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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, 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
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 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: $837,000.
As of September 15, 1999, the aggregate market value of the voting stock held by
non-affiliates (based on the closing sales price as reported by NASDAQ) was
approximately $1,451,000 (assuming all officers and directors are deemed
affiliates for this purpose).
As of September 15, 1999 the registrant had 3,482,019 shares of its common stock
outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: YES [ ] NO [X]
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Kings Road Entertainment, Inc. ("Company" or "Registrant"), incorporated
in Delaware in 1980, 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
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 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 that 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"), West Union Leasing
Ltd. ("West") 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 2,393,235 shares of Immediate
Entertainment Group, Inc. ("Immediate"), approximately 19% of Immediate's
outstanding common stock, for an aggregate of $2,300,000 in cash, 1,477,567
newly issued shares of the Company's common stock and a note ("Immediate Note")
payable to the sellers of the stock for $210,803. Immediate is a diversified
entertainment holding company that provides services
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relating to music production, audio recording, CD manufacturing, film soundtrack
and script development and operates a mail order music club.
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 1999 and 1998, the Company spent
approximately $176,000 and $96,000, respectively, on development activities.
Subject to its overall strategic direction, the Company expects to increase its
expenditures 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 distribution rights in
its pictures and other investments from third parties. Once fully financed, the
Company would primarily earn fees for its development and production services
plus contingent compensation based on the success of a film. If necessary, the
Company may finance a portion of the cost of a film using internally generated
capital or debt financing.
PRODUCTION
Once fully financed, the Company attempts to produce its pictures at the
lowest possible cost consistent with the quality that it seeks to achieve. The
Company avoids the substantial overhead of major studios by maintaining only a
small permanent staff and by renting production facilities and engaging
production staff only as required. The Company has generally produced 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, 1999, the Company has produced (or co-produced)
twenty-five pictures, eighteen of which were theatrically released in the
domestic market and seven of which were released directly to video or pay
television in the domestic market, as follows:
<TABLE>
<CAPTION>
TITLE PRINCIPAL CAST RELEASE DATE
- ----- -------------- ------------
<S> <C> <C>
All of Me Steve Martin, Lily Tomlin September 1984
Creator Peter O'Toole, Mariel Hemingway September 1985
Enemy Mine Dennis Quaid, Louis Gossett, Jr. December 1985
The Best of Times Robin Williams, Kurt Russell January 1986
Touch & Go Michael Keaton, Maria Conchita Alonso August 1986
Morgan Stewart's Coming Home Jon Cryer, Lynn Redgrave February 1987
The Big Easy Dennis Quaid, Ellen Barkin August 1987
</TABLE>
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<TABLE>
<S> <C> <C>
In the Mood Patrick Dempsey, Beverly D'Angelo September 1987
Rent-A-Cop Burt Reynolds, Liza Minelli January 1988
The Night Before Keanu Reeves, Lori Louglin March 1988
My Best Friend is a Vampire Robert Sean Leonard, Cheryl Pollack May 1988
Jacknife Robert DeNiro, Ed Harris March 1989
Time Flies When You're Alive Paul Linke July 1989
Kickboxer Jean Claude Van Damme August 1989
Homer & Eddie Whoopi Goldberg, James Belushi December 1989
Blood of Heroes Rutger Hauer, Joan Chen February 1990
Kickboxer II Sasha Mitchell, Peter Boyle June 1991
Kickboxer III Sasha Mitchell June 1992
Paydirt Jeff Daniels, Catherine O'Hara August 1992
Knights Kris Kristofferson, Kathy Long November 1993
Brainsmasher Andrew Dice Clay, Teri Hatcher November 1993
Kickboxer IV Sasha Mitchell July 1994
The Stranger Kathy Long March 1995
The Redemption Mark Dacascos August 1995
The Haunted Heart Diane Ladd, Olympia Dukakis January 1996
</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. The Company's most recent pictures,
however, were not theatrically released and were initially released on either
home video or pay television.
Home Video - 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. During the year ended April 30, 1999,
the Company licensed the home video and DVD rights for the United States and
Canada to nineteen (19) of its pictures to Trimark Pictures. All but one of the
pictures has been previously released.
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.
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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 previously generated substantial
revenues from the licensing of its pictures outside of the United States.
However, in 1996 the Company sold the international distribution rights to most
of its films to another company. For those pictures where international
distribution rights are still owned by the Company, it licenses these pictures
to local distributors on a territory-by-territory basis. Each license may cover
one or more pictures, and may include all rights or only certain rights. Sales,
collections and delivery of product are handled by outside foreign sales
organizations. Such organizations generally receive a commission based on a
percentage of cash receipts. The Company believes that, based on its current and
anticipated future level of film production, it is more efficient and cost
effective to use outside foreign sales organizations rather than to maintain its
own staff.
EMPLOYEES
As of April 30, 1999, the Company employed two full-time employees in
its Los Angeles office. During the production of a motion picture, the Company
would engage between thirty and one-hundred twenty-five additional employees 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 or has been 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
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pictures. The Company submits 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 facilities and
would rent 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
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 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 ("Nasdaq") 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, 1999 (all per share information in this
report reflects a reverse 1-for-3 stock split effected by the Company on April
17, 1998):
<TABLE>
<CAPTION>
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter 3 21/32 1 1/8
Second Quarter 1 7/8 1 1/8
Third Quarter 2 1/16 1 1/2
Fourth Quarter 2 7/16 1 5/16
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1999 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter 1 9/16 1 3/16
Second Quarter 1 7/16 1 1/16
Third Quarter 3 5/16 1 5/16
Fourth Quarter 4 1/8 2 5/8
</TABLE>
As of September 15, 1999, the Company had approximately 220 stockholders
of record. In addition, the Company believes it has over 600 beneficial owners
holding shares in street name.
On January 11, 1999, Nasdaq advised the Company that the acquisition by
FAB, MBO, West and RAS of 962,360 shares of the Company's stock resulted in a
change in control of the Company. Further, Nasdaq has advised the Company that
its purchase of 2,393,235 shares of
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common stock of Immediate resulted in a change in the Company's business which
would require the Company to meet all initial listing requirements for the
Nasdaq SmallCap Market. The Company responded to Nasdaq that it believed there
would be no change in the Company's business unless it merged with Immediate.
Although the Company had announced plans to merge with Immediate in connection
with its purchase of Immediate stock, such plans were abandoned by the mutual
consent of the parties.
On August 17, 1999, Nasdaq notified the Company that it had failed to
timely file its Form 10-KSB for the fiscal year ended April 30, 1999 and that
the Company's securities were subject to delisting from the Nasdaq SmallCap
Market pending a hearing scheduled for September 30, 1999. The Company is
required to demonstrate to Nasdaq that it has met and will meet all filing
requirements under the Securities Exchange Act of 1934 and that it has the
ability to sustain long-term compliance with all other Nasdaq maintenance
criteria. Among the Nasdaq SmallCap maintenance criteria are a $1.00 minimum bid
price for the Company's common stock and a $1,000,000 minimum market value of
shares owned by non-affiliates of the Company. As of September 15, 1999, the
closing price for the Company's common stock was $.94. The Company has
approximately 1.2 million shares outstanding that are owned by non-affiliates of
the Company.
There can be no assurance that the Company will be able to maintain its
listing on the Nasdaq SmallCap Market. Further, in the event the Company's
securities are delisted, the Company will be in default of the Convertible Note
described in Note G of the Company's Consolidated Financial Statements.
Subsequent to April 30, 1999, the Company sold approximately 92,700
shares of new common stock under a Regulation S offering to offshore investors.
Gross proceeds were approximately $214,000, or approximately $2.30 per share.
Net proceeds, after commissions and offering expenses, were approximately
$161,000. The proceeds from the offering were used for general corporate
purposes.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION 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 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 that 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,
MBO, West and RAS purchased 962,360 shares of the Company's common stock
(approximately 50.3% of the Company's then outstanding common stock) from the
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,
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
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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. 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 2,393,235 shares of Immediate,
approximately 19% of Immediate's outstanding common stock, for an aggregate of
$2,300,000 in cash, 1,477,567 newly issued shares of the Company's common stock
and a note payable to the sellers of the stock for $210,803. 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.
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, 1999, 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. Subject to its overall strategic direction, the Company expects
to 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 and are typically 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, often 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 sold the international distribution rights to most of its films to
another company in 1996 and international revenues have substantially decreased
due to this sale. As a result of these factors, the Company's revenues vary
significantly each year depending on the number and success of release of films
that become available in the various media during that fiscal year.
As revenues 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
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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 year ended April 30, 1999 feature film revenues were
approximately $765,000 as compared to approximately $1,538,000 for the year
ended April 30, 1998. The substantial decrease in feature film revenues of
approximately 50% 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 another
overall strategic plan, the Company expects that its feature film revenues will
continue to decline. Interest income decreased to approximately $72,000 for the
year ended April 30, 1999 from approximately $160,000 reflecting the decrease in
marketable securities held during the year versus the same period last year.
Film cost amortization as a percentage of feature film revenues
increased slightly to approximately 40% for the year ended April 30, 1999 from
approximately 38% for the year ended April 30, 1998. Film cost amortization
during the year ended April 30, 1999 included approximately $140,000 of costs
associated with various development projects that were abandoned by the Company
versus approximately $90,000 for the year ended April 30, 1998. Selling expenses
increased by approximately 105% to approximately $118,000 during the year fiscal
ended April 30, 1999 versus approximately $58,000 during the previous fiscal
year. This increase results primarily from an increased provision for bad debt
reserves and costs associated with the Company's license of home video and DVD
rights for the United States and Canada to nineteen (19) of its films to Trimark
Pictures.
General and administrative costs decreased to approximately $771,000
during the year ended April 30, 1999 versus approximately $1,012,000 during the
same period last year. A substantial reduction in legal expenditures of
approximately $319,000 due to the resolution in December 1997 and April 1998 of
certain litigation involving the Company was partially offset by increases in
salaries and bonus expenditures. 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 that approximated the
aggregate difference between the exercise price under the options and the fair
market value of the Company's common stock at the time of cancellation. Interest
expense was approximately $433,000 primarily resulting from an interest charge
of approximately $427,000 related to a beneficial conversion feature contained
in a $1,000,000 convertible note issued by the Company on April 26, 1999. No
interest expense was incurred during the year ended April 30, 1998.
Equity in the losses of affiliates was approximately $476,000 during the
year ended April 30, 1999 reflecting the Company's share of the losses incurred
by Immediate. The Company also recorded a valuation allowance of approximately
$3,284,000 to reflect the Company's evaluation of the recoverability of its
investment in Immediate. Immediate has experienced recurring operating losses
and has a working capital deficit. Immediate's management is presently pursuing
plans to increase sales, reduce administrative costs, improve cash flow and
obtain additional financing. Immediate's ability to achieve its operating goals
and to obtain additional financing is uncertain. During the year ended April 30,
1998, the Company had no affiliates.
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During the year ended April 30, 1999, the Company incurred a net loss of
approximately $4,537,000 versus net income of approximately $39,000 during the
year ended April 30, 1998. The loss results primarily from (i) the valuation
allowance recorded by the Company to reflect the recoverability of its
investment in Immediate, (ii) the Company's share of losses incurred by
Immediate, (iii) a substantial decrease in feature film revenues due to the fact
that the Company has not produced any new films since the fiscal year ended
April 30, 1995 and (iv) the increase in interest expense associated with the
issuance of a convertible note. During the years ended April 30, 1999 and April
30, 1998, the Company had no significant provision for income taxes.
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 portion
of a film's cost. The Company's principal source of working capital during the
year ended April 30, 1999 was motion picture licensing income and the issuance
on April 26, 1999 of a $1,000,000 convertible note ("Convertible Note"). Except
for the financing of film production costs and the repayment of the Convertible
Note, management believes that its existing cash resources will be sufficient to
fund its ongoing operations.
During the year ended April 30, 1999, the Company used approximately
$2,603,000 of cash on hand plus approximately $1,211,000 of cash provided by
financing activities to fund approximately $1,230,000 of operating activities
and approximately $2,584,000 of investing activities. The financing activities
consisted primarily of the issuance of the Convertible Note. The investing
activities consisted primarily of the Company's investment in Immediate. (SEE
RECENT DEVELOPMENTS). During the year ended April 30, 1998, the Company used
operating cash flow of approximately $373,000 plus cash flow generated by the
sale of marketable securities of approximately $5,967,000 to make a cash
distribution to its shareholders of approximately $3,957,000 on June 27, 1997.
As of April 30, 1999, the Company had cash, cash equivalents and restricted cash
of approximately $1,056,000 as compared to approximately $2,659,000 as of April
30, 1998.
The Convertible Note is due April 25, 2000 bearing interest at 8% per
annum payable quarterly and is convertible into the Company's common stock at
the lower of (i) $2.06 per share or (ii) 70% of the average closing bid price
for the five (5) trading days immediately preceding the date of conversion but
in no event less than $1.00 ("Conversion Price"). The Conversion Price is
subject to reduction of 3% per month beginning on the six month anniversary of
the Convertible Note in the event any portion of the securities issuable upon
conversion have not been registered under the Securities Act of 1933, as
amended. The Company has entered into a Registration Rights Agreement with the
note holder wherein the Company, as soon as practicable, has agreed to register
the securities issuable upon conversion of the Convertible Note.
FUTURE COMMITMENTS
On May 12, 1999, the Company used the proceeds from the Convertible Note
to purchase approximately 19% of the outstanding common stock of Star TV AG
("Star") through the Company's wholly owned subsidiary, Orwell Properties, Inc.
("Orwell"). At April 30, 1999, these proceeds were reflected as restricted cash
on the Company's balance sheet. Pursuant to a Pledge and Security Agreement
between the Convertible Note holder and Orwell, the Convertible Note is secured
by Orwell's investment in Star. In addition, Orwell has agreed to guarantee the
obligations of the Company under the Convertible Note.
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If the term of the Convertible Note is not extended on or before April
20, 2000 or is not converted, the Company will need to secure financing to repay
the Convertible Note. There can be no assurance that such financing can be
secured by the Company.
On April 27, 1999, the Company entered into a letter agreement ("Joint
Venture Agreement") with Merchant Ivory Productions ("MIP") pursuant to which
the Company was required to contribute to Merchant Ivory Distribution, LLC
("MIFD") on or before May 5, 1999 $250,000 plus options to purchase up to
250,000 shares of the Company's common stock. The Company is also required to
provide a revolving line of credit of up to $500,000 to MIFD to fund print and
advertising expenses incurred by MIFD. MIFD is a joint venture between the
Company and MIP, 25% owned by the Company and 75% owned by MIP formed to acquire
and subsequently distribute motion pictures in significant markets including the
United States. On May 18, 1999, the Company made a contribution of $250,000 to
MIFD. MIP has subsequently advised the Company that it believes the Company has
materially breached the Joint Venture Agreement by failing to provide the stock
options and the line of credit to MIFD. On the other hand, the Company believes
that MIP has materially breached its obligations to the Company under the Joint
Venture Agreement. MIP and the Company are currently discussing the matter.
On May 17, 1999, the Company entered into a Loan Agreement ("Star Loan
Agreement") with Star whereby the Company borrowed $250,000 from Star ("Star
Loan") bearing interest at 6% per annum. The Star Loan was originally due July
19, 1999. By agreement dated July 22, 1999, the due date was extended until
August 19, 1999. As of September 15, 1999, the Star Loan has not been repaid and
the Company is currently in default of the Star Loan Agreement. A further
extension of the due date of the Star Loan is currently being discussed with
Star.
The Company does not have any other material future commitments.
FORWARD-LOOKING STATEMENTS
The foregoing discussion, as well as the other sections of this Annual
Report on Form 10-KSB, 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 which are
successful in the market, to arrange financing, distribution and promotion for
these projects on favorable terms in various markets and to attract and retain
qualified personnel.
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
On April 16, 1999, the Company selected the firm of Richard A. Eisner &
Company, LLP as the Company's independent auditors for the fiscal year ended
April 30, 1999. Stonefield
11
<PAGE> 12
Josephson had served as the Company's independent auditors for the fiscal years
ended April 30, 1998, 1997 and 1996. The Company believes there were no
disagreements with Stonefield Josephson as to any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure in connection with the audits of the Company's financial statements
for the fiscal years ended April 30, 1998, 1997 and 1996.
On September 10, 1999, the Company selected the firm of Jones, Jensen &
Company, LLC as the Company's independent auditors for the fiscal year ended
April 30, 1999. The firm of Richard A. Eisner & Company, LLP has served as the
Company's independent auditors since April 16, 1999 but had not completed any
audit of the Company's financial statements for any fiscal year or interim
period. The Company believes there were no disagreements with Richard A. Eisner
& Company, LLP as to any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure during the period in which
they were retained.
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. There are no family relationships
between any of the directors or executive officers.
<TABLE>
<CAPTION>
EXPIRATION
NAME AGE POSITION OF TERM
---- --- -------- ----------
<S> <C> <C> <C>
David Dube 43 Chairman 1999
Christopher Trunkey 33 Senior Vice President, Chief ----
Financial and Administrative
Officer
James Leaderer 45 Director 2000
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
DAVID DUBE has been a director of the Company since April 1999 and
Chairman of the Company's board of directors since June 1999. Mr. Dube is
presently Chairman and Chief Executive Officer of Stonewall Holdings, Inc., a
privately held corporate finance and investment banking firm. Mr. Dube was
Senior Vice President of Investment Banking with FAB Securities of America, Inc.
from March 1998 until June 1999 and was, from September 1997 to February 1998 a
project finance consultant to the firm. Mr. Dube was President and Chief
Executive Officer of Optimax Industries, Inc. from July 1996 to September 1997.
From February 1991 to June 1996, Mr. Dube had been the principal of Dube &
Company, a financial consulting firm. Mr. Dube currently serves on the boards of
directors of Helmstar Group, Inc. and SafeScience, Inc. Mr. Dube graduated from
Suffolk University where he also received a Master's degree in Taxation and
graduated from Bentley College with an additional Master's degree in
Accountancy. Mr. Dube is a certified public accountant and holds various general
and principal securities licenses.
12
<PAGE> 13
CHRISTOPHER TRUNKEY, Senior Vice President, Chief Financial and
Administrative Officer and Secretary joined the Company in May 1994. Between
September 1997 and May 1998, Mr. Trunkey served as a consultant to the Company
while also serving as Senior Vice President of Overseas Filmgroup. 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.
JAMES LEADERER has been a director of the Company since November 1998.
Mr. Leaderer currently serves as the President and Chief Executive Officer of
Directrade, Inc., a stock day trading firm. From November 1997 to January 1999,
Mr. Leaderer was Vice President of Investment Banking and was a director of FAB
Securities of America, Inc. From June 1991 to November 1997, Mr. Leaderer was
the President and Chief Executive Officer of Woodside Assurance, Inc., a private
investment entity. Mr. Leaderer graduated from Syracuse University with a degree
in Industrial Engineering. Mr. Leaderer also holds various general securities
licenses.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
FAB Capital Corp. (and Phillip Cook as an indirect beneficial owner)
filed a Form 4 approximately 2 days late in connection with its transfer of
restricted common stock in January 1999. Other than the foregoing, the Company
does not know of any person or beneficial owner that did not timely file the
reports required by Section 16(a) of the Securities Exchange Act.
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, 1999 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 $100,000 in any of the last three fiscal years.
13
<PAGE> 14
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- STOCK OPTIONS ALL OTHER
NAME AND POSITION YEAR SALARY ($) BONUS ($) (SHARES) COMPENSATION
----------------- ---- ---------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
Phillip Cook (1)
Chairman and Chief 1999 $0 $0 0 $0
Executive Officer
Kenneth Aguado (2) 1999 71,085 75,334 66,667 1,154(3)
Chairman and Chief 1998 115,269 10,000 27,708 64,314(4)
Executive Officer 1997 89,577 3,596 0 619(3)
Christopher Trunkey (5)
Senior Vice President, 1999 107,885 41,055 34,000 4,171(3)
Chief Financial and
Administrative Officer
</TABLE>
- ---------------
(1) Mr. Cook was the Company's Chief Executive Officer from November 6,
1998 until his resignation on June 24, 1999.
(2) Mr. Aguado was the Company's Chief Executive Officer from October 7,
1996 until his resignation on November 6, 1999.
(3) Represents contributions made by the Company on behalf of the
respective employee pursuant to the Company's SIMPLE IRA plan.
(4) Includes $58,808 representing the difference between the exercise
price and the market price on the date of exercise of stock options
exercised by Mr. Aguado and $5,506 representing contributions made by
the Company on behalf of Mr. Aguado pursuant to the Company's SIMPLE
IRA plan.
(5) Mr. Trunkey was not a Named Officer during 1998 or 1997 as his salary and
bonus during the respective fiscal years did not exceed $100,000.
OPTION GRANTS, EXERCISES AND YEAR-END VALUES
The following table sets forth the individual grants of stock options
made during the fiscal year ended April 30, 1999 to the Named Officers:
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS
GRANTED TO
OPTIONS EMPLOYEES EXERCISE EXPIRATION
NAME GRANTED IN FISCAL YEAR PRICE DATE
---- ---------- -------------- -------- ----------
<S> <C> <C> <C> <C>
Kenneth Aguado 66,667(1) 66% $1.22 06/03/2003
Christopher Trunkey 34,000(1) 34% $1.22 06/03/2003
</TABLE>
- ---------------
(1) On November 6, 1998, in connection with a Stock Acquisition Agreement, the
options granted to Mr. Aguado and Mr. Trunkey were canceled. For such
cancellation, Mr. Aguado and Mr. Trunkey 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.
No options were exercised during the fiscal year ended April 30, 1999
and no options were outstanding as of April 30, 1999.
EMPLOYMENT AGREEMENTS
The Company has a consulting agreement dated as of July 1, 1999 with
David W. Dube, the Company's Chairman of the Board of Directors. The agreement
provides for a monthly
14
<PAGE> 15
consulting fee of $10,000 per month beginning on July 1, 1999 through April 30,
2000. Pursuant to the terms of the consulting agreement, on September 14, 1999,
Mr. Dube was granted options to purchase up to 125,000 shares of the Company's
common stock at an exercise price of $.9375, with 50% of the options granted
vesting on July 1, 2000 and the balance of the options vesting on July 1, 2001.
The Company entered into an employment agreement dated as of April 17,
1998 with Christopher Trunkey, the Company's Senior Vice President, Chief
Financial and Administrative Officer. The agreement provides for Mr. Trunkey's
employment with the Company beginning May 11, 1998 through and including May 5,
2000 ("Term"). Pursuant to the terms of the agreement, Mr. Trunkey is to receive
a salary of $110,000 during the first year of the Term and $120,000 for the
second year of the Term. Mr. Trunkey was also granted options to purchase up to
34,000 shares of the Company's common stock at an exercise price of $1.22. On
July 16, 1998, Mr. Trunkey's employment agreement was amended to provide an
advance to Mr. Trunkey of $20,000 against Mr. Trunkey's annual salary to be
repaid in equal installments over the then remaining term of the employment
agreement ("Salary Advance"). On November 6, 1998, in connection with a Stock
Acquisition Agreement, the options granted to Mr. Trunkey were canceled. For
such cancellation, Mr. Trunkey received, the sum of $38,420 representing the
difference between $2.35, the per share purchase price under the Acquisition
Agreement, and the exercise price of $1.22.
On September 14, 1999, each of the directors, Mr. Dube and James
Leaderer were each granted options to purchase up to 50,000 shares of the
Company's common stock at an exercise price of $.9375. Of Mr. Leaderer's
options, 50% vest on November 7, 1999, to coincide with the one-year anniversary
of Mr. Leaderer's appointment to the board of directors with the balance vesting
on November 7, 2000. Of Mr. Dube's options, 50% vest on April 1, 2000,
coinciding with the one-year anniversary of Mr. Dube's appointment to the board
of directors with the balance vesting on April 1, 2001.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of August 1,
1999, 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 based on the Company's records and information
provided by the owners:
15
<PAGE> 16
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS
- ------------------------------------ ------------------ ----------
<S> <C> <C>
Michael Berresheim 1,201,247(1)(2)(3) 34.7%
Gerauer Street
58A Moerfelden - Walldorf
Germany 64546
MBO Music Verlag GmbH 950,829 27.3%
Gerauer Street
58A Moerfelden - Walldorf
Germany 64546
Tresor Worldwide Limited 1,000,000(4) 22.3%
Havilland Hall
Guernsey, Channel Islands GYS 8TP
FAB Capital Corporation 732,680(2) 21.0%
50 Broadway
New York, New York 10004
West Union Leasing Limited 256,418(3) 7.4%
C/o Christoph Martin, Trustee
10 Greycoat Place
1 Premier House
London SW1 United Kingdom
</TABLE>
- ---------------
(1) Includes 950,829 shares owned by MBO Music Verlag GmbH of which Mr.
Berresheim is the Managing Director and sole shareholder and 256,418 shares
owned by West Union Leasing Limited ("West Union"), a trust whose
beneficiary is Mrs. Johanna Ammons, the mother of Mr. Berresheim. Mr.
Berresheim disclaims beneficial ownership of the shares held by West Union.
(2) The Company has been advised of a claim of ownership by Mr. Berresheim or
his affiliates to the 732,680 shares owned of record by FAB Capital
Corporation. In the event Mr. Berresheim is determined to be the owner of
such shares, the ownership of Mr. Berresheim would increase to 1,939,927
shares, 55.7% of the Company's outstanding common stock.
(3) The Company has been advised of a claim of ownership by West Union to
150,000 shares owned by Robert H. Jaffe & Associates, P.A. as Trustee for
Lancaster Consultants, Inc. and Robert H. Jaffe & Associates, P.A. In the
event that West Union is determined to be the owner of such shares, the
ownership of West Union would increase to 406,418 shares, 11.7% of the
Company's outstanding common stock. Mr. Berresheim's beneficial ownership
would likewise increase to 1,351,247 shares, 38.8% of the Company's
outstanding common stock.
(4) Represents 1,000,000 shares of the Company's common stock issuable to Tresor
Worldwide Limited as of September 15, 1999 under the terms of a Convertible
Note dated as of April 26, 1999. As of September 15, 1999, a principal
balance of $1,000,000 was due to Tresor convertible into shares of the
Company's common stock at the lower of (i) $2.06 or (ii) seventy (70%)
percent of the average closing bid price for the five (5) trading days
immediately preceding the date of conversion (on September 15, 1999 such
average price would be $.98) but in no event less than $1.00.
(5) Hayward Lake Funding Services, Inc. ("Hayward") is the owner of record of
165,000 shares, 4.7% of the Company's outstanding common stock. The sole
shareholder of Hayward is Mr. Fred Schulman. Mr. Schulman's sister, Mrs.
Faye Peltz, is the owner of record of 135,000 shares, 3.9% of the Company's
outstanding common stock. Hayward and Mrs. Peltz disclaim beneficial
ownership of the shares held by the other.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of September 15, 1999, 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:
16
<PAGE> 17
<TABLE>
<CAPTION>
NAME AND ADDRESS OF DIRECTORS OR NUMBER OF PERCENT OF
NUMBER OF PERSONS IN GROUP SHARES CLASS
- -------------------------------- --------- -------------
<S> <C> <C>
David Dube 50,000(1) 1.5%
50 Broadway, 14th Floor
New York, New York 10004
Christopher Trunkey 0 0.0%
1901 Avenue of the Stars, Suite 1545
Los Angeles, California 90067
James Leaderer 25,000(2) Less than 1.0%
50 Broadway, 14th Floor
New York, New York 10004
All Executive Officers and
Directors as a Group (3 persons) 75,000 2.2%
</TABLE>
- ---------------
(1) Does not include options to purchase up to 175,000 shares that are not
presently exercisable.
(2) Represents options to purchase shares that become exercisable on November 7,
1999. Does not include options to purchase up to an additional 25,000 shares
that are not presently exercisable.
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
On November 6, 1998, pursuant to a Stock Acquisition Agreement, FAB,
MBO, West and RAS purchased 421,949, 373,350, 159,461 and 100 shares,
respectively, of the Company's common stock from the 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 in the aggregate 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 until his resignation on
June 24, 1999.
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. 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 approximately 19% of the
outstanding common stock of Immediate from FAB, MBO and West for an aggregate of
$2,300,000 in cash, 1,477,567 newly issued shares of the Company's stock and the
Immediate 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. Pursuant to
such transaction FAB, MBO and West, respectively, received $1,016,679, $898,875
and $384,446 in cash, 653,131, 577,479 and 246,957 shares of the
17
<PAGE> 18
Company's common stock and are due $93,175, $82,424 and $35,204 under the Note.
During the year ended April 30, 1999, interest expense of $4,996 was accrued on
the Note. FAB, MBO and West owned 429,449, 373,350 and 159,461 shares,
respectively, of the Company's common stock at the time of this transaction.
In connection with the Convertible Note, the Company agreed to pay FAB
Securities of America, Inc. ("FAB Securities"), a wholly-owned subsidiary of
FAB, a commission of 5% of the Convertible Note gross proceeds, $50,000. In
addition, FAB Securities is entitled to warrants to purchase the Company's
common stock equal to 5% of any portion of the Convertible Note converted by
Tresor into the Company's common stock at an exercise price equal to the closing
price of the Company's common stock on the date of issuance of such warrants. As
of April 30, 1999, $11,400 was due and payable to FAB Securities under this
agreement.
During the fiscal year ended April 30, 1999, the Company has advanced to
Immediate or made payments to third parties on Immediate's behalf the aggregate
sum of $147,000. Immediate has agreed to repay such advances to the Company
together with interest at the rate of 6% per annum. As of September 15, 1999,
the Company has advanced an additional approximately $267,000 to Immediate and
Immediate has repaid approximately $26,000 to the Company.
18
<PAGE> 19
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.(1)
3.2 Bylaws of Registrant.(2)
10.1 1998 Stock Option Plan.(1)
10.2 Employment Agreement effective as of May 11, 1998 between
Christopher Trunkey and the Registrant.(3)
10.3 Stock Acquisition Agreement dated November 6, 1998 between the
Estate of Stephen Friedman, RAS Securities Corp., FAB Capital Corp.,
Christopher Trunkey and the Registrant.(4)
10.4 Stock Purchase Agreement dated November 9, 1998 between West Union
Leasing Ltd., FAB Capital Corp., MBO Music Verlag GmbH, Immediate
Entertainment Group, Inc. and the Registrant.(4)
10.5 Convertible Note dated April 26, 1999 issued by Registrant to Tresor
Worldwide Ltd.(5)
10.6 Registration Rights Agreement dated as of April 26, 1999 between
Tresor Worldwide Ltd. and the Registrant.(5)
10.7 Pledge and Security Agreement dated April 26, 1999 between Tresor
Worldwide Ltd. and Orwell Properties, Inc., a wholly owned
subsidiary of the Registrant.(5)
10.8 Letter Agreement dated April 27, 1999 between Merchant Ivory
Productions and the Registrant.(5)
21 Subsidiaries of Registrant.(5)
27 Financial Data Schedule.(5)
</TABLE>
- ---------------
(1) Incorporated by reference to Form 10-KSB for the fiscal year ended April 30,
1998.
(2) Incorporated by reference to Form 10-K for the fiscal year ended April 30,
1988.
(3) Incorporated by reference to Form 10-QSB for the quarterly period ended
July 31, 1998.
(4) Incorporated by reference to Schedule 13D dated November 13, 1998 filed by
FAB Capital Corp., RAS Securities Corp., MBO Music Verlag GmbH, West Union
Leasing Ltd., Christoph Martin and Michael Berresheim.
(5) Filed electronically with Securities and Exchange Commission, omitted in
copies distributed to shareholders or other persons.
(B) FORMS 8-K
On April 21, 1999 the Company filed a Form 8-K reporting under Item 4
thereof a change in the Company's independent auditors for the fiscal
year ended April 30, 1999.
On September 15, 1999, the Company filed a Form 8-K reporting under Item
4 thereof a change in the Company's independent auditors for the fiscal
year ended April 30, 1999. The Company also reported under Item 5
thereof that (i) the Company had not filed its Annual Report on Form
10-KSB and that the Nasdaq Stock Market has notified the Company that
its common stock was subject to delisting pending a hearing scheduled
for September 30, 1999 and (ii) Phillip Cook resigned as the Company's
President and Chairman on June 24, 1999 and that David Dube, who has
been a member of the board of directors since April 1, 1999, became the
Company's new Chairman.
19
<PAGE> 20
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: September 27, 1999 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/David W. Dube Chairman of the Board of September 27, 1999
- ------------------------- Directors and Chief Executive
DAVID DUBE Officer (Principal Executive
Officer)
/s/James P. Leaderer Director September 27, 1999
- -------------------------
JAMES LEADERER
/s/Christopher M. Trunkey Senior Vice President, Chief September 27, 1999
- ------------------------- Financial and Administrative
CHRISTOPHER M. TRUNKEY Officer (Principal Financial
and Accounting Officer)
</TABLE>
20
<PAGE> 21
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1999
<TABLE>
<S> <C>
Reports of Independent Auditors F-2
Consolidated Balance Sheet as of April 30, 1999 F-4
Consolidated Statements of Income for the Years
Ended April 30, 1999 and 1998 F-5
Consolidated Statements of Stockholders' Equity
for the Years Ended April 30, 1999 and 1998 F-6
Consolidated Statements of Cash Flows for the Years
Ended April 30, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 22
STONEFIELD JOSEPHSON, INC.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of
Directors of Kings Road Entertainment, Inc.
Los Angeles, California:
We have audited the accompanying statement of operation of Kings Road
Entertainment, Inc. (the "Company") for the year ended April 30, 1998, and the
related statements of shareholders' equity and cash flows. 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 results of the operations of Kings Road
Entertainment, Inc. for the year ended April 30, 1998, and their cash flows, in
conformity with generally accepted accounting principles.
/s/ Stonefield Josephson, Inc.
- ------------------------------
STONEFIELD JOSEPHSON, INC.,
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
July 15, 1998
F-2
<PAGE> 23
JONES, JENSEN & COMPANY
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of
Directors of Kings Road Entertainment, Inc.
Los Angeles, California:
We have audited the accompanying consolidated balance sheet of Kings Road
Entertainment, Inc. (the "Company") as of April 30, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Kings
Road Entertainment, Inc. as of April 30, 1999, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ Jones, Jensen & Company
- ---------------------------
Jones, Jensen & Company
Salt Lake City, Utah
September 24, 1999
F-3
<PAGE> 24
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
APRIL 30, 1999
---------------
<S> <C>
ASSETS
Cash and Cash Equivalents $ 55,583
Restricted Cash 1,000,000
Accounts Receivable, net of allowance of $32,630 332,342
Film Costs, net of amortization of $168,409,527 157,486
Investment in Immediate Entertainment Group 1,941,926
Prepaid Expenses 16,234
Fixed Assets 9,768
Other Assets 141,179
------------
TOTAL ASSETS $ 3,654,518
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts Payable $ 270,976
Note Payable to Related Parties 210,803
Convertible Note Payable 1,000,000
Accrued Expenses 91,652
Deferred Revenue 7,275
------------
TOTAL LIABILITIES 1,580,706
COMMITMENTS AND CONTINGENCIES 0
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, 12,000,000 shares
authorized, 3,389,315 shares issued and outstanding 33,893
Additional Paid-In Capital 24,573,401
Deficit (22,533,482)
------------
TOTAL STOCKHOLDERS' EQUITY 2,073,812
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,654,518
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 25
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
REVENUES
Feature Films $ 765,116 $1,538,292
Interest Income 72,183 159,802
---------- ----------
837,299 1,698,094
COSTS AND EXPENSES
Film Cost Amortization 304,243 584,333
Selling Expenses 117,996 57,645
General & Administrative Expenses 770,899 1,011,895
Interest Expense 433,276 0
---------- ----------
1,626,414 1,653,873
---------- ----------
OPERATING (LOSS)/INCOME (789,115) 44,221
OTHER EXPENSES
Equity in Losses of Affiliates 475,695 0
Adjustment in Valuation of Investment in Immediate 3,283,973 0
---------- ----------
3,759,668 0
(LOSS)/INCOME BEFORE INCOME TAXES (4,548,783) 44,221
Provision for Income Taxes (11,924) 5,404
---------- ----------
NET (LOSS)/INCOME $(4,536,859) $ 38,817
========== ==========
Net (Loss)/Income Per Share -- Basic $( 1.71) $ 0.02
========== ==========
Weighted Average Number of Common
Shares -- Basic 2,650,532 1,873,954
========== ==========
Net (Loss)/Income Per Share -- Diluted $( 1.71) $ 0.02
========== ==========
Weighted Average Number of Common Shares
and Common Share Equivalents -- Diluted 2,650,532 1,873,954
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 26
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Common Additional Retained Total
Stock Stock Paid-In Earnings/ Stockholders'
Shares Amount Capital (Deficit) Equity
--------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1997 1,706,581 $17,066 $24,930,827 $(18,035,440) $ 6,912,453
Exercise of Stock Options 205,167 2,052 143,069 -- 145,121
Distribution to Shareholders -- -- (3,956,696) -- (3,956,696)
Net Income -- -- -- 38,817 38,817
--------- ------- ----------- ------------ -----------
Balance at April 30, 1998 1,911,748 19,118 21,117,200 (17,996,623) 3,139,695
Issuance of Stock for
Investment in Immediate 1,477,567 14,775 3,029,016 -- 3,043,791
Issuance of Convertible
Note -- -- 427,185 -- 427,185
Net Loss -- -- -- (4,536,859) (4,536,859)
--------- ------- ----------- ------------ -----------
Balance at April 30, 1999 3,389,315 $33,893 $24,573,401 $(22,533,482) $ 2,073,812
========= ======= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 27
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss)/Income $(4,536,859) $ 38,817
Adjustments to reconcile Net (Loss)/Income to Net
Cash (Used In)/Provided by Operating Activities:
Depreciation and Amortization 221,093 592,751
Equity in Losses of Affiliates 475,695 0
Adjustment in Valuation of Investment in Immediate 3,283,973
Additional Reserve for Bad Debts 37,630 0
Non-cash Interest Expense 427,185 0
Change in Assets and Liabilities:
Increase in Restricted Cash (1,000,000) 0
Decrease/(Increase) in Accounts Receivable 3,491 (59,614)
Increase in Amount Due from Related Party (147,000) 0
Decrease/(Increase) in Prepaid Expenses 31,607 (34,546)
Increase in Other Assets (138,679) 0
Increase/(Decrease) in Accounts Payable 37,809 (82,554)
Increase in Accrued Expenses 76,652 0
Decrease in Income Taxes Payable 0 (3,482)
Decrease in Deferred Revenue (2,325) (78,200)
----------- -----------
NET CASH AND CASH EQUIVALENTS
(USED IN)/PROVIDED BY OPERATING ACTIVITIES (1,229,728) 373,172
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase)/Disposal of Fixed Assets (2,988) 484
Gross Additions to Film Costs (70,201) (118,816)
Investment in Immediate Entertainment Group (2,510,803) 0
Sale of Marketable Securities 0 5,967,031
----------- -----------
NET CASH AND CASH EQUIVALENTS
(USED IN)/PROVIDED BY INVESTING ACTIVITIES (2,583,992) 5,848,699
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from Related Parties 210,803 0
Issuance of Convertible Note 1,000,000 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 1,210,803 (3,811,575)
----------- -----------
NET (DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS (2,602,917) 2,410,296
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,658,500 248,204
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 55,583 $ 2,658,500
=========== ===========
Cash paid for:
Interest 0 0
Taxes 7,362 5,404
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 28
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the
accounts of Kings Road Entertainment, Inc. and its subsidiaries, Ticker, Inc.
("Ticker") and Orwell Properties, Inc. ("Orwell"), after elimination of all
intercompany items and transactions. Collectively, they are referred to as the
"Company." Ticker is a California corporation that was inactive at April 30,
1999. Orwell is a corporation formed under the laws of the Territory of the
British Virgin Islands to make an investment in Star TV AG ("Star"). SEE NOTE O
- - TRANSACTIONS SUBSEQUENT TO APRIL 30, 1999.
Accounting Method - The Company's consolidated financial statements are prepared
using the accrual method of accounting. The Company has elected an April 30
year-end.
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>
For the year ended April 30, 1999, the Company earned revenue from three
significant customers of approximately $516,000 (68%) of feature film revenues.
For the year ended April 30, 1998, the Company earned revenue from three
significant customers of approximately $740,000 (48%) of feature film revenues.
Revenues from foreign sources were approximately $82,000 and $956,000 for the
years ended April 30, 1999 and 1998, respectively.
Film Costs - Film costs, including any 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 basis 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.
F-8
<PAGE> 29
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 term of the applicable lease, whichever is less.
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, 1999, approximately 6% of the Company's accounts
receivable were from foreign distributors.
Cash Concentration - The Company maintains its cash balances at financial
institutions that are federally insured, however, at times such balances may
exceed federally insured limits. The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of - On
April 1, 1997, the Company adopted the provisions of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of. This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair values of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the costs to sell. Adoption of this statement did not have a material impact on
the Company's financial position or results of operations.
Year 2000 Compliance - As has been widely reported, many computer systems
process dates based on two digits for the year of a transaction and may be
unable to correctly process dates in the year 2000 and beyond. The Company
believes that all of its computer systems are year 2000 compliant. Although the
Company does not expect year 2000 compliance to have a material adverse effect
on its internal operations, it is possible that year 2000 compliance problems
could have a significant adverse effect on the Company's suppliers and their
ability to service the Company and to accurately process payments received.
F-9
<PAGE> 30
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements - The Company has adopted SFAS No. 130, Reporting
Comprehensive Income and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. Adoption of these pronouncements did not
have a material impact on the Company's financial position or results of
operations as there were no items of comprehensive income and there were no
reportable segments. The Company operates in one business segment, consisting
primarily of production and distribution of feature length motion pictures.
Recent Accounting Pronouncements Effective Subsequent to 1999 - In April 1998,
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP
98-5") was issued. SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. The SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not anticipate that the adoption of this statement will have a material impact
on the Company's financial position or results of operations.
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities became effective for fiscal years beginning after June 15, 1999. The
Company does not anticipate that the adoption of this statement will have a
material impact on the Company's financial position or results of operations.
In October 1998, FASB released an exposure draft of its Proposed Statement of
Position - Accounting by Producers and Distributors of Films ("Proposed SOP").
This Proposed SOP would replace FASB No. 53, Financial Reporting by Producers
and Distributors of Motion Picture Films and, if adopted, would become effective
for fiscal years beginning after December 15, 1999. The Company does not
anticipate that the adoption of this statement, as currently drafted, will have
a material impact on the Company's financial position or results of operations.
Basic and Fully Diluted Income/(Loss) Per Share - During the Company's fiscal
year ended 1998, the Company implemented SFAS No. 128, Earnings Per Share. SFAS
No. 128 provides for the calculation of "Basic" and "Diluted" earnings per
share. Basic earnings per share includes no dilution and is computed by dividing
income available to common stockholder by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity
that were outstanding for the period, similar to fully diluted earnings per
share.
Reclassification - Certain amounts for the year ended April 30, 1998 have been
reclassified to conform with the presentation of the April 30, 1999 amounts. The
reclassifications have no effect on net income for the year ended April 30,
1999.
NOTE B - RESTRICTED CASH
On April 30, 1999 the Company had restricted cash of $1,000,000 on deposit with
Eckstein Treuhand GmbH ("Eckstein"), a Swiss limited liability company, pursuant
to an April 17, 1999 Trust Agreement ("Trust Agreement") between Orwell, a
wholly owned subsidiary of the Company, and Eckstein. Pursuant to the Trust
Agreement, on May 12, 1999, Eckstein purchased 140,000 shares of Star on behalf
of Orwell with the restricted cash. SEE NOTE O - TRANSACTIONS SUBSEQUENT TO
APRIL 30, 1999.
F-10
<PAGE> 31
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - FILM COSTS
Film costs consist of:
<TABLE>
<CAPTION>
As Of
April 30, 1999
--------------
<S> <C>
Released Films, less amortization $ 30,517
Films in Production 0
Films in Development 126,969
--------
$157,486
========
</TABLE>
Based on the Company's estimates of future revenue as of April 30, 1999, 100% of
unamortized film costs applicable to released films will be amortized during the
three years ended April 30, 2002. No interest or overhead was capitalized to
film costs during the fiscal years ended April 30, 1999 and 1998, as no new
motion pictures were produced.
NOTE D - INVESTMENT IN IMMEDIATE ENTERTAINMENT GROUP
On November 9, 1998, the Company acquired 2,393,235 shares of Immediate
Entertainment Group, Inc. ("Immediate"), approximately 19% of Immediate's
outstanding common stock, for an aggregate of $2,300,000 in cash, 1,477,567
newly issued shares of the Company's common stock and a note payable to the
sellers of the stock for $210,803. The Company's investment in Immediate has
been accounted for using the equity method. 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. The Company has evaluated the
recoverability of its investment in Immediate and recorded a valuation allowance
of $3,283,973. The Company's investment in Immediate also includes $147,000 of
amounts advanced to Immediate or payments made to third parties on Immediate's
behalf.
NOTE E - FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
As Of
April 30, 1999
--------------
<S> <C>
Office Equipment $ 199,919
Furniture & Fixtures 31,479
Accumulated Depreciation (221,630)
---------
$ 9,768
=========
</TABLE>
NOTE F - OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
As Of
April 30, 1999
--------------
<S> <C>
Deposits $ 2,500
Miscellaneous Receivables 33,809
Capitalized Financing Costs 104,870
--------
$141,179
========
</TABLE>
F-11
<PAGE> 32
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - NOTES PAYABLE
On November 9, 1998, the Company acquired 2,393,235 shares of Immediate,
approximately 19% of Immediate's outstanding common stock, from FAB Capital
Corporation ("FAB"), MBO Music Verlag GmbH ("MBO") and West Union Leasing Ltd.
("West") for an aggregate of $2,300,000 in cash, 1,477,567 newly issued shares
of the Company's common stock and a note payable to the sellers of the stock for
$210,803 bearing interest at 5% per annum due upon demand but in no event
earlier that April 30, 2000 ("Note"). Pursuant to such transaction, FAB, MBO and
West are due $93,175, $82,424, and $35,204, respectively, under the Note.
Interest expense of $4,996 was incurred on the Note during the fiscal year ended
April 30, 1999, none of which has been paid.
On April 26, 1999, the Company issued a convertible note ("Convertible Note") to
Tresor Worldwide Limited ("Tresor") in the principal amount of $1,000,000. The
Convertible Note has a term of one year and bears interest at the rate of 8% per
annum, payable quarterly on July 1, 1999, October 1, 1999 and January 1, 2000.
Tresor has the right to convert, in whole or in part, any outstanding and unpaid
principal and interest into fully paid and non-assessable shares of the
Company's common stock at the lower of (i) $2.06 per share or (ii) 70% of the
average closing bid price for the five (5) trading days immediately preceding
the date of conversion but in no event less than $1.00 ("Conversion Price"). The
Conversion Price is subject to reduction of 3% per month beginning on the six
month anniversary of the Convertible Note in the event any portion of the
securities issuable upon conversion have not been registered under the
Securities Act of 1933, as amended. The Company has entered into a Registration
Rights Agreement with the note holder wherein the Company, as soon as
practicable, has agreed to register the securities issuable upon conversion of
the Convertible Note. The accrued interest balance at April 30, 1999 was $1,096.
As the Convertible Note has a beneficial conversion feature, the Company has
recorded interest expense of $427,185 associated with this conversion feature
and included a corresponding amount in Additional Paid-In Capital.
On May 12, 1999, the Company used the proceeds from the Convertible Note to
purchase approximately 19% of the outstanding common stock of Star through the
Company's wholly owned subsidiary, Orwell. Pursuant to a Pledge and Security
Agreement between Tresor and Orwell, the Convertible Note is secured by Orwell's
investment in Star. In addition, Orwell has agreed to guarantee the obligations
of the Company under the Convertible Note. SEE NOTE O - TRANSACTIONS SUBSEQUENT
TO APRIL 30, 1999.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases approximately 1,500 square feet of office space on a
month-to-month basis. Rent expense was $28,793 and $28,838 for the years ended
April 30, 1999 and 1998, respectively.
F-12
<PAGE> 33
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - STOCK OPTIONS AND WARRANTS
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 April
30, 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.
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 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.
NOTE J - 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>
1999 1998
----------- --------
<S> <C> <C>
Computed Expected Tax at Statutory Rate $(1,546,586) $ 15,035
Benefit of Prior Years Amended Tax Returns (19,286) 0
State and Local Taxes 6,256 4,220
Foreign Taxes 1,106 1,184
Valuation Allowance 1,546,586 (15,035)
----------- --------
$( 11,924) $ 5,404
=========== ========
</TABLE>
For federal income tax purposes, the Company has available investment tax
credits of approximately $2,166,000 after being reduced by 35% as a result of
the Tax Reform Act of 1986 (expiring between 2000 and 2002) and net operating
loss carryforwards of approximately $19,496,000 (expiring between 2001 and 2016)
to potentially 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:
F-13
<PAGE> 34
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
As Of
April 30, 1999
--------------
<S> <C>
Deferred Revenue $3,000
Film Cost Amortization 8,000
Net Operating Loss Carryforwards 7,799,000
Investment Tax Credit Carryforwards 2,166,000
Foreign Tax Credit Carryforwards 400,000
--------------
10,376,000
Valuation Allowance (10,376,000)
--------------
$0
==============
</TABLE>
A valuation allowance of $10,376,000 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. In addition, as a result of the change in control of the
Company resulting from a November 6, 1998 Acquisition Agreement, Internal
Revenue Code section 382 significantly limits the Company's ability to utilize
its net operating loss carryforwards. As a result of this limitation, the
Company expects that its investment tax credit and foreign tax credit
carryforwards as well as a significant amount of its net operating loss
carryforwards will expire prior to utilization by the Company.
NOTE K - LITIGATION AND CONTINGENCIES
On April 27, 1999, the Company entered into a letter agreement ("Joint Venture
Agreement") with Merchant Ivory Productions ("MIP") pursuant to which the
Company was required to contribute to Merchant Ivory Distribution, LLC ("MIFD")
on or before May 5, 1999 $250,000 plus options to purchase up to 250,000 shares
of the Company's common stock. The Company is also required to provide a
revolving line of credit of up to $500,000 to MIFD to fund print and advertising
expenses incurred by MIFD. MIFD is a joint venture between the Company and MIP,
25% owned by the Company and 75% owned by MIP formed to acquire and subsequently
distribute motion pictures in significant markets including the United States.
On May 18, 1999, the Company made a contribution of $250,000 to MIFD. MIP has
subsequently advised the Company that it believes the Company has materially
breached the Joint Venture Agreement by failing to provide the stock options and
the line of credit to MIFD. On the other hand, the Company believes that MIP has
materially breached its obligations to the Company under the Joint Venture
Agreement. MIP and the Company are currently discussing the matter.
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.
F-14
<PAGE> 35
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - 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 and owns 50% of the Partnership. Revenue
generated by the Picture, after deduction of distribution expenses, is disbursed
equally to the Company and the Limited Partner. 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 contributions to the
Picture are amortized according to the individual film forecast method described
in Note A. During the fiscal year ended April 30, 1999, the Company received
approximately $164,000 from the Partnership.
NOTE M - INVESTMENT IN JOINT VENTURE
On April 27, 1999, the Company entered into a letter agreement ("Joint Venture
Agreement") with Merchant Ivory Productions ("MIP") pursuant to which the
Company was required to contribute to Merchant Ivory Distribution, LLC ("MIFD")
on or before May 5, 1999 $250,000 plus options to purchase up to 250,000 shares
of the Company's common stock. The Company is also required to provide a
revolving line of credit of up to $500,000 to MIFD to fund print and advertising
expenses incurred by MIFD. MIFD is a joint venture between the Company and MIP,
25% owned by the Company and 75% owned by MIP formed to acquire and distribute
motion pictures in significant markets including the United States. As of April
30, 1999, the Company had not made any contributions to MIFD under the Joint
Venture Agreement. SEE NOTE K - LITIGATION AND CONTINGENCIES AND NOTE O -
TRANSACTIONS SUBSEQUENT TO APRIL 30, 1999.
NOTE N - RELATED PARTY TRANSACTIONS
On November 6, 1998, pursuant to a Stock Acquisition Agreement, FAB, MBO, West
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 in the aggregate represented approximately 50.3% of the Company's
then outstanding common stock. Phillip Cook, Chairman, Chief Executive Officer
and 25% shareholder of FAB Capital became Chairman and Chief Executive Officer
of the Company until his resignation on June 24, 1999.
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.
F-15
<PAGE> 36
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - RELATED PARTY TRANSACTIONS (CONTINUED)
On November 9, 1998, the Company acquired 19% of the outstanding common stock of
Immediate from FAB, MBO and West 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. Pursuant to such transaction FAB, MBO and
West, 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. During the year ended April 30, 1999,
interest expense of $4,996 was accrued on the Note. FAB, MBO and West owned
429,449, 373,350 and 159,461 shares, respectively, of the Company's common stock
at the time of this transaction.
In connection with the Convertible Note, the Company agreed to pay FAB
Securities of America, Inc. ("FAB Securities"), a wholly-owned subsidiary of
FAB, a commission of 5% of the Convertible Note gross proceeds, $50,000. In
addition, FAB Securities is entitled to warrants to purchase the Company's
common stock equal to 5% of any portion of the Convertible Note converted by
Tresor into the Company's common stock at an exercise price equal to the closing
price of the Company's common stock on the date of issuance of such warrants. As
of April 30, 1999, $11,400 was due and payable to FAB Securities under this
agreement.
During the fiscal year ended April 30, 1999, the Company has advanced to
Immediate or made payments to third parties on Immediate's behalf the aggregate
sum of $147,000. Immediate has agreed to repay such advances together with
interest at the rate of 6% per anum.
NOTE O - TRANSACTIONS SUBSEQUENT TO APRIL 30, 1999
On May 12, 1999, the Company used the $1,000,000 in proceeds from the issuance
of the Convertible Note to purchase approximately 19% of the outstanding common
stock of Star through its wholly owned subsidiary, Orwell.
On May 17, 1999, the Company entered into a Loan Agreement ("Star Loan
Agreement") with Star whereby the Company borrowed $250,000 from Star ("Star
Loan") bearing interest at 6% per annum. The Star Loan was originally due July
19, 1999. By agreement dated July 22, 1999, the due date was extended until
August 19, 1999. As of September 15, 1999, the Star Loan has not been repaid and
the Company is currently in default of the Star Loan Agreement. A further
extension of the due date of the Star Loan is currently being discussed with
Star.
On May 18, 1999, the Company made a contribution of $250,000 to MIFD. As of
September 15, 1999, the Company has not provided any portion of the line credit
required under the Joint Venture Agreement. SEE NOTE K LITIGATION AND
CONTINGENCIES AND NOTE M - INVESTMENT IN JOINT VENTURE.
F-16
<PAGE> 1
Exhibit 10.5
CONVERTIBLE NOTE
THIS NOTE AND THE COMMON STOCK INTO WHICH IT IS CONVERTIBLE
(COLLECTIVELY, THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") OR UNDER THE LAWS OF ANY
STATE OR OTHER JURISDICTION. THE SECURITIES MAY NOT BE OFFERED
OR SOLD UNLESS THEY ARE REGISTERED UNDER THE ACT AND UNDER THE
LAWS OF THE STATES WHERE EACH SALE IS MADE, OR AN EXEMPTION FROM
REGISTRATION REQUIREMENTS IS AVAILABLE IN THE OPINION OF COUNSEL
SATISFACTORY TO KINGS ROAD ENTERTAINMENT, INC.
FOR VALUE RECEIVED, KINGS ROAD ENTERTAINMENT, INC., a Delaware
corporation (hereinafter called "Borrower"), hereby promises to pay to TRESOR
WORLDWIDE LIMITED, a corporation of the British Virgin Islands (the "Holder"),
with an address at Havilland Hall, Guernsey, Channel Islands, GY6 8TP and
telecopy number of 011 44 171 823 5129, the sum of ONE MILLION U.S. DOLLARS
($1,000,000.00), together with interest as provided below, on the first
anniversary of the date of this Note (the "Maturity Date"). This Note and any
other convertible notes which are issued in exchange for all or any portion of
this Note are referred to herein as the "Notes."
The following terms shall apply to this Note:
ARTICLE I
GENERAL
I.1 Payment Grace Period. The Borrower shall have a ten (10) day grace
period to pay any amounts due under this Note.
I.2 Interest Rate. Interest shall accrue at 8% per annum, payable
quarterly, on July 1, 1999, October 1, 1999, January 1, 2000 and the Maturity
Date, and until this Note is paid in full. In the event that this Note is not
paid in full on the Maturity Date or any extended maturity date or upon
acceleration of this Note, interest shall accrue at the maximum interest rate
permitted by applicable law.
I.3 Prepayment. The Borrower may, upon giving thirty (30) days' notice
to the Holder, prepay this Note prior to the Maturity Date, in whole or in part,
at any time without penalty; provided, however, that Borrower shall not have
such right of prepayment in the event the Holder, within ten (10) days after
receiving such notice of prepayment, gives written notice to the Borrower that
the Holder objects to such proposed prepayment of this Note.
I.4 Option to Extend Maturity Date of this Note.
<PAGE> 2
(a) By written notice to the Borrower prior to the Maturity Date or any
extended Maturity Date, the Holder from time to time may extend, for a period or
periods not to exceed one (1) year in the aggregate, the date on which the
principal and interest on this Note are due provided that such notice sets forth
clearly the new maturity date and whether or not the Holder may further extend
the new maturity date by prior notice to the Borrower.
I.5 Convertible Note Purchase Agreement. This Note is issued by the
Borrower to the Holder pursuant to a Convertible Note Purchase Agreement made
between them dated as of the date hereof.
ARTICLE II
CONVERSION AND REGISTRATION RIGHTS
The Holder shall have the right to convert the principal amount due
under this Note and the interest accrued and unpaid thereon, into shares of the
Common Stock of the Borrower, as set forth below.
II.1 Conversion into Borrower's Common Stock.
(a) The Holder shall have the right from time to time, at any time on or
prior to the date the Note is paid in full, to convert in whole or in part any
outstanding and unpaid principal portion of this Note of not less than $25,000
(or any lesser amount representing the full remaining outstanding and unpaid
portion of the Note), together with the interest accrued and unpaid thereon,
into fully paid and nonassessable shares (the "Conversion Shares") of Common
Stock, $0.01 par value per share, of the Borrower as such stock exists on the
date of issuance of this Note (the "Common Stock") or any shares of capital
stock of the Borrower and/or other securities into which such Common Stock shall
hereafter be changed or reclassified at the conversion price (the "Conversion
Price"), determined as provided herein. Upon the surrender of this Note,
accompanied by the Holder's written request for conversion, Borrower shall issue
and deliver to the Holder that number of shares of Common Stock and/or other
securities for the portion of the Note converted and a new Note in the form
hereof for the balance of the principal amount hereof, if any. The number of
shares of Common Stock and/or other securities to be issued upon each conversion
of this Note shall be determined by dividing the dollar amount of that portion
of the Note to be converted by the Conversion Price and shall be delivered to
the Holder not later than three (3) business days after Holder has delivered its
request for conversion.
(b) Subject to adjustment as provided in Section 2.1(e) hereof, the
Conversion Price shall be the lower of (i) $2.06 or (ii) seventy (70%) percent
of the average closing bid price of the Common Stock as quoted on The Nasdaq
SmallCap Market ("SmallCap Market") or the so-called "pink sheets" or the OTC
"Electronic Bulletin Board," as the case may be, for the five (5) trading days
immediately preceding the date of conversion of all or part of the Note;
provided, however, that the Conversion Price shall in no event be less than
$1.00 (One Dollar) except through the operation of adjustments as provided in
Section 2.1(e) or the Penalty, described in Section 2.1(c), and, in addition,
unless shareholders of the Borrower have approved the terms of the Note, the
Borrower, upon conversion of the Note, shall not be obligated to issue more
shares than it could issue under NASD Rule 4310(c)(25)(H)(i)d without having to
obtain shareholder
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approval and the unconvertible balance of the Note, if any, shall remain a debt
of the Borrower. Unless the shareholders of the Borrower have approved the terms
of the Note within one hundred thirty-five (135) days of the date of the Note,
the holder of the Note may declare the Note immediately due and payable.
(c) The Borrower and the Holder have entered into a Registration Rights
Agreement dated as of the date hereof (the "Registration Rights Agreement").
Capitalized terms used and not defined in this Note have the respective meaning
assigned to them in the Registration Rights Agreement. (i) Unless a Registration
Statement registering all of the Registrable Securities has become effective
under the Securities Act by the six-month anniversary (the "Six-Month
Anniversary") of the date of this Note, or (ii) if such Registration Statement
has become effective but thereafter ceases to be effective as to all Registrable
Securities at any time prior to the expiration of the Registration Period, as
long as any portion of the Registrable Securities remains as a Restricted
Security, the applicable Conversion Price at the time of conversion will be
reduced by three (3%) percent on a cumulative basis (the "Penalty") at the
beginning of each thirty (30) day period following (i) the Six-Month Anniversary
or (ii) the date on which such Registration Statement ceases to be effective, as
the case may be, up to a maximum of an eighteen (18%) percent reduction in the
Conversion Price. If, however, after the first anniversary of the date of this
Note, the Registrable Securities may not be sold because of the Company's
failure to be current in its reporting obligations, or because of volume
limitations under Rule 144(e)(2), then the three (3%) percent Penalty will
continue with respect to the reduction of the Conversion Price on a cumulative
basis at the beginning of each thirty (30) day period following the first
anniversary of the date of this Note until such portion of the Registrable
Securities ceases to be a Restricted Security and the Conversion Price may be
reduced by more than eighteen (18%) percent.
(d) [Intentionally left blank.]
(e) The Conversion Price and number and kind of shares of other
securities to be issued upon conversion shall be subject to adjustment from time
to time upon the happening of certain events while this conversion right remains
outstanding, as follows:
A. Merger, Sale of Assets, etc. If the Borrower at any time
shall consolidate with or merge into or sell or convey all or substantially all
its assets to any other corporation, this Note shall thereafter evidence the
right to purchase such number and kind of shares or other securities and
property as would have been issuable or distributable on account of such
consolidation, merger, sale or conveyance, upon or with respect to the
securities subject to the conversion or purchase right immediately prior to such
consolidation, merger, sale or conveyance. The foregoing provision shall
similarly apply to successive transactions of a similar nature by any such
successor or purchaser. Without limiting the generality of the foregoing, the
anti-dilution provisions of this Section 2.1(e) shall apply to such securities
of such successor or purchaser after any such consolidation, merger, sale or
conveyance.
B. Reclassification, etc. If the Borrower at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes, this Note shall
thereafter evidence the right to purchase such
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<PAGE> 4
number and kind of securities as would have been issuable as the result of such
change with respect to the Common Stock immediately prior to such
reclassification or other change.
C. Stock Splits, Combinations and Dividends. If the shares of
Common Stock are subdivided or combined into a greater or smaller number of
shares of Common Stock, or if a dividend is paid on the Common Stock in shares
of Common Stock, the Conversion Price shall be proportionately reduced in the
case of subdivision of shares or stock dividend or proportionately increased in
the case of combination of shares, in each such case by the ratio which the
total number of shares of Common Stock outstanding immediately after such event
bears to the total number of shares of Common Stock outstanding immediately
prior to such event.
D. Adjustment for Sale of Additional Shares.
(1) If the Borrower shall issue any additional shares of
Common Stock of any class at a price per share less than the last sale price of
the Common Stock on the SmallCap Market in effect immediately prior to the sale
of such shares, and the Borrower is paid exclusively in cash for such shares,
then in each such case the Conversion Price shall be reduced to an amount
determined by multiplying in the Conversion Price by a fraction:
(i) the numerator of which shall be (x) the number of
shares of Common Stock of all classes outstanding (excluding treasury
shares) immediately prior to the issuance of such additional shares of
Common Stock plus (y) the number of shares of Common Stock which the
consideration received by the Borrower for the total number of such
additional shares of Common Stock so issued would purchase at the
Conversion Price (prior to adjustment), and
(ii) the denominator of which shall be (x) the number of
shares of Common Stock of all classes outstanding (excluding treasury
shares) immediately prior to the issuance of such additional shares of
Common Stock plus (y) the number of such additional shares of Common
Stock so issued.
(2) Notwithstanding anything herein to the contrary, no
adjustment to the Conversion Price will be made pursuant to the preceding
paragraph D.(1) in connection with the Borrower's proposed transactions with
Immediate Entertainment Group, Inc. or Star TV Ag or in connection with the
purchase by the Borrower of the assets of DCC Compact Classics, Inc. or the IEGP
Subsequent Acquisitions, defined and described in the Convertible Note Purchase
Agreement between the Borrower and the Holder.
II.2 Method of Conversion. This Note may be converted by the Holder in
whole or in part by the surrender of this Note at the office of the Borrower set
forth below. Upon partial exercise hereof, a new Note containing the same date
and provisions of this Note shall be issued by the Borrower to the Holder for
the principal balance of this Note which shall not have been converted.
4
<PAGE> 5
ARTICLE III
EVENTS OF DEFAULT
If any of the following events shall occur (herein individually referred
to as an "Event of Default"):
(i) Default in payment of the principal amount of this Note when due;
(ii) Default in the payment when due of any interest accruing on this
Note if such default is not cured by the Borrower within ten (10) days after the
Holder has given Borrower written notice of such default; provided, that after
Holder has given notice under this clause (ii) on two separate occasions, no
notice shall be required of a default in interest payments to constitute any
further Event of Default hereunder;
(iii) Failure of the Borrower to deliver the Conversion Shares and/or
other securities to the Holder within three (3) business days as provided in
Section 2.1(a).
(iv) A material default by Borrower of any obligation, or breach by the
Borrower of any representation, warranty, covenant or agreement, set forth in
any other document signed by Borrower in connection with the issuance of this
Note, which is not cured or cannot be cured by the Borrower within ten (10) days
after the Holder has given the Borrower written notice of such default;
(v) Failure by the Borrower to maintain its SmallCap Market Listing for
shares of its stock.
(vi) Any default of Borrower under any indebtedness or other obligations
which aggregate at least $100,000 if such default is not cured by Borrower
before the earlier of (1) ten (10) days after the Holder has given Borrower
written notice of such default or (2) the obligee of such indebtedness or other
obligation has made demand or notified Borrower of any acceleration and, in
either case, any cure period has lapsed;
(vii) The rendering of one or more judgments or orders against Borrower
for the payment of money exceeding any applicable insurance coverage by more
than $25,000 in the aggregate, and either (1) enforcement proceedings shall have
been commenced by any creditor upon any such judgment or order or (2) there
shall be any period of thirty consecutive days during which a stay or
enforcement of any such judgement or order, by reason of a pending appeal or
otherwise, shall not be in effect;
(viii) The institution by Borrower of proceedings to be adjudicated as
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it or the filing by it of a petition or answer or
consent seeking reorganization or release under the federal Bankruptcy Code, or
any other applicable federal or state law, or the consent by Borrower to the
filing of any such petition or the appointment of a receiver, liquidator,
assignee, trustee or other similar official for all or any substantial part of
its property, or the taking of any action by the Borrower in furtherance of any
such action; or
5
<PAGE> 6
(ix) If, within sixty (60) days after the commencement of an action
against Borrower seeking any bankruptcy, insolvency, reorganization, liquidation
or similar relief under any present or future statute, law or regulation, such
action shall not have been resolved in favor of Borrower or all orders or
proceedings thereunder affecting the property of Borrower stayed, or if the stay
of any such petition or the appointment of a receiver, liquidator, assignee,
trustee or other similar official for all or any substantial part of the
Borrower's property shall not have been vacated;
Then, with the exception of any Event of Default specified in clauses
(viii) or (ix) above, the Holder of this Note may, by notice to Borrower,
declare the principal of this Note, all interest thereon and any other amounts
payable hereunder to be immediately due and payable, without presentment,
demand, protest or other notice of any kind, all of which are hereby expressly
waived by the Borrower, whereupon the principal amount of this Note, all such
interest and all such other amounts shall become and be immediately due and
payable, and the Holder may exercise any and all of its other rights under
applicable law hereunder.
Upon the occurrence of an Event of Default specified in clauses (viii)
or (ix) above, the principal amount of this Note, all interest thereon and all
other amounts payable hereunder shall thereupon and concurrently therewith
become due and payable, all without any action by the Holder of this Note, and
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived by the Borrower, anything in this Note to the
contrary notwithstanding.
The Borrower covenants and agrees that, so long as any portion of this
Note is outstanding, it will hold in reserve solely for the issuance of the
Conversion Shares one share of Common Stock for each one dollar of principal
amount of this Note outstanding.
ARTICLE IV
REPRESENTATIONS
Borrower represents and warrants to the Holder that: (i) this Note is a
legal, valid and binding agreement of the Borrower, enforceable against the
Borrower in accordance with its terms; (ii) the execution and delivery by the
Borrower of this Note and the performance by the Borrower of the transactions
contemplated hereby do not and will not conflict with, or result in a breach of,
or constitute a default under, any agreement to which the Borrower is a party or
to which the Borrower may be bound; and (iii) the authorized capital stock of
the Borrower consists of 12,000,000 shares of Common Stock, of which 3,389,315
are issued and outstanding and that no options or warrants or other securities
convertible into shares of Common Stock are outstanding.
ARTICLE V
MISCELLANEOUS
V.1 Failure or Indulgency Not Waiver. No failure or delay on the part of
Holder hereof in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof,
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nor shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege. All rights and remedies existing hereunder are cumulative to, and not
exclusive of, any rights or remedies otherwise available.
V.2 Notices. All notices or other communications given or made hereunder
shall be in writing and shall be deemed delivered the day telecopied (with copy
mailed by overnight courier) to the party to receive the same at its address set
forth below or to such other address as either party shall hereafter give to the
other by notice duly made under this Section 5.2: (i) if to the Borrower, to
Phillip Cook, c/o FAB Securities of America, Inc., 50 Broadway 14th Floor, New
York, New York 10004, telecopy: 212-785-3232, with a copy to Joseph L. Cannella,
Fischbein- Badillo- Wagner- Harding, 909 Third Avenue, New York, NY 10022,
telecopy number: (212) 644-3603; and (ii) if to the Holder, to the name, address
and telecopy number (if one is provided) set forth on the first page hereof,
with a copy to Lawrence Blatte, Esq., Rosen & Reade, LLP, 757 Third Avenue, New
York, NY 10017, telecopy number: (212) 755-5600.
V.3 Amendment Provision. The term "Note" and all reference thereto, as
used throughout this instrument, shall mean this instrument as originally
executed, or if later amended or supplemented, then as so amended or
supplemented.
V.4 Assignability. This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns.
V.5 Governing Law. This Note has been executed in and shall be governed
by the laws of the State of New York.
V.6 Guaranty of this Note by Orwell Properties, Inc. This Note and any
additional Notes are guaranteed by the Borrower's wholly-owned subsidiary,
Orwell Properties, Inc., a corporation of the British Virgin Islands. The form
of the Guaranty is attached to the Convertible Note Purchase Agreement as
Exhibit M.
V.7 Expenses and Attorneys' Fees. Borrower shall be fully responsible
for and shall pay costs and expenses incurred by Holder in enforcing Holder's
rights under this Note, including, but not limited to, attorney's fees, court
costs and disbursements.
V.8 Submission to Jurisdiction; Service of Process. Borrower irrevocably
agrees to submit to personal jurisdiction of the Courts of England, situated in
London, England, in any action or proceeding arising under this Note. Borrower
further irrevocably agrees that suit, action or other legal proceedings may be
brought in such courts of England and waives any objection which Borrower may
have to the laying of venue of any such suit, action or proceeding in such
courts. Borrower further agrees and consents that any such service of process
upon Borrower in any manner as is provided in Section 5.2 for the giving of
Notices shall be taken and held to be valid personal service upon Borrower for
the courts of England and that any such service of process shall be of the same
force and validity as if service were made upon Borrower according to the laws
governing the validity and requirements of such service in England, and Borrower
waives all claim of error by reason of such service.
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<PAGE> 8
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its
name by its duly authorized officer on this 26th day of April, 1999.
KINGS ROAD ENTERTAINMENT, INC.
By: /s/Phillip Geoffrey Cook
--------------------------------------
Title:Chairman
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Exhibit 10.6
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of this 26th day of April, 1999
(the "Agreement"), by and between Kings Road Entertainment, Inc., a Delaware
Corporation, with principal executive offices located at 1901 Avenue of the
Stars, Los Angeles, CA 90067 (the "Company") and Tresor World Wide, Havilland
Hall, Guernsey, Channel Islands, GY6 8TP (the "Holder").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the Convertible
Note Purchase Agreement dated as of the date hereof between the Company and the
Holder (the "Convertible Note Purchase Agreement"), the Company has agreed to
issue and sell to the Holder a One Million U.S. Dollar ($1,000,000.00)
Convertible Note which, upon the terms and subject to the conditions thereof, is
convertible into shares of the common stock, $.01 par value, of the Company (the
"Common Stock"); and
WHEREAS, to induce the Holder to execute and deliver the Convertible
Note Purchase Agreement, the Company has agreed to provide with respect to the
Common Stock issued or issuable, upon conversion of the Convertible Note certain
registration rights with respect to the Securities Act.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. DEFINITIONS
(a) As used in this Agreement, the following terms shall have the
meanings:
(i) "CONVERTIBLE NOTE" means the One Million U.S. Dollar
($1,000,000.00) Convertible Note issued by the Company to the Holder or any
Convertible Note subsequently issued by the Company (or its Successors or
assigns) representing all or any portion of the Convertible Note.
(ii) "COMMISSION" means the Securities and Exchange Commission.
(iii) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission thereunder, or any
similar successor statute.
(iv) "HOLDER" means any Person who at the time in question is
the owner or beneficial owner of all or any portion of the Convertible Note.
(v) "PERSON" means any individual, partnership, corporation,
limited liability company, joint stock company, association, trust,
unincorporated organization, or a government or agency or political subdivision
thereof.
(vi) "PROSPECTUS" means the prospectus (including, without
limitation, any preliminary prospectus and any final prospectus filed pursuant
to Rule 424 (b) under the Securities Act, including any prospectus that
discloses information previously omitted from a prospectus filed as part of an
effective registration statement in reliance on Rule 430A under the
<PAGE> 2
Securities Act) included in the Registration Statement, as amended or
supplemented by any prospectus supplement with respect to the terms of the
offering of any portion of the Registrable Securities covered by the
Registration Statement and by all other amendments and supplements to such
prospectus, including all material incorporated by reference in such prospectus
and all documents filed after the date of such prospectus by the Company under
the Exchange Act and incorporated by reference therein.
(vii) "REGISTRABLE SECURITIES" means the Common Stock and other
securities issued or issuable upon conversion of all or any portion of a
Convertible Note; provided, however, a share of Common Stock shall cease to be a
Registrable Security for purposes of this Agreement when it no longer is a
Restricted Security.
(viii) "REGISTRATION STATEMENT" means a registration statement
of the Company filed on an appropriate form under the Securities Act providing
for the registration of, and the sale on a continuous or delayed basis by the
holders of, all of the Registrable Securities pursuant to Rule 415 under the
Securities Act, including the Prospectus contained therein and forming a part
thereof, any amendments to such registration statement and supplements to such
Prospectus, and all exhibits and other material incorporated by reference in
such registration statement and Prospectus.
(ix) "RESTRICTED SECURITY" means any share of Common Stock or
other security issued or issuable upon conversion of all or any portion of a
Convertible Note except any such share that (i) has been registered pursuant to
an effective registration statement under the Securities Act and sold in a
manner contemplated by the Prospectus included in the Registration Statement,
(ii) has been transferred in compliance with the resale provisions of Rule 144
under the Securities Act (or any successor provision thereto) or is transferable
by the holder thereof pursuant to paragraph (k) of Rule 144 under the Securities
Act (or any successor provision thereto), or (iii) otherwise has been
transferred and a new share of Common Stock not subject to transfer restrictions
under the Securities Act has been delivered by or on behalf of the Company.
(x) "SECURITIES ACT" means the Securities Act of 1933 , as
amended, and the rules and regulations of the Commission thereunder, or any
similar successor statute.
(b) All capitalized terms used and not defined herein have the
respective meaning assigned to them in the Convertible Note Purchase Agreement.
2. REGISTRATION
(a) FILING AND EFFECTIVENESS OF REGISTRATION STATEMENT. The Company
shall promptly prepare and file with the Commission a Registration Statement on
Form S-3 (or if the Company is not then eligible to register for resale the
Registrable Securities on Form S-3 such registration shall be on another
appropriate Form in accordance herewith) relating to the offer and sale of all
of the Registrable Securities and shall use its reasonable best efforts to cause
the Commission to declare such Registration Statement effective under the
Securities Act as promptly as practicable, but not later than the six-month
anniversary of the date of the Convertible Note, and shall use its reasonable
best efforts to keep such Registration Statement continuously effective under
the Securities Act until the date which is thirteen (13) months after the date
that such Registration Statement is declared effective by the Commission
(subject to the suspension periods described in Section 3(a) hereof) or such
shorter period that will terminate when all the
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<PAGE> 3
Registrable Securities covered by the Registration Statement have been sold
pursuant thereto in accordance with the plan of distribution provided in the
Prospectus, transferred pursuant to Rule 144 under the Securities Act or
otherwise transferred in a manner that results in the delivery of new securities
not subject to transfer restrictions under the Securities Act (the "Registration
Period").
(b) PIGGYBACK REGISTRATION RIGHTS.
(i) In the event, the Company determines to proceed with the
preparation and filing of a Registration Statement under the Securities Act in
connection with the proposed offer and sale for cash of any of its securities by
it or any of its other security holders (other than a registration statement
pursuant to Section 2(a) or on Form S-4, S-8 or other limited purpose form), the
Company shall give written notice of its determination to all record holders of
a Convertible Note or of Registrable Securities. Upon the written request of a
record holder of a Convertible Note or any of the Registrable Securities, given
within twenty (20) days after receipt of any such notice from the Company, and
provided the Company receives from such record holder all other information the
Company reasonably requests, the Company shall, subject to the remainder of this
Section 2(b), cause such holder's Registrable Securities to be included in such
Registration Statement. Nothing herein shall prevent the Company from, at any
time, abandoning or delaying any registration contemplated by this Section 2(b).
(ii) If any registration pursuant to this Section 2(b) is
underwritten in whole or in part, the Company may also require that the included
Registrable Securities be so included in the underwriting on the same terms and
conditions as the other securities being sold through such underwriter(s) and
that each holder thereof enter into an appropriate underwriting agreement. If,
in good faith judgment of the managing underwriter of such public offering, the
inclusion of such Registrable Securities and any other securities having similar
piggyback registration rights for which registration at the same time as such
Registrable Securities has been requested (such Registrable Securities and other
securities being collectively, the "Piggyback Securities") would interfere with
the successful marketing, or require a reduction in the number, of the
securities offered by the Company, the number of the Piggyback Securities
otherwise to be included in such underwritten public offering may be reduced pro
rata (as the Company, in its sole discretion, deems equitable) among the holders
thereof or excluded in their entirety if so required by the underwriter(s). To
the extent only a portion of the Piggyback Securities is included in the
underwritten public offering, the excluded Registrable Securities shall be
withheld from the market by the holders thereof for a period, not to exceed 180
days, which the managing underwriter reasonably determines is necessary in order
to effect the underwritten public offering.
(iii) The Company shall pay the expenses described in Section 5
for each Registration Statement filed pursuant to this Section 2(b) which
becomes effective.
3. OBLIGATIONS OF THE COMPANY. If and when the Company is required by the
provisions of this Agreement to use its reasonable best efforts to effect the
registration of the Registrable Securities, the Company shall:
(a) Prepare and file with the Commission such amendments (including
post-effective amendments) to the Registration Statement and supplements to the
Prospectus as may be necessary to keep the Registration Statement effective and
in compliance with the provisions of the Securities Act applicable thereto so as
to permit the Prospectus forming part thereof to be current and useable by the
Holders for resales of the Registrable Securities during
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<PAGE> 4
the Registration Period. Notwithstanding the foregoing provisions of this
section 3 (a) , the Company may, during the Registration Period, suspend the
sale by the Holders of their Registrable Securities pursuant to the Registration
Statement for a reasonable period not to exceed ninety (90) days upon (1) the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of any
proceeding for such purpose, in which case suspension shall be limited to sales
in such jurisdiction, (2) the occurrence of any event that makes any statement
made in the Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, or (3) the good faith determination of the Board of
Directors of the Company that because of valid business reasons, including
pending mergers or other business combination transactions, the planned
acquisition or divestiture of assets, pending material corporate developments
and similar events which the Company has a bona fide business purpose for
preserving as confidential, it is in the best interests of the Company to
suspend such use, and prior to or contemporaneously with suspending such use,
the Company provides the Holders with written notice of such suspension, which
notice need not specify the nature of the event giving rise to such suspension.
At the end of any such suspension period, the Company shall provide the Holders
with written notice of the termination of such suspension. Each Holder agrees
that it will not sell Registrable Securities pursuant to the Registration
Statement during any suspension period and the Company agrees to cause each such
suspension period to end as soon as reasonably practicable.
(b) Furnish to each Holder whose Registrable Securities are
included in the Registration Statement and its legal counsel identified to the
Company such number of copies of the Prospectus (including any preliminary
Prospectus), and all amendments and supplements thereto as such Holder may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Holder.
(c) Use its reasonable best efforts to register or qualify the
Registrable Securities covered by the Registration Statement under such
securities or "blue sky" laws of such jurisdictions as Holders who hold a
majority-in-interest of the Registrable Securities being offered reasonably
request in order to facilitate the disposition of the Registrable Securities by
the Holders; provided, however, that the Company shall not be required in
connection therewith or asa condition thereto to (1) qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3 (c), (2) subject itself to general taxation in any such
jurisdiction or (3) file a general consent to service of process in any such
jurisdiction.
(d) Use its reasonable best efforts to cause all the Registrable
Securities covered by the Registration Statement to be listed on the principal
national securities exchange, and included in an inter-dealer quotation system
of a registered national securities association, on or in which securities of
the same class or series issued by the Company are then listed or included.
(e) Maintain a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement.
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<PAGE> 5
(f) Take all reasonable actions as the Holders may reasonably
request necessary to expedite or facilitate the disposition by the Holders of
their Registrable Securities.
(g) (i) Make reasonably available for inspection by the Holders
participating in any disposition pursuant to the Registration Statement, and any
attorney or accountant retained by such Holders, all relevant financial and
other records, pertinent corporate documents and properties of the Company and
its subsidiaries, and (ii) cause the Company's officers, directors and employees
to supply all information reasonably requested by such Holders or any such
attorney or accountant in connection with the Registration Statement, in each
case, as is customary for similar due diligence examinations; provided, however,
that all records, information and documents that are designated in writing by
the Company, in good faith, as confidential, proprietary or containing any
material non-public information shall be kept confidential by such Holders and
any such attorney or accountant (pursuant to an appropriate confidentiality
agreement in the case of any such holder) , unless such disclosure is made
pursuant to judicial process in a court proceeding (after first giving the
Company an opportunity promptly to seek a protective order or otherwise limit
the scope of the information sought to be disclosed) or is required by law, or
such records, information or documents become available to the public generally
or through a third party not in violation of an accompanying obligation of
confidentiality; and provided further that, if the foregoing inspection and
information gathering would otherwise disrupt the Company's conduct of its
business, such inspection and information gathering shall, to the maximum extent
possible, be coordinated on behalf of the Holders and the other parties entitled
thereto by one firm of counsel designed by and on behalf of the majority in
interest of Holders and other parties.
(h) Promptly notify the Holders (i) when a Prospectus or any
Prospectus supplement or post-effective amendment has been filed and, with
respect to a Registration Statement or any post-effective amendment, when the
same has become effective, (ii) of any request by the Commission or any state
securities authority for amendments and supplements to a Registration Statement
and Prospectus or for additional information after the Registration Statement
has become effective, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of a Registration Statement or the initiation or
threatening of any proceedings for that purpose, (iv) of the issuance by any
state securities commission or other regulatory authority of any order
suspending the qualification or exemption from qualification of any of the
Registrable Securities under state securities or "blue sky" laws or the
initiation of any proceedings for that purpose, (v) if, between the effective
date of a Registration Statement and the closing of any sale of Registrable
Securities covered thereby, the representations and warranties of the Company
contained in any securities sales agreement or other similar agreement, if any,
relating to the offering cease to be true and correct in all material respects,
and (vi) of the happening of any event which makes any statement made in a
Registration Statement or related Prospectus untrue or which requires the making
of any changes in such Registration Statement or Prospectus so that they will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. As promptly as possible following expiration of any suspension
period, the Company shall prepare and file with the Commission and furnish a
supplement or amendment to such Prospectus so that, as thereafter deliverable to
the purchasers of such Registrable Securities, such Prospectus will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
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<PAGE> 6
(i) Make generally available to the Holders an earnings
statement satisfying the provisions of Section 11(a) of the Securities Act no
later than 45 days after the end of the 12-month period beginning with the first
day of the Company's first fiscal quarter commencing after the effective date of
a Registration Statement, which earnings statement shall cover said 12-month
period, and which requirement will be deemed to be satisfied if the Company
timely files complete and accurate information on forms 10-Q, 10-K or 10 QSB, 10
KSB, as the case may be, and 8-K under the Exchange Act and otherwise complies
with Rule 158 under the Securities Act.
(j) Promptly use its reasonable best efforts to prevent the
issuance of or, if issued, obtain the withdrawal of any order suspending the
effectiveness of a Registration Statement, and if one is issued use commercially
reasonable efforts to obtain the withdrawal of any order suspending the
effectiveness of a Registration Statement at the earliest possible moment.
(k) Permit counsel for the Holders to review the Registration
Statement and all amendments and supplements thereto for a reasonable period of
time prior to their filing with the Commission, and shall not file any document
in a form to which such counsel reasonably objects.
(l) Cooperate with the Holders in a reasonable manner to
facilitate the timely preparation and delivery of certificates (not bearing any
restrictive legends) representing Registrable Securities to be sold pursuant to
the registration statement and enable such certificates to be in such
denominations or amounts, as the case may be, and registered in such names as
the Holders may reasonably request.
4. OBLIGATIONS OF THE HOLDERS. In connection with the registration of the
Registrable Securities, the Holders shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company
to complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Holder that such Holder shall furnish to
the Company such information regarding itself, the Registrable Securities held
by it and the intended method of disposition of the Registrable Securities held
by it as shall be reasonably required to effect the registration of such (a)
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request in order to assure compliance
with the Securities Act and the Exchange Act. At least twenty (20) business days
prior to the first anticipated filing date of the Registration Statement, the
Company shall notify each Holder of the information the Company requires from
each such Holder (the "Requested Information") if such Holder elects to have any
of its Registrable Securities included in the Registration Statement. If at
least three (3) business days prior to the anticipated filing date the Company
has not received the Requested Information from a Holder (a "NonResponsive
Holder"), then the Company may file the Registration Statement without including
Registrable Securities of such Non-Responsive Holder and have no further
obligations to the Non-Responsive Holder.
(b) Each Holder by its acceptance of the Registrable Securities agrees
to cooperate with the Company in connection with the preparation and filing of
the Registration Statement hereunder, unless such Holder has notified the
Company in writing of its election to exclude all of its Registrable Securities
from the Registration Statement.
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<PAGE> 7
(c) Each Holder agrees that, to the extent limited thereby, it will not
effect sales of the Registrable Securities during any suspension period as
described in section 3(a) hereof until such Holder receives notice from the
Company that the suspension period has ended and, if so directed by the Company,
such Holder shall deliver to the Company or destroy (and deliver to the Company
a certificate of destruction) all copies in such Holder's possession, of the
Prospectus covering such Registrable Securities current at the time of receipt
of notice of such suspension.
(d) The failure of any Holder to comply with the provisions of this
Section 4 shall not relieve the Company of its obligations to the other Holders
under this Agreement with respect to the registration of such other Holders'
Registrable Securities in accordance with the terms hereof, except where the
failure of any Holder to so comply will materially interfere with the ability of
the Company to timely perform its obligations hereunder to the other Holders.
5. EXPENSES OF REGISTRATION. All expenses, other than underwriting
discounts and commissions, if any, incurred in connection with registrations,
filings or qualifications pursuant to Section 2 shall be borne by the Company;
provided, that the Holders shall bear their own attorney's fees and expenses and
all underwriting discounts and commissions applicable to their Registrable
Securities.
6. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification by the Company. If the Registrable Securities are
registered under the Securities Act pursuant to Section 2 hereof, the Company
shall indemnify and hold harmless each Holder who sold Registrable Securities
pursuant to such registration its officers, directors, partners and trustees,
and each person who controls a Holder within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act (each, a "Holder Indemnitee")
from and against any losses, claims, damages or liabilities to which such Holder
Indemnitee may become subject under the Securities Act, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement or any amendment thereto or an
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, not misleading or
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in a Prospectus (as the same may have been amended
or supplemented) or an omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
and the Company hereby agrees to reimburse such Holder Indemnitee for all
reasonable legal and other expenses incurred by them in connection with
investigating or defending any such action or claim as and when such expenses
are incurred; provided, however, that the Company shall not be liable to any
such Holder Indemnitee in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon (i) an untrue statement or
alleged untrue statement made in, or an omission or alleged omission from, such
Registration Statement or Prospectus in reliance upon and in conformity with
written information furnished to the Company by such Holder Indemnitee expressly
for use therein or (ii) the use by the Indemnified Holder of an outdated or
defective Prospectus after the Company has provided to such Holder Indemnitee an
updated Prospectus correcting the untrue statement or alleged untrue statement
or omission or alleged omission giving rise to such loss, claim, damage or
liability.
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<PAGE> 8
(b) Indemnification by the Holders. If any Registrable Securities are
registered under the Securities Act pursuant to Section 2 hereof each Holder
agrees to (i) indemnify and hold harmless the Company, its directors (including
any person who, with his or her consent, is named in the Registration Statement
as a director nominee of the Company), its officers who sign any Registration
Statement and each person, if any, who controls the Company within meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act,
against any losses, claims, damages or liabilities to which the Company or such
other persons may become subject, under the Securities Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in such Registration Statement or an omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in any Prospectus or an omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading in each case to the extent that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company by such holder
expressly for use therein, and (ii) reimburse the Company for any legal or other
expenses incurred by the Company in connection with investigating or defending
any such action or claim as such expenses are incurred; provided, however, that
a Holder shall be liable to the Company under this Section 6(b) only to the
extent of, in the aggregate, the lesser of (i) the amount of any such loss,
claim, damage or liability or (ii) the net proceeds actually received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c) Notice of Claims, etc. Promptly after receipt by a party seeking
indemnification pursuant to this Section 6 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to this
Section 6 is being sought (the "Indemnifying Party") of the commencement
thereof; but the omission to so notify the Indemnifying Party shall not relieve
it from any liability that it otherwise may have to the Indemnified Party,
except to the extent that the Indemnifying Party is materially prejudiced and
forfeits substantive rights and defenses by reason of such failure. In
connection with any Claim as to which both the Indemnifying Party and the
Indemnified Party are parties, the Indemnifying Party shall be entitled to
assume the defense thereof. Notwithstanding the assumption of the defense of any
Claim by the Indemnifying Party, the Indemnified Party shall have the right to
employ separate legal counsel and to participate in the defense of such Claim,
and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs
and expenses of such separate legal counsel to the Indemnified Party if (and
only if): (x) the Indemnifying Party shall have agreed to pay such fees, costs
and expenses, (y) representation of the Indemnified Party by the Indemnifying
Party by the same legal counsel would not be appropriate due to actual or, as
reasonably determined by legal counsel to the Indemnified Party, potentially
differing interests between such parties in the conduct of the defense of such
Claim, or if there may be legal defenses available to the Indemnified Party that
are in addition to or disparate from those available to the Indemnifying Party,
or (z) the Indemnifying Party shall have failed to employ legal counsel
reasonably satisfactory to the Indemnified Party within a reasonable period of
time after notice of the commencement of such Claim; provided, however, in no
event shall the Indemnifying Party be required to pay the fees and expenses of
more than one separate firm for all Indemnified Parties. If the Indemnified
Party employs separate legal counsel in circumstances other than as described in
clauses (x), (y) or (z) above, the fees, costs and expenses of such legal
counsel
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<PAGE> 9
shall be borne exclusively by the Indemnified Party. The Indemnifying Party
shall not, without the prior written consent of the Indemnifying Party (which
consent shall not unreasonably be withheld), settle or compromise any Claim or
consent to the entry of any judgment that does not include an unconditional
release of the Indemnifying Party from all liabilities with respect to such
Claim or judgment.
(d) Contribution. If the indemnification provided for in this Section 6
is unavailable to or insufficient to hold harmless an Indemnified Person under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein because such
indemnification is held by a court of competent jurisdiction to be
unenforceable, then each Indemnifying Party shall contribute to the amount paid
or payable by such Indemnified Party as a result of such losses, claims, damages
or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and the
Indemnified Party in connection with the statements or omissions which resulted
in such losses, claims, damages or liabilities (or actions in respect thereof),
as well as any other relevant equitable considerations, subject, however, to the
limitations on the liability of the Holders contained in subsection (b) above.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by such Indemnifying Party or by
such Indemnified Party, and the parties, relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 6 (d) were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to in this Section 6 (d) . The amount paid or payable by
an Indemnified Party as a result of the losses, claims, damages or liabilities
(or actions in respect thereof) referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
7. RULE 144. With a view to making available the benefits of certain
rules and regulations of the Commission that may permit the sale of the
Registrable Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) Make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the Securities Act;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements; and
(c) So long as the Holder owns a Convertible Note or any Registrable
Securities, furnish to the Holder forthwith upon written request a written
statement by the Company as to its compliance with the reporting requirements of
Rule 144, and of the Securities Act and the Exchange Act, a copy of the most
recent annual or quarterly report of the Company, and such other reports and
documents so filed as the Holder may reasonably request in availing itself of
any rule or regulation of the Commission allowing the Holder to sell any such
securities without registration.
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<PAGE> 10
8. ASSIGNMENT. The rights to have the Company register Registrable
Securities pursuant to this Agreement may be assigned by the Holders to any
permitted transferee of all or any portion of the Registrable Securities (or all
or any portion of any Convertible Note) provided, that: (a) the Holder agrees in
writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (i) the name and address of such
transferee or assignee and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) immediately following
such transfer or assignment, the securities so transferred or assigned to the
transferee or assignee constitute Restricted Securities, and (d) at or before
the time the Company received the written notice contemplated by clause (b) of
this sentence the transferee or assignee agrees in writing with the Company to
be bound by all of the provisions contained herein.
9. AMENDMENT AND WAIVER. Any provision of this Agreement may be amended
and the observance thereof may be waived (either generally or in a particular
instance and either retroactively or prospectively) , only with the written
consent of the Company and Holders who hold a majority-ininterest of the
Registrable Securities. Any amendment or waiver effected in accordance with this
Section 10 shall be binding upon each Holder and the Company; provided, however,
that no amendment or waiver shall be effective as to any Holder whose rights
hereunder may be adversely affected thereby without such Holder's express
written consent.
10. MISCELLANEOUS.
(a) A person or entity shall be deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Except as may be otherwise provided herein, any notice or other
communication or delivery required or permitted hereunder shall be in writing
and shall be delivered personally or sent by certified mail, postage prepaid, or
by a nationally recognized overnight courier service, and shall be deemed given
when so delivered personally or by overnight courier service, or, if mailed,
three (3) days after the date of deposit in the United States mails, as follows:
(1) if to the Company, to:
KINGS ROAD ENTERTAINMENT, INC.
1901 Avenue of the Stars
Los Angeles, CA 90067
Attn: __________________
With a copy to:
FISCHBEIN - BADILLO - WAGNER - HARDING
909 Third Avenue
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<PAGE> 11
New York, NY 10022
Attn: Joseph L. Canella, Esq.
(2) if to any Holder, at the most current address as such Holder
shall have provided in writing to the Company in accordance with
the provisions of this Section 10, which address shall initially
be the address set forth next to such Holder's name on the
initial page of this Agreement.
With a copy to :
ROSEN & READE, LLP
757 Third Avenue
New York, NY 10017
Attn: Lawrence A. Blatte, Esq.
(c) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of New York.
(d) The remedies provided in this Agreement are cumulative and not
exclusive of any remedies provided by law. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provision,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(e) This Agreement, the Convertible Note Purchase Agreement and the
Convertible Note constitute the entire agreement among the parties hereto with
respect to the subject matter hereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein.
This Agreement, the Convertible Note Purchase Agreement and the Convertible Note
supersede all prior agreements and undertakings among the parties hereto with
respect to the subject matter hereof.
(f) Subject to the requirements of Section 8 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. A facsimile transmission of this signed Agreement shall be legal
and binding on all parties hereto.
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<PAGE> 12
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed and delivered as of the date first above written
KINGS ROAD ENTERTAINMENT, INC.
By: /s/Phillip Geoffrey Cook
--------------------------------------
Name: Phillip Geoffrey Cook
Title: Chairman
TRESOR WORLD WIDE
By: /s/Allan Hamilton Burnside
--------------------------------------
Name: Allan Hamilton Burnside
Title: Director
12
<PAGE> 1
Exhibit 10.7
PLEDGE AND SECURITY AGREEMENT
AGREEMENT dated April 26th, 1999, between ORWELL PROPERTIES, INC., with
offices at 1901 Avenue of the Stars, Los Angeles, CA 90067 ("Pledgor") and
Tresor WorldWide Limited, with an address at Havilland Hall, Guernsey, Channel
Island, GY6 8TP ("Pledgee").
Kings Road Entertainment, Inc. ("Kings Road"), the parent company of
Pledgor, has delivered to Pledgee Kings Road's 8% Convertible Note in the
principal amount of $1,000,000.00 (the "Promissory Note"). As security for the
due and punctual payment of all amounts due to Pledgee as Payee under the
Promissory Note, Pledgor is pledging to Pledgee 140,000 shares of capital stock
of Star TV Ag, a Swiss corporation, which are owned by Pledgor, in accordance
with this Agreement. Such shares of Star TV Ag common stock are hereinafter
referred to as the "Pledged Shares."
NOW, THEREFORE, the parties hereto agree as follows:
1. Pledge; Obligations Secured. As collateral security for the due and
punctual payment of the Promissory Note and the due and punctual performance by
Pledgor of all of its obligations under this Agreement (all such payments and
obligations being collectively, the "Obligations"), Pledgor does hereby pledge,
hypothecate, sign, transfer, set over and deliver unto Pledgee, and grant to
Pledgee a security interest in, the following:
(a) The Pledged Shares and the certificates representing the
Pledged Shares, and all cash, securities and other property at any time and from
time to time received, receivable or otherwise distributed in respect of or in
exchange for any or all of the Pledged Shares; and
(b) All securities hereafter delivered to Pledgee in
substitution for or in addition to any of the foregoing, all certificates and
instruments representing or evidencing such securities and all interest, cash,
securities and other property at any time and from time to time received,
receivable or otherwise distributed in respect of or in exchange for any or all
thereof.
(Such Pledged Shares, certificates, interest, cash, securities
and other property are herein collectively called the "Pledged Collateral").
2. Delivery of Pledged Collateral. Concurrently with the execution and
delivery of this Agreement, Pledgor is delivering to the Pledgee pursuant to
this Agreement, all certificates representing the Pledged Shares, accompanied by
stock powers endorsed in blank with signatures guaranteed. All other Pledged
Collateral, whether in substitution for or in addition to the Pledged Shares,
shall be delivered to the Pledgee forthwith after Pledgor receives or becomes
entitled to receive the same.
3. Representations and Warranties. Pledgor represents and warrants
(which representations and warranties shall be true at all times until the
Pledged Collateral is released to Pledgor or otherwise disposed of in accordance
with this Agreement):
(a) The Pledgor is the sole legal and beneficial owner of the
Pledged Shares free and clear of any lien, security interest, option or other
charge or encumbrance except for the security interest created by this
Agreement.
<PAGE> 2
(b) The pledge of the Pledged Shares pursuant to this Agreement
creates a valid and perfected first priority security interest in the Pledged
Shares, securing the payment and performance of the Obligations.
(c) All corporate action required to authorize the execution,
delivery and performance by Pledgor of this Agreement has been duly taken.
(d) This Agreement is a legal, valid and binding agreement of
Pledgor enforceable in accordance with its terms.
(e) No authorization, approval, or other action by, and no
notice to or from and with, any governmental authority or regulatory body is
required either (i) for the execution, delivery or performance of this Agreement
by Pledgor or (ii) for the exercise by Pledgee of the voting or other rights
provided for in this Agreement or the remedies in respect of the Pledged Shares
pursuant to this Agreement (except as may be required in connection with such
exercise of remedies by laws affecting the offering and sale of securities,
generally).
4. Further Assurances. Pledgor agrees that, at any time and from time to
time, Pledgor will promptly execute and deliver all further instruments and
documents, and take all further action, that may be necessary or desirable, or
that Pledgee may request, in order to perfect and protect any security interest
granted or purported to be granted hereby or to enable Pledgee to exercise and
enforce its rights and remedies hereunder with respect to any of the Pledged
Collateral.
5. Voting; Dividends; Etc.
(a) So long as no Event of Default (as defined below) shall have
occurred:
(i) Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Pledged Collateral or any
part thereof for any purpose not inconsistent with the rights of Pledgee under
this Agreement.
(ii) Pledgor shall be entitled to receive and retain any
and all dividends paid in respect of the Pledged Collateral, provided, however,
that any and all
A. dividends paid or payable in respect of, and
instruments and other property received, receivable or otherwise distributed in
respect of, or in a permitted exchange for, any Pledged Collateral;
B. dividends and other distributions paid or
payable in cash in respect of any of the Pledged Collateral in connection with a
permitted partial or total liquidation or dissolution or in connection with a
reduction of capital, capital surplus or paid-in-surplus; and
C. cash paid, payable or otherwise distributed
in respect of a permitted redemption of, or in exchange for, any of the Pledged
Collateral;
shall be forthwith delivered to the Pledgee to hold as Pledged Collateral and
shall, if received by Pledgor, be received in trust for the benefit of Pledgee,
be segregated from the other property or funds of Pledgor, and be forthwith
delivered to the Pledgee as Pledged Collateral in the same form as so received
(with any necessary endorsement).
2
<PAGE> 3
(b) Upon the occurrence of an Event of Default, all rights of
Pledgor to exercise the voting and other consensual rights which it would
otherwise be entitled to exercise pursuant to Section 5(a)(i), and to receive
the dividend payments which it would otherwise be authorized to receive and
retain pursuant to Section 5(a)(ii), shall cease and all such rights shall
immediately become vested in Pledgee who shall then have the sole right to
exercise such voting and other consensual rights and to receive and hold as
Pledged Collateral such dividends.
6. Other Covenants. Pledgor, by its signature below, agrees that it will
not (a) sell or otherwise dispose of, or grant any option with respect to, any
of the Pledged Collateral, or (b) create or permit to exist any lien, security
interest or other charge or encumbrance upon or with respect to any of the
Pledged Collateral, except for the security interest under this Agreement.
7. Pledgee Appointed Attorney-in-Fact. Pledgor hereby appoints Pledgee
as Pledgor's attorney-in-fact, with full authority in the place and stead of
Pledgor and in the name of Pledgor or otherwise, from time to time in Pledgee's
discretion, to take any action and to execute any instrument which Pledgee may
deem reasonably necessary or advisable to accomplish the purposes of this
Agreement, including, without limitation, to receive, endorse and collect all
instruments made payable to Pledgor representing any dividend, interest payment
or other distribution in respect of the Pledged Collateral or any part thereof
and to give full discharge for the same.
8. Reasonable Care. The Pledgee shall be deemed to have exercised
reasonable care in the custody and preservation of the Pledged Collateral in its
possession if the Pledged Collateral is accorded treatment substantially equal
to that which it accords its own property.
9. Events of Default. "Events of Default," as used herein, shall have
the meaning assigned to such term in the Promissory Note.
10. Remedies upon Default. If any Event of Default shall have occurred:
(a) Pledgee shall give written notice to the Pledgor of its
intention to exercise its rights under this Agreement and describing the Event
of Default.
(b) Thereafter, unless enjoined by service of an order issued by
an English court situated in London, England, after the expiration of five days
after the Pledgor received the notice from the Pledgee pursuant to Section
10(a), Pledgee may exercise in respect of the Pledged Collateral, in addition to
other rights and remedies provided for herein or otherwise available to Pledgee,
all the rights and remedies of a secured party under the laws of England and
Wales. Pledgor agrees that, to the extent notice of sale shall be required by
law, at least twenty days' notice to Pledgor of the time and place of any public
sale or the time after which any private sale is to be made shall constitute
reasonable notification.
11. Amendments, etc. No amendment or waiver of any provision of this
Agreement, nor consent to any departure by Pledgor or Pledgee from any
requirement hereof, shall in any event be effective unless the same shall be in
writing and signed by the party to be charged, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
12. Notices. All notices, affidavits or other communications given or
made hereunder shall be in writing and shall be delivered by hand (which shall
include an overnight courier service), against written receipt, sent by
facsimile transmission, receipt confirmed, or mailed by registered or
3
<PAGE> 4
certified mail, return receipt requested, postage prepaid, to the party at its
address set forth above. Notices shall be deemed given on the date of receipt
or, if mailed, two business days after mailing, except notices of change of
address, which shall be deemed given when received.
13. Continuing Security Interest. This Agreement shall create a
continuing security interest in the Pledged Collateral and shall (a) remain in
full force and effect until the earlier of (i) payment and performance in full
of the Obligations, or (ii) the return to Pledgor of all of the Pledged
Collateral and all instruments of transfer or assignment with respect thereto,
(b) be binding upon Pledgor and its successors and assigns, and (c) inure,
together with the rights and remedies of Pledgee hereunder, to the benefit of
Pledgee and Pledgee's heirs, personal representatives, successors, and assigns.
14. Governing Law; Terms. This Agreement shall be governed by and
construed in accordance with the laws of England and Wales without regard to
principles of conflict of laws.
15. Submission to Jurisdiction. Pledgor hereby irrevocably agrees to
submit to personal jurisdiction of the courts of England situated in London,
England in any action or proceeding arising under this Agreement or otherwise
relating to the Obligations and consents to the service of process of such court
in the same manner as is provided in Section 12 for the giving of Notices.
16. Expenses; Return of Remaining Pledged Shares.
(a) Pledgor shall be fully responsible for and shall pay costs
and expenses incurred by Pledgee in enforcing Pledgee's rights under this
Agreement or otherwise with respect to the Obligations, including, but not
limited to, attorneys' fees, court costs and disbursements and costs relating to
the disposition of the Pledged Collateral in accordance with Section 10 hereof.
(b) Upon satisfaction of the Obligations, Pledgor shall be
entitled to the prompt return of all of the Pledged Collateral, to or at the
direction of Pledgor, which have not been used or applied toward the
satisfaction of the Obligations.
4
<PAGE> 5
IN WITNESS WHEREOF, Pledgor has caused this Agreement to be duly
executed and delivered by its officer thereunto duly authorized as of the date
first above written.
PLEDGOR:
ORWELL PROPERTIES, INC.
By: /s/Phillip Geoffrey Cook
--------------------------------------
Title: Chairman
PLEDGEE:
TRESOR WORLDWIDE LIMITED
By: /s/Allan Hamilton Burnside
--------------------------------------
Title: Director
5
<PAGE> 1
Exhibit 10.8
Kings Road Entertainment
1901 Avenue of the Stars Los Angeles California 90067
Phone: (310) 552-0057 Fax: (310) 277-4468
April 27, 1999
Via facsimile (212) 459-9201
Mr. Ismail Merchant
Merchant Ivory Productions
250 West 57th Street, Suite 1913A
New York, NY 10107
Dear Mr. Merchant:
This letter will confirm that Merchant Ivory Productions ("MIP") and Kings Road
Entertainment, Inc. ("KREN") will create a company to be called Merchant Ivory
Film Distribution, LLC ("MIFD"), for the purpose of worldwide distribution of
various visual entertainment material (films).
The outline of the transaction for the Joint Venture ("Venture") follows:
1) Investment: MIP will contribute $250,000 for a consideration in total of
75% of the Joint Venture. KREN will contribute Two Hundred Fifty
Thousand Dollars ($250,000) and Two Hundred Fifty Thousand (250,000)
KREN stock options, exercisable at the average price of the five day
period prior to the date of execution of this Joint Venture Agreement,
plus $0.125 (provided that, in no event shall the exercise price exceed
$3.50), into the Venture, for a consideration in total of 25% of the
Venture.
2) Ownership: The ownership of the new entity will be 25% KREN and 75% MIP.
3) Overhead and Related Costs: The Venture will contribute fifty (50%) of
the New York City Office rent and related telephone and office
expenditures as well as a Ten Thousand Dollar ($10,000) budget per
festival, for each major film festival (i.e. Cannes, Venice, Berlin,
etc.) that MIFD personnel attend.
4) Board of Directors: The directors of the newly formed company shall be
provided as follows: three (3) directors appointed by MIP and two (2)
directors appointed by KREN.
5) Auditors: Richard A. Eisner & Co. of New York, NY.
6) Bank: Bank of New York
<PAGE> 2
Page 2 - Agreement
April 27, 1999
7) MIFD shall have the opportunity to acquire distribution rights to MIP
films (library and new projects) as such rights are available (to be
determined in MIP's sole discretion) in good faith, upon terms to be
negotiated at arms length; provided, however, nothing in this agreement
shall obligate MIP to distribute its film library or future productions
through MIFD.
8) To further this Venture, MIP will use its reasonable best efforts to
search out completed film projects of accomplished filmmakers that may
be readily licensed for distribution in all media in significant markets
(in North America whenever reasonably available) to help build a
successful library for the Venture. Neither MIP nor KREN may on its own,
"carve out" any rights separately from any films licensed from third
parties intended for the Venture. Both MIP and KREN will extend, to
MIFD, the opportunity to acquire the distribution rights to MIP and KREN
films to the extent same are reasonably available, in good faith through
agreements negotiated at arms length.
9) KREN will provide a revolving line of credit of up to Five Hundred
Thousand Dollars ($500,000) toward the print and advertising expenses
incurred in the distribution of MIFD films. KREN will charge MIFD an
interest rate (which shall be exclusive of fees and charges) not to
exceed the rate charged to KREN by its financial institution on all
money drawn from the line of credit. Eighty percent (80%) of the net
revenue of each MIFD film will be used to payback such line of credit.
10) The parties intend to enter into a more formal agreement incorporating
the above terms as well as other standard terms for agreements of this
nature. Unless or until such more formal agreement is entered into, this
agreement will be deemed a binding agreement and funding shall occur not
later than May 5, 1999.
11) This agreement shall be construed in accordance with the laws in the
State of New York applicable to agreements, which are executed and fully
performed within said state.
12) KREN agrees to indemnify MIP, its employees assignees and licensees from
and against any and all damages, losses, or expenses incurred or
suffered by MIP as a result of any representaions, warranties, or
agreements made by MIP by or on behalf of KREN.
13) MIP agrees to indemnify KREN, its employees, assignees and licenseses
from and against any and all damages, losses, or expenses incurred or
suffered by KREN as a result of any representations, warranties, or
agreements made to KREN by or on behalf of MIP.
For: Kings Road Entertainment, Inc. For: Merchant Ivory Productions
By: /s/ Phillip Geoffrey Cook By: /s/ Ismail Merchant
-------------------------------- --------------------------------
Phillip G. Cook Ismail Merchant
Chairman
2
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Ticker, Inc.
Orwell Properties, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-KSB FOR THE FISCAL YEAR ENDED APRIL 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 55,583
<SECURITIES> 0
<RECEIVABLES> 364,972
<ALLOWANCES> (32,630)
<INVENTORY> 157,486
<CURRENT-ASSETS> 1,545,411
<PP&E> 231,398
<DEPRECIATION> (221,630)
<TOTAL-ASSETS> 3,654,518
<CURRENT-LIABILITIES> 1,481,779
<BONDS> 0
0
0
<COMMON> 24,607,294
<OTHER-SE> (22,533,482)
<TOTAL-LIABILITY-AND-EQUITY> 3,654,518
<SALES> 765,116
<TOTAL-REVENUES> 837,299
<CGS> 304,243
<TOTAL-COSTS> 1,193,138
<OTHER-EXPENSES> 3,759,668
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 433,276
<INCOME-PRETAX> (4,548,783)
<INCOME-TAX> (11,924)
<INCOME-CONTINUING> (4,536,859)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,536,859)
<EPS-BASIC> (1.71)
<EPS-DILUTED> (1.71)
</TABLE>
