10KSB 1 form10ksb.txt FORM 10-KSB FOR PERIOD ENDING APRIL 30, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended April 30, 2005 Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File No. 0-14234 KINGS ROAD ENTERTAINMENT, INC. ---------------------------------------------- (Name of Small Business Issuer in Its Charter) Delaware 95-3587522 ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 447 B Doheny Drive, Beverly Hills, CA 90210 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number: 310-278-9975 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $0.01 Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ___ 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 ___ No _X_ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ___ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_ Issuer's revenues for its most recent fiscal year: $241,727 As of March 15, 2006, the aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of $0.09 as reported on the Pink Sheets was $413,861.04; calculated on the basis of 4,598,456 shares held by non-affiliates according to the beneficial ownership tables. As of March 15, 2006 the registrant had 6,957,756 shares of its common stock outstanding. Documents Incorporated by Reference: None Transitional Small Business Disclosure Format: Yes ___ No ___ TABLE OF CONTENTS ----------------- ITEMS PAGE ----- ---- PART I ------ Item 1. Description of Business......................................... 1 Item 2. Description of Property......................................... 12 Item 3. Legal Proceedings............................................... 13 Item 4. Submission of Matters to a Vote of Security Holders ............ 14 PART II ------- Item 5. Market For Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities............ 15 Item 6. Management's Discussion and Analysis or Plan of Operation....... 16 Item 7. Financial Statements............................................ 18 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................ 18 Item 8A. Controls and Procedures......................................... 18 Item 8B. Other Information............................................... 18 PART III -------- Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act............... 19 Item 10. Executive Compensation ......................................... 22 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ..................... 23 Item 12. Certain Relationships and Related Transactions.................. 25 Item 13. Exhibits ....................................................... 25 Item 14. Principal Accountant Fees and Services ......................... 25 ii CAUTIONARY STATEMENT Some of the statements contained in this Form 10-KSB for Kings Road Entertainment, Inc. ("Company") discuss future expectations, contain projections of results of operation or financial condition or state other "forward-looking" information. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions. Important factors that may cause actual results to differ from projections include, for example: o the success or failure of management's efforts to implement their business strategy; o the ability of the Company to raise sufficient capital to meet operating requirements; o the uncertainty of consumer demand for our product; o the ability of the Company to protect its intellectual property rights; o the ability of the Company to compete with major established companies; o the effect of changing economic conditions; o the ability of the Company to attract and retain quality employees; and, o other risks which may be described in future filings with the SEC. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results and outcomes may differ materially from what is expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under "Risk Factors" as well as those noted in the documents incorporated herein by reference. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. iii PART I. ITEM 1. DESCRIPTION OF BUSINESS General ------- Kings Road Entertainment, Inc. ("Company" or "Registrant"), incorporated in Delaware in 1980, has been engaged primarily in the development, financing and production of motion pictures for subsequent distribution in theaters, to pay, network and syndicated television, on home video, and in other ancillary media in the United States (the "domestic market") and all other countries and territories of the world (the "international market"). The Company began active operations in January 1983 and released its first motion picture in 1984, All of Me, starring Steve Martin. There have been 17 additional pictures theatrically released in the domestic market and seven pictures have been released directly to the domestic home video or pay television market. Business Development -------------------- Subsequent to the fiscal year end April 30, 1995, the Company has not produced any new films and has derived revenues principally from the exploitation of films produced prior to April 30, 1995. KRTR Inc. On August 10, 2000, the Company incorporated the wholly owned subsidiary KRTR, Inc., a New York Corporation, with its registered office situated at 12. E. 33rd St., New York, NY 10016, for the purpose of theatre production. On August 31, 2000, the Company announced that it had entered into an agreement as Executive Producer for an Off-Broadway production of the play "End of the World Party." The play opened November 9, 2000 and closed on February 25, 2001, and on March 13, 2001 the Company announced that the play had conducted its final show. During October 2001, the Company elected to cease all operations pertaining to the stage play. All operations pertaining to the Play were classified as discontinued and were segregated from the Company's viable operations. At the date of discontinuance, KRTR had no assets and liabilities of $15,000. The Company created a reserve of $5,000 to cover any unforeseen claims related to the Play. On December 22, 2003, the Board resolved to dissolve KRTR. KRTR could not be dissolved until taxes for the year 2003 had been filed with the State of New York. On March 8, 2005, the Company sent a check for $930.58, constituting such outstanding tax assessment together with the relevant dissolution documentation. On April 20, 2005, the New York State Department of Taxation and Finance gave consent to the dissolution of the Corporation. Subsequent to the period covered by this report, on May 11, 2005, a certificate of dissolution was filed with the State of New York, Department of State and KRTR was officially dissolved. As of April 30, 2005, the Company has $4,000 accrued liabilities outstanding, relating to the KRTF subsidiary. Development ----------- Development activities are a fundamental building block to the Company's future financial success. The existing properties, which the Company owns and exploits through prequels, sequels, and remakes are among the Company's most valuable assets. Financing --------- The Company's previous strategy has been to fully finance its pictures by obtaining advances and guarantees from the licensing of distribution rights in its pictures and other investments from third parties. Once fully financed, the Company would primarily earn fees for its development and production services plus contingent compensation based on the success of a film. If necessary, the Company may finance a portion of the cost of a film using internally generated funds or debt financing. 1 Production ---------- Once a project is fully financed, the Company attempts to produce a picture at the lowest possible cost consistent with the quality that it seeks to achieve. The Company avoids the substantial overhead of major studios by maintaining only a small staff and by renting production facilities and engaging production staff only as required. The Company has generally produced pictures that have had a cost of production between $1,000,000 and $10,000,000 and did not exceed their budgeted cost. Although the Company's past production experience allows it certain control over production costs, production costs of motion pictures as an industry trend have substantially escalated in recent years. As of April 30, 2005, the Company had produced (or co-produced) 25 pictures, 18 of which were theatrically released in the domestic market and seven of which were released directly to video or pay television in the domestic market, as follows:
Title Principal Cast Release Date -------------------------------------------------------------------------------------------------- All of Me Steve Martin, Lily Tomlin September 1984 Creator Peter O'Toole, Mariel Hemingway September 1985 Enemy Mine Dennis Quaid, Louis Gossett, Jr. December 1985 The Best of Times Robin Williams, Kurt Russell January 1986 Touch & Go Michael Keaton, Maria Conchita Alonso August 1986 Morgan Stewart's Coming Home Jon Cryer, Lynn Redgrave February 1987 The Big Easy Dennis Quaid, Ellen Barkin August 1987 In the Mood Patrick Dempsey, Beverly D'Angelo September 1987 Rent-A-Cop Burt Reynolds, Liza Minelli January 1988 The Night Before Keanu Reeves, Lori Louglin March 1988 My Best Friend is a Vampire Robert Sean Leonard, Cheryl Pollack May 1988 Jacknife Robert DeNiro, Ed Harris March 1989 Time Flies When You're Alive Paul Linke July 1989 Kickboxer Jean Claude Van Damme August 1989 Homer & Eddie Whoopi Goldberg, James Belushi December 1989 Blood of Heroes Rutger Hauer, Joan Chen February 1990 Kickboxer II Sasha Mitchell, Peter Boyle June 1991 Kickboxer III Sasha Mitchell June 1992 Paydirt Jeff Daniels, Catherine O'Hara August 1992 Knights Kris Kristofferson, Kathy Long November 1993 Brainsmasher Andrew Dice Clay, Teri Hatcher November 1993 Kickboxer IV Sasha Mitchell July 1994 The Stranger Kathy Long March 1995 The Redemption Mark Dacascos August 1995
2 The Company also has profit participation in the following theatrical film releases: o SLAP SHOT (1977). Starring Paul Newman and Michael Ontkean. Directed by George Roy Hill (director for "Butch Cassidy and the Sundance Kid"). o FAST BREAK (1979). Starring Gabe Kaplan o LITTLE DARLINGS (1980). Starring Tatum O'Neal, Kristy McNichol and Matt Dillon o THE HAUNTED HEART (1996). Starring Diane Ladd, Olympia Dukakis o TICKER (2001) Starring Steven Seagal, Tom Sizemore, Dennis Hopper. Distribution ------------ Theatrical - The Company, when practical, has licensed its pictures to distributors for theatrical distribution in the domestic market. These distributors undertake all activities related to the distribution of the Company's motion pictures, including booking the picture into theaters, shipping prints and collecting film rentals. In certain cases, distributors have advanced the costs of advertising and publicizing the motion pictures and the manufacture of prints, however, in most cases, the Company has been required to fund or arrange funding for these costs itself. The Company's most recent pictures, however, were not theatrically released and were initially released on either home video or pay television. Home Video - Distribution into the home video market has occurred by licensing the home video rights for the Company's pictures to video distributors including HBO Video, Paramount Pictures, and Lions Gate Films. These video distributors, in turn, sell videocassettes to video retailers that rent or sell videocassettes to consumers. During the year ended April 30, 1999, the Company licensed the home video and DVD rights for the United States and Canada to 19 of its pictures to Lions Gate Films, formerly Trimark Pictures. All but one of the pictures had been previously released. Pay and Free Television - Distribution on pay television has occurred by licensing the pay television rights of its movies to cable television companies such as HBO/Cinemax, Showtime/The Movie Channel and various pay-per-view distributors. After licensing to pay television, the Company's films are then made available to television stations and basic cable outlets. The Company has licensed the free television rights to its films to companies such as ITC Entertainment (now Granada) and Worldvision Enterprises, a division of Paramount, who, in turn, sell packages of films to television stations and basic cable services. Other Rights - Network television, non-theatrical, music publishing, soundtrack album, book publishing, and other miscellaneous rights in the Company's pictures have been, whenever possible, licensed by the Company to third parties. The revenue derived from the exercise of these other rights is generally not as significant as revenue derived from other sources. International Markets - The Company previously generated substantial revenues from the licensing of its pictures outside of the United States. However, in 1996 the Company sold the international distribution rights to most of its films to another company. For those pictures where international distribution rights are still owned by the Company, it licenses these pictures to local distributors on a territory-by-territory basis. Each license may cover one or more pictures and may include all rights or only certain rights. Sales, collections and delivery of product are handled by outside foreign sales organizations. Such organizations generally receive a commission based on a percentage of cash receipts. The Company believes that, based on its current and anticipated future level of film production, it is more efficient and cost effective to use outside foreign sales organizations rather than to maintain its own staff. Personnel --------- As of April 30, 2005, the Company has been operated by its two Officer/Directors, as well as an administrative assistant. The Company is subject to the terms of certain industry-wide collective bargaining agreements with the Writers Guild of America, the Directors Guild of America and the Screen Actors Guild, among others, relating to its completed films and projects in development. The Company considers its employee relations to be satisfactory at present, although the renewal of these union contracts does not depend on the Company's activities or decisions alone. Any strike, work stoppage or other labor disturbance may have a materially adverse effect on the production of motion pictures. (Please see under Item 9 - Significant Personnel.) 3 Competition ----------- The motion picture industry is highly competitive. The Company faces intense competition from motion picture studios and numerous independent production companies, many of which have significantly greater financial resources than the Company. All of these companies compete for motion picture projects and talent and are producing motion pictures that compete for exhibition time at theaters, on television and on home video with pictures produced by the Company. Regulation and Governmental Approval ------------------------------------ Distribution rights to motion pictures are granted legal protection under the copyright laws of the United States and most foreign countries, which provide substantial civil and criminal sanctions for unauthorized duplication and exhibition of motion pictures. Motion pictures, musical works, sound recording, artwork, still photography and motion picture properties are each separate works subject to copyright under most copyright laws, including the United States Copyright Act of 1976, as amended. The Company has taken all appropriate and reasonable measures to obtain agreements from licensees to secure, protect and maintain copyright protection for all motion pictures under the laws of all applicable jurisdictions. The Classification and Rating Administration of the Motion Picture Association of America, an industry trade association, assigns ratings for age-group suitability for motion pictures. The Company submits its pictures for such ratings. Management's current policy is to produce or participate in the production of motion pictures that qualify for a rating no more restrictive than "R." Patents Trademarks and Other Intellectual Property -------------------------------------------------- The Company owns distribution rights in all North American territories (US & Canada) to all media in regard to 14 completed motion pictures and additionally retains ownership to all world rights in all media to one motion picture (Knights). In most cases, the Company owns all remake, prequel, sequel and TV film and series rights to all motion picture properties. Additionally, the Company has legal ownership of certain intellectual properties in the form of 10 screenplays and the corresponding underlying rights in all but one case, The Magic Mountain. Reports to Security Holders --------------------------- The Public may view obtain copies of the Company's reports, as filed with the Securities and Exchange Commission, at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. Additionally, copies of the Company's reports are available and can be accessed and downloaded via the internet on the SEC's internet site at http://www.sec.gov/cgi-bin/srch-edgar, by simply typing in "Kings Road Entertainment, Inc." RISK FACTORS ------------ You should carefully consider the following discussion of risks and the other information included or incorporated by reference in this report in evaluating the Company and our business. The risks described below are not the only ones facing the Company. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. Risk that the Company's Common Stock may be deemed a "Penny Stock" ------------------------------------------------------------------ The Company's common stock may be deemed to be a "penny stock" as that term is defined in Rule 3a51-1 of the Exchange Act of 1934. Penny stocks are stocks (i) with a price of less than five dollars per share; (ii) that are not traded on a "recognized" national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv) of an issuer with net tangible assets of less than US$2,000,000 (if the issuer has been in continuous operation for at least three years) or US$5,000,000 (if in continuous operation for less than three years), or with average annual revenues of less than US$6,000,000 for the last three years. 4 A principal exclusion from the definition of a penny stock is an equity security that has a price of five dollars ($5.00) of more, excluding any broker or dealer commissions, markups or markdowns. As of the date of this report the Company's common stock has a price less than $5.00. If the Company's Common Stock is at any time deemed a penny stock, section 15(g) and Rule 3a51-1 of the Exchange Act of 1934 would require broker-dealers dealing in the Company's Common Stock to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account. Potential investors in the Company's common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stock." Moreover, Rule 15g-9 of the Exchange Act of 1934 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for investors in the Company's common stock to resell their shares to third parties or to otherwise dispose of them. Volatile and Limited Market for Common Stock -------------------------------------------- As of April 30, 2005, the Company's common stock was quoted on the Bulletin Board under the symbol "KREN.PK." OTC, or "Over The Counter," securities are issued by companies that either choose not to, or are unable to, meet the standards for listing on the NASDAQ or a national stock exchange. OTC equity securities can be quoted on the Pink Sheets Electronic Quotation Service, or, if the companies meet the SEC reporting requirements and eligibility requirements established by the NASD, such equity securities may be quoted on the NASD OTC Bulletin Board Service. The market price of the Company's Common Stock has been and is likely to continue to be highly volatile and subject to wide fluctuations due to various factors, many of which may be beyond the Company's control, including: annual variations in operating results; announcements of technological innovations, services or products by the Company or its competitors; and changes in financial estimates and recommendations by securities analysts. In addition, there have been large price and volume fluctuations in the stock market, which have affected the market prices of securities of many companies, often unrelated to the operating performance of such companies. These broad market fluctuations, as well as general economic and political conditions, may adversely affect the market price of the Company's Common Stock. In the past, volatility in the market price of a company's securities has often led to securities class action litigation. Such litigation could result in substantial costs and diversion of the Company's attention and resources, which could have a material adverse effect on the Company's business, financial condition and operating results. No Guarantee of Continued Listing on OTC Bulletin Board ------------------------------------------------------- There is no guarantee that the Company's common stock will continue to be listed on the pink sheets or on any other published medium including but not limited to the OTC Bulletin Board or any publication by the National Quotation Bureau, Incorporated or any by similar successor organizations, or by any member firm of the New York Stock Exchange, or other American Exchange, NASDAQ, or NASD related entity. 5 Dependence on Key Personnel and Need for Additional Management -------------------------------------------------------------- The Company is heavily dependent on the abilities of H. Martin DeFrank and Geraldine Blecker, who have contributed essential management experience. The loss of their services would have a material adverse effect on the Company's business. However, their interests are closely aligned with those of the Company. There can be no assurance that it will be able to employ qualified persons on acceptable terms to replace any of them should their services become unavailable. In the event of future growth in administration, marketing, distribution and customer support functions, the Company may have to increase the depth and experience of its management team by adding new members. The Company's success will depend to a large degree upon the active participation of its key officers and employees, as well as, the continued service of its key management personnel and its ability to identify, hire and retain additional qualified personnel. There can be no assurance that the Company will be able to recruit such qualified personnel to enable it to conduct its proposed business successfully. Conflicts of Interest; Related Party Transactions ------------------------------------------------- The possibility exists that the Company may acquire or merge with a business or company in which the Company's executive officers, directors, beneficial owners or their affiliates may have an ownership interest. Although there is no formal bylaw, stockholder resolution or agreement authorizing any such transaction, corporate policy does not forbid it and such a transaction may occur if management deems it to be in the best interests of the Company and its stockholders, after consideration of all factors. A transaction of this nature would present a conflict of interest to those parties with a managerial position and/or an ownership interest in both the Company and the acquired entity, and may compromise management's fiduciary duties to the Company's stockholders. An independent appraisal of the acquired company may or may not be obtained in the event a related party transaction is contemplated. Furthermore, because management and/or beneficial owners of the Company's common stock may be eligible for finder's fees or other compensation related to potential acquisitions by the Company, such compensation may become a factor in negotiations regarding such potential acquisitions. It is the Company's intention that all future transactions be entered into on such terms as if negotiated at arms length, unless the Company is able to receive more favorable terms from a related party. Risks Associated with Significant Fluctuations in Annual Operating Results -------------------------------------------------------------------------- The Company expects to experience large fluctuations in future annual operating results that may be caused by many factors, including the timing of introductions or enhancements to its products and library by the Company or its competitors; market acceptance of such introduced or upgraded films; the pace of development of the market; changes in strategy; the success of or costs associated with acquisitions, joint ventures or other strategic relationships; changes in key personnel; seasonal trends; changes in the level of operating expenses to support projected growth; and general economic conditions. Substantial Future Sales of Stock; Dilution ------------------------------------------- There may be substantial sales of the Company stock. Sales of substantial amounts of stock could have a material dilutive effect on shareholders. Additionally, it may be necessary to offer warrants or options to obtain strategic relationships or to raise additional capital. All of these issuances will dilute the holdings of existing shareholders thereby reducing such holder's percentage ownership. No Dividends ------------ The Company anticipates that it will use any funds available to finance its growth and that it will not pay cash dividends to stockholders in the foreseeable future. The Company cannot assure future profitability ---------------------------------------------- We cannot assure you that we will operate profitably, and if we do not, we may not be able to meet our debt service requirements, working capital requirements, capital expenditure plans, anticipated production slate, acquisition and releasing plans or other cash needs. Our inability to meet those needs could have a material adverse effect on our business, results of operations and financial condition. 6 Possible substantial capital requirements and financial risks ------------------------------------------------------------- Our business requires a substantial investment of capital. The production, acquisition and distribution of motion pictures and television programs require a significant amount of capital. A significant amount of time may elapse between our expenditure of funds and the receipt of commercial revenues from or government contributions to our motion pictures or television programs. This time lapse requires us to fund a significant portion of our capital requirements from our revolving credit facility and from other financing sources. Although we intend to continue to reduce the risks of our production exposure through financial contributions from broadcasters, distributors, tax shelters, government and industry programs and other studios, we cannot assure you that we will continue to implement successfully these arrangements or that we will not be subject to substantial financial risks relating to the production, acquisition, completion and release of future motion pictures and television programs. If we increase (through internal growth or acquisition) our production slate or our production budgets, we may be required to increase overhead, make larger up-front payments to talent and consequently bear greater financial risks. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition. Our substantial leverage could adversely affect our financial condition. The amount we have available to borrow under this facility depends upon our borrowing base, which in turn depends on the value of our existing library of films and television programs, as well as accounts receivable and cash held in collateral accounts. If several of our larger motion picture productions are commercial failures or our library declines in value, our borrowing base could decrease. Such a decrease could have a material adverse effect on our business, results of operations and financial condition. For example, it could: o require us to dedicate a substantial portion of our cash flow to the repayment of our indebtedness, reducing the amount of cash flow available to fund motion picture and television production, distribution and other operating expenses; o limit our flexibility in planning for or reacting to downturns in our business, our industry or the economy in general; o limit our ability to obtain additional financing, if necessary, for operating expenses, or limit our ability to obtain such financing on terms acceptable to us; and, o limit our ability to pursue strategic acquisitions and other business opportunities that may be in our best interests. Budget overruns may adversely affect our business ------------------------------------------------- Our business model requires that we be efficient in the production of our motion pictures and television programs. Actual motion picture and television production costs often exceed their budgets, sometimes significantly. The production, completion and distribution of motion pictures and television productions are subject to a number of uncertainties, including delays and increased expenditures due to creative differences among key cast members and other key creative personnel or other disruptions or events beyond our control. Risks such as death or disability of star performers, technical complications with special effects or other aspects of production, shortages of necessary equipment, damage to film negatives, master tapes and recordings or adverse weather conditions may cause cost overruns and delay or frustrate completion of a production. If a motion picture or television production incurs substantial budget overruns, we may have to seek additional financing from outside sources to complete production. We cannot make assurances regarding the availability of such financing on terms acceptable to us, and the lack of such financing could have a material adverse effect on our business, results of operations and financial condition. In addition, if a motion picture or television production incurs substantial budget overruns, we cannot assure you that we will recoup these costs, which could have a material adverse effect on our business, results of operations and financial condition. Increased costs incurred with respect to a particular film may result in any such film not being ready for release at the intended time and the postponement to a potentially less favorable time, all of which could cause a decline in box office performance, and thus the overall financial success of such film. Budget overruns could also prevent a picture from being completed or released. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition. Production costs and marketing costs are rising at a faster rate than increases in either domestic admissions to movie theatres or admission ticket prices, leaving us more dependent on other media, such as home video, television and foreign markets, and new media. If we cannot successfully exploit these other media, it could have a material adverse effect on our business, results of operations and financial condition. 7 Revenues and results of operations may fluctuate significantly -------------------------------------------------------------- Revenues and results of operations are difficult to predict and depend on a variety of factors. Our revenues and results of operations depend significantly upon the commercial success of the motion pictures and television programming that we distribute, which cannot be predicted with certainty. Accordingly, our revenues and results of operations may fluctuate significantly from period to period, and the results of any one period may not be indicative of the results for any future periods. In recent years, our revenues and results of operations have been significantly impacted by the success of critically acclaimed and award winning films, including Academy Award winners and nominees. We cannot assure you that we will manage the production, acquisition and distribution of future motion pictures as successfully as we have done with these recent critically acclaimed and award winning films or that we will produce or acquire motion pictures that will receive similar critical acclaim or perform as well commercially, which could have a material adverse effect on our business, results of operations and financial condition. The Company lacks output agreements with cable and broadcast channels --------------------------------------------------------------------- While similar broadcasters exhibit our films, they license such rights on a film-by-film, rather than an output, basis. We cannot assure you that we will be able to secure other output agreements on acceptable terms, if at all. Without multiple output agreements that typically contain guaranteed minimum payments, our revenues may be subject to greater volatility, which could have a material adverse effect on our business, results of operations and financial condition. Revenue sharing agreements might not be renewed ----------------------------------------------- The failure to renew these agreements on similar terms could have a material adverse effect on our business, results of operations and financial condition. Reliance on a few major customers in realizing our filmed and television content -------------------------------------------------------------------------------- library distribution revenues ----------------------------- A small number of retailers account for a significant percentage of our filmed and television content library distribution revenues. We do not have long-term agreements with any of these customers. We cannot assure you that we will continue to maintain favorable relationships with these customers or that they will not be adversely affected by economic conditions. If any of these customers reduces or cancels a significant order, it could have a material adverse effect on our business, results of operations and financial condition. Revenues and results of operations are vulnerable to currency fluctuations -------------------------------------------------------------------------- We report our revenues and results of operations in U.S. dollars, but a portion of our revenues are earned outside of the United States. We cannot accurately predict the impact of future exchange rate fluctuations or other foreign currencies on revenues and operating margins, and fluctuations could have a material adverse effect on our business, results of operations and financial condition. From time to time we may experience currency exposure on distribution and production revenues and expenses from foreign countries, which could have a material adverse effect on our business, results of operations and financial condition. Accounting practices used in our industry may accentuate fluctuations in ------------------------------------------------------------------------ operating results ----------------- In addition to the cyclical nature of the entertainment industry, our accounting practices (which are standard for the industry) may accentuate fluctuations in our operating results. We regularly review, and revise when necessary, our total revenue estimates on a title-by-title basis. This review may result in a change in the rate of amortization and/or a write-down of the film or television asset to its estimated fair value. Results of operations in future years depend upon our amortization of our film and television costs. Periodic adjustments in amortization rates may significantly affect these results. In addition, we are required to expense film advertising costs as incurred, but are also required to recognize the revenue from any motion picture or television program over the entire revenue stream expected to be generated by the individual picture or television program. 8 Failure to manage future growth may adversely affect our business ----------------------------------------------------------------- We are subject to risks associated possible acquisitions, business combinations, or joint ventures. From time to time we engage in discussions and activities with respect to possible acquisitions, business combinations, or joint ventures intended to complement or expand our business. We may not realize the anticipated benefit from any of the transactions we are pursuing. Regardless of whether we consummate any such transaction, the negotiation of the potential transaction as well as the integration of the acquired business could require us to incur significant costs and cause diversion of management's time and resources. Any such transaction could also result in impairment of goodwill and other intangibles, development write-offs and other related expenses. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition. We may be unable to integrate any business that we acquire or have acquired or with which we combine or have combined. Integrating any business that we acquire or have acquired or with which we combine or have combined, may be distracting to our management and disruptive to our business and may result in significant costs to us. We may face challenges in consolidating functions and integrating procedures, information technology and accounting systems, personnel and operations in a timely and efficient manner. If any such integration is unsuccessful, or if the integration takes longer than anticipated, there could be a material adverse effect on our business, results of operations and financial condition. We may have difficulty managing the combined entity in the short term if we experience a significant loss of management personnel during the transition period after the acquisition. Claims against us relating to any acquisition or business combination may necessitate our seeking claims against the seller for which the seller may not indemnify us or that may exceed the seller's indemnification obligations. There may be liabilities assumed in any acquisition or business combination that we did not discover or that we underestimated in the course of performing our due diligence investigation. Although a seller generally will have indemnification obligations to us under an acquisition or merger agreement, these obligations usually will be subject to financial limitations, such as general deductibles and maximums, as well as time limitations. We cannot assure you that our right to indemnification from any seller will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the amount of any undiscovered or underestimated liabilities that we may incur. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business, results of operations and financial condition. The Company may not be able to obtain additional funding to meet our requirements. Our ability to grow through acquisitions, business combinations and joint ventures, to maintain and expand our development, production and distribution of motion pictures and television programs and to fund our operating expenses depends upon our ability to obtain funds through equity financing, debt financing (including credit facilities) or the sale or syndication of some or all of our interests in certain projects or other assets. If we do not have access to such financing arrangements, and if other funding does not become available on terms acceptable to us, there could be a material adverse effect on our business, results of operations and financial condition. If the Company fails to maintain an effective system of internal controls or ---------------------------------------------------------------------------- fails to implement changes to address reportable conditions, it may not be able ------------------------------------------------------------------------------- to report our financial results accurately ------------------------------------------ Effective internal controls are necessary for us to provide reliable financial reports. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. Failure to implement and maintain an effective system of internal controls could have a material adverse effect on our business, results of operation and financial condition. 9 Ability to exploit our filmed and television content library may be limited --------------------------------------------------------------------------- A significant portion of our filmed and television content library revenues comes from a small number of titles. We depend on a limited number of titles for the majority of the revenues generated by our filmed and television content library. In addition, many of the titles in our library are not presently distributed and generate substantially no revenue. If we cannot acquire new product and the rights to popular titles through production, distribution agreements, acquisitions, mergers, joint ventures or other strategic alliances, it could have a material adverse effect on our business, results of operations and financial condition. We are limited in our ability to exploit a portion of our filmed and television content library. Our rights to the titles in our filmed and television content library vary; in some cases we have only the right to distribute titles in certain media and territories for a limited term. We cannot assure you that we will be able to renew expiring rights or that any such renewal will be on acceptable terms. Any such failure could have a material adverse effect on business, results of operations and financial condition. Our success depends on external factors in the motion picture and television ---------------------------------------------------------------------------- industry -------- Our success depends on the commercial success of motion pictures and television programs, which is unpredictable. Operating in the motion picture and television industry involves a substantial degree of risk. Each motion picture and television program is an individual artistic work, and unpredictable audience reactions primarily determine commercial success. Generally, the popularity of our motion pictures or programs depends on many factors, including the critical acclaim they receive, the format of their initial release, for example, theatrical or direct-to-video, the actors and other key talent, their genre and their specific subject matter. The commercial success of our motion pictures or television programs also depends upon the quality and acceptance of motion pictures or programs that our competitors release into the marketplace at or near the same time, critical reviews, the availability of alternative forms of entertainment and leisure activities, general economic conditions and other tangible and intangible factors, many of which we do not control and all of which may change. We cannot predict the future effects of these factors with certainty, any of which factors could have a material adverse effect on our business, results of operations and financial condition. In addition, because a motion picture's or television program's performance in ancillary markets, such as home video and pay and free television, is often directly related to its box office performance or television ratings, poor box office results or poor television ratings may negatively affect future revenue streams. Our success will depend on the experience and judgment of our management to select and develop new investment and production opportunities. We cannot make assurances that our motion pictures and television programs will obtain favorable reviews or ratings, that our motion pictures will perform well at the box office or in ancillary markets or that broadcasters will license the rights to broadcast any of our television programs in development or renew licenses to broadcast programs in our library. The failure to achieve any of the foregoing could have a material adverse effect on our business, results of operations and financial condition. Licensed distributors' failure to promote our programs may adversely affect our ------------------------------------------------------------------------------- business -------- Licensed distributors' decisions regarding the timing of release and promotional support of our motion pictures, television programs and related products are important in determining the success of these pictures, programs and products. As with most companies engaging in licensed distribution, we do not control the timing and manner in which our licensed distributors distribute our motion pictures or television programs. Any decision by those distributors not to distribute or promote one of our motion pictures, television programs or related products or to promote our competitors' motion pictures, television programs or related products to a greater extent than they promote ours could have a material adverse effect on our business, results of operations and financial condition. 10 Adverse affects of strikes or other union job actions ----------------------------------------------------- The motion picture and television programs that we produce generally employ actors, writers and directors who are members of the Screen Actors Guild, Writers Guild of America and Directors Guild of America, pursuant to industry-wide collective bargaining agreements. Many productions also employ members of a number of other unions, including, without limitation, the International Alliance of Theatrical and Stage Employees, the International Brotherhood of Teamsters and the Alliance of Canadian Cinema, Television and Radio Artists. A strike by, or a lockout of, one or more of the unions that provide personnel essential to the production of motion pictures or television programs could delay or halt our ongoing production activities. Such a halt or delay, depending on the length of time, could cause a delay or interruption in our release of new motion pictures and television programs, which could have a material adverse effect on our business, results of operations and financial condition. Substantial competition in all aspects of our business ------------------------------------------------------ We are smaller and less diversified than many of our competitors. As an independent distributor and producer, we constantly compete with major U.S. and international studios. Most of the major U.S. studios are part of large diversified corporate groups with a variety of other operations, including television networks and cable channels, that can provide both the means of distributing their products and stable sources of earnings that may allow them better to offset fluctuations in the financial performance of their motion picture and television operations. In addition, the major studios have more resources with which to compete for ideas, storylines and scripts created by third parties as well as for actors, directors and other personnel required for production. The resources of the major studios may also give them an advantage in acquiring other businesses or assets, including film libraries, that we might also be interested in acquiring. The foregoing could have a material adverse effect on our business, results of operations and financial condition. The motion picture industry is highly competitive and at times may create an oversupply of motion pictures in the market. The number of motion pictures released by our competitors, particularly the major U.S. studios, may create an oversupply of product in the market, reduce our share of box office receipts and make it more difficult for our films to succeed commercially. Oversupply may become most pronounced during peak release times, such as school holidays and national holidays, when theatre attendance is expected to be highest. Moreover, we cannot guarantee that we can release all of our films when they are otherwise scheduled. In addition to production or other delays that might cause us to alter our release schedule, a change in the schedule of a major studio may force us to alter the release date of a film because we cannot always compete with a major studio's larger promotion campaign. Any such change could adversely impact a film's financial performance. In addition, if we cannot change our schedule after such a change by a major studio because we are too close to the release date, the major studio's release and its typically larger promotion budget may adversely impact the financial performance of our film. The foregoing could have a material adverse effect on our business, results of operations and financial condition. The limited supply of motion picture screens compounds this product oversupply problem. Currently, a substantial majority of the motion picture screens in the U.S. typically are committed at any one time to only 10 to 15 films distributed nationally by major studio distributors. In addition, as a result of changes in the theatrical exhibition industry, including reorganizations and consolidations and the fact that major studio releases occupy more screens, the number of screens available to us when we want to release a picture may decrease. If the number of motion picture screens decreases, box office receipts, and the correlating future revenue streams, such as from home video and pay and free television, of our motion pictures may also decrease, which could have a material adverse effect on our business, results of operations and financial condition. Technological advances may reduce our ability to exploit our motion pictures and television programs. The entertainment industry in general and the motion picture industry in particular continue to undergo significant technological developments, including video-on-demand. This rapid growth of technology combined with shifting consumer tastes could change how consumers view our motion pictures and television programs. For example, an increase in video-on-demand could decrease home video rentals. Other larger entertainment distribution companies will have larger budgets to exploit these growing trends. We cannot predict how we will financially participate in the exploitation of our motion pictures and television programs through these emerging technologies or whether we have the right to do so for certain of our library titles. If we cannot successfully exploit these and other emerging technologies, it could have a material adverse effect on our business, results of operations and financial condition. 11 International business risks ---------------------------- We distribute motion picture and television productions outside the United States through third party licensees and derive revenues from these sources. As a result, our business is subject to certain risks inherent in international business, many of which are beyond our control. These risks include: o changes in local regulatory requirements, including restrictions on content; o changes in the laws and policies affecting trade, investment and taxes, including laws and policies relating to the repatriation of funds and to withholding taxes; o differing degrees of protection for intellectual property; o instability of foreign economies and governments; o cultural barriers; o wars and acts of terrorism; and, o the spread of contagious diseases. Any of these factors could have a material adverse effect on our business, results of operations and financial condition. Protecting and defending against intellectual property claims may have a ------------------------------------------------------------------------ material adverse effect on our business --------------------------------------- Our ability to compete depends, in part, upon successful protection of our intellectual property. We do not have the financial resources to protect our rights to the same extent as major studios. We attempt to protect proprietary and intellectual property rights to our productions through available copyright and trademark laws and licensing and distribution arrangements with reputable international companies in specific territories and media for limited durations. Despite these precautions, existing copyright and trademark laws afford only limited practical protection in certain countries. We also distribute our products in other countries in which there is no copyright or trademark protection. As a result, it may be possible for unauthorized third parties to copy and distribute our productions or certain portions or applications of our intended productions, which could have a material adverse effect on our business, results of operations and financial condition. Litigation may also be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and the diversion of resources and could have a material adverse effect on our business, results of operations and financial condition. We cannot assure you that infringement or invalidity claims will not materially adversely affect our business, results of operations and financial condition. Regardless of the validity or the success of the assertion of these claims, we could incur significant costs and diversion of resources in enforcing our intellectual property rights or in defending against such claims, which could have a material adverse effect on our business, results of operations and financial condition. Piracy of motion pictures, including digital and Internet piracy, may reduce the -------------------------------------------------------------------------------- gross receipts from the exploitation of our films ------------------------------------------------- Motion picture piracy is extensive in many parts of the world, including South America, Asia, the countries of the former Soviet Union and other former Eastern bloc countries. Additionally, as motion pictures begin to be digitally distributed using emerging technologies such as the Internet and online services, piracy could become more prevalent, including in the U.S., because digital formats are easier to copy. As a result, users can download and distribute unauthorized copies of copyrighted motion pictures over the Internet. In addition, there could be increased use of devices capable of making unauthorized copies of motion pictures. As long as pirated content is available to download digitally, many consumers may choose to download such pirated motion pictures rather than pay to view motion pictures. Piracy of our films may adversely impact the gross receipts received from the exploitation of these films, which could have a material adverse effect on our business, results of operations and financial condition. 12 Risks of liability claims for media content, which could adversely affect our ----------------------------------------------------------------------------- business, results of operations and financial condition ------------------------------------------------------- As a distributor of media content, we may face potential liability for: o defamation; o invasion of privacy; o negligence; o copyright or trademark infringement; and, o other claims based on the nature and content of the materials distributed. These types of claims have been brought, sometimes successfully, against producers and distributors of media content. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition. ITEM 2. DESCRIPTION OF PROPERTY Since 1999, the Company maintains a 3-unit storage facility in Los Angeles CA, rented on a quarterly basis from Stor America at an annual cost of $3,300. These units contain all the Company's film materials. On June 7, 2002, the Company established a satellite office at 67 Wall St., Suite 2211, New York, NY 10005, at a monthly cost of approx. $100. The Company continues to maintain representation in London, England, and Frankfurt, Germany, in the form of agents, who utilize their own residences for work involving the Company. On October 31, 2003, the Company took out a one-year lease of a three-room space at 447 B Doheny Drive, Beverly Hills, CA 90210. This property comprises monthly leased accommodation of approximately 500 square feet at a monthly rent of $1,463. The Company does not own or intend to acquire production facilities and will rent any such facilities as needed on a film-by-film basis. The Company has not experienced any difficulty to date in obtaining such facilities. ITEM 3. LEGAL PROCEEDINGS 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. On November 10, 2003, the Company received a letter from the Chairman of the Kings Road Shareholders Action Committee inquiring as to the status of the Independent Counsel's investigation as formally requested by such Shareholders Action Committee in its letter to the Board of April 17, 2003. The inquiry as conducted by the independent counsel at that time was proceeding at an unsatisfactory pace and therefore the Board removed this first independent counsel. The Board thereupon appointed a new independent counsel to investigate these transactions and report to the Board, the Shareholders Action Committee and the Shareholders. On November 3, 2004, the Board received a report from the new independent counsel, Mr. Leonard Machtinger of Kenoff & Machtinger, LLP, with respect to some of the transactions of November 1998 through April 2001. This report has since been evaluated by the Board and in consultation with the Company's corporate counsel and financial advisors. As a result of these discussions, the Company has decided not to legally pursue this matter as the legal costs are likely to exceed any damages which might be awarded by an appropriate court were the Company to file suit. 13 Demand and Notice For Annual Meeting ------------------------------------ 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 purported 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 reports and intended on holding an annual meeting of the Shareholders as soon as practical after the Company's periodic reports were current and the Company had received the report from the independent counsel pertaining to certain transactions. The Company is currently bringing its financials current and preparing to complete its annual audit after which it intends to hold a shareholders meeting. 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") made 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 number P03000043121) doing business as Regal Productions (collectively the "Florida Entities"), corporations controlled by Michael Berresheim and Eric Ottens, without the consent or knowledge of the Company. On June 8, 2004, the Company made a demand upon the Florida Entities, 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, denied any malfeasance, and Mr. Berresheim at that time indicated his intention to repay these monies, and to undertake other actions, to resolve this situation. On September 9, 2004, the Company filed suit in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, Case No. 04-14356 CACE 13, against Messrs. Berresheim, Ottens, the Florida Entities, et al, "seeking the return of money illegally obtained and converted from KRE Delaware, an accounting and an injunction from further use of its trade name." Defendants Ottens and Berresheim were served with the Complaint and discovery commenced. Subsequent to this report, in May 2005, Defendant Ottens was deposed, and on July 26, 2005, Defendant Berresheim filed his answer to the Company's complaint, along with affirmative defenses and counterclaims, seeking to recover approximately $500,000. In a hearing held on March 6, 2006, the court verbally ordered the striking of the defendant's affirmative defenses and counterclaims and on March 18, 2006 an order of default and an order striking the pleadings was entered. On April 18, 2006, the court entered a final default judgment in favor of the Company in the amount of $332,553.57 and entered a permanent injunction requiring Berresheim to cease and desist all use of the name Kings Road in any capacity. Claim on the Company from MBO Media GmbH ---------------------------------------- On March 29, 2005, the Company received a German-language fax communication from attorney-at-law Ms. Beate C. Mueller, on behalf of her client MBO Media GmbH and its managing director Mr. Michael Berresheim (former director and officer of the Company) demanding the Company's repayment of leasing costs of 179,884.37 Euro for the video and film editing suite Avid Symphony V 2.0 as ostensibly paid by her client MBO Media GmbH (formerly MBO Musikverlags GmbH). According to this letter the initial claim for the reimbursement of this sum was made by her client on May 18, 2000. The Company has no record of any such claim, invoice, or corresponding leasing/repayment agreement between the parties in its files and has passed this correspondence on to its German counsel, who repudiated this claim on April 4, 2005. This claim was subsequently included in the counterclaims filed by defendant Berresheim with his affirmative defenses filed on July 26, 2005 (see above Claim Against Michael Berresheim, Eric Ottens, et al. case No. 04-14356 CACE 13). On March 6, 2006, the court verbally ordered the striking of the defendant's affirmative defenses and counterclaims and on March 10, 2006 an order of default and an order striking the pleadings was entered. 14 Shareholder Demand for Inspection of Company Records ---------------------------------------------------- On March 30, 2005 the Company received a registered letter dated March 22, 2005 from Georgia-based attorney-at-law Daniel D. Dinur, Esq., on behalf of his client Kings Road Enterprises Corp. (formerly Parkland AG - an entity controlled by a former Director and Officer of the Company), together with a Power of Attorney signed on March 16, 2005 by that Company's President Mr. Evert Wilbrink and a Demand Under Oath likewise dated March 22, 2005. The Agent for the Stockholder pursuant to such Power of Attorney made "Demand Under Oath to inspect the Corporation's stock ledger, list of its stockholders, and its other books and records and to make copies or extracts there from, all as provided in Section 220 of the Delaware General Corporation Law and states that the purpose of the demand and the inspection is (i) to make a determination as to the value of the Stockholder's stock in the Corporation, (ii) to investigate the Corporation's compliance with applicable laws, including but not limited to applicable corporate and securities laws and its own organizational and operational requirements as may be set forth in the books and records, based upon a reasonable suspicion of mismanagement and/or self-dealing due, among other things, to the apparent sale of stock to certain stockholders for less than its actual value." The Company's counsel has been in contact with Mr. Dinur and the Company has complied with this demand. Donal C. Tunnell Complaint against Kings Road Entertainment and Kings Road to ----------------------------------------------------------------------------- Fame (Delaware) --------------- On September 14, 2005 and subsequent to the period covered by this report, the Company was served with a complaint by Donal C. Tunnell, case number 05-007436 CACE 18, in the Circuit Court in and for Broward County, FL. This complaint is on three counts: Breach of Contract, Unjust Enrichment and Fraud. The Plaintiff is basing his claims on the existence and subsequent breach of an employment agreement of January 19, 2002. The Company has no record of any such employment agreement in its files and disputes the authenticity of same. On October 14, 2005, the Company's Florida counsel filed a motion to dismiss the complaint, which has yet to be heard by the Court. The Company believes that the claim is fraudulent and without merit. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders during the fiscal year covered by this report. PART II. ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES The Company's common stock trades on the Pink Sheets under the symbol: "KREN.PK." The following table sets forth the high and low sales prices of the Company's common stock during the years ended April 30, 2005 and 2004: Fiscal Year 2005 High Low ------------------------------------------------------------------ First Quarter 0.08 0.05 Second Quarter 0.12 0.06 Third Quarter 0.20 0.08 Fourth Quarter 0.15 0.10 Fiscal Year 2004 High Low ------------------------------------------------------------------ First Quarter 0.05 0.02 Second Quarter 0.08 0.03 Third Quarter 0.10 0.08 Fourth Quarter 0.08 0.04 Holders ------- As of March 15, 2006, the Company had approximately 234 stockholders of record. In October 1999, the Company's common stock was de-listed from the NASDAQ Small Cap Market because the Company failed to meet certain minimum listing maintenance criteria set by NASDAQ and on September 17, 2002 the Company was delisted from the OTC Bulletin Board for failing to meet its eligibility requirements. The Company continues to fail in meeting the listing requirements. 15 Dividends --------- The Company has not declared any cash dividends with respect to its common stock, and does not intend to declare dividends in the foreseeable future. There are no material restrictions limiting, or that are likely to limit, the Company's ability to pay dividends on its securities. Recent Sale of Unregistered Securities -------------------------------------- On January 16, 2005, the Board resolved, in order to reduce its total debt and to settle outstanding amounts due to certain privately contracted service providers, to issue restricted shares of the Company's common stock at a share price of $0.10 per share. This price represents the 90-day weighted moving average price of the Company's common stock as quoted on the Pink Sheets. This conversion of debt into equity also includes a portion of deferred unpaid accrued compensation to the Company's management and personnel set forth as follows: On January 16, 2005, the Company authorized the issuance of 200,000 restricted shares of Common Stock to Gordon Jones of J & J Consulting, in exchange for services rendered to the Company in the amount of $20,000. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. On January 16, 2005, the Company authorized the issuance of 300,000 restricted shares of Common Stock to Endeavour Broadcast Services, in exchange for services rendered to the Company in the amount of $30,000. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. On January 16, 2005, the Company authorized the issuance of 200,000 restricted shares of Common Stock to Deborah Nugent, in exchange for services rendered to the Company in the amount of $20,000. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. On January 16, 2005, the Company authorized the issuance of 400,000 restricted shares of Common Stock to Geraldine Blecker, in exchange for services rendered to the Company in the amount of $40,000. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. On January 16, 2005, the Company authorized the issuance of 400,000 restricted shares of Common Stock to H. Martin DeFrank, in exchange for services rendered to the Company in the amount of $40,000. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. On January 16, 2005, the Company authorized the issuance of 100,000 restricted shares of Common Stock to Philip M. Holmes, in exchange for services rendered to the Company. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. On February 4, 2005, the Company entered into a Stock Purchase Agreement with and among Geraldine Blecker, an affiliate of the Company, the People Helpers, Inc. and International Solutions Business Consulting GmbH, solely managed by director Philip M. Holmes, and therefore an affiliate of the Company, to purchase an aggregate of 1.5 million shares of the Company's restricted common stock for $0.10 per share, which price represents the closing price of the Company's stock as quoted on the Pink Sheets on that date, for a total cash contribution of $150,000 with the closing date set at February 11, 2005. On February 8, 2005, the Board resolved to approve, ratify and adopt this transaction. On February 11, 2005, the stock purchase was concluded, the stock price paid and the stock certificates subsequently issued. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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. The Company's most recent picture, The Redemption, was completed in early 1995 and premiered on Home Box Office pay television in August 1995. The Company expects to increase its expenditures on development activities, including the purchase of books and screenplays, in order to obtain the types of projects that will attract third party financing and subsequently achieve commercial success. (See "Item 1. - Description of Business"). 16 The Company's revenues have been substantially derived from the exploitation of the feature films it produces and are typically spread over a number of years. The Company attempts to generate revenues from theatrical distributors as soon as possible following completion of a picture. However, lower budget films, which the Company has produced most recently, often do not have a theatrical release. Revenues from home video are initially recognized when a film becomes available for release on videocassette, typically six months after the initial theatrical release or, when no theatrical release occurs, upon delivery of the film to the distributor. Revenues from pay and free television of a film are similarly recognized when a film becomes available for exploitation in those media, typically six to twenty-four months after the initial release. Some distribution contracts, however, may license more than one medium, a "multiple rights license." In this case, the full license fee is recognized when the film is exploited in the first available medium. Revenues from international markets generally follow the same pattern as revenues from the domestic market and may include multiple rights licenses as well. However, the Company sold the international distribution rights to most of its films to another company in 1996 and international revenues have substantially decreased due to this sale. As a result of these factors, the Company's revenues vary significantly each year depending on the number and the success of the release of films that become available in the various media during that fiscal year. Although the Company has not produced any films since 1995, the Company believes its present development activities, which may include the sale of certain projects to non-affiliated companies, as was the case with respect to the sale of "Ticker" during the year ended April 30, 2001, will achieve commercial success, while limiting the Company's front end exposure. As revenues have been recognized for each film, the Company has amortized the costs incurred in producing that film. The Company previously amortized film costs under the income forecast method as described in Financial Accounting Standards Board Statement No. 53 ("FAS 53"), which provided that film costs are amortized for a motion picture in the ratio of revenue earned in the current period to the Company's estimate of total revenues to be realized. The Company's management had periodically reviewed its estimates on a film-by-film basis and, when unamortized costs exceeded net realizable value for a film, that film's unamortized costs had been written down to net realizable value. During the year ended April 30, 2001, the Company adopted Financial Accounting Standards Board Statement No. 139, which, in effect, replaced FAS 53. Since the Company has not produced a motion picture film since 1995 and in light of the fact that all of the Company's previously produced motion picture films have been fully amortized, there was no effect to the Company in adopting this new accounting standard. Costs relating to projects that have been abandoned or sold before being produced have been charged to overhead in the year that event occurs. Results of Operations --------------------- For the year ended April 30, 2005, feature film revenues were $241,727 as compared to $378,347 for the year ended April 30, 2004. The decrease in feature film revenues resulted primarily from decreased domestic and foreign distribution revenues from feature films in the Company's library. The decrease is the result of several different factors, most notably the lack of focused marketing and sales efforts over the past twelve months, and the Company's inability to add newer items to its aging entertainment library. Until such time as the Company either produces new films or develops and implements a different overall strategic plan, the Company expects that its feature film revenues will continue to decline. Operating costs and expenses totaled $734,923 and $669,921 for the years ended April 30, 2005 and 2004, respectively, an increase of $65,002. This increase resulted primarily from an increase in officer compensations of $135,608, partially offset by a decrease in general and administrative expenses of $97,882. During the year ended April 30, 2005, the Company incurred a net loss of $495,590 versus net loss of $294,127 during the year ended April 30, 2004, resulting in an increased net loss of $201,463. The increased net loss resulted primarily from a significant decrease in feature film revenues of $136,620, an increase in officer compensation of $135,608, offset in part by a decrease in general and administrative expenses of $97,882. During the years ended April 30, 2005 and 2004, the Company had no significant provision for income taxes, however, there is a significant tax loss carry forward of approximately $15,000,000, which may be offset against future taxable income. 17 Liquidity and Capital Resources ------------------------------- The production of motion pictures requires substantial capital. In producing a motion picture, the Company may expend substantial sums for both the production and distribution of a picture, before that film generates any revenues. In many instances, the Company obtains advances or guarantees from its distributors but these advances and guarantees generally defray only a portion of a film's cost. The Company's principal source of working capital during the year ended April 30, 2005 was motion picture licensing income. Except for the financing of film production costs, management believes that the Company's licensing income will likely be insufficient to fund its ongoing operations. In order to address the Company's need for capital during the 2005 fiscal year, the Company sold 1,500,000 shares of its common stock for $150,000 in cash in February, 2005. In addition, the Company entered into a Distribution Agreement with Lions Gate Films, Inc. in September 2004. Per the terms of this Agreement, the Company received $250,000 in cash in September 2004, and received an additional $950,000 subsequent to April 30, 2005. However, due in part to its decreasing operating revenues and significant short-term debt, the Company's auditors have expressed doubt about the Company's ability to continue as a going concern. Management intends to address this issue by continuing to actively market the Company's film library to various studios and producers for sequel and remake rights. In addition, the Company is working closely with independent industry consultants regarding capitalization strategies and accessing film production funds, which would help the Company maintain greater ownership of film projects. During the year ended April 30, 2005, the Company's operating activities used $59,801 in cash, compared to using $6,672 in 2004. In 2005, the Company's net loss of $495,590 was partially offset in this regard by increases in accounts payable $122,567, accrued expenses $55,902 and a decrease in accounts receivable $48,246. The Company also received $150,000 in cash from the sale of common stock in 2005. The Company had cash of $112,114 and $21,915 at April 30, 2005 and 2004, respectively. Forward-Looking Statements -------------------------- The foregoing discussion, as well as the other sections of this Annual Report on Form 10-KSB, contains forward-looking statements that reflect the Company's current views with respect to future events and financial results. Forward-looking statements usually include the verbs "anticipates," "believes," "estimates," "expects," "intends," "plans," "projects," "understands" and other verbs suggesting uncertainty. The Company reminds shareholders that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors which could cause the actual results to differ materially from the forward-looking statements. Potential factors that could affect forward-looking statements include, among other things, the Company's ability to identify, produce and complete film projects which are successful in the market, to arrange financing, distribution and promotion for these projects on favorable terms in various markets and to attract and retain qualified personnel. ITEM 7. FINANCIAL STATEMENTS The Financial Statements of Kings Road Entertainment, Inc. are listed on the Index to Financial Statements set forth on page F-2. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 8A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report (the "Evaluation Date"). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to us (including our consolidated subsidiaries) required to be included in our reports filed or submitted under the Securities Exchange Act of 1934, as amended. (b) Changes in Internal Controls. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the fourth quarter of the year ended April 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 18 ITEM 8B. OTHER INFORMATION Credit / Overdraft Facility --------------------------- On March 4, 2004, the Company signed a Corporate Resolution to Borrow / Grant Collateral from the City National Bank, 400 North Roxbury Drive, Beverly Hills, CA 90210. The principal is $60,000 and maturity is March 1, 2005. On March 4, 2004, the Company likewise signed a Promissory Note to borrow the amount of $60,000 at an annual interest rate of 2.850% from the City National Bank, 400 North Roxbury Drive, Beverly Hills, CA 90210. The date of maturity is March 1, 2005. On March 8, 2005, the Company signed a Change in Terms Agreement renewing the aforesaid Borrow/Grant of Collateral from the City National Bank, 400 North Roxbury Drive, Beverly Hills, CA 90210, at an annual interest rate of 4.550%. The principal is $60,000 and maturity is March 1, 2006. Distribution Agreement with Lions Gate Films -------------------------------------------- On September 30, 2004, the Company executed an Amendment Agreement with Lions Gate Films, Inc., ("LGF"), extending and amending the original Agreement dated August 1, 1998. This Agreement, effective August 20, 2004 through August 30, 2015, stipulates that LGF pay the Company a minimum guarantee (in the form of an advance against royalties) of $1.2 million; $250,000 of which was payable upon execution of the Agreement, and the remaining $950,000 payable on September 1, 2005. In addition, the Company is entitled to certain royalties related to U.S. home video distribution. The Company received the initial $250,000 in September 2004, and the remaining $950,000 in September, 2005. Option/Purchase Agreement ------------------------- Subsequent to the period covered by this report, on August 16, 2005, the Company received $90,000 (less 10% agency commission of $9,000) from New Line Cinema, as an option fee, applicable against the $900,000 purchase price, pertaining to the Company's rights to the movie production, All of Me. The option fee entitles New Line Cinema to the film rights of the remake of All of Me, for a 16-month option period from June 16, 2005 and expiring on October 11, 2006. Should New Line Cinema elect to move forward with the remake, it will be required to pay the Company an additional $810,000 (less commissions of 10.0%) within the 16-month option period. New Line has the right to extend this option period for an additional 18-month period upon payment of a further $90,000, which shall be non-applicable against the purchase price. In accordance with the agreement, the Company shall be granted an official producer credit. PART III. ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information with respect to the directors and executive officers of the Company. Directors are elected at the annual meeting of stockholders to serve for staggered terms of three years each and until their successors are elected and qualified. Officers serve at the request of the Board of Directors of the Company.
Expiration Name Age Position of Term -------------------------------------------------------------------------------------------------- Geraldine Blecker 59 Director, Chief Executive Officer, Vice 2006 President and Company Secretary Ms. Blecker took over as CEO on 5th March 2002 H. Martin DeFrank 59 Director, President, and Chief 2006 Operating Officer Mr. DeFrank took over as President on 5th March 2002 Philip M. Holmes 50 Director 2006 Mr. Holmes was appointed to the Board on October 16, 2003, upon the resignation of Mr. Wolfgang Stangl
19 Arrangements ------------ There are no arrangements or understandings between any of the directors or executive officers, or any other person or persons pursuant to which they were selected as directors and/or officers. Executive Officers and Directors -------------------------------- GERALDINE BLECKER has been a director and Vice President of the Company since April 2001, coordinating the Company's on-going film script development activities and international production. In March 2001 Ms. Blecker took over as Company Secretary and on March 5, 2002, she took over as Chief Executive Officer from Mr. Michael Berresheim. With a solid background in music and the performing arts, Ms. Blecker moved on to become an active film and television screenwriter, lyricist, musical supervisor and script consultant for numerous productions and production companies, (Europe's ZDF, HR, SFB, WDR, SAT 1, networks, (SCHLOSS & SIEGEL, Cannes Film Festival entry and winner of the Max Orphuls prize for best screenplay), as well as a developer of film and television product for a variety of companies in Germany and the UK (BBC, ATV, London Weekend, TaunusFilm, Traumwerk, FFP Entertainment, Madbox Filmtrick, TempoMedia, U5 Film). In addition to founding BSS Music Publishing Company in 1985, Ms. Blecker was founder and managing director of PDN Media GmbH, formed in 1997 to develop and package multimedia product for the international market. She has worked as a TV journalist for RTL, ZDF and Deutsche Bank TV and as a freelance print journalist for a variety of music and film publications. Ms. Blecker studied music and performing arts at California's Pasadena Playhouse and attended London's National Film and Television School (specializing in production). H. MARTIN DeFRANK has been a director and Chief Operating Officer of the Company since April 2001. In March 2002, he took over the additional post of Company President upon the resignation of Mr. Michael Berresheim. Mr. DeFrank was Managing Director of Weathervane Entertainment Group from 1995 through 2001, inclusive, where he directed the creation and production of interactive and reality television programming. From 1991 through 1994, Mr. DeFrank was Director of Development Treetop Systems, Inc., where he managed the development and patenting of robotically controlled telescoping tower systems for aerial videography. In addition, from 1976 to 1994, Mr. DeFrank was a producer for Unicorn Enterprises Films, Inc., where he had executive and line producer responsibilities on a range of feature film and television productions ranging from classic drama to light comedy featuring a variety of stars from the Redgraves to Dolly Parton. During the eighties, he was one of the founders of the postproduction house, Finecut Films Ltd., which provided the technical and creative services to television and feature film producers on a range of projects including "Heaven's Gate," "The Muppet Movie," and "Heat and Dust." He has provided facilities and technical expertise to such renowned film distributors as Columbia-Warner-EMI, the Rank and Cannon Groups. In 1981 he formed Television Syndication Group, which assembled and distributed film libraries worldwide. Mr. DeFrank attended Yale Drama and the University of New Haven. PHILIP MICHAEL HOLMES began his career in the UK as an apprentice Radio and TV Technician before moving into accounting at the Post Office for four years prior to his relocation to Germany in 1978. He successfully completed commercial accounting studies in Munich in 1985 whilst working as Chief Accountant for Ansell, an Australian distributor of household rubber goods, from 1980 to 1986. He then joined the process automation division of an American Company, Combustion Engineering Inc. in their European Headquarters in Germany as their CFO for Central Europe from 1986 thru 1991 and accompanied their merger with ABB in 1989. From 1991 thru 1997 he was CFO for two US and German based software companies before becoming self-employed in 1997 as a business consultant. Most notable achievement was accompanying the start-up of a cable TV company in 1998 as a co-investor, financial consultant and acting CFO thru to its private placement in 2000 for 176 million euros bringing a 400% return for its investors. In 2001 he accompanied the start-up phase of a new cable TV venture in Germany and was co-founder and main investor of Audio Elevation GmbH, a manufacturer of high-end sub-woofers. In 2002 he set up with his business partners the PFS - PRO Finance Services GmbH, a finance consulting company concentrating on start-ups, financing, mergers and acquisitions and IPO consulting. His activities as a business consultant with PFS include accompanying start-ups in the very different areas of cross-media document management, designers of customized business software, and manufacturers of environmental technology. 20 Significant Personnel --------------------- The Company is currently operated by two of its Directors. H. Martin DeFrank, President and Chief Operating Officer, deals with global rights management and the basic corporate administration in Los Angeles. Mr. DeFrank is actively involved in creative media production and currently concerned with certain franchises (remakes, sequels, TV-series) of the Company's feature film product. Geraldine Blecker, Chief Executive Officer, is responsible for overseeing all aspects of Company administration. In her function as Company Secretary, she is also the keeper of all Corporate Records and Minutes. Splitting her time between Los Angeles and Europe (Frankfurt), Ms. Blecker is additionally responsible for international feature film co-production. Family Relationships -------------------- There are no family relationships between any of the directors or executive officers. Involvement in Certain Legal Proceedings ---------------------------------------- During the past five years, no present director, executive officer or person nominated to become a director or an executive officer, promoter or control person of the Company: (1) was a general partner or executive officer of any business against which any bankruptcy petition was filed, either at the time of the bankruptcy or two years prior to that time; (2) was convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) was subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities, (4) was found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated. Section 16(a) Beneficial Ownership Reporting Compliance ------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors and persons who own more than ten percent of the Company's Common Stock, to file initial reports of beneficial ownership on Form 3, changes in beneficial ownership on Form 4 and an annual statement of beneficial ownership on Form 5, with the SEC. Such executive officers, directors and greater than ten percent shareholders are required by SEC rules to furnish the Company with copies of all such forms that they have filed. Based solely on its review of the copies of such forms filed with the SEC electronically, received by the Company and representations from certain reporting persons, the Company believes that for the fiscal year ended April 30, 2005, all the officers, directors and more than 10% beneficial owners complied with the above described filing requirements, although the initial Forms 3 and 4 of each officer and director was filed late. 21 ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table -------------------------- The following table sets forth the compensation for each of the last three fiscal years of the Company's Chief Executive Officers and up to four of the other most highly compensated individuals serving as executive officers at April 30, 2005 whose total salary and bonus exceeded $100,000 for the fiscal year ("Named Officers"). No other Named Officer of the Company received salary and bonus in excess of $100,000 in any of the last three fiscal years. SUMMARY COMPENSATION TABLE --------------------------
Long Term Compensation Annual Compensation Awards Payouts ----------------------------------------------------------------------------------------------------------------------------------- Securities All Other Underlying Other Annual Restricted Options/ LTIP Compen- Name and Year or Compen- Stock SAR's Payouts sation Principal Period Salary Bonus sation) Awards (#) ($) ($) Position Ended ($) ($) ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) ----------------------------------------------------------------------------------------------------------------------------------- H. Martin DeFrank 2005 $54,000 4,500 $0 400,000 0 0 0 COO, President 2004 $48,000 3,000 $0 0 0 0 0 2003 $36,000 3,000 $0 100,000 (1) 0 0 0 Geraldine Blecker 2005 $54,000 4,500 $0 400,000 0 0 0 CEO, Vice President 2004 $48,000 3,000 $0 0 0 0 0 Secretary 2003 $36,000 3,000 $0 100,000 (1) 0 0 0
_____________________ (1) Shares granted on May 22, 2002 as compensation for services to the Company. Option Grants, Exercises and Year-End Values -------------------------------------------- Shown below is information with respect to ownership by the Named Officers of options and option values as of April 30, 2005. No options were granted or exercised during the year ended April 30, 2005. Option Grants Table ------------------- The following tables reflect certain information with respect to stock options granted under the Company's stock option plans to certain executive officers and directors up through the end of the fiscal year. OPTIONS/SAR GRANTS IN LAST FISCAL YEAR --------------------------------------
Number Of % Of Total Securities Options Underlying Granted To Exercise Options Employees Or Base Granted In Fiscal Price Expiration Name (#) Year(%) ($/Sh) Date ------------------------------------------------------------------------------------- H. Martin DeFrank 0 0 0 0 Geraldine Blecker 0 0 0 0 Philip Michael Holmes 0 0 0 0
No options were granted or exercised during the year ended April 30, 2005. 22 Option Exercise and Year End-Value Table ---------------------------------------- The following tables reflect certain information, with respect to the exercise of stock options by certain executive officers during fiscal 2005: Aggregated options/SAR exercises in last fiscal year and end option/SAR value ----------------------------------------------------
Value of Unexercised Number of Unexercised In-the-Money Options Options at April 30, 2005 at April 30, 2005 Name Exercisable Unexercisable Exercisable Unexercisable N/A - - - -
There are no outstanding options. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Principal Stockholders ---------------------- The following table sets forth certain information, as of March 15, 2006 concerning ownership of shares of Common Stock by each person who is known by the Company to own beneficially more than 5% of the issued and outstanding Common Stock of the Company:
Title Name and Address Amount and Nature Percent Of Of of of Class Beneficial Owner Beneficial Owner Class ----------------------------------------------------------------------------------------------- Common International Solutions 800,000 (1) 11.50% Pastor-Klein-Strasse 17d D-56073 Koblenz, Germany Common Geraldine Blecker 850,000 12.22% Wetteraustr 23 Frankfurt, Germany 60389 Common H. Martin DeFrank 500,000 7.19% 447 B Doheny Drive, Beverly Hills, CA 90210 Common Parkland AG 500,418 (2) 7.19% 5743 NW 66hth Avenue Parkland, FL 33067 Common The People Helpers Inc 350,000 5.03% 228 East 14th Street New York, NY 10003 Common MBO Musikverlags, GmbH 577,479 (2) 8.30% Gerauer Street 58A Moerfelden Walldorf, Germany 64546 Common MBO Media, GmbH 373,350 (2) 5.37% Gerauer Street 58A Moerfelden Walldorf, Germany 64546 Total 3,951,247 56.79%
__________________________ (1) These 800,000 shares of the Company's Common Stock are held by International Solutions Business Consulting GmbH, which is solely managed by director Philip M. Holmes, and therefore an affiliate of the Company. Philip M. Holmes personally holds 209,300 shares of the Company's Common Stock in his own name giving him control over 1,009,300 shares or 14.51% of the outstanding and issued stock. (2) Michael Berresheim, a former officer and director of the Company, is the sole shareholder of MBO Media, GmbH that was formerly MBO Musikverlags, GmbH. Michael Berresheim is also the controlling shareholder of Parkland AG, which subsequent to the period covered by this report has changed its name to Kings Road Enterprises Corp. with its offices at 1001 East Sample Road, Suite 8W, Pompano Beach, Florida 33064. Therefore, in effect, Michael Berresheim controls 20.86% of the Company's outstanding common stock. 23 Security Ownership of Management -------------------------------- The following table sets forth, as of March 15, 2006, certain information concerning ownership of shares of Common Stock by each director of the Company and by all executive officers and directors of the Company as a group:
Title Name and Address Amount and Nature Percent Of Of of of Class Beneficial Owner Beneficial Owner Class ----------------------------------------------------------------------------------------------- Common Geraldine Blecker 850,000 12.22% Wetteraustr 23 Frankfurt, Germany 60389 Common H. Martin DeFrank 500,000 7.19% 447 B Doheny Drive, Beverly Hills, CA 90210 Common Philip Michael Holmes (1) 1,009,300 (1) 14.51% Pastor-Klein-Str. 17 D D-56068 Koblenz, Germany Executive Officers and Directors as a Group 2,359,300 33.91% (3 persons)
--------------------------- (1) This number includes 800,000 shares of the Company's Common Stock held by International Solutions Business Consulting GmbH, which is solely managed by director Philip M. Holmes, and therefore an affiliate of the Company. Except as otherwise disclosed herein, the Company does not know of any arrangements, including any pledge of the Company's securities, the operation of which at a subsequent date may result in a change of control of the Company. Changes In Control ------------------ To the best of the Company's knowledge there are no present arrangements or pledges of the Company's securities, which may result in a change in control of the Company. Securities Authorized for Issuance Under Equity Compensation Plans ------------------------------------------------------------------
---------------------------------- --------------------- ------------------- ---------------------- Number of Weighted-average Number of securities Securities to be exercise price of remaining available issued upon outstanding for future issuance exercise of options, warrants under equity outstanding and rights compensation plans options, warrants (excluding and rights securities reflected in column (a)) ---------------------------------- --------------------- ------------------- ---------------------- ---------------------------------- --------------------- ------------------- ---------------------- (a) (b) (c) ---------------------------------- --------------------- ------------------- ---------------------- ---------------------------------- --------------------- ------------------- ---------------------- Equity compensation plans approved by security holders(1) - $- - ---------------------------------- --------------------- ------------------- ---------------------- ---------------------------------- --------------------- ------------------- ---------------------- Equity compensation plans Not approved by security - $- - holders(2) ---------------------------------- --------------------- ------------------- ---------------------- ---------------------------------- --------------------- ------------------- ---------------------- Total - $- - ---------------------------------- --------------------- ------------------- ----------------------
No securities have been authorized for issuance as part of any Equity Compensation Plan. 24 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On January 16, 2005, the Company authorized the issuance of 400,000 restricted shares of Common Stock to Geraldine Blecker, in exchange for services rendered to the Company in the amount of $40,000. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. On January 16, 2005, the Company authorized the issuance of 400,000 restricted shares of Common Stock to H. Martin DeFrank, in exchange for services rendered to the Company in the amount of $40,000. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. On January 16, 2005, the Company authorized the issuance of 100,000 restricted shares of Common Stock to Philip M. Holmes, in exchange for services rendered to the Company. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. On February 4, 2005, the Company entered into a Stock Purchase Agreement with and among Geraldine Blecker, an affiliate of the Company, the People Helpers, Inc. and International Solutions Business Consulting GmbH, solely managed by director Philip M. Holmes, and therefore an affiliate of the Company, to purchase an aggregate of 1.5 million shares of the Company's restricted common stock for $0.10 per share, which price represents the closing price of the Company's stock as quoted on the Pink Sheets on that date, for a total cash contribution of $150,000 with the closing date set at February 11, 2005. On February 8, 2005, the Board resolved to approve, ratify and adopt this transaction. On February 11, 2005, the stock purchase was concluded, the stock price paid and the stock certificates subsequently issued. No underwriters were used. The securities were issued pursuant to an exemption from registration provided under Section 4(2) of the Securities Act of 1933. ITEM 13. EXHIBITS (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) 31** Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 31** Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 32** 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 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Independent Public Accountants ------------------------------ The Company's independent accountants for the fiscal years ended April 30, 2005 and 2004 were HJ Associates & Consultants, LLP. (a) Audit Fees. For the fiscal years ended 2005 and 2004, the aggregate fees billed by HJ Associates & Consultants, LLP for services rendered for the audits of the annual financial statements and the review of the financial statements included in the quarterly reports on Form 10-QSB or services provided in connection with the statutory and regulatory filings or engagements for those fiscal years was $28,900 and $37,300, respectively. (b) Audit-Related Fees. For the fiscal years ended 2005 and 2004 HJ Associates & Consultants, LLP, did not bill for any audit-related services other than as set forth in paragraph (a) above. (c) Tax Fees. For the fiscal years ended 2005 and 2004, HJ Associates & Consultants, LLP did not bill any fees for tax compliance services. The auditors did not provide tax-planning advice for the fiscal years ended 2005 and 2004. (d) All Other Fees. None. 25 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: May 3, 2006 /Geraldine Blecker/ _______________________________ By: Geraldine Blecker Its: Chief Executive Officer Date: May 3, 2006 /H. Martin DeFrank/ _______________________________ By: H. Martin DeFrank Its: Chief Financial Officer 26 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS April 30, 2005 C O N T E N T S --------------- Report of Independent Registered Public Accounting Firm.......F-3 Consolidated Balance Sheet....................................F-4 Consolidated Statements of Operations.........................F-5 Consolidated Statements of Stockholders' Equity (Deficit).....F-6 Consolidated Statements of Cash Flows.........................F-7 Notes to the Consolidated Financial Statements................F-8 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- To the Shareholders and the Board of Directors Kings Road Entertainment, Inc. Beverly Hills, California We have audited the accompanying consolidated balance sheet of Kings Road Entertainment, Inc. and Subsidiaries (the Company) as of April 30, 2005 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended April 30, 2005 and 2004. These consolidated statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kings Road Entertainment, Inc. and Subsidiaries as of April 30, 2005 and the results of their operations and their cash flows for the years ended April 30, 2005 and 2004 in conformity with United States generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 8 to the consolidated financial statements, the Company has sustained recent losses from operations, has a deficit in working capital and a stockholders' deficit. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 8. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. HJ Associates & Consultants, LLP Salt Lake City, Utah February 28, 2006 F-3 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Consolidated Balance Sheet April 30, 2005
ASSETS April 30, 2005 ----------------------- CURRENT ASSETS Cash and cash equivalents $ 112,114 Restricted cash 60,386 Accounts receivable 69,764 ----------------------- Total Current Assets 242,264 ----------------------- FIXED ASSETS, NET (Note 3) - ----------------------- OTHER ASSETS Film development costs, net (Note 2) 53,055 ----------------------- Total Other Assets 53,055 ----------------------- TOTAL ASSETS $ 295,319 ======================= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable $ 69,133 Accrued expenses 361,549 Deferred revenue 215,509 Line of credit (Note 6) 60,000 ----------------------- Total Current Liabilities 706,191 ----------------------- TOTAL LIABILITIES 706,191 ----------------------- COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY (DEFICIT) Common stock; 12,000,000 shares authorized, $0.01 par value, 6,957,757 shares issued and outstanding 69,578 Additional paid-in capital 25,211,721 Accumulated deficit (25,692,171) ----------------------- Total Stockholders' Equity (Deficit) (410,872) ----------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 295,319 =======================
The accompanying notes are an integral part of these consolidated financial statements. F-4 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Consolidated Statements of Operations April 30, 2005 and 2004
For the Years Ended April 30, ---------------------------------------- 2005 2004 ---------------------------------------- REVENUES Feature films $ 241,727 $ 378,347 ---------------------------------------- Total Revenue 241,727 378,347 ---------------------------------------- COSTS AND EXPENSES Salaries and wages 239,858 104,250 Bad debt expense 48,896 - Professional and consulting 348,287 349,288 General and administrative 97,882 216,383 ---------------------------------------- Total Costs and Expenses 734,923 669,921 ---------------------------------------- OPERATING (LOSS) (493,196) (291,574) ---------------------------------------- OTHER INCOME (EXPENSES) Interest income 386 486 Interest expense (2,780) (3,039) ---------------------------------------- Total Other Income (Expenses) (2,394) (2,553) ---------------------------------------- NET (LOSS) $ (495,590) $ (294,127) ---------------------------------------- BASIC (LOSS) PER SHARE $ (0.11) $ (0.08) ======================================== BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 4,414,801 3,864,390 ========================================
The accompanying notes are an integral part of these consolidated financial statements. F-5 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) April 30, 2005 and 2004
Additional Common Stock Paid-In Accumulated --------------------------------------- Shares Amount Capital Deficit -------------------------------------------------------------------------------- Balance, April 30, 2003 3,857,757 $ 38,578 $ 24,932,721 $ (24,902,454) Net loss for the year ended April 30, 2004 - - - (294,127) ------------------ ------------------ ----------------- ------------------- Balance April 30, 2004 3,857,757 38,578 24,932,721 (25,196,581) Common shares issued for debt At $0.10 per share 1,600,000 16,000 144,000 - Common shares issued for cash At $0.10 per share 1,500,000 15,000 135,000 - Net loss for the year ended April 30, 2005 - - - (495,590) ------------------ ------------------ ----------------- ------------------- Balance, April 30, 2005 6,957,757 $ 69,578 $ 25,211,721 $ (25,692,171) ================== ================== ================= ===================
The accompanying notes are an integral part of these consolidated financial statements. F-6 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows April 30, 2005 and 2004
For the Years Ended April 30, ------------------------------------------------ 2005 2004 ------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (495,590) $ (294,127) Adjustments to reconcile net income (loss) to net cash used by operating activities: Bad debt expense 48,896 - Impairment of film development costs 11,274 - Changes in operating assets and liabilities Increase (decrease) in restricted cash (386) - (Increase) decrease in accounts receivable 48,246 183,439 Increase (decrease) in film development costs 1,108 - Increase (decrease) in accounts payable 122,567 65,315 Increase (decrease) in accrued expenses 55,902 58,041 Increase (decrease) in deferred revenue 148,182 (19,340) ------------------------------------------------ Net Cash (Used by) Operating Activities (59,801) (6,672) ------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Increase in film development costs - (22,092) ------------------------------------------------ Net Cash Provided by (Used by) Investing Activities - (22,092) ------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Restricted cash received from line of credit - 60,000 Common stock issued for cash 150,000 - Increase in restricted cash - (60,000) ------------------------------------------------ Net Cash Provided by Financing Activities 150,000 - ------------------------------------------------ NET INCREASE IN CASH 90,199 (28,764) CASH AND CASH EQUVIVALENT, BEGINNING OF YEAR 21,915 50,679 ------------------------------------------------ CASH AND CASH EQUVIVALENT, END OF PERIOD $ 112,114 $ 21,915 ================================================ SUPPLIMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID FOR: Interest $ - $ - Income taxes $ - $ - NON-CASH FINANCING ACTIVITIES: Common stock issued for services $ - $ -
The accompanying notes are an integral part of these consolidated financial statements. F-7 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements April 30, 2005 and 2004 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES a. Organization The consolidated financial statements include those of Kings Road Entertainment, Inc. and its wholly-owned subsidiaries (collectively the "Company"). All inter-company items and transactions have been eliminated in consolidation. The wholly-owned subsidiaries include Ticker, Inc., (a California corporation), and KRTR, Inc., (a New York corporation), both of which were inactive at April 30, 2005. b. Accounting Method The Company's consolidated financial statements are prepared using the accrual method of accounting. The Company has elected an April 30 year-end. c. Recognition of Revenues Revenues from theatrical exhibition are recognized on the dates of exhibition. Revenues from international, home video, television and pay-television license agreements are recognized when the license period begins and the film is available for exhibition or exploitation pursuant to the terms of the applicable license agreement. Once complete, a typical film will generally be made available for licensing as follows:
Months After Approximate Marketplace Initial Release Release Period Domestic theatrical 6 months All international makets 1-10 years Domestic home video 6 months 6-12 months Domestic cable/pay television 12-18 months 18 months Domestic syndicated/free television 24-48 months 1-6 years
As of April 30, 2005, the Company has deferred revenue totaling $215,509. The Company is following the guidelines of SOP 00-02 for film production and distribution. d. Film Development Costs Film development costs, including any related interest and overhead, are capitalized as incurred. Profit participations and residuals, if any, are accrued in the proportion that revenue for a period bears to the estimated future revenues. The individual film forecasts method set forth in FASB Statement No. 53 ("FASB 53") is used to amortize these costs based on the ratio of revenue earned in the current period to the Company's estimate of total revenues to be realized. Management periodically reviews its estimates on a film-by-film basis and, when unamortized costs exceed net realizable value for a film, that film's unamortized costs are written down to net realizable value. During the years ended April 30, 2005 and 2004, the Company impaired $11,274 and $-0- in film development costs, respectively. F-8 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Continued) April 30, 2005 and 2004 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued) e. New Accounting Pronouncements On December 16, 2004 the FASB issued SFAS No. 123(R), Share-Based Payment, which is an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. This new standard eliminates the ability to account for share-based compensation transactions using Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires such transactions to be accounted for using a fair-value-based method and the resulting cost recognized in our financial statements. This new standard is effective for awards that are granted, modified or settled in cash in interim and annual periods beginning after June 15, 2005. In addition, this new standard will apply to unvested options granted prior to the effective date. We will adopt this new standard effective for the fourth fiscal quarter of 2005, and have not yet determined what impact this standard will have on our financial position or results of operations. In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . ." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this Statement will have any immediate material impact on the Company. In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate Time-sharing Transactions, which amends FASB statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Management believes the adoption of this Statement will have no impact on the financial statements of the Company. In December 2004, the FASB issued SFAS No.153, Exchange of Nonmonetary Assets. This Statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetrary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years beginning after the date of this statement is issued. Management believes the adoption of this Statement will have no impact on the financial statements of the Company. The implementation of the provisions of these pronouncements are not expected to have a significant effect on the Company's consolidated financial statement presentation. F-9 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Continued) April 30, 2005 and 2004 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued) f. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. g. Concentration of Credit Risk and Major Customers The Company licenses various rights in its films to distributors throughout the world. Generally, payment is received in full or in part prior to the Company's delivery of the film to the applicable distributor. As of April 30, 2005, none of the Company's accounts receivable was from foreign distributors. During the 2005 fiscal year, the Company generated revenue on sales to major customers individually exceeding 10 percent of total revenues as follows: Customer A $ 62,834 Customer B $ 46,932 Customer C $ 81,818 h. Cash Concentration The Company maintains its cash balances at financial institutions that are federally insured. However, at times these balances may exceed federally insured limits. i. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of The Company has adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of and SFAS No. 142 "Goodwill and other intangible assets." These statements require that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed their respective fair values. Assets to be disposed of are reported at the lower of the carrying amount of fair value less the costs to sell. j. Restricted cash During 2004, the Company entered into a certificate of deposit to secure a revolving line of credit (See Note 6). This certificate of deposit had a beginning principal balance of $60,000 and interest accrued at a rate two percent below the rate on the line of credit it secured. During 2004, the interest on the certificate of deposit accrued at rate of 0.85%. Funds contained in this CD are classified as restricted as long as the related line of credit is outstanding. F-10 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Continued) April 30, 2005 and 2004 NOTE 2 - FILM DEVELOPMENT COSTS Film development costs relate to projects not yet in production. At April 30, 2005 these costs totaled $53,055, net of an allowance of $34,000. During the year ended April 30, 2005, the Company capitalized $1,392 in film development costs. The script for one of the projects currently under development was acquired from a current officer and director of the Company. NOTE 3 - COMMON STOCK On January 16, 2005, the Company issued an aggregate of 1,600,000 shares of its previously unissued restricted common stock to various parties in order to reduce the Company's outstanding debt. The shares were valued at $0.10 per share, representing the 90-day weighted average market value of the shares. Of the 1,600,000 shares issued, 900,000 were issued to officers and/or directors for accrued compensation. On February 4, 2005, the Company's Board of Directors resolved to authorize the issuance of 1,500,000 shares of its previously unissued restricted common stock to various parties for cash at $0.10 per share, resulting in total cash proceeds of $150,000. Of the 1,500,000 shares issued pursuant to this resolution, 800,000 were issued to an entity controlled by a director of the Company, and 350,000 to an officer and director of the Company. NOTE 4 - INCOME TAXES Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Net deferred tax assets consist of the following components as of April 30, 2005 and 2004: 2005 2004 Deferred tax assets: NOL Carryover $ 6,100,000 $ 6,015,800 Deferred Tax Liabilities: - - Valuation allowance (6,100,000) (6,015,800) ------------ ------------ Net deferred tax asst $ - $ - ============ ============ The income tax provision differs from the amount of income tax determined by applying the U.S. federal and state income tax rates of 39% to pretax income from continuing operations for the years ended April 30, 2005 and 2004 due to the following: 2005 2004 Book income (loss) $ (198,832) $ (106,105) Meals and entertainment 4,035 1,065 State tax (40) (39) Accrued expenses 131,800 Valuation allowance 63,037 105,079 ------------ ------------ $ - $ - ============ ============ F-11 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Continued) April 30, 2005 and 2004 NOTE 4 -INCOME TAXES (Continued) At April 30, 2005, the Company had net operating loss carryforwards of approximately $15,000,000 that may be offset against future taxable income from the year 2005 through 2025. No tax benefit has been reported in the April 30, 2005 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years. NOTE 5 - COMMITMENTS AND CONTINGENCIES Investigation of Related-Party Transactions On April 17, 2003, a Shareholders Committee made a formal request to the Company's Board of Directors requesting an investigation of a series of Related Party Transactions that occurred during the period of November 1998 through April 2001. The Board of Directors appointed independent legal counsel to investigate these transactions and report to both the Board of Directors and the Shareholders Committee. This report has since been evaluated by the Board and in consultation with the Company's corporate counsel and financial advisors. As a result of these discussions, the Company has decided not to legally pursue this matter as the legal costs are likely to exceed any damages which might be awarded by an appropriate court were the Company to file suit. "Kickboxer" Dispute On August 25, 2003, a lawsuit was filed against the Company for breach of contract concerning an option agreement related to "The Kickboxer" series of television movies originally optioned on June 6, 1997. In June 2004 the Company entered into a Settlement Agreement with the plaintiff, in which each agreed to release the other from all claims arising from the lawsuit. Additionally, the parties entered into a related Option and License Agreement, whereby the Company granted to the former plaintiff two exclusive options to use the word "Kickboxer" in the title of up to two motion pictures. Per the terms of the Agreement, the first option expired on October 31, 2005, making the second option redundant. All rights pursuant thereto have thus reverted back to the Company. Other Commitments and Contingencies In the ordinary course of business, the Company has or may become involved in matters of dispute which in the aggregate are not believed by management to be material to its financial position or results of operations. NOTE 6 - LINE OF CREDIT On March 4, 2004, the Company entered into a revolving line of credit loan with a beginning principal balance of $60,000, secured by a $60,000 certificate of deposit (see Note 1). During 2004, the line of credit accrued interest at a rate of 2.85% per annum, and expired on March 1, 2005. The line of credit was renewed during the period and the expiration date extended to March 1, 2006, at a rate of 4.55% per annum. F-12 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Continued) April 30, 2005 and 2004 NOTE 7 - DISCONTINUED OPERATIONS The Company has discontinued the operations of its subsidiary KRTR, which was formally dissolved on May 13, 2005. KRTR has been inactive and had no operations for the past two years. As of April 30, 2005 the Company has $4,000 of accrued liabilities outstanding, relating to the KRTR subsidiary. NOTE 8 - GOING CONCERN The Company's consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However at April 30, 2005, the Company has a deficit in working capital of $478,159, has an accumulated deficit of $25,692,171, and has sustained recent losses from operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management believes that increasing project development efforts will eventually result in achieving profitable operations and consistent revenue streams. In addition, the Company has discontinued certain operations that historically produced negative cash flow. Further, the Company plans to raise capital through equity-based investment instruments, which will provide funding for the development of future projects and operating expenses. Also, the Company has sold certain distribution rights pertaining to portions of its film library (see Note 10), and the Company continues to seek opportunities to exploit its film library to generate future cash inflows and related business and marketing opportunities. NOTE 9 - DISTRIBUTION AGREEMENT On September 30, 2004, the Company executed an Amendment Agreement with Lions Gate Films, Inc., ("LGF"), extending and amending the original Agreement dated August 1, 1998. This Agreement, effective August 20, 2004 through August 30, 2015, stipulates that LGF pay the Company a guarantee (in the form of an advance against royalties) of $1.2 million; $250,000 of which was payable upon execution of the Agreement, and the remaining $950,000 payable on September 1, 2005. In addition, the Company is entitled to certain royalties related to home video distribution. The Company received the initial $250,000 in September, 2004, and the remaining $950,000 in September, 2005. The Company will amortize this advance on a quarterly basis over the ten-year term of the Agreement. NOTE 10 - SUBSEQUENT EVENTS Option/Purchase Agreement On August 16, 2005, the Company received $90,000 (less 10% agency commission of $9,000) from New Line Cinema, as an option fee, applicable against the $900,000 purchase price, pertaining to the Company's rights to the movie production, All of Me. F-13 KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Continued) April 30, 2005 and 2004 NOTE 10 - SUBSEQUENT EVENTS (Continued) The option fee entitles New Line Cinema to the film rights of the remake of All of Me, for a 16-month option period expiring October 11, 2006. Should New Line Cinema elect to move forward with the remake, it will be required to pay the Company an additional $810,000 (less commissions of 10.0%) within the 16-month option period. New Line has the right to extend this option period for an additional 18-month period upon payment of a further $90,000, which shall be non-applicable against the purchase price. In accordance with the agreement, the Company shall be granted an official producer credit. Resolution of Legal Dispute In April, 2004, the Company discovered that checks in an aggregate amount of $103,517, from Paramount Pictures Group ("Paramount") payable to Regal Productions ("Regal") c/o Kings Road Entertainment (earned jointly by the Company and Regal) were deposited into accounts of Kings Road Entertainment, Inc., ("KREN Florida") and Kings Road to Fame, Inc. (KRF Florida) doing business as Regal Productions, corporations controlled by Michael Berresheim and Eric Ottens, without the consent or knowledge of the Company. In June, 2004, the Company made a demand upon KREN Florida, KRF Florida, 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, denied any malfeasance, and Mr. Berresheim indicated his intention to repay these monies, and to undertake other actions, to resolve this situation. In August, 2004, the Company, through its legal counsel, filed suit in Florida, against Messrs. Berresheim and Ottens, KREN Florida, KRF Florida, et al, "seeking the return of money illegally obtained and converted from [the Company], an accounting and an injunction from further use of its trade name." In July, 2005, Defendant Berresheim filed his answer to the Company's complaint, along with affirmative defenses and counterclaims, seeking to recover approximately $500,000. In a hearing held on March 6, 2006, the court ordered the striking of said Defendant's affirmative defenses and counterclaims and entered a default judgment against him. Despite receiving the favorable default judgment in this matter, the Company elected to fully allow for its receivable relating to the claim against Berreshiem et al at April 30, 2005, due in part to the difficulty in collecting the judgment amount. Accordingly, the Company recognized bad debt expense in the amount of $48,896 during the year ended April 30, 2005. Management anticipates making concerted attempts to collect this judgment in the near future. Legal Dispute Pertaining to Alleged Employment Agreement: D. Tunnell vs. KREN On September 14, 2005 and subsequent to the period covered by this report, the Company was served with a complaint by Donal C. Tunnell, case number 05-007436 CACE 18, in the Circuit Court in and for Broward County, FL. This complaint is on three counts: Breach of Contract, Unjust Enrichment and Fraud. The Plaintiff is basing his claims on the existence and subsequent breach of an employment agreement of January 19, 2002, between the Company and the Plaintiff. This purported agreement was signed on behalf of the Company by Mr. Michael L. Berresheim, a former officer and director of the Company. The Company has no record of any such employment agreement in its files and disputes the authenticity of said agreement. On October 14, 2005, the Company's Florida counsel filed a motion to dismiss the complaint, which has yet to be heard by the Court. The Company believes that the claim is fraudulent and without merit. F-14