<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[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 July 31, 1995 Commission File No. 0-14234
</TABLE>
KINGS ROAD ENTERTAINMENT, INC.
(Exact name of Registrant as specified 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)
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
------ -----
On September 18, 1995 the Registrant had 5,120,047 shares of its common stock,
$.01 par value, issued and outstanding.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET - (UNAUDITED)
<TABLE>
<CAPTION>
AS OF
JUL. 31, 1995
-------------
<S> <C>
ASSETS
Cash and Cash Equivalents $ 320,332
Accounts Receivable, net of allowance of $15,000 680,761
Film Costs, net of amortization of $164,181,832 - Note B 3,965,018
Prepaid Expenses 24,495
Fixed Assets, net of depreciation of $207,628 6,230
Other Assets 22,600
------------
TOTAL ASSETS $ 5,019,436
============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts Payable $ 539,092
Due to Related Party - Note C 175,000
Accrued Expenses 24,125
Income Taxes Payable 17,957
Deferred Revenue 290,611
-----------
TOTAL LIABILITIES 1,046,785
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
Deficit (20,975,242)
------------
TOTAL SHAREHOLDERS' EQUITY 3,972,651
------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 5,019,436
============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 3
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JULY 31,
1995 1994
--------- --------
<S> <C> <C>
REVENUES:
Feature Films $ 984,349 $852,652
Interest Income 1,475 271
Other Income 2,639 1,510
---------- --------
988,463 854,433
COSTS AND EXPENSES:
Costs Related to Revenue 906,073 465,241
Selling Expenses 130,480 175,522
General & Administrative Expenses 294,138 224,439
Interest - Note B 10,619 0
---------- --------
1,341,310 865,202
LOSS BEFORE
INCOME TAXES (352,847) (10,769)
Provision for Income
Taxes - Note F 26,257 21,900
---------- --------
NET LOSS $ (379,104) $(32,669)
========== ========
Net Loss Per
Share - Note A $(0.07) $(0.01)
========== ========
Weighted Average Number
of Common Shares 5,120,047 5,080,047
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - (UNAUDITED)
<TABLE>
<CAPTION>
Common Common Additional Total
Stock Stock Paid-In Shareholders'
Shares Amount Capital Deficit Equity
--------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance,
April 30, 1994 5,080,047 $45,316 $24,886,327 $(20,201,393) $4,730,250
Net Loss - - - (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
Net Loss - - - (379,104) (379,104)
--------- ------- ----------- ------------ ----------
Balance,
July 31, 1995 5,120,047 $45,716 $24,902,177 $(20,975,242) $3,972,651
========= ======= =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JULY 31,
1995 1994
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(379,104) $ (32,669)
Adjustments to Reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 906,613 468,016
Changes in Assets and Liabilities:
Decrease in Accounts Receivable 332,648 229,768
Increase in Prepaid Expenses (15,942) 0
Increase in Other Assets (17,100) (2)
(Decrease)/Increase in Accounts Payable (60,167) 27,038
(Decrease)/Increase in Accrued Expenses (142,523) 13,810
Increase/(Decrease) in Deferred Revenue 75,899 (25,740)
--------- -----------
NET CASH AND CASH EQUIVALENTS
PROVIDED BY OPERATING ACTIVITIES 700,324 693,388
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets (957) (1,839)
Gross Additions to Film Cost (264,823) (1,525,668)
--------- -----------
NET CASH AND CASH EQUIVALENTS
USED IN INVESTING ACTIVITIES (265,780) (1,527,507)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Debt 0 1,383,119
Repayment of Debt 0 (687,957)
Repayments to Related Party (268,132) 0
--------- -----------
NET CASH AND CASH EQUIVALENTS
(USED IN)/PROVIDED BY FINANCING
ACTIVITIES (268,132) 695,162
--------- -----------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 166,412 (138,957)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 153,920 177,364
--------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 320,332 $ 38,407
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
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, 1995, included in
the Kings Road Entertainment, Inc. ("Company" or "Registrant") annual report on
Form 10-KSB for that period.
In the opinion of the Company's management, all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position as of July 31, 1995 and the results of operations and cash flows for
the three month periods ended July 31, 1995 and 1994 have been included.
The results of operations for the three month period ended July 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, 1995.
Net Income or Loss per share amounts have been calculated using 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>
Film Costs Consist of: As of
July 31, 1995
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<S> <C>
Released Films, less amortization $3,808,021
Films in Production 0
Films in Development 156,994
----------
Total Film Costs $3,965,015
==========
</TABLE>
In accordance with Financial Accounting Standards No. 34, interest costs are
capitalized to feature film productions until the date of completion. No
interest expense was capitalized to Film Costs during the three months ended
July 31, 1995, approximately $9,000 of interest expense was capitalized to Film
Costs for the three months ended July 31, 1994.
6
<PAGE> 7
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - DEBT
As of July 31, 1995, the Company had no bank debt (SEE ITEM 2 - LIQUIDITY AND
CAPITAL RESOURCES). 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 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 during a portion of the
fiscal year ended April 30, 1995 and the quarter ended July 31, 1995.
Repayments to Mr. Friedman during the quarter ended July 31, 1995 were
approximately $268,000. Interest expense to Mr. Friedman during the same
period was approximately $10,600.
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 causes of
action for breach of contract, conversion and breach of fiduciary duty, among
other things, and seeking an accounting, declaratory relief and monetary
damages, 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 the deduction of certain fees and expenses. The
Company believes TMG has substantially underpaid the monies which the Company
is entitled to receive. 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. TMG has 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.
7
<PAGE> 8
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - STOCK OPTIONS AND WARRANTS
The Company's 1987 Non-qualified Stock Option Plan ("1987 Plan") provides for
the grant of options to purchase up to 850,000 shares. At July 31, 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 Chief Executive Officer,
16,875 by a director and officer, and 50,000 by another officer of the Company.
Options to purchase an additional 250,000 shares have also 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 F - INCOME TAXES
A reconciliation of the provision for income taxes to the expected income tax
expense at the statutory tax rate of 34% is as follows:
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<CAPTION>
Quarter Ending
July 31, 1995
--------------
<S> <C>
Computed Expected Tax at Statutory Rate $(120,000)
State and Local Income Taxes 4,812
Foreign Taxes 21,445
Valuation Allowance 120,000
---------
$ 26,257
=========
</TABLE>
For federal income tax purposes, the Company has available investment tax
credits of approximately $2,166,000, after being reduced 35% by the Tax Reform
Act of 1986 (expiring between 2000 and 2002) and net operating loss
carryforwards of approximately $16,274,000 (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:
8
<PAGE> 9
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
As of
Assets/(Liabilities) July 31, 1994
------------------------ -------------
<S> <C>
Deferred Revenue $ 86,000
Film Cost Amortization (158,000)
Net Operating Loss Carryforwards 6,488,000
Investment Tax Credit Carryforwards 2,166,000
Foreign Tax Credit Carryforwards 400,000
-----------
8,982,000
Valuation Allowance (8,982,000)
-----------
$ 0
===========
</TABLE>
A valuation allowance of $8,982,000 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.
9
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the three months ended July 31, 1995, the Company reported a net
loss of approximately $379,000 on revenues of approximately $988,000 compared
to a net loss of approximately $33,000 on revenues of approximately $834,000
for the same period last year. Although revenues increased approximately 17%
over the same period last year, the Company reported an increased net loss
during the quarter ending July 31, 1995 compared to the quarter ending July 31,
1994. This increased net loss results primarily from the write-down to net
realizable value, in accordance with generally accepted accounting principles,
of the Company's investment in a film produced during a prior fiscal year and
from increased reserves for potential residual payments to third parties in
connection with the exploitation of the Company's films. During the quarter
ending July 31, 1995, the Company primarily recognized domestic home video and
foreign revenues for "The Stranger". Future revenues of the Company will be
dependent upon the success of its films and on the Company's ability to
continue to generate working capital for the development and production of new
motion picture projects. (SEE "LIQUIDITY AND CAPITAL RESOURCES").
Costs relating to revenue were approximately $906,000 during the three
months ended July 31, 1995 versus approximately $465,000 during the three
months ended July 31, 1994. These costs relate to amortization of production
costs of films for which revenue was recognized during the period and for the
write-down to net realizable value and the reserve for potential residual
payments discussed above. Selling expenses decreased to approximately $130,000
during quarter versus approximately $175,000 for the same period last year.
General and administrative expenses increased approximately $70,000 during the
quarter from approximately $224,000 during the same period last year. This
increase results primarily from increased legal expenses in connection with the
litigation referred to in NOTE D TO THE 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 distribution of a picture, all before any revenues are generated
by the film. In certain instances the Company obtains advances and guarantees
from its distributors, but these advances and guarantees defray only a small
portion of a film's cost.
The Company's principal source of working capital during the quarter
ending July 31, 1995 has been motion picture licensing income. During the
fiscal year ended April 30, 1995, significant working capital was also provided
under a revolving credit facility ("Credit Facility") with Credit Lyonnais Bank
Nederland N.V. ("CLBN"); borrowings were limited to a percentage of qualifying
contracts receivable of the Company and were secured by first position liens on
all amounts to be received under the Company's film license agreements and the
copyrights to all of the Company's films. The Credit Facility expired March 1,
1995.
For the three months ended July 31, 1995, the Company's net cash flow
provided by operating activities was approximately $700,000 compared to
approximately $693,000 during the same period last year. Net cash flows of
approximately $268,000 were used in financing
10
<PAGE> 11
activities reflecting the repayments to Stephen Friedman, Chief Executive
Officer, of certain loans made in prior periods. (SEE NOTE C TO THE
CONSOLIDATED FINANCIAL STATEMENTS). During the same period last year,
approximately $695,000 of cash flow was provided by financing activities.
During the quarters ending July 31, 1995 and 1994 respectively, cash flows of
approximately $266,000 and $1,528,000 were used in investing activities,
primarily gross additions to film costs. Cash and cash equivalents increased
from approximately $38,000 as of July 31, 1994 to approximately $320,000 as of
July 31, 1995.
The principal asset on the Company's balance sheet is unamortized film
costs. The Company's unamortized film costs at July 31, 1995 and 1994 were
approximately $3,965,000 and $5,520,000, 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 $7,000,000
(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. In recent years, 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 are
generally dependent on adequate borrowing availability. The Credit Facility
with CLBN expired March 1, 1995 and allowed the Company to borrow a percentage
of qualifying contracts receivable. There are a number of banks in the
entertainment industry that support this type of lending and the Company is
actively pursuing a new facility 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 results of operations 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 a film entitled "The Haunted Heart". The
Company, which acts as the general partner, guaranteed repayment of 50% of a
loan made to the partnership by the sole limited partner in the approximate
amount of $1,500,000. 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.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
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.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
KINGS ROAD ENTERTAINMENT, INC.
Dated: September 18, 1995 /s/Stephen J. Friedman
----------------------
Stephen J. Friedman
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Dated: September 18, 1995 /s/Christopher M. Trunkey
-------------------------
Christopher M. Trunkey
Vice President, Chief Financial and
Administrative Officer and Secretary
(Principal Financial and Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDING JULY 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> JUL-31-1995
<CASH> 320,332
<SECURITIES> 0
<RECEIVABLES> 695,761
<ALLOWANCES> (15,000)
<INVENTORY> 3,965,018
<CURRENT-ASSETS> 4,966,111
<PP&E> 213,858
<DEPRECIATION> (207,628)
<TOTAL-ASSETS> 5,019,436
<CURRENT-LIABILITIES> 756,174
<BONDS> 0
<COMMON> 24,947,893
0
0
<OTHER-SE> (20,975,242)
<TOTAL-LIABILITY-AND-EQUITY> 5,019,436
<SALES> 984,349
<TOTAL-REVENUES> 988,463
<CGS> 906,073
<TOTAL-COSTS> 1,330,691
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,619
<INCOME-PRETAX> (352,847)
<INCOME-TAX> 26,257
<INCOME-CONTINUING> (379,104)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (379,104)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
