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, 1999 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
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 15, 1999 the registrant had 3,389,315 shares of its common stock
outstanding.
Transitional Small Business Disclosure Format: YES ___ NO X_
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS OF
JAN. 31, 1999
--------------------
ASSETS
Cash and Cash Equivalents $ 47,216
Accounts and Notes Receivable,
net of allowance of $10,000 388,108
Film Costs, net of amortization
of $168,335,670 308,261
Investment in Immediate
Entertainment Group 5,951,851
Prepaid Expenses 72,101
Fixed Assets 12,874
Other Assets 2,500
-------------------
TOTAL ASSETS $6,782,911
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts Payable $205,017
Note Payable to Related Parties 210,803
Accrued Expenses 10,586
Deferred Revenue 8,400
-------------------
TOTAL LIABILITIES 434,806
COMMITMENTS AND CONTINGENCIES 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value,
12,000,000 shares authorized,
3,389,315 shares issued and
outstanding at Jan. 31, 1999 65,815
Additional Paid-In Capital 24,542,788
Deficit (18,260,498)
-------------------
TOTAL SHAREHOLDERS' EQUITY 6,348,105
-------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,782,911
===================
The accompanying notes are an integral part of this balance sheet.
2
<PAGE>
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
1999 1998 1999 1998
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
REVENUES
Feature Films $242,806 $668,513 $464,970 $1,339,575
Interest Income 4,466 32,557 71,165 127,077
-------------- ---------- --------------- --------------
247,272 701,070 536,135 1,466,652
COSTS AND EXPENSES
Costs Related to Revenue 81,997 186,161 90,854 488,658
Selling Expenses 3,016 34,725 32,489 57,260
General & Administrative Expenses 235,604 282,320 548,191 781,291
Interest 2,426 0 2,426 0
Cancellation of Stock Options 113,754 0 113,754 0
--------------- ----------- --------------- ------------
436,797 503,206 787,714 1,327,209
--------------- ----------- --------------- ------------
OPERATING (LOSS)/INCOME (189,525) 197,864 (251,579) 139,443
Equity in Losses of Affiliates (31,236) 0 (31,236) 0
--------------- ----------- --------------- ------------
(LOSS)/INCOME BEFORE
INCOME TAXES (220,761) 197,864 (282,815) 139,443
Provision for Income Taxes 0 4,452 (18,940) 5,274
--------------- ----------- --------------- ------------
NET (LOSS)/INCOME ($220,761) $193,412 ($263,875) $134,169
=============== =========== =============== ============
Net Loss Per Share - Basic ($0.07) $0.10 ($0.11) $0.07
=============== =========== =============== ============
Weighted Average Number of
Common Shares - Basic 3,389,315 1,884,141 2,404,270 1,864,423
=============== =========== =============== ============
Net Loss Per Share - Diluted ($0.07) $0.10 ($0.11) $0.07
=============== =========== =============== ============
Weighted Average Number of
Common Shares and Common
Share Equivalents - Diluted 3,389,315 1,911,849 2,427,714 1,895,094
=============== =========== =============== ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<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, 1997 1,706,581 $45,716 $24,902,177 ($18,035,440) $6,912,453
Exercise of
Stock Options 205,167 5,324 139,797 ----- 145,121
Distribution to
Shareholders ----- ----- (3,956,696) ----- (3,956,696)
Net Income ----- ----- ----- 38,817 38,817
----------------- ----------------- ----------------- ----------------- -----------------
Balance,
April 30, 1998 1,911,748 51,040 21,085,278 (17,996,623) 3,139,695
Issuance of Stock
for Acquisitions 1,477,567 14,775 3,457,510 ----- 3,472,285
Net Loss ----- ----- ----- (263,875) (263,875)
----------------- ----------------- ----------------- ----------------- -----------------
Balance,
Jan. 31, 1999 3,389,315 $65,815 $24,542,788 ($18,260,498) $6,348,105
========== ========== =========== ============= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JAN. 31,
1999 1998
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($263,875) $134,169
Adjustments to reconcile Net Loss to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 97,024 494,933
Equity in Losses of Affiliates 31,236 0
Changes in Assets and Liabilities:
Increase in Accounts Receivable (14,645) (30,724)
Increase in Prepaid Expenses (24,260) (56,523)
Decrease in Accounts Payable (28,150) (61,310)
Decrease in Accrued Expenses (4,414) 0
Decrease in Income Taxes Payable 0 (3,482)
Decrease in Deferred Revenue (1,200) (8,982)
------------------- -------------------
NET CASH AND CASH EQUIVALENTS (USED IN)/
PROVIDED BY OPERATING ACTIVITIES (208,284) 468,081
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of Marketable Securities 0 3,480,266
(Purchase)/Disposal of Fixed Assets (4,560) 3,207
Gross Additions to Film Costs (98,441) (102,740)
Investment in Immediate Entertainment Group (5,983,087) 0
------------------- -------------------
NET CASH AND CASH EQUIVALENTS (USED IN)/
PROVIDED BY INVESTING ACTIVITIES (6,086,088) 3,380,733
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Stock for Investment in Immediate 3,472,285 0
Borrowings from Related Parties 210,803 0
Exercise of Stock Options 0 145,121
Distribution to Shareholders 0 (3,956,696)
------------------- -------------------
NET CASH AND CASH EQUIVALENTS PROVIDED
BY/(USED IN) FINANCING ACTIVITIES 3,683,088 (3,811,575)
------------------- -------------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (2,611,284) 37,239
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,658,500 248,204
------------------- -------------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $47,216 $285,443
=================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Kings Road
Entertainment, Inc. and its subsidiaries. The Company has one affiliate,
Immediate Entertainment Group, Inc., which is 20% owned by the Company, that is
accounted for using the equity method.
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, 1998, 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, 1999 and the results of operations and cash flows for
the three and nine month periods ended January 31, 1999 and 1998 have been
included.
The results of operations for the three and nine month periods ended January 31,
1999 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, 1998.
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 periods.
Actual results could differ from those estimates.
The Company has adopted Statement of Financial Accounting Standard No. 128,
Earnings Per Share ("SFAS No. 128"), which became effective for financial
statements issued for periods ending after December 15, 1997. In accordance with
SFAS No. 128, prior year earnings per share ("EPS") amounts have been restated.
SFAS No. 128 was issued to simplify the standards for calculating EPS previously
set forth in Accounting Principles Board No. 15, Earnings Per Share. SFAS No.
128 replaces the presentation of primary EPS with basic EPS. The new rules also
require dual presentation of basic and diluted EPS on the face of the statements
of operations.
In April 1998, the Company effected a 1-for-3 reverse stock split for
shareholders of record on April 17, 1998. All share and per share data in the
financial statements reflect the reverse stock split for all periods presented.
6
<PAGE>
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - FILM COSTS
Film costs consist of:
As Of
Jan. 31, 1999
-------------
Released Films, less amortization $115,663
Films in Production 0
Films in Development 192,598
-------
$308,261
=======
NOTE C - INVESTMENT IN IMMEDIATE ENTERTAINMENT GROUP
On November 9, 1998, the Company acquired 20% of the common stock of Immediate
Entertainment Group, Inc. ("Immediate") for an aggregate of $2,300,000 in cash,
1,477,567 newly issued shares of the Company's stock and a note payable to the
sellers for $210,803 bearing interest at 5% per annum due upon demand but in no
event earlier than April 30, 2000. The Company's investment in Immediate has
been accounted for using the equity method. At January 31, 1999, the quoted
market value of the Company's investment in Immediate was approximately
$8,675,477. This valuation represents a mathematical calculation based on the
closing price of Immediate's common stock on the NASD over-the-counter bulletin
board market and is not necessarily indicative of the amounts that could be
realized upon sale. Accounts and Notes Receivable include $97,000 of amounts due
from Immediate. Immediate is a diversified entertainment holding company that
provides services relating to music production, audio recording, CD
manufacturing, film soundtrack and script development and operates a mail order
music club.
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
The Company's 1998 Stock Option Plan ("1998 Plan") provides for the grant of
options to purchase up to 400,000 shares of the Company's common stock. At
January 31, 1999, no options were outstanding under the 1998 Plan. On November
6, 1998, in connection with a November 6, 1998 Stock Acquisition Agreement
("Acquisition Agreement"), all of the then outstanding options under the 1998
Plan were canceled. For such cancellation, the option holders received, in the
aggregate, the sum of $113,754, representing the difference between $2.35, the
per share purchase price under the Acquisition Agreement, and the exercise price
of $1.22 times 100,667, the number of then outstanding options.
7
<PAGE>
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - STOCK OPTIONS (CONTINUED)
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 method provided for under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, requires the 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.
Pro forma information regarding net income and earnings per share under the fair
value accounting method for the three and nine month periods ended January 31,
1999 and 1998 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:
Nine Months Ended Nine Months Ended
Jan. 31, 1999 Jan. 31, 1998
Computed Expected Tax at Statutory Rate ($96,157) $67,274
Benefit of Prior Years Amended Returns (19,286) 0
State and Local Income Taxes 0 4,220
Foreign Taxes 346 232
Valuation Allowance 96,157 (67,274)
--------- --------
($18,940) $4,452
========= =======
The Company filed amended federal and state tax returns for the fiscal years
ended April 30, 1997 and 1996 that resulted in a reduction in income tax expense
of $19,286 recorded during the nine month period ended January 31, 1999.
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 $16,626,000 (expiring between 2001 and 2007)
to offset future income tax liabilities.
Deferred tax assets 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 are as follows:
8
<PAGE>
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - INCOME TAXES (CONTINUED)
As Of
Jan. 31, 1999
-------------
Deferred Revenue $4,000
Film Cost Amortization 18,000
Net Operating Loss Carryforwards 6,650,000
Investment Tax Credit Carryforwards 2,166,000
Foreign Tax Credit Carryforwards 400,000
---------
9,238,000
Valuation Allowance (9,238,000)
---------
$0
=========
A valuation allowance of $9,238,000 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 - RELATED PARTY TRANSACTIONS
On November 6, 1998, pursuant to a Stock Acquisition Agreement, FAB Capital
Corporation ("FAB"), MBO Music Verlag GmbH ("MBO"), Western Union Leasing Ltd.
("Western") and RAS Securities Corp. (collectively, the "Acquirors") purchased
421,949, 373,350, 159,461 and 100 shares, respectively, of the Company's common
stock from the Estate of Stephen Friedman ("Estate") and FAB simultaneously
purchased 7,500 shares from Christopher Trunkey, the Chief Financial Officer of
the Company, for a purchase price of $2.35 per share or $2,261,546 in the
aggregate. Such shares represented approximately 50.3% of the Company's then
outstanding common stock. Phillip Cook, Chairman, Chief Executive Officer and
25% shareholder of FAB became Chairman and Chief Executive Officer of the
Company.
Music Action Ltd. ("MAC") agreed that it would, as soon as practicable but in
any event within 120 days after November 6, 1998, make or cause to be made an
offer to each of the Company's shareholders other than the Acquirors, the Estate
and Mr. Trunkey, for the purchase of up to ninety percent (90%) of such
shareholder's shares at a price of $2.35 per share ("Purchase Offer"). MAC
agreed that, in the event the Purchase Offer was not made within ninety days
after November 6, 1998, it would deposit $1,800,000 into escrow to be applied
toward the Purchase Offer. FAB agreed to make the $1,800,000 deposit into escrow
in the event MAC did not do so. On February 3, 1999, the Stock Acquisition
Agreement was amended to eliminate the Purchase Offer due to the fact that the
Company's closing share price exceeded the $2.35 Purchase Offer price for the
previous ten (10) trading days.
On November 9, 1998, the Company acquired 20% of the common stock of Immediate
from FAB, MBO and Western for an aggregate of $2,300,000 in cash, 1,477,567
newly issued shares of the Company's stock and a note payable to the sellers
("Note") for $210,803 bearing interest at 5% per annum due upon demand but in no
event earlier than April 30, 2000. Pursuant to such transaction FAB, MBO and
Western, respectively, received $1,016,679, $898,875 and $384,446 in cash,
653,131, 577,479 and 246,957 shares of the Company's common stock and are due
$93,175, $82,424 and $35,204 under the Note.
9
<PAGE>
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company also entered into a non-binding letter of intent, pursuant to which
Immediate will merge into a newly formed, wholly owned subsidiary of the Company
in a proposed tax-free transaction. The merger is conditioned upon the
negotiation and execution of definitive final agreements and the satisfaction of
any legal requirements including the consent of shareholders, if required.
During the quarter ending January 31, 1999, interest expense of $2,426 was
accrued on the Note. Michael Berresheim, Chairman, Chief Executive Officer and
significant shareholder of Immediate is the Managing Director and sole
shareholder of MBO.
On December 17, 1998, the Company paid $25,000 to FAB as reimbursement for
expenses it incurred in connection with the pending merger negotiations between
the Company and Immediate. On February 9, 1999, the Company paid $25,000 to FAB
as reimbursement for legal fees incurred in connection with the pending merger
negotiations between the Company and Immediate.
Subsequent to November 9, 1998, the Company has advanced to Immediate or made
payments to third parties on Immediate's behalf of $97,000. Immediate has agreed
to repay such advances in the event the pending merger negotiations between the
Company and Immediate are terminated.
10
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Recent Developments
Subsequent to the fiscal year ended April 30, 1995, the Company has not
produced any new films and has derived revenues almost exclusively from the
exploitation of films produced prior to April 30, 1995. Following the death on
October 4, 1996 of Mr. Stephen Friedman, the Company's founder and then Chairman
of the Board of Directors and Chief Executive Officer, 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. 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 November 6, 1998, pursuant to a Stock Acquisition Agreement, FAB
Capital Corporation ("FAB"), MBO Music Verlag GmbH ("MBO"), Western Union
Leasing Ltd. ("Western") and RAS Securities Corp. (collectively, the
"Acquirors") purchased 962,360 shares of the Company's common stock
(approximately 50.3% of the Company's then outstanding common stock) from the
Estate of Stephen Friedman ("Estate") and Christopher Trunkey, the Chief
Financial Officer of the Company, for a purchase price of $2.35 per share or
$2,261,546 in the aggregate. In addition, Music Action Ltd. ("MAC") agreed that
it would, as soon as practicable but in any event within 120 days after November
6, 1998, make or cause to be made an offer to each of the Company's shareholders
other than the Acquirors, the Estate and Mr. Trunkey, for the purchase of up to
ninety percent (90%) of such shareholder's shares at a price of $2.35 per share
("Purchase Offer"). MAC agreed that, in the event the Purchase Offer was not
made within ninety days after November 6, 1998, it would deposit $1,800,000 into
escrow to be applied toward the Purchase Offer. FAB agreed to make the
$1,800,000 deposit into escrow in the event MAC did not do so. On February 3,
1999, the Stock Acquisition Agreement was amended to eliminate the Purchase
Offer due to the fact that the Company's closing share price exceeded the $2.35
Purchase Offer price for the previous ten (10) trading days.
On November 9, 1998, the Company acquired 20% of the common stock of
Immediate from FAB, MBO and Western for an aggregate of $2,300,000 in cash,
1,477,567 newly issued shares of the Company's stock and a note payable to the
sellers ("Note") for $210,803 bearing interest at 5% per annum due upon demand
but in no event earlier than April 30, 2000. The Company also entered into a
non-binding letter of intent, pursuant to which Immediate will merge into a
newly formed, wholly owned subsidiary of the Company in a proposed tax-free
transaction. The merger is conditioned upon the negotiation and execution of
definitive final agreements and the satisfaction of any legal requirements
including the consent of shareholders, if required. Immediate's principal
business is the production, acquisition and distribution of audio and video CD's
as well as CD-ROM by engaging artists and producers to create recordings or
acquiring previously completed recordings.
Results of Operations
The Three Months Ended January 31, 1999 vs. the Three Months
Ended January 31, 1998
For the quarter ended January 31, 1999 feature film revenues were
approximately $243,000 as compared to approximately $669,000 for the quarter
ended January 31, 1998. The substantial decrease in feature film revenues of
11
<PAGE>
approximately 64% results primarily from the fact that the Company has not
produced any new films since the fiscal year ended April 30, 1995. Until such
time as the Company either produces new films or develops and implements a new
overall strategic plan, the Company expects that its feature film revenues will
continue to decline. Interest income decreased to approximately $4,000 during
the quarter ended January 31, 1999 versus approximately $33,000 for the same
period last year. This decrease results from the substantial decrease in the
Company's cash and marketable securities during the quarter versus the same
period last year.
Costs related to revenue as a percentage of feature film revenues
increased to approximately 34% for the quarter ended January 31, 1999 from
approximately 28% for the quarter ended January 31, 1998. These costs represent
the amortization of production costs of films that generated revenue during the
period. Selling expenses decreased to approximately $3,000 during the quarter
ended January 31, 1999 versus approximately $35,000 during the same quarter last
year. This decrease in selling expenses results from the decrease in feature
film revenues of approximately 65%.
General and administrative costs decreased by approximately 17% to
approximately $236,000 during the quarter ended January 31, 1999 versus
approximately $282,000 during the same period last year. This decrease results
primarily from a substantial decrease of approximately $65,000 in legal
expenditures due to the resolution in December 1997 and April 1998 of certain
litigation involving the Company partially offset by increased investor
relations expenses. In connection with the Stock Acquisition Agreement, all of
the then outstanding options under the Company's 1998 Stock Option Plan were
canceled. For such cancellation, the option holders received approximately
$114,000 that was recorded as an expense during the quarter ended January 31,
1999.
The Company had a net loss of approximately $221,000 for the quarter
ended January 31, 1999 including equity in losses of affiliates of approximately
$31,000 versus net income of approximately $193,000 for the quarter ended
January 31, 1998 reflecting the Company's lower revenues during the current
quarter versus the same quarter last year.
The Nine Months Ended January 31, 1999 vs. the Nine Months
Ended January 31, 1998
For the nine months ended January 31, 1999 feature film revenues were
approximately $465,000 as compared to approximately $1,340,000 for the nine
months ended January 31, 1998. The substantial decrease in feature film revenues
of approximately 65% results primarily from the fact that the Company has not
produced any new films since the fiscal year ended April 30, 1995. Until such
time as the Company either produces new films or develops and implements a new
overall strategic plan, the Company expects that its feature film revenues will
continue to decline. Interest income decreased to approximately $71,000 for the
nine months ended January 31, 1999 from approximately $127,000 during the same
nine month period last year, reflecting the decrease in cash and marketable
securities held during the nine month period ended January 31, 1999.
Costs related to revenue as a percentage of feature film revenues
decreased to approximately 20% for the nine months ended January 31, 1999 from
approximately 37% for the nine months ended January 31, 1998. This decrease
results from the fact that a significant portion of the costs associated with
the Company's films have previously been amortized. Selling expenses decreased
to approximately $32,000 during the nine months ended January 31, 1999 versus
approximately $57,000 during the same nine month period last year.
12
<PAGE>
General and administrative costs decreased by approximately 30% to
approximately $548,000 during the nine months ended January 31, 1999 versus
approximately $781,000 during the same nine month period last year. This
decrease results primarily from a substantial decrease of approximately $277,000
in legal expenditures due to the resolution in December 1997 and April 1998 of
certain litigation involving the Company which was partially offset by increased
investor relations expenses. In connection with the Acquisition Agreement, all
of the then outstanding options under the Company's 1998 Stock Option Plan were
canceled. For such cancellation, the option holders received approximately
$114,000 that was recorded as an expense during the nine months ended January
31, 1999.
The Company had a net loss of approximately $264,000 for the nine
months ended January 31, 1999 including equity in losses of affiliates of
approximately $31,000 versus net income of approximately $134,000 for the
quarter ended January 31, 1998 reflecting the Company's lower revenues during
the current nine month period versus the same period last year.
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 may obtain advances or guarantees from
its distributors but these advances and guarantees generally may defray only a
portion of a film's cost. The Company's principal source of working capital
during the nine months ended January 31, 1999 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.
For the nine months ended January 31, 1999, the Company's net cash flow
used in its operating activities was approximately $208,000, a decrease of
approximately $676,000 as compared to approximately $468,000 of net cash flow
provided by operating activities during the nine months ended January 31, 1998.
This decrease is due primarily to the substantial decrease of approximately 67%
in feature film revenues during the nine month period ended January 31, 1999 as
compared to the same period in 1998.
During the nine months ended January 31, 1999, the Company invested
approximately $5,984,000 for the purchase of 20% of the outstanding common stock
of Immediate. This investment was funded through the issuance of approximately
$3,472,000 worth of the Company's common stock, $2,300,000 of existing cash and
cash equivalents and approximately $211,000 of borrowings from related parties.
During the nine months ended January 31, 1998, the Company used cash flow,
primarily generated by the sale of marketable securities, to make a cash
distribution to shareholders of approximately $3,957,000 on June 27, 1997. As of
January 31, 1999, the Company had cash and cash equivalents of approximately
$47,000 as compared to approximately $2,772,000 as of January 31, 1998.
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").
13
<PAGE>
Forward-Looking Statements
The foregoing discussion, as well as the other sections of this
Quarterly Report on Form 10-QSB, contains 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 shareholders 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 that
could affect forward-looking statements include, among other things, the
Company's ability to identify, produce and complete film projects that are
successful in the marketplace, to arrange financing, distribution and promotion
for these projects on favorable terms in various markets and to attract and
retain qualified personnel. In addition, the Company is currently seeking merger
and acquisition proposals for the Company and its plans, strategies and future
results are subject to the outcome of any such proposals.
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
(c) On November 9, 1998, the Company issued 1,477,567 shares of Common
Stock as partial consideration for its acquisition of 20% of the outstanding
common stock of Immediate. See the third paragraph under Note G to the Financial
Statements, above.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Forms 8-K
On November 20, 1998, the Company filed a Form 8-K reporting under
Item 1 thereof a change in control of the Company.
14
<PAGE>
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: March 15, 1999 KINGS ROAD ENTERTAINMENT, INC.
By: /s/Phillip Cook
--------------------------
Phillip Cook
Chief Executive Officer
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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