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 March 31, 1997
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
--- ---
1,733,839 Common Shares, $.0001 par value were issued and outstanding at March
31, 1997.
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION
TABLE OF CONTENTS
Page No.
--------
Part I - Financial Information
Consolidated Balance Sheets, March 31, 1997 (unaudited)
and December 31, 1996 3
Consolidated Statements of Operations for the three
months ended March 31, 1997 and 1996 (unaudited) 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 (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 SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------- -------------------
(Unaudited)
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 960,604 $ 939,281
Investment in U.S. government securities 474,144 474,144
Accounts receivable, net 1,455,178 411,220
Interest receivable 27,863 19,814
Inventory 52,888 18,838
Prepaid expenses and other current assets 122,518 150,819
------------------- -------------------
Total current assets 3,093,195 2,014,116
------------------- -------------------
Property and equipment, at cost
Computers, furniture and equipment 995,541 990,105
Less accumulated depreciation 537,468 490,193
------------------- -------------------
Net property and equipment 458,073 499,912
------------------- -------------------
Other assets 1,204,042 55,681
------------------- -------------------
$ 4,755,310 $ 2,569,709
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,301,217 $ 796,729
Deferred revenue 135,504 66,088
Customer deposit 50,000 50,000
Line of credit 303,333 320,833
Other current liabilities 53,865 96,063
------------------- -------------------
Total current liabilities 1,843,919 1,329,713
Note payable to bank 9,062 18,253
Deferred rent and other 143,982 149,125
------------------- -------------------
Total liabilities 1,996,963 1,497,091
------------------- -------------------
Commitments and contingencies
Stockholders' equity
Common stock, $.0001 par value. Authorized 5,000,000
shares; issued and outstanding 1,733,839 and 1,518,880
shares as of March 31, 1997 and December 31, 1996 174 152
Additional paid-in capital 14,058,571 11,893,549
Accumulated deficit (11,154,969) (10,665,959)
Deferred compensation (145,429) (155,124)
------------------- -------------------
Total stockholders' equity 2,758,347 1,072,618
------------------- -------------------
$ 4,755,310 $ 2,569,709
=================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------------
1997 1996
----------------- ------------------
<S> <C>
Revenue
Service fees $ 673,379 $ 225,624
Product sales 1,055,003 15,236
Royalties 9,347 6,111
----------------- ------------------
Total revenue 1,737,729 246,971
----------------- ------------------
Expenses
Cost of service fees 412,423 262,855
Cost of product sales 942,885 5,553
Research and development 72,444 41,156
Selling, general and administrative 814,808 452,525
Write-off of purchased research and development -- 289,330
----------------- ------------------
Total operating expenses 2,242,560 1,051,419
----------------- ------------------
Loss from operations (504,831) (804,448)
Other income, net 15,821 42,245
================= ==================
Net loss $ (489,010) $ (762,203)
================= ==================
Weighted average number of common shares outstanding 1,584,465 1,453,771
================= ==================
Net loss per common share $ (0.31) $ (0.52)
================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------------------
1997 1996
------------------- -------------------
<S> <C>
Cash flows from operating activities
Net loss $ (489,010) $ (762,203)
Adjustments to reconcile net loss to net cash
used in operating activities, net of effects
from purchase of Forsight, Inc.
Depreciation and amortization 59,638 34,416
Amortization of deferred compensation 9,695 --
Loss on disposal of assets -- 39
Write-off of purchased research and development -- 289,330
Increase (decrease) in cash from changes in assets and liabilities
Accounts receivable (1,043,958) (40,091)
Interest receivable (8,049) (10,364)
Inventory (34,050) --
Prepaid expenses and other current assets 28,301 (42,458)
Other assets 1,639 1,275
Accounts payable and accrued liabilities 504,488 (85,446)
Other liabilities 61,215 (127,779)
------------------- -------------------
Net cash used in operating activities (910,091) (743,281)
------------------- -------------------
Cash flows from investing activities
Capital expenditures (17,799) (40,824)
Proceeds from sale of property and equipment -- 200
Payment for purchase of Forsight, net of cash acquired -- (46,424)
------------------- -------------------
Net cash used in investing activities (17,799) (87,048)
------------------- -------------------
Cash flows from financing activities
Net proceeds from exercise of options and warrants 975,044 --
Payments on line of credit (17,500) --
Payments on note payable to a bank (8,331) --
------------------- -------------------
Net cash provided by financing activities 949,213 --
------------------- -------------------
Net increase (decrease) in cash and cash equivalents 21,323 (830,329)
Cash and cash equivalents, beginning of period 939,281 4,177,534
=================== ===================
Cash and cash equivalents, end of period $ 960,604 $ 3,347,205
=================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The consolidated financial statements of Pacific Animated Imaging
Corporation (the "Company") as of and for the three month periods ended March
31, 1997 and 1996 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 consolidated financial statements for the year ended December
31, 1996 included in the Company's Annual Report on Form 10-KSB previously filed
with the Securities and Exchange Commission.
2. STOCK SPLIT
On January 30, 1997, the Board of Directors of the Company voted a
three-for-two split of the Company's common stock. The split is contingent upon
shareholder approval of a proposal to amend the Company's Certificate of
Incorporation and is subject to ratification by the Board of Directors. Neither
the par value of the stock nor the number of authorized shares will be affected
by the split. The results of the shareholder vote will be announced at the
annual meeting of shareholders, scheduled to be held on May 22, 1997. Had the
additional shares resulting from the proposed stock split been outstanding
during the three month periods ended March 31, 1997 and 1996, net loss per share
would have been as follows: 1997, $ 0.21 and 1996, $ 0.35. Financial information
contained elsewhere in this report has not been adjusted to reflect the impact
of the proposed common stock split.
3. NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Statements of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), which specifies the computation,
presentation, and disclosure requirements for earnings per share. SFAS 128 is
effective for financial statements for periods ending after December 15, 1997.
The Company believes that the adoption of SFAS 128 will not have a material
effect on the financial statements.
4. COMMITMENTS
The Company had a subcontract with the Data Technologies Division of
TRW, Inc. ("TRW") to provide training services to TRW in support of its contract
with the State of California for the development and implementation of a
management information system for the state's correctional facilities. Through
1996, the Company had completed the design phase and had begun the development
of the training program. However, effective February 21, 1997, TRW's prime
contract with the State of California was terminated. Accordingly, no more work
will be performed by the Company with respect to this subcontract. During the
years 1996 and 1995, the Company had recognized revenue of approximately
$134,000 and $118,000, respectively.
On March 20, 1997, the Company entered into a financial consulting
agreement ("consulting agreement") with First Cambridge Securities Corporation
("First Cambridge"). First Cambridge is required to review materials provided by
the Company, perform financial consulting services, and advise the Company.
First Cambridge is required to provide at least 50 hours of service per month on
a yearly average. The terms of the agreement include that First Cambridge will
receive 100,000 stock options at an exercise price of $2.00 per share. First
Cambridge vests immediately in the 100,000 options and will have an exercise
period of six (6) months. First Cambridge exercised their options on March 28,
1997.
6
<PAGE>
As of March 31, 1997, the Company had a deferred asset of approximately $1.1
million. The consulting agreement is for the five year period January 1, 1998
- - December 31, 2002. Accordingly, the Company will be recognizing an expense of
approximately $1.1 million, using the straight-line method over the term of the
consulting agreement, or approximately $22,000 per month, beginning January 1,
1998.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The Company's revenue is comprised of service fees, product sales, and
royalties. Service fees are for systems integration services provided by UST,
the Company's subsidiary acquired in July 1996, and for the development of
custom multimedia software. Product sales are for software and hardware products
primarily sold by UST. Royalties are paid to the Company by customers who resell
copies of software developed by the Company for such customers.
Total revenues for the three month period ended March 31, 1997 were
$1,737,729 as compared to $246,971 for the same period of 1996, an increase of
approximately $1,491,000. This increase was primarily attributable to the
inclusion of UST revenues of approximately $1,462,000, as well as an increase in
sales of the Company's custom software products of approximately $40,000. The
net loss and net loss per share were $489,010 and $0.31 per share, respectively,
for the three month period ended March 31, 1997, as compared to a net loss and
net loss per share of $762,203 and $0.52 per share, respectively, for the same
period of the prior year.
During the three month period ended March 31, 1997, revenue from services
fees for systems integration and software development services provided by UST
was $407,490, as compared to $0 in the prior year.
During the three month period ended March 31, 1997, revenue from custom
multimedia software development services was $265,889 as compared to $225,624
for the same period of the prior year, an increase of approximately $40,000 or
18%. The increase is due to several contracts which started in the first quarter
of 1997.
During the three month period ended March 31, 1997, revenue from sales of
products was $1,055,003, as compared to $15,236 in the same period of the prior
year, an increase of approximately $1,040,000. All of the revenue from sales of
products for the three month period ended March 31, 1997 represents sales of
computer hardware and software products by UST. UST sells computer hardware and
software products as part of their systems integration services. The
approximately $15,000 in revenue for the three month period ended March 31, 1996
represents sales of two consumer off-the-shelf products which the Company began
marketing during the last quarter of 1995 when it initiated test market mailing
programs for certain products. Both mailings generated low response rates;
accordingly, the Company does not plan to perform any additional mailings for
these products.
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 $9,347 during the three month period ended March 31,
1997, as compared to $6,111 for the same period of the prior year, an increase
of approximately $3,000 or 53%. The Company generally expects royalty revenue to
decrease 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.
7
<PAGE>
During the three month period ended March 31, 1997, total operating
expenses were $2,242,560 as compared to $1,051,419 in the same period of the
prior year, an increase of approximately $1.2 million. The operations of UST,
acquired by the Company in July 1996, primarily accounted for the increase;
offset by the 1996 write-off of purchased research and development in connection
with the acquisition of Forsight, which totaled approximately $289,000.
Cost of service fees for systems integration services provided by UST was
approximately $202,000 for the three month period ended March 31, 1997,
resulting in a gross margin of approximately 50%.
For the three month period ended March 31, 1997, the cost of service fees
for custom multimedia software was approximately $211,000, as compared to
approximately $263,000, for the same period of the prior year. The gross margin
for the three month period ended March 31, 1997 was approximately 20%, as
compared to the negative gross margin for the same period of 1996 of
approximately (14%). The improvement in gross margin is primarily due to the
consolidation of the multimedia related operations into one location. The
consolidation of the Redmond office was completed by December 31, 1996.
Cost of product sales was $942,885 for the three month period ended March
31, 1997, as compared to $5,553 in the prior year. All of the cost of product
sales for the three month period ended March 31, 1997 are from the sale of
products by UST and resulted in a gross margin of approximately 10%. All of the
costs for the prior year are the costs associated with the consumer
off-the-shelf marketing initiative discussed above.
During the three month period ended March 31, 1997, research and
development expenses were $72,444 as compared to $41,156 for same period of the
prior year. Research and development expenses include improvement on existing
tools and development of software tools to be sold by UST in conjunction with
their sales of certain IBM mid-range systems.
During the three month period ended March 31, 1997, selling, general and
administrative expenses were $814,808 as compared to $452,525 in the same period
of the prior year, an increase of approximately $362,000, or 80%. The increase
is primarily due to the addition of the UST operations.
During the three month period ended March 31, 1997, total other income
(expense) decreased by approximately $26,000 from the same period of the prior
year due to a decrease in the amount of funds available for investment, as well
as the addition of interest expense incurred on UST's line-of-credit and bank
note.
Cash Flow, Liquidity and Capital Resources
The Report of Independent Accountants on the 1996 consolidated financial
statements of the Company includes an explanatory paragraph stating that the
recurring losses from operations and the existing cash resources may be
insufficient to fund planned operations and that these conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company incurred a net loss of $3,823,621 for the year ended December 31,
1996, and as of December 31, 1996 had an accumulated deficit of $10,665,959. For
the three month period ended March 31, 1997, the Company incurred a net loss of
$489,010, an improvement from the net loss of $762,203 for the same period of
the prior year. As discussed under Strategy to Achieve Profitable Operations
below, the Company has implemented certain actions to address the losses and
liquidity matters. However, there can be no assurance that such actions will
generate sufficient cash flow to ensure the continued existence of the Company;
or that additional financing will be available from any sources at terms and
conditions suitable to the Company.
For the three month period ended March 31, 1997, the Company used cash of
approximately $910,000 in operations. In addition to the net loss, the Company
experienced increases in accounts receivable and inventory. Net cash of
approximately $18,000 was used for investing activities for the purchase of
equipment. Net cash of approximately $950,000 was provided by the exercise of
common
8
<PAGE>
stock options and warrants, offset by approximately $26,000 used to make
payments on UST's obligations to a bank.
For the three month period ended March 31, 1996, the Company used cash of
approximately $743,000 in operations. In addition to the net loss, the Company
experienced increases in accounts receivable and prepaid and other current
assets and decreases in liabilities. Net cash of approximately $87,000 was used
for investing activities for the purchase of equipment and Forsight, Inc.
Working capital of approximately $1.2 million at March 31, 1997, together
with funds to be generated from investment income and future sales of services
and products are expected to provide sufficient liquidity to meet anticipated
cash needs on a short-term basis. During the first quarter of 1997, the Company
received net proceeds of approximately $900,000 from the exercise of underwriter
warrants and stock options. Management recognizes that the Company may require
additional financing until such time that service fees and product sales are of
sufficient volume to generate positive cash flows from operations. Although the
Company may seek financing from placements of equity or debt securities, there
can be no assurances that such financing will be available, or if available,
will be under terms and conditions suitable to the Company.
Strategy to Achieve Profitable Operations
The Company's strategy to increase revenue is to utilize its wide range
of computer systems integration, support services, and software development
capabilities to provide high-performance value-added integrated computer
services to mid- to large-sized service organizations, manufacturers and other
companies located in the United States. Custom multimedia software and software
applications developed for use in conjunction with Lotus Notes(R)/Domino(TM) are
expected to be important components of the services provided by the Company to
such customers. Management believes that the Company's ability to provide all of
the services required in connection with design, installation and support of
computer systems will enhance its ability to effectively market its custom
software development services, including intranet and Internet services, to
customers that prefer to purchase an integrated set of products and services
from a single vendor, and that the Company's expertise in developing such
software will in turn enhance the Company's ability to market its computer
systems integration and support services. In addition, the Company believes that
it can increase revenue by using its proprietary products and software
development skills to produce generic versions of its custom software products
for sale to companies that do not require or cannot afford complete customized
services. In addition, the Company intends to increase revenues by establishing
ongoing arrangements with larger companies that need to integrate custom
multimedia software with work group computing systems.
During 1996, the Company consummated two acquisitions in order to expand
its areas of expertise and broaden its base of customers for custom multimedia
software development services. As a result of these acquisitions, the Company
develops software applications used in conjunction with Lotus
Notes(R)/Domino(TM), markets IBM midrange computers and systems integration and
support services, and provides interactive multimedia software development
services for corporate communications using state-of-the-art technology,
including intranet and Internet services. The Company believes that marketing
custom multimedia services to this broadened customer base and marketing its
acquired expertise to the multimedia customers will facilitate the growth of its
business. In addition, the Company intends to pursue the acquisition of
companies in the computer systems integration and related businesses, as well as
other acquisitions, strategic alliances and joint ventures that can provide the
Company with additional complementary capabilities or further broaden its base
of customers requiring the products and services currently provided. Management
believes that in the future, the percentage of the Company's revenues
attributable to the development of custom multimedia software will decrease and
the percentage attributable to the sale of systems integration and related
support services, including the sale of hardware, will increase as a result of
this strategy.
9
<PAGE>
Management believes that its strategy for increasing revenues combined
with the impact of the consolidation of the multimedia related operations will
enhance the Company's probability of achieving profitable operations during
1997. However, no assurance can be given that these measures, even if
successful, will ensure the continued existence of the Company. Management's
estimates are based upon information currently available and may not necessarily
prove accurate.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements contained in this document and other statements which are
not historical facts are forward looking statements that involve risks and
uncertainties, including, the success of newly implemented sales strategies; the
continued existence of agreements with product providers; market acceptance of
the Company's products and services; the ability to obtain a larger number and
size of contracts; the timing of contract awards; work performance and customer
response; the impact of competitive products and pricing; technological
developments by the Company's competitors or difficulties in the Company's
research and development efforts; and other risks as detailed in the Company's
Securities and Exchange Commission filings.
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: None
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 March 31, 1997
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: March 15, 1997
BY: /s/ Suzanne C. Brown
___________________________
Suzanne C. Brown
Chief Financial and Accounting Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 960,604
<SECURITIES> 474,144
<RECEIVABLES> 1,523,242
<ALLOWANCES> 40,201
<INVENTORY> 52,888
<CURRENT-ASSETS> 3,093,195
<PP&E> 995,541
<DEPRECIATION> 537,468
<TOTAL-ASSETS> 4,755,310
<CURRENT-LIABILITIES> 1,843,919
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 2,758,173
<TOTAL-LIABILITY-AND-EQUITY> 4,755,310
<SALES> 1,737,729
<TOTAL-REVENUES> 1,737,729
<CGS> 1,355,308
<TOTAL-COSTS> 2,242,560
<OTHER-EXPENSES> (15,821)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (489,010)
<INCOME-TAX> (489,010)
<INCOME-CONTINUING> (489,010)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (489,010)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> 0
</TABLE>
