<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended April 30, 1995 Commission File No. 0-14234
KINGS ROAD ENTERTAINMENT, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
Delaware 95-3587522
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
</TABLE>
1901 Avenue of the Stars, Suite 605
Los Angeles, California 90067
(Address of principal executive office)
Issuer's telephone number, including area code: (310) 552-0057
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01
Check whether the issuer (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
----- -----
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained herein, and will not 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. [ ]
State issuer's revenues for its most recent fiscal year: $4.3 million.
As of July 20, 1995 the aggregate market value of the voting stock held by
non-affiliates of the Registrant (based on the average of the bid and ask
prices as reported on the NASDAQ) was approximately $1,211,000 (assuming that
all officers and directors of the Registrant are deemed to be affiliates for
this purpose).
As of July 20, 1995 the Registrant had 5,120,047 shares of its common stock,
$.01 par value, issued and outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: YES NO X
----- -----
<PAGE> 2
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Kings Road Entertainment, Inc. ("Company" or "Registrant") is engaged
primarily in the development, financing, production and distribution of motion
pictures for theatrical exhibition (when practical) and for subsequent
distribution 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 with its first motion picture, "All of
Me", starring Steve Martin and Lily Tomlin, which was released in 1984.
Seventeen other pictures have subsequently been theatrically released in the
domestic market; four other pictures have been released directly to the
domestic home video or pay television market; and two pictures have yet to be
domestically released. The Company has also acquired certain distribution
rights to several other films produced by other production companies.
The Company's strategy is to maximize returns by financing its
pictures itself by offsetting a significant portion of the cost of production
by obtaining advances and guarantees from the licensing of the distribution
rights in its pictures and, in some cases, investments from third parties.
(SEE "FINANCING"). Advances represent cash payments which can be used to
defray a portion of the cost of production, while guarantees can be used as
collateral to obtain loans from banks. Advances and guarantees are generally
not refundable under any circumstances provided the film has been completed and
delivered.
DEVELOPMENT
The Company allocates a significant portion of the time and energy of
its staff to search for potentially viable motion picture material and to the
development of screenplays. At any given time, the Company is developing
between approximately 5 and 15 motion picture scripts or ideas for possible
future production. As of April 30, 1995, approximately $157,000 had been spent
or committed by the Company in connection with projects that were active at
that date. During fiscal years 1995 and 1994, the Company spent approximately
$20,000 and $123,000, respectively, on development activities, and anticipates
that it will spend between $100,000 and $600,000 each year in the future on
such activities. Although a substantial number of projects which the Company
develops are subsequently abandoned, the Company believes that these
expenditures are necessary if the Company is to obtain projects which have a
chance of achieving commercial success.
PRODUCTION
The Company attempts to produce its pictures at the lowest possible
cost consistent with the quality which it seeks to achieve. The Company avoids
the substantial overhead of major studios by maintaining a small permanent
staff and by renting production facilities and engaging production staff only
as required on a film-by-film basis. The Company generally produces pictures
which have a cost of production between $1,000,000 and $7,000,000 and which it
believes cannot significantly exceed their budgeted cost. Although the
Company's past production experience allows a certain control of production
costs, the production costs of motion pictures as an industry trend have
continually escalated in recent years.
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As of April 30, 1995, the Company has produced (or co-produced)
twenty-four pictures, eighteen of which were theatrically released in the
domestic market, four of which were released directly to video or pay
television in the domestic market, and two of which have not yet been released
domestically.
The Company's pictures produced (or co-produced) to date are as follows:
<TABLE>
<CAPTION>
TITLE PRINCIPAL CAST RELEASE DATE
----- -------------- ------------
<S> <C> <C>
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
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
Brain Smasher Andrew Dice Clay, Teri Hatcher November 1993
Kickboxer IV Sasha Mitchell July 1994
The Haunted Heart Diane Ladd, Olympia Dukakis TBA
The Stranger Kathy Long March 1995
The Redemption Mark Dacascos TBA
</TABLE>
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FINANCING
The Company attempts to offset a significant portion of the cost of
production of its pictures by obtaining advances and guarantees from the
licensees of distribution rights in its pictures. However, under certain
circumstances, whether because the financial risk of a picture exceeds that
which the Company is willing to take or for other reasons, the Company may
obtain the financing for all or part of the cost of production of a picture
from a third party.
The principal sources of working capital for the Company have been (i)
a revolving credit facility with Credit Lyonnais Bank Nederland N.V. ("Credit
Lyonnais") which provided borrowings limited to a percentage of certain
receivables of the Company, and was secured by a first lien on all amounts to
be received under the Company's license agreements and by a first lien on all
copyrights owned by the Company ("Credit Facility"), (ii) individual production
loans on films provided by Credit Lyonnais and/or other banks, (iii) internally
generated funds, primarily from the exploitation of the Company's pictures, to
the extent that such funds have not been pledged to Credit Lyonnais, and (iv)
financing from third-party investors.
The Credit Facility expired March 1, 1995. The Company fully repaid
all of its obligation on March 20, 1995, and Credit Lyonnais has subsequently
released all collateral. At April 30, 1995, the Company had no outstanding
amounts due under this or any other credit facility or bank loan. (SEE "NOTE D
TO THE CONSOLIDATED FINANCIAL STATEMENTS").
DISTRIBUTION
Theatrical -- The Company, when practical, licenses 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. Although in certain cases the
distributors advance costs relating to advertising and publicizing the motion
pictures and the manufacturing of prints, the Company expects that in most
cases it will be required to fund or arrange funding for the prints and
advertising costs itself. (SEE "FINANCING").
Home Video and Pay Television -- While in the past the Company's
pictures were all theatrically released before being distributed on home video,
certain low budget pictures are often not released theatrically, but are
distributed for the first time on video or pay television. Distribution into
the home video market has occurred by licensing the home video rights for the
Company's pictures to video distributors including Home Box Office, Paramount
Pictures, Live Home Video, and Trimark. These video distributors in turn sell
videocassettes to video retailers which rent or sell videocassettes to
consumers. 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 pay-per-view distributors.
Free Television -- After licensing to pay television, the Company's
films are made available to television stations and basic cable outlets. The
Company licenses the free television rights to its films to companies such as
ITC Entertainment and Worldvision Enterprises who in turn sell packages of
films to televisions stations and basic cable services.
Other Rights -- Network television, non-theatrical, music publishing,
soundtrack album, novelization, and other miscellaneous rights in the Company's
pictures are, whenever possible,
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licensed by the Company to third parties. The revenue to be derived from the
exercise of these other rights is generally not as significant as revenue from
other sources.
International Markets -- The Company generates substantial revenues
from the licensing of its pictures outside of the United States. The Company
licenses its 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 it own staff.
EMPLOYEES
At April 30, 1995, the Company employed eight full-time employees in
its Los Angeles office. During the production of a motion picture, additional
employees are engaged by the Company for that production. The compensation of
these additional employees, including in some cases the right to participate in
the net or gross revenues of a particular picture, are included in the
capitalized cost of the related picture. The Company and certain of its
subsidiaries are subject to the terms of various industry-wide collective
bargaining agreements with the Writers Guild of America, the Directors Guild of
America, and the Screen Actors Guild. 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.
COMPETITION
The motion picture industry is highly competitive. The Company faces
competition from motion picture studios and numerous independent production
companies, many of which have 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
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. The Company plans to take 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 follows the practice of
submitting its pictures for such ratings. Management's current policy is to
produce motion pictures which qualify for a rating no more restrictive than
"R".
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ITEM 2. PROPERTIES
The Company leases its principal executive office in Los Angeles,
California on a month-to-month basis. The Company currently leases
approximately 3,300 square feet of office space at $1.00 per square foot per
month. In management's opinion, the space currently occupied will be adequate
for future needs. The Company does not own or intend to acquire production
facilities and rents any necessary production or post production 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
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, and seeking an accounting and declaratory relief, among
other things, arising from a sales agency agreement ("Agreement") with TMG in
connection with one of the Company's films. Under the Agreement, the Company
is entitled to receive certain monies derived from exploitation of the film
after 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 of the
causes of action, the likelihood of any monetary recovery is uncertain and the
Company may be required to share any recovery with certain third parties.
Subsequent to April 30, 1995, TMG filed a cross-complaint against the Company
and a third party alleging, among other things, inducing breach of contract,
recision based on fraud and intentional interference with existing business
relationships. Management believes it has substantial defenses to all of the
allegations in the cross-complaint.
In the ordinary course of business, the Company has or may become
involved in disputes or litigation which in the aggregate are not believed by
management to be material to its 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 fourth quarter of the fiscal year covered by this report.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the NASDAQ stock market under
the symbol "KREN" since September 1985. The following table sets forth the
high and low closing bid prices of the Common Stock as reported by NASDAQ
through April 30, 1995:
<TABLE>
<CAPTION>
FISCAL YEAR 1994 HIGH LOW
---------------- ----- ----
<S> <C> <C>
First Quarter 5/8 3/8
Second Quarter 3/4 1/4
Third Quarter 13/16 5/8
Fourth Quarter 3/4 9/16
</TABLE>
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<TABLE>
<CAPTION>
FISCAL YEAR 1995 HIGH LOW
---------------- ----- ----
<S> <C> <C>
First Quarter 11/16 9/16
Second Quarter 25/32 9/16
Third Quarter 9/16 3/8
Fourth Quarter 17/32 3/8
</TABLE>
As of July 20, 1995, the Company had approximately 275 stockholders of
record plus approximately 800 shareholders holding shares in street name.
The Company has never paid a cash or stock dividend on its Common
Stock and has no intention to pay any dividends in the future. The Company
currently intends to retain all earnings for use in its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company's revenues are almost exclusively derived from the
exploitation of the feature films it produces, as well as from film rights it
has acquired, and are 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, of which the Company has
recently been producing, generally 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. As a result of these
factors, the Company's revenues vary significantly each year depending on the
number and success of release of films which become available in the various
media during that fiscal year. Of the two films produced by the Company during
the fiscal year ended April 30, 1995, the Company released one to the domestic
pay television market and the international home video market. The second film
was released only to certain territories in the international home video
market.
As revenues are recognized for each film, the Company amortizes the
costs incurred in producing that film. The Company amortizes film costs under
the income forecast method as described in Statement of Financial Accounting
Standards (SFAS) No. 53 which provides 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
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. Costs relating to
projects which are abandoned or sold before being produced are charged to
overhead and capitalized to film costs in the year that event occurs.
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RESULTS OF OPERATIONS
For the fiscal year ended April 30, 1995, the Company reported a net
loss of approximately $395,000 on feature film revenues of approximately $4.3
million as compared to a net profit of approximately $669,000 on feature film
revenues of approximately $8.1 million for the prior fiscal year. The net loss
results primarily from the write-down to net realizable value of approximately
$680,000 for two films produced by the Company in prior fiscal years and a
decrease in revenues of approximately 47%. The decrease in revenues is
primarily attributable to the fact that one of the films produced by the
Company during the current year was not available for release in the domestic
market. During the last fiscal year, the films produced by the Company were
completed and released in both the domestic and foreign markets prior to the
end of the fiscal year. The decrease is also attributable to greater
competition for lower budget films, which the Company has been producing,
resulting in generally lower prices in the home video and television markets.
Domestic television revenues were recognized for "The Stranger", "Brain
Smasher", "Knights" and "Kickboxer". Significant foreign revenues were
recognized for "Kickboxer IV: The Aggressor", "Brain Smasher", "The Stranger"
and "The Redemption".
Costs related to revenue as a percentage of feature film revenues for
fiscal year 1995 increased to 81% from 68% for fiscal year 1994. This increase
is attributable to the write-down to net realizable value of the Company's
investment in two films produced in prior fiscal years. Selling expenses for
fiscal year 1995 decreased to approximately $502,000 from approximately
$978,000 for fiscal year 1994. This decrease results primarily from decreased
commissions expense attributable to the decrease in revenues during the fiscal
year. General and administrative expenses for the current year decreased to
approximately $645,000 from approximately $873,000 for fiscal year 1994. This
decrease is attributable to (i) continued reductions in the Company's overhead
expenditures and (ii) the decrease in salary during a substantial portion of
the current year by one of the Company's officers. Although the resulting
decrease will not be repaid to the officer, subsequent to April 30, 1995 the
officer's salary was restored to its original level. (SEE "ITEM 10. EXECUTIVE
COMPENSATION"). During the current and prior fiscal year, interest expense of
approximately $122,000 and $118,000 for 1995 and 1994, respectively, was
capitalized to film costs in accordance with SFAS No. 34.
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
the production and distribution of a picture, all before any revenues are
generated by that film. In certain instances the Company obtains advances and
guarantees from its distributors but these advances and guarantees generally
defray only a small portion of a film's cost.
The Company's principal sources of working capital during fiscal year
1995 were (i) motion picture licensing income and (ii) Credit Lyonnais under
the Credit Facility; borrowings were limited to a percentage of certain
contract receivables of the Company up to $1,500,000. The Credit Facility
expired on March 1, 1995 and bore interest at LIBOR plus 3% (as of March 1,
1995, 9.0%) and was secured by a first lien on all amounts to be received under
the Company's license agreements and by a first lien on all copyrights owned by
the Company.
The Company's net cash provided by operating activities increased to
approximately $3.6 million as compared to approximately $3.5 million in fiscal
1994. The Company used its operating cash flow in investment activities,
almost exclusively gross additions to film costs, of
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approximately $3.6 million in fiscal 1995, and $2.4 million in fiscal 1994 and
in financing activities in 1994 with the repayment of debt of approximately
$965,000. Financing activities during 1995 contributed net cash flow of
approximately $11,000, however, the Company repaid the Credit Facility in full.
The principal asset on the Company's balance sheet is unamortized film
costs. The Company's unamortized film costs at the end of fiscal years 1995
and 1994 were approximately $4.6 million and $4.5 million respectively. Not
reflected on the Company's balance sheet, in accordance with generally accepted
accounting principles, is the full realizable 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 million (not including the Company's five most recently
produced films) which represented the present value of future estimated sales
less associated costs. There is no assurance that the Company could realize
all of this estimated value.
FUTURE COMMITMENTS
The Company's anticipated major financial commitments relate to the
production and release of its motion pictures. Recently the Company has been
concentrating on lower budget films and expects to continue producing these
types of films, but will pursue projects with higher budgets if management
feels sufficient resources are available and risk is limited. The financial
resources necessary for the production and release of films is generally
dependent on adequate borrowing availability. The Credit Facility with Credit
Lyonnais expired March 1, 1995 and 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
it will be able to obtain financing for the production of new films, the
Company's financial position and operations have been and will be constrained
by the availability of adequate financing.
The Company owns 50% of a limited partnership created for the sole
purpose of producing and distributing the film "The Haunted Heart". The
Company guaranteed repayment of 50% of a loan made to the partnership by the
limited partner in the approximate amount of $1.5 million. In management's
opinion, this potential future commitment will not have a materially adverse
impact on the Company's financial position or results of operations. (SEE
"NOTE I TO THE CONSOLIDATED FINANCIAL STATEMENTS").
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Kings Road Entertainment,
Inc. and subsidiaries are listed on the Index to Financial Statements set forth
on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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
pleasure of the Board of Directors of the Company. Except as indicated below,
there are no other family relationships between any of the directors or
executive officers.
<TABLE>
<CAPTION>
EXPIRATION
NAME AGE POSITION OF TERM
---- --- -------- -------
<S> <C> <C> <C>
Stephen Friedman 58 Chairman of the Board 1996
and Chief Executive Officer
Christopher Trunkey 29 Vice President, Chief Financial ----
and Administrative Officer and
Secretary
Kenneth Aguado 37 Vice President and Director 1995
Martin Davidson 54 Director 1997
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
STEPHEN FRIEDMAN, Chairman of the Board of Directors and Chief
Executive Officer, has been an officer and director of the Company since its
inception in 1980. Mr. Friedman has been an independent motion picture
producer since 1971. He produced nine motion pictures between 1971 and 1982,
including "The Last Picture Show", "Slapshot", "Little Darlings", "Fast Break",
and "Eye of the Needle". Prior thereto, Mr. Friedman was employed as an
attorney by Paramount Pictures Corporation, Ashley Famous Agency, a talent
agency serving the entertainment industry, Columbia Pictures, and briefly the
Federal Trade Commission. Mr. Friedman graduated from Harvard Law School in
1960 and the Wharton School of the University of Pennsylvania in 1957 with a
B.S. in Economics.
CHRISTOPHER TRUNKEY, Vice President, Chief Financial and
Administrative Officer and Secretary, joined the Company in May 1994. Prior to
joining the Company, Mr. Trunkey was Controller for Ulysse Entertainment from
October 1993 to May 1994. Previous to Ulysse Entertainment, Mr. Trunkey was
Director of Financial Planning at Reeves Entertainment from May 1990 through
September 1993 and Staff Accountant for Telautograph Corporation from August
1988 through May 1990. Mr. Trunkey is a graduate of Drake University with a
degree in Finance.
KENNETH AGUADO has been a director of the Company since February 1989.
In July 1994, Mr. Aguado rejoined the Company as Vice-President for Creative
Affairs, a position he held from 1981 until 1990. Between 1990 and 1994, Mr.
Aguado headed production for Miller-Boyett Motion Pictures at Warner Brothers
and was Vice-President of Production for Badham/Cohen Group at Universal
Pictures. Mr. Aguado attended Tulane University, where he graduated with a
degree in Psychology and Film Theory & Criticism. Mr. Aguado is a nephew of
Stephen Friedman.
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MARTIN DAVIDSON has been a director of the Company since February
1989. He has been a producer, writer, and director of feature films since
1972. He produced the film "A Fan's Notes," wrote, produced and directed "The
Lords of Flatbush," wrote and directed "Almost Summer" and "Eddie and the
Cruisers," and directed "Hero at Large," "Long Gone," "Heart of Dixie," and
"Hard Promises". Mr. Davidson was the head of the motion picture division of
Ashley Famous Agency from 1960 to 1964. He attended Syracuse University from
1957 to 1958 and the American Academy of Dramatic Arts from 1959 to 1961.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation of the Company's Chief
Executive Officer for each of the last three fiscal years. No other executive
officer of the Company received salary and bonus in excess of $100,000 in any
of the last three fiscal years.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
STOCK OPTIONS
NAME AND POSITION YEAR SALARY ($) BONUS ($) (SHARES)
----------------- ---- ---------- --------- --------
<S> <C> <C> <C> <C>
Stephen Friedman 1995 60,000(1) 0 0
Chairman of the Board
and Chief Executive 1994 250,000 0 0
Officer
1993 250,000 0 235,500(2)
</TABLE>
-----------------
(1) During a portion of the fiscal year, Mr. Friedman voluntarily
reduced his salary from $250,000 to $25,000 to provide the Company
with the resources necessary to begin repayment of the borrowings
identified in "Item 12. Certain Relationships and Related Party
Transactions".
(2) The term of previously granted options scheduled to expire on
August 8, 1992 was extended an additional five years.
OPTION GRANTS, EXERCISES AND YEAR-END VALUES
Shown below is information with respect to the unexercised options
held by the Chief Executive Officer, all of which are currently exercisable.
No options were granted to or exercised by Mr. Friedman during the fiscal year
ended April 30, 1995.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
NAME OPTIONS AT APRIL 30, 1995 AT APRIL 30, 1995 (1)
---- ------------------------- ---------------------
<S> <C> <C>
Stephen Friedman 485,500 $121,375
</TABLE>
-----------------
(1) Based upon the difference between the closing stock price on
April 30, 1995 and the option exercise price.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of July 20,
1995, 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:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS
------------------------------------ ------ -----
<S> <C> <C>
Stephen Friedman 3,239,871(1) 57.8%
1901 Avenue of the Stars, Suite 605
Los Angeles, CA 90067
</TABLE>
-----------------
(1) Includes options granted to Mr. Friedman to purchase 485,500
shares at an exercise price of $.25 per share which are presently
exercisable.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of July 20, 1995, 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:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF DIRECTORS OR NUMBER OF PERCENT OF
NUMBER OF PERSONS IN GROUP SHARES CLASS
-------------------------- ------ -----
<S> <C> <C>
Stephen Friedman 3,239,871 (1) 57.8%
1901 Avenue of the Stars, Suite 605
Los Angeles, CA 90067
Kenneth Aguado 16,875 (2) *
4309 Wilkinson Avenue
Studio City, CA 91604
Martin Davidson 0 0
1505 Viewsite Terrace
Los Angeles, CA 90069
All Executive Officers and
Directors as a Group (4 persons) 3,256,746 (3) 57.9%
</TABLE>
-----------------
* Less than 1%.
(1) Includes options granted to Mr. Friedman to purchase 485,500
shares which are presently exercisable.
(2) Consists of options granted to Mr. Aguado to purchase 16,875
shares which are presently exercisable.
(3) Of the shares included as beneficially owned by all directors and
officers as a group, 502,375 shares may be acquired by exercise of
options which are presently exercisable.
12
<PAGE> 13
The Company knows of no 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since December 1992, the Company has borrowed approximately $682,000
from Stephen Friedman, an officer of the Company, including $283,000 at an
interest rate of 24% per annum (Mr. Friedman's actual cost of funds), during
the fiscal year ended April 30, 1995. These funds were used for current
expenses and as additional financing for the production of certain films. In
September 1994, the Company began making regular payments to Mr. Friedman to
reduce these outstanding loans and, when excess cash was available, additional
repayments were made. To facilitate these repayments, Mr. Friedman voluntarily
reduced his salary from $250,000 to $25,000 for a portion of the fiscal year.
(SEE "ITEM 10. EXECUTIVE COMPENSATION"). As of April 30, 1995 the principal
balance due under these loans was approximately $443,000. As of July 20, 1995,
the principal balance due under these loans was approximately $175,000.
Interest expense to Mr. Friedman was approximately $56,000 for the year ended
April 30, 1995.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)
3.1 Restated Certificate of Incorporation, as amended. (2)
3.2 Bylaws of Registrant. (2)
10.1 November 10, 1986 Agreement between ITC Entertainment, Inc.
and Registrant. (1)
10.2 1987 Non-Qualified Stock Option Plan of Registrant. (2)
10.3 December 28, 1989 Agreement between Worldvision Enterprises,
Inc. and Registrant. (3)
10.4 Second Amended and Restated Revolving Credit Facility and
Security Agreement dated July 12, 1994 between Credit Lyonnais
and Registrant, among others. (5)
21 Subsidiaries of Registrant. (4)
-----------------
(1) Incorporated by reference to Amendment No. 1 (on Form 8) to
Registrant's Form 10-K for fiscal year ended April 30, 1987
(confidential treatment of certain sections requested).
(2) Incorporated by reference to Form 10-K for the fiscal year ended
April 30, 1988.
(3) Incorporated by reference to Form 10-K for the fiscal year ended
April 30, 1991.
(4) Incorporated by reference to Form 10-KSB for the fiscal year
ended April 30, 1993.
(5) Incorporated by reference to Form 10-KSB for the fiscal year
ended April 30, 1994.
(B) FORMS 8-K
None.
13
<PAGE> 14
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.
Date: July 20, 1995 KINGS ROAD ENTERTAINMENT, INC.
By: /s/Stephen Friedman
--------------------------------
Stephen Friedman,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/Stephen Friedman Chairman of the Board of July 20, 1995
- ---------------------- Directors, Chief Executive
STEPHEN FRIEDMAN Officer
(Principal Executive Officer)
/s/Martin Davidson Director July 20, 1995
- ----------------------
MARTIN DAVIDSON
/s/Kenneth Aguado Director July 20, 1995
- ----------------------
KENNETH AGUADO
/s/Christopher Trunkey Vice President, Chief Financial July 20, 1995
- ---------------------- and Administrative Officer and
CHRISTOPHER TRUNKEY and Accounting Officer)
</TABLE>
14
<PAGE> 15
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED APRIL 30, 1995
<TABLE>
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheet as of April 30, 1995 F-3
Consolidated Statements of Operations for
the Years Ended April 30, 1995 and 1994 F-4
Consolidated Statements of Shareholders' Equity
for the Years Ended April 30, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years
Ended April 30, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 16
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
of Kings Road Entertainment, Inc.:
We have audited the accompanying consolidated balance sheet of Kings Road
Entertainment, Inc. and subsidiaries (the "Company") as of April 30, 1995, and
the related consolidated statements of operations, shareholders' equity and
cash flows for the two years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement preparation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 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, 1995, and the results of
their operations and their cash flows for the two years then ended in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
July 20, 1995
F-2
<PAGE> 17
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
APRIL 30, 1995
--------------
<S> <C>
ASSETS
Cash and Cash Equivalents $153,920
Accounts Receivable, net of allowance of $15,000 - Note A 1,013,409
Film Costs, net of amortization of $163,276,474 - Notes A & B 4,606,268
Prepaid Expenses 8,553
Fixed Assets - Notes A & C 5,813
Other Assets 5,500
-----------
TOTAL ASSETS $5,793,463
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts Payable $599,259
Due to Related Party - Note D 443,132
Accrued Expenses 166,648
Income Taxes Payable 17,957
Deferred Revenue 214,712
-----------
TOTAL LIABILITIES 1,441,708
COMMITMENTS AND CONTINGENCIES
Notes E & H
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, 12,000,000 shares
authorized, 5,120,047 shares issued and outstanding 45,716
Additional Paid-In Capital 24,902,177
Deficit (20,596,138)
-----------
TOTAL SHAREHOLDERS' EQUITY 4,351,755
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,793,463
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE> 18
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
1995 1994
---------- ----------
<S> <C> <C>
REVENUES
Feature Films - Note A $4,281,973 $8,076,564
Interest Income 313 692
Other Income 1,510 2,500
---------- ----------
4,283,796 8,079,756
COSTS AND EXPENSES
Costs Related to Revenue 3,476,300 5,510,564
Selling Expenses 502,327 978,498
General & Administrative Expenses 645,478 872,635
Interest - Note B 0 0
---------- ----------
4,624,105 7,361,697
---------- ----------
INCOME/(LOSS) BEFORE INCOME TAXES (340,309) 718,059
Provision for Income Taxes - Note G 54,436 49,011
---------- ----------
NET INCOME/(LOSS) ($394,745) $669,048
========== ==========
Net Income/(Loss) Per Share - Note A ($0.07) $0.13
========== ==========
Weighted Average Number of Common Shares 5,407,345 5,339,339
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 19
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Common Additional Retained Total
Stock Stock Paid-In Earnings/ Shareholders'
Shares Amount Capital (Deficit) Equity
--------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance,
April 30, 1993 5,080,047 $45,316 $24,886,327 ($20,870,441) $4,061,202
Net Income -- -- -- 669,048 669,048
--------- ------- ----------- ------------ ----------
Balance,
April 30, 1994 5,080,047 45,316 24,886,327 (20,201,393) 4,730,250
Net Income -- -- -- (394,745) (394,745)
Exercise of
Stock Options 40,000 400 15,850 -- 16,250
--------- ------- ----------- ------------ ----------
Balance,
April 30, 1995 5,120,047 $45,716 $24,902,177 ($20,596,138) $4,351,755
========= ======= =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 20
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss)/Income ($394,745) $669,048
Adjustments to reconcile Net (Loss)/Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 3,487,394 5,521,657
Provision for loss on Accounts Receivable 17,500 114,885
Change in Assets and Liabilities:
Decrease in Restricted Cash 10,430 0
Decrease/(Increase) in Accounts Receivable 411,704 (221,059)
Decrease in Prepaid Expenses 3,440 27,905
Decrease in Other Assets 20,661 0
Decrease in Accounts Payable (68,385) (683,904)
Decrease in Settlements Payable 0 (525,000)
Increase in Accrued Expenses 139,621 13,179
Decrease in Income Taxes Payable 0 (1,110)
Decrease in Deferred Revenue (32,940) (1,401,763)
---------- ----------
NET CASH AND CASH EQUIVALENTS
PROVIDED BY OPERATING ACTIVITIES 3,594,680 3,513,838
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (5,813) 0
Gross Additions to Film Cost (3,622,888) (2,386,897)
---------- ----------
NET CASH AND CASH EQUIVALENTS
USED IN INVESTING ACTIVITIES (3,628,701) (2,386,897)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Debt 2,807,855 2,064,164
Repayment of Debt (2,858,179) (3,127,734)
Borrowing from Related Party 283,000 99,286
Repayments to Related Party (238,349) (805)
Proceeds from Exercise of Stock Options 16,250 0
---------- ----------
NET CASH AND CASH EQUIVALENTS PROVIDED
BY/(USED IN) FINANCING ACTIVITIES 10,577 (965,089)
---------- ----------
NET (DECREASE)/INCREASE IN CASH
AND CASH EQUIVALENTS (23,444) 161,852
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 177,364 15,512
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $153,920 $177,364
========== ==========
Cash paid for:
Interest - Note A 97,879 91,014
Taxes - Note G 54,436 49,011
</TABLE>
The accompanying notes are an integral part of these statements
F-6
<PAGE> 21
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation -- The consolidated financial statements include
the accounts of Kings Road Entertainment, Inc. and its subsidiaries after
elimination of all intercompany items and transactions.
Basis of Presentation -- The consolidated financial statements have been
prepared on a going concern basis which assumes the realization of assets and
the satisfaction of liabilities in the normal course of business.
Recognition of Revenues -- The Company recognizes revenues in accordance with
the provisions of SFAS No. 53. 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 license as
follows:
<TABLE>
<CAPTION>
Months After Approximate
Marketplace Initial Release Release Period
----------- --------------- --------------
<S> <C> <C>
Domestic theatrical 6 months
All international markets 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
</TABLE>
In 1995, the Company earned revenue from one significant customer of
approximately $930,000 (22%) of consolidated revenues. No customer constituted
more than 10% of total sales for 1994.
Revenues from foreign sources were approximately $2,712,000 and $5,391,000 in
1995 and 1994, respectively.
Film Costs -- Film costs, including related interest and production 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 forecast method set forth in SFAS 53 is
used to amortize these costs based in 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 and, when
unamortized costs exceed net realizable value for a film, that film's
unamortized costs are written down to net realizable value. Costs related to
projects which are abandoned or sold before being produced are charged to
overhead and capitalized to film costs in the year that event occurs.
F-7
<PAGE> 22
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and Amortization -- Depreciation of fixed assets is computed by
the straight-line method over the estimated useful lives of the assets ranging
from three to five years. Leasehold improvements are amortized over the
useful life of the improvements or the terms of the applicable lease,
whichever is less.
Per Share Data -- Per share computations are based on the average number of
the Company's common shares and common equivalents outstanding during each year.
Concentration of Credit Risk -- 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, 1995, approximately 25% of the Company's
accounts receivable were from foreign distributors.
Income Taxes -- Effective May 1, 1993, the Company adopted SFAS 109,
"Accounting for Income Taxes", which required a change to the "asset and
liability method" of accounting for income taxes from the "deferred method" of
accounting for income taxes. The adoption of SFAS 109 did not have a material
effect on the Company's financial position or results of operations.
(SEE "NOTE G").
Accounts Receivable -- Accounts receivable are stated net of an allowance for
doubtful accounts of $15,000 as of April 30, 1995.
NOTE B - FILM COSTS
Film Costs consist of:
<TABLE>
<CAPTION>
April 30, 1995
--------------
<S> <C>
Released Films, less amortization $4,449,274
Films in Production 0
Films in Development 156,994
----------
$4,606,268
==========
</TABLE>
Based on the Company's estimates of revenues as of April 30, 1995, 100% of
unamortized film costs applicable to released films will be amortized during
the three years ended April 30, 1998.
Interest capitalized to film costs was $121,930 and $118,041 in 1995 and 1994,
respectively. Overhead capitalized to film costs was $522,405 and $294,049 in
1995 and 1994, respectively.
F-8
<PAGE> 23
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - FIXED ASSETS
<TABLE>
<CAPTION>
April 30, 1995
--------------
<S> <C>
Office Equipment $180,526
Furniture & Fixtures 28,217
Leasehold Improvements 4,159
--------
212,902
Less -- Accumulated Depreciation 207,089
--------
$5,813
========
</TABLE>
NOTE D - DEBT
As of April 30, 1995, the Company had no bank debt. The Credit Facility
expired March 1, 1995 and was fully repaid on March 20, 1995. The Credit
Facility bore interest at LIBOR plus 3% (as of March 1, 1995, 9.0%) and was
secured by a first lien on all amounts to be received under the Company's
license agreements and by a first lien on all copyrights owned by the Company.
All collateral has subsequently been released.
Since December 1992, the Company has borrowed approximately $682,000 from
Stephen Friedman, an officer of the Company, including $283,000 at an interest
rate of 24% per annum (Mr. Friedman's actual cost of funds), during the fiscal
year ended April 30, 1995. These funds were used for current expenses and as
additional financing for the production of certain films. In September 1994,
the Company began making regular payments to Mr. Friedman to reduce these
outstanding loans and, when excess cash was available, additional repayments
were made. To facilitate these repayments, Mr. Friedman voluntarily reduced
his salary from $250,000 to $25,000 for a portion of the fiscal year.
Repayments to Mr. Friedman during the fiscal year were approximately $239,000.
Interest expense to Mr. Friedman during the fiscal year was approximately
$56,000.
NOTE E - COMMITMENTS AND CONTINGENCIES
The Company leases approximately 3,300 square feet of office space on a
month-to-month basis at $1.00 per square foot per month.
Rent expense was $46,637 and $77,778 in 1995 and 1994, respectively. Rent
expense for 1994 is net of $2,500 of sublease rental income.
The Company operates in one business segment, consisting primarily of
production and distribution of feature length motion pictures.
NOTE F - 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 April 30, 1995,
options to purchase up to 302,375 shares were outstanding under the 1987 Plan
at exercise prices ranging from $.25 to $.56 per share. Of the outstanding
options under the 1987 Plan, 235,500 are held by the
F-9
<PAGE> 24
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F- STOCK OPTIONS AND WARRANTS (CONTINUED)
Chief Executive Officer, 16,875 by a director and 50,000 by another officer of
the Company. Options to purchase an additional 250,000 shares also have been
granted to the Chief Executive Officer outside the 1987 Plan at an exercise
price of $.25 per share. Of the outstanding options, 502,375 expire in August
1997 and 50,000 expire in November 1999.
NOTE G - INCOME TAXES
A reconciliation of the provision for income taxes to the expected income tax
expense at the statutory federal tax rate of 34% is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Computed Expected Tax at Statutory Rate ($116,000) $244,140
State and Local Income Taxes 9,940 13,011
Foreign Taxes 44,496 36,000
Valuation Allowance 116,000 (244,140)
--------- --------
$54,436 $49,011
========= ========
</TABLE>
For federal income tax purposes, the Company has available income tax credits
of approximately $2,166,000 after being reduced by 35% as a result of the Tax
Reform Act of 1986 (expiring between 2000 and 2002) and net operating loss
carryforwards of approximately $15,921,000 (expiring between 2001 and 2007) to
offset future income tax liabilities.
Deferred tax assets and liabilities result from temporary differences between
financial and tax accounting in the recognition of revenue and expenses.
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
As of
Assets/(Liabilities) April 30, 1995
-------------------- --------------
<S> <C>
Deferred Revenue $86,000
Film Cost Amortization (158,000)
Net Operating Loss Carryforwards 6,368,000
Investment Tax Credit Carryforwards 2,166,000
Foreign Tax Credit Carryforwards 400,000
----------
8,862,000
Valuation Allowance (8,862,000)
----------
$0
==========
</TABLE>
A valuation allowance of $8,862,000 has been recorded to offset the net
deferred tax assets due to the uncertainty of realizing the benefits of the tax
assets in the future.
NOTE H - 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 causes of
action for breach of contract, conversion, and breach of fiduciary duty, among
other things, and seeking an
F-10
<PAGE> 25
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - LITIGATION AND CONTINGENCIES (CONTINUED)
accounting and declaratory relief, among other things, arising from a sales
agency agreement ("Agreement") with TMG in connection with one of the Company's
films. Under the Agreement, the Company is entitled to receive certain monies
derived from exploitation of the film after 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 of the causes of action, the likelihood of any
monetary recovery is uncertain and the Company may be required to share any
recovery with certain third parties. Subsequent to April 30, 1995, TMG filed a
cross-complaint against the Company and a third party alleging, among other
things, inducing breach of contract, recision based on fraud and intentional
interference with existing business relationships. Management believes it has
substantial defenses to all of the allegations in the cross-complaint.
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 I - INVESTMENT IN LIMITED PARTNERSHIP
In September 1993, the Company entered into an agreement ("Agreement") with
another corporation ("Limited Partner") wherein a limited partnership
("Partnership") was formed for the purpose of producing and distributing one
theatrical motion picture ("Picture") at a cost of approximately $3,000,000.
The Company is the general partner, responsible for all financial and tax
reporting of the Partnership, and owns 50% of the Partnership. Under the
Agreement, the Company is obligated (i) to contribute 25% of the budget of the
Picture to the Partnership and (ii) to guarantee repayment of one-half of a
loan made to the Partnership by the Limited Partner of 50% of the budget of the
Picture. The outstanding balance of the aforementioned loan was approximately
$1.5 million as of April 30, 1995. The remaining 25% of the budget of the
motion picture was provided by the Limited Partner.
All revenue generated by the Picture, after deduction of certain distribution
expenses, will be disbursed (i) to the Limited Partner to repay the
aforementioned loan with interest, then (ii) to the Limited Partner to
reimburse certain legal expenses incurred in connection with the Agreement,
then (iii) to the Company until it receives a deferred executive producer's fee
of $250,000, and then (iv) to the Company and Limited Partner in equal shares.
For financial reporting purposes, the Company's contribution of 25% of the
Picture, and certain capitalized overhead and interest expenses, are included
in film costs. Revenue from the Partnership will be recognized when received
and the Company's costs amortized according to the individual film forecast
method described in Note A. In management's opinion, none of the commitments
made by the Company in the Agreement will have a materially adverse impact on
the Company's financial position and results of operations.
F-11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE FISCAL YEAR ENDED APRIL 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-END> APR-30-1995
<CASH> 153,920
<SECURITIES> 0
<RECEIVABLES> 1,028,409
<ALLOWANCES> (15,000)
<INVENTORY> 4,606,268
<CURRENT-ASSETS> 5,773,597
<PP&E> 212,902
<DEPRECIATION> (207,089)
<TOTAL-ASSETS> 5,793,463
<CURRENT-LIABILITIES> 1,226,996
<BONDS> 0
<COMMON> 24,947,893
0
0
<OTHER-SE> (20,596,138)
<TOTAL-LIABILITY-AND-EQUITY> 5,793,463
<SALES> 4,281,973
<TOTAL-REVENUES> 4,283,796
<CGS> 3,476,300
<TOTAL-COSTS> 4,624,105
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (340,309)
<INCOME-TAX> 54,436
<INCOME-CONTINUING> (394,745)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (394,745)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
