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 MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ECURITIES
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, SE - Suite 200, Bothell, WA 98021
(Address of Principal Executive Offices) (Zip Code)
(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 May 5, 1998, approximately 12,031,000 shares of the Company's
Common Stock, par value $.001 per share, were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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ORCA TECHNOLOGIES, INC. AND SUBSIDIARIES
Form 10QSB
For the Quarterly Period Ended March 31, 1998
TABLE OF CONTENTS
Page
------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1998
and June 30, 1997 3
Condensed Consolidated Statements of Operations - Three
and Nine Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
Three and Nine Months Ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 8
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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ORCA Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 3,695,223 $ -
Accounts receivable, net 256,888 233,714
Notes receivable - related parties 270,368 33,549
Notes receivable - others 223,484 105,953
Prepaid expenses 138,939 70,556
--------------- ---------------
Total current assets 4,584,902 443,772
Property & Equipment - net 1,890,392 826,413
Notes Receivable, less current portion 99,975 38,148
Other Assets 4,281,413 189,101
--------------- ---------------
Total assets $ 10,856,682 $ 1,497,434
=============== ===============
LIABILITIES & SHAREHOLDERS EQUITY
- ---------------------------------
Current Liabilities
Accounts payable $ 1,075,190 $ 1,414,317
Accrued liabilities 1,464,950 635,985
Deferred revenues 382,199 334,700
Notes payable - other 141,741 171,742
Current portion of long-term debt 210,700 91,274
--------------- ---------------
Total current liabilities 3,274,780 2,648,018
Long-Term Debt, less current portion 2,453,986 153,632
Long-Term Debt Due to Related Parties 4,219,420 1,737,000
Shareholders' Equity (Deficit) 908,496 (3,041,216)
--------------- ---------------
Total liabilities and stockholders
equity $ 10,856,682 $ 1,497,434
=============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ORCA Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 651,842 $ 644,575 $ 1,937,402 $ 1,985,414
Cost of Revenues 628,473 391,228 1,767,808 1,385,548
-------------- -------------- -------------- --------------
Gross Profit 23,369 253,347 169,594 599,866
Operating Expenses 1,712,881 455,673 2,857,000 1,428,088
-------------- -------------- -------------- --------------
Loss from Operations (1,689,512) (202,326) (2,687,406) (828,222)
Interest Income 6,850 - 24,716 -
Interest Expense (165,512) (22,730) (397,233) (155,427)
-------------- -------------- -------------- --------------
Net Loss $ (1,848,174) $ (225,056) $ (3,059,923) $ (983,649)
============== ============== ============== ==============
Net Loss per Share $ (0.30) $ (0.06) $ (0.66) $ (0.27)
============== ============== ============== ==============
Weighted Average Number
of Shares Outstanding 6,136,631 3,660,186 4,649,037 3,660,186
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ORCA Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flow
For the Three and Nine Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------- -------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,848,174) $ (225,056) $ (3,059,923) $ (983,649)
Adjustments to reconcile net loss to cash used:
Depreciation and amortization 183,831 56,027 292,565 147,452
Change in operating assets 515,716 (307,857) (312,801) (496,702)
Change in operating liabilities 683,509 10,570 94,744 785,476
-------------- -------------- -------------- --------------
Net Cash Used By Operating Activities (465,118) (466,316) (2,985,415) (547,423)
-------------- -------------- -------------- --------------
INVESTING ACTIVITIES
Purchases of property & equipment (269,079) - (637,626) (485,793)
Changes in notes receivable 1,824 520 (61,827) (194,800)
Cash balances of acquired companies 33,629 - 33,629 -
Pre-acquisition advances to acquired entities (514,255) - (514,255) -
Other investing activities (184,546) 2,600 (203,523) (23,022)
-------------- -------------- -------------- --------------
Net Cash Provided (Used) By Investing Activities (932,427) 3,120 (1,383,602) (703,615)
-------------- -------------- -------------- --------------
FINANCING ACTIVITIES
Change in short-term borrowings, net - 575,000 - 1,268,837
Reduction in debt (30,964) (27,379) (126,223) (80,543)
Proceeds from debt 9,148 - 2,386,948 189,678
Issuance of common stock and warrants 4,384,125 - 5,803,515 -
-------------- -------------- -------------- --------------
Net Cash Provided By Financing Activities 4,362,309 547,621 8,064,240 1,377,972
-------------- -------------- -------------- --------------
NET CASH PROVIDED (USED) 2,964,764 84,425 3,695,223 126,934
Cash & cash equivalents, Beginning of Period 730,459 51,944 - 9,435
-------------- -------------- -------------- --------------
CASH & CASH EQUIVALENTS, End of Period $ 3,695,223 $ 136,369 $ 3,695,223 $ 136,369
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ORCA TECHNOLOGIES, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 and nine-month
periods ended March 31, 1998 have been included. All significant
intercompany transactions have been eliminated in the consolidation
process.
These financial statements should be read in conjunction with
the audited financial statements and notes thereto for the year
ended June 30 1997, which have been provided in their entirety in
the Company's Form 10-KSB for the fiscal year ended June 30, 1997.
The results of operations for the three and nine-month periods ended
March 31, 1998 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 1998.
NOTE 2. MERGER WITH TELEVAR, INC.
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 83% of
the 13,968,625 shares of the Company's 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, which
was determined pursuant to arms-length negotiations between the
Company and the management of Televar. In connection with the
Merger, the Company also issued an aggregate of 1,125,000 shares of
common stock (approximately 8% of the outstanding common stock on a
post-merger basis) to certain consultants as compensation for
services rendered to the Company prior to the merger.
Prior to the Merger, the Company was inactive and had only
nominal assets and liabilities. The financial statements included
in this report include the activity of both Televar and the Company
retroactively restated to the beginning of the periods covered by
the financial statements.
NOTE 3. REVERSE STOCK SPLIT
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; after effecting the stock
split, the Company had 3,660,186 shares outstanding. At the time of
the stock split, the Company's trading symbol changed from "JUNS" to
JNGS" on the electronic bulletin board exchange.
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NOTE 4. NAME CHANGE
The Company was originally organized under the name Jungle
Street, Inc. On December 31, 1997, the Company changed its name to
Orca Technologies, Inc. At the time of the name change, the
Company's trading symbol on the electronic bulletin board was
changed from "JNGS" to "ORCA".
NOTE 5. PROPOSED FORMATION OF INFORMATION TECHNOLOGY GROUP BY
PACIFIC AEROSPACE & ELECTRONICS, INC. AND DEBT
RESTRUCTURING AGREEMENT
The Interim Agreement
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 (see Note 8).
Under the agreement, PA&E agreed to provide certain consulting,
management and financial assistance and support to the Company until
a proposed acquisition of the Company and several other companies,
by PA&E could be completed. These companies included MONITRx, Inc.
("Monitrx"), Digital Network Associates, Inc. ("DNA"), Advantage
Video Productions, Inc. ("AVP"), and Brigadoon.com, Inc.
("Brigadoon"). PA&E subsequently determined that it would not
proceed with the proposed acquisitions.
The Company is presently negotiating to acquire AVP. There
can be no assurance, however, that an agreement will be reached to
acquire AVP. In connection with the proposed acquisition, at March
31, 1998 the Company had loaned approximately $270,000 to AVP.
During the term of the Interim Agreement, PA&E loaned funds to
the Company (and the other target companies) and guaranteed a bank
loan for approximately $1.3 million and equipment lease of $372,000.
As of March 31, 1998 in addition to the guarantee, the total amount
loaned under the agreement by PA&E was approximately $4.2 million.
Debt Restructuring Agreement
On April, 27, 1998, the Company consummated an agreement with
PA&E to convert the $4,219,000 owed under the combined Orca, Televar
and assumed Monitrx notes into shares of Orca common stock at $2.00
per share (the "Restructuring Agreement"), immediately following
Orca's completion of its pending private offering of common stock.
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, piggyback registration rights, which
will be effective the earliest of: (a) the closing of Orca's third
round of financing, and (b) the first anniversary of the closing of
the Restructuring Agreement. In addition, PA&E agreed to continue
guaranteeing Orca's $1.3 million loan to a commercial lender and
equipment lease, and Orca agreed to time limitations on the
guaranties.
As an inducement to 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 Brigadoon, including
PA&E's interest in a lawsuit filed by PA&E against Brigadoon to
recover the amount owed. 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 is $950,000, payable over five years under a
promissory note, with
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interest at the rate of 8% per annum. Under the note, Orca will pay
interest only 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. There is no assurance that
the Company's interest in Brigadoon willultimately have significant
value for the Company.
The following reflects the debt and equity section of the
Company's balance sheet as if the Restructuring Agreement had been
entered into effective the fiscal quarter ended March 31, 1998:
Actual Pro Forma
------ ---------
March 31, 1998 March 31, 1998
-------------- --------------
Current liabilities $ 3,274,780 $ 3,215,039
Long-term debt 6,673,406 3,463,727
Shareholders' equity 908,496 4,177,916
-------------- --------------
Total Liabilities and Equity $10,856,682 $10,856,682
============== ==============
Debt to equity ratio 7.35:1 0.83:1
============== ==============
NOTE 6. CERTAIN RELATIONSHIPS
Mr. Roger Vallo, Chairman and CEO of the Company, and Mr.
Donald Cotton, a director of the Company, until January 1998, were
directors of PA&E. Both are shareholders of PA&E. In addition, Mr.
Donald A. Wright, PA&E's Chief Executive Officer and President, and
Mr. Nick A. Gerde, PA&Es Chief Financial Officer, Vice President,
Finance and Treasurer, and certain of Mr. Gerde's family members,
are shareholders of the Company. Until June 1997, Mr. Wright and
Mr. Gerde were also directors of the Company. Mr. Allen Dahl, a
shareholder of the Company, is a director and shareholder of PA&E.
As of May 7, 1998, PA&E is the beneficial owner approximately 19.0%
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 new corporate
headquarters. The Company believes that the terms and conditions of
the lease are representative of prevailing market rates and terms in
the suburban Seattle area in which the building is located.
Messrs. Vallo, Cotton, Gerde, Wright and Dahl have each
personally guaranteed certain obligations of the Company or its
subsidiaries.
Mr. Michael Hendrickson, the Chief Executive Officer, a
director and shareholder of AVP, is also a director of the Company.
In addition, Mr. Vallo is an executive officer, director and
shareholder of AVP.
NOTE 7. ISSUANCE OF COMMON STOCK
During the nine months ended March 31, 1998, the Company
issued 992,000 restricted shares of common stock to certain
accredited investors in a private transaction exempt from
registration under federal and state securities laws. In connection
with this offering the Company also issued warrants to purchase
496,000 shares of common stock at $1.85 per share, expiring
September 30, 1998. The net proceeds to the Company from this
offering were approximately $1.4 million.
8
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During the quarter ended March 31, 1998, the Company issued
3,925,000 restricted shares of common stock to certain accredited
investors and sophisticated purchasers in a private transaction
exempt from registration under federal and state securities laws.
In connection with this offering the Company also issued the
investors warrants to purchase a total of 1,570,000 additional
shares of common stock at $1.85 per share, expiring March 13, 1999.
The Company also issued warrants to purchase 232,850 shares of
common stock as a commission. These warrants also expire on March
13, 1999. The net proceeds of this offering were approximately $4.4
million.
During the quarter ended March 31, 1998, the Company issued
1,200,000 and 111,000 restricted shares of common stock in
connection with the acquisition of the assets of Monitrx and DNA,
respectively.
The Company is continuing discussions to secure additional
equity financing. Notwithstanding the completion of the two
offerings 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 8 ACQUISITIONS
In February 1998, the Company acquired Monitrx and DNA for
cash and stock valued at approximately $4,150,000 and $265,000,
respectively. Monitrx develops and markets advanced network based
software applications for the home-health care industry. DNA has
developed proprietary computer networking technology which empowers
authorized field-based personnel without computer skills, to access
and update data on network data bases, by means of a regular touch-
tone telephone pad.
The Company exchanged 1,311,000 shares of its restricted
common stock valued at $1,206,120 ($.92 per share) and assumed
approximately $3,207,000 in liabilities in connection with these
acquisitions. The Company also granted certain piggyback
registration rights on a total of 1,200,000 shares in the event of a
subsequent public offering of the Company's common stock. The
purchase agreements also require the Company to make cash payments
to the former shareholders and/or employees of Monitrx and DNA over
a five-year period commencing July 1, 1998, if projected annual net
income forecasts are exceeded by the business units through which
the Company effected these transactions.
The above acquisitions have been accounted for as a purchase,
and accordingly, the operating results of Monitrx and DNA have been
included in the Company's consolidated financial statements since
the date of acquisition. The excess of the aggregate purchase price
over the fair market value of assets acquired (approximately
$3,932,000) is being amortized over periods ranging from 3 to 5
years.
NOTE 9 COMPUTATION OF EARNINGS PER SHARE
Earnings per share is computed in accordance with Financial
Accounting Standards No. 128 - "Earnings Per Share" (SFAS 128). In
accordance with SFAS 128 basic earnings per share is computed using
the weighted average number of common shares outstanding. Diluted
earnings per share is computed using weighted average number of
common shares plus dilutive common share equivalents outstanding
during the period using the treasury stock method. Common stock
equivalents were not
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included in the computation of earnings per share for the periods
presented because their inclusion is antidilutive.
Item 2. Management's Discussion and Analysis or Plan of Operation
This Quarterly Report on Form 10-QSB for the quarter ended
March 31, 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 for the year ended June 30,
1997. The Company's actual results may differ materially from the
results projected in the forward-looking statements.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
Revenues for the three months ended March 31, 1998, were
$651,800, a slight increase over revenues of $644,600 for the three-
month period ended March 31, 1997. Revenue in both periods is
largely attributed to Internet access service.
Cost of sales for the three month period ended March 31, 1998
were $628,500 compared with cost of sales for the three month period
ended March 31, 1997 of $391,200. The increase is primarily
attributed to higher line charges, a portion of which is attributed
to the recent network upgrade and expansion. Cost of sales consist
primarily of commissions and network operating costs, including
leased line and local access charges.
Selling, general and administrative expenses for the three
months ended March 31, 1998 were $1,712,900 compared to $455,700 for
the three month period ending March 31, 1997, an increase of
$1,257,200. Expenses at Televar increased approximately $259,000 or
57% between the two periods, due to legal fees, bad debts and a
charge to earnings for an out-of-court negotiated settlement. The
remaining $998,000 increase is due to expenses incurred at Monitrx,
DNA and the corporate office that were not part of the Company's
operations in 1997, including approximately $67,000 related to
amortization of premiums associated with acquired companies.
Interest expense for the three months ended March 31, 1998 was
$165,500 compared to $22,700 for the same period in 1997. The
increase in interest expense is due to the increased level of
borrowings during the quarter in 1998. See - "Liquidity". Interest
expense also includes interest for Monitrx and DNA, which were not
included in the Company's operating results in 1997.
Nine Months Ended March 31, 1998 and 1997
Revenues for the nine months ended March 31, 1998 were
approximately $1,937,400. Of these revenues, approximately 92% were
from Internet access fees and approximately 8% represented revenues
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derived from the sale of other goods and services. Comparatively,
revenues for the nine months ended March 31, 1997 were approximately
$1,985,400. Of these revenues, approximately 72% represented
Internet access fees, 16% represented VAR fee revenues, and
approximately 12% represented revenues derived from other goods and
services. VAR revenues are deferred until certainty of collection
has been historically demonstrated. No VAR revenues have been
reported for the nine months ended March 31, 1998.
Cost of sales for the nine months ended March 31, 1998 were
approximately $1,767,800 compared to cost of sales for the nine
months ended March 31, 1997 of $1,385,500. Cost of sales consists
primarily of commissions and network operating cost, including
leased line and local access charges. Cost of sales increased as a
percentage of revenues (excluding VAR revenues) from approximately
80% in 1997 to 90% in 1998. Management attributes the increase in
cost of sales to expanding and upgrading the network. This includes
the installation of additional lines and increased depreciation
expense attributed to the network upgrade. Some of these costs were
incurred to better serve the Company's existing customers and in
anticipation of growth in the Company's subscription base. The
Company is subject to the continuing risk that operating expenses
may increase faster than revenues.
Selling, general and administrative expenses consist primarily
of personnel, marketing and software development expenses. Sales,
general and administrative expenses were $2,857,000 for the nine
months ended March 31, 1998 compared to $1,428,100 for the nine
months ended March 31, 1997, an increase of $1,428,900. Televar
experienced a $182,900 increase between the two periods, due to
legal fees, bad debts and a charge to earnings for an out-of-court
settlement, partially offset by other operating efficiencies. The
remaining $1,246,000 increase over the comparable period is
attributable to expenses at Monitrx and DNA which were acquired
during the quarter ended March 31, 1998 and the expenses associated
with the new corporate office of the Company, which were not
incurred in 1997, including approximately $67,000 related to
amortization of premiums associated with acquired companies.
Interest expense for the nine months ended March 31, 1998 was
$397,200 compared to $155,400 for the nine months ended March 31,
1997. The increase in expense is due to increased borrowings during
the period. Interest expense also includes interest for Monitrx and
DNA, which were acquired in 1998. The Company continues to borrow in
order to fund operations. Also, during the nine months ended March
31, 1998, the Company realized net proceeds of approximately $5.8
million from the issuance of common stock in a private placement to
non-U.S. persons and accredited investors.
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 March 31, 1998, the Company's total current assets were
$4,584,900 and its total current liabilities were $3,215,000 for net
working capital of $1,369,900.
The Company has met some of its cash requirements through a
combination of cash flow from operations, issuance of common stock
and
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borrowings from PA&E. Subsequent to the end of the period
covered by this report, the Company entered into an agreement under
which PA&E converted debt of $4,219,000 to equity (See Note 5) and
extended its guarantee of a loan and equipment lease of the Company.
This transaction substantially improved the working capital position
of the Company, but 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 $1,215,765 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.
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.
ACQUISITIONS
Monitrx
In February 1998, the Company acquired substantially all of
the assets and assumed certain liabilities of Monitrx, a California
corporation, through a wholly owned subsidiary. In consideration
for the purchase, the Company issued 1,200,000 restricted shares of
the Company's common stock. Subsequent to the closing, the
Company's subsidiary changed its name to Monitrx, Inc. Monitrx,
Inc. conducts its business at the Company's headquarters in Bothell,
Washington.
DNA
In February 1998, the Company acquired substantially all of
the assets, and assumed certain liabilities of DNA, through a wholly
owned subsidiary. In consideration for the purchase, the Company
issued 111,000 restricted shares of the Company's unregistered
common stock. Subsequent to the closing, the Company's subsidiary
changed its name to Digital Networks Associates, Inc. Digital
Networks Associates, Inc. conducts its business out of offices
located in Costa Mesa, California.
Assimilation of Acquisitions
The Company's acquisitions have placed a significant burden on
its management, financial and other resources. Past and future
acquisitions may subject the Company to many risks, including risks
relating to integrating and managing the operations and personnel of
acquired companies, and maintaining and implementing uniform
standards, controls, procedures and policies. The success of future
acquisitions will depend in part upon the Company's ability to
assess and manage the risks typically associated with acquisitions,
including the risks of assessing the values, strengths and
weaknesses of acquisition candidates or new products, possible
diversion of management attention
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from the Company's existing businesses, reduction of cash, disruption
of product development cycles, dilution of earnings per share, or other
factors. A failure to achieve or sustain the anticipated benefits of
any acquisition could result in that acquisition having a detrimental
effect on the Company's results of operation, cash flow and financial
position.
CAPITAL EXPENDITURES
The Company has no current plans for material capital
expenditures. Additions and replacements of furniture, fixtures and
equipment are generally funded through working capital, capital
leases or loans from financing institutions, which are secured by
the equipment being acquired.
Part II. Other Information
Item 1. Legal Proceedings
On or about October 27, 1997, Gregory K. Martin and Strategic
Resources Group, Inc. ("SRG") filed an action against the Company,
its subsidiary, Televar, Inc., certain shareholders of the Company
and Roger P. Vallo, the Chairman and CEO of the Company in the
Chelan County Superior court for the State of Washington, alleging
breach of various employment and other agreements and failing to
consummate a merger with SRG resulting in damages in excess of
$275,000. The defendants denied plaintiffs' claims and filed
various counterclaims. Management believed that the claims of SRG
were wholly without merit. In April 1998, the matter was mediated
and the Company paid $125,000 to settle the case.
Item 2. Changes in Securities.
During the nine months ended March 31, 1998, the Company
issued 992,000 restricted shares of common stock in a private
placement to certain accredited investors and sophisticated
purchasers. In connection with the offering, the Company also issued
warrants to purchase a total of 496,000 additional shares of common
stock at $1.85 per share, expiring September 30, 1998. The net
proceeds to the Company were approximately $1.4 million (or
approximately $1.41 per share).
During the quarter ended March 31, 1998, the Company issued
3,925,000 restricted shares of common stock in a private transaction
to certain accredited investors and sophisticated purchasers. In
connection with this offering, the Company also issued warrants to
purchase a total of 1,570,000 restricted shares of common stock at
$1.85 per share, expiring March 13, 1999. In connection with this
offering, the Company also issued warrants to purchase 232,850
shares of common stock at $1.85 per share, as commissions. These
warrants also expire on March 13, 1999. The net proceeds of the
offering provided the Company with approximately $4.4 million
(approximately $2.80 per share).
In each of the transactions described above, the offer and
sale of such shares was made without registration in reliance upon
exemptions from the registration requirements of the Securities Act
of 1933, as amended (the "1933 Act") and relevant state law,
applicable to private offerings. The purchasers of the shares were
accredited investors (as that term is defined in Rule 501 of
Regulation D, promulgated under the 1933 Act) or sophisticated
purchasers who had
13
<PAGE>
access to information reasonably intended to allow them to make an
informed decision regarding a purchase of the shares.
During the quarter ended March 31, 1998, the Company issued
1,200,000 and 111,000 shares of unregistered common stock to
purchase Monitrx and DNA, respectively.
In each of the transactions, the offer and sale of such shares
was made without registration under the 1933 Act, pursuant to and in
reliance upon exemptions from the registration requirements of the
1933 Act, including the provisions of Sections 3(b) and 4(2) of the
Act and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Item 5. Other Information
Restructuring Agreement
On April 27, 1998, the Company entered an agreement with PA&E
to convert $4,219,000 owed under certain notes into shares of the
Company's common stock at $2.00 per share (the "Restructuring
Agreement"). The Company also granted PA&E demand registration
rights for those shares and, in the event of an underwritten public
offering, piggyback registration rights, which will be effective the
earliest of: (a) the closing of a third round of financing by the
Company, or (b) the first anniversary of the closing of the
Restructuring Agreement. In addition, PA&E agreed to continue to
guarantee a $1.3 million loan with a commercial lender and an
equipment lease, subject to certain mutually acceptable time
limitations.
As an inducement to have PA&E convert the debt to equity, the
Company also acquired a note and all related interests of PA&E in
Brigadoon, including the rights and claims of PA&E in certain
litigation. 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 is
$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
interest only 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. The is no assurance that
the Company's interest in Brigadoon will ultimately have significant
value for the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-B.
(27) Financial Data Schedule
(b) Reports on Form 8-K. During the quarter ended March 31, 1998,
the Company filed the following current reports on Form 8-K:
1. March 5, 1998 to report acquisition of DNA
2. March 26, 1998 to report acquisition of Monitrx
14
<PAGE>
SIGNATURES
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.
ORCA TECHNOLOGIES, INC.
Date: May 15, 1998 /s/ Roger P. Vallo
----------------------------
Roger P. Vallo, President
15
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