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Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
<TABLE>
<S> <C> <C>
For the Quarterly Period Ended January 31, 1995 Commission File No. 0-14234
</TABLE>
KINGS ROAD ENTERTAINMENT, INC.
(exact name of registrant as specified in charter)
<TABLE>
<S> <C>
Delaware 95-3587522
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
</TABLE>
1901 Avenue of the Stars, Suite 605
Los Angeles, California 90067
(Address of principal executive office)
Registrant's telephone number, including area code: (310) 552-0057
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ____
As of March 16, 1995 the Registrant had 5,120,047 shares of its Common Stock,
$.01 par value, issued and outstanding.
Page 1 of 13
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - (UNAUDITED)
<TABLE>
<CAPTION>
AS OF
JAN. 31, 1995
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<S> <C>
ASSETS
Cash in Bank $4,391
Restricted Cash 0
Accounts Receivable 1,394,458
Film Costs 5,800,507
Prepaid Expense 11,993
Fixed Assets 4,613
Other Assets 26,163
-----------
TOTAL ASSETS $7,242,125
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts Payable $741,317
Due to Related Party - Note C 560,407
Accrued Expenses 96,184
Income Taxes Payable 17,957
Debt - Note C 754,805
Deferred Revenue 482,467
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TOTAL LIABILITIES 2,653,137
COMMITMENTS AND CONTINGENCIES
Note D
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 12,000,000
shares authorized; 5,120,047 shares issued
and outstanding - Note E 45,716
Additional Paid-in Capital 24,902,177
Retained deficit (20,358,905)
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TOTAL SHAREHOLDERS' EQUITY 4,588,988
-----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $7,242,125
===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
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KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED (DEFICIT) - (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Feature Films $1,427,056 $2,994,717 $2,771,541 $5,202,798
Interest Income 13 34 291 504
Other Income 0 0 1,510 2,500
----------- ----------- ----------- -----------
1,427,069 2,994,751 2,773,342 5,205,802
COSTS AND EXPENSES:
Costs Related to Revenue 1,220,662 2,486,364 2,053,226 3,881,382
Selling Expenses 83,423 25,897 326,166 331,075
General & Admin. Exp. 179,672 207,246 499,690 620,426
Interest - Note B 0 27,840 0 27,840
----------- ----------- ----------- -----------
1,483,757 2,747,347 2,879,082 4,860,723
INCOME/(LOSS) BEFORE
INCOME TAXES (56,688) 247,404 (105,740) 345,079
Provision for income
taxes - Note F 1,422 3,371 51,772 49,130
----------- ----------- ----------- -----------
NET INCOME/(LOSS) (58,110) 244,033 (157,512) 295,949
Retained Deficit
Beginning of Period (20,300,795) (20,818,525) (20,201,393) (20,870,441)
----------- ----------- ----------- -----------
End of Period (20,358,905) (20,574,492) (20,358,905) (20,574,492)
=========== =========== =========== ===========
Net Earnings
Per Share - Note A ($0.01) $0.05 ($0.03) $0.06
=========== =========== =========== ===========
Weighted Average Number
of Common Shares 5,120,047 5,080,047 5,120,047 5,080,047
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED JANUARY 31,
1995 1994
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<S> <C> <C>
OPERATING ACTIVITIES
Net Income/(Loss) ($157,512) $295,949
Noncash items included in income:
Depreciation and amortization 2,061,547 3,881,383
(Increase)/Decrease in:
Accounts Receivable 48,155 (1,013,806)
Prepaid Expenses 0 181
Other Assets (2) 0
Restricted Cash 10,430 10,430
Increase/(Decrease) in:
Accounts Payable 73,673 (769,638)
Settlements Payable 0 (350,000)
Accrued Expenses 69,157 13,810
Income Taxes Payable 0 (1,110)
Deferred Revenue 234,815 (430,667)
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NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,340,263 1,636,532
INVESTING ACTIVITIES
Purchase of Fixed Assets (1,839) 0
Gross additions to Film Costs (3,394,054) (1,552,592)
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NET CASH (USED IN)
INVESTING ACTIVITIES (3,395,893) (1,552,592)
FINANCING ACTIVITIES
Increase in Debt 2,742,181 1,326,527
Repayment of Debt (2,158,774) (1,322,157)
Borrowing from Related Party 283,000 98,481
Proceeds from Exercise of Stock Options 16,250 0
---------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 882,657 102,851
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INCREASE/(DECREASE) IN CASH (172,973) 186,791
CASH AT BEGINNING OF PERIOD 177,364 15,512
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CASH AT END OF PERIOD $4,391 $202,303
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements. Accordingly, they do not include all of the information
and disclosures required for annual financial statements. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes for the year ended April 30, 1994, included in
the Company's annual report on Form 10-KSB for that period.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of January 31, 1995 and the results of operations and cash flows
for the three month and nine month periods ended January 31, 1995 and 1994 have
been included. Certain adjustments were made to reflect the adoption of SFAS
109, "Accounting for Income Taxes", effective May 1, 1993. (See Note F- Income
Taxes.)
The results of operations for the three and nine month periods ended January
31, 1995 are not necessarily indicative of the results to be expected for the
full fiscal year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-KSB for the year ended April 30, 1994.
Earnings per share has been calculated based upon the weighted average number
of common shares outstanding. Stock options have been excluded as common stock
equivalents because of their antidilutive or non-material effect.
NOTE B - FILM COSTS
<TABLE>
<CAPTION>
As of
Jan. 31, 1995
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<S> <C>
Film costs consist of:
Films in release $164,994,848
Accumulated Amortization (161,853,400)
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Subtotal 3,141,448
Films in production 2,190,442
Story rights & development costs 468,617
------------
Total Film Costs $5,800,507
============
</TABLE>
In accordance with Financial Accounting Standards No. 34, interest costs are
capitalized to feature film productions until the date of completion. The
total amount of interest expense capitalized to film costs during the three
months ended January 31,
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1995 was approximately $41,000, no interest was capitalized for the three
months ended January 31, 1994. The total amount of interest expense
capitalized to film costs during the nine months ended January 31, 1995 and
1994 was approximately $88,000 and $46,000, respectively.
NOTE C - DEBT
As of January 31, 1995, the Company had debt of $754,805 due March 1, 1995.
The Company entered into an agreement with a bank on July 12, 1994 to provide a
revolving facility with maximum borrowings up to $1,500,000 expiring March 1,
1995. The loan bears interest at LIBOR plus 3% (as of January 1, 1995, 9.125%)
and is secured by a first lien on all amounts to be received under the
Company's theatrical, video, pay television, free television and foreign film
licensing agreements and by first liens on the copyrights of all films owned by
the Company. The agreement contains a provision wherein the Company cannot
request advances under the credit facility after December 31, 1994. The
Company is in compliance with all covenants specified in the agreement.
In January 1993, the Company borrowed $300,000 from an officer of the Company
to allow it to meet current expenses. The Company has subsequently borrowed an
additional $382,286 from the same officer and repaid $121,074 of its
obligation. The loan is payable with interest at 6% on demand but not earlier
than May 1995. The Company is also responsible for the officer's cost of
funds, if any, above 6%.
NOTE D - LITIGATION AND CONTINGENCIES
In December 1994, the Company filed a lawsuit in the Superior Court of the
County of Los Angeles against The Movie Group, Inc. ("TMG") alleging cause of
action for breach of contract, conversion and breach of fiduciary duty, among
other things, arising from a sales agency agreement ("Agreement") with TMG in
connection with one of the Company's films. Under the Agreement, the Company
is entitled to receive certain monies derived from sales of the film after
deduction of certain fees and expenses. The Company believes TMG has
substantially underpaid the monies to which the company is entitled to receive.
The lawsuit seeks payment of any monies due along with termination of the
Agreements. While management believes it may prevail on some or all of the
causes of action, the likelihood of any monetary recovery is uncertain and the
Company may be required to share any recovery with third parties.
In the ordinary course of business, the Company has or may become involved in
disputes or litigation. On the basis of information available to it,
management believes such contingencies will not have a materially adverse
impact on the Company's financial position or results of operations.
NOTE E - STOCK OPTIONS AND WARRANTS
The Company's 1987 Nonqualified Stock Option Plan (the "1987 Plan") provides
for the grant of options to purchase up to 850,000 shares. At January 31,
1995, options to purchase up to 302,375 shares were outstanding under the 1987
Plan at exercise prices ranging from $.25 to $.52 per share. Of the
outstanding options under the 1987 Plan, 235,500 are held by the Chairman of
the Board, 16,875 by another director, and 50,000 by an officer of the Company.
Options to purchase an additional 250,000
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shares have also been granted to the Chairman of the Board outside the 1987
Plan at an exercise price of $.25 per share. All of the outstanding options
expire in August 1997.
NOTE F - INCOME TAXES
Effective May 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109
requires a change to the "asset and liability method" of accounting for income
taxes from the "deferred method" of accounting for income taxes which was
required under Accounting Principles Board Opinion No. 11 ("APB 11"). Under
SFAS 109, deferred tax assets and liabilities are recognized with respect to
the tax consequences attributable to differences between the financial
statement carrying values and the tax bases of existing assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to the taxable income in the years in which these temporary
differences are expected to be recovered or settled. Further, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Under the deferred
method, deferred taxes were not adjusted for subsequent changes in tax rates.
Pursuant to the deferred method of accounting for income taxes required by APB
11, applicable in the years prior to the fiscal year ended April 30, 1994,
deferred taxes would have been provided for timing differences between
financial statement and tax return recognition of income and expenses.
Although timing differences arose during periods prior to fiscal 1994, any
future taxes payable would have been offset by tax benefits resulting from the
use of losses from such years, and accordingly, no deferred taxes were
provided. The principal timing differences that arose during those periods
relates to the recognition of revenues from licensing agreements and different
bases in film costs for book and tax purposes.
The Company's financial position and results of operations were not impacted by
the change in the method of accounting for income taxes resulting from the
adoption of SFAS 109. Deferred income taxes at January 31, 1995 reflect the
impact of temporary differences between assets and liabilities from financial
reporting purposes and their carrying values as measured by tax laws. These
temporary differences are determined in accordance with SFAS 109 and are more
inclusive in nature than timing differences as determined under previously
applicable accounting policies.
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities at January 31, 1994 are as follows:
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<TABLE>
<CAPTION>
Assets/(Liabilities) 1994
- -------------------- ----------
<S> <C>
Deferred revenue $253,000
(Film cost amortization) (491,000)
Net operating loss carryforwards 6,440,000
Investment tax credit carryforwards 2,166,000
Foreign tax credit carryforwards 400,000
----------
Subtotal 8,768,000
Valuation allowance (8,768,000)
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Net Deferred Taxes $0
==========
</TABLE>
A valuation allowance of $8,768,000 has been recognized to offset the related
deferred tax assets due to the uncertainty of realizing the benefit of
utilizing the loss carryforwards.
8
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Item 2 - Management's Discussion and Analysis of Financial
Position and Results of Operations
Results of Operations
For the three months ended January 31, 1995, the Company reported a net loss of
approximately $58,000 on revenues of approximately $1,427,000 compared to net
income of approximately $244,000 on revenues of approximately $2,995,000 for
the same period last year. The decrease in revenue of approximately 50% is due
to the fact that the Company released only one film, "The Stranger", to the
domestic pay television market during the current quarter. For the same period
last year, the Company released one film to the domestic home video market and
two films to the foreign market. For the nine months ended January 31, 1995
the net loss reported by the Company was approximately $158,000 on revenues of
approximately $2,772,000 versus net income of approximately $296,000 on
revenues of approximately $5,203,000 for the same period last year. The
Company currently projects that "The Stranger" and another completed film, "The
Redemption", will be released into the foreign market in the fourth quarter.
Future revenues of the Company will be dependent upon the success of these
releases and on the Company's ability to continue to generate working capital
for the development of additional motion picture projects and the success of
those projects. (See "Liquidity and Capital Resources.")
Costs relating to revenue were approximately $1,221,000 during the three months
ended January 31, 1995 versus approximately $2,053,000 versus the three months
ended January 31, 1994. These costs relate to amortization of production costs
of films on which revenue was recognized during the period. Selling expenses
increased to approximately $83,000 during quarter versus approximately $26,000
for the same period last year. General and Administrative Expenses decreased
to approximately $180,000 during the quarter from approximately $207,000 during
the same period last year. This decrease resulted from continued reductions in
overhead expenditures made by the Company.
In accordance with Statement of Financial Accounting Standards No. 34, interest
is capitalized to film costs based upon the weighted average of production
costs outstanding during a period. For the three months ended January 31,
1995, the Company capitalized approximately $41,000 of interest costs. During
the three months ended January 31, 1994, no interest was capitalized to
production costs. Interest expense during this period was approximately
$28,000. (See Note B to the Unaudited Consolidated Financial Statements.)
Liquidity and Capital Resources
The production of motion pictures requires substantial capital. In producing a
motion picture, the Company must expend substantial sums for both production
and print and advertising expenses, all before any revenues are generated by
the film. In certain instances the Company has been able to negotiate with a
distributor to have print and advertising monies advanced, although often the
Company has financed these capital investments itself. The Company has
obtained advances and guarantees from its distributors in various media
worldwide with respect to many of its pictures, but these advances and
guarantees are generally not received until after completion and release of the
picture.
The principal asset on the Company's balance sheet is unamortized film costs.
The unamortized film costs reflects the lower of cost or management's estimate
of future revenues on a film by film basis in accordance with generally
accepted accounting principles. The
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Company's unamortized film costs as of January 31, 1995 and 1994 were
approximately $5,800,000 and $5,255,000, respectively.
Not reflected on the Company's balance sheet, in accordance with generally
accepted accounting principles, is the full value of the Company's film
library. Once fully amortized for financial statement purposes, a film may
still generate significant revenue. A consultant, hired by the Company in
October 1993, estimated the value of the Company's film library at
approximately $7,000,000 (not including the Company's four most recently
completed films). This represents the present value of future estimated
revenues less associated sales costs. There is no assurance that the company
could realize all of this estimated value.
For the nine months ended January 31, 1995, the Company's net cash provided by
operating activities was approximately $2,340,000, compared to approximately
$1,637,000 in the same period last year. Net cash provided by financing
activities was approximately $883,000 and approximately $103,000 for the nine
month periods ending January 31, 1995 and January 31, 1994, respectively. The
net cash provided by operating and financing activities in addition to
approximately $173,000 of cash on hand was used primarily for investing
activities through gross additions to film costs of approximately $3,394,000
for the nine month period ended January 31, 1995 and approximately $1,553,000
for the same period last year.
Sources of Capital
The Company's principal sources of working capital are provided by motion
picture licensing income and Credit Lyonnais Bank Nederland N.V. under a
revolving credit facility agreement; borrowings are limited to a percentage of
the amount of certain contract receivables of the Company. This credit
facility provides for maximum borrowings of $1,500,000 expiring March 1, 1995.
The credit facility bears interest at LIBOR plus 3% and is secured by a first
lien on all amounts to be received under the Company's theatrical, home video,
pay television, free television and foreign license agreements and by first
liens on the copyrights of all films produced or acquired by the Company. (See
Note C to the Unaudited Consolidated Financial Statements.)
Additional capital was provided through a loan made by another corporation
("Limited Partner") to a limited partnership ("Partnership"), owned 50% by the
Company. The sole purpose of the Partnership is the production and
distribution of a feature-length theatrical motion picture with a budget of
approximately $3,000,000. The Limited Partner loaned 50% of the budget and
contributed, as equity, 25% of the budget of the picture. The remaining 25% of
the budget was provided, as equity, by the Company. The Company guaranteed
repayment of 50% of the loan made by the Limited Partner, and agreed to act as
the general partner for the Partnership. The revenues generated by the
Partnership will first be disbursed by the Partnership to repay the Limited
Partner's loan and legal expenses and to pay the Company's executive producing
fee of $250,000, then, revenues will be disbursed to the Limited Partner and
the Company in equal shares. (See "Future Commitments".)
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Future Commitments
The Company's anticipated major financial commitments relate to the production
and release of its motion pictures. In recent years, the Company has
concentrated on producing and distributing low budget films which require small
amounts of working capital. The Company plans to continue producing these
types of films, but will pursue projects with higher budgets if management
feels sufficient resources are available.
The Company's short-term cash needs are dependent on adequate borrowing
availability. The revolving credit facility with Credit Lyonnais Bank
Nederland N.V. previously discussed expired March 1, 1995. The credit facility
allowed the Company to borrow a percentage of certain contract receivables.
There are a number of banks in the entertainment industry that support this
type of lending and the Company is actively pursuing discussions with these
banks. Although management believes that it will be able to obtain financing
for the production of new films, the Company's operations have been and will be
constrained by the availability of adequate financing.
The Company, in the Partnership Agreement discussed above, guaranteed repayment
of 50% of the loan made to the Partnership by the Limited Partner. In
management's opinion, this potential future commitment will not have a
materially adverse impact on the Company's financial position and results of
operations.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In December 1994, the Company filed a lawsuit in the Superior Court of the
County of Los Angeles against The Movie Group, Inc. ("TMG") alleging causes of
action for breach of contract, conversion and breach of fiduciary duty, among
other things, arising from a sales agency agreement ("Agreement") with TMG in
connection with one of the Company's films. Under the Agreement, the Company
is entitled to receive certain monies derived from sales of the film after
deduction of certain fees and expenses. The Company believes TMG has
substantially underpaid the monies to which the Company is entitled to receive.
The lawsuit seeks payment of any monies due along with termination of the
Agreement. While management believes it may prevail on some or all the causes
of action, the likelihood of any monetary recovery is uncertain and the Company
may be required to share any recovery with third parties.
In the ordinary course of business, the Company has or may become involved in
disputes or litigation. On the basis of information available to it,
management believes such contingencies will not have a materially adverse
impact on the Company's financial position or results of operations.
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SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KINGS ROAD ENTERTAINMENT, INC.
Dated: March 16,1995 /s/Stephen J. Friedman
----------------------------------
Stephen J. Friedman
Chairman of the Board of Directors
and Chief Executive Officer
Dated: March 16, 1995 /s/Christopher M. Trunkey
----------------------------------
Christopher M. Trunkey
Chief Financial Officer
13
