. The Company had a gain on sale of assets of $0 during the quarter ended July 31, 2003 as compared to a $100,000 gain during the quarter ended July 31, 2002. This decrease resulted from the sale of part of the Company's film library during the quarter ended July 30, 2002, for which there was no comparable gain in the quarter ended July 31, 2003. 7 Interest income increased to $152 for the quarter ended July 31, 2003 compared to $0 for the quarter ended July 31, 2002, reflecting a slight increase in cash held during the quarter ended July 31, 2003. During the quarter ended July 31, 2003, the Company had no interest expense. The Company had a net income of $28,506 for the quarter ended July 31, 2003 compared to net income of $76,815 for the quarter ended July 31, 2002. The decrease in net income resulted primarily from the sale of part of the Company's film library during the quarter ended July 31, 2002, detailed above, for which there was no comparable gain during the quarter ended July 31, 2003. During the quarters ended July 31, 2003 and 2002, the Company had no significant provisions for income taxes due to its net operating loss carryovers. Liquidity and Capital Resources The Company's principal source of working capital during the three month period ended July 31, 2003 was motion picture licensing income. 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, 2003, the Company's net cash flow provided by operating activities was $67,068 compared to net cash out flow used in operating activities of $119,514 for the quarter ended July 31, 2002. At July 31, 2003 and 2002, the Company had cash of 106,447 and $8,411, respectively. 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. (a) Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act), as of a date within 90 days of the filing date of this Quarterly Report on Form 10-QSB. Based on such evaluation, they have concluded that as of such date, our disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms. 8 (b) Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of evaluation by our principal executive officer and principal financial officer. PART II - OTHER INFORMATION Item 1. Legal Proceedings. Demand for Investigation by Shareholders Action Committee --------------------------------------------------------- On April 17, 2003, the Company received a formal request by a Shareholders Action Committee for the Board to investigate a series of Related Party Transactions, which occurred during the period of November 1998 through April 2001. The Board appointed independent counsel to investigate these transactions and report to the Board. Rigel USA Inc. vs. Kings Road Entertainment, Inc. ------------------------------------------------ On July 31, 2003, subsequent to the date of this report, Rigel USA Inc., a California corporation, filed suit in the Superior Court of California, County of Los Angeles, case number BC300041, in which the plaintiff alleged causes of action against the Company, Micky Berresheim, and Ken Aguado for breach of contract, promissory estoppel, breach of implied in law contract, breach of implied in fact contract, declaratory relief and unfair competition. The plaintiff was seeking declaratory relief in excess of $5,000,000. On or about June 3, 2004, the Company entered into a Settlement Agreement with Rigel providing for the settlement of the matter and other possible claims of the parties. Pursuant to the terms of the Settlement Agreement Rigel and the Company have each agreed to release the other from any and all claims arising out of the lawsuit. Additionally, as part of the Settlement the Company and Rigel executed an Option and License Agreement, whereby in consideration of $10,000 paid by Rigel to the Company, the Company granted Rigel two exclusive options to use the word "Kickboxer" in the title of up to two live-action feature length motion pictures. The first option period shall commence on August 1, 2004 and end on October 31, 2005, and shall be exercised by commencement of principal photography and the payment of $90,000 to the Company. The option for the second motion picture shall commence on November 1, 2005 and end on July 31, 2006, and shall be exercised by the commencement of principal photography and the payment of $75,000 to the Company. Either or both motion pictures are produced, the Company shall also be entitled to 10% of net proceeds. 9 Second Demand Letter from the Shareholders Action Committee ----------------------------------------------------------- Subsequent to the period covered by this report, the Company received a letter dated November 10, 2003 from the Chairman of the Kings Road Shareholders Action Committee inquiring as to the status of the Independent Counsel's investigation into a series of transactions that occurred during the period of November 1998 through April 2001. The inquiry as conducted by the independent counsel was proceeding at an unsatisfactory pace and therefore the Board removed this first independent counsel. The Board has recently appointed new independent counsel to investigate these transactions and report to the Board, the Shareholders Action Committee and the Shareholders. The inquiry is now proceeding at a satisfactory pace and the Board expects to receive a status report in the very near future. Demand and Notice For Annual Meeting ------------------------------------ Subsequent to the period covered by this report, the Board received a Letter dated November 17, 2003, from counsel for Kings Road Enterprises Corp. (formerly Parkland AG) of which Mr. Michael Berresheim a former officer and director of the Company, is the principal shareholder, the President and a director. In this letter, Kings Road Enterprises Corp., the holder of 1,507,247 shares of common stock of the Company, claims that the Board has failed to comply with SEC filing regulations and announced his intention of calling a Special Shareholders Meeting in order to replace the Board of Directors. Mr. Berresheim through his counsel was advised that the Board was working with the Company's auditors in order to complete any delinquent reports and intended on holding an annual meeting of the Shareholders as soon as practical after the Company's period reports were current, and the Company had received the report from the independent counsel pertaining to the Demand of the Shareholders Action Committee. Subsequent to the period covered by this report, the Company has announced that the date of the 2004 annual meeting of stockholders will be September 15, 2004 and that the record date for stockholders entitled to notice and to vote at the meeting and any postponements and adjournments thereof, is fixed at July 30, 2004. Claim Against Michael Berresheim, Eric Ottens, et al. ---------------------------------------------------- On or about April 1, 2004, the Company discovered that checks in an aggregate amount of $103,517, from Paramount Pictures Group ("Paramount") payable to Regal Productions c/o Kings Road Entertainment (earned by the Company and Regal Productions) as part of its joint venture on the film "Fastbreak", were deposited into accounts of Kings Road Entertainment, Inc., (Florida Corporation P03000042628) and Kings Road to Fame, Inc. (Florida Corporation P03000043121) dba Regal Productions, corporations controlled by Michael Berresheim and Eric Ottens, without the consent or knowledge of the Company. The Company has notified Messrs. Berresheim and Ottens that it has concluded that these monies have been diverted and should be returned immediately to the Company. Mr. Berresheim strenuously denies that such monies were taken without the Company's knowledge, but nevertheless has informed the Company that it is his intention to repay these monies to the Company in July 2004. The Company has requested that Mr. Berresheim pledge all shares of the Company owned directly or indirectly by him or entities controlled by him, as collateral for repayment, but Mr. Berresheim has refused to do so, and as of the date of this report has not repaid these monies. 10 The Company's investigation has revealed that four checks sent by Paramount between April 1, 2003 and December 20, 2003, payable to Regal Productions c/o Kings Road Entertainment, were mailed to 5743 NW 66th Avenue, Parkland, Florida 33067, the previous address of the Company. Rather than contacting and forwarding these check to the Company the checks were deposited into accounts of Kings Road Entertainment, Inc. (Florida Corporation P03000042628) and Kings Road to Fame, Inc. (Florida Corporation P03000043121) dba Regal Productions, corporations controlled by Messrs. Berresheim and Ottens. The Company has learned that on April 11, 2003, Messrs. Berresheim and Ottens filed electronic Articles of Incorporation with the Secretary of State of Florida, to form Kings Road Entertainment, Inc. (Florida Corporation P03000042628) which Articles were processed on April 16, 2003. According to the Florida Secretary of State records, Mr. Berresheim was and is the President and a Director, and Mr. Ottens was and is the Secretary and a Director, of Kings Road Entertainment, Inc. (Florida Corporation P03000042628). On April 11, 2003, Messrs. Berresheim and Ottens also filed electronic Articles of Incorporation with the Secretary of State of Florida, to form Kings Road to Fame, Inc. (Florida Corporation P03000043121), which Articles were processed on April 17, 2003. According to the Florida Secretary of State records, Mr. Berresheim was and is the President and a Director, and Mr. Ottens was and is the Secretary and a Director, of Kings Road to Fame, Inc. (Florida Corporation P03000043121). On April 17, 2003, Kings Road to Fame, Inc. (Florida Corporation P03000043121) filed an application for registration of the use of the fictitious name "Kings Road Entertainment" and "Regal Productions." Between April 18, 2003 and December 20, 2003, without the knowledge or authorization of the Company, the 4 checks totaling $103,517, belonging to the Company and Regal Productions were deposited into accounts of Kings Road Entertainment, Inc., (Florida Corporation P03000042628) and Kings Road to Fame, Inc. (Florida Corporation P03000043121) dba Regal Productions. On June 8, 2004, the Company made a demand upon Kings Road Entertainment, Inc., (Florida Corporation P03000042628) Kings Road to Fame, Inc. (Florida Corporation P03000043121) dba Regal Productions, and Messrs. Berresheim and Ottens, to pay the Company the sum of $103,517 plus interest and attorneys fees. Messrs. Berresheim and Ottens, through counsel, have denied any malfeasance, and Mr. Berresheim has indicated his intention to repay these monies, and to undertake other actions, to resolve this situation. The Company is currently in negotiations with counsel for Mr. Berresheim with regard to the settlement of this matter. If settlement cannot be reached according to terms acceptable to the Company, the Company intends to proceed as necessary to recover the amounts due. As of the date of this report Mr. Berresheim has not repaid these monies and no settlement has been reached. The Company is not aware of any 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 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of our shareholders during the quarter ended July 31, 2003. Item 5. Other Information. None. 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** Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 99.2** Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 99.3** 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-KSB 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 No current reports on Form 8-K were filed during the quarter ended July 31, 2003. 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. July 15, 2004 /s/ Geraldine Blecker Date: _______________ _______________________________ By: Geraldine Blecker Its: Chief Executive Officer July 15, 2004 /s/ H. Martin DeFrank Date: ________________ _______________________________ By: H. Martin DeFrank Its: Chief Financial Officer 13