- ------------------------------------------------------------------------------
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, 1998
OR
[__] 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
(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 $1,187,638.
The aggregate market value of the voting stock held by non-affiliates as of June
8, 1998 was $91,286.
The number of shares outstanding of the issuer's Common Stock as of June 8, 1998
was 20,495,726.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the 1998
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
- ------------------------------------------------------------------------------
<PAGE>
OUT-TAKES, INC.
FORM 10-K ANNUAL REPORT FOR FISCAL YEAR ENDING MARCH 31, 1998
TABLE OF CONTENTS
Page
PART I 1
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 4
ITEM 3. LEGAL PROCEEDINGS 4
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 4
PART II 5
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 5
ITEM 6. SELECTED FINANCIAL DATA 5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION 6
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 27
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 a retail studio, called Out-Takes(R),
which opened on May 24, 1993 and is located in MCA/ Universal's CityWalkSM
project in Los Angeles, California ("the CityWalk Studio"). The Company had a
second studio, which 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"). As a result of management's
continuing review of the poor performance of the Irvine Studio, management
decided to close the Irvine Studio. The Irvine Studio ceased operations on April
22, 1998. The CityWalk studio employs 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 distinction in the
consumer portraiture business. Most of the portraits taken in the CityWalk
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 ("Para mount"); MCA/Universal Merchandising, Inc. ("Universal");
Warner Bros. Consumer Products ("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"), Curtis
Archives ("Curtis A"), Curtis Management ("Curtis M"), King Features ("King"),
MTV Networks ("MTV"), Saban Merchandising Inc. ("Saban"), Innerspace Visions
("Visions"), The Baywatch Production Company ("Baywatch") and others,
individually and collectively referred to as the "License Agreements"
(Paramount, Universal, Turner, Fox, Morgan, TSW, Queen Bee, Curtis A, Curtis M,
King, MTV, Saban, Visions and Baywatch 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.
1
<PAGE>
A summary of the License Agreements and the Titles/Properties available
thereunder is presented in the table on the following page.
Licensor Selected Titles / Properties Territory and Usage
Paramount Pictures
Corporation Current titles in use: Territory: Worldwide.
Star Trek (Original Series)
Trek Wrath of Khan
Deep Space Nine
Cool World
Friday the 13th
MCA/Universal Current titles in use: Territory: United States,
Merchandising, Inc. Back to the Future, Part I United Kingdom, Holland,
Jaws New Zealand and Australia
Jurassic Park
Harry & Hendersons
Warner Bros. Consumer Current titles in use: Territory: United States
Products - (For MGM and Gone with the Wind and its territories and
Hanna-Barbera film Tom & Jerry Movie possessions.
libraries) Wizard of Oz
The Flintstones
Cave Kids
Twentieth Century Fox Current titles in use: Territory: "The entire
Licensing & Merchandising Miracle on 34th St. world".
The Simpsons
The Pagemaster
Jay P. Morgan Photography Multi-property agreement Territory: Worldwide.
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
and Canada.
Elvira in bathtub
Elvira at movie theater
Curtis Archives (on All Norman Rockwell Territory: United States
behalf of Norman illustrations 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.
2
<PAGE>
MTV Networks Current property in use: Territory: United States
Beavis & Butt-head and its territories and
possessions, Canada
Saban Merchandising Inc. Current property in use: Territory: United States
Mighty Morphin Power and its territories and
Rangers possessions.
The Baywatch Production Current property in use: Territory: United States
Company Baywatch and its territories and
possessions.
3
<PAGE>
No single License Agreement represents greater than 15% 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 15% of the Company's revenues.
Although the Company has not commenced to market all Licensed Articles on a
timely basis, as of June 8, 1998, 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 PCA sublicense agreement has not yet generated
any royalties.
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 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 has enjoyed 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 expired on May 31,
1998, the landlord would 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. The new lease does not contain the
same restrictive covenant. This restriction did not apply to photographic
products offered within the theme park adjacent to the CityWalk Studio. The
opening of additional digital photographic concessions within the theme park in
the spring of 1997 increased the number of photographic opportunities available
to visitors to the area and has diluted the CityWalk Studio's share of the
market. As a result of the expiration of the lease restriction, the Company may
face new competition at the CityWalk Studio. 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. The Company has renewed the
lease for a further seven years.
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 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.
Employees
4
<PAGE>
As of March 31, 1998, the Company had 24 employees, 18 of whom were
part-time. The Company's full time employees include a Financial Controller
handling primarily administrative and accounting responsibilities. All of the
remaining persons were employed in retail operations at the CityWalk Studio (17
employees) and the Irvine Studio (6 employees). Due to the closure of the Irvine
Studio on April 22, 1998, the Company reduced the number of full time personnel
from 6 people to 4 people and reduced the number of part-time personnel by 4
persons. In addition, between March 31, 1998 and June 8, 1998, the Company
increased the number of part-time employees at its CityWalk Studio by 2 persons,
such that as of June 8, 1998, the Company had a total of 20 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 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. 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.
In order to comply with federal, state and local environmental
regulations, the Company has a per manent filtration system at the CityWalk
Studio that lessens 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
procedures 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 1,699 square feet of retail space (plus approximately
200 square feet of mezzanine 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
$123,250 plus a percentage rental payment equal to ten percent (10%) of annual
store revenues over $881,177. During the year to March 31, 1998 the Company paid
additional rent of $13,351 as a result of revenues being in excess of the
$881,177 threshold. The CityWalk Studio lease expired on May 31, 1998 and the
Company has exercised its option to renew the lease for a period of seven (7)
years. The lease may be terminated by the lessor if the Company does not meet a
minimum annual sales requirement of $587,000.
The Company maintains computer graphics and image production facilities at
the CityWalk 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 insurance with limits and conditions that management
deems customary for the industry.
ITEM 3. LEGAL PROCEEDINGS
None.
5
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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-Bulletin BoardSM under the symbol OUTT.
The following table sets forth, for the periods indicated, the high and
low closing prices for the Common Stock as reported by Nasdaq Trading and Market
Services Inc.
Fiscal 1996 Fiscal 1997 Fiscal 1998
High Low High Low High Low
First Quarter 18/100 7/100 27/100 22/100 10/100 7/100
Second Quarter 17/100 15/100 25/100 10/100 7.5/100 7/100
Third Quarter 19/100 13/100 6.5/100 6/100 7/100 4/100
Fourth Quarter 25/100 13/100 9/100 4/100 3.125/100 1.5/100
There were approximately 83 holders of record of the Company's Common
Stock as of June 8, 1998.
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 for the years ended March 31,
1994 through March 31, 1998. Refer to "Item 7. Management's Discussion and
Analysis or Plan of Operation" for discussion of operations.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Income Statement Data
Revenue from operations $1,187,638 $2,014,788 $1,580,712 $1,274,836 $ 454,395
Gross Income (Loss) (541,246) 88,858 (635,416) (44,276) (531,379)
Net Loss (1,082,306) (753,346)(1,576,484)(1,309,459)(2,883,366)
Net loss per share ($0.05) ($0.05) ($0.16) ($0.24) ($0.54)
Balance Sheet Data
6
<PAGE>
Total Assets $285,840 $1,011,463 $1,409,752 $1,862,279 $2,614,752
Total Liabilities 1,020,943 698,710 1,383,653 769,696 255,037
Stockholders' Equity
(Deficit) (735,103) 312,753 26,099 1,092,583 2,359,715
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 a photographic portrait studio, which was
opened on May 24, 1993 at MCA/Universal's CityWalkSM project in Los Angeles,
California ("the CityWalk Studio"). The Company opened a second studio 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
Irvine Studio closed on April 22, 1998.
The following table summarizes the Company's fiscal quarter results:
<TABLE>
Fiscal Year Ended March 31, 1998 Fiscal Year Ended March 31, 1997
-------------------------------- --------------------------------
3 months 3 months 3 months 3 months 3 months 3 months 3 months 3 months
ended ended ended ended ended ended ended ended
Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $333,149 $342,616 $306,588 $205,285 $468,187 $657,643 $520,666 $ 368,292
Gross Income/
(Loss) (72,279) (72,973) (101,160) (294,834) 18,425 126,736 15,081 (71,384)
Net Loss for
the period (219,536) (210,151) (237,672) (414,947) (204,568) (172,582) (172,530) (203,666)
Net Loss per
share ($ 0.01) ($ 0.01) ($ 0.01) ($ 0.02) ($ 0.02) ($ 0.01) ($ 0.02) ($ 0.01)
Closing Bid
Price per share
of Common
Stock $ 0.06 $ 0.06 $ 0.04 $ 0.015 $ 0.22 $ 0.10 $ 0.065 $ 0.085
</TABLE>
- ------------------------------------------------------------------------------
As noted in the table presented above, the Company continues to operate at
a net loss. The Irvine Studio incurred net losses of $1,058,283 from the date of
opening in December 1995 until closure in April 1998. Management believes that
the closure of the Irvine Studio will therefore have a positive impact on the
Company's operating results as no further losses will be incurred by the Irvine
Studio. The Company's short term objectives are to improve the revenues from the
CityWalk Studio, continue the reduction of expenses, source appropriate
locations and facilitate the opening of additional studios. Notwithstanding, net
losses are expected to continue unless and until the Company opens such
additional studios and / or the revenue stream from the CityWalk Studio
increases substantially.
On April 22, 1998, following extensive negotiations with the landlord, the
Company closed the Irvine Studio and the lease was terminated with no further
obligations to the Company. The costs associated with the closure of the studio
totaled $164,745 and included approximately a $135,000 non-cash loss on disposal
of leasehold improvements and write off of equipment identified as only being of
use for spare parts for the CityWalk Studio; $3,000 in termination payments to
staff; $5,000 to remove equipment from the studio and vacate the premises;
$7,000 in property tax obligations; and estimated additional operating costs of
approximately $14,000 through to the date of closure. It is management's opinion
that as of March 31, 1998, all costs associated with the closure of the Irvine
Studio had been accrued.
Pursuant to the Personnel Consulting Agreement with the Company dated June
28, 1995, Photo Corporation Group Pty Limited ("PCG") is entitled to charge the
Company management fees for services provided to the Company . To assist the
Company in funding its day to day operations and to enable the Company to make
the payments due to former officers of the Company, PCG agreed effective
December 1,
7
<PAGE>
1996, not to charge the Company management fees for a period of two years. The
Company has recorded a capital contribution of $31,200 for management fees, in
recognition of services provided by PCG during the year ended March 31, 1998.
Management believes that this amount represents the reasonable cost of doing
business, for services provided by PCG in the year ended March 31, 1998.
During the period April 1, 1997 to June 8, 1998, PCG has provided a further
$470,000 of cash to assist the Company in funding its day to day operations, to
enable the Company to make the payments due to former officers and to meet the
expenses associated with the closure of the Irvine Studio. The debt due to PCG
is disclosed on the balance sheet as "Due to Related Party". In addition,
certain subsidiaries of PCG have purchased, for a total of $20,000 cash, certain
equipment with no book value and identified as being surplus, following the
closure of the Irvine Studio.
Significant improvements have occurred in digital photography equipment
software and computers utilized in high-end computer graphics, since the opening
of the Company's CityWalk Studio in 1993. The Company has incorporated these
developments in to its CityWalk Studio where possible, to enable the Company to
produce 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
studio's long-term earning capabilities.
Results of Operations
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
The net loss for the year ended March 31, 1998 was $1,082,306 compared with
$753,346 for the year ended March 31, 1997. The primary reasons for the increase
in the net loss were a decrease in the gross income generated by the CityWalk
Studio, an increase in the gross loss incurred by the Irvine Studio and the
costs associated with the closure of the Irvine Studio, partly offset by a
reduction in general and administrative expenses.
The following table shows Revenues, Cost of Revenues and Gross Income /
(Loss) during the fiscal years ended March 31, 1998 and March 31, 1997, by
studio.
Fiscal Year Ended March 31, 1998 Fiscal Year Ended March 31, 1997
-------------------------------- --------------------------------
CityWalk Irvine Traveling CityWalk Irvine Traveling
Studio Studio Studio Studio Studio Studio
------ ------ ------ ------ ------ ------
Revenues $909,683 $ 277,558 $ 397 $1,492,024 $508,192 $ 14,572
-------- --------- -------- ---------- -------- --------
Cost of Revenues:
Compensation &
Related
Benefits 333,947 188,558 1,771 429,764 277,501 5,674
Depreciation &
Amortization 170,155 250,010 152 137,855 220,975 293
Rent 133,094 101,098 2,000 192,432 100,500 7,925
Loss on closure
of studio - 164,745 - - - -
Other 243,498 139,053 803 318,536 227,188 7,287
--------- ---------- ------- --------- -------- -------
Total 880,694 843,464 4,726 1,078,587 826,164 21,179
--------- ---------- ------- ---------- -------- -------
Gross Income /
(Loss) $ 28,989 $ (565,906) $(4,329) $ 413,437 $(317,972)$(6,607)
========= ========== ======= ========== ========== ======
The Company overall generated $1,187,638 in revenues in the fiscal year ended
March 31, 1998, compared to revenues of $2,014,788 in the fiscal year ended
March 31, 1997. CityWalk Studio revenues decreased by $582,341 to $909,683, a
decrease of 39.0%. Management attributes this decline to a number of factors
including the opening of additional digital photographic concessions within the
theme park adjacent to the CityWalk Studio in the spring of 1997. The Company's
lease contains a restriction that prevents the sale of computer generated
photographs by any other store within CityWalk during the Company's initial
lease term (the initial lease term expired May 31, 1998). The Company has
renewed the lease for a further seven years however the new lease does not
contain the same restrictive covenant. This restriction has afforded the Company
limited protection from competition, however the restriction does not apply to
photographic products offered within the theme park. The opening of additional
digital photographic concessions within the theme park has increased the number
of photographic opportunities available to visitors to the area and has diluted
the
8
<PAGE>
CityWalk Studio's share of the market. Management also believes that the
Studio's performance is directly affected by the level of foot traffic through
the theme park, resulting in a flow on effect into the Studio. In May 1996, a
new "ride" opened in the theme park, that management believes attracted an
increased number of both new and repeat visitors to the area. Management
perceives that the absence of a significant new attraction during the year to
March 31, 1998, has resulted in a decline in the level of foot traffic through
the Studio. Also, in the first part of calendar 1996, a travel show broadcast on
national television in Japan, included an episode on "Hollywood" featuring the
CityWalk Studio. Throughout the nine months ended December 31, 1996, an
unusually high number of Japanese tourists, who had seen the segment on
television in Japan, visited the CityWalk Studio. There was no similar national
television broadcast in 1997. Management continues to explore opportunities to
return the Studio's sales to previous levels, but there is no certainty that
this will occur.
Irvine Studio revenues decreased by $230,634 to $277,558, a decrease of 45.4%.
The demographics of the area in which the Irvine Studio was located, indicated
that many of the customers to the Irvine Spectrum Entertainment Center were
local or repeat customers. While such persons utilize entertainment facilities
on a regular basis, they viewed photography as a service to be used only
occasionally or infrequently, hence the Studio did not benefit from the repeat
business experienced by other vendors in the center. In August 1997, Stage II of
The Irvine Company's development plan for the Irvine Spectrum commenced. A
consequence of this was to dramatically limit parking facilities in and around
the center, which in turn led to a substantial reduction in foot traffic through
the Studio. Despite management's substantial efforts to increase the Studio's
revenues, management concluded that the only way to stop the negative cashflow
effect generated by the Irvine Studio, was to close the Studio. Following
lengthy negotiations with the Studio's landlord, the landlord agreed to allow
the Company to terminate its lease at the Irvine Entertainment Center and the
Company closed the Irvine Studio on April 22, 1998. The costs associated with
the closure of the studio totaled $164,745 and included approximately $135,000
non-cash loss on disposal of leasehold improvements and write off of equipment
identified as only being of use for spare parts for the CityWalk Studio; $3,000
in termination payments to staff; $5,000 to remove equipment from the studio and
vacate the premises; $7,000 in property tax obligations; and $14,000 in
operating losses for the period that the store remained open from March 31, 1998
to the date of closure. It is management's opinion that as of March 31, 1998,
all costs associated with the closure of the Irvine Studio have been provided
for in full.
Revenues from the Traveling Studio were $397 in the fiscal year ended March 31,
1998 compared with $14,572 in the preceding year. In December 1997, for a one
month trial period, the Company tested an event photography system at a central
meeting venue for inbound Japanese tourists. The trial proved to be
unsuccessful, generating only $397 in revenues and as a result, the trial was
discontinued.
Cost of revenues in the year to March 31, 1998 were $1,728,884 or
approximately 145.6% of revenues. Excluding the $164,745 of costs associated
with the closure of the Irvine Studio, cost of revenues in the year to March 31,
1998 were $1,564,139 or approximately 131.7% of revenues. Cost of revenues in
the year to March 31, 1997 were $1,925,930 or approximately 95.6% of revenues.
Cost of revenues for the CityWalk Studio decreased by $197,893 to $880,694.
Compensation and related benefits were $95,817 lower than the previous year as a
result of tighter controls over the number of staff hours worked at the studio
and as a consequence of the reduction in revenues. Depreciation was higher than
the previous year by $32,300. Rent was lower by $59,338 as a result of the
Company paying rent based on a percentage of revenues, such revenues being lower
than in the previous period by $582,341. Other cost of revenues decreased by
23.6%. The percentage decrease in other cost of revenues was less than the
decrease in revenues as there are certain costs that are not incurred in direct
proportion to the level of revenue, including insurance, taxes, repairs and
maintenance, utilities and cleaning. The CityWalk Studio earned gross income of
$28,989 during the fiscal year ended March 31, 1998 compared to gross income of
$413,437 for the same period last year, a decrease in gross income of $384,448.
Cost of revenues for the Irvine Studio increased by $17,300 to $843,464
compared with $826,164 for the year to March 31, 1997. Excluding the $164,745 of
costs associated with the closure of the Irvine Studio, cost of revenues
decreased by $147,445 to $678,719. The percentage decrease in cost of revenues
was less than the decrease in revenues as there are certain costs that are not
incurred in direct proportion to the level of revenue, including insurance,
taxes, repairs and maintenance, utilities and cleaning. Compensation and related
benefits were $88,943 lower than the previous year as a result of tighter
controls over the number of staff hours worked at the studio. Management reduced
staffing levels in the studio to the extent possible within the constraints of
the number of hours the studio was required to be open, in order to minimize the
impact of the reduction in revenue. Depreciation was higher by $29,035 than the
previous year. Rent increased by $598 from $100,500 in the year to March 31,
1997 to $101,098 for the year to March 31, 1998. Other cost of revenues
decreased by 38.8%, in line with the decrease in revenues. The Irvine Studio
incurred a gross loss of $565,906 during the fiscal year ended March 31, 1998
compared to a gross loss of $317,972 for the same period last year, an
9
<PAGE>
increase in gross loss of $247,934. Excluding the $164,745 of costs related to
the closure of the Irvine Studio, there was an $83,189 increase in the gross
loss.
Cost of revenues for the Traveling Studio were $4,726, resulting in a gross
loss of $4,329. In the year ended March 31, 1997, the Traveling Studio incurred
a gross loss of $6,607.
The Company overall incurred a gross loss of $541,246 during the fiscal year
ended March 31, 1998, compared with gross income for the same period last year
of $88,858. The incremental gross loss for the year to March 31, 1998 of
$630,104 consists of a $384,448 reduction in gross income generated by the
CityWalk Studio, an increase of $247,934 in the gross loss incurred by the
Irvine Studio, such increase including $164,745 of costs associated with the
closure of the studio, partly offset by a decrease in the gross loss incurred by
the Traveling Studio of $2,278. Excluding the $164,745 of costs related to the
closure of the Irvine Studio, the Company overall incurred a gross loss of
$376,501 in the year to March 31, 1998, a $465,359 increase in gross loss
compared with the previous year.
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. After adjusting for this non-recurring item, the Company's general and
administrative expenses decreased from $736,836 in the fiscal year ended March
31, 1997 to $488,875 in the fiscal year ended March 31, 1998, a decrease of
$247,961 or approximately 33.7%. This decrease is consistent with management's
plan to reduce overhead costs. Compensation and related benefits decreased by
approximately 51.4% to $125,571 (excluding the $51,250 termination payments)
from $258,380 for the same period last year. This decrease was the result of the
cessation of employment of the Vice President Operations and the Vice President
Development on September 1, 1996, together with the cessation of employment of
the Operations Manager during the quarter ended December 31, 1997 and a
reduction in the level of administrative and technical support staff during the
year to March 31, 1998 compared with the year to March 31, 1997. Professional
fees decreased by 9.5% to $91,218, compared to $100,777 for the same period last
year. Management fees of $31,200 have been expensed in recognition of the
services provided during the year by PCG. The expense for the year to March 31,
1997 was $131,000. The reduction of $99,800 in management fees is a consequence
of a greater number of responsibilities being managed by the Company internally
and therefore a reduction in the level of services provided by PCG. Management
believes that $31,200 (1997: $131,000) represents the reasonable cost of
services provided by PCG during the year. As PCG agreed not to charge management
fees for a period of two years from December 1, 1996, the Company has recorded a
capital contribution of $31,200. Office and storage rent expenses decreased from
$39,558 in the year to March 31, 1997 to $33,300. Depreciation and amortization
costs were higher by $1,297. Other general and administrative expenses decreased
by $832 to $114,626 for the fiscal year ended March 31, 1998, compared to
$115,458 for the same period last year.
The Company earned interest income of $224 in the fiscal year ended March 31,
1998 as compared to $484 earned during the prior year. Interest charges totaling
$52,409 were incurred on the loan from PCG and on the loan payable to former
executives of the Company, compared with interest expense of $54,602 in the year
ended March 31, 1997.
As of March 31, 1998, the Company has net operating loss carry forwards of
approximately $10,700,000. 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.
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.
Fiscal Year Ended March 31, 1997 Fiscal Year Ended March 31, 1996
-------------------------------- --------------------------------
CityWalk Irvine Traveling CityWalk Irvine Traveling
Studio Studio Studio Studio Studio Studio
(Opened (Not
12/9/95) Operational)
Revenues $1,492,024 $ 508,192 $14,572 $1,422,845 $157,867 $ -
---------- ---------- ------- ---------- -------- ------
10
<PAGE>
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 -
Loss on
impairment of
Long-Lived
Assets - - - 722,000 - 40,129
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 1,843,727 332,272 40,129
--------- --------- ------ --------- ------- ------
Gross Income /
(Loss) $ 413,437 ($317,972) ($6,607) ($420,882) ($174,405) $40,129
========== ========= ====== ========= ========= =======
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 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 $2,216,128 or approximately 140.0% of revenues. 34.4% of the cost of
revenues in the year to March 31, 1996 represents a loss on impairment of
long-lived assets. Excluding this amount, 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 $765,140 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 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, and the
recognition of a $722,000 loss on impairment of CityWalk Studio assets in the
quarter ended June 30, 1995, together with the fact that certain assets have now
been fully depreciated. As a result of the Company's continuing operating
losses, the information obtained during research and the development of the
Irvine Studio and the revised total projected future cash flows of the CityWalk
Studio, in June 1995 management determined that an impairment loss of
approximately $722,000 should be recognized. This loss was calculated as the
excess of the net carrying value of the CityWalk Studio long lived assets over
the total projected future cash flows over the remaining useful life of the
assets. 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 a gross loss of $420,882 for
the same period last year, an improvement of $834,319. Excluding the effect of
the impairment loss recognized in the year ended March 31, 1996, this represents
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. In the year ended March 31, 1996 as a consequence of the
adoption of SFAS No. 121, the Traveling Studio incurred a gross loss of $40,129.
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. The gross loss for the same period last year was $635,416. The increase in
gross income for the year to March 31, 1997 is mainly due to the loss on
impairment of long-lived assets of $762,129 recorded in the year ended March 31,
1996 (there was no similar charge in the year to March 31, 1997), offset by 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. Also contributing to the increase in gross
11
<PAGE>
income is the $112,319 (excluding the $722,00 loss on impairment of long-lived
assets recorded in the year to March 31, 1996) 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. 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 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. Management believes that $131,000 (1996: $130,000)
represents the reasonable cost of services provided by PCG during the year.
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 $8,476, or 8% to $115,458 for the fiscal
year ended March 31, 1997, compared to $106,982 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, 1997, the Company had 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.
Liquidity and Capital Resources
At March 31, 1998, the Company had a working capital deficit of $918,299 as
compared to a working capital deficit on March 31, 1997 of $516,861. The
increase of $401,438 is primarily attributable to operating losses incurred
during the year to March 31, 1998. Funds have been provided by PCG during the
year to enable the Company to meet the costs associated with its day to day
operations and to fund the payments due to former officers of the Company. In
addition, a provision of $31,878 has been made to meet costs incurred subsequent
to year end in connection with the closure of the Irvine Studio on April 22,
1998. The increase in the working capital deficiency is partly offset by
payments totaling $119,990 made to former officers of the Company during the
year. As of March 31, 1998, the Company's cash and cash equivalents balance was
$23,044.
Net cash used in operating activities was $482,207 for the fiscal year
ended on March 31, 1998, compared to the utilization of $336,376 of cash for the
same period last year. The increase of $145,831 in cash used in operations
includes $119,990 paid to former officers of the Company and an overall $82,630
reduction in accounts payable balances compared with the previous year. Included
in the $482,207 net cash used in operating activities is the $151,151 cash loss
incurred by the Irvine Studio and approximately $29,000 of cash expenses
associated with the closure of the Irvine Studio.
In the period April 1 to 17, 1998 $1,347 was paid to former officers of the
Company, thus satisfying all obligations of the Company pursuant to the
Settlement and Mutual Release Agreement dated September 1, 1996 between the
Company, Mr Robert Shelton, Mrs Leah Peterson-Shelton and PCG.
The Company invested a total of $26,484 in the fiscal year ended March 31,
1998 for equipment in the CityWalk Studio and administrative office. By
comparison, in the previous year the Company invested $46,630 for equipment at
the CityWalk and Irvine Studios.
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 or to raise funds through debt and/or equity financing. The
Company's recurring operating losses and net working capital deficiency raises
12
<PAGE>
substantial doubt about the entity's ability to continue as a going concern.
Management's plans include improving the revenues from the CityWalk Studio,
continuing the reduction of expenses and finding suitable locations for
additional studios. 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. As of June 8, 1998 PCG has not committed to continue to
fund the Company and may at any time decide that it will not advance any
additional funds to the Company. In such event, it is likely that the Company
will be unable to meet its current obligations, which may result in the
commencement of insolvency proceedings with respect to the Company.
In the fiscal year ended March 31, 1998, further funding of $455,000 in the
form of cash advances was provided by PCG. In addition, PCG paid $5,727 of
expenses on behalf of the Company. This compares with $260,000 funding provided
by PCG in the year ended March 31, 1997, and $131,000 of management fees accrued
but unpaid in the period April 1, 1996 to November 30, 1996.
Despite its working capital deficiency, the Company has maintained
generally good relations with its vendors.
Although the Company has not commenced to market all Licensed Articles on a
timely basis, as of June 8, 1998, 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,
with a seven year option period. The initial lease expired on May 31, 1998 and
the Company has exercised its option to renew the lease for an additional seven
years.
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
The Company's securities are quoted on the OTC-Bulletin Board under the
trading symbol OUTT.
13
<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 sheets of Out-Takes, Inc.
as of March 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three fiscal years in the
period ended March 31, 1998. 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, 1998 and 1997 and the results of its operations and its cash flows
for each of the three fiscal years in the period ended March 31, 1998, 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.
Moore Stephens, P.C.
Certified Public Accountants
Cranford, New Jersey
May 20, 1998
14
<PAGE>
OUT-TAKES INC.
BALANCE SHEETS
ASSETS March 31,
1998 1997
Current Assets:
Cash and Cash Equivalents $ 23,044 $ 70,908
Inventory 10,082 22,879
Due from Related Party - 7,343
Prepaid Insurance 8,949 10,796
Prepaid Taxes 3,005 7,829
Other Current Assets 9,564 8,132
----------- -----------
Total Current Assets $ 54,644 $ 127,887
Plant & Equipment - Net 204,148 845,198
Other Non-Current Assets:
Deposits 27,048 38,378
----------- -----------
Total Assets $ 285,840 $ 1,011,463
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 31,173 $ 113,803
Accrued Payroll 22,047 42,868
Accrued Expenses 108,819 104,331
Accrued Interest - Related Party 56,452 7,871
Provision for Studio closure 31,878 -
Compensation payable - Related Parties 1,347 115,375
Due to Related Party 721,227 260,500
----------- -----------
Total Current Liabilities $ 972,943 $ 644,748
Non-Current Liabilities:
Notes Payable $ 48,000 $ 48,000
Compensation payable - Related Parties - 5,962
----------- -----------
Total Non-Current Liabilities $ 48,000 $ 53,962
Commitments (Note 8) - -
Stockholders' Equity (Deficit):
Preferred Stock, par value $.01 per share;
5,000,000 shares authorized, none issued $ - $ -
Common Stock, par value $.01 per share;
35,000,000 shares authorized; 20,788,122
shares issued of which 292,396 shares
are in Treasury 207,882 207,882
Capital in excess of par value 9,905,430 10,014,980
Accumulated deficit (10,740,009) (9,657,703)
----------- -----------
Total ($ 626,697)$ 565,159
Less: Treasury Stock, at cost (108,406) (108,406)
Deferred Compensation - (144,000)
----------- -----------
Total Stockholders' Equity (Deficit) ($ 735,103)$ 312,753
---------- -----------
Total Liabilities and Stockholders' Equity $ 285,840 $ 1,011,463
=========== ===========
The Accompanying Notes are an Integral Part of These Financial Statements.
15
<PAGE>
OUT-TAKES INC.
STATEMENTS OF OPERATIONS
Years ended March 31,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Revenues $ 1,187,638 $ 2,014,788 $ 1,580,712
------------- ----------- -----------
Cost of Revenues:
Compensation and Related Benefits 524,276 712,939 548,137
Depreciation and Amortization 420,317 359,123 249,249
Loss on Impairment of Long-Lived
Assets - - 762,129
Pre-Opening Costs - Irvine Studio - - 67,007
Rent 236,192 300,857 210,639
Loss on closure of Irvine Studio 164,745 - -
Other Cost of Revenues 383,354 553,011 378,967
------------- ----------- -----------
Total Cost of Revenues 1,728,884 1,925,930 2,216,128
------------- ----------- -----------
Gross Income (Loss) (541,246) 88,858 (635,416)
-------------- ----------- -----------
General and Administrative Expenses:
Compensation and Related Benefits 125,571 309,630 313,432
Professional Fees 91,218 100,777 206,979
Management Fee - Related Party 31,200 131,000 130,000
Rent of Offices 33,300 39,558 29,524
Depreciation and Amortization 92,960 91,663 128,907
Other G & A Expenses 114,626 115,458 106,982
------------- ----------- -----------
Total Expenses 488,875 788,086 915,824
------------- ----------- -----------
Loss from Operations (1,030,121) (699,228) (1,551,240)
Other Income (Expense)
Interest income 224 484 3,035
Interest expense (210) (3,423) (7)
Interest expense - Related Parties (52,199) (51,179) (28,272)
-------------- -----------------------
Total Other Income (Expense) (52,185) (54,118) (25,244)
-------------- -----------------------
Net Loss ($ 1,082,306) ($ 753,346)($1,576,484)
============ =========== ===========
Net Loss Per Share (Basic and
Diluted) ($ 0.05) ($ 0.05)($ 0.16)
============= =========== ===========
Weighted Average Common Shares
Outstanding 20,495,726 14,824,881 9,567,748
============= =========== ===========
The Accompanying Notes are an Integral Part of These Financial Statements.
16
<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, 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 650,000 6,500 123,500 - - - 130,000
Stock Issued upon
Conversion of Debt 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
Management fee -
Related Party - - 31,200 - - - 31,200
Adjustment for
cancellation of escrow
shares(See note [6A]) - - (144,000) - - 144,000 -
Options issuance cost - - 3,250 - - - 3,250
Net Loss for the year
ended March 31,1998 - - - (1,082,306) - - (1,082,306)
---------- -------- ----------- ------------ -------- -------- ----------
Balance - March 31, 1998 20,788,122 $207,882 $ 9,905,430 ($10,740,009) ($108,406) $ - ($ 735,103)
=========== ======== =========== ============ ========= ======== ==========
</TABLE>
The Accompanying Notes are an Integral Part of These Financial Statements.
17
<PAGE>
OUT-TAKES INC.
STATEMENT OF CASH FLOWS
<TABLE>
Years ended March 31,
1998 1997 1996
Operating Activities:
<S> <C> <C> <C>
Net Loss ($1,082,306) ($ 753,346) $(1,576,484)
----------- ---------- ------------
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation and Amortization $ 513,277 $ 450,786 $ 378,156
Loss on Impairment of Long-Lived Assets - - 762,129
Loss on closure of Irvine Studio 154,157 - -
Loss on Disposal of Plant and Equipment - 504 997
Management fee - Related Party 31,200 - -
Options issuance cost 3,250 - -
Changes in Assets and Liabilities:
(Increase) Decrease in:
Prepaid Royalties - - 840
Due from Related Party 7,343 (7,343) -
Deposits 11,330 334 (18,290)
Inventory 12,797 13,719 (10,090)
Due from Officers - - 8,565
Prepaid Insurance 1,847 (2,003) -
Prepaid Taxes 4,824 (5,754) -
Other Current Assets (1,432) 1,670 (10,314)
Increase (Decrease) in:
Accounts Payable (82,630) 24,880 (196,867)
Accrued Payroll and Other Expenses (16,333) (275,020) 56,453
Notes Payable - (15,036) 15,036
Accrued Interest - Related Party 48,581 (22,104) 20,835
Provision for Studio closure 31,878 - -
Accrued Management Fee - Related Party - 131,000 130,000
Compensation Payable - Related Parties (119,990) 121,337 -
----------- ---------- -----------
Total Adjustments $ 600,099 $ 416,970 $ 1,137,450
---------- ---------- -----------
Net Cash Used in Operating Activities ($ 482,207) ($ 336,376) ($ 439,034)
---------- ---------- ------------
Investing Activities:
Acquisition of Equipment and Leasehold
Improvements ($ 26,484) ($ 46,630) ($ 652,814)
Proceeds on Disposal of Plant and Equipment 100 2,242 1,050
---------- ---------- -----------
Net Cash Used in Investing Activities ($ 26,384) ($ 44,388) ($ 651,764)
---------- ---------- ------------
Financing Activities:
Proceeds from the Issuance of Stock $ - $ 130,000 $ 510,000
Advances from Related Party 460,727 260,000 649,500
Proceeds from Interim Loan Financing -
Related Party - - 39,000
Payment of Interim Loan Financing -
Related Party - - (100,000)
-- ------ ---------- ------------
Net Cash Provided by Financing Activities $ 460,727 $ 390,000 $ 1,098,500
--------- ---------- -----------
Net (Decrease) Increase in Cash and Cash
Equivalents ($ 47,864) $ 9,236 $ 7,702
Cash and Cash Equivalents - Beginning of
Years 70,908 61,672 53,970
--------- ---------- -----------
Cash and Cash Equivalents - End of Years $ 23,044 $ 70,908 $ 61,672
========== ========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 7,650 $ 66,501 $ 4,401
Income Tax $ - $ - $ -
</TABLE>
Non-Cash Investing and Financing Activities
On May 7, 1996, the majority stockholder, Photo Corporation Group Pty. Ltd.
("PCG"), converted $130,000 of its then $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 Photo Corporation Group Pty Limited ("PCG").
The Accompanying Notes are an Integral Part of These Financial Statements.
18
<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, 1997 and 1996 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
Employee 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, 1998.
Risk Concentrations - Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist principally of cash. At March
31, 1998, 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, 1998, 1997 and 1996 was $21,069,
$28,552 and $13,140 respectively.
Loss per share - The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share" which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended March 31, 1998 has been calculated in accordance
with SFAS No. 128. Prior periods earnings per share data have been recalculated
as necessary to conform prior years data to SFAS No. 128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share" and replaces its primary earnings per share with a new basic earnings
per share representing the amount of earnings for the period
19
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[1] Summary of Significant Accounting Policies - (continued)
available to each share of common stock outstanding during the reporting period.
SFAS No. 128 also requires a dual presentation of basic and diluted earnings per
share in the face of the statement of operations for all companies with complex
capital structures. Diluted earnings per share reflects the amount of earnings
for the period available to each share of common stock outstanding during the
reporting period, while giving effect to all dilutive potential common shares
that were outstanding during the period, such as common shares that could result
from the potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e. increasing earnings per share or reducing
loss per share). The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
Potential common shares of 125,000 are not currently dilutive, but may be in the
future.
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.
[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 a retail studio, called Out-Takes(R),
which opened on May 24, 1993 and is located at MCA/Universal's CityWalkSM
project in Los Angeles, California ("the CityWalk Studio"). During the period
December 1, 1995 to April 22, 1998, the Company operated a second Studio, at the
Entertainment Center in the Bazaar at the Irvine Spectrum, located in Irvine,
Orange County, California ("the Irvine Studio").
[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 ("Warner"), Twentieth Century Fox
Licensing & Merchandising ("Fox"), Jay P. Morgan Photography ("Morgan"), MTV
Networks ("MTV"), Saban Merchandising Inc. ("Saban"), The Baywatch Production
Company ("Baywatch") 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,
1998, 1997 and 1996 was $39,365, $66,816 and $35,622 respectively.
Although the Company has not commenced to market all Licensed Articles on a
timely basis, as of March 31, 1998, 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), 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
20
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[B] Sublicense Agreement - Related Party - (continued)
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, 1998, the PCA
sublicense agreement has not yet generated any royalties.
[4] Plant and Equipment
March 31, 1998 March 31, 1997
The components of plant and equipment are:
Photographic Equipment $ 620,750 $ 622,192
Computers and Software 659,048 679,427
Equipment and Furniture 301,316 308,987
Leasehold Improvements 609,494 1,011,292
Motor Vehicle 21,433 -
------------- -------------
Total - At Cost 2,212,041 2,621,898
Less: Accumulated Depreciation 2,007,893 1,776,700
------------- -------------
Net $ 204,148 $ 845,198
============= =============
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
totaling $274,373 were consolidated on September 1, 1996, and were 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, 1998 interest expense totaled $3,618.
As of March 31, 1998, interest of $67 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, 1998.
During the year to March 31, 1997, PCG charged the Company $131,000 in
management fees pursuant to the Personnel Consulting Agreement with the Company
dated June 28, 1995. Effective December 1, 1996, PCG agreed not to charge
management fees for services provided by it or its related parties for a period
of two years. The Company has recorded a capital contribution of $31,200 for
management fees for the year to March 31, 1998. Management believes that this
represents the reasonable cost of doing business, for services provided by PCG
personnel in the year to March 31, 1998.
At March 31, 1998 the $721,227 "Due to Related Party" ($260,500 as of March 31,
1997) was advanced by PCG. This balance consists of $715,500 advanced to the
Company and $5,727 of expenses paid by PCA on behalf of the Company (1997:
$7,343 "Due from Related Party" representing monies advanced by the Company
during fiscal 1997 on behalf of PCA). The funds advanced to the Company 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 on the
21
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[5] Related Party Transactions - (continued)
funds advanced to the Company and for the year ended March 31, 1998 was $48,581.
As of March 31, 1998, interest of $56,452 was accrued.
The weighted average interest rate on short term borrowings as of March 31, 1998
was approximately 10.0%.
[6] Capital Stock Transactions
[A] Escrow Shares
In March, 1992, 1,900,000 shares were issued to the Company's founders
("Founders") and deferred compensation of $364,800 was recorded for the
1,900,000 shares. Included in the 1,900,000 shares were 1,150,000 shares issued
to the Founders for services in connection with the incorporation of the
Company. Accordingly, $220,800 was amortized as compensation expense in 1992.
The remaining 750,000 shares of the Company's Common Stock were placed into
escrow for the benefit of the Founders. As the Company's pre-tax earnings did
not equal or exceed the required threshold level, in May of 1998 the Company
requested that the shares be returned to the Company to be placed in Treasury.
The financial statements reflect the reversal of the deferred compensation
attributable to these shares, however the share data will be adjusted as of the
date the shares are returned.
[B] Stock Option Plan
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. In September of 1997, options for 175,000 shares were issued to
employees and consultants of the Company.
Information is summarized as follows:
Shares Under Options and Warrants
---------------------------------
Amended Weighted
And Restated Price Average
1992 Stock per Exercise
Option Plan Share Price
----------- ----- -----
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 - - -
Granted during the year
ended March 31, 1998 175,000 $0.06 $0.06
Forfeited during the year
ended March 31, 1998 (50,000)
-------
Outstanding at March 31, 1998 125,000 - $0.06
=========
The exercise price for the options outstanding at March 31, 1998 is $0.06 with a
vesting period of three years and a contractual life of ten years. The company
estimates that approximately 100% of such options will eventually vest.
22
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[6] Capital Stock Transactions - (continued)
[B] Stock Option Plan - (continued)
On September 15, 1997, the Board of Directors granted to four individuals, a
total of 175,000 stock options to purchase company stock at an exercise price of
$0.06 per share for past services performed. The options are to vest over a
three year period, 50% the first year and 25% the remaining two years, with an
expiration date of September 15, 2007. The company applies APB Opinion 25 in
accounting for its fixed and performance based stock option compensation plans.
Compensation cost of $3,250, $0 and $0 was charged to operations for the three
years ended March 31, 1998, 1997 and 1996 respectively. Had compensation cost
been determined on the basis of fair value pursuant to FASB Statement No. 123,
net income and earnings per share would have been recorded as follows:
1998 1997 1996
$ $ $
Net Income (Loss)
As reported (1,082,306) (753,346) (1,576,484)
Pro forma (1,089,056) (753,346) (1,576,484)
Earnings per Share
As reported (0.05) (0.05) (0.16)
Pro forma (0.05) (0.05) (0.16)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998: dividend yields of $0 for each year,
expected volatility of approximately 106% for each year, risk free interest
rates of 5.83% and an expected life of five years. The weighted-average fair
value of options granted was $0.06 for the year ended March 31, 1998.
[7] Closure of Irvine Studio
In the third quarter of the Company's fiscal year, management determined that
despite its substantial efforts to increase the revenues of the Irvine Studio,
it would be in the best interests of the Company to contain the negative cash
flow incurred by the Company, by determining an exit plan for the Irvine Studio.
In the fourth quarter of the fiscal year, the Company finalized its exit plan.
Following lengthy negotiations with the landlord of the Irvine Studio,
management reached an agreement with the landlord to close the Studio. The
closure was effected without the payment of any additional amounts to the
landlord. The Studio closed on April 22, 1998. Costs associated with the closure
of the studio totaled $164,745 and included approximately $135,000 non-cash loss
on disposal of leasehold improvements and write off of equipment identified as
only being of use for spare parts for the CityWalk Studio; $3,000 in termination
payments to staff; $5,000 to remove equipment from the studio and vacate the
premises; $7,000 in property tax obligations; and estimated additional operating
costs of approximately $14,000 through to the date of closure. It is
management's opinion that as of March 31, 1998, all costs associated with the
closure of the Irvine Studio have been accrued.
[8] Commitments
Lease Agreements - The Company leases its CityWalk Studio premises under a five
year lease, with an option to extend the lease for a period of seven years. The
initial lease term expired on May 31, 1998 and the Company has exercised its
option to renew the lease for a further seven years. The lease provides for an
annual rental payment of $123,250 and the payment of 10% of annual store
revenues in excess of $881,177. In addition, pursuant to the lease agreement,
the Company pays annual allocated property taxes for the CityWalk Studio of
approximately $600. 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.
23
<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, 1998 are shown in the table below.
Year ended March 31
-------------------
1999 $ 123,250
2000 123,250
2001 123,250
2002 123,250
2003 123,250
Thereafter 267,041
---------
Total $ 883,291
=========
In the year to March 31, 1998 the Company paid $101,098 in rent for the Irvine
Studio. Following closure of the Irvine Studio on April 22, 1998, the lease was
terminated. There is no further obligation on the Company with respect to the
lease.
The Company has a month to month commitment of $2,450 per month for corporate
office space and a month to month commitment of $650 per month for storage
facilities.
Total rental charged to operations for the fiscal years ended March 31, 1998,
1997 and 1996 is broken down as follows:
1998 1997 1996
$ $ $
Base rental 256,141 278,128 183,301
Additional rent 13,351 62,287 56,862
-------- ------- --------
$269,492 $340,415 $240,163
======== ======== ========
The additional rent is a result of sales being in excess of the $881,177 sales
threshold.
Consulting Agreement - the Company has a consulting agreement with an
unaffiliated entity for the maintenance of the image technology at the CityWalk
Studio. Effective October 1, 1997 the agreement provides for the payment of
$50,000 per annum of consulting fees and a discretionary performance bonus of up
to 10% of the fees paid. The agreement may be terminated by either party with a
minimum of one month's notice. For the year ended March 31, 1998 the Company
expensed $49,000 in payments to this unaffiliated entity.
[9] Net Loss Per Share
Net loss per share was calculated based on the weighted average shares
outstanding during the year. Potential common shares have not been included as
their inclusion would be antidilutive.
[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.
[11] Income Taxes
As of March 31, 1998, the Company has a net operating loss carry forward of
approximately $10,700,000. 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, 1998, the Company has deferred tax
assets of approximately $729,000 arising from these operating loss carry
forwards which will expire in March, 2011. However, due to uncertainty as to
whether the Company will generate income in the future sufficient to fully or
partially utilize these loss carry forwards, an allowance of $729,000 has been
established to offset this asset. The Company recorded an increase in its
valuation allowance of $66,000 over the allowance at March 31, 1997.
24
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[12] Notes Payable
The Note Payable of $48,000 is unsecured and 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.
The note holder has threatened to commence litigation, however management has
advised the note holder that no amount is due at the present time as the Company
has not generated positive cashflow. Counsel has advised the Company that no
litigation has commenced and counsel is unable to assess a possible outcome.
[13] New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information". SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997 and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
[14] Going Concern
The Company commenced commercial operations on May 24, 1993 and as of May 29,
1998, 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, 1998 was $482,207. The Company incurred a net loss of $1,082,306 for the
year ended March 31, 1998 and has a working capital deficit as of March 31, 1998
of $918,299.
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 improving the revenues from the CityWalk Studio,
continuing the reduction of expenses throughout the Company and continuing in
its efforts to find suitable locations in which to open additional studios.
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 that such additional financing will be
provided.
[15] 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.
25
<PAGE>
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[15] Impairment of Long-Lived Assets (Continued)
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,
1998, management expects these assets to be fully recoverable.
[16] Financial Instruments
The carrying amount of cash and notes payable approximates fair value.
[17] Subsequent Events
During the period April 1, 1998 to May 29, 1998 PCG provided an additional
$15,000 of cash to assist the Company in funding its day to day operations, to
enable the Company to make the required payments due to the former officers of
the Company and to meet the expenses associated with the closure of the Irvine
Studio. Certain subsidiaries of PCG have purchased, for a total of $20,000 cash,
certain equipment with no book value.
. . . . . . . . . . .
26
<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
27
<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)
28
<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
Current Report on Form 8-K dated April 27, 1998.
(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.
29
<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 8, 1998 By: /s/ Peter C. Watt, President
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
/s/ Peter C. Watt Chairman of the Board, President, June 8, 1998
----------------- Chief Executive Officer, Principal
Peter C. Watt Financial Officer and Secretary
(Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
/s/ Michael C. Roubicek Director June 8, 1998
-----------------------
Michael C. Roubicek
30
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to such information.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> mar-31-1998
<PERIOD-END> mar-31-1998
<CASH> 23,044
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 10,082
<CURRENT-ASSETS> 54,644
<PP&E> 204,148
<DEPRECIATION> 0
<TOTAL-ASSETS> 285,840
<CURRENT-LIABILITIES> 972,943
<BONDS> 0
0
0
<COMMON> 207,882
<OTHER-SE> (942,985)
<TOTAL-LIABILITY-AND-EQUITY> 285,840
<SALES> 0
<TOTAL-REVENUES> 1,187,638
<CGS> 1,728,884
<TOTAL-COSTS> 488,875
<OTHER-EXPENSES> 52,185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 210
<INCOME-PRETAX> (1,082,306)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,082,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,082,306)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
