<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, 1996 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 1545
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: $8.4 million.
As of July 15, 1996 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 $1,327,000 (assuming that
all officers and directors of the Registrant are deemed to be affiliates for
this purpose).
As of July 15, 1996 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 and production of motion pictures for
subsequent distribution in theaters, to pay, network and syndicated television,
on home video, and in other ancillary media in the United States (the domestic
market) and all other countries and territories of the world (the international
market). The Company began active operations in January 1983 and released its
first motion picture in 1984, "All of Me", starring Steve Martin. Seventeen
additional pictures have since been theatrically released in the domestic
market and six pictures have been released directly to the domestic home video
or pay television market.
DEVELOPMENT
The Company allocates a significant portion of the time and energy of
its staff to search for potentially viable motion picture material and the
development of screenplays. At any given time, the Company is developing
between approximately five and fifteen motion picture scripts or ideas for
possible future production. During fiscal years 1995 and 1996, the Company
spent approximately $31,000 and $20,000, respectively, on development
activities. The Company expects to significantly increase its expenditure on
development activities, including the purchase of books and screenplays, and
anticipates that it will spend between $250,000 and $750,000 each year in the
future on such activities. Although many of the projects that the Company
develops are subsequently abandoned, the Company believes that these
expenditures are necessary if the Company is to obtain projects that will
attract third party financing and subsequently achieve commercial success.
FINANCING
The Company's strategy is to fully finance its pictures by obtaining
advances and guarantees from the licensing of the distribution rights in its
pictures and other investments from third parties. Once fully financed, the
Company would primarily earn fees for its development and production services
plus contingent compensation based on the success of a film. If necessary, the
Company may finance a portion of the cost of a film using internally generated
capital or debt financing.
PRODUCTION
Once fully financed, the Company attempts to produce its pictures at
the lowest possible cost consistent with the quality that it seeks to achieve.
The Company avoids the substantial overhead of major studios by maintaining 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 that have a cost of production between $1,000,000
and $10,000,000 and which it believes cannot significantly exceed their
budgeted cost. Although the Company's past production experience allows it
certain control over production costs, production costs of motion pictures as
an industry trend have continually escalated in recent years.
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As of April 30, 1996, the Company has produced (or co-produced)
twenty-four pictures, eighteen of which were theatrically released in the
domestic market and six of which were released directly to video or pay
television in the domestic market, 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 January 1996
The Stranger Kathy Long March 1995
The Redemption Mark Dacascos August 1995
</TABLE>
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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. In certain cases the distributors
advance the costs of advertising and publicizing the motion pictures and the
manufacture of prints, however, in most cases the Company would be required to
fund or arrange funding for these costs itself.
Home Video -- 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 Pictures. These video distributors in turn sell
videocassettes to video retailers that rent or sell videocassettes to
consumers.
Pay and Free Television -- Distribution on pay television has occurred
by licensing the pay television rights of its movies to cable television
companies such as HBO/Cinemax, Showtime/The Movie Channel and various
pay-per-view distributors. After licensing to pay television, the Company's
films are then made available to television stations and basic cable outlets.
The Company 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 television 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, 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 has generated substantial
revenues from the licensing of its pictures outside of the United States,
however, the Company has recently sold the international distribution rights to
most of its films to another company. (See "Item 6. - Management's Discussion
and Analysis of Financial Position and Results of Operations"). For those
pictures still owned by the Company, it licenses these pictures to local
distributors on a territory-by-territory basis. Each license may cover one or
more pictures, and may include all rights or only certain rights. Sales,
collections and delivery of product are handled by outside foreign sales
organizations. Such organizations generally receive a commission based on a
percentage of cash receipts. The Company believes that, based on its current
and anticipated future level of film production, it is more efficient and cost
effective to use outside foreign sales organizations rather than to maintain it
own staff.
EMPLOYEES
As of April 30, 1996, the Company employed six full-time employees in
its Los Angeles office. During the production of a motion picture, between
thirty and one-hundred twenty-five 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, is 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
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collective bargaining agreements with the Writers Guild of America, the
Directors Guild of America, and the Screen Actors Guild, among others. 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
intense competition from motion picture studios and numerous independent
production companies, many of which have significantly greater financial
resources than the Company. All of these companies compete for motion picture
projects and talent and are producing motion pictures that compete for
exhibition time at theaters, on television, and on home video with pictures
produced by the Company.
REGULATION
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 that qualify for a rating no more restrictive than "R".
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 1,500 square feet of office space at $1.60 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 Los Angeles Superior
Court against The Movie Group, Inc. ("TMG") alleging breach of contract, among
other things, of 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 entered into a settlement agreement
("Settlement") with TMG on May 17, 1996. Under the terms of the Settlement,
the Company received a promissory note due November 23, 1996 in the amount
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<PAGE> 6
of $350,000 in exchange for a mutual release of all claims. It is uncertain
whether the Company will actually receive any monies due under the promissory
note and, if it does, may be required to share the monies with a third party.
Due to this uncertainty, management has not recorded any amounts in connection
with the promissory note in the accompanying financial statements. All future
monies from the exploitation of the film are to be paid to an escrow account
and disbursed by an escrow agent according to the terms of the Settlement,
which are substantially similar to the original Agreement.
On October 20, 1995, as amended on November 9, 1995, SK Films Ltd.,
Inc. ("Limited Partner") filed a lawsuit in Los Angeles Superior Court
("Court") against Mother Productions Limited Partnership ("Partnership"), a
limited partnership of which the Company is the general partner and the Limited
Partner is the sole limited partner. The lawsuit alleges breaches of the
partnership agreement, fraud, and misrepresentation, among other things, and
seeks recision, appointment of a receiver and declaratory relief, among other
things, in addition to monetary damages of not less than $2,254,157 plus
interest. Although not named as a defendant, the Company, as general partner,
is responsible for conducting the business of the Partnership and could be
liable for any damages awarded to the Limited Partner. On January 19, 1996,
the Court ordered that the dispute be submitted to arbitration and stayed any
further proceedings until completion of the arbitration. As of July 15, 1996,
the Limited Partner had not initiated any arbitration proceedings. Management
has provided for all losses which it deems necessary in connection with the
Partnership. (See "Note I - Investment in Limited Partnership").
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 Company's Common Stock as reported by
NASDAQ through April 30, 1996:
<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
<CAPTION>
FISCAL YEAR 1996 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter 11/16 7/16
Second Quarter 3/4 13/32
Third Quarter 23/32 3/8
Fourth Quarter 11/16 27/64
</TABLE>
6
<PAGE> 7
As of July 15, 1996, the Company had approximately 265 stockholders of
record. In addition, the Company believes it has over 700 beneficial owners
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
In recent years the Company has been producing films with budgets
between $1,000,000 and $3,000,000 that are released directly to the home video
or pay television markets both domestically and abroad. During the fiscal year
ended April 30, 1996, the Company did not produce any films, the Company's most
recent picture "The Redemption" was completed in early 1995 and premiered on
the Home Box Office pay television service in August 1995. The Company may
continue to produce these types of films but will generally seek to produce
films with budgets between $3,000,000 and $10,000,000. The Company expects to
significantly increase its expenditures on development activities, including
the purchase of books and screenplays, to obtain these types of projects that
will attract third party financing and subsequently achieve commercial success.
(See "Item 1. - Description of Business").
The Company's revenues are almost exclusively derived from the
exploitation of the feature films it produces, 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, however,
the Company has recently sold the international distribution rights to most of
its films to another company ("Foreign Sale") and expects a substantial
decrease in international revenues due to this sale. As a result of these
factors, the Company's revenues vary significantly each year depending on the
number and success of release of films that become available in the various
media during that fiscal year.
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
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value. Costs relating to projects that are abandoned or sold before being
produced are charged to overhead and capitalized to film costs in the year that
event occurs.
RESULTS OF OPERATIONS
For the fiscal year ended April 30, 1996, the Company reported net
income of approximately $1,972,000 on feature film revenues of approximately
$8,345,000 as compared to a net loss of approximately $395,000 on feature film
revenues of approximately $4,282,000 for the prior fiscal year. The net income
and increase in revenues of approximately 49% resulted primarily from the
Foreign Sale that accounted for approximately $5,255,000 of the Company's
revenues during the fiscal year ended April 30, 1996, the remaining revenues of
approximately $3,180,000 were generated primarily by international revenues
from certain films not included in the Foreign Sale and revenues from the
domestic market that also was not included in the Foreign Sale.
Costs related to revenue as a percentage of feature film revenues for
fiscal year 1996 decreased to 53% from 81% for fiscal year 1995. This decrease
was attributable to the Foreign Sale that primarily included films with little
or no unamortized film costs. Selling expenses for fiscal year 1996 increased
to approximately $748,000 from approximately $502,000 for fiscal year 1995.
This increase resulted from the increased commissions expense attributable to
the substantial increase in revenues during the fiscal year. General and
administrative expenses for the current year increased to approximately
$1,142,000 from approximately $645,000 for fiscal year 1995. This increase
resulted from the fact that no portion of the Company's overhead during the
fiscal year ended April 30, 1996 was capitalized to film costs, as allowed by
SFAS No. 53. During the prior fiscal year ended April 30, 1995, approximately
$552,000 of the Company's overhead expenses were capitalized to film costs.
During 1996, no interest expense was capitalized to film costs while during
1995 approximately $122,000 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 may expend substantial sums for both
the production and distribution of a picture, before any revenues are generated
by that film. In many instances the Company obtains advances or guarantees
from its distributors but these advances and guarantees generally defray only a
small portion of a film's cost. The Company's principal source of working
capital during fiscal year 1996 was motion picture licensing income. Except
for the financing of film production costs, management believes that its
existing cash resources will be sufficient to fund its ongoing operations.
The Company's net cash provided by operating activities increased to
approximately $6.6 million as compared to approximately $3.6 million in fiscal
1995. The Company used its operating cash flow in investment activities,
primarily the purchase of marketable securities of approximately $4.4 million
and gross additions to film cost of approximately $1.4 million as compared to
approximately $3.6 million of operating cash flow used in investing activities
during fiscal year 1995. The Company also used approximately $440,000 of
operating cash flow in financing activities to fully repay all of its
obligations to an officer of the Company.
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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 may continue producing these types of
films, but the Company expects to pursue projects with higher budgets if
sufficient financing from third parties is available and risk is limited.
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.
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
On March 1, 1996, the Company filed a Form 8-K reporting under Item 4
thereof a change in the Company's independent auditors for the fiscal year
ended April 30, 1996 from Arthur Andersen LLP to Stonefield Josephson,
Accountancy Corporation. The Form 8-K also reported that the Company believed
that there were no disagreements with Arthur Andersen LLP and that Arthur
Andersen LLP agreed with the statements made by the Company therein.
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 59 Chairman of the Board 1996
and Chief Executive Officer
Christopher Trunkey 30 Vice President, Chief Financial ------
and Administrative Officer and
Secretary
Kenneth Aguado 38 Vice President and Director 1998
Martin Davidson 55 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
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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. Before
joining the Company, Mr. Trunkey was Controller for Ulysse Entertainment from
October 1993 to May 1994. Prior 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.
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 $100,000 in any
of the last three fiscal years.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION -------------
------------------- STOCK OPTIONS
NAME AND POSITION YEAR SALARY ($) BONUS ($) (SHARES)
----------------- ---- ---------- --------- --------
<S> <C> <C> <C> <C>
Stephen Friedman 1996 237,500 (1) 0 0
Chairman of the Board
and Chief Executive 1995 60,000 (1) 0 0
Officer
1994 250,000 0 0
</TABLE>
- ---------------
(1) During a portion of the respective 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".
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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, 1996.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
NAME OPTIONS AT APRIL 30, 1996 AT APRIL 30, 1996 (1)
---- ------------------------- ---------------------
<S> <C> <C>
Stephen Friedman 485,500 $91,031
</TABLE>
- -----------------
(1) Based upon the difference between the closing stock price on
April 30, 1996 and the option exercise price.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of July 15,
1996, 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)(2)(3) 57.8%
1901 Avenue of the Stars, Suite 1545
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.
(2) Includes 100,000 shares owned by the Stephen J. Friedman Films, Inc.
Employee Pension Plan of which Mr. Friedman is the trustee.
(3) Includes 57,000 shares owned by SJF Productions Ltd. of which Mr. Friedman
is the sole shareholder of the general partner, Friedman Films, Inc.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of July 15, 1996, 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 1545
Los Angeles, CA 90067
</TABLE>
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SECURITY OWNERSHIP OF MANAGEMENT (CONTINUED)
<TABLE>
<CAPTION>
NAME AND ADDRESS OF DIRECTORS OR NUMBER OF PERCENT OF
NUMBER OF PERSONS IN GROUP SHARES CLASS
-------------------------- ------ -----
<S> <C> <C>
Kenneth Aguado 20,875(2) Less
4309 Wilkinson Avenue than 1%
Studio City, CA 9160
Martin Davidson 0 0
1505 Viewsite Terrace
Los Angeles, CA 90069
All Executive Officers and
Directors as a Group (4 persons) 3,274,146(3) 58.1%
</TABLE>
- -------------
(1) See "Principal Stockholders".
(2) Includes 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, 512,375 shares may be acquired by the exercise of options which
are presently exercisable.
The Company does not know of any arrangements, including any pledge of
the Company's securities, the operation of which at a subsequent date, may
result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Between 1992 and 1994, the Company borrowed approximately $682,000
from Stephen Friedman, an officer of the Company. As of April 30, 1995, the
principal balance due under these loans was approximately $443,000. During the
fiscal year ended April 30, 1996, the Company repaid all outstanding principal
and interest due to Mr. Friedman. Interest expense to Mr. Friedman was
approximately $14,000 for the year ended April 30, 1996 and approximately
$56,000 for the year ended April 30, 1995. The Company does not expect that
additional loans from Mr. Friedman will be necessary.
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)
12
<PAGE> 13
(A) EXHIBITS (CONTINUED)
21 Subsidiaries of Registrant.
- -----------------
(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.
(B) FORMS 8-K
On October 26, 1995, the Company filed a Form 8-K reporting under Item
2 thereof the sale of certain assets of the Company.
On March 1, 1996, the Company filed a Form 8-K reporting under Item 4
thereof a change in the Company's independent auditors for the fiscal
year ending April 30, 1996.
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 15, 1996 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 15, 1996
- -------------------- Directors and Chief Executive
STEPHEN FRIEDMAN Officer (Principal Executive
Officer)
/s/ Martin Davidson Director July 15, 1996
- -------------------
MARTIN DAVIDSON
/s/ Kenneth Aguado Director July 15, 1996
- ------------------
KENNETH AGUADO
/s/ Christopher Trunkey Vice President, Chief Financial July 15, 1996
- ----------------------- and Administrative Officer and
CHRISTOPHER TRUNKEY Secretary (Principal Financial
and Accounting Officer)
</TABLE>
14
<PAGE> 15
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED APRIL 30, 1996
<TABLE>
<S> <C>
Reports of Independent Public Accountants F-2
Consolidated Balance Sheet as of April 30, 1996 F-4
Consolidated Statements of Operations for
the Years Ended April 30, 1996 and 1995 F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended April 30, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the Years
Ended April 30, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 16
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Kings Road Entertainment, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Kings Road Entertainment, Inc. and
subsidiaries (the Company) for the year ended April 30, 1995. 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 audit.
We conducted our audit 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 results of operations and cash flows of
Kings Road Entertainment, Inc. and subsidiaries for the year ended April 30,
1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
July 20, 1995
F-2
<PAGE> 17
STONEFIELD JOSEPHSON
ACCOUNTANCY CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of
Directors of Kings Road Entertainment, Inc.
Los Angeles, California:
We have audited the accompanying balance sheet of Kings Road Entertainment,
Inc. and subsidiaries (the "Company") as of April 30, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year 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 audit.
We conducted our audit 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 presentation. We believe that our audit provides a reasonable basis
for 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, 1996, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
STONEFIELD JOSEPHSON
ACCOUNTANCY CORPORATION
Santa Monica, California
July 1, 1996
F-3
<PAGE> 18
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
APRIL 30, 1996
--------------
<S> <C>
ASSETS
Cash and Cash Equivalents $ 405,539
Marketable Securities, at market value - Note A 4,447,383
Accounts Receivable, net of allowance of $10,000 - Note A 608,119
Film Costs, net of amortization of $166,587,752 - Notes A & B 1,578,253
Prepaid Expenses 3,711
Fixed Assets - Notes A & C 11,695
Other Assets 5,500
-----------
TOTAL ASSETS $ 7,060,200
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts Payable $ 302,177
Accrued Expenses 91,582
Income Taxes Payable 47,941
Deferred Revenue 295,014
-----------
TOTAL LIABILITIES 736,714
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 (18,624,407)
------------
TOTAL SHAREHOLDERS' EQUITY 6,323,486
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,060,200
============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-4
<PAGE> 19
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
1996 1995
--------- ---------
<S> <C> <C>
REVENUES
Feature Films - Note A $8,345,384 $4,281,973
Interest Income 78,294 313
Other Income 11,604 1,510
---------- ----------
8,435,282 4,283,796
COSTS AND EXPENSES
Costs Related to Revenue 4,459,739 3,476,300
Selling Expenses 747,818 502,327
General & Administrative Expenses 1,142,338 645,478
Interest - Note B 14,461 0
---------- ----------
6,364,356 4,624,105
---------- ----------
INCOME/(LOSS) BEFORE INCOME TAXES 2,070,926 (340,309)
Provision for Income Taxes - Note G 99,195 54,436
---------- ----------
NET INCOME/(LOSS) $1,971,731 ($394,745)
========== ==========
Net Income/(Loss) Per Share - Note A $0.37 ($0.07)
========== ==========
Weighted Average Number of Common Shares 5,336,695 5,407,345
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 20
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, 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 Income ----- ----- ----- 1,971,731 1,971,731
--------- ------- ----------- ------------ ----------
Balance,
April 30, 1996 5,120,047 $45,716 $24,902,177 ($18,624,407) $6,323,486
========= ======= =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 21
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
1996 1995
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) $ 1,971,731 ($394,745)
Adjustments to reconcile Net Income/(Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 4,463,317 3,487,394
Provision for loss on Accounts Receivable 16,012 17,500
Change in Assets and Liabilities:
Decrease in Restricted Cash 0 10,430
Decrease in Accounts Receivable 389,278 411,704
Decrease in Prepaid Expenses 4,842 3,440
Decrease in Other Assets 0 20,661
Decrease in Accounts Payable (297,082) (68,385)
(Decrease)/Increase in Accrued Expenses (75,066) 139,621
Increase in Income Taxes Payable 29,984 0
Increase/(Decrease) in Deferred Revenue 80,302 (32,940)
----------- ---------
NET CASH AND CASH EQUIVALENTS
PROVIDED BY OPERATING ACTIVITIES 6,583,318 3,594,680
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Marketable Securities (4,447,383) 0
Purchase of Fixed Assets (9,460) (5,813)
Gross Additions to Film Cost (1,431,724) (3,622,888)
----------- ----------
NET CASH AND CASH EQUIVALENTS
USED IN INVESTING ACTIVITIES (5,888,567) (3,628,701)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Debt 0 2,807,855
Repayment of Debt 0 (2,858,179)
Borrowing from Related Party 0 283,000
Repayments to Related Party (443,132) (238,349)
Proceeds from Exercise of Stock Options 0 16,250
----------- ----------
NET CASH AND CASH EQUIVALENTS (USED IN)/
PROVIDED BY FINANCING ACTIVITIES (443,132) 10,577
----------- ----------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 251,619 (23,444)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 153,920 177,364
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 405,539 $ 153,920
=========== ==========
Cash paid for:
Interest - Note A 14,461 97,879
Taxes - Note G 55,254 54,436
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 22
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principles 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 licensing 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>
During 1996, the Company earned revenue from one significant customer of
approximately $5,255,000 (62%) of consolidated revenues. In 1995, the Company
earned revenue from one significant customer of approximately $930,000 (22%) of
consolidated revenues.
Revenues from foreign sources were approximately $7,225,000 and $2,712,000 in
1996 and 1995, respectively.
Film Costs -- Film costs, including related interest and overhead, are
capitalized as incurred. Profit participations and residuals, if any, are
accrued in the proportion that revenue for a period bears to the estimated
future revenues. The individual film forecast method set forth in SFAS No. 53
is used to amortize these costs based on the ratio of revenue earned in the
current period to the Company's estimate of total revenues to be realized.
Management periodically reviews its estimates on a film-by-film 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.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE> 23
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, 1996, approximately 22% of the Company's accounts
receivable were from foreign distributors.
Marketable Securities -- In accordance with SFAS No. 115, the Company
determines the classification of marketable securities at the time of purchase
and reevaluates such designation at each balance sheet. Marketable securities
have been classified as available for sale and are stated at market value. It
is the Company's policy to purchase only U.S. Government securities with
maturities less than one year.
Accounts Receivable -- Accounts receivable are stated net of an allowance for
doubtful accounts of $10,000 as of April 30, 1996.
NOTE B - FILM COSTS
<TABLE>
<CAPTION>
April 30, 1996
--------------
<S> <C>
Released Films, less amortization $1,573,253
Films in Production 0
Films in Development 5,000
----------
$1,578,253
==========
</TABLE>
Based on the Company's estimates of revenue as of April 30, 1996, 100% of
unamortized film costs applicable to released films will be amortized during
the three years ended April 30, 1999. No interest or overhead was capitalized
to film costs during the fiscal year ended April 30, 1996. $121,930 and
$522,405 of interest and overhead were capitalized, respectively during the
year ended April 30, 1995.
NOTE C - FIXED ASSETS
<TABLE>
<CAPTION>
April 30, 1996
--------------
<S> <C>
Office Equipment $189,986
Furniture & Fixtures 28,216
Leasehold Improvements 4,159
Accumulated Depreciation (210,666)
--------
$ 11,695
========
</TABLE>
F-9
<PAGE> 24
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - DEBT
As of April 30, 1996, the Company had no bank debt. Between 1992 and 1994, the
Company borrowed approximately $682,000 from Stephen Friedman, an officer of
the Company. As of April 30, 1995, the principal balance due under these loans
was approximately $443,000. During the fiscal year ended April 30, 1996, the
Company repaid all outstanding principal and interest due to Mr. Friedman.
Interest expense to Mr. Friedman was approximately $14,000 for the year ended
April 30, 1996 and approximately $56,000 for the year ended April 30, 1995.
NOTE E - COMMITMENTS AND CONTINGENCIES
The Company leases approximately 1,500 square feet of office space on a
month-to-month basis at $1.60 per square foot per month. Rent expense was
$34,284 and $46,637 in 1996 and 1995, respectively.
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, 1996,
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 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>
1996 1995
---- ----
<S> <C> <C>
Computed Expected Tax at Statutory Rate $481,929 ($116,000)
State and Local Income Taxes 5,720 9,940
Foreign Taxes 49,534 44,496
Valuation Allowance (437,988) 116,000
------- -------
$99,195 $54,436
======= =======
</TABLE>
For federal income tax purposes, the Company has available investment 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 $14,100,000 (expiring between 2001 and
2007) to offset future income tax liabilities.
F-10
<PAGE> 25
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G - INCOME TAXES (CONTINUED)
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>
April 30, 1996
--------------
<S> <C>
Deferred Revenue $118,000
Film Cost Amortization (352,000)
Net Operating Loss Carryforwards 5,877,000
Investment Tax Credit Carryforwards 2,166,000
Foreign Tax Credit Carryforwards 400,000
----------
8,209,000
Valuation Allowance (8,209,000)
----------
$0
==========
</TABLE>
A valuation allowance of $8,209,000 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 Los Angeles Superior Court
against The Movie Group, Inc. ("TMG") alleging breach of contract, among other
things, of 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 entered into a settlement agreement
("Settlement") with TMG on May 17, 1996. Under the terms of the Settlement,
the Company received a promissory note due November 23, 1996 in the amount of
$350,000 in exchange for a mutual release of all claims. It is uncertain
whether the Company will actually receive any monies due under the promissory
note and, if it does, may be required to share the monies with a third party.
Due to this uncertainty, management has not recorded any amounts in connection
with the promissory note in the accompanying financial statements. All future
monies from the exploitation of the film are to be paid to an escrow account
and disbursed by an escrow agent according to the terms of the Settlement,
which are substantially similar to the original Agreement.
On October 20, 1995, as amended on November 9, 1995, SK Films Ltd., Inc.
("Limited Partner") filed a lawsuit in Los Angeles Superior Court ("Court")
against Mother Productions Limited Partnership ("Partnership"), a limited
partnership of which the Company is the general partner and the Limited Partner
is the sole limited partner. The lawsuit alleges breaches of the partnership
agreement, fraud, and misrepresentation, among other things, and seeks
recision, appointment of a receiver and declaratory relief, among other things,
in addition to monetary damages of not less than $2,254,157 plus interest.
Although not named as a defendant, the Company, as general partner, is
responsible for conducting the business of the Partnership and could be liable
for any damages awarded to the Limited Partner. On January 19, 1996,
F-11
<PAGE> 26
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - LITIGATION AND CONTINGENCIES (CONTINUED)
the Court ordered that the dispute be submitted to arbitration and stayed any
further proceedings until completion of the arbitration. As of July 15, 1996,
the Limited Partner had not initiated any arbitration proceedings. Management
has provided for all losses which it deems necessary in connection with the
Partnership. (See "Note I - Investment in Limited Partnership").
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 as equity 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. In February 1996, the Company paid approximately
$801,000 to the Limited Partner in satisfaction of the aforementioned
guarantee. The remaining 25% of the budget of the motion picture was provided
by the Limited Partner as equity.
All revenue generated by the Picture, after deduction of certain distribution
expenses, is disbursed (i) 50% each to the Company and the Limited Partner
until the balance of the loan made by the Limited Partner to the Partnership
has been fully repaid, 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 producing fee of $250,000, and
then (iv) to the Company and Limited Partner in equal shares. As of April 30,
1996 the Company had not received any revenues from the Partnership.
For financial reporting purposes, the Company's contributions to 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-12
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Wetherly, Inc.
Old Time Productions, Inc.
Tigertail Video, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE FISCAL YEAR ENDED APRIL 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<CASH> 405,539
<SECURITIES> 4,447,383
<RECEIVABLES> 618,119
<ALLOWANCES> (10,000)
<INVENTORY> 1,578,253
<CURRENT-ASSETS> 7,039,294
<PP&E> 222,361
<DEPRECIATION> (210,666)
<TOTAL-ASSETS> 7,060,200
<CURRENT-LIABILITIES> 441,700
<BONDS> 0
24,947,893
0
<COMMON> 0
<OTHER-SE> (18,624,407)
<TOTAL-LIABILITY-AND-EQUITY> 7,060,200
<SALES> 8,345,384
<TOTAL-REVENUES> 8,435,282
<CGS> 4,459,739
<TOTAL-COSTS> 6,349,895
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,461
<INCOME-PRETAX> 2,070,926
<INCOME-TAX> 99,195
<INCOME-CONTINUING> 1,971,731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,971,731
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
