UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] for the fiscal year ended
March 31, 1999
OR
[__] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
for the transition period from ____________to___________
Commission File Number: 0-21322
OUT-TAKES, INC.
(Name of small business issuer in its charter)
Delaware 95-4363944
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3811 Turtle Creek Blvd., Suite 350 75219
Dallas, Texas (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (214) 528-8200
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. ___
The issuer's revenues for the most recent fiscal year were $637,450.
The aggregate market value of the voting stock held by non-affiliates as of
March 31, 1999 and as of March 1, 2000 was $456,429.
The number of shares outstanding of the issuer's Common Stock as of March 31,
1999 and as of March 1, 2000 was 20,788,122.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the
1999 Annual Meeting of Stockholders are incorporated herein by reference into
Part II and Part III.
Transitional Small Business Disclosure Format (Check One): Yes No X
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OUT-TAKES, INC.
FORM 10-K ANNUAL REPORT FOR FISCAL YEAR ENDING MARCH 31, 1999
TABLE OF CONTENTS
Page
PART I 1
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 4
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II 12
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS 12
ITEM 6. SELECTED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION 13
ITEM 8. FINANCIAL STATEMENTS 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ****
PART III ****
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT ****
ITEM 11. EXECUTIVE COMPENSATION ****
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ****
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ****
PART IV ****
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K ****
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Except for historical financial information contained herein, the matters
discussed in this annual report may be considered forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended and subject to
the safe harbor created by the Securities Litigation Reform Act of 1995. Such
statements include declarations regarding the intent, belief or current
expectations of the Company and its management. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties; actual results
could differ materially from those indicated by such forward-looking statements.
Among the important factors that could cause actual results to differ materially
from those indicated by such forward-looking statements are: that the
information is of a preliminary nature and may be subject to further adjustment,
the possible unavailability of financing, risks related to the development,
acquisition and operation of power plants, the impact of avoided cost pricing,
energy price fluctuations and gas price increases, the impact of curtailment,
start-up risks, general operating risks, the dependence on third parties, risks
associated with the power marketing business, changes in government regulation,
the availability of natural gas, the effects of competition, the dependence on
senior management, (xvii) volatility in the Company's stock price, fluctuations
in quarterly results and seasonality, and other risks identified from time to
time in the Company's reports and registration statements filed with the
Securities and Exchange Commission.
GENERAL
Out-Takes, Inc., a corporation incorporated in Delaware on March 18, 1992 ("the
Company"), up until October 26, 1998, was engaged in the sale of photographic
portraits of children, adults and family groups. Until October 26, 1998,
the Company operated a retail photo studio, called Out- Takes(R), which
opened on May 24, 1993 and is located in MCA/ Universal's CityWalkSM
project in Los Angeles, California ("the CityWalk Studio"). The Company had a
second studio, which commenced operations on December 1, 1995, at the
Entertainment Center in the Bazaar at the Irvine Spectrum located in Irvine,
Orange County, California ("the Irvine Studio"). As a result of management's
continuing review of the poor performance of the Irvine Studio, management
decided to close the Irvine Studio. The Irvine Studio ceased operations on April
22, 1998. The CityWalk studio employs proprietary hardware and software
developed by, or specifically for, the Company which includes digital imaging
technology and automated motion control equipment to position the studio camera
and set subject lighting to the proper levels for each scene (collectively, the
"Proprietary System"). Using the Proprietary System, the Company is able to
place pictures it takes of its clients "into" still photographs prepared in
advance from popular movie scenes and other backgrounds licensed by the Company.
On or about August 31, 1998, the Company acquired all of the issued and
outstanding units of equity of Los Alamos Energy, LLC, which operates a 1 mega
watt power plant in Los Alamos, California, which produces electricity from
"waste gas," and shifted its business emphasis to that of electrical energy
provider.
On or about October 26, 1998, the Company leased its photo studio assets to
Colorvision International, Inc., completing the shift of its business focus to
the providing of electrical energy.
LOS ALAMOS ENERGY
Los Alamos Energy was formed in June, 1996, for the purpose of becoming a
principal electricity provider in the State of California. With the acquisition
of Los Alamos Energy, the Company is engaged in a "niche" area of electricity
production from "waste gas," natural gas which is produced in conjunction with
oil production, but for which there is no market. Normally, waste gas is
flared, or burned. The procurement of waste gas provides an inexpensive source
of fuel for the Company's generators. The Company currently provides all of the
electrical energy to the unincorporated town of Los Alamos, California, through
Pacific Gas and Electric Company (PG&E), which is mandated by current law to
purchase all the electrical energy that the Company can produce.
On August 31, 1998, the Company entered into a Share Purchase Agreement (the
"Acquisition Agreement") whereby the Company acquired (the "Acquisition")
all of the issued and outstanding equity interests in Los Alamos Energy,
LLC, a California limited liability company ("LAE"). The purchase price to be
paid for the equity interests of LAE is Four Million Dollars ($4,000,000),
which was paid by Promissory Notes (the "Notes") to the holders of LAE
equity (the "Equity Holders") calling for interest on all outstanding
amounts to accrue at the rate of ten percent (10%) per annum. Payments of
principal and accrued interest under the Notes shall be made monthly in arrears
up to the maturity date, which is the fifth anniversary of the Notes. The Notes
may be prepaid at any time without premium or penalty.
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.
The indebtedness represented by the Notes is secured by (a) a Security
Agreement, granting a first lien and security interest upon all of the assets of
the Company; and (b) a pledge of the common stock of the Company held by Photo
Corporation Group Pty Limited, an Australian corporation, which is the
controlling stockholder of the Company. The stock pledge grants the Holders
specific rights under certain circumstances, including the right to receive
distributions made by the Company in respect of its common stock and the right
to vote the pledged shares, for so long as the Notes are in force.
The purchase price to be paid by the Company for all of the issued and
outstanding equity of LAE was negotiated based upon several factors, including,
without limitation, the asset value of LAE and its projected income from
operations based, in part, upon management's estimates of its natural gas
reserves and its current contracts.
The Company is engaged in the sale of photographic portraits of children, adults
and family groups. Prior to the acquisition, Out Takes derived substantially
all of its revenue from a retail photographic studio, called OUT-TAKES , which
opened on May 24, 1993 and is located in MCA/Universal's City Walk project in
Los Angeles, California. LAE is engaged in the collection and distribution of
natural gas from properties owned or leased by it in the State of California,
and management of LAE intends to position LAE to become an important
independent power producer, and to benefit as a principal provider of
electricity to consumers in California and elsewhere as deregulation is
implemented. LAE will be operated as a wholly-owned subsidiary of the Company.
THE MARKET
The power industry represents the third largest industry in the United States,
with an estimated end-user market of over $250 billion of electricity sales in
1998 produced by an aggregate base of power generation facilities with a
capacity of approximately 750,000 megawatts. In response to increasing customer
demand for access to low-cost electricity and enhanced services, new regulatory
initiatives have been and are continuing to be adopted at both the state and
federal level to increase competition in the domestic power generation industry.
Management believes that this increase in competition will benefit rather than
harm the Company, because the Company will be free to sell its power to any
customer, rather than to just PG&E, who is now obligated to buy all the power
the Company can produce. Management expects that with the advent of dergulation,
prices for power will increase over and above what it the Company is being paid
by PG&E. The power generation industry historically has been largely
characterized by electric utility monopolies producing electricity from old,
inefficient, high-cost generating facilities selling to a captive customer base.
Industry trends and regulatory initiatives have transformed the existing market
into a more competitive market where end users purchase electricity from a
variety of suppliers, including non-utility generators, power marketers, public
utilities and others. There is a significant need for additional power
generating capacity throughout the United States, both to satisfy increasing
demand, as well as to replace old and inefficient generating facilities. Due to
environmental and economic considerations, managment believes this new capacity
will be provided predominantly by gas-fired facilities. Management believes that
these market trends will create substantial opportunities for efficient,
low-cost power producers that can produce and sell energy to customers at
competitive rates.
In addition, as a result of a variety of factors, including deregulation of the
power generation market, utilities, independent power producers and industrial
companies are disposing of power generation facilities. To date, numerous
utilities have sold or announced their intentions to sell their power generation
facilities and have focused their resources on the transmission and distribution
segments. Many independent producers operating a limited number of power plants
are also seeking to dispose of their plants in response to competitive
pressures, and industrial companies are selling their power plants to redeploy
capital in their core businesses.
STRATEGY
The Company's strategy is to expand its existing power plant to 4 mW, and to
further expand its power producing capacity by exploring acquisition
opportunities in the power market, by exploring opportunities that exist to
merge with other similarly situated small electrical power production companies
which produce electrical energy from waste gas, in order to expand its current
power production capacity, and to capture more of a market share of this growing
industry, which the Company predicts will increase with the advent of
deregulation of the power industry.
DESCRIPTION OF FACILITIES
The Company has purchased all of the natural gas reserves on the Blair Oil and
Gas Field ("the field"), which is located adjacent to the unincorporated town of
Los Alamos, California, on Rancho El Roblar, approximately 60 miles north of
Santa Barbara along US 101, and which is operated by Texaco. The field has 15
oil wells producing approximately 500 barrels of oil per day, and from which
approximately one million cubic feet (1073 BTU) of natural gas was being flared.
The gas recoverable reserve is estimated to be sufficient to provide electrical
production for the next several years.
During 1986, the Blairs entered into an agreement with American Cogenics of
California ("ACI") to convert the waste gas into electricity, and two gas
driven, CAT G398T generator sets ("Gensets"), each respectively 550 kilowatts
and 600 kilowatts, were installed, from which electricity was generated and
sold to PG&E, pursuant to a power purchase agreement, dated November 28, 1988
(the "PG&E contract"). In early 1995, the Santa Barbara County Air Pollution
Control District ("APCD") shut down the operation due to emissions violations.
During October, 1996, Los Alamos Energy consummated the purchase and sale
agreement with American Cogenics of California ("ACI"), dated August 28, 1996,
and acquired the rights to the gas, the two Gensets, the PG&E contract, the
FERC certification, and power purchase agreement with Texaco, and brought the
equipment into APCD compliance.
When the Gensets were initially installed, there were only a few wells
producing oil and gas on the field. Since that time, production has increased
from about 150 MCFD to about 1,000 MCFD currently, providing the potential of
adding more generators to increase the Company's current capacity from 1 mega
watt (1 mW) to 4mW, at an estimated cost of $1.2 million to $1.5 million.
GOVERNMENT REGULATION
The Company is subject to complex and stringent energy, environmental and other
governmental laws and regulations at the federal, state and local levels in
connection with the development, ownership and operation of its energy
generation facilities. Federal laws and regulations govern transactions by
electrical and gas utility companies, the types of fuel which may be utilized
by an electric generating plant, the type of energy which may be produced by
such a plant and the ownership of a plant. State utility regulatory commissions
must approve the rates and, in some instances, other terms and conditions under
which public utilities purchase electric power from independent producers and
sell retail electric power. Under certain circumstances where specific
exemptions are otherwise unavailable, state utility regulatory commissions may
have broad jurisdiction over non-utility electric power plants. Energy
producing projects also are subject to federal, state and local laws and
administrative regulations which govern the emissions and other substances
produced, discharged or disposed of by a plant and the geographical location,
zoning, land use and operation of a plant. Applicable federal environmental
laws typically have both state and local enforcement and implementation
provisions. These environmental laws and regulations generally require that a
wide variety of permits and other approvals be obtained before the commencement
of construction or operation of an energy-producing facility and that the
facility then operate in compliance with such permits and approvals.
FEDERAL ENERGY REGULATION
As described below, the exemptions from extensive federal and state regulation
afforded by PURPA to Qualifying Facilities are important to the Company and its
competitors. The project that the Company currently owns meet the requirements
under PURPA to be a Qualifying Facilities and will be maintained on that basis.
Additionally, managment expects regulatory impositions on power marketing
operations to be minimal under existing regulatory standards.
PURPA
The enactment of the Public Utility Regulatory Policies Act of 1978, as amended
("PURPA") and the adoption of regulations thereunder by the Federal Energy
Regulatory Commission ("FERC") provided incentives for the development of small
power facilities (those having a capacity of less than 80 megawatts.) A
domestic electtricity generating project must be a Qualifying Facility ("QF")
under FERC regulations in order to take advantage of certain rate and
regulatory incentives provided by PURPA> PURPA exempts QF's from most
provisions of the Federal Power Act ("FPA") and, except under certain limited
cicrcumstances, state laws concerning rate or financial regulation. In order
to be a Qualifying Facility, a cogeneration facility must (i) produce not only
electricity but also a certain quantity of thermal energy (such as steam) which
is used for a purpose other than power generation, (ii) meet certain energy
operating and efficiency standards when oil or natural gas is used as a fuel
source and (iii) not be controlled or more than 50% owned by an electric
utility or electric utility holding company, or any combination thereof.
PURPA provides two primary benefits to Qualifying Facilities owned and operated
by non-utility generators. First, Qualifying Facilities under PURPA are exempt
from certain provisions of PUHCA, the Federal Power Act (the "FPA") and, except
under certain limited circumstances, state laws respecting rate and financial
regulation. Second, PURPA requires that electric utilities purchase electricity
generated by Qualifying Facilities at a price equal to the purchasing utility's
full "avoided cost" and that the utility sell back-up power to the Qualifying
Facility on a non-discriminatory basis. Avoided costs are defined by PURPA as
the "incremental costs to the electric utility of electric energy or capacity
or both which, but for the purchase from the Qualifying Facility or Qualifying
Facilities, such utility would generate itself or purchase from another
source." The FERC regulations also permit Qualifying Facilities and utilities
to negotiate agreements for utility purchases of power at rates other than the
purchasing utility's avoided cost. Although public utilities are not required
by PURPA to enter into long-term contracts, PURPA helped to create a regulatory
environment in which it has become more common for such contracts to be
negotiated or executed through selective procurement or competitive bidding. If
Congress amends PURPA, the statutory requirement that an electric utility
purchase electricity from a Qualifying Facility at full avoided costs could be
eliminated. Although current legislative proposals specify the honoring of
existing contracts, repeal of the statutory purchase requirements of PURPA
going forward could increase pressure to renegotiate existing contracts. Any
changes which result in lower contract prices could have an adverse effect on
the Company's operations and financial position. See Competition.
PUHCA
Under the Public Utility Holding Company Regulation ("PUHCA"), any person
(defined by PUHCA to include corporations and partnerships and other legal
entities) which owns or controls ten percent or more of the outstanding voting
securities of a "public utility company" or a company which is a "holding
company" of a "public utility company" is subject to registration with the
Securities and Exchange Commission (the "Commission") and regulation under
PUHCA, unless such person is eligible for an exemption, such as is available to
Qualifying Facilities under PURPA, or as established elsewhere under PUHCA. A
registered holding company is required by PUHCA to limit its operation to a
single integrated utility system and to divest any other operations not
functionally related to the operation of that utility system.
THE ENERGY ACT
Congress passed the Energy Act to promote further competition in the
development of new wholesale power generation sources. Through amendments to
PUHCA, the Energy Act encourages the development of independent power projects
which will be certified by the FERC as exempt wholesale generators ("EWGs").
The owners or operators of these facilities are exempt from the provisions of
PUHCA. The Energy Act also provides the FERC with extensive new authority to
order electric utilities to provide other electric utilities, Qualifying
Facilities and independent power projects with access to their transmission
systems. However, the Energy Act does preclude the FERC from ordering
transmission services to retail customers and prohibits sham wholesale energy
transactions which appear to provide wholesale service, but actually are
providing service to retail customers.
A company engaged in the ownership or operation of electric power generation
and transmission facilities faces certain types of regulation for its
international activities. The principal regulatory consideration for
international projects is PUHCA, since it is broadly applicable to the
ownership and operation of power facilities (including generation and
transmission facilities) both inside and outside of the United States. For
international projects, the principal basis for exemption from PUHCA is by
obtaining EWG status from the FERC. EWG status is even more beneficial for
international projects because, although EWGs are not permitted to make retail
sales in the United States, retail sales by EWGs are generally allowed in
international markets. Another way to obtain an exemption from PUHCA for
foreign ownership and operation activities is by filing a foreign utility
company determination ("FUCO") with the Commission. However, FUCO filings are
less frequently used, because unlike EWGs, no formal regulatory order is issued
confirming the status of a FUCO, and more rigorous state commission scrutiny is
entailed.
Structuring the Company's activities to ensure that it is not a "holding
company" of a "public utility company" under PUHCA is also important in
providing financing and financial reporting flexibility to the Company. The
cogeneration facilities owned by the Company, or in which the Company has
investments, are Qualifying Facilities under PURPAthe Company has also pursued
the development of independent power projects which will not qualify for the
benefits provided by PURPA, which could subject these projects to PUHCA
jurisdiction. To avoid such a consequence, the Company will structure its
participation in independent power projects in a manner to qualify for
exemptions under PUHCA provided by the Energy Act. Such structures will permit
the Company to take ownership positions in a number of independent power
project projects.
FPA
The Federal Power Act ("FPA") grants the FERC exclusive rate-making
jurisdiction over wholesale sales of electricity in interstate commerce. The
FPA provides the FERC with ongoing as well as initial jurisdiction, enabling
the FERC to revoke or modify previously approved rates. Such rates may be based
on a cost-of-service approach or on rates that are determined through
competitive bidding or negotiation on a market basis.
Although Qualifying Facilities under PURPA are exempt from rate-making and
certain other provisions of the FPA, independent power projects and certain
power marketing activities are subject to the FPA and to the FERC's rate-making
jurisdiction.
Utilities are not obligated to purchase power from projects subject to
regulation by the FERC under the FPA because they do not meet the requirements
of PURPA. However, because such projects would not be bound by PURPA's thermal
energy use requirement, they may have greater latitude in site selection and
facility size. The project currently owned or operated by the Company as a
Qualifying Facility under PURPA is exempt from the FPA. FERC has significantly
relaxed the rules under which power marketers and independent power producers
can sell or market power. With approval from FERC, such entities, with certain
exceptions, are exempted from cost-based rates and can make all sales at
market-based rates set through negotiations. The independent power project in
which the Company currently participates have been granted market based rate
authority and comply with the FPA requirements governing approval of wholesale
rates and subsequent transfers of ownership interest in such projects.
CHANGES IN FEDERAL REGULATIONS
Historically in the United States, regulated and government-owned utilities
have been the only significant producers of electric power for sale to third
parties. The energy crisis of the 1970s led to the enactment of the federal
Public Utility Regulatory Policies Act of 1978 ("PURPA"), which encouraged
companies other than utilities to enter the electric power business by reducing
regulatory constraints. In addition, PURPA and its implementing regulations
created unique opportunities for the development of cogeneration facilities by
requiring utilities to purchase electric power generated in cogeneration plants
meeting certain requirements (referred to as "Qualifying Facilities"). See
"Regulatory Matters -- Energy Regulation."
As a result of PURPA, a significant market for electric power produced by
independent power producers such as the Company developed in the United States.
In 1992, Congress enacted the Energy Policy Act of 1992 ("Energy Act"), which
amended the Public Utility Holding Company Act of 1935 ("PUHCA") to create new
exemptions from PUHCA for independent power producers selling electric energy
at wholesale, to increase electricity transmission access for independent power
producers and to reduce the burdens of complying with PUHCA's restrictions on
corporate structures for owning or operating generating or transmission
facilities in the United States or abroad. The Energy Act has enhanced the
development of independent power projects and has further accelerated the
changes in the electric utility industry that were initiated by PURPA.
Implementation of federal and state policies resulting in increased
availability of transmission access for wholesale and retail transactions could
create additional markets and competition for electricity power sales.
The Company believes it is possible that changes in PURPA, PUHCA and other
related federal statutes may occur in the next several years. The nature and
impact of such changes on the Company's projects operations and contracts is
unknown at this time. The Company is actively monitoring these developments
directly and through industry trade groups to determine such impacts as well as
to evaluate new business opportunities created by restructuring of the electric
power industry. Depending on the outcome of these legislative matters, changes
in legislation could have an adverse effect on current contract prices.
STATE REGULATION
State public utility commissions, pursuant to state legislative authority, have
jurisdiction over how any new federal initiatives are implemented in each state
and have broad jurisdiction over regulated independent power projects which are
not Qualifying Facilities under PURPA, and which are considered public
utilities in many states. Such jurisdiction would include the issuance of
certificates of public convenience and necessity to construct a facility as
well as regulation of organizational, accounting, financial and other corporate
matters on an ongoing basis. Although the FERC generally has exclusive
jurisdiction over the rates charged by an independent power project to its
wholesale customers, state public utility commissions have the practical
ability to influence the establishment of such rates by asserting jurisdiction
over the purchasing utility's ability to pass through the resulting cost of
purchased power to its retail customers. In addition, states may assert
jurisdiction over the siting and construction of independent power projects
and, among other things, issuance of securities, related party transactions and
sale and transfer of assets. The actual scope of jurisdiction over independent
power projects by state public utility regulatory commissions varies from state
to state.
In the State of California, restructuring legislation was enacted in
September 1996 and was implemented in 1998. This legislation established an
Independent Systems Operator ("ISO") responsible for centralized control and
efficient and reliable operation of the state-wide electric transmission grid,
and a Power Exchange responsible for an efficient competitive electric energy
auction open on a non-discriminatory basis to all electric services providers.
Other provisions include the quantification and qualification of utility
stranded costs to be eligible for recovery through competitive transition
charges ("CTC"), market power mitigation through utility divestiture of fossil
generation plants, the unbundling and establishment of rate structure for
historical utility functions, the continuation of public purpose programs and
issues related to issuance of rate reduction bonds.
The California Energy Commission ("CEC") and Legislature have responsibility
for development of a competitive market mechanism for allocation and
distribution of funds made available by the legislation for enhancement of in-
state renewable resource technologies and public interest research and
development programs. Funds are to be available through the four-year
transition period to a fully competitive electric services industry.
In addition to the significant opportunity provided for power producers such as
the Company through implementation of customer choice (direct access), the
California restructuring legislation both recognizes the sanctity of existing
contracts, provides for mitigation of utility horizontal market power through
divestiture of fossil generation and provides funds for continuation of public
services programs including fuel diversity through enhancement for in-state
renewable technologies (includes geothermal) for the four-year transition
period to a fully competitive electric services industry.
TRANSMISSION AND WHEELING
Energy-producing projects that sell power to customers which are not
geographically located near the project require that the project have the
capability of transmitting its power over utility power transmission grids to
the purchaser ("wheeling"). The FERC and state utility regulatory commissions
have jurisdiction over the wheeling of power to remote users; the prices and
related terms and conditions of wheeling in interstate commerce are regulated
by the FERC. At the moment, the Company's customers being serviced by Los
Alamos Energy are in the same geographical area as the Company's power plant.
The PUCT has promulgated rules that require affected utilities to provide
wheeling service. These rules are in effect in the Electrical Reliability
Counsel of Texas system and the new transmission access provisions of the
Energy Act do not alter that federal and state jurisdictional balance.
Rules adopted at the FERC and a number of state utility regulatory commissions
require utilities to grant power producers increased access to transmission and
wheeling. The provisions of the Energy Act increase such access. The Energy Act
supports increased transmission access, and in April 1996 the FERC adopted
rules (Order 888) to expand significantly transmission service and access and
provide alternative methods of pricing for transmission services. Upon
promulgation of the final rule by the FERC (and the PUCT for ERCOT), the
interstate transmission grid in the continental United States was opened to all
qualified persons that seek transmission services to wheel wholesale power.
Utilities are required to provide transmission customers non-discriminatory
open access to their transmission grids with rates, terms, and conditions
comparable to that which the utility imposes on itself. This provides the
Company with increased opportunities to sell and market the power produced by
its independent power projects. It also increases competition on a nationwide
basis between traditional and non-traditional power generators, such as the
Company.
ENVIRONMENTAL REGULATION
The construction and operation of domestic and international energy and fuel
producing projects and the exploitation of natural resource properties are
subject to extensive federal, state and local laws and regulations adopted for
the protection of the environment and to regulate land use. The laws and
regulations applicable to the Company and projects in which it participates
primarily involve the discharge of emissions into the water and air, but can
also include wetlands preservation, noise regulation and a comprehensive
Environmental Impact Assessment which includes evaluation of the facility's
impact on air, water, ecology, human health and socioeconomic factors. These
laws and regulations in many cases require a lengthy and complex process of
obtaining licenses, permits and approvals from federal, state and local
agencies. Obtaining necessary approvals regarding the discharge of emissions
into the air is critical to the development of a project and can be time-
consuming and difficult. Each energy-producing project requires technology and
facilities which comply with federal, state and local requirements and
sometimes extensive negotiations with administrative agencies. Meeting the
requirements of each jurisdiction with authority over a project can delay or
sometimes prevent the completion of a proposed project, as well as require
extensive modifications to existing projects.
The Company monitors environmental standards and evaluates its selection of
technology to ensure that applicable standards are being met. Based on current
trends, the Company expects that environmental and land use regulation will
become more stringent. Accordingly, the Company plans to continue to place a
strong emphasis on the development and use of state-of-the-art technology to
minimize potential impacts on the environment. In addition, the Company has
developed expertise and experience in obtaining necessary licenses, permits and
approvals.
In November 1990, comprehensive amendments to the Clean Air Act were enacted
(the "1990 Amendments"). The first major revisions to the Clean Air Act since
1977, the 1990 Amendments vastly expand the scope of federal regulations and
enforcement in several significant respects. In particular, provisions relating
to non-attainment, air toxics, permitting, enforcement and acid deposition may
affect the Company's domestic projects. The Clean Air Act and the 1990
Amendments contain provisions that regulate the amount of sulfur dioxide and
nitrogen oxides that may be emitted by a project. These emissions may be a
cause of "acid rain." The project the Company owns, operates or plan's to
investment in are, or will be fueled by natural gas and are not expected to be
significantly affected by the acid rain provisions of the 1990 Amendments.
One of the key elements of the 1990 Amendments is the inclusion of an operating
permit program in Title V. This program is intended to establish a central
point in tracking all applicable air quality requirements for every source
required to obtain a permit under the Clean Air Act. Final regulations
implementing these provisions were issued by the EPA in 1992. These regulations
created minimum requirements for the operating permit program. Each state was
required to submit a program for its implementation of the regulations for
approval to the EPA. The Company is required to submit complete operating
permit applications to those states in which it has operating projects which
meet the applicability standards under the 1990 Amendments.
PHOTO STUDIO BUSINESS
Prior to the acquisition of Los Alamos Energy, the Company's principal business
was running a digital portrait photo studio in Universal City Walk, Universal
City, California.
Effective as of October 26, 1998, Out-Takes, Inc., a Delaware corporation
(the "Company") has entered into an Asset Lease Agreement (the "Lease")
with Colorvision International, Inc., a Florida corporation ("CVI"),
pursuant to which CVI will lease certain assets of the Company described in
the Lease and held at the Company's photographic studio located on
Universal City Walk, Universal City, California and certain other locations
(the "Leased Assets"). The Leased Assets constitute substantially all of
the photographic business assets owned by the Company. Along with the
lease of the Leased Assets, the Company assigned to CVI its interests in
the Business Lease (the "Studio Lease"), dated as of November 13, 1992,
between the Company and MCA Development Company, a division of MCA, Inc. (the
"Landlord"), in which most of the Leased Assets are used. Although CVI
has agreed to be responsible for all of the Company's liabilities under the
Lease, and has indemnified the Company against any liabilities arising under
the Lease from the date of its assignment to CVI, the Company remains
contingently liable for its obligations to the Landlord under the Studio
Lease notwithstanding CVI's express assumption of those liabilities.
The Studio Lease expires on May 30, 2005.
Under the Lease, CVI paid a deposit to the Company in the amount of Fifty
Thousand Dollars ($50,000), and shall pay a monthly rental amount equal to
seven percent of the gross revenues generated from the use of the Leased
Assets, or the conduct of any other business, at the photographic studio
covered by the Studio Lease. CVI has agreed to use its best efforts to operate
its business at the photographic studio profitably, although there can be
no assurance that profitable operations will result from CVI's use of the
Leased Assets, and if none occur, then no monthly rental may be paid under the
Lease. The Lease also included a license for CVI to use the trade
name of the Company at such photographic studio.
In addition to the assumption of the Company's obligations under the Studio
Lease, the Lease provides for CVI to assume the Company's obligations under
a number of license agreements between the Company and third-party
licensees, primarily motion picture studios for the use of certain film
images in its photographic business. These licenses contain certain use-
based royalties, as well as minimum annual payment guarantees, which CVI
has expressly assumed responsibility for, including in respect of certain
past due payments owed by the Company to some of these third-party
licensees.
The entry by the Company into the Lease with CVI is intended by management of
the Company to provide for the productive use of its photographic studio
assets, while permitting management to focus on its plans for the
Company, through its wholly-owned subsidiary Los Alamos Energy, LLC ("LAE"), to
become an important independent power producer, and to benefit as a principal
provider of electricity to consumers in California and elsewhere as
deregulation of the electric utility markets is implemented.
Products and Services-Photo Studio
The technological capabilities of the Proprietary System and the variety of
backgrounds that the Company has developed pursuant to various merchandise
licenses in effect (see "- License Agreements") represent a distinction in
the consumer portraiture business. Most of the portraits taken in the
CityWalk Studio are presented to the customer as framed 8" x 10", 5"
x 7" and wallet-sized photographs within about thirty minutes after the
portrait session is completed. The remainder (primarily enlargements and
greeting cards based on these photographic images) are produced and delivered
to clients within several weeks using the Company's order fulfillment
capabilities as well as processing arranged through independent service
bureaus.
Licensing Agreements-Photo Studio
The Company has merchandise licensing agreements with Paramount Pictures
Corporation ("Para mount"); MCA/Universal Merchandising, Inc.
("Universal"); Warner Bros. Consumer Products ("Warner") with respect to
several properties from the Hanna-Barbera and MGM libraries; Twentieth
Century Fox Licensing & Merchandising ("Fox"); Jay P. Morgan Photography
("Morgan"); Tony Stone Worldwide Stock Agency ("TSW"), Queen Bee
Productions ("Queen Bee"), Curtis Archives ("Curtis A"), Curtis Management
("Curtis M"), King Features ("King"), MTV Networks ("MTV"), Saban
Merchandising Inc. ("Saban"), Innerspace Visions ("Visions"), The Baywatch
Production Company ("Baywatch") and others, individually and
collectively referred to as the "License Agreements" (Paramount,
Universal, Turner, Fox, Morgan, TSW, Queen Bee, Curtis A, Curtis M, King, MTV,
Saban, Visions and Baywatch are individually and collectively referred to
herein as "Licensors").
The License Agreements generally grant the Company the right to
manufacture, sell and distribute in a defined geographic area,
computer generated photographs incorporating a customer's image into a still
photograph ("Licensed Products") with the characters, designs and/or visual
representations ("Licensed Articles") as they appear in television
productions and motion pictures. The Licensed Products may be sold
separately or affixed to items approved by the Licensor, including
photographic enlargements, greeting cards, posters, books, t-shirts,
mugs, buttons and other novelty items, in consideration of payment to
the Licensor of a specified royalty based on a percentage of gross
retail sales revenue from each of the Licensed Products. Many of the License
Agreements require a non-refundable advance payment against future royalties
and stipulate a guaranteed minimum level of royalties that must be paid during
each year of their term. The License Agreements also provide that the Licensor
retains approval rights over the use of the Licensed Articles.
A summary of the License Agreements and the Titles/Properties available
thereunder is presented in the table as follows:
Licensor Selected Titles /Properties Territory and Usage
Paramount Pictures
Corporation Current titles in use: Territory: Worldwide.
Star Trek (Original Series)
Trek Wrath of Khan
Deep Space Nine
Cool World
Friday the 13th
MCA/Universal Current titles in use: Territory: United States
Merchandising, Inc. Back to the Future, Part I United Kingdom, Holland,
Jaws New Zealand and Australia
Jurassic Park
Harry & Hendersons
Warner Bros. Consumer Current titles in use: Territory: United States
Products - (For MGM and Gone with the Wind and its territories and
Hanna-Barbera film Tom & Jerry Movie possessions.
libraries) Wizard of Oz
The Flintstones
Cave Kids
Twentieth Century Fox Current titles in use: Territory: "The entire
Licensing & Merchandising Miracle on 34th St. world".
The Simpsons
The Pagemaster
Jay P. Morgan Photography Multi-property agreement Territory: Worldwide.
covering 25 original Jay P.
Morgan images. Out-Takes
has the right of substitution
from time-to-time.
Tony Stone World-wide International stock and Territory: Worldwide.
Stock Agency assignment photography,
including access to a
library of photographs
contributed by over 1,000
photographers worldwide.
Queen B Productions Current titles in use: Territory: United States
and Canada.
Elvira in bathtub
Elvira at movie theater
Curtis Archives (on All Norman Rockwell Territory: United
States
behalf of Norman illustrations including
Rockwell's Estate) artwork and logo art associated
with his extensive collection
of Saturday Evening Post
magazine covers.
Curtis Management Approved photographs Territory: United
States
supplied by licensor.
Current property in use:
Hollywood Sign
King Features Current titles in use: Territory: United
States,
Betty Boop Canada and Mexico
Popeye
Innerspace Visions Approved photographs Territory: Worldwide
supplied by the photographer.
MTV Networks Current property in use: Territory: United
States
Beavis & Butt-head and its territories and
possessions, Canada
Saban Merchandising Inc. Current property in use: Territory: United
States
Mighty Morphin Power and its territories and
Rangers possessions.
The Baywatch Production Current property in use: Territory: United
States
Company Baywatch and its territories and
possessions.
As of March 31, 1999, the Company has not received any notice that any Licensor
intends, by virtue of this matter, to exercise any of the remedies provided
for in its respective License Agreements. The Company is current with respect
to all payments and required reports to all Licensors and believes that its
relationship with all Licensors is satisfactory.
On March 1, 1995, the Company entered into a sublicense agreement with
Photo Corporation of Australia Pty Limited ("PCA"), a subsidiary of
Photo Corporation Group Pty. Ltd. ("PCG"), that, subject to the prior approval
of the Licensors, grants PCA a non-exclusive license to utilize the Licensed
Articles on substantially the same terms as provided in the License
Agreements. The sublicense also provides that PCA will pay the Company an
amount equal to 120% of the royalties the Company pays to Licensors for such
images. The Company has received consent from Morgan, Fox and Paramount
and other Licensors have indicated their willingness to support utilization
of the licensed Articles in countries where PCA operates. The PCA sublicense
agreement has not yet generated any royalties.
COMPETITION
Los Alamos Energy
The power generation industry is characterized by intense competition, and the
Company encounters competition from utilities, industrial companies and other
power producers. The independent power industry has grown rapidly over the past
twenty years. The demand for power may be met by generation capacity based on
several competing technologies, such as gas-fired or coal-fired cogeneration
and power generating facilities fueled by alternative energy sources including
hydro power, synthetic fuels, solar, wind, wood, geothermal, waste heat, solid
waste and nuclear sources. The Company competes with other non-utility
generators, regulated utilities, unregulated subsidiaries of regulated
utilities and other energy service companies in the development and operation
of energy-producing projects and the marketing of electric power. In recent
years, there has been increasing competition in an effort to obtain power sales
agreements, and this competition has contributed to a reduction in electricity
prices. In addition, many states are implementing or considering regulatory
initiatives designed to increase competition in the domestic power industry. In
California, the CPUC issued decisions which provide for direct access for all
customers as of April 1, 1998. This competition has put pressure on electric
utilities to lower their costs, including the cost of purchased electricity,
and increasing competition in the future will increase this pressure. However,
management believes that the deregulation of the electrical power industry in
California will enable it to achieve higher revenues from the sale of power.
Power sales are currently limited to PG&E, who must purchase all of the power
the Company can produce at regulated rates.
At the Federal level, the Energy Act reduces certain restrictions currently
applicable to certain projects which are not Qualifying Facilities (as further
defined below) under PURPA and provides for the removal of certain impediments
to competition in the power generation industry. Although the provisions of the
Energy Act apply only to wholesale transactions, actions by many state
authorities are also increasing competition for industrial, commercial and
other larger scale customers in the provision of services by Qualifying
Facilities ("QF's"), and independent power projects, as well as power marketers
and other unregulated suppliers. The development rights of Qualifying
Facilities, which were facilitated by certain provisions of PURPA, have not
been affected, nor amended, by the Energy Act. However, proposed legislation
has been introduced in Congress to repeal all or part of PURPA. These federal
legislative proposals would not abrogate or amend existing contracts with
electric utilities and would only be effective prospectively for new contracts.
Legislation to repeal PUHCA is also currently pending in Congress. Although
passage of stand alone legislation repealing PUHCA is not expected during the
current session, eventual repeal or modification of PUHCA is being considered.
Congressional repeal or modification of PUHCA will loosen the strictures
currently placed on utilities and others from acquiring generation and
transmission assets outside of their service territories. This will
significantly increase the competition the Company faces.
The industry is presently characterized by rapid change in the regulatory and
commercial aspects of competition. Although the timing and ultimate effect of
these changes cannot be predicted, management of the Company believes that the
overall effect of the current changes will be to increase competition in the
generation, transmission and sale of electric power.
Photo Studios-Competition and Seasonality
Competition in the traditional portrait photography industry, the
merchandise licensing business and with respect to the development of
new technology is intense. The Company has enjoyed limited protection
from competition at its CityWalk Studio because of a restriction contained
in its lease which states that during the initial lease term, which expired on
May 31, 1998, the landlord would not lease to third parties nor operate
for its own account a retail store engaged in selling computer-generated
photographs similar to those produced and sold by the Company. The new lease
does not contain the same restrictive covenant. This restriction did not
apply to photographic products offered within the theme park adjacent to
the CityWalk Studio. The opening of additional digital photographic
concessions within the theme park in the spring of 1997 increased the number of
photographic opportunities available to visitors to the area and has diluted
the CityWalk Studio's share of the market. As a result of the expiration of
the lease restriction, the Company may face new competition at the CityWalk
Studio. The Company has identified three potential kinds of competition -
traditional photographers who are likely to compete for retail customers as
well as future locations; photographers who employ digital technologies
who are likely to compete for retail customers, future locations and
merchandise licensing agreements; and new technologies which may render the
Proprietary System obsolete or require the Company to incur a substantial
expense in order to remain competitive in terms of product quality,
selection, pricing and customer service. The Company has renewed the lease
for a further seven years.
Many of the firms with which the Company competes, or can reasonably be
anticipated to compete in the future, have far greater financial
resources, experience and industry relationships than the Company. In
addition, such organizations have proven operating histories, which may
afford these firms significant advantages in negotiating and obtaining future
merchandise licenses and retail leases, arranging financing, attracting
skilled personnel and developing technology and products. Many of these
firms offer their products at substantially lower prices than the Company
sells its products. The Company believes that its portrait photography
products are competitive in terms of product quality, service quality and
the selection and attractiveness of the Licensed Products.
The professional photography business is seasonal, with the largest volume of
sales generally occurring in the Company's third fiscal quarter during the
period preceding the Christmas season. The CityWalk location is one of the
major tourist attractions in Southern California and therefore is also
highly seasonal, with its largest number of visits occurring in the Company's
second and third fiscal quarters, particularly between July 4th and Labor Day.
EMPLOYEES
As of March 31, 1999, the Company employed 2 people. None of the Company's
employees are covered by collective bargaining agreements, and the Company has
never experienced a work stoppage, strike or labor dispute. The Company
considers relations with the Company's employees to be good.
ITEM 2. PROPERTIES
Photo Studio
The Company leases 1,699 square feet of retail space (plus approximately 200
square feet of mezzanine space) from MCA Recreation Services, a division of
MCA Inc., for the CityWalk Studio. (see "Description of Business -
General") This lease provides for a minimum annual rental obligation of
approximately $123,250 plus a percentage rental payment equal to ten percent
(10%) of annual store revenues over $881,177. During the year to March 31, 1998
the Company paid additional rent of $13,351 as a result of revenues being
in excess of the $881,177 threshold. The CityWalk Studio lease expired on
May 31, 1998 and the Company has exercised its option to renew the lease for
a period of seven (7) years. The lease may be terminated by the lessor if the
Company does not meet a minimum annual sales requirement of $587,000. This
lease has been assigned to Colorvision.
The Company maintains computer graphics and image production facilities at the
CityWalk Studio and has its administrative offices at 1419 Peerless Place,
Suite 116 in Los Angeles, California ("the Peerless Premises"). Certain of
the Company's equipment, furniture and materials are temporarily stored at
101 E. Alameda Ave., Burbank, California ("the Storage Facility"). The
Company has a month to month rental obligation for both the Peerless Premises
and the Storage Facility.
All of the Company's leasehold premises are covered by casualty, liability and
business interruption insurance with limits and conditions that management
deems customary for the industry.
Los Alamos Energy
The Company rents offices from its President, James C. Harvey, at the rate of
$850 per month, on a month to month basis, and also rents offices from a former
member of LAE at a nominal rental on a month to month basis at 466 Bell Street,
Los Alamos, California. The Company owns two internal combustion
engine/generator sets located on the Blair Ranch. The Company owns all right,
title and interest in and to the power purchase agreement between ACI and PG&E,
dated November 28, 1988, and the power purchase agreement with Texaco,
consisting of correspondence between Texaco and ACI.
PATENTS, SERVICE MARKS, COPYRIGHTS AND OTHER PROPRIETARY TECHNOLOGY
Photo Studio
The Company has registered the marks Out-Takes(R), So You Want to be in
Pictures(R), Photomation(R) and Create the Moment(R) with the U.S. Patent
and Trademark Office and has registered the Out-Takes(R) service mark in
Japan, in both Japanese and English. The Company actively manages the
protection of its trademarks, know-how, trade secrets and other intellectual
property by requiring all its employees and those contractors where
applicable, to execute confidentiality agreements in relation to the
Company's intellectual property. The Company is not aware of any instance
where there has been a breach of such confidentiality obligations.
Los Alamos Energy
The Company has no patents, copyrights or trademarks with respect to its power
plant operations.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq Small Cap MarketSM
("NASDAQ") on March 9, 1993 under the symbol OUTT (also OUTTC during the
period from October 28, 1994 through December 30, 1994). On January 3,
1995, the Company's securities were delisted from NASDAQ as a consequence of
the Company's not fulfilling the minimum bid price requirements set forth in
Paragraph 1(c)(4) of Schedule D of the NASDAQ By-Laws. On January 4, 1995,
the Company's Common Stock began to be quoted on the OTC-Bulletin BoardSM
under the symbol OUTT.
The NASD has recently added an "E" to the symbol, making it "OUTTE," which
indicates that it has been placed on the NASD OTC Bulletin Board's eligibility
list. In order to remain quoted on the NASD Bulletin Board, the Company must
comply with all of the reporting requirements of the Securities and Exchange
Act of 1933 by the ninth day of March 2000. If the Company fails to do this,
it will no longer be quoted on the NASD OTC Bulletin Board. There can be no
assurance that the Company will continue to be quoted on the NASD OTC Bulletin
Board.
The following table sets forth, for the periods indicated, the high and low
closing prices for the Common Stock as reported by Nasdaq Trading, Market
Services Inc., and Freerealtime.com.
Fiscal 1997 Fiscal 1998 Fiscal 1999
High Low High Low High Low
First Quarter 27/100 22/100 10/100 7/1005/641/32
Second Quarter 25/100 10/100 7.5/100 7/1001/161/32
Third Quarter 6.5/100 6/100 7/100 4/1003/321/32
Fourth Quarter 9/100 4/100 3.125/100 1.5/1009/647/100
There were approximately 83 holders of record of the Company's Common
Stock as of March 31, 1999 and as of February 23, 2000.
The Company has not paid any dividends on its Common Stock since
incorporation in March 1992 and does not anticipate paying dividends in
the foreseeable future. There are no restrictions on the Company's present
ability to pay dividends on its Common Stock, other than those prescribed by
Delaware law.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain data for the years ended March 31, 1995
through March 31, 1999. Refer to "Item 7. Management's Discussion and
Analysis or Plan of Operation" for discussion of operations.
1999 1998 1997 1996 1995
Income Statement Data
Revenue from operations 637,450 $1,187,638 $2,014,788 $1,580,712 $1,274,836
Gross Income (Loss) (541,246) 88,858 (635,416) (44,276)
Net Loss (403,774)(1,082,306) (753,346)(1,576,484)(1,309,459)
Net loss per share (0.019) ($0.05) ($0.05) ($0.16) ($0.24)
Balance Sheet Data
Total Assets 312,503 $285,840 $1,011,463 $1,409,752 $1,862,279
Total Liabilities 1,667,7251,020,943 698,710 1,383,653 769,696
Stockholders' Equity
(Deficit) (1,355,672) (735,103) 312,753 26,099 1,092,583
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the historical
financial statements of Out-Takes, Inc. ("the Company") and notes
thereto included elsewhere in this Form 10-K.
Overview
The Company currently leases to a third party, Colorvision, an operating
photographic portrait studio, which was opened on May 24, 1993 at
MCA/Universal's CityWalkSM project in Los Angeles, California ("the
CityWalk Studio"). The Company opened a second studio on December 1, 1995
at the Entertainment Center in the Bazaar at the Irvine Spectrum located
in Irvine, Orange County, California ("the Irvine Studio"). The Irvine Studio
closed on April 22, 1998.
The Company currently operates a 1 mW waste gas electricity plant in Los Alamos,
California, which was acquired from Los Alamos Energy, LLC on August 31, 1998.
The following table summarizes the Company's fiscal quarter results:
On or about August 31, 1998, the Company acquired all of the issued and
outstanding units of equity of Los Alamos Energy, LLC, which operates a 1 mega
watt power plant in Los Alamos, California, which produces electricity from
"waste gas," and shifted its business emphasis to that of electrical energy
provider.
On or about October 26, 1998, the Company leased its photo studio assets to
Colorvision International, Inc., completing the shift of its business focus to
the providing of electrical energy.
Results of Operations
Year Ended March 31, 1999 Compared to Year Ended March 31, 1998
The net loss for the year ended March 31, 1998 was $1,082,306 compared with
$403,774 for the year ended March 31, 1999. The primary reasons for the
decrease in the net loss were the elimination of expenses of the photo studio,
and the increase in gross income from the operation of the power plant. Studio.
The Company overall generated $1,187,638 in revenues in the fiscal year ended
March 31, 1998, compared to revenues of $637,450 in the fiscal year ended
March 31, 1999. Management attributes this decline to the change in
business focus from a photography studio with negative cash flow to power
production, with positive cash flow.
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
The net loss for the year ended March 31, 1998 was $1,082,306 compared with
$753,346 for the year ended March 31, 1997. The primary reasons for the
increase in the net loss were a decrease in the gross income generated by
the CityWalk Studio, an increase in the gross loss incurred by the Irvine
Studio and the costs associated with the closure of the Irvine Studio,
partly offset by a reduction in general and administrative expenses.
The following table shows Revenues, Cost of Revenues and Gross Income/
(Loss) during the fiscal years ended March 31, 1998 and March 31, 1997,
by studio.
Fiscal Year Ended March 31, 1998 Fiscal Year Ended March 31,
1997
-------------------------------- -------------------------------
- -
CityWalk Irvine Traveling CityWalk Irvine
Traveling
Studio Studio Studio Studio Studio Studio
------ ------ ------ ------ ------ ------
Revenues $909,683 $ 277,558 $ 397 $1,492,024 $508,192 $ 14,572
-------- --------- -------- ---------- -------- --------
Cost of Revenues:
Compensation &
Related
Benefits 333,947 188,558 1,771 429,764 277,501 5,674
Depreciation &
Amortization 170,155 250,010 152 137,855 220,975 293
Rent 133,094 101,098 2,000 192,432 100,500 7,925
Loss on closure
of studio - 164,745 - - - -
Other 243,498 139,053 803 318,536 227,188 7,287
--------- ---------- ------- --------- -------- -------
Total 880,694 843,464 4,726 1,078,587 826,164 21,179
--------- ---------- ------- ---------- -------- -------
Gross Income /
(Loss) $ 28,989 $ (565,906) $(4,329) $ 413,437 $(317,972)$(6,607)
========= ========== ======= ========== ========== ======
The Company overall generated $1,187,638 in revenues in the fiscal year ended
March 31, 1998, compared to revenues of $2,014,788 in the fiscal year
ended March 31, 1997. CityWalk Studio revenues decreased by $582,341 to
$909,683, a decrease of 39.0%. Management attributes this decline to a
number of factors including the opening of additional digital photographic
concessions within the theme park adjacent to the CityWalk Studio in the
spring of 1997. The Company's lease contains a restriction that prevents
the sale of computer generated photographs by any other store within
CityWalk during the Company's initial lease term (the initial lease term
expired May 31, 1998). The Company renewed the lease for a further seven
years however the new lease did not contain the same restrictive covenant.
This restriction has afforded the Company limited protection from competition,
however the restriction does not apply to photographic products offered
within the theme park. The opening of additional digital photographic
concessions within the theme park has increased the number of photographic
opportunities available to visitors to the area and has diluted the CityWalk
Studio's share of the market. Management also believes that the Studio's
performance was directly affected by the level of foot traffic through the
theme park, resulting in a flow on effect into the Studio. In May 1996, a
new "ride" opened in the theme park, that management believes attracted
an increased number of both new and repeat visitors to the area.
Management perceives that the absence of a significant new attraction during
the year to March 31, 1998, has resulted in a decline in the level of foot
traffic through the Studio. Also, in the first part of calendar 1996, a travel
show broadcast on national television in Japan, included an episode on
"Hollywood" featuring the CityWalk Studio. Throughout the nine months
ended December 31, 1996, an unusually high number of Japanese
tourists, who had seen the segment on television in Japan, visited the
CityWalk Studio. There was no similar national television broadcast in 1997.
Irvine Studio revenues decreased by $230,634 to $277,558, a decrease of
45.4%. The demographics of the area in which the Irvine Studio was located,
indicated that many of the customers to the Irvine Spectrum Entertainment
Center were local or repeat customers. While such persons utilize
entertainment facilities on a regular basis, they viewed photography as
a service to be used only occasionally or infrequently, hence the Studio
did not benefit from the repeat business experienced by other vendors in the
center. In August 1997, Stage II of The Irvine Company's development plan
for the Irvine Spectrum commenced. A consequence of this was to dramatically
limit parking facilities in and around the center, which in turn led to a
substantial reduction in foot traffic through the Studio. Despite
management's substantial efforts to increase the Studio's revenues,
management concluded that the only way to stop the negative 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 and included
approximately $135,000 non-cash loss on disposal of leasehold improvements
and write off of equipment identified as only being of use for spare parts for
the CityWalk Studio; $3,000 in termination payments to staff; $5,000 to remove
equipment from the studio and vacate the premises; $7,000 in property tax
obligations; and $14,000 in operating losses for the period that the store
remained open from March 31, 1998 to the date of closure. It is management's
opinion that as of March 31, 1998, all costs associated with the closure of
the Irvine Studio have been provided for in full.
Revenues from the Traveling Studio were $397 in the fiscal year ended March
31, 1998 compared with $14,572 in the preceding year. In December 1997, for
a one month trial period, the Company tested an event photography system at a
central meeting venue for inbound Japanese tourists. The trial
proved to be unsuccessful, generating only $397 in revenues and as a
result, the trial was discontinued.
Cost of revenues in the year to March 31, 1998 were $1,728,884 or
approximately 145.6% of revenues. Excluding the $164,745 of costs
associated with the closure of the Irvine Studio, cost of revenues in the year
to March 31, 1998 were $1,564,139 or approximately 131.7% of revenues. Cost
of revenues in the year to March 31, 1997 were $1,925,930 or approximately
95.6% of revenues.
Cost of revenues for the CityWalk Studio decreased by $197,893 to $880,694.
Compensation and related benefits were $95,817 lower than the previous year as
a result of tighter controls over the number of staff hours worked at the
studio and as a consequence of the reduction in revenues. Depreciation was
higher than the previous year by $32,300. Rent was lower by $59,338 as a
result of the Company paying rent based on a percentage of revenues, such
revenues being lower than in the previous period by $582,341. Other cost of
revenues decreased by 23.6%. The percentage decrease in other cost of
revenues was less than the decrease in revenues as there are certain costs
that are not incurred in direct proportion to the level of revenue, including
insurance, taxes, repairs and maintenance, utilities and cleaning. The
CityWalk Studio earned gross income of $28,989 during the fiscal year ended
March 31, 1998 compared to gross income of $413,437 for the same period last
year, a decrease in gross income of $384,448.
Cost of revenues for the Irvine Studio increased by $17,300 to $843,464
compared with $826,164 for the year to March 31, 1997. Excluding the $164,745
of costs associated with the closure of the Irvine Studio, cost of
revenues decreased by $147,445 to $678,719. The percentage decrease in cost
of revenues was less than the decrease in revenues as there are certain costs
that are not incurred in direct proportion to the level of revenue,
including insurance, taxes, repairs and maintenance, utilities and cleaning.
Compensation and related benefits were $88,943 lower than the previous
year as a result of tighter controls over the number of staff hours worked at
the studio. Management reduced staffing levels in the studio to the extent
possible within the constraints of the number of hours the studio was required
to be open, in order to minimize the impact of the reduction in revenue.
Depreciation was higher by $29,035 than the previous year. Rent increased by
$598 from $100,500 in the year to March 31, 1997 to $101,098 for the year
to March 31, 1998. Other cost of revenues decreased by 38.8%, in line
with the decrease in revenues. The Irvine Studio incurred a gross loss of
$565,906 during the fiscal year ended March 31, 1998 compared to a gross loss
of $317,972 for the same period last year, an increase in gross loss of
$247,934. Excluding the $164,745 of costs related to the closure of the
Irvine Studio, there was an $83,189 increase in the gross loss. Cost of
revenues for the Traveling Studio were $4,726, resulting in a gross loss of
$4,329. In the year ended March 31, 1997, the Traveling Studio incurred a
gross loss of $6,607.
The Company overall incurred a gross loss of $541,246 during the fiscal year
ended March 31, 1998, compared with gross income for the same period last
year of $88,858. The incremental gross loss for the year to March 31,
1998 of $630,104 consists of a $384,448 reduction in gross income
generated by the CityWalk Studio, an increase of $247,934 in the gross
loss incurred by the Irvine Studio, such increase including $164,745 of
costs associated with the closure of the studio, partly offset by a decrease
in the gross loss incurred by the Traveling Studio of $2,278. Excluding the
$164,745 of costs related to the closure of the Irvine Studio, the Company
overall incurred a gross loss of $376,501 in the year to March 31, 1998, a
$465,359 increase in gross loss compared with the previous year.
General and administrative expenses for the fiscal year ended March 31, 1997
includes termination payments totaling $51,250 paid to former officers of
the Company. After adjusting for this non-recurring item, the Company's
general and administrative expenses decreased from $736,836 in the fiscal
year ended March 31, 1997 to $488,875 in the fiscal year ended March 31,
1998, a decrease of $247,961 or approximately 33.7%. This decrease is
consistent with management's plan to reduce overhead costs. Compensation and
related benefits decreased by approximately 51.4% to $125,571 (excluding
the $51,250 termination payments) from $258,380 for the same period last
year. This decrease was the result of the cessation of employment of the Vice
President Operations and the Vice President Development on September 1, 1996,
together with the cessation of employment of the Operations Manager during
the quarter ended December 31, 1997 and a reduction in the level of
administrative and technical support staff during the year to March 31, 1998
compared with the year to March 31, 1997. Professional fees decreased by 9.5%
to $91,218, compared to $100,777 for the same period last year. Management
fees of $31,200 have been expensed in recognition of the services
provided during the year by PCG. The expense for the year to March 31, 1997 was
$131,000. The reduction of $99,800 in management fees is a consequence of a
greater number of responsibilities being managed by the Company internally and
therefore a reduction in the level of services provided by PCG. Management
believes that $31,200 (1997: $131,000) represents the reasonable cost
of services provided by PCG during the year. As PCG agreed not to charge
management fees for a period of two years from December 1, 1996, the Company
has recorded a capital contribution of $31,200. Office and storage rent
expenses decreased from $39,558 in the year to March 31, 1997 to $33,300.
Depreciation and amortization costs were higher by $1,297. Other general and
administrative expenses decreased by $832 to $114,626 for the fiscal year
ended March 31, 1998, compared to $115,458 for the same period last year.
The Company earned interest income of $224 in the fiscal year ended March 31,
1998 as compared to $484 earned during the prior year. Interest charges
totaling $52,409 were incurred on the loan from PCG and on the loan payable
to former executives of the Company, compared with interest expense of $54,602
in the year ended March 31, 1997.
As of March 31, 1998, the Company has net operating loss carry forwards of
approximately $10,700,000. The ability to utilize $8,275,000 of these losses
to be offset against future taxable income is restricted as a result of the
change in control arising from the PCG transaction. The losses will expire
in March, 2011.
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
The net loss for the year ended March 31, 1997 was $753,346 compared with
$1,576,484 for the year ended March 31, 1996. The primary reason for
the reduction in the net loss between the two years is that in the year ended
March 31, 1996 there was a loss on impairment of long-lived assets of $762,129.
There was no such loss in the year ended March 31, 1997.
The following table shows Revenues, Cost of Revenues and Gross Income / (Loss)
during the fiscal years ended March 31, 1997 and March 31, 1996, by studio.
Fiscal Year Ended March 31, 1997 Fiscal Year Ended March 31,
1996
-------------------------------- -------------------------------
- -
CityWalk Irvine Traveling CityWalk Irvine Traveling
Studio Studio Studio Studio Studio Studio
(Opened (Not
12/9/95)
Operational)
Revenues $1,492,024 $ 508,192 $14,572 $1,422,845 $157,867 $ -
---------- ---------- ------- ---------- -------- ------
Cost of Revenues:
Compensation &
Related
Benefits 429,764 277,501 5,674 439,350 108,787 -
Depreciation &
Amortization 137,855 220,975 293 189,781 59,468 -
Loss on
impairment of
Long-Lived
Assets - - - 722,000 - 40,129
Pre-opening
Costs - - - - 67,007 -
Rent 192,432 100,500 7,925 183,421 27,218 -
Other 318,536 227,188 7,287 309,175 69,792 -
---------- --------- ------ -------- ------- ------
Total 1,078,587 826,164 21,179 1,843,727 332,272 40,129
--------- --------- ------ --------- ------- ------
Gross Income /
(Loss) $ 413,437 ($317,972) ($6,607) ($420,882) ($174,405) $40,129
========== ========= ====== ========= ========= =======
The Company overall generated $2,014,788 in revenues in the fiscal year
ended March 31, 1997, compared to revenues of $1,580,712 in the fiscal
year ended March 31, 1996. The increase in revenues of approximately
$434,076 is primarily a result of the Irvine Studio trading for a full twelve
months in the year to March 31, 1997 compared with only four months in the
year to March 31, 1996 (the Irvine Studio commenced trading on December 9,
1995). CityWalk Studio revenues increased by $69,179 to $1,492,024, an
increase of 4.9%. Revenues from the Irvine Studio and the Traveling
Studio were $508,192 and $14,572 respectively.
Cost of revenues in the year to March 31, 1997 were $1,925,930 or
approximately 95.6% of revenues. Cost of revenues in the year to March 31,
1996 were $2,216,128 or approximately 140.0% of revenues. 34.4% of the
cost of revenues in the year to March 31, 1996 represents a loss on
impairment of long-lived assets. Excluding this amount, cost of revenues in
the year to March 31, 1996 were $1,453,999 or approximately 92.0% of revenues.
Cost of revenues for the CityWalk Studio decreased by $765,140 to
$1,078,587 despite the $69,179 increase in revenues. Compensation and
related benefits were $9,586 lower than the previous year as a result of
tighter controls over the number of staff hours worked at the studio.
Depreciation was lower by $51,926 as a result of the adoption in June
1995 of Statement of Financial Accounting Standard ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and the recognition of a $722,000 loss on
impairment of CityWalk Studio assets in the quarter ended June 30, 1995,
together with the fact that certain assets have now been fully depreciated.
As a result of the Company's continuing operating losses, the information
obtained during research and the development of the Irvine Studio and the
revised total projected future cash flows of the CityWalk Studio, in June
1995 management determined that an impairment loss of approximately
$722,000 should be recognized. This loss was calculated as the excess of the
net carrying value of the CityWalk Studio long lived assets over the total
projected future cash flows over the remaining useful life of the assets.
Rent was higher as a result of the Company paying rent based on a
percentage of revenues, such revenues being higher than in the previous
period by $69,179. Other cost of revenues increased by 3.0%, in line with
the 4.9% increase in revenue. The CityWalk Studio earned gross income of
$413,437 during the fiscal year ended March 31, 1997 compared to a gross loss
of $420,882 for the same period last year, an improvement of $834,319.
Excluding the effect of the impairment loss recognized in the year ended March
31, 1996, this represents an improvement of $112,319.
Costs of revenues for the Irvine Studio were $826,164, resulting in a gross
loss of $317,972. Included in cost of revenues was $220,975 of depreciation,
a non-cash expense. Cost of revenues for the prior year of $322,272
represented the four month period from opening to March 31, 1996, and
included $67,007 of non-recurring pre-opening costs. The Irvine Studio is
still performing below expectation and the Company is continuing to develop
the portfolio of products available at the Irvine Studio in an endeavor to
improve the revenues from the Irvine Studio.
Cost of revenues for the Traveling Studio were $21,179, resulting in a
gross loss of $6,607. In the year ended March 31, 1996 as a consequence of
the adoption of SFAS No. 121, the Traveling Studio incurred a gross loss of
$40,129.
Despite the gross loss of $317,972 which was incurred in the Irvine Studio, and
the gross loss of $6,607 incurred by the Traveling Studio, the Company
overall earned a gross income of $88,858 during the fiscal year ended March
31, 1997. The gross loss for the same period last year was $635,416. The
increase in gross income for the year to March 31, 1997 is mainly due
to the loss on impairment of long-lived assets of $762,129 recorded in the year
ended March 31, 1996 (there was no similar charge in the year to March 31,
1997), offset by the gross loss incurred in the Irvine Studio which traded
for a full twelve months in the year to March 31, 1997 compared with only
four months trading in the prior year. Also contributing to the increase in
gross income is the $112,319 (excluding the $722,00 loss on impairment of
long-lived assets recorded in the year to March 31, 1996) improvement in the
gross income generated by the CityWalk Studio.
General and administrative expenses for the fiscal year ended March 31,
1997 includes termination payments totaling $51,250 paid to former officers
of the Company. The corresponding year ended March 31, 1996
includes a non-recurring charge of $110,000 for professional fees
relating to the PCG transaction. After adjusting for these non-recurring
items, the Company's general and administrative expenses decreased from
$805,824 in the fiscal year ended March 31, 1996 to $736,836 in the fiscal
year ended March 31, 1997, a decrease of approximately 9%. This decrease is
consistent with Management's plan to reduce overhead costs. Compensation
and related benefits decreased by approximately 18% to $258,380 (excluding
the $51,250 termination payments) from $313,432 for the same period last year,
as a consequence of the cessation of employment on September 1, 1996 of the
Vice President Operations and the Vice President Development. Professional
fees, excluding the $110,000 in kind consideration on the PCG transaction
in the year ended March 31, 1996, increased by 4% to $100,777, compared to
$96,979 for the same period last year. Management fees of $131,000 payable to
PCG were accrued, relating to the period April 1, 1996 to November 29, 1996,
pursuant to the Personnel Consulting Agreement dated June 28, 1995. The
expense for the year to March 31, 1997 of $131,000 is comparable with the
$130,000 accrued in the previous year for the period July 1, 1995 to March 31,
1996. Management believes that $131,000 (1996: $130,000) represents the
reasonable cost of services provided by PCG during the year. Office and
storage rent expenses increased from $29,524 in the year to March 31, 1996 to
$39,558. Depreciation and amortization costs were lower by $37,244 as a result
of previously non-producing assets being put into production and the
consequential charges reported in cost of revenues. Other general
and administrative expenses increased by $8,476, or 8% to $115,458 for the
fiscal year ended March 31, 1997, compared to $106,982 for the same period last
year.
The Company earned interest income of $484 in the fiscal year ended March 31,
1997 as compared to $3,035 earned during the prior year. Interest charges
totaling $54,602 were incurred on the loan from PCG and on the loan payable
to former executives of the Company compared with interest expense of
$28,279 in the year ended March 31, 1996.
As of March 31, 1997, the Company had net operating loss carry forwards of
approximately $9,650,000. The ability to utilize $8,275,000 of these losses
to be offset against future taxable income is restricted as a result of the
change in control arising from the PCG transaction. The losses will expire
in March, 2011.
Liquidity and Capital Resources
At March 31, 1998, the Company had a working capital deficit of $918,299 as
compared to a working capital deficit on March 31, 1999 of ****. The
increase of $**** is primarily attributable to operating losses incurred
during the year to March 31, 1999. Funds have been provided by PCG during
the year to enable the Company to meet the costs associated with its day
to day operations and to fund the payments due to former officers of the
Company.
Net cash used in operating activities was $482,207 for the fiscal year
ended on March 31, 1998, compared to the utilization of $**** of cash for the
same period last year.
The Company does not anticipate that it will have any problems in meeting its
obligations for continuing fixed expenses, materials procurement or
operating labor.
Other Matters
The Company's securities are quoted on the OTC-Bulletin Board under the
trading symbol OUTTE. The NASD has recently added an "E" to the symbol, making
it "OUTTE," which indicates that it has been placed on the NASD OTC Bulletin
Board's eligibility list. In order to remain quoted on the NASD Bulletin
Board, the Company must comply with all of the reporting requirements of the
Securities and Exchange Act of 1933 by the first day of March, 2000. If the
Company fails to do this, it will no longer be quoted on the NASD OTC Bulletin
Board. There can be no assurance that the Company will continue to be quoted
on the NASD OTC Bulletin Board.
ITEM 8. FINANCIAL STATEMENTS
Report of Independent Auditor
Board of Directors
Out-Takes, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Out-Takes,
Inc., and subsidiary as of March 31, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Out-Takes, Inc. which reflected total assets of $285,840 as of March 31, 1998
and total revenues of $1,187,638 and $2,014,788 for the years ended March 31,
1998 and 1997 respectively. Other auditors whose report dated May 20, 1998,
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Out-Takes, Inc. and its subsidiary as of March 31, 1999 and the consolidated
results of its operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 7 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 7. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Rogelio G. Castro
Certified Public Accountant
Oxnard, California
March 2, 2000
[CAPTION]
CONSOLIDATED BALANCE SHEETS FOR
THE PERIOD MARCH 31, 1998 AND
MARCH 31, 1999
ASSETS March 31,
1999 1998
Current Assets:
Cash and Cash Equivalents $ 1,356 $ 26,878
Inventory - 10,082
Prepaid Expenses - 11,954
Advances Related party 217,414 96,560
Other Current Assets - 9,564
----------- -----------
Total Current Assets $ 218,770 $ 155,038
Plant & Equipment - Net 248,965 472,848
Other Non-Current Assets:
Deposits 24,692 50,196
----------- -----------
Total Assets $ 492,427 $ 678,082
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 4,600 $ 31,173
Accrued Expenses - 135,466
Provision for Studio closure 31,878
Compensation payable - Related Parties 202,341 122,801
Due to Related Party 357,506 1,032,733
Convertible Interests 250,278 250,278
Interest payable 93,008 56,452
Prepaid asset lease 30,604 -
----------- -----------
Total Current Liabilities 938,337 1,660,781
Long-term Debt 951,400 103,556
Commitments (Note 8)
Stockholders' Equity (Deficit):
Preferred Stock, par value $.01 per share;
5,000,000 shares authorized, none issued - -
Common Stock, par value $.01 per share;
35,000,000 shares authorized; 20,788,122
shares issued of which 292,396 shares
are in Treasury 207,882 207,882
Capital in excess of par value 9,914,230 9,906,430
Accumulated deficit (11,411,016)(11,092,161)
Less treasury shares, at cost 108,406 108,406
----------- -----------
Total Stockholders' Equity (Deficit) ($1,397,310) (1,086,255)
---------- -----------
Total Liabilities and Stockholders' Equity $ 492,427 $ 678.082
=========== ===========
[CAPTION]
CONSOLIDATED STATEMENTS
OF OPERATIONS OF OUT-TAKES, INC.
Years ended March 31,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Revenues $ 637,450 $ 1,204,238 $ 2,014,788
Cost of Sales 192,374 1,728,884 1,929,273
------------- ----------- -----------
Gross Income (Loss) 445,076 (524,646) 85,515)
------------- ----------- -----------
General and Administrative 671,473 661,955 869,349
------------- ----------- -----------
Loss from Operations ( 226,397) (1,186,601) ( 810,834)
Other Income (Expense)
Interest income 35 224 484
Interest expense (36,559) (52,409) (54,602)
Discontinued operation (55,934)
Startup cost (37,214) (46,852)
-------------- ------------ ----------
Total Other Income (Expense) (92,458) (89,399) (100,970)
-------------- ------------ ----------
Net Loss ($ 318,855) ($1,276,000)($ 911,804)
============ =========== ===========
Net Loss Per Share (Basic and
Diluted) ($ 0.02) ($ 0.05)($ 0.05)
============= =========== ===========
Weighted Average Common Shares
Outstanding 20,495,726 20,495,726 14,824,881
=========== ========== ==========
[CAPTION]
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY
Common Stock Capital
------------
Number of in Excess of Accumulated
Treasury Deferred
Shares Amount Par Value Deficit
Stock Compensation Total
------ ------ --------- -------
- ----- ------------ -----
Balance - March 31, 1996 11,168,122 $111,682 $ 9,071,180 ($ 8,904,357)
($108,406)($144,000) 26,099
Cash Proceeds from
Issuance of Stock 650,000 6,500 123,500 -
- - - 130,000
Stock Issued upon
Conversion of Debt 8,970,000 89,700 820,300 -
- - - 910,000
Capital Contribution 1,000
1,000
Net Loss for the year
ended March 31, 1997 - - - (911,804)
- - - (911,804)
---------- -------- ----------- ------------
- -------- -------- ----------
Balance - March 31, 1997 20,788,122 207,882 10,015,980 ( 9,816,161) (
108,406)( 144,000) 155,295
Management fee -
Related Party - - 31,200 -
- - - 31,200
Adjustment for
cancellation of escrow
shares(See note [6A]) - - (144,000) -
- - 144,000 -
Options issuance cost - - 3,250 -
- - - 3,250
Net Loss for the year
ended March 31,1998 - - - (1,276,000)
- - - (1,276,000)
---------- -------- ----------- ------------
- -------- --------
- ----------
Balance - March 31, 1998 20,788,122 207,882 9,905,430 (10,740,009)
(108,406) - (1,086,255)
Capital adjustment 7,800
7,800
Net loss for the year
Ended March 31, 1999 ( 318,855)
(318,855)
----------- -------- ---------- ------------
- -------- --------
- ----------
Balance, March 31, 1999 20,788,122 $207,882 $9,914,230 $(11,411,016)
$(108,406) $ - $(1,397,310)
=========== ======== =========== ============
========= ======== ==========
[CAPTION]
CONSOLIDATED STATEMENT OF
CASH FLOWS
Years ended March 31,
1999 1998
1997
Operating Activities:
Net Loss $(318,855) $(1,276,000)
$(911,804)
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation and Amortization 53,256 540,185
466,369
Loss on Impairment of Long-Lived Assets - -
762,129
Loss on closure of Irvine Studio 154,157 -
Loss on Disposal of Plant and Equipment - 504
997
Compensation fee related party 80887 110,062
- -
Options issuance cost 3,250
- -
Changes in Assets and Liabilities:
(Increase) Decrease in:
Due from Related Party (120,854)
3,847
Deposits (25,504) 11,330
(22,814)
Inventory 10,082 12,797
13,719
Due from Officers - -
8,565
Prepaid Expenses 11,954 6,671)
(7,757)
Other Current Assets 9,564 -
- -
Increase (Decrease) in:
Accounts Payable (162,039) (127,413)
(248,769)
Notes payable - -
(15,036)
Interest payable 35,556 48,581
(22,104)
Provision for Studio Closure (31,878) 31,878
- -
Prepaid asset lease 30,604 -
- -
Compensation payable-Related Party 79,540 (119,990)
252,337
---------- ----------
- -----------
Net Cash Used in Operating Activities ( 346,687) ( 604,492) (
448,916)
---------- ----------
- ------------
Investing Activities:
Purchases of Property, Plant and
Equipment ( 33,522) ( 218,893) (
165,362)
Proceeds on Disposal of Plant and Equipment 100
2,242
---------- ----------
- -----------
Net Cash Used in Investing Activities ( 33,522) ( 218,883) (
163,120)
---------- ----------
- ------------
Financing Activities:
Proceeds from the Issuance of Stock -
130,000
Advances from Related Party 272,887 703,783
260,000
Capital 7,800
1,000
Convertible notes 74,000 65,834
240,000
-------- ----------
- -----------
Net Cash Provided by Financing Activities 354,727 769,617
631,000
--------- ----------
- -----------
Net Increase (Decrease)in Cash and Cash
Equivalents ( 25,522) ( 57,758)
18,964
Cash and Cash Equivalents - Beginning of
Years 26,878 80,636
61,672
--------- ---------
- ---------
Cash and Cash Equivalents - End of Years $ 1,356 $ 26,878 $
80,636
========= =========
=========
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 7,650 $
66,501
[CAPTION]
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation - The accompanying consolidated financial statements are
presented on an accrual basis. Revenues are recognized when merchandise is sold
and expenses are recognized when incurred.
Principals of Consolidation On August 31, 1998, Out-Takes, Inc. acquired all
of the issued and outstanding equity interests of Los Alamos Energy, LLC, a
California limited liability company (LAE). This acquisition has been accounted
for as an exchange between companies under common control. 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.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Los Alamos Energy, LLC. All
significant inter-company transactions and balances have been eliminated in
consolidation.
Plant and Equipment and Depreciation - Plant and equipment as of March 31, 1999
consists primarily of generators, computers, furniture and fixtures, and they
are stated at cost. Depreciation is provided over the estimated useful asset
lives using the straight-line method over 5-7 years for all equipment and
furniture.
Stock Options - The difference between the fair market value and the exercise
price, if below fair market value, of a stock option granted under the Company's
Employee Stock Option Plan is charged to expense in the period in which the
option is granted. All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair market value
of the equity instruments issued, whichever is more reliably measurable
Inventories - Inventories consisting principally of frames, bags, mattes,
chemicals, paper products and other supplies are priced at cost determined using
the FIFO method.
Cash and cash equivalents - The Company classifies all highly liquid debt
instruments, readily convertible to cash and purchased with a maturity of three
months or less at date of purchase, as cash equivalents. The Company had no cash
equivalents at March 31, 1999.
Risk concentrations - Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist principally of cash. At March
31, 1999, the Company had no deposits in financial institutions which exceeded
the $100,000 federally insured limit. The excess of the institution's deposit
liability to the Company over the federally insured limit was therefore zero.
Company's primary customer is Pacific, Gas and Electric Company.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts. Accordingly, actual
amounts could differ from those estimates.
Advertising - Advertising costs are expensed as incurred. Advertising
expenditures for the year ended March 31, 1999 were $4,500.
Loss per share - The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share" which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended March 31, 1998 has been calculated in accordance
with SFAS No. 128. Prior periods earnings per share data have been recalculated
as necessary to conform prior years data to SFAS No. 128. SFAS No. 128
supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share" and
replaces its primary earnings per share with a new basic earnings per share
representing the amount of earnings for the period available to each share of
common stock outstanding during the reporting period. SFAS No. 128 also requires
a dual presentation of basic and diluted earnings per share in the face of the
statement of operations for all companies with complex capital structures.
Diluted earnings per share reflects the amount of earnings for the period
available to each share of common stock outstanding during the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e. increasing earnings per share or reducing
loss per share). The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants. Potential common shares of 125,000 are not currently dilutive, but
may be in the future.
Deferred Taxes - There are no material differences between the accounting
methods used for financial and tax purposes. The Company has sustained losses in
recent years and has a large net operating loss carryforward. No deferred taxes
are reflected in these financial statements.
Note 2 - Plant and Equipment
March 31, 1999 March 31, 1998
The components of plant and equipment are:
Photographic Equipment $ - $ 620,750
Computers and Software 1,300 660,348
Equipment and Furniture 337,912 605,707
Leasehold Improvements - 609,494
Motor Vehicle 5,500 26,933
------------- -------------
Total - At Cost 344,712 2,523,232
Less: Accumulated Depreciation 95,747 2,050,384
------------- -------------
Net $ 248,965 $ 472,848
============= =============
Depreciation is provided over the estimated useful asset lives using the
straight-line method over five to seven years for all equipment and furniture.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the term of the lease. Maintenance,
repairs and minor purchases are expensed as incurred.
Note 3 - Related Party Transactions
The amount due to related party is unsecured and payable upon demand. Interest
expense is charge at a rate of 10% per annum. As of March 31, 1999, interest of
$93,008 was accrued.
Note 4 Commitments
The Company has an extended 12 month operating lease agreement for an office
facility.
Future minimum lease obligations as of March 31, 1999 are:
Year ended March 31
-------------------
2000 $ 10,200
--------
Total $ 10,200
=========
In the year to March 31, 1999 the Company paid $116,884
Note 5 - Income Taxes
As of March 31, 1999, the Company has a net operating loss carry forward of
approximately $11,411,016.
Note 6 - New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information". SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997 and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
Note 7 - Going Concern
The Company has been unsuccessful in generating net cash from operations.
The net cash used by the Company in operating activities in the year ended March
31, 1998 was $346,687. The Company incurred a net loss of $318,555 for the
year ended March 31, 1999 and has a working capital deficit as of March 31, 1999
of $719,567.
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.
The Company has, subsequent to March 31, 1999, during June, 1999, executed a
letter of intent with Coastal Resources Corporation, which, among other things,
provides for a merger to be effected pursuant to the provisions of a Share
Exchange Agreement to be entered into, and also providing for $300,000 in loans
to be made to Los Alamos Energy, LLC, a subsidiary of the Company.
The Company has also executed a letter of intent with Atlas Engineering, LLC to
the effect that the Company shall acquire Atlas Engineering, LLC pursuant to the
provisions of a Purchase Agreement to be entered into.
Management plans to expand its existing power plant to 4 or 5 Mega Watt, and to
actively pursue other power plant development and acquisitions.
Note 8 - Impairment of Long-Lived Assets
The Company had adopted Statement of Financial Accounting Standard ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of.
Long term assets of the Company are reviewed at least annually as to whether
their carrying value has become impaired, pursuant to guidance established in
Statement of Financial Standards ("SFAS") No. 121. Management considers assets
to be impaired if the carrying value exceeds the future projected cash flows
from related operations (undiscounted and without interest charges). If
impairment is deemed to exist, the assets will be written down to fair value or
projected discounted cash flows from related operations. Management also
re-evaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives. As of March 31,
1999, management expects these assets to be fully recoverable.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report as required by
Item 601 of Regulation S-B:
3.1 Certificate of Incorporation of the Company. (ii)
3.2 Certificate of Amendment of Certificate of Incorporation. (ix)
3.3 Bylaws of the Company. (I)
4.1 Form of Unit Purchase Option. (I)
4.2 Form of Warrant Agreement. (I)
4.3 Form of Escrow Agreement. (iv)
4.4 Section 203 of the Delaware General Corporation Law. (ix)
10.1 Form of Registration Rights Agreement. (I)
10.5 Form of Standard Employment Agreement for hourly wage employee. (vi)
10.6 Form of Standard Employment Agreement for hourly wage employee
eligible to earn commissions. (vi)
10.7 Form of Standard Employment Agreement for salaried employee. (vi)
10.8 Form of Standard Employment Agreement for salaried employee eligible
to earn commissions. (vi)
10.9 Form of Standard Employment Agreement for salaried employee eligible
for bonus in the form of incentive compensation. (vi)
10.10 Agreement dated March 16, 1992 between the Placement Agent
and Shelton on behalf of "Founders" specified therein, as amended. (I) +
10.11 Founders Agreement dated March 25, 1992 among Robert H. Shelton
("Shelton"), Ellen Korval ("Korval"), Robert A. Small ("Small"), Leah
R. Shelton ("Shelton")and John L. Sigalos ("Sigalos"), as
supplemented by letter agreement dated as of March 25, 1992 among
Shelton, Shelton, Sigalos, Korval and Small. (I) +
10.12 Merchandising License Agreement dated February 25, 1992 between
MCA/Universal Merchandising, Inc. and the Company. (I)
10.13 Merchandising License Agreement dated April 24, 1992 between Turner
Home Entertainment, Inc. and the Company. (I)
10.14 Merchandising License Agreement dated as of April 16, 1992 between
Paramount Pictures Corporation and the Company. (I)
10.15 Letter Agreement between the Image Bank West and the Company dated
as of August 5, 1992. (I)
10.16 Letter Agreement between the Company and Tony Stone Worldwide dated
as of August 31, 1992. (I)
10.17 1992 Employee Stock Option Plan. (iii) +
10.18 1992 Non-Employee Directors Stock Option Plan. (iii)
10.19 Metrum Imaging Products VAR Agreement dated September 11, 1992
between Metrum Information Storage and the Company. (I)
10.20 Lease dated November 13, 1992 between the Company and MCA
Development Company. (ii)
10.21 Lease dated October 13, 1992 between the Company and Midis
Properties, Ltd. (ii)
10.22 Lease dated March 28, 1993 between the Company and Midis Properties,
Ltd. (vi)
10.23 Letter Agreement between the Company and Jay P. Morgan Photography
dated September 28, 1992. (iii)
10.24 Settlement Agreement and Mutual Release dated as of August 11, 1994
between the Company, on the one hand, and Richard T. Eckhouse, B&E
Financial Express, Business & Executives Financial Group, Innovative
Business Management Inc., and R. T. Eckhouse & Assoc., on the other
hand. (vii)
10.25 Promissory Note in favor of Photo Corporation of Australia Pty
Limited, dated March 23, 1995. (viii)
10.26 Security Agreement between the Company and Photo Corporation of
Australia Pty Limited, dated as of March 23, 1995. (viii)
10.27 Subscription Agreement between the Company and Oakrusk Pty Limited,
dated May 26, 1995. (viii)
10.28 Stock Option Agreement between the Company and Oakrusk Pty Limited,
dated May 26, 1995. (viii)
10.29 Form of Subscription Agreement. (ix)
10.30 Settlement and Mutual Release Agreement between the Company,
Shelton, Shelton and Photo Corporation Group Pty Limited, dated
August 31, 1996. (x)
10.31 Purchase and Sale Agreement between the Company and Los Alamos
Energy, LLC, Dated August 31, 1998
10.32 Asset Lease Agreement dated October 26, 1998
14(a)2 Report of Former Independent Accountant
Financial Statements as of March 31, 1997 and 1996
Statements of Operations
Statements of Stockholder's Equity
Statements of Cash Flows
16 Letter of Former Independent Accountant
(b) Reports on Form 8-K
Current Report on Form 8-K dated April 27, 1998.
Current Report on Form 8-K dated May 13, 1998
Current Report on Form 8-K dated October 28, 1998
(I) Incorporated by reference to the Company's Registration Statement
on Form S-1 (Registration No. 33- 52904) filed on October 5, 1992
(the "Registration Statement").
(ii) Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed on December 21, 1992.
(iii) Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registration Statement filed on January 15, 1993.
(iv) Incorporated by reference to Pre-Effective Amendment No. 3 to the
Registration Statement filed on February 3, 1993.
(v) Incorporated by reference to the Company's Registration Statement on
Form 8-A (No. 0-21322) filed on March 5, 1993 and effective on March 19, 1993.
(vi) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1993.
(vii) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 1994.
(viii) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1995.
(ix) Incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended March 31, 1995.
(x) Incorporated by reference to the Company's Report on Form 10-QA for the
period ended September 30, 1996.
Management contract or compensatory plan.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Out-Takes, Inc.
Dated: March 1, 2000 By: /s/ James Harvey, President
James Harvey, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ James Harvey Chairman of the Board, President, March 1, 2000
----------------- Chief Executive Officer, Chief
James Harvey Financial Officer and Secretary,
And Sole Director
[TYPE]EX-27
<SEQUENCE>2
[DESCRIPTION]FDS --
[ARTICLE] 5
[LEGEND]
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to such information.
[PERIOD-TYPE] Year
[FISCAL-YEAR-END] Mar-31-1999
[PERIOD-END] Mar-31-1999
[CASH] 23,044
[SECURITIES] 0
[RECEIVABLES] 0
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 506
[PP&E] 291,456
[DEPRECIATION] 0
[TOTAL-ASSETS] 312,053
[CURRENT-LIABILITIES] 716,323
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 20,788
[OTHER-SE] 0
[TOTAL-LIABILITY-AND-EQUITY] 312,053
[SALES] ****
[TOTAL-REVENUES] ****
[CGS] ****
[TOTAL-COSTS] ****
[OTHER-EXPENSES] ****
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] ****
[INCOME-PRETAX] ****
[INCOME-TAX] 0
[INCOME-CONTINUING] ****
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] ****
[EPS-BASIC] ****
[EPS-DILUTED] ****
EXHIBIT 10.31 PURCHASE AND SALE AGREEMENT BETWEEN COMPANY AND LOS
ALAMOS ENERGY, LLC, DATED AUGUST 31, 1998
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (the "Agreement") is made and entered into as
of the 31st day of August, 1998, by and between OUT-TAKES, INC., a
corporation duly organized and validly existing under the laws of the state
of Delaware (the "Purchaser") and the several individuals named on the
signature page of this Agreement (collectively, the "Seller").
WHEREAS, the Purchaser is a publicly-traded corporation on the OTC-Bulletin
Board under the symbol OUTT; and
WHEREAS, the Seller collectively owns all of the issued and outstanding
units of equity interest (the "Equity") in LOS ALAMOS ENERGY, LLC, a
limited liability company organized and existing under the laws of the
State of California (the "Company"); and
WHEREAS, the Purchaser desires to purchase from the Seller, and the Seller
desires to sell and convey to the Purchaser, all of the Equity in the
Company, subject to and in accordance with the terms and conditions set
forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants and agreements set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby
agree as follows:
PURCHASE AND SALE OF THE EQUITY. Upon execution of this Agreement by
both parties, and subject to the fulfillment of all Closing Conditions (as
such term is defined below) contained in Section 7 below, the Purchaser hereby
irrevocably agrees to purchase, and the Seller agrees to sell, transfer and
convey to the Purchaser, all of the Equity in the Company outstanding as of
the Closing (as defined below). Such units of Equity, once delivered to the
Purchaser as set forth herein, shall be validly issued, fully paid and
non-assessable. The Seller may elect, in its sole discretion at any time
prior to the Closing, to convert its form of organization from a limited
liability company to a corporation, in which case each reference to the
Company shall be deemed to refer to the new corporation, and each
reference to units of Equity in this Agreement shall be deemed to refer to
shares of capital of the new corporation.
CONSIDERATION TO BE PAID FOR THE EQUITY. As consideration for the Equity to be
purchased hereunder, the Purchaser shall deliver to the Seller promissory
notes, substantially in the form of Exhibit A attached hereto, totaling four
million dollars ($4,000,000) in the aggregate (collectively, the
"Promissory Note"). The Promissory Note shall have a maturity of five (5)
years, and shall bear interest at the rate of ten percent (10%) per annum
until paid in full. As security for the Note, at the Closing, the Purchaser
shall deliver to the Seller a security agreement (the "Security Agreement")
substantially in the form of Exhibit B attached hereto, and a stock pledge
agreement (the "Stock Pledge") substantially in the form of Exhibit C attached
hereto. The security interests granted in the Security Agreement and the
Stock Pledge shall remain in full force and effect until the Note has been
repaid in its entirety, or converted as set forth in Section 3 below.
3. CONVERSION OPTION IN THE NOTE. The Note shall contain an option
(the "Conversion Option") to convert the indebtedness represented thereby
into such number of shares of voting common stock of the Purchaser as
shall represent ninety percent (90%) of the shares of such voting stock
issued and outstanding as of the date of conversion, on a fully-diluted
basis (the "Conversion Shares"). In the event that the Seller desires to
exercise the Conversion Option, it shall notify the Purchaser of such fact,
and commence such actions not later than ninety days from the date of the
Note. Within thirty (30) days after the Purchaser determines that the
Conversion may be lawfully completed (or such other time as is mutually
agreed between the parties), there shall be a closing of the Conversion Option
(the "Conversion Closing"). At such Conversion Closing, the Seller shall
deliver to the Purchaser the Note marked Paid in Full, and the Purchaser shall
deliver to the Seller, or its nominees, a certificate or certificates
evidencing the issuance to the Seller of the Conversion Shares, which
Conversion Shares when so delivered shall be validly issued, fully paid, and
non-assessable. The Conversion Closing shall be subject to the condition
that the Purchaser shall have effected a reverse stock split of one (1)
share for every one hundred (100) shares of the Purchaser outstanding as of
such date. The Conversion Closing shall only occur if the foregoing
condition has been fully satisfied or waived prior to or simultaneously
with such Conversion Closing as set forth herein.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLER. Each Seller
hereby represents and warrants to the Purchaser, as to himself only and not
jointly, as of the date hereof, the following:
(a) each Seller is an adult individual, and has full power and capacity
to enter into, execute, deliver and perform this Agreement in accordance with
its terms, which Agreement, once so executed and delivered by such Seller,
shall be the valid and binding obligation of such Seller, enforceable against
him by any court of competent jurisdiction in accordance with its
terms;
(b) no Seller, is bound by or subject to any contract, agreement,
court order, judgment, administrative ruling, law, regulation or any other
item which prohibits or restricts such party from entering into and
performing this Agreement, or which requires the consent of any third party
prior to the entry into or performance of this Agreement, in accordance
with its terms.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby
represents and warrants to the Seller, as of the date hereof, the
following:
the Purchaser is a corporation duly organized and validly existing under
the laws of the State of Delaware, and has full power and authority to enter
into and perform this Agreement in accordance with its terms;
the individuals signing this Agreement on behalf the Purchaser are the
duly elected executive officers of the Purchaser so indicated, and have full
power and authority to execute and deliver this Agreement for and on behalf
of the Purchaser, which Agreement, once so executed and delivered, shall be
the valid and binding obligation of the Purchaser, enforceable against it by
any court of competent jurisdiction in accordance with its terms;
the Purchaser is not bound by or subject to any contract, agreement,
court order, judgment, administrative ruling, law, regulation or any other
item which prohibits or restricts such party from entering into and
performing this Agreement, or which requires the consent of any third party
prior to the entry into or performance of this Agreement, in accordance
with its terms;
(d) a majority of the Purchaser's voting stock is owned by PCG,
which controls, beneficially and of record, fourteen million four hundred ten
thousand (14,410,000) shares of the Company's common stock and a beneficial
interest in another approximately eight hundred eighty five thousand
(885,000) shares of the Company's common stock (common stock being the only
voting securities of the Company outstanding as of the date hereof), on
a fully-diluted basis, representing approximately seventy-five percent
(75%) of the total number of shares of common stock issued and
outstanding as of the date hereof;
(e) the Purchaser has been given every opportunity to review all
documents, and ask all questions of the Seller and the executive officers of
the Company, as it shall have requested prior to executing and delivering
this Agreement to the Seller; and the Purchaser has been advised to
consult with its attorney and tax advisor regarding the consequences of
purchasing the Equity.
INDEMNIFICATION. The parties each hereby agree that they shall be
responsible for, and shall hold harmless and indemnify the other party from and
against, any and all obligations, liabilities, losses, costs, charges,
damages or expenses (including, but not limited to, reasonable attorneys
fees and court costs incurred in defense thereof) of whatever type or nature
to the extent that any such Claim shall result from or arise out of the
breach by such party of any agreement, undertaking, representation or
warranty contained in this Agreement (including, without limitation, all
exhibits and other documents entered into pursuant hereto).
7. CLOSING. The transactions contemplated by this Agreement shall
be consummated at such location, at such time and on such date as the parties
shall mutually agree (the "Closing"). At the Closing, each Seller shall
deliver to the Purchaser a certificate evidencing his respective portion
of the Equity being acquired hereunder, and the Purchaser shall deliver to each
such Seller an originally-signed Note, evidencing such Seller's pro rata
portion of the Purchase Price, together with originally-signed copies of the
Security Agreement and the Stock Pledge, and each party shall further
deliver such documents and instruments as the other party may reasonably
request to further the transactions to be consummated at the Closing (all
of such delivery items being referred to herein as the "Closing
Conditions").
8. MISCELLANEOUS PROVISIONS.
(A) NOTICES. All notices, requests, demands and other communications to
be given hereunder shall be in writing and shall be deemed to have been duly
given on the date of personal service or transmission by fax if such
transmission is received during the normal business hours of the
addressee, or on the first business day after sending the same by overnight
courier service or by telegram, or on the third business day after mailing
the same by first class mail, or on the day of receipt if sent by certified
or registered mail, addressed as set forth below, or at such other address
as any party may hereafter indicate by notice delivered as set forth in
this Section 8(a):
If to the Seller: Sellers of Equity in the Company
c/o Los Alamos Energy, LLC
466 Bell Street
Los Alamos, CA 93440
Attn: Mr. Hannes Faul
Managing Member
(with a copy) to: Feldhake, August & Roquemore
600 Anton Boulevard, Suite 1730
Costa Mesa, CA 92626
Attn: Kenneth S. August, Esquire
Partner
If to the Purchaser: Out-Takes, Inc.
1419 Peerless Place
Suite 116
Los Angeles, California 90035
Attn: Mr. Peter C. Watt
President
(with a copy) to: Photo Corporation Group Pty. Limited
P.O. Box 415
Chester Hill, N.S.W. Australia 2162
Attn: Mr. Michael C. Roubicek
Group Commercial Manager
(B) BINDING AGREEMENT; ASSIGNMENT. This Agreement shall constitute
the binding agreement of the parties hereto, enforceable against each of
them in accordance with its terms. This Agreement shall inure to the benefit
of each of the parties hereto, and their respective successors and
permitted assigns; provided, however, that this Agreement may not be assigned
(whether by contract or by operation of law) by either party without the prior
written consent of the other party.
(C) ENTIRE AGREEMENT. This Agreement constitutes the entire and
final agreement and understanding between the parties with respect to the
subject matter hereof and the transactions contemplated hereby, and
supersedes any and all prior oral or written agreements, statements,
representations, warranties or understandings between the parties, all of
which are merged herein and superseded hereby.
(D) WAIVER. No waiver of any provision of this Agreement shall be deemed
to be or shall constitute a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No waiver shall
be binding unless executed in writing by the party making the waiver.
(E) HEADINGS. The headings provided herein are for convenience only
and shall have no force or effect upon the construction or interpretation
of any provision hereof.
(F) COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
FURTHER DOCUMENTS AND ACTS. Each party agrees to execute such other and
further documents and to perform such other and further acts as may be
reasonably necessary to carry out the purposes and provisions of this
Agreement.
GOVERNING LAW; VENUE. This Agreement shall be governed by and construed
in accordance with the internal laws of the State of California, without
giving effect to the principles of conflicts of laws applied thereby.
(I) INJUNCTIVE RELIEF. Each party hereby agrees that should either
party materially breach any of its respective obligations under this
Agreement, including without limitation any exhibit or other document entered
into between the parties pursuant hereto, the non-breaching party would
have no adequate remedy at law, since the harm caused by such a breach may not
be easily measured and compensated for in damages. Accordingly, the parties
agree that in addition to such other remedies as may be available to the
non-breaching party at law, such party may also obtain injunctive or other
equitable relief including, but not limited to, specific performance, to
compel the breaching party to meet its obligations under this Agreement. All
of such remedies available to any party hereunder shall be cumulative and
non-exclusive.
(J) CONFIDENTIALITY. By their execution hereof, each party
hereby acknowledges to the other that certain information furnished to it by
the other party is proprietary to such disclosing party, and neither the
receiving party, nor any affiliate, employee, officer, director,
shareholder, agent or representative of such receiving party shall have
any rights to distribute or divulge any of such Confidential Information
to any third party without the disclosing party's prior, written consent,
or to use any such Confidential Information in any way detrimental to the
disclosing party or its affiliates, or which would otherwise destroy, injure
or impair any of the disclosing party's rights in or in respect of any such
Confidential Information including, without limitation, by using of such
Confidential Information to establish or assist any person or entity which
is, or will be, directly or indirectly in competition with the disclosing
party. For purposes of this Agreement, the term "Confidential
Information" shall mean any and all proprietary information belonging to
the disclosing party, whether tangible or intangible, written or oral,
including, without limitation, any non-public intellectual property
rights, trade secrets, designs, books and records, computer software and
files, and lists of (and/or information concerning) such disclosing party's
financial condition, customers, suppliers, vendors, sources, methods,
techniques and other business relationships or information.
(K) SEVERABLE PROVISIONS. The provisions of this Agreement are severable,
and if any one or more provisions is determined to be illegal,
indefinite, invalid or otherwise unenforceable, in whole or in part, by
any court of competent jurisdiction, then the remaining provisions of this
Agreement and any partially unenforceable provisions to the extent
enforceable in the pertinent jurisdiction, shall continue in full force and
effect and shall be binding and enforceable on the parties.
(L) EXHIBITS. All Schedules and Exhibits attached hereto are
hereby incorporated by reference herein as an integral part of this Agreement,
with the same force and effect as if the same had been written herein in their
entirety.
SURVIVAL. The provisions of Sections 4, 5, 6 and 8(j) shall expressly
survive any expiration, termination or revocation of this Agreement by
either party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date and year first above written.
THE PURCHASER:
OUT-TAKES, INC. ATTEST:
By: /s/ By: /s/
Peter C. Watt Michael C.
Roubicek
President Secretary
THE SELLER:
HANNES FAUL WITNESS:
/s/ /s/
LANCE HALL WITNESS:
/s/ /s/
THE INWOOD 1991 TRUST WITNESS:
By: /s/ /s/
James C. Harvey
Trustee
EXHIBIT A TO
PURCHASE AND SALE AGREEMENT
THIS CONVERTIBLE PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER THE LAWS OF ANY STATE, AND MAY
NOT BE RESOLD, ASSIGNED, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO
THE MAKER THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
OUT-TAKES, INC.
CONVERTIBLE PROMISSORY NOTE
-----------------------------
$_________ August __, 1998
FOR VALUE RECEIVED, OUT-TAKES, INC., a corporation organized and existing
under the laws of the State of Delaware (hereinafter referred to as the
"Maker"), hereby promises to pay to the order of
_______________________________, an adult individual residing in the County of
________, State of California (hereinafter referred to as the "Payee"), at
Payee's principal address located at ________________________, _______
California, 9____, or such other place or places as the Payee may hereafter
direct from time to time, in lawful money of the United States and in
immediately available funds, the principal sum of _____________________ DOLLARS
($_________). This Convertible Promissory Note (hereinafter referred to as the
"Note") shall accrue simple interest at the rate of ten percent (10%) per annum.
Amounts of principal and accrued interest due and payable in respect of this
Promissory Note shall be paid out of gross operating revenues, as available,
with payments to be made monthly in arrears up to ninety-nine percent (99%) of
gross revenues from operations, being applied first to accrued interest and then
to principal, with the balance due on August __, 2003 (the "Maturity Date"),
unless this Note is earlier converted in accordance with the provisions set
forth below (the "Conversion Date"). The principal amount of this Promissory
Note shall be due and payable on the Maturity Date, unless earlier converted in
accordance with the provisions set forth herein.
This Promissory Note may be converted into shares of common stock of the
Maker, having a par value of One Cent ($0.01) per share, (the "Common Stock") in
whole or in part, in the manner set forth below. Each Promissory Note shall be
convertible into such number of shares of Common Stock of the Maker as are
obtained by (a) calculating the total outstanding amount of principal and
accrued interest owed by Maker to all sellers of Los Alamos Energy, LLC
(pursuant to that certain Purchase and Sale Agreement dated as of August 31,
1998, by and between Maker and the several sellers named therein (the "Purchase
Agreement") as of the effective date of such conversion (the "Conversion Date");
(b) determining what percentage of such total amount is represented by the
indebtedness evidenced by this Note; and (c) multiplying such percentage by the
total number of Conversion Shares available (as such term is defined in the
Purchase Agreement).
The indebtedness represented by this Promissory Note constitutes senior
secured indebtedness of the Maker, and shall be senior in right of payment to
all other indebtedness of the Maker. By its execution of this Note, the Maker
represents and warrants that it is not subject to any indebtedness which would
be senior to, or pari passu with, the indebtedness to the Payee evidenced by
this Note, other than in accordance with the Purchase Agreement.
The Maker hereby agrees and covenants with the Payee that, in the event that
the Maker shall hereafter become in default under this Promissory Note, the
Maker shall not make or authorize any dividend or other distribution to
shareholders of the Maker prior to the repayment in full of any amounts
outstanding hereunder.
Upon the occurrence of either of the following specified Events of Default
(each herein called an "Event of Default"):
(i) Breach of Agreements. The Maker shall be in breach or violation, for a
period of three (3) days, of any material agreement, undertaking, obligation,
representation, warranty or statement contained in this Promissory Note, the
Purchase Agreement, or any other Exhibit or document entered into by the Maker
pursuant thereto; or
(ii) Insolvency. The Maker shall suspend or discontinue its business, or
make an assignment for the benefit of creditors or a composition with creditors,
shall file a petition in bankruptcy, shall be adjudicated insolvent or bankrupt,
shall petition or apply to any tribunal for the appointment of any custodian,
receiver, liquidator or trustee of or for it or any substantial part of its
property or assets, shall commence any proceedings relating to it under any
applicable bankruptcy, reorganization, arrangement, readjustment of debt,
receivership, dissolution or liquidation law or statute of any jurisdiction,
whether now or hereafter in effect; or there shall be commenced against the
Maker any such proceeding which shall remain undismissed or unstayed for a
period of forty-five (45) days or more, or any such order, judgment or decree
shall be entered, or the Maker shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any such proceeding or in the
appointment of any such custodian, receiver, liquidator or trustee; or the Maker
shall take any action for the purpose of effecting any of the foregoing;
then, and in any such event, and at any time thereafter if any Event of Default
shall be continuing, the Payee may, by written notice to the Maker, declare the
entire principal of this Promissory Note, and any accrued but unpaid interest in
respect thereof, to be forthwith due and payable. The Maker hereby expressly
waives presentment, demand, protest or other notice of any kind.
This Promissory Note shall inure to the benefit of the Payee, his or her
heirs, executors, successors and permitted assigns. The obligations of the
Maker arising hereunder shall become the obligations of any successor in
interest or permitted assignee thereof, whether by contract or by operation of
law.
This Promissory Note shall be governed by and construed in accordance with the
internal laws of the State of California applicable to the enforcement and
operation of such instruments in the State, and without giving effect to the
principles of conflicts of laws which may be applied thereby. Any action
brought under or in respect of this Promissory Note shall be brought only in a
court of competent jurisdiction sitting in the County of Los Angeles, State of
California. If any suit or other proceeding shall be instituted with respect to
this Promissory Note, the prevailing party shall, in addition to such other
relief as the court may award, be entitled to recover reasonable attorneys'
fees, expenses and costs of investigation.
IN WITNESS WHEREOF, the Maker hereby sets its hand and seal in the County of
Los Angeles, State of California, as of the date and year first above
written.
THE MAKER:
OUT-TAKES, INC. ATTEST:
[SEAL]
By: _________________________ By:
____________________
Peter C. Watt Michael C.Roubicek
President Secretary
EXHIBIT B TO PURCHASE AND SALE AGREEMENT
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement") is made and entered into as of this
___th day of August, 1998 by and between OUT-TAKES, INC., a corporation
organized and existing under the laws of the State of California (the "Grantor")
and the several individuals named on the signature page of this Agreement
(collectively, the "Secured Party").
WHEREAS, the Grantor and the Secured Party have entered into that certain
Purchase and Sale Agreement, dated as of August ___, 1998 (the "Purchase
Agreement"), pursuant to which Grantor has purchased (the "Acquisition") all of
the equity securities issued and outstanding of LOS ALAMOS ENERGY, LLC, a
California limited liability company (the "Subsidiary"); and
WHEREAS, the Grantor has delivered to the Secured Party, as the Purchase
Price for the Acquisition, a Secured Promissory Note in the amount of Four
Million Dollars ($4,000,000) dated as of even date herewith (the "Note"); and
WHEREAS, in order to induce the Secured Party to accept the Note as
consideration for the Acquisition, the Grantor has agreed to provide the Secured
Party with a security interest in and first lien upon all of its assets and the
assets of the Subsidiary, and the parties now desire to enter into this
Agreement to evidence the same;
NOW, THEREFORE, in consideration of the foregoing premises and the promises and
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties,
intending to be legally bound, hereby agree as follows: 1. Grant
of Security Interest. Grantor hereby assigns, conveys and grants to Secured
Party a continuing security interest in and first lien upon all of Grantor's
right, title and interest in and to all of the assets and properties owned or
used by the Grantor in the conduct of its business, or the business of the
Subsidiary, now owned or hereafter acquired at any time during the term
hereof, whether tangible or intangible, fixed, movable or fixtures, of whatever
kind or nature and wherever located, including, without limitation, all cash and
cash equivalents, securities, accounts receivable, plant and equipment,
inventory, rolling stock, materials, supplies, intellectual property rights,
contract rights, choses in action, and any proceeds from the sale, lease,
transfer or other disposition of any of such assets, whether for cash or
property (all of the foregoing being herein referred to collectively as the
"Collateral"). The security interest granted herein is intended to secure the
prompt payment, when due, of all amounts due and payable to Secured Party under
the Note including, without limitation, all principal amounts due thereunder,
all interest accrued thereon, and all applicable late charges or other fees due
under the Note, as well as the performance in full of all of Grantor's
obligations under the Purchase Agreement (collectively, the "Secured
Obligations").
2. Transfers and Other Liens. Grantor hereby acknowledges to, and agrees
with, Secured Party that for so long as this Agreement shall be in effect,
Grantor, without the prior written consent of the Secured Party, shall not:
(a) sell, assign or otherwise dispose of, any or all of the Collateral
(except in the ordinary course of business); or
(b) create or permit to exist or be created any lien, mortgage, security
interest, or other charge or encumbrance upon or with respect to the Collateral,
other than the Secured Obligations; or
(c) move the Collateral from any location other than the Grantor's principal
place of business located at the address set forth in Section 6(b) below.
Remedies Upon an Event of Default.
- ---------------------------------------
In the event that the Grantor shall fail to perform fully any Secured Obligation
on the date such performance is due, or if the Grantor should breach or be in
default of any other provision of the Note, the Purchase Agreement or this
Agreement (any of such occurrences being hereinafter referred to as an "Event of
Default"), to the extent that such Event of Default is not cured or waived
within ten (10) days after the occurrence of such Event of Default, then the
Secured Party shall be entitled to foreclose upon and take possession of the
Collateral, in satisfaction (full or partial as the case may be) of the
indebtedness owed by Grantor. Promptly after retaking possession of the
Collateral upon any such foreclosure, the Secured Party shall, after deducting
therefrom any amounts expended by the Secured Party in enforcing the Note, the
Purchase Agreement or this Agreement and/or repossessing the Collateral
(including, without limitation, the cost of reasonable attorneys' fees), remit
to the Grantor the difference between the liquidation value of the Collateral on
the date of repossession thereof and the sum of any amounts paid to the Secured
Party to purchase the Collateral in a liquidating sale. The parties hereby
agree that any such payment to Grantor upon such foreclosure may be made in
stock of the Grantor or a five (5)-year promissory note bearing interest at the
rate of ten percent (10%) per annum, or some combination thereof, as determined
in the sole discretion of the Secured Party.
The Secured Party hereby agrees with the Grantor that, in the event it shall
exercise any or all of its remedies upon an event of default set forth in Clause
3(a) above, it shall look first to satisfy all of the Secured Obligations out of
the assets of the Subsidiary, which it shall exhaust as fully as reasonably
possible prior to looking to the assets of the Grantor to satisfy any remaining
Secured Obligations.
4. Continuing Security Interest; Termination of Same.
------------------------------------------------------
(a) This Agreement shall create a continuing security interest in the
Collateral, and shall (i) remain in full force and effect until all of the
Secured Obligations of Grantor shall have been paid or performed in full; (ii)
be binding upon the Grantor, its successors and permitted assigns; and (iii)
inure to the benefit of the Secured Party and their respective successors,
heirs, executors, administrators, transferees and assigns.
(b) Upon the payment or performance in full of all Secured Obligations, and
any fees, costs and penalties owing thereon, the security interest granted
hereby shall automatically terminate. Upon any such termination, the Secured
Party shall execute and deliver to the Grantor such documents as the Grantor
shall reasonably request to evidence such termination and to effect the release
of the Collateral.
5. Amendments and Waivers. No amendment or waiver of any provision of this
Agreement, the Purchase Agreement or the Note, and no consent to any departure
by the Grantor herefrom or therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Secured Party, and then such waiver
or consent shall be effective only in the specific instance and for the express
written purpose for which given.
6. Notices. In the event that any notice or other communication is to be
sent pursuant to this Agreement, such notice shall be in writing, sent by telex
or by certified mail, return receipt requested, or by delivery in person, or by
overnight courier, addressed as follows, or to such other address as either
party may notify the other of in accordance with the provisions hereof:
if to Secured Party, to: c/o Mr. Hannes Faul
466 Bell Street
Los Alamos, CA 93440
(with a copy) to: Feldhake, August & Roquemore
600 Anton Boulevard, Suite 1730
Costa Mesa, CA 92626
Attn: Kenneth S. August, Esquire
Partner
if to Grantor, to: OUT-TAKES, INC.
1419 Peerless Place
Suite 116
Los Angeles, CA 90035
Attn: Mr. Peter C. Watt
President
(with a copy) to: Photo Corporation Group
Pty. Limited
P.O. Box 415
Chester Hill, N.S.W.
Australia 2162
Attn: Mr. Michael C. Roubicek
Group Commercial Manager
All notices and other communications hereunder shall be deemed given
when telexed or delivered, or upon receipt if mailed, in accordance
with this paragraph.
7. Further Assurances. Grantor agrees to execute and deliver immediately
upon request, financing statements on Form UCC-1 for recordation with the
California Secretary of State; and (b) such other documents as may be necessary
to perfect the Secured Parties' security interests in the Collateral.
8. Entire Agreement. This Agreement, together with the Note, constitutes
the entire agreement between Grantor and Secured Party, with respect to the
subjects contained herein, and supersedes any prior agreements or
understandings, whether written or oral, express or implied.
9. Governing Law; Venue. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without reference to
principles of conflicts of law. Any action brought by any party to enforce any
of the terms or provisions of this Agreement or the note, or otherwise in
connection with or relating to this Agreement, shall be brought only in the
courts of the State of California in the county of Los Angeles, and the parties
hereby accept the exclusive jurisdiction of such courts for all disputes arising
under this Agreement, the Purchase Agreement or the Note.
10. Miscellaneous. All other provisions of the Purchase Agreement,
including, without limitation, the specific clauses setting forth the governing
law and venue of this Agreement, the right of further assurances, severability,
specific performance and other injunctive relief, and every other aspect of the
performance, interpretation relationship between the parties and other
miscellaneous provisions, are hereby incorporated herein by reference from the
Purchase Agreement, and are of force and effect as fully as if the same had been
repeated herein in their entirety.
IN WITNESS WHEREOF, Grantor has caused this Agreement to be duly executed and
delivered as of the date first above written.
THE GRANTOR:
OUT-TAKES, INC. ATTEST:
By: _____________________ By: _____________________
Peter C. Watt Michael Roubicek
President Secretary
THE SECURED PARTY:
LOS ALAMOS ENERGY, LLC WITNESS:
By: ____________________________ By: ________________________
Hannes Faul
Managing Member
THE INDIVIDUALS: WITNESS:
_____________________ ___________________
_____________________ ___________________
EXHIBIT 10.33 ASSET LEASE AGREEMENT BETWEEN COMPANY AND COLORVISION,
INC. DATED OCTOBER 26, 1998
ASSET LEASE AGREEMENT
This is an Asset Lease Agreement ("Agreement"), effective as of October __,
1998, by and between Colorvision International, Inc., a Florida
corporation, located at 8250 Exchange Drive, Suite 132, Orlando, Florida 32809
(hereinafter referred to as "Lessee") and Out-Takes, Inc., a Delaware
corporation located at 1419 Peerless Place, Suite 116, Los Angeles, California
90035 (hereinafter referred to as "Lessor").
BACKGROUND
Lessor owns and operates the Out Takes photo store (the "Business") located at
Universal Studios California City Walk (the "Location"). Lessee seeks to
lease from Lessor, and Lessor seeks to lease to Lessee certain of the assets of
the Business for use at the Location as set forth in this Agreement, subject to
the terms and conditions set forth below. Accordingly, in consideration of the
mutual covenants and agree-ments set forth below, the parties agree as follows:
TERMS
1. LEASE OF ASSETS. The parties hereby agree that, at Closing (as defined
below), Lessor shall lease the assets of the Business set forth on Schedule 1 to
this Agreement (collectively the "Assets") provided, however, that within thirty
(30) days from the date of this Agreement they shall jointly prepare an item by
item list of the Assets being leased hereunder, and the agreed-upon value
thereof, which list will then be attached to this Agreement as a revised
Schedule 1. Lessor further agrees that the Assets shall be used only at the
Location during the Lease Term, as hereafter defined. Upon the expiration of
the Lease Term, or its earlier termination, all of the Assets shall be returned
to Lessor hereunder in the same condition as they are being delivered to Lessee
at the Closing, normal wear and tear excepted, and free and clear of any lien,
charge, security interest, claim or other encumbrance. The Assets are being
leased to Lessee on an "as is-where is" basis, and Lessor makes no
representation or warranty to Lessee, express or implied, as to the condition of
any Asset or suitability to the Business or the contemplated use thereof by
Lessee.
Throughout the entire Lease Term, Lessee hereby agrees with and covenants to
Lessor that it shall not do any of the following, nor suffer or permit any of
the following to occur to the extent the same shall be within its discretion or
control, without having obtained the prior written consent of Lessor:
(a) sell, lease, sublease, exchange, transfer or otherwise dispose of
any of the Assets;
(b) subject any of the Assets to any lien, security interest or
encumbrance;
(c) take any action which would materially destroy, injure, alter or
modify any Asset, or the right of Lessor to use any Asset, or which would render
defective or otherwise encumber good and marketable title to any such Asset, to
the extent such title exists in respect of such Asset at the Closing.
2. ASSIGNMENT OF LEASE. At Closing (as defined below), Lessor shall assign
and transfer to Lessee all of its right, title and interest in and to that
certain Business Lease executed as of November 13, 1992 ("Lease") between Lessor
and MCA Development Company, a division of MCA Inc. ("Landlord") pursuant to an
Assignment of Lease substantially in the form attached to this Agreement as
Exhibit "A" ("Assignment"), which Assignment requires the written consent of the
Landlord.
3. LEASE PRICE. The rental price for the Assets (the "Lease Price") shall
be a monthly amount equal to seven percent (7%) of the gross revenues (less
applicable sales taxes due on goods sold at the Location) ("Gross Revenues")
derived by Lessee from the Business, or any other business conducted or engaged
in by Lessee at the Location during each month, or portion thereof, that Lessee
shall be in possession of the Assets, for the duration of the Lease, as
currently extended through May 30, 2005 (the "Lease Term"). In the event Lessee
ceases to conduct any business at the Location: (i) for reasons of bankruptcy or
insolvency, (ii) acts of God, emergencies, strikes or other causes out of
Lessee's control; (iii) any loss of the right of Lessor to lease the Assets to
Lessee prior to the conclusion of the Lease Term; or (iv) any termination of
Lease by Landlord if through no fault of the Lessee, then no further payments
shall be due Lessor hereunder from the date Lessee ceases to operate at the
Location until Lessee resumes business at the Location, if such a resumption of
business occurs. Lessee acknowledges to Lessor by its execution of this
Agreement that it intends in good faith to operate at the Location profitably in
accordance with the Lease, and shall use its best efforts throughout the Lease
term to do so, and Lessor acknowledges to Lessee that it understands such
profitable operation cannot be guaranteed.
4. PAYMENT OF LEASE PRICE. Subject to the terms of this Agreement and in
reliance on the representations and warranties of Lessor set forth below, Lessee
shall lease, at Closing, the Assets and, in full consideration therefor, shall:
(a) pay $50,000.00 as a deposit ("Deposit") to Lessor at Closing.
Lessee shall have the option of making the payment by cashier's check or bank
wire. Lessor shall provide bank wire instructions to Lessee if requested by
Lessee; and
(b) pay the entire amount of the Lease Price due and payable to Lessor
(together with the applicable amount of any taxes as may be required in
connection with payments of the Lease Price) on or before the fifteenth day of
the month following each month of the Lease Term; provided, however, that Lessee
may deduct up to $4,166.67 each month from any sum otherwise payable to Lessee
pursuant to this subsection 4(b) until the entire amount of the Deposit has been
repaid to Lessee; further provided that the amount of any security deposits
shown on Schedule 2 to this Agreement which are transferred to, or credited to
the account of, Lessee by the holders of such deposits shall be deemed
repayments of the Deposit to Lessee and shall thereby reduce, by a corresponding
amount, any deductions from the Gross Revenues otherwise payable to Lessor which
Lessee may make pursuant to this Subsection 4(b).
5. LICENSE TO USE TRADE NAME. In further consideration of the payment
of the Lease Price to Lessor as set forth above, the Lessor hereby grants to
Lessee a license (the "License") to use the trade name "Out-Takes" (the "Trade
Name") only in connection with the Business at the Location and for so long as
Lessee operates the Business at the Location. Lessee shall have no right to
use the Trade Name in connection with any other present or future operations of
Lessee. Lessee recognizes and acknowledges Lessor's ownership of and prior
rights in the Trade Name and shall not take any action inconsistent with
Lessor's ownership of and prior rights in the Trade Name or which would
otherwise destroy or impair Lessor's interest in such rights.
Notwithstanding any other provisions contained in this Agreement concerning the
rights of Lessor to indemnification hereunder, and without limiting or
excluding any of such rights, Lessee hereby expressly agrees with Lessor that in
the event Lessor shall be named in any lawsuit or other proceeding solely by
virtue of Lessee's use of the Trade Name hereunder (and not in connection with
any actual liability or specific claim against Lessor in such lawsuit or
proceeding), then Lessee shall provide to the Lessor directly, and promptly upon
its request therefor, the full amount of any fees or expenses (including,
without limitation, reasonable attorneys' fees and expenses) incurred by Lessor
in having itself dismissed from any such action.
The license to use the Trade Name granted hereunder shall be co- terminous
with the Lease Term or such shorter period as Lessee shall actually operate the
Business at the Location. Lessor agrees that, for so long as this Agreement
shall be in effect, it shall not take any action, or omit to take any action
which would have the effect of impairing any of Lessor's rights in the Trade
Name, or the value thereof to Lessor. Lessor covenants that it shall not enter
into any agreement, arrangement or undertaking, the effect of which would be to
result in the transfer, assignment, mortgage, hypothecation, dilution or
extinguishment of the Trade Name or any rights of Lessor therein.
6. CLOSING. The closing of the transaction contemplated by this Agreement
(the "Closing") shall take place in Los Angeles, California on October ___,
1998, or such other date and/or place as the parties mutually agree in writing
(the "Closing Date").
7. DELIVERIES BY LESSOR. At Closing, Lessor shall deliver to Lessee:
(a) an originally executed copy of this Agreement;
(b) the Assignment, duly executed by Lessor;
(c) a certificate of actions by Board of Directors of Lessor
authorizing the transaction contemplated by this Agreement to be undertaken by
Lessor.
8. DELIVERIES BY LESSEE. At Closing, Lessee shall deliver to Lessor (1) an
originally executed copy of this Agreement; (2) the Deposit in accordance with
subsection 4(a) hereof; (3) the Assignment, duly executed by Lessee; and (4) a
certificate of action by the Board of Directors of Lessee authorizing the
transactions contemplated by the Agreement to be undertaken by Lessee.
9. LIABILITIES OF LESSOR. Except with respect to the Assignment and except
as provided in Schedule 3 to this Agreement, Lessee will not assume any trade
and accounts payable that are, or have become due for payment as of the Closing
date or any other liabilities not incurred by Lessor in the ordinary course of
business through the Closing Date. Without limiting the generality of the
foregoing, Lessee will not assume intercompany liabilities, payables or
obligations of Lessor, nor will it assume any of Lessor's liabilities or
obligations arising out of employment agreements between Lessor and any of
Lessor's employees or Lessor's liabilities or obligations relating to the
negotiation and/or closing of the transaction contemplated herein including, but
not limited to, any broker commission payable in connection with the
transaction. Lessee shall be solely and exclusively liable for, and Lessor
expressly does not agree to assume any of the obligations created or liabilities
imposed upon Lessee by virtue of its use of the Assets after the Closing.
Lessee further covenants to and agrees with Lessor that in the use of the Assets
as contemplated herein, it shall not disturb any agreement to which such Assets
are subject nor by which they are bound, nor create, nor suffer or permitted to
be created or imposed, any lien, charge or other liability to, upon or for the
account of, Lessor.
10. INDEMNIFICATION.
(a) Except as otherwise contemplated herein, Lessor shall indemnify and
hold Lessee harmless from, against, and in respect of the following:
(i) any and all liabilities, obligations, debts, contracts or
other commitments of Lessor of any kind, known or unknown, whether fixed or
contingent, and whether arising in contract, in tort, or otherwise from the
operation of the Business at the Location prior to Closing including, but not
limited to, any liability of Lessor for sales and use taxes;
(ii) any damage or deficiency resulting from any misrepresentation
in or omission from any certificate or other instrument furnished or to be
furnished to Lessee by Lessor pursuant to this Agreement;
(iii) any and all losses, liabilities, claims, damages and
expenses, including court costs and reasonable attorney's fees, arising out of
any claim for brokerage or other commissions relative to this Agreement or the
transactions contemplated hereby insofar as any such claim arises by reason of
services alleged to have been rendered to or at the instance of Lessor;
(iv) any material breach by Lessor of this Agreement;
and
(v) all actions, suits, proceedings, claims, demands,
assessments, judgments, legal fees, costs and expenses incident to any of the
foregoing or arising out of any act or omission of Lessor in the conduct of
the Business before the Closing.
(b) Lessee shall indemnify and hold Lessor harmless from, against, and
in respect of the following:
(i) any and all liabilities, obligations, debts, contracts or
other commitments of Lessee of any kind, known or unknown, whether fixed or
contingent, and whether arising in contract, in tort, or otherwise from the
operation of the Business (or any other business or activity conducted) at the
Location after the Closing including, but not limited to, any liability of
Lessee for sales and use taxes and any use of the Trade Name at any location by
Lessee in breach of Section 5 hereof; and
(ii) any material breach by Lessee of this Agreement.
(iii) any liability or obligation arising out of the inclusion in
the list of Assets of the license agreements set forth on Schedule 1 hereto,
including without limitation for the failure of Lessor to obtain the consent of
any licensor thereunder prior to leasing such licenses to Lessee, or any
liability or obligation which may be agreed upon between Lessee and any of such
licensors subsequent to the date of the Closing.
(c) Each party agrees to give notice to the other party of the
assertion of any claim or demand or the institution of any action, suit, or
proceeding in respect of which indemnification may be claimed hereunder and the
party receiving such notice shall have the right to undertake the defense or
settlement of such action, suit or proceeding ("Litigation") at it's own
expense. If the party receiving such notice does not undertake (or, within ten
(10) days thereafter, express its intention to so undertake) the defense or
settlement of the Litigation, the party giving such notice may control the
defense or settlement of the Litigation, provided, that if at any time during
the pendency of such Litigation it shall be deemed in good faith by either
party, or its respective counsel, that the interests of the respective parties
in respect of such Litigation are or may become adverse, or otherwise conflict
in any material way, then each party shall be entitled to separate counsel
thereafter, and, provided, further, that in no event shall either party be
entitled to make any offer or agreement of settlement in respect of any
such Litigation which is or will or could become binding upon the other party
hereto, without having obtained such other party's prior written consent to
be bound thereby. In the event Lessee is controlling the defense or
settlement of Litigation pursuant to this Subsection 10(c), and provided that
Lessor is not entitled to indemnification in respect of such Litigation
pursuant to Section 10(b) above, Lessor hereby authorizes Lessee to deduct the
costs of such defense or settlement from any sums due Lessor pursuant to
subsection 4(b) hereof. In the event such costs exceed any sums due Lessor
pursuant to subsection 4(b) hereof, Lessor shall remit the amount of such
costs directly to Lessee.
(d) Notwithstanding anything else contained in this Section 10, Lessee shall
promptly notify Lessor in the manner set forth in Section 16(d) below in the
event it becomes aware of any threatened or pending litigation involving or
relating to the Business, any other business or activity conducted at the
Location, the Assets (or any part thereof) or the Lease.
11. REPRESENTATIONS AND WARRANTIES OF LESSOR. Lessor represents and
warrants to Lessee as follows:
(a) Organization and Standing. Lessor is a corporation organized
under the laws of the State of Delaware and its status is active.
(b) Power and Authority. Lessor has the requisite corporate authority
to enter into this Agreement and to incur and perform its obligations under this
Agreement. Lessor has all necessary corporate power to own, lease, hold, and
operate all of its properties and assets and to carry on the Business as it is
now being conducted. The execution, delivery and performance by Lessor of this
Agreement has been authorized by all necessary corporate action. Upon the
execution and delivery of this Agreement, this Agreement shall constitute a
valid and binding agreement of Lessor, enforceable against Lessor in accordance
with its terms, subject only to applicable bankruptcy, moratorium and similar
laws.
(c) Title to Assets. Except for any licenses listed on Schedule
7 hereto with respect to which Lessor makes no representation or warranty as
to title, quality or validity thereof, Lessor has good and marketable title to
all of the Assets, free and clear from all liens, encumbrances, security
interests or claims of any kind or nature, other than liens incurred in
the ordinary course of the Business for trade or in connection with the
purchase of assets, or for services rendered to Lessor by materialmen or other
similar persons, or for taxes not yet due and payable, or which otherwise do
not have a material adverse impact upon the financial condition of the Business.
With respect to any security interests by a third party in the Assets,
Lessor shall deliver to Lessee at closing (or as soon thereafter as Lessor may
become aware thereof) a copy of a duly filed UCC Form 3 terminating the
security interest of any third party in the Assets.
(d) Approvals and Consents. The execution, delivery and performance of
this Agreement (and the transactions contemplated by this Agreement) do not and
will not: (i) contravene any provision of the articles of incorporation or
bylaws of Lessor; (ii) result in a material breach of, constitute a material
default under, result in the modification or cancellation of, or give rise to
any right of termination, modification or acceleration in respect of any
indenture, loan agreement, mortgage, lease or any other contract, or agreement
to which Lessor or any of the Assets are bound (other than in respect of the
Lease); (iii) other than as may apply to Lessee, result in the creation of any
security interest, pledge, lien, charge, claim, option, right to acquire,
encumbrance, restriction on transfer, or adverse claim of any nature whatsoever
upon any of the Assets; (iv) violate any writ, order, injunction or decree of
any court or any federal, state, municipal or other domestic or foreign
governmental department, commission, board, bureau, agency or instrumentality,
which violation or default in any such case would have a material adverse effect
on the Business; (v) require approval of the shareholders of Lessor; or (vi)
require any authorization, consent or approval of, or filing with or notice to,
any governmental or judicial body or agency, or any other entity or person,
including, without limitation, any filing with the Securities and Exchange
Commission ("SEC") other than any obligation Lessor may have to file a Form 8-
K as contemplated by Section 15 of this Agreement.
(d) Litigation. There are no actions or suits at law or in equity now
---------- pending or, to the actual knowledge of Lessor,
threatened which could have a material adverse effect on the Business or any of
the Assets, or the ability of Lessor to consummate the transactions
contemplated by this Agreement.
(e) Collective Bargaining Agreements. There are no collective
---------------------------------- bargaining agreements to
which Lessor is a party or by which Lessor is bound, and there is no pending
or threatened labor dispute, labor union organizing attempt, strike, or work
stoppage affecting either Lessor or the Business.
(f) Benefit Plans. There are no benefit plans applicable to any of the
-------------
employees of the Business that are currently in effect or which, with respect to
the Business, Lessor has committed to implement prior to the Closing, except as
shown on Schedule 4 to this Agreement.
(g) Contracts. Schedule 5 to this Agreement lists all material
contracts (including contracts with consultants), leases (where Lessor is lessor
or lessee) except the Lease, licenses, agreements, and undertakings of Lessor to
which it is or at the Closing Date will be a party and bound, or to which any of
its properties or Assets are or will be subject, and, if written, Lessor shall
have supplied Lessee with copies of such documents. Except as shown on Schedule
6 to this Agreement, each such contract, undertaking or other commitment listed
in Schedule 5 is, and upon the Closing will be (except as completed or expired
by its terms), valid and enforce-able in accordance with its terms, and no party
is in default under any material provision thereof.
(h) Trade Name. Lessor has adopted and uses the Trade Name in
connection with the Business. Lessor has not been notified that Lessor's use of
the trade name or logo infringes the rights of a third party. No proceedings
have been or will at the Closing Date have been instituted or threatened which
assert infringement of rights of any third party against Lessor pursuant to its
use of the Trade Name.
(i) Compliance with Laws. As of the date of this Agreement, to the
actual knowledge of Lessor, (i) there is no violation of any applicable
laws, regulations or orders relating to the conduct of the Business, and (ii)
there is no use of the Assets by Lessor in the Business which violates any
applicable laws, codes, ordinances and regulations, whether federal, state or
local, which, in either case, would have a material adverse effect on
the Business.
(j) Conditions Affecting the Business. Other than as applicable
to Gerry Wersh, who is deemed to be essential to the technical aspects of
the Business as currently being conducted, Lessor is not aware of any
extraordinary or unusual conditions in existence on the date hereof with
respect to the markets, services, facili-ties, personnel, or supplies of
Lessor that is not public information or known generally in Lessor's industry or
which has not been disclosed in writing to Lessee and which Lessor
believes will result in a material and adverse effect on the Business not
experienced by others in similar businesses.
(k) No Misrepresentations. None of the representations and warranties
of Lessor set forth in this Agreement or in the attached exhibits and schedules
nor any information or statements contained in the lists or documents provided
or to be provided by Lessor to Lessee, notwithstanding any investigation thereof
by Lessee, contains or will contain any untrue statement of a material fact, or
omits or will omit the statement of any material fact necessary to render the
same not misleading.
(l) Conveyance Not Fraudulent. Lessor is not making the transactions
contemplated by this Agreement with the intent to hinder, delay, or defraud
either its present or future creditors.
(m) Discontinuance of Business. Upon consummation of the transactions
contemplated hereby, Lessor will discontinue its operation of the Business, but
not of any other business owned or operated by Lessor.
12. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee represents
and warrants to Lessor as follows:
(a) Organization and Standing. Lessee is a corporation organized
and existing under the laws of the State of Florida and its status is
active.
(b) Power and Authority. Lessee has the requisite corporate authority
to enter into this Agreement and to incur and perform its obligations under this
Agreement. Lessee has all necessary corporate power to own, lease, hold, and
operate the Assets and carry on the Business as it is now being conducted. The
execution, delivery, and performance by Lessee of this Agreement has been
authorized by all necessary corporate action. Upon the execution and delivery
of this Agreement, this Agreement shall constitute a valid and binding agreement
of Lessee, enforceable against Lessee in accordance with its terms, subject only
to applicable bankruptcy, moratorium, and similar laws.
(c) Approvals and Consents. The execution, delivery and performance
of this Agreement (and the transactions contemplated by this Agreement) do not
and will not: (i) contravene any provision of the articles of
incorporation or bylaws of Lessee; (ii) result in a breach of, constitute a
default under, result in the modification or cancellation of, or give
rise to any right of termination, modification, or acceleration in
respect of any indenture, loan agreement, mortgage, lease or any other
contract, or agreement to which Lessee is bound; (iii) require any
authorization, consent or approval of, or filing with or notice to, any
governmental or judicial body or agency, or any other entity or person.
(d) No Misrepresentations. None of the representations and warranties
of Lessee set forth in this Agreement or in the attached exhibits and schedules,
nor any information or statements included in the lists or documents to be
provided by Lessee to Lessor, notwithstanding any investigation thereof by
Lessor, contains or will contain any untrue statement of a material fact, or
omits or will omit the statement of any material fact necessary to render the
same not misleading.
(e) Brokers' Fees. Lessee has no liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement.
13. SURVIVAL OF PROVISIONS. All representations, warranties, agreements,
covenants, assignments and licenses made or granted herein by Lessor or
Lessee in connection with the transactions contemplated by or set forth in this
Agreement or contained in any certificate, schedule, exhibit, or other document
delivered pursuant to this Agreement shall survive the Closing.
14. DISCLOSURE AND NON-INTERFERENCE. The parties agree not to make any
independent press releases or to disclose the terms of this Agreement except to
their attorneys and other necessary parties. The parties further agree to
prepare and issue a mutually agreeable press release upon Closing of this
transac-tion, provided that Lessee understands that Lessor may be obligated to
file with the SEC on Form 8-K within five days following the Closing. Further,
the parties agree not to interfere in each other's businesses, nor to make any
statements which would adversely impact the other's business interests.
15. RELATIONSHIP CREATED; INDEPENDENT CONTRACTOR. No provision of this
Agreement is intended to make Lessee an employee or agent of Lessor for any
purpose whatsoever, nor shall the execution of this Agreement be deemed to
create any partnership, joint venture or other form of business association
between the parties other than that of independent contractors. Lessor
acknowledges that it shall not have the right to require Lessee to make any
specific amount or number of sales, to attend sales meetings, to conform to any
fixed or minimum number of hours devoted to selling effort, to follow prescribed
itineraries, or do anything else which would jeopardize the relationship being
created between the parties. Notwithstanding the foregoing, Lessor shall have
the right to request Lessee to, and Lessee shall, provide Lessor with such
reports or information regarding the Assets as Lessor may reasonably request
from time to time during the Lease Term.
16. GENERAL PROVISIONS.
(a) Further Assurances. The parties agree that, from time to time
hereafter and upon request, each of them will execute, acknowledge and deliver
such other instruments as may be reasonably required to carry out the terms and
conditions of this Agreement.
(b) Benefit and Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns. The rights of Lessee hereunder may not be assigned without the prior
written consent of Lessor which shall not unreasonably be withheld. The rights
of Lessor hereunder may be assigned, provided that any such assignment shall in
no way relieve Lessor of its obligations and responsibilities to Lessee under
this Agreement.
(c) Governing Law; Venue. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, excluding
those laws of California relating to conflicts of laws of different
jurisdictions. The parties hereby expressly submit to the jurisdiction of any
court of competent jurisdiction sitting in and for the County of Los Angeles,
State of California.
(d) Notices. All notices, requests, demands and other communications
hereunder shall be in writing, and shall be deemed to have been duly given if
delivered by overnight delivery service or hand delivered, addressed as follows:
If to Lessor:
Out-Takes, Inc.
1419 Peerless Place, Suite 116
Los Angeles, California 90035
With a copy (which shall not constitute notice) to:
Feldhake, August & Roquemore
600 Anton Boulevard, Suite 1730
Costa Mesa, California 92626
Attention: Kenneth S. August, Esquire
If to Lessee:
Colorvision International, Inc.
8250 Exchange Drive, Suite 132
Orlando, Florida 32809
With a copy (which shall not constitute notice) to:
Holland & Knight LLP
Post Office Box 1526
Orlando, Florida 32802
Attention: John R. Dierking, Esquire
(e) Expenses. Any expenses in connection with this Agreement or
the transactions contemplated herein shall be paid for by the party incurring
such expenses following the Closing. Lessee shall not assume any
obligations of Lessor, nor Lessor assume any obligations of Lessee, in
connection with any such expenses.
(f) Sales and Other Taxes. Any sales and other applicable taxes with
respect to the lease of the Assets hereunder shall be borne by Lessee, and shall
be paid by Lessee as and when such taxes become due consistent with the lease of
the Assets set forth on Schedule 1 attached hereto.
(g) Headings. All paragraph headings herein are inserted for
convenience only and shall not modify or affect the construction or
interpretation of any provision of this Agreement.
(h) Counterparts; Faxes. This Agreement may be signed in one or
more counterparts, each of which shall be considered an original copy but
all of which together shall be deemed to be but one and the same instrument.
Wherever in this Agreement an original signature shall be required, a
facsimile of an original signature shall be deemed an original signature
for all purposes.
(i) Schedules and Exhibits. The schedules and exhibits attached
to this Agreement are hereby incorporated herein as an integral part
hereof as fully as if they had been written into the body of this
Agreement in their entirety.
(j) Amendment, Modification and Waiver. This Agreement may be
modified, amended and supplemented only by the mutual written agreement of
both of the parties hereto. Each party may waive in writing any condition
intended to be for its benefit.
(k) Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement which shall remain in full force and
effect, nor shall the invalidity or unenforceability of a portion of any
provision of this Agreement affect the validity or enforceability of the balance
of such provision.
(l) Entire Agreement. This Agreement and the Schedules and Exhibits
delivered herewith represent the entire Agreement of the parties and supersede
all prior negotiations and discussions by and among the parties hereto with
respect to the subject matter hereof. No provision or document of any kind
shall be included in or form a part of this Agreement unless in writing and
delivered to the other party by the party to be charged. This agreement
supersedes and replaces the Letter which shall terminate upon the execution of
this Agreement by the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year set forth above.
LESSOR:
OUT-TAKES, INC. ATTEST:
By: By:
__________________________
James C. Harvey James C.
Harvey
President
Secretary
LESSEE:
COLORVISION INTERNATIONAL, INC. ATTEST:
By: _____________________________ By:
__________________________
President
Secretary
EXHIBIT "A"
ASSIGNMENT, ASSUMPTION OF LEASE AND LANDLORD CONSENT AGREEMENT
THIS AGREEMENT is made and entered into as of this ___ day of October,
1998 by and between Out-Takes, Inc. ("Assignor"), Colorvision International,
Inc. ("Assignee") and Universal CityWalk Hollywood, a Unit of Universal
Studios, Inc., as successor in interest to MCA Development, a division of
MCA Inc. ("Landlord").
R E C I T A L S
A. Landlord and Assignor, as Tenant, entered into that certain written
Lease dated as of November 12, 1992 (" 1992 Lease") pursuant to which Landlord
leased to Assignor certain premises located in Universal City, California as
described in such 1992 Lease (the "Premises"), which was subsequently amended by
that certain First Amendment to Lease dated March, 1993. The 1992 Lease and the
First Amendment to Lease are collectively referred to herein as the "Lease".
B. Simultaneously as of November 13, 1992 Guarantor executed and delivered
a Guarantee of Lease (the "Guarantee") with respect to Assignor's obligations
under the 1992 Lease, which Guarantee remains in full force and effect.
C. Effective as of the date first written above, Assignor wishes to assign
and Assignee wishes to accept such assignment and assume all of Assignor's
rights and obligations under the Lease.
NOW, THEREFORE, in consideration of the above and other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Assignor hereby assigns, conveys and transfers all of its right, title and
interest in the Lease, a copy of which is attached and incorporated herein by
reference.
2. Assignee hereby assumes, agrees to be bound by and undertakes to
perform each and every one of the terms, covenants and conditions contained in
the Lease. The Assignee further assumes all obligations and liabilities of the
Assignor under the Lease in all respects as if Assignee were the original party
to the Lease.
3. Assignee shall be liable for all amounts due under the Lease on or after
the date hereof. In the event of a default under the Lease, Lessor shall have
the right to proceed directly and immediately against the Assignee without first
proceeding against the property and such proceeding is not deemed to be an
irrevocable election of remedies.
4. Subject to the terms and conditions herein, Lessor consents to the
assignment of the Lease from Assignor to Assignee. Assignor acknowledges that
this consent by Lessor is given without releasing Assignor from its obligations
under the Lease. This consent by Lessor shall not be deemed to be or construed
as a consent to any subsequent assignment of the Lease.
5. Assignee and Lessor agree that Assignee shall replace Robert Shelton as
Guarantor under said Lease, and shall assume all obligations of Guarantor
consistent with the terms of the Lease.
6. Assignee shall deposit with Lessor a Security Deposit of two months
Minimum Rent (as defined in the Lease) in the amount of Twenty Thousand Seven
Hundred Forty Five Dollars and Seventy Cents ($20,745.70). Landlord hereby
agrees that, notwithstanding the foregoing, Assignor shall transfer its Security
Deposit currently held by Landlord in the amount of Eighteen Thousand Seven
Hundred Twenty Two Thousand Dollars Sixty Six Cents ($18,722.66), less any
amounts owed to Landlord prior to the Effective Date, to Assignee's Security
Deposit account, and Assignee shall remit to Landlord on or before the Effective
Date any balance remaining in order to satisfy the Security Deposit requirement
of Assignee.
7. Assignor represents, warrants and agrees that all furniture, fixtures and
equipment which are the property of Assignor (including but not limited to
property which Assignor leases to Assignee as part of the assignment
transaction) and used in the Premises will be owned by Assignor, free and clear
of any lien or encumbrance, and further that in the event of a default by
Assignee which results in the loss of the right of Assignee to occupy the
Premises and the re-entry by Assignor, all of Assignor's furniture, fixtures and
equipment located in the Premises will be left in the Premises for Assignor's
use without compensation until the obligations of Assignor to Landlord under the
Lease have been satisfied.
8. Except as modified hereby, all terms and conditions of the Lease shall
remain in full force and effect.
9. All of the terms and provisions of this Agreement shall be binding and
shall insure to the benefit of the parties, their respective successors and
assigns.
IN WITNESS WHEREOF, the parties have caused this instrument to be executed
as of the date first written above.
ASSIGNOR: OUT-TAKES, INC.
By ________________________________
Name: ______________________________
Title: _______________________________
ASSIGNEE: Colorvision International, Inc.
By: ________________________________
Name: ______________________________
Title: _______________________________
LANDLORD: Universal CityWalk Hollywood,
a Unit of Universal Studios, Inc.
By:___________________________________
Larry Kurzweil
Senior Vice President & General Manager
SCHEDULE 1
ASSETS OF BUSINESS
1. All items remaining in the Out Takes store at Universal City Walk as
of October ___ , 1998, excluding the Sticker Machine belonging to
paradise Creations.
2. All items remaining in the Panorama City storage facility including
equipment previously used by Lessor in operating its Irvine, California
location.
3. The licenses listed on Schedule 7 hereof.
[The parties shall prepare a definitive list of the above-referenced Assets
being leased hereunder within thirty (30) days from the date of this Agreement
in accordance with the provisions of Section 1 hereof.]
SCHEDULE 2
SECURITY DEPOSITS
City Walk premises deposit $18,722.66 Board
of Equalization deposit $
1,000.00
City Walk electricity deposit $
700.00
SCHEDULE 3
LIABILITIES OF LESSOR TO BE ASSUMED BY LESSEE
Lessee assumes all liabilities in connection with royalties on the below
named contracts, as of October ___, 1998. Lessee will assume financial
responsibility and liability for any and all existing or future guarantees or
other commitments in respect of the below named contracts:
1. MTV Networks
2. King Features
3. Stan Gorman
4. Young Kwon
5. Simon Kornblit
6. Gerry Wersh/Watkins
7. 20th Century Fox
8. Curtis Archives
9. CMC
10. Universal Studios
11. Tony Stone Images
12. Paramount
13. JP Morgan
14. Queen B
15. Saban
16. Baywatch
17. Warner Brothers
SCHEDULE 4
BENEFIT PLANS OF LESSOR
1. Group health insurance plan in effect as of September 30, 1998
SCHEDULE 5
SCHEDULE OF CONTRACTS
1. License Agreements listed on Schedule 3
SCHEDULE 6
CONTRACT DEFAULTS
License agreements with:
1. JP Morgan
2. 20th Century Fox
3. Curtis Archives
4. CMC
4. Universal Studios
6. Warner Brothers
SCHEDULE 7
LICENSE AGREEMENTS
1. MTV Networks
2. King Features
3. Stan Gorman
4. Young Kwon
5. Simon Kornblit
6. Gerry Wersh/Watkins
7. 20th Century Fox
8. Curtis Archives
9. CMC
10. Universal Studios
11. Tony Stone Images
12. Paramount
13. JP Morgan
14. Queen B
15. Saban
16. Baywatch
17. Warner Brothers
OUT TAKES, INC.
WRITTEN CONSENT
of the
SOLE DIRECTOR
October 26, 1998
This Written Consent of the Sole Director of Out Takes, Inc., a Delaware
Corporation (the "Corporation") is made as of the date set forth above in
accordance with the Bylaws of the Corporation. The Sole Director hereby
consents, pursuant to the provisions of Section 141(f) of the Delaware
Corporations Code, to the adoption of the following Resolutions, effective as of
5:00 p.m. on October 26, 1998, which are to be filed with the Minutes of the
Board of Directors:
WHEREAS, it is in the best interests of the Corporation to lease to others
certain of its assets; and
WHEREAS, it is in the best interests of the Corporation to divest itself of
certain of its liabilities:
RESOLVED, that the Corporation enter into an Asset Lease Agreement with
Colorvision International, Inc.
FURTHER RESOLVED, that all of the actions taken by the executive officers of
the Corporation since the last meeting of the Board of Directors are hereby
specifically authorized, ratified and approved by the Sole Director.
APPROVED:
____________________
James C. Harvey
Sole Director
EXHIBIT 14(a)2FORMER INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors of
Out-Takes, Inc.
Los Angeles, California
We have audited the accompanying balance sheets of Out-Takes, Inc.
as of March 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three fiscal years in the
period ended March 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Out-Takes, Inc. as of March
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the three fiscal years in the period ended March 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has suffered recurring losses from
operations and has a net working capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 14. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Moore Stephens, P.C.
Certified Public Accountants
Cranford, New Jersey
May 20, 1998
OUT-TAKES INC.
BALANCE SHEETS
ASSETS March 31,
1998 1997
Current Assets:
Cash and Cash Equivalents $ 23,044 $ 70,908
Inventory 10,082 22,879
Due from Related Party - 7,343
Prepaid Insurance 8,949 10,796
Prepaid Taxes 3,005 7,829
Other Current Assets 9,564 8,132
----------- -----------
Total Current Assets $ 54,644 $ 127,887
Plant & Equipment - Net 204,148 845,198
Other Non-Current Assets:
Deposits 27,048 38,378
----------- -----------
Total Assets $ 285,840 $ 1,011,463
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 31,173 $ 113,803
Accrued Payroll 22,047 42,868
Accrued Expenses 108,819 104,331
Accrued Interest - Related Party 56,452 7,871
Provision for Studio closure 31,878 -
Compensation payable - Related Parties 1,347 115,375
Due to Related Party 721,227 260,500
----------- -----------
Total Current Liabilities $ 972,943 $ 644,748
Non-Current Liabilities:
Notes Payable $ 48,000 $ 48,000
Compensation payable - Related Parties - 5,962
----------- -----------
Total Non-Current Liabilities $ 48,000 $ 53,962
Commitments (Note 8) - -
Stockholders' Equity (Deficit):
Preferred Stock, par value $.01 per share;
5,000,000 shares authorized, none issued $ - $ -
Common Stock, par value $.01 per share;
35,000,000 shares authorized; 20,788,122
shares issued of which 292,396 shares
are in Treasury 207,882 207,882
Capital in excess of par value 9,905,430 10,014,980
Accumulated deficit (10,740,009) (9,657,703)
----------- -----------
Total ($ 626,697)$ 565,159
Less: Treasury Stock, at cost (108,406) (108,406)
Deferred Compensation - (144,000)
----------- -----------
Total Stockholders' Equity (Deficit) ($ 735,103)$ 312,753
---------- -----------
Total Liabilities and Stockholders' Equity $ 285,840 $ 1,011,463
=========== ===========
OUT-TAKES INC.
STATEMENTS OF OPERATIONS
Years ended March 31,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Revenues $ 1,187,638 $ 2,014,788 $ 1,580,712
------------- ----------- -----------
Cost of Revenues:
Compensation and Related Benefits 524,276 712,939 548,137
Depreciation and Amortization 420,317 359,123 249,249
Loss on Impairment of Long-Lived
Assets - - 762,129
Pre-Opening Costs - Irvine Studio - - 67,007
Rent 236,192 300,857 210,639
Loss on closure of Irvine Studio 164,745 - -
Other Cost of Revenues 383,354 553,011 378,967
------------- ----------- -----------
Total Cost of Revenues 1,728,884 1,925,930 2,216,128
------------- ----------- -----------
Gross Income (Loss) (541,246) 88,858 (635,416)
-------------- ----------- -----------
General and Administrative Expenses:
Compensation and Related Benefits 125,571 309,630 313,432
Professional Fees 91,218 100,777 206,979
Management Fee - Related Party 31,200 131,000 130,000
Rent of Offices 33,300 39,558 29,524
Depreciation and Amortization 92,960 91,663 128,907
Other G & A Expenses 114,626 115,458 106,982
------------- ----------- -----------
Total Expenses 488,875 788,086 915,824
------------- ----------- -----------
Loss from Operations (1,030,121) (699,228) (1,551,240)
Other Income (Expense)
Interest income 224 484 3,035
Interest expense (210) (3,423) (7)
Interest expense - Related Parties (52,199) (51,179) (28,272)
-------------- -----------------------
Total Other Income (Expense) (52,185) (54,118) (25,244)
-------------- -----------------------
Net Loss ($ 1,082,306) ($ 753,346)($1,576,484)
============ =========== ===========
Net Loss Per Share (Basic and
Diluted) ($ 0.05) ($ 0.05)($ 0.16)
============= =========== ===========
Weighted Average Common Shares
Outstanding 20,495,726 14,824,881 9,567,748
============= =========== ===========
OUT-TAKES INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock Capital
------------
Number of in Excess of Accumulated
Treasury Deferred
Shares Amount Par Value Deficit
Stock Compensation Total
------ ------ --------- -------
- ----- ------------ -----
Balance - March 31, 1995 5,728,122 $ 57,282 $ 8,615,580 ($ 7,327,873)
($108,406)($144,000) $1,092,583
Proceeds from Issuance of
Stock 5,440,000 54,400 455,600 -
- - - 510,000
Net Loss for the year
ended March 31,1996 - - - (1,576,484)
- - - (1,576,484)
---------- -------- ----------- ------------
- ------- -------- ----------
Balance - March 31, 1996 11,168,122 $111,682 $ 9,071,180 ($ 8,904,357)
($108,406)($144,000) $ 26,099
Cash Proceeds from
Issuance of Stock 650,000 6,500 123,500 -
- - - 130,000
Stock Issued upon
Conversion of Debt 8,970,000 89,700 820,300 -
- - - 910,000
Net Loss for the year
ended March 31, 1997 - - - (753,346)
- - - (753,346)
---------- -------- ----------- ------------
- -------- -------- ----------
Balance - March 31, 1997 20,788,122 $207,882 $10,014,980 ($ 9,657,703)
($108,406)($144,000) $ 312,753
Management fee -
Related Party - - 31,200 -
- - - 31,200
Adjustment for
cancellation of escrow
shares(See note [6A]) - - (144,000) -
- - 144,000 -
Options issuance cost - - 3,250 -
- - - 3,250
Net Loss for the year
ended March 31,1998 - - - (1,082,306)
- - - (1,082,306)
---------- -------- ----------- ------------
- -------- -------- ----------
Balance - March 31, 1998 20,788,122 $207,882 $ 9,905,430 ($10,740,009)
($108,406) $ - ($ 735,103)
=========== ======== =========== ============
========= ======== ==========
OUT-TAKES INC.
STATEMENT OF CASH FLOWS
Years ended March 31,
1998 1997
1996
Operating Activities:
Net Loss ($1,082,306) ($ 753,346)
$(1,576,484)
----------- ----------
- ------------
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation and Amortization $ 513,277 $ 450,786 $
378,156
Loss on Impairment of Long-Lived Assets - -
762,129
Loss on closure of Irvine Studio 154,157 - -
Loss on Disposal of Plant and Equipment - 504 997
Management fee - Related Party 31,200 - -
Options issuance cost 3,250 -
Changes in Assets and Liabilities:
(Increase) Decrease in:
Prepaid Royalties - - 840
Due from Related Party 7,343 (7,343) -
Deposits 11,330 334 (18,290)
Inventory 12,797 13,719
(10,090)
Due from Officers - - 8,565
Prepaid Insurance 1,847 (2,003) -
Prepaid Taxes 4,824 (5,754) -
Other Current Assets (1,432) 1,670
(10,314)
Increase (Decrease) in:
Accounts Payable (82,630) 24,880
(196,867)
Accrued Payroll and Other Expenses (16,333) (275,020) 56,453
Notes Payable - (15,036) 15,036
Accrued Interest - Related Party 48,581 (22,104) 20,835
Provision for Studio closure 31,878 - -
Accrued Management Fee - Related Party - 131,000 130,000
Compensation Payable - Related Parties (119,990) 121,337 -
----------- ----------
- -----------
Total Adjustments $ 600,099 $ 416,970
$1,137,450
---------- ----------
- -----------
Net Cash Used in Operating Activities ($ 482,207) ($ 336,376) ($
439,034)
---------- ----------
- ------------
Investing Activities:
Acquisition of Equipment and Leasehold
Improvements ($ 26,484) ($ 46,630) ($
652,814)
Proceeds on Disposal of Plant and Equipment 100 2,242 1,050
---------- ----------
- -----------
Net Cash Used in Investing Activities ($ 26,384) ($ 44,388) ($
651,764)
---------- ----------
- ------------
Financing Activities:
Proceeds from the Issuance of Stock $ - $ 130,000 $
510,000
Advances from Related Party 460,727 260,000
649,500
Proceeds from Interim Loan Financing -
Related Party - -
39,000
Payment of Interim Loan Financing -
Related Party - -
(100,000)
-- ------ ----------
- ------------
Net Cash Provided by Financing Activities $ 460,727 $ 390,000
$1,098,500
--------- ----------
- -----------
Net (Decrease) Increase in Cash and Cash
Equivalents ($ 47,864) $ 9,236 $
7,702
Cash and Cash Equivalents - Beginning of
Years 70,908 61,672
53,970
--------- ----------
- -----------
Cash and Cash Equivalents - End of Years $ 23,044 $ 70,908 $
61,672
========== ==========
===========
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 7,650 $ 66,501 $
4,401
Income Tax $ - $ - $ -
Non-Cash Investing and Financing Activities On May 7, 1996, the majority
stockholder, Photo Corporation Group Pty. Ltd. ("PCG"), converted $130,000
of its then $649,500 loan payable into 650,000 shares of the Company's
Common Stock. On November 29, 1996, PCG converted an additional $780,000 into
8,320,000 shares of the Company's Common Stock. This represented loan
principal of $519,000 and accrued management fees of $261,000 payable to Photo
Corporation of Australia Pty Limited ("PCA") which debt was assumed by Photo
Corporation Group Pty Limited ("PCG").
The Accompanying Notes are an Integral Part of These Financial Statements.
OUT-TAKES INC.
NOTES TO FINANCIAL STATEMENTS
[1] Summary of Significant Accounting Policies
Basis of Presentation - The accompanying financial statements are presented on
an accrual basis. Revenues are recognized when merchandise is sold and expenses
are recognized when incurred. Where applicable, the figures for the years ended
March 31, 1997 and 1996 have been reclassified in order to facilitate comparison
with the figures for the current year.
Plant and Equipment and Depreciation - Plant and equipment consists primarily of
computers, photography equipment and leasehold improvements, and are stated at
cost. Depreciation is provided over the estimated useful asset lives using the
straight-line method over 5 years for all equipment and furniture. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
useful life of the improvement or the term of the lease. Maintenance, repairs
and minor purchases are expensed as incurred.
Royalties - Royalties are calculated as a percentage of sales as specified in
each License Agreement and are expensed over the life of the agreement except
where this amount is less than the minimum guarantee provided by the agreement.
In the latter situation, royalty expense is equal to the minimum guarantee,
amortized on a straight-line basis over the period of the guarantee. Where
royalties have been paid in advance, such amounts are disclosed on the Company's
balance sheet as prepaid royalties, net of amounts expensed.
Stock Options - The difference between the fair market value and the exercise
price, if below fair market value, of a stock option granted under the Company's
Employee Stock Option Plan is charged to expense in the period in which the
option is granted. All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair market value
of the equity instruments issued, whichever is more reliably measurable
Inventories - Inventories consisting principally of frames, bags, mattes,
chemicals, paper products and other supplies are priced at cost determined using
the FIFO method.
Cash and Cash Equivalents - The Company classifies all highly liquid debt
instruments, readily convertible to cash and purchased with a maturity of three
months or less at date of purchase, as cash equivalents. The Company had no cash
equivalents at March 31, 1998.
Risk Concentrations - Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist principally of cash. At March
31, 1998, the Company had no deposits in financial institutions which exceeded
the $100,000 federally insured limit. The excess of the institution's deposit
liability to the Company over the federally insured limit was therefore zero.
A significant part of the Company's ability to generate revenues is dependent on
the continuation of the License Agreements with the various Licensors. Three of
the License Agreements provide a portfolio of images that each result in
approximately 15% of the revenues of the Company. While the Company has License
Agreements relating to the use of the images there can be no assurance that the
License Agreements will be renewed or renewed on commercially acceptable terms
after their current expiry dates. In such event, unless alternative License
Agreements can be obtained, the loss of the License Agreements would have a
material adverse affect on the Company (see note 3[A]).
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts. Accordingly, actual
amounts could differ from those estimates.
Advertising - Advertising costs are expensed as incurred. Advertising
expenditure for the years ended March 31, 1998, 1997 and 1996 was $21,069,
$28,552 and $13,140 respectively.
Loss per share - The Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share" which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended March 31, 1998 has been calculated in accordance
with SFAS No. 128. Prior periods earnings per share data have been recalculated
as necessary to conform prior years data to SFAS No. 128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share" and replaces its primary earnings per share with a new basic earnings
per share representing the amount of earnings for the period available to each
share of common stock outstanding during the reporting period. SFAS No. 128 also
requires a dual presentation of basic and diluted earnings per share in the face
of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding during the
reporting period, while giving effect to all dilutive potential common shares
that were outstanding during the period, such as common shares that could result
from the potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e. increasing earnings per share or reducing
loss per share). The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
Potential common shares of 125,000 are not currently dilutive, but may be in the
future.
Deferred Taxes - There are no material differences between the accounting
methods used for financial and tax purposes. The Company has sustained losses in
recent years and has a large net operating loss carryforward. No deferred taxes
are reflected in these financial statements.
[2] Organization and Business
The Company was incorporated on March 18, 1992, under the laws of the State of
Delaware. The Company is engaged in the production and sale of photographic
portraits of children, adults and family groups using proprietary hardware and
digital imaging software. The Company currently operates and derives
substantially all of its revenues from a retail studio, called Out-
Takes(R), which opened on May 24, 1993 and is located at MCA/Universal's
CityWalkSM project in Los Angeles, California ("the CityWalk Studio"). During
the period December 1, 1995 to April 22, 1998, the Company operated a second
Studio, at the Entertainment Center in the Bazaar at the Irvine Spectrum,
located in Irvine, Orange County, California ("the Irvine Studio").
[3] [A] License Agreements and Royalties
The Company has merchandise licensing agreements ("License Agreements") with
Paramount Pictures Corporation ("Paramount"), MCA/Universal Merchandising, Inc.
("Universal"), Warner Bros. Consumer Products ("Warner"), Twentieth Century Fox
Licensing & Merchandising ("Fox"), Jay P. Morgan Photography ("Morgan"), MTV
Networks ("MTV"), Saban Merchandising Inc. ("Saban"), The Baywatch Production
Company ("Baywatch") and various other agencies and photographers that grant the
Company the right to manufacture, sell and distribute in a defined geographic
area, still photographs which combine a digital photograph taken of the customer
in the studio with a licensed background from one of the Licensors which may be
sold separately or affixed to items approved by these licensors, including
photographic enlargements, greeting cards, posters, books, t-shirts, mugs,
buttons and other novelty items. Royalties expense for the year ending March 31,
1998, 1997 and 1996 was $39,365, $66,816 and $35,622 respectively.
Although the Company has not commenced to market all Licensed Articles on a
timely basis, as of March 31, 1998, the Company has not received any notice that
any Licensor intends, by virtue of this matter, to exercise any of the remedies
provided for in its respective License Agreements. The Company is current with
respect to all payments and required reports to all Licensors.
[B] Sublicense Agreement - Related Party
On March 1, 1995, the Company entered into a sublicense agreement with Photo
Corporation of Australia Pty Limited ("PCA"), a subsidiary of Photo Corporation
Group Pty. Ltd. ("PCG") (see note 5), that, subject to the prior approval of the
Licensors, grants PCA a non-exclusive license to utilize the Licensed Articles
on substantially the same terms as provided in the License Agreements. The
sublicense also provides that PCA will pay the Company an amount equal to 120%
of the royalties the Company pays to Licensors for such images. The Company
has received consent from Morgan, Fox and Paramount and other Licensors
indicating their willingness to support utilization of the Licensed Articles
in countries where PCA operates. As of March 31, 1998, the PCA
sublicense agreement has not yet generated any royalties.
[4] Plant and Equipment
March 31, 1998 March 31,
1997
The components of plant and equipment are:
Photographic Equipment $ 620,750 $ 622,192
Computers and Software 659,048 679,427
Equipment and Furniture 301,316 308,987
Leasehold Improvements 609,494 1,011,292
Motor Vehicle 21,433 -
------------- -------------
Total - At Cost 2,212,041 2,621,898
Less: Accumulated Depreciation 2,007,893 1,776,700
------------- -------------
Net $ 204,148 $ 845,198
============= =============
Depreciation is provided over the estimated useful asset lives using the
straight-line method over five years for all equipment and furniture. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
useful life of the improvement or the term of the lease. Maintenance, repairs
and minor purchases are expensed as incurred.
[5] Related Party Transactions
Mr Robert Shelton, Vice President Development and Mrs Leah Peterson-
Shelton, Vice President Operations, ceased employment with the Company from and
effective September 1, 1996. Mr Shelton also ceased as a Director of the
Company from and effective September 1, 1996.
Deferred salaries owing to Mr Shelton and Mrs Peterson-Shelton, accrued interest
on deferred salaries, accrued vacation pay and amounts payable on termination
totaling $274,373 were consolidated on September 1, 1996, and were repaid over
the period to April 17, 1998. This liability is presented on the balance sheet
as "Compensation payable - Related Party". The liability is secured by the
assets of the Company pursuant to the Settlement and Mutual Release Agreement as
of September 1, 1996, between the Company, Mr Shelton, Mrs Peterson-Shelton and
Photo Corporation Group Pty Limited ("PCG"), the majority stockholder. Interest
expense is incurred at the prime rate of interest (approximately 8.5%) and in
the period to March 31, 1998 interest expense totaled $3,618. As of March 31,
1998, interest of $67 was accrued and unpaid.
The Settlement and Mutual Release Agreement inter alia provides for Mr Shelton
and Mrs Peterson-Shelton to act as consultants to the Company as requested by
the Company and as agreed to by them. No consulting fees were incurred or paid
during the year ended March 31, 1998.
During the year to March 31, 1997, PCG charged the Company $131,000 in
management fees pursuant to the Personnel Consulting Agreement with the Company
dated June 28, 1995. Effective December 1, 1996, PCG agreed not to charge
management fees for services provided by it or its related parties for a period
of two years. The Company has recorded a capital contribution of $31,200 for
management fees for the year to March 31, 1998. Management believes that this
represents the reasonable cost of doing business, for services provided by PCG
personnel in the year to March 31, 1998.
At March 31, 1998 the $721,227 "Due to Related Party" ($260,500 as of March 31,
1997) was advanced by PCG. This balance consists of $715,500 advanced to the
Company and $5,727 of expenses paid by PCA on behalf of the Company (1997:
$7,343 "Due from Related Party" representing monies advanced by the Company
during fiscal 1997 on behalf of PCA). The funds advanced to the Company have
been used predominantly to fund the day to day operation of the business and to
fund the payments due to former officers of the Company. The amount Due to
Related Party is unsecured and is payable on demand. Interest expense is
incurred at a rate of 10% per annum on the funds advanced to the Company and for
the year ended March 31, 1998 was $48,581. As of March 31, 1998, interest of
$56,452 was accrued.
The weighted average interest rate on short term borrowings as of March 31, 1998
was approximately 10.0%.
[6] Capital Stock Transactions
[A] Escrow Shares
In March, 1992, 1,900,000 shares were issued to the Company's founders
("Founders") and deferred compensation of $364,800 was recorded for the
1,900,000 shares. Included in the 1,900,000 shares were 1,150,000 shares issued
to the Founders for services in connection with the incorporation of the
Company. Accordingly, $220,800 was amortized as compensation expense in 1992.
The remaining 750,000 shares of the Company's Common Stock were placed into
escrow for the benefit of the Founders. As the Company's pre-tax earnings did
not equal or exceed the required threshold level, in May of 1998 the Company
requested that the shares be returned to the Company to be placed in Treasury.
The financial statements reflect the reversal of the deferred compensation
attributable to these shares, however the share data will be adjusted as of the
date the shares are returned.
[B] Stock Option Plan
Under the Company's Amended and Restated 1992 Stock Option Plan, incentive stock
options may be granted to purchase shares of the Company's stock at a price not
less than the fair market value of the Common Stock at the date of the grant.
Non-qualified stock options may be granted at a price not less than 85% of the
fair market value. No option may be exercised after ten years from the date of
the grant. In September of 1997, options for 175,000 shares were issued to
employees and consultants of the Company.
Information is summarized as follows:
Shares Under Options and Warrants
---------------------------------
Amended Weighted
And Restated Price Average
1992 Stock per Exercise
Option Plan Share Price
----------- ----- -----
Outstanding at March 31, 1995 249,245 $0.65 to $4.40 $3.44
Forfeited during the year
ended March 31, 1996 (94,527)
--------
Outstanding at March 31, 1996 154,898 $0.65 to $4.40 $4.00
Forfeited during the year
ended March 31, 1997 (154,898)
--------
Outstanding at March 31, 1997 - - -
Granted during the year
ended March 31, 1998 175,000 $0.06 $0.06
Forfeited during the year
ended March 31, 1998 (50,000)
-------
Outstanding at March 31, 1998 125,000 - $0.06
=========
The exercise price for the options outstanding at March 31, 1998 is $0.06 with a
vesting period of three years and a contractual life of ten years. The company
estimates that approximately 100% of such options will eventually vest.
On September 15, 1997, the Board of Directors granted to four individuals,
a total of 175,000 stock options to purchase company stock at an exercise price
of $0.06 per share for past services performed. The options are to vest
over a three year period, 50% the first year and 25% the remaining two years,
with an expiration date of September 15, 2007. The company applies APB
Opinion 25 in accounting for its fixed and performance based stock option
compensation plans. Compensation cost of $3,250, $0 and $0 was charged to
operations for the three years ended March 31, 1998, 1997 and 1996
respectively. Had compensation cost been determined on the basis of fair
value pursuant to FASB Statement No. 123, net income and earnings per share
would have been recorded as follows:
1998 1997 1996
$ $ $
Net Income (Loss)
As reported (1,082,306) (753,346) (1,576,484)
Pro forma (1,089,056) (753,346) (1,576,484)
Earnings per Share
As reported (0.05) (0.05) (0.16)
Pro forma (0.05) (0.05) (0.16)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-
average assumptions used for grants in 1998: dividend yields of $0 for
each year, expected volatility of approximately 106% for each year, risk
free interest rates of 5.83% and an expected life of five years. The
weighted-average fair value of options granted was $0.06 for the year ended
March 31, 1998.
[7] Closure of Irvine Studio
In the third quarter of the Company's fiscal year, management determined that
despite its substantial efforts to increase the revenues of the Irvine Studio,
it would be in the best interests of the Company to contain the negative cash
flow incurred by the Company, by determining an exit plan for the Irvine Studio.
In the fourth quarter of the fiscal year, the Company finalized its exit plan.
Following lengthy negotiations with the landlord of the Irvine Studio,
management reached an agreement with the landlord to close the Studio. The
closure was effected without the payment of any additional amounts to the
landlord. The Studio closed on April 22, 1998. Costs associated with the closure
of the studio totaled $164,745 and included approximately $135,000 non-cash loss
on disposal of leasehold improvements and write off of equipment identified as
only being of use for spare parts for the CityWalk Studio; $3,000 in termination
payments to staff; $5,000 to remove equipment from the studio and vacate the
premises; $7,000 in property tax obligations; and estimated additional operating
costs of approximately $14,000 through to the date of closure. It is
management's opinion that as of March 31, 1998, all costs associated with the
closure of the Irvine Studio have been accrued.
[8] Commitments
Lease Agreements - The Company leases its CityWalk Studio premises under a five
year lease, with an option to extend the lease for a period of seven years. The
initial lease term expired on May 31, 1998 and the Company has exercised its
option to renew the lease for a further seven years. The lease provides for an
annual rental payment of $123,250 and the payment of 10% of annual store
revenues in excess of $881,177. In addition, pursuant to the lease agreement,
the Company pays annual allocated property taxes for the CityWalk Studio of
approximately $600. Both the base rental amount and the percentage rental cut-
in point are adjusted annually for changes in the consumer price index. The
lease may be terminated by the lessor if the Company does not meet a minimum
annual sales requirement of $587,000.
Future minimum lease payments under non-cancelable operating leases as of
March
31, 1998 are shown in the table below.
Year ended March 31
-------------------
1999 $ 123,250
2000 123,250
2001 123,250
2002 123,250
2003 123,250
Thereafter 267,041
---------
Total $ 883,291
=========
In the year to March 31, 1998 the Company paid $101,098 in rent for the
Irvine Studio. Following closure of the Irvine Studio on April 22, 1998, the
lease was terminated. There is no further obligation on the Company with
respect to the lease.
The Company has a month to month commitment of $2,450 per month for corporate
office space and a month to month commitment of $650 per month for storage
facilities.
Total rental charged to operations for the fiscal years ended March 31, 1998,
1997 and 1996 is broken down as follows:
1998 1997 1996
$ $ $
Base rental 256,141 278,128 183,301
Additional rent 13,351 62,287 56,862
-------- ------- --------
$269,492 $340,415 $240,163
======== ======== ========
The additional rent is a result of sales being in excess of the $881,177
sales threshold.
Consulting Agreement - the Company has a consulting agreement with an
unaffiliated entity for the maintenance of the image technology at the CityWalk
Studio. Effective October 1, 1997 the agreement provides for the payment of
$50,000 per annum of consulting fees and a discretionary performance bonus of up
to 10% of the fees paid. The agreement may be terminated by either party with a
minimum of one month's notice. For the year ended March 31, 1998 the Company
expensed $49,000 in payments to this unaffiliated entity.
[9] Net Loss Per Share
Net loss per share was calculated based on the weighted average shares
outstanding during the year. Potential common shares have not been included as
their inclusion would be antidilutive.
[10] Trademark Registrations and Patent Applications
The Company has registered the marks Out-Takes(R), So You Want to be in
Pictures(R) , Photomation(R) and Create the Moment(R) with the U.S. Patent and
Trademark Office and has registered the Out-Takes(R) service mark in Japan, in
both Japanese and English.
[11] Income Taxes
As of March 31, 1998, the Company has a net operating loss carry forward of
approximately $10,700,000. The ability to offset $8,275,000 of these losses
against future taxable income has been restricted as a result of the change in
control which occurred on June 28, 1995 when a majority shareholding in the
Company was acquired by PCG. As of March 31, 1998, the Company has deferred tax
assets of approximately $729,000 arising from these operating loss carry
forwards which will expire in March, 2011. However, due to uncertainty as to
whether the Company will generate income in the future sufficient to fully or
partially utilize these loss carry forwards, an allowance of $729,000 has been
established to offset this asset. The Company recorded an increase in its
valuation allowance of $66,000 over the allowance at March 31, 1997.
[12] Notes Payable
The Note Payable of $48,000 is unsecured and is due to a former financial
consultant to the Company pursuant to a settlement agreement dated August
17,1994. The note is non-interest bearing and payment is subject to availability
of future cash flows from the Company's operations.
The note holder has threatened to commence litigation, however management has
advised the note holder that no amount is due at the present time as the Company
has not generated positive cashflow. Counsel has advised the Company that no
litigation has commenced and counsel is unable to assess a possible outcome.
[13] New Authoritative Pronouncements
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information". SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997 and comparative information for earlier years is to be restated. SFAS No.
131 need not be applied to interim financial statements in the initial year of
its application. SFAS No. 131 is not expected to have a material impact on the
Company.
[14] Going Concern
The Company commenced commercial operations on May 24, 1993 and as of May 29,
1998, the Company has been unsuccessful in generating net cash from operations.
The net cash used by the Company in operating activities in the year ended March
31, 1998 was $482,207. The Company incurred a net loss of $1,082,306 for the
year ended March 31, 1998 and has a working capital deficit as of March 31, 1998
of $918,299.
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The continuation
of the Company as a going concern is dependent upon its ability to generate net
cash from operations. The Company's recurring operating losses and net working
capital deficiency raises substantial doubt about the entity's ability to
continue as a going concern.
Management's plans include improving the revenues from the CityWalk Studio,
continuing the reduction of expenses throughout the Company and continuing in
its efforts to find suitable locations in which to open additional studios.
There can be no assurance that management will be successful in these endeavors
and if it is not, the Company will be dependent on the willingness and the
ability of the major stockholder, PCG, to continue to provide additional
financing and no assurance can be given that such additional financing will be
provided.
[15] Impairment of Long-Lived Assets
The Company had adopted Statement of Financial Accounting Standard ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of.
As a result of the Company's continuing operating losses and the information
obtained during research and the development of the Irvine Studio, the Company
reviewed the carrying value of the assets at its CityWalk studio for impairment
in the June 1995 quarter. Management determined that an impairment loss of
approximately $722,000 should be recognized. This loss was determined as the
excess of carrying value over fair value. Fair value was determined by reference
to costs for similar assets for the Irvine Studio. As a result of the
significant operating difficulties associated with the Traveling Studio,
the Company reviewed the carrying value of the asset for impairment in the
March 1996 quarter. Management determined that an impairment loss of $40,129
should be recognized to reduce the carrying value of the asset to its fair
value of zero. Fair value was determined to be zero as the asset was not able to
be placed into production in its present form. Long term assets of the Company
are reviewed at least annually as to whether their carrying value has become
impaired, pursuant to guidance established in Statement of Financial Standards
("SFAS") No. 121. Management considers assets to be impaired if the carrying
value exceeds the future projected cash flows from related operations
(undiscounted and without interest charges). If impairment is deemed to
exist, the assets will be written down to fair value or projected discounted
cash flows from related operations. Management also re-evaluates the
periods of amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives. As of March 31,
1998, management expects these assets to be fully recoverable.
[16] Financial Instruments
The carrying amount of cash and notes payable approximates fair value. [17]
Subsequent Events
During the period April 1, 1998 to May 29, 1998 PCG provided an additional
$15,000 of cash to assist the Company in funding its day to day operations, to
enable the Company to make the required payments due to the former officers of
the Company and to meet the expenses associated with the closure of the Irvine
Studio. Certain subsidiaries of PCG have purchased, for a total of $20,000 cash,
certain equipment with no book value.
EXHIBIT 16. LETTER OF FORMER INDEPENDENT ACCOUNTANT
U.S. Securities and Excahnge Commission Washington, D.C. 10549
The undersigned certifying accountants hereby acknowledge that they have
reviewed the "Changes in and Disagreements on Accounting and Financial
Disclosures" as contianed in the form 10-K being filed by Out Takes, Inc., and
that the undersigned concurs with the statements made therein by the Registrant
concerning the change in the Registrant's independent accountant.
/s/MOORE STEPHENS, P.C.
Moore Stephens, P.C.
Certified Public Accountants
Cranford, New Jersey
March 1, 2000