FORM 10-KSB - ANNUAL REPORT
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-18184
SK TECHNOLOGIES CORPORATION
(Name of small business issuer in its charter)
Delaware 52-1507455
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Fairway Drive, Suite 104, Deerfield Beach, FL 33441
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (954) 418-0101
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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
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 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 other
amendment to this Form 10-KSB. X
State the Issuer's revenues for its most recent fiscal year.
$801,483
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date
within 60 days.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at June 13, 1997 was $517,250.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
As of June 13, 1997, 6,323,828 shares of Common Stock, par value
$.001 per share, were issued and outstanding.
PART I
ITEM 1. DESCRIPTION OF BUSINESS:
BUSINESS DEVELOPMENT
SK Technologies Corporation, a publicly-held Delaware corporation
(the "Company"), was incorporated in September 1986. In January 1989 the
Company acquired SK Technologies Corp. (the Company's predecessor") which
was incorporated under the laws of the State of Florida in March 1985, and
the Company changed its name to SK Technologies Corporation. Prior to
this acquisition, the Company had limited operations.
BUSINESS OF ISSUER
The Company's Products
The Company is engaged in developing, manufacturing and marketing
point-of-sale and store management software for the retail industry.
StoreKare, the Company's product family, is designed for general and
specialty retailers (hard and soft goods merchants). The Company's goals
are to continue to develop and expand the StoreKare family of products so
that they are simple to use, flexible, compatible with most commonly used
hardware in the point-of-sale industry and affordable to most small
businesses. The Company sold the StoreKare for Subway product to an
unrelated party in May 1997 and discontinued sales to Subway Sandwich and
Salads fast food restaurants.
StoreKare
The StoreKare Retail System provides a single screen display for all
transactions, pop-up help and information windows, system
security/unauthorized access restrictions, bar code scanning of
merchandise, credit card reading/authorizations, printing of receipts,
handling of discounts, markdowns, promotions, layaways, pickup/delivery,
commissions, time clock, X and Z tapes, credit card settlements, inventory
management and store management reports. The StoreKare Retail Point-of-
Sale module currently has a suggested retail price of $1,195. The Company
offers optional modules for the StoreKare Retail System including
purchasing and receiving, sales and profit analysis, time and attendance,
in-house accounts, remote communications and third party software
interface. StoreKare's optional modules are offered at a suggested
retail price of $120 to $1,195. To date, approximately 1,000 StoreKare
Retail Systems have been shipped, of which approximately 300 have been
shipped in fiscal 1997, nationwide through the Company's indirect sales
channel (resellers and distributors), and other business relationships.
Business Ventures
Management believes that aligning the Company with one or more major
corporations will assist in the marketing of its products. The Company
has entered into formal agreements and/or business alliances with such
major companies as, ScanSource, International Business Machines Corp.
("IBM"), and Omron Systems of America, Inc. ("Omron") which management
believes will increase the Company's visibility in the point-of-sale
industry and expand its market share. The Company believes that its
StoreKare family of products has fundamental features and functions
desired by many retailers in various segments of the retail industry and,
for this reason, it intends to continue to align itself with major
distribution companies.
ScanSource
ScanSource is the sole distributor for the IBM SureOne point-of-sale
terminal and provides sales development services on behalf of IBM, on the
SureOne. The Company is an authorized independent software vendor ("ISV")
and reseller of the SureOne product and is an invited participant in all
ScanSource sponsored trade shows and lead development activities.
IBM
The Company has been authorized as a Personal Computer Value-Added
Reseller in May 1996 and is also an IBM Business Partner. The Company is
also a participant in the IBM retail solutions program which will provide the
Company with access to IBM technical information and new IBM hardware products
prior to their release. The Company is a participant in an ongoing IBM lead
generation program, in which more than 100,000 retailers are targeted. The
leads are distributed to IBM authorized resellers, nationwide, that are
partnered with the Company and other software vendors.
Omron
The Company's relationship with Omron, pursuant to a May 1992
document of understanding which continues to be renewed annually, consists
primarily of marketing and distribution of StoreKare products through the
Omron reseller channel. Omron, a provider of hardware, offers products
with a PC based terminal with a retail style keyboard designed for the
small to medium sized retail merchant. The Company has access to new
Omron hardware products prior to their release which provides the
opportunity for StoreKare to be ported and offered as compatible with any
newly released Omron DOS based cash register. During fiscal 1997, the
StoreKare products have been displayed at the Omron booth with the
Company's personnel in support, at many retail industry shows where Omron
exhibits its products.
Consulting Agreement - Capital Hill Group
In May 1993, the Company and Capital Hill Group Inc. ("CHG"), an
investment banking firm providing services to the Company since 1988,
entered into an amendment (the "Amendment") to the January 1991
Consulting and Finder's Agreements. The Amendment extended the
expiration date of these agreements until December 31, 1996 and called for
payment of $5,500 per month beginning June 1, 1993. The Company incurred
consulting fees to CHG of $49,500 and $66,000 during fiscal 1997 and 1996,
respectively, which are included in other selling, general and
administrative expenses in the Statements of Operations. As additional
compensation for services to be provided by CHG, the Company granted CHG
a five year option for 161,806 shares based on the proceeds of $2,000,000
from the February 1993 Series B preferred convertible stock offering (the
"Preferred Offering") at an exercise price of $.10 per share which was
less than the market value of $1.5625 per share in May 1993. This option
has been adjusted to 89,869 shares pursuant to the terms of the Amendment
as the Company only received gross proceeds of $1,082,600. All amounts
owed by CHG to the Company or by the Company to CHG were considered fully
satisfied by the Amendment. All unexercised options previously granted to
CHG and/or its president were also cancelled. CHG received compensation
of $38,333 in lieu of any compensation that would be due and payable under
the Finder's Agreement in connection with proceeds from Common and
Preferred Stock offerings through the date of the Amendment. This amount
was recorded as offering costs and therefore netted with the proceeds of
the Preferred Offering. In addition, the Company reimbursed CHG for legal
expenses of $21,500 related to the Preferred Offering which amounts were
also recorded as offering costs and therefore netted with the proceeds
from the Preferred Offering.
In connection with the Finder's agreement, in the event CHG
introduces a party to the Company which results in the Company
consummating a debt or equity financing with such third party, or if CHG
does not introduce such party to the Company but the Company otherwise
requests CHG's assistance in structuring such transaction, CHG will be
entitled to a finder's fee of 5% of the first $1,000,000 value of such
transaction, 4% of the next $1,000,000, 3% of the next $1,000,000, 2% of
the next $1,000,000 and 1% of the any balance. In addition, in the event
CHG should act as an underwriter of such financing, or participate as a
member of the underwriting syndicate, or otherwise act as a
broker/reseller in the placement of such financing, CHG shall not be
entitled to receive the finder's fee as to that portion of financing in
which it participated; however, CHG shall receive a commission (the
"Broker's Commission") identical to the commission paid to other
participating broker/resellers in an amount not exceeding 10% on that
portion of the financing in which it participated, payable in cash at the
closing of the transaction, provided that (i) CHG is a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD")
at the time of the financing, (ii) it is duly registered as a
broker/reseller in all applicable jurisdictions in which registration is
a pre-requisite to the payment of the Broker's Commission and (iii) such
payment is permissible under the NASD's rules
and regulations. As of March 31, 1997 finders fees of $493,000 have been
accrued. The Company accrued finders fees of $100,500 and $166,000 during
fiscal 1997 and 1996 respectively which are included in other selling
general and administrative expenses in the Statements of Operations.
Research and Development
The Company continues to develop new products as well as enhancements
and add-on features for its existing product lines. The Company also
performs limited customized product development and product enhancements
on a customer funded contract basis for chain store projects.
Research and development costs expensed in fiscal 1997 and 1996 were
approximately $162,000 and $226,000, respectively. The Company
capitalized development costs of approximately $232,000 and $334,000
during fiscal 1997 and 1996, respectively. Approximately $74,000 of Kodak
costs previously capitalized were expensed against Kodak revenues received
during fiscal 1996.
Typically, development cycles of software products are lengthy, which
results in an extended period of time between the initiation of a
development project for a product and its production of revenue. During
that period of time, which averages 9 to 12 months, the product features
are finalized, specifications are developed, software code and support
documentation are written, and the product (software and documentation) is
tested in the Company's test lab. The product is then field tested at
selected customer test sites. Subsequently, the product goes through the
manufacturing process, resellers and sales representatives receive product
training, and the marketing process then commences.
Inventory and Hardware
The Company manufactures its software products on an "as needed"
basis and has never experienced any difficulty in its software
manufacturing process. Due to the nature of the Company's software
products, orders are taken for currently available products and reproduced
to satisfy customer's orders. There is no backlog of orders since all
orders are fulfilled as they are received.
The Company does not manufacture hardware. The Company maintains a
capital equipment inventory of terminals manufactured by the major point-
of-sale equipment manufacturers for testing its products. The Company
obtains SureOne product on a "just in time" basis from ScanSource for
resale to direct customers.
Marketing
The Company markets its products directly to retail store chains
using the IBM SureOne terminal, as well as through a reseller network, and
to co-ops and franchises, in areas where the Company's dealer network is
not strong, and through other business relationships. Resellers handle
specific geographic regions and provide technical expertise to their
customers. The Company requires all resellers to attend a three day
intensive training class which is offered to resellers at the Company's
offices or at the reseller's locations. Additional programs for marketing
and technical support are offered to resellers.
The Company has also aligned itself with several major corporations.
Management believes that alliance agreements that the Company has with
such corporations as ScanSource, IBM and Omron will assist in the
marketing of its products.
During fiscal 1997, Subway and Kodak accounted for 17% and less than
1%, respectively, of the Company's revenues and during fiscal 1996 Subway
and Kodak accounted for 15% and 18%, respectively, of the Company's
revenues.
Service and Maintenance
The Company's success in marketing its software is dependent upon its
ability to provide technical support services to its resellers and users
at a higher level of quality than the industry standard and at reasonable
rates.
The Company warrants that the media on which software programs are
sold will be free from defects in materials and workmanship under normal
usage for 30 days from the date of delivery. A comprehensive user manual
is provided with complete instructions for operation of the StoreKare
system. The Company provides 9 hour standard and 24 hour extended
telephone support for its software.
SK Credit Corporation
The Company formed a wholly-owned subsidiary, SK Credit Corporation
("SK Credit"), to offer financing to customers of the Company. SK Credit,
which commenced operations in September 1990, was primarily engaged in the
financing of point-of-sale and other value added computer systems
developed by the Company to end users who are franchisees and other multi-
store business groups. SK Credit is inactive.
Competition
Management believes that the principal competitive factors in its
market are product performance, functionality and reliability, price, user
friendliness, product availability, service and support, marketing and
promotion. Management of the Company believes it competes favorably in
all of these areas. In addition, management believes that, due to the
rapid technological changes and advances in the computer industry
generally, and the segment thereof in which the Company operates, another
major competitive factor in its market is the ability to achieve
technological advances and enhancements comparable to and competitive with
those made by others in such industry segment. While the Company believes
that it presently competes favorably in this area and intends to continue
to do so, no assurances are given that the Company will be able to
adequately respond to product obsolescence or effect advances in
technology in a manner as to be commercially feasible. The Company's plan
for addressing this competitive factor is to utilize industry standard
personal computer compatible hardware, and to continue to modify the
Company's products to function on revised and/or replacement hardware of
manufacturers who are viewed as industry leaders and who command the
greatest market share in the point of sale industry. Additionally, the
Company has estimated a three year life cycle for each version of a
product to be released by the Company. The Company's plan also includes
developing on-going upgrades and enhancements (new versions) to its
products and releasing such upgrades and enhancements to the market place
on an ongoing basis.
Since the Company's strategy is to provide software products that
function on industry standard operating systems (DOS, Windows 95 and
Windows/NT), standard hardware (including but not limited to IBM, Omron,
and NCR manufactured hardware) and operate in a generic point-of-sale
environment, the Company is not dependent upon any one hardware
manufacturer or external application with one exception. That exception
is the Operating Systems (DOS, Windows 95 and Windows/NT) which are owned
by Microsoft and sold directly by Microsoft, as well as licensed to nearly
all hardware manufacturers of IBM compatible computers. In view of the
perceived stability of Microsoft as well as the license rights provided to
multiple hardware manufacturers, management of the Company does not view
this dependency on Microsoft as a material factor to the continued success
of the Company's products. In any event, the Company believes it could
convert its products to function under an alternative operating system
(e.g., Windows 95, Windows/NT, Unix or OS/2) if the need should ever
arise.
The Company's principal competitors in the point-of-sale market
include, but are not limited to, Advantec, ARS, CAM, CRS, Infocorp,
MicroBiz Corp., MSG, PSI, ReMacs, RSS, RTI, Softpoint, STS and
Synchronics. Many of these competitors do not sell fully featured point-
of-sale systems. While some of the Company's competitors have
substantially greater financial, personnel and technological resources
than the Company, management believes that its point-of-sale products have
several advantages over competing products, including distributed
communications capabilities and the support of a wide variety of point-of-
sale hardware products from various manufacturers. Additionally, in
management's opinion the Company's agreements and relationships with IBM
and Omron, as well as its other relationships give the Company a
competitive edge in its market.
Copyrights and Licenses
The Company has not sought patent protection for its products but
seeks to maintain its proprietary rights by a combination of copyright and
trade secret protection. The Company has obtained statutory copyright
protection for its Invisible Link and StoreKare software, as well as
federal trademark registration for its SK Technologies and StoreKare
names.
Personnel
The Company currently employs 27 persons as follows: executive
officers (four persons), customer service (five persons), sales and
marketing (eight persons), programming and quality assurance (six
persons), administration and finance (two persons), technicians (one
person),and operations (one person). The Company also engages the services
of one programmer and two technical writers as needed, on an independent
contractor basis. The Company retains additional sales, technical and
customer support persons as it deems necessary.
The Company is not a party to any collective bargaining agreements
and believes it has achieved harmonious employee relations.
ITEM 2. DESCRIPTION OF PROPERTY:
The Company's principal executive offices were located at 1650 South
Dixie Highway, Boca Raton, Florida 33432 where the Company occupied 8,055
square feet. On May 1, 1996, the fifth floor office space of 2,685 square
feet, was sold to an unrelated party at a gross selling price of $240,000
and the Company vacated those premises on April 30, 1996. 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. One financial institution held a $200,000
three year first mortgage due February 1998, bearing interest at 13% on
this space plus 1,558 square feet on the third floor. This mortgage of
$200,000 was settled in full on May 1, 1996.
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 recognized a gain of $10,612 on the sale of this
property. The Company vacated these premises on January 31, 1997.
The Company leases 7,029 square feet of office space from an
unrelated entity for $8,688 per month through January 1998, pursuant to a
lease which expires January 31, 2002. This amount includes rent of $5,272
per month which will increase 4.5% annually for the next four years and
additional rent of approximately $5 per square foot for the Company's
allocated share of expenses for 1997. The expense allocation will be
adjusted annually.
ITEM 3. 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").
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, pursuant
to the terms of the Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS:
Market Information
The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol SKTC. The following table sets forth the high and low bid
quotations for the Common Stock for the periods indicated. These
quotations reflect prices between resellers and do not include retail
mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
Common Stock
High Low
April 1, 1995 -
June 30, 1995 $ 0.875 $ 0.375
July 1, 1995 -
September 30, 1995 $ 0.6875 $ 0.1875
October 1, 1995 -
December 31, 1995 $ 0.3125 $ 0.1875
January 1, 1996 -
March 31, 1996 $ 0.1875 $ 0.0625
April 1, 1996 -
June 30, 1996 $ 0.8125 $ 0.09375
July 1, 1996 -
September 30, 1996 $ 0.3125 $ 0.125
October 1, 1996 -
December 31, 1996 $ 0.21875 $ 0.1875
January 1, 1997 -
March 31, 1997 $ 0.75 $ 0.1875
April 1, 1997 -
June 13, 1997 $ 0.375 $ 0.125
On June 13, 1997, the closing bid price on the OTC Bulletin Board of
the Common Stock was $.125.
As of June 13, 1997, Common Stock was held by approximately 500
shareholders of record. The Company, however, believes that the number of
beneficial owners of its securities to be in excess of such number.
As of the date hereof, the Company has never declared or paid cash
dividends on its Common Stock. As management of the Company seeks growth
and expansion of the Company's business through the reinvestment of
profits, if any, management does not anticipate the Company will pay
dividends in the foreseeable future.
ITEM 6. 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 general and specialty
retailers (hard and soft goods merchants).
The goal of the Company has been to design feature-rich, flexible,
simple and yet affordable software, that a retail store owner with limited
computer experience could learn and use without extensive training and
support. The result of that goal is the Company's StoreKare product
family, a series of proprietary software modules, that provide nearly all
required information processing for a wide range of retail operations.
With the advancement of the hardware technology (computers and
cash/registers) and extensive reduction in cost, the small retailer can
now afford a complete business management system that previously was too
expensive and cumbersome to operate.
Liquidity and Capital Resources
The Company sustained a net loss of $1,596,166 for the fiscal year
ended March 31, 1997. The Company's cash increased slightly from $74,531
at March 31, 1996 to $103,316 at March 31, 1997. The working capital
deficiency increased from $(3,009,900) at March 31, 1996 to $(4,267,106)
at March 31, 1997. The increase in the working capital deficiency was
mainly due to the receipt of loans totaling $1,238,000 during fiscal 1997
from two shareholders/directors of the Company and their related entities
and the accrued interest on these loans of $249,777 during fiscal 1997.
There was a decrease in the working capital deficiency due to a reduction
in current borrowings of $200,582 which were paid off during fiscal 1997.
At March 31, 1997 the Company's capitalized expenditures for
development were $892,326 as compared to $660,056 at March 31, 1996
(accumulated amortization was $409,703 and $202,662 at March 31, 1997 and
1996 respectively). The Company capitalized development costs of $232,271
and $334,302 during fiscal 1997 and 1996, respectively. The Company
expensed previously capitalized costs of $74,359 during fiscal 1996,
incurred in developing the Kodak product. The Company, subject to the
availability of working capital, anticipates incurring a comparable amount
of development costs for the year ended March 31, 1998 as compared to the
development costs incurred during the year ended March 31, 1997 as it
continues to develop new features for the StoreKare retail point-of-sale
and back office module products and continues the development of a new
StoreKare Windows/NT based product.
The Company is continuing to cultivate its reseller base by
providing the resellers with support, training and the tools and
incentives to sell the product on behalf of the Company. The Company's
region managers support the existing resellers and pursue opportunities to
recruit new resellers. In addition the region managers are seeking to
sell and support the Company's products directly to retail chains, co-ops,
and franchises as customers. The Company intends to complete development
projects which are currently in process and implement its plans to develop
new technology if financing is secured to meet the Company's long term
capital needs. In May 1997 the Company sold the StoreKare for Subway
software and related assets to an unrelated party and discontinued sales
to Subway Sandwich and Salads fast food restaurants.
Through March 31, 1997, the Company has incurred significant
operating losses and has a working capital deficiency. During fiscal
1997, the Company's principal source of funding was from loans of
$1,238,000 from two majority shareholders/directors of the Company and
their related entities. The loans accrue interest at 10% per annum,
$249,777 was accrued during fiscal 1997. During the period April 1, 1997
through May 1997 the Company has received additional loans of $142,500
from these shareholders/directors and their related entities. Since March
1995 through May 31, 1997, the Company has received monthly funding in the
form of loans totalling $3,160,500 from these shareholders/directors and
their related entities, which are payable on demand. These two
shareholders/directors are actively involved with management of the
Company. While no assurance can be made, the Company believes that these
shareholders/directors and their related entities will continue to fund
the Company. However, if additional funding is not obtained from these
shareholders/directors and their related entities, the Company would have
to seek other sources of funding of which none have presently been
identified, or the Company would have to curtail operations and/or take
other actions. Based on these conditions, doubt exists about the ability
of the Company to continue as a going concern. The financial statements
for the year ended March 31, 1997 do not include adjustments relating to
the recoverability and classification of the recorded carrying value of
assets or the amounts or classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
Results of Operations
For the years ended March 31, 1997 and 1996, the Company reported a
net loss of $1,596,166 and $2,197,036, respectively. Revenues for the
years ended March 31, 1997 and 1996, were $801,483 and $645,650,
respectively.
Amortization of software development costs was $207,042 for fiscal
1997 and $97,387 for 1996. In addition, the Company incurred research and
development costs of $162,211 and $226,102 which were expensed during
fiscal 1997 and 1996 respectively. Of these amounts $162,211 and $151,743
were incurred to maintain and improve the existing versions of the
StoreKare products during fiscal 1997 and 1996 respectively. In
connection with the development of the Kodak product, costs aggregating
$74,359 have been expensed in fiscal 1996 to match such costs incurred
against fees of $109,000 received from Kodak during fiscal 1996.
Total selling, general and administrative expenses for fiscal 1997
decreased 24% from fiscal 1996. This was due to a decrease in
compensation and payroll taxes of 13%, from $1,167,176 in fiscal 1996 to
$1,013,227 in fiscal 1997 which can be attributed to the turnover in
certain positions and certain vacated positions were restructured within
the Company. Other selling, general and administrative expenses decreased
24% from fiscal 1996 to fiscal 1997. This was due to reductions in
advertising, consulting, rent and other overhead costs. In addition, the
Company recorded an impairment loss of $158,980 which is included in
selling, general and administrative expenses for fiscal 1996. The Company
anticipates that total selling, general and administrative expenses will
remain the same or increase slightly during fiscal 1998.
In connection with the planned sale of the Company's offices, the
Company reviewed the net carrying value of its offices, and determined
that the offices' net carrying value exceeded their net realizable value.
As a result, the Company adjusted the net carrying value of the offices to
their estimated net realizable value by recording an impairment loss of
$158,980 which is included as part of the Company's operating loss for the
year ended March 31, 1996. The $158,980 impairment loss includes $47,193
related to the loss realized on the sale of a portion of the Company's
offices in May 1996 and $111,787 related to adjusting the carrying value
of the remaining offices to their estimated net realizable value. The
Company disposed of the remaining offices during fiscal 1997 and
recognized a gain of $10,612 which is included in other income.
The Company incurred interest expense of $326,752 and $201,351
during fiscal 1997 and 1996 respectively. This increase was due to the
increasing amount of interest, $249,777 and $93,266 for fiscal 1997 and
1996, respectively, accrued on the loans from two shareholder/directors.
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.
Inflation
The Company believes the impact of inflation has historically been
and will continue to be minimal.<PAGE>
ITEM 7. FINANCIAL STATEMENTS
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants -
Ernst & Young LLP F-1
Consolidated Balance Sheet
March 31, 1997 F-2-3
Consolidated Statements of Operations
Years Ended March 31, 1997 and 1996 F-4
Consolidated Statements of Capital Deficiency
Years Ended March 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows
Years Ended March 31, 1997 and 1996 F-6-7
Notes to Consolidated Financial Statements
March 31, 1997 and 1996 F-8-19
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
SK Technologies Corporation
We have audited the accompanying consolidated balance sheet of SK
Technologies Corporation and subsidiaries as of March 31, 1997 and the
related consolidated statements of operations, capital deficiency and cash
flows for each of the two years in the period ended March 31, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on 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
SK Technologies Corporation and subsidiaries at March 31, 1997 and the
consolidated results of their operations and their cash flows for each of
the two years in the period ended March 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that SK Technologies Corporation and subsidiaries will continue as a going
concern. As more fully described in Note 13, the Company has incurred
recurring operating losses and has a capital deficiency. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
West Palm Beach, Florida
May 21, 1997
F-1
<PAGE>
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
ASSETS
Current Assets:
Cash $ 103,316
Trade accounts receivable, net of
allowance for doubtful accounts
of approximately $42,500 93,486
Inventories 20,170
----------
Total Current Assets 216,972
Property and Equipment, Net 102,156
Other Assets:
Software development costs, net
of accumulated amortization
of $409,703 482,623
Other, net 25,206
----------
Total Other Assets 507,829
----------
$ 826,957
==========
(Continued on following page.)
F-2
<PAGE>
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONT'D)
MARCH 31, 1997
LIABILITIES AND CAPITAL DEFICIENCY
Current Liabilities:
Accounts payable $ 47,491
Accrued expenses 109,487
Due to shareholders/officers/directors 1,156,608
Current portion of capital lease obligations 10,490
Loans payable shareholders/directors 3,018,000
Deferred income 142,002
----------
Total Current Liabilities 4,484,078
Notes payable to shareholder 400,000
Capital lease obligations, less current portion 13,886
Commitments and Contingencies
Capital Deficiency:
Convertible Preferred Stock, $.001 par
value, 5,000,000 shares authorized,
1,000,000 shares designated as
convertible Series B Preferred Stock,
of which 671,732 is 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 12,117,031
Accumulated deficit (16,194,850)
----------
Capital Deficiency (4,071,007)
----------
$ 826,957
==========
See accompanying notes.
F-3
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
Revenues:
Equipment and software sales $ 801,483 $ 536,650
Development and other fees - 109,000
----------- -----------
801,483 645,650
Cost of Revenues:
Cost of equipment sold 85,321 53,430
Amortization of software
development costs 207,042 97,387
Research and development expense 162,211 226,102
----------- -----------
454,574 376,919
----------- -----------
346,909 268,731
Selling, General and Administrative
Expenses:
Compensation and payroll taxes 1,013,227 1,167,176
Other selling, general and
administrative expenses 705,262 930,031
Impairment loss - 158,980
----------- -----------
1,718,489 2,256,187
----------- -----------
Operating loss (1,371,580) (1,987,456)
Other (Expenses) Income:
Interest income 2,481 2,794
Interest expense (326,752) (201,351)
Other, net 99,685 (11,023)
----------- -----------
Total Other Expenses (224,586) (209,580)
----------- -----------
Net loss $(1,596,166) $(2,197,036)
=========== ===========
Loss Per Common Share $ (.26) $ (.36)
=========== ===========
Weighted Average Number of
Common Shares Outstanding 6,127,235 6,051,806
=========== ===========
See accompanying notes.
F-4
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIENCY
YEARS ENDED MARCH 31, 1997 AND 1996
Table A
Note: This is Part One of Table A.
Numbers will add up across in Part One and Part Two (Part Two to follow).
Preferred Stock Common Stock
Shares Amount Shares Amount
Balance at
March 31, 1995 721,733 $722 5,917,667 $5,918
Issuance pursuant to
conversion of
Convertible Promissory
Notes plus accrued
interest - - 115,890 115
Conversion of
Preferred Stock to
Common Stock (16,667) (17) 16,667 17
Issuance of Common
Stock for services - - 36,937 37
Net loss - - - -
------- --- --------- -----
Balance at
March 31, 1996 705,066 705 6,087,161 6,087
Issuance of Common
Stock pursuant to
exercise of stock
options - - 10,000 10
Conversion of
Preferred Stock to
Common Stock (33,334) (33) 33,334 33
Issuance of Common
Stock for services - - 10,000 10
Value of options
pursuant to settlement
agreements - - - -
Net Loss - - - -
_______ ____ _________ ______
Balance at
March 31, 1997 671,732 $672 6,140,495 $6,140
======= ==== ========= ======
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIENCY
YEARS ENDED MARCH 31, 1997 AND 1996
Note: This is Part Two of Table A.
Numbers will add up across in Part One and Part Two (Part One on previous page).
Additional
Paid-In Accumulated Capital
Capital Deficit Deficiency
Balance at
March 31, 1995 $12,027,074 $(12,401,648) $(367,934)
Issuance pursuant to
conversion of
Convertible Promissory
Notes plus accrued
interest 57,830 - 57,945
Conversion of
Preferred Stock to
Common Stock - - -
Issuance of Common
Stock for services 23,047 - 23,084
Net loss - (2,197,036) (2,197,036)
---------- ------------ -----------
Balance at
March 31, 1996 12,107,951 (14,598,684) (2,483,941)
Issuance of Common
Stock pursuant to
exercise of stock
options 90 - 100
Conversion of
Preferred Stock to
Common Stock - - -
Issuance of Common
Stock for services 2,490 - 2,500
Value of options
pursuant to settlement
agreements 6,500 - 6,500
Net Loss - (1,596,166) (1,596,166)
___________ _____________ ____________
Balance at
March 31, 1997 $12,117,031 $(16,194,850) $(4,071,007)
=========== ============= ============
See accompanying notes.
F-5
<PAGE>
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997 AND 1996
1997 1996
Cash Flows From Operating Activities:
Net loss $(1,596,166) $(2,197,036)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 57,668 92,942
Amortization 214,766 103,761
Loss on disposal of fixed assets 4,742 15,619
Impairment loss - 158,980
Gain on settlement (88,350) -
Gain on sale of property (10,612) -
Changes in operating assets and liabilities:
Trade accounts receivable (77,669) 127,690
Inventories 4,230 5,004
Other current assets - 60,000
Accounts payable (27,560) 21,174
Accrued expenses 44,101 (128,989)
Due to shareholders/directors 395,675 400,266
Deferred income 8,012 20,025
----------- -----------
Net cash used in operating
activities (1,071,163) (1,320,564)
Cash Flows From Investing Activities:
Purchases of property and equipment (34,487) (7,620)
Additions to software development costs (232,271) (259,943)
Net increase in other assets (19,827) (4,193)
Proceeds on sale of property,net 675,956 -
----------- -----------
Net cash provided by (used in)
investing activities 389,371 (271,756)
Cash Flows from Financing Activities:
Proceeds from issuance of Common Stock 100 -
Proceeds from loans from shareholders/directors 1,238,000 1,700,000
Principal payments on bank mortgages (389,995) (274,204)
Principal payments on notes payable to
related parties/shareholders (125,813) (9,349)
Principal payments on capital lease obligations (11,715) (10,149)
Proceeds from bank mortgage - 191,250
----------- -----------
Net cash provided by financing
activities 710,577 1,597,548
Increase in cash 28,785 5,228
Cash at beginning of year 74,531 69,303
----------- -----------
Cash at end of year $ 103,316 $ 74,531
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 80,259 $ 102,589
=========== ===========
(Continued on following page.)
F-6
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONT'D)
YEARS ENDED MARCH 31, 1997 AND 1996
Supplemental Schedule of Non-Cash Financing Activities
During fiscal 1996, the Company entered into capitalized lease
obligations amounting to $36,058.
During fiscal 1996, convertible notes of $50,000 plus accrued
interest on these notes in the amount of $7,945 of which $7,493 was
accrued for at March 31, 1995 were converted to Common Stock.
During fiscal 1997 and 1996, accrued legal fees of $2,500 and
$23,084, respectively, were converted to Common Stock. During fiscal 1997
stock options valued at $6,500 were granted as part of a settlement, where
the Company recognized a gain on the settlement in the amount of $88,350,
which is included in other income.
See accompanying notes.
F-7
SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
SK Technologies Corporation (the "Parent"), and its wholly owned
subsidiaries (collectively "the Company"), is engaged in developing 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 Sandwich and Salads
("Subway") fast food restaurants. In May 1997 the Company sold the
StoreKare for Subway software and related assets to an unrelated party and
discontinued sales to Subway (See Note 12).
During fiscal 1997 and 1996, Subway accounted for 17% and 15%, and
Kodak accounted for less than 1% and 18%, respectively, of the Company's
revenues.
Principles of Consolidation
The consolidated financial statements include the accounts of SK
Technologies Corporation and its two wholly-owned operating subsidiaries,
SK Technologies Corp. and SK Credit Corporation. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Revenues and Expense Recognition
In accordance with Statement of Position 91-1, "Software Revenue
Recognition" ("SOP 91-1"), the Company recognizes revenue from software
sales upon delivery and determination that collectibility of the proceeds
is probable. Equipment sales revenue is recognized upon shipment.
Additionally, the Company performs various enhancements to their
basic software, which are retained by the Company, for which they receive
compensation from unrelated parties. Such revenues and costs are recorded
using the percentage of completion method.
Maintenance and support revenues are recognized ratably over the term
of the contract.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity
of three months or less at the date of acquisition to be cash equivalents.
The concentration of credit risk associated with cash and cash equivalents
is considered low due to the credit quality of the issuers of the
financial instruments.
Trade Accounts Receivable
Trade accounts receivable are primarily from small retail stores and
fast food franchisees. The Company performs ongoing evaluations of its
significant customers and generally does not require collateral. The
Company maintains an allowance for doubtful accounts at a level which
management believes is sufficient to cover potential credit losses.
Inventories
Inventories consist of component parts and support materials used in
the delivery of Company designed computer systems. Inventories are stated
at the lower of cost (first-in, first-out) or market.
F-8
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT'D)
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over their estimated useful lives.
Long-Lived Assets
Management periodically evaluates the Company's property and
equipment to determine if there has been any impairment other-than-
temporary in the carrying value of the assets. In March 1995, the
Financial Accounting Standards Board issued Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of" ("Statement 121"), which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company adopted Statement 121 in 1996
and, has recorded an impairment loss of $158,980 in its statement of
operations for 1996 (See Note 2).
Software Development Costs
In accordance with Statement of Financial Accounting Standards ( "SFAS")
No. 86, "Accounting for Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," all direct software production costs incurred to
generate Production Masters after technological feasibility has been
established are capitalized and subsequently amortized over the estimated
product life cycles. Prior to technological feasibility, software
development costs are charged to operations as incurred.
The amortization of capitalized computer software costs commences
when the Company's software development reaches a point where its
technology is economically feasible for effective market distribution of
the developed product.
Deferred Income and Revenue Recognition
Deferred income consists of 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 and $50,319 from
support contracts to be recognized ratably over the terms of the contracts.
Pursuant to a 1994 agreement with the Company, this party
agreed to purchase products from the Company to a value of $500,000 with
a provision for quarterly payments. At March 31, 1997, $367,573 is due to
the Company pursuant to this agreement but is not included in the
consolidated balance sheet at March 31, 1997 since this party has notified
the Company of its intention to terminate the agreement. The Company
communicated with this party in pursuit of an equitable settlement in
accordance with the Company's rights under the terms of the agreement and
in October 1996 filed a Demand for Arbitration to settle this dispute.
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 the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-9
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT'D)
Advertising Costs
The Company expenses all advertising costs as incurred.
Loss Per Common Share
Loss per Common Share is calculated by dividing net loss by the
weighted average Common Shares outstanding. Contingently issuable shares
are considered Common Stock equivalents and have been excluded from the
primary loss per share computation since the conditions for their issuance
have not been met and the effect of contingently issuable shares on loss
per Common Share is anti-dilutive.
Accounting for Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," the adoption of which is required for fiscal years
beginning after December 15, 1995. The new standard encourages companies
to use the fair value method of accounting for issuance of stock options
and other equity instruments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award
and is recognized over the service period, which is usually the vesting
period. Pursuant to SFAS No. 123, companies are also permitted to
continue to account for such transactions under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
but would be required to disclose in a note to the financial statements
pro forma net income and per share amounts as if the Company had applied
the new method of accounting. Additionally, SFAS No. 123 requires
increased disclosure for stock-based compensation arrangements regardless
of the method chosen to measure and recognize compensation for employee
stock-based arrangements.
The Company currently accounts for such transactions under APB
Opinion No. 25 and has elected not to change its method of accounting for
the issuance of stock options and other equity instruments to the fair
value method.
Income Taxes
Effective April 1, 1993, the Company adopted FASB Statement No. 109
"Accounting for Income Taxes" ("Statement 109"). The implementation of
Statement 109 did not have a material impact on the Company.
Under Statement 109, the liability method is used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Prior to the adoption of Statement 109, income tax expense was determined
using the deferred method.
Recent Accounting Pronouncement
In February 1997, SFAS No. 128 "Earnings Per Share" was issued.
SFAS No. 128 established new standards for
F-10
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT'D)
computing and presenting earnings per share ("EPS"). This statement
replaces the presentation of primary EPS and will require a dual
presentation of basic and diluted EPS. SFAS No. 128 is effective for
financial statements issued for periods ended after December 15, 1997 and
requires restatement of all prior-period EPS data presented. The Company
has not yet determined the impact, if any, the adoption of SFAS No. 128
will have on the Company's financial statements.
Reclassifications
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.
NOTE 2 - PROPERTY AND EQUIPMENT
At March 31, 1997, property and equipment consists of the following:
Useful
Life (years)
Furniture and equipment $307,142 5-10
Leasehold improvements 3,668 5
----------
310,810
Less accumulated depreciation
and amortization (208,654)
----------
$102,156
==========
During fiscal 1996, the Company entered into capitalized lease
obligations amounting to $36,058. Included in furniture and equipment at
March 31, 1997 is $30,910 under capital leases, net of accumulated
amortization of $15,413.
During fiscal 1997 and 1996 the Company examined the schedule of
furniture and equipment as compared to the assets still used by the
Company and determined that a total of $4,742 and $15,619, which are net
of accumulated depreciation, are no longer in use by the Company and
accordingly losses of $4,742 and $15,619 on disposal of fixed assets are
included in other expenses for fiscal 1997 and 1996.
The Company leases 7,029 square feet of office space from an
unrelated entity for $8,688 per month through January 1998, pursuant to a
lease which expires January 31, 2002. This amount includes rent of $5,272
per month which will increase 4.5% annually for the next four years and
additional rent of approximately $5 per square foot for the company's
allocated share of expenses for 1997. The expense allocation will be
adjusted annually.
In May 1996, the fifth floor office space consisting of 2,685 square
feet in the condominium building where the Company's executive offices were
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
F-11
NOTE 2 - PROPERTY AND EQUIPMENT (CONT'D)
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 recognized a gain of $10,612 on this sale, which is
included in other income in the Statement of Operations. The Company
vacated these premises on January 31, 1997.
NOTE 3 - SOFTWARE DEVELOPMENT COSTS
The Company released versions 3.2 and 3.2.11 of its retail product,
during the second and fourth quarters of fiscal 1997 respectively and
expects to release a new version of its retail product during the first
quarter of fiscal 1998. Due to feature enhancements, as of March 1995,
the Company discontinued sales of the previous versions of the retail
products to new customers and sells only the 3.1 and 3.2 versions.
The Company capitalized approximately $232,000 and $334,000 of
software development costs during fiscal 1997 and 1996, respectively.
Amortization of software development costs was approximately $207,000
and $97,000 during fiscal 1997 and 1996, respectively.
NOTE 4 - NOTES PAYABLE TO SHAREHOLDER
At March 31, 1997 notes payable to shareholder consists of a note
payable to a shareholder in the amount of $400,000.
In November 1992 this shareholder advanced the Company $500,000 for
a period of one year. This agreement was amended in March and April 1993,
in June 1994 and again in December 1996 extending the term of the loan so
that principal payments will begin in November 1999 and are payable over
a four year period.
In January 1997, the Company made a principal payment of $100,000 on
this loan. The Company collateralized this loan with the office furniture
and equipment which the Company owns (excluding leased equipment) which
has a book value at March 31, 1997 of approximately $68,000.
At the lender's discretion, the interest may be paid in cash or 50%
in cash and 50% in Common Stock at a conversion rate of $2.50 per share.
This loan bears interest at 10% per annum which is paid monthly. During
both fiscal 1997 and 1996 interest expense of $50,000 was incurred on this
note. None of the interest was converted to stock.
The Company also issued to this shareholder 10,000 shares of the
Company's Common Stock for $.01 per share, with demand registration
rights. In addition, two 5,000 share options were granted to another
shareholder for his assistance in obtaining and restructuring this loan.
The value of this Common Stock and options was recorded as deferred
financing costs and was amortized through November 1994 on a straight line
basis which approximates the interest method.
F-12
NOTE 5 - CAPITALIZED LEASE OBLIGATIONS
Furniture and equipment are leased under capital lease agreements
expiring through fiscal 2000 and are included in furniture and equipment.
Future minimum commitments by year under noncancellable capital leases at
March 31, 1997 are as follows:
Amount
Year ended March 31, 1998 $ 17,064
Year ended March 31, 1999 16,374
Year ended March 31, 2000 5,590
------
Total minimum lease payments 39,028
Less: Amount representing
interest (12%) and deferred
maintenance charges (14,652)
------
Present value of net minimum
lease payments 24,376
Less: current portion (10,490)
------
Long-term portion of capital
lease obligations $ 13,886
======
NOTE 6 - CAPITAL DEFICIENCY
In September 1996, 10,000 shares of Common Stock were issued to the
Company's legal counsel in settlement of $2,500 of outstanding legal fees.
At March 31, 1997 there were 490,070 private warrants outstanding,
which were issued pursuant to a private offering in 1993. Such warrants
are convertible into 490,070 shares of Common Stock at a conversion price
of $1.00 per share and expire in March 1998.
Common Stock
The number of shares of Common Stock reserved for future issuance at
March 31, 1997 and 1996 is summarized as follows:
1997 1996
Common Stock Purchase Warrants 490,070 567,570
Stock Options 1,803,669 1,913,945
Convertible Preferred Stock 671,732 705,066
--------- ---------
2,965,471 3,186,581
========= =========
NOTE 7 - RELATED PARTY TRANSACTIONS
Pursuant to a May 1993 agreement between the Company and Fundamental
Management Corp. ("Fundamental"), a fee of $25,000 was approved to be paid
in installments to Fundamental based on the amount of proceeds
received from the 1993 Preferred Stock offering. The first
installment of $8,333 was paid in May 1993 and $16,667 is included in
accounts payable due to shareholders/officers/directors, at March 31,
1997.
F-13
NOTE 7 - RELATED PARTY TRANSACTIONS (CONT'D)
Two shareholder/directors of the Company and their related entities
have provided short term loans to the Company totalling $3,018,000, of
which $80,000 was received in March 1995, $1,700,000 was received during
fiscal 1996 and $1,238,000 was received during fiscal 1997. These loans
accrue interest at 10% per annum, $343,043 through March 31, 1997 and are
due on demand. During the period April 1, through May 31, 1997 additional
short term loans of $142,500 were provided to the Company. In December
1996, the Company collateralized these loans with the StoreKare software
and documentation. In June 1997 a Financing Statement was filed to
perfect the security interest.
In May 1993, the Company and Capital Hill Group Inc. ("CHG"), an
investment banking firm providing services to the Company since 1988,
entered into an amendment (the "Amendment") to the January 1991
Consulting and Finder's Agreements. The Amendment extended the
expiration date of these agreements until December 31, 1996 and called for
payment of $5,500 per month beginning June 1, 1993. The Company incurred
consulting fees to CHG of $49,500 and $66,000 during fiscal 1997 and 1996,
respectively, which are included in other selling, general and
administrative expenses in the Statements of Operations. As additional
compensation for services to be provided by CHG, the Company granted CHG
a five year option for 161,806 shares based on the proceeds of $2,000,000
from the February 1993 Series B preferred convertible stock offering (the
"Preferred Offering") at an exercise price of $.10 per share which was
less than the market value of $1.5625 per share in May 1993. This option
has been adjusted to 89,869 shares pursuant to the terms of the Amendment
as the Company only received gross proceeds of $1,082,600. All amounts
owed by CHG to the Company or by the Company to CHG were considered fully
satisfied by the Amendment. All unexercised options previously granted to
CHG and/or its president were also cancelled. CHG received compensation
of $38,333 in lieu of any compensation that would be due and payable under
the Finder's Agreement in connection with proceeds from Common and
Preferred Stock offerings through the date of the Amendment. This amount
was recorded as offering costs and therefore netted with the proceeds of
the Preferred Offering. In addition, the Company reimbursed CHG for legal
expenses of $21,500 related to the Preferred Offering which amounts were
also recorded as offering costs and therefore netted with the proceeds
from the Preferred Offering.
In connection with the Finder's agreement, in the event CHG
introduces a party to the Company which results in the Company
consummating a debt or equity financing with such third party, or if CHG
does not introduce such party to the Company but the Company otherwise
requests CHG's assistance in structuring such transaction, CHG will be
entitled to a finder's fee of 5% of the first $1,000,000 value of such
transaction, 4% of the next $1,000,000, 3% of the next $1,000,000, 2% of
the next $1,000,000 and 1% of the any balance. In addition, in the event
CHG should act as an underwriter of such financing, or participate as a
member of the underwriting syndicate, or otherwise act as a
broker/reseller in the placement of such financing, CHG shall not be
entitled to receive the finder's fee as to that portion of financing in
which it participated; however, CHG shall receive a commission (the
"Broker's Commission") identical to the commission paid to other
participating broker/resellers in an amount not exceeding 10% on that
portion of the financing in which it participated, payable in cash at the
closing of the transaction, provided that (i) CHG is a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD")
at the time of the financing, (ii) it is duly registered as a
broker/reseller in all applicable jurisdictions in which registration is
a pre-requisite to the payment of the Broker's Commission and (iii) such
payment is permissible under the NASD's rules and regulations. As of March 31,
1997 finders fees of $493,000 have been accrued. The Company accrued finders
fees of $100,500 and $166,000 during fiscal
F-14
NOTE - 7 RELATED PARTY TRANSACTIONS (CONT'D)
1997 and 1996 respectively which are included in other selling general and
administrative expenses in the Statements of Operations.
NOTE 8 - INCOME TAXES
The Company accounts for income taxes in accordance with FASB
Statement No. 109 "Accounting for Income Taxes" ("Statement 109"). Under
Statement 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
At March 31, 1997 the Company has net operating loss carryforwards of
approximately $14.4 million that can be used to offset future taxable
income, that expire in the years 2005 through 2012. In fiscal 1995, the
Company had ownership changes as defined under Internal Revenue Code
Section 382 (Section 382). As such, the availability to utilize the net
operating losses that existed as of this ownership change is limited.
Significant components of the Company's deferred tax assets as of
March 31, 1997 are as follows:
Reserve for bad debts $ 88,000
Software development costs 320,000
Deferred compensation 148,000
Net operating losses 5,446,000
Research and development costs 316,000
Accrued expenses 154,000
Impairment loss 60,000
-----------
6,532,000
Valuation allowance (6,532,000)
-----------
$ -
===========
The net change in the valuation allowance during 1997 was $612,000.
The reconciliation of income tax attributable to continuing
operations computed at the U.S. federal statutory tax rate of 34% to loss
before income taxes for the years ended March 31, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Tax at U.S. statutory rates $(543,000) $ (747,000)
Unrecognized benefit of net
operating losses 543,000 747,000
--------- -----------
$ - $ -
========= ===========
</TABLE>
F-15
NOTE 9 - STOCK OPTIONS
1990 Company Stock Option Plan
On April 3, 1990, the Company adopted a Stock Option Plan (the "1990
Option Plan") for its directors and employees, which provides for the
grant of options to purchase an aggregate 50,000 shares of the Company's
Common Stock. Of this amount, 45,000 shares may be granted as incentive
stock options.
The 1990 Option Plan is intended to qualify as an "Incentive Stock
Option Plan" under Section 422A of the Internal Revenue Code. Under the
1990 Option Plan, incentive stock options may be granted at not less than
100 percent of the fair market value of the Company's Common Stock as
determined by the Board of Directors on the date of grant (110% of fair
market value for 10% or greater shareholders) and options granted to any
one participant may not exceed $100,000 in option price per year, plus
certain carryovers from prior years. Options must be granted within ten
(10) years from the adoption of the 1990 Option Plan. Each option granted
under the 1990 Option Plan must be exercised within ten (10) years from
the date of grant.
During both fiscal 1997 and 1996 there were 1,600 options outstanding
pursuant to the 1990 Option Plan. As of March 31, 1997 and 1996, 1,600 of
the options through the 1990 Option Plan were exercisable at an exercise
price of $30.00 per share.
1995 Company Stock Option Plan
In November 1995, the Company adopted the 1995 Option Plan, reserving
1,400,000 shares of Common Stock which may be purchased pursuant to the
exercise of options granted under this plan.
The 1995 Option Plan is also intended to qualify as an "Incentive
Stock Option Plan" under Section 422A of the Internal Revenue Code. Under
the Option Plan, incentive stock options may be granted at not less than
100 percent of the fair market value of the Company's Common Stock as
determined by the Board of Directors on the date of grant (110% of fair
market value for 10% or greater shareholders) and options granted to any
one participant may not exceed $100,000 in option price per year, plus certain
carryovers from prior years. Options must be granted within ten (10) years
from the adoption of the Option Plan. Each option granted under the Option
Plan must be exercised within five (5) years from the date of grant. The
Options issued pursuant to the 1995 Option Plan may be Incentive Stock Options
("ISOs"), options which are not ISOs ("NSOs"), or "reload options", (as
defined). On October 31, 1996 the 1995 Option Plan was approved by a majority
of the shareholders of the Company. As of March 31, 1997, all options granted
pursuant to this plan are ISOs.
In August 1996 options for 714,450 shares of Common Stock at an
exercise price of $.50 per share, were cancelled and replaced with options
for 714,450 shares of Common Stock at an exercise price of $.32 per share.
During fiscal 1997, options for Common Stock ranging from 500 to
30,000 shares were granted to nineteen employees. Such options are
exercisable at $.32 per share, vest through August 1999 and expire five
years from the date of grant. As of March 31, 1997, 52,255 of these
options are exercisable.
During fiscal 1997, options for Common Stock, ranging from 25,000 to
400,000 shares were granted to three executive officers and four directors
of the Company. Such options are exercisable at $.32 per share, vest
through August 1999 and expire five years from the date of grant. As of
March 31, 1997, 620,000 of these options are exercisable.
F-16
NOTE 9 - STOCK OPTIONS (CONT'D)
Other Stock Options
As of March 31, 1997 and 1996 other stock options of 353,669 and
463,945, respectively, were outstanding. Such options expire through
1998. As of March 31, 1997 and 1996, 353,669 and 461,745 respectively, of
the other stock options are fully vested.
Stock Based Compensation
As required by Statement No. 123, pro forma information regarding net
loss and loss per share 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 a Black-Scholes option pricing model with the
following weighted-average assumptions for 1997; risk-free rate of return
of 6.00%; dividend yield of 0.000%; volatility factor of the expected
market price of the Company's common stock of 1.228 and a weighted-average
expected life of the options of two to eight years.
The Black-Scholes option valuation 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 stock price volatility. Because the Company's stock options have
characteristics significantly different from traded options, and because
changes in the subjective input assumptions can materially affect the fair
value estimate, the existing models, in management's opinion, do not
necessarily provide a reliable single measure of the fair value of its
stock options.
Information regarding stock options for the years ended March 31, 1997 and
March 31, 1996 is summarized as follows:
Weighted Average
Number of Exercise Price
Shares Per Share
Outstanding April 1, 1995 1,375,495
Exercised -
Expired (11,250)
Forfeited -
Cancelled (898,700)
Granted 892,950
----------
Outstanding March 31, 1996 1,358,495 $1.48
Exercised (10,000) $ .00
Expired (125,276) $ .77
Forfeited - -
Cancelled (892,950) $ .33
Granted 1,012,750 $ .24
----------
Outstanding at March 31, 1997 1,343,019 $ .63
==========
Exercisable at March 31, 1997 1,027,524 $ .55
==========
Reserved for future option grants
at March 31, 1997 460,650
==========
F-17
NOTE - 9 STOCK OPTIONS (CONT'D)
FASB Statement No. 123 requires disclosure of the weighted average
exercise prices for the current year only in the initial year of adoption.
For the purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period.
The Company's 1997 and 1996 pro forma information follows:
1997 1996
Net Loss $(1,716,219) $(2,197,036)
============ ============
Loss per common share $ (.28) $ (.36)
============ ============
The 1997 pro forma effect on net loss is not necessarily
representative of the effect in the future years because it does not take
into consideration pro forma compensation expense related to grants made
prior to 1995.
The exercise price of options outstanding at March 31, 1997 ranged
between $.10 and $30.00.
NOTE 10 - 401(K) PROFIT SHARING PLAN
The Company adopted a 401(K) Profit Sharing Plan (the "401(K) Plan")
effective January 1, 1995. All employees are eligible to participate in
the 401(K) Plan once they have satisfied the eligibility requirements
which are as follows: employees must be 21 years of age and have
completed 3 months of service with the Company. The 401(K) Plan is
currently funded by employee contributions only. Employees may elect to
contribute up to, the lesser of, 15% of their salary or $9,500 for 1997,
as adjusted to reflect annual federal cost of living increases, or such
lesser amount as determined by discrimination tests for the plan.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosure for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents and
restricted cash approximate their fair values.
Borrowings/Bank Mortgages: The fair value for borrowings/bank
mortgages is generally estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's significant
financial instruments at March 31, 1997 are as follows:
Carrying Fair Value
Amount
Cash and cash $ 103,316 $ 103,316
equivalents
Loans payable to shareholders/ 3,418,000 (See below)
directors/related parties
F-18
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT'D)
It is impracticable to estimate the fair value of the loans payable
to shareholders/directors/related parties due to the unavailability of
information on comparable instruments.
NOTE - 12 SUBSEQUENT EVENTS
On May 21, 1997 the Company entered into an Asset Purchase Agreement
with an unrelated party (the "Buyer"), whereby the Buyer acquired from the
Company, the StoreKare Software for Subway (including the software source
code) and certain other related assets.
The purchase price of the assets is the sum of the following:
(a) $55,000 was paid to the Company on May 21, 1997 upon
signing the agreement,
(b) the greater of either $5,000 per month for 24 months after
the date of agreement or 10% of gross sales, of any software
that is an associative or derivative of the Software for
Subway, during the first 24 months after the date of the
agreement,
(c) quarterly payments of 10% of gross sales, of any software
that is an associative or derivative of the Software for
Subway, for the 25th through 60th month after the date of the
agreement, and
(d) if the Buyer introduces a new system to Subway, the
unrelated party shall pay the Company on a quarterly basis, for
a period of five years after the date of this agreement, 10% of
the gross margins on hardware and software sales of such
product to Subway (exclusive of any software or hardware
developed exclusively by the Buyer).
NOTE 13 - LIQUIDITY
Through March 31, 1997 the Company has incurred significant operating
losses and has a working capital deficiency. Since March 1995 through May
31, 1997 two majority shareholders/directors of the Company and their
related entities have provided funding to the Company in the form of loans
totalling $3,160,500 of which $1,238,000 was received during fiscal 1997.
These loans are due on demand. If additional funding is not obtained from
these two shareholders/directors and their related entities, through an
offering or alternate sources of funding of which none have presently been
identified, the Company would have to curtail operations and/or take other
actions. Based on these conditions, doubt exists about the ability of the
Company to continue as a going concern. The financial statements for the
year ended March 31, 1997 do not include adjustments relating to the
recoverability and classification of the recorded carrying value of assets
or the amounts or classifications of liabilities that might be necessary
should the Company be unable to continue as a going concern.
F-19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following persons are the directors and executive officers of the
Company as of March 31, 1997. All directors are elected by the
shareholders to serve until the next meeting of shareholders or until
their successors are duly elected and qualified. Officers are elected by
the Board of Directors to serve at the pleasure of the Board.
Name Age Position
Calvin S. Shoemaker 56 President/Chief Executive
Officer/Director
Melvin T. Goldberger 77 Treasurer/Director
Roger N. Oesterling 54 Executive Vice President
Douglas A. Beard 65 Executive Vice President
Gary S. Spirer 52 Director
David H. Peipers 40 Director
C. Shelton James 57 Director
Calvin S. Shoemaker. Mr. Shoemaker has been an officer and director
of the Company since May 1993. Mr. Shoemaker was a founder and President
of Flashpoint Computer Corp. from 1986 through 1993. Mr. Shoemaker was
with Northridge Corp. from 1984 through 1986; Vice President of Sales and
Marketing of Timeplex from 1983 through 1984 and Vice President of Sales
and Marketing for Gould Inc/SEL Computer Systems from 1971 through 1983.
Mr. Shoemaker earned a Bachelor of Science degree from Randolph Macon College.
Melvin T. Goldberger. Mr. Goldberger has been an officer of the
Company since July 1993 and a director since January 1994. Mr. Goldberger
has been President of Seventh Investment Bancing Corp. since 1972 to date
and is also the President of MTG Development Inc. From 1968 through 1971
he was Chairman of the Board of Vector Company. Mr. Goldberger serves as
a member of the Board of Directors of Mae Volen Senior Citizen Center. He
is also a member of the Board of Governors of the Florida Philharmonic
Orchestra and has served as its Treasurer for the past three years. Mr.
Goldberger earned a Bachelor of Science degree from Ohio State University.
Roger N. Oesterling. Mr. Oesterling has been an officer of the
Company since May 1993. Mr. Oesterling was Senior Engineering Director of
Racal Milgo Inc. from 1989 through 1991 and Senior Director of Network
Management from 1985 through 1989. He was a business manager of Timeplex
Inc. from 1984 through 1985 and held various positions as director and
manager of Gould Inc./SEL Computer Systems from 1973 through 1984. Mr.
Oesterling earned a Bachelor of Science degree from Grove City College.
Douglas A. Beard. Mr. Beard has been an officer of the Company since
November 1993. From 1990 through 1991 Mr. Beard was a Director of
Atlantix Corporation. Mr. Beard was a Senior Director of Gould Inc./SEL
Computer Systems from 1985 through 1990 and held various positions
including Director of World-Wide Support Services, Director of Systems
Engineering and Director of Sales Support from 1972 through 1981. He was
a Director of World-Wide Customer Service for Modcomp from 1981 through
1985. Mr. Beard attended Plymouth and Devonport College of Technology in
the United Kingdom and earned a Bachelor of Science degree.
Gary S. Spirer. Mr. Spirer was elected as a director of the Company
on May 13, 1993. Prior to that date, he served as a member of the
Company's Advisory Board. Mr. Spirer is President of Capital Hill Group,
Inc. since 1981 which provides consulting services to the Company. He is
also a director of Buckeye Communications Inc. Mr. Spirer holds a B.A.
from New York University where he graduated Magna Cum Laude and Phi Beta
Kappa, and he holds an M.B.A. from Columbia University. Mr. Spirer is the
sole shareholder of Capital Hill Investment Corporation, a real estate
investment company.
David H. Peipers. Mr. Peipers was elected as a director of the
Company on May 13, 1993. Among other activities, Mr. Peipers is President
of Peipers & Co. Inc., an investment firm dealing with securities and
venture capital, since 1982. He also has been a general partner of the
Winsome Limited Partnership, which makes long term investments in the
securities of both public and private companies, since 1989. He is a
founder and Chairman of Segrets, Inc., a Beverly, Massachusetts-based
women's sportswear manufacturer, and Bedminster Bioconversion Corporation,
an environmental company based in Cherry Hill, New Jersey. Mr. Peipers
holds an A.B. from Harvard University (1978) and a J.D. from Harvard Law
School (1981).
C. Shelton James. Mr. James was elected as a director of the Company
on May 13, 1993. Prior to that date he served as a member of the
Company's Advisory Board. Mr. James is President of Fundamental
Management Corp. and Chairman and Chief Executive Officer of Elcotel Inc.
since May 1991. He was President of the Computer Systems Division of
Gould, Inc. from 1980 through 1989 and Executive Vice President of Gould's
Information System Business Section from 1985 through 1989. He provides
consulting services to the Company pursuant to a May 1993 agreement. Mr.
James has been a director of NAI Inc. since 1990, Harris Computer Systems
Inc. since September 1994, CSPI since December 1994 and Group Long
Distance Inc. since October 1995. He earned a Bachelors of Business
Administration degree from Clarkson University and a Masters of Business
Administration from New York University.
Compliance with Section 16(A) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than
ten percent of the Company's outstanding Common Stock, to file with the
Securities and Exchange Commission ("SEC") initial reports of ownership
and reports of changes in ownership of Common Stock. Such persons are
required by SEC regulation to furnish the Company with copies of all such
reports they file.
To the Company's knowledge, based solely on a review of the copies
of such reports furnished to the Company and written representation that
no other reports were required. All Section 16(a) filing requirements
applicable to its officers, directors and greater than ten percent
beneficial owners have been complied with.
<TABLE>
ITEM 10. EXECUTIVE COMPENSATION:
<CAPTION>
Annual Compensation Awards Payouts
Other Restricted All
Other Annual Stock Options/ LTIP Other
Name and Fiscal Salary Bonus Compensa- Awards SARs Payouts Compensa-
Position Year ($) ($) tion ($) (# Shares)(1) (#) ($) tion ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Calvin Shoemaker 1995 75,000 4,123 0 0 0 0 0
President/Chief 1996 75,000 13,846 0 400,000 0 0 0
Executive Officer 1997 75,000 13,047 0 400,000 0 0 0
All executive (2)
officers as a 1995 260,000 6,479 0 0 0 0 0
group (four 1996 263,334 38,496 0 785,000 0 0 0
persons) 1997 209,626 36,242 0 730,000 0 0 0
</TABLE>
(1) The number of shares granted as restricted stock awards to
executive officers in fiscal 1996 have been adjusted since options
for 400,000 shares for Calvin Shoemaker and for 635,000 shares for
all executive officers were cancelled and replaced with new options
in fiscal 1997. The new options are included in the fiscal 1997
restricted stock awards.
(2) The current executive officers joined the Company during
fiscal 1994. The total compensation for all officers as a
group includes amounts paid to former executive officers
totalling $65,000 and $76,986 and $5,417 for fiscal 1995,
1996 and 1997, respectively.
During fiscal 1997 the following stock options were issued to
executive officers:
Number of Exercise Expiration
Name Shares Price Date
Calvin Shoemaker 400,000 $ .32 2001
Roger Oesterling 195,000 .32 2001
Douglas Beard 135,000 .32 2001
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT:
The following table sets forth, as of June 13, 1997, certain
information regarding the amount and percentage of Common and Preferred
Stock beneficially owned by each person known by the Company to own more
than five percent of its outstanding Common and Preferred Stock, each
director of the Company and all officers and directors as a group.
Amount of
Name and Address Beneficial Percentage
Beneficial Owner of Ownership of of Voting
Identity of Group Common Stock(1) Securities(1)
Calvin S. Shoemaker(4) 80,091 1.18%
500 Fairway Drive, Suite 104
Deerfield Beach, FL 33441
Gary S. Spirer(1)(5) 106,300 1.56%
150 E. 58th Street
New York, NY 10155
Capital Hill Group(5) 3,945 .06%
Gary Spirer, President
150 E. 58th Street
New York, NY 10155
David H. Peipers(1)(3) 315,811 4.64%
610 Fifth Avenue #605
New York, NY 10020
Cornerhouse Ltd. Ptshp.(3) 837,294 12.29%
David Peipers, G.P.
610 Fifth Avenue #605
New York, NY 10020
Winsome Ltd. Ptshp(3) 603,909 8.87%
David Peipers, G.P.
610 Fifth Avenue #605
New York, NY 10020
Segrets, Inc.(3) 1,312,421 19.27%
David Peipers, Chairman
66 Cherry Hill Drive
Beverly, MA 01915
C. Shelton James(1)(6) 9,973 .15%
4000 Hollywood Blvd.
Hollywood, FL 33021
Fundamental Management Corp.(6) 93 .001%
C.S. James, President
4000 Hollywood Blvd.
Hollywood, FL 33021
Fundamental Active
Investors Ltd II(6) 1,190,014 17.47%
Fundamental Mgmt Corp., G.P.
4000 Hollywood Blvd.
Hollywood, FL 33021
Melvin Goldberger(1)(2) 20,333 .30%
1700 South Dixie Highway
Boca Raton, FL 33432
Seventh Investment
Bancing Corp.(2) 122,229 1.80%
Melvin Goldberger, President
1700 South Dixie Highway
Boca Raton, FL 33432
All Directors and
Executive Officers as
a Group (7 persons) (7) 4,668,926 68.54%
____________________________
(1) Stock options were granted to four directors of the Company in
August 1996. Each director received an option for 25,000 shares of
Common Stock at an exercise price of $.32 per share.
(2) Includes 131,229 shares of Common Stock and 11,033 shares of
Preferred Stock (held by Melvin Goldberger, trustee for the Grace
Goldberger Trust).
(3) Includes 2,886,101 shares of Common Stock and 183,334 shares of
Preferred Stock.
(4) Includes 63,424 shares of Common Stock and 16,667 shares of
Preferred Stock.
(5) In May 1993 the 1991 agreements between the Company and Capital Hill
Group were amended. Under the amended Financial Consulting
Agreement, as additional compensation for services to be provided by
CHG, the Company granted to CHG a five year option for 161,806
shares of Common Stock at an exercise price of $.10. All
unexercised options previously granted to CHG and/or Gary Spirer
were cancelled as of the date of this amendment. This option has
been adjusted to 89,869 shares pursuant to the May 1993 consulting
agreement.
(6) Pursuant to the Company's agreement with Fundamental Management
Corp. and its president, a stock option for 28,801 shares of Common
Stock which represents 1% of the potentially fully diluted stock at
the time of closing the Preferred Stock offering at an option price
of $1.50. This option is immediately exercisable and the underlying
shares of Common Stock will be registered. This option will be
issued 50% to Fundamental and 50% to its president.
(7) As part of the units sold in a September 1993 offering, these
executive officers and directors have warrants for 447,138 shares of
Common Stock at an exercise price of $1.00 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Pursuant to a May 1993 agreement between the Company and Fundamental
Management Corp. ("Fundamental"), a fee of $25,000 was approved to be paid
in installments to Fundamental based on the amount of proceeds
received from the 1993 Preferred Stock offering. The first
installment of $8,333 was paid in May 1993 and $16,667 is included in
accounts payable due to shareholders/officers/directors, at March 31,
1997.
Two shareholder/directors of the Company and their related entities
have provided short term loans to the Company totalling $3,018,000, of
which $80,000 was received in March 1995, $1,700,000 was received during
fiscal 1996 and $1,238,000 was received during fiscal 1997. These loans
accrue interest at 10% per annum, $343,043 through March 31, 1997 and are
due on demand. During the period April 1, through May 31, 1997
additional short term loans of $ 142,500 were provided to the Company. In
December 1996, the Company collateralized these loans with the StoreKare
software and documentation. In June 1997 a Financing Statement was filed
to perfect the security interest.
In May 1993, the Company and Capital Hill Group Inc. ("CHG"), an
investment banking firm providing services to the Company since 1988,
entered into an amendment (the "Amendment") to the January 1991
Consulting and Finder's Agreements. The Amendment extended the
expiration date of these agreements until December 31, 1996 and called for
payment of $5,500 per month beginning June 1, 1993. The Company incurred
consulting fees to CHG of $49,500 and $66,000 during fiscal 1997 and 1996,
respectively, which are included in other selling, general and
administrative expenses in the Statements of Operations. As additional
compensation for services to be provided by CHG, the Company granted CHG
a five year option for 161,806 shares based on the proceeds of $2,000,000
from the February 1993 Series B preferred convertible stock offering (the
"Preferred Offering") at an exercise price of $.10 per share which was
less than the market value of $1.5625 per share in May 1993. This option
has been adjusted to 89,869 shares pursuant to the terms of the Amendment
as the Company only received gross proceeds of $1,082,600. All amounts
owed by CHG to the Company or by the Company to CHG were considered fully
satisfied by the Amendment. All unexercised options previously granted to
CHG and/or its president were also cancelled. CHG received compensation
of $38,333 in lieu of any compensation that would be due and payable under
the Finder's Agreement in connection with proceeds from Common and
Preferred Stock offerings through the date of the Amendment. This amount
was recorded as offering costs and therefore netted with the proceeds of
the Preferred Offering. In addition, the Company reimbursed CHG for legal
expenses of $21,500 related to the Preferred Offering which amounts were
also recorded as offering costs and therefore netted with the proceeds
from the Preferred Offering.
In connection with the Finder's agreement, in the event CHG
introduces a party to the Company which results in the Company
consummating a debt or equity financing with such third party, or if CHG
does not introduce such party to the Company but the Company otherwise
requests CHG's assistance in structuring such transaction, CHG will be
entitled to a finder's fee of 5% of the first $1,000,000 value of such
transaction, 4% of the next $1,000,000, 3% of the next $1,000,000, 2% of
the next $1,000,000 and 1% of the any balance. In addition, in the event
CHG should act as an underwriter of such financing, or participate as a
member of the underwriting syndicate, or otherwise act as a
broker/reseller in the placement of such financing, CHG shall not be
entitled to receive the finder's fee as to that portion of financing in
which it participated; however, CHG shall receive a commission (the
"Broker's Commission") identical to the commission paid to other
participating broker/resellers in an amount not exceeding 10% on that
portion of the financing in which it participated, payable in cash at the
closing of the transaction, provided that (i) CHG is a member in good
standing of the National Association of Securities Dealers, Inc. ("NASD")
at the time of the financing, (ii) it is duly registered as a
broker/reseller in all applicable jurisdictions in which registration is
a pre-requisite to the payment of the Broker's Commission and (iii) such
payment is permissible under the NASD's rules
and regulations. As of March 31, 1997 finders fees of $493,000 have been
accrued. The Company accrued finders fees of $100,500 and $166,000 during
fiscal 1997 and 1996 respectively which are included in other selling
general and administrative expenses in the Statements of Operations.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K:
The following documents are filed as part of this report:
(a) Exhibits
Exhibit # Description of Exhibit
3.1 Certificate of Incorporation, as
amended, through September 19, 1992,
is incorporated herein by reference
to the Registration Statement on Form
S-18, File No. 33-27977-A, as decla-
red effective on July 10, 1989, as
amended by Post-Effective Amendment
No. 1 declared effective on September
12, 1990, as amended by Post-Effec-
tive Amendment No. 2 declared effec-
tive on November 15, 1991 (collec-
tively, the "Registration Statement",
the Annual Report on Form 10-K for
the fiscal year ended March 31, 1990,
File No. 0-18184 filed June 29, 1990
("1990 10-K"), and the Annual Report
on Form 10-K for the fiscal year
ended March 31, 1991, File No. 0-
18184 filed July 13, 1991 ("1991 10-
K").
3.2 Amended Certificate of Designation of
Preferences Right and Limitations
dated November 1, 1991 is incorporat-
ed herein by reference to the Regis-
tration Statement on Form S-1, as
amended, File No. 33-44402, declared
effective by the Commission on May
15, 1992 ("Form S-1").
3.3 The Bylaws are incorporated herein by
reference to the Registration State-
ment.
3.4 Certificate of Amendment of the Cer-
tificate of Incorporation dated No-
vember 4, 1996 is incorporated herein
by reference to schedule 14C filed on
November 5, 1996.
4.1 Warrant Agreement between the Regis-
trant and Interwest Transfer Company
is incorporated herein by reference
to the 1990 10-K.
4.2 Certificates of Designations, Prefer-
ences Rights and Limitations - Series
B Convertible Redeemable Preferred
Stock dated February 17, 1993 and
amended April 14, 1993 is incorporat-
ed herein by reference to the 1993
10-KSB.
4.3 Amended Certificate of Designation of
Preferences Right and Limitations
Series B Convertible Redeemable Pre-
ferred Stock dated March 23, 1993 is
incorporated by reference to the 1993
10-KSB.
4.4 Copy of letter to shareholders dated
May 14, 1993 from President of the
Company references reverse one-for-
ten stock split of the Company's
Common Shares, effective June 1, 1993
(the "Reverse Stock Split") is incor-
porated by reference to the 1993 10-
KSB.
4.5 Copy of Directors' Consent authoriz-
ing the Reverse Stock Split dated May
11, 1993 is incorporated by reference
to the 1993 10-KSB.
4.6 Form of Specimen Common Stock Certif-
icate reflecting the Reverse Stock
Split is incorporated by reference to
the 1993 10-KSB.
10.1 May 13, 1993 Financial Consulting
Agreement between the Registrant and
Capital Hill Group, Inc. ("Financial
Consulting Agreement") is incorporat-
ed herein by reference to the 1991
10-K.
10.2 Amendment to Financial Consulting
Agreement dated May 13, 1993 is in-
corporated herein by reference to the
1993 10-KSB.
10.3 Option for Capital Hill Group, Inc.
to Purchase Common Stock is incorpo-
rated by reference to the 1991 10-K.
10.4 Finder's Agreement between the Regis-
trant and Capital Hill Group, Inc.
("Finder's Agreement") is incorporat-
ed by reference to the 1991 10-K.
10.5 Amendment to Finder's Agreement,
dated May 13, 1993 is incorporated by
reference to the 1993 10-KSB.
10.8 Agreement dated September 16, 1994
between Fujitsu-ICL Systems, Inc. and
the Registrant (confidential treat-
ment has been granted for portions of
this exhibit) is incorporated by
reference to the 1995 10-KSB.
10.9 Solution Provider agreement between
NCR Corporation and the Registrant
dated February 7, 1994 is incorporat-
ed herein by reference to the 1994
10-KSB.
10.10 Common Stock Purchase Warrant between
the Company and Gary S. Spirer, dated
May 13, 1993 is incorporated herein
by reference to the 1993 10-KSB.
10.11 Consulting Agreement between the
Company and C. Shelton James and
Fundamental Management Corporation,
dated May 13, 1993 is incorporated
herein by reference to the 1993 10-
KSB.
10.12 Promissory Note dated November 7,
1992, as amended March 9, 1993 and
April 7, 1993, with Baron Coleman as
Holder and the Company as Maker is
incorporated herein by reference to
the 1993 10-KSB.
10.14 Letter of Understanding between the
Company and Omron Systems of America
dated April 29, 1992 is incorporated
herein by reference to the 1993 10-
KSB.
10.16 1995 Company Stock Option Plan is
incorporated herein by reference to
the 1996 10-KSB.
21. Subsidiaries of the Registrant is
incorporated by reference to the 1991
10-K.
22. Information Statement sent on October
9, 1996, to notify shareholders of
the Company's intention to file a
certificate of Amendment to its Cer-
tificate of Incorporation, decreasing
the amount of authorized shares of
Common Stock and Preferred Stock, is
herein incorporated by reference to
Schedule 14C filed on November 5,
1996.
23. Consent of Ernst & Young LLP
27. Financial Data Schedule for the Year
Ended March 31, 1997
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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,
a Delaware corporation
Date: June 30, 1997 By: /s/ Calvin S. Shoemaker
Calvin S. Shoemaker, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Calvin S. Shoemaker President/Chief June 30, 1997
Calvin S. Shoemaker Executive Officer/
Director
/s/ Melvin T. Goldberger Treasurer/Director/ June 30, 1997
Melvin T. Goldberger Principal Accounting
Officer
/s/ C. Shelton James Director June 30, 1997
C. Shelton James
David Peipers Director
Gary Spirer Director
Exhibit 23
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-50042) pertaining to the Amended and
restated 1990 Stock Option Plan of SK Technologies Corporation of
our report dated May 21, 1997, with respect to the consolidated
financial statements of SK Technologies Corporation included in
this Annual Report (Form 10-KSB) for the year ended March 31,
1997.
Ernst & Young LLP
West Palm Beach, Florida
June 27, 1997
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This schedule contains summary financial information extracted from form 10 KSB
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