<PAGE> 1
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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, 1996
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
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CST ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
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)
(Registrant's telephone number including area code): (310) 417-3444
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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
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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
--- ---
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 25, 1996, was approximately $6,819,585.
As of September 25, 1996, there were 27,278,340 shares of common stock
outstanding.
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<PAGE> 2
PART 1
ITEM 1. BUSINESS
General:
CST Entertainment, Inc., (the "Company" or "CST") was incorporated in
Delaware in 1983 and 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,
paint and 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 income. 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. During Mr.
Shefsky's tenure, the Company 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 $.5 million in
June 1996. In February 1995, Mr. Shefsky relocated back to Canada in conjunction
with his relinquishment as CEO. In July 1996, Mr. Shefsky resigned his position
with the Company.
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. In 1996, Mr.
Shapiro continued to expand and diversify CST's business base. The Company's
Featurization division entered into a licensing agreement to produce and deliver
a total of thirteen (13) John Wayne "Young Duke" episodes and thirteen (13)
"Attack of the Killer B's" science fiction anthology episodes with Nelvana Tech.
Furthermore, the Company entered into a new licensing agreement with BMG Ariola
Muenchen GmbH ("BMG") and Bavaria Kopierwek GmbH ("Bavaria") to represent CST's
technology to a nine-country network in Europe. 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 20 to the Financial Statements which
is incorporated herein by reference):
The Company's primary line of business is the electronic conversion of
black-and-white videotape into color.
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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. The Company was involved in a lawsuit with the joint
venturer, which was settled subsequent to fiscal year end June 30, 1996
(see Note 21).
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 1996 (see Statements of Operations for net loss for the three years
ended June 30, 1996). In 1996, the Company financed operations and cash flow by
obtaining a term loan and line-of-credit along with certain reductions in
expenses. The Company continues to refine its color conversion system and its
animation software.
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 1995 and 1996. Recently,
the Company has seen an increase in domestic and international entities
interested on 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. However, the Company does have patent protection rights in
Italy and Canada on the patents described above. In August 1995, the Company
filed for new patents based on significant new coloring conversion developments.
See Note 3 with respect to the patent infringement lawsuit.
Primary Customers: The Company has numerous major customers in fiscal
1994 through 1996 as described in Note 1 to the Financial Statements, which is
incorporated herein by reference.
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Backlog: The Company continues to have discussions with numerous
entities for production work in all four of its divisions. As of October 1996,
the Company believes it has a firm sales backlog of almost $2.5 million, a
portion of which is expected to be realized in revenues in 1997. Also as of
October 1996, the Company is in discussions for over $10 million of production
work, a portion of which is expected to be realized in 1997. 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 1996.
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 continues to improve and modify
the digital coloring system in order to increase production and quality and
capitalizes the related costs. 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 system 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, 1996 and Management's Discussion & Analysis of Financial Condition & Results
of Operations.
Employees: As of June 30, 1996, the Company employed approximately 84
full-time employees, consisting of 15 administrative personnel and officers, two
post production personnel, one maintenance personnel, two engineers and
approximately sixty four color conversion operations personnel. The Company
expects it will employ the necessary personnel to fulfill its delivery
obligations.
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 Company leases this
facility, which lease terminates on 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 except as described below.
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 except as described below.
Patent Infringement Lawsuit:
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 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.
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Bank of America Lawsuit
On April 18, 1996, in Case No. SC 031 643 entitled Bank of America
National Trust etc. v. CST Entertainment Imaging, Inc., etc. et al., the
Superior Court of California, County of Los Angeles, entered a judgment in favor
of Bank of America National Trust and Savings Association ("Bank of America")
and against CST Entertainment, Inc. (the "Company") in the principal sum of
$437,421, plus interest at the rate of 7% per annum on $404,610 of such
principal sum from December 12, 1994 to March 8, 1996, plus additional interest,
at the rate of approximately $78 per day, from March 9, 1996 to April 18, 1996.
The foregoing judgment was based upon Bank of America's allegations that the
Company had in its possession and control property belonging to Gerald Shefsky,
the Company's former Chairman of the Board and former Chief Executive Officer,
which property is subject to execution in satisfaction of a prior judgment
obtained by Bank of America against Mr. Shefsky in the amount of $486,528. The
Company has appealed the decision and will continue to defend its position
vigorously. The Company accrued amounts for the judgment, including the
principal, interest and applicable legal expenses related to this lawsuit during
the quarter ended March 31, 1996. The Company has been and is currently in
discussions with Bank of America and Gerald Shefsky regarding settlement of the
matter.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 1994 through June 1996.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
--------------- ---------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 1 1/2 1 1 1/8 11/16
Second Quarter 1 3/8 3/4 15/16 7/16
Third Quarter 1 1/2 15/16 15/16 1/2
Fourth Quarter 1 1/8 3/4 9/16 3/8
</TABLE>
On September 25, 1996, the last sale price for the Common Stock, as
reported on the American Stock Exchange, was $1/4 per share. As of September 25,
1996, there were 687 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,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Coloring revenue $ 3,758,900 $ 3,703,122 $ 2,242,101 $ 4,913,136 $ 2,326,931
Total revenue 4,764,573 3,752,106 3,337,268 6,122,164 4,826,464
Production expense 3,273,761 3,199,653 1,660,842 3,487,089 1,116,913
Film library amortization . 305,018 40,000 334,128 246,129 1,828,500
Research & development
expense 157,464 388,568 289,379 192,253 95,489
Other expenses 4,058,802 3,375,027 2,945,767 3,656,637 5,255,048
Loss before extraordinary
item (3,030,472) (3,251,142) (1,892,848) (1,459,944) (3,469,486)
Loss before extraordinary
item per share (0.21) (0.18) (0.08) (0.06) (0.13)
BALANCE SHEET DATA:
Current assets 1,023,522 649,878 1,745,419 1,803,814 1,832,909
Total assets 3,914,656 2,862,251 6,246,600 5,417,045 5,269,538
Current liabilities 1,987,896 1,829,836 2,082,690 2,030,790 4,119,818
Long-term obligations 1,670,947 560,172 280,086 -- 640,425
Stockholders' equity 255,813 472,243 3,883,824 3,386,255 509,295
</TABLE>
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Results of Operations
For the year ended June 30, 1996, the Company reported an operating
loss of $3.5 million as compared to an operating loss of $1.5 million in fiscal
1995 and $1.9 million in fiscal 1994. The 1996 results are primarily the result
of lower coloring revenues of approximately $2.5 million and higher film
amortization of nearly $1.6 million as compared to fiscal 1995, along with an
accrual for almost $.6 million relating to a lawsuit with Bank of America (see
Note 13). In addition, the Company also wrote- down its film library in 1996 by
almost $1.5 million based on lower than anticipated sales of its library
products. In addition, the Company operated the colorization facility at less
than optimum capacity during a portion of 1996, but took proactive measures to
reduce staffing and certain expenses to meet sales demand throughout 1996. The
Company is continuing with this philosophy and is currently analyzing various
cost-cutting measures.
For the past four to five years, the Company has been restructuring its
debt and cutting expenses. In 1996, 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, paint and composite and software division. In 1996,
the Company was successful in securing numerous contracts including
approximately $2.2 million for producing and licensing 26 episodes of
Featurizations programming. The Company continued to further diversify its
business as Color F/X revenues were almost 38% of total coloring revenue,
compared with 25% for 1995. In 1996, 30% of the Company's revenues from its two
business segments were derived from the Coloring division, 18% from the Color
F/X division, and 48% from the Featurizations division. The Company is currently
in the process of producing and pre-selling other Featurizations products. The
Computoons division completed two projects during the year, including one
animated commercial and an animated short story. The Computoons division is
currently developing three to four animation products and completed the
development of its animation software. Additional 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 decreased 46% in 1996 as compared to 1995 and
increased 156% in 1995 as compared to 1994. The decreases in 1996 are
attributable to the differences in the Company's operations in 1996 as compared
to 1995 above. Also, in November 1995, the Company reduced its labor force by
changing from three eight-hour shifts to two eight-hour shifts. In January 1996,
the Company again reduced its labor force by reducing to two four-hour shifts
for a significant portion of its production labor force. In April 1996, the
Company increased its production labor force back to two eight-hour shifts. The
Company will continue to adjust its production labor force to meet sales demand.
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 1996 increased 16% as
compared with 1995. The increase is attributed to a change in the product mix
whereby a significant portion of its deliverable color conversion work was on
Featurizations and Color F/X projects in 1996. The increase is also attributed
to the higher price per minute charged in the Color F/X division and the Company
steadily increasing its
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rates charged for services. The average price per minute delivered in 1995
decreased 13% as compared to 1994. The decrease is due to a change in the
product mix whereby the majority of its deliverable color conversion work was on
Color F/X projects in 1994.
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, twenty-eight
color converted John Wayne movies (798 minutes color converted in 1990), a
television special on the Three Stooges (completed in 1991), thirteen Science
Fiction Anthology segments of colorized public domain movies and four titles
completed under the MGM/UA agreement. Licensing/royalty revenue is comprised of
guaranteed advances or remittances from television and video distributors on the
Company's library. Distributors recoup advances from the sales of the films
before remitting additional payments to the Company. The Company also entered
into a $200,000 licensing agreement with BMG Ariola Muenchen GmbH ("BMG") and
Bavaria Kopierwerk GmbH ("Bavaria") to represent CST's technology to a
nine-country network in Europe. Licensing/royalty revenues were $2,499,533 in
1996, $706,268 in 1995 and $939,605 in 1994. Revenue from coloring and licensing
library products was 92% of the total revenue for 1996. The Company anticipates
continuing growth in licensing/royalty revenues as it produces additional work
for its own library and receives payments on products previously delivered.
The Company revalued its film library in 1996 which resulted in a
write-down of $1,487,697 due to lower than anticipated sales of its library
products. The film library's estimated net realizable value at June 1996 of
$2,143,417 is anticipated to be realized over the next five years.
Software sales income of $500,000 in 1995 reflects the sale of the
Company's first completed animation software to a related party. The total
selling price of the software was $2.6 million. $300,000 of the $2.6 million was
collected during fiscal year ended June 30, 1995, $200,000 was received during
fiscal year ended June 30, 1996, and $2.1 million to be paid through the
issuance of a note. This note to be liquidated by 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. During 1996, the Company repurchased the
rights to the animation software previously sold in consideration for which the
Company issued 300,000 shares of restricted common stock value at $150,000 (see
Note 4).
Color conversion production minutes decreased 24% in 1996 as compared
to 1995 and increased 39% in 1995 as compared to 1994. Total cost of production
decreased 4% in 1996 as compared to 1995 and increased 40% in 1995 as compared
to 1994. The decrease in 1996 and the increase in 1995 correspond to the
decrease and increase in minutes delivered as more fully described above.
The ratio of total cost of production to total coloring revenue
decreased 8% from 1995 to 1996 and decreased 44% from 1994 to 1995. The decrease
in 1996 is the result of decreases in the production labor force. The decrease
in 1995 is primarily the result of unexpected costs incurred in the colorizing
of "The Little Rascals" and Warner Brothers projects.
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Production expense decreased significantly for 1996, due to the change
in the Company's revenue base described above. Specifically, a significant
portion of 1996 revenue was from the Featurizations division. As such,
capitalizable costs associated with these projects are being amortized in
accordance with Statement of Financial Standards ("SFAS") No. 53 as described
below. The decrease is also due to the reduction in the production labor force
as described above.
Research and development expense decreased 50% in 1996 as compared to
1995 and decreased 34% in 1995 as compared to 1994. In 1996, the Company reduced
its staffing in this department as the majority of the color conversion software
enhancements were completed. 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. Expenditures for the further development and enhancements of animation and
color conversion software are expected to continue in 1997.
Film library amortization expense increased significantly in 1996, as
the Company recognized amortization expense on film library products which were
sold during the 1995, and 1996 year. The increase is due to the timing of the
revenue streams and recognition of the related amortization expense recorded in
accordance with SFAS No. 53.
General and administrative expenses decreased 7% in 1996 as compared to
1995, primarily due to more projects in production resulting in more overhead
allocation being capitalized to the Company's film library and work-in-process
than in the same periods for 1995. The decrease is also due to the employment of
fewer corporate personnel in the Company. 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. General and administrative expenses are expected to decrease in 1997 as
compared to the 1996 level, as the Company continues to reduce overhead.
Interest expense decreased $11,520 in 1996 as compared to 1995. The
majority of the 1996 interest expense related to interest costs incurred on the
notes payable, loans payable and line of credit. 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.
Lawsuits and litigation expense increased $737,000 due primarily to the
Company's significant legal costs associated with the Patent Infringement and
Bank of America lawsuits (see Notes 3 and 13).
Participation and licensing expense increased due to the new licensing
agreements entered into in 1996 (see Note 5).
Liquidity and Capital Resources
The Company's working capital deficiency was $2,286,909 at June 30,
1996 as compared to a negative $226,976 at June 30, 1995. Losses from operations
were $3,469,486 in 1996, $1,459,944 in 1995 and $1,892,848 in 1994. 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 stating there is substantial
doubt 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.
9
<PAGE> 10
The Company is currently in discussions for production work in excess
of $10 million in its various divisions, a portion of which the Company expects
to be consummated in fiscal 1997.
Cash flows from operating activities improved by approximately $2.6
million from 1995 to 1996 due to more activity in process by the Company during
fiscal year ended June 30, 1996. This includes increases in accrued expenses
(approximately $.7 million) and deferred income (approximately $.3 million). The
Company also reduced its commitments payable (approximately $.2 million) and
collected a related party receivable.
Cash flows from investing activities decreased over $3.0 million from
1995 to 1996, due mainly to substantially higher expenditures for its film
library (approximately $3.4 million). Cash flows from 1994 to 1995 decreased
mainly to less expenditures for film library and property, plant and equipment.
Cash flows from financing activities increased by approximately $1.0
million from 1995 to 1996 due mainly to the addition of the term loan and line
of credit. Cash flows from financing activities decreased approximately $4.0
million from 1994 to 1995 due to significant decreases in proceeds from private
placements and warrant exercises.
The Company's work-in-process decreased $392,569 in 1996 as compared to
1995. At June 30, 1996, the Company had produced $405,039 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 1997.
Deferred income increased $332,213 in 1996 as compared to 1995, and is
primarily the result of pre-payments on undelivered coloring product.
The Company completed the color conversion of its final picture for
credit under its commitments obligation and recognized coloring income of
$273,258.
In 1996, the Company expended $23,470 on property and equipment
consisting primarily of various computer related equipment. 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 1996, the Company expended approximately $3,581,604 on its film
library for the Featurizations division. These costs include colorization costs,
along with all other relevant internal and external costs to produce the
programming. The new additions to the film library are nine science fiction
color converted anthology episodes, thirteen color converted John Wayne "Young
Duke" half-hours and four titles under the agreement with MGM/UA. The Company
anticipates future expenditures of $2 - $3 million over the next twelve months
for future library products.
In 1996, the Company capitalized $296,995 of resources which was
devoted to the production of color conversion and 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, $132,263 of which has either been
collected or liquidated in exchange for consulting services.
Should the Company be successful in obtaining the contracts currently
under negotiation, the Company anticipates cash flows from operations to be
positive in 1997. The Company believes it will
10
<PAGE> 11
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 $2 to $3 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 $3,800 from the exercise of employee
stock options in 1996. The Company does not know if significant amounts of
warrants or employee stock options will be exercised in 1997. All 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, 1996, the Company has significant amounts
of net operating loss carry-forwards and other tax credits (see Note 19 to the
Financial Statements) which result in deferred tax assets; however, a valuation
reserve is recognized for the full amount due to the uncertainty regarding the
recoverability of the 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.
Inflation
Management believes that inflation has not had a significant impact on
the Company's costs and prices during the past three years.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard established new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, certain
identifiable intangible assets and goodwill, should be recognized and how
impairment losses should be measured. The Company does not expect such new
standard to have a material effect on its financial position or results of
operations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 15,
1995. The new Standard establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from non-employees in exchange for equity instruments. At the
present time, the Company has not determined if it will change its accounting
policy for stock based compensation or only provide the required disclosure. As
such, the impact on the Company's financial position and results of operations
is currently unknown. The Company does not expect adoption to have a material
effect on its financial position or results of operations.
11
<PAGE> 12
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 1996 and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1996. 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 and
schedule. 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 1996, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1996, 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 for two of the past three years and has a negative working capital
deficiency of $2,286,909 at June 30, 1996. The Company has also been slow and is
delinquent in paying its accounts payable and other obligations. 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.
BDO SEIDMAN, LLP
Los Angeles, California
October 18, 1996
12
<PAGE> 13
CST ENTERTAINMENT, INC.
BALANCE SHEETS
ASSETS (NOTE 12)
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 24,694 $ 54,304
Accounts receivable, net (Note 6) 368,868 896,049
Work-in-process (Note 2) 1,161,868 769,299
Prepaid expenses 33,384 98,257
Receivable from related parties (Notes 4 and 11) 215,000 15,000
------------ ------------
1,803,814 1,832,909
------------ ------------
Property and equipment (Notes 2 and 4):
Color conversion equipment 3,896,789 3,896,789
Leasehold improvements and other equipment 1,591,550 1,615,020
Capitalized software 985,382 1,432,377
------------ ------------
6,473,721 6,944,186
Less accumulated depreciation and amortization 5,118,680 5,792,607
------------ ------------
1,355,041 1,151,579
------------ ------------
Other assets:
Accounts receivable - long term (Note 7) 137,559 --
Notes receivable from officers (Note 11) 192,263 125,000
Patent, net of accumulated amortization of
$520,633 and $554,844 (Note 2) 34,211 --
Film library, net of accumulated amortization of
$2,340,275 and $4,782,775 (Note 2) 1,878,010 2,143,417
Other assets 16,147 16,633
------------ ------------
2,258,190 2,285,050
------------ ------------
$ 5,417,045 $ 5,269,538
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 12) $ -- $ 507,826
Current portion of term loan -- 250,200
Notes payable (Notes 8 and 12) 492,430 735,652
Accounts payable 333,163 488,635
Accrued expenses (Note 9) 537,852 1,227,205
Deferred income (Note 2) 493,087 825,300
Commitments payable - short-term (Note 13) 174,258 --
Loans payable to related party (Note 11) -- 85,000
------------ ------------
2,030,790 4,119,818
------------ ------------
Long-term liabilities:
Non-current portion of term loan (Note 12) -- 640,425
Commitments and contingencies (Note 13) -- --
Stockholders' equity:
Common stock, par value $.15 per share; authorized
40,000,000 shares; issued and outstanding
26,199,624 shares and 27,278,340 shares 3,929,944 4,091,752
Additional paid-in capital 55,667,022 56,097,740
Accumulated deficit (56,210,711) (59,680,197)
------------ ------------
3,386,255 509,295
------------ ------------
$ 5,417,045 $ 5,269,538
============ ============
</TABLE>
See Accompanying Notes to Financial Statements
13
<PAGE> 14
CST ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues (Notes 1 and 20):
Coloring income $ 2,242,101 $ 4,913,136 $ 2,326,931
Film licensing/royalty income 939,605 706,268 2,499,533
Software sales income (Note 4) -- 500,000 --
Gain in sale of equipment, net -- -- --
Other income 155,562 2,760 --
------------ ------------ ------------
3,337,268 6,122,164 4,826,464
Expenses:
Production 1,660,842 3,487,089 1,116,913
Cost of software sold -- 432,772 --
Research and development 289,379 192,253 95,489
Depreciation and amortization 1,058,901 1,040,712 553,364
Film library amortization 334,128 246,129 1,828,500
Film library write-down -- -- 1,487,697
Participation and licensing (Note 5) -- -- 440,000
General and administrative 1,860,883 2,039,650 1,905,004
Interest expense 25,983 143,503 131,983
Lawsuits and litigation (Notes 3 and 13) -- -- 737,000
------------ ------------ ------------
5,230,116 7,582,108 8,295,950
------------ ------------ ------------
Loss before extraordinary item (1,892,848) (1,459,944) (3,469,486)
------------ ------------ ------------
Extraordinary item - gain from forgiveness of debt
(Note 18) 160,064 94,390 --
------------ ------------ ------------
Net loss $ (1,732,784) $ (1,365,554) $ (3,469,486)
============ ============ ============
Per share:
Loss before extraordinary item $ (0.08) $ (0.06) $ (0.13)
Extraordinary item 0.01 0.01 --
------------ ------------ ------------
Net loss $ (0.07) $ (0.07) $ (0.13)
============ ============ ============
Weighted average number of common shares
outstanding 22,715,826 25,359,000 26,878,877
============ ============ ============
</TABLE>
See Accompanying Notes to Financial Statements
14
<PAGE> 15
CST ENTERTAINMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ISSUED ADDITIONAL
---------------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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 17) 12,897 1,935 23,890 -- 25,825
Common stock, restricted, issued in connection
with exercise of warrants (Note 17) 386,700 58,005 680,535 -- 738,540
Common stock, restricted, issued in private
placements (Note 16) 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 options (Note 17) 24,993 3,749 16,745 -- 20,494
Common stock restricted, issued in private
placements (Note 16) 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
Common stock, restricted, issued as payment
for services rendered 274,450 41,168 123,558 -- 164,726
Common stock issued in connection with
exercise of stock options (Note 17) 4,266 640 3,160 -- 3,800
Common stock, restricted, issued in connection
with debt restructuring (Note 17) 500,000 75,000 175,000 -- 250,000
Common stock, restricted, issued in connection
with animation rights repurchase (Note 17) 300,000 45,000 105,000 -- 150,000
Warrants issued as payment for services rendered -- -- 24,000 -- 24,000
Net loss -- -- -- (3,469,486) (3,469,486)
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1996 27,278,340 $ 4,091,752 $ 56,097,740 $(59,680,197) $ 509,295
============ ============ ============ ============ ============
</TABLE>
See Accompanying Notes to Financial Statements
15
<PAGE> 16
CST ENTERTAINMENT, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,732,784) $(1,365,554) $(3,469,486)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,393,029 1,286,841 2,381,864
Non-cash payment of expenses 15,000 30,000 240,617
Non-cash revenue from commitments payable (280,086) (666,000) (174,258)
Gain from forgiveness of debt (160,064) (94,390) --
Film library write-down -- -- 1,487,697
(Increase) decrease in operating assets:
Accounts receivable (381,677) 239,531 (527,181)
Work-in-process (456,560) (657,782) 392,569
Prepaid expenses (38,284) 20,948 (76,831)
Receivable from related party -- (200,000) 200,000
Other assets (2,750) 10,877 (486)
Accounts receivable - long-term (324,940) 187,381 137,559
Increase (decrease) in operating liabilities:
Accounts payable (49,607) 162,518 186,698
Accrued expenses 155,010 125,061 689,353
Deferred income 340,940 152,147 332,213
----------- ----------- -----------
Total adjustments 210,011 597,132 5,269,814
----------- ----------- -----------
Net cash provided by (used in) operating activities (1,522,773) (768,422) 1,800,328
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (1,213,837) (217,888) (23,470)
Payments of notes receivables to officers -- -- 67,263
Additions to film library (1,733,808) (412,949) (3,414,972)
Sales of capitalized software -- 432,772 --
Additions to capitalized software (192,145) (467,084) (296,995)
Notes receivable from officers (237,263) -- --
----------- ----------- -----------
Net cash used in investing activities (3,377,053) (665,149) (3,668,174)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of options 25,825 20,494 3,800
Proceeds from sales of restricted stock in private placements 4,350,000 847,491 --
Proceeds from exercise of warrants 738,540 -- --
Loans payable to related party -- -- 85,000
Additions to notes payable -- -- 500,000
Payments of notes payable (33,425) (11,322) (6,678)
Borrowings from line of credit -- -- 2,040,633
Additions to term loan -- -- 1,000,000
Payments on term loan -- -- (109,375)
Pay-down on line of credit -- -- (1,615,924)
----------- ----------- -----------
Net cash provided by financing activities 5,080,940 856,663 1,897,456
----------- ----------- -----------
Net increase (decrease) in cash 181,114 (576,908) 29,610
Cash at beginning of year 420,488 601,602 24,694
----------- ----------- -----------
Cash at end of year $ 601,602 $ 24,694 $ 54,304
=========== =========== ===========
</TABLE>
See Accompanying Notes to Financial Statements
16
<PAGE> 17
CST ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1994 1995 1996
------- -------- ------
<S> <C> <C> <C>
Cash paid during the year for interest $19,258 $122,181 $7,807
======= ======== ======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
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-progress 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.
Year ended June 30, 1996
The Company liquidated $7,226 of accounts payable by issuing 14,450
shares of the Company's common stock.
The Company liquidated $24,000 of accounts payable by issuing 57,600
warrants to purchase the Company's common stock.
The Company repaid $250,000 of notes payable by converting it to
500,000 shares of the Company's common stock.
The Company paid $87,500 of outside consulting expense by issuing
100,000 shares of the Company's common stock.
The Company paid $150,000 by issuing 300,000 shares of restricted
common stock for the repurchase of the rights to the animation software
previously sold to Toreal Holdings Limited.
The Company paid $70,000 of outside legal expense by issuing 160,000
shares of the Company's common stock.
The Company capitalized $166,632 of depreciation expense under its film
library.
The Company paid $83,117 of interest expense and fees on its line of
credit and term loan by adding such amounts to its available line of credit
balance. The Company also paid $109,375 of principal payments on its term loan
by adding such amounts to its available line of credit balance.
See Accompanying Notes to Financial Statements
17
<PAGE> 18
CST ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
Three Years ended June 30, 1996
The Company restructured portions of its debt as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- ------- --------
<S> <C> <C> <C>
Accounts payable $146,772 $94,390 $ 31,226
Accrued interest 1,398 - -
Other accrued expenses 15,000 - -
Prepaid expenses 15,000 - -
Notes payable 11,894 - 250,000
-------- ------- --------
$190,064 $94,390 $281,226
======== ======= ========
The debts or expenses listed above were satisfied as follows:
1994 1995 1996
-------- ------- --------
Issuance of common stock $ 30,000 $ - $257,226
Issuance of warrants - - 24,000
Restructured debt - - -
Gain from forgiveness of debt 160,064 94,390 -
-------- ------- --------
$190,064 $94,390 $281,226
======== ======= ========
</TABLE>
See Accompanying Notes to Financial Statements
18
<PAGE> 19
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
1. THE COMPANY AND GOING CONCERN UNCERTAINTY
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 20 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, paint and 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 exclusive of
extraordinary items. 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, 1996, the Company had stockholders' equity of $509,295 and a negative
working capital of $2,286,909. It has experienced significant negative cash flow
from operations for two of the past three years. The Company has also been slow
and is delinquent in paying its accounts payable and other obligations.
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 continue to 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 $2 to $3 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, 1994, 1995,
and 1996 were derived from services performed for certain major customers as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Twentieth Century Fox Film Corporation 35% 11%
Paravision 24%
Nelvana Tech. 47%
RHI Entertainments, Inc. 17%
King World Productions, Inc./Taurus-Film GbmH & Co. 16%
</TABLE>
In September 1996, the Company entered into an agreement with MGM/UA
whereby the Company sold its rights in the first four films produced under its
minimum seven picture agreement. In exchange, the Company received $500,000. As
such, the Company will not maintain any future rights and has written off
balances carried on the books for these projects in excess of the amount
received. This amount is included in the Company's film library write-down
expense for the year ended June 30, 1996.
19
<PAGE> 20
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
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. Work-in-process includes internally
generated costs of production and colorization, along with relevant external
costs.
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 useful 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: Capitalized computer software costs was $245,130 at
June 30, 1996 and $510,984 at June 30, 1995. Amortization expense of capitalized
computer software was $252,975, 234,810 and 179,262 for the three years ended
June 30, 1994, 1995 and 1996. 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. The Company applied for new patents in August, 1995, and is awaiting final
approval.
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
cost 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 1996 by $1,487,697 to $2,143,417 its
estimated net realizable values. 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, 1996 approximately
75% of unamortized film costs applicable to released films will be amortized
during the three years ending June 30, 1999. 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 1997. The Company also completed
four films under its MGM/UA contract (see Note 13). The Company's film library
consists of approximately 50 films, all of which have been released as of June
30, 1996, except for the seven 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 years presented, would be anti-dilutive.
Accounting Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
20
<PAGE> 21
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
Fair Value of Notes Payable and Long-Term Debt: The fair value of the
Company's notes payable and long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. Accordingly, the current
value is the same as the carrying value.
3. PATENT INFRINGEMENT LAWSUIT:
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 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.
4. SOFTWARE SALES:
Software sales income of $500,000 during fiscal 1995 reflects the sale of
the Company's animation software to a related party (see Note 11). The total
selling price of the software is $2.6 million. $300,000 of the $2.6 million was
paid in the fiscal year ended June 30, 1995, $200,000 was received in 1996 and
$2.1 million to be paid through the issuance of a note; this note to be
liquidated by receipts generated from the subsequent sales of software and
payable 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 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. During 1996, the Company
repurchased the rights to the animation software previously sold, in
consideration for which the Company issued 300,000 shares of restricted common
stock valued at $150,000.
5. PARTICIPATION AND LICENSING:
Participation and licensing expense is due to the new licensing agreements
entered into during 1996. First, the Company recorded a $280,000 license fee
expense in conjunction with delivery of the first four science fiction anthology
episodes to Nelvana Tech. In addition, the Company recorded a $160,000 licensing
expense in conjunction with the foreign license agreement entered into with
BMG/Bavaria.
6. ACCOUNTS RECEIVABLE:
Included in accounts receivable at June 30, 1995 and 1996 is an allowance
for doubtful accounts for $19,100.
7. ACCOUNTS RECEIVABLE - LONG-TERM:
Accounts receivable - long-term at June 30, 1995 represents 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
receivable was collected in full subsequent to fiscal year ended June 30, 1996.
21
<PAGE> 22
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
8. DEBT:
Notes payable consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Term loan, bearing interest at 11.5%, due
November 1998 $ - $ 890,625
Note payable, bearing interest at 12.5%, due
December 31, 1996 - 250,000
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 132,151 125,373
Future interest payments 9,762 9,762
-------- ----------
492,430 1,626,277
Less: current portion 492,430 985,852
-------- ----------
$ - $ 640,425
======== ==========
</TABLE>
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 were 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, exercisable at $0.65 per share.
The exercise price was reduced to $0.50 per share as the note payable was not
repaid in full by November 1, 1995. In November 1995, $250,000 of the note was
converted into 500,000 shares of the Company's common stock. The maturity date
of the remaining $250,000 note and applicable accrued interest was extended
first to February 1, 1996 and subsequently to December 31, 1996. The note is
secured by certain fixed assets of the Company.
9. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Accrued interest $ 36,154 $ 92,967
Accrued legal 18,013 128,890
Accrued taxes 65,587 46,599
Accrued payroll and payroll taxes 93,200 105,360
Accrued employee benefits 107,422 86,030
Accrued lawsuit and litigation expenses - 637,000
Other accrued expenses 217,476 130,359
-------- ----------
$537,852 $1,227,205
======== ==========
</TABLE>
Included above under accrued lawsuit are costs related primarily to the
Bank of America lawsuit (see Note 3). This amount includes approximately
$487,000 for the judgement, along with additional plaintiff and defense attorney
costs. The accrual above also includes $70,000 to one law firm related to the
Patent Infringement Lawsuit (see Note 3), along with other minor legal expenses
related to the case.
22
<PAGE> 23
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
10. 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 $193,235, $231,371 and
$238,604 for the years ended June 30, 1994, 1995 and 1996. Obligations under the
facility lease are $243,936 for the year ending June 30, 1997 and $487,872 for
the years ending June 30, 1998 and 1999. The total obligation for the four years
ending June 30, 1999 is $975,744.
11. RELATED PARTY TRANSACTIONS:
During 1995, the Company sold animation software to a related party for
$2.6 million. However, the Company recognized only $500,000 of the $2.6 million
as revenue, of which $200,000 is included in receivables from related parties at
June 30, 1995. The Company also repurchased certain rights to the animation
software previously sold (see Note 4).
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 currently being
negotiated.
Long-term notes receivables from officers consists of loans to three
officers at June 30, 1995 for $192,263 and two officers for $125,000 at June 30,
1996. 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. In August 1996, one
officer's loan for $25,000 was offset against certain expenses due to the
officer in conjunction with his resignation with the Company.
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
were due upon 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 noted above. In addition, in April 1996, $35,000 of
Company-related expenses paid by Mr. Shapiro were converted to a note payable
under similar terms and conditions of the above notes. All amounts due Mr.
Shapiro were repaid in September, 1996.
12. LONG-TERM DEBT:
In December 1991, the Company restructured $325,018 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 8). 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.
23
<PAGE> 24
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
In November 1995, the Company obtained a line of credit and term loan with
Coast Business Credit. The line of credit was for $750,000 and based on valid
trade receivables. The term loan portion was also for $750,000, and due three
years from loan inception. The interest rate on the line of credit and term loan
is prime plus 3% and 3.5%, respectively. There are minimum monthly loan
repayments and interest repayments for the loan and line of credit regardless of
outstanding balances. In April 1996, the debt facilities were restructured
whereby the term loan portion was increased to $1,000,000. Accordingly, the line
of credit portion was reduced to $500,000. The Company is subject to certain
debt covenants which it believes to be in compliance with at June 30, 1996. The
line of credit and term loan are secured by the majority of the assets of the
Company. The prime rate was 8% at June 30, 1996.
13. COMMITMENTS AND CONTINGENCIES:
The Company has employment agreements with four officers. The employment
agreements specify annual salaries totaling $680,000. 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 December 31, 1996 through September 30, 1997. In August 1996, one officer
resigned whose employment agreement was mutually terminated in exchange for
substantially less than was due under contract.
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. The
Company was bought out of the rights on the first four films for $500,000 (See
Note 1).
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 would not have a material adverse effect on the Company, except as
described below.
Bank of America Lawsuit
On April 18, 1996, in Case No. SC 031 643 entitled Bank of America National
Trust etc. v. CST Entertainment Imaging, Inc., etc., et al., the Superior Court
of California, County of Los Angeles, entered a judgment in favor of Bank of
America National Trust and Savings Association ("Bank of America") and against
CST Entertainment, Inc. (the "Company") in the principal sum of $437,421, plus
interest at the rate of 7% per annum on $404,610 of such principal sum from
December 12, 1994 to March 8, 1996, plus additional interest, at the rate of
approximately $78 per day, from March 9, 1996 to April 18, 1996. The foregoing
judgment was based upon Bank of America's allegations that the Company had in
its possession and control property belonging to Gerald Shefsky, the Company's
former Chairman of the Board and former Chief Executive Officer, which property
is subject to execution in satisfaction of a prior judgment obtained by Bank of
America against Mr. Shefsky in the amount of $486,528. The Company has appealed
the decision and will continue to defend its position vigorously. The Company
accrued amounts for the judgment, including the principal, interest, and
applicable legal expenses related to this lawsuit during the quarter ended March
31, 1996. The Company has been and is currently in discussion with Bank of
America and Gerald Shefsky regarding settlement of the matter.
24
<PAGE> 25
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
14. 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 years ended June 30, 1995 or
1996, respectively.
15. CONTRACT COMMITMENTS PAYABLE:
The Company was committed to a former customer to color convert six motion
pictures for the customer, one in calendar 1992, two in calendar 1994 and two in
calendar 1995. At June 30, 1995, one motion picture was reflected in short-term
commitments payable at an estimated cost of $174,258, which was completed and
delivered during fiscal year end June 30, 1996.
16. STOCK PLACEMENTS:
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.
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.
17. STOCK OPTIONS AND WARRANTS:
The Company maintains three stock option plans which reserve up to
5,893,000 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, 1996, is as follows:
<TABLE>
<CAPTION>
NO. OF SHARES EXERCISE PRICE
------------- --------------
<S> <C> <C>
Outstanding June 30, 1993 987,452 $0.59-3.25
Granted 757,100 0.94-2.00
Exercised (12,897) 0.94-3.25
Canceled (78,797) 0.82
--------- ----------
Outstanding June 30, 1994 1,652,858 0.59-3.25
Granted 769,400 0.94-3.25
Exercised (177,800) 0.82
Canceled (24,993) 0.44-3.25
--------- ----------
Outstanding June 30, 1995 2,219,465 0.59-3.25
Granted 821,400 0.44-0.81
Exercised (4,266) 0.89
Canceled (252,899) 0.81-3.25
--------- ----------
Outstanding June 30, 1996 2,783,700 $0.44-3.25
========= ==========
</TABLE>
25
<PAGE> 26
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
The options to purchase the 2,783,700 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 $4,118,968.
A summary of shares of common stock issuable under warrants for the three
years ended June 30, 1996, is as follows:
<TABLE>
<CAPTION>
NO. OF SHARES EXERCISE PRICE
------------- --------------
<S> <C> <C>
Outstanding June 30, 1993 2,335,000 $1.37-6.00
Granted 300,000 1.75-3.00
Exercised (415,000) 2.00-6.00
Canceled (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
Granted 1,752,600 0.44-2.00
Canceled (540,700) 1.75-2.38
--------- ----------
Outstanding June 30, 1996 3,320,200 $0.44-6.00
========= ==========
</TABLE>
The warrants to purchase the 3,320,200 shares of the Company's stock are
exercisable upon issuance and expire on varying dates through June 2001. Should
all of the warrants issued be exercised prior to expiration or cancellation, the
proceeds to the Company would be $4,086,948.
There have been no compensation expenses recorded in conjunction with the
issuance of warrants during fiscal 1994, 1995 and 1996.
18. EXTRAORDINARY ITEM - FORGIVENESS AND CONVERSIONS 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, 1996 follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1994
--------------------------------------------------
DEBT
BEGINNING CONVERTED FORGIVENESS ENDING
OLD DEBT TO EQUITY OF DEBT NEW 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 $ -
========= ======== ======== ===
YEAR ENDED JUNE 30, 1995
--------------------------------------------------
DEBT
BEGINNING CONVERTED FORGIVENESS ENDING
OLD DEBT TO EQUITY OF DEBT NEW DEBT
--------- --------- ------- --------
Accounts payable $ 94,390 $ - $ 94,390 $ -
========= ====== ======== ====
</TABLE>
26
<PAGE> 27
CST ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
-------------------------------------------------
DEBT
BEGINNING CONVERTED FORGIVENESS ENDING
OLD DEBT TO EQUITY OF DEBT NEW DEBT
-------- --------- ------- --------
<S> <C> <C> <C> <C>
Accounts payable $ 31,226 $ 31,226 $ - $ -
Notes payable 250,000 250,000 - -
--------- -------- ------ -------
$ 281,226 $281,226 $ - $ -
========= ======== ====== =======
</TABLE>
19. 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, 1996, the Company has available net operating loss
carry-forwards of approximately $56,400,000 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
$18,700,000 which expire from 2003 through 2020. 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.
20. SEGMENT INFORMATION:
The Company is engaged in two principal business segments: conversions 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, 1994, 1995 and 1996.
FINANCIAL INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLOR CONVERSION FILM ROYALTY LICENSING TOTAL
----------------------- ---------------------- ----------------------
1994 1995 1996 1994 1995 1996 1994 1995 1996
------ ------- ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $2,397 $4,916 $2,327 $ 940 $1,206 $2,500 $3,337 $6,122 $4,827
Depreciation and amortization 1,059 1,041 2,203 334 246 179 1,393 1,287 2,382
Operating profit (loss) (2,499) (1,987) (2,113) 606 527 (1,357) (1,893) (1,460) (3,470)
Identifiable assets 4,367 3,351 2,614 1,880 2,066 2,656 6,247 5,417 5,270
Capital expenditures 1,406 547 24 1,734 551 3,582 3,140 1,098 3,606
</TABLE>
21. SUBSEQUENT EVENT:
Subsequent to fiscal year end 1996, the Company settled its lawsuit with
Interactive Tech, Inc. ("Interactive Tech"), the company involved with CST in
the European joint venture. Under the Settlement, CST will issue to Interactive
Tech 400,000 shares of common stock, in exchange for which Interactive Tech will
forego all rights related to the joint venture with CST.
27
<PAGE> 28
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Identification of Executive Officers and Directors. The executive
officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Gerald Shefsky 63 Chairman of the Board (1)(2)(3)
Jonathan D. (Jody) Shapiro 41 President, Chief Executive
Officer and Director
Abbey Butler 59 Director (1)(3)
Summer Long 73 Director (1)(2)
Michael J. Solomon 58 Director (2)
Stanton Rutledge 41 Executive Vice President and
Chief Operating Officer(3)
Stephen S. Strick 47 Senior Vice President,
Corporate and Business
Affairs and Secretary
Jack Norton 37 Vice President of Engineering
and Development
Rob Word 49 Senior Vice President and
President, CST
Featurizations, Inc.
</TABLE>
(1) Member of the Company's Audit Committee.
(2) Member of the Company's Stock Option/Remuneration Committee.
(3) Resigned from all positions subsequent to fiscal year ended 1996.
Directors are elected by the stockholders at each annual meeting or (in the
case of a vacancy) appointed by the directors until their successors are elected
and qualified.
Officers serve at the discretion of the Board of Directors.
GERALD SHEFSKY has been Chairman of the Board of the Company since December
1986. Mr. Shefsky was Vice Chairman of the Board from June 1983 to December
1986, Chairman of the Board of the Company from November 1981 to June 1983 and
Treasurer of the Company from June 1983 until May 1985. He was Chief Executive
Officer of the Company from December 1991 until December, 1994. Mr. Shefsky is
also a Director of FoxMeyer Canada (formerly Evans Health Group, Ltd.). In July
1996, Mr. Shefsky resigned his position with the Company.
JONATHAN D. (JODY) SHAPIRO joined the Company as its President and
Chief Operating Officer in October of 1993, and became a Director in November
1993 and Chief Executive Officer in December, 1994. Mr. Shapiro previously
served in various executive capacities including, RHI Entertainment, Inc. where
he was Executive Vice President U.S. Sales and President of RHI Television Sales
(formerly New Line Television Distribution). Prior to that he was Executive Vice
President Telecommunications
28
<PAGE> 29
Division at Qintex Entertainment, Inc. and President of Hal Roach Studios
Syndication. Mr. Shapiro served in numerous positions at Telepictures
Corporation in New York including, Senior Vice President Domestic Division. In
October 1996, Mr. Shapiro was elected Chairman of the Board of Directors.
ABBEY J. BULTER became a Director of the Company June 1, 1993. Since March
1991, Mr. Butler has been Co-Chairman and Co-Chief Executive Officer of the
Board of Directors of FoxMeyer Health Corporation. In November 1991, he was
appointed Co-Chairman of Ben Franklin Retail Stores, Inc. Mr. Butler is also the
President and a director of C.B. Equities Corp., a private investment company,
since 1982. Mr. Butler presently serves as a director and a member of the
Executive Committee of FWB Bancorporation, a trustee of The American University,
a director of the Starlight Foundation, a charitable organization, and is a
member of the advisory boards of the Pediatric AIDS Foundation and the National
Center for Survivors of Child Abuse. He is also a director of UroHealth, Inc.
and Pharmor, Inc. Mr. Butler was appointed by President Bush to serve on the
President's Advisory Committee on the Arts and he now serves as a member of the
Executive Committee of the National Committee for the Performing Arts, John F.
Kennedy Center, Washington, D.C. In October 1996, Mr. Butler resigned his
position with the Company.
SUMNER ADAM LONG has been a director of the Company since June 1983.
Mr. Long has been the President of both L.Q.M. Associates Corp. and L.Q.M.
Associates, Inc., and their predecessor companies which are engaged in the ship
brokerage business for over 40 years and currently directs the tanker broker
activities of Shipping Financing Services Corp. He is a graduate of the United
States Merchant Marine Academy and the Massachusetts Institute of Technology.
MICHAEL JAY SOLOMON became a Director of the Company in March, 1994. Mr.
Solomon's diverse background in entertainment began with executive positions at
United Artists and MCA. In 1978, he founded Telepictures Corporation, which
under his leadership as Chairman and Chief Executive Officer became the largest
television syndication company in the United States. In 1985, Telepictures
merged with Lorimar and Mr. Solomon became the new company's President as well
as a member of its Board of Directors. From 1989 to 1994, Mr. Solomon served as
President of Warner Brothers International Television where he headed up the
company's sales and marketing to television cable and satellite companies
outside the U.S. Following his tenure at Warner Brothers, he launched Solomon
International Enterprises, his global entertainment, telecommunications company
focusing on emerging opportunities in Latin America, Europe, Asia and the Middle
East.
STANTON RUTLEDGE joined the Company in November 1992, as Vice President,
Executive Producer. He became an Executive Vice President in February 1994. He
comes to the Company from American Film Technologies, Inc. where he was employed
from 1986 as Vice President, Executive Producer. From 1981 to 1986 he was with
E.F. Hutton and Co. In August 1996, Mr. Rutledge resigned his position with the
Company.
STEPHEN S. STRICK joined the Company in August 1994, as its Senior Vice
President of Corporate and Business Affairs and Secretary. Prior to joining the
Company, Mr. Strick was an entertainment lawyer, motion picture and television
executive and film producer. From 1982 through 1989, Mr. Strick was a key
executive of Dino De Laurentis Corporation and De Laurentis Entertainment Group,
where he was primarily involved in motion picture and television production,
financing and distribution. From 1977 to 1980, Mr. Strick practiced law at the
law firm Loeb and Loeb. He also held executive positions at Home Box Office and
United Artists Corporation. Mr. Strick is a member of the Academy of Motion
Picture Arts and Sciences and was appointed an American Arbitration Association
Arbitrator in 1984. He is a graduate of Stanford University (AB 1971) and the
University of California (Juris Doctor) in 1974. In October 1996, Mr. Strick was
elected to the Board of Directors of the Company.
29
<PAGE> 30
JACK NORTON joined the Company in 1991, as Director of Software
Development. He was instrumental in developing the digital colorization and
animation systems. Prior to January 1991, he worked as a consultant for Showscan
Corporation on development of their computer graphics based motion control
system. Mr. Norton has over 16 years experience managing numerous product
developments ranging from military to entertainment applications.
ROB WORD joined the Company in January 1994, as President of CST
Featurizations, Inc. and Vice President and subsequently, Senior Vice President
of the Company. Mr. Word's previous executive positions include, Senior Vice
President, Creative Development at I.T.C.; Senior Vice President Marketing at
Qintex Entertainment, Inc. and Senior Vice President, Production and Marketing
at Hal Roach Studios: Director of Marketing at Orion Entertainment. He received
an Emmy nomination as writer/producer of "An Ozzie and Harriet Christmas,"
produced and wrote the pilots to "Paradise Beach" for New World Productions and
"The Action Pack Network" for MCA. Other credits include: "The Laurel and Hardy
Show," "T and T," A&E's "Biography," "The Adventures of William Tell" and
"Outlaws of the Movies. Mr. Word is also the producer and one of the founding
fathers of the annual Golden Boot Awards, which honors western film stars and
benefits the Motion Picture and Television Fund.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the Company
for services rendered during the year ended June 30, 1996, 1995, and 1994, to
the (i) Chief Executive Officer and (ii) the three most highly compensated
executive officers of the Company.
<TABLE>
<CAPTION>
Name and Long Term
Principal Compensation & All
Position Year (1) Salary Stock Options (2) Other
- -------- -------- -------- ----------------- -------
<S> <C> <C> <C> <C>
Jonathan D. Shapiro 1996 $275,000 300,000(3) $6,000(6)
President and Chief 1995 $270,000 300,000(4) $6,000(6)
Executive Officer 1994 $197,308 400,000(5) $6,000(6)
and Director
Stanton Rutledge 1996 $165,000 50,000(7) $6,000(6)
Executive 1995 $165,000 50,000(8) $6,400(6)
Vice President 1994 $123,878 - $6,000(6)
Rob Word 1996 $150,000 50,000(9) $6,000(6)
Senior Vice President 1995 $150,000 75,000(10) $6,000(6)
and President of CST 1994 $ 61,038 125,000(11) $3,000(6)
Featurizations, Inc.
Stephen Strick 1996 $151,000(14) 80,000(12) $6,000(6)
Senior Vice President 1995 $112,741 120,000(13) $5,500(6)
1994 N/A N/A N/A
</TABLE>
All other executive officers of the company received less than $100,000 in
cash compensation for services rendered in the fiscal year ended June 30, 1996.
(1) No cash bonuses were paid in the years presented.
(2) The Long Term Compensation Plans operated by the Company are the
Company's Employee Stock Option Plans and its Warrant Plan for directors. The
Company instituted a 401(k) Plan during fiscal year 1995, covering substantially
all eligible employees. The company is not obligated to contribute to the Plan,
and did not make any contributions in the fiscal years ended 1995 or 1996.
30
<PAGE> 31
(3) These options were granted to Mr. Shapiro December 6, 1995 at an
exercise price of $0.63 per share.
(4) These options were granted to Mr. Shapiro December 12, 1994, at an
exercise price of $0.94 per share.
(5) These options were granted to Mr. Shapiro September 8, 1993 at an
exercise price of $2.00 per share.
(6) This amount reflects the officers' $750 or $500 monthly car allowance
and/or $200 monthly phone allowance.
(7) These options were granted to Mr. Rutledge June 30, 1996 at an
exercise price of $0.44 per share.
(8) These options were granted to Mr. Rutledge December 12, 1994 at an
exercise price of $0.94 per share.
(9) These options were granted to Mr. Word June 30, 1996 at an exercise
price of $0.44 per share.
(10) These options were granted to Mr. Word July 1, 1995, effective June 1,
1995 at an exercise price of $0.94 per share.
(11) These options were granted to Mr. Word January 3, 1994 at an exercise
price of $2.31 per share.
(12) These options were granted to Mr. Strick June 30, 1996 at an exercise
price of $0.44 per share.
(13) 60,000 of these options were granted to Mr. Strick in August, 1994 at
an exercise price of $1.00 per share and 60,000 options were granted July 1,
1995 effective June 1, 1995 at an exercise price of $0.94 per share.
(14) This amount reflects an additional $26,000 earned for production fees
due him on the Featurizations programming delivered in 1996.
Employment Agreements
In September 1993, the Company entered into a written employment agreement
with Mr. Jonathan D. Shapiro, which provides for annual salary compensation of
$150,000, annual guaranteed commissions of $120,000 and annual car allowance of
$6,000. Mr. Shapiro may earn additional commissions of 3% on sales of the
Company's library products and 1% of coloring service sales in excess of
$120,000. The employment agreement expires in September 1996. The employment
agreement was extended two years in October 1995, which increased his annual
salary compensation to $300,000 and annual car allowance to $9,000. In addition,
in December 1995, Mr. Shapiro was granted an additional 300,000 employee stock
options at $.63 per share. Mr. Shapiro will also receive $1,000 per half-hour of
programming produced by the Featurizations division. Mr. Shapiro has deferred
production fees of $26,000 due him to be paid no later than June 1997.
In December 1992, the Company entered into a written employment agreement
with Mr. Stanton Rutledge, which provides for annual salary compensation of
$100,000 (increased to $115,000 and $165,000 in February and December, 1994,
respectively) commission of 1% on gross receipts generated in excess of
$10,000,000 and annual car allowance of $6,000. The employment agreement was
renewed in October 1995 for an additional two (2) year period. In August, 1996
Mr. Rutledge resigned his position with the Company.
31
<PAGE> 32
In August 1994, the Company entered into a written employment agreement
with Mr. Stephen Strick, which provides for annual compensation of $125,000 and
an annual car allowance of $6,000. Mr. Strick's employment with the Company
expires in August, 1997.
In January 1994, the Company entered into a written employment agreement
with Mr. Robert Word, which provides for annual salary compensation of $90,000,
guaranteed annual commission of $60,000 and annual car allowance of $6,000. Mr.
Word may also earn commission of between 1% and 3% on productions developed for
the Company. The employment agreement expires in December 1996. Mr. Word has
deferred production fees of $26,000 due him to be paid no later than December,
1996.
Stock Option and/or Stock Warrants Granted During Fiscal 1996
The table below sets forth certain information regarding grants of options
and/or warrants during the fiscal year ended June 30, 1996, to the executive
officers named in the Summary Compensation Table above. No stock appreciation
rights were granted during fiscal 1996, 1995 and 1994.
<TABLE>
<CAPTION>
% of Potential Realizable
Total Options/ Value at Assumed
Warrants Annual Rates of
Options/ Granted to Exercise Stock Price
Warrants Employees in Price Expiration Appreciation
Name Granted Fiscal Year Per Share Date For Option Term(1)
- ---- -------- ------------- --------- ---------- ----------------------
5% 10%
-------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jonathan D. Shapiro 300,000 44% $ 0.63 12/2005 $118,000 $ 299,000
Stanton Rutledge 50,000 7% $ 0.44 6/2006 $ 14,000 $ 35,000
Rob Word 50,000 7% $ 0.44 6/2006 $ 14,000 $ 35,000
Stephen Strick 80,000 12% $ 0.44 6/2006 $ 22,000 $ 56,000
</TABLE>
(1) Potential realizable value is determined by taking the initial dollar
value per share and applying the stated annual appreciation rate compounded
annually for the term of the options (10 years), subtracting the applicable
exercise price per share at the end of the period and multiplying the remaining
number by the number of options or warrants granted. Actual gains, if any, on
stock option or transfer exercises and common stock holdings are dependent on
the future performance of the common stock and overall stock market conditions.
There can be no assurance that the amounts reflected in this table will be
achieved.
AGGREGATED OPTION AND/OR WARRANT EXERCISES IN FISCAL YEAR 1996
AND FISCAL YEAR AND OPTION AND WARRANT VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options Held In-the-money Options
at FY End at FY End ($)(1)
Shares ------------------------------- -------------------------------
Acquired on Value
Name Exercise (2) Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan D.
Shapiro - - 366,666 633,334 - -
Stanton
Rutledge - - 166,666 83,334 - -
Rob Word - - 108,332 141,668 - -
Stephen
Strick - - 40,000 200,000 - -
</TABLE>
(1) This value is the difference between the closing price of the Company's
common stock on June 30, 1996, and the exercise price of options and/or warrants
multiplied by the number of shares subject to the options or warrants.
(2) During fiscal 1996, no executive officers named in the summary
compensation table above exercised any options or warrants.
32
<PAGE> 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND OFFICERS
AND DIRECTORS AS OF SEPTEMBER 25, 1996
The following table sets forth as of September 25, 1996, certain
information regarding the beneficial ownership of Common Stock owned by (i) each
stockholder known to the Company to be the beneficial owner of more than 5% of
the Common Stock (ii) each director of the Company, (iii) each nominee director,
(iv) certain executive officers, and (v) all officers and directors of the
Company as a group. Unless otherwise indicated, each of the stockholders has
sole voting and investment power with respect to shares beneficially owned.
Name and Address Number of Shares Percent
of Beneficial Owner Beneficially Owned(1) of Class
- ------------------- --------------------- --------
Merrill Lynch Phoenix Fund 2,525,000 (2) 9.3%
800 Scudders Mill Road
Plainsboro, NJ 08536
M&A Investments, Inc. 1.787,670 (4) 6.6%
1220 Senlac Drive
Carrollton, Texas 75006
Gerald Shefsky 1,150,000 (3) 4.2%
5901 Green Valley Circle, Ste. 400
Culver City, California 90230
Abbey J. Butler 650,000 (4) 2.4%
207 Dune Road
West Hampton Beach, New York 11978
Jonathan D. (Jody) Shapiro 369,092 (4) 1.4%
5901 Green Valley Circle, Ste. 400
Culver City, CA 90230
Michael Jay Solomon 260,000 (4) *
440 N. Rodeo Drive
Penthouse Suite
Beverly Hills, CA 90210
Stanton Rutledge 166,967 (4) *
5901 Green Valley Circle, Ste. 400
Culver City, CA 90230
Sumner Adam Long 175,000 (3) *
3 Park Avenue, 38th Floor
New York, New York 10016
Rob Word 109,132 (4) *
5901 Green Valley Circle, Ste. 400
Culver City, CA 90230
33
<PAGE> 34
Stephen Strick 40,000 (3) *
5901 Green Valley Circle, Ste. 400
Culver City, CA 90230
Directors and Officers 2,994,609 (5) 11.0%
as a group (9 persons)
* signifies less than one percent (1%)
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose of, or
to direct the disposition of, a security). In addition, for purposes of this
table, a person is deemed, as of any date, to have "beneficial ownership" of any
security that such persons have the right to acquire within 60 days after such
date.
(2) Consists entirely of shares owned.
(3) Consists entirely of options or warrants to purchase shares.
(4) Consists of both shares owned and options and/or warrants to purchase
shares.
(5) Includes an aggregate 3,330,397 shares that such officers and directors
have the right to acquire pursuant to stock options and warrants granted by the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 28, 1993, the Company issued a loan to the President, Mr.
Jonathan D. (Jody) Shapiro in the amount of $50,000 at an interest rate of 4%.
Principal and interest was due April 30, 1994. $35,000 of the loan was paid
down. Payoff of the $15,000 balance and interest is currently being negotiated.
On February 18, 1994, the Company issued a loan to the President, Mr.
Jonathan D. (Jody) Shapiro in the amount of $100,000 at an interest rate of
5.3%. Principal and interest is due the earlier of: (i) February 18, 1997, (ii)
within 10 days from the date Mr. Shapiro exercises options granted him, or (iii)
six months after the date Mr. Shapiro is no longer employed by the Company. The
loan is secured by a second trust deed on Mr. Shapiro's residence.
On June 30, 1994, the Company issued a loan to the Chairman, Mr. Gerald
Shefsky in the amount of $67,263 at an interest rate of 5.3%. Principal and
interest is due the earlier of: (i) June 30, 1997, (ii) within 10 days from the
date Mr. Shefsky exercises options granted him or, (iii) six months after the
date Mr. Shefsky is no longer employed by the Company. Mr. Shefsky repaid the
loan in April 1996.
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 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 noted above. In
34
<PAGE> 35
addition, in April, 1996, $35,000 of Company related expenses paid by Mr.
Shapiro were converted to a note payable under similar terms and conditions of
the above notes. All amounts due Mr. Shapiro were repaid in September, 1996.
In July 1995, the Company obtained short-term financing from M&A
Investments, Inc. of $500,000 and issued to M&A a note bearing 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. In November,
1995, $250,000 of the note was converted into 500,000 shares of the Company's
common stock. The maturity date of the remaining $250,000 of the note and
applicable accrued interest was extended first to February 1, 1996 and then
subsequently to December 31, 1996. If the note is not repaid in full by December
31, 1996, the options are convertible at $0.50 per share.
35
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
A. Index of Financial Statements: Page
----
<S> <C>
Report of Independent Certified Public Accountants 12
Balance Sheets as of June 30, 1995 and 1996 13
Statements of Operations for the years ended June 30, 1994, 1995 and 1996 14
Statements of Stockholders' Equity for the years ended June 30, 1994, 1995 and 1996 15
Statements of Cash Flows for the years ended June 30, 1994, 1995 and 1996 16-18
Notes to Financial Statements 19-27
B. Index of Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts and Reserves 39
</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 Form 8-K was 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.
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"), incorporated herein by reference.
(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 9, 1994, between the Company and Stephen
Strick, regarding Stephen Strick's employment by the Company,
incorporated herein by reference.
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.
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.
36
<PAGE> 37
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, incorporation 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.
37
<PAGE> 38
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- ---------- ---------- ----------
BALANCE AT BALANCE
BEGINNING END OF
OF YEAR ADDITIONS DEDUCTIONS YEAR
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Allowance for doubtful accounts deducted from
accounts receivable in balance sheet $19,100 $ $ $19,100
======= ======= ========== =======
1995
Allowance for doubtful accounts deducted from
accounts receivable in balance sheet $ $19,100 $ $19,100
======= ======= ========== =======
</TABLE>
38
<PAGE> 39
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: November 1, 1996
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.
Signature Title Date
--------- ----- ----
/s/ Sumner A. Long
___________________________ Director November 1, 1996
Sumner A. Long
/s/ Jonathan D. Shapiro
___________________________ Chairman of the Board, President November 1, 1996
Jonathan D. Shapiro and Chief Executive Officer
/s/ Stephen Strick
___________________________ Director November 1, 1996
Stephen Strick
/s/ Michael Jay Solomon
___________________________ Director November 1, 1996
Michael Jay Solomon
39
<PAGE> 40
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
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 October 18, 1996, 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, 1996. Our report contains an explanatory
paragraph regarding the Company's ability to continue as a going concern.
BDO SEIDMAN, LLP
Los Angeles, California
November 1, 1996
40
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS - FISCAL YEAR ENDED JUNE 30, 1996 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-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 54304
<SECURITIES> 0
<RECEIVABLES> 739390
<ALLOWANCES> 19100
<INVENTORY> 769299
<CURRENT-ASSETS> 1832909
<PP&E> 6944186
<DEPRECIATION> 5792607
<TOTAL-ASSETS> 5269538
<CURRENT-LIABILITIES> 4119818
<BONDS> 0
0
0
<COMMON> 4091752
<OTHER-SE> (3482457)
<TOTAL-LIABILITY-AND-EQUITY> 5369538
<SALES> 2326931
<TOTAL-REVENUES> 4826464
<CGS> 1116913
<TOTAL-COSTS> 7047054
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131983
<INCOME-PRETAX> (3469486)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3469486)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3469486)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
