<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10 - QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly period Ended: SEPTEMBER 30, 1998.
-------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to .
--------- ---------
Commission File Number: 0-27390
ORCA TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Utah 87-0368236
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
24000 - 35th Avenue Southeast - Suite 200, Bothell, WA 98021
(Address of principal executive offices)
(425) 354-1600
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
As of November 10, 1998, 12,778,407 shares of the Company's Common Stock, par
value $.001 per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
1
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ORCA TECHNOLOGIES
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
INDEX PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Balance Sheets
September 30, 1998 and June 30, 1998 5
Condensed Consolidated Statement of Shareholders' Equity (Deficit)
Three Months Ended September 30, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
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<TABLE>
<CAPTION>
ORCA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For The Three Months Ended September 30
(Unaudited)
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 99,274 $ -
Costs and Expenses
Cost of Revenue 22,820 -
Research and development 397,683 -
Sales and marketing 354,545 -
Professional services 291,091 -
Customer services 158,611 -
General and administrative 822,947 86,848
----------- ----------
Total operating costs and expenses 2,047,697 86,848
----------- ----------
Operating loss (1,948,423) (86,848)
Interest Income 2,361 -
Interest Expense (65,197) (33,070)
----------- ----------
----------- ----------
Net Loss $(2,011,259) $ (119,918)
=========== ==========
Basic Loss per Share $ (0.16) $ (0.03)
Weighted average number of shares outstanding 12,236,615 3,712,135
=========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
3
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ORCA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the Three Months Ended september 30
(Unaudited)
<TABLE>
1998 1997
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,011,259) $(119,918)
Adjustments to reconcile net loss to cash used:
Depreciation and amortization 281,023 -
Change in operating assets and liabilities, net
of effects of business acquired and disposed:
Inventories (35,552) -
Accounts payable 199,502 12,898
Other current assets (39,956) (8,828)
Other current liabilities (290,873) 9,707
----------- ---------
Net Cash Used By Operating Activities (1,897,115) (106,141)
----------- ---------
INVESTING ACTIVITIES
Purchases of property & equipment (85,485) (2,697)
Changes in notes receivable - (210,000)
Proceeds from sale of subsidiary 300,000 -
Other investing activities 14,000 -
----------- ---------
Net Cash Provided (Used) By Investing Activities 228,515 (212,697)
----------- ---------
FINANCING ACTIVITIES
Payments on long-term debt (88,973) -
Borrowings on short-term debt 584,235 -
Borrowings from related parties on long-term debt - 325,000
Issuance of common stock and warrants 1,004,264 -
----------- ---------
Net Cash Provided By Financing Activities 1,499,526 325,000
----------- ---------
NET CASH PROVIDED (USED) (169,074) 6,162
Cash & cash equivalents, Beginning of Period 472,754 13,032
----------- ---------
CASH & CASH EQUIVALENTS, End of Period $ 303,680 $ 19,194
=========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
<PAGE>
ORCA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- -------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 303,680 $ 472,754
Receivables 12,200 217,227
Inventories 72,280 36,728
Prepaid expenses and other 45,349 83,146
---------- ----------
Total current assets 433,509 809,855
LONG-TERM RECEIVABLES 37,038 45,146
PROPERTY AND EQUIPMENT, net 852,117 2,366,185
OTHER ASSETS 3,573,756 4,453,704
$4,896,420 $7,674,890
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $1,889,793 $2,001,454
Accounts payable 670,663 1,222,329
Accrued liabilities 764,376 557,086
Accrued loss for discontinued operations 309,176 1,035,625
---------- ----------
Total current liabilities 3,634,008 4,816,494
LONG-TERM DEBT 1,416,454 1,289,890
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY (DEFICIT) (154,042) 1,568,506
$4,896,420 $7,674,890
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
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ORCA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Three Months Ended September 30
(Unaudited)
<TABLE>
<CAPTION>
Common Paid-in Accumulated
Stock Capital Deficit Total
----- ------- ------- -----
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1998 $12,834 $12,283,379 $(10,727,707) $1,568,506
Net Loss (2,011,259)
Sale of discontinued operations (778) (714,776) (715,554)
Sale of common stock 722 1,003,543 1,004,265
------- ----------- ------------ ----------
BALANCE, SEPTEMBER 30, 1998 $12,778 $13,286,922 $(13,453,742) $ (154,042)
======= =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
6
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10 - QSB and in
accordance with Item 310 of Regulation S-B. Accordingly, such unaudited
financial statements do not include all of the information and footnotes
normally included in audited financial statements presented in accordance with
generally accepted accounting principles. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's consolidated financial position, consolidated results of
operations, and consolidated statements of cash flow for the three month period
ended September 30, 1998 have been included. All significant intercompany
transactions have been eliminated in consolidation.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended June 30, 1998, which
have been provided in their entirety in the Company's Form 10-KSB for the fiscal
year ended June 30, 1998. The results of operations for the three-month period
ended September 30, 1998 is not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 1999.
In June of 1998 the Company formally decided to dispose of its Internet Service
Operations segment. Prior to that date, the Company was engaged in the Internet
service business. The accounts and activities of the Company's wholly-owned
subsidiaries, Televar, Inc. and Boss Internet, Inc. have been presented in the
accompanying financial statements as "discontinued operations."
NOTE 2 FORMATION OF COMPANY
On August 30, 1996, the Company effected a merger between a wholly owned
subsidiary formed for the purpose of the merger, and Televar, Inc. (the
"Merger"). The shareholders of Televar received 11,593,325 shares of common
stock of the Company in the Merger, resulting in shareholders of Televar owning
an aggregate of about 83% of the 13,968,625 shares of common stock outstanding
on the effective date of the Merger. As a result of the Merger, Televar became
a wholly owned subsidiary of the Company. The Televar capital stock that was
converted into the Company's common stock was converted based on a five-for-one
conversion ratio. In connection with the Merger, the Company also issued an
aggregate of 1,125,000 shares of common stock to certain consultants as
compensation for services rendered to the Company prior to the Merger. The
Company and Televar accounted for the merger as a reverse acquisition, or
merger, with the surviving entity being the Company.
Prior to the Merger, the Company was inactive and had only nominal assets and
liabilities.
7
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On April 12, 1997, the Company executed a one-for-four reverse stock split of
its outstanding common shares. Before the split, the Company had 14,640,745
shares outstanding, while after effecting the reverse stock split, the Company
had 3,660,186 shares outstanding.
In anticipation of a proposed acquisition of the Company by Pacific Aerospace
and Electronics, Inc. ("PA&E"), the Company and PA&E entered into an Operations
Consulting and Expense Reimbursement Agreement (the "Interim Agreement") in June
1997. Under the agreement, PA&E agreed to provide certain consulting,
management and financial assistance and support to the Company until PA&E's
proposed acquisition of the Company, and several other entities could be
completed. PA&E subsequently determined that it would not proceed with the
proposed acquisitions.
During the term of the Interim Agreement, PA&E loaned a total of approximately
$4,219,418 to the Company. In addition, on behalf of the Company, PA&E
guaranteed a bank loan for approximately $1,215,765 and a three-year equipment
lease of $373,421.
On April 27, 1998, the Company consummated an agreement with PA&E to convert the
$4,219,418 owed into shares of Orca common stock at $2.00 per share (the
"Restructuring Agreement"). In the Restructuring Agreement, Orca agreed to
grant PA&E demand registration rights for those shares and, in the event of an
underwritten public offering, piggy back registration rights, which will be
effective the earlier of : (a) the closing of Orca's third round of financing
following the closing of the Restructuring Agreement, or (b) the first
anniversary of the closing of the Restructuring Agreement. In addition, PA&E
agreed to continue guaranteeing Orca's $1,215,765 bank loan for eighteen months
from the date of the Restructuring Agreement and to guarantee the equipment
lease for the life of the lease.
As an inducement to obtain PA&E's agreement to convert the Company's debt to
equity, the Company also agreed to purchase a promissory note and all related
interests of PA&E in a company, Brigadoon.com, Inc. ("Brigadoon"). This
included PA&E's interest in a lawsuit filed by PA&E against Brigadoon to recover
amounts Brigadoon owed PA&E, totaling approximately $1,600,000. The Company
also joined in filing involuntary bankruptcy proceedings against Brigadoon in
March 1998. Included in the rights acquired by the Company is a common stock
purchase warrant that entitles the Company to purchase 12.5% of Brigadoon's
fully diluted common stock. The purchase price of these rights and interests
was $950,000 payable over five years under a promissory note, with interest at
the rate of 8% per annum. Under the note, Orca will pay only interest for the
first year commencing March 1, 1998 and will make fully amortizing monthly
payments of principal plus interest for the final four years of the note term.
Under the terms of the disposal of the Company's Internet Services Group
(discussed in Note 5.), the Company sold all of its rights and claims to
Brigadoon assets. The Company retained the $950,000 note payable to PA&E (the
"PA&E Note")and the $1,215,765 PA&E guaranteed note payable to a bank. As of
September 30, 1998 the amount of the guaranteed note payable to
8
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a bank increased to $1,300,000 and the Company is not current with its interest
payments to PA&E.
In February 1998, the Company acquired all of the assets and certain liabilities
of MONITRx Corporation ("Monitrx"). The aggregate purchase price of $1,129,000
consisted of 1,200,000 shares of the Company's restricted common stock valued at
approximately $1,104,000 and certain expenses totaling $25,000. In addition the
Company assumed about $3,044,286 in liabilities. Costs in excess of net book
value of $3,700,000 were recorded as a result of this transaction. Monitrx
develops and markets advanced proprietary and patented network based software
applications for the home health care industry.
In connection with the Monitrx acquisition, the purchase agreement requires the
Company to make cash payments to the former shareholders and / or employees of
Monitrx on a declining scale over a five-year period commencing July 1, 1998, if
annual net operating profits, as defined, exceed at least $1,200,000.
Also in February 1998, the Company acquired all of the assets and certain
liabilities of Digital Network Associates, Inc. ("DNA") for an aggregate
purchase price of $107,000, which consisted of 111,000 shares of the Company's
restricted common stock valued at $102,120 and certain expenses totaling $5,000.
In addition, the Company assumed about $162,736 in liabilities. Costs in excess
of the net book value of $240,000 were recorded as a result of this transaction.
DNA has developed a proprietary computer networking technology that empowers
authorized field-based health care personnel without computer skills to access
and update data on network databases by means of a regular touch-tone telephone
pad.
In June 1998, the Company acquired the stock of Boss Internet Group ("Boss").
The aggregate purchase price of $731,000 consisted of 777,776 shares of the
Company's restricted common stock, 300,000 warrants exercisable over the next 18
months, and certain expenses totaling $15,000. Costs in excess of the net book
value of $484,000 were recorded as a result of this transaction. The Boss
acquistion was subsequently rescinded in September 1998. (See Note 5 -
"Discontinued Operations.")
The business acquisitions described above have been accounted for using the
purchase method, and accordingly, the operating results of the acquired entities
have been included in the Company's consolidated financial statements from the
date of acquisition. The assets acquired and liabilities assumed have been
recorded at an estimate of their fair values, with the difference being
reflected as cost in excess of book value, or goodwill. The related goodwill is
being amortized into operations over periods ranging from three to five years.
NOTE 3 GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. During the years ended June 30,
1998 and 1997, the Company incurred net
9
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losses of approximately $7,333,738 and $2,787,328, respectively. In addition,
the Company incurred a loss of $2,011,259 for the three-months ended September
30, 1998. At September 30, 1998 the Company has a net working capital deficit of
about $3,200,499, a cash balance of $303,680 and a shareholders' deficit of
$154,042. These factors, among others, may indicate that the Company may be
unable to continue as a going concern for a reasonable period of time.
Financing for the Company's operations to date has been significantly augmented
by the sale of common stock and borrowings. The Company's ability to achieve a
level of profitable operations and / or additional financing may impact the
Company's ability to continue as it is presently organized. Resolution of these
issues is dependent on the success of management's plans to raise funds through
the sale of its equity securities in a private placement or a public offering.
The financial statements do not include any adjustments relating to the
recoverability and classification of assets and liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional equity financing or borrowings, and ultimately to attain
profitability.
NOTE 4 RELATED PARTY TRANSACTIONS
An officer and director of the Company and a director of the Company were, until
January 1998, directors of PA&E. Both are also shareholders of PA&E. In
addition, PA&E's Chief Executive Officer and President (CEO), as well as its
Chief Financial Officer (CFO) and certain members of the CFO's family are, or
were, shareholders of the Company. Until June 1997, PA&E's CEO and CFO were
directors of the Company. A shareholder of the Company, who currently owns
about 2.6% of the Company's stock is a director and shareholder of PA&E. As of
September 15, 1998, PA&E is the beneficial owner of approximately 17.9% of the
Company's outstanding common stock.
The Company subleases from PA&E approximately 20,000 square feet of a newly
constructed office building situated in Bothell, Washington, which serves as the
Company's corporate headquarters and primary office facility. The Company
believes that the terms and conditions of the lease, and sub-lease, are at
prevailing market rates and terms in the suburban Seattle area in which the
building is located. The Company has been unable to meet the agreed upon
payment terms of the lease with PA&E since July 1998.
Certain officers and / or directors and shareholders of both the Company and
PA&E have each personally guaranteed certain obligations of the Company or its
subsidiaries.
PA&E has agreed to guarantee certain of the Company's debt instruments,
including a loan from a bank in the amount of $1,215,765 and equipment under a
capital lease with the sum of the original payments totaling approximately
$373,421. During the three months ended
10
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September 30, 1998 the bank agreed to advance the Company additional funds to
meet required interest payments. As of September 30, 1998 the balance of the
loan from a bank is $1,300,000.
In addition, the Company owes PA&E $950,000 under the terms of a loan executed
at the time of the Company's debt restructuring. Under the terms of the
agreement, PA&E has the option to require that the entire unpaid balance of
principal and interest immediately become due and payable in the event of
default. Although the Company is not current with its interest payments, there
has been no formal notification that PA&E will exercise the default acceleration
provisions of the agreement. (See Note 2 - "Formation of Company".)
During the year ended June 30, 1998 the Company paid $55,000 in consulting fees
to a company whose president was simultaneously the President of Televar, Inc.
The former Televar President resigned effective September 1997. In a subsequent
complaint and cross-complaint, the former President and the Company each alleged
certain matters. The matters were mediated in April 1998, with the Company
paying the former Televar president $125,000 to settle the case.
The Company presently holds a $250,000 note receivable from a company in which
an officer, director and shareholder of the Company along with another director
and shareholder of the Company, are also officers, directors and shareholders.
In addition, as of September 30, 1998 the Company has provided approximately
$42,000 in unreimbursed administrative services to the company. As of June 30,
1998 the notes are not reflected as an asset on the Company's balance sheet.
As a result of the acquisition of Monitrx, the Company assumed certain notes
payable, totaling about $500,000, to former shareholders of Monitrx, who are now
officers or former officers of the Company. The notes require monthly payments
of principal and interest over the next three years. In addition, the notes
require the Company to pay 6% of all new common stock equity raised as
additional principal payments on the notes, until such time as the notes are
fully repaid. The Company is not presently current with the payments required
under the terms of the notes.
The Company has made various advances, in the form of notes receivable, to
certain officers and other key employees in connection with the relocation of
former Monitrx employees to the Company's Bothell, Washington facility. The
notes total about $150,000, are non-interest bearing and are to be repaid out of
future earnings of the acquired operations. As of June 30, 1998 the notes are
not reflected as an asset on the Company's balance sheet.
NOTE 5 DISCONTINUED OPERATIONS
In June 1998, the Company's Board of Directors adopted a plan to discontinue its
Internet Service Operations Group. On September 28, 1998 the Company completed
a transaction whereby it sold substantially all of the assets and most of the
liabilities of these operations
11
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to Boss. In addition, Boss and the Company, in a separate agreement, dated
September 10, 1998, agreed to the rescission of the Company's previously
announced acquisition of Boss.
The two transactions involved the cash payment of $300,000 to the Company, the
buyers assumption of certain Televar liabilities plus the return to the Company
of 777,776 common shares and warrants to purchase 300,000 shares of the
Company's common stock. These transactions resulted in a loss being recorded on
the sale of $1,600,000, which was recognized during the year ended June 30,
1998. In addition, the transactions effectively ended the Company's involvement
in the Internet service business and allows the company to concentrate on its
home health care software applications products.
The Company has restated its prior financial statements to present the operating
results of the Internet Service Group as discontinued operations. The
components of net assets of the discontinued operations included in the
accompanying consolidated balance sheet as of June 30, 1998 are as follows
(effected assets and liabilities have been removed from the Company's balance
sheet as of September 30, 1998):
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
Receivables - net $ 212,227
Prepaid expenses 70,553
Property and equipment - net 1,542,112
Other assets 642,366
Accounts payable (751,168)
Accrued liabilities (188,107)
Deferred revenues (385,625)
Long-term debt (602,323)
-------------
$ 540,035
=============
</TABLE>
Liabilities of the Internet Services Group retained by the Company as of June
30, 1998, and included in the amounts listed above, are $201,168 included in
accounts payable, $15,326 included in accrued liabilities, $327,354 included in
deferred revenues and $130,312 included in long-term debt.
Revenues from discontinued operations were $796,400 and $562,598 for the three-
months ended September 30, 1998 and 1997, and $2,711,114 and $2,302,913 for the
years ended June 30, 1998 and 1997, respectively.
Under generally accepted accounting principles, a provision for loss on
discontinued operations has been included based upon management's best estimates
of the amounts that are expected to be realized on the sale.
12
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NOTE 6 COMMON STOCK
During the three months ended September 30, 1998, the Company issued 722,000
restricted shares of common stock in a private placement, exempt from
registration under federal and state securities laws. The net proceeds to the
Company were approximately $1.0 million (or approximately $1.40 per share). See
"Part II - Item 5 - "Changes in Securities").
On September 28, 1998 issued and outstanding warrants to acquire 496,000 shares
of the Company's common stock, at $1.85 per share expired unexercised. The
warrants had been issued in connection with a common stock financing in the
prior fiscal year and would have provided the Company gross proceeds of
approximately $917,600. With the rescission of the Company's acquisition of
Boss, 300,000 warrants to acquire shares of the Company's common stock at $2.04
per share were cancelled.
The Company now has 1,927,850 issued and outstanding warrants to purchase
additional shares of common stock that expire in March 1999 and September 2001
at prices ranging from $.84 to $1.85, respectively. In addition, as of
September 30, 1998, the Company has outstanding options to purchase 1,050,000
shares of the Company's common stock at $2.00 per share, of which 262,500 had
vested and are currently exercisable.
The Company is continuing discussions to secure additional equity financing.
Notwithstanding the completion of the offering described above, the Company
requires additional debt or equity financing to continue operations. There can
be no assurance that the Company will be successful in its efforts to attract
additional financing.
NOTE 7 RISKS AND UNCERTAINTITIES
With the sale of its Internet Service Group, the Company has focused its
operations on its ability to develop and effectively bring to market high
technology software products to meet its customers needs in the home health care
industry. In the competitive market environment in which the Company intends to
operate, software development and marketing processes are uncertain and complex,
requiring successful management of various development and marketing risks. The
Company's ability to continue to attract the appropriate number and quality of
software development and senior management personnel and to successfully
introduce its products to the market place, could impact its ability to capture
market share.
The Company's products have been developed with full recognition of the pending
new millennium, however acceptance of the Company's products may be impacted by
adverse Year 2000 problems by potential customers.
Additionally, the health care industry in general, as well as the home health
care segment, is undergoing significant and rapid changes.
13
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As discussed in "Note 3 -- Going Concern Matters", above, the Company's ability
to secure adequate sources of capital will impact its prospects for growth and
to continue as a going concern.
In light of these factors, it is reasonably possible that failure to
successfully manage software development, failure to successfully introduce
products to market, uncontrollable failures of internal computer systems at
potential customer sites, the Company's failure to adopt to a rapidly changing
business environment, or the Company's failure to successfully secure additional
sources of financing, could have severe near-term impacts on the Company's
prospects for growth and its ability to continue as a going concern.
14
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Quarterly Report on Form 10 - QSB for the quarter ended September 30, 1998,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934. Such statements may include, but are not limited to, projection of
revenues, income, or loss, capital expenditures, plans for product development
and cooperative arrangements, future operations, financing needs or plans of the
Company as well as assumptions relating to the foregoing. The words "believe,"
"expect," "anticipate," "estimate," "project," and similar expressions identify
forward-looking statements, which speak only as of the date the statement was
made. Such statements are inherently subject to risks and uncertainties as
further described herein and in the "Considerations Related to the Company's
Business" section of the Company's Annual Report on Form 10-KSB/A for the year
ended June 30, 1998. The Company's actual results may differ materially from
the results projected in the forward-looking statements.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
Revenues for the three months ended September 30, 1998 was $99,300. Revenue
from software accounts for approximately 65% of total revenue and the remaining
35% is attributed to hardware sales for the three months ended September 30,
1998. There was no revenue from continuing operations for the three months
ended September 30, 1997.
Cost of sales for the three month period ended September 30, 1998 was $22,800.
This represents the cost of hardware sold. There was no cost of sales from
continuing operations for the three months ended September 30, 1998.
Research and development expenses were approximately $397,700, compared to $0
for the three month period ended September 30, 1997. The 1998 expenses
consisted primarily of personnel and overhead costs incurred in conjunction with
research and further development of the CuraSys software. Sales and marketing
expenses were approximately $355,000, compared to $0 for the three month period
ended September 30, 1997. These expenses consisted primarily of personnel,
travel, marketing, advertising and overhead costs associated with the sales and
marketing of the CuraSys product. Professional services expenses were
approximately $291,100, compared to $0 for the three month period ended
September 30, 1997. These expenses consist primarily of personnel, training and
overhead expenses. These expenses were incurred to provide technical support
for existing contracts and training in anticipation of future growth. Customer
service expenses of approximately $158,600 consisted primarily of personnel
costs, compared to $0 for the three month period ended September 30, 1997.
These expenses were incurred to provide customer service for existing contracts
and develop the organization to accommodate projected growth. General and
administrative expenses for the three months ended September 30, 1998 were
$822,900 compared to $86,800 for the three months ended September 30, 1997.
General and
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administrative expenses consisted primarily of personnel, goodwill amortization,
depreciation, facilities costs, professional and other administrative expenses.
General and administrative expenses for the three months ended September 30,
1998 were significantly higher than they were during the same period for the
prior year because the prior year did not include expenses of acquired
subsidiaries which were not part of the Company's operations in 1997.
Additionally, there was significantly lower corporate activity in 1997.
Interest expense for the three months ended September 30, 1998 was $65,200
compared to $33,070 for the same period in 1997. The increase in interest
expense is due to the increased level of borrowings during the quarter in 1998
and the increase in debt during the last three quarters of 1997. See " -
Liquidity". Management's current objective is to secure additional equity
funding to finance operating cash flow shortfalls. There can be no assurance,
however, that the Company will be able to identify investors willing to purchase
its securities at a price and on terms satisfactory to the Company, in which
event the Company will be required to continue borrowings at current or
increased levels or to cut back its operations. See " - Liquidity."
LIQUIDITY
At September 30, 1998, the Company's total current assets were $433,509 and its
total current liabilities were $3,634,008 for net working capital deficit of
$3,200,499.
Historically, the Company met some of its cash requirements through a
combination of cash flow from operations, issuance of common stock and
borrowings from PA&E. However, with the sale of its 100% owned subsidiary,
Televar, Inc., the Company did not record enough revenues from its ongoing
operations to sustain its current level of operations without additional
financing. It is anticipated that the Company will continue to require
additional financing. See the notes to financial statements accompanying this
report.
The Company has a $1,300,000 loan with a commercial lender that was established
in July 1997. Repayment of all advances to the Company pursuant to the loan is
guaranteed by PA&E for an eighteen-month period commencing April 27, 1998.
On August 28, 1998, the Company signed a secured promissory note and borrowed
$500,000 from a third party. The note bears an interest rate of 18% and is due
on December 31, 1998. The note contains provisions allowing the Company to
extend the due date until February 1, 1999.
During the three months ended September 30, 1998, the Company issued 722,000
restricted shares of common stock in a private placement, exempt from
registration under federal and state securities laws. The net proceeds to the
Company were approximately $1.0 million (or approximately $1.40 per share).
(See "Part II - Item 2 - "Changes in Securities").
The Company is continuing discussions to secure additional equity financing.
Notwithstanding the completion of the offering described above, the Company
requires
16
<PAGE>
additional debt or equity financing to continue operations. There can be no
assurance that the Company will be successful in its efforts to attract
additional financing.
The proceeds from borrowings, together with cash from operations, are
insufficient to fund budgeted operations for the near term. The Company will
require additional financing in order to fund its operating plan and budget and
is in discussions with several potential equity financing sources. There is no
assurance; however, that these discussions will result in additional funding on
terms that are favorable to the Company or that additional financing will be
available to the Company from other sources. If the Company is unable to raise
additional capital, the Company's ability to continue operations may be
adversely affected.
CAPITAL EXPENDITURES
The Company has no current plans for material capital expenditures. Additions
and replacements of furniture, fixtures and equipment will be generally funded
through working capital, capital leases, loans from financing institutions, or
other sources of equity funds. Borrowings to acquire capital equipment will
generally be secured by the equipment being acquired.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
During the three months ended September 30, 1998, the Company issued 722,000
restricted shares of common stock in a private placement to certain accredited
investors and sophisticated purchasers. The net proceeds to the Company were
approximately $1.0 million (or approximately $1.40 per share). The offer and
sale of such shares was made without registration in reliance upon Regulation S,
promulgated under the Securities Act of 1933, as amended, . Pursuant to a
resolution adopted by the Company's board of directors on October 30, 1998, the
Company issued 144,400 shares of common stock to the investors in this offering,
without additional cash consideration.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
On September 22, 1998, the Company received a notice of default from PA&E, one
of the Company"s largest shareholders, with respect to the PA&E Note. (See Note
2 to the Financial Statements contained in Part I - Item 1.) As of November 10,
1998, the Company was three months past due on the interest payments due on the
PA&E Note, in the aggregate amount of approximately $19,000.00. In addition, on
September 22, 1998, the Company received a notice of default on its lease
payments to PA&E, in the aggregate amount of approximately $91,345.00. The
Company is currently in discussions with PA&E with respect to each of these
defaults. (See Note 4 to the Financial Statements contained in Part I - Item 1.)
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits required by Item 601 of Regulation S-B.
See Exhibit Table on page 20.
(b) Reports on Form 8-K. During the quarter ended September 30, 1998, the
Company filed the following current reports on Form 8-K:
None.
18
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated this 13/th/ day ORCA TECHNOLOGIES, INC.
of November, 1998
/s/ Roger Vallo
-------------------------------------------
Roger P. Vallo, Chairman and President
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
19
<PAGE>
EXHIBITS
Page Exhibit Number Exhibit Name
- ---- -------------- ------------
27.1 Financial Data Schedule
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 303,680
<SECURITIES> 0
<RECEIVABLES> 12,200
<ALLOWANCES> 0
<INVENTORY> 72,280
<CURRENT-ASSETS> 433,509
<PP&E> 982,199
<DEPRECIATION> 130,082
<TOTAL-ASSETS> 4,896,420
<CURRENT-LIABILITIES> 3,634,008
<BONDS> 0
0
0
<COMMON> 12,778
<OTHER-SE> 13,286,922
<TOTAL-LIABILITY-AND-EQUITY> 4,896,420
<SALES> 99,274
<TOTAL-REVENUES> 99,274
<CGS> 22,820
<TOTAL-COSTS> 22,820
<OTHER-EXPENSES> 2,024,877
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,197
<INCOME-PRETAX> (2,011,259)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,011,259)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,011,259)
<EPS-PRIMARY> (0.164)
<EPS-DILUTED> (0.164)
</TABLE>