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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-14613
CST ENTERTAINMENT, INC.
(FORMERLY CST ENTERTAINMENT IMAGING, INC.)
(Exact name of registrant as specified in its charter)
DELAWARE 13-2614435
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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)
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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
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The Registrant has 27,118,340 shares of common stock, par value $0.15
per share, issued and outstanding as of January 15, 1996.
Total number of sequentially numbered pages in this document: 5
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NOTE 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 was due on demand subject to certain terms and conditions. The loan
was secured by certain fixed assets of the Company. In November 1995, the
Company repaid the principal and accrued interest due to Mr. Shapiro. In
December, 1995, Mr. Shapiro again loaned the Company $50,000 under similar
terms and conditions of the first loan. As of February 5, 1996, the loan was
still outstanding.
NOTE 5 - LINE OF CREDIT
The Company obtained 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 payments of $25,000
will be due regardless of outstanding balances. The line of credit and term
loan are secured by the majority of the assets of the Company.
NOTE 6 - GERMAN LICENSING AGREEMENT
In November, 1995, the Company entered into a long-term licensing
agreement with Munich based BMG Ariola Muechen GmbH ("BMG") and Bavaria
Kopierwerk GmbH ("Bavaria") to represent CST's technology to a nine-country
network in Europe. As part of the agreement, BMG will install CST's patented
software at its studio facility in Munich and be linked to CST's facility via
phone lines. Services are expected to be on-line in the first quarter of
1996. In conjunction with the licensing agreement, the Company received a
$200,000 advance, and in turn recognized an expense for $160,000 based on the
terms of the agreement.
NOTE 7 - PATENT INFRINGEMENT LAWSUIT
On January 25, 1996, the Company announced that it had filed a lawsuit
against Silicon Graphics, Inc., Eastman Kodak Co. and LucosFilm, Ltd. that
alleges infringement of CST's patented technology entitled Priority Masking
Techniques for Video Special Effects. The patent was issued to CST by the
U.S. Patent & Trademark Office as U.S. Patent No. 4,642,676 on February 10,
1987.
The lawsuit, filed in the U.S. District Court for the Northern District
of California, alleges that each of the defendants has been making, using
and/or selling devices that embody CST's proprietary technology and otherwise
inducing others to infringe its technology. CST is seeking an injunction to
halt further infringement, an accounting of damages and the payment of
attorney fees.
NOTE 8 - REPURCHASE OF ANIMATION SOFTWARE RIGHTS
During the quarter ended December 31, 1995, the Company repurchased the
rights to the animation software previously sold to Toreal Holdings Limited,
in consideration for which the Company issued 300,000 shares of common stock.
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Interest expense decreased 66% and 61% in the quarter and six months
ended December 31, 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. The decrease was slightly offset by the increase in
interest incurred on the note and loans payable.
Depreciation and amortization expense decreased 57% and 60% for the
quarter and six months ended December 31, 1995. The decrease is attributed
to the allocation of depreciation and amortization expense to production
products 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 and $366,075 for the
quarter and six months ended December 31, 1995.
The increase in film amortization expense in the quarter and six months
ended December 31, 1995 is a direct result of amortization costs associated
with licensing revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position as of December 31, 1995 was a
positive $125,348 as compared to a negative $1,346,777 as of December 31,
1994. The Company has experienced significant negative cash 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 six months ended December 31, 1995, the Company expended
$22,185 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 $95,099 on the adaption of animation software for
alternative uses and $88,886 on the enhancement of coloring software in the
six months ended December 31, 1995. The Company expects to devote additional
resources in the current fiscal year for the production and enhancements of
its proprietary software.
During the six months ended December 31, 1995, the Company produced and
completed 16 productions for its film library. Furthermore, 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On January 25, 1996, the Company announced that it has filed a
lawsuit against Silicon Graphics, Inc., Eastman Kodak, Co and
LucasFilm Ltd. that alleges infringement of CST's patented technology
entitled Priority Masking Techniques For Video Special Effects. The
patent was issued to CST by the U.S. Patent & Trademark Office as
U.S. Patent No. 4,642,676 on February 10, 1987.
The lawsuit, filed in the U.S. District Court for the Northern
Distrcit of California, alleges that each of the defendants has been
making, using and/or selling devices that embody CST's proprietary
technology and otherwise inducing others to infringe its technology.
CST is seeking an injunction to halt further infringement, an
accounting of damages and the payment of attorney fees.
Item 2. Changes in Securities. None.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submissions of Matters to a Vote of Security Holders.
On January 29, 1996, the Company held its Annual Meeting of
Shareholders for the fiscal year ended June 30, 1995. At the
meeting, the three items voted upon in the Proxy Solicitation were
approved. These items included re-election of the five encumbent
Board members, reappointment of the independent accountants, and
approval of the proposal to increase the aggregate number of shares
of Common Stock under the Company's 1990 Stock Option Plan from
2,400,000 to 4,400,000.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K. None.
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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
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JONATHAN D. SHAPIRO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/Jeffrey M. Jacobs
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JEFFREY M. JACOBS
CONTROLLER
February 20, 1996
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