UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the transition period from to .
Commission File No. 0-21322
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OUT-TAKES, INC.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
No. 95-4363944
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(I.R.S. Employer Identification No.)
3811 Turtle Creek Boulevard, Suite 350, Dallas, Texas 75219
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(Address of principal executive offices)
(214) 528-8200
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(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.
[ ] No [X] Yes
The number of shares outstanding of the issuer's Common Stock outstanding as of
November 12, 1998 was 20,495,726.
-1-
OUT-TAKES, INC.
FORM 10Q - QUARTERLY REPORT FOR
QUARTERLY PERIOD ENDING SEPTEMBER 30, 1998
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1998 and March 31, 1998
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
----
Statements of Operations (Unaudited) for the three and six
months ended September 30, 1998 and 1997. . . . . . . . . . . . . 6
----
Statements of Stockholders' Equity (Unaudited) for the six months
Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . 8
----
Statements of Cash Flows (Unaudited) for the six months ended
September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . 9
----
Notes to Financial Statements (Unaudited) . . . . . . . . . . . . . . 10
----
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . 13
----
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
----
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 15
----
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . 18
----
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 20
----
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
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-2-
PART I - FINANCIAL INFORMATION
-3-
ITEM 1. FINANCIAL STATEMENTS
---------------------
OUT-TAKES, INC.
BALANCE SHEETS
SEPTEMBER 30, 1998 AND MARCH 31, 1998
(Unaudited)
ASSETS
September 30, March 31,
1998 1998
-------------- ----------
Current Assets
Cash and cash equivalents $ 18,896 $ 23,044
Accounts receivable . . . 33,028 -
Inventory . . . . . . . . 6,586 10,082
Prepaid insurance . . . . 1,950 8,949
Other current assets. . . 14,034 12,569
-------------- ----------
Total Current Assets . . . 74,494 54,644
-------------- ----------
Plant and Equipment, Net . 387,613 204,148
-------------- ----------
Other Assets
Deposits and advances . . 63,069 27,048
Organizational costs, net 2,131 -
-------------- ----------
Total Other Assets . . . . 65,200 27,048
-------------- ----------
TOTAL ASSETS . . . . . . . $ 527,307 $ 285,840
- -------------------------- ============== ==========
-4-
See accompanying notes to consolidated financial statements.
OUT-TAKES, INC.
BALANCE SHEETS
SEPTEMBER 30, 1998 AND MARCH 31, 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 30, March 31,
1998 1998
--------------- -------------
Liabilities
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . $ 139,627 $ 31,173
Accrued payroll. . . . . . . . . . . . . . . . . . 10,386 22,047
Accrued interest - related party . . . . . . . . . 90,508 56,452
Accrued interest . . . . . . . . . . . . . . . . . 2,500 -
Accrued expenses . . . . . . . . . . . . . . . . . 66,539 108,819
Royalties payable. . . . . . . . . . . . . . . . . 4,913 -
Provision for studio closure . . . . . . . . . . . - 31,878
Compensation payable - related parties . . . . . . - 1,347
Note payable, current portion. . . . . . . . . . . 80,556 -
Due to related parties . . . . . . . . . . . . . . 927,680 721,227
--------------- -------------
Total Current Liabilities. . . . . . . . . . . . . . 1,322,709 972,943
--------------- -------------
Note payable . . . . . . . . . . . . . . . . . . . . 48,000 48,000
Note payable - Los Alamos Energy . . . . . . . . . . 26,016 -
Deposits . . . . . . . . . . . . . . . . . . . . . . 4,600 -
--------------- -------------
Total Liabilities. . . . . . . . . . . . . . . . . . 1,401,325 1,020,943
- ---------------------------------------------------- --------------- -------------
Stockholders' Equity (Deficit)
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
Preferred stock, par value $0.01 per share,
5,000,000 shares authorized; none issued . . . . . - -
Capital in excess of par value . . . . . . . . . . . 9,913,230 9,905,430
Accumulated deficit. . . . . . . . . . . . . . . . . (10,886,724) (10,740,009)
--------------- -------------
(765,612) (626,697)
Less: Treasury Stock, at cost . . . . . . . . . . . (108,406) (108,406)
- ---------------------------------------------------- --------------- -------------
Total Stockholders' Equity (Deficit) . . . . . . . . (874,018) (735,103)
- ---------------------------------------------------- --------------- -------------
Total Liabilities and Stockholders' Equity (Deficit) $ 527,307 $ 285,840
- ---------------------------------------------------- =============== =============
-5-
See accompanying notes to consolidated financial statements.
OUT-TAKES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
September 30,
--------------
1998 1997
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Revenues. . . . . . . . . . . . . . . . . . $ 239,985 $ 342,616
------------ ------------
Cost of Revenues
Compensation and related benefits. . . . . 58,305 140,465
Depreciation and amortization. . . . . . . 9,585 107,542
Rent . . . . . . . . . . . . . . . . . . . 31,118 61,220
Lease operating expense. . . . . . . . . . 50,091 -
Other cost of revenues . . . . . . . . . . 65,118 106,362
------------ ------------
Total Costs of Revenues . . . . . . . . . . 214,217 415,589
------------ ------------
Gross Income (Loss) . . . . . . . . . . . . 25,768 (72,973)
------------ ------------
General and Administrative Expenses
Compensation and related benefits. . . . . 28,724 40,231
Professional fees. . . . . . . . . . . . . 56,771 24,053
Management fee - related party . . . . . . 5,600 -
Rent of offices. . . . . . . . . . . . . . 10,506 8,400
Depreciation and amortization. . . . . . . 6,525 22,668
Other expenses . . . . . . . . . . . . . . 26,802 25,530
------------ ------------
Total Expenses. . . . . . . . . . . . . . . 134,928 120,882
------------ ------------
Loss from Operations. . . . . . . . . . . . (109,160) (193,855)
------------ ------------
Other Income (Expense)
Interest income. . . . . . . . . . . . . . 18 67
Interest expense . . . . . . . . . . . . . (1,250) (326)
Interest expense - related parties . . . . (12,695) (12,037)
Gain on sale of assets . . . . . . . . . . (1,061) -
------------ ------------
Total Other Income (Expense). . . . . . . . (14,988) (12,296)
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Net Loss. . . . . . . . . . . . . . . . . . $ (124,148) $ (206,151)
============ ============
Net Loss Per Share. . . . . . . . . . . . . $ (.01) $ (.01)
============ ============
Weighted Average Common Shares Outstanding. 20,495,726 20,495,726
- ------------------------------------------- ============ ============
-6-
See accompanying notes to consolidated financial statements.
OUT-TAKES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended
September 30,
-------------
1998 1997
------------ ------------
Revenues . . . . . . . . . . . . . . $ 530,919 $ 675,765
------------ ------------
Cost of Revenues
Compensation and related benefits . 178,977 280,741
Depreciation and amortization . . . 46,581 213,477
Rent. . . . . . . . . . . . . . . . 62,033 125,946
Lease operating expense . . . . . . 47,905 -
Other cost of revenues. . . . . . . 124,773 200,853
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Total Costs of Revenues. . . . . . . 460,269 821,017
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Gross Income (Loss). . . . . . . . . 70,650 (145,252)
------------ ------------
General and Administrative Expenses
Compensation and related benefits . 33,453 75,903
Professional fees . . . . . . . . . 109,598 56,206
Management fee - related party. . . 7,800 -
Rent of offices . . . . . . . . . . 27,875 17,100
Depreciation and amortization . . . 23,555 44,962
Other expenses. . . . . . . . . . . 44,226 55,815
------------ ------------
Total Expenses . . . . . . . . . . . 246,507 249,986
------------ ------------
Loss from Operations . . . . . . . . (175,857) (395,238)
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Other Income (Expense)
Interest income . . . . . . . . . . 45 156
Interest expense. . . . . . . . . . (2,883) (326)
Interest expense - related parties. (34,059) (20,879)
Gain on sale of assets. . . . . . . 18,939 -
Taxes . . . . . . . . . . . . . . . (800) -
------------ ------------
Total Other Income (Expense) . . . . (18,758) (21,049)
------------ ------------
Net Loss . . . . . . . . . . . . . . $ (194,615) $ (416,287)
============ ============
Net Loss Per Share . . . . . . . . . $ (.01) $ (.02)
============ ============
Weighted Average Common Shares
Outstanding . . . . . . . . . . . . 20,495,726 20,495,726
- ------------------------------------ ============ ============
-7-
See accompanying notes to consolidated financial statements.
OUT-TAKES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock
------------
Capital in
Number of Excess of Accumulated Treasury
Shares Amount Par Value Deficit Stock Total
---------- -------- ----------- ------------- ---------- ----------
Balance,
March 31, 1998 . . . . . 20,788,122 $207,882 $ 9,905,430 $(10,740,009) $(108,406) $(735,103)
---------- -------- ----------- ------------- ---------- ----------
Management fee -
related party. . . . . . - - 7,800 - - 7,800
---------- -------- ----------- ------------- ---------- ----------
Net loss for the six
months ended
September 30, 1998 . . . - - - (194,615) - (194,615)
Elimination of subsidiary
retained earnings. . . . - - - 47,900 - 47,900
---------- -------- ----------- ------------- ---------- ----------
Balance,
September 30, 1998 . . . 20,788,122 $207,882 $ 9,913,230 $(10,886,724) $(108,406) $(874,018)
- ------------------------- ========== ======== =========== ============= ========== ==========
-8-
See accompanying notes to consolidated financial statements.
OUT-TAKES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months
Ended September 30,
-------------------
1998 1997
---------- --------
Cash Flows from Operating Activities
Net loss. . . . . . . . . . . . . . . . . . . . . . $ (194,615) $(416,287)
Adjustments to reconcile net loss to net cash . . .
used by operating activities: . . . . . . . . . .
Depreciation and amortization . . . . . . . . . 91,159 258,439
Gain on sale of assets. . . . . . . . . . . . . (18,939) -
Management fee. . . . . . . . . . . . . . . . . 7,800 -
(Increase) decrease in assets: . . . . . . . . .
Prepaid royalties . . . . . . . . . . . . . . - (2,079)
Accounts receivable . . . . . . . . . . . . . (12,717) -
Deposits. . . . . . . . . . . . . . . . . . . (375) 11,330
Inventory . . . . . . . . . . . . . . . . . . 3,496 8,953
Prepaid insurance . . . . . . . . . . . . . . 7,516 2,274
Other current assets. . . . . . . . . . . . . (615) (11,917)
Increase (decrease)in liabilities:. . . . . . .
Accounts payable. . . . . . . . . . . . . . . 82,102 (43,795)
Accrued payroll . . . . . . . . . . . . . . . (11,661) (15,441)
Accrued expenses. . . . . . . . . . . . . . . (90,499) 4,781
Provision for studio closure. . . . . . . . . (31,878) -
Accrued interest - related parties. . . . . . 34,056 18,184
Accrued interest. . . . . . . . . . . . . . . 2,500 -
Royalties payable . . . . . . . . . . . . . . 4,913 -
Loan payable - related parties. . . . . . . . - (62,303)
Due to related party. . . . . . . . . . . . . 39,527 23,956
---------------- ----------
Net Cash Used by Operating Activities (88,230) (223,905)
---------------- ----------
Cash Flows from Investing Activities
Proceeds from sale of property. . . . . . . . . . . 25,225 -
Acquisition of equipment and leasehold improvements (3,177) (23,393)
---------------- ----------
Net Cash Provided (Used) by Investing Activities. . . 22,048 (23,393)
---------------- ----------
Cash Flows from Financing Activities
Capital contributions. . . . . . . . . . . . . . . 46,921 -
Distributions paid . . . . . . . . . . . . . . . . (9,887) -
Due to related party . . . . . . . . . . . . . . . - 215,000
Proceeds from note payable . . . . . . . . . . . . 25,000 -
---------------- ----------
Net Cash Flows From Financing Activities. . . . . . . 62,034 215,000
---------------- ----------
Net Decrease in Cash and Cash Equivalents . . . . . . (4,148) (32,928)
Cash and Cash Equivalents at beginning of period. . . 23,044 70,908
---------------- ----------
Cash and Cash Equivalents at end of period. . . . . . $ 18,896 $ 38,610
- ----------------------------------------------------- ================ ==========
-9-
See accompanying notes to consolidated financial statements.
OUT-TAKES, INC
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
Basis of Presentation
- -----------------------
The accompanying interim consolidated notes to financial statements are
unaudited and have been prepared in accordance with the requirements of
Regulation S-X and Form 10-QSB 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-month periods ended September 30, 1998 and 1997 have been made.
The results of operations for any interim period are not necessarily indicative
of the results for the full year. These notes to 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, 1998.
Comparative Statements
- -----------------------
The balance sheet at March 31, 1998, and the statements of operations
and cash flows for the three-month period ended September 30, 1997 have not been
restated to reflect the acquisition of the Company's wholly owned subsidiary,
Los Alamos Energy, LLC on August 31, 1998. As such, the presentations at
September 30, 1998 and March 31, 1998 are not comparative.
Plant and Equipment and Depreciation
- ----------------------------------------
The Company's plant and equipment is shown net of accumulated depreciation of
$2,045,090 as of September 30, 1998, and $2,007,893 as of March 31, 1998.
Nature of Operations and Principals of Consolidation
- ----------------------------------------------------------
On August 31, 1998, Out-Takes, Inc. entered into a Share Purchase Agreement to
acquire all of the issued and outstanding equity interests of Los Alamos Energy,
LLC, a California limited liability company ("LAE"). The purchase price of
$4,000,000 was paid with a promissory note to LAE with an annual interest rate
of 10%. The Note payments of principal and interest are to be made monthly
until maturity, which is five years form the date of the agreement. This
acquisition has been accounted for as an exchange between companies under common
control; accordingly, the investment has been recorded at historical cost in a
manner similar to a pooling of interest, and the face value of the note given
has been adjusted down to the net equity value of LAE at the date of the
exchange.
As discussed above, the consolidated financial statements at September 30, 1998
include the accounts of Out-Takes, Inc. and its wholly-owned subsidiary, LAE
(collectively, the "Company"). Significant intercompany items and transactions
have been eliminated in the consolidation.
Use of Estimates in the Preparation of Financial Statements
- -------------------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Earnings Per Share (SFAS 128)
- ---------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share", which was adopted by the Company for the year ended December 31, 1997.
SFAS 128 replaces the presentation of primary earnings per share with a
presentation of basic earnings per share based upon the weighted average number
of common shares outstanding for the relevant period. It also requires dual
presentation of basic and diluted earnings per share for companies with complex
capital structures. Under SFAS 128, the computation of diluted EPS shall not
assume conversion or exercise of securities that would have an antidilutive
effect on earnings per share.
-10-
Interim Period Financial Statements
- --------------------------------------
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments which are of a normal recurring nature, necessary to
present fairly the financial position as of March 31, 1998 and 1997, and the
results of operations and cash flows for the six months ended March 31, 1998 and
1997, respectively. Interim financial results are not necessarily indicative of
operating results for the entire year.
New Accounting Pronouncements
- -------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 (SFAS 130), Reporting Comprehensive Income. This statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 will
be adopted by the Company for the year ended December 31, 1998. Prior period
financial statements provided for comparative purposes will be reclassified, as
required. Upon adoption, the Company does not expect SFAS 130 to have a
material effect upon the Company's financial condition or results of operations.
In June 1997, the FASB issued Statements of Financial Accounting Standards No.
131 (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. The statement requires the Company to report income/loss, revenue,
expense and assets by business segment including information regarding the
revenues derived from specific products and services and about the countries in
which the Company is operating. The Statement also requires that the Company
report descriptive information about the way that operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the Company's general-purpose financial statements, and changes in
the measurement of segment amounts from period to period. SFAS 131 has been
adopted by the Company for the year ended December 31, 1998. This statement has
no effect on financial statements traditionally presented by the Company, but
increases required disclosures.
NOTE 2 - 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.
The note holder has threatened to commence legal action, however management has
advised the note holder that no amount is due at the present time as the Company
has not generated positive cash flow. Counsel has advised the Company that no
litigation has commenced in respect of such note, and counsel is unable to
assess a possible outcome, should litigation be commenced.
NOTE 3 - GOING CONCERN
--------------
The Company commenced commercial operations on May 24, 1993 and as of August 10,
1998 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, 1998 was $88,230. The Company incurred a net loss of
$194,615 for the six-month period ended September 30, 1998 and has a working
capital deficit as of September 30, 1998 of $1,248,215.
-11-
The accompanying notes to 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 or to raise funds through debt and/or equity
financing. The Company's recurring operating losses and net working capital
deficiency raises substantial doubt about the entity's ability to continue as a
going concern. Management's plans include improving the revenues from the
CityWalk Studio and continuing the reduction of expenses and expanding the
activities of Los Alamos Energy to include direct service of consumer
electricity. There can be no assurance that management will be successful in
these endeavors, and if not, the Company will be required to seek additional
capitalization from investors, which may or may not be successful.
If the Company is not able to obtain sufficient capital from operations and/or
from additional investment, 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. The Board of Directors has,
accordingly, commenced exploration of alternative courses of action, to address
this contingency.
NOTE 4 - 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 were paid over the period through April 17, 1998.
The outstanding liability as of March 31, 1998 of $1,347 is presented on the
balance sheet as "Compensation Payable Related Parties". The liability was paid
off by September 30, 1998.
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 $927,680 ($721,227 as of March 31, 1998)
includes $773,845 which was advanced by Photo Corporation Group Pty Ltd., the
Company's largest shareholder ("PCG") and $153,835 advanced from Los Alamos
Energy. The funds advanced to the Company have been used predominantly 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 owed to PCG 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, 1998 was $34,059. As of
September 30, 1998, interest of $90,508 was accrued. On September 1,
1998, the Company reached an agreement with PCG whereby PCG would receive shares
of the Company's Series A Redeemable Preferred Stock in satisfaction of certain
amounts owed it by the Company. The redemption value of the shares is $177,000.
As of December 1998, the shares had not yet been created or issued to PCG.
The weighted average interest rate on short term borrowings as of September 30,
1998 was approximately 10%.
NOTE 5 - CAPITAL STOCK TRANSACTIONS - ESCROW SHARES
-----------------------------------------------
In March 1992, 1,900,000 shares were issued to the Company's founders
("Founders") and deferred compensation of $364,800 was recorded for the
1,900,000 shares. Included in the 1,900,000 shares were 1,150,000 shares issued
to the Founders for services in connection with the incorporation of the
Company. Accordingly, $220,800 was amortized as compensation expense in 1992.
The remaining 750,000 shares of the Company's Common Stock were placed into
escrow for the benefit of the Founders. As the Company's pre-tax earnings did
not equal or exceed the required threshold level, in May of 1998 the Company
requested that the shares be returned to the Company to be placed in Treasury.
The notes to financial statements reflect the reversal of the deferred
compensation attributable to these shares, however the share data will be
adjusted as of the date the shares are returned.
NOTE 6 - SUBSEQUENT EVENTS
------------------
Effective October 26, 1998, the Company leased substantially all of its
remaining photographic assets, including leasehold interests, to an unrelated
party. The Company will receive monthly rent equal to 7% of the gross revenues
derived from the operation of the assets. [See: Management's Discussion and
Analysis.]
-12-
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., a Delaware corporation (the "Company")
and notes thereto included elsewhere in this Form 10-QSB.
Overview
- --------
The Company currently operates a photographic portrait studio, which opened on
May 24, 1993 at the MCA/Universal CityWalkSM project in Los Angeles, California
(the "CityWalk Studio"). The Company opened a second studio on December 9, 1995
at The Entertainment Center at Irvine Spectrum located in Irvine, Orange County,
California (the "Irvine Studio"). The Irvine Studio closed on April 22, 1998.
On August 31, 1998, in an effort to diversify its income-producing operations
and take advantage of what management perceives to be a potentially more
lucrative niche (the independent power production market) occassioned by the
deregulation of the electric energy utility industry in California, the Company
acquired all of the issued and outstanding equity interests in Los Alamos
Energy, LLC ("LAE") in exchange for a promissory note. LAE is engaged in the
collection and distribution of waste natural gas in the State of California, and
the conversion of such natural gas into electricity which is then sold to retail
providers of consumer electricity such as Pacific Gas & Electric. To further
reduce the Company's exposure to the lack of profitability of its photographic
business, on October 26, 1998, the Company entered into an agreement with
Colorvision International, Inc. a Florida corporation ("CVI") to lease to CVI
all of its photographic business assets. CVI is a privately-owned corporation
based in Orlando, Florida which maintains approximately sixty (60) domestic and
thirty-seven (37) foreign photographic business locations and, in the opinion of
management, is better off to take advantage of building LAE's electricity
production business. Under the terms of the lease, the Company will receive
monthly rental payments equal to 7% of the gross revenues generated from the
photographic assets. Periods presented prior to September 30, 1998 have not
been restated to include the Company's wholly-owned subsidiary, LAE. As such,
results of operations do not reflect the consolidated activities of both
companies at September 30, 1997, and for the quarter and six months then ended,
and are not comparative to September 30, 1998. This information will be
restated in subsequent quarterly and annual reports. The following table
summarizes the Company's results for the six month periods ended September 30,
1998 and 1997.
For the Six Months Ended
September 30,
-------------
1998 1997
---------- ----------
Gross sales revenue:
Photographic Studio. . . . . . . . . . . $ 447,665 $ 675,765
---------- ----------
Energy distribution. . . . . . . . . . . 83,254 -
---------- ----------
Gross profit (loss):
Photographic Studio. . . . . . . . . . . 65,301 (145,252)
---------- ----------
Energy distribution. . . . . . . . . . . 5,349 -
---------- ----------
Net loss for the period . . . . . . . . . . $(124,147) $(416,287)
---------- ----------
Net loss per share. . . . . . . . . . . . . $ (.01) $ (.02)
---------- ----------
Closing bid price per share of common stock
- -------------------------------------------
As noted in the table presented above, the Company continues to operate its
photographic business at a net loss. The Irvine Studio incurred net losses of
$1,058,283 from the date of opening in December 1995 until closure in April
1998. Management believes that the closure of the Irvine Studio had a positive
impact on the Company's operating results as no further losses will be incurred
by the Irvine Studio. The Company's short term objectives are to (1) use the
asset rental agreement entered into with CVI to permit the Company to benefit
from certain economic and other operating efficiencies which management believes
CVI is able to bring to bear, and (2) develop the independent power production
business engaged in by LAE, its wholly-owned subsidiary, in order to compete
effectively in the niche created by the deregulation of the sale of electric
power in the State of California. Notwithstanding, net losses are expected to
continue unless and until the revenue stream from the CityWalk Studio and the
operations of LAE can increase substantially.
-13-
To assist the Company in funding its day to day operations, Photo Corporation
Group Pty Ltd ("PCG"), the Company's largest shareholder, provided the Company
with $35,000 of cash during the period April 1, 1998 to August 10, 1998. In
addition, effective December 1, 1996, PCG agreed not to charge management fees
for services provided by it or its related parties pursuant to the Personnel
Consulting Agreement with the Company dated June 28, 1995, for a period of two
years. The Company has recorded a capital contribution of $7,800 for management
fees for the six months ended September 30, 1998 based upon management's belief
that this represents the reasonable cost for services performed by PCG personnel
in the six-month period ended September 30, 1998.
As reflected in the Company's Form 8-K filed in September 1998 following the
acquisition of LAE, the Acquisition Agreement provides that, in the event the
Equity Holders shall desire to do so, they may convert their indebtedness to
common stock of the Company representing in the aggregate ninety percent (90%)
of the issued and outstanding shares of such common stock as of the date of such
conversion. The Acquisition Agreement provides that it is a condition of the
conversion that the Company effect a reverse stock split of one (1) share for
every one hundred (100) shares issued and outstanding as of such date. LAE
contemplates that a significant number of persons currently holding promissory
notes and/or working interests in its electricity production (collectively,
"Interest Holders") will exercise their rights to convert such interests into
the equity of LAE, and subsequently to join in the conversion of the Notes into
common stock of the Company. Presently, management of LAE anticipates that,
prior to the conversion of the Notes and after giving effect to the contemplated
reverse stock split, the Company will issue approximately three million
(3,000,000) additional shares of common stock, and that subsequent to completing
the conversion, the Equity Holders and Interest Holders will own, in the
aggregate, approximately two million eight hundred eighty thousand (2,880,000)
shares of the Company's common stock, representing ninety percent (90%) of the
total amount of common stock estimated to be issued and outstanding as of the
date such conversion rights are exercised.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations
- -----------------------
Six Months Ended September 30, 1998 Compared to Six Months Ended September 30,
1997. As discussed previously, the Company acquired LAE on August 31, 1998.
Results of Operations for the six months ended September 30, 1998 include the
consolidated activities of both companies.
The following table shows Revenues, Cost of Revenues and Gross Income (Loss)
during the three months ended September 30, 1998 and 1997 by segment.
For the Three Months Ended September 30, 1998
- ----------------------------------------------------
Energy Distribution Photographic Studios
--------------------- ---------------------
Revenues. . . . . . . . . . . . . . $ 38,238 $ 201,747
--------------------- ---------------------
Cost of Revenues
Compensation and related benefits. - 58,305
Depreciation and amortization. . . - 9,585
Rent . . . . . . . . . . . . . . . - 31,118
Lease operating expenses . . . . . 50,091 -
Other cost of revenues . . . . . . - 65,118
--------------------- ---------------------
Total Cost of Revenues. . . . . . . 50,091 164,126
--------------------- ---------------------
Gross Income (Loss) . . . . . . . . $ (11,853) $ 37,621
- ----------------------------------- ===================== =====================
For the Three Months Ended September 30, 1997
- ----------------------------------------------------
City Walk Studio Irvine Studio
---------------- -------------
Revenues $ 266,726 $ 75,890
---------------- -------------
Cost of Revenues
Compensation and related
Benefits 86,554 53,911
Depreciation and amortization 42,475 65,067
Rent 35,764 25,456
Other cost of revenues 67,973 38,389
---------------- --------------
Total Cost of Revenues 232,766 182,823
---------------- --------------
Gross Income (Loss) $ 33,960 $ (106,933)
================ ==============
In the fiscal quarter ended September 30, 1998, the Company generated $239,985
in revenues, compared to revenues of $342,616 during the same period last year,
a net decrease of $102,631. Revenues attributed to photographic studios
declined $140,869 from the same period last year, primarily due to the closure
of the Irvine Studio. To take advantage of certain economic and other operating
efficiencies available to operators of multiple photographic studios, management
arranged for the lease of all of the Company's photographic assets to CVI, in
consideration of a fixed monthly rental equal to seven percent (7%) of the gross
revenues generated by CVI from the use of such assets.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
- -----------------------
Despite management's substantial efforts to increase the revenues from the
Irvine Studio, management concluded in the fourth quarter of the year ended
March 31, 1998 that the only way to stop the negative cash flow effect generated
by the Irvine Studio was to close the Studio. Following lengthy negotiations
with the Studio's landlord, the landlord agreed to allow the Company to
terminate its lease at the Irvine Entertainment Center and the Company closed
the Irvine Studio on April 22, 1998. The costs associated with the closure of
the Studio totaled $164,745. This included approximately a $135,000 non-cash
loss on disposal of leasehold improvements and write off of equipment identified
as only being of use for spare parts for the CityWalk Studio and approximately
$14,000 in operating losses for the period from April 1, 1998 to the date of
closure.
Cost of revenues for the photographic business decreased to $214,217 overall
during the fiscal quarter ended September 30, 1998, compared to $415,589 for the
same period last year. $164,126 of the $201,372 decrease is due to the closure
of the Irvine Studio.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
- -----------------------
Cost of revenues for the CityWalk Studio remained constant for the two periods,
decreasing by $68,640 or 29% in the fiscal quarter ended September 30, 1998 to
$164,126 as compared to $232,766 in the same period last year. Cost of
revenues, as a percentage of sales, remained relatively constant between the two
quarters at 81% of sales compared to 87% for the same period last year.
Compensation and related benefits for the CityWalk Studio were $28,249 lower
than in the fiscal quarter ended September 30, 1997, a decrease of 33%.
Depreciation for the CityWalk Studio was lower than for the fiscal quarter ended
September 30, 1997, by $32,890, as a consequence of many of the Studio's assets
being fully depreciated by September 1998. Rent for the CityWalk Studio was
lower than for the fiscal quarter ended September 30, 1997 by $4,646. Other
costs of revenues for the CityWalk Studio decreased by $2,855, or 4%. The
CityWalk Studio earned gross income of $37,621 during the fiscal quarter ended
September 30, 1998 compared to gross income of $33,960 for the same period last
year, an increase of $3,661 or 10%.
Overall, the Company generated gross income of $25,768 during the fiscal quarter
ended September 30, 1998 compared to a gross loss of $72,973 for the same period
last year. The increase in gross income of $47,205 comprises the additional
gross income of $3,661 generated by the CityWalk Studio and the fact that the
Irvine Studio was closed and did not incur a gross loss similar to the $106,933
gross loss incurred for the three months ended September 30, 1997. The increase
is further attributed to revenues generated by the Company's newly acquired
subsidiary, LAE.
General and administrative expenses increased by $14,046 to $134,928 in the
quarter ended September 30, 1998 from $120,882 in the same period last year, an
increase of 12%. Compensation and related benefits decreased by $11,507 to
$28,724 as compared to $40,231 for the same period last year, a decrease of 29%.
This decrease is due primarily to reduced compensation expense for the
photographic studio of $26,507 coupled with increased compensation of $15,000
incurred by LAE. Professional fees increased in the fiscal quarter ended
September 30, 1998 to $56,771 from $24,053 in the same period last year, an
increase of $32,718 or 136%. General and administrative expenses for the fiscal
quarter ended September 30, 1998 include $5,600 of management fees. A capital
contribution of $5,600 has been recorded to reflect the reasonable cost of doing
business, for services performed by PCG personnel. There is no corresponding
expense in the quarter ended September 30, 1997. Rent increased by $2,106 to
$10,506 in the quarter ended September 30, 1998 from $8,400 for the quarter
ended September 30, 1997. Depreciation and amortization costs were lower by
$16,143 as many of the fixed assets were fully depreciated by September 1998.
Other general and administrative expenses increased by $1,272 to $26,802 for the
fiscal quarter ended September 30, 1998, compared to $25,530 for the same period
last year.
-17-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Results of Operations (Continued)
- -----------------------
The loss from operations of the Company for the six month period ended September
30, 1998 was $175,857, compared with a loss from operations for the six month
period ended September 30, 1997, of $395,238, a decrease in the loss from
operations of $219,381.
Interest charges totaling $34,059 were incurred on the loan from PCG and on the
Compensation payable to former officers of the Company, compared with $20,879 of
charges during the fiscal quarter ended September 30, 1997.
The net loss of the Company for the fiscal quarter ended September 30, 1998 was
$194,615 as compared to a net loss of $416,287, incurred in the same period last
year, a decrease in the net loss of $221,672.
As of September 30, 1998, the Company has net operating loss carry forwards of
approximately $10.8 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, 1998, the Company had a working capital deficit of $1,248,215
as compared to a working capital deficit on March 31, 1998 of $918,299. The
increase of $329,916 is attributable to the net loss from operations incurred in
the six month period ended September 30, 1998.
Net cash used in operating activities was $88,230 for the six months ended
September 30, 1998, compared to $223,905 for the same period last year. This
decrease is primarily attributable to the reduction in the loss from operations
for the three months ended September 30, 1998 compared with the six months ended
September 30, 1997.
The Company currently has no specific commitments for capital expenditure.
The continuation of the Company as a going concern is dependent upon its ability
to generate net cash from operations or to raise funds through debt and/or
equity financing. The Company's recurring operating losses and net working
capital deficiency raises substantial doubt about the entity's ability to
continue as a going concern. Management's plans include improving the revenues
from the CityWalk Studio and continuing the reduction of expenses. There can be
no assurance that management will be successful in these endeavors, and if not,
the Company will be required to seek additional capitalization from investors,
which may or may not be successful. If the Company is not able to obtain
sufficient capital from operations and/or from additional investment, 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. The Board of Directors has, accordingly, commenced exploration of
alternative courses of action, to address this contingency.
In the three months ended September 30, 1998, $25,000 of funds were loaned to
the LAE by outside parties for working capital requirements.
Despite its working capital deficiency, the Company has maintained generally
good relations with its vendors.
-18-
PART II - OTHER INFORMATION
-19-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------
(a) Exhibits - None.
(b) Reports on Form 8-K.
During the period ended September 30, 1998, the Company filed a report on Form
8-K covering the acquisition of LAE. Subsequent thereto, the Company filed a
report on Form 8-K covering the asset lease by CVI (filed September 14, 1998).
-20-
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OUT-TAKES, INC
- ---------------
(Registrant)
/s/ James C. Harvey
- ----------------------
James C. Harvey
President and Principal Financial Officer
-21-