SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 1-12536
PACIFIC ANIMATED IMAGING CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 11-2964894
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
326 First Street, Suite 100
Annapolis, Maryland 21403
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (410) 263-7761
Not applicable
(Former name, former address and former fiscal year if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
1,514,595 Common Shares, $.0001 par value were issued and outstanding at June
30, 1996.
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION
TABLE OF CONTENTS
Page No.
Part I - Financial Information
Consolidated Balance Sheets, June 30, 1996 (unaudited)
and December 31, 1995 3
Consolidated Statements of Operations for the three and
six months ended June 30, 1996 and 1995 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and 1995 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II - Other Information
Items 1-6 10
Signature 11
2
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,641,389 $ 4,177,534
Investment in U.S. government securities 474,144 --
Accounts receivable, net 191,608 260,655
Interest receivable 9,823 3,939
Prepaid expenses and other current assets 95,186 82,719
----------- -----------
Total current assets 3,412,150 4,524,847
----------- -----------
Property and equipment, at cost
Computers, furniture and equipment 638,514 500,162
Less accumulated depreciation 286,771 218,593
----------- -----------
Net property and equipment 351,743 281,569
----------- -----------
Other assets 136,433 62,708
----------- -----------
$ 3,900,326 $ 4,869,124
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 251,171 $ 274,313
Deferred revenue 30,306 76,201
Customer deposit 50,000 50,000
Other current liabilities 73,853 7,781
----------- -----------
Total current liabilities 405,330 408,295
Deferred rent and other 27,439 22,399
----------- -----------
Total liabilities 432,769 430,694
----------- -----------
Commitments and contingencies
Stockholders' equity
Common stock, $.0001 par value. Authorized 5,000,000 shares;
issued and outstanding 1,514,595 shares as of June 30, 1996
and 1,441,024 shares as of December 31, 1995. 151 144
Additional paid-in capital 11,833,895 11,280,624
Accumulated deficit (8,191,974) (6,842,338)
Deferred compensation (174,515) --
----------- -----------
Total stockholders' equity 3,467,557 4,438,430
----------- -----------
$ 3,900,326 $ 4,869,124
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
--------------- -------------- --------------- ---------------
<S> <C>
Revenue
Custom software revenue $ 127,088 $ 143,556 $ 352,712 $ 329,332
Product sales 130 -- 15,366 --
Royalties 27,636 12,255 33,747 29,905
--------------- -------------- --------------- ---------------
Total revenue 154,854 155,811 401,825 359,237
--------------- -------------- --------------- ---------------
Expenses
Cost of custom software production 217,162 191,341 480,017 368,187
Cost of product sales 38 -- 5,591 --
Research and development 82,614 74,517 123,770 203,467
Selling, general and administrative 482,273 401,142 934,798 830,517
Write-off of purchased research and development -- -- 289,330 --
--------------- -------------- --------------- ---------------
Total operating expenses 782,087 667,000 1,833,506 1,402,171
--------------- -------------- --------------- ---------------
Loss from operations (627,233) (511,189) (1,431,681) (1,042,934)
Other income 39,800 11,370 82,045 24,348
=============== ============== =============== ===============
Net loss $ (587,433) $ (499,819) $ (1,349,636) $ (1,018,586)
=============== ============== =============== ===============
Weighted average number of shares outstanding 1,459,922 520,739 1,450,473 520,739
=============== ============== =============== ===============
Net loss per common share $ (0.40) $ (0.96) $ (0.93) $ (1.96)
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
<S> <C>
Cash flows from operating activities
Net loss $ (1,349,636) $ (1,018,586)
Adjustments to reconcile net loss to net cash
used in operating activities, net of effects
from purchase of Forsight
Depreciation and amortization 68,752 72,565
(Gain) loss on disposal of assets (258) 6,568
Write-off of purchased research and development 289,330 --
Decrease (increase) in assets
Accounts receivable 69,047 (10,308)
Interest receivable (5,884) 27,181
Prepaid expenses and other current assets (12,467) 75,296
Other assets (73,725) 200
Increase (decrease) in liabilities
Accounts payable and accrued liabilities (23,142) (53,372)
Other liabilities 19,865 (21,158)
------------------- -------------------
Net cash used in operating activities (1,018,118) (921,614)
------------------- -------------------
Cash flows from investing activities
Purchase of U.S. government securities (474,144) --
Proceeds from maturity of U.S. government securities -- 867,506
Capital expenditures (64,518) (24,575)
Proceeds from sale of property and equipment 1,200 9,300
Payment for purchase of Forsight, net of cash acquired (180,562) --
------------------- -------------------
Net cash provided by (used in) investing activities (718,024) 852,231
------------------- -------------------
Cash flows from financing activities
Proceeds from exercise of options 199,997 --
------------------- -------------------
Net cash provided by financing activities 199,997 --
------------------- -------------------
Net decrease in cash and cash equivalents (1,536,145) (69,383)
Cash and cash equivalents, beginning of period 4,177,534 505,761
=================== ===================
Cash and cash equivalents, end of period $ 2,641,389 $ 436,378
=================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The consolidated financial statements as of and for the three and six
month periods ended June 30, 1996 and 1995 are unaudited; however, in the
opinion of management, include all adjustments, consisting of normal recurring
adjustments necessary for fair presentation of such financial information. These
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Pacific Animated Imaging
Corporation (the "Company") consolidated financial statements for the year ended
December 31, 1995 included in the Company's Annual Report on Form
10-KSB previously filed with the Securities and Exchange Commission.
2. ACQUISITION OF FORSIGHT
Effective February 2, 1996, the Company acquired substantially all the
assets of Forsight, Inc. ("Forsight"), a closely held corporation engaged in the
business of developing and selling interactive multimedia software to the
business communications and the consumer publishing market for a total purchase
price of approximately $317,000, plus direct expenses of the acquisition which
totaled approximately $23,000. The Company acquired cash, fixtures and
equipment, accounts receivable, intellectual property, and other miscellaneous
assets for the assumption of certain liabilities of Forsight which totaled
approximately $190,000, and 20,000 unregistered shares of common stock of the
Company. Other terms of the acquisition included the employment by the Company
of certain of Forsight's key employees, who will continue as part of the
Company's senior management team; and the acquisition of all of the shares of
Series A Convertible Preferred Stock of Forsight from Circa Pharmaceuticals,
Inc. in an amount equal to thirty percent of the net income each year for three
years of Forsight's operations up to a maximim value of $600,000, payable in
unregistered shares of common stock of the Company. The Series A Convertible
Preferred Stock of Forsight was cancelled after the acquisition. The Company
allocated approximately $109,000 to identifiable tangible assets and wrote-off
approximately $289,000 as in process research and development on the date of
acquisition. The acquisition did not meet materiality thresholds for separate
pro forma disclosure.
3. SUBSEQUENT EVENT
Effective July 19, 1996, U.S. Technologies Inc. Acquisition
Corporation, a wholly owned subsidiary of the Company, merged with and into U.S.
Technologies, Inc ("UST"), with UST being the surviving corporation. As a result
of the merger, the Company owns 100% of UST. No consideration was paid by the
Company for the merger as of the effective date; however, under the terms of the
merger, the former 100% owner of UST has the ability to earn $400,000 worth of
common stock in the Company provided certain financial standards are met.
6
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The Company's principal source of revenue is from the development of
custom multimedia software for electronic performance support systems, training,
marketing and corporate communications. The Company also derives revenue in the
form of royalties paid by customers who resell copies of software developed by
the Company for such customers. In the last quarter of 1995, in connection with
the implementation of a marketing initiative for consumer off-the-shelf software
products, the Company began to derive revenue from the sale of these products.
Total revenues for the three month period ended June 30, 1996 were
$154,854 as compared to $155,811 for the same period of 1995, a decrease of
approximately 1%. This decrease was attributable to a decrease in sales of the
Company's custom software products of approximately $16,000, offset by an
increase in royalty revenue of approximately $15,000. The net loss and net loss
per share were $587,433 and $0.40 per share, respectively, for the three month
period ended June 30, 1996 as compared to a net loss and net loss per share of
$499,819 and $0.96 per share, respectively, for the same period of the prior
year.
Total revenues for the six month period ended June 30, 1996 were
$401,825 as compared to $359,237 for the same period of 1995, an increase of
approximately 12%. This increase was attributable to increases in sales of the
Company's custom software products, sales of off-the-shelf software products,
and an increase in royalty revenue of approximately $23,000, $15,000, and
$4,000, respectively. The net loss and net loss per share were $1,349,636 and
$0.93 per share, respectively, for the six month period ended June 30, 1996 as
compared to a net loss and net loss per share of $1,018,586 and $1.96 per share,
respectively, for the same period of the prior year.
During the three and six month periods ended June 30, 1996, custom
software revenue was $127,088 and $352,712, respectively, as compared to
$143,556 and $329,332, respectively, for the same periods of 1995. During 1995,
the Company refocused its sales efforts towards selected industries in which it
has had previous success, including automotive and packaging. In connection with
the Company's strategy to focus on selected industries, certain sales related
expenses were eliminated during 1995. In addition, the Company is also focusing
on securing larger contracts. These refocused efforts have not yet resulted in
the increase in sales that the Company has planned. In addition, the Company
recognized less revenue than anticipated during the three and six month periods
ended June 30, 1996 due to delays in certain contracts with customers.
During the three and six month periods ended June 30, 1996, revenue
from sales of products was $130 and $15,366, as compared to $0 in the prior
year. This revenue represents sales of consumer off-the-shelf products which the
Company began marketing during the last quarter of 1995. The Company initiated
two test market mailing programs for products developed by American Laser Games
and Apogee. Both mailings generated affirmative response rates below 1.5%. Based
on the low response rates, the Company does not plan to perform any additional
mailings for the American Laser Games and Apogee products. The Company has not
entered into any additional agreements with developers to market their products;
however, the Company may enter into other agreements and may perform additional
test mailings for other products in the future.
The Company has entered into agreements that allow certain customers to
resell copies of the Company's software products in exchange for royalty
payments. Royalties were $27,636 and $33,747, respectively, during the three and
six months ended June 30, 1996, as compared to $12,255 and $29,905 for the same
periods in the prior year. Currently, the Company is entitled to receive
royalties from one customer in connection with the sale of education programs
developed by the Company in prior years, as
7
<PAGE>
well as from the resale of software by another customer. The Company expects
royalty revenue to decrease in 1996 and in the future due to the aging shelf
life of products for which the Company currently receives royalties. However,
the Company continually explores additional marketing and development partners
to increase revenues generated from royalty arrangements.
During the three and six month periods ended June 30, 1996, total
operating expenses were $782,087 and $1,833,506, respectively, as compared to
$667,000 and $1,402,171 in the same periods of the prior year, increases of
approximately $115,000 or 17% and $431,000 or 31%, respectively. The increases
are primarily due to the addition of Forsight, which was acquired in February
1996. The increase for the six month period ended June 30, 1996 includes a
write-off of purchased research and development, which totaled approximately
$289,000, in connection with the acquisition of Forsight.
During the three and six month periods ended June 30, 1996, the gross
margins for custom software products were approximately (71%) and (36%), as
compared to (33%) and (12%) for the same periods in 1995. The negative gross
margins for the 1996 period are primarily due to the lower than anticipated
level of sales and Forsight's operating results. The Company expects gross
margins in custom software to improve by growing revenues and controlling
production and development costs so that they are more consistent with the level
of sales.
Cost of product sales was approximately $38 and $5,600 for the three
and six month periods ended June 30, 1996, as compared to $0 in the same periods
of 1995. These are the costs associated with the consumer off-the-shelf
marketing initiative discussed above.
During the three and six month periods ended June 30, 1996, research
and development expenses were $82,614 and $123,770, respectively, as compared to
$74,517 and $203,467 for the same periods of 1995. During 1995, the Company
incurred expenses to improve the utility and functionality of the Company's
software. Research and development expenditures are expected to be lower for
1996 as most of the improvements to the Company's software were substantially
completed during 1995. However, the Company continues to improve on existing
tools as needed and is developing modified versions of traditional custom
software products to be sold on a more generic basis to a broad range of
commercial customers.
During the three and six month periods ended June 30, 1996, selling,
general and administrative expenses increased by approximately $81,000 and
$104,000, respectively, or 20% and 13% from the same periods in 1995. The
increases are due to the addition of Forsight.
During the three and six month periods ended June 30, 1996, total other
income (expense) increased by approximately $28,000 and $58,000, respectively,
from the same periods of the prior year, primarily due to an increase in funds
available for investment.
Strategy to Achieve Profitable Operations
During 1995, the Company began implementing a number of actions
intended to address the continued losses, including concentrating the Company's
sales efforts on selected industries where it has had previous success,
improving productivity by resizing the production and development staff to
reflect the level of actual sales, and improving project management and tracking
techniques.
Management believes that the Company's revenues will increase in the
future based upon the current volume of outstanding proposals and the historical
success rate of securing contracts for which it has submitted a formal bid or
design specification; the Company's existing technology and marketing base which
should enable the Company to expand its custom software business; and the entry
into new markets, including corporate communications and web-site development.
In addition, the Company believes that it can increase revenues by leveraging
its proprietary products and developmental skills to
8
<PAGE>
appeal to a wider market. For example, the Company is developing modified
versions of traditional custom software products to be sold on a more generic
basis to a broad range of commercial customers. In addition, the Company
will seek to establish ongoing arrangements with larger companies that need to
integrate a multimedia software solution for electronic performance support,
training, marketing or corporate communication projects.
Management believes that its strategy for increasing revenues combined
with the impact of implemented cost control measures will enhance the Company's
probability of achieving profitable operations during 1997. The general
consistency of the level of operating expenses for the three and six months
periods ended June 30, 1996 (excluding the first quarter one-time expense
related to the write-off of purchased research and development in connection
with the acquisition of Forsight), as compared to the same periods of 1995, is a
factor and trend which management believes support expectations that the Company
has the ability to operate on a profitable basis if and when additional revenues
are generated. Management's estimates are based upon information currently
available to management and may not necessarily prove accurate.
Cash Flow, Liquidity and Capital Resources
For the six month period ended June 30, 1996, the Company used cash of
approximately $1,018,000 in operations, primarily due to the net loss of
$1,349,636, net of the write-off of purchased research and development, which
totaled approximately $289,000, in connection with the acquisition of Forsight.
During the six month period ended June 30, 1996, net cash of approximately
$718,000 was used for investing activities for the purchase of U.S. government
securities, property and equipment, and Forsight. During the six month period
ended June 30, 1996, net cash of approximately $200,000 was provided by the
exercise of 28,571 common stock options.
For the six month period ended June 30, 1995, the Company used cash of
approximately $922,000 in operations, primarily due to the net loss of
$1,018,586. During the six month period ended June 30, 1995, net cash of
approximately $852,000 was provided by investing activities primarily from
proceeds received at maturity of liquid investment securities.
The Company plans to meet its cash requirements on a short-term and
long-term basis from funds generated from investment income and current backlog
of custom software revenue and its general working capital reserve of
approximately $3 million at June 30, 1996.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements contained in this section and other statements which are
not historical facts are forward looking statements that involve risks and
uncertainties, including, but not limited to, the effect of economic conditions;
product demand risks; the ability to obtain a larger number of and larger size
of contracts; the timing of contract awards, customer response, and work
performance; the impact of competitive products and pricing; technological
developments or difficulties in the Company's research and development efforts;
actual purchases under agreements and other risks as detailed in the Company's
Securities and Exchange Commission filings.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: None
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders:
On June 21, 1996, the following items were submitted to a vote at the Company's
annual meeting of shareholders (See Note 1 below with respect to Item #2):
<TABLE>
<CAPTION>
For Against Abstain/Nonvotes
<S> <C>
1. Election of one Class I director:
A. David Rossin 1,138,203 19,708 0
2. Approval of adoption of Incentive
Stock Option Plan No. 3 See Note 1
3. Approval of appointment of Coopers & Lybrand
LLP as auditors for the fiscal year 1996 1,148,371 7,785 1,755
</TABLE>
Note 1: Due to a lack of votes on Item #2, the annual meeting as to this item
was adjourned first to July 15, 1996 and then extended to August 12, 1996 for
which the results were not available as of the time of this filing.
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits: None
(b) No reports on Form 8-K were required to be filed for the
three months ended June 30, 1996.
However, the following report on Form 8-K was filed
subsequent to June 30, 1996:
July 19, 1996 - Acquisition or Disposition of Assets -
U.S. Technologies, Inc. Merger
10
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION
SIGNATURE
Pursuant to the requirements 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.
PACIFIC ANIMATED IMAGING CORPORATION
(Registrant)
Dated: August 14, 1996
BY: /s/ Suzanne C. Brown
Suzanne C. Brown
Chief Financial and Accounting Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,641,389
<SECURITIES> 474,144
<RECEIVABLES> 201,431
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,412,150
<PP&E> 638,514
<DEPRECIATION> 286,771
<TOTAL-ASSETS> 3,900,326
<CURRENT-LIABILITIES> 405,330
<BONDS> 0
0
0
<COMMON> 151
<OTHER-SE> 3,467,406
<TOTAL-LIABILITY-AND-EQUITY> 3,900,326
<SALES> 154,854
<TOTAL-REVENUES> 154,854
<CGS> 38
<TOTAL-COSTS> 782,087
<OTHER-EXPENSES> (39,800)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (587,433)
<INCOME-TAX> 0
<INCOME-CONTINUING> (587,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (587,433)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
