<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 January 31, 1998 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)
(310) 552-0057
(Issuer's telephone number)
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 March 12, 1997, the registrant had 5,735,547 shares of its common stock
outstanding.
Transitional Small Business Disclosure Format: Yes No X
----- -----
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENT
KINGS ROAD ENTERTAINMENT, INC.
BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
AS OF
JANUARY 31, 1998
---------------
<S> <C>
ASSETS
Cash and Cash Equivalents $ 285,443
Marketable Securities, at market value 2,486,765
Accounts Receivable, net of allowance of $10,000 344,573
Film Costs, net of amortization of $167,769,996 380,273
Prepaid Expenses 69,818
Fixed Assets 13,904
Other Assets 2,500
---------------
TOTAL ASSETS $ 3,583,276
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts Payable $ 254,411
Accrued Expenses 15,000
Deferred Revenue 78,818
---------------
Total Liabilities 348,229
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 (17,901,271)
---------------
TOTAL SHAREHOLDERS' EQUITY 3,235,047
---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,583,276
===============
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE> 3
KINGS ROAD ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended January 31, Ended January 31,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Feature Films $ 668,513 $ 181,588 $ 1,339,575 $ 1,460,707
Interest Income 32,557 80,276 127,077 215,288
Other Income 0 730 0 2,079
----------- ----------- ----------- -----------
701,070 262,594 1,466,652 1,678,074
COSTS AND EXPENSES
Costs Related to Revenue 186,161 103,898 488,658 847,311
Selling Expenses 34,725 22,862 57,260 60,544
General and Administrative Expenses 282,320 139,238 781,291 596,449
----------- ----------- ----------- -----------
503,206 265,998 1,327,209 1,504,304
INCOME/(LOSS) BEFORE INCOME
TAXES 197,864 (3,404) 139,443 173,770
Provision for Income Taxes 4,452 (9,092) 5,274 (5,446)
----------- ----------- ----------- -----------
NET INCOME $ 193,412 $ 5,688 $ 134,169 $ 179,216
=========== =========== =========== ===========
Net Earnings Per Share $ 0.03 $ 0.00 $ 0.02 $ 0.03
=========== =========== =========== ===========
Weighted Average Number of Common
Shares 5,652,422 5,120,047 5,593,269 5,120,047
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this 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 -- -- -- 134,169 134,169
------------ ------------ ------------ ------------ ------------
Balance
January 31, 1998 5,652,422 $ 51,040 $ 21,085,278 $(17,901,271) $ 3,235,047
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statements.
-4-
<PAGE> 5
KINGS ROAD ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended January 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 134,169 $ 179,216
Adjustments to reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation and Amortization 494,933 851,089
Change in Assets and Liabilities
(Increase)/Decrease in Accounts Receivable (30,724) 206,962
Increase in Prepaid Expenses (56,523) (15,342)
Decrease in Other Assets 0 3,000
Decrease in Accounts Payable (61,310) (1,171)
Decrease in Accrued Expenses 0 (86,582)
Decrease in Income Taxes Payable (3,482) (47,941)
Decrease in Deferred Revenue (8,982) (208,200)
----------- -----------
NET CASH AND CASH EQUIVALENTS PROVIDED BY 468,081 881,031
OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Sale/(Purchase) of Marketable Securities 3,480,266 (763,065)
Disposal/(Purchase) of Fixed Assets 3,207 (7,082)
Gross Additions to Film Cost (102,740) (126,758)
----------- -----------
NET CASH AND CASH EQUIVALENTS PROVIDED BY/(USED IN) INVESTING ACTIVITIES 3,380,733 (896,905)
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 37,239 (15,874)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 248,204 405,539
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 285,443 $ 389,665
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statements.
-5-
<PAGE> 6
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 January 31, 1998 and the results of operations and cash flows for
the three- and nine-month periods ended January 31, 1998 have been included.
The results of operations for the three- and nine-month periods ended January
31, 1998 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.
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<PAGE> 7
NOTE C - FILM COSTS
Film Costs consist of:
<TABLE>
<CAPTION>
January 31,
1998
---------------
<S> <C>
Released Films, less amortization $ 305,692
Films in Production 0
Films in Development 74,581
---------------
$ 380,273
===============
</TABLE>
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 January 31, 1998,
options to purchase up to 83,125 shares were outstanding under the 1987 Plan and
were held by the Company's Chief Executive Officer. The exercise price of such
options was reduced to $.00 per share based upon the impact of the Company's
extraordinary cash distribution in June 1997 of $.70 per share. On February 2,
1998, the Company's Chief Executive Officer exercised such options.
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
January 31, 1998
---------------
<S> <C>
Computed Expected Tax at Statutory Rate $ 67,274
State and Local Income Taxes 4,220
Foreign Taxes 232
Valuation Allowance (67,274)
---------------
$ 4,452
===============
</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
-7-
<PAGE> 8
(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>
January 31,
1998
------------
<S> <C>
Deferred Revenued $ 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
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 January 31, 1998, 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 ("Common Stock") to an outside party which would provide a new
source of financing for the Company.
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.
The Company and the Morgan Kent Group, Inc. ("Morgan Kent") executed a
Stock Purchase Agreement, dated as of December 11, 1997 (the "Purchase
Agreement"), and a side letter relating thereto, dated as of December 11, 1997
(the "Side Letter").
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<PAGE> 9
Presently, Morgan Kent holds a controlling interest in a publicly-held
information technology company. Pursuant to the Purchase Agreement, the Company
will issue a number of shares of the Company's common stock which will provide
Morgan Kent with approximately 53% of the outstanding common stock on the date
of issuance in return for a purchase price of $2,967,738. In accordance with the
Side Letter, the Company will use its best efforts to obtain the consent of
holders of a majority of the outstanding shares of common stock to effect a
one-for-three reverse stock split prior to the consummation of the Purchase
Agreement.
Prior to the consummation of the Purchase Agreement, the Company will make
a cash distribution ("Cash Distribution") to shareholders equal to $2,492,922
(the amount of cash and marketable securities of the Company as of August 31,
1997) plus the value of certain receivables estimated to be approximately
$231,000 minus the aggregate amount of the Company's costs incurred in the
preparation of the proxy statement and solicitation relating to the Purchase
Agreement and the company's legal fees and other expenses incurred in the
negotiation and consummation of the Purchase Agreement. The cash distribution is
expected to be approximately $.42 per share (prior to the effectuation of the
reverse stock split, if at all, discussed above).
Until the one year anniversary of the Purchase Agreement, the Company will
indemnify Morgan Kent and its affiliates for losses exceeding $75,000, which
result from an uncured breach by the Company of any Company representation,
warranty, covenant or agreement set forth in the Purchase Agreement or from any
Company stockholder action relating to the purchase of stock by Morgan Kent, by
issuing to Morgan Kent a number of additional shares of Common Stock equal to
the amount of losses in excess of $75,000 divided by $.4656 (to be adjusted to
$1.164 upon the effectuation of the reverse stock split, if at all, discussed
above).
In the event that the Purchase Agreement is terminated by Morgan Kent based
upon the Company's uncured breach of representations, warranties, covenants or
agreements set forth in the Purchase Agreement resulting in losses to Morgan
Kent in excess of $75,000, the Company will pay to Morgan Kent $75,000 plus fees
and expenses incurred in collecting such money (the "Breakup Fee"). In the event
that the Purchase Agreement is terminated by the Company based upon Morgan
Kent's uncured breach of representations, warranties, covenants or agreements
set forth in the Purchase Agreement, Morgan Kent will pay the Company the
Breakup Fee.
According to information provided by Morgan Kent to the Company, Morgan
Kent's purchase of the shares of Common Stock pursuant to the Purchase Agreement
is part of its overall business strategy to acquire assets of or majority or
controlling interests in the equity of existing businesses in diverse industries
whose financial performance could be improved with Morgan Kent's management
guidance. Morgan Kent's investment in the Company represents Morgan Kent's
interest in targeting certain segments of the media industry which, Morgan Kent
believes, show potential for growth.
-9-
<PAGE> 10
Following the consummation of the Purchase Agreement, the Company intends
to exploit the "Kings Road" name and to enhance the Company's position as a
niche producer of low-cost films. In making its investment, Morgan Kent has
indicated its support of, and has infused funds which it believes will assist
the Company in pursuing, such business plan.
RESULTS OF OPERATIONS
For the three months ended January 31, 1998, the Company reported net
income of approximately $193,000 on total revenues of approximately $701,000
compared to net income of approximately $6,000 on total revenues of
approximately $263,000 for the same period last year. Feature film revenue
increased by approximately 267% to approximately $669,000 for the quarter ended
January 31, 1998 from approximately $182,000 for the same period last year
primarily due to increased foreign distribution revenue. During the quarter
ending January 31, 1998, 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. The remaining revenue were primarily interest income.
Costs relating to revenue were approximately $186,000 during the three
months ended January 31, 1998 versus approximately $104,000 during the three
months ended January 31, 1997. These costs relate to amortization of production
costs of films for which revenue was recognized during the period. As a
percentage of revenue, cost relating to revenue declined to 26.5% from 39.5% in
the prior period due to the fact that many of the Company's films have little or
no unamortized costs. Selling expenses increased to approximately $35,000 during
the quarter ended January 31, 1998 versus approximately $23,000 for the same
period last year. General and administrative expenses increased by approximately
$143,000 to approximately $282,000 during the quarter ended January 31, 1998
from approximately $139,000 during the same period last year. This increase
resulted primarily from increased legal expenditures in connection with certain
ongoing litigation to which the Company is a party.
For the nine months ended January 31, 1998, the Company reported net income
of approximately $134,000 versus net income of approximately $179,000 for the
same period last year. Revenues decreased 13% to approximately $1,467,000 for
the nine months ended January 31, 1997 as compared to approximately $1,678,000
for the same period last year as a result of the fact that the Company did not
produce or release any new films during the period and derived revenues almost
exclusively from the exploitation of films produced in prior fiscal years. Costs
relating to revenue decreased 42% to approximately $489,000 as compared to
approximately $847,000 for the same period last year, and declined as a
percentage of revenue to 29% for the current period from 50% in the prior period
due to the fact that many of the Company's films have little or no unamortized
costs.
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<PAGE> 11
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. As a result, the Company has been primarily pursuing
projects that it hopes will attract third party financing. The Company's
principal source of working capital during the quarter ended January 31, 1998
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 consummation of the Purchase Agreement is
expected to allow the Company to make a significant distribution to its
shareholders without decreasing the capital of the Company.
For the nine months ended January 31, 1998, the Company's net cash flow
provided by operating activities decreased to approximately $468,000 compared to
approximately $881,000 during the nine months ended January 31, 1997. That cash
flow, together with approximately $3,480,000 in cash from the sale of marketable
securities, was used to finance the June 1997 return of capital to shareholders.
As of January 31, 1998, the Company had cash and cash equivalents of
approximately $285,000 and marketable securities of approximately $2,487,000 as
compared to cash and cash equivalents of approximately $390,000 and marketable
securities of approximately $5,210,000 as of January 31, 1997.
FUTURE COMMITMENTS
The Company has no material commitments for capital expenditures although
it expects to make a cash distribution to shareholders if the Purchase Agreement
is consummated. The Company will evaluate the adequacy of and need for capital
resources once a final strategic plan has been developed. (SEE "RECENT
DEVELOPMENTS").
FORWARD-LOOKING STATEMENTS
The foregoing discussion, as well as the other sections of this Quarterly
Report on Form 10-QSB, contains various forward-looking statements that reflect
the Company's current views with respect to future events and financial results.
Forward-looking statements usually include the verbs "anticipates," "believes,"
"estimates," "expects," "intends," "plans," "projects," "understands" and other
verbs suggesting uncertainty. The Company reminds stockholders that
forward-looking statements are merely predictions and therefore inherently
subject to uncertainties and other factors which could cause the actual results
to differ materially from the forward-looking statements. Potential factors
which could affect forward-looking statements include, among other things, the
Company's ability to identify and successfully complete film projects and to
attract and retain qualified personnel.
-11-
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1 - 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. In a ruling dated December 24, 1997, an arbitrator dismissed
with prejudice all of Jasmine's claims. Jasmine had sought damages in excess of
$1.5 million.
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.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered In accordance with Item 601 of Regulation S-B)
3.1 Restated Certificate of Incorporation of Registrant, as
amended(1)
3.2 Bylaws of Registrant(1)
27 Financial Data Schedule(2)
- ----------
(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 December 24, 1997, the Company filed a Form 8-K reporting under Item
1 thereof a change in control of the Company resulting from the execution of a
Stock Purchase Agreement with the Morgan Kent Group, Inc. (SEE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS - RECENT
DEVELOPMENTS).
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<PAGE> 13
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: February 16, 1997
KINGS ROAD ENTERTAINMENT, INC.
By: /s/ Kenneth I. Aguado
--------------------------------------
Kenneth I. Aguado
Chairman of the Board of Directors and
Chief Executive Officer
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998 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> JAN-31-1998
<CASH> 285,443
<SECURITIES> 2,486,765
<RECEIVABLES> 354,573
<ALLOWANCES> (10,000)
<INVENTORY> 380,273
<CURRENT-ASSETS> 3,497,054
<PP&E> 230,344
<DEPRECIATION> (216,440)
<TOTAL-ASSETS> 3,583,276
<CURRENT-LIABILITIES> 269,411
<BONDS> 0
0
0
<COMMON> 21,136,318
<OTHER-SE> (17,901,271)
<TOTAL-LIABILITY-AND-EQUITY> 3,583,276
<SALES> 668,513
<TOTAL-REVENUES> 701,070
<CGS> 186,161
<TOTAL-COSTS> 503,206
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 197,864
<INCOME-TAX> 4,452
<INCOME-CONTINUING> 193,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 193,412
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
