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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1997
OR
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number: 0-21322
OUT-TAKES, INC.
(Exact name of registrant as stated 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)
(310) 788 9440
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the issuer's Common Stock as of November 10,
1997 was 20,495,726.
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OUT-TAKES INC.
FORM 10Q - QUARTERLY REPORT FOR
QUARTERLY PERIOD ENDING SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS 1
Balance Sheets
As of September 30, 1997 and March 31, 1997 [Unaudited] 1
Statements of Operations [Unaudited] for the three and six
month periods ended September 30, 1997 and 1996 2
Statements of Stockholders' Equity [Unaudited] for the six months
ended September 30, 1997 3
Statements of Cash Flows [Unaudited] for the six months ended
September 30, 1997 and 1996 4
Notes to Financial Statements [Unaudited] 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 7
Overview 7
Results of Operations 8
Liquidity and Capital Resources 12
PART II OTHER INFORMATION 13
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURE 14
PART 1
ITEM 1. FINANCIAL STATEMENTS
OUT-TAKES INC.
BALANCE SHEETS As of As of
[Unaudited] September 30, March 31,
Assets 1997 1997
Current Assets:
Cash and Cash Equivalents $ 38,610 $ 70,908
Inventory 13,926 22,879
Due from Related Party - 7,343
Prepaid Insurance 8,522 10,796
Prepaid Taxes 11,461 7,829
Prepaid Royalties 7,799 5,720
Other Current Assets 10,697 2,412
---------- -----------
Total Current Assets $ 91,015 $ 127,887
Plant and Equipment - Net $ 610,152 $ 845,198
Other Non-Current Assets:
Deposits 27,048 38,378
--------- -----------
Total Non-Current Assets $ 637,200 $ 883,576
---------- -----------
Total Assets $ 728,215 $ 1,011,463
========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts Payable $ 70,008 $ 113,803
Accrued Payroll 27,427 42,868
Accrued Expenses 109,112 104,331
Accrued Interest - Related Party 26,055 7,871
Compensation payable - Related Parties 59,034 115,375
Due to Related Party 492,113 260,500
---------- -----------
Total Current Liabilities $ 783,749 $ 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 $ - $ -
Stockholders' Equity (Deficit):
Preferred Stock, par value $0.01 per share, 5,000,000
shares authorized; none issued - -
Common Stock, par value $0.01 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 10,014,980 10,014,980
Accumulated Deficit (Includes $6,990,000 in accumulated
losses during the development stage and a $762,129
loss on impairment of assets) (10,073,990) ( 9,657,703)
Totals $ 148,872 $ 565,159
Less: Treasury Stock - At Cost ( 108,406) ( 108,406)
Deferred Compensation ( 144,000) ( 144,000)
---------- -----------
Total Stockholders' Equity (Deficit) ($ 103,534) $ 312,753
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 728,215 $ 1,011,463
The Accompanying Notes are an Integral Part of These Financial Statements.
1
OUT-TAKES INC.
STATEMENTS OF OPERATIONS
[Unaudited]
Three Months Ended Six Months Ended
September 30,September 30, September 30,September 30,
1997 1996 1997 1996
---------- ---------- ---------- -----------
Revenues $ 342,616 $ 657,643 $ 675,765 $ 1,125,830
--------- ---------- ---------- -----------
Cost of Revenues:
Compensation and Related Benefits 140,465 208,922 280,741 378,030
Depreciation and Amortization 107,542 80,618 213,477 160,195
Rent 61,220 85,125 125,946 151,930
Other Cost of Revenues 106,362 156,242 200,853 290,514
--------- ---------- ---------- -----------
Total Cost of Revenues 415,589 530,907 821,017 980,669
--------- ---------- ---------- -----------
Gross (Loss) / Income ( 72,973) 126,736 ( 145,252) 145,161
--------- ---------- ----------- -----------
General and Administrative Expenses:
Compensation and Related Benefits 40,231 137,983 75,903 240,584
Professional Fees 24,053 25,248 56,206 41,282
Management Fee - Related Party - 65,000 - 96,000
Rent of Offices 8,400 10,671 17,100 21,111
Depreciation and Amortization 22,668 22,736 44,962 45,472
Other General and Administrative Expenses 25,530 20,940 55,815 43,215
-------- ---------- ---------- --------
Total Expenses 120,882 282,578 249,986 487,664
--------- ---------- ---------- -----------
Loss from Operations ( 193,855) ( 155,842) 395,238) ( 342,503)
--------- ---------- ---------- -----------
Other Income (Expense):
Interest Income 67 - 156 141
Interest Expense ( 326) - ( 326) -
Interest Expense - Related Parties ( 12,037) ( 16,740) ( 20,879) ( 34,788)
--------- ---------- ---------- -----------
Total Other (Expense) Income ( 12,296) ( 16,740) ( 21,049) ( 34,647)
--------- ---------- ---------- -----------
Net Loss ($206,151) ($ 172,582) ($ 416,287) ($ 377,150)
========= ========= ========= ==========
Net Loss Per Share ($ 0.01) ($ 0.01) ($ 0.02) ($ 0.03)
========= ========= ========== ===========
Weighted Average Common
Shares Outstanding 20,495,726 12,175,726 20,495,726 11,919,986
========== ========== ========== ==========
The Accompanying Notes are an Integral Part of These Financial Statements.
2
OUT-TAKES INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
[UNAUDITED]
Common Stock Capital in
Number of Excess of Accumulated Treasury Deferred Total
Shares Amount Par Value Deficit Stock Compensation
Balance - March 31, 1997 20,788,122 $ 207,882 $10,014,980 ($9,657,703) ($108,406) ($144,000) $ 312,753
Net Loss for the six months
ended September 30, 1997 - - - ( 416,287) - - ( 416,287)
--------- --------- ---------- --------- --------- --------- ---------
Balance - September 30, 1997 20,788,122 $ 207,882 $10,014,980 ($10,073,990) ($108,406) ($144,000) ($103,534)
========== ========= =========== ============= ========= ========= =========
The Accompanying Notes are an Integral Part of These Financial Statements.
3
OUT-TAKES INC.
STATEMENT OF CASH FLOWS
[UNAUDITED]
Six Months Ended
September 30, September 30,
Operating Activities: 1997 1996
----------- ----------
Net Loss ($ 416,287) ($ 377,150)
--------- -----------
Adjustments to Reconcile Net Loss to Net Cash
Used for Operating Activities:
Depreciation and Amortization $ 258,439 $ 205,667
Changes in Assets and Liabilities:
(Increase) Decrease in Assets:
Prepaid Royalties (2,079) 2,263
Deposits 11,330 (665)
Inventory 8,953 6,499
Prepaid Insurance 2,274 -
Prepaid Taxes (3,632) -
Other Current Assets (8,285) (15,504)
Increase (Decrease) in Liabilities:
Accounts Payable (43,795) 33,102
Accrued Payroll (15,441) (186,698)
Accrued Expenses 4,781 6,173
Notes Payable - (15,036)
Accrued Interest - Related Parties 18,184 (24,646)
Accrued Management Fee - Related Party - 96,000
Loan payable - Related Parties (62,303) 226,502
Due to Related Party 23,956 -
---------- -----------
Total Adjustments $ 192,382 $ 333,657
---------- -----------
Net Cash used in Operating Activities ($ 223,905) ($ 43,493)
---------- -----------
Investing Activities:
Acquisition of Equipment and Leasehold Improvements ($ 23,393) ($ 28,219)
----------- ------------
Net Cash used in Investing Activities ($ 23,393) ($ 28,219)
---------- -----------
Financing Activities:
Proceeds from Issuance of Stock $ - $ 130,000
Due to Related Party 215,000 -
---------- -----------
Net Cash provided by Financing Activities $ 215,000 $ 130,000
---------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents ($ 32,298) $ 58,288
Cash and Cash Equivalents - Beginning of Periods 70,908 61,672
---------- -----------
Cash and Cash Equivalents - End of Periods $ 38,610 $ 119,960
========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES
On May 7, 1996 the majority stockholder, Photo Corporation Group Pty Ltd,
converted $130,000 of its then $649,500 loan payable into 650,000 shares of the
Company's Common Stock.
The Accompanying Notes are an Integral Part of These Financial Statements.
4
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS
[Unaudited]
[1] Summary of Significant Accounting Policies
Basis of Presentation - The accompanying interim financial statements are
unaudited and have been prepared in accordance with the requirements of
Regulation S-X and Form 10-Q and, therefore, do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of the management of the Company,
all adjustments consisting only of normal recurring adjustments necessary for a
fair presentation of financial position, results of operations and cash flows
for the three and six month periods ended September 30, 1997 and 1996 have been
made. The results of operations for any interim period are not necessarily
indicative of the results for the full year. These financial statements should
be read in conjunction with the financial statements and notes thereto contained
in the annual report on Form 10-K for the year ended March 31, 1997.
Plant and Equipment and Depreciation - The Company's plant and equipment is
shown net of accumulated depreciation of $2,035,139 as of September 30, 1997,
and $1,776,700 as of March 31, 1997.
[2] Net Loss Per Share
Net loss per share was calculated based on the weighted average number of shares
outstanding during the periods. Neither the 292,396 shares held in Treasury nor
the 750,000 shares held in escrow pursuant to an escrow agreement between the
founding stockholders and the Company have been included in the weighted average
shares outstanding during the year as their inclusion would be anti-dilutive.
The effect of outstanding stock warrants and options was not included in the
calculations as their effect would also be anti-dilutive.
[3] Notes Payable
A note payable of $48,000 is due to a former financial consultant to the Company
pursuant to a settlement agreement dated August 17, 1994. The note is
non-interest bearing and payment is subject to availability of future cash flows
from the Company's operations.
[4] Going Concern
The Company commenced commercial operations on May 24, 1993 and as of November
10, 1997 the Company has been unsuccessful in generating net cash from
operations. The net cash used by the Company in operating activities in the six
month period ended September 30, 1997 was $223,905. The Company incurred a net
loss of $416,287 for the six month period ended September 30, 1997 and has a
working capital deficit as of September 30, 1997 of $692,734.
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.
Despite management's substantial efforts to increase the Irvine Studio's
revenues, management has now concluded, after carefully considering a number of
alternatives, that it would be in the best interests of the Company, to close
the Irvine Studio. See Note 6 - Subsequent Events.
Management is also continuing the reduction of expenses throughout the Company
and is seeking to obtain additional equity or debt financing. There can be no
assurance that management will be successful in these endeavors and if it is
not, the Company will be dependent on the willingness and ability of Photo
Corporation Group Pty Ltd ("PCG"), to continue to provide additional financing.
No assurance can be given that such additional financing will be provided.
5
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS
[Unaudited, continued]
[5] Related Party Transactions
Robert Shelton, Vice President Development and a Director of the Company, and
Leah Peterson Shelton, Vice President Operations, ceased employment with the
Company and 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 are being paid over the period through April 17,
1998. The outstanding liability as of September 30, 1997 of $59,034 is presented
on the balance sheet as "Compensation payable - Related Parties". 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 PCG. Interest expense is incurred at the prime rate of
interest (approximately 8.5%) and in the six months ended September 30, 1997,
was $2,695.
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.
The amount Due to Related Party of $492,113 ($260,500 as of March 31, 1997)
represents funds advanced by PCG. The funds have been used to fund the day to
day operations 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 charged at a rate of 10% per annum and for the six
months ended September 30, 1997, was $18,184. As of September 30, 1997, interest
of $26,056 was accrued.
The weighted average interest rate on short term borrowings as of September 30,
1997 was approximately 10%.
[6] Subsequent Events
Loan - During the period October 1, 1997 to November 10, 1997, PCG provided an
additional $50,000 cash loan to assist the Company in funding its day to day
operations and to enable the Company to make the required payments due to former
officers of the Company.
Closure of the Irvine Studio - Subsequent to September 30, 1997, management
determined that despite it's substantial efforts to increase the Irvine studio's
revenues, it would be in the best interests of the Company to contain the
negative cashflow incurred by the studio, by closing the Irvine studio.
Management is currently negotiating the terms of the closure with the studio's
landlord and anticipates closing the store on or about December 28, 1997.
Management estimates that costs of between $50,000 and $150,000 will be incurred
during the closure for expenses such as payment to the landlord for early
termination of the lease, termination payments to staff and the cost of
dismantling and removing the rig and other equipment, fixtures and improvements.
In addition, leasehold improvements, with an estimated book value of $110,000,
will be written off when the store closes.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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-Q.
Overview
The Company currently operates two photographic portrait studios, the first of
which was opened on May 24, 1993 at the MCA/Universal CityWalkSM project in Los
Angeles, California ("the CityWalk Studio"). The second studio opened on
December 9, 1995 at The Entertainment Center at Irvine Spectrum located in
Irvine, Orange County, California ("the Irvine Studio"). The following table
summarizes the Company's results for the three and six month periods ended
September 30, 1997 and September 30, 1996.
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
--------- ---------- ---------- ----------
Gross Sales Revenue $342,616 $ 657,643 $ 675,765 $1,125,830
Gross (Loss) / Income ( 72,973) 126,736 ( 145,252) 145,161
Adjusted Net Loss for the Period (206,151) ( 121,332)1 ( 416,287) ( 325,900)1
Net Loss Per Share ($ 0.01) ($ 0.01) ($ 0.02) ($ 0.03)
Closing Bid Price per Share
of Common Stock $ 0.06 $ 0.10 $ 0.06 $ 0.10
As indicated in the following notes, the figures have been adjusted in order
to facilitate comparison:
1 The net loss for the three and six month periods ended September 30, 1996
excludes termination payments totaling $51,250 paid to former officers of the
Company.
As noted in the table presented above, the Company continues to operate at a net
loss. This is predominantly due to the poor performance of the Irvine Studio.
Having regard to the length of time that the Irvine Studio has now been open,
the poor performance of the Studio, including its negative cashflow,
notwithstanding the substantial efforts that have been made to improve the
performance of the Studio, management is of the opinion that the continued
operation of the Irvine Studio is not in the best interest of the Company. Since
the Irvine Studio opened in December 1995, it has incurred a gross loss of
$698,698 ($289,941 excluding non-cash depreciation of $408,757). Having regard
to the unsuccessful efforts that have been made to increase the Studio's
revenues, management has determined that the only way to reduce the negative
cashflow effect resulting from the studio's operation, is to close the studio.
Management estimates the closure will occur on or about December 28, 1997. The
landlord of the Irvine Studio, has been informed of this decision and management
is currently negotiating the terms of the closure with the landlord. The cost to
close the studio, including payment to the landlord for early termination of the
lease, termination payments to staff, the cost of dismantling and removing the
rig and other equipment, fixtures and improvements is estimated to be between
$50,000 and $150,000. In addition, leasehold improvements, with an estimated
book value of $110,000 will be written off when the store closes.
The Company will continue to implement overhead reductions to improve the
Company's operating margins and reduce the cash outflow from operations. Net
losses (including depreciation expenses for the CityWalk studio and office
premises of approximately $65,000 per quarter) are expected to continue unless
and until the Company opens additional studios or other operations, or the
revenue stream from the CityWalk studio, increases substantially.
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, Photo
Corporation Group Pty Limited ("PCG") provided the Company with $265,000 of cash
during the period July 1, 1997 to November 10, 1997. In addition, effective
December 1, 1996, PCG suspended management fees to it or its related parties
pursuant to the Personnel Consulting Agreement with the Company dated June 28,
1995, for a period of two years.
7
Results of Operations
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996.
The following table shows Revenues, Cost of Revenues and Gross Income/(Loss)
during the three months ended September 30, 1997 and 1996, by studio.
Three months ended Septembe Three months ended September 30, 1996
City Walk Irvine City Walk Irvine,
Studio Studio Studio Studio
Revenues $ 266,726 $ 75,890 $ 510,916 $146,727
--------- ---------- --------- --------
Cost of Revenues:
Compensation and
Related Benefits 86,554 53,911 128,049 80,873
Depreciation and
Amortization 42,475 65,067 35,948 44,670
Rent 35,764 25,456 62,189 22,936
Other Cost of
Revenues 67,973 38,389 92,964 63,278
--------- ---------- --------- --------
Total Cost of
Revenues 232,766 182,823 319,150 211,757
--------- ---------- --------- --------
Gross Income/(Loss) $ 33,960 ($ 106,933) $ 191,766 ($65,030)
========= ========== ========= ========
In the fiscal quarter ended September 30, 1997, the Company generated $342,616
in revenues, compared to revenues of $657,643 during the same period last year,
a net decrease of $315,027.
CityWalk Studio revenues decreased by $244,190 to $266,726, a decrease of 48%.
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 spring 1997. This has increased the number of
photographic opportunities available to visitors to the area and has diluted the
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 in the corresponding
quarter this year, 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 quarter ended September 30, 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 the quarter ended September 30, 1997. Management is
exploring promotional opportunities to return the Studio's sales to previous
levels.
Irvine Studio revenues decreased by $70,837 to $75,890, a decrease of 48%. The
quarter ended September 30, 1996 represented the first summer season for the
Studio. The demographics of the area indicate many of the customers to the
Irvine Spectrum Entertainment Center where the Studio is located are local or
repeat customers. While these people utilize the entertainment facilities of the
center on a regular basis, they view photography as a service to be used only
occasionally or infrequently, hence the Studio is not benefiting 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. The
consequence was to dramatically limit parking facilities in and around the
Irvine Spectrum. This has led to a substantial reduction in foot traffic through
the Center. The construction is not due to be completed until the summer of
1998. As already discussed, despite management's substantial efforts to increase
the studio's revenues, management has now determined that the only way to stop
the negative cashflow effect generated by the Irvine studio, is to close the
store. Management is currently negotiating the terms of the closure with the
studio's landlord and anticipates closing the studio on or about December 28,
1997.
8
Cost of revenues decreased to $415,589 overall during the fiscal quarter ended
September 30, 1997, compared to $530,907 for the same period last year.
Cost of revenues for the CityWalk Studio decreased by $86,384, or 27% in the
fiscal quarter ended September 30, 1997 to $232,766 as compared to $319,150 in
the same period last year, as a consequence of the reduction in sales.
Compensation and related benefits for the CityWalk Studio were $32,643 lower
than in the fiscal quarter ended September 30, 1996, in line with the decrease
in revenues. Cost of revenues, as a percentage of sales, increased between the
two quarters from 63% of sales in the quarter ended September 30, 1996 to 87% of
sales in the quarter ended September 30, 1997. Depreciation for the CityWalk
Studio was higher than the fiscal quarter ended September 30, 1996, by $6,527.
Rent for the CityWalk Studio was lower than the fiscal quarter ended September
30, 1996 by $26,425 as a result of the Company paying rent based on a percentage
of revenues, such revenues being lower than in the fiscal quarter ended
September 30, 1996 by $244,190. Other cost of revenues for the CityWalk Studio
decreased by $24,991 or 27%. The percentage decrease in other costs 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 $33,960 during the fiscal quarter ended September 30,
1997 compared to gross income of $191,766 for the same period last year, a
decrease of $157,806, or 82%.
Cost of revenues for the Irvine Studio decreased by $28,934, or 14% in the
fiscal quarter ended September 30, 1997 to $182,823 as compared to $211,757 in
the same period last year. Compensation and related benefits for the Irvine
studio were $26,962 lower than in the fiscal quarter ended September 30, 1996.
Management has reduced, and continues to reduce, staffing levels in the studio
to the extent possible within the constraints of the number of hours the studio
is required to be open, in order to minimize the impact of the reduction in
revenue. Depreciation for the Irvine Studio was higher than the fiscal quarter
ended September 30, 1996, by $20,397 as a result of the purchase and subsequent
depreciation of additional equipment. Rent for the Irvine Studio was higher than
the fiscal quarter ended September 30, 1996 by $2,520, as a result of an
increase in base rent on December 1, 1996 in accordance with the Company's
lease. Effective September 1, 1997 the landlord agreed, in light of the studio's
difficult business circumstances, to reduce the monthly rent payable by $2,195
per month. Other cost of revenues for the Irvine Studio decreased by $24,889 or
39%, in line with the reduction in revenue. The Irvine Studio incurred a gross
loss of $106,933 during the fiscal quarter ended September 30, 1997 compared to
a gross loss of $65,030 for the same period last year, an increase in gross loss
of $41,903.
Overall, the Company incurred a gross loss of $72,973 during the fiscal quarter
ended September 30, 1997 compared to gross income of $126,736 for the same
period last year. The reduction in gross income of $199,709 comprises the
reduction in gross income of $157,806 generated by the CityWalk Studio and the
$41,903 additional gross loss incurred by the Irvine Studio.
General and administrative expenses for the three months ended September 30,
1996 includes termination payments to former officers of the Company totaling
$51,250 and management fees of $65,000 payable to Photo Corporation of Australia
Pty Limited ("PCA"), a subsidiary of PCG, pursuant to the Personnel Consulting
Agreement dated June 28, 1995. After adjusting for these items, general and
administrative expenses decreased by $45,446 to $120,882 in the quarter ended
September 30, 1997 from $166,328 in the same period last year, a decrease of
27%. Compensation and related benefits decreased by $46,502 to $40,231 as
compared to $86,733, (excluding the termination payments to former officers of
the Company totaling $51,250) 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 as of September 1, 1996. Professional fees
decreased in the fiscal quarter ended September 30, 1997 to $24,053 from $25,248
in the same period last year. There is no management fee expense in the quarter
ended September 30, 1997 similar to the $65,000 expense incurred in the three
months ended September 30, 1996, as PCG suspended management fees to it or its
related parties for two years from December 1, 1996. Rent decreased by $2,271 to
$8,400 in the quarter ended September 30, 1997 from $10,671 for the quarter
ended September 30, 1996. Depreciation and amortization costs were lower by $68.
Other general and administrative expenses increased by $4,590 to $25,530 for the
fiscal quarter ended September 30, 1997, compared to $20,940 for the same period
last year.
The loss from operations of the Company for the three month period ended
September 30, 1997 was $193,855, compared with a loss from operations for the
three month period ended September 30, 1996, of $155,842, an increase in the
loss from operations of $38,013.
Interest charges totaling $12,037 were incurred on the loan from PCG and on the
Compensation payable to former officers of the Company, compared with $16,740 of
charges during the fiscal quarter ended September 30, 1996.
The net loss of the Company for the fiscal quarter ended September 30, 1997 was
$206,151 as compared to a net loss of $172,582, incurred in the same period last
year, an increase in the net loss of $33,569.
9
Six Months Ended September 30, 1997 Compared to Six Months Ended September 30,
1996.
The following table shows Revenues, Cost of Revenues and Gross Income/(Loss)
during the six months ended September 30, 1997 and 1996, by studio.
Six months ended September Six months ended September 30, 1996
City Walk Irvine City Walk Irvine,
Studio Studio Studio Studio
Revenues $ 513,842 $ 161,923 $ 844,213 $281,617
--------- ---------- --------- --------
Cost of Revenues:
Compensation and
Related Benefits 171,534 109,207 237,135 140,895
Depreciation and
Amortization 85,163 128,314 71,782 88,413
Rent 70,922 55,024 106,138 45,792
Other Cost of
Revenues 125,154 75,699 170,794 119,720
--------- ---------- --------- --------
Total Cost of
Revenues 452,773 368,244 585,849 394,820
--------- ---------- --------- --------
Gross Income/(Loss) $ 61,069 ($ 206,321) $ 258,364 ($113,203)
========= ========== ========= =========
In the six months ended September 30, 1997, the Company generated $675,765 in
revenues, compared to revenues of $1,125,830 during the same period last year, a
net decrease of $450,065.
CityWalk Studio revenues decreased by $330,371 to $513,842, a decrease of 39%.
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 spring 1997. This has increased the number of
photographic opportunities available to visitors to the area and has diluted the
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, which has 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 in the corresponding period this
year, 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 six months ended September 30, 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 is exploring promotional opportunities to return the
Studio's sales to previous levels.
Irvine Studio revenues decreased by $119,694 to $161,923, a decrease of 43%. The
six months ended September 30, 1996 represented the first spring/summer season
for the Studio. The demographics of the area indicate many of the customers to
the Irvine Spectrum Entertainment Center where the Studio is located are local
or repeat customers. While these people utilize the entertainment facilities of
the center on a regular basis, they view photography as a service to be used
only occasionally or infrequently, hence the Studio is not benefiting 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. The consequence was to dramatically limit parking facilities in and
around the Irvine Spectrum. This has led to a substantial reduction in foot
traffic through the Center. The construction is not due to be completed until
the summer of 1998. As already discussed, despite management's efforts to
increase the studio's revenues, management has now determined that the only way
to stop the negative cashflow effect is to close the store. The terms of the
closure are currently being negotiated with the studio's landlord and management
anticipates closing the studio on or about December 28, 1997.
10
Cost of revenues decreased to $821,017 overall during the six months ended
September 30, 1997, compared to $980,669 for the same period last year.
Cost of revenues for the CityWalk Studio decreased by $133,076, or 23% in the
six months ended September 30, 1997 to $452,773 as compared to $585,849 in the
same period last year, as a consequence of the reduction in sales. Compensation
and related benefits for the CityWalk Studio were $65,601 lower than in the six
months ended September 30, 1996, in line with the decrease in revenues. Cost of
revenues, as a percentage of sales, increased between the two periods from 69%
of sales in the six months ended September 30, 1996 to 88% of sales in the six
months ended September 30, 1997. Depreciation for the CityWalk Studio was higher
than the six months ended September 30, 1996, by $13,381. Rent for the CityWalk
Studio was lower than the six months ended September 30, 1996 by $35,216 as a
result of the Company paying rent based on a percentage of revenues, such
revenues being lower than in the six months ended September 30, 1996 by
$330,371. Other cost of revenues for the CityWalk Studio decreased by $45,640 or
27%. The percentage decrease in other costs 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
$61,069 during the six months ended September 30, 1997 compared to gross income
of $258,364 for the same period last year, a decrease of $197,295, or 76%.
Cost of revenues for the Irvine Studio decreased by $26,576, or 7% in the six
months ended September 30, 1997 to $368,244 as compared to $394,820 in the same
period last year. The decrease in cost of sales of 7% was less than the decline
in revenue of 43% as a consequence of additional funds being expended during the
six months ended September 30,1997 in an effort to improve revenues from the
Studio. Compensation and related benefits for the Irvine studio were $31,688
lower than in the six months ended September 30, 1996. Management has reduced,
and continues to reduce, staffing levels in the studio to the extent possible
within the constraints of the number of hours the studio is required to be open,
in order to minimize the impact of the reduction in revenue. Depreciation for
the Irvine Studio was higher than the six months ended September 30, 1996, by
$39,901. Rent for the Irvine Studio was higher than the six months ended
September 30, 1996 by $9,232, as a result of an increase in base rent on
December 1, 1996 in accordance with the Company's lease. Effective September 1,
1997 the landlord agreed, in light of the studio's difficult business
circumstances, to reduce the monthly rent payable by $2,195 per month. Other
cost of revenues for the Irvine Studio decreased by $44,021 or 37%, in line with
the reduction in revenue. The Irvine Studio incurred a gross loss of $206,321
during the six months ended September 30, 1997 compared to a gross loss of
$113,203 for the same period last year, an increase in gross loss of $93,118.
Overall, the Company incurred a gross loss of $145,252 during the six months
ended September 30, 1997 compared to gross income of $145,161 for the same
period last year. The reduction in gross income of $290,413 comprises the
reduction in gross income of $197,295 incurred by the CityWalk Studio and the
$93,118 additional gross loss incurred by the Irvine Studio.
General and administrative expenses for the six months ended September 30, 1996
includes termination payments to former officers of the Company totaling $51,250
and management fees payable to PCA of $96,000. After adjusting for these items,
general and administrative expenses decreased by $90,428 to $249,986 in the six
months ended September 30, 1997 from $340,414 in the same period last year, a
decrease of 27%. Compensation and related benefits decreased by $113,431 to
$75,903 as compared to $189,334 (excluding termination payments to former
officers of the Company totaling $51,250) 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 as of September 1, 1996.
Professional fees increased in the six months ended September 30, 1997 to
$56,206 from $41,282 in the same period last year. This increase includes
approximately $7,700 of costs incurred in the quarter ended June 30, 1997
associated with engaging a consultant to work with staff at the Irvine Studio in
an effort to expand the Studio's customer base and increase revenues. Although
general and administrative expenses for the six months ended September 30, 1996
include $96,000 of management fees payable to PCA, there is no corresponding
expense in the six months ended September 30, 1997 as PCG suspended management
fees to it or its related parties for two years from December 1, 1996. Rent
decreased by $4,011 to $17,100 in the six months ended September 30, 1997 from
$21,111 for the six months ended September 30, 1996. Depreciation and
amortization costs were lower by $510. Other general and administrative expenses
increased by $12,600 to $55,815 for the six months ended September 30, 1997,
compared to $43,215 for the same period last year.
The loss from operations of the Company for the six month period ended September
30, 1997 was $395,238, compared with a loss from operations for the six month
period ended September 30, 1996, of $342,503, an increase in the loss from
operations of $52,735.
Interest charges totaling $20,879 were incurred on the loan from PCG and on the
Compensation payable to former officers of the Company, compared with $34,788 of
charges during the six months ended September 30, 1996.
11
The net loss of the Company for the six months ended September 30, 1997 was
$416,287 as compared to a net loss of $377,150, incurred in the same period last
year, an increase in the net loss of $39,137.
As of September 30, 1997, the Company has net operating loss carry forwards of
approximately $10 million. The ability to utilize $8.3 million of these losses
to be offset against future taxable income is restricted as a result of the
change in control arising from the acquisition by PCG in June 1995 of in excess
of 50% of the Common Stock of the Company. The losses will expire in March,
2011.
Liquidity and Capital Resources
On September 30, 1997, the Company had a working capital deficit of $692,734 as
compared to a working capital deficit on March 31, 1997 of $516,861. The
increase of $175,873 is attributable to the net loss from operations incurred in
the six month period ended September 30, 1997.
Net cash used in operating activities was $223,905 for the six months ended
September 30, 1997, compared to $43,493 for the same period last year. This
increase is primarily attributable to the net loss for the six months ended
September 30, 1997, together with payments made to former officers of the
Company of $62,303 (disclosed in the Statement of Cash Flows as "Compensation
payable - Related Parties"). In addition, $43,796 of cash was used to reduce
amounts due to creditors and suppliers.
During the closure of the Irvine Studio, management anticipates costs of between
$50,000 and $150,000 will be incurred. These costs may include payment to the
landlord for early termination of the lease, termination payments to staff, and
the cost of dismantling and removing the rig, other equipment, fixtures and
improvements. In addition, leasehold improvements, with an estimated book value
of $110,000 will be written off when the store closes.
Management does not anticipate that the closure of the Irvine Studio will
adversely affect the Company's cashflow requirements. Since the Irvine Studio
opened in December 1995, it has incurred a gross loss of $698,698 ($289,941
excluding $408,757 of non-cash depreciation) and consequently it has not
contributed to meeting the Company's overhead costs. The closure of the Irvine
Studio is expected to partially alleviate the Company's reliance on external
funding, as additional cash will no longer be required to assist with meeting
the costs of operating the Irvine Studio.
The Company currently has no specific commitments for capital expenditures,
however management continues to evaluate opportunities to expand the business.
The development and construction of additional studios in the future may require
significant capital expenditures.
In the six months ended September 30, 1997, $215,000 of funds were loaned to the
Company by PCG for working capital requirements. A further $50,000 has been
loaned to the Company in the period October 1, 1997 to November 10, 1997.
The Company does not anticipate that it will have any problems in the near term,
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, that 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 capital contributions 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.
12
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereon duly authorized.
OUT-TAKES INC.
Dated: November 10, 1997. By:/s/ Peter C. Watt
Peter C. Watt
President and Principal Financial Officer
14