SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to ____________
Commission File Number: 1-12536
PACIFIC ANIMATED IMAGING CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 11-2964894
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
326 First Street, Suite 100
Annapolis, Maryland 21403
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (410) 263-7761
Securities registered pursuant to Section 12(b) of the Act: Common Stock,
$.0001 par value
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Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
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 ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulations S-K (ss.229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
As of March 25, 1997 the aggregate market value of the voting stock
held by non-affiliates, approximately 1,589,000 shares of Common Stock, $.0001
par value, was approximately $20,856,000 based on the closing sales price of
$13.125 for one share of Common Stock on the Nasdaq Small Cap Market on such
date. The number of shares outstanding of the Registrant's Common Stock, as of
March 25, 1997 was 1,633,839.
Documents incorporated by reference: Portions of the Registrant's
definitive Proxy Statement regarding its 1997 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Report.
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PART I
Item 1. Description of Business.
General
The Company is a full service provider of technology based solutions and
computer systems integration and support services, including the sale of
hardware and software products, specializing in the development of software
applications related to work group and work flow computing solutions and custom
interactive multimedia software. The Company's systems integration division is
comprised of the business of U.S. Technologies, Inc. ("UST"), a wholly owned
subsidiary, which the Company acquired in July 1996. UST is a Lotus Premium
Business Partner that develops software applications used in conjunction with,
and provides services related to the use of Lotus Notes(R) and Domino(TM), and
an IBM Industry Remarketer of AS/400(R) and RS/6000(R) midrange computers. The
Company's multimedia division develops and markets custom interactive multimedia
software used to deliver electronic performance support systems, employee
training, sales and marketing presentations, and corporate communications. For
the year ended December 31, 1996, approximately 60% of the Company's revenue was
attributable to six months of operations of the systems integration division
following the acquisition of UST and 40% to the multimedia division. References
to the "Company" herein refer to Pacific Animated Imaging Corporation and its
subsidiaries.
Systems Integration Services
As the result of its acquisition of UST in July 1996, the Company is a
full-service provider of computer systems integration and support services,
including the sale of hardware and software products and the development of
software applications for and providing services related to work group and work
flow computing solutions. UST is a Lotus Premium Business Partner that develops
software applications used in conjunction with, and provides services related to
the use of Lotus Notes(R) and Domino(TM), and an IBM Industry Remarketer of
AS/400(R) and RS/6000(R) midrange computers. Approximately 57% of the Company's
revenues for the year ended December 31, 1996 was attributable to sales of
systems integration and support services provided in connection with the
implementation of Lotus Notes(R) and Domino(TM)-related products following the
acquisition of UST. Management believes that UST is one of only approximately a
dozen companies that is both a Lotus Premium Business Partner and an IBM
Industry Remarketer, and that the combination of capabilities resulting from
such alliances will enable the Company to effectively market its systems
integration and support services.
Full-Service Systems Integration. UST is a full-service provider of
computer systems integration and support services. Such services include needs
analysis, network design, equipment specification, project planning with the
customer, acquisition and installation of computers and other equipment
(including configuration of the server, or shared computer, and workstations),
wiring installation, integration of network components, development of
customized systems and software applications, data conversion and migration,
testing, documentation, administrative and end user training, and
post-installation support services.
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Lotus Premium Business Partner. Lotus Notes(R) and Domino(TM) are
proprietary groupware and messaging software products developed by Lotus
Development Corporation that enables users to communicate and collaborate over a
local area network or telecommunications link and access documents and data
residing on a shared computer, or server. As of December 31, 1996, there were
approximately 9.5 million users of Lotus Notes(R)/Domino(TM) products worldwide.
In 1996, UST began marketing Domino(TM), Lotus and IBM's next generation of
groupware products, and has successfully implemented this state-of-the-art
technology for several customers.
As a Lotus Premium Business Partner, UST develops a wide variety of
custom software applications expanding the applicability of Lotus
Notes(R)/Domino(TM) to a particular customer's needs. Such applications have
included numerous project, time, sales, and database management applications.
For example, UST recently has developed a sales force automation system for a
publisher and distributor of secondary education products and a quality control
application for an international manufacturer of consumer goods. UST also
provides a full complement of services related to the use of Lotus
Notes(R)/Domino(TM), including the integration, design, development and
installation of computer systems, intranet and Internet services, and education
and support services.
UST has been a Lotus Premium Business Partner since December 1994. Of the
more than 12,000 Lotus Business Partners worldwide, less than 10% have achieved
premium status. Such status has been conferred upon UST by Lotus Development
Corporation, based upon UST's deployment, or implementation, of Lotus
Notes(R)/Domino(TM) software and related services, and the number of qualified
Lotus Notes(R)/Domino(TM) software developers and instructors the Company
employs. As a result of UST's premium status, UST receives leads from Lotus
Development Corporation and IBM for companies located in the same geographic
area as UST that desire products and services related to Lotus
Notes(R)/Domino(TM). Management estimates that such referrals accounted for
approximately 39% of the Company's revenues for the year ended December 31,
1996.
UST's status as a Premium Business Partner is reviewed on an annual
basis, and is subject to termination by Lotus Development Corporation at any
time. UST has been able to satisfy the requirements for maintaining such status
for the last two years and management believes that the Company's relationship
with Lotus Development Corporation is good. Although UST intends to continue to
satisfy such requirements, there can be no assurance that it will be able to do
so. Termination of UST's status as a Lotus Premium Business Partner could have a
material adverse effect on UST's and the Company's results of operations.
IBM Industry Remarketer. In November 1996, UST became an IBM Industry
Remarketer for the AS/400(R) and RS/6000(R) midrange computers. Midrange
computers generally are the most powerful computers frequently used by mid-sized
companies (companies with annual sales of $25 to $250 million). Management
believes that approximately 40,000 AS/400(R)'s and 50,000 RS/6000(R)'s were sold
worldwide during 1996.
During the fourth quarter of 1996, UST entered into an agreement with
Support Net, Inc., IBM's largest Managing Industry Remarketer, that enables UST
to sell the AS/400(R) and
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RS/6000(R) midrange computers on a non-exclusive basis to end users of those
computers located in the United States. UST often sells such computers
together with a variety of value-added services which may include Lotus
Notes(R)/Domino(TM) products and services. Because of the existence of the
agreement, Support Net and IBM may refer companies located in the Southeastern
United States to UST to obtain their AS/400(R) and RS/6000(R) midrange
computers. Due to the timing of the agreements with IBM and Support Net, one
sale for approximately $80,000 was made during the year ended December 31, 1996.
Support Net may terminate the agreement with UST for any reason on three
months' notice, and may terminate it for cause at any time. Management believes
that in order to remain in good standing with Support Net, UST must order an
average of at least $250,000 of computers annually. Although management believes
that UST's relationship with Support Net is good and that UST's computer orders
will meet Support Net's expectations, there can be no assurance that Support Net
will not terminate the agreement. Termination of the agreement could have a
material adverse effect on UST's and the Company's results of operations.
For the year ended December 31, 1996, approximately 13% of the Company's
revenue was attributable to the sale of miscellaneous hardware by UST other than
AS/400(R) and RS/6000(R) midrange computers following the acquisition of UST.
LAUNCH for Lotus Notes(R) on AS/400(R). UST recently released a companion
product for Lotus Notes(R) marketed under the name LAUNCH for Notes. LAUNCH is a
combination of powerful, user-friendly software and customized services that
enables AS/400(R) systems professionals to rapidly develop and install Lotus
Notes(R)/Domino(TM) applications for their businesses. The list price of the
LAUNCH package is $24,995, and it consists of three components: utilities to
enable users to move data to/from a non-Notes(TM) based system to/from a
Notes(TM) based system, applications templates, and customized services.
The utilities include four software products developed by others for
which UST has acquired exclusive marketing rights: infoENABLER(TM),
infoCOORDINATOR(TM), infoDISTRIBUTOR(TM), and infoCOURIER(TM). infoENABLER(TM)
provides automatic mapping of host system database specifications into a Lotus
Notes(R) form; infoCOORDINATOR(TM) allows the exchange of data between
Notes(TM)-based and non-Notes(TM)-based host systems databases;
infoDISTRIBUTOR(TM) pulls database reports into Notes(TM) where users easily can
run key word searches to locate important information; and infoCOURIER(TM)
provides intelligent search tools that search Notes(TM) and other databases, as
well as the Internet. The application templates consists of five popular Lotus
Notes(R)/Domino(TM) application modules developed by other companies for which
UST has acquired nonexclusive marketing rights, which may be used without
modification or tailored for specific business needs. The LAUNCH services
include one week of customized education and training.
Development and Services. At the outset of each systems integration
project, UST provides each of its customers with a statement of work that
details the products and services that UST will provide, sets forth a good faith
estimate of the amount UST will charge, and provides a work and payment
schedule. The payment schedule varies from customer to customer, but usually
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includes some form of up-front payment and either weekly or monthly payments or
payments based upon the completion of phases of the project. UST generally
charges an aggregate of $10,000 to $250,000 for systems integration services
(including the purchase of hardware) and the amount of time required to complete
such services ranges from several days to a year. Post-installation support
services are billed separately, usually on an hourly basis.
Each customer is required to provide UST with a purchase order reflecting
the estimated charges and payment schedule set forth in the statement of work,
and invoices periodically are submitted by UST against the purchase order. Any
changes to the project that will result in charges that exceed the purchase
order amount are submitted to the customer for approval prior to implementation
and documented by modifying the purchase order. To date, the amount actually
charged with respect to projects undertaken by UST generally has been within
five percent of the amount estimated. UST generally has not experienced
difficulty completing projects according to the schedules set forth in its
statements of work.
Because of the extensive testing and evaluation procedures that are
undertaken in conjunction with its customers with respect to the Company's
systems integration services, the Company does not provide warranties with
respect to such services. Lotus Development Corporation and IBM, as well as
other equipment manufacturers, provide the Company's customers with limited
warranties on their products.
Custom Multimedia Software
The Company's multimedia division develops and markets custom interactive
multimedia software used to deliver electronic performance support systems,
employee training, sales and marketing presentations, and corporate
communications. Its software products utilize state-of-the-art interactive
computer animation, full-motion video and audio communications, color graphics,
and text and hypertext to provide vivid and effective instruction and
information. The Company's products are available for use on multiple platforms
including Windows, Macintosh, DOS and other proprietary operating systems and
can be delivered using various mediums including CD-Rom and via intranets and
the Internet.
Electronic Performance Support Systems ("EPSS"). The Company's EPSS
software enables users to perform better at their jobs by providing
computer-based support that is integrated into a workstation or work environment
and acts as a combination coach/trainer/job aid/reference. EPSS increases
employee productivity by providing needed information and training when and
where it is needed - and in an amount and format that is more useful to the
user.
Employee Training. The Company's training software (computer-based
training, or "CBT") provides an interactive learning experience to instruct
employees to use complex equipment or to understand complicated industrial
processes by simulating operation and production procedures. These products
typically replace or supplement technical manuals and operating documentation
and provide interactive self-paced training. They often incorporate cut-away
views of equipment that would be difficult or impossible to display in a
real-world setting
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and enable users to learn complex processes by viewing them in real or lapsed
time or in slow motion. Management believes that CBT enables users to master
skills and retain information more effectively that traditional instructor-led
training. Recent technological developments and advances in computer
network technology enable the Company to deliver CBT via the World Wide Web,
which is known as Web-based training.
Sales and Marketing. The Company's sales and marketing software enables
manufacturers and distributors to demonstrate their products to potential
customers at trade shows or in kiosks. This software enhances sales and
marketing presentations by encouraging customer participation through the use of
interactive product demonstrations. In addition, the Company has developed
software enabling distributors to better understand the markets for a
manufacturer's products.
Corporate Communications. The Company also markets custom multimedia
software and services for internal and external corporate communications.
Internal corporate communications products developed by the Company include
software used to disseminate corporate policies and procedures and information
about products and services in a comprehensive and cost-effective manner. The
Company also develops software that delivers lively and compelling messages to
large groups of employees in disparate locations. The Company's external
corporate communications business, marketed under the name NetCommerce(TM),
primarily involves the development and upgrade of Internet World Wide Web sites
for its customers. These services include designing innovative marketing and
advertising tools and digital catalogs, efficient inventory databases, and
secure payment processing procedures for web sites. The Company also designs
interactive sites that provide customers with demographic, tracking, and other
information regarding web site visitors.
Turn-key Services and Generic Software. The Company recently has begun
providing turn-key multimedia manual services, known as TechShelf(TM).
TechShelf(TM) services convert customers manuals, reference guides, or other
technical materials into interactive multimedia software, including full-motion
video, audio, animation and interaction, at a relatively low cost using a
browser shell developed by the Company.
The Company may develop other generic and off-the-shelf products derived
from its custom software when it is believed that there is a market and it is
technologically feasible. The Company has discontinued efforts to market
off-the-shelf software developed by others, except for those products sold by
UST as described under "Systems Integration Services."
Development and Services. Custom multimedia services include needs
analysis, design specification and product development. Needs analysis typically
takes from three to ten days and the charges for such services range from $5,000
to $15,000. The design phase lasts from four to six weeks, and the charges for
such services range from $20,000 to $40,000. The time required to complete
product development can range anywhere from one month to several years, and the
charges for such services range from $10,000 to $1 million.
At the outset of each project, the Company provides each of its customers
with a statement of work that details the services that the Company will
provide, sets forth the amount that the
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Company will charge, and provides a work and payment schedule. Any changes to
the project that will result in additional charges are submitted to the
customer for approval prior to providing the services. The payment
schedule varies from customer to customer, but usually includes some form of
up-front payment and progress payments based upon the completion of phases
of the project. To date, the Company has not experienced any significant
difficulties in delivering its custom software products to customers in
accordance with schedules.
The Company's contracts with respect to its custom multimedia software
products include an express warranty which usually terminates upon acceptance of
the software by the customer. However, the Company generally will service the
software to ensure that it performs as set forth in the statements of work for a
one-year period. Because of the extensive testing and evaluation procedures
performed in conjunction with the customer that are undertaken during the
development process, to date, servicing cost after customer acceptance has been
insignificant. Post-development support services are available and are billed
separately, usually on an hourly basis.
Customers and Backlog
Systems integration services customers are generally mid-size and large
companies that have or require at least 50 individual computers to be attached
to a network. These customers represent a wide variety of industries and service
organizations. While a substantial percentage of the systems integration
revenues historically has been generated by customers located within Florida,
where UST is located, management anticipates that this percentage will decrease
in the future as the Company markets UST's products and services to customers
located outside of the state, including to the Company's multimedia customers.
The Company's custom multimedia customers traditionally have been
comprised primarily of large manufacturers who must train employees to use
complex equipment or understand complicated industrial processes. Such customers
have represented a broad range of industries, including the automotive,
packaging, electronics, pharmaceutical, beverage bottling, and fitness and food
manufacturing industries, as well as government agencies located throughout the
United States.
During fiscal 1996, one customer, Data Systems International, accounted
for approximately 10% of the Company's revenue. During fiscal 1995, three
customers, Bell & Howell, TRW, Inc. ("TRW"), and Mack Trucks, Inc., accounted
for approximately 17%, 17%, and 13%, respectively, of the Company's revenue.
During fiscal 1994, three customers, Dowbrands, Heath Company, and Mead
Packaging (a division of Mead Corporation), accounted for approximately 23%,
11%, and 10%, respectively, of the Company's revenue.
The Company had a subcontract with the Data Technologies Division of 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
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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, under the subcontract.
As of December 31, 1996, the backlog of custom multimedia software
products and systems integration services (i.e., the difference between the fees
payable to the Company set forth in existing contracts and the amount of such
fees that had been recognized as revenue on the Company's financial statements)
was approximately $400,000, which is expected to be recognized during 1997.
Research and Development
For the years ended December 31, 1996 and 1995, costs associated with
research and development activities totaled approximately $252,000 and $258,000,
respectively. Historically, research and development activities included the
development of a library of reusable codes, utilities, and tools that the
Company can utilize in the early stages of development of many of its software
applications and custom multimedia products. Costs during the year ended
December 31, 1996 also included approximately $13,000 incurred in connection
with the development of UST's product, LAUNCH for Notes on AS/400.
The Company believes that costs for research and development will
continue in the future at consistent levels since the Company plans to continue
to improve its reusable codes, utilities, and tools, as well as develop new
reusable applications, codes, utilities, and tools, and continue development of
products similar to LAUNCH for Notes.
Marketing
The Company markets products through the use of a direct sales force,
participation in trade shows, trade journal advertising, direct mail advertising
and telemarketing. The Company employs approximately 9 salespeople who receive a
combination of salary and commission. In addition, as described above under
"Systems Integration Services," UST is a Lotus Premium Business Partner and an
IBM Industry Remarketer and receives leads from Lotus Development Corporation,
IBM and Support Net. The Company's strategy includes cross-marketing its wide
range of products and services and may enter into additional referral
relationships. The Company believes that it has good relationships with its
existing customer base and expects that these contacts will enable it to
successfully pursue this strategy.
Competition
The markets for all of the Company's products and services are highly
competitive. The Company's systems integration business competes with Lotus
Development Corporation, IBM, other Lotus Notes Business Partners and IBM
Industry Remarketers, companies that manufacture and market midrange computers
that compete with the AS/400(R) and RS/6000(R) and their remarketing agents,
companies that manufacture software that competes with Lotus
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Notes(R)/Domino(TM) and their business partners, and numerous other providers of
systems integration and consulting services.
The Company's custom multimedia software business competes with companies
that produce interactive training software and other third-party suppliers of
training and marketing materials, as well as internal training departments of
potential customers. The Company expects additional competition from existing
software companies and book publishers seeking to broaden their product lines,
and the continued improvement in computer programming tools may enable
businesses to develop their own software internally.
Many of the Company's current and potential competitors have
substantially greater financial, technical, sales, marketing, and other
resources, as well as greater name recognition, than the Company. The Company
believes that its wide range of software development and systems integration and
support capabilities will enable it to compete successfully, and intends to
focus on the provision of high-performance value-added integrated products and
services designed to be marketed on the basis of quality as well as price.
Intellectual Property
Most of the Company's contracts state that its software is proprietary
and that title to and ownership of its software generally reside with the
Company. The Company grants nonexclusive licenses to customers for software
developed by the Company for such customers. Like many software firms, the
Company has no patents. The Company attempts to protect its rights with a
combination of copyright, trade secret laws, and employee and third-party
nondisclosure agreements. Despite these precautions, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
obtain and use information that the Company regards as proprietary, such as
source codes or programming techniques.
As the number of software products increases and their functionality
further overlaps, the Company believes that software programs will increasingly
become the subject of infringement claims. Although the Company's products have
never been the subject of an infringement claim, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that any such assertion may not require the Company to enter into
royalty arrangements or result in costly litigation.
The Company has applied to register the following trademarks: LAUNCH(TM),
infoENABLER(TM), infoCOORDINATOR(TM), infoDISTRIBUTOR(TM), infoCOURIER(TM),
TechShelf(TM), and Net Commerce(TM).
Product Liability Insurance
The Company does not currently carry product liability insurance and
there can be no assurance that such coverage, if obtainable, would be adequate
in terms and scope to protect the Company against material adverse effects in
the event of a successful product liability claim. Although the Company has not
been subject to any product liability claims, such claims could
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arise in the future. There can be no assurance that the Company would
have sufficient resources to satisfy any liability resulting from these claims
or would be able to have its customers indemnify the Company against such
claims.
Employees
As of February 28, 1997, the Company had 44 full-time employees, 9 of
whom were in administration, 12 of whom were in sales and marketing, and 23 of
whom held professional technical positions. As of such date, the Company also
had two part-time employees in sales and marketing. None of the Company's
employees are represented by unions. Management believes the Company's employee
relations are good.
Item 2. Description of Property.
The Company leases office space in Annapolis and Rockville, Maryland;
Tampa, Orlando, and Ft. Lauderdale, Florida; and Atlanta, GA. The leases require
the Company to pay monthly rent of approximately $2,800, $3,500, $3,500, $2,700,
$1,500, and $2,800, respectively, and expire at various times through 2000. In
addition, the Company leases office space in Redmond, Washington, for a monthly
rent of approximately $9,500, which is subleased to an unaffiliated third party
through the end of the Company's lease term in January 1998 due to the
consolidation of the multimedia division. Management believes that its current
office facilities are adequate and suitable for the Company's current
operations.
Item 3. Legal Proceedings.
The Company is not subject any legal proceedings other than claims that
arise in the ordinary course of its business.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Since November 11, 1993, the Company's Common Stock has been listed on
the NASDAQ Small Cap Market under the symbol "PAID" and on the Boston Stock
Exchange under the symbol "PAD." Prior to November 11, 1993, the Company's
Common Stock traded in the over-the-counter market and was quoted in the "Pink
Sheets."
The following table shows the high and low sale prices for the Company's
Common Stock, for the periods indicated, based upon information supplied to the
Company from NASDAQ.
Year High Low
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1996
1st Quarter $10.875 $8.875
2nd Quarter $13.75 $9.625
3rd Quarter $13.375 $10.625
4th Quarter $15.00 $12.25
1995
1st Quarter $10.9375 $7.00
2nd Quarter $12.25 $7.00
3rd Quarter $13.125 $8.96875
4th Quarter $10.50 $5.75
The above prices have been adjusted for the 1:3.5 reverse stock split
which was effective December 8, 1995.
The closing bid price for the Company's Common Stock on March 25, 1997,
was $13.125.
The Company had approximately 173 holders of record of Common Stock as of
March 25, 1997. Management believes that the number of beneficial holders of the
Company's Common Stock as of March 25, 1997, was approximately 3,800.
No cash dividends have been paid by the Company on its Common Stock and
no such payment is anticipated in the foreseeable future.
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Fiscal 1996 Compared to Fiscal 1995
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 year ended December 31, 1996 were $1,588,094 as
compared to $708,652 for the same period of 1995, an increase of approximately
$879,000. This increase was primarily attributable to the inclusion of six
months of UST revenues of approximately $960,000 following its acquisition by
the Company in July 1996, offset by a decrease in sales of the Company's custom
software products of approximately $81,000. The net loss and net loss per share
were $3,823,621 and $2.58 per share, respectively, for the year ended December
31, 1996 as compared to a net loss and net loss per share of $1,949,415 and
$3.52 per share, respectively, for the prior year.
During the year ended December 31, 1996, revenue from services fees for
systems integration and software development services provided by UST following
its acquisition by the Company in July 1996 was $603,366, as compared to $0 in
the prior year.
During the year ended December 31, 1996, revenue from custom multimedia
software development services was $552,397 as compared to $633,092 for the prior
year, a decrease of approximately $81,000 or 13%. The decrease was primarily due
to the number and size of new contracts the Company was able to secure and to
ongoing delays in certain contracts with customers, particularly the Company's
subcontract with TRW. During the first quarter of 1997, the Company was notified
that TRW's contract with the State of California was terminated; accordingly,
the Company's subcontract with TRW was terminated. The Company recognized
approximately $134,000 in revenue from this contract during 1996 as compared to
approximately $118,000 during 1995.
During the year ended December 31, 1996, revenue from sales of products
was $372,256, as compared to $21,739 in the prior year, an increase of
approximately $350,000. Approximately $357,000 of the revenue for the year ended
December 31, 1996, represents six months of sales of computer hardware and
software products by UST. UST sells computer hardware and software products as
part of their systems integration services. The remaining $15,000 in revenue for
the year ended December 31, 1996 and all of the revenue for the year ended
December 31, 1995 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.
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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 $60,075 during the year ended December 31, 1996 as
compared to $53,821 for the prior year, an increase of approximately $6,000 or
12%. 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.
During the year ended December 31, 1996, total operating expenses were
$5,419,016 as compared to $2,697,069 in the prior year, an increase of
approximately $2.7 million. The acquisitions of Forsight, Inc. ("Forsight") and
UST in February 1996 and July 1996, respectively, primarily accounted for the
increase. The increase includes the write-off of purchased research and
development in connection with the acquisition of Forsight, which totaled
approximately $289,000, and the write-off of goodwill in connection with the
acquisition of UST, which totaled approximately $578,000.
For the years ended December 31, 1996 and 1995, the cost of service fees
for custom multimedia software exceeded custom multimedia software revenue,
resulting in negative gross margins of approximately (42%) and (14%),
respectively. The negative gross margin for 1996 is primarily due to the lower
than anticipated level of sales of the Company's custom multimedia software
services, particularly for sales expected in connection with the acquisition of
Forsight.
Cost of service fees for systems integration services provided by UST
following its acquisition by the Company was approximately $603,000 for the year
ended December 31, 1996, resulting in an approximate break-even gross margin for
1996. The break-even gross margin for the 1996 period was primarily due to the
lower than anticipated level of sales of UST's services, as well as employee
turnover as a result of the merger.
Cost of product sales was $223,498 for the year ended December 31, 1996,
as compared to $11,253 in the prior year. Approximately $219,000 of these costs
for the year ended December 31, 1996 was from the sale of products by UST
following its acquisition by the Company and resulted in a gross margin of
approximately 40%, an unusually high margin due to a one-time transaction
recognized during 1996. Approximately $5,000 of these costs for the year ended
December 31, 1996 and all of the costs for the prior year are the costs
associated with the consumer off-the-shelf marketing initiative discussed above.
During the year ended December 31, 1996, research and development
expenses were $251,778 as compared to $257,979 for the prior year. Research and
development expenses were consistent with the prior year as the Company
continued to improve on existing tools as needed and develop modified versions
of traditional custom software products to be sold to a broad range of
commercial customers.
During the year ended December 31, 1996, selling, general and
administrative expenses were $2,691,483 as compared to $1,707,521 in the prior
year, an increase of approximately
13
<PAGE>
$984,000, or 58%. Approximately $922,000 of the increase is due to the
acquisitions of Forsight and UST. The remaining increase is due to the
Company's increased sales and marketing efforts.
During the year ended December 31, 1996, total other income (expense)
decreased by approximately $32,000 from the same period of the prior year due to
losses recognized during 1996 related to the consolidation of the multimedia
division, the write off of certain obsolete inventory and computer equipment, as
well as interest expense on UST's line-of-credit and bank note.
Fiscal 1995 Compared to Fiscal 1994
Total revenues for the year ended December 31, 1995 were $708,652 as
compared to $844,395 for the prior year, a decrease of approximately 16%. This
decrease was attributable to a decrease in sales of the Company's custom
software products of approximately $49,000, a decrease in product sales of
approximately $53,000, and a decrease in royalty revenue of approximately
$33,000. The net loss and net loss per share were $1,949,415 and $3.52 per
share, respectively, for the year ended December 31, 1995 as compared to a net
loss and net loss per share of $2,406,099 and $4.62 per share, respectively, for
the prior year.
For the year ended December 31, 1995, custom multimedia software revenue
was $633,092 as compared to $682,591 for the prior year, a decrease of
approximately $49,000 or 7%. The decrease was primarily due to the number and
size of new contracts the Company was able to secure and to ongoing delays in
certain contracts with customers, particularly the Company's subcontract with
TRW.
For the year ended December 31, 1995, revenue from product sales was
$21,739 which represented the sales of 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. Prior to 1995, the Company
also derived revenues from the sale of hardware and software utilized in
teaching and instructional skills. The sale of these products was discontinued
effective June 30, 1994; accordingly, there was no revenue from sales of these
products for the year ended December 31, 1995, as compared to $74,985 in the
prior year.
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 $53,821 during the year ended December 31, 1995, as
compared to $86,819 in the prior year. The decrease in 1995 royalty revenue is
primarily due to the aging shelf life of products for which the Company
currently receives royalties.
For the year ended December 31, 1995, total operating expenses were
$2,697,069 as compared to $3,339,095 in the prior year, a decrease of
approximately $640,000 or 19%. The decrease was due to lower costs associated
with custom software development of approximately $290,000, the elimination of
costs of approximately $51,000 related to the sale of instructional products
(offset by costs of approximately $11,000 associated with the sale of consumer
off-the-shelf products), and a reduction in selling, general and administrative
expenses of $314,000.
14
<PAGE>
For the years ended December 31, 1995 and 1994, the cost of custom
software production exceeded custom software revenue, resulting in negative
gross margins of approximately (14%) and (48%), respectively. The decrease in
the cost of custom software production and the improved gross margins during the
1995 period reflects the downsizing of the Company's development staff, as well
as the implementation of improved project management and tracking techniques.
Selling, general and administrative expenses decreased primarily due to
actions taken during 1995 to restructure the Company's sales and marketing
activities. Actions included concentrating the Company's sales efforts on
selected industries in which it has had previous success, including automotive
and packaging; converting certain full-time sales people to independent sales
representatives; substituting commission-based compensation for fixed salaries;
and eliminating certain advertising, travel and related expenses.
For the year ended December 31, 1995, total other income (expense)
decreased approximately $50,000 from the prior year, primarily due to a decrease
in funds available for investment.
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. As
discussed in Note 1 to the Notes to the Consolidated Financial Statements and
under Strategy to Achieve Profitable Operations below, the Company plans to
implement 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 year ended December 31, 1996, the Company used cash of
approximately $2.8 million in operations, primarily due to the net loss of
approximately $3.8 million, net of amortization and depreciation and the
write-offs of purchased research and development and goodwill in connection with
the acquisitions of Forsight and UST, which totaled approximately $1.1 million.
Net cash of approximately $634,000 was used for investing activities for the
purchase of U.S. government securities, equipment, and Forsight. Net cash of
approximately $200,000 was provided by the exercise of 28,571 common stock
options, offset by approximately $43,000 used to make payments on UST's
obligations to a bank.
For the year ended December 31, 1995, the Company used cash of
approximately $1.8 million in operating activities. In addition to the net loss,
the Company experienced increases in accounts receivables and other assets. Net
cash of approximately $1.7 million was provided by investing
15
<PAGE>
activities primarily from proceeds received at maturity of liquid investment
securities. Net cash of approximately $3.8 million was provided from financing
activities as a result of net proceeds received from the December 1995
public offering of 920,000 shares of the Company's Common Stock. Working
capital at December 31, 1995 was approximately $4.1 million.
For the year ended December 31, 1994, the Company used cash of
approximately $2.2 million in operating activities. In addition to the net loss,
the Company experienced increases in receivables and prepaid expenses and other
current assets. Net cash of approximately $2.1 million was used in investing
activities to purchase liquid investment securities and property and equipment.
Working capital of approximately $684,000 at December 31, 1996, 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. In addition, during the first quarter of 1997,
the Company received net proceeds of approximately $900,000 from the exercise of
underwriter warrants and stock options. As of December 31, 1996, backlog of
custom multimedia software and systems integration services totals approximately
$400,000, all of which is expected to be earned during 1997. 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
16
<PAGE>
services. As a result of these acquisitions, the Company develops software
applications used in conjunction with Lotus Notes(R)/Domino(R),
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
web-site development and other 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.
To better control costs, the Company is implementing plans to consolidate
the multimedia related operations into one location by consolidating the
Redmond, WA and the Rockville, MD office into the Annapolis, MD location. The
consolidation of the Redmond office was completed by December 31, 1996 and the
consolidation of the Rockville office is expected to be completed by April 30,
1997.
Management believes that its strategy for increasing revenues combined
with the impact of its cost control measures 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.
Item 7. Financial Statements
The information required by Item 7 appears at page F-1 which appears
after this page.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
17
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
-------
<S> <C>
Report of Coopers & Lybrand L.L.P, Independent Accountants, on the
December 31, 1996 and 1995 Consolidated Financial Statements F-2
Consolidated Balance Sheets, December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995, and 1994 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995, and 1994 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995, and 1994 F-6
Notes to Consolidated Financial Statements F-7 - F-16
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Pacific Animated Imaging Corporation
We have audited the accompanying consolidated balance sheets of Pacific Animated
Imaging Corporation and its subsidiaries (the Company) as of December 31, 1996
and 1995 and the consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1996 and 1995 and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
had an accumulated deficit of $10,665,959, and its existing cash resources are
insufficient to fund planned operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans to address these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
COOPERS & LYBRAND L.L.P
McLean, Virginia
March 28, 1997
F-2
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
-------------- --------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 939,281 $ 4,177,534
Investment in U.S. government securities 474,144 --
Accounts receivable, net 411,220 260,655
Interest receivable 19,814 3,939
Inventory 18,838 --
Prepaid expenses and other current assets 150,819 82,719
-------------- --------------
Total current assets 2,014,116 4,524,847
-------------- --------------
Property and equipment, at cost
Computers, furniture and equipment 990,105 500,162
Less accumulated depreciation 490,193 218,593
-------------- --------------
Net property and equipment 499,912 281,569
-------------- --------------
Other assets 55,681 62,708
-------------- --------------
$ 2,569,709 $ 4,869,124
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 796,729 $ 274,313
Deferred revenue 66,088 76,201
Customer deposit 50,000 50,000
Line of credit 320,833 --
Other current liabilities 96,063 7,781
-------------- --------------
Total current liabilities 1,329,713 408,295
Note payable to bank 18,253 --
Deferred rent and other 149,125 22,399
-------------- --------------
Total liabilities 1,497,091 430,694
-------------- --------------
Commitments and contingencies
Stockholders' equity
Common stock, $.0001 par value. Authorized 5,000,000 shares;
issued and outstanding 1,518,880 and 1,441,024 shares
as of December 31, 1996 and 1995. 152 144
Additional paid-in capital 11,893,549 11,280,624
Accumulated deficit (10,665,959) (6,842,338)
Deferred compensation (155,124) --
-------------- --------------
Total stockholders' equity 1,072,618 4,438,430
-------------- --------------
$ 2,569,709 $ 4,869,124
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1996 1995 1994
------------------ ----------------- -----------------
<S> <C>
Revenue
Service fees $ 1,155,763 $ 633,092 $ 682,591
Product sales 372,256 21,739 74,985
Royalties 60,075 53,821 86,819
------------------ ----------------- -----------------
Total revenue 1,588,094 708,652 844,395
------------------ ----------------- -----------------
Expenses
Cost of service fees 1,385,131 720,316 1,010,295
Cost of product sales 223,498 11,253 50,966
Research and development 251,778 257,979 256,552
Selling, general and administrative 2,691,483 1,707,521 2,021,282
Write-off of purchased research and development 289,330 -- --
Write-off of goodwill related to purchase of
U.S. Technologies, Inc. 577,796 -- --
------------------ ----------------- -----------------
Total operating expenses 5,419,016 2,697,069 3,339,095
------------------ ----------------- -----------------
Loss from operations (3,830,922) (1,988,417) (2,494,700)
Other income, net 7,301 39,002 88,601
================== ================= =================
Net loss $ (3,823,621) $ (1,949,415) $ (2,406,099)
================== ================= =================
Average number of common shares outstanding 1,483,831 553,687 520,739
================== ================= =================
Net loss per common share $ (2.58) $ (3.52) $ (4.62)
================== ================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-in Accumulated Deferred
Shares Amount Capital Deficit Compensation Total
----------- ------ ------------ ------------- ------------ ------------
<S> <C>
Balance, December 31, 1993 520,739 $ 52 $ 7,551,490 $ (2,486,824) $ -- $ 5,064,718
Net loss -- -- -- (2,406,099) -- (2,406,099)
----------- ------ ------------ ------------- ---------- ------------
Balance, December 31, 1994 520,739 52 7,551,490 (4,892,923) -- 2,658,619
Exercise of incentive stock options 285 -- 2,250 -- 2,250
Net proceeds from public offering of
shares of common stock, $5.25 per share,
net of offering costs of $1,103,104 920,000 92 3,726,884 -- 3,726,976
Net loss -- -- -- (1,949,415) (1,949,415)
----------- ------ ------------ ------------- ---------- ------------
Balance, December 31, 1995 1,441,024 144 11,280,624 (6,842,338) -- 4,438,430
Exercise of stock options 32,856 3 238,424 -- -- 238,427
Stock issued for services 25,000 3 193,904 -- (155,124) 38,783
Stock issued in connection with
Forsight acquisition 20,000 2 159,373 -- -- 159,375
Adjustment to 1995 offering costs -- -- 21,224 -- -- 21,224
Net loss -- -- -- (3,823,621) -- (3,823,621)
=========== ====== ============ ============= ========== ============
Balance, December 31, 1996 1,518,880 $ 152 $11,893,549 $(10,665,959) $(155,124) $ 1,072,618
=========== ====== ============ ============= ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
------------ ------------- -------------
<S> <C>
Cash flows from operating activities
Net loss $(3,823,621) $ (1,949,415) $ (2,406,099)
Adjustments to reconcile net loss to net cash used in
operating activities, net of effects from purchases
of Forsight, Inc. and U.S. Technologies, Inc.
Depreciation and amortization 269,741 146,867 104,352
Provision for bad debt expense 28,981 6,000 6,118
Amortization of deferred compensation 38,783 -- --
Loss on disposal of assets 22,634 21,022 26,713
Write-off of purchased research and development 289,330 -- --
Write-off of goodwill 577,796
Increase (decrease) in cash from changes in assets and liabilities
Accounts receivable (15,244) (143,449) (1,520)
Interest receivable (15,875) 34,376 (38,315)
Inventory 41,091 -- --
Prepaid expenses and other current assets (68,100) 68,586 (67,693)
Other assets 25,276 (48,102) 33,042
Accounts payable and accrued liabilities (1,146) 17,322 97,294
Other liabilities (130,659) 62,100 40,655
------------ ------------- -------------
Net cash used in operating activities (2,761,013) (1,784,693) (2,205,453)
------------ ------------- -------------
Cash flows from investing activities
Purchase of U.S. government securities (474,144) -- (2,695,959)
Proceeds from maturity of U.S. government securities -- 1,698,319 997,640
Capital expenditures (134,033) (46,462) (383,066)
Proceeds from sales of property and equipment 11,200 14,038 --
Payment for purchase of Forsight, Inc., net of cash acquired (46,424) -- --
Cash acquired from purchase of U.S. Technologies, Inc. 9,549 -- --
------------ ------------- -------------
Net cash provided by (used in) investing activities (633,852) 1,665,895 (2,081,385)
------------ ------------- -------------
Cash flows from financing activities
Net proceeds from sale of common stock -- 3,726,976 --
Financing costs included in liabilities as of December 31, 1995 -- 61,345 --
Proceeds from exercise of options 199,997 2,250 --
Payments on line of credit (26,886) -- --
Payments on note payable to a bank (16,499) -- --
------------ ------------- -------------
Net cash provided by financing activities 156,612 3,790,571 --
------------ ------------- -------------
Net (decrease) increase in cash and cash equivalents (3,238,253) 3,671,773 (4,286,838)
Cash and cash equivalents, beginning of year 4,177,534 505,761 4,792,599
------------ ------------- -------------
Cash and cash equivalents, end of year $ 939,281 $ 4,177,534 $ 505,761
============ ============= =============
Supplemental disclosures of cash paid:
Interest $ 22,701 $ -- $ --
Income taxes -- -- --
Supplemental schedule of noncash investing and financing activities:
Stock issued as payment for unearned professional fees $ 193,907 $ -- $ --
Stock options exercised in lieu of payment for professional fees 38,430 -- --
Stock issued in connection with acquisition of Forsight 159,375 -- --
Adjustment to 1995 offering costs 21,224 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business. Pacific Animated Imaging Corporation and its
subsidiaries (the "Company") are full-service providers of technology based
software solutions and computer systems integration (including the sale of
hardware and software products) and support services specializing in the
development of software applications related to work group and work flow
computing solutions, and the development of custom interactive multimedia
software for use in the areas of process enhancement, technical documentation,
training, and performance support for a variety of commercial and industrial
end-users.
Going Concern. The Company's financial statements for the year ended
December 31, 1996 have been prepared on a going concern basis which contemplates
the realization of assets and the settlement of liabilities and commitments in
the normal course of business. 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. Management recognizes that in order to develop and
market its services and products effectively, 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 its equity securities or placements of debt,
there can be no assurances that such financing will be available or, if
available, will be under terms and conditions suitable to the Company.
Management's plans to address the losses and liquidity matters include (i)
consolidating the multimedia related operations into one location and (ii)
increasing sales by leveraging the expanded capabilities and customer lists
obtained in connection with the acquisitions made during 1996 by marketing the
full services of the Company to the customers of the acquired companies. In
addition, one of the Company's subsidiaries was approved during the fourth
quarter as an IBM Industry Remarketer for both the AS/400 and RS/6000 midrange
computer platforms. It is Management's belief that by selling the IBM midrange
products, the Company will be able to sell additional services to customers by
providing customers with the ability to purchase an integrated set of products
and services from a single vendor. However, no assurances can be given that
these measures, even if successful, will ensure the continued existence of the
Company. The Company's financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Principles of Consolidation. The consolidated financial statements
include the accounts of Pacific Animated Imaging Corporation ("PAI") and
its wholly owned subsidiaries, JMC Company, Inc. ("JMC"), and U.S.
Technologies, Inc. ("UST"). All significant intercompany transactions have
been eliminated in consolidation. PAI, JMC, and UST are hereinafter referred to
as the "Company".
Revenue Recognition. Revenues from hardware and software product sales
are recognized on delivery. Revenues from consulting and training services are
recognized as services are performed. Revenues from the Company's custom
multimedia software products are recognized using the percentage of completion
method due to the significant customization involved in their development. Cost
estimates are reviewed periodically as work progresses, and adjustments to
revenue are reflected in the period in which revisions to such estimates are
deemed necessary. Revenues from royalties are recognized in the period for which
the royalties are earned. Software products generally are delivered without post
sale vendor obligations and without a significant obligation to the customer.
Deferred revenue represents amounts advanced by customers and is recognized as
revenue upon delivery of the products or services and is adjusted on a quarterly
basis to reflect the status of projects.
F-7
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Use of 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.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Investments in U.S. Government Securities. The Company anticipates that
any investments in U.S. Government securities, composed of U.S. Treasury Bills
and Notes, would be available for sale in response to the Company's liquidity
needs, if necessary. Accordingly, these securities are principally considered as
available-for-sale as defined by Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
115). As of December 31, 1996, amortized cost approximated market, therefore, no
adjustment was made to stockholders' equity. Interest income is accrued as
earned.
Inventory. Inventory consists primarily of miscellaneous computer
components and is stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market.
Property and Equipment. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, which are principally three to seven years.
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the estimated useful life of the improvements or the
remaining lease term. When assets are retired or disposed, the cost and the
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recognized in operations for the period.
Per Share Data. Loss per share is computed on the weighted average number
of shares of common stock and dilutive common equivalent shares outstanding
during the period. In loss periods, dilutive common equivalent shares,
consisting of stock options and warrants, are excluded as the effect would be
anti-dilutive.
New Accounting Standard. In February 1997, the Financial Accounting
Standards Board issued 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.
Research and Development Expenses and Software Development Costs.
Statement of Financial Accounting Standards No. 86, "Accounting for the Cost of
Computer Software to be Sold, Leased or Otherwise Marketed" (SFAS 86) requires
the capitalization of certain software development costs once technological
feasibility is established, which the Company generally defines as the
completion of a working model. Capitalization ceases when the products are
available for general release to customers, at which time amortization of the
capitalized costs begins on a straight-line basis over the estimated product
life, or on the ratio of current revenues to total projected product revenues,
whichever is greater. To date, software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs with respect to its continuing
operations. In addition, research and development costs including software
development costs prior to technological feasibility are expensed in the period
in which they are incurred.
F-8
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Concentration of Credit Risk. The Company had approximately $750,000 and
$4,077,000 on deposit in money market funds with strong credit ratings and
checking accounts at various commercial banking institutions in excess of
insured amounts at December 31, 1996 and 1995, respectively. The Company has not
experienced losses on these investments.
The Company provides hardware and software products, develops software,
and performs services for its customers located throughout the United States.
The customer base of one of the Company's subsidiaries, which accounted for
approximately 60% of the Company's 1996 revenues, is located primarily
throughout Florida. The Company provides credit in the normal course of business
and, to date, has not experienced significant losses related to receivables from
individual customers or groups of customers in a particular industry or
geographic area. In addition, for certain hardware orders and for custom
multimedia software development projects, the Company requires advances or
deposits of at least one-third of the price of the custom software or hardware
products with additional amounts due at certain milestones during the custom
software development process or delivery of the hardware products. Due to these
factors management believes no additional credit risk beyond amounts provided
for in the doubtful account allowance is inherent in the Company's accounts
receivable.
For the year ended December 31, 1996, one customer, a systems integrator,
accounted for 10% of the Company's revenue. For the year ended December 31,
1995, three customers, an automobile parts distribution company, a government
contractor, and a truck manufacturer, accounted for 17%, 17%, and 13%,
respectively, of the Company's revenue. For the year ended December 31, 1994,
three customers, a household products manufacturer, an electronics education
firm, and a packaging company, accounted for 23%, 11%, and 10%, respectively, of
the Company's revenue. At December 31, 1996, two customers, a government
contractor and a department store, accounted for approximately 14% and 18%,
respectively, of accounts receivable. At December 31,1995, two customers, a
truck manufacturer and a government contractor, accounted for approximately 24%
and 45%, respectively, of accounts receivable.
Recoverability of Long-Lived Assets. The Company evaluates the
recoverability of the carrying value of property and equipment and intangible
assets in accordance with the provisions of Statement of Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of".
The Company considers historical performance and anticipated future results in
its evaluation of potential impairment. Accordingly, when indicators of
impairment are present, the Company evaluates the carrying value of these assets
in relation to the operating performance of the business and future and
undiscounted cash flows expected to result from the use of these assets.
Impairment losses are recognized when the sum of expected future cash flows are
less than the assets' carrying value. On December 31, 1996, the Company
recognized an impairment loss of approximately $578,000 related to the write-off
of goodwill that resulted from the purchase of U.S. Technologies, Inc. (see Note
2). Factors leading to the impairment were a combination of historical losses,
anticipated future losses, and inadequate cash flows.
Reverse Stock Split. On November 10, 1995, the Board of Directors, acting
on shareholder approval, authorized a one-for-three and one half reverse stock
split to be effective December 8, 1995. All share, per share, conversion
amounts, and exercise prices relating to common stock, warrants and stock
options included in the accompanying financial statements and footnotes have
been restated to reflect the one-for-three and one half reverse stock split.
Income Taxes. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
F-9
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
Fair Value of Financial Instruments. During 1995, the Company adopted
Statement of Financial Accounting Standards No. 107, "Disclosure of Fair Value
of Financial Instruments" ("SFAS 107"). The Company believes that for all
financial instruments, as defined by SFAS 107, the carrying amount, as reported
in the balance sheet approximates fair value.
Reclassifications. Certain prior year amounts have been reclassified
to correspond to the current year presentation.
2. ACQUISITIONS
During 1996, the Company acquired the entities described below, which
were accounted for by the purchase method of accounting. The results of
operations of the acquired companies are included in the Company's statement of
income for the period in which they were owned by the Company.
Acquisition of Forsight, Inc.
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 $375,000, 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 $200,000, 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 maximum value of $600,000, payable in
unregistered shares of common stock of the Company. The Series A Convertible
Preferred Stock of Forsight was canceled 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.
Acquisition of U.S. Technologies, Inc.
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. Consideration at the time of
purchase amounted to approximately $642,000 which represents the excess of UST's
liabilities over its assets as of the date of the merger. On December 31, 1996,
the Company wrote-off approximately $578,000, which represented the purchase
consideration of approximately $642,000, net of approximately $64,000 of
accumulated amortization, as an impairment loss (see Note 1).
In addition, under the terms of the merger, the former 100% owner of UST
has the ability to earn up to 31,068 shares of common stock in the Company (the
market value of which was $400,000 as of the date of the merger), provided
certain financial milestones are met by UST. The value of the shares of common
stock will be accounted for as compensation at the time of issuance. As of
December 31, 1996, the Company has not issued any shares of common stock to the
former 100% owner of UST. In addition, the Company made a commitment to provide
working capital to UST. Through December 31, 1996, working capital provided to
UST totaled approximately $722,000.
F-10
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
If the acquisition of UST had occurred on January 1, 1995, management
estimates that on an unaudited pro forma consolidated basis, revenues, total
operating expenses, net loss, and net loss per common share would have been as
follows:
1996 1995
---- ----
Revenues $2,918,235 $5,361,617
Total operating expenses $6,945,473 $7,731,445
Net loss ($4,036,851) ($2,421,090)
Net loss per common share ($2.72) ($4.37)
These estimates were based on assumptions that management deems
appropriate, but the results are not necessarily indicative of those that might
have occurred had the acquisition taken place on January 1, 1995.
3. ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 1996 and 1995 consist of the
following:
December 31,
1996 1995
---- ----
Accounts receivable $ 451,421 $ 266,674
Less: Allowance for doubtful accounts 40,201 6,019
--------- ---------
$ 411,220 $ 260,655
========= =========
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities as of December 31, 1996 and 1995
consist of the following:
December 31,
1996 1995
---- ----
Accounts payable $ 398,273 $ 101,822
Payroll and related expenses 171,262 67,407
Other 227,194 105,084
---------- ----------
$ 796,729 $ 274,313
========== =========
5. LINE OF CREDIT
As of December 31, 1996, the Company's subsidiary, UST, had $320,833 of
short-term debt outstanding under a line of credit with a bank. This line of
credit is collateralized by accounts receivable as well as the personal
guarantee of the former sole stockholder of UST. In July 1996, in connection
with the acquisition of UST, this line of credit was renegotiated and required
twelve monthly principal payments, which are guaranteed by the Company, of
$5,833 plus interest through July, 1997. Interest is at the bank's prime rate
plus 2%. The remaining unpaid principal balance is due and payable on August 18,
1997; accordingly, as of December 31, 1996, the outstanding balance was
classified as a current obligation.
F-11
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
6. NOTE PAYABLE TO BANK
As of December 31, 1996, the Company's subsidiary, UST, had a note
payable to a bank, as follows:
December 31,
1996
----
Note payable to bank in monthly payments of
$3,222, including interest at 9.75% through
June 1998; collateralized by equipment,
inventory, and accounts receivable $53,242
Less current portion, included in other current liabilities (34,989)
-------
Note payable to bank, less current portion $18,253
=======
7. COMMON STOCK
In connection with the Company's public offering of 920,000 shares of its
common stock in December 1995, a warrant to purchase 80,000 shares of its common
stock was issued to the underwriter. The warrant is exercisable at the option of
the holder, in whole or in part, at a price of $7.09 per share at any time
during the period December 15, 1996 through December 15, 2000. These warrants
were exercised in February, 1997 for which the Company received net proceeds of
approximately $540,000.
In connection with the Company's public offering of 171,428 shares of its
common stock in November 1993, a warrant to purchase 17,142 shares of its common
stock was issued to the underwriter. The warrant is exercisable at the option of
the holder, in whole or in part, at a price of $39.20 per share at any time
during the period November 10, 1994 through November 9, 1998.
8. STOCK OPTION PLANS
Incentive Stock Option Plans
In 1992, the shareholders approved the Company's Incentive Stock Option
Plan ("ISO Plan No. 1") for its employees to purchase up to a total of 39,222
registered shares of the Company's common stock. In 1994, the shareholders
approved the Company's Incentive Stock Option Plan No. 2 ("ISO Plan No. 2") for
its employees to purchase up to a total of 28,571 registered shares of the
Company's common stock. For both Incentive Stock Option Plans, the option price
per share may not be less than the fair market value of the stock on the date of
the grant, the terms of the options are ten years from the date of grant, and
options vest over a five-year period beginning on the date of grant. If
immediately before a grant an employee owns more than 10% of the total combined
voting stock of the Company, the exercise price shall be at least 110% of the
fair market value of the stock on the date of the grant and the options expire
five years from the date of grant.
F-12
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
A summary of option activity under ISO Plans No. 1 and No. 2 is as
follows:
Number Weighted Average
of Options Option Prices
---------- ----------------
Options outstanding at December 31, 1993 24,568
Granted 25,710
Exercised --
Expired (27,996)
--------
Options outstanding at December 31, 1994 22,282 $ 8.10
Granted 41,138 $11.375
Exercised (285) $ 7.875
Expired (7,999) $ 8.34
-------
Options outstanding at December 31, 1995 55,136 $ 10.57
Granted 37,711 $ 10.50
Exercised -- --
Expired (45,708) $ 10.75
--------
Options outstanding at December 31, 1996 47,139 $ 10.00
======
Nonqualified Stock Option Plans
In 1992, the shareholders approved the Company's Nonqualified Stock
Option Plan ("Nonqualified Plan") for its directors to purchase up to a total of
8,571 registered shares of the Company's common stock. Effective in 1994, the
Company adopted Nonqualified Stock Option Plan No. 2, under which the Company
authorized the issuance of options to consultants for the purchase of up to a
total of 71,428 registered shares of its common stock. Effective in 1995, the
Company adopted Nonqualified Stock Option Plan No. 3, under which the Company
authorized the issuance of options to consultants for the purchase of up to a
total of 13,571 shares of its common stock. Effective in 1996, the Company
adopted Nonqualified Stock Option Plans No. 4, 5, and 6 under which the Company
authorized the issuance of options to employees and consultants for the purchase
of up to a total of 32,500, 100,000, and 150,000 shares, respectively, of its
common stock. The option price per share under these plans may be greater than
or less than the fair market value of the stock on the date of the grant. Both
the option price and the terms of the options are determined by the Board of
Directors or a committee of the Board as of the date of the grant. Generally,
the terms of the options are ten years from the date of grant, and options vest
100% on the date of grant. A summary of option activity under the Nonqualified
Plans is as follows:
Number Weighted Average
of Options Option Prices
---------- ----------------
Options outstanding at December 31, 1993 8,571
Granted 37,142
Exercised --
Expired (8,571)
-------
Options outstanding at December 31, 1994 37,142 $7.20
Granted 46,426 $8.88
Exercised -- --
Expired -- --
-------
Options outstanding at December 31, 1995 83,568 $8.14
Granted 182,500 $10.67
Exercised (32,856) $7.26
Expired (28,500) $5.25
--------
Options outstanding at December 31, 1996 204,712 $11.04
=======
F-13
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
As of December 31, 1996, there was an aggregate of 158,871 options
available for future grant under the Incentive Stock Option and Nonqualified
Stock Option Plans. As of December 31, 1996 and 1995, there were 230,020 and
102,476 options, respectively, exercisable under the Incentive Stock Option and
Nonqualified Stock Option Plans at weighted average exercise prices of $10.79
and $8.40, respectively. The weighted average fair value of options granted
during the years ended December 31, 1996 and 1995 was $5.44 and $6.95,
respectively. As of December 31, 1996, the weighted average remaining
contractual life of options outstanding was 9 years and the range of options
prices was $7.88 - $11.75.
Performance Based Stock Plans
During 1994, the Company adopted the Performance Stock Plan under which
certain officers and key employees of the Company may be granted awards of up to
an aggregate of 85,714 Performance Shares upon the attainment of certain
performance objectives. Each awarded Performance Share is convertible to one
share of the Company's common stock at the earlier of December 31, 1997, death,
total disability, termination of the plan, or other event as determined by the
Executive Compensation and Stock Option Committee of the Board of Directors. As
of December 31, 1996, no Performance Shares had been awarded and there are
12,857 shares available for award.
In connection with the acquisition of UST, the Company established a
Phantom Stock Plan (the "Plan") for UST's key employees. Pursuant to the Plan,
UST's key employees have the ability to earn up to 46,602 shares of the
Company's common stock, the market value of which was $600,000 as of the date of
the merger. The ability to earn these shares is subject to UST meeting certain
financial milestones. As of December 31, 1996, no shares had been awarded.
Pro Forma Information in Accordance with SFAS 123
The Company applies Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its equity participation programs. Accordingly, no compensation
cost has been recognized for its incentive and nonqualified stock option plans
related to stock options granted to employees. Had compensation cost for the
Company's incentive stock option plans been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
accounting under Statements of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" ("SFAS 123"), the Company's net loss
and net loss per share would have been the amounts indicated below:
1996 1995
---- ----
Net loss As reported $3,823,621 $1,949,415
Pro forma $4,861,148 $2,360,051
Net loss per common share As reported $2.58 $3.52
Pro forma $3.28 $4.26
The fair value of each option is estimated on the date of grant using a
type of Black-Scholes option-pricing model with the following weighted average
assumptions used for option grants during the years ended December 31, 1996 and
1995, respectively: dividend yield of 0%, expected volatility of 66%, risk-free
interest rate of 6.28% and 6.1%, and expected terms of 3.9 years.
F-14
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
9. INCOME TAXES
The tax effects of the primary temporary differences and carryforwards
which give rise to net deferred tax assets are as follows as of December 31,
1996 and 1995:
December 31,
1996 1995
---- ----
Net operating loss carryforwards $ 3,574,000 $ 2,315,000
Other 273,000 28,000
----------- -----------
3,847,000 2,343,000
Valuation allowance (3,847,000) (2,343,000)
----------- -----------
-- --
=========== ===========
Realization of deferred tax assets at the balance sheet date are
dependent on the Company's ability to generate future taxable income.
Accordingly, management has provided a full valuation allowance against the
Company's deferred tax assets as of December 31, 1996 and 1995.
The change in the deferred tax asset valuation allowance is primarily
attributable to the increase in net operating loss carryforwards. As of December
31, 1996, net operating loss carryforwards total approximately $9.3 million
which expire at various times through 2011. As a result of certain changes in
ownership, the use of these carryforwards to offset future taxable income may be
limited.
10. RELATED PARTY TRANSACTIONS
Prior to the acquisition, UST's sole stockholder advanced amounts to UST
to fund working capital needs. The amounts due are non-interest bearing and are
to be repaid upon availability of funds and after all amounts due to the bank
are repaid in full by UST. Accordingly, these loans are considered long-term
obligations. The amount due as of December 31, 1996 was $120,579.
11. LEASES
The Company leases office space, automobiles and certain equipment under
separate noncancelable operating leases which expire at various dates through
2000. The agreements generally require that the Company pay applicable utility,
property taxes, maintenance, and insurance costs. Certain excess office space is
subleased to a third party. The future annual minimum rental payments, net of
sublease income, under these leases at December 31, 1996 are as follows: 1997,
$190,292; 1998, $103,015; 1999, $69,604; 2000, $23,654; and thereafter, $0.
Rental expense for the years ended December 31, 1996, 1995, and 1994, was
approximately $297,000, $170,000, and $152,000, respectively.
12. RETIREMENT AND OTHER BENEFIT PLANS
Effective January 1, 1994, the Company established a defined contribution
retirement plan covering eligible full-time employees. Under this plan,
participants can contribute up to the lesser of 15% of their compensation or the
maximum allowable by IRS regulations, currently $9,500. Employees may direct the
investment of their contributions among several mutual fund options. The Company
may make discretionary contributions out of current or accumulated net profit.
Expense for the years ended December 31, 1996 and 1995 totaled approximately
$1,250 and $1,200, respectively.
F-15
<PAGE>
PACIFIC ANIMATED IMAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
During 1994, the Company entered into split dollar agreements with two
officers whereby the Company pays the premiums on split dollar life insurance
policies held by these individuals. Under the agreements, the Company has an
interest in the policy equal to the cumulative value of all premiums paid by the
Company and will be reimbursed for these premiums upon death, termination of the
agreement, or termination of employment. However, since it is possible that the
Company at its discretion may waive this requirement, no asset for the premium
has been recorded. The Company paid approximately $15,000 and $22,500,
respectively, in premiums for the years ended December 31, 1996 and 1995.
Effective June 14, 1995, this plan was terminated with respect to one officer in
connection with his resignation from the Company.
13. COMMITMENTS
The Company has entered into an employment agreement with a certain
officer of the Company. This agreement, which is automatically renewable at the
Company's option, expires in 1998 and requires payments of $100,000 and $66,667,
respectively, in 1997 and 1998, respectively.
In connection with the acquisition of UST, the former 100% owner of UST
entered into an employment agreement with the Company for a three year period,
automatically renewable for one year periods following the termination date at
the option of either party. This agreement requires payments of $100,000,
$100,000, and $50,000, in 1997, 1998, and 1999, respectively.
In connection with the development of certain software products, UST has
entered into royalty agreements with developers that require UST to pay
approximately one-third of gross revenue from sales of the products. Amounts are
payable once a certain amount advanced to the developer has been recovered. As
of December 31, 1996, no amounts have been accrued or paid to developers.
14. SUBSEQUENT EVENTS
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. Neither the par value of the stock nor the number of authorized
shares will be affected by the split. The result 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 throughout all of 1996, 1995, and 1994, net loss per share would
have been as follows: 1996, $1.72; 1995, $2.35; and 1994, $3.08. Financial
information contained elsewhere in this report has not been adjusted to reflect
the impact of the proposed common stock split.
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 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. 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
$1.3 million, using the straight-line method over the term of the consulting
agreement, or approximately $22,000 per month, beginning January 1, 1998.
F-16
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant; Compliance With
Section 16(a) of the Exchange Act.
The following table sets forth certain information concerning the
directors and executive officers of the Company as of March 7, 1997.
Name Age Position
John J. Cadigan 66 Chairman of the Board, President, Chief Executive
Officer, Secretary, and Treasurer of the Company
Suzanne C. Brown 31 Chief Financial and Accounting Officer of the
Company
A. David Rossin 65 Director
Joseph Amato 64 Director
Frederick D. Pettit 61 Director
John J. Cadigan has been Chairman, Chief Executive Officer, Secretary,
Treasurer, and a director of the Company since February, 1991. He assumed the
position of President in July 1995. Prior to joining the Company, Mr. Cadigan
served as Chairman of PAI from its inception in 1989 until it was merged into
the Company in February, 1991.
Suzanne C. Brown, C.P.A. has been with the Company since February,
1994. In January 1996, Ms. Brown was promoted to Chief Financial Officer. From
August, 1988 to February, 1994, Ms. Brown was with KPMG Peat Marwick, an
international accounting firm.
Dr. A. David Rossin has been a director of the Company since February,
1991. He has been employed since August 1987 as President of Rossin and
Associates, a California consulting firm which specializes in nuclear
energy matters. Dr. Rossin served as Assistant Secretary of the U.S. Energy
Department from 1986 to 1987.
Joseph Amato has been a director of the Company since December, 1993.
Mr. Amato retired during 1996 from TRW Inc.'s Systems Integration Group,
headquartered in Fairfax, Virginia, where he served as Director of Strategic
Planning since October, 1990. From March to October, 1990, Mr. Amato was a
self-employed consultant for the Government and private industry.
Frederick D. Pettit has been a director of the Company since July
1995. Mr. Pettit currently serves as Chairman and CEO of Consultant Pettit
Associates, a private international investment banking firm of which he is
the sole shareholder, since August, 1994. Mr. Pettit was
18
<PAGE>
Chairman, CEO, and COO of EEONYX Corporation from September, 1991 to May,
1992. From September, 1989, to September, 1991, Mr. Pettit was employed by
Chemical Bank.
Board of Directors
The Company's Certificate of Incorporation and Bylaws divide
the Company's directors into three classes designated as Class I, Class II and
Class III, that serve staggered three-year terms that expire at the annual
meeting of the Stockholders in the final year of the term. Each class consists,
as nearly as may be possible, of one-third of the total number of directors
constituting the entire Board of Directors. Directors serve for their term and
until their successors are duly elected, or until their earlier resignation,
removal from office, or death. The remaining directors may fill any vacancy in
the Board of Directors for an unexpired term.
There are presently four directors serving on the Board. A. David
Rossin has been designated as a Class I director and his term expires in 1999.
Joseph Amato has been designated as a Class II director and his term expires in
1997. On March 14, 1997, Mr. Amato tendered his resignation to be effective at
the next annual meeting. The Board will not have a nominee in time for the 1997
annual meeting but does intend to fill the vacancy once a qualified candidate is
found. John J. Cadigan and Frederick D. Pettit have been designated as Class III
directors and their terms expire in 1998.
The Company has two standing committees, the Executive Compensation and
Stock Option Committee and the Audit Committee. Mr. Amato, Mr. Rossin and Mr.
Pettit are the members of both the Executive and Stock Option and the Audit
Committees. The Executive Compensation and Stock Option Committee has the power
and authority to designate, recommend and/or review compensation of the
Company's executive officers and other employees, including salaries, bonuses,
fringe benefits and the grant of stock options. The Audit Committee has the
power and authority to recommend the engagement of independent accountants,
review external and internal auditing procedures and policies, review
compensation paid to auditors and make recommendations and/or implement changes
with respect to the foregoing.
Officers are elected by the Board of Directors at the annual meeting of
directors following the annual shareholders meeting and serve until their
successors are duly elected, subject to earlier removal by the Board of
Directors.
19
<PAGE>
Item 10. Executive Compensation
This information will be contained in the definitive proxy statement of
the Company for the 1997 Annual Meeting of Stockholders under the captions
"Directors' Compensation", "Executive Compensation", "Employment Agreements",
and "Executive and Other Employee Benefit Plans" and is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
This information will be contained in the definitive proxy statement of
the Company for the 1997 Annual Meeting of Stockholders under the caption
"Security Ownership of Certain Beneficial Owners and Management" and is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
This information will be contained in the definitive proxy statement of
the Company for the 1997 Annual Meeting of Stockholders under the caption
"Transactions Involving Directors and Officers" and is incorporated herein by
reference.
20
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a)(1)(2) Financial Statements
A list of the Financial Statements filed as a part of this Report is set
forth in Item 7 and appears at Page F-1 of this Report; which list is
incorporated herein by reference.
<TABLE>
<CAPTION>
(a)(3) Exhibits
--------
<S> <C>
1(A) Stock Purchase Agreement with Forsight, Inc. (8)
1(B) Asset Purchase Agreement with Forsight, Inc. (8)
2 Plan of Merger between U.S. Technologies, Inc. Acquisition Corporation and U.S. Technologies, Inc (9)
2(A) Articles of Merger of U.S. Technologies, Inc and U.S. Technologies, Inc. Acquisition Corporation (9)
3 Certificate of Incorporation and Amendment thereto (1)
3(B) By-Laws (1)
3(C) Form of Amendments to Certificate of Incorporation and Bylaws
dated October 20, 1995 (5)
10 Form of Indemnification Agreement executed in favor of each
officer and director of the Company (1)
10(A) Form of Indemnification Agreement Amendment executed in favor
of certain officers and directors of the Company (8)
10(B) Form of Indemnification Agreement executed in favor of each
officer and director of the Company (8)
10(C) Teaming Agreement between command Support Division, Systems
Integration Group, TRW, Inc. and the Registrant (1)
10(G) Employment Agreement (9/23/94) - William H. Kauffman (3)
10(H) Employment Agreement with John J. Cadigan dated September 1, 1995 (5)
10(J) Consulting Agreement (6/15/95) - Larry Crawford (5)
10(K) Assignment of Consulting Agreement (8/10/95) - Larry Crawford (5)
10(N) Consulting Agreement with Robert Neff dated July 7, 1994 (6)
10(O) Master Development Agreement and related documents between
Mack Trucks, Inc. and the Company dated June 26, 1995 (6)
10(Q) Form of Underwriter's Consulting Contract (7)
10(U) Employment Agreement (7/15/96) - Peter S. Steele (11)
10(V) Loan Renewal and Modification Agreement (11)
21 Subsidiaries of Registrant (2)
23 Consent of Coopers & Lybrand L.L.P. (11)
99 Incentive Stock Option Plan No. 1 (4)
99(A) Nonqualified Stock Option Plan No. 1(4)
99(B) Incentive Stock Option Plan No. 2 (5)
99(D) Phantom Stock Performance Stock Plan (3)
99(E) Nonqualified Stock Option Plan No. 2 (5)
99(F) Nonqualified Stock Option Plan No. 3 (5)
99(H) Split Dollar Plan Agreement (11/21/94) - John J. Cadigan (3)
99(I) Nonqualified Stock Option Plan No. 4 (8)
99(J) Nonqualified Stock Option Plan No. 5 (11)
99(K) Nonqualified Stock Option Plan No. 6 (11)
99(L) Nonqualified Stock Option Plan No. 7 (10)
</TABLE>
- -------------------
(1) Incorporated by reference to Form S-1 Registration Statement, File No.
33-68826 Exhibits 2, 3, 3(A), 3(B), 10, 10(A), 10(B), 10(C), 10(D),
10(E), 10(G), 10(H), and 10(J), respectively.
(2) JMC Company, Inc. and Forsight, Inc., are wholly owned subsidiaries of
the Company incorporated under the laws of the State of Maryland. U.S.
Technologies, Inc. is a wholly owned subsidiary incorporated under the
laws of the State of Florida.
(3) Incorporated by reference to December 31, 1994 Form 10-K.
(4) Incorporated by reference to Form S-8 Registration Statement, File No.
33-53536.
(5) Incorporated by reference to Original Form SB-2, File No. 33-97776.
(6) Incorporated by reference to Amendment No. 1 to Form SB-2, File No.
33-97776.
(7) Incorporated by reference to Form SB-2 Registration Statement, File No.
33-97776, Exhibit 1(C).
(8) Incorporated by reference to December 31, 1995 Form 10-K.
(9) Incorporated by reference to Form 8-K, dated July 19, 1996.
(10) Incorporated by reference to Form S-8 Registration Statement, File No.
333-23777.
(11) Filed herewith.
(b) Reports on Form 8-K
-------------------
The following report on Form 8-K was filed during the three months ended
December 31, 1996: November 14, 1996 - Amendment No. 1 to the Form 8-K filed on
August 2, 1996, Acquisition or Disposition of Assets - U.S. Technologies,
Inc. Merger.
21
<PAGE>
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PACIFIC ANIMATED IMAGING CORPORATION
BY: /s/ Suzanne C. Brown Dated: March 31, 1997
----------------------
Suzanne C. Brown, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ John J. Cadigan Chairman of the Board, March 31, 1997
- ------------------- President, Chief Executive
John J. Cadigan Officer, Secretary and
Treasurer
/s/ Dr. A. David Rossin Director March 31, 1997
- -----------------------
Dr. A. David Rossin
/s/ Frederick Pettit Director March 31, 1997
- -----------------------
Frederick Pettit
EXHIBIT 10(U)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 15th day of
July, 1996, between U.S. TECHNOLOGIES, INC., a Florida Corporation with its
principal executive offices at 8160 Woodland Center Blvd., Tampa, Florida 33614,
(the "Company"), and PETER S. STEELE ("Employee").
INTRODUCTION
The Company desires to continue to employ Employee, and Employee
desires to continue his employment with the Company. In consideration of the
mutual covenants and promises contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged by
the parties hereto, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. Term of Employment. The Company hereby continues to employ Employee
and Employee hereby accept the continuation of his employment with the Company
upon the terms set forth in this Agreement for a period of three (3) years
commencing on the date of this Agreement (the "Commencement Date"), unless
sooner terminated in accordance with the provisions of Section 4. This Agreement
shall automatically renew for one (1) year periods following the termination
date unless either party shall give at least thirty (30) days written notice to
the other party of showing an intention to terminate the Agreement at the end of
the then current term or if this Agreement is terminated by the mutual consent
of the parties.
2. Title Capacity. Employee shall serve as the President of the Company
and shall have such authority as is delegated to Employee by the Board of
Directors of the Company.
Employee hereby accepts the employment and agrees to undertake the
duties and responsibilities inherent in Employee's position and such other
duties and responsibilities as the Board of Directors of the Company shall from
time to time reasonably assign to Employee. Employee agrees to devote Employee's
entire business time to the business and interest of the Company, and those
companies affiliated with the Company during the Employment Period and Employee
agrees to abide by the ordinary, customary and reasonable rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company. Because Company
is a one hundred percent (100%) owned subsidiary of Pacific Animated Imaging
Corporation ("PAI") Employee agrees to render such services and provide such
assistance to PAI as requested by the Chief Executive Officer of PAI from time
to time.
3. Compensation and Benefits.
3.1 Salary. The Company shall pay Employee such annual salary
as is set forth in the Compensation Schedule attached hereto and made a part
hereof as Exhibit "A". By mutual agreement of the parties, Exhibit "A" may be
revised from time to time.
3.2 Fringe Benefits. Employee shall be entitled to participate
in all fringe benefit programs that the Company establishes and makes available
to its officer-employees generally, if any. The Employee shall be entitled to
vacation, sick leave and personal leave each year of employment in accordance
with Company policy as revised from time to time, to be taken at such times as
may be mutually agreeable to Employee and the Board of Directors of the Company.
3.3 Reimbursement of Expenses. The Company shall reimburse
Employee for all reasonable travel, entertainment and other expenses incurred or
paid by Employee in connection with, or related to, the performance of
Employee's duties, responsibilities or services under this Agreement, upon
presentation by the Employee of documentation, expense statements, vouchers
and/or such other supporting information as the Company may request.
3.4 Automobile Allowance. During the term of this Agreement
and any renewal thereof, Employee shall be provided with a lease automobile.
4. Employment Termination. The employment of Employee by the Company
pursuant to this Agreement shall terminate upon the occurrence of any of the
following:
4.1 Expiration of the Employment Period in accordance with
Section 1;
4.2 At the election of the Company, for "Cause", immediately
upon written notice from PAI to the Employee. For the purposes of this Section
4.2, "Cause" for termination shall be deemed to include only (a) the direct or
indirect competition by Employee with Company and/or PAI (as hereinafter defined
in Section 6.); (b) the conviction of an Employee of a felony or an act
involving moral turpitude; (c) the drug or alcohol abuse by Employee, which
impairs the performance of Employee's duties, but only if Employee fails to seek
appropriate counseling or fails to complete a prescribed counseling program; or
(d) the failure of Employee to comply with any material term of this Agreement
after written notice of such noncompliance or nonperformance is received by
<PAGE>
Employee and the Employee fails to comply or perform within ten (10) days of the
receipt of such written notice counting as the first day of the ten (10) day
period the first business day after receipt of such notice. Cause shall not be
construed as a failure of Employee to perform services for Company substantially
different from the services performed by Employee during the initial term of
this Agreement.
4.3 Upon the Disability of the Employee. As used in this
Agreement, the term "Disability" shall mean the inability of the Employee, due
to a physical or mental disability, for a period of thirty (30) days, whether or
not consecutive, during any sixty (60) day period to perform the normal and
customary services required of Employee pursuant to this Agreement. A
determination of disability shall be made by a physician satisfactory to both
Employee and the Company, provided that, if Employee and the Company do not
agree on a physician, Employee and the Company shall each select a physician and
such two physicians together shall select a third physician, whose determination
as to disability shall be binding on the parties.
4.4 Death of Employee.
4.5 By Employee for "Good Reason". "Good Reason" shall mean
the following, unless such circumstances are fully corrected within ten (10)
days after the Employee notifies the Company in writing that he intends to
terminate his employment for Good Reason:
(a) the assignment, without the Employee's prior
written consent to another person, of Employee's primary duties that the
Employee was responsible for during the initial term of this Agreement, or
a significant adverse alteration in the nature or status of the Employee's
employment from those in effect during the initial term of this Agreement;
(b) any reduction by the Company in Employee's
aggregate compensation (other than as agreed to by Employee) in effect on the
date hereof or as the same may be increased after such date.
5. Effect of Termination.
5.1 Termination due to Expiration of Employment Period. If
Employee' s employment is terminated due to the expiration of the Employment
Period pursuant to Section 4.1, the Company shall pay Employee the Compensation
per Exhibit "A" (including accrued bonuses, if any) and benefits due to Employee
under Section 3.2, 3.3 and 3.4 through the last day of Employee' s actual
employment hereunder.
5.2 Termination for Cause. In the event that Employee's
employment is terminated for "Cause" pursuant to Section 4.2, the Company shall
pay Employee the Compensation per Exhibit "A" (not including accrued bonuses, if
any) and benefits due to Employee under Section 3.2, 3.3 and 3.4 through the
last day of Employee's actual employment hereunder.
5.3 Termination by Company Not for Cause. In the event that
Employee's employment is terminated by the Company Not for "Cause", the Company
shall pay Employee compensation at the rate of two hundred thousand dollars
($200,000) per year for the duration of the non-competition section as defined
in section 6.1 herein, which at the option of the Company may be shortened.
5.4 Termination for Death or Disability. If Employee's
employment is terminated by reason of death or disability pursuant to Section
4.3. or Section 4.4., the Company shall pay the estate of Employee or Employee,
as the case may be, the Compensation per Exhibit "A" (including accrued bonuses,
if any,) and benefits under Sections 3.2, 3.3 and 3.4 which would otherwise be
payable to Employee up to the end of the month in which the termination of this
Agreement for such death or disability occurs.
5.5 Termination for Good Reason. In the event the Employee's
employment is terminated by him for "Good Reason" pursuant to Section 4.5, the
Company shall pay the Employee compensation at the rate of two hundred thousand
dollars ($200,000) per year for the duration of the non-competition section as
defined in section 6.1 herein, which at the option of the Company may be
shortened.
5.6 Termination by Employee not for Good Reason. In the event
Employee's employment is terminated by him not for "Good Reason", the Company
shall pay Employee the Compensation per Exhibit "A" (not including accrued
bonus, if any) and benefits due Employee under Section 3.2, 3.3 and 3.4 through
the last day of Employee's actual employment hereunder.
6. Non-Competition.
6.1 Employee agrees that, during the Employment Period and for
a period of time equal to the duration of Employee's employment with the
Company, but in no instance to exceed two (2) years after the termination of the
employment period for any reason:
(a) Employee will not recruit or solicit any employee
of the Company, or its other subsidiaries and affiliated companies or other-
wise induce any employee to leave the employment of PAI, the Company,
Company's or PAI's subsidiaries and affiliated companies to become an
employee of or otherwise
<PAGE>
become associated with Employee or any firm, corporation, business or
institution with which Employee is or may become associated;
(b) Employee will not solicit or divert the business
or patronage of any of the customers or accounts of PAI, the Company,
Company's subsidiaries and affiliated companies or prospective customers or
accounts of the aforementioned, which were contracted, solicited or served by
the Company while Employee was employed by the Company to a business directly
or indirectly in competition with PAI, the Company, Company's or PAI's
subsidiaries and affiliated companies;
(c) Employee will not engage or participate in any
line of business related to or involving in any way computer software, as an
employer, employee, principal, partner, officer, stockholder, agent,
independent contractor or otherwise, directly or indirectly, alone, or in
concert with another individual or entity; and
(d) Employee will not compete with Company or PAI,
directly or this subsection (d), "compete", or any variation thereof, means
the Employee's engagement or participation in, or furnishing of aid or
assistance in connection with, the distribution, sale, marketing or
rendering of products or services of the type or kind distributed, sold,
marketed or rendered by PAI, the Company, the Company's or PAI's subsidiaries
or affiliated companies during employment or after termination of employment,
including those products or services that the Company, the Company's
subsidiaries or affiliated companies, as the case may be, was in the process of
developing or designing for distribution, sale, marketing or rendering at such
time.
6.2 The parties to this Agreement consider the restrictions
contained herein reasonable. If, however, such restrictions are found by any
court having jurisdiction to be unreasonable because they are (or one of them
is, as the case may be) overly broad, then such restriction(s) will nevertheless
remain effective, but shall be considered amended in whatever manner is
considered reasonable by that court, and as so amended shall be enforced.
6.3 If there is any breach by the Employee of any of the
covenants contained in this Section 6., the damage to PAI, the Company, the
Company's or PAI's subsidiaries or affiliated companies will be substantial,
although difficult to ascertain, and money damages alone will not afford the
injured party an adequate remedy. Therefore, if any breach occurs, in addition
to such other remedies as may be provided by law, PAI, the Company, the
Company's or PAI's subsidiaries or affiliated companies, as the case may be, has
the right to specific performance of the covenants of the Employee contained in
this Agreement by way of temporary or permanent injunctive relief.
7. Non-Disclosure. Employee agrees not to disclose to any third party,
or to use for Employee's own benefit or for the benefit of any third party, any
trade secrets or confidential or other proprietary information relating to the
products, services, markets, customers, suppliers or current or planned business
operations of PAI, the Company, the Company's and PAI's subsidiaries and
affiliated companies without the Company's prior written consent. Employee
further agrees that all documents, notes, letters, records, models, prototypes,
computer programs and other tangible and intangible evidence of such trade
secrets or confidential or other proprietary information are the sole and
exclusive property of PAI, the Company, the Company's or PAI's subsidiaries and
affiliated companies; that Employee shall surrender all such evidence in
Employee's possession or control to the Company upon the termination of the
Employment Period or at any other time upon request and that Employee shall not
retain or use any copies or summaries thereof.
8. Inventions, Improvements, Copyrights, Ideas and Similar Creative
Property. Employee agrees that any inventions, improvements or ideas which
Employee may make or conceive, and any copyrightable subject matter of which
Employee may be the author, either solely or jointly with others, which Employee
makes, conceives, or authors during the period of Employee's employment with the
Company, shall be the property of PAI, the Company, the Company's or PAI's
subsidiaries or affiliated companies, as the case may be, and that Employee will
promptly disclose all such inventions, improvements, ideas and material to PAI,
the Company, the Company's or PAI's subsidiary or affiliated companies, as the
case may be, and that on request, Employee will execute all applications,
assignments, and other papers necessary to enable PAI, the Company, the
Company's or PAI's subsidiary or affiliates to obtain full protection and title
in all countries to such inventions, improvements, ideas and matter.
9. Arbitration. Except as provided in Section 6.3, any dispute,
including a'claimed breach of the terms hereof, arising out of or in connection
with this Agreement shall be resolved by arbitration conducted by the American
Arbitration Association in Tampa, Florida in accordance with its Rules then in
existence. The arbitrators shall not contravene or vary in any respect any of
the terms or provisions of this Agreement. The award of the arbitrators shall be
final and binding upon the parties hereto, their heirs, administrators,
executors, successors and assigns and judgment upon such award may be entered in
any court having jurisdiction thereof.
10. Notices. All notices required or permitted under this Agreement
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, postage prepaid, by registered mail
<PAGE>
return receipt requested, or when delivered by a nationally recognized overnight
delivery service issuing a receipt, addressed to the other party at the address
shown above or at such other address or addresses as either party shall provide
to the other.
11. Pronouns. Whenever the context may require, any pronouns used in
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular forms of nouns and pronouns shall include the plural,
and vice versa.
12. Construction of Agreement. The parties to this Agreement and their
respective counsel have reviewed this Agreement and have had the opportunity to
revise this Agreement, and the normal rule of construction to the effect that
any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement.
13. Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings,
whether written or oral, relating to the subject matter of this Agreement.
14. Amendment. This Agreement may be amended or modified only by a
written instrument executed by both the Company and the Employee.
15. Governing Law. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the State of Florida.
16. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of both parties and their respective successors and
assigns, including any corporation with which or into which the Company may be
merged or which may succeed to its assets or business, provided however, that
the obligations of the Employee are personal and shall not be assigned by
Employee.
17. Miscellaneous.
17.1 No delay or omission by the Company in exercising any
right under this Agreement shall operate as a waiver of that or any other right.
A waiver or consent given by the Company on any one occasion shall be effective
only in that instance and shall not be construed as a bar or waiver of any right
on any other occasion.
17.2 The captions of the Sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any Section of this Agreement.
17.3 In the case any provision of this Agreement shall be
invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above. U.S. TECHNOLOGIES, INC.
By:
John J. Cadigan, For the Board of Directors
Peter S. Steele, Employee
EXHIBIT "A"
COMPENSATION SCHEDULE
Pursuant to the attached Employment Agreement, the compensation payable to
Employee shall be as follows: One hundred thousand dollars and 00/100 ($100,000)
on an annual basis.
IN WITNESS WHEREOF, the parties hereto have executed this Compensation Schedule
the date and year written above.
U.S. TECHNOLOGIES, INC.
By:
John J. Cadigan For the Board of Directors
Peter S. Steele, Employee
EXHIBIT 10(V)
LOAN RENEWAL AND MODIFICATION AGREEMENT
THIS LOAN RENEWAL AND MODIFICATION AGREEMENT is entered into on July
18, 1996, but shall be effective as of June 5, 1996, by and among BARNETT BANK,
N.A., a national banking association, successor by merger to Barnett Bank of
Tampa ("Barnett"), U.S. TECHNOLOGIES, lNC. ("UST"), PETER S. STEELE, SHERRY S.
STEELE (collectively "the Steeles"), and PACIFIC ANIMATED IMAGING CORPORATION, a
Delaware corporation ("PAI").
R E C I T A L S:
WHEREAS, on or about June 5, 1995, UST executed and delivered to
Barnett a Promissory Note in the principal amount of $100,000.00 (hereinafter
referred to as "Note l"). Under the terms of Note 1, UST is required to make
payments on a monthly basis for 36 months such that the final payment will be
due and payable on June 5, 1998 pursuant to the terms of Note 1. Note 1 is
secured by:
(a) All inventory, chattel paper, accounts, contract rights, equipment
and general intangibles of UST, together with such other property as identified
in the Commercial Security Agreement attached to this Agreement as Exhibit A;
and
(b) An assignment of Life Insurance Policy 7500016351 of Alexander
Hamilton Life Insurance Company on the life of Peter S. Steele;
WHEREAS, on or about June 5, 1995, UST executed and delivered to
Barnett a Promissory Note in the principal amount of $350,000.00 (hereinafter
referred to as "Note 2"). Note 2 is secured by:
(a) All inventory, chattel paper, accounts, contract rights, equipment
and general intangibles of UST, together with such other property as identified
in the Commercial Security Agreement attached to this Agreement as Exhibit B;
and
(b) An assignment of Life Insurance Policy 7500016351 of Alexander
Hamilton Life Insurance Company on the life of Peter S. Steele;
WHEREAS, Note 2 is currently in default because of UST's failure to
make payment on all amounts due under Note 2 on June 5, 1996, the maturity date
under Note 2; and
WHEREAS, Peter S. Steele and Sherry S. Steele have unconditionally
guaranteed all monies due under Note 1 and Note 2; and
WHEREAS, PAI has entered into an agreement to acquire all of the
outstanding shares of UST and has requested that Barnett consent to that
transaction; and
WHEREAS, UST and PAI have requested that (i) Barnett renew and extend
the term of Note 2 as more fully set forth hereinafter, (ii) Barnett not
exercise any rights Barnett may have at this point in time with respect to the
cross-default and cross-collateralization provisions of Note 1 and the
additional loan documents executed in relation thereto, and (ii) Barnett consent
to the Acquisition (as hereinafter defined); and
WHEREAS, to induce Barnett to (i) agree to renew and modify Note 2,
(ii) not proceed under the cross-default and cross-collateralization provisions
of the Note 1 loan documents and (iii) consent to the Acquisition, PAI has
agreed to guarantee a portion of the debt due under Note 2 as more fully
identified hereinafter and to otherwise comply with the terms and conditions of
this Agreement;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Recitals. The above recitals are true and correct and are
incorporated herein by reference.
2. Representations bv UST, the Steeles and PAI. UST, the Steeles and
PAI warrant and represent to Barnett as follows:
A. The loan documents relating to Note 1 are in full force and
effect as of the date hereof, and are enforceable in accordance with their
respective terms;
B. The loan documents relating to Note 2 are in full force and
effect as of the date hereof, and are enforceable in accordance with their
respective terms, as modified: and
C. As a result of the implementation of the agreement and plan
of merger transaction by and between PAI, UST and the Steeles (hereinafter "the
Acquisition"), PAI will obtain ownership of all of the outstanding stock of UST.
PAI, UST and the Steeles further represent that UST will continue to exist after
the Acquisition in the same form as it existed prior to the Acquisition. UST,
PAI and the Steeles further represent that after the Acquisition UST will
continue to maintain ownership and possession of the assets and properties which
<PAGE>
have been pledged to Barnett as collateral for Note 1 and Note 2. Consistent
with the terms of the loan documents relating to Note 1 and Note 2, neither PAI,
the Steeles nor UST shall take any action to transfer such assets or properties
without the prior written consent of Barnett, provided, however, it is
understood that UST will be allowed to continue to sell products in the ordinary
course of business, and Barnett's security interests shall continue to attach
to, among other things, UST's equipment, accounts receivables, inventory, and
the proceeds thereof.
D. The security interests of Barnett, as evidenced by the
Commercial Security Agreements attached hereto as Exhibits A and B, and as
evidenced by the other loan documents executed pursuant to transactions
involving Note 1 and Note 2, shall remain in full force and effect, and PAI, UST
and the Steeles shall do nothing to diminish those security interests.
3. Reaffirmation of Note 1. UST will continue to make the payments as
required under the terms of the loan documents relating to Note 1. UST
acknowledges that as of the date of this Agreement the outstanding principal
balance of Note l is $67,085.57.
4. Renewal and Modification of Note 2. The parties agree that the Note
2 loan shall be modified as follows:
A. UST will execute a Renewal Promissory Note in the principal
amount of $350,000.00 (the "Renewal Note"). The Renewal Note shall be payable as
follows:
1) Principal shall be paid in twelve (12) equal
monthly installments of $5,833.33 each, commencing on August 18, 1996, together
with accrued interest thereon and continuing on the same day of each successive
month thereafter, and the entire unpaid principal indebtedness evidenced by
the Renewal Note, together with accrued and unpaid interest, shall be due and
payable on August 18, 1997.
2) Interest will accrue under the Renewal Note
at the prime rate of Barnett Banks, Inc. as established from time to time, plus
two percent (2%).
3) Barnett shall continue to hold a security
interest in the collateral identified in the existing Commercial Security
Agreement securing Note 2 and on the referenced life insurance policy on
Peter S. Steele.
4) The Steeles, as guarantors, will execute
consents to the renewal and modification of the Note 2 loan transaction and
their guarantees shall remain in full force and effect.
5) PAI agrees to unconditionally guarantee the
monthly payments due under the Renewal Note, for the 12-month period ending
July 18, 1997, and agrees to execute an unconditional guarantee of this
amount in a form acceptable to Barnett.
6) UST will have no right to make draws under
the Renewal Note, and the loan evidenced by the Renewal Note will no longer
constitute a line of credit for UST.
7) Except as specifically modified herein, the remaining loan documents relating
to Note 2 shall remain in full force and effect.
B. UST, the Steeles and PAI agree to waive any right to a jury
trial with respect to any dispute which may arise out of this modification or
any of the loan documents executed pursuant thereto and agree to execute a
specific waiver of jury trial to that effect.
C. UST, the Steeles and PAI agree to execute such other
documents as are necessary to effectuate this transaction and perfect, protect
and confirm Barnett's security interests.
5. Financial Reporting.
A. Reports by UST. UST would provide to Barnett the following
financial reports:
1. No later than ninety (90) days after the end
of each fiscal year, UST shall provide Barnett with UST's balance sheet and
income statement, statement of cash flow and notes to statements for year ended,
audited by a certified public accountant satisfactory to Barnett.
2. No later than forty-five (45) days after the
end of each month, UST shall provide Barnett with the balance sheet and profit
and loss statement for the period ended; prepared and certified as correct to
the best knowledge and belief by UST's chief financial officer or other officer
or person acceptable to the lender.
3. No later than forty-five (45) days after the
end of each month, UST shall provide Barnett with reports as to accounts
receivables from: a detailed aging of accounts by totals, a summary aging of
accounts by account debtor and a reconciliation statement.
B. Financial Reports by Steeles. On an annual basis, the
Steeles shall provide Barnett with dated personal financial statements on
Barnett's forms and, immediately after filing, the personal income tax returns
filed for the past calendar year.
<PAGE>
C. Compliance with GAAP. All financial reports required to be
provided under this Agreement shall be prepared in accordance with GAAP and
certified by UST or the Steeles, as the case may be, as being true and correct.
6. Subordination to Barnett. The Subordination Agreements executed by
UST and the Steeles on or about June 5, 1995 with respect to Note 1 and Note 2
shall remain in full force and effect and shall apply to the Renewal Note. PAI
also agrees that it will not accept repayment, directly or indirectly, of any
debt from UST or the Steels to PAI so long as the debts from UST to Barnett
under Note 1 or the Renewal Note remain outstanding. PAI shall execute and
deliver to Barnett a Subordination Agreement in the same form as the
Subordination Agreements previously executed by the Steeles. UST and PAI agree
that no dividends will be paid to UST's stockholders until Barnett is paid in
full all amounts owed under Note 1 and the Renewal Note.
7. Prohibition of Further Security Interests. UST will not grant any
security interests in its equipment, inventory, accounts or other properties
subject to Barnett's security interests to any party other than Barnett so long
as the debts to Barnett under Note 1 or the Renewal Note remain outstanding.
8. Release and Acknowledgment of No Defenses bv UST, the Steeles and
PAI. UST, the Steeles and PAI acknowledge that UST and the Steeles have no
defenses to the enforcement of the loan documents relating to Note 1, Note 2 and
the Renewal Note and the guarantees thereof by the Steeles. PAI acknowledges
that it has no defenses to the enforcement of the guarantee of payments under
the Renewal Note as more fully set forth above. PAI, UST and the Steeles
acknowledge that they have no claims against Barnett relating in any way to the
transactions relating to Note 1, Note 2 or the Renewal Note, and to the extent
that they should determine that all or any of them have any such claims, USTs
the Steeles and PAI hereby release and forever discharge Barnett, its officers,
directors, affiliated companies and agents, of and from any and all claims any
of them may IIOW have or hereafter have through the date of this Agreement
arising out of any aspect of the transactions relating to Note 1, Note 2 and/or
the Renewal Note.
9. Agreement to Lift Stay in Bankruptcy. UST and the Steeles agree that
in return for Barnett's agreement to extend and modify the loans set forth in
this Agreement, UST and the Steeles agree that, in the event that any of them
shall become the subject of any voluntary or involuntary bankruptcy proceedings,
UST, and/or the Steeles will promptly join in entering into such stipulation as
Barnett may request for purposes of the bankruptcy court's entry of any
appropriate order lifting the automatic stay in bankruptcy to allow Barnett to
enforce its security interest, and will otherwise cooperate fully with Barnett
in its attempt to lift any such stay.
10. Transactional Costs. UST shall pay all closing costs for this
transaction including Barnett's attorneys' fees. In addition, UST shall pay a
loan origination fee of $1,750.00 and a loan processing fee of $350.00 and will
be required to bring all outstanding interest on Note 1 and Note 2 current as of
closing of this transaction.
11. Documentary stamps. UST, the Steeles and PAI, their heirs
successors and assigns, agree to defend and hold Barnett harmless against or for
documentary stamps and intangible taxes, if any, imposed upon Barnett by virtue
of its execution and acceptance of this document and any documents executed
pursuant hereto, including its ownership of the Renewal Note, as from time to
time modified or renewed, including any penalties, interest and attorneys' fees
incurred by Barnett in connection therewith, and all such charges shall be
secured by the lien of Barnett's security agreement, as amended, and bear
interest at the default rate provided for in the Renewal Note from the date of
any advance by Barnett until paid by UST, PAI or the Steeles. The provisions of
this paragraph shall survive the repayment of the Renewal Note and the
indebtedness evidenced thereby and satisfaction of Barnett's security interest,
and shall continue for so long as a claim may be asserted by the State of
Florida or any of its agencies.
12. Consent to the Acquisition. Upon (i) the execution of this
Agreement and the documents referenced in paragraphs 4 and 6 above by UST, the
Steeles, and PAI, (ii) the delivery of the originals of such documents to
Barnett, and (iii) the payment to Barnett by or on behalf of UST of the costs
described in paragraph 10 above, Barnett shall automatically and without any
further action on its part be deemed to have consented to the Acquisition.
13. No Novation. It is the intent of the parties hereto that this
Agreement and the loan documents executed pursuant thereto shall not constitute
a novation and shall in no way adversely affect and impair the lien priority of
Barnett's security agreements. Except as expressly modified hereby, the loan
documents shall remain unchanged and in full force and effect, and the priority
of Barnett's security interest shall not be in any manner changed, altered or
affected hereby.
14 Binding Effect. The terms of this Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns.
<PAGE>
15. Conflict. 1ll the event of any conflict between the terms of the
loan documents and this Agreement, the terms of this Agreement shall control.
16. Counterparts. This Agreement may be executed in counterparts, each
of which shall constitute an original and all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the undersigned have caused this instrument to be
executed as of the day and year first above written.
Witnesses:
By:
BARNETT BANK, N.A., a national banking association, successor by merger to
Barnett Bank of Tampa BARNETT BANKS, INC., a Florida corporation, as
attorney-in-fact for Barnett Bank of Tampa, pursuant to a Power of Attorney
dated as of March 1, 1992
[ ]
Print Name:
STATE OF FLORIDA
COUNTY OF
THE FOREGOING instrument was acknowledged before me this day of
, 1996, by as
of Barnett Banks, Inc., a Florida corporation, as attorney-in-fact for Barnett
Bank, N.A. He/She is personally known to me or has produced as identification.
Print, Type or
Stamp Name:
Notary Public, State of Florida
Serial No., if any:
Witnesses:
Print
Name
Print Name:
U.S. TECHNOLOGIES, INC.
By: Name:
Title:
STATE OF FLORIDA
COUNTY OF
THE FOREGOING instrument was acknowledged before me this day of
, 1996, by as
of U.S. Technologies, Inc. He/She is personally known to me or has produced
as identification.
Print, Type or
Stamp Name:
Notary Public, State of Florida
Serial No., if any:
Witnesses:
Print PETER S. STEELE
Name:_
Print Name:
STATE OF
COUNTY OF
THE FOREGOING instrument was acknowledged before me this day
of , 1996, by Peter S. Steele. He is personally acknowledged to me or has
produced as identification.
Print, Type or
Stamp Name:
Notary Public, State of Florida
Serial Number if any
<PAGE>
Witnesses:
Print SHERRY S. STEELE
Name:
Print
Name:
STATE OF
COUNTY OF
THE FOREGOING instrument was acknowledged before me this day of ,
1996, by Sherry S. Steele. She is personally known to me or has produced as
identification.
Print, Type or
Stamp Name:
Notary Public, State of Florida
Serial No., if any:
witnesses:
Name: Suzanne C. Brown
Name Linda A. Peppers
STATE OF Maryland
COUNTY OF Anne Arundel
PACIFIC ANIMATED IMAGING
CORPORATION, a Delaware corporation
THE FOREGOING instrument was acknowledged before me this 18th day of July,
1996, by John J. Cadigan as President & CEO of Pacific Animated Imaging
Corporation. He/She is personally known to me or has produced
drivers license as identification.
Carolyn Moore
Print, Type or
Stamp Name:
Notary Public, State of Maryland
Serial No., if any:
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Pacific Animated Imaging Corporation on Form S-8 (File Nos. 333-23777,
333-10399, 33-53536, 33-94078, 33-94150, 33-94148, and 33-94062) and Form S-3
(File No. 333-20997) of our report dated March 28, 1997 on our audits of the
consolidated financial statements of Pacific Animated Imaging Corporation as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 which report is included in this Annual Report on Form 10-KSB.
COOPERS & LYBRAND, L.L.P.
McLean, Virginia
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 939,281
<SECURITIES> 474,144
<RECEIVABLES> 471,235
<ALLOWANCES> 40,201
<INVENTORY> 18,838
<CURRENT-ASSETS> 150,819
<PP&E> 990,105
<DEPRECIATION> 490,193
<TOTAL-ASSETS> 2,569,709
<CURRENT-LIABILITIES> 1,329,713
<BONDS> 0
0
0
<COMMON> 152
<OTHER-SE> 1,072,466
<TOTAL-LIABILITY-AND-EQUITY> 2,569,709
<SALES> 372,256
<TOTAL-REVENUES> 1,588,094
<CGS> 223,498
<TOTAL-COSTS> 5,419,016
<OTHER-EXPENSES> (7,301)
<LOSS-PROVISION> 28,981
<INTEREST-EXPENSE> 22,701
<INCOME-PRETAX> (3,823,621)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,823,621)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,823,621)
<EPS-PRIMARY> (2.58)
<EPS-DILUTED> 0
</TABLE>
Exhibit 99 (J)
PACIFIC ANIMATED IMAGING CORPORATION
NONQUALIFIED STOCK OPTION PLAN NO. 5
Effective
1. Definitions ...............................................................1
2. Purpose ...................................................................1
3. Administration.............................................................1
4. Shares Subject to Plan.....................................................1
5. Eligibility................................................................2
6. Allotment of Shares. ......................................................2
7. Option Price...............................................................2
8. Option Period. ............... ............................................2
9. Termination of Option......................................................2
10. Rights in Event of Death. .................................................2
11. Payment and Notice of Exercise.............................................2
12. Exercise of Option.........................................................3
13. Changes in Capital Structures, etc.........................................3
14. Nontransferability.........................................................4
15. Other Provisions. .........................................................4
16. Re-Issuance of Shares. ....................................................4
17. Interpretation.............................................................4
18. Term of Plan, Amendment, Discontinuance....................................5
19. Effect of the Plan, Etc....................................................5
PACIFIC ANIMATED IMAGING CORPORATION
NONQUALIFIED STOCK OPTION PLAN NO. 5
1. Definitions. As used herein, the following terms shall have the
following meanings:
(a) "Board" shall mean the Board of Directors of Pacific Animated
Imaging Corporation.
(b) "Committee" shall mean the Committee appointed by the Board
pursuant to Section 3. of this Plan to administer this Plan, if appointed.
(c) "Company" shall mean Pacific Animated Imaging Corporation.
(d) "Effective Date" shall mean the date this Plan is approved by the
Board of Directors of Pacific Animated Imaging Corporation, as provided in
Section 18. hereof.
(e) "Option Period" shall mean the period during which an option
granted under this Plan shall be exercisable, as set forth in Section 8. hereof.
(f) "Subsidiary", for purposes of this Plan, shall mean any corporation
(or similar organization) of which the Company owns, directly or indirectly,
more than 50% of the total voting power of all classes of stock entitled to vote
therein.
2. Purpose. The purpose of this Plan is to increase the interest in the
welfare of the Company of those directors, officers and employees of the Company
who have made valuable contributions to the business of the Company, to furnish
such directors, officers and employees with an incentive to continue their
services to and for the Company, by enabling such directors, officers and
employees to acquire an interest in the Company through a grant to them of
options to purchase shares of the Company's Common Stock.
3. Administration. This Plan shall be administered by the Board or a
Committee (the "Committee"), if appointed by the Board, which shall consist of
not less than two (2) members of the Board. No member of the Board or Committee
shall participate in any action by the Board or Committee which allots or grants
options to him personally.
<PAGE>
4. Shares Subject to Plan. Options may be granted from time to time
under this Plan providing for the purchase of not more than one hundred thousand
(100,000) shares of the common stock, par value $.0001 per share, of the Company
("Common Stock"), as constituted on the Effective Date (subject to adjustment
pursuant to Section 13.), plus such number of such shares as may become
available for reissuance pursuant to Section 16. Shares of authorized and
unissued Common Stock reacquired by the Company and held in its Treasury, as
from time to time determined by the Board, may be issued upon exercise of
options granted under this Plan.
5. Eligibility. Except as otherwise provided herein, those directors,
officers and employees of the Company who have performed or who are about to
perform services for the Company and who are designated by the Board or the
Committee shall be eligible to be granted options under this Plan. Said
designated person shall hereinafter be referred to as "Participant".
6. Allotment of Shares. The grant of an option to an eligible person
under this Plan shall not be deemed either to entitle such person to, or to
disqualify such person from, participation in any other grant of options under
this Plan or under any other plan of the Company.
7. Option Price. The price at which shares of Common Stock may be
purchased upon the exercise of an option granted under this Plan shall be fixed
by the Board or the Committee, and may be greater than or less than the fair
market value of such shares at the time of grant.
8. Option Period. An option granted under this Plan may be exercised
during the period (the "Option Period") which begins upon the date the option is
granted (or at such other time as may be determined by the Board or Committee,
as set forth in the resolutions evidencing the grant of the option) and which
ends no later than ten (10) years after the date the option is granted or such
lesser time as may be determined by the Board or the Committee as set forth in
the resolutions evidencing the grant of the option.
9. Termination of Option. All rights to exercise an option granted
under this Plan shall terminate at the end of the Option Period, as described in
Section 8. above.
10. Rights in Event of Death. If a Participant dies without having
fully exercised an option granted under this Plan, the executors,
administrators, legatees or distributees of his estate shall have the right, for
a period of three (3) months after the date of his death to exercise the
unexercised and unexpired portion, if any, of such option, in whole or in part,
to the same extent that the Participant could have exercised such option at the
expiration of such three month period had the Participant lived.
11. Payment and Notice of Exercise. Full payment of the purchase price
for shares purchased upon the exercise, in whole or in part, of an option
granted under this Plan shall be made at the time of such exercise. The purchase
price must be paid for with cash. No such shares shall be issued or transferred
to a Participant until full payment therefor has been made and the Participant
has delivered his written Notice of Exercise of the respective options to the
Company at its principal office, and a Participant who is not already a
stockholder at the time of the issue shall have none of the rights of a
stockholder until shares are issued or transferred to him.
12. Exercise of Option. As directed by the Board or Committee, options
granted hereunder may be exercisable by a Participant pursuant to a vesting
formula which will set forth the dates and the number of options which are then
available to the Participant. Options granted under this Plan shall be
exercisable during the Option Period at such times, in such amounts, in
accordance with such terms and conditions, and subject to such restrictions as
may be determined by the Board or Committee, and as are set forth in the
resolutions and the Notice of Grant evidencing the grant of such options as well
as the Notice of Exercise evidencing a Participant's exercise of such options.
In no event shall an option be exercised or shares be issued pursuant to an
option if any applicable laws shall not have been conformed with or if any
requisite approval or consent of any governmental authority having jurisdiction
over the exercise of the options or the issue and sale of the Common Stock shall
not have been secured, unless in the opinion of counsel for the Company the
exercise or issuance is exempt from the obligation to obtain approval or
consent. Each Participant shall agree not to offer, sell, pledge, hypothecate or
otherwise transfer any shares of Common Stock purchased pursuant to the exercise
of an option granted under this Plan unless the shares have been registered
under applicable federal and state securities laws or unless the proposed
transaction is exempt from such registration in the opinion of Counsel for the
Company. Each Participant shall, at the time of purchase of shares of Common
Stock upon the exercise of an option, if requested by the Company upon advice of
its counsel that the same is necessary or desirable, deliver to the Company his
written representation that he is purchasing the shares for his own account for
investment and not with a view to public distribution or with any present
intention of reselling any of such shares, and deliver such other written
representations as may be reasonably requested by the Company to assure
compliance with applicable laws. If a Participant so requests, shares purchased
upon the exercise of an option may be issued in or transferred into the name of
the Participant and other person jointly with the right of survivorship.
<PAGE>
13. Changes in Capital Structures. etc. In the event of the payment of
any dividend payable in, or the making of any distribution of, Common Stock of
the Company to holders of record of Common Stock of the Company, which increases
the outstanding Common Stock of the Company by more than twenty-five (25%)
percent during the period any option granted under this Plan is outstanding or
in the event of any stock split, combination of shares, recapitalization or
other similar change in the authorized capital stock of the Company during such
period or in the event of the merger or consolidation of the Company into or
with any other corporation or the reorganization, dissolution, liquidation or
winding up of the Company during such period, Participants shall be entitled,
upon the exercise of any unexercised option held by them, to receive such new,
additional or other shares of stock of any class, or other property (including
cash), as they would have been entitled to receive as a matter of law in
connection with such payment, distribution, stock split, combination,
recapitalization, change, merger, consolidation, reorganization, dissolution or
liquidation, as the case may be, had they held the shares of the Common Stock
being purchased upon exercise of such option on the record date set for the such
payment or distribution or on the date of such stock split, combinations
recapitalization, change, merger, consolidation, reorganization, dissolution or
liquidation, and the option price under any such option shall be appropriately
adjusted. In case any such event shall occur during the term of this Plan, the
number of shares that my be optioned and sold under this Plan as provided in
Section 4. shall be appropriately adjusted. The decision of the Board or the
Committee, with respect to all such adjustments shall be conclusive.
14. Nontransferability. Options granted under this Plan shall not be
transferable other than by will or by the laws of descent and distribution, and
shall be exercisable only by the Participant or by Participant's heirs or
personal representatives as provided in Section 10. of this Plan.
15. Other Provisions. Options granted under this Plan shall contain
such other provisions, including, without limitation, restrictions upon the
exercise of the option, as the Board or Committee shall deem advisable by
written notice to Participant.
16. Re-Issuance of Shares. Any shares of Common Stock which, by reason
of the expiration of an option or otherwise, are no longer subject to purchase
pursuant to an option granted under this Plan shall be available for re-issuance
under this Plan.
17. Interpretation. The Board shall interpret this Plan and prescribe,
amend or rescind rules and regulations relating to it and make any and all other
determinations necessary or advisable for its administration.
18. Term of Plan, Amendment. Discontinuance. Upon approval by the Board
of Directors, the Plan shall be deemed effective and adopted as of such date.
This Plan, unless sooner terminated or discontinued by the Board pursuant to
this Section 18, shall expire on the sooner terminated or discontinued by the
Board pursuant to this Section 18., shall expire on the tenth anniversary of the
Effective Date (except to the extent necessary for administration of options
exercisable but unexercised on that date), and no options shall be granted under
this Plan after that date. The Board may terminate or discontinue this Plan at
any time and may suspend this Plan or amend or modify this Plan in any respect
at any time or from time to time, without the approval of the stockholders,
except that the number of shares of Common Stock that may be optioned and sold
under this Plan, as provided in Section 4., above, may not be changed (except
pursuant to Section 13., above) and the class of eligible persons to whom
options may be granted, as provided in Section 5., above, may not be modified
without the approval of the Board or the Committee. No action of the Board, the
Committee or stockholders may alter or impair the rights of a Participant under
any option theretofore granted to him without his consent to such action.
19. Effect of the Plan etc. Neither the adoption of this Plan, nor any
action of the Board or Committee, shall be deemed to give any person any right
to be granted an option to purchase Common Stock of the Company or any other
rights hereunder unless and until the Board or Committee shall have adopted a
resolution granting such person an option, and then only to the extent and on
such terms and conditions as may be set forth in such resolution; the terms and
conditions of options granted under this Plan may differ from one another as the
Board or Committee shall at its discretion determine, as long as all options
granted under the Plan satisfy the requirements in this Plan.
Date Adopted by Board:
Effective Date:
Exhibit 99 (K)
PACIFIC ANIMATED IMAGING CORPORATION
NONQUALIFIED STOCK OPTION PLAN NO. 6
Effective June 20, 1996
1. Definitions 1
2. Purpose 1
3. Administration 1
4. Shares Subject to Plan 2
5. Eligibility 2
6. Allotment of Shares 2
7. Option Price. 2
8. Option Period. 2
9. Termination of Option 2
10 Rights in Event of Death. 2
11 Payment and Notice of Exercise 2
12 Exercise of Option 3
13 Changes in Capital Structures, Etc 3
14 Nontransferability 4
15 Other Provisions 4
16 Re-Issuance of Shares 4
17 Interpretation 4
18. Term of Plan, Amendment, Discontinuance 4
19. Effect of the Plan, etc. 4
PACIFIC ANIMATED IMAGING CORPORATION
NONOUALIFIED STOCK OPTION PLAN NO. 6
1. Definitions. As used herein, the following terms shall have the
following meanings:
(a) "Board" shall mean the Board of Directors of Pacific
Animated Imaging Corporation.
(b) "Committee" shall mean the Committee appointed by the
Board pursuant to Section 3. of this Plan to administer this Plan, if appointed.
(c) "Company" shall mean Pacific Animated Imaging Corporation.
(d) "Effective Date" shall mean the date this Plan is approved
by the Board of Directors of Pacific Animated Imaging Corporation, as provided
in Section 18. hereof.
(e) "Option Period" shall mean the period during which an
option granted under this Plan shall be exercisable, as set forth in Section 8.
hereof.
(f) "Subsidiary", for purposes of this Plan, shall mean any
corporation (or similar organization) of which the Company owns, directly or
indirectly, more than 50% of the total voting power of all classes of stock
entitled to vote therein.
2. Purpose. The purpose of this Plan is to increase the interest in the
welfare of the Company of those directors, officers and employees of the Company
who have made valuable contributions to the business of the Company, to furnish
such directors, officers and employees with an incentive to continue their
services to and for the Company, by enabling such directors, officers and
employees to acquire an interest in the Company through a grant to them of
options to purchase shares of the Company's Common Stock.
<PAGE>
3. Administration. This Plan shall be administered by the Board or a
Committee (the "Committee"), if appointed by the Board, which shall consist of
not less than two (2) members of the Board. No member of the Board or Committee
shall participate in any action by the Board or Committee which allots or grants
options to him personally.
4. Shares Subject to Plan. Options may be granted from time to time
under this Plan providing for the purchase of not more than one hundred fifty
thousand (150,000) shares of the common stock, par value $.0001 per share, of
the Company ("Common Stock"), as constituted on the Effective Date (subject to
adjustment pursuant to Section 13.), plus such number of such shares as may
become available for reissuance pursuant to Section 16. Shares of authorized and
unissued Common Stock reacquired by the Company and held in its Treasury, as
from time to time determined by the Board, may be issued upon exercise of
options granted under this Plan.
5. Eligibility. Except as otherwise provided herein, those directors,
officers and employees of the Company who have performed or who are about to
perform services for the Company and who are designated by the Board or the
Committee shall be eligible to be granted options under this Plan. Said
designated person shall hereinafter be referred to as "Participant".
6. Allotment of Shares. The grant of an option to an eligible person
under this Plan shall not be deemed either to entitle such person to, or to
disqualify such person from, participation in any other grant of options under
this Plan or under any other plan of the Company.
7. Option Price. The price at which shares of Common Stock may be
purchased upon the exercise of an option granted under this Plan shall be fixed
by the Board or the Committee, and may be greater than or less than the fair
market value of such shares at the time of grant.
8. Option Period. An option granted under this Plan may be exercised
during the period (the "Option Period") which begins upon the date the option is
granted (or at such other time as may be determined by the Board or Committee,
as set forth in the resolutions evidencing the grant of the option) and which
ends no later than ten (10) years after the date the option is granted or such
lesser time as may be determined by the Board or the Committee as set forth in
the resolutions evidencing the grant of the option.
9. Termination of Option. All rights to exercise an option granted
under this Plan shall terminate at the end of the Option Period, as described in
Section 8. above.
10. Rights in Event of Death. If a Participant dies without having
fully exercised an option granted under this Plan, the executors,
administrators, legatees or distributees of his estate shall have the right, for
a period of one (1) year after the date of his death to exercise the unexercised
and unexpired portion, if any, of such option, in whole or in part, to the same
extent that the Participant could have exercised such option at the expiration
of such one (1) year period had the Participant lived.
11. Payment and Notice of Exercise. Full payment of the purchase price
for shares purchased upon the exercise, in whole or in part, of an option
granted under this Plan shall be made at the time of such exercise. The purchase
price must be paid for with cash. No such shares shall be issued or transferred
to a Participant until full payment therefor has been made and the Participant
has delivered his written Notice of Exercise of the respective options to the
Company at its principal office, and a Participant who is not already a
stockholder at the time of the issue shall have none of the rights of a
stockholder until shares are issued or transferred to him.
12. Exercise of Option. As directed by the Board or Committee, options
granted hereunder may be exercisable by a Participant pursuant to a vesting
formula which will set forth the dates and the number of options which are then
available to the Participant. Options granted under this Plan shall be
exercisable during the Option Period at such times, in such amounts, in
accordance with such terms and conditions, and subject to such restrictions as
may be determined by the Board or Committee, and as are set forth in the
resolutions and the Notice of Grant evidencing the grant of such options as well
as the Notice of Exercise evidencing a Participant's exercise of such options.
In no event shall an option be exercised or shares be issued pursuant to an
option if any applicable laws shall not have been conformed with or if any
requisite approval or consent of any governmental authority having jurisdiction
over the exercise of the options or the issue and sale of the Common Stock shall
not have been secured, unless in the opinion of counsel for the Company the
exercise or issuance is exempt from the obligation to obtain approval or
consent. Each Participant shall agree not to offer, sell, pledge, hypothecate or
otherwise transfer any shares of Common Stock purchased pursuant to the exercise
of an option granted under this Plan unless the shares have been registered
under applicable federal and state securities laws or unless the proposed
transaction is exempt from such registration in the opinion of Counsel for the
Company. Each Participant shall, at the time of purchase of shares of Common
Stock upon the exercise of an option, if requested by the Company upon advice of
its counsel that the same is necessary or desirable, deliver to the Company his
written representation that he is purchasing the shares for his own account for
investment and not with a view to public distribution or with any present
intention of
<PAGE>
reselling any of such shares, and deliver such other written representations as
may be reasonably requested by the Company to assure compliance with applicable
laws. If a Participant so requests, shares purchased upon the exercise of an
option may be issued in or transferred into the name of the Participant and
other person jointly with the right of survivorship.
13. Changes in Capital Structures. etc. In the event of the payment of
any dividend payable in, or the making of any distribution of, Common Stock of
the Company to holders of record of Common Stock of the Company, which increases
the outstanding Common Stock of the Company by more than twenty-five (25%)
percent during the period any option granted under this Plan is outstanding or
in the event of any stock split, combination of shares, recapitalization or
other similar change in the authorized capital stock of the Company during such
period or in the event of the merger or consolidation of the Company into or
with any other corporation or the reorganization, dissolution, liquidation or
winding up of the Company during such period, Participants shall be entitled,
upon the exercise of any unexercised option held by them, to receive such new,
additional or other shares of stock of any class, or other property (including
cash), as they would have been entitled to receive as a matter of law in
connection with such payment, distribution, stock split, combination,
recapitalization, change, merger, consolidation, reorganization, dissolution or
liquidation, as the case may be, had they held the shares of the Common Stock
being purchased upon exercise of such option on the record date set for the such
payment or distribution or on the date of such stock split, combination,
recapitalization, change, merger, consolidation, reorganization, dissolution or
liquidation, and the option price under any such option shall be appropriately
adjusted. In case any such event shall occur during the term of this Plan, the
number of shares that my be optioned and sold under this Plan as provided in
Section 4. shall be appropriately adjusted. The decision of the Board or the
Committee, with respect to all such adjustments shall be conclusive.
14. Nontransferability. Options granted under this Plan shall not be
transferable other than by will or by the laws of descent and distribution, and
shall be exercisable only by the Participant or by Participant's heirs or
personal representatives as provided in Section 10. Of this Plan.
15. Other Provisions. Options granted under this Plan shall contain
such other provisions, including, without limitation, restrictions upon the
exercise of the option, as the Board or Committee shall deem advisable by
written notice to Participant.
16. Re-Issuance of Shares. Any shares of Common Stock which, by reason
of the expiration of an option or otherwise, are no longer subject to purchase
pursuant to an option granted under this Plan shall be available for re-issuance
under this Plan.
17. Interpretation. The Board shall interpret this Plan and prescribe,
amend or rescind rules and regulations relating to it and make any and all other
determinations necessary or advisable for its administration.
18. Term of Plan. Amendment. Discontinuance. Upon approval by the Board
of Directors, the Plan shall be deemed effective and adopted as of such date.
This Plan, unless sooner terminated or discontinued by the Board pursuant to
this Section 18, shall expire on the tenth anniversary of the Effective Date
(except to the extent necessary for administration of options exercisable but
unexercised on that date), and no options shall be granted under this Plan after
that date. The Board may terminate or discontinue this Plan at any time and may
suspend this Plan or amend or modify this Plan in any respect at any time or
from time to time, without the approval of the stockholders, except that the
number of shares of Common Stock that may be optioned and sold under this Plan,
as provided in Section 4., above, may not be changed (except pursuant to Section
13., above) and the class of eligible persons to whom options may be granted, as
provided in Section 5., above, may not be modified without the approval of the
Board or the Committee. No action of the Board, the Committee or stockholders
may alter or impair the rights of a Participant under any option theretofore
granted to him without his consent to such action.
19. Effect of the Plan. etc. Neither the adoption of this Plan, nor any
action of the Board or Committee, shall be deemed to give any person any right
to be granted an option to purchase Common Stock of the Company or any other
rights hereunder unless and until the Board or Committee shall have adopted a
resolution granting such person an option, and then only to the extent and on
such terms and conditions as may be set forth in such resolution; the terms and
conditions of options granted under this Plan may differ from one another as the
Board or Committee shall at its discretion determine, as long as all options
granted under the Plan satisfy the requirements in this Plan.
Date Adopted by Board: June 20, 1996
Effective Date: June 20, 1996
