<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10 - QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period Ended: March 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______________ to ______________.
Commission File Number: 0-27390
ORCA TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Utah 87-0368236
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
24000 35th Avenue Southeast - Suite 200, Bothell, WA 98021
(Address of principal executive offices)
(425) 354-1600
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of May 3, 1999, approximately 16,072,657 shares of the Company's Common
Stock, par value $.001 per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
ORCA TECHNOLOGIES, INC.
FORM 10-QSB
For the Quarterly Period Ended March 31, 1999
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Index Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
Three and Nine Months Ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
Three and Nine Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Balance Sheets
March 31, 1999 and June 30, 1998 5
Condensed Consolidated Statement of Shareholders' Equity (Deficit)
Nine Months Ended March 31, 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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<PAGE>
ORCA Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Nine Month Periods Ended March 31
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
----------------------------------- ----------------- -----------------
1999 1998 1999 1998
------------------ --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 101,946 $ - $ 328,035 $ -
Costs and Expenses
Cost of revenue 3,981 11,713 115,392 -
Research and development 526,016 215,130 1,196,800 215,130
Sales and marketing 238,391 60,999 1,316,100 259,061
Customer services 77,647 250,817 400,000 52,755
General and administrative 751,816 470,962 2,094,497 730,742
------------------ --------------- ----------------- -----------------
Total operating costs and expenses 1,597,851 1,009,621 5,122,789 1,257,688
------------------ --------------- ----------------- -----------------
Operating loss (1,495,905) (1,009,621) (4,794,754) (1,257,688)
Interest Income - 6,850 2,730 24,716
Interest Expense (112,241) (37,130) (270,258) (64,331)
------------------ --------------- ----------------- -----------------
Loss from Continuing Operations (1,608,146) (1,039,901) (5,062,282) (1,297,303)
Loss from Discontinued Operations - (808,273) - (1,762,620)
------------------ --------------- ----------------- -----------------
Net Loss $ (1,608,146) $ (1,848,174) $ (5,062,282) $ (3,059,923)
================== =============== ================= ================
Basic Loss per Share
Loss from Continuing Operations $ (0.12) $ (0.17) $ (0.39) $ (0.28)
Loss from Discontinued Operations - (0.13) - (0.38)
------------------ --------------- ----------------- -----------------
Net Loss per Share $ (0.12) $ (0.30) $ (0.39) $ (0.66)
================== =============== ================= ================
Weighted average number of shares
outstanding 13,831,213 6,136,631 13,105,648 4,649,037
================== =============== ================= ================
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated statements.
<PAGE>
ORCA Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flow
For the Three and Nine Month Periods Ended March 31
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, March 31,
----------------------------- ---------------------------
1999 1998 1999 1998
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,608,146) $ (1,848,174) $ (5,062,282) $ (3,059,923)
Adjustments to reconcile net loss to cash used:
Depreciation and amortization 283,010 183,831 811,225 292,565.00
Change in operating assets and liabilities, net
of effects of business acquired and disposed:
Inventories 1,164 - (24,778) -
Accounts payable 17,899 481,962 611,048 481,962
Other current assets 42,121 515,716 156,430 (312,801)
Other current liabilities 147,386 201,547 (604,719) (387,218)
------------- -------------- ------------- --------------
Net Cash Used By Operating Activities (1,116,566) (465,118) (4,113,076) (2,985,415)
------------- -------------- ------------- --------------
INVESTING ACTIVITIES
Purchases of property & equipment - (269,079) (96,085) (637,626)
Changes in notes receivable - 1,824 - (61,827)
Proceeds from sale of subsidiary - - 300,000 -
Pre-acquisition advances to acquired subsidiaries - (480,626) (480,626)
Decrease (Increase) in other assets - (184,546) -
Other investing activities (150,000) - (136,000) (203,523)
------------- -------------- ------------- --------------
Net Cash Provided (Used) By Investing Activities (150,000) (932,427) 67,915 (1,383,602)
------------- -------------- ------------- --------------
FINANCING ACTIVITIES
Payments on long-term debt (25,489) (30,964) (134,593) (126,223)
Borrowings on short-term debt 110,000 - 894,235 -
Borrowings on long-term debt - 9,148 - 1,186,948
Borrowings from related parties 7,500 137,500 1,200,000
Issuance of common stock and warrants 1,182,950 4,384,125 2,691,239 5,803,515
------------- -------------- ------------- --------------
Net Cash Provided By Financing Activities 1,274,961 4,362,309 3,588,381 8,064,240
------------- -------------- ------------- --------------
NET CASH PROVIDED (USED) 8,395 2,964,764 (456,780) 3,695,223
Cash & cash equivalents, Beginning of Period 7,579 730,459 472,754 -
------------- -------------- ------------- --------------
CASH & CASH EQUIVALENTS, End of Period $ 15,974 $ 3,695,223 $ 15,974 $ 3,695,223
============= ============== ============= ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ORCA Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, June 30,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 15,974 $ 472,754
Receivables 30,035 217,227
Inventories 61,506 36,728
Prepaid expenses and other 36,667 83,146
------------ ------------
Total current assets 144,182 809,855
LONG-TERM RECEIVABLES 6,357 45,146
PROPERTY AND EQUIPMENT, net 734,688 2,366,185
OTHER ASSETS 3,145,028 4,453,704
------------ ------------
$ 4,030,255 $ 7,674,890
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,941,763 $ 2,001,454
Accounts payable 1,082,209 1,222,329
Accrued liabilities 623,180 557,086
Accrued loss for discontinued operations 131,266 1,035,625
------------ ------------
Total current liabilities $ 4,778,418 4,816,494
LONG -TERM DEBT 726,176 1,289,890
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY (DEFICIT) (1,474,339) 1,568,506
------------ ------------
$ 4,030,255 $ 7,674,890
============ ============
</TABLE>
<PAGE>
Orca Technologies, Inc. and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity (Deficit)
Nine Months Ended March 31
(Unaudited)
<TABLE>
<CAPTION>
Common Paid -in Accumulated
Stock Capital Deficit Total
-------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
BALANCE, JUNE 30, 1998 $12,834 $12,283,379 $(10,727,707) $ 1,568,506
Net Loss (5,062,282) (5,062,282)
Sale of discontinued operations (778) (714,776) (715,554)
Sale of common stock 2,492 2,732,499 2,734,991
------- ----------- ------------ -----------
BALANCE, MARCH 31, 1999 $14,548 $14,301,102 $(15,789,989) $(1,474,339)
======= =========== ============ ===========
</TABLE>
<PAGE>
Notes to Condensed Consolidated Financial Statements (unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10 - QSB and in
accordance with Item 310 of Regulation S-B. Accordingly, such unaudited
financial statements do not include all of the information and footnotes
normally included in audited financial statements presented in accordance with
generally accepted accounting principles. In the opinion of management, all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's consolidated financial position, consolidated results of
operations, and consolidated statements of cash flow for the three and six-month
periods ended March 31, 1999 have been included. All significant intercompany
transactions have been eliminated in consolidation.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended June 30, 1998, which
have been provided in their entirety in the Company's Form 10-KSB for the fiscal
year ended June 30, 1998. The results of operations for the three and six-month
periods ended March 31, 1999 is not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 1999.
In June of 1998, Orca Technologies, Inc. (the "Company") formally decided to
dispose of its Internet Services Group. 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. ("Televar") and Boss Internet
Group ("Boss"), have been presented in the accompanying financial statements as
"discontinued operations."
NOTE 2 FORMATION OF COMPANY
On August 30, 1996, the Company effected a merger between a wholly owned
subsidiary formed for the purpose of the merger, and Televar, Inc. (the
"Merger"). The shareholders of Televar received 11,593,325 shares of common
stock of the Company in the Merger, resulting in shareholders of Televar owning
an aggregate of about 83% of the 13,968,625 shares of common stock outstanding
on the effective date of the Merger. As a result of the Merger, Televar became
a wholly owned subsidiary of the Company. The Televar capital stock that was
converted into the Company's common stock was converted based on a five-for-one
conversion ratio. In connection with the Merger, the Company also issued an
aggregate of 1,125,000 shares of common stock to certain consultants as
compensation for services rendered to the Company prior to the Merger. The
Company and Televar accounted for the merger as a reverse acquisition, or
merger, with the surviving entity being the Company.
Prior to the Merger, the Company was inactive and had only nominal assets and
liabilities.
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.
<PAGE>
In anticipation of a proposed acquisition of the Company by Pacific Aerospace
and Electronics, Inc. ("PA&E"), the Company and PA&E entered into an Operations
Consulting and Expense Reimbursement Agreement (the "Interim Agreement") in June
1997. Under the agreement, PA&E agreed to provide certain consulting,
management and financial assistance and support to the Company until PA&E's
proposed acquisition of the Company, and several other entities could be
completed. PA&E subsequently determined that it would not proceed with the
proposed acquisitions.
During the term of the Interim Agreement, PA&E loaned a total of approximately
$4,219,418 to the Company. In addition, on behalf of the Company, PA&E
guaranteed a bank loan for approximately $1,215,765 and a three-year equipment
lease of $373,421.
On April 27, 1998, the Company consummated an agreement with PA&E to convert the
$4,219,418 owed into shares of the Company's common stock at $2.00 per share
(the "Restructuring Agreement"). In the Restructuring Agreement, the Company
agreed to grant PA&E demand registration rights for those shares and, in the
event of an underwritten public offering, piggy back registration rights, which
will be effective the earlier of : (a) the closing of the Company 's third round
of financing following the closing of the Restructuring Agreement, or (b) the
first anniversary of the closing of the Restructuring Agreement. In addition,
PA&E agreed to continue guaranteeing the Company's 's $1,215,765 bank loan for
eighteen months from the date of the Restructuring Agreement and to guarantee
the equipment lease for the life of the lease.
As an inducement to obtain PA&E's agreement to convert the Company's debt to
equity, the Company also agreed to purchase a promissory note and all related
interests of PA&E in a company, Brigadoon.com, Inc. ("Brigadoon"). This
included PA&E's interest in a lawsuit filed by PA&E against Brigadoon to recover
amounts Brigadoon owed PA&E, totaling approximately $1,600,000. The Company
also joined in filing involuntary bankruptcy proceedings against Brigadoon in
March 1998. Included in the rights acquired by the Company is a common stock
purchase warrant that entitles the Company to purchase 12.5% of Brigadoon's
fully diluted common stock. The purchase price of these rights and interests
was $950,000 payable over five years under a promissory note, with interest at
the rate of 8% per annum (the "PA&E Note"). Under the PA&E Note, the Company
will pay only interest for the first year commencing March 1, 1998 and will make
fully amortizing monthly payments of principal plus interest for the final four
years of the note term.
Under the terms of the disposal of the Company's Internet Services Group
(discussed in Note 5), the Company sold all of its rights and claims to
Brigadoon assets. The Company retained the $950,000 note payable to PA&E and
the $1,215,765 PA&E guaranteed note payable to a bank. As of March, 1998 the
amount of the guaranteed note payable to a bank increased to $1,300,000 and the
Company is not current with its interest payments to PA&E.
In February 1998, the Company acquired all of the assets and certain liabilities
of MONITRx, Inc.("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.
<PAGE>
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 in the purchase agreement, exceed at
least $1,200,000.
Also in February 1998, the Company acquired all of the assets and certain
liabilities of Digital Network Associates, Inc. ("DNA") for an aggregate
purchase price of $107,000, which consisted of 111,000 shares of the Company's
restricted common stock valued at $102,120 and certain expenses totaling $5,000.
In addition, the Company assumed about $162,736 in liabilities. Costs in excess
of the net book value of $240,000 were recorded as a result of this transaction.
The unamortized portion of costs in excess of book value was written-off in
fiscal 1999. 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 . 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 the Company's common stock
exercisable over the next 18 months, and certain expenses totaling $15,000.
Costs in excess of the net book value of $484,000 were recorded as a result of
this transaction. The Boss acquisition was subsequently rescinded in September
1998. (See Note 5 "Discontinued Operations.")
The business acquisitions described above have been accounted for using the
purchase method, and accordingly, the operating results of the acquired entities
have been included in the Company's consolidated financial statements from the
date of acquisition. The assets acquired and liabilities assumed have been
recorded at an estimate of their fair values, with the difference being
reflected as cost in excess of book value, or goodwill. The related goodwill is
being amortized into operations over five years.
NOTE 3 GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. During the years ended June 30,
1998 and 1997, the Company incurred net losses of approximately $7,333,738 and
$2,787,328, respectively. In addition, the Company incurred a loss of
$5,062,282 for the nine-months ended March 31, 1999. At March 31, 1999 the
Company has a net working capital deficit of about $4,634,2236, a cash balance
of $15,974 and a shareholders' deficit of $1,474,339. These factors, among
others, may indicate that the Company may be unable to continue as a going
concern for a reasonable period of time.
Financing for the Company's operations to date has been significantly augmented
by the sale of common stock and borrowings. The Company's ability to achieve a
level of profitable operations and / or additional financing may impact the
Company's ability to continue as it is presently organized. Resolution of these
issues is dependent on the success of management's plans to raise funds through
the sale of its equity securities in a private placement or a public offering.
<PAGE>
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
March 31, 1999, PA&E is the beneficial owner of approximately 14.5% of the
Company's outstanding common stock.
The Company subleases from PA&E approximately 20,000 square feet of a newly
constructed office building situated in Bothell, Washington, which serves as the
Company's corporate headquarters and primary office facility. The Company
believes that the terms and conditions of the lease, and sub-lease, are at
prevailing market rates and terms in the suburban Seattle area in which the
building is located. The Company has been unable to meet the agreed upon
payment terms of the lease with PA&E since July 1998.
Certain officers and / or directors and shareholders of both the Company and
PA&E have each personally guaranteed certain obligations of the Company or its
subsidiaries.
PA&E has agreed to guarantee certain of the Company's debt instruments,
including a loan from a bank in the amount of $1,215,765 and equipment under a
capital lease with the sum of the original payments totaling approximately
$373,421. In September 1998 the bank agreed to advance the Company additional
funds to meet required interest payments. As of December 31, 1998 the balance
of the loan from a bank is $1,300,000. The loan was due April 30, 1999 and the
Company is currently in default on the loan.
In addition, the Company owes PA&E $950,000 under the terms of the PA&E Note
issued in connection with the execution of the Restructuring Agreement. Under
the terms of the Restructuring Agreement, PA&E has the option to require that
the entire unpaid balance of principal and interest immediately become due and
payable in the event of default. Although the Company is not current with its
interest payments, there has been no formal notification that PA&E will exercise
the default acceleration provisions of the agreement. (See Note 2 - "Formation
of Company".)
During the year ended June 30, 1998 the Company paid $55,000 in consulting fees
to a company whose president was simultaneously the President of Televar, Inc.
The former Televar President resigned effective September 1997. In a subsequent
complaint and cross-complaint, the former President and the Company each alleged
certain matters. The matters were mediated in April 1998, with the Company
paying the former Televar president $125,000 to settle the case.
<PAGE>
The Company presently holds a $250,000 note receivable from a company in which
an officer, director and shareholder of the Company along with another director
and shareholder of the Company, are also officers, directors and shareholders.
In addition, as of March 31, 1999 the Company has provided approximately $42,000
in unreimbursed administrative services to the company. As of June 30, 1998 the
notes are not reflected as an asset on the Company's balance sheet.
As a result of the acquisition of Monitrx, the Company assumed certain notes
payable, totaling about $500,000, to former shareholders of Monitrx, who are now
officers or former officers of the Company. The notes require monthly payments
of principal and interest over the next three years. In addition, the notes
require the Company to pay 6% of all new common stock equity raised as
additional principal payments on the notes, until such time as the notes are
fully repaid. The Company is not presently current with the payments required
under the terms of the notes.
The Company has made various advances, in the form of notes receivable, to
certain officers and other key employees in connection with the relocation of
former Monitrx employees to the Company's Bothell, Washington facility. The
notes total about $150,000, are non-interest bearing and are to be repaid out of
future earnings of the acquired operations. As of June 30, 1998 the notes are
not reflected as an asset on the Company's balance sheet.
NOTE 5 DISCONTINUED OPERATIONS
In June 1998, the Company's Board of Directors adopted a plan to discontinue its
Internet Services 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 Boss. In addition, Boss and the Company, in
a separate agreement, dated September 10, 1998, agreed to the rescission of the
Company's previously announced acquisition of Boss.
The two transactions involved the cash payment of $300,000 to the Company, the
buyers assumption of certain Televar liabilities plus the return to the Company
of 777,776 common shares and warrants to purchase 300,000 shares of the
Company's common stock. These transactions resulted in a loss being recorded on
the sale of $1,600,000, which was recognized during the year ended June 30,
1998. In addition, the transactions effectively ended the Company's involvement
in the Internet service business and allows the company to concentrate on its
home health care software applications products.
The Company has restated its prior financial statements to present the operating
results of the Internet Service Group as discontinued operations. The
components of net assets of the discontinued operations included in the
accompanying consolidated balance sheet as of June 30, 1998 are as follows
(effected assets and liabilities have been removed from the Company's balance
sheet as of September 30, 1998):
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
Receivables - net $ 212,227
Prepaid expenses 70,553
Property and equipment - net 1,542,112
Other assets 642,366
Accounts payable (751,168)
Accrued liabilities (188,107)
Deferred liabilities (385,625)
Long-term debt (602,323)
-------------
$ 540,035
=============
</TABLE>
Liabilities of the Internet Services Group retained by the Company as of June
30, 1998, and included in the amounts listed above, are $201,168 included in
accounts payable, $15,326 included in accrued liabilities, $327,354 included in
deferred revenues and $130,312 included in long-term debt.
Revenues from discontinued operations were $796,400 and $562,598 for the three-
months ended September 30, 1998 and 1997, and $2,711,114 and $2,302,913 for the
years ended June 30, 1998 and 1997, respectively.
Under generally accepted accounting principles, a provision for loss on
discontinued operations has been included based upon management's best estimates
of the amounts that are expected to be realized on the sale.
NOTE 6 COMMON STOCK
During the nine months ended March 31, 1999, the Company issued 2,518,000
restricted shares of common stock in a private placement, exempt from
registration under federal and state securities laws. The net proceeds to the
Company were approximately $2,734,991 (or approximately $1.09 per share). See
"Part II - Item 5 - "Changes in Securities").
The warrants had been issued in connection with a common stock financing in the
prior fiscal year and would have provided the Company gross proceeds of
approximately $917,600. With the rescission of the Company's acquisition of
Boss, 300,000 warrants to acquire shares of the Company's common stock at $2.04
per share were cancelled.
The Company now has 355,000 issued and outstanding warrants to purchase
additional shares of common stock that expire between March, 2002 and February,
2004 at prices ranging from $1.00 to $1.25, respectively. In addition, as of
March 31, 1998, the Company has outstanding options to purchase 2,630,000
shares of the Company's common stock at prices ranging from $1.00 to $2.00 per
share, of which 1,026,250 have vested and are currently exercisable, and
1,247,500 of which were granted to employees of the Company on December 23, 1998
,which grant is conditioned upon shareholder approval of revisions to the
Company's stock option plan at the next annual shareholders' meeting.
<PAGE>
The Company is continuing discussions to secure additional equity financing.
Notwithstanding the completion of the offering described above, the Company
requires additional debt or equity financing to continue operations. There can
be no assurance that the Company will be successful in its efforts to attract
additional financing.
NOTE 7 RISKS AND 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 by potential
customers may be impacted by adverse Year 2000 problems.
Additionally, the health care industry in general, as well as the home health
care segment, is undergoing significant and rapid changes.
As discussed in Note 3 - "Going Concern Matters", above, the Company's ability
to secure adequate sources of capital will impact its prospects for growth and
to continue as a going concern.
In light of these factors, it is reasonably possible that failure to
successfully manage software development, failure to successfully introduce
products to market, uncontrollable failures of internal computer systems at
potential customer sites, the Company's failure to adapt to a rapidly changing
business environment, or the Company's failure to successfully secure additional
sources of financing, could have severe near-term impacts on the Company's
prospects for growth and its ability to continue as a going concern.
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
This Quarterly Report on Form 10 - QSB for the quarter ended December 31, 1998,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such statements may include, but are not limited to,
projection of revenues, income, or loss, capital expenditures, plans for product
development and cooperative arrangements, future operations, financing needs or
plans of the Company as well as assumptions relating to the foregoing. The
words "believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements, which speak only as of the date
the statement was made. Such statements are inherently subject to risks and
uncertainties as further described herein and in the "Considerations Related to
the Company's Business" section of the Company's Annual Report on Form 10-KSB/A
for the year ended June 30, 1998. The Company's actual results may differ
materially from the results projected in the forward-looking statements.
RESULTS OF OPERATIONS
Three month periods ended March 31, 1999 and 1998
Revenues for the three months ended March 31, 1999 were approximately $101,900.
Revenue from software accounts for approximately 79% of total revenue, 8 % of
total revenue is attributed to maintenance revenue and consulting services
generated 13% of total revenue. There was no revenue from continuing operations
for the three months ended March 31, 1998.
Cost of revenue for the three-month period ended March 31, 1999 was $4,000.
There was no cost of revenue from continuing operations for the three months
ended March 31, 1999.
Research and development expenses were approximately $526,000 for the three
months ended March 31, 1999 compared to $215,100 for the three-month period
ended March 31, 1998. These expenses consisted primarily of personnel and
overhead costs incurred in conjunction with research and further development of
the CuraSys software. Research and development expenses were higher in the
three month period ended March 31, 1999 compared to the same period in 1998
because Monitrx was acquired in the middle of the 1998 third quarter therefore,
1998 included expenses for only half of the third quarter. Sales and
marketing expenses were approximately $238,400, compared to $61,000 for the
three month period ended March 31, 1998. These expenses consisted primarily of
personnel, travel, marketing, advertising and overhead costs associated with the
sales and marketing of the CuraSys product. Sales and marketing expenses were
higher in the three month period ended March, 31 1999 compared to the same
period in 1998 because Monitrx was acquired in the middle of the 1998 third
quarter therefore, 1998 included expenses for only half of the third quarter.
Customer service expenses were approximately $77,600 for the three-month period
ended March 31, 1999 compared to $250,800 for the three-month period ended March
31, 1998. The reduction in these expenses is due to an internal reorganization
of resources resulting in less personnel costs and other related expenses
charged to this expense category. These expenses were incurred to provide
customer service for existing contracts and develop the organization to
accommodate projected growth. General and administrative expenses for the three
months ended March 31, 1999 were $751,800 compared to $470,900 for the three
months ended March 31, 1998. General and administrative expenses consisted
primarily of personnel, goodwill amortization, depreciation, facilities costs,
<PAGE>
professional and other administrative expenses. General and administrative
expenses for the three months ended March 31, 1999 were significantly higher
than they were during the same period for the prior year because Monitrx was
acquired in the middle of the third quarter in 1998 therefore, 1998 included
expenses for only half of the third quarter.
Interest expense for the three months ended March 31, 1999 was $112,200 compared
to $37,100 for the same period in 1998. The increase in interest expense is due
to the increased level of borrowings during 1998 and 1999. See " - Liquidity".
Management's current objective is to secure additional equity funding to finance
operating cash flow shortfalls. There can be no assurance, however, that the
Company will be able to identify investors willing to purchase its securities at
a price and on terms satisfactory to the Company, in which event the Company
will be required to continue borrowings at current or increased levels or to cut
back its operations. See " - Liquidity."
Nine- month periods ended March 31, 1999 and 1998
Revenues for the nine months ended March 31, 1999 were approximately $328,000.
Revenue from software accounts for approximately 53% of total revenue, 36% of
total revenue is attributed to hardware sales, 2% of total revenue is attributed
to maintenance fees and consulting services generated 9% of total revenue.
There was no revenue from continuing operations for the nine months ended March
31, 1998.
Cost of revenue for the nine-month period ended March 31, 1999 was $115,400.
The cost of hardware sold accounts for 81% of the cost of revenue. The cost and
expenses attributed to software and consulting services represent 9% and 10%,
respectively, of total cost revenue. There was no cost of revenue from
continuing operations for the nine months ended March 31, 1998.
Research and development expenses for the nine months ended March 31, 1999 were
approximately $1,196,800 compared to $215,100 for the nine-month period ended
March 31, 1998. The $981,700 increase is due to Monitrx being acquired in the
middle of the third quarter of 1998. These expenses consisted primarily of
personnel and overhead costs incurred in conjunction with research and further
development of the CuraSys software. Sales and marketing expenses for the nine
months ended March 31, 1999 were approximately $1,316,100 compared to $259,000
for the nine-month period ended March 31, 1998. The $1,057,100 increase is due
to Monitrx being acquired in middle of the third quarter of 1998. These
expenses consisted primarily of personnel, travel, marketing, advertising and
overhead costs associated with the sales and marketing of the CuraSys product
expenses. Customer service expenses were approximately $400,000 for the nine
months ended March 31, 1999 compared to $53,000 for the nine-month period ended
March 31, 1998. The increase of $347,000 is due to Monitrx being acquired in
the middle of the third quarter of 1998. These expenses were incurred to
provide customer service for existing contracts and develop the organization to
accommodate projected growth. General and administrative expenses for the nine
months ended March 31, 1999 were $2,094,500 compared to $730,700 for the nine
months ended March 31, 1998, an increase of $1,363,800. General and
administrative expenses consisted primarily of personnel, goodwill amortization,
depreciation, facilities costs, professional and other administrative expenses.
General and administrative expenses for the nine months ended March 31, 1999
were significantly higher than they were during the same period for the prior
<PAGE>
year because the prior year did not include additional expenses of acquired
subsidiaries which were not part of the Company's operations in 1998.
Additionally, there was significantly lower corporate activity in the first half
of 1998.
Interest expense for the nine months ended March 31, 1999 was approximately
$270,300 compared to $64,300 for the same period in 1998. The increase in
interest expense is due to the increased level of borrowings during the quarter
in 1998 and the increase in debt during the last three quarters of 1997. See "
- - Liquidity". Management's current objective is to secure additional equity
funding to finance operating cash flow shortfalls. There can be no assurance,
however, that the Company will be able to identify investors willing to purchase
its securities at a price and on terms satisfactory to the Company, in which
event the Company will be required to continue borrowings at current or
increased levels or to cut back its operations. See " - Liquidity."
LIQUIDITY
At March 31, 1999, the Company's total current assets were $144,182 and its
total current liabilities were $4,778,418. The net working capital deficit was
$4,128,117.
Historically, the Company met some of its cash requirements through a
combination of cash flow from operations, issuance of common stock and
borrowings from PA&E. However, with the sale of its 100% owned subsidiary,
Televar, the Company did not record enough revenues from its ongoing operations
to sustain its current level of operations without additional financing. It is
anticipated that the Company will continue to require additional financing. (See
the notes to financial statements accompanying this report.)
The Company has a $1,300,000 loan with a commercial lender that was established
in July 1997. The loan was due April 30, 1999 and the Company is in default on
that loan. Repayment of all advances to the Company pursuant to the loan is
guaranteed by PA&E for an eighteen-month period commencing April 27, 1998.
On November 27, 1998, the Company signed a secured promissory note and borrowed
$700,000 from a third party. The note bears an interest rate of 18% and was due
on February 28, 1999and was extended to May 30, 1999.
During the nine months ended March 31, 1999, the Company issued 2,518,000
restricted shares of common stock in a private placement, exempt from
registration under federal and state securities laws. The net proceeds to the
Company were approximately $2,734,991 (or approximately $1.09 per share). (See
"Part II - Item 2 - "Changes in Securities").
The Company is continuing discussions to secure additional equity financing.
Notwithstanding the completion of the offering described above, the Company
requires additional debt or equity financing to continue operations. There can
be no assurance that the Company will be successful in its efforts to attract
additional financing.
The proceeds from borrowings, together with cash from operations, are
insufficient to fund budgeted operations for the near term. The Company will
require additional financing in order to fund its operating plan and budget and
is in discussions with several potential equity
<PAGE>
financing sources. There is no assurance, however, that these discussions will
result in additional funding on terms that are favorable to the Company or that
additional financing will be available to the Company from other sources. If the
Company is unable to raise additional capital, the Company's ability to continue
operations may be adversely affected.
ACQUISITIONS
In January 1999, the Company acquired two computer software programs from
Millennium Software Inc., a Washington corporation ("Millennium"). In
consideration for the purchase, the Company agreed to pay $150,000 cash in
various installments. The Company also agreed to pay the 35,000 shares of the
Company's common stock to Millennium contingent upon the completion of a
milestone event by April 1, 1999.
CAPITAL EXPENDITURES
The Company has no current plans for material capital expenditures. Additions
and replacements of furniture, fixtures and equipment will be generally funded
through working capital, capital leases, loans from financing institutions, or
other sources of equity funds. Borrowings to acquire capital equipment will
generally be secured by the equipment being acquired.
<PAGE>
Part II. Other Information
Item 2. Changes in Securities.
During the three-month period ended March 31, 1999, the Company issued 1,300,000
restricted shares of common stock in a private placement to certain accredited
investors and sophisticated purchasers. The net proceeds to the Company were
approximately $1,182,900 (or approximately $0.91 per share). The offer and sale
of such shares was made without registration in reliance upon Regulation D and
Regulation S, promulgated under the Securities Act of 1933, as amended.
Pursuant to a resolution adopted by the Company's board of directors on October
30, 1998, the Company issued 144,400 shares of common stock to the investors in
this offering, without additional cash consideration.
Item 3 Defaults Upon Senior Securities
On September 22, 1998, the Company received a notice of default from PA&E, the
company's largest shareholders, with respect to the PA&E Note. (See Note 2 to
the Financial Statements contained in Part I - Item 1.) As of April, 30 1999,
the Company was nine months past due on the interest payments due on the PA&E
Note, in the aggregate amount of approximately $50,700. In addition, on
September 22, 1998, the Company received a notice of default on its lease
payments to PA&E, in the aggregate amount of approximately $91,345. As of
January 31, 1999, the default amount on lease payments was approximately
$195,300. The Company is continuing discussions with PA&E with respect to each
of these defaults. (See Note 4 to the Financial Statements contained in Part I
- - Item 1.)
As of May 3, 1999, the Company is in default on a $1,300,000 loan from a
commercial lender that was due April 30, 1999. The Company is also past due on
interest payments with respect to that loan for approximately $45,800. The loan
is guaranteed by PA&E. As of May 3, 1999, the Company has not received a
formal notice of default or demand for payment from the bank. The Company is
currently discussing the status of the loan and the default with the bank. (See
Note 4 to the Financial Statements contained in Part I - Item 1.)
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-B.
See Exhibit Table on page 20
(b) Reports on Form 8-K. During the quarter ended December 31, 1998, the
Company filed the following current reports on Form 8-K: None
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated this 11 day ORCA TECHNOLOGIES, INC.
of May, 1999
/s/ Roger P. Vallo
------------------
Roger P. Vallo, Chairman and President
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
<PAGE>
EXHIBITS
Page Exhibit Number Exhibit Name
- ---- -------------- ------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 15,974
<SECURITIES> 0
<RECEIVABLES> 30,035
<ALLOWANCES> 0
<INVENTORY> 61,506
<CURRENT-ASSETS> 144,182
<PP&E> 992,802
<DEPRECIATION> 258,114
<TOTAL-ASSETS> 4,030,255
<CURRENT-LIABILITIES> 4,778,418
<BONDS> 0
0
0
<COMMON> 14,548
<OTHER-SE> (1,459,751)
<TOTAL-LIABILITY-AND-EQUITY> 4,030,255
<SALES> 101,946
<TOTAL-REVENUES> 101,946
<CGS> 3,981
<TOTAL-COSTS> 1,597,851
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,241
<INCOME-PRETAX> (1,608,146)
<INCOME-TAX> (1,608,146)
<INCOME-CONTINUING> (1,608,146)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,608,146)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
