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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, 2000 Commission File No. 0-14234
KINGS ROAD ENTERTAINMENT, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
Delaware 95-3587522
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
</TABLE>
3489 West Cahuenga Blvd., Suite D
Hollywood, California 90068
(Address of principal executive office)
Issuer's telephone number: (323) 512-5045
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $.01
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $661,251
As of August 15, 2000, the aggregate market value of the voting stock held by
non-affiliates (based on the closing sales price as reported by NASDAQ) was
approximately $663,487 (assuming all officers and directors are deemed
affiliates for this purpose).
As of August 15, 2000 the registrant had 3,541,140 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.
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 then
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. During the fiscal year ended
April 30, 2000, this note, plus its accrued interest, was converted into the
Company's common stock pursuant to an agreement between the Company and the
sellers of the Immediate shares dated as of March 12, 1999. 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, after carefully
evaluating the carrying value of its investment in Immediate, decided to
completely write down its investment in Immediate. This decision was based upon
Immediate's continued operating losses, changes in management, a "going
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concern" opinion rendered by Immediates's auditors and a material decrease in
the price of Immediate's common stock. The Company is presently evaluating
various alternatives with respect to recovering its investment in Immediate.
On May 20, 2000, the Company announced that it would acquire Animal Town,
Inc. ("Animal Town"), a privately-held direct mail order catalogue company that
markets children's toys, games, crafts and books specializing in cooperative
play and development, animal protection and environmental awareness. The Company
has agreed to acquire all of the outstanding common stock of Animal Town in
exchange for approximately $51,000 in cash and the issuance of up to 97,026
restricted shares of the Company's commons stock, the exact number of shares to
be determined based upon a debt-for-equity exchange offer to be made to existing
Animal Town creditors. The Company also agreed, on an interim basis in advance
of the closing of the acquisition, to provide a secured credit facility in order
for Animal Town to immediately commence production of a Fall 2000 catalog. The
Company believes that there are numerous opportunities in the children's
educational and entertainment markets and intends to develop a focused strategy
that, in the future, will capitalize on these opportunities.
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 is developing between
approximately five and fifteen motion picture scripts or ideas for possible
future production. During fiscal years 2000 and 1999, the Company spent
approximately $54,000 and $176,000, respectively, on development activities. The
Company expects to increase its expenditures on development activities,
including the purchase of books and screenplays, and anticipates that it will
spend between $50,000 and $150,000 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.
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As of April 30, 2000, 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
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,
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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.
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, 2000, the Company employed three full-time employees. The
Company is subject to the terms of certain industry-wide collective bargaining
agreements with the Writers Guild of America, the Directors Guild of America,
and the Screen Actors Guild, among others, relating to its completed films and
projects in development. 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.
The Company expects the children's educational and entertainment markets
to be highly competitive as well, with numerous well known and well financed
companies providing a broad array of children's products and merchandise.
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REGULATION
Distribution rights to motion pictures are granted legal protection under
the copyright laws of the United States and most foreign countries, which
provide substantial civil and criminal sanctions for unauthorized duplication
and exhibition of motion pictures. Motion pictures, musical works, sound
recording, artwork, still photography and motion picture properties are each
separate works subject to copyright under most copyright laws, including the
United States Copyright Act of 1976, as amended. The Company plans to take all
appropriate and reasonable measures to obtain agreements from licensees to
secure, protect and maintain copyright protection for all motion pictures under
the laws of all applicable jurisdictions.
The Classification and Rating Administration of the Motion Picture
Association of America, an industry trade association, assigns ratings for
age-group suitability for motion pictures. The Company submits its pictures for
such ratings. Management's current policy is to produce or participate in the
production of motion pictures that qualify for a rating no more restrictive than
"R".
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 3489 West
Cahuenga Blvd., Suite D, Hollywood, California 90068 and consist of
approximately 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 OTC Bulletin Board under the
symbol: "KREN". The following table sets forth the high and low sales prices of
the Company's common stock during the years ended April 30, 1999 and 2000:
<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>
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<TABLE>
<CAPTION>
FISCAL YEAR 2000 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter 3 13/16 1 1/2
Second Quarter 1 5/8 1/2
Third Quarter 7/8 3/8
Fourth Quarter 7/16 3/8
</TABLE>
As of August 15, 2000, the Company had approximately 217 stockholders of
record.
In October 1999, the Company's common stock was de-listed from the NASDAQ
SmallCap Market because the Company failed to meet certain minimum listing
maintenance criteria set by NASDAQ.
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.
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
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. During the fiscal
year ended April 30, 2000, this note, plus its accrued interest, was converted
into the Company's common stock pursuant to an agreement between the Company and
the sellers of the Immediate shares dated as of March 12, 1999. 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, after carefully
evaluating the carrying value of its investment in Immediate, decided to
completely write down its investment in Immediate. This decision was based upon
Immediate's continued operating losses, changes in management, a "going concern"
opinion rendered by Immediate's auditors and a material decrease in the price of
Immediate's common stock. The Company is presently evaluating various
alternatives with respect to recovering its investment in Immediate.
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On May 20, 2000, the Company announced that it would acquire Animal Town,
Inc. ("Animal Town"), a privately-held direct mail order catalogue company that
markets children's toys, games, crafts and books specializing in cooperative
play and development, animal protection and environmental awareness. The Company
has agreed to acquire all of the outstanding common stock of Animal Town in
exchange for approximately $51,000 in cash and the issuance of up to 97,026
restricted shares of the Company's commons stock, the exact number of shares to
be determined based upon a debt-for-equity exchange offer to be made to existing
Animal Town creditors. The Company also agreed, on an interim basis in advance
of the closing of the acquisition, to provide a secured credit facility in order
for Animal Town to immediately commence production of a Fall 2000 catalog. The
Company believes that there are numerous opportunities in the children's
educational and entertainment markets and intends to develop a focused strategy
that, in the future, will capitalize on these opportunities.
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, 2000, the Company did not produce any films. The Company's
most recent picture, The Redemption, was completed in early 1995 and premiered
on the Home Box Office pay television service in August 1995. Subject to its
overall strategic direction, the Company may continue to produce these types of
films but will generally seek to produce films with budgets between $3,000,000
and $10,000,000. The Company expects to increase its expenditures on development
activities, including the purchase of books and screenplays, in order 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. Although the
Company has not produced any films since 1995, the Company believes its present
development activities, which may include the sale of certain projects to
non-affiliated companies, may achieve commercial success.
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As revenues have been recognized for each film, the Company has amortized
the costs incurred in producing that film. The Company has amortized film costs
under the income forecast method as described in Financial Accounting Standards
Board Statement No. 53, which provides that film costs are amortized for a
motion picture in the ratio of revenue earned in the current period to the
Company's estimate of total revenues to be realized. The Company's management
has periodically reviewed its estimates on a film-by-film basis and, when
unamortized costs exceed net realizable value for a film, that film's
unamortized costs have been written down to net realizable value. Costs relating
to projects that have been abandoned or sold before being produced have been
charged to overhead and capitalized to film costs in the year that event occurs.
RESULTS OF OPERATIONS
For the year ended April 30, 2000, feature film revenues were
approximately $660,000 as compared to approximately $765,000 for the year ended
April 30, 1999. The decrease in feature film revenues of approximately 14%
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 different overall
strategic plan, the Company expects that its feature film revenues will continue
to decline. Interest income decreased to approximately $1,000 for the year ended
April 30, 2000 from approximately $72,000 reflecting the substantial decrease in
excess cash held during the year versus the same period last year.
Film cost amortization decreased to approximately $80,000, approximately
12% of feature film revenues, for the year ended April 30, 2000 from
approximately $304,000, approximately 40% of feature film revenues, for the year
ended April 30, 1999. This decrease results primarily from the fact that a
significant portion of the costs associated with the Company's films has
previously been amortized. Selling expenses decreased by approximately 84% to
approximately $19,000 during the fiscal year ended April 30, 2000 versus
approximately $118,000 during the previous fiscal year. This decrease results
primarily from decreased 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 and decreased provisions for bad debt reserves.
General and administrative costs decreased by approximately 13% to
approximately $674,000 during the year ended April 30, 2000 versus approximately
$771,000 during the same period last year. Interest expense decreased to
approximately $86,000 during the year ended April 30, 2000 from approximately
$433,000 during the year ended April 30, 1999. This decrease results primarily
from an interest charge during the year ended April 30, 1999 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.
During the year ended April 30, 2000, the Company had no equity in the
losses of affiliates versus approximately $476,000 for the year ended April 30,
1999. The equity in losses of affiliates during the year ended April 30, 1999
represented the Company's share of losses incurred by Immediate. During the
years ended April 30, 2000 and 1999, the Company recorded valuation allowances
of approximately $1,979,000 and $3,284,000, respectively, reflecting the
Company's uncertainty regarding the recoverability of its investment in
Immediate. As of April 30, 2000, the Company had recorded equity in losses of
affiliates and/or valuation allowances for the full amount of its investment in
Immediate. Immediate has experienced substantial recurring operating losses and
has a significant working capital deficit. During the year ended April 30, 2000,
the Company also recorded a valuation allowance for the full amount of its
investment in Merchant Ivory Distribution LLC. (SEE NOTE C - INVESTMENTS).
During the
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period ended April 30, 2000, the Company recorded a gain on the sale of its
investment in Star TV. The gain results from the forgiveness by Star of a loan
in the principal amount of $250,000 plus accrued interest of $10,538 that
occurred as part of a transaction whereby the Company sold its investment in
Star back to Star. (SEE NOTE C - INVESTMENTS AND NOTE E - NOTES PAYABLE).
During the year ended April 30, 2000, the Company incurred a net loss of
approximately $2,172,000 versus a net loss of approximately $4,537,000 during
the year ended April 30, 1999. The loss for the year ended April 30, 2000
results primarily from the valuation allowances recorded by the Company to
reflect the recoverability of certain investments, primarily Immediate. The
decrease in the Company's net loss of approximately $2,365,000 as compared to
the year ended April 30, 1999 results primarily from (i) the decrease in equity
in losses of affiliates and valuation allowances of approximately $1,530,000,
(ii) the interest charge of approximately $427,000 recorded during the year
ended April 30, 1999 associated with the issuance of a convertible note and
(iii) the decrease in film cost amortization and selling expenses of
approximately $323,000. During the years ended April 30, 2000 and 1999, 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, 2000 was motion picture licensing income. Except for the
financing of film production costs, management believes that its existing cash
resources will be sufficient to fund its ongoing operations.
During the year ended April 30, 2000, the Company's operating activities
generated approximately $919,000 of cash that was primarily used to repay a
convertible note in the principal amount of $1,000,000. 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. As of April 30, 2000, the Company had cash and cash
equivalents of approximately $85,000 as compared to cash, cash equivalents and
restricted cash of approximately $1,056,000 as of April 30, 1999.
FUTURE COMMITMENTS
On May 20, 2000, the Company announced that it would acquire all of the
outstanding common stock of privately-held Animal Town for a combination of
$51,000 in cash and the issuance of up to 97,026 shares of the Company's common
stock. Further, the Company agreed, on an interim basis in advance of the
closing of the acquisition, to provide a secured credit facility in order for
Animal Town to immediately commence production of a new catalogue. The Company
believes that is has sufficient working capital to undertake this new business
activity.
The Company does not have any other material future commitments.
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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
None.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the directors
and executive officers of the Company. Directors are elected at the annual
meeting of stockholders to serve for staggered terms of three years each and
until their successors are elected and qualified. Officers serve at the request
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>
Michael L. Berresheim 47 Chairman and Chief Executive 2001
Officer
David W. Dube 44 Director, President and Chief 2000
Operating Officer
James P. Leaderer 46 Director 2000
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
MICHAEL L. BERRESHEIM has been a director of the Company since November
1999 and began serving as the Company's Chairman and Chief Executive Officer in
April 2000. Mr. Berresheim was the Chairman and Chief Executive Officer of
publicly traded Immediate Entertainment Group, Inc. from November 1997 to March
2000. From November 1993 to November 1997 Mr. Berresheim was Chairman of Media
and Music Services Holding Corp., a music publishing company. Prior to November
1993, Mr. Berresheim was self-employed, during
11
<PAGE> 12
which time he was associated with Filmtrax, an independent film music publisher
in Europe and founded King Biscuit Flower Hour Records, a U.S. based music
label.
DAVID W. DUBE has been a director of the Company since April 1999 and
became the Company's President and Chief Operating Officer in April 2000. From
June 1999 until April 2000, Mr. Dube was the Company's Chairman and Chief
Executive Officer. From September 1997 to October 1999, Mr. Dube was Senior Vice
President of FAB Capital Corporation, a merchant banking and securities firm.
Mr. Dube was President and Chief Executive Officer of Optimax Industries, Inc.,
a publicly traded company with interests in the horticultural, decorative
giftware and truck parts accessories industries from July 1996 to September
1997. From February 1991 to June 1996, Mr. Dube was the principal of Dube &
Company, a financial consulting firm. Mr. Dube currently serves as a director of
SafeScience, Inc., CareerEngine Network, Inc., New World Wine Group, Ltd. and
several other privately held companies. Mr. Dube received undergraduate and
graduate degrees from Suffolk University and an additional graduate degree from
Bentley College. Mr. Dube is certified public accountant in the State of New
Hampshire, holds various general and principal securities licenses and is an
adjunct instructor of accounting for the Center for Professional Education, Inc.
JAMES P. LEADERER has been a director of the Company since November 1999.
Mr. Leaderer currently serves as the President and Chief Executive Officer of
Directrade, Inc., a 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 holds various general and principal
securities licenses.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company believes that Mr. Berresheim is currently delinquent in
filing a Form 4 since joining the Company's board of directors. 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, 2000 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 $100,000 in any of the last three fiscal years.
12
<PAGE> 13
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- STOCK OPTIONS ALL OTHER
NAME AND POSITION YEAR SALARY($) BONUS($) (SHARES) COMPENSATION
----------------- ---- --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Michael L. Berresheim(1)
Chairman and Chief 2000 $ 10,000 $ 0 0 $ 0
Executive Officer
David W. Dube(2)
President and Chief 2000 100,000 0 175,000 0
Operating Officer
Phillip G. Cook(3)
Former Chairman and 2000 0 0 0 0
Chief Executive Officer 1999 0 0 0 0
Kenneth I. Aguado(4)
Former Chairman and 1999 71,085 75,334 66,667 1,154(5)
Chief Executive Officer 1998 115,269 10,000 27,708 64,314(6)
</TABLE>
---------------
(1) Mr. Berresheim became the Company's Chief Executive Officer in
April 2000.
(2) Mr. Dube was the Company's Chief Executive Officer from June 1999
until his resignation from that position in April 2000.
(3) Mr. Cook was the Company's Chief Executive Officer from November
1998 until his resignation in June 1999.
(4) Mr. Aguado was the Company's Chief Executive Officer from October
1996 until his resignation in November 1999.
(5) Represents contributions made by the Company on behalf of Mr.
Aguado pursuant to the Company's SIMPLE IRA plan.
(6) 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.
OPTION GRANTS
The following table sets forth the individual grants of stock options
made during the fiscal year ended April 30, 2000 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>
David W. Dube 175,000 100% $0.94 09/12/2004
</TABLE>
OPTION EXERCISES AND YEAR-END VALUES
Shown below is information with respect to ownership by the Named
Officers of options and option values as of April 30, 2000. No options were
exercised during the year ended April 30, 2000.
13
<PAGE> 14
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT APRIL 30, 2000 AT APRIL 30, 2000(1)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David W. Dube 25,000 150,000 $0 $0
</TABLE>
----------
(1) Based upon the difference between the closing stock price on April
30, 2000 and the option exercise price.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of July 31, 2000,
concerning ownership of shares of Common Stock by each person who is known by
the Company to own beneficially more than 5% of the issued and outstanding
Common Stock of the Company:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS
------------------------------------ --------- ----------
<S> <C> <C>
Michael Berresheim 1,560,997(1)(2) 44.1%
Gerauer Street
58A Moerfelden
Walldorf, Germany 64546
MBO Music Verlag GmbH 988,493 27.9%
Gerauer Street
58A Moerfelden
Walldorf, Germany 64546
West Union Leasing 572,504(2) 16.2%
10 Greycoat Place
1 Premier House
London SW1 United Kingdom
Wavecount, Inc. 300,000(3) 8.5%
42 Broadway, Suite 1101
New York, New York 10004
Randy Strausberg 300,000(3) 8.5%
42 Broadway, Suite 1101
New York, New York 10004
</TABLE>
----------
(1) Includes 988,493 shares owned by MBO Music Verlag GmbH of which
Mr. Berresheim is the Managing Director and sole shareholder and
572,504 shares of West Union Leasing Limited ("West Union"), a
trust whose beneficiary is Mrs. Johanna Ammons, the mother of Mr.
Berresheim.
(2) 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 722,504 shares, 20.4% of the Company's outstanding
common stock. Mr. Berresheim's beneficial ownership would likewise
increase to 1,710,997 shares, 48.3% of the Company's outstanding
common stock.
(3) Mr. Strausberg is the President and a significant shareholder of
Wavecount, Inc., the registered holder of 300,000 shares of the
Company's common stock.
14
<PAGE> 15
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of July 31, 2000, certain information
concerning ownership of shares of Common Stock by each director of the Company
and by all executive officers and directors of the Company as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF DIRECTORS OR NUMBER OF PERCENT OF
NUMBER OF PERSONS IN GROUP SHARES CLASS
-------------------------------- --------- ----------
<S> <C> <C>
Michael L. Berresheim 1,560,997(1) 42.7%
Gerauer Street
58A Moerfelden
Walldorf, Germany 64546
David W. Dube 137,500(2) 3.8%
12 East 33rd Street, 12th Floor
New York, New York 10016
James P. Leaderer 25,000(3) Less than 1.0%
135 East 54th Street, 14th Floor
New York, New York 10022
All Executive Officers and
Directors as a Group (3 persons) 1,723,497 47.2%
</TABLE>
----------
(1) Includes 988,493 shares owned by MBO Music Verlag GmbH of which
Mr. Berresheim is the Managing Director and sole shareholder and
572,504 shares of West Union Leasing Limited ("West Union"), a
trust whose beneficiary is Mrs. Johanna Ammons, the mother of Mr.
Berresheim.
(2) Includes options to purchase up to 87,500 shares that are
currently exercisable. Does not include options to purchase up to
87,500 shares that are not currently exercisable.
(3) Includes options to purchase up to 25,000 shares that are
currently exercisable. Does not include options to purchase up to
25,000 shares that are not currently 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
During the fiscal year ended April 30, 2000, the Company has advanced to
Immediate Entertainment Group, Inc. ("Immediate") or made payments to third
parties on Immediate's behalf the aggregate sum of $93,000. An aggregate of
approximately $240,000 is currently due to the Company from Immediate. In order
to repay these advances, the Company has reached an agreement with Immediate
whereby Immediate will transfer to the Company ownership to certain film
projects currently being developed by Immediate. The basis for determining the
value of these projects will be the historical costs paid by Immediate for
development of the projects that will then reduce, on a dollar-for-dollar basis,
amounts due from Immediate. The Company has recorded a write down of
approximately $185,000 to reflect the difference between the historical costs
for the projects the Company expects to receive and the amount due to the
Company from Immediate. Mr. Berresheim, the Company's Chairman and Chief
Executive Officer, was an officer of Immediate and continues to be a significant
shareholder of Immediate.
15
<PAGE> 16
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-B)
3.1 Restated Certificate of Incorporation of Registrant.(1)
3.2 Bylaws of Registrant.(2)
10.1 1998 Stock Option Plan.(1)
21 Subsidiaries of Registrant.(3)
27 Financial Data Schedule.(5)
----------
(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-KSB for the fiscal year ended
April 30, 1999.
(4) Filed electronically with Securities and Exchange Commission,
omitted in copies distributed to shareholders or other persons.
(b) FORMS 8-K
None
(c) SEE (a) ABOVE
16
<PAGE> 17
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: August 18, 2000 KINGS ROAD ENTERTAINMENT, INC.
By: /s/Michael Berresheim
-------------------------------------
Michael Berresheim,
Chief Executive 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/Michael Berresheim Chairman of the Board of August 18, 2000
-------------------------
MICHAEL BERRESHEIM Directors and Chief Executive
Officer (Principal Executive
Officer)
/s/David Dube Director, President and Chief August 18, 2000
-------------------------
DAVID DUBE Operating Officer (Principal
Financial and Accounting Officer)
/s/James Leaderer Director August 18, 2000
-------------------------
JAMES LEADERER
</TABLE>
17
<PAGE> 18
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 2000
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheet as of April 30, 2000 F-3
Consolidated Statements of Operations for the Years
Ended April 30, 2000 and 1999 F-4
Consolidated Statements of Shareholders' Equity
for the Years Ended April 30, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the Years
Ended April 30, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 19
HJ & ASSOCIATES, LLC
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. and Subsidiaries (the "Company") as of April 30, 2000, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years ended April 30, 2000 and 1999. 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 audits.
We conducted our audits 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 consolidated 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 audits provide a
reasonable basis for our 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, 2000 and the results of their
operations and their cash flows for the years ended April 30, 2000 and 1999, in
conformity with generally accepted accounting principles.
/s/HJ & Associates, LLC
-----------------------------
HJ & Associates, LLC,
Salt Lake City, Utah
August 14, 2000
F-2
<PAGE> 20
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
APRIL 30, 2000
--------------
<S> <C>
ASSETS
Cash and Cash Equivalents $ 85,159
Accounts Receivable, net of allowance of $32,630 99,958
Due from Related Party 55,660
Film Costs, net of amortization of $168,440,044 131,636
Prepaid Expenses 12,477
Fixed Assets 10,338
Other Assets 1,990
------------
TOTAL ASSETS $ 397,218
============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts Payable $ 189,068
Accrued Expenses 3,160
Deferred Revenue 1,900
------------
TOTAL LIABILITIES 194,128
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value, 12,000,000 shares
authorized, 3,541,140 shares issued and outstanding 35,411
Additional Paid-In Capital 24,872,798
Deficit (24,705,119)
------------
TOTAL SHAREHOLDERS' EQUITY 203,090
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 397,218
============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE> 21
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
2000 1999
----------- -----------
<S> <C> <C>
REVENUES
Feature Films $ 659,941 $ 765,116
Interest Income 1,310 72,183
----------- -----------
661,251 837,299
COSTS AND EXPENSES
Film Cost Amortization 79,554 304,243
Selling Expenses 19,073 117,996
General & Administrative Expenses 674,252 770,899
Interest Expense 85,545 433,276
----------- -----------
858,424 1,626,414
----------- -----------
OPERATING LOSS (197,173) (789,115)
Equity in Losses of Affiliates 0 475,695
Adjustment in Valuation of Investments 2,229,475 3,283,973
Gain on Sale of Investment in Star TV (260,538) 0
----------- -----------
LOSS BEFORE INCOME TAXES (2,166,110) (4,548,783)
Provision for Income Taxes 5,527 (11,924)
----------- -----------
NET LOSS $(2,171,637) $(4,536,859)
=========== ===========
Net Loss Per Share - Basic $ (0.62) $ (1.71)
=========== ===========
Weighted Average Number of Common
Shares - Basic 3,484,810 2,650,532
=========== ===========
Net Loss Per Share - Diluted $ (0.62) $ (1.71)
=========== ===========
Weighted Average Number of Common Shares
and Common Share Equivalents - Diluted 3,484,810 2,650,532
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 22
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Common Additional Retained Total
Stock Stock Paid-In Earnings/ Shareholders'
Shares Amount Capital (Deficit) Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance 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
Issuance of Stock in
Regulation S Offering 91,418 914 158,045 -- 158,959
Issuance of Stock to
Repay Note 60,407 604 141,352 -- 141,956
Net Loss -- -- -- (2,171,637) (2,171,637)
------------ ------------ ------------ ------------ ------------
Balance at April 30, 2000 3,541,140 $ 35,411 $ 24,872,798 $(24,705,119) $ 203,090
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 23
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 30
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(2,171,637) $(4,536,859)
Adjustments to Reconcile Net Loss to Net
Cash Provided By/(Used In) Operating Activities:
Depreciation and Amortization 84,100 221,093
Equity in Losses of Affiliates 0 475,695
Adjustment in Valuation of Investments 2,229,475 3,283,973
Gain on Sale of Investments (260,538) 0
Additional Reserve for Bad Debts 0 37,630
Non-cash Interest Expense 0 427,185
Benefit from Conversion of Note Payable to
Related Party into Common Stock (68,847) 0
Changes in Assets and Liabilities:
Decrease/(Increase) in Restricted Cash 1,000,000 (1,000,000)
Decrease in Accounts Receivable 232,385 3,491
Decrease/(Increase) in Amount Due from Related Party (93,210) (147,000)
Decrease in Prepaid Expenses 3,757 31,607
Decrease/(Increase) in Other Assets 139,189 (138,679)
(Decrease)/Increase in Accounts Payable (81,908) 37,809
(Decrease)/Increase in Accrued Expenses (88,492) 76,652
Decrease in Deferred Revenue (5,375) (2,325)
----------- -----------
NET CASH AND CASH EQUIVALENTS
PROVIDED BY/(USED IN) OPERATING ACTIVITIES 918,899 (1,229,728)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Investments (1,250,000) (2,510,803)
Purchase of Fixed Assets (5,116) (2,988)
Gross Additions to Film Costs (53,704) (70,201)
Sale of Investments 1,260,538 0
----------- -----------
NET CASH AND CASH EQUIVALENTS
USED IN INVESTING ACTIVITIES (48,282) (2,583,992)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Stock 158,959 0
(Repayment)/Issuance of Convertible Note (1,000,000) 1,000,000
Borrowing from Related Parties 0 210,803
----------- -----------
NET CASH AND CASH EQUIVALENTS
(USED IN)/PROVIDED BY FINANCING ACTIVITIES (841,041) 1,210,803
----------- -----------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 29,576 (2,602,917)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 55,583 2,658,500
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 85,159 $ 55,583
=========== ===========
Cash paid for:
Interest 66,034 0
Taxes 4,727 7,362
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 24
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Principals 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. Ticker is a California corporation that was
inactive at April 30, 2000. Orwell is a corporation formed under the laws of the
Territory of the British Virgin Islands that was also inactive at April 30,
2000.
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>
During the year ended April 30, 2000, the Company earned revenue from four
significant customers of approximately $445,000 (67%) of revenues. During the
year ended April 30, 1999, the Company earned revenue from three significant
customers of approximately $516,000 (62%) of revenues.
Revenues from foreign sources were approximately $20,000 and $82,000 in 2000 and
1999, 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 in the year that event occurs.
F-7
<PAGE> 25
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, 2000, approximately 9% 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 - The Company did not experience any problems with its
computer systems relating to year 2000 processing issues.
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 operated in one business segment at April 30,
2000, consisting of the production and distribution of feature length motion
pictures, however, recent events may require segment reporting in future
periods.
F-8
<PAGE> 26
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements Effective Subsequent to 2000 - 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. 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 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 shareholders 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, 1999 have been
reclassified to conform with the presentation of the April 30, 2000 amounts. The
reclassifications have no effect on reported net income.
NOTE B - FILM COSTS
Film costs consist of:
<TABLE>
<CAPTION>
As Of
April 30, 2000
--------------
<S> <C>
Released Films, less amortization $ 0
Films in Production 0
Projects in Development 131,636
--------
$131,636
========
</TABLE>
No interest or overhead was capitalized to film costs during the fiscal years
ended April 30, 2000 and 1999, as no new motion pictures were produced during
those periods.
NOTE C - INVESTMENTS
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, 2000, the Company received
approximately $102,000 from the Partnership.
F-9
<PAGE> 27
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INVESTMENTS (CONTINUED)
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. During the fiscal year ended April 30, 2000,
this note, plus its accrued interest, was converted into the Company's common
stock pursuant to an agreement between the Company and the sellers of the
Immediate shares dated as of March 12, 1999. The Company has evaluated the
recoverability of its investment in Immediate and recorded a valuation allowance
of $1,794,926 during the year ended April 30, 2000, reducing the carrying value
of this investment to $0. An aggregate of approximately $240,000 is currently
due to the Company from Immediate. In order to repay these advances, the Company
has reached an agreement with Immediate whereby Immediate will transfer to the
Company ownership to certain film projects currently being developed by
Immediate. The basis for determining the value of these projects will be the
historical costs paid by Immediate for development of the projects that will
then reduce, on a dollar-for-dollar basis, amounts due from Immediate. The
Company has recorded a write down of approximately $185,000 to reflect the
difference between the historical costs for the projects the Company expects to
receive and the amount due to the Company from Immediate.
On May 12, 1999, the Company purchased approximately 19% of the outstanding
common stock of Star TV AG ("Star") through the Company's wholly owned
subsidiary, Orwell Properties, Inc. On February 15, 2000, the Company sold its
investment in Star back to Star for (i) cash proceeds of $1,000,000 and (ii)
extinguishment of the Star Loan and related accrued interest. The cash proceeds
were used to repay the Convertible Note. SEE NOTE E - NOTES PAYABLE.
On April 27, 1999, the Company entered into an agreement ("Joint Venture
Agreement") with Merchant Ivory Productions ("MIP"). Pursuant to the Joint
Venture Agreement, the Company was required to contribute to Merchant Ivory
Distribution, LLC ("MIFD"), on or before May 5, 1999, $250,000 and options to
purchase up to 250,000 shares of the Company's common stock at an exercise price
equal to the average price of the Company's stock for the five day period prior
to the execution of the Joint Venture Agreement. The Company was 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. On May 18, 1999, the Company
contributed $250,000 to MIFD. As of April 30, 2000, the Company has abandoned
its interest in MIFD and recorded a valuation allowance of $250,000 during the
year ended April 30, 2000 to write-off its investment in MIFD.
NOTE D - FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
As Of
April 30, 2000
--------------
<S> <C>
Office Equipment $11,788
Furniture & Fixtures 4,640
Accumulated Depreciation (6,090)
-------
$10,338
=======
</TABLE>
F-10
<PAGE> 28
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - 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"), collectively, the "Sellers," 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 were due $93,175, $82,424, and $35,204,
respectively, under the Note. The Note, at the option of the Company, was
convertible into shares of the Company's common stock at the rate of $2.35 per
share pursuant to an agreement between the Company and the Sellers dated March
12, 1999. During the fiscal year ended April 30, 2000, the Company converted the
Note plus applicable accrued interest, after the deduction of certain advances
made by the Company to the Sellers or to third parties affiliated with the
Sellers.
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. On
February 15, 2000, the Convertible Note was repaid in full using the cash
proceeds from the sale of the Company's investment in Star. SEE NOTE C -
INVESTMENTS.
On May 17, 1999, the Company entered into a Loan Agreement with Star TV whereby
the Company borrowed $250,000 from Star ("Star Loan") bearing interest at 6% per
annum. On February 15, 2000, the Star Loan was extinguished as part of the
Company's sale of its investment in Star back to Star. SEE NOTE C - INVESTMENTS.
NOTE F - COMMITMENTS AND CONTINGENCIES
On May 20, 2000, the Company announced that it would acquire all of the
outstanding common stock of privately-held Animal Town, Inc. for a combination
of $51,000 in cash and the issuance of up to 97,026 shares of the Company's
common stock. Further, the Company agreed, on an interim basis in advance of the
closing of the acquisition, to provide a secured credit facility in order for
Animal Town to immediately commence production of a new catalog.
The Company leases approximately 500 square feet of office space and various
film element and general storage space on a month-to-month basis. Rent expense
for the Company's office and storage space was $36,262 and $50,822 in 2000 and
1999, respectively.
NOTE G - 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, 2000, options to purchase up to 225,000 shares of the Company's common stock
were outstanding under the 1998 Plan at an exercise price of $0.94 per share. Of
such outstanding options, 50,000 were fully vested and exercisable as of April
30, 2000.
F-11
<PAGE> 29
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G - STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its employee stock options since 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 H - 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>
2000 1999
---- ----
<S> <C> <C>
Computed Expected Tax at Statutory Rate $(702,430) $(1,546,586)
Benefit of Prior Years Amended Tax Returns 0 (19,286)
State and Local Taxes 5,394 6,256
Foreign Taxes 133 1,106
Valuation Allowance 702,430 1,546,586
--------- -----------
$ 5,527 $ (11,924)
========= ===========
</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 $15,525,000 (expiring between 2001 and 2014)
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:
<TABLE>
<CAPTION>
As Of
April 30, 2000
--------------
<S> <C>
Valuation Allowances 2,436,000
Net Operating Loss Carryforwards 6,210,000
Investment Tax Credit Carryforwards 2,166,000
Foreign Tax Credit Carryforwards 400,000
----------
11,212,000
Valuation Allowance (11,212,000)
----------
$0
----------
</TABLE>
A valuation allowance of $11,212,000 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 incurred prior to the change in control will expire prior to
utilization by the Company.
F-12
<PAGE> 30
KINGS ROAD ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - LITIGATION AND CONTINGENCIES
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.
NOTE J - RELATED PARTY TRANSACTIONS
During the fiscal year ended April 30, 2000, the Company has advanced to
Immediate Entertainment Group, Inc. ("Immediate") or made payments to third
parties on Immediate's behalf the aggregate sum of $93,000. An aggregate of
approximately $240,000 is currently due to the Company from Immediate. In order
to repay these advances, the Company has reached an agreement with Immediate
whereby Immediate will transfer to the Company ownership to certain film
projects currently being developed by Immediate. The basis for determining the
value of these projects will be the historical costs paid by Immediate for
development of the projects that will then reduce, on a dollar-for-dollar basis,
amounts due from Immediate. The Company has recorded a write down of
approximately $185,000 to reflect the difference between the historical costs
for the projects the Company expects to receive and the amount due to the
Company from Immediate. Mr. Berresheim, the Company's Chairman and Chief
Executive Officer, was an officer of Immediate and continues to be a significant
shareholder of Immediate. SEE NOTE C - INVESTMENTS.
F-13
