- ------------------------------------------------------------------------------
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 December 31, 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 February 13,
1998 was 20,495,726.
- ------------------------------------------------------------------------------
OUT-TAKES INC.
FORM 10Q - QUARTERLY REPORT FOR
QUARTERLY PERIOD ENDING DECEMBER 31, 1997
TABLE OF CONTENTS
Page
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS 1
Balance Sheets
As of December 31, 1997 and March 31, 1997 [Unaudited] 1
Statements of Operations [Unaudited] for the three and nine month
periods ended December 31, 1997 and 1996 2
Statements of Stockholders' Equity [Unaudited] for the nine months
ended December 31, 1997 3
Statements of Cash Flows [Unaudited] for the nine months ended
December 31, 1997 and 1996 4
Notes to Financial Statements [Unaudited] 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 8
Overview 8
Results of Operations 9
Liquidity and Capital Resources 13
PART II OTHER INFORMATION 14
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE 15
PART 1
ITEM 1. FINANCIAL STATEMENTS
OUT-TAKES INC.
BALANCE SHEETS As of As of
[Unaudited] December 31, March 31,
Assets 1997 1997
Current Assets:
Cash and Cash Equivalents $ 73,135 $ 70,908
Inventory 11,194 22,879
Due from Related Party - 7,343
Prepaid Insurance 11,171 10,796
Prepaid Taxes 3,676 7,829
Prepaid Royalties 5,757 5,720
Other Current Assets 3,604 2,412
---------- -----------
Total Current Assets $ 108,537 $ 127,887
Plant and Equipment - Net $ 481,970 $ 845,198
Other Non-Current Assets:
Deposits 27,048 38,378
---------- -----------
Total Non-Current Assets $ 509,018 $ 883,576
---------- -----------
Total Assets $ 617,555 $ 1,011,463
========== ===========
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Accounts Payable $ 60,939 $ 113,803
Accrued Payroll 24,933 42,868
Accrued Expenses 125,614 104,331
Accrued Interest - Related Party 40,213 7,871
Compensation payable - Related Parties 29,037 115,375
Due to Related Party 618,425 260,500
---------- -----------
Total Current Liabilities $ 899,161 $ 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 $762,129 loss
on impairment of assets) (10,300,062) ( 9,657,703)
Totals ($ 77,200) $ 565,159
Less: Treasury Stock - At Cost ( 108,406) ( 108,406)
Deferred Compensation ( 144,000) ( 144,000)
---------- -----------
Total Stockholders' Equity (Deficit) ($ 329,606) $ 312,753
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 617,555 $ 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 Nine Months Ended
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
--------- ---------- ---------- -----------
Revenues $ 306,588 $ 520,666 $ 982,353 $ 1,646,496
--------- ---------- ---------- -----------
Cost of Revenues:
Compensation and Related Benefits 138,763 191,321 419,504 569,351
Depreciation and Amortization 105,936 80,777 319,413 240,972
Rent 56,397 77,466 182,343 229,396
Other Cost of Revenues 106,652 156,021 307,505 446,535
--------- ---------- ---------- -----------
Total Cost of Revenues 407,748 505,585 1,228,765 1,486,254
--------- ---------- ---------- -----------
Gross (Loss) / Income ( 101,160) 15,081 ( 246,412) 160,242
---------- ---------- ---------- -----------
General and Administrative Expenses:
Compensation and Related Benefits 26,758 61,782 102,661 302,366
Professional Fees 26,568 19,362 82,774 60,644
Management Fee - Related Party - 35,000 - 131,000
Rent of Offices 7,950 9,847 25,050 30,958
Profit on Disposal of Plant and Equipment - (658) - (658)
Depreciation and Amortization 24,080 22,863 69,042 68,335
Other General and Administrative Expenses 24,931 28,512 80,746 71,727
--------- ---------- ---------- -----------
Total Expenses 110,287 176,708 360,273 664,372
--------- ---------- ---------- -----------
Loss from Operations ( 211,447) ( 161,627) ( 606,685) ( 504,130)
--------- ---------- ---------- -----------
Other Income (Expense):
Interest Income 162 - 318 141
Interest Expense - ( 2,823) ( 326) ( 4,103)
Interest Expense - Related Parties (14,787) ( 8,080) ( 35,666) ( 41,588)
--------- ---------- ---------- -----------
Total Other (Expense) Income ( 14,625) ( 10,903) ( 35,674) ( 45,550)
--------- ---------- ---------- -----------
Net Loss ($226,072) ($ 172,530) ($ 642,359) ($ 549,680)
========= ========== ========== ===========
Net Loss Per Common Share
(Basic and Diluted) ($ 0.01) ($ 0.01) ($ 0.03) ($ 0.04)
========= ========== ========== ===========
Weighted Average Common
Shares Outstanding 20,495,726 15,160,072 20,495,726 13,003,940
========== ========== ========== ==========
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 nine months
ended December 31, 1997 - - - ( 642,359) - - ( 642,359)
---------- --------- ---------- ---------- --------- ---------- ---------
Balance - December 31, 1997 20,788,122 $ 207,882 $10,014,980 ($10,300,062) ($ 108,406) ($ 144,000) ($329,606)
========== ========= =========== ============ ========== ========== =========
The Accompanying Notes are an Integral Part of These Financial Statements.
3
OUT-TAKES INC.
STATEMENT OF CASH FLOWS
[UNAUDITED]
Nine Months Ended
December 31, December 31,
Operating Activities: 1997 1996
---------- -----------
Net Loss ($ 642,359) ($ 549,680)
--------- -----------
Adjustments to Reconcile Net Loss to Net Cash
Used for Operating Activities:
Depreciation and Amortization $ 388,455 $ 309,307
Profit on Disposal of Plant and Equipment - (658)
Changes in Assets and Liabilities:
(Increase) Decrease in Assets:
Prepaid Royalties (37) 2,387
Deposits 11,330 (2,065)
Inventory 11,685 (442)
Prepaid Insurance (375) -
Prepaid Taxes 4,153 -
Other Current Assets (1,192) (12,893)
Increase (Decrease) in Liabilities:
Accounts Payable (52,864) 45,576
Accrued Payroll (17,935) (202,171)
Accrued Expenses 21,283 (14,866)
Notes Payable - (15,036)
Accrued Interest - Related Parties 32,342 (25,904)
Accrued Management Fee - Related Party - 131,000
Compensation payable - Related Parties (92,300) 171,412
Due to Related Party 30,268 -
---------- -----------
Total Adjustments $ 334,813 $ 385,647
---------- -----------
Net Cash used in Operating Activities ($ 307,546) ($ 164,033)
---------- -----------
Investing Activities:
Acquisition of Equipment and Leasehold Improvements ($ 25,227) ($ 35,462)
Proceeds on Disposal of Plant and Equipment - 1,000
---------- -----------
Net Cash used in Investing Activities ($ 25,227) ($ 34,462)
---------- -----------
Financing Activities:
Proceeds from Issuance of Stock $ - $ 130,000
Due to Related Party 335,000 50,000
---------- -----------
Net Cash provided by Financing Activities $ 335,000 $ 180,000
---------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents $ 2,227 ($ 18,495)
Cash and Cash Equivalents - Beginning of Periods 70,908 61,672
---------- -----------
Cash and Cash Equivalents - End of Periods $ 73,135 $ 43,177
========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES
On May 7, 1996 the majority stockholder, Photo Corporation Group Pty Limited,
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
4
$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.
5
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 nine month periods ended December 31, 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 $2,165,155 as of December 31, 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, nor approximately 4,220,000 warrants
outstanding, 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] New Authoritative Pronouncements
The FASB issued SFAS No. 128, "Earnings Per Share" and SFAS No. 129. "Disclosure
of Information about Capital Structure" in February 1997. SFAS No. 128
simplifies the earnings per share ("EPS") calculations required by Accounting
Principles Board ("APB") Opinion No. 15, and related interpretations, by
replacing the primary presentation of primary EPS with a presentation of basic
EPS. SFAS No. 128 requires dual presentation of basic and diluted EPS by
entities with complex capital structures. Basic EPS includes no dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in the earnings of an
entity, similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997. The Company has adopted SFAS No. 128 in these financial statements. Basic
EPS will be based on average common shares outstanding and diluted EPS will
include the effects of potential common stock such as options and warrants, if
dilutive. Adoption of SFAS No.
128 is not material to the Company.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
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.
6
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS
[Unaudited, continued]
[4] New Authoritative Pronouncements (continued)
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.
[5] Going Concern
The Company commenced commercial operations on May 24, 1993 and as of February
13, 1998 the Company has been unsuccessful in generating net cash from
operations. The net cash used by the Company in operating activities in the nine
month period ended December 31, 1997 was $307,546. The Company incurred a net
loss of $642,359 for the nine month period ended December 31, 1997 and has a
working capital deficit as of December 31, 1997 of $790,624.
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.
As reported in the Company's Form 10Q for the quarter ended September 30, 1997,
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. However, management has been unable to satisfactorily
conclude negotiations with the landlord of the Irvine Studio and so the Studio
remains open at this time. The landlord has not agreed to a buy out of the
remaining lease obligation. The landlord objects to the closure of the Studio
unless a replacement tenant is located and approved by the landlord. Management
will continue its efforts to find a suitable replacement tenant for the Studio
but unless and until such a new tenant can be located, the studio will continue
to remain open until the conclusion of the lease period in November 1998.
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.
The Company has been dependent upon PCG to fund its continuing operations. 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.
[6] 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 December 31, 1997 of $29,037 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.
7
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS
[Unaudited, continued]
[6] Related Party Transactions (continued)
Peterson Shelton and PCG. Interest expense is incurred at the prime rate of
interest (approximately 8.5%) and in the nine months ended December 31, 1997,
was $3,324.
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 $618,425 ($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 nine
months ended December 31, 1997, was $32,342.
As of December 31, 1997, interest of $40,213 was accrued.
The weighted average interest rate on short term borrowings as of December 31,
1997 was approximately 10%.
[7] Subsequent Events
Loan - During the period January 1, 1998 to February 13, 1998, PCG provided an
additional $85,000 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.
8
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 nine month periods ended
December 31, 1997 and December 31, 1996.
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
--------- ---------- ---------- ----------
Gross Sales Revenue $306,588 $ 520,666 $ 982,353 $1,646,496
Gross (Loss) / Income (101,160) 15,081 ( 246,412) 160,242
Adjusted Net Loss for the Period (226,072) (172,530) ( 642,359) ( 498,430)1
Net Loss Per Share ($ 0.01) ($ 0.01) ($ 0.03) ($ 0.04)
Closing Bid Price per Share
of Common Stock $ 0.04 $ 0.065 $ 0.04 $ 0.065
As indicated in the following notes, the figures have been adjusted in order
to facilitate comparison:
1 The net loss for the nine month period ended December 31, 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
$782,680 ($310,827 excluding non-cash depreciation of $471,853). 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.
However, the landlord has not agreed to a buy out of the remaining lease
obligation. The landlord objects to the closure of the Studio unless a
replacement tenant is located and approved by the landlord. As management has
been unable to satisfactorily conclude negotiations with the landlord of the
Irvine Studio, the Studio remains open at this time. Management will continue
its efforts to find a suitable replacement tenant for the Studio but unless and
until such a new tenant can be located, the studio will remain open until the
lease expires in November 1998.
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 $67,000 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 $85,000 of cash
during the period January 1, 1998 to February 13, 1998. 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.
9
Results of Operations
Three Months Ended December 31, 1997 Compared to Three Months Ended December 31,
1996.
The following table shows Revenues, Cost of Revenues and Gross Income/(Loss)
during the three months ended December 31, 1997 and 1996, by studio.
Three months ended December 31, 1997 Three months ended December 31, 1996
City Walk Irvine Traveling City Walk Irvine Traveling
Studio Studio Studio Studio Studio Studio
-------- ------- --------- --------- -------- ----------
Revenues $216,418 $89,773 $ 397 $365,814 $149,807 $ 5,045
-------- ------- ------ -------- -------- --------
Cost of Revenues:
Compensation and
Related Benefits 90,741 46,251 1,771 112,034 78,350 937
Depreciation and
Amortization 42,688 63,096 152 36,002 44,723 52
Rent 31,360 23,037 2,000 48,736 25,130 3,600
Other Cost of
Revenues 64,478 41,371 803 90,879 61,535 3,607
------- ------- ------ -------- ------- --------
Total Cost of
Revenues 229,267 173,755 4,726 287,651 209,738 8,196
------- ------- ------ -------- ------- --------
Gross Income/(Loss) ($12,849) ($83,982) ($4,329) $ 78,163 ($59,931) ($ 3,151)
======== ======== ======= ======== ======== ========
In the fiscal quarter ended December 31, 1997, the Company generated $306,588 in
revenues, compared to revenues of $520,666 during the same period last year, a
net decrease of $214,078.
CityWalk Studio revenues decreased by $149,396 to $216,418, a decrease of 41%.
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 period to
December 31, 1997, has resulted in a decline in the level of foot traffic
through the Studio. Management continues to explore promotional opportunities to
return the Studio's sales to previous levels.
Irvine Studio revenues decreased by $60,034 to $89,773, a decrease of 40%. 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
Studio. However, as the landlord has not agreed to a buy out of the remaining
lease obligation and objects to the closure of the Studio unless a replacement
tenant is located, the Studio remains open at this time. Management will
continue its efforts to find a suitable replacement tenant for the Studio but
unless and until such a new tenant can be located, the studio will remain open
until the lease expires in November 1998.
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 as disclosed
above as "Traveling Studio". As a result, the trial has been discontinued.
10
Cost of revenues decreased to $407,748 overall during the fiscal quarter ended
December 31, 1997, compared to $505,585 for the same period last year.
Cost of revenues for the CityWalk Studio decreased by $58,384, or 20% in the
fiscal quarter ended December 31, 1997 to $229,267 as compared to $287,651 in
the same period last year, as a consequence of the reduction in sales.
Compensation and related benefits for the CityWalk Studio were $21,293 lower
than in the fiscal quarter ended December 31, 1996, in line with the decrease in
revenues. Cost of revenues, as a percentage of sales, increased between the two
quarters from 79% of sales in the quarter ended December 31, 1996 to 106% of
sales in the quarter ended December 31, 1997. Compensation and related benefits
includes $11,313 of costs associated with engaging a consultant to work with the
CityWalk staff in an effort in increase the Studio's revenues. Depreciation for
the CityWalk Studio was higher than the fiscal quarter ended December 31, 1996,
by $6,686. Rent for the CityWalk Studio was lower than the fiscal quarter ended
December 31, 1996 by $17,376 as a result of the Company paying rent based on a
percentage of revenues, such revenues being lower than in the fiscal quarter
ended December 31, 1996 by $149,396. Other cost of revenues for the CityWalk
Studio decreased by $26,401 or 29%. 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 incurred a gross loss of $12,849 during the fiscal quarter ended December
31, 1997 compared to gross income of $78,163 for the same period last year, a
decrease of $91,012.
Cost of revenues for the Irvine Studio decreased by $35,983, or 17% in the
fiscal quarter ended December 31, 1997 to $173,755 as compared to $209,738 in
the same period last year. Compensation and related benefits for the Irvine
studio were $32,099 lower than in the fiscal quarter ended December 31, 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 December 31, 1996, by $18,373 as a result of the purchase and subsequent
depreciation of additional equipment. Rent for the Irvine Studio was lower than
the fiscal quarter ended December 31, 1996 by $2,093. Other cost of revenues for
the Irvine Studio decreased by $20,164 or 33%, in line with the reduction in
revenue. The Irvine Studio incurred a gross loss of $83,982 during the fiscal
quarter ended December 31, 1997 compared to a gross loss of $59,931 for the same
period last year, an increase in gross loss of $24,051.
Cost of revenues for the Traveling Studio were $4,726. This includes
Compensation and related benefits of $1,771, depreciation of $152, rent for the
use of the event photography system of $2,000 and other cost of revenues of
$803. As the Traveling Studio is used for one-off events, it is not appropriate
to compare the costs incurred during the quarter ended December 31, 1997 to the
costs incurred at unrelated events and locations during the quarter ended
December 31, 1996.
Overall, the Company incurred a gross loss of $101,160 during the fiscal quarter
ended December 31, 1997 compared to gross income of $15,081 for the same period
last year. The reduction in gross income of $116,241 comprises the increase in
gross loss of $91,012 at the CityWalk Studio, the $24,051 additional gross loss
incurred by the Irvine Studio and the additional $1,178 gross loss incurred by
the Traveling Studio.
General and administrative expenses for the three months ended December 31, 1996
includes management fees of $35,000 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 this item, general and
administrative expenses decreased by $31,421 to $110,287 in the quarter ended
December 31, 1997 from $141,708 in the same period last year, a decrease of 22%.
Compensation and related benefits decreased by $35,024 to $26,758 as compared to
$61,782 for the same period last year. This decrease was the result of the
cessation of employment of the Operations Manager and a reduction in the number
of administrative and technical support staff compared with the quarter ended
December 31, 1996. Professional fees increased in the fiscal quarter ended
December 31, 1997 to $26,568 from $19,362 in the same period last year. There is
no management fee expense in the quarter ended December 31, 1997 similar to the
$35,000 expense incurred in the three months ended December 31, 1996, as PCG
suspended management fees to it or its related parties for two years from
December 1, 1996. Rent decreased by $1,897 to $7,950 in the quarter ended
December 31, 1997 from $9,847 for the quarter ended December 31, 1996. A profit
on disposal of plant and equipment of $658 was recorded during the quarter ended
December 31, 1996. There was no similar profit / loss on disposal of plant and
equipment in the quarter to December 31, 1997. Depreciation and amortization
costs increased by $1,217. Other general and administrative expenses decreased
by $3,581 to $24,931 for the fiscal quarter ended December 31, 1997, compared to
$28,512 for the same period last year.
11
The loss from operations of the Company for the three month period ended
December 31, 1997 was $211,447, compared with a loss from operations for the
three month period ended December 31, 1996, of $161,627, an increase in the loss
from operations of $49,820.
Interest charges totaling $14,787 were incurred on the loan from PCG and on the
Compensation payable to former officers of the Company, compared with $8,080 of
charges during the fiscal quarter ended December 31, 1996.
The net loss of the Company for the fiscal quarter ended December 31, 1997 was
$226,072 as compared to a net loss of $172,530, incurred in the same period last
year, an increase in the net loss of $53,542.
Nine Months Ended December 31, 1997 Compared to Nine Months Ended December 31,
1996.
The following table shows Revenues, Cost of Revenues and Gross Income/(Loss)
during the nine months ended December 31, 1997 and 1996, by studio.
Nine months ended December 31, 1997 Nine months ended December 31, 1996
City Walk Irvine Traveling City Walk Irvine Traveling
Studio Studio Studio Studio Studio Studio
Revenues $730,260 $251,696 $ 397 $1,210,027 $431,424 $ 5,045
-------- -------- ------ ---------- -------- --------
Cost of Revenues:
Compensation and
Related Benefits 262,275 155,458 1,771 349,169 219,245 937
Depreciation and
Amortization 127,851 191,410 152 107,785 133,135 52
Rent 102,282 78,061 2,000 154,874 70,922 3,600
Other Cost of
Revenues 189,632 117,070 803 261,672 181,256 3,607
------- -------- ------ --------- ------- --------
Total Cost of
Revenues 682,040 541,999 4,726 873,500 604,558 8,196
------- -------- ------ --------- ------- --------
Gross Income/(Loss) $48,220 ($290,303) ($4,329) $ 336,527 ($173,134) ($ 3,151)
======= ========= ======= ========= ========= ========
In the nine months ended December 31, 1997, the Company generated $982,353 in
revenues, compared to revenues of $1,646,496 during the same period last year, a
net decrease of $664,143.
CityWalk Studio revenues decreased by $479,767 to $730,260, a decrease of 40%.
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 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 promotional opportunities to return the
Studio's sales to previous levels.
12
Irvine Studio revenues decreased by $179,728 to $251,696, a decrease of 42%.
Included in the nine months ended December 31, 1996 was 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
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. However, as the landlord has not
agreed to a buy out of the remaining lease obligation and objects to the closure
of the Studio unless a replacement tenant is located, the Studio remains open at
this time. Management will continue its efforts to find a suitable replacement
tenant for the Studio but unless and until such a new tenant can be located, the
studio will remain open until the lease expires in November 1998.
Cost of revenues decreased to $1,228,765 overall during the nine months ended
December 31, 1997, compared to $1,486,254 for the same period last year.
Cost of revenues for the CityWalk Studio decreased by $191,460, or 22% in the
nine months ended December 31, 1997 to $682,040 as compared to $873,500 in the
same period last year, as a consequence of the reduction in sales. Compensation
and related benefits for the CityWalk Studio were $86,894 lower than in the nine
months ended December 31, 1996, in line with the decrease in revenues. Cost of
revenues, as a percentage of sales, increased between the two periods from 72%
of sales in the nine months ended December 31, 1996 to 93% of sales in the nine
months ended December 31, 1997. Depreciation for the CityWalk Studio was higher
than the nine months ended December 31, 1996, by $20,066. Rent for the CityWalk
Studio was lower than the nine months ended December 31, 1996 by $52,592 as a
result of the Company paying rent based on a percentage of revenues, such
revenues being lower than in the nine months ended December 31, 1996 by
$479,767. Other cost of revenues for the CityWalk Studio decreased by $72,040 or
28%. 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
$48,220 during the nine months ended December 31, 1997 compared to gross income
of $336,527 for the same period last year, a decrease of $288,307, or 86%.
Cost of revenues for the Irvine Studio decreased by $62,559, or 10% in the nine
months ended December 31, 1997 to $541,999 as compared to $604,558 in the same
period last year. The decrease in cost of revenues of 10% was less than the
decline in revenue of 42% as a consequence of additional funds being expended
during the nine months ended December 31,1997 in an effort to improve revenues
from the Studio. Compensation and related benefits for the Irvine studio were
$63,787 lower than in the nine months ended December 31, 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 nine months ended
December 31, 1996, by $58,275. Rent for the Irvine Studio was higher than the
nine months ended December 31, 1996 by $7,139, 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 $64,186 or 35%, in
line with the reduction in revenue. The Irvine Studio incurred a gross loss of
$290,303 during the nine months ended December 31, 1997 compared to a gross loss
of $173,134 for the same period last year, an increase in gross loss of
$117,169.
Overall, the Company incurred a gross loss of $246,412 during the nine months
ended December 31, 1997 compared to gross income of $160,242 for the same period
last year. The reduction in gross income of $406,654 comprises the reduction in
gross income of $288,307 incurred by the CityWalk Studio, the $117,169
additional gross loss incurred by the Irvine Studio and an increase in the gross
loss incurred by the Traveling Studio of $1,178.
General and administrative expenses for the nine months ended December 31, 1996
includes termination payments to former officers of the Company totaling $51,250
and management fees payable to PCA of $131,000. After adjusting for these items,
general and administrative expenses decreased by $121,849 to $360,273 in the
nine months ended December 31, 1997 from $482,122 in the same period last year,
a decrease of 25%. Compensation and related benefits decreased by $148,455 to
$102,661 as compared to $251,116 (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
13
Vice President Development as of 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 nine months ended December 31, 1997 compared with the nine months
ended December 31, 1996. Professional fees increased in the nine months ended
December 31, 1997 to $82,774 from $60,644 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 nine months ended
December 31, 1996 include $131,000 of management fees payable to PCA, there is
no corresponding expense in the nine months ended December 31, 1997 as PCG
suspended management fees to it or its related parties for two years from
December 1, 1996. Rent decreased by $5,908 to $25,050 in the nine months ended
December 31, 1997 from $30,958 for the nine months ended December 31, 1996. A
profit on disposal of plant and equipment of $658 was recorded during the nine
month period ended December 31, 1996. There was no similar profit / loss on
disposal of plant and equipment in the nine month period ended December 31,
1997. Depreciation and amortization costs were higher by $707. Other general and
administrative expenses increased by $9,019 to $80,746 for the nine months ended
December 31, 1997, compared to $71,727 for the same period last year.
The loss from operations of the Company for the nine month period ended December
31, 1997 was $606,685, compared with a loss from operations for the nine month
period ended December 31, 1996, of $504,130, an increase in the loss from
operations of $102,555.
Interest charges totaling $35,666 were incurred on the loan from PCG and on the
Compensation payable to former officers of the Company, compared with $41,588 of
charges during the nine months ended December 31, 1996.
The net loss of the Company for the nine months ended December 31, 1997 was
$642,359 as compared to a net loss of $549,680, incurred in the same period last
year, an increase in the net loss of $92,679.
As of December 31, 1997, the Company has net operating loss carry forwards of
approximately $10.2 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 December 31, 1997, the Company had a working capital deficit of $790,624 as
compared to a working capital deficit on March 31, 1997 of $516,861. The
increase of $273,763 is attributable to the net loss from operations incurred in
the nine month period ended December 31, 1997.
Net cash used in operating activities was $307,546 for the nine months ended
December 31, 1997, compared to $164,033 for the same period last year. This
increase is primarily attributable to the net loss for the nine months ended
December 31, 1997, together with payments made to former officers of the Company
of $92,300 (disclosed in the Statement of Cash Flows as "Compensation payable -
Related Parties"). In addition, $52,864 of cash was used to reduce amounts due
to creditors and suppliers.
If management is able to find a suitable tenant to take over the space currently
leased in the Irvine Entertainment Center and close the Irvine Studio, it is not
anticipated that the closure of the Studio will adversely affect the Company's
cashflow requirements. Since the Irvine Studio opened in December 1995, it has
incurred a gross loss of $782,680 ($310,827 excluding $471,853 of non-cash
depreciation) and consequently it has not contributed to meeting the Company's
overhead costs. The closure of the Irvine Studio would be 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 nine months ended December 31, 1997, $335,000 of funds were loaned to the
Company by PCG for working capital requirements. A further $85,000 has been
loaned to the Company in the period January 1, 1998 to February 13, 1998.
14
The Company is dependent upon PCG to fund its continuing operations. 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.
Funds advanced by PCG have assisted the Company in meeting its obligations for
continuing fixed expenses, materials procurement and 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.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
15
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: February 13, 1998. By: /s/ Peter C. Watt
-----------------------------------
Peter C. Watt
President and Principal Financial
Officer
16