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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended June 30, 1998
[ ] Transition report under 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.
(Name of small business issuer in its charter)
Utah 87-0368236
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
24000 35th Avenue, SE, Suite 200
Bothell, Washington 98021
(425) 354-1600
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities 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 ___
-
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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|
Incorporation by Reference. The issuer hereby incorporates by reference the
Company's 1998 Proxy Statement into Items 10; 11 and 12 of Part III of this
Report on form 10-KSB. The Proxy Statement will be provided to stockholders
subsequent to the filing of this Report.
The issuer's revenues from continuing operations for its most recent fiscal year
were $0.
The aggregate market value of the voting stock held by non-affiliates, based on
the closing price for the registrant's Common Stock on the Nasdaq Electronic
Bulletin Board, as of October 7, 1998, was $8,045,112.
The number of shares outstanding of the issuer's Common Stock, as of October 7,
1998 was 12,778,407 shares.
Transitional small business disclosure format (check one): Yes [ ] No [X]
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PART I
Preliminary Note Regarding Forward-looking Statements
The information set forth in this report in Item 1 - "Description of
Business" and in Item 6 - "Management's Discussion and Analysis or Plan of
Operation" includes "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, as amended (the "Exchange Act"), and is subject to the
safe harbor created by those sections. Certain factors that realistically could
cause results to differ materially from those projected in the forward-looking
statements are set forth in Item 1 - "Considerations Related to the Company's
Business."
Item 1. Description of Business
General
The Company provides products and value-added services in the information
access and home health care management industry. Highly productive information
management systems that are insensitive to distance and location and designed to
solve defined business problems are urgently needed in many markets. Customers
will often pay a premium for significant gains in productivity, but require
seamless product-network integration in return. The Company seeks to deliver
turnkey, application-rich proprietary products to fast growth market niches.
The Company's primary focus is in the home health care market. Prior to
September 1998, the Company also provided Internet access and related services
in the Northwest area of the United States. The Company divested itself of the
Internet access business that comprised its Network Services Group in September
1998. The Company's stated mission is to institutionalize the management of
information with custom software products and services that immediately deliver
both efficiency and quality to its customers.
As a result of a recent restructuring, the Company has determined it will
focus its business activities on providing software application solutions,
offering proprietary software applications that provide efficience and
compliance with government mandated regulations. In connection with its
restructuring, the Company accomplished several key goals:
. Assimilation of a completely new management team
. Completion of two key strategic acquisitions
. Closing of equity financing
. Execution of a debt-for-equity swap which eliminated approximately
$3.3 million in corporate obligations
. Sale of its Network Services Group
. Introduction of its primary product line, CuraSys(TM), to the
healthcare industry
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The 1998 Acquisitions
MONITRx. In February 1998, the Company acquired substantially all of the
assets and assumed certain liabilities of MONITRx Corporation, a California
corporation, through a wholly owned subsidiary now conducting business under the
name MONITRx, Inc. ("MONITRx"). In consideration for the purchase, the Company
issued 1,200,000 restricted shares of the Company's Common Stock.
DNA. In February 1998, the Company also 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. DNA conducts its business out of offices located in Costa
Mesa, California.
The Company's acquisitions and the discontinued Internet access business of
the Company placed a significant burden on its management, financial and other
resources. Past and future acquisitions may subject the Company to additional
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 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.
Products
Orca develops and markets information technology products and services to
the "alternate site" healthcare marketplace. This includes home healthcare,
extended care facilities, nursing and acute care facilities (such as hospitals).
The initial product line, CuraSys(TM), is a software application that fully
automates both the field-based and the administrative operations of the health
care customer. All applications within the CuraSys system provide workflow-
based management capability through a proprietary means by defining and
automating clinical processes rather than by providing a system that merely
collects and prints billing claims. The CuraSys product line uses a patented
means of collecting detailed patient care data that, when aggregated, provides
for significant clinical diagnoses and analyses, and mitigates both financial
and regulatory risks for the users of the system. The Company has engineered
all applications with the system using reliable, scalable, best-of-breed
technologies. The Company believes these features enhance its goal of becoming
a leader in this new business sector. The newly assembled management includes a
capable team with over 17 years of successful operating experience in the
alternative site healthcare market, whose work has been characterized by their
innovation and contributions to the growth of the market.
With the acquisition of MONITRx, the Company acquired a suite of powerful
applications focused on driving the business of improving quality patient care
through advanced network-based products and services. The strategic premise of
the effort was to develop and validate that through providing "point-of-care"
automation to field-based care providers (nurses, therapists, aides, etc.), home
healthcare agencies are expected to realize significant and immediate gains in
operating efficiency. The prototype of the product was tested in a pilot
program at the Fremont, California branch of Coram Healthcare, Inc. Coram is a
major US home healthcare agency located in the San Francisco Bay Area. The
results of the pilot program were generally very positive.
The home healthcare market has been characterized by inefficient operating
practices. The inefficient nature of the market developed in large part as a
result of an overall lack of payer-based incentives because
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of heavy subsidies paid by government reimbursement programs through HCFA and
Medicare. As a result of government mandates, however, home healthcare providers
have now been forced to accept a radical, risk-based, reimbursement environment
called the "Prospective Payment System." To remain profitable under the
Prospective Payment System, home healthcare agencies must find a way to cut
operating costs by as much as 35% while continuing to show that they
consistently provide quality patient care. The Company believes the opportunity
to assist these providers with new technology provides a market for its
CuraSys products.
The Company's suite of network-based software products is marketed under
the CuraSys(TM) brand name. The hallmark of the suite is its use of advanced
technologies to deliver information and analysis to assist home healthcare
agencies achieve rapid efficiency in their operations. The products become
especially efficient when linked with the Company's ORCANet Intranet
technologies.
According to studies conducted by the Company with cooperation of
prospective customers, the use of the Company's products reduces operating costs
as a result of the following:
. Providing home healthcare agency operations managers with a detailed
understanding of the clinical, operational and economic procedures
will effectively bring the desired outcome of treatment.
. Defining risks to both clinical efficacy and profitability.
. Increasing operating efficiency through the dissemination of effective
standardized, disease-based, operating procedures to all users of the
system.
. Eliminating inefficient labor intensive, paper-based operating
procedures and transcription costs.
. Dramatically reducing Days Services Outstanding by assuring that all
documentation required for payer reimbursement is available for
submission in a timely fashion immediately following completion of
reimbursable services.
Due to the open, network-based architecture of the Company's products,
there is a significant opportunity for integrating physicians, payers and other
customer business partners via the ORCANet into the CuraSys products. These
applications will take advantage of low-cost, rapidly developed, browser-based
technologies which access patient care data at customer sites via the ORCANet.
The most significant competitor of the Company is HBO & Co., a billion-
dollar healthcare information systems company. Both HBO and the Company are
introducing similarly staged products into the marketplace. The market is
estimated to consist of 15,000 home healthcare agencies, with a total
penetration of less than 20%. The home healthcare market in the US provides
post-acute care patient services through a number of delivery segments. The
majority of market activity involves providing care for post-operative,
geriatric, terminal and chronically ill patients outside hospitals.
Organizations serving the market are both for-profit and not-for-profit and
range in scale from single site community-based nursing agencies to national
for-profit managed care organizations. In total, the market currently maintains
over 15,000 registered home healthcare agencies in the following market
segments:
. Local Home Nursing Agencies
. Regional Home Healthcare Agencies
. Regional Managed Care Organizations
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. Hospital-based Home Healthcare Agencies
. National Home Healthcare Agencies
. National Managed Care Organizations
The market receives most of its revenues from the US Health Care Financing
Administration (HCFA) as entitlements delivered under the Medicare/Medicaid
programs or from commercial insurers and managed care organizations. This
market represents the fastest growing segment of the US healthcare industry,
estimated at approximately 22% per year. This is evidenced in part by the
growth in annual reimbursements from $4 billion in 1990 to almost $20 billion in
1996 through Medicare/Medicaid alone. The rapid growth of the industry is
driven by:
. Lower home care costs (approximately 60% below hospital-based care for
similar services).
. A trend toward earlier discharge of patients from hospitals and other
critical care environments.
. Trends in payer reimbursement in critical care settings toward
negotiated group contract (capitation) or risk-based episodic models.
. The overall aging of the US population.
. Improved technology in acute care.
Since the mid-1980's, Medicare, HCFA and other payers have worked to revise
the reimbursement structure of the home healthcare market. The market has
evolved from a virtual cottage business to a $25 billion industry in less than
20 years. As the factors affecting growth discussed above began to affect
institutional healthcare in the late 1970's, home care was viewed as an
effective means of providing medical care to patients who would normally require
weeks or months of recovery from acute care situations in a hospital setting.
Subsequently, demand for home care services increased dramatically and within a
few years, thousands of home care organizations were developed and licensed
annually.
The typical home healthcare agency consists of field-based nurses, aids and
therapists managed by a central administration and operations management
resources. An agency can be either a single location or may be comprised of a
number of branch locations. Business is derived through contracts with local
hospitals or managed care providers to accept patients discharged by these
providers for care in their own home or in sub-acute or extended care
facilities. Agencies also contract with pharmacies, medical supply and
equipment companies, specialty care agencies, and other service providers to
adequately supply and deliver care to their patients.
With the rapid growth of the market in the 1980's, HCFA experienced
difficulty in preventing fraud and abuse in the reimbursement system. The
problems of the system were compounded by the practice of enforcing a largely
paper-based system of establishing the basis for reimbursement. The system
required that all participants in the continuum of care (Medicare, physicians,
home healthcare agencies, and individual care providers) manage hundreds of
thousands of handwritten notes documenting and proving that the care authorized
to be delivered to a patient was actually provided as prescribed within an
established plan of treatment. In the mid-1980's, the US government began to
investigate incidents of flagrant abuses and, in a number of highly publicized
cases, aggressively prosecuted numerous high profile agencies for blatant fraud
and abuse of the Medicare/Medicaid system.
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In the wake of these investigations, HCFA began implemented a series of
ill-fated policies that ultimately failed to provide adequate economic
incentives for home healthcare agencies to become efficient. The Federal
Government also instituted heavy handed enforcement tactics (e.g., "Operation
Restore Trust") in an effort to use fines and criminal liability to encourage
institution of controls and elimination of fraud and abuse. Finally, as a
result of cost-cutting measures affecting HCFA as part of the Balanced Budget
Act of 1996, HCFA announced its intent to proceed with a revised reimbursement
program referred to as the "Prospective Payment System" ("PPS"). Under the PPS
, HCFA determined to provide home healthcare agencies with fixed reimbursement
based on the nature of the disease of the patient and the desired outcome of the
treatment for the disease. This model is similar to the earlier DRG program
used to control hospital treatment costs which in many ways spawned the rapid
growth of home health care by prompting hospitals to discharge patients earlier
and to move many traditional hospital-based treatment programs to home agencies.
Under the PPS, a patient is referred to a home healthcare agency to be
treated for a specific disease or group of diseases. Based on national averages
identified by HCFA, the agency is provided with an initial distribution that
would cover the costs to treat the disease for a fixed period of time and/or
arrive at the desired treatment goals defined for the patient's care. The
agency must provide data supporting that the claim that the care being provided
is based on recognized quality standards and that the patient was actually
satisfied with the care received. The PPS has been implemented under pilot
programs in 150 agencies nationwide. The purpose of the pilot is to provide
standard cost data needed to fully implement the program within 2 years. In
October 1997, HCFA announced the implementation of the Interim Payment System or
IPS, which took effect in January 1998. Under the IPS, a mandatory 15%
reduction was implemented in all HCFA reimbursement to home healthcare providers
treating patients within the Medicare system. The industry views this as an
indication that full implementation of the PPS is expected and that the industry
must modernize and become more efficient if it is to continue to be profitable.
Despite the rapid technical advancements in many industries, the home
healthcare industry has been relatively slow to modernize its information
technology. Less than 20% of the market currently relies on information
technology of any kind to automate operations. A recent study confirmed this
when it reported that in 1995 less than 1% of all home healthcare visits were
performed using information technology to collect patient care and field
operational data interactively within the process of providing care. The
traditional reason for this lack of information technology and infrastructure
has been the lack of economic motivation for the market to become more efficient
and competitive. This has now changed with the moves to cut reimbursement
described above.
The trends in the home healthcare market described above were the genesis
for the Company's CuraSys products. CuraSys is designed to provide home
healthcare agencies and other customers a world class information system based
on simple to use applications utilizing commercial grade technologies. The
system includes:
. A scalable, system-wide network-based client/server open systems
architecture based on industry standard Windows-95(R) and Windows
NT(R) operating systems.
. Cost effective data networks that can be both sized dynamically
according to the needs of each customer and branch as well as used to
provide value added services to customers and business partners that
include physicians and payers as well as home healthcare agencies.
. Relational Database Management Systems (RDBMs) to collect, store,
analyze, and report branch, agency, and system-wide information.
. Proven development tools such as PowerBuilder and C++ that provide
rapid and efficient production of stable software systems.
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. Administrative and management functions to adequately and effectively
support the system's growth and expansion over time.
Pilots using the system have determined that it greatly increases efficacy
and productivity of agency operations. The bulk of the savings defined were
found as a result of driving inefficient, paper-based work processes out of the
daily operations of the organizations studied. The potential cost savings
provide customers with the ability to reduce both field-based and back office
labor costs and to increase patient population and revenues as a result.
The products are marketed through a number of channels. Primarily, Orca
employs a regional outside direct sales team focused on defined geographic
markets and niche segments. In addition to direct sales, the Company is also in
the process of launching a comprehensive VAR and channel marketing program that
will be offered to large consulting firms, management companies and technology
marketing agencies.
CuraSys is presently installed at three strategic sites nationwide. Each
location represents a specific segment of the market. The Company has recently
expanded its sales force and hired 4-5 regional sales managers prior to the end
of July 1998. Advertising and promotional campaigns are expected to support the
sales expansion effort of the Company by increasing name and product recognition
for the CuraSys products and services.
There are a number of companies that have entered the market with
technology designed to facilitate gathering and analysis of information required
for administration of home healthcare agencies. Administration services include
resource/patient scheduling, clinical operations, admissions and billing
functions. These systems have been in existence for a number of years and
provide basic value for their designed operations. At present there are very
few entrants capable of providing a viable product aimed at capturing and
analyzing operational and clinical data taken at the primary site of care.
Other companies that provide these "back office" systems (i.e., HBO & Co., Delta
Health Systems, InfoMed) have also developed or acquired point-of-care
technologies as add-on applications to their existing systems. The typical
approach has been to develop software that can be used by care providers via
notebook or laptop computer. In general, however, these systems have been
poorly received and market penetration has been limited. The major objections
of the customers have included high capital investments required for
installation of these systems and, more fundamentally, the resistance of the
nursing community to laptop computers. To use these systems, the provider must
master basic computer skills for input of data and must learn more sophisticated
tasks such as use of modems for downloading and uploading records. These
systems also tend to reflect biases of their highly technical designers and
often are developed in terms and logic that are not easily assimilated by the
end user. The Company is not aware of any such systems that are in significant
actual use.
One competitor has emerged with the first non-PC-based system for this
market. Patient Care Technologies, Inc., has developed this product utilizing a
Data General "hammer head" style hand-held unit or keypad. The Company views
Patient Care as its primary potential competitor, but believes its strategy and
the connection with the Company's own Network Services Group provide a means for
effectively competing in the market. However, there is no assurance that this is
the case.
The Company has two patent filings now pending before the US Patent Office
relating to the CuraSys system. In addition, the Company has a design patent (US
serial no. 29 043 280) and a utility patent (US serial no. 08 549 415).
Employees
The Company has 47 full-time employees as of October 7, 1998.
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Recent Developments
Restructuring Agreement. On April 27, 1998, the Company entered an
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agreement with Pacific Aerospace & Electronics, Inc. ("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 an Internet service
provider, including the rights and claims of PA&E in certain litigation
involving that company. The Company also joined in filing an involuntary
bankruptcy proceeding against that company 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 the Internet service provider's fully diluted
Common Stock. The purchase price due PA&E for 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
Company sold these rights and obligations with its own Internet services
business in September 1998.
Divestiture of Televar. In September 1998, the Company sold the Internet
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access business of its wholly owned subsidiary, Televar, Inc. ("Televar"). The
sale included all assets of Televar used in the Internet access business as well
as the rights and interests relating to the Internet service provider acquired
from PA&E described above. Under the terms of the agreement for the sale of
Televar assets, the buyer assumed certain liabilities of the Company related to
the Televar business and paid the Company cash of $300,000. The buyer also
agreed to assume trade accounts payable, leases and certain employee-related
expenses. The Company had earlier agreed to
acquire the buyer, but determined that a divestiture of the Internet service
business was more consistent with the future objectives of the Company. With the
divestiture of the Televar assets, the Company ceased operations in the Internet
access and services industry.
Considerations Related to the Company's Business
The business of the Company is subject to risks, many of which are outside
the control of the Company. These risks may cause the operating results and
financial condition of the Company to differ from the Company's own
expectations. The following factors should be considered in evaluating the
Company's business and operations:
Limited Operating History, Operating Losses
The Company has had a limited operating history in the healthcare
information industry. Although the Company has experienced recent growth in
revenues, it experienced net losses of each of the last four fiscal years.
Furthermore, much of the revenue from past years was generated by the Company's
Internet access services business which was sold in September 1998. The
Company's current focus is on developing its alternate site medical information
products and marketing them. Notwithstanding cost-saving measures that the
Company has implemented, which include its divestiture of Televar, it expects
for the foreseeable future to continue to incur net losses. There is no
assurance that revenue growth will continue or that the Company will in the
future achieve or sustain profitability or positive cash flow from operations.
Need for Additional Capital
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The success of the Company will depend in significant part on its ability
to raise additional equity or debt financing, or combination of debt and equity
financing, to pay existing obligations, to provide working capital, and to
finance operations and potential acquisitions. The Company will be required to
seek additional funding from other sources to repay amounts borrowed from PA&E,
to repay other debt and to finance its operations. The Company's current
working capital sources are insufficient to fund its near-term operations. There
is no assurance that the Company will be able to raise additional capital on
favorable terms or, if it raises such additional capital, that such financing
will be sufficient to permit the Company to operate profitably.
New and Uncertain Market
The market for the Company's products and related services is in an early
stage of growth. Because this market is relatively new and because current and
future competitors are likely to continue to introduce competing services and
products, it is difficult to predict the rate at which the market will grow or
at which new or increased competition will result in market saturation. If
demand for the Company's products and services fails to grow or grows more
slowly than anticipated, or if the market becomes saturated with competitors,
the Company's business, operating results and financial condition will be
adversely affected.
Technological Change and New Services
The software development business historically has been characterized by
rapidly changing technology, frequent new product and service introductions, and
evolving industry standards and customer expectations. The Company believes that
its future success will depend on its ability to anticipate such changes and to
offer on a timely basis services that meet these evolving industry standards and
customer requirements. There can be no assurance that the Company can
successfully anticipate such changes and develop and bring new products and
services to market in a timely manner, or that services or technology developed
by others will not render the Company's services and technology noncompetitive
or obsolete.
Reimbursement and Cost Containment Policies
Revenues of the Company are derived in part from payments made by entities
who depend significantly on reimbursement by third-party payers, including
Medicare and Medicaid, private insurance and self-funded employer groups. These
payers have implemented, from time to time, and may be expected in the future to
implement cost containment measures in an effort to reduce the expense of health
care for their insureds. Such measures include establishment of rate schedules
and limitations on amounts reimbursed by the insurers and restrictions on the
types of therapies, medications and illnesses covered by their insurance or
benefit plans. Such policies may adversely affect the business of the Company
by reducing or limiting the revenues of its clients and the amount they may have
to pay for new technology. The home health care industry generally provides
patient treatments and therapies at lower costs to third-party payers than
comparable hospital care providers. As a result, home health care providers and
suppliers have benefitted from cost containment policies which are intended to
encourage the use of home health treatment and care. While the Company believes
that the trend in health care reform is toward increasing home health care and
managed care programs, the need to reduce health care expense in general may
lead to additional limitations on reimbursement levels and cost containment
policies affecting the home health care industry. Such limitations, changes in
reimbursement levels and other cost containment measures could have a material
adverse effect on the Company's business and profitability.
Product Liability and Malpractice Liability; Insurance
Providers in the health care industry, including those operating in the
same segments as the Company, are from time to time subject to lawsuits alleging
malpractice, product liability or related legal theories, which have become an
increasingly frequent risk of doing business for physicians, hospitals, and
other medical care providers. While it is unlikely that any of the Company's
products or services would result in personal injury,
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errors in billing or other data processing using the Company's products and
services may occur, resulting in liability for the customer using such product
or service in its own business. The Company currently maintains liability
insurance intended to cover such claims. However, the coverage provided by such
policies in a particular case is subject to acceptance of the claim relating to
such occurrence by the insurance carrier. There can be no assurance that a
particular claim, if asserted, would be covered by the existing policies of
insurance, neither can there be any assurance that the coverage limits of the
policies now maintained by the Company will be adequate, that the Company will,
in the future, be able to continue to maintain or obtain such insurance or that
such insurance will be available to the Company in the future at costs which are
acceptable to the Company or within its ability to afford such coverage. A
successful claim against the Company in excess of any policy limits could have a
material adverse effect upon the business of the Company and upon its financial
condition. The assertion of such claims, regardless of their merit or eventual
outcome also may have a material adverse effect on the Company and its business
reputation and performance.
Competition
The health care industry is highly competitive and the market is divided
among a large number of providers. Many of the Company's competitors have or
may obtain significantly greater financial and marketing strength and resources
than the Company. There can be no assurance that the Company will not encounter
increased competition in the future, which could have a material adverse effect
on the ability of the Company to successfully market its products and services.
Dividend Policy
The Company has never declared or paid any cash dividends on its Shares and
does not anticipate paying cash dividends in the foreseeable future. The
payment of dividends to holders of Common Stock may be subject to preferences
granted in the future by the Board of Directors to holders of the Company's
Preferred Stock.
Risks Inherent in Company's Growth Strategy
The Company may continue to grow and diversify through expanding current
operations or by acquiring existing operations. This growth strategy entails
the risks inherent in assessing the value, strengths and weaknesses of
acquisition candidates, in integrating and managing the operations of acquired
companies and in identifying suitable locations for additional branch
facilities. The Company's growth may place significant demands on the Company's
financial and management resources. There can be no assurance that the Company
will be able to implement its growth strategy or that such strategy will
ultimately prove successful.
Volatility of Stock Prices
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Company's common
stock, like the stock prices of many publicly traded home health care companies,
has been and may continue to be highly volatile. Announcements of innovations
or new products or services by the Company or its competitors, developments or
disputes concerning proprietary rights, publicity regarding actual or potential
medical results relating to products under development by the Company or its
competitors, regulatory developments in both the U.S. and foreign countries and
economic and other external factors, as well as period-to-period fluctuations in
financial results, may have a significant impact on the market price of the
common stock.
Year 2000 Risks
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Historically, the Company has implemented computer systems for accounting
and financial management, purchasing, research, development and design, and
other purposes. The computer industry recently has recognized that many existing
computer programs, many of which are large, custom-programmed mainframe
applications that have continuously been written and amended over a long time
period and by a variety of different programmers, use only two digits to
identify a year in the date field. Such programs were designed, developed and
modified without considering the impact of the upcoming change in the century.
If not corrected, many such computer applications could fail or create erroneous
results by or at the year 2000 by erroneously identifying the year "00" as 1900,
rather than 2000. This problem has become known, among other names, as the
"Year 2000" problem. Correcting a Year 2000 problem on a large mainframe or
network application, however, can be difficult and expensive. In many cases,
the original developer of the subject software is either defunct or otherwise
unable or unwilling to address the problem. Moreover, because many individuals
may have programmed different pieces of a program, and some of them may have
died or cannot be located, many companies will be forced to review the code
comprising their software on a line-by-line basis, which can take enormous
amounts of time and significant financial resources. The Year 2000 issue
affects virtually all companies and organizations, including the Company. If a
company does not successfully address its Year 2000 issues, it may face material
adverse consequences. The Company is in the process of insuring that its
internal computer systems are Year 2000 compliant. The Company's own products
are designed using and for use with current personal computer technology and are
designed using and for use with current personal computer technology and are
designed to be Year 2000 compliant. With respect to third-party providers whose
services are critical to the Company, the Company intends to monitor the efforts
of such providers as they become Year 2000 compliant. Management is presently
not aware of any Year 2000 issues that have been encountered by any such third-
party which could materially affect the Company's operations. Notwithstanding
the foregoing, there can be no assurance that the Company will not experience
operational difficulties as a result of Year 2000 issues, either arising out of
internal operations, or caused by third-party service providers, which
individually or collectively could have an adverse impact on business operations
or require the Company to incur unanticipated expenses to remedy any problems.
Item 2. Description of Property
The following chart summarizes the Company's properties currently under
lease for its operations:
<TABLE>
<CAPTION>
Location Approximate Size Annual Rents Expiration Date
- - -------- ----------------- ------------ ---------------
<S> <C> <C> <C>
Bothell, WA 20,000 square ft. $366,000 Feb. 2004
San Francisco, CA 350 square ft. $ 28,200 month-to-month
</TABLE>
The Bothell property is subleased from Pacific Aerospace & Electronics,
Inc., a shareholder of the Company (PA&E) at market rates and on terms that are
considered by the Company to be arm's length.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Page 11 of 57
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Page 12 of 57
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters.
The Company's Common Stock is traded on the over-the-counter (Nasdaq
Electronic Bulletin Board) market under the symbol "ORCA." In April 1997, the
Company approved and implemented a 4 for 1 reverse split of its common stock,
reducing the number of issued and outstanding shares of its common stock from
14,460,745 to 3,615,186 shares. The prices indicated in the following chart
reflect this reverse split.
The following table shows the range of high and low bids for the Common
Stock as reported by Nasdaq for each period in the fiscal years shown below.
<TABLE>
<CAPTION>
Period (Fiscal Year Ended June 30,) High Low
----------------------------------- ---- ---
<S> <C> <C>
1996
Third Quarter (from February 13, 1996) No Quotes Entered
Fourth Quarter No Quotes Entered
1997
First Quarter $1.8125 $0.625
Second Quarter $1.250 $0.750
Third Quarter $1.750 $0.750
Fourth Quarter $6.875 $1.625
1998
First Quarter $5.625 $3.750
Second Quarter $2.750 $1.000
Third Quarter $3.000 $1.000
Fourth Quarter $2.625 $1.750
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commission, and may not represent actual transactions. As of September
30, 1998, there were approximately 500 holders of record of 12,778,407 shares of
Common Stock issued and outstanding.
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings to
fund the operation of its business and does not anticipate paying dividends on
the Common Stock in the foreseeable future.
Recent Sales of Unregistered Securities
In November 1997, 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, which expired September 30, 1998. The net proceeds to the Company were
approximately $1.4 million (or approximately $1.41 per share). The offer and
sale of such shares was made without registration under the Securities Act of
1933, as amended (the "Act"), pursuant to and in reliance upon exemptions from
the registration requirements of the 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.
In February 1998, the Company acquired Monitrx and DNA for cash and stock
valued at approximately $4,150,000 and $265,000, respectively. 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
Page 13 of 57
<PAGE>
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.
In March 1998, the Company also 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.
In August, 1998, the Company issued 722,000 shares of restricted common
stock at a price of $1.50 per share in a private transaction to certain
accredited investors, which were also shareholders of the Company. Total
proceeds to the Company from the sale of these shares was $1,083,000. The
Company continues to offer its shares to other potential purchasers at the same
price and terms.
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 access to information reasonably intended to allow them to make an informed
decision regarding a purchase of the shares.
In fiscal year 1997, the Company issued 1,125,000 shares of Common Stock to
consultants who were shareholders of the Company prior to its merger with and
into Televar and who provided financial and other services to that entity.
Item 6. Management's Discussion and Analysis or Plan of Operation
Formation of Company and Overview
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.
On April 12, 1997, the Company effected a one-for-four reverse split of its
outstanding common shares. Before the split, the Company had 14,640,745 shares
outstanding. After giving effect to the reverse split, the Company had
3,660,186 common 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
Page 14 of 57
<PAGE>
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 earliest of: (a) the closing of Orca's third round of financing,
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 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 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 common stock
on a fully diluted basis. 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 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 will ultimately have
significant value for the Company.
In February 1998, the Company acquired all of the assets and certain
liabilities of Monitrx. Monitrx develops and markets advanced proprietary and
patented network software applications for the home health care industry. In
addition, in February 1998, the Company acquired all the assets and certain
liabilities of DNA. 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. Each of these acquisitions is more fully
described in Part I, Item 1., Business - The 1998 Acquisitions, and in the
"Business Acquisitions" footnote to the accompanying consolidated financial
statements.
In September 1998, the Company sold substantially all of the assets and
business of its Internet Service Operations. In addition, the Company rescinded
its agreement to purchase Boss Internet Group ("Boss"), an Internet Service
Provider located in Washington. Under the terms of the divestiture of the
Company's Internet Services Group, the Company sold all of its rights and claims
to Brigadoon, described above. The Company remains liable under the $950,000
note payable to PA&E and the $1,215,765 note payable to a bank that has been
guaranteed by PA&E.
Going forward, the Company intends to provide software application
solutions to the home health care industry.
During the past year the Company has restructured itself to enter the
market for these products. This includes the following:
. Assimilation of a complete new management team;
Page 15 of 57
<PAGE>
. Acquisition of two key strategic entities (Monitrx and DNA), which help
to form the backbone of the Company's vision for the future.
. Completion of two significant private equity fundings
providing net proceeds of approximately $5,750,000;
. Execution of a debt for equity swap to eliminate approximately
$3,300,000 in debt; and
. Introduction of the Company's primary product line, CuraSys(TM), to
the health care industry.
Results of Operations
The Company has changed significantly in 1998. The Company began the year
with one subsidiary (Televar) that was an Internet service provider. In
February 1998, the Company acquired Monitrx and DNA. Monitrx develops and
markets advanced proprietary and patented network based software applications
for the home health care industry. 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, using a
common touch-tone telephone pad.
In June 1998, the Company agreed to acquire Boss Internet Group, an
Internet service provider. However, in September 1998, the Company sold
substantially all of the assets and liabilities of Teller and rescinded its
previous acquisition of Boss. Accordingly, the operating results of Televar and
Boss including provisions for estimated losses to the date of divestiture and
estimated costs of disposing of the operations have been segregated from
continuing operations and reported as a separate item on the Company's statement
of operations.
Additionally, the loss from continuing operations for the year ended June
30, 1998 includes the operating results of Orca's corporate office for twelve
months and the operating results of Monitrx and DNA for five months (since the
date of acquisition). The loss from discontinued operations for the year ended
June 30, 1997 does not include the operating results of Monitrx or DNA because
they were not part of the Company's operations in 1997.
The Company had no revenues attributable to its continuing operations for
the years ended June 30, 1998 and 1997. Therefore, there was no cost of
revenues for those periods. Operating expenses from continuing operations for
the year ended June 30, 1998 were approximately $3,493,000 compared to $154,000
for the year ended June 30, 1997. This increase is due to inclusion of the
operating expenses of subsidiaries acquired in 1998, which are not included in
1997 operating expenses.
Research and development expenses were approximately $642,000. These
expenses consisted primarily of personnel and allocated overhead and were
incurred in conjunction with research and further development of the CuraSys
software. Sales and marketing expenses were approximately $474,000. These
expenses consisted primarily of personnel, travel, marketing, advertising
expenses, and allocated overhead. These expenses represent the cost of efforts
associated with the sales and marketing of the CuraSys product. Professional
services expenses were approximately $476,000. These expenses included
personnel, training and allocated overhead. These expenses were incurred to
provide professional technical support for existing contracts and training in
anticipation of future growth. Customer service expenses were approximately
$196,000. These expenses consisted primarily of personnel, training and
associated overhead. These expenses were incurred to provide customer service
for existing contracts and develop the department to accommodate projected
growth. General and administrative expenses were approximately $1,705,000 for
the year ended June 30, 1998 compared to $154,000 for the year ended June 30,
1997. General and administrative expenses consisted primarily of personnel and
administrative costs. In addition, general and administrative expenses for the
year ended June 30, 1998, included charges of approximately $400,000 to reserve
for advances made to
Page 16 of 57
<PAGE>
related parties and employees due to the uncertainty of collection. General and
administrative expenses for the year ended June 30, 1997, were comparatively
lower because they do not include expenses of the acquired subsidiaries which
were not part of the Company's operations in 1997. Additionally, there was a
significantly lower level of corporate activity in 1997.
Going Concern Matters
The accompanying financial statements have been prepared on the assumption
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company's independent public accountants have issued their
report for the year ended June 30, 1998 that includes an explanatory paragraph
stating that the Company's recurring losses and accumulated deficit, among other
things, raise substantial doubt about the Company's ability to continue as a
going concern. As shown in the financial statements, during the years ended
June 30, 1998 and 1997, the Company incurred losses of approximately $7,333,738
and $2,787,328, respectively. In addition, the Company has a net working
capital deficit of about $2,409,476, a cash balance of $472,754 and total
shareholders' equity of $1,568,506 as of June 30, 1998. These factors, among
others, may indicate that the Company may not 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 or obtain additional financing to fund
its operations 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 and on the success of its new products.
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.
Business Acquisitions
In February 1998, the Company acquired all of the assets and certain
liabilities of 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 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 DNA. The 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.
Page 17 of 57
<PAGE>
In June 1998, the Company agreed to purchase the stock of Boss. The
aggregate purchase price of $731,000 consisted of 777,776 shares of the
Company's restricted common stock, warrants to purchase 300,000 shares of common
stock exercisable over the next 18 months, and payment of 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 transaction was rescinded in
September 1998. See "Discontinued Operations," below.
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
amortized into operations over periods ranging from three to five years.
The following summary, prepared on a pro forma basis, combines the
consolidated condensed results of operations as if Monitrx and DNA had been
acquired as of the beginning of the year ended June 30, 1997. There are no
material adjustments that impact the summary.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues $ - $ -
Loss from continuing operations $(4,761,000) $(1,630,000)
Net loss from continuing operations $(4,777,000) $(1,717,000)
Basic Loss per Share from Continuing Operations $ (0.65) $ (0.39)
Weighted Average number of shares outstanding 7,385,698 4,432,819
</TABLE>
The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been consummated as
indicated, nor are they intended to indicate results that may occur in the
future.
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 to the Boss Internet Group. In
addition, Boss and the Company, in a separate agreement, dated September 10,
1998, agreed to rescind the Company's agreement to acquire Boss Internet Group.
Accordingly, the operating results of the Internet Service Group, including
provisions for estimated losses to the date of disposal and estimated costs of
disposing of the operations have been segregated from continuing operations and
reported as a separate item on the statement of operations as discontinued
operations.
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 sheets are as follows:
Page 18 of 57
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Receivables - net $ 212,227 $ 373,216
Prepaid expenses $ 70,553 $ 70,556
Property and equipment - net $1,542,112 $ 826,413
Other assets 642,366 227,249
Accounts payable (751,168) (1,414,317)
Accrued liabilities (188,107) (826,676)
Deferred revenues (385,625) (144,009)
Long-term debt (602,323) (2,153,648)
---------- -----------
$ 540,035 $(3,041,216)
========== ===========
</TABLE>
Liabilities of the Internet Services Group to be 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.
Under generally accepted accounting principles, a provision for loss on
discontinued operations has been included based upon management's best estimates
of the amounts expected to be realized on the sale.
Liquidity and Capital Resources
At June 30, 1998, the Company's total current assets were $809,855 and its
total current liabilities were $3,600,729 for net negative working capital of
$2,790,874.
The Company has met some of its cash requirements through a combination of
cash flow from its discontinued operations, issuance of Common Stock, borrowings
from PA&E and other sources and the conversion of certain related party debt
into equity.
The Company continues to carry a significant amount of debt, for which
there is no current source of repayment.
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 operations
and is in discussions with several potential sources of equity or debt
financing. 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.
During the year the Company issued 4,917,000 restricted shares of common
stock to certain accredited investors in two private transactions exempt from
registration under federal and state securities laws. In connection with these
offerings the Company also issued warrants to purchase 2,298,850 shares of
common stock at $1.85 per share, expiring in various amounts on September 30,
1998 and March 13, 1999. The net proceeds to the Company from these two
offerings was approximately.
As of June 30, 1998 the Company had outstanding common stock purchase
warrants as follows (no warrants were exercised, canceled or expired during the
year):
Page 19 of 57
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<TABLE>
<CAPTION>
Cash
Available
Exercise No. of from
Expiry Date Price Warrants Exercise
- - ----------- -------- -------- ---------
<S> <C> <C> <C>
September 1998 $1.85 496,000 $ 917,600
December 1998 2.04 100,000 204,000
March 1999 1.85 1,802,850 3,335,273
June 1999 2.04 100,000 204,000
December 1999 2.04 100,000 204,000
September 2001 1.81 65,000 117,650
--------- ----------
2,663,850 $4,982,523
========= ==========
</TABLE>
The holders of warrants, each acting on their own will most likely consider
a number of factors before exercising. Among those factors that could be
considered will be the current market value of the Company's common stock on or
around the exercise date and the prospects for the Company going forward. There
can be no assurances that warrant holders will exercise their rights and
purchase additional shares from the Company. Holders of warrants expiring in
September 1998 did not elect to exercise their rights to purchase additional
common stock shares and there can be no assurances that other outstanding
warrants will be exercised.
Income Taxes
The Company has available net operating loss (NOL) carry forwards of
approximately $10,728,000, the benefits of which will expire in various amounts
through 2013. NOLs will only be usable to the extent that the Company is
successful in obtaining future profitability, or incurring profitable
transactions.
Risks and Uncertainties
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.
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, or the Company's failure to adopt to a rapidly
changing business environment could have severe near-term impacts on the
Company's prospects for growth.
Page 20 of 57
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Year 2000 Issues
The Company uses computer hardware and software to manage its business and
operations and to aid in the design and manufacture of its products. The
Company also relies on third-parties to facilitate its business including, for
example: telecommunications providers; public utilities which provide electrical
power and other utilities needed in the Company's operations; major credit card
companies that process payments for the Company's products; major shipping
companies through which the Company ships its products; financial institutions
that provide commercial banking and other financial services to the Company; and
the over-the-counter stock market, which reports information regarding the
Company's stock.
Many existing computer programs use only two digits to identify a year in
the date field and were designed, developed and modified without considering the
impact of the upcoming change in the century. If not corrected, such computer
applications could fail or create erroneous results by or after the Year 2000 by
erroneously identifying the year "00" as 1900, rather than 2000. Correcting a
Year 2000 problem on a large mainframe or network application can be difficult
and expensive. If a company does not successfully address its Year 2000 issues,
it may face material adverse consequences. The Company is in the process of
insuring that all of its internal computer systems are Year 2000 compliant. In
addition, the Company has designed its own products to be Year 2000 compliant.
The Company has selected a team of employees to assess the readiness of the
Company for meeting the Year 2000 problem. As a result of the assessment
efforts of this team to date, the Company has identified one product component
requiring modification and has engaged the services of a consultant to make the
necessary modification to make this product Year 2000 compliant. It is expected
that the assessment and remediation, if any, of Year 2000 issues affecting the
Company's internal systems or products, including any issues involving embedded
technology, will be completed by June 30, 1999.
With respect to third-party providers whose services are critical to the
Company, the Company intends to monitor the efforts of such providers as they
become Year 2000 compliant. The Company is presently not aware of any Year 2000
issues that have been encountered by any such third party which could materially
affect the Company's operations. Notwithstanding the foregoing, there can be no
assurance that the Company will not experience operational difficulties as a
result of Year 2000 issues, either arising out of internal operations or caused
by third-party service providers, which individually or collectively could have
a material adverse effect on the Company's business, financial condition or
results of operations.
Recent Accounting Pronouncements
In September 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires
entities presenting a complete set of financial statements to include details of
comprehensive income that arise in the reporting period. Comprehensive income
consists of net earnings or loss for the current period and other comprehensive
income, which consists of revenue, expenses, gains and losses that bypass the
statement of earnings and are reported directly in a separate component of
equity. Other comprehensive income includes, for example, foreign currency
items, minimum pension liability adjustments and unrealized gains and losses on
certain investment securities.
SFAS 130 requires that components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS is effective for fiscal years beginning after
December 15, 1997 and requires restatement of prior period financial statements
presented for comparative purposes. Adoption of SFAS 130 is not required for
reporting on interim periods prior to the close of the fiscal year beginning
after December 15, 1997. The Company will adopt SFAS 130 commencing with the
year ending June 30, 1999 and does not anticipate it will have a significant
impact on the Company.
Page 21 of 57
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During January 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5 "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 becomes effective for all fiscal years
beginning after December 15, 1998. The Company will adopt SOP 98-5 in its
fiscal year beginning July 1, 1999. Because the current amortization periods of
the product development costs and start-up costs averaging 12 months, the
Company does not expect the adoption of SOP 98-5 to have a material impact on
the Company's financial statements.
During January 1998, the AICPA issued Statement of Position 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 becomes effective for all fiscal years
beginning after December 15, 1998. The Company does not expect the adoption of
SOP 98-1 to have a material adverse effect on the Company's financial
statements.
Subsequent Events
On August 20, 1998 the Company received approximately $840,000 in partial
net proceeds from a private equity offering. The Company anticipates receiving
additional funds under this offering. In the event that the offering is fully
subscribed it is anticipated that the net proceeds to the Company would be
approximately $1,400,000.
The Company is continuing discussions to secure additional financing.
Notwithstanding the receipt of funds in connection with the above mentioned
August financing, the Company requires additional funds to continue operations.
There can be no assurance that the Company will be successful in its efforts to
attract additional financing.
On September 28, 1998 the Company completed a transaction whereby it sold
substantially all of the assets and most of the liabilities of its wholly owned
subsidiary, Televar to Boss. The transaction is more fully described in the
"Discontinued Operations" note to the financial statements.
Page 22 of 57
<PAGE>
Item 7. Financial Statements
The consolidated financial statements of the Company follow and are a part
of this report.
Index to Financial Statements
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report
Balance Sheet, June 30, 1998
Statements of Operations for the Years Ended
June 30, 1997 and June 30, 1998
Statements of Stockholders' Deficit for the Years Ended
June 30, 1997 and June 30, 1998
Statements of Cash Flows for the Years Ended June 30, 1997
and June 30, 1998
Notes to Financial Statements
</TABLE>
Page 23 of 57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF ORCA TECHNOLOGIES, INC.:
We have audited the accompanying consolidated balance sheets of Orca
Technologies, Inc. (a Utah corporation) and subsidiaries as of June 30, 1998 and
1997, and the related consolidated statements of operations, shareholders'
(deficit) equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 Orca Technologies,
Inc. as of June 30, 1998 and 1997, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Orca
Technologies, Inc., and its subsidiaries, will continue as going concerns. As
discussed in the footnotes to the financial statements, the Company has
accumulated losses and a net working capital deficit as of June 30, 1998, which
raise substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to these matters are also described in
the footnotes. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Mantyla, McReynolds and Associates
Salt Lake City, Utah
August 21, 1998,
Except for Note 19, as to which the date is October 8, 1998
Page 24 of 57
<PAGE>
ORCA Technologies, Inc.
CONSOLIDATED BALANCE SHEETS
As of June 30
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
- - ------
CURRENT ASSETS
Cash and cash equivalents $ 472,754 $ -
Receivables 217,227 373,216
Inventories 36,728 -
Prepaid expenses and other 83,146 70,556
-------------------- -------------------
Total Current Assets 809,855 443,772
-------------------- -------------------
LONG-TERM RECEIVABLES 45,146 38,148
PROPERTY AND EQUIPMENT, net 2,366,185 826,413
OTHER ASSETS 4,453,704 189,101
-------------------- --------------------
$ 7,674,890 $ 1,497,434
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- - ----------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,001,454 $ 263,016
Accounts payable 1,222,329 1,414,317
Accrued liabilities 557,086 826,676
Accrued loss for discontinued operations 1,035,625 -
Deferred revenues - 144,009
-------------------- --------------------
Total Current Liabilities 4,816,494 2,648,018
-------------------- --------------------
LONG-TERM DEBT 1,289,890 1,890,632
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY (DEFICIT) 1,568,506 (3,041,216)
-------------------- --------------------
$ 7,674,890 $ 1,497,434
===================== ====================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 25 of 57
<PAGE>
ORCA Technologies, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended June 30
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenue $ - $ -
Costs and Expenses:
Cost of revenue - -
Research and development 642,442 -
Sales and marketing 473,515 -
Professional services 476,499 -
Customer services 195,680 -
General and administrative 1,705,003 154,420
Total operating costs and expenses 3,493,139 154,420
Operating Loss (3,493,139) (154,420)
Interest Income 25,158 -
Interest Expense (248,685) -
Loss from Continuing Operations (3,716,666) (154,420)
Discontinued Operations:
Loss from discontinued operations (2,017,072) (2,632,908)
Loss on disposal (1,600,000) -
Net Loss $ (7,333,738) $ (2,787,328)
Basic Loss per Share:
Loss from Continuing Operations $ (0.57) $ -
Loss from Discontinued Operations (0.55) (0.89)
=================== =====================
Net Loss per Share $ (1.12) $ (0.89)
=================== =====================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 26 of 57
<PAGE>
ORCA Technologies, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
For the Years Ended June 30
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
------ ---------- ----------- -----
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1996 $ 1,697 $ 306,056 $ (606,641) $ (298,888)
Net Loss (2,787,328) (2,787,328)
Merger of Televar, Inc. and ORCA 11,818 (11,818) -
Shares issued for services in connection -
with the Televar / ORCA merger 1,125 (1,125) - -
Reverse stock split (one-for-four) (10,980) 10,980 - -
Stock issued in satisfaction of a debt 45 44,955 - 45,000
------------------- ------------------- ------------------- -------------------
BALANCE, JUNE 30, 1997 3,705 349,048 (3,393,969) (3,041,216)
Net Loss (7,333,738) (7,333,738)
Stock issued in satisfaction of a debt 14 52,486 - 52,500
Sale of common stock 4,917 5,744,952 - 5,749,869
Acquisition of businesses 2,088 1,919,585 - 1,921,673
Conversion of debt to equity 2,110 4,217,308 - 4,219,418
-------------------- -------------------- -------------------- ---------------------
BALANCE, JUNE 30, 1998 $ 12,834 $ 12,283,379 $ (10,727,707) $ 1,568,506
==================== ==================== ==================== =====================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 27 of 57
<PAGE>
ORCA Technologies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30
<TABLE>
<CAPTION>
OPERATING ACTIVITIES 1998 1997
---- ----
<S> <C> <C>
Net Loss $ (7,333,738) $ (2,787,328)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 723,575 204,018
Loss on disposal of subsidiary 1,600,000 -
Write-off of long-term notes receivable 518,027 -
Change in operating assets and liabilities,
net of effect of businesses acquired:
Accounts receivable 26,042 40,480
Inventories (34,460) -
Accounts payable (381,102) 825,627
Other current assets (16,538) (50,520)
Other current liabilities (197,969) 490,622
------------------ -----------------
Net Cash Used By Operating Activities (5,096,163) (1,277,101)
------------------ -----------------
INVESTING ACTIVITIES
Advances under long-term receivables (104,556) (98,703)
Advances to related parties under long-term receivables (332,908) -
Cash collections from long-term receivables 6,601 4,701
Capital expenditures for property and equipment (930,473) (306,875)
Pre-acquisition advances to acquired subsidiaries (480,626) -
Change in other assets - net (94,612) -
------------------ -----------------
Net Cash Used By Investing Activities (1,936,574) (400,877)
------------------ -----------------
FINANCING ACTIVITIES
Payments on long-term debt (647,088) (250,457)
Borrowings on long-term debt 15,765 132,000
Borrowing from related parties on long-term debt 2,386,946 1,787,000
Proceeds from sale of common stock 5,749,868 -
------------------ -----------------
Net Cash Provided By Financing Activities 7,505,491 1,668,543
------------------ -----------------
Net Cash Provided (Used) 472,754 (9,435)
Cash and cash equivalents, beginning of year - 9,435
------------------ -----------------
Cash and Cash Equivalents, End of Year $ 472,754 $ -
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Page 28 of 57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Orca Technologies, Inc., located in Bothell,
Washington provides sophisticated network-based software solutions for the
increasing information needs of the home healthcare industry. The
Company's software products are designed to fully integrate both the front
and back office management needs of a home health care agency.
In December 1997 the Company changed its name from "Jungle Street, Inc." 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".
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."
ACCOUNTING PRINCIPLES. The financial statements are prepared on a basis
consistent with United States generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of Orca
Technologies, Inc. and Subsidiaries (the Company) include the accounts of
the Company and its Subsidiaries. All significant intercompany
transactions have been eliminated.
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 amounts reported in its
consolidated financial statements and accompanying notes. Actual results
may differ from these estimates.
REVENUE RECOGNITION. Revenue will be recognized when earned, as products
are shipped or services provided to customers.
RESEARCH AND DEVELOPMENT. Research and development costs are expensed as
incurred. The cost of equipment used in research and development is
capitalized and not treated as expense of the period. Such equipment is
depreciated over its estimated useful life.
FEDERAL INCOME TAX. Deferred tax assets and liabilities will be recognized
for the expected tax consequences of temporary differences between the tax
bases of assets and liabilities and their reported amounts for financial
reporting purposes.
Page 29 of 57
<PAGE>
For the years ending June 30, 1998 and 1997 the Company had no significant
income tax expense or liability as a result of net operating losses
incurred. Deferred tax benefits, and the related deferred tax assets,
arising from the recognition of the tax consequences of net operating
losses have not been recorded or recognized by the Company. Currently,
there is no reasonable assurance that the Company will be able to take
advantage of accumulated loss carryforwards in future periods.
CALCULATION OF COMMON SHARE DATA. Loss per share of common stock has been
computed on the basis of the weighted average number of shares of common
stock outstanding during the period. Common stock equivalents have been
excluded from the calculation, as due to the loss they would be anti-
dilutive. The weighted average number of outstanding shares were 6,569,048
and 3,121,819 for the years ending June 30, 1998 and 1997, respectively.
STOCK-BASED COMPENSATION. In accordance with the provisions of Financial
Accounting Standards Board Opinion No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), the Company intends to follow the intrinsic value
based method of accounting for stock-based compensation. The intrinsic
value method is prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25).
Under APB 25, when the exercise price of employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recorded. At the date of grant, the market price was equal to
the grant price. Accordingly, no compensation cost has been recognized in
the financial statements related to options. The Company has adopted the
disclosure-only provisions of FASB 123.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with maturities of three months or less when purchased to be
cash equivalents. The Company places its cash and cash equivalents with
high credit quality institutions. At times, such investments may be in
excess of the Federal Deposit Insurance Corporation insurance limits.
INVENTORIES. Inventories are stated at the lower of cost (first-in, first-
out method) or market. At June 30, 1998 they consist of finished goods
purchased for resale.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost and
depreciated for financial reporting purposes using the straight-line method
over the lesser of the related lease life, or estimated useful lives of the
assets. Amounts recorded as depreciation expense include amortization
expense for assets acquired under capitalized leases. Expenditures that
extend the useful life of the related asset are capitalized, whereas
maintenance and repairs are expensed as incurred.
Page 30 of 57
<PAGE>
DEFERRED REVENUES. The Company has historically collected fees for its
Internet access service on monthly, quarterly, or annual billing
arrangements. The Company records cash receipts as deferred revenues and
recognizes revenue when the earnings process is complete.
GOODWILL. Represents costs in excess of the value of net assets of
businesses acquired, and is amortized over periods ranging from three to
five years using the straight-line method.
FAIR VALUE. The carrying value of financial instruments approximates fair
value, unless otherwise disclosed. Fair values have been estimated using
available market prices for similar issues and maturities.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to fiscal 1998 presentation. These changes had no impact on
previously reported results of operations or shareholders' equity.
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.
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
Page 31 of 57
<PAGE>
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 earliest of : (a) the closing of Orca's
third round of financing, 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 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 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 will ultimately have significant
value for the Company.
Under the terms of the contemplated disposal of the Company's Internet
Services Group, the Company intends to include all of its rights and claims
to Brigadoon assets in any sale of the discontinued operations. The
Company will retain the $950,000 note payable to PA&E and the $1,215,765
PA&E guaranteed note payable to a bank.
NOTE 3: GOING CONCERN MATTERS
Page 32 of 57
<PAGE>
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. As shown in the financial
statements, during the years ended June 30, 1998 and 1997, the Company
incurred net losses of approximately $7,333,738 and $2,787,328,
respectively. In addition, the Company has a net working capital deficit
of about $4,006,639, a cash balance of $472,754 and total shareholders'
equity of $1,568,506 as of June 30, 1998. These factors, among others, may
indicate that the Company may not 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.
Page 33 of 57
<PAGE>
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.
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 notes "Formation of
Company" and "Long-Term Debt".)
During the year 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 President $125,000 to settle the
case.
ORCA presently holds a $250,000 note receivable from a company in which an
officer, director and shareholder of ORCA along with another director and
shareholder of ORCA, are also officers, directors and shareholders. In
addition, as of June 30, 1998 ORCA has provided approximately $42,000 in
unreimbursed administrative services to the company. These amounts have
been fully reserved in Company's financial statements.
As a result of the acquisition of MONITRx Corporation (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 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 have been fully reserved.
Page 34 of 57
<PAGE>
NOTE 5: BUSINESS ACQUISITIONS
In February 1998, the Company acquired all of the assets and certain
liabilities of 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). The 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 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.
The following summary, prepared on a pro forma basis, combines the
consolidated condensed results of operations as if Monitrx and DNA had been
Page 35 of 57
<PAGE>
acquired as of the beginning of the year ended June 30, 1997. There are no
material adjustments that impact the summary.
1998 1997
---- ----
Revenues $ - $ -
Loss from continuing operations $(4,761,000) $(1,630,000)
Net loss from continuing operations $(4,777,000) $(1,717,000)
Basic loss per share from continuing operations $ (0.65) $ (0.39)
Weighted average number of share outstanding 7,385,698 4,432,819
The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been
consummated as indicated, nor are they intended to indicate results that
may occur in the future.
NOTE 6: 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 to the Boss
Internet Group. 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 the Boss Internet Group.
Accordingly, the operating results of the Internet Service Group, including
provisions for estimated losses to the date of disposal and estimated costs
of disposing of the operations have been segregated from continuing
operations and reported as a separate item on the statement of operations.
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 sheets are as follows:
Page 36 of 57
<PAGE>
1998 1997
---- ----
Receivables - net $ 212,227 $ 373,216
Prepaid expenses 70,553 70,556
Property and equipment - net 1,542,112 826,413
Other assets 642,366 227,249
Accounts payable (751,168) (1,414,317)
Accrued liabilities (188,107) (826,676)
Deferred revenues (385,625) (144,009)
Long-term debt (602,323) (2,153,648)
---------- -----------
$ 540,035 $(3,041,216)
========== ===========
Liabilities of the Internet Services Group to be 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 were $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 expected to be realized on the sale.
NOTE 7: SALE OF COMMON STOCK
During the year the Company issued 4,917,000 restricted shares of common
stock to certain accredited investors in two private transactions exempt
from registration under federal and state securities laws. In connection
with these offerings the Company also issued warrants to purchase 2,298,850
shares of common stock at $1.85 per share, expiring in various amounts on
September 30, 1998 and March 13, 1999. The net proceeds to the Company
from these two offerings was approximately $5,750,000.
NOTE 8: STOCK OPTION PLAN AND COMMON STOCK WARANTS
The Company's 1996 Stock Incentive Plan (the "1996 Plan") provides for the
granting to officers, key employees, and to non-employee consultants and
independent contractors of non-qualified stock options, incentive stock
options, and restricted stock awards. For incentive stock options, the
option price cannot be less than the fair market value of the common stock
at the date of grant. Non-qualified stock options may be granted at less
than the fair market value of the common stock. Options become exercisable
at the rate of 25% per year and
Page 37 of 57
<PAGE>
expire ten years from the date of grant. Options may be exercisable as
determined by the committee of the Board of Directors that administers the
Plan. Restricted Stock Awards (RSA's) may be granted or sold to officers
and key employees. RSA's may not be sold or otherwise disposed of during
the established restriction periods. No RSA's have been currently granted.
The committee of the Board of Directors that administers the Plans may, at
its discretion, determine the number of shares, the purchase price,
applicable vesting periods, and any other terms of each option or award.
No options, awards or grants were made during 1997. Information relating
to stock option activity during the year and as of June 30, 1998 is as
follows:
Shares
Available
Shares for future
Under Option
Option or Award Price Range
------ ---------- -----------
Outstanding, 1997 - 3,000,000
Granted 1,050,000 (1,050,000) $ 2.00 - $ 2.00
Exercised - -
Canceled - -
---------- -----------
Outstanding, 1998 1,050,000 1,950,000
========== ===========
Exercisable, 1998 262,500
==========
All issued and outstanding options are incentive stock options. No
compensation expense has been recorded in the financial statements related
to stock option grants for either 1998 or 1997, as the option exercise
prices were equal to the fair market value of the stock on the date of
grant.
Pro-forma information regarding net income and loss per share is required
under the provisions of FASB 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for 1998, the only year options have been
granted.
Risk free interest rate 5.5%
Dividend yield 0.0%
Volatility factor 135%
Weighted average expected life 4 years
Page 38 of 57
<PAGE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected future stock price
volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is assumed to be amortized to expense over the option's vesting period.
The Company's pro forma net loss and net loss per share were as follows:
[table]
As of June 30, 1998 the Company had outstanding common stock purchase
warrants as follows (no warrants were exercised, cancelled or expired
during the year):
[table]
The holders of warrants, each acting on their own will most likely consider
a number of factors before exercising. Among those factors that could be
considered will be the current market value of the Company's common stock
on or around the exercise date and the prospects for the Company going
forward. There can be no assurances that warrant holders will exercise
their rights and
Page 39 of 57
<PAGE>
purchase additional shares from the Company. Holders of warrants expiring
in September 1998 did not elect to exercise their rights to purchase
additional common stock shares.
NOTE 9: RECEIVABLES
[table]
Long-term receivables consists of notes receivable from Value Added
Resellers (VARs) who had purchased the rights to various sales territories
for the Company's discontinued Internet Service Operations. The notes
carried terms of 12 to 36 months and interest rates ranging from 0% to 18%.
Due to the uncertain nature of the ultimately collectability of the VAR
notes, the Company established an offsetting deferred revenue. Earnings
from the sale of territorial rights are recognized as cash payments on the
notes are received. As part of the negotiations held in connection with the
sale of the Internet Service Operations, the Company agreed to retain the
notes receivable and related offsetting deferred revenue accounts.
NOTE 10: PROPERTY AND EQUIPMENT
[table]
Page 40 of 57
<PAGE>
Included in depreciation and amortization expense is amortization related
to assets under capital leases of $106,275 and $50,574 for the years ended
June 30, 1998 and 1997, respectively.
NOTE 11: OTHER ASSETS
Other assets consist primarily of goodwill associated with the excess of
the costs of acquisitions over the book value of assets acquired.
Page 41 of 57
<PAGE>
NOTE 12: LONG-TERM DEBT
[table]
Long-term debt maturities for fiscal years ending June 30 are as follows:
$1,702,785 for 2000; $344,478 for 2001; $256,453 for 2002; and $201,939 for
2003.
Page 42 of 57
<PAGE>
NOTE 13: SHAREHOLDERS' EQUITY
The Company has authorized the issuance of up to 50,000,000 shares of
common stock, with a par value of $0.001 per share. There were 12,834,183
and 3,707,573 shares issued and outstanding as of June 30, 1998 and 1997,
respectively.
NOTE 14: LEASING ARRANGEMENTS
The Company leases certain office facilities and equipment. Rental expense
for the years ended June 30, 1998 and 1997, were $307,101 and $27,301,
respectively.
Future minimum lease payments as of year-end under capital leases and non-
cancelable operating leases, having initial lease terms of more than one
year, are as follows:
[table]
The present value of net minimum lease payments is presented in the balance
sheet as a portion of long-term debt.
NOTE 15: INCOME TAXES
The Company has available net operating loss (NOL) carryforwards of
approximately $10,728,000, the benefits of which will expire in various
amounts through 2013. NOLs will only be usable to the extent that the
Company is successful in obtaining future profitability, or incurring
profitable transactions.
NOTE 16: RISKS AND UNCERTAINTITIES
Page 43 of 57
<PAGE>
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.
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, or the Company's failure to adopt to a rapidly
changing business environment could have severe near-term impacts on the
Company's prospects for growth.
NOTE 17: COMMITMENTS AND CONTINGENCIES
The Company is party to a lawsuit involving one of its Value Added
Resellers (VAR) associated with the operations of the discontinued Internet
Services Group, and its Televar subsidiary. Under the terms of the
agreement to sell Televar, the Company agreed to keep this legal matter.
The dispute relates to ownership of certain equipment used in the Internet
operations as well as ownership of customer accounts of one of the
Company's forty Internet operating sites. The two parties have agreed to
mediation in an attempt to resolve the matter.
In the opinion of management, the outcome of such current legal proceeding
can not be known at this time. The matter could have a material effect on
the Company's cash flows when resolved, however it is not expected to have
a material effect on the Company's results of operations or financial
position.
NOTE 18: SUPPLEMENTAL CASH FLOW INFORMATION
Page 44 of 57
<PAGE>
[table]
NOTE 19: SUBSEQUENT EVENTS
On August 20, 1998 the Company received approximately $840,000 in partial
net proceeds from a private equity offering. The Company anticipates
receiving additional funds under this offering. In the event that the
offering is fully subscribed it is anticipated that the net proceeds to the
Company would be approximately $1,400,000.
The Company is continuing discussions to secure additional financing.
Notwithstanding the receipt of funds in connection with the above mentioned
August financing, the Company requires additional funds to continue
operations. There can be no assurance that the Company will be successful
in its efforts to attract additional financing.
On September 28, 1998 the Company completed a transaction whereby it sold
substantially all of the assets and most of the liabilities of its 100%
owned subsidiary, Televar, Inc. to the Boss Internet Group. The
transaction is more fully described in Note 6 "Discontinued Operations".
Page 45 of 57
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers
<TABLE>
<CAPTION>
Name Age Position with Company
- - ----------------------- --- --------------------------------------------
<S> <C> <C>
Roger P. Vallo 62 President, Chief Executive Officer, Director
Benoit Demeulemeester 34 Director
Donald Cotton 59 Director
Michael Hendrickson 52 Director
William F. Davis 65 Director
Douglass H. Ebstyne 55 Director
</TABLE>
Roger P. Vallo
Mr. Vallo has been a director of the Company since August 1996 and the
President and CEO of the Company since April 15, 1997. Prior to that time, he
was a director of Televar. Mr. Vallo was a founder and former president and
chief executive officer of Telematic Products, Inc., which developed,
manufactured and marketed a line of billing computers. He was a director of
PA&E and its predecessors from May 1990 until 1998. Mr. Vallo served as a
director of Pacific Coast Technologies, Inc., from February 1991 to November
1995 and as Secretary of that company from July 1993 to October 1994. Mr. Vallo
also is a director of Prudential Preferred Properties, a real estate company
located in Everett, Washington.
Benoit Demeulemeester
Mr. Demeulemeester is a founding partner of CAMCO AG, a Zurich, Switzerland
based independent portfolio management company. Prior to forming CAMCO in 1991,
Mr. Demeulemeester was a manager of the Equity Derivatives Group at Swiss Bank
Corporation International in London, with responsibility for institutional
clients in Italy and France. Previously he worked for Merrill Lynch Capital
Markets in London and Zurich, where he was responsible for the creation and sale
of structured derivative products to Swiss institutional clients. Prior to that
he worked in the Fixed Income Department of Shearson Lehman Amex Finance in
Geneva. Mr. Demeulemeester holds the International Securities Markets
Association diploma and is a licensed securities dealer in the US. He is also a
registered Securities and Futures Authority in the United Kingdom. In addition,
he sits on the board of the International Menuhin Music Academy Foundation. Mr.
Demeulemeester speaks German, English, French and Italian and joined the
Company's board of directors in 1998.
Donald B. Cotton
Mr. Cotton has been a director of the Company since August 1996. Prior to
that time, he was a director of Televar. He was a director of PA&E and its
predecessors from 1993 to 1998. Mr. Cotton retired from GTE in 1993, where he
served most recently as a vice president. He is currently self-employed as a
software consultant.
Michael Hendrickson
Mr. Hendrickson has been a director of the Company since April 4, 1997.
Mr. Hendrickson has over 25 years of experience in the insurance business with
Prudential Insurance. He spent 22 years in management, most recently as Vice
President of Regional Marketing in the Pacific Northwest. He is currently on
the board
Page 46 of 57
<PAGE>
of directors of Robodyne Corporation (Minneapolis, MN), Hendrickson Mining &
Exploration (Anchorage, AK), Advantage Video Productions (Everett, WA), and West
Coast Management Production & Capital (Bellevue, WA). Mr. Hendrickson currently
works as a private consultant for major life insurance companies in the U.S.
William F. Davis
Mr. Davis has been a director of the Company since June 19, 1997.
Previously he was President and CEO of DNA, a company which designs, implements
and manages data delivery networks for the health care industry. Prior to
forming DNA, Mr. Davis was the President of Selectel Corp., a co-marketing
partner of AT&T. From 1987 to 1992 he was founder and President of Value Added
Communications, a company which pioneered the automated operator process for
operator calls originating from public calling venues. He also served as a Vice
President - Operations, for Telematic Products, Inc., which developed,
manufactured and marketed a line of billing computers, primarily for the Bell
Operating Company market. From 1955 to 1983, Mr. Davis held a variety of
executive positions with GTE, a major world-wide provider of telecommunications
equipment and services. Mr. Davis holds a BS degree from UCLA and an MBA from
the University of Connecticut.
Directors of the Company hold office until the next annual meeting of
shareholders and until their successors have been elected and duly qualified.
Non-employee directors receive no salary for their services and receive no fee
from the Company for their participation in meetings, although all directors are
reimbursed for reasonable travel and other out-of-pocket expenses in attending
meetings of the Board. Executive officers are elected by the Board of Directors
of the Company at the first meeting after each annual meeting of shareholders
and hold office until their successors are elected and duly qualified.
No family relationships exist between or among any of the Company's
officers and directors.
Other Key Employees
In addition to the directors and executive officers of the Company
identified above, the following individuals are expected to make a significant
contribution to the business of the Company.
Anthony D. Begando
Mr. Begando is Chief Executive Officer of the Products Group. He is an
experienced healthcare information technology leader and entrepreneur. He has
experience in many facets of corporate management and has participated in the
formation and leadership of a number of successful early stage enterprises. As
the CEO of the Products Group, Mr. Begando is the principal architect of the
technological and organizational infrastructure for delivery of the Company's
initial products to the market. Prior to joining the Company as part of the
MONITRx acquisition, Mr. Begando was a managing consultant for NexGen SI, Inc.,
in Atlanta, Georgia, responsible for the operational management of an
international information technology-consulting firm. He was also director of
information technology at CAPS, Inc. (a division of IVAX, Inc. of Irvine,
California) and responsible for the reorganization, consolidation and leadership
of the Corporate Information Technology Team. He has also held various
positions in the software development teams of Southern California Edison
Corporation, Los Angeles, California. Mr. Begando served with distinction in
the US military and earned a BS in Computer Information Systems from the
University of Redlands, California.
Norman Plummer
Mr. Plummer was the founder of MONITRx and a pioneer in alternate site
(home health care and home infusion therapy) industry since the early 1980's.
He is now the Vice President Administration and General Counsel of the Company.
Prior to joining MONITRx, Mr. Plummer helped found, operate and later sell
Page 47 of 57
<PAGE>
Lifesource, Inc., a home healthcare conglomerate consisting of six regional
pharmacy and home health nursing agencies in California. Mr. Plummer has a law
degree and is an active member of the California Bar.
Board of Director Compensation
Directors of the Company may participate in the Company's Stock Option and
Incentive Plan as discussed below under "Executive Compensation -- 1996 Stock
Option and Incentive Plan."
During the year ended June 30, 1997, the Company had no standard
arrangement pursuant to which directors of the Company were compensated for any
services as a director or for committee participation or special assignments
performed in the capacity of director of the Company.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements.
The Company has an employment contract with its Chief Executive Officer,
Roger Vallo, pursuant to the terms of which Mr. Vallo is paid a base salary of
$160,000 per year and receives certain other benefits, such as insurance and a
car allowance of $1,000 per month. If the Agreement is terminated by the
Company prior to the expiration of its term or for reasons other than "cause" as
defined in the agreement, Mr. Vallo will receive a severance payment equal to
one year's base salary. The agreement contains covenants by Mr. Vallo
concerning confidentiality and non-disclosure. For fiscal year 1998, Mr. Vallo
had the potential of receiving a bonus based on the profitability of the
Company. If all of the bonus payments were earned, options for purchase of a
total of 120,000 shares of the Company's common stock will be made available to
Mr. Vallo under the agreement. There are no written employment agreements with
any other executive officers of the Company. Certain officers of the Company's
operating subsidiaries hare under written contract for services provided to the
subsidiaries.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who beneficially own more than 10 percent of
a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent shareholders are required by
regulation of the Securities and Exchange Commission to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms furnished to the
Company during the fiscal year ended June 30, 1997 and representations made by
certain persons subject to this obligation that such filings were not required
to be made, the Company believes that all of the reports required to be filed by
these individuals and persons under Section 16(a) were filed in a timely manner
and the Company is not aware of any filings required to be made under Section
16(a) by reporting persons of the Company which were not made for fiscal year
then ended.
Item 10. Executive Compensation
The following table sets forth certain information with respect to the
compensation of the Chief Executive Officer and the only executive officer of
the Company and its subsidiaries who earned $100,000 or more during the three
most recent fiscal years of the Company (the "Named Officers"), ending September
30, 1996, 1995 and 1994 and the amounts earned:
Page 48 of 57
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
------------------------------- -----------------------------------
Long-term
Name and Other Annual Compensation Awards All other
Principal Salary Bonus Compensation Of Stock Options Compensation
Position Year ($) ($) ($) (#) ($)
- - -------------------- ---- -------- ----- ------------ ------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Roger P. Vallo/(1)/
CEO/President 1997 $ 25,000 $ 0 $ 0 0 0
1998 $160,000 --- $12,000/2/ 325,000/3/ ---
</TABLE>
(1) Mr. Vallo became the Chief Executive Officer and President of the Company
on April 15, 1997.
(2) Represents a $1,000 per month car allowance.
(3) Vest over 4 years, first year immediately vest. Exercise price of $2.00 per
share.
1996 Stock Incentive Plan
The Company's 1996 Stock Incentive Plan (the "Plan") provides for the award
of incentive stock options ("ISOs") to key employees and the award of non-
qualified stock options ("NSOs"), stock appreciation rights ("SARs"), bonus
rights, and other incentive grants to employees and certain non-employees (other
than non-employee directors) who have important relationships with the Company
or its subsidiaries. The Plan has been adopted by the Board of Directors but has
not been submitted to the shareholders for approval. No options or other
incentive awards have been granted under the Plan.
Administration. The Plan may be administered by the Board of Directors or
--------------
by a committee of directors or officers of the Company. The Board of Directors
has designated an Option Committee to administer the Plan. The Option Committee
determines and designates the individuals to whom awards under the Plan should
be made and the amount and terms and conditions of the awards, except that if
officers of the Company serve on the Option Committee it may not grant options
to such officers. The Option Committee may adopt and amend rules relating to the
administration of the Plan, but only the Board of Directors may amend or
terminate the Plan. The Plan is administered in accordance with Rule 16b-3
adopted under the Exchange Act.
Eligibility. Awards under the Plan may be made to employees, including
-----------
employee directors, of the Company and its subsidiaries, and to nonemployee
agents, consultants, advisors, and other persons (but not including non-employee
directors) that the Option Committee believes have made or will make an
important contribution to the Company or any subsidiary thereof.
Shares Available. Subject to adjustment as provided in the Plan, a maximum
----------------
of 3,000,000 shares of Common Stock are reserved for issuance thereunder. The
maximum number of shares with respect to which options may be granted to any
person during any fiscal year is 1,000,000. If an option, SAR or performance
unit granted under the Plan expires or is terminated or canceled, the unissued
shares subject to such option, SAR or performance unit are again available under
the Plan. In addition, if shares sold or awarded as a bonus under the Plan are
forfeited to the Company or repurchased thereby, the number of shares forfeited
or repurchased are again available under the Plan.
Term. Unless earlier terminated by the Board, the Plan will continue in
----
effect until the earlier of: (i) ten years from the date on which the Plan is
adopted by the Board, and (ii) the date on which all shares available for
issuance under the Plan have been issued and all restrictions on such shares
have lapsed. The Board may suspend or terminate the Plan at any time except with
respect to options, performance units, and shares subject to restrictions then
outstanding under the Plan.
Stock Option Grants. The Option Committee may grant ISOs and NSOs under the
-------------------
Plan. With respect to each option grant, the Option Committee determines the
number of shares subject to the option, the option price, the period of the
option, the time or times at which the option may be exercised (including
whether the option will be subject to any vesting requirements and whether there
will be any conditions precedent to exercise of the option), and the other terms
and conditions of the option.
ISOs are subject to special terms and conditions. The aggregate fair market
value, on the date of the grant, of the Common Stock for which an ISO is
exercisable for the first time by the optionee during any calendar
Page 49 of 57
<PAGE>
year, may not exceed $100,000. An ISO may not be granted to an employee who
possesses more than 10% of the total voting power of the Company's stock unless
the option price is at least 110% of the fair market value of the Common Stock
subject to the option on the date it is granted and the option is not
exercisable five years after the date of grant. No ISO may be exercisable after
ten years from the date of grant. The option price may not be less than 100% of
the fair market value of the Common Stock covered by the option at the date of
grant.
In general, no vested option may be exercised unless at the time of such
exercise the optionee is employed by or in the service of the Company or any
subsidiary thereof, within 12 months following termination of employment by
reason of death or disability, or within three months following termination for
any other reason except for cause. Options are nonassignable and nontransferable
by the optionee except by will or by the laws of descent and distribution at the
time of the optionee's death. No shares may be issued pursuant to the exercise
of an option until full payment therefor has been made. Upon the exercise of an
option, the number of shares reserved for issuance under the Plan will be
reduced by the number of shares issued upon exercise of the option. As of
September 30, 1996, no options to purchase shares of Common Stock have been
granted under the Plan.
Stock Appreciation Rights. The Option Committee may grant SARs under the
-------------------------
Plan. Each SAR entitles the holder, upon exercise, to receive from the Company
an amount equal to the excess of the fair market value on the date of exercise
of one share of Common Stock of the Company over its fair market value on the
date of grant (or, in the case of a SAR granted in connection with an option,
the excess of the fair market value of one share of Common Stock of the Company
over the option price per share under the option to which the SAR relates),
multiplied by the number of shares covered by the SAR or the option. Payment by
the Company upon exercise of a SAR may be made in Common Stock, in cash, or by a
combination of Common Stock and cash.
If a SAR is granted in connection with an option, the following rules shall
apply: (i) the SAR shall be exercisable only to the extent and on the same
conditions that the related option could be exercised; (ii) the SAR shall be
exercisable only when the fair market value of the stock exceeds the option
price of the related option; (iii) the SAR shall be for no more than 100% of the
excess of the fair market value of the stock at the time of exercise over the
option price; (iv) upon exercise of the SAR, the option or portion thereof to
which the SAR relates terminates; and (v) upon exercise of the option, the
related SAR or portion thereof terminates.
Each SAR is nonassignable and nontransferable by the holder except by will
or by the laws of descent and distribution at the time of the holder's death.
Upon the exercise of a SAR for shares, the number of shares reserved for
issuance under the Plan will be reduced by the number of shares issued. Cash
payments of SARs will not reduce the number of shares of Common Stock reserved
for issuance under the Plan. No SARs have been granted under the Plan.
Restricted Stock. The Option Committee may issue shares of Common Stock
----------------
under the Plan subject to the terms, conditions, and restrictions determined
thereby. Upon the issuance of restricted stock, the number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued. No
restricted shares have been granted under the Plan.
Stock Bonus Awards. The Option Committee may award shares of Common Stock
------------------
as a stock bonus under the Plan. The Option Committee may determine the
recipients of the awards, the number of shares to be awarded, and the time of
the award. Stock received as a stock bonus is subject to the terms, conditions,
and restrictions determined by the Option Committee at the time the stock is
awarded. No stock bonus awards have been granted under the Plan.
Cash Bonus Rights. The Option Committee may grant cash bonus rights under
-----------------
the Plan in connection with (i) options granted or previously granted, (ii) SARs
granted or previously granted, (iii) stock bonuses awarded or previously
awarded, and (iv) shares issued under the Plan. Bonus rights granted in
connection with options entitle the optionee to a cash bonus if and when the
related option is exercised. The amount of the bonus is determined by
multiplying the excess of the total fair market value of the shares acquired
upon the exercise
Page 50 of 57
<PAGE>
over the total option price for the shares by the applicable bonus percentage.
The bonus rights granted in connection with a SAR entitle the holder to a cash
bonus when the SAR is exercised. The amount of the bonus is determined by
multiplying the total fair market value of the shares or cash received pursuant
to the exercise of the SAR by the applicable percentage. The bonus percentage
applicable to any bonus right is determined by the Option Committee but may in
no event exceed 75%. Bonus rights granted in connection with stock bonuses
entitle the recipient to a cash bonus, in an amount determined by the Option
Committee, when the stock is awarded or purchased or any restrictions to which
the stock is subject lapse. No bonus rights have been granted under the Plan.
Performance Units. The Option Committee may grant performance units
-----------------
consisting of monetary units which may be earned if the Company achieves certain
goals established by the Committee over a designated period of time. The goals
established by the Option Committee may include earnings per share, return on
shareholders' equity, return on invested capital, and similar benchmarks.
Payment of an award earned may be in cash or in Common Stock or partly in both,
and may be made when earned, or vested and deferred, as the Option Committee
determines. Each performance unit will be nonassignable and nontransferable by
the holder except by will or by the laws of descent and distribution at the time
of the holder's death. The number of shares reserved for issuance under the Plan
shall be reduced by the number of shares issued upon payment of an award. No
performance units have been granted under the Plan.
Changes in Capital Structure. The Plan provides that if the outstanding
----------------------------
Common Stock of the Company is increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation by reason of any recapitalization, stock split
or certain other transactions, appropriate adjustment will be made by the Option
Committee in the number and kind of shares available for grants under the Plan.
In addition, the Option Committee will make appropriate adjustments in the
number and kind of shares as to which outstanding options will be exercisable.
In the event of a merger, consolidation or other fundamental corporate
transformation, the Board may, in its sole discretion, permit outstanding
options to remain in effect in accordance with their terms; to be converted into
options to purchase stock in the surviving or acquiring corporation in the
transaction; or to be exercised, to the extent then exercisable, during a 30-day
period prior to the consummation of the transaction.
Certain Tax Considerations Related to Executive Compensation
As a result of Section 162(m) of the Internal Revenue Code of 1986, as
amended, in the event that compensation paid by the Company to a "covered
employee" (the chief executive officer and the next four highest paid employees)
in a year were to exceed an aggregate of $1,000,000, the Company's deduction for
such compensation could be limited to $1,000,000.
Page 51 of 57
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table summarizes certain information as of June 29, 1998 with
respect to the beneficial ownership of the Company's Common Stock (i) by the
Company's officers and directors, (ii) by stockholders known by the Company to
own 5 percent or more of the Company's Common Stock and (iii) by all officers
and directors as a group. At October 7, 1998, there were 12,778,407 shares of
Common Stock issued and outstanding.
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Name and Address of 5% Beneficial Owners, Beneficially Owned
Executive Officers and Directors/1/ at October 7, 1998/2/ Percent of Class/3/
- - ---------------------------------------- --------------------- -------------------
<S> <C> <C>
5% Beneficial Owners:
- - --------------------
Pacific Aerospace & Electronics, Inc. 2,289,309 17.8%
Lombard Odier & Cie 1,983,250/4/ 11.5%
Banca Popolare Fruliadua 1,287,250/5/ 8.6%
CAMCO BVI 910,000/6/ 7.1%
Dirctors
- - --------
Benoit Demeulmeester, Director 1,142,500/7/ 8.6%
Roger Vallo, President and Director and CEO 370,365/8/ 2.9%
Donald B. Cotton, Director 259,115 2.0%
William Davis, Director and VP Corp. Development 55,500 *
Michael Hendrickson, Director 85,000 *
Non-Director Executive Officers
- - ------------------------------
Norman Plummer, VP Administration and General Counsel 381,113/9/ 3.0%
Anthony Begando, President Products Group 140,794/10/ 1.1%
Officers and Directors as a Group (5 persons) 1,912,480 15.0%
(*) Less than 1 percent
</TABLE>
- - -------------------------------------
/1/ Unless otherwise indicated, the business address of the individual or
person named is the same as the Company.
/2/ Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. To the Company's knowledge, each person or
entity has sole voting and sole investment power with respect to the shares
beneficially owned except as note in the footnotes below, subject to community
property laws, where applicable.
/3/ Rounded to the nearest 1/10th of one percent, based on 12,778,407 shares of
Common Stock outstanding on October 7, 1998.
/4/ Includes presently exercisable stock purchase warrants to acquire 437,500
shares of Common Stock.
/5/ Includes presently exercisable stock purchase warrants to acquire 325,000
shares of Common Stock.
/6/ Includes presently exercisable stock purchase warrants to acquire 260,000
shares of Common Stock.
/7/ Mr. Demeulmeester is a partner in CAMCO AG, which in turn is an affiliate
of CAMCO BVI. Amount shown includes 650,000 shares held in the name of CAMCO BVI
and options to purchase 260,000 shares held by CAMCO BVI, as well as options to
acquire 232,500 shares held by CAMCO AG.
/8/ Includes presently exercisable stock options to purchase 81,250 shares of
Common Stock.
/9/ Includes presently exercisable stock options to purchase 75,000 shares of
Common Stock.
/10/ Includes presently exercisable stock options to purchase 62,500 shares of
Common Stock.
Page 52 of 57
<PAGE>
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.
Certain officers and 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. 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.
During the year 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 President $125,000 to settle the case.
Orca presently holds a $250,000 note receivable from a company in which an
officer, director and shareholder of Orca along with another director and
shareholder of Orca, are also officers, directors and shareholders. In
addition, as of June 30, 1998 Orca has provided approximately $42,000 in
unreimbursed administrative services to the company. These amounts have been
fully reserved in Company's financial statements.
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 make principal payments in an amount equal to 6% of
the proceeds from new common stock equity offerings, until such time as the
notes are fully repaid.
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 have
been fully reserved.
Item 13. Exhibits and Reports on Form 8-K
Page 53 of 57
<PAGE>
(a) Exhibits
--------
<TABLE>
<CAPTION>
Exhibit Number Description
- - -------------- -------------------------------------------
<S> <C>
3.1 Articles of Incorporation of Jungle Street, Inc., as filed
with the Secretary of State of the State of Utah on July 10,
1980. (Previously filed)
3.2 Articles of Amendment to the Articles of Incorporation of
Jungle Street, Inc., filed with the Secretary of State of
the State of Utah on July 20, 1995. (Previously filed)
3.3 Bylaws of Jungle Street, Inc. (Previously filed)
4.1 Subscription Agreement, dated May 10, 1996, between Televar
Northwest, Inc. and Gary Arsenault. (incorporated by
reference to Form 10-KSB filed for the year ended June 30,
1996).
4.2 Registration Rights Agreement, dated September 25, 1996,
between Jungle Street, Inc. and UTCO Associates, Ltd.
(incorporated by reference to Form 10-KSB filed for the year
ended June 30, 1996).
4.3 Common Stock Purchase Warrant, dated September 25, 1996,
issued to UTCO Associates, Ltd. by Jungle Street, Inc.
(incorporated by reference to Form 10-KSB filed for the year
ended June 30, 1996).
4.4 Agreement and Plan of Merger, dated August 29, 1996, among
Jungle Street, Inc., Televar Northwest, Inc., and Jungle
Street, Inc., a Washington corporation (incorporated by
reference to Current Report on Form 8-K filed on September
13, 1996).
10.1 Convertible Promissory Note from Televar Northwest, Inc., to
BarbJorgensen, dated April 25, 1996. (incorporated by
reference to Form 10-KSB filed for the year ended June 30).
10.2 Promissory Note from Jungle Street, Inc. to UTCO Associates,
Ltd., dated September 25, 1996. (incorporated by reference
to Form 10-KSB filed for the year ended June 30).
10.3 Security Agreement, dated September 25, 1996, between Jungle
Street, Inc., Televar Northwest, Inc., and UTCO Associates,
Ltd. (incorporated by reference to Current Report on Form
8-K filed on September 13, 1996).
10.4 Guarantee of Loan, dated September 24, 1996, by Televar
Northwest, Inc., Charles D. DeJong, and Mark D. Hamilton in
favor of UTCO Associates, Ltd. (incorporated by reference
to Current Report on Form 8-K filed on September 13, 1996).
10.5 1996 Stock Incentive Plan (incorporated by reference to
Current Report on Form 8-K filed on September 13, 1996).
</TABLE>
Page 54 of 57
<PAGE>
<TABLE>
<S> <C>
10.6 Customer Provided Access Request and Authorization, dated
June 3, 1996, between Televar Northwest, Inc., and Sprint
Communications Company L.P. (incorporated by reference to
Current Report on Form 8-K filed on September 13, 1996).
10.7 Dedicated Access Charges and Special Access Surcharge
Application for Exemption, dated June 3, 1996, between
Televar Northwest, Inc., and Sprint Communications Company,
L.P. (incorporated by reference to Current Report on Form 8-
K filed on September 13, 1996).
10.8 Lease Agreement and Guarantee, dated August 6, 1996, between
Televar Northwest, Inc., and Financial Pacific Co.
(incorporated by reference to Current Report on Form 8-K
filed on September 13, 1996).
10.9 Lease Agreement, dated July 26, 1993, between Televar
Northwest, Inc., and E. Gus Noyd and Laura Jean Noyd.
(incorporated by reference to Current Report on Form 8-K
filed on September 13, 1996).
10.10 Lease Agreement, dated June 28, 1995, between Televar
Northwest, Inc., and Cascade Leasing Company, and Equipment
Lease Guaranty made by Charles D. DeJong, Michael P.
Schuyleman, and Mark D. Hamilton in favor of Cascade Leasing
Company (incorporated by reference to Current Report on Form
8-K filed on September 13, 1996).
10.11 Sublease Agreement, dated April 1, 1995, between Televar
Northwest, Inc., and Telewaves, Inc. (incorporated by
reference to Current Report on Form 8-K filed on September
13, 1996).
10.12 Lease Agreement, dated March 7, 1995, between Televar
Northwest, Inc., and David A. Quick and Cirri A. Quick,
d/b/a DCR Properties (incorporated by reference to Current
Report on Form 8-K filed on September 13, 1996).
10.13 Lease Agreement, effective July 15, 1996, between Televar
Northwest, Inc., and Summit Leasing, Inc. (incorporated by
reference to Current Report on Form 8-K filed on September
13, 1996).
10.14 Promissory Note from Televar Northwest, Inc., to Michael P.
Schuyleman and Janet L. Schuyleman, dated November 1, 1995
(incorporated by reference to Current Report on Form 8-K
filed on September 13, 1996).
10.15 Escrow Account Instructions and Agreement, dated October 31,
1995, between David M. Bohr, Michael P. Schuyleman and Janet
L. Schuyleman, and Televar Northwest, Inc. (incorporated by
reference to Current Report on Form 8-K filed on September
13, 1996).
10.16 Asset Purchase Agreement with Digital Network Associates,
dated February 17, 1998, (incorporated by reference to
Report on Form 8-K, filed March 5, 1998).
</TABLE>
Page 55 of 57
<PAGE>
<TABLE>
<S> <C>
10.17 Asset Purchase Agreement with MONITRX, Inc., incorporated by
reference to Current Report on Form 8-K, filed March 22,
1998.
27 Financial Data Schedule
</TABLE>
Page 56 of 57
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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: October 13, 1998 By /s/ Roger P. Vallo
-----------------------------------
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the following
capacities on October 13, 1998.
<TABLE>
<CAPTION>
Signature Title
- - ----------- -----
<S> <C>
/s/ Roger P. Vallo Chief Executive Officer, and
- - --------------------------------- Chairman of the Board (Principal
Roger P. Vallo Executive and Accounting Officer)
Director
- - ---------------------------------
Donald B. Cotton
/s/ William F. Davis Director
- - ---------------------------------
William F. Davis
Director
- - --------------------------------
Michael Hendrickson
/s/ Benoit Demeulmeester Director
- - --------------------------------
Benoit Demeulmeester
</TABLE>
Page 57 of 57
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001004932
<NAME> ORCA TECHNOLOGIES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 472,754
<SECURITIES> 0
<RECEIVABLES> 441,825
<ALLOWANCES> 224,598
<INVENTORY> 36,728
<CURRENT-ASSETS> 809,855
<PP&E> 2,994,409
<DEPRECIATION> 608,224
<TOTAL-ASSETS> 7,674,890
<CURRENT-LIABILITIES> 4,816,494
<BONDS> 0
0
0
<COMMON> 12,834
<OTHER-SE> 1,555,672
<TOTAL-LIABILITY-AND-EQUITY> 7,674,890
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> (3,493,139)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 189,598
<INTEREST-EXPENSE> 248,685
<INCOME-PRETAX> (3,716,666)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,716,666)
<DISCONTINUED> (3,617,072)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,333,738)
<EPS-PRIMARY> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
