<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended April 30, 1997 Commission File No. 0-14234
KINGS ROAD ENTERTAINMENT, INC.
(Name of small business issuer 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
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $.01
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 ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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: $2.7 million.
As of July 15, 1997, the aggregate market value of the voting stock held by
non-affiliates (based on the closing sales price as reported by NASDAQ) was
approximately $1,189,138 (assuming all officers and directors are deemed
affiliates for this purpose).
As of July 15, 1997 the registrant had 5,652,422 shares of its common stock
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") has been
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.
RECENT EVENTS
During the fiscal year ended April 30, 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. The implementation of any of such options could result in a material
alteration in the Company's business strategy, and the following discussion of
the Company's business in prior years under the captions "Development,"
"Financing," "Production" and "Distribution" should be read in conjunction with
the discussion of the Company's strategic plans. (SEE "ITEM 6. - MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS").
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 has been developing
between approximately five and fifteen motion picture scripts or ideas for
possible future production. During fiscal years 1997 and 1996, the Company spent
approximately $132,000 and $31,000, respectively, on development activities.
Subject to its overall strategic direction, 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 $100,000 and
$250,000 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 has been 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.
2
<PAGE> 3
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
substantially escalated in recent years.
As of April 30, 1997, 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 September 1985
Hemingway
Enemy Mine Dennis Quaid, Louis December 1985
Gossett, Jr.
The Best of Times Robin Williams, Kurt Russell January 1986
Touch & Go Michael Keaton, Maria August 1986
Conchita Alonso
Morgan Stewart's Coming Jon Cryer, Lynn Redgrave February 1987
Home
The Big Easy Dennis Quaid, Ellen Barkin August 1987
In the Mood Patrick Dempsey, Beverly September 1987
D'Angelo
Rent-A-Cop Burt Reynolds, Liza Minelli January 1988
The Night Before Keanu Reeves, Lori Louglin March 1988
My Best Friend is a Robert Sean Leonard, Cheryl May 1988
Vampire Pollack
Jacknife Robert DeNiro, Ed Harris March 1989
Kickboxer Jean Claude Van Damme August 1989
Homer & Eddie Whoopi Goldberg, James December 1989
Belushi
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 August 1992
O'Hara
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
TITLE PRINCIPAL CAST RELEASE DATE
----- -------------- ------------
<S> <C> <C>
Knights Kris Kristofferson, Kathy November 1993
Long
Brainsmasher Andrew Dice Clay, Teri November 1993
Hatcher
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>
DISTRIBUTION
Theatrical The Company, when practical, has licensed 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 distributors have advanced
the costs of advertising and publicizing the motion pictures and the manufacture
of prints, however, in most cases the Company has been 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 HBO Video, 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 has
licensed 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 have been, 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 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
4
<PAGE> 5
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, 1997, the Company employed three 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 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
is subject to the terms of various industry-wide collective bargaining
agreements with the Writers Guild of America, the Directors Guild of America,
and the Screen Actors Guild, 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, as amended. 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's principal executive offices are located at 1901 Avenue of
the Stars, Suite 1545, Los Angeles, California 90067 and consist of
approximately 1,500 square feet leased on a month-to-month basis. In
management's opinion, the space currently occupied will be adequate for future
needs. The Company does not own or intend to acquire production
5
<PAGE> 6
facilities and rents any such 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
On March 3, 1997, Jasmine Films, Inc. ("Jasmine") initiated arbitration
with the American Arbitration Association of its claim that the Company breached
the terms of a limited partnership agreement between the Company, as general
partner, and SK Films, Inc. for the purpose of producing and distributing one
motion picture. Jasmine also claims, among other things, that the Company is
liable for breach of fiduciary duty, negligence and negligent misrepresentation.
Jasmine seeks unspecified damages in excess of $1.5 million. Arbitration of this
dispute is scheduled for late 1997. The Company believes it has substantial
defenses to Jasmine's claims. (SEE "NOTE H - INVESTMENT IN LIMITED
PARTNERSHIP").
On March 19, 1997, Strother Film Partners II and Strother Investment Co.
(collectively, "Strother") filed lawsuits against the Company and the Estate of
Stephen Friedman ("Friedman Estate") in United States Bankruptcy Court for the
District of New Jersey and in Los Angeles Superior Court. Strother alleges that
the Company breached the terms of a settlement agreement entered into between
Strother and the Company in March 1990 concerning a prior lawsuit. Strother also
alleges that the Company breached a December 31, 1986 joint venture agreement
between the Company and Strother pursuant to which a joint venture between the
Company and Strother (which terminated March 20, 1993) financed the domestic
theatrical distribution expenses of two Company-produced motion pictures in
return for a percentage of certain revenues generated by the two motion
pictures. In addition, Strother also alleges, among other things, that the
Company breached its fiduciary duty and committed fraud. Strother seeks
unspecified damages in excess of $1 million. The Company believes that it has
substantial defenses to the Strother claims.
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 trades on the Nasdaq SmallCap Market tier of
the Nasdaq Stock Market under the symbol: "KREN". The following table sets forth
the high and low sales prices of the Company's common stock as reported by
Nasdaq through April 30, 1997:
<TABLE>
<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
<TABLE>
<CAPTION>
FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter 3/4 5/8
Second Quarter 23/32 1/2
Third Quarter 21/32 7/16
Fourth Quarter 1 3/32 7/16
</TABLE>
As of July 15, 1997, the Company had approximately 258 stockholders of
record. In addition, the Company believes it has over 700 beneficial owners
holding shares in street name.
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. Future distributions, if any, will
depend on the Company's final strategic plans. (SEE "ITEM 6. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS").
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
During the fiscal year ended April 30, 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 Company has agreed that until August 20, 1997, the Company will not directly
or indirectly solicit or discuss the sale of all or part of the Company with any
party other than Acquiror.
As of July 22, 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 July 22, 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 Acquiror completed its evaluation of the Company's
assets, however, and no assurances can be made that the
7
<PAGE> 8
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 provides 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.
OVERVIEW
In recent years the Company's business has been to produce 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, 1997, 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. Subject to its
overall strategic direction, 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 the types of projects that will attract third party financing and
subsequently achieve commercial success. (SEE "ITEM 1. - DESCRIPTION OF
BUSINESS").
The Company's revenues have been derived almost exclusively from the
exploitation of the feature films it produces, 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 produced most recently, 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 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
8
<PAGE> 9
year depending on the number and success of release of films that become
available in the various media during that fiscal year.
As revenues have been recognized for each film, the Company has amortized
the costs incurred in producing that film. The Company has amortized film costs
under the income forecast method as described in Financial Accounting Standards
Board Statement 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 has
periodically reviewed its estimates on a film-by-film basis and, when
unamortized costs exceed net realizable value for a film, that film's
unamortized costs have been written down to net realizable value. Costs relating
to projects that have been abandoned or sold before being produced have been
charged to overhead and capitalized to film costs in the year that event occurs.
RESULTS OF OPERATIONS
For the fiscal year ended April 30, 1997, the Company reported net income
of approximately $589,000 on feature film revenues of approximately $2,357,000
as compared to net income of approximately $1,972,000 on feature film revenues
of approximately $8,345,000 for the prior fiscal year. The substantial decrease
in revenues of approximately 72% resulted primarily from the lack of new films
produced by the Company during the fiscal year and the Foreign Sale, discussed
above, that accounted for approximately $5,255,000 of the Company's revenues
during the fiscal year ended April 30, 1996. Net income decreased by
approximately 70% reflecting the aforementioned decrease in revenues.
Costs related to revenue as a percentage of feature film revenues for
fiscal year 1997 decreased slightly to 50% from 53% for fiscal year 1996.
Selling expenses for fiscal year 1997 decreased substantially to approximately
$128,000 from approximately $748,000 for fiscal year 1996. This decrease of
approximately 83% resulted from the decrease in commissions expense attributable
to the substantial decrease in revenues during the fiscal year discussed above.
General and administrative expenses for the current fiscal year decreased to
approximately $799,000 from approximately $1,142,000 for fiscal year 1996. This
decrease resulted primarily from lower salary expenditures due to the death of
Stephen Friedman and reductions in office staff and lower legal expenditures
following the completion of the Foreign Sale in fiscal year 1996.
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 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 decreased to
approximately $1,740,000 as compared to approximately $6,583,000 in fiscal year
1996. The Company used its operating cash flow solely in investment activities,
primarily the purchase of marketable securities of approximately $1,520,000. As
of April 30, 1997, the Company had cash and cash equivalents of approximately
$248,000 and marketable securities of approximately $5,967,000
9
<PAGE> 10
as compared to cash and cash equivalents of approximately $406,000 and
marketable securities of approximately $4,447,000 as of April 30, 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")
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements of Kings Road Entertainment, Inc. are listed
on the Index to Financial Statements set forth on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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>
Kenneth Aguado 39 Chairman of the Board 1998
and Chief Executive Officer
Christopher Trunkey 31 Vice President, Chief Financial ----
and Administrative Officer
and Secretary
Martin Davidson 55 Director 1997
Susan Aguado 63 Director 1996
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
KENNETH AGUADO has been a director of the Company since February 1989.
Mr. Aguado became the Company's Chief Executive Officer in October 1996
following the death of Stephen Friedman. In July 1994, Mr. Aguado rejoined
the Company as Vice-President of 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. Mr.
Aguado is the son of Susan Aguado.
10
<PAGE> 11
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.
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.
SUSAN AGUADO has been a director of the Company since October 1996.
Since March 1992, Mrs. Aguado has been retired. Between March 1989 and March
1992, Mrs. Aguado was Creative Director for Hometown Films and from January
1983 to March 1989, Mrs. Aguado was Vice President of East Coast Development
for the Company. Mrs. Aguado is graduate of New York University. Mrs.
Aguado is the mother of Kenneth Aguado.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
On July 10, 1997, the Friedman Estate filed a Report on Form 4 indicating
that, on August 10, 1995, the Company extended the expiration date to August 10,
1997 of an option granted to Mr. Friedman to purchase 250,000 shares of common
stock. The option had originally been a five-year option granted to Mr. Friedman
on August 10, 1990.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for each of the last three
fiscal years of the Company's Chief Executive Officers and up to four of the
other most highly compensated individuals serving as executive officers at April
30, 1997 whose total salary and bonus exceeded $100,000 for the fiscal year
("Named Officers"). No other Named Officer of the Company received salary and
bonus in excess of $100,000 in any of the last three fiscal years.
11
<PAGE> 12
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
--------------------- STOCK
OPTIONS ALL OTHER
NAME AND POSITION YEAR SALARY ($) BONUS ($) (SHARES) COMPENSATION
----------------- ---- ---------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Stephen Friedman(1) 1997 115,385 0 0 0
Chairman of the Board 1996 237,500(2) 0 0 0
and Chief Executive 1995 60,000(2) 0 0 0
Officer
Kenneth Aguado(1) 1997 89,577 3,596 83,125 619(3)
Chairman of the Board
and Chief Executive
Officer
</TABLE>
---------------
(1) Kenneth Aguado became the Company's Chief Executive Officer on October
7, 1996 following the death of Stephen Friedman on October 4, 1996.
(2) 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 repay various loans Mr.
Friedman made to the Company.
(3) Represents contributions made by the Company on behalf of Mr. Aguado
pursuant to the Company's SIMPLE IRA plan.
OPTION GRANTS
Shown below is information with respect to options granted to the Named
Officers during the fiscal year ended April 30, 1997.
<TABLE>
<CAPTION>
% OF TOTAL OPTIONS
NUMBER OF GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME OPTIONS GRANTED DURING FISCAL YEAR PRICE DATE
---- --------------- -------------------- -------- -----------
<S> <C> <C> <C> <C>
Kenneth Aguado 83,125(1) 100% $.56 10/14/2001
</TABLE>
---------------
(1) Options were granted on October 14, 1996 and vest one year from the
date of such grant.
OPTION EXERCISES AND YEAR-END VALUES
Shown below is information with respect to ownership by the Named Officers
of options and option values as of April 30, 1997. No options were exercised by
Mr. Friedman, the Friedman Estate or Mr. Aguado during the fiscal year ended
April 30, 1997.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT APRIL 30, 1997 AT APRIL 30, 1997(1)
--------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen Friedman 485,500(2) 0 $334,995 $0
Kenneth Aguado 16,875(3) 83,125 8,944 31,588
</TABLE>
---------------
(1) Based upon the difference between the closing stock price on April 30,
1997 ($.94) and the option exercise price.
(2) On June 9, 1997, the executor of the Friedman Estate exercised such
options to purchase 485,500 shares of common stock.
(3) On June 6, 1997, Mr. Aguado exercised such options to purchase 16,875
shares of common stock.
12
<PAGE> 13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of July 15, 1997,
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>
Estate of Stephen Friedman(1) 3,239,871(2)(3) 57.3%
c/o William Immerman, Executor
1999 Avenue of the Stars, Suite 1250
Los Angeles, CA 90067
</TABLE>
---------------
(1) Directors Susan Aguado and Kenneth Aguado are 50% and 25%
beneficiaries, respectively, of the Friedman Estate.
(2) Includes 100,000 shares owned by the Stephen J. Friedman Films,
Inc. Employee Pension Plan of which Mr. Immerman is the trustee.
(3) Includes 57,000 shares owned by SJF Productions Ltd. of which
Mr. Immerman is the President of the general partner, Stephen J.
Friedman Films, Inc.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of July 15, 1997, 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>
Susan Aguado 1,619,936(1) 28.7%
235 Cleveland Drive
Croton, NY 10520
Kenneth Aguado 831,843(2) 14.7%
4309 Wilkinson Avenue
Studio City, CA 91604
Martin Davidson 0 00.0%
1505 Viewsite Terrace
Los Angeles, CA 90069
All Executive Officers and
Directors as a Group (4 persons) 3,274,146 44.0%
</TABLE>
---------------
(1) Includes 1,619,936 shares representing 50% of the 3,239,871
shares beneficially owned by the Friedman Estate of which Mrs.
Aguado is a 50% beneficiary. See "Principal Stockholders".
(2) Includes 809,968 shares representing 25% of the 3,239,871 shares
beneficially owned by the Friedman Estate of which Mr. Aguado is a
25% beneficiary. See "Principal Stockholders".
13
<PAGE> 14
The Friedman Estate is currently the controlling shareholder of the
Company and the distribution of its common stock to its beneficiaries will
increase the common stock ownership of Susan Aguado and Kenneth Aguado by
1,619,936 and 809,968 shares, respectively. See "Principal Stockholders".
In addition, as discussed above, the Company has entered into a
non-binding letter of intent with Acquiror pursuant to which Acquiror may
acquire control of the Company. (SEE "ITEM 6. - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS").
Except as otherwise disclosed herein, 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
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-B)
<S> <C>
3.1 Restated Certificate of Incorporation of Registrant, as amended.(1)
3.2 Bylaws of Registrant.(1)
10.1 1987 Non-Qualified Stock Option Plan of Registrant.(1)
21 Subsidiaries of Registrant.(2)
27 Financial Data Schedule.(2)
</TABLE>
---------------
(1)Incorporated by reference to Form 10-K for the fiscal year ended April
30, 1988.
(2)Filed electronically with Securities and Exchange Commission, omitted
in copies distributed to shareholders or other persons.
(b) FORMS 8-K
On October 4, 1996, the Company filed a Form 8-K reporting the death of
Stephen Friedman, the Company's principal shareholder, and the resulting
change in control of the Company from Mr. Friedman to the Friedman Estate.
(c) SEE (a) ABOVE
14
<PAGE> 15
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 22, 1997 KINGS ROAD ENTERTAINMENT, INC.
By: /s/ CHRISTOPHER M. TRUNKEY
-------------------------
Christopher M. Trunkey,
Chief Financial 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/ KENNETH AGUADO Chairman of the Board of July 22, 1997
- --------------------------- Directors and Chief Executive
KENNETH AGUADO Officer (Principal Executive
Officer)
/s/ MARTIN DAVIDSON Director July 22, 1997
- ---------------------------
MARTIN DAVIDSON
/s/ SUSAN AGUADO Director July 22, 1997
- ---------------------------
SUSAN AGUADO
/s/ CHRISTOPHER M. TRUNKEY Vice President, Chief Financial July 22, 1997
- --------------------------- and Administrative Officer and
CHRISTOPHER M. TRUNKEY Secretary (Principal Financial
and Accounting Officer)
</TABLE>
15
<PAGE> 16
KINGS ROAD ENTERTAINMENT, INC.
FINANCIAL STATEMENTS
YEAR ENDED APRIL 30, 1997
<TABLE>
<S> <C>
Report of Independent Public Accountants F-2
Balance Sheet as of April 30, 1997 F-3
Statements of Income for the Years
Ended April 30, 1997 and 1996 F-4
Statements of Shareholders' Equity
for the Years Ended April 30, 1997 and 1996 F-5
Statements of Cash Flows for the Years
Ended April 30, 1997 and 1996 F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<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.
(the "Company") as of April 30, 1997, and the related statements of income,
shareholders' equity and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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. as of April 30, 1997, and the results of their operations
and their cash flows for the two years then ended, in conformity with generally
accepted accounting principles.
/s/ STONEFIELD JOSEPHSON, INC.
- ------------------------------
STONEFIELD JOSEPHSON
ACCOUNTANCY CORPORATION
Santa Monica, California
July 17, 1997
F-2
<PAGE> 18
KINGS ROAD ENTERTAINMENT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
APRIL 30, 1997
--------------
<S> <C>
ASSETS
Cash and Cash Equivalents $248,204
Marketable Securities, at market value 5,967,031
Accounts Receivable, net of allowance of 313,849
$10,000
Film Costs, net of amortization of $167,802,095 766,191
Prepaid Expenses 13,295
Fixed Assets 23,386
Other Assets 2,500
-----------
TOTAL ASSETS $ 7,334,456
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts Payable $315,721
Income Taxes Payable 3,482
Accrued Expenses 15,000
Deferred Revenue 87,800
-----------
TOTAL LIABILITIES 422,003
COMMITMENTS AND CONTINGENCIES 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, 12,000,000 shares
authorized, 5,120,047 shares issued and 45,716
outstanding
Additional Paid-In Capital 24,902,177
Deficit (18,035,440)
-----------
TOTAL SHAREHOLDERS' EQUITY 6,912,453
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,334,456
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE> 19
KINGS ROAD ENTERTAINMENT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
1997 1996
----------- ----------
<S> <C> <C>
REVENUES
Feature Films $2,356,940 $8,345,384
Interest Income 328,705 78,294
Other Income 2,079 11,604
----------- ----------
2,687,724 8,435,282
COSTS AND EXPENSES
Costs Related to Revenue 1,171,843 4,459,739
Selling Expenses 128,118 747,818
General & Administrative Expenses 799,087 1,142,338
Interest 0 14,461
----------- ----------
2,099,048 6,364,356
----------- ----------
INCOME BEFORE INCOME TAXES 588,676 2,070,926
Provision for Income Taxes (291) 99,195
----------- ----------
NET INCOME $588,967 $1,971,731
=========== ==========
Net Income Per Share $0.11 $0.37
=========== ==========
Weighted Average Number of Common
Shares and Common Share Equivalents 5,460,234 5,336,695
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 20
KINGS ROAD ENTERTAINMENT, INC.
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, 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
Net Income -- -- -- 588,967 588,967
--------- ------- ----------- ------------ ----------
Balance,
April 30, 1997 5,120,047 $45,716 $24,902,177 ($18,035,440) $6,912,453
========= ======= ============ =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 21
KINGS ROAD ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $588,967 $1,971,731
Adjustments to reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 1,178,032 4,463,317
Provision for loss on Accounts 0 16,012
Receivable
Change in Assets and Liabilities:
Decrease in Accounts Receivable 294,270 389,278
(Increase)/Decrease in Prepaid (9,584) 4,842
Expenses
Decrease in Other Assets 3,000 0
Increase/(Decrease) in Accounts 13,544 (297,082)
Payable
Decrease in Accrued Expenses (76,582) (75,066)
(Decrease)/Increase in Income Taxes (44,459) 29,984
Payable
(Decrease)/Increase in Deferred (207,214) 80,302
Revenue
---------- ----------
NET CASH AND CASH EQUIVALENTS
PROVIDED BY OPERATING ACTIVITIES 1,739,974 6,583,318
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Marketable Securities (1,519,648) (4,447,383)
Purchase of Fixed Assets (17,880) (9,460)
Gross Additions to Film Cost (359,781) (1,431,724)
---------- ----------
NET CASH AND CASH EQUIVALENTS
USED IN INVESTING ACTIVITIES (1,897,309) (5,888,567)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments to Related Party 0 (443,132)
---------- ----------
NET CASH AND CASH EQUIVALENTS
USED IN FINANCING ACTIVITIES 0 (443,132)
---------- ----------
NET (DECREASE)/INCREASE IN CASH
AND CASH EQUIVALENTS (157,335) 251,619
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 405,539 153,920
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 248,204 $ 405,539
========== ==========
Cash paid for:
Interest 0 14,461
Taxes 70,158 55,254
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 22
KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation In the prior fiscal year, the financial
statements included the accounts of Kings Road Entertainment, Inc. and its
subsidiaries after elimination of all intercompany items and transactions.
Effective October 31, 1996, all of the Company's subsidiaries were merged into
Kings Road Entertainment, Inc.
Basis of Presentation The 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 Financial Accounting Standards Board ("FASB") Statement 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 1997, the Company earned revenue from two significant customers of
approximately $1,008,000 (37%) of revenues, of which approximately $158,000 is
included in accounts receivable as of April 30, 1997. During 1996, the Company
earned revenue from one significant customer of approximately $5,255,000 (62%)
of revenues.
Revenues from foreign sources were approximately $1,471,000 and $7,225,000 in
1997 and 1996, 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 FASB Statement
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.
Accounts Receivable Accounts receivable are stated net of an allowance for
doubtful accounts of $10,000 as of April 30, 1997.
F-7
<PAGE> 23
KINGS ROADS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
Earnings Per Share Per share computations are based on the average number of
the Company's common shares and common equivalents outstanding during each year.
FASB has issued a new statement recently which requires companies to report
"basic" earnings per share, which will exclude options, warrants and other
convertible securities. The accounting and disclosure requirements of this
statement are effective for financial statements for fiscal years beginning
after December 15, 1997, with earlier adoption encouraged. Management does not
believe that the adoption of this pronouncement will have a material impact on
the financial statements.
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, 1997, approximately 5% of the Company's accounts
receivable were from foreign distributors.
Marketable Securities In accordance with FASB Statement 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.
NOTE B - FILM COSTS
<TABLE>
<CAPTION>
April 30, 1997
--------------
<S> <C>
Released Films, less amortization $682,051
Films in Production 0
Films in Development 84,140
--------
$766,191
========
</TABLE>
Based on the Company's estimates of revenue as of April 30, 1997, 100% of
unamortized film costs applicable to released films will be amortized during the
three years ended April 30, 2000. No interest or overhead was capitalized to
film costs during the fiscal years ended April 30, 1997 and 1996.
F-8
<PAGE> 24
KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE C - FIXED ASSETS
<TABLE>
<CAPTION>
April 30, 1997
--------------
<S> <C>
Office Equipment $ 205,112
Furniture & Fixtures 30,970
Leasehold Improvements 0
Accumulated Depreciation (212,696)
---------
$ 23,386
=========
</TABLE>
NOTE D - COMMITMENTS AND CONTINGENCIES
The Company leases approximately 1,500 square feet of office space on a
month-to-month basis. Rent expense was $30,579 and $34,284 in 1997 and 1996,
respectively.
The Company operates in one business segment, consisting primarily of production
and distribution of feature length motion pictures.
NOTE E - STOCK OPTIONS AND WARRANTS
The Company's 1987 Nonqualified Stock Option Plan (the "1987 Plan") provides for
the grant of options to purchase up to 850,000 shares of the Company's common
stock. At April 30, 1997, options to purchase up to 635,500 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, 485,500 are held by the
Estate of Stephen Friedman (see "Principal Stockholders"), 100,000 by the Chief
Executive Officer and 50,000 by another officer of the Company. Of the
outstanding options, 502,375 expire in August 1997, 50,000 expire in November
1999 and 83,125 expire in October 2001.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its employee stock options because the alternative fair value
accounting provided for under FASB No. 123, "Accounting for Stock-Based
Compensation," requires use of valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Proforma information regarding net income and earnings per share under the fair
value method has not been presented as the amounts are immaterial.
NOTE F - 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>
1997 1996
---- ----
<S> <C> <C>
Computed Expected Tax at Statutory Rate $ 154,228 $ 481,929
State and Local Income Taxes 8,276 5,720
Foreign Taxes 6,173 49,534
Valuation Allowance (168,968) (437,988)
--------- ---------
($291) $ 99,195
========= =========
</TABLE>
F-9
<PAGE> 25
KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE F - INCOME TAXES (CONTINUED)
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 $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:
<TABLE>
<CAPTION>
April 30, 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.
NOTE G - LITIGATION AND CONTINGENCIES
On March 3, 1997, Jasmine Films, Inc. ("Jasmine") initiated arbitration with the
American Arbitration Association of its claim that the Company breached the
terms of a limited partnership agreement between the Company, as general
partner, and SK Films, Inc. for the purpose of producing and distributing one
motion picture. Jasmine also claims, among other things, that the Company is
liable for breach of fiduciary duty, negligence and negligent misrepresentation.
Jasmine seeks unspecified damages in excess of $1.5 million. Arbitration of this
dispute is scheduled for late 1997. The Company believes it has substantial
defenses to Jasmine's claims. (SEE "NOTE H - INVESTMENT IN LIMITED
PARTNERSHIP").
On March 19, 1997, Strother Film Partners II and Strother Investment Co.
(collectively, "Strother") filed lawsuits against the Company and the Estate of
Stephen Friedman in United States Bankruptcy Court for the District of New
Jersey and in Los Angeles Superior Court. Strother alleges that the Company
breached the terms of a settlement agreement entered into between Strother and
the Company in March 1990 concerning a prior lawsuit. Strother also alleges that
the Company breached a December 31, 1986 joint venture agreement between the
Company and Strother pursuant to which a joint venture between the Company and
Strother (which terminated March 20, 1993) financed the domestic theatrical
distribution expenses of two Company-produced motion pictures in return for a
percentage of certain revenues generated by the two motion pictures. In
addition, Strother also alleges, among other things, that the Company breached
its fiduciary duty and committed fraud. Strother seeks unspecified damages in
excess of $1 million. The Company believes that it has substantial defenses to
the Strother claims.
F-10
<PAGE> 26
KINGS ROAD ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE G - LITIGATION AND CONTINGENCIES (CONTINUED)
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 H - 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 (i) contributed 25% of the budget of the Picture to the Partnership as
equity and (ii) guaranteed repayment of one-half of a loan made to the
Partnership by the Limited Partner equal to approximately 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.
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.
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 is recognized when received and the
Company's costs amortized according to the individual film forecast method
described in Note A.
F-11
<PAGE> 1
SUBSIDIARIES OF REGISTRANT
None.
Exhibit 21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE FISCAL YEAR ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 248,204
<SECURITIES> 5,967,031
<RECEIVABLES> 323,849
<ALLOWANCES> (10,000)
<INVENTORY> 766,191
<CURRENT-ASSETS> 7,295,275
<PP&E> 236,082
<DEPRECIATION> (212,696)
<TOTAL-ASSETS> 7,334,456
<CURRENT-LIABILITIES> 334,203
<BONDS> 0
0
0
<COMMON> 24,947,893
<OTHER-SE> (18,035,440)
<TOTAL-LIABILITY-AND-EQUITY> 7,334,456
<SALES> 2,356,940
<TOTAL-REVENUES> 2,687,724
<CGS> 1,171,843
<TOTAL-COSTS> 2,099,048
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 588,676
<INCOME-TAX> (291)
<INCOME-CONTINUING> 588,967
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 588,967
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
