SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 1998; or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _________ to __________
Commission File Number: 0-24109
SYNTHONICS TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
UTAH 87-0302620
- ------------------------------ -----------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31324 Via Colinas, Suite 106, Westlake Village, CA 91362
- ---------------------------------------------------- ------------------------
(Address of principal executive offices) Zip Code)
(818) 707-6000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that a
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
On September 30, 1998, there were 19,948,279 shares of the registrant's
Common Stock, $0.01 par value, issued and outstanding.
Transitional Small Business Disclosure Format. Yes [ ] No [ X ]
This Form 10-QSB has 26 pages, the Exhibit Index is located at page 22.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The financial statements included herein have been prepared by the Company,
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading.
In the opinion of the Company, all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of September 30, 1998 and the results of its operations and changes
in its financial position from inception through September 30, 1998 have been
made. The results of operations for such interim period is not necessarily
indicative of the results to be expected for the entire year.
Index to Financial Statements
------------------------------
Page
Balance Sheets .......................................................... 3
Statements of Operations ................................................ 5
Statements of Stockholders' Equity (deficit) ............................ 6
Statements of Cash Flows ................................................ 8
Notes to Financial Statements for Period ................................ 11
All other schedules are not submitted because they are not applicable or
not required or because the information is included in the financial statements
or notes thereto.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
Page 2 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 101,653 $ 311,610
Accounts receivable (Note 1) 38,626 8,332
Prepaid expenses 2,667 2,667
---------------- ---------------
Total Current Assets 142,946 322,609
---------------- ---------------
PROPERTY AND EQUIPMENT (Net)(Note 2) 100,165 124,534
---------------- ---------------
OTHER ASSETS
Organization costs, net of accumulated
amortization of $1,378 and $1,195 (Note 1) - 183
Goodwill (Note 1) 12,023 48,092
Intangibles (Note 3) 189,902 144,591
Deposits 15,083 15,083
---------------- ---------------
Total Other Assets 217,008 207,949
---------------- ---------------
TOTAL ASSETS $ 460,119 $ 655,092
================ ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 3 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 136,385 $ 126,034
Wages payable (Note 5) 376,166 99,299
Other accrued expenses 37,680 22,166
Notes payable, current portion (Note 6) 555,000 100,000
---------------- ---------------
Total Current Liabilities 1,105,231 347,499
---------------- ---------------
LONG-TERM DEBTS
Notes payable (Note 6) - -
---------------- ---------------
Total Long-Term Debt - -
---------------- ---------------
Total Liabilities 1,105,231 347,499
---------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock; 550,000 shares
authorized of $10.00 par value,
10,000 and 50,000 shares issued
and outstanding, respectively 100,000 500,000
Common stock; 50,000,000 shares
authorized of $0.01 par value,
19,948,279 and 17,823,387 shares
issued and outstanding respectively 199,483 178,234
Additional paid-in capital 4,995,812 3,961,790
Accumulated deficit (5,940,407) (4,332,431)
---------------- ---------------
Total Stockholder's Equity (Deficit) (645,112) 307,593
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT) $ 460,119 $ 655,092
---------------- ---------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Net sales $ - $ 129,899 $ 179,947 $ 238,529
Cost of goods sold - 4,040 105,740 11,956
------------------------------------------------------
Gross Profit - 125,859 74,207 226,573
------------------------------------------------------
EXPENSES
Research and development 153,538 100,492 326,261 379,063
Production costs 270,432 - 594,390 -
General and administrative 259,530 162,148 654,024 547,544
Depreciation and
amortization 31,596 9,558 83,842 33,074
------------------------------------------------------
Total Expenses 715,096 272,198 1,658,517 959,681
------------------------------------------------------
Loss From Operations (715,096) (146,339) (1,584,310) (733,108)
------------------------------------------------------
OTHER INCOME (EXPENSE)
Other income - - - 2,580
Interest income 3,305 453 6,326 3,491
Interest expense (15,001) - (29,992) -
-----------------------------------------------------
Total Other
Income(Expense) (11,696) 453 (23,666) 6,071
=====================================================
NET LOSS $(726,792) $(145,886) $(1,607,976) $(727,037)
=====================================================
LOSS PER SHARE $ (0.04) $ (0.01) $ (0.08) $ (0.05)
=====================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 5 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1996 - $ - 15,902,033 $159,020 $3,091,389 $(2,753,832)
Common stock issued
upon exercise of
warrants - - 167,000 1,670 (1,670) -
Common stock issued
upon exercise of
warrants at $0.70
per share - - 350,000 3,500 241,500 -
Common stock issued
upon exercise of
options at $0.22
per share - - 688,500 6,885 144,862 -
Common stock issued to
acquire Christopher
Raphael Inc., at
$0.52 per share - - 10,000 100 5,100 -
Common stock issued to
replace original shares
of Synthonics, Inc.,
recorded at predecessor
cost - - 179,700 1,797 (1,797) -
Common stock issued for
services rendered at
$1.00 per share - - 25,154 252 24,903 -
Common stock issued in
exchange for the
forfeiture of 750,000
stock options - - 501,000 5,010 243,990 -
Preferred stock issued
for cash at
$10.00 per share 50,000 500,000 - - - -
Stock offering costs - - - - (50,620) -
Additional capital
contributed - - - - 279,133 -
Dividends declared - - - - (15,000) -
Net loss for the
year ended
December 31, 1997 - - - - - (1,578,599)
-----------------------------------------------------------
Balance
December 31, 1997 50,000 $500,000 17,823,387 $178,234 $3,961,790 $(4,332,431)
-----------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 6 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------- ------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1997 50,000 $500,000 17,823,387 $178,234 $3,961,790 $(4,332,431)
Common stock issued
for cash at $0.65
per share - - 550,002 5,500 352,000 -
Common stock issued
in lieu of debt at
$0.71 per share - - 70,000 700 49,300 -
Common stock issued
for services rendered
at $0.66 per share - - 34,815 348 22,630 -
Conversion of preferred
shares to
common shares (40,000) (400,000) 615,200 6,152 393,848 -
Common stock issued upon
exercise of warrants
at $0.20 per share - - 420,000 4,200 79,800 -
Common stock issued upon
exercise of warrants - - 167,000 1,670 (1,670) -
Dividends declared - - - - (21,000) -
Stock offering costs - - - - (30,176) -
Common stock issued upon
exercise of warrants at
$0.75 per share - - 250,000 2,500 185,000 -
Common stock issued
in lieu of debt at
$0.25 per share - - 17,875 179 4,290 -
Net loss for the nine
months ended
September 30, 199 - - - - - (1,607,976)
-----------------------------------------------------------
Balance
September 30, 1998 10,000 $100,000 19,948,279 $199,483 $4,995,812 $(5,940,407)
============================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 7 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(726,792) $(145,886) $(1,607,976) $(727,037)
Adjustments to reconcile
net loss to net cash
used by operating
activities:
Common stock issued
for services - - 22,978 -
Depreciation and
amortization 31,596 9,558 83,842 33,074
(Increase) decrease in
accounts receivable 118,842 (4,260) (30,294) (4,260)
(Increase) decrease in
loan receivable - (1,800) - (3,600)
(Increase) decrease in
prepaid expenses and
deposits - (53,073) - (68,073)
(Increase) decrease in
other assets (37,625) - (61,011) -
(Increase) decrease in
accounts payable 42,584 156,542 14,820 121,547
(Increase) decrease in
accrued expenses 96,489 (98,077) 292,381 66,923
------------------------------------------------------
Net Cash Used by
Operating Activities (470,906) (136,996) (1,285,260) (581,426)
------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of fixed assets (2,009) (90,125) (7,521) (99,048)
------------------------------------------------------
Net Cash Used by
Investing Activities $ (2,009) (90,125) $ (7,521) $ (99,048)
------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 8 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from loan - 1,800 550,000 51,800
Repayment of loan (15,000) - (45,000) -
Dividends paid (3,000) - (21,000) -
Capital contributions - 268,237 - 268,237
Issuance of common stock 211,500 4,760 598,824 4,760
------------------------------------------------------
Net Cash Provided by
Financing Activities 193,500 247,797 1,082,824 324,797
------------------------------------------------------
NET INCREASE (DECREASE)
IN CASH (279,415) 47,676 (209,957) (355,677)
CASH AT BEGINNING OF
PERIOD 381,068 122,378 311,610 525,731
------------------------------------------------------
CASH AT END OF PERIOD $ 101,653 $ 170,054 $ 101,653 $ 170,054
======================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 9 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW
INFORMATION
CASH PAID FOR:
Interest $ 15,001 $ - $ 29,992 $ -
Income Taxes $ $ $ $
NON-CASH FINANCING
ACTIVITIES:
Common stock issued
for services $ 4,469 $ - $ 54,469 $
Common stock issued
in lieu of debt $ - $ - $ 22,978 $ -
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 10 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1998 and December 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization
The consolidated financial statements presented are those of
Synthonics Technologies, Inc. (STI) and its wholly-owned
subsidiaries, Synthonics Incorporated (Synthonics) and
Christopher Raphael, Inc. (CRI). Collectively, they are referred
to herein as the "Company". STI was incorporated on March 27,
1974 under She laws of the State of Utah. Effective May 19, 1995,
STI issued 9,983,301 shares of Its common stock in exchange for
98% of the issued and outstanding common stock of Synthonics.
During 1997, STI issued an additional 179,700 shares of its
common stock for the remaining 2%. In 1996, STI changed its name
to Synthonics Technologies, Inc.
Synthonics was incorporated on August 26, 1993 under the state
laws of California. Synthonics was organized to engage in the
design, development and marketing of computer-interactive and
computer-automated image analysis software and hardware products.
With the acquisition of Synthonics, STI continued to engage in
these activities.
At the time of the acquisition of Synthonics, STI was essentially
inactive, with no operations and minimal assets. Additionally,
the exchange of STl's common stock for the common stock of
Synthonics resulted in the former stockholders of Synthonics
obtaining control of STI. Accordingly, Synthonics became the
continuing entity for accounting purposes, and the transaction
was accounted for as a recapitalization of Synthonics with no
adjustment to the basis of Synthonic's assets acquired or
liabilities assumed For legal purposes, STI was the surviving
entity.
On October 1, 1997, STI purchased CRI for $5,200 by issuing
10,000 shares of its common stock in exchange for 100% of the
issued and outstanding stock of CRI. The common stock issued was
valued at its trading price of $0.52 per share.
CRI was incorporated on June 17, 1997 under the state laws of
California. CRI was organized as a graphic design and print
brokerage firm.
b. Accounting Methods
The Company's financial statements are prepared using the accrual
method of accounting. The Company has elected a December 31, year
end.
c. Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid investments
with maturities of three months or less at the time of
acquisition.
Page 11 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1998 and December 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Lose Per Share
The computations of loss per share of common stock are based on
the weighted average number of common shares outstanding during
the period of the consolidated financial statements. Common stock
equivalents, consisting of warrants and employee stock options,
have not been included in the calculation as their effect is
antidilutive or immaterial for the periods presented.
e. Computer Software Development
The Company records all coats incurred to establish the
technological feasibility of its computer software products as
research and development expenses.
f. Property and Equipment
Property and equipment is recorded at cost. Major additions and
improvement are capitalized. The cost and related accumulated
depreciation of equipment retired or sold are removed from the
accounts and any differences between the undepreciated amount and
the proceeds from the sale are recorded as gain or loss on sale
of equipment. Depreciation is computed using the straight-line
method over a period of five years.
g. Organization costs
Organization costs are recorded at cost and are amortized using
the straight-line method over a period of five years. At
September 30, 1998, all organizational cost had been amortized.
h. Accounts receivable
Accounts receivable are shown net of the allowance for doubtful
accounts.
i. Provision For Taxes
At September 30, 1998, the Company has net operating loss
carryforwards of approximately $5,900,000 that may be offset
against future taxable income through 2013. No tax benefit has
been reported in the consolidated financial statements, because
the Company believes there is a 50% or greater chance the net
operating loss carryforwards will not be used. Accordingly, the
potential tax benefits of the net operating loss carryforwards
are offset by a valuation allowance of the same amount.
j. Principles of Consolidation
The consolidated financial statements include those of Synthonics
Technologies, Inc. and its wholly-owned subsidiaries, Synthonics
Incorporated and Christopher Raphael, Inc.
All material intercompany accounts and transactions have been
eliminated.
Page 12 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1998 and December 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. Uninsured Cash Balances
The Company maintains its corporate cash balances at various
banks. Corporate cash accounts at banks are insured by the FDIC
for up to $100,000. Amounts in excess of insured limits were
approximately $1,653 at September 30, 1998.
l. Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
m. Goodwill
Goodwill consists of the excess of the purchase price over the
fair value of net tangible assets of the purchased subsidiary and
is amortized on the straight-line method over a two year period.
The Company periodically reviews goodwill for impairment.
Amortization expense on the goodwill for the six months ended
September 30, 1998 was $36,069.
N. Unaudited Financial Statements.
The accompanying unaudited consolidated financial statements
include all of the adjustments which, in the opinion of
management, are necessary for a fair presentation. Such
adjustments are of a normal, recurring nature.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of
following:
September 30, December 31,
1998 1997
---------------------------
(Unaudited)
Computer equipment $ 174,821 $ 168,057
Furniture and fixtures 18,546 17,789
Photographic equipment 55,122 55,122
---------------------------
248,489 240,968
Accumulated depreciation (148,324) (116,434)
---------------------------
Net property and
equipment $ 100,165 $ 124,534
===========================
Depreciation expense for the six months ended September 30, 1998
and for the year ended December 31, 1997 was $31,890 and $35,746,
respectively.
Page 13 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1998 and December 31, 1997
NOTE 3 - INTANGIBLES
Intangible costs incurred are as follows:
September December 31,
1998 1997
---------------------------
(Unaudited)
Trademarks $ 1,484 $ 1,484
Patents 247,686 186,675
---------------------------
249,170 188,159
Less accumulated
amortization (59,268) (43,568)
---------------------------
Total $ 189,902 $ 144,591
===========================
Amortization expense for the nine months ended September 30, 1998
and for the year ended December 31, 1997 was $15,700 and $26,866,
respectively.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
During 1998, the Company entered into two separate operating
lease agreements for various equipment. The lease terms expire
beginning In May 2001 and ending June 2001. The monthly rental
payment for the two leases combined is $443.
During 1997, the Company entered into three separate operating
lease agreements for various computer equipment. The lease terms
expire beginning in November 1999 and ending November 2000. The
monthly rental payment for all three leases combined is $2,668.
The Company entered into a lease agreement for its office
facilities effective September 1, 1996 and expiring August 31,
1999. The monthly rental payment is $2,254.
The Company also has entered into employment agreements with
certain officers of the Company. The Company has agreed to pay
its Chief Executive Officer and Chief Technical Officer a base
annual salary of $240,000, each, beginning on July 1, 1996 and
ending on December 31, 2000. The Company has also agreed to pay
its Vice President of Marketing and Sales a base annual salary of
$144,000. The Company's Board of Directors may also authorize
bonuses on an ad-hoc basis.
NOTE 5 - RELATED PARTY TRANSACTIONS
As of September 30 1998 and December 31, 1997, the Company owed
$376,166 and $99,299 to certain of its officers and shareholders,
respectively. These amounts represent accrued wages.
Page 14 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1998 and December 31, 1997
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following at September 30, 1998
and December 31, 1997:
September 30, December 31,
1998 1997
----------------------------
(Unaudited)
Note payable to a corporation,
principal and 7.50% interest
originally due April 1, 1997.
Secured by 70,000 shares of common
stock and 70,000 warrants to
purchase common stock. $ - $ 50,000
Notes payable to various
individuals, interest at 10% due
semi-annually, principal due in
May 1999 (payable in cash or
stock at $0.20 per share,
at the option of the Company),
unsecured. 550,000 -
Unsecured bank line-of-credit
at 11.5% interest, interest paid
monthly, principal amount due
December 1998 5,000 50,000
---------------------------
Total Notes Payable 555,000 100,000
Less: Current Portion (555,000) (100,000)
---------------------------
Long-Term Notes Payable $ - $ -
===========================
The aggregate principal maturities of notes payable are as
follows:
Year Ended
December 31, Amount
------------- ---------
1998 $ 5,000
1999 550,000
2000 -
2001 -
2002 -
2003 and thereafter -
---------------------------------------
Total $ 555,000
Page 15 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial
September 30, 1998 and December 31, 1997
NOTE 7 - STOCK OPTIONS, WARRANTS AND RIGHTS
a. Stock Option and Management Cash Incentive Plans
At the annual shareholders' meeting in April 1998, the
shareholders approved a Stock Option Plan and a Management Cash
Incentive Plan. Management believes that these plans will help
increase the productivity and efficiency of the officers and
employees involved.
b. Stock Subscription Receivable
During 1993, the Board of Directors of Synthonics approved stock
purchase option agreements for certain of its key employees and
officers. During January 1994, all outstanding options to
purchase common stock were exercised at $0.50 per share. A total
of 7,402,500 shares of common stock were issued as a result of
the exercise of the stock options. Synthonics received promissory
notes in the amount of $822,500 in return for all options
exercised. During 1995, 6,997,500 of the shares of common stock
issued were returned to the Company for cancellation and the
related promissory notes of $777,500 were also canceled. During
1996, 326,409 of the 405,000 remaining shares were returned to
the Company for cancellation and an additional amount of $35,000
on the promissory notes was canceled. The remaining 78,591 shares
were paid for by the receipt of $10,000 during 1996.
c. Stock "Rights" and Warrants
In connection with its acquisition of Synthonics, the Company
acquired from Synthonics stockholders, warrants and "rights" to
acquire 1,369,190 shares of Synthonics common stock. In exchange,
the Company granted the exchanging stockholders warrants and
"rights" to purchase 6,161,355 Shares of the Company's common
stock. 1,950,500 of the 2,124,000 stock purchase warrants were
exercised during 1996 at $0.27 per share and the remaining
173,500 warrants expired unexercised on February 15, 1996. There
are 2,597,355 uncertificated "rights" with an exercise price of
$0.11 per share outstanding at December 31, 1997. 562,500 expired
January 1, 1998 and 2,034,855 expire May 31, 1999.
During 1996, 337,000 warrants were purchased at $1.00 per share
for $337,000. 168,500 of the warrants are "A" warrants and
168,500 are "B" warrants. They are redeemable at 50% of the
average price the month before being exercised. The "A" warrants
were exercised during June 1997 and the "B" warrants were
exercised during June 1998.
Page 16 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 1998 and December 31, 1997
NOTE 7 - STOCK OPTIONS, WARRANTS AND RIGHTS (Continued)
d. Common Stock Options
During 1996, certain of the Company's officers were granted stock
options for a total of 600,000 restricted common shares of the
Company at S1.00 per share in return for their forgiveness of
deferred compensation debt in the amount of $236,500. During
1997, these officers were granted additional stock options to
purchase 588,290 shares of restricted common stock at $1.00 per
share in return for their forgiveness of deferred compensation
debt in the amount of $279,133. The Company also issued 501,000
shares of common stock during 1997 in exchange for the forfeiture
of 750,000 common stock options. 450,000 of those stock options
were valued at $0.22 per option and the remaining 300,000 stock
options were valued at $0.50 per option. The amounts are rewarded
as contributed capital at December 31, 1996 and 1997. The options
can be exercised in total or in part prior to December 31, 2001
and 2002.
The total amount of outstanding stock options of the Company at
June 30, 1998 is summarized as follows:
Shares Exercise Price Exercised By
-------------------------------------------------
2,034,855 $ 0.22 May 1999
1,200,000 $ 0.50 July 2006
2,121,290 $ 1.00 December 1999 - December 2002
825,000 $ 0.75 October 2002
NOTE 8 - PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31,
1997 and 1996, consists of the following:
December 31,
1997 1996
-------------------
State Franchise Taxes $ 1,700 $ 800
===================
NOTE 9 - PREFERRED STOCK
At December 31, 1997, the Company had 50,000 outstanding shares
of cumulative convertible preferred stock. Prior to September 30,
1998, 40,000 of the shares were converted early into 615,200
shares of common stock. The early conversion was at a 15.38 to 1
conversion as an incentive for the preferred shareholders to give
up their future dividends from the preferred stock. Thus, at
September 30, 1998, the Company has 10,000 outstanding shares of
cumulative convertible preferred stock. The remaining preferred
stock is convertible at the option of the holder into five shares
of the Company's common stock for each share of preferred stock
for each share of preferred stock, are non-voting, and feature a
12% annual dividend, paid quarterly. Accrued dividends as of
September 30, 1998 and December 31, 1997 were $3,000 and $15,000,
respectively.
Page 17 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Statements
September 30, 1998 and December 31, 1997
NOTE 10 - GOING CONCERN
The Company's consolidated financial statements are prepared
using generally accepted accounting principles applicable to a
going concern which contemplates the realization of assets and
liquidation of liabilities in the normal course of business. The
Company has historically incurred significant losses which have
resulted in an accumulated deficit of $4,332,431 at December 31,
1997 which raises substantial doubt about the Company's ability
to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts
or the amount and classification of liabilities that might result
form the outcome of this uncertainty. It is the intent of
management to create additional revenues through the development
and sales of its image analysis software and to rely upon
additional equity financing if required to sustain operations
until revenues are adequate to cover the costs.
Page 18 of 26
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere herein.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997.
- --------------------------------------------------------------------------------
NET SALES decreased $129,899 over the comparable period a year earlier. For
such three-month periods the decrease was from $129,899 to $0. During the
quarter just ended, the Company reported no sales. The Smithsonian Institution
CD-ROM launch was delayed resulting in no sales in the reporting period. (This
CD-ROM started shipping during the first week of October). Scheduling access to
artifacts and late delivery by the Smithsonian of support materials caused the
overall delay in completing the CD-ROM as originally scheduled.
GROSS PROFIT decreased $125,859 in the three months ended September 30,
1998 to $0 from $125,859. The decrease in gross profit is due to the lack of
sales for the period.
OPERATING EXPENSES increased to $715,096 for the three months ended
September 30, 1998 from $272,198 for the three months ended September 30, 1997.
The increase in operating expense is primarily due to an increase in staffing to
support growth. Synthonics acquired Christopher Raphael, Inc. on October 1, 1997
to provide a custom content generation capability. This business unit has been
primarily focused on the completion of the Smithsonian CD-ROM during the three
months ending September 30, 1998. As such, 60% of the expense increase is
attributed to the completion of the Smithsonian CD-ROM. Business development
expense increases accounted for 20% of the overall increased operating expense.
During the third quarter of fiscal 1997, the Company had no designated resources
focused exclusively on business development. It now has those resources in
place. A reclassification of out of period patent related expenses to the
balance sheet during the quarter ending September 30, 1997 accounted for 15% of
the increased expenses. The Company also incurred a 5% increase in depreciation
and amortization as compared to the quarter ended September 30, 1997. The
majority of this increase is a result of amortizing the goodwill booked by the
Company at the time of the Christopher Raphael, Inc. acquisition on October 1,
1997.
As a result of the foregoing factors, the Company had a NET LOSS of
$726,792 for the three months ended September 30,1998 as compared to a NET LOSS
of $145,886 for the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997.
- -------------------------------------------------------------------------------
NET SALES decreased 24.6% for the nine months ended September 30, 1998 to
$179,947 from $238,529 for the nine months ended September 30, 1997. The
decrease in sales is mainly attributed to the late launch of the Smithsonian
CD-ROM which was originally due to be shipped early in the third quarter of
1998. Scheduling access to artifacts and late delivery by the Smithsonian of
support materials caused the overall delay in completing the CD-ROM as
originally scheduled. Shipments of the CD-ROM commenced during the first week of
October.
Page 19 of 26
<PAGE>
GROSS PROFIT decreased 67.2% in the nine months ended September 30, 1998 to
$74,207 from $226,573 in the nine months ended September 30, 1997. Gross profit
as a percentage of sales also decreased to 41.2% for the first three quarters of
fiscal 1998 as compared to 94.9% for the first three quarters of fiscal 1997.
The decrease in percentage gross profit is due to the terms of the Company's
contract to produce a CD-ROM for the Smithsonian institution. This contract
requires Synthonics to initially fund all costs to develop and produce the
CD-ROM. In return for funding the CD-ROM, Synthonics receives 100% of the
initial sales revenues until its development and production costs are recovered.
After recovery, Synthonics and the Smithsonian share the revenues on a 50/50
basis. Since the CD-ROM is not yet ready for distribution, the Company incurred
development costs during the first nine months of fiscal 1998 without the
benefit of offsetting sales revenues.
OPERATING EXPENSES increased to $1,658,517 for the nine months ended
September 30, 1998 from $959,681 for the nine months ended September 30, 1997.
The increase in operating expenses is primarily due to the increase in staffing
to support growth. The primary contributions to the overall increase in
operating expenses of $698,836 include:
% of
EXPENSE INCREASE
------- --------
Smithsonian CD-ROM Development 65.1%
Business Development 26.2%
Goodwill Amortization 7.1%
The Company funded and developed a CD-ROM title for the Smithsonian
Institution during the first nine months of 1998. That project was completed
during September, 1998 and the Company commenced shipping during October, 1998.
The Company's contract with the Smithsonian assures that Synthonics recovers
their costs from the first quantities of the CD-ROM that is sold to the public.
With the completion of the Smithsonian CD-ROM, the Company has trimmed back its
expenses and these reductions will be realized in future quarters.
As a result of the foregoing factors, the Company had a NET LOSS of
$1,607,976 for the nine months ended September 30, 1998 as compared to a NET
LOSS of $727,037 for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary need for funds is to provide working capital
associated with forecasted growth in sales volume. Specifically, funds are
required to promote the Smithsonian CD-ROM and to complete the programming
effort yet required for the Acuscape products as well as specific application
utility products the Company will be introducing over the next several quarters.
Additionally, funds are required to promote future business development by
creating customer specific pilot projects that demonstrate the benefits derived
by utilizing Synthonics' technology with that of the potential customer. Working
capital for the nine months ended September 30, 1998 was funded primarily
through the sale of equity, private borrowing and the collection of accounts
receivable.
Net cash provided by financing activities for the nine months ended
September 30, 1998 was $1,082,824 compared to $324,797 during the nine months
ended September 30, 1997. The first nine months of fiscal 1998 included $550,000
from private loans and $598,824 from the issuance of capital stock. These
amounts were offset by $45,000 for the payment of a loan and $21,000 for a
dividend paid to Preferred Stock shareholders. For the first nine months of
1997, $51,800 in funds were provided by a private loan and $272,997 in funds
were provided through the issuance of capital stock.
Page 20 of 26
<PAGE>
The Company has borrowed $550,000 from six shareholders. The loan agreement
requires the Company to repay the principal amount by May 1999. The Company has
the option of paying off the loan in cash or with restricted shares of its
Common Stock valued at $0.20 per share.
CAUTIONARY FORWARD -LOOKING STATEMENT
- -------------------------------------
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and in future filings by the
Company with the Securities and Exchange Commission, in the Company's press
releases and in oral statements made with the approval of an authorized
executive officer which are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) the extremely competitive conditions that
currently exist in the three dimensional software development marketplace are
expected to continue, placing further pressure on pricing which could adversely
impact sales and erode profit margins; (ii) many of the Company's major
competitors in its channels of distribution have significantly greater financial
resources than the Company; and (iii) the inability to carry out marketing and
sales plans would have a materially adverse impact on the Company's projections.
The foregoing list should not be construed as exhaustive and the Company
disclaims any obligation subsequently to revise any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
Page 21 of 26
<PAGE>
PART II - OTHER INFORMATION.
Item 1. Legal Proceedings.
During the period covered by this report there are no legal proceedings
against the Company and the Company is unaware of any unasserted claim or
assessment which will have a material effect on the financial position or future
operations of the Company.
Item 2. Changes in Securities.
Not required.
Item 3. Defaults Upon Senior Securities.
Not required.
Item 4. Submission of Matters to a Vote of Security Holders.
Not required
Item 5. Other Information.
On April 28, 1998, the Company filed a Registration Statement on Form 10-SB
in order to register the Company's common stock, $0.01 par value pursuant to
Section 12(g) of the Securities Exchange Act of 1934. Pursuant to statute the
registration statement on Form 10-SB was deemed effective on June 28, 1998. On
July 14, 1998, subsequent to the effectiveness of the Registration Statement,
the Company received comments from the SEC requesting clarification of certain
items in the Registration Statement. On November 6, 1998 the Company filed
Amendment No. 1 to the Registration Statement in response to the SEC's comments.
The Registration Statement on Form 10-SB and Amendment No. 1 to the Registration
on Form 10-SB, as filed with the Securities and Exchange Commission are
incorporated herein by reference.
On September 25, 1998, Mr. Timothy Andrews, a director of the Company
resigned. Mr. Andrews resignation was not due to any disagreements between
himself and the management of the Company relating to the Company's operations,
policies or practices.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits attached or incorporated by referenced pursuant to
Item 601 of Regulation S-B.
(3) Articles of Incorporation and By-Laws.
3.1 Articles of Incorporation of the Registrant filed on
March 27, 1994, (incorporated by reference to Exhibit 3.1 of
the Registrant's Registration Statement on Form 10-SB dated
April 28, 1998; Commission File No. 0-24109).
Page 22 of 26
<PAGE>
3.2 Restated Articles of Incorporation of the Registrant
dated May 18, 1995, (incorporated by reference to Exhibit
3.2 of the Registrant's Registration Statement on Form 10-SB
dated April 28, 1998; Commission File No. 0-24109).
3.3 Articles of Amendment to Articles of Incorporation of
the Registrant, filed on September 16, 1996, (incorporated
by reference to Exhibit 3.3 of the Registrant's Registration
Statement on Form 10-SB dated April 28, 1998; Commission
File No. 0-24109).
3.4 Statement of Designation of Foreign Corporation in
California filed November 4, 1996, (incorporated by
reference to Exhibit 3.4 of the Registrant's Registration
Statement on Form 10-SB dated April 28, 1998; Commission
File No. 0-24109).
3.5 Certificate of Amendment to Articles of Incorporation
filed September 6, 1997, (incorporated by reference to
Exhibit 3.5 of the Registrant's Registration Statement on
Form 10-SB dated April 28, 1998; Commission File No.
0-24109).
3.6 Amended and Restated Articles of Incorporation filed
April 23, 1998, (incorporated by reference to Exhibit 3.6 of
the Registrant's Registration Statement on Form 10-SB dated
April 28, 1998; Commission File No. 0-24109).
3.7 By-Laws of the Registrant (incorporated by reference to
Exhibit 3.7 of the Registrant's Registration Statement on
Form 10-SB dated April 28, 1998; Commission File No.
0-24109).
(4) Instruments defining the rights of holders.
4.1 Statement of Rights, Preferences and Privileges of
Common and Preferred Stock of the Registrant as of September
6, 1997, (incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form 10-SB dated
April 28, 1998; Commission File No. 0-24109).
(10) Material Contracts
10.1 Management Cash Incentive Plan (incorporated by
reference to Exhibit 10.1 of the Registrant's Registration
Statement on Form 10-SB dated April 28, 1998; Commission
File No. 0-24109).
10.2 1998 Stock Option Plan (incorporated by reference to
Exhibit 10.2 of the Registrant's Registration Statement on
Form 10-SB dated April 28, 1998; Commission File No.
0-24109).
10.3 Acuscape License Agreement (incorporated by reference
to Exhibit 10.3 of the Registrant's Amendment No. 1 to the
Registration Statement on Form 10-SB filed on November 6,
1998; Commission File No. 0-24109).
Page 23 of 26
<PAGE>
10.4 Smithsonian License Agreement dated October 2, 1997
(incorporated by reference to Exhibit 10.4 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.5 Amendment No. 1 to Smithsonian License Agreement
(incorporated by reference to Exhibit 10.5 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.6 Centro Alameda Inc. Contract Agreement dated December
19, 1997 (incorporated by reference to Exhibit 10.6 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.7 Knowledge LINK Strategic Alliance Agreement
(incorporated by reference to Exhibit 10.7 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.8 Synthonics Technologies - Industrial Lease Agreement
(incorporated by reference to Exhibit 10.8 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
10.9 Joseph Maher - Industrial Lease Agreement (incorporated
by reference to Exhibit 10.9 of the Registrant's Amendment
No. 1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.10 Dell Financial Lease No. 004591649-001 (incorporated
by reference to Exhibit 10.10 of the Registrant's Amendment
No. 1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.11 Dell Financial Lease No. 004591649-002 (incorporated
by reference to Exhibit 10.11 of the Registrant's Amendment
No. 1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.12 Americorp Financial Inc. - Lease 6976-2 (incorporated
by reference to Exhibit 10.12 of the Registrant's Amendment
No. 1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.13 Sanwa Leasing Corporation - Lease Agreement
(incorporated by reference to Exhibit 10.13 of the
Registrant's Amendment No. 1 to the Registration Statement
on Form 10-SB filed on November 6, 1998; Commission File No.
0-24109).
Page 24 of 26
<PAGE>
10.14 AT & T Equipment Lease - 003866952 (incorporated by
reference to Exhibit 10.14 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.15 AT & T Equipment Lease - 003871854 (incorporated by
reference to Exhibit 10.15 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.16 F. Michael Budd Employment Agreement (incorporated by
reference to Exhibit 10.16 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.17 Charles S. Palm Employment Agreement (incorporated by
reference to Exhibit 10.3 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
10.18 First Colony Life Insurance Policy (incorporated by
reference to Exhibit 10.18 of the Registrant's Amendment No.
1 to the Registration Statement on Form 10-SB filed on
November 6, 1998; Commission File No. 0-24109).
(27) Financial Data Schedule
27.1. Financial Data Schedule (submitted electronically for
SEC information only).
(b) There were no other reports on Form 8-K filed during the quarter of the
period covered.
Page 25 of 26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the Undersigned, thereunto duly authorized.
SYNTHONICS TECHNOLOGIES, INC.
A Utah Corporation
Dated: November 9, 1998 /s/ F. Michael Budd
---------------------------------
By: F. Michael Budd
Its: President
Chief Executive Officer
and principal Financial
and Accounting Officer
Page 26 of 26
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<PERIOD-START> JAN-01-1998
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