<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-14613
------------------------
CST ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-2614435
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
5901 GREEN VALLEY CIRCLE, SUITE 400, 90230
CULVER CITY, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
</TABLE>
(Registrant's telephone number including area code): (310) 417-3444
------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Par Value $0.15 Per Share
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting common stock held by
non-affiliates, based upon the last reported sale price of the Common Stock on
the American Stock Exchange on September 15, 1995, was approximately
$22,928,403.
As of September 15, 1995, there were 26,203,890 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K is incorporated herein by
reference to the registrant's definitive Proxy Statement relating to its 1995
Annual Meeting of Stockholder which will be filed with the Commission within 120
days after the end of the registrant's fiscal year.
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<PAGE>
PART 1
ITEM 1. BUSINESS
GENERAL:
CST Entertainment, Inc., (the "Company") is the pioneer in the electronic
conversion of black-and-white videotape to color. For the past three to four
years the Company has been restructuring its debt and cutting expenses. In
recent years, the Company restructured or paid off significant portions of its
debt, reduced overhead, raised working capital and upgraded its original analog
color conversion system to a state-of-the-art digital system. In 1994, the
Company engaged a new president and divided itself into four divisions: CST
Coloring ("Coloring"), colorizing old black-and-white productions; CST Color F/X
("Color F/X") -- coloring new black-and-white productions; CST Featurizations
("Featurizations") -- unique blend of new and/or old color and black-and-white
productions; and CST Computoons ("Computoons") -- the Company's animation ink
and paint, composite and software division. The Company is engaged in two
principal business segments: conversion of black-and-white videotape to color
and film licensing/royalty. See below for further description. Certain of the
divisions generate revenues in each of the business segments.
The Company began color conversion operations in 1983. In October 1986, the
Company entered into the film distribution business, when it purchased a film
library for approximately $11.5 million. Anticipated revenues from the library
were never realized and the Company defaulted on a note which was collateralized
by the film library. In September 1989, the note-holder purchased the library
and related assets for $3.75 million in a foreclosure sale. The Company at this
time was working on restructuring itself and was able to maintain operations and
cash flows only because of the concessions and cooperation of its creditors and
customers. In May 1990, the Company's backlog of business was depleted and the
Company was forced to lay-off virtually all of its employees. In November 1990,
Chairman of the Board, Gerald Shefsky relocated from Canada to devote his full
attention as Chief Executive Officer. Since Mr. Shefsky's relocation, the
Company has raised $14 million of working capital, replaced its analog coloring
system with a superior digital system and consummated agreements to restructure
$26.3 million of debt into $7.5 million with $11.1 million converted into equity
and $7.7 million relieved through debt forgiveness. Such accomplishments have
helped in transforming stockholders' equity from a negative $17.2 million in
June 1989 to a positive $3.4 million in June 1995. In February 1995, Mr. Shefsky
relocated back to Canada in conjunction with his relinquishment as CEO.
The Company completed its restructuring during fiscal 1994 and currently is
continuing to expand and diversify its business base, securing production work
and generating products for its own library. To accomplish these goals, in 1994
the Company engaged a new president and divided itself into four divisions. The
Company's new President and Chief Operating Officer, Jonathan D. (Jody) Shapiro,
became Chief Executive Officer in December 1994. During fiscal year 1995, Mr.
Shapiro negotiated a multi-million dollar colorizing deal with
Metro-Goldwyn-Mayer/United Artists
("MGM/UA"), completed an approximately $2 million contract for colorizing 71
"The Little Rascals" episodes, transacted to colorize 38 episodes of Warner
Brothers 1930's cartoons, entered into a licensing agreement with NBC
Entertainment for certain CST library products, and involved the Company in its
first television series airing on The Fox Television Network. In addition, the
Company also completed the first sale of its animation software. The Company is
currently in negotiations for production work in all four divisions. Due to
recent marketing efforts and the improved quality of completed products, the
Company anticipates continued growth in all of its divisions.
BUSINESS SEGMENTS (ALSO SEE NOTE 18 TO THE FINANCIAL STATEMENTS WHICH IS
INCORPORATED HEREIN BY REFERRED):
The Company's primary line of business is the electronic conversion of
black-and-white videotape into color.
2
<PAGE>
The Company's second line of business is the licensing and distribution of
its film library. The Company also retains a participatory interest in color
converted material owned by other entities. Revenues generated by products
produced in the Company's Featurizations and Computoons divisions would
generally be reflected under this segment as well as revenues generated from the
sale of colorized public domain movies. The Company reflects revenues from this
segment as licensing/ royalty income.
In February 1993, the Company entered into a subcontracting agreement and a
joint venture agreement with a third-party in an effort to penetrate the
European color conversion market. The Company and its joint venturer each own
half of the joint venture. The Company has the exclusive right to color convert
materials for the joint venture for a fee equal to two-thirds of the fee charged
by the joint venture to its color conversion customers. The Company has equal
rights to accept or reject projects submitted to the joint venture and the
contract price for projects. The joint venture is responsible for all
pre-production, art and post production work. The Company is responsible for
only the color conversion. As equal owners, the Company and its joint venturer
will share equally in any profits generated from the joint venture. In 1993, the
joint venture conducted limited operations in Paris, France which have since
been discontinued. In 1994 and 1995, the joint venture's operations were
minimal. The Company believes it has no further obligation under the terms of
the joint venture agreement.
DESCRIPTION OF BUSINESS:
PRINCIPAL PRODUCTS: The Company's principal product is the electronic
conversion of black-and-white videotape into color. The principal customers of
the Company are U.S. and international owners of black-and-white product,
usually movie and television studios, for the Coloring and Featurizations
divisions. The principal customers for the Color F/X division are advertising
agencies, music video production companies and producers of new television
programs. The color converted product is normally distributed through television
and cable stations and also through home video. The Company has suffered
technical, production and economic setbacks in the past. The Company operated at
a loss for 1995 (see Statements of Operations for net loss for the three years
ended June 30, 1995). In 1995, the Company financed operations and cash flow
primarily through private placements of equity. The Company continues to refine
its color conversion system and has completed its animation software for the
Computoons division.
SOURCES OF RAW MATERIALS: The amount of old black-and-white product in the
world is a finite number. The Company does not believe it will color convert so
much product as to deplete the sources of old black-and-white product valuable
enough to color convert. The growth of new product produced in black-and-white
for Color F/X increased dramatically in 1994 and 1995. Recently, the Company has
seen an increase in domestic and international entities interested in color
conversion.
PATENTS: The Company's color conversion system is covered by two patents.
The Company expects to file for patent and copyright protection on all products,
software codes and materials it creates. There can be no assurance that the
Company's current patents, or future patents and/or copyrights, if challenged,
will be upheld, nor can there be any assurance that a prospective competitor
will not be able to develop the means of bypassing claims covered by these
patents. Although the Company does not believe that the loss of its patents
would impair its ability to achieve successful operations, the loss of its
patents might facilitate the entry of future competitors into the Company's
markets. Because the Company's patents are not and can no longer be registered
in foreign countries, the Company has no protection under these patents outside
the United States. In August 1995, the Company filed for new patents based on
new significant coloring conversion development.
PRIMARY CUSTOMERS: The Company's primary customers for the year ended June
30, 1993 were Turner Entertainment, Inc. and International Creative Exchange.
The Company completed its contract with Turner in October 1992 and has not
provided color conversion work for Turner since that time. The Company had other
major customers in fiscal 1993 through 1995 as described in Note 1 to the
Financial Statements, which is incorporated herein by reference.
3
<PAGE>
BACKLOG: The Company continues to have discussions with numerous entities
for production work in all four of its divisions. As of September 1995, the
Company believes it has a firm sales backlog of almost $4 million, a portion of
which is expected to be realized in revenues in 1996. Also as of September 1995,
the Company is in negotiations for over $20 million of production work, a
portion of which is expected to be realized in 1996. There can be no assurance
that the Company will be able to materialize these verbal indications in the
form of written contracts. At the same time last year, the Company had verbal
indications of $10 million of which approximately $3 million was realized in
1995.
COMPETITION: The Company's primary competition in the color conversion
business was American Film Technologies, Inc. ("AFT"). AFT filed for bankruptcy
in fiscal 1994 and, to the best of the Company's knowledge, is no longer
providing coloring service. The Company does not know of any other major
competitors.
RESEARCH AND DEVELOPMENT: The Company began research and development of the
digital coloring system in 1990. In December 1991, the Company substantially
completed the software development and installation and production operation
began. The Company continues to improve and modify the system in order to
increase production and quality. During fiscal 1993 and 1994, the Company
completed its first product developed by its animation software. Subsequent to
this, the Company has been capitalizing animation software costs. See Statements
of Operations for research and development expenses and Statements of Cash Flows
for capitalized software costs incurred in the three years ended June 30, 1995
and Management's Discussion & Analysis of Financial Condition & Results of
Operations.
EMPLOYEES: As of June 30, 1995, the Company employed approximately 140
full-time employees, consisting of 15 administrative personnel and officers,
five post production personnel, two maintenance personnel, six engineers and
approximately one-hundred twelve color conversion operations personnel. The
Company expects it will hire additional employees as needed.
ITEM 2. PROPERTIES
The Company's operations, including all production, engineering and
executive offices, are located at its 18,024 square foot facility at 5901 Green
Valley Circle, Suite 400, Culver City, California 90230. The lease commenced on
February 1, 1993 and was amended on April 28, 1994 for additional space
beginning October 1, 1994. The lease terminates September 30, 1999 and may be
extended another one to five years. The Company believes its facility is
adequate for its current and future production capacity.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various other legal proceedings, all of which are
considered routine and incidental to the business of the Company and are not
material to its financial condition and operations. The Company is not a party
to any litigation which is expected to have a material adverse effect upon the
Company's financial condition or results of operations.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
4
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's stock is listed on the American Stock Exchange under the
symbol CLR. The following table sets forth the high and low sale prices reported
on the American Stock Exchange for the period from July 1993 through June 1995.
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995
---------------- -----------------
HIGH LOW HIGH LOW
------- ------- ------- --------
<S> <C> <C> <C> <C>
First Quarter..................................... 3 1 7/8 1 1/2 1
Second Quarter.................................... 3 5/8 2 1/8 1 3/8 3/4
Third Quarter..................................... 2 9/16 1 9/16 1 1/2 15/16
Fourth Quarter.................................... 2 1 1/8 1 1/8 3/4
</TABLE>
On September 15, 1995, the last sale price for the Common Stock, as reported
on the American Stock Exchange, was $ 7/8 per share. As of September 15, 1995,
there were 706 holders of record of shares of the Common Stock.
The Company has never paid any cash dividends on its Common Stock and
anticipates that for the foreseeable future all earnings, if any, will be
retained for use in its business.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
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1991 1992 1993 1994 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Coloring revenue..................... $ 3,286,800 $ 3,758,900 $ 3,703,122 $ 2,242,101 $ 4,913,136
Total revenue........................ 4,038,511 4,764,573 3,752,106 3,337,268 6,122,164
Production Expense................... 2,762,867 3,273,761 3,199,653 1,660,842 3,487,089
Research & development expense....... 269,941 157,464 388,568 289,379 192,253
Other expenses....................... 4,322,546 4,363,820 3,415,027 3,279,895 3,902,766
Loss before extraordinary item....... (3,316,843) (3,030,472) (3,251,142) (1,892,848) (1,459,944)
Loss before extraordinary item per
share............................... (0.31) (0.21) (0.18) (0.08) (0.06)
BALANCE SHEET DATA:
Current assets....................... 330,994 1,023,522 649,878 1,745,419 1,803,814
Total assets......................... 2,990,207 3,914,656 2,862,251 6,246,600 5,417,045
Current liabilities.................. 9,286,781 1,987,896 1,829,836 2,082,690 2,030,790
Long-term obligations................ 1,404,386 1,670,947 560,172 280,086 --
Stockholders' equity (deficiency).... (7,700,960) 255,813 472,243 3,883,824 3,386,255
</TABLE>
5
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
For the year ended June 30, 1995, the Company reported an operating loss of
$1.5 million as compared to an operating loss of $1.9 million in fiscal 1994 and
$3.3 million in fiscal 1993. The 1994 results are primarily the result of
operating the colorization facility at less than optimum capacity in the first
half of the 1994 year as the Company lacked a sustainable backlog of business.
In the second half of 1994, the Company expanded 20%, began operating at full
capacity and has shown improvements in its operations. The first half of the
1994 year accounted for 81% of the total 1994 operating loss.
For the past four to five years, the Company has been restructuring its debt
and cutting expenses. In 1995, the Company's strategy has been the continued
diversification of its business, the securement of contracts for production work
and the generation of products for its own library. In 1994, the Company engaged
a new president and divided itself into four divisions: CST Coloring
("Coloring") -- colorizing old black-and-white productions; CST Color F/X
("Color F/X") -- colorizing new productions which are purposely shot in
black-and-white so as to take advantage of the Company's unique coloring
abilities; CST Featurization ("Featurizations") -- unique blend of new and/or
old color and black-and-white productions; and CST Computoons ("Computoons") --
the Company's new animation ink and paint, composite and software division. In
1995, the Company was successful in securing numerous Coloring contracts and
Color F/X Contracts, including approximately $2.0 million for coloring 71
episodes of "The Little Rascals" and 38 episodes of Warner Brothers 1930's
cartoons. It also created and sold its second Featurizations product, the NBC
made-for-television Science Fiction Anthology "Attack of the Killer B Movies."
Additionally, the Company completed its first television series project, which
included over one hundred minutes of digital special effects. In 1995, 60% of
the Company's total revenues were derived from the Coloring division, 20% from
the Color F/X division, and 12% from the Featurizations division. The Company is
currently in the process of producing and pre-selling other Featurizations
products. The Computoons division is currently developing several animation
products and completed the development of its animation software. Revenues are
expected to be generated from the Computoons division in 1996. The Company is
currently in negotiations for additional contracts in all of these divisions.
Future revenues and profits are dependent on the successful attainment of these
contracts.
Delivered minutes increased 156% in 1995 as compared to 1994 and decreased
44% in 1994 as compared to 1993. In the second half of 1994 and for all of 1995,
the Company operated approximately thirty-two work-stations on three eight hour
shifts. In the first half of 1994, the Company operated approximately
twenty-three work stations on two eight hour shifts.
The average price per minute delivered in 1995 decreased 13% as compared
with 1994. The decrease is attributed to a change in the product mix whereby the
majority of its deliverable color conversion work was on Color F/X projects in
1994. Although Color F/X revenue increased in total in 1995, the increase in
coloring revenue was much more substantial. The average price per minute
delivered in 1994 increased 44% as compared to 1993. The increase is attributed
to the higher price per minute charged in the Color F/X division and also an
overall trend towards increased coloring rates as the Company's only major
competitor in the coloring business filed for bankruptcy. The Company
anticipates the average price per minute will be consistent or increase slightly
in 1996 as compared to 1995.
In addition to coloring revenue, the Company earns licensing/royalty revenue
on its film library which consists primarily of one Wyatt Earp television
special, three colorized public domain motion pictures, fifteen color converted
John Wayne movies (798 minutes color converted in 1990), a television special on
the Three Stooges (completed in 1991) and a Science Fiction Anthology of
colorized public domain movies. Licensing/royalty revenue is comprised of
guaranteed advances or remittances from television and video distributors on the
Company's library. Distributors recoup advances from
6
<PAGE>
the sales of the films before remitting additional payments to the Company.
Licensing/royalty revenues were $706,268 in 1995, $939,605 in 1994 and $31,366
in 1993. Revenue from library products was 12% of the total revenue for 1995.
The Company anticipates continuing growth in licensing/ royalty revenues as it
produces additional work for its own library. Subsequent to year end, the
Company entered into an agreement to produce additional Science Fiction movies
for foreign distribution (See Note 1).
The Company revalued its film library in 1993 which resulted in a write-down
of $10,838. The film library's estimated net realizable value at June 1995 of
$1,878,010 is anticipated to be realized over the next five years.
Software sales income of $500,000, representing 8% of total revenues,
reflects the sale of the Company's first completed animation software to a
related party. The total selling price of the software is $2.6 million. $300,000
of the $2.6 million was collected during fiscal year ended June 30, 1995,
$200,000 is to be received in the remainder of the calendar year, and $2.1
million paid through the issuance of a note payable from receipts generated from
the subsequent sales of software and payable to the Company no later than
fifteen years from the date of issuance. Gross receipts derived from the
exploitation of the software will be paid: First to each entity for approved
costs incurred in connection with the sale, purchase, marketing and licensing of
the software; second, 30% to the Company, 38.5% to the pay-down of the $2.1
million note and 31.5% to the purchaser. After the note has been completely paid
off, the gross receipts will be paid 93% to the Company and 7% to the purchaser.
The Company has not recorded the $2.1 million note receivable as it is
contingent upon the generation of future sales. As such, any additional proceeds
from this transaction will be recognized as revenue when received. A unique
aspect of the transaction is that the Company retains the exclusive rights to
market and exploit the software to customers.
Gain on sale of equipment in 1993 resulted from the sale of equipment
associated with the discontinuation of the Company's analog color conversion
system.
Other income in 1994 is primarily the result of a judgment in favor of the
Company in regards to sales and use tax previously paid to the State Board of
Equalization.
Color conversion production minutes increased 39% in 1995 as compared to
1994 and decreased 23% in 1994 as compared to 1993. Total cost of production
increased 40% in 1995 as compared to 1994 and decreased 2% in 1994 as compared
to 1993. The increase in 1994 and the decrease in 1993 correspond to the
decrease and increase in minutes delivered and are explained by production down-
time and stations operating as more fully described above.
The ratio of total cost of production to total coloring revenue decreased
44% from 1994 to 1995 and increased 40% from 1993 to 1994. The increase in 1994
is the result of non-utilization of full production capacity in the first half
of 1994 and production of color F/X products which require a greater amount of
production detail and time. The increase in 1995 is primarily the result of
unexpected costs incurred in the colorizing of "The Little Rascals" and Warner
Brothers projects.
Research and development expense decreased 34% in 1995 as compared to 1994
and decreased 26% in 1994 as compared to 1993. In 1994 and 1995, resources were
expanded on the development of animation software and color conversion software.
In 1994, resources expended on animation software were capitalized subsequent to
January 1994. In 1993, resources expended on the production of color conversion
software were capitalized. Expenditures for the further development and
enhancements of animation and color conversion software are expected to continue
in 1996.
Film library amortization expense decreased slightly in 1995, as the Company
recognized amortization expense on film library products which were sold during
the 1994, and 1995 year. The decrease is due to the timing of the revenue
streams and recognition of the related amortization expense recorded in
accordance with SFAS No. 53.
7
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General and administrative expenses increased 10% in 1995 as compared to
1994, due to the employment of additional corporate personnel hired during 1994
and thus employed for the entire 1995 year. Also, the Company obtained
additional insurance coverage during the fiscal year ended June 30, 1995.
General and administrative expenses increased 38% in 1994 as compared to 1993,
due to the employment of additional corporate personnel. General and
administrative expenses are expected to remain stable in 1996 as compared to the
1995 level.
Interest expense increased $117,520 in 1995, compared to 1994. The increase
is primarily the result of interest costs incurred in financing arrangements
entered into whereby the Company's receivables were sold at discounted values.
Interest expense did not change significantly from 1993 to 1994. Interest
expense decreased 82% in 1993 as compared to 1992 and is primarily the result of
debt restructurings and decreasing notes payable balances.
Accounts receivable -- long-term write-down of $819,750 in 1993 resulted
from a change in terms of a receivable guaranteed to be paid by a customer in
four years. In March 1993, the Company and the customer agreed to convert the
guaranteed receivable into an immediate 55% revenue participation in the first
$900,000 of domestic net receipts and a 35% revenue participation for a period
of twenty-five years thereafter in the domestic distribution sales of fifty
episodes of a television series color converted for the customer. Because of the
uncertainty that such revenue participation will occur, the $819,750 was written
off.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficiency was $226,976 at June 30, 1995 as
compared to $337,271 at June 30, 1994. Losses from operations were $1,459,944 in
1995, $1,892,848 in 1994 and $3,251,142 in 1993. The Company has experienced
significant negative cash flows from operations for the past three years. The
Company's independent certified public accountants have included an explanatory
paragraph in their report with respect to the Company's ability to continue as a
going concern.
The following are the Company's plans to improve its liquidity; secure
contracts for the Coloring, Color F/X, Featurizations and Computoons divisions;
raise additional working capital; and the production and subsequent sale of
product in its own library. There can be no assurance that such efforts will be
sufficiently successful to ensure the ultimate viability of the Company.
The Company is currently in negotiations for production work in excess of
$25 million in its various divisions, a portion of which the Company expects to
be consummated in fiscal 1996.
Cash flows from operating activities improved by approximately $.8 million
from 1994 to 1995 due to significantly more activity in process by the Company
at fiscal year ended June 30, 1995. This includes increases in accounts payable
(approximately $.2 million) and work in process (approximately $.7 million). The
Company also reduced its commitments payable (approximately $.7 million) and
collected a long-term receivable. Additionally, the Company's net loss for the
year was approximately $.4 million less than in 1994.
Cash flows from investing activities improved over $2.7 million from 1994 to
1995, due mainly to substantially less expenditures for property, plant, and
equipment (approximately $1 million) and for its film library (approximately
$1.3 million). Cash flows for 1995 were generally consistent with 1993.
Cash flows from financing activities decreased approximately $4.2 million
due to significant decreases in proceeds from private placements and warrant
exercises. Cash flows from financing activities increased from 1993 to 1994, due
to more sales of private placements and the exercising of warrants.
The Company's accounts receivable, non-current balance from 1994 to 1995
decreased $187,381, which is the result of a financing arrangement entered into
whereby the receivable was sold at a discounted value.
8
<PAGE>
The Company's work-in-process increased $695,782 in 1995 as compared to
1994. At June 30, 1995, the Company had produced $823,198 of coloring product
that had not been processed through the Company's quality assurance department
and therefore, had not been delivered to the customer. Revenue will be
recognized from this work-in-process in fiscal 1996 and 1997.
Deferred income increased $152,147 in 1995 as compared to 1994, and is
primarily the result of pre-payments on undelivered coloring product.
The Company completed the color conversion of two pictures for credit under
its commitments obligation and recognized coloring income of $666,000.
Subsequent to year end, the Company completed its final picture under the
commitment obligation.
In 1995, the Company expended $217,888 on property and equipment consisting
primarily of completion of the new in-house edit bay and an upgrade of the
Company's main computer processor. The Company anticipates it will have capital
expenditures over the next twelve months of $200,000 to $400,000 for additional
work-stations and/or upgrade of current work-stations.
In 1995, the Company expended approximately $413,000 on its film library for
the Featurizations division. The new additions to the film library are four
science fiction movies for Featurizations color converted public domain movies.
The Company anticipates future expenditures of $3 - $5 million over the next
twelve months for future library products.
In 1995, the Company capitalized $467,084 of resources which were devoted to
the production of animation software.
In 1995, the Company issued a note receivable in the amount of $15,000 to a
former officer of the Company, which has been liquidated in exchange for
consulting services. In 1994, the Company issued four notes receivable in the
amount of $272,263 to officers of the Company, $65,000 of which has either been
collected or liquidated in exchange for consulting services.
The Company raised $847,491 through private placements in 1995. Should the
Company be successful in obtaining the contracts currently under negotiation,
the Company anticipates cash flows from operations to be positive in 1996. The
Company believes it will cover any needed cash requirements, such as capital
expenditures and production of library products for its own account, over the
next twelve months through operating cash flow, pre-sales of its library
products, placements of the Company's equity securities or other financing
arrangements which the Company is currently pursuing. The Company anticipates $3
to $5 million will be needed for the production of future library products and
capital expenditures over the next twelve months, although the amount could be
adjusted based on production orders.
The Company received proceeds of $20,494 from the exercise of employee stock
options in 1995. The Company does not know if significant amounts of warrants or
employee stock options will be exercised in 1996. Most of the Company's
outstanding warrants and stock options are at exercise prices greater than the
current market price of the Company's common stock.
Effective July 1, 1993, the Company adopted Statement of Financial Standards
("SFAS") No. 109, Accounting for Income Taxes. Implementation of SFAS No. 109
did not have a significant impact on the Company's results of operations or
financial position. As of June 30, 1995, the Company has significant amounts of
net operating loss carry-forwards and other tax credits (see Note 17 to the
Financial Statements) which result in deferred tax assets. It is not possible at
this time to determine that the realization of the deferred tax assets is more
likely than not; accordingly, a valuation reserve has been established for the
full amount.
Future revenues and profits are dependent upon the successful attainment of
contracts currently in negotiations. There can be no assurance that the
Company's efforts will be sufficiently successful to ensure the ultimate
viability of the Company.
Management believes that inflation has not had a significant impact on the
Company's costs and prices during the past three years.
9
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
CST Entertainment, Inc.
We have audited the accompanying balance sheets of CST Entertainment, Inc.,
as of June 30, 1995 and 1994 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1995. We have also audited the financial statement schedule
listed in the accompanying index. These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule 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 financial statements and schedule 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 presentation of
the financial statements and schedule. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CST Entertainment, Inc., as
of June 30, 1995, and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended June 30, 1995, in conformity
with generally accepted accounting principles.
Also in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has suffered significant recurring losses and negative cash flows from
operations and has a working capital deficiency of $226,976 at June 30, 1995.
These factors, among others discussed in Note 1, raise substantial doubt about
its ability to continue as a going concern. There is no assurance that the
Company will be able to realize its recorded assets and liquidate its
liabilities in the normal course of business. Management's plans in regards to
these matters are described in Note 1. The financial statements and schedule do
not include any adjustments that might result from the outcome of this
uncertainty.
Effective July 1, 1993, the Company adopted Statement of Financial Standards
("SFAS") No. 109, Accounting for Income Taxes. Implementation of SFAS No. 109
did not have a significant impact on the Company's results of operations or
financial position.
BDO SEIDMAN, LLP
Los Angeles, California
September 11, 1995
10
<PAGE>
CST ENTERTAINMENT, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------
1994 1995
--------------- ---------------
<S> <C> <C>
Current assets:
Cash......................................................................... $ 601,602 $ 24,694
Accounts receivable, net (Note 4)............................................ 608,399 368,868
Work-in-process (Note 2)..................................................... 466,086 1,161,868
Prepaid expenses............................................................. 54,332 33,384
Receivable from related parties (Notes 3 and 9).............................. 15,000 215,000
--------------- ---------------
1,745,419 1,803,814
--------------- ---------------
Property and equipment (Notes 2 and 3):
Color conversion equipment................................................. 3,787,287 3,896,789
Leasehold improvements and other equipment................................. 1,483,164 1,591,550
Capitalized software....................................................... 951,070 985,382
--------------- ---------------
6,221,521 6,473,721
Less accumulated depreciation and amortization............................... 4,064,204 5,118,680
--------------- ---------------
2,157,317 1,355,041
--------------- ---------------
Other assets:
Accounts receivable -- long term (Note 5).................................... 324,940 137,559
Notes receivable from officers (Note 9)...................................... 222,263 192,263
Patent, net of accumulated amortization of $477,397 and $520,633 (Note 2).... 77,447 34,211
Film library, net of accumulated amortization of $2,094,146 and $2,340,275
(Note 2).................................................................... 1,692,190 1,878,010
Other assets................................................................. 27,024 16,147
--------------- ---------------
2,343,864 2,258,190
--------------- ---------------
$ 6,246,600 $ 5,417,045
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Notes 6 and 10)............................................... $ 503,752 $ 492,430
Accounts payable............................................................. 265,035 333,163
Accrued expenses (Note 7).................................................... 412,791 537,852
Deferred income (Note 2)..................................................... 340,940 493,087
Commitments payable -- short-term (Note 13).................................. 560,172 174,258
--------------- ---------------
2,082,690 2,030,790
--------------- ---------------
Long-term liabilities:
Commitments payable -- long-term (Note 13)................................... 280,086
---------------
Commitments and Contingencies (Note 11)
Stockholders' equity:
Common stock, par value $.15 per share; authorized 40,000,000 shares; issued
24,974,631 shares and 26,199,624 shares..................................... 3,746,195 3,929,944
Additional paid-in capital................................................... 54,982,786 55,667,022
Accumulated deficit.......................................................... (54,845,157) (56,210,711)
--------------- ---------------
3,883,824 3,386,255
--------------- ---------------
$ 6,246,600 $ 5,417,045
--------------- ---------------
--------------- ---------------
</TABLE>
See Accompanying Notes to Financial Statements
11
<PAGE>
CST ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues (Notes 1 and 18):
Coloring income................................................. $ 3,703,122 $ 2,242,101 $ 4,913,136
Film licensing/royalty income................................... 31,366 939,605 706,268
Software sales income (Note 3).................................. 500,000
Gain in sale of equipment, net.................................. 3,000
Other income.................................................... 14,618 155,562 2,760
-------------- -------------- --------------
3,752,106 3,337,268 6,122,164
Expenses:
Production...................................................... 3,199,653 1,660,842 3,487,089
Cost of software sold........................................... 432,772
Research and development........................................ 388,568 289,379 192,253
Depreciation and amortization................................... 1,078,763 1,058,901 1,040,712
Film library amortization....................................... 40,000 334,128 246,129
General and administrative...................................... 1,351,916 1,860,883 2,039,650
Interest expense................................................ 22,760 25,983 143,503
Accounts receivable -- long-term write-down..................... 819,750
Film library write-down......................................... 101,838
-------------- -------------- --------------
7,003,248 5,230,116 7,582,108
-------------- -------------- --------------
Loss before extraordinary item.................................... (3,251,142) (1,892,848) (1,459,944)
-------------- -------------- --------------
Extraordinary item -- gain from forgiveness of debt (Note 16)..... 138,102 160,064 94,390
-------------- -------------- --------------
Net loss.......................................................... $ (3,113,040) $ (1,732,784) $ (1,365,554)
-------------- -------------- --------------
-------------- -------------- --------------
Per share:
Loss before extraordinary item.................................. $ (0.18) $ (0.08) $ (0.06)
Extraordinary item.............................................. 0.01 0.01 0.01
-------------- -------------- --------------
Net loss.......................................................... $ (0.17) $ (0.07) $ (0.05)
-------------- -------------- --------------
--------------
Weighted average number of common shares outstanding.............. 18,683,080 22,715,826 25,359,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See Accompanying Notes To Financial Statements
12
<PAGE>
CST ENTERTAINMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1993, 1994, AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ISSUED ADDITIONAL
---------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at July 1, 1992....................... 17,726,423 $2,658,963 $47,596,183 $(49,999,333) $ 255,813
Common stock, restricted, issued in connection
with debt restructuring...................... 81,000 12,150 133,600 145,750
Common stock, restricted, issued as payment
for services rendered........................ 40,000 6,000 35,200 41,200
Common stock issued in connection with
exercise of options (Note 15)................ 600 90 960 1,050
Common stock, restricted, issued in connection
with exercise of warrants (Note 15).......... 355,011 53,252 513,218 566,470
Common stock, restricted, issued in private
placements................................... 2,460,000 369,000 2,206,000 2,575,000
Net Loss...................................... (3,113,040) (3,113,040)
---------- ---------- ----------- ------------ ------------
Balance at June 30, 1993...................... 20,663,034 3,099,455 50,485,161 (53,112,373) 472,243
Common stock, restricted, issued as payment
for services rendered........................ 12,000 1,800 28,200 30,000
Common stock issued in connection with
exercise of options (Note 15)................ 12,897 1,935 23,890 25,825
Common stock, restricted, issued in connection
with exercise of warrants (Note 15).......... 386,700 58,005 680,535 738,540
Common stock, restricted, issued in private
placements (Note 14)......................... 3,900,000 585,000 3,765,000 4,350,000
Net loss...................................... (1,732,784) (1,732,784)
---------- ---------- ----------- ------------ ------------
Balance at June 30, 1994...................... 24,974,631 3,746,195 54,982,786 (54,845,157) 3,883,824
Common stock issued in connection with
exercise of stock options (Note 15).......... 24,993 3,749 16,745 20,494
Common stock restricted, issued in private
placements (Note 14)......................... 1,200,000 180,000 667,491 847,491
Net loss...................................... (1,365,554) (1,365,554)
---------- ---------- ----------- ------------ ------------
Balance at June 30, 1995...................... 26,199,624 $3,929,944 $55,667,022 $(56,210,711) $3,386,255
---------- ---------- ----------- ------------ ------------
---------- ---------- ----------- ------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
13
<PAGE>
CST ENTERTAINMENT, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................................. $ (3,113,040) $ (1,732,784) $ (1,365,554)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization......................................... 1,118,763 1,393,029 1,286,841
General and administrative expenses not requiring outlay of cash...... 41,200 15,000 30,000
Gain from forgiveness of debt........................................... (138,102) (160,064) (94,390)
Gain on sale of equipment, net.......................................... (3,000)
Accounts receivable -- long-term write-down........................... 819,750
Film library write-down............................................... 101,838
(Increase) decrease in operating assets:
Accounts receivable................................................... 423,335 (381,677) 239,531
Work-in-process....................................................... 57,401 (456,560) (657,782)
Prepaid expenses...................................................... 53,306 (38,284) 20,948
Receivable from related party......................................... (200,000)
Other assets.......................................................... (2,448) (2,750) 10,877
Accounts receivable -- long-term...................................... (380,455) (324,940) 187,381
Increase (decrease) in operating liabilities:
Accounts payable...................................................... (92,121) (49,607) 162,518
Accrued expenses...................................................... (134,057) 155,010 125,061
Deferred income....................................................... (76,881) 340,940 152,147
Commitments payable................................................... (582,016) (280,086) (666,000)
------------ ------------ ------------
Total adjustments..................................................... 1,206,513 210,011 597,132
------------ ------------ ------------
Net cash used in operating activities................................. (1,906,527) (1,522,773) (768,422)
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment................................... (743,611) (1,213,837) (217,888)
Proceeds from sale of property and equipment.......................... 3,000
Additions to film library............................................. (1,733,808) (412,949)
Sales of capitalized software........................................... 432,772
Additions to capitalized software..................................... (235,075) (192,145) (467,084)
Notes receivable from officers........................................ (237,263)
------------ ------------ ------------
Net cash used in investing activities................................. (975,686) (3,377,053) (665,149)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds form exercise of options..................................... 1,050 25,825 20,494
Proceeds from sales of restricted stock in private placements......... 2,575,000 4,350,000 847,491
Proceeds from exercise of warrants.................................... 566,470 738,540
Payments of notes payable............................................. (99,909) (33,425) (11,322)
------------ ------------ ------------
Net cash provided by financing activities............................. 3,042,611 5,080,940 856,663
------------ ------------ ------------
Net increase (decrease) in cash......................................... 160,398 181,114 (576,908)
Cash at beginning of year............................................... 260,090 420,488 601,602
------------ ------------ ------------
Cash at end of year..................................................... $ 420,488 $ 601,602 $ 24,694
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Accompanying Notes to Financial Statements
(Continued)
14
<PAGE>
CST ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Cash paid during the year for interest........................................ $ 38,479 $ 19,258 $ 122,181
--------- --------- -----------
--------- --------- -----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES
YEAR ENDED JUNE 30, 1993
The Company issued restricted common stock with a value of $41,200 to a
former officer of the Company for services rendered.
The Company satisfied $145,750 of accrued expenses through issuance of
common stock.
The Company transferred $760,258 of commitments payable from long-term to
short-term.
The Company liquidated $43,796 of accrued expenses, $78,340 of notes payable
and $15,966 of accounts payable through the forgiveness of debt.
The Company transferred $350,517 of long-term debt to notes payable.
YEAR ENDED JUNE 30, 1994
The Company liquidated $1,398 of accrued expenses, $11,894 of notes payable
and $146,772 of accounts payable through the forgiveness of debt.
Included in prepaid expenses is $15,000 paid to a vendor for services to be
performed by the vendor. The $15,000 payment was satisfied by issuing restricted
stock to the vendor.
The Company capitalized $252,510 and $7,906 of depreciation expense under
its film library and work-in-process respectively.
YEAR ENDED JUNE 30, 1995
The Company liquidated $94,390 of accounts payable through the forgiveness
of debt.
The Company liquidated $30,000 of notes receivable from two former employees
in exchange for consulting services.
The Company capitalized $19,000 and $38,000 of depreciation expense under
its film library and work-in-process, respectively.
See Accompanying Notes to Financial Statements
(Continued)
15
<PAGE>
CST ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING & FINANCING ACTIVITIES (CONTINUED)
THREE YEARS ENDED JUNE 30, 1995
The Company restructured portions of its debt as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Accounts payable........................................................... $ 15,966 $ 146,772 $ 94,390
Accrued interest........................................................... 33,475 1,398
Other accrued expenses..................................................... 156,071 15,000
Prepaid expenses........................................................... 15,000
Notes payable.............................................................. 85,840 11,894
----------- ----------- -----------
$ 291,352 $ 190,064 $ 94,390
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The debts or expenses listed above were satisfied as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Issuance of common stock................................................... $ 145,750 $ 30,000 $
Restructured debt.......................................................... 7,500
Gain from forgiveness of debt.............................................. 138,102 160,064 94,390
----------- ----------- -----------
$ 291,352 190,064 $ 94,390
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Accompanying Notes to Financial Statements
16
<PAGE>
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
1. THE COMPANY:
CST ENTERTAINMENT, INC. (the "Company") is engaged in two principal business
segments: conversion of black-and-white videotape to color and film
licensing/royalty revenue. See Note 18 for detailed segment information. The
Company has divided itself into four divisions: CST Coloring -- colorizing old
black-and-white productions; CST Color F/X -- colorizing new black-and-white
productions; CST Featurizations -- a unique blend of new and/or old color and
black-and-white productions; and CST Computoons -- the Company's new animation
ink and paint, composite and software division. Certain of the divisions
generate revenues in each business segment. The Company is currently in
negotiations for contracts in all of these divisions. Future revenues and
profits are dependent on the successful attainment of these contracts.
The Company has consistently incurred substantial losses. The Company has
restructured substantial amounts of its debt which relieved considerable amounts
of its debt service requirement; reduced overhead significantly; raised working
capital; and converted its video/analog colorizing system into a
state-of-the-art digital system. At June 30, 1995, the Company had stockholders'
equity of $3,386,255 and a working capital deficiency of $226,976. It has
experienced significant negative cash flow from operations for the past three
years. Accordingly, there is substantial doubt as to its ability to continue as
a growing concern.
Over the next twelve months the Company expects cash flow from operations to
be positive. This is expected to be accomplished through revenues generated from
significant new contracts currently being negotiated. Should the Company not be
successful in obtaining sufficient new contracts, of which many are currently
under negotiation, it will reduce operations. In view of this matter and the
matters described in the preceding paragraph, recoverability of a substantial
portion of recorded asset amounts is uncertain. The Company anticipates capital
expenditures of approximately $3 to $5 million for film library products,
although the amount could be adjusted based on production orders. The Company
believes it will be successful in its endeavors to meet its cash requirements
over the next twelve months. The Company may issue stock in the future in order
to meet its cash flow requirements. There can be no assurance that such efforts
will be sufficiently successful to ensure the ultimate viability of the Company.
The Company's coloring revenues for the years ended June 30, 1993, 1994, and
1995 were derived from services performed for certain major customers as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Twentieth Century Fox Film Corporation................................. 15% 35% 11%
Paravision............................................................. 24%
Turner Entertainment Co................................................ 42%
International Creative Exchange........................................ 34%
RHI Entertainment, Inc................................................. 17%
King World Productions, Inc./Taurus-Film GbmH & Co..................... 16%
</TABLE>
In August 1995, the Company entered into a $800,000 licensing agreement
whereby the Company will produce and deliver eight colorized one-half hour
episodes. In exchange, the Company will receive foreign licensing fees which
will be recognized as revenue upon delivery to the customer. As such, the
Company will maintain certain domestic distribution rights and is currently
pursuing licensing those rights.
In August 1995, the Company filed for new patents based on new significant
coloring conversion developments.
17
<PAGE>
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
WORK-IN-PROCESS: Work-in-process is stated at the lower of cost or market,
not to exceed net realizable value.
PROPERTY AND EQUIPMENT AND DEPRECIATION: Property and equipment relating to
the Company's digital coloring system, including capitalized software and other
equipment, is carried at cost and is depreciated by the straight-line method
over the estimated use life of three years. Leasehold improvements and video
equipment are being depreciated by the straight-line method over the estimated
useful life of five years.
CAPITALIZED SOFTWARE: Unamortized capitalized computer software costs was
$446,621 at June 30, 1994 and $245,130 at June 30, 1995. Amortization expense of
capitalized computer software was $217,628, $252,975 and 234,810 for the three
years ended June 30, 1993, 1994 and 1995. (See also Note 3)
PATENT: Costs incurred in acquiring the patent are being amortized on a
straight-line basis over the remaining life of the patent, which expires in
1996.
FILM LIBRARY: The Company's film library is carried at the lower of cost or
estimated net realizable value. The film library costs primarily include the
rights to acquire the film and internally generated costs of production and
colorization.
The film library is evaluated periodically and when management determines
costs are not recoverable, the library is written down to net realizable value.
The film library was written down in 1993 by $101,838 to $40,000, its estimated
net realizable value. The Company utilizes no more than five years in the
projection of future revenues for purposes of evaluating recoverability of film
costs.
The Company's films are generally colorized public domain films and specials
that are generally released, first, in the domestic television market. Based on
the Company's estimates of revenue as of June 30, 1995 approximately 80% of
unamortized film costs applicable to released films will be amortized during the
three years ending June 30, 1998. The Company utilizes the individual-film-
forecast-computation method in the amortization of its film library. The Company
anticipates the release of its three films which were completed in fiscal 1994
to occur in fiscal 1996. The Company's film library consists of 24 films, all of
which have been released as of June 30, 1995, except for the three previously
mentioned.
REVENUE RECOGNITION: Revenues are recognized when color converted projects
are completed and shipped. Deferred income arises as a result of prepayments on
contracts in progress. Revenues and related expenses from television and video
licensing agreements are generally recognized on the date the film is available
for broadcasting by the licensee. Revenues from royalties are recognized upon
receipt.
NET LOSS PER SHARE: Net loss per share is based on the weighted average
number of shares of common stock outstanding during each year, exclusive of
common share equivalents which, for the year presented, would be anti-dillutive.
3. SOFTWARE SALES:
Software sales income of $500,000 reflects the sale of the Company's first
completed animation software to a related party. The total selling price of the
software is $2.6 million. $300,000 of the $2.6 million was collected in the
fiscal year ended June 30, 1995, $200,000 is to be received in the remainder of
the 1995 calendar year and $2.1 million paid through the issuance of a note
payable from receipts generated from the subsequent sales of software and
payable to the Company no later than
18
<PAGE>
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
3. SOFTWARE SALES (CONTINUED):
fifteen years from the date of issuance. Gross receipts derived from the
exploitation of the software will be paid: First to each entity for approved
costs incurred in connection with sale, purchase, marketing and licensing of the
software; second, 30% to the Company, 38.5% to the pay-down of the $2.1 million
note and 31.5% to the purchaser. After the note has been completely paid off,
the gross receipts will be paid 93% to the Company and 7% to the purchaser. The
Company has not recorded the $2.1 million note receivable as it is contingent
upon the generation of future sales. As such, any additional proceeds from this
transaction will be recognized as revenue when received. A unique aspect of the
transaction is that the Company retains the exclusive rights to market and
exploit the software to customers.
4. ACCOUNTS RECEIVABLE:
Included in accounts receivable at June 30, 1995, is an allowance for
doubtful accounts for $19,100.
5. ACCOUNTS RECEIVABLE -- LONG-TERM:
Accounts receivable -- long-term at June 30, 1992 of $439,295 was due from a
customer. This receivable was to be paid when additional sales of a color
converted television series were secured by the customer through distribution
and after the customer's recoupment of coloring cost. The receivable was
guaranteed to be paid within four years and was collateralized by the customer's
rights in and to the color converted television series. During 1993, the
guaranteed receivable increased to $819,750. In March 1993, the Company and the
customer agreed to convert the guaranteed receivable into an immediate 55%
revenue participation in the first $900,000 of domestic distribution sales of
the television series with no guarantee of payment within four years. Because it
is doubtful that such revenue participation will occur, the $819,750 accounts
receivable -- long-term was written off.
Accounts receivable -- long-term at June 30, 1994 of $324,940 represented
the present value of future payments due from the licensing of a product in the
Company's film library of $187,381 and a receivable for $137,559 resulting from
a judgment in favor of the Company in regards to sales and use taxes previously
paid to the State Board of Equalization. The film library receivable was
collected during the fiscal year ended June 30, 1995.
6. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Note bearing interest at between 9.75% and 12%, monthly interest
only payments through December 1993 when principal was due (see
Note 10)........................................................... $ 350,517 $ 350,517
Notes payable, trade, bearing interest at rates between 0% and 10.6%
per annum.......................................................... 143,473 132,151
Future interest payments............................................ 9,762 9,762
----------- -----------
$ 503,752 $ 492,430
----------- -----------
----------- -----------
</TABLE>
19
<PAGE>
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
7. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Accrued interest.................................................... $ 14,832 $ 36,154
Accrued legal....................................................... 18,013
Accrued taxes....................................................... 46,080 65,587
Accrued payroll and payroll taxes................................... 172,533 93,200
Accrued employee benefits........................................... 87,279 107,422
Other accrued expenses.............................................. 92,067 217,476
----------- -----------
$ 412,791 $ 537,852
----------- -----------
----------- -----------
</TABLE>
8. LEASES:
The Company leases its operating facility. In April 1994, the Company
amended its lease to include additional space commencing October 1, 1994. The
termination date of the amended lease is September 30, 1999 with an option to
extend the lease 1-5 years thereafter. Rent expense was $181,495 and $193,235
and $231,371 for the years ended June 30, 1993, 1994 and 1995. Obligations under
the facility lease are $243,936 for the year ending June 30, 1996 and $731,808
for the years ending June 30, 1997 through 1999. The total obligation for the
four years ending June 30, 1999 is $975,744.
9. RELATED PARTY TRANSACTIONS:
During 1995, the Company sold animation software to a related party for $2.6
million, of which $200,000 is included in receivables from related parties at
June 30, 1995 (See Note 3).
Also included in receivables from related parties is a note receivable from
an officer that consists of a remaining $15,000 balance on a $50,000 note, with
interest at 4%. Principal and interest was due April 30, 1994. $35,000 of the
note was repaid with the payoff of the remaining $15,000 extended to December
31, 1995.
Long-term notes receivables from officers consists of loans to four officers
for $222,263 at June 30, 1994 and three officers at June 30, 1995 for $192,263.
These loans carry an interest rate of 5.3% and are due the earlier of: the due
dates, ranging from December 14, 1996 through June 30, 1997; the date each
respective officer exercises warrants or stock options; or six months after the
officer is no longer employed by the Company. One loan for $100,000 is also
secured by a second trust deed on an officer's residence.
10. LONG-TERM DEBT:
In December 1991, the Company restructured $325,058 of capital lease
obligations and $25,459 of accrued interest into a long-term note of $350,517.
The terms of the note are: interest at between 9.75% and 12%; 24 monthly
interest only payments commencing January 1992; and due date of December 1993.
The note was transferred to current notes payable in 1993 (see Note 6). Such
note is collateralized by 103,587 shares of the Company's restricted common
stock. In December 1993, the note became due; however, an integral part of the
paydown of the note was to have come from proceeds obtained in the sale of the
Company's collateralized common stock and the sale of certain collateralized
equipment. The Company and the former equipment lessor have had discussions in
regards to the payoff of the note but have not yet come to a final resolution.
20
<PAGE>
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
11. COMMITMENTS AND CONTINGENCIES:
The Company has employment agreements with four officers. The employment
agreements specify annual salaries totaling $530,000. In addition, two of these
officers receive guaranteed annual commissions totaling $180,000. Certain
officers may also earn commissions on sales or financing contracts they obtain
for the Company. The employment agreements terminate on various dates ranging
from November 30, 1995 through December 31, 1996.
In April, 1995, the Company entered into an agreement with Metro-Goldwyn
Mayer (MGM) which calls for the Company to invest in the colorization of seven
black and white United Artists Pictures' films from the MGM and United Artists'
library. In exchange, the Company will share with MGM in all new revenues
resulting from the worldwide distribution of the color-converted titles. MGM/UA
Telecommunications Group will handle distribution for international television
markets, while MGM/UA Home Entertainment will manage the video release.
From time to time, the Company receives demands for payments and threats of
litigation from persons or entities. It is the Company's belief that such
matters are in the normal course of business and do not have a material adverse
effect on the Company.
12. BENEFIT PLAN:
In October 1994, the Company instituted a 401(K) Plan (the "Plan") covering
substantially all eligible employees. Employees are eligible to participate in
the Plan after completing six months or 1,000 hours of service. Employees may
contribute up to a maximum of 15% annually, subject to certain discrimination
testing requirements. The Company is not obligated to contribute to the Plan,
and did not make any contributions in the fiscal year ended June 30, 1995.
13. CONTRACT COMMITMENTS PAYABLE:
In September 1987, the Company had entered into an agreement with a former
customer whereby the Company color converted 13 films for the customer. Under
the agreement, the customer had the option beginning December 1988 and ending
April 1991 to color convert additional 2,000 minutes of film at a discounted
price or sell the minutes back to the Company at $910 per minute, or $1,820,000.
In 1991, the Company received notice from the former customer of the exercise of
their right to sell back to the Company the 2,000 minutes. In 1992, the Company
entered into a new agreement to satisfy the Company's $1.82 million indebtedness
as follows: the Company has paid $137,559 for sales tax and interest due in
respect of services rendered by the Company for the former customer under the
1987 agreement; the Company will color convert six motion pictures for the
former customer, one in calendar 1992, two in calendar 1994 and one in calendar
1995. At June 30, 1994, three motion pictures are reflected in commitments
payable, two in short-term and two in long-term. At June 30, 1995, one motion
picture is reflected in short-term commitments payable. Subsequent to fiscal
year end June 30, 1995, the final film was completed and delivered.
14. STOCK PLACEMENTS:
During the year ended 1994, the Company completed various private placements
in which 3,900,000 shares were issued at prices ranging between $0.67 and $2.00
per share resulting in proceeds of $4,350,000.
In January 1995, the Company completed a private placement to foreign
investors in which 300,000 shares were issued at $.75 per share, resulting in
proceeds of $225,000.
In March 1995, the Company completed a private placement in which 900,000
shares were issued at $.75 per share, resulting in proceeds of $675,000.
21
<PAGE>
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
14. STOCK PLACEMENTS (CONTINUED):
In connection with the above placements, the Company incurred $52,509 in
legal and related fees which were accounted for as a reduction of total proceeds
from those placements.
15. STOCK OPTIONS AND WARRANTS:
The Company maintains three stock option plans which reserve up to 3,893,030
shares of common stock for issuance to officers and employees of the Company.
The exercise price of all stock options granted under the plans must be at least
equal to the fair market value of shares of common stock on the date of grant.
The maximum term of each option is ten years. The options become exercisable at
such time and in such amounts as the Board of Director's Remuneration Committee
directs.
A combined summary of transaction in stock option plans for the three years
ended June 30, 1995, is as follows:
<TABLE>
<CAPTION>
NO. OF EXERCISE
SHARES PRICE
------------ -------------
<S> <C> <C>
Outstanding July 1, 1992........................................ 1,054,063 $ 0.59.2.62
Granted....................................................... 53,600 2.12-3.25
Exercised..................................................... (600) 1.75
Canceled...................................................... (119,611) 1.88-3.25
------------ -------------
Outstanding June 30, 1993....................................... 987,452 0.59-3.25
Granted....................................................... 757,100 2.00-2.62
Exercised..................................................... (12,897) 0.82-2.62
Canceled...................................................... (78,797) 1.75-3.25
------------ -------------
Outstanding June 30, 1994....................................... 1,652,858 0.59-3.25
Granted....................................................... 769,400 0.94-2.00
Exercised..................................................... (177,800) 0.94-3.25
Canceled...................................................... (24,993) 0.82
------------ -------------
Outstanding June 30, 1995....................................... 2,219,465 $ 0.59-3.25
------------ -------------
------------ -------------
</TABLE>
The options to purchase the 2,219,465 shares of the Company's stock are
exercisable on varying dates through December 2004. The options expire ten years
from the date of grant or 30 and 90 days after the date of termination of the
employee. Should all of the options granted be exercised prior to expiration or
cancellation, the proceeds to the Company would be $4,008,546.
22
<PAGE>
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
15. STOCK OPTIONS AND WARRANTS (CONTINUED):
A summary of shares of common stock issuable under warrants for the three
years ended June 30, 1995, is as follows:
<TABLE>
<CAPTION>
NO. OF EXERCISE
SHARES PRICE
------------ -------------
<S> <C> <C>
Outstanding July 1, 1992........................................ 2,772,500 $ 1.10-6.00
Issued to directors........................................... 300,000 2.37
Canceled...................................................... (382,489) 1.75-4.00
Exercised..................................................... (355,011) 1.10-2.00
------------ -------------
Outstanding June 30, 1993....................................... 2,335,000 1.37-6.00
Granted....................................................... 300,000 1.75-3.00
Canceled...................................................... (415,000) 2.00-6.00
Exercised..................................................... (386,700) 1.80-2.00
------------ -------------
Outstanding June 30, 1994....................................... 1,833,300 1.37-3.00
Granted....................................................... 725,000 0.94-1.19
Canceled...................................................... (450,000) 1.37-2.37
------------ -------------
Outstanding June 30, 1995....................................... 2,108,300 $ 0.94-3.00
------------ -------------
------------ -------------
</TABLE>
The warrants to purchase the 2,108,300 shares of the Company's stock are
exercisable upon issuance and expire on varying dates through December 1997.
Should all of the warrants issued be exercised prior to expiration or
cancellation, the proceeds to the Company would be $3,518,898.
There have been no compensation expenses recorded in conjunction with the
issuance of warrants during fiscal 1993, 1994 and 1995.
16. EXTRAORDINARY ITEM -- FORGIVENESS OF DEBT:
The Company entered into restructuring agreements whereby creditors
converted debt into equity and forgiveness. A schedule of forgiveness of debt
for each of the three years in the period ended June 30, 1995 follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1993
--------------------------------------------------
DEBT
BEGINNING CONVERTED FORGIVENESS ENDING NEW
OLD DEBT TO EQUITY OF DEBT DEBT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accounts payable...................................... $ 15,966 $ $ 15,966 $
Accrued expenses...................................... 189,546 145,750 43,796
Notes payable......................................... 85,840 $ 78,340 7,500
----------- ----------- ----------- -----------
$ 291,352 $ 145,750 $ 138,102 $ 7,500
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1994
------------------------------------------------
DEBT
BEGINNING CONVERTED FORGIVENESS ENDING NEW
OLD DEBT TO EQUITY OF DEBT DEBT
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Accounts payable....................................... $ 146,772 $ $ 146,772 $
Accrued expenses....................................... 16,398 15,000 1,398
Prepaid expenses....................................... 15,000 15,000
Notes payable.......................................... 11,894 $ 11,894
----------- --------- ----------- -----------
$ 190,064 $ 30,000 $ 160,064 $ --
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
23
<PAGE>
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1993, 1994 AND 1995
16. EXTRAORDINARY ITEM -- FORGIVENESS OF DEBT (CONTINUED):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1995
----------------------------------------------
DEBT
BEGINNING CONVERTED FORGIVENESS ENDING NEW
OLD DEBT TO EQUITY OF DEBT DEBT
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Accounts payable......................................... $ 94,390 $ -- $ 94,390 $ --
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
17. INCOME TAXES:
Effective July 1, 1993, the Company adopted Statement of Financial Standards
("SFAS") No. 109, Accounting for Income Taxes. SFAS No. 109 significantly
changes existing practice by requiring, among other things, an asset and
liability approach to calculating deferred income taxes. Implementation of SFAS
No. 109 did not have a significant impact on the Company's results of operations
or financial position.
As of June 30, 1995, the Company has available net operating loss
carry-forwards of approximately $54,800,000 for federal tax purposes. These net
operating loss carry-forwards expire from 1996 through 2008. For state income
tax purposes the Company has available net operating losses of approximately
$18,000,000 which expire from 2003 through 2020. As of June 30, 1994, the
Company had investment tax credit carry-forwards of approximately $100,000
expiring principally in the year 2001. Under federal tax laws, certain
significant changes in ownership of the Company may operate to restrict future
utilization of these carry-forwards. The operating loss and tax credit
carry-forwards result in deferred tax assets of approximately $19,000,000
(subject to limitations). It is not possible at this time to determine that the
realization of the deferred tax assets is more likely than not; accordingly, a
valuation reserve has been established for the full amount.
18. SEGMENT INFORMATION:
The Company is engaged in two principal business segments: conversion of
black-and-white videotape to color and film licensing, royalty revenue. The
table that follow shows certain financial information for each business segment
for the fiscal years ended June 30, 1993, 1994 and 1995.
FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
FILM ROYALTY/
COLOR CONVERSION LICENSING TOTAL
------------------------ -------------------- -------------------------
1993 1994 1995 1993 1994 1995 1993 1994 1995
------- ------- ------ ----- ------ ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................................. $ 3,721 $ 2,397 $4,916 $ 31 $ 940 $1,206 $ 3,752 $ 3,337 $ 6,122
Depreciation and amortization........... 1,079 1,059 1,041 40 334 246 1,119 1,393 1,287
Operating profit (loss)................. (3,242) (2,499) (1,987) (9) 606 527 (3,251) (1,893) (1,460)
Identifiable assets..................... 2,822 4,367 3,351 40 1,880 2,066 2,862 6,247 5,417
Capital expenditures.................... 979 1,406 547 1,734 551 979 3,140 1,098
</TABLE>
19. SUBSEQUENT EVENT:
In July 1995, the Company obtained short term financing by entering into a
$500,000 note payable. The note bears interest at 12.50% and the principal and
accrued interest are due November 1, 1995. The note is convertible at the option
of the creditor into shares of the Company's common stock. The Company also
issued 750,000 warrants to the creditor. The warrants are exercisable at $0.65
per share. The exercise price will be reduced to $0.50 per share if the note
payable is not repaid in full by November 1, 1995. The note is collateralized by
certain fixed assets of the Company.
24
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
The information called for by Part III (Items 10, 11, 12 and 13) is
incorporated by reference from the Company's definitive proxy statement, to be
filed pursuant to Regulation 14(A), which involves the election of directors and
which the Company intends to file with the Securities Exchange Commission not
later than 120 days after June 30, 1995, the end of the fiscal year covered ;by
this Form 10-K. If such definitive proxy statement is not filed with the
Securities Exchange Commission within the 120-day period, the items comprising
the Part III information will be filed as an amendment to this Form 10-K under
cover of Form 10-K/A, not later than the end of the 120-day period.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
A. INDEX OF FINANCIAL STATEMENTS: PAGE
---------
<S> <C> <C>
Report of Independent Certified Public Accountants.............................. 10
Balance Sheets as of June 30, 1994 and 1995..................................... 11
Statements of Operations for the years ended June 30, 1993, 1994 and 1995....... 12
Statements of Stockholders' Equity for the years ended June 30, 1993, 1994 and
1995........................................................................... 13
Statements of Cash Flows for the years ended June 30, 1993, 1994 and 1995....... 14-16
Notes to Financial Statements................................................... 17-24
B. INDEX OF FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts and Reserves................... 27
</TABLE>
All other schedules are omitted because they are not applicable or not
required, or because the required information is included in the financial
statements or the notes thereto.
C. No reports on Form 8-K were filed during the last quarter of the period
reported on hereby.
D. EXHIBITS
The following exhibits required to be filed as part of this Annual Report on
Form 10-K have been included.
<TABLE>
<C> <S>
3(a) Certificate of Incorporation of the Company, as amended, filed as Exhibit 3(a) to
the Company's Registration Statement on Form S-18 (Registration No. 2-98368-LA)
filed on June 13, 1985 (the "Form S-18"), included herein.
(b) Bylaws of the Company, as amended, filed as Exhibit 3(b) to the Form S-18,
incorporated herein by reference.
10(aa) Agreement dated October 19, 1994, between the Company and Stephen Strick,
regarding Stephen Strick's employment by the Company, included herein.
10(rr) Agreement with 20th Century Fox, Inc., dated June 30, 1992, regarding the
Company's commitment to provide certain services to 20th Century Fox, Inc. over a
three year period in exchange for cancellation of the Company's debt obligations
to 20th Century Fox, Inc., filed as Exhibit 10(rr) to the Company's Form 10-K
filed on September 28, 1994, incorporated herein by reference.
10(xx) Agreement with RHI Entertainment, Inc., King World Productions, Inc. and
Taurus-Film GmbH and Co., dated March 1, 1994 regarding coloring service to be
provided, filed as Exhibit 10(xx) to the Company's Form 10-K filed on September
28, 1994, incorporated herein by reference.
</TABLE>
25
<PAGE>
<TABLE>
<C> <S>
10(yy) Agreement dated September 1, 1993, between the Company and Jonathan D. Shapiro,
regarding Mr. Shapiro's employment by the Company, filed as Exhibit 10(yy) to the
Company's Form 10-K filed on September 28, 1994, incorporated by reference.
10(zz) Agreement dated January 3, 1994, between the Company and Robert Jennings Word II,
regarding Mr. Word's employment by the Company, filed as Exhibit 10(zz) to the
Company's Form 10-K filed on September 28, 1994, incorporated by reference.
24(a) Consent of Certified Public Accountants regarding the incorporation by reference
of the Company's audited financial statements contained in this Form 10-K for the
fiscal year ended June 30, 1994, to the Company's Registration Statement on Form
S-8 (Registration No. 33-45035) filed in December 1991.
27(a) Financial Data Schedule, included herein.
</TABLE>
26
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE
AT BALANCE
BEGINNING END OF
OF YEAR ADDITIONS DEDUCTIONS YEAR
--------- --------- ---------- ---------
1995
Allowance for doubtful accounts
deducted from accounts receivable in
balance sheet........................ $ $19,100 $ $19,100
--------- --------- ---------- ---------
--------- --------- ---------- ---------
1994.................................... $ $ $ $
--------- --------- ---------- ---------
--------- --------- ---------- ---------
1993.................................... $ $ $ $
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</TABLE>
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13, or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CST ENTERTAINMENT, INC.
By: /s/ JEFFREY M. JACOBS
-----------------------------------
Jeffrey M. Jacobs,
CONTROLLER
By: /s/ JONATHAN D. SHAPIRO
-----------------------------------
Jonathan D. Shapiro
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Dated: September 26, 1995
Pursuant to 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
- ------------------------------------------- ------------------------------------------- -----------------------
<C> <S> <C>
/s/ ABBEY BUTLER
---------------------------------- Director September 26, 1995
Abbey Butler
/s/ SUMNER A. LONG
---------------------------------- Director September 26, 1995
Sumner A. Long
/s/ JONATHAN D. SHAPIRO Director, President and Chief Executive
---------------------------------- Officer September 26, 1995
Jonathan D. Shapiro
/s/ GERALD SHEFSKY
---------------------------------- Chairman of the Board September 26, 1995
Gerald Shefsky
/s/ MICHAEL JAY SOLOMON
---------------------------------- Director September 26, 1995
Michael Jay Solomon
</TABLE>
28
<PAGE>
CONSENT OF CERTIFIED PUBLIC ACCOUNTS
CST Entertainment, Inc.
Culver City, California
We hereby consent to use in the Registration Statement on Form S-8,
Registration Number 33-45035 of our report dated September 11, 1995, relating to
the audit of the financial statements and schedule of CST Entertainment, Inc.,
which are contained in and incorporated by reference to the Annual Report on
Form 10-K for the year ended June 30, 1995. Our report contains an explanatory
paragraph regarding the Company's ability to continue as a going concern.
BDO SEIDMAN, LLP
Los Angeles, California
September 27, 1995
29
<PAGE>
Exhibit 3(a)
RESTATED CERTIFICATE OF INCORPORATION
OF
FEDERAL DATA PROCESSING CORPORATION
-------------
Adopted in Accordance with the Provisions
of Sections 242 and 245 of the General
Corporation Law of the State of Delaware
-------------
We, Charles Richter, President, and Lewis Suslow,
Secretary of FEDERAL DATA PROCESSING CORPORATION, a
Delaware corporation, do hereby certify under the seal of
the Corporation, as follows:
I. The Certificate of Incorporation of the Corporation
is hereby restated as follows:
1. The name of the corporation is FEDERAL DATA
PROCESSING CORPORATION.
2. The address of the corporation's registered
office in Delaware is 129 South State Street, City of
Lover, County of Kent. The United States Corporation
Company is the corporation's registered agent at that
address.
3. The purpose of the corporation is to engage in
any lawful act or activity for which corporations may be
organized under the Delaware General Corporation Law.
<PAGE>
4. The corporation shall have authority to issue
1,875,000 shares of stock, of which 1,500,000 shares
shall be Common Stock of the par value of 10 CENTS per
share and 375,000 shares shall be Class B stock of the
par value of 10 CENTS per share.
The powers, preference and rights of each class of
stock and the qualifications, limitations or restrictions
thereof, are as follows:
(A) The holders of the Common and Class B stock
shall vote together as one class on all matters on which
the vote (or the consent in lieu of voting) of the
stockholders is required or taken, and shall be entitled
to one vote for each share of such stock registered in
their names on the books of the corporation.
(B) The holders of the Common Stock shall be
entitled to receive all dividends payable in cash, stock
or otherwise, which may be declared by the Board of
Directors, from time to time, out of any funds lawfully
available therefor, and the Class B Stock shall not be
entitled to receive any such dividends. The holders of
Class B Stock shall, however, be entitled to share
ratably with the Common Stock in any preferential rights
given stockholders to subscribe for securities of the
corporation.
2
<PAGE>
(C) On or after March 31, 1971 the Class B Stock
shall, at the option of the respective holders thereof,
be convertible into fully-paid and non-assessable shares
of Common Stock of the corporation upon the following
terms and conditions:
(i) The Class B Stock shall initially be
convertible into Common Stock at an initial
conversion ratio of one share of Common Stock for
each share of Class B Stock.
(ii) The conversion ratio shall be subject
to adjustment from time to time, as follows:
(a) If at any time the corporation
shall issue any shares of Common Stock by way
of stock dividend or stock split, the number of
shares of Common Stock into which each share of Class
B Stock shall thereafter become convertible,
shall be proportionately increased and,
conversely, if at any time the corporation
contracts the number of outstanding shares of
Common Stock by combining such shares into a
smaller number of shares, the number of shares
of Common Stock into which each share of Class
B Stock shall thereafter be convertible, shall
be proportionately decreased.
3
<PAGE>
(b) In the case of a merger or consolidation
of the corporation with or into another
corporation, or the reclassification of its
Common Stock (other than by way of stock split
or contraction, or a change in par value), the
holders of the Class B Stock shall thereafter
be entitled to receive, upon conversion, the
kind and amount of shares of stock and
securities and property which they would have
been entitled to receive had they converted
such Class B Stock into Common Stock of the
corporation as of the record date for the
determination of Common stockholders entitled
to participate in such merger, consolidation or
reclassification.
(c) If at any time or from time
to time it shall appear to the Board of
Directors that conditions may arise by reason
of action proposed to be taken by the
corporation, which conditions, in the opinion
of the Board of Directors, are not adequately
covered by the other provisions of this
paragraph (C) and would materially and
adversely affect the conversion rights of the
holders of the Class B Stock, the conversion
price then in effect shall be adjusted in such
manner as the Board of Directors, in its sole
4
<PAGE>
discretion, may determine to be equitable under
the circumstances. Failure of the Board of
Directors to provide for an adjustment prior to
the effective date of any such action by the
corporation shall be conclusive evidence that
no adjustment under this subdivision (c) is
required in consequence of such action.
(iii) In order to exercise the conversion
privilege the holder of the Class B Stock shall
surrender the certificate or certificates therefor
to any transfer agent of the corporation for such
Class B Stock, accompanied by written notice of
election to convert such Class B Stock or portion
thereof. As soon as practicable thereafter, the
corporation shall cause to be issued and delivered a
certificate or certificates for the number of shares
of Common Stock issuable hereunder upon the
conversion of such Class B Stock, together with such
cash or scrip, as may be deliverable pursuant to
paragraph (iv) hereof. Such conversion shall be
deemed to have been effected on the date on which
the certificates of such Class B Stock have been
surrendered as provided above, and the
5
<PAGE>
person in whose name any certificate or certificates
for shares of Common Stock are issuable upon such
conversion shall be deemed to have become on said
date the holder of record of the shares represented
thereby.
(iv) In the event that the conversion of
any Class B Stock would result in the issuance of
fractions of a share, the corporation shall have the
option to (a) issue fractions of a share; (b) pay in
cash the fair value of fractions of a share as of
the time when those entitled to receive such
fractions are determined; or (c) issue scrip or
fractional warrants, exchangeable as therein
provided for full shares, but such scrip or
fractional warrants shall not entitle the holder to
any rights of a shareholder except as therein
provided. Such scrip or fractional warrants may be
issued subject to the condition that it shall become
void if not exchanged for certificates representing
full shares before a specified date, or subject to
the condition that the shares for which such scrip
or fractional warrants are exchangeable may be sold
by the corporation and
6
<PAGE>
the proceeds thereof distributed to the holders of
such scrip or fractional warrants, or subject to any
other conditions which the Board of Directors may
determine.
(D) In the event of the liquidation, dissolution or
winding-up of the corporation, whether voluntary or
involuntary, resulting in any distribution of its assets
to its stockholders, the holders of the shares of Common
Stock outstanding on the record date for determining
stockholders entitled to receive such distribution shall
be entitled to receive in respect of each such share an
amount equal to the liquidation preference hereinafter
set forth before any payment or distribution of the
assets of the corporation is made to or set apart for the
Class B Stock. After payment in full of such liquidation
preference, the holders of the Common Stock and Class B
Stock shall be entitled to receive, share and share alike
and without priority or preference, any and all remaining
assets and funds of the corporation. The liquidation
preference of the Common Stock shall be $4; provided,
however, that, if at any time the corporation shall
issue any shares of Common Stock by way of stock dividend
or stock split, the liquidation preference shall
thereafter
7
<PAGE>
be proportionately decreased, and, conversely, if at any
time the corporation contracts the number of outstanding
shares of Class A stock by combining such shares into a
smaller number of shares, the liquidation preference
shall thereafter be proportionately increased.
5. The Board of Directors shall have the power to
make, alter or repeal the by-laws of the corporation.
6. The corporation shall, to the full extent
permitted by Section 145 of the Delaware General
Corporation Law, as amended from time to time, indemnify
all persons whom it may indemnify pursuant thereto.
7. Whenever a compromise or arrangement is proposed
between this corporation and its creditors or any class
of them and/or between this corporation and its
stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the
application in a summary way of this corporation or of
any creditor or stockholder thereof or on the application
of any receiver or receivers appointed for this
corporation under the provisions of section 291 of Title 8
of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for
this
8
<PAGE>
corporation under the provisions of section 279 of Title 8
of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class
of stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court directs.
If a majority in number representing three-fourths in
value of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise
or arrangement and to any reorganization of this
corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the
said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on
all the creditors or class of creditors, and/or on all
the stockholders or class of stockholders, of this
corporation, as the case may be, and also on this
corporation.
II. The amendments to the Certificate of
Incorporation of the Corporation which consist of:
(i) the change of the corporation's registered
office and registered agent;
(ii) the revision of the corporation's purposes;
9
<PAGE>
(iii) the change of the corporation's authorized
stock from 1,000,000 shares of Class A Stock, 10
CENTS par value; 250,000 shares of Class B Stock, 10
CENTS par value and 1,000,000 shares of preferred
stock, $1 par value, to 1,500,000 shares of Common
Stock, 10 CENTS par value, and 375,000 shares of
Class B Stock, 10 CENTS par value, and the
specification of revised powers, preferences,
rights, qualifications, limitations and restrictions
in connection therewith (since all of the
corporation's issued shares are Class B Stock, 10
CENTS par value, and no change in par value of such
shares is being made, the capital of the corporation
will not be reduced by reason of the amendment);
(iv) the elimination of certain provisions
not now required by the General Corporation Law; and
(v) the addition of a provision with
respect to indemnification;
and their restatement herein were authorized in
accordance with Sections 242 and 245 of the General
Corporation Law by the unanimous written consent of all
the directors of the corporation pursuant to Section
141(f) of the General Corporation Law and the unanimous
written consent of all the stockholders entitled to vote
thereon, pursuant to Section 228 of the General
Corporation Law.
IN WITNESS WHEREOF, we have signed this
10
<PAGE>
Certificate and caused the corporate seal of the
corporation to be affixed this 23rd day of January, 1968.
FEDERAL DATA PROCESSING CORPORATION
By /s/ CHARLES RICHTER
---------------------------------
Charles Richter
President
By /s/ LEWIS SUSLOW
---------------------------------
Lewis Suslow,
Secretary
[SEAL]
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
BE IT REMEMBERED that on this 23rd day of January,
1968, personally came before me, a notary public for the
State of New York, Charles Richter and Lewis Suslow, the
persons who executed the foregoing Restated Certificate
of Incorporation, known to me personally to be such, and
acknowledged the said Certificate to be their act and
deed and that the facts therein stated are truly set
forth.
GIVEN under my hand and seal of office the day and
year aforesaid.
/s/ DOROTHY E. FINIGAN
------------------------------
Notary Public
[SEAL]
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF AMENDMENT OF "FEDERAL DATA PROCESSING
CORPORATION", FILED IN THIS OFFICE ON THE THIRD DAY OF NOVEMBER,
A.D. 1969, AT 2:30 O'CLOCK P.M.
/s/ EDWARD J. FREEL
[SEAL] ---------------------------------
EDWARD J. FREEL,
SECRETARY OF STATE
0660526 8100 AUTHENTICATION: 7412307
950036614 DATE: 02-17-95
<PAGE>
CERTIFICATE OF AMENDMENT
of
CERTIFICATE OF INCORPORATION
of
FEDERAL DATA PROCESSING CORPORATION
We, Charles Richter, President, and Richard Richter, Secretary, of
Federal Data Processing Corporation, a Delaware corporation (the "Company"),
hereby certify under the seal of the Company that:
1. On October 28, 1969, at the duly called annual meeting of
stockholders of the Company, the proposed amendment to the Certificate of
Incorporation of the Company described in Paragraph 2 hereof was duly
approved by the vote of a majority of the outstanding stock entitled to vote
thereon.
2. The following is a true and correct copy of the amended Article 4
of the Certificate of Incorporation of the Company, approved by the
stockholders as aforesaid:
"4. The corporation shall have authority to issue
1,975,000 shares of stock, of which 100,000 shares shall be
Preferred Stock, without par value, 1,500,000 shares shall be
Common Stock of the par value of 10 CENTS per share and 375,000
shares shall be Class B Stock of the par value of 10 CENTS per share.
<PAGE>
The powers, preference and rights of each class of stock and the
qualifications, limitations or restrictions thereof, are as follows:
(A) The Board of Directors may authorize the issuance of the
Preferred Stock from time to time in one or more series and with such
designations, preferences, relative, participating, optional and other
special rights, and qualifications, limitations or restrictions thereof,
which may differ with respect to each series, as the Board may fix by
resolution. Without limiting the foregoing, the Board of Directors is
expressly authorized to fix, with respect to each series:
(i) The number of shares which shall constitute such
series and the name of designation of such series;
(ii) The rate and the times at which dividends on such
series shall be paid, and whether or not such dividends shall be
cumulative;
(iii) The voting powers, if any, of the holders of such
series, subject to the provisions of the Delaware General
Corporation Law;
(iv) The terms and conditions for the redemption of shares
of such series, and the price or prices payable upon such
redemption;
(v) The rights of such shares upon voluntary or
involuntary limitation, including the amounts payable thereon;
(vi) The terms or amount of any sinking fund or purchase
fund for the purchase or redemption of shares of such series; and
(vii) The conversion right or rights, if any.
(B) The holders of the Common and Class B Stock shall vote together
as one class on all matters on which the vote (or the consent in lieu of
voting) of the stockholders is required or taken, and shall be entitled to
one vote for each share of such stock registered in their names on the books
of the corporation.
<PAGE>
(C) The holders of the Common Stock shall be entitled to receive
dividends payable in cash, stock or otherwise, which may be declared by the
Board of Directors, from time to time, out of any funds lawfully available
therefor, and the Class B Stock shall not be entitled to receive any such
dividends (other than dividends payable in Class B Stock). The holders of
Class B Stock shall, however, be entitled to share ratably with the Common
Stock in any preferential rights given stockholders to subscribe for
securities of the corporation.
(D) On or after March 31, 1971, the Class B Stock shall, at the
option of the respective holders thereof, be convertible into fully-paid and
non-assessable shares of Common Stock of the corporation upon the following
terms and conditions:
(i) The Class B Stock shall initially be convertible into
Common Stock at an initial conversion ratio of one share of Common
Stock for each share of Class B Stock.
(ii) The conversion ratio shall be subject to adjustment
from time to time, as follows:
(a) If at any time the corporation shall issue
any shares of Common Stock by way of stock dividend or
stock split, the number of shares of Common Stock into
which each share of Class B Stock shall thereafter become
convertible shall be proportionately increased and,
conversely, if at any time the corporation contracts the
number of outstanding shares of Common Stock by combining
such shares into a smaller number of shares, the number
of shares of Common Stock into which each share of Class B
Stock shall thereafter be convertible, shall be
proportionately decreased.
(b) In the case of a merger or consolidation of
the corporation with or into another corporation, or the
reclassification of its Common Stock (other than by way
of stock split or contraction, or a change
<PAGE>
in par value), the holders of the Class B Stock shall
thereafter be entitled to receive, upon conversion, the
kind and amount of shares of stock and securities and
property which they would have been entitled to receive
had they converted such Class B Stock into Common Stock of
the corporation as of the record date for the
determination of common stockholders entitled to
participate in such merger, consolidation or
reclassification.
(c) If at any time or from time to time it
shall appear to the Board of Directors that conditions
may arise by reason of action proposed to be taken by the
corporation, which conditions, in the opinion of the
Board of Directors, are not adequately covered by the
other provisions of this paragraph (D) and would
materially and adversely affect the conversion rights of
the holdings of the Class B Stock, the conversion price
then in effect shall be adjusted in such manner as the
Board of Directors, in its sole discretion, may determine
to be equitable under the circumstances. Failure of the
Board of Directors to provide for an adjustment prior to
the effective date of any such action by the corporation
shall be conclusive evidence that no adjustment under
this subdivision (c) is required in consequence of such
action.
(iii) In order to exercise the conversion privilege the
holder of the Class B Stock shall surrender the certificate or
certificates therefor to any transfer agent of the corporation for
such Class B Stock, accompanied by written notice of election to
convert such Class B Stock or portion thereof. As soon as
practicable thereafter, the corporation shall cause to be issued
and delivered a certificate or certificates for the number of
shares of Common Stock issuable hereunder upon the conversion of
such Class B
<PAGE>
Stock, together with such cash or scrip, as may be deliverable pursuant
to paragraph (iv) hereof. Such conversion shall be deemed to have been
effected on the date on which the certificates of such Class B Stock have
been surrendered as provided above, and the person in whose name any
certificate or certificates for shares of Common Stock are issuable upon
such conversion shall be deemed to have become on said date the holder of
record of the shares represented thereby.
(iv) In the event that the conversion of any Class B Stock would
result in the issuance of fractions of a share, the corporation shall
have the option to (a) issue fractions of a share; (b) pay in cash the
fair value of fractions of a share as of the time when those entitled to
receive such fractions are determined; or (c) to issue scrip or fractional
warrants, exchangeable as therein provided for full shares, but such scrip
or fractional warrants shall not entitle the holder to any rights of a
shareholder except as therein provided. Such scrip or fractional warrants
may be issued subject to the condition that it shall become void if not
exchanged for certificates representing full shares before a specified
date, or subject to the condition that the shares for which such scrip
or fractional warrants are exchangeable may be sold by the corporation
and the proceeds thereof distributed to the holders of such scrip or
fractional warrants, or subject to any other conditions which the Board
of Directors may determine.
(E) In the event of any liquidation, dissolution or other winding up of
the affairs of the corporation, whether voluntarily or involuntarily and
after provision for the holders of the Preferred Stock, the holders of the
shares of Common Stock outstanding on the record date for determining
stockholders entitled to receive such distribution shall be entitled to
receive in respect of each such share an amount equal to the liquidation
preference hereinafter set forth before any payment or distribution of the
assets of the corporation is made to or set apart for the
<PAGE>
Class B Stock. After payment in full of such liquidation preference, the
holders of the Common Stock and Class B Stock shall be entitled to receive,
share and share alike and without priority or preference, any and all
remaining assets and funds of the corporation. The liquidation preference of
the Common Stock shall be $4; provided, however, that, if at any time the
corporation shall issue any shares of Common Stock by way of stock dividend or
stock split, the liquidation preference shall thereafter be proportionately
decreased, and, conversely, if at any time the corporation contracts the
number of outstanding shares of Class A Stock by combining such shares into
a smaller number of shares, the liquidation preference shall thereafter be
proportionately increased."
3. Such amendment has been duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware, and
the capital of the Company will not be reduced under or by reason of such
amendment.
IN WITNESS WHEREOF, we, Charles Richter, President, and Richard Richter,
Secretary, of Federal Data Processing Corporation, have signed this
Certificate and caused the corporate seal of the Company to be hereunto
affixed this 30th day of October, 1969.
/s/ CHARLES RICHTER
------------------------------
Charles Richter, President
/s/ RICHARD RICHTER
------------------------------
Richard Richter, Secretary
<PAGE>
STATE OF NEW YORK )
: SS.:
COUNTY OF NEW YORK )
BE IT REMEMBERED that on this 30th day of October, 1969, personally came
before me, a notary public for the State of New York, Charles Richter and
Richard Richter, the persons who executed the foregoing Certificate of
Amendment, known to me personally to be such, and acknowledged the said
Certificate to be their act and deed and that the facts therein stated are
truly set forth.
GIVEN under my hand and the seal of office the day and year aforesaid.
------------------------------
Notary Public
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "FEDERAL DATA PROCESSING CORPORATION", CHANGING ITS NAME FROM
"FEDERAL DATA PROCESSING CORPORATION" TO "COLOR SYSTEMS TECHNOLOGY, INC.",
FILED IN THIS OFFICE ON THE THIRD DAY OF JANUARY, A.D. 1983, AT 9 O'CLOCK A.M.
/s/ EDWARD J. FREEL
-----------------------------------
Edward J. Freel, Secretary of State
0660526 8100 AUTHENTICATION: 7412308
950036614 DATE: 02-17-95
<PAGE>
CERTIFICATE OF AMENDMENT
of
CERTIFICATE OF INCORPORATION OF
FEDERAL DATA PROCESSING CORPORATION
FEDERAL DATA PROCESSING CORPORATION, a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of FEDERAL DATA PROCESSING
CORPORATION, by the unanimous written consent of its members, filed with the
minutes of the Board, duly adopted resolutions setting forth proposed
amendments to the Restated Certificate of Incorporation of said corporation,
declaring said amendments to be advisable and calling for a meeting of the
stockholders of said corporation for consideration thereof. The resolutions
setting forth the proposed amendments are as follows:
RESOLVED, that the Restated Certificate of Incorporation
of this Corporation be amended by changing the Articles thereof
numbered "First" and "Fourth" so that, as amended said articles
shall be and read as follows:
"First: The name of the Corporation is Color Systems
Technology, Inc."
"Fourth: The total number of shares of stock which the
Corporation shall have authority to issue is 15,000,000
shares of Common Stock of the par value of $.10 each."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance
<PAGE>
with Section 222 of the General Corporation Law of the State of Delaware at
which meeting the necessary number of shares as required by statute were
voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 212 of the General Corporation Law of the State of
Delaware.
FOURTH: That the capital of said Corporation will not be reduced under or
by reason of said amendment.
IN WITNESS WHEREOF, said FEDERAL DATA PROCESSING CORPORATION has caused
its corporate seal to be hereunto affixed and this certificate to be signed
by Jerry Shefsky, its President, and attested by Alan Shefsky, its Assistant
Secretary, this 22nd day of December, 1982.
FEDERAL DATA PROCESSING CORPORATION
By: /s/ JERRY SHEFSKY
-----------------------------------
President
ATTEST:
By: /s/ ALAN SHEFSKY
- --------------------
Assistant Secretary
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "COLOR SYSTEMS TECHNOLOGY, INC.", FILED IN THIS OFFICE ON THE
SECOND DAY OF JUNE, A.D. 1983, AT 9 O'CLOCK A.M.
/s/ EDWARD J. FREEL
-----------------------------------
Edward J. Freel, Secretary of State
0660526 8100 AUTHENTICATION: 7412309
950036614 DATE: 02-17-95
<PAGE>
CERTIFICATE OF AMENDMENT
of
RESTATED CERTIFICATE OF INCORPORATION OF
COLOR SYSTEMS TECHNOLOGY, INC.
COLOR SYSTEMS TECHNOLOGY, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of COLOR SYSTEMS TECHNOLOGY, INC., at
a special meeting duly held at which a quorum was present, duly adopted
resolution setting forth a proposed amendment to the Restated Certificate of
Incorporation of said corporation as amended, declaring said amendment to be
advisable and calling for a meeting of the stockholders of said corporation
for consideration thereof. The resolution setting forth the proposed
amendment is as follows:
RESOLVED, that the Certificate of Amendment to the Restated
Certificate of Incorporation of this Corporation be further amended
by changing the Article thereof numbered "Fourth" so that, as amended
said Article shall be and read as follows:
"Fourth: The total number of shares of stock which the
Corporation shall have authority to issue is 15,000,000
shares of Common Stock of the par value of $.15 each."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary
number of shares as
<PAGE>
required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: That the capital of said Corporation will not be reduced under
or by reason of said amendment.
IN WITNESS WHEREOF, said COLOR SYSTEMS TECHNOLOGY, INC. has caused its
corporate seal to be hereunto affixed and this certificate to be signed by
Jerry Shefsky, its President, and attested by Morton H. Farber, its Secretary,
this 2nd day of June, 1983.
COLOR SYSTEMS TECHNOLOGY, INC.
By: /s/ JERRY SHEFSKY
------------------------------
President
ATTEST:
By: /s/ MORTON H. FARBER
- ------------------------
Secretary
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "COLOR SYSTEMS TECHNOLOGY, INC.", FILED IN THIS OFFICE ON THE
NINTH DAY OF FEBRUARY, A.D. 1987, AT 10 O'CLOCK A.M.
/s/ EDWARD J. FREEL
-----------------------------------
Edward J. Freel, Secretary of State
0660526 8100 AUTHENTICATION: 7412310
950036614 DATE: 02-17-95
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
* * * * *
COLOR SYSTEMS TECHNOLOGY, INC., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of COLOR SYSTEMS
TECHNOLOGY, INC. resolutions were duly adopted setting forth the proposed
amendment to the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and calling a meeting of the stockholders of
said corporation for consideration thereof. The resolution setting forth the
proposed amendments are as follows:
RESOLVED, that the Certificate of Incorporation of this
corporation be amended by changing Article 4 thereof so that, as
amended said Article shall be and read as follows:
"Article 4. The corporation shall be authorized to issue
40,000,000 shares of common stock of the par value of $.15 per
share and 10,000,000 shares of preferred stock of the par value of
$.01 per share.
The Board of Directors is authorized to cause the
issuance, from time to time, of Preferred Stock, and one or more
series thereof, for any proper purpose without shareholder
approval, except where, because of the particular circumstances
under which any of such shares shall be issued, shareholder
approval is required by law. Each series of Preferred Stock shall
be distinctly titled and shall consist of the number of shares
designated by the Board of Directors. The Board of Directors is
expressly vested with the right to determine, with respect to the
Preferred Stock and each series thereof, the following: (a) whether
such shares shall be granted voting rights, and if so, to what
extent, and upon what terms and conditions; (b) the rates and times
at which, and the terms and conditions on which, dividends on
<PAGE>
such shares shall be paid and any dividend rights to cumulation;
(c) whether such shares shall be granted conversion rights, and if
so, upon what terms and conditions; (d) whether the corporation
shall have the right to redeem such shares, and if so, upon what
terms and conditions; (e) the liquidation rights (if any) of such
shares, including whether such shares shall enjoy any liquidation
preference over the Common Stock; and (f) such other designations,
preferences, relative rights and limitations (if any) attaching to
such shares of Preferred Stock."
FURTHER RESOLVED, that the Certificate of Incorporation
of this corporation be amended by adding Article 8 thereof so that,
as added said Article shall be and read as follows:
"Article 8. No director of the Corporation shall be
liable to the Corporation or its shareholders for monetary damages
for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to the
Corporation or its shareholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction for which the director
derived an improper personal benefit. Neither the amendment or
repeal of this Article 8 nor the adoption of any provision of the
Certificate of Incorporation inconsistent with this Article 8 shall
eliminate or reduce the effect of this Article 8 in respect of any
matter occurring, or any suit, claim or cause of action that but
for this Article 8 would accrue or arise, prior to such amendment,
repeal or adoption of an inconsistent provision."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of The General
Corporation Law of the State of Delaware at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendments were duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS WHEREOF, said COLOR SYSTEMS TECHNOLOGY, INC. has caused
this certificate to be signed by Buddy Young, its President, and attested by
Charles M. Powell, its Secretary, this 4th day of February, 1987.
COLOR SYSTEMS TECHNOLOGY, INC.
By /s/ BUDDY YOUNG
-----------------------------------
Buddy Young, President
ATTEST:
By /s/ CHARLES M. POWELL
- -----------------------------------
Charles M. Powell, Secretary
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF CHANGE OF REGISTERED AGENT OF "COLOR
SYSTEMS TECHNOLOGY, INC.", FILED IN THIS OFFICE ON THE NINTH DAY
OF FEBRUARY, A.D. 1987, AT 10:01 O'CLOCK A.M.
/s/ EDWARD J. FREEL
[SEAL] ---------------------------------
EDWARD J. FREEL,
SECRETARY OF STATE
0660526 8100 AUTHENTICATION: 7412311
950036614 DATE: 02-17-95
<PAGE>
CERTIFICATE OF CHANGE OF REGISTERED AGENT
AND
REGISTERED OFFICE
* * * * *
COLOR SYSTEMS TECHNOLOGY, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
The present registered agent of the corporation is United States
Corporation Company and the present registered office of the corporation is
in the county of Kent.
The Board of Directors of COLOR SYSTEMS, TECHNOLOGY, INC. adopted the
following resolution on the 9th day of December, 1986.
Resolved, that the registered office of COLOR SYSTEMS TECHNOLOGY,
INC. in the state of Delaware be and it hereby is changed to Corporation
Trust Center, 1209 Orange Street, in the City of Wilmington, County of
New Castle, and the authorization of the present registered agent of
this corporation be and the same is hereby withdrawn, and THE
CORPORATION TRUST COMPANY, shall be and is hereby constituted and
appointed the registered agent of this corporation at the address of its
registered office.
IN WITNESS WHEREOF, COLOR SYSTEMS TECHNOLOGY, INC. has caused this
statement to be signed by , its
_______________________ President and attested by ,
its ______________________ Secretary this 2nd day of February, 1987.
By [SIG]
-------------------------------------
President
ATTEST:
By [SIG]
-------------------------------------
Secretary
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF AMENDMENT OF "COLOR SYSTEMS
TECHNOLOGY, INC.", FILED IN THIS OFFICE ON THE NINTH DAY OF
SEPTEMBER, A.D. 1991, AT 9 O'CLOCK A.M.
/s/ EDWARD J. FREEL
[SEAL] ---------------------------------
EDWARD J. FREEL,
SECRETARY OF STATE
0660526 8100 AUTHENTICATION: 7411620
950036350 DATE: 02-16-95
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 09/09/1991
912535066 - 660526
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
COLOR SYSTEMS TECHNOLOGY, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of COLOR SYSTEMS
TECHNOLOGY, INC. resolutions were duly adopted setting forth the proposed
amendment to the Certificate of Incorporation of said corporation, declaring
said amendment; to be advisable and calling a meeting of the stockholders of
said corporation for consideration thereof. The resolution setting forth the
proposed amendments are as follows:
RESOLVED, that the Certificate of Incorporation of this corporation
be amended by changing Article 4 thereof so that, as amended said
Article shall be and read as follows:
"Article 4. The corporation shall be authorized to issue 20,000,000
shares of common stock of the par value of $.15 per share."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of The General
Corporation Law of the State of Delaware at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
1
<PAGE>
IN WITNESS WHEREOF, said COLOR SYSTEMS TECHNOLOGY, INC. has caused this
certificate to be signed by Buddy Young, its President, and attested L.
Stephen Albright, its Secretary, this 3rd day of September, 1991.
COLOR SYSTEMS TECHNOLOGY, INC.
By /s/ BUDDY YOUNG
-------------------------------------
BUDDY YOUNG, President
ATTEST:
By /s/ L. STEPHEN ALBRIGHT
-------------------------------------
L. STEPHEN ALBRIGHT, Secretary
2
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF AMENDMENT OF "COLOR SYSTEMS
TECHNOLOGY, INC.", CHANGING ITS NAME FROM "COLOR SYSTEMS
TECHNOLOGY, INC." TO "CST ENTERTAINMENT IMAGING, INC.", FILED IN
THIS OFFICE ON THE SIXTEENTH DAY OF MARCH, A.D. 1992, AT 9
O'CLOCK A.M.
/s/ EDWARD J. FREEL
[SEAL] ---------------------------------
EDWARD J. FREEL,
SECRETARY OF STATE
0660526 8100 AUTHENTICATION: 7411621
950036350 DATE: 02-16-95
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 03/16/1992
920765329 - 660526
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION OF
COLOR SYSTEMS TECHNOLOGY, INC.
COLOR SYSTEMS TECHNOLOGY, INC., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of COLOR SYSTEMS
TECHNOLOGY, INC. resolutions were duly adopted setting forth the proposed
amendments to the Certificate of Incorporation of said corporation, declaring
said amendments to be advisable and calling a meeting of the stockholders of
said corporation for consideration thereof. The resolution setting forth the
proposed amendments are as follows:
RESOLVED, that the Certificate of Incorporation of this
Corporation be amended as follows:
"First: the name of the Corporation is CST ENTERTAINMENT
IMAGING, INC."
"Fourth: The total number of shares of stock which the
Corporation shall be authorized to issue is 30,000,000
shares of common stock of the par value of $.15 per
share."
SECOND: That thereafter, the annual meeting of the stockholders of
said corporation was duly called and held, upon notice in accordance with
Section 222 of The General Corporation Law of the State of Delaware at which
meeting the necessary
<PAGE>
number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendments were duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said COLOR SYSTEMS TECHNOLOGY, INC. has caused
this certificate to be signed by Gerald Shefsky, its Chief Executive Officer
& Chairman of the Board, and attested L. Stephen Albright, its Secretary,
this 12th day of March, 1992.
COLOR SYSTEMS TECHNOLOGY, INC.
By /s/ GERALD SHEFSKY
-------------------------------------
Gerald Shefsky, CEO & Chairman
ATTEST:
By /s/ L. STEPHEN ALBRIGHT
------------------------------------
L. Stephen Albright, Secretary
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
-----------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "CST ENTERTAINMENT IMAGING, INC.", CHANGING ITS NAME FROM "CST
ENTERTAINMENT IMAGING, INC." TO "CST ENTERTAINMENT, INC.", FILED IN THIS
OFFICE ON THE SIXTEENTH DAY OF FEBRUARY, A.D. 1995, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL]
---------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 7411566
0660526 8100
DATED: 02-16-95
950036406
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION OF
CST ENTERTAINMENT IMAGING, INC.
CST ENTERTAINMENT IMAGING, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of CST ENTERTAINMENT
IMAGING, INC. were duly adopted setting forth the proposed amendments to the
Certificate of Incorporation of said corporation, declaring said amendments
to be advisable and calling a meeting of the stockholders of said corporation
for consideration thereof. The resolution setting forth the proposed
amendments are as follows:
RESOLVED, that the Certificate of Incorporation of this Corporation
be amended as follows:
"First: the name of the Corporation is CST ENTERTAINMENT, INC."
"Second: The total number of shares of stock which the Corporation
shall be authorized to issue is 40,000,000 shares of common stock
of the par value of $.15 per share."
SECOND: That thereafter, the annual meeting of the stockholders of said
corporation was duly called and held, upon notice in accordance with Section
222 of The General Corporation Law of the State of Delaware at which meeting
the necessary numbers as required by statute were voted in favor of the
amendment.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS WHEREOF, said CST ENTERTAINMENT IMAGING, INC. has caused the
certificate to be signed by Jonathan D. Shapiro, its Chief Executive Officer,
and attested Stephen S. Strick, its Secretary, this 30th day of December 12,
1994.
CST ENTERTAINMENT IMAGING, INC.
By: /s/ JONATHAN D. SHAPIRO
----------------------------
Jonathan D. Shapiro,
President and Chief Executive Officer
ATTEST:
By /s/ STEPHEN S. STRICK
----------------------------
Stephen S. Strick, Secretary
<PAGE>
EXHIBIT 10(aa)
[LOEB AND LOEB LETTERHEAD]
(310) 282-2057
October 19, 1994
Jonathan D. Shapiro
President and COO
CST Entertainment, Inc.
5901 Green Valley Circle
Suite 400
Culver City, California 90230
RE: CST Entertainment Imaging, Inc. and
Art and Commerce f/s/o Stephen S. Strick
----------------------------------------
Dear Jody:
The following will set forth the principal terms of the agreement we
reached pursuant to which Art and Commerce ("Company") will furnish the
services of Stephen S. Strick to CST Entertainment, Inc. as set forth
hereinbelow:
1. Stephen will render those services that are normally rendered by a
Corporate/Business Affairs Executive in the United States television
business. These services will be rendered on a non-exclusive, but first
priority basis to CST. Stephen shall report directly to you and Gerald
Shefsky.
2. The term of the agreement will be for a period of two (2) years. CST
may terminate the services provided herein by written notice to Art and
Commerce at 1211 Sunset Plaza Drive, Suite 314, Los Angeles, California
90065, with a copy to Loeb and Loeb at 10100 Santa Monica Boulevard, Suite
2200, Los Angeles, California 90067, Attention: John J. Dellaverson, Esq.,
for any legal reason, provided that the sums payable pursuant to Paragraphs 4
and 5 shall continue for a period of six months after the date of receipt of
such written notice.
3. Stephen's title will be Senior Vice President, Corporate and Business
Affairs.
4. The Company will receive the annual sum of $125,000, in equal
consecutive monthly installments, the first installment of which will be
payable on the date that the Company furnishes Stephen's services. All other
installments shall be
<PAGE>
[LOEB AND LOEB LETTERHEAD]
Jonathan D. Shapiro
October 19, 1994
Page 2
payable on the first business day of each succeeding month. The Company shall
also be entitled to reimbursement for Employer's share of payroll taxes, FICA
and other fringes.
5. The Company shall be entitled to receive a car allowance and
cellular telephone allowance equal to the car and cellular telephone
allowances paid to other executives of CST, but not less than an amount equal
to the aggregate of $700 per month ($500 for car allowance, $200 for
telephone allowance). Such sums shall be payable in advance upon the
commencement of the services provided hereunder, and thereafter monthly,
together with the sums payable under Paragraph 4.
6. Company or Stephen shall be entitled to all normal fringes provided by
CST to its executives including health, dental and life insurance plans, as
well as other benefits or bonuses that may be offered in the future to
executives of CST.
7. Company or Stephen will be granted the right and option to purchase
up to 60,000 shares of CST's Common Stock in accordance with CST's Common
Stock Employee Option Plan. One-third of such stock shall vest on the first
anniversary of this Agreement, one-third shall vest on the second anniversary
of this Agreement, and one-third shall vest on the third anniversary of this
Agreement or on any more favorable basis if such more favorable vesting is
accorded other executives of CST. The option price for each share shall be
the price of CST's common stock as listed on the American Stock exchange on
the close of business August 8, 1994. Stephen and/or Company's rights under
this paragraph shall accelerate and immediately vest on the date that (a) a
controlling interest of the shares of voting common stock shall change, or
(b) that the management of the Company shall change.
8. Company or Stephen shall be entitled to a commission for any business
brought to CST in the amount of 1% of the gross amount billed for such
business payable upon receipt by CST of such sums.
This agreement shall be governed by the laws of the State of California
applicable to contracts wholly made and to be performed therein.
If the foregoing is acceptable, kindly arrange for execution on behalf
of CST Entertainment, Inc. in the space
<PAGE>
[LOEB AND LOEB LETTERHEAD]
Jonathan D. Shapiro
October 19, 1994
Page 3
provided. I will then arrange for counterexecution on behalf of Art and
Commerce by Stephen.
Very truly yours,
/s/ JOHN J. DELLAVERSON
-----------------------
John J. Dellaverson
of Loeb and Loeb
JJD:dal
666666666
DEJ10338.L03
ACCEPTED AND AGREED TO:
Dated: 10-19, 1994 CST ENTERTAINMENT, INC.
By: /s/ JONATHAN D. SHAPIRO
-------------------------
Dated: Oct 19, 1994 ART AND COMMERCE f/s/o
STEPHEN S. STRICK
By: /s/ STEPHEN S. STRICK
---------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
audited financial statements - year ended June 30, 1995 (Form 10-K) and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 24,694
<SECURITIES> 0
<RECEIVABLES> 587,868
<ALLOWANCES> 19,100
<INVENTORY> 1,161,868
<CURRENT-ASSETS> 1,803,814
<PP&E> 6,473,721
<DEPRECIATION> 5,118,680
<TOTAL-ASSETS> 5,417,045
<CURRENT-LIABILITIES> 2,030,790
<BONDS> 0
<COMMON> 3,929,944
0
0
<OTHER-SE> (543,689)
<TOTAL-LIABILITY-AND-EQUITY> 5,417,045
<SALES> 5,413,136
<TOTAL-REVENUES> 6,122,164
<CGS> 3,919,861
<TOTAL-COSTS> 7,438,605
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 143,503
<INCOME-PRETAX> (1,459,944)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,459,944)
<DISCONTINUED> 0
<EXTRAORDINARY> 94,390
<CHANGES> 0
<NET-INCOME> (1,365,554)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
