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: June 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 June 30, 1998, there were 19,560, 404 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 24.
<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 June 30, 1998 and the results of its operations and changes in its
financial position from inception through June 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>
June 30, December 31,
1998 1997
---------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 381,068 $ 311,610
Accounts receivable (Note 1) 157,468 8,332
Prepaid expenses 2,667 2,667
---------------- ---------------
Total Current Assets 541,203 322,609
---------------- ---------------
PROPERTY AND EQUIPMENT (Net)(Note 2) 108,786 124,534
---------------- ---------------
OTHER ASSETS
Organization costs, net of accumulated
amortization of $1,333 and $1,195 (Note 1) 45 183
Goodwill (Note 1) 24,046 48,092
Intangibles (Note 3) 161,176 144,591
Deposits 15,083 15,083
---------------- ---------------
Total Other Assets 200,350 207,949
---------------- ---------------
TOTAL ASSETS $ 850,339 $ 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>
June 30, December 31,
1998 1997
---------------- ---------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 94,271 $ 126,034
Wages payable (Note 5) 293,426 99,299
Other accrued expenses 23,931 22,166
Notes payable, current portion (Note 6) 570,000 100,000
---------------- ---------------
Total Current Liabilities 981,628 347,499
---------------- ---------------
LONG-TERM DEBTS
Notes payable (Note 6) - -
---------------- ---------------
Total Long-Term Debt - -
---------------- ---------------
Total Liabilities 981,628 347,499
---------------- ---------------
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,
19,560,404 and 17,823,387 shares
issued and outstanding respectively 195,604 178,234
Additional paid-in capital 4,786,722 3,961,790
Accumulated deficit (5,213,615) (4,332,431)
---------------- ---------------
Total Stockholder's Equity (Deficit) (131,289) 307,593
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT) $ 850,339 $ 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 Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
Net sales $ 153,820 $ 57,662 $ 179,947 $ 108,630
Cost of goods sold 35,014 4,546 105,740 7,916
------------------------------------------------------
Gross Profit 118,806 53,116 74,207 100,714
------------------------------------------------------
EXPENSES
Research and development 167,537 131,645 321,038 272,299
General and administrative 261,986 190,479 570,137 391,668
Depreciation and
amortization 31,218 11,862 52,246 23,516
------------------------------------------------------
Total Expenses 460,741 333,986 943,421 687,483
------------------------------------------------------
Loss From Operations (341,935) (280,870) (869,214) (586,769)
------------------------------------------------------
OTHER INCOME (EXPENSE)
Other income - 2,552 - 2,580
Interest income 1,376 1,571 3,021 3,038
Interest expense (10,071) - (14,991) -
-----------------------------------------------------
Total Other
Income(Expense) (8,695) 4,123 (11,970) 5,618
=====================================================
NET LOSS $(350,630) $(276,747) $(881,184) $(581,151)
=====================================================
LOSS PER SHARE $ (0.02) $ (0.02) $ (0.05) $ (0.04)
=====================================================
</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 - - 300,000 3,000 57,000 -
Common stock issued upon
exercise of warrants
at $0.00 - - 167,000 1,670 (1,670) -
Dividends declared - - - - (18,000) -
Stock offering costs - - - - (30,176) -
Net loss for the six
months ended
June 30, 1998 - - - - (881,184) -
-----------------------------------------------------------
Balance
June 30, 1998 10,000 $100,000 19,560,404 $195,604 $4,786,722 $(5,213,615)
============================================================
</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 Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $(350,630) $(276,747) $(881,184) $(581,151)
Adjustments to reconcile
net loss to net cash
used by operating
activities:
Common stock issued
for services 22,978 - 22,978 -
Depreciation and
amortization 31,218 11,862 52,246 23,516
(Increase) decrease in
accounts receivable (130,144) 42,895 (149,136) -
(Increase) decrease in
loan receivable - (1,800) - -
(Increase) decrease in
prepaid expenses and
deposits - (15,000) - (15,000)
(Increase) decrease in
other assets (21,112) - (23,386) -
(Increase) decrease in
accounts payable (152,068) (31,514) (31,764) (34,995)
(Increase) decrease in
accrued expenses 188,102 82,500 195,892 165,000
------------------------------------------------------
Net Cash Used by
Operating Activities (411,656) (187,804) (814,354) (444,430)
------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of fixed assets - (2,093) (5,512) (8,923)
------------------------------------------------------
Net Cash Used by
Investing Activities $ - (2,093) $ (5,512) $ (8,923)
------------------------------------------------------
</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 Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from loan $ 550,000 - $ 550,000 $ 50,000
Repayment of loan (15,000) - (30,000) -
Dividends paid (3,000) - (18,000) -
Issuance of common stock 60,000 - 387,324 -
------------------------------------------------------
Net Cash Provided by
Financing Activities 592,000 - 889,324 50,000
------------------------------------------------------
NET INCREASE (DECREASE)
IN CASH 180,344 (189,897) 69,458 (403,353)
CASH AT BEGINNING OF
PERIOD 200,724 312,275 311,610 525,731
------------------------------------------------------
CASH AT END OF PERIOD $ 381,068 $ 122,378 $ 381,068 $ 122,378
======================================================
</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 Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW
INFORMATION
CASH PAID FOR:
Interest $ 10,071 $ - $ 14,991 $ -
Income Taxes $ $ $ $
NON-CASH FINANCING
ACTIVITIES:
Common stock issued
for services $ 22,978 $ - $ 22,978 $
Common stock issued
in lieu of debt $ $ - $ 50,000 $ -
</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
June 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
June 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.
h. Accounts receivable
Accounts receivable are shown net of the allowance for doubtful
accounts.
i. Provision For Taxes
At June 30, 1998, the Company has net operating loss
carryforwards of approximately $5,200,000 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
June 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 $281,068 at June 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
June 30, 1998 was $24,046.
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:
June 30, December 31,
1998 1997
---------------------------
(Unaudited)
Computer equipment $ 172,810 $ 168,057
Furniture and fixtures 18,548 17,789
Photographic equipment 55,122 55,122
---------------------------
246,480 240,968
Accumulated depreciation (137,694) (116,434)
---------------------------
Net property and
equipment $ 108,786 $ 124,534
===========================
Depreciation expense for the six months ended June 30, 1998 and
for the year ended December 31, 1997 was $21,260 and $35,746,
respectively.
Page 13 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 1998 and December 31, 1997
NOTE 3 - INTANGIBLES
Intangible costs incurred are as follows:
June 30, December 31,
1998 1997
---------------------------
(Unaudited)
Trademarks $ 1,484 $ 1,484
Patents 210,061 186,675
---------------------------
211,545 188,159
Less accumulated
amortization (50,369) (43,568)
---------------------------
Total $ 161,176 $ 144,591
===========================
Amortization expense for the six months ended June 30, 1998 and
for the year ended December 31, 1997 was $6,801 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 $2668.
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 June 30 1998 and December 31, 1997, the Company owed
$293,426 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
June 30, 1998 and December 31, 1997
NOTE 6 - NOTES PAYABLE
Notes payable consisted of the following at June 30, 1998 and
December 31, 1997:
June 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 20,000 50,000
---------------------------
Total Notes Payable 570,000 100,000
Less: Current Portion (570,000) (100,000)
---------------------------
Long-Term Notes Payable $ - $ -
===========================
The aggregate principal maturities of notes payable are as
follows:
Year Ended
December 31, Amount
------------- ---------
1998 $ 20,000
1999 550,000
2000 -
2001 -
2002 -
2003 and thereafter -
---------------------------------------
Total $ 570,000
Page 15 of 26
<PAGE>
SYNTHONICS TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial
June 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
June 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 $ 0.72 May 1999
1,200,000 $ 0.50 July 2006
2,151,290 $ 1.00 December 1999 - December 2002
950,000 $ 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 June 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 June
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, are
non-voting, and feature a 12% annual dividend, paid quarterly.
Accrued dividends as of June 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
June 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 JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997.
- -------------------------------------------------------------------------------
NET SALES increased $96,158 or 165% over the comparable period a year
earlier. For such three month periods the increase was from $57,662 to $153,820.
The increase in net sales is primarily attributable to the Company's contract
with Centro Alameda, Inc. to provide a 3D digital database. The Company also
achieved its first revenues from its strategic alliance with KnowledgeLINK
during the quarter just completed.
GROSS PROFIT increased 123% in the three months ended June 30, 1998 to
$118,806 from $53,116. Gross profit as a percentage of sales was 77.2% for the
second quarter of fiscal 1998 compared to 92.1% for the second quarter 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 second quarter of fiscal 1998 without the benefit
of offsetting sales revenues.
OPERATING EXPENSES increased to $460,741 for the three months ended June
30, 1998 from $333,986 for the three months ended June 30, 1997. The increase in
operating expense is primarily due to an increase in staffing to support growth.
Business development expense increases accounted for 46% of the overall
increased operating expense. During the second quarter of fiscal 1997, the
Company had no designated resources focused exclusively on business development.
It now has those resources in place. The other major contributors to the
increase in operating expense are: programming to support Acuscape product
completion (10% of increase); the addition of basic medical benefits required to
attract and retain employees (11% of increase); incremental legal expenses
associated with becoming a "reporting" company (11% of increase); and leasing of
computer equipment for incremental employees (6% of increase). The Company
acquired Christopher Raphael, Inc. in October 1997. This acquisition resulted in
goodwill in the amount of $96,184 being added to the Company's balance sheet.
The goodwill is being amortized over a two-year period. As such, an amortization
increase of $12,023 (9% of the increased operating expense) occurred in the
quarter ended June 30, 1998.
As a result of the foregoing factors, the Company had a NET LOSS of
$350,630 for the three months ended June 30,1998 as compared to a NET LOSS of
$276,747 for the three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997.
- ----------------------------------------------------------------------------
NET SALES increased 65.6% for the six months ended June 30,1998 to $179,947
from $108,630 for the six months ended June 30, 1997. The increase in net sales
is attributable to the Company's contract with Centro Alameda, Inc. to
Page 19 of 26
<PAGE>
provide a 3D digital database. This was somewhat offset by lower revenues from
Acuscape. For the six months ended June 30, 1997, the Company benefited from
revenues that were invoiced on a delayed basis to Acuscape. These represented
services performed by Synthonics prior to the legal formation and funding of
Acuscape. Once Acuscape achieved funding (during first quarter of fiscal 1997),
Synthonics invoiced that company for prior period services.
GROSS PROFIT decreased 26.3% in the six months ended June 30, 1998 to
$74,207 from $100,714 in the six months ended June 30, 1997. Gross profit as a
percentage of sales also decreased to 41.2% for the first half of fiscal 1998 as
compared to 92.7% for the first half 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
half of fiscal 1998 without the benefit of offsetting sales revenues.
OPERATING EXPENSES increased to $943,421 for the six months ended June 30,
1998 from $687,483 for the six months ended June 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 $255,838 include:
% of
EXPENSE INCREASE
------- --------
Business Development 42%
Acuscape Product Development 9%
Legal to Support Reporting Company status 11%
Medical Insurance 12%
Equipment Leases 10%
Goodwill Amortization 9%
As a result of the foregoing factors, the Company had a NET LOSS of
$881,184 for the six months ended June 30, 1998 as compared to a NET LOSS of
$581,151 for the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary needs for funds are to provide working capital
associated with forecasted growth in sales volume. Specifically, funds are
required to complete the Smithsonian CD-ROM and the programming effort yet
required for the Acuscape products. Additionally, funds are required to promote
future business development. Working capital for the six months ended June 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 six months ended June 30,
1998 was $889,324 compared to $50,000 during the six months ended June 30, 1997.
The first half of fiscal 1998 included $550,000 from private loans and $387,324
from the issuance of capital stock. These amounts were offset by $30,000 for the
payment of a loan and $18,000 for a dividend paid to Preferred Stock
shareholders. For the first half of 1997, $50,000 in funds were provided by a
private loan.
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.
(a) On April 8, 1998, the Company held its Annual Meeting of the
Shareholders. Of the Company's 17,893,387 shares of Common Stock entitled to
vote at the meeting, 15,985,914 were represented, either in person or by proxy.
The purpose of the meeting was to consider and act upon the following proposals:
1. Approval of the Amended and Restated Articles of Incorporation to
provide for the staggered board of directors.
2. Election of 9 Directors, three with a term of 1 year, three with a
term of 2 years and three with a term of 3 years;
3. Ratification of the appointment of Jones, Jensen & Company as the
Company's independent accountants for the fiscal year 1998;
4. Approval of the Management Cash Incentive Plan;
5. Approval of the 1998 Stock Option Plan; and
6. To transact such other business as may properly come before the
meeting of any adjournment thereof.
(b) At this Annual Meeting, the following persons were elected as Directors
of the Company:
Class I Directors - David L. Stewart, Joseph R. Maher and Timothy J.
Andrews, are hereby elected to serve for a term of one (1) year until
the next annual meeting of Shareholders and until their successors are
duly appointed and qualified.
Class II Directors - Ronald S. Speirs, Timothy G. Paulson and Thomas
K. Carpenter, are elected to serve for a term of two (2) years until
the 2000 annual meeting of Shareholders and until their successors are
duly appointed and qualified.
Page 22 of 26
<PAGE>
Class III Directors - LeRoy K. Speirs, F. Michael Budd and Charles S.
Palm, are elected to serve for a term of three (3) years until the
2001 annual meeting of Shareholders and until their successors are
duly appointed and qualified.
(c) At this Annual Meeting, the following other matters were voted on with
the number of votes cast for, against or withheld, and abstentions as to each
matter as follows:
Proposal No. 1 - Approval of the Amended and Restated Articles of
Incorporation to provide for a staggered board of directors, by
amending Article 6. of the Articles of Incorporation, as amended and
restated, would read as follows:
ARTICLE 6.
Board of Directors
------------------
Number. The board of directors of the Corporation shall consist of
such number of persons, not less than three, as shall be determined in
accordance with the bylaws from time to time. As of the effective date
of this article the number of directors is nine.
Staggered Board; Tenure. The directors shall be divided into three
classes: Class I, Class II, and Class III. The term of office of
directors shall be three years, staggered by class so that one class
is elected each year. Such classes shall be as nearly equal in number
as possible. Directors chosen to succeed those who have been removed
or whose terms have expired shall be identified as being of the same
class as the directors they succeed and shall be elected for a term
expiring at the expiration date of such class or thereafter when their
respective successors are elected and have been qualified. If the
number of directors is changed, any increase or decrease in directors
shall be apportioned among the classes so as to maintain all classes
as nearly equal in number as possible, and any individual director
elected to any class shall hold office for a term which shall coincide
with the term of such class. In no case, will a decrease in the number
of directors shorten the term of any incumbent director.
Votes for .............. 14,243,525
Votes against ......... 525
Abstaining ............ 21,800
Proposal No. 2 - Election of 9 Directors, three with a term of 1 year,
three with a term of 2 years and three with a term of 3 years.
See paragraph (b) above for results.
Proposal No. 3 - Ratification of the appointment of Jones, Jensen &
Company as the Company's independent accountants for the fiscal year
1998.
Votes for .............. 15,137,717
Votes against ......... 0
Abstaining ............ 866,747
Page 23 of 26
<PAGE>
Proposal No. 4 - Approval of the Management Cash Incentive Plan. The
purpose of the Management Cash Incentive Plan is to provide a
significant and flexible economic opportunity to selected officers and
employees of the Company and its subsidiaries to generate increased
incentive to contribute to the Company's future success and
prosperity, thus enhancing the value of the Company for the benefit of
the shareholders, and to enhance the ability of the Company to attract
and retain individuals of exceptional managerial talent upon whom, in
large measure, the sustained progress, growth and profitability of the
Company depend.
Votes for .............. 15,386,703
Votes against ......... 174,078
Abstaining ............ 345,551
Proposal No. 5 - Approval of the 1998 Stock Option Plan. The purpose
of the 1998 Stock Option Plan is to attract, retain, and reward
persons providing services to the Company and its subsidiaries, to
generate increased incentive to contribute to the Company's future
success and prosperity.
Votes for .............. 14,029,013
Votes against ......... 675,019
Abstaining ............ 165,501
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. The Registration Statement
on Form 10-SB as filed with the Securities and Exchange Commission is
incorporated herein by reference.
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).
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).
Page 24 of 26
<PAGE>
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).
(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: August 3, 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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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 381,086
<SECURITIES> 0
<RECEIVABLES> 157,468
<ALLOWANCES> 0
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0
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<COMMON> 195,604
<OTHER-SE> 4,786,722
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<TOTAL-REVENUES> 179,947
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