FORM 10-QSB - QUARTERLY REPORT
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number 0-18184
SK Technologies Corporation
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(Exact name of small business issuer as specified in its charter)
Delaware 52-1507455
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
500 Fairway Drive, Suite 104, Deerfield Beach, FL 33441
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(Address of principal executive offices)
(954) 418-0101
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(Issuer's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act during the past 12 months (or for such
shorter periods that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
issuer's classes of common equity as of the latest
practicable date.
Common Stock, $.001 Par Value = 14,139,494 shares as of
July 29, 1999.
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SK TECHNOLOGIES CORPORATION
INDEX
FORM 10-QSB
THREE MONTHS ENDED June 30, 1999
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements . . . . . . . . . . 1
Consolidated Condensed Balance Sheet . . 2-3
Consolidated Condensed Statements of
Operations . . . . . . . . . . . . . . 4-5
Consolidated Condensed Statements of
Cash Flows . . . . . . . . . . . . . 6
Notes to the Consolidated Condensed
Financial Statements . . . . . . . . . 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations . . . . . . . . . . . . 9-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . 12
Item 2. Changes in Securities . . . . . . . . . 12
Item 3. Defaults Upon Senior Securities . . . . 12
Item 4. Submission of Matters to a Vote
of Security Holders . . . . . . . . . 12
Item 5. Other Information . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The interim financial information included herein
is unaudited. Certain information and footnote
disclosures normally included in the financial
statements have been condensed or omitted pursuant
to the rules and regulations of the Securities and
Exchange Commission, although the Company believes
that the disclosures made are adequate to make the
information presented not misleading. These
financial statements should be read in conjunction
with the financial statements and related notes
contained in the Company's 1999 Annual Report on
Form 10-KSB. Other than indicated herein, there
have been no significant changes from the financial
data published in said report. In the opinion of
management, such unaudited information reflects all
adjustments, consisting only of normal recurring
accruals and other adjustments as disclosed herein,
necessary for a fair presentation of the unaudited
information below.
Results for interim periods are not necessarily
indicative of results expected for the full year.
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SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
June 30, 1999
ASSETS
<S> <C>
Current Assets:
Cash $ 91,864
Trade accounts receivable, net of
allowance for doubtful accounts
of $31,759 7,807
Inventories 31,590
Current portion of installment
accounts receivable 5,000
Other current assets 1,809
---------
Total Current Assets 138,070
Property and Equipment, Net 60,883
Other Assets:
Software development costs,
net of accumulated amortization
of $805,843 307,512
Other, net 20,400
---------
Total Other Assets 327,912
---------
$ 526,865
=========
<FN>
(Continued on following page)
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SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET (CONT'D)
June 30, 1999
LIABILITIES AND CAPITAL DEFICIENCY
<S> <C>
Current Liabilities:
Accounts payable $ 72,662
Accrued expenses 102,595
Due to shareholders/officers/directors 793,476
Current portion of notes payable to
shareholder 12,000
Current portion of capital lease
obligations 6,795
Deferred income 29,393
----------
Total Current Liabilities 1,016,921
Notes payable to shareholder 385,000
Deferred gross profit on installment sale 4,011
Capital lease obligations, less current portion 4,121
Capital Deficiency:
Preferred Stock, $.001 par value,
5,000,000 shares authorized
1,000,000 shares designated as
convertible Series B Preferred
Stock, 454,399 shares issued
and outstanding 454
3,000 shares designated as Series D
Preferred Stock, 793 shares issued
and outstanding 1
Common stock, $.001 par value,
25,000,000 shares authorized,
14,139,494 shares issued and
outstanding 14,139
Additional paid-in capital 12,782,183
Accumulated deficit (13,679,965)
------------
Capital Deficiency (883,188)
------------
$ 526,865
============
<FN>
See accompanying notes.
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SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
<CAPTION>
1999 1998
<S> <C> <C>
Revenues:
Equipment, software sales and
support $ 242,681 $ 165,555
Cost of Revenues:
Cost of equipment sold 19,778 25,523
Amortization of software development
costs 46,720 58,266
Research and development expenses 6,849 34,744
------------- ------------
73,347 118,533
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Gross Profit 169,334 47,022
Selling, General and Administrative
Expenses:
Compensation and payroll taxes 234,466 250,327
Other selling, general and
administrative expenses 94,157 100,657
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328,623 350,984
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Operating Loss (159,289) (303,962)
Other Income (Expenses):
Gross profit on installment sale 12,034 16,045
Interest expense (118,777) (114,066)
Other, net 1,260 482
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Total Other Income (Expenses) (105,483) (97,539)
------------- ------------
Loss Before Income Taxes and
and Extraordinary Item (264,772) (401,501)
Income tax benefit 105,909 -
------------- ------------
Loss Before Extraordinary Item (158,863) (401,501)
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(Continued on following page)
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SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (CONT'D)
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
<CAPTION>
1999 1998
<S> <C> <C>
Extraordinary Item: Gain from
restructuring of debt (net
of income taxes of $2,196,542) 3,294,813 -
Benefit from utilization of net
operating loss carryforwards 2,090,633 -
------------- ------------
Net Income $ 5,226,583 $ (401,501)
============= ============
Basic Earnings (Loss) Per
Common Share
Loss before extraordinary item $ (.02) $ (.06)
Extraordinary income (net,
plus tax benefit) .77 -
------------- ------------
Net Income Per Common Share $ .75 $ .(06)
============= ============
Diluted Earnings (Loss) Per
Common Share
Loss before extraordinary item $ (.02) $ (.06)
Extraordinary income (net, plus
tax benefit) .77 -
------------- ------------
Net Income Per Common Share $ .75 $ (.06)
============= ============
Weighted Average Number of
Common Shares Outstanding 6,956,418 6,357,828
============= ============
<FN>
See accompanying notes.
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SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
<CAPTION>
1999 1998
<S> <C> <C>
Net cash used in operating activities $ (85,734) $ (264,010)
Cash Flows From Investing Activities:
Additions to software development costs (50,535) (28,362)
Purchases of property and equipment (709) (372)
Net (decrease) increase in other assets (176) 1,124
----------- -----------
Net cash used in
investing activities (51,420) (27,610)
Cash Flows From Financing Activities:
Proceeds from loans from
shareholders/directors 66,000 274,000
Principal payments on capital
lease obligations (6,170) (6,291)
Proceeds from issuance of common stock 140,000 -
---------- ----------
Net cash provided by financing
activities 199,830 267,709
---------- ----------
Increase (decrease) in cash 62,676 (23,911)
Cash at beginning of period 29,188 38,898
---------- ----------
Cash at end of period $ 91,864 $ 14,987
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SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
During the three months ended June 30, 1999, short term loans in the
amounts of $3,997,000 and $792,500, were converted to Common Stock and
Preferred Stock, respectively.
See accompanying notes
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SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1999
Note 1 - ACCOUNTS RECEIVABLE - INSTALLMENT SALE
The Company sold the StoreKare Software for Subway (including
software source code) to an unrelated party in May 1997 for
$175,000 with payments to be made over 24 months. Through June 30,
1999, the Company received a total of $170,000 of which $15,000 was
received during the three months ended June 30, 1999 and the
Company recognized gross profit of $12,034 for the three months
then ended. At June 30, 1999, the Balance Sheet reflects
installment accounts receivable of $5,000 and deferred gross profit
of $4,011 from this sale.
Note 2 - LOANS PAYABLE SHAREHOLDERS/DIRECTORS
Two shareholders/directors of the Company and their related
entities have provided short term loans to the Company totaling
$4,789,500 through April 30, 1999 of which $66,000 was received in
April 1999. These loans accrued interest at the rate of 10% per
annum, $1,234,789 was accrued through June 21, 1999, of which
$107,333 was accrued during the three months ended June 30, 1999.
On June 22 and 23, 1999 these shareholders/directors and their
related entities agreed to convert the loans to shares of the
Company's Common and Preferred Stock and they have agreed to
forgive the accrued interest on these loans in the amount of
$1,234,789. See Note 5.
Note 3 - DEFERRED INCOME AND REVENUE RECOGNITION
Deferred income consists of $29,393 from support contracts to
be recognized ratably over the terms of the contracts.
NOTE 4 - STOCKHOLDERS' EQUITY
Preferred Stock
In July 1999, the Company filed a Certificate of Designation
with the State of Delaware authorizing the issuance of 3,000 shares
of Series D Redeemable Preferred Stock $.001 par value at $1,000
per share with cumulative dividends payable annually at the rate of
8% per annum.
Conversion of Short Term Loans
In June 1999 two shareholders/directors of the Company and
their related entities agreed to convert short term loans totaling
$3,997,000 to 6,661,666 shares of the Company's Common Stock at a
conversion rate of $.60 per share. One shareholder/director agreed
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SK TECHNOLOGIES CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1999
to convert loans totaling $792,500 to shares of the Series D 8%
Cumulative Preferred Stock.
Common Stock
One shareholder/director of the Company committed to provide
funding to the Company in the amount of $405,000, based on the
Company's projected cash deficiencies for the remainder of fiscal
2000, for shares of the Company's Common Stock at $.125 per share.
During the three months ended June 30, 1999, the
shareholder/director provided funding in the amount of $140,000 for
which he received 1,120,000 shares of the Company's Common Stock.
NOTE 5 - EXTRAORDINARY INCOME
Two shareholders/directors of the Company and their related
entities agreed to convert short term loans in the amount of
$4,789,500 to Common and Preferred Stock and to forgive accrued
interest on these loans in the amount of $1,234,789. These
transactions meet the criteria for trouble debt restructuring and
accordingly the gain, in the amount of $5,491,355, is recorded as
extraordinary income in the Statement of Operations, for the three
months ended June 30, 1999 and consists of the following:
Forgiveness of debt/Accrued interest $1,234,789
Difference of .$52 per share, between
the conversion prices of common
stock and the market value of
the common stock 3,464,066
Amount converted to preferred stock 792,500
Total Extraordinary Income $5,491,355
==========
Through March 31, 1999, the Company has net operating loss
carryforwards of approximately $18 million, which expire in the
years 2004 through 2013, that can be used to offset future taxable
income. In fiscal 1995, the Company had ownership changes as
defined under Internal Revenue Code Section 382. As such the
availability to utilize the net operating losses that existed as of
this ownership change is limited.
The related deferred tax on these gains, for federal and state
taxes, at a combined rate of 40% would be $2,196,542 and is offset
by the Company's deferred tax assets for the unrecognized benefit
of net operating losses.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:
General
The Company is a developer of retail store management software
for the specialty retail industry. The Company's StoreKare product
family is a modular system of information technology products,
which offers retailers an affordable, scalable, feature rich
application that runs in both Windows and DOS environments. The
goal of the Company has been to offer such a product that a retail
store owner with limited computer experience could learn and use
without extensive training and support. 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.
Except for historical information contained herein, certain
matters set forth in this Form 10-QSB are forward looking and
involve a number of risks and uncertainties that could cause future
results to differ materially from these statements and trends.
Such factors include but are not limited to, significant changes in
economic conditions, competition in the Company's markets, changes
in technology and the continued availability of funding from third
parties.
Impact of the Year 2000
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Some of the Company's older computer programs that have time
sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000.
The Company has assessed the existing software and hardware in
use in all departments of the Company and has determined that a
minimal amount of modifications or replacements of software and
hardware will be required so that its computer systems will
function properly with respect to dates in the year 2000 and
thereafter. Other equipment and systems in use by the Company,
such as the accounting system, voice mail/telephone system and
alarm system, have been tested and/or have been certified by the
vendor to be year 2000 compliant. The Company anticipates that the
cost to be compliant with the year 2000 will not be material during
fiscal 2000 and should not exceed $25,000.
Year 2000 and StoreKare - StoreKare has been designed for use
in Point of Sale and Retail Management applications before, during
and beyond the year 2000. In addition to the many new features
added to StoreKare since version 3.0, StoreKare 3.3.20, and later
versions, provide complete Year 2000 date processing capability for
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StoreKare data. This date processing capability is summarized as
follows:
Enter and record dates in StoreKare records over the years
ranging from 1900 to 2259
Use a 2 digit year short cut data entry sliding window for the
current date -80 or +20 years
Handle calculations and sort records using dates that span the
range 1900 to 2259
Recognize the year 2000 as a leap year
Import and Export records with dates in either 2-digit or 4-
digit year representation
Authorize and settle credit and debit cards that expire beyond
December 31, 1999
Operate the StoreKare application over a date range of 1980 to
2099
All StoreKare 3.0C, 3.1 and 3.2 systems must be upgraded to
StoreKare 3.3.2X and all StoreKare 3.3 systems must be updated to
StoreKare 3.3.2X over the period July 1998 to December 1999 to
correctly process dated records across the 20th and 21st century
boundaries.
Liquidity and Capital Resources
The Company had a net loss, before income taxes and
extraordinary items, of $264,772 and $401,501 for the three months
ended June 30, 1999 and 1998 respectively. For the three months
ended June 30, 1999, the Company had an extraordinary gain of
$5,491,355 from restructuring debt, which resulted in net income of
$5,226,583 for the three months then ended. The debt restructuring
was due to two shareholders/directors of the Company and their
related entities converting short term loans totaling $4,789,500 to
Common and Preferred Stock. Interest on these loans in the amount
of $1,234,789 was forgiven. Accordingly, the Company's working
capital deficiency decreased from $(6,762,102) at March 31, 1999 to
$(878,851) at June 30, 1999.
One shareholder/director of the Company committed to provide
funding to the Company in the amount of $405,000, based on the
Company's projected cash deficiencies for the remainder of fiscal
2000, for shares of the Company's Common Stock at $.125 per share.
During the three months ended June 30, 1999, this shareholder
director provided funding in the amount of $140,000 for 1,120,000
shares of Common Stock. If actual cash deficiencies exceed the
projected amount, this shareholder/director agreed to fund any
additional cash deficiencies through March 31, 2000, with the terms
of the additional funding to be determined at such time.
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During the three months ended June 30, 1999 and 1998 the
company capitalized $50,535 and $28,362, respectively, of
development costs. Amortization of development costs was $46,720
and $58,266, for the three months ended June 30, 1999 and 1998,
respectively. The Company anticipates incurring a comparable
amount of development costs for the remainder of fiscal 2000 as the
Company continues its efforts to offer Windows products.
Results of Operations
The Company had a net loss, before income taxes and
extraordinary items, of $264,772 and $401,501 for the three months
ended June 30, 1999 and 1998 respectively. For the three months
ended June 30, 1999, the Company had an extraordinary gain of
$5,491,355 from restructuring debt, which resulted in net income of
$5,226,583 for the three months then ended. Revenues for the three
months ended June 30, 1999 and 1998 were $242,681 and $165,555,
respectively, from equipment and software sales and support.
Amortization of software development costs was $46,720 and
$58,266, for the three months ended June 30, 1999 and 1998,
respectively. In addition the Company incurred and expensed,
research and development costs of, $6,849 and $34,744 during the
three months ended June 30, 1999 and 1998, respectively, to
maintain and improve the existing versions of the StoreKare
products.
Total selling, general and administrative expenses for the
three months ended June 30, 1999 decreased 6% to $328,623 for the
three months ended June 30, 1999 from $350,984 for the three months
ended June 30, 1998. The Company anticipates that total selling
general and administrative costs for the remainder of fiscal 2000
will increase slightly from the first three months of fiscal 2000,
as the Company expands its sales staff.
The Company incurred interest expense of $118,777 and $114,066
during the three months ended June 30, 1999 and 1998, respectively.
Interest expense was incurred on loans from shareholders/directors
and their related entities, of $107,333 and $101,900 during the
three months ended June 30, 1999 and 1998. Since these loans were
converted to Common and Preferred Stock in June 1999, interest was
accrued through June 21, 1999 only.
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
product.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable
Item 2. Changes in Securities.
Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
The Company did not file any reports on Form 8-K during the
three months ended June 30, 1999.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
27. Financial Data Schedule for the three months ended
June 30, 1999
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, SK Technologies Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SK Technologies Corporation
(Registrant)
Date: August 10, 1999 /s/ Calvin S. Shoemaker
President, Chief Executive Officer
Date: August 10, 1999 /s/ Melvin T. Goldberger
Treasurer, Principal Accounting Officer
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10 QSB
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 91,864
<SECURITIES> 0
<RECEIVABLES> 39,566
<ALLOWANCES> 31,759
<INVENTORY> 31,590
<CURRENT-ASSETS> 138,070
<PP&E> 260,746
<DEPRECIATION> 199,863
<TOTAL-ASSETS> 526,865
<CURRENT-LIABILITIES> 1,016,921
<BONDS> 385,000
0
455
<COMMON> 14,139
<OTHER-SE> (897,782)
<TOTAL-LIABILITY-AND-EQUITY> 526,865
<SALES> 242,681
<TOTAL-REVENUES> 242,681
<CGS> 19,778
<TOTAL-COSTS> 73,347
<OTHER-EXPENSES> 447,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (264,772)
<INCOME-TAX> 0
<INCOME-CONTINUING> (159,289)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,491,355
<CHANGES> 0
<NET-INCOME> 5,226,583
<EPS-BASIC> 0.75
<EPS-DILUTED> 0.75
</TABLE>
