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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
for the fiscal year ended March 31, 1997
OR
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
for the transition period from to
Commission File Number: 0-21322
OUT-TAKES, INC.
(Name of small business issuer in its charter)
Delaware 95-4363944
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1419 Peerless Place, Suite 116 90035
Los Angeles, California (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (310) 788-9440
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
Class A Warrants to purchase Common Stock, $.01 par value Class B Warrants
to purchase Common Stock, $.01 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer'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 issuer's revenues for the most recent fiscal year were $2,014,788.
The aggregate market value of the voting stock held by non-affiliates as of
June 10, 1997 was $456,429.
The number of shares outstanding of the issuer's Common Stock as of
June 10, 1997 was 20,495,726.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the 1997
Annual Meeting of Stockholders are incorporated herein by reference into Part II
and Part III.
Transitional Small Business Disclosure Format (Check One): Yes No X
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<PAGE>
OUT-TAKES, INC.
FORM 10-K ANNUAL REPORT FOR FISCAL YEAR ENDING MARCH 31, 1997
TABLE OF CONTENTS
Page
PART I 1
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 5
ITEM 3. LEGAL PROCEEDINGS 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5
PART II 6
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 6
ITEM 6. SELECTED FINANCIAL DATA 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION 7
ITEM 8. FINANCIAL STATEMENTS 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 26
PART III 26
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT 26
ITEM 11.EXECUTIVE COMPENSATION 26
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 26
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
PART IV
ITEM 14.EXHIBITS AND REPORTS ON FORM 8-K 27
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Out-Takes, Inc., a corporation incorporated in Delaware on March 18, 1992
("the Company"), is engaged in the sale of photographic portraits of children,
adults and family groups. The Company currently operates and derives
substantially all of its revenues from two retail studios, called Out-Takes(R),
the first of which opened on May 24, 1993 and is located in MCA/ Universal's
CityWalkSM project in Los Angeles, California ("the CityWalk Studio"). The
second studio commenced operations, on December 1, 1995, at the Entertainment
Center in the Bazaar at the Irvine Spectrum located in Irvine, Orange County,
California ("the Irvine Studio"). The studios employ proprietary hardware and
software developed by, or specifically for, the Company which includes digital
imaging technology and automated motion control equipment to position the studio
camera and set subject lighting to the proper levels for each scene
(collectively, the "Proprietary System"). Using the Proprietary System, the
Company is able to place pictures it takes of its clients "into" still
photographs prepared in advance from popular movie scenes and other backgrounds
licensed by the Company.
Products and Services
The technological capabilities of the Proprietary System and the variety of
backgrounds that the Company has developed pursuant to various merchandise
licenses in effect (see "- License Agreements") represent a dis tinction in the
consumer portraiture business. Most of the portraits taken in the CityWalk
Studio and the Irvine Studio are presented to the customer as framed 8" x 10",
5" x 7" and wallet-sized photographs within about thirty minutes after the
portrait session is completed. The remainder (primarily enlargements and
greeting cards based on these photographic images) are produced and delivered to
clients within several weeks using the Company's order fulfillment capabilities
as well as processing arranged through independent service bureaus.
License Agreements
The Company has merchandise licensing agreements with Paramount Pictures
Corporation ("Paramount"); MCA/Universal Merchandising, Inc. ("Universal");
Warner Bros. Consumer Products - formerly Turner Home Entertainment, Inc.
("Warner") with respect to several properties from the Hanna-Barbera and MGM
libraries; Twentieth Century Fox Licensing & Merchandising ("Fox"); Jay P.
Morgan Photography ("Morgan"); Tony Stone Worldwide Stock Agency ("TSW"), Queen
Bee Productions ("Queen Bee"), Simon Kornblit ("Kornblit"), Curtis Archives
("Curtis A"), Curtis Management ("Curtis M"), King Features ("King"), MTV
Networks ("MTV"), Saban Merchandising Inc. ("Saban"), Innerspace Visions
("Visions") and others, individually and collectively referred to as the
"License Agreements" (Paramount, Universal, Turner, Fox, Morgan, TSW, Queen Bee,
Kornblit, Curtis A, Curtis M, King, MTV, Saban and Visions are individually and
collectively referred to herein as "Licensors").
The License Agreements generally grant the Company the right to
manufacture, sell and distribute in a defined geographic area, computer
generated photographs incorporating a customer's image into a still photograph
("Licensed Products") with the characters, designs and/or visual representations
("Licensed Articles") as they appear in television productions and motion
pictures. The Licensed Products may be sold separately or affixed to items
approved by the Licensor, including photographic enlargements, greeting cards,
posters, books, t-shirts, mugs, buttons and other novelty items, in
consideration of payment to the Licensor of a specified royalty based on a
percentage of gross retail sales revenue from each of the Licensed Products.
Many of the License Agreements require a non-refundable advance payment against
future royalties and stipulate a guaranteed minimum level of royalties that must
be paid during each year of their term. The License Agreements also provide that
the Licensor retains approval rights over the use of the Licensed Articles.
A summary of the License Agreements and the Titles/Properties available
thereunder is presented in the table on the following page.
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Licensor Selected Titles / Properties Territory and Usage
Paramount Pictures Corp Current titles in use: Territory: Worldwide.
Star Trek (Original Series)
Trek Wrath of Khan
Deep Space Nine
Cool World
Friday the 13th
MCA/Universal Merchandise Current titles in use: Territory: United States,
Back to the Future, United Kingdom, Holland,
Jaws New Zealand and Australia.
Jurassic Park
Harry & Hendersons
Dracula
Warner Bros. Consumer Current titles in use: Territory: United States and
Products-formerly Turner Gone with the Wind its territories and
Home Entertainment(For Tom & Jerry Movie possessions
MGM and Hanna-Barbera Wizard of Oz
film libraries) The Flintstones
Cave Kids
Twentieth Century Fox Current titles in use: Territory: "The entire world".
Licensing & Miracle on 34th St.
Merchandising The Simpsons
The Pagemaster
Jay P. Morgan Multi-property agreement Territory: Worldwide.
Photography covering 25 original
Jay P. Morgan images.
Out-Takes has the right
of substitution from
time-to-time.
Tony Stone World-wide International stock and Territory: Worldwide.
Stock Agency assignment photography,
including access to a
library of photographs
contributed by over
1,000 photographers
worldwide.
Queen B Productions Current titles in use: Territory: United States
Elvira in bathtub and Canada
Elvira at movie theater
Simon Kornblit Approved photographs Territory: Worldwide.
supplied by the
photographer.
Curtis Archives All Norman Rockwell Territory: United States
on behalf of Norman illustraations, including
Rockwell's estate artwork and logo art
associated with his
extensive collection of
Saturday Evening Post
magazine covers.
Curtis Management Approved photographs Territory: United States
supplied by licensor.
Current property in use:
Hollywood Sign
King Features Current titles in use: Territory: United States,
Betty Boop Canada and Mexico.
Popeye
Innerspace Visions Approved photographs Territory: Worldwide
supplied by the
photographer.
MTV Networks Current property in use Territory: United States
Beavis & Butt-head and its territories and
possessions, Canada
Saban Merchandising, Current property in use Territory: United States
Inc. Mighty Morphin Power and its territories and
Rangers. possessions.
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No single License Agreement represents greater than 20% of the Company's
aggregate sales revenues. The Company is materially dependent upon the License
Agreements with Paramount, Universal, Warner, Fox and Morgan, and the appeal of
Licensed Articles from these Licensors in the retail marketplace. Three of these
License Agreements each represents approximately 10% of the Company's revenues.
Although the Company has not commenced to market all Licensed Articles on a
timely basis, as of June 10, 1997, the Company has not received any notice that
any Licensor intends, by virtue of this matter, to exercise any of the remedies
provided for in its respective License Agreements. The Company is current with
respect to all payments and required reports to all Licensors and believes that
its relationship with all Licensors is satisfactory.
On March 1, 1995, the Company entered into a sublicense agreement with
Photo Corporation of Australia Pty Limited ("PCA"), a subsidiary of Photo
Corporation Group Pty. Ltd. ("PCG"), that, subject to the prior approval of the
Licensors, grants PCA a non-exclusive license to utilize the Licensed Articles
on substantially the same terms as provided in the License Agreements. The
sublicense also provides that PCA will pay the Company an amount equal to 120%
of the royalties the Company pays to Licensors for such images. The Company has
received consent from Morgan, Fox and Paramount and other Licensors have
indicated their willingness to support utilization of the licensed Articles in
countries where PCA operates. The Company has not yet become entitled to receive
any royalties from PCA.
Patents, Service Marks, Copyrights and Other Proprietary Technology
The Company has registered the marks Out-Takes(R), So You Want to be in
Pictures(R), Photomation(R) and Create the Moment(R) with the U.S. Patent and
Trademark Office and has registered the Out-Takes(R) service mark in Japan, in
both Japanese and English. The Company has filed a document (the "Disclosure
Document") with the U.S. Patent and Trademark Office concerning aspects of its
technology that it considers may be patentable. The Company has also filed an
application with the U.S. Patent and Trademark Office seeking patent protection
for certain aspects of the Company's technology described in the Disclosure
Document and has supplemented this with a "Continuation in Part" filing, which
is presently pending. While the issue of the patent would provide an advantage
to the Company, it is not material to the value of the Company or its ongoing
viability.
The Company actively manages the protection of its trademarks, know-how,
trade secrets and other intellectual property by requiring all its employees and
those contractors where applicable, to execute confidentiality agreements in
relation to the Company's intellectual property. The Company is not aware of any
instance where there has been a breach of such confidentiality obligations.
Competition and Seasonality
Competition in the traditional portrait photography industry, the
merchandise licensing business and with respect to the development of new
technology is intense. The Company enjoys limited protection from competition at
its CityWalk Studio because of a restriction contained in its lease which states
that during the initial lease term (which runs through May 31, 1998), the
landlord will not lease to third parties nor operate for its own account a
retail store engaged in selling computer-generated photographs similar to those
produced and sold by the Company. Such a restriction does not apply to the lease
of premises at the Irvine Spectrum, however, it is considered unlikely that a
competitive business will be opened at the Irvine Spectrum. The Company has
identified three potential kinds of competition - traditional photographers who
are likely to compete for retail customers as well as future locations;
photographers who employ digital technologies who are likely to compete for
retail customers, future locations and merchandise licensing agreements; and new
technologies which may render the Proprietary System obsolete or require the
Company to incur a substantial expense in order to remain competitive in terms
of product quality, selection, pricing and customer service.
Many of the firms with which the Company competes, or can reasonably be
anticipated to compete in the future, have far greater financial resources,
experience and industry relationships than the Company. In addition, such
organizations have proven operating histories, which may afford these firms
significant advantages in negotiating and obtaining future merchandise licenses
and retail leases, arranging financing, attracting skilled personnel and
developing technology and products. Many of these firms offer their products at
substantially lower prices than the Company sells its products. The Company
believes that its portrait photography products are competitive in terms of
product quality, service quality and the selection and attractiveness of the
Licensed Products.
The professional photography business is seasonal, with the largest volume
of sales generally occurring in the Company's third fiscal quarter during the
period preceding the Christmas season. The CityWalk location
3
<PAGE>
is one of the major tourist attractions in Southern California and therefore is
also highly seasonal, with its largest number of visits occurring in the
Company's second and third fiscal quarters, particularly between July 4th and
Labor Day. Although the revenue stream at the Irvine Studio is not as seasonal
as the CityWalk Studio, the third fiscal quarter generates the highest level of
revenue, as a result of greeting card sales and the seasonal gift giving of
portraits.
Employees
As of March 31, 1997, the Company had 34 employees, 25 of whom were
part-time. The Company's full time employees include a Retail Operations
Manager, responsible for the overall performance of the Studios, a Financial
Controller handling primarily administrative and accounting responsibilities and
two persons coord inating image production and technical support activities. All
of the remaining persons were employed in retail operations at the CityWalk
Studio (17 employees) and the Irvine Studio (13 employees). Between March 31,
1997 and June 10, 1997, the Company reduced the image production and
technical support function from two persons to one person and reduced the
number of part-time personnel employed in its retail operations by 1 person,
such that as of June 10, 1997, the Company had a total of 32 employees. In
addition to the above personnel, the Company also engages the services of
independent consultants and third-party contractors from time to time and
continues to rely heavily on the personnel and outside support of PCA pursuant
to the terms of a Personnel Consulting Agreement entered into and approved
by the Company's stockholders on June 28, 1995. Management fees were
suspended for a period of two years from December 1, 1996. None of the Company's
employees is covered by a collective bargaining agreement.
All employees have executed employment and confidentiality agreements with
the Company. The Company considers its labor relations to be good.
Research & Development, Regulations and Suppliers
Between inception and December 31, 1994, the Company incurred $6,990,000 of
losses during the development stage where it devoted substantially all of its
efforts to designing and building the Proprietary System, including writing four
custom software applications that operate it, approximately 100 images that can
be produced with it and the retail business systems in which this equipment,
software and images are employed.
The opening of the Irvine Studio on December 1, 1995, provided an
opportunity for the Company to upgrade its photographic, image manipulation and
compositing hardware and software to take advantage of the technological
advances that have been made since the opening of the CityWalk Studio.
Consequently the Irvine Studio incorporates the second generation of equipment
and software which provides substantially higher resolution photographs and the
opportunity to provide a broader product line than the CityWalk Studio.
Approximately $12,000 was expended during the fiscal year ended March 31, 1997
(in addition to the $240,000 expended during the fiscal year ended March 31,
1996) on technological advancement for computer hardware and software and the
re-production of CityWalk Studio images for the Irvine Studio. The marketing
focus of the Irvine Studio recognizes the need for additional "traditional"
style backgrounds and these are continuing to be developed as part of ongoing
operations. The costs associated with this effort are included in the Statement
of Operations.
In order to comply with federal, state and local environmental regulations,
the Company has permanent filtration systems at the CityWalk and Irvine Studios
that lessen the discharge of certain chemicals that may be harmful to the
environment by reducing the concentration of these chemicals to safe levels
before they are disposed. The Company also contracts with a hazardous waste
disposal company with respect to the residue (primarily trace silver) that the
filtration unit produces. The Company believes that this equipment and these pro
cedures are sufficient to address any environmental problems associated with its
business and it has not received any indication that it is not complying with
all applicable regulations.
The principal materials used in the Company's business are photographic
paper, chemicals, mattes and frames, all of which are readily available
throughout the region from a number of wholesale suppliers.
4
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 1,699 square feet of retail space (plus approximately
200 square feet of mezzanine space and an additional 300 square feet of storage
space) from MCA Recreation Services, a division of MCA Inc., for the CityWalk
Studio. (see "Description of Business - General") This lease provides for a
minimum annual rental obligation of approximately $130,599 plus a percentage
rental payment equal to ten percent (10%) of annual store revenues over
$867,383. During the year to March 31, 1997 the Company paid additional rent of
$62,287 as a result of revenues being in excess of the $867,383 threshold. The
CityWalk Studio lease expires on May 31, 1998 and is subject to one seven (7)
year renewal period at the option of the Company. The lease may be terminated by
the lessor if the Company does not meet a minimum annual sales requirement of
$587,000.
The Company leases 2,634 square feet of retail space from the Irvine Retail
Properties Company for the Irvine Studio (see "Description of Business -
General"). The lease provides for a minimum annual rental obligation of
approximately $118,202 per annum plus a percentage rental payment equal to seven
percent (7%) of store revenues over $1,128,857 per annum. The Irvine Studio
lease expires on November 21, 1998 and is subject to one seven (7) year renewal
period at the option of the Company. The option to renew the lease is available
only if sales revenue in the twelve months prior to the date of giving notice is
in excess of $810,000 and the net worth of the Company is in excess of $600,000.
The Company maintains computer graphics and image production facilities at
both the CityWalk Studio and the Irvine Studio, and has its administrative
offices at 1419 Peerless Place, Suite 116 in Los Angeles, California ("the
Peerless Premises"). Certain of the Company's equipment, furniture and materials
are temporarily stored at 101 E. Alameda Ave., Burbank, California ("the Storage
Facility"). The Company has a month to month rental obligation for both the
Peerless Premises and the Storage Facility.
All of the Company's leasehold premises are covered by casualty, liability
and business interruption insur ance with limits and conditions that management
deems customary for the industry.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq Small Cap MarketSM
("NASDAQ") on March 9, 1993 under the symbol OUTT (also OUTTC during the period
from October 28, 1994 through December 30, 1994). On January 3, 1995, the
Company's securities were delisted from NASDAQ as a consequence of the Company's
not fulfilling the minimum bid price requirements set forth in Paragraph 1(c)(4)
of Schedule D of the NASDAQ By-Laws. On January 4, 1995, the Company's Common
Stock began to be quoted on the OTC-Bulleting BoardSM under the symbol OUTT.
The following table sets forth, for the periods indicated, the high and low
prices for the Common Stock as reported by Nasdaq Stock Market Inc.
Fiscal 1995 Fiscal 1996 Fiscal 1997
High Low High Low High Low
First Quarter 16/32 6/32 18/100 7/100 27/100 22/100
Second Quarter 22/32 6/32 17/100 15/100 25/100 10/100
Third Quarter 14/32 6/32 19/100 13/100 6.5/100 6/100
Fourth Quarter 14/32 6/32 25/100 13/100 9/100 4/100
There were approximately 72 holders of record of the Company's Common Stock
as of June 10, 1997.
The Company has not paid any dividends on its Common Stock since
incorporation in March 1992 and does not anticipate paying dividends in the
forseeable future. There are no restrictions on the Company's present ability to
pay dividends on its Common Stock, other than those prescribed by Delaware law.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain data the the years ended March 31,
1993 through March 31, 1997. Refer to "Item 7. Management's Discussion and
Analysis or Plan of Operation" for discussion of operations.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Income Statement Data
Revenue from operations 2,014,788 1,580,712 1,274,836 454,395 -
Gross Income / (Loss) 88,858 126,713 (44,276) (531,379) -
Adjusted net Loss
(see notes) (702,096) (704,355) (1,188,746)(2,987,219) (2,875,652)
Adjusted net loss
per share ($0.05) ($0.07) ($0.22) ($0.56) ($1.18)
Balance Sheet Data
Total Assets $1,011,463 1,409,752 1,862,279 2,614,752 $5,496,643
Total Liabilities 698,710 1,383,653 769,696 255,037 253,562
Stockholders' Equity 312,753 26,099 1,092,583 2,359,715 5,243,081
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The above figures have been adjusted as follows, to facilitate comparison:
1. The net loss for the year ended March 31, 1997 excludes termination payments
totaling $51,250 paid to former officers of the Company.
2. The net loss for the year ended March 31, 1996 excludes a $762,129
non-recurring loss on impairment of long-lived assets, a non-cash accounting
adjustment to adopt SFAS No. 121 and $110,000 of non-recurring professional
costs associated with the transaction with Photo Corporation Group Pty Limited.
3. The net loss for the year ended March 31, 1995 excludes $120,713 in
non-recurring expenses associated with the Company having terminated leases at
the 920 and 910 Colorado Premises.
4. The net loss for the year ended March 31, 1994 excludes $103,853 in
miscellaneous income.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the historical
financial statements of Out-Takes, Inc. ("the Company") and notes thereto
included elsewhere in this Form 10-K.
Overview
The Company currently operates two photographic portrait studios, the first
of which was opened on May 24, 1993 at MCA/Universal's CityWalkSM project in Los
Angeles, California ("the CityWalk Studio"), the second opened on December 1,
1995 at the Entertainment Center in the Bazaar at the Irvine Spectrum located in
Irvine, Orange County, California ("the Irvine Studio"). During the quarter
ended December 31, 1996, the Company engaged a consultant to work with its
technical staff, to determine whether the Traveling Studio could be made
operational. After some effort and expenditure, the Traveling Studio has been
used in five promotions, over a total of ten days. The following table
summarizes the Company's fiscal quarter results which have been adjusted for the
matters set forth in the notes below:
<TABLE>
Fiscal Year Ended March 31, 1996 Fiscal Year Ended March 31, 1997
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
ended Jun30 ended Sep30 ended Dec31 ended Mar31 ended Jun30 ended Sep30 ended Dec31 ended Mar 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 357,226 $ 444,838 $ 375,711 $ 402,937 $ 468,187 $ 657,643 $ 520,666 $ 368,292
Gross Income/(Loss) 32,279 138,332 15,721 (59,619) 18,425 126,736 15,081 (71,384)
Adjusted Net Loss
for the period
(see notes below) (117,272)1 (79,278) (210,078) (297,727)2 (204,568) (121,332)3 (172,530) (203,666)
Adjusted Net Loss
per share ($ 0.02) ($ 0.01) ($ 0.01) ($ 0.03) ($ 0.02) ($ 0.01) ($ 0.02) ($ 0.01)
Closing Bid Price
per share of Common
Stock $0.125 $ 0.15 $ 0.13 $ 0.22 $ 0.22 $ 0.10 $0.065 $0.085
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</TABLE>
As indicated in the following notes, the quarterly figures have been adjusted in
order to facilitate comparison.:
1 The net loss for the three month period ended June 30, 1995 excludes $110,000
of non-recurring professional costs associated with the transaction with Photo
Corporation Group Pty Limited and a $722,000 non-recurring loss on impairment
of long-lived assets, a non-cash accounting adjustment to adopt SFAS No. 121.
2 The net loss for the three month period ended March 31, 1996 excludes a
$40,129 non-recurring loss on impairment of long-lived assets, a non-cash
accounting adjustment to adopt SFAS No. 121.
3 The net loss for the three month period ended September 30, 1996 excludes
termination payments totaling $51,250 paid to former officers of the Company.
As noted in the table presented above, the Company continues to operate at a
net loss. Management is focusing on improving revenues from the Irvine Studio by
developing a marketing program to attract more customers and creating a
background image portfolio that is more suitable for the market in which the
Irvine Studio is located. There can be no assurance that this program for the
Irvine Studio will be successful and accordingly, the Company will continue to
implement overhead reductions to improve the Company's operating margins and
reduce the cash outflow from operations. The Company's short term objectives are
to increase the revenues of the Irvine Studio, source additional opportunities
and venues for the utilization of the Traveling Studio, continue the reduction
of expenses and raise capital for opening additional studios. Notwithstanding,
net losses (which include depreciation expenses of approximately $100,000 per
quarter) are expected to continue unless and until the Company opens such
additional studios or the revenue stream from the two existing studios,
especially the Irvine studio, increases substantially.
On April 24, 1996 the Board of Directors authorized the issuance of up to 3
million shares of the Company's Common Stock for a price of $0.20 per share,
which represented the fair market value of the stock on April 24, 1996. On May 6
and 7, 1996, the Company received stock subscriptions from six investors
totaling $130,000 for 650,000 shares of Common Stock. The Company received total
payment on these subscriptions as of June 6, 1996. On May 7, 1996, Photo
Corporation Group Pty Limited ("PCG") converted $130,000 of the $649,500 loan
payable at that time to 650,000 shares of the Company's Common Stock. This
represented a value of $0.20 per share of Common Stock, which was the fair
market value as determined by the Board of Directors, on this date and the same
price paid on such date by the six independent investors. On November 29, 1996,
PCG converted $519,000 of the remaining $519,500 note payable, together with
$261,000 of accrued management
7
<PAGE>
fees payable to Photo Corporation of Australia Pty Limited ("PCA"), which debt
was assumed by PCG, into 8,320,000 shares of the Company's Common Stock. This
represented a value of $0.09375 per share of Common Stock, which the Board of
Directors determined to be a fair price at that time. In addition, PCG suspended
management fees to it or its related parties pursuant to the Personnel
Consulting Agreement with the Company dated June 28, 1995 for a period of two
years commencing December 1, 1996.
During the period December 1, 1996 to June 10, 1997, PCG has provided a
further $305,000 of cash to assist the Company in funding its day to day
operations and to enable the Company to make the payments due to former
officers. The debt due to PCG is disclosed on the balance sheet as "Due to
Related Party".
The Company opened the Irvine Studio on December 1, 1995, commenced
operations on December 9, 1995 and at the same time completed the integration of
an improved version of the Company's proprietary technology. The original
technology incorporated in the CityWalk Studio was placed into service in
mid-1993. Since that time, significant improvements have occurred in digital
photography equipment software and computers utilized in high-end computer
graphics. The Company's new technology incorporates these newer system
components and is designed to produce significantly higher resolution and hence
better quality photographs across a broader product line. Notwithstanding the
quality improvements that have been achieved to date, digital camera technology
is still not able to produce photographs which, when enlarged beyond 11" x 14"
sizes, are of the same quality as traditional silver halide film, and this may
have a negative effect on the studios' long-term earning capabilities.
Results of Operations
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
The net loss for the year ended March 31, 1997 was $753,346 compared with
$1,576,484 for the year ended March 31, 1996. The primary reason for the
reduction in the net loss between the two years is that in the year ended March
31, 1996 there was a loss on impairment of long-lived assets of $762,129. There
was no such loss in the year ended March 31, 1997.
The following table shows Revenues, Cost of Revenues and Gross Income /
(Loss) during the fiscal years ended March 31, 1997 and March 31, 1996, by
studio.
<TABLE>
Fiscal Year Ended March 31, 1997Fiscal Year Ended March 31, 1996
CityWalk Irvine Travelling CityWalk Irvine Traveling
Studio Studio Studio Studio Studio Studio
(Opened (Not
12/9/95) operatonal)
<C> <C> <C> <C> <C> <C>
Revenues $1,492,02 $ 508,192 $ 14,572 $1,422,845 $ 157,867 $ -
-------- -------- ------- --------- -------- --------
Cost of Revenues:
Compensation &
Related Benefits 429,764 277,501 5,674 439,350 108,787 -
Depreciation &
Amortization 137,855 220,975 293 189,781 59,468 -
Pre-opening Costs - - - - 67,007 -
Rent 192,432 100,500 7,925 183,421 27,218 -
Other 318,536 227,188 7,287 309,175 69,792 -
--------- -------- ------- --------- -------- --------
Total 1,078,587 826,164 21,179 1,121,727 332,272 -
Gross Income /(Loss) 413,437 ($317,972) ($6,607) $301,118 ($174,405) -
========= ======== ======== ======== ======== ========
</TABLE>
The Company overall generated $2,014,788 in revenues in the fiscal year
ended March 31, 1997, compared to revenues of $1,580,712 in the fiscal year
ended March 31, 1996. The increase in revenues of approximately $434,076 is
primarily a result of the Irvine Studio trading for a full twelve months in the
year to March 31, 1997
8
<PAGE>
compared with only four months in the year to March 31, 1996 (the Irvine Studio
commenced trading on December 9, 1995). CityWalk Studio revenues increased by
$69,179 to $1,492,024, an increase of 4.9%. Revenues from the Irvine Studio and
the Traveling Studio were $508,192 and $14,572 respectively.
Cost of revenues in the year to March 31, 1997 were $1,925,930 or
approximately 95.6% of revenues. Cost of revenues in the year to March 31, 1996
were $1,453,999 or approximately 92.0% of revenues.
Cost of revenues for the CityWalk Studio decreased by $43,140 to $1,078,587
despite the $69,179 increase in revenues. Compensation and related benefits were
$9,586 lower than the previous year as a result of tighter controls over the
number of staff hours worked at the studio. Depreciation was lower by $51,926 as
a result of the adoption in June 1995 of SFAS No. 121 and the recognition of a
$722,000 loss on impairment of CityWalk Studio assets, together with the fact
that certain assets have now been fully depreciated. Rent was higher as a result
of the Company paying rent based on a percentage of revenues, such revenues
being higher than in the previous period by $69,179. Other cost of revenues
increased by 3.0%, in line with the 4.9% increase in revenue. The CityWalk
Studio earned gross income of $413,437 during the fiscal year ended March 31,
1997 compared to gross income of $301,118 for the same period last year, an
improvement of $112,319.
Costs of revenues for the Irvine Studio were $826,164, resulting in a gross
loss of $317,972. Included in cost of revenues was $220,975 of depreciation, a
non-cash expense. Cost of revenues for the prior year of $322,272 represented
the four month period from opening to March 31, 1996, and included $67,007 of
non-recurring pre-opening costs. The Irvine Studio is still performing below
expectation and the Company is continuing to develop the portfolio of products
available at the Irvine Studio in an endeavor to improve the revenues from the
Irvine Studio.
Cost of revenues for the Traveling Studio were $21,179, resulting in a gross
loss of $6,607.
Despite the gross loss of $317,972 which was incurred in the Irvine Studio,
and the gross loss of $6,607 incurred by the Traveling Studio, the Company
overall earned a gross income of $88,858 during the fiscal year ended March 31,
1997. Gross income for the same period last year was $126,713. The decrease in
gross income for the year to March 31, 1997 is mainly due to the gross loss
incurred in the Irvine Studio which traded for a full twelve months in the year
to March 31, 1997 compared with only four months trading in the prior year. The
decrease in gross income is partly offset by a $112,319 improvement in the gross
income generated by the CityWalk Studio.
General and administrative expenses for the fiscal year ended March 31, 1997
includes termination payments totaling $51,250 paid to former officers of the
Company. The corresponding year ended March 31, 1996 includes a non-recurring
charge of $110,000 for professional fees relating to the PCG transaction and a
$762,129 non-cash loss on impairment of long-lived assets. After adjusting for
these non-recurring items, the Company's general and administrative expenses
decreased from $805,824 in the fiscal year ended March 31, 1996 to $736,836 in
the fiscal year ended March 31, 1997, a decrease of approximately 9%. This
decrease is consistent with Management's plan to reduce overhead costs.
Compensation and related benefits decreased by approximately 18% to $258,380
(excluding the $51,250 termination payments) from $313,432 for the same period
last year, as a consequence of the cessation of employment on September 1, 1996
of the Vice President Operations and the Vice President Development.
Professional fees, excluding the $110,000 in kind consideration on the PCG
transaction in the year ended March 31, 1996, increased by 4% to $100,777,
compared to $96,979 for the same period last year. Management fees of $131,000
payable to PCG were accrued, relating to the period April 1, 1996 to November
29, 1996, pursuant to the Personnel Consulting Agreement dated June 28, 1995.
The Personnel Consulting Agreement was suspended for two years from December 1,
1996. The expense for the year to March 31, 1997 of $131,000 is comparable with
the $130,000 accrued in the previous year for the period July 1, 1995 to March
31, 1996. Office and storage rent expenses increased from $29,524 in the year to
March 31, 1996 to $39,558. Depreciation and amortization costs were lower by
$37,244 as a result of previously non-producing assets being put into production
and the consequential charges reported in cost of revenues. Other general and
administrative expenses increased by $8,969, or 8% to $114,954 for the fiscal
year ended March 31, 1997, compared to $105,985 for the same period last year.
The Company earned interest income of $484 in the fiscal year ended March
31, 1997 as compared to $3,035 earned during the prior year. Interest charges
totaling $54,602 were incurred on the loan from PCG and on the loan payable to
former executives of the Company compared with interest expense of $28,279 in
the year ended March 31, 1996.
As of March 31, 1996, the Company has net operating loss carry forwards of
approximately $9,650,000. The ability to utilize $8,275,000 of these losses to
be offset against future taxable income is restricted as a result of the change
in control arising from the PCG transaction. The losses will expire in March,
2011.
9
<PAGE>
Year Ended March 31, 1996 Compared to Year Ended March 31, 1995
The following table shows Revenues, Cost of Revenues and Gross Income /
(Loss) during the fiscal years ended March 31, 1996 and March 31, 1995, by
studio.
<TABLE>
Fiscal Year Ended March 31, 1996 Fiscal Year Ended March 31, 1995
CityWalk Irvine CityWalk Irvine
Studio Studio Studio Studio
(Opened 12/9/95) (Not Open)
<S> <C> <C> <C> <C>
Revenues $1,422,845 $ 157,867 $1,274,836 $ -
---------- ----------- ---------- ---------
Cost of Revenues:
Compensation &
Related Benefits 439,350 108,787 459,217 -
Depreciation &
Amortization 189,781 59,468 340,423 -
Pre-opening Costs - 67,007 - -
Rent 183,421 27,218 172,480 -
Other 309,175 69,792 346,992 -
---------- --------- -------- ---------
Total 1,121,727 332,272 1,319,112 -
--------- --------- --------- ---------
Gross Income/(Loss) 301,118 ($ 174,405) ($44,276) $ -
========= ========== ========= =========
</TABLE>
The Company overall generated $1,580,712 in revenues, compared to revenues
of $1,274,836 during the same period last year, for a net increase of $305,876.
CityWalk Studio revenues increased by $148,009 to $1,422,845, an increase of
11.6%. Revenues from the Irvine Studio from the date of opening, December 1,
1995 to March 31, 1996 were $157,867.
Cost of revenues increased by 10.2% to $1,453,999 overall during the fiscal
year ended March 31, 1996 compared to $1,319,112 for the same period last year.
Cost of revenues for the CityWalk Studio decreased by $197,385 to $1,121,727
despite the $148,009 increase in revenues. Compensation and related benefits
were $19,867 lower than the previous year as a result of tighter controls over
the number of staff hours worked at the studio. Depreciation was lower by
$150,642 as a result of the adoption in June 1995 of SFAS No. 121 and the
recognition of a $722,000 loss on impairment of CityWalk Studio assets. Rent was
higher as a result of the Company paying rent based on a percentage of revenues,
such revenues being higher than the previous period by $148,099. Other cost of
revenues decreased by 10.9% as a result of cost reduction programs at studio
level. The CityWalk Studio earned gross income of $301,118 during the fiscal
year ended March 31, 1996 compared to a gross loss of $44,276 for the same
period last year, an improvement of $345,394.
Cost of revenues for the Irvine Studio were $332,272, resulting in a gross
loss of $174,405. Included in cost of revenues were $67,007 of non-recurring
pre-opening costs and $59,468 of depreciation, a non-cash expense. All of the
Company's previously idle equipment has been placed into production in the
Irvine Studio. The Irvine Studio is performing well below expectation and the
Company is proceeding to develop its portfolio of products available at the
Irvine Studio in an endeavor to improve the revenues from the Irvine Studio.
Despite the gross loss of $174,405 which was incurred in the new Irvine
Studio, the Company overall earned a gross income of $126,713 during the fiscal
year ended March 31, 1996 compared to a gross loss of $44,276 for the same
period last year, an improvement of $170,989.
General and administrative expenses for the fiscal year ended March 31, 1996
include a non-recurring charge of $110,000 for professional fees relating to the
PCG transaction and a $762,129 non-cash loss on impairment of long-lived assets.
The corresponding year ended March 31, 1995 includes non-recurring lease
abandonment expenses of $120,713 associated with the discontinued leases on the
920 and 910 Colorado Premises. After adjusting for these non-recurring items,
the Company's general and administrative expenses decreased from $1,144,481 in
the fiscal year ended March 31, 1995 to $834,103 in the fiscal year ended March
31, 1996, a decrease of approximately 28%. This decrease resulted from lower
expenditures within almost every
10
<PAGE>
overhead expense category, consistent with Management's plan to cut overhead
costs. Compensation and related benefits decreased by 15% to $313,432 from
$369,618 for the same period last year. Professional fees, excluding the
$110,000 in kind consideration on the PCG transaction, decreased by almost 70%
to $96,979 from $320,047 for the same period last year. Approximately $80,000 of
the professional fees expended during the fiscal year ended March 31, 1995 were
attributable to negotiations with potential financiers, including two equity
funding transactions which the Company announced on Form 8-K current report
filings and which did not subsequently close. Management fees of $130,000
payable to PCG have been accrued relating to the period July 1, 1995 to March
31, 1996, pursuant to the Personnel Consulting Agreement dated June 28, 1995.
Office rent expenses were lower than last year by $37,364 as a result of the
closure of the Corporate offices at 920 and 910 Colorado Premises. Depreciation
and amortization costs were lower as a result of previously non-producing assets
being put into production and the consequential charges reported in cost of
revenues. Interest charges totaling $28,279 were incurred on the loan from PCG
and on the deferred salaries accrual owing to executives of the Company. There
were no such charges in the prior year. Other general and administrative
expenses decreased by $41,493 or 28% to $105,985 for the fiscal year ended March
31, 1996, compared to $147,478 for the same period last year.
The Company earned interest income of $3,035 in the fiscal year ended March
31, 1996 as compared to $11 earned during the prior year.
During the months of July through November 1995 the Company designed and
constructed the Irvine Studio. As a result of this work and the continuing
operating losses, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets. In this regard, the Company reviewed the
carrying value of its CityWalk Studio assets for impairment and determined that
an impairment loss of $722,000 should be recognized in June 1995. This loss is
reflected in the Company's statement of operations. The loss was calculated as
the excess of carrying value over fair value, the latter determined by reference
to prices for similar assets for the Irvine Studio. This adjustment does not
affect the Company's working capital.
In the quarter ended March 31, 1996, the Company recognized an impairment
loss of $40,129 in respect of its Traveling Studio, a studio developed in 1992
but used on only one occasion because of significant operating difficulties
which have not been addressed because of the Company's decision to pursue cost
reductions and focus efforts exclusively on the two permanent studios. The fair
value of the Traveling Studio has been determined to be zero.
As of March 31, 1996 the Company has net operating loss carry forwards of
approximately $8,900,000. The ability to utilize $8,275,000 of these losses to
be offset against future taxable income is restricted as a result of the change
in control arising from the PCG transaction. The losses will expire in March
2011.
Liquidity and Capital Resources
At March 31, 1997, the Company had a working capital deficit of $516,861 as
compared to a working capital deficit on March 31, 1996 of $1,216,713. The
decrease of $699,852 is primarily attributable to the cash proceeds of stock
subscriptions received in the fiscal quarter ended June 30, 1996 from six
investors totaling $130,000 for 650,000 shares of Common Stock, together with
the conversion of a $649,000 loan from PCG and $261,000 of accrued management
fees payable to PCA, which debt was assumed by PCG, into 8,970,000 shares of
Common Stock. This decrease is partly offset by payments to former officers of
the Company of approximately $153,000. As of March 31, 1997, the Company's cash
and cash equivalents balance was $70,908.
Net cash used in operating activities was $336,376 for the fiscal year ended
on March 31, 1997, compared to the utilization of $439,034 of cash for the same
period last year. Approximately $133,000 less cash was required for operating
activitites and there were no payments for long outstanding trade creditors made
in the fiscal year ended March 31, 1997 whereas $196,867 of cash was required in
the previous year. These reductions in cash requirements were offset by
approximately $153,000 paid to former officers of the Company during the fiscal
year ended March 31, 1997.
The Company invested a total of $46,630 in the fiscal year ended March 31,
1997 for equipment in the Irvine and CityWalk Studios. By comparison, in the
previous year the Company invested $652,814 for the acquisition of Irvine Studio
leasehold improvements and equipment, computer hardware and software associated
with the technological advancement of the Proprietary System and for equipment
for the CityWalk Studio.
The Company's auditors rendered a going concern report. The continuation of
the Company as a going concern is dependent upon its ability to generate net
cash from operations and its ability to continue with debt and/or equity
financing. The Company's recurring operating losses and net working capital
deficiency raises substantial doubt about the entity's ability to continue as a
going concern. Management's plans include increasing revenues of the Irvine
Studio, continuing the reduction of expenses, and obtaining additional equity or
debt
11
<PAGE>
financing. There can be no assurance that Management will be successful in these
endeavors and if not, the Company will be dependent on the willingness and the
ability of the majority stockholder, PCG, to continue to provide additional
financing.
In the fiscal year ended March 31, 1997, further funding of $260,000 in the
form of cash was provided by PCG. $131,000 of management fees were accrued but
unpaid during the period April 1996 to November 1996, pursuant to a Personnel
Consulting Agreement entered into by the Company with PCA. This compares with a
total of $1,098,500 funding in the form of debt and equity provided by PCG in
the year ended March 31, 1996, and $130,000 of management fees accrued in the
period July 1, 1995 to March 31, 1996.
Despite its working capital deficiency, the Company has maintained generally
good relations with its vendors.
On April 24, 1996 the Board of Directors authorized the issuance of up to 3
million shares of the Company's Common Stock for a price of $0.20 per share,
which represented the fair market value of the stock on April 24, 1996. On May 6
and 7, 1996, the Company received stock subscriptions from six investors
totaling $130,000 for 650,000 shares of Common Stock. The Company received total
payment on these subscriptions as of June 6, 1996. On May 7, 1996, PCG converted
$130,000 of the $649,500 loan payable to 650,000 shares of the Company's Common
Stock. This represented a value of $0.20 per share of Common Stock, which was
the fair value on this date, as determined by the Board of Directors and the
same price paid on such date by the six independent investors.
On November 29,1996, PCG converted $519,000 of the remaining $519,500 note
payable, together the $261,000 of accrued management fees payable to PCA, which
debt was assumed by PCG, into 8,320,000 shares of the Company's Common Stock.
This represented a value of $0.09375 per share of Common Stock, which the Board
of Director's determined to be a fair price at that time. In addition, PCG
suspended management fees to it or its related parties pursuant to the Personnel
Consulting Agreement with the Company dated June 28, 1995 for a period of two
years commencing December 1, 1996.
Although the Company has not commenced to market all Licensed Articles on a
timely basis, as of June 10, 1997, the Company has not received any notice that
any Licensor intends, by virtue of this matter, to exercise any of the remedies
provided for in its respective License Agreements. The Company is current with
respect to all payments and required reports to all Licensors and believes that
its relationship with all Licensors is satisfactory.
The Company leases its CityWalk Studio premises under a five year lease,
which expires on May 31, 1998. This lease is subject to renewal at the option of
the Company for an additional seven years. The Company leases its Irvine Studio
premises under a three year lease which expires on November 21, 1998. This lease
is subject to renewal at the option of the Company for an additional seven
years, provided sales revenue in the twelve months prior to the date of giving
notice is in excess of $810,000 and the net worth of the Company is in excess of
$600,000. Given that the Company has not met either of the criteria for renewal
of the Irvine Studio lease, management cannot state with certainty that the
seven year option period will be exercised and accordingly, no lease commitment
in respect of the option period has been disclosed in note 8 to the financial
statements.
The Company does not anticipate that it will have any problems in meeting
its obligations for continuing fixed expenses, materials procurement or
operating labor. Management believes the managerial assistance that is being
provided to the Company through its association with PCG and the willingness and
ability of PCG to continue to fund the cash flow deficiencies of the Company are
necessary to ensure the continued operating viability of the Company. The
Company is continuing to identify and evaluate opportunities for the building
and bringing into operation of additional studios, which would require funding
from sources external to the Company. Having regard to the current financial
position of the Company, the most likely source of funding for such growth is
through additional equity or a loan from PCG. There is no ongoing commitment by
PCG to supply such funds and there can be no assurance that such funds will be
made available by PCG. The Company is continuing to explore other opportunities
for funding its studio expansion, however no assurance can be given that
appropriate sources of finance will be found.
Other Matters
On August 31, 1996, Michael C. Roubicek, Vice President of the Company, was
elected to the Board of Directors of the Company to fill the vacancy created by
Mr Robert Shelton's cessation as a director of the Company.
The Company's securities are quoted on the OTC-Bulletin Board under the
trading symbol OUTT.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors of
Out-Takes, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of Out-Takes, Inc. as
of March 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three fiscal years in the
period ended March 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. 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 Out-Takes, Inc. as
of March 31, 1997 and 1996 and the results of its operations and its cash flows
for each of the three fiscal years in the period ended March 31, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 14 to
the financial statements, the Company has suffered recurring losses from
operations and has a net working capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 14. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 16 to the financial statements, effective for
the year ended March 31, 1996, the Company adopted Statement of Financial
Accounting Standard No. 121, (Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of), resulting in a write down of its
plant and equipment of $762,129.
Moore Stephens, P.C.
Certified Public Accountants
Cranford, New Jersey
May 15, 1997
13
<PAGE>
OUT-TAKES INC.
BALANCE SHEET
ASSETS March 31,
Current Assets: 1997 1996
---- ----
Cash and Cash Equivalents $ 70,908 $ 61,672
Inventory 22,879 36,598
Due from Related Party 7,343 -
Prepaid Insurance 10,796 8,793
Prepaid Taxes 7,829 2,075
Other Current Assets 8,132 9,802
--------- ---------
Total Current Assets $ 127,887 $ 118,940
Plant & Equipment - Net 845,198 1,252,100
Other Non-Current Assets:
Deposits 38,378 38,712
--------- ---------
Total Assets $1,011,463 $1,409,752
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 113,803 $ 88,923
Accrued Payroll 42,868 218,291
Accrued Expenses 104,331 203,928
Accrued Interest - Related Party 7,871 29,975
Compensation payable - Related Parties 115,375 -
Notes Payable - 15,036
Accrued Management Fee - Related Party - 130,000
Due to Related Party 260,500 649,500
--------- ---------
Total Current Liabilities $ 644,748 $1,335,653
Non-Current Liabilities:
Notes Payable $ 48,000 $ 48,000
Compensation payable - Related Parties 5,962 -
--------- ---------
Total Non-Current Liabilities $ 53,962 $ 48,000
Commitments (Note 8) - -
Stockholders' Equity:
Preferred Stock, par value $.01 per share;
5,000,000 share authorized, none issued $ - $ -
Common Stock, par value $.01 per share;
35,000,000 shares authorized; (March 31, 1996:
25,000,000). 20,788,122 and 11,168,122 shares
issued March 31, 1997 and March 31, 1996
respectively, (of which 292,396shares are in
Treasury) 207,882 111,682
Capital in excess of par value 10,014,980 9,071,180
Accumulated deficit (includes
$6,990,000 in accumulated losses during
development stage and a $762,129
loss on impairment of assets) (9,657,703)(8,904,357)
Total $ 565,159 $ 278,505
Less: Treasury Stock, at cost (108,406) (108,406)
Deferred Compensation (144,000) (144,000)
------- -------
Total Stockholders' Equity $ 312,753 $ 26,099
--------- ---------
Total Liabilities and Stockholders' Equity $1,011,463 $1,409,752
The Accompanying Notes are an Integral Part of These Financial Statements.
14
<PAGE>
OUT-TAKES INC.
STATEMENTS OF OPERATIONS
Years ended March 31,
1 9 9 7 1 9 9 6 1995
------- ------- ----
Revenues $ 2,014,788 $1,580,712 $1,274,836
----------- ------------ ----------
Cost of Revenues:
Compensation and Related Benefits 712,939 548,137 459,217
Depreciation and Amortization 359,123 249,249 340,423
Pre-Opening Costs - Irvine Studio - 67,007 -
Rent 300,857 210,639 172,480
Other Cost of Revenues 553,011 378,967 346,992
----------- --------- ---------
Total Cost of Revenues 1,925,930 1,453,999 1,319,112
----------- --------- ---------
Gross Income (Loss) 88,858 126,713 (44,276)
----------- --------- ----------
General and Administrative Expenses:
Compensation and Related Benefits 309,630 313,432 369,618
Professional Fees 100,777 206,979 320,047
Management Fee - Related Party 131,000 130,000 -
Rent of Offices 39,558 29,524 66,888
Loss on Disposal of Plant and Equipment 504 997 -
Depreciation and Amortization 91,663 128,907 228,838
Loss on Impairment of Long-Lived Assets - 762,129 -
Lease Abandonment - - 120,713
Amortization of Organization Costs - - 8,712
Rent - Related Parties - - 2,900
Other G & A Expenses 114,954 105,985 147,478
----------- --------- ---------
Total Expenses 788,086 1,677,953 1,265,194
----------- --------- ---------
Loss from Operations (699,228) (1,551,240) (1,309,470)
Other Income (Expense)
Interest income 484 3,035 11
Interest expense (3,423) (7) -
Interest expense - Related Parties (51,179) (28,272) -
------------ ----------- ----------
Total Other Income (Expense) (54,118) (25,244) 11
------------ ------------ ----------
Net Loss ($ 753,346) ($1,576,484) ($1,309,459)
========== ============ ============
Net Loss Per Share ($ 0.05) ($ 0.16) ($ 0.24)
============ ========== ==========
Weighted Average Common Shares
Outstanding 14,824,881 9,567,748 5,341,547
The Accompanying Notes are an Integral Part of These Financial Statements.
15
<PAGE>
OUT-TAKES INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
Common Stock Capital
Number of in Excess of Accumulated Treasury Deferred
Shares Amount Par Value Deficit Stock Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1994 5,603,122 $ 56,032 $8,573,393 ($6,018,414) ($107,296) ($144,000) $2,359,715
Non-Cash Compensation
Expense (Trustee Shares) - - 20,000 - - - 20,000
Non-Cash Compensation
Expense (Christmas Bonus) 125,000 1,250 22,187 - - - 23,437
Repurchase of Treasury
Stock - - - - (1,110) - (1,110)
Net Loss for the year
ended March 31,1995 - - - (1,309,459) - - (1,309,459)
----- ------ ------- --------- -------- -------- ---------
Balance - March 31,1995 5,728,122 $57,282 $8,615,580 ($7,327,873) ($108,406) ($144,000) $1,092,583
Proceeds from Issuance of
Stock 5,440,000 54,400 455,600 - - - 510,000
Net Loss for the year
ended March 31,1996 - - - (1,576,484) - - (1,576,484)
--------- ------ ------- --------- -------- -------- ---------
Balance - March 31, 1996 11,168,122 $ 111,682 $9,071,180 ($8,904,357) ($108,406) ($144,000) $ 26,099
Cash Proceeds from Issuance
of Stock (see note 6) 650,000 6,500 123,500 - - - 130,000
Stock Issued upon Conversion
of Debt (see note 6) 8,970,000 89,700 820,300 - - - 910,000
Net Loss for the year
ended March 31, 1997 - - - (753,346) - - (753,346)
--------- ------- ------- --------- -------- -------- --------
Balance - March 31, 1997 20,788,122 $207,882 $10,014,980 ($9,657,703) ($108,406) ($144,000) $ 312,753
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
16
<PAGE>
OUT-TAKES INC.
STATEMENT OF CASH FLOWS
Years ended March 31,
1997 1996 1995
Operating Activities:
Net Loss ($753,346) ($1,576,484) $ (1,309,459)
--------- ----------- ------------
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation and Amortization $450,786 $378,156 $ 569,261
Loss on Impairment of Long-Lived Assets - 762,129 -
Loss on Disposal of Plant and Equipment 504 997 -
Amortization of Organization Costs - - 8,712
Non-Cash Compensation Expense - - 43,437
Loss from Discontinued Lease - - 107,968
Changes in Assets and Liabilities:
(Increase) Decrease in:
Prepaid Royalties - 840 25,272
Due from Related Party (7,343) - -
Deposits 334 (18,290) 19,770
Inventory 13,719 (10,090) 30,628
Due from Officers - 8,565 (8,565)
Prepaid Insurance (2,003) - -
Prepaid Taxes (5,754) - -
Other Current Assets 1,670 (10,314) 27,534
Increase (Decrease) in:
Accounts Payable 24,880 (196,867) 66,887
Accrued Payroll and Other Expenses (275,020) 56,453 338,772
Notes Payable (15,036) 15,036 -
Accrued Interest - Related Party (22,104) 20,835 -
Accrued Management Fee-Related Party 131,000 130,000 -
Compensation Payable-Related Parties 121,337 - -
------- --------- ---------
Total Adjustments $416,970 $1,137,450 $1,229,676
--------- ---------- ----------
Net Cash Used in Operating Activities ($336,376) ($439,034) ($ 79,783)
Investing Activities:
Acquisition of Equipment and Leasehold
Improvements ($46,630) ($ 652,814) ($53,037)
Proceeds on Disposal of Plant and
Equipment 2,242 1,050 -
Net Cash Used in Investing Activities ($ 44,388) ($651,764) ($ 53,037)
Financing Activities:
Proceeds from the Issuance of Stock $130,000 $510,000 $ -
Due to Related Party 260,000 649,500 -
Proceeds from Note Payable - - 48,000
Proceeds from Interim Loan Financing -
Related Party - 39,000 61,000
Repurchase of Treasury Stock - - (1,110)
Payment of Interim Loan Financing -
Related Party - (100,000) -
Net Cash Provided by Financing
Activities $ 390,000 $1,098,500 $ 107,890
Net Increase in Cash and Cash Equivalent $ 9,236 $ 7,702 ($ 24,930)
Cash and Cash Equivalents - Beginning
of Years 61,672 53,970 78,900
Cash and Cash Equivalents - End of
Year $ 70,908 $ 61,672 $ 53,970
======== ======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 66,501 $ 4,401 $ -
Income Tax $ - $ - $ -
Non-Cash Investing and Financing Activities
On May 7, 1996, the majority stockholder, Photo Corporation Group Pty. Ltd.
("PCG"), converted $130,000 of its $649,500 loan payable into 650,000 shares of
the Company's Common Stock. On November 29, 1996, PCG converted an additional
$780,000 into 8,320,000 shares of the Company's Common Stock. This represented
loan principal of $519,000 and accrued management fees of $261,000 payable to
Photo Corporation of Australia Pty Limited ("PCA") which debt was assumed by
PCG. The Accompanying Notes are an Integral Part of These Financial Statements.
17
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS
[1] Summary of Significant Accounting Policies
Basis of Presentation - The accompanying financial statements are presented on
an accrual basis. Revenues are recognized when merchandise is sold and expenses
are recognized when incurred. Where applicable, the figures for the years ended
March 31, 1996 and 1995 have been reclassified in order to facilitate comparison
with the figures for the current year.
Plant and Equipment and Depreciation - Plant and equipment consists primarily of
computers, photography equipment and leasehold improvements, and are stated at
cost. Depreciation is provided over the estimated useful asset lives using the
straight-line method over 5 years for all equipment and furniture. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
useful life of the improvement or the term of the lease.
Maintenance, repairs and minor purchases are expensed as incurred.
Royalties - Royalties are calculated as a percentage of sales as specified in
each License Agreement and are expensed over the life of the agreement except
where this amount is less than the minimum guarantee provided by the agreement.
In the latter situation, royalty expense is equal to the minimum guarantee,
amortized on a straight-line basis over the period of the guarantee. Where
royalties have been paid in advance, such amounts are disclosed on the Company's
balance sheet as prepaid royalties, net of amounts expensed.
Stock Options - The difference between the fair market value and the exercise
price, if below fair market value, of a stock option granted under the Company's
Stock Option Plan is charged to expense in the period in which the option is
granted. All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair market value of the equity
instruments issued, whichever is more reliably measurable.
Inventories - Inventories consisting principally of frames, bags, mattes,
chemicals, paper products and other supplies are priced at cost determined using
the FIFO method.
Cash and Cash Equivalents - The Company classifies all highly liquid debt
instruments, readily convertible to cash and purchased with a maturity of three
months or less at date of purchase, as cash equivalents. The Company had no cash
equivalents at March 31, 1997.
Risk Concentrations - Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist principally of cash. At March
31, 1997, the Company had no deposits in financial institutions which exceeded
the $100,000 federally insured limit. The excess of the institution's deposit
liability to the Company over the federally insured limit was therefore zero.
A significant part of the Company's ability to generate revenues is dependent on
the continuation of the License Agreements with the various Licensors. Three of
the License Agreements provide a portfolio of images that each result in
approximately 15% of the revenues of the Company. While the Company has License
Agreements relating to the use of the images there can be no assurance that the
License Agreements will be renewed or renewed on commercially acceptable terms
after their current expiry dates. In such event, unless alternative License
Agreements can be obtained, the loss of the License Agreements would have a
material adverse affect on the Company (see note 3[A]).
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts.
Accordingly, actual amounts could differ from those estimates.
Advertising - Advertising costs are expensed as incurred. Advertising
expenditure for the years ended March 31, 1997, 1996 and 1995 was $28,552,
$13,140 and $ 9,841 respectively.
Deferred Taxes - There are no material differences between the accounting
methods used for financial and tax purposes. The Company has sustained losses in
recent years and has a large net operating loss carryforward. No deferred taxes
are reflected in these financial statements.
18
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[2] Organization and Business
The Company was incorporated on March 18, 1992, under the laws of the State of
Delaware. The Company is engaged in the production and sale of photographic
portraits of children, adults and family groups using proprietary hardware and
digital imaging software. The Company currently operates and derives
substantially all of its revenues from two retail studios, called Out-Takes(R),
one of which opened on May 24, 1993 and is located at MCA/Universal's CityWalkSM
project in Los Angeles, California ("the CityWalk Studio"). The other studio
opened on December 1, 1995 at the Entertainment Center in the Bazaar at the
Irvine Spectrum, located in Irvine, Orange County, California ("the Irvine
Studio"). During the quarter ended December 31, 1996, the Company engaged a
consultant, to work with its technical staff, to determine whether the Traveling
Studio could be made operational.
[3] [A] License Agreements and Royalties
The Company has merchandise licensing agreements ("License Agreements") with
Paramount Pictures Corporation ("Paramount"), MCA/Universal Merchandising, Inc.
("Universal"), Warner Bros. Consumer Products - formerly Turner Home
Entertainment, Inc. ("Warner"), Twentieth Century Fox Licensing & Merchandising
("Fox"), Jay P. Morgan Photography ("Morgan"), MTV Netowrks ("MTV"), Saban
Merchandising Inc. ("Saban") and various other agencies and photographers that
grant the Company the right to manufacture, sell and distribute in a defined
geographic area, still photographs which combine a digital photograph taken of
the customer in the studio with a licensed background from one of the Licensors
which may be sold separately or affixed to items approved by these licensors,
including photographic enlargements, greeting cards, posters, books, t-shirts,
mugs, buttons and other novelty items. Royalties expense for the year ending
March 31, 1997, 1996 and 1995 was $66,816, $35,622 and $48,245 respectively.
Although the Company has not commenced to market all Licensed Articles on a
timely basis, as of March 31, 1997, the Company has not received any notice that
any Licensor intends, by virtue of this matter, to exercise any of the remedies
provided for in its respective License Agreements. The Company is current with
respect to all payments and required reports to all Licensors.
[B] Sublicense Agreement - Related Party
On March 1, 1995, the Company entered into a sublicense agreement with Photo
Corporation of Australia Pty Limited ("PCA"), a subsidiary of Photo Corporation
Group Pty. Ltd. ("PCG") (see note 5 and note 15), that, subject to the prior
approval of the Licensors, grants PCA a non-exclusive license to utilize the
Licensed Articles on substantially the same terms as provided in the License
Agreements. The sublicense also provides that PCA will pay the Company an amount
equal to 120% of the royalties the Company pays to Licensors for such images.
The Company has received consent from Morgan, Fox and Paramount and other
Licensors indicating their willingness to support utilization of the Licensed
Articles in countries where PCA operates. As of March 31, 1997, the Company had
not yet become entitled to receive any royalties from PCA.
[4] Plant and Equipment
March 31, 1997 March 31, 1996
The components of plant and equipment are:
Photographic Equipment $ 622,192 $ 689,238
Computers and Software 679,427 653,753
Equipment and Furniture 308,987 309,835
Leasehold Improvements 1,011,292 930,375
------------ ------------
Total - At Cost 2,621,898 2,583,201
Less: Accumulated Depreciation 1,776,700 1,331,101
------------ ------------
Net $ 845,198 $ 1,252,100
============ ============
19
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[4] Plant and Equipment - (Continued)
Depreciation is provided over the estimated useful asset lives using the
straight-line method over five years for all equipment and furniture. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
useful life of the improvement or the term of the lease. Maintenance, repairs
and minor purchases are expensed as incurred.
[5] Related Party Transactions
Mr Robert Shelton, Vice President Development and Mrs Leah Peterson-Shelton,
Vice President Operations, ceased employment with the Company from and effective
September 1, 1996. Mr Shelton also ceased as a Director of the Company from and
effective September 1, 1996.
Deferred salaries owing to Mr Shelton and Mrs Peterson-Shelton, accrued interest
on deferred salaries, accrued vacation pay and amounts payable on termination
totalling $274,373 were consolidated on September 1, 1996, and are being repaid
over the period to April 17, 1998. This liability is presented on the balance
sheet as "Compensation payable - Related Party". The liability is secured by the
assets of the Company pursuant to the Settlement and Mutual Release Agreement as
of September 1, 1996, between the Company, Mr Shelton, Mrs Peterson-Shelton and
Photo Corporation Group Pty Limited ("PCG"), the majority stockholder. Interest
expense is incurred at the prime rate of interest (approximately 8.5%) and in
the period to March 31, 1997 interest expense totalled $10,604. As of March 31,
1997, interest of $676 was accrued and unpaid.
The Settlement and Mutual Release Agreement inter alia provides for Mr Shelton
and Mrs Peterson-Shelton to act as consultants to the Company as requested by
the Company and as agreed to by them. No consulting fees were incurred or paid
during the year ended March 31, 1997.
Management fees of $261,000 payable to PCA were accrued pursuant to the
Personnel Consulting Agreement with the Company dated June 28, 1995. These
charges cover the period from July 1, 1995 through November 30, 1996. On
November 29, 1996 PCG suspended management fees to it or its related parties
pursuant to the Personnel Consulting Agreement with the Company dated June 28,
1995 for a period of two years from December 1, 1996. On November 29, 1996, the
accrued management fees of $261,000 were converted into shares of the Company's
Common Stock (see note 6).
At March 31, 1997 the $260,500 "Due to Related Party" ($649,500 as of March 31,
1996) was advanced by PCG. The proceeds of the $649,500 advance were used
predominantly to fund the construction of the Irvine Studio and to upgrade the
technology in relation to the studio's operation. Of the $649,500 total,
$649,000 was converted into shares of the Company's Common Stock on November 29,
1996 (see note 6). A further $260,000 in cash was advanced by PCG during the
period to March 31, 1997. The funds have been used predominantly to fund the day
to day operation of the business and to fund the payments due to former officers
of the Company. The amount Due to Related Party is unsecured and is payable on
demand. Interest expense is incurred at a rate of 10% per annum and for the year
ended March 31, 1997 was $40,575. As of March 31, 1997, interest of $7,871 was
accrued.
The amount "Due from Related Party" of $7,343 as of March 31, 1997 represents
monies advanced by the Company during fiscal 1997 on behalf of PCA.
The weighted average interest rate on short term borrowings as of March 31, 1997
was approximately 10.0%.
[6] Stockholders' Equity
Authorization for Issuance of Additional Shares - On April 24, 1996, the Board
of Directors authorized the issuance of up to 3 million shares of the Company's
Common Stock for a price of $0.20 per share, which represented the Board of
Directors' determination of the fair market value for restricted shares of stock
on April 24, 1996.
On November 29, 1996 the Board of Directors agreed to reduce the price for any
additional issuance of shares of Common Stock to $0.09375, which represented the
fair market value at that time.
Increase in Authorized Number of Shares - On July 24, 1996, at the Annual
Meeting of Stockholders of the Company, the stockholders approved an amendment
to the Company's certificate of incorporation to increase the authorized number
of shares of Common Stock of the Company from 25,000,000 to 35,000,000.
20
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[6] Stockholders' Equity - (Continued)
Stock Subscription - On May 6 and 7, 1996 the Company received stock
subscriptions from six investors totaling $130,000 for 650,000 shares of Common
Stock. The Company received total payment on these subscriptions as of June 6,
1996.
Debt to Equity Conversion - On May 7, 1996, the majority stockholder, PCG,
converted $130,000 of its $649,500 loan payable into 650,000 shares of the
Company's Common Stock. This represented a value of $0.20 per share of Common
Stock which represented the Board of Directors' determination of the fair market
value on this date and the same price also paid by the six independent investors
in May 1996.
On November 29, 1996, PCG converted $519,000 of the remaining $519,500 note
payable, together with $261,000 of accrued management fees payable to PCA, which
debt was assumed by PCG, into 8,320,000 shares of the Company's Common Stock .
This represented a value of $0.09375 per share of Common Stock, which the Board
of Directors' determined to be a fair price at that time. In addition, PCG
suspended management fees to it or its related parties pursuant to the Personnel
Consulting Agreement with the Company dated June 28, 1995 for a period of two
years commencing December 1, 1996.
Escrow Shares - In March, 1992, an aggregate of 750,000 shares of the Company's
Common Stock was placed into escrow for the benefit of the Company's founders
("Founders"). The Founders are permitted to vote their respective Escrow Shares
while they are in escrow, however, the Escrow Shares are not assignable or
transferable, except through the laws of inheritance, guardianship, legal
representation or trusteeship for the benefits of the holder or the holder's
immediate family. In the event the Company's pre-tax earnings first equals or
exceeds an amount listed below for any fiscal year ending on or prior to
November 30, 1998, the Escrow Shares will be released to the Founders as
follows:
Escrow Shares
Pre-Tax Earnings to be Released
$1,500,000 250,000
$1,750,000 250,000
$2,500,000 250,000
If the above pre-tax earnings levels are achieved, the Company will recognize a
compensation expense equal to the difference between the fair market value at
the time of release of Escrow Shares to officers or employees of the Company and
the recorded value at the time of issuance. Release of the Escrow Shares is
likely to result in substantial compensation expense to the Company in future
years. In the event the above does not occur, the shares will be returned to the
Company as Treasury Shares.
During the 1993 fiscal year, a stockholder contributed 137,500 shares to the
Company in exchange for registering 630,728 shares and granting the Company an
irrevocable proxy to vote the shares. For the period of four years commencing
September 10, 1994, the holders of at least 51% of the shares sold in a private
placement completed in June and July of 1992 have the right to require the
Company to register these shares for public sale under the Securities Act of
1933.
Warrants - The Company issued a total of 2,353,125 redeemable Class A Warrants
and 1,868,750 redeemable Class B Warrants in connection with the Company's
initial public offering ("IPO") on March 9, 1993. Each Class A Warrant provides
the holder with the right to purchase one share of Common Stock at $4.80 and
each Class B Warrant provides the holder with the right to purchase one share of
Common Stock at $6.75 per share. The warrants expire at the close of business on
March 9, 1998 and are subject to redemption at $0.05 per warrant in the event
that the average closing bid price per share of the Common Stock exceeds $8.00
per share with respect to the Class A Warrant and $11.75 per share with respect
to the Class B Warrant for any 20 consecutive trading days ending not more than
15 days prior to the date of the notice of redemption.
The exercise price of the Class A and Class B warrants are subject to adjustment
upon the occurrence of certain events including: the issuance of Common Stock as
a dividend to the holders of all outstanding Common Stock or for cash in an
amount per share less than the warrant exercise price per share; subdivisions,
combinations, or certain reclassifications of Common Stock; or certain issuances
of rights, options, or warrants to subscribe for Common Stock or securities of
the Company convertible into Common Stock. At March 31, 1997, the exercise price
of the Class A and Class B warrants had not been adjusted and none of the
warrants had been exercised or redeemed by the Company. There are 2,353,125 of
Class A warrants and 1,868,750 Class B warrants outstanding at March 31, 1997.
21
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Contimued)
[7] Stock Option Plans
Under the Company's Amended and Restated 1992 Stock Option Plan, incentive stock
options may be granted to purchase shares of the Company's stock at a price not
less than the fair market value of the Common Stock at the date of the grant.
Non-qualified stock options may be granted at a price not less than 85% of the
fair market value. No option may be exercised after ten years from the date of
the grant. At March 31, 1997, 462,000 shares were reserved for future grants.
Effective March 20 1997, the Company's 1992 Directors Stock Option Plan for
Non-employee Directors was terminated.
No compensation cost was recognized in income.
Information is summarized as follows:
<TABLE>
Shares Under Options and Warrants
Amended 1992 Weighted
And Restated Directors Price Average
1992 Stock Stock per Exercise
Option Plan Option Plan Share Price
<S> <C> <C> <C> <C>
Outstanding at March 31,1994 249,245 - $0.65 to $4.40 $3.44
Granted/forfeited during the
year ended March 31, 1995 - -
Outstanding at March 31, 1995 249,245 - $0.65 to $4.40 $3.44
Forfeited during the year
ended March 31, 1996 (94,527) -
Outstanding at March 31, 1996 154,898 - $0.65 to $4.40 $4.00
Forfeited during the year
ended March 31, 1997 (154,898) -
Outstanding at March 31, 1997 - - - -
============
</TABLE>
[8] Commitments
Lease Agreements - The Company leases its CityWalk Studio premises under a five
year lease, which expires on May 31, 1998. This lease is subject to renewal at
the option of the Company for an additional seven years. The lease provides for
an annual rental payment of $130,599 and the payment of 10% of annual store
revenues in excess of $867,383. The Company paid $62,287 additional rent during
the year to March 31, 1997 (1996: $56,862; 1995: $36,184) as a result of sales
being in excess of the threshold. Both the base rental amount and the percentage
rental cut-in point are adjusted annually for changes in the consumer price
index. The lease may be terminated by the lessor if the Company does not meet a
minimum annual sales requirement of $587,000.
The Company leases its Irvine Studio premises under a three year lease, which
expires on November 21, 1998. This lease is subject to renewal at the option of
the Company for an additional seven years. The lease provides for an annual
rental payment including common area costs and marketing costs of $118,202 per
annum and the payment of 7% of store revenues in excess of $1,128,857 per annum.
Both the base rental amount and the percentage rental cut-in point are adjusted
annually for changes in the consumer price index. The option to renew the lease
is available only if sales revenue in the twelve months prior to the date of
giving notice is in excess of $810,000 and the net worth of the Company is in
excess of $600,000.
22
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[8] Commitments - (Continued)
Future minimum lease payments under non-cancelable operating leases as of March
31, 1997 are shown in the table below. The table includes the option period for
the CityWalk Studio but does not include the option period for the Irvine Studio
(see note 14).
Year ended March 31
-------------------
1998 $ 248,801
1999 209,400
2000 130,599
2001 130,599
2002 130,599
Thereafter 413,562
-------
Total $ 1,263,560
=========
The Company has a month to month commitment of $2,300 per month for temporary
corporate office space and a month to month commitment of $600 per month for
storage facilities. Total rental expense for the fiscal years ended March 31,
1997, 1996 and 1995 was $340,717, $240,163 and $239,368 respectively.
[9] Net Loss Per Share
Net loss per share was calculated based on the weighted average shares
outstanding during the year. Neither the 292,396 shares held in Treasury nor the
750,000 shares held in escrow pursuant to an escrow agreement between the
Founders and the Company have been included in the weighted average shares
outstanding during the year as their inclusion would be anti-dilutive (see note
6). The effect of outstanding stock warrants and options was not included in the
calculations as their effect would also be anti-dilutive.
[10] Trademark Registrations and Patent Applications
The Company has registered the marks Out-Takes(R), So You Want to be in
Pictures(R) , Photomation(R) and Create the Moment(R) with the U.S. Patent and
Trademark Office and has registered the Out-Takes(R) service mark in Japan, in
both Japanese and English. The Company has filed two applications with the U.S.
Patent and Trademark Office seeking patent protection for certain aspects of the
Company's technology.
[11] Income Taxes
As of March 31, 1997, the Company has a net operating loss carry forward of
approximately $9,650,000. The ability to offset $8,275,000 of these losses
against future taxable income has been restricted as a result of the change in
control which occurred on June 28, 1995 when a majority shareholding in the
Company was acquired by PCG. As of March 31, 1997, the Company has deferred tax
assets of approximately $663,000 arising from these operating loss carry
forwards which will expire in March, 2011. However, due to uncertainty whether
the Company will generate income in the future sufficient to fully or partially
utilize these loss carry forwards, an allowance of $663,000 has been established
to offset this asset.
[12] Notes Payable
The Note Payable of $48,000 is due to a former financial consultant to the
Company pursuant to a settlement agreement dated August 17,1994. The note is
non-interest bearing and payment is subject to availability of future cash flows
from the Company's operations.
23
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[13] New Authoritative Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996. The provisions of SFAS No. 125
must be applied prospectively; retroactive application is prohibited. Adoption
of this Standard on January 1, 1997 did not have a material impact on the
Company. The FASB deferred some provisions of SFAS No. 125 which are not
expected to be relevant to the Company.
The FASB issued SFAS No. 128, "Earnings Per Share" and SFAS No. 129 "Disclosure
of Information about Capital Structure" in February 1997. SFAS No. 128
simplifies the earnings per share ("EPS") calculations required by Accounting
Principles Board ("APB") Opinion No. 15, and related interpretations, by
replacing the presentation of primary EPS with a presentation of basic EPS. SFAS
No. 128 requires dual presentation of basic and diluted EPS by entities with
complex capital structures. Basic EPS includes no dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 including
interim periods; earlier application is not permitted. When adopted, SFAS No.
128 will require restatement of all prior-period EPS data presented; however,
the Company has not sufficiently analyzed SFAS No. 128 to determine what effect
SFAS No. 128 will have on its historically reported EPS amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
[14] Going Concern
The Company commenced commercial operations on May 24, 1993 and as of May 15,
1997, the Company has been unsuccessful in generating net cash from operations.
The net cash used by the Company in operating activities in the year ended March
31, 1997 was $336,376. The Company incurred a net loss of $753,346 for the year
ended March 31, 1997 and has a working capital deficit as of March 31, 1997 of
$516,861.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The continuation
of the Company as a going concern is dependent upon its ability to generate net
cash from operations. The Company's recurring operating losses and net working
capital deficiency raises substantial doubt about the entity's ability to
continue as a going concern.
Management's plans include increasing revenues of the Irvine Studio. Given that
the Company has not met either of the criteria for renewal of the Irvine Studio
lease, management cannot state with certainty that the seven year option period
will be exercised and accordingly, no lease commitment in respect of the option
period has been disclosed in note 8.
Management is also continuing the reduction of expenses throughout the Company
and is seeking to obtain additional equity or debt financing. There can be no
assurance that management will be successful in these endeavors and if it is
not, the Company will be dependent on the willingness and the ability of the
major stockholder, PCG, to continue to provide additional financing and no
assurance can be given the such additional financing will be provided.
[15] Change of Control - Photo Corporation Group Pty. Ltd. ("PCG")
On June 28, 1995, the Company closed a transaction with PCG whereby PCG was
issued 5,440,000 shares of Common Stock of the Company, representing 50.001% of
its total issued and outstanding shares at that time, at an issue price of
$0.09375 per share. As part of this transaction, PCG also acquired options to
purchase 4,560,001 shares of Common Stock at an exercise price of $0.1875 per
share, together with the entering into of various agreements, particulars of
which were fully disclosed in the Proxy Statement forwarded to all stockholders
in connection with the Annual Meeting of Stockholders held on June 28, 1995 (see
note 3B and note 5).
24
<PAGE>
OUT-TAKES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[16] Impairment of Long-Lived Assets
The Company had adopted Statement of Financial Accounting Standard ("SFAS")
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of.
As a result of the Company's continuing operating losses and the information
obtained during research and the development of the Irvine Studio, the Company
reviewed the carrying value of the assets at its CityWalk studio for impairment
in the June 1995 quarter. Management determined that an impairment loss of
approximately $722,000 should be recognized. This loss was determined as the
excess of carrying value over fair value. Fair value was determined by reference
to costs for similar assets for the Irvine Studio.
As a result of the significant operating difficulties associated with the
Traveling Studio, the Company reviewed the carrying value of the asset for
impairment in the March 1996 quarter. Management determined that an impairment
loss of $40,129 should be recognized to reduce the carrying value of the asset
to its fair value of zero. Fair value was determined to be zero as the asset was
not able to be placed into production in its present form.
Long term assets of the Company are reviewed at least annually as to whether
their carrying value has become impaired, pursuant to guidance established in
Statement of Financial Standards ("SFAS") No. 121. Management considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from related operations (undiscounted and without interest charges). If
impairment is deemed to exist, the assets will be written down to fair value or
projected discounted cash flows from related operations. Management also
re-evaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. As of March 31,
1997, management expects these assets to be fully recoverable.
[17] Financial Instruments
The carrying amount of cash and notes payable approximates fair value.
[18] Subsequent Events
During the period April 1, 1997 to May 15, 1997 PCG provided an additional
$45,000 of cash to assist the Company in funding its day to day operations and
to enable the Company to make the required payments due to the former officers
of the Company.
. . . . . . . . . . .
25
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required herein is hereby incorporated by reference to the
information appearing under the caption "Election of Directors" in the Company's
Proxy Statement, to be filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is hereby incorporated by reference to the
information appearing under the caption "Executive Compensation" in the
Company's Proxy Statement, to be filed with the Securities and Exchange
Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required herein is hereby incorporated by reference to the
information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement, to be filed
with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is hereby incorporated by reference to the
information appearing under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement, to be filed with the Securities
and Exchange Commission.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report as required by Item
601 of Regulation S-B:
3.1 Certificate of Incorporation of the Company. (ii)
3.2 Certificate of Amendment of Certificate of Incorporation. (ix)
3.3 Bylaws of the Company. (i)
4.1 Form of Unit Purchase Option. (i)
4.2 Form of Warrant Agreement. (i)
4.3 Form of Escrow Agreement. (iv)
4.4 Section 203 of the Delaware General Corporation Law. (ix)
10.1 Form of Registration Rights Agreement. (i)
10.5 Form of Standard Employment Agreement for hourly wage employee. (vi)
10.6 Form of Standard Employment Agreement for hourly wage employee eligible
to earn commissions. (vi)
10.7 Form of Standard Employment Agreement for salaried employee. (vi)
10.8 Form of Standard Employment Agreement for salaried employee eligible
to earn commissions. (vi)
10.9 Form of Standard Employment Agreement for salaried employee eligible
for bonus in the form of incentive compensation. (vi)
10.10 Agreement dated March 16, 1992 between the Placement Agent and Shelton
on behalf of "Founders" specified therein, as amended. (i) +
10.11 Founders Agreement dated March 25, 1992 among Robert H. Shelton
("Shelton"), Ellen Korval ("Korval"), Robert A. Small ("Small"), Leah
R. Shelton ("Shelton")and John L. Sigalos ("Sigalos"), as supplemented
by letter agreement dated as of March 25, 1992 among Shelton, Shelton,
Sigalos, Korval and Small. (i) +
10.12 Merchandising License Agreement dated February 25, 1992 between
MCA/Universal Merchandising, Inc. and the Company. (i)
10.13 Merchandising License Agreement dated April 24, 1992 between
Turner Home Entertainment, Inc. and the Company. (i)
10.14 Merchandising License Agreement dated as of April 16, 1992 between
Paramount Pictures Corporation and the Company. (i)
10.15 Letter Agreement between the Image Bank West and the Company dated as
of August 5, 1992. (i)
10.16 Letter Agreement between the Company and Tony Stone Worldwide dated as
of August 31, 1992. (i)
10.17 1992 Employee Stock Option Plan. (iii) +
10.18 1992 Non-Employee Directors Stock Option Plan. (iii)
10.19 Metrum Imaging Products VAR Agreement dated September 11, 1992 between
Metrum Information Storage and the Company. (i)
10.20 Lease dated November 13, 1992 between the Company and MCA Development
Company. (ii)
10.21 Lease dated October 13, 1992 between the Company and Midis Properties,
Ltd. (ii)
27
<PAGE>
10.22 Lease dated March 28, 1993 between the Company and Midis Properties,
Ltd. (vi)
10.23 Letter Agreement between the Company and Jay P. Morgan Photography
dated September 28, 1992. (iii)
10.24 Settlement Agreement and Mutual Release dated as of August 11, 1994
between the Company, on the one hand, and Richard T. Eckhouse, B&E
Financial Express, Business & Executives Financial Group, Innovative
Business Management Inc., and R. T. Eckhouse & Assoc., on the other
hand. (vii)
10.25 Promissory Note in favor of Photo Corporation of Australia Pty Limited,
dated March 23, 1995. (viii)
10.26 Security Agreement between the Company and Photo Corporation of
Australia Pty Limited, dated as of March 23, 1995. (viii)
10.27 Subscription Agreement between the Company and Oakrusk Pty Limited,
dated May 26, 1995. (viii)
10.28 Stock Option Agreement between the Company and Oakrusk Pty Limited,
dated May 26, 1995. (viii)
10.29 Form of Subscription Agreement. (ix)
10.30 Settlement and Mutual Release Agreement between the Company, Shelton,
Shelton and Photo Corporation Group Pty Limited, dated August 31,
1996.(x)
(b) Reports on Form 8-K
None.
(i) Incorporated by reference to the Company's Registration Statement on
Form S-1 (Registration No. 33- 52904) filed on October 5, 1992 (the
"Registration Statement").
(ii) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed on December 21, 1992.
(iii) Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registration Statement filed on January 15, 1993.
(iv) Incorporated by reference to Pre-Effective Amendment No. 3 to the
Registration Statement filed on February 3, 1993.
(v) Incorporated by reference to the Company's Registration Statement on
Form 8-A (No. 0-21322) filed on March 5, 1993 and effective on March 19, 1993.
(vi) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1993.
(vii) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 1994.
(viii) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1995.
(ix) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 1995.
(x) Incorporated by reference to the Company's Report on Form 10-QA for the
period ended September 30, 1996.
+ Management contract or compensatory plan.
28
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Out-Takes, Inc.
Dated: June 10, 1997 By:
Peter C. Watt, President
In accordance with the Exchange Act, 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
Chairman of the Board, President June 10, 1997
Peter C. Watt Chief Executive Officer, Principal
Financial Officer and Secretary
(Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
Director June 10, 1997
Michael C. Roubicek
29
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<LEGEND>
This schedule contains summary financial information extracted from the
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qualified in its entirety by reference to such financial statements.
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<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> mar-31-1997
<PERIOD-END> mar-31-1997
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<PP&E> 845,198
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<CURRENT-LIABILITIES> 644,748
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0
0
<COMMON> 207,882
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<TOTAL-LIABILITY-AND-EQUITY> 1,011,463
<SALES> 2,014,788
<TOTAL-REVENUES> 2,014,788
<CGS> 1,925,930
<TOTAL-COSTS> 788,086
<OTHER-EXPENSES> 50,695
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<INTEREST-EXPENSE> 3,423
<INCOME-PRETAX> (753,346)
<INCOME-TAX> 0
<INCOME-CONTINUING> (753,346)
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<EPS-PRIMARY> (0.05)
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