<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended July 31, 1997 Commission File No. 0-14234
KINGS ROAD ENTERTAINMENT, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 95-3587522
State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1901 Avenue of the Stars, Suite 1545
Los Angeles, California 90067
(Address of principal executive office)
Issuer's telephone number: (310) 552-0057
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
--- ---
As of September 5, 1997, the registrant had 5,652,422 shares of its common stock
outstanding.
Transitional Small Business Disclosure Format: YES NO X
--- ---
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
KINGS ROAD ENTERTAINMENT, INC.
BALANCE SHEET - (UNAUDITED)
<TABLE>
<CAPTION>
AS OF
JULY 31, 1997
-------------
<S> <C>
ASSETS
Cash and Cash Equivalents $ 353,393
Marketable Securities, at market value 2,133,186
Accounts Receivable, net of allowance of $10,000 290,777
Film Costs, net of amortization of $167,769,996 805,521
Prepaid Expenses 41,191
Fixed Assets 20,973
Other Assets 2,500
------------
TOTAL ASSETS $ 3,647,541
============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts Payable $ 322,862
Accrued Expenses 15,000
Deferred Revenue 94,455
------------
TOTAL LIABILITIES 432,317
COMMITMENTS AND CONTINGENCIES 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, 12,000,000 shares
authorized, 5,652,422 shares issued and outstanding 51,040
Additional Paid-In Capital 21,085,278
Deficit (17,921,094)
------------
TOTAL SHAREHOLDERS' EQUITY 3,215,224
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,647,541
============
</TABLE>
The accompanying notes are an integral part of this statement.
2
<PAGE> 3
KINGS ROAD ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS - (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JULY 31,
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Feature Films $ 357,915 $ 567,815
Interest Income 60,306 65,119
Other Income 0 0
----------- -----------
418,221 632,934
COSTS AND EXPENSES
Costs Related to Revenue 36,507 373,945
Selling Expenses 4,002 11,120
General & Administrative Expenses 263,269 245,872
----------- -----------
303,778 630,937
----------- -----------
INCOME BEFORE INCOME TAXES 114,443 1,997
Provision for Income Taxes 97 2,166
----------- -----------
NET INCOME/(LOSS) $ 114,346 $ (169)
=========== ===========
Net Income Per Share $ 0.02 $ 0.00
=========== ===========
Weighted Average Number of Common
Share and Common Share Equivalents 5,652,422 5,120,047
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
KINGS ROAD ENTERTAINMENT, INC.
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, 1996 5,120,047 $ 45,716 $ 24,902,177 ($18,624,407) $ 6,323,486
Net Income -- -- -- 588,967 588,967
------------ ------------ ------------ ------------ ------------
Balance,
April 30, 1997 5,120,047 45,716 24,902,177 (18,035,440) 6,912,453
Exercise of
Stock Options 532,375 5,324 139,797 -- 145,121
Distribution to
Shareholders -- -- (3,956,696) -- (3,956,696)
Net Income -- -- -- 114,346 114,346
------------ ------------ ------------ ------------ ------------
Balance,
July 31, 1997 5,652,422 $ 51,040 $ 21,085,278 ($17,921,094) $ 3,215,224
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
KINGS ROAD ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS - (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JULY 31,
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) $ 114,346 $ (169)
Adjustments to reconcile Net Income/(Loss) to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 38,806 414,957
Change in Assets and Liabilities:
Decrease in Accounts Receivable 23,072 368,262
Increase in Prepaid Expenses (27,896) (7,539)
Decrease in Other Assets 0 3,000
Increase in Accounts Payable 7,141 40,064
Decrease in Accrued Expenses 0 (82,974)
Decrease in Income Taxes Payable (3,482) (47,941)
Increase/(Decrease) in Deferred Revenue 6,655 (145,620)
----------- ---------
NET CASH AND CASH EQUIVALENTS
PROVIDED BY OPERATING ACTIVITIES 158,642 542,040
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale/(Purchase) of Marketable Securities 3,833,845 (543,388)
Disposal of Fixed Assets 114 0
Gross Additions to Film Cost (75,837) (90,740)
----------- ---------
NET CASH AND CASH EQUIVALENTS
PROVIDED BY/(USED IN) INVESTING ACTIVITIES 3,758,122 (634,128)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of Stock Options 145,121 0
Distribution to Shareholders (3,956,696) 0
----------- ---------
NET CASH AND CASH EQUIVALENTS USED IN
FINANCING ACTIVITIES (3,811,575) 0
----------- ---------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 105,189 (92,088)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 248,204 405,539
----------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 353,393 $ 313,451
=========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - BASIS OF PREPARATION
The accompanying unaudited 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 financial statements and related footnotes for the year
ended April 30, 1997, 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, 1997 and the results of operations and cash flows for
the three month periods ended July 31, 1997 and 1996 have been included.
The results of operations for the three month period ended July 31, 1997 are not
necessarily indicative of the results to be expected for the full fiscal year.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year ended April
30, 1997.
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.
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.
NOTE B - MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards 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 currently the Company's policy to purchase only U.S. Government
securities with maturities less than one year.
NOTE C - FILM COSTS
Film Costs consist of:
<TABLE>
<CAPTION>
July 31, 1997
-------------
<S> <C>
Released Films, less amortization $683,589
Films in Production 0
Films in Development 121,932
--------
$805,521
========
</TABLE>
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KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C - FILM COSTS (CONTINUED)
In accordance with Statement of 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
periods ended July 31, 1997 and 1996, respectively.
NOTE D - LITIGATION AND CONTINGENCIES
In the ordinary course of business, the Company has or may become involved in
disputes or litigation. On the basis of information available to it, management
believes such contingencies will not have a materially adverse impact on the
Company's financial position or results of operations.
NOTE E - STOCK OPTIONS AND WARRANTS
The Company's 1987 Non-qualified Stock Option Plan ("1987 Plan") provides for
the grant of options to purchase up to 850,000 shares. At July 31, 1997, options
to purchase up to 103,125 shares were outstanding under the 1987 Plan at an
exercise price of $.56 per share. Of the outstanding options under the 1987
Plan, 83,125 are held by the Chief Executive Officer and 20,000 by another
officer of the Company. Of the outstanding options, 20,000 expire in November
1999 and 83,125 expire in October 2001.
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:
<TABLE>
<CAPTION>
Quarter Ending
July 31, 1997
-------------
<S> <C>
Computed Expected Tax at Statutory Rate $38,878
State and Local Income Taxes 0
Foreign Taxes 97
Valuation Allowance (38,878)
-------
$ 97
=======
</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 $16,070,000 (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:
7
<PAGE> 8
KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F - INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
July 31, 1997
-------------
<S> <C>
Deferred Revenue $ 35,000
Film Cost Amortization (140,000)
Net Operating Loss Carryforwards 6,428,000
Investment Tax Credit Carryforwards 2,166,000
Foreign Tax Credit Carryforwards 400,000
-----------
8,889,000
Valuation Allowance (8,889,000)
-----------
$ 0
===========
</TABLE>
A valuation allowance of $8,889,000 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.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
During the quarter ended July 31, 1997, the Company did not produce any
new films and derived revenues almost exclusively from the exploitation of films
produced in prior fiscal years. Following the death on October 4, 1996 of Mr.
Stephen Friedman, then Chairman of the Board of Directors and Chief Executive
Officer of the Company, the Company has explored various business options,
including, among other things, the liquidation of the Company, the sale of the
Company as a going concern to an outside party, the sale of substantially all of
the assets of the Company to an outside party and the issuance of shares of
common stock to an outside party which would provide a new source of financing
for the Company. From January through May 1997, the Company had discussions with
over twenty outside parties which expressed varying degrees of interest in
acquiring all or part of the Company or in supplying additional capital in
return for an equity interest in the Company.
On June 23, 1997, the Company signed a non-binding letter of intent
with a privately held corporation ("Acquiror") pursuant to which, subject to
certain conditions, Acquiror would acquire control of the Company. Presently,
Acquiror holds a controlling interest in a publicly held information technology
company. The term of the non-binding letter of intent expired August 20, 1997;
however, as of September 5, 1997, the Company and Acquiror are continuing
negotiations.
As of September 5, 1997, Acquiror and the Company contemplate entering
into a transaction involving the distribution to the Company's shareholders of
all of the Company's cash and marketable securities and the subsequent
acquisition of control of the Company by Acquiror through the purchase of
newly-issued shares of common stock. For the purposes of such stock purchase,
the non-distributed assets of the Company, subject to completion of financial
and other due diligence, were tentatively valued by the parties, as of September
5, 1997, in an amount between $2.5 million and $3.2 million. The final
structure, terms (including purchase price) and conditions of such transaction
have not yet been determined nor has the
8
<PAGE> 9
Acquiror completed its evaluation of the Company's assets, however, and no
assurances can be made that the transaction, if completed, will be substantially
the same as the transaction described or that the valuation will not be
significantly different from the range set forth above.
The non-binding letter of intent provided that such transaction is
conditioned upon, among other things, the completion of due diligence to the
satisfaction of both parties, the completion of a definitive agreement that is
satisfactory to both parties, the receipt of all necessary consents and
approvals and the absence of any material adverse change in the business or
prospects of the Company. As a result, there can be no assurance that Acquiror
and the Company will consummate the contemplated transaction. In the event that
Acquiror does acquire control of the Company, there can be no assurance that the
Company will adhere to its current strategy and a change in the Company's
business strategy could have a material adverse impact upon the Company's
results of operations and financial position. If the Company does not complete
the contemplated transaction, the Company will have to choose among its other
options as noted above.
On June 9, 1997, based upon the Company's recognition that its business
plan at such date did not require the then existing level of cash on hand and
that a distribution of such funds to the Company's shareholders would better
serve the shareholders' interests, the Company declared a cash distribution of
$3,956,695, or $.70 per share of common stock, that was paid on June 27, 1997 to
shareholders of record on June 20, 1997.
RESULTS OF OPERATIONS
For the three months ended July 31, 1997, the Company reported net
income of approximately $114,000 on total revenues of approximately $418,000
compared to a net loss of approximately $200 on total revenues of approximately
$633,000 for the same period last year. Feature film revenue decreased by
approximately 37% to approximately $358,000 for the quarter ended July 31, 1997
from approximately $568,000 for the same period last year. During the quarter
ending July 31, 1997, the Company did not produce or release any new films and
derived revenues almost exclusively from the exploitation of films produced in
prior fiscal years.
Costs relating to revenue were approximately $37,000 during the three
months ended July 31, 1997 versus approximately $374,000 during the three months
ended July 31, 1996. These costs relate to amortization of production costs of
films for which revenue was recognized during the period. Selling expenses
decreased to approximately $4,000 during the quarter ended July 31, 1997 versus
approximately $11,000 for the same period last year. General and administrative
expenses increased by approximately $17,000 to approximately $263,000 during the
quarter ended July 31, 1997 from approximately $246,000 during the same period
last year. This increase results primarily from increased legal expenditures in
connection with certain ongoing litigation to which the Company is a party.
LIQUIDITY AND CAPITAL RESOURCES
The production of motion pictures requires substantial capital. In
producing a motion picture, the Company may expend substantial sums for both the
production and distribution of a picture, before that film generates any
revenues. In many instances the Company obtains advances or guarantees from its
distributors but these advances and guarantees generally defray only a small
portion of a film's cost. The Company's principal source of working capital
during the quarter ended July 31, 1997 was motion picture licensing income.
Except for the
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<PAGE> 10
financing of film production costs, management believes that its existing cash
resources will be sufficient to fund its ongoing operations.
For the three months ended July 31, 1997, the Company's net cash flow
provided by operating activities decreased to approximately $159,000 as compared
to approximately $542,000 during the three months ended July 31, 1996. Net cash
flow provided by investing activities was approximately $3,758,000, primarily
the sale of marketable securities. The Company used net cash flow of
approximately $3,812,000 in financing activities, primarily a return of capital
to shareholders. As of July 31, 1997, the Company had cash and cash equivalents
of approximately $353,000 and marketable securities of approximately $2,133,000
as compared to cash and cash equivalents of approximately $313,000 and
marketable securities of approximately $4,991,000 as of July 31, 1996.
FUTURE COMMITMENTS
The Company has no material commitments for capital expenditures. The
Company will evaluate the adequacy of and need for capital resources once a
final strategic plan has been developed. (SEE "RECENT DEVELOPMENTS")
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.
10
<PAGE> 11
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.
Dated: September 5, 1997 KINGS ROAD ENTERTAINMENT, INC.
/s/ Christopher M. Trunkey
-------------------------------
Christopher M. Trunkey
Vice President, Chief Financial and
Administrative Officer and Secretary
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE QUARTER ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1997
<CASH> 353,393
<SECURITIES> 2,133,186
<RECEIVABLES> 300,777
<ALLOWANCES> (10,000)
<INVENTORY> 805,521
<CURRENT-ASSETS> 3,582,877
<PP&E> 234,743
<DEPRECIATION> (213,770)
<TOTAL-ASSETS> 3,647,541
<CURRENT-LIABILITIES> 337,862
<BONDS> 0
<COMMON> 21,136,318
0
0
<OTHER-SE> (17,921,094)
<TOTAL-LIABILITY-AND-EQUITY> 3,647,541
<SALES> 357,915
<TOTAL-REVENUES> 418,221
<CGS> 36,507
<TOTAL-COSTS> 303,778
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 114,443
<INCOME-TAX> 97
<INCOME-CONTINUING> 114,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 114,346
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
