SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
July 30, 1997
(Date of report)
STAR TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-13318 93-0794452
(State or other jurisdiction of (Commission File No.) (I.R.S. employer
incorporation or organization) identification no.)
515 Shaw Road
Sterling, Virginia 20166
(Address of principal executive offices)
(Zip Code)
(703) 689-4400
(Registrant's telephone number, including area code)
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(b) Pro Forma Financial Information
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information
gives effect to the July 30, 1997 acquisition of certain assets and
liabilities of Intrafed Inc. (the "Acquisition Transaction") and the July 30,
1997 disposition of the Medical Information Systems ("MIMS") Technology (the
"Disposition Transaction").
In the Acquisition Transaction, PowerScan, Inc. ("PowerScan"), a
wholly-owned subsidiary of Star Technologies, Inc. ("Star" or the "Company"),
acquired from Intrafed, Inc. ("Intrafed") intellectual property related to
the PowerScan (R) and StageWorks (R) software products, and certain related
fixed assets, inventory, contracts and licenses, and assumed certain
liabilities, including those under customer maintenance contracts. At
closing, the consideration paid to Intrafed was $1,880,000 in cash and 1.3
million shares of Star common stock, with up to an additional 1.3 million
shares issuable to Intrafed based upon the future performance of PowerScan.
In the Disposition Transaction, Star sold its MIMS technology, including
the Image Management Server and Film Image Scan System software, to CompuRAD,
Inc. ("CompuRAD"). The selling price included 100,000 shares of CompuRAD
common stock, valued at approximately $575,000, and possible future payments
of up to approximately $850,000 on software sales by CompuRAD of the MIMS
technology for a five-year period commencing July 30, 1997.
The unaudited pro forma consolidated statement of financial position has
been prepared as if the Acquisition Transaction and the Disposition
Transaction were consummated as of June 30, 1997. The unaudited pro forma
consolidated statements of operations for the year ended March 31, 1997 and
for the three months ended June 30, 1997, give effect to the transactions as
if each was completed as of April 1, 1996 and combines Star's and Intrafed's
statements of operations for each of those periods.
This method of combining historical financial statements for the
preparation of the pro forma consolidated financial information is for
presentation only. Actual statements of operations of Star will reflect the
operating results including both the Acquisition Transaction and the
Disposition Transaction from the closing date of the transactions with no
retroactive adjustments. The unaudited pro forma consolidated financial
information is provided for illustrative purposes only and is not necessarily
indicative of the consolidated financial position or consolidated results of
operations that would have been reported had the transactions occurred on the
dates indicated, nor do they represent a forecast of the consolidated
financial position or results of operations for any future period. The
unaudited pro forma consolidated financial information should be read in
conjunction with the historical financial statements and accompanying notes
of Star and Intrafed.
<PAGE>
<TABLE>
STAR TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997
(In thousands, except per share data)
Disposition
Acquisition Transaction
----Historical---- Transaction Adjustments Pro Forma
Star Intrafed Adjustments (3) Star
<S> <C> <C> <C> <C> <C>
Revenue $ 1,247 $ 3,398 $ - $ (34) $4,611
Cost of revenue 1,218 1,184 - (7) 2,395
Gross margin 29 2,214 - (27) 2,216
Operating expenses
Research and development 1,130 1,071 - (650) 1,551
Sales and marketing 952 1,207 - (606) 1,553
General and
administrative 2,248 1,407 (26) 2(c) (25) 3,604
2(d)
2(e)
2(f)
4,330 3,685 (26) (1,281) 6,708 2(i)
Operating income (loss) (4,301) (1,471) 26 1,254 (4,492)
Interest income (expense) 574 (406) 312 2(g) - 480
2(h)
Other income (expense) 6,362 (29) - - 6,333
Net income (loss) $ 2,635 $(1,906) $338 $1,254 $2,321
======= ======= ========== ========== ======
Earnings (loss) per share:
Primary $ .63 $ .58
Fully diluted $ .58 $ .53
Weighted average shares
outstanding:
Primary 19,873 21,173
Fully diluted 21,985 23,285
See accompanying notes to unaudited pro forma consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
STAR TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997
(In thousands, except per share data)
Disposition
Acquisition Transaction
----Historical---- Transaction Adjustments Pro Forma
Star Intrafed Adjustments (3) Star
<S> <C> <C> <C> <C> <C>
Revenue $ 169 $ 1,220 $ - $ - $ 1,389
------- ------- ------ ----------- --------
Cost of revenue 137 461 - - 598
------- ------- ------ -----------
Gross margin 32 759 - - 791
------- ------- ------ -----------
Operating expenses
Research and development 227 238 - (149) 316
Sales and marketing 216 314 - (129) 401
General and
administrative 357 130 92 2(d)2(e) (8) 571
------- ------- ------ -----------
800 682 92 (286) 1,288
------- ------- ------ -----------
Operating income (loss) (768) 77 (92) 286 (497)
Interest income (expense) 66 (65) 41 - 42
Other income (expense) - 1 - - 1
------- ------- ------ -----------
Net income (loss) $ (702) $ 13 $(51) $ 286 $ (454)
======= ======= ====== =========== ========
Earnings (loss) per share:
Primary $ (.04) $ (.02)
Fully diluted $ (.04) $ (.02)
Weighted average shares
outstanding
Primary 19,857 21,157
Fully diluted 21,938 23,238
See accompanying notes to unaudited pro forma consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
STAR TECHNOLOGIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION
JUNE 30, 1997
(In thousands)
----------Intrafed---------- Acquisition Disposition
Adjus- Transaction Transaction
Historical Histor- ments As Adjustments Adjustments Pro Forma
Star ical 2(a) Acquired 2(b) (3) Star
Assets
Current assets
<S> <C> <C> <C> <C> <C> <C> <C>
Cash $ 43 $ 525 $ (525) $ - $ - $ - $ 43
Short-term investments 4,799 - - - (1,880) - 2,919
Accounts receivable, net 85 92 (92) - - - 85
Other current assets, net 117 233 (145) 88 - - 205
---------- ------ ------- -------- ---------- ----------- ---------
Total current assets 5,044 850 (762) 88 (1,880) - 3,252
Property and equipment, net 245 330 - 330 52 (86) 541
Intangible and other assets 35 37 (17) 20 2,450 575 3,080
---------- ------ ------- -------- ---------- ----------- ---------
Total assets $5,324 $1,217 $ (779) $ 438 $ 622 $489 $6,873
========== ====== ======= ======== =========== =========== =========
Liabilities and stockholders' equity (deficit)
Current liabilities
Accounts payable $ 152 $1,035 $(1,035) - $ 236 $ - $ 388
Accrued payroll and related
benefits 248 57 (57) - - - 248
Other accrued liabilities 225 703 (204) 499 - - 724
Current portion of long-term debt
and capital lease obligations - 3,474 (3,474) - - - -
---------- ------ ------- -------- ---------- ----------- ---------
Total current liabilities 625 5,269 (4,770) 499 236 - 1,360
Long-term debt and capital lease
obligation, net of current portion - 216 (216) - - - -
---------- ------ ------- -------- ---------- ----------- ---------
Total liabilities 625 5,485 (4,986) 499 236 - 1,360
---------- ------ ------- -------- ---------- ----------- ---------
Stockholders' equity (deficit) 4,699 (4,268) 4,207 (61) 61 489 5,513
325
---------- ------ ------- -------- ---------- ----------- ---------
Total liabilities and
stockholders' equity (deficit) $5,324 $1,217 $ (779) $ 438 $ 622 $489 $6,873
========== ====== ======= ======== ========== =========== =========
See accompanying notes to unaudited pro forma consolidated financial
statements.
</TABLE>
<PAGE>
STAR TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The pro forma consolidated statement of operations for the year ended
March 31, 1997 includes an updated Intrafed statement of operations, as
Intrafed reported its results of operations on a calendar year basis. This
updating was performed by adding the results for the three months ended March
31, 1997 to the results for the year ended December 31, 1996 and by deducting
the results for the three-month period ended March 31, 1996.
NOTE 1 - Purchase Price of Assets Acquired and Liabilities Assumed
The purchase price of the assets acquired from Intrafed is computed as
follows:
<TABLE>
<S> <C>
Cash consideration $1,880
Estimated fair value of common stock issued 325
Estimated transaction costs 236
------
$2,441
======
The purchase price is expected to be allocated as follows:
Current assets $ 88
Property and equipment 382
Other assets 20
Patents and trademarks 150
Goodwill 2,300
Liabilities assumed (499)
------
$2,441
======
</TABLE>
The allocation of the purchase price to tangible and identifiable assets
was based on management's preliminary estimate of the fair value of those
assets. The final estimation of the fair value of assets and liabilities
assumed may result in differences in the final allocation of the purchase
price.
NOTE 2 - Pro Forma Adjustments - Acquisition Transaction
The following pro forma adjustments have been made to the unaudited pro
forma consolidated financial information:
(a) Reflects the elimination of Intrafed assets not acquired and
liabilities not assumed.
<PAGE>
(b) Reflects the cash paid and the fair value of Star common stock
issued as consideration in the Acquisition Transaction, the
preliminary allocation of the purchase price to the assets acquired
and liabilities assumed, and the elimination of Intrafed's
historical equity. The closing price of Star common stock on July
30, 1997 was used to value the common stock issued. Goodwill will
be amortized on a straight-line basis over an 8-year period. In
the event that additional shares of Star common stock are issued as
a result of the future performance of PowerScan, goodwill resulting
from the acquisition and related amortization expense will increase.
(c) Reflects the elimination of $212,000 of expenses incurred by
Intrafed for the year ended March 31, 1997 on behalf of an entity
under the common control of Intrafed's sole shareholder. The
Company did not acquire any of the assets or liabilities of this
affiliate of Intrafed.
(d) Reflects the increase in compensation of a former Intrafed
executive retained by the Company, based on an employment agreement
entered into in connection with the Acquisition Transaction. The
increase totalled $50,000 for the year ended March 31, 1997 and
$13,000 for the three months ended June 30, 1997.
(e) Reflects amortization of goodwill on a straight-line basis over an
8-year period, depreciation on a straight-line basis over a 5-year
period of the write up to estimated fair market value of property
and equipment acquired, and amortization of patents and trademarks
acquired on a straight-line basis over an 8-year period.
Collectively, this amortization and depreciation totalled $313,000
for the year ended March 31, 1997 and $79,000 for the three months
ended June 30, 1997.
(f) Reflects the elimination of Intrafed's historical amortization and
write-off of deferred debt financing costs. During the year ended
March 31, 1997, Intrafed defaulted on its long-term obligations
and, accordingly, wrote off $177,000 of unamortized loan
origination fees.
(g) Reflects the elimination of Intrafed's historical interest expense
of $406,000 for the year ended March 31, 1997 and $29,000 for the
three months ended June 30, 1997.
(h) Reflects the elimination of a portion of historical interest income
on the Company's short-term investments as a result of the cash
consideration paid in the Acquisition Transaction, assuming a 5%
rate of return on such investments. The interest income eliminated
totalled $94,000 for the year ended March 31, 1997 and $24,000 for
the three months ended June 30, 1997.
(i) The accompanying unaudited pro forma consolidated statements of
operations do not reflect any reductions in operating expenses
associated with the integration of the Company and the PowerScan
business. The Company intends to eliminate certain duplicate
functions and take advantage of other operational synergies in
integrating the businesses. Additionally, the accompanying
statements include certain general and administrative and research
and development expenses incurred in connection with the Company's
<PAGE>
former business line, medical imaging, which expenses are not
expected to recur. Such costs are primarily related to reductions
of facility space and personnel levels. The Company estimates that
on a combined basis a total of $1.3 million of operating expenses
incurred in the year ended March 31, 1997 will be eliminated.
However, no assurances can be given that the businesses will be
successfully integrated or that operational synergies will be
achieved to the extent expected by management, if at all, or that
the expected cost savings will be achieved.
In addition, during the year ended March 31, 1997, Intrafed
incurred termination costs relating to a certain office lease of
approximately $129,000 which management of the Company believes to
be nonrecurring. Such costs are included in the accompanying
unaudited pro forma consolidated statement of operations for the
year ended March 31, 1997.
NOTE 3 - Pro Forma Adjustments - Disposition Transaction
Pro forma adjustments have been made to the unaudited pro forma
consolidated financial information to reflect the elimination of historical
revenues and expenses associated with the MIMS technology business, the
disposition of MIMS-related assets, and the CompuRAD stock in consideration
thereof. The gain on the sale of MIMS technology of approximately $489,000
recognized by the Company as a result of the Disposition Transaction is not
reflected in the accompanying unaudited pro forma consolidated statements of
operations.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits (con't.)
(a) Financial Statements of Business Acquired.
<TABLE>
INTRAFED, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Sales $1,948,609 $2,153,514
Cost of sales 629,039 929,782
---------- ----------
Gross margin 1,319,570 1,223,732
---------- ----------
Operating expenses
General and administrative 223,373 625,998
Research and development 481,898 547,012
Selling and marketing 563,829 703,465
---------- ----------
Total operating expenses 1,269,100 1,876,475
---------- ----------
Operating income (loss) 50,470 (652,743)
---------- ----------
Other income (expense)
Interest expense, net of interest income of $1,317 (128,325) (174,446)
and $4,939
Miscellaneous (4,696) (7,142)
---------- ----------
Total other expense (133,021) (181,588)
---------- ----------
Loss before income taxes (82,551) (834,331)
Income taxes - -
---------- ----------
Net loss $ (82,551) $ (834,331)
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
<TABLE>
INTRAFED, INC.
CONDENSED BALANCE SHEET
(Unaudited)
June 30,
Assets 1997
Current assets
<S> <C>
Cash $ 525,187
Accounts receivable, less allowance of $163,728
for uncollectible accounts 91,791
Inventory 75,373
Prepaid expenses 157,561
Receivable from affiliate -
----------
Total current assets 849,912
----------
Property and equipment
Computer hardware and software 612,058
Furniture and fixtures 96,927
Office equipment 411,429
Vehicles 60,655
----------
Less accumulated depreciation 1,181,069
(851,298)
----------
Net property and equipment 329,771
----------
Other
Intangible assets, less accumulated amortization of $18,577 17,215
Other assets 20,010
----------
Total other assets 37,225
----------
Total assets $1,216,908
==========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
<TABLE>
INTRAFED, INC.
CONDENSED BALANCE SHEET
(Unaudited)
June 30,
1997
Liabilities and Stockholder's Deficit
Current liabilities
<S> <C>
Accounts payable $ 1,034,535
Accrued expenses 210,563
Deferred revenue 550,226
Current portion of long-term debt 3,384,726
Current portion of capital lease 88,486
-----------
Total current liabilities 5,268,536
-----------
Long-term liabilities
Long-term debt, less current portion 12,497
Long-term portion of capital lease 203,951
-----------
Total long-term liabilities 216,448
-----------
Total liabilities 5,484,984
Stockholder's deficit (4,268,076)
-----------
Total liabilities and stockholder's deficit $ 1,216,908
===========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
<TABLE>
INTRAFED, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1997 1996
Operating activities
<S> <C> <C>
Net loss $ (82,551) $ (834,331)
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation and amortization 120,286 148,821
Amortization of discount related to stock warrants - 10,000
Provision for doubtful accounts 8,591 -
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 451,432 130,449
Inventory 23,954 54,331
Refundable income taxes - 47,077
Prepaid expenses and other current assets (53,628) 131,090
Receivables from affiliate - (11,870)
Increase (decrease) in liabilities
Accounts payable 67,344 23,905
Accrued expenses (68,694) (95,970)
Deferred revenue 18,223 247,137
---------- ----------
Net cash provided by (used in) operating activities 484,957 (149,361)
---------- ----------
Investing activities
Capital expenditures (9,372) (46,916)
Increase in intangible assets - (22,700)
---------- ----------
Net cash used in investing activities (9,372) (69,616)
---------- ----------
Financing activities
Principal payments on long-term debt (134,180) (3,033)
---------- ----------
Net cash provided by financing activities (134,180) (3,033)
---------- ----------
Net increase (decrease) in cash 341,405 (222,010)
Cash, beginning of period 183,782 246,816
---------- ----------
Cash, end of period $ 525,187 $ 24,806
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
INTRAFED, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - Financial Information
The interim financial statements presented herein are unaudited. They
reflect all adjustments that, in the opinion of management, are necessary to
fairly present financial position and results of operations of Intrafed, Inc.
("Intrafed") for the interim periods presented. All such adjustments are of
a normal, recurring nature. The results of operations for the six-month
period ended June 30, 1997 are not necessarily indicative of the results to
be expected for the entire fiscal year.
NOTE 2 - Subsequent Event
On July 30, 1997, Intrafed sold to PowerScan, Inc. ("PowerScan"), a
wholly-owned subsidiary of Star Technologies, Inc. ("Star"), intellectual
property related to the PowerScan (R) and StageWorks (R) software products,
and certain related fixed assets, inventory, contracts and licenses, and
certain liabilities, including those under customer maintenance contracts.
The consideration received was $1.9 million in cash and up to 2.6
million shares of Star common stock, of which 1.3 million shares were issued
at closing. A portion of the stock consideration will be issued to
Intrafed based upon the future performance of PowerScan. The 1.3 million
shares of Star common stock issued at the closing of the acquisition are
being held in escrow to secure Intrafed's indemnification obligations to
PowerScan under the Asset Purchase Agreement between PowerScan and
Intrafed.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(con't.)
(c) Exhibits
* 2.1 Asset Purchase Agreement dated July 30, 1997 between PowerScan Inc.
and Intrafed, Inc., incorporated by reference from the exhibit
filing to the Company's Current Report on Form 8-K dated July 30,
1997 (Registration No. 0-13318) filed with the Commission on August
14, 1997
* 2.2 Employment Agreement dated July 30, 1997 between Star Technologies,
Inc., PowerScan, Inc. and John R. Meshinsky, incorporated by
reference from the exhibit filing to the Company's Current Report
on Form 8-K dated July 30, 1997 (Registration No. 0-13318) filed
with the Commission on August 14, 1997
* 2.3 Technology Purchase Agreement dated July 30, 1997 between Star
Technologies, Inc. and CompuRAD, Inc., incorporated by reference
from the exhibit filing to the Company's Current Report on Form 8-K
dated July 30, 1997 (Registration No. 0-13318) filed with the
Commission on August 14, 1997
23.1 Consent of BDO Seidman, LLP, independent auditors
** 27.1 Financial Data Schedule
* Incorporated by reference.
** Not required for this filing.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
STAR TECHNOLOGIES, INC.
Dated: October 7, 1997 By /s/ Brenda A. Potosnak
Brenda A. Potosnak
Vice President of Finance and
Administration, Secretary,
Treasurer and Chief Financial
Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
*2.1 Asset Purchase Agreement dated July 30, 1997 between PowerScan Inc.
and Intrafed, Inc., incorporated by reference from the exhibit filing
to the Company's Current Report on Form 8-K dated July 30, 1997
(Registration No. 0-13318) filed with the Commission on August 14,
1997
*2.2 Employment Agreement dated July 30, 1997 between Star Technologies,
Inc., PowerScan, Inc. and John R. Meshinsky, incorporated by
reference from the exhibit filing to the Company's Current Report on
Form 8-K dated July 30, 1997 (Registration No. 0-13318) filed with
the Commission on August 14, 1997
*2.3 Technology Purchase Agreement dated July 30, 1997 between Star
Technologies, Inc. and CompuRAD, Inc., incorporated by reference from
the exhibit filing to the Company's Current Report on Form 8-K dated
July 30, 1997 (Registration No. 0-13318) filed with the Commission on
August 14, 1997
23.1 Consent of BDO Seidman, LLP, independent auditors
**27.1 Financial Data Schedule
* Incorporated by reference.
** Not required for this filing.
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(con't.)
(a) Financial Statements of Business Acquired (Con't.).
INTRAFED INC.
Financial Statements and Supplemental Material
Years Ended December 31, 1996 and 1995
BDO
BDO Seidman, LLP
Accountants and Consultants
<PAGE>
INTRAFED INC.
Contents
Independent Auditors' Report 3
Financial Statements
Balance sheets 4
Statements of operations and accumulated deficit 5
Statements of cash flows 6-7
Summary of accounting policies 8-10
Notes to financial statements 11-17
Supplemental Material
Independent auditors' report on supplemental material 18
Schedules of general and administrative expenses 19
Schedules of research and development expenses 20
Schedules of selling and marketing expenses 21
2
<PAGE>
BDO BDO Seidman, LLP 1129 20th Street, N.W., Suite 500
Accountants and Consultants Washington, DC 20036
Telephone: (202) 496-1700
Fax: (202) 496-1717
Independent Auditors' Report
INTRAFED INC.
Bethesda, Maryland
We have audited the accompanying balance sheets of INTRAFED INC. as of
December 31, 1996 and 1995 and the related statements of operations and
accumulated deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of INTRAFED INC. at December 31,
1996 and 1995 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations, has a significant working capital deficit and requires additional
capital to continue its product development and marketing. These factors
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
BDO Seidman, LLP
May 14, 1997
3
<PAGE>
<TABLE>
INTRAFED, INC.
Balance Sheets
December 31, 1996 1995
Assets (Note 5)
Current
<S> <C> <C>
Cash $ 183,782 $ 246,816
Accounts receivable, less allowance of $163,728 and
$175,000 for uncollectible accounts (Note 5) 551,814 1,353,581
Inventory (Notes 2 and 5) 99,327 240,345
Refundable income taxes - 47,077
Prepaid expenses and other current assets 103,933 257,699
Receivable from affiliate (Note 3) - 221,855
Total current assets 938,856 2,367,373
Property and equipment (Notes 5 and 6)
Computer hardware and software 616,695 599,804
Furniture and fixtures 96,927 96,927
Office equipment 411,428 365,250
Vehicles 60,655 61,518
1,185,705 1,123,499
Less accumulated depreciation 748,603 502,040
Net property and equipment 437,102 621,459
Other
Software development costs, net (Note 4) - -
Intangible assets, less accumulated
amortization of $14,998 and $114,283 (Note 1) 20,794 204,893
Other assets 20,010 -
Total other assets 40,804 204,893
$1,416,762 $3,193,725
</TABLE>
<PAGE>
<TABLE>
INTRAFED INC.
Balance Sheets
December 3l, 1996 1995
Liabilities and stockholder's deficit
Current liabilities
<S> <C> <C>
Accounts payable $ 967,191 $1,281,050
Accrued expenses 279,257 236,613
Deferred revenue 532,003 385,924
Current maturities of long-term debt (Note 5) 3,505,079 1,610,804
Current portion of capital lease (Note 6) 102,313 209,258
Total current liabilities 5,385,843 3,723,649
Long-term debt, less current portion (Note 5) 12,497 1,454,116
Long-term portion of capital lease (Note 6) 203,951 123,820
Total liabilities 5,602,291 5,301,585
Commitments (Notes 6 and 9)
Stockholder's deficit
Class A common stock, par value $.01 per share;
authorized 5,000,000 shares, 100,000 shares
issued and outstanding in 1996 and 1995 1,000 1,000
Class B non-voting convertible common stock,
par value $.01 per share; authorized
5,000,00O shares, -0- shares
issued and outstanding in 1996 and 1995 - -
Additional paid-in capital 356,000 356,000
Accumulated deficit (4,542,529) (2,464,860)
Total stockholder's deficit (4,185,529) (2,107,860)
$ 1,416,762 $3,193,725
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
INTRAFED INC.
Statements of Operations and
Accumulated Deficit
Years ended December 31, 1996 1995
<S> <C> <C>
Sales $4,124,413 $8,437,075
Cost of sales 1,750,752 7,058,191
Gross profit 2,373,661 1,378,884
Operating Expenses
General and administrative expenses 1,601,195 1,986,062
Research and development expenses (Note 4) 1,109,158 1,228,556
Selling and marketing expenses 1,284,701 1,599,793
Total operating expenses 3,995,054 4,814,411
Operating loss (1,621,393) (3,435,527)
Other income (expense)
Interest expense, net of interest income of $9,520
and $43,404 (422,242) (329,548)
Miscellaneous (34,034) 19,671
Total other expense (456,276) (309,877)
Loss before income tax benefit (2,077,669) (3,745,404)
Income tax benefit (Note 7) - 378,000
Net loss (2,077,669) (3,367,404)
(Accumulated deficit) retained earnings,
beginning of year (2,464,860) 902,544
Accumulated deficit, end of year $(4,542,529)$(2,464,860)
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
5
<PAGE>
<TABLE>
INTRAFED INC.
Statements of Cash Flows
Years ended December 31, 1996 1995
Operating Activities
<S> <C> <S>
Net loss $(2,077,669)$(3,367,404)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 295,326 714,627
Amortization of discount related to
stock warrants 70,000 30,000
Provision for doubtful accounts 267,031 396,333
Deferred taxes - (378,000)
Loss on disposal of equipment 3,264 15,197
Compensation paid via reduction in amount
due from stockholder - 86,942
Write-off of capitalized
software development costs - 1,033,962
Write-off of intangible assets 176,303 -
Changes in operating assets and liabilities
(Increase) decrease in assets
Accounts receivable 746,889 962,965
Inventory 141,018 318,049
Refundable income taxes 47,077 663,380
Prepaid expenses and other
current assets 153,766 (98,285)
Receivables from affiliate 9,702 (221,855)
Other assets (20,010) -
Increase (decrease) in liabilities
Accounts payable (313,859) (679,828)
Accrued expenses 42,644 (72,276)
Deferred revenue 146,079 85,977
Net cash used in operating activities (312,439) (510,216)
</TABLE>
6
<PAGE>
<TABLE>
INTRAFED INC.
Statements of Cash Flows
Years ended December 31, 1996 1995
Investing activities
<S> <C> <C>
Capital expenditures (137,426) (241,694)
Proceeds from sale of equipment 30,989 -
Capitalized software development costs - (374,440)
Increase in intangible assets - (12,854)
Net cash used in investing activities (106,437) (628,988)
Financing activities
Borrowings under revolving line of credit - 600,000
Proceeds from issuance of long-term debt 558,041 339,135
Principal payments on long-term debt (202,199) (519,527)
Net cash provided by financing activities 355,842 419,608
Net decrease in cash (63,034) (719,596)
Cash, beginning of year 246,816 966,412
Cash, end of year $183,782 $246,816
See accompanying summary of accounting policies and notes to financial
statements.
</TABLE>
7
<PAGE>
INTRAFED INC.
Summary of Accounting Policies
Organization and
Business INTRAFED, Inc. (the "Company") was incorporated on January
7, 1985 in the State of Maryland. The Company develops,
markets, licenses and services document capture and image
processing systems. The company integrates its software
with industry standard hardware and other components to
provide high production, turnkey document capture and image
processing solutions. Software products produced by the
Company include PowerScan(tm) and StageWorks(tm). The
company markets its products worldwide through a variety of
distribution channels. Over the past two years the
Company has transitioned from a systems integrator with
imaging products to a software development company that
produces shrink-wrapped products.
Revenue
Recognition Revenue from the sale of computer hardware and software is
recognized when the systems are shipped. Customized
software revenue is recognized when the software is
accepted by the customer. Revenues from integration,
installation, and systems training is recognized when the
services are performed. Revenue from the sale of
maintenance contracts is recognized ratably over the term
of the contract.
Concentrations of
Credit Risk The Company's sales are geographically dispersed throughout
the United States. However, a significant portion of these
sales, are to customers who are government agencies, or who
are prime contractors to the United States government.
During 1996 and 1995, approximately 26% and 17% of sales,
respectively, were to these customers. The Company's
exposure to credit risk is limited to the amount of
outstanding accounts receivable at year end. The Company
reviews a customer's credit history before extending
credit and establishes an allowance for uncollectible
accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
Inventory Inventory is stated at the lower of approximate cost or
market. Cost is determined by the average cost method.
Raw materials consist principally of computer hardware used
to assemble various integrated imaging systems for
customers and spare computer parts for use in servicing
systems under
8
<PAGE>
INTRAFED INC.
Summary of Accounting Policies
maintenance contracts. Work-in progress represents partial
completion of these systems and includes applicable labor
and overhead costs.
Property,
Equipment and
Depreciation Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over estimated
useful lives, ranging from five to seven years. For tax
purposes, depreciation is computed using accelerated and
straight-line methods.
Software
Development
Costs An integral part of the Company's business activities is
the development of software. The Company's policy is to
expense the costs incurred prior to the establishment of
technological feasibility as research and development
costs. The establishment of technological feasibility and
the ongoing assessment of recoverability of software
development costs requires considerable judgment by
management with respect to certain external factors,
including anticipated future gross revenue, estimated
economic life and changes in technologies.
Development costs incurred beyond the point of
technological feasibility are capitalized. Amortization
begins when the product is available for general release
and is computed on a product by product basis over the
estimated economic life of one to three years. The
Company's policy is to amortize capitalized software costs
by the greater of (a) the ratio that current gross revenues
for a product bear to the total of current and anticipated
future gross revenues for that product or (b) the
straight-line method over the remaining estimated economic
life of the product including the period reported on. It
is possible that those estimates of anticipated future
gross revenues, the remaining estimated economic life of
the product, or both may be reduced in the near term.
Software for which capitalized costs are determined to be
greater than net realizable value are written down
accordingly.
Amortization of deferred software development costs is
included in cost of sales in the accompanying statements of
income and retained earnings. Research and development
costs incurred to establish technological feasibility are
reflected as operating expenses net of any capitalized
development costs
9
<PAGE>
INTRAFED INC.
Summary of Accounting Policies
and amounted to approximately $1,109,158 and $1,228,556 for
the years ended December 31, 1996 and 1995, respectively.
Income Taxes The Company has filed an election with the Internal Revenue
Service to convert from C Corporation status to S
Corporation status. Accordingly, existing deferred tax
assets and liabilities were written off at December 31,
1995. The Company has made no provision for federal, state
or local taxes on its income because such taxes are now the
obligation of the sole stockholder.
Intangible
Assets Intangible assets consist principally of patents and
trademarks which are stated at cost and are amortized on a
straight-line basis over their estimated useful lives, not
exceeding 5 years. Amortization expense was $7,796 and
$87,559 for the years ended December 31, 1996 and 1995,
respectively. For the year ended December 31, 1996, the
Company wrote off loan origination costs, with a net book
value of $176,303. See Note 1.
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 reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue
and expenses during the reporting period. Actual results
could differ from those estimates.
Reclassifications Certain amounts reported in the prior year have been
reclassified to conform to the presentation adopted in the
current year. The system has no effect upon the previously
reported results of operations.
See notes to financial statements.
10
<PAGE>
INTRAFED INC.
Notes to Financial Statements
1. Recent
Events and
Future
Prospects During 1996, the Company ceased making contractual payments
on its bank debt and is currently in default under its term
loan and revolving credit facility. Accordingly, the net
book value of loan origination costs and stock purchase
warrants associated with the initial debt instrument of
approximately $176,000 and $70,000, respectively, were
written off as of December 31, 1996. The Company has hired
a financial consultant to help obtain additional financing
and negotiate with its current lender to restructure its
debt. Various financing alternatives being considered
include an equity investment or sale of a controlling
interest in the Company to outside investors.
The Company has been successful in extending several of its
current trade obligations and has reduced operating
expenses by cutting back on personnel and related costs as
well as reducing rent expenses due to the relocation of its
offices. The Company expects sales volume to increase in
1997 due to its transition from being a systems integrator
to being more of a software development company that
produces shrink-wrapped products.
In spite of these improvements however, the Company was
still not able to generate positive cash flow from
operations for the years ended December 31, 1996 and 1995.
As a result, the Company was not able to develop, market,
deploy and maintain several of its previously capitalized
computer software products. Accordingly, the Company has
written of approximately $1,034,000 of capitalized software
costs for the year ended December 31, 1995.
The Company's financial statements have been presented on
the basis that it is a going concern, which contemplates
the realization of assets and the satisfaction of
liabilities in the normal course of business. Although the
Company has suffered recurring losses from operations, has
a significant working capital deficit and requires
additional capital to continue its product development and
marketing, management believes the Company will continue as
a going concern. As discussed above, management is
negotiating with its current lender to restructure its debt
and is actively pursuing financing from potential investors
which will enable it to meet its current obligations and
provide funds for continued product development and related
marketing. However, there can be no assurance that these
activities will be successful.
11
<PAGE>
INTRAFED INC.
Notes to Financial Statements
<TABLE>
2. Inventory Inventory consists of the following:
December 31, 1996 1995
<S> <C> <C>
Raw materials $99,327 $220,995
On consignment - 19,350
$99,327 $240,345
</TABLE>
3. Transactions
with
Affiliate During the year ended December 31, 1995, the Company's
stockholder established an affiliated company in Great
Britain. In connection therewith, the Company advanced to
the affiliate certain assets totaling $221,855 during the
year ended December 31, 1995. During 1996, it was
determined that reimbursement for these advances was
doubtful. Accordingly, the Company wrote off the remaining
balance of $212,153. During the years ended December 31,
1996 and 1995, the Company had sales to the affiliated
Company of $47,824 and $159,702, respectively. At December
31, 1996 and 1995, the Company had a trade receivable from
the affiliated Company of $58,572 and $954, respectively.
4. Software
Development
Costs Activity related to software development costs consisted of
the following during the year ended December 31, 1995:
<TABLE>
<S> <C>
Balance, beginning of year $ 1,087,098
Costs capitalized 374,440
Write-offs (1,033,962)
Amortization (427,576)
Balance, end of year $ -
</TABLE>
12
<PAGE>
INTRAFED INC.
Notes to Financial Statements
During the year ended December 31, 1995, the Company
determined that the net realizable value of its capitalized
software development costs had been substantially impaired.
Accordingly, the remaining net book value of $1,033,962 was
written-off. Due to the drop in sales volume during the
year ended December 31, 1996 net realizable value concerns
were present with respect to capitalized software
development costs. Accordingly, for the year ended December
31, 1996, the Company expensed all research and development
costs as incurred.
5. Long-term Long-term debt consists of the following:
Debt
<TABLE>
December 31, 1996 1995
<S> <C> <C>
Term loan(a) $1,950,000 $2,000,000
Revolving line of credit(a) 1,100,000 1,100,000
Note payable in monthly
installments of principal
plus interest at prime
plus 2% (10.25% at December
31, 1996), due 1997. 92,310 -
Note payable in monthly
installments of principal
plus interest at 10.25%,
due in September 1997. 351,150 -
Note payable, monthly payments of
principal plus interest at 7.3%,
due in 1998, collateralized by
an automobile. 24,116 34,920
Total 3,517,576 3,134,920
Less: discount for warrants - 70,000
Less: current maturities 3,505,079 1,610,804
Net long-term debt $ 12,497 $1,454,116
</TABLE>
13
<PAGE>
INTRAFED INC.
Notes to Financial Statements
(a) In June 1994, the Company entered into a term loan and
revolving credit agreement with a Bank. The term loan
balance of $2,500,000 is payable in 20 equal quarterly
installments of $125,000 commencing January 1, 1995, is due
in full on October l, 1999 and is collateralized by a first
lien on all assets. Interest accrues monthly at the Bank's
base lending rate (defined as the greater of its prime rate
or the Federal Funds rate plus 1/2%) plus 2%, effectively
10.25% at December 31, 1996. The loan agreement also
allows the term loan to be converted to either a "Base Rate
Loan" or an "Eurodollar Loan". The base rate loan accrues
interest as defined above; the Eurodollar loan bears
interest at a quoted rate plus 3 3/4%.
As part of the financing arrangement with the Bank,
detachable stock purchase warrants were issued entitling
the Bank to purchase 11,111 shares of Class A or Class B
common stock. The warrants are exercisable at $.01 per
share through June 22, 2004. The warrants have both "put"
and "call" options which commence upon the earlier of full
repayment of the debt obligation or December 31, 1999.
As of December 31, 1994, $100,000 of the proceeds of the
term loan was allocated to the detachable stock purchase
warrants and reflected as additional paid-in capital in the
accompanying financial statements. The related $100,000
discount in the recorded principal amount of the term loan
is being amortized as interest expense over the life of the
note. Amortization of the discount amounted to $30,000 for
the year ended December 31, 1995. The remaining discount
of $70,000 was written-off during 1996. See Note l.
The revolving line of credit agreement provides for
borrowings of up to 85% of the net amount of eligible
accounts receivable plus the lesser of $1,000,000 or 50% of
eligible inventory, as defined by the financing agreement.
Total borrowings under the revolving line of credit may not
exceed $2,500,000. Borrowings under the line of credit
totaled $1,100,000 at December 31, 1995 and 1996, bear
interest at the Bank's base lending rate, as defined, plus
1 1/2%, effectively 9.75% at December 31, 1996.
14
<PAGE>
INTRAFED INC.
Notes to Financial Statements
The financing agreement also allows for a reduction in the
accrued interest rate provided that certain levels of
capital are obtained. Provisions of the agreement require,
among other things, that the Company maintain certain
financial ratios and meet specified levels of net worth.
The agreement contains further restrictions on
distributions of dividends, capital expenditures and
additional borrowings.
Due to the Company's inability to meet its contractual
obligations under the term loan and revolving credit
facility the total amount due of $3,050,000 is in default
and has been classified as a current obligation.
Scheduled maturities of long-term debt at December 31, 1996
are as follows:
<TABLE>
<C> <C>
1997 $3,505,079
1998 12,497
$3,517,576
</TABLE>
6. Commitments Leases
The Company leases certain office space and equipment under
noncancellable operating leases. As of December 31, 1996
future minimum rental payments required under these leases
are as follows:
<TABLE>
Year ending, Rental Sublease Net
December 31, Commitments Income Commitment
<C> <C> <C> <C>
1997 $ 590,138 $ (366,801) $ 223,337
1998 215,178 - 215,178
1999 243,932 - 243,932
2000 240,120 - 240,120
2001 240,120 - 240,120
Thereafter 860,430 - 860,430
Total $2,389,918 $ (366,801) $2,023,117
</TABLE>
15
<PAGE>
INTRAFED INC.
Notes to Financial Statements
During the year ended December 31, 1996, the Company moved
its office to a new location which it leases under an
operating lease agreement expiring in July 2005. In
conjunction with this move, the Company, whose existing
lease agreement was to expire in November 1999, exercised
its right to terminate its existing lease agreement
effective November 1997. In addition, the Company
subleased its existing office space to a third party under
an agreement which also expires in November 1997. Total
expense of approximately $129,000 was recognized in 1996
for the lease termination and included the remaining lease
payments reduced by the probable sublease income, the
termination payment and leasehold improvements.
Rental expense for the years ended December 31, 1996 and
1995 totalled $457,457 and $489,204, respectively.
Sublease income was $234,728 for the year ended December
31, 1996.
The Company also leases certain equipment from a financing
company under capital lease agreements. As of December 31,
1996, the Company was in default on these agreements. In
April 1997, the Company reached a settlement with the
financing company whereby the outstanding balances on the
leases plus attorney fees of $28,736 were converted to a
$335,000 note bearing interest at 9% per year and payable
in monthly installments through July 1999. Scheduled
maturities of the note balance as of December 31, 1996 are
as follows:
<TABLE>
<C> <C>
1997 $102,313
1998 146,603
1999 57,348
$306,264
</TABLE>
Employee Benefit Plans
The Company has a 401(k) Plan which covers all employees
over the age of 21 who work at least 1,000 hours per year.
The contributions to the Plan are based on a certain
percentage of each dollar contributed by the employee. The
Corporation contributed approximately $14,700 and $37,000
for the years ended December 31, 1996 and 1995,
respectively.
16
<PAGE>
INTRAFED INC.
Notes to Financial Statements
7. Taxes on
Income The Company filed an election with the Internal Revenue
Service to convert from C Corporation status to S
Corporation status. Existing deferred tax assets and
liabilities were written off, resulting in a deferred tax
benefit of $378,000 for the year ended December 31, 1995.
8. Supplemental
Cash Flow
Information Cash paid for interest during 1996 and 1995 totalled
$354,534 and $371,116, respectively. Cash paid for income
taxes totalled $3,976 in 1995.
9. Litigation The Company is involved in various legal actions arising
from the normal course of business. Management does not
anticipate any material losses as a result of these
proceedings.
17
<PAGE>
SUPPLEMENTAL MATERIAL
<PAGE>
Independent Auditors' Report
on Supplemental Material
Our audits of the basic financial statements included in the preceding section
of this report were performed for the purpose of forming an opinion on the
basic financial statements taken as a whole. The supplemental material
presented in the following section of this report is presented only for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
BDO Seidman, LLP
Certified Public Accountants
Washington, D.C.
May 14, 1997
18
<PAGE>
INTRAFED INC.
<TABLE>
Supplemental Material
Schedule of General and Administrative Expenses
Year ended December 31, 1996 1995
<S> <C> <C>
Salaries $ 474,003 $ 911,067
Bad debt expense 267,031 396,334
Amortization 197,023 87,240
Rent 142,637 122,301
Professional Fees 132,786 125,244
Relocation 81,361 -
Depreciation 55,524 39,442
Business insurance 42,397 30,502
Payroll Taxes 37,056 72,739
Outside services 34,200 -
Travel 31,747 23,659
Medical Insurance 24,314 43,446
Telephone 18,605 27,044
Shipping 16,740 30,961
Office supplies 11,396 35,119
Life insurance 7,650 8,168
401(k) 5,695 11,913
Temporary labor 5,661 -
Miscellaneous 5,615 734
Maintenance 4,434 5,422
Postage 2,325 6,507
Dues and subscriptions 2,273 617
Education 722 5,317
International - 2,286
$1,601,195 $1,986,062
</TABLE>
See accompanying accountants' report on supplemental material.
19
<PAGE>
INTRAFED INC.
<TABLE>
Supplemental Material
Schedule of Research and Development Expenses
Year ended December 31, 1996 1995
<S> <C> <C>
Salaries $ 516,078 $ 558,881
Depreciation 188,507 113,490
Rent 175,919 171,222
Consultants 98,000 193,535
Payroll Taxes 40,122 71,019
Medical insurance 28,873 42,419
Telephone 22,093 21,476
Office supplies 13,533 27,889
Life insurance 8,283 7,975
401(k) 6,166 11,631
Maintenance 5,265 4,306
Postage 2,761 -
Dues and subscriptions 2,700 490
Education 858 4,223
$1,109,158 $1,228,556
</TABLE>
See accompanying accountants' report on supplemental material.
20
<PAGE>
INTRAFED INC.
<TABLE>
Supplemental Material
Schedule of Selling and Marketing Expenses
Year ended December 31, 1996 1995
<S> <C> <C>
Salaries $ 661,609 $ 721,797
Rent 118,864 97,841
Commissions 100,713 152,498
Travel 70,000 70,000
Trade shows 57,699 148,617
Payroll taxes 51,723 57,628
Advertising and Public Relations 46,403 147,002
Depreciation 36,160 24,625
Medical insurance 33,432 34,420
Telephone 25,581 20,681
Marketing materials 17,112 21,784
Office supplies 15,670 26,856
Entertainment 12,034 14,373
Life insurance 10,678 6,471
401(k) 7,949 9,438
Maintenance 6,097 4,146
Temporary labor 5,661 -
Postage 3,197 -
Dues and subscriptions 3,126 472
Education 993 4,066
Outside services - 37,078
$1,284,701 $1,599,793
</TABLE>
See accompanying accountants' report on supplemental material.
21
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Star Technologies, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 33-42042 and 2-97518) of our report dated
May 14, 1997, relating to the financial statements of Intrafed, Inc. for the
years ended December 31, 1996 and 1995.
BDO Seidman, LLP
Washington, D.C.
September 25, 1997
