<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-14613
CST ENTERTAINMENT, INC.
(FORMERLY CST ENTERTAINMENT IMAGING, INC.)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-2614435
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
Incorporation or
organization)
</TABLE>
5901 GREEN VALLEY CIRCLE, SUITE 400
CULVER CITY, CALIFORNIA 90230
(Address of principal executive offices)
(Zip Code)
(310) 417-3444
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
------------------------
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 ___
The Registrant has 26,203,890 shares of common stock, par value $0.15 per
share, issued and outstanding as of October 15, 1995.
Total number of sequentially numbered pages in this document: 12
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CST ENTERTAINMENT, INC.
FORM 10-Q FOR QUARTER ENDED
SEPTEMBER 30, 1995
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Balance Sheets at June 30, 1995 and September 30, 1995.................................... 4
Statements of Operations for the Quarter Ended September 30, 1994 and 1995................ 5
Statements of Cash Flows for the Quarter Ended September 30, 1994 and 1995................ 6-7
Notes to Financial Statements............................................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 11
Item 2. Changes in Securities..................................................................... 11
Item 3. Defaults upon Senior Securities........................................................... 11
Item 4. Submission of Matters to a Vote of Securities Holders..................................... 11
Item 5. Other Information......................................................................... 11
Item 6. Exhibits and Reports on Form 8-K.......................................................... 11
Signature Page............................................................................ 12
</TABLE>
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(This page has been left blank intentionally.)
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ITEM 1. FINANCIAL STATEMENTS
CST ENTERTAINMENT, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1995 1995
------------- -------------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash............................................................................. $ 24,694 $ 40,023
Accounts receivable, net......................................................... 368,868 443,528
Work-in-process.................................................................. 1,161,868 1,857,349
Prepaid expenses................................................................. 33,384 69,191
Receivable from related parties.................................................. 215,000 15,000
------------- -------------
Total current assets........................................................... 1,803,814 2,425,091
Property and equipment:
Color conversion equipment....................................................... 3,896,789 3,896,789
Leasehold improvements and other equipment....................................... 1,591,550 1,596,201
Software......................................................................... 985,382 1,093,897
------------- -------------
6,473,721 6,586,887
Less accumulated depreciation...................................................... 5,118,680 5,299,053
------------- -------------
1,355,041 1,287,834
------------- -------------
Other assets:
Patent, net of accumulated amortization of $520,633 and $531,442................. 34,211 23,402
Film library, net of accumulated amortization of $2,340,275 and $2,562,275....... 1,878,010 1,698,151
Other assets..................................................................... 16,147 16,147
Notes receivable from officers................................................... 192,263 192,263
Accounts receivable - long term.................................................. 137,559 137,559
------------- -------------
2,258,190 2,067,522
------------- -------------
$ 5,417,045 $ 5,780,447
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.................................................................... $ 492,430 $ 967,017
Accounts payable................................................................. 333,163 331,304
Accrued expenses................................................................. 537,852 875,588
Deferred income.................................................................. 493,087 610,060
Commitments payable -- short-term................................................ 174,258
Loans payable to related party................................................... 100,000
------------- -------------
Total current liabilities.......................................................... 2,030,790 2,883,969
------------- -------------
Stockholders' equity:
Common stock, par value $0.15 per share; authorized 40,000,000 shares; issued
26,199,624 and 26,203,890 shares................................................ 3,929,944 3,929,944
Additional paid-in capital....................................................... 55,667,022 55,667,022
Accumulated deficit.............................................................. (56,210,711) (56,700,488)
------------- -------------
3,386,255 2,896,478
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$ 5,417,045 $ 5,780,447
------------- -------------
------------- -------------
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE>
CST ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1995
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<S> <C> <C>
Revenue:
Coloring income.................................................................. $ 1,569,718 $ 678,780
Licensing/royalty income......................................................... 243,019 400,000
Other income..................................................................... 2,435
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1,815,172 1,078,780
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Expense:
Production....................................................................... 1,179,029 526,735
Research and development......................................................... 41,604 36,782
Depreciation and amortization.................................................... 366,942 137,071
Film library amortization........................................................ 114,629 222,000
General and administrative....................................................... 476,756 631,361
Interest expense................................................................. 24,345 14,608
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2,203,305 1,568,557
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Loss before extraordinary item................................................... (388,133) (489,777)
Extraordinary item -- gain from forgiveness of debt.............................. 13,998
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Net profit (loss)................................................................ $ (374,135) (489,777)
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Per share:
Loss before extraordinary item................................................... $ (0.01) $ (0.02)
Extraordinary item............................................................... 0.00 0.00
------------- -------------
Net profit (loss) per share...................................................... $ (0.01) $ (0.02)
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Weighted average number of common shares outstanding............................. 25,017,128 26,201,046
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------------- -------------
</TABLE>
See Accompanying Notes To Financial Statements
5
<PAGE>
CST ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995
(UNAUDITED)
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1994 1995
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<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................................. $ (374,135) $ (489,777)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization......................................................... 481,571 359,071
Non-cash revenue from commitments payable............................................. (174,258)
Gain from forgiveness of debt......................................................... (13,998)
(Increase) decrease in operating assets:
Accounts receivable................................................................... (171,944) (74,660)
Work in process....................................................................... 199,307 (641,370)
Prepaid expenses...................................................................... 15,955 (35,807)
Receivable from related parties....................................................... 200,000
Increase (decrease) in liabilities:
Accounts payable...................................................................... (18,471) (1,859)
Accrued expenses...................................................................... (19,343) 337,736
Deferred income....................................................................... (340,940) 116,973
Loans payable to related party........................................................ 100,000
----------- -----------
Total adjustments....................................................................... 132,137 185,826
----------- -----------
Net cash used in operating activities............................................... (241,998) (303,951)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment................................................... (62,194) (4,651)
Additions to capitalized software..................................................... (142,078) (108,515)
Additions to film library............................................................. (42,141)
Additions to note receivables from officers........................................... (15,000)
----------- -----------
Net cash used in investing activities............................................... (219,272) (155,307)
----------- -----------
Cash flows from financing activities:
Payments of notes payable............................................................. (2,126) (25,413)
Additions to notes payable............................................................ 500,000
Proceeds from exercise of stock options............................................... 20,494
----------- -----------
Net cash provided by financing activities............................................... 18,368 474,587
----------- -----------
Net increase (decrease) in cash......................................................... (442,902) 15,329
Cash at beginning of period............................................................. 601,602 24,694
----------- -----------
Cash at end of period................................................................... $ 158,700 $ 40,023
----------- -----------
----------- -----------
</TABLE>
(Continued)
6
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995
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<S> <C> <C>
Cash paid during the quarter for interest................................................... $ 24,345 $ 145
--------- ---------
--------- ---------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING & FINANCING ACTIVITIES
THREE MONTHS ENDED SEPTEMBER 30, 1994
The Company liquidated $13,998 of accounts payable through the forgiveness
of debt.
THREE MONTHS ENDED SEPTEMBER 30, 1995
The Company capitalized $54,111 of depreciation expense under its
work-in-process.
See Accompanying Notes to Financial Statements
7
<PAGE>
CST ENTERTAINMENT, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
1. COMMENTS:
In the opinion of the Company's management, the accompanying unaudited
financial statements contain all adjustments, consisting of only normal
recurring accruals, necessary to present fairly the Company's financial position
at September 30, 1995, the results of operations for the quarter ended September
30, 1995 and 1994 and the cash flows for the quarter ended September 30, 1995
and 1994. Although management of the Company believes that the disclosures in
the financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
financial statements that have been prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended June 30, 1995.
The results of operations for the quarter ended Septmebr 30, 1995 are not
necessarily indicative of the results of operations to be expected for the full
year ending June 30, 1996.
Certain prior period amounts have been reclassified to conform to current
period's presentation.
2. LICENSE AGREEMENT:
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. Subsequent to September 30, the Company was
negotiating to amend the agreement to produce an additional 18 (eighteen)
one-half hour episodes under similar terms and conditions.
3. NOTES PAYABLE:
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. Subsequent to September 30, 1995, the
Company had not repaid the principal or interest due and was negotiating as to
repayment of the amounts owed.
4. LOANS PAYABLE TO RELATED PARTY:
In July 1995, Mr. Jonathan D. (Jody) Shapiro issued a short-term loan to the
Company for $100,000 at an interest rate of 10.25%. Principal and interest is
due on demand subject to certain terms and conditions. The loan is
collateralized by certain fixed assets of the Company.
5. LINE OF CREDIT:
The Company is currently in negotiations for a line of credit and term loan
with Coast Business Credit. The line of credit is for $750,000 and is based on
valid trade receivables. The term loan portion is also for $750,000, and will be
due three years from loan inception. The interest rate is approximately prime
+2.5% and 3%, respectively and minimum monthly interest payments of $25,000 will
be due regardless of outstanding balances. The line of credit and term loan will
be collateralized by the majority of the assets of the Company.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Coloring revenue for the quarter ended September 30, 1995 decreased over
50%, as compared to 1994. At September 30, 1995, two colorizing projects
included in work-in-process were awaiting customer approval for approximately
$425,000 (188 minutes). Furthermore, in the quarter ended September 30, 1994,
the Company delivered over $1,000,000 of "The Little Rascals" colorized product
(approximately 585 minutes).
The increase in Licensing/royalty income in 1995 is due primarily to the
results of the Featurizations division. The Company did not complete any
projects for its Featurizations division during the quarter ended September 30,
1995. However, the Company did license its four previously completed 30-minute
science fiction anthology segments (See Note 2).
The average price per minute delivered increased 68% in the quarter ended
September 30, 1995 as compared to 1994. The difference is the result of the
change in the Company's product mix in the quarter whereby a significant portion
of its deliverable color conversion work was on Color F/X projects (i.e. music
videos and commercials) in 1995.
Delivered minutes decreased 74% in the quarter September 30, 1995 as
compared to 1994. Minutes produced decreased 22% in the quarter and ended
September 30, 1995 as compared to 1994. The decreases in 1995 are attributable
to the differences in the Company's operations in 1995 as compared to 1994 as
described above.
The ratio of cost of production to color conversion revenue increased 122%
in the quarter ended September 30, 1995 as compared to 1994 and is attributable
the differences in the Company's operations in 1995 as compared to 1994 as
described above. This increase is also due primarily to unexpected costs
incurred in the completion of the Warner Brothers Project.
The average cost of minute produced increased 24% in the quarter ended
September 30, 1995 as compared to 1994 and is attributable the differences in
the Company's operations in 1995 as compared to 1994 as described above.
Research and development costs decreased 12% in the quarter ended September
30, 1995 as compared to 1994. The decreases are the result of more of the
Company's research and development personnel in 1994 being deployed to provide
alternative adaptions and enhancements of animation and coloring software.
General and administrative expenses increased 32% in the quarter ended
September 30, 1995, as compared to 1994. The increase was primarily due to the
Company recording a $280,000 license fee expense in conjunction with the
delivery of the four 30-minute science fiction anthology segments described
above. The increase was offset slightly by decreased costs resulting from the
employment of fewer corporate personnel in the Company's three additional
operating divisions.
Interest expense decreased $9,737 in the quarter ended September 30, 1995 as
compared to 1994. The decrease is primarily the result of interest costs
incurred in financing arrangements entered into in the quarter ended September
30, 1994 whereby Company receivables were sold at discounted values.
Depreciation and amortization expense decreased 63% for the quarter ended
September 30, 1995. The decrease is attributed to the allocation of depreciation
and amortization expense to production products in the current quarter and many
of the assets becoming fully depreciated during the current and previous
quarter. Depreciation and amortization expense before capitalization to
production products was $191,182 for the quarter ended September 30, 1995.
The increase in film amortization expense in the quarter ended September 30,
1995 is a direct result of amortization costs associated with licensing revenues
earned in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position as of September 30, 1995 was a
negative $458,878 as compared to a negative $428,613 as of September 30, 1994.
The Company has experienced significant negative cash
9
<PAGE>
flows from operations and the Company's independent certified public accountants
included an explanatory paragraph in their last fiscal year-end report with
respect to the Company's ability to continue as a going concern.
The following are the Company's plans for improving operations: securement
of production work; securement of working capital; production capacity
expansion; development of Featurization products and other products for its own
library; expansion of the Company's Color FX division; animation "inking and
painting" production; and animation software sales.
The Company has secured some contracts for color conversion work. The
Company continues to negotiate for contracts on substantial amounts of color
conversion work. Future color conversion revenues and profits are dependent upon
the successful attainment of these contracts, neither of which can be assumed.
During the quarter ended September 30, 1995, the Company completed the color
conversion of the final picture for credit under its commitment obligation and
recognized revenue of $273,258.
During the quarter ended September 30, 1995, the Company expended $4,651 on
property and equipment for leasehold improvements and other equipment. The
Company anticipates it will have capital expenditures over the next twelve
months of between $100,000 and $300,000 for additional work-stations and/or
upgrade of current work-stations.
The Company expended $49,962 on the adaption of animation software for
alternative uses and $58,553 on the enhancement of coloring software in the
quarter ended September 30, 1995. The Company expects to devote additional
resources in the current fiscal year for the production and enhancements of its
proprietary software.
During the quarter ended September 30, 1995, the Company did not complete
any productions for its film library. However, the Company delivered the Science
Fiction Anthology "Attack of the Killer "B" Movies" to a foreign distributor.
The Company anticipates future expenditures of $3 to $4 million over the next
twelve months for future library products.
Should the Company be successful in obtaining the contracts currently under
negotiation, the Company anticipates cash flows from operations to be positive
over the next twelve months. The Company believes it will cover any needed cash
requirements over the next twelve months through operating cash flow, pre-sales
of its library products, sales of software products, placements of the Company's
equity securities or other financing arrangements which the Company is currently
pursuing (See Note 5).
The Company does not anticipate significant amounts of warrants or employee
stock options will be exercised in 1995 as the majority of the Company's
outstanding warrants and options are at an exercise price greater than the
current market price of the Company's common stock.
Future color conversion revenues and profits are dependent upon the
successful attainment of contracts currently in negotiations. The Company has
not yet attained operating profitability. There can be no assurance that the
Company's efforts will be sufficiently successful to ensure the ultimate
viability of the Company.
10
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PART II -- OTHER INFORMATION
<TABLE>
<S> <C>
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submissions of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K. None.
</TABLE>
11
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
/s/ JONATHAN D. SHAPIRO
--------------------------------------
JONATHAN D. SHAPIRO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ JEFFREY M. JACOBS
--------------------------------------
JEFFREY M. JACOBS
CONTROLLER
November 7, 1995
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from unaudited
financial statements for the quarter ended September 30, 1995 (Form 10Q) and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 40,023
<SECURITIES> 0
<RECEIVABLES> 462,628
<ALLOWANCES> 19,100
<INVENTORY> 1,857,349
<CURRENT-ASSETS> 2,425,091
<PP&E> 6,586,887
<DEPRECIATION> 5,299,053
<TOTAL-ASSETS> 5,780,447
<CURRENT-LIABILITIES> 2,883,969
<BONDS> 0
<COMMON> 3,929,944
0
0
<OTHER-SE> (1,033,466)
<TOTAL-LIABILITY-AND-EQUITY> 5,780,447
<SALES> 678,780
<TOTAL-REVENUES> 1,078,780
<CGS> 526,735
<TOTAL-COSTS> 1,553,949
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,608
<INCOME-PRETAX> (489,777)
<INCOME-TAX> 0
<INCOME-CONTINUING> (489,777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (489,777)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
