FORM 10-QSB - QUARTERLY REPORT
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
[ ] 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 0-18184
SK Technologies Corporation
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(Exact name of small business issuer as specified in its charter)
Delaware 52-1507455
--------------------------- ------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
500 Fairway Drive, Suite 104, Deerfield Beach, FL 33441
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(Address of principal executive offices)
(954) 418-0101
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(Issuer's telephone number, including area code)
1650 S. Dixie Highway, Boca Raton, FL 33432
(561) 393-7540
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(Former name, former address and former fiscal year,
if changed since last report)
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 periods 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
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity as of the latest practicable date.
Common Stock, $.001 Par Value = 6,140,495 shares as of January 31,
1997.
<PAGE>
SK TECHNOLOGIES CORPORATION
INDEX
FORM 10-QSB
THREE MONTHS ENDED DECEMBER 31, 1996
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements . . . . . . . . . . . 1
Consolidated Condensed Balance Sheet . . . 2-3
Consolidated Condensed Statements of
Operations . . . . . . . . . . . . . . . 4
Consolidated Condensed Statements of
Cash Flows . . . . . . . . . . . . . . 5
Notes to the Consolidated Condensed
Financial Statements . . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations . . . . . . . . . . . . . . 8-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . 10
Item 2. Changes in Securities . . . . . . . . . . 10
Item 3. Defaults Upon Senior Securities . . . . . 10
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . . 10
Item 5. Other Information . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . 10
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 11
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The interim financial information included herein is
unaudited. Certain information and footnote disclosures
normally included in the financial statements have been
condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although the
Company believes that the disclosures made are adequate to
make the information presented not misleading. These
financial statements should be read in conjunction with the
financial statements and related notes contained in the
Company's 1996 Annual Report on Form 10-KSB. Other than
indicated herein, there have been no significant changes
from the financial data published in said report. In the
opinion of management, such unaudited information reflects
all adjustments, consisting only of normal recurring
accruals and other adjustments as disclosed herein,
necessary for a fair presentation of the unaudited
information below.
Results for interim periods are not necessarily indicative
of results expected for the full year.
Certain amounts in the prior periods' consolidated financial
statements have been reclassified to conform to the current
periods' presentation. These reclassifications do not
materially impact the prior periods' consolidated financial
statements.
<PAGE>
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current Assets:
Cash $ 111,010
Trade accounts receivable, net of
allowance for doubtful accounts
of approximately $41,000 91,803
Inventories 23,351
Other current assets 1,788
----------
Total Current Assets 227,952
Property and Equipment, Net 526,100
Other Assets:
Software development costs,
net of accumulated amortization
of $367,824 483,776
Other, net 4,360
----------
Total Other Assets 488,136
----------
$1,242,188
==========
<PAGE>
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (CONT'D)
DECEMBER 31, 1996
LIABILITIES AND CAPITAL DEFICIENCY
Current Liabilities:
Accounts payable $ 91,852
Accrued expenses 147,462
Due to shareholders/officers/directors 1,081,403
Current portion of borrowings,
bank mortgages 189,618
Current portion of borrowing, notes
payable to related parties/shareholders 117,997
Current portion of capital lease
obligations 11,380
Deferred income 147,813
Loans payable shareholders/directors 2,785,000
------------
Total Current Liabilities 4,572,525
Borrowings, notes payable to related
parties/shareholders, less current portion 400,000
Capital lease obligations, less current
portion 16,882
Capital Deficiency:
Convertible Preferred Stock, $.001
par value, 5,000,000 shares
authorized, 1,000,000 shares
designated as convertible Series B
Preferred Stock, 671,734 shares
issued and outstanding 672
Common stock, $.001 par value,
25,000,000 shares authorized,
6,140,495 shares issued and
outstanding 6,140
Additional paid-in capital 12,110,531
Accumulated deficit (15,864,562)
------------
Capital Deficiency (3,747,219)
------------
$ 1,242,188
============
<PAGE>
<TABLE>
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Equipment, software sales and
support $ 243,252 $ 162,945 $ 645,140 $ 452,684
Development and other fees - - - 109,000
------------ ----------- ----------- -----------
243,252 162,945 645,140 561,684
Cost of Revenues:
Cost of equipment sold 21,610 12,365 72,683 41,972
Amortization of software development
costs 57,142 31,996 146,903 65,871
Research and development expenses 51,610 39,349 141,627 184,134
------------ ----------- ----------- -----------
130,362 83,710 361,213 291,977
------------ ----------- ----------- -----------
Gross Profit 112,890 79,235 283,927 269,707
Selling, General and Administrative
Expenses:
Compensation and payroll taxes 225,218 280,075 740,787 863,512
Other selling, general and
administrative expenses 191,262 237,697 566,177 741,338
------------ ----------- ----------- -----------
416,480 517,772 1,306,964 1,604,850
------------ ----------- ----------- -----------
Operating loss (303,590) (438,537) (1,023,037) (1,335,143)
Other (Expenses) Income:
Interest income 553 303 1,556 2,405
Interest expense (87,965) (59,348) (243,152) (134,125)
Other, net (3,714) (12,205) (1,246) (12,022)
------------ ----------- ------------ -----------
Total Other Expenses (91,126) (71,250) (242,842) (143,742)
------------ ----------- ------------ -----------
Net loss $ (394,716) $ (509,787) $ (1,265,879) $(1,478,885)
============ =========== ============ ===========
Loss per common share $ (.06) $ (.09) $ (.21) $ (.26)
============ =========== ============ ===========
Weighted Average Number of
Common Shares Outstanding 6,140,495 5,611,276 6,122,895 5,611,276
</TABLE>
<PAGE>
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
Net cash used in operating activities $ (807,054) $ (913,210)
Cash Flows From Investing Activities:
Additions to software development costs (173,285) (255,885)
Purchases of property and equipment (20,903) (5,423)
Net decrease in other assets 8,743 2,589
Proceeds from sale of property 240,000 -
----------- -----------
Net cash provided by (used in)
investing activities 54,555 (258,719)
Cash Flows From Financing Activities:
Proceeds from loans from shareholder/directors 1,005,000 1,330,000
Principal payments on bank mortgages (200,377) (273,622)
Principal payments on notes payable to
related parties/shareholders (7,817) (6,902)
Principal payments on capital lease obligations (7,828) (7,995)
Proceeds from bank mortgage - 191,250
----------- -----------
Net cash provided by financing
activities 788,978 1,232,731
----------- -----------
Increase in cash 36,479 60,802
Cash at beginning of period 74,531 69,303
----------- -----------
Cash at end of period $ 111,010 $ 130,105
=========== ===========
<PAGE>
SK TECHNOLOGIES CORPORATION AND SUBSIDIEARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1996
Note 1 - PROPERTY AND EQUIPMENT
In May 1996, the fifth floor office space consisting of 2,685 square
feet in the condominium building where the Company's executive offices are
located, was sold to an unrelated party at a gross selling price of $240,000.
The Company vacated these premises on April 30, 1996. The Company received
net proceeds of $34,841, after payment of closing costs and settlement in full
of the mortgage in the amount of $200,000 which was collateralized by this
property and Suites 3A & 3B at the same location. The carrying value of the
fifth floor was adjusted to $236,818 and an impairment loss of $47,193 was
recorded at March 31, 1996. Accordingly there was no loss on the sale of the
fifth floor.
On January 15, 1997, the Company sold the second and third floor office
space consisting of 5,370 square feet in this condominium building to another
unrelated party at a gross selling price of $445,000. The carrying value of
the second and third floors was adjusted to $437,640, and an impairment loss
of $111,787 was recorded at March 31, 1996. The net proceeds to the Company
on this sale were $215,000 after payment of closing costs and settlement in
full of the two mortgages totaling $210,876. The Company vacated these
premises on January 31, 1997.
Note 2 - LOANS PAYABLE SHAREHOLDERS/DIRECTORS
Two shareholders/directors of the Company and their related entities
have provided short term loans to the Company totalling $2,785,000 through
December 31, 1996, of which $1,005,000 was received during the nine months
ended December 31, 1996, $1,700,000 was received during fiscal 1996 and
$80,000 was received in March 1995. Additional loans of $75,000 were made to
the Company in January 1997. These loans accrue interest at the rate of 10%
per annum, $271,236 through December 31, 1996 of which $177,970 was accrued
for the nine months ended December 31, 1996. In December 1996, the Company
collateralized these loans with the StoreKare software and documentation.
Note 3 - DEFERRED INCOME AND REVENUE RECOGNITION
Deferred income consists of maintenance and support revenues of $56,130,
as such revenue is recognized ratably over the term of the contract, and a
$91,683 prepayment from an unrelated party for products to be shipped to
resellers of this unrelated party with revenues to be recognized as such
products are shipped. Pursuant to a 1994 agreement between the Company and
this unrelated party, this party agreed to purchase products from the Company
to a value of $500,000 with a provision for quarterly payments. At December
31, 1996, $367,573 is due to the Company pursuant to this agreement but is not
included in the consolidated balance sheet at December 31, 1996 since the
party has notified the Company of its intention to terminate the agreement.
On October 18, 1996 the Company filed a Demand for Arbitration in regard to
this agreement.
Note 4 - BORROWINGS, BANK MORTGAGES
In May 1996, a mortgage of $200,000 which was collateralized by the
fifth floor, and a portion of the third floor office space, Suites 3A & B, was
paid in full, upon the sale of the fifth floor office space.
The mortgage on the second floor office space in the amount of $189,618,
which expired on June 30, 1996, was extended for two three month periods,
through December 1996 with interest at 2% above prime. This mortgage was paid
in full on January 15, 1997, upon the sale of the second floor office space.
<PAGE>
NOTE 5 - BORROWINGS, NOTES PAYABLE TO RELATED PARTIES/SHAREHOLDERS
The mortgage collateralized by a portion of the third floor office
space, Suites 3 C & D, in the amount of $17,997 plus accrued interest, was
paid in full on January 15, 1997, upon the sale of the third floor office
space. Accordingly, the mortgage of $17,997 is classified as a current
liability on the December 31, 1996 Consolidated Condensed Balance Sheet.
In December 1996, a loan agreement with a shareholder was amended
providing for a principal payment of $100,000 to be made to this shareholder
upon the receipt of the proceeds from the sale of the second and third floor
office space. This amendment also extended the loan term so that principal
payments will begin in November 1999, and are payable over a four year term.
On January 24, 1997, the Company paid this shareholder $100,000 and will
continue to pay interest monthly at 10% per annum on the remaining balance.
In addition, the Company agreed to collateralize the loan with the office
furniture and equipment which has a book value of approximately $70,000.
NOTE 6 - LIQUIDITY
Through December 31, 1996, the Company has incurred significant
operating losses and has a working capital deficiency. During the nine months
ended December 31, 1996, the Company received short term loans of $1,005,000
from two shareholders/directors of the Company and their related entities.
These loans accrue interest at the rate of 10% per annum, $67,564 and $177,970
was accrued for the three and nine months ended December 31, 1996 and $93,266
was accrued during the year ended March 31, 1996. During January 1997, the
Company received additional loans of $75,000 from these shareholders/directors
and their related entities. If additional funding is not obtained through an
offering or alternate sources of funding of which none are presently available,
the Company will have to dramatically curtail operations and/or take other
actions.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
General
The Company is engaged in developing, manufacturing and marketing point-
of-sale and store management software for the retail industry. StoreKare, the
Company's primary product family, includes two versions - one designed for
general and specialty retailers (hard and soft goods merchants) and the other
for Subway Sandwiches and Salads ("Subway") fast food restaurants. The
Company's goals are to continue development of the StoreKare products which
are currently in process and to develop new technology.
Liquidity and Capital Resources
The Company sustained a net loss of $394,716 and $1,265,879 and $509,787
and $1,478,885, for the three and nine months ended December 31, 1996 and
1995, respectively. The Company's working capital deficiency increased from
$(3,009,900) at March 31, 1996 to $(4,344,573) at December 31, 1996. This
increase was mainly due to the receipt of short term loans of $1,005,000 and
the related interest of $177,970 accrued during the nine months ended December
31, 1996, from two shareholders/directors and their related entities. In
addition, $100,000 of a $500,000 note payable to a related party/shareholder
was reclassified as a current liability at December 31, 1996. The Company
agreed to pay $100,000 of principal on this note upon the sale of the office
space which the Company sold on January 15, 1997.
During the three and nine months ended December 31, 1996 and 1995, the
Company capitalized $44,324 and $173,285, and $72,106 and $255,885, of
development costs. Amortization of development costs was $57,142 and
$146,903, and $31,996 and $65,871, for the three and nine months ended
December 31, 1996 and 1995, respectively. The Company, subject to the
availability of working capital, anticipates incurring a comparable amount of
development costs for the remainder of fiscal 1997 as it continues to develop
new features for the StoreKare retail point-of-sale and back office module
products and begins development of new technology software.
The Company principally markets its products on a nonexclusive basis
through a reseller network and other business relationships. The Company's
region managers continue to support the existing resellers and pursue
opportunities to recruit new resellers. In addition, the region managers are
seeking retail chains, co-ops, and franchises as customers, to sell and
support the Company's products directly to retailers. The Company has aligned
itself and participates in various programs with several major corporations
including ScanSource, International Business Machines Corp., Omron Systems of
America, Inc., and CompuRegister Corporation. The Company believes that such
alliances assist in the marketing of its products.
The Company has formed an alliance with Retail Business Systems Inc.
("RBS"), the primary supplier of cash registers to Subway. RBS will market
and sell the StoreKare products jointly with its efforts to market and sell
cash registers to Subway customers. The Company will continue to be
responsible for technical support and future development of the StoreKare
product for Subway.
Through December 31, 1996, the Company has incurred significant
operating losses and has a working capital deficiency. During the nine months
ended December 31, 1996 the Company received short term loans of $1,005,000
from two shareholders/directors of the Company and their related entities.
These loans accrue interest at the rate of 10% per annum, $67,564 and $177,970
was accrued for the three and nine months ended December 31, 1996 and $93,266
was accrued during fiscal 1996. During January 1997, the Company has received
additional loans of $75,000 from these shareholders/directors and their
related entities. If additional funding is not obtained through an offering
or alternate sources of funding, of which none are presently available, the
Company will have to dramatically curtail operations and/or take other
actions.
<PAGE>
Results of Operations
For the three and nine months ended December 31, 1996 and 1995, the
Company reported a net loss of $394,716 and $1,265,879, and $509,787 and
$1,478,885, respectively. Revenues for the three and nine months ended
December 31, 1996 were $243,252 and $645,140 from equipment and software sales
and support. For the three and nine months ended December 31, 1995 revenues
were $162,945 and $561,684 which included equipment and software sales and
support revenues of $162,945 and $452,684 for the three and nine months ended
December 31, 1995 and development fees of $109,000 during the three months
ended June 30, 1995.
Amortization of software development costs was $57,142 and $146,903, and
$31,996 and $65,871, for the three and nine months ended December 31, 1996 and
1995, respectively. In addition, the Company expensed $51,610 and $141,627,
and $39,349 and $184,134, respectively of research and development costs
during the three and nine months ended December 31, 1996 and 1995,
respectively. Included in expenses and in connection with the development of
the Kodak product, costs aggregating $74,360 have been expensed during the
three months ended June 30, 1995, to match such costs against fees of $109,000
received from Kodak during the three months ended June 30, 1995.
Total selling, general and administrative expenses decreased from
$1,604,850 to $1,306,964 for the nine months ended December 31, 1995 and 1996,
respectively. There was a 15% decrease in compensation and payroll taxes due
to a small reduction in staffing and a decrease of 24% in other selling,
general and administrative expenses, which can be attributed to a reduction in
legal fees, marketing, travel expenses and other overhead costs. The Company
anticipates that total selling, general and administrative expenses for the
fourth quarter of fiscal 1997 will remain consistent with the first three
quarters of fiscal 1997.
The Company incurred interest expense of $87,965 and $243,152, and
$59,348 and $134,125, during the three and nine months ended December
31, 1996 and 1995 respectively. Interest expense was incurred on loans from
shareholders/directors, of $67,564 and $177,970, during the three and nine
months ended December 31, 1996 as compared to $29,450 and $53,195, for the
three and nine months ended December 31, 1995. As of December 31, 1996 and
1995, loans from shareholders/directors were $2,785,000 and $1,410,000
respectively.
Seasonality
The Company believes that seasonality has not historically had any
material impact on its business. However, during the winter holiday season
retail businesses typically delay the installation and/or purchase of any
capital assets such as our Storekare products.
<PAGE>
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.
On October 18, 1996 the Company filed a Demand for Arbitration of a
dispute arising out of a contract dated September 16, 1994 (the
"Agreement") between the Company and Fujitsu-ICL Systems, Inc. ("ICL").
Pursuant to the terms of the Agreement $367,573 is due to the Company
from ICL. On February 27, 1996, ICL advised the Company of its
intention to terminate the Agreement and has failed to make any payments
to the Company for the $367,573 balance which is presently due and
outstanding.
Item 2. Changes in Securities.
Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
On October 31, 1996, shareholders of the Company owning 4,264,515 of the
6,795,562 shares of the Company's Common and Preferred Stock issued and
outstanding as of October 4, 1996, representing a majority in interest
of all the issued and outstanding shares of the Company's stock,
approved by written consent the following:
1. The Company's 1995 Stock Option Plan.
2. An adoption of an amendment to the
Certificate of Incorporation reducing the
number of authorized shares of Common
Stock to 25,000,000 and reducing the
number of authorized shares of Preferred
Stock to 5,000,000.
On October 9, 1996 an Information Statement was sent to the Company's
shareholders of record to notify them of this action.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
27. Financial Data Schedule for the quarterly period ended
December 31, 1996.
b) The Company did not file any reports on Form 8-K during the three
months ended December 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, SK
Technologies Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SK Technologies Corporation
(Registrant)
Date: February 14, 1997 /s/ Calvin S. Shoemaker
President, Chief Executive Officer
Date: February 14, 1997 /s/ Melvin T. Goldberger
Treasurer, Principal Accounting Office
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 111,010
<SECURITIES> 0
<RECEIVABLES> 133,188
<ALLOWANCES> 41,385
<INVENTORY> 23,351
<CURRENT-ASSETS> 227,952
<PP&E> 871,387
<DEPRECIATION> 345,287
<TOTAL-ASSETS> 1,242,188
<CURRENT-LIABILITIES> 4,572,525
<BONDS> 416,882
672
0
<COMMON> 6,140
<OTHER-SE> (3,754,031)
<TOTAL-LIABILITY-AND-EQUITY> 1,242,188
<SALES> 645,140
<TOTAL-REVENUES> 645,140
<CGS> 72,683
<TOTAL-COSTS> 361,213
<OTHER-EXPENSES> 1,306,964
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 243,152
<INCOME-PRETAX> (1,265,879)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,023,037)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,265,879)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
